<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 5, 1999
REGISTRATION NO. 333-80863
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
HEALTHEON/WEBMD CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7372 77-0515536
(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, CALIFORNIA 95054
(408) 876-5000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
<TABLE>
<S> <C>
W. MICHAEL LONG JEFFREY T. ARNOLD
CHAIRMAN AND CHIEF OPERATING OFFICER CHIEF EXECUTIVE OFFICER
HEALTHEON/WEBMD CORPORATION HEALTHEON/WEBMD CORPORATION
4600 PATRICK HENRY DRIVE 400 THE LENOX BUILDING
SANTA CLARA, CALIFORNIA 95054 3399 PEACHTREE ROAD NE
(408) 876-5000 ATLANTA, GEORGIA 30326
(404) 479-7600
</TABLE>
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C> <C> <C>
LARRY W. SONSINI, ESQ. H. BRYAN IVES III, ESQ. MARK J. TANNENBAUM, ESQ. WILLIAM G. ROCHE, ESQ.
MARTIN W. KORMAN, ESQ. C. MARK KELLY, ESQ. REBOUL, MACMURRAY, STACEY K. GEER, ESQ.
DANIEL R. MITZ, ESQ. CATHERINE L. AMSPACHER, ESQ. HEWITT, KING & SPALDING
MARK L. REINSTRA, ESQ. NELSON MULLINS RILEY & SCARBOROUGH, MAYNARD & KRISTOL 191 PEACHTREE STREET
WILSON SONSINI GOODRICH & L.L.P. 45 ROCKEFELLER PLAZA ATLANTA, GA 30303
ROSATI BANK OF AMERICA CORPORATE CENTER NEW YORK, NY 10111 (404) 572-4600
PROFESSIONAL CORPORATION SUITE 2600 (212) 841-5700
650 PAGE MILL ROAD 100 NORTH TRYON STREET
PALO ALTO, CA 94304 CHARLOTTE, NC 28202-4000
(650) 493-9300 (704) 417-3000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
Upon consummation of the Healtheon-WebMD reorganization described herein.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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, 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. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED SHARE PRICE REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock $0.0001 par value(1).... 79,606,928 shares $76.5625(2) $6,094,905,425 (3)
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock $0.0001 par value(4).... 101,137,570 shares not applicable $ 119,396,546(5) (3)
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock $0.0001 par value(6).... 9,852,950 shares not applicable $ 478,226,051(7) (3)
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock $0.0001 par value(8).... 2,621,676 shares not applicable $ 8,553,622(9) $2,378
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents the number of shares of the Common Stock of the Registrant which
may be issued to stockholders of Healtheon Corporation, a Delaware
corporation, pursuant to the transactions described herein.
(2) Pursuant to Rule 457(f)(1) and Rule 457(c) under the Securities Act of 1933,
as amended (the "Act"), the maximum aggregate offering price has been
calculated based on the average of the high and low prices per share of
Healtheon Corporation's Common Stock on June 15, 1999 as reported on the
Nasdaq National Market.
(3) A filing fee of $1,860,523 has previously been paid.
(4) Represents the number of shares of the Common Stock of the Registrant which
may be issued to stockholders of WebMD, Inc., a Georgia corporation,
pursuant to the transactions described herein.
(5) Pursuant to Rule 457(f)(2) under the Act, the maximum aggregate offering
price has been calculated based on the book value of WebMD as of April 30,
1999.
(6) Represents the number of shares of the Common Stock of the Registrant which
may be issued to stockholders of MEDE AMERICA Corporation, a Delaware
corporation, pursuant to the transactions described herein.
(7) Pursuant to Rule 457(f)(1) and Rule 457(c) under the Act, the maximum
aggregate offering price is the product of (i) $32.00, the average of the
high and low prices per share of MEDE AMERICA Corporation Common Stock on
June 15, 1999 as reported on the Nasdaq National Market and (ii) 14,944,563
shares of MEDE AMERICA Common Stock to be cancelled in the MEDE AMERICA
reorganization described herein.
(8) Represents the number of shares of the Common Stock of the Registrant which
may be issued to stockholders of Greenberg News Networks, Inc., a Delaware
corporation, pursuant to the transactions described herein.
(9) Pursuant to Rule 457(f)(2) under the Act, the maximum aggregate offering
price has been calculated based on the book value of Greenberg News as of
June 30, 1999.
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> 2
[HEALTHEON LOGO]
To Our Stockholders:
You are cordially invited to attend the special meeting of stockholders of
Healtheon Corporation to be held at the principal executive offices of Healtheon
at 4600 Patrick Henry Drive, Santa Clara, California 95054 on , 1999
at 9:00 a.m., Pacific time.
The proposals expected to be acted upon at the meeting, including a
reorganization that will cause Healtheon to become a subsidiary of a new parent
company, called Healtheon/WebMD Corporation, and the issuance of shares of
Healtheon/WebMD in connection with the merger with WebMD, Inc., are described in
detail in the attached notice of special meeting of stockholders and proxy
statement/prospectus.
The attached proxy statement/prospectus also includes information about a
proposed acquisition by Healtheon of MEDE AMERICA Corporation and a proposed
acquisition by Healtheon/WebMD of Greenberg News Networks, Inc., which is
referred to as Medcast. While your vote is not required for those acquisitions,
you should be aware that if those acquisitions are completed, MEDE AMERICA and
Medcast will become wholly owned subsidiaries of Healtheon/WebMD, and MEDE
AMERICA and Medcast stockholders will receive Healtheon/WebMD common stock. You
should carefully read the entire proxy statement/prospectus, including "Risk
Factors" beginning on page 34.
The Healtheon-WebMD reorganization and the MEDE AMERICA reorganization are
independent of one another. The combination of Medcast with Healtheon/WebMD,
however, is dependent on the Healtheon-WebMD reorganization.
Following the WebMD merger, the acquisition of MEDE AMERICA and the
acquisition of Medcast, the board of directors of Healtheon/WebMD will consist
of nine people, four appointed by Healtheon, four appointed by WebMD and one
appointed by both Healtheon and WebMD. In addition, the principal officers of
Healtheon/WebMD following the reorganization will be W. Michael Long as Chairman
and Chief Operating Officer and Jeffrey T. Arnold as Chief Executive Officer.
After the proposed reorganization, Healtheon/WebMD will be a public company, and
its shares will trade on the Nasdaq National Market.
After careful consideration, your board of directors has approved the
reorganization that will cause Healtheon to become a subsidiary of
Healtheon/WebMD, the issuance of Healtheon/WebMD shares in connection with the
WebMD merger, and the transactions related thereto, and has determined it to be
fair to and in the best interests of Healtheon and its stockholders. YOUR BOARD
OF DIRECTORS RECOMMENDS A VOTE FOR THE HEALTHEON-WEBMD REORGANIZATION, THE
ISSUANCE OF HEALTHEON/WEBMD SHARES IN CONNECTION WITH THE WEBMD MERGER, AND FOR
EACH OF THE OTHER PROPOSALS ON WHICH YOU MAY VOTE.
It is important that you use this opportunity to take part in the affairs
of Healtheon by voting on the business to come before this meeting. Whether or
not you expect to attend the meeting, please complete, date, sign and promptly
return the accompanying proxy in the enclosed postage paid envelope so that your
shares may be represented at the meeting. Please be advised that stockholders
holding a majority of Healtheon's outstanding common stock have already signed
voting agreements agreeing to approve the proposed reorganization. However, YOUR
VOTE IS VERY IMPORTANT ON THE OTHER MATTERS. Returning the proxy does not
deprive you of your right to attend the meeting and to vote your shares in
person.
Sincerely,
W. Michael Long
Chief Executive Officer
This proxy statement/prospectus is dated , 1999 and was
first mailed to stockholders on or about , 1999.
<PAGE> 3
HEALTHEON LOGO
-------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD , 1999 AT 9:00 A.M.
To Our Stockholders:
A special meeting of stockholders of Healtheon Corporation will be held at
the executive offices of Healtheon located at 4600 Patrick Henry Drive, Santa
Clara, California 95054 on , 1999 at 9:00 a.m., Pacific time, for
the following purposes:
1. To consider and vote upon a proposal to approve a reorganization
that will cause Healtheon to become a subsidiary of a new parent company,
called Healtheon/WebMD Corporation. In the transaction, Healtheon/WebMD
will issue one share of Healtheon/WebMD common stock in exchange for each
outstanding share of Healtheon common stock.
2. To approve the issuance of shares of Healtheon/WebMD common stock
in the merger of a wholly owned subsidiary of Healtheon/WebMD with and into
WebMD, Inc. Healtheon/WebMD will issue 1.815 shares of Healtheon/WebMD
common stock for each share of outstanding WebMD common stock. Following
the reorganization and assuming the completion of the proposed acquisitions
of MEDE AMERICA and Medcast, Healtheon stockholders will own approximately
48.6%, WebMD stockholders will own approximately 43.7%, MEDE AMERICA
stockholders will own approximately 6.0% and Medcast stockholders will own
approximately 1.7% of Healtheon/WebMD.
3. To amend Healtheon's 1996 stock plan, if the Healtheon-WebMD
reorganization is completed, to increase the number of shares of common
stock reserved for issuance under the plan from 19,107,321 shares to
29,107,321 shares.
4. To amend Healtheon's 1998 employee stock purchase plan to (1)
increase the number of shares of common stock reserved under the plan by
1,000,000 and (2) change the formula for annually increasing the number of
shares available to be issued under the plan.
5. To transact any other business that properly comes before the
special meeting or any adjournments or postponements thereof.
The accompanying proxy statement/prospectus describes the proposed
reorganization and other proposals in more detail. We encourage you to read the
entire document carefully.
We have fixed the close of business on , 1999 as the record
date for the determination of our stockholders entitled to vote at this meeting.
By Order of the Board of Directors of
Healtheon Corporation
John L. Westermann III
Chief Financial Officer, Treasurer and
Secretary
Santa Clara, California
, 1999
TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE MEETING, PLEASE COMPLETE, DATE
AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE POSTAGE-PAID ENVELOPE
PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING. YOU CAN REVOKE YOUR
PROXY AT ANY TIME BEFORE IT IS VOTED.
<PAGE> 4
[WEBMD LOGO]
, 1999
To Our Stockholders:
You are cordially invited to attend the special meeting of stockholders of
WebMD, Inc. to be held at the principal executive offices of WebMD at 400 The
Lenox Building, 3399 Peachtree Road NE, Atlanta, Georgia 30326 on ,
1999 at 10:00 a.m., Eastern time.
The proposals expected to be acted upon at the meeting, including a merger
that will cause WebMD to become, along with Healtheon Corporation, a subsidiary
of a new parent company called Healtheon/ WebMD Corporation, and its related
transactions, are described in detail in the attached notice of special meeting
of stockholders and proxy statement/prospectus.
The attached proxy statement/prospectus also includes information about
proposed acquisitions by Healtheon/WebMD of MEDE AMERICA Corporation and of
Greenberg News Networks, Inc., which is referred to as Medcast. While your vote
is not required for those acquisitions, you should be aware that if those
acquisitions are completed, MEDE AMERICA and Medcast will also become wholly
owned subsidiaries of Healtheon/WebMD, and MEDE AMERICA and Medcast stockholders
will receive Healtheon/WebMD common stock. You should carefully read the entire
proxy statement/prospectus, including "Risk Factors" beginning on page 34.
The Healtheon-WebMD reorganization and the MEDE AMERICA reorganization are
independent of one another. The combination of Medcast with Healtheon/WebMD,
however, is dependent on the Healtheon-WebMD reorganization.
In the merger, Healtheon/WebMD will issue 1.815 shares of Healtheon/WebMD
common stock for each outstanding share of WebMD common stock. The preferred
stock of WebMD will remain outstanding unless it is converted into common stock
prior to the WebMD merger.
After careful consideration, your board of directors has approved the
merger and the transactions related thereto that will cause WebMD to become a
subsidiary of Healtheon/WebMD, and has determined them to be fair to and in the
best interests of WebMD and its stockholders. Your board of directors
unanimously recommends a vote FOR the WebMD merger and FOR each of the other
proposals on which you may vote.
It is important that you use this opportunity to take part in the affairs
of WebMD by voting on the business to come before this meeting. Whether or not
you expect to attend the meeting, please complete, date, sign and promptly
return the accompanying proxy in the enclosed postage-paid envelope so that your
shares may be represented at the meeting. Please be advised that the vote to
approve the reorganization agreement and the proposed merger is assured.
However, YOUR VOTE IS VERY IMPORTANT ON THE OTHER MATTER. Returning the proxy
does not deprive you of your right to attend the meeting and to vote your shares
in person.
Sincerely,
Jeffrey T. Arnold
Chief Executive Officer
This proxy statement/prospectus is dated , 1999 and was
first mailed to stockholders on or about , 1999.
<PAGE> 5
WEBMD LOGO
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
-------------------------
To Our Stockholders:
A special meeting of stockholders of WebMD, Inc. will be held at 10:00
a.m., Eastern time, on , 1999, at our headquarters, located at 400
The Lenox Building, 3399 Peachtree Road NE, Atlanta, Georgia 30326, to:
1. Consider and vote on a proposal to approve and adopt a reorganization
agreement with Healtheon Corporation and approve a merger that will
cause WebMD to become a subsidiary of a new parent company called
Healtheon/WebMD Corporation. In the WebMD merger, Healtheon/ WebMD will
issue 1.815 shares of Healtheon/WebMD common stock for each outstanding
share of WebMD common stock. The preferred stock of WebMD will remain
outstanding unless it is converted into common stock prior to the WebMD
merger. Following the reorganization and assuming the completion of the
proposed acquisitions of MEDE AMERICA and Medcast, Healtheon
stockholders will own approximately 48.6%, WebMD stockholders will own
approximately 43.7%, MEDE AMERICA stockholders will own approximately
6.0% and Medcast stockholders will own approximately 1.7% of
Healtheon/WebMD.
2. Consider and vote on a proposal to approve the acceleration of vesting
provisions in stock options held by some WebMD employees as a result of
the completion of the reorganization so that WebMD will be able to
deduct compensation expense relating to these options.
3. Transact any other business that properly comes before the special
meeting or any adjournments or postponements thereof.
The accompanying proxy statement/prospectus describes the reorganization
agreement and the proposed reorganizations in more detail. We encourage you to
read the entire document carefully. You also should know that you may be
entitled to assert dissenters' rights in connection with the WebMD merger.
We have fixed the close of business on , 1999 as the record
date for the determination of our stockholders entitled to vote at this meeting.
By Order of the Board of Directors
of WebMD, Inc.
--------------------------------------
W. Michael Heekin
Executive Vice President, General
Counsel
and Secretary
Atlanta, Georgia
, 1999
- --------------------------------------------------------------------------------
TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE MEETING, PLEASE
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE
POSTAGE-PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE
MEETING. YOU MAY REVOKE YOUR PROXY AT ANY TIME BEFORE IT IS VOTED.
- --------------------------------------------------------------------------------
<PAGE> 6
[MEDE LOGO]
90 MERRICK AVENUE, SUITE 501
EAST MEADOW, NEW YORK 11554
, 1999
To Our Stockholders:
You are cordially invited to attend a special meeting of our stockholders
to be held at our headquarters at 90 Merrick Avenue, Suite 501, East Meadow, New
York on , 1999 at 8:00 a.m., Eastern time. At the meeting, you will
be asked to consider and vote upon a proposal to approve and adopt a
reorganization agreement with Healtheon Corporation and approve a merger that
will cause MEDE AMERICA to become a wholly owned subsidiary of a new parent
company called Healtheon/WebMD Corporation.
In the merger, you will receive 0.6593 shares of Healtheon/WebMD common
stock for each share of MEDE AMERICA common stock you own, subject to adjustment
if the ten-day average closing price of Healtheon common stock for the period
ending two days prior to the stockholders' meeting is less than $38.68. This
adjustment to the exchange ratio is more fully described in the section entitled
"Structure of the reorganization and conversion of MEDE AMERICA common stock" on
page 96 of this proxy statement/prospectus. On , 1999, Healtheon
common stock closed at $ per share.
The attached proxy statement/prospectus also includes information about a
proposed merger between Healtheon and WebMD, Inc. and a proposed acquisition by
Healtheon/WebMD of Greenberg News Networks, Inc., which is referred to as
Medcast. While your vote is not required for those reorganizations, you should
be aware that if those reorganizations are completed, WebMD and Medcast will
also become subsidiaries of Healtheon/WebMD.
The Healtheon-WebMD reorganization and the MEDE AMERICA reorganization are
independent of one another. The combination of Medcast with Healtheon/WebMD,
however, is dependent on the Healtheon-WebMD reorganization.
AFTER CAREFUL CONSIDERATION, YOUR BOARD OF DIRECTORS UNANIMOUSLY APPROVED
THE MERGER AND CONCLUDED THAT IT IS IN THE BEST INTERESTS OF MEDE AMERICA AND
ITS STOCKHOLDERS. YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE
"FOR" THIS TRANSACTION.
Attached is a notice of special meeting of stockholders and a proxy
statement/prospectus relating to the merger. The proxy statement/prospectus
provides you with detailed information concerning Healtheon and the merger. We
encourage you to read it carefully. IN PARTICULAR, YOU SHOULD READ CAREFULLY THE
DISCUSSION IN THE SECTION ENTITLED "RISK FACTORS" ON PAGE 34 OF THIS PROXY
STATEMENT/PROSPECTUS.
We cordially invite you to attend the meeting. However, whether or not you
plan to attend the meeting, please complete, sign and date the enclosed proxy
and return it to us in the enclosed envelope. If you attend the meeting, you may
vote in person if you wish, even though you have previously returned your proxy.
Please be advised that the vote to approve the reorganization agreement and the
proposed merger is assured. However, YOUR VOTE IS VERY IMPORTANT ON ANY OTHER
MATTERS THAT MAY COME BEFORE THE MEETING.
DO NOT SEND YOUR STOCK CERTIFICATES AT THIS TIME.
Sincerely,
Thomas P. Staudt
Chairman, Chief Executive Officer
and Director
This proxy statement/prospectus is dated , 1999 and was
first mailed to stockholders on or about , 1999.
<PAGE> 7
MEDE LOGO
90 MERRICK AVENUE, SUITE 501
EAST MEADOW, NEW YORK 11554
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
------------------------
To Our Stockholders:
A special meeting of stockholders of MEDE AMERICA Corporation will be held
at 8:00 a.m., Eastern time, on , 1999, at our headquarters, located
at 90 Merrick Avenue, Suite 501, East Meadow, New York, to:
1. Consider and vote on a proposal to approve and adopt a reorganization
agreement with Healtheon Corporation and approve a merger that will
cause MEDE AMERICA to become a wholly owned subsidiary of
Healtheon/WebMD Corporation, a new parent company. In the MEDE AMERICA
merger, Healtheon/WebMD will issue 0.6593 shares of Healtheon/WebMD
common stock for each outstanding share of MEDE AMERICA common stock
unless the exchange ratio is adjusted as described in the attached proxy
statement/prospectus. Following the merger and the completion by
Healtheon/WebMD of its mergers with WebMD and Medcast, MEDE AMERICA
stockholders will own approximately 6.0%, Healtheon stockholders will
own approximately 48.6%, WebMD stockholders will own approximately 43.7%
and Medcast stockholders will own approximately 1.7% of Healtheon/WebMD.
2. Transact any other business that properly comes before the special
meeting or any adjournments or postponements thereof.
The accompanying proxy statement/prospectus describes the reorganization
agreement and the proposed merger in more detail. We encourage you to read the
entire document carefully.
We have fixed the close of business on , 1999 as the record
date for the determination of our stockholders entitled to vote at this meeting.
By Order of the Board of Directors
of MEDE AMERICA Corporation
Richard P. Bankosky
Chief Financial Officer, Treasurer and
Corporate Secretary
East Meadow, New York
, 1999
- --------------------------------------------------------------------------------
TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE MEETING, PLEASE
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE
POSTAGE-PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE
MEETING. YOU MAY REVOKE YOUR PROXY AT ANY TIME BEFORE IT IS VOTED.
- --------------------------------------------------------------------------------
<PAGE> 8
[MEDCAST LOGO] [GREENBERG NEWS LOGO]
1175 PEACHTREE STREET, SUITE 2400
ATLANTA, GEORGIA 30361
, 1999
Dear Stockholders:
You are cordially invited to attend a special meeting of our stockholders
to be held at the offices of King & Spalding, 191 Peachtree Street, Atlanta,
Georgia 30303 on , 1999 at 8:00 a.m., Eastern time. At the meeting,
you will be asked to consider and vote upon a proposal to approve a merger that
will cause Greenberg News Networks, Inc., which is referred to as Medcast, to
become a wholly owned subsidiary of Healtheon/WebMD and to approve and adopt the
related reorganization agreement.
In the merger, you will receive approximately 0.5483 shares of
Healtheon/WebMD common stock for each share of Medcast common stock you own,
after conversion of any shares of Medcast preferred stock you own. The exchange
ratio is based on a formula that is more fully described in the section entitled
"Structure of the Medcast reorganization and conversion of Medcast common stock"
on page of the attached proxy statement/prospectus.
The proxy statement/prospectus includes information about a proposed merger
between Healtheon and WebMD, Inc., which is referred to as a reorganization. If
the Healtheon-WebMD reorganization does not occur, Medcast will instead merge
with a subsidiary of WebMD, and will separately seek your approval for that
merger. The proxy statement/prospectus also includes information about a
proposed reorganization between Healtheon and MEDE AMERICA Corporation. While
your vote is not required for either of these reorganizations, you should be
aware that if the Healtheon-MEDE AMERICA reorganization is completed, Healtheon,
WebMD and MEDE AMERICA will become subsidiaries of Healtheon/WebMD.
The Healtheon-WebMD reorganization and the MEDE AMERICA reorganization are
independent of one another. The Medcast reorganization, however, is dependent on
the Healtheon-WebMD reorganization.
AFTER CAREFUL CONSIDERATION, YOUR BOARD OF DIRECTORS UNANIMOUSLY APPROVED
THE MERGER AND CONCLUDED THAT IT IS IN THE BEST INTERESTS OF MEDCAST AND ITS
STOCKHOLDERS. YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR"
THIS TRANSACTION.
Attached is a notice of special meeting of stockholders and a proxy
statement/prospectus relating to the merger. The proxy statement/prospectus
provides you with detailed information concerning Healtheon/ WebMD and the
merger. We encourage you to read it carefully. IN PARTICULAR, YOU SHOULD READ
CAREFULLY THE SECTION ENTITLED "RISK FACTORS" ON PAGE 34 OF THE ATTACHED PROXY
STATEMENT/PROSPECTUS.
We cordially invite you to attend the meeting. However, whether or not you
plan to attend the meeting, please complete, sign and date the enclosed proxy
and return it to us in the enclosed envelope. If you attend the meeting, you may
vote in person if you wish, even though you have previously returned your proxy.
Please be advised that the vote to approve the proposed merger and the
reorganization agreement is assured. However, YOUR VOTE IS VERY IMPORTANT ON ANY
OTHER MATTER THAT MAY COME BEFORE THE MEETING.
DO NOT SEND YOUR STOCK CERTIFICATES AT THIS TIME.
Sincerely,
Alan N. Greenberg
Chairman and Chief Executive Officer
This proxy statement/prospectus is dated , 1999 and was first
mailed to stockholders on or about , 1999.
<PAGE> 9
[MEDCAST LOGO] [GREENBERG NEWS LOGO]
1175 PEACHTREE STREET, SUITE 2400
ATLANTA, GEORGIA 30361
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
------------------------
To Our Stockholders:
A special meeting of stockholders of Greenberg News Networks, Inc., which
is referred to as Medcast, will be held at 8:00 a.m., Eastern time, on
, 1999, at the offices of King & Spalding, located at 191 Peachtree
Street, Atlanta, Georgia, to:
1. Consider and vote on a proposal to approve and adopt a reorganization
agreement and approve a merger, which is referred to as a
reorganization, that will cause Medcast to become a wholly owned
subsidiary of Healtheon/WebMD Corporation. In the Medcast merger,
Healtheon/ WebMD will issue approximately 0.5483 shares of
Healtheon/WebMD common stock for each outstanding share of Medcast
common stock, after conversion of all outstanding shares of Medcast
preferred stock. The exchange ratio is based on a formula that is
described in the attached proxy statement/prospectus. Following the
reorganization and assuming completion of the proposed acquisitions by
Healtheon/WebMD of Healtheon, WebMD and MEDE AMERICA, Medcast
stockholders will own approximately 1.7%, Healtheon stockholders will
own approximately 48.6%, WebMD stockholders will own approximately 43.7%
and MEDE AMERICA stockholders will own approximately 6.0% of
Healtheon/WebMD.
2. Transact any other business that properly comes before the special
meeting or any adjournments or postponements thereof.
The accompanying proxy statement/prospectus describes the reorganization
agreement and the proposed reorganization in more detail. We encourage you to
read the entire document carefully.
We have fixed the close of business on , 1999 as the record
date for the determination of our stockholders entitled to vote at this meeting.
By Order of the Board of Directors
of Greenberg News Networks, Inc.
Gordon T. Wyatt
Chief Financial Officer and Corporate
Secretary
Atlanta, Georgia
, 1999
- --------------------------------------------------------------------------------
TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE MEETING, PLEASE
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE
POSTAGE PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE
MEETING. YOU MAY REVOKE YOUR PROXY AT ANY TIME BEFORE IT IS VOTED.
- --------------------------------------------------------------------------------
<PAGE> 10
THE INFORMATION IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS NOT COMPLETE AND MAY
BE CHANGED. HEALTHEON/WEBMD CORPORATION MAY NOT SELL THESE SECURITIES UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS JOINT PROXY STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION DATED AUGUST , 1999
PROXY STATEMENT/PROSPECTUS
HEALTHEON/WEBMD CORPORATION
HEALTHEON CORPORATION
WEBMD, INC.
MEDE AMERICA CORPORATION
GREENBERG NEWS NETWORKS, INC. (MEDCAST)
REORGANIZATIONS PROPOSED
The board of directors of Healtheon Corporation and WebMD, Inc. have
approved a reorganization agreement pursuant to which a new parent company will
be formed called Healtheon/WebMD Corporation. Healtheon will merge with a
subsidiary of Healtheon/WebMD, and WebMD will merge with another subsidiary of
Healtheon/WebMD, resulting in Healtheon and WebMD each becoming subsidiaries of
Healtheon/WebMD. Upon completion of the reorganization, Healtheon and WebMD
stockholders will receive shares of Healtheon/WebMD according to specified
exchange ratios.
The board of directors of Healtheon and MEDE AMERICA Corporation have
approved a reorganization agreement pursuant to which a new parent company will
be formed, called Healtheon/ WebMD. Healtheon will merge with the subsidiary of
Healtheon/WebMD, and MEDE AMERICA will merge with another subsidiary of
Healtheon/WebMD, resulting in Healtheon and MEDE AMERICA each becoming
subsidiaries of Healtheon/WebMD. Upon completion of the reorganization,
Healtheon and MEDE AMERICA stockholders will receive shares of Healtheon/WebMD
according to a specified exchange ratio.
The board of directors of Healtheon, WebMD, Healtheon/WebMD and Greenberg
News Networks, Inc., which is referred to as "Medcast", have approved a
reorganization agreement pursuant to which a subsidiary of Healtheon/WebMD would
be merged with and into Medcast and Medcast would become a wholly-owned
subsidiary of Healtheon/WebMD. Upon completion of the reorganization, Medcast
stockholders will receive shares of Healtheon/WebMD according to a specified
exchange ratio.
This joint proxy statement/prospectus is also the prospectus of
Healtheon/WebMD regarding the Healtheon/WebMD common stock to be issued to
stockholders of Healtheon, WebMD, MEDE AMERICA and Medcast in exchange for their
shares in connection with the reorganization. Healtheon/WebMD shares to be
issued in connection with the reorganization or upon the exercise of converted
options will be listed, subject to official notice of issuance, on the Nasdaq
National Market under the symbol "HLTH."
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 11
PROXY STATEMENT/PROSPECTUS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
QUESTIONS AND ANSWERS FOR HEALTHEON AND WEBMD
STOCKHOLDERS.............................................. 1
QUESTIONS AND ANSWERS FOR MEDE AMERICA STOCKHOLDERS......... 5
QUESTIONS AND ANSWERS FOR MEDCAST STOCKHOLDERS.............. 8
SUMMARY OF THE PROXY STATEMENT/PROSPECTUS................... 10
The companies............................................. 10
Structure of the reorganizations.......................... 12
Summary of the Healtheon-WebMD reorganization............. 13
Summary of the MEDE AMERICA reorganization................ 18
Summary of the Medcast reorganization..................... 23
Selected historical and selected unaudited pro forma
condensed combined financial data...................... 28
Comparative historical and unaudited pro forma per share
data................................................... 32
RISK FACTORS................................................ 34
THE HEALTHEON MEETING....................................... 50
THE WEBMD MEETING........................................... 52
THE MEDE AMERICA MEETING.................................... 55
THE MEDCAST MEETING......................................... 57
THE HEALTHEON-WEBMD REORGANIZATION.......................... 60
Background of the Healtheon-WebMD reorganization and
related agreements..................................... 60
Joint reasons for the Healtheon-WebMD reorganization...... 62
Healtheon's reasons for the Healtheon-WebMD
reorganization......................................... 63
Recommendation of Healtheon's board of directors.......... 64
WebMD's reasons for the Healtheon-WebMD reorganization.... 64
Recommendation of WebMD's board of directors.............. 66
Opinion of Healtheon's financial advisor.................. 66
Opinion of WebMD's financial advisor...................... 72
Modification of vesting of employee stock options......... 79
Interests of directors, officers and affiliates in the
Healtheon-WebMD reorganization......................... 79
Completion and effectiveness of the Healtheon merger and
the WebMD merger....................................... 80
Structure of the Healtheon-WebMD reorganization and
conversion of WebMD common stock and Healtheon common
stock and treatment of WebMD preferred stock........... 80
Healtheon/WebMD's strategic alliances with and investments
from Microsoft and other partners...................... 81
Exchange of Healtheon and WebMD stock certificates for
Healtheon/WebMD stock certificates..................... 82
No dividends.............................................. 83
Material U.S. federal income tax considerations of the
Healtheon-WebMD reorganization......................... 83
Accounting treatment of the Healtheon-WebMD
reorganization......................................... 85
Regulatory filings and approvals required to complete the
Healtheon-WebMD reorganization......................... 85
</TABLE>
i
<PAGE> 12
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Restrictions on sales of shares by affiliates of WebMD and
Healtheon.............................................. 86
Listing on the Nasdaq National Market of Healtheon/WebMD
common stock to be issued in the Healtheon-WebMD
reorganization......................................... 86
Operations after the Healtheon-WebMD reorganization....... 86
Rights of dissenting WebMD stockholders................... 86
THE HEALTHEON-WEBMD REORGANIZATION AGREEMENT................ 89
HEALTHEON/WEBMD RELATED TRANSACTION AGREEMENTS.............. 95
WebMD stockholders' voting agreement and conversion
agreement.............................................. 95
Healtheon stockholders' voting agreement.................. 95
Microsoft shareholder agreement........................... 96
THE MEDE AMERICA REORGANIZATION............................. 97
Background of the MEDE AMERICA reorganization............. 97
Joint reasons for the MEDE AMERICA reorganization......... 99
MEDE AMERICA's reasons for the MEDE AMERICA
reorganization......................................... 100
Recommendation of MEDE AMERICA's board of directors....... 102
Opinion of MEDE AMERICA's financial advisor............... 102
Interests of directors, officers and affiliates in the
MEDE AMERICA reorganization............................ 107
Completion and effectiveness of the MEDE AMERICA
reorganization......................................... 108
Structure of the MEDE AMERICA reorganization and
conversion of MEDE AMERICA common stock................ 108
Exchange of MEDE AMERICA stock certificates for
Healtheon/WebMD stock certificates..................... 109
Material U.S. federal income tax considerations of the
MEDE AMERICA reorganization............................ 109
Accounting treatment of the MEDE AMERICA reorganization... 111
Regulatory filings and approvals required to complete the
MEDE AMERICA reorganization............................ 111
Restrictions on sales of shares by affiliates of MEDE
AMERICA and Healtheon.................................. 111
Listing on the Nasdaq National Market of Healtheon common
stock to be issued in the MEDE AMERICA
reorganization......................................... 112
Delisting and deregistration of MEDE AMERICA common stock
after the MEDE AMERICA reorganization.................. 112
Operations after the MEDE AMERICA reorganization.......... 112
THE MEDE AMERICA REORGANIZATION AGREEMENT................... 113
MEDE AMERICA RELATED TRANSACTION AGREEMENTS................. 120
MEDE AMERICA voting agreement............................. 120
MEDE AMERICA registration rights agreement................ 120
THE MEDCAST REORGANIZATION.................................. 121
Background of the Medcast reorganization.................. 121
Joint reasons for the Medcast reorganization.............. 123
Medcast's reasons for the Medcast reorganization.......... 123
Recommendation of Medcast's board of directors............ 124
Opinion of Medcast's financial advisor.................... 124
</TABLE>
ii
<PAGE> 13
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Interests of directors, officers and affiliates in the
Medcast reorganization................................. 127
Completion and effectiveness of the Medcast
reorganization......................................... 128
Structure of the Medcast reorganization and conversion of
Medcast capital stock.................................. 129
Adjustment to preferred stock conversion ratios........... 129
Purchase price adjustment................................. 130
The exchange ratio........................................ 131
Exchange of Medcast stock certificates for Healtheon/WebMD
stock certificates..................................... 131
Material U.S. federal income tax considerations of the
Medcast reorganization................................. 132
Accounting treatment of the Medcast reorganization........ 134
Regulatory filings and approvals required to complete the
Medcast reorganization................................. 134
Restrictions on sales of shares by affiliates of Medcast
and Healtheon/WebMD.................................... 134
Listing on the Nasdaq National Market of Healtheon/WebMD
common stock to be issued in the Medcast
reorganization......................................... 135
Operations after the Medcast reorganization............... 135
Rights of dissenting Medcast stockholders................. 135
THE MEDCAST REORGANIZATION AGREEMENT........................ 138
MEDCAST VOTING AGREEMENTS................................... 145
COMPARATIVE PER SHARE MARKET PRICE DATA..................... 146
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION............................................... 147
COMPARISON OF RIGHTS OF HOLDERS OF HEALTHEON COMMON STOCK
AND HEALTHEON/WEBMD COMMON STOCK.......................... 178
COMPARISON OF RIGHTS OF HOLDERS OF WEBMD CAPITAL STOCK AND
HEALTHEON/WEBMD COMMON STOCK.............................. 179
COMPARISON OF RIGHTS OF HOLDERS OF MEDE AMERICA COMMON STOCK
AND HEALTHEON/WEBMD COMMON STOCK.......................... 191
COMPARISON OF RIGHTS OF HOLDERS OF MEDCAST CAPITAL STOCK AND
HEALTHEON/WEBMD COMMON STOCK.............................. 195
MANAGEMENT OF HEALTHEON/WEBMD............................... 201
INFORMATION REGARDING HEALTHEON............................. 203
Healtheon's business...................................... 203
Market for Healtheon's common stock and related
stockholder matters.................................... 212
Healtheon selected consolidated financial data............ 214
Healtheon management's discussion and analysis of
financial condition and results of operations.......... 215
Healtheon's management.................................... 225
Healtheon's certain related-party transactions............ 236
Share ownership by Healtheon's principal stockholders,
management and directors............................... 239
INFORMATION REGARDING WEBMD................................. 242
WebMD's business.......................................... 242
WebMD selected consolidated financial data................ 254
</TABLE>
iii
<PAGE> 14
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
WebMD management's discussion and analysis of financial
condition and results of operations.................... 255
WebMD's management........................................ 264
WebMD's and related-party transactions.................... 270
Share ownership by principal stockholders, management and
directors of WebMD..................................... 273
INFORMATION REGARDING MEDE AMERICA.......................... 276
MEDE AMERICA's business................................... 276
MEDE AMERICA selected consolidated financial data......... 284
MEDE AMERICA management's discussion and analysis of
financial condition and results of operations.......... 286
Share ownership by MEDE AMERICA's principal stockholders,
management and directors............................... 302
INFORMATION REGARDING MEDCAST............................... 305
Medcast's business........................................ 305
Medcast's selected financial data......................... 312
Medcast management's discussion and analysis of financial
condition and results of operations.................... 313
Share ownership by Medcast's principal stockholders,
management and directors............................... 318
ADDITIONAL MATTERS BEING SUBMITTED TO A VOTE OF ONLY
HEALTHEON STOCKHOLDERS.................................... 321
LEGAL OPINION............................................... 328
EXPERTS..................................................... 328
WHERE YOU CAN FIND MORE INFORMATION......................... 330
</TABLE>
<TABLE>
<S> <C> <C>
ANNEX A The Healtheon-WebMD Reorganization Agreement
ANNEX B The MEDE AMERICA Reorganization Agreement
ANNEX C The Medcast Reorganization Agreement
ANNEX D Opinion of Healtheon Financial Advisor
ANNEX E Opinion of WebMD Financial Advisor
ANNEX F Opinion of MEDE AMERICA Financial Advisor
ANNEX G Opinion of Medcast Financial Advisor
ANNEX H Georgia Business Corporation Code Sections 14-2-1301 through
14-2-1332
ANNEX I Delaware General Corporation Law Section 262
</TABLE>
iv
<PAGE> 15
QUESTIONS AND ANSWERS FOR HEALTHEON AND WEBMD STOCKHOLDERS
Q: WHAT IS THE HEALTHEON-WEBMD REORGANIZATION?
A: The boards of directors of Healtheon and WebMD have voted to combine the
businesses of Healtheon and WebMD. To combine the companies, a new parent
company will be formed, called Healtheon/WebMD Corporation. Healtheon will
merge with a subsidiary of Healtheon/WebMD, and WebMD will merge with another
subsidiary of Healtheon/ WebMD, resulting in Healtheon and WebMD each
becoming subsidiaries of Healtheon/ WebMD. (See diagrams on page 12).
After the Healtheon-WebMD reorganization, assuming conversion of all shares
of WebMD preferred stock into common stock and completion of the proposed
combination of Healtheon and MEDE AMERICA, and Healtheon/WebMD and Medcast,
which are discussed further below, the former stockholders of Healtheon will
own approximately 48.6%, the former stockholders of WebMD will own
approximately 43.7%, the former stockholders of MEDE AMERICA will own
approximately 6.0% and the former stockholders of Medcast will own
approximately 1.7% of Healtheon/WebMD.
For a more complete description of the Healtheon-WebMD reorganization, see
the section entitled "The Healtheon-WebMD reorganization" on page 60.
Q: WHAT IS THE NEW PARENT COMPANY, HEALTHEON/ WEBMD?
A: Healtheon/WebMD is a new parent corporation formed to facilitate the
combination of the businesses of Healtheon and WebMD. It is expected that
Healtheon/WebMD common stock will trade on the Nasdaq National Market under
the trading symbol "HLTH" in lieu of Healtheon common stock. Initially, the
businesses of Healtheon and WebMD will remain in the subsidiaries of
Healtheon/ WebMD, but Healtheon/WebMD management will control the combined
entities.
Q: WHAT WILL HEALTHEON STOCKHOLDERS RECEIVE IN THE REORGANIZATION?
A: When the reorganization is completed, Healtheon stockholders will receive one
share of Healtheon/WebMD common stock in exchange for each share of Healtheon
common stock. However, Healtheon stockholders will not be required to give up
their stock certificates because old Healtheon stock certificates will
represent their interest in Healtheon/ WebMD.
Holders of options or warrants to purchase shares of Healtheon common stock
will hold options or warrants, as appropriate, to purchase shares of
Healtheon/WebMD common stock after completion of the reorganization.
Q: WHAT WILL WEBMD COMMON STOCKHOLDERS RECEIVE IN THE REORGANIZATION?
A: When the Healtheon-WebMD reorganization is completed, holders of each series
of WebMD common stock will receive 1.815 shares of Healtheon/WebMD common
stock in exchange for each share of WebMD common stock, except for those
holders who exercise dissenters' rights under Georgia law. No fractional
shares will be issued. WebMD common stockholders will receive cash based on
the market price of Healtheon common stock instead of any fractional share.
Example: If a WebMD common stockholder owns 100 shares, then after the
reorganization the stockholder will receive 181 shares of Healtheon/WebMD
common stock and a check for the market value of the 0.5 fractional share of
Healtheon/WebMD common stock.
Holders of options or warrants to purchase shares of WebMD common stock will
hold options or warrants as appropriate to purchase shares of Healtheon/WebMD
common stock after completion of the reorganization.
For a more complete description of what WebMD stockholders will receive in
the Healtheon-WebMD reorganization, see the section entitled "Structure of
the Healtheon-WebMD reorganization and conversion of
1
<PAGE> 16
WebMD common stock and Healtheon common stock and treatment of WebMD
preferred stock" on page 80.
Q: WHAT WILL WEBMD PREFERRED STOCKHOLDERS RECEIVE IN THE REORGANIZATION?
A. When the reorganization is completed, WebMD's preferred stockholders will
continue to hold their WebMD preferred stock which will then represent
preferred stock of the WebMD subsidiary of Healtheon/WebMD. The preferred
stock will continue to be convertible into WebMD common stock and not into
publicly traded common stock of Healtheon/WebMD, and will continue to have
all of the other preferences and rights currently applicable to the WebMD
preferred stock. As a result of conversion agreements and voting agreements
that have been signed by the holders of a majority of the outstanding shares
of WebMD's Series C, D, E and F preferred stock, those series of preferred
stock will be converted into WebMD common stock prior to the effective time
of the reorganization and thus will receive 1.815 shares of Healtheon common
stock for each share of WebMD common stock received in the preferred stock
conversion. In the case of the Series A preferred stock and Series B
preferred stock, if the holders of a majority of either series elect to
convert into WebMD common stock prior to the reorganization, then the entire
series will be automatically converted. In the case of the Series A preferred
stock, any holder may elect to convert into common stock prior to the
reorganization.
Holders of options and warrants for WebMD preferred stock, other than its
Series A and B preferred stock, will hold options and warrants as appropriate
to purchase shares of Healtheon/WebMD common stock after the completion of
the reorganization. Options and warrants for WebMD Series A and B preferred
stock, other than options to acquire Series B preferred stock under the
Sapient Option Plan, will remain exercisable for WebMD Series A and Series B
preferred stock after the reorganization, unless a majority of the holders of
the applicable series elects to cause the entire series to be converted into
WebMD common stock prior to the effective time of the reorganization, in
which case options and warrants to purchase the applicable series shall
become by their terms options and warrants for Healtheon/WebMD common stock.
Upon completion of the reorganization, options granted under the option plan
of Sapient Health Network, Inc. to acquire Series B preferred stock will
become exercisable for Healtheon/WebMD common stock.
Q: WHAT ARE THE MEDE AMERICA AND MEDCAST REORGANIZATIONS?
A: Healtheon has also agreed to a reorganization with MEDE AMERICA and
Healtheon/ WebMD has agreed to a reorganization with Greenberg News Networks,
Inc., which is referred to as Medcast. These reorganizations are described in
this proxy statement/ prospectus. The Healtheon-WebMD reorganization does not
depend on Healtheon's reorganization with MEDE AMERICA or on
Healtheon/WebMD's reorganization with Medcast. However, you should be aware
that if these reorganizations are completed, MEDE AMERICA and Medcast will
become wholly owned subsidiaries of the combined Healtheon/WebMD, and MEDE
AMERICA and Medcast stockholders will become stockholders of Healtheon/WebMD.
This proxy statement/prospectus is also being sent to stockholders of MEDE
AMERICA and Medcast. Unless stated otherwise, information provided in this
proxy statement/prospectus assumes completion of the MEDE AMERICA and Medcast
reorganizations. Where appropriate, we have indicated where information
pertaining to Healtheon and WebMD does not give effect to the reorganizations
with MEDE AMERICA or Medcast.
Q: DOES THE BOARD OF DIRECTORS OF HEALTHEON RECOMMEND VOTING IN FAVOR OF THE
HEALTHEON-WEBMD REORGANIZATION?
A: Yes. After careful consideration, Healtheon's board of directors recommends
that its stockholders vote in favor of the proposed Healtheon-WebMD
reorganization and the issuance of shares of Healtheon/WebMD common stock to
the stockholders of WebMD in the reorganization.
2
<PAGE> 17
Q: DOES THE BOARD OF DIRECTORS OF WEBMD RECOMMEND VOTING IN FAVOR OF THE
HEALTHEON-WEBMD REORGANIZATION?
A: Yes. After careful consideration, WebMD's board of directors unanimously
recommends that its stockholders vote in favor of the Healtheon-WebMD
reorganization agreement and the proposed WebMD merger.
Q: ARE THERE RISKS I SHOULD CONSIDER IN DECIDING WHETHER TO VOTE FOR THE
HEALTHEON-WEBMD REORGANIZATION?
A: Yes. In evaluating the Healtheon-WebMD reorganization, you should carefully
consider the factors discussed in the section entitled "Risk Factors" on page
34.
Q: WHAT DO I NEED TO DO NOW?
A: Mail your signed proxy card in the enclosed return envelope as soon as
possible so that your shares may be represented at your meeting. If you do
not include instructions on how to vote your properly signed proxy, your
shares will be voted "FOR" approval of the Healtheon-WebMD reorganization and
the other proposals to be voted on at the meeting.
For a more complete description of voting at the Healtheon meeting, see the
section entitled "Proxies" on page 51.
For a more complete description of voting at the WebMD meeting, see the
section entitled "Proxies" on page 53.
Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE?
A: If you are a Healtheon stockholder and want to change your vote, send the
secretary of Healtheon a later-dated, signed proxy card before the Healtheon
meeting or attend the meeting in person. You may also revoke your proxy by
sending written notice to the secretary of Healtheon before the meeting.
Healtheon stockholders who have signed voting agreements may not revoke the
proxies given by them in the voting agreements.
For a more complete description of how to change your vote as a Healtheon
stockholder, see the section entitled "Proxies" on page 51.
If you are a WebMD stockholder and want to change your vote, send the
secretary of WebMD a later-dated, signed proxy card before the WebMD meeting
or attend the meeting in person. You may also revoke your proxy by sending
written notice to the secretary of WebMD before the meeting. WebMD
stockholders who have signed voting or conversion agreements may not revoke
the proxies given by them in the voting or conversion agreements.
For a more complete description of how to change your vote as a WebMD
stockholder, see the section entitled "Proxies" on page 53.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the reorganization is completed, we will send WebMD stockholders
written instructions for exchanging their stock certificates for
Healtheon/WebMD stock certificates. Healtheon stockholders need not exchange
their stock certificates for Healtheon/WebMD stock certificates.
Q: WHEN DO YOU EXPECT THE HEALTHEON-WEBMD REORGANIZATION TO BE COMPLETED?
A: We are working toward completing the Healtheon-WebMD reorganization as
quickly as possible. We hope to complete the reorganization during the third
calendar quarter of 1999.
For a more complete description of the conditions to the Healtheon-WebMD
reorganization, see the section entitled "Conditions to completion of the
Healtheon-WebMD reorganization" on page 91.
Q: WILL I RECOGNIZE AN INCOME TAX GAIN OR LOSS ON THE HEALTHEON-WEBMD
REORGANIZATION?
A: For both Healtheon and WebMD stockholders, we expect that if the
Healtheon-WebMD reorganization is completed, you will not recognize gain or
loss for U.S. federal income tax purposes, except that WebMD stockholders
will recognize gain or loss with respect to cash received instead of
fractional shares or received after the exercise of appraisal rights.
However, all stockholders are urged to consult their own tax advisor to
determine their particular tax consequences.
For a more complete description of the tax consequences to Healtheon and
WebMD
3
<PAGE> 18
stockholders, see the section entitled "Material U.S. federal income tax
consequences of the Healtheon-WebMD reorganization" on page 83.
Q: AM I ENTITLED TO DISSENTERS' OR APPRAISAL RIGHTS?
A: Under Georgia law, holders of WebMD common stock and WebMD Series A preferred
stock are entitled to appraisal rights in the WebMD merger.
Under Delaware law, holders of Healtheon stock are not entitled to
dissenters' or appraisal rights in the Healtheon merger.
For a description of appraisal rights for WebMD stockholders, see the section
entitled "Rights of Dissenting WebMD stockholders" on page 86.
Q: WHO SHOULD I CALL WITH QUESTIONS?
A: Healtheon stockholders should call Scott Wilson, Edelman Public Relations
Worldwide, at (415) 433-5381, extension 208, with any questions about the
Healtheon reorganization.
WebMD stockholders should call L. Scott Askins, Vice President and Corporate
Counsel, at (404) 479-7600 with any questions about the WebMD reorganization.
You may also obtain additional information about Healtheon from documents
filed with the Securities and Exchange Commission by following the
instructions in the section entitled "Where you can find more information" on
page 330.
4
<PAGE> 19
QUESTIONS AND ANSWERS FOR MEDE AMERICA STOCKHOLDERS
Q: WHAT IS THE MEDE AMERICA REORGANIZATION?
A: The boards of directors of Healtheon and MEDE AMERICA have voted to combine
the businesses of Healtheon and MEDE AMERICA. To combine the companies, a new
parent company will be formed, called Healtheon/WebMD. Healtheon will merge
with a subsidiary of Healtheon/WebMD, and MEDE AMERICA will merge with
another subsidiary of Healtheon/WebMD, resulting in each of Healtheon and
MEDE AMERICA becoming subsidiaries of Healtheon/WebMD. The MEDE AMERICA
reorganization does not depend on the Healtheon-WebMD reorganization or the
Medcast reorganization. (See diagrams on page 12.)
For a more complete description of the reorganization, see the section
entitled "The MEDE AMERICA reorganization" on page 97.
Q: WHAT IS HEALTHEON/WEBMD?
A: Healtheon/WebMD is a new corporation formed to facilitate the combination of
the businesses of Healtheon, WebMD, MEDE AMERICA and Medcast. After the
reorganizations, Healtheon/WebMD will be the parent company of each of
Healtheon, WebMD, MEDE AMERICA and Medcast. It is expected that
Healtheon/WebMD common stock will trade on the Nasdaq National Market in lieu
of Healtheon common stock under the trading symbol "HLTH." Initially, the
businesses of Healtheon, WebMD, MEDE AMERICA and Medcast will remain as
subsidiaries of Healtheon/WebMD, but Healtheon/WebMD management will control
the combined entities.
Q: WHAT WILL MEDE AMERICA STOCKHOLDERS RECEIVE IN THE REORGANIZATION?
A: When the reorganization is completed, MEDE AMERICA stockholders will receive,
subject to upward adjustment in certain circumstances described below, 0.6593
shares of Healtheon/ WebMD common stock in exchange for each share of MEDE
AMERICA common stock. Healtheon/WebMD will not issue fractional shares.
Adjustment of the exchange ratio may be made if the average closing price of
Healtheon common stock for the ten-day period ending two business days before
the MEDE AMERICA stockholders meeting is less than $38.68. MEDE AMERICA
stockholders will receive cash based on the market price of Healtheon/WebMD
common stock instead of any fractional share.
Example: If the average Healtheon closing sale price is $50 and you own 100
shares of MEDE AMERICA common stock, then after the reorganization you will
receive 65 shares of Healtheon/WebMD common stock and a check for the market
value of the 0.93 fractional share of Healtheon/WebMD common stock.
If the average closing sale price of Healtheon common stock is less than
$38.68 during the ten-day period ending two business days before the MEDE
AMERICA stockholders meeting, Healtheon may adjust the exchange ratio to an
amount calculated by dividing 25.50 by this average closing sale price. This
adjustment would increase the number of shares issued to MEDE AMERICA
stockholders in the reorganization. If Healtheon does not elect to adjust the
exchange ratio, MEDE AMERICA would have the right to terminate the
reorganization agreement at this time.
Example: If the average Healtheon closing sale price is $35 for the ten-day
period ending two business days before the MedE AMERICA stockholders meeting
and you own 100 shares of MEDE AMERICA common stock, and if Healtheon adjusts
the exchange ratio, then the new exchange ratio is 0.7286. You will receive
72 shares of Healtheon/WebMD common stock and a check for the market value of
the 0.86 fractional share of Healtheon/WebMD common stock. We calculated the
exchange ratio by dividing $25.50 by $35. However, if Healtheon does not
adjust the exchange ratio, the MedE AMERICA board of directors may decide to
terminate the reorganization agreement prior to the stockholders meeting. If
MedE AMERICA board of directors does not terminate the reorganization
agreement, the exchange ratio will be 0.6593, and after the reorganization
you will receive 65 shares of
5
<PAGE> 20
Healtheon/WebMD common stock and a check for the market value of the 0.93
fractional share of Healtheon/WebMD common stock.
Holders of options or warrants to purchase shares of MEDE AMERICA common
stock will hold options or warrants as appropriate to purchase shares of
Healtheon/WebMD common stock after completion of the reorganization.
Healtheon's stock price has been volatile. As an example, the following table
sets forth the high and low closing sale prices per share of Healtheon common
stock on the Nasdaq National Market during the indicated months.
<TABLE>
<CAPTION>
CLOSING
SALE PRICES
PER SHARE
OF HEALTHEON
COMMON
STOCK
-----------------
MONTH HIGH LOW
----- ------- ------
<S> <C> <C>
August 1999 (through August
4)............................ $ 46.38 $41.59
July 1999....................... $ 77.63 $50.25
June 1999....................... $ 88.88 $72.38
May 1999........................ $105.00 $39.94
April 1999...................... $ 58.28 $45.25
March 1999...................... $ 46.38 $25.50
February 1999................... $ 31.38 $24.00
</TABLE>
For a more complete description of what you will receive in the
reorganization, see the section entitled "Structure of the MEDE AMERICA
reorganization and conversion of MEDE AMERICA common stock" on page 96. After
the close of business on the last day of the ten-day period during which the
average Healtheon closing price is determined, MEDE AMERICA stockholders may
obtain information relating to any adjustment of the exchange ratio by
calling .
Q: DOES THE BOARD OF DIRECTORS OF MEDE AMERICA RECOMMEND VOTING IN FAVOR OF THE
MEDE AMERICA REORGANIZATION?
A: Yes. After careful consideration, MEDE AMERICA's board of directors
unanimously recommends that its stockholders vote in favor of the
reorganization agreement and the proposed merger.
For a more complete description of the recommendation of the board of
directors of MEDE AMERICA, see the sections entitled "MEDE AMERICA's reasons
for the MEDE AMERICA reorganization" on page 88 and "Recommendation of MEDE
AMERICA's board of directors" on page 102.
Q: ARE THERE RISKS I SHOULD CONSIDER IN DECIDING WHETHER TO VOTE FOR THE MEDE
AMERICA REORGANIZATION?
A: Yes. In evaluating the MEDE AMERICA reorganization, you should carefully
consider the factors discussed in the section entitled "Risk Factors" on page
34.
Q: WHAT DO I NEED TO DO NOW?
A: Mail your signed proxy card in the enclosed return envelope as soon as
possible so that your shares may be represented at your meeting. If you do
not include instructions on how to vote your properly signed proxy, your
shares will be voted "FOR" approval and adoption of the reorganization
agreement and approval of the merger.
For a more complete description of voting at the meeting, see the section
entitled "Proxies" on page 56.
Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE?
A: If you want to change your vote, send the secretary of MEDE AMERICA a
later-dated, signed proxy card before the meeting or attend the meeting in
person. You may also revoke your proxy by sending written notice to the
secretary of MEDE AMERICA before the meeting. MEDE AMERICA stockholders who
have signed voting agreements may not revoke the proxies given by them in the
voting agreement.
For a more complete description of how to change your vote, see the section
entitled "Proxies" on page 56.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your shares only if you provide instructions on how to
vote by following the information provided to you by your broker.
6
<PAGE> 21
For a more complete description of voting shares held in "street name," see
the section entitled "Proxies" on page 56.
Q: SHOULD I SEND IN MY MEDE AMERICA STOCK CERTIFICATES NOW?
A: No. After the reorganization is completed, we will send you written
instructions for exchanging your MEDE AMERICA stock certificates for
Healtheon/WebMD stock certificates.
Q: WHEN DO YOU EXPECT THE MEDE AMERICA REORGANIZATION TO BE COMPLETED?
A: We are working toward completing the MEDE AMERICA reorganization as quickly
as possible. We hope to complete the reorganization during the third calendar
quarter of 1999.
For a more complete description of the conditions to the MEDE AMERICA
reorganization, see the section entitled "Conditions to completion of the
MEDE AMERICA reorganization" on page 104.
Q: WILL I RECOGNIZE AN INCOME TAX GAIN OR LOSS ON THE MEDE AMERICA
REORGANIZATION?
A: We expect that if the reorganization is completed, MEDE AMERICA stockholders
will not recognize gain or loss for U.S. federal income tax purposes, except
that MEDE AMERICA stockholders will recognize gain or loss with respect to
cash received instead of fractional shares. However, MEDE AMERICA
stockholders are urged to consult their own tax advisor to determine their
particular tax consequences.
For a more complete description of the tax consequences, see the section
entitled "Material U.S. federal income tax consequences of the MEDE AMERICA
reorganization" on page 109.
Q: AM I ENTITLED TO DISSENTERS' OR APPRAISAL RIGHTS?
A: Under Delaware law, holders of MEDE AMERICA common stock are not entitled to
dissenters' or appraisal rights in the merger.
Q: WHO SHOULD I CALL WITH QUESTIONS?
A: MEDE AMERICA stockholders should call Mitchell Sepaniak, MEDE AMERICA
Investor Relations at (770) 416-0673, ext. 1106 with any questions about the
MEDE AMERICA reorganization.
You may also obtain additional information about Healtheon and MEDE AMERICA
from documents filed with the Securities and Exchange Commission by following
the instructions in the section entitled "Where you can find more
information" on page 330.
7
<PAGE> 22
QUESTIONS AND ANSWERS FOR MEDCAST STOCKHOLDERS
Q: WHAT IS THE MEDCAST REORGANIZATION?
A: The boards of directors of each of Healtheon, WebMD and Medcast have voted to
combine the businesses of Healtheon, WebMD and Medcast. To combine the
companies, a new parent company will be formed, called Healtheon/WebMD
Corporation. Healtheon will merge with a subsidiary of Healtheon/WebMD, WebMD
will merge with a second subsidiary of Healtheon/WebMD and Medcast will merge
with a third subsidiary of Healtheon/WebMD, resulting in each of Healtheon,
WebMD and Medcast becoming subsidiaries of Healtheon/ WebMD. It is also
expected that MEDE AMERICA will merge with a fourth subsidiary of
Healtheon/WebMD and become a subsidiary of Healtheon/WebMD. (See diagrams on
page 12.)
For a more complete description of the reorganization, see the section
entitled "The Medcast reorganization" on page 121.
Q: DOES THE MEDCAST REORGANIZATION DEPEND ON THE HEALTHEON-WEBMD REORGANIZATION
OR THE MEDE AMERICA REORGANIZATION?
A: The combination of Medcast with a wholly owned subsidiary of Healtheon/WebMD
is dependent on the simultaneous or prior completion of the Healtheon-WebMD
reorganization. If the Healtheon-WebMD reorganization does not occur, Medcast
will instead merge with a subsidiary of WebMD, and will separately seek your
approval for that merger. This proxy statement/prospectus does not describe
the alternative WebMD-Medcast merger.
The Medcast reorganization does not depend on the MEDE AMERICA
reorganization.
Q: WHAT IS THE NEW PARENT COMPANY, HEALTHEON/ WEBMD?
A: Healtheon/WebMD is a new parent corporation formed to facilitate the
combination of the businesses of Healtheon, WebMD, MEDE AMERICA and Medcast.
It is expected that Healtheon/WebMD common stock will trade on the Nasdaq
National Market in lieu of Healtheon common stock under the trading symbol
"HLTH." Initially, the businesses of Healtheon, WebMD, MEDE AMERICA and
Medcast will remain in the subsidiaries of Healtheon/WebMD, but
Healtheon/WebMD management will control the combined entities.
Q: WHAT WILL MEDCAST STOCKHOLDERS RECEIVE IN THE REORGANIZATION?
A: When the reorganization is completed, Medcast stockholders will receive
approximately 0.5483 shares of Healtheon/WebMD common stock in exchange for
each share of Medcast common stock they own, after conversion of any shares
of Medcast preferred stock they own. Healtheon/WebMD will not issue
fractional shares, but instead will pay Medcast stockholders cash based on a
price per share of $81.98 for any fractional share.
Holders of options or warrants to purchase shares of Medcast common stock
will hold options or warrants to purchase shares of Healtheon/WebMD common
stock after completion of the reorganization.
For a more complete description of what you will receive in the
reorganization, see the section entitled "Structure of the Medcast
reorganization and conversion of Medcast capital stock" on page 129.
Q: DOES THE BOARD OF DIRECTORS OF MEDCAST RECOMMEND VOTING IN FAVOR OF THE
MEDCAST MERGER?
A: Yes. After careful consideration, Medcast's board of directors unanimously
recommends that its stockholders vote in favor of the reorganization
agreement and the proposed merger.
For a more complete description of the recommendation of the board of
directors of Medcast, see the sections entitled "Medcast's reasons for the
Medcast reorganization" on page 123 and "Recommendation of Medcast's board of
directors" on page 124.
Q: ARE THERE RISKS I SHOULD CONSIDER IN DECIDING WHETHER TO VOTE FOR THE MEDCAST
REORGANIZATION?
A: Yes. In evaluating the Medcast reorganization, you should carefully consider
the factors discussed in the section entitled "Risk Factors" on page 34.
8
<PAGE> 23
Q: WHAT DO I NEED TO DO NOW?
A: Many Medcast stockholders have previously executed an irrevocable proxy in
favor of Alan N. Greenberg. If you have not previously executed an
irrevocable proxy, you are receiving a proxy with this proxy statement/
prospectus. Mail your signed proxy card in the enclosed return envelope as
soon as possible so that your shares may be represented at your meeting.
PLEASE NOTE THAT ALL HOLDERS OF SERIES A PREFERRED STOCK AND SERIES C
PREFERRED STOCK ARE CONTRACTUALLY OBLIGATED TO VOTE IN FAVOR OF THE MERGER.
If you do not include instructions on how to vote your properly signed proxy,
your shares will be voted "FOR" approval and adoption of the reorganization
agreement and approval of the merger.
For a more complete description of voting at the meeting, see the section
entitled "Proxies" on page 58. For a description of the contractual
obligation of the Series A and Series C preferred stockholders to vote in
favor of the merger, see the section entitled "Medcast stockholders
agreements" on page 58.
Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE?
A: If you have not previously executed an irrevocable proxy and you want to
change your vote, send the secretary of Medcast a later-dated, signed proxy
card before the meeting or attend the meeting in person. You may also revoke
your proxy by sending written notice to the secretary of Medcast before the
meeting.
For a more complete description of how to change your vote, see the section
entitled "Proxies" on page 58.
Q: SHOULD I SEND IN MY MEDCAST STOCK CERTIFICATES NOW?
A: No. After the reorganization is completed, we will send you written
instructions for exchanging your Medcast stock certificates for
Healtheon/WebMD stock certificates.
Q: WHEN DO YOU EXPECT THE MEDCAST REORGANIZATION TO BE COMPLETED?
A: We are working toward completing the Medcast reorganization as quickly as
possible. We hope to complete the reorganization during the third calendar
quarter of 1999.
For a more complete description of the conditions to the Medcast
reorganization, see the section entitled "Completion and effectiveness of the
Medcast reorganization" on page 128.
Q: WILL I RECOGNIZE AN INCOME TAX GAIN OR LOSS ON THE MEDCAST REORGANIZATION?
A: We expect that if the reorganization is completed, Medcast stockholders will
not recognize gain or loss for U.S. federal income tax purposes, except that
Medcast stockholders will recognize gain or loss with respect to cash
received instead of fractional shares or received after the exercise of
dissenters' rights. However, Medcast stockholders are urged to consult their
own tax advisor to determine their particular tax consequences.
For a more complete description of the tax consequences, see the section
entitled "Material U.S. federal income tax consequences of the Medcast
reorganization" on page 132.
Q: AM I ENTITLED TO DISSENTERS' OR APPRAISAL RIGHTS?
A: Under Delaware law, holders of Medcast capital stock are entitled to
dissenters' rights in the merger. For a detailed description of these rights,
see "The Medcast reorganization -- Rights of dissenting Medcast stockholders"
on page 135.
Q: WHO SHOULD I CALL WITH QUESTIONS?
A: Medcast stockholders should call Gordon T. Wyatt, Chief Financial Officer and
Corporate Secretary, at (404) 266-8500 with any questions about the Medcast
reorganization.
You may also obtain additional information about Healtheon from documents
filed with the Securities and Exchange Commission by following the
instructions in the section entitled "Where you can find more information" on
page 330.
9
<PAGE> 24
SUMMARY OF THE PROXY STATEMENT/PROSPECTUS
This proxy statement/prospectus pertains to the reorganization of Healtheon
and WebMD, the reorganization of Healtheon and MEDE AMERICA and the
reorganization of Healtheon/WebMD and Medcast, and is being sent to the
stockholders of all of the companies. Unless stated otherwise, information in
this proxy statement/prospectus assumes that the combined company, to be known
as Healtheon/ WebMD, will consist of Healtheon, WebMD, MEDE AMERICA and Medcast.
THE COMPANIES
[HEALTHEON LOGO]
HEALTHEON CORPORATION
4600 Patrick Henry Drive
Santa Clara, CA 95054
(408) 876-5000
www.healtheon.com
Healtheon is pioneering the use of the Internet to simplify workflows,
decrease costs and contribute to the quality of patient care throughout the
healthcare industry. Healtheon has designed and developed the Healtheon
Platform, an Internet-based information and transaction platform that allows
Healtheon 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 Healtheon's Internet-based platform.
Healtheon's solution enables the secure exchange of information among disparate
healthcare information systems and supports a broad range of healthcare
transactions, including enrollment, eligibility determination, referrals and
authorizations, laboratory and diagnostic test ordering, clinical data retrieval
and claims processing. Healtheon was founded in 1995.
[WebMD LOGO]
WEBMD, INC.
400 The Lennox Building
3399 Peachtree Road NE
Atlanta, Georgia 30326
(404) 479-7600
www.webmd.com
WebMD provides web-based services to healthcare professionals and consumers
under its WebMD brand name. WebMD's subscription-based professional web site
includes access to electronic data interchange services, enhanced communications
services, healthcare-related information and other web-based services that are
useful to healthcare professionals. WebMD designed its professional web site to
simplify healthcare practices by integrating multiple administrative,
communications and research functions into a single, easy to use web-based
solution. WebMD's free consumer web site includes access to premium, branded
healthcare-related information, personalized, targeted information about
specific health conditions and content-specific online communities that allow
consumers to participate in real-time discussions and support networks via the
web. WebMD designed its consumer web site to assist consumers in making informed
healthcare decisions. WebMD commercially launched its Internet-based services in
October 1998. WebMD was incorporated in 1996.
10
<PAGE> 25
[MEDE LOGO]
MEDE AMERICA CORPORATION
90 Merrick Avenue, Suite 501
East Meadow, NY 11554
(516) 542-4500
www.medeamerica.com
MEDE AMERICA is a leading provider of electronic data interchange, or
"EDI," products and services to a broad range of providers and payers in the
healthcare industry. MEDE AMERICA offers an integrated suite of EDI solutions
that allows hospitals, pharmacies, physicians, dentists and other healthcare
providers and provider groups to electronically edit, process and transmit
claims, eligibility and enrollment data, track claims submissions throughout the
claims payment process and obtain faster reimbursement for their services. In
addition to offering greater processing speed, MEDE AMERICA's EDI products
reduce processing costs, increase collection rates and result in more accurate
data interchange. MEDE AMERICA was founded in 1995.
[GNN LOGO] [MEDCAST LOGO]
GREENBERG NEWS NETWORKS, INC.
1175 Peachtree Street, Suite 2400
Atlanta, Georgia 30361
(404) 266-8500
www.medcast.com
Greenberg News Networks, Inc., which is referred to as Medcast, is a
leading provider of medical news, information, educational programs and services
designed for physicians and other healthcare professionals. Medcast's product,
Medcast Networks, is downloaded to the hard drives of its users' personal
computers via the Internet and can be accessed using standard PC architecture.
With Medcast, physicians may also obtain continuing medical education credits
and can easily access information provided by specialty medical associations and
leading academic institutions. To date, Medcast has developed five physician
specialty networks: Medcast Cardiology, Medcast Psychiatry, Medcast Oncology,
Medcast Endocrinology and Medcast Elite Primary Care. Medcast was founded in
1997.
FORWARD-LOOKING STATEMENTS IN THIS PROXY STATEMENT/PROSPECTUS
This proxy statement/prospectus contains forward-looking statements. These
statements include statements with respect to Healtheon/WebMD's, Healtheon's,
WebMD's, MEDE AMERICA'S and Medcast's financial condition, results of operations
and business and on the expected impact of the reorganizations described in this
proxy statement/prospectus on Healtheon/WebMD's financial performance. Words
such as anticipates, expects, intends, plans, believes, seeks, estimates and
similar expressions identify forward-looking statements.
These forward-looking statements are not guarantees of future performance
and are subject to risks and uncertainties that could cause actual results to
differ materially from the results contemplated by the forward-looking
statements. These risks and uncertainties include:
- the possibility that the reorganizations will not be consummated
- the possibility that the anticipated benefits from the reorganizations
will not be fully realized
- the possibility that costs or difficulties related to the integration of
our businesses will be greater than expected
- other risk factors as may be detailed from time to time in Healtheon's
and MEDE AMERICA's public announcements and filings with the Securities
and Exchange Commission.
In evaluating the reorganizations, you should carefully consider the
discussion of these and other factors in the section entitled "Risk Factors" on
page .
11
<PAGE> 26
STRUCTURE OF THE REORGANIZATIONS
The transactions contemplated by the Healtheon-WebMD reorganization, the
MEDE AMERICA reorganization and the Medcast reorganization are illustrated by
the first diagram below and the holding company structure of Healtheon/WebMD
following the reorganizations is illustrated by the second diagram below.
[FLOW CHART]
The figure entitled "Structure of the Reorganizations" consists of two
diagrams: the first depicts the structure of the companies prior to the
reorganizations; the second depicts the structure of the companies after the
reorganizations.
The first diagram, entitled "Prior to Reorganizations," has one large
rectangle at the top center with the words "Healtheon/WebMD" in it. Centered
beneath this rectangle is a single row of eight smaller squares. From left to
right, these eight squares contain the words "Healtheon," "Healtheon Merger
Sub," "WebMD," "WebMD Merger Sub," "MEDE Merger Sub," "MEDE AMERICA," "Medcast
Merger Sub" and "Medcast," respectively. A line extends from the
"Healtheon/WebMD" rectangle to each of the following four squares: "Healtheon
Merger Sub," "WebMD Merger Sub," "MEDE Merger Sub" and "Medcast Merger Sub." An
arrow extends from the "Healtheon Merger Sub" square to the "Healtheon" square;
from the "WebMD Merger Sub" square to the "WebMD" square; from the "MEDE Merger
Sub" square to the "MEDE AMERICA" square; and from the "Medcast Merger Sub"
square to the "Medcast" square.
The second diagram, entitled "After Reorganizations," has one large ellipse
at the top center with the words "Former stockholders of Healtheon, WebMD* and
MEDE AMERICA" in it. Centered beneath this ellipse is a single, large rectangle
with the words "Healtheon/WebMD" in it. A vertical line connects the ellipse and
the rectangle. Centered beneath the rectangle is a single row of four smaller
squares. From left to right, these four squares contain the words "Healtheon,"
"WebMD," MEDE AMERICA," and "Medcast," respectively. A line extends from each of
these four squares to the "Healtheon/WebMD" rectangle. Finally, the footnote at
the bottom of this diagram read: "*assumes conversion of all WebMD preferred
stock."
12
<PAGE> 27
SUMMARY OF THE HEALTHEON-WEBMD REORGANIZATION
THE HEALTHEON-WEBMD REORGANIZATION
In the Healtheon-WebMD reorganization, Healtheon will merge with a
subsidiary of a new parent company, called Healtheon/WebMD, and WebMD will merge
with another subsidiary of Healtheon/WebMD, resulting in Healtheon and WebMD
each becoming subsidiaries of Healtheon/WebMD. (See diagrams on page 12).
The Healtheon-WebMD reorganization agreement is attached to this proxy
statement/prospectus as Annex A. We encourage you to read it carefully. The
Healtheon-WebMD reorganization agreement is more fully discussed on page 89.
We believe the Healtheon-WebMD reorganization will provide Healtheon/WebMD
with the opportunity to realize several benefits, including:
- combining WebMD's strong brand recognition and strategic relationships
with Healtheon's e-commerce transaction platform and industry
relationships will enable Healtheon/WebMD to move decisively toward the
goal of achieving critical mass in the healthcare industry with a
comprehensive, integrated Internet-based solution
- expanding each company's connected network of customers and partners.
Healtheon/WebMD is expected to offer connectivity and transactions for
physicians, consumers and healthcare institutions over a network
consisting of approximately 540 payers, 180,000 physicians, 1,100
hospitals, 42,000 pharmacies, 10,000 dentists and 200 affiliate partners,
assuming completion of the MEDE AMERICA reorganization
- increasing each company's transaction volume
- broadening each company's offerings of Internet-based healthcare-related
services and creating enhanced cross-selling opportunities
- increasing the speed of Internet transaction processing by streamlining
inefficient manual and paper-based processes
- creating a strong combined management team
The reorganization could harm Healtheon/ WebMD in a number of ways,
including:
- the uncertainty of key third party relationships
- the strain associated with rapid and significant expansion of operations
- the loss of key contractual rights if consents to the reorganization
cannot be obtained
- the inability of computer systems to accommodate increased use while
maintaining performance
The potential benefits of the Healtheon-WebMD reorganization may not be
achieved. For a more complete description of the risks, see the sections
entitled "Risk Factors" on page 34, and "Joint reasons for the Healtheon-WebMD
reorganization" on page 62.
CONDITIONS TO COMPLETION OF THE HEALTHEON-WEBMD REORGANIZATION
Healtheon's and WebMD's respective obligations to complete the
Healtheon-WebMD reorganization are subject to the satisfaction or waiver of
closing conditions. The conditions that must be satisfied or waived before the
completion of the reorganization include the following, subject to exceptions
and qualifications:
- the reorganization must be approved by Healtheon stockholders and the
reorganization agreement must be approved and adopted and the WebMD
merger must be approved by WebMD stockholders
- no injunction or order preventing the completion of the Healtheon-WebMD
reorganization can be in effect
- the applicable waiting periods under antitrust laws must expire or be
terminated
- Healtheon and WebMD must each receive an opinion of tax counsel to the
effect that the Healtheon-WebMD reorganization will qualify as a
transaction in which no gain or loss will be recognized for U.S. income
tax purposes upon the receipt of Healtheon/ WebMD shares
13
<PAGE> 28
- the shares of Healtheon/WebMD common stock to be issued in the Healtheon-
WebMD reorganization must have been approved for listing on Nasdaq
National Market, subject to notice of issuance
- no material adverse effect shall have occurred with respect to Healtheon
or WebMD
- no stockholder, taken together with its affiliates, of WebMD shall
beneficially own, or have the right to beneficially own, at any time in
the future, 40% or more of the outstanding shares of WebMD stock on a
fully diluted, as converted basis
- no more than 0.66% of the shares of WebMD capital stock on a fully
diluted, as converted basis shall have perfected appraisal or dissenters
rights with respect to the merger
- WebMD shall have provided Healtheon with reasonably satisfactory evidence
that, with limited exceptions, all material rights of stockholders and
obligations of WebMD under any stockholder agreement shall have
terminated
- WebMD shall have received an additional investment from Microsoft
pursuant to the terms of the Investment Agreement dated May 12, 1999 in
an amount equal to $150 million
- The shareholder agreement with Microsoft shall be in full force and
effect
If either Healtheon or WebMD waives any conditions, the companies will each
consider the facts and circumstances at that time and make a determination
whether a resolicitation of proxies from stockholders is appropriate.
The Healtheon-WebMD reorganization is not conditioned upon completion of
the MEDE AMERICA reorganization or the Medcast reorganization.
For a more complete description of the conditions to completion of the
Healtheon-WebMD reorganization, see the section entitled "Conditions to
completion of the Healtheon-WebMD reorganization" on page 91.
VOTE REQUIRED FOR APPROVAL
The holders of a majority of the outstanding shares of Healtheon common
stock must approve the Healtheon merger and the issuance of Healtheon/WebMD
common stock in the WebMD merger. Healtheon stockholders holding % of
outstanding Healtheon common stock as of the record date have agreed to vote in
favor of the Healtheon merger. Healtheon stockholders are entitled to cast one
vote per share of Healtheon common stock owned as of 1999, the
record date.
A majority of the votes entitled to be cast by the following holders of
WebMD's stock, each voting as separate voting groups, must vote in favor of the
reorganization agreement and the WebMD merger:
- common stock and Series A preferred stock, voting together
- Series B common stock
- Series C and E common stock, voting together
As a result of voting agreements that have been signed by WebMD directors,
executive officers and affiliates and the conversion agreements that have been
signed by holders of at least a majority of each series of WebMD's Series C, D
and E preferred stock, the votes required to approve the merger are assured.
For a more complete description of the vote required for approval of the
Healtheon-WebMD reorganization see the sections entitled "Vote and quorum
required" on page 50 and "Votes required; voting agreements; conversion
agreements" on page 52.
TERMINATION OF THE HEALTHEON-WEBMD REORGANIZATION AGREEMENT
The Healtheon-WebMD reorganization agreement may be terminated before
completion:
- by mutual consent of Healtheon and WebMD
- by Healtheon or WebMD, if the Healtheon-WebMD reorganization is not
completed before December 15, 1999
- by Healtheon or WebMD, if a court or governmental authority enjoins,
restrains or
14
<PAGE> 29
prohibits the Healtheon-WebMD reorganization
- by Healtheon or WebMD, if the required stockholder votes are not obtained
- by Healtheon or WebMD, upon a breach of any representation, warranty,
covenant or agreement by the other party, or if any of the other party's
representations or warranties are or become untrue so that the
corresponding condition to completion of the Healtheon-WebMD
reorganization would not be met unless the breach or inaccuracy is cured
prior to December 15, 1999
For a more complete description of the manner in which the Healtheon-WebMD
reorganization agreement may be terminated, see the section entitled
"Termination of the Healtheon-WebMD reorganization agreement" on page 93.
NO OTHER NEGOTIATIONS INVOLVING WEBMD
WebMD agreed that until the completion of the Healtheon-WebMD
reorganization or unless Healtheon consents in writing, WebMD and its
subsidiaries will use commercially reasonable efforts consistent with past
practices and policies to not directly or indirectly take any of the following
actions:
- solicit, initiate, encourage or induce any "acquisition proposal," as
defined in the Healtheon-WebMD reorganization agreement included as Annex
A to this proxy statement/prospectus
- participate in any discussions or negotiations regarding any acquisition
proposal
- disclose any non-public information with respect to any acquisition
proposal
- take any other action to facilitate any inquiries or the making of any
proposal that constitutes or may reasonably be expected to lead to any
acquisition proposal
- engage in discussions with any person with respect to any acquisition
proposal
- approve, endorse or recommend any acquisition proposal
- enter into any letter of intent or similar document or any contract,
agreement or commitment relating to any "acquisition transaction," as
defined in the Heatheon-WebMD reorganization agreement
WebMD has agreed to promptly inform Healtheon as to any acquisition
proposal, request for non-public information or inquiry which WebMD believes
would lead to an acquisition proposal. WebMD has agreed to inform Healtheon of
the status and details of any acquisition proposal.
For a more complete description of these limitations on WebMD's actions
with respect to an acquisition proposal, see the sections entitled "No other
negotiations involving WebMD," on page 90.
THE VOTING AND CONVERSION AGREEMENTS
Healtheon stockholders, who collectively held approximately % of the
outstanding Healtheon common stock as of the record date, entered into voting
agreements requiring them to vote all of their shares in favor of the Healtheon-
WebMD reorganization.
WebMD stockholders who are directors, executive officers or affiliates
entered into voting agreements in which they have agreed to vote their shares of
common stock in favor of the merger. Additional holders of at least a majority
of each series of WebMD Series C, D and E preferred stock have entered into
conversion agreements in which they have agreed that after , 1999
and prior to , 1999 either they will enter into voting agreements to
cause their preferred stock to be converted into Series D common stock or their
preferred stock will be automatically converted into Series D common stock as of
the day prior to the record date. By virtue of these voting agreements, the
required vote for the merger is assured. As a result of the conversion
agreements, all of the Series C, D, E and F preferred stock will be converted
into Series D common stock.
For a more complete description of the voting agreements, see the sections
entitled "Healtheon stockholders' voting agreement" on page 95 and "WebMD
stockholders' voting agreement and conversion agreement" on page 95.
15
<PAGE> 30
THE MICROSOFT SHAREHOLDER AGREEMENT
Microsoft Corporation has entered into a shareholder agreement with
Healtheon. The shareholder agreement requires that Microsoft vote all of the
shares of WebMD capital stock beneficially owned by it in favor of the
reorganization.
As of the record date, Microsoft beneficially owned shares,
including shares issuable upon exercise of warrants, of WebMD capital stock
which represented approximately % of the outstanding WebMD
capital stock.
THE MICROSOFT INVESTMENT AND STRATEGIC RELATIONSHIP
Microsoft has acquired through a tender offer and purchases of WebMD
preferred stock and has committed to purchase by the completion of the
reorganization approximately % of WebMD for approximately $395.7 million.
In connection with these purchases and the reorganization, Microsoft and
Healtheon/WebMD have also agreed to expand Microsoft's strategic relationship
with WebMD following the reorganizations to encompass the entire company.
DIRECTORS AND EXECUTIVE OFFICERS OF HEALTHEON/ WEBMD FOLLOWING THE
HEALTHEON-WEBMD REORGANIZATION
Following the reorganization, the board of directors of Healtheon/WebMD
will consist of nine members, four designated by Healtheon, four designated by
WebMD, and one designated by mutual agreement. It is anticipated that Messrs.
Long and Arnold will serve on the board of directors.
Following the reorganization, Jeffrey T. Arnold, the current Chairman and
Chief Executive Officer of WebMD, will be Chief Executive Officer and a director
of Healtheon/WebMD; and W. Michael Long, the current Chief Executive Officer of
Healtheon, will be Chairman and Chief Operating Officer of Healtheon/WebMD.
OPINIONS OF HEALTHEON'S AND WEBMD'S FINANCIAL ADVISORS
In deciding to approve the Healtheon-WebMD reorganization, Healtheon's
board of directors considered an opinion from its financial advisors, Morgan
Stanley & Co. Incorporated, as to the fairness of the exchange ratio from a
financial point of view to Healtheon. In connection with the WebMD merger,
WebMD's board considered the opinion of BancBoston Robertson Stephens Inc. as to
the fairness, from a financial point of view, of the exchange ratio to the
holders of WebMD common stock. The full text of the written opinions of the
financial advisors are attached to the back of this document as Annex D and
Annex E, and should be read carefully in their entireties for a description of
the assumptions made, matters considered and limitations on the review
undertaken. The opinion of Morgan Stanley is directed to the Healtheon board and
the opinion of BancBoston Robertson Stephens is directed to the WebMD board, and
these opinions do not constitute a recommendation as to how to vote to any
stockholders with respect to any matter relating to the proposed merger.
ACCOUNTING TREATMENT OF THE HEALTHEON-WEBMD REORGANIZATION
We intend to account for the Healtheon-WebMD reorganization as a "purchase"
for financial accounting purposes, in accordance with generally accepted
accounting principles.
For a more complete description of the accounting treatment of the
reorganization see the section entitled "Accounting treatment of the
Healtheon-WebMD reorganization" on page 85.
INTERESTS OF DIRECTORS, OFFICERS AND AFFILIATES IN THE HEALTHEON-WEBMD
REORGANIZATION
When considering the recommendations of Healtheon's and WebMD's boards of
directors, you should be aware that some Healtheon and WebMD directors, officers
and affiliates have interests in the reorganization that are different from, or
are in addition to, yours. These interests include:
- In connection with the Healtheon-WebMD reorganization, Jeffrey T. Arnold
will be offered a position as the Chief Executive Officer of
Healtheon/WebMD and W. Michael Long will be offered a position as the
Chairman of the Board and Chief Operating Officer of Healtheon/WebMD.
Other executive officers may also be offered positions.
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- Mr. Arnold has agreed to waive any vesting of his unvested stock options
granted under his employment agreement that would occur upon the
completion of the reorganization. However, if Mr. Arnold is terminated
other than for cause by Healtheon/ WebMD following the reorganization,
then all options granted to him pursuant to his employment agreement will
immediately vest and become fully exercisable on the date of such
termination.
- Following the Healtheon-WebMD reorganization, Healtheon/WebMD will expand
its strategic relationship with Microsoft, a current stockholder of WebMD
that will own approximately % of the Healtheon/ WebMD common stock on a
fully diluted basis following the reorganization. Microsoft will also
have the right to require Healtheon/WebMD to register for resale its
Healtheon/WebMD common stock. For a more complete description of the
Microsoft relationship see the section entitled "Healtheon/WebMD's
strategic alliances with and investments from Microsoft and other
partners" on page 81.
For a more complete description of the interests of persons in the
Healtheon-WebMD reorganization, see the section entitled "Interests of certain
directors, officers and affiliates in the Healtheon-WebMD reorganization" on
page 68.
ANTITRUST APPROVAL REQUIRED TO COMPLETE THE HEALTHEON-WEBMD REORGANIZATION
The Healtheon-WebMD reorganization is subject to antitrust laws. Healtheon,
WebMD, Jeffrey T. Arnold and Microsoft have made the required filings with the
Department of Justice and the Federal Trade Commission. However, the companies
are not permitted to complete the Healtheon-WebMD reorganization until all
applicable waiting periods have expired or terminated. The Department of Justice
or the Federal Trade Commission, as well as a foreign regulatory agency or
government, state or private person, may challenge the Healtheon-WebMD
reorganization at any time before or after its completion.
For a more complete description of the antitrust approvals required in
connection with the Healtheon-WebMD reorganization, see the section entitled
"Regulatory filings and approvals required to complete the Healtheon-WebMD
reorganization" on page 85.
RESTRICTIONS ON THE ABILITY TO SELL HEALTHEON/ WEBMD STOCK
All shares of Healtheon/WebMD common stock received by WebMD stockholders
in connection with the Healtheon-WebMD reorganization will be freely
transferable unless the holder is considered an affiliate of either Healtheon or
WebMD under the Securities Act of 1933.
For a more complete description of transfer restrictions applicable to our
affiliates, see the section entitled "Restrictions on sales of shares by
affiliates of WebMD and Healtheon" on page 86.
MARKET PRICE INFORMATION
Shares of Healtheon common stock are listed on the Nasdaq National Market.
On May 19, 1999, the last full trading day prior to the public announcement of
the proposed Healtheon-WebMD reorganization, Healtheon's common stock closed at
$80.25 per share. On , 1999, Healtheon's common stock closed at
$
per share. We urge you to obtain current market quotations. WebMD's capital
stock is not publicly traded.
For a more complete description of market price information see the section
entitled "Comparative per share market price data" on page 146.
This summary may not contain all of the information that is important to
you. You should read carefully this entire document and the other documents we
refer to for a more complete understanding of the Healtheon-WebMD
reorganization. In particular, you should read the documents attached to this
proxy statement/prospectus, including the reorganization agreement, which is
attached as Annex A, the opinion of Morgan Stanley, which is attached as Annex
D, and the opinion of BancBoston Robertson Stephens, which is attached as Annex
E.
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SUMMARY OF THE MEDE AMERICA REORGANIZATION
THE MEDE AMERICA REORGANIZATION
In the reorganization, MEDE AMERICA will merge with a subsidiary of
Healtheon/WebMD, and as a result MEDE AMERICA will become a subsidiary of
Healtheon/WebMD. (See diagrams on page 12).
The reorganization agreement is attached to this proxy statement/prospectus
as Annex B. We encourage you to read the reorganization agreement carefully. The
reorganization agreement is more fully discussed on page 113.
We believe the reorganization will provide Healtheon/WebMD with the
opportunity to realize several benefits, including:
- expanding each company's connected network of customers and partners,
accelerating our efforts towards achieving critical mass in the
healthcare industry and strengthening our competitive position
- enabling us to migrate MEDE AMERICA's large, installed base of prominent
healthcare institutions and professionals to Healtheon's Internet-based
platform and front-end Web connectivity
- increasing our transaction volume
- broadening our offerings of Internet-based financial and clinical
transactions services, and creating enhanced cross-selling opportunities
- facilitating electronic prescriptions among physicians, consumers and
pharmacies because of our expanded connectivity
- creating a strong combined management team
There are potential risks to the reorganization, including:
- technical, operational, regulatory and strategic challenges to
integrating MEDE AMERICA and Healtheon
- the loss of contractual rights by MEDE AMERICA as a result of the
reorganization
- volatility of Healtheon's stock price affecting the ability of MEDE
AMERICA stockholders to realize the value of the merger consideration as
measured prior to closing
The potential benefits of the reorganization may not be achieved. For a
more complete description of the risks, see the sections entitled "Risk Factors"
on page 34, and "MEDE AMERICA's reasons for the MEDE AMERICA reorganization" on
page 100.
CONDITIONS TO COMPLETION OF THE MEDE AMERICA REORGANIZATION
Healtheon's and MEDE AMERICA's respective obligations to complete the
reorganization are subject to the satisfaction or waiver of closing conditions.
The conditions that must be satisfied or waived before the completion of the
merger include the following, subject to exceptions and qualifications:
- the reorganization agreement must be approved and adopted and the merger
must be approved by MEDE AMERICA stockholders
- the applicable waiting periods under antitrust laws must expire or be
terminated
- no injunction or order preventing the completion of the reorganization
may be in effect
- Healtheon and MEDE AMERICA must each receive an opinion of tax counsel to
the effect that the reorganization will qualify as a transaction in which
no gain or loss will be recognized for U.S. federal income tax purposes
upon the receipt of Healtheon/WebMD shares
- the shares of Healtheon/WebMD common stock to be issued to MEDE AMERICA
stockholders in the reorganization must have been approved for listing on
Nasdaq
- no material adverse effect shall have occurred with respect to Healtheon
or MEDE AMERICA
- Healtheon must obtain the consent of its current registration rights
holders to grant registration rights to the parties to the registration
rights agreement
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- MEDE AMERICA must terminate all registration rights of its stockholders
and all rights of its stockholders to appoint nominees to its board of
directors
If either Healtheon or MEDE AMERICA waives any conditions, we will each
consider the facts and circumstances at that time and make a determination as to
whether a resolicitation of proxies from stockholders is appropriate.
The MEDE AMERICA reorganization is not conditioned upon the completion of
the Healtheon-WebMD reorganization or the Medcast reorganization.
For a more complete description of the conditions to completion of the MEDE
AMERICA reorganization, see the section entitled "Conditions to completion of
the MEDE AMERICA reorganization" on page 116.
VOTE REQUIRED FOR APPROVAL
The holders of a majority of the outstanding shares of MEDE AMERICA common
stock must approve and adopt the reorganization agreement and approve the
merger. MEDE AMERICA stockholders are entitled to cast one vote per share of
MEDE AMERICA common stock owned as of 1999, the record date.
MEDE AMERICA stockholders holding 47.4% of MEDE AMERICA common stock as of
the record date have agreed to vote in favor of the merger. Directors and
officers of MEDE AMERICA collectively beneficially owned approximately 53.6% of
the outstanding MEDE AMERICA common stock as of the record date.
For a more complete description of the vote required for approval of the
reorganization see the section entitled "Vote and quorum required" on page 48.
TERMINATION OF THE MEDE AMERICA REORGANIZATION AGREEMENT
The reorganization agreement may be terminated under limited circumstances
at any time before the completion of the reorganization, as summarized below.
- by mutual consent of Healtheon and MEDE AMERICA
- by Healtheon or MEDE AMERICA, if the merger is not completed by December
15, 1999, except that the right to terminate the reorganization agreement
is not available to any party whose action or failure to act has resulted
in the failure of the merger to occur on or before December 15, 1999, and
such action or failure to act constitutes a material breach of the
reorganization agreement
- by Healtheon or MEDE AMERICA, if a final court order prohibiting the
merger is issued and is not appealable
- by Healtheon or MEDE AMERICA, if the MEDE AMERICA stockholders do not
approve and adopt the reorganization agreement and approve the merger at
the MEDE AMERICA special meeting
- by Healtheon, if the MEDE AMERICA board, fails to recommend that MEDE
AMERICA stockholders approve and adopt the reorganization agreement
- by Healtheon, if the MEDE AMERICA board makes any recommendation or
approval of extraordinary transactions involving MEDE AMERICA and a party
other than Healtheon, such as a merger or a sale of significant assets
If the average price of Healtheon's stock for the ten-day period ending two
days prior to the meeting is less than $38.68, Healtheon may adjust the exchange
ratio to an amount calculated by dividing $25.50 by that average closing price.
If Healtheon chooses not to do so, MEDE AMERICA may terminate the reorganization
agreement.
For a more complete description of the manner in which the reorganization
agreement may be terminated, see the section entitled "Termination of the MEDE
AMERICA reorganization agreement" on page 117.
TERMINATION FEE
If the reorganization agreement is terminated because MEDE AMERICA
stockholders do not approve and adopt the reorganization agreement and approve
the merger, or if the reorganization is not completed by December 15, 1999, MEDE
AMERICA may be obligated to pay Healtheon a
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termination fee of $15 million. For MEDE AMERICA to become obligated to pay
Healtheon the termination fee, an extraordinary transaction of the nature
specified in the reorganization agreement involving MEDE AMERICA and a party
other than Healtheon must be publicly proposed before the termination of the
reorganization agreement. Furthermore, for the termination fee to become
payable, MEDE AMERICA must enter into an agreement for or complete an
extraordinary transaction within 12 months following termination of the
reorganization agreement.
In addition, subject to qualifications, MEDE AMERICA will pay Healtheon a
termination fee of $15 million if the reorganization agreement is terminated
because MEDE AMERICA's board of directors takes either of the following actions:
- fails to recommend that MEDE AMERICA stockholders approve and adopt the
reorganization agreement and the merger
- makes any recommendation or approval of extraordinary transactions
involving MEDE AMERICA and a party other than Healtheon, such as a merger
or a sale of significant assets
For a more complete description of the payment of the termination fee, see
the section entitled "Payment of termination fee" on page 119.
NO OTHER NEGOTIATIONS INVOLVING MEDE AMERICA
MEDE AMERICA agreed that until the completion of the reorganization or
unless Healtheon consents in writing, MEDE AMERICA will not directly or
indirectly take any of the following actions:
- solicit, initiate, encourage or induce any "acquisition proposal," as
defined in the MEDE AMERICA reorganization agreement included as Annex B
to this proxy statement/prospectus
- participate in any discussions or negotiations regarding any acquisition
proposal
- disclose any non-public information with respect to any acquisition
proposal
- take any other action to facilitate any inquiries or the making of any
proposal that constitutes or may reasonably be expected to lead to any
acquisition proposal
- engage in discussions with any person with respect to any acquisition
proposal
- approve, endorse or recommend any acquisition proposal
- enter into any letter of intent or similar document or any contract,
agreement or commitment relating to any "acquisition transaction," as
defined in the MEDE AMERICA reorganization agreement
However, notwithstanding the restrictions above, MEDE AMERICA may, if
necessary to comply with its fiduciary obligations under Delaware law and
subject to other qualifications, furnish information and engage in discussions
or negotiations in response to unsolicited proposals for business combinations
and acquisitions which the board of directors of MEDE AMERICA determines, in its
reasonable judgement, to be more favorable to MEDE AMERICA than the terms of the
reorganization with Healtheon.
MEDE AMERICA has agreed to promptly inform Healtheon as to any acquisition
proposal, request for non-public information or inquiry which MEDE AMERICA
believes would lead to an acquisition proposal. MEDE AMERICA has agreed to
inform Healtheon of the status and details of any acquisition proposal.
For a more complete description of these limitations on MEDE AMERICA's
actions with respect to an acquisition proposal, see the section entitled "No
other negotiations involving MEDE AMERICA reorganization agreement," on page
114.
THE VOTING AGREEMENT
MEDE AMERICA stockholders Welsh, Carson, Anderson & Stowe V, L.P., Welsh,
Carson, Anderson & Stowe VI, L.P., WCAS Information Partners L.P., WCAS Capital
Partners II, L.P., William Blair Capital Partners V, L.P. and William Blair
Leveraged Capital Fund, Limited Partnership, who collectively held 47.4% of the
MEDE AMERICA common stock as of the record date, entered into a voting agreement
with Healtheon. The voting agreement requires these
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MEDE AMERICA stockholders to vote all shares of MEDE AMERICA common stock
beneficially owned by them in favor of the approval and adoption of the
reorganization agreement and approval of the merger.
For a more complete description of the voting agreement see the section
entitled "MEDE AMERICA voting agreement" on page 120.
THE REGISTRATION RIGHTS AGREEMENT
MEDE AMERICA stockholders Welsh, Carson, Anderson & Stowe V, L.P., Welsh,
Carson, Anderson & Stowe VI, L.P., WCAS Information Partners L.P., WCAS Capital
Partners II, L.P., William Blair Capital Partners V, L.P. and William Blair
Leveraged Capital Fund, Limited Partnership entered into a registration rights
agreement with Healtheon. The registration rights agreement gives these MEDE
AMERICA stockholders the right to have the shares they receive in the
reorganization registered with the Securities and Exchange Commission. Each of
these MEDE AMERICA stockholders has similar rights associated with the shares of
MEDE AMERICA common stock it holds.
For a more complete description of the registration rights agreement see
the section entitled "MEDE AMERICA registration rights agreement" on page 120.
OPINION OF MEDE AMERICA'S FINANCIAL ADVISOR
In connection with the MEDE AMERICA reorganization, the MEDE AMERICA board
received a written opinion from Salomon Smith Barney Inc. as to the fairness,
from a financial point of view, of the exchange ratio to the holders of MEDE
AMERICA common stock. The full text of Salomon Smith Barney's written opinion is
attached to the back of this document as Annex F, and should be read carefully
in its entirety for a description of the assumptions made, matters considered
and limitations on the review undertaken. Salomon Smith Barney's opinion is
directed to the MEDE AMERICA board and does not constitute a recommendation to
any stockholder with respect to any matter relating to the reorganization.
ACCOUNTING TREATMENT OF THE MEDE AMERICA REORGANIZATION
We intend to account for the reorganization as a "purchase" for financial
accounting purposes, in accordance with generally accepted accounting
principles.
For a more complete description of the accounting treatment of the
reorganization see the section entitled "Accounting treatment of the MEDE
AMERICA reorganization" on page 111.
INTERESTS OF DIRECTORS, OFFICERS AND AFFILIATES IN THE MEDE AMERICA
REORGANIZATION
When considering the recommendations of Healtheon's and MEDE AMERICA's
boards of directors, you should be aware that some of the Healtheon and MEDE
AMERICA directors, officers and affiliates have interests in the reorganization
that are different from, or are in addition to, yours. These interests include:
- Welsh, Carson, Anderson & Stowe and William Blair & Co., L.L.C. will have
the right to jointly select one nominee to the Healtheon/WebMD board of
directors after the reorganization so long as they continue to hold in
excess of 25% of the shares they receive in the reorganization. William
Blair & Co., L.L.C. has waived its right to participate in the selection
of a nominee to the Healtheon board. Thomas McInerney and Anthony de
Nicola are directors of MEDE AMERICA and are also general partners of
Welsh, Carson, Anderson & Stowe. Timothy Murray is a director of MEDE
AMERICA and is also a principal of William Blair & Co., L.L.C.
- Thomas Staudt, the current Chief Executive Officer of MEDE AMERICA, is
expected to become an officer of Healtheon/WebMD following the
reorganization.
- Funds affiliated with Welsh, Carson, Anderson & Stowe and William Blair &
Co., L.L.C. will receive registration rights for the Healtheon shares
they receive in the reorganization. Thomas McInerney and Anthony de
Nicola are directors of MEDE AMERICA and are also general partners of
Welsh, Carson, Anderson & Stowe. Timothy Murray is a director of MEDE
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AMERICA and is also a principal of William Blair & Co., L.L.C.
- Employees of MEDE AMERICA will receive options to purchase an aggregate
of 700,000 shares of Healtheon/WebMD common stock following the
reorganization.
- Medic Computer Systems, Inc. holds a warrant to purchase 1,250,000 shares
of MEDE AMERICA common stock that would vest at the time the
reorganization is completed. One of the members of the MEDE AMERICA board
of directors, Alan Winchester, sits as the designee of Medic.
- If the merger is completed, William Blair & Co., L.L.C. will receive a
transaction fee of 0.05% of the MEDE AMERICA reorganization transaction
value.
- Any options held by employees of MEDE AMERICA prior to completion of the
reorganization whose employment is terminated without cause or
constructively terminated by Healtheon/WebMD within two years after the
reorganization will become fully vested.
For a more complete description of the interests of persons in the
reorganization, see the section entitled "Interests of directors, officers and
affiliates in the MEDE AMERICA reorganization" on page 107.
ANTITRUST APPROVAL REQUIRED TO COMPLETE THE MEDE AMERICA REORGANIZATION
The MEDE AMERICA reorganization is subject to antitrust laws. Healtheon and
MEDE AMERICA have made the required filings with the Department of Justice and
the Federal Trade Commission and the applicable waiting periods have expired.
The Department of Justice or the Federal Trade Commission, as well as a foreign
regulatory agency or government, state or private person, may challenge the
reorganization at any time before or after its completion.
For a more complete description of the antitrust approvals required in
connection with the reorganization see the section entitled "Regulatory filings
and approvals required to complete the MEDE AMERICA reorganization" on page 99.
RESTRICTIONS ON THE ABILITY TO SELL HEALTHEON/ WEBMD STOCK
All shares of Healtheon common stock received by MEDE AMERICA stockholders
in connection with the reorganization will be freely transferable unless the
holder is considered an affiliate of either Healtheon/WebMD or MEDE AMERICA
under the Securities Act of 1933.
For a more complete description of transfer restrictions applicable to our
affiliates see the section entitled "Restrictions on sales of shares by
affiliates of MEDE AMERICA and Healtheon" on page 111.
COMPARATIVE MARKET PRICE INFORMATION
Shares of both Healtheon common stock and MEDE AMERICA common stock are
listed on the Nasdaq National Market. On April 20, 1999, the last full trading
day prior to the public announcement of the reorganization, Healtheon's common
stock closed at $45.72 per share, and MEDE AMERICA's common stock closed at
$22.06 per share. On , 1999, Healtheon's common stock closed at
$ per share, and MEDE AMERICA's common stock closed at $ per share. We
urge you to obtain current market quotations.
For a more complete description of market price information see the section
entitled "Comparative per share market price data" on page 146.
This summary may not contain all of the information that is important to
you. You should read carefully this entire document and the other documents we
refer to for a more complete understanding of the reorganization. In particular,
you should read the documents attached to this proxy statement/prospectus,
including the reorganization agreement, which is attached as Annex B, and the
opinion of Salomon Smith Barney, which is attached as Annex F.
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SUMMARY OF THE MEDCAST REORGANIZATION
THE MEDCAST REORGANIZATION
In the reorganization, Medcast will merge with a subsidiary of
Healtheon/WebMD, and as a result Medcast will become a subsidiary of
Healtheon/WebMD. (See diagrams on page 12.)
The reorganization agreement is attached to this proxy statement/prospectus
as Annex C. We encourage you to read it carefully. The reorganization agreement
is more fully discussed on page .
We believe the reorganization will provide the Healtheon/WebMD with the
opportunity to realize several benefits, including:
- enabling the combined company to move toward the goal of offering a
comprehensive, integrated Web-based solution for the administrative,
communications and information needs of the healthcare industry
- broadening each company's offerings of Internet-based healthcare related
content offerings and creating cross-selling opportunities
- creating a strong combined management team
- better positioning the combined company to achieve subscriber penetration
among physicians, payers, providers, consumers and other healthcare
industry participants
- enhancing the means by which each company delivers content and services
to physicians
There are potential risks to the reorganization, including:
- technical, operational, regulatory and strategic challenges to
integrating Medcast and Healtheon/WebMD
- the possible loss of contractual rights by Medcast as a result of the
reorganization
- volatility of Healtheon/WebMD's stock price affecting the ability of
Medcast stockholders to realize the value of the consideration as
measured prior to closing
The potential benefits of the reorganization may not be achieved. For a
more complete description of the risks, see the sections entitled "Risk Factors"
on page 34, and "Medcast's reasons for the Medcast reorganization" on page 123.
CONDITIONS TO COMPLETION OF THE MEDCAST REORGANIZATION
Our respective obligations to complete the reorganization and the other
transactions contemplated by the reorganization agreement are subject to the
satisfaction or waiver of conditions which include:
- the reorganization agreement and the merger must be approved by the
stockholders of Medcast
- all applicable waiting periods under applicable antitrust laws must have
expired or been terminated
- no law, regulation or order or other action of any court or governmental
authority may be enacted or issued that has the effect of making the
reorganization illegal or otherwise prohibits or restricts completion of
the reorganization and other transactions contemplated by the
reorganization agreement
- Healtheon/WebMD and Medcast must each receive from their respective tax
counsel an opinion to the effect that the reorganization will qualify as
a transaction in which no gain or loss will be recognized for U.S.
federal income tax purposes upon receipt of shares of Healtheon/WebMD
common stock
- the shares of Healtheon/WebMD common stock to be issued in the
reorganization must be authorized for listing on the Nasdaq Stock Market,
subject to notice of issuance.
- the registration statement that contains this proxy statement/prospectus
must have been declared effective by the Securities and Exchange
Commission and no stop order suspending the effectiveness of the
registration statement may have been issued by the Securities and
Exchange Commission
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- no material adverse effect shall have occurred with respect to Healtheon/
WebMD or Medcast
- the Healtheon-WebMD reorganization must be completed simultaneously with
or prior to the completion of the Medcast reorganization
The Medcast reorganization is not conditioned upon the completion of the
MEDE AMERICA reorganization
For a more complete description of the conditions to completion of the
Medcast reorganization, see the section entitled "Conditions to completion of
the Medcast reorganization" on page 142.
VOTE REQUIRED FOR APPROVAL
The reorganization agreement must be approved and adopted, and the merger
must be approved, by the holders of a majority of the outstanding shares of:
- Medcast common stock, Series B preferred stock and Series C preferred
stock, voting together
- Medcast Series A preferred stock voting as a separate group
Holders of Medcast common stock are entitled to cast one vote per share of
Medcast common stock held as of , 1999, the record date. Holders
of Series A preferred stock, Series B preferred stock and Series C preferred
stock are entitled to cast one vote per share of common stock into which the
preferred stock held as of the record date is convertible.
Medcast stockholders holding approximately % of Medcast common stock,
including common stock issuable upon conversion of all outstanding shares of
preferred stock, as of the record date have agreed to vote in favor of the
reorganization. Directors and executive officers of Medcast collectively
beneficially owned approximately % of the outstanding Medcast common stock
as of the record date, assuming conversion of all outstanding shares of
preferred stock.
Medcast stockholders holding approximately % of the outstanding Series
A preferred stock as of the record date have agreed to vote in favor of the
reorganization. Directors and executive officers of Medcast collectively
beneficially owned approximately % of the outstanding Series A preferred
stock as of the record date.
For a more complete description of the vote required for approval of the
merger see the section entitled "Vote and quorum required; voting agreements" on
page 57.
TERMINATION OF THE MEDCAST REORGANIZATION AGREEMENT
The reorganization agreement may be terminated under limited circumstances
at any time prior to the reorganization, as summarized below:
- by mutual consent of Healtheon, WebMD and Medcast
- by Healtheon and WebMD, acting together, or by Medcast, if the
reorganization is not completed by the earlier of the 30th day after the
completion of the Healtheon-WebMD reorganization and December 15, 1999
- by Healtheon and WebMD, acting together, or by Medcast in the event of a
breach of any representation, warranty, covenant or other agreement of
the other party in the reorganization agreement such that the other party
would be unable to satisfy the conditions to completion of the
reorganization regarding the accuracy of its representations and
warranties or performance of its agreements and covenants
- by Healtheon and WebMD, acting together, or by Medcast, if there is any
final and non-appealable order, decree or ruling or other action of any
governmental authority having the effect of permanently restraining,
enjoining or otherwise prohibiting the reorganization
- by Healtheon and WebMD, acting together, if the board of directors of
Medcast fails to call a meeting of its stockholders for the purpose of
approving the reorganization or affirms, recommends or authorizes Medcast
to enter into any other acquisition proposal, as defined in the
reorganization agreement included as Annex C to this proxy statement/
prospectus.
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- by Healtheon and WebMD, acting together, if the board of directors of
Medcast adversely withdraws, modifies or changes its approval or
recommendation of the reorganization
For a more complete description of the manner in which the reorganization
agreement may be terminated, see the section entitled "Termination of the
Medcast reorganization agreement" on page 144.
NO OTHER NEGOTIATIONS INVOLVING MEDCAST
Medcast agreed not to directly or indirectly take any of the following
actions:
- solicit, initiate, encourage or induce any acquisition proposal
- participate in any discussions or negotiations regarding any acquisition
proposal
- disclose any non-public information to any person with respect to any
acquisition proposal
- take any other action to facilitate any inquiries or the making of any
proposal that constitutes or may reasonably be expected to lead to any
acquisition proposal
- engage in discussions with any person with respect to any acquisition
proposal
- approve, endorse or recommend any acquisition proposal
- enter into any letter of intent or similar document or any contract,
agreement or commitment relating to any acquisition transaction, as
defined in the reorganization agreement included as Annex C to this proxy
statement/prospectus
Medcast has agreed to promptly inform Healtheon and WebMD as to any
acquisition proposal, or request for non-public information or inquiry which
Medcast believes would lead to an acquisition proposal. Medcast has also agreed
to inform Healtheon and WebMD of the status and details of any acquisition
proposal.
For a more complete description of the limitations on Medcast's actions
with respect to an acquisition proposal, see the section entitled "No other
negotiations involving Medcast" on page 139.
THE VOTING AGREEMENTS
Medcast stockholders Medcast Networks, L.P., Stephens Group, Inc.,
Noro-Moseley Partners IV, L.P., Noro-Moseley Partners IVB, L.P., Richland
Ventures, L.P. and Richland Ventures II, L.P. have entered into voting
agreements with Healtheon/WebMD and WebMD which require them to vote in favor of
the merger. These stockholders have sufficient votes to approve the merger under
Delaware law and Medcast's certificate of incorporation.
For a more complete description of the voting agreements see the section
entitled "Medcast voting agreements" on page 145.
THE ESCROW ARRANGEMENT
Ten percent of the shares of Healtheon/ WebMD common stock to be received
in the reorganization by stockholders of Medcast will be delivered to an escrow
agent. These shares will be subject to indemnification claims by Healtheon/WebMD
for breaches of the reorganization agreement by Medcast, and will be held in
escrow for one year, plus any additional periods necessary to resolve claims
existing at that time. Healtheon/WebMD will have a claim for indemnification
against the shares in escrow to the extent that the aggregate amount of all its
losses, expenses, liabilities and other damages arising out of breaches of the
reorganization agreement by Medcast exceed $500,000.
For a more complete description of the escrow arrangement, see the section
entitled "Escrow and indemnification of Healtheon/WebMD" on page 140.
OPINION OF MEDCAST'S FINANCIAL ADVISOR
In connection with the reorganization, the Medcast board received a written
opinion from Hambrecht & Quist LLC as to the fairness, from a financial point of
view, of the consideration to be received by the holders of Medcast capital
stock in the reorganization. The full text of Hambrecht & Quist's written
opinion dated June 30, 1999 is attached to this proxy statement/ prospectus as
Annex G. It should be read carefully in its entirety for a description of the
assumptions made, matters considered and limitations on the review undertaken.
Hambrecht & Quist's opinion is directed to the Medcast board
25
<PAGE> 40
of directors and does not constitute a recommendation to any stockholder with
respect to any matter relating to the proposed reorganization.
ACCOUNTING TREATMENT OF THE MEDCAST REORGANIZATION
We intend to account for the reorganization as a "purchase" for financial
accounting purposes, in accordance with generally accepted accounting
principles.
For a more complete description of the accounting treatment of the
reorganization see the section entitled "Accounting treatment of the Medcast
reorganization" on page 134.
INTERESTS OF DIRECTORS, OFFICERS AND AFFILIATES IN THE MEDCAST REORGANIZATION
When considering the recommendation of Medcast's board of directors, you
should be aware that certain directors and executive officers of Medcast have
interests in the reorganization different from, or in addition to, yours. These
interests include:
- Mark Dailey, the Chief Operating Officer of Medcast and Gordon Wyatt, the
Chief Financial Officer of Medcast, each have an employment agreement
that provides for severance payments if:
- Medcast fails to renew his agreement in accordance with its terms
- he is terminated by Medcast without cause, or
- he terminates his employment for "good reason", which includes being
assigned to a different position that results in a material reduction
in title, responsibility, duties or authority
We do not know what position, if any, Messrs. Dailey and Wyatt will
have with Healtheon/WebMD and its subsidiaries after the reorganization
or whether either of them will attempt to terminate his employment if
asked to accept a different position.
- unvested options to purchase shares of Medcast common stock held by
Messrs. Dailey and Wyatt will automatically vest in full upon the closing
of the reorganization.
- Medcast will pay an affiliate of Stephens Group, Inc., which is a
beneficial owner of in excess of 5% of the outstanding shares of Medcast
capital stock, a financial advisor fee equal to 0.25% of the merger
transaction value.
For a more complete description of the interests of related parties in the
reorganization, see the section entitled "Interests of directors, officers and
affiliates in the Medcast reorganization" on page 127.
ANTITRUST APPROVAL REQUIRED TO COMPLETE THE MEDCAST REORGANIZATION
The Medcast reorganization may be subject to antitrust laws. Healtheon,
WebMD and Medcast have not filed any information or materials with the
Department of Justice and the Federal Trade Commission and, therefore the
applicable waiting period, if any, has not expired. The Department of Justice or
the Federal Trade commission, as well as a foreign regulatory agency or
government, state or private person, may challenge the reorganization at any
time before or after its completion.
For a more complete description of the antitrust approvals required in
connection with the reorganization, see the section entitled "Regulatory filings
and approvals required to complete the Medcast reorganization" on page 134.
RESTRICTIONS ON THE ABILITY TO SELL HEALTHEON/ WEBMD STOCK
All shares of Healtheon/WebMD common stock received by Medcast stockholders
in connection with the reorganization will be freely transferable unless the
holder is considered an affiliate of either Healtheon/WebMD or Medcast under the
Securities Act.
For a complete description of transfer restrictions applicable to our
affiliates, see the section entitled "Restrictions on sales of shares by
affiliates of Medcast and Healtheon/WebMD" on page 134.
26
<PAGE> 41
MARKET PRICE INFORMATION
Shares of Healtheon common stock are listed on the Nasdaq National Market.
On June 30, 1999, the last full trading day prior to the public announcement of
the proposed Medcast reorganization, Healtheon's common stock closed at $77.00
per share. On , 1999, Healtheon's common stock closed at $ per
share. Under the Healtheon-WebMD reorganization agreement, each share of
Healtheon common stock will convert into one share of Healtheon/WebMD common
stock. We urge you to obtain current market quotations. Medcast's capital stock
is not publicly traded.
For a more complete description of market price information see the section
entitled "Comparative per share market price data" on page 146.
This summary may not contain all of the information that is important to
you. You should read carefully this entire document and the other documents we
refer to for a more complete understanding of the reorganization agreement. In
particular, you should read the documents attached to this proxy
statement/prospectus, including the reorganization agreement, which is attached
as Annex C, and the opinion of Hambrecht & Quist, which is attached as Annex G.
27
<PAGE> 42
SELECTED HISTORICAL AND SELECTED UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL DATA
The following selected historical financial data of Healtheon, WebMD, MEDE
AMERICA and Medcast have been derived from their respective historical financial
statements, and should be read in conjunction with those financial statements
and the related notes which are included elsewhere in this proxy
statement/prospectus. The selected unaudited pro forma condensed combined
financial data of Healtheon, WebMD, MEDE AMERICA and Medcast are derived from
the unaudited pro forma condensed combined financial information, which gives
effect to the transactions as purchases, and should be read in conjunction with
the unaudited pro forma condensed combined financial information and related
notes, which are included elsewhere in this prospectus/proxy statement.
For pro forma purposes, Healtheon's historical statement of operations for
the year ended December 31, 1998, WebMD's statement of operations for the year
ended December 31, 1998, after giving effect to the acquisition of Sapient
Health Network, Inc. and Direct Medical Knowledge, Inc., MEDE AMERICA's
statement of operations for the twelve months ended December 31, 1998, after
giving effect to the acquisition of Healthcare Interchange, Inc., and Medcast's
historical statement of operations for the twelve months ended December 31, 1998
have been combined to give effect to the reorganizations as if they had occurred
on January 1, 1998. Healtheon's historical statement of operations for the three
months ended March 31, 1999, WebMD's historical statement of operations for the
three months ended March 31, 1999, MEDE AMERICA's historical statement of
operations for the three months ended March 31, 1999 and Medcast's historical
statement of operations for the three months ended March 31, 1999 have been
combined to give effect to the reorganizations as if they had occurred on
January 1, 1999.
The unaudited pro forma combined condensed balance sheet data assumes that
the WebMD, MEDE AMERICA and Medcast reorganizations took place as of March 31,
1999 and combine Healtheon's, WebMD's, MEDE AMERICA's and Medcast's historical
balance sheets at that date.
The total estimated purchase prices of the WebMD, MEDE AMERICA and Medcast
reorganizations have been allocated on a preliminary basis to assets and
liabilities based on management's best estimates of their fair value with the
excess over the net tangible assets acquired allocated to goodwill and other
intangible assets. These allocations are subject to change pending a final
determination and analysis of the total purchase prices and the fair value of
the assets acquired and liabilities assumed. The impact of such changes could be
material.
The unaudited pro forma condensed combined information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have actually occurred if the
reorganizations, either individually or combined, had been consummated as of the
dates indicated, nor is it necessarily indicative of future operating results or
financial condition of the combined companies.
28
<PAGE> 43
HEALTHEON'S SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------ -------------------
1998 1997 1996 1995 1994 1999 1998
-------- -------- -------- ------- ------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL STATEMENTS OF
OPERATIONS DATA:
Revenues.................. $ 48,838 $ 13,390 $ 11,013 $ 2,175 $ 190 $ 17,555 $ 9,754
Loss from operations...... (53,948) (25,423) (16,541) (3,936) (3,118) (19,127) (9,028)
Net loss applicable to
common stockholders..... (54,048) (28,005) (18,606) (4,458) (3,426) (18,569) (9,676)
Basic and diluted net loss
per common share........ (1.54) (3.88) (2.83) (0.85) (0.30) (1.19)
Shares used in computing
basic and diluted net
loss per common share... 34,987 7,223 6,583 5,246 62,665 8,099
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------- MARCH 31,
1998 1997 1996 1995 1994 1999
------- ------- -------- ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments.......................... $36,817 $21,804 $ 7,539 $ 9,386 $ 4,186 $ 63,175
Working capital........................ 27,934 14,790 2,505 7,244 4,226 52,989
Total assets........................... 79,940 53,747 34,407 10,801 5,379 121,055
Long-term obligations, net of current
portion.............................. 2,984 932 1,210 -- 63 3,153
Convertible redeemable preferred
stock................................ -- 50,948 39,578 16,029 7,919 --
Total stockholders' equity (net capital
deficiency).......................... 59,413 (9,930) (14,553) (7,698) (2,838) 95,731
</TABLE>
WEBMD'S SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION THREE MONTHS
(APRIL 21, ENDED
YEARS ENDED DECEMBER 31, 1994) TO MARCH 31,
------------------------------------- DECEMBER 31, ------------------
1998 1997 1996 1995 1994 1999 1998
-------- ------- ------- ------ ------------ -------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL STATEMENTS OF OPERATIONS
DATA:
Revenues............................. $ 408 $ -- $ -- $ -- $ -- $ 2,458 $ --
Loss from operations................. (23,036) (2,594) -- -- -- (18,017) (1,277)
Loss from continuing operations...... (23,175) (3,319) -- (17,803) (1,423)
Net loss applicable to common
stockholders....................... (18,546) (4,349) (1,682) (39) (40) (18,341) (1,563)
Net loss per share -- continuing
operations......................... (2.08) (0.40) -- (1.46) (0.13)
Basic and diluted net loss per common
share.............................. (1.52) (0.52) (0.64) (0.04) (0.04) (1.46) (0.14)
Shares used in computing basic and
diluted net loss per common
share.............................. 12,196 8,300 2,612 1,000 1,000 12,533 10,912
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------- MARCH 31,
1998 1997 1996 1995 1994 1999
------- ------ ------ ---- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL BALANCE SHEET DATA:
Cash and cash equivalents................ $ 6,226 $2,696 $ -- $ -- $ -- $ 9,673
Working capital.......................... 4,313 2,532 -- -- -- 23,542
Total assets............................. 18,245 9,190 3,497 638 213 135,328
Long-term obligations, net of current
portion................................ -- 2,965 -- -- -- 353
Total stockholders' equity (net capital
deficiency)............................ 5,286 3,036 558 (32) (31) 118,647
</TABLE>
29
<PAGE> 44
MEDE AMERICA'S SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED JUNE 30, MARCH 31,
------------------------------------------- ------------------
1998 1997 1996 1995 1999 1998
------- -------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL STATEMENTS OF OPERATIONS
DATA:
Revenues.............................. $42,290 $ 35,279 $ 31,768 $ 16,246 $39,756 $30,189
Income (loss) from operations......... (1,382) (8,165) (18,340) (16,342) 1,348 (1,506)
Loss before extraordinary item........ (5,035) (8,833) (19,330) (16,601) (1,577) (4,026)
Net loss applicable to common
stockholders........................ (7,435) (11,233) (21,730) (16,628) (4,640) (5,826)
Basic and diluted net loss per common
share:
Loss before extraordinary item........ (1.31) (2.07) (4.14) (3.17) (0.42) (1.03)
Net income (loss) applicable to common
stockholders........................ (1.31) (2.07) (4.14) (3.17) (0.65) (1.03)
Shares used in computing basic and
diluted net loss per common share... 5,679 5,425 5,245 5,238 7,116 5,677
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
------------------------------------------ MARCH 31
1998 1997 1996 1995 1999
-------- -------- ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
HISTORICAL BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 2,950 $ 1,919 $ 2,639 $ 8,554 $ 4,042
Working capital (deficit)...................... 2,345 (2,567) (4,207) 504 9,372
Total assets................................... 59,394 48,090 43,031 59,511 78,914
Long-term debt, including current portion...... 41,324 25,161 11,601 5,805 6,771
Redeemable cumulative preferred stock.......... 31,223 28,823 26,423 24,023 --
Total stockholders' equity (net capital
deficiency).................................. (24,692) (17,438) (8,472) 12,942 61,351
</TABLE>
MEDCAST'S SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------- -------------------
1998 1997 1999 1998
-------- ------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
HISTORICAL STATEMENTS OF OPERATIONS DATA:
Revenues.................................................... $ -- $ -- $ 8 $ --
Loss from operations........................................ (14,657) (1,960) (7,996) (1,286)
Net loss applicable to common stockholders.................. (18,535) (1,960) (70,981) (1,337)
Basic and diluted net loss per common share................. (9.72) (1.11) (37.06) (0.69)
Shares used in computing basic and diluted net loss per
common share.............................................. 1,906 1,762 1,915 1,940
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------- MARCH 31,
1998 1997 1999
-------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
HISTORICAL BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 2,269 $ 34 $ 122
Working capital (deficit)................................... 5,365 (1,962) (2,806)
Total assets................................................ 11,259 63 3,164
Long-term debt, including current portion................... 372 -- 354
Redeemable preferred stock.................................. 26,591 -- 89,626
Total stockholders' equity (net capital deficiency)......... (18,901) (1,929) (89,746)
</TABLE>
30
<PAGE> 45
HEALTHEON/WEBMD SELECTED UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, THREE MONTHS ENDED
1998 MARCH 31, 1999
------------ ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $ 102,587 $ 34,789
Loss from operations........................................ (2,511,259) (639,230)
Net loss applicable to common stockholders.................. (2,514,229) (641,377)
Basic and diluted net loss per common share................. (23.25) (4.72)
Shares used in computing basic and diluted net loss per
common share.............................................. 108,118 135,796
</TABLE>
<TABLE>
<CAPTION>
AS OF
MARCH 31,
1999
-----------
(UNAUDITED)
<S> <C>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 462,012
Working capital............................................. 378,598
Total assets................................................ 7,958,790
Long-term obligations, net of current portion............... 10,255
Total stockholders' equity.................................. 7,810,234
</TABLE>
- ------------------------
(1) For detailed information see "Unaudited pro forma condensed combined
financial information" on pages 147 through 177.
31
<PAGE> 46
COMPARATIVE HISTORICAL AND UNAUDITED PRO FORMA PER SHARE DATA
The following table sets forth:
(1) historical net loss per share and historical net tangible book value
per share data of Healtheon
(2) historical net loss per share and historical net tangible book value
per share of WebMD
(3) historical net loss per share and historical net tangible book value
per share data of MEDE AMERICA
(4) historical net loss per share and historical net tangible book value
per share data of Medcast
(5) unaudited pro forma condensed combined net loss per share and unaudited
pro forma condensed combined net tangible book value per share data of
Healtheon/WebMD after giving effect to the Healtheon-WebMD
reorganization, the MEDE AMERICA reorganization and the Medcast
reorganization
(6) unaudited pro forma condensed combined net loss per share and unaudited
pro forma condensed combined net tangible book value per share data of
Healtheon/WebMD after giving effect to the Healtheon-WebMD
reorganization and the MEDE AMERICA reorganization
(7) unaudited pro forma condensed combined net loss per share and unaudited
pro forma condensed combined net tangible book value per share of
Healtheon/WebMD after giving effect to the Healtheon-WebMD
reorganization and the Medcast reorganization
(8) unaudited pro forma condensed combined net loss per share and unaudited
pro forma condensed combined net tangible book value per share of
Healtheon/WebMD after giving effect to the Healtheon-WebMD
reorganization
(9) unaudited pro forma condensed combined net loss per share and unaudited
pro forma condensed combined net tangible book value per share data of
Healtheon after giving effect to the MEDE AMERICA reorganization
(10) unaudited equivalent pro forma condensed combined net loss per share and
unaudited equivalent pro forma condensed combined net tangible book
value per share data of WebMD assuming the MEDE AMERICA reorganization
does not occur
(11) unaudited equivalent pro forma condensed combined net loss per share and
unaudited equivalent pro forma condensed combined net tangible book
value per share data of MEDE AMERICA based on the exchange ratio of
0.6593 shares of Healtheon's common stock for each share of MEDE
AMERICA's common stock. See "The Healtheon-WebMD Reorganization" on page
60 and "The MEDE AMERICA Reorganization" on page 97.
The information in the table should be read in conjunction with the
historical financial statements of Healtheon/WebMD, MEDE AMERICA and Medcast and
the related notes incorporated by reference in this proxy statement/prospectus
and the unaudited pro forma condensed combined financial information and related
notes included elsewhere in this proxy statement/prospectus. The unaudited pro
forma condensed combined financial information is not necessarily indicative of
the net loss per share or book value per share that would have been achieved had
the merger been consummated as of the beginning of the periods presented and
should not be construed as representative of these amounts for any future dates
or periods.
<TABLE>
<CAPTION>
PRO FORMA CONDENSED COMBINED
OF HEALTHEON/WEBMD INCLUDING:
---------
HEALTHEON
HISTORICAL WEBMD
-------------------------------------- MEDE
MEDE AMERICA
HEALTHEON WEBMD AMERICA MEDCAST MEDCAST
(1) (2) (3) (4) (5)
--------- ------ ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Net loss per share -- basic and diluted
for the:
Year Ended December 31, 1998............. $(1.54) $(1.52) $(1.16) $ (9.72) (23.25)
Three Months Ended March 31, 1999........ (0.30) (1.46) (0.13) (37.06) (4.72)
Book value per share at March 31, 1999.... 1.04 5.38 0.98 (0.06) 3.25
<CAPTION>
WEBMD
ORMA CONDENSED COMBINED OF HEALTHEON/WEBMD INCLUDING:
----------------------------------------------------- PRO FORMA MEDE
ON CONDENSED AMERICA
HEALTHEON COMBINED EQUIVALENT
WEBMD HEALTHEON HEALTHEON (WITHOUT PRO FORMA
A MEDE WEBMD HEALTHEON MEDE MEDE CONDENSED
T AMERICA MEDCAST WEBMD AMERICA AMERICA) COMBINED
(6) (7) (8) (9) (10) (11)
-- --------- --------- --------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net loss per share -- basic and diluted
for the:
Year Ended December 31, 1998............. $(23.00) (23.93) $(23.67) $(4.25)
Three Months Ended March 31, 1999........ (4.62) (4.79) (4.68) (0.70)
Book value per share at March 31, 1999.... 3.68 3.67 4.04 0.75 $7.34 $0.50
</TABLE>
- -------------------------
- - Historical net tangible book value per share is computed by dividing
stockholders' equity less goodwill and other intangible assets by the number
of shares of common stock outstanding at the end of each period.
- - The pro forma condensed combined book value per share is computed by dividing
pro forma stockholders' equity less goodwill and other intangible assets,
including the effect of pro forma adjustments, by the pro forma number of
shares of Healtheon/WebMD common stock which would have been outstanding had
the reorganizations been consummated as of March 31, 1999.
32
<PAGE> 47
- - The WebMD equivalent pro forma condensed combined per share amounts are
calculated by multiplying the pro forma condensed combined book value per
share amounts by the exchange ratio of 1.815 shares of Healtheon/WebMD common
stock for each share of WebMD common stock.
- - The MEDE AMERICA equivalent pro forma condensed combined per share amounts are
calculated by multiplying the pro forma condensed combined book value per
share amounts by the exchange ratio of 0.6593 shares of Healtheon/WebMD common
stock for each share of MEDE AMERICA common stock.
- - The Medcast equivalent pro forma condensed combined per share amounts are
calculated by multiplying the pro forma condensed combined book value per
share amounts by the expected exchange ratio of 0.5483 shares of
Healtheon/WebMD common stock for each share of Medcast capital stock.
33
<PAGE> 48
RISK FACTORS
The reorganizations involve a high degree of risk. By voting in favor of
the Healtheon-WebMD reorganization, the MEDE AMERICA reorganization or the
Medcast reorganization, you will be choosing to invest in Healtheon/WebMD common
stock. An investment in Healtheon/WebMD common stock involves a high degree of
risk. In addition to the other information contained or incorporated by
reference in this proxy statement/prospectus, you should carefully consider the
following risk factors in deciding whether to vote for the reorganizations.
HEALTHEON, WEBMD, MEDE AMERICA AND MEDCAST HAVE INCURRED AND HEALTHEON/WEBMD
WILL CONTINUE TO INCUR SUBSTANTIAL LOSSES
Healtheon began operations in January 1996 and has incurred net losses from
operations in each fiscal period since its inception. WebMD commercially
launched its Internet-based services in October 1998 and has incurred net losses
from operations since that time. MEDE AMERICA was formed in March 1995 and has
incurred net losses from operations in each fiscal period since its inception.
Medcast was formed in January 1997 and has incurred net losses from operations
in each fiscal period since its inception. As of March 31, 1999, the four
companies combined had accumulated losses of approximately $308 million. In
addition, Healtheon/WebMD currently intends to invest heavily in acquisitions,
infrastructure development, applications development and sales and marketing in
order to extend its services to a growing number of potential customers and
partners.
If the Healtheon-WebMD reorganization, the MEDE AMERICA reorganization or
the Medcast reorganization occurs, the purchase price of these acquisitions will
be amortized over the useful life of the tangible and intangible assets. We
currently anticipate that this amortization will cause Healtheon/ WebMD to incur
significant net losses for the next several years. We expect that
Healtheon/WebMD will incur increasing net operating losses and negative cash
flows for the foreseeable future and may never be profitable.
THE BUSINESS OF PROVIDING SERVICES OVER THE INTERNET IS DIFFICULT TO EVALUATE
AND THE HEALTHEON/WEBMD BUSINESS MODEL IS UNPROVEN
Because each of Healtheon, WebMD, MEDE AMERICA and Medcast recently began
operations, it is difficult to evaluate their businesses and prospects.
Healtheon/WebMD's revenue and income potential is unproven and its business
model is emerging. Healtheon/WebMD's pro forma historical financial information
is of limited value in projecting future operating results because of no
operating history as a combined organization and the emerging nature of its
markets. Healtheon/WebMD will initially derive a substantial portion of its
revenue from non-Internet network services, from development and consulting
services and from managing and operating its customers' information technology
infrastructures. Healtheon/WebMD may never achieve favorable operating results
or profitability.
HEALTHEON/WEBMD'S QUARTERLY OPERATING RESULTS MAY VARY, WHICH COULD AFFECT THE
MARKET PRICE OF ITS COMMON STOCK
Fluctuations in Healtheon/WebMD's quarterly results could affect the market
price of Healtheon/ WebMD's common stock in a manner unrelated to its long-term
operating performance. Healtheon/ WebMD expects that quarterly revenue and
operating results may fluctuate as a result of a number of factors discussed
throughout this risk factor section.
In addition, Healtheon/WebMD will depend on its distribution partners and
content and service providers, sponsors and advertisers, as well as the above
list. Healtheon/WebMD expects to increase activities and spending in
substantially all operational areas. Healtheon/WebMD will base its expense
levels in part upon its expectations concerning future revenue and these expense
levels will be relatively fixed in the short-term. If it has lower revenue,
Healtheon/WebMD may not be able to reduce its spending in the short-term in
response. Any shortfall in revenue would have a direct impact on Healtheon/
34
<PAGE> 49
WebMD's results of operations. For these and other reasons, Healtheon/WebMD may
not meet the earnings estimates of securities analysts or investors and its
stock price could suffer.
HEALTHEON/WEBMD PRO FORMA ACCOUNTING FOR THE REORGANIZATIONS MAY CHANGE
Healtheon/WebMD has allocated the total estimated purchase price for WebMD,
MEDE AMERICA and Medcast on a preliminary basis to assets and liabilities based
on Healtheon/WebMD's best estimates of the fair value of these assets and
liabilities, with the excess costs over the net assets acquired allocated to
goodwill and other intangible assets. These allocations are subject to change
pending a final determination and analysis of the total purchase prices and the
fair value of the assets acquired and liabilities assumed. The impact of these
changes could be material to Healtheon/WebMD's future results of operations.
HEALTHEON/WEBMD WILL INCUR SIGNIFICANT EXPENSE TO ACQUIRE SUBSCRIBERS AND
PROMOTE ITS SERVICES
Healtheon/WebMD intends to use a significant portion of the proceeds from
recent sales of WebMD capital stock to fund branding and advertising, including
promotional arrangements. These increased expenses may not lead to increased
revenues, subscribers or users. Agreements and promotional arrangements with
strategic partners often require payments in various forms, including royalties,
license fees and other significant guaranteed amounts on a per subscriber or a
minimum dollar amount basis over terms ranging from one to three years. Some of
these payments must be made whether or not Healtheon/ WebMD ever uses services
under these agreements. Healtheon/WebMD must also fund some of the rebates and
costs that our strategic partners offer and incur in connection with the
promotion of WebMD. WebMD estimates that it will make the following aggregate
guaranteed payments under its current strategic agreements:
<TABLE>
<CAPTION>
PERIOD AMOUNT
------ -------------
<S> <C>
April - December 1999....................................... $66.4 million
2000........................................................ 72.5 million
2001........................................................ 78.3 million
2002........................................................ 40.4 million
2003........................................................ 34.4 million
</TABLE>
In addition, some strategic partner agreements and promotional arrangements
require payments on a per subscriber basis. Healtheon/WebMD anticipates entering
into additional arrangements with current and future strategic partners that
will require payments in various forms in amounts that may significantly exceed
the amounts required under the current arrangements. Promotional arrangements
currently require, and future arrangements may require, Healtheon/WebMD to pay
amounts that can be recouped only if subscribers maintain a subscription and pay
all required subscription fees for an extended period of time. For example, for
the year ended December 31, 1998, WebMD accrued $5,000,000 in license fees
payable to McKesson HBOC, Inc. for software that McKessonHBOC intends to offer
to healthcare professionals in connection with its promotion of WebMD. WebMD is
also obligated to pay McKessonHBOC an annual $750,000 maintenance fee on this
software beginning on January 1, 2000. These subscriptions will be for 3 years,
but will be subject to cancellation after a year. If all of these subscriptions
were canceled after one year, WebMD would have paid $5,000,000 in license fees
and would have only received $3,000,000 in subscription fees. In addition,
Healtheon/WebMD does not know whether these subscribers will honor their
contracts or pay any early termination fee, if required. Accordingly,
Healtheon/WebMD does not know whether it will generate sufficient revenue from
subscribers obtained through current or future promotional arrangements to
offset the cost of promotions. Healtheon/WebMD also does not know whether
subscribers obtained through any promotional arrangements will actually use its
services. Therefore, the number of paying subscribers may not be indicative of
the level of usage of Healtheon/ WebMD's services, and the level of usage is
likely to be a primary source for generating revenues from advertising,
sponsorships and transactions.
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<PAGE> 50
THE HEALTHCARE INDUSTRY MAY NOT ACCEPT HEALTHEON/WEBMD'S SOLUTIONS
Healtheon/WebMD 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 and these healthcare participants
may not adopt Healtheon/WebMD's solutions. Electronic information exchange and
transaction processing by the healthcare industry is still developing.
Healtheon/ WebMD believes 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
Healtheon/WebMD expects it will. Even if the conversion does occur as rapidly as
expected, healthcare industry participants may use applications and services
offered by others.
Healtheon/WebMD believes that it must gain significant market share with
its applications and services before its competitors introduce alternative
products, applications or services with features similar to its current or
proposed offerings. Healtheon/WebMD's business plan is based on its belief that
the value and market appeal of its solution will grow as the number of
participants and the scope of the transaction services available on its platform
increase. Healtheon/WebMD may not achieve the critical mass of users it believes
is necessary. In addition, Healtheon/WebMD expects to generate a significant
portion of its revenue from subscription and transaction-based fees.
Consequently, any significant shortfall in the number of users or transactions
occurring over its platform would adversely affect the amount of revenues
Healtheon/WebMD derives.
HEALTHEON/WEBMD WILL RELY ON STRATEGIC RELATIONSHIPS TO GENERATE REVENUE
Healtheon/WebMD must establish and maintain strategic relationships with
leaders in a number of healthcare industry segments. This is critical to
Healtheon/WebMD because Healtheon/WebMD believes that these relationships will
enable it to:
- extend the reach of its applications and services to the various
participants in the healthcare industry
- obtain specialized healthcare expertise
- develop and deploy new applications
- further enhance its brand
- generate revenue
Healtheon/WebMD may not be able to establish commercial acceptance of its
platform applications and services if it loses any of its strategic
relationships, fails to obtain modifications of existing relationships or fails
to establish additional relationships, or if its strategic partners fail to
actively pursue additional business relationships and partnerships.
Entering into strategic relationships is complicated because some of
Healtheon's, WebMD's, MEDE AMERICA's and Medcast's current and future strategic
partners may decide to compete with Healtheon/ WebMD and some strategic
relationships may put Healtheon/WebMD in competition with existing business
partners or customers. In addition, Healtheon/WebMD may not be able to maintain
or establish relationships with key participants in the healthcare industry if
Healtheon, WebMD, MEDE AMERICA or Medcast has established relationships with
competitors of these key participants. Consequently, it is important that
Healtheon/WebMD is perceived as independent of any particular customer or
partner. Moreover, many potential partners may resist working with
Healtheon/WebMD until its applications and services have been successfully
introduced and have achieved market acceptance.
As Healtheon/WebMD establishes strategic relationships, it will depend on
its partners' ability to generate increased acceptance and use of its platform,
applications and services. To date, Healtheon, WebMD, MEDE AMERICA and Medcast
have established only a limited number of strategic
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<PAGE> 51
relationships and these relationships are in the early stages of development.
These companies have limited experience in establishing and maintaining
strategic relationships with healthcare industry participants.
In addition, Healtheon/WebMD will depend on its strategic distribution
relationships to grow the WebMD subscriber base. Exclusive rights that WebMD has
granted to market its services in the infertility, obstetrics, gynecology,
cardiology, orthopaedics, cardiothoracic, integrated delivery networks and
medical supply markets, and its agreement not to market through some competitors
of its strategic partners, may limit Healtheon/WebMD's ability to fully
penetrate these markets.
HEALTHEON/WEBMD WILL FACE TECHNICAL, OPERATIONAL AND STRATEGIC CHALLENGES THAT
MAY PREVENT IT FROM SUCCESSFULLY INTEGRATING HEALTHEON, WEBMD, MEDE AMERICA AND
MEDCAST
The reorganizations involve risks related to the integration and management
of acquired technology, operations and personnel. The integration of Healtheon,
WebMD, MEDE AMERICA and Medcast will be a complex, time consuming and expensive
process and may disrupt Healtheon/WebMD's business if not completed in a timely
and efficient manner. Following the reorganizations, Healtheon/WebMD must
operate as a combined organization utilizing common information and
communication systems, operating procedures, financial controls and human
resources practices. Healtheon/WebMD may encounter substantial difficulties,
costs and delays involved in integrating the operations of Healtheon, WebMD,
MEDE AMERICA and Medcast, including:
- potential incompatibility of business cultures
- perceived adverse changes in business focus
- potential conflicts in sponsor, advertising or strategic relationships
- the loss of key employees and diversion of the attention of management
from other ongoing business concerns
HEALTHEON, WEBMD, MEDE AMERICA AND MEDCAST MAY LOSE CONTRACTUAL RIGHTS WITH
SUPPLIERS, CUSTOMERS AND OTHER BUSINESS PARTNERS DUE TO THE REORGANIZATIONS
Healtheon, WebMD, MEDE AMERICA and Medcast have contracts with many
suppliers, customers and other business partners. Some of these contracts
require Healtheon, WebMD, MEDE AMERICA and Medcast to obtain the consent, waiver
or approval of these other parties in connection with the proposed
reorganizations. If consent, waiver or approval cannot be obtained,
Healtheon/WebMD may lose the right to use intellectual property or other rights
that are necessary for smooth operation. Healtheon, WebMD, MEDE AMERICA and
Medcast have agreed to seek to secure the necessary consents, waivers and
approvals. However, Healtheon, WebMD, MEDE AMERICA and Medcast may not be able
to obtain all of the necessary consents, waivers and approvals.
In addition, each of Healtheon, WebMD, MEDE AMERICA and Medcast have
granted exclusive rights to third parties with regard to certain content,
sponsorship or other strategic relationships. Some of these rights conflict with
rights granted by the other parties. We may not successfully resolve these
conflicts and failure to do so could harm Healtheon/WebMD's business.
OFFICERS AND DIRECTORS OF HEALTHEON, WEBMD, MEDE AMERICA AND MEDCAST MAY HAVE
DIFFERENT INTERESTS FROM YOURS
The directors and officers of Healtheon, WebMD, MEDE AMERICA and Medcast
may have interests in the reorganizations and may participate in arrangements
that are different from, or are in addition to, those of Healtheon, WebMD, MEDE
AMERICA and Medcast stockholders generally. These include:
- Board of Directors. Messrs. Long and Arnold will serve on the board of
Healtheon/WebMD. Messrs. Long currently serves on Healtheon's board and
Mr. Arnold currently serves on WebMD's board.
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<PAGE> 52
- Executive Officers. Mr. Long will serve as Chairman and Chief Operating
Officer and Mr. Arnold will serve as Chief Executive Officer of
Healtheon/WebMD. If Mr. Arnold is terminated by Healtheon/WebMD other
than for cause or if he resigns after a diminution in his authority,
options owned by him to acquire 923,067 shares of Healtheon/WebMD, which
are currently subject to vesting conditions, will immediately vest.
- Premiere Technologies. Boland T. Jones is the President and Chief
Executive Officer of Premiere Technologies, Inc. and a WebMD board
member. William P. Payne is Vice Chairman of Premiere and Chairman of one
of its subsidiaries. Mr. Payne is also the Vice Chairman of WebMD.
Premiere Technologies and WebMD entered into an amendment to their
co-marketing and integration agreement in connection with obtaining
Premiere Technologies' agreement to vote for the Healtheon-WebMD
reorganization agreement and the WebMD merger. The amendment requires
WebMD to use its best efforts to cause Healtheon/WebMD to honor the
rights and obligations under that agreement, including the exclusivity
for telecommunications services.
- Registration Rights. Welsh, Carson, Anderson & Stowe and William Blair &
Co., L.L.C., two large stockholders of MEDE AMERICA, will have the right
to require Healtheon/WebMD to register for resale up to 6,000,000 of the
shares of Healtheon/WebMD common stock that they receive as a result of
the MEDE AMERICA reorganization. Thomas E. McInerney and Anthony J. de
Nicola, directors of MEDE AMERICA, are general partners of WCAS. Timothy
M. Murray, a director of MEDE AMERICA, is a principal of William Blair &
Co.
- Stock Options. Employees of MEDE AMERICA, including officers of MEDE
AMERICA, will receive options to purchase an aggregate of 700,000 shares
of Healtheon/WebMD common stock, with an exercise price of $45.72 per
share, following the completion of the mergers, to be allocated
individually at a later date. The options will vest over four years, and
are intended to serve as compensation for continued service to the
combined company. Based upon the fair value of Healtheon/WebMD's common
stock at the date of grant, these options may generate additional
compensation costs to Healtheon/WebMD over the vesting period of the
awards.
- Employment Agreements. Mark Dailey and Gordon T. Wyatt have employment
agreements with Medcast that are implicated by the reorganization.
- Potential Vesting of Medcast Options. The Medcast stock option plan
provides that all unvested options under the plan will immediately vest
upon the closing of the reorganization. Messrs. Dailey and Wyatt, each
executive officers of Medcast, hold options that will accelerate as of
the reorganization.
- Transaction Fee. If the Medcast reorganization is completed, Stephens,
Inc., an affiliate of Stephens Group, Inc. and an affiliate of Medcast,
will receive a transaction fee in connection with the Medcast
reorganization.
HEALTHEON/WEBMD'S ABILITY TO GENERATE REVENUES WILL SUFFER IF IT DOES NOT
QUICKLY EXPAND ITS SUITE OF APPLICATIONS
Healtheon currently offers a limited number of applications on its platform
and many of WebMD's service offerings are not fully developed. For example,
WebMD does not currently provide a site-wide search capability on its Web site,
and its electronic data interchange services do not include claims processing.
Healtheon/WebMD's must quickly introduce new applications and services in
several healthcare segments. If Healtheon/WebMD cannot improve the functionality
of the suite of WebMD Internet applications, it will not be able to retain
subscribers once they are required to pay for their WebMD subscriptions or
attract other subscribers who will pay for their subscriptions. WebMD expects
that its advertising revenues will be dependent on the level of usage of its
services by subscribers, and believes that levels of usage will not increase
unless it improves functionality. Healtheon/WebMD will not have the internal
resources and specialized healthcare expertise to develop all these applications
and services independently. Consequently, it must rely on a combination of
internal development, strategic relationships, licensing and acquisitions to
develop these applications and services. Each of Healtheon/
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WebMD's applications, regardless of how it was developed, must be integrated and
customized to operate with existing customer legacy computer systems and
Healtheon/WebMD's platform. Developing, integrating and customizing these
applications and services will be time consuming, and these applications and
services may never achieve market acceptance, which could also cause
Healtheon/WebMD's business to suffer.
HEALTHEON/WEBMD MUST ACQUIRE TECHNOLOGIES AND COMPANIES TO INCREASE ITS CUSTOMER
BASE
Healtheon/WebMD expects to continue to acquire technologies and other
healthcare technology companies to increase the number and variety of
applications and services on its platform and to increase its customer base. To
be successful, Healtheon/WebMD will need to identify additional applications,
technologies and businesses that are complementary to its own, integrate
disparate technologies and corporate cultures and manage a geographically
dispersed company. Future acquisitions could divert management's attention from
other business concerns and expose it to unforeseen liabilities or risks
associated with entering new markets. Finally, Healtheon/WebMD may lose key
employees while integrating these new companies.
Integrating newly acquired organizations and technologies into
Healtheon/WebMD could be expensive, time consuming and may strain its resources.
In addition, Healtheon/WebMD may lose its current customers if any acquired
companies have relationships with competitors of Healtheon/WebMD's customers.
Consequently, Healtheon/WebMD may not be successful in integrating acquired
businesses or technologies and may not achieve anticipated revenue and cost
benefits. Healtheon/WebMD also cannot guarantee that these acquisitions will
result in sufficient revenues or earnings to justify its investment in, or
expenses related to, these acquisitions or that any synergies will develop. The
healthcare industry is consolidating and Healtheon/WebMD expects that it will
face intensified competition for acquisitions, especially from larger,
better-funded organizations. If Healtheon/WebMD fails to execute its acquisition
strategy successfully for any reason, its business will suffer significantly.
Healtheon/WebMD intends to pay for some of its acquisitions by issuing
additional common stock and this would dilute its stockholders. Healtheon/WebMD
may also use cash to buy companies or technologies, and it may need to incur
debt to pay for these acquisitions. Acquisition financing may not be available
on favorable terms or at all. In addition, Healtheon/WebMD may be required to
amortize significant amounts of goodwill and other intangible assets in
connection with future acquisitions, which would materially increase its
operating expenses.
HEALTHEON/WEBMD'S BUSINESS WILL SUFFER IF IT FAILS TO MANAGE ITS GROWTH
Healtheon, WebMD, MEDE AMERICA and Medcast have rapidly and significantly
expanded their operations and Healtheon/WebMD expects to continue to do so. This
growth has placed a significant strain on each company's managerial,
operational, financial and other resources and is expected to continue to strain
the resources of Healtheon/WebMD. If Healtheon/WebMD is unable to respond to and
manage this expected growth, then the quality of its services and its results of
operations could be materially adversely affected.
Healtheon's, WebMD's, MEDE AMERICA's and Medcast's current information
systems, procedures and controls may not continue to support Healtheon/WebMD's
operations, and may hinder its ability to exploit the market for healthcare
applications and services. Healtheon/WebMD is in the process of evaluating its
accounting and management information systems and anticipates that it may
implement new systems within the next twelve months. Healtheon/WebMD could
experience interruptions to its business while it transitions to new systems.
Healtheon/WebMD cannot guarantee that its systems, procedures and controls will
be adequate to support expansion of our operations.
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HEALTHEON/WEBMD'S BUSINESS WILL SUFFER IF COMMERCIAL USERS AND SUBSCRIBERS DO
NOT ACCEPT INTERNET SOLUTIONS
Healtheon/WebMD's business model depends on the adoption of Internet
solutions by commercial users and subscribers. Healtheon/WebMD's ability to
generate revenues 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 relating to conducting transactions
over the Internet
- lack of development of complementary products, such as high-speed modems
and high-speed communication lines
- delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity
The Internet infrastructure may be unable to support the demands placed on
it by continued growth and use of the Internet. The adoption of Internet
solutions by healthcare participants will require the acceptance of a new way of
conducting business and exchanging information. The healthcare industry, in
particular, relies on legacy systems that may be unable to benefit from
Healtheon/WebMD's Internet-based platform. To maximize the benefits of
Healtheon/WebMD's platform, healthcare participants must be willing to allow
sensitive information to be stored in Healtheon/WebMD's databases. Healtheon/
WebMD can process transactions for healthcare participants that maintain
information on their own proprietary databases. However, the benefits of
Healtheon/WebMD's connectivity and sophisticated information management solution
are limited under these circumstances. Customers using legacy and client-server
systems may refuse to adopt new systems when they have made extensive investment
in hardware, software and training for older systems.
PERFORMANCE PROBLEMS WITH HEALTHEON/WEBMD'S SYSTEMS COULD DAMAGE ITS BUSINESS
Healtheon/WebMD's customer satisfaction and its business could be harmed if
Healtheon/WebMD or its customers experience system delays, failures or loss of
data. Healtheon, WebMD, MEDE AMERICA and Medcast currently process substantially
all their customer transactions and data at their respective facilities.
Although Healtheon, WebMD and Medcast have safeguards for emergencies, they do
not have backup facilities to process information if these facilities are not
functioning. The occurrence of a major catastrophic event or other system
failure at any of Healtheon/WebMD's facilities could interrupt data processing
or result in the loss of stored data. In addition, Healtheon/WebMD will depend
on the efficient operation of Internet connections from customers to its
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.
Healtheon/WebMD will depend on service and content providers to provide
information and data feeds on a timely basis. Healtheon/WebMD's web sites could
experience disruptions or interruptions in service due to the failure or delay
in the transmission or receipt of this information. In addition,
Healtheon/WebMD's customers will depend on Internet service providers, online
service providers and other web site operators for access to our web sites. All
of these providers have experienced significant outages in the past and could
experience outages, delays and other difficulties in the future due to system
failures unrelated to our systems. Any significant interruptions in our services
or increases in response time could result in a loss of potential or existing
customers, strategic partners, advertisers or sponsors and, if sustained or
repeated, could reduce the attractiveness of Healtheon/WebMD's services.
Healtheon/WebMD's service agreements will contain performance standards. If
Healtheon/WebMD fails to meet these standards, its customers could terminate
their agreements with Healtheon/WebMD. The loss of any of Healtheon/WebMD's
service agreements would directly and significantly impact its
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business. Healtheon/WebMD may be unable to expand or adapt its network
infrastructure to meet additional demand or its customers' changing needs on a
timely basis and at a commercially reasonable cost, or at all.
IF HEALTHEON/WEBMD SYSTEMS EXPERIENCE SECURITY BREACHES OR ARE OTHERWISE
PERCEIVED TO BE INSECURE, HEALTHEON/WEBMD'S REPUTATION WILL SUFFER.
A material security breach could damage Healtheon/WebMD's reputation or
result in liability. Healtheon/WebMD will retain confidential customer and
patient information in its processing centers. Healtheon/WebMD may be required
to spend significant capital and other resources to protect against security
breaches or to alleviate problems caused by breaches. Any well-publicized
compromise of Internet security could deter people from using the Internet or
from conducting transactions that involve transmitting confidential information,
including confidential healthcare information. Therefore, it is critical that
these facilities and infrastructure remain secure and are perceived by the
marketplace to be secure. Despite the implementation of security measures, this
infrastructure may be vulnerable to physical break-ins, computer viruses,
programming errors, attacks by third parties or similar disruptive problems.
TECHNOLOGY MAY CHANGE FASTER THAN HEALTHEON/WEBMD CAN UPDATE ITS APPLICATIONS
AND SERVICES
Healthcare information exchange and transaction processing is a relatively
new and evolving market. The pace of change in Healtheon/WebMD's markets is
rapid and there are frequent new product introductions and evolving industry
standards. Healtheon/WebMD may be unsuccessful in responding to technological
developments and changing customer needs. In addition, Healtheon/WebMD's
applications and services offerings may become obsolete due to the adoption of
new technologies or standards.
HEALTHEON/WEBMD'S PLATFORM INFRASTRUCTURE AND SCALABILITY ARE NOT PROVEN AND IT
MAY FAIL TO RESPOND TO NEW GROWTH
So far, Healtheon and WebMD have processed a limited number and variety of
transactions over their platforms. Similarly, a limited number of healthcare
participants use these platforms. Healtheon/ WebMD's systems may not accommodate
increased use while maintaining acceptable overall performance. MEDE AMERICA, by
contrast, currently processes approximately 950,000 transactions per business
day. Healtheon/WebMD must continue to expand and adapt its network
infrastructure to accommodate additional users, increased transaction volumes
and changing customer requirements. This expansion and adaptation will be
expensive and will divert Healtheon/WebMD's attention from other activities.
PROBLEMS RELATING TO THE YEAR 2000 ISSUE COULD ADVERSELY AFFECT
HEALTHEON/WEBMD'S BUSINESS
Some of Healtheon/WebMD's software programs may not recognize calendar
dates beginning in the Year 2000. As a result of this problem, some of these
systems could fail to operate or fail to produce correct results. Accordingly,
Healtheon, WebMD, MEDE AMERICA and Medcast are reviewing their internal computer
programs and systems to determine if they will be Year 2000 compliant.
Healtheon, WebMD, MEDE AMERICA and Medcast presently believe that their computer
systems will be Year 2000 compliant in a timely manner or, in the alternative,
that contingency plans are in place for any systems that may not be compliant.
Nevertheless, undetected errors or defects may remain. Furthermore,
Healtheon/WebMD will depend on third party suppliers for most of the services it
provides. Healtheon, WebMD is in the process of contacting any third party
suppliers regarding their Year 2000 readiness. If these parties are affected by
the Year 2000 problem, Healtheon/WebMD's ability to provide services to its
subscribers may be impaired. For further information, see the sections entitled
"Healtheon management's discussion and analysis of financial condition and
results of operations -- Year 2000 compliance" on page 222, "WebMD management's
discussion and analysis of financial condition and results of operations -- Year
2000 compliance" on page 261, "MEDE AMERICA management's discussion and analysis
of financial condition and results of operations -- Year 2000 compliance" on
page 298 and "Medcast management's discussion and analysis of financial
condition and results of operations -- Year 2000 compliance" on page 316.
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IF HEALTHEON/WEBMD IS UNABLE TO GENERATE SIGNIFICANT ADVERTISING REVENUES, ITS
FUTURE RESULTS OF OPERATIONS WILL BE MATERIALLY ADVERSELY AFFECTED.
Healtheon/WebMD will derive a portion of its revenues from advertising on
its web sites. Significant advertising revenues have not been earned by WebMD,
and Healtheon/WebMD may not be able to generate significant advertising
revenues. No standards have been widely accepted to measure the effectiveness of
web advertising. If no standards develop, existing advertisers may not continue
their current level of web advertising, and advertisers that have traditionally
relied on other advertising media may be reluctant to advertise on the web.
Advertisers that already have invested substantial resources in other
advertising methods may be reluctant to adopt a new strategy. Healtheon/WebMD's
business would be adversely affected if the market for web advertising fails to
develop or develops more slowly than expected.
Different pricing models are used to sell advertising on the web. It is
difficult to predict which, if any, will emerge as the industry standard. This
makes it difficult to project future advertising revenues. Moreover, "filter"
software programs that limit or prevent advertising from being delivered to a
web user's computer are available. Widespread adoption of this software could
adversely affect the commercial viability of web advertising.
HEALTHEON/WEBMD MAY BE UNABLE TO GENERATE HEALTHCARE TRANSACTION REVENUES
Healtheon/WebMD plans to derive a portion of its revenue from transactions
on its web sites. However, neither Healtheon nor WebMD has earned any Internet
transaction revenues to date, and we cannot guarantee that Healtheon/WebMD will
be able to generate significant transaction revenues in the future.
Healtheon/WebMD has developed relationships with service providers to offer
healthcare products and services through direct links from its web sites to
their web sites. However, there is no established business model for the sale of
healthcare products or services over the Internet. Accordingly, Healtheon/WebMD
has no significant experience in the sale of products or services online and the
development of relationships with providers of such products and services, nor
can we predict the rate at which our customers will elect to engage in this form
of commerce or the compensation that we will receive for enabling these
transactions.
HEALTHEON/WEBMD'S REVENUES WILL BE CONCENTRATED IN A FEW CUSTOMERS, AND ITS
ABILITY TO GENERATE REVENUE WOULD SUFFER IF IT LOST ANY OF THESE CUSTOMERS
Healtheon/WebMD expects that it will generate a significant portion of its
revenue from a small number of customers for the next few years. If
Healtheon/WebMD does not generate as much revenue from these customers as it
expects, or if it loses any of these customers, Healtheon/WebMD's revenue will
be significantly reduced which would harm its business. Currently, Healtheon
receives a substantial majority of its revenue from four customers. United
Health Group, SmithKline Labs, Brown & Toland and Beech Street together
accounted for approximately 86% of Healtheon's total revenue for the three
months ended March 31, 1999. On a pro forma basis after giving effect to the
reorganizations with WebMD, MEDE AMERICA and Medcast, these four customers would
account for 43% of Healtheon/WebMD's total pro forma revenue for the three
months ended March 31, 1999. Customers who also own shares of Healtheon stock,
including UnitedHealth Group and SmithKline Labs, accounted for 43% of
Healtheon's total revenue in 1998 and 55% of Healtheon's total revenue in 1997.
Upon the completion of the reorganizations, UnitedHealth Group will own
approximately 6.3% of Healtheon/ WebMD's stock and SmithKline Labs will own
approximately 4.4% of Healtheon/WebMD's stock.
HEALTHEON/WEBMD WILL FACE SIGNIFICANT COMPETITION
The market for healthcare information services is intensely competitive,
rapidly evolving and subject to rapid technological change. Many of Healtheon's
competitors have greater financial, technical, product development, marketing
and other resources than Healtheon/WebMD will have. These organizations may
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be better known and have more customers than Healtheon/WebMD will have.
Healtheon/WebMD may be unable to compete successfully against these
organizations.
Many of Healtheon/WebMD's competitors have announced or introduced Internet
strategies that will compete with Healtheon/WebMD's applications and services.
Healtheon/WebMD has many competitors, including:
- healthcare information software vendors, including McKesson HBOC 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
- small regional organizations
Healtheon/WebMD expects that major software information systems companies
and others specializing in the healthcare industry will offer competitive
applications or services. Some of Healtheon/ WebMD's large customers may also
compete with Healtheon/WebMD.
Healtheon/WebMD will also compete for subscribers, consumers, content and
service providers, advertisers, sponsors and acquisition candidates with the
following categories of companies:
- online services or web sites targeted to the healthcare industry and
healthcare consumers generally, including medscape.com, pol.net,
ivillage.com, medcareonline.com, mediconsult.com, betterhealth.com,
drkoop.com, onhealth.com, healthcentral.com and thriveonline.com
- publishers and distributors of traditional offline media, including those
targeted to healthcare professionals, many of which have established or
may establish web sites
- general purpose consumer online services and portals which provide access
to healthcare-related content and services
- public sector and non-profit web sites that provide healthcare
information without advertising or commercial sponsorships
- vendors of healthcare information, products and services distributed
through other means, including direct sales, mail and fax messaging
- web search and retrieval services and other high-traffic web sites
IF HEALTHEON/WEBMD IS NOT SUCCESSFUL IN ESTABLISHING ITS BRAND, ITS ABILITY TO
GENERATE REVENUES WOULD BE HARMED
Healtheon/WebMD must establish its brand in order to increase its number of
users and increase its online traffic. For Healtheon/WebMD to be successful in
establishing its brand:
- participants in the healthcare industry must perceive Healtheon/WebMD as
offering quality, cost-effective products and services
- healthcare consumers must perceive Healtheon/WebMD as offering relevant,
reliable healthcare information from trustworthy sources
- medical suppliers, pharmaceutical companies and other vendors to the
healthcare community must perceive the Healtheon/WebMD web site as an
effective marketing and sales channel for their products and services
Healtheon/WebMD may need to substantially increase its marketing budget to
generate brand recognition and brand loyalty. Healtheon/WebMD ability to
generate revenues may be affected it cannot increase awareness of its brand.
Further, Healtheon/WebMD's web sites will be more attractive to healthcare
advertisers and sponsors if it has a large number of users with demographic
characteristics that are
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desirable to advertisers and sponsors. Therefore, Healtheon/WebMD intends to
introduce additional or enhanced services in the future in an effort to retain
its current users and attract new users. Healtheon/WebMD's reputation and brand
name could be adversely affected if it experiences difficulties in introducing
new services, if its services are not accepted by subscribers or consumers, if
it is required to discontinue existing services or if its services do not
function properly.
CHANGES IN THE HEALTHCARE INDUSTRY COULD ADVERSELY AFFECT HEALTHEON/WEBMD'S
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 Healtheon/
WebMD to make unplanned modifications of applications or services, or result in
delays or cancellations of orders or in the revocation of endorsement of
Healtheon/WebMD's applications and services by healthcare participants. Federal
and state legislatures have periodically considered programs to reform or amend
the U.S. healthcare system at both the federal and state level. These programs
may contain proposals to increase governmental involvement in healthcare, lower
reimbursement rates or otherwise change the environment in which healthcare
industry participants operate. Healthcare industry participants may respond by
reducing their investments or postponing investment decisions, including
investments in Healtheon/WebMD's applications and services. Healtheon/WebMD does
not know what effect any proposals would have on its business.
THE TREND TOWARD CONSOLIDATION IN THE HEALTHCARE INDUSTRY COULD LEAD TO LOWER
MARGINS FOR HEALTHEON/ WEBMD
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 Healtheon/WebMD's applications
and services. If Healtheon/WebMD is forced to reduce its prices, its operating
margins would decrease. As the healthcare industry consolidates, competition for
customers will become more intense and the importance of acquiring each customer
will become greater.
GOVERNMENT REGULATION COULD ADVERSELY AFFECT HEALTHEON/WEBMD'S BUSINESS
Healtheon/WebMD's business will be subject to government regulation.
Existing as well as new laws and regulations could adversely affect its
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
- characteristics and quality of products and services
Regulation regarding patient confidentiality
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 Healtheon/WebMD's applications and services may be affected by
additional regulation of the Internet. For example, until recently Health Care
Financing Administration guidelines prohibited transmission of Medicare
eligibility information over the Internet.
Healtheon/WebMD will be subject to extensive regulation relating to the
confidentiality and release of patient records and other health care industry
issues. For example, legislation currently prevents MEDE
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AMERICA from providing Medicare claims processing services and eligibility
verification from the same database. 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, Healtheon/WebMD may be restricted or
prevented from delivering patient records electronically.
Emerging standards required by The Health Insurance Portability and
Accountability Act of 1996
Legislation currently being considered at the federal level could affect
Healtheon/WebMD's 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. Healtheon/ WebMD
will design its platform and applications to comply with these proposed
regulations; however, until these regulations become final, they could change,
which could cause Healtheon/WebMD to use additional resources to revise its
platform and applications and lead to delays. In addition, Healtheon/ WebMD's
success depends on other healthcare participants complying with these
regulations.
Possible regulation by the U.S. Food and Drug Administration
Some computer applications and software are considered medical devices and
are subject to regulation by the U.S. Food and Drug Administration, or the FDA.
None of Healtheon, WebMD, MEDE AMERICA or Medcast believes that its current
applications or services are subject to FDA regulation. Healtheon/WebMD may
expand its application and service offerings into areas that subject it to FDA
regulation. Healtheon/WebMD has no experience in complying with FDA regulations.
Healtheon/ WebMD believes that complying with FDA regulations would be time
consuming, burdensome and expensive and could delay its introduction of new
applications or services.
HEALTHEON/WEBMD MAY FACE LIABILITIES DUE TO ERRORS IN ITS PRODUCTS OR CONTENT
PROVIDED ON ITS WEB SITES
Although Healtheon/WebMD and its customers will test its applications, they
may contain defects or result in system failures. In addition, Healtheon/WebMD's
platform and Web sites 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
Healtheon/WebMD's reputation or increased insurance costs.
Many of Healtheon/WebMD's strategic relationships and services agreements
involve providing critical information technology services to Healtheon/WebMD's
clients' businesses. If Healtheon/WebMD fails to meet its clients' expectations,
its reputation could suffer and it could be liable for damages. In addition,
patient care could suffer and Healtheon/WebMD could be liable if its systems
fail to deliver correct information in a timely manner. Healtheon/WebMD's
insurance may not protect it from this risk. Finally, if third persons were able
to penetrate our network security or otherwise misappropriate our users'
personal information our reputation could be damaged and we could be subject to
liability.
Many of Healtheon/WebMD's contracts will limit its liability arising from
its errors; however, these provisions may not be enforceable and may not protect
it from liability. While Healtheon/WebMD has general liability insurance that it
believes is adequate, including coverage for errors and omissions,
Healtheon/WebMD may not be able to maintain this insurance on reasonable terms
in the future. In addition, Healtheon/WebMD's insurance may not be sufficient to
cover large claims and Healtheon/ WebMD's insurer could deny coverage on claims.
If Healtheon/WebMD is liable for an uninsured or underinsured claim or if
Healtheon/WebMD's premiums increase significantly, its financial condition could
be materially harmed.
In addition, Healtheon/WebMD could be subject to third party claims based
on the nature and content of information supplied on its Web sites by
Healtheon/WebMD or third parties, including content providers, medical advisors
or users. Healtheon/WebMD could also be subject to liability for content that
may be accessible through its Web sites or third party Web sites linked from its
Web sites or through
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content and information that may be posted by users in chat rooms or bulletin
boards. Even if these claims do not result in liability to Healtheon/WebMD,
investigating and defending against these claims could be expensive and
time-consuming and could divert management's attention away from operating the
business.
HEALTHEON/WEBMD'S INTELLECTUAL PROPERTY MAY BE SUBJECTED TO INFRINGEMENT CLAIMS
OR MAY BE INFRINGED UPON
Healtheon/WebMD's intellectual property will be important to its business.
Healtheon/WebMD could be subject to intellectual property infringement claims as
the number of its competitors grows and the functionality of its applications
overlaps with competitive offerings. These claims, even if not meritorious,
could be expensive and divert management's attention from operating the company.
If Healtheon/WebMD becomes liable to third parties for infringing their
intellectual property rights, it could 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.
Healtheon/WebMD may be unable to develop noninfringing technology or obtain a
license on commercially reasonable terms, or at all. In addition,
Healtheon/WebMD may not be able to protect against misappropriation of its
intellectual property. Third parties may infringe upon Healtheon/WebMD's
intellectual property rights, Healtheon/ WebMD may not detect this unauthorized
use and it may be unable to enforce its rights.
LENGTHY SALES AND IMPLEMENTATION CYCLES FOR HEALTHEON/WEBMD'S SOLUTIONS COULD
ADVERSELY AFFECT ITS REVENUE GROWTH
A key element of Healtheon/WebMD's strategy is to market its solutions
directly to large healthcare organizations. Healtheon/WebMD will be unable to
control many of the factors that will influence its customers' buying decisions.
Healtheon/WebMD expects that the sales and implementation process will be
lengthy and will involve a significant technical evaluation and commitment of
capital and other resources by its customers. The sale and implementation of its
solutions are subject to delays due to its customers' internal budgets and
procedures for approving large capital expenditures and deploying new
technologies within their networks.
Healtheon/WebMD will need to expend substantial resources to integrate its
applications with the existing legacy and client-server architectures of large
healthcare organizations. Healtheon/WebMD has limited experience in integrating
its applications with large, complex architectures, and it may experience delays
in the integration process. These delays would, in turn, delay its ability to
generate revenue from these applications and could adversely affect its results
of operations.
HEALTHEON/WEBMD'S BUSINESS WILL BE ADVERSELY AFFECTED IF IT CANNOT ATTRACT AND
RETAIN KEY PERSONNEL
Healtheon/WebMD future operating results will substantially depend on the
ability of its officers and key employees to manage changing business conditions
and to implement and improve its technical, administrative, financial control
and reporting systems. Healtheon/WebMD needs to attract, integrate, motivate and
retain additional highly skilled technical people. In particular,
Healtheon/WebMD needs to attract experienced professionals capable of
developing, selling and installing complex healthcare information systems.
Healtheon/WebMD faces intense competition for these people. If the Healtheon/
WebMD reorganization occurs, Healtheon/WebMD's executive management team,
including Jeffrey T. Arnold, the designated Chief Executive Officer of
Healtheon/WebMD, and W. Michael Long, its designated Chairman and Chief
Operating Officer, will be critical to Healtheon/WebMD's success.
IF HEALTHEON/WEBMD IS UNABLE TO MAINTAIN ITS RELATIONSHIPS WITH CONTENT
PROVIDERS, ITS BUSINESS COULD BE ADVERSELY AFFECTED
WebMD relies on independent content providers for the majority of the
clinical, educational and other general healthcare information that it provides
through its web site. Any failure by these parties to develop and maintain high
quality, attractive content could result in user dissatisfaction, could inhibit
Healtheon/ WebMD's ability to add users and could dilute the Healtheon/WebMD
brand name. WebMD has entered
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into strategic relationships with several companies to obtain content for WebMD,
and Healtheon/WebMD intends to enter into additional relationships in the
future. Healtheon/WebMD must maintain WebMD's existing relationships with these
content providers and build new relationships with other content providers.
WebMD's agreements with content providers are short-term and non-exclusive.
Termination of one or more significant content provider agreements would
decrease the selection of healthcare-related news and information which can be
offered to subscribers and consumers. Healtheon/WebMD's competitors could offer
content that is similar or the same as that provided on the WebMD web site. If
this information is readily available elsewhere, including on other web sites at
a reduced cost or free of charge, Healtheon/ WebMD may lose subscribers. In
addition, WebMD depends on content providers to deliver high quality content
from reliable sources and to continually upgrade their content in response to
subscriber and consumer demand and evolving healthcare industry trends.
SOME OF WEBMD'S SERIES A PREFERRED STOCK AND SERIES B PREFERRED STOCK MAY REMAIN
OUTSTANDING FOLLOWING THE HEALTHEON-WEBMD REORGANIZATION
If the holders of the WebMD Series A preferred stock and Series B preferred
stock do not convert their shares into WebMD common stock prior to the
Healtheon-WebMD reorganization, these shares of preferred stock will remain
outstanding as shares of WebMD. If this were to occur, WebMD would have minority
stockholders who could hold up to approximately 12.6% of the capital stock of
WebMD, a subsidiary of Healtheon/WebMD. The rights of these minority
stockholders may delay or limit action that Healtheon/WebMD might otherwise want
to take with respect to WebMD. In addition, complying with these rights might be
costly to Healtheon/WebMD and divert the time and efforts of its management.
Healtheon, WebMD and McKessonHBOC have been discussing the modification of
the existing strategic relationship between WebMD and McKessonHBOC, the parent
of HBO & Company, as well as McKessonHBOC's rights to purchase additional equity
in WebMD. This modification would also result in the execution of conversion
agreements by HBO & Company, which together with conversion agreements signed by
other holders of the Series A and B preferred stock, will ensure that those
series are converted into common stock of WebMD prior to the Healtheon-WebMD
reorganization.
YOU MAY NOT KNOW THE NUMBER OF SHARES OF HEALTHEON/WEBMD COMMON STOCK TO BE
ISSUED TO MEDE AMERICA STOCKHOLDERS UNTIL AS LATE AS TWO DAYS PRIOR TO THE MEDE
AMERICA STOCKHOLDERS' MEETING
Upon the completion of the MEDE AMERICA reorganization, stockholders of
MEDE AMERICA will be entitled to receive 0.6593 of a share of Healtheon/WebMD
common stock per MEDE AMERICA share, subject to adjustment based on changes in
the market price of Healtheon's common stock prior to the stockholders' meeting.
If the ten-day average closing price of Healtheon's common stock price for the
period ending two days before the stockholders' meeting is less than $38.68,
then the actual number of shares MEDE AMERICA stockholders will receive in the
MEDE AMERICA reorganization may be adjusted based on a formula involving the
average closing price. This formula for determining the potential adjustment to
the exchange ratio is described in detail under the heading "Structure of the
reorganization and conversion of MEDE AMERICA common stock." Once an exchange
ratio is determined there will be no adjustment to this exchange ratio if the
market price of either MEDE AMERICA common stock or Healtheon common stock
fluctuates prior to completion of the reorganization. The share prices of both
MEDE AMERICA common stock and Healtheon common stock are subject to price
fluctuations in the market for publicly-traded equity securities and have each
experienced significant volatility. We cannot predict the market prices for
either MEDE AMERICA common stock or Healtheon common stock at any time before
the completion of the reorganization or the market price for Healtheon common
stock after the completion of the reorganization. WE ENCOURAGE YOU TO OBTAIN
CURRENT MARKET QUOTATIONS OF HEALTHEON COMMON STOCK AND MEDE AMERICA COMMON
STOCK.
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YOU MAY NOT KNOW THE NUMBER OF SHARES OF HEALTHEON/WEBMD COMMON STOCK TO BE
ISSUED TO MEDCAST STOCKHOLDERS UNTIL AS LATE AS THE DAY OF THE MEDCAST
REORGANIZATION
Upon the completion of the Medcast reorganization, stockholders of Medcast
will be entitled to receive approximately 0.5483 shares of Healtheon/WebMD
common stock for each share of Medcast common stock they own after conversion of
any shares of Medcast preferred stock they own. The exchange ratio is based on a
formula that is more fully described under the heading "Structure of the Medcast
reorganization and conversion of Medcast common stock." The share price of
Healtheon common stock is subject to price fluctuations in the market for
publicly-traded equity securities and has experienced significant volatility. We
cannot predict the market prices for Healtheon common stock at any time before
the completion of the reorganization or the market price for Healtheon/WebMD
common stock after the completion of the reorganization. WE ENCOURAGE YOU TO
OBTAIN CURRENT MARKET QUOTATIONS OF HEALTHEON COMMON STOCK.
FUTURE SALES OF HEALTHEON/WEBMD SHARES COULD AFFECT THE STOCK PRICE
The market price of the Healtheon/WebMD common stock could fall
dramatically if stockholders sell large amounts of stock in the public market
following the reorganizations. These sales, or the possibility that these sales
may occur, could make Healtheon/WebMD stockholders unable to realize the value
of the merger consideration received (as measured prior to completion of the
mergers) and may make it more difficult for Healtheon/WebMD to sell equity or
equity-related securities in the future. Before the reorganizations, a
significant portion of the common stock of Healtheon and MEDE AMERICA was
subject to restrictions on transfer under federal securities law and "lock-up"
agreements with the underwriters of their IPOs, and there was no public market
for the capital stock of WebMD. Until , , affiliates of
Healtheon, WebMD, MEDE AMERICA and Medcast will not be able to transfer the
Healtheon/WebMD common stock due to restrictions under federal securities laws.
Thereafter, an aggregate of shares of Healtheon/WebMD common stock
will be eligible for resale in the public market. of these shares will
be subject to limitations on the volume of sales under federal securities laws.
Some Healtheon/WebMD stockholders will also have the right to demand
registration of their shares for resale.
BENEFITS OF HEALTHEON-WEBMD REORGANIZATION MAY NOT BE AVAILABLE TO MEDE AMERICA
OR MEDCAST STOCKHOLDERS
None of the benefits identified by Healtheon and WebMD as reasons for the
reorganization will be realized by MEDE AMERICA and Medcast stockholders if the
Healtheon-WebMD reorganization is not completed. Nevertheless, the MEDE AMERICA
reorganization is not conditioned on the Healtheon-WebMD reorganization.
HEALTHEON STOCK PRICE COULD BE AFFECTED IF THE HEALTHEON-WEBMD REORGANIZATION IS
NOT COMPLETED
The Healtheon stock price has increased from $47.00 on May 13, 1999, the
date prior to press reports indicating Healtheon and WebMD were in
reorganization discussions to $ as of , 1999. If the Healtheon-WebMD
reorganization does not occur, the Healtheon stock price may decline.
Nevertheless, neither the MEDE AMERICA reorganization nor the determination of
the exchange ratio is dependent on the closing of the Healtheon-WebMD
reorganization.
BENEFITS OF MEDE AMERICA REORGANIZATION MAY NOT BE AVAILABLE TO WEBMD OR MEDCAST
STOCKHOLDERS
None of the benefits identified by Healtheon and MEDE AMERICA as reasons
for the reorganization will be realized by WebMD or Medcast stockholders if the
MEDE AMERICA reorganization is not completed. Nevertheless, neither the
Healtheon-WebMD reorganization nor the Medcast reorganization is conditioned on
the MEDE AMERICA reorganization.
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BENEFITS OF MEDCAST REORGANIZATION MAY NOT BE AVAILABLE TO HEALTHEON OR MEDE
AMERICA STOCKHOLDERS
None of the benefits identified as reasons for the Medcast reorganization
will be realized by Healtheon or MEDE AMERICA stockholders if the Medcast
reorganization is not completed. Nevertheless, the Healtheon-WebMD
reorganization and MEDE AMERICA reorganization are not conditioned on the
Medcast reorganization.
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THE HEALTHEON MEETING
DATE, TIME AND PLACE OF HEALTHEON'S SPECIAL MEETING
, 1999
9:00 a.m. Pacific Time
4600 Patrick Henry Drive
Santa Clara, California 95054
PURPOSE OF THE SPECIAL MEETING
The purpose of the Healtheon stockholders' meeting is to vote on the
following proposals:
1. To approve the reorganization of Healtheon that will cause
Healtheon to become a subsidiary of a new parent company, called
Healtheon/WebMD Corporation. In the transaction, Healtheon/ WebMD will
issue one share of Healtheon/WebMD common stock in exchange for each
outstanding share of Healtheon common stock.
2. To approve the issuance of shares of Healtheon/WebMD common stock
in the merger of a wholly owned subsidiary of Healtheon/WebMD with and into
WebMD, Inc. as contemplated by the Agreement and Plan of Reorganization
dated as of May 20, 1999, as amended, among Healtheon/ WebMD, Healtheon,
WebMD, Water Acquisition Corp. and Hydrogen Acquisition Corp. Healtheon/
WebMD will issue 1.815 shares of Healtheon/WebMD common stock for each
share of outstanding WebMD common stock. Following the Healtheon-WebMD
reorganization and assuming the completion of the proposed acquisition of
MEDE AMERICA and Medcast, Healtheon stockholders will own approximately
48.6%, WebMD stockholders will own approximately 43.7%, MEDE AMERICA
stockholders will own approximately 6.0% and Medcast stockholders will own
approximately 1.7% of the combined Healtheon/WebMD.
3. To amend Healtheon's 1996 Stock Plan, if the Healtheon-WebMD
reorganization is completed, to increase the number of shares of common
stock reserved for issuance under the plan from 19,107,321 shares to
29,107,321 shares.
4. To amend Healtheon's 1998 employee stock purchase plan to (1)
increase the number of shares of common stock reserved under the plan and
(2) change the formula for annually increasing the number of shares
available to be issued under the plan.
5. To transact any other business that properly comes before the
special meeting or any adjournments or postponements thereof.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of Healtheon common stock at the close of business
on the record date are entitled to notice of and to vote at the meeting. As of
the close of business on the record date, there were shares of
Healtheon common stock outstanding and entitled to vote, held of record by
approximately stockholders, although Healtheon has been informed that
there are in excess of beneficial owners.
VOTE AND QUORUM REQUIRED
Holders of Healtheon's common stock are entitled to one vote for each share
held as of the record date. Approval of each of the proposals to be voted upon
by Healtheon stockholders requires the affirmative vote of a majority of the
total voting power of the outstanding common stock of Healtheon as of the record
date.
On the record date, directors, executive officers and affiliates of
Healtheon as a group beneficially owned shares of Healtheon common
stock. Officers, directors and major stockholders of Healtheon have entered into
voting agreements with WebMD that obligate them to vote in favor of approval of
the Healtheon merger. As a result, if such persons vote as required by the
voting agreements, the Healtheon proposals relating to the Healtheon-WebMD
reorganization will be approved.
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ABSTENTIONS; BROKER NON-VOTES
Abstentions will be included in determining the number of shares present
and voting at the meeting and will have the same effect as votes against the
proposals. In the event that a broker, bank, custodian, nominee or other record
holder of Healtheon common stock indicates on a proxy that it does not have
discretionary authority to vote shares on a particular matter, which is called a
broker non-vote, those shares will not be considered for purposes of determining
the number of shares entitled to vote with respect to a particular proposal on
which the broker has expressly not voted, but will be counted for purposes of
determining the presence or absence of a quorum for the transaction of business.
EXPENSES OF PROXY SOLICITATION
Healtheon will pay the expenses of soliciting proxies to be voted at the
meeting. Following the original mailing of the proxies and other soliciting
materials, Healtheon and its agents also may solicit proxies by mail, telephone,
telegraph or in person. Following the original mailing of the proxies and other
soliciting materials, Healtheon will request brokers, custodians, nominees and
other record holders of Healtheon common stock to forward copies of the proxy
and other soliciting materials to persons for whom they hold shares of Healtheon
common stock and to request authority for the exercise of proxies. In these
cases, Healtheon upon the request of the record holders, will reimburse such
holders for their reasonable expenses.
PROXIES
The proxy accompanying this proxy statement/prospectus is solicited on
behalf of the Healtheon board of directors for use at the meeting. Please
complete, date and sign the accompanying proxy and promptly return it in the
enclosed envelope or otherwise mail it to Healtheon. All properly signed proxies
that Healtheon receives prior to the vote at the meeting and that are not
revoked will be voted at the meeting according to the instructions indicated on
the proxies or, if no direction is indicated, to approve the Healtheon merger.
You may revoke it at any time before it is exercised at the meeting by taking
any of the following actions:
- delivering to the secretary of Healtheon, by any means, including
facsimile, a written notice, bearing a date later than the date of the
proxy, stating that the proxy is revoked
- signing and delivering a proxy relating to the same shares and bearing a
later date prior to the vote at the meeting
- attending the meeting and voting in person, although attendance at the
meeting will not, by itself, revoke a proxy
Please note, however, that if your shares are held of record by a broker,
bank or other nominee and that stockholder wishes to vote at the meeting, the
stockholder must bring to the meeting a letter from the broker, bank or other
nominee confirming your beneficial ownership of the shares.
Healtheon's board of directors does not know of any matter that is not
referred to herein to be presented for action at the meeting. If any other
matters are properly brought before the meeting, the persons named in the
proxies will have discretion to vote on such matters in accordance with their
best judgment.
NO APPRAISAL RIGHTS
Holders of Healtheon common stock are not entitled to dissenters' rights or
appraisal rights with respect to the Healtheon merger or the other proposals to
be considered at the meeting.
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THE WEBMD MEETING
DATE, TIME AND PLACE OF WEBMD'S SPECIAL MEETING
, 1999
10:00 a.m., Eastern time
400 The Lenox Building
3399 Peachtree Road NE
Atlanta, Georgia 30326
PURPOSE OF THE SPECIAL MEETING
The purpose of the WebMD stockholders' meeting is to vote on the following
WebMD proposals:
1. To approve and adopt the Healtheon-WebMD reorganization agreement
and approve the WebMD merger, and
2. To approve the modification of accelerated vesting provisions in
WebMD options to acquire an aggregate of 1,131,394 shares of WebMD common
stock held by five WebMD employees as a result of the completion of the
WebMD merger so that WebMD will not be prevented from deducting
compensation expense relating to these options.
MAILING DATE AND RECORD DATE
This proxy statement/prospectus is being mailed initially on or about
, 1999 to all stockholders of record of WebMD as of , 1999. The record
date for the WebMD stockholders' meeting is the close of business on ,
1999. WebMD will also mail this proxy statement/prospectus to any person who is
a record holder on the record date but who was not a record holder on the
initial mailing date. Only holders of record on the record date of WebMD common
stock and Series A preferred stock are entitled to vote at the WebMD
stockholders' meeting.
VOTES REQUIRED; VOTING AGREEMENTS; CONVERSION AGREEMENTS
Pursuant to Georgia law and the WebMD articles of incorporation, in order
for WebMD Proposal 1 to be approved it must receive a majority of the votes
entitled to be cast by the holders of WebMD's:
- common stock and Series A preferred stock
- Series B common stock
- Series C and E common stock
each voting as a separate voting group. As of the date this proxy
statement/prospectus was mailed, there were outstanding shares of
common stock held by stockholders of record, shares of
Series A preferred stock held by stockholders of record,
shares of Series B common stock held by one stockholder of record, and
shares of Series C and E common stock held by stockholders
of record. The common stock is entitled to one vote per share and the Series A
preferred stock is entitled to votes per share. The voting rights of any
holder of Series A preferred stock shall not become effective until WebMD and
the holder have made any required filings under the HSR Act with respect to the
acquisition of voting securities of WebMD and the applicable waiting period has
expired.
The presence, in person or by proxy, of a majority of the votes entitled to
be cast by each of the three voting groups is required to constitute a quorum
for action on the WebMD proposals. Abstentions will be counted for purposes of
determining a quorum. A majority of all votes entitled to be cast by all shares
entitled to vote in each of the three voting groups must be cast in favor of
WebMD proposal 1 in order for it to be approved. In order for WebMD proposal 2
to be approved, it must receive the vote of 75% of the total number of votes
entitled to be cast by the holders of all of WebMD's common stock and Series A
preferred stock. For purposes of determining the 75% vote, shares held by the
individuals whose option
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acceleration provisions are the subject of proposal 2 are not counted as
outstanding. An abstention or failure to vote are the same as a vote against the
proposals.
Directors, executive officers and other affiliates of WebMD have executed
voting agreements in which they have agreed to vote their shares of common stock
and have granted irrevocable proxies to the board of directors of Healtheon to
vote their shares of common stock for the WebMD proposals. Under the
reorganization agreement, the Healtheon board is required to vote those shares
for the WebMD proposals. As a result of the voting agreements and proxies
granted under the voting agreements, the required stockholder votes for proposal
1 are assured.
Holders of at least a majority of each series of WebMD's Series C, D and E
preferred stock have entered into conversion agreements providing that after
, 1999 and prior to , 1999 they either will enter into
voting agreements and grant proxies to the board of directors of Healtheon to
vote their preferred stock so as to cause it to be converted into Series D
common stock prior to the effective time of the WebMD merger, or their preferred
shares will be automatically converted into WebMD Series D common stock on the
day prior to the record date.
By virtue of these conversion agreements, all of the shares of Series C
preferred stock, Series D preferred stock, Series E preferred stock and Series F
preferred stock will be converted into Series D common stock either the day
prior to the record date or immediately prior to the effective time of the WebMD
merger.
Unless the holders of a majority of the shares of the Series A preferred
stock elect to cause the entire Series to be converted into common stock or
unless any particular holder elects to convert his own shares of Series A
preferred stock into common stock prior to the effective time of the WebMD
merger, the shares of Series A preferred stock will remain outstanding shares of
WebMD after the WebMD merger. Unless the holders of a majority of the shares of
the Series B preferred stock elect to cause the entire Series to be converted
into common stock prior to the effective time of the WebMD merger, the shares of
Series B preferred stock will remain outstanding shares of WebMD after the WebMD
merger.
APPRAISAL RIGHTS
Only the holders of WebMD common stock and Series A preferred stock will be
entitled to appraisal rights under Georgia law. Holders of other series of
preferred stock must convert their preferred stock prior to the record date for
the WebMD stockholders' meeting if they want to exercise dissenters' appraisal
rights. For more information regarding the rights of dissenting WebMD
stockholders, see the section entitled "Rights of dissenting WebMD stockholders"
on page 86.
PROXIES
All shares of WebMD common stock and preferred stock that are entitled to
vote and are represented at the WebMD stockholders' meeting by properly executed
proxies received prior to or at the WebMD stockholders' meeting and not duly and
timely revoked will be voted at the WebMD stockholders' meeting in accordance
with the instructions indicated on the proxies. If no instructions are
indicated, the proxies will be voted for both WebMD proposals.
Execution of a proxy does not affect a stockholder's right to attend the
meeting and, other than in the case of irrevocable proxies executed in
connection with the voting agreements, does not prevent the stockholder from
voting in person at the meeting. Any proxy, other than those executed in
connection with the execution of a voting agreement, may be revoked by a
stockholder at any time before it is exercised by delivering a written
revocation or a later-dated proxy to the secretary of WebMD, or by attending the
meeting and voting in person. Any written notice of revocation or subsequent
proxy should be sent so as to be delivered to WebMD at 400 The Lenox Building,
3399 Peachtree Road NE, Atlanta GA 30326, attention: Corporate Secretary, or
hand-delivered to the corporate secretary of WebMD, in each case at or before
the taking of the vote at the WebMD stockholders' meeting.
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RECOMMENDATION OF WEBMD BOARD OF DIRECTORS
The WebMD board of directors has unanimously approved the Healtheon-WebMD
reorganization agreement and the reorganization itself and has determined that
the WebMD merger is fair to, and in the best interest of, WebMD and its
stockholders. THE WEBMD BOARD UNANIMOUSLY RECOMMENDS A VOTE IN FAVOR OF APPROVAL
AND ADOPTION OF THE HEALTHEON-WEBMD REORGANIZATION AGREEMENT AND APPROVAL OF THE
WEBMD MERGER.
The WebMD board of directors has unanimously approved the modification of
accelerated vesting provisions in WebMD options held by five employees to
purchase an aggregate of 1,131,394 shares of WebMD common stock as described in
more detail in the section entitled "The Healtheon-WebMD reorganization
agreement -- Modification of vesting of employee stock options" on page 79 and
has determined that this acceleration is in the best interest of WebMD and its
stockholders. THE WEBMD BOARD UNANIMOUSLY RECOMMENDS A VOTE IN FAVOR OF APPROVAL
OF THE MODIFICATION OF ACCELERATED VESTING PROVISIONS IN THESE WEBMD STOCK
OPTIONS HELD BY THESE WEBMD EMPLOYEES.
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THE MEDE AMERICA MEETING
DATE, TIME AND PLACE OF MEDE AMERICA'S SPECIAL MEETING
, 1999
8:00 a.m., Eastern Time
90 Merrick Avenue, Suite 501
East Meadow, New York
PURPOSE OF THE SPECIAL MEETING
The special meeting is being held so you can consider and vote upon a
proposal to approve and adopt a reorganization agreement with Healtheon
Corporation and approve a merger that will cause MEDE AMERICA to become a wholly
owned subsidiary of a new parent company, called Healtheon/WebMD. The MEDE
AMERICA reorganization agreement is attached to this proxy statement/prospectus
as Annex B. See the sections entitled "The MEDE AMERICA reorganization" on page
97 and "The MEDE AMERICA reorganization agreement" on page 113.
In the reorganization, you will receive 0.6593 shares of Healtheon/WebMD
common stock for each share of MEDE AMERICA common stock you own, subject to
adjustment if the ten-day average closing price of Healtheon common stock for
the period ending two days prior to the MEDE AMERICA stockholders' meeting is
less than $38.68. This adjustment to the exchange ratio is more fully described
in the section entitled "Structure of the merger and conversion of MEDE AMERICA
common stock" on page 108 of this proxy statement/prospectus. On ,
1999, Healtheon common stock closed at $ per share.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of MEDE AMERICA common stock at the close of
business on the record date are entitled to notice of and to vote at the
meeting. As of the close of business on the record date, there were
shares of MEDE AMERICA common stock outstanding and entitled to
vote, held of record by approximately stockholders, although MEDE
AMERICA has been informed that there are in excess of beneficial
owners. Each stockholder is entitled to one vote for each share of MEDE AMERICA
common stock held as of the record date.
VOTE AND QUORUM REQUIRED
The affirmative vote of a majority of the outstanding shares of MEDE
AMERICA common stock is required to approve and adopt the reorganization
agreement and to approve the merger. The required quorum for the transaction of
business at the meeting is a majority of the shares of MEDE AMERICA common stock
outstanding on the record date.
On the record date, directors, executive officers and affiliates of MEDE
AMERICA as a group beneficially owned 7,498,780 shares of MEDE AMERICA common
stock, or approximately 53.6% of the outstanding shares on that date.
Stockholders beneficially owning 6,295,759 shares of MEDE AMERICA common stock,
or approximately 47.4% of the outstanding shares on the record date have
executed voting agreements with Healtheon, under which they have agreed to vote
their shares in favor of the merger. See "MEDE AMERICA voting agreement" on page
120.
ABSTENTIONS; BROKER NON-VOTES
Abstentions will be included in determining the number of shares present
and voting at the meeting and will have the same effect as votes against the
merger. Broker non-votes will have the same effect as votes against the merger.
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PROXIES
The proxy accompanying this proxy statement/prospectus is solicited on
behalf of the MEDE AMERICA board of directors for use at the meeting. MEDE
AMERICA stockholders are requested to complete, date and sign the accompanying
proxy and promptly return it in the enclosed envelope or otherwise mail it to
MEDE AMERICA. All properly signed proxies received by MEDE AMERICA prior to the
vote at the meeting that are not revoked will be voted at the meeting according
to the instructions indicated on the proxies or, if no direction is indicated,
to approve the merger. MEDE AMERICA stockholders may revoke their proxy at any
time before it is exercised at the meeting, by taking any of the following
actions:
- delivering to the secretary of MEDE AMERICA, by any means, including
facsimile, a written notice, bearing a date later than the date of the
proxy, stating that the proxy is revoked,
- signing and so delivering a proxy relating to the same shares and bearing
a later date prior to the vote at the meeting, or
- attending the meeting and voting in person, although attendance at the
meeting will not, by itself, revoke a proxy
Please note, however, that if a MEDE AMERICA stockholder's shares are held
of record by a broker, bank or other nominee and that stockholder wishes to vote
at the meeting, the stockholder must bring to the meeting a letter from the
broker, bank or other nominee confirming the stockholder's beneficial ownership
of the shares.
Holders of MEDE AMERICA common stock are not entitled to dissenters' rights
or appraisal rights with respect to the merger.
HOLDERS OF MEDE AMERICA COMMON STOCK SHOULD NOT SEND ANY CERTIFICATES
REPRESENTING MEDE AMERICA COMMON STOCK. FOLLOWING THE EFFECTIVE TIME OF THE
MERGER, HOLDERS OF MEDE AMERICA COMMON STOCK WILL RECEIVE INSTRUCTIONS FOR THE
SURRENDER AND EXCHANGE OF SUCH STOCK CERTIFICATES.
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THE MEDCAST MEETING
DATE, TIME AND PLACE OF MEDCAST'S SPECIAL MEETING
, 1999
8:00 a.m., Eastern Time
King & Spalding
191 Peachtree Street
Atlanta, Georgia 30303
PURPOSE OF THE SPECIAL MEETING
The special meeting is being held so you can consider and vote upon a
proposal to approve and adopt a reorganization agreement with Healtheon/WebMD
Corporation, Healtheon Corporation, WebMD, Inc. and a newly formed subsidiary of
Healtheon/WebMD Corporation and approve a merger, which is referred to as the
reorganization, that will cause Medcast to become a wholly owned subsidiary of a
new parent company, called Healtheon/WebMD. The Medcast merger agreement, which
is referred to as the reorganization agreement, is attached to this proxy
statement/prospectus as Annex C. For a detailed description of the Medcast
reorganization and the reorganization agreement, see the sections entitled "The
Medcast reorganization" on page 121 and "The Medcast reorganization agreement"
on page 138.
In the reorganization, you will receive approximately 0.5483 shares of
Healtheon/WebMD common stock for each share of Medcast common stock you own,
after conversion of any shares of preferred stock you own. The exchange ratio is
based on a formula that is more fully described in the section entitled
"Structure of the Medcast reorganization and conversion of Medcast capital
stock" on page 129 of this proxy statement/prospectus. On , 1999,
Healtheon common stock closed at $ per share. Under the Healtheon-WebMD
reorganization agreement, each share of Healtheon common stock will convert into
one share of Healtheon/WebMD common stock.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of Medcast capital stock at the close of business on
the record date are entitled to notice of and to vote at the meeting. As of the
close of business on the record date, the following shares of Medcast capital
stock were outstanding:
<TABLE>
<CAPTION>
NUMBER OF SHARES
OUTSTANDING HOLDERS OF RECORD
---------------- -----------------
<S> <C> <C>
Common stock................................... 1,915,235 43
Series A preferred stock....................... 1,913,044 22
Series B preferred stock....................... 109,765 1
Series C preferred stock....................... 388,747 29
</TABLE>
Each holder of common stock is entitled to one vote for each share of
Medcast common stock held as of the record date. Each holder of Series A
preferred stock, Series B preferred stock and Series C preferred stock is
entitled to cast one vote per share of common stock into which the preferred
stock held as of the record date is convertible.
VOTE AND QUORUM REQUIRED; VOTING AGREEMENTS
The reorganization agreement must be approved and adopted, and the merger
must be approved, by the holders of a majority of the outstanding shares of:
- Medcast common stock, Series B preferred stock and Series C preferred
stock, voting together
- Medcast Series A preferred stock voting as a separate group
The required quorum for the transaction of business at the meeting is a
majority of the shares of Medcast common stock outstanding on the record date
and shares of common stock into which the
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Series B preferred stock and Series C preferred stock outstanding on the record
date are convertible and a majority of the shares of Series A preferred stock
outstanding on the record date.
On the record date, directors and executive officers of Medcast as a group
beneficially owned 2,994,136 shares of Medcast common stock, assuming conversion
of all outstanding preferred stock, or approximately 66.1% of the outstanding
shares on that date. Stockholders beneficially owning 2,755,819 shares of
Medcast common stock, assuming conversion of all outstanding preferred stock, or
approximately 59.9% of the outstanding shares on the record date, have executed
voting agreements with Healtheon and WebMD, under which they have agreed to vote
their shares in favor of the reorganization. These stockholders beneficially own
1,073,909 shares of Medcast Series A preferred stock, or approximately 56.1% of
the outstanding shares on the record date. For a detailed description of the
voting agreements, see "Medcast voting agreements" on page 145.
ABSTENTIONS
Abstentions will be included in determining the number of shares present
and voting at the meeting and will have the same effect as votes against the
merger.
MEDCAST STOCKHOLDERS AGREEMENTS
The holders of 453,200 shares of the outstanding common stock of Medcast
have executed a stockholders agreement that provides that Alan N. Greenberg, the
Chief Executive Officer of Medcast, may require these stockholders to take all
steps reasonably necessary or desirable to consummate a merger of Medcast with a
bona fide third party. Further, these stockholders have agreed to vote all of
their shares of common stock in favor of any merger transaction and have
executed irrevocable proxies in favor of Mr. Greenberg. Therefore, these
stockholders will not receive a proxy with respect to the Healtheon/
WebMD-Medcast reorganization.
The holders of all of the outstanding shares of Series A preferred stock
and Series C preferred stock of Medcast have executed a stockholders agreement
that provides that if the stockholders of Medcast holding at least 66 2/3% of
the outstanding common stock approve a change of control transaction that meets
requirements specified in the agreement, then Medcast may require each holder of
Series A preferred stock and Series C preferred stock to approve the
transaction. Alan N. Greenberg, who controls the vote of in excess of 66 2/3% of
the outstanding common stock, has agreed to vote in favor of the Medcast
reorganization. THEREFORE, ALL HOLDERS OF SERIES A PREFERRED STOCK AND SERIES C
PREFERRED STOCK ARE CONTRACTUALLY OBLIGATED TO VOTE IN FAVOR OF THE MERGER.
DISSENTERS' RIGHTS
Holders of Medcast capital stock are entitled to dissenters' rights with
respect to the reorganization. For a detailed description of dissenters' rights,
see "Rights of dissenting Medcast stockholders" on page 135. Annex I includes
the complete text of the provisions of Delaware law that grant dissenters
rights.
PROXIES
The proxy accompanying this proxy statement/prospectus is solicited on
behalf of the Medcast board of directors for use at the meeting. Medcast
stockholders that have not previously executed an irrevocable proxy in favor of
Alan N. Greenberg are requested to complete, date and sign the accompanying
proxy and promptly return it in the enclosed envelope or otherwise mail it to
Medcast. All properly signed proxies received by Medcast prior to the vote at
the meeting that are not revoked will be voted at the meeting according to the
instructions indicated on the proxies or, if no direction is indicated, to
approve the merger. Medcast stockholders that have not previously executed an
irrevocable proxy in favor of Alan N.
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Greenberg may revoke their proxy at any time before it is exercised at the
meeting, by taking any of the following actions:
- delivering to the secretary of Medcast, by any means, including
facsimile, a written notice, bearing a date later than the date of the
proxy, stating that the proxy is revoked
- signing and so delivering a proxy relating to the same shares and bearing
a later date prior to the vote at the meeting, or
- attending the meeting and voting in person, although attendance at the
meeting will not, by itself, revoke a proxy
HOLDERS OF MEDCAST CAPITAL STOCK SHOULD NOT SEND ANY CERTIFICATES
REPRESENTING MEDCAST CAPITAL STOCK. FOLLOWING THE EFFECTIVE TIME OF THE
REORGANIZATION, HOLDERS OF MEDCAST CAPITAL STOCK WILL RECEIVE INSTRUCTIONS FOR
THE SURRENDER AND EXCHANGE OF THEIR STOCK CERTIFICATES.
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THE HEALTHEON-WEBMD REORGANIZATION
This section of the proxy statement/prospectus describes the proposed
Healtheon-WebMD reorganization. While we believe that the description covers the
material terms of the reorganization and the related transactions, this summary
may not contain all of the information that is important to you. You should
carefully read this entire document and the other documents we refer to for a
more complete understanding of the reorganization.
BACKGROUND OF THE HEALTHEON-WEBMD REORGANIZATION AND RELATED AGREEMENTS
During the fourth quarter of 1998, Healtheon concluded that the development
of healthcare consumer and physician web sites would accelerate the adoption of
its Internet-based information and transaction platform. Healtheon with its
advisors identified WebMD's consumer and physician focus, as well as strategic
relationships and brand awareness, as complementary to Healtheon's consumer and
physician web site efforts. As a result, Healtheon determined that it should
approach WebMD to evaluate a potential partnership.
On April 8, 1999 Mr. Long called Mr. Arnold. That evening, Mr. Long and Mr.
Arnold met for dinner in Atlanta, Georgia to discuss the strategic objectives of
Healtheon and WebMD and to discuss a partnership between the two companies.
At the invitation of Mr. Long, James H. Clark, Healtheon's Chairman, Mr.
Long, Mr. Arnold and a representative from BancBoston Robertson Stephens met for
dinner in Atlanta, Georgia on the evening of April 11, 1999 and discussed the
businesses of Healtheon and WebMD and the potential of a business combination
between the two companies. At that time, WebMD was concluding negotiations with
Microsoft for a $100 million purchase by Microsoft of WebMD's Series E
convertible preferred stock at an effective price of $54.17 per common share as
well as the terms of a strategic relationship between Microsoft and WebMD.
Moreover, on April 10, 1999, Microsoft had commenced a tender offer for
approximately 27.8% of the equity interests in WebMD for $54.17 per common
share. A condition to Microsoft's obligation to purchase shares in the tender
offer was that WebMD not authorize, propose or announce any significant business
combination. In addition, the terms of the Series E preferred stock that
Microsoft had agreed to purchase from WebMD gave Microsoft the right to approve
business combinations involving WebMD. Accordingly, WebMD informed Healtheon of
this restriction and informed Microsoft of the discussions held on April 11,
1999.
On April 12, 1999, Mr. Long and other members of Healtheon's management
team met with officials from Microsoft to discuss the business of Healtheon and
a possible business combination of Healtheon and WebMD. On April 14, 1999,
officials of Microsoft and senior executives of WebMD held a conference call
during which Microsoft encouraged WebMD to explore a possible business
combination with Healtheon.
On April 19, 1999, Morgan Stanley was formally engaged by Healtheon to
provide it financial advisory services in connection with the Healtheon-WebMD
reorganization.
On April 26, 1999, Mr. Long and Mr. Clark met with representatives from
Morgan Stanley in Los Angeles, California to discuss the merits of a merger
between Healtheon and WebMD. At this meeting, the participants also discussed
transaction terms that Healtheon and WebMD would need to agree to for the merger
to proceed. These transaction terms included valuation, management of the
combined company, headquarters location and transaction structure.
Later that day, Mr. Long, Mr. Clark and L. John Doerr, a director of
Healtheon, met with Mr. Arnold for dinner to discuss a potential combination
between the two companies. Principal business terms of a combination were
discussed at this meeting, but no agreements were made between the two
companies.
On April 27, 1999, Mr. Clark delivered a letter to Mr. Arnold outlining
terms of a potential business combination for purposes of continuing and
focusing the earlier discussions. At the invitation of Mr. Arnold, on May 3,
1999, Mr. Clark, Mr. Long and a representative from Morgan Stanley met for
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dinner in Atlanta, Georgia with Mr. Arnold, other senior executives of WebMD and
WebMD outside directors U. Bertram Ellis, Jr., S. Taylor Glover and Jouko J.
Rissanen for the purpose of discussing the potential benefits of a business
combination.
On May 4, 1999 in the offices of WebMD, Mr. Long, Mr. Clark and a
representative from Morgan Stanley met with Mr. Arnold, other representatives of
WebMD's senior management team and BancBoston Robertson Stephens to discuss the
terms of a possible business combination between Healtheon and WebMD. In
addition, on May 4, Mr. Long, Mr. Clark, other members of Healtheon's senior
management team and representatives from Morgan Stanley conducted business due
diligence on WebMD.
On May 5, 1999, Mr. Long, Mr. Clark and representatives from Morgan Stanley
met with Mr. Arnold, other members of WebMD's senior management team as well as
WebMD's financial advisors to discuss terms of a possible business combination
between Healtheon and WebMD. At this meeting, the parties agreed to an outline
for a possible combination of the two companies. It was agreed that a potential
combination between Healtheon and WebMD should be structured as a merger with
each set of shareholders owning approximately 50% of the pro forma company. In
addition, at this meeting it was discussed that Mr. Long would become Chairman
and Chief Operating Officer of the newly formed Healtheon/WebMD and Mr. Arnold
would become Chief Executive Officer.
On May 6, 1999, Healtheon and WebMD signed a Mutual Non-disclosure
Agreement. On May 6 and 7, 1999, senior executives of both companies and their
respective legal and financial advisors met in Palo Alto, California to continue
due diligence and the process of negotiating the terms of the transaction. These
discussions continued through the following week in Palo Alto, California.
During these discussions it was agreed with representatives of Microsoft
that Microsoft would increase the amount of its investment in WebMD from $100
million to $250 million, at an effective price per WebMD common share of $54.17,
with the additional $150 million conditioned upon the closing of WebMD's merger
with Healtheon.
On May 13, 1999, Healtheon's board of directors held a special meeting to
discuss the proposed business combination with WebMD. At this meeting,
Healtheon's senior management and financial and legal advisors presented to the
board the principal terms of the proposed combination with WebMD that was under
discussion and the status of business, financial and legal due diligence of the
transaction.
On May 14, 1999, it was reported in the press that Healtheon and WebMD were
having discussions concerning a possible business combination. Over the weekend
of May 15 - 16, 1999, and into the following week the senior executives,
attorneys and financial advisors for Healtheon and WebMD continued to work to
finalize the Healtheon-WebMD reorganization agreement and other documents
evidencing the various arrangements, including the Microsoft investment and
revisions to its strategic relationship as well as the investments by and
contracts with the other purchasers of WebMD's Series E preferred stock.
On May 16, 1999, Healtheon's board of directors held a special meeting to
discuss the progress of negotiations of the definitive agreement, ultimately
adjourning the meeting until a later time.
On May 17, 1999, Healtheon's board of directors reconvened the special
meeting of the board at which the board reviewed with its senior management and
financial and legal advisors the results of the negotiations with WebMD. At this
meeting, representatives of Morgan Stanley presented its financial analysis of
the proposed transaction and expressed their opinion that the exchange ratio
provided for by the reorganization agreement was fair from a financial point of
view to Healtheon. Healtheon's board reviewed a draft of the reorganization
agreement and posed questions to representatives of Wilson Sonsini Goodrich &
Rosati, Healtheon's legal counsel, regarding the document and the terms of the
transaction. Following discussions, Healtheon's board approved the
reorganization, the reorganization agreement, related agreements, and the
issuance of shares to WebMD stockholders in the transaction. Healtheon's board
determined to recommend to the Healtheon stockholders its approval of the
reorganization and the issuance of shares to WebMD stockholders.
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On May 19, 1999, Healtheon's board convened a special meeting to discuss
the results of subsequent negotiations of the reorganization. After posing
questions to representatives of management and Wilson Sonsini Goodrich & Rosati
and following discussions, the board approved the transaction, subject to
satisfactory completion of final details of the reorganization agreement changes
to be approved by management.
A meeting of the WebMD board was convened in New York City on May 16, 1999,
during which WebMD's senior management, financial advisors and legal counsel
outlined the terms of the proposed combination with Healtheon and related
transactions with Microsoft and others and described the status of the
negotiations.
The meeting was adjourned and reconvened several times over the next four
days, with WebMD's senior management, financial advisors and legal counsel
advising the WebMD board of the progress of the negotiations at each meeting. At
its meeting held on May 17, 1999, the WebMD board approved by unanimous vote the
amendments to WebMD's Investment Agreement with Microsoft, to provide for the
increase in Microsoft's investment from $100 million to $250 million, with the
additional $150 million conditioned upon the closing of the merger, and for up
to $150 million of investments by other strategic investors.
At the WebMD board meeting held on May 19, 1999, WebMD senior management
and legal counsel discussed the results of the negotiations with Healtheon and
the terms of the proposed reorganization agreement, the voting agreements and
the conversion agreements. At this meeting representatives of BancBoston
Robertson Stephens, Inc. presented an analysis of the financial terms of the
proposed reorganization and expressed their opinion that the exchange ratio was
fair to the holders of WebMD stock from a financial point of view. In addition,
the WebMD board of directors reviewed a draft of the reorganization agreement
and a representative from Nelson Mullins Riley & Scarborough, L.L.P. answered
questions regarding the document from the board of directors. Following these
presentations and other discussions, the WebMD board approved by unanimous vote
the terms of the reorganization and the reorganization agreement substantially
in the form presented, and authorized a committee of the WebMD board consisting
of Messrs. Arnold, Gilbertson, Draughon, Heekin and Rissanen to complete the
negotiations and execution of the reorganization agreement.
During the evening of May 19 and early morning of May 20 the negotiations
of the final minor details of the reorganization agreement were completed. The
special committee heard an updated financial analysis and opinion from
BancBoston Robertson Stephens and approved the final agreement at a meeting held
at 6:30 a.m. eastern time, May 20, 1999. At a meeting of the WebMD board held at
9:00 a.m. eastern time, May 20, 1999, representatives of BancBoston Robertson
Stephens again presented its updated financial analysis and opinion that the
exchange ratio was fair to the stockholders of WebMD from a financial point of
view, counsel reviewed the terms of the final reorganization agreement and
related documents, and the reorganization agreement and the WebMD merger were
ratified and approved by the unanimous vote of the WebMD board.
JOINT REASONS FOR THE HEALTHEON-WEBMD REORGANIZATION
Healtheon's and WebMD's boards of directors have determined that the
Healtheon-WebMD reorganization is fair to, and in the best interests of, the
stockholders of their respective companies. They concluded that the combined
company following the Healtheon-WebMD reorganization would have the potential to
realize long-term improved operating and financial results and a stronger
competitive position. Potential mutual benefits identified by the boards of
directors include the following:
- the combination of WebMD's brand recognition and existing strategic
relationships with Healtheon's e-commerce transaction platform and
industry relationships will enable Healtheon/ WebMD to move decisively
toward Healtheon's and WebMD's key strategic goal of offering a
comprehensive, integrated Web-based solution for the administrative,
communications and information needs of the healthcare industry
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- the combination of two leading providers of end-to-end Internet solutions
to the healthcare industry will better position Healtheon/WebMD to
achieve increased subscriber penetration among physicians, payers,
providers and other healthcare industry participants
- expanding each company's connected network of customers and strategic
partners, accelerating Healtheon/WebMD's efforts toward achieving broad
acceptance in the healthcare industry and strengthening its competitive
position. Healtheon/WebMD is expected to offer connectivity and
transactions for physicians, consumers and healthcare institutions over a
network consisting of approximately 540 payers, 180,000 physicians, 1,100
hospitals, 42,000 pharmacies, 10,000 dentists and 200 affiliate partners
- increasing Healtheon/WebMD's transaction volume
- broadening each company's offerings of Internet-based healthcare-related
transactions services, and creating enhanced cross-selling opportunities
- increasing the speed at which Internet transaction processing streamlines
inefficient manual and paper-based processes
- enhancing the quality and depth of patient-doctor communications
- creating a strong combined management team
HEALTHEON'S REASONS FOR THE HEALTHEON-WEBMD REORGANIZATION
At the meeting held on May 19, 1999, the board of directors of Healtheon
concluded that the merger was in the best interests of Healtheon and determined
to recommend that the stockholders approve the stockholder proposals relating to
the merger.
The decision of the board of directors of Healtheon was based upon several
potential benefits of the merger, including the following, the order of which
does not necessarily reflect their relative significance:
- EXPANSION OF BUSINESS MODEL TO INCLUDE CONSUMER AND HEALTHCARE
PROFESSIONAL WEB SITES. To date, Healtheon has focused primarily on the
development and deployment of a transaction "engine" and related software
applications to facilitate Internet based healthcare transactions between
payers, providers and institutions. Examples of Internet-based healthcare
transactions that Healtheon intends to facilitate include the following:
enrollment, eligibility determination, referrals and authorizations,
laboratory and diagnostic test ordering, clinical data retrieval and
claims processing. To date, WebMD has focused its efforts on the
development of consumer and healthcare professional web sites that
provide authoritative content, on line communities, practice management
services and personalized service to both healthcare professionals and
consumers. Healtheon believes that the WebMD Internet applications
directed toward physicians and consumers will be essential to
accelerating Healtheon sponsored transactions, as physicians today
initiate most healthcare transactions, with consumers' choice playing an
increasing role.
- CREATION OF COMPLETE END-TO-END HEALTHCARE E-COMMERCE SOLUTION. Healtheon
believes that, through the Healtheon-WebMD reorganization,
Healtheon/WebMD will create a leading end-to-end healthcare e-commerce
solution with the ability to facilitate business-to-business,
consumer-to-business and business-to-consumer transactions.
- EXPANSION OF STRATEGIC PARTNERSHIPS. The reorganization will provide
Healtheon with additional strategic relationships with healthcare and
technology industry leaders to augment its current strategic alliances.
WebMD has business relationships with Microsoft, Intel, SOFTBANK,
Excite@Home, Lycos, DuPont, CNN and other leading institutions. In
addition, many of these leading companies are also investors in WebMD.
These strategic partnerships will help the combined company achieve its
objectives of connectivity and transactions between consumers, payers,
providers and institutions, establish the Healtheon/WebMD brand and
contribute towards the establishment of a common Internet healthcare
technology platform.
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<PAGE> 78
- DIVERSIFICATION OF FINANCIAL BUSINESS MODEL. To date, Healtheon has
focused on a financial business model that is based on transactions
between payers, providers and institutions. To date, WebMD has focused on
a financial business model that includes subscriptions, sponsorships and
advertising. Additionally, Healtheon believes that the cross-selling
opportunities are substantial given the complementary service offerings
and customer bases of the two companies.
The foregoing discussion of the information and factors considered by the
Healtheon board is not intended to be exhaustive but is believed to include all
material factors considered by Healtheon's board. In view of the complexity and
wide variety of information and factors, both positive and negative, considered
by the Healtheon board, it did not find it practical to quantify, rank or
otherwise assign relative or specific weights to the factors considered. In
addition, the Healtheon board did not reach any specific conclusion with respect
to each of the factors considered, or any aspect of any particular factor, but,
rather, conducted an overall analysis of the factors described above, including
discussions with Healtheon's management and legal, financial and accounting
advisors. In considering the factors described above, individual members of the
Healtheon board may have given different weight to different factors. The
Healtheon board considered all these factors as a whole and believed the factors
supported its determination to approve the reorganization. After taking into
consideration all of the factors set forth above, Healtheon's board concluded
that the reorganization was fair to, and in the best interests, of Healtheon and
that Healtheon should proceed with the reorganization.
RECOMMENDATION OF HEALTHEON'S BOARD OF DIRECTORS
After carefully evaluating these factors, both positive and negative, the
board of directors of Healtheon has determined that the reorganization is in the
best interests of Healtheon and recommends that they vote for approval and
adoption of the reorganization agreement, approval of the Healtheon merger and
approval of the issuance of shares in the WebMD merger.
In considering the recommendation of the Healtheon board with respect to
the reorganization, you should be aware that one director of Healtheon has
interests in the reorganization that are different from, or are in addition to
the interests of Healtheon stockholders generally. Please see the section
entitled "Interests of directors, officers and affiliates in the Healtheon-WebMD
reorganization" on page 79.
WEBMD'S REASONS FOR THE HEALTHEON-WEBMD REORGANIZATION
In addition to the anticipated joint benefits described above, WebMD's
board of directors believes that the following are additional reasons the
Healtheon-WebMD reorganization will be beneficial to WebMD and for stockholders
of WebMD to vote for approval of the reorganization agreement and the WebMD
merger:
- the implied value of the WebMD merger consideration on the date of the
reorganization agreement of $145.65 (based on the closing price of
Healtheon common stock on the day prior to the WebMD board's approval of
the merger) represented a premium to the $54.17 price per common share
that Microsoft agreed to pay for its initial strategic investment and in
its tender offer
- the opportunity of WebMD stockholders to participate in the potential
growth of Healtheon/ WebMD following the WebMD merger or to realize their
investment by selling their Healtheon/ WebMD shares in a public market
- the liquidity afforded WebMD's stockholders upon exchange of their shares
in WebMD, which are not publicly traded, for shares in Healtheon/WebMD,
which will be publicly traded
- the greater liquidity anticipated to be afforded WebMD's stockholders
upon the closing of the WebMD merger as compared to the closing of
WebMD's own previously proposed initial public offering because a larger
number of shares of Healtheon/WebMD are anticipated to be outstanding
after the reorganization than would be outstanding after a WebMD initial
public offering and the resulting likelihood of greater trading volume
and increased coverage by investment research and analyst reports
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<PAGE> 79
In reaching its decision to approve the reorganization agreement and the
proposed merger, the WebMD board of directors consulted with WebMD's management,
as well as with its financial and legal advisors, and considered a number of
factors, including the following:
- The WebMD board of directors reviewed various historical information
concerning WebMD's and Healtheon's respective businesses, financial
performances and conditions, operations, technologies, management teams
and competitive positions. The WebMD board of directors considered
available information on Healtheon including its Registration Statement
on Form S-1 and subsequent fiscal quarters as filed with the Securities
and Exchange Commission. In addition, the board of directors instructed
management and BancBoston Robertson Stephens to conduct additional due
diligence on Healtheon's financial condition and prospects and the
results of that due diligence were reported to the board of directors.
Based in part upon these factors, the WebMD board of directors believes
that a merger with Healtheon would be advisable and fair to and in the
best interests of WebMD and WebMD's stockholders.
- The WebMD board of directors viewed the terms of the reorganization
agreement, including the parties' representations, warranties and
covenants, the conditions to their respective obligations and the
termination provisions, as reasonable in light of the entire transaction.
WebMD's board also considered the provisions in the reorganization
agreement that prohibited solicitation of third-party bids and the
acceptance, approval or recommendation of any unsolicited third-party
bids. The WebMD board of directors considered that the provisions in the
reorganization agreement for the benefit of WebMD reasonably protected
the interests of WebMD stockholders, and those for the benefit of
Healtheon did not present any significant impediments to proceeding with
the transaction considering all of the circumstances.
- The WebMD board of directors considered favorably the detailed financial
analyses and pro forma and other information relating to the two
companies presented by BancBoston Robertson Stephens, including the
opinion of BancBoston Robertson Stephens that the WebMD exchange ratio
was fair to WebMD stockholders from a financial point of view. This
opinion is subject to assumptions and limitations noted in the opinion
and described under "Opinion of WebMD's financial advisor," and
stockholders should carefully read both that section and the opinion
which is attached to this document as Annex D. The opinion of BancBoston
Robertson Stephens is directed to WebMD's board of directors and does not
constitute a recommendation to stockholders of WebMD on how they should
vote at, or take any other action in connection with, the special meeting
for the WebMD merger. The WebMD board of directors viewed the analyses
and opinion of an independent, internationally recognized financial
advisor such as BancBoston Robertson Stephens to be important factors in
reaching a determination that the transaction should be approved.
- The WebMD board received reports from WebMD's management and its
financial advisor as to the results of their due diligence investigation
of Healtheon, which consisted of a review of publicly available
information and research analyst reports and meetings with members of
Healtheon's management. These reports indicated no significant issues
that would preclude the WebMD board's approval of the merger.
- The WebMD board of directors also identified and considered a variety of
potentially negative factors in its deliberations concerning the
reorganization, including:
- the risk to WebMD's stockholders that the value to be received in the
reorganization could decline significantly from the indicated value on
the date of the reorganization agreement due to potential declines in
the trading price of Healtheon stock, which has been volatile since
Healtheon's initial public offering
- the challenges of integrating a business such as WebMD with a company
such as Healtheon and the attendant risk that the potential benefits
sought in the reorganization might not be fully realized
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<PAGE> 80
- the possibility that the reorganization might not be consummated and the
effect of public announcement of the reorganization on:
- WebMD's ability to expand its existing strategic relationships and
attract new strategic partners and distribution channels
- WebMD's ability to attract and retain key management, sales and
marketing and technical personnel
- the progress of potential and actual strategic relationships with
third parties who may view working with Healtheon differently than
working with WebMD
- the risk that despite the efforts of Healtheon/WebMD, key technical and
management personnel might not remain employed by Healtheon/WebMD
- risks associated with fluctuations in Healtheon's stock price prior to
closing of the reorganization
- various other risks
The WebMD board also considered what alternatives existed to the
reorganization, including reviewing the prospects for WebMD as an independent
company. In light of the factors described above, the WebMD board determined
that the value and benefits available to WebMD stockholders from the
reorganization exceeded the potential they might realize from WebMD's continuing
as an independent company.
This discussion of the information and factors considered by the WebMD
board is not intended to be exhaustive but is believed to include all material
factors considered by WebMD's board. In view of the complexity and wide variety
of information and factors, both positive and negative, considered by the WebMD
board, it did not find it practical to quantify, rank or otherwise assign
relative or specific weights to the factors considered. In addition, the WebMD
board did not reach any specific conclusion with respect to each of the factors
considered, or any aspect of any particular factor, but, rather, conducted an
overall analysis of the factors described above, including discussions with
WebMD's management and legal, financial and accounting advisors. In considering
the factors described above, individual members of the WebMD board may have
given different weight to different factors. The WebMD board considered all
these factors as a whole and believed the factors supported its determination to
approve the reorganization. After taking into consideration all of the factors
set forth above, WebMD's board concluded that the reorganization was fair to,
and in the best interests, of WebMD and its stockholders and that WebMD should
proceed with the reorganization.
RECOMMENDATION OF WEBMD'S BOARD OF DIRECTORS
After carefully evaluating these factors, both positive and negative, the
board of directors of WebMD has determined that the Healtheon-WebMD
reorganization is in the best interests of the WebMD stockholders and
unanimously recommends that you vote for approval and adoption of the
reorganization agreement and approval of the WebMD merger.
In considering the recommendation of the WebMD board with respect to the
reorganization, you should be aware that some directors and officers of WebMD
have interests in the reorganization that are different from, or are in addition
to the interests of WebMD stockholders generally. For information regarding the
interests of these directors and officers, see the section entitled "Interests
of directors, officers and affiliates in the Healtheon-WebMD reorganization" on
page 79.
OPINION OF HEALTHEON'S FINANCIAL ADVISOR
Under an engagement letter dated April 19, 1999, Healtheon retained Morgan
Stanley to provide it with financial advisory services and a financial fairness
opinion in connection with the Healtheon/WebMD reorganization. The Healtheon
board of directors selected Morgan Stanley to act as Healtheon's financial
advisor based on Morgan Stanley's qualifications, expertise and reputation and
its knowledge of the
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<PAGE> 81
business and affairs of Healtheon. At the meeting of the Healtheon board of
directors on May 17, 1999, Morgan Stanley rendered its oral opinion,
subsequently confirmed in writing, that as of May 17, 1999, based upon and
subject to the various considerations set forth in the opinion, the exchange
ratio pursuant to the reorganization agreement was fair from a financial point
of view to Healtheon. Morgan Stanley subsequently confirmed its May 17, 1999
opinion by delivering to the Healtheon board of directors a written opinion
dated as of May 20, 1999.
You should consider the following when reading the discussion of the
Healtheon's financial advisor in this document.
- While we believe that this discussion is materially complete, you are
urged to read the full text of the written opinion of Morgan Stanley
dated May 20, 1999 that is attached as Annex C to this document and sets
forth, among other things, the assumptions made, procedures followed,
matters considered and limitations on the scope of the review undertaken
by Morgan Stanley in rendering its opinion
- Morgan Stanley's opinion is directed to the Healtheon board of directors
and addresses only the fairness of the exchange ratio pursuant to the
reorganization agreement from a financial point of view to Healtheon as
of the date of the opinion
- Morgan Stanley's opinion does not address any other aspect of the
reorganization and does not constitute a recommendation to any holder of
Healtheon common stock as to how to vote at the Healtheon special meeting
In connection with rendering its opinion, Morgan Stanley, among other
things:
- reviewed publicly available financial statements and other information of
Healtheon, including the pro forma impact of Healtheon's proposed
acquisition of MEDE AMERICA, referred to as Pro Forma Healtheon
- reviewed internal financial statements and other financial and operating
data concerning WebMD and Pro Forma Healtheon prepared by the managements
of WebMD and Healtheon, respectively
- analyzed financial projections pro forma for the investments made by
Microsoft and other investors pursuant to the investment agreement, as
well as other investments by other investors as contemplated by the
reorganization agreement, relating to WebMD prepared by the management of
WebMD
- reviewed and discussed with the senior managements of Healtheon and WebMD
the strategic rationale for the reorganization
- discussed the past and current operations and financial condition and the
prospects of Pro Forma Healtheon, including information relating to
strategic, financial and operational synergies and benefits anticipated
from the reorganization, with senior executives of Healtheon
- discussed the past and current operations and financial condition and the
prospects of WebMD, including information relating to strategic,
financial and operational benefits anticipated from the reorganization,
with senior executives of WebMD
- discussed the effect of the strategic investments on the business and
trading prospects of each of Pro Forma Healtheon and WebMD, including
information relating to strategic, financial and operational benefits
anticipated from each strategic investment, with senior executives of
Healtheon and WebMD, respectively
- discussed the effect of the strategic investments on the business and
trading prospects of Pro Forma Healtheon and WebMD pro forma for the
merger, including information relating to strategic, financial and
operational benefits anticipated from each strategic investment, with
senior executives of Healtheon and WebMD
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<PAGE> 82
- reviewed the pro forma impact of the reorganization on the income
statement of Pro Forma Healtheon
- reviewed the reported prices and trading activity of the Healtheon common
stock
- compared the financial performance of Pro Forma Healtheon and WebMD and
the prices and trading activity of the Healtheon common stock with that
of publicly-traded companies comparable to Healtheon and WebMD and their
securities
- participated in negotiations and discussions among representatives of
Healtheon and WebMD
- reviewed the reorganization agreement and the investment agreement, as
well as documents related to the reorganization and the strategic
investments
- reviewed the registration statement on Form S-1 of WebMD (File No.
333-7135) filed with the Securities and Exchange Commission, as amended
on February 26, 1999, as well as documents related to that registration
statement
- performed such other analysis and considered such other factors as Morgan
Stanley deemed appropriate
Morgan Stanley assumed and relied upon, without independent verification,
the accuracy and completeness of the information reviewed by it for the purposes
of its opinion. With respect to the internal financial statements and other
financial and operating data, including forecasts, and discussions relating to
the strategic, financial and operational benefits anticipated from the strategic
investments and from the reorganization provided by Healtheon and WebMD, Morgan
Stanley assumed that they have, in each case, been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the prospects
of Pro Forma Healtheon and WebMD. Morgan Stanley relied upon the assessment by
the managements of Healtheon and WebMD of their ability to retain key employees
of Pro Forma Healtheon and WebMD. Morgan Stanley also relied upon, without
independent verification, the assessment by the managements of Healtheon and
WebMD of the following:
- the strategic and other benefits expected to result from the
reorganization
- the timing and risks associated with the integration of Pro Forma
Healtheon and WebMD
- the validity of, and risks associated with, Pro Forma Healtheon's and
WebMD's existing and future products and technologies
Morgan Stanley did not make any independent valuation or appraisal of the
assets or liabilities or technology of Pro Forma Healtheon and WebMD, nor had
Morgan Stanley been furnished with any such appraisals. In addition, Morgan
Stanley assumed that the reorganization will be treated as a tax-free
reorganization and/or exchange, pursuant to the Internal Revenue Code of 1986
and will be consummated in accordance with the terms set forth in the
reorganization agreement. Morgan Stanley also assumed that all strategic
investments will be consummated in accordance with the terms of their respective
agreements, and that the Microsoft tender offer would not materially delay, or
otherwise have a material adverse effect on, the consummation of the
reorganization. Morgan Stanley's opinion is necessarily based on financial,
economic, market and other conditions as in effect on, and the information made
available to it as of the date of its opinion.
The following is a brief summary of the analyses performed by Morgan
Stanley in connection with the preparation of its opinion letter dated May 20,
1999. Selected summaries of financial analyses include information presented in
tabular format. In order to understand fully the financial analyses used by
Morgan Stanley, the tables must be read together with the text of each summary.
The tables alone do not constitute a complete description of the financial
analyses.
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<PAGE> 83
Peer group comparison. Morgan Stanley compared financial information of
Healtheon, Pro Forma Healtheon and WebMD with publicly available information for
several comparable groups of companies.
- Electronic Commerce Companies
- Amazon.com, Inc.
- eBay Inc.
- Priceline.com Incorporated
- E*Trade Group, Inc.
- VerticalNet, Inc.
- Sportsline USA, Inc.
- Portals/Community Companies
- Yahoo! Inc.
- Broadcast.com Inc.
- Lycos, Inc.
- CNET, Inc.
- Infoseek Corporation
- iVillage Inc.
- XOOM.com, Inc.
- Portals/ISP Companies
- America Online, Inc.
- Excite@Home Corporation
Based on estimates from securities research analysts, with median values
shown except for Healtheon, Pro Forma Healtheon and WebMD and using both the
closing price of Healtheon common stock on May 14, 1999 of $57.00, or the
"Affected Share Price," and on May 13, 1999 of $47.00, or the "Unaffected Share
Price," the day prior to published rumors of a potential transaction with WebMD,
such analysis showed that as of May 14, 1999:
<TABLE>
<CAPTION>
AGGREGATE VALUE/REVENUE
------------------------
CALENDAR YEAR
------------------------
1999 E 2000 E
-------- --------
<S> <C> <C>
Affected Share Price
Healtheon................................................. 56.9x 32.7x
Healtheon Pro Forma....................................... 52.1x 23.5x
Unaffected Share Price
Healtheon................................................. 46.6x 26.8x
Healtheon Pro Forma....................................... 42.7x 19.3x
WebMD
At Affected Share Price................................... 109.2x 31.4x
At Unaffected Share....................................... 86.0x 24.7x
Electronic Commerce Companies Median........................ 58.2x 33.4x
Portal/Community Companies Median........................... 50.8x 28.8x
Portal/ISP Companies Median................................. 44.9x 24.9x
</TABLE>
No company utilized in the peer group comparison analysis is identical to
Pro Forma Healtheon. In evaluating the peer groups, Morgan Stanley made
judgments and assumptions with regard to industry performance, general business,
economic, market and financial conditions and other matters, many of which are
beyond control of Healtheon and WebMD, such as the impact of competition on the
businesses of Pro Forma Healtheon and WebMD and the industry generally, industry
growth and the absence of any adverse material change in the financial condition
and prospects of Pro Forma Healtheon, WebMD or the
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<PAGE> 84
industry or in the financial markets in general. Mathematical analysis, such as
determining the average or median, is not in itself a meaningful method of using
peer group data.
Discounted equity value. Morgan Stanley performed an analysis of the
present value per share of the implied value of WebMD on a standalone basis
based on WebMD's future equity value. Morgan Stanley observed the following,
based on a range of revenue estimates from WebMD management with growth
estimates ranging from 50% to 100%, for the calendar years 2001 and 2002,
assuming calendar year 2000 revenue multiples of approximately 20 to 30:
<TABLE>
<CAPTION>
PRESENT VALUE OF
REVENUE MULTIPLE RANGE DISCOUNT RATES FULLY DILUTED EQUITY VALUE
- ---------------------- -------------- --------------------------
<S> <C> <C>
20.0 - 30.0x 35.0% - 50.0% $4.0Bn to $10.5Bn
</TABLE>
Morgan Stanley also observed the following for WebMD, based on revenue
growth estimates from WebMD management ranging from 50% to 100% and operating
income margins ranging from 25% to 35%, for the calendar year 2003, assuming
calendar year earnings multiples ("P/E") of approximately 50 to 80:
<TABLE>
<CAPTION>
PRESENT VALUE OF
P/E MULTIPLE RANGE DISCOUNT RATES FULLY DILUTED EQUITY VALUE
- ------------------ -------------- --------------------------
<S> <C> <C>
50.0 - 80.0x 25.0% - 50.0% $ 1.3Bn to $9.4Bn
</TABLE>
Morgan Stanley performed an analysis of the present value per share of the
implied value of Pro Forma Healtheon on a standalone basis. Based on a range of
revenue estimates with growth estimates ranging from 30% to 60%, Morgan Stanley
observed the following for the calendar years 2001 and 2002, assuming calendar
year 2000 revenue multiples of approximately 15 to 23:
<TABLE>
<CAPTION>
PRESENT VALUE OF
REVENUE MULTIPLE RANGE DISCOUNT RATES FULLY DILUTED EQUITY VALUE
---------------------- -------------- --------------------------
<S> <C> <C>
15.0 - 23.0x 25.0% - 35.0% $36.67 to $84.45
Affected Share Price (May 14, 1999) $57.00
Unaffected Share Price (May 13, 1999) $47.00
</TABLE>
Morgan Stanley also observed the following for Pro Forma Healtheon, based
on revenue growth estimates ranging from 40% to 80% and operating income margins
ranging from 20% to 30%, for the calendar year 2003, assuming forward P/E
multiples of approximately 40 to 70:
<TABLE>
<CAPTION>
PRESENT VALUE OF
P/E MULTIPLE RANGE DISCOUNT RATES FULLY DILUTED EQUITY VALUE
------------------ -------------- --------------------------
<S> <C> <C>
40.0 - 70.0x 15.0% - 25.0% $18.37 to $124.02
Affected Share Price (May 14, 1999) $57.00
Unaffected Share Price (May 13, 1999) $47.00
</TABLE>
Morgan Stanley performed an analysis of the present value per share of the
implied value of the combined company based on its future trading price. Morgan
Stanley observed the following for the combined company, based on revenue growth
estimates ranging from 50% to 100% and operating income margins ranging from 25%
to 35%, for the calendar year 2003, assuming forward P/E multiples of
approximately 45 to 75:
<TABLE>
<CAPTION>
PRESENT VALUE OF
P/E MULTIPLE RANGE DISCOUNT RATES FULLY DILUTED EQUITY VALUE
------------------ -------------- --------------------------
<S> <C> <C>
45.0 - 75.0x 20.0% - 30.0% $24.55 to $151.50
Affected Share Price (May 14, 1999) $57.00
Unaffected Share Price (May 13, 1999) $47.00
</TABLE>
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Preliminary initial public offering valuation. Morgan Stanley performed an
analysis of the estimated initial public offering valuation of WebMD based on
aggregate value as a multiple of a range of estimated calendar year 2000
revenues. Morgan Stanley observed the following implied initial public offering
valuation, assuming calendar year 2000 revenue multiples of approximately 20 to
30:
<TABLE>
<CAPTION>
REVENUE MULTIPLE RANGE FULLY DILUTED EQUITY VALUE
- ---------------------- --------------------------
<S> <C>
20.0 - 30.0x $3.0Bn to $6.0Bn
</TABLE>
Relative contribution analysis. Morgan Stanley analyzed the pro forma
contribution of each of Pro Forma Healtheon and WebMD to the combined company
assuming consummation of the reorganization and based on estimates from
securities research analysts and from WebMD management, respectively. The
analysis showed, among other things, the following:
<TABLE>
<CAPTION>
% CONTRIBUTION BY
---------------------------
PRO FORMA HEALTHEON WEBMD
------------------- -----
<S> <C> <C>
PROJECTED CALENDAR YEAR 1999
Revenue 65.5% 34.5%
Gross Profit 37.3% 62.7%
PROJECTED CALENDAR YEAR 2000
Revenue 55.9% 44.1%
Gross Profit 41.6% 58.4%
OFFERED PRICE 50.0% 50.0%
</TABLE>
Pro forma reorganization analysis. Morgan Stanley analyzed the pro forma
impact of the reorganization on the combined company's projected earnings per
share for calendar year 1999 and 2000. Such analysis was based on earnings
projections by WebMD management for WebMD and by securities research analysts
for Pro Forma Healtheon.
- Morgan Stanley observed that the reorganization would result in earnings
per share dilution for Pro Forma Healtheon, prior to giving effect to any
synergies, of $0.02 for calendar year 1999 and earnings per share
accretion of $0.02 for calendar year 2000 on a cash earnings basis,
defined as earnings excluding non-cash charges such as goodwill, as
reported by securities research analysts
- Morgan Stanley observed that the reorganization would result in earnings
per share dilution for Pro Forma Healtheon, prior to giving effect to any
synergies, of approximately $4.34 for calendar year 1999 and
approximately $8.49 for calendar year 2000 on GAAP earnings estimates
reported by securities research analysts
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. In arriving
at its opinion, Morgan Stanley considered the results of all of its analyses as
a whole and did not attribute any particular weight to any analysis or factor
considered by it. Furthermore, Morgan Stanley believes that selecting any
portion of its analyses, without considering all analyses, would create an
incomplete view of the process underlying its opinion. In addition, Morgan
Stanley may have given various analyses and factors more or less weight than
other analyses and factors, and may have deemed various assumptions more or less
probable than other assumptions, so that the ranges of valuations resulting from
any particular analysis described above should not be taken to be Morgan
Stanley's view of the actual value of Pro Forma Healtheon or WebMD. In
performing its analyses, Morgan Stanley made numerous assumptions with respect
to industry performance, general business and economic conditions and other
matters, many of which are beyond the control of Healtheon or WebMD. Any
estimates contained in Morgan Stanley's analyses are not necessarily indicative
of future results or actual values, which may be significantly more or less
favorable than those suggested by such estimates.
The analyses performed were prepared solely as part of Morgan Stanley's
analysis of the fairness of the exchange ratio pursuant to the reorganization
agreement from a financial point of view to Healtheon
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and were conducted in connection with the delivery of the Morgan Stanley
opinion. The analyses do not purport to be appraisals or to reflect the prices
at which Healtheon or WebMD might actually be sold.
The exchange ratio pursuant to the reorganization agreement was determined
through arm's-length negotiations between Healtheon and WebMD and was approved
by the Healtheon board of directors. Morgan Stanley provided advice to Healtheon
during these negotiations; however, Morgan Stanley did not recommend any
specific exchange ratio to Healtheon or that any specific exchange ratio
constituted the only appropriate exchange ratio for the reorganization.
In addition, Morgan Stanley's opinion and presentation to the Healtheon
board of directors was one of many factors taken into consideration by
Healtheon's board of directors in making its decision to approve the
reorganization. Consequently, the Morgan Stanley analyses as described above
should not be viewed as determinative of the opinion of the Healtheon board of
directors with respect to the exchange ratio or of whether the Healtheon board
of directors would have been willing to agree to a different exchange ratio.
The Healtheon board of directors retained Morgan Stanley based upon Morgan
Stanley's qualifications, experience and expertise. Morgan Stanley is an
internationally recognized investment banking and advisory firm. Morgan Stanley,
as part of its investment banking business, is continuously engaged in the
valuation of businesses and securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate, estate and other purposes. In the past, Morgan Stanley
and its affiliates have provided financing and advisory services for Healtheon,
Microsoft and other parties to the strategic investments and have received fees
for rendering these services. Morgan Stanley is also an equity owner of
Healtheon as a result in Morgan Stanley's participation in a private placement.
In the ordinary course of Morgan Stanley's trading and brokerage activities,
Morgan Stanley or its affiliates may at any time hold long or short positions,
may trade or otherwise effect transactions, for its own account or for the
account of customers in the equity securities of Healtheon, Microsoft or any of
the other parties to the strategic investments.
Under the engagement letter, Morgan Stanley provided financial advisory
services and a financial fairness opinion in connection with the merger, and
Healtheon agreed to pay Morgan Stanley a fee of approximately $20 million, with
the exact amount to be determined by a formula using the average of the average
price of Healtheon common stock over a period of time before the date of
announcement and before the date of closing. In the past, Morgan Stanley has
been paid approximately $800,000 for financing services. In addition, Healtheon
has also agreed to indemnify Morgan Stanley and its affiliates, their respective
directions, officers, agents and employees and each person, if any controlling
Morgan Stanley or any of its affiliates against liabilities and expenses,
including liabilities under the federal securities laws, arising out of Morgan
Stanley's engagement.
OPINION OF WEBMD'S FINANCIAL ADVISOR
On March 12, 1999, WebMD and BancBoston Robertson Stephens executed an
engagement letter, which was supplemented by a letter dated April 20, 1999,
pursuant to which BancBoston Robertson Stephens was engaged to render an opinion
as to the fairness of the exchange ratio, from a financial point of view, to the
stockholders of WebMD.
On May 19, 1999 at a meeting of the WebMD board held to evaluate the
proposed Healtheon/ WebMD reorganization, BancBoston Robertson Stephens
delivered to the WebMD board its oral opinion, subsequently confirmed in
writing, that as of May 19, 1999 and based on the matters described in the
opinion, the exchange ratio was fair from a financial point of view to the
stockholders of WebMD, with the exception of Healtheon, any affiliate of
Healtheon and any holder of WebMD stock who has exercised dissenters' rights.
The exchange ratio was determined through negotiations between the respective
managements of WebMD and Healtheon. Although BancBoston Robertson Stephens did
assist the management of WebMD in those negotiations, it was not asked by, and
did not recommend to, WebMD that any specific exchange ratio constituted the
appropriate exchange ratio for the WebMD merger.
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BancBoston Robertson Stephens also assisted WebMD's management in the
negotiations leading to an agreement on principal structural terms of the
transaction.
BancBoston Robertson Stephens expresses no opinion as to the tax
consequences of the WebMD merger, and the BancBoston Robertson Stephens opinion
as to the fairness of the exchange ratio does not take into account the
particular tax status or position of any stockholder of WebMD. In furnishing its
opinion, BancBoston Robertson Stephens was not engaged as an agent or fiduciary
of WebMD's stockholders or any other third party.
The full text of the BancBoston Robertson Stephens opinion, which sets
forth, among other things, assumptions made, matters considered and limitations
on the review undertaken, is attached as Annex D and is incorporated in this
proxy statement/prospectus by reference. Stockholders of WebMD are urged to read
the BancBoston Robertson Stephens opinion in its entirety. The BancBoston
Robertson Stephens opinion was prepared for the benefit and use of the WebMD
board in its consideration of the Healtheon-WebMD reorganization and does not
constitute a recommendation to stockholders of WebMD as to how they should vote
at, or take any action in connection with, the special meeting for the
Healtheon-WebMD reorganization. The BancBoston Robertson Stephens opinion does
not address:
- the relative merits of the Healtheon-WebMD reorganization and any other
transactions
- business strategies discussed by the WebMD board as alternatives to the
reorganization, or
- the underlying business decision of the WebMD board to proceed with the
reorganization process
The summary of the BancBoston Robertson Stephens opinion set forth in this
proxy statement/ prospectus is qualified in its entirety by reference to the
full text of the BancBoston Robertson Stephens opinion.
In connection with the preparation of the BancBoston Robertson Stephens
opinion, BancBoston Robertson Stephens, among other things:
- reviewed publicly available financial statements and other business and
financial information of Healtheon
- reviewed internal financial statements and other financial and operating
data concerning WebMD and Healtheon, including information relating to
strategic, financial and operational benefits anticipated from the WebMD
merger, prepared by the managements of WebMD and Healtheon
- reviewed financial forecasts and other forward looking financial
information prepared by the managements of WebMD and Healtheon
- held discussions with the respective managements of WebMD and Healtheon
concerning the businesses, past and current operations, financial
condition and future prospects of both WebMD and Healtheon, independently
and combined, including discussions with the managements of WebMD and
Healtheon concerning cost savings and other synergies that are expected
to result from the WebMD merger as well as their views regarding the
strategic rationale for the WebMD merger
- reviewed the financial terms and conditions set forth in the
reorganization agreement
- reviewed the stock price and trading history of Healtheon
- reviewed the valuations of publicly traded companies deemed comparable to
WebMD
- compared the financial terms of the WebMD merger with the financial
terms, to the extent publicly available, of other transactions that we
deemed relevant
- reviewed the pro forma impact of the WebMD merger on Healtheon's revenues
and cash earnings per share
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- reviewed and considered in the analysis, information prepared by members
of management of WebMD and Healtheon relating to the relative
contributions of WebMD and Healtheon to the revenues of the combined
company
- prepared an analysis of WebMD with respect to an initial public offering
- participated in discussions and negotiations among representatives of
WebMD and Healtheon and their financial and legal advisors
- made other studies and inquiries, and reviewed other data as BancBoston
Robertson Stephens deemed relevant
In BancBoston Robertson Stephens' review and analysis and in arriving at
its opinion, BancBoston Robertson Stephens assumed and relied upon the accuracy
and completeness of all of the financial and other information provided to it
including information furnished to BancBoston Robertson Stephens orally or
otherwise discussed with BancBoston Robertson Stephens by management of WebMD
and Healtheon, or publicly available and has neither attempted to verify, nor
assumed responsibility for verifying, any of such information. BancBoston
Robertson Stephens has relied upon the assurances of management of WebMD and
Healtheon that neither is aware of any facts that would make such information
inaccurate or misleading. Furthermore, BancBoston Robertson Stephens did not
obtain or make, or assume any responsibility for obtaining or making, any
independent evaluation or appraisal of the properties, assets or liabilities,
contingent or otherwise, of WebMD or Healtheon, nor was BancBoston Robertson
Stephens furnished with any such evaluation or appraisal. With respect to the
financial forecasts and projections, and the assumptions and bases for the
financial forecasts and projections, for each of WebMD and Healtheon that
BancBoston Robertson Stephens has reviewed, upon the advice of the managements
of WebMD and Healtheon, BancBoston Robertson Stephens has assumed that:
- these forecasts and projections have been reasonably prepared in good
faith on the basis of reasonable assumptions
- these forecasts and projections reflect the best currently available
estimates and judgments as to the future financial condition and
performance of WebMD and Healtheon
BancBoston Robertson Stephens has assumed that:
- the Healtheon-WebMD reorganization will be consummated upon the terms set
forth in the reorganization agreement without material alteration
- the Healtheon-WebMD reorganization will be accounted for as a business
combination and will be accounted for using the "purchase method" of
accounting in accordance with generally accepted accounting principles,
or GAAP
- the Healtheon-WebMD reorganization will be treated as a transaction in
which no gain or loss will be recognized for U.S. federal income tax
purposes
- the historical financial statements of each of WebMD and Healtheon
reviewed by BancBoston Robertson Stephens have been prepared and fairly
presented in accordance with GAAP consistently applied
BancBoston Robertson Stephens has relied as to all legal matters relevant
to rendering its opinion on the advice of its counsel. Although developments
following the date of the BancBoston Robertson Stephens opinion may affect the
opinion, BancBoston Robertson Stephens assumed no obligation to update, revise
or reaffirm its opinion. The opinion is necessarily based upon market, economic
and other conditions as in effect on, and information made available to
BancBoston Robertson Stephens as of the date of the opinion. It should be
understood that subsequent developments may affect the conclusion expressed in
the opinion and that BancBoston Robertson Stephens has disclaimed any
undertaking or obligation to advise any person of any change in any matter
affecting the opinion which may come or be brought to BancBoston Robertson
Stephens' attention after the date of the opinion. BancBoston Robertson
Stephens' opinion is limited to the fairness, from a financial point of view and
as of the date thereof, to the
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holders of WebMD stock, with the exception of Healtheon, any affiliate of
Healtheon and any holder of WebMD Common Stock who has exercised dissenters'
rights, of the exchange ratio.
BancBoston Robertson Stephens does not express any opinion as to:
- the value of any employee agreement or other arrangement entered into in
connection with the WebMD merger
- any tax or other consequences that might result from the WebMD merger, or
- what the value of Healtheon/WebMD common stock will be when issued to
WebMD's stockholders pursuant to the WebMD merger or the price at which
the shares of Healtheon/ WebMD common stock that are issued pursuant to
the WebMD merger may be traded in the future
The following is a summary of the material financial analysis performed by
BancBoston Robertson Stephens in connection with rendering the BancBoston
Robertson Stephens opinion. The summary of the financial analysis is not a
complete description of all of the analyses performed by BancBoston Robertson
Stephens. Certain of the information in this section is presented in a tabular
form. In order to better understand the financial analysis by BancBoston
Robertson Stephens, these tables must be read together with the text of each
summary. The BancBoston Robertson Stephens opinion is based upon the totality of
the various analyses performed by BancBoston Robertson Stephens and no
particular portion of the analyses has any merit standing alone.
Comparable companies analysis. Using publicly available information,
BancBoston Robertson Stephens analyzed, among other things, the market values
plus net debt, referred to as total capitalization, of WebMD and of publicly
traded companies involved in Internet businesses, including those involved in
the consumer Internet community market, the health content/connectivity market,
the business and e-commerce market, and other online specific content providers,
including:
- America Online
- Lycos
- theglobe.com
- Yahoo!
- Xoom.com
- Healtheon
- Mediconsult.com
- OnHealth Network
- Critical Path
- Exodus
- Inktomi
- VerticalNet
- CNET
- Preview Travel
- SportsLine, USA
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Comparable company analysis -- multiples. BancBoston Robertson Stephens
applied estimated multiples for WebMD with total capitalization to estimated
revenues for calendar years 1999 and 2000. The estimated multiples for WebMD
were based on multiples of the above companies. These estimated multiples
resulted in the following mean implied equity values, implied mean prices per
share, and mean implied exchange ratios:
<TABLE>
<CAPTION>
IMPLIED
ESTIMATED TOTAL CAPITALIZATION/ MEAN IMPLIED MEAN PRICE IMPLIED MEAN
CALENDAR YEAR CALENDAR YEAR MULTIPLE EQUITY VALUE ($MM) PER SHARE EXCHANGE RATIO
------------- ------------------------------- ------------------------ ---------- --------------
<S> <C> <C> <C> <C>
2000................. 21.0x $3,739.6 $ 75.07 0.935x
1999................. 45.0x $2,462.4 $ 53.34 0.665x
Mean for 1999-2000 $ 64.21 0.800x
Implied offer price on
May 19, 1999 $145.65 1.815x
</TABLE>
Comparable companies -- estimated initial public offering price. BancBoston
Robertson Stephens estimated the market capitalization to the estimated revenue
multiple for the year 2000 for WebMD based on actual multiples of the following
publicly traded companies involved in internet businesses:
- America Online
- @Home
- Yahoo!
- Amazon.com
- eBay
- Inktomi
- Network Solutions
- CNET
- Earthweb
- Infoseek
- SportsLine, USA
- theglobe.com
This estimated multiple was used to further estimate a price which the
WebMD common stock may sell for in an initial public offering of such stock.
BancBoston Robertson Stephens has estimated a market capitalization to estimated
revenue multiple for calendar year 2000 of 19.0x. This multiple would result in
the following values compared to actual values for the current transaction:
<TABLE>
<CAPTION>
MARKET
CAPITALIZATION/ IMPLIED EQUITY PRICE PER IMPLIED EXCHANGE
ESTIMATED REVENUE VALUE SHARE RATIO
--------------------- -------------- --------- ----------------
<S> <C> <C> <C> <C>
Estimated based on calendar year
2000........................... 19.0x $3,013.4 $ 62.72 0.782x
Implied offer price on May 19,
1999........................... -- $7,900.0 $145.65 1.815x
</TABLE>
Precedent transaction analysis. Using publicly available information,
BancBoston Robertson Stephens analyzed the consideration offered plus net debt
assumed, debt less cash on hand, and implied transaction value multiples paid or
proposed to be paid in selected merger or acquisition transactions in the
internet content and service industry including:
- Broadcast.com/Yahoo! (April 1, 1999)
- Geocities/Yahoo! (January 28, 1999)
- Excite/@Home (January 19, 1999)
- Netscape/America Online (November 24, 1998)
- N2K/CDnow (October 22, 1998)
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- CKS Group, Inc./USWeb Corporation (September 2, 1998)
- Infoseek/Disney (June 18, 1998)
BancBoston Robertson Stephens compared, among other things, the total
consideration in the above precedent transactions as a multiple of estimated
revenues of the acquired company for calendar year 2000, for the twelve months
prior to the transaction announcement and for the twelve months subsequent to
the transaction announcement. BancBoston Robertson Stephens applied a range of
multiples based on the above transactions for calendar years 1999 and 2000 from
15.0x to 35.0x and from 10.0x to 25.0x, respectively, and estimated mean
multiples for WebMD for the same periods of 25.0x and 12.5x, respectively. These
mean multiples yielded an implied price per share and an implied exchange ratio
for these periods of $37.81 and 0.471x and of $52.13 and 0.650x, respectively.
<TABLE>
<CAPTION>
MULTIPLE RANGE MEAN
-------------------- PER SHARE IMPLIED
LOW HIGH MEAN PRICE EXCHANGE RATIO
---- ---- ---- --------- --------------
<S> <C> <C> <C> <C> <C>
Total capitalization to
calendar year 2000 revenues................ 10.0x 25.0x 12.5x $52.13 0.650x
Total capitalization to
calendar year 1999 revenues................ 15.0x 35.0x 25.0x $37.81 0.471x
</TABLE>
Using publicly available information, BancBoston Robertson Stephens applied
the premiums paid in the precedent transactions to the closing stock price of
the target one day prior to announcement and four weeks prior to announcement
premiums of 35% to 95%, respectively, to the value of WebMD implied by the price
offered by Microsoft in its tender offer for 27.8% of the outstanding stock of
WebMD of $2,100 million.
<TABLE>
<CAPTION>
MICROSOFT MULTIPLE RANGE EQUITY VALUE PER SHARE IMPLIED
TENDER OFFER MEAN MEAN PRICE EXCHANGE RATIO
- ------------ -------------- ------------ --------- --------------
<S> <C> <C> <C> <C>
$2,100 35% $2,839.2 $59.75 0.745x
$2,100 95% $4,084.5 $80.94 1.009x
</TABLE>
Pro forma earnings analysis. BancBoston Robertson Stephens analyzed pro
forma effects resulting from the WebMD merger, including, among other things,
the impact of the WebMD merger on the projected revenues and earnings per share
of the combined company for calendar year 2000. Without taking into account
synergies that the combined company may or may not realize in its operations,
the results of the pro forma earnings analysis suggested that while the WebMD
merger could be 20.3% dilutive to the combined company's revenue per share, the
WebMD merger could be 50.9% accretive to the combined company's cash earnings
per share in calendar year 2000. The factors that would affect the potential
accretion or dilution in the combined company's revenue per share include, among
other things, the respective company's 1999 and 2000 revenue growth rates and
the amount of revenue synergies realized, while the potential accretion or
dilution in the combined company's cash earnings per share would also depend
significantly upon the amount of operating synergies realized. The actual
results achieved by the combined company may vary from projected results and the
variations may be material.
Contribution analysis. BancBoston Robertson Stephens estimated that WebMD's
contribution to revenues for calendar years 1998, 1999 and 2000 would imply an
exchange ratio of, 0.022x, 0.560x and 1.307x, respectively, indicating that the
deal exchange ratio of 1.815x represents a 815%, 229% and 38% premiums,
respectively.
No company, business or transaction compared in the comparable companies
analysis or precedent transaction analysis is identical to WebMD, Healtheon or
the combined company. Accordingly, an analysis of the results of the foregoing
is not entirely mathematical; rather it involves complex considerations and
judgments concerning differences in financial and operating characteristics and
other factors that could affect the acquisition, public trading and other values
of the comparable companies, precedent transactions or the business segment,
company or transactions to which they are being compared.
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While the foregoing summary describes analyses and factors that BancBoston
Robertson Stephens deemed material in its presentation to the WebMD board, it is
not a comprehensive description of all analyses and factors considered by
BancBoston Robertson Stephens. The preparation of a fairness opinion is a
complex process that involves various determinations as to the most appropriate
and relevant methods of financial analysis and the application of these methods
to the particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. BancBoston Robertson Stephens believes that
its analyses must be considered as a whole and that selecting portions of its
analyses and of the factors considered by it, without considering all analyses
and factors, would create an incomplete view of the evaluation process
underlying the BancBoston Robertson Stephens opinion. Several analytical
methodologies were employed and no one method of analysis should be regarded as
critical to the overall conclusion reached by BancBoston Robertson Stephens.
Each analytical technique has inherent strengths and weaknesses, and the nature
of the available information may further affect the value of particular
techniques. The conclusions reached by BancBoston Robertson Stephens are based
on all analyses and factors taken as a whole and also on application of
BancBoston Robertson Stephens own experience and judgment. Such conclusions may
involve significant elements of subjective judgment and qualitative analysis.
BancBoston Robertson Stephens therefore gives no opinion as to the value or
merit standing alone of any one or more parts of the analyses it performed. In
performing its analyses, BancBoston Robertson Stephens considered general
economic, market and financial conditions and other matters, many of which are
beyond the control of WebMD and Healtheon. The analyses performed by BancBoston
Robertson Stephens are not necessarily indicative of actual values or future
results, which may be significantly more or less favorable than those suggested
by such analyses. Accordingly, analyses relating to the value of a business do
not purport to be appraisals or to reflect the prices at which the business
actually may be purchased. Furthermore, no opinion is being expressed as to the
prices at which shares of Healtheon common stock may be traded at any future
time.
Fees and indemnification. The BancBoston Robertson Stephens engagement
letter provides that, for its services, BancBoston Robertson Stephens is
entitled to receive a transaction fee of up to a maximum of $15,000,000,
dependent on the outcome of the assignment and the aggregate transaction value
at closing, which includes a $500,000 opinion fee paid upon delivery of the
BancBoston Robertson Stephens opinion. WebMD has not paid any other fees to
BancBoston Robertson Stephens over the past two years. WebMD has also agreed to
reimburse BancBoston Robertson Stephens for limited out-of-pocket expenses,
including legal fees, and to indemnify and hold harmless BancBoston Robertson
Stephens and its affiliates and any person, director, employee or agent of
BancBoston Robertson Stephens or any of its affiliates, or any person
controlling BancBoston Robertson Stephens or its affiliates for losses, claims,
damages, expenses and liabilities relating to or arising out of services
provided by BancBoston Robertson Stephens as financial advisor to WebMD. The
terms of the fee arrangement with BancBoston Robertson Stephens, which WebMD and
BancBoston Robertson Stephens believe are customary in transactions of this
nature, were negotiated at arm's length between WebMD and BancBoston Robertson
Stephens, and the WebMD board was aware of such fee arrangements, including the
fact that a significant portion of the fees payable to BancBoston Robertson
Stephens is contingent upon completion of the WebMD merger. BancBoston Robertson
Stephens and its affiliates have provided financial advisory and financing
services for WebMD, including other advisory work relating to the investment in
WebMD by Microsoft, and advisory work relating to other strategic minority
investments, including those by SOFTBANK Corporation, Intel Corporation, Covad
Communications, Inc., Excite, Inc., and Superior Consultant Holdings
Corporation, for which BancBoston Robertson Stephens will receive fees of
approximately $15,000,000.
BancBoston Robertson Stephens was retained based on BancBoston Robertson
Stephens' experience as a financial advisor in connection with mergers and
acquisitions and in securities valuations generally, as well as BancBoston
Robertson Stephens' investment banking relationship and familiarity with WebMD.
BancBoston Robertson Stephens is a nationally recognized investment banking
firm. As part of its investment banking business, BancBoston Robertson Stephens
is frequently engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of securities, private placements and other purposes. BancBoston
Robertson
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Stephens may actively trade the equity securities of Healtheon for its own
account and for the account of its customers and, accordingly, may at any time
hold a long or short position in such securities.
MODIFICATION OF VESTING OF EMPLOYEE STOCK OPTIONS
Under their employment or option agreements, options to acquire 923,067
shares of WebMD common stock held by Jeffery T. Arnold, 138,460 shares held by
John Danaher, WebMD's chief medical officer, and 69,867 shares held by three
sales and marketing employees that are currently unvested will vest upon the
completion of the reorganization. Mr. Arnold has agreed and WebMD will request
that the other employees agree to modify these vesting provisions so that the
options will not vest upon the completion of the reorganization but will vest if
thereafter the employees are terminated other than for cause, and in the case of
Mr. Arnold, if his duties, responsibilities or authority is diminished. In
addition, Mr. Arnold has agreed and the other employees will be requested to
agree to subject these modified vesting arrangements to a vote of the
stockholders as described in the section entitled "The WebMD Meeting -- votes
required; voting agreements; conversion agreements" on page 52. Absent these
modifications, the options would vest upon the consummation of the
reorganization, but Healtheon/WebMD would be unable to deduct for federal income
tax purposes approximately $28,839,372 of compensation expense, subject to
adjustment based on the actual value of the options on the acceleration date,
attributable to that vesting and the employees would suffer an excise tax of 20%
on such amount.
INTERESTS OF DIRECTORS, OFFICERS AND AFFILIATES IN THE HEALTHEON-WEBMD
REORGANIZATION
In accordance with the terms of the Healtheon-WebMD reorganization
agreement, four representatives elected by the Board of Directors of WebMD and
four representatives elected by the Board of Directors of Healtheon will become
the initial members of the Board of Directors of Healtheon/WebMD. The
Healtheon/WebMD Board of Directors will be comprised of nine members, with the
other seat to be filled by a person designated by Healtheon and WebMD. It is
expected that Jeffrey T. Arnold, the current Chairman of the Board and Chief
Executive Officer of WebMD, will join the Healtheon/WebMD Board of Directors as
one of the representatives of WebMD and W. Michael Long, the current Chief
Executive Officer of Healtheon, will join the Healtheon/WebMD Board of Directors
as one of the representatives of Healtheon.
In connection with the Healtheon-WebMD reorganization, Jeffrey T. Arnold
will be offered a position as the Chief Executive Officer of Healtheon/WebMD and
W. Michael Long will be offered a position as the Chairman of the Board and
Chief Operating Officer of Healtheon/WebMD. In addition, Healtheon and WebMD are
currently in the process of negotiating with some of their executive officers
regarding their potential roles in the combined companies. They are currently
unable to predict the outcome of these discussions. The Healtheon-WebMD
reorganization is not conditioned upon the retention or termination of any of
these officers.
Mr. Arnold has agreed to waive any vesting of his unvested stock options
granted under his employment agreement that would occur upon the completion of
the WebMD merger. However, if he is terminated other than for cause by
Healtheon/WebMD following the Healtheon-WebMD reorganization, then all options
granted to him pursuant to his employment agreement will immediately vest and
become fully exercisable on the date of such termination.
Microsoft will have the right to require Healtheon/WebMD to register for
resale the Healtheon/WebMD common stock owned by Microsoft. Microsoft and
Healtheon/WebMD have also agreed to expand Microsoft's strategic relationship
with WebMD following the reorganizations to encompass the entire company. For a
more complete description of the Microsoft relationship see the section entitled
"Healtheon/WebMD's strategic alliances with and investments from Microsoft and
other partners" on page 81.
Premiere Technologies, Inc. and WebMD entered into an amendment to their
co-marketing and integration agreement in connection with obtaining Premiere
Technologies' agreement to vote for the Healtheon-WebMD reorganization agreement
and the WebMD merger. The amendment requires WebMD
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to use its best efforts to cause Healtheon/WebMD to honor the rights and
obligations under that agreement, including the exclusivity for
telecommunications services. Boland T. Jones is the President and Chief
Executive Officer of Premiere Technologies and a WebMD board member. William P.
Payne is Vice Chairman of Premiere Technologies and Chairman of one of its
subsidiaries. Mr. Payne is also the Vice Chairman of WebMD.
COMPLETION AND EFFECTIVENESS OF THE HEALTHEON MERGER AND THE WEBMD MERGER
The WebMD merger will be completed when all of the conditions to completion
of the WebMD merger are satisfied or waived, including approval and adoption of
the Healtheon-WebMD reorganization agreement by the stockholders of WebMD and
Healtheon and approval of the WebMD merger by the stockholders of WebMD and the
Healtheon merger by the stockholders of Healtheon. The WebMD merger will become
effective upon the filing of the certificate of merger with the State of
Georgia. The Healtheon merger will become effective upon the filing of the
certificate of merger with the State of Delaware.
STRUCTURE OF THE HEALTHEON-WEBMD REORGANIZATION, CONVERSION OF WEBMD COMMON
STOCK AND HEALTHEON COMMON STOCK AND TREATMENT OF WEBMD PREFERRED STOCK
Pursuant to the Healtheon-WebMD reorganization agreement, the WebMD merger
sub will be merged with and into WebMD and the Healtheon merger sub will be
merged with and into Healtheon, the result of which will be that each of WebMD
and Healtheon will be subsidiaries of Healtheon/ WebMD. Healtheon/WebMD will
thereafter be a public company, the shares of which will be traded on the Nasdaq
National Market and will be held by the former common stockholders of Healtheon
and the former common stockholders of WebMD. Accordingly, the business of
Healtheon/WebMD will initially consist primarily of holding the capital stock of
Healtheon and WebMD, and each of WebMD and Healtheon will continue to operate
its current business.
Upon completion of the Healtheon merger, each outstanding share of
Healtheon common stock will be converted into the right to receive one share of
Healtheon/WebMD common stock. Upon completion of the WebMD merger, each
outstanding share of WebMD common stock will be converted into a right to
receive 1.815 shares of Healtheon/WebMD common stock. No fractional shares of
Healtheon/WebMD common stock will be issued pursuant to the WebMD merger. In
lieu of the issuance of any fractional shares of Healtheon/WebMD common stock,
cash equal to the product of such fractional share amount and the average
closing sale price of Healtheon common stock on Nasdaq for the ten trading days
prior to the closing date of the mergers will be paid to holders in respect of
any fractional share of Healtheon/ WebMD common stock that would otherwise be
issuable.
As a result of conversion or voting agreements that have been signed by the
holders of a majority of the outstanding shares of WebMD's Series C, D, E and F
preferred stock, those Series of preferred stock will be converted into WebMD
common stock prior to the effective time of the WebMD merger and will therefore
receive 1.815 shares of Healtheon-WebMD common stock for each share of WebMD
common stock received upon the conversion. In the case of the Series A preferred
stock and Series B preferred stock, if a majority of the holders of either
Series elects to convert into common stock prior to the WebMD merger then the
entire Series is automatically converted. In the case of the Series A preferred
stock, but not the Series B preferred stock, any holder may elect to convert
into common stock prior to the WebMD merger.
Each outstanding share of WebMD preferred stock that is not converted into
WebMD common stock prior to the effective time of the WebMD merger will remain
outstanding in WebMD, which will be a subsidiary of Healtheon/WebMD following
the reorganization and have the same preferences, rights, privileges or powers
of, or restrictions provided for the benefit of, the holders of the preferred
stock. These preferences and rights include:
- the right to participate on an as-if-converted to WebMD common stock
basis in any dividends declared by WebMD on its common stock
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- the right of the holders of the Series A preferred stock to elect a
director of WebMD
- the right to receive in any liquidation of WebMD a portion of the assets
distributed in liquidation computed as if the preferred stock had been
converted into WebMD common stock, but in no event less than the price
originally paid for the stock, plus any declared but unpaid dividends
- the right to convert their shares of preferred stock into WebMD common
stock at a conversion rate of one share of common stock for each share of
preferred stock, subject to adjustments for dilutive issuances of stock
by WebMD
- the right to approve stock redemptions, other than under employee stock
ownership or option plans, the creation of senior equity securities, or
changes to WebMD bylaws or articles of incorporation or other action that
would alter the preferences, rights, privileges or powers of, or
restrictions for the benefit of, the holders of the preferred stock. In
addition, the holders of the Series A preferred stock would be required
to approve the creation of any equity securities unless the rights of the
equity securities to dividends, distributions, and in liquidation were
junior to the rights of the Series A preferred stock
The dividend and liquidation rights of the Series A preferred stock are senior
to the rights of the Series B preferred stock.
In addition to these rights of the holders of the Series A preferred stock
and Series B preferred stock, HBO & Company, a holder of Series A and Series B
preferred stock, has additional rights, including:
- the right to receive annual budgets and business plans of WebMD, subject
to confidentiality obligations
- a right of first refusal to purchase WebMD's physician-only answering
service business if WebMD desires to sell it
- a right of first refusal to purchase equity securities that WebMD may
sell in the future, other than to the public or in connection with
acquisitions
- the right to require WebMD to register its securities in WebMD for sale
to the public in an underwritten public offering
HEALTHEON/WEBMD'S STRATEGIC ALLIANCES WITH AND INVESTMENTS FROM MICROSOFT AND
OTHER PARTNERS
As of May 6, 1999, WebMD and Microsoft entered into a five-year strategic
alliance, which is subject to renewal, under which:
- WebMD will develop, host and maintain a health channel for MSN, MSNBC and
WebTV, and WebMD and Microsoft will share advertising and e-commerce
revenues generated by the health channel.
- Microsoft will sponsor up to 5.0 million subscriber/months of WebMD
subscriptions, which will require Microsoft to pay for or sell these
subscriptions and may result in up to $149.8 million in revenues to WebMD
the five-year term of the agreement.
- WebMD and Microsoft will share advertising, sponsorship and e-commerce
revenues generated by these Microsoft-sponsored subscriptions and
DuPont-sponsored subscriptions.
- WebMD will utilize Microsoft operation systems and other technologies as
its technology platform for the health channel and WebMD's web site.
- Microsoft and its affiliates will be the sole providers of some Internet
services and content to WebMD, including Internet access services and
some non-healthcare related content to WebMD's consumer web site.
- WebMD and Microsoft have committed co-marketing funds and advertising
space on their respective web sites.
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The strategic alliance agreement provides that Microsoft will place a link
from its MSN.com home page, promote the health channel on the MSN.com in a
manner equivalent to all other major MSN topic specific offerings and provide a
guaranteed minimum amount of advertising for the health channel. Microsoft has
also agreed to promote the WebMD brand by providing a joint credit on each page
of the health channel.
On June 11, 1999, Microsoft completed the purchase of 273,214 shares of
WebMD Series F preferred stock tendered by its stockholders pursuant to an offer
to purchase for an effective price of $54.17 per share which was commenced on
April 10, 1999. In addition, in May 1999, Microsoft purchased from WebMD 184,604
shares of Series E preferred stock for approximately $100.0 million representing
an effective price of $54.17 per WebMD common share and was issued a warrant to
acquire 7,614,916 shares of WebMD common stock at $54.17 per share. On May 20,
1999, Microsoft committed to acquire another 276,906 shares of Series E
preferred stock upon the completion of the Healtheon-WebMD reorganization for
approximately $150.0 million representing an effective price of $54.17 per WebMD
common share. Microsoft will beneficially own approximately 17.2% of the fully
diluted Healtheon/WebMD common stock following the completion of the
reorganizations.
Healtheon, Microsoft and WebMD have agreed to expand the strategic
relationship to Healtheon/WebMD following the Healtheon-WebMD reorganization.
Healtheon/WebMD has agreed to utilize Microsoft operating systems and other
technologies as its technology platform.
In connection with the Microsoft investment, Intel Corporation, Excite@Home
Inc., Covad Communications Group, Inc., Superior Consultant Holdings
Corporation, The Reader's Digest Association, Inc. and Dell USA, L.P., an
investment vehicle for Dell Computer Corporation, purchased a total of 272,292
shares of WebMD Series E preferred stock and 184,604 shares of WebMD Series D
common stock for approximately $157.5 million. Some of these investors have also
entered into strategic relationships with WebMD. For a complete description of
these relationships, see the section entitled "Information Regarding
WebMD -- WebMD's business -- Strategic relationships" on page 246.
Because of investments, HBO & Company has the right to purchase 38,773
shares of Series E preferred stock, 16,745 shares of Series D common stock and a
warrant exercisable for 636,980 shares of Series D common stock for an exercise
price of $54.17 per share for aggregate consideration of approximately $21.9
million representing an effective price per WebMD common share of $54.17. Upon
the purchase by Microsoft of an additional 276,906 shares of Series E preferred
stock, HBO & Company will have the right to purchase 25,117 shares of Series F
preferred stock for an aggregate price of approximately $13.6 million
representing an effective price per WebMD common share of $54.17. HBO & Company
will have ten business days after it receives notice from WebMD describing these
rights to exercise these rights. Assuming McKessonHBOC exercises these rights,
it will own approximately 4.5% of the fully-diluted Healtheon/WebMD common stock
following completion of the reorganizations.
EXCHANGE OF HEALTHEON AND WEBMD STOCK CERTIFICATES FOR HEALTHEON/WEBMD STOCK
CERTIFICATES
Healtheon stockholders will not exchange their Healtheon stock certificates
for Healtheon/WebMD stock certificates following the reorganization. Each
Healtheon stock certificate will validly evidence an equal number of shares of
Healtheon/WebMD common stock after the merger. DO NOT SUBMIT YOUR HEALTHEON
STOCK CERTIFICATES.
When the WebMD merger is completed, Healtheon/WebMD's exchange agent will
mail to WebMD stockholders a letter of transmittal and instructions for use in
surrendering WebMD stock certificates in exchange for Healtheon/WebMD stock
certificates. When a WebMD stockholder delivers a WebMD stock certificate to the
exchange agent along with an executed letter of transmittal and any other
required documents, the WebMD stock certificate will be canceled and the WebMD
stockholder will receive Healtheon/WebMD stock certificates representing the
number of full shares of Healtheon/WebMD common stock to which the stockholder
is entitled under the reorganization agreement. A WebMD stockholder will receive
payment in cash, without interest, in lieu of any fractional shares of
Healtheon/ WebMD common stock which would have been otherwise issuable to the
stockholder in the merger.
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WEBMD STOCKHOLDERS SHOULD NOT SUBMIT THEIR WEBMD STOCK CERTIFICATES FOR
EXCHANGE UNTIL THEY RECEIVE THE TRANSMITTAL INSTRUCTIONS AND A FORM OF LETTER OF
TRANSMITTAL FROM THE EXCHANGE AGENT.
NO DIVIDENDS
WebMD stockholders are not entitled to receive any dividends or other
distributions on Healtheon/ WebMD common stock until the Healtheon/WebMD
reorganization is completed and they have surrendered their WebMD stock
certificates in exchange for Healtheon/WebMD stock certificates.
Subject to the effect of applicable laws, promptly following surrender of
WebMD stock certificates and the issuance of the corresponding Healtheon/WebMD
certificates, WebMD stockholders will be paid the amount of any dividends or
other distributions, without interest, with a record date after the completion
of the reorganization which were previously paid with respect to their whole
shares of Healtheon/WebMD common stock. At the appropriate payment date, WebMD
stockholders will also receive the amount of any dividends or other
distributions, without interest, with a record date after the completion of the
reorganization and a payment date after they exchange their WebMD stock
certificates for Healtheon/WebMD stock certificates.
Healtheon/WebMD will only issue WebMD stockholders a Healtheon/WebMD stock
certificate or a check in lieu of a fractional share in a name in which the
surrendered WebMD stock certificate is registered. If WebMD stockholders wish to
have their certificates issued in another name they must present the exchange
agent with all documents required to show and effect the unrecorded transfer of
ownership and show that they paid any applicable stock transfer taxes.
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS OF THE HEALTHEON-WEBMD
REORGANIZATION
This section summarizes material U.S. federal income tax considerations
relevant to the reorganization that apply to Healtheon/WebMD stockholders. This
discussion is based on existing provisions of the Internal Revenue Code,
existing treasury regulations and current administrative rulings and court
decisions, all of which are subject to change. Any such change, which may or may
not be retroactive, could alter the tax consequences of the merger to you. The
Internal Revenue Service may adopt a contrary position.
We do not discuss all U.S. federal income tax considerations that may be
relevant to you in light of your particular circumstances. Factors that could
alter the tax consequences of the merger to you include:
- if you are a dealer in securities
- if you are a tax-exempt organization
- if you are subject to the alternative minimum tax provisions of the tax
code
- if you are a foreign person or entity
- if you are a financial institution or insurance company
- if you do not hold your Healtheon or WebMD shares, as the case may be, as
capital assets
- if you acquired your shares in connection with stock option or stock
purchase plans or in other compensatory transactions
- if you hold Healtheon or WebMD shares as part of an integrated
investment, including a "straddle," comprised of shares of Healtheon or
WebMD capital stock and one or more other positions, or
- if you hold Healtheon or WebMD shares subject to the constructive sale
provisions of Section 1259 of the tax code
In addition, we do not discuss the tax consequences of the merger under
foreign, state or local tax laws, the tax consequences of transactions
effectuated prior or subsequent to, or concurrently with, the merger, whether or
not any of these transactions are undertaken in connection with the merger,
including
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without limitation any transaction in which Healtheon or WebMD shares are
acquired or shares of Healtheon/WebMD common stock are disposed of, or the tax
consequences to holders of options, warrants or similar rights to acquire
Healtheon or WebMD capital stock. ACCORDINGLY, WE URGE YOU TO CONSULT YOUR OWN
TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING THE
APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO YOU OF THE
MERGER.
Tax implications for Healtheon and Healtheon stockholders
Counsel to Healtheon, Wilson Sonsini Goodrich & Rosati, is of the opinion
that the merger of Healtheon with a wholly owned subsidiary of Healtheon/WebMD
will be a "reorganization" for U.S. federal income tax purposes within the
meaning of section 368(a) of the tax code. This means that:
- Healtheon stockholders will not recognize gain or loss when they receive
Healtheon/WebMD common stock solely in exchange for their shares of
Healtheon common stock in the Healtheon merger.
- The aggregate tax basis of the Healtheon/WebMD common stock received by
holders of Healtheon common stock will be the same as the aggregate tax
basis of the Healtheon common stock surrendered in the exchange.
- The holding period of the Healtheon/WebMD common stock received by
holders of Healtheon common stock in the Healtheon merger will include
the period the exchanged Healtheon common stock was considered to be
held, provided that the Healtheon common stock surrendered is held as a
capital asset at the time of the Healtheon merger.
- Healtheon will not recognize gain solely as a result of the Healtheon
merger.
Tax implications for WebMD and WebMD stockholders
Counsel to WebMD, Nelson Mullins Riley & Scarborough, L.L.P., is of the
opinion that the merger of WebMD with a wholly owned subsidiary of
Healtheon/WebMD will be a "reorganization" for U.S. federal income tax purposes
within the meaning of section 368(a) of the tax code and/or, when taken together
with the merger of Healtheon with a wholly owned subsidiary of Healtheon/WebMD,
as a transfer of property to Healtheon/WebMD by the shareholders of WebMD
governed by Section 351 of the tax code. This means that:
- WebMD stockholders will not recognize gain or loss when they receive
Healtheon/WebMD common stock solely in exchange for their shares of WebMD
common stock in the WebMD merger, except for cash received for a
fractional share of Healtheon/WebMD common stock
- Cash payments received by you for a fractional share of Healtheon/WebMD
common stock should be treated as if such fractional share had been
issued in the WebMD merger and then redeemed by Healtheon/WebMD. The
WebMD stockholders should recognize gain or loss with respect to these
cash payment, measured by the difference, if any, between the amount of
cash received and the basis in such fractional share
- WebMD stockholders who exercise appraisal rights and receive payment for
such stock in cash should generally recognize gain or loss for federal
income tax purposes, measured by the difference, if any, between the
amount of cash received and the basis in such shares, provided that the
payment is not treated as a dividend distribution for tax purposes. A
sale of WebMD shares pursuant to an exercise of appraisal rights should
generally not be treated as a dividend if, as a result of such exercise,
the stockholder owns no shares of Healtheon/WebMD or WebMD stock, either
actually or constructively
- The aggregate tax basis of the Healtheon/WebMD common stock received by
holders of WebMD common stock will be the same as the aggregate tax basis
of the WebMD common stock surrendered in exchange for the Healtheon/WebMD
common stock
- The holding period of the Healtheon/WebMD common stock received by
holders of WebMD stock in the WebMD merger will include the period the
exchanged WebMD common stock was
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considered to be held, provided that the WebMD common stock surrendered
is held as a capital asset at the time of the WebMD merger
- WebMD will not recognize gain solely as a result of the WebMD merger
Limitations on the tax opinions
Neither Healtheon nor WebMD has requested a ruling from the IRS with regard
to any of the federal income tax consequences of the Healtheon-WebMD Merger.
The opinions described above do not bind the IRS nor preclude it from
adopting a contrary position. These opinions are subject to qualifications and
are conditioned upon assumptions.
Consequences of a contrary IRS determination
A successful IRS challenge to the reorganization status of the Healtheon
merger would result in a Healtheon stockholder recognizing gain or loss with
respect to each share of Healtheon common stock surrendered. A successful IRS
challenge to the status of the WebMD merger as both a reorganization and, when
taken together with the Healtheon merger, as a transfer of property to
Healtheon/WebMD by the shareholders of WebMD governed by Section 351 of the tax
code, would result in a WebMD stockholder recognizing gain or loss with respect
to each share of WebMD common stock surrendered. In either case, this gain or
loss would equal the difference between the stockholder's basis in the shares
and the fair market value, at the time of the Healtheon-WebMD reorganization, of
the Healtheon/WebMD common stock received. In this event, a stockholder's
aggregate basis in the Healtheon/WebMD common stock received would equal its
fair market value, and the stockholder's holding period for the Healtheon/ WebMD
stock would begin the day after the reorganization.
Even if the Healtheon merger and the WebMD merger qualify as a
reorganization or as a transaction governed by section 351 of the tax code, a
stockholder who receives shares of Healtheon/WebMD common stock would recognize
gain to the extent that those shares were considered received in exchange for
services. Gain would also have to be recognized to the extent that a holder of
Healtheon common stock or WebMD stock was treated as receiving, directly or
indirectly, consideration other than Healtheon/ WebMD common stock in exchange
for the holder's Healtheon common stock or WebMD common stock. All or a portion
of those gain amounts may be taxable as ordinary income.
ACCOUNTING TREATMENT OF THE HEALTHEON-WEBMD REORGANIZATION
We intend to account for the Healtheon-WebMD reorganization as a purchase
for financial reporting and accounting purposes, under generally accepted
accounting principles. After the merger, the results of operations of Healtheon
and WebMD will be included in the consolidated financial statements of
Healtheon/WebMD. The purchase price will be allocated based on the fair values
of the assets acquired and the liabilities assumed. Any excess of cost over fair
value of the net tangible assets of WebMD acquired will be recorded as goodwill
and other intangible assets and will be amortized by charges to operations under
generally accepted accounting principles. These allocations will be made based
upon valuations and other studies that have not yet been finalized.
REGULATORY FILINGS AND APPROVALS REQUIRED TO COMPLETE THE HEALTHEON-WEBMD
REORGANIZATION
The merger is subject to the requirements of the Hart-Scott-Rodino
Antitrust Improvements Act, which prevents transactions from being completed
until required information and materials are furnished to the Antitrust Division
of the Department of Justice and the Federal Trade Commission and the
appropriate waiting periods end or expire. Healtheon, WebMD and Jeffrey T.
Arnold have filed the required information and materials with the Department of
Justice and the Federal Trade Commission and these waiting periods have expired.
Microsoft and Healtheon have filed the required information and materials
concerning Microsoft's acquisition of Healtheon/WebMD stock in connection with
the reorganization, and this waiting period has not yet expired. The
requirements of Hart-Scott-Rodino will be satisfied if the reorganization is
completed within one year from the termination of all applicable waiting
periods.
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The Antitrust Division of the Department of Justice or the Federal Trade
Commission may challenge the merger on antitrust grounds either before or after
expiration of the waiting period. Accordingly, at any time before or after the
completion of the merger, either the Antitrust Division of the Department of
Justice or the Federal Trade Commission could take action under the antitrust
laws. Other persons could take action under the antitrust laws, including
seeking to enjoin the reorganization. Additionally, at any time before or after
the completion of the merger, notwithstanding that the applicable waiting period
expired or ended, any state could take action under the antitrust laws. A
challenge to the reorganization could be made and we may not prevail.
We are not aware of any other material governmental or regulatory approval
required for completion of the merger, other than the effectiveness of the
registration statement of which this proxy statement/prospectus is a part, and
compliance with applicable corporate laws of Delaware and Georgia.
RESTRICTIONS ON SALES OF SHARES BY AFFILIATES OF WEBMD AND HEALTHEON
The shares of Healtheon/WebMD common stock to be issued in the merger will
be registered under the Securities Act. These shares will be freely transferable
under the Securities Act, except for shares of Healtheon/WebMD common stock
issued to any person who is an affiliate of either of WebMD or Healtheon.
Persons who may be deemed to be affiliates include individuals or entities that
control, are controlled by, or are under common control of either of WebMD or
Healtheon and may include some of their respective officers and directors, as
well as their respective principal stockholders. Affiliates may not sell their
shares of Healtheon/WebMD common stock acquired in the merger except pursuant
to:
- an effective registration statement under the Securities Act covering the
resale of those shares,
- an exemption under paragraph (d) of Rule 145 under the Securities Act, or
- any other applicable exemption under the Securities Act.
LISTING ON THE NASDAQ NATIONAL MARKET OF HEALTHEON/WEBMD COMMON STOCK TO BE
ISSUED IN HEALTHEON-WEBMD REORGANIZATION
It is a condition to the closing of the merger that the shares of
Healtheon/WebMD common stock to be issued in the merger be approved for listing
on Nasdaq, subject to official notice of issuance.
OPERATIONS AFTER THE HEALTHEON-WEBMD REORGANIZATION
Following the reorganization, Healtheon and WebMD will continue their
operations as subsidiaries of Healtheon/WebMD. The common stockholders of
Healtheon and WebMD will become stockholders of Healtheon/WebMD, and their
rights as stockholders will be governed by Healtheon/WebMD's amended and
restated certificate of incorporation, Healtheon/WebMD's bylaws and the laws of
the State of Delaware. The holders of the Series A preferred stock and Series B
preferred stock of WebMD could remain holders of those series of preferred stock
of the WebMD subsidiary of Healtheon/WebMD following the reorganization unless
those series are converted into WebMD common stock prior to the reorganization.
See "Comparison of rights of holders of WebMD capital stock and Healtheon/WebMD
common stock" on page 179.
RIGHTS OF DISSENTING WEBMD STOCKHOLDERS
Pursuant to Sections 14-2-1301 through 14-2-1332, inclusive, of the Georgia
Business Corporation Code, a dissenting WebMD stockholder who desires to object
to the WebMD merger and to receive the fair value of his or her WebMD stock in
cash by following the procedure described below may do so by complying with the
provisions of Georgia law pertaining to the exercise of dissenters' rights. Only
those WebMD stockholders entitled to vote on the reorganization agreement and
WebMD merger are entitled to dissent and receive the fair value of their shares.
As more fully discussed in the section entitled "The WebMD meeting -- required
vote; voting agreements; conversion agreements" only the holders of WebMD common
stock and Series A preferred stock are entitled to vote on the reorganization
and WebMD merger and thus only those holders may dissent and receive the fair
value of their shares. Holders of preferred
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stock, other than Series A preferred stock, who wish to dissent to the WebMD
merger and obtain the fair value of their shares must convert their preferred
shares into common shares before the record date for the WebMD stockholders
meeting. The following is a summary of the provisions of Georgia law and is
qualified in its entirety by reference to such provisions, a copy of which is
attached as Annex F hereto.
Georgia law provides that any WebMD stockholder who has the right to vote
on the WebMD merger and who desires to object to the WebMD merger and receive
payment in cash for the fair value of his shares of WebMD stock must deliver,
prior to the WebMD stockholder vote, written notice of his intent to demand
payment of the fair value of his shares if the WebMD merger is effectuated. The
notice must be delivered to WebMD, Inc., 400 The Lenox Building, 3399 Peachtree
Road, NE, Atlanta, Georgia 30326, Attention: W. Michael Heekin, Corporate
Secretary. Further, the dissenting stockholder must not vote his or her shares
in favor of the reorganization agreement or the WebMD merger. The written
objection requirement referred to above will not be satisfied under Georgia law
by merely voting against the reorganization agreement by proxy or in person at
the WebMD meeting. Any holder of WebMD stock who returns a signed proxy but
fails to provide instructions as to the manner in which the shares are to be
voted will be deemed to have voted in favor of the transaction and will not be
entitled to assert dissenters' rights.
If the reorganization agreement and the WebMD merger are approved by the
WebMD stockholders, WebMD is required to send a written dissenters' notice to
each of the dissenting stockholders who filed a written notice of his intent to
dissent and did not vote in favor of the merger. The dissenters' notice must:
- state where the dissenting stockholders' first payment demand must be
sent and where and when certificates for certificated shares must be
deposited
- inform the holders of uncertificated shares to what extent transfer of
such shares will be restricted after payment demand is made
- state the date by which WebMD must receive the first payment demand,
which date shall be fixed by WebMD and shall not be fewer than 30 nor
more than 60 days after the date the dissenters' notice is delivered
- contain a copy of Georgia law relating to dissenters' rights
Any dissenting stockholder who voted for or consented in writing to the
reorganization agreement shall not be entitled to a dissenters' notice from
WebMD or to receive payment of the fair value of his or her shares of WebMD
stock pursuant to the dissenters' rights provisions of Georgia law. WebMD is
required to send the dissenters' notice to each of the dissenting stockholders
no later than ten days after the date on which the WebMD stockholders vote to
approve the reorganization agreement. The dissenters' notice will be sent to
each dissenting stockholder at his or her address as it appears in the stock
transfer books of WebMD or at any other address the dissenting stockholder
supplies by notice to WebMD.
Each dissenting stockholder to whom WebMD sends a dissenter's notice must
make a first payment demand for his or her shares by written notice to WebMD and
deposit his or her share certificates in accordance with the terms of the
dissenters' notice. The first payment demand must contain the name and address
of the dissenting stockholder, the number of shares as to which the dissenting
stockholder is demanding payment and a demand for payment to the dissenting
stockholder of the fair value of his or her shares. Any dissenting stockholder
who does not submit a first payment demand or deposit their shares as set forth
in the dissenters' notice shall lose their rights to dissent and shall not be
entitled to payment for his or her shares pursuant to the dissenters' rights
provisions of Georgia law.
Within ten days of the later of the closing the WebMD merger or WebMD's
receipt of the first payment demand, WebMD shall offer to pay the dissenting
stockholders who have complied with the provisions of Georgia law the amount
WebMD estimates to be the fair value of the shares plus accrued interest.
WebMD's offer of payment must be accompanied by:
- WebMD's balance sheet as of the fiscal year ended not more than 16 months
before the date of payment, an income statement for that year, a
statement of changes in stockholders' equity for that year and the latest
available interim financial statements, if any
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- a statement of WebMD's estimate of the fair value of the shares
- an explanation of how the interest was calculated
- a statement of the dissenting stockholder's right to demand payment of a
different amount if the dissenting stockholder is dissatisfied with the
offer
- a copy of Article 13 of Georgia law
If a dissenting stockholder accepts WebMD's offer by providing written
notice to WebMD within 30 days after the date the offer is made or is deemed to
have accepted such offer by failure to respond within said 30 days, WebMD shall
make payment for the dissenting stockholder's shares within 60 days after the
date WebMD made the offer or the date on which the WebMD merger occurs,
whichever date is later.
If the WebMD merger is not effected within 60 days after the first payment
demand and the deposit of share certificates, WebMD must return the deposited
share certificates and release the transfer restrictions imposed on
uncertificated shares. If, after such return and release, the WebMD merger is
effectuated, WebMD must send a new dissenters' notice and repeat the payment
demand procedure described above.
If a dissenting stockholder is dissatisfied with WebMD's offer of payment
or the merger does not occur and WebMD does not return the deposited
certificates within 60 days after the date set for making the first payment
demand, a dissenting stockholder may make a second payment demand to WebMD in
writing of his or her own estimate of the fair value of his or her shares and
the amount of interest due. A dissenting stockholder waives his or her right to
demand payment of a different amount than that offered by WebMD and is deemed to
have accepted the amount offered by WebMD unless the dissenting stockholder
makes a second payment demand within 30 days after the date WebMD makes its
offer.
In the event a dissenting stockholder's second payment demand remains
unsettled within 60 days after WebMD receives the dissenting stockholder's
second payment demand, WebMD shall commence a nonjury equitable valuation
proceeding in the Superior Court of Fulton County, Georgia to determine the fair
value of the shares and accrued interest. WebMD shall make all dissenting
stockholders whose second payment demand remains unsettled parties to the court
proceeding. In the proceeding, the court will fix a value of the shares and may
appoint one or more appraisers to receive evidence and recommend a decision on
the question of fair value. If WebMD does not commence the proceeding within 60
days after receiving the dissenting stockholder's second payment demand, WebMD
shall pay each dissenting stockholder whose second payment demand remains
unsettled the amount demanded by each dissenting stockholder in his or her
second payment demand.
The determination of a "fair value" necessarily involves matters of
judgment upon which reasonable persons may disagree. Georgia law provides that,
for purposes of dissenters' rights, the value of the WebMD stock is determined
immediately before the consummation of the WebMD merger and that the fair value
excludes any appreciation or depreciation in anticipation of the WebMD merger.
Any dissenting stockholder who perfects his or her right to be paid the
value of his or her shares will recognize taxable gain or loss upon receipt of
cash for the shares for U.S. federal income tax purposes. For a more complete
description of the federal income tax consequences of the WebMD merger, see the
section entitled "Material U.S. federal income tax considerations of the
Healtheon-WebMD reorganization" on page 83.
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THE HEALTHEON-WEBMD REORGANIZATION AGREEMENT
REPRESENTATIONS AND WARRANTIES
Healtheon and WebMD each made representations and warranties in the
Healtheon-WebMD reorganization agreement regarding aspects of their respective
businesses, financial condition, structure and other facts pertinent to the
Healtheon-WebMD reorganization, including:
- capitalization
- changes in our businesses since December 31, 1998
- intellectual property used in our businesses
- fairness opinions received by our financial advisors
- financial statements
In addition, WebMD made additional representations and warranties regarding
payments, if any, required to be made by WebMD to employees and directors on
account of the Healtheon-WebMD reorganization.
The representations and warranties in the Healtheon-WebMD reorganization
agreement are complicated and not easily summarized. The reorganization
agreement is attached to this proxy statement/prospectus as Annex A and we urge
you to read it carefully, including the sections of the agreement entitled
"Representations and Warranties of the Company" and "Representations and
Warranties of Healtheon/WebMD and Merger Sub."
CONDUCT OF BUSINESS BEFORE COMPLETION OF THE HEALTHEON-WEBMD REORGANIZATION
Healtheon and WebMD each agreed that until the completion of the
Healtheon-WebMD reorganization or unless the other party consents in writing,
each party will use commercially reasonable efforts consistent with past
practices and policies to:
- preserve intact its present business organization
- keep available the services of its present executive officers and key
employees
- preserve its relationships with customers, suppliers, licensors,
licensees, and others with which it has business dealings
We also agreed that until the completion of the reorganization or unless
the other party consents in writing, each party would conduct its business in
compliance with specific restrictions relating to:
- the issuance and redemption of securities
- employees and employee benefits and remuneration
- intellectual property
- the issuance of dividends or other distributions
- modification of certificate or articles of incorporation and bylaws,
except as contemplated by the reorganization
- the liquidation or restructuring of, or merger involving, Healtheon or
WebMD
- the acquisition of assets or other entities
- the disposition of assets
- the incurrence of indebtedness
- entering into, material modification or termination of contracts
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- accounting policies and procedures
- actions that would jeopardize the tax treatment of the merger
The agreements related to the conduct of each party's business in the
reorganization agreement are complicated and not easily summarized. You are
urged to carefully read the sections of the reorganization agreement entitled
"Conduct prior to the effective time."
NO OTHER NEGOTIATIONS INVOLVING WEBMD
Until the Healtheon-WebMD reorganization is completed or the reorganization
agreement is terminated, WebMD has agreed not to directly or indirectly take any
of the following actions without the consent of Healtheon:
- solicit, initiate, encourage or induce any "acquisition proposal", as
defined below
- participate in any discussions or negotiations regarding any acquisition
proposal
- disclose any non-public information with respect to any acquisition
proposal
- take any other action to facilitate any inquiries or the making of any
proposal that constitutes or may reasonably be expected to lead to any
acquisition proposal
- engage in discussions with any person with respect to any acquisition
proposal
- approve, endorse or recommend any acquisition proposal
- enter into any letter of intent or similar document or any contract,
agreement or commitment relating to any "acquisition transaction", as
defined below
WebMD has agreed to promptly inform Healtheon of any acquisition proposal,
request for non-public information or inquiry that WebMD believes would lead to
an acquisition proposal, including the identity of the person, entity or group
making the acquisition proposal, request or inquiry and the material terms of
the acquisition proposal, request or inquiry. WebMD has agreed to inform
Healtheon of the status and details of any acquisition proposal.
An acquisition proposal is any offer or proposal relating to any
acquisition transaction, other than an offer or proposal from Healtheon. An
acquisition transaction is any transaction involving any of the following:
- the acquisition or purchase of more than a 5% interest in the total
outstanding voting securities of WebMD or any of its subsidiaries
- any tender offer or exchange offer, that, if consummated, would result in
any person or group beneficially owning 5% or more of the total
outstanding voting securities of WebMD
- any merger, consolidation, business combination or similar transaction
involving WebMD
- any sale, lease outside the ordinary course of business, acquisition or
disposition of more than 5% of the assets of WebMD
- any liquidation or dissolution of WebMD
TREATMENT OF HEALTHEON AND WEBMD STOCK OPTIONS AND WARRANTS
Upon completion of the Healtheon-WebMD reorganization, each outstanding
option or warrant to purchase Healtheon and WebMD capital stock, other than
options or warrants to purchase WebMD Series A or B preferred stock, will be
converted, in accordance with its terms, into an option or warrant, as the case
may be, to purchase the number of shares of Healtheon/WebMD common stock equal
to the number of shares of Healtheon or WebMD common stock that could have been
obtained before the Healtheon-WebMD reorganization upon the exercise of each
option or warrant times the applicable exchange ratio, rounded to the nearest
whole share. The exercise price for options and warrants to
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purchase WebMD capital stock that are converted into options and warrants for
Healtheon/WebMD common stock will be equal to the exercise price per share of
WebMD common stock subject to the option or warrant before the reorganization
divided by the exchange ratio, rounded to the nearest whole cent.
Options and warrants for WebMD Series A and B preferred stock, other than
options to acquire Series B preferred stock under the Sapient option plan, will
remain exercisable for WebMD Series A or Series B preferred stock after the
reorganization, unless a majority of the holders of the applicable Series elects
to cause the entire series to be converted into WebMD common stock prior to the
effective time of the WebMD merger, in which case options and warrants to
purchase such series shall by their terms become options and warrants for
Healtheon/WebMD common stock, with the exercise prices adjusted as provided in
the previous paragraph. Upon completion of the reorganization options granted
under the Sapient Health Network option plan to acquire Series B preferred stock
will become exercisable for Healtheon/WebMD common stock and the exercise price
for such options will be adjusted in the manner provided above.
The other terms of each option and the Healtheon and WebMD option plans
referred to above under which the options were issued will continue to apply in
accordance with their terms. Upon completion of the reorganization, each
outstanding award, including restricted stock, stock equivalents and stock
units, under any employee incentive or benefit plans, programs or arrangements
maintained by Healtheon and WebMD which provide for grants of equity-based
awards will be amended or converted into a similar instrument of
Healtheon/WebMD, with adjustments to preserve their value. The other terms of
each Healtheon and WebMD award, and the plans or agreements under which they
were issued, will continue to apply in accordance with their terms.
Healtheon/WebMD intends to file a registration statement on Form S-8, if
available, for the shares of Healtheon/WebMD common stock issuable with respect
to options under the Healtheon and WebMD stock option plans and will maintain
the effectiveness of that registration statement for as long as any of the
options remain outstanding.
BOARD OF DIRECTORS AND OFFICERS OF HEALTHEON/WEBMD
Immediately after the reorganization, Healtheon/WebMD's board of directors,
will consist of nine persons, four of whom will be designated by the Board of
Directors of WebMD, including Jeffrey T. Arnold, four of whom shall have been
designated by the Board of Directors or Healtheon, including W. Michael Long,
and one of whom will be designated by mutual agreement of Healtheon and WebMD.
After the reorganization, W. Michael Long, the current Chief Executive
Officer of Healtheon, will be offered a position as Chairman of the Board and
Chief Operating Officer of Healtheon/WebMD, and Jeffrey T. Arnold, the current
Chairman and Chief Executive Officer of WebMD, will be offered a position as
Chief Executive Officer of Healtheon/WebMD.
CONDITIONS TO COMPLETION OF THE HEALTHEON-WEBMD REORGANIZATION
Our respective obligations to complete the Healtheon-WebMD reorganization
and the other transactions contemplated by the reorganization agreement are
subject to the satisfaction or waiver of each of the following conditions before
completion of the reorganization:
- the reorganization agreement must be approved and adopted by the
requisite vote of Healtheon's and WebMD's stockholders, and the mergers
must be approved by the requisite vote of the outstanding shares of
Healtheon and WebMD stock and of WebMD stock
- no law, regulation or order must be enacted or issued which has the
effect of making the mergers illegal or otherwise prohibiting completion
of the merger substantially on the terms contemplated by the merger
agreement
- all applicable waiting periods under applicable antitrust laws must have
expired or been terminated
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- Healtheon and WebMD must each receive from their respective tax counsel,
an opinion to the effect that the reorganization will constitute either a
reorganization within the meaning of Section 368(a) of the Internal
Revenue Code or an exchange within the meaning of Section 351(a) of the
Internal Revenue Code. However, if counsel to either Healtheon or WebMD
does not render this opinion, this condition will be satisfied if counsel
to the other party renders the opinion to such party.
- the shares of Healtheon/WebMD common stock to be issued in the mergers
must be authorized for listing on Nasdaq, subject to notice of issuance
WebMD's obligations to complete the WebMD merger and the other transactions
contemplated by the reorganization agreement are subject to the satisfaction or
waiver of each of the following additional conditions before completion of the
WebMD merger:
- Healtheon's representations and warranties must be true and correct as of
May 20, 1999 and as of the date the merger is to be completed except to
the extent Healtheon's representations and warranties address matters
only as of a particular date
- if any of these representations and warranties are not true and correct
but the effect in each case, and in the aggregate, of the inaccuracies of
these representations and breaches of these warranties, other than that
concerning Healtheon's capital structure, obligations with respect to
capital stock, board approval, receipt of fairness opinion, and
restrictions on business activities, which must be true and correct in
all material respects, is not and does not have a material adverse effect
on Healtheon, then this condition will be deemed satisfied
- Healtheon must perform or comply in all material respects with all of its
agreements and covenants required by the merger agreement to be performed
or complied with by Healtheon at or before completion of the merger
- no material adverse effect with respect to Healtheon, shall have occurred
since May 20, 1999 and be continuing
Healtheon's obligations to complete the WebMD merger and the other
transactions contemplated by the reorganization agreement are subject to the
satisfaction or waiver of each of the following additional conditions before
completion of the WebMD merger:
- WebMD's representations and warranties must be true and correct as of May
20, 1999 and as of the date the merger is to be completed except to the
extent WebMD's representations and warranties address matters only as of
a particular date
- if any of these representations and warranties are not true and correct
but the effect in each case, or in the aggregate, of the inaccuracies of
these representations and breaches of these warranties, other than those
concerning WebMD's capital structure, obligations with respect to capital
stock, Microsoft's tender offer, board approval, receipt of the fairness
opinion, and restrictions on business activities, which must be true and
correct in all material respects, is not and does not have a material
adverse effect on WebMD, then this condition will be deemed satisfied
- WebMD must perform or comply in all material respects with all of its
agreements and covenants required by the reorganization agreement to be
performed or complied with by WebMD at or before completion of the WebMD
merger
- no material adverse effect with respect to WebMD shall have occurred
since May 20, 1999 and be continuing
- WebMD shall have obtained all consents, waivers and approvals required in
connection with the WebMD merger
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- no stockholder, taken together with its affiliates, of WebMD shall
beneficially own, or have the right to beneficially own, at any time in
the future, 40% or more of the outstanding shares of WebMD stock on a
fully diluted, as converted basis
- no more than 0.66% of the shares of WebMD capital stock on fully diluted,
as converted basis shall have perfected rights of appraisal or dissenters
rights with respect to the WebMD merger
- WebMD's legal counsel shall have delivered a legal opinion
- WebMD shall have provide Healtheon with reasonably satisfactory evidence
that, with limited exceptions, all material rights of stockholders and
obligations of WebMD under any stockholder agreement in its capacity as a
stockholder shall have terminated
- WebMD shall have received a $150 million investment from Microsoft upon
completion of the Healtheon-WebMD reorganization.
- WebMD shall also have received certain additional investments from
strategic investors other than Microsoft
- the shareholder agreement with Microsoft shall be in full force and
effect
A material adverse effect is any change, event, violation, inaccuracy,
circumstance or effect that is materially adverse to the business, assets,
including intangible assets, financial condition or results of operations of an
entity taken as a whole with its subsidiaries.
TERMINATION OF THE HEALTHEON-WEBMD REORGANIZATION AGREEMENT
The reorganization agreement may be terminated at any time prior to
completion of the WebMD merger, whether before or after approval and adoption of
the reorganization agreement and approval of the mergers by Healtheon and/or
WebMD stockholders:
- by mutual consent of Healtheon and WebMD
- by Healtheon or WebMD, if the WebMD merger is not completed before
December 15, 1999 except that the right to terminate the reorganization
agreement is not available to any party whose action or failure to act
has been a principal cause of or resulted in the failure of the WebMD
merger to occur on or before December 15, 1999 and such action or failure
to act constitutes a material breach of the reorganization agreement
- by Healtheon or WebMD, if there is any order of a court or governmental
authority having jurisdiction over either of us permanently enjoining,
restraining or prohibiting the completion of the WebMD merger which is
final and nonappealable
- by Healtheon or WebMD, if the reorganization agreement and the mergers
fail to receive the requisite vote for approval and adoption by the
stockholders of Healtheon at the Healtheon special meeting, except that
the right to terminate the reorganization agreement pursuant to this
provision by Healtheon is not available to Healtheon where the failure to
obtain Healtheon stockholder approval was caused by the action or failure
to act by Healtheon and such action or failure to act constitutes a
material breach of the reorganization agreement
- by Healtheon or WebMD, if the reorganization agreement and the mergers
fail to receive the requisite vote for approval and adoption by the
stockholders of WebMD at the WebMD special meeting, except that the right
to terminate the reorganization agreement pursuant to this provision by
WebMD is not available to WebMD where the failure to obtain WebMD
stockholder approval was caused by the action or failure to act by WebMD
and such action or failure to act constitutes a material breach of the
reorganization agreement
- by WebMD, upon a breach of any representation, warranty, covenant or
agreement of Healtheon in the reorganization agreement, or if any of
Healtheon's representations or warranties are or become untrue so that
the corresponding condition to completion of the reorganization would not
be met.
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However, if the breach or inaccuracy is curable by Healtheon through the
exercise of its commercially reasonable efforts, and Healtheon continues to
exercise commercially reasonable efforts, WebMD may not terminate the merger
agreement if the breach or inaccuracy is cured prior to December 15, 1999
- by Healtheon, upon a breach of any representation, warranty, covenant or
agreement of WebMD in the reorganization agreement, or if any of WebMD'S
representations or warranties are or become untrue so that the
corresponding condition to completion of the reorganization would not be
met. However, if the breach or inaccuracy is curable by WebMD through the
exercise of its commercially reasonable efforts and WebMD continues to
exercise commercially reasonable efforts Healtheon may not terminate the
reorganization agreement if the breach or inaccuracy is cured prior to
December 15, 1999.
EXTENSION, WAIVER AND AMENDMENT OF THE HEALTHEON-WEBMD REORGANIZATION AGREEMENT
We may amend the reorganization agreement before completion of the
reorganization provided we comply with applicable state law.
Either of us may extend the other's time for the performance of any of the
obligations or other acts under the reorganization agreement, waive any
inaccuracies in the other's representations and warranties and waive compliance
by the other with any of the agreements or conditions contained in the
reorganization agreement.
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HEALTHEON/WEBMD RELATED TRANSACTION AGREEMENTS
WEBMD STOCKHOLDERS' VOTING AGREEMENT AND CONVERSION AGREEMENT
Some of WebMD's stockholders who are directors, executive officers or
affiliates of WebMD entered into voting agreements with Healtheon and WebMD. The
voting agreements require these WebMD stockholders to vote all of the shares of
WebMD stock owned by them in favor of
- the WebMD merger
- the conversion of WebMD preferred stock into Series D common stock
immediately prior to and contingent on the WebMD merger
- the acceleration of the vesting provisions in certain WebMD options
- against any proposal in opposition to the WebMD merger or other action
inconsistent with completing the WebMD merger
The voting agreements also contain an irrevocable election to convert any
WebMD preferred stock held by the stockholder into WebMD common stock
immediately prior to the WebMD merger.
Some holders of WebMD Series B, C, D, E and F preferred stock entered into
conversion agreements with Healtheon and WebMD. The conversion agreements
require the preferred stockholders to:
- vote to amend the terms of the Series B, C, D, E and F preferred stock to
permit the automatic conversion of each series of preferred stock into
Series D common stock upon the election by the holders of a majority of
the outstanding shares of that series
- no sooner than three business days after the mailing of this proxy
statement/prospectus, to either:
- execute a voting agreement in the same form as the voting agreement
described above, or
- be deemed to have irrevocably elected to convert their preferred stock
into WebMD common stock effective as of the day immediately prior to
the record date of the WebMD stockholder meeting
As a result of the voting agreements and the conversion agreements, WebMD
has sufficient votes to approve the reorganization agreement and the proposed
merger to the extent required under Georgia law.
The WebMD stockholders who have executed voting agreements or conversion
agreements also agreed not to transfer or encumber their WebMD shares covered by
those agreements. None of the WebMD stockholders were paid any consideration for
entering into the voting agreements or conversion agreements, although WebMD did
enter into a letter of understanding with Premier Technologies, Inc. described
above under the section entitled "Interests of certain directors, officers and
affiliates in the Healtheon-WebMD reorganization" concerning its strategic
relationship with WebMD following the WebMD merger in connection with obtaining
Premier's voting agreement.
The voting and conversion agreements will terminate upon the earlier to
occur of:
- the termination of the reorganization agreement in accordance with its
terms, or
- the completion of the merger
HEALTHEON STOCKHOLDERS' VOTING AGREEMENT
Some Healtheon stockholders have entered into a voting agreement with
WebMD. The voting agreement requires these Healtheon stockholders to vote all of
the shares of Healtheon common stock beneficially owned by them in favor of the
merger.
As of the record date, the Healtheon stockholders who entered into the
voting agreement collectively beneficially owned shares,
including shares issuable upon exercise of warrants, of Healtheon common stock
which represented approximately shares of the outstanding
Healtheon
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common stock. None of the Healtheon stockholders who are parties to the voting
agreement were paid additional consideration in connection with entering into
the voting agreement.
Each Healtheon stockholder who is a party to the voting agreement agreed
not to sell the Healtheon stock and options owned, controlled or acquired,
either directly or indirectly, by that person until the termination of the
voting agreements or the record date without the prior written consent of WebMD.
The voting agreement will terminate upon the earlier to occur of:
- the termination of the reorganization agreement in accordance with its
terms, or
- the completion of the merger
MICROSOFT SHAREHOLDER AGREEMENT
Microsoft has entered into a shareholder agreement with Healtheon. The
shareholder agreement requires that Microsoft vote all of the shares of WebMD
capital stock beneficially owned by it in favor of the reorganization, unless
there are material amendments to the reorganization agreement.
As of the record date, Microsoft beneficially owned 14,920,467 shares,
including shares issuable upon exercise of warrants, of WebMD capital stock
which represented approximately 34.9% of the outstanding WebMD capital stock.
Microsoft agreed not to sell the WebMD stock and options owned, controlled
or acquired, either directly or indirectly, by it until the termination of the
stockholder agreement, or the record date without the prior written consent of
Healtheon, unless the transferee executes an irrevocable proxy to vote the
shares being transferred in favor of the reorganization.
Microsoft further agreed, effective with the reorganization, to irrevocably
waive certain rights, including its rights of anti-dilution, under the Master
Agreement dated as of April 10, 1999 between WebMD and Microsoft, and under
Microsoft's Warrant to purchase shares of common stock of WebMD dated May 12,
1999.
The stockholder agreement will terminate upon the earliest to occur of:
- the termination of the reorganization agreement in accordance with its
terms, or
- the completion of the reorganization
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THE MEDE AMERICA REORGANIZATION
This section of the proxy statement/prospectus describes certain aspects of
the proposed MEDE AMERICA reorganization, including the reorganization agreement
and related agreements. While we believe that the description covers the
material terms of the MEDE AMERICA reorganization and the related transactions,
this summary may not contain all of the information that is important to you.
You should read this entire document and the other documents we refer to
carefully for a more complete understanding of the reorganization.
BACKGROUND OF THE MEDE AMERICA REORGANIZATION
On May 3, 1998, MEDE AMERICA filed a registration statement for an initial
public offering of common stock. Shortly thereafter, the MEDE AMERICA board of
directors decided to evaluate the interest of potential buyers in a strategic
combination or other business combination. On June 1, 1998, MEDE AMERICA engaged
Salomon Smith Barney to act as its financial advisor for this purpose. Over the
course of the next several weeks, at the direction of MEDE AMERICA, Salomon
Smith Barney contacted nine potential buyers, including Healtheon, to ascertain
their interest in acquiring MEDE AMERICA. Of the nine companies contacted, one
indicated interest in acquiring MEDE AMERICA for cash consideration in a range
of $140 million to $150 million. The MEDE AMERICA board of directors decided to
reject the proposal and to proceed with an initial public offering.
On February 1, 1999, the MEDE AMERICA registration statement was declared
effective and MEDE AMERICA sold 5,307,710 shares of its common stock at a price
to the public of $13 per share.
On February 16, 1999, Thomas Staudt, the President and Chief Executive
Officer of MEDE AMERICA, was approached by Michael Hoover, President of
Healtheon, regarding a possible strategic business combination between the two
companies. Mr. Staudt indicated that there might be some interest in pursuing
the matter, and that he would be willing to meet with Michael Long, Chief
Executive Officer of Healtheon at the upcoming HIMSS Annual conference scheduled
for February 21 - 25, 1999 in Atlanta, Georgia. Immediately following the
conversation with Mr. Hoover, Mr. Staudt consulted with Anthony J. de Nicola, a
director of MEDE AMERICA and a principal of Welsh, Carson, Anderson & Stowe, its
largest stockholder. During their conversation, Messrs. Staudt and de Nicola
decided that the preliminary discussions with Mr. Long should focus on the need
for Healtheon to establish a level of enterprise valuation for MEDE AMERICA that
would result in an increase in stockholder value to MEDE AMERICA stockholders.
On February 24, 1999, Messrs. Staudt and Long met. Mr. Staudt informed Mr.
Long that if Healtheon were interested in having further conversations, Mr. Long
should meet with MEDE AMERICA's principal stockholders within the subsequent two
weeks in order to extend a proposal.
On March 9, 1999, Mr. Long and his advisors met with Messrs. Staudt,
Richard Bankosky, MEDE AMERICA'S Chief Financial Officer, MEDE AMERICA directors
de Nicola, Thomas E. McInerney, who is also a principal of Welsh, Carson,
Anderson and Stowe, and Timothy M. Murray, who is also a general partner of
William Blair Capital Partners, and representatives of Salomon Smith Barney and
Warburg Dillon Read LLC, which had also been retained as a financial advisor to
MEDE AMERICA, and discussed the possibility of Healtheon acquiring MEDE AMERICA.
Further discussions with Healtheon were conducted during the third week of
March.
On April 1, 1999, MEDE AMERICA and Healtheon entered into a confidentiality
agreement.
From April 6, 1999 through April 9, 1999, representatives of Healtheon and
its legal and financial advisors conducted business and legal due diligence
meetings in Uniondale, New York. On April 9, 1999, Healtheon presented MEDE
AMERICA with a reorganization agreement for the acquisition of MEDE AMERICA by
Healtheon.
From April 12, 1999 through April 15, 1999, representatives of MEDE
AMERICA, together with their legal and financial advisors, conducted business
and legal due diligence meetings in Santa Clara,
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California. At the same time, representatives of both parties began negotiating
the terms of the proposed merger agreement. The negotiation included discussions
regarding:
- the proposed exchange ratios, and related minimum and maximum thresholds
given possible fluctuations in the price of Healtheon common stock
- the scope of representations and warranties to be made by the parties
- conditions to consummation of a reorganization
- possible post-reorganization employment arrangements with key employees
of MEDE AMERICA
- treatment of MEDE AMERICA stock options
- the scope of the "fiduciary out" provisions of the reorganization
agreement, which would permit the board of directors to respond to
unsolicited offers under limited circumstances
- the circumstances under which the reorganization agreement could be
terminated by either party
- the request of Healtheon for voting agreements with the major
stockholders of MEDE AMERICA
On April 14, 1999, the MEDE AMERICA board of directors met to discuss the
progress of the transaction. At this meeting, MEDE AMERICA's legal advisors
discussed the board's fiduciary duties in considering a strategic business
combination and strategic alternatives and discussed the terms of the draft
reorganization agreement and related documents. The board authorized Mr. Staudt
and MEDE AMERICA's legal and financial advisors to continue discussions with
Healtheon and the negotiation of the proposed reorganization agreement.
The MEDE AMERICA board met again on April 16, 1999 to assess the status of
the transaction. At this meeting, MEDE AMERICA's senior management and legal and
financial advisors reviewed:
- the status of negotiations of the proposed transaction
- the results of the due diligence evaluation of Healtheon
- the benefits and risks of the transaction with Healtheon
- the principal terms of the draft merger agreement and related documents.
The board directed Mr. Staudt and MEDE AMERICA's legal and financial
advisors to continue the negotiations.
Negotiations of a definitive reorganization agreement and due diligence
continued through the weekend of April 16 - 18, 1999. Morgan Stanley was
formally engaged by Healtheon on April 19, 1999 to provide it financial advisory
services in connection with the MEDE AMERICA reorganization. During the evening
of April 19, 1999, the MEDE AMERICA board met, together with its financial and
legal advisors, to consider various aspects of the Healtheon proposal, including
the exchange ratio of 0.6593 shares of Healtheon common stock for each share of
MEDE AMERICA stock, and the terms of the proposed "collar" arrangement. MEDE
AMERICA's legal counsel summarized the principal terms of the reorganization
agreement and updated the Board on the status of open points in the
negotiations. Salomon Smith Barney reviewed the financial analyses it performed
in connection with its evaluation of the exchange ratio and rendered to the MEDE
AMERICA board an oral opinion, subject to review of definitive documentation and
other customary matters, as to the fairness, from a financial point of view, of
the exchange ratio to the holders of MEDE AMERICA common stock. Thereafter, the
board unanimously approved the transaction, approved the reorganization
agreement and authorized Mr. Staudt to negotiate the remaining issues with
representatives of Healtheon.
On April 19, 1999, there was a special meeting of the board of directors of
Healtheon which included a discussion of the reorganization agreement and
related transactions. Morgan Stanley discussed its analyses of the merger with
Healtheon, and responded to various questions raised by members of the Healtheon
board of directors regarding its analyses. The Healtheon board of directors
reviewed a draft of the reorganization agreement, the stock option agreement and
related documents. After considering the terms of the proposed transaction, the
Healtheon board of directors determined that the reorganization was
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fair to Healtheon and that the proposed reorganization was in the best interests
of Healtheon. The Healtheon board of directors then unanimously approved the
reorganization agreement and its exhibits, including the stock option agreement,
and the reorganization.
On April 20, 1999, the reorganization agreement was executed and a joint
press release was issued prior to the opening of trading on April 21, 1999.
In June 1999, following the announcement of the proposed Healtheon-WebMD
reorganization, Mr. de Nicola, on behalf of the MEDE AMERICA board, requested
that Healtheon agree to amend the collar arrangement to prevent MEDE AMERICA
stockholders from being prejudiced by the likely delay in the closing of the
MEDE AMERICA reorganization caused by the Healtheon-WebMD reorganization.
Healtheon and MEDE AMERICA agreed to base the adjustments to the exchange ratio
on the lower of the average closing price of Healtheon common stock for the ten
business days ending July 30, 1999 or the ten day period ending two business
days before the MEDE AMERICA stockholders meeting, and to extend the final date
for the consummation of the MEDE AMERICA reorganization from September 30, 1999
to December 15, 1999.
On August 2, 1999, the MEDE AMERICA board met together with its financial
and legal advisors, to consider the impact of the proposed reorganizations of
Healtheon, WebMD and Medcast on the board's recommendation of the MEDE AMERICA
reorganization, and to formally approve the amendment of the reorganization
agreement. Salomon Smith Barney reviewed the updated financial analyses it had
performed, taking into consideration the proposed reorganizations between
Healtheon, WebMD and Medcast, and rendered to the MEDE AMERICA board an oral
opinion, subject to review of definitive documentation of the amendment and
other customary matters, as to the fairness of the modified exchange ratio from
a financial point of view. The MEDE AMERICA board thereafter unanimously
reconfirmed its approval of the transaction and the amended reorganization
agreement.
JOINT REASONS FOR THE MEDE AMERICA REORGANIZATION
MEDE AMERICA's and Healtheon's boards of directors have determined that the
MEDE AMERICA reorganization is in the best interests of the stockholders of
their respective companies. They concluded that the combined company following
the reorganization would have the potential to realize long-term improved
operating and financial results and a stronger competitive position. The boards
of directors believe that the combined company will:
- expand each company's connected network of customers and partners,
accelerating our efforts towards achieving critical mass in the
healthcare industry and strengthening our competitive positions.
Healtheon/WebMD is expected to offer connectivity and transactions for
physicians, consumers and healthcare institutions over a network
consisting of approximately 540 payers, 180,000 physicians, 1,100
hospitals, 42,000 pharmacies, 10,000 dentists and 200 affiliate partners
- increase each company's transaction volume
- position Healtheon/WebMD to migrate MEDE AMERICA's large, installed base
of prominent healthcare institutions and professionals to Healtheon's
Internet-based platform and front-end Web connectivity
- broaden Healtheon/WebMD's offerings of Internet-based financial and
clinical transactions services, and create enhanced cross-selling
opportunities
- facilitate electronic prescriptions among physicians, consumers and
pharmacies because of our expanded connectivity
- create a strong combined management team
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MEDE AMERICA'S REASONS FOR THE MEDE AMERICA REORGANIZATION
The board of directors of MEDE AMERICA has determined that the terms of the
merger are fair to, and in the best interests of, MEDE AMERICA and its
stockholders. ACCORDINGLY, THE MEDE AMERICA BOARD RECOMMENDS THAT YOU VOTE FOR
APPROVAL OF THE REORGANIZATION AGREEMENT AND THE MERGER.
MEDE AMERICA's board consulted with MEDE AMERICA's senior management as
well as its legal counsel, independent accountants and financial advisors in
reaching its decision to approve the MEDE AMERICA reorganization. Among the
factors considered by MEDE AMERICA's board in its deliberations were the
following:
- current industry, economic and market conditions and trends
- historical information concerning Healtheon's and MEDE AMERICA's
respective financial performance, results of operations, assets,
liabilities, operations, technology, management and competitive position,
including Healtheon's public reports filed with the SEC
- MEDE AMERICA's management's view of the financial condition, results of
operations, assets, liabilities, businesses and prospects of MEDE AMERICA
as a separate entity and with Healtheon after giving effect to the
reorganization
- the current and historical market prices of the shares of both MEDE
AMERICA and Healtheon
- current market conditions and historical trading information with respect
to Healtheon's common stock, including price variability, limited public
float compared to the total shares outstanding and the number of shares
that will become free of lockup restrictions and eligible for public sale
in the future
- other merger transactions in the healthcare electronic data interchange
industry
- the terms and conditions of the merger agreement, including the purchase
price protection and provisions which would permit MEDE AMERICA to pursue
and accept other proposals
In reaching its decision, the MEDE AMERICA board identified several
potential benefits of the merger in addition to the joint benefits identified
above, including the following:
- the combination with Healtheon will allow MEDE AMERICA to access internet
e-commerce technology at a faster pace than could be achieved through
internal development, enabling MEDE AMERICA to accelerate growth in
internet transaction volume and related revenues
- the implied value of the merger consideration on the date of the
reorganization agreement, which was $30.14 and represented a premium of
approximately 37% over the market price of MEDE AMERICA's stock
immediately before the announcement of the transaction and 132% over the
price to the public in MEDE AMERICA's IPO, which had occurred two months
before
- the opinion of Salomon Smith Barney as to the fairness, from a financial
point of view, of the exchange ratio to the holders of MEDE AMERICA
common stock. This opinion is subject to assumptions and limitations
noted in the opinion and described under "Opinion of MEDE AMERICA's
financial advisor," and stockholders should carefully read both that
section and the opinion of Salomon Smith Barney, which is attached to
this document as Annex E
- the opportunity afforded to MEDE AMERICA stockholders to participate in
the potential growth of the combined company following the reorganization
or to realize their investment in a market that has been more active and
liquid than the market for MEDE AMERICA stock
- the tax-free nature of the merger, which will allow MEDE AMERICA
stockholders to defer tax on gains until they sell the Healtheon stock
they receive in the reorganization
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The MEDE AMERICA board also identified and considered a variety of
potential negative factors in its deliberations concerning the reorganization,
including, but not limited to:
- the risk to MEDE AMERICA's stockholders that the value to be received in
the reorganization could decline significantly due to potential declines
in the trading price of Healtheon stock, which has been extremely
volatile since its IPO
- the possibility that the $15.0 million termination fee could have the
effect of discouraging more favorable offers
- the loss of control over the future operations of MEDE AMERICA following
the reorganization
- the impact of the loss of MEDE AMERICA's status as an independent company
on MEDE AMERICA's stockholders, optionholders, employees and customers
- the risk that the potential strategic benefits sought in the MEDE AMERICA
reorganization might not be realized
- the possibility that the MEDE AMERICA reorganization might not be
consummated and the potential adverse effects of the public announcement
of the MEDE AMERICA reorganization on:
- MEDE AMERICA's sales and operating results
- MEDE AMERICA's ability to attract and retain key employees
- MEDE AMERICA's overall competitive position
- the risk that, despite the efforts of Healtheon and MEDE AMERICA, key
technical and management personnel might not remain employees of
Healtheon/WebMD following the closing of the merger
- the transaction costs expected to be incurred in connection with the
reorganization transactions and the other risks described under "Risk
Factors" beginning on page 34.
After due consideration, the MEDE AMERICA board concluded that the risks
associated with the proposed MEDE AMERICA reorganization were outweighed by the
potential benefits of the merger.
During the process of evaluating the Healtheon offer, the MEDE AMERICA's
board also considered the provisions of the merger agreement that prohibited
solicitation of third-party bids and the acceptance, approval or recommendation
of any unsolicited third-party bids. After fully discussing these matters during
its deliberations, the MEDE AMERICA board determined that the benefits of the
Healtheon offer justified these conditions and proceeded to approve the merger.
The foregoing discussion of the information and factors considered by the
MEDE AMERICA board is not intended to be exhaustive but is believed to include
all material factors considered by MEDE AMERICA's board. In view of the
complexity and wide variety of information and factors, both positive and
negative, considered by the MEDE AMERICA board, it did not find it practical to
quantify, rank or otherwise assign relative or specific weights to the factors
considered. In addition, the MEDE AMERICA board did not reach any specific
conclusion with respect to each of the factors considered, or any aspect of any
particular factor, but, rather, conducted an overall analysis of the factors
described above, including thorough discussions with MEDE AMERICA's management
and legal, financial and accounting advisors. In considering the factors
described above, individual members of the MEDE AMERICA board may have given
different weight to different factors. The MEDE AMERICA board of directors
considered all these factors as a whole and believed the factors supported its
determination to approve the Healtheon/MEDE AMERICA reorganization. After taking
into consideration all of the factors set forth above, MEDE AMERICA's board
concluded that the Healtheon/MEDE AMERICA reorganization was fair to, and in the
best interests of, MEDE AMERICA and its stockholders and that MEDE AMERICA
should proceed with the MEDE AMERICA reorganization.
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RECOMMENDATION OF MEDE AMERICA'S BOARD OF DIRECTORS
AFTER CAREFULLY EVALUATING THESE FACTORS, BOTH POSITIVE AND NEGATIVE, THE
BOARD OF DIRECTORS OF MEDE AMERICA HAS DETERMINED THAT THE MEDE AMERICA
REORGANIZATION IS IN YOUR BEST INTERESTS AND UNANIMOUSLY RECOMMENDS THAT YOU
VOTE FOR APPROVAL AND ADOPTION OF THE REORGANIZATION AGREEMENT AND APPROVAL OF
THE REORGANIZATION.
In considering the recommendation of the MEDE AMERICA board of directors
with respect to the MEDE AMERICA reorganization, you should be aware that
certain directors and officers of MEDE AMERICA have interests in the
reorganization that are different from, or are in addition to the interests of
MEDE AMERICA stockholders generally. For a description of these interests, see
the section entitled "Interests of directors, officers and affiliates in the
MEDE AMERICA reorganization" on page 107.
OPINION OF MEDE AMERICA'S FINANCIAL ADVISOR
Salomon Smith Barney was retained by MEDE AMERICA to act as its financial
advisor in connection with the proposed MEDE AMERICA reorganization. In
connection with its engagement, MEDE AMERICA requested that Salomon Smith Barney
evaluate the fairness, from a financial point of view, to the holders of MEDE
AMERICA common stock of the exchange ratio provided for in the reorganization.
On April 19, 1999, at a meeting of the MEDE AMERICA board held to evaluate the
proposed reorganization, Salomon Smith Barney delivered to the MEDE AMERICA
board an oral opinion, subsequently confirmed by delivery of a written opinion
dated April 20, 1999, the date of the reorganization agreement, to the effect
that, as of the date of the written opinion and based on and subject to the
matters stated in the opinion, the exchange ratio was fair, from a financial
point of view, to the holders of MEDE AMERICA common stock. Salomon Smith Barney
confirmed this opinion by delivery of a written opinion dated August 2, 1999,
the date of the amendment to the reorganization agreement. For purposes of its
opinion dated August 2, 1999, Salomon Smith Barney reviewed the factors
considered and assumptions made, and updated the material analyses performed, in
connection with its earlier opinion.
In arriving at its opinion, Salomon Smith Barney:
- reviewed the reorganization agreement
- held discussions with senior officers, directors and other
representatives and advisors of MEDE AMERICA and senior officers and
other representatives and advisors of Healtheon concerning the
businesses, operations and prospects of MEDE AMERICA and Healtheon
- examined publicly available business and financial information relating
to MEDE AMERICA and Healtheon as well as financial forecasts and other
information and data for MEDE AMERICA and Healtheon which the management
of MEDE AMERICA and Healtheon provided to or otherwise discussed with
Salomon Smith Barney, including information relating to strategic
implications and operational benefits anticipated to result from the
reorganization
- reviewed the financial terms of the reorganization as described in the
reorganization agreement in relation to, among other things, current and
historical market prices and trading volumes of MEDE AMERICA common stock
and Healtheon common stock, the historical and projected earnings and
other operating data of MEDE AMERICA and Healtheon, and the
capitalization and financial condition of MEDE AMERICA and Healtheon
- considered, to the extent publicly available, the financial terms of
other transactions recently effected which Salomon Smith Barney
considered relevant in evaluating the reorganization
- analyzed financial, stock market and other publicly available information
relating to the businesses of other companies whose operations Salomon
Smith Barney considered relevant in evaluating those of MEDE AMERICA and
Healtheon
- evaluated the potential pro forma financial impact of the reorganization
on Healtheon
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- conducted other analyses and examinations and considered other financial,
economic and market criteria as Salomon Smith Barney deemed appropriate
in arriving at its opinion
In rendering its opinion, Salomon Smith Barney assumed and relied, without
independent verification, on the accuracy and completeness of all financial and
other information and data that it reviewed or considered. With respect to these
financial forecasts and other information and data, the managements of MEDE
AMERICA and Healtheon advised Salomon Smith Barney that they were reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the managements of MEDE AMERICA and Healtheon as to the future
financial performance of MEDE AMERICA and Healtheon and the strategic
implications and operational benefits anticipated to result from the
reorganization.
Salomon Smith Barney assumed, with MEDE AMERICA's consent, that the
reorganization will be treated as a "tax-free" reorganization for federal income
tax purposes. Salomon Smith Barney also assumed, with MEDE AMERICA's consent,
that the proposed WebMD and MedCast transactions will be completed consistent
with their terms in all material respects and, to the extent relevant to its
analysis evaluated Healtheon pro forma for those transactions. Salomon Smith
Barney's opinion relates to the relative values of MEDE AMERICA and Healtheon.
Salomon Smith Barney did not express any opinion as to what the value of
Healtheon common stock actually will be when issued to MEDE AMERICA stockholders
in the reorganization or the prices at which the Healtheon common stock will
trade after the reorganization. Salomon Smith Barney did not make and was not
provided with an independent evaluation or appraisal of the assets or
liabilities, contingent or otherwise, of MEDE AMERICA or Healtheon, and did not
make any physical inspection of the properties or assets of MEDE AMERICA or
Healtheon.
In connection with its opinion, Salomon Smith Barney was not requested to,
and did not, solicit third party indications of interest in the possible
acquisition of all or a part of MEDE AMERICA; however, Salomon Smith Barney, at
the request of MEDE AMERICA, did solicit third party indications of interest in
the possible acquisition of MEDE AMERICA prior to MEDE AMERICA's initial public
offering in February 1999. Salomon Smith Barney expressed no view as to, and its
opinion does not address, the relative merits of the reorganization as compared
to any alternative business strategies that might exist for MEDE AMERICA or the
effect of any other transaction in which MEDE AMERICA might engage. Salomon
Smith Barney's opinion was necessarily based on information available, and
financial, stock market and other conditions and circumstances existing and
disclosed, to Salomon Smith Barney as of the date of its opinion. Although
Salomon Smith Barney evaluated the exchange ratio from a financial point of
view, Salomon Smith Barney was not asked to and did not recommend the specific
consideration payable in the reorganization, which was determined through
negotiation between MEDE AMERICA and Healtheon. No other instructions or
limitations were imposed by MEDE AMERICA on Salomon Smith Barney with respect to
the investigations made or procedures followed by Salomon Smith Barney in
rendering its opinion.
MEDE AMERICA selected Salomon Smith Barney based on its experience,
expertise and familiarity with MEDE AMERICA and its business. Salomon Smith
Barney is an internationally recognized investment banking firm that regularly
engages in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes.
THE FULL TEXT OF SALOMON SMITH BARNEY'S OPINION DATED AUGUST 2, 1999, WHICH
DESCRIBES THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW
UNDERTAKEN, IS ATTACHED TO THIS DOCUMENT AS ANNEX F AND INCORPORATED BY
REFERENCE IN THIS DOCUMENT. SALOMON SMITH BARNEY'S OPINION IS DIRECTED TO THE
MEDE AMERICA BOARD AND RELATES ONLY TO THE FAIRNESS OF THE EXCHANGE RATIO FROM A
FINANCIAL POINT OF VIEW, DOES NOT ADDRESS ANY OTHER ASPECT OF THE REORGANIZATION
OR ANY RELATED TRANSACTION AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
STOCKHOLDER WITH RESPECT TO ANY MATTER RELATING TO THE PROPOSED REORGANIZATION.
In preparing its opinion, Salomon Smith Barney performed a variety of
financial and comparative analyses, including those described below relating to
Salomon Smith Barney's opinion dated August 2,
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1999. The summary of these analyses is not a complete description of the
analyses underlying Salomon Smith Barney's opinion. The preparation of a
fairness opinion is a complex analytic process involving various determinations
as to the most appropriate and relevant methods of financial analysis and the
application of those methods to the particular circumstances and, therefore, a
fairness opinion is not readily susceptible to summary description. Salomon
Smith Barney's opinion was not based on any single factor or analysis, but
rather on the totality of the factors considered and analyses performed.
Accordingly, Salomon Smith Barney believes that its analyses must be considered
as a whole and that selecting portions of its analyses and factors or focusing
on information presented in tabular format, without considering all analyses and
factors or the narrative description of the analyses, could create a misleading
or incomplete view of the processes underlying its analyses and opinion. The
order in which Salomon Smith Barney's analyses are described, and the results
derived from its analyses, do not represent the relative weight or importance
given to the analyses by Salomon Smith Barney.
In its analyses, Salomon Smith Barney considered industry performance,
general business, economic, market and financial conditions and other matters
existing as of the date of its opinion, many of which are beyond the control of
MEDE AMERICA and Healtheon. No company, transaction or business used in those
analyses as a comparison is identical to MEDE AMERICA, Healtheon or the proposed
reorganization, nor is an evaluation of those analyses entirely mathematical;
rather, the analyses involve complex considerations and judgments concerning
financial and operating characteristics and other factors that could affect the
acquisition, public trading or other values of the companies, business segments
or transactions being analyzed.
The estimates contained in Salomon Smith Barney's analyses and the
valuation ranges resulting from any particular analysis are not necessarily
indicative of actual values or predictive of future results or values, which may
be significantly more or less favorable than those suggested by its analyses. In
addition, analyses relating to the value of businesses or securities do not
purport to be appraisals or to reflect the prices at which businesses or
securities actually may be sold. Accordingly, Salomon Smith Barney's analyses
and estimates are inherently subject to substantial uncertainty.
Salomon Smith Barney's opinion and analyses were only one of many factors
considered by the MEDE AMERICA board in its evaluation of the reorganization and
should not be viewed as determinative of the views of the MEDE AMERICA board or
management with respect to the exchange ratio or the proposed reorganization.
The following is a summary of the material financial analyses performed by
Salomon Smith Barney in connection with the rendering of its opinion dated
August 2, 1999. THE FINANCIAL ANALYSES SUMMARIZED BELOW INCLUDE INFORMATION
PRESENTED IN TABULAR FORMAT. IN ORDER TO FULLY UNDERSTAND SALOMON SMITH BARNEY'S
FINANCIAL ANALYSES, THE TABLES MUST BE READ TOGETHER WITH THE TEXT OF EACH
SUMMARY. THE TABLES ALONE DO NOT CONSTITUTE A COMPLETE DESCRIPTION OF THE
FINANCIAL ANALYSES. CONSIDERING THE DATA SET FORTH BELOW WITHOUT CONSIDERING THE
FULL NARRATIVE DESCRIPTION OF THE FINANCIAL ANALYSES, INCLUDING THE
METHODOLOGIES AND ASSUMPTIONS UNDERLYING THE ANALYSES, COULD CREATE A MISLEADING
OR INCOMPLETE VIEW OF SALOMON SMITH BARNEY'S FINANCIAL ANALYSES.
MEDE AMERICA public market analysis
Salomon Smith Barney derived an implied equity reference range for MEDE
AMERICA by performing a public market analysis. A public market analysis
provides a valuation range based, among other things, on the trading multiples
of a group of publicly traded peer companies. Salomon Smith Barney compared
financial information of MEDE AMERICA with similar information for the following
two groups of publicly traded companies:
Healthcare Electronic Data Interchange Companies
- MedQuist Inc.
- National Data Corporation
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- QuadraMed Corporation
Other Electronic Data Interchange Companies
- Harbinger Corp.
- QRS Corporation
- Sterling Commerce, Inc.
Salomon Smith Barney compared, among other things, market prices as a
multiple of estimated calendar years 1999 and 2000 earnings per share, adjusted
for after-tax amortization related to purchase accounting, and firm value,
calculated as equity value, plus debt, less cash, as a multiple of estimated
calendar year 1999 earnings before interest, taxes, depreciation and
amortization, commonly known as EBITDA. All multiples were based on closing
stock prices on July 28, 1999. Estimated financial data for the selected
companies were based on publicly available research analysts' estimates and
estimated financial data for MEDE AMERICA were based on internal estimates of
the management of MEDE AMERICA.
Applying a range of selected multiples of estimated calendar years 1999 and
2000 adjusted earnings per share and estimated calendar year 1999 EBITDA for the
selected companies, excluding QuadraMed Corporation whose financial statistics
were significantly more depressed than those of the other selected companies, to
corresponding financial data of MEDE AMERICA resulted in an implied equity
reference range for MEDE AMERICA of approximately $18.56 to $22.29 per share, as
compared to the equity value implied by the exchange ratio of approximately
$34.65 per share based on the closing stock price of Healtheon common stock on
July 28, 1999.
Precedent transactions analysis
Salomon Smith Barney derived an implied per share equity reference range
for MEDE AMERICA by performing a precedent transactions analysis. A precedent
transaction analysis provides a valuation range based, among other things, on
the purchase prices paid in transactions involving peer companies in the same or
similar industries as the company or business segment analyzed. Using publicly
available information, Salomon Smith Barney reviewed the purchase prices and
implied transaction value multiples paid or proposed to be paid in the following
seven selected transactions:
<TABLE>
<CAPTION>
ACQUIROR TARGET
-------- ------
<S> <C>
- - Quintiles Transnational Corp. - Envoy Corporation
- - HBO & Company - Access Health, Inc.
- - QuadraMed Corporation - Pyramid Health Group
- - Envoy Corporation - ExpressBill, Inc.
- - National Data Corporation - Physician Support Systems Inc.
- - National Data Corporation - C.I.S. Technologies, Inc.
- - Envoy Corporation - National Electronic Information Corporation
- - First Data Corporation - Merchant Processing & POS Business (Envoy
Corporation)
</TABLE>
Salomon Smith Barney compared the firm values implied by the purchase
prices in the selected transactions as multiples of, among other things, latest
12 months revenues and EBITDA. All multiples were based on financial information
available at the announcement date of the relevant transaction.
Applying a range of selected multiples for the selected transactions of
latest 12 months revenues and EBITDA to calendar year 1998 revenues and
estimated calendar year 1999 EBITDA of MEDE AMERICA resulted in an implied
equity reference range for MEDE AMERICA of approximately $21.88 to $27.48 per
share, as compared to the equity value implied by the exchange ratio of
approximately $34.65 per share based on the closing stock price of Healtheon
common stock on July 28, 1999.
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Discounted cash flow analysis
Salomon Smith Barney derived an implied per share equity reference range
for MEDE AMERICA by performing a five-year discounted cash flow analysis, based
on internal estimates of the management of MEDE AMERICA, on the stand-alone
unlevered free cash flows of MEDE AMERICA. A discounted cash flow analysis
determines the net present value of the projected free cash flows of a company
or business segment. The range of estimated terminal values for MEDE AMERICA was
calculated by applying terminal value multiples of 13.0x to 17.0x, with
particular focus on terminal value multiples of 14.0x to 16.0x, to MEDE
AMERICA's projected 2003 EBITDA. The cash flows and terminal values were
discounted to present value using discount rates ranging from 12% to 14%, with
particular focus on discount rates of 12.5% to 13.5%.
Based on terminal multiples of 14.0x to 16.0x and discount rates of 12.5%
to 13.5%, this analysis resulted in an implied equity reference range for MEDE
AMERICA of approximately $26.59 to $30.51 per share, as compared to the equity
value implied by the exchange ratio of approximately $34.65 per share based on
the closing stock price of Healtheon common stock on July 28, 1999.
Premiums analysis
Salomon Smith Barney analyzed the premiums implied by the exchange ratio in
the reorganization based on the closing stock price of Healtheon common stock on
July 28, 1999, April 20, 1999 and based on the closing stock prices of MEDE
AMERICA common stock on the date of its initial public offering, over the 10 day
trading period ended April 20, 1999. This analysis indicated the following
implied premiums:
<TABLE>
<CAPTION>
IMPLIED PREMIUM FOR
MEDE AMERICA AT
PERIOD EXCHANGE RATIO
------ -------------------
<S> <C>
Initial public offering of MEDE AMERICA on February 1,
1999...................................................... 166.5%
10 trading day average ended April 20, 1999................. 73.8%
April 20, 1999.............................................. 57.1%
July 28, 1999............................................... 15.3%
</TABLE>
Historical exchange ratio analysis
Salomon Smith Barney reviewed the relationship between the daily closing
prices of MEDE AMERICA common stock and Healtheon common stock during the
periods beginning on the date of Healtheon's initial public offering on February
11, 1999 through April 20, 1999 and from April 20, 1999 through July 28, 1999.
Implied historical exchange ratios for this analysis were determined by dividing
the price per share of MEDE AMERICA common stock by the price per share of
Healtheon common stock over the relevant periods. The following compares the
exchange ratio in the reorganization with the high, low and average of these
implied historical exchange ratios:
<TABLE>
<CAPTION>
FEBRUARY 11, 1999 APRIL 20, 1999
TO TO
APRIL 20, 1999 JULY 28, 1999
----------------- --------------
<S> <C> <C> <C>
High...................................... 0.728 0.602
Low....................................... 0.286 0.338
Average................................... 0.465 0.464
Reorganization Exchange Ratio............. 0.6593
</TABLE>
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Pro forma earnings per share impact on Healtheon
Salomon Smith Barney analyzed the potential pro forma financial effects of
the reorganization, taken together with the proposed WebMD and Medcast
transactions, on, among other things, Healtheon's earnings per share for
calendar years 1999 and 2000. Estimated financial data used in this analysis
were based on internal estimates of the managements of MEDE AMERICA, Healtheon,
WebMD and Medcast without giving effect to potential synergies that may result
from the reorganization or the WebMD and Medcast transactions. The results of
this analysis suggested that the reorganization could be dilutive to, or result
in a decrease in, Healtheon's earnings per share in calendar years 1999 and
2000. The actual results achieved by the combined company may vary from
projected results and the variations may be material.
Miscellaneous
MEDE AMERICA has agreed to pay Salomon Smith Barney upon completion of the
reorganization an aggregate financial advisory fee equal to 0.7% of the total
consideration, including liabilities assumed, payable in connection with the
reorganization. MEDE AMERICA has also agreed to reimburse Salomon Smith Barney
for its travel and other out-of-pocket expenses, including the fees and expenses
of its legal counsel, and to indemnify Salomon Smith Barney and related persons
against liabilities, including liabilities under the federal securities laws,
arising out of its engagement.
Salomon Smith Barney has advised MEDE AMERICA that, in the ordinary course
of business, Salomon Smith Barney and its affiliates may actively trade or hold
the securities of MEDE AMERICA and Healtheon for their own account or for the
account of customers and, accordingly, may at any time hold a long or short
position in those securities. Salomon Smith Barney has in the past provided
investment banking services to MEDE AMERICA unrelated to the proposed
reorganization, having acted as a managing underwriter for MEDE AMERICA's
initial public offering for which Salomon Smith Barney received total
underwriting discounts and commissions of approximately $2.2 million. In
addition, Salomon Smith Barney and its affiliates, including Citigroup Inc. and
its affiliates, may maintain relationships with MEDE AMERICA, Healtheon and
their respective affiliates.
INTERESTS OF DIRECTORS, OFFICERS AND AFFILIATES IN THE MEDE AMERICA
REORGANIZATION
When considering the recommendation of MEDE AMERICA's board of directors,
MEDE AMERICA stockholders should be aware that some of the directors and
officers of MEDE AMERICA have interests in the reorganization and have
arrangements that are different from, or are in addition to those of MEDE
AMERICA stockholders generally. These include:
- Board of Directors. Welsh, Carson, Anderson & Stowe and William Blair &
Co., L.L.C., two significant stockholders of MEDE AMERICA, will have the
right to select one nominee to the board of directors of Healtheon.
Thomas E. McInerney and Anthony J. de Nicola, directors of MEDE AMERICA,
are general partners of WCAS. Timothy M. Murray, a director of MEDE
AMERICA, is a principal of William Blair & Co.
- Registration Rights. Welsh, Carson, Anderson & Stowe and William Blair &
Co., L.L.C. will have the right to require Healtheon/WebMD to register
for resale up to 6,000,000 of the shares of Healtheon/WebMD common stock
that they receive as a result of the reorganization.
- Stock Option Grants. Employees of MEDE AMERICA will receive options to
purchase an aggregate of 700,000 shares of Healtheon/WebMD common stock,
with an exercise price of $45.72 per share, following the completion of
the reorganization, to be allocated individually at a later date. The
options will vest over four years, and are intended to serve as
compensation for continued service to Healtheon/WebMD.
- Potential Vesting of Options. In the event that employees of MEDE AMERICA
have their employment terminated without cause or are constructively
terminated by Healtheon/WebMD
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within two years after the completion of the reorganization, any options
that were held by those employees prior to the completion of the
reorganization will vest fully.
- Vesting of Warrants. Medic Computer Systems, Inc. holds a warrant to
purchase 1,250,000 shares of MEDE AMERICA common stock that would vest at
the time the merger is completed. One of the members of the MEDE AMERICA
board of directors, Alan Winchester, sits as a designee of Medic
- Transaction Fee. If the MEDE AMERICA reorganization is completed, William
Blair & Co., L.L.C. will receive a transaction fee of 0.05% of the MEDE
AMERICA reorganization transaction value, which is based on the closing
price of the Healtheon common stock for the five trading days preceding
the closing
- Indemnification. Healtheon and MEDE AMERICA directors have customary
rights to indemnification
As a result, these directors could be more likely to vote to approve the
reorganization agreement and the reorganization than if they did not hold these
interests.
COMPLETION AND EFFECTIVENESS OF THE MEDE AMERICA REORGANIZATION
The reorganization will be completed when all of the conditions to
completion of the reorganization are satisfied or waived, including approval and
adoption of the reorganization agreement and approval of the merger by the
stockholders of MEDE AMERICA. The merger will become effective upon the filing
of a certificate of merger with the State of Delaware.
STRUCTURE OF THE MEDE AMERICA REORGANIZATION AND CONVERSION OF MEDE AMERICA
COMMON STOCK
Merc Acquisition Corp., a newly formed and wholly owned subsidiary of
Healtheon/WebMD, will be merged with and into MEDE AMERICA. As a result of the
merger, the separate corporate existence of Merc will cease and MEDE AMERICA
will survive the reorganization as a wholly owned subsidiary of Healtheon/WebMD.
Upon completion of the reorganization, each outstanding share of MEDE
AMERICA common stock will be automatically canceled and converted into the right
to receive a specific number of shares of Healtheon/WebMD common stock. The
number of shares of Healtheon/WebMD common stock that will be issued in exchange
for each outstanding share of MEDE AMERICA common stock is referred to as the
exchange ratio. The exchange ratio in the reorganization will depend upon the
average closing price of Healtheon common stock as reported on Nasdaq for the
ten trading day period ending two days before the date of the MEDE AMERICA
stockholder meeting.
- If the average closing sale price of Healtheon common stock for such
period is equal to or greater than $38.68, the exchange ratio in the
reorganization will be 0.6593
- If the average closing sale price of Healtheon common stock for the ten
day period ending two days before the special meeting is less than
$38.68, Healtheon may elect to adjust the exchange ratio no later than 24
hours prior to the MEDE AMERICA stockholder meeting, to equal the
quotient obtained by dividing $25.50 by this lower average price
The exchange ratio will also be adjusted to reflect the effect of any stock
split, reverse stock split, stock dividend, reorganization, recapitalization,
reclassification or other like change with respect to Healtheon common stock or
MEDE AMERICA common stock occurring prior to the completion of the
reorganization.
No certificate or scrip representing fractional shares of Healtheon/WebMD
common stock will be issued in connection with the merger. Instead MEDE AMERICA
stockholders will receive cash, without interest, in lieu of a fraction of a
share of Healtheon/WebMD common stock.
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EXCHANGE OF MEDE AMERICA STOCK CERTIFICATES FOR HEALTHEON/WEBMD STOCK
CERTIFICATES
When the reorganization is completed, Healtheon/WebMD's exchange agent will
mail to MEDE AMERICA stockholders a letter of transmittal and instructions for
use in surrendering MEDE AMERICA stock certificates in exchange for
Healtheon/WebMD stock certificates. When MEDE AMERICA stockholders deliver their
MEDE AMERICA stock certificates to the exchange agent along with an executed
letter of transmittal and any other required documents, their MEDE AMERICA stock
certificates will be canceled and MEDE AMERICA stockholders will receive
Healtheon/WebMD stock certificates. MEDE AMERICA stockholders will receive
payment in cash, without interest, in lieu of any fractional shares of
Healtheon/WebMD common stock which would have been otherwise issuable to MEDE
AMERICA stockholders in the reorganization.
YOU SHOULD NOT SUBMIT YOUR MEDE AMERICA STOCK CERTIFICATES FOR EXCHANGE
UNTIL YOU RECEIVE THE TRANSMITTAL INSTRUCTIONS AND A FORM OF LETTER OF
TRANSMITTAL FROM THE EXCHANGE AGENT.
MEDE AMERICA stockholders are not entitled to receive any dividends or
other distributions on Healtheon/WebMD common stock until the reorganization is
completed and they have surrendered their MEDE AMERICA stock certificates in
exchange for Healtheon/WebMD stock certificates.
Subject to the effect of applicable laws, promptly following surrender of
MEDE AMERICA stock certificates and the issuance of the corresponding
Healtheon/WebMD certificates, MEDE AMERICA stockholders will be paid the amount
of any dividends or other distributions, without interest, with a record date
after the completion of the reorganization which were previously paid with
respect to their whole shares of Healtheon/WebMD common stock. At the
appropriate payment date, MEDE AMERICA stockholders will also receive the amount
of any dividends or other distributions, without interest, with a record date
after the completion of the merger and a payment date after they exchange their
MEDE AMERICA stock certificates for Healtheon/WebMD stock certificates.
Healtheon/WebMD will only issue MEDE AMERICA stockholders a Healtheon/WebMD
stock certificate or a check in lieu of a fractional share in a name in which
the surrendered MEDE AMERICA stock certificate is registered. If you wish to
have your certificate issued in another name you must present the exchange agent
with all documents required to show and effect the unrecorded transfer of
ownership and show that you paid any applicable stock transfer taxes.
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS OF THE MEDE AMERICA
REORGANIZATION
This section summarizes material U.S. federal income tax considerations
relevant to the merger that apply to MEDE AMERICA stockholders. This discussion
is based on existing provisions of the Internal Revenue Code, existing treasury
regulations and current administrative rulings and court decisions, all of which
are subject to change. Any such change, which may or may not be retroactive,
could alter the tax consequences of the merger to you. The Internal Revenue
Service may adopt a contrary position.
We do not discuss all U.S. federal income tax considerations that may be
relevant to you in light of your particular circumstances. Factors that could
alter the tax consequences of the merger to you include:
- if you are a dealer in securities
- if you are a tax-exempt organization
- if you are subject to the alternative minimum tax provisions of the
Internal Revenue Code
- if you are a foreign person or entity
- if you are a financial institution or insurance company
- if you do not hold your MEDE AMERICA shares as capital assets
- if you acquired your shares in connection with stock option or stock
purchase plans or in other compensatory transactions
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- if you hold MEDE AMERICA shares as part of an integrated investment,
including a "straddle", comprised of shares of MEDE AMERICA common stock
and one or more other positions, or
- if you hold MEDE AMERICA shares subject to the constructive sale
provisions of Section 1259 of the Internal Revenue Code
In addition, we do not discuss the tax consequences of the reorganization
under foreign, state or local tax laws, the tax consequences of transactions
effectuated prior or subsequent to, or concurrently with, the reorganization,
whether or not any such transactions are undertaken in connection with the
reorganization, including without limitation any transaction in which MEDE
AMERICA shares are acquired or shares of Healtheon/WebMD common stock are
disposed of, or the tax consequences to holders of options, warrants or similar
rights to acquire MEDE AMERICA capital stock. ACCORDINGLY, WE URGE YOU TO
CONSULT YOUR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE
REORGANIZATION, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES TO YOU OF THE REORGANIZATION.
Tax implications for MEDE AMERICA and MEDE AMERICA stockholders
Counsel to Healtheon, Wilson Sonsini Goodrich & Rosati, and counsel to MEDE
AMERICA, Reboul, MacMurray, Hewitt, Maynard & Kristol, are of the opinion that
the merger of MEDE AMERICA with a wholly owned subsidiary of Healtheon/WebMD
will be a "reorganization" for U.S. federal income tax purposes within the
meaning of section 368(a) of the Internal Revenue Code. This means that:
- MEDE AMERICA stockholders will not recognize gain or loss when they
receive Healtheon/ WebMD common stock solely in exchange for their shares
of MEDE AMERICA common stock in the MEDE AMERICA merger, except on cash
received for a fractional share of Healtheon/ WebMD common stock
- Cash payments received by MEDE AMERICA stockholders for a fractional
share of Healtheon/ WebMD common stock should be treated as if such
fractional share had been issued in the merger and then redeemed by
Healtheon/WebMD. You should recognize gain or loss with respect to such
cash payment, measured by the difference, if any, between the amount of
cash received and the basis in such fractional share
- The aggregate tax basis of the Healtheon/WebMD common stock received by
holders of MEDE AMERICA common stock will be the same as the aggregate
tax basis of the MEDE AMERICA stock surrendered in the exchange
- The holding period of the Healtheon/WebMD common stock received by
holders of MEDE AMERICA stock in the MEDE AMERICA merger will include the
period the exchanged MEDE AMERICA stock was considered to be held,
provided that the MEDE AMERICA stock surrendered is held as a capital
asset at the time of the MEDE AMERICA reorganization
- MEDE AMERICA will not recognize gain solely as a result of the MEDE
AMERICA reorganization
Limitations on the tax opinions
MEDE AMERICA has not requested a ruling from the IRS with regard to any of
the federal income tax consequences of the MEDE AMERICA reorganization.
The opinions described above do not bind the IRS nor preclude it from
adopting a contrary position. These opinions are subject to qualifications and
are conditioned upon assumptions.
Consequences of a contrary IRS determination
A successful IRS challenge to the reorganization status of the MEDE AMERICA
reorganization would result in a MEDE AMERICA stockholder recognizing gain or
loss with respect to each share of MEDE AMERICA stock surrendered. This gain or
loss would equal the difference between the
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stockholder's basis in the MEDE AMERICA share and the fair market value, at the
time of the Healtheon-WebMD reorganization, of the Healtheon/WebMD common stock
received. In such event, a stockholder's aggregate basis in the Healtheon/WebMD
common stock received would equal its fair market value, and the stockholder's
holding period for the Healtheon/WebMD stock would begin the day after the MEDE
AMERICA reorganization.
Even if the MEDE AMERICA reorganization qualifies as a reorganization, a
recipient of shares of Healtheon/WebMD common stock would recognize gain to the
extent that those shares were considered to be received in exchange for
services. Gain would also have to be recognized to the extent that a holder of
MEDE AMERICA stock was treated as receiving, directly or indirectly,
consideration other than Healtheon/WebMD common stock in exchange for the
holder's MEDE AMERICA stock. All or a portion of those gain amounts may be
taxable as ordinary income.
ACCOUNTING TREATMENT OF THE MEDE AMERICA REORGANIZATION
Healtheon and MEDE AMERICA intend to account for the reorganization as a
purchase for financial reporting and accounting purposes, under generally
accepted accounting principles. After the reorganization, the results of
operations of MEDE AMERICA will be included in the consolidated financial
statements of Healtheon/WebMD. The purchase price will be allocated based on the
fair values of the assets acquired and the liabilities assumed. Any excess of
cost over fair value of the net tangible assets of MEDE AMERICA acquired will be
recorded as goodwill and other intangible assets and will be amortized by
charges to operations under generally accepted accounting principles. These
allocations will be made based upon valuations and other studies that have not
yet been finalized.
REGULATORY FILINGS AND APPROVALS REQUIRED TO COMPLETE THE MEDE AMERICA
REORGANIZATION
The reorganization is subject to the requirements of the Hart-Scott-Rodino
Antitrust Improvements Act, which prevents transactions from being completed
until required information and materials are furnished to the Antitrust Division
of the Department of Justice and the Federal Trade Commission and the
appropriate waiting periods end or expire. Healtheon, MEDE AMERICA and the
applicable shareholders of MEDE AMERICA have filed the required information and
materials with the Department of Justice and the Federal Trade Commission and
the applicable waiting period has expired. The requirements of Hart-Scott-Rodino
will be satisfied if the merger is completed within one year from the
termination of the waiting period.
The Antitrust Division of the Department of Justice or the Federal Trade
Commission may challenge the reorganization on antitrust grounds either before
or after expiration of the waiting period. Accordingly, at any time before or
after the completion of the reorganization, either the Antitrust Division of the
Department of Justice or the Federal Trade Commission could take action under
the antitrust laws. Certain other persons could take action under the antitrust
laws, including seeking to enjoin the reorganization. Additionally, at any time
before or after the completion of the reorganization, notwithstanding that the
applicable waiting period expired or ended, any state could take action under
the antitrust laws. A challenge to the reorganization could be made and if a
challenge is made we may not prevail.
Neither Healtheon nor MEDE AMERICA is aware of any other material
governmental or regulatory approval required for completion of the
reorganization, other than the effectiveness of the registration statement of
which this proxy statement/prospectus is a part, and compliance with applicable
corporate law of Delaware.
RESTRICTIONS ON SALES OF SHARES BY AFFILIATES OF MEDE AMERICA AND HEALTHEON
The shares of Healtheon/WebMD common stock to be issued in the
reorganization will be registered under the Securities Act. These shares will be
freely transferable under the Securities Act, except for shares of
Healtheon/WebMD common stock issued to any person who is an affiliate of either
Healtheon/ WebMD or MEDE AMERICA. Persons who may be deemed to be affiliates
include individuals or entities
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that control, are controlled by, or are under common control of either Healtheon
or MEDE AMERICA and may include some of their respective officers and directors,
as well as their respective principal stockholders. Affiliates may not sell
their shares of Healtheon/WebMD common stock acquired in the reorganization
except pursuant to:
- an effective registration statement under the Securities Act covering the
resale of those shares,
- an exemption under paragraph (d) of Rule 145 under the Securities Act, or
- any other applicable exemption under the Securities Act.
LISTING ON THE NASDAQ NATIONAL MARKET OF HEALTHEON COMMON STOCK TO BE ISSUED IN
THE MEDE AMERICA REORGANIZATION
It is a condition to the closing of the reorganization that the shares of
Healtheon/WebMD common stock to be issued in the reorganization be approved for
listing on the Nasdaq National Market, subject to official notice of issuance.
DELISTING AND DEREGISTRATION OF MEDE AMERICA COMMON STOCK AFTER THE MEDE AMERICA
REORGANIZATION
If the reorganization is completed, MEDE AMERICA common stock will be
delisted from the Nasdaq National Market and will be deregistered under the
Securities Exchange Act.
OPERATIONS AFTER THE MEDE AMERICA REORGANIZATION
Following the reorganization, MEDE AMERICA will continue its operations as
a wholly owned subsidiary of Healtheon/WebMD. The stockholders of MEDE AMERICA
will become stockholders of Healtheon/WebMD, and their rights as stockholders
will be governed by the Healtheon/WebMD certificate of incorporation, the
Healtheon/WebMD bylaws and the laws of the State of Delaware. For a description
of the differences in the rights of stockholders of MEDE AMERICA and
Healtheon/WebMD, see "Comparison of rights of holders of MEDE AMERICA common
stock and Healtheon/WebMD common stock" on page 191.
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THE MEDE AMERICA REORGANIZATION AGREEMENT
REPRESENTATIONS AND WARRANTIES
Healtheon and MEDE AMERICA each made representations and warranties in the
reorganization agreement regarding aspects of their businesses, financial
condition, structure and other facts pertinent to the reorganization, including:
- capitalization
- changes in our businesses since December 31, 1998
- intellectual property used in our businesses
- material contracts
In addition, MEDE AMERICA made additional representations and warranties
regarding payments, if any, required to be made by MEDE AMERICA to employees and
directors because of the reorganization and the fairness opinion received by
MEDE AMERICA from its financial advisor.
The representations and warranties in the merger agreement are complicated
and not easily summarized. The reorganization agreement is attached to this
proxy statement/prospectus as Annex B and we urge you to read it carefully,
including the sections of the reorganization agreement entitled "Representations
and Warranties of the Company" and "Representations and Warranties of Parent and
Merger Sub."
MEDE AMERICA'S CONDUCT OF BUSINESS BEFORE COMPLETION OF THE MEDE AMERICA
REORGANIZATION
MEDE AMERICA agreed that until the completion of the reorganization or
unless Healtheon consents in writing, MEDE AMERICA and its subsidiaries will use
commercially reasonable efforts consistent with past practices and policies to:
- preserve intact its present business organization
- keep available the services of its present executive officers and key
employees
- preserve its relationships with customers, suppliers, licensors,
licensees, and others with which it has business dealings
MEDE AMERICA also agreed that until the completion of the reorganization or
unless Healtheon consents in writing, MEDE AMERICA and its subsidiaries would
conduct their business in compliance with specific restrictions relating to the
following:
- the issuance and redemption of securities
- employees and employee benefits and remuneration
- MEDE AMERICA's intellectual property
- the issuance of dividends or other distributions
- modification of MEDE AMERICA's certificate of incorporation and bylaws
- the liquidation or restructuring of, or merger involving, MEDE AMERICA
- the acquisition of assets or other entities
- capital expenditures
- the disposition of MEDE AMERICA's assets
- the incurrence of indebtedness
- entrance into, modification or termination of contracts
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- accounting policies and procedures
- actions which would jeopardize the tax treatment of the reorganization
The agreements related to the conduct of MEDE AMERICA's business in the
reorganization agreement are complicated and not easily summarized. You are
urged to carefully read the sections of the reorganization agreement entitled
"Conduct of business by the company."
HEALTHEON'S CONDUCT OF BUSINESS BEFORE COMPLETION OF THE MEDE AMERICA
REORGANIZATION
Healtheon agreed that until the completion of the reorganization or unless
MEDE AMERICA consents in writing, Healtheon and its subsidiaries would conduct
their business so as not to jeopardize the tax treatment of the reorganization.
NO OTHER NEGOTIATIONS INVOLVING MEDE AMERICA
Until the reorganization is completed or the reorganization agreement is
terminated, MEDE AMERICA has agreed not to directly or indirectly take any of
the following actions:
- solicit, initiate, encourage or induce any "acquisition proposal", as
defined below
- participate in any discussions or negotiations regarding any acquisition
proposal
- disclose any non-public information with respect to any acquisition
proposal
- take any other action to facilitate any inquiries or the making of any
proposal that constitutes or may reasonably be expected to lead to any
acquisition proposal
- engage in discussions with any person with respect to any acquisition
proposal
- approve, endorse or recommend any acquisition proposal
- enter into any letter of intent or similar document or any contract,
agreement or commitment relating to any "acquisition transaction", as
defined below
Notwithstanding the limitations on MEDE AMERICA's actions, MEDE AMERICA may
furnish information and engage in negotiations in response to an unsolicited,
bona fide "superior offer", as defined below, made by a third party, provided
that MEDE AMERICA's board has concluded, on the advice of outside counsel, that:
- such action is necessary to comply with its fiduciary obligations
- MEDE AMERICA notifies Healtheon/WebMD beforehand, and enters into a
confidentiality agreement with such third party having terms no less
favorable to MEDE AMERICA than those contained in its confidentiality
agreement with Healtheon/WebMD
- MEDE AMERICA provides any nonpublic information disclosed to the third
party to Healtheon/WebMD
A superior offer is any of the following transactions which the board of
MEDE AMERICA determines, after consultation with a financial adviser of national
reputation, is more favorable to MEDE AMERICA's stockholders than the MEDE
AMERICA reorganization:
- any merger or consolidation in which the MEDE AMERICA stockholders before
the transaction hold less than 50% of the equity interest in the
surviving entity
- any sale or other disposition of assets of MEDE AMERICA representing in
excess of 85% of the fair market value of MEDE AMERICA's business
- the acquisition by any person or group of ownership of 85% or more of the
then outstanding stock of MEDE AMERICA
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MEDE AMERICA has agreed to promptly inform Healtheon as to any acquisition
proposal, request for non-public information or inquiry which MEDE AMERICA
believes would lead to an acquisition proposal, including the identity of the
person, entity or group making the acquisition proposal, request or inquiry and
the material terms of the acquisition proposal, request or inquiry. MEDE AMERICA
has agreed to inform Healtheon of the status and details of any acquisition
proposal.
An acquisition proposal is any offer or proposal relating to any
acquisition transaction, other than an offer or proposal from Healtheon.
An acquisition transaction is any transaction involving any of the
following:
- the acquisition or purchase of more than a 5% interest in the total
outstanding voting securities of MEDE AMERICA or any of its subsidiaries
- any tender offer or exchange offer, that, if consummated, would result in
any person or group beneficially owning 5% or more of the total
outstanding voting securities of MEDE AMERICA
- any merger, consolidation, business combination or similar transaction
involving MEDE AMERICA
- any sale, lease outside the ordinary course of business, acquisition or
disposition of more than 5% of the assets of MEDE AMERICA
- any liquidation or dissolution of MEDE AMERICA
MEDE AMERICA'S EMPLOYEE BENEFIT PLANS
Individuals who are employed by MEDE AMERICA when the reorganization is
completed will become employees of Healtheon/WebMD or one of its subsidiaries,
although Healtheon/WebMD may terminate these employees at any time.
Healtheon/WebMD and MEDE AMERICA will work together to agree upon mutually
acceptable employee benefit and compensation arrangements so as to provide
benefits to MEDE AMERICA employees generally equivalent in the aggregate to
those provided to similarly situated employees of Healtheon/WebMD. MEDE AMERICA
will terminate its separation, retention and salary continuation plans, programs
or arrangements prior to the effective time of the reorganization.
Healtheon/WebMD has agreed to maintain MEDE AMERICA's employee severance policy
for one year following the reorganization.
TREATMENT OF MEDE AMERICA STOCK OPTIONS AND WARRANTS
Upon completion of the reorganization, each outstanding option or warrant
to purchase MEDE AMERICA common stock will be converted, in accordance with its
terms, into an option or warrant, as the case may be, to purchase the number of
shares of Healtheon/WebMD common stock equal to the number of shares of MEDE
AMERICA common stock that could have been obtained before the reorganization
upon the exercise of each option or warrant times the exchange ratio, rounded
down to the nearest whole share. The exercise price will be equal to the
exercise price per share of MEDE AMERICA common stock subject to the option or
warrant before conversion divided by the exchange ratio, rounded up to the
nearest whole cent.
The other terms of each option and the MEDE AMERICA option plans referred
to above under which the options were issued will continue to apply in
accordance with their terms. Upon completion of the reorganization, each
outstanding award, including restricted stock, stock equivalents and stock
units, under any employee incentive or benefit plans, programs or arrangements
maintained by MEDE AMERICA which provide for grants of equity-based awards will
be amended or converted into a similar instrument of Healtheon, with certain
adjustments to preserve their value. The other terms of each MEDE AMERICA award,
and the plans or agreements under which they were issued, will continue to apply
in accordance with their terms, except that Healtheon has agreed to provide for
the options of any employees who are terminated without cause or are
constructively terminated within two years following the reorganization to
become fully vested.
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Healtheon/WebMD intends to file a registration statement on Form S-8, if
available, for the shares of Healtheon/WebMD common stock issuable with respect
to options under the MEDE AMERICA stock option plans and will maintain the
effectiveness of that registration statement for as long as any of the options
remain outstanding.
GRANT OF HEALTHEON/WEBMD STOCK OPTIONS
Healtheon/WebMD agreed to grant options to purchase 700,000 shares at a per
share price of $45.72 to employees of MEDE AMERICA immediately following the
reorganization. These options will be granted in reasonable and customary
amounts sufficient to provide adequate incentive to former MEDE AMERICA
employees in connection with their service on behalf of Healtheon/WebMD.
CONDITIONS TO COMPLETION OF THE MEDE AMERICA REORGANIZATION
Our respective obligations to complete the reorganization and the other
transactions contemplated by the reorganization agreement are subject to the
satisfaction or waiver of each of the following conditions before completion of
the reorganization:
- the reorganization agreement must be approved and adopted and the
reorganization must be approved by the holders of a majority of the
outstanding shares of MEDE AMERICA stock
- no law, regulation or order must be enacted or issued which has the
effect of making the reorganization illegal or otherwise prohibiting
completion of the merger substantially on the terms contemplated by the
reorganization agreement
- all applicable waiting periods under applicable antitrust laws must have
expired or been terminated
- Healtheon/WebMD and MEDE AMERICA must each receive from their respective
tax counsel, an opinion to the effect that the reorganization will
constitute a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code, however, if counsel to either Healtheon/WebMD or
MEDE AMERICA does not render this opinion, this condition will be
satisfied if counsel to the other party renders the opinion to such party
- the shares of Healtheon/WebMD common stock to be issued in the
reorganization must be authorized for listing on Nasdaq, subject to
notice of issuance
MEDE AMERICA's obligations to complete the reorganization and the other
transactions contemplated by the reorganization agreement are subject to the
satisfaction or waiver of each of the following additional conditions before
completion of the reorganization:
- Healtheon/WebMD's representations and warranties must be true and correct
as of April 20, 1999 and as of the date the reorganization is to be
completed, subject to certain exceptions, as if made as of that time
except:
- to the extent Healtheon/WebMD's representations and warranties address
matters only as of a particular date, they must be true and correct as
of that date
- if any of these representations and warranties are not true and
correct but the effect in each case, and in the aggregate, of the
inaccuracies of these representations and breaches of these
warranties, other than that concerning Healtheon/WebMD's board
approval, which must be true and correct in all material respects, is
not and does not have a material adverse effect on Healtheon/WebMD,
then this condition will be deemed satisfied
- Healtheon/WebMD must perform or comply in all material respects with
all of its agreements and covenants required by the reorganization
agreement to be performed or complied with by Healtheon/WebMD at or
before completion of the reorganization
- No material adverse effect with respect to Healtheon/WebMD, taken as a
whole with its subsidiaries, shall have occurred since April 20, 1999
and be continuing
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- Healtheon/WebMD must obtain the consent of holders of registration
rights relating to Healtheon/WebMD's common stock
Healtheon/WebMD's obligations to complete the reorganization and the other
transactions contemplated by the reorganization agreement are subject to the
satisfaction or waiver of each of the following additional conditions before
completion of the reorganization:
- MEDE AMERICA's representations and warranties must be true and correct as
of April 20, 1999 and as of the date the reorganization is to be
completed as if made as of such time except:
- to the extent MEDE AMERICA's representations and warranties address
matters only as of a particular date, they must be true and correct as
of that date
- if any of these representations and warranties are not true and
correct but the effect in each case, or in the aggregate, of the
inaccuracies of these representations and breaches of these
warranties, other than those concerning MEDE AMERICA's capital
structure, obligations with respect to capital stock, board approval
and, receipt of the fairness opinion, which must be true and correct
in all material respects, is not and does not have a material adverse
effect on MEDE AMERICA, then this condition will be deemed satisfied
- MEDE AMERICA must perform or comply in all material respects with all
of its agreements and covenants required by the reorganization
agreement to be performed or complied with by MEDE AMERICA at or
before completion of the reorganization
- No material adverse effect with respect to MEDE AMERICA, taken as a
whole with its subsidiaries, shall have occurred since April 20, 1999
and be continuing
- All existing agreements by MEDE AMERICA to register its shares must
have been terminated
A material adverse effect is any change, event, violation, inaccuracy,
circumstance or effect that is materially adverse to the business, assets
including intangible assets, capitalization, financial condition or results of
operations of an entity taken as a whole with its subsidiaries, except to the
extent that any such change, event, violation, inaccuracy, circumstance or
effect directly and primarily results from changes in trading prices for such
entity's capital stock which do not result from an event which itself has a
material adverse effect.
TERMINATION OF THE MEDE AMERICA REORGANIZATION AGREEMENT
The reorganization agreement may be terminated at any time prior to
completion of the reorganization, whether before or after approval and adoption
of the reorganization agreement and approval of the reorganization by MEDE
AMERICA stockholders:
- by mutual consent of Healtheon/WebMD and MEDE AMERICA
- by Healtheon/WebMD or MEDE AMERICA, if the reorganization is not
completed before December 15, 1999 except that the right to terminate the
reorganization agreement is not available to any party whose action or
failure to act has been a principal cause of or resulted in the failure
of the reorganization to occur on or before December 15, 1999 and such
action or failure to act constitutes a material breach of the
reorganization agreement
- by Healtheon/WebMD or MEDE AMERICA, if there is any order of a court or
governmental authority having jurisdiction over either of us permanently
enjoining, restraining or prohibiting the completion of the
reorganization which is final and nonappealable
- by Healtheon/WebMD or MEDE AMERICA, if the reorganization agreement fails
to receive the requisite vote for approval and adoption by the
stockholders of MEDE AMERICA at the MEDE AMERICA special meeting, except
that the right to terminate the reorganization agreement pursuant to this
provision by MEDE AMERICA is not available to MEDE AMERICA where the
failure to obtain MEDE AMERICA stockholder approval was caused by the
action or failure to act
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by MEDE AMERICA and such action or failure to act constitutes a material
breach of the reorganization agreement
- by Healtheon/WebMD, at any time prior to the adoption and approval of the
reorganization agreement and the reorganization by the required vote of
MEDE AMERICA stockholders:
- if MEDE AMERICA's board of directors withdraws or amends or modifies
in a manner adverse to Healtheon/WebMD its unanimous recommendation in
favor of the adoption and approval of the reorganization agreement or
the approval of the reorganization
- if MEDE AMERICA enters into a letter of intent accepting an
acquisition proposal
- if MEDE AMERICA's board of directors approves or recommends any
acquisition proposal
- if a tender or exchange offer relating to the securities of MEDE
AMERICA is commenced by a person unaffiliated with Healtheon/WebMD,
and MEDE AMERICA does not send to its securityholders within 10
business days after such tender or exchange offer is first commenced a
statement disclosing that MEDE AMERICA recommends rejection of such
tender or exchange offer
- by MEDE AMERICA, upon a breach of any representation, warranty, covenant
or agreement on the part of Healtheon/WebMD set forth in the
reorganization agreement, or if any of Healtheon/ WebMD's representations
or warranties are or become untrue so that the corresponding condition to
completion of the reorganization would not be met. However, if the breach
or inaccuracy is curable by Healtheon/WebMD through the exercise of its
commercially reasonable efforts, and Healtheon/WebMD continues to
exercise such commercially reasonable efforts, MEDE AMERICA may not
terminate the reorganization agreement if the breach or inaccuracy is
cured prior to December 15, 1999
- by Healtheon/WebMD, upon a breach of any representation, warranty,
covenant or agreement on the part of MEDE AMERICA set forth in the
reorganization agreement, or if any of MEDE AMERICA's representations or
warranties are or become untrue so that the corresponding condition to
completion of the reorganization would not be met. However, if the breach
or inaccuracy is curable by MEDE AMERICA through the exercise of its
commercially reasonable efforts and MEDE AMERICA continues to exercise
such commercially reasonable efforts Healtheon may not terminate the
reorganization agreement if the breach or inaccuracy is cured prior to
December 15, 1999
- by MEDE AMERICA, if the average trading price of Healtheon's common stock
for the ten trading day period ending two days prior to the MEDE AMERICA
stockholders meeting is less than $38.68 and Healtheon/WebMD does not
elect to adjust the exchange ratio
The board of directors of MEDE AMERICA would have a fiduciary duty to its
stockholders in evaluating whether to exercise its termination rights under
these circumstances. In making this evaluation, the board would take into
account all relevant facts and circumstances existing at the time, including:
- the then-existing stock prices of Healtheon and MEDE AMERICA in light of
overall market factors
- the expected benefits of the reorganization balanced against the
perceived risks
- the available opportunities for alternative business combinations and
strategic alliances versus the prospects for continuation as an
independent company with growth through internal expansion and
acquisition
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PAYMENT OF TERMINATION FEE
MEDE AMERICA will pay Healtheon/WebMD a termination fee of $15 million
promptly, but not later than, two days after the reorganization agreement is
terminated by Healtheon/WebMD if:
- MEDE AMERICA's board of directors withdraws or amends or modifies in a
manner adverse to Healtheon its unanimous recommendation in favor of the
adoption and approval of the reorganization agreement or the approval of
the reorganization
- MEDE AMERICA enters into a letter of intent accepting an acquisition
proposal
- MEDE AMERICA's board of directors approves or recommends any acquisition
proposal, or
- a tender or exchange offer relating to the securities of MEDE AMERICA is
commenced by a person unaffiliated with Healtheon/WebMD and MEDE AMERICA
does not send to its securityholders within 10 business days after such
tender or exchange offer is first published, sent or given, a statement
disclosing that MEDE AMERICA recommends rejection of such tender or
exchange offer
Also, in the event that the reorganization agreement is terminated by
either Healtheon/WebMD or MEDE AMERICA because the reorganization has not been
consummated by December 15, 1999 or because the required approval of MEDE
AMERICA stockholders is not obtained, and, in either event, prior to that
termination a third party has publicly announced an acquisition proposal, and
within 12 months following that termination, MEDE AMERICA consummates a company
acquisition, or enters into an agreement providing for a "company acquisition",
as defined below, MEDE AMERICA will pay to Healtheon/WebMD a termination fee of
$15 million promptly, but not later than, two days after the consummation of the
company acquisition or the entry by MEDE AMERICA into that agreement.
A company acquisition is any of the following:
- a merger, consolidation, business combination, recapitalization,
liquidation, dissolution or similar transaction involving MEDE AMERICA
pursuant to which the stockholders of MEDE AMERICA immediately preceding
such transaction hold less than 50% of the aggregate equity interests in
the surviving or resulting entity of such transaction
- a sale or other disposition by MEDE AMERICA of assets representing in
excess of 50% of the aggregate fair market value of MEDE AMERICA's
business immediately prior to such sale
- the acquisition by any person or group, including by way of a tender
offer or an exchange offer or issuance by MEDE AMERICA, directly or
indirectly, of beneficial ownership or a right to acquire beneficial
ownership of shares representing in excess of 50% of the voting power of
the then outstanding shares of capital stock of MEDE AMERICA
EXTENSION, WAIVER AND AMENDMENT OF THE MEDE AMERICA REORGANIZATION AGREEMENT
We may amend the reorganization agreement before completion of the
reorganization provided we comply with applicable state law.
Either of us may extend the other's time for the performance of any of the
obligations or other acts under the reorganization agreement, waive any
inaccuracies in the other's representations and warranties and waive compliance
by the other with any of the agreements or conditions contained in the
reorganization agreement.
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MEDE AMERICA RELATED TRANSACTION AGREEMENTS
MEDE AMERICA VOTING AGREEMENT
Healtheon required MEDE AMERICA stockholders Welsh, Carson, Alexander &
Stowe V, L.P., Welsh, Carson, Anderson & Stowe VI, L.P., WCAS Information
Partners L.P., WCAS Capital Partners II, L.P., William Blair Capital Partners V,
L.P. and William Blair Leveraged Capital Fund, Limited Partnership to enter into
a voting agreement. The voting agreement requires these MEDE AMERICA
stockholders to vote all of the shares of MEDE AMERICA common stock beneficially
owned by them in favor of the reorganization.
As of the record date, the MEDE AMERICA stockholders who entered into the
voting agreement collectively beneficially owned 6,295,759 shares, which
includes shares issuable upon exercise of warrants, of MEDE AMERICA common stock
which represented approximately 47.4% of the outstanding MEDE AMERICA common
stock. None of the MEDE AMERICA stockholders who are parties to the voting
agreement were paid additional consideration in connection with entering into
the voting agreement.
Each MEDE AMERICA stockholder who is a party to the voting agreement agreed
not to sell the MEDE AMERICA stock and options owned, controlled or acquired,
either directly or indirectly, by that person until the termination of the
voting agreements or the record date without the prior written consent of
Healtheon.
The voting agreement will terminate upon the earlier to occur of:
- the termination of the reorganization agreement in accordance with its
terms, or
- the completion of the reorganization
MEDE AMERICA REGISTRATION RIGHTS AGREEMENT
Healtheon/WebMD agreed with MEDE AMERICA stockholders Welsh, Carson,
Alexander & Stowe V, L.P., Welsh, Carson, Anderson & Stowe VI, L.P., WCAS
Information Partners L.P., WCAS Capital Partners II, L.P., William Blair Capital
Partners V, L.P. and William Blair Leveraged Capital Fund, Limited Partnership
to enter into a registration rights agreement. The registration rights agreement
gives these MEDE AMERICA stockholders the right to have shares of
Healtheon/WebMD common stock they receive in the merger registered with the
Securities and Exchange Commission. These MEDE AMERICA stockholders currently
hold similar rights with respect to their shares of MEDE AMERICA common stock.
The MEDE AMERICA stockholders who are parties to the registration rights
agreement are permitted to request that Healtheon/WebMD register up to 3,000,000
shares of Healtheon/WebMD common stock they receive as a result of the
reorganization within three months after the merger and an additional 3,000,000
shares within six months after the reorganization. As of the record date, the
MEDE AMERICA stockholders who entered into the registration rights agreement
collectively beneficially owned 6,295,759 shares, which includes shares issuable
upon exercise of warrants, of MEDE AMERICA common stock which represented
approximately 47.4% of the outstanding MEDE AMERICA common stock.
Healtheon/WebMD is only required to complete two registrations under the
registration rights agreement. Healtheon/WebMD will pay the expenses of these
registrations, subject to certain exceptions. The request for the first of these
registrations must be made within sixty days following the reorganization.
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THE MEDCAST REORGANIZATION
This section of the proxy statement/prospectus describes certain aspects of
the proposed Medcast reorganization, including the reorganization agreement and
related agreements. While we believe that the description covers the material
terms of the Medcast reorganization and the related transactions, this summary
may not contain all of the information that is important to you. You should read
this entire document and the other documents we refer to carefully for a more
complete understanding of the reorganization.
BACKGROUND OF THE MEDCAST REORGANIZATION
In April 1999, the board of directors of Medcast decided to evaluate the
interest of potential buyers in a strategic combination or other business
combination and engaged Hambrecht & Quist to act as Medcast's financial advisor
for this purpose.
Russell R. French, a member of Medcast's board of directors, contacted
Jeffrey T. Arnold, the Chief Executive Officer of WebMD, to discuss the
possibility of a strategic alliance or business combination. At a meeting on
April 20, 1999, Messrs. French and Arnold discussed the potential benefits and
synergies of a strategic relationship and decided that further discussions
should be pursued.
Later that day, several representatives of WebMD met with representatives
of Medcast at the Medcast offices to review Medcast's product and operations.
Alan N. Greenberg, the Chief Executive Officer of Medcast, and Nan
Kirstin-Forte, the President of Programming and Development of Medcast, met with
Mr. Arnold and Reginald R. Bradford, the Vice President of Marketing of WebMD,
on April 24, 1999 in Carefree, Arizona to discuss a possible transaction. At
that meeting, it was agreed that additional WebMD representatives would visit
Medcast's offices.
On April 29, 1999, a number of WebMD representatives visited Medcast's
offices for a formal presentation and review of Medcast and its operations.
Following the meeting, WebMD indicated that it was interested in pursuing
further discussions concerning a possible transaction and requested that Medcast
agree not to pursue other business combinations for 30 days in order to permit
WebMD sufficient time to negotiate a transaction with Medcast. On April 30,
1999, Medcast agreed to negotiate with WebMD on an exclusive basis through May
19, 1999 and Medcast and WebMD entered into a mutual non-disclosure agreement.
In early May 1999, Mr. Arnold advised Mr. Greenberg that WebMD was in
discussions with Healtheon about a possible combination between Healtheon and
WebMD. Messrs. Arnold and Greenberg discussed the possible impact of the
proposed Healtheon-WebMD reorganization on a potential Medcast-WebMD
transaction.
In late May, Medcast and WebMD recommenced discussions concerning their
possible transaction in light of the pending Healtheon-WebMD reorganization. At
a meeting on May 28, 1999, WebMD made a proposal to acquire Medcast for
Healtheon/WebMD stock, subject to completion of its due diligence, review of
Medcast's operations and negotiation of a mutually acceptable definitive merger
agreement.
On June 7, 1999, WebMD, together with its legal and financial advisors,
commenced its due diligence review of Medcast. At the same time, representatives
of both parties began negotiations concerning the terms of a definitive
reorganization agreement. The negotiations included discussions of the principal
terms and conditions, including
- the proposed exchange ratio of Medcast stock for Healtheon/WebMD stock
- the scope of the representations and warranties to be made by each of the
parties
- the terms and conditions under which Healtheon/WebMD could assert claims
for breaches of representations and warranties by Medcast and the means
by which those claims would be satisfied
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- the conditions to closing the reorganization
- the terms and conditions under which WebMD would acquire Medcast if the
Healtheon-WebMD reorganization did not occur
- possible post-reorganization employment arrangements between key
employees of Medcast and Healtheon/WebMD
- treatment of Medcast stock options
- the circumstances under which the reorganization agreement could be
terminated by either party
On June , 1999, the Medcast board of directors met to review the status
of negotiations and authorized Messrs. Greenberg and French to continue
discussions concerning the proposed transaction.
The Medcast board of directors met on June 28, 1999, together with its
financial and legal advisors, to consider the proposed reorganization and
reorganization agreement with Healtheon/WebMD. At this meeting, Medcast's legal
advisors discussed the board's fiduciary duties considering a strategic business
combination and strategic alternatives. Medcast's legal advisors also reviewed
the principal terms and conditions of the draft reorganization agreement and
related documents and reviewed the open issues that were still under discussion
with WebMD and Healtheon. Management reviewed the status of negotiations and
analyzed its reasons for favoring the proposed transaction. Hambrecht & Quist
reviewed the financial and strategic analyses it performed in connection with
its evaluation of the proposed transaction and rendered to the Medcast board of
directors an oral opinion, subject to review of final documentation and other
customary matters, as to the fairness, from a financial point of view, of the
transaction to the stockholders of Medcast. Following discussion and review of
questions addressed to management and its financial and legal advisors, the
board of directors unanimously approved the reorganization agreement and the
Medcast reorganization and authorized Messrs. Greenberg and French to negotiate
the remaining issues with representatives of WebMD and Healtheon.
On June 23, 1999, WebMD's board of directors held a special meeting to
discuss the proposed business combination with Medcast. At this meeting, WebMD's
senior management and inside legal counsel presented to the board the terms of
the proposed reorganization with Medcast and the status of business, financial
and legal due diligence of the transaction. In addition, the WebMD board
reviewed a draft of the reorganization agreement. Following these presentations
and other discussions, the WebMD board approved by unanimous vote the terms of
the reorganization and the reorganization agreement substantially in the form
presented and authorized senior management to negotiate the remaining issues and
to enter into the reorganization agreement and related documents.
On June 30, 1999, there was a special meeting of the board of directors of
Healtheon which included a discussion of the Medcast reorganization agreement
and related transactions. The Healtheon board of directors reviewed a draft of
the Medcast reorganization agreement and related documents. After considering
the terms of the proposed transaction, the Healtheon board of directors
determined that the reorganization was fair to Healtheon and that the proposed
reorganization was in the best interest of Healtheon. The Healtheon board of
directors then unanimously approved the reorganization agreement and exhibits
thereto, and the reorganization. The parties completed negotiation of the terms
of the definitive reorganization agreement after the close of business on June
30, 1999 and executed the reorganization agreement and related documents.
A press release concerning the Medcast reorganization was made before the
open of business on July 1, 1999.
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JOINT REASONS FOR THE MEDCAST REORGANIZATION
WebMD's, Healtheon's and Medcast's boards of directors have determined that
the Healtheon/ WebMD - Medcast reorganization is fair to, and in the best
interests of, the stockholders of their respective companies. They concluded
that the combined company following the Healtheon/WebMD - Medcast reorganization
would have the potential to realize long-term improved operating and financial
results and a stronger competitive position. Potential mutual benefits include:
- the combination of Medcast's brand recognition and strategic
relationships directed toward physicians with Healtheon/WebMD's brand
recognition and strategic relationships directed toward both physicians
and consumers and its e-commerce platform and industry relationships will
enable the combined company to move toward the goal of offering a
comprehensive, integrated Web-based solution for the administrative,
communications and information needs of the healthcare industry
- broadening each company's offerings of Internet-based healthcare related
content offerings and creating cross-selling opportunities
- creating a strong combined management team
- the combination of leading providers of Internet solutions to the
healthcare industry will better position the combined company to achieve
subscriber penetration among physicians, payers, providers, consumers,
and other healthcare industry participants
- enhancing the means by which the each company delivers content and
services to physicians
MEDCAST'S REASONS FOR THE MEDCAST REORGANIZATION
At the meeting of the board of directors held June 28, 1999, the board of
directors of Medcast concluded that the reorganization was in the best interests
of Medcast and determined to recommend the reorganization to the stockholders of
Medcast. The decision of the board of directors of Medcast was based upon
several potential benefits of the reorganization, including the following, which
are listed in no particular order of significance:
- the liquidity afforded Medcast's stockholders upon exchange of their
shares in Medcast, which are not publicly traded, for shares in
Healtheon/WebMD, which will be publicly traded
- the opportunity of Medcast stockholders to participate in the potential
growth of Healtheon/ WebMD following the Medcast reorganization or to
realize their investment by selling their Healtheon/WebMD shares in a
public market
- the value of the aggregate Medcast reorganization consideration on the
date of the reorganization agreement of approximately $214.9 million
based on the average of the closing price of Healtheon common stock over
the 10 trading days immediately prior to the execution of the
reorganization agreement
- the oral opinion of Hambrecht & Quist LLC, Medcast's financial advisor,
which was directed toward Medcast's board of directors only and not in
any way as a recommendation to the Medcast stockholders, that the Medcast
reorganization agreement and merger were fair to the Medcast stockholders
from a financial point of view, subject to assumptions and limitations
given in that opinion
- access to Healtheon/WebMD's complete end-to-end healthcare e-commerce
solution. The healthcare information technology industry is changing
quickly and is becoming more competitive. Medcast believes that, through
the completion of the Healtheon-WebMD reorganization, Healtheon/WebMD
will create a leading end-to-end healthcare e-commerce solution with the
ability to facilitate business to business, consumer-to-business and
business-to consumer transactions
- access to strategic alliances. WebMD currently has relationships with
Microsoft, Excite@Home, Lycos, SOFTBANK, DuPont, Intel, and other leading
institutions. In addition, many of these leading companies are investors
in WebMD. These strategic alliances will help the combined company
achieve its objectives of connectivity and transactions between
consumers, payers,
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providers and institutions, establish the Healtheon/WebMD brand and
contribute towards the establishment of a common Internet technology
platform
- access to subscribers. Some of WebMD's strategic partners sponsor
subscriptions for physician subscribers, which provide a cross-selling
opportunity for the Medcast service
- creating leverage. The combined company will have greater leverage with
pharmaceutical companies and other potential sponsors and strategic
partners
There are potential risks to the reorganization, including:
- technical, operational, regulatory and strategic challenges to
integrating Medcast and Healtheon/ WebMD
- the possible loss of contractual rights by Medcast as a result of the
reorganization
- volatility of Healtheon/WebMD's stock price affecting the ability of
Medcast stockholders to realize the value of the consideration as
measured prior to closing
- the additional risks relating to the combined company's business
Medcast stockholders should consider that the potential benefits of the
reorganization may not be achieved.
RECOMMENDATION OF MEDCAST'S BOARD OF DIRECTORS
After carefully evaluating these factors, both positive and negative, the
board of directors of Medcast has determined that the Medcast reorganization is
in your best interests and unanimously recommends that you vote for approval and
adoption of the reorganization agreement and approval of the merger.
In considering the recommendation of the Medcast board of directors with
respect to the Medcast reorganization, you should be aware that directors and
executive officers of Medcast have interests in the reorganization that are
different from, or are in addition to the interests of Medcast stockholders
generally. Please see the section entitled "Interests of directors, officers and
affiliates in the Medcast reorganization" on page .
OPINION OF MEDCAST'S FINANCIAL ADVISOR
The board of directors engaged Hambrecht & Quist to act as its financial
advisor in connection with the reorganization and to render an opinion as to the
fairness from a financial point of view to the holders of the outstanding shares
of capital stock of Medcast of the consideration to be received by such
stockholders in connection with the proposed reorganization. If the
Healtheon-WebMD reorganization is not completed, Medcast's board of directors
has approved a merger with a subsidiary of WebMD. Hambrecht & Quist rendered its
oral opinion on June 28, 1999 to the board of directors that, as of that date,
the consideration to be received by the holders of the Medcast stock in the
merger was fair to such holders from a financial point of view. A copy of
Hambrecht & Quist's written opinion dated June 30, 1999, which sets forth the
assumptions made, the matters considered, the scope and limitations of the
review undertaken and the procedures followed by Hambrecht & Quist is attached
as Annex G to this proxy statement/prospectus. Medcast stockholders are advised
to read this opinion in its entirety. Stockholders should note that the opinion
expressed by Hambrecht & Quist was provided for the information of the board of
directors of Medcast in its evaluation of the reorganization and does not
constitute a recommendation to any stockholder as to how that stockholder should
vote with respect to the reorganization. No limitations were placed on Hambrecht
& Quist by the board of directors of Medcast with respect to the investigation
made or the procedures followed in preparing and rendering its opinion.
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IN CONNECTION WITH ITS REVIEW OF THE MEDCAST REORGANIZATION, AND IN
ARRIVING AT ITS OPINION, HAMBRECHT & QUIST, AMONG OTHER THINGS:
- reviewed the publicly available consolidated financial statements of
Healtheon, WebMD and Healtheon/WebMD, with and without MEDE AMERICA
financial results, for recent years and interim periods to date and other
relevant financial and operating data of WebMD and Healtheon/ WebMD,
including their respective capital structures and, in the case of
Healtheon/WebMD, with and without MEDE AMERICA financial information,
that was made available to Hambrecht & Quist from published sources and
from the internal records of WebMD
- reviewed internal financial and operating information, including
projections, relating to WebMD prepared by the management of WebMD
- reviewed financial and operating information, including
publicly-available projections, relating to Healtheon
- reviewed financial and operating information, including
publicly-available projections, relating to MEDE AMERICA
- discussed the business, financial condition and prospects of
Healtheon/WebMD with members of senior management of WebMD
- reviewed internal financial and operating information, including
projections, relating to Medcast prepared by the senior management of
Medcast
- discussed the business, financial condition and prospects of Medcast with
members of senior management of Medcast
- reviewed the recent reported prices and trading activity for the common
stock of Healtheon and compared such information and financial
information for Healtheon with similar information for other companies
engaged in businesses considered comparable
- reviewed the financial terms, to the extent publicly available, of
comparable merger and acquisition transactions
- reviewed the draft reorganization agreement
- performed such other analyses and examinations and considered such other
information, financial studies, analyses and investigations and
financial, economic and market data as Hambrecht & Quist deemed relevant
In rendering its opinion, Hambrecht & Quist assumed and relied upon the
accuracy and completeness of all of the information concerning Medcast,
Healtheon, WebMD, MEDE AMERICA and Healtheon/ WebMD considered in connection
with its review of the Medcast reorganization, and Hambrecht & Quist did not
assume any responsibility for independent verification of that information.
Hambrecht & Quist did not prepare any independent valuation or appraisal of any
of the assets or liabilities of Medcast, Healtheon, WebMD, and MEDE AMERICA, nor
did Hambrecht & Quist conduct a physical inspection of the properties and
facilities of any of the companies. With respect to the financial forecasts and
projections made available to Hambrecht & Quist and used in its analysis,
Hambrecht & Quist assumed that they reflected the best then currently available
estimates and judgments of the expected future financial performance of Medcast,
Healtheon, WebMD and MEDE AMERICA. For purposes of its opinion, Hambrecht &
Quist assumed that none of Medcast, Healtheon, WebMD and MEDE AMERICA was a
party to any pending transactions, including external financings,
recapitalizations or material merger discussions, other than the transactions
described in this proxy statement/prospectus, the transactions contemplated by
the reorganization agreement, and those activities undertaken in the ordinary
course of conducting their respective businesses. Its opinion was necessarily
based upon market, economic, financial and other conditions as they then existed
and could be evaluated as of the date of the opinion and any change in such
conditions would require a reevaluation of its opinion. Hambrecht & Quist
expressed no opinion as to the price at which Healtheon/WebMD common stock will
trade subsequent to the effective
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time of the Medcast reorganization. In rendering its opinion, Hambrecht & Quist
assumed that the Medcast reorganization will be consummated substantially on the
terms discussed in the reorganization agreement, without any waiver of any
material terms or conditions by any party. Hambrecht & Quist was not requested
to, and did not, solicit indications of interest from any other parties in
connection with a possible acquisition of, or business combination with,
Medcast.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The summary
of the Hambrecht & Quist analyses set forth below does not purport to be a
complete description of the analyses underlying the Hambrecht & Quist opinion.
In arriving at its opinion, Hambrecht & Quist did not attribute any particular
weight to any analysis or factor considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor.
Accordingly, Hambrecht & Quist believes that its analyses and the summary set
forth below must be considered as a whole and that selecting portions of its
analyses, without considering all analyses, or of the summary set forth below,
without considering all factors and analyses, could create an incomplete view of
the processes underlying the analyses set forth in the Hambrecht & Quist
presentation to the board of directors and the Hambrecht & Quist opinion. In
performing its analyses, Hambrecht & Quist made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Medcast, Healtheon, WebMD
and MEDE AMERICA. THE ANALYSES PERFORMED BY HAMBRECHT & QUIST AS SUMMARIZED
BELOW ARE NOT NECESSARILY INDICATIVE OF ACTUAL VALUES OR ACTUAL FUTURE RESULTS,
WHICH MAY BE SIGNIFICANTLY MORE OR LESS FAVORABLE THAN SUGGESTED BY SUCH
ANALYSES. ADDITIONALLY, ANALYSES RELATING TO THE VALUES OF BUSINESSES DO NOT
PURPORT TO BE APPRAISALS OR TO REFLECT THE PRICES AT WHICH BUSINESSES ACTUALLY
MAY BE SOLD.
Transaction analysis. Hambrecht & Quist reviewed and analyzed the proposed
terms of the Medcast reorganization and understands that the terms of the
reorganization agreement provide, among other things, that Healtheon/WebMD will
purchase all the outstanding common stock of Medcast, including all preferred
stock, options regardless of whether they are exercisable, and warrants
convertible into common stock, at a price of approximately $215 million in
Healtheon/WebMD stock. For purposes of its opinion, Hambrecht & Quist assumed
that the Medcast reorganization will qualify as a tax-free reorganization under
the Internal Revenue Code for the stockholders of Medcast and that the
reorganization will be accounted for as a purchase.
In determining the fairness of the consideration offered to the
stockholders of Medcast by Healtheon/ WebMD, Hambrecht & Quist reviewed selected
market and company specific information. This information, not in any particular
order of importance, included:
- the difficult business conditions Medcast faces, including its early
stage business model, its inability to generate significant revenue to
date and its uncertainty as to its ability to generate significant
revenue in the future as a stand-alone company
- the uncertainty of Medcast's ability to raise capital at an attractive
valuation to meet its operating needs and projected cash requirements
- the potential synergies to be realized in a combination of Medcast with
Healtheon and WebMD
- the increasingly competitive nature of the healthcare and Internet
content and services industries, including both the number of companies
focused on providing health information as well as the amount of capital
such companies have raised
- the unlikelihood that another potential acquiror of similar quality
offering an equal or greater consideration in the near future would
materialize
- the public equity market environment in general and specific trading
valuations of companies comparable to Medcast, Healtheon and WebMD
No information related to the overall market environment or related to
selected companies used in the above consideration is directly comparable to
Medcast, Healtheon, WebMD or the reorganization. An analysis of the results of
the foregoing market and company information is not mathematical and involves
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complex considerations and judgments concerning differences in financial and
operating characteristics of the companies and other factors that could affect
the public trading values of the companies or company to which they are
compared. The foregoing description of Hambrecht & Quist's opinion is qualified
in its entirety by reference to the full text of the opinion, which is attached
as Annex G to this proxy statement/ prospectus.
Prior relationship and terms of engagement. Hambrecht & Quist, as part of
its investment banking services, is regularly engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
strategic transactions, corporate restructurings, negotiated underwritings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate and other purposes. The board of directors of
Medcast selected Hambrecht & Quist to serve as its financial advisor in
connection with the reorganization because it is an internationally recognized
investment banking firm whose professionals have substantial experience in
merger and acquisition transactions and transactions similar to the
reorganization. In the past, Hambrecht & Quist has provided investment banking
and other financial advisory services to Healtheon and during 1998 and 1999 it
received an aggregate of $310,000 in fees for rendering these services. In the
ordinary course of business, Hambrecht & Quist acts as a market maker and broker
in the publicly traded securities of Healtheon for which it receives customary
compensation, and it provides research coverage for Healtheon. In the ordinary
course of business, Hambrecht & Quist actively trades in the equity and
derivative securities of Healtheon for its own account and for the accounts of
its customers and, accordingly, may at any time hold a long or short position in
such securities. Hambrecht & Quist may in the future provide additional
investment banking or other financial advisory services to Healtheon/WebMD.
Under the terms of Hambrecht & Quist's engagement, Medcast has agreed to
pay Hambrecht & Quist an advisory fee of 1.75% of the Medcast reorganization
transaction value. For this purpose, the reorganization transaction value is
calculated using the value of Healtheon/WebMD common stock to be received by
Medcast stockholders in the reorganization at the closing. Based upon an assumed
per share value for Healtheon/WebMD common stock of $ , which is the closing
price per share of Healtheon common stock on August , 1999, the Hambrecht &
Quist fee would be approximately $ . The actual fee will vary based on the
value of the Healtheon/WebMD common stock at the time of the reorganization. A
substantial portion of this fee will not be paid unless and until the
reorganization is completed. The advisory fee includes a fee of $400,000
relating to the issuance of the fairness opinion, which will be paid whether or
not the Medcast reorganization is consummated. Medcast has agreed to reimburse
Hambrecht & Quist for its reasonable out of pocket expenses, and to indemnify
Hambrecht & Quist against certain liabilities, including liabilities under the
federal securities laws or relating to or arising out of Hambrecht & Quist's
engagement as financial advisor. The amount of compensation to be paid to
Hambrecht & Quist was determined by negotiations between the board of directors
of Medcast and Hambrecht & Quist.
INTERESTS OF DIRECTORS, OFFICERS AND AFFILIATES IN THE MEDCAST REORGANIZATION
When considering the recommendation of Medcast's board of directors,
Medcast stockholders should be aware that some of the directors, executive
officers and affiliates of Medcast have interests in the reorganization and have
arrangements that are different from, or are in addition to, those of Medcast
stockholders generally. These include:
- Employment agreements. The following executive officers have employment
agreements with Medcast that are implicated by the reorganization
- Mark Dailey, Chief Operating Officer -- Mr. Dailey's employment
agreement provides for severance if:
- Medcast fails to renew his agreement in accordance with its terms
- if he is terminated by Medcast without cause, or
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- if he terminates his employment for "good reason," which includes
being assigned to a different position that results in a material
reduction in title, responsibility, duties or authority
We do not know what position, if any, Mr. Dailey will have with
Healtheon/WebMD and its subsidiaries after the reorganization or
whether he will attempt to terminate his employment if asked to accept
a different position. Mr. Dailey's severance, if required, includes the
acceleration of all of his unvested options and the continued payment
of his base salary for the remaining initial term of his employment
agreement or 12 months from the date of termination, whichever is
later. Mr. Dailey's base salary is $225,000 per year, subject to
adjustments for inflation. The initial term of his employment agreement
expires on January 4, 2002.
- Gordon T. Wyatt, Chief Financial Officer -- Mr. Wyatt's employment
agreement provides for severance if:
- Medcast fails to renew his agreement in accordance with its terms
- if he is terminated by Medcast without cause, or
- if he terminates his employment for "good reason," which includes
being assigned to a different position that results in a material
reduction in title, responsibility, duties or authority
We do not know what position, if any, Mr. Wyatt will have with
Healtheon/WebMD and its subsidiaries after the reorganization or
whether he will attempt to terminate his employment if asked to accept
a different position. Mr. Wyatt's severance, if required, includes the
acceleration of all of his unvested options and the continued payment
of his base salary for the remaining initial term of his employment
agreement or 12 months from the date of termination, whichever is
later. Mr. Wyatt's base salary is $150,000 for year one, $175,000 for
year two and $200,000 for year three, subject to adjustments for
inflation. The initial term of his employment agreement expires on
April 1, 2001.
- Potential vesting of options. The Medcast stock option plan provides that
all unvested options under the plan will immediately vest upon the
closing of the reorganization. Messrs. Dailey and Wyatt, each executive
officers of Medcast, hold options that will accelerate as of the
reorganization.
- Transaction fee. If the Medcast reorganization is completed, Stephens,
Inc., an affiliate of Stephens Group, Inc. and an affiliate of Medcast,
will receive a transaction fee of 0.25% of the Medcast reorganization
transaction value. For this purpose, the reorganization transaction value
is calculated using the value of Healtheon/WebMD common stock at the time
of the reorganization. Based upon an assumed per share value for
Healtheon/WebMD common stock of $ , which is the closing price
per share of Healtheon common stock on August , 1999, the Stephens' fee
would be approximately $ . The actual fee will vary based on the
value of the Healtheon/WebMD common stock at the time of the
reorganization.
As a result of all of the above, the related parties could be more likely
to vote to approve the reorganization agreement and the reorganization than if
these interests did not exist.
COMPLETION AND EFFECTIVENESS OF THE MEDCAST REORGANIZATION
The reorganization will be completed when all of the conditions to
completion of the reorganization are satisfied or waived, including approval of
the reorganization agreement and the reorganization by the stockholders of
Medcast. The reorganization will become effective upon the filing of a
certificate of merger with the State of Delaware.
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STRUCTURE OF THE MEDCAST REORGANIZATION AND CONVERSION OF MEDCAST CAPITAL STOCK
A newly formed and wholly owned subsidiary of Healtheon/WebMD, will be
merged with and into Medcast. As a result of the reorganization, the separate
corporate existence of the subsidiary will cease and Medcast will survive the
reorganization as a wholly owned subsidiary of Healtheon/WebMD.
Upon completion of the reorganization, each share of Medcast Series A,
Series B and Series C preferred stock will be converted into shares of Medcast
common stock according to the conversion rates set forth in their respective
certificates of designation, and then each outstanding share of Medcast common
stock will be automatically canceled and converted into the right to receive a
specific number of shares of Healtheon/WebMD common stock. The number of shares
of Healtheon/WebMD common stock that will be issued in exchange for each
outstanding share of Medcast common stock is referred to as the exchange ratio.
The exchange ratio will be adjusted to reflect the effect of any stock
split, stock dividend, contribution of shares or similar recapitalization with
respect to Healtheon/WebMD common stock occurring prior to the completion of the
reorganization.
We agreed upon an exchange ratio that is based upon the aggregate number of
shares of Healtheon/ WebMD common stock that Healtheon/WebMD was willing to
issue in the reorganization for all of the outstanding equity of Medcast. This
number of shares was 2,621,676. This number is subject to minor downward
adjustments as discussed under the heading "Purchase price adjustment" below.
The final exchange ratio is calculated by dividing 2,621,676 by the sum of:
- the number of shares of Medcast common stock outstanding as of the date
of the reorganization after giving effect to the conversion of all
outstanding shares of Medcast preferred stock into Medcast common stock
as discussed below plus
- the total number of shares of Medcast common stock issuable upon exercise
of options and warrants of Medcast outstanding as of the reorganization
as determined in accordance with the treasury method.
The exact exchange ratio is therefore subject to variations based upon:
- adjustments to the conversion ratios of the outstanding Medcast preferred
stock
- the purchase price adjustment described under the heading "Purchase price
adjustment" below and
- whether the holders of options and warrants exercise those convertible
securities prior to the reorganization.
Any option or warrant exercises also may affect the conversion of Medcast
preferred stock into Medcast common stock.
ADJUSTMENT TO PREFERRED STOCK CONVERSION RATIOS
The certificate of designation for the Medcast Series A preferred stock
provides that each share of Series A preferred stock will convert into one share
of Medcast common stock, except upon the occurrence of specified events. Prior
to the reorganization, the only events that will change this conversion ratio
are the exercise by Hamilton M. Jordan and Tom Cohen of warrants to purchase in
excess of 23,913 shares of Medcast common stock in the aggregate and the
exercise by Gordon T. Wyatt, the chief financial officer of Medcast, of any of
his stock options prior to the reorganization. Mr. Wyatt holds currently
exercisable options to purchase 21,521 shares of Medcast common stock. We
anticipate that Messrs. Jordan and Cohen will exercise their warrants prior to
the reorganization.
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In the event that exercises of warrants and/or options occur, each share of
the Series A preferred stock will convert into a number of shares of Medcast
common stock equal to the number of shares of Medcast common stock outstanding
after such exercises, excluding the first 23,913 shares issued under Messrs.
Jordan's and Cohen's warrants, divided by the number of shares of common stock
outstanding immediately prior to such exercises. The following calculations
discuss the possible changes in the conversion of the Series A preferred stock:
- assuming that none of the holders of such convertible securities exercise
their options or warrants prior to the reorganization, each share of
Series A preferred stock will convert into one share of Medcast common
stock
- assuming that Messrs. Jordan and Cohen exercise their warrants in full
but Mr. Wyatt does not exercise any of his options prior to the
reorganization, each share of Series A preferred stock will convert into
1.0125 shares of Medcast common stock
- assuming that Messrs. Jordan and Cohen exercise their warrants in full
and Mr. Wyatt exercises his options to the fullest extent possible prior
to the reorganization, each share of Series A preferred stock will
convert into 1.0237 shares of Medcast common stock
The certificate of designation for the Medcast Series B preferred stock
provides that each share of Series B preferred stock will convert into one share
of Medcast common stock in connection with the reorganization.
The certificate of designation for the Medcast Series C preferred stock
provides that each share of Series C preferred stock will convert into 1.4593
shares of Medcast common stock.
PURCHASE PRICE ADJUSTMENT
The Medcast stock option plan provides that each unvested option granted
under the plan will accelerate and vest in full upon a change in control of
Medcast, and provides that the board of directors of Medcast may terminate an
option 90 days after a change in control to the extent it has not been
exercised.
Prior to the reorganization, we will seek to obtain waivers from the
holders of these options that will provide for:
- a waiver of acceleration of vesting of the options for the reorganization
and any future change in control
- termination of the board of directors' ability to terminate the options
90 days after the reorganization or any future change in control
- the acceleration of vesting of the options upon a termination of the
option holder's employment by Medcast or its affiliates without cause
after the reorganization, which options will remain exercisable for 90
days after a holder's termination of employment and will then terminate
To the extent that we do not obtain waivers from the holders of unvested
options that account for at least 66% of the "spread" between the aggregate
market value of the shares subject to the unvested options minus the aggregate
exercise price for the unvested options, excluding options held by Mr. Dailey,
the number of shares used to calculate the exchange ratio will be reduced by an
amount equal to the amount of such shortfall divided by $81.98. The market value
of the shares subject to the unvested options are valued per share at $81.98
multiplied by the exchange ratio. The amount of this reduction will be decreased
by the number of shares associated with the amount of "spread" associated with
Mr. Wyatt's options if the number of shares used to calculate the exchange ratio
is reduced as a result of Mr. Wyatt's failure to execute an amendment to his
employment agreement as discussed below.
If Mr. Wyatt does not execute an amendment to his employment agreement in
the form previously provided to Mr. Wyatt and Medcast, the number of shares used
to calculate the exchange ratio will be reduced by 6,404.
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The maximum reduction in the number of shares used to calculate the
exchange ratio as a result of Mr. Wyatt's employment agreement amendment and the
option waivers is 19,588.
THE EXCHANGE RATIO
Based on the expected adjustments to the preferred stock conversion ratio
and the possible purchase price adjustments discussed above, we expect the
exchange ratio for the Medcast reorganization to be between 0.5385 and 0.5483 of
a share of Healtheon/WebMD common stock for each outstanding share of Medcast
common stock.
Throughout this proxy statement/prospectus, whenever we provide that
holders of Medcast common stock will receive approximately 0.5483 shares of
Healtheon/WebMD common stock for each share of Medcast common stock that they
own, we have assumed the following:
- Messrs. Jordan and Cohen exercise warrants to purchase an aggregate of
47,826 shares of common stock prior to the reorganization
- Mr. Wyatt does not exercise any options to purchase shares of common
stock prior to the reorganization
- the purchase price is not adjusted as described above under the heading
"Purchase price adjustment"
EXCHANGE OF MEDCAST STOCK CERTIFICATES FOR HEALTHEON/WEBMD STOCK CERTIFICATES
When the reorganization is completed, Healtheon/WebMD's exchange agent will
mail to Medcast stockholders a letter of transmittal and instructions for use in
surrendering Medcast stock certificates in exchange for Healtheon/WebMD stock
certificates. When Medcast stockholders deliver their Medcast stock certificates
to the exchange agent along with an executed letter of transmittal and any other
required documents, their Medcast stock certificates will be canceled and
Medcast stockholders will receive Healtheon/WebMD stock certificates.
No certificate representing fractional shares of Healtheon/WebMD common
stock will be issued in connection with the reorganization. Instead Medcast
stockholders will receive cash, without interest, in lieu of a fraction of a
share of Healtheon/WebMD common stock.
YOU SHOULD NOT SUBMIT YOUR MEDCAST STOCK CERTIFICATES FOR EXCHANGE UNTIL
YOU RECEIVE THE TRANSMITTAL INSTRUCTIONS AND A FORM OF LETTER OF TRANSMITTAL
FROM THE EXCHANGE AGENT.
Medcast stockholders are not entitled to receive any dividends or other
distributions on Healtheon/ WebMD common stock until the reorganization is
completed and they have surrendered their Medcast stock certificates in exchange
for Healtheon/WebMD stock certificates.
Subject to the effect of applicable laws, promptly following surrender of
Medcast stock certificates and the issuance of the corresponding Healtheon/WebMD
certificates, Medcast stockholders will be paid the amount of any dividends or
other distributions, without interest, with a record date after the completion
of the reorganization that were previously paid with respect to their whole
shares of Healtheon/WebMD common stock. At the appropriate payment date, Medcast
stockholders will also receive the amount of any dividends or other
distributions, without interest, with a record date after the completion of the
reorganization and a payment date after they exchange their Medcast stock
certificates for Healtheon/ WebMD stock certificates.
Healtheon/WebMD will only issue Medcast stockholders a Healtheon/WebMD
stock certificate or a check in lieu of a fractional share in a name in which
the surrendered Medcast stock certificate is registered.
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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS OF THE MEDCAST REORGANIZATION
This section summarizes material U.S. federal income tax considerations
relevant to the reorganization that apply to Medcast stockholders. This
discussion is based on existing provisions of the Internal Revenue Code,
existing Treasury regulations and current administrative rulings and court
decisions, all of which are subject to change. Any such change, which may or may
not be retroactive, could alter the tax consequences of the reorganization to
you. The Internal Revenue Service may adopt a contrary position.
We do not discuss all U.S. federal income tax considerations that may be
relevant to you in light of your particular circumstances. Factors that could
alter the tax consequences of the reorganization to you include:
- if you are a dealer in securities
- if you are a tax-exempt organization
- if you are subject to the alternative minimum tax provisions of the
Internal Revenue Code
- if you are a foreign person or entity
- if you are a financial institution or insurance company
- if you do not hold your Medcast shares as capital assets
- if you acquired your shares in connection with stock option or stock
purchase plans or in other compensatory transactions
- if you hold Medcast shares as part of an integrated investment, including
a "straddle", comprised of shares of Medcast capital stock and one or
more other positions
- if you hold Medcast shares subject to the constructive sale provisions of
Section 1259 of the Internal Revenue Code
In addition, we do not discuss the tax consequences of the reorganization
under foreign, state or local tax laws, the tax consequences of transactions
effectuated prior or subsequent to, or concurrently with, the reorganization,
whether or not any such transactions are undertaken in connection with the
reorganization, including without limitation any transaction in which Medcast
shares are acquired or shares of Healtheon/ WebMD common stock are disposed of,
or the tax consequences to holders of options or warrants to acquire Medcast
capital stock. Accordingly, we urge you to consult your own tax advisors as to
the specific tax consequences of the reorganization, including the applicable
federal, state, local and foreign tax consequences to you of the reorganization.
Tax implications of the conversion of Medcast preferred stock
For federal income tax purposes, no gain or loss should be recognized by
the holders of Medcast preferred stock upon the conversion of their shares of
preferred stock into shares of Medcast common stock immediately prior to the
Medcast reorganization. Shares of Medcast common stock that are treated as
having been received by a stockholder upon conversion of Medcast preferred stock
immediately prior to the Medcast reorganization should have the same tax basis
as the stockholder's basis in the shares of Medcast preferred stock that were
converted, and the holding period of the shares of Medcast common stock deemed
to have been received upon conversion of a stockholder's shares of Medcast
preferred stock should include the holding period of the shares of Medcast
preferred stock that were converted.
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Tax implications for Medcast and Medcast stockholders
Counsel to Healtheon/WebMD, Alston & Bird LLP, and counsel to Medcast, King
& Spalding, are of the opinion that the merger of Medcast with a wholly owned
subsidiary of Healtheon/WebMD will be a "reorganization" for U.S. federal income
tax purposes within the meaning of section 368(a) of the tax code. This means
that, subject to the limitations and qualifications described below:
- Medcast stockholders will not recognize gain or loss when they receive
Healtheon/WebMD common stock solely in exchange for their shares of
Medcast common stock in the Medcast reorganization.
- Cash payments received by Medcast stockholders for a fractional share of
Healtheon/WebMD common stock should be treated as if such fractional
share had been issued in the reorganization and then redeemed by
Healtheon/WebMD. You should recognize gain or loss with respect to such
cash payment, measured by the difference, if any, between the amount of
cash received and the basis in such fractional share.
- The aggregate tax basis of the Healtheon/WebMD common stock received by
holders of Medcast capital stock will be the same as the aggregate tax
basis of the Medcast stock surrendered in the exchange.
- The holding period of the Healtheon/WebMD common stock received by
holders of Medcast stock in the reorganization will include the period
the exchanged Medcast stock was considered to be held, provided that the
Medcast stock surrendered is held as a capital asset at the time of the
Medcast reorganization.
- Cash received by a dissenting Medcast stockholder in satisfaction of
appraisal rights will result in the recognition of gain or loss for
federal income tax purposes, measured by the difference between the
amount of cash received and the basis of the Medcast common stock
surrendered.
- Medcast will not recognize gain solely as a result of the receipt of
substantially all of the assets and liabilities of the newly formed
wholly owned subsidiary of Healtheon/WebMD or the distribution of
Healtheon/WebMD common stock to the Medcast stockholders pursuant to the
Medcast reorganization.
Limitations on the tax opinions
Medcast has not requested a ruling from the Internal Revenue Service with
regard to any of the federal income tax consequences of the Medcast
reorganization.
The opinions described above do not bind the Internal Revenue Service nor
preclude it from adopting a contrary position. These opinions are subject to
qualifications, are conditioned upon assumptions and are based upon factual
representations made to each of Alston & Bird LLP and King & Spalding by the
parties to the reorganization agreement. The opinions may not be relied upon if
these factual representations are incorrect or incomplete.
Certain tax implication of the escrow arrangement
As discussed in more detail below under the heading "The Medcast
Reorganization Agreement -- Escrow and indemnification of Healtheon/WebMD" on
page 140, a total of 10% of the shares of Healtheon/WebMD common stock to be
received in the Medcast reorganization will be delivered to an escrow agent and
will be subject to indemnification claims by Healtheon/WebMD for breaches of the
reorganization agreement by Medcast. If any of the shares of Healtheon/WebMD
common stock issued in the Medcast reorganization are returned to
Healtheon/WebMD from escrow, no gain or loss should be recognized by the former
stockholders of Medcast with respect to such shares. In addition, a former
Medcast stockholder's tax basis in any shares of Healtheon/WebMD common stock so
returned to Healtheon/WebMD should be added to the tax basis of the
stockholder's remaining shares of Healtheon/WebMD common stock received in the
Medcast reorganization.
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ACCOUNTING TREATMENT OF THE MEDCAST REORGANIZATION
Healtheon/WebMD and Medcast intend to account for the reorganization as a
purchase for financial reporting and accounting purposes, under generally
accepted accounting principles. After the reorganization, the results of
operations of Medcast will be included in the consolidated financial statements
of Healtheon/WebMD. The purchase price will be allocated based on the fair
values of the assets acquired and the liabilities assumed. Any excess of cost
over fair value of the net tangible assets of Medcast acquired will be recorded
as goodwill and other intangible assets and will be amortized by charges to
operations under generally accepted accounting principles. These allocations
will be made based upon valuations and other studies that have not yet been
finalized.
REGULATORY FILINGS AND APPROVALS REQUIRED TO COMPLETE THE MEDCAST REORGANIZATION
The reorganization may be subject to the requirements of the
Hart-Scott-Rodino Antitrust Improvements Act, which prevents reportable
transactions from being completed until required information and materials are
furnished to the Antitrust Division of the Department of Justice and the Federal
Trade Commission and the appropriate waiting periods end or expire. Healtheon,
WebMD and Medcast have not filed any information and materials with the
Department of Justice and the Federal Trade Commission and, therefore the
applicable waiting period, if any, has not expired. The requirements of
Hart-Scott-Rodino, if any, would be satisfied if the reorganization is completed
within one year from the termination of the waiting period.
The Antitrust Division of the Department of Justice or the Federal Trade
Commission may challenge the reorganization on antitrust grounds either before
or after expiration of the waiting period. Accordingly, at any time before or
after the completion of the reorganization, either the Antitrust Division of the
Department of Justice or the Federal Trade Commission could take action under
the antitrust laws. Certain other persons could take action under the antitrust
laws, including seeking to enjoin the reorganization. Additionally, at any time
before or after the completion of the reorganization, notwithstanding that the
applicable waiting period expired or ended, any state could take action under
the antitrust laws. A challenge to the reorganization could be made and if a
challenge is made we may not prevail.
Neither Healtheon/WebMD nor Medcast is aware of any other material
governmental or regulatory approval required for completion of the
reorganization, other than the effectiveness of the registration statement of
which this proxy statement/prospectus is a part, and compliance with applicable
corporate law of Delaware.
RESTRICTIONS ON SALES OF SHARES BY AFFILIATES OF MEDCAST AND HEALTHEON/WEBMD
The shares of Healtheon/WebMD common stock to be issued in the
reorganization will be registered under the Securities Act. These shares will be
freely transferable under the Securities Act, except for shares of
Healtheon/WebMD common stock issued to any person who is an affiliate of either
Healtheon/ WebMD or Medcast. Persons who may be deemed to be affiliates include
individuals or entities that control, are controlled by, or are under common
control of either Healtheon/WebMD or Medcast and may include some of their
respective officers and directors, as well as their respective principal
stockholders. Affiliates may not sell their shares of Healtheon/WebMD common
stock acquired in the reorganization except pursuant to:
- an effective registration statement under the Securities Act covering the
resale of those shares
- an exemption under paragraph (d) of Rule 145 under the Securities Act, or
- any other applicable exemption under the Securities Act
The reorganization agreement requires Medcast to deliver letters executed
by affiliates of Medcast providing that such affiliates will not transfer their
shares of Healtheon/WebMD common stock in violation of Rule 145 under the
Securities Act.
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LISTING ON THE NASDAQ NATIONAL MARKET OF HEALTHEON/WEBMD COMMON STOCK TO BE
ISSUED IN THE MEDCAST REORGANIZATION
It is a condition to the closing of the reorganization that the shares of
Healtheon/WebMD common stock to be issued in the reorganization be approved for
listing on the Nasdaq National Market, subject to official notice of issuance.
OPERATIONS AFTER THE MEDCAST REORGANIZATION
Following the reorganization, Medcast will continue its operations as a
wholly owned subsidiary of Healtheon/WebMD. The stockholders of Medcast will
become stockholders of Healtheon/WebMD, and their rights as stockholders will be
governed by the Healtheon/WebMD certificate of incorporation, the
Healtheon/WebMD bylaws and the laws of the State of Delaware. For a description
of the rights of stockholders of Medcast and Healtheon/WebMD, see "Comparison of
rights of holders of Medcast capital stock and Healtheon/WebMD common stock" on
page 195.
RIGHTS OF DISSENTING MEDCAST STOCKHOLDERS
Pursuant to section 262 of the Delaware law, a dissenting Medcast
stockholder who desires to object to the Medcast reorganization and to receive
the fair value of his or her shares of Medcast stock in cash by following the
procedure described below may do so by complying with the provisions of Delaware
law pertaining to the exercise of dissenters' rights. Only those Medcast
stockholders entitled to vote on the reorganization agreement and the Medcast
reorganization are entitled to dissent and receive the fair value of their
shares. As more fully discussed in the section entitled "The Medcast
meeting -- Vote and quorum required," all of the holders of Medcast's capital
stock are entitled to vote on the reorganization agreement and the
reorganization and all of the holders may dissent and receive the fair value of
their shares. The following is a summary of the provisions of Delaware law and
it is qualified in its entirety by reference to Delaware law. A copy of the
relevant provisions is attached to this proxy statement/prospectus as Annex I.
A written demand for appraisal of shares of Medcast capital stock must be
delivered to Medcast by a Medcast stockholder seeking appraisal before the vote
on the reorganization agreement is taken. The written demand must be separate
from any proxy or vote abstaining from or voting against approval and adoption
of the reorganization agreement. Voting against approval and adoption of the
reorganization agreement, abstaining from voting or failing to vote with respect
to approval and adoption of the reorganization agreement will not constitute a
demand for appraisal within the meaning of Section 262. By voting against
approval and adoption of the reorganization agreement or by abstaining from
voting in favor of the reorganization agreement, a Medcast stockholder may
preserve his or her rights of appraisal as a dissenting stockholder.
Medcast stockholders electing to exercise their appraisal rights under
Section 262 must not vote for approval and adoption of the reorganization
agreement. A vote by a Medcast stockholder against approval and adoption of the
reorganization agreement is not required in order for a Medcast stockholder to
exercise appraisal rights. However, if a Medcast stockholder returns a signed
proxy but does not specify a vote against approval and adoption of the
reorganization agreement or a direction to abstain, the proxy, if not revoked,
will be voted for approval and adoption of the reorganization agreement, which
will have the effect of waiving such Medcast stockholder's appraisal rights.
A demand for appraisal will be sufficient if it reasonably informs Medcast
of the identity of the Medcast stockholder and that such Medcast stockholder
intends thereby to demand appraisal. If the Medcast capital stock is owned of
record in a fiduciary capacity, such as by a trustee, guardian, or custodian,
such demand must be executed by the fiduciary. If the Medcast capital stock is
owned of record by more than one person, as in a joint tenancy or tenancy in
common, such demand must be executed by all joint owners. An authorized agent,
including an agent for two or more joint owners, may execute the demand for
appraisal for a Medcast stockholder of record; however, the agent must identify
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the record owner or owners and expressly disclose the fact that, in exercising
the demand, he or she is acting as agent for the record owner or owners.
A Medcast stockholder who elects to exercise appraisal rights should mail
or deliver his or her written demand to Medcast at its executive offices set
forth under the caption "Summary of the proxy statement/prospectus -- The
Companies -- Medcast" on page 10 in this proxy statement/prospectus or deliver
such demand to Medcast at Medcast's special meeting. The demand should specify
such Medcast stockholder's name and mailing address and the number of shares of
Medcast capital stock owned. It is the responsibility of each Medcast
stockholder electing to exercise appraisal rights to ensure that the written
demand is received by Medcast before the vote is taken at Medcast's special
meeting.
Within 10 days after the effective time of the reorganization,
Healtheon/WebMD must provide notice to all Medcast stockholders who have
complied with Section 262(d), summarized above, and have not voted for approval
of the reorganization agreement.
Within 120 days after the effective time of the reorganization, any Medcast
stockholder who has complied with the provisions of Sections 262(a) and (d),
summarized above, is entitled, upon written request, to receive from
Healtheon/WebMD a statement setting forth the aggregate number of shares of
Medcast capital stock not voted in favor of approval and adoption of the
reorganization agreement and with respect to which demands for appraisal have
been received and the aggregate number of holders of such shares. Such statement
must be mailed within 10 days after the written request for it has been received
by Healtheon/WebMD or within 10 days after expiration of the time for delivery
of demands for appraisal under Section 262(d), whichever is later.
Within 120 days after the effective time of the reorganization, either
Healtheon/WebMD or any holder of Medcast capital stock who has complied with the
required conditions of Sections 262(a) and (d) and who is otherwise entitled to
appraisal rights may file a petition in the Court of Chancery of the State of
Delaware demanding a determination of the fair value of the shares of any
dissenting Medcast stockholders. If a petition for an appraisal is timely filed,
at a hearing on such petition, the court will determine which Medcast
stockholders are entitled to appraisal rights and will appraise the shares of
Medcast capital stock owned by such Medcast stockholders, determining the fair
value of such shares, exclusive of any element of value arising from the
accomplishment or expectation of the reorganization, together with a fair rate
of interest, if any, to be paid upon the amount determined to be the fair value.
In determining fair value, the court is to take into account all relevant
factors. In Weinberger v. UOP, Inc., decided in 1983, the Delaware Supreme
Court, in the context of litigation involving holders of common stock of a
Delaware corporation, expanded the factors that could be considered in
determining fair value in an appraisal proceeding, stating that "proof of value
by any techniques or methods which are generally considered acceptable in the
financial community and otherwise admissible in court" should be considered, and
that "[f]air price obviously requires consideration of all relevant factors
involving the value of a company . . . ." The Delaware Supreme Court stated that
in making this determination of fair value the court must consider market value,
asset value, dividends, earnings prospects, the nature of the enterprise and any
other facts which could be ascertained as of the date of the relevant merger
which throw any light on future prospects of the merged corporation. In
Weinberger, the Delaware Supreme Court held that "elements of future value,
including the nature of the enterprise, which are known or susceptible of proof
as of the date of the merger and not the product of speculation, may be
considered."
Medcast stockholders considering seeking appraisal should be aware that the
fair value of their shares determined under Section 262 could be more than, the
same as or less than the value of the consideration they are to receive under
the reorganization agreement if they do not seek appraisal of their shares.
Both fairness opinions and appraisal proceedings review many different
aspects of a company's financial and business circumstances under accepted
valuation techniques, but the perspectives differ. A determination that a
transaction is fair from a financial point of view may be based on a finding
that the price term of a transaction falls within a range of values that would
be fair for other companies involved in similar types of transactions and
circumstances. Such a finding does not determine what the best possible price
would be, but looks at the transaction as a whole and determines whether
entering the transaction is
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a reasonable business decision. In reaching the determination that an offered
price is fair from a financial point of view, consideration is given to the fact
that a purchaser of an entire company may be willing to pay a "control premium"
in excess of the fair market value of the stock. A determination of fair value
in an appraisal proceeding attempts to reduce all of the elements of value of a
company to a set amount rather than focusing on the range of values in similar
transactions. A judicial finding of fair value attempts to ensure that each
dissenting stockholder receives the substantial equivalent of his proportionate
interest in a company before the merger occurred. An appraisal proceeding does
not attempt to consider the effects, if any, of the merger transaction itself on
the value of the stock of a company.
The cost of the appraisal proceeding may be determined by the court and
taxed against the parties as the court deems equitable in the circumstances.
Upon application of a dissenting Medcast stockholder, the court may order that
all or a portion of the expenses incurred by any dissenting stockholder in
connection with the appraisal proceeding, including without limitation
reasonable attorney's fees and the fees and expenses of experts, be charged
against the value of shares of Medcast capital stock entitled to appraisal. In
the absence of such a determination or assessment, each party bears its own
expenses.
A Medcast stockholder who has duly demanded appraisal in compliance with
Section 262 will not, after the effective time of the reorganization, have any
rights in respect of shares subject to such demand except for appraisal rights
and the right to receive payment of dividends or other distributions, if any, on
such shares payable to Medcast stockholders of record as of a date prior to the
effective time.
At any time within 60 days after the effective time of the merger, a
Medcast stockholder will have the right to withdraw his or her demand for
appraisal and to accept the terms of the reorganization; after this period, the
Medcast stockholder may withdraw his or her demand for appraisal only with the
consent of Healtheon/WebMD. If no petition for appraisal is filed with the court
within 120 days after the effective time of the reorganization, the Medcast
stockholder's rights to appraisal will cease. As Healtheon/WebMD has no
obligation to file such a petition, a Medcast stockholder who desires such a
petition to be filed is advised to file it on a timely basis. No petition timely
filed in the court demanding appraisal may be dismissed as to a Medcast
stockholder without the approval of the court, and such approval may be
conditioned upon such terms as the court deems just.
The provisions of Section 262 are technical in nature and complex. Medcast
stockholders desiring to exercise appraisal rights and obtain appraisal of the
fair value of their Medcast capital stock should consult counsel, since failure
to comply strictly with the provisions of Section 262 may defeat their appraisal
rights.
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THE MEDCAST REORGANIZATION AGREEMENT
Healtheon, Healtheon/WebMD and WebMD are parties to the reorganization
agreement. In the event that the Healtheon-WebMD reorganization agreement is
terminated prior to the completion of the Healtheon-WebMD reorganization, the
reorganization agreement will terminate as to Healtheon/WebMD and Healtheon, and
WebMD will acquire Medcast on the terms provided in the reorganization
agreement. The terms of a Medcast reorganization with WebMD are not identical to
the terms described in this proxy statement/prospectus for Healtheon/WebMD's
acquisition of Medcast. WebMD and Medcast will contact the holders of Medcast
capital stock in the event that WebMD becomes the acquiror of Medcast under the
reorganization agreement. If this occurs, this proxy statement/prospectus will
cease to be effective for purposes of consummating the Medcast reorganization
with WebMD and you will receive a new proxy statement/prospectus or similar
materials from Medcast and WebMD describing the terms of the reorganization
agreement as they relate to WebMD's acquisition of Medcast.
REPRESENTATIONS AND WARRANTIES
WebMD and Medcast each made representations and warranties in the
reorganization agreement regarding aspects of their businesses, financial
condition, structure and other facts pertinent to the reorganization, including:
- capitalization
- changes in our businesses
- intellectual property used in our businesses
- tax matters
- litigation
In general, the representations and warranties of Medcast are more detailed
and cover topics not covered by the WebMD representations and warranties. Such
additional representations and warranties regarding the business of Medcast not
given by WebMD include:
- real and personal property leases
- accounts receivable
- proprietary software of Medcast
- year 2000 compliance
- material contracts
- benefit plans
In addition, Medcast made additional representations and warranties
regarding the fairness opinion received by Medcast from its financial advisor
and state anti-takeover laws.
Healtheon/WebMD also makes representations and warranties in the
reorganization agreement regarding aspects of its organization, structure and
other facts pertinent to the reorganization, including:
- capitalization
- the contents of Healtheon's filings with the Securities and Exchange
Commission
The representations and warranties in the reorganization agreement are
complicated and not easily summarized. The reorganization agreement is attached
to this proxy statement/prospectus as Annex C and we urge you to read it
carefully, including the sections of the reorganization agreement entitled
"Representations and Warranties of GNN", "Representations and Warranties of
WebMD", "Representations and Warranties of Newco" and "Representations and
Warranties of Purchaser and Merger Corp."
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MEDCAST'S CONDUCT OF BUSINESS BEFORE COMPLETION OF THE MEDCAST REORGANIZATION
Medcast agreed that until the completion of the reorganization Medcast
will:
- conduct its business as presently conducted and refrain from entering
into any transactions or contracts other than in the ordinary course of
business, or even if in the ordinary course of business not in excess of
$50,000 individually
- consult with Healtheon and WebMD prior to undertaking new business
opportunities outside the ordinary course of business
- confer on a regular basis with representatives of Healtheon and WebMD as
to material matters and the general status of ongoing business operations
- notify Healtheon and WebMD of any material change in the course of its
business
Medcast also agreed that until the completion of the reorganization or
unless Healtheon and WebMD consent in writing, Medcast would conduct its
business in compliance with specific restrictions relating to the following:
- employees and employee benefits and remuneration
- the incurrence of indebtedness
- capital expenditures
- strategic alliances, sponsorship agreements and distribution, sale,
license or marketing agreements
- modification of Medcast's certificate of incorporation and bylaws
- accounting policies and procedures
- the issuance and redemption of securities
- the issuance of dividends or other distributions
- making any loans
- the disposition of Medcast's assets
- Medcast's intellectual property
- the acquisition of assets or other entities whether by merger or
otherwise
- entrance into, modification or termination of contracts
- actions which would cause the representations and warranties regarding
Medcast's business, financial condition and structure in the
reorganization agreement to be untrue or incorrect in any material
respect
The agreements related to the conduct of Medcast's business in the
reorganization agreement are complicated and not easily summarized. You are
urged to carefully read the sections of the reorganization agreement entitled
"Conduct of Business Pending Consummation."
NO OTHER NEGOTIATIONS INVOLVING MEDCAST
Until the reorganization is completed or the reorganization agreement is
terminated, Medcast has agreed not to directly or indirectly take any of the
following actions:
- solicit, initiate, encourage or induce any "acquisition proposal," as
defined below
- participate in any discussions or negotiations regarding any acquisition
proposal
- disclose any non-public information to any person with respect to any
acquisition proposal
- take any other action to facilitate any inquiries or the making of any
proposal that constitutes or may reasonably be expected to lead to any
acquisition proposal
- engage in discussions with any person with respect to any acquisition
proposal
- approve, endorse or recommend any acquisition proposal
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- enter into any letter of intent or similar document or any contract,
agreement or commitment relating to any "acquisition transaction," as
defined below
Medcast has agreed to promptly inform Healtheon and WebMD as to any
acquisition proposal, or request for non-public information or inquiry which
Medcast believes would lead to an acquisition proposal, including the identity
of the person, entity or group making the acquisition proposal, request or
inquiry and the material terms of the acquisition proposal, request or inquiry.
Medcast has agreed to inform Healtheon and WebMD of the status and details of
any acquisition proposal.
An acquisition proposal is any offer or proposal relating to any
acquisition transaction, other than an offer or proposal from Healtheon/WebMD.
An acquisition transaction is any transaction or series of related
transactions involving any of the following:
- the acquisition or purchase of more than a 5% interest in the total
outstanding voting securities of Medcast
- any tender offer or exchange offer, that, if consummated, would result in
any person or group beneficially owning 5% or more of the total
outstanding voting securities of Medcast
- any reorganization, consolidation, business combination or similar
transaction involving Medcast
- any sale, lease outside the ordinary course of business, acquisition or
disposition of more than 5% of the assets of Medcast
- any liquidation or dissolution of Medcast
ESCROW AND INDEMNIFICATION OF HEALTHEON/WEBMD
A total of 10% of your shares of Healtheon/WebMD common stock to be
received in the reorganization will be delivered to an escrow agent. Such shares
will be subject to indemnification claims by Healtheon/WebMD for breaches of the
reorganization agreement by Medcast. Prior to the completion of the
reorganization, a national bank, acting as escrow agent, and your
representatives will execute an escrow agreement in the form specified in the
reorganization agreement for this escrow.
By approval of the reorganization agreement, you will designate Alan N.
Greenberg, Russell R. French and Doug Martin collectively as your
representatives for all matters arising under the escrow agreement and the
reorganization agreement, including defending and settling claims against your
shares held in escrow. All decisions of the representatives must be made by a
majority of the representatives. None of the representatives will be liable to
you for any actions or omissions in their capacity as representatives unless
they were taken or omitted in bad faith and constituted willful default or gross
negligence. If any representative resigns, dies or becomes unable to act as a
representative, a majority of the members of the board of directors of Medcast
prior to the reorganization will name his successor from among the former
stockholders of Medcast.
Your shares will be held in escrow for one year, plus any additional
periods necessary to resolve unresolved claims in existence at the expiration of
a year. Healtheon/WebMD will have a claim for indemnification against the shares
in escrow to the extent that the aggregate amount of all of its losses,
expenses, liabilities and other damages arising out of breaches of the
reorganization agreement by Medcast exceed $500,000. For purposes of determining
whether Medcast breached any of its representations and warranties in the
reorganization agreement, exceptions and qualifications for material,
materiality, material adverse effect and similar expressions will be
disregarded. If Healtheon/WebMD has a valid claim for indemnification, the
escrow agent will return to Healtheon/WebMD a number of shares of Healtheon/
WebMD common stock equal to the amount of the claim divided by the value per
share of Healtheon/ WebMD common stock, which the reorganization agreement deems
to be $81.98, and Healtheon/WebMD will cancel and retire any such shares.
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You will receive the cash dividends for any shares held in escrow. In
addition, your representatives will be entitled to instruct the escrow agent as
to the exercise of any voting rights for the shares held in escrow, provided
such instructions are received at least five days prior to the relevant meeting
date. Any additional securities issued in respect of the shares held in escrow
in a stock split, stock dividend, stock combination or similar recapitalization
will be added to the shares in escrow and the value per share will be
proportionately adjusted to reflect such events for purposes of determining the
number of shares to be cancelled and retired for valid Healtheon/WebMD
indemnification claims. Any shares remaining in escrow at the expiration of the
term of the escrow will be distributed to you pro rata based upon the amount of
shares you received in the reorganization.
The terms of the escrow and the indemnification of Healtheon/WebMD are
complicated and not easily summarized. You are urged to read carefully the
sections of the reorganization agreement entitled "Escrow; Shareholder
Representative."
MEDCAST'S EMPLOYEE BENEFIT PLANS
Individuals who are employed by Medcast when the reorganization is
completed will become employees of Healtheon/WebMD or one of its subsidiaries,
although Healtheon/WebMD may terminate these employees at any time. The
employees of Medcast will be provided employee benefits based on the positions
they hold with Healtheon/WebMD and its subsidiaries after the reorganization on
terms and conditions which are substantially similar in the aggregate to those
provided by Healtheon/WebMD and its subsidiaries to their similarly situated
employees after the reorganization.
TREATMENT OF MEDCAST STOCK OPTIONS AND WARRANTS
Upon completion of the reorganization, each outstanding option or warrant
to purchase Medcast common stock will be converted, in accordance with its
terms, into an option or warrant, as the case may be, to purchase the number of
shares of Healtheon/WebMD common stock equal to the number of shares of Medcast
common stock that could have been obtained before the reorganization upon the
exercise of each option or warrant times the exchange ratio, rounded down to the
nearest whole share. The exercise price will be equal to the exercise price per
share of Medcast common stock subject to the option or warrant before conversion
divided by the exchange ratio, rounded up to the nearest whole cent.
The other terms of each Medcast option and the plans or agreements under
which they were issued, will continue to apply in accordance with their terms,
except that Medcast has agreed to seek waivers from the holders of all options
that will vest or accelerate vesting in connection with or as a result of the
reorganization or any future "change of control" as defined in the Medcast stock
option plan. Medcast will also execute each of these waivers in order to
eliminate the provision in the Medcast stock option plan that would give the
board of directors of Medcast the option of terminating all of the options
issued under such plan 90 days after completion of the reorganization. In
addition, each holder of an option that executes a waiver will also be granted
the right to exercise his or her options in full if his or her employment is
terminated without cause by Medcast or one of its affiliates after completion of
the reorganization for a period of 90 days after such termination. If the option
holder does not execute his or her options during such 90 day period, the
options will terminate.
Healtheon/WebMD intends to file a registration statement on Form S-8, if
available, with respect to the shares of Healtheon/WebMD common stock issuable
with respect to options under the Medcast stock option plan. Healtheon/WebMD
will maintain the effectiveness of that registration statement for as long as
any of the options remain outstanding.
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CONDITIONS TO COMPLETION OF THE MEDCAST REORGANIZATION
Our respective obligations to complete the reorganization and the other
transactions contemplated by the reorganization agreement are subject to the
satisfaction or waiver of each of the following conditions before completion of
the reorganization:
- the reorganization agreement and the reorganization must be approved by
the stockholders of Medcast as and to the extent required by Delaware law
and Medcast's governing instruments
- all applicable waiting periods under applicable antitrust laws must have
expired or been terminated
- no law, regulation or order or other action of any court or governmental
authority shall be enacted or issued which has the effect of making the
reorganization illegal or otherwise prohibits or restricts completion of
the reorganization and other transactions contemplated by the
reorganization agreement
- Healtheon/WebMD and Medcast must each receive from their respective tax
counsel an opinion to the effect that the reorganization will constitute
a reorganization within the meaning of Section 368(a) of the Internal
Revenue Code. However, if counsel to either Healtheon/WebMD or Medcast
does not render this opinion, this condition will be satisfied if counsel
to the other party renders the opinion to such party
- the shares of Healtheon/WebMD common stock to be issued in the
reorganization must be authorized for listing on the Nasdaq Stock Market,
subject to notice of issuance and the registration statement that
contains this proxy statement/prospectus shall have been declared
effective by the Securities and Exchange Commission and no stop order
suspending the effectiveness of that registration statement shall have
been issued by the Securities and Exchange Commission
Healtheon/WebMD's obligations to complete the reorganization and the other
transactions contemplated by the reorganization agreement are subject to the
satisfaction or waiver of each of the following additional conditions before
completion of the reorganization:
- Medcast's representations and warranties must be true and correct in all
material respects as of June 30, 1999 and as of the date the
reorganization is to be completed as if made as of such time except:
- to the extent Medcast's representations and warranties address
matters only as of a particular date, they must be true and correct
as of that date
- if any of these representations and warranties are qualified as to
material, materiality, material adverse effect or similar
expressions or are subject to similar type exceptions, those
representations and warranties shall be true and correct in all
respects
- Medcast must perform or comply in all material respects with all of its
agreements and covenants required by the reorganization agreement to be
performed or complied with by Medcast at or before completion of the
reorganization
- Medcast's legal counsel shall have delivered a legal opinion pertaining
to certain items
- Medcast shall have delivered all of its books and records to
Healtheon/WebMD
- the directors of Medcast shall have resigned as of the completion of the
reorganization
- no material adverse effect with respect to Medcast shall have occurred
since June 30, 1999
- no more than 2.0% of the shares of Medcast capital stock shall have
elected to seek statutory dissenter's rights with respect to the
reorganization
- the Healtheon-WebMD reorganization must be completed simultaneously with
or prior to the completion of the reorganization, or Medcast will instead
merge with WebMD
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- Medcast shall have provided Healtheon/WebMD a certificate that shares of
Medcast's capital stock do not constitute "U.S. real property" under the
Internal Revenue Code
- Medcast's certified public accountants shall have delivered a comfort
letter with respect to financial information relating to Medcast included
in the registration statement of which this proxy statement/prospectus is
a part
- at least 95.0% of the outstanding shares of Medcast capital stock shall
have voted to approve the Medcast merger and the reorganization agreement
- a majority of the Medcast board of directors, other than the directors
elected by holders of Medcast Series A preferred stock, and a majority of
the holders of the Medcast common stock and Series B preferred stocks
voting together as a class, shall have approved an adjustment to the
conversion price of the Medcast Series C preferred stock such that it
converts into Medcast common stock immediately prior to converting into
Healtheon/WebMD common stock in the reorganization
- Medcast shall have obtained written terminations of the Medcast
stockholders agreement dated February 18, 1998 from the holders of at
least 90.0% of the shares of the Medcast Series A preferred stock that
have executed such agreement and from the holders of at least 90.0% of
the shares of the Medcast Series C preferred stock that have executed
such agreement
- Medcast shall have caused the termination of specified contracts
Medcast's obligations to complete the reorganization and the other
transactions contemplated by the reorganization agreement are subject to the
satisfaction or waiver of each of the following additional conditions before
completion of the reorganization:
- Healtheon/WebMD's and WebMD's representations and warranties must be true
and correct in all material respects as of June 30, 1999 and as of the
date the reorganization is to be completed as if made as of that time
except:
- to the extent Healtheon/WebMD's or WebMD's representations and
warranties address matters only as of a particular date, they must be
true and correct as of that date
- if any of these representations and warranties are qualified as to
material, materiality, material adverse effect or similar expressions
or are subject to similar type exceptions, those representations and
warranties shall be true and correct in all respects
- Healtheon/WebMD must perform or comply with all of its agreements and
covenants required by the reorganization agreement to be performed or
complied with by Healtheon/WebMD at or before completion of the
reorganization
- No material adverse effect with respect to Healtheon/WebMD, taken as a
whole with its subsidiaries, which will be deemed to include Healtheon,
WebMD and MEDE AMERICA, shall have occurred since June 30, 1999
A material adverse effect is any event, change or occurrence which,
individually or taken together with any other event, change or occurrence, has a
material adverse impact on the financial position, business or results of
operations of an entity and its subsidiaries, taken as a whole, or the ability
of such entity to perform its obligations under the reorganization agreement or
to consummate the reorganization or other transactions contemplated by the
reorganization agreement.
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TERMINATION OF THE MEDCAST REORGANIZATION AGREEMENT
The reorganization agreement may be terminated at any time prior to
completion of the reorganization, whether before or after approval of the
reorganization agreement and the merger by Medcast stockholders:
- by mutual consent of Healtheon, WebMD and Medcast
- by Healtheon and WebMD, acting together, or Medcast, if the
reorganization is not completed by a termination date mutually agreed to
by the parties; such termination date is the earlier of the 30th day
after the completion of the Healtheon-WebMD reorganization and December
15, 1999
- by Healtheon and WebMD, acting together, in the event of a breach by
Medcast of any representation, warranty, covenant or other agreement in
the reorganization agreement such that Medcast would be unable to satisfy
the conditions to completion of the reorganization regarding the accuracy
of its representations and warranties or performance of its agreements
and covenants. However, if the breach is curable through the exercise of
commercially reasonable efforts, and Medcast continues to exercise
reasonable efforts, Healtheon and WebMD may not terminate the
reorganization agreement prior to the termination date specified above
- by Medcast in the event of a breach by Healtheon/WebMD or WebMD of any
representation, warranty, covenant or other agreement in the
reorganization agreement such that Healtheon/ WebMD or WebMD would be
unable to satisfy the conditions to completion of the reorganization
regarding the accuracy of its representations and warranties or
performance of its agreements and covenants. However, if the breach is
curable through the exercise of commercially reasonable efforts, and
Healtheon/WebMD or WebMD continues to exercise reasonable efforts,
Medcast may not terminate the reorganization agreement prior to the
termination date specified above
- by Healtheon and WebMD, acting together, or Medcast, if there is any
order, decree or ruling or other action of any governmental authority
having the effect of permanently restraining, enjoining or otherwise
prohibiting the reorganization which is final and non-appealable
- by Healtheon and WebMD, acting together, if the board of directors of
Medcast fails to call a meeting of its stockholders for the purpose of
approving the reorganization at least ten days prior to the termination
date discussed above or affirms, recommends or authorizes Medcast to
enter into any other acquisition proposal
- by Healtheon and WebMD, acting together, if the board of directors of
Medcast adversely withdraws, modifies or changes it approval or
recommendation of the reorganization
A party's ability to terminate the reorganization agreement is limited if
it is in breach of the reorganization agreement.
EXTENSION, WAIVER AND AMENDMENT OF THE MEDCAST REORGANIZATION AGREEMENT
We may amend the reorganization agreement before completion of the
reorganization provided we comply with applicable state law.
Either of us may extend the other's time for the performance of any of the
obligations or other acts under the reorganization agreement, waive any
inaccuracies in the other's representations and warranties and waive compliance
by the other with any of the agreements or conditions contained in the
reorganization agreement.
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MEDCAST VOTING AGREEMENTS
This section of the proxy statement/prospectus describes voting agreements
related to the Medcast reorganization agreement. While we believe that this
description covers the material terms of these agreements, this summary may not
contain all of the information that is important to you.
Healtheon/WebMD and WebMD required Medcast stockholders Medcast Networks,
L.P., Stephens Group, Inc., Noro-Moseley Partners IV, L.P., Noro-Moseley
Partners IVB, L.P., Richland Ventures, L.P. and Richland Ventures II, L.P. to
enter into voting agreements. The voting agreements require these Medcast
stockholders to vote all of the shares of Medcast capital stock beneficially
owned by them in favor of the reorganization.
As of the record date, the Medcast stockholders who entered into the voting
agreements collectively beneficially owned
- 1,357,209 shares of Medcast common stock which represents approximately
70.9% of the outstanding shares of common stock
- 1,073,909 shares of Medcast Series A preferred stock which represents
approximately 56.1% of the outstanding shares of Series A preferred stock
- 109,765 shares of Medcast Series B preferred stock which represents
100.0% of the outstanding shares of Series B preferred stock
- 138,099 shares of the Medcast Series C preferred stock which represents
approximately 35.5% of the outstanding shares of Series C preferred stock
Such shares have sufficient votes to approve the reorganization agreement and
the merger to the extent required under Delaware law and Medcast's certificate
of incorporation. None of the Medcast stockholders who are parties to a voting
agreement were paid additional consideration in connection with entering into
the voting agreement.
Each Medcast stockholder who is a party to a voting agreement agreed not to
sell the Medcast stock owned, controlled or acquired, either directly or
indirectly, by that person until the termination of the voting agreements.
Each voting agreement will terminate upon the earlier to occur of:
- the termination of the reorganization agreement in accordance with its
terms, or
- the completion of the reorganization
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COMPARATIVE PER SHARE MARKET PRICE DATA
MEDE AMERICA common stock has been traded on the Nasdaq National Market
under the symbol MEDE since February 1, 1999, the date of MEDE AMERICA's initial
public offering. Healtheon common stock has been traded on the Nasdaq National
Market under the symbol HLTH since February 10, 1999, the date of Healtheon's
initial public offering. WebMD's capital stock has no established public trading
market, and therefore has no public market price.
The following table sets forth, for the calendar quarters indicated, the
high and low sale prices per share of MEDE AMERICA common stock and Healtheon
common stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
MEDE AMERICA HEALTHEON
COMMON STOCK COMMON STOCK
---------------- -----------------
HIGH LOW HIGH LOW
------ ------ ------- ------
<S> <C> <C> <C> <C>
Year Ending December 31, 1999:
First Quarter........................................ $21.50 $11.88 $ 49.38 $21.75
Second Quarter....................................... 37.75 17.38 105.00 39.94
Third Quarter (through , 1999)................
</TABLE>
The following table sets forth the closing prices per share of Healtheon
common stock and MEDE AMERICA common stock as reported on the Nasdaq National
Market on April 20, 1999, the business day preceding public announcement that
Healtheon and MEDE AMERICA had entered into the merger agreement, and on
[ ], 1999, the last full trading day for which closing prices were
available at the time of the printing of this proxy statement/prospectus. This
table also sets forth the equivalent price per share of MEDE AMERICA common
stock on those dates. The equivalent price per share is equal to the closing
price of a share of Healtheon common stock on that date multiplied by 0.6593,
the number of shares of Healtheon common stock to be issued in exchange for each
share of MEDE AMERICA common stock, assuming no adjustment to the exchange ratio
as provided for in the MEDE AMERICA reorganization agreement.
<TABLE>
<CAPTION>
MEDE
AMERICA HEALTHEON EQUIVALENT PER
COMMON STOCK COMMON STOCK SHARE PRICE
------------ ------------ --------------
<S> <C> <C> <C>
April 20, 1999.................................... $22.06 $45.72 $30.14
, 1999............................. [ ] [ ] [ ]
</TABLE>
MEDE AMERICA and Healtheon believe that MEDE AMERICA common stock presently
trades on the basis of the value of the Healtheon common stock expected to be
issued in exchange for the MEDE AMERICA common stock in the MEDE AMERICA
reorganization, discounted primarily for the uncertainties associated with the
reorganization. Apart from the publicly disclosed information concerning
Healtheon which is included in this proxy statement/prospectus, Healtheon cannot
state with certainty what factors account for changes in the market price of the
Healtheon common stock.
MEDE AMERICA stockholders are advised to obtain current market quotations
for Healtheon common stock and MEDE AMERICA common stock. No assurance can be
given as to the market prices of Healtheon common stock or MEDE AMERICA common
stock at any time before the consummation of the reorganization or as to the
market price of Healtheon common stock at any time after the reorganization. You
may receive less than or more than 0.6593 of a share of Healtheon/WebMD common
stock for each share of your MEDE AMERICA common stock depending on the average
closing sale price of Healtheon common stock for the ten trading day periods
ending two days prior to the stockholders' meeting. See "Structure of the MEDE
AMERICA reorganization and conversion of MEDE AMERICA common stock" on page 108
of this proxy statement/prospectus for further information.
HEALTHEON AND MEDE AMERICA HAVE NEVER PAID CASH DIVIDENDS ON THEIR
RESPECTIVE SHARES OF CAPITAL STOCK. PURSUANT TO THE MEDE AMERICA REORGANIZATION
AGREEMENT, MEDE AMERICA HAS AGREED NOT TO PAY CASH DIVIDENDS PENDING THE
CONSUMMATION OF THE REORGANIZATION, WITHOUT WRITTEN CONSENT OF HEALTHEON/WEBMD.
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UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information
for Healtheon/WebMD gives effect to:
1. The proposed Healtheon-WebMD reorganization, the MEDE AMERICA
reorganization and the Medcast reorganization using the purchase
accounting method, based on preliminary allocations of the total
estimated purchase prices. The historical financial information has been
derived from the respective historical financial statements of
Healtheon, WebMD, MEDE AMERICA and Greenberg News Networks, which is
referred to as Medcast, and should be read in conjunction with such
financial statements and the related notes included in this proxy
statement/prospectus.
2. The proposed Healtheon-WebMD reorganization and MEDE AMERICA
reorganization using the purchase accounting method, based on
preliminary allocations of the total estimated purchase prices. The
historical financial information has been derived from the respective
historical financial statements of Healtheon, WebMD and MEDE AMERICA,
and should be read in conjunction with such financial statements and the
related notes included in this proxy statement/prospectus.
3. The proposed Healtheon-WebMD reorganization and the Medcast
reorganization using the purchase accounting method, based on
preliminary allocations of the total estimated purchase prices. The
historical financial information has been derived from the respective
historical financial statements of Healtheon, WebMD and Medcast, and
should be read in conjunction with such financial statements and the
related notes included in this proxy statement/prospectus.
4. The proposed Healtheon-WebMD reorganization only, using the purchase
accounting method, based on a preliminary allocation of the total
estimated purchase price. The historical financial information has been
derived from the respective historical financial statements of Healtheon
and WebMD, and should be read in conjunction with such financial
statements and the related notes included in this proxy
statement/prospectus.
5. The proposed MEDE AMERICA reorganization only, using the purchase
accounting method, based on a preliminary allocation of the total
estimated purchase price. The historical financial information has been
derived from the respective historical financial statements of Healtheon
and MEDE AMERICA, and should be read in conjunction with such financial
statements and the related notes included in this proxy
statement/prospectus.
6. WebMD's acquisitions of Direct Medical Knowledge, Inc. and Sapient
Health Network, Inc. in January 1999, using the purchase accounting
method.
7. MEDE AMERICA's acquisition of Healthcare Interchange, Inc. in October
1998, using the purchase accounting method.
The unaudited pro forma condensed combined balance sheets have been
prepared assuming the reorganizations took place as of March 31, 1999 and
allocate the total estimated purchase prices to the fair values of assets and
liabilities of the acquired companies based on preliminary valuations.
The unaudited pro forma condensed combined statements of operations combine
Healtheon's, WebMD's, MEDE AMERICA's and Medcast's historical statements of
operations and give effect to the reorganizations, including the amortization of
goodwill and other intangible assets resulting from the reorganizations, as if
they occurred on January 1, 1998, for the twelve months ended December 31, 1998
and on January 1, 1999 for the three months ended March 31, 1999. The MEDE
AMERICA financial information has been recast to conform to Healtheon's December
31 fiscal year end. The unaudited pro forma condensed combined statement of
operations for the year ended December 31, 1998 combines the audited historical
consolidated statement of operations of Healtheon for the year ended December
31, 1998, the audited historical consolidated statement of operations of WebMD,
after giving effect to the acquisitions of Sapient Health Network, Inc. and
Direct Medical Knowledge, Inc. -- the entities were acquired by WebMD in January
1999, for the year ended December 31, 1998, the unaudited historical
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<PAGE> 162
UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL INFORMATION (CONTINUED)
consolidated statement of operations of MEDE AMERICA, after giving effect to the
acquisition of Healthcare Interchange, Inc. -- this entity was acquired by MEDE
AMERICA in October 1998, for the twelve months ended December 31, 1998 and the
audited historical statement of operations of Medcast for the year ended
December 31, 1998.
The total estimated purchase prices of WebMD, MEDE AMERICA and Medcast have
been allocated on a preliminary basis to assets and liabilities based on
management's estimates of their fair values with the excess costs over the net
assets acquired allocated to goodwill and other intangible assets. These
allocations are subject to change pending a final determination and analysis of
the total purchase prices and the fair values of the assets acquired and
liabilities assumed. The impact of such changes could be material.
The unaudited pro forma condensed combined information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have actually occurred if the
reorganizations, either individually or combined, had been consummated as of the
dates indicated, nor is it necessarily indicative of the future operating
results or financial position of the combined companies. The pro forma
adjustments are based on the information available at the time of the printing
of this proxy statement/prospectus.
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HEALTHEON/WEBMD CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED
WITH WEBMD, MEDE AMERICA AND MEDCAST
BALANCE SHEET
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
-----------------------------------------------------------------------------
MEDE PRO FORMA PRO FORMA
HEALTHEON WEBMD AMERICA MEDCAST ADJUSTMENTS COMBINED
--------- -------- -------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash, cash equivalents and
short-term investments..... $ 63,175 $ 9,673 $ 4,042 $ 122 $ 385,000(5) $ 462,012
Accounts receivable, net..... 10,424 879 15,332 33 -- 26,668
Other current assets......... 1,561 25,520 1,037 101 -- 28,219
--------- -------- -------- -------- ---------- ----------
Total current
assets.............. 75,160 36,072 20,411 256 385,000 516,899
--
Property and equipment, net.... 17,410 4,839 5,424 1,981 -- 29,654
Goodwill and other intangible
assets, net.................. 24,828 50,861 48,650 -- 7,334,838(2) 7,359,666
(99,511)(4)
Other assets................... 3,657 43,556 4,429 929 -- 52,571
--------- -------- -------- -------- ---------- ----------
Total assets.......... $ 121,055 $135,328 $78,914 $ 3,166 $7,620,327 $7,958,790
========= ======== ======== ======== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable................ $ 1,054 $ -- $ -- $ -- $ -- $ 1,054
Accounts payable............. 4,017 2,636 3,466 727 -- 10,846
Accrued liabilities.......... 11,110 9,554 7,148 2,214 89,500(1) 119,526
Current portion of lease
obligations................ 2,393 340 425 120 -- 3,278
Deferred revenue............. 3,597 -- -- -- -- 3,597
--------- -------- -------- -------- ---------- ----------
Total current
liabilities......... 22,171 12,530 11,039 3,061 89,500 138,301
Long term obligations.......... 3,153 353 6,524 225 -- 10,255
Redeemable warrants............ -- 3,798 -- -- (3,798)(3) --
Stockholders' equity:
Preferred stock.............. -- 120,928 -- 89,627 (210,555)(3) --
Common stock................. 7 41,640 130 19 7(1) 14
(41,789)(3)
Paid in capital.............. 228,833 -- 114,660 -- 7,329,496(1) 7,943,329
(114,660)(3)
385,000(5)
Deferred compensation........ (11,112) (924) -- (584) 1,508(3) (11,112)
Retained earnings
(accumulated deficit)...... (121,997) (42,997) (53,439) (89,182) 185,618(3) (121,997)
--------- -------- -------- -------- ---------- ----------
Total stockholders'
equity.............. 95,731 118,647 61,351 (120) 7,534,625 7,810,234
--------- -------- -------- -------- ---------- ----------
Total liabilities and
stockholders'
equity.............. $ 121,055 $135,328 $78,914 $ 3,166 $7,620,327 $7,958,790
========= ======== ======== ======== ========== ==========
</TABLE>
See accompanying notes.
149
<PAGE> 164
HEALTHEON/WEBMD CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED
WITH WEBMD, MEDE AMERICA AND MEDCAST
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
------------------------------------------------------------------
WEBMD MEDE AMERICA
----------------------------------------- ----------
PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED
HEALTHEON HISTORICAL (I) (I) HISTORICAL
--------- ---------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenue.......................... $ 48,838 $ 408 $ 878 $ 1,286 $48,180
Operating costs and expenses:
Cost of operations............. 43,014 -- -- -- 18,426
Development and engineering.... 19,002 7,484 3,332 10,816 4,346
Sales, general and
administrative............... 23,095 13,862 5,350 19,212 17,354
Depreciation and
amortization................. 17,675 2,098 15,041 17,139 7,832
-------- -------- -------- -------- -------
Total operating costs and
expenses................... 102,786 23,444 23,723 47,167 47,958
-------- -------- -------- -------- -------
Income (loss) from operations.... (53,948) (23,036) (22,845) (45,881) 222
Interest, net.................... 790 (139) (422) (561) (4,417)
Dividends on preferred stock..... (890) -- -- -- (2,400)
Gain on disposal of discontinued
operations, net................ -- 7,709 -- 7,709 --
Extraordinary loss............... -- (930) -- (930) --
Accretion of redeemable warrants
and preferred stock to
redemption value............... -- (2,150) -- (2,150) --
-------- -------- -------- -------- -------
Net loss applicable to common
stockholders................... $(54,048) $(18,546) $(23,267) $(41,813) $(6,595)
======== ======== ======== ======== =======
Basic and diluted net loss per
common share................... $ (1.54) $ (1.52) $ (3.43) $ (1.16)
======== ======== ======== =======
Weighted-average shares
outstanding used in computing
basic and diluted net loss per
common share................... 34,987 12,196 12,196 5,684
======== ======== ======== =======
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
------------------------------------------------------------------------
MEDE AMERICA
------------------------------
PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED PRO FORMA PRO FORMA
(II) (II) MEDCAST ADJUSTMENTS COMBINED
--------------- ------------ -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue.......................... $ 4,283 $52,463 $ -- $ -- $ 102,587
Operating costs and expenses:
Cost of operations............. 1,493 19,919 3,644 -- 66,577
Development and engineering.... -- 4,346 633 -- 34,797
Sales, general and
administrative............... 2,602 19,956 10,126 -- 72,389
Depreciation and
amortization................. 941 8,773 254 2,396,242(A) 2,440,083
------- ------- -------- ----------- -----------
Total operating costs and
expenses................... 5,036 52,994 14,657 2,396,242 2,613,846
------- ------- -------- ----------- -----------
Income (loss) from operations.... (753) (531) (14,657) (2,396,242) (2,511,259)
Interest, net.................... (834) (5,251) 713 -- (4,309)
Dividends on preferred stock..... -- (2,400) -- (3,290)
Gain on disposal of discontinued
operations, net................ -- -- -- -- 7,709
Extraordinary loss............... -- -- -- -- (930)
Accretion of redeemable warrants
and preferred stock to
redemption value............... -- -- (4,591) 4,591(C) (2,150)
------- ------- -------- ----------- -----------
Net loss applicable to common
stockholders................... $(1,587) $(8,182) $(18,535) $(2,391,651) $(2,514,229)
======= ======= ======== =========== ===========
Basic and diluted net loss per
common share................... $ (1.44) $ (9.72) $ (23.25)
======= ======== ===========
Weighted-average shares
outstanding used in computing
basic and diluted net loss per
common share................... 5,684 1,906 108,118(B)
======= ======== ===========
</TABLE>
- -------------------------
(i) Reflects the acquisitions by WebMD of Direct Medical Knowledge, Inc. and
Sapient Health Network, Inc. in January, 1999, and all pro forma
adjustments associated with the acquisitions.
(ii) Reflects the acquisition by MEDE AMERICA of Healthcare Interchange, Inc. at
October 30, 1998, and all pro forma adjustments associated with this
acquisition.
See accompanying notes.
150
<PAGE> 165
HEALTHEON/WEBMD CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED
WITH WEBMD, MEDE AMERICA AND MEDCAST
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
-------------------------------------------------------
MEDE PRO FORMA PRO FORMA
HEALTHEON WEBMD AMERICA MEDCAST ADJUSTMENTS COMBINED
--------- -------- ------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue...................... $ 17,555 $ 2,458 $14,776 $ 8 $ -- $ 34,797
Operating costs and expenses:
Cost of operations......... 15,518 380 5,280 2,147 -- 23,325
Development and
engineering............. 7,035 5,172 1,109 259 -- 13,575
Sales, general and
administrative.......... 8,901 11,421 4,885 5,419 -- 30,626
Depreciation and
amortization............ 5,228 3,502 2,375 179 595,217(A) 606,501
-------- -------- ------- -------- ---------- ---------
Total operating
costs and
expenses......... 36,682 20,475 13,649 8,004 595,217 674,027
-------- -------- ------- -------- ---------- ---------
Income (loss) from
operations................. (19,127) (18,017) 1,127 (7,996) (595,217) (639,230)
Interest, net................ 558 214 (567) 49 -- 254
Dividends on preferred
stock...................... -- -- (244) -- (244)
Extraordinary loss........... -- -- (1,619) -- (1,619)
Accretion of redeemable
warrants and preferred
stock to redemption
value...................... -- (538) -- (63,034) 63,034(C) (538)
-------- -------- ------- -------- ---------- ---------
Net loss applicable to common
stockholders............... $(18,569) $(18,341) $(1,303) $(70,981) $ (532,183) $(641,377)
======== ======== ======= ======== ========== =========
Basic and diluted net loss
per common share........... $ (0.30) $ (1.46) $(0.13) (37.06) $ (4.72)
======== ======== ======= ======== =========
Weighted-average shares
outstanding used in
computing basic and diluted
net loss per common
share...................... 62,665 12,533 10,042 1,915 135,796(B)
======== ======== ======= ======== =========
</TABLE>
See accompanying notes.
151
<PAGE> 166
HEALTHEON/WEBMD CORPORATION
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED WITH WEBMD, MEDE AMERICA AND
MEDCAST FINANCIAL INFORMATION
The unaudited pro forma condensed combined financial information reflects
the Healtheon-WebMD reorganization, the Medcast reorganization and MEDE AMERICA
reorganization and gives effect to certain reclassifications to the unaudited
historical financial statements to conform the presentation of the historical
operations of the merged companies.
The total estimated purchase prices of the reorganizations have been
allocated on a preliminary basis to assets and liabilities based on management's
estimate of their fair values. The excess of the purchase prices over the fair
value of the net assets acquired has been allocated to goodwill and other
intangible assets. These allocations are subject to change pending the
completion of the final analysis of the total purchase prices and fair values of
the assets acquired and liabilities assumed. The impact of such changes could be
material.
The adjustments to the unaudited pro forma condensed combined balance sheet
as of March 31, 1999, have been calculated as if the reorganizations occurred on
March 31, 1999 and are as follows:
(1) To reflect the acquisition of all of the outstanding capital stock of
WebMD, Medcast and MEDE AMERICA by exchanging shares of Healtheon/WebMD
common stock in exchange for each share of WebMD, Medcast and MEDE
AMERICA capital stock for a total estimated combined purchase price of
approximately $7,409.9 million. The purchase consideration consists of
the issuance of an estimated 73.1 million shares of Healtheon/WebMD's
common stock with a fair value of approximately $5,277.9 million and
the assumption of options and warrants to purchase 33.0 million shares
of Healtheon common stock with a fair value of approximately $2,042.5
million and other related reorganization costs of approximately $89.5
million, consisting primarily of approximately $64.0 million in
investment banking, legal, accounting and regulatory filing fees, and
approximately $25.5 million in costs anticipated to be incurred for
employee retention, work force reduction, facility consolidation and
other reorganization related costs.
The purchase price was determined as follows:
<TABLE>
<CAPTION>
WEBMD MEDCAST MEDE AMERICA TOTAL
--------------------------- ---------------------------- ---------------------------- HEALTHEON/
EQUIVALENT FAIR VALUE EQUIVALENT FAIR VALUE EQUIVALENT FAIR VALUE WEBMD
SHARES (IN THOUSANDS) SHARES (IN THOUSANDS) SHARES (IN THOUSANDS) SHARES
---------- -------------- ---------- --------------- ---------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Shares................... 62,127,739 $4,646,409 2,482,358 $191,049 8,521,383 $440,423 73,131,480
Stock Options............ 11,627,080 805,245 200,030 6,473 616,000 25,943 12,443,110
Warrants................. 19,696,899 1,168,801 127,738 905 879,539 35,155 20,604,176
---------- ---------- --------- -------- ---------- -------- -----------
Total Shares...... 93,451,718 2,710,126 10,016,922 106,178,766
========== ========= ========== ===========
Reorganization Costs..... 51,200 14,500 23,800
---------- -------- --------
$6,671,655 $212,927 $525,321
========== ======== ========
<CAPTION>
AGGREGATE
FAIR
VALUE
(IN THOUSANDS)
---------------
<S> <C>
Shares................... $5,277,881
Stock Options............ 837,661
Warrants................. 1,204,861
Total Shares......
Reorganization Costs..... 89,500
----------
$7,409,903
==========
</TABLE>
The estimated fair value of the common stock to be issued is based on
the average closing price of Healtheon's common stock on the five days
prior and subsequent to the days the reorganizations were announced,
which was May 20, 1999 for WebMD, July 1, 1999 for Medcast and April 21,
1999 for MEDE AMERICA. The estimated fair value of the options and
warrants to be assumed is based on the Black-Scholes model using the
following assumptions:
- Expected lives of one-half to 2.5 years
- Expected volatility factor of 1.0
- Risk-free interest rate of 4.5%
- Expected dividend rate of 0%
152
<PAGE> 167
HEALTHEON/WEBMD CORPORATION
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED WITH WEBMD, MEDE AMERICA AND
MEDCAST FINANCIAL INFORMATION (CONTINUED)
The purchase price for MEDE AMERICA may be increased by 25% based upon
the average closing price of Healtheon's stock for the 10 day period
ending two days prior to the special meeting of MEDE AMERICA
stockholders, if that lower average stock price is below $38.68.
The preliminary purchase price of MEDE AMERICA excludes the impact of
the options issued to MEDE AMERICA employees to purchase 700,000 shares
of Healtheon/WebMD common stock. On the date of the closing of the
reorganization, any difference between the fair market value of the
shares at that date and the strike price of the awards will be treated
as deferred compensation and amortized over the vesting periods of the
options.
The preliminary purchase price for WebMD excludes the impact of the
anti-dilutive rights held by McKesson HBOC, as well as the potential
that the WebMD Series A and B preferred stock may not be converted to
common stock, since it is anticipated these issues will be resolved
prior to the closing and will not impact the pro forma financial
statements.
(2) Recognition of the excess purchase price of approximately $7,334.8
million over the fair value of net tangible assets acquired, have been
recorded as goodwill and other intangible assets.
(3) To reflect the elimination of the historical stockholders' equity
accounts of WebMD, Medcast and MEDE AMERICA.
(4) To reflect the elimination of goodwill and other intangible assets on
the balance sheets of WebMD and MEDE AMERICA as of the acquisition
date.
(5) To reflect the proceeds, net of offering costs, relating to the
investments in capital stock made or to be made by strategic partners
prior to the consummation of the Healtheon-WebMD reorganization. The
Healtheon-WebMD reorganization agreement requires that these
investments be completed prior to the closing of the Healtheon-WebMD
reorganization.
In May and June of 1999, WebMD sold 456,896 shares of Series E preferred
stock for approximately $250 million. Upon closing of the
Healtheon-WebMD reorganization, 276,906 shares of Series E preferred
stock will be sold for $150 million.
The adjustments to the unaudited pro forma condensed combined statements of
operations for the quarter ended March 31, 1999 and year ended December 31,
1998, assume the reorganizations occurred as of January 1, 1999 and January 1,
1998, respectively, and are as follows:
(A) To reflect the amortization of goodwill and other intangible assets
resulting from the reorganizations. The goodwill and other intangible
assets are being amortized over periods of approximately three to four
years. Currently, management does not anticipate that any significant
value will be attributed to purchased in-process research and
development.
(B) Basic and diluted net loss per share have been adjusted to reflect the
issuance of approximately [73.1] million shares of Healtheon/WebMD's
common stock, as if the shares had been outstanding for the entire
periods presented. The effect of stock options and warrants of WebMD,
Medcast and MEDE AMERICA assumed in the reorganizations have not been
included as their inclusion would be anti-dilutive.
(C) To reflect the reversal of accretion on redeemable preferred stock,
that is forfeited by redeemable preferred stockholders upon voting for
and consummation of the Medcast reorganization.
153
<PAGE> 168
HEALTHEON/WEBMD CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED
WITH WEBMD AND MEDE AMERICA
BALANCE SHEET
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
------------------------------------------------------------
MEDE PRO FORMA PRO FORMA
HEALTHEON WEBMD AMERICA ADJUSTMENTS COMBINED
--------- -------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash, cash equivalents and
short-term investments.......... $ 63,175 $ 9,673 $ 4,042 $ 385,000(5) $ 461,890
Accounts receivable, net........... 10,424 879 15,332 -- 26,635
Other current assets............... 1,561 25,520 1,037 -- 28,118
--------- -------- -------- ---------- ----------
Total current assets....... 75,160 36,072 20,411 385,000 516,643
--
Property and equipment, net.......... 17,410 4,839 5,424 -- 27,673
Goodwill and other intangible assets,
net................................ 24,828 50,861 48,650 7,121,791(2) 7,146,619
(99,511)(4)
Other assets......................... 3,657 43,556 4,429 -- 51,642
--------- -------- -------- ---------- ----------
Total assets............... $ 121,055 $135,328 $ 78,914 $7,407,280 $7,742,577
========= ======== ======== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable...................... $ 1,054 $ -- $ -- $ -- $ 1,054
Accounts payable................... 4,017 2,636 3,466 -- 10,119
Accrued liabilities................ 11,110 9,554 7,148 75,000(1) 102,812
Current portion of lease
obligations..................... 2,393 340 425 -- 3,158
Deferred revenue................... 3,597 -- -- -- 3,597
--------- -------- -------- ---------- ----------
Total current
liabilities.............. 22,171 12,530 11,039 75,000 120,740
Long term obligations................ 3,153 353 6,524 -- 10,030
Redeemable warrants.................. -- 3,798 -- (3,798)(3) --
Stockholders' equity:
Preferred stock.................... -- 120,928 -- (120,928)(3) --
Common stock....................... 7 41,640 130 7(1) 14
(41,770)(3)
Paid in capital.................... 228,833 -- 114,660 7,131,069(1) 7,744,902
(114,660)(3)
385,000(5)
Deferred compensation.............. (11,112) (924) -- 924(3) (11,112)
Retained earnings (accumulated
deficit)........................ (121,997) (42,997) (53,439) 96,436(3) (121,997)
--------- -------- -------- ---------- ----------
Total stockholders'
equity................... 95,731 118,647 61,351 7,336,078 7,611,807
--------- -------- -------- ---------- ----------
Total liabilities and
stockholders' equity..... $ 121,055 $135,328 $ 78,914 $7,407,280 $7,742,577
========= ======== ======== ========== ==========
</TABLE>
See accompanying notes.
154
<PAGE> 169
HEALTHEON/WEBMD CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED
WITH WEBMD AND MEDE AMERICA
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
------------------------------------------------------------------
WEBMD MEDE AMERICA
----------------------------------------- ----------
PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED
HEALTHEON HISTORICAL (I) (I) HISTORICAL
--------- ---------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenue.......................... $ 48,838 $ 408 $ 878 $ 1,286 $48,180
Operating costs and expenses:
Cost of operations............. 43,014 -- -- -- 18,426
Development and engineering.... 19,002 7,484 3,332 10,816 4,346
Sales, general and
administrative............... 23,095 13,862 5,350 19,212 17,354
Depreciation and
amortization................. 17,675 2,098 15,041 17,139 7,832
-------- -------- -------- -------- -------
Total operating costs and
expenses................... 102,786 23,444 23,723 47,167 47,958
-------- -------- -------- -------- -------
Income (loss) from operations.... (53,948) (23,036) (22,845) (45,881) 222
Interest, net.................... 790 (139) (422) (561) (4,417)
Dividends on preferred stock..... (890) -- -- -- (2,400)
Gain on disposal of discontinued
operations, net................ -- 7,709 -- 7,709 --
Extraordinary loss............... -- (930) -- (930) --
Accretion of redeemable warrants
to redemption value............ -- (2,150) -- (2,150) --
-------- -------- -------- -------- -------
Net loss applicable to common
stockholders................... $(54,048) $(18,546) $(23,267) $(41,813) $(6,595)
======== ======== ======== ======== =======
Basic and diluted net loss per
common share................... $ (1.54) $ (1.52) $ (3.43) $ (1.16)
======== ======== ======== =======
Weighted-average shares
outstanding used in computing
basic and diluted net loss per
common share................... 34,987 12,196 12,196 5,684
======== ======== ======== =======
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------------
MEDE AMERICA
------------------------------
PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED PRO FORMA PRO FORMA
(II) (II) ADJUSTMENTS COMBINED
--------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Revenue.......................... $ 4,283 $52,463 $ -- $ 102,587
Operating costs and expenses:
Cost of operations............. 1,493 19,919 -- 62,933
Development and engineering.... -- 4,346 -- 34,164
Sales, general and
administrative............... 2,602 19,956 -- 62,263
Depreciation and
amortization................. 941 8,773 2,325,226(A) 2,368,813
------- ------- ----------- -----------
Total operating costs and
expenses................... 5,036 52,994 2,325,226 2,528,173
------- ------- ----------- -----------
Income (loss) from operations.... (753) (531) (2,325,226) (2,425,586)
Interest, net.................... (834) (5,251) -- (5,022)
Dividends on preferred stock..... -- (2,400) -- (3,290)
Gain on disposal of discontinued
operations, net................ -- -- -- 7,709
Extraordinary loss............... -- -- -- (930)
Accretion of redeemable warrants
to redemption value............ -- -- -- (2,150)
------- ------- ----------- -----------
Net loss applicable to common
stockholders................... $(1,587) $(8,182) $(2,325,226) $(2,429,269)
======= ======= =========== ===========
Basic and diluted net loss per
common share................... $ (1.44) $ (23.00)
======= ===========
Weighted-average shares
outstanding used in computing
basic and diluted net loss per
common share................... 5,684 105,636(B)
======= ===========
</TABLE>
- -------------------------
(i) Reflects the acquisitions by WebMD of Direct Medical Knowledge, Inc. and
Sapient Health Network, Inc. in January, 1999, and all pro forma
adjustments associated with the acquisitions.
(ii) Reflects the acquisition by MEDE AMERICA of Healthcare Interchange, Inc. at
October 30, 1998, and all pro forma adjustments associated with this
acquisition.
See accompanying notes.
155
<PAGE> 170
HEALTHEON/WEBMD CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED
WITH WEBMD AND MEDE AMERICA
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
------------------------------------------------------------
MEDE PRO FORMA PRO FORMA
HEALTHEON WEBMD AMERICA ADJUSTMENTS COMBINED
--------- -------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenue............................ $ 17,555 $ 2,458 $14,776 $ -- $ 34,789
Operating costs and expenses:
Cost of operations............... 15,518 380 5,280 -- 21,178
Development and engineering...... 7,035 5,172 1,109 -- 13,316
Sales, general and
administrative................ 8,901 11,421 4,885 -- 25,207
Depreciation and amortization.... 5,228 3,502 2,375 577,463(A) 588,568
-------- -------- ------- ---------- ----------
Total operating costs and
expenses............... 36,682 20,475 13,649 577,463 648,269
-------- -------- ------- ---------- ----------
Income (loss) from operations...... (19,127) (18,017) 1,127 (577,463) (613,480)
Interest, net...................... 558 214 (567) -- 205
Dividends on preferred stock....... -- -- (244) -- (244)
Extraordinary loss................. -- -- (1,619) -- (1,619)
Accretion of redeemable warrants to
redemption value................. -- (538) -- -- (538)
-------- -------- ------- ---------- ----------
Net loss applicable to common
stockholders..................... $(18,569) $(18,341) $(1,303) $ (577,463) $ (615,676)
======== ======== ======= ========== ==========
Basic and diluted net loss per
common share..................... $ (0.30) $ (1.46) $(0.13) $ (4.62)
======== ======== ======= ==========
Weighted-average shares outstanding
used in computing basic and
diluted net loss per common
share............................ 62,665 12,533 10,042 133,314(B)
======== ======== ======= ==========
</TABLE>
See accompanying notes.
156
<PAGE> 171
HEALTHEON/WEBMD CORPORATION
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED WITH WEBMD AND MEDE AMERICA FINANCIAL INFORMATION
The unaudited pro forma condensed combined financial information reflects
the Healtheon-WebMD reorganization and MEDE AMERICA reorganization and gives
effect to certain reclassifications to the unaudited historical financial
statements to conform the presentation of the historical operations of the
merged companies.
The total estimated purchase prices of the reorganizations have been
allocated on a preliminary basis to assets and liabilities based on management's
estimate of their fair values. The excess of the purchase prices over the fair
value of the net assets acquired has been allocated to goodwill and other
intangible assets. These allocations are subject to change pending the
completion of the final analysis of the total purchase prices and fair values of
the assets acquired and liabilities assumed. The impact of such changes could be
material.
The adjustments to the unaudited pro forma condensed combined balance sheet
as of March 31, 1999, have been calculated as if the reorganizations occurred on
March 31, 1999 and are as follows:
(1) To reflect the acquisition of all of the outstanding capital stock of
WebMD and MEDE AMERICA by exchanging shares of Healtheon/WebMD common
stock in exchange for each share of WebMD and MEDE AMERICA capital
stock for a total estimated combined purchase price of approximately
$7,196.9 million. The purchase consideration consists of the issuance
of an estimated 70.6 million shares of Healtheon/WebMD's common stock
with a fair value of approximately $5,086.8 million and the assumption
of options and warrants to purchase 32.8 million shares of Healtheon's
Common Stock with a fair value of approximately $2,035.1 million and
other related reorganization costs of approximately $75.0 million,
consisting primarily of approximately $54.5 million in investment
banking, legal, accounting and regulatory filing fees, and
approximately $20.5 million in costs anticipated to be incurred for
employee retention, work force reduction, facility consolidation and
other reorganization related costs.
The purchase price was determined as follows:
<TABLE>
<CAPTION>
WEBMD MEDE AMERICA
--------------------------- --------------------------- TOTAL AGGREGATE
EQUIVALENT FAIR VALUE EQUIVALENT FAIR VALUE HEALTHEON/WEBMD FAIR VALUE
SHARES (IN THOUSANDS) SHARES (IN THOUSANDS) SHARES (IN THOUSANDS)
---------- -------------- ---------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Shares................ 62,127,739 $4,646,409 8,521,383 $440,423 70,649,122 $5,086,832
Stock Options......... 11,627,080 805,245 616,000 25,943 12,243,080 831,188
Warrants.............. 19,696,899 1,168,801 879,539 35,155 20,576,438 1,203,956
---------- ---------- -----------
Total
Shares..... 93,451,718 10,016,922 103,468,640
========== ========== ===========
Reorganization
Costs............... 51,200 23,800 75,000
---------- -------- ----------
$6,671,655 $525,321 $7,196,976
========== ======== ==========
</TABLE>
The estimated fair value of the common stock to be issued is based on
the average closing price of Healtheon's common stock on the five days
prior and subsequent to the days the reorganizations were announced,
which was May 20, 1999 for WebMD and April 21, 1999 for MEDE AMERICA.
The estimated fair value of the options and warrants to be assumed is
based on the Black-Scholes model using the following assumptions:
- Expected lives of one-half to 2.5 years
- Expected volatility factor of 1.0
- Risk-free interest rate of 4.5%
- Expected dividend rate of 0%
157
<PAGE> 172
HEALTHEON/WEBMD CORPORATION
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED WITH WEBMD AND MEDE AMERICA FINANCIAL INFORMATION (CONTINUED)
The purchase price for MEDE AMERICA may be increased by 25% based upon
the average closing price of Healtheon's stock for the 10 day period
ending two days prior to the special meeting of MEDE AMERICA
stockholders, if that lower average stock price is below $38.68.
The preliminary purchase price for MEDE AMERICA excludes the impact of
the options issued to MEDE AMERICA employees to purchase 700,000 shares
of Healtheon/WebMD's common stock. On the date of the closing of the
reorganization, any difference between the fair market value of the
shares at that date and the strike price of the awards will be treated
as deferred compensation and amortized over the vesting periods of the
options.
The preliminary purchase price for WebMD excludes the impact of the
anti-dilutive rights held by McKesson HBOC, as well as the potential
that the WebMD Series A and B Preferred Stock may not be converted to
common stock, since it is anticipated these issues will be resolved
prior to closing and will not impact the pro forma financial statements.
(2) Recognition of the excess purchase price of approximately $7,121.8
million over the fair value of net tangible assets acquired, have been
recorded as goodwill and other intangible assets.
(3) To reflect the elimination of the historical stockholders' equity
accounts of WebMD and MEDE AMERICA.
(4) To reflect the elimination of goodwill and other intangible assets on
the balance sheets of WebMD and MEDE AMERICA as of the acquisition
date.
(5) To reflect the proceeds, net of offering costs, relating to the
investments in capital stock made or to be made by strategic partners
prior to the consummation of the Healtheon-WebMD reorganization. The
Healtheon-WebMD reorganization agreement requires that these
investments be completed prior to the closing of the Healtheon-WebMD
reorganization.
In May and June of 1999, WebMD sold 456,896 shares of Series E preferred
stock for approximately $250 million. Upon closing of the
Healtheon-WebMD reorganization, 276,906 shares of Series E preferred
stock will be sold for $150 million.
The adjustments to the unaudited pro forma condensed combined statements of
operations for the quarter ended March 31, 1999 and year ended December 31,
1998, assume the reorganizations occurred as of January 1, 1999 and January 1,
1998, respectively, and are as follows:
(A) To reflect the amortization of goodwill and other intangible assets
resulting from the reorganizations. The goodwill and other intangible
assets are being amortized over periods of approximately three to four
years. Currently, management does not anticipate that any significant
value will be attributed to purchased in-process research and
development.
(B) Basic and diluted net loss per share have been adjusted to reflect the
issuance of approximately 70.6 million shares of Healtheon/WebMD's
common stock, as if the shares had been outstanding for the entire
periods presented. The effect of stock options and warrants of WebMD
and MEDE AMERICA assumed in the reorganizations have not been included
as their inclusion would be anti-dilutive.
158
<PAGE> 173
HEALTHEON/WEBMD CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED
WITH WEBMD AND MEDCAST
BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
-----------------------------------------------
PRO FORMA PRO FORMA
HEALTHEON WEBMD MEDCAST ADJUSTMENTS COMBINED
--------- -------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash, cash equivalents and
short-term investments..... $ 63,175 $ 9,673 $ 122 $ 385,000(5) $ 457,970
Accounts receivable, net...... 10,424 879 33 -- 11,336
Other current assets.......... 1,561 25,520 101 -- 27,182
--------- -------- -------- ---------- ----------
Total current
assets.............. 75,160 36,072 256 385,000 496,488
Property and equipment, net..... 17,410 4,839 1,981 -- 24,230
Goodwill and other intangible
assets, net................... 24,828 50,861 -- 6,822,218(2) 6,847,046
(50,861)(4)
Other assets.................... 3,657 43,556 929 -- 48,142
--------- -------- -------- ---------- ----------
Total assets.......... $ 121,055 $135,328 $ 3,166 $7,156,357 $7,415,906
========= ======== ======== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable................. $ 1,054 $ -- $ -- $ -- $ 1,054
Accounts payable.............. 4,017 2,636 727 -- 7,380
Accrued liabilities........... 11,110 9,554 2,214 65,700(1) 88,578
Current portion of lease
obligations................ 2,393 340 120 -- 2,853
Deferred revenue.............. 3,597 -- -- -- 3,597
--------- -------- -------- ---------- ----------
Total current
liabilities......... 22,171 12,530 3,061 65,700 103,462
Long term obligations........... 3,153 353 225 -- 3,731
Redeemable warrants............. -- 3,798 -- (3,798)(3) --
Stockholders' equity:
Preferred stock............... -- 120,928 89,627 (210,555)(3) --
Common stock.................. 7 41,640 19 6(1) 13
(41,659)(3)
Paid in capital............... 228,833 -- -- 6,827,976(1) 7,441,809
385,000(5)
Deferred compensation......... (11,112) (924) (584) 1,508(3) (11,112)
Retained earnings (accumulated
deficit)................... (121,997) (42,997) (89,182) 132,179(3) (121,997)
--------- -------- -------- ---------- ----------
Total stockholders'
equity.............. 95,731 118,647 (120) 7,094,455 7,308,713
--------- -------- -------- ---------- ----------
Total liabilities and
stockholders'
equity.............. $ 121,055 $135,328 $ 3,166 $7,156,357 $7,415,906
========= ======== ======== ========== ==========
</TABLE>
See accompanying notes.
159
<PAGE> 174
HEALTHEON/WEBMD CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED
WITH WEBMD AND MEDCAST
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
---------------------------------------------------------------------------------------------
WEBMD
-----------------------------------------
PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED PRO FORMA PRO FORMA
HEALTHEON HISTORICAL (I) (I) MEDCAST ADJUSTMENTS COMBINED
--------- ---------- -------------- ----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue.................... $ 48,838 $ 408 $ 878 $ 1,286 $ -- $ -- $ 50,124
Operating costs and
expenses:
Cost of operations....... 43,014 -- -- -- 3,644 -- 46,658
Development and
engineering............ 19,002 7,484 3,332 10,816 633 -- 30,451
Sales, general and
administrative......... 23,095 13,862 5,350 19,212 10,126 -- 52,433
Depreciation and
amortization........... 17,675 2,098 15,041 17,139 254 2,273,770(A) 2,308,838
-------- -------- -------- -------- -------- ----------- -----------
Total operating costs
and expenses......... 102,786 23,444 23,723 47,167 14,657 2,273,770 2,438,380
-------- -------- -------- -------- -------- ----------- -----------
Income (loss) from
operations............... (53,948) (23,036) (22,845) (45,881) (14,657) (2,273,770) (2,388,256)
Interest, net.............. 790 (139) (422) (561) 713 -- 942
Dividends on preferred
stock.................... (890) -- -- -- -- -- (890)
Gain on disposal of
discontinued operations,
net...................... -- 7,709 -- 7,709 -- -- 7,709
Extraordinary loss......... -- (930) -- (930) -- -- (930)
Accretion of redeemable
warrants and preferred
stock to redemption
value.................... -- (2,150) -- (2,150) (4,591) 4,591(C) (2,150)
-------- -------- -------- -------- -------- ----------- -----------
Net loss applicable to
common stockholders'..... $(54,048) $(18,546) $(23,267) $(41,813) $(18,535) $(2,269,179) $(2,383,575)
======== ======== ======== ======== ======== =========== ===========
Basic and diluted net loss
per common share......... $ (1.54) $ (1.52) $ (3.43) $ (9.72) $ (23.93)
======== ======== ======== ======== ===========
Weighted-average shares
outstanding used in
computing basic and
diluted net loss per
common share............. 34,987 12,196 12,196 1,906 99,597(B)
======== ======== ======== ======== ===========
</TABLE>
- -------------------------
(i) Reflects the acquisitions by WebMD of Direct Medical Knowledge, Inc. and
Sapient Health Network, Inc. in January, 1999, and all pro forma adjustments
associated with these acquisitions.
See accompanying notes.
160
<PAGE> 175
HEALTHEON/WEBMD CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED
WITH WEBMD AND MEDCAST
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
----------------------------------------------------------
PRO FORMA PRO FORMA
HEALTHEON WEBMD MEDCAST ADJUSTMENTS COMBINED
--------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenue................................. $ 17,555 $ 2,458 $ 8 $ -- $ 20,021
Operating costs and expenses:
Cost of operations.................... 15,518 380 2,147 -- 18,045
Development and engineering........... 7,035 5,172 259 -- 12,466
Sales, general and administrative..... 8,901 11,421 5,419 -- 25,741
Depreciation and amortization......... 5,228 3,502 179 565,016(A) 573,925
-------- -------- -------- --------- ---------
Total operating costs and
expenses......................... 36,682 20,475 8,004 565,016 630,177
-------- -------- -------- --------- ---------
Income (loss) from operations........... (19,127) (18,017) (7,996) (565,016) (610,156)
Interest, net........................... 558 214 49 -- 821
Accretion of redeemable warrants and
preferred stock to redemption value... -- (538) (63,034) 63,034(C) (538)
-------- -------- -------- --------- ---------
Net loss applicable to common
stockholders.......................... $(18,569) $(18,341) $(70,981) $(501,982) $(609,873)
======== ======== ======== ========= =========
Basic and diluted net loss per common
share................................. $ (0.30) $ (1.46) $ (37.06) $ (4.79)
======== ======== ======== =========
Weighted-average shares outstanding used
in computing basic and diluted net
loss per common share................. 62,665 12,533 1,915 127,275(B)
======== ======== ======== =========
</TABLE>
See accompanying notes.
161
<PAGE> 176
HEALTHEON/WEBMD CORPORATION
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED WITH WEBMD AND MEDCAST
FINANCIAL INFORMATION
The unaudited pro forma condensed combined financial information reflects
the Healtheon-WebMD reorganization and the Medcast reorganization and gives
effect to certain reclassifications to the unaudited historical financial
statements to conform the presentation of the historical operations of the
merged companies.
The total estimated purchase price of the reorganization has been allocated
on a preliminary basis to assets and liabilities based on management's estimate
of their fair values. The excess of the purchase price over the fair value of
the net assets acquired has been allocated to goodwill and other intangible
assets. This allocation is subject to change pending the completion of the final
analysis of the fair value of the assets acquired and liabilities assumed. The
impact of such changes could be material.
The adjustments to the unaudited pro forma condensed combined balance sheet
as of March 31, 1999, have been calculated as if the reorganization occurred on
March 31, 1999 and are as follows:
(1) To reflect the acquisition of all of the outstanding capital stock of
WebMD and Medcast by exchanging 1.815 shares of Healtheon/WebMD common
stock for each share of WebMD capital stock and 0.5483 shares of
Healtheon/WebMD common stock for each share of Medcast common stock,
after conversion of all preferred stock into common stock for a total
estimated purchase price of approximately $6,884.6 million. The
purchase consideration consists of the issuance of an estimated 64.6
million shares of Healtheon/WebMD's common stock with a fair value of
approximately $4.837.5 million and the assumption of options and
warrants to purchase 31.6 million shares of Healtheon/WebMD's common
stock with a fair value of approximately $1.981.4 million and other
related reorganization costs of approximately $65.7 million, consisting
primarily of approximately $51.6 million in investment banking, legal,
accounting and regulatory filing fees, and approximately $14.1 million
in costs anticipated to be incurred for employee retention, work force
reduction, facility consolidation and other reorganization related
costs.
The purchase price was determined as follows:
<TABLE>
<CAPTION>
WEBMD MEDCAST
--------------------------- --------------------------- TOTAL AGGREGATE
EQUIVALENT FAIR VALUE EQUIVALENT FAIR VALUE HEALTHEON/WEBMD FAIR VALUE
SHARES (IN THOUSANDS) SHARES (IN THOUSANDS) SHARES (IN THOUSANDS)
---------- -------------- ---------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Shares................. 62,127,739 $4,646,409 2,482,358 $ 191,049 64,610,097 $4,837,458
Stock options.......... 11,627,080 805,245 200,030 6,473 11,827,110 811,718
Warrants............... 19,696,899 1,168,801 27,738 905 19,724,637 1,169,706
---------- ---------- --------- ---------- ----------
Total shares.... 93,451,718 2,710,126 96,161,844
========== ========= ==========
Reorganization costs............... 51,200 14,500 65,700
---------- ---------- ----------
$6,671,655 $ 212,927 $6,884,582
========== ========== ==========
</TABLE>
The estimated fair value of the common stock to be issued is based on
the average closing price of Healtheon's common stock on the five days
prior and subsequent to the days the reorganizations were announced,
which was May 20, 1999 for WebMD and July 1, 1999 for Medcast. The
estimated fair value of the options and warrants to be assumed is based
on the Black-Scholes model using the following assumptions:
- Expected lives of one-half to 2.5 years
- Expected volatility factor of 1.0
- Risk-free interest rate of 4.5%
- Expected dividend rate of 0%
162
<PAGE> 177
HEALTHEON/WEBMD CORPORATION
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED WITH WEBMD AND MEDCAST
FINANCIAL INFORMATION (CONTINUED)
The preliminary purchase price for WebMD excludes the impact of the
anti-dilutive rights held by McKesson HBOC, as well as the potential
that the WebMD Series A and B Preferred Stock may not be converted to
common stock, since it is anticipated these issues will be resolved
prior to closing and will not impact the pro forma financial statements.
(2) Recognition of the excess purchase price of approximately $6,822.2
million over the fair value of net tangible assets acquired, has been
recorded as goodwill and other intangible assets.
(3) To reflect the elimination of the historical stockholders' equity
accounts of WebMD and Medcast.
(4) To reflect the elimination of goodwill and other intangible assets on
the balance sheet of WebMD as of the acquisition date.
(5) To reflect the proceeds, net of offering costs, relating to investments
in capital stock made or to be made by strategic partners prior to the
consummation of the reorganization. The reorganization agreement
requires that these investments be completed prior to the closing of
the reorganization.
In May and June of 1999, WebMD sold 456,896 shares of Series E preferred
stock for approximately $250 million. Upon closing of the
Healtheon-WebMD reorganization, 276,906 shares of Series E preferred
stock will be sold for approximately $150 million.
The adjustments to the unaudited pro forma condensed combined statements of
operations for the quarter ended March 31, 1999 and year ended December 31,
1998, assume the reorganization occurred as of January 1, 1999 and January 1,
1998, respectively, and are as follows:
(A) To reflect the amortization of goodwill and other intangible assets
resulting from the reorganization. The goodwill and other intangible
assets are being amortized over periods of approximately three years.
Currently, management does not anticipate that any significant value
will be attributed to purchased in-process research and development.
(B) Basic and diluted net loss per share has been adjusted to reflect the
issuance of 64.6 million shares of Healtheon/WebMD's common stock, as
if the shares had been outstanding for the entire periods presented.
The effect of stock options and warrants of WebMD and Medcast assumed
in the reorganization have not been included as their inclusion would
be anti-dilutive.
(C) To reflect the reversal of accretion on redeemable preferred stock,
that is forfeited by redeemable preferred stockholders upon voting for
and consummation of the Medcast reorganization.
163
<PAGE> 178
HEALTHEON/WEBMD CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED
WITH WEBMD
BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
----------------------------------------------------
PRO FORMA PRO FORMA
HEALTHEON WEBMD ADJUSTMENTS COMBINED
--------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Current assets:
Cash, cash equivalents and short-term
investments.......................... $ 63,175 $ 9,673 $ 385,000(5) $ 457,848
Accounts receivable, net................ 10,424 879 -- 11,303
Other current assets.................... 1,561 25,520 -- 27,081
--------- -------- ---------- ----------
Total current assets............ 75,160 36,072 385,000 496,232
Property and equipment, net............... 17,410 4,839 -- 22,249
Goodwill and other intangible assets,
net..................................... 24,828 50,861 6,609,171(2) 6,633,999
(50,861)(4)
Other assets.............................. 3,657 43,556 -- 47,213
--------- -------- ---------- ----------
Total assets.................... $ 121,055 $135,328 $6,943,310 $7,199,693
========= ======== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable........................... $ 1,054 $ -- $ -- $ 1,054
Accounts payable........................ 4,017 2,636 -- 6,653
Accrued liabilities..................... 11,110 9,554 51,200(1) 71,864
Current portion of lease obligations.... 2,393 340 -- 2,733
Deferred revenue........................ 3,597 -- -- 3,597
--------- -------- ---------- ----------
Total current liabilities....... 22,171 12,530 51,200 85,901
Long term obligations..................... 3,153 353 -- 3,506
Redeemable warrants....................... -- 3,798 (3,798)(3) --
Stockholders' equity:
Preferred stock......................... -- 120,928 (120,928)(3) --
Common stock............................ 7 41,640 6(1) 13
(41,640)(3)
Paid in capital......................... 228,833 -- 6,629,549(1) 7,243,382
385,000(5)
Deferred compensation................... (11,112) (924) 924(3) (11,112)
Retained earnings (accumulated
deficit)............................. (121,997) (42,997) 42,997(3) (121,997)
--------- -------- ---------- ----------
Total stockholders' equity...... 95,731 118,647 6,895,908 7,110,286
--------- -------- ---------- ----------
Total liabilities and
stockholders' equity.......... $ 121,055 $135,328 $6,943,310 $7,199,693
========= ======== ========== ==========
</TABLE>
See accompanying notes.
164
<PAGE> 179
HEALTHEON/WEBMD CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED
WITH WEBMD
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------------------------------------
WEBMD
-----------------------------------------
PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED PRO FORMA PRO FORMA
HEALTHEON HISTORICAL (I) (I) ADJUSTMENTS COMBINED
--------- ---------- -------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenue........................ $ 48,838 $ 408 $ 878 $ 1,286 $ -- $ 50,124
Operating costs and expenses:
Cost of operations........... 43,014 -- -- -- -- 43,014
Development and
engineering................ 19,002 7,484 3,332 10,816 -- 29,818
Sales, general and
administrative............. 23,095 13,862 5,350 19,212 -- 42,307
Depreciation and
amortization............... 17,675 2,098 15,041 17,139 2,202,754(A) 2,237,568
-------- -------- -------- -------- ----------- -----------
Total operating costs and
expenses................. 102,786 23,444 23,723 47,167 2,202,754 2,352,707
-------- -------- -------- -------- ----------- -----------
Income (loss) from
operations................... (53,948) (23,036) (22,845) (45,881) (2,202,754) (2,302,583)
Interest, net.................. 790 (139) (422) (561) -- 229
Dividends on preferred stock... (890) -- -- -- -- (890)
Gain on disposal of
discontinued operations,
net.......................... -- 7,709 -- 7,709 -- 7,709
Extraordinary loss............. -- (930) -- (930) -- (930)
Accretion of redeemable
warrants to redemption
value........................ -- (2,150) -- (2,150) -- (2,150)
-------- -------- -------- -------- ----------- -----------
Net loss applicable to common
stockholders'................ $(54,048) $(18,546) $(23,267) $(41,813) $(2,202,754) $(2,298,615)
======== ======== ======== ======== =========== ===========
Basic and diluted net loss per
common share................. $ (1.54) $ (1.52) $ (3.43) $ (23.67)
======== ======== ======== ===========
Weighted-average shares
outstanding used in computing
basic and diluted net loss
per common share............. 34,987 12,196 12,196 97,115(B)
======== ======== ======== ===========
</TABLE>
- -------------------------
(i) Reflects the acquisitions by WebMD of Direct Medical Knowledge, Inc. and
Sapient Health Network, Inc. in January, 1999, and all pro forma adjustments
associated with these acquisitions.
See accompanying notes.
165
<PAGE> 180
HEALTHEON/WEBMD CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED
WITH WEBMD
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
-------------------------------------------------
PRO FORMA PRO FORMA
HEALTHEON WEBMD ADJUSTMENTS COMBINED
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue....................................... $ 17,555 $ 2,458 $ -- $ 20,013
Operating costs and expenses:
Cost of operations.......................... 15,518 380 -- 15,898
Development and engineering................. 7,035 5,172 -- 12,207
Sales, general and administrative........... 8,901 11,421 -- 20,322
Depreciation and amortization............... 5,228 3,502 547,262(A) 555,992
-------- -------- --------- ---------
Total operating costs and expenses....... 36,682 20,475 547,262 604,419
-------- -------- --------- ---------
Income (loss) from operations................. (19,127) (18,017) (547,262) (584,406)
Interest, net................................. 558 214 -- 772
Accretion of redeemable warrants to redemption
value....................................... -- (538) -- (538)
-------- -------- --------- ---------
Net loss applicable to common stockholders.... $(18,569) $(18,341) $(547,262) $(584,172)
======== ======== ========= =========
Basic and diluted net loss per common share... $ (0.30) $ (1.46) $ (4.68)
======== ======== =========
Weighted-average shares outstanding used in
computing basic and diluted net loss per
common share................................ 62,665 12,533 124,793(B)
======== ======== =========
</TABLE>
See accompanying notes.
166
<PAGE> 181
HEALTHEON/WEBMD CORPORATION
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED WITH WEBMD FINANCIAL INFORMATION
The unaudited pro forma condensed combined financial information reflects
the Healtheon-WebMD reorganization and gives effect to certain reclassifications
to the unaudited historical financial statements to conform the presentation of
the historical operations of the merged companies.
The total estimated purchase price of the reorganization has been allocated
on a preliminary basis to assets and liabilities based on management's estimate
of their fair values. The excess of the purchase price over the fair value of
the net assets acquired has been allocated to goodwill and other intangible
assets. This allocation is subject to change pending the completion of the final
analysis of the fair value of the assets acquired and liabilities assumed. The
impact of such changes could be material.
The adjustments to the unaudited pro forma condensed combined balance sheet
as of March 31, 1999, have been calculated as if the reorganization occurred on
March 31, 1999 and are as follows:
(1) To reflect the acquisition of all of the outstanding capital stock of
WebMD by exchanging 1.815 shares of Healtheon/WebMD common stock for
each share of WebMD capital stock for a total estimated purchase price
of approximately $6,671.6 million. The purchase consideration consists
of the issuance of an estimated 62.1 million shares of
Healtheon/WebMD's common stock with a fair value of approximately
$4,646.4 million and the assumption of options and warrants to purchase
31.3 million shares of Healtheon/WebMD's common stock with a fair value
of approximately $1,974.0 million and other related reorganization
costs of approximately $51.2 million, consisting primarily of
approximately $42.1 million in investment banking, legal, accounting
and regulatory filing fees, and approximately $9.1 million in costs
anticipated to be incurred for employee retention, work force
reduction, facility consolidation and other reorganization related
costs.
The purchase price was determined as follows:
<TABLE>
<CAPTION>
TOTAL
WEBMD HEALTHEON/WEBMD FAIR VALUE
SHARES SHARES (IN THOUSANDS)
---------- --------------- ---------------
<S> <C> <C> <C>
Shares issued............................... 34,230,159 62,127,739 $4,646,409
Stock options assumed....................... 6,406,105 11,627,080 805,245
Warrants assumed............................ 10,852,286 19,696,899 1,168,801
---------- ----------
Total shares...................... 51,488,550 93,451,718
========== ==========
Reorganization costs........................ 51,200
----------
$6,671,655
==========
</TABLE>
The estimated fair value of the common stock to be issued is based on
the average closing price of Healtheon's common stock on the five days
prior and subsequent to the day the reorganization was announced, which
was May 20, 1999. The estimated fair value of the options and warrants
to be assumed is based on the Black-Scholes model using the following
assumptions:
- Expected lives of one-half to 2.5 years
- Expected volatility factor of 1.0
- Risk-free interest rate of 4.5%
- Expected dividend rate of 0%
The preliminary purchase price for WebMD excludes the impact of the
anti-dilutive rights held by McKesson HBOC, as well as the potential that
the WebMD Series A and B Preferred Stock may not be converted to common
stock, since it is anticipated these issues will be resolved prior to
closing and will not impact the pro forma financial statements.
167
<PAGE> 182
HEALTHEON/WEBMD CORPORATION
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED WITH WEBMD FINANCIAL INFORMATION (CONTINUED)
(2) Recognition of the excess purchase price of approximately $6,609.1
million over the fair value of net tangible assets acquired, has been
recorded as goodwill and other intangible assets.
(3) To reflect the elimination of the historical stockholders' equity
accounts of WebMD.
(4) To reflect the elimination of goodwill and other intangible assets on
the balance sheet of WebMD as of the acquisition date.
(5) To reflect the proceeds, net of offering costs, relating to investments
in capital stock made or to be made by strategic partners prior to the
consummation of the reorganization. The reorganization agreement
requires that these investments be completed prior to the closing of
the reorganization.
In May and June of 1999, WebMD sold 456,896 shares of Series E preferred
stock for approximately $250 million. Upon closing of the
Healtheon-WebMD reorganization, 276,906 shares of Series E preferred
stock will be sold for $150 million.
The adjustments to the unaudited pro forma condensed combined statements of
operations for the quarter ended March 31, 1999 and year ended December 31,
1998, assume the reorganization occurred as of January 1, 1999 and January 1,
1998, respectively, and are as follows:
(A) To reflect the amortization of goodwill and other intangible assets
resulting from the reorganization. The goodwill and other intangible
assets are being amortized over periods of approximately three years.
Currently, management does not anticipate that any significant value
will be attributed to purchased in-process research and development.
(B) Basic and diluted net loss per share has been adjusted to reflect the
issuance of 62.1 million shares of Healtheon/WebMD's common stock, as
if the shares had been outstanding for the entire periods presented.
The effect of stock options and warrants of WebMD assumed in the
reorganization have not been included as their inclusion would be
anti-dilutive.
168
<PAGE> 183
HEALTHEON/WEBMD CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED
WITH MEDE AMERICA
BALANCE SHEET
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
--------------------------------------------------
MEDE PRO FORMA PRO FORMA
HEALTHEON AMERICA ADJUSTMENTS COMBINED
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Current assets:
Cash, cash equivalents and short-term
investments............................ $ 63,175 $ 4,042 $ -- $ 67,217
Accounts receivable, net.................. 10,424 15,332 -- 25,756
Other current assets...................... 1,561 1,037 -- 2,598
--------- -------- --------- ---------
Total current assets................... 75,160 20,411 -- 95,571
--
Property and equipment, net................. 17,410 5,424 -- 22,834
Goodwill and other intangible assets, net... 24,828 48,650 512,620(2) 537,448
(48,650)(4)
Other assets................................ 3,657 4,429 -- 8,086
--------- -------- --------- ---------
Total assets......................... $ 121,055 $ 78,914 $ 463,970 $ 663,939
========= ======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................. $ 1,054 $ -- $ -- $ 1,054
Accounts payable.......................... 4,017 3,466 -- 7,483
Accrued liabilities....................... 11,110 7,148 23,800(1) 42,058
Current portion of lease obligations...... 2,393 425 -- 2,818
Deferred revenue.......................... 3,597 -- -- 3,597
--------- -------- --------- ---------
Total current liabilities.............. 22,171 11,039 23,800 57,010
Long term obligations....................... 3,153 6,524 -- 9,677
Stockholders' equity:
Common stock.............................. 7 130 1(1) 8
(130)(3)
Paid in capital........................... 228,833 114,660 501,520(1) 730,353
(114,660)(3)
Deferred compensation..................... (11,112) -- -- (11,112)
Retained earnings (accumulated deficit)... (121,997) (53,439) 53,439(3) (121,997)
--------- -------- --------- ---------
Total stockholders' equity............. 95,731 61,351 440,170 597,252
--------- -------- --------- ---------
Total liabilities and stockholders'
equity............................ $ 121,055 $ 78,914 $ 463,970 $ 663,939
========= ======== ========= =========
</TABLE>
See accompanying notes.
169
<PAGE> 184
HEALTHEON/WEBMD CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED
WITH MEDE AMERICA
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
---------------------------------------------------------------------------------
MEDE AMERICA
-----------------------------------------
PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED PRO FORMA PRO FORMA
HEALTHEON HISTORICAL (I) (I) ADJUSTMENTS COMBINED
--------- ---------- -------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue......................... $ 48,838 $48,180 $ 4,283 $52,463 $ -- $ 101,301
Operating costs and expenses:
Cost of operations............ 43,014 18,426 1,493 19,919 -- 62,933
Development and engineering... 19,002 4,346 -- 4,346 -- 23,348
Sales, general and
administrative.............. 23,095 17,354 2,602 19,956 -- 43,051
Depreciation and
amortization................ 17,675 7,832 941 8,773 122,472(A) 148,920
-------- ------- ------- ------- --------- ---------
Total operating costs
and expenses......... 102,786 47,958 5,036 52,994 122,472 278,252
-------- ------- ------- ------- --------- ---------
Income (loss) from operations... (53,948) 222 (753) (531) (122,472) (176,951)
Interest, net................... 790 (4,417) (834) (5,251) -- (4,461)
Dividends on preferred stock.... (890) (2,400) -- (2,400) -- (3,290)
-------- ------- ------- ------- --------- ---------
Net loss applicable to common
stockholders.................. $(54,048) $(6,595) $(1,587) $(8,182) $(122,472) $(184,702)
======== ======= ======= ======= ========= =========
Basic and diluted net loss per
common share.................. $ (1.54) $ (1.16) $ (1.44) $ (4.25)
======== ======= ======= =========
Weighted-average shares
outstanding used in computing
basic and diluted net loss per
common share.................. 34,987 5,684 5,684 43,508(B)
======== ======= ======= =========
</TABLE>
- -------------------------
(i) Reflects the acquisition by MedE AMERICA of Healthcare Interchange, Inc. at
October 30, 1998, and all pro forma adjustments associated with this
acquisition.
See accompanying notes.
170
<PAGE> 185
HEALTHEON/WEBMD CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED
WITH MEDE AMERICA
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
--------------------------------------------------
MEDE PRO FORMA PRO FORMA
HEALTHEON AMERICA ADJUSTMENTS COMBINED
--------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue..................................... $ 17,555 $14,776 $ -- $ 32,331
Operating costs and expenses:
Cost of operations........................ 15,518 5,280 -- 20,798
Development and engineering............... 7,035 1,109 -- 8,144
Sales, general and administrative......... 8,901 4,885 -- 13,786
Depreciation and amortization............. 5,228 2,375 30,201(A) 37,804
-------- ------- -------- --------
Total operating costs and
expenses........................ 36,682 13,649 30,201 80,532
-------- ------- -------- --------
Income (loss) from operations............... (19,127) 1,127 (30,201) (48,201)
Interest, net............................... 558 (567) -- (9)
Dividends on preferred stock................ -- (244) -- (244)
Extraordinary loss.......................... -- (1,619) -- (1,619)
-------- ------- -------- --------
Net loss applicable to common
stockholders.............................. $(18,569) $(1,303) $(30,201) $(50,073)
======== ======= ======== ========
Basic and diluted net loss per common
share..................................... $ (0.30) $(0.13) $ (0.70)
======== ======= ========
Weighted-average shares outstanding used in
computing basic and diluted net loss per
common share.............................. 62,665 10,042 71,186
======== ======= ========
</TABLE>
See accompanying notes.
171
<PAGE> 186
HEALTHEON/WEBMD CORPORATION
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED WITH MEDE AMERICA FINANCIAL INFORMATION
The unaudited pro forma condensed combined financial information reflects
the MEDE AMERICA reorganization and gives effect to certain reclassifications to
the unaudited historical financial statements to conform the presentation of the
historical operations of the merged companies.
The total estimated purchase price of the reorganization has been allocated
on a preliminary basis to assets and liabilities based on management's estimate
of their fair values. The excess of the purchase price over the fair value of
the net assets acquired has been allocated to goodwill and other intangible
assets. This allocation is subject to change pending the completion of the final
analysis of the total purchase price and the fair value of the assets acquired
and liabilities assumed. The impact of such changes could be material.
The adjustments to the unaudited pro forma condensed combined balance sheet
as of March 31, 1999, have been calculated as if the reorganization occurred on
March 31, 1999 and are as follows:
(1) To reflect the acquisition of all of the outstanding capital stock of
MEDE AMERICA by exchanging 0.6593 shares of Healtheon/WebMD common
stock for each share of MEDE AMERICA common stock for a total estimated
purchase price of approximately $525.3 million. The purchase
consideration consists of the issuance of an estimated 8.5 million
shares of Healtheon/WebMD's common stock with a fair value of
approximately $440.4 million and the assumption of options and warrants
to purchase 1.5 million shares of Healtheon/WebMD's common stock with a
fair value of approximately $61.1 million and other related
reorganization costs of approximately $23.8 million, consisting
primarily of approximately $12.4 million in investment banking, legal,
accounting and regulatory filing fees, and approximately $11.4 million
in costs anticipated to be incurred for employee retention, work force
reduction, facility consolidation and other reorganization related
costs.
The purchase price was determined as follows:
<TABLE>
<CAPTION>
MEDE TOTAL
AMERICA HEALTHEON/WEBMD FAIR VALUE
SHARES SHARES (IN THOUSANDS)
---------- --------------- --------------
<S> <C> <C> <C>
Shares issued............................... 12,924,895 8,521,383 $440,423
Stock options assumed....................... 934,323 616,000 25,943
Warrants assumed............................ 1,334,050 879,539 35,155
---------- ----------
Total shares...................... 15,193,268 10,016,922
========== ==========
Reorganization costs........................ 23,800
--------
$525,321
========
</TABLE>
The estimated fair value of the common stock to be issued is based on
the average closing price of Healtheon's common stock on the five days
prior and subsequent to the day the reorganization was announced, which
was April 21, 1999. The estimated fair value of the options and warrants
to be assumed is based on the Black-Scholes model using the following
assumptions:
- Expected lives of one-half to 2.5 years
- Expected volatility factor of 1.0
- Risk-free interest rate of 4.5%
- Expected dividend rate of 0%
The purchase price for MEDE AMERICA may be increased by 25% based upon
the average closing price of Healtheon's stock for the 10 day period
ending two days prior to the special meeting of MEDE AMERICA
stockholders, if that lower average stock price is below $38.68.
172
<PAGE> 187
HEALTHEON/WEBMD CORPORATION
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED WITH MEDE AMERICA FINANCIAL INFORMATION (CONTINUED)
The preliminary purchase price for MEDE AMERICA excludes the impact of
the options issued to MEDE AMERICA employees to purchase 700,000 shares
of Healtheon/WebMD common stock. On the date of the closing of the
reorganization, any difference between the fair market value of the
shares at that date and the strike price of the awards will be treated
as deferred compensation and amortized over the vesting periods of the
options.
(2) Recognition of the excess purchase price of approximately $512.6
million over the fair value of net tangible assets acquired, has been
recorded as goodwill and other intangible assets.
(3) To reflect the elimination of the historical stockholders' equity
accounts of MEDE AMERICA.
(4) To reflect the elimination of goodwill and other intangible assets on
the balance sheet of MEDE AMERICA as of the acquisition date.
The adjustments to the unaudited pro forma condensed combined statements of
operations for the quarter ended March 31, 1999 and year ended December 31,
1998, assume the reorganization occurred as of January 1, 1999 and January 1,
1998, respectively, and as follows:
(A) To reflect the amortization of goodwill and other intangible assets
resulting from the reorganization. The goodwill and other intangible
assets are being amortized over periods of approximately four years.
Currently, management does not anticipate that any significant value
will be attributed to purchased in-process research and development.
(B) Basic and diluted net loss per share have been adjusted to reflect the
issuance of approximately 8.5 million shares of Healtheon/WebMD's
common stock, as if the shares had been outstanding for the entire
periods presented. The effect of stock options and warrants of MEDE
AMERICA assumed in the reorganization have not been included as their
inclusion would be anti-dilutive.
173
<PAGE> 188
HEALTHEON/WEBMD CORPORATION
WEBMD UNAUDITED PRO FORMA CONDENSED COMBINED WITH DIRECT MEDICAL KNOWLEDGE, INC.
AND SAPIENT HEALTH NETWORK, INC. STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------------------------------------
SAPIENT
DIRECT MEDICAL HEALTH
DIRECT SAPIENT KNOWLEDGE NETWORK
MEDICAL HEALTH PRO FORMA PRO FORMA PRO FORMA
WEBMD KNOWLEDGE NETWORK ADJUSTMENTS ADJUSTMENTS COMBINED
-------- --------- -------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue..................... $ 408 $ 338 $ 540 $ -- $ -- $ 1,286
Operating costs and
expenses:
Cost of operations........ -- -- -- -- -- --
Development and
engineering............ 7,484 1,063 2,269 -- -- 10,816
Sales, general and
administrative......... 13,862 1,800 3,550 -- -- 19,212
Depreciation and
amortization........... 2,098 513 343 3,546(A) 10,639(A) 17,139
-------- ------- ------- ------- -------- --------
Total operating
costs and
expenses........ 23,444 3,376 6,162 3,546 10,639 47,167
-------- ------- ------- ------- -------- --------
Income (loss) from
operations................ (23,036) (3,038) (5,622) (3,546) (10,639) (45,881)
Interest, net............... (139) 5 (427) -- -- (561)
Gain on disposal of
discontinued operations,
net....................... 7,709 -- -- -- -- 7,709
Extraordinary loss.......... (930) -- -- -- -- (930)
Accretion of redeemable
warrants to redemption
value..................... (2,150) -- -- -- -- (2,150)
-------- ------- ------- ------- -------- --------
Net loss applicable to
common stockholders....... $(18,546) $(3,033) $(6,049) $(3,546) $(10,639) $(41,813)
======== ======= ======= ======= ======== ========
Basic and diluted net loss
per common share.......... $ (1.52) $ (3.43)
======== ========
Weighted-average shares
outstanding used in
computing basic and
diluted net loss per
common share.............. 12,196 12,196(B)
======== ========
</TABLE>
174
<PAGE> 189
HEALTHEON/WEBMD CORPORATION
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED WITH
DIRECT MEDICAL KNOWLEDGE, INC. AND SAPIENT HEALTH NETWORK, INC.
STATEMENT OF OPERATIONS FOR WEBMD CORPORATION
The unaudited pro forma condensed combined statement of operations reflects
WebMD's acquisitions of Direct Medical Knowledge, Inc. and Sapient Health
Network, Inc. and gives effect to certain reclassifications to the historical
financial statements to conform the presentation of the historical operations of
the merged companies.
In January 1999, WebMD acquired Direct Medical Knowledge in exchange for
494,018 shares of Series B preferred stock valued at $20 per share in a
transaction accounted for as a purchase. WebMD recorded $13.6 million in
goodwill and other intangible assets, which will be amortized over three years.
WebMD also acquired Sapient Health Network for 1,619,190 shares of Series B
Preferred Stock valued at $20 per share in a transaction accounted for as a
purchase. WebMD recorded $38.3 million in goodwill and other intangible assets,
which will be amortized over three years.
The pro forma adjustments to the unaudited pro forma condensed combined
statement of operations have been calculated as if the acquisition occurred on
January 1, 1998 as described below:
(A) Reflects a year of amortization of the excess of the purchase
price over the fair value of net assets acquired which is being amortized
over three years.
(B) Basic and diluted net loss per common share has not been adjusted
to reflect the issuance of WebMD's Series B preferred stock, nor does it
reflect the stock options and warrants of Direct Medical Knowledge and
Sapient Health Network assumed in the acquisitions as the inclusion of
these securities would be anti-dilutive.
175
<PAGE> 190
HEALTHEON/WEBMD CORPORATION
MEDE AMERICA UNAUDITED PRO FORMA CONDENSED COMBINED
WITH HEALTHCARE INTERCHANGE, INC.
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31, 1998
-------------------------------------------------------
MEDE HEALTHCARE PRO FORMA PRO FORMA
AMERICA INTERCHANGE(1) ADJUSTMENTS COMBINED
------- -------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue................................... $48,180 $4,283 $ -- $52,463
Operating costs and expenses:
Cost of operations...................... 18,426 1,493 -- 19,919
Development and engineering............. 4,346 -- -- 4,346
Sales, general and administrative....... 17,354 2,602 -- 19,956
Depreciation and amortization........... 7,832 145 796(A) 8,773
------- ------ ------- -------
Total operating costs and
expenses...................... 47,958 4,240 796 52,994
------- ------ ------- -------
Income (loss) from operations............. 222 43 (796) (531)
Interest, net............................. (4,417) (226) (608)(B) (5,251)
Dividends on preferred stock.............. (2,400) -- -- (2,400)
------- ------ ------- -------
Net loss applicable to common
stockholders............................ $(6,595) $ (183) $(1,404) $(8,182)
======= ====== ======= =======
Basic and diluted net loss per common
share................................... $ (1.16) $ (1.44)
======= =======
Weighted-average shares outstanding used
in computing basic and diluted net loss
per common share........................ 5,684 5,684
======= =======
</TABLE>
- ---------------
(1) Reflects the historical results for the 10 months ended October 31, 1998.
176
<PAGE> 191
HEALTHEON/WEBMD CORPORATION
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED
WITH HEALTHCARE INTERCHANGE, INC. STATEMENT OF OPERATIONS
FOR MEDE AMERICA CORPORATION
The unaudited pro forma condensed combined statement of operations reflects
MEDE AMERICA's acquisition of Healthcare Interchange, Inc. and gives effect to
certain reclassifications to the historical financial statements to conform the
presentation of the historical operations of the merged companies.
MEDE AMERICA acquired the net assets of Healthcare Interchange, Inc. in
exchange for $11.7 million in cash on October 30, 1998. The acquisition was
accounted for as a purchase and, accordingly, the results of operations of
Healthcare Interchange have been included in the consolidated statement of
operations commencing on the date of acquisition. The purchased intangibles of
approximately $2.7 million were recorded and are being amortized on a
straight-line basis over a useful life of five years. Goodwill of $8.2 million
was recorded and is being amortized on a straight-line basis over a useful life
of 20 years.
The pro forma adjustments to the unaudited pro forma condensed combined
statement of operations have been calculated as if the acquisition occurred on
January 1, 1998 as described below:
(A) Reflects amortization for 10 months of the excess of the purchase
price over the fair value of net assets acquired which is being amortized
over five years for intangibles and 20 years for goodwill.
(B) Represents 10 months of interest expense on $11.7 million of
borrowings under a credit facility used to fund the Healthcare Interchange
acquisition at a composite interest rate of 6.22%.
177
<PAGE> 192
COMPARISON OF RIGHTS OF HOLDERS OF
HEALTHEON COMMON STOCK AND
HEALTHEON/WEBMD COMMON STOCK
There are no material differences between the rights of holders of
Healtheon common stock and of Healtheon/WebMD common stock, other than the
following:
REMOVAL OF DIRECTORS
The Healtheon/WebMD bylaws provide that any director or the entire board of
directors may be removed only with cause by the holders of a majority of the
shares then entitled to vote at an election of directors. In contrast, the
Healtheon bylaws provide that any director or the entire board may be removed
with or without cause by a similar majority vote.
178
<PAGE> 193
COMPARISON OF RIGHTS OF HOLDERS OF
WEBMD CAPITAL STOCK AND
HEALTHEON/WEBMD COMMON STOCK
WebMD's articles of incorporation and bylaws and Georgia law currently
govern the rights of stockholders of WebMD. After the completion of the
Healtheon-WebMD reorganization, WebMD's common stockholders will become
stockholders of Healtheon/WebMD. As a result, WebMD common stockholders' rights
will be governed by Healtheon/WebMD's certificate of incorporation and bylaws.
Furthermore, because Healtheon/WebMD is a Delaware corporation, after the
Healtheon-WebMD reorganization the rights of WebMD common stockholders will be
governed by Delaware law, rather than Georgia law. The following paragraphs
summarize certain differences between the rights of Healtheon/ WebMD
stockholders and WebMD stockholders under the certificate of incorporation and
bylaws of Healtheon/WebMD and articles of incorporation and bylaws of WebMD, and
under Delaware and Georgia law, as applicable.
COMMON STOCK
Healtheon/WebMD has one class of common stock. Holders of Healtheon/WebMD
common stock are entitled to one vote for each share held.
WebMD has five classes of common stock: common stock without series
designation, Series B common stock, Series C common stock, Series D common
stock, and Series E common stock. The holders of common stock without series
designation are entitled to one vote for each share held; the holders of all
other series of common stock are entitled to no voting rights except as required
by Georgia law. Stockholders may not cumulate votes in connection with the
election of directors. The holders of common stock are entitled to receive
ratably such dividends, if any, as may be declared from time to time by the
board of directors. In the event of a liquidation, dissolution or winding up of
WebMD, the holders of each share of Series B common stock, Series C common stock
and Series E common stock are entitled to be paid first out of the assets of
WebMD available for distribution to holders of WebMD's capital stock of all
classes or series, before any sums are paid to the holders of the common stock
without series designation or the Series D common stock, an amount equal to
$0.285714 per share, $1.00 per share and $1.00 per share, respectively. If the
assets of WebMD are insufficient to permit the payment in full to the holders of
the Series B common stock, the Series C common stock and the Series E common
stock, then the assets shall be distributed ratably among the holders thereof,
with each share of Series B common stock entitled to $0.285714 per each $1.00 to
be distributed to each shares of Series C common stock or Series E common stock.
The common stock has no preemptive rights or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock.
PREFERRED STOCK
The Healtheon/WebMD certificate of incorporation authorizes the board of
directors to issue shares of preferred stock in one or more series and to fix
the designations, preferences, powers and rights of the shares to be included in
each series. The Healtheon/WebMD certificate of incorporation reserves for
issuance 5,000,000 shares of preferred stock.
The WebMD articles of incorporation authorized for issuance 10,000,000
shares of preferred stock. WebMD currently has 9,172,000 shares of preferred
stock designated in series. The terms of the preferred stock are described
below.
WebMD's Series A preferred stock, Series B preferred stock, Series C
preferred stock, Series D preferred stock, Series E preferred stock, and Series
F preferred stock have the rights, preferences and privileges set forth below:
Series A preferred stock. The holders of Series A preferred stock are
entitled to one vote per share, on an as if converted to common stock basis, on
all matters to be voted upon by the stockholders and are entitled, as a class,
to elect one member of the WebMD Board of Directors, but are not be entitled to
vote
179
<PAGE> 194
with regard to the election of any other directors. These voting rights would
not apply, however, to any holder of Series A preferred stock if as a result of
such voting rights such holder would be required to effect any filings required
by the HSR Act until such filings are made and the applicable waiting period has
elapsed. Without the vote of the holders of a majority of the shares of Series A
preferred stock outstanding, WebMD may not:
- amend its articles of incorporation or bylaws if such action would alter
the preferences, rights, privileges or powers of, or restrictions for the
benefit of, the holders of the Series A preferred stock
- create any new series of capital stock or increase the authorized amount
of any series of capital stock, unless such series ranks junior to the
Series A preferred stock with respect to dividends and distribution of
assets upon liquidation, dissolution or winding up
- increase or decrease the authorized number of shares of Series A
preferred stock
- take any action that would alter the preferences, rights, privileges or
powers of, or restrictions for the benefit of, the holders of the Series
A preferred stock in such a manner as would require the vote of the
holders of the Series A preferred stock as a voting group under Georgia
law, or
- redeem or otherwise acquire for value any shares of its capital stock,
except pursuant to stock option and other employee stock plans or
pursuant to the exercise of an existing right of first refusal.
The holders of Series A preferred stock are not entitled to receive
dividends, but if dividends are declared or paid with respect to any share of
any series of common stock, an equal dividend must be declared or paid for each
share of Series A preferred stock, on an as if converted to common stock basis.
In the event of a liquidation, dissolution or winding up of WebMD, the holder of
each share of Series A preferred stock is entitled to receive, at their
election, in exchange for and in redemption of such share, prior to any
distributions to the holders of any capital stock ranking junior to the Series A
preferred stock that portion of such funds equal to the number of shares of
common stock into which such share of Series A preferred stock is convertible,
divided by the sum of the aggregate number of shares of common stock into which
all shares of Series A preferred stock are convertible, plus all other shares of
common stock outstanding, plus all other shares of capital stock of WebMD
outstanding which are entitled to participate in the proceeds of a liquidation,
dissolution or winding up. The amount payable with respect to each share of
Series A preferred stock will be increased, if necessary, to equal the sum of
$15.00, adjusted to give effect to any subdivisions or combinations of the
common stock, $10.83 after giving effect to the April 9, 1999 dividend, plus any
declared but unpaid dividends. If the assets of WebMD are insufficient to permit
the payment in full to the holders of the Series A preferred stock, then the
assets shall be distributed ratably among the holders thereof. There are no
other redemption or sinking fund provisions applicable to the Series A preferred
stock.
The Series A preferred stock is convertible into common stock without
series designation at any time at the option of the holder. In addition, all
outstanding shares of Series A preferred stock are to be converted into common
stock without series designation at the election of the holders of a majority of
the shares of Series A preferred stock then outstanding or upon the closing of
the first underwritten public offering of equity securities of WebMD. Each share
of Series A preferred stock is convertible into one share of common stock
without series designation. The conversion rate and conversion price are subject
to adjustment upon the occurrence of certain events, including subdivisions or
combinations of common stock without series designation, dividends and
distributions payable in any series of common stock or in other securities
convertible into any series of stock without any payment therefore, in each case
without a corresponding subdivision, combination, dividend or distribution with
respect to the Series A preferred stock, and issuances of any series of common
stock or any series or other securities convertible into any series of common
stock at a price less than the conversion price then in effect. The Series A
preferred stock has no preemptive rights or subscription rights.
Series B preferred stock. The holders of Series B preferred stock are
generally not entitled to vote, except that if WebMD does not consummate an
initial public offering within one year of the issuance of
180
<PAGE> 195
any share of Series B preferred stock, the holders would be entitled to one vote
per share, on an as if converted to common stock basis, on all matters to be
voted upon by the stockholders. Also, without the vote of the holders of a
majority of the shares of Series B preferred stock outstanding, or a greater
percentage if required by Georgia law, WebMD may not:
- amend its articles of incorporation or bylaws if such action would alter
the preferences, rights, privileges or powers of, or restrictions for the
benefit of, the holders of the Series B preferred stock
- create any new series of capital stock or increase the authorized amount
of any series of capital stock, unless such series ranks junior to or on
a parity with the Series B preferred stock with respect to dividends and
distribution of assets upon liquidation, dissolution or winding up
- increase or decrease the authorized number of shares of Series B
preferred stock
- take any action that would alter the preferences, rights, privileges or
powers of, or restrictions for the benefit of, the holders of the Series
B preferred stock in such a manner as would require the vote of the
holders of the Series B preferred stock as a voting group under Georgia
law, or
- redeem or otherwise acquire for value any shares of its capital stock,
except pursuant to stock option and other employee stock plans or
pursuant to the exercise of an existing right of first refusal.
The holders of Series B preferred stock are not entitled to receive
dividends, but if dividends are declared or paid with respect to any share of
any series of common stock, an equal dividend must be declared or paid for each
share of Series B preferred stock, on an as if converted to common stock basis.
No dividends may be paid with respect to the Series B preferred stock until
dividends have been paid with respect to the Series A preferred stock. In the
event of a liquidation, dissolution or winding up of WebMD, the holder of each
share of Series B preferred stock is entitled to receive, at their election, in
exchange for and in redemption of such share, on a parity with the holders of
any capital stock ranking on a parity with the Series B preferred stock that
portion of such funds equal to the number of shares of common stock into which
such share of Series B preferred stock is convertible, divided by the sum of the
aggregate number of shares of common stock into which all shares of Series B
preferred stock are convertible, plus all other shares of common stock of all
series outstanding, plus all other shares of capital stock of WebMD outstanding
which are entitled to participate in the proceeds of a liquidation, dissolution
or winding up. The amount payable with respect to each share of Series B
preferred stock will be increased, if necessary, to equal the sum of the issue
price of such share, as adjusted to give effect to any subdivisions or
combinations of the common stock, plus any declared but unpaid dividends. No
amounts may be paid to the holders of the Series B preferred stock until all
amounts have been paid to the holders of the Series A preferred stock. If the
assets distributable to the holders of the Series B preferred stock of WebMD are
insufficient to permit the payment in full to the holders of the Series B
preferred stock, then the assets shall be distributed ratably among them. There
are no other redemption or sinking fund provisions applicable to the Series B
preferred stock.
The Series B preferred stock is convertible into common stock without
series designation at any time after the anniversary of the date of issuance of
such share at the option of the holder. In addition, all outstanding shares of
Series B preferred stock are to be converted into common stock without series
designation at the election of the holders of a majority of the shares of Series
B preferred stock then outstanding or upon the closing of the first underwritten
public offering of equity securities of WebMD. Each share of Series B preferred
stock is convertible into one share of common stock without series designation.
The conversion rate and conversion price are subject to adjustment upon the
occurrence of certain events, including subdivisions or combinations of common
stock without series designation, dividends and distributions payable in any
series of common stock or in other securities convertible into any series of
common stock without any payment therefore, in each case without a corresponding
subdivision, combination, dividend or distribution with respect to the Series B
preferred stock, and issuances of common stock of any series or other securities
convertible into any series of common stock at
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a price less than the conversion price then in effect. The Series B preferred
stock has no preemptive rights or subscription rights.
Series C preferred stock. The rights of the holders of Series C preferred
stock are identical to the rights of the holders of the Series B preferred
stock.
Series D preferred stock. The holders of Series D preferred stock are
generally not entitled to vote, except that if WebMD does not consummate an
initial public offering within one year of the issuance of any share of Series D
preferred stock, or on such earlier date on which the holders of common stock of
any series other than the common stock without series designation or the holders
of the Series A preferred stock obtain such rights, the holder of such share
would be entitled to one vote per share, on an as if converted to common stock
basis, on all matters to be voted upon by the stockholders. Also, without the
vote of the holders of a majority of the shares of Series D preferred stock
outstanding, or a greater percentage if required by Georgia law, WebMD may not:
- amend its articles of incorporation or bylaws if such action would alter
the preferences, rights, privileges or powers of, or restrictions for the
benefit of, the holders of the Series D preferred stock
- create any new series of capital stock or increase the authorized amount
of any series of capital stock, unless such series ranks junior to or on
a parity with the Series D preferred stock with respect to dividends and
distribution of assets upon liquidation, dissolution or winding up
- increase or decrease the authorized number of shares of Series D
preferred stock
- take any action that would alter the preferences, rights, privileges or
powers of, or restrictions for the benefit of, the holders of the Series
D preferred stock in such a manner as would require the vote of the
holders of the Series D preferred stock as a voting group under Georgia
law, or
- redeem or otherwise acquire for value any shares of its capital stock,
except pursuant to stock option and other employee stock plans or
pursuant to the exercise of an existing right of first refusal.
The holders of Series D preferred stock are entitled to receive dividends
when, as and if declared by the WebMD Board of Directors. No dividends may be
paid with respect to any series of common stock or any other securities entitled
to participate in the earnings or assets of WebMD, other than the Series A
preferred stock, unless at the same time an equal dividend is paid for each
share of Series D preferred stock and Series A preferred stock. No dividends may
be paid with respect to the Series D preferred stock until dividends have been
paid with respect to the Series A preferred stock. The holders of the Series D
preferred stock are also entitled to a proportionate and corresponding
distribution in the event of a distribution to holders of common stock of any
series consisting of securities of another person, evidence of indebtedness
issued by WebMD or another person or assets. In the event of a liquidation,
dissolution or winding up of WebMD, the holder of each share of Series D
preferred stock is entitled to receive, at their election, in exchange for and
in redemption of that share, on a parity with the holders of any capital stock
ranking on a parity with, and prior to any capital stock ranking junior to, the
Series D preferred stock that portion of such funds equal to the number of
shares of common stock into which such share of Series D preferred stock is
convertible, divided by the number of shares of common stock outstanding and
into which any securities convertible into common stock of any series are
convertible. The amount payable to with respect to each share of Series D
preferred stock will be increased, if necessary, to equal the sum of $100,
adjusted to give effect to any subdivisions or combinations of the common stock,
plus any declared but unpaid dividends. No amounts may be paid to the holders of
the Series D preferred stock until all amounts have been paid to the holders of
the Series A preferred stock. If the assets of WebMD are insufficient to permit
the payment in full to the holders of the Series D preferred stock, then the
assets distributable to the holders of the Series D preferred stock shall be
distributed ratably among them. There are no other redemption or sinking fund
provisions applicable to the Series D preferred stock.
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The Series D preferred stock is convertible into common stock without
series designation at the option of the holder at any time after the earliest to
occur of:
- March 1, 2000
- any reclassification or change of the common stock without series
designation
- any merger or consolidation of WebMD in which WebMD is not the surviving
entity
- any sale of all or substantially all of the assets of WebMD. In addition,
all outstanding shares of Series D preferred stock are to be converted
into common stock without series designation at the election of the
holders of a majority of the shares of Series D preferred stock then
outstanding or upon the closing of the first underwritten public offering
of equity securities of WebMD. Each share of Series D preferred stock is
convertible into five shares of common stock without series designation.
The conversion rate and conversion price are subject to adjustment upon
the occurrence of certain events, including subdivisions or combinations
of common stock without series designation, dividends and distributions
payable in any series of common stock or in other securities convertible
into any series of common stock without any payment therefore, in each
case without a corresponding subdivision, combination, dividend or
distribution with respect to the Series D preferred stock, and issuances
of common stock of any series or other securities convertible into any
series of common stock without series designation at a price less than
the conversion price then in effect. The Series D preferred stock has no
preemptive rights or subscription rights.
Series E preferred stock. The holders of Series E preferred stock are
generally not entitled to vote, except without the vote of the holders of a
majority of the shares of Series E preferred stock outstanding, or a greater
percentage if required by Georgia law, WebMD may not:
- amend its articles of incorporation or bylaws if such action would alter
the preferences, rights, privileges or powers of, or restrictions for the
benefit of, the holders of the Series E preferred stock
- create any new series of capital stock or increase the authorized amount
of any series of capital stock, unless such series ranks junior to or on
a parity with the Series E preferred stock with respect to dividends and
distribution of assets upon liquidation, dissolution or winding up
- increase or decrease the authorized number of shares of Series E
preferred stock
- take any action that would alter the preferences, rights, privileges or
powers of, or restrictions for the benefit of, the holders of the Series
E preferred stock in such a manner as would require the vote of the
holders of the Series E preferred stock as a voting group under Georgia
law
- redeem or otherwise acquire for value any shares of its capital stock,
except pursuant to stock option and other employee stock plans or
pursuant to the exercise of an existing right of first refusal
- enter into certain transactions having the effect of a change of control
of WebMD, or
- create any new series of capital stock or increase the authorized amount
of any series of capital stock, ranking junior to or on a parity with the
Series E preferred stock with respect to dividends and distribution of
assets upon liquidation, dissolution or winding up, if the holders
thereof would beneficially own more shares of capital stock, on an as if
converted to common stock basis, than Microsoft and its permitted
transferees.
The holders of Series E preferred stock are not entitled to receive
dividends, but if dividends are declared or paid with respect to any series of
common stock or any other securities entitled to participate in the earnings or
assets of WebMD, other than the Series A preferred stock, an equal dividend must
be declared or paid for each share of Series E preferred stock. No dividends may
be paid with respect to the Series E preferred stock until dividends have been
paid with respect to the Series A preferred stock. The holders of the Series E
preferred stock are also entitled to a proportionate and corresponding
distribution in the event of a distribution to holders of common stock of any
series consisting of securities of another person, evidence of indebtedness
issued by WebMD or another person or assets. In the event of a
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liquidation, dissolution or winding up of WebMD, the holder of each share of
Series E preferred stock is entitled to receive, at their election, in exchange
for and in redemption of that share, on a parity with the holders of any capital
stock ranking on a parity with, and prior to any capital stock ranking junior
to, the Series E preferred stock, that portion of such funds equal to the number
of shares of common stock into which such share of Series E preferred stock is
convertible, divided by the number of shares of common stock of all series
outstanding and into which any securities convertible into common stock of any
series are convertible. The amount payable to with respect to each share of
Series E preferred stock will be increased, if necessary, to equal the sum of
$541.70, adjusted to give effect to any subdivisions or combinations of the
common stock without series designation, plus any declared but unpaid dividends.
No amounts may be paid to the holders of the Series E preferred stock until all
amounts have been paid to the holders of the Series A preferred stock. If the
assets of WebMD are insufficient to permit the payment in full to the holders of
the Series E preferred stock, then the assets shall be distributed ratably among
them. There are no other redemption or sinking fund provisions applicable to the
Series E preferred stock.
The Series E preferred stock is convertible into common stock without
series designation at the option of the holder at any time after January 15,
2000. In addition, after such time, all outstanding shares of Series E preferred
stock are to be converted into common stock without series designation at the
election of the holders of a majority of the shares of Series E preferred stock
then outstanding or upon the closing of the first underwritten public offering
of equity securities of WebMD. Each share of Series E preferred stock is
convertible into ten shares of common stock without series designation. The
conversion rate and conversion price are subject to adjustment upon the
occurrence of certain events, including subdivisions or combinations of common
stock without series designation, dividends and distributions payable in any
series of common stock or in other securities convertible into any series of
common stock without any payment therefore, in each case without a corresponding
subdivision, combination, dividend or distribution with respect to the Series E
preferred stock, and issuances of common stock of any series or other securities
convertible into any series of common stock without series designation at a
price less than the conversion price then in effect. In addition, if WebMD has
not sold any shares of any series of common stock pursuant to an effective
registration statement by January 15, 2000, the conversion price shall be
adjusted to 71.72% of the conversion price then in effect, with the result of
increasing the number of shares of common stock without series designation into
which each share of Series E preferred stock may be converted. The Series E
preferred stock has no preemptive rights or subscription rights.
Series F preferred stock. The rights of the holders of Series F preferred
stock are identical to the rights of the holders of the Series E preferred stock
except as set forth below. The holders of Series F preferred stock are not
entitled to receive dividends, but if dividends are declared or paid with
respect to any series of common stock, an equal dividend must be declared or
paid for each share of Series F preferred stock. The holders of the Series F
preferred stock are also entitled to a proportionate and corresponding
distribution in the event of a distribution to holders of common stock of any
series consisting of securities of another person, evidence of indebtedness
issued by WebMD or another person or assets. In the event of a liquidation,
dissolution or winding up of WebMD, the holder of each share of Series F
preferred stock is entitled to receive, at their election, in exchange for and
in redemption of such share, on a parity with the holders of any capital stock
ranking on a parity with, and prior to any capital stock ranking junior to, the
Series F preferred stock that portion of such funds equal to the number of
shares of common stock without series designation into which such share of
Series F preferred stock is convertible, divided by the number of shares of
common stock of all series outstanding and into which any securities convertible
into common stock of any series are convertible. No amounts may be paid to the
holders of the Series F preferred stock until all amounts have been paid to the
holders of the Series A preferred stock, the Series B preferred stock, the
Series C preferred stock, the Series D preferred stock and the Series E
preferred stock. If the assets of WebMD are insufficient to permit the payment
in full to the holders of the Series F preferred stock, then the assets
distributable to the holders of the Series F preferred stock shall be
distributed ratably to them. There are no other redemption or sinking fund
provisions applicable to the Series F preferred stock.
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The Series F preferred stock is convertible into common stock without
series designation on the same terms as the Series E preferred stock. In
addition, if WebMD has not sold any shares of any series of common stock
pursuant to an effective registration statement by January 15, 2000, the
conversion price shall be adjusted to 86% of the conversion price then in
effect, with the result of increasing the number of shares of common stock
without series designation into which each share of Series F preferred stock may
be converted. The Series F preferred stock has no preemptive rights or
subscription rights.
SPECIAL MEETING OF STOCKHOLDERS
Under both Delaware and Georgia law, a special meeting of stockholders may
be called by the board of directors or any other person authorized to do so in
the certificate or articles of incorporation or the bylaws. In addition, Georgia
law provides that a special meeting of stockholders may also be called by the
holders of at least 25%, or such greater or lesser percentages as the articles
of incorporation or bylaws provide, of all votes entitled to be cast on any
issue proposed to be considered at a special meeting. Healtheon/WebMD's bylaws
authorize the board of directors, the president of Healtheon/WebMD, or one or
more stockholders holding shares in the aggregate entitled to cast no less than
10% of the votes at that meeting to call a special meeting of stockholders.
WebMD's bylaws allow the WebMD board of directors, the chairman of the board,
the chief executive officer of WebMD, or the holders of shares representing at
least a majority of the votes entitled to be cast on each issue presented at
such meeting to call a meeting of stockholders or any class or series of
stockholders.
ACTION BY WRITTEN CONSENT IN LIEU OF A STOCKHOLDERS' MEETING
Under Delaware and Georgia law, stockholders may take action by written
consent in lieu of voting at a stockholders meeting. Delaware law permits a
corporation, pursuant to a provision in such corporation's certificate of
incorporation, to eliminate the ability of stockholders to act by written
consent. Elimination of the ability of stockholders to act by written consent
could lengthen the amount of time required to take stockholder actions because
certain actions by written consent are not subject to the minimum notice
requirements of a stockholders' meeting, and could therefore deter hostile
takeover attempts. If the ability of stockholders to act by written consent is
eliminated, a holder or group of holders controlling a majority in interest of a
corporation's capital stock, for example, would not be able to amend such
corporation's bylaws or remove its directors pursuant to a stockholders' written
consent. Healtheon/WebMD's certificate eliminates the ability of stockholders to
act by written consent. Under Georgia law, all actions taken by written consent
must be unanimous unless the articles of incorporation provide otherwise.
WebMD's articles provide that all actions by stockholders shall be taken at a
meeting of the stockholders.
VOTING BY WRITTEN BALLOT
Under Delaware law, the right to vote by written ballot may be restricted
if so provided in the certification of incorporation. Healtheon/WebMD's
certificate and bylaws do not restrict the right to vote by ballot. Georgia law
does not contain a similar provision and the WebMD articles and bylaws do not
specify any rules for accepting voice or ballot votes.
RECORD DATE FOR DETERMINING STOCKHOLDERS
Both the Healtheon/WebMD bylaws and the WebMD bylaws provide that their
respective boards of directors may fix a record date that:
- in the case of determination of the stockholders entitled to vote at any
meeting of stockholders or adjournment of any meeting, shall not be more
than 60 days, in the case of Healtheon/WebMD, or 70 days, in the case of
WebMD, nor less than 10 days before the date of the meeting
- in the case of any other action, shall not be more than 60 days, in the
case of Healtheon/WebMD, or 70 days, in the case of WebMD, prior to such
other action
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Furthermore, both Healtheon/WebMD bylaws provide that if the board of
directors does not fix a record date in the manner described above, then:
- the record date for determining stockholders entitled to notice of or to
vote at a meeting of stockholders shall be at the close of business on
the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on
which the meeting is held
- the record date for determining stockholders for any other purpose shall
be at the close of business on the same day on which the board of
directors adopts the related resolution
ADVANCE NOTICE PROVISIONS FOR BOARD NOMINATION AND OTHER STOCKHOLDER
BUSINESS -- ANNUAL MEETINGS
The Healtheon/WebMD bylaws require that nominations of persons for election
to the board of directors and the proposal of business to be considered at any
meeting of stockholders must made by:
- the corporation's notice of meeting,
- the board of directors, or
- a stockholder who gives proper notice. If made by a stockholder, the
proposal or nomination must be made by advance written notice given to
Healtheon/WebMD between 60 and 90 days prior to the first anniversary of
the preceding year's annual meeting of stockholders. However, if less
than 65 days notice of the meeting is given to the stockholder by
Healtheon/WebMD, the stockholder's The WebMD bylaws provide that if the
board of directors does not fix a record date in the manner described
above, then:
- the record date for determining stockholders entitled to notice of or to
vote at a meeting of stockholders shall be the date on which notice of a
stockholders' meeting is mailed
- the record date for determining stockholders entitled to receive
dividends shall be the date on which the board of directors adopts a
resolution declaring a dividend
- the record date for determining stockholders for any other purpose shall
be the date on which the action is taken that requires a determination
notice of a proposal or nomination must be delivered not earlier than the close
of business on the seventh day following the day on which the notice of the
meeting is mailed.
The WebMD bylaws require that nominations of persons for election to the
board of directors and the proposal of business to be considered at an annual
meeting of stockholders must be made by the board of directors, the chairman of
board, the Chief Operating Officer or by a stockholder who gives proper notice.
If made by a stockholder, the proposal or nomination must be made by advance
written notice given to WebMD between 60 and 90 days prior to the first
anniversary of the preceding year's annual meeting of stockholders.
ADVANCE NOTICE PROVISION FOR BOARD NOMINATION AND OTHER STOCKHOLDER
BUSINESS -- SPECIAL MEETINGS
The Healtheon/WebMD bylaws provide for the same requirements for raising
business at special meetings of stockholders as for raising business at annual
meetings.
The WebMD bylaws provide that, at special meetings of stockholders, the
only business that can be conducted will be the items of business set forth in
the notice of the special meeting.
NUMBER OF DIRECTORS
The Healtheon/WebMD bylaws provide that the board of directors shall
consist of not fewer than six and not more than 11 directors. The WebMD bylaws
provide that the board of directors shall consist of not more than 15 directors.
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CLASSIFIED BOARD OF DIRECTORS
Delaware law and Georgia law each provide that a corporation's board of
directors may be divided into various classes with staggered terms of office.
The board of directors of each of Healtheon/WebMD and WebMD is divided into
three classes, as nearly equal in size as possible, with one class being elected
annually. Healtheon/WebMD and WebMD directors are elected to a term of three
years and until their successors are elected and qualified.
REMOVAL OF DIRECTORS
Under Delaware and Georgia law, except as otherwise provided in the
corporation's certificate or articles of incorporation, a director of a
corporation that has a classified board of directors may be removed only with
cause. In addition, under Delaware law, when a corporation's certificate of
incorporation provides that holders of a series or class, voting as a class or
series, are entitled to elect one or more directors, then any director may be
removed, without cause, only by the applicable vote of holders of shares of that
class or series. Under Georgia law, if a director is elected by a voting group,
only the stockholders of that voting group may participate in the vote to remove
such director.
The Healtheon/WebMD bylaws provide that any director or the entire board of
directors may be removed, with cause, by the holders of a majority of the shares
then entitled to vote at an election of directors.
The WebMD bylaws provide that any director, or the entire WebMD board of
directors, may be removed with cause by the stockholders, provided that
directors elected by a particular voting group may be removed only by the
stockholders in that voting group. WebMD's bylaws do not allow directors to be
removed without cause.
BOARD OF DIRECTORS VACANCIES
Under Delaware law, vacancies and newly created directorships may be filled
by a majority of the directors then in office, even though less than a quorum,
unless otherwise provided in the certificate of incorporation or bylaws, and
unless the certificate of incorporation directs that a particular class of stock
is to elect such director, in which case any other directors elected by such
class, or a sole remaining director so elected, may fill such vacancy. Under
Georgia law, unless the articles of incorporation or a bylaw adopted by the
stockholders provides otherwise, vacancies and newly created directorships may
be filled by the stockholders, by the board of directors, or by a majority of
the directors remaining in office if such directors constitute less than a
quorum, unless the director was elected by a voting group, in which case the
stockholders of such voting group or the remaining directors elected by such
voting group may fill such vacancy.
The Healtheon/WebMD bylaws provide that vacancies on the board of directors
may only be filled by the vote of the majority of directors remaining in office.
WebMD's bylaws provided that a vacancy may be filled by the affirmative
vote of a majority of the remaining directors, provided that if the vacant
office was held by a director elected by a particular voting group, only the
holder of shares of such voting group or the remaining directors elected by such
voting group may fill the vacancy, provided further that if there is no
remaining director elected by such voting group, the other remaining directors
may fill the vacancy during an interim period before the stockholders of the
applicable voting group act to fill the vacancy.
NOTICE OF SPECIAL MEETINGS OF THE BOARD OF DIRECTORS
The Healtheon/WebMD bylaws provide that the Chief Executive Officer may
call special meetings of the board of directors upon three days notice of the
meeting. The president or secretary may call special meetings upon the written
request of two directors and upon three days notice of the meeting.
The WebMD bylaws provide that special meetings may be called by the
chairman of the board, the Chief Operating Officer or by a majority of the
directors upon one day's notice of the meeting.
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APPROVAL OF LOANS TO OFFICERS
The Healtheon/WebMD bylaws provide that Healtheon may lend money to or
otherwise assist any officer or other employee whenever the directors judge such
a loan or assistance reasonably to be expected to benefit the corporation.
The WebMD bylaws do not specifically address loans to officers or
employees.
INDEMNIFICATION
Both the Healtheon/WebMD certificate of incorporation and bylaws and the
MEDE AMERICA certificate of incorporation and bylaws provide that its respective
directors and officers shall be indemnified to the fullest extent authorized by
law against any action, proceeding or suit brought against such a person by
reason of the fact that he or she is or was a director or officer of the
corporation or serves or served at any other enterprise as at the request of the
corporation.
Both the Healtheon/WebMD by laws and the WebMD bylaws provide that the
respective corporations may pay all expenses incurred by a director or officer
in defending any proceeding within the scope of the indemnification provisions.
The WebMD bylaws provide that payment of expenses in advance of the final
disposition of an action shall be authorized by the board of directors in some
circumstances and may be authorized by the board of directors in other
circumstances upon receipt of an affirmation by the director or officer that he
or she has met the applicable standard of conduct.
LIMITATIONS ON LIABILITY
Healtheon/WebMD's certificate limits or eliminates, to the fullest extent
permitted by Delaware law, the personal liability of a director to
Healtheon/WebMD or its stockholders for monetary damages for breach of fiduciary
duty as a director. Under Delaware law, such provision may not eliminate or
limit director monetary liability for:
- breaches of the director's duty of loyalty to the corporation or its
stockholders
- acts or omissions not in good faith involving intentional misconduct or
knowing violations of law
- the payment of unlawful dividends or unlawful stock repurchases or
redemptions, or
- transaction in which the director received an improper personal benefit.
WebMD's articles eliminate a director's personal liability for monetary
damages to WebMD or any of its stockholders for any breach of duties of such
position, except that such liability is not eliminated for
- any appropriation, in violation of such director's duties, of any
business opportunity of WebMD
- acts or omission which involve intentional misconduct or a knowing
violation of law
- liability for unlawful distributions
- any transaction from which the director received an improper personal
benefit.
WebMD's Articles provide that if at any time Georgia law is amended to
further eliminate or limit the liability of a director, then the liability of
each director of WebMD shall be eliminated or limited to the fullest extent
permitted thereby.
STOCKHOLDER APPROVAL OF CERTAIN BUSINESS COMBINATIONS
Under Delaware and Georgia law, "business combinations" by corporations
with "interested stockholders" are subject to a moratorium of three or five
years, respectively, unless specified conditions are met. The prohibited
transactions include, in each case, a merger with, disposition of assets to, or
the issuance of stock to, the interested stockholder, or certain transactions
that have the effect of increasing the proportionate share of the outstanding
securities held by the interested stockholder. Under Delaware law, an interested
stockholder may avoid the prohibition against effecting certain significant
transactions
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with the corporation if the board of directors, prior to the time such
stockholder becomes an interested stockholder, approves such transaction or the
transaction by which such stockholder becomes an interested stockholder or if at
or subsequent to such time the board of directors and the stockholders approve
such transaction. Under Georgia law, an interested stockholder may avoid the
prohibition against effecting certain significant transactions with the
corporation if the board of directors, prior to the time such stockholder
becomes an interested stockholder approves such transaction or the transaction
by which such stockholder becomes an interested stockholder.
These provisions of Delaware law apply to a Delaware corporation unless the
corporation "opts out" of the provisions in its certificate of incorporation or
bylaws. Healtheon/WebMD has not opted out of these provisions in its certificate
of incorporation or bylaws and consequently is subject to these provisions.
The similar provisions of Georgia law do not apply to a Georgia corporation
unless it has affirmatively elected in its bylaws to be governed by them. The
WebMD bylaws do not currently contain a provision electing to be governed by the
similar provisions of Georgia law. Georgia law also contains a provision
concerning "fair price requirements" which if elected by a Georgia corporation
in its bylaws imposes certain requirements on "business combinations" of a
Georgia corporation with any person who is an "interested stockholder" of that
corporation. The WebMD bylaws do not presently contain a provision electing to
be governed by the fair price requirements.
PAR VALUE, DIVIDENDS AND REPURCHASES OF SHARES
Georgia law dispenses with the concept of par value of shares for most
purposes as well as statutory definitions of capital, surplus and the like. The
concepts of par value, capital and surplus are retained under Delaware law.
Delaware law permits a corporation to declare and pay dividends out of
surplus or, if there is no surplus, out of the net profits for the fiscal year
in which the dividend is declared and/or for the preceding fiscal year as long
as the amount of capital of the corporation following the declaration and
payment of the dividend is not less than the aggregate amount of the capital
represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets. In addition, Delaware law generally
provides that a corporation may redeem or repurchase its shares only if such
redemption or repurchase would not impair the capital of the corporation.
Notwithstanding the foregoing, a Delaware corporation may redeem or repurchase
shares having a preference upon the distribution of any of its assets if such
shares will be retired upon acquisition, and provided that, after the reduction
in capital made in connection with such retirement of shares, the corporation's
remaining assets are sufficient to pay any debts not otherwise provided for.
Under Georgia law, a corporation may make distributions to its stockholders
subject to any restrictions imposed in the corporation's articles of
incorporation, except that no distribution may be made if as a result the
corporation would not be able to pay its debts as they become due in the usual
course of business or its total assets would be less than the sum of its total
liabilities plus the amount that would be needed, if the corporation were to be
dissolved at the time of the distribution, to satisfy the preferential rights
upon dissolution of stockholders whose preferential rights are superior to those
receiving the distribution. A Georgia corporation may acquire its own shares and
shares so acquired will constitute authorized but unissued shares, unless the
articles of incorporation provide that such shares become treasury shares or
prohibit the reissuance of reacquired shares. If such reissuance is prohibited,
the number of authorized shares will be reduced by the number of shares
reacquired.
DISSENTERS' OR APPRAISAL RIGHTS
Under both Delaware and Georgia law, a stockholder of a corporation
participating in certain major corporate transactions may be entitled to
dissenters' or appraisal rights pursuant to which such stockholder may receive
cash in the amount of the fair value of his or her shares in lieu of the
consideration he or she would otherwise receive in the transaction.
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Under Delaware law, such rights are not available:
- with respect to the sale, lease or exchange of all or substantially all
of the assets of a corporation or an amendment to the corporation's
certificate of incorporation
- with respect to a merger or consolidation by a corporation the shares of
which are either listed on a national securities exchange or held of
record by more than 2,000 stockholders if such stockholders are required
to receive only shares of the surviving corporation, shares of any other
corporation which are either listed on a national securities exchange or
held of record by more than 2,000 holders, cash in lieu of fractional
shares or a combination of the foregoing, or
- to stockholders of a corporation surviving the merger if no vote of the
stockholder of the surviving corporation is required to approve the
merger because the merger does not amend the certificate of
incorporation, and each share of the surviving corporation outstanding
prior to the merger is an identical outstanding or treasury share after
the merger, and the number of shares to be issued in the merger does not
exceed 20% of the shares of the surviving corporation outstanding
immediately prior to the merger.
In contrast, under Georgia law, dissenters' rights are available in the
event of any of the following corporate actions:
- a merger if the approval of the stockholders is required for such merger
and the stockholder is entitled to vote on the merger or if the
corporation is a subsidiary that is merged with its parent
- a share exchange in which the corporation's shares will be acquired, if
the stockholder is entitled to vote on the share exchange
- a sale or exchange of all or substantially all of the assets of a
corporation, if a stockholder vote is required, other than a sale
pursuant to a court order or a sale for cash the proceeds of which will
be distributed to the stockholders within one year
- an amendment of the articles of incorporation that adversely affects
rights relating to such stockholder's shares, or
- any corporate action taken pursuant to a stockholder vote to the extent
the articles of incorporation, bylaws or a resolution of the board of
directors provides that voting or nonvoting stockholders are entitled to
dissent and obtain payment for their shares. This right is not available
when the affected shares are listed on a national securities exchange or
held of record by more than 2,000 stockholders unless the articles of
incorporation or a resolution of the board of directors approving the
transaction provide otherwise, or in a plan of merger or share exchange
the holders of such shares are required to accept anything other than
shares of the surviving corporation or another publicly held corporation
which at the effective date of the merger or share exchange are either
listed on a national securities exchange or held of record by more than
2,000 stockholders, except for payments in lieu of fractional shares.
Appraisal rights are available to the holders of the common stock and
holders of the Series A preferred stock of WebMD with respect to the
WebMD merger.
STOCKHOLDER DERIVATIVE SUITS
Under Delaware law, a stockholder may only bring a derivative action on
behalf of the corporation if the stockholder was a stockholder at the time of
the transaction in question or his or her stock thereafter devolved upon him or
her by operation of law.
Under Georgia law, a stockholder may not commence or maintain a derivative
proceeding unless the stockholder was a stockholder of the corporation at the
time of the act or omission complained of or became a stockholder through
transfer by operation of law from one who was a stockholder at that time. In
addition, Georgia law requires that the stockholder fairly and adequately
represent the interests of the corporation in enforcing the rights of the
corporation.
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COMPARISON OF RIGHTS OF HOLDERS OF
MEDE AMERICA COMMON STOCK AND
HEALTHEON/WEBMD COMMON STOCK
The rights of stockholders of MEDE AMERICA are currently governed by MEDE
AMERICA's certificate of incorporation, which has been amended and restated, and
MEDE AMERICA's bylaws. After the completion of the MEDE AMERICA reorganization,
MEDE AMERICA stockholders will become stockholders of Healtheon/WebMD. The
rights of stockholders of Healtheon/WebMD will be governed by Healtheon/WebMD's
certificate of incorporation and Healtheon/WebMD's bylaws. Because MEDE AMERICA
and Healtheon/WebMD are both Delaware corporations, after the MEDE AMERICA
reorganization the rights of MEDE AMERICA stockholders will continue to be
governed by Delaware law. The following paragraphs summarize certain differences
between the rights of Healtheon/WebMD stockholders and MEDE AMERICA stockholders
under the certificates of incorporation and bylaws of Healtheon/WebMD and MEDE
AMERICA, as applicable.
COMMON STOCK
Healtheon/WebMD and MEDE AMERICA each have one class of common stock issued
and outstanding. Holders of Healtheon/WebMD common stock and holders of MEDE
AMERICA common stock are each entitled to one vote for each share held.
PREFERRED STOCK
Both the Healtheon/WebMD and MEDE AMERICA certificates of incorporation
authorize the respective boards of directors to issue shares of preferred stock
in one or more series and to fix the designations, preferences, powers and
rights of the shares to be included in each series. The Healtheon/ WebMD
certificate of incorporation and the MEDE AMERICA certificate of incorporation
each reserve for issuance 5,000,000 shares of preferred stock.
SPECIAL MEETING OF STOCKHOLDERS
Special meetings of Healtheon may be called by Healtheon/WebMD's board of
directors, by Healtheon/WebMD's president or by written request of the holders
of not less than 10% of the votes at that meeting.
Special meetings of MEDE AMERICA may be called by the chairman of MEDE
AMERICA's board of directors, by MEDE AMERICA's president or by majority of MEDE
AMERICA's board of directors.
ACTION BY WRITTEN CONSENT IN LIEU OF A STOCKHOLDERS' MEETING
Healtheon/WebMD stockholders may not take action without a meeting by
written consent.
MEDE AMERICA stockholders may take action without a meeting by written
consent of the holders of outstanding stock having the number of votes that
would be necessary to take such an action at a meeting at which all shares
entitled to vote were present and voted.
VOTING BY WRITTEN BALLOT
Healtheon/WebMD's bylaws do not contain any provision requiring a vote by
written ballots.
MEDE AMERICA's bylaws provide that a vote at a stockholders' meeting need
not be by written ballot unless so demanded by a stockholder present in person
or by proxy at the meeting, or if so directed by the chairman of the meeting.
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RECORD DATE FOR DETERMINING STOCKHOLDERS
Both the Healtheon/WebMD bylaws and the MEDE AMERICA bylaws provide that
their respective boards of directors may fix a record date that:
- in the case of determination of the stockholders entitled to vote at any
meeting of stockholders or adjournment of any meeting, shall not be more
than 60 days nor less than 10 days before the date of the meeting
- in the case of any other action, shall not be more than 60 days prior to
such other action
Furthermore, both the Healtheon/WebMD bylaws and the MEDE AMERICA bylaws
provide that if the respective board of directors does not fix a record date in
the manner described above, then:
- the record date for determining stockholders entitled to notice of or to
vote at a meeting of stockholders shall be at the close of business on
the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on
which the meeting is held
- the record date for determining stockholders for any other purpose shall
be at the close of business on the same day on which the board of
directors adopts the related resolution
ADVANCE NOTICE PROVISIONS FOR BOARD NOMINATION AND OTHER STOCKHOLDER BUSINESS --
ANNUAL MEETINGS
The Healtheon/WebMD bylaws require that nominations of persons for election
to the board of directors and the proposal of business to be considered at any
meeting of stockholders must made by:
- the corporation's notice of meeting,
- the board of directors, or
- a stockholder who gives proper notice. If made by a stockholder, the
proposal or nomination must be made by advance written notice given to
Healtheon/WebMD between 60 and 90 days prior to the first anniversary of
the preceding year's annual meeting of stockholders. However, if less
than 65 days notice of the meeting is given to the stockholder by
Healtheon/WebMD, the stockholder's notice of a proposal or nomination
must be delivered not earlier than the close of business on the seventh
day following the day on which the notice of the meeting is mailed.
The MEDE AMERICA bylaws require that nominations of persons for election to
the board of directors and the proposal of business to be considered at an
annual meeting of stockholders must be made by the board of directors or the
chairman of the meeting or by a stockholder who gives proper notice. If made by
a stockholder, the proposal or nomination must be made by advance written notice
given to MEDE AMERICA between 60 and 90 days prior to the first anniversary of
the preceding year's annual meeting of stockholders.
ADVANCE NOTICE PROVISION FOR BOARD NOMINATION AND OTHER STOCKHOLDER
BUSINESS -- SPECIAL MEETINGS
The Healtheon/WebMD bylaws provide for the same requirements for raising
business at special meetings of stockholders as for raising business at annual
meetings.
The MEDE AMERICA bylaws provide that, at special meetings of stockholders,
the only business that can be conducted will be the items of business set forth
in the notice of the special meeting.
NUMBER OF DIRECTORS
The Healtheon/WebMD bylaws provide that the board of directors shall
consist of not fewer than six and not more than 11 directors.
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The MEDE AMERICA bylaws provide that the board of directors shall consist
of not fewer than three and not more than 11 directors.
CLASSIFIED BOARD OF DIRECTORS
Delaware law provides that a corporation's board of directors may be
divided into various classes with staggered terms of office. Healtheon/WebMD's
board of directors is divided into three classes, as nearly equal in size as
possible, with one class being elected annually. Healtheon/WebMD directors are
elected to a term of three years and until their successors are elected and
qualified.
MEDE AMERICA's directors are not divided into classes. MEDE AMERICA's
directors are all elected each year to a term of one year. At an annual meeting
in which a quorum is present, the persons receiving a plurality of the votes
cast are elected as the directors.
REMOVAL OF DIRECTORS
The Healtheon/WebMD bylaws provide that any director or the entire board of
directors may be removed, with cause, by the holders of a majority of the shares
then entitled to vote at an election of directors.
The MEDE AMERICA bylaws provide that any director or the entire board of
directors may be removed, with or without cause, by an action by the holders of
a majority of the shares present in person or by proxy at a stockholders'
meeting and entitled to vote or by proper written consent of the stockholders.
BOARD OF DIRECTORS VACANCIES
The Healtheon/WebMD bylaws provide that vacancies on the board of directors
may be filled only by the vote of the majority of directors remaining in office.
The MEDE AMERICA bylaws provide that vacancies on the board of directors
resulting from death, resignation or removal shall only be filled by the vote of
a majority of the directors remaining in office. Newly created directorships
created by any increase in the number of directors shall be filled by the board
of directors, or if not filled by the board of directors, by the stockholders at
the next annual meeting of at a special meeting called for that purpose.
NOTICE OF SPECIAL MEETINGS OF THE BOARD OF DIRECTORS
The Healtheon/WebMD bylaws provide that the Chief Executive Officer may
call special meetings of the board of directors upon three days notice of the
meeting. The president or secretary may call special meetings upon the written
request of two directors and upon three days notice of the meeting.
The MEDE AMERICA bylaws provide that special meetings may be called by the
Chairman of the board, the President or by a majority of the directors. Notice
of such a meeting must be mailed at least five days before the date of the
meeting, or delivered by telephone, telegraph, cable, radio or wireless no later
than one day before the date of the meeting.
APPROVAL OF LOANS TO OFFICERS
The Healtheon/WebMD bylaws provide that Healtheon may lend money to or
otherwise assist any officer or other employee whenever the directors judge such
a loan or assistance reasonably to be expected to benefit the corporation.
The MEDE AMERICA bylaws do not specifically address loans to officers or
employees.
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INDEMNIFICATION
Both the Healtheon/WebMD certificate of incorporation and bylaws and the
MEDE AMERICA certificate of incorporation and bylaws provide that its respective
directors and officers shall be indemnified to the fullest extent authorized by
law against any action, proceeding or suit brought against such a person by
reason of the fact that he or she is or was a director or officer of the
corporation or serves or served at any other enterprise as at the request of the
corporation.
Both the Healtheon/WebMD bylaws and the MEDE AMERICA bylaws provide that
the respective corporations may pay all expenses incurred by a director or
officer in defending any proceeding within the scope of the indemnification
provisions. The MEDE AMERICA bylaws provide that payment of expenses in advance
of the final disposition of an action may be authorized by the board of
directors upon receipt of an undertaking by the director or officer to repay the
amount unless it is determined that he or she is entitled to be indemnified by
the corporation.
LIMITATION ON LIABILITY
Both the Healtheon/WebMD certificate of incorporation and the MEDE AMERICA
certificate of incorporation provide that no director shall be personally liable
to the corporation or any of its stockholders for monetary damages for breach of
the director's fiduciary duty. The MEDE AMERICA certificate of incorporation
does not limit liability:
- for a director's breach of his or her duty of loyalty to the corporation
or its stockholders
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law
- under Section 174 of the DGCL, or
- for any transaction from which the director derived an improper personal
benefit
The Healtheon/WebMD certificate of incorporation limits liability of its
directors to the fullest extent permitted by Delaware law.
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COMPARISON OF RIGHTS OF HOLDERS OF MEDCAST CAPITAL
STOCK AND HEALTHEON/WEBMD COMMON STOCK
The rights of stockholders of Medcast are currently governed by Medcast's
certificate of incorporation, which has been amended, and Medcast's bylaws.
After the completion of the Medcast reorganization, Medcast stockholders will
become stockholders of Healtheon/WebMD. The rights of stockholders of
Healtheon/WebMD will be governed by Healtheon/WebMD's certificate of
incorporation and Healtheon/ WebMD's bylaws. Because Medcast and Healtheon/WebMD
are both Delaware corporations, after the Medcast reorganization the rights of
Medcast stockholders will continue to be governed by Delaware law. The following
paragraphs summarize certain differences between the rights of Healtheon/WebMD
stockholders and Medcast stockholders under the certificates of incorporation
and bylaws of Healtheon/ WebMD and Medcast, as applicable.
COMMON STOCK
Healtheon/WebMD and Medcast each have one class of common stock issued and
outstanding. Holders of Healtheon/WebMD common stock and holders of Medcast
common stock are each entitled to one vote for each share held.
PREFERRED STOCK
Both the Healtheon/WebMD and Medcast certificates of incorporation
authorize the respective boards of directors to issue shares of preferred stock
in one or more series and to fix the designations, preferences, powers and
rights of the shares to be included in each series. The Healtheon/WebMD
certificate of incorporation and the Medcast certificate of incorporation each
authorize for issuance 10,000,000 shares of preferred stock. Medcast currently
has 2,522,809 shares of preferred stock designated in series. The terms of the
preferred stock are described below.
Medcast's Series A preferred stock, Series B preferred stock, and Series C
preferred stock, are referred to in this section entitled "Comparison of Rights
of Holders of Medcast Capital Stock and Healtheon/WebMD Common Stock"
collectively as the "preferred stock," have the rights, preferences and
privileges set forth below:
Dividend rights. If Medcast declares a dividend on the common stock, the
holders of preferred stock are entitled to receive pro rata cumulative cash
dividends on each share of preferred stock as if the shares of preferred stock
were converted into common stock immediately prior to the record date for
payment of any cash dividend on the common stock. The holders of the Series A
preferred stock and Series C preferred stock will receive dividends in
preference to the holders of Series B preferred stock, common stock and any
other securities to which the Series A preferred stock and Series C preferred
stock rank prior. As long as the Series A preferred stock and Series C preferred
stock remain outstanding, Medcast is not permitted to pay any dividends on the
Series B preferred stock or the common stock unless Medcast first pays the full
amount of the dividend required to be paid on the Series A preferred stock and
Series C preferred stock, as described in the first sentence of this paragraph.
Liquidation preference. In the event of any liquidation, dissolution or
winding up of Medcast, the holders of the preferred stock will be entitled to
receive certain liquidation preferences. A merger or consolidation of Medcast
with or into any other entity, unless the stockholders of Medcast own more than
50% of the voting securities of the resulting entity, or sale of all or
substantially all of Medcast's assets, will be deemed a liquidation unless the
merger, consolidation or sale of assets constitutes a "qualified sale." A
"qualified sale" with respect to the Series A preferred stock is a sale of
Medcast in which the holders of shares of Series A preferred stock receive at
least $23 for each share of Series A preferred stock or for that number of
shares of common stock into which each share of Series A preferred stock is
convertible. A "qualified sale" with respect to the Series C preferred stock is
a sale of Medcast in which the holders of shares of Series C preferred stock
receive at least $65.59 for each of Series C preferred stock or for that number
of shares of common stock into which each share of Series C preferred stock is
convertible. If a sale of Medcast would not otherwise result in a qualified
sale, Medcast may elect to
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adjust the conversion price for the Series A and Series C preferred stock as is
necessary to cause the sale to constitute a qualified sale. To make this
election, a majority of the board of directors of Medcast, other than the
directors elected by the holders of shares of Series A preferred stock, must
approve the election and submit the election to the holders of the common stock
and Series B preferred stock for approval. The Medcast reorganization described
in this proxy statement/prospectus will be a qualified sale with respect to the
Series A preferred stock. The reorganization agreement provides that board of
directors of Medcast will recommend, and the holders of a majority of the common
stock and Series B preferred stock will approve, an election to cause the
Medcast reorganization to constitute a qualified sale with respect to the Series
C preferred stock.
Voting rights. The preferred stock votes together with the common stock as
a single class on all matters to be voted upon by the stockholders, except for
those matters as to which the Series A preferred stock or the Series C preferred
stock vote as a separate class or as described above regarding the qualified
sale. Holders of preferred stock are entitled to cast that number of votes equal
to the number of shares of common stock into which their preferred stock is then
convertible. Medcast is not permitted to take any of the following actions
without the prior written consent of the holders of a majority of the then
outstanding Series A preferred stock voting as a separate class. The first,
second, fourth, fifth and seventh bullet points below also require the prior
written consent of the holders of a majority of the then outstanding Series C
preferred stock voting as a separate class:
- amend the certificate of incorporation or bylaws of Medcast in a manner
that would affect the rights, preferences, powers or privileges of the
Series A preferred stock, or the Series C preferred stock, as
appropriate, other than an amendment that would either create common
stock and Series B preferred stock or increase the number of authorized
shares of common stock
- enter into any voluntary liquidation, dissolution or winding up of
Medcast
- enter into any merger or consolidation of Medcast into or with any other
corporation or entity, or a sale, assignment or transfer of all or
substantially all of the assets of Medcast
- apply any of the assets of Medcast to the redemption, retirement,
purchase or other acquisition, directly or indirectly, of any shares of
common stock and Series B preferred stock
- create, authorize or issue any security ranking senior to the Series A
preferred stock, or the Series C preferred stock, as appropriate, with
respect to payment of dividends, distribution of assets or redemption
- engage in any transaction with an Affiliate of Medcast, as defined in the
certificate of designations for the Series A preferred stock
- declare a dividend on any common stock and Series B preferred stock
- incur debt greater than $5 million in any one transaction or series of
related transactions
- enter into a single transaction or series of related transactions
involving the commitment of greater than $2 million
The holders of Series A preferred stock and Series C preferred stock are
contractually obligated to approve the Medcast reorganization pursuant to the
stockholders agreement among Alan. N. Greenberg, Medcast Networks, L.P., and the
holders of preferred stock.
Voluntary conversion rights. Each share of preferred stock is convertible
at the option of the holder thereof at any time into shares of common stock at
the then applicable conversion rate. The conversion rate for the preferred stock
is one for one, representing a conversion price of $11.50 per share of common
stock for each share of Series A preferred stock, and $46.85 per share of common
stock for each share of Series C preferred stock.
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Mandatory conversion. Each share of preferred stock will automatically
convert into shares of common stock at the then applicable conversion rate if
any of the following events occurs:
- Medcast closes an underwritten public offering meeting specified price
per share and gross proceeds thresholds with respect to each of the
Series A preferred stock and Series C preferred stock
- Medcast achieves an annual cash flow from operations in excess of $25
million as determined in accordance with generally accepted accounting
principles and reflecting on Medcast's audited annual financial
statements, or
- a qualified sale of Medcast as described above
Anti-dilution provisions. The conversion price of each share of preferred
stock is subject to adjustment for changes in Medcast's capitalization, stock
splits, combinations, stock dividends and to prevent dilution in the event
Medcast issues additional shares of common stock or common stock equivalents at
a purchase price per share less than the applicable conversion price for each
series of preferred stock. In addition, the conversion price of the Series A
preferred stock will be reduced upon the exercise of options granted to Mark
Dailey and Gordon Wyatt and certain warrants held by Tom Cohen and Hamilton
Jordan.
Additional adjustments.
Sales of Medcast. In the event of a sale of Medcast which results in
aggregate gross proceeds in excess of $250 million or in the case of an
initial public offering which results in an implied valuation of Medcast's
outstanding equity of at least $250 million, the Series A conversion rate
will be reduced by certain multipliers depending on the aggregate gross
proceeds or implied valuation, as applicable.
Certain conversions of Series A preferred stock. If Medcast closes a
public offering which is a mandatory conversion event for the Series A
Preferred Stock but not the Series C preferred stock, then a holder of
Series A preferred stock may delay mandatory conversion with respect to all
of its Series A preferred stock until a mandatory conversion event occurs
with respect to the Series C preferred stock, or the approval by Medcast's
stockholders of a qualified sale with respect to the Series A preferred
stock; provided that the terms of that holder's non-converted Series A
preferred stock will be amended automatically to make certain adjustments
to its liquidation preference and redemption amount.
Redemption. At any time on or after February 14, 2004, any holder of Series
A preferred stock may elect to require Medcast to repurchase all or some of the
shares of Series A preferred stock held by that holder at a redemption price
equal to the greater of the sum of $11.50 plus a return of 8% per year,
compounded annually, and the average of the fair market value of such shares
determined as of two dates in the preceding two calendar quarters. At any time
after April 6, 2005, any holder of Series C preferred stock may elect to require
Medcast to repurchase all or some of the shares of Series C preferred stock held
by that holder at $46.85 per share. The fair market value of the shares to be
redeemed will be determined by an appraisal conducted by an appraiser agreed
upon by Medcast and the holders of a majority of the shares to be redeemed. The
determination of fair market value by such appraisal will not include any
discount for minority interests. Medcast will pay the redemption prices either
100% in cash or, at Medcast's option, 33% in cash and 67% by issuing a two-year
note bearing interest at the prime rate plus 2%, payable in two equal annual
installments of principal plus accrued interest on each of the first and second
anniversaries of the date of issuance of the note. The note will be secured by a
first lien pledge on the shares of preferred stock redeemed.
SPECIAL MEETING OF STOCKHOLDERS
Special meetings of Healtheon may be called by Healtheon/WebMD's board of
directors, by Healtheon/WebMD's president or by written request of the holders
of not less than 10% of the votes at that meeting. Special meetings of Medcast
may be called by Medcast's board of directors or by written request of the
holders of a majority of the voting power of Medcast's outstanding capital
stock.
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ACTION BY WRITTEN CONSENT IN LIEU OF A STOCKHOLDERS' MEETING
Healtheon/WebMD stockholders may not take action without a meeting by
written consent.
Medcast stockholders may take action without a meeting by written consent
of the holders of outstanding stock having the number of votes that would be
necessary to take such an action at a meeting at which all shares entitled to
vote were present and voted.
VOTING BY WRITTEN BALLOT
Healtheon/WebMD's bylaws do not contain any provision requiring a vote by
written ballots.
Medcast's bylaws provide that a vote at a stockholders' meeting need not be
by written ballot unless so demanded by a stockholder present in person or by
proxy at the meeting, or if so directed by Medcast's board of directors.
RECORD DATE FOR DETERMINING STOCKHOLDERS
Both the Healtheon/WebMD bylaws and the Medcast bylaws provide that their
respective boards of directors may fix a record date that:
- in the case of determination of the stockholders entitled to vote at any
meeting of stockholders or adjournment of any meeting, will not be more
than 60 days nor less than 10 days before the date of the meeting
- in the case of any other action, will not be more than 60 days prior to
such other action
The Healtheon/WebMD bylaws provide that if the Healtheon/WebMD board of
directors does not fix a record date in the manner described above, then:
- the record date for determining stockholders entitled to notice of or to
vote at a meeting of stockholders will be at the close of business on the
day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on
which the meeting is held
- the record date for determining stockholders for any other purpose will
be at the close of business on the same day on which the board of
directors adopts the related resolution
The Medcast bylaws provide that if the Medcast board of directors does not
fix a record date in the manner described above, then the record date for
determining stockholders for any other purpose will be at the close of business
on the same day on which the board of directors adopts the related resolution.
ADVANCE NOTICE PROVISIONS FOR BOARD NOMINATION AND OTHER STOCKHOLDER
BUSINESS -- ANNUAL MEETINGS
The Healtheon/WebMD bylaws require that nominations of persons for election
to the board of directors and the proposal of business to be considered at any
meeting of stockholders must made by:
- the corporation's notice of meeting
- the board of directors, or
- a stockholder who gives proper notice.
If made by a stockholder, the proposal or nomination must be made by
advance written notice given to Healtheon/WebMD between 60 and 90 days prior to
the first anniversary of the preceding year's annual meeting of stockholders.
However, if less than 65 days notice of the meeting is given to the stockholder
by Healtheon/WebMD, the stockholder's notice of a proposal or nomination must be
delivered not earlier than the close of business on the seventh day following
the day on which the notice of the meeting is mailed.
The Medcast bylaws do not contain advance notice provisions for nominations
for election to the board of directors.
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NUMBER OF DIRECTORS
The Healtheon/WebMD bylaws provide that the board of directors will consist
of not fewer than six and not more than 11 directors.
The Medcast bylaws provide that the board of directors will consist of one
or more members.
CLASSIFIED BOARD OF DIRECTORS
Delaware law provides that a corporation's board of directors may be
divided into various classes with staggered terms of office. Healtheon/WebMD's
board of directors is divided into three classes, as nearly equal in size as
possible, with one class being elected annually. Healtheon/WebMD directors are
elected to a term of three years and until their successors are elected and
qualified.
Medcast's directors are not divided into classes.
REMOVAL OF DIRECTORS
Both the Healtheon/WebMD bylaws and the Medcast bylaws provide that any
director or the entire board of directors may be removed, with cause, by the
holders of a majority of the shares then entitled to vote at an election of
directors.
BOARD OF DIRECTORS VACANCIES
The Healtheon/WebMD bylaws provide that vacancies on the board of directors
may be filled by the vote of the majority of directors remaining in office,
unless the vacancy is attributable to a directorship elected by the holders of a
particular class or series of stock, in which case the vacancy may be filled by
a majority of the directors elected by such class or series remaining in office.
The Medcast bylaws provide that vacancies on the board of directors may be
filled by the vote of the majority of directors remaining in office.
NOTICE OF SPECIAL MEETINGS OF THE BOARD OF DIRECTORS
The Healtheon/WebMD bylaws provide that the chairman of the board of
directors, president, secretary, any vice president, or any two directors may
call special meetings of the board of directors. Notice of such a meeting must
be mailed at least four days before the date of the meeting, or delivered by
telephone, telegraph, or personally no later than 48 hours before the time of
the meeting.
The Medcast bylaws provide that special meetings may be called by the
chairman of the board, the secretary or by the written request of two or more
directors. Notice of such a meeting must be mailed at least 72 hours before the
time of the meeting, or delivered by telephone, telecopy or personal service no
later than 24 hours before the time of the meeting.
INDEMNIFICATION
Both the Healtheon/WebMD certificate of incorporation and bylaws and the
Medcast bylaws provide that its respective directors and officers will be
indemnified to the fullest extent authorized by law against any action,
proceeding or suit brought against such a person by reason of the fact that he
or she is or was a director or officer of the corporation or serves or served at
any other enterprise as at the request of the corporation.
Both the Healtheon/WebMD bylaws and the Medcast bylaws provide that the
respective corporations may pay all expenses incurred by a director or officer
in defending any proceeding within the scope of the indemnification provisions.
The Medcast bylaws provide that payment of expenses in advance of the final
disposition of an action may be authorized by the board of directors upon
receipt of an undertaking by the director or officer to repay the amount unless
it is determined that he or she is entitled to be indemnified by the
corporation.
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LIMITATION ON LIABILITY
Both the Healtheon/WebMD certificate of incorporation and the Medcast
certificate of incorporation provide that no director will be personally liable
to the corporation or any of its stockholders for monetary damages for breach of
the director's fiduciary duty. The Medcast certificate of incorporation does not
limit liability:
- for a director's breach of his or her duty of loyalty to the corporation
or its stockholders
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law
- under Section 174 of Delaware law, or
- for any transaction from which the director derived an improper personal
benefit.
Both the Healtheon/WebMD certificate of incorporation and the Medcast
certificate of incorporation limit liability of their directors to the fullest
extent permitted by Delaware law.
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MANAGEMENT OF HEALTHEON/WEBMD
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information as of August 5, 1999 with
respect to persons who are expected to serve as executive officers or directors
of Healtheon/WebMD:
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
W. Michael Long..................................... 46 Chairman and Chief Operating Officer
Jeffrey T. Arnold................................... 29 Chief Executive Officer and Director
</TABLE>
For biographical information concerning the executive officers and
directors of each of Healtheon and WebMD who will serve as executive officers or
directors of Healtheon/WebMD, see the sections entitled "Information regarding
Healtheon" on page 203 and "Information regarding WebMD" on page 242.
COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors of Healtheon/WebMD will have the following
committees:
Audit committee
The audit committee will review and recommend to the board the internal
accounting and financial controls for Healtheon/WebMD and the accounting
principles and auditing practices and procedures to be used for the financial
statements of Healtheon/WebMD. 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.
Stock option committee
The stock option committee will be charged with overseeing the stock option
plans as they relate to employees other than officers and directors of
Healtheon/WebMD.
Compensation committee
The compensation committee will review and recommend to the board policies,
practices and procedures relating to the compensation of the officers and other
managerial employees and the establishment and administration of employee
benefit plans. The compensation committee will exercise all authority under
Healtheon/WebMD's employee equity incentive plans and will advise and consult
with the officers of Healtheon/WebMD regarding managerial personnel policies.
COMPENSATION OF DIRECTORS
Directors of Healtheon/WebMD will not receive any cash fees for their
services on the board or any board committee, but they will be entitled to
reimbursement for all reasonable out-of-pocket expenses incurred in connection
with their attendance at board and board committee meetings. All board members
will be eligible to receive Healtheon/WebMD Stock options under the Healtheon
1996 Stock Plan which will be assumed by Healtheon/WebMD in connection with the
reorganization.
COMPENSATION OF EXECUTIVE OFFICERS
Healtheon/WebMD has not yet paid any compensation to any of its executive
officers and the form and amount of the compensation has not yet been
determined. The board will rely on its compensation committee to recommend the
form and amount of compensation to be paid to Healtheon/WebMD executive
officers.
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It is anticipated that when the compensation committee meets to determine
compensation, the committee will generally adhere to compensation policies which
reflect the belief that:
- Healtheon/WebMD must attract and retain individuals of outstanding
ability and motivate and reward them for sustained performance
- a significant portion of an executive's compensation should be at risk
based upon that executive's and the Healtheon/WebMD's performance
- levels of compensation should generally be in line with that offered by
comparable corporations
For information concerning the compensation historically paid to the
executive officers of each of Healtheon and WebMD who will serve as executive
officers or directors of Healtheon/WebMD, see the sections entitled "Information
regarding Healtheon" on page [ ] and "Information regarding WebMD" on page
[ ].
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INFORMATION REGARDING HEALTHEON
HEALTHEON'S BUSINESS
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 the flow of information and documents, or
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 providers, payers, hospitals, consumers, laboratories and other
healthcare industry participants to exchange information and conduct
transactions with each other over the Internet. Healtheon VHNs allow for the
secure exchange of information among disparate healthcare information systems
and support a broad range of healthcare transactions, including:
- enrollment in health plans
- determination of eligibility of patients to receive care
- referrals and authorizations to additional providers
- ordering of laboratory and diagnostic tests and reporting of results
- clinical data retrieval
- processing of payment claims
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 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.
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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'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. Healtheon offers its network-based
transaction and information services on a per transaction or subscription fee
basis. Healtheon believes that this pricing model reduces the initial investment
required for physicians, small organizations and individuals to obtain the
benefits of high-end information technology systems. 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.
HEALTHEON'S SET OF SERVICES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
CUSTOMERS/ NAME OF
BUSINESS FUNCTION USERS TRANSACTIONS SUPPORTED HEALTHEON SERVICE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Membership Services Consumers Payers - Enrollment in health plans Benefit
- Comparison/selection of health plans Central
- Provider search, selection, change
- Benefits inquiry
- Messaging between consumers, payers
and employers
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
CUSTOMERS/ NAME OF
BUSINESS FUNCTION USERS TRANSACTIONS SUPPORTED HEALTHEON SERVICE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Healthcare Administration and Payers Providers - Eligibility for care determination/ Healtheon
Financial Management authorization Practice
- Approval of referrals to other Healtheon
providers ProviderWorks*
- Claims submission and status ProviderLink
- Confirmation of payment to providers
- Provider directories*
- Provider files-management*
- Information reporting to providers
- Claims repricing*
- -------------------------------------------------------------------------------------------------------------------------------
Clinical Information Services Providers Suppliers - Patient identification and encounter Healtheon Dx
history SCAN+
- Patient registration GMPI+
- Lab test orders and results
- Text document/transcription
distribution
- -------------------------------------------------------------------------------------------------------------------------------
Online Consumer Information Consumers - Access to licensed dictionaries and Healtheon
encyclopedias, medical news and other Consumer
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
Benefit Central service. The Benefit Central 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, benefit inquiries and messaging between consumers and payers. Benefit
Central users also receive Healtheon's Health Risk Appraisal service, which
provides consumer education in wellness and health risks. Healtheon has
contracted to deploy its Benefit Central service directly and through
aggregators to 50 companies, covering approximately 190,000 members.
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
UnitedHealth Group. Healtheon has developed 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 confirmation of
payment to providers. 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 4,850 active provider sites in more
than 20 major markets, and processes over 3.7 million transactions per month.
Healtheon has developed Healtheon Practice, a new Internet-based provider
service with support from Brown & Toland Physician Services Organization, or
Brown & Toland, one of Healtheon's strategic
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partners. Healtheon Practice, which is in production, is designed to provide all
of the functionality of ProviderLink and also support referrals, authorization,
and reporting on directories of providers. Providers using the Healtheon
Practice service 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 Corporation, 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 Beecham
Clinical Laboratories, Inc., or SmithKline Labs, and providers using SmithKline
Labs' services. ActaMed acquired the SCAN application from SmithKline Labs. SCAN
is deployed on approximately 5,100 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, that will
combine the functionality of SCAN and ProviderLink. For a more complete
description, see the section entitled "-- Strategic Relationships" on page 207.
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 application that was developed by ActaMed and that is not yet compatible for
use over the Internet. 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; Adam.com'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 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
management services of its customers' networks on a temporary or transitional
basis. 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.
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
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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 include UnitedHealth Group, 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. 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 has contracted to
deploy it Benefits Administration service directly and through aggregators to 50
companies, 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:
UnitedHealth Group. UnitedHealth Group is one of the largest health and
well-being enterprises in the United States. UnitedHealth Group is Healtheon's
second largest stockholder and after the merger will own approximately 6.3% of
Healtheon's common stock. In March 1996, Healtheon acquired UnitedHealth Group's
ProviderLink network which currently supports over 4,850 active provider sites
in more than 20 major markets servicing over 3.7 million transactions per month.
Healtheon earns transaction fee revenue
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by providing certain healthcare information services to UnitedHealth Group,
members of UnitedHealth Group's provider network and ProviderLink subscribers.
In April 1996, Healtheon and UnitedHealth Group entered into a Services and
License Agreement, or the UnitedHealth Group Agreement, under which Healtheon,
using ProviderLink, provides claims processing, referral, eligibility and
enrollment services, to UnitedHealth Group's managed care providers and
customers. Under the UnitedHealth Group Agreement, Healtheon currently receives
a monthly fee for each user site enrolled with UnitedHealth Group and a fee per
transaction. However, the UnitedHealth Group Agreement does not guarantee any
minimum level of transactions or payments to Healtheon. The UnitedHealth Group
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 UnitedHealth Group are
currently negotiating the new prices, and Healtheon anticipates that the new
prices will reduce the rates paid by UnitedHealth Group. UnitedHealth Group has
also agreed during the term of the UnitedHealth Group Agreement not to promote
or contract for services providing the same functionality as that provided by
Healtheon, although UnitedHealth Group is permitted to continue to utilize
services it was utilizing when it entered into the UnitedHealth Group Agreement.
In addition, 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 UnitedHealth Group to expand the applications and content available to
UnitedHealth Group'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 UnitedHealth Group, is a member of
Healtheon's Board of Directors. The UnitedHealth Group 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 UnitedHealth Group Agreement.
SmithKline Beecham Clinical Laboratories, Inc. SmithKline Labs, a
subsidiary of SmithKline Beecham, is one of the largest independent clinical
laboratories in the United States. SmithKline Beecham is a stockholder of
Healtheon and after the merger will own approximately 4.4% of Healtheon's common
stock. 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.
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.,
Chairman Research and Development, Pharmaceuticals of SmithKline Beecham, 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. 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 December 1998, Healtheon agreed to purchase, and 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.
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On February 9, 1999, SmithKline Beecham announced that it has agreed to
sell SmithKline Labs to Quest Diagnostics, Incorporated. SmithKline Labs has
been one of Healtheon's strategic partners since December 1997, and Healtheon's
relationship with them has been beneficial. Healtheon expects its agreements
with SmithKline Labs to remain in effect as a result of the acquisition by Quest
Diagnostics.
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, 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 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 distributed application framework, combined
with software tools that ensure security, scalability, availability, reliability
and manageability, on which transaction intensive applications can be delivered
over the Internet or over other distributed environments. The Healtheon Platform
is deployed on a server complex at the Healtheon data center in Santa Clara,
California, which consists of SUN Solaris and Windows NT 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 COBRA-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
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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.
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 March 31,
1999, Healtheon had 275 employees and independent contractors in customer
support functions, including network services, provider services and customer
support services.
Sales and marketing
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 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
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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 March 31, 1999, Healtheon employed 140 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 March 31, 1999, Healtheon employed 270 people in the areas of applications
design, research and development, quality assurance and technical support.
Healtheon's development and engineering expense, which excludes development
expenses included in cost of operations, totaled $19.0 million in 1998, $12.3
million in 1997, $8.3 million in 1996, $7.0 million in the three months ended
March 31, 1999 and $3.7 million in the three months ended March 31, 1998.
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.
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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.
Employees
As of March 31, 1999, Healtheon had a total of 725 employees and
independent contractors, of whom there were 275 in customer, network and
provider services, 270 in development and engineering, 140 in sales and
marketing and 40 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.
Properties
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 11,000 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.
Legal proceedings
To date, Healtheon has not been subject to any material litigation.
MARKET FOR HEALTHEON'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Healtheon completed the initial public offering of its common stock on
February 10, 1999. Healtheon's common stock has been traded on the Nasdaq
National Market under the symbol "HLTH" since February 11, 1999. Prior to that
date, there was no public market for our common stock and, therefore, no quoted
market prices for our common stock are available for the years ended December
31, 1998 and 1997. The following table lists quarterly information on the price
range of Healtheon common stock based on the high and low reported closing bid
prices for Healtheon common stock as reported on the Nasdaq Stock Market for the
periods indicated below:
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
Fiscal Year Ended December 31, 1999:
First Quarter............................................. $ 49.38 $21.75
Second Quarter............................................ 105.00 39.94
Third Quarter (through August 4, 1999).................... 46.38 41.59
</TABLE>
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On February 28, 1999, there were 373 holders of record of our common stock.
Because many of such shares are held by brokers and other institutions on behalf
of stockholders, we are unable to estimate the total number of stockholders
represented by these record holders.
The market price of Healtheon's common stock has fluctuated since the date
of its initial public offering and is likely to fluctuate in the future. Factors
that may have a significant effect on the market price of our common stock
include:
- 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
- conditions affecting the Internet or healthcare industries, in general
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 many adversely affect
the trading price of Healtheon's common stock, regardless of Healtheon's 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.
Healtheon has never declared or paid any cash dividends on our common stock
or other securities and does not anticipate paying cash dividends in the
foreseeable future.
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HEALTHEON SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of Healtheon 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 proxy
statement/ 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, 1998 and the consolidated balance sheet data at December 31, 1998
and 1997 are derived from, and are qualified by reference to, the audited
consolidated financial statements included elsewhere in this proxy
statement/prospectus. The consolidated statements of operations data for the
two-year period ended December 31, 1995 and the consolidated balance sheet data
at December 31, 1996, 1995 and 1994 are derived from, and are qualified by
reference to, audited consolidated financial statements that are not included in
this proxy statement/prospectus. The consolidated statements of operations and
balance sheet data as of and for the years ended December 31, 1995 and 1994 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 statement of operations
data for the three-month periods ended March 31, 1999 and 1998 and the balance
sheet data as of March 31, 1999 are derived from unaudited financial statements
included elsewhere in this proxy statement/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 these periods. Historical operating results are not
necessarily indicative of results in the future, and the results for interim
periods are not necessarily indicative of the results that may be expected for
the entire year. 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.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------------- ------------------
1998 1997 1996 1995 1994 1999 1998
-------- -------- -------- ------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue................................... $ 48,838 $ 13,390 $ 11,013 $ 2,175 $ 190 $ 17,555 $ 9,754
Loss from operations...................... (53,948) (25,423) (16,541) (3,936) (3,118) (19,127) (9,028)
Net loss applicable to common
stockholders............................ $(54,048) $(28,005) $(18,606) $(4,458) $(3,426) $(18,569) $(9,676)
Basic and diluted net loss per common
share................................... $ (1.54) $ (3.88) $ (2.83) $ (0.85) $ (0.30) $ (1.19)
Weighted-average shares outstanding used
in computing basic and diluted net loss
per common share........................ 34,987 7,223 6,583 5,246 62,665 8,099
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
---------------------------------------------------- MARCH 31,
1998 1997 1996 1995 1994 1999
------- ------- -------- ------- ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments............................. $36,817 $21,804 $ 7,539 $ 9,386 $ 4,186 $ 63,175
Working capital........................... 27,934 14,790 2,505 7,244 4,226 52,989
Total assets.............................. 79,940 53,747 34,407 10,801 5,379 121,055
Long-term obligations, net of current
portion................................. 2,984 932 1,210 -- 63 3,153
Convertible redeemable preferred stock.... -- 50,948 39,578 16,029 7,919 --
Total stockholders' equity (net capital
deficiency)............................. 59,413 (9,930) (14,553) (7,698) (2,838) 95,731
</TABLE>
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HEALTHEON MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Healtheon is pioneering the use of the Internet to simplify workflows,
decrease costs and improve the quality of patient care throughout the healthcare
industry. Healtheon's Virtual Healthcare Network, or VHN, solution enables the
secure exchange of information among a wide array of disparate healthcare
information systems and provides a framework for a broad range of healthcare
transactions.
Healtheon was incorporated in December 1995, commenced operations in
January 1996 and until late 1997 had not recognized substantial revenue and was
therefore 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 results of operations of Healtheon
and ActaMed for all dates and periods presented. Healtheon's 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, or EDI, a
wholly-owned subsidiary of UnitedHealth Group, 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 200,000 shares are held in escrow to secure indemnification obligations.
Of the total shares issued, 476,548 shares were 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. The Metis acquisition was treated as a tax-free reorganization and was
accounted for as a purchase.
Because Healtheon has recently begun operations, it is difficult to
evaluate its business and prospects. Healtheon's revenue and income potential is
unproven and its business model is still emerging. Healtheon's historical
financial information is of limited value in projecting its future operating
results because of its limited operating history as a combined organization and
the emerging nature of its markets. Healtheon began operations in January 1996
and until recently had not earned significant revenue. Healtheon has lost money
since it began operations and, as of March 31, 1999, it had an accumulated
deficit of $122.0 million. Healtheon plans to invest heavily in acquisitions,
infrastructure development, applications development and sales and marketing. As
a result, Healtheon expects that it will continue to lose money through 1999 and
it may never achieve or sustain profitability.
Healtheon has developed strategic relationships with healthcare industry
leaders, including UnitedHealth Group, SmithKline Labs, Brown & Toland and Beech
Street. These four companies each accounted for over 10% of Healtheon's total
revenue in 1998 and the first quarter of 1999, and together accounted for
approximately 87% of Healtheon's total revenue in 1998. Healtheon expects that a
small number of customers will continue to account for a substantial portion of
its revenue for the foreseeable future. The loss of one or more of Healtheon's
significant customers, or a decline in the volume of business generated by these
customers, could have a material adverse effect on Healtheon's business,
financial condition and results of operations.
Cost of operations consist of costs related to services Healtheon provides
to customers and costs associated with the operation and maintenance of its
networks. These costs include salaries and related expenses for consulting and
development personnel, network operations personnel and customer support
personnel; telecommunication costs; maintenance of network equipment;
amortization of certain intangible assets; a portion of facilities expenses; and
leased personnel and facilities costs. Given Healtheon's limited operating
history, changes in revenue mix, limited history of Internet-based network
services, recent investments in personnel, amortization of infrastructure
investments and evolving business model, Healtheon believes that analysis of
historical cost of operations as a percentage of revenue is not
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meaningful. Healtheon anticipates that its total cost of operations will
increase in absolute dollars in the future.
Development and engineering expense, which excludes development expenses
that are included in cost of operations, consists primarily of salaries and
related expenses associated with the development of applications and services.
Expenses include compensation paid to engineering personnel, fees to outside
contractors and consultants, a portion of facilities expenses and the
maintenance 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 expenses are expensed as incurred.
Sales, general and administrative expense consists primarily of salaries
and related expenses for sales, account management, marketing, administrative,
finance, legal, human resources and executive personnel; commissions; costs and
expenses for marketing programs and trade shows; fees for professional services;
and costs of accounting and internal control systems to support 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.
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RESULTS OF OPERATIONS
The following table sets forth certain data expressed as a percentage of
total revenue for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------- ---------------
1998 1997 1996 1999 1998
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Revenue:
Services..................................... 55.5% 32.1% 16.3% 44.7% 50.3%
Services to related parties.................. 42.9 54.6 38.5 54.2 47.7
Software licenses............................ 1.6 13.3 45.2 1.1 2.0
------ ------ ------ ------ -----
Total revenue........................ 100.0 100.0 100.0 100.0 100.0
Operating costs and expenses:
Cost of operations:
Cost of services............................. 55.1 29.2 14.4 44.1 51.0
Cost of services to related parties.......... 33.0 48.8 44.7 44.3 25.9
Cost of software licenses.................... -- -- 1.5 -- --
------ ------ ------ ------ -----
Total cost of operations............. 88.1 78.0 60.6 88.4 76.9
Development and engineering.................... 38.9 91.6 75.7 40.0 38.1
Sales, general and administrative.............. 47.3 75.4 76.3 50.7 48.4
Depreciation and amortization.................. 32.9 44.8 37.7 29.8 29.2
Write-off of offering costs.................... 3.3 -- -- -- --
------ ------ ------ ------ -----
Total operating costs and expenses... 210.5 289.9 250.3 208.9 192.6
------ ------ ------ ------ -----
Loss from operations......................... (110.5) (189.9) (150.3) (108.9) (92.6)
Interest income................................ 2.6 4.6 4.9 4.0 3.7
Interest expense............................... (1.0) (2.4) (0.5) (0.8) (1.2)
Dividends on ActaMed's convertible redeemable
preferred stock.............................. (1.8) (21.4) (23.1) -- (9.1)
------ ------ ------ ------ -----
Net loss..................................... (110.7)% (209.1)% (169.0)% (105.7)% (99.2)%
====== ====== ====== ====== =====
</TABLE>
Three months ended March 31, 1999 and 1998
Revenue. Healtheon earns revenue from services 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. Services revenue also includes revenue from the management and
operation of customers' IT infrastructure. Customers may purchase some or all of
Healtheon's applications and services and the customer relationship may evolve
from utilizing development and consulting services to utilizing transaction and
subscription-based services. Healtheon earns network-based services revenue from
fixed fee subscription arrangements, which revenue is recognized ratably over
the term of the applicable agreement, and from arrangements that are priced on a
per-transaction or per-user basis, which revenue is recognized as the services
are performed. Revenue from development projects is recognized on a
percentage-of-completion basis or as the services are performed, depending on
the terms of the contract. Revenue from consulting services and revenue from the
management and operation of customers' IT infrastructure is recognized as the
services are performed. Cash received in excess of revenue recognized relating
to these services has been recorded as deferred revenue. At March 31, 1999,
Healtheon had deferred revenue of approximately $3.6 million.
Total revenue increased to $17.6 million in the first quarter of 1999 from
$9.8 million in the first quarter of 1998. Revenue from the service agreements
with UnitedHealth and SmithKline Labs increased to $9.5 million from the first
quarter of 1999 from $4.7 million in the first quarter of 1998. Increased
transaction based services under the UnitedHealth Group Agreement, and
additional revenue from the
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January 1999 services agreement with SmithKline Labs, which was phased in during
the first quarter of 1999 contributed to the significant increases in revenue.
In addition, Healtheon's revenue increased due to contracts with new
customers and increased revenue from existing customers, Brown & Toland and
Beech Street. Healtheon recognized revenue for IT services of $4.9 million in
the first quarter of 1999 and $3.8 million in the first quarter of 1998. In
addition, Healtheon recognized revenue related to IT development services of
$0.5 million in the 1999 period and $0.8 million in the 1998 period.
The UnitedHealth Group Agreement has a five-year term. However, the
agreement provides that two years after the date of the agreement, which was
signed on April 4, 1996, the parties will agree on new prices that are
competitive with the marketplace. Healtheon and UnitedHealth Group are
negotiating the new prices and Healtheon anticipates that the new prices will
reduce the rates paid by UnitedHealth Group, on a prospective basis. The
services agreements with SmithKline Labs also each have a five-year term.
However, the December 1997 services agreement provides that the parties will
negotiate new rates as of January 1, 2001 and every two years thereafter. Under
the terms of the services agreement, the renegotiated rates must be competitive
with the marketplace and must be no higher than the lowest fees charged by
Healtheon to similar customers.
Cost of operations. Cost of operations was $15.5 million in the first
quarter of 1999 and $7.5 million in the first quarter of 1998. These increases
resulted mainly from higher personnel and network operation costs required to
support these increased service revenues.
Development and engineering. Development and engineering expense was $7.0
million in the first quarter of 1999 and $3.7 million in the first quarter of
1998. The increase was the result of a significant increase in the number of
engineers engaged in the development of Healtheon's applications and services.
Sales, general and administrative. Sales, general and administrative
expense increased to $8.9 million in the first quarter of 1999 from $4.7 million
in the first quarter of 1998. The amortization of deferred stock compensation
expense increased by $1.6 million. The remainder of the increase resulted from
salaries and related costs of added sales personnel and executive management.
Deferred stock compensation represents the difference between the purchase
or exercise price of certain restricted stock and stock option grants and the
deemed fair value of Healtheon's common stock at the time of those grants.
Healtheon recorded deferred stock compensation of $6.3 million in the first
quarter of 1999, $8.2 million in the full year of 1998 and $2.7 million in the
full year of 1997. The deferred stock compensation balance at March 31, 1999 was
$11.1 million. The deferred stock compensation balance is being amortized based
on a graded vesting method over the vesting period, generally four years, of the
option or restricted stock grants. Amortization is estimated to total $7.8
million in 1999, $3.5 million in 2000, $1.5 million in 2001 and $.4 million for
2002.
Depreciation and amortization. Depreciation and amortization was $5.2
million in the first quarter of 1999 and $2.8 million in the first quarter of
1998. Property and equipment is being depreciated over the estimated useful life
of the related assets, generally three to seven years. All of the intangible
assets are being amortized over expected lives of three to five years. The
increase is due primarily to the technology rights acquired with the January
1999 services agreement with SmithKline Labs and the acquisition of Metis LLC in
August 1998, as well as the increase in property and equipment to support
overall growth. Amortization charges are estimated to be $11.8 million in 1999,
$10.0 million in 2000, $3.4 million in 2001, $1.8 million in both 2002 and 2003
and $.2 million in 2004 assuming no impairment of the remaining unamortized
intangible asset balances and no additional acquisitions of intangible assets.
Interest income and expense. Interest income has been derived primarily
from cash investments. Interest expense results primarily from Healtheon's
borrowings and from capitalized lease obligations for equipment purchases. Net
interest income was $0.6 million in the first quarter of 1999 and $0.2 million
in the first quarter of 1998. The increase for the 1999 period was due to higher
average cash balances resulting from the proceeds of Healtheon's $46.1 million
preferred stock financing in October 1998 and the net proceeds of $41.4 million
from Healtheon's initial public offering in February 1999.
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Dividends on ActaMed's convertible redeemable preferred stock. Healtheon
acquired ActaMed in a transaction accounted for as a pooling-of-interests in May
1998. Because dividends on ActaMed's convertible redeemable preferred stock were
cumulative whether declared or not, ActaMed accrued the dividends on a quarterly
basis. Dividends of $.9 million were charged against income in the consolidated
statements of operations in the first quarter of 1998. None of the dividends
were paid, and, in conjunction with approving the acquisition of ActaMed by
Healtheon, ActaMed's preferred stockholders waived their right to receive the
dividends, which totaled $7.5 million at the time of the acquisition. The
ActaMed preferred stockholders received an aggregate of 17.3 million shares of
Healtheon common stock in exchange for their ActaMed convertible redeemable
preferred stock.
Years ended December 31, 1998, 1997 and 1996
Revenue. At December 31, 1998, Healtheon had deferred revenue of
approximately $1.9 million.
Total revenue increased to $48.8 million in 1998 from $13.4 million in 1997
and $11.0 million in 1996. Revenue from services was $27.1 million in 1998, $4.3
million in 1997 and $1.8 million in 1996. The significant increase in services
revenue in these periods was principally due to new contracts with Brown &
Toland Physician Services Organization, or Brown & Toland, and Beech Street
Corporation, or 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.
Healtheon recognized revenue for IT services of $15.1 million in 1998 and $2.1
million in 1997. Revenue for IT services included costs of leased personnel and
facilities of $11.8 million in 1998 and $1.9 million in 1997. These amounts are
also included in cost of services. In addition, Healtheon recognized revenue
related to development services of $6.5 million in 1998 and $.2 million in 1997.
No revenue was recognized from IT services or development services in 1996.
Revenue from services to related parties consists of services provided to
UnitedHealth Group under a Services and License Agreement between ActaMed and
UnitedHealth Group dated April 4, 1996, or the UnitedHealth Group Agreement, and
services provided to SmithKline Beecham Clinical Laboratories, Inc., or
SmithKline Labs, under a Services Agreement between ActaMed and SmithKline Labs
dated December 31, 1997, or the Services Agreement. Revenue from services to
related parties increased to $21.0 million in 1998 from $7.3 million in 1997 and
$4.2 million in 1996. The increase was primarily due to the additional revenue
from the December 1997 Services Agreement with SmithKline Labs to service its
SCAN laboratory and test order and results service.
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 $6.3 million. Under the Agreement, Healtheon recognized
software license revenue of approximately $1.2 million in 1997 and approximately
$3.4 million in 1996, upon delivery of the software. All revenue under the
Agreement had been recognized by the end of 1997.
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 $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 was issued a five-year
warrant to purchase 282,522 shares of 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, Healtheon is recognizing this revenue as the
proceeds are collected. Healtheon recognized revenue from the License of $.8
million in 1998, $.8 million in 1997 and $1.0 million in 1996. Deferred revenue
at December 31, 1998 included $1.6 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.
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Cost of operations. Total cost of operations was $43.0 million in 1998,
$10.4 million in 1997 and $6.7 million in 1996. Cost of services increased to
$26.9 million in 1998 from $3.9 million in 1997 and $1.6 million in 1996. The
increases included costs of leased personnel and facilities utilized to provide
IT services totaling $11.8 million in 1998 and $1.9 million in 1997 as well as
costs related to development services of $6.5 million in 1998 and $.2 million in
1997. The remainder of the increase resulted from increased personnel and
expansion of Healtheon's network infrastructure to support current customers and
future business activities. Healtheon believes that its margin on services
revenue will continue to be negative until revenue from other than IT and
development services increases.
Cost of services to related parties was $16.1 million in 1998, $6.5 million
in 1997 and $4.9 million in 1996. The increase in 1998 over 1997 was due to
higher personnel and network operation costs required to support increased
transactions from Healtheon's SCAN services under the Services Agreement with
SmithKline Labs, and the increase in 1997 over 1996 was due to increased
transaction volume under the United Health Group Agreement.
Development and engineering. Development and engineering expense was $19.0
million in 1998, $12.3 million in 1997 and $8.3 million in 1996. The increase
was the result of 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 $23.1 million in 1998 from $10.1 million in 1997 and $8.4
million in 1996. The amortization of deferred stock compensation expense
accounted for $2.8 million of the increase in 1998 and $.6 million of the
increase in 1997. In addition, 1998 includes $.8 million of costs related to the
merger with ActaMed. Substantially all of the remainder of the increase in both
1998 and 1997 resulted from salaries and related support costs for added sales
personnel and executive management.
Deferred stock compensation represents the difference between the purchase
or exercise price of certain restricted stock and stock option grants and the
deemed fair value of Healtheon's common stock at the time of those grants.
Healtheon recorded deferred stock compensation of $8.2 million in 1998 and $2.7
million in 1997. The deferred stock compensation balance at December 31, 1998
was $6.9 million. From January 1, 1999 through February 10, 1999, the date of
Healtheon's initial public offering, Healtheon granted additional stock options
for which it recorded approximately $6.3 million of additional deferred stock
compensation. The deferred stock compensation balance will be amortized based on
a graded vesting method over the vesting period, generally four years, of the
option or restricted stock grants. Amortization is estimated to total $7.8
million for 1999, $3.5 million for 2000, $1.5 million for 2001 and $.4 million
for 2002.
Depreciation and amortization. Depreciation and amortization of intangible
assets was $16.1 million in 1998, $6.0 million in 1997 and $4.2 million in 1996.
The intangible assets include those arising from the acquisitions of EDI from
UnitedHealth Group in March 1996 and of Metis in August 1998 as well as certain
intangible assets related to the technology rights acquired related to the SCAN
Services Agreement with SmithKline Labs in December 1997. Property and equipment
is being depreciated over the estimated useful life of the related assets,
generally three to seven years, while the intangible assets are generally being
amortized over a three-year life. Although the Services and License Agreement
entered into with UnitedHealth Group 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, 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 UnitedHealth Group and
SmithKline Labs will be profitable after the price renegotiations required by
the agreements, particularly given the
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uncertainty of future rates and volumes under those agreements. At December 31,
1998, a total of $19.9 million remained to be amortized. Amortization charges
are estimated to be $10.1 million in 1999 and $8.2 million in 2000, assuming no
impairment of the remaining unamortized intangible asset balances. See Notes 2
and 3 of Notes to Consolidated Financial Statements.
Write-off of offering costs. In October 1998, Healtheon withdrew a planned
initial public offering and wrote off the accumulated costs related to the
planned offering. These costs consisted primarily of professional fees for legal
and accounting services and printing costs.
Interest income and expense. Interest income has been derived primarily
from the investment of excess cash. Interest expense results primarily from
Healtheon's borrowings and from capitalized lease obligations for equipment
purchases. Net interest income was $.8 million in 1998, $.3 million in 1997 and
$.5 million in 1996. The 1998 increase was due to higher average cash balances
resulting from the proceeds of Healtheon's $25.0 million preferred stock
financing in October 1997 and its $46.1 million preferred stock financing in
October 1998. Healtheon expects that net interest income may increase in the
near term as the proceeds of its initial public offering in February 1999 are
invested.
Dividends on ActaMed's convertible redeemable preferred stock. Because
dividends on ActaMed's convertible redeemable preferred stock were cumulative
whether declared or not, ActaMed accrued the dividends on a quarterly basis.
Dividends of $.9 million in 1998, $2.9 million in 1997 and $2.5 million in 1996
were charged against income in the consolidated statements of operations.
Income taxes. At December 31, 1998, Healtheon had net operating loss
carryforwards for federal income tax purposes of approximately $76.5 million and
federal tax credits of approximately $1.8 million, both expiring from 2009
through 2018. Of these net operating losses, approximately $19.9 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.
LIQUIDITY AND CAPITAL RESOURCES
In February 1999, Healtheon completed the initial public offering of its
common stock and realized net proceeds from the offering of approximately $41.4
million. Prior to the offering, Healtheon had funded its operations since
inception primarily through the private placement of equity securities, through
which it had raised net proceeds of $106.2 million through December 31, 1998.
Healtheon had also financed its operations through equipment lease financing and
bank borrowings. As of March 31, 1999, Healtheon had outstanding equipment lease
liabilities of $5.5 million and borrowings against a line of credit of $1.1
million. As of March 31, 1999, Healtheon had approximately $63.2 million of
cash, cash equivalents and short-term investments.
Cash used in operating activities was $11.3 million in the first quarter of
1999 and $3.0 million in the first quarter of 1998. The cash used during these
periods was primarily attributable to net losses of $18.6 million in the first
quarter of 1999 and $9.7 million in the first quarter of 1998. The net losses
were offset in part by depreciation and amortization. Cash used in operating
activities was $27.0 million in 1998, $16.4 million in 1997 and $9.6 million in
1996. The cash used during these periods was primarily attributable to net
losses of $54.0 million in 1998, $28.0 million in 1997 and $18.6 million in 1996
offset in part by depreciation and amortization and dividends on ActaMed's
convertible redeemable preferred stock. Healtheon's losses were principally
related to increased development and engineering expenses and sales, general and
administrative expenses.
Investments in property and equipment, excluding equipment acquired under
capital leases or through the issuance of common stock, were $4.0 million in the
first quarter of 1999 and $2.0 million in the first quarter of 1998. Due to cash
in excess of the amounts needed for operations for the next 90 days, Healtheon
will, from time to time, purchase short-term investments. In the first quarter
of 1999,
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Healtheon used $15.1 million of cash to purchase short-term investments and
realized $7.8 million in cash from maturities of its short-term investments. In
the first quarter of 1998, Healtheon used $3.1 million of cash to purchase
short-term investments and realized $7.1 million in cash from maturities of its
short-term investments. Investments in property and equipment, excluding
equipment acquired under capital leases, and internally developed software were
$6.3 million in 1998, $2.8 million in 1997 and $2.0 million in 1996. In 1997,
Healtheon used $5.3 million of cash to purchase short-term investments. In 1998,
Healtheon purchased an additional $22.5 million of short-term investments and
realized $10.4 million in cash from maturities of its short-term investments.
Healtheon had no purchases or maturities of short-term investments in 1996. We
invest our excess cash in short-term investments and will continue to do so in
the future. Healtheon is not assured of having excess cash balances in the
future, so purchases of short-term investments cannot be assured.
Cash provided by financing activities was $40.9 million in the first
quarter of 1999, primarily from the net proceeds of Healtheon's initial public
offering of $41.4 million, as well as proceeds from exercises of employee stock
options, offset slightly by payments totaling $.9 million on capital lease
obligations and line of credit borrowings. Financing activities used $.1 million
of cash in the first quarter of 1998, resulting primarily from payments of
capital lease obligations. Cash provided by financing activities was $49.0
million in 1998, $34.6 million in 1997 and $11.1 million in 1996, 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. In addition,
proceeds from the issuance of common stock in 1998 totaled $3.7 million.
As of March 31, 1999, Healtheon did not have any material commitments for
capital expenditures. Healtheon's principal commitments at March 31, 1999
consisted of obligations under operating and capital leases and line of credit
borrowings.
Healtheon currently anticipates that 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 its 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 its
customers and suppliers; the hardware and software systems Healtheon uses
internally in the management of its business; and non-information technology
systems and services Healtheon uses in its business, such as telephone systems
and building systems.
Healtheon has reviewed the proprietary software systems Healtheon 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. In January 1999, Healtheon acquired certain electronic
laboratory connectivity devices from SmithKline Labs. SmithKline has warranted
these services to be Year 2000 compliant. Also, two
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systems acquired by ActaMed, specifically SCAN and ProviderLink, which together
accounted for approximately 42% of Healtheon's total revenue in 1998, will
require modifications to become Year 2000 compliant. Healtheon has released an
updated version of SCAN which is Year 2000 compliant and Healtheon is in the
process of deploying the updated version of SCAN to its customers. ProviderLink
has two versions. The DOS version was made Year 2000 compliant and is currently
being deployed to Healtheon's DOS-based customers. The Internet version is being
modified to be Year 2000 compliant and Healtheon expects to begin deployment
over the Internet in the second half of 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 Healtheon must upgrade or replace them. 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 its 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, its revenues
from SCAN, ProviderLink and electronic laboratory delivery 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 of Healtheon's 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 effect on
Healtheon's business, financial condition and results of operations. In certain
of Healtheon's 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 the 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's
systems, Healtheon's business, financial condition and results of operations
would be materially adversely affected. Furthermore, the purchasing patterns of
these customers or potential customers may be affected by Year 2000 issues as
companies expend significant resources to become Year 2000 compliant. The costs
of becoming Year 2000 compliant for current or potential customers may result in
reduced funds being available to purchase and implement Healtheon's applications
and services.
Healtheon, with the assistance of an independent consulting firm
specializing in Year 2000 issues, has completed a formal assessment of its Year
2000 exposure and is taking steps to address the identified points of exposure.
Healtheon expects to complete its Year 2000 remediation efforts in the second
half of 1999. Healtheon is in the process of developing a contingency plan for
handling Year 2000 problems that are not detected and corrected prior to their
occurrence. However, Healtheon is unable to make contingency plans if any
significant number of the computers constituting the Internet fail to properly
process dates for the year 2000 and there is a system-wide slowdown or
breakdown. Any failure by Healtheon to address any unforeseen Year 2000 issue
could adversely affect Healtheon's business, financial condition and results of
operations. Any interruption or significant degradation of Internet operations,
whether due to Year 2000 problems or otherwise, could harm Healtheon's business.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants, or
AICPA, 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
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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.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or 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 its financial condition or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate sensitivity
The primary objective of Healtheon's investment activities is to preserve
principal while at the same time maximizing the income it receives from its
investments without significantly increasing risk. Some of the securities that
Healtheon has invested in may be subject to market risk. This means that a
change in prevailing interest rates may cause the principal amount of the
investment to fluctuate. For example, if Healtheon holds a security that was
issued with a fixed interest rate at the then-prevailing rate and the prevailing
interest rate later rises, the principal amount of Healtheon's investment will
probably decline. To minimize this risk, Healtheon maintains its portfolio of
cash equivalents and short-term investments in a variety of securities,
including commercial paper, other non-government debt securities and money
market funds. In general, money market funds are not subject to market risk
because the interest paid on such funds fluctuates with the prevailing interest
rate. In addition, Healtheon invests in relatively short-term securities. As of
December 31, 1998, all of Healtheon's investments mature in less than one year.
See note 1 of notes to Healtheon's consolidated financial statements.
The following table presents the amounts of Healtheon's cash equivalents
and short-term investments that are subject to market risk by range of expected
maturity and weighted-average interest rates as of March 31, 1999. This table
does not include money market funds because those funds are not subject to
market risk.
<TABLE>
<CAPTION>
MATURING IN
--------------------
THREE THREE
MONTHS MONTHS TO FAIR
OR LESS ONE YEAR TOTAL VALUE
------- --------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Included in cash and cash equivalents.............. $35,339 N/A $35,339 $35,339
Weighted-average interest rates.................... 4.87%
Included in short-term investments................. $15,024 $9,762 $24,786 $24,786
Weighted-average interest rates.................... 4.97% 4.92%
</TABLE>
Exchange rate sensitivity
Currently the majority of Healtheon's sales and expenses are denominated in
U.S. dollars and as a result Healtheon has experienced no significant foreign
exchange gains and losses to date. While Healtheon is conducting some
transactions in foreign currencies during 1999, it does not anticipate that
foreign exchange gains or losses will be significant. Healtheon has not engaged
in foreign currency hedging activities to date.
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HEALTHEON'S MANAGEMENT
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..................... 55 Chairman of the Board of Directors
W. Michael Long.................... 48 Chief Executive Officer and Director
Steve Curd......................... 40 Executive Vice President and Chief Operating Officer
Stephen D. Smith................... 51 Executive Vice President, Worldwide Sales and Marketing
Mark Bailey........................ 40 Vice President, Business Development
Kallen Chan........................ 44 Corporate Controller
Theresa Dadone-Carlsted............ 44 Vice President, Human Resources
Jack Dennison...................... 42 Vice President and General Counsel
Dennis Drislane.................... 50 Vice President, National Accounts
Edward Fotsch, M.D................. 42 Vice President, Member Organizations
Nancy Ham.......................... 38 Vice President, Connectivity and Institutional Services
Krishna Kolluri.................... 35 Vice President, Provider Enterprise Services
Matthew Moore...................... 34 Vice President, Consumer Direct
Pavan Nigam........................ 40 Vice President, Chief Technology Officer
Charles Saunders, M.D.............. 44 Vice President, Strategic Planning and Medical Director
John L. Westermann III............. 54 Vice President, Chief Financial Officer, Secretary
and Treasurer
L. John Doerr...................... 48 Director
Thomas A. Jermoluk................. 43 Director
C. Richard Kramlich................ 64 Director
William W. McGuire, M.D............ 51 Director
Laura D'Andrea Tyson............... 52 Director
Tadataka Yamada, M.D............... 54 Director
</TABLE>
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 served as the Chairman of the Board of Directors
of Netscape from its inception until it was acquired by America Online, Inc. in
March 1999. 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 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.
Steve Curd has served as Executive Vice President, Chief Operating Officer
since joining Healtheon in February 1999. Prior to joining Healtheon, Mr. Curd
was Chief Information Officer of UnitedHealth Group's Uniprise business unit,
from 1995 to early 1999. Prior to that, he served as Vice President of
Information Systems for CIGNA. From 1986 to 1993, Mr. Curd held various
positions at American Airlines, including Vice President of Scheduling and
Capacity Planning systems. He holds a B.A. from William Jewell College, and an
M.B.A. from the Wharton School at the University of Pennsylvania.
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Stephen D. Smith has served as Executive Vice President, Worldwide Sales &
Marketing since joining Healtheon in February 1999. Prior to joining Healtheon,
Mr. Smith was Area Vice President for HBO & Company for eight years where he
managed the sales organization for the western half of the U.S. Prior to that
Mr. Smith spent 15 years with Ernst & Young as partner-in-charge of their
Northern California healthcare practice. Mr. Smith holds a B.S. in business from
California State University and is a Certified Public Accountant.
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 M.B.A. from Harvard University and a B.S.E. 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.
Theresa Dadone-Carlsted has served as Vice President Human Resources since
joining Healtheon in January 1999. Prior to joining Healtheon, Ms.
Dadone-Carlsted was Director Human Resources at Synopsys from 1995 to early
1999. From 1984 to 1995, she served in various roles at Novell, Inc. including
world wide Director, Compensation and Benefits, Site Director for Employee
Relations, and Director, Human Resources merger and acquisition integration. She
holds a B.A. from San Jose State University.
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, National Accounts of
Healtheon since joining Healtheon in July 1997. Mr. Drislane served as Vice
President, Communications Industry Group, at Electronic Data Systems
Corporation, or 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, Member Organizations
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.
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Nancy Ham has served as Vice President, Connectivity and Institutional
Services 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.
Krishna Kolluri has served as Vice President, Provider Enterprise Services
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 Direct 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,
Chief Technology Officer 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.
Charles Saunders, M.D. has served as Vice President, Strategic Planning 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.
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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 Healtheon Corporation,
Amazon.com, Inc., 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 of Excite@Home since he joined
@Home in July 1996 and was Chief Executive Officer of @Home until its merger
with Excite in May 1999. 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 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
UnitedHealth Group since 1989 and the Chief Executive Officer and Chairman of
the Board of Directors of UnitedHealth Group since 1991. Prior to this, Dr.
McGuire was Executive Vice President and Chief Operating Officer of UnitedHealth
Group. 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.
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. Dr. Tyson is also a director of Ameritech
Corporation, Eastman Kodak Company, Human Genome Sciences, Inc. and Morgan
Stanley. She holds a B.A. in Economics from Smith College and a Ph.D. in
Economics from the Massachusetts Institute of Technology.
Tadataka Yamada, M.D. has served as a director of Healtheon since Healtheon
acquired ActaMed in May 1998. Dr. Yamada has been Chairman Research and
Development, Pharmaceuticals of SmithKline Beecham since February 1999 and has
been a non-executive director of SmithKline Beecham's Board of Directors since
February 1994. Dr. Yamada was President and Executive Director of SmithKline
Beecham HealthCare Services from February 1996 to February 1999. 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
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UCLA School of Medicine. Dr. Yamada holds a B.A. in history from Stanford
University and an M.D. from the New York University School of Medicine.
BOARD OF DIRECTORS' 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 Mr. Jermoluk, Mr. Sadler, Dr.
Tyson 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 sets the compensation
of the Chief Executive Officer, reviews the design, administration and
effectiveness of compensation programs for other key executives, and approves
stock option grants to officers and directors. 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. All board members are eligible to receive stock
options under the 1996 stock plan, and outside directors receive stock options
pursuant to automatic grants of stock options under the 1996 stock 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 stock 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 provided that they remain directors
of Healtheon. In January 1999, Healtheon granted to each of Dr. Clark, Mr.
Doerr, Mr. Kramlich, Dr. McGuire, Mr. Sadler and Dr. Yamada an option to
purchase 20,000 shares of its common stock under the 1996 stock plan with an
exercise price equal to $3.55 per share. In February 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 stock plan with an exercise price equal to $5.85 per
share. The board also determined that under the 1996 stock plan each outside
director will automatically receive an option to purchase 20,000 shares of
common stock annually on January 1.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Dr. McGuire, a member of the Compensation Committee, is the Chairman and
Chief Executive Officer of UnitedHealth Group, which, with its affiliates,
beneficially owns approximately 12.7% of Healtheon's common stock, and has
entered into the UnitedHealth Group Agreement and certain other agreements with
Healtheon. See "Healtheon's Certain Relationships and Related 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.
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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
- any transaction from which the director derived an improper personal
benefit
These provisions are permitted under Delaware law.
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
- 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 has entered 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 has obtained 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.
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EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
earned for services rendered to Healtheon in 1998 by Healtheon's Chief Executive
Officer and 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, referred to in the sections entitled "Executive compensation"
and "Share ownership by principal stockholders, management and directors of
Healtheon" as 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................................... $458,337 $ -- --
Chief Executive Officer
Michael K. Hoover(2).............................. 154,487 60,000 80,000
President
Dennis Drislane................................... 163,500 73,500 --
Vice President, National Accounts
Pavan Nigam....................................... 225,000 -- 325,000
Vice President, Chief Technology Officer
Charles Saunders.................................. 151,250 45,000 200,000(3)
Vice President, Medical Director
</TABLE>
- -------------------------
(1) Includes bonuses paid in both 1998 and 1999 related to services provided in
1998.
(2) Mr. Hoover resigned from Healtheon in May 1999.
(3) Includes 100,000 shares underlying an option granted in 1998 that was
cancelled under a stock option repricing exchange program in October 1998.
OPTION GRANTS IN FISCAL 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 and generally vest
over four years -- 25% at the end of one year and 1/48 per month thereafter.
Healtheon granted options to purchase common stock and issued shares of common
stock under restricted stock purchase agreements equal to a total of 8,652,907
shares during 1998. This amount includes 2,057,950 shares underlying options
granted and 568,732 shares issued under 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
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and Exchange Commission requirements and do not reflect Healtheon's projection
or estimate of future stock price growth.
<TABLE>
<CAPTION>
% OF TOTAL POTENTIAL REALIZABLE VALUE
NUMBER OF OPTIONS AT ASSUMED ANNUAL RATES OF
SECURITIES GRANTED STOCK PRICE APPRECIATION FOR
UNDERLYING TO OPTION TERM
OPTIONS EMPLOYEES EXERCISE PRICE EXPIRATION ----------------------------
NAME GRANTED IN 1998 PER SHARE DATE 5% 10%
---- ---------- ---------- -------------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
W. Michael Long................. -- --% $ -- -- $ -- $ --
Michael K. Hoover............... 80,000 0.9 3.55 06/02/08 178,606 425,623
Dennis Drislane................. -- -- -- -- -- --
Pavan Nigam..................... 325,000 3.8 4.50 07/08/08 919,758 2,330,848
Charles Saunders................ 100,000(1) 1.2 4.50 -- 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.
AGGREGATE OPTION EXERCISES IN FISCAL 1998 AND FISCAL 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 values of in-the-money options are based on the initial
public offering price of $8.00 per share and are net of the option exercise
price.
<TABLE>
<CAPTION>
SHARES NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
ACQUIRED UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
ON AT DECEMBER 31, 1998 DECEMBER 31, 1998
EXERCISE VALUE -------------------------------- ------------------------------
NAME (#) REALIZED($) 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 $4,165,525 $12,109,375
750,000(2) -- 4,500,000 --
Michael K. Hoover........ 100,000 446,800(3) 793,268 80,000 5,876,388 356,000
Dennis Drislane.......... -- -- -- -- -- --
Pavan Nigam.............. -- -- 36,458 413,542 255,206 1,757,294
Charles Saunders......... -- -- 111,160 288,840 861,490 1,908,510
</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.
(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 and Mr. Long, 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 fully vested options to purchase 593,268 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. The option granted to Mr. Long vested immediately as to 25% of the
shares and vests ratably each month during the second through fourth years of
his employment as to the remainder of the shares.
COMPENSATION ARRANGEMENTS WITH EXECUTIVE OFFICERS
In July 1997, Healtheon and Mr. Long entered into an employment agreement
under which Mr. Long became the President and Chief Executive Officer of
Healtheon. Healtheon granted Mr. Long an option to
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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 years 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.
EMPLOYEE BENEFIT PLANS
1996 Healtheon stock plan. In February 1996 the board adopted, and
Healtheon's stockholders approved, the 1996 stock plan. Healtheon initially
reserved for issuance 9,000,000 shares of common stock under the 1996 stock
plan. In March 1998, the Board and the stockholders each approved an amendment
to the 1996 stock 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 stock plan to 15,000,000 shares
plus annual increases equal to the lesser of 5% of the outstanding shares or 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. In February 1999, the board and the stockholders approved an
amendment to limit the automatic annual increase provision to a maximum of
9,000,000 shares. In February 1999, the board and the stockholders also approved
an amendment to increase the number of shares reserved for issuance under the
1996 stock plan by an additional 1,000,000 shares. Unless terminated sooner, the
1996 Plan will terminate automatically in February 2006. The 1996 stock plan
provides for the discretionary grant of incentive stock options, within the
meaning of Section 422 of the Internal Revenue Code of 1986 known as the "Code,"
to employees and for the grant of nonstatutory stock options and stock purchase
rights to employees, directors and consultants. The 1996 stock plan also
provides for annual grants of options to purchase 5,000 shares of common stock
to each of the outside directors.
The 1996 stock 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 stock purchase rights granted, including
the exercise price of the options or stock purchase rights, the number of shares
subject to each option or stock purchase right, 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 stock
plan, provided that no share of common stock previously issued and sold or any
option previously granted under the 1996 stock plan is affected.
The exercise price of all incentive stock options granted under the 1996
stock 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 stock
purchase rights granted under the 1996 stock 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 stock 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.
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In the case of stock purchase rights, 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 stock purchase rights granted under the 1996 stock plan are
generally not transferable by the optionee, and each option and stock purchase
right is exercisable during the lifetime of the optionee only by the optionee.
Options granted under the 1996 stock 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 stock plan provides that, in the event of a merger of Healtheon
with or into another corporation, each outstanding option and stock purchase
right must be assumed or an equivalent option substituted by the successor
corporation. If the outstanding options and stock purchase rights are not
assumed or substituted by the successor corporation, the outstanding options and
stock purchase rights 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, which are collectively referred to as 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:
- 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
- provide that all ActaMed options shall be assumed by the successor
corporation, or
- provide for a combination of the above.
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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 500,000 shares, .5% of the outstanding
shares on such date, or 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 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 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 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 at the beginning of the offering period or 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 so that
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<PAGE> 250
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.
HEALTHEON'S RELATED-PARTY TRANSACTIONS
Since January 1, 1998, 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 compensation agreements and other arrangements, which are described
where required in "Executive Compensation," and the transactions described
below.
ActaMed Corporation acquisition
On May 19, 1998, Healtheon acquired ActaMed in a merger. In connection with
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.
Transactions with directors, executive officers and 5% stockholders
On May 19, 1998, in connection with 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 UnitedHealth Group 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, an entity wholly controlled by Dr.
Clark -- 2,850,000 shares; and
- New Enterprise Associates VI, LP -- 416,667 shares.
Upon the closing of Healtheon's initial public offering in February 1999,
each share of Series A preferred stock converted into one share of common stock.
Sadler relationships. Companies affiliated with Mr. P.E. Sadler, a former
director, had agreements with ActaMed whereby ActaMed provided office space,
phone facilities and computer network support. ActaMed was paid approximately
$204,000 in 1998 under those agreements. Mr. Sadler resigned from the board of
directors on June 30, 1999.
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<PAGE> 251
Officer loan. In March 1999, Healtheon loaned Steve Curd, an officer of
Healtheon, $2.5 million for the purchase of a residence upon his relocation to
the San Francisco Bay Area. The loan is secured, bears no interest, and must be
repaid by Mr. Curd upon the earlier of the end of five years, the sale of the
residence, or the discontinuation of his employment with Healtheon. Mr. Curd
also must apply to the loan any proceeds received by him from the sale of
Healtheon common stock resulting from the exercise of his stock options.
Healtheon has agreed to repurchase the residence from Mr. Curd upon his request
at a price equal to Mr. Curd's purchase price of the residence plus the cost of
any improvements. Additionally, Healtheon will reimburse Mr. Curd for the amount
of taxes payable by him for his residence as well as resulting from the loan.
Excite@Home ownership of WebMD stock. Excite@Home purchased 46,151 shares
of WebMD Series E preferred stock in May 1999 for a price of $54.17 per share,
and will receive approximately 837,640 shares of Healtheon/WebMD common stock in
the Healtheon-WebMD reorganization. Thomas Jermoluk, a director of Healtheon, is
the Chairman of Excite@Home.
Business relationships
SmithKline Labs
1997-1998 services 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 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 Healtheon's
SCAN application. SmithKline Labs was obligated to pay Healtheon a minimum of
approximately $10.0 million in 1998 for laboratory test orders and results
transactions and is obligated to pay $9.1 million in 1999 and $9.1 million in
2000. 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 $10.4 million in service and transaction fees
during 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.
Asset purchase agreement. Also under one of the SmithKline Agreements, the
asset purchase agreement, 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
237
<PAGE> 252
merger. In June 1998, SmithKline Labs transferred SmithKline assets from the
remaining two regions to Healtheon in exchange for 1,336,209 shares of Healtheon
common stock.
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 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 Agreements. In December 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. 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. In addition, Healtheon
agreed to purchase, and 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.
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. On February 9, 1999,
SmithKline Beecham announced that it has agreed to sell SmithKline Labs to Quest
Diagnostics, Incorporated.
UnitedHealth Group
EDI Services acquisition. In March 1996, ActaMed acquired EDI Services, a
wholly-owned subsidiary of UnitedHealth Group, which had been formed by
UnitedHealth Group to deliver the ProviderLink service to UnitedHealth Group's
provider network. In exchange for EDI, ActaMed issued UnitedHealth Group
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 UnitedHealth Group that granted UnitedHealth Group a
license to certain ActaMed technology and granted ActaMed the responsibilities
of managing the ProviderLink service and of providing other information
technology services to UnitedHealth Group. UnitedHealth Group pays Healtheon
fees based on the number of ProviderLink sites in use and transactions
processed. In 1998, ActaMed, prior to the merger, and Healtheon were paid an
aggregate of $10.4 million related to services, transaction and license fees.
Healtheon is also obligated to provide certain support and maintenance services
to UnitedHealth Group. 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 UnitedHealth Group 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 UnitedHealth Group are negotiating these new prices, and Healtheon
anticipates that the new prices will reduce the rates paid by UnitedHealth
Group. See "Healtheon Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview" and Note 2 of Notes to
Consolidated Financial Statements included in our Annual Report on Form 10-K.
UnitedHealth Group is a principal stockholder of Healtheon and Dr. William
McGuire, Chief Executive Officer and Chairman of UnitedHealth Group, 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. UnitedHealth Group was a
limited partner of HLM. HLM was also a stockholder of ActaMed.
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<PAGE> 253
SHARE OWNERSHIP BY HEALTHEON'S PRINCIPAL STOCKHOLDERS, MANAGEMENT AND DIRECTORS
The following table sets forth certain information with respect to the
beneficial ownership of Healtheon's common stock as of June 15, 1999 by:
- each person who is known by Healtheon to own beneficially more than 5% of
Healtheon's common stock
- each director of Healtheon
- each of the named executive officers
- all directors and executive officers of Healtheon as a group
The number and percentage of Healtheon shares beneficially owned prior to
the reorganization are based on 71,029,688 shares of common stock outstanding as
of June 15, 1999. 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 June 15, 1999 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. The shares subject to options or warrants held by a person 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.
Percentage of ownership is based on the following exchange ratios:
- 1.815 shares of Healtheon/WebMD common stock for each share of WebMD
common stock outstanding on June 15, 1999, assuming the conversion of all
shares of WebMD preferred stock into common stock immediately prior to
that date and including the additional 276,906 shares of Series E
preferred stock to be purchased by Microsoft and the exercise in full by
McKessonHBOC of its right of first refusal
- 0.5483 shares of Healtheon/WebMD common stock for each share of Medcast
common stock outstanding on July 1, 1999 assuming the conversion of all
shares of Medcast preferred stock into common stock immediately prior to
that date
- 0.6593 shares of Healtheon/WebMD common stock for each share of MEDE
AMERICA common stock outstanding on June 15, 1999 assuming the exercise
of all options and warrants that are currently exercisable or are
exercisable within 60 days of June 15, 1999
Further, percentage of ownership is based on:
- an estimated 134,826,836 shares of Healtheon/WebMD common stock
outstanding following the Healtheon-WebMD reorganization
- an estimated 137,310,267 shares of Healtheon/WebMD common stock
outstanding following the Healtheon-WebMD and Medcast reorganizations
- an estimated 79,739,379 shares of Healtheon/WebMD common stock
outstanding following the MEDE AMERICA reorganization
- an estimated 143,536,528 shares of Healtheon/WebMD common stock
outstanding following the Healtheon-WebMD and MEDE AMERICA
reorganizations
- an estimated 146,019,958 shares of Healtheon/WebMD common stock
outstanding following all the reorganizations
239
<PAGE> 254
<TABLE>
<CAPTION>
HEALTHEON SHARES
BENEFICIALLY OWNED PERCENT OF HEALTHEON/WEBMD
PRIOR TO THE SHARES BENEFICIALLY OWNED AFTER
REORGANIZATION ---------------
------------------------------------------------- THE HEALTHEON-
NAME AND ADDRESS OF COMMON EXERCISABLE EXERCISABLE WEBMD
BENEFICIAL OWNER STOCK WARRANTS OPTIONS PERCENT REORGANIZATION
------------------- ------ ----------- ----------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Entities associated with James H.
Clark(1).......................... 11,702,265 -- -- 16.5% 8.7%
c/o Healtheon Corporation
4600 Patrick Henry Drive
Santa Clara, CA 95054
Entities associated with
UnitedHealth Group(2)............. 8,986,687 -- -- 12.7 6.7
9900 Bren Road East
300 Opus Center
Minnetonka, MN 55343
William W. McGuire, M.D.(2)....... 8,986,687 -- -- 12.7 6.7
9900 Bren Road East
300 Opus Center
Minnetonka, MN 55343
Entities associated with Kleiner
Perkins Caufield & Byers(3)....... 7,082,473 1,029,359 -- 11.3 6.0
2750 Sand Hill Road
Menlo Park, CA 94025
L. John Doerr(3).................. 7,082,473 1,029,359 -- 11.3 6.0
2750 Sand Hill Road
Menlo Park, CA 94025
SmithKline Beecham
Corporation(4).................... 6,251,003 -- -- 8.8 4.6
1201 South Collegeville Road
Collegeville, PA 19426
Tadataka Yamada(4)................ 6,251,003 -- -- 8.8 4.6
1201 South Collegeville Road
Collegeville, PA 19426
P. E. Sadler(5).................... 5,001,993 -- -- 7.0 3.7
c/o Healtheon Corporation
7000 Central Parkway, Suite 600
Atlanta, GA 30328 [?]
Entities associated with New
Enterprise Associates, L.P.(6).... 3,743,590 11,979 -- 5.3 2.8
1119 St. Paul Street
Baltimore, MD 21202
C. Richard Kramlich(6)............ 3,743,590 11,979 -- 5.3 2.8
1119 St. Paul Street
Baltimore, MD 21202
W. Michael Long.................... 1,051,378 750,000 450,000 3.1 1.7
Michael K. Hoover(7)............... 96,378 -- 616,601 1.0 *
Dennis Drislane(8)................. 550,901 -- -- * *
Pavan Nigam(9)..................... 471,240 -- 135,937 * *
Thomas A. Jermoluk(10)............. 489,534 -- -- * 1.0
Charles Saunders................... 161,690 -- -- * *
Laura D'Andrea Tyson............... -- -- -- * *
All executive officers and
directors as a group (24
persons).......................... 50,219,877 2,832,676 1,202,538 67.5 36.4
<CAPTION>
PERCENT OF HEALTHEON/WEBMD SHARES BENEFICIALLY OWNED AFTER
---------------------------------------------------------------------------
THE HEALTHEON- THE HEALTHEON-
WEBMD AND THE MEDE WEBMD AND
NAME AND ADDRESS OF MEDCAST AMERICA MEDE AMERICA ALL THE
BENEFICIAL OWNER REORGANIZATIONS REORGANIZATION REORGANIZATIONS REORGANIZATIONS
------------------- --------------- ------------------ --------------- ------------------
<S> <C> <C> <C> <C>
Entities associated with James H.
Clark(1).......................... 8.5% 14.7% 8.2% 8.0%
c/o Healtheon Corporation
4600 Patrick Henry Drive
Santa Clara, CA 95054
Entities associated with
UnitedHealth Group(2)............. 6.5 11.3 6.3 6.2
9900 Bren Road East
300 Opus Center
Minnetonka, MN 55343
William W. McGuire, M.D.(2)....... 6.5 11.3 6.3 6.2
9900 Bren Road East
300 Opus Center
Minnetonka, MN 55343
Entities associated with Kleiner
Perkins Caufield & Byers(3)....... 5.9 10.0 5.6 5.5
2750 Sand Hill Road
Menlo Park, CA 94025
L. John Doerr(3).................. 5.9 10.0 5.6 5.5
2750 Sand Hill Road
Menlo Park, CA 94025
SmithKline Beecham
Corporation(4).................... 4.6 7.8 4.4 4.3
1201 South Collegeville Road
Collegeville, PA 19426
Tadataka Yamada(4)................ 4.6 7.8 4.4 4.3
1201 South Collegeville Road
Collegeville, PA 19426
P. E. Sadler(5).................... 3.6 6.3 3.5 3.4
c/o Healtheon Corporation
7000 Central Parkway, Suite 600
Atlanta, GA 30328 [?]
Entities associated with New
Enterprise Associates, L.P.(6).... 2.7 4.7 2.6 2.6
1119 St. Paul Street
Baltimore, MD 21202
C. Richard Kramlich(6)............ 2.7 4.7 2.6 2.6
1119 St. Paul Street
Baltimore, MD 21202
W. Michael Long.................... 1.6 2.8 1.6 1.5
Michael K. Hoover(7)............... * * * *
Dennis Drislane(8)................. * * * *
Pavan Nigam(9)..................... * * * *
Thomas A. Jermoluk(10)............. * * * *
Charles Saunders................... * * * *
Laura D'Andrea Tyson............... * * * *
All executive officers and
directors as a group (24
persons).......................... 35.7 60.5 34.2 33.6
</TABLE>
- -------------------------
* Less than one percent
(1) Represents:
- 166,667 shares held of record by Atherton Properties Partnership, LP
- 1,000,000 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
- 300,000 shares held of record by JHC Investments, LLC
- 9,218,369 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.
(2) Represents:
- 6,538,276 shares held of record by UnitedHealth Group
- 502,069 shares held of record by United HealthCare Services, Inc., a
subsidiary of UnitedHealth Group
- 676,262 shares held of record by HLM Partners VII, L.P., of which
UnitedHealth Group is a limited partner
- 1,270,080 shares held of record by Validus, L.P., of which UnitedHealth
Group is the sole limited partner
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<PAGE> 255
UnitedHealth Group 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 UnitedHealth Group. Dr. McGuire
disclaims beneficial ownership of all shares held by UnitedHealth Group.
(3) 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
- 352,874 shares held of record by KPCB Life Sciences Zaibatsu Fund II
- 25,000 shares held of record by KPCB VIII Associates (KPCB VIII). 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. L. John
Doerr, a general partner of KPCB VIII 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
(4) Represents 6,251,003 shares held of record by SmithKline Beecham
Corporation. Dr. Yamada, a director of Healtheon, is Chairman Research and
Development, Pharmaceuticals of SmithKline Beecham and a director of
SmithKline Beecham. Dr. Yamada disclaims beneficial ownership of all shares
held by SmithKline Beecham and SmithKline Labs.
(5) 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 resigned from the board of directors of
Healtheon on June 30, 1999.
(6) Represents 3,723,590 shares held of record directly by New Enterprise
Associates VI, L.P., or New Enterprise Associates VI, 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 to the extent of his pecuniary interest in the
entities.
(7) Represents 93,878 shares held of record directly by Mr. Hoover and 2,500
shares held by Nicholas D. Hoover for which Mr. Hoover is custodian. Mr.
Hoover resigned as President and a director of Healtheon in May 1999.
(8) Includes 275,000 shares held by Mr. Drislane that will remain subject to a
right of repurchase by Healtheon 60 days after May 31, 1999.
(9) Includes 65,626 shares that will remain subject to a right of repurchase by
Healtheon 60 days after May 31, 1999.
(10) Includes 837,640 shares of WebMD held of record by Excite@Home, of which
Mr. Jermoluk is Chairman of the board of directors. Mr. Jermoluk disclaims
beneficial ownership of shares held by Excite@Home.
241
<PAGE> 256
INFORMATION REGARDING WEBMD
WEBMD'S BUSINESS
WebMD provides Web-based services to healthcare professionals and consumers
under its WebMD brand name. WebMD's subscription-based professional web site
includes access to electronic data interchange services, enhanced communications
services, healthcare-related information and other web-based services that are
useful to healthcare professionals. WebMD designed its professional web site to
simplify healthcare practices by integrating multiple administrative,
communications and research functions into a single, easy to use web-based
solution. WebMD's free consumer web site includes access to premium, branded
healthcare-related information, personalized, targeted information about
specific health conditions and content-specific online communities that allow
consumers to participate in real-time discussions and support networks via the
web. WebMD designed its consumer web site to assist consumers in making informed
healthcare decisions.
The WebMD solution
WebMD provides healthcare professionals a single, easy to use Web-based
solution that integrates and helps manage their administrative, communications
and information functions. WebMD provides healthcare consumers with free access
to a broad range of healthcare-related information and online healthcare
communities.
Benefits to healthcare professionals
A single point of access. WebMD reduces the need for healthcare
professionals to use multiple administrative, communications and information
services by integrating these services via the Internet. WebMD believes that it
provides healthcare professionals with the ability to adopt Web-based technology
with a minimum of difficulty and expense.
Premium services and content. WebMD provides a suite of premium services
and content, including electronic data interchange services, the Virtual
Receptionist unified messaging platform, WebMD's On Call physician-only
answering service, customized physician web sites and content from recognized
market leaders. WebMD intends to enhance its current services and content and
offer additional services and content in the future.
Ease of use. WebMD provides its services via the standardized interface of
web browsers. Therefore, subscribers who use WebMD's services do not require
training on multiple proprietary devices.
Competitive pricing. WebMD offers a bundle of services at a price that it
believes is competitive with the price healthcare professionals would pay for
these services if purchased individually.
Benefits to healthcare consumers
Premium content. WebMD provides healthcare consumers with a single point of
access to health and wellness databases, reference materials and other
publications developed and maintained by third party content providers with
which WebMD has established relationships. Consumers can use this free
information to educate themselves on healthcare-related matters in order to make
better informed healthcare decisions. In addition, WebMD can deliver
personalized content and e-mail updates based on a consumer's specific profile,
including education level, and can search and retrieve relevant healthcare
information from the web.
Online healthcare communities. WebMD provides access to online communities
that provide consumers with personalized information about their health
conditions and allow them to participate in message boards, real-time chat rooms
and support networks via the web. In addition, online communities provide
member-generated content based on shared experiences. WebMD currently offers
access to over 40 online communities focused on chronic health conditions and
health topics and intends to introduce additional communities in the future.
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Convenience and reliability. Through WebMD, consumers can access reliable
healthcare information relating to a variety of health topics that is reviewed
and approved by medical professionals. In addition, if a physician subscriber
has a customized web site through WebMD, their patients can obtain office hours,
location and other information without having to place a telephone call to the
physician's office.
WebMD services
The WebMD web site includes subscription-based services for healthcare
professionals and a free health and wellness center for consumers. Subscribers
and consumers can access WebMD's services by using commonly-available web
browsers and any personal computer with Internet access.
WebMD currently offers its healthcare professional subscribers two monthly
service packages: WebMD, which includes all of the following services, except
the physician-only answering service; and WebMD OnCall, which also includes
WebMD's physician-only answering service. The majority of the services and
content currently offered by WebMD are provided through its strategic
relationships. For a more complete description of these relationships, see the
section entitled "-- Strategic relationships on page 246." Healthcare
professionals who subscribe to WebMD's services have access to multiple areas on
the WebMD web site, including:
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OFFICE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
PRODUCT OR SERVICE FEATURES BENEFITS
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
Electronic data interchange Offers electronic access to Makes insurance verification
real-time insurance and patient referrals faster
eligibility verification and and easier by streamlining the
patient referrals process
- ----------------------------------------------------------------------------------------------
Virtual Receptionist Integrates web-based Allows healthcare
communications and information professionals to communicate
services, including e-mail, and retrieve information via
voice mail and fax messaging, the Internet, telephone or fax
paging, conference calling,
long distance and active
message notification
- ----------------------------------------------------------------------------------------------
WebMD OnCall Offers physician-only After hours messages can be
answering services that delivered via pager, e-mail or
utilize experienced fax by the physician's
professionals to assist both personal Virtual Receptionist
physicians and patients during
physicians' off hours
- ----------------------------------------------------------------------------------------------
Physician and practice web Allows individual physicians Allows individual physicians
sites and group practices to develop and group practices to more
and manage their own effectively market their
customized Web sites and to practices and better
include information such as communicate with and educate
e-mail addresses, office patients
hours, telephone numbers,
office locations and
directions, hospital
affiliations and links to
patient education information
- ----------------------------------------------------------------------------------------------
Practice management tools Provides access to Physician's Improves clinical practice and
Practice Digest articles, a business efficiency
fee schedule analyzer, which
allows physicians to compare
fees with reimbursements rates
in their specific geographic
market, and a physician search
tool
- ----------------------------------------------------------------------------------------------
Supplies Provides online access to Allows healthcare
ordering of medical and professionals to order medical
surgical supplies from and surgical supplies
McKessonHBOC conveniently 24 hours a day,
seven days a week
- ----------------------------------------------------------------------------------------------
Peer forums Offers physician-only peer Physicians can exchange
forums focused on different information with colleagues in
specialties their specialty
- ----------------------------------------------------------------------------------------------
</TABLE>
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LIBRARY
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
PRODUCT OR SERVICE FEATURES BENEFITS
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
Physician references Provides access to topical, Allows physicians quick access
daily medical news, to reliable clinical and
comprehensive physician research information necessary
reference and patient for their practice and
education databases, medical easy-to-understand patient
encyclopedias, journals, education materials
dictionaries and directories
from well-recognized sources
- ----------------------------------------------------------------------------------------------
MedBookStore Provides online access to a Allows healthcare
medical bookstore professionals to purchase
current medical texts and
journals online
- ----------------------------------------------------------------------------------------------
</TABLE>
CLASSROOM
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
PRODUCT OR SERVICE FEATURES BENEFITS
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
Continuing medical education Offers continuing medical Provides physicians with the
courses education courses in a variety opportunity to obtain required
of practice areas educational credits
conveniently
- ----------------------------------------------------------------------------------------------
</TABLE>
CAREER CENTER
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
PRODUCT OR SERVICE FEATURES BENEFITS
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
Placement and recruitment Offers online access to Allows healthcare
services permanent and temporary career professionals to search and
placement and recruitment apply for permanent and
services temporary positions online and
provides access to a variety
of career-related resources,
such as state licensure
guidelines and relocation
information
- ----------------------------------------------------------------------------------------------
</TABLE>
MY DESK
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
PRODUCT OR SERVICE FEATURES BENEFITS
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
Leisure content and services Provides access to financial Provides financial products,
services and products, as well insurance at discounted rates
as news, stock, sports and and convenient access to
travel information leisure information
- ----------------------------------------------------------------------------------------------
</TABLE>
WebMD offers some of its services to subscribers for additional transaction
or monthly fees.
Consumer services
Healthcare consumers have free access to the health and wellness center on
WebMD's web site.
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HEALTH AND WELLNESS CENTER
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
PRODUCT OR SERVICE FEATURES BENEFITS
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
Premium healthcare content Consolidates patient education Healthcare consumers have free
information and healthcare access to numerous sources of
news, including information reliable consumer-oriented
for people with health healthcare resources reviewed
conditions or concerns, by medical professionals
wellness content including
fitness and nutrition, drug
references and medical
encyclopedias
- ----------------------------------------------------------------------------------------------
Online communities Offers online communities Consumers may develop loyalty
focused on chronic health to their online community
conditions and women's health which we believe translates
topics into more frequent usage by
consumers and longer stays on
our web site
- ----------------------------------------------------------------------------------------------
Chat rooms and message boards Offers multiple message boards Consumers can share
including "ask our experts," experiences and exchange
chat rooms and at least one information with other members
scheduled live chat event per who share their health
week with guests including condition or concern
physicians, social boards
workers and nurses
- ----------------------------------------------------------------------------------------------
Personalized information Searches and retrieves Consumers can receive
relevant healthcare healthcare information that is
information from our premium tailored to their health
and proprietary content based condition or concern and level
on a member's profile, of sophistication and, through
including education level and updated profiles, continue to
other factors, and provides receive new and compelling
personalized e-mail updates to content
community members
- ----------------------------------------------------------------------------------------------
</TABLE>
WebMD's current online communities are organized by health conditions and
topics, such as women's health, hepatitis C, fibromyalgia, weight control and
prostrate cancer. WebMD intends to introduce additional communities in the
future. WebMD cannot assure you that these communities will be successfully
introduced in a timely manner, or at all, or that consumers will join these
communities.
Strategic relationships
WebMD has entered into strategic relationships for distribution, services
and content. WebMD believes that these relationships will enable it to rapidly
develop and distribute its services, enhance the WebMD brand, generate traffic
on its web site and capitalize on additional distribution and revenue
opportunities. Although WebMD views its strategic relationships as a key factor
in its overall business strategy and in the development and commercialization of
its services and relies on its strategic partners for most of the services and
content it provides, WebMD cannot guarantee that its strategic partners will
view their relationships with WebMD as significant to their own business or that
they will not reassess their commitment to WebMD in the future. WebMD's
principal strategic relationships include the following:
Online and media distribution partners
Microsoft. Microsoft is a leading provider of software for personal
computers and the owner and operator of the MSN network of web sites. WebMD has
entered into a significant strategic alliance with Microsoft. For a complete
description of the Microsoft relationship, see the section entitled, "Healtheon/
WebMD strategic alliances with and investments from Microsoft and other
partners" on page 81.
Excite@Home. Excite@Home is a global Internet media company offering
consumers and advertisers comprehensive Internet navigator services with
extensive personalization and targeting
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capabilities. Excite@Home has agreed to position WebMD as the exclusive provider
of health content on the Excite network.
Lycos. Lycos is the second most-visited site on the Web. Lycos has agreed
to position and promote WebMD as the exclusive source of health content for a
co-branded channel on the Lycos network.
CNN. Cable News Network, Inc. is a leading electronic news and information
company. CNN has agreed to position WebMD as its premier provider of content for
CNN's health section on "cnn.com" and to promote WebMD on CNN's online,
television and radio networks. CNN will also engage in several other promotions
of WebMD, including banner advertisements, links to WebMD, e-mails and
promotions under health-related chat and message boards.
Dell. Dell Computer Corporation will provide WebMD's subscribers with
access to the purchase of personal computers and accessories. In addition, Dell
has agreed to provide a link to WebMD's consumer web site from its DellZone web
site, which is preloaded on all Dell personal computers.
Reader's Digest. The Reader's Digest Association, Inc. has entered into a
strategic relationship with WebMD regarding WebMD's development of a co-branded
health web site. The relationship also provides for the advertising and
promotion of WebMD in Reader's Digest magazine, and WebMD's purchase of these
magazines for its subscribers.
Healthcare distribution partners
DuPont. DuPont is a leading provider of life sciences products, including
pharmaceuticals and nutritional products and services. DuPont has agreed to
sponsor WebMD subscriptions. In addition, DuPont will be the exclusive provider
of life sciences content on WebMD's Web site. DuPont has also agreed to consult
with WebMD on the development of a pharmacy channel on WebMD's Web site.
MedQuist. MedQuist is a leading national provider of electronic
transcription and document management services to the healthcare industry.
MedQuist has agreed to sponsor WebMD subscriptions. WebMD intends to offer
online medical dictation and transcription services through its relationship
with Transcriptions Ltd., a subsidiary of MedQuist.
Matria. Matria is a leading provider of comprehensive disease management
services for health plans and employers for pregnancy and the chronic conditions
of diabetes, respiratory disorders and cardiovascular disease. Matria has agreed
to market WebMD directly to its established customer base of obstetricians,
gynecologists and cardiologists.
McKessonHBOC. McKessonHBOC is a healthcare supply management company and
provider of integrated patient care, clinical, financial, managed care and
strategic management software solutions to the healthcare industry. Under the
current arrangements between the companies, McKessonHBOC has agreed to market
webMD subscriptions to integrated delivery networks, hospitals, physician
offices, pharmacies, pharmaceutical companies and medical and surgical supply
manufacturers. WebMD has agreed to provide Web-enabled access to McKessonHBOC
products and services. The current arrangements leave open for future
negotiations many important terms. For example, if McKessonHBOC and WebMD agree
on performance criteria, WebMD would not provide web-enabled access to products
competitive with McKessonHBOC's products within the areas of supply chain
management, automation products and pharmacy connectivity provided that this
exclusivity does not conflict with exclusivity arrangements with other specified
WebMD strategic partners. Healtheon, WebMD and McKessonHBOC have been discussing
a comprehensive revision to the existing relationship between WebMD and
McKessonHBOC, which may affect the arrangements described above and could
involve the issuance of additional equity in lieu of McKessonHBOC's rights to
purchase additional equity in WebMD described in the section entitled
"Healtheon/WebMD's strategic alliances with and investments from Microsoft and
other partners on page 81."
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Service relationships
Premiere Technologies. Premiere Technologies, Inc. is a leading provider of
enhanced communications services. WebMD uses Premiere Communications, Inc.'s, a
subsidiary of Premiere Technologies, computer telephony platform and private
frame relay network to provide enhanced communications services through its
Virtual Receptionist service offering.
iXL. WebMD provides customized web sites for physicians through its
relationship with iXL. iXL also provides Web development and physician web site
hosting services to WebMD. WebMD intends to provide streaming audio and visual
features for its continuing medical education courses through its relationship
with iXL. In addition, WebMD provides certain insurance and home finance
products at discounted rates to subscribers through its relationship with
Consumer Financial Network, Inc., a subsidiary of iXL.
Covad. Covad Communications Group, Inc. is a leading high-speed Internet
and network access provider offering digital subscriber line services to
Internet service provider and enterprise customers. Covad has entered into a
strategic relationship with WebMD providing for Covad to be the preferred
provider of high-speed Internet access to WebMD's subscribers.
Content relationships
Thomson Healthcare. Thomson Healthcare Information Group provides WebMD
with comprehensive online physician reference databases and publications,
including the Physicians' Desk Reference library and articles from Medical
Economics Company journals.
Medical Communications Network. Medical Communications Network, Inc., a
leading publisher of healthcare reference materials, provides WebMD with monthly
articles from Physician's Practice Digest.
Although WebMD views its strategic relationships as a key factor in its
overall business strategy and in the development and commercialization of its
services, WebMD cannot guarantee that its strategic partners will view their
relationships with WebMD as significant to their own business or that they will
not reassess their relationship with WebMD in the future.
Sales and marketing
WebMD markets its services through an internal sales force and its
strategic distribution relationships which typically couple WebMD's use of the
strategic partner's services or content with the strategic partner's marketing
of WebMD's services to its customer or client base. WebMD's distribution
partners, which target different healthcare sectors, combined with WebMD's
internal sales force, provide WebMD with sales, and marketing professionals who
are experienced in the healthcare industry. WebMD and WebMD's strategic
partners' direct marketing efforts, which may include promotional offers, direct
mail and telemarketing initiatives, emphasize the ease of use and adoption,
attractive pricing and integrated solution offered by WebMD. WebMD has entered
into, and intends to continue to enter into, strategic alliances with parties
who have established customer or client bases that have an anticipated need for
the services provided by WebMD. In connection with some of these strategic
alliances, such as the alliances with Microsoft, DuPont, McKessonHBOC, E*TRADE,
and MedQuist, WebMD has agreed to bear some of the cost associated with these
promotional offers or to compensate such partners for each subscriber that WebMD
obtains through their marketing efforts or to make guaranteed payments to some
of its distribution partners and service and content providers. WebMD intends to
enter into similar promotional arrangements in the future. WebMD has also issued
warrants in connection with entering into strategic alliances, such as its
alliances with Microsoft, DuPont, McKessonHBOC and Premier. For a more complete
description of these arrangements, see the section entitled "WebMD management's
discussion and analysis of financial condition and results of
operation -- Promotional arrangements" and "-- Guaranteed payments on page 255."
WebMD is currently engaged in a significant branding and advertising
campaign to increase awareness of the WebMD brand. WebMD is employing a
combination of print and online advertising and other
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marketing and promotional efforts aimed at defining a desirable online
destination for healthcare professionals and consumers, attracting new
subscribers and consumers, increasing traffic on the WebMD Web site and
developing additional revenue opportunities. WebMD promotes its web-based
services through traditional print media, including trade journals, newspapers
and magazines targeted at healthcare professionals, and participates in
tradeshows, conferences and speaking engagements as part of its ongoing public
relations program. In addition, WebMD has entered into several strategic
alliances to promote the WebMD brand offline, including the alliance with CNN
which provides for the promotion of WebMD on television and radio. WebMD plans
to continue to allocate significant resources to marketing its services.
Customer service and support
WebMD believes that effective customer service is essential to attracting
and retaining subscribers and consumers. WebMD provides ongoing telephone
support through its customer service and sales support centers which are
accessible by a toll-free call and are available from 8:00 a.m. to 8:00 p.m.,
Eastern time Monday through Friday. WebMD's live operators screen all requests
for telephone support and direct the call to the appropriate customer service
personnel. Technical support personnel are responsible for consulting with
WebMD's strategic partners regarding technical support issues and for resolving
technical problems encountered by users, strategic partners or other parties.
Competition
Web-based services. The market for web-based services and products is
relatively new, intensely competitive and rapidly changing. Since the Internet's
commercialization in the early 1990's, the number of web sites on the Internet
competing for users' attention has proliferated with no substantial barriers to
entry. WebMD expects competition in the markets in which it competes to increase
significantly as new companies enter these markets and current competitors
expand their product lines and services. Competition may also increase as a
result of industry consolidation. Many of these potential competitors are likely
to enjoy substantial competitive advantages, including:
- greater resources that they can devote to the development, promotion and
sale of their services
- longer operating histories
- greater financial, technical and marketing resources
- greater name recognition
- larger subscriber and consumer bases
WebMD does not know whether its current or potential competitors will
develop products and services comparable or superior to WebMD's products and
services or adapt more quickly than WebMD to new technologies, evolving industry
trends or changing Internet user preferences. Increased competition could result
in price reductions, reduced margins or loss of market share, any of which would
significantly harm WebMD.
WebMD competes, directly and indirectly, for subscribers, consumers,
content and service providers, advertisers, sponsors and acquisition candidates
with the following categories of companies:
In addition, with regard to its electronic data interchange service offering,
WebMD also competes with providers of electronic data interchange terminals that
provide access to a single service, such as those provided by VeriFone Inc.
WebMD generally does not have the contractual right to prevent its subscribers
from terminating their service or changing to a competing service.
WebMD believes that the principal competitive factors in attracting and
retaining healthcare professional subscribers are brand recognition and the
depth, breadth and timeliness of its services and content. Other important
factors in attracting and retaining healthcare professionals as subscribers
include the ease of use, quality and cost of WebMD's services. WebMD believes
that the principal competitive factors that attract advertisers include price,
the number of healthcare professionals who subscribe to
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WebMD, the traffic on its Web site, the demographics of its subscriber and
consumer bases and the creative implementation of advertisement placements.
Communications and information services. WebMD also competes in the
communications and information services markets. These markets are also
intensely competitive, rapidly evolving and subject to rapid technological
change. Other providers currently offer each of the individual services and
certain combinations of the services that WebMD offers. WebMD's voice mail
services compete with voice mail services provided by regional Bell operating
companies as well as by independent voice mail vendors. WebMD's communications
services and features, such as conference calling, compete with services
provided by companies with significantly greater resources than WebMD as well as
smaller interexchange long distance providers. Telecommunications companies also
compete for consumers based on price, and major competitors often conduct
extensive advertising campaigns to capture market share. A decrease in rates
charged by WebMD's telecommunications competitors could have a material adverse
effect on its business. WebMD expects that the communications and information
services markets will continue to attract new entrants and new technologies,
possibly including alternative technologies that are more sophisticated and cost
effective than WebMD's technology.
To be competitive in these markets, WebMD must license leading
technologies, enhance its existing services and content, develop new
technologies that address the increasingly sophisticated and varied needs of
healthcare professionals and healthcare consumers and respond to technological
advances and emerging industry standards and practices on a timely and
cost-effective basis. WebMD may not be successful in using new technologies
effectively or adapting its Web site and proprietary technology to user
requirements or emerging industry standards. Any pricing pressures, reduced
margins or loss of market share resulting from WebMD's failure to compete
effectively would significantly harm WebMD.
Government regulation and legal uncertainties
Internet laws. There are currently few laws or regulations that
specifically regulate communications or commerce on the Internet. However, laws
and regulations may be adopted in the future that address issues such as online
content, user privacy, pricing and quality of products and services. For
example, local exchange carriers have petitioned the Federal Communications
Commission to regulate Internet service providers and online service providers
in a manner similar to long distance telephone carriers. The local exchange
carriers want the Federal Communications Commission to impose access fees on
those providers because the growing popularity and use of the Internet has
burdened the existing telecommunications infrastructure. Internet user privacy
has become an issue both in the U.S. and abroad. Although the U.S. or other
countries may adopt legislation to protect privacy, no current U.S. law
specifically covers the collection of personal information online. Any
legislation of this nature could affect the way WebMD conducts its business,
especially its collection or use of personal information, and could harm its
business. In addition, it may take years to determine the extent to which
existing laws governing issues such as property ownership, libel, negligence and
personal privacy are applicable to the Internet.
The tax treatment of the Internet and e-commerce is currently unsettled. A
number of proposals have been made at the federal, state and local level and by
certain foreign governments that could impose taxes on the sale of goods and
services and certain other Internet activities. A recently-passed law places a
temporary moratorium on certain types of taxation on Internet commerce. WebMD
cannot predict the effect of current attempts to tax or regulate commerce over
the Internet. Any legislation that substantially impairs the growth of
e-commerce could harm WebMD's business.
Healthcare laws. Currently, WebMD's operations are not regulated by any
healthcare agency. However, the Health Insurance Portability and Accountability
Act of 1996 mandates the use of standard transactions and identifiers, security
and other provisions regarding healthcare issues on the Internet by the end of
the year 2000. It will be necessary for WebMD's platform and for the
applications that WebMD provides to be in compliance with the proposed
regulations. Congress is also likely to consider legislation establishing
uniform, comprehensive federal rules about an individual's right to access his
own or someone else's medical information. This legislation would likely define
what is to be considered "protected health
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information" and outline steps to ensure the confidentiality of this
information. The proposed Health Information Modernization and Security Act
would provide for establishing standards and requirements for the electronic
transmission of health information.
Food and Drug Administration regulation of medical devices. The Food and
Drug Administration regulates some computer applications and software that it
considers medical devices. The Food and Drug Administration might decide to
regulate WebMD's current services, although WebMD does not believe that they
will do so. Expansion of WebMD's services may subject it to future regulation.
WebMD has no experience in complying with Food and Drug Administration
regulations and doing so could be time consuming, burdensome and expensive and
could delay or prevent its introduction of new services.
Regulation of the practice of medicine. The practice of medicine requires
licensing under applicable state law. WebMD attempted to structure its Web site
and strategic relationships to avoid violating state licensing requirements. A
state regulatory authority may, however, allege that some portion of WebMD's
business violates these statutes and seek to have us discontinue those portions
or cause us to suffer financial damage. Further, WebMD's insurance may not cover
any liability based on a determination that we engaged in the practice of
medicine without a license.
State insurance regulation. WebMD markets online insurance offered by third
parties, and receives referral fees from those providers in connection with this
activity. Online marketing of insurance is a relatively new practice. It is not
clear whether or to what extent state insurance licensing laws apply to these
activities. It could be costly or impossible for WebMD to comply with these
licensing laws, if compliance is required.
Intellectual property
WebMD's proprietary rights. WebMD relies on a combination of copyright,
trademark and trade secret laws and contractual provisions to establish and
protect its proprietary rights. WebMD has applied for federal registration of
the service marks "WebMD," "Web-MD," "WebMD OnCall," "Health has a Homepage" and
"WebRN." On August 10, 1999, the Patent & Trademark Office cleared the "Web-MD"
mark for a notice of publication for opposition prior to final registration.
WebMD cannot guarantee that the "Web-MD" mark will not be opposed by a third
party during the publication process or that it will be cleared by final
registration. WebMD has applied for registration of the service marks "WebMD,"
"Health has a Homepage" and "WebRN" in approximately 75 foreign countries. WebMD
cannot guarantee that it will be able to secure registration for these marks in
the United States or in foreign countries. WebMD has also registered the domain
name "webmd.com."
The steps WebMD has taken to protect its proprietary rights may not be
adequate, and WebMD may not be able to secure trademark or service mark
registrations for marks in the U.S. or in foreign countries. Third parties may
infringe upon or misappropriate WebMD's copyrights, trademarks, service marks
and similar proprietary rights. In addition, effective copyright and trademark
protection may be unavailable or limited in many foreign countries, and the
global nature of the Internet makes it impossible to control the ultimate
destination of its services. It is possible that competitors or others will
adopt product or service names similar to WebMD's names, which could impede
WebMD's efforts to build brand identity and possibly lead to customer confusion.
Moreover, because domain names derive value from the individual's ability to
remember such names, WebMD's domain name will lose its value if, for example,
users begin to rely on mechanisms other than domain names to access online
resources. WebMD's inability to protect its marks adequately would hurt WebMD's
ability to establish its brand. In the future, litigation may be necessary to
enforce and protect WebMD's trade secrets, copyrights and other intellectual
property rights. Litigation would divert management resources and be expensive
and may not effectively protect WebMD's intellectual property.
Third-party proprietary rights. WebMD also relies on a variety of
intellectual property rights that it licenses from third parties, including its
Internet server software and healthcare content used on the WebMD Web site.
These third party licenses may not be available to WebMD on commercially
reasonable terms. WebMD's loss of or inability to maintain or obtain upgrades to
any of these licenses
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could significantly harm WebMD. In addition, because WebMD licenses a majority
of its content from third parties, WebMD's exposure to copyright infringement
actions may increase because it must rely upon such parties for information as
to the origin and ownership of such licensed content.
Facilities
WebMD's corporate headquarters and call center occupy approximately 20,000
square feet of office space in Atlanta, Georgia under a lease expiring February
1, 2000, with an option to renew the lease term for one year. In addition, WebMD
leases approximately 5,300 square feet of space in Atlanta, Georgia for its
emergency call center. WebMD also has offices in Portland, Oregon and San
Francisco, California. WebMD believes that its current office space is
sufficient to meet its present needs and does not anticipate any difficulty
securing additional space, as needed, on terms acceptable to it.
Employees
As of March 31, 1999, WebMD employed 165 persons on a full-time basis. None
of WebMD's employees are members of a labor union or are covered by a collective
bargaining agreement. WebMD believes that its relationship with employees is
good.
Legal proceedings
In connection with the sale of its cardiac monitoring assets to Matria,
WebMD and its subsidiary Endeavor, formerly known as Quality Diagnostic
Services, Inc., retained liabilities, including liabilities relating to actual
and potential litigation. These liabilities include potential sanctions
associated with Endeavor's receipt of service of a civil subpoena from the
Department of Health and Human Services, Office of the Inspector General on July
28, 1998. Endeavor responded to the subpoena in a timely manner on August 31,
1998. In a letter from the OIG dated November 25, 1998, the OIG requested that
Matria, as successor in interest to Endeavor's cardiac monitoring business,
should put in place measures to ensure proper use of facsimile machines and
telephone lines and periodically certify that these measures are being
effectively implemented to provide assurances that facsimile machines and
telephone lines used in the offices of referral sources are dedicated to cardiac
monitoring. The OIG has orally stated that it intends to enter into a settlement
agreement related to the subpoena that will describe the proper measures.
These liabilities also include a lawsuit filed in the Circuit Court for the
Judicial Circuit in and for Duval County, Florida by Brenda G. Durant under the
caption Brenda G. Durant, as personal representative of the Estate of James R.
Durant, deceased v. Jackson Heart Center, P.A., Jay Dunerman and Quality
Diagnostic Services, Inc. (No. 98-06052/CA). The complaint alleges a cause of
action for negligence for failure to notify plaintiff's physician of an abnormal
and potentially life threatening heart monitor recording which was received and
maintained by QDS. WebMD is currently in the process of filing an answer to the
complaint. Defending the lawsuit against QDS may involve significant expense.
Due to the inherent uncertainties of litigation, there can be no certainty as to
the ultimate outcome.
In addition, these retained liabilities include a potential claim by Life
Watch, an Illinois corporation and subsidiary of Ralin Medical, Inc., which in
February 1998 asserted orally that WebMD's use of cardiac monitoring devices
constituted an infringement of a patent held by Life Watch. Life Watch then
offered to grant license rights to WebMD under the patent. WebMD informed Life
Watch that Card Guard Scientific Survival, Ltd., an independent third party,
owns all rights to the devices and that Endeavor was merely a distributor of
such devices. There has been no further action in this regard. In the event that
this matter results in litigation, an adverse decision could result in
substantial damages and attorneys' fees that could harm WebMD.
On March 4, 1999, a lawsuit was filed in the Superior Court of the State of
California for the County of Los Angeles by Derek Rundell and Gary Coursey under
the caption Derek Rundell and Gary Coursey v. WebMD, Inc. (No. BC206440),
against WebMD. The complaint alleges breach of oral contract, breach of implied
covenant of good faith and fair dealing, breach of implied-in-fact contract,
fraud, unfair competition and constructive trust. The plaintiffs were former
employees of certifiedemail.com, Inc., which
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WebMD acquired on December 31, 1998. The plaintiffs allege, among other things,
that WebMD breached oral contracts of continued employment and committed fraud
against the plaintiffs by inducing them to accept employment with WebMD. On
March 24, 1999, WebMD filed its answer to the complaint in which it denied the
material allegations of liability. WebMD strongly disputes the material legal
and factual allegations contained in the complaint and believes that the
complaint is without merit. WebMD intends to vigorously defend against the
action. On March 22, 1999, WebMD filed a complaint against Gary B. Coursey and
certifiedemail.com in the Superior Court of Fulton County, State of Georgia
under the caption WebMD, Inc. v. Gary B. "Court" Coursey, Jr. and
certifiedemail.com, Inc. (No. 1999CV06474). The complaint alleges, among other
things, that defendants breached representations and warranties contained in the
asset purchase agreement between WebMD and certifiedemail.com. The complaint
also alleges that Mr. Coursey breached his employment agreement with WebMD.
Defending the lawsuit against WebMD and pursuing the lawsuit against Mr. Coursey
and certifiedemail.com may involve significant expense. Due to the inherent
uncertainties of litigation, there can be no certainty as to the ultimate
outcome.
From time to time, WebMD may be involved in litigation relating to claims
arising out of its operations. WebMD is not currently a party to any other legal
proceedings, the adverse outcome of which, individually or in the aggregate,
would have a material adverse effect on its business, financial condition or
operating results.
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WEBMD SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of WebMD for the years ended
December 31, 1995, 1996, 1997 and 1998 and as of December 31, 1996, 1997 and
1998 are derived from WebMD's consolidated financial statements. The selected
statement of operations data for the period from April 21, 1994 to December 31,
1994 and the three months ended March 31, 1998 and 1999 and the selected balance
sheet data as of December 31, 1994 and 1995 and March 31, 1998 and 1999 were
derived from unaudited consolidated financial statements which, in the opinion
of management, include all adjustments, consisting only of normal recurring
accruals necessary for a fair presentation of the information set forth therein.
The results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results for a full year. The following data should
be read in conjunction with "WebMD management's discussion and analysis of
financial condition and results of operations" and WebMD's consolidated
financial statements and related notes thereto included elsewhere in this proxy
statement/prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION THREE MONTHS
(APRIL 21, ENDED
YEAR ENDED DECEMBER 31, 1994) TO MARCH 31,
------------------------------------- DECEMBER 31, ------------------
1998 1997 1996 1995 1994 1999 1998
-------- ------- ------- ------ ------------ -------- -------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL STATEMENTS OF OPERATIONS DATA:
Revenues.......................................... $ 408 $ -- $ -- $ -- $ -- $ 2,458 $ --
Operating loss.................................... (23,036) (2,594) -- -- -- (18,017) (1,277)
Net loss applicable to common stockholders........ $(18,546) $(4,349) $(1,682) $ (39) $ (40) $(18,341) $(1,563)
Net loss per common stockholder................... $ (1.52) $ (0.52) $ (0.64) $(0.04) $(0.04) $ (1.46) $ (0.14)
Shares used in computing basic and diluted net
loss per common share(2)........................ 12,196 8,300 2,612 1,000 1,000 12,533 10,912
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
------------------------------------------------------ MARCH 31,
1998 1997 1996 1995 1994 1999
----------- ------ ------ ----------- ---- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 6,226 $2,696 $ -- $ -- $ -- $ 9,673
Working capital..................................... 4,313 2,532 -- -- -- 23,542
Total assets........................................ 18,245 9,190 3,497 638 213 135,328
Long-term debt, net of discount(3).................. -- 2,965 -- -- -- --
Total stockholders' equity (net capital
deficiency)....................................... 5,286 3,036 558 (32) (31) 118,647
</TABLE>
- -------------------------
(1) WebMD was incorporated in October 1996, and in March 1997, a subsidiary of
WebMD merged with Endeavor, a provider of cardiac monitoring services, and
Endeavor was the surviving corporation. Endeavor was incorporated in April
1994. Statement of operations data for all periods presented include
statement of operations data for Endeavor, as the predecessor of WebMD.
Effective as of July 1, 1998, WebMD sold substantially all its cardiac
monitoring assets to Matria. The Company's financial statements reflect the
cardiac monitoring operations as discontinued operations for all periods and
dates prior to such sale of assets. In addition, on July 1, 1997, WebMD sold
its subsidiary, Ultra Scan, Inc.
(2) Basic and diluted net loss per share was determined using all classes of
common stock outstanding during each period. It does not include the
conversion of preferred stock, options or warrants to purchase stock as they
are antidilutive.
(3) See Note 5 of the WebMD notes to consolidated financial statements.
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WEBMD MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with WebMD's
consolidated financial statements and the related notes thereto and other
financial information appearing elsewhere in this proxy statement/prospectus.
OVERVIEW
WebMD provides services to healthcare professionals and healthcare
consumers under its WebMD brand name. WebMD's subscription-based professional
web site includes access to electronic data interchange services, enhanced
communications services, healthcare-related information and other web-based
services that are useful to healthcare professionals. WebMD designed its
professional web site to simplify healthcare practices by integrating multiple
administrative, communications and research functions into a single, easy to use
web-based solution. WebMD's free consumer web site includes access to premium,
branded healthcare-related information, personalized, targeted information about
specific health conditions and content-specific online communities that allow
consumers to participate in real-time discussions and support networks via the
web. WebMD designed its consumer web site to assist consumers in making informed
healthcare decisions.
WebMD was formerly engaged in the cardiac monitoring business, and WebMD
has only recently begun implementing its new Internet-based business model.
WebMD's activities to date have primarily consisted of licensing and creating
content, negotiating relationships with strategic partners, engaging in
marketing and branding promotions, recruiting personnel and raising capital.
WebMD commercially launched its Internet-based services in October 1998.
Acquisitions
On December 31, 1998, WebMD acquired substantially all of the assets and
assumed certain liabilities of certifiedemail.com, Inc. in exchange for 50,000
shares of WebMD's Series D common stock. On January 22, 1999, WebMD acquired
Direct Medical Knowledge for 494,018 shares of WebMD's Series B preferred stock.
In addition, WebMD converted existing Direct Medical Knowledge options and
warrants into options and warrants to acquire 181,323 shares of WebMD's Series B
preferred stock. At closing, WebMD also paid $300,000 in liabilities of Direct
Medical Knowledge. On January 25, 1999, WebMD acquired Sapient Health Network
for 1,619,190 shares of WebMD's Series B preferred stock. In addition, WebMD
converted existing Sapient Health Network options and warrants into options and
warrants to acquire 180,953 shares of WebMD's Series B preferred stock. At
closing, WebMD also paid $2.9 million of liabilities of Sapient Health Network.
Series D common stock and Series B preferred stock exchanged in these
acquisitions were valued at $20 per share which was determined to be the fair
market value of these securities by WebMD's board in the absence of a liquid
market based on recent sales of similar securities to third parties.
As a result of the Sapient Health Network and Direct Medical Knowledge
acquisitions, WebMD recorded an aggregate of $51.9 million in goodwill and other
intangible assets in the first quarter of 1999, which WebMD will amortize on a
straight-line basis over a three-year period.
Stock dividend
On April 9, 1999, WebMD's board of directors declared a stock dividend of
0.03846 shares of Series F preferred stock, which is convertible into common
stock on a ten-for-one basis, for each share of WebMD capital stock outstanding.
In addition, WebMD's board approved adjustments to each WebMD option and warrant
outstanding on April 9, 1999 to reflect the stock dividend, regardless of
whether these options and warrants were vested. The dividend adjustments to the
options and warrants were vested or will vest according to the same vesting
schedule as the underlying options and warrants. Unless otherwise indicated, the
stock dividend has been reflected as if it had occurred for all periods
presented.
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Service offerings
WebMD markets subscriptions to its Internet-based services to healthcare
professionals. WebMD currently offers its subscribers two monthly service
packages: WebMD and WebMD OnCall. The following are some of the service
offerings included in WebMD and WebMD OnCall:
- electronic data interchange services for eligibility verifications and
patient referrals
- the Virtual Receptionist integrated messaging platform, which manages
incoming calls, voice mails, e-mails and fax messages
- a customized physician web site
- practice management tools
- physician medical references
- continuing medical education courses
- access to financial services and products, as well as news, stock, sports
and travel information
A subscription to WebMD OnCall also includes WebMD's physician-only
answering service. WebMD's current base subscription fees for WebMD and WebMD
OnCall are $29.95 and $99.95 per month, respectively. The WebMD and WebMD OnCall
packages generally require a 12-month service period and are generally
terminable upon 90 days prior written notice. WebMD also offers Internet access
and paging services for additional monthly fees.
Promotional arrangements
WebMD currently funds promotions of its services through its distribution
relationships with Microsoft, DuPont, McKessonHBOC and MedQuist. WebMD generally
requires subscribers under these promotional arrangements to commit to 12-to-36
month subscriptions. WebMD has entered into these promotional arrangements in
order to establish its subscriber base and build brand recognition. WebMD's
promotional arrangements currently require, and future arrangements may require,
it to pay amounts that WebMD will only recoup if subscribers maintain a
subscription and pay all required subscription fees for an extended period of
time.
WebMD cannot guarantee that it will generate sufficient revenue from
subscribers it obtains through current or future promotional arrangements to
offset the cost of its promotions. WebMD's promotional arrangements include the
sponsorship of WebMD subscriptions by some of WebMD's strategic partners. These
sponsorships require the strategic partners to pay WebMD for subscriptions that
the partners are unable to sell to their existing customers. Although WebMD
expects to receive revenue from these arrangements, WebMD cannot predict the
number of actual subscribers, if any, that these relationships will actually
generate. WebMD also cannot guarantee that subscribers it obtains through
promotional arrangements will actually use its services. Therefore, the amount
of revenue WebMD receives may not be indicative of the level of usage of WebMD's
services and WebMD expects the level of usage of its web site to be a primary
factor in determining the amount of advertising revenue that it can derive.
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Guaranteed payments
WebMD estimates that it will make the following aggregate guaranteed
payments under its current strategic agreements:
<TABLE>
<CAPTION>
PERIOD AMOUNT
------ -------------
<S> <C>
April - December 1999..................................... $66.4 million
2000...................................................... 72.5 million
2001...................................................... 78.3 million
2002...................................................... 40.4 million
2003...................................................... 34.4 million
</TABLE>
In addition, some strategic partner agreements and promotional arrangements
require payments on a per subscriber basis. WebMD may enter into additional
promotional arrangements with current and future strategic partners that may
require it to pay consideration in amounts that significantly exceed the amounts
WebMD is required to pay under its current arrangements. These guaranteed
payments and promotional and other arrangements may require WebMD to incur
significant expenses. WebMD cannot guarantee that it will generate sufficient
revenues to offset these expenses.
Revenues and results of operations
WebMD anticipates that the majority of its revenues will initially consist
of subscription revenues paid by its subscribers and strategic partners. WebMD
recognizes revenue when services are provided. Revenues from subscriptions are
deferred and recognized ratably over the term of the subscription. WebMD
anticipates that revenues from its Internet operations will consist primarily of
revenues from subscribers, including revenues generated from Microsoft's and
DuPont's sponsorship of WebMD subscriptions. If WebMD is successful in building
its subscriber base and brand recognition and increasing traffic on its web
site, WebMD expects advertising, sponsorship and transaction revenues to
increase as a percentage of total revenues. Some of WebMD's strategic partner
agreements provide for WebMD to share revenues from advertising, sponsorships
and transactions with the strategic partner.
WebMD has incurred net operating losses and negative cash flows from
operating activities since its inception. As of March 31, 1999, WebMD had an
accumulated deficit of $43.0 million. WebMD has not achieved profitability, and
WebMD expects to incur increasing net operating losses and negative cash flows
for the foreseeable future. WebMD will incur significant direct expenses
associated with its branding and advertising campaign, promotional arrangements,
and with the development of its services. WebMD may not be able to achieve
sufficient revenues in relation to its expenses to ever be profitable. If WebMD
achieves profitability, it may not be able to sustain or increase profitability
on a quarterly or annual basis. In addition, WebMD expects its quarterly
revenues, expenses and operating results to fluctuate significantly in the
future as a result of a variety of factors, some of which are outside WebMD's
control.
As a result of its limited operating history, its recent acquisitions and
the emerging nature of the markets in which it intends to compete, WebMD is
unable to forecast its revenues with any degree of certainty. WebMD's current
and projected expense levels are based largely on its estimates of future
revenues and are mostly fixed. WebMD expects its expenses to increase
significantly in the future as it continues to incur significant sales and
marketing, product development and administrative expenses. The success of its
business depends on WebMD's ability to increase its revenues to offset expenses.
WebMD cannot guarantee that it will be able to generate sufficient revenues to
offset operating expenses or the costs of its promotional arrangements or that
WebMD will be able to achieve or maintain profitability. If WebMD revenues fall
short of its projections, WebMD's business, financial condition and operating
results would be materially and adversely affected.
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Historical operating results
Effective July 1, 1998, WebMD sold substantially all of its cardiac
monitoring assets to Matria for an aggregate purchase price of $17.0 million in
cash and up to $6.0 million in additional contingent consideration payable
subject to the achievement during calendar year 1999 of certain revenue goals by
Matria in the operation of the purchased assets. Substantially all of WebMD's
historical revenues were derived from its cardiac monitoring operations. WebMD
does not consider the historical results of its cardiac monitoring operations to
be meaningful or indicative of its future results of operations. WebMD's
financial statements reflect the cardiac monitoring operations as discontinued
operations for all periods and dates prior to such sale of assets. As of March
31, 1999, WebMD has not recorded any amounts relating to the contingent
consideration described above.
RESULTS OF OPERATIONS
In June 1997, WebMD began redirecting its focus to the development of
integrated Web-based administrative, communications and information services to
healthcare professionals and healthcare information to consumers. WebMD
commercially launched its Internet-based services in October 1998. WebMD
believes that year-to-year comparisons of its results of operations for the
years ended December 31, 1998 and 1997 and the period-to-period comparisons of
the results of operations for the three months ended March 31, 1999 and 1998 are
not meaningful and should not be relied upon as an indication of WebMD's future
performance.
Revenues
During the year ended December 31, 1998 and the three months ended March
31, 1999, WebMD generated $408,000 and $2.5 million, respectively, in revenues.
WebMD did not generate any revenues from its continuing operations for the year
ended December 31, 1997 and for the three months ended March 31, 1997. Revenues
for the three months ended March 31, 1999 increased primarily due to the
commercial launch of WebMD's Internet-based services and consisted of $1.1
million in subscription revenues, $1.1 million from services to a related party
and $258,000 in advertising and sponsorship revenues.
Operating expenses
Product development and content. Product development and content costs
consist of Web development fees, content license fees, fees to service providers
and salaries and related expenses. Product development and content costs are
expensed as incurred. Content costs are converted over the term of the license
agreement, generally ranging from one to five years. Product development and
content costs were $7.5 million and $566,000 for the years ended December 31,
1998 and 1997, respectively, and $5.6 million and $695,000 for the three months
ended March 31, 1999 and 1998, respectively. In 1998, product development and
content costs increased primarily due to fees of $4.5 million for the
development of its Web site and content license fees of $1.4 million and other
research and development. Product development and content costs increased for
the three months ended March 31, 1999 primarily due to content license fees of
$2.3 million, fees of $1.2 million for development of WebMD's web site and $1.1
million in salaries and related expenses of development personnel.
Sales and Marketing. Sales and marketing costs consist of salaries and
related expenses and advertising, marketing and promotional expenses. Sales and
marketing costs are expensed as incurred. Sales and marketing costs were $3.7
million and $213,000 for the years ended December 31, 1998 and 1997,
respectively, and $8.8 million and $63,000 for the three months ended March 31,
1999 and 1998, respectively. In 1998, sales and marketing expense increased
primarily due to $2.2 million in salaries and related expenses of sales
personnel and $1.5 million related to WebMD's branding and advertising campaign.
Sales and marketing costs increased for the three months ended March 31, 1999
primarily due to $5.6 million in payments to WebMD's consumer portal
distribution partners, including promotional arrangements, $2.2 million related
to its branding and advertising campaign and increased marketing efforts
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in connection with the distribution of its services and $577,000 in salaries and
related expenses of sales personnel.
General and administrative. General and administrative expenses consist
primarily of salaries, non-cash compensation charges and related expenses for
executive and administrative functions and other expenses. General and
administrative expenses were $10.1 million and $1.8 million for the years ended
December 31, 1998 and 1997, respectively, and $2.7 million and $509,000 for the
three months ended March 31, 1999 and 1998, respectively. In 1998, general and
administrative expenses increased primarily due to $3.2 million in non-cash
compensation charges related to the issuance of options to employees with an
exercise price less than the fair market value of WebMD's capital stock on the
date of issuance, $2.7 million in salaries and related expenses for additional
executive and administrative personnel, $1.7 million for contract labor and $1.7
million in professional fees. General and administrative costs increased for the
three months ended March 31, 1999 primarily due to $1.3 million in salaries and
related expenses for additional administrative and executive personnel, $259,000
in professional fees and $366,000 for contract labor.
Write down of customer terminals. For the year ended December 31, 1998,
WebMD recorded a charge of $1.8 million to write down computer terminals to
their net realizable value. WebMD previously offered computer terminals with
some of its promotional packages or as a option for an additional fee. In 1998,
WebMD changed its service offerings to no longer offer computer terminals to its
subscribers and has sold all terminals previously held in inventory.
Depreciation and amortization. Depreciation and amortization expense
consists of the depreciation of property and equipment and the amortization of
intangible assets. Depreciation and amortization was $303,000 and $9,000 for the
years ended December 31, 1998 and 1997, respectively and $3.5 million and
$10,000 for the three months ended March 31, 1999 and 1998, respectively.
Depreciation and amortization increased due to the amortization of intangible
assets and purchases of property and equipment for the expansion of WebMD's
service offerings. In the three months ended March 31, 1999, WebMD recorded $2.9
million in amortization expense in connection with the acquisitions of Sapient
Health Network, Direct Medical Knowledge and certifiedemail.com. WebMD will
amortize the remaining $50.9 million in intangible assets on a straight-line
basis over the remainder of its three-year life.
Net interest income or expense. Net interest income or expense consists
primarily of interest paid on loans from related parties, loans that have been
repaid and interest earned on cash balances. Net interest expense was $139,000
and $725,000 for the years ended December 31, 1998 and 1997, respectively. Net
interest income was $214,000 for the three months ended March 31, 1999 and net
income expense was $146,000 for the three months ended March 31. Net interest
income decreased for the year ended December 31, 1998 due to the repayment of an
aggregate of $6.0 million in loans from Sirrom Investments, Inc. and a $509,605
loan from a related party and interest earned on WebMD's investment of cash
received from the sale of its cardiac monitoring assets and the sale of its
capital stock. Net interest income or expense increased for the three months
ended March 31, 1999 to reflect interest income earned on cash balances, net of
interest expense.
Discontinued operations. Effective as of July 1, 1998, WebMD sold
substantially all of its cardiac monitoring assets to Matria. WebMD incurred a
loss from discontinued operations of $1.2 million and $1.7 million for the years
ended December 31, 1997 and 1996, respectively. For the year ended December 31,
1998, WebMD recognized a gain of $7.7 million on the sale of its cardiac
monitoring operations. On July 1, 1997, WebMD sold UltraScan, a diagnostic
imaging services provider, and recognized a gain on the UltraScan sale of
$165,000 for the year ended December 31, 1997.
Income taxes. At March 31, 1999, WebMD had total net operating loss
carryforwards for federal and state income tax purposes of $31.7 million that
expire in years 2010 through 2014. Utilization of WebMD's net operating loss
carryforwards may be subject to an annual limitation due to the "change of
ownership" provisions of the tax code and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization. For financial reporting purposes, a valuation allowance has
been recognized to reduce the net deferred tax assets to zero due to
uncertainties with
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respect to WebMD's ability to generate taxable income in the future sufficient
to realize the benefit of deferred income tax assets.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, WebMD has financed its operations primarily through
private debt financings, the sale of its cardiac monitoring operations and the
sale of its capital stock.
Loans from Sirrom Investments, Inc. On August 29, 1997, WebMD borrowed $4.0
million from Sirrom for working capital and general corporate purposes. In
connection with the loan, WebMD issued Sirrom a warrant to purchase 771,901
shares of Series D common stock. In July 1998, WebMD borrowed an additional $2.0
million from Sirrom as bridge financing prior to the closing of the sale of
WebMD's cardiac monitoring operations to Matria. WebMD used $6.0 million of the
proceeds from the sale of its cardiac operations to repay the loans from Sirrom.
Sale of WebMD's cardiac monitoring operations. Effective as of July 1,
1998, WebMD sold substantially all of its cardiac monitoring assets to Matria
for an aggregate purchase price of $17.0 million in cash and up to $6.0 million
additional contingent consideration payable subject to Matria's achievement
during calendar year 1999 of certain revenue goals in the operation of the
purchased assets. In July 1998, WebMD used $2.7 million of the proceeds for
settlement costs of a dissenting stockholder law suit related to Endeavor. For a
more complete description of the lawsuit, see "WebMD's management --
Compensation committee interlocks and insider participation -- Dissenting
stockholder lawsuit" on page . WebMD also used $6.0 million of the proceeds to
pay the loans outstanding to Sirrom. The remainder of the proceeds were used for
WebMD's branding and advertising campaign, development of its services and other
general corporate purposes.
Sales of WebMD's capital stock. During the years ended December 31, 1998
and 1997, WebMD received $15.9 million and $5.8 million, respectively from the
sale of its capital stock. During the three months ended March 31, 1999 and
1998, WebMD received $34.0 million and $1.1 million, respectively, from the sale
of its capital stock.
Sources and uses of liquidity
As of March 31, 1999, WebMD's primary source of liquidity consisted of $9.7
million in cash and cash equivalents, and WebMD had working capital of $23.5
million.
Net cash used in continuing operations was $17.6 million and $3.6 million
for the years ended December 31, 1998 and 1997, respectively, and $24.6 million
and $1.3 million for the three months ended March 31, 1999 and 1998,
respectively. The principal uses of cash in continuing operations during 1998
were to fund WebMD's net loss of $16.4 million from operations, which was
partially offset by a $3.4 million in changes in accounts payable and accrued
expenses and $3.4 million in non-cash compensation expense in continuing
operations during 1998. The principal uses of cash in continuing operations
during the three months ended March 31, 1999 were to fund WebMD's net loss of
$17.8 million from operations, which was partially offset by $3.5 million in
depreciation and amortization, $2.0 million in non-cash amortization equity
issued for services, a $9.4 million increase in other current assets and a
decrease of $2.1 million in accounts payable and accrued expenses.
Net cash provided by investing activities for the year ended December 31,
1998 was $9.5 million, and net cash used in investing activities was and $1.6
million for the year ended December 31, 1997. Net cash used in investing
activities was $3.7 million and $1.1 million for the three months ended March
31, 1999 and 1998, respectively. Net cash used in investing activities during
1997 primarily related to purchases of property and equipment related to
discontinued operations. Net cash provided by investing activities during 1998
primarily related to $16.6 million in net proceeds from the sale of discontinued
operations, partially offset by $4.5 million in purchases of property and
equipment related to continuing and discontinued operations and payment of $2.7
million in settlement of a dissenting stockholder lawsuit. Net cash used in
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investing activities during the three months ended March 31, 1999 primarily
related to purchases of property and equipment related to continuing operations.
Net cash provided by financing activities of continuing operations was
$11.9 million and $9.7 million for the year ended December 31, 1998 and 1997,
respectively, and $31.7 million and $1.3 million for the three months ended
March 31, 1999 and March 31, 1998, respectively. Financing activities during
1998 consisted primarily of the proceeds from the issuance of equity securities
and proceeds from the $2.0 million loan from Sirrom and the repayment of the
$6.0 million loan from Sirrom. Financing activities during the three months
ended March 31, 1999 consisted primarily of proceeds from the issuance of equity
securities, partially offset by a $2.2 million repayment of a capital lease.
As of March 31, 1999, WebMD had material commitments of approximately $3.6
million for capital expenditures relating to the acquisition of computer
equipment.
If the Healtheon-WebMD reorganization is not consummated, WebMD believes
that the net proceeds from the recent sales of securities will be sufficient to
fund its working capital and capital expenditure requirements for at least the
next 12 months. However, WebMD expects to continue to incur significant
operating losses for at least the next 24 months due to its branding and
advertising campaign and the development of its services. If the Healtheon-WebMD
reorganization is not consummated and WebMD determines that it will require
additional funds to support operations or the expansion of its business, WebMD
may sell additional equity, issue debt or convertible securities or obtain
credit facilities through financial institutions. The sale of additional equity
or convertible securities will result in additional dilution to WebMD's
stockholders. There can be no assurance that additional financing, if required,
will be available to WebMD in amounts or on terms acceptable to WebMD.
YEAR 2000 COMPLIANCE
Some computers, software and other equipment include programming code in
which calendar year data is abbreviated to only two digits. As a result of this
design decision, some of these systems could fail to operate or fail to produce
correct results if "00" is interpreted to mean 1900, rather than 2000. These
problems are widely expected to increase in frequency and severity as the year
2000 approaches and are commonly referred to as the "Year 2000 problem."
State of readiness. The Year 2000 problem could affect computers, software
and other equipment that WebMD uses. WebMD has completed a review of its
internal computer programs and systems to determine if they will be Year 2000
compliant. WebMD believes that its computer systems will be Year 2000 compliant
before the end of the fourth quarter of 1999. However, while WebMD does not
expect the cost of these efforts to be material to its financial position or any
year's operating results, WebMD cannot provide you with any assurance to this
effect.
Internal infrastructure. WebMD has reviewed all of the major computers,
software applications and related equipment that WebMD uses in connection with
its internal operations and determined that, with the exception of its telephone
system, which it intends to replace, no modifications, upgrades or replacements
are required to minimize the possibility of a material disruption to its
business. WebMD has started modifying, upgrading and replacing systems that it
has identified as potentially being adversely affected. WebMD expects to
complete this process before the end of the third quarter of 1999. WebMD does
not expect the cost related to these efforts to be material to its business,
financial condition or operating results.
Systems other than information technology systems. In addition to computers
and related systems, the operation of WebMD's office and facilities equipment,
such as fax machines, photocopiers, telephone switches, security systems,
elevators and other common devices may be affected by the Year 2000 problem.
WebMD is currently assessing the potential effect of, and costs of remediating,
the Year 2000 problem on this equipment. WebMD does not expect that the total
cost of completing any required modifications, upgrades or replacements of these
internal systems will have a material effect on its business, financial
condition or operating results.
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Suppliers. WebMD depends on third party suppliers for most of the services
it provides. If these parties are affected by the Year 2000 problem, WebMD's
ability to provide services to our subscribers and users may be materially
adversely affected. WebMD has been gathering information from and has initiated
communications with all of its service and content providers to identify and, to
the extent possible, resolve issues involving the Year 2000 problem. WebMD has
received written responses from iXL, Premiere Technologies and MedQuist
addressing their Year 2000 readiness. Based on these responses, WebMD believes
these service providers will be Year 2000 ready. However, WebMD has limited or
no control over the actions of its service and content providers. Therefore,
while WebMD expects that it will be able to resolve any significant Year 2000
Problems with its systems, WebMD cannot guarantee that its service and content
providers will resolve any or all Year 2000 Problems with their systems before
the occurrence of a material disruption to WebMD's business. Any failure of
these third parties to resolve Year 2000 problems with their systems in a timely
manner could have a material adverse effect on WebMD's business, financial
condition or operating results.
Most likely consequences of Year 2000 problems. WebMD expects to identify
and resolve all Year 2000 problems that could materially adversely affect its
business, financial condition or operating results. However, WebMD believes that
it will not be possible to determine with complete certainty that all Year 2000
problems affecting WebMD have been identified or corrected. The number of
devices that could be affected and the interactions among these devices are
simply too numerous. In addition, WebMD cannot accurately predict how many
failures related to the Year 2000 problem will occur or the severity, duration
or financial consequences of such failures. As a result, WebMD could possibly
suffer the following consequences:
- a significant number of operational inconveniences and inefficiencies for
WebMD, its service and content providers and subscribers and users that
may divert time and attention and financial and human resources from
WebMD's ordinary business activities
- a lesser number of serious system failures that may require significant
efforts by WebMD, its service and content providers or WebMD's
subscribers and users to prevent or alleviate material business
disruptions
Contingency plans. WebMD is currently developing contingency plans to be
implemented as part of its efforts to identify and correct Year 2000 problems
affecting its internal systems. WebMD expects to complete its contingency plans
by the end of the third quarter of 1999. Depending on the systems affected,
these plans could include:
- accelerated replacement of affected equipment or software
- short to medium-term use of backup equipment and software
- increased work hours for our personnel or use of contract personnel to
correct on an accelerated schedule any Year 2000 problems which arise or
to provide manual workarounds for information systems
- other similar approaches
If WebMD is required to implement any of these contingency plans, such
plans could have a material adverse effect on its financial condition or
operating results.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997. SFAS No. 131
establishes standards for disclosures about operating segments, products and
services, geographic areas and major customers.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
WebMD's financial instruments consist of cash that is invested in
institutional money market funds. At March 31, 1999, the carrying values of
WebMD's financial instruments approximated their fair values based on current
market prices and rates. It is WebMD's policy not to purchase or hold derivative
financial instruments. WebMD does not have significant foreign currency exposure
since it does not currently transact business in foreign currencies. Therefore,
WebMD did not have significant overall currency exposure at March 31, 1999.
CHANGE IN INDEPENDENT ACCOUNTANTS
On February 23, 1997, Direct Medical Knowledge dismissed Berg & Company as
its independent accountants. The report of Berg & Company on Direct Medical
Knowledge's financial statements for the period from inception (May 24, 1995)
through December 31, 1996 contained no adverse opinion or disclaimer of opinion.
The opinion was qualified as to the uncertainty of Direct Medical Knowledge's
ability to continue as a going concern. In connection with these audits and
through February 23, 1997, there had been no disagreements with Berg & Company
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreement if not resolved
to the satisfaction of Berg & Company would have caused them to make reference
thereto in their report on the financial statements for such periods. The
decision to change accounting firms was approved by Direct Medical Knowledge's
management. Direct Medical Knowledge has requested that Berg & Company furnish
it with a letter addressed to the Commission stating whether or not it agrees
with the above statements. A copy of that letter, dated June 15, 1999, is filed
as an exhibit to the registration statement of which the proxy
statement/prospectus forms a part.
Direct Medical Knowledge engaged PricewaterhouseCoopers LLP as its new
independent accountants as of February 23, 1997. During the period from
inception (May 24, 1995) through February 23, 1997, Direct Medical Knowledge had
not consulted with PricewaterhouseCoopers LLP on items which were or should have
been subject to Statement of Auditing Standards No. 50, or concerned the subject
matter of a disagreement or reportable event with Berg & Company.
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WEBMD'S MANAGEMENT
The following table sets forth certain information regarding WebMD's
current executive officers and directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jeffrey T. Arnold(1)............. 29 Chairman of the Board and Chief Executive Officer
William P. Payne................. 52 Vice Chairman of the Board
K. Robert Draughon............... 39 Chief Financial Officer
W. Michael Heekin(1)............. 46 Executive Vice President, General Counsel,
Secretary and Director
Lucius E. Burch, III(2).......... 56 Director
U. Bertram Ellis, Jr............. 45 Director
J. Rex Fuqua..................... 48 Director
S. Taylor Glover(3).............. 48 Director
Boland T. Jones(1)............... 39 Director
Jouko J. Rissanen(2)............. 53 Director
Glenn W. Sturm(1)................ 45 Director
</TABLE>
- -------------------------
(1) Member of executive committee of the board of directors.
(2) Member of compensation committee of the board of directors.
(3) Member of audit committee of the board of directors.
Jeffrey T. Arnold, WebMD's founder, has served as Chairman of the Board and
Chief Executive Officer of WebMD since its inception in October 1996. In
addition, Mr. Arnold served as its President from its inception until September
1997. From April 1994 until Endeavor's merger with WebMD in March 1997, Mr.
Arnold served in various capacities at Endeavor, including as Chairman and Chief
Executive Officer. Mr. Arnold also serves on the board of directors of iXL and
Premiere Technologies.
William P. Payne has served as Vice Chairman of WebMD since September 1998.
Mr. Payne also serves as Vice Chairman of Premiere Technologies and as Chairman
of Orchestrate.com, Inc., a subsidiary of Premiere Technologies. From February
1997 to June 1998, Mr. Payne was a Vice Chairman of NationsBank Corporation. He
was President and Chief Executive Officer of the Atlanta Committee for the
Olympic Games from 1991 to 1997. Mr. Payne is also a director of Premiere
Technologies, Anheuser-Busch Companies, Inc., Jefferson-Pilot Corporation,
ACSYS, Inc. and Cousins Properties, Inc.
K. Robert Draughon has served as Chief Financial Officer of WebMD since
February 1998. From January 1988 to February 1998, he served as Chief Investment
Officer for Fuqua Capital Corporation, a private investment firm based in
Atlanta, Georgia. Mr. Draughon also serves on the board of directors of XRT,
Corp. and NuSoft Technologies, Inc.
W. Michael Heekin has served as an Executive Vice President of WebMD since
November 1998 and as General Counsel since January 1999. Mr. Heekin served as
Chief Operating Officer of WebMD from August 1997 to November 1998. Mr. Heekin
has also served as one of WebMD's directors and as Secretary of WebMD since
September 1997. From March 1993 to August 1997, Mr. Heekin served as Senior Vice
President and Corporate Secretary of American Heritage Life Investment
Corporation. Prior to March 1993, Mr. Heekin served as an Associate Dean of
Florida State University College of Law.
Lucius E. Burch, III has served as one of WebMD's directors since its
inception. He served as President from 1981 to 1994 and has been Chairman from
1994 to present of Massey Burch Investment Group, Inc., a private venture fund.
Mr. Burch also serves on the board of directors of QMS, Inc., Norrell
Corporation and Physicians Resource Group, Inc.
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U. Bertram Ellis, Jr. has served as one of WebMD's directors since June
1997. Since April 1996, he has served as Chairman and Chief Executive Officer of
iXL. Mr. Ellis founded and served as President of Ellis Communications, Inc., an
owner of television and radio stations, from 1993 to 1996.
J. Rex Fuqua has served as one of WebMD's directors since February 1997.
Mr. Fuqua has been President and Chief Executive Officer of Fuqua Capital
Corporation, a private investment firm based in Atlanta, Georgia, since 1989.
Mr. Fuqua is also Managing Director of Fuqua Ventures LLC, a firm which invests
in emerging technology companies. Mr. Fuqua serves on the board of directors of
Aaron Rents, Inc. and Graham-Field Health Products, Inc. Mr. Fuqua also serves
on the Board of Directors of Convergence.com Corporation, a privately-held
broadband Internet access company.
S. Taylor Glover has served as one of WebMD's directors since September
1997. Mr. Glover has served in various capacities at Merrill Lynch Pierce Fenner
& Smith Incorporated since 1973, most recently as Senior Vice
President -- Investments of the Private Client Group. Mr. Glover also serves on
the board of directors of Gaston-Loughlin, Inc., a privately-held workers
compensation managed care company, and Convergence.com.
Boland T. Jones has served as one of WebMD's directors since August 1998.
Since 1990, Mr. Jones has served as Chairman of the board of directors and Chief
Executive Officer of Premiere Technologies. Mr. Jones also serves on the board
of directors of Intellivoice Communications, Inc., a privately-held developer of
speech applications and Internet telephony, and Webforia, a privately-held
developer and provider of Internet tools for users to search, catalog and group
information.
Jouko J. Rissanen has served as one of WebMD's directors since its
inception. Mr. Rissanen has founded several medical companies, including Cardiac
Systems, Inc., Ocudyne, Inc., Occumedics, Inc., MedFusion, Inc. and Sensor
Technology, Inc. He served as President of Sensor Technology, Inc. from 1987 to
1994, at which time the company was sold to Eli Lilly and Company. Currently,
Mr. Rissanen is an individual investor and land developer, and serves as a
consultant to Guidant Corporation. Mr. Rissanen also serves on the board of
directors of J&C Nationwide.
Glenn W. Sturm has served as one of WebMD's directors since February 1997.
Mr. Sturm is a partner in the law firm of Nelson Mullins Riley & Scarborough,
L.L.P., where he serves as Corporate Chairman and as a member of the Executive
Committee. Mr. Sturm is a director of Phoenix International Ltd., Inc., The
InterCept Group, Inc. and Towne Services, Inc. Mr. Sturm is a principal in
Centaurus Ventures, a recently formed venture fund which invests in and advises
electronic commerce, transaction processing and computer telephony companies.
WebMD's board is divided into three classes, and each class serves for a
staggered three-year term, or until successors of such class have been elected
and qualified. Messrs. Arnold, Gilbertson, Heekin and Jones are Class I
directors and serve until the annual meeting of stockholders held in 2000.
Messrs. Burch, Glover, Payne and Rissanen are Class II directors and serve until
the annual meeting of stockholders held in 2001. Messrs. Ellis, Fuqua and Sturm
are Class III directors and serve until the annual meeting of stockholders held
in 2002. At each annual meeting of stockholders, a class of directors is elected
for a three-year term to succeed the directors or director of the same class
whose terms are then expiring. To the extent there is an increase in the number
of directors, the WebMD board will distribute the additional directorships among
the three classes so that, as nearly as possible, each class will consist of an
equal number of directors.
Executive officers of WebMD are elected by the board on an annual basis and
serve until the next annual meeting of WebMD's board and until their successors
have been duly elected and qualified. There are no family relationships among
any of WebMD's executive officers or directors.
BOARD OF DIRECTORS' COMMITTEES
WebMD's board of directors has established an executive committee, audit
committee and compensation committee. Messrs. Arnold, Heekin, Jones and Sturm
are members of the executive committee, which exercises the power of WebMD's
board of directors between board meetings, subject to
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certain limitations. Mr. Glover is currently the only member of the audit
committee, which reviews WebMD's audit functions, including its accounting and
financial reporting practices, the adequacy its system of internal accounting
controls, the quality and integrity of its financial statements and relations
with its independent auditors. Messrs. Burch and Rissanen are members of the
compensation committee, which establishes the compensation of WebMD's executive
officers, including salaries, bonuses, commissions, benefit plans and
compensation issues which are subject to Section 162(m) of the tax code and
administers WebMD's stock incentive plan.
DIRECTOR COMPENSATION
WebMD awards options to purchase common stock to non-employee directors for
their service on the board of directors. Each non-employee director received a
grant of options to acquire 27,692 shares of Series D common stock at an
exercise price of $10.83 per share on November 13, 1998, the date WebMD's
director option plan was approved. Each non-employee director received a grant
of options to acquire 6,923 shares of Series D common stock at an exercise price
of $14.44 on January 1, 1999. WebMD reimburses its directors for out-of-pocket
expenses incurred in connection with their rendering of services as directors.
WebMD has not paid and does not intend to pay cash fees to our directors for
attendance at meetings.
Effective May 22, 1998, William P. Payne became an employee and the
Chairman of the board of Orchestrate.com, a wholly-owned subsidiary of Premiere
Technologies. As Chairman of Orchestrate.com, one of Mr. Payne's principal
duties is to assist WebMD in the development of WebMD's business for the purpose
of increasing revenue opportunities for Premiere Technologies and enhancing the
value of Premiere Technologies' investment in WebMD. In consideration of Mr.
Payne's devotion of up to 60% of his time directly to WebMD's business, WebMD
reimburses Premiere Technologies $375,000 per year for Mr. Payne's salary,
$125,000 per year for Mr. Payne's minimum bonus and $6,000 per year for Mr.
Payne's automobile allowance, each for the balance of Mr. Payne's two-year
employment with Orchestrate.com. In addition, WebMD granted Mr. Payne options to
acquire 276,920 shares of Series D common stock with an exercise price of $1.44
per share. WebMD also reimburses Mr. Payne for any expenses he incurs in
discharging his duties to WebMD.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee of WebMD's board of directors was formed on
September 17, 1998. The current members of the compensation committee are Lucius
E. Burch, III and Jouko J. Rissanen. Neither Messrs. Burch nor Rissanen has been
an officer or employee of WebMD at any time.
For the three months ended March 31, 1999 and for years ended December 31,
1996, 1997 and 1998, WebMD paid approximately $1,200, $2,100, $5,000 and $4,800,
respectively, in health, life and dental insurance premiums for Mr. Rissanen and
his wife.
In August 1996, Mr. Rissanen loaned $200,000 to Endeavor pursuant to an
oral agreement. In March 1998, pursuant to a conversion of debt, indemnification
and release agreement among WebMD, Endeavor, Mr. Rissanen and Finn Partners, a
general partnership of which Mr. Rissanen is the managing partner and in which
he owns a 16.7% interest, the parties agreed to convert such debt into 100,000
shares of Series D common stock which were issued to Finn Partners.
In January 1997, WebMD loaned Jeffrey T. Arnold $4,000 to purchase
4,000,000 shares of common stock, Mr. Rissanen $1,400 to purchase 1,400,000
shares of Series B common stock and Mr. Burch $1,000 to purchase 1,000,000
shares of Series C common stock. These unsecured loans were evidenced by
promissory notes bearing interest at the rate of 8.75% per annum. Principal and
interest on the loans have been paid in full.
Dissenting Stockholder Lawsuit. In March 1997, a majority of the
stockholders of Endeavor approved and adopted a plan and agreement of merger
providing for the merger of Endeavor into QDS Acquisition Corporation, a wholly
owned subsidiary of WebMD. Prior to this merger, the stockholders of Endeavor
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consisted of: Messrs. Arnold, Rissanen and Burch, Robert A. Frist, and nine
physicians. Messrs. Arnold, Rissanen, Burch and Frist, who owned a majority of
Endeavor's capital stock, voted for the merger. The minority stockholders of
Endeavor asserted the right granted to them under Georgia law to dissent with
regard to such action and to demand payment for the fair value of their shares
in exchange for the surrender of such shares. Approval of the merger was also
required by WebMD as the sole stockholder of QDS Acquisition Corporation.
WebMD's board of directors was, thus, required to approve the merger. The merger
was approved unanimously by the board, which at that time consisted of Messrs.
Arnold, Rissanen, Burch and Frist and three other individuals. In addition, at
the time of the merger, WebMD's four largest stockholders were Messrs. Arnold,
Rissanen, Burch and Frist, and the sole voting stockholder was Mr. Arnold. In
July 1998, WebMD paid an aggregate of $2.7 million to settle the dissenters'
rights action and entered into a consulting agreement with one of the dissenting
stockholders.
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by or
paid for services rendered to WebMD in all capacities during the fiscal year
ended December 31, 1998 by WebMD's Chief Executive Officer and each of WebMD's
other two highest paid executive officers whose total compensation exceeded
$100,000, referred to in this section and the section entitled "Share ownership
by principal stockholders, management and directors of WebMD" on page 273 as
"named executive officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS OPTIONS(#) COMPENSATION
--------------------------- --------- ------ ------------ ------------
<S> <C> <C> <C> <C>
Jeffrey T. Arnold............................. $214,302 -- 1,384,600 $6,000
Chairman and Chief Executive Officer
K. Robert Draughon............................ 154,000 -- 443,072 5,500
Chief Financial Officer
W. Michael Heekin............................. 150,000 -- -- 6,000
Executive Vice President, General Counsel
and Secretary
</TABLE>
Mr. Arnold's annual salary consists of $180,000 in base salary plus $34,302
representing forgiveness of indebtedness owed to WebMD and an amount paid to Mr.
Arnold sufficient to pay the tax due on such forgiveness of indebtedness. For
more information see the section entitled "WebMD's related party transactions,"
on page 270. "All other compensation" consists of amounts paid for car
allowances.
OPTION GRANTS IN FISCAL 1998
The following table sets forth information concerning grants of stock
options to the named executive officers during the fiscal year ended December
31, 1998:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------- POTENTIAL REALIZABLE VALUE AT
NUMBER OF PERCENTAGE OF ASSUMED ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ------------------------------
NAME GRANTED FISCAL YEAR SHARE DATE 5% 10%
---- ---------- ------------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey T. Arnold........ 1,384,600 40.9% $10.83 Sept. 2002 $18,226,781 $21,954,499
K. Robert Draughon....... 366,919 10.8 1.44 Feb. 2002 642,229 773,576
76,153 2.2 10.83 Nov. 2002 1,002,473 1,207,497
W. Michael Heekin........ -- -- -- -- -- --
</TABLE>
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All options vest one-third on the date of grant and one-sixth, one-sixth
and one-third on the first three anniversaries of the date of grant. The
percentage of total options granted to employees during the fiscal year is based
on a total of 3,123,840 options granted to all employees during the fiscal year
ended December 31, 1998. All options were granted at an exercise price equal to
the fair market value of the common stock on the date of grant. Potential
realizable values are computed by (a) multiplying the number of shares of common
stock subject to a given option by the exercise price and (b) assuming that the
aggregate stock value derived from that calculation compounds at the annual rate
of 5% and 10% for the remainder of the four-year term of the option. In
accordance with the rules of the Securities and Exchange Commission, the
potential realizable values for such options shown in the table are based on
assumed rates of stock price appreciation of 5% and 10% compounded annually from
the date the respective options were granted to their expiration date. These
assumed rates of appreciation do not represent our estimate or projection of the
appreciation of shares of our common stock.
The following table sets forth information concerning exercisable and
unexercisable stock options held as of December 31, 1998 by each of the named
executive officers. No options were exercised by the named executive officers in
1998.
AGGREGATE OPTION EXERCISES IN FISCAL 1998 AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
AT DECEMBER 31, 1998 DECEMBER 31, 1998
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Jeffrey T. Arnold............................... 461,533 923,067 $1,666,662 $ 333,335
K. Robert Draughon.............................. 147,689 295,382 1,919,978 3,840,009
W. Michael Heekin............................... 207,690 207,690 2,700,000 2,100,000
</TABLE>
The value of unexercised in-the-money options at December 31, 1998 was
determined by subtracting the exercise price from $14.44 per share, the fair
market value of WebMD capital stock at December 31, 1998 as determined in good
faith by the WebMD board.
EMPLOYMENT AGREEMENTS
WebMD has an employment agreement effective September 30, 1998 with Jeffrey
T. Arnold. His employment agreement has a two-year term and renews for
consecutive one-year terms, unless either party gives 360-days notice prior to
the expiration of any term. WebMD pays Mr. Arnold an annual salary of $180,000,
and WebMD may pay him an annual bonus as determined by the board, or the
compensation committee, Mr. Arnold has agreed not to compete with WebMD during
the term of his employment and for one year after his termination. If WebMD
terminates Mr. Arnold without cause, Mr. Arnold will be entitled to 12 months'
salary as severance. WebMD granted Mr. Arnold options to acquire 1,384,600
shares of Series D common stock in his employment agreement. His options vest
one-third on the date of grant and one-sixth, one-sixth and one-third on the
first three anniversaries of the date of grant. All of Mr. Arnold's options will
immediately vest and become exercisable in the event of a change of control,
whether by contract, ownership of voting securities or otherwise, of the direct
or indirect power to direct the management and policies of WebMD. A change of
control will be deemed to have occurred if any person or entity that is not on
the date of his employment agreement the beneficial owner of any securities
becomes the beneficial owner of 20% or more of the combined voting power of
WebMD's outstanding voting securities which would have the right to vote for the
election of WebMD's directors. In connection with the Healtheon-WebMD
reorganization, Mr. Arnold agreed to waive any change of control vesting which
would occur as a result of the reorganization. If Mr. Arnold is terminated after
the reorganization for any reason other than cause, all his options will
immediately vest.
WebMD also has employment agreements effective February 1, 1998 and July
11, 1997 with K. Robert Draughon and W. Michael Heekin, respectively. Their
employment agreements have two-year
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terms and renew for one additional term unless either party gives 180-days
notice prior to the end of the initial two-year term. WebMD pays Messrs.
Draughon and Heekin an annual salary of $175,000 and $150,000, respectively, and
WebMD may pay either of them an annual bonus as determined by WebMD's board of
directors or the compensation committee. They have each agreed not to compete
with WebMD during the term of their employment and for one year thereafter. If
WebMD terminates either of them without cause, they will be entitled to 12
month's salary as severance. WebMD granted Messrs. Draughon and Heekin options
to acquire 366,919 and 415,380 shares, respectively, of Series D common stock.
Their options vest one-third on the date of employment and one-sixth, one-sixth
and one-third on the first three anniversaries of the date of their initial
employment.
OPTION PLANS
Stock Incentive Plan. In September 1997, the WebMD board of directors
adopted and WebMD's stockholders approved its stock incentive plan under which
6,000,000 shares of common stock of WebMD are available to be granted to
employees, consultants and others rendering services to WebMD. WebMD's stock
incentive plan is effective as of January 1, 1997 by its terms. In September
1998 and April 1999, the WebMD board adopted certain amendments to the stock
incentive plan, which provided, in part, for the increase in the number of
authorized shares of common stock under the stock incentive plan to 5,000,000
and 6,000,000, respectively. In March 1999, the WebMD board adopted amendments
to the stock incentive plan which provided for estate and gift planning
transfers approved by the compensation committee. The amendments to the stock
incentive plan were approved by the WebMD's stockholders in January 1999 and
March 1999, respectively. Options may be either incentive stock options within
the meaning of Section 422 of the tax code, which permits the deferral of
taxable income related to the exercise of such options, or nonqualified options
not entitled to such deferral. Incentive stock options may only be granted to
employees. In addition, the stock incentive plan allows for the award of
restricted stock. In April 1999, WebMD's board adjusted the shares of common
stock underlying the awards in connection with WebMD's stock dividend.
WebMD's stock incentive plan is administered by the WebMD board and the
compensation committee. Subject to the provisions of the stock incentive plan,
the WebMD board and the compensation committee, in their discretion, select the
recipients of awards and the number of options granted thereunder and determine
other matters including vesting and exercisability schedules, the exercise price
of options, which cannot be less than 100% of the fair market value of the
common stock on the date of grant for all stock options and the duration of
awards.
As of August 5, 1999 WebMD options to acquire 6,383,543 shares of Series D
common stock of WebMD were outstanding under the stock incentive plan. In
addition, WebMD assumed options to acquire an aggregate of 362,276 shares of
Series B preferred stock in connection with the Sapient Health Network and
Direct Medical Knowledge acquisitions.
Director Option Plan. In November 1998, WebMD's board adopted WebMD's
director option plan, which was approved by WebMD's stockholders in January
1999. The director option plan provides for non-qualified stock options to be
granted to WebMD's non-employee directors. The director option plan authorizes
the issuance of up to 1,000,000 shares of common stock pursuant to options
having an exercise price equal to the fair market value of the common stock on
the date the options are granted. In April 1999, WebMD's board adjusted the
shares of common stock underlying the awards in connection with WebMD's stock
dividend.
The director option plan provides for an initial grant of options to
acquire 27,692 shares of common stock to each non-employee director who served
on WebMD's board on November 13, 1998. The director option plan also provides a
grant of options to acquire 27,692 shares of common stock to each non-employee
director who is elected to WebMD's board after the date of approval of the
director option plan and an annual grant of options on January 1 of each
calendar year to acquire 6,923 shares of common stock to each non-employee
director. Each option will be exercisable in full beginning six months after the
date of grant and will expire ten years after the date of grant, unless
cancelled sooner as a result of
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termination of service or death, or unless such option is fully exercised prior
to the end of the option period. As of August 5, 1999, options to acquire
307,696 shares of Series D common stock were outstanding under the director
option plan.
WEBMD'S RELATED PARTY TRANSACTIONS
In July 1996, WebMD's subsidiary Endeavor, loaned Jeffrey T. Arnold,
Chairman and Chief Executive Officer of WebMD, $57,142 to purchase 5,000 shares
of common stock of Endeavor. This loan is evidenced by a full-recourse
promissory note bearing interest at 8.5% per annum. The principal and accrued
interest were payable in 24 equal installments beginning on August 1, 1996 and
continuing on the first day of each month thereafter until the indebtedness is
paid in full. In March 1997, the terms of this note were modified to provide
that the obligation to make payments on the note began on July 1, 1997 rather
than August 1, 1996. The principal and interest on the note are payable in 24
equal installments of $2,381. During Mr. Arnold's employment and through
December 31, 1998, he paid principal and interest of $52,015. As of June 1999,
this note was repaid full.
In August 1997, J. Rex Fuqua and S. Taylor Glover, directors of WebMD,
loaned WebMD $100,000. The interest rate on these loans was 8.5% per annum. In
September 1997, WebMD repaid $100,350 to each of Mr. Fuqua and Mr. Glover as
payment in full. In connection with these loans, WebMD granted to each of
Messrs. Fuqua and Glover an option to purchase 13,846 shares of Series D common
stock at a price of $1.44 per share. These options were immediately exercisable,
remain exercisable for three years and expire upon the Healtheon-WebMD
reorganization.
In December 1997, Premiere Technologies purchased 1,100,000 shares of
Series E common stock for $2,200,000. In connection with the stock purchase,
WebMD issued Premiere Technologies a warrant to purchase an additional 1,000,000
shares of Series E common stock for $2,000,000. In April 1998, Premiere
Technologies exercised the warrant in full. Boland T. Jones, a director of
WebMD, is the Chairman and Chief Executive Officer of Premiere Technologies and
Jeffrey T. Arnold, WebMD's Chairman and Chief Executive Officer is a director of
Premiere Technologies. WebMD also subleases the space for its corporate
headquarters and call center in Atlanta, Georgia from Premiere Communications, a
subsidiary of Premiere Technologies. The term of the sublease ends on February
1, 2000, with an option to renew the lease term for one additional year. The
sublease requires monthly payments by WebMD to Premiere Technologies of
$36,466.50 and the payment of additional costs and expenses. WebMD also leases
equipment and other personal property necessary for the operation of its call
center from Premiere Communications. The term of this lease ends on February 1,
2000, with an option to renew the lease term for one additional year. This lease
requires monthly payments by WebMD to Premiere Technologies of $24,311. For
three months ended March 31, 1999 and the year ended December 31, 1998, WebMD
paid an aggregate of $607,775 and $364,665, respectively under this lease. In
addition, WebMD leases the use of an airplane on an hourly basis from a limited
liability company that is owned 99% by Boland T. Jones, a director of WebMD and
Chairman and Chief Executive Officer of Premiere Technologies, and 1% by
Premiere Technologies. The term of the lease is month-to-month. For the six
months ended June 30, 1999, WebMD paid approximately $400,000 under this lease.
WebMD provides its subscribers with Premiere Technologies' enhanced
communications services. WebMD's agreement with Premiere Technologies is
effective until January 31, 2001 and contains minimum commitments for per
account and transaction payments by WebMD to Premiere Technologies. The minimum
commitments began at $10,000 per month as of September 1998. For each month
following September 1998, the minimum commitments increase by $10,000 per month
to a maximum of $80,000 per month in April 1999 and thereafter. WebMD's
agreement with Premiere Technologies also provides for a $350,000 fee for the
development of the Orchestrate platform for WebMD which was paid by WebMD in
January 1998. WebMD paid a $100,000 fee in November 1998 to Premiere
Technologies to integrate the Orchestrate service and its services. In addition,
the agreement requires that WebMD spend $750,000 for joint marketing efforts
with Premiere Technologies. Premiere Technologies and WebMD entered into an
amendment to their agreement in connection with obtaining Premiere Technologies'
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agreement to vote for the Healtheon-WebMD reorganization and the WebMD merger.
The amendment requires WebMD to use its best efforts to cause Healtheon/WebMD to
honor the rights and obligations under that agreement, including the exclusivity
of telecommunications services.
In February 1998, WebMD granted to Mr. Fuqua the option to purchase 48,461
shares of Series D common stock at a price of $1.44 per share. This option
expires three years from the date of grant. WebMD granted this option in
exchange for services provided by K. Robert Draughon to WebMD while he was an
employee of Fuqua Capital Corporation, of which Mr. Fuqua is the President,
Chief Executive Officer and a stockholder.
In June 1998, WebMD entered into strategic agreements with iXL for iXL's
provision of Web development services to WebMD. Under such agreements WebMD will
pay to iXL a minimum of $3.2 million for services over the next two years. U.
Bertram Ellis is the Chairman, Chief Executive Officer and a stockholder of iXL.
Jeffrey T. Arnold, WebMD's Chairman and Chief Executive Officer, serves on the
board of iXL, and Messrs. Fuqua and Rissanen are stockholders of iXL.
On August 24, 1998, McKessonHBOC purchased 667,000 shares of Series A
preferred stock for $10,005,000. In connection with this investment,
McKessonHBOC also received a warrant to purchase 415,380 shares of Series A
preferred stock with an exercise price of $13.00 per share, which McKessonHBOC
exercised in April 1999. On January 27, 1999, McKesson HBOC also purchased
650,000 shares of Series C preferred stock for $13,000,000. In connection with
McKessonHBOC's initial investment, WebMD was required to issue an additional
150,000 and 57,690 shares of Series A and Series F preferred stock,
respectively, to McKessonHBOC on May 22, 1999, because WebMD failed to complete
an initial public offering by that date. WebMD has also issued a warrant to
McKessonHBOC to grant up to 183,333 shares of Series A preferred stock upon
attainment of revenue goals by McKessonHBOC. All shares held by McKessonHBOC are
subject to registration rights. In addition, McKessonHBOC has the right to
purchase 38,773 shares of Series E preferred stock, 16,745 shares of Series D
common stock and a warrant to purchase 636,980 shares of Series D common stock.
Upon the purchase by Microsoft of an additional 276,906 shares of Series E
preferred stock, McKessonHBOC will have the right to purchase 25,117 shares of
Series E preferred stock. WebMD has entered into strategic agreements with
McKessonHBOC. McKessonHBOC has agreed to market WebMD's services to its existing
customer base and to sponsor WebMD's subscriptions. These agreements also
require WebMD to provide McKessonHBOC with $5.0 million in research and
development services and to pay McKessonHBOC $5 per month per subscription
placed by McKessonHBOC. For more information regarding these arrangements, see
"WebMD's management's discussion and analysis of financial condition and results
of operations -- Overview -- Promotional arrangements" on page 256.
In May 1999, Microsoft purchased 184,604 shares of Series E preferred stock
of WebMD. On June 11, 1999, Microsoft purchased 273,214 shares of Series F
preferred stock of WebMD pursuant to an offer to purchase. Microsoft is
committed to acquire an additional 276,906 shares of Series E preferred stock
upon the completion of the Healtheon/WebMD reorganization. For a complete
description of the Microsoft relationship, see the section entitled,
"Healtheon/WebMD's strategic alliances with and investments from Microsoft and
other partners on page 81.
All sales of capital stock were made at a price per share equal to the fair
market value of such stock on the date of sale as determined by WebMD's board of
directors. Some of the transactions described above may be on terms more
favorable to officers, directors and principal stockholders than they could
obtain in a transaction with an unaffiliated party. WebMD has adopted a policy
requiring that all material transactions between WebMD and its officers,
directors or other affiliates must be approved by a majority of the
disinterested members of our board of directors and be on terms no less
favorable to WebMD than could be obtained from unaffiliated third parties.
WebMD's director Glenn W. Sturm is a partner in the law firm of Nelson
Mullins Riley & Scarborough, L.L.P., where he serves as Corporate Chairman and a
member of its executive committee. Nelson Mullins serves as WebMD's primary law
firm.
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On December 1, 1998, WebMD employed Jay P. Gilbertson as President and
Chief Operating Officer. On June 4, 1999, WebMD informed Mr. Gilbertson that it
intended to terminate his employment, which the WebMD board did on June 15,
1999. WebMD and Mr. Gilbertson have not reached agreement on the terms of his
termination. Effective July 27, 1999, Mr. Gilbertson resigned as a director of
WebMD. Mr. Gilbertson served as a director of WebMD from August 1998 to November
1998 as a representative of McKessonHBOC's subsidiary, HBOC, and he was
reappointed to the board in connection with his employment by WebMD in January
1999.
For more information concerning Messrs. Arnold and Rissanen, see the
section entitled "WebMD's management -- Compensation committee interlocks and
insider participation" on page 266. For more information concerning Mr. Payne,
see the section entitled "WebMD's management -- Director compensation on page
."
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SHARE OWNERSHIP BY PRINCIPAL STOCKHOLDERS,
MANAGEMENT AND DIRECTORS OF WEBMD
The following table sets forth certain information with respect to the
beneficial ownership of WebMD's outstanding capital stock as of June 15, 1999,
and as adjusted to reflect the Healtheon-WebMD reorganization, by:
- each person or entity known by WebMD to be the beneficial owner of more
than 5% of the outstanding shares of WebMD capital stock;
- each of WebMD's directors and named executive officers
- all of WebMD's directors and executive officers as a group
Unless otherwise indicated, the address of each of the beneficial owners
identified is c/o WebMD, Inc., 400 The Lenox Building, 3399 Peachtree Road, NE,
Atlanta, Georgia 30326. Except as otherwise indicated, such beneficial owners
have sole voting and investment power with respect to all shares of common stock
owned by them, subject to community property laws where applicable.
Percentage of ownership is based on WebMD common stock outstanding on June
15, 1999, assuming the conversion of all shares of WebMD preferred stock into
common stock immediately prior to that date and the exercise of all options and
warrants that are currently exercisable or are exercisable within 60 days of
June 15, 1999.
Percentage of ownership is also based on the following exchange ratios:
- 1.815 shares of Healtheon/WebMD common stock for each share of WebMD
common stock outstanding on June 15, 1999, assuming the conversion of
all shares of WebMD preferred stock into common stock immediately prior
to that date and including the additional 276,906 shares of Series E
preferred stock to be purchased by Microsoft and the exercise in full by
McKessonHBOC of its right of first refusal
- 0.5483 shares of Healtheon/WebMD common stock for each share of Medcast
common stock outstanding on July 1, 1999 assuming the conversion of all
shares of Medcast preferred stock into common stock immediately prior to
that date
- 0.6593 shares of Healtheon/WebMD common stock for each share of MEDE
AMERICA common stock outstanding on June 15, 1999, assuming the exercise
of all options and warrants that are currently exercisable or are
exercisable within 60 days of June 15, 1999
Further, percentage of ownership is based on:
- an estimated 134,826,836 shares of Healtheon/WebMD common stock
outstanding following the Healtheon-WebMD reorganization
- an estimated 137,310,267 shares of Healtheon/WebMD common stock
outstanding following the Healtheon-WebMD and Medcast reorganizations
- an estimated 143,536,528 shares of Healtheon/WebMD common stock
outstanding following the Healtheon-WebMD and MEDE AMERICA
reorganizations
- an estimated 146,019,458 shares of Healtheon/WebMD common stock
outstanding following all the reorganizations
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<PAGE> 288
<TABLE>
<CAPTION>
PERCENT OF HEALTHEON/WEBMD
SHARES BENEFICIALLY OWNED AFTER
WEBMD SHARES BENEFICIALLY ---------------------------------
OWNED PRIOR TO THE
REORGANIZATIONS THE HEALTHEON-
----------------------------------------------- THE HEALTHEON- WEBMD
COMMON EXERCISABLE EXERCISABLE WEBMD AND MEDCAST
NAME AND ADDRESS OF BENEFICIAL OWNER STOCK WARRANTS OPTIONS PERCENT REORGANIZATION REORGANIZATIONS
- ------------------------------------ ---------- ----------- ----------- ------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Microsoft Corporation............ 7,305,550 7,614,916 -- 34.9% 18.2% 17.9%
One Microsoft Way
Redmond, WA 98052
E.I. du Pont de Nemours and 5,538,400 --
Company........................ 180,000 14.1 7.2 7.0
1007 Market Street
Wilmington, DE 19898
Jeffrey T. Arnold(1)............. 3,650,772 -- 461,533 11.5 5.6 5.5
Boland T. Jones(2)............... 2,958,690 -- 34,615 8.5 4.0 4.0
Premiere Technologies, Inc....... 2,675,047 -- -- 7.6 3.6 3.5
600 The Lenox Building
3399 Peachtree Road, NE
Atlanta, GA 30326
HBO & Company(3)................. 3,171,463 636,980 -- 10.6 4.8 4.7
301 Perimeter Center North
Atlanta, Georgia 30346
Jouko J. Rissanen(4)............. 2,261,530 -- 34,615 6.5 3.9 3.8
Finn Partners(4)................. 1,500,000 -- 34,615 4.3 2.8 2.7
Lucius E. Burch III(5)........... 1,384,600 -- 34,615 4.0 1.9 1.9
J. Rex Fuqua(6).................. 599,900 -- 96,922 2.0 * *
S. Taylor Glover(7).............. 509,304 -- 48,461 1.6 * *
William P. Payne................. -- -- 303,856 * * *
U. Bertram Ellis, Jr............. 240,000 -- 34,615 * * *
Glenn W. Sturm................... 118,460 -- 34,615 * * *
W. Michael Heekin................ -- -- 219,231 * * *
K. Robert Draughon............... 50,000 -- 150,832 * * *
All directors and executives as a 13,790,296 1,488,524
group (11 persons)............. 14,944,719 46.6 24.1 23.7
<CAPTION>
PERCENT OF HEALTHEON/WEBMD
SHARES BENEFICIALLY OWNED AFTER
---------------------------------
THE HEALTHEON-
WEBMD
AND MEDE
AMERICA ALL THE
NAME AND ADDRESS OF BENEFICIAL OWNER REORGANIZATIONS REORGANIZATIONS
- ------------------------------------ --------------- ---------------
<S> <C> <C>
Microsoft Corporation............ 17.2% 16.9%
One Microsoft Way
Redmond, WA 98052
E.I. du Pont de Nemours and
Company........................ 6.8 6.7
1007 Market Street
Wilmington, DE 19898
Jeffrey T. Arnold(1)............. 5.3 5.2
Boland T. Jones(2)............... 3.8 3.7
Premiere Technologies, Inc....... 3.4 3.3
600 The Lenox Building
3399 Peachtree Road, NE
Atlanta, GA 30326
HBO & Company(3)................. 4.5 4.4
301 Perimeter Center North
Atlanta, Georgia 30346
Jouko J. Rissanen(4)............. 3.6 3.6
Finn Partners(4)................. 2.6 2.6
Lucius E. Burch III(5)........... 1.8 1.8
J. Rex Fuqua(6).................. * *
S. Taylor Glover(7).............. * *
William P. Payne................. * *
U. Bertram Ellis, Jr............. * *
Glenn W. Sturm................... * *
W. Michael Heekin................ * *
K. Robert Draughon............... * *
All directors and executives as a
group (11 persons)............. 22.7 22.3
</TABLE>
- -------------------------
* Less than 1% of the outstanding WebMD capital stock.
(1) Includes:
- 2,845,845 shares held of record
- 507,700 shares held of record by Arnold Family Irrevocable Trust
- 276,920 shares held of record by JT Arnold Enterprises LLLP, of which Mr.
Arnold is a general partner and in which he owns a 3% interest with his
wife
- 20,307 shares held by his wife. Other than 8,308 shares held by JT Arnold
Enterprises LLLP attributable to Mr. Arnold, he disclaims beneficial
ownership of the shares held by Arnold Family Irrevocable Trust and JT
Arnold Enterprises LLLP.
(2) Includes:
- 244,382 shares held of record
- 39,461 shares held of record by Andrea L. Jones, as trustee of the 1997
Jones Family Trust
- 2,675,047 shares held of record by Premiere Technologies, of which Mr.
Jones is Chairman of the Board and Chief Executive Officer. Mr. Jones
disclaims beneficial ownership of the shares held by the 1997 Jones
Family Trust and Premiere Technologies.
(3) Includes 69,230 contingent shares to be received by HBO & Company. Does not
include 92,307 warrants that would have been issued upon McKessonHBOC's
attainment of revenue goals by March 31, 1999.
(4) Includes:
- 761,530 shares held of record
- 1,500,000 shares held of record by Finn Partners, of which Mr. Rissanen
is the managing general partner and in which he owns a one-third interest
along with his wife. Other than 500,000 shares held by Finn Partners
attributable to Mr. Rissanen, he disclaims beneficial ownership of the
shares held by Finn Partners.
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(5) Includes:
- 553,840 shares held of record
- 830,760 shares held of record by Burch House, LP, of which Mr. Burch is
the managing partner and in which he owns a one-sixth interest. Other
than the 138,460 shares held by Burch House, LP attributable to Mr.
Burch, he disclaims beneficial ownership of the shares held by Burch
House, LP.
(6) Includes:
- 438,410 shares held of record
- 161,470 shares held of record by Fuqua Holdings I, L.P., of which Fuqua
Holdings, Inc. is the general partner and Mr. Fuqua is the President
(7) Includes:
- 469,310 shares held of record
- 39,994 shares held of record by STG Partners, LP, 1% of which is owned by
STG Management, LLC as general partner and of which Mr. Taylor and his
wife are members. Mr. Taylor is also Chief Executive Officer of STG
Management, LLC. Other than the 485 shares held by STG Partners, LP
attributable to Mr. Taylor, he disclaims beneficial ownership of shares
held by STG Partners, LP.
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INFORMATION REGARDING MEDE AMERICA
MEDE AMERICA'S BUSINESS
MEDE AMERICA is a leading provider of electronic data interchange products
and services to a broad range of providers and payers in the healthcare
industry. MEDE AMERICA offers an integrated set of electronic data interchange
solutions that allows hospitals, pharmacies, physicians, dentists and other
healthcare providers and provider groups to electronically edit, process and
transmit claims, eligibility and enrollment data, track claims submissions
throughout the claims payment process and obtain faster reimbursement for their
services. In addition to offering greater processing speed, MEDE AMERICA's
electronic data interchange products and services reduce processing costs,
increase collection rates and result in more accurate data interchange. MEDE
AMERICA maintains over 540 direct connections with insurance companies, Medicare
and Medicaid agencies, Blue Cross and Blue Shield systems and other third party
payers, as well as over 500 indirect connections with additional payers through
claims clearinghouses. As of March 31, 1999, MEDE AMERICA processed
approximately 950,000 transactions per day for over 65,000 providers located in
all 50 states.
MEDE AMERICA was formed in March 1995 through the consolidation and
subsequent spin-off of three subsidiaries of CES, in connection with the
acquisition by First Data Corporation of CES' credit card processing business.
The three subsidiaries, MEDE AMERICA, Inc., MPC, and Wellmark, which comprised
the healthcare services business of CES, historically provided electronic data
interchange services to hospitals and physicians. Since MEDE AMERICA's
formation, it has expanded both through internal growth and the acquisition of
six healthcare transaction processing businesses. As part of its strategy of
providing an integrated set of electronic data interchange products and services
to a broad range of healthcare providers, MEDE AMERICA has focused on
acquisitions that provide entry into new markets or expand its product set.
Competitive strengths
MEDE AMERICA believes that it has several competitive strengths which will
enable it to capitalize on the significant growth opportunities in the
healthcare electronic data interchange marketplace.
Comprehensive set of electronic data interchange products and
services. MEDE AMERICA has followed a strategy of developing or acquiring
electronic data interchange products and services that may be provided to a
broad range of healthcare clients. MEDE AMERICA's products incorporate open
architecture designs and what MEDE AMERICA regard as "best of breed" technology.
Its products may be purchased as modular additions to the client's existing data
storage and retrieval system, or as part of a comprehensive electronic data
interchange processing system. These products also provide to the client the
capability and the required security to transmit or receive electronic data
interchange transactions across the Internet. They are designed to be compatible
with a broad variety of hospital, medical, pharmacy and dental practice
management and billing systems. In addition, new products can be added to
respond to changing client requirements, and the scalability of MEDE AMERICA's
products permits the client to accommodate increasing transaction volumes
without requiring substantial new investments in software and hardware.
Broad and diversified client base. MEDE AMERICA markets its products and
services to a broad range of healthcare providers including the medical market,
comprised of hospitals, clinics and physicians, the dental market, comprised of
small to medium-sized dental practice groups, and the pharmacy market, which
includes retail pharmacies -- independents and chains -- as well as pharmacy
benefits managers. In addition, it has relationships through practice management
system vendors and other intermediaries. As of March 31, 1999, MEDE AMERICA's
highly diversified client base consisted of approximately 42,000 pharmacies,
8,800 dental offices, 1,100 hospitals and clinics and 14,000 physicians.
Direct relationships with providers and payers. MEDE AMERICA has developed
over 540 direct connections with healthcare payers including Medicare and
Medicaid agencies, Blue Cross and Blue Shield systems and commercial insurance
companies. In addition, MEDE AMERICA can access over
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<PAGE> 291
500 additional payers through contractual relationships with multiple claims
clearinghouses. It also has direct client relationships with providers such as
hospitals, clinics, physicians and pharmacies. The range of MEDE AMERICA's
services and the extent of its connectivity with payers provides the opportunity
to achieve deeper penetration of its provider base, while at the same time
offering more complete solutions to new clients.
Focus on client service. MEDE AMERICA has focused on implementing a wide
range of client service and support functions. These support activities include
the use of automated client service tracking software, expanded client help desk
and account executive support functions, and extensive client feed-back
mechanisms. This focus has enhanced MEDE AMERICA's awareness of client needs and
improved its ability to respond to those needs.
Leading technology and product platforms. MEDE AMERICA recognizes the
critical role of technology and telecommunications platforms to ensure reliable
and high quality service. Over the past two years, it has invested significant
capital in new hardware and software systems resulting in an estimated threefold
increase in transaction processing capacity. MEDE AMERICA has designed its
products on a modular client/server model, using open architecture and commonly
available hardware, with redundant processing capabilities. The redundancies in
MEDE AMERICA's computing capacity and its dual-site operations enable it to
provide uninterrupted processing and data transmission with little, if any,
downtime.
Experienced management team. Each member of MEDE AMERICA's senior
management team has over 15 years of experience in the information technology
and transaction processing industries and has extensive background in working
with emerging companies in the information processing industry. MEDE AMERICA
believes that the range and depth of its senior management team position it to
address the evolving requirements of its clients and to manage the growth
required to meet its strategic goals.
MEDE America's electronic data interchange products and services
MEDE AMERICA's products and services enable its healthcare clients to
process and transmit transactions more efficiently and accurately, reducing
costs and increasing overall processing speed. MEDE AMERICA's electronic data
interchange products incorporate open architecture designs and what it regards
as superior technology and may be purchased as modular additions to existing
data storage and retrieval systems or as part of a comprehensive electronic data
interchange processing system. Open architecture systems are designed to be
compatible with a broad variety of hospital, medical, pharmacy and dental
practice management and billing systems. In addition, new products can be added
to respond to changing client requirements. The scalability of MEDE AMERICA's
products permits its clients to accommodate increasing transaction volumes
without substantial new investments in software and hardware. The following
table illustrates the breadth of MEDE AMERICA's product and service offerings:
MEDE AMERICA'S SET OF EDI PRODUCTS AND SERVICES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
NAME OF PRODUCT/SERVICE DESCRIPTION OF
AND MARKETS SERVED PRODUCT/SERVICE FEATURES CLIENT BENEFITS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Healthcare Claim
Processing
MEDEClaim -- - Downloads claims data from client software - Accelerates cash flow through faster
All Markets applications and provides claims data entry and claim reimbursement.
correction capability. Edits, formats and - Increases cash flow through high level
screens transaction data to meet payer-specific of payer acceptance of edited claims.
requirements. - Improves accounts receivables
management.
- Reduces administrative expenses.
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
NAME OF PRODUCT/SERVICE DESCRIPTION OF
AND MARKETS SERVED PRODUCT/SERVICE FEATURES CLIENT BENEFITS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Other Claim Services
MEDE Assist -- - Bills, on an aggregate basis, pharmacy - Improves accounts receivable
Pharmacy prescriptions and performs non-electronic management and accelerates cash flow
reconciliation and payer accounts receivable through faster claim reimbursement.
management. - Reduces administrative expenses.
Claims Tracking -- - Tracks and provides a lock box service for payer - Improves accounts receivable
Dental reimbursements. management and accelerates cash flow.
- ----------------------------------------------------------------------------------------------------------------------------
Eligibility Verification
MEDE Eligibility -- - Verifies patients' eligibility for specific - Reduces costs by minimizing fraud.
All Markets healthcare benefits for Medicaid and commercial - Ensures patient services are supported
payers. by a designated health benefit plan.
- Reduces administrative expenses.
- ----------------------------------------------------------------------------------------------------------------------------
Medicaid Enrollment
Medicaid - Processes and tracks Medicaid enrollment - Reduces expenses through on-line
Enrollment Manage- applications allowing for the verification and application process.
ment System (MEMS) processing of Medicaid claims. Utilized by - Reduces application processing time.
-- Medical hospitals and government agencies in New York, - Improves Medicaid claims billing and
New Jersey and California. collection.
- Reduces bad debt.
- ----------------------------------------------------------------------------------------------------------------------------
Transaction Switching
MEDE Xchange -- - Routes real-time and batch transaction data from - Reduces costs.
All Markets clients to facilitate transaction transmission - Increases network availability and
to payers. reliability.
- Supports a broad array of access methods. - Provides extensive payer connectivity.
- ----------------------------------------------------------------------------------------------------------------------------
Real-Time Pharmacy
Benefit Management
(PBM)
MEDE Select -- - Adjudicates on-line claims, incorporating - Accelerates cash flow through faster
All Markets patient eligibility and benefit review. claim reimbursement.
- Increases cash flow through high level
of payer acceptance of edited claims.
- Improves accounts receivables
management.
- Reduces administrative expenses.
- ----------------------------------------------------------------------------------------------------------------------------
Pharmacy Practice
Management
Systems (PPM)
Solution Plus -- - Facilitates dispensing, inventory and pricing of - Expands drug pricing and coverage
Pharmacy products for hospital, outpatient and clinic capabilities.
pharmacies. - Improves cash flow through faster
- Provides on-line claims adjudication. claim reimbursement.
- Improves efficiency of pharmacy
management and operations.
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
NAME OF PRODUCT/SERVICE DESCRIPTION OF
AND MARKETS SERVED PRODUCT/SERVICE FEATURES CLIENT BENEFITS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Other Products and
Services
Link -- - Connects physicians to pharmacies for the - Reduces costs related to manual
Medical and Pharmacy transmission of prescriptions and related generation and transmission of
information and approvals. prescriptions.
- Increases accuracy and transmission
speed of prescriptions.
Formulary - Administers and manages formulary programs for - Reduces drug costs and increases PBM
Management -- PBMs. revenue through manufacturer
Pharmacy - Promotes the usage by healthcare plans of incentives.
designated drug products. - Promotes compliance with payer
formularies.
Patient Statements -- - Facilitates patient statement billing. - Reduces costs and improves patient
All Markets relations.
Credit/Debit Card and - Assists patients in making co-payments or paying - Reduces bad debt and enhances patient
Check Guarantee -- other out-of-pocket charges. convenience.
All Markets
Additional Electronic - Processes data relating to referrals, encounters - Reduces practice expense and improves
Data Interchange and benefit precertifications. efficiency and patient relations.
Transactions --
All Markets
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Clients
MEDE AMERICA markets its products primarily to hospitals, pharmacies,
physicians, dentists and other healthcare providers and provider groups,
including HMOs, PPOs and healthcare practice management vendors, renters of and
process transactions for providers in all 50 states. MEDE AMERICA believes it is
one of the largest pharmacy transaction in the U.S. based on the total number of
transactions processed, serving more than 42,000 pharmacies in various
electronic data interchange capacities. MEDE AMERICA has a strong presence in
the medical market in New York, New Jersey, California, Florida, Minnesota, and
Ohio, currently providing electronic data interchange services to more than
1,100 hospitals and clinics, and 14,000 physicians. In the dental market, it
serves more than 8,800 dental offices. No single client of ours accounted for
more than 3% of MEDE AMERICA's revenues in fiscal year 1998.
Sales, marketing and client services
MEDE AMERICA markets its products through a national sales and marketing
organization consisting of 95 associates organized according to market, client
type and product category. It also has a client services organization consisting
of 69 associates dedicated to help desk and client support functions. A
significant component of compensation for all sales personnel is performance
based, although it bases quotas and bonuses on a number of factors in addition
to actual sales, such as client satisfaction and collection of receivables.
MEDE AMERICA's marketing efforts include direct sales, telesales, strategic
partnerships with healthcare vendors, trade shows, direct marketing,
telemarketing, the Internet, and specific advertising and marketing campaigns
where appropriate. In the medical and pharmacy markets, MEDE AMERICA's current
strategic business alliances include relationships with some of the country's
largest hospitals, hospital networks, hospital information systems vendors,
practice management software vendors, pharmacy chains, healthcare organizations
and payers. MEDE AMERICA also maintain strategic alliances with certain state
Medicaid programs.
MEDE AMERICA's strategic alliances with vendors, distributors and dealers
of practice management software have played an important role in building
relationships with individual and small groups of physicians, pharmacies and
dentists. These companies promote MEDE AMERICA's electronic data interchange
products as modular additions to their practice management software. MEDE
AMERICA has also won endorsements from 18 state dental associations,
representing nearly half of all dentists in practice
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today. Its sales channels include targeting dental practice management companies
and payer-driven programs aimed at their network providers.
Research and development
As of March 31, 1999, MEDE AMERICA employed 87 people in the areas of
product design, research and development, and 41 people in the areas of quality
assurance and technical support. MEDE AMERICA's product development strategy is
focused on continuous enhancement of its existing products to increase their
functionality and ease of use, and the development of new products for
additional electronic data interchange transactions and telecommunications
offerings.
Research and development expenditures totaled $2.1 million in fiscal 1996,
$3.3 million in fiscal 1997 and $3.9 million in fiscal 1998. For the nine months
ended March 31, 1999, research and development expenditures totaled $3.4
million. See "MEDE AMERICA Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Technology and operations
Since the beginning of fiscal 1996, MEDE AMERICA has spent over $5.0
million on new hardware and software data center improvements. MEDE AMERICA
estimates that it is currently operating at approximately one-third of its
operating capacity.
Advanced open architecture
MEDE AMERICA's products and applications offer clients the benefits of an
"open architecture" EDI system. As a result, a client's system can expand or
change without incurring significant incremental capital expenditures for
hardware or software. The open architecture of MEDE AMERICA's systems also
improves reliability and connectivity, and facilitates the cross selling of its
products, in part because of the following characteristics:
- SCALABILITY. Products that are scalable whose capacity can be expanded by
additions, or reduced by subtractions, without having to replace the
original product with a new one. MEDE AMERICA's systems are designed to
take full advantage of the client/server environment, UNIX operating
systems and Redundant Array of Inexpensive Disks, referred to in this
section entitled "MEDE AMERICA's business" as "RAID" technology, allowing
clients to expand MEDE AMERICA's processing capacity.
- MODULARITY. Systems that are modular are designed as a number of
components that can be added or subtracted without having to replace
other components. MEDE AMERICA's client/server systems has been developed
with discrete functionality that can be replicated and utilized with
additional hardware. This modularity enables us to optimize application
and hardware performance.
- REDUNDANCY. The implementation of a dual site, geographically dispersed
On-Line Transaction Processing, referred to in this section entitled
"MEDE AMERICA's business" as "OLTP" switch (Twinsburg, Ohio and Mitchel
Field, New York) and RAID technology for batch processing significantly
reduces the risk of business interruption. Each of its sites is designed
to be entirely self-supporting.
- OPEN SYSTEMS. Through the use of an open systems architecture, MEDE
AMERICA can add new functionality to a wide variety of software
applications and hardware without re-designing its products.
- INDUSTRY STANDARDS. Through the adoption and active use of pertinent
standards for healthcare EDI processing, MEDE AMERICA can support client
and payer processing requirements and provide standard interfaces to
other EDI processing organizations.
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- EASE OF USE. MEDE AMERICA's products are either Windows-based or are
based on a similar "graphical user interface" and function in UNIX,
Novell and Windows NT operating environments, thereby enhancing ease of
use by MEDE AMERICA's clients.
Competition
Competition in the market for MEDE AMERICA's products and services is
intense and is expected to increase. The electronic data interchange market is
characterized by rapidly changing technology, evolving user needs and frequent
introduction of new products. Many of MEDE AMERICA's competitors and potential
competitors have significantly greater financial, technical, product
development, marketing and other resources and market recognition than it does.
In addition, many of its competitors also currently have, or may develop or
acquire, substantial installed client bases in the healthcare industry. As a
result of these factors, MEDE AMERICA's competitors may be able to respond more
quickly to new or emerging technologies, changes in client requirements and
political, economic or regulatory changes in the healthcare industry, and may be
able to devote greater resources to the development, promotion and sale of their
products than it can.
MEDE AMERICA's principal competitors include:
- National Data Corporation, Envoy Corporation and SSI, Inc. in claims
processing and eligibility verification;
- QuadraMed Corporation in claims processing;
- Medifax, Inc. and HDX Healthcare Data Exchange Corporation in eligibility
verification; and
- Envoy Corporation in the dental market.
MEDE AMERICA also may face potential competition from other companies not
currently involved in healthcare electronic data transmission, which may enter
the market as electronic data interchange becomes more established. MEDE AMERICA
believes that existing and potential clients in the healthcare electronic data
interchange market evaluate the products and services of competing EDI providers
on the basis of the compatibility of the provider's software, cost, ease of
installation, the range of applications available, the quality of service and
the degree of payer connectivity.
Employees
As of March 31, 1999, MEDE AMERICA employed 406 people, including 113 in
operations, 95 in sales and marketing, 69 in client services, 87 in research and
development, 32 in finance and administration and ten in corporate. None of MEDE
AMERICA's employees is represented by a union or other collective bargaining
group. MEDE AMERICA believes its relationship with its employees to be
satisfactory.
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Facilities
The following chart summarizes MEDE AMERICA's facilities and their monthly
transaction capacities:
<TABLE>
<CAPTION>
ESTIMATED
MONTHLY
TRANSACTION OWNED/LEASED
FACILITY PERSONNEL TRANSACTION TYPE CAPACITY EXPIRATION DATE
-------- --------- ---------------- ----------- ---------------
<S> <C> <C> <C> <C>
Ohio (Primary Medical and 145 Eligibility 2,000,000 Owned
Pharmacy Data Center) Real-Time Benefit Management 6,000,000
Switching 48,000,000
Claims 3,000,000
New York (Secondary Medical 39 Eligibility 2,000,000 January 2003
and Pharmacy Data Center) Enrollment 25,000
Georgia (Dental Data Center) 63 Dental Claims 1,600,000 January 2001
Corporate Headquarters, Sales & 141 Real-Time Benefit Management 2,000,000 Various dates between
Development Offices (5 sites) and January 1999 and
PBM Processing February 2003
St. Louis (HII Facility) 18 Claims N/A(1) May 2005
</TABLE>
- -------------------------
(1) All claims of this facility are outsourced to a third party processor.
Intellectual property
MEDE AMERICA considers its methodologies, computer software and many of its
databases to be proprietary. MEDE AMERICA relies on a combination of trade
secrets, copyright and trademark laws, contractual provisions and technical
measures to protect its rights in various methodologies, systems, products and
databases. MEDE AMERICA has no patents covering its software technology. Due to
the nature of its application software, MEDE AMERICA believes that patent and
trade secret protection are less significant than its ability to further
develop, enhance and modify its current products. However, any infringement or
misappropriation of its proprietary software and databases could disadvantage
MEDE AMERICA in its efforts to retain and attract new clients in a highly
competitive market and could cause us to lose revenues or incur substantial
litigation expense. MEDE AMERICA seeks to protect its proprietary information
through nondisclosure agreements with its consultants, clients and potential
clients, and limits access to, and distribution of, its proprietary information.
Substantial litigation regarding intellectual property rights exists in the
software industry, and MEDE AMERICA expects that software products may be
increasingly subject to third-party infringement claims as the number of
competitors in MEDE AMERICA's industry segment grows and the functionality of
products overlaps. Although MEDE AMERICA believes that its products do not
infringe on the intellectual rights of others, there can be no assurance that
such a claim will not be asserted against it in the future, or that a license or
similar agreement will be available on reasonable terms in the event of an
unfavorable ruling on any such claim.
Legal proceedings
In June 1995, MEDE AMERICA acquired substantially all of the assets of
Latpon for a purchase price of $2,470,000, plus the assumption of approximately
$963,000 of liabilities. On June 6, 1998, Curtis J. Oakley filed a complaint
with the Supreme Court of the State of New York, County of Nassau asserting
multiple causes of action against several persons, including a cause of action
naming us as a defendant, based on his alleged ownership of a 22% interest in
Latpon. According to the complaint, Mr. Oakley's claim against us is for $2
million or such other amount as may be equivalent to the present value of his
alleged ownership interest in Latpon's predecessor. MEDE AMERICA believes that
it is fully indemnified by the former owners of Latpon under the Latpon
acquisition agreement against any costs or damages arising from this claim. By
letter dated July 10, 1998, one of the former owners of Latpon confirmed that he
would indemnify us in accordance with the terms of the acquisition agreement. On
August 25, 1998, MEDE AMERICA filed a motion to dismiss this claim. That motion
was granted on January 27, 1999. On May 14, 1999, the plaintiff filed a notice
of appeal.
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On May 14, 1999, National Data Corporation, or NDC filed suit against MEDE
America and its subsidiary Healthcare Interchange, Inc., or HII, which was
acquired by the Company in October 1998, in the Superior Court of DeKalb County,
Georgia, alleging, among other things, unjust enrichment, breach of contract,
misappropriation of trade secrets and interference with contract. The action
arises out of an alleged breach of a license agreement entered into between HII
and Healthcare Affiliated Services, Inc., which was subsequently acquired by
NDC. The agreement provided for the termination of the license in the event HII
was sold or merged into an entity other than RightCHOICE Managed Care, Inc.,
formerly a 50% shareholder of HII. The complaint seeks to recover $5 million in
compensatory damages, plus punitive damages and litigation expenses, including
attorneys' fees. On April 1, 1999, NDC had issued a demand letter to the Company
demanding, among other things, that HII cease using the licensed software and
assign to NDC certain agreements with hospital and physician clients. On April
9, 1999, NDC offered to license the software retroactively to HII as of the
acquisition date and sell the source code to HII for $2.3 million. A total of 88
hospital clients, and approximately 700 physician clients of HII, providing
monthly revenue to HII of approximately $200,000, utilize the software licensed
pursuant to the agreement. Because the software is not Year 2000 compliant and
migration of the hospital and physician clients to other software is underway in
any event, HII rejected the offer. Further negotiations with NDC were
unsuccessful in reaching what the Company believes to be a fair resolution of
the issue. The Company has responded to NDC's complaint, denying the
allegations, and intends to vigorously contest the action.
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MEDE AMERICA SELECTED CONSOLIDATED FINANCIAL DATA
The statement of operations data presented below for the years ended June
30, 1996, 1997 and 1998 and the balance sheet data as of June 30, 1997 and 1998
are derived from, and qualified by reference to, the audited consolidated
financial statements of MEDE AMERICA included elsewhere herein. The statement of
operations data for the year ended June 30, 1995 and the balance sheet data as
of June 30, 1995 and 1996 are derived from, and qualified by reference to, the
audited consolidated financial statements of MEDE AMERICA not included herein.
The statement of operations data for the nine months ended March 31, 1998 and
1999 and the balance sheet data as of March 31, 1998 and 1999 are derived from,
and qualified by reference to, the unaudited consolidated financial statements
of MEDE AMERICA. In the opinion of management, the unaudited consolidated
financial statements have been prepared on the same basis as the audited
consolidated financial statements and include all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
financial position and results of operations for such periods. The results for
the interim period are not necessarily indicative of the results for the full
fiscal year. The selected consolidated financial data should be read in
conjunction with, and is qualified in its entirety by, the Consolidated
Financial Statements of MEDE AMERICA, the notes thereto and the other financial
information included elsewhere in this proxy statement/prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED JUNE 30, ENDED MARCH 31,
------------------------------------------ ----------------------
1995 1996 1997(1) 1998(1) 1998(1) 1999(1)
-------- -------- -------- ------- --------- ---------
(IN THOUSANDS,
(IN THOUSANDS, EXCEPT PER SHARE DATA) EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues(2)......................................... $ 16,246 $ 31,768 $ 35,279 $42,290 $30,189 $39,756
Operating Expenses:
Operations........................................ 9,753 19,174 16,817 16,958 12,485 14,975
Sales, marketing and client services.............. 3,615 7,064 8,769 10,765 7,769 9,456
Research and development.......................... 2,051 2,132 3,278 3,941 2,886 3,379
General and administrative........................ 3,119 6,059 5,263 4,865 3,307 4,138
Depreciation and amortization..................... 2,995 5,176 5,460 7,143 5,248 6,460
Write-down of intangible assets................... 8,191(3) 9,965(4) -- -- -- --
Acquired in-process research and development(5)... -- -- 1,556 -- -- --
Other charges(6).................................. 2,864 538 2,301 -- -- --
-------- -------- -------- ------- ------- -------
Total operating expenses............................ 32,588 50,108 43,444 43,672 31,695 38,408
-------- -------- -------- ------- ------- -------
Income (loss) from operations....................... (16,342) (18,340) (8,165) (1,382) (1,506) 1,348
Other (income) expenses............................. -- 313 (893) (12) 13 --
Interest expense, net............................... 189 584 1,504 3,623 2,470 (2,822)
-------- -------- -------- ------- ------- -------
Loss before provision for income taxes and
extraordinary item................................ (16,531) (19,237) (8,776) (4,993) (3,989) (1,474)
Provision for income taxes.......................... 70 93 57 42 37 103
-------- -------- -------- ------- ------- -------
Loss before extraordinary item...................... (16,601) (19,330) (8,833) (5,035) (4,026) (1,577)
Extraordinary item.................................. -- -- -- -- -- (1,619)
Preferred stock dividends........................... (27) (2,400) (2,400) (2,400) (1,800) (1,444)
-------- -------- -------- ------- ------- -------
Net loss applicable to common stockholders.......... $(16,628) $(21,730) $(11,233) $(7,435) $(5,826) $(4,640)
======== ======== ======== ======= ======= =======
Basic and diluted net loss per common share:
Loss before extraordinary item.................... $ (3.17) $ (4.14) $ (2.07) $ (1.31) $ (1.03) $ (0.42)
Extraordinary item................................ -- -- -- -- -- (0.23)
-------- -------- -------- ------- ------- -------
Net loss applicable to common stockholders........ $ (3.17) $ (4.14) $ (2.07) $ (1.31) $ (1.03) $ (0.65)
======== ======== ======== ======= ======= =======
Weighted and average common shares outstanding --
Basic and diluted................................. 5,238 5,245 5,425 5,679 5,677 7,116
======== ======== ======== ======= ======= =======
</TABLE>
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<TABLE>
<CAPTION>
AS OF JUNE 30,
--------------------------------------- AS OF MARCH 31,
1995 1996 1997(1) 1998(1) 1999
------- ------- -------- -------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
HISTORICAL BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments......... 8,554 2,639 1,919 2,950 4,042
Working capital........................................... $ 504 $(4,207) $ (2,567) $ 2,345 $ 9,372
Total assets.............................................. 59,511 43,031 48,090 59,394 78,914
Long-term debt, including current portion................. 5,805 11,601 25,161 41,324 6,771
Redeemable cumulative preferred stock..................... 24,023 26,423 28,823 31,223 --
Total stockholders' equity (net capital deficiency)....... 12,942 (8,472) (17,438) (24,692) 61,351
</TABLE>
- -------------------------
(1) As restated, to adjust the write-off of acquired in-process research and
development and the amortization of goodwill resulting from the TCS
acquisition. See Note 13 of Notes to Consolidated Financial Statements of
MEDE AMERICA.
(2) During the periods presented, MEDE AMERICA made a series of acquisitions and
divested certain non-core or unprofitable operations. Revenues attributable
to these divested operations, which are included in the statement of
operations data, were $1,709,000, $3,617,000, $2,252,000, $241,000 and
$241,000 in the fiscal years ended June 30, 1995, 1996, 1997 and 1998 and
the nine months ended March 31, 1998, respectively.
(3) Reflects the write-off of goodwill related to the acquisitions of MPC and
Wellmark.
(4) Reflects the write-down of costs relating to client lists and related
allocable goodwill obtained in the acquisition of MEDE OHIO.
(5) Reflects the write-off of acquired in-process research and development costs
upon the consummation of the TCS acquisition.
(6) Reflects expenses of $2,864,000 relating to the spin-off of MEDE AMERICA by
CES in the fiscal year ended June 30, 1995 and expenses recorded relating to
contingent consideration paid to former owners of acquired businesses of
$538,000 and $2,301,000 in the fiscal years ended June 30, 1996 and 1997,
respectively.
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MEDE AMERICA MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
MEDE AMERICA is a leading provider of electronic data interchange products
and services to a broad range of providers and payers in the healthcare provider
industry. MEDE AMERICA's integrated set of electronic data interchange solutions
and services allows hospitals, pharmacies, physicians, dentists and other
healthcare providers and provider groups to electronically edit, process and
transmit claims, eligibility and enrollment data, track claims submissions
throughout the claims payment process and obtain faster reimbursement for their
services. Currently, MEDE AMERICA processes approximately 950,000 transactions
per business day for over 65,000 providers located in all 50 states.
MEDE AMERICA was formed in March 1995 through the consolidation and
subsequent spin-off of three subsidiaries of CES, in connection with the
acquisition by First Data Corporation of CES' credit card processing business.
The three subsidiaries, MEDE AMERICA, Inc., MPC and Wellmark, which comprised
the healthcare services business of CES, historically provided electronic data
interchange services to hospitals and physicians. Their combined financial
results were reflected in the fiscal 1995 financial statements on a full year
basis.
Since its formation, MEDE AMERICA has expanded both through internal growth
and the acquisition of six healthcare transaction processing businesses. As part
of its strategy of providing an integrated set of electronic data interchange
products to a broad range of healthcare providers, MEDE AMERICA has focused on
acquisitions that provide entry into new markets or expand its product set. MEDE
AMERICA has accounted for all acquisitions under the purchase method of
accounting. MEDE AMERICA has actively pursued the integration of its
acquisitions and, in the process, has either divested, closed or modified
various operations of the acquired entities in order to eliminate non-core or
redundant operations and achieve cost savings and operating efficiencies. These
integration activities impacted MEDE AMERICA's financial results in the fiscal
years ended June 30, 1995, 1996, 1997 and 1998 and are ongoing.
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The following table summarizes MEDE AMERICA's acquisitions and divested
products and operations:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
PRIMARY PRODUCTS OF DIVESTED PRODUCTS OF
DATE FOUNDING/ACQUIRED FOUNDING/ACQUIRED
FOUNDING COMPANIES ACQUIRED MARKET COMPANY COMPANY DATE DIVESTED
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
MEDE AMERICA, Inc. 4/94(1) Medical Eligibility Verification, -- --
Enrollment
- ----------------------------------------------------------------------------------------------------------------------------------
MPC 5/94(1) Medical Hospital Claims, Physician Data Entry 1/97
Billing Physician Billing 12/96
Physician Billing 8/97
- ----------------------------------------------------------------------------------------------------------------------------------
Wellmark 5/94(1) Medical Hospital Claims, Physician -- --
Billing
- ----------------------------------------------------------------------------------------------------------------------------------
COMPANIES ACQUIRED BY MEDE AMERICA
- ----------------------------------------------------------------------------------------------------------------------------------
MEDE OHIO 3/95 Pharmacy Switching, PBM, Third Party Practice Management 2/96
Billing Software
Practice Management 12/97
Software
- ----------------------------------------------------------------------------------------------------------------------------------
Latpon 6/95 Medical Hospital Claims Physician Billing 3/96
- ----------------------------------------------------------------------------------------------------------------------------------
EC&F/Premier 10/95 Dental Dental Claims, Practice Practice Management 3/97
Management Software Software
- ----------------------------------------------------------------------------------------------------------------------------------
TCS 2/97 Pharmacy/ PBM, Switching, Eligibility -- --
Medical Verification
- ----------------------------------------------------------------------------------------------------------------------------------
Stockton 11/97 Pharmacy PBM -- --
- ----------------------------------------------------------------------------------------------------------------------------------
HII 10/98 Medical Hospital Claims Physician -- --
Claims
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents date acquired by CES.
In March 1995, MEDE AMERICA's largest stockholder acquired all of the
outstanding shares of MEDE OHIO, formerly known as General Computer Corporation,
for a cash purchase price of approximately $22,593,000, including transaction
expenses. The largest stockholder subsequently merged MEDE OHIO into MEDE
AMERICA. The purchase price MEDE AMERICA paid for MEDE OHIO to its largest
stockholder was equal to the purchase price paid by the largest stockholder.
MEDE OHIO develops electronic data interchange systems for the pharmacy market
and provides transaction switching/routing services. At the time of its
acquisition, MEDE OHIO had been incurring significant losses for over two years
and was in very poor financial condition. The acquisition was accounted for
under the purchase method and MEDE AMERICA recorded total intangible assets of
$25,814,000, consisting of $892,000 of software which was completed and not
in-process at the time of the acquisition, $2,527,000 of client lists and
$22,395,000 of goodwill. During fiscal year 1996, MEDE AMERICA wrote-down
$9,965,000 of costs relating to client lists and related allocable goodwill due
to a loss of approximately 25% of the acquired MEDE OHIO client base. The loss
of this significant portion of MEDE OHIO's client base was primarily due to
problems MEDE AMERICA experienced in the post-merger integration of MEDE OHIO's
operations into MEDE AMERICA's operations. This post-merger integration process
took place during the same general time period in which MEDE AMERICA was
spun-off from CES and a new management team was installed at MEDE AMERICA. MEDE
AMERICA is generally amortizing the software over three years and the remaining
value of client lists is being amortized over five years. The goodwill is being
amortized over 20 years.
In June 1995, MEDE AMERICA acquired substantially all of the assets of
Latpon for a cash purchase price of approximately $2,470,000, plus the
assumption of approximately $963,000 of liabilities consisting primarily of
long-term debt. Latpon, a developer of claims processing software, provided
electronic data interchange transaction processing services to hospitals and
hospital-based physician groups. Latpon also provided electronic and manual
business office administrative services. The acquisition was
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accounted for under the purchase method and MEDE AMERICA recorded total
intangible assets of $2.3 million, consisting of $993,000 of software and client
lists and $1.3 million of goodwill. MEDE AMERICA is generally amortizing the
software over five years and are amortizing the client lists and goodwill over
five years and 20 years, respectively.
In October 1995, MEDE AMERICA acquired two commonly-owned companies, EC&F,
an all payer electronic data interchange dental claims processor, and Premier, a
dental practice management software vendor. The acquisitions were funded with an
initial cash payment of $4.0 million, including transaction expenses, and
contingent earn-out payments based on the achievement of certain EBITDA growth
targets by the EC&F business over three one-year periods ending on September 30,
1998. MEDE AMERICA recorded expenses of $538,000 during fiscal year 1996
relating to the first such period and an aggregate $2.3 million during fiscal
year 1997 primarily relating to the second and third such periods. At the
conclusion of the earn-out period, it was determined that no additional earn-out
payments would be required. The acquisitions of EC&F and Premier were accounted
for under the purchase method and MEDE AMERICA recorded total intangible assets
of $4.4 million, consisting of $764,000 of software, and $3.6 million of
goodwill. MEDE AMERICA generally is amortizing the software over three years and
are amortizing the goodwill over 20 years. MEDE AMERICA sold Premier in January
1997 for a cash payment of $388,000. There was no gain or loss on the sale of
Premier.
In February 1997, MEDE AMERICA acquired certain assets of TCS, a provider
of pharmacy switching and PBM transaction processing systems and services for
pharmacies and eligibility verification services for physicians, for a total
cash payment of $11.5 million, including transaction expenses. The acquisition
was accounted for under the purchase method and MEDE AMERICA recorded total
intangible assets of $11.1 million, consisting of $1.6 million of in-process
research and development, $3.0 million of software and $6.5 million of goodwill.
As of the date of the acquisition, MEDE AMERICA wrote off the acquired
in-process research and development which had not reached technological
feasibility and had no alternative future use. MEDE AMERICA generally is
amortizing the software over three years and are amortizing the goodwill over
seven years.
The in-process research and development acquired from TCS consisted of
advanced Windows software technology for PC and client server platforms for
healthcare electronic data interchange transactions. Products under development
included a plan member eligibility verification product for workers
compensation, a medical claims processing system to meet the HCFA 1500
electronic data interchange industry standard and a switching system for
internet claims from retail pharmacies. At the time of the acquisition, MEDE
AMERICA estimated that continued development activities for six months to one
year resulting in additional estimated research and development costs of
$460,000 would be required in order to prove feasibility and bring the project
to commercial viability. It was the opinion of management that such projects had
an above average probability of successful completion and could contribute to
revenue, profit and cash flow within 18 to 24 months from the date of purchase.
At this time, all three projects are substantially complete. However, any or all
of these projects could fail to produce an economic gain. Such failure, if
encountered, would not affect MEDE AMERICA's current product set and financial
results, but would decrease its opportunities for growth. Estimated costs to
complete the acquired in-process research and development projects as of the
date of acquisition were as follows:
ESTIMATED RESEARCH AND DEVELOPMENT EXPENSE (IN THOUSANDS)
<TABLE>
<CAPTION>
WORKERS
COMP. HCFA 1500 PHARMACY TOTAL
------------- --------- -------- -----
<S> <C> <C> <C> <C>
Fiscal 1997..................................... $ 58 $ 70 $ 65 $193
Fiscal 1998..................................... 80 97 90 267
---- ---- ---- ----
Total...................................... $138 $167 $155 $460
==== ==== ==== ====
</TABLE>
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Prior to the consummation of the acquisition, TCS had incurred development
costs of $67,000, for the workers compensation eligibility product, $125,000 for
HCFA 1500 and $56,000 for the internet pharmacy claims product, the three
in-process research and development projects shown above.
MEDE AMERICA determined the value of the purchased in-process technologies
by estimating the projected net cash flows related to each of the in-process
products. The resulting net cash flows were then discounted back to their net
present values. The amount of the write-off of in-process research and
development costs was then limited to the portion allocable to pre-acquisition
development costs incurred by TCS versus post-acquisition costs incurred by us.
The net cash flows were based on management's estimates of the costs necessary
to complete the development of the products, the revenues that would be earned
after commercial availability and the estimated operating expenses associated
with those revenues. The projections were based on the following principal
assumptions:
For the workers compensation eligibility product, the projections assumed
commercial availability in January 1998 and revenue growth from $431,000 in
fiscal 1998 to $1.3 million in fiscal 2002, an annual rate increase of
approximately 25%. For HCFA 1500, the projections assumed commercial
availability in March 1998. It was assumed that revenues from the HCFA 1500
product would grow from $1.4 million in fiscal 1998 to $5.5 million in fiscal
2002, increasing at an annual rate of 50% in the first year of commercial
availability, 35% in the second year and at a rate of 25% per year thereafter.
For the internet pharmacy claims product, the projections assumed commercial
availability in December 1997. It was assumed that revenues from the internet
pharmacy claims product would grow from $41,000 in fiscal 1997 to approximately
$3.2 million in fiscal 2002, increasing at an annual rate of approximately 35%
in the first year of commercial availability, 30% in the second year and at a
rate of 25% per year thereafter.
In all three cases, post-development operating expenses, including sales,
advertising and promotion and general and administrative costs, were projected
to grow at the rate of 10% per year between fiscal 1999 and 2002. No significant
synergies were projected for any of the three in-process products because MEDE
AMERICA had no comparable products in the market or in development and no
penetration in the products' prospective user bases.
The projected net cash flows for the in-process products were discounted to
their present values using a discount rate of 18%. Such discount rate was
composed of two factors: MEDE AMERICA's estimated weighted average cost of
capital (the rate of return an investment would have to generate in order to
provide the required rate of return to MEDE AMERICA's equity and long-term debt
capital), which was calculated to be approximately 13%, and a 5% risk factor
reflecting the uncertainty of successful completion and market acceptance of the
in-process products. Together, the weighted average cost of capital and risk
factor yield a discount factor of 18%. MEDE AMERICA used a 13% discount rate
factor to value fully developed software, as it faces substantially the same
risks as the business as a whole. The 5% risk factor reflected the fact that the
in-process products did not involve complex or innovative technologies, and
primarily reflected the risk of market acceptance once the developed products
were released to customers.
Since the TCS acquisition, all three in-process products have been
completed and two are in the early stages of commercialization. As of March 31,
1999, none of these products had generated significant revenues, and, given the
results of MEDE AMERICA's marketing efforts to date, MEDE AMERICA currently
believes that the revenues derived from these three products will be lower than
projected.
The market for the workers compensation eligibility product has been less
receptive than had been anticipated and this product did not generate any
revenues as of March 31, 1999. However, MEDE AMERICA believes that, over time
and with increased marketing effort, this product will achieve commercial
viability.
The introduction of the HCFA 1500 product experienced roll out delays. As a
result of the reorganization agreement between Healtheon and MEDE AMERICA and
the anticipated integration of their operations, the development of the HCFA
1500 product has been suspended and is expected to be integrated with the
Healtheon platform at a later date.
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The internet pharmacy product is the only one of the three in-process
products acquired from TCS that had generated revenues by the end of fiscal
1998. However, the revenues produced were approximately 22% of the revenues
projected for it at the time of the acquisition. The commercial introduction of
this product was delayed due to changes in the Department of Health and Human
Services standards governing the use of the Internet to process pharmacy claims
and uncertainty over the privacy standards that will ultimately prevail. MEDE
AMERICA has participated in the debate on the appropriate standards, which is
ongoing. Although MEDE AMERICA is currently processing transactions with this
product for a small number of pharmacy clients, it is unable to predict the
effect of the final regulations on the pharmacy internet product acquired from
TCS.
Although any or all of these projects could fail to generate significant
returns for MEDE AMERICA and such failure could render the TCS acquisition less
valuable to us than had been anticipated, such failure would not affect MEDE
AMERICA's current set of products or, in MEDE AMERICA's opinion, have a material
impact on its results of operations or overall financial condition.
In November 1997, MEDE AMERICA acquired certain assets and assumed certain
liabilities of Stockton, a provider of PBM transaction processing systems and
related services for the pharmacy market. Stockton was purchased for an initial
cash payment of $10.7 million including transaction expenses, and a contingent
earnout payment based upon the achievement of certain revenue growth targets.
Based on revenues recorded through September 30, 1998 by Stockton, MEDE AMERICA
has accrued additional contingent consideration of $2.0 million as of September
30, 1998 which was treated as additional purchase price and was, therefore,
added to goodwill. Based upon revenue generated, MEDE AMERICA made a payment of
approximately $1.8 million to the selling shareholders on February 23, 1999.
Certain additional funds totalling approximately $100,000 were placed in escrow
as being in dispute pursuant to the earn-out provisions. Depending on the
outcome of litigation between the selling shareholders of Stockton and one of
its customers, those funds will be released accordingly. The acquisition was
accounted for under the purchase method and MEDE AMERICA recorded total
intangible assets of $10.4 million, consisting of $2.1 million of software and
client lists and $8.3 million of goodwill. MEDE AMERICA is generally amortizing
the software over five years and is amortizing the client lists and goodwill
over five years and 20 years, respectively.
In October 1998, MEDE AMERICA acquired HII, a provider of electronic data
interchange transaction processing services to hospitals and physician groups in
Missouri, Kansas and Illinois. Prior to the purchase of HII, Intercare and
Telemedical, two unrelated healthcare services divisions, were divested from HII
in separate transactions. MEDE AMERICA did not acquire such businesses or any
proceeds from the disposition of those businesses. HII was purchased for a total
cash payment of approximately $11.7 million, including transaction expenses. The
acquisition was accounted for under the purchase method and MEDE AMERICA
recorded total intangible assets of approximately $11.0 million, consisting of
$2.7 million of client lists and approximately $8.3 million of goodwill. MEDE
AMERICA is amortizing the client lists over five years and goodwill over 20
years.
Medic agreement
On July 17, 1998, MEDE AMERICA entered into a Transaction Processing
Agreement with Medic Computer Systems, Inc., a subsidiary of Misys plc that
develops and licenses software for healthcare providers, principally physicians,
MSOs and PPMs. Under the processing agreement, MEDE AMERICA will undertake
certain software development obligations, and on July 1, 1999, it will become
the exclusive processor, subject to certain exceptions, of medical reimbursement
claims for Medic's subscribers submitted to payers with whom MEDE AMERICA has or
establishes connectivity. Under the processing agreement, MEDE AMERICA will be
entitled to revenues to be paid by payers, in respect of which a commission is
payable to Medic, as well as fees to be paid by Medic. The processing agreement
sets forth detailed performance criteria and development and implementation
timetables; inability to meet these criteria may result in financial penalties
or give Medic a right to terminate this agreement. The agreement may also be
terminated by Medic within a period of eight months after a change of control of
MEDE AMERICA. The processing agreement is for a fixed term of five years, with
annual renewals thereafter.
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Contemporaneously, to ensure a close working relationship between the
parties, on July 17, 1998 MEDE AMERICA granted to Medic a warrant to acquire
1,250,000 shares of MEDE AMERICA's common stock, at a per share exercise price
equal to the price of the common stock to the public in the initial public
offering or, in the event that the initial public offering was not completed by
March 31, 1999 at an exercise price equal to $8 per share. The Medic warrant
contains customary weighted average antidilution provisions. The Medic warrant
vests over a two year period, subject to acceleration upon a change of control,
and may be exercised up to five years after issuance. The Medic warrant was
valued at $3.9 million using the Black-Scholes Option Pricing Model and is
recorded in other assets. The Medic warrant is being amortized over the life of
the processing agreement, five years. MEDE AMERICA and certain principal
stockholders have agreed that following the completion of the initial public
offering and until the earlier of the termination of the processing agreement or
the disposition by Medic and its affiliates of at least 25% of the shares of
common stock issuable under the Medic warrant, Medic shall have the right to
designate one director to MEDE AMERICA's board of directors. Medic named a
designee effective February 12, 1999.
Revenues
Revenues are derived from the sale of transaction processing products and
services primarily on a fee-for-transaction basis. Transaction fees vary
depending upon transaction type and service provided. MEDE AMERICA currently
receives fees from providers for the majority of its transactions including
claims processing, eligibility verification, claims switching, pharmacy script
processing and tracking and Medicaid enrollment. It also receives fees from
payers for the transmission of electronic claims and formulary payments from
pharmaceutical manufacturers relating to its PBM script processing and
management reporting services. These transaction-based revenues comprise the
predominant portion of MEDE AMERICA's total revenues and tend to be recurring.
Other revenue is derived from one-time payments related to installation and
implementation services, software license fees and sales of computers and
related hardware. For a more complete description, see the section entitled
"MEDE AMERICA's business -- Set of electronic data interchange products and
services" on page 276.
Transaction-based revenues and related formulary services revenues, to the
extent applicable, which collectively constitute the majority of MEDE AMERICA's
total revenues, are recognized at the time the transactions are processed and
the services are provided. Revenues associated with software support and
implementation fees, each constituting less than 3% of MEDE AMERICA's revenues
for the fiscal year ended June 30, 1998 and the nine months ended March 31,
1999, are recognized ratably over the contract period or as the service is
provided. Revenue from licensing of software, which also constitutes less than
3% of its total revenues for the fiscal year ended June 30, 1998 and the nine
months ended March 31, 1999, is recognized upon installation if it is determined
that MEDE AMERICA has no significant remaining obligations and collectibility of
the resulting receivable is considered probable.
Operating expenses
Operations expense. Operations expense consists of:
- data and voice telecommunications expense
- salaries and benefits for operations employees
- other costs associated with transaction processing and services provided
to clients, such as
- network and telecommunications
- maintenance
- computer operations
- systems administration, facilities and other additional indirect
expenses
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Since 1996, operations expense as a percentage of revenues and operations
expense per transaction have declined as a result of MEDE AMERICA's integration
and restructuring efforts and increased operating leverage. Restructuring
charges recorded in connection with its integration activities have resulted in
variability in its quarterly operating results.
Sales, marketing and client services expense. Sales, marketing and client
services expense consists primarily of salaries, benefits, commissions and
related indirect costs and expenditures for marketing programs, trade shows,
advertising, help desk software and related client communications. As MEDE
AMERICA continues to implement its growth strategy, sales, marketing and client
services expenses are expected to continue to increase.
Research and development expense. Research and development expense consists
primarily of salaries, benefits and related indirect expenses associated with
the design, research and development of new products and enhancements to
existing current products. The development of new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility has been established. After technological feasibility
has been established, any additional software development costs are capitalized
in accordance with Statement of Financial Accounting Standards, referred to as
"SFAS", No. 86, "Accounting For the Cost of Computer Software To Be Sold, Leased
or Otherwise Marketed." Amortization of purchased software and technology and of
capitalized software development costs is provided on a product-by-product basis
at the greater of the amount computed using the ratio of current revenues for a
product to the total of current and anticipated future revenues or the
straight-line method over the remaining estimated economic life of the product.
Generally, an original estimated economic life of three to five years is
assigned to purchased software and technology and an original estimated economic
life of five years is assigned to capitalized software development costs.
Amortization begins in the period in which the related product is available for
general release to customers. During the fiscal year ended June 30, 1998 and the
nine months ended March 31, 1999, MEDE AMERICA capitalized $462,000 and
$820,000, respectively, of software development costs for projects for which
technological feasibility has been established but were not yet available for
client release. Prior to July 1, 1997, MEDE AMERICA did not have any software
development projects for which significant development costs were incurred
between the establishment of technological feasibility and general client
release of the product. MEDE AMERICA believes that the development of enhanced
and new product offerings are essential to remaining competitive and it expects
that development expenses will increase in the future.
General and administrative expense. General and administrative expense
primarily consists of salaries, benefits and related indirect costs for the
administrative, executive, finance, legal, human resources and internal systems
personnel, as well as accounting and legal fees. As MEDE AMERICA implement its
growth strategy, general and administrative expenses are expected to increase.
Depreciation and amortization expense. MEDE AMERICA depreciates the cost of
its tangible capital assets on a straight-line basis over the estimated economic
life of the asset: three to five years for computer equipment, five years for
furniture and fixtures, and 20 to 25 years for buildings and improvements.
Acquisition-related intangible assets, which include the value of software and
client lists, are amortized based on the estimated useful economic life of the
asset at the time of acquisition, and therefore will vary among acquisitions.
MEDE AMERICA recorded amortization expense relating to goodwill and other
intangible assets of $3.7 million during the fiscal year ended June 30, 1997,
$5.1 million during the fiscal year ended June 30, 1998, and $4.9 million during
the nine months ended March 31, 1999.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from MEDE AMERICA's consolidated statements of operations expressed as a
percentage of total revenues.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
-------------------- ------------------
1996 1997 1998 1998 1999
---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues.......................................... 100% 100% 100% 100% 100%
Operating Expenses:
Operations...................................... 60 48 40 41 38
Sales, marketing and client services............ 22 25 25 26 24
Research and development........................ 7 9 9 10 8
General and administrative...................... 19 15 12 11 10
Depreciation and amortization................... 16 15 17 17 16
</TABLE>
Subsequent to the issuance of its consolidated financial statements for the
fiscal year ended June 30, 1998, MEDE AMERICA determined that it was necessary
to revise the valuation of the write-off of in-process research and development
incurred in connection with the TCS acquisition in February 1997. As a result,
its financial statements for the fiscal years ended June 30, 1997 and 1998 and
the nine months ended March 31, 1998 have been restated from the amounts
previously reported in order to reflect the effects of the adjustment to the
write-off of in-process research development. See Note 13 of MEDE AMERICA notes
to consolidated financial statements.
Nine months ended March 31, 1999 compared to nine months ended March 31, 1998
Revenues in the nine months ended March 31, 1999 were $39.8 million,
compared to $30.2 million in the corresponding period of fiscal 1998,
representing an increase of 32%. Approximately 55% of the increase was
attributable to growth of the existing business and the remainder to incremental
revenue from the acquisition of The Stockton Group in November 1997 and HII in
October 1998. MEDE AMERICA processed 227.8 million transactions in the nine
months ended March 31, 1999, compared to 171.0 million transactions processed in
the corresponding period of fiscal 1998, representing an increase of 33%.
Approximately 20% of the increase resulted from the incremental transactions
from the acquisition of Stockton and HII, and the remainder to the addition of
new clients and the increased transaction volume from existing clients. The
average price per transaction received by MEDE AMERICA for the nine months ended
March 31, 1999 declined by 5%, compared with the corresponding period of the
prior fiscal year, as a result of a relatively higher proportion of lower-priced
Pharmacy division switching transactions compared to the other divisions'
higher-priced transactions, and a greater portion of transactions that were
processed under contracts with volume-based pricing terms, partially offset by
the acquisition of HII and its relatively higher priced transactions when
compared to MEDE AMERICA's average in the three and nine month periods.
Operating expenses
Operations expense was $5.3 million and $15.0 million in the three and nine
months ended March 31, 1999, respectively, compared to $4.3 and $12.5 million in
the corresponding periods of fiscal 1998, representing increases of 24% and 20%,
respectively. As a percentage of revenues, operations expense decreased from 38%
and 41% in the three and nine months ended March 31, 1998, respectively, to 36%
and 38% in the corresponding periods of fiscal 1999. Approximately 55% of the
increase in operations expense was attributable to the higher volume of
transactions processed, and the remainder to the acquisition of Stockton in
November 1997 and HII in October 1998. The decrease in operations expense as a
percentage of revenues was primarily due to operations leverage from systems
consolidation for the recent acquisitions, the effects of ongoing cost reduction
programs, and to a lesser extent, the impact of the divested operations, which
results were included in the fiscal 1998 periods but not the fiscal 1999
periods.
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Sales, marketing and client services expense was $3.3 million and $9.5
million in the three and nine months ended March 31, 1999, respectively,
compared to $3.0 million and $7.8 million in the corresponding periods of fiscal
1998, representing increases of 10% and 22%, respectively. As a percentage of
revenues, sales, marketing and client services expense decreased from 27% and
26% for the three and nine months ended March 31, 1998, respectively, to 23% and
24% in the corresponding periods of 1999. Approximately 27% of the increase in
sales, marketing and client services expense for the nine month period, but more
than 70% of the increase for the three month period, was due to the inclusion of
the Stockton and HII acquisitions. The decrease in sales, marketing and client
services expense as a percentage of revenues was primarily due to operations
leverage from consolidation of recent acquisitions.
Research and development expense was $1.1 million and $3.4 million in the
three and nine months ended March 31, 1999, respectively, compared to $1.0
million and $2.9 million in the corresponding periods of fiscal 1998,
representing increases of 9% and 17%, respectively. As a percentage of revenues,
research and development expense decreased from 9% and 10% for the three and
nine months ended March 31, 1998, respectively, to 8% in the corresponding
periods of fiscal 1999. MEDE AMERICA capitalized $354,000 and $820,000 of
software development costs in the three and nine months ended March 31, 1999,
respectively, compared to $125,000 and $319,000 in the corresponding periods of
fiscal 1998. The increases in research and development costs in the fiscal 1999
periods were primarily due to development of new and enhanced EDI transaction
products and services, development associated with major customer contracts
currently expected to roll out in calendar 1999 and the establishment of
additional direct payor connections. In addition, Year 2000 compliance
expenditures amounted to $97,000 and $609,000 in the three and nine months ended
March 31, 1999, respectively, compared to $106,000 in both of the corresponding
periods of fiscal 1998.
General and administrative expense was $1.6 million and $4.1 million in the
three and nine months ended March 31, 1999, respectively, compared to $1.1
million and $3.3 million in the corresponding periods of fiscal 1998,
representing an increase of 37% and 25%, respectively. As a percentage of
revenues, general and administrative expense increased from 10% for the three
months ended March 31, 1998 to 11% in the corresponding period of fiscal 1999
and decreased from 11% for the nine months ended March 31, 1998 to 10% in the
corresponding period of 1999.
Depreciation and amortization expense was $2.4 million and $6.5 million in
the three and nine months ended March 31, 1999, respectively, compared to $1.9
million and $5.2 million in the corresponding periods of fiscal 1998,
representing increases of 28% and 23%, respectively. The increase in
depreciation and amortization expense was primarily attributable to the Stockton
and HII acquisitions. As a percentage of revenues, depreciation and amortization
expense decreased to 16% in the three and nine months ended March 31, 1999 from
17% in the three and nine months ended March 31, 1998.
Year ended June 30, 1998 compared to year ended June 30, 1997
Revenues
Revenues for the fiscal year ended June 30, 1998 were $42.3 million
compared to $35.3 million in fiscal 1997, representing an increase of 20%. The
increase was primarily attributable to incremental revenue from the acquisitions
of TCS and Stockton in February 1997 and November 1997, respectively, and to the
growth of the existing business, partially offset by the loss of revenues from
operations that were divested.
MEDE AMERICA processed 234 million transactions in the fiscal year ended
June 30, 1998, compared to 161 million transactions processed in fiscal 1997,
representing an increase of 45%. The increase resulted from the addition of new
clients, increased transaction volume from existing clients and the acquisitions
of TCS and Stockton. The average price per transaction MEDE AMERICA received in
fiscal 1998 declined by 13% from 1997, as a result of the greater proportion of
transactions processed under contracts with volume-based terms and pricing and a
larger proportion of lower-priced eligibility verification transactions as a
result of the acquisition of TCS.
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Operating expenses
Operations expense was $17.0 million for the fiscal year ended June 30,
1998 compared to $16.8 million in fiscal 1997, representing an increase of 1%.
As a percentage of revenues, operations expense decreased from 48% in fiscal
1997 to 40% in fiscal 1998. The containment of operations expense in fiscal 1998
was a result of ongoing cost reduction programs, systems consolidation for
recent acquisitions and the impact of the divested operations, which results are
included in fiscal 1997 but not in fiscal 1998.
Sales, marketing and client services expense was $10.8 million for the
fiscal year ended June 30, 1998 compared to $8.8 million in fiscal 1997,
representing an increase of 23%. As a percentage of revenues, sales, marketing
and client services expense was 25% for each such fiscal year. The increase in
such expenses was primarily due to the inclusion of TCS and Stockton in the
results of operations for the fiscal year ended June 30, 1998. The increase in
such expenses, to a lesser extent, was due to increases in expenses relating to
the hiring of new employees for client support and help desk service, the
installation of help desk tracking software and resources devoted to telesales.
Research and development expense was $3.9 million for the fiscal year ended
June 30, 1998 compared to $3.3 million in fiscal 1997, representing an increase
of 20%. As a percentage of revenues, research and development expense was 9% for
each such fiscal year. MEDE AMERICA capitalized $462,000 of software development
costs in fiscal 1998; however, no software development costs were capitalized in
fiscal 1997. Prior to July 1, 1997, MEDE AMERICA did not have any software
development projects for which significant development costs had been incurred
between the establishment of technological feasibility and general client
release of the product.
General and administrative expense was $4.9 million for the fiscal year
ended June 30, 1998 compared to $5.3 million in fiscal 1997, representing a
decrease of 8%. As a percentage of revenues, general and administrative expense
decreased from 15% in fiscal 1997 to 12% in fiscal 1998. This decrease was
primarily a result of cost controls and the consolidation and integration
activities to MEDE AMERICA's recent acquisitions.
Depreciation and amortization expense was $7.1 million for the fiscal year
ended June 30, 1998 compared to $5.5 million in fiscal 1997, representing an
increase of 31%. As a percentage of revenues, depreciation and amortization
expense increased from 15% in fiscal 1997 to 17% in fiscal 1998. These increases
reflect the increased amortization expense related to the acquisitions of TCS in
February 1997 and Stockton in November 1997.
There were no acquisition-related expenses for the fiscal year ended June
30, 1998, as compared to $3.9 million of such expenses in fiscal 1997. Included
in the amount for fiscal 1997 was a $1.6 million write-off related to in-process
research and development from the acquisition of TCS for software that had not
achieved technological feasibility and had no alternative use, and a contingent
earnout charge of $2.3 million recorded by MEDE AMERICA in connection with the
EC&F purchase agreement. In addition, in fiscal 1997, MEDE AMERICA recorded a
gain of $885,000 from a sale of securities. See Note 12 of Notes to Consolidated
Financial Statements of MEDE AMERICA.
Year ended June 30, 1997 compared to year ended June 30, 1996
Revenues.
Revenues for the fiscal year ended June 30, 1997 were $35.3 million
compared to $31.8 million in fiscal 1996, representing an increase of 11%. The
increase was primarily attributable to revenue from the acquisition of TCS in
February 1997, partially offset by the loss of revenues from operations that
were divested. The increase was also due to the growth of the existing business.
MEDE AMERICA processed 161 million transactions in the fiscal year ended
June 30, 1997 compared to 129 million transactions processed in fiscal 1996,
representing an increase of 25%. The increase resulted from the addition of new
clients, the growth of business from existing clients and the
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TCS acquisition. The average price per transaction in fiscal 1997 declined by 4%
from fiscal 1996, primarily as a result of the divested operations having higher
claims pricing.
Operating expenses.
Operations expense was $16.8 million for the fiscal year ended June 30,
1997 compared to $19.2 million in fiscal 1996, representing a decrease of 12%.
As a percentage of revenues, operations expense decreased from 60% in fiscal
1996 to 48% in fiscal 1997. The operations expense improvement was a result of
ongoing cost reduction programs, systems consolidation for recent acquisitions
and the divestitures of non-core or unprofitable operations.
Sales, marketing and client services expense was $8.8 million for the
fiscal year ended June 30, 1997 compared to $7.1 million in fiscal 1996,
representing an increase of 24%. As a percentage of revenues, sales, marketing
and client service expense increased from 22% in fiscal 1996 to 25% in fiscal
1997. These increases reflect the inclusion of the TCS acquisition in the
results for five months and, to a lesser extent, the addition of client support
personnel and the increase in help desk tracking software expenses.
Research and development expense was $3.3 million for the fiscal year ended
June 30, 1997 compared to $2.1 million in fiscal 1996, representing an increase
of 54%. As a percentage of revenues, research and development expense increased
from 7% in fiscal 1996 to 9% in fiscal 1997. These increases were due to the
hiring of new employees and other expenses related to the expansion of MEDE
AMERICA's processing capacity and the implementation of new technology
processing platforms throughout its data processing centers.
General and administrative expense was $5.3 million for the fiscal year
ended June 30, 1997 compared to $6.1 million in fiscal 1996, representing a
decrease of 13%. As a percentage of revenues, general and administrative expense
decreased from 19% in fiscal 1996 to 15% in fiscal 1997. These decreases were
primarily a result of consolidation and integration activities.
Depreciation and amortization expense was $5.5 million for fiscal year
ended June 30, 1997 compared to $5.2 million in fiscal 1996, representing an
increase of 5%. As a percentage of revenues, depreciation and amortization
expense decreased from 16% in fiscal 1996 to 15% in fiscal 1997.
Acquisition-related expenses for the fiscal year ended June 30, 1997
included a $1.6 million write-off related to in-process research and development
from the acquisition of TCS (for software that had not achieved technological
feasibility and had no alternative use) and a contingent earnout charge of $2.3
million recorded by us in connection with the EC&F purchase agreement. In
addition, in fiscal 1997, MEDE AMERICA recorded a gain of $885,000 from a sale
of securities. See Note 12 of MEDE AMERICA notes to consolidated financial
statements.
During the fiscal year ended June 30, 1996, MEDE AMERICA wrote down
approximately $10.0 million of costs relating to client lists and related
allocable goodwill obtained in the acquisition of MEDE OHIO. Such intangible
assets were written down to the net present value of the estimated future cash
flows to be derived from these clients as of June 30, 1996. The write-down was
required due to a loss of approximately 25% of the acquired MEDE OHIO client
base. In addition, a contingent earnout charge of $538,000 was recorded in
connection with the EC&F purchase agreement during the fiscal year ended June
30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, MEDE AMERICA has used capital from external sources to
fund its internal growth and operations and to make acquisitions. Prior to its
initial public offering, such capital requirements were provided by MEDE
AMERICA's four principal stockholders, through periodic purchases of its debt
and equity securities and MEDE AMERICA's credit facility. Since June 30, 1995 an
investment fund affiliated with Welsh, Carson, Anderson and Stowe, or WCAS, has
purchased a senior subordinated note in the principal amount of $25.0 million
and 370,993 shares of common stock from MEDE AMERICA for an aggregate $25.0
million, which was used in connection with the acquisition of Time-Share
Computer
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Systems, Inc., to repay borrowings under the Credit Facility and for general
working capital purposes. In October 1998, the total availability under the
Credit Facility was increased to $36.0 million, and MEDE AMERICA drew down an
additional $13.2 million, of which $11.7 million was used to finance the HII
acquisition.
On January 26, 1999, MEDE AMERICA entered into a new credit facility with
NationsBank, N.A., as Administrative Agent, and NationsBanc Montgomery
Securities LLC, as Syndication Agent. The credit facility provides for a $25
million revolving credit facility that matures on February 5, 2002. The credit
facility is not guaranteed by any third party, but is secured by substantially
all of MEDE AMERICA's assets including the stock of MEDE AMERICA's subsidiaries.
The credit facility contains various covenants and conditions, including those
relating to Year 2000 compliance, changes in control and management and
restrictions on the payment of dividends on the common stock. The closing of the
credit facility occurred simultaneously with the consummation of the initial
public offering. As of March 31, 1999, MEDE AMERICA had outstanding borrowings
of $6.0 million under the credit facility. Such borrowings bore interest at a
weighted average rate of 7.4% per year as of March 31, 1999. If the MEDE AMERICA
reorganization is completed, it is expected that the credit facility will be
terminated.
On February 5, 1999, MEDE AMERICA consummated an initial public offering of
5,307,710 shares of common stock at a price of $13.00 per share (including
692,310 shares that were subject to the underwriters' overallotment option,
which was exercised in full). The net proceeds to us were approximately $61.9
million (after deducting the underwriting discount and offering expenses payable
by us). The net proceeds to us were used to prepay approximately $25.2 million
of outstanding principal and accrued interest on MEDE AMERICA's outstanding 10%
senior subordinated note due February 1, 2002 and repay approximately $28.3
million of outstanding indebtedness and accrued interest under MEDE AMERICA's
credit facility. MEDE AMERICA used the remaining $8.4 million of net proceeds to
pay a portion of outstanding accrued dividends on its preferred stock, and
approximately $301,000 of accrued dividends were converted into 23,124 shares of
common stock. In addition, in connection with the initial public offering all
outstanding shares of preferred stock were converted into 1,845,815 shares of
common stock at the initial public offering price of $13.00 per share. In
connection with the prepayment of the senior subordinated note and the
establishment of the New Credit Facility, MEDE AMERICA recorded an extraordinary
charge of approximately $1.6 million relating to the write-off of the remaining
discount on the Senior Subordinated Note and deferred financing costs.
As of March 31, 1999, MEDE AMERICA had cash and cash equivalents of $4.0
million and net working capital of $9.4 million. Net cash used in operations was
$8.1 million for the nine months ended March 31, 1999. The $8.1 million net cash
used in operations in the nine months ended March 31, 1999 resulted primarily
from increased investments in accounts receivable of $2.0 million, formulary
receivables of $2.6 million, resulting from growth in the pharmacy business, and
other assets of $642,000, as well as a decrease in accounts payable and accrued
expenses of $2.6 million due to the timing of payments, partially offset by the
$5.5 million of income from operations, after adding back non-cash charges.
Cash used for investment purposes was $13.6 million in nine months ended
March 31, 1999. Cash used for investment purposes during the nine months ended
March 31, 1999 was primarily used to acquire HII for $11.4 million, net of cash
acquired, and to fund capital expenditures of $1.1 million and additions to
intangible assets of $1.0 million. MEDE AMERICA expects to pay at least $2.0
million per year for the foreseeable future for capital investment to support
growth in transaction processing.
Cash provided by financing activities was $17.2 million for the nine months
ended March 31, 1999. Cash provided by financing activities during the nine
months ended March 31, 1999 was primarily provided from net proceeds from the
initial public offering of $61.9 million, which was partially offset by
principal repayments of debt and capital lease obligations and the payment of
preferred stock dividends.
On April 20, 1999, MEDE AMERICA, Healtheon and Merc Acquisition Corp., a
wholly-owned subsidiary of Healtheon entered into the MEDE AMERICA
reorganization agreement, pursuant to which Merc will be merged with and into
MEDE AMERICA, with MEDE AMERICA being the surviving corporation of the
reorganization. Upon consummation of the merger, the separate existence of Merc
will
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cease, and MEDE AMERICA's existing stockholders will become stockholders of
Healtheon in accordance with the terms of the merger agreement.
If the MEDE AMERICA reorganization is not consummated and MEDE AMERICA's
independent existence continues, MEDE AMERICA would expect to use the credit
facility to finance its future acquisitions and for general working capital
needs, and subject to satisfaction of the covenants set forth therein, might
finance acquisitions through the issuance of additional equity and debt
securities. MEDE AMERICA believes that existing cash balances and cash generated
by operations in the near term, and the borrowings available under the credit
facility, would be sufficient to finance its operations for at least an
additional 18 months. However, future acquisitions might require funding beyond
its cash resources and currently anticipated capital or operating requirements
could change, with the result that it would be required to raise additional
funds through the public or private sale of additional securities.
YEAR 2000 COMPLIANCE
Assessment
Since 1996, MEDE AMERICA has specified that all developed software be Year
2000 compliant. In January 1998 MEDE AMERICA performed a product assessment on
all legacy products identifying all those that were not Year 2000 compliant, and
began the process of renovating its existing non-compliant products, usually in
connection with improving product functionality. In August 1998, all Year 2000
remediation programs were centralized under the direction of a Year 2000 Project
Manager. Also in 1998 MEDE AMERICA began tracking Year 2000 expenditures as a
separate category of expenditures. Total Year 2000 expenditures prior to August
1, 1998 amounted to approximately $225,000; expenditures from August 1, 1998
through March 31, 1999 totaled approximately $544,000.
MEDE AMERICA completed its assessment of whether it will have to modify or
replace portions of its software and its products, services and internal systems
so that they will function properly with respect to dates in the year 2000 and
thereafter. In addition to its general Year 2000 compliance review, MEDE AMERICA
specifically identified several areas which were not Year 2000 compliant as of
November 30, 1998:
- its PBM system in Ohio
- the UNIX operating platform software used in connection with its pharmacy
practice management system
- the UNIX operating platform software utilized in its pharmacy transaction
switching
With the exception of the Ohio PBM system, MEDE AMERICA believes its
internally developed software and systems are Year 2000 compliant.
Remediation and implementation
MEDE AMERICA has developed a remediation program to correct the Year 2000
problems it has identified. PBM clients who utilize MEDE AMERICA's PBM system in
Ohio are being migrated to the PBM system it acquired from Stockton, which MEDE
AMERICA considers to be Year 2000 compliant. Testing has been completed and
migration of these clients has begun, with 28% of the client base migrated. The
migration process is scheduled for completion in September 1999. Clients who
wish to continue to utilize the PBM System in Ohio will be permitted to do so
through the end of 1999, but not after. For retail pharmacy practice management
clients, MEDE AMERICA's remediation program consists of providing a Year 2000
compliant version of the UNIX software to replace the older non-compliant
version which is no longer being supported by the vendor, as well as software
upgrades, with discounted hardware packages to enable such clients to utilize
the Year 2000 compliant system. MEDE AMERICA has completed upgrades for all
clients. A version of the UNIX operating platform software used in pharmacy
transaction switching, which the manufacturer represents to be Year 2000
compliant, was
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released in December 1998. Testing of that operating platform software on MEDE
AMERICA's hardware, with its pharmacy transaction switching software, has been
successfully completed.
During its assessment phase, MEDE AMERICA identified potentially Year 2000
non-compliant "non-information technology" systems, such as embedded
microcontrollers. Accordingly, it is replacing its older and potentially
non-compliant computer and telecommunications hardware with hardware that is
Year 2000 compliant. These expenditures are being made in the general course of
MEDE AMERICA's renovation and modernization program, and as such are accounted
for as ordinary capital expenditures instead of Year 2000 expenses.
In October 1998, MEDE AMERICA acquired HII. HII's EDI products and services
fall into three categories:
- physician claims processing (small-and large-group)
- hospital claims processing
- claims data transmission including extraction and transmission of claim
data to a third party data analyst.
Based on its review at the time of the acquisition, MEDE AMERICA determined
that none of HII's products is Year 2000 compliant. MEDE AMERICA has completed
the programming necessary to modify HII's common carrier and Internet-based
claims processing system for small physician groups to make the products Year
2000 compliant. Clients are being selected for beta-testing. It has also
modified HII's payer data transmission products to make such products Year 2000
compliant. MEDE AMERICA is migrating HII's claims processing for hospitals and
large physician groups to its MEDE Claim product. Currently, 12 clients have
installed the MEDE Claim product, 25 more are under contract, 17 have declined
to migrate to the system, and the remainder have either committed verbally to
upgrade, or are in various stages of contract negotiation. MEDE AMERICA can, if
necessary, process claims for hospitals and large physician groups through its
common carrier and Internet-based claims processing system.
Some or all of MEDE AMERICA's revenues from each of the three areas in
which Year 2000 problems have been identified, as well as those of HII's
clients, are subject to the risk of Year 2000 noncompliance. The total revenue
from MEDE AMERICA's PBM services clients was $6,491,000 in fiscal 1998. The
total revenue from Pharmacy retail system sales was $511,000 in fiscal 1998. The
total revenue derived from Pharmacy switching was $8,183,000 in fiscal 1998. The
total claims and related revenue derived from HII was $4,950,000 for the twelve
months ended June 30, 1998.
Excluding anticipated expenditures associated with ordinary product
development, MEDE AMERICA has budgeted approximately $1,210,000 through December
1999 for Year 2000 compliance costs, of which approximately $769,000 had been
expended through March 31, 1999. MEDE AMERICA believes that this amount will be
sufficient to execute its plan and cover contingency plan costs. MEDE AMERICA
believes that it has sufficient resources to implement its plan. However, there
can be no assurance that expenditures required to achieve compliance with Year
2000 requirements will not exceed the budgeted amounts.
MEDE AMERICA's client base consists of over 65,000 healthcare providers and
over 1,000 payers. While it has not attempted to assess the readiness of each of
these entities, MEDE AMERICA has begun to work with major customers and
suppliers to insure that Year 2000 compliance issues will not interrupt the
normal activities supported by these relationships. Implementation of Year 2000
compliant software is product-and platform-specific. If the software resides on
the host system, all clients will automatically access the new software.
Similarly, products that can receive updates remotely will be updated via remote
distribution. The existing telephone number for HII's bulletin board program can
be automatically redirected to connect to a product of ours that is Year 2000
compliant. A small minority of MEDE AMERICA's clients, mostly retail pharmacy
clients, will require on-site installation. In most cases, this installation
will also provide the clients with the capability to receive future enhancements
that will not otherwise be available.
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MEDE AMERICA's Medicare/Medicaid payers are subject to a Year 2000
compliance program undertaken by the Health Care Financing Administration. Under
the HCFA plan, all mission critical systems have been identified, and an
Independent Verification and Validation consultant has been retained to perform
inspections and testing of all public payers. This plan includes both random and
announced system and site testing.
Contingencies
MEDE AMERICA believes that the most likely worst case Year 2000 scenario
would include the following:
- one or more parts of MEDE AMERICA's software and operating systems would
operate incorrectly;
- one or more of MEDE AMERICA's payers would be unable to receive
transactions; and
- one or more of MEDE AMERICA's providers/clients would not have completed
internal Year 2000 conversions.
It is possible that failures of MEDE AMERICA's software or operating
systems could cause MEDE AMERICA's clients to either terminate their contracts
with us and/or sue us for damages. Also, if MEDE AMERICA fails to achieve Year
2000 compliance by September 30, 1999, such failure could constitute a default
under its credit facility, which could in turn have a material adverse effect on
MEDE AMERICA's business, financial condition and results of operations. MEDE
AMERICA has completed the assessment of its critical hardware and software and
believes that the assessment has revealed all significant Year 2000 problems,
that such problems will be capable of remediation, and that its software and
hardware will perform substantially as planned when Year 2000 processing begins.
Although it may experience Year 2000 problems, based on its assessment and
remediation program to date, MEDE AMERICA believes that Year 2000 compliance
issues will not have a material adverse effect on its business, financial
condition or prospects and will not, therefore, result in a default under the
Year 2000 compliance covenant in its credit facility. However, due to the
uncertainties that are inherent in addressing the Year 2000 problem, MEDE
AMERICA may experience unforeseen Year 2000 problems, which problems could have
a material adverse effect on MEDE AMERICA's business, financial condition and
results of operations.
As contingency planning, MEDE AMERICA has three available options should
certain functions not operate properly on January 1, 2000.
- MEDE AMERICA has developed its internal systems in such a manner as to
allow such systems to accept non-Year 2000 compliant data, and convert
such data based on defaults and algorithms developed in conjunction with
the providers to Year 2000 compatible formats. This methodology is
applicable for claims, eligibility and enrollment transactions.
- For payers, in the event a payer is unable to accept EDI claims, MEDE
AMERICA currently has the capability, internally and, if necessary with
support from an outside vendor, to print paper claims forms from supplied
provider data and to send those claims in paper form to non-Year 2000
compliant payers.
- For medical claims, a bulletin board system acquired in the HII
transaction could be utilized by clients, with minimal programming set
up, as a means of transmitting claims to us via common carriers and the
Internet.
IMPACT OF INFLATION
Inflation has not had a material impact on MEDE AMERICA's historical
operations or financial condition.
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RECENT ACCOUNTING PRONOUNCEMENTS
Recent pronouncements of the Financial Accounting Standards Board, which
are not required to be adopted at this date, include SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information", and SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." These
pronouncements are not expected to have a material impact on MEDE AMERICA's
financial statements.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 981, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." This statement is not required to be
adopted at this date. MEDE AMERICA is currently evaluating the impact of this
statement on its financial statements.
NET OPERATING LOSSES
As of June 30, 1998, MEDE AMERICA had net operating loss carryforwards for
federal income tax purposes of approximately $36.4 million. Such loss
carryforwards expire in the fiscal years 2005 through 2013. Because of certain
changes in ownership, as defined in the Internal Revenue Code, which occurred
during 1996 and 1995, certain of these net operating loss carryforwards are
subject to annual limitations. See Note 7 of MEDE AMERICA notes to consolidated
financial statements.
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SHARE OWNERSHIP BY MEDE AMERICA'S PRINCIPAL STOCKHOLDERS,
MANAGEMENT AND DIRECTORS
The following table sets forth information concerning the beneficial
ownership of common stock of MEDE AMERICA as of June 15, 1999 for the following:
- each person or entity who is known by MEDE AMERICA to own beneficially
more than 5% of the outstanding shares of MEDE AMERICA's common stock;
- each of MEDE AMERICA's current directors;
- the Chief Executive Officer and the four other most highly compensated
officers of MEDE AMERICA during 1998; and
- all directors and executive officers of MEDE AMERICA as a group.
Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable. This
table includes percentage ownership data reflecting ownership both before and
after consummation of the merger with Healtheon.
Percentage of ownership is based on 13,210,513 shares of common stock of
MEDE AMERICA outstanding on June 15, 1999, Beneficial ownership by a person
assumes the exercise of all options and warrants held by such person that are
currently exercisable or are exercisable within 60 days of such date. Unless
otherwise indicated, the entities and individuals identified in this table have
sole voting and investment power with respect to all shares shown as
beneficially owned by them, subject to community property laws, where
applicable.
Percentage of ownership is also based on:
- an exchange ratio of 0.6593 shares of Healtheon/WebMD common stock for
each share of MEDE AMERICA common stock outstanding on June 15, 1999
- an exchange ratio of 1.815 shares of Healtheon/WebMD common stock for
each share of WebMD common stock outstanding on June 15, 1999, assuming
the conversion of all shares of WebMD preferred stock into common stock
immediately prior to that date and including the additional 276,906
shares of Series E preferred stock to be purchased by Microsoft and the
exercise in full by McKesson HBOC of its right of first refusal
- an exchange ratio of 0.5483 shares of Healtheon/WebMD common stock for
each share of Medcast common stock outstanding on July 1, 1999, assuming
the conversion of all shares of Medcast preferred stock into common stock
immediately prior to that date
Further, percentage of ownership is based on:
- an estimated 79,739,379 shares of Healtheon/WebMD common stock
outstanding following the MEDE AMERICA reorganization
- an estimated 143,536,528 shares of Healtheon/WebMD common stock
outstanding following the Healtheon-WebMD and MEDE AMERICA
reorganizations
- an estimated 146,019,958 shares of Healtheon/WebMD common stock
outstanding following all the reorganizations
<TABLE>
<CAPTION>
MEDE AMERICA SHARES BENEFICIALLY OWNED
PRIOR TO THE REORGANIZATION
-----------------------------------------------
NAME AND ADDRESS OF COMMON EXERCISABLE EXERCISABLE
BENEFICIAL OWNER STOCK WARRANTS OPTIONS PERCENT
------------------- --------- ----------- ----------- -------
<S> <C> <C> <C> <C>
Welsh, Carson, Anderson
& Stowe(1).................... 5,511,262 67,240 -- 42.0%
320 Park Avenue,
25th Floor
New York, NY 10019
William Blair & Co.,
L.L.C.(2)..................... 874,370 16,810 -- 6.7
222 West Adams Street
Chicago, Illinois 60606
<CAPTION>
PERCENT OF
HEALTHEON/WEBMD SHARES BENEFICIALLY OWNED AFTER
------------------------------------------------------
THE MEDE THE HEALTHEON-WEBMD
NAME AND ADDRESS OF AMERICA AND MEDE AMERICA ALL THE
BENEFICIAL OWNER REORGANIZATION REORGANIZATIONS REORGANIZATIONS
------------------- -------------- ------------------- ---------------
<S> <C> <C> <C>
Welsh, Carson, Anderson
& Stowe(1).................... 4.6% 2.6% 2.5%
320 Park Avenue,
25th Floor
New York, NY 10019
William Blair & Co.,
L.L.C.(2)..................... * * *
222 West Adams Street
Chicago, Illinois 60606
</TABLE>
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<TABLE>
<CAPTION>
MEDE AMERICA SHARES BENEFICIALLY OWNED
PRIOR TO THE REORGANIZATION
-----------------------------------------------
NAME AND ADDRESS OF COMMON EXERCISABLE EXERCISABLE
BENEFICIAL OWNER STOCK WARRANTS OPTIONS PERCENT
------------------- --------- ----------- ----------- -------
<S> <C> <C> <C> <C>
Thomas P. Staudt................ 206,708 -- 43,646 1.9
Richard P. Bankosky............. 58,328 -- -- *
James T. Stinton................ 21,803 -- 7,500 *
William M. McManus.............. 32,356 -- 437 *
Linda K. Ryan................... 505 -- 2,793 *
Roger L. Primeau................ 2,250 -- 12,772 *
Thomas E. McInerney(3).......... 5,368,399 67,240 -- 40.9
320 Park Avenue,
25th Floor
New York, NY 10019
Anthony J. de Nicola(4)......... 2,838,925 -- -- 21.5
320 Park Avenue, 25th Floor
New York, NY 10019
Timothy M. Murray(5)............ 871,106 16,810 -- 6.7
222 West Adams Street
Chicago, Illinois 60606
Alan Winchester(6).............. 15,000 625,000 -- 4.6
8601 Six Forks Road
Suite 300
Raleigh, NC 27615
All current directors and
executive officers as a group
(10 persons).................. 7,498,780 709,050 776,198 53.6
<CAPTION>
PERCENT OF
HEALTHEON/WEBMD SHARES BENEFICIALLY OWNED AFTER
------------------------------------------------------
THE MEDE THE HEALTHEON-WEBMD
NAME AND ADDRESS OF AMERICA AND MEDE AMERICA ALL THE
BENEFICIAL OWNER REORGANIZATION REORGANIZATIONS REORGANIZATIONS
------------------- -------------- ------------------- ---------------
<S> <C> <C> <C>
Thomas P. Staudt................ * * *
Richard P. Bankosky............. * * *
James T. Stinton................ * * *
William M. McManus.............. * * *
Linda K. Ryan................... * * *
Roger L. Primeau................ * * *
Thomas E. McInerney(3).......... 4.5 2.5 2.5
320 Park Avenue,
25th Floor
New York, NY 10019
Anthony J. de Nicola(4)......... 2.3 1.3 1.3
320 Park Avenue, 25th Floor
New York, NY 10019
Timothy M. Murray(5)............ * * *
222 West Adams Street
Chicago, Illinois 60606
Alan Winchester(6).............. * * *
8601 Six Forks Road
Suite 300
Raleigh, NC 27615
All current directors and
executive officers as a group
(10 persons).................. 6.2 3.4 3.4
</TABLE>
- -------------------------
* Represents beneficial ownership of less than 1% of the common stock.
(1) Includes:
- 2,447,546 shares of common stock held by WCAS V
- 2,462,851 shares of common stock held by WCAS VI
- 59,223 shares of common stock held by WCAS Information Partners L.P.
("WCAS Info.")
- 370,993 shares of common stock held by WCAS CP II
- 170,649 shares of common stock held by individual partners of WCAS
Such partners are also partners of the sole general partner of each of the
foregoing limited partnerships. The respective general partners of WCAS V, WCAS
VI, WCAS Info. and WCAS CP II are WCAS V Partners, WCAS VI Partners, L.P., WCAS
INFO Partners and WCAS CP II Partners. The individual partners of each of these
partnerships include some or all of Patrick J. Welsh, Russell L. Carson, Bruce
K. Anderson, Richard H. Stowe, Thomas E. McInerney, Andrew M. Paul, Robert A.
Minicucci, Anthony J. de Nicola, Laura M. VanBuren, Charles G. Moore, III, James
B. Hoover and Paul B. Queally. The partners of WCAS who are also directors of
MEDE AMERICA are Thomas E. McInerney, who is also Chairman of the board of
directors, and Anthony J. de Nicola. Each of the foregoing persons may be deemed
to be the beneficial owner of the common stock owned by WCAS.
(2) Includes:
- 572,429 shares of common stock held by Blair V
- 298,677 shares of common stock held by Blair LCF
- 3,264 shares of common stock held by an individual affiliated with WBCP.
Timothy M. Murray, a partner of WBCP, is also a director of MEDE AMERICA
and may be deemed to be a beneficial owner of MEDE AMERICA's common stock
owned by WBCP.
(3) Includes:
- 2,447,546 shares of common stock held by WCAS V
- 2,462,851 shares of common stock held by WCAS VI
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- 59,223 shares of common stock held by WCAS Info.
- 370,993 shares of common stock held by WCAS CP II
Mr. McInerney disclaims beneficial ownership of such shares.
(4) Includes:
- 2,462,851 shares of common stock held by WCAS VI.
- 370,993 shares of common stock held by WCAS CP II.
Mr. de Nicola disclaims beneficial ownership of such shares.
(5) Includes:
- 572,429 shares of common stock held by Blair V.
- 298,677 shares of common stock held by Blair LCF.
Mr. Murray disclaims beneficial ownership of such shares.
(6) The warrants are held by Medic Computer Systems, Inc. Mr. Winchester
disclaims beneficial ownership of such shares.
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INFORMATION REGARDING MEDCAST
MEDCAST'S BUSINESS
Greenberg News Networks, Inc., which is referred to as Medcast, is a
leading provider of medical news, information, educational programs and services
designed for physicians and other healthcare professionals through its product,
Medcast Networks. Medcast Networks is delivered to users' personal computers via
the Internet and can be accessed using standard personal computers. Medcast's
content is updated throughout the day and can be used in conjunction with the
vast resources available on the World Wide Web. Medcast's daily broadcasts,
disease tutorials and expert commentary address the latest medical news issues
that are critical to physicians. With Medcast, physicians may also obtain
continuing medical education credits and can easily access information provided
by specialty medical associations and leading academic institutions.
For a monthly subscription fee, Medcast provides the physician with a
customized user interface for his or her computer, Medcast software and ongoing
support and maintenance services. Medcast's medical news team, consisting of
over 60 professionals including researchers, reporters, writers, graphic
designers and medical advisors, creates daily content that is medically-reviewed
and graphically rich. To date, Medcast has developed five specialty networks:
Medcast Cardiology, Medcast Psychiatry, Medcast Oncology, Medcast Endocrinology
and Medcast Elite Primary Care, and it has a subscriber base of approximately
7,400 signed contracts. To distribute Medcast Networks, Medcast has built a
sales and service organization of over 100 representatives that cover
approximately 65 of the largest U.S. markets.
The Medcast solution
Medcast aims to meet the increasing information and education demands of
today's physicians and healthcare professionals as well as the marketing needs
of sponsors. Medcast benefits a variety of parties within the healthcare
spectrum, including physicians, sponsors, hospitals, medical institutions and
patients.
Benefits to subscribers include:
- Clinically-relevant medical information delivered daily
- Specialty-specific continuing medical education courses
- Multimedia patient education tools
- Access to the Internet
- General interest content related to subscribers' travel, leisure and
business interests
Benefits to sponsors would include:
- Electronic delivery of tailored marketing messages to a highly targeted
audience
- Ability to run interactive promotional campaigns
- Opportunity to rapidly launch new marketing programs
- Ability to track aggregate user activity
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Products and services
Medcast provides daily medical news, information, educational programs and
services designed for physicians and other healthcare professionals. Each
subscriber specifies his or her medical specialty at registration. The physician
receives a product configuration designed for his or her primary specialty, but
also may elect to receive other medical specialty news networks at no extra
charge. The physician's specialty would determine which sponsor advertisements
and promotions are displayed.
Each day, the editorial and programming staff creates a graphically rich
program that is compressed and automatically downloaded nightly. When the
physician arrives for work, his or her Medcast screensaver is running with fresh
news and information. At the touch of the keyboard or mouse, a Medcast Greeter
Box appears with the user's name and lists daily news items and other content
features. A graphic on the screen also invites the physician to start "Today's
Daily Broadcast." The physician can play the broadcast or go directly to the
main interface screen for access to a variety of channels. In addition to being
updated automatically, Medcast may be updated on demand throughout the day.
Each subscribing physician can customize professional and personal news,
information and education among more than 40 content channels on the Medcast
system with different configurations to fit their preferences at any time.
Medcast Networks offers the following general categories of information:
- Medical news
- Medical information and reference data
- Medical education
- World and national news
- Personal information
MEDICAL NEWS
Top Stories. Over 90% of the content on Medcast's Top Stories channel is
written by Medcast's news staff and is prepared on a daily basis. Each day, Top
Stories presents 10 to 20 breaking medical news stories. If a major medical
story breaks in a leading print or broadcast news publication, Medcast typically
covers it the same day. Expert commentary enhances these stories, coming in the
form of audio interviews that are incorporated into these stories.
Specialty Medical. Specialty Medical channels present daily original
medical news stories based on the latest medical research and medical
conferences. These channels currently include Cardiology, Endocrinology,
Oncology, Elite Primary Care and Psychiatry. Medical associations such as the
American College of Cardiology also appear on specialty channels, with seamless
links to their own channels on Medcast.
MD Business. The MD Business channel includes a combination of stories from
renowned columnists on health policy, practice management, coding and
reimbursement and other areas affecting the administration of a medical
practice. Selected content from PR Newswire, Bloomberg(R) News, Associated
Press, Reuters Health and American Health Line is also available.
Media Alert. Media Alert summarizes leading medical stories appearing in
popular broadcast and print media, enabling Medcast physicians to prepare for
their patients' questions and concerns.
MEDICAL INFORMATION AND REFERENCE DATA
MD Library. MD Library offers access to over nine million medical articles
through the National Library of Medicine's "Medline," as well as other important
databases. The Disease Updates channel consists of write-ups on common diseases
and disorders created for Medcast by leading physicians. These updates contain
current medical understanding with references and candid expert opinion from
renown medical leaders. The One-Minute consult channel contains quick reference
information developed daily that include a printable question and answer sheet
about individual diseases for patients. The Patient
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Demos channel contains original animations designed for physicians to help their
patients understand disease processes and medical procedures.
Community. Community is a resource for keeping current and connected with
the world of medicine. As of June 30, 1999, John Hopkins Medicine and the
American College of Cardiology had their own Medcast channels. The most
up-to-date press releases from more than 60 medical societies and associations
are available in the Collegium channel, as well as links to each individual
association or society website. In the Meetings channel, regional, national and
international medical meetings and conferences are listed and linked. The
Resources channel includes additional links to governmental agencies, medical
boards and accreditation agencies, and guides to other trustworthy medical
content on the Web.
Market Research. The Market Research channel contains Today's Poll, which
is tied to daily news. Results are posted daily and past polls are archived.
Additionally, physicians may periodically participate in in-depth surveys and
evaluations.
MEDICAL EDUCATION
Medcast provides an easy way for physicians to earn between 65 and 300 free
accredited continuing medical education credits annually via its Just-in-Time
continuing medical education courses that are tied to daily medical news.
Medcast partners and sponsors may also bring longer format continuing medical
information programs to the Medcast system at little or no cost.
WORLD AND NATIONAL NEWS
Medcast editors hand-pick stories each day from The New York Times.
Subscribers also have access to CNN World News, CNN Weather and CNN Sports, each
of which can be updated throughout the day.
PERSONAL INFORMATION
Investing. Medcast's Investing channel provides personal financial news and
information, including a portfolio tracker. Each day, nine to ten original
financial news stories are provided by TheStreet.com, and 10 to 15 stories are
hand-picked from Bloomberg(R) News.
Connoisseur. The Connoisseur channel provides information about travel,
music, golf, books and wine. National Geographic Traveler provides content on
travel. Rolling Stone presents a selection of current music reviews, as well as
access to their website and a hotlink to purchase compact discs. The Books
channel integrates The New York Times book reviews and the ability to buy
discounted best sellers online with Ingram/BuyBooks.com, while MedBookStore.com
offers physicians a discount on vintage medical books. The Wine channel offers
reviews from The New York Times.
OTHER FEATURES
Medcast Networks also includes the following features:
- Interactive Sponsor Window -- Promotional and advertising messages play
continuously on the physician's desktop. Sponsor advertisements and
promotions are interspersed with Medcast promotional messages and
advertisements, academic institution messages and medical association
messages. A user can click on an advertisement and the corresponding
information appears in the Medcast content window. The user can continue
to interact with the new content window that has appeared or can easily
click on another Medcast channel of interest
- Medcast screensaver, with news and information and interactive sponsor
window
- Medcast wallpaper to give a "branded" look and feel to the physicians'
desktop
- Medcast start up and shut down screens
- Personalized Medcast e-mail address
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Medcast production
Medcast's editorial and production team, consisting of over 60
professionals, includes dedicated medical doctors, Masters and PhD level medical
editors, writers, illustrators and roving reporters. The team has been producing
daily medical news since September 1998. Medcast's medical news center is in its
Atlanta, Georgia headquarters with a bureau located in the National Press
Building in Washington, D.C. The daily production cycle is similar to that of
any news gathering organization and the daily medical editing mirrors that of
any scientific journal.
Morning editorial meetings establish story direction and allocate
production resources, while at the same time Medcast's unique daily content
integration strategy commences: the selection of the medical news stories that
will contain Medcast's originally-written "Just In Time CME(TM)," "1-Minute
Consult(TM)" and "Physician Poll." A series of production and editorial
deadlines are met throughout the day as stories come in, continuing medical
education tests are reviewed by Medcast's continuing medical education
consortium, 1-Minute Consults are written, medical illustrations are created,
the Daily Broadcast soundtrack is voiced and recorded and the images are edited,
and Medcast staff physicians edit articles and review the work of illustrators,
artists, editors and narrators. Late afternoon, early evening and finally mid-
evening deadlines are met leaving time for one last medical editorial review
prior to the "publishing" of each customized download for the next morning.
Sales, marketing and support
Medcast has a dedicated sales and service organization consisting of over
100 professionals covering approximately 65 of the largest U.S. markets. Its
sales professionals meet with physicians, conduct product training and maintain
relationships with subscribers.
Technology
Medcast has designed its Medcast software in an open architecture framework
such that the ability to extend and upgrade exists in concert with enhancements
to leading industry standards. Because Medcast owns its software code, it can
control the quality of the software and provide needed flexibility.
The following are Medcast's key technology features:
- Multi-media rich graphics, which include intricate medical illustrations
and images, downloaded via an optimized delivery system with advanced
compression
- Off-line interactivity enabling the user to view articles and submit
information instantaneously through the computer's hard drive
- Built into the Medcast software, through Microsoft's Foundation Class, is
a browser window utilizing Internet Explorer's standard interface. As
Internet Explorer is upgraded, Medcast is also upgraded.
Server architecture and broadcast center. Medcast's server architecture
delivers four to six megabytes of compressed information daily to each of its
users via the Internet. Medcast believes that its broadcast center is a
reliable, mission-critical facility, which consists of multiple, redundant Sun
Solaris Servers running Oracle 8 Database engines and is equipped with
temperature monitoring, security and fire-protection systems. All load balancing
and firewall protection are handled via industry standard security systems.
Client application. Medcast's software runs on Windows 95/98 or Windows NT
operating systems and utilizes Microsoft's Visual C/C++ technology for maximum
flexibility and speed. Medcast uses the Internet for delivery of its product.
All communication between the client and server is performed via standard Web
protocol, known as HTTP, which provides Medcast flexibility in large
installations.
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Medcast serves the following configurations:
- Single-user physician.
- Physicians on a local area network with a high bandwidth, constant
Internet connection, which require installation of software, hardware and
an Ethernet card for local area network access.
- Large multi-user installation with high bandwidth Internet access, which
requires the installation of a custom server designed to serve all
subscribers on the local area network.
Medical board of advisors
The Medcast Networks Medical Advisory Board consists of an expert
representative for each of Medcast's specialty networks as well as a handful of
multidisciplinary medical experts who represent other important aspects of
medicine, such as public health, health economics, drug regulatory affairs,
health policy and patient education. The nomination and recruitment of a board
member originates within Medcast Networks' executive and editorial staff. Final
board selections are made by Medcast's chief medical officer and Medcast's
President of Programming and Development.
The Medcast Networks Medical Advisory Board meets at least once annually,
and in addition, there may be other scheduled telephone conference calls.
Members are paid an honorarium and are also reimbursed for expenses incurred in
traveling to and from advisory board meetings each year. If members are not
permitted to accept the honorarium, the check is made payable to the board
member's charity of choice. Board members are asked to sign a financial
disclosure and conflict of interest statement, stating that they do not have a
material, direct or indirect, interest in any competing product. Unless
otherwise authorized, each Medical Advisory Board member agrees to keep
confidential all financial, marketing, and proprietary information provided by
Medcast.
Competition
The market for Internet services and products is relatively new, intensely
competitive and rapidly changing. Medcast competes, directly and indirectly,
with the following categories of companies:
- publishers and distributors of traditional off-line media, including
those targeted to physicians
- online services or websites targeted to the healthcare industry generally
- vendors of healthcare information, products and services distributed
through other means, including direct sales, mail and fax messaging
- other services that are designed to enable companies to market their
products to physicians
Medcast believes that the principal competitive factors in attracting and
retaining physician subscribers are the depth, breadth and timeliness of
services and content and the ability to offer compelling content and services.
Other important factors in attracting and retaining physician professionals
include ease of use, ability to access information quickly, quality of service
and cost. Medcast believes that the principal competitive factors that will
attract sponsors include price, the ability to access physicians in specified
specialties and the number of physicians who subscribe to Medcast Networks. To
be competitive, Medcast must continually enhance its existing content and
introduce transactional services.
Many of Medcast's current and potential competitors have greater resources
to devote to the development, promotion and sale of their services; longer
operating histories; greater financial, technical and marketing resources;
greater name recognition; and larger subscriber bases than Medcast and,
therefore, have a significantly greater ability to attract subscribers and
advertisers. Many of these competitors may be able to respond more quickly than
Medcast to new or emerging technologies in the Internet and changes in Internet
user requirements and to devote greater resources than Medcast to the
development, promotion and sale of their services. In addition, in some cases
Medcast does not have contractual rights to prevent its strategic partners from
entering into competing businesses or directly competing with Medcast. There can
be no assurance that Medcast's current or potential competitors will
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not develop products and services comparable or superior to those developed by
Medcast or adapt more quickly than Medcast to new technologies, evolving
industry trends or changing Internet user preferences. Increased competition
could result in price reductions, reduced margins or loss of market share, any
of which would materially and adversely affect Medcast's business, financial
condition and operating results. There can be no assurance that Medcast will be
able to compete successfully against current and future competitors, or that
competitive pressures faced by Medcast will not have a material adverse effect
on its business, financial condition and operating results.
Intellectual property
Medcast's success and ability to compete are dependent upon its marketing
and continued development of the Medcast Network. To protect its technology,
Medcast relies primarily on copyright, trade secret and trademark laws. Medcast
generally enters into confidentiality agreements with its subcontractors,
consultants and corporate partners, and generally controls access to and
distribution of its software, documentation and other proprietary information.
Governmental regulation
Medcast is not currently subject to direct regulation by any domestic or
foreign governmental agency, other than regulations applicable to businesses
generally, and laws or regulations directly applicable to access to online
commerce. However, due to the increasing popularity and use of the Internet and
other online services, it is possible that laws and regulations will be adopted
with respect to the Internet or other online services covering issues such as
user privacy, pricing, content, taxation, copyrights, distribution and
characteristics and quality of products and services.
Food and Drug Administration. All promotional materials placed on Medcast
by pharmaceutical or other companies that make health care products are subject
to regulation by the U.S. Food and Drug Administration, known as the "FDA". The
FDA has very strict standards that apply to such advertising, including
requirements that there be contained within each promotional piece a disclosure
of risk information and also a linkage to full prescribing information. The FDA
scrutinizes all such promotional materials carefully, and frequently takes
enforcement actions against companies and products in violation of the
regulations. All promotional materials issued by pharmaceutical companies,
including those displayed on Medcast Networks, must be submitted to the FDA at
the time of first use. In addition, the FDA is in the process of drafting a
guidance that applies to Internet promotion. This guidance will set forth more
specific criteria for promotion of health care products on Internet-type
services. Medcast has made clear to its sponsors that compliance with the FDA
requirements will be the responsibility of the sponsor of the promotional
activity.
There currently is major litigation that may affect FDA's policies and
enforcement of its advertising and promotion rules. This litigation deals with
the ability of pharmaceutical companies to promote their products for uses not
specifically approved by the FDA, referred to as off-label uses. As a result of
the ongoing litigation, the FDA has not enforced its off-label promotion policy
with the vigor that it might employ if the litigation did not exist. A ruling in
favor of the FDA in this case could lead to more aggressive enforcement by the
FDA of its off-label promotion regulations. In addition, the legal case has
raised questions about the FDA's policies regarding the promotion of
pharmaceutical and other health care products in continuing medical education
programs. A ruling in favor of the FDA in the ongoing litigation could cause the
FDA to pursue more aggressively its enforcement of its regulation regarding
continuing medical education, and could lead to new requirements for companies
wishing to sponsor such programs.
Finally, the FDA has assumed jurisdiction over all promotional materials
issued by regulated companies that appear over the Internet. The FDA currently
is developing a policy statement to set forth its views on such materials. An
adverse policy could place new restrictions on the way that pharmaceutical and
medical device products are promoted over the Internet, which has the potential
to affect the content of materials placed on the Internet.
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Federal Trade Commission. The Federal Trade Commission Act prohibits the
dissemination of false, deceptive, misleading and unfair advertising, and grants
the Federal Trade Commission, known as the "FTC," enforcement powers to impose
and seek civil and criminal penalties, consumer redress, injunctive relief and
other remedies upon persons who disseminate prohibited advertisements. Medcast
could be subject to liability under the FTC Act if it was found to have
participated in creating and/or disseminating a prohibited advertisement with
knowledge, or had reason to know that the advertising was false or deceptive.
The FTC requires advertising in all media, including the Internet, to have
substantiation for claims made. The FTC recently brought several actions against
companies for allegedly deceptive advertising via the Internet. If any
advertising of a non-pharmaceutical nature appears on Medcast, it would be
subject to the FTC rules and regulations.
Employees
As of June 15, 1999, Medcast had 229 full-time employees, of whom 52 were
engaged in content creation, 107 in sales and marketing, 29 in support, 30 in
technology and 11 in finance, administration and operations. Medcast also
retains by contract other individuals that provide editorial services. None of
Medcast's employees is represented by a labor union. Medcast believes that its
employee relations are good.
Facilities
Medcast leases approximately 28,000 square feet of office space for its
executive offices in Atlanta, Georgia. This lease expires in August 2003. In
addition, Medcast has a news bureau in Washington, D.C. consisting of 150 square
feet of leased space.
Legal proceedings
Medcast is not a party to any litigation that it believes could have a
material adverse effect on it or its business.
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MEDCAST SELECTED FINANCIAL DATA
The selected financial data of Medcast for the period from January 8, 1997
to December 31, 1997 and year ended December 31, 1998 and as of December 31,
1997 and 1998 are derived from Medcast's financial statements. The selected
statement of operations data for the three months ended March 31, 1998 and 1999
and the selected balance sheet data as of March 31, 1999 were derived from
unaudited financial recurring accruals necessary for a fair presentation of the
information set forth therein. The results of operations for the three months
ended March 31, 1999 are not necessarily indicative of the results for a full
year. The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Medcast's financial statements and related notes thereto included elsewhere in
this proxy statement/prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JANUARY 8, THREE MONTHS ENDED
YEAR ENDED 1997 TO MARCH 31,
DECEMBER 31, DECEMBER 31, -------------------
1998 1997 1999 1998
------------ ------------ -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
HISTORICAL STATEMENTS OF OPERATIONS DATA:
Revenues.......................................... $ -- $ -- $ 8 $ --
Operating loss.................................... (14,657) (1,960) (7,996) (1,286)
Net loss applicable to common stockholders........ $(18,535) $(1,960) $(70,981) $ (1,337)
Net loss per common stockholder................... $ (9.72) $ (1.11) $ (37.06) $ (0.69)
Shares used in computing basic and diluted net
loss per common share(2)........................ 1,906 1,762 1,915 1,940
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------- AS OF
1998 1997 MARCH 31, 1999
------------ ------------ -------------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
HISTORICAL BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 2,269 $ 34 $ 122
Working capital................................... 5,365 (1,959) (2,806)
Total assets...................................... 11,259 63 3,166
Long-term debt, net of discount................... 372 -- 344
Redeemable preferred stock........................ 26,591 -- 89,626
Total stockholders' equity (net capital
deficiency)..................................... (18,901) (1,929) (89,746)
(Alternative stockholders' equity) includes
redeemable preferred stock...................... 7,691 (1,929) (120)
</TABLE>
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MEDCAST MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
Medcast's financial statements and the related notes thereto included elsewhere
in this proxy statement/prospectus.
OVERVIEW
Greenberg News Networks, Inc., which is referred to as Medcast, is a
leading provider of medical news, information, educational programs and services
designed for physicians and other healthcare professionals through its product,
Medcast Networks. Medcast Networks is delivered to our users' personal computers
via the Internet and can be accessed using standard personal computers.
Medcast's content is updated throughout the day and can be used in conjunction
with the vast resources available on the Web. Medcast's daily broadcasts,
disease tutorials and expert commentary address the latest medical news issues
that are critical to physicians. With Medcast, physicians may also obtain
continuing medical education credits and can easily access information provided
by specialty medical associations and leading academic institutions.
Medcast was incorporated in Delaware in January 1997. During 1998, we hired
our first reporters and writers. It began publishing and broadcasting in
September 1998. Following a series of initial tests at over 900 sites, Medcast
launched its product consisting of five medical networks in March 1999. To
enhance its sales and marketing efforts, Medcast grew its sales team from two at
March 31, 1998 to 107 at March 31, 1999. Its subscriber base has grown to
approximately 7,400 signed contracts and approximately 2,100 installed
subscribers at the end of June 1999. Medcast is in the process of installing the
remaining 5,300 physicians, or backlog. Medcast's backlog at June 30, 1999 is
not necessarily indicative of future backlog amounts.
Medcast currently derives all of its revenue from subscription fees.
Revenue derived from the sale of subscriptions is recognized ratably over the
period that services are provided to the subscriber.
Medcast offers physicians three-year subscriptions for $25 per month, or
$35 per month for a more sophisticated computer. Subscriptions include a
personal computer equipped with Medcast software and Internet access. Physicians
that already have computers that meet Medcast's specifications can subscribe to
receive Medcast content and Internet access for one year at a rate of $10 per
month. Medcast purchases the computers directly and has expensed these computers
upon installation. It is not certain at this time whether Medcast will provide
computers to new subscribers. Internet service is generally provided through one
principal service provider for all subscribers, and fees for such service are
paid directly by Medcast. Deferred revenue relates to subscription fees for
which amounts have been billed or collected but for which revenue has not been
recognized.
Cost of revenue represents expenses incurred for production, delivery and
support of our daily medical news and education service to subscribers. The
costs incurred to operate Medcast's news and publishing operations, and delivery
and support costs to Medcast's subscriber base, consist of:
- payroll and related expense
- expenses for news, databases, continuing medical education courses and
graphical images provided by third parties
- Medcast's computer room and Internet service provider costs
- expenses incurred for customer support services provided to subscribers
Sales and marketing expenses represent costs incurred in selling,
installing and training subscribers and in marketing Medcast. Sales and
marketing expenses consist primarily of
- payroll and related expense
- cost of personal computers for subscribers and related installation
expenses
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- consulting fees for marketing and market research activities
- travel and entertainment expenses
- advertising expenses for marketing programs incurred in promoting
Medcast. For the foreseeable future, Medcast expects its sales and marketing
expenses to be substantial as it continues to build its brand and subscriber
base.
Research and development expenses consist primarily of payroll and related
expense associated with development of software and new technologies to enhance
Medcast service and performance. Product development expenses for existing
networks are relatively fixed, though there are some variable costs related to
increased subscriber base and use of the product. For new networks and product
features and web-based offerings under development, expenses may vary
dramatically based on scope of technology changes, volume of features and
functions and complexity of software integration.
General and administrative expenses consist primarily of:
- payroll and related expenses for executive, finance and administrative
personnel
- professional fees
- other corporate expenses, including office and furniture rent
Medcast has only a limited operating history upon which you can evaluate
its business and prospects. It has not achieved profitability, and it expects to
continue to incur net losses in 1999 and subsequent fiscal periods. Medcast
expects to continue to incur significant operating expenses and, as a result,
will need to generate significant revenues to achieve profitability. Even if
Medcast does achieve profitability, it may be unable to sustain or increase
profitability on a quarterly or annual basis in the future. Medcast believes
that quarter-to-quarter comparisons of our operating results may not be a good
indication of its future performance, nor would its operating results for any
particular quarter be indicative of future operating results.
RESULTS OF OPERATIONS
Total revenue
Medcast began recognizing subscriber revenue in the first quarter of 1999.
Medcast did not charge its beta users.
Cost of revenue
Cost of revenue was $62,000 for the three months ended March 31, 1998 and
$2.2 million for the three months ended March 31, 1999. Medcast incurred no
costs of revenue for the year ended December 31, 1997 because it was in an early
stage of development. Cost of revenue was $3.6 million for the year ended
December 31, 1998. The increases were primarily attributable to higher costs
incurred to operate its news and publishing operations, and delivery and support
costs resulting from Medcast moving from inception in 1997 to development in
1998 and product launch in March 1999.
Sales and marketing
Sales and marketing expense was $128,000 for the three months ended March
31, 1998 and $4.4 million for the three months ended March 31, 1999. Of the $4.3
million increase, $1.7 million was due to an increase in compensation and
benefits, $1.1 million was due to the costs of providing personal computers to
subscribers, $496,000 was due to travel expenses, $409,000 was due to print
advertising and public relations for the launch of Medcast and $304,000 was due
to an increase in consulting fees associated with marketing Medcast Networks.
Sales and marketing expense was $282,000 for the year ended December 31, 1997
and $6.8 million for the year ended December 31, 1998. Of the $6.3 million
increase, $2.5 million was due to an increase in compensation and benefits, $1.1
million was due to print advertising and public relations for the launch of
Medcast, $811,000 was due to the cost of providing
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computers to subscribers, $784,000 was due to travel expenses, $486,000 was due
to recruiting expenses and $479,000 was due to an increase in consulting fees
associated with marketing Medcast Networks.
Research and development
Research and development expense was $26,000 for the three months ended
March 31, 1998 and $259,000 for the three months ended March 31, 1999. The
increase was due primarily to increases in salaries and related expenses to
increase Medcast's software development and engineering staff to develop the
Medcast software and distribution technologies. Research and development was
$815,000 for the year ended December 31, 1997 and $633,000 for the year ended
December 31, 1998. The decrease year to year resulted primarily from
significant, non-recurring outside contractor fees incurred during 1997 to build
the initial prototype of Medcast Networks, including content, software, graphics
and user interface design.
General and administrative
General and administrative expenses were $1.1 million for the three months
ended March 31, 1998, including approximately $565,000 of agent fees associated
with financing activities, and $1.0 million for the three months ended March 31,
1999. General and administrative expenses were $852,000 for the year ended
December 31, 1997 and $3.3 million for the year ended December 31, 1998. The
increases resulted primarily from increases in salaries and related benefits to
support expansion of Medcast's operations. Medcast anticipates that its general
and administrative expenses will continue to increase significantly as it
continues to expand and broaden its operations.
Depreciation and amortization
Depreciation and amortization expense consists of depreciation of property
and equipment. Depreciation and amortization expense was $4,000 for the three
months ended March 31, 1998 and $179,000 for the three months ended March 31,
1999. Depreciation and amortization expense was $11,000 for the year ended
December 31, 1997 and $254,000 for the year ended December 31, 1998.
Depreciation and amortization increased due to purchases of property and
equipment for the expansion of Medcast. Medcast anticipates that depreciation
and amortization costs will continue to grow in absolute dollars due to hardware
and software costs associated with the continued expansion of Medcast Networks.
Net interest and other income or expense
Net interest and other income was $129,000 for the three months ended March
31, 1998 and $49,000 for the three months ended March 31, 1999. There was no
interest and other income (expense) for the year ended December 31, 1997. For
the year ended December 31, 1998, net interest and other income totaled
$713,000. This represented interest earned on cash balances.
Income taxes
There were no provisions for federal or state income taxes recorded because
Medcast incurred net operating losses through March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, Medcast has financed its operations primarily through
private placements of preferred stock, which have resulted in aggregate proceeds
of approximately $41.5 million. To a lesser degree, Medcast has also funded its
operations through equipment lease borrowings and financing arrangements
totaling approximately $1.2 million. In April 1999, Medcast obtained $18.2
million in net proceeds from the sale of Series C preferred stock and also
obtained approximately $750,000 through the sale and leaseback of certain
computer equipment. Medcast has provided a letter of credit of $660,000, secured
by a pledge of an equivalent amount from Medcast's short-term investment
account, to the lessor of Medcast's headquarter facilities. As of May 31, 1999,
Medcast's primary source of liquidity consisted of cash and cash equivalents and
short term investments on hand totaling approximately $14.0 million.
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Medcast's operating activities have used cash during each fiscal quarter
since inception. Net cash used in operating activities increased from $1.1
million in the three months ended March 31, 1998 to $7.6 million in the three
months ended March 31, 1999, reflecting increasing net losses principally
related to increased expenditures to support Medcast's growth. During the year
ended December 31, 1998, cash used in operating activities totaled $11.3
million. This resulted primarily from a net loss of $13.9 million, which was
caused by increased expenditures to support Medcast's growth and an increase in
prepaid expenses and other assets of $657,000, offset by an increase of $2.8
million in accrued expenses from December 31, 1997, $254,000 of depreciation and
amortization expense in 1998, and $268,000 of compensation expense related to
stock options and warrants in 1998. During the year ended December 31, 1997,
cash used in operating activities of $1.5 million resulted primarily from a net
loss of $2.0 million, offset in part by an increase of $430,000 in accrued
expenses.
Cash provided by investing activities for the three months ended March 31,
1999 totaled $5.8 million, derived primarily from a decrease in short term
investments of $6.0 million offset by purchases of property and equipment of
$230,000. Cash used in investing activities for the three months ended March 31,
1998 totaled $19.4 million, consisting primarily of an increase in short term
investments. Cash used in investing activities for the year ended December 31,
1997 was $11,000 and for the year ended December 31, 1998 was approximately $7.7
million. Cash used in investing activities, other than increases in short term
investments, was principally for the purchase of computer equipment and software
for internal use to support Medcast's growth, as well as office furniture and
fixtures, and leasehold improvements. The increase in cash used in investing
activities resulted from increased purchases of computer equipment, software,
and office furniture to support Medcast's growth and headquarter leasehold
improvements during 1998 totaling $1.7 million and an increase of $6.0 million
in short-term investments.
Cash used in financing activities for the three months ended March 31, 1999
totaled $307,000, resulting primarily from an increase in restricted cash
balances pledged to secure an increase in the letter of credit on the
headquarters facility lease, which was amended to provide for expansion of
headquarters office space. Cash provided by financing activities totaled $21.3
million for the three months ended March 31, 1998 and was attributable
principally to the sale of Series A preferred stock. Cash provided by financing
activities was $21.3 million in 1998 and $1.6 million in 1997. In 1998, $22.0
million was provided from the sale of Medcast's Series A preferred stock,
approximately $387,000 was used to increase restricted cash balances pledged to
secure a letter of credit on the headquarters facility lease and $300,000 was
used to repay a stockholder loan. In 1997, $1.6 million was provided from
borrowings from its principal stockholder, of which $1.3 million was converted
into Series B preferred stock during 1998 and the remaining balance was repaid.
Medcast's growth and capital requirements depend on numerous factors,
including market acceptance of Medcast's products, the resources Medcast devotes
to developing, marketing, selling, and supporting its products and the timing
and extent of establishing strategic business relationships. Medcast expects to
devote substantial capital resources to hire and expand its marketing and sales,
support, and product development and publishing organizations, to expand
marketing programs, and for other general corporate activities.
YEAR 2000 COMPLIANCE
Medcast is currently in the process of addressing the Year 2000 problem,
which is the result of computer programs being written using two digits rather
than four to define the applicable year. As a result, computer applications and
software may recognize an input of two zeros (00) as the year 1900. This
incorrect date recognition could cause systems and software malfunctions that
may have a material adverse effect on business operations. This potential
problem could affect not only Medcast's internal information systems but also
those of third parties, such as clients and vendors using information systems
that may interact with or affect Medcast's operations.
Readiness. Medcast is currently performing a review of various software
applications and computer infrastructure that are likely to be affected by the
Year 2000 problem. IT systems refer to all pre-packaged
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and internally developed software applications and programs and related computer
hardware as well as telephone communication systems. "Non-IT systems" are not
being reviewed. Non-IT systems refer to various equipment and devices that may
have "embedded" computer language. The IT systems review will be completed using
Medcast's employees and various computer products. Medcast's review is conducted
in phases. First, all relevant computer systems are being assessed as to
functionality and to determine Year 2000 compliance. Medcast estimates that it's
assessment of IT systems is approximately 70% complete and anticipates
completing the assessment in August, 1999. To date, no production dependent
system, hardware or software, have been found to be non-compliant. For any
remaining systems and software found to be non-compliant or in need of
upgrading, corrective steps will be taken. Corrective steps primarily relate to
developing, modifying, and purchasing system software and hardware. Second,
Medcast will perform validation testing on IT systems and anticipates that it
will complete validation testing in August, 1999. Finally, Medcast anticipates
that it will implement any appropriate solutions prior to October, 1999. Medcast
presently believes that the Year 2000 problem will not pose significant
operational problems for its IT systems.
Medcast has significantly completed its survey of all material third party
IT systems vendors to determine their Year 2000 compliance status and has
received certificates, where possible, as to their compliance. Medcast is
requiring that significant clients and vendors certify those products and
services to be Year 2000 compliant. However, there can be no assurance that the
information systems provided by or utilized by other companies which affect
Medcast's operations will be timely revised in such a way as to allow them to
continue normal business operations or furnish products, services or data to
Medcast without disruption. No estimates can be made as to any potential adverse
impact resulting from the failure of any third party vendor or service provider
to be Year 2000 compliant. If the Year 2000 problem has a material adverse
effect on the business operations or financial condition of third parties with
which Medcast has material relationships, such as vendors, service providers,
and suppliers, the Year 2000 problem could also harm Medcast's business, results
of operations and financial condition. For example, Medcast relies on IT systems
to provide web publishing and hosting functions. If the hardware or software
running these functions is found to be non-compliant, Medcast would have to make
significant changes to its product to enable delivery. At a minimum, this would
consist of "rolling-back" the dates included within the Medcast product such
that the product could be delivered, but would include date errors. As a further
example, Medcast utilizes database software to store and publish content. If
this software is found to be non-complaint, Medcast would have to move all the
data currently stored in this database into a different database product. Both
of the above examples would require significant time and effort to implement,
and no estimates can be made as to any potential adverse impact on Medcast by
virtue of either example occurring. Last, Medcast, product is delivered via the
Internet. To the extent the Year 2000 problem causes material failures in the
Internet, delivery of the Medcast product could be materially and adversely
affect or stopped altogether, which could have a material adverse effect on
Medcast's results of operation or financial condition.
Cost of Compliance. Medcast is currently hiring employees who will be
available to assist in the validation and implementation stage of its Year 2000
review. Preliminary cost estimates for Year 2000 compliance are in the range of
$75,000 to $100,000. To date, Medcast has incurred approximately $50,000 of this
estimated cost. Medcast expects the majority of the remaining costs to be
incurred by the third quarter of 1999. Medcast's Year 2000 project costs are not
expected to have a material impact on its results of operation or financial
condition.
Risk and Contingency Plans. Medcast's IT systems identified as
non-compliant are being repaired or replaced. Medcast expects these replacements
to be substantially completed by year-end 1999. If needed conversions to
Medcast's IT systems are not made on a timely basis or Medcast's significant
clients or vendors fail to make such remediations and conversions on a timely
basis, it could have a material adverse effect on Medcast's results of operation
or financial condition. As described above, Medcast has a contingency plan in
place if the IT systems for web hosting or database systems are found to be non-
compliant.
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SHARE OWNERSHIP BY MEDCAST'S PRINCIPAL STOCKHOLDERS,
MANAGEMENT AND DIRECTORS
The following table sets forth certain information concerning the
beneficial ownership of Medcast's common stock as of July 1, 1999 for the
following:
- each person or entity known to Medcast to beneficially own at least 5% of
the outstanding shares of Medcast's common stock
- each of Medcast's current directors and executive officers
- all executive officers and directors as a group
Unless otherwise indicated, the address of each of the beneficial owners
identified is c/o Greenberg News Networks, Inc., 1175 Peachtree Street, 100
Colony Square, Suite 2400, Atlanta, GA 30361. Except as otherwise indicated,
such beneficial owners have sole voting and investment power with respect to all
shares of common stock owned by them, subject to community property law where
applicable.
Percentage of ownership is based on 4,529,328 shares of Medcast common
stock outstanding as of July 1, 1999, assuming the conversion of all shares of
Medcast preferred stock into common stock immediately prior to that date. Shares
not outstanding but deemed beneficially owned by virtue of the right of a person
or member of a group to acquire them within 60 days are treated as outstanding
only when determining the amount and percent owned by such group. The percentage
of shares beneficially owned accounts for conversion of each share of Series A
preferred stock into 1.01249 shares of common stocks assuming exercise of the
warrants held by Tom Cohen and Hamilton M. Jordan. See the section entitled
"Structure of the Medcast reorganization and conversion of Medcast capital
stock" on page . Percentage of shares beneficially owned accounts for each
share of Series C preferred stock converting into common stock at a rate of
1.4593 shares of common stock for each share of Series C preferred stock.
Percentage of ownership is also based on:
- an exchange ratio of 1.815 shares of Healtheon/WebMD common stock for
each share of WebMD common stock outstanding on June 15, 1999, assuming
the conversion of all shares of WebMD preferred stock into common stock
immediately prior to that date and including the additional 276,906
shares of Series E preferred stock to be purchased by Microsoft and the
exercise in full by McKessonHBOC of its right of first refusal
- an exchange ratio of 0.6593 shares of Healtheon/WebMD common stock for
each share of MEDE AMERICA common stock outstanding on June 15, 1999,
assuming the exercise of all options and warrants that are currently
exercisable or are exercisable within 60 days of June 15, 1999
- An exchange ratio of 0.5483 shares of Healtheon/WebMD common stock for
each share of Medcast common stock outstanding on July 1, 1999 assuming
the conversion of all shares of Medcast preferred stock into common
stock immediately prior to that date
Further, percentage of ownership is based on:
- and estimated 137,310,267 shares of Healtheon/WebMD common stock
outstanding following the Healtheon-WebMD and Medcast reorganization
- an estimated 146,019,958 shares of Healtheon/WebMD common stock
outstanding following all the reorganizations
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<TABLE>
<CAPTION>
NAME AND ADDRESS OF MEDCAST SHARES BENEFICIALLY OWNED
BENEFICIAL OWNER PRIOR TO THE MEDCAST REORGANIZATION
------------------- -----------------------------------------------------------------------------------
COMMON SERIES A SERIES B SERIES C EXERCISABLE EXERCISABLE
STOCK PREFERRED PREFERRED PREFERRED WARRANTS OPTIONS PERCENT
--------- --------- --------- --------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Alan Greenberg(1)(2)............. 1,259,383 -- 109,765 -- -- -- 30.2%
William Longley(2)............... 270,000 -- -- -- -- -- 6.0
Gordon Wyatt..................... -- -- -- -- -- 21,521 *
Mark Dailey...................... -- -- -- -- -- -- *
Doug Martin(3)(4)................ -- 869,566 -- 42,689 -- -- 20.8
Stephens Group, Inc.
111 Center Street
Little Rock, Arkansas 72201
Russell French(5)................ -- 260,870 -- 42,689 -- -- 7.2
Noro-Moseley Partners IV, L.P.
9 North Parkway Square
4200 Northside Parkway, N.W.
Atlanta, Georgia 78327
Hamilton M. Jordan(2)............ 10,000 -- -- -- 26,087 1,500 *
Tom Cohen(2)..................... 5,000 -- -- -- 21,739 -- *
All executive officers and
directors as a group (8
persons)....................... 1,544,383 1,130,435 109,765 85,378 47,826 23,021 66.1
FIVE PERCENT STOCKHOLDERS:
Medcast Networks, L.P............ 1,259,383 -- 109,765 -- -- -- 30.2
Stephens Group, Inc.(4).......... -- 869,566 -- 42,689 -- -- 20.8
111 Center Street
Little Rock, Arkansas 72201
Entities associated with Mike
Devlin(6)...................... 97,826 152,174 -- 168,986 -- -- 11.0
Suite 120
10 Burton Hills Boulevard
Nashville, Tennessee 37215
Mike Devlin(6)................... 97,826 152,174 -- 175,389 -- -- 11.2
Suite 120
10 Burton Hills Boulevard
Nashville, Tennessee 37215
Entities associated with
D. Robert Crants III(6)........ 97,826 152,174 -- 168,986 -- -- 11.0
Suite 120
10 Burton Hills Boulevard
Nashville, Tennessee 37215
D. Robert Crants III(6).......... 97,826 152,174 -- 175,389 -- -- 11.2
Suite 120
10 Burton Hills Boulevard
Nashville, Tennessee 37215
MKFJ-IV, L.L.C................... -- 260,870 -- 42,689 -- -- 7.2
Noro-Moseley Partners IV, L.P.
9 North Parkway Square
4200 Northside Parkway, N.W.
Atlanta, Georgia 78327
Jack Tyrell(7)................... 97,826 173,913 -- 64,034 -- -- 8.1
Suite 200
200 31st Avenue
Nashville, Tennessee 37203-1205
W. Patrick Ortale III(7)......... 97,826 173,913 -- 64,034 -- -- 8.1
Suite 200
200 31st Avenue
Nashville, Tennessee 37203-1205
Noro-Moseley Partners IV, L.P.... -- 260,870 -- 32,017 -- -- 6.9
9 North Parkway Square
4200 Northside Parkway, N.W.
Richland Ventures II, L.P........ -- 173,913 -- 42,689 -- -- 5.3
Suite 200
200 31st Avenue
Nashville, Tennessee 37203-1205
<CAPTION>
PERCENT OF
HEALTHEON/WEBMD
SHARES BENEFICIALLY
NAME AND ADDRESS OF OWNED AFTER THE
BENEFICIAL OWNER ---------------------------------
------------------- HEALTHEON-WEBMD
AND MEDCAST ALL THE
REORGANIZATIONS REORGANIZATIONS
--------------- ---------------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Alan Greenberg(1)(2)............. * *
William Longley(2)............... * *
Gordon Wyatt..................... * *
Mark Dailey...................... * *
Doug Martin(3)(4)................ * *
Stephens Group, Inc.
111 Center Street
Little Rock, Arkansas 72201
Russell French(5)................ * *
Noro-Moseley Partners IV, L.P.
9 North Parkway Square
4200 Northside Parkway, N.W.
Atlanta, Georgia 78327
Hamilton M. Jordan(2)............ * *
Tom Cohen(2)..................... * *
All executive officers and
directors as a group (8
persons)....................... * *
FIVE PERCENT STOCKHOLDERS:
Medcast Networks, L.P............ * *
Stephens Group, Inc.(4).......... * *
111 Center Street
Little Rock, Arkansas 72201
Entities associated with Mike
Devlin(6)...................... * *
Suite 120
10 Burton Hills Boulevard
Nashville, Tennessee 37215
Mike Devlin(6)...................
Suite 120
10 Burton Hills Boulevard
Nashville, Tennessee 37215
Entities associated with
D. Robert Crants III(6)........ * *
Suite 120
10 Burton Hills Boulevard
Nashville, Tennessee 37215
D. Robert Crants III(6)..........
Suite 120
10 Burton Hills Boulevard
Nashville, Tennessee 37215
MKFJ-IV, L.L.C................... * *
Noro-Moseley Partners IV, L.P.
9 North Parkway Square
4200 Northside Parkway, N.W.
Atlanta, Georgia 78327
Jack Tyrell(7)................... * *
Suite 200
200 31st Avenue
Nashville, Tennessee 37203-1205
W. Patrick Ortale III(7)......... * *
Suite 200
200 31st Avenue
Nashville, Tennessee 37203-1205
Noro-Moseley Partners IV, L.P.... * *
9 North Parkway Square
4200 Northside Parkway, N.W.
Richland Ventures II, L.P........ * *
Suite 200
200 31st Avenue
Nashville, Tennessee 37203-1205
</TABLE>
- ---------------
* Less than one percent
(1) Includes 1,259,383 shares of common stock beneficially owned by Medcast
Networks, L.P. Mr. Greenberg is the General Partner of Medcast Networks,
L.P. Excludes shares of common stock for which Mr. Greenberg holds an
irrevocable proxy.
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<PAGE> 334
(2) Mr. Greenberg has been granted an irrevocable proxy to vote an aggregate of
453,200 shares of common stock owned by certain stockholders. The proxy may
be exercised in connection with any action to be taken by stockholders.
(3) Represents shares beneficially owned by Stephens Group, Inc. Mr. Martin is a
Sr. Vice President of Stephens Group, Inc. and directs the vote of the
shares beneficially owned by Stephens Group, Inc.
(4) Includes an aggregate of 230,439 shares of Series A preferred stock and
11,313 shares of Series C preferred stock that Stephens Group, Inc. has
transferred to various affiliated persons and entities.
(5) Represents shares beneficially owned by MKFJ-IV, L.L.C. as the general
partner of Noro-Moseley Partners IV, L.P. and Noro-Moseley Partners IVB,
L.P. Mr. French is a member of MKFJ-IV, L.L.C. and directs the vote of the
shares it beneficially owns.
(6) Mr. Devlin and Mr. Crants share voting and investment power over the shares
held by the entities controlled by them.
(7) Represents shares beneficially owned by Richland Ventures L.P. and Richland
Ventures II, L.P. Mr. Tyrell and Mr. Ortale share voting and investment
power over the shares beneficially owned by both limited partnerships.
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<PAGE> 335
ADDITIONAL MATTERS BEING SUBMITTED TO A
VOTE OF ONLY HEALTHEON STOCKHOLDERS
PROPOSAL 1 -- APPROVAL OF AMENDMENT TO 1996 STOCK PLAN
Stockholders are being asked to approve an amendment to the 1996 stock plan
to provide for an increase in the number of shares of common stock reserved for
issuance under the plan by 10,000,000 shares. The board believes that adding
shares to the plan is in the best interests of Healtheon because it will permit
Healtheon to attract and retain employees by providing them with appropriate
equity incentives. The plan plays an important role in Healtheon's efforts to
attract and retain employees of outstanding ability.
Set forth below is a summary of the principal features of the incentive
plan. Healtheon will provide, without charge, to each person to whom a proxy
statement is delivered, upon request of such person and by first class mail
within three business days of receipt of such request, a copy of the incentive
plan. Any such request should be directed as follows: Secretary, Healtheon
Corporation, 4600 Patrick Henry Drive, Santa Clara, California 95054; telephone
number (408) 876-5000.
SUMMARY OF THE 1996 STOCK PLAN
General. The purpose of the 1996 stock plan is to attract and retain the
best available personnel for positions of substantial responsibility with
Healtheon, to provide additional incentive to the employees, directors and
consultants of Healtheon and to promote the success of Healtheon's business.
Options and stock purchase rights may be granted under the 1996 stock plan.
Options granted under the 1996 stock plan may be either "incentive stock
options," as defined in Section 422 of the tax code, or nonstatutory stock
options.
Administration. The stock plan may generally be administered by the board
or a committee appointed by the board, as applicable, the "administrator".
Eligibility; limitations. Nonstatutory stock options and stock purchase
rights may be granted under the 1996 stock plan to employees, directors and
consultants of Healtheon and any parent or subsidiary of Healtheon. Incentive
stock options may be granted only to employees. The administrator, in its
discretion, selects the employees, directors and consultants to whom options and
stock purchase rights may be granted, the time or times at which such options
and stock purchase rights shall be granted, and the number of shares subject to
each such grant.
Section 162(m) of the tax code places limits on the deductibility for
federal income tax purposes of compensation paid to certain executive officers
of Healtheon. In order to preserve Healtheon's ability to deduct the
compensation income associated with options and stock purchase rights granted to
such persons, the 1996 stock plan provides that no employee, director or
consultant may be granted, in any fiscal year of Healtheon, options and stock
purchase rights to purchase more than 500,000 shares of common stock.
Notwithstanding this limit, however, in connection with such individual's
initial employment with the he or she may be granted options or stock purchase
rights to purchase up to an additional 500,000 shares of common stock.
Terms and conditions of options. Each option is evidenced by a stock option
agreement between Healtheon and the optionee, and is subject to the following
additional terms and conditions:
(a) Exercise price. The administrator determines the exercise price of
options at the time the options are granted. The exercise price of an
incentive stock option may not be less than 100% of the fair market value
of the common stock on the date such option is granted; provided, however,
the exercise price of an incentive stock option granted to a 10%
stockholder may not be less than 110% of the fair market value of the
common stock on the date such option is granted. The fair market value of
the common stock is generally determined with reference to the closing sale
price for the common stock on the last market trading day prior to the date
the option is granted.
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<PAGE> 336
(b) Exercise of option; form of consideration. The administrator
determines when options become exercisable, and may in its discretion,
accelerate the vesting of any outstanding option. Stock options granted
under the 1996 stock plan generally vest and become exerciseable over four
years. The means of payment for shares issued upon exercise of an option is
specified in each option agreement. The 1996 stock plan permits payment to
be made by cash, check, promissory note, other shares of common stock of
Healtheon, with some restrictions, cashless exercises, a reduction in the
amount of any company liability to the optionee, any other form of
consideration permitted by applicable law, or any combination thereof.
(c) Term of option. The term of an incentive stock option may be no
more than ten years from the date of grant; provided that in the case of an
incentive stock option granted to a 10% stockholder, the term of the option
may be no more than five years from the date of grant. No option may be
exercised after the expiration of its term.
(d) Termination of employment. If an optionee's employment or
consulting relationship terminates for any reason, other than death or
disability, then all options held by the optionee under the 1996 stock plan
expire on the earlier of the date set forth in his or her notice of grant
or the expiration date of such option. To the extent the option is
exercisable at the time of termination, the optionee may exercise all or
part of his or her option at any time before termination.
(e) Death or disability. If an optionee's employment or consulting
relationship terminates as a result of death or disability, then all
options held by such optionee under the 1996 plan on the earlier of 12
months from the date of such termination or the expiration date of such
option. The optionee, or the optionee's estate or the person who acquires
the right to exercise the option by bequest or inheritance, may exercise
all or part of the option at any time before such expiration to the extent
that the option was exercisable at the time of such termination.
(g) Nontransferability of options: Options granted under the 1996
stock plan are not transferable other than by will or the laws of descent
and distribution, and may be exercised during the optionee's lifetime only
by the optionee, unless otherwise determined by the administrator.
(h) Other provisions: The stock option agreement may contain other
terms, provisions and conditions not inconsistent with the 1996 stock plan
as may be determined by the administrator.
Stock purchase rights. In the case of stock purchase rights, unless the
administrator determines otherwise, the restricted stock purchase agreement
shall grant Healtheon a repurchase option exercisable upon the voluntary or
involuntary termination of the purchaser's employment with Healtheon for any
reason. The purchase price for shares repurchased pursuant to the restricted
stock purchase agreement shall 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 shall lapse at a rate determined by the administrator.
Adjustments upon changes in capitalization. In the event that the stock of
Healtheon changes by reason of any stock split, reverse stock split, stock
dividend, combination, reclassification or other similar change in the capital
structure of Healtheon effected without the receipt of consideration,
appropriate adjustments shall be made in the number and class of shares of stock
subject to the 1996 stock plan, the number and class of shares of stock subject
to any option or stock purchase right outstanding under the 1996 stock plan, and
the exercise price of any such outstanding option or stock purchase right.
In the event of a liquidation or dissolution, the administrator shall
notify each optionee at least fifteen days prior to such action, and any
unexercised options or stock purchase rights will terminate immediately prior
thereto.
In connection with any merger, consolidation, acquisition of assets or like
occurrence involving Healtheon, each outstanding option or stock purchase right
may be assumed or an equivalent option or right substituted by the successor
corporation. If the successor corporation refuses to assume the options and
stock purchase rights or to substitute substantially equivalent options and
stock purchase rights, the
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<PAGE> 337
optionee shall have the right to exercise the option or stock purchase right as
to all of the optioned stock, including shares not otherwise exercisable.
Amendment and termination of the 1996 stock plan. The board may amend,
alter, suspend or terminate the 1996 stock plan, or any part thereof, at any
time and for any reason. However, Healtheon shall obtain shareholder approval
for any amendment to the 1996 stock plan to the extent necessary to comply with
applicable laws. No such action by the board of directors or stockholders may
alter or impair any option or stock purchase right previously granted under the
1996 stock plan without the written consent of the optionee. Unless terminated
earlier, the 1996 stock plan shall terminate ten years from the date of its
approval by the stockholders or the board of directors of Healtheon, whichever
is earlier.
FEDERAL INCOME TAX CONSEQUENCES
Incentive stock options. An optionee who is granted an incentive stock
option does not recognize taxable income at the time the option is granted or
upon its exercise, although the exercise may subject the optionee to the
alternative minimum tax. Upon a disposition of the shares more than two years
after grant of the option and one year after exercise of the option, any gain or
loss is treated as long-term capital gain or loss. If these holding periods are
not satisfied, the optionee recognizes ordinary income at the time of
disposition equal to the difference between the exercise price and the lower of
the fair market value of the shares at the date of the option exercise or the
sale price of the shares. Any gain or loss recognized on such a premature
disposition of the shares in excess of the amount treated as ordinary income is
treated as long-term or short-term capital gain or loss, depending on the
holding period. A different rule for measuring ordinary income upon such a
premature disposition may apply if the optionee is also an officer, director, or
10% shareholder of Healtheon. Net capital gains on shares held for more than 12
months are taxed at a maximum rate of 20%. Capital losses are allowed in full
against capital gains and up to $3,000 against other income. Healtheon is
generally entitled to a deduction in the same amount as the ordinary income
recognized by the optionee.
Nonstatutory stock options. An optionee does not recognize any taxable
income at the time he or she is granted a nonstatutory stock option. Upon
exercise, the optionee recognizes taxable income generally measured by the
excess of the then fair market value of the shares over the exercise price. Any
taxable income recognized in connection with an option exercise by an employee
of Healtheon is subject to tax withholding by Healtheon. Healtheon is generally
entitled to a deduction in the same amount as the ordinary income recognized by
the optionee. Upon a disposition of such shares by the optionee, any difference
between the sale price and the optionee's exercise price, to the extent not
recognized as taxable income as provided above, is treated as long-term or
short-term capital gain or loss, depending on the holding period. Net capital
gains on shares held for more than 12 months are taxed at a maximum rate of 20%.
Capital losses are allowed in full against capital gains and up to $3,000
against other income.
Stock purchase rights. Stock purchase rights will generally be taxed in the
same manner as nonstatutory stock options. However, restricted stock is
generally purchased upon the exercise of a stock purchase right. At the time of
purchase, restricted stock is subject to a "substantial risk of forfeiture"
within the meaning of Section 83 of the tax code. As a result, the purchaser
will not recognize ordinary income at the time of purchase. Instead, the
purchaser will recognize ordinary income on the dates when the stock ceases to
be subject to a substantial risk of forfeiture. The stock will generally cease
to be subject to a substantial risk of forfeiture when it is no longer subject
to Healtheon's right to repurchase the stock upon the purchaser's termination of
employment with Healtheon. At such times, the purchaser will recognize ordinary
income measured as the difference between the purchase price and the fair market
value of the stock on the date the stock is no longer subject to a substantial
risk of forfeiture.
The purchaser may accelerate to the date of purchase his or her recognition
of ordinary income, if any, and the beginning of any capital gain holding period
by timely filing an election pursuant to Section 83(b) of the tax code. In such
event, the ordinary income recognized, if any, is measured as the difference
between the purchase price and the fair market value of the stock on the date of
purchase, and the capital gain holding period commences on such date. The
ordinary income recognized by a purchaser
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who is an employee will be subject to tax withholding by Healtheon. Different
rules may apply if the purchaser is also an officer, director, or 10%
shareholder of Healtheon.
THE FOREGOING IS ONLY A SUMMARY OF THE EFFECT OF FEDERAL INCOME TAXATION
UPON OPTIONEES, HOLDERS OF STOCK PURCHASE RIGHTS, AND HEALTHEON WITH RESPECT TO
THE GRANT AND EXERCISE OF OPTIONS AND STOCK PURCHASE RIGHTS UNDER THE 1996 STOCK
PLAN. IT DOES NOT PURPORT TO BE COMPLETE, AND DOES NOT DISCUSS THE TAX
CONSEQUENCES OF THE EMPLOYEE'S OR CONSULTANT'S DEATH OR THE PROVISIONS OF THE
INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH THE
EMPLOYEE OR CONSULTANT MAY RESIDE.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE
AMENDMENT TO THE 1996 STOCK PLAN.
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PROPOSAL 2 -- APPROVAL OF AMENDMENT TO THE 1998 EMPLOYEE STOCK PURCHASE PLAN
Healtheon's board of directors determined that it is in the best interests
of Healtheon and its stockholders to amend our 1998 employee stock purchase
plan:
- to increase the number of shares reserved under the employee stock
purchase plan by 1,000,000 shares
- to change the formula for annually increasing the number of shares
available to be issued under the plan. If our stockholders approve the
amendment to the employee stock purchase plan, the total number of shares
available to be issued under the plan will be 2,000,000, plus annual
increases on the first day of each fiscal year equal to the lesser of
(a) 1,000,000 shares
(b) 0.5% of the outstanding shares on such date, or
(c) a lesser amount determined by our board of directors.
As of July 31, 1999, 207,252 shares have been issued pursuant to the
employee stock purchase plan and 792,748 shares are available for issuance.
Healtheon's stockholders are being asked to approve the increase in the number
of shares reserved under the employee stock purchase plan. Healtheon's board of
directors believes that the amendment to the employee stock purchase plan is
needed to provide Healtheon with greater flexibility to attract and retain
employees in the future, which may include current and future employees of
Healtheon, WebMD, MEDE AMERICA and Medcast.
SUMMARY OF THE EMPLOYEE STOCK PURCHASE PLAN
General.
Our employee stock purchase plan was adopted by our board of directors and
approved by our stockholders in September 1998. The purpose of the employee
stock purchase plan is to provide employees with an opportunity to purchase our
common stock through payroll deductions.
Administration.
The employee stock purchase plan may be administered by the board of
directors or a committee appointed by the board of directors. All questions of
interpretation or application of the employee stock purchase plan are determined
by the board of directors or its appointed committee, and its decisions are
final, conclusive and binding upon all participants.
Eligibility.
Each employee of Healtheon or its designated subsidiaries, whose customary
employment with Healtheon or its designated subsidiaries is at least 20 hours
per week and more than five months in any calendar year, is eligible to
participate in the employee stock purchase plan; except that no employee shall
be granted an option under the employee stock purchase plan:
- to the extent that, immediately after the grant, such employee would own
5% of either the voting power or value of the stock of Healtheon or any
of its subsidiaries, or
- to the extent that his or her rights to purchase stock under all employee
stock employee stock purchase plans of Healtheon or its subsidiaries
accrues at a rate which exceeds $25,000 worth of stock, determined at the
fair market value of the shares at the time such option is granted, for
each calendar year.
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<PAGE> 340
Offering period.
The employee stock purchase plan has consecutive and overlapping 24 month
offering periods that begin every six months. Each twenty-four month offering
period includes four six-month purchase periods, during which payroll deductions
are accumulated and, at the end of which, shares of common stock are purchased
with a participant's accumulated payroll deductions. The board of directors has
the power to change the duration of future offering periods, if such change is
made at least five days prior to the scheduled beginning of the first offering
period to be affected. Special additional offering periods also may be created
to allow immediate participation in the plan by individuals who become our
employees due to a merger or other acquisition by Healtheon. To participate in
the employee stock purchase plan, an eligible employee must authorize payroll
deductions pursuant to the employee stock purchase plan. Such payroll deductions
may not exceed 15% of a participant's compensation during the offering period.
Once an employee becomes a participant in the employee stock purchase plan, the
employee automatically will participate in each successive offering period until
the employee withdraws from the employee stock purchase plan or the employee's
employment with Healtheon and its designated subsidiaries terminates. At the
beginning of each offering period, each participant automatically is granted an
option to purchase shares of Healtheon's common stock. The option expires at the
end of the offering period or upon termination of employment, whichever is
earlier, but is exercised at the end of each purchase period to the extent of
the payroll deductions accumulated during such purchase period.
Purchase price.
Shares of our common stock may be purchased under the employee stock
purchase plan at a purchase price not less than 85% of the lesser of the fair
market value of our common stock on:
- the first day of the offering period, or
- the last day of the purchase period. The fair market value of our common
stock on any relevant date will be the closing price per share as
reported on the Nasdaq National Market, or the mean of the closing bid
and asked prices, if no sales were reported, as quoted on such exchange
or reported in The Wall Street Journal. The number of shares of our
common stock a participant purchases in each offering period is
determined by dividing the total amount of payroll deductions withheld
from the participant's compensation prior to the last day of the purchase
period by the purchase price.
Payment of purchase price and payroll deductions.
The purchase price of the shares is accumulated by payroll deductions
throughout each purchase period. The number of shares of our common stock a
participant may purchase in each purchase period during an offering period is
determined by dividing the total amount of payroll deductions withheld from the
participant's compensation during that purchase period by the purchase price;
provided, however, that a participant may not purchase more than 5,000 shares
each purchase period. During the offering period, a participant may discontinue
his or her participation in the employee stock purchase plan, and may decrease
or increase the rate of payroll deductions in an offering period within limits
set by the administrator.
All payroll deductions made for a participant are credited to the
participant's account under the employee stock purchase plan, are withheld in
whole percentages only and are included with the general funds of Healtheon.
Funds received by Healtheon pursuant to exercises under the employee stock
purchase plan are also used for general corporate purposes. A participant may
not make any additional payments into his or her account.
Withdrawal.
Generally, a participant may withdraw from an offering period at any time
by written notice without affecting his or her eligibility to participate in
future offering periods. However, once a participant withdraws from a particular
offering period, that participant may not participate again in the same offering
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period. To participate in a subsequent offering period, the participant must
deliver to Healtheon a new subscription agreement.
Termination of employment.
Termination of a participant's employment for any reason, including
disability or death, or the failure of the participant to remain in the
continuous scheduled employ of Healtheon or its designated subsidiaries for at
least 20 hours per week, cancels his or her option and participation in the
employee stock purchase plan immediately. In such event, the payroll deductions
credited to the participant's account will be returned to him or her or, in the
case of death, to the person or persons entitled thereto as provided in the
employee stock purchase plan.
Adjustments upon changes in capitalization, dissolution, liquidation, merger or
asset sale.
Changes in capitalization. Subject to any required action by the
stockholders of Healtheon, the number of shares reserved under the employee
stock purchase plan as well as the price per share of common stock covered by
each option under the employee stock purchase plan which has not yet been
exercised shall be proportionately adjusted for any increase or decrease in the
number of issued shares of common stock resulting from a stock split, reverse
stock split, stock dividend, combination or reclassification of the common
stock, or any other increase or decrease in the number of shares of common stock
effected without receipt of consideration by Healtheon; provided, however, that
conversion of any convertible securities of Healtheon shall not be deemed to
have been "effected without receipt of consideration." Such adjustment shall be
made by the board of directors, whose determination in that respect shall be
final, binding and conclusive. Except as expressly provided herein, no issuance
by Healtheon of shares of stock of any class, or securities convertible into
shares of stock of any class, shall affect, and no adjustment by reason thereof
shall be made with respect to, the number or price of shares of common stock
subject to an option.
Dissolution or liquidation. In the event of the proposed dissolution or
liquidation of Healtheon, any offering period will terminate immediately prior
to the consummation of such proposed action, unless otherwise provided by the
board of directors.
Merger or asset sale. In the event of any merger, consolidation,
acquisition of assets or like occurrence involving Healtheon, each option under
the employee stock purchase plan shall be assumed or an equivalent option shall
be substituted by such successor corporation or a parent or subsidiary of such
successor corporation. In the event the successor corporation refuses to assume
or substitute for the options, the board of directors shall shorten any purchase
periods and offering periods then in progress by setting a new exercise date and
any offering periods shall end on the new exercise date. The new exercise date
shall be prior to the merger, consolidation or asset sale. If the board of
directors shortens any purchase periods and offering periods then in progress,
the board of directors shall notify each participant in writing, at least ten
business days prior to the new exercise date, that the exercise date has been
changed to the new exercise date and that the option will be exercised
automatically on the new exercise date, unless the participant has already
withdrawn from the offering period.
The board of directors may, if it so determines in the exercise of its sole
discretion, also make provision for adjusting the number of shares reserved
under the employee stock purchase plan, as well as the price per share of common
stock covered by each outstanding option, in the event Healtheon effects one or
more reorganizations, recapitalization, rights offerings or other increases or
reductions of shares of its outstanding common stock, and in the event of
Healtheon being consolidated with or merged into any other corporation.
Amendment and termination of the plan.
The board of directors may at any time terminate or amend the employee
stock purchase plan. An offering period may be terminated by the board of
directors at the end of any purchase period if the board of directors determines
that termination of the employee stock purchase plan is in the best interests of
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Healtheon and its stockholders. Generally, no such termination can affect
options previously granted. No amendment shall be effective unless it is
approved by the holders of a majority of the votes cast at a duly held
stockholders' meeting, if such amendment would require stockholder approval in
order to comply with Section 423 of the tax code. The employee stock purchase
plan will terminate in 2008.
Certain federal income tax information.
The following brief summary of the effect of federal income taxation upon
the participant and Healtheon with respect to the shares purchased under the
employee stock purchase plan does not purport to be complete, and does not
discuss the tax consequences of a participant's death or the income tax laws of
any state or foreign country in which the participant may reside.
The employee stock purchase plan, and the right of participants to make
purchases thereunder, is intended to qualify under the provisions of Sections
421 and 423 of the tax code. Under these provisions, no income will be taxable
to a participant until the shares purchased under the employee stock purchase
plan are sold or otherwise disposed of. Upon sale or other disposition of the
shares, the participant will generally be subject to tax in an amount that
depends upon the holding period. If the shares are sold or otherwise disposed of
more than two years from the first day of the applicable offering period and one
year from the applicable date of purchase, the participant will recognize
ordinary income measured as the lesser of (a) the excess of the fair market
value of the shares at the time of such sale or disposition over the purchase
price, or (b) an amount equal to 15% of the fair market value of the shares as
of the first day of the applicable offering period. Any additional gain will be
treated as long-term capital gain. If the shares are sold or otherwise disposed
of before the expiration of these holding periods, the participant will
recognize ordinary income generally measured as the excess of the fair market
value of the shares on the date the shares are purchased over the purchase
price. Any additional gain or loss on such sale or disposition will be long-term
or short-term capital gain or loss, depending on the holding period. Healtheon
generally is not entitled to a deduction for amounts taxed as ordinary income or
capital gain to a participant except to the extent of ordinary income recognized
by participants upon a sale or disposition of shares prior to the expiration of
the holding periods described above.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE
AMENDMENT TO THE 1998 EMPLOYEE STOCK PURCHASE PLAN.
LEGAL OPINION
The validity of the shares of Healtheon/WebMD common stock offered by this
proxy statement/prospectus will be passed upon for Healtheon/WebMD by Wilson
Sonsini Goodrich & Rosati, Professional Corporation.
EXPERTS
The consolidated financial statements of Healtheon Corporation at December
31, 1998 and 1997, and for the three years in the period ended December 31, 1998
appearing in this proxy statement/prospectus 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
reports given upon the authority of such firms as experts in accounting and
auditing.
The consolidated financial statements of ActaMed Corporation for the year
ended December 31, 1996, which are not separately presented in this proxy
statement/prospectus, 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.
328
<PAGE> 343
The consolidated financial statements of WebMD, Inc. at December 31, 1997
and 1998 and for each of the three years in the period ended December 31, 1998,
appearing in this proxy statement/prospectus have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The financial statements of Sapient Health Network, Inc. as of September
30, 1997 and 1998 and the period from November 21, 1995 (date of inception)
through September 30, 1996 and each of the years in the two-year period ended
September 30, 1998, have been included herein in reliance upon the report of
KPMG Peat Marwick LLP, independent auditors, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing. The
report of KPMG Peat Marwick LLP dated November 18, 1998 contains an explanatory
paragraph that states that Sapient Health Network has incurred losses since
inception and has a net capital deficiency; these conditions raise substantial
doubt about the entity's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
that uncertainty.
The financial statements of Direct Medical Knowledge, a development stage
company, as of December 31, 1997, and for the year then ended and for the period
from May 24, 1995 (date of incorporation) to December 31, 1997, included in this
registration statement and the related proxy statement/prospectus, have been
incorporated herein in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing. The financial statements of Direct Medical Knowledge
for the period from May 24, 1995 (date of incorporation) to December 31, 1996
were audited by other auditors, and the report of PricewaterhouseCoopers LLP
relies on the report of these other auditors in so far as it relates to the
amounts included for the period for the period from May 24, 1995 (date of
incorporation) to December 31, 1996. The report of PricewaterhouseCoopers LLP
includes an explanatory paragraph about Direct Medical Knowledge recurring
losses and negative cash flows from operations which raise substantial doubt
about its ability to continue as a going concern.
The consolidated financial statements of MEDE AMERICA as of June 30, 1997
and 1998 and for each of the three years in the period ended June 30, 1998
included in this proxy statement/prospectus, have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein,
which report expressed an unqualified opinion and includes an explanatory
paragraph relating to the restatement disclosure in Note 13, and has been so
included in reliance upon such report given upon their authority as experts in
accounting and auditing.
The statement of operations of The Stockton Group, Inc. for the year ended
June 30, 1997 included in this proxy statement/prospectus has been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein and has been so included in reliance upon such report given upon their
authority as experts in accounting and auditing.
The consolidated financial statements of Healthcare Interchange, Inc. and
subsidiary as of June 30, 1998 and for the nine-month period ended June 30,
1998, included herein and elsewhere in the registration statement have been
audited and reported upon by KPMG LLP, independent certified accountants. Such
financial statements have been included herein and in the registration statement
in reliance upon the report of KPMG LLP, appearing herein, and upon the
authority of said firm as experts in accounting and auditing.
The financial statements of Greenberg News Networks, Inc., which is
referred to as Medcast (a development stage company) as of December 31, 1997 and
1998 and for the period January 8, 1997 (date of inception) to December 31,
1997, for the year ended December 31, 1998, and for the period January 8, 1997
(date of inception) to December 31, 1998 included in this proxy
statement/prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein and have been so included
in reliance upon such report given upon their authority as experts in accounting
and auditing.
329
<PAGE> 344
WHERE YOU CAN FIND MORE INFORMATION
<TABLE>
<S> <C>
Reports, proxy statements and other Reports, proxy statements and other
information concerning MEDE AMERICA may information regarding Healtheon may be
be inspected at: inspected at:
The National Association of Securities The National Association of
Dealers Securities Dealers
1735 K Street, N.W. 1735 K Street, N.W.
Washington, D.C. 20006 Washington, D.C. 20006
Requests for documents relating to MEDE Requests for documents relating to
AMERICA should be directed to: Healtheon should be directed to:
MEDE AMERICA Corporation Healtheon Corporation
90 Merrick Avenue, Suite 501 4600 Patrick Henry Drive
East Meadow, New York 11554 Santa Clara, California 95054
(516) 542-4500 (408) 876-5000
</TABLE>
Each of Healtheon and MEDE AMERICA file reports, proxy statements and other
information with the Securities and Exchange Commission. Copies of our reports,
proxy statements and other information may be inspected and copied at the public
reference facilities maintained by the Securities and Exchange Commission:
<TABLE>
<S> <C> <C>
Judiciary Plaza Citicorp Center Seven World Trade Center
Room 1024 500 West Madison Street 13th Floor
450 Fifth Street, N.W. Suite 1400 New York, New York 10048
Washington, D.C. 20549 Chicago, Illinois 60661
</TABLE>
Copies of these materials can also be obtained by mail at prescribed rates
from the Public Reference Section of the Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, D.C. 20549 or by calling the Securities and
Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission
maintains a website that contains reports, proxy statements and other
information regarding each of us. The address of the Securities and Exchange
Commission website is http://www.sec.gov.
Healtheon/WebMD has filed a registration statement under the Securities Act
with the Securities and Exchange Commission with respect to Healtheon/WebMD's
common stock to be issued to WebMD stockholders, MEDE AMERICA stockholders and
Medcast stockholders in the reorganization. This proxy statement/prospectus
constitutes the prospectus of Healtheon/WebMD filed as part of the registration
statement. This proxy statement/prospectus does not contain all of the
information set forth in the registration statement because certain parts of the
registration statement are omitted as provided by the rules and regulations of
the Securities and Exchange Commission. You may inspect and copy the
registration statement at any of the addresses listed above.
THIS DOCUMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO PURCHASE, THE HEALTHEON/WEBMD COMMON STOCK OR THE SOLICITATION OF A
PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM OR FROM WHOM IT IS
UNLAWFUL TO MAKE THE OFFER, SOLICITATION OF AN OFFER OR PROXY SOLICITATION IN
THAT JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR
ANY DISTRIBUTION OF SECURITIES MEANS, UNDER ANY CIRCUMSTANCES, THAT THERE HAS
BEEN NO CHANGE IN THE INFORMATION SET FORTH OR INCORPORATED IN THIS DOCUMENT BY
REFERENCE OR IN OUR AFFAIRS SINCE THE DATE OF THIS PROXY STATEMENT/PROSPECTUS.
THE INFORMATION CONTAINED IN THIS DOCUMENT WITH RESPECT TO WEBMD AND ITS
SUBSIDIARIES WAS PROVIDED BY WEBMD; THE INFORMATION CONTAINED IN THIS DOCUMENT
WITH RESPECT TO HEALTHEON WAS PROVIDED BY HEALTHEON; THE INFORMATION CONTAINED
IN THIS DOCUMENT WITH RESPECT TO MEDE AMERICA AND ITS SUBSIDIARIES WAS PROVIDED
BY MEDE AMERICA; AND THE INFORMATION CONTAINED IN THIS DOCUMENT WITH RESPECT TO
MEDCAST WAS PROVIDED BY MEDCAST.
330
<PAGE> 345
HEALTHEON/WEBMD CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
HEALTHEON CORPORATION:
Report of Ernst & Young LLP, Independent Auditors......... F-3
Independent Auditors' Report.............................. F-4
Consolidated Balance Sheets............................... F-5
Consolidated Statements of Operations..................... F-6
Consolidated Statement of Convertible Redeemable Preferred
Stock and
Stockholders' Equity (Net Capital Deficiency).......... F-7
Consolidated Statements of Cash Flows..................... F-11
Notes to Consolidated Financial Statements................ F-12
WEBMD, INC.:
Report of Independent Auditors............................ F-32
Consolidated Balance Sheets............................... F-33
Consolidated Statements of Operations..................... F-34
Consolidated Statements of Shareholders' Equity........... F-35
Consolidated Statements of Cash Flows..................... F-37
Notes to Consolidated Financial Statements................ F-38
MEDE AMERICA CORPORATION:
Independent Auditors' Report.............................. F-52
Consolidated Balance Sheets............................... F-53
Consolidated Statements of Operations..................... F-54
Consolidated Statements of Stockholders' Equity
(Deficit).............................................. F-55
Consolidated Statements of Cash Flows..................... F-56
Notes to Consolidated Financial Statements................ F-57
GREENBERG NEWS NETWORKS, INC. (REFERRED TO AS MEDCAST):
Independent Auditors' Report.............................. F-74
Balance Sheets............................................ F-75
Statements of Operations.................................. F-76
Statements of Stockholders' Equity........................ F-77
Statements of Cash Flows.................................. F-78
Notes to Financial Statements............................. F-79
DIRECT MEDICAL KNOWLEDGE, INC.:
Reports of Independent Accountants........................ F-88
Balance Sheets............................................ F-91
Statements of Operations.................................. F-92
Statements of Changes in Shareholders' Equity (Deficit)... F-93
Statements of Cash Flows.................................. F-94
Notes to Financial Statements............................. F-95
SAPIENT HEALTH NETWORK, INC.:
Independent Auditors' Report.............................. F-103
Balance Sheets............................................ F-104
Statements of Operations.................................. F-105
Statements of Shareholders' Deficit....................... F-106
Statements of Cash Flows.................................. F-107
Notes to Financial Statements............................. F-108
</TABLE>
F-1
<PAGE> 346
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
THE STOCKTON GROUP, INC.:
Independent Auditors' Report.............................. F-120
Statements of Income...................................... F-121
Notes to Financial Statement.............................. F-122
HEALTHCARE INTERCHANGE, INC.:
Independent Auditors' Report.............................. F-124
Consolidated Balance Sheets............................... F-125
Consolidated Statements of Operations..................... F-126
Consolidated Statements of Stockholders' Equity
(Deficit).............................................. F-127
Consolidated Statements of Cash Flows..................... F-128
Notes to Consolidated Financial Statements................ F-129
</TABLE>
F-2
<PAGE> 347
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, 1998 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
three years in the period ended December 31, 1998. 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 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, 1998 and 1997, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Palo Alto, California
February 16, 1999
F-3
<PAGE> 348
INDEPENDENT AUDITOR'S REPORT
Board of Directors of ActaMed Corporation
We have audited the consolidated statements of operations, convertible
redeemable preferred stock and stockholders' equity (net capital deficiency),
and cash flows of ActaMed Corporation and subsidiary (the "Company") for the
year 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 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 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 audit provide a reasonable basis for our opinion.
In our opinion, such consolidated statements of operations, convertible
redeemable preferred stock and stockholders' equity (net capital deficiency),
and cash flows present fairly, in all material respects, the results of the
Company's operations and its cash flows for the year 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-4
<PAGE> 349
HEALTHEON CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ---------------------
1999 1998 1997
----------- --------- --------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 38,389 $ 19,389 $ 16,504
Short-term investments................................. 24,786 17,428 5,300
Accounts receivable, net of allowance for doubtful
accounts of $152 in 1999 and 1998 and $71 in 1997... 5,519 4,594 2,723
Due from related parties............................... 4,905 3,360 1,533
Other current assets................................... 1,561 706 527
--------- --------- --------
Total current assets................................... 75,160 45,477 26,587
Property and equipment, net.............................. 17,410 12,285 5,500
Intangible assets, net................................... 24,828 19,868 18,768
Other assets............................................. 3,657 2,310 2,892
--------- --------- --------
$ 121,055 $ 79,940 $ 53,747
========= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Borrowings under line of credit........................ $ 1,054 $ 1,213 $ 3,425
Accounts payable....................................... 4,017 5,178 2,225
Accrued compensation................................... 2,703 2,424 448
Other accrued liabilities.............................. 8,407 4,559 1,265
Current portion of capital lease obligations........... 2,393 2,295 1,038
Deferred revenue....................................... 3,597 1,874 3,396
--------- --------- --------
Total current liabilities.............................. 22,171 17,543 11,797
Capital lease obligations, net of current portion........ 3,153 2,984 932
Commitments
Convertible redeemable preferred stock, $.016 par value,
issuable in series; 1999 and 1998: none authorized,
issued or outstanding; 1997: 16,488,860 shares
authorized, 16,488,860 shares issued and outstanding,
at amounts paid in..................................... -- -- 50,948
Stockholders' equity (net capital deficiency):
Convertible preferred stock, $.0001 par value, issuable
in series; 1999: 5,000,000 authorized, no shares
issued or outstanding 1998: 8,285,007 shares
authorized, 7,683,341 shares issued and outstanding;
1997: 48,020,000 shares authorized, 21,002,692
shares issued and outstanding; at amounts paid in... -- 46,101 43,756
Common stock, $.0001 par value; 1999: 150,000,000
shares authorized; 70,741,694 shares issued and
outstanding; 1998: 150,000,000 shares authorized;
54,463,097 shares issued and outstanding; 1997:
75,000,000 shares authorized; 9,436,724 shares
issued and outstanding.............................. 7 5 1
Additional paid-in capital............................. 228,833 123,670 4,502
Note receivable from officer........................... -- -- (349)
Deferred stock compensation............................ (11,112) (6,935) (2,151)
Accumulated deficit.................................... (121,997) (103,428) (55,689)
--------- --------- --------
Total stockholders' equity (net capital deficiency).... 95,731 59,413 (9,930)
--------- --------- --------
$ 121,055 $ 79,940 $ 53,747
========= ========= ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 350
HEALTHEON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------ ------------------
1998 1997 1996 1999 1998
-------- -------- -------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Services............................... $ 27,102 $ 4,301 $ 1,795 $ 7,839 $ 4,903
Services to related parties............ 20,956 7,309 4,237 9,521 4,656
Software licenses...................... 780 1,780 4,981 195 195
-------- -------- -------- -------- -------
Total revenue.......................... 48,838 13,390 11,013 17,555 9,754
Operating costs and expenses:
Cost of operations:
Cost of services.................... 26,907 3,910 1,590 7,737 4,971
Cost of services to related
parties........................... 16,107 6,536 4,919 7,781 2,527
Cost of software licenses........... -- -- 160 -- --
-------- -------- -------- -------- -------
Total cost of operations............ 43,014 10,446 6,669 15,518 7,498
Development and engineering............ 19,002 12,267 8,332 7,035 3,720
Sales, general and administrative...... 23,095 10,096 8,400 8,901 4,716
Depreciation and amortization.......... 16,055 6,004 4,153 5,228 2,848
Write-off of offering costs............ 1,620 -- -- -- --
-------- -------- -------- -------- -------
Total operating costs and expenses..... 102,786 38,813 27,554 36,682 18,782
-------- -------- -------- -------- -------
Loss from operations..................... (53,948) (25,423) (16,541) (19,127) (9,028)
Interest income.......................... 1,262 611 539 697 358
Interest expense......................... (472) (323) (56) (139) (116)
Dividends on ActaMed's convertible
redeemable preferred stock............. (890) (2,870) (2,548) -- (890)
-------- -------- -------- -------- -------
Net loss................................. $(54,048) $(28,005) $(18,606) $(18,569) $(9,676)
======== ======== ======== ======== =======
Basic and diluted net loss per common
share.................................. $ (1.54) $ (3.88) $ (2.83) $ (0.30) $ (1.19)
======== ======== ======== ======== =======
Weighted-average shares outstanding used
in computing basic and diluted net loss
per common share....................... 34,987 7,223 6,583 62,665 8,099
======== ======== ======== ======== =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 351
HEALTHEON CORPORATION
CONSOLIDATED STATEMENT OF CONVERTIBLE REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE
REDEEMABLE CONVERTIBLE NOTE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
---------------------- ---------------------- ------------------- PAID-IN FROM
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL OFFICER
----------- -------- ----------- -------- ---------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995... 7,682,671 $ 16,030 -- $ -- 5,846,288 $1 $ 1,379 $ --
Net loss and comprehensive
loss.......................... -- -- -- -- -- -- -- --
Issuance of common stock to
founders and employees for
cash.......................... -- -- -- -- 2,806,134 -- 140 --
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 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...................... -- -- -- -- -- -- 4 --
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 1,523 --
<CAPTION>
TOTAL
DEFERRED STOCKHOLDERS'
STOCK ACCUM- EQUITY (NET
COMPEN- ULATED CAPITAL
SATION DEFICIT DEFICIENCY)
-------- --------- -------------
<S> <C> <C> <C>
Balances at December 31, 1995... $ -- $ (9,078) $ (7,698)
Net loss and comprehensive
loss.......................... -- (18,606) (18,606)
Issuance of common stock to
founders and employees for
cash.......................... -- -- 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 preferred
stock warrant to investor for
services...................... -- -- 500
Issuance of Series C convertible
redeemable preferred stock for
acquisition................... -- -- --
Issuance of common stock
warrants...................... -- -- 4
Dividends accrued on convertible
redeemable preferred stock.... -- -- --
-------- --------- --------
Balances at December 31, 1996... -- (27,684) (14,553)
</TABLE>
See accompanying notes.
F-7
<PAGE> 352
HEALTHEON CORPORATION
CONSOLIDATED STATEMENT OF CONVERTIBLE REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE
REDEEMABLE CONVERTIBLE NOTE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
---------------------- ---------------------- ------------------- PAID-IN FROM
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL OFFICER
----------- -------- ----------- -------- ---------- ------ ---------- ----------
<S> <C> <C> <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 $ 1,523 $ --
Net loss and comprehensive
loss.......................... -- -- -- -- -- -- -- --
Issuance of common stock for
options and restricted stock
exercises by employees........ -- -- -- -- 1,397,844 -- 297 --
Repurchase of employee common
stock......................... -- -- -- -- (613,542) -- (31) --
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 -- -- -- (500)
Issuance of Series B 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.................. -- -- -- -- -- -- -- 151
Dividends accrued on convertible
redeemable preferred stock.... -- 2,870 -- -- -- -- -- --
Deferred stock compensation..... -- -- -- -- -- -- 2,713 --
Amortization of deferred stock
compensation.................. -- -- -- -- -- -- -- --
----------- -------- ----------- -------- ---------- -- -------- -----
Balances at December 31, 1997... 16,488,860 50,948 21,002,692 43,756 9,436,724 1 4,502 (349)
<CAPTION>
TOTAL
DEFERRED STOCKHOLDERS'
STOCK ACCUM- EQUITY (NET
COMPEN- ULATED CAPITAL
SATION DEFICIT DEFICIENCY)
-------- --------- -------------
<S> <C> <C> <C>
Balances at December 31, 1996... $ -- $ (27,684) $(14,553)
Net loss and comprehensive
loss.......................... -- (28,005) (28,005)
Issuance of common stock for
options and restricted stock
exercises by employees........ -- -- 297
Repurchase of employee common
stock......................... -- -- (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............... -- -- --
Issuance of Series B 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
Dividends accrued on convertible
redeemable preferred stock.... -- -- --
Deferred stock compensation..... (2,713) -- --
Amortization of deferred stock
compensation.................. 562 -- 562
-------- --------- --------
Balances at December 31, 1997... (2,151) (55,689) (9,930)
</TABLE>
See accompanying notes.
F-8
<PAGE> 353
HEALTHEON CORPORATION
CONSOLIDATED STATEMENT OF CONVERTIBLE REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE
REDEEMABLE CONVERTIBLE NOTE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
---------------------- ---------------------- ------------------- PAID-IN FROM
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL OFFICER
----------- -------- ----------- -------- ---------- ------ ---------- ----------
<S> <C> <C> <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 $ 4,502 $(349)
Net loss and comprehensive
loss.......................... -- -- -- -- -- -- -- --
Issuance of common stock for
option and restricted stock
exercises by employees........ -- -- -- -- 3,532,731 -- 5,849 --
Repurchase of employee common
stock......................... -- -- -- -- (714,896) -- (2,176) --
Issuance of Series B convertible
preferred stock for warrant
exercise...................... -- -- 1,017,229 2,034 -- -- -- --
Issuance of Series D convertible
redeemable preferred stock for
asset purchase................ 763,548 2,800 -- -- -- -- -- --
Dividends accrued on convertible
redeemable preferred stock.... -- 890 -- -- -- -- -- --
Conversion of redeemable
preferred and preferred stock
to common stock............... (17,252,408) (54,638) (22,019,921) (45,790) 39,272,329 4 94,115 --
Issuance of Series A convertible
preferred stock............... -- -- 7,683,341 46,101 -- -- -- --
Issuance of common stock for
asset purchases............... -- -- -- -- 2,936,209 -- 13,220 --
Repayment of note receivable
from officer.................. -- -- -- -- -- -- -- 349
Deferred stock compensation..... -- -- -- -- -- -- 8,160 --
Amortization of deferred stock
compensation.................. -- -- -- -- -- -- -- --
----------- -------- ----------- -------- ---------- -- -------- -----
Balances at December 31, 1998... -- $ -- 7,683,341 $ 46,101 54,463,097 $5 $123,670 $ --
=========== ======== =========== ======== ========== == ======== =====
<CAPTION>
TOTAL
DEFERRED STOCKHOLDERS'
STOCK ACCUM- EQUITY (NET
COMPEN- ULATED CAPITAL
SATION DEFICIT DEFICIENCY)
-------- --------- -------------
<S> <C> <C> <C>
Balances at December 31, 1997... $ (2,151) $ (55,689) $ (9,930)
Net loss and comprehensive
loss.......................... -- (54,048) (54,048)
Issuance of common stock for
option and restricted stock
exercises by employees........ -- -- 5,849
Repurchase of employee common
stock......................... -- -- (2,176)
Issuance of Series B convertible
preferred stock for warrant
exercise...................... -- -- 2,034
Issuance of Series D convertible
redeemable preferred stock for
asset purchase................ -- -- --
Dividends accrued on convertible
redeemable preferred stock.... -- -- --
Conversion of redeemable
preferred and preferred stock
to common stock............... -- 6,309 54,638
Issuance of Series A convertible
preferred stock............... -- -- 46,101
Issuance of common stock for
asset purchases............... -- -- 13,220
Repayment of note receivable
from officer.................. -- -- 349
Deferred stock compensation..... (8,160) -- --
Amortization of deferred stock
compensation.................. 3,376 -- 3,376
-------- --------- --------
Balances at December 31, 1998... $ (6,935) $(103,428) $ 59,413
======== ========= ========
</TABLE>
See accompanying notes.
F-9
<PAGE> 354
HEALTHEON CORPORATION
CONSOLIDATED STATEMENT OF CONVERTIBLE REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE
REDEEMABLE CONVERTIBLE NOTE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
---------------------- ---------------------- ------------------- PAID-IN FROM
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL OFFICER
----------- -------- ----------- -------- ---------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1998... -- $ -- 7,683,341 $ 46,101 54,463,097 $5 $123,670 $ --
Net loss and comprehensive loss
(unaudited)................... -- -- -- -- -- -- -- --
Issuance of common stock for
option exercises by employees
(unaudited)................... -- -- -- -- 1,003,903 -- 357 --
Issuance of common stock in
connection with initial public
offering, net of issuance
costs of $4,602 (unaudited)... -- -- -- -- 5,750,000 1 41,397 --
Conversion of preferred stock to
common stock in connection
with initial public offering
(unaudited)................... -- -- (7,683,341) (46,101) 7,683,341 1 46,100 --
Issuance of common stock for
services (unaudited).......... -- -- -- -- 8,020 -- 48 --
Issuance of common stock for
asset purchase (unaudited).... -- -- -- -- 1,833,333 -- 11,000 --
Deferred stock compensation
(unaudited)................... -- -- -- -- -- -- 6,261 --
Amortization of deferred stock
compensation (unaudited)...... -- -- -- -- -- -- -- --
----------- -------- ----------- -------- ---------- -- -------- -----
Balances at March 31, 1999
(unaudited)................... -- $ -- -- $ -- 70,741,694 $7 $228,833 $ --
=========== ======== =========== ======== ========== == ======== =====
<CAPTION>
TOTAL
DEFERRED STOCKHOLDERS'
STOCK ACCUM- EQUITY (NET
COMPEN- ULATED CAPITAL
SATION DEFICIT DEFICIENCY)
-------- --------- -------------
<S> <C> <C> <C>
Balances at December 31, 1998... $ (6,935) $(103,428) $ 59,413
Net loss and comprehensive loss
(unaudited)................... -- (18,569) (18,569)
Issuance of common stock for
option exercises by employees
(unaudited)................... -- -- 357
Issuance of common stock in
connection with initial public
offering, net of issuance
costs of $4,602 (unaudited)... -- -- 41,398
Conversion of preferred stock to
common stock in connection
with initial public offering
(unaudited)................... -- -- --
Issuance of common stock for
services (unaudited).......... -- -- 48
Issuance of common stock for
asset purchase (unaudited).... -- -- 11,000
Deferred stock compensation
(unaudited)................... (6,261) -- --
Amortization of deferred stock
compensation (unaudited)...... 2,084 -- 2,084
-------- --------- --------
Balances at March 31, 1999
(unaudited)................... $(11,112) $(121,997) $ 95,731
======== ========= ========
</TABLE>
See accompanying notes.
F-10
<PAGE> 355
HEALTHEON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------ ------------------
1998 1997 1996 1999 1998
-------- -------- -------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $(54,048) $(28,005) $(18,606) $(18,569) $(9,676)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of intangibles............................... 13,382 7,564 5,402 4,177 2,643
Depreciation.............................................. 6,198 1,755 964 1,769 899
Amortization of deferred stock compensation............... 3,376 562 -- 2,084 479
Common stock, warrants and preferred stock issued for
services................................................ -- 119 500 48 --
Dividends on ActaMed's convertible redeemable preferred
stock................................................... 890 2,870 2,548 -- 890
Changes in operating assets and liabilities:
Accounts receivable..................................... (3,510) (806) (5,066) (2,470) (529)
Other assets............................................ 420 (224) (325) (3,069) (365)
Accounts payable........................................ 2,857 751 1,139 (1,161) 1,703
Accrued compensation and other liabilities.............. 4,996 345 800 4,127 359
Deferred revenue........................................ (1,522) (1,285) 3,078 1,723 624
-------- -------- -------- -------- -------
Net cash used in operating activities....................... (26,961) (16,354) (9,566) (11,341) (2,973)
-------- -------- -------- -------- -------
Cash flows from investing activities:
Purchase of short-term investments.......................... (22,529) (5,300) -- (15,148) (3,083)
Maturities of short-term investments........................ 10,401 -- -- 7,790 7,059
Decrease (increase) in restricted cash...................... -- (867) -- 867 --
Purchases of property and equipment......................... (6,340) (2,817) (2,027) (4,048) (2,021)
Cash paid in business combination........................... (652) -- -- -- --
Acquisition costs related to business combination........... -- -- (316) -- --
Capitalized internally developed software costs............. -- (291) (1,001) -- --
-------- -------- -------- -------- -------
Net cash used in investing activities....................... (19,120) (9,275) (3,344) (10,539) 1,955
-------- -------- -------- -------- -------
Cash flows from financing activities:
Proceeds from line of credit borrowings and bridge notes.... -- 5,395 30 -- --
Payment of line of credit borrowings........................ (2,212) -- -- (159) --
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................... 48,135 29,530 11,107 -- --
Proceeds from issuance of common stock, net of
repurchases............................................... 3,673 266 144 41,755 26
Payments on note receivable from officer.................... 349 151 -- -- 168
Principal payments of capital lease obligations............. (979) (748) (218) (716) (322)
-------- -------- -------- -------- -------
Net cash from financing activities.......................... 48,966 34,594 11,063 40,880 (128)
-------- -------- -------- -------- -------
Net increase (decrease) in cash and cash equivalents........ 2,885 8,965 (1,847) 19,000 (1,146)
Cash and cash equivalents at beginning of period............ 16,504 7,539 9,386 19,389 16,504
-------- -------- -------- -------- -------
Cash and cash equivalents at end of period.................. $ 19,389 $ 16,504 $ 7,539 $ 38,389 $15,358
======== ======== ======== ======== =======
Supplemental disclosure of cash flow information:
Interest paid............................................. $ 350 $ 252 $ 56 $ 139 $ 116
======== ======== ======== ======== =======
Supplemental schedule of noncash investing and financing
activities:
Equipment acquired under capital lease obligations........ $ 4,236 $ 774 $ 2,083 $ 983 $ 277
======== ======== ======== ======== =======
Issuance of note receivable from officer for preferred
stock................................................... $ -- $ 500 $ -- $ -- $ --
======== ======== ======== ======== =======
Conversion of bridge notes to preferred stock............. $ -- $ 2,000 $ -- $ -- $ --
======== ======== ======== ======== =======
Issuance of convertible redeemable preferred stock for
business combination.................................... $ -- $ -- $ 21,000 $ -- $ --
======== ======== ======== ======== =======
Issuance of convertible redeemable preferred stock for
asset purchase.......................................... $ 2,800 $ 8,500 $ -- $ -- $ --
======== ======== ======== ======== =======
Issuance of common stock for asset purchases.............. $ 13,220 $ -- $ -- $ 11,000 $ 2,800
======== ======== ======== ======== =======
Deferred stock compensation related to options granted.... $ 8,160 $ 2,713 $ -- $ 6,261 $ 1,353
======== ======== ======== ======== =======
Conversion of convertible redeemable preferred and
convertible preferred stock to common stock............. $ 94,119 $ -- $ -- $ 46,101 $ --
======== ======== ======== ======== =======
</TABLE>
See accompanying notes.
F-11
<PAGE> 356
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 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 and Healtheon was incorporated on December 26, 1995. All
financial information has been restated to reflect the combined operations of
Healtheon and ActaMed.
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.
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.
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.
F-12
<PAGE> 357
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 1998 IS UNAUDITED)
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,
MARCH 31, ------------------
1999 1998 1997
----------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Cash equivalents:
Corporate and other non-government debt
securities..................................... $35,339 $16,858 $12,704
Money market funds................................ 108 43 3,429
------- ------- -------
35,447 16,901 16,133
Short-term investments:
Government securities............................. 5,833 -- --
Corporate and other non-government debt
securities..................................... 18,953 17,428 5,300
------- ------- -------
24,786 17,428 5,300
------- ------- -------
$60,233 $34,329 $21,433
======= ======= =======
</TABLE>
Net unrealized gains (losses) were immaterial at March 31, 1999 and
December 31, 1998 and 1997.
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, 1998 and 1997, 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 at December 31, 1998 and 1997. We had no restricted
cash at March 31, 1999.
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.
F-13
<PAGE> 358
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 1998 IS UNAUDITED)
Software Development Costs
Software development costs are incurred in the development or enhancement
of software utilized in providing Healtheon's 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 $291,000 in
1997. There were no internally developed software costs capitalized in 1998 or
during the three months ended March 31, 1999. 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 operations was
approximately $782,000, $376,000 and $134,000 for the years ended December 31,
1998, 1997 and 1996. Amortization expense was approximately $108,000 for the
three months ended March 31, 1998.
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 in 1998 noted above. No impairment losses were recorded in
1997 and 1996.
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. Services
revenue also includes revenue from the management and operation of customers' IT
infrastructure. 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 and revenue from the management and operation of
customers' IT infrastructure is recognized as the services are performed. Cash
received in excess of revenue recognized relating to 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 UnitedHealth Group and SmithKline Labs. To date, we have derived
no significant revenue from brokers, value-added resellers or systems
integrators.
During 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
F-14
<PAGE> 359
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 1998 IS UNAUDITED)
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. In the three months ended March 31, 1999 and 1998, we recognized
revenue of approximately $4,927,000 and $3,800,000 for the IT services and
approximately $549,000 and $777,000 for the development services. In fiscal
1998, we recognized revenue of approximately $15,061,000 for the IT services and
approximately $6,471,000 for the development services. In fiscal 1997, we
recognized revenue of approximately $2,100,000 for the IT services and
approximately $200,000 for the development services. Revenue recognized for IT
services included $3,466,000 in the three months ended March 31, 1999,
$3,450,000 in the three months ended March 31, 1998, $11,792,000 in fiscal 1998
and $1,909,000 in fiscal 1997 related to leased personnel and facilities. These
amounts were also included in cost of operations 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
(AICPA) 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. Under the Agreement, we recognized software
license revenue of approximately $1,200,000 in 1997 and approximately $3,400,000
in 1996, upon delivery of the software. All revenue under the Agreement had been
recognized by the end of 1997.
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 ActaMed's 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. We recognized revenue
from the License of $195,000 in each of the three months ended March 31, 1999
and 1998, $780,000 in fiscal 1998, $780,000 in fiscal 1997 and $995,000 in
fiscal 1996. Accounts receivable included $19,000 at March 31, 1999, $815,000 at
December 31, 1998 and $738,000 at December 31, 1997 due from IBM. Other assets
included $835,000 at March 31, 1999, $900,000 at December 31, 1998 and
$1,715,000 at December 31, 1997 due from IBM. Deferred revenue included
$1,366,000 at March 31, 1999, $1,561,000 at December 31, 1998 and $2,341,000 at
December 31, 1997 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.
F-15
<PAGE> 360
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 1998 IS UNAUDITED)
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
Healtheon currently derives a substantial portion of its consolidated
revenue from a few large customers, two of which are related parties. Four
customers represented 30%, 12%, 11% and 10% of the total balance of trade
accounts receivable and amounts due from related parties at December 31, 1998
and two customers represented 35% and 17% of the total balance of trade accounts
receivable and amounts due from related parties at December 31, 1997. 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. We added approximately $103,000 in fiscal 1998, $35,000 in
fiscal 1997 and $41,000 in fiscal 1996 to our bad debt reserves. Total
write-offs of uncollectible amounts were $22,000 in fiscal 1998, $5,000 in
fiscal 1997 and zero in 1996.
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 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.
We have had no 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. 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.
F-16
<PAGE> 361
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 1998 IS UNAUDITED)
The following table presents the calculation of basic and diluted net loss
per common share follows (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------ ------------------
1998 1997 1996 1999 1998
-------- -------- -------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss................................. $(54,048) $(28,005) $(18,606) $(18,569) $(9,676)
======== ======== ======== ======== =======
Basic and diluted:
Weighted-average shares of common stock
outstanding......................... 36,418 8,621 7,398 63,789 9,498
Less: Weighted-average shares subject
to repurchase....................... (1,431) (1,398) (815) (1,124) (1,399)
-------- -------- -------- -------- -------
Weighted-average shares used in computing
basic and diluted net loss per common
share.................................. 34,987 7,223 6,583 62,665 8,099
======== ======== ======== ======== =======
Basic and diluted net loss per common
share.................................. $ (1.54) $ (3.88) $ (2.83) $ (0.30) $ (1.19)
======== ======== ======== ======== =======
</TABLE>
We have excluded all convertible redeemable preferred stock, convertible
preferred stock, warrants, outstanding stock options and shares subject to
repurchase by Healtheon from the calculation of diluted loss per common share
because all such securities are anti-dilutive for all periods presented. The
total number of shares excluded from the calculation of diluted loss per share
was 18,208,030 in the three months ended March 31, 1999, 52,570,914 in the three
months ended March 31, 1998, 23,020,426 in fiscal 1998, 51,216,689 in fiscal
1997 and 36,643,084 in fiscal 1996. See Notes 9, 10 and 11 for further
information on these securities.
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.
Reclassifications
Certain reclassifications have been made to the financial statements to
conform with the current presentation.
Unaudited Financial Statements
The accompanying unaudited financial statements as of March 31, 1999 and
for the three months ended March 31, 1999 and 1998 have been prepared on a basis
substantially the same as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial information set forth therein.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (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 do
not currently engage in hedging
F-17
<PAGE> 362
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 1998 IS UNAUDITED)
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 AICPA 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.
In December 1998, the AICPA issued SOP. 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions." SOP 98-9
requires recognition of revenue using the "residual method" in a
multiple-element software arrangement when fair value does not exist for one or
more of the delivered elements in the arrangement. Under the "residual method,"
the total fair value of the undelivered elements is deferred and recognized in
accordance with SOP 97-2. We are required to implement SOP 98-9 for the year
ending December 31, 2000. SOP 98-9 also extends the deferral of the application
of SOP 97-2 to certain other multiple-element software arrangements through
Healtheon's year ending December 31, 1999. Adoption of SOP 98-9 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 UnitedHealth Group, 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 UnitedHealth Group's local health
plans since 1992.
In connection with the acquisition, UnitedHealth Group 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
UnitedHealth Group 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
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
remainder 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 1997 and 1996,
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.
F-18
<PAGE> 363
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 1998 IS UNAUDITED)
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 1996 (in thousands,
except per share data, unaudited):
<TABLE>
<S> <C>
Net revenue................................................. $ 12,031
========
Net loss.................................................... $(20,492)
========
Basic and diluted net loss per common share................. $ (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.
Separate results of the combined entities for the four months ended April
30, 1998 (period ended immediately prior to the acquisition) and the full years
of 1997 and 1996 were as follows (in thousands, unaudited):
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED YEARS ENDED DECEMBER 31,
APRIL 30, ------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Healtheon....................................... $ 6,405 $ 3,199 $ 1,200
ActaMed......................................... 6,690 10,191 9,813
-------- -------- --------
$ 13,095 $ 13,390 $ 11,013
======== ======== ========
Net loss:
Healtheon....................................... $ (6,664) $(13,979) $ (8,543)
ActaMed......................................... (6,186) (14,026) (10,063)
-------- -------- --------
$(12,850) $(28,005) $(18,606)
======== ======== ========
</TABLE>
There were no intercompany transactions between the two companies or
significant conforming accounting adjustments.
F-19
<PAGE> 364
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 1998 IS UNAUDITED)
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 were 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.
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 Labs, to
outsource the network connection between their customers and SmithKline Labs
laboratories. In connection with this transaction, SmithKline Labs 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
Labs and its provider customers.
As part of that transaction, we acquired a license to SmithKline Labs' 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.
In January 1999, 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-20
<PAGE> 365
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 1998 IS UNAUDITED)
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997
------- ------
<S> <C> <C>
Computer equipment.......................................... $14,979 $6,238
Office equipment, furniture and fixtures.................... 2,958 1,237
Purchased software for internal use......................... 2,624 1,240
Leasehold improvements...................................... 1,465 328
------- ------
22,026 9,043
Less accumulated depreciation and amortization.............. (9,741) (3,543)
------- ------
Property and equipment, net................................. $12,285 $5,500
======= ======
</TABLE>
Property and equipment included assets acquired under capital lease
obligations with a cost of approximately $6,481,000 at December 31, 1998 and a
cost of approximately $3,076,000 at December 31, 1997. Accumulated depreciation
related to the assets acquired under capital leases totaled $2,656,000 at
December 31, 1998 and $1,174,000 at December 31, 1997.
5. INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
AMORTIZATION MARCH 31, --------------------
PERIOD 1999 1998 1997
------------ ----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Services agreements.................. 3 years $ 2,855 $ 2,855 $ 2,855
Software technology rights........... 3-5 years 32,244 23,107 17,664
Internally developed software........ 3 years -- -- 1,292
Trademarks........................... 3 years 216 216 216
Goodwill............................. 3 years 15,363 15,668 8,012
Other................................ 2-3 years 2,934 2,924 1,541
-------- -------- --------
53,612 44,770 31,580
Less accumulated amortization........ (28,784) (24,902) (12,812)
-------- -------- --------
$ 24,828 $ 19,868 $ 18,768
======== ======== ========
</TABLE>
6. COMMITMENTS
Healtheon has entered into several lease lines of credit. Lease lines
entered into totaled $3,500,000 in 1996, $2,000,000 in 1997 and $7,000,000 in
1998. Approximately $7,092,000 had been utilized under these lease lines through
December 31, 1998. At December 31, 1998, approximately $6,508,000 was available
for future utilization under these lease lines. This amount included
approximately $1,100,000 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."
F-21
<PAGE> 366
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 1998 IS UNAUDITED)
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 $2,386,000 in 1998, $1,165,000 in 1997 and
$1,646,000 in 1996. These amounts are net of sublease income from a related
party of approximately $65,000 in 1998, $58,000 in 1997 and $68,000 in 1996.
Future minimum lease commitments under noncancellable lease agreements at
December 31, 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
<S> <C> <C>
Year ending December 31,
1999...................................................... $ 2,612 $2,636
2000...................................................... 2,055 2,035
2001...................................................... 1,570 1,151
2002...................................................... 968 --
2003...................................................... 987 --
Thereafter................................................ 4,277 --
------- ------
Total minimum lease payments................................ $12,469 5,822
=======
Amount representing interest................................ (543)
------
Present value of minimum lease payments under capital lease
obligations............................................... 5,279
Less current portion........................................ (2,295)
------
Non-current portion......................................... $2,984
======
</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, 1998, the note
had been paid in full.
In March 1999, Healtheon loaned $2.5 million to an officer for the purchase
of a residence upon relocation to the San Francisco Bay Area. The loan is
secured by a first priority lien on certain residential real property. The loan
does not bear interest and must be repaid by the officer upon the earlier of the
end of five years, the sale of the residence, or the discontinuation of the
officer's employment with Healtheon. The officer must apply to the loan any
proceeds received from the sale of Healtheon common stock resulting from the
exercise of the officer's stock options. Healtheon has agreed to repurchase the
residence from the officer upon request at a price equal to the officer's
purchase price of the residence plus the cost of any improvements. Additionally,
Healtheon has agreed to reimburse the officer for the amount of taxes payable by
the officer for his residence as well as resulting from the loan. On a quarterly
basis, compensation expense is recorded for the amount of interest that would be
payable had the loan been on commercial terms. In addition, reimbursements for
taxes payable by the officer for the residence will be treated as compensation
expense.
F-22
<PAGE> 367
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 1998 IS UNAUDITED)
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 (7.75% at December 31, 1998).
Interest is payable monthly with payments commencing on September 30, 1997. The
line of credit availability declines over the term to $1,215,000 at December 31,
1998 and $547,000 at December 31, 1999, and expires on September 5, 2000. The
amount outstanding is collateralized by certain assets. At March 31, 1999,
$1,054,000 was outstanding under this agreement, and at December 31, 1998,
$1,213,000 was outstanding under the agreement.
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 bore
interest at the bank's prime rate (7.75% at December 31, 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 was
payable monthly with payments commencing on January 31, 1998. The principal
balance of the loan was repaid in full in August 1998.
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.
9. CONVERTIBLE REDEEMABLE PREFERRED STOCK
A summary of ActaMed's 8% cumulative convertible redeemable preferred stock
is as follows.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------
SHARES ISSUED AND LIQUIDATION
AUTHORIZED OUTSTANDING PREFERENCE
---------- ----------- -----------
<S> <C> <C> <C>
Series A...................................... 5,519,912 5,519,912 $10,458,000
Series B...................................... 2,162,759 2,162,759 8,171,000
Series C...................................... 6,488,276 6,488,276 23,936,000
Series D...................................... 2,317,913 2,317,913 8,500,000
---------- ---------- -----------
16,488,860 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
F-23
<PAGE> 368
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 1998 IS UNAUDITED)
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.
10. STOCKHOLDERS' EQUITY
Initial Public Offering
On February 10, 1999, Healtheon completed its initial public offering. We
sold 5,750,000 shares of common stock to the public and realized net proceeds of
$41,398,000.
Convertible Preferred Stock
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 $46,101,000 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. Upon the
closing of our initial public offering in February 1999, all of the outstanding
shares of Series A preferred stock were converted into shares of common stock.
At December 31, 1997, 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, 1997
----------------------------------------
ISSUED
SHARES AND LIQUIDATION
DESIGNATED OUTSTANDING PREFERENCE
---------- ----------- -----------
<S> <C> <C> <C>
Series A...................................... 10,305,000 10,305,000 $ 5,153,000
Series B...................................... 6,105,000 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 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.
F-24
<PAGE> 369
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 1998 IS UNAUDITED)
All outstanding shares of preferred stock were converted into common stock
in connection with our initial public offering.
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. This resolution
became effective upon the date of our initial public offering, February 10,
1999.
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 warrant was outstanding at December 31, 1997 and in May 1998
was converted to a warrant to purchase common stock. It remained outstanding at
December 31, 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 December 31, 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 December 31, 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 December 31, 1998, were converted to
warrants to purchase 44,718 shares of common stock.
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. The warrant vests as to 200,000 shares in
December 1999 and as to an additional 100,000 shares in December 2000, 2001 and
2002. The warrant expires in March 2003. The warrant has been accounted for as a
fixed
F-25
<PAGE> 370
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 1998 IS UNAUDITED)
award since there is a significant economic penalty for nonperformance under the
service agreement. The value of the warrant at the date of issuance was not
material.
At December 31, 1998, we had reserved 2,577,240 shares of our common stock
for issuance upon exercise of the outstanding warrants for common stock.
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. 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, 1998, a total of 15,000,000 shares had been reserved under the 1996
Plan and 1,237,424 shares remained available for future grant under the 1996
Plan. The number of shares reserved under the 1996 Plan is subject to an annual
increase equal to the lesser of 5% of the outstanding common shares or a lesser
amount determined by the Board of Directors. In January 1999, an additional
3,107,321 shares were reserved under the 1996 Plan under the annual increase
provision. In February 1999, the Board of Directors and the stockholders
approved an amendment to increase the number of shares reserved for issuance
under the 1996 Plan by an additional 1,000,000 shares.
On October 20, 1998, we offered our employees who were granted options from
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 an
option price of $3.55 per share; the deemed fair value of Healtheon common stock
on that date was $4.80. 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 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.
Shares issued subject to restricted stock purchase agreements totaled
1,098,732 in 1998, 850,000 in 1997 and 1,806,000 in 1996. All of these shares
were issued to employees for cash. The common stock is subject to repurchase at
the original exercise price until vested, at our option. The shares vest over a
period of time as determined by the Board of Directors for each individual
purchase agreement, generally four years. During 1998, 259,896 shares were
repurchased from terminated employees and 613,542 shares were repurchased in
1997. In addition, on December 14, 1998, 455,000 shares of common stock issued
in July 1998 subject to restricted stock purchase agreements were rescinded as
part of the repricing program. Shares subject to repurchase totaled
approximately 1,247,000 at December 31, 1998, approximately 1,430,000 at
December 31, 1997 and approximately 1,660,000 at December 31, 1996.
F-26
<PAGE> 371
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 1998 IS UNAUDITED)
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
---------- ----------------
<S> <C> <C>
Options outstanding at December 31, 1995................ 2,474,438 $ .88
Granted............................................... 3,004,384 .54
Exercised............................................. (300) .05
Canceled.............................................. (233,907) .78
----------
Options outstanding at December 31, 1996................ 5,244,615 .68
Granted............................................... 5,394,008 .73
Exercised............................................. (547,844) .16
Canceled.............................................. (890,528) .49
----------
Options outstanding at December 31, 1997................ 9,200,251 .72
Granted............................................... 7,743,881 4.32
Exercised............................................. (2,433,999) .59
Canceled.............................................. (2,997,333) 4.95
----------
Options outstanding at December 31, 1998................ 11,512,800 2.06
Granted (unaudited)................................... 4,187,225 6.32
Exercised (unaudited)................................. (1,003,903) .34
Canceled (unaudited).................................. (216,748) 2.52
==========
Options outstanding at March 31, 1999 (unaudited)....... 14,479,374 $3.41
==========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Weighted-average fair value of options granted.............. $.67 $.18 $.15
==== ==== ====
</TABLE>
The following table summarizes information regarding options outstanding
and exercisable at December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
WEIGHTED- REMAINING WEIGHTED-
AVERAGE CONTRACTUAL AVERAGE
NUMBER EXERCISE LIFE NUMBER PRICE
EXERCISE PRICES OUTSTANDING PRICE (IN YEARS) EXERCISABLE EXERCISE
--------------- ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ .03 - $ .08............................. 1,218,970 $ .04 6.28 687,696 $ .04
$ .20 - $ .25............................. 2,887,653 .25 8.54 2,192,610 .25
$1.00 - $1.50............................. 1,597,411 1.25 7.90 730,210 1.35
$2.00 - $3.24............................. 1,368,002 2.84 8.70 661,437 3.22
$3.55..................................... 2,863,225 3.55 9.67 -- --
$3.67 - $4.50............................. 1,550,239 4.36 9.45 1,500 4.50
$6.30 - $8.00............................. 27,300 7.26 9.71 -- --
---------- ---------
$ .03 - $8.00............................. 11,512,800 $2.06 8.64 4,273,453 $ .86
========== =========
</TABLE>
We recorded deferred stock compensation of approximately in $6,261,000 in
the three months ended March 31, 1999, $8,160,000 in 1998 and $2,713,000 in
1997. These amounts represented the difference
F-27
<PAGE> 372
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 1998 IS UNAUDITED)
between the exercise price and the deemed fair value of our common stock on the
date the stock options were granted. We recorded amortization of deferred stock
compensation of approximately $2,084,000 in the three months ended March 31,
1999, $3,376,000 in 1998 and $562,000 in 1997 based on a graded vesting method.
At March 31, 1999, we had a total of approximately $11,112,000 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 our 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: risk-free
interest rate of approximately 4.9% in 1998, 6.0% in 1997 and 6.0% in 1996; a
weighted-average expected life of the option of 3.5 years in 1998, 4.2 years in
1997 and 4.3 years in 1996; and a dividend yield of zero for all years.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net loss (in thousands):
As reported...................................... $(54,048) $(28,005) $(18,606)
======== ======== ========
Pro forma........................................ $(55,414) $(28,173) $(18,695)
======== ======== ========
Basic and diluted net loss per common share:
As reported...................................... $ (1.54) $ (3.88) $ (2.83)
======== ======== ========
Pro forma........................................ $ (1.58) $ (3.90) $ (2.84)
======== ======== ========
</TABLE>
Employee Stock Purchase Plan
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. The 1998 Purchase Plan became
effective on the effective date of our initial public offering, February 10,
1999. 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-28
<PAGE> 373
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 1998 IS UNAUDITED)
purposes. Significant components of Healtheon's deferred tax assets
(liabilities) were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 29,984 $ 14,263
Intangible assets......................................... 5,491 3,688
Research and development tax credit....................... 2,353 1,014
Other..................................................... 2,775 308
-------- --------
Total deferred tax assets................................... 40,603 19,273
Valuation allowance......................................... (40,530) (18,931)
-------- --------
Net deferred tax assets..................................... 73 342
-------- --------
Deferred tax liabilities:
Depreciation.............................................. (73) (45)
Capitalized software development costs.................... -- (297)
-------- --------
Total deferred tax liabilities.............................. (73) (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 $21,599,000 in 1998, $9,386,000 in 1997 and $6,580,000 in
1996.
At December 31, 1998, we had net operating loss carryforwards for federal
income tax purposes of approximately $76,500,000, which expire in 2009 through
2018, and federal tax credits of approximately $1,800,000, which expire in 2009
through 2018.
Approximately $19,890,000 of the net operating loss carryforwards at
December 31, 1998 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. Under this agreement,
we granted the partnership exclusive licenses to use ActaMed's technology for
industries other than the healthcare industry. Under the agreement, we will
receive a commercial royalty on the partnership's gross receipts. If we desire
in the future to expand to other industries, the partnership must either develop
that industry in a defined time period or rights to that industry revert to
Healtheon. The agreement expired unexercised on December 3, 1998. No fees were
paid to Healtheon under this agreement.
F-29
<PAGE> 374
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 1998 IS UNAUDITED)
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 $80,000 in 1998, $46,000 in 1997 and $58,000 in 1996.
Approximately $124,000 in 1998, $78,000 in 1997 and $187,000 in 1996 was
reimbursed for the use of the network maintained by Healtheon. All of the
amounts reimbursed are included as an offset to general and administrative
expenses in the accompanying consolidated statements of operations. Amounts due
from the related party of $40,000 at December 31, 1998 and $72,000 at December
31, 1997 were included in other current assets in the accompanying consolidated
balance sheets.
14. SEGMENT INFORMATION
Healtheon derives its revenue from a single operating segment, healthcare
transaction and information services delivered over the Internet, private
intranets or other networks and from development and consulting contracts
related to these services. In addition, we manage the information technology
operations of some of our customers.
Revenue derived from each of these services is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------------- -----------------------------
1999 1998 1998 1997 1996
-------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Healthcare transactions and
information services............ $12,628 $5,954 $33,777 $11,290 $11,013
Information technology operations
management...................... 4,927 3,800 15,061 2,100 --
------- ------ ------- ------- -------
Total revenue..................... $17,555 $9,754 $48,838 $13,390 $11,013
======= ====== ======= ======= =======
</TABLE>
Geographic Information
Healtheon operates solely within the United States and to date has derived
all of its revenue from within the United States. All of our assets are located
within the United States.
Major Customers
For the three months ended March 31, 1999, four customers accounted for
35%, 19%, 16% and 16% of consolidated revenue. In 1998, four customers accounted
for 25%, 22%, 21% and 19% of consolidated revenue. In 1997, two customers
accounted for 55% and 15% of consolidated revenue. In 1996, two customers
accounted for 46% and 38% of consolidated revenue.
15. SUBSEQUENT EVENTS
MedE AMERICA Acquisition
On April 21, 1999 Healtheon announced that it had entered into an agreement
to acquire MEDE AMERICA Corporation ("MEDE"), a leading provider of healthcare
transaction solutions for pharmacies, hospitals, physicians, dentists, payers
and pharmacy benefits managers (PBMs). Under the terms of the agreement,
Healtheon will exchange 0.6593 shares of common stock, subject to adjustment if
the price of the Healtheon stock is greater than $63.99 or less than $38.39, for
each share of MEDE stock. The transaction is preliminarily valued at
approximately $525.3 million. The acquisition, which is expected to be accounted
for using the purchase method of accounting, is anticipated to be completed in
the third
F-30
<PAGE> 375
HEALTHEON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 1998 IS UNAUDITED)
quarter of 1999. The transaction is subject to customary closing conditions,
including approval by MEDE stockholders, and is subject to regulatory review.
WebMD Acquisition
On May 20, 1999 Healtheon announced that it had entered into an agreement
to acquire WebMD, Inc. ("WebMD"), a leading provider of integrated Web-based
solutions for the administrative, communications and information needs of
healthcare professionals and for the healthcare information needs of consumers.
Under the terms of the agreement, Healtheon will exchange 1.8150 shares of
common stock for each share of WebMD stock. The transaction is preliminarily
valued at approximately $6,671.6 million. The acquisition, which is expected to
be accounted for using the purchase method of accounting, is anticipated to be
completed in the third quarter of 1999. The transaction is subject to customary
closing conditions, including approval by WebMD stockholders, and is subject to
regulatory review.
F-31
<PAGE> 376
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
WebMD, Inc.
We have audited the accompanying consolidated balance sheets of WebMD, Inc.
(formerly Endeavor Technologies, Inc.) and subsidiaries as of December 31, 1997
and 1998, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. 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.
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, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
WebMD, Inc. and subsidiaries at December 31, 1997 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
January 16, 1999, except for
Note 12, as to which the
date is April 9, 1999
F-32
<PAGE> 377
WEBMD, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1997 1998 1999
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,696 $ 6,226 $ 9,673
Accounts receivable....................................... -- -- 770
Current portion of note receivable........................ 100 102 109
Current portion of prepaid software licenses, content, and
services................................................ -- 5,000 24,216
Other current assets...................................... 53 2,684 1,304
------- -------- --------
Total current assets.................................... 2,849 14,012 36,072
Property and equipment, net................................. 73 3,140 4,839
Prepaid software licenses, content, and services, net of
current portion........................................... -- -- 41,192
Other assets................................................ -- -- 2,364
Intangibles, net............................................ 118 1,060 50,861
Note receivable, less current portion....................... 106 33 --
------- -------- --------
Total assets from continuing operations..................... 3,146 18,245 135,328
Total assets from discontinued operations................... 6,044 -- --
------- -------- --------
Total assets.............................................. $ 9,190 $ 18,245 $135,328
======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 317 $ 3,101 $ 2,636
Accrued expenses............................................ -- 5,711 8,920
Leases payable.............................................. -- -- 340
Other liabilities........................................... -- 887 634
------- -------- --------
Total current liabilities................................. 317 9,699 12,530
Leases payable, net of current portion.................... -- -- 353
Notes payable, net of discount.............................. 2,965 -- --
------- -------- --------
Total liabilities from continuing operations................ 3,282 9,699 12,883
Total liabilities from discontinued operations.............. 1,762 -- --
------- -------- --------
Total liabilities.................................. 5,044 9,699 12,883
Warrants with redemption feature............................ 1,110 3,260 3,798
Shareholders' equity:
Preferred stock; no par value; 10,000,000 shares
authorized; 404,091, 1,281,243 and 5,937,529 shares
issued and outstanding at December 31, 1997, 1998 and
March 31, 1999.......................................... 2,598 16,100 120,928
Common stock; no par value; 97,000,000 shares authorized:
Common stock, voting; 3,000,000, 3,000,000 and
2,500,000 shares issued and outstanding at December
31, 1997 and 1998 and March 31, 1999, respectively... 853 853 643
Series B, non-voting; 1,400,000 shares issued and
outstanding.......................................... 289 289 289
Series C, non-voting; 1,500,000 shares issued and
outstanding.......................................... 568 568 568
Series D, non-voting; 3,506,805, 4,486,805 and
5,096,805 shares issued and outstanding at December
31, 1997, 1998 and March 31, 1999, respectively...... 3,490 10,138 37,139
Series E, non-voting; 1,100,000, 2,100,000 and
2,100,000 shares issued and outstanding at December
31, 1997, 1998 and March 31, 1999, respectively...... 1,556 3,001 3,001
Deferred compensation..................................... (8) (1,007) (924)
Stock subscription receivables............................ (200) -- --
Accumulated deficit....................................... (6,110) (24,656) (42,997)
------- -------- --------
Total shareholders' equity................................ 3,036 5,286 118,647
------- -------- --------
Total liabilities and shareholders' equity......... $ 9,190 $ 18,245 $135,328
======= ======== ========
</TABLE>
See accompanying notes.
F-33
<PAGE> 378
WEBMD, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------- -----------------------------
1996 1997 1998 1998 1999
---------- ---------- ----------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue........................... $ -- $ -- $ 408 $ -- $ 2,458
Operating expenses:
Product development and
content...................... -- 566 7,484 695 5,552
Sales and marketing............. -- 213 3,739 63 8,770
General and administrative...... -- 1,806 10,123 509 2,651
Write-down of customer
terminals.................... -- -- 1,795 -- --
Depreciation and amortization... -- 9 303 10 3,502
---------- ---------- ----------- ----------- -----------
Total operating
expenses.............. -- 2,594 23,444 1,277 20,475
---------- ---------- ----------- ----------- -----------
Operating loss.................... -- (2,594) (23,036) (1,277) (18,017)
Interest expense, net............. -- (725) (139) (146) 214
---------- ---------- ----------- ----------- -----------
Net loss from continuing
operations...................... -- (3,319) (23,175) (1,423) (17,803)
Discontinued operations:
Loss from discontinued
operations................... (1,682) (1,195) -- (110) --
Gain on disposal of discontinued
operations, net of operating
losses of $393 in 1998....... -- 165 7,709 -- --
---------- ---------- ----------- ----------- -----------
Net loss before extraordinary
item............................ (1,682) (4,349) (15,466) (1,533) (17,803)
Extraordinary loss on early
extinguishment of notes
payable...................... -- -- (930) -- --
---------- ---------- ----------- ----------- -----------
Net loss.......................... (1,682) (4,349) (16,396) (1,533) (17,803)
Accretion of warrants with
redemption feature.............. -- -- (2,150) (30) (538)
---------- ---------- ----------- ----------- -----------
Net loss applicable to common
shareholders.................... $ (1,682) $ (4,349) $ (18,546) $ (1,563) $ (18,341)
========== ========== =========== =========== ===========
Net loss per share (basic and
diluted):
Continuing operations (including
redemption feature).......... $ -- $ (0.40) $ (2.08) $ (0.13) $ (1.46)
Discontinued operations......... (0.64) (0.12) 0.63 (0.01) --
Extraordinary loss on early
extinguishment of note
payable...................... -- -- (0.07) -- --
---------- ---------- ----------- ----------- -----------
Net loss per share attributable
to common shareholders....... $ (0.64) $ (0.52) $ (1.52) $ (0.14) $ (1.46)
========== ========== =========== =========== ===========
Weighted average shares
outstanding..................... 2,611,918 8,300,261 12,195,680 10,911,944 12,532,916
========== ========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-34
<PAGE> 379
WEBMD, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------------------------------------------------------------
COMMON STOCK SERIES B SERIES C SERIES D
------------------- ------------------ ------------------ -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------ --------- ------ --------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996
(Combined)........................ 1,000,000 $ 35 -- $ -- -- $ -- -- $ --
Stock subscription receivable
including non-cash compensation
charge.......................... 2,500,000 1,031 -- -- -- -- -- --
Issuance of stock for cash........ -- -- 700,000 289 250,000 361 -- --
Transfer of common stock series... (500,000) (207) -- -- 500,000 207 -- --
Net loss.......................... -- -- -- -- -- -- -- --
---------- ------ --------- ---- --------- ---- --------- -------
Balance at December 31, 1996
(Combined)........................ 3,000,000 859 700,000 289 750,000 568 -- --
Issuance of Endeavor stock to
founders........................ 2,000,000 -- 700,000 -- 750,000 -- -- --
Dissent of QDS minority
shareholders.................... (1,000,000) (6) -- -- -- -- -- --
Cancellation of the stock of
QDS............................. (2,000,000) -- (700,000) -- (750,000) -- -- --
Issuance of Endeavor stock in
exchange for QDS stock.......... 2,000,000 -- 700,000 -- 750,000 -- -- --
Transfer of common stock series... (1,000,000) -- -- -- -- -- 1,000,000 --
Stock subscription receivable..... -- -- -- -- -- -- 100,000 144
Issuance of stock for cash, net of
issuance costs.................. -- -- -- -- -- -- 1,897,500 2,598
Issuance of stock upon conversion
of note payable................. -- -- -- -- -- -- 509,305 735
Issuance of stock options......... -- -- -- -- -- -- -- 13
Non-cash stock option
compensation.................... -- -- -- -- -- -- -- --
Payment of stock subscription
receivable...................... -- -- -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- -- -- --
---------- ------ --------- ---- --------- ---- --------- -------
Balance at December 31, 1997........ 3,000,000 853 1,400,000 289 1,500,000 568 3,506,805 3,490
Exercise of stock options......... -- -- -- -- -- -- -- --
Issuance of stock including
non-cash compensation charge.... -- -- -- -- -- -- 800,000 1,336
Issuance of stock upon conversion
of note payable................. -- -- -- -- -- -- 100,000 144
Issuance of preferred stock for
cash............................ -- -- -- -- -- -- -- --
Issuance of stock for services.... -- -- -- -- -- -- 30,000 293
Issuance of stock for
acquisition..................... -- -- -- -- -- -- 50,000 650
Issuance of stock options
including non-cash compensation
charge.......................... -- -- -- -- -- -- -- 4,225
Non-cash stock option
compensation.................... -- -- -- -- -- -- -- --
Payment on stock subscription
receivable...................... -- -- -- -- -- -- -- --
Accretion of warrants with
redemption feature.............. -- -- -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- -- -- --
---------- ------ --------- ---- --------- ---- --------- -------
Balance at December 31, 1998........ 3,000,000 853 1,400,000 289 1,500,000 568 4,486,805 10,138
Issuance of stock upon exercise of
options......................... -- -- -- -- -- -- -- --
Issuance of stock for cash........ -- -- -- -- -- -- 10,000 145
Issuance of preferred stock for
cash............................ -- -- -- -- -- -- -- --
Issuance of stock for goods and
services........................ -- -- -- -- -- -- -- --
Issuance of stock in connection
with strategic alliances........ -- -- -- -- -- -- 100,000 1,446
Issuance of stock for
acquisitions.................... -- -- -- -- -- -- -- --
Issuances of warrants for
services........................ -- -- -- -- -- -- -- 25,200
Non-cash compensation expense..... -- -- -- -- -- -- -- --
Transfer of common stock series... (500,000) (210) -- -- -- -- 500,000 210
Accretion of warrants with
redemption feature.............. -- -- -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- -- -- --
---------- ------ --------- ---- --------- ---- --------- -------
Balance at March 31, 1999
(unaudited)....................... 2,500,000 $ 643 1,400,000 $289 1,500,000 $568 5,096,805 $37,139
========== ====== ========= ==== ========= ==== ========= =======
<CAPTION>
COMMON STOCK
------------------
SERIES E
------------------
SHARES AMOUNT
--------- ------
<S> <C> <C>
Balance at January 1, 1996
(Combined)........................ -- $ --
Stock subscription receivable
including non-cash compensation
charge.......................... -- --
Issuance of stock for cash........ -- --
Transfer of common stock series... -- --
Net loss.......................... -- --
--------- ------
Balance at December 31, 1996
(Combined)........................ -- --
Issuance of Endeavor stock to
founders........................ -- --
Dissent of QDS minority
shareholders.................... -- --
Cancellation of the stock of
QDS............................. -- --
Issuance of Endeavor stock in
exchange for QDS stock.......... -- --
Transfer of common stock series... -- --
Stock subscription receivable..... -- --
Issuance of stock for cash, net of
issuance costs.................. 1,100,000 1,556
Issuance of stock upon conversion
of note payable................. -- --
Issuance of stock options......... -- --
Non-cash stock option
compensation.................... -- --
Payment of stock subscription
receivable...................... -- --
Net loss.......................... -- --
--------- ------
Balance at December 31, 1997........ 1,100,000 1,556
Exercise of stock options......... 1,000,000 1,445
Issuance of stock including
non-cash compensation charge.... -- --
Issuance of stock upon conversion
of note payable................. -- --
Issuance of preferred stock for
cash............................ -- --
Issuance of stock for services.... -- --
Issuance of stock for
acquisition..................... -- --
Issuance of stock options
including non-cash compensation
charge.......................... -- --
Non-cash stock option
compensation.................... -- --
Payment on stock subscription
receivable...................... -- --
Accretion of warrants with
redemption feature.............. -- --
Net loss.......................... -- --
--------- ------
Balance at December 31, 1998........ 2,100,000 3,001
Issuance of stock upon exercise of
options......................... -- --
Issuance of stock for cash........ -- --
Issuance of preferred stock for
cash............................ -- --
Issuance of stock for goods and
services........................ -- --
Issuance of stock in connection
with strategic alliances........ -- --
Issuance of stock for
acquisitions.................... -- --
Issuances of warrants for
services........................ -- --
Non-cash compensation expense..... -- --
Transfer of common stock series... -- --
Accretion of warrants with
redemption feature.............. -- --
Net loss.......................... -- --
--------- ------
Balance at March 31, 1999
(unaudited)....................... 2,100,000 $3,001
========= ======
</TABLE>
See accompanying notes.
F-35
<PAGE> 380
WEBMD, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK STOCK TOTAL
-------------------- DEFERRED SUBSCRIPTION ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT COMPENSATION RECEIVABLES DEFICIT EQUITY
--------- -------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996
(Combined)......................... 38,460 $ 13 $ -- $ -- $ (79) $ (31)
Stock subscription receivable
including non-cash compensation
charge........................... 96,150 397 -- (57) -- 1,371
Issuance of stock for cash......... 36,537 250 -- -- -- 900
Transfer of common stock series.... -- -- -- -- -- --
Net loss........................... -- -- -- -- (1,682) (1,682)
--------- -------- ------- ----- -------- ---------
Balance at December 31, 1996
(Combined)......................... 171,147 660 -- (57) (1,761) 558
Issuance of Endeavor stock to
founders......................... 132,687 -- -- -- -- --
Dissent of QDS minority
shareholders..................... (38,460) (3) -- -- -- (9)
Cancellation of the stock of QDS... (132,687) -- -- -- -- --
Issuance of Endeavor stock in
exchange for QDS stock........... 132,687 -- -- -- -- --
Transfer of common stock series.... -- -- -- -- -- --
Stock subscription receivable...... 3,846 56 -- (200) -- --
Issuance of stock for cash, net of
issuance costs................... 115,284 1,597 -- -- -- 5,751
Issuance of stock upon conversion
of
note payable..................... 19,588 283 -- -- -- 1,018
Issuance of stock options.......... -- 5 (18) -- -- --
Non-cash stock option
compensation..................... -- -- 10 -- -- 10
Payment of stock subscription
receivable....................... -- -- -- 57 -- 57
Net loss........................... -- -- -- -- (4,349) (4,349)
--------- -------- ------- ----- -------- ---------
Balance at December 31, 1997......... 404,092 2,598 (8) (200) (6,110) 3,036
Exercise of stock options.......... 38,460 555 -- -- -- 2,000
Issuance of stock including
non-cash
compensation charge.............. 30,768 514 -- -- -- 1,850
Issuance of stock upon conversion
of
note payable..................... 3,846 56 -- -- -- 200
Issuance of preferred stock for
cash............................. 801,000 12,015 -- -- -- 12,015
Issuance of stock for services..... 1,154 112 -- -- -- 405
Issuance of stock for
acquisition...................... 1,923 250 -- -- -- 900
Issuance of stock options including
non-cash compensation charge..... -- -- (4,225) -- -- --
Non-cash stock option
compensation..................... -- -- 3,226 -- -- 3,226
Payment on stock subscription
receivable....................... -- -- -- 200 -- 200
Accretion of warrants with
redemption
feature.......................... -- -- -- -- (2,150) (2,150)
Net loss........................... -- -- -- -- (16,396) (16,396)
--------- -------- ------- ----- -------- ---------
Balance at December 31, 1998......... 1,281,243 16,100 (1,007) -- (24,656) 5,286
Issuance of stock upon exercise of
option........................... 4,982 22 -- -- -- 22
Issuance of stock for cash......... 385 55 -- -- -- 200
Issuance of preferred stock for
cash............................. 1,753,699 33,785 -- -- -- 33,785
Issuance of stock for goods and
services......................... 425,383 23,596 -- -- -- 23,596
Issuance of stock in connection
with strategic alliances......... 3,645 555 -- -- -- 2,001
Issuance of stock for
acquisitions..................... 2,468,192 46,815 -- -- -- 46,815
Issuance of warrants for
services......................... -- -- -- -- -- 25,200
Non-cash compensation expense...... -- -- 83 -- -- 83
Transfer of common stock series.... -- -- -- -- -- --
Accretion of warrants with
redemption feature............... -- -- -- -- (538) (538)
Net loss........................... -- -- -- -- (17,803) (17,803)
--------- -------- ------- ----- -------- ---------
Balance at March 31, 1999
(unaudited)........................ 5,937,529 $120,928 $ (924) $ -- $(42,997) $ 118,647
========= ======== ======= ===== ======== =========
</TABLE>
See accompanying notes.
F-36
<PAGE> 381
WEBMD, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ -------------------
1996 1997 1998 1998 1999
------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss....................................... $(1,682) $(4,349) $(16,396) $(1,533) $(17,803)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ -- 9 303 10 3,502
Gain on disposal of discontinued
operations................................. -- (165) (7,709) -- --
Extraordinary loss on early extinguishment of
notes payable.............................. -- -- 930 -- --
Loss on equity investment.................... -- -- -- -- 98
Non-cash compensation expense................ -- 11 3,375 7 83
Non-cash interest expense.................... -- 593 105 45 --
Non-cash amortization of equity issued for
services................................... -- -- 405 -- 2,052
Changes in operating assets and liabilities,
net of business acquired:
Accounts receivable........................ -- -- -- -- (687)
Other current assets....................... -- (53) (2,861) 31 (9,426)
Accounts payable and accrued expenses...... -- 317 3,396 164 (2,126)
Other liabilities.......................... -- -- 887 -- (253)
------- ------- -------- ------- --------
Net cash used in operating activities by
continuing operations........................ (1,682) (3,637) (17,565) (1,276) (24,560)
Net cash provided by (used in) operating
activities of discontinued operations........ 1,627 (249) (361) 737 --
------- ------- -------- ------- --------
Net cash used in operating activities.......... (55) (3,886) (17,926) (539) (24,560)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment............ -- (76) (2,687) (86) (1,183)
Purchases of property and equipment for
discontinued operations...................... (2,325) (1,713) (1,787) (965) --
Payment of dissenters' claim................... -- -- (2,653) -- --
Payment of costs associated with
acquisitions................................. -- -- -- -- (2,594)
Proceeds received on note receivable........... -- -- 71 -- 26
Proceeds from sale of discontinued
operations................................... -- 200 16,597 -- --
------- ------- -------- ------- --------
Net cash (used in) provided by investing
activities................................... (2,325) (1,589) 9,541 (1,051) (3,751)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of stock................ -- 5,751 15,715 1,060 34,007
Proceeds from issuance of notes payable........ -- 2,890 2,000 -- --
Proceeds from issuance of common stock warrants
associated with notes payable................ -- 1,110 -- -- --
Payment of notes payable and capital leases.... -- -- (6,000) -- (2,249)
Amounts received on stock subscriptions........ -- 57 200 200 --
Deferred financing costs....................... -- (124) -- -- --
------- ------- -------- ------- --------
Net cash provided by financing activities of
continuing operations........................ -- 9,684 11,915 1,260 31,758
Net cash provided by (used in) financing
activities of discontinued operations........ 2,380 (1,513) -- (145) --
------- ------- -------- ------- --------
Net cash provided by financing activities...... 2,380 8,171 11,915 1,115 31,758
------- ------- -------- ------- --------
Net increase in cash and cash equivalents...... -- 2,696 3,530 (475) 3,447
Cash and cash equivalents at beginning of
period....................................... -- -- 2,696 2,696 6,226
------- ------- -------- ------- --------
Cash and cash equivalents at end of period..... $ -- $ 2,696 $ 6,226 $ 2,221 $ 9,673
======= ======= ======== ======= ========
</TABLE>
See accompanying notes.
F-37
<PAGE> 382
WEBMD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Endeavor Technologies, Inc., a Georgia corporation, was formed on October
17, 1996 and was renamed WebMD, Inc. (the "Company") in August 1998. In the
fourth quarter of 1998, the Company launched a branded, integrated, Web-based
solution for the administrative, communications and information needs of
healthcare professionals and for the healthcare information needs of consumers.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. On March 26, 1997, the Company acquired
Quality Diagnostic Services, Inc. ("QDS"). The assets and liabilities of QDS
were acquired in a transaction accounted for as a reverse acquisition/
recapitalization and are recorded at historical cost. Additionally, the results
of operations of the combined companies are reflected as if the above
transaction took place at January 1, 1996. All significant intercompany accounts
and transactions have been eliminated in consolidation. Consequently, for
comparative purposes, the combined financial statements have been presented as
if the Company and its subsidiaries were a single entity for the periods
presented.
Effective July 1, 1997, the Company sold all of the outstanding stock of
UltraScan, Inc. ("UltraScan") for $400.
Effective July 1, 1998, the Company sold substantially all of the assets of
QDS and Telemedics, Inc. ("Telemedics") for $17,000 in cash and up to $6,000 in
additional contingent consideration based on 1999 QDS and Telemedics revenues.
No contingent consideration has been recorded as of December 31, 1998.
The consolidated financial statements reflect the results of UltraScan,
QDS, and Telemedics as discontinued operations. See Note 2 for further
discussion.
USE OF 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 and the
accompanying notes. Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to significant
concentrations of credit risk, consist principally of cash and cash equivalents.
The Company maintains cash and cash equivalents with two separate financial
institutions located in Georgia. At December 31, 1998, substantially all of the
Company's cash and cash equivalents are invested in short-term money market
accounts, which bear minimal risk, and are available on demand.
The carrying amount reported in the balance sheet for cash and cash
equivalents and accounts payable approximate their fair values due to the
short-term nature of these financial instruments. The carrying amount reported
in the balance sheet for long-term debt approximates its fair value based on
discounted cash flows.
F-38
<PAGE> 383
WEBMD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
The Company is dependent upon various content providers to provide content
for use on the Company's Web site.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the respective assets, generally three to seven years.
PRODUCT DEVELOPMENT AND CONTENT COSTS
Product development and content costs include personnel costs associated
with the development, management, testing and upgrades to the Company's Web site
and systems, license fees for content acquisition and third party Web site
development services. Product development costs are charged to operations as
incurred. Content costs are amortized over the term of the content license
agreement or over the useful life of the content (if the term of the content
provided is indefinite) on a straight line basis. Amortization periods have
generally ranged from six months to five years.
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,"
requires the capitalization of certain software development costs subsequent to
the establishment of technological feasibility. Based upon the Company's product
development process, technological feasibility is established upon the
completion of a working model. Costs incurred by the Company between completion
of a working model and the point at which the product is ready for general
release have not been significant.
ADVERTISING COSTS
Advertising costs are charged to expense in the period the costs are
incurred. Advertising expense for the years ended December 31, 1996, 1997 and
1998 was $0, $164 and $604, respectively.
INCOME TAXES
Income taxes have been provided using the liability method in accordance
with SFAS No. 109, "Accounting for Income Taxes."
REVENUE RECOGNITION
The Company derives revenue from its subscriptions. Revenues from
subscriptions are deferred and recognized ratably over the term of the
subscription. Revenues related to the Company's various Internet-based
administrative, communication and information services are recognized when the
services are provided. The Company has recently entered into advertising and
commerce sponsorship agreements, which involve integration with the Company's
services and provide for varied sources of revenue to the Company over the term
of the agreements. In some cases revenues derived from advertising and
electronic commerce transactions will be shared between the advertiser and the
Company, in accordance with the term of the arrangement, as realized.
F-39
<PAGE> 384
WEBMD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STOCK SPLIT
On October 2, 1997, the Company effected a one-for-two reverse stock split.
The share and per share amounts in the financial statements have been
retroactively adjusted for the reverse stock split.
NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"),
and in February 1998, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 98 related to SFAS 128. SFAS 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is similar to the previously reported
fully diluted earnings per share. The Company's common stock equivalents were
antidilutive and therefore were not included in the computation of weighted
average shares used in computing diluted loss per share.
Options and warrants to purchase 4,510,321 and 8,160,309 shares of common
stock with a weighted average exercise price of $1.20 and $4.59 per share,
outstanding in 1997 and 1998, respectively, and 30,000 shares of restricted
common stock issued during 1998 were not included in the computation of diluted
loss per share because the Company reported a loss and, therefore, the effect
would be antidilutive.
STOCK BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation" ("SFAS 123") sets forth accounting and reporting standards
for stock-based employee compensation plans. As permitted by SFAS 123, the
Company continues to account for stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations (collectively "APB 25"). Under APB 25,
no compensation expense is recognized for stock options granted to employees at
fair market value. Certain stock, stock options and warrants were granted with
exercise prices below the then fair market value or at fair market value to
third parties. In connection with these issuances, the Company recognized
$1,371, $11 and $3,226 in compensation expense during 1996, 1997 and 1998,
respectively.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 financial statements
to conform with the 1998 presentation.
UNAUDITED FINANCIAL STATEMENTS
The accompanying unaudited financial statements as of March 31, 1999 and
for the three months ended March 31, 1998 and 1999 have been prepared on a basis
substantially the same as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial information set forth therein.
2. DISCONTINUED OPERATIONS
Effective July 1, 1998, the Company sold substantially all of the assets of
QDS and Telemedics. The sale resulted in a net gain of $7,709. In connection
with the sale, the Company has issued a warrant to purchase 80,000 shares of the
Company's Series D common stock (see Note 10). The operations of these
F-40
<PAGE> 385
WEBMD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
subsidiaries are included in the statements of operations as a loss from
discontinued operations. Net patient service revenues from QDS for the years
ended December 31, 1996, 1997 and for the period from January 1, 1998 to July 1,
1998 were approximately $3,257, $7,091 and $5,261, respectively. Product sales
from Telemedics for the year ended December 31, 1997 (the first year of
operations) and for the period from January 1, 1998 to July 1, 1998 were
approximately $283 and $26, respectively. Net losses for QDS and Telemedics
combined for the years ended December 31, 1996 and 1997 and for the period from
January 1, 1998 to July 1, 1998 were $1,645, $778 and $393, respectively.
QDS revenues from arrhythmia monitoring services were recognized as the
services were performed over the contract term. Telemedics product sales revenue
from the sale of arrhythmia monitoring devices were recognized upon shipment.
Net patient service revenues for QDS were reported at the estimated net
realizable amounts from third-party payors and others for services rendered.
Contractual allowances were reflected as a reduction in gross charges to arrive
at net patient service revenue. An allowance for doubtful accounts was
established for revenue estimated to be uncollectible and adjusted based upon
management's evaluation of current economic conditions, historical collection
experience and other relevant factors that, in the opinion of management,
required recognition in estimating such allowance.
Effective July 1, 1997, the Company sold all of the outstanding shares of
common stock of Ultrascan to its former President. The sale resulted in a net
gain of approximately $165. The operations of this subsidiary are included in
the statements of operations as a loss from discontinued operations. Revenue and
net losses from Ultrascan for the year ended December 31, 1996 and the six month
period ended June 30, 1997, were approximately $13 and $189 and $37 and $417,
respectively. As of December 31, 1998, a note receivable of $134 is due from the
purchaser related to this sale.
Balance sheet information for QDS, Telemedics and Ultrascan is provided as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
ASSETS
Cash........................................................ $ 192
Other current assets........................................ 1,919
Property and equipment, net................................. 3,280
Intangibles, net............................................ 653
------
Total assets...................................... $6,044
======
LIABILITIES
Accounts payable, accrued expenses and other................ $1,762
------
Total liabilities................................. $1,762
======
</TABLE>
F-41
<PAGE> 386
WEBMD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Supplemental cash flow information from the operations of QDS, Telemedics
and Ultrascan is provided as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1997 1998
------- ------- -----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $(1,682) $(1,195) $ --
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Cash flow related to results from operations deferred
until sold............................................. -- -- (393)
Depreciation and amortization............................. 326 777 529
Loss on write-off of property and equipment............... -- 235 97
Non-cash compensation expense............................. 1,371 -- --
Changes in operating assets and liabilities:
Accounts receivable, net............................... (693) (1,155) (507)
Other current assets................................... (35) 11 4
Accounts payable and accrued expenses.................. 733 (280) (216)
Deferred contract revenue.............................. 64 216 187
------- ------- -----
Net cash provided by (used in) operating activities......... $ 84 $(1,391) $(299)
======= ======= =====
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the sale of common stock...................... $ 900 $ -- $ --
Proceeds from amounts due to related parties................ 1,302 500 --
Payments on amounts due to related parties.................. (1,505) (262) --
Proceeds from issuance of notes payable and other debt...... 1,879 206 --
Payments on notes payable and other debt.................... (196) (1,957) --
------- ------- -----
Net cash provided by (used in) financing activities......... $ 2,380 $(1,513) $ --
======= ======= =====
</TABLE>
The net increases in cash balances associated with the discontinued
operations were $139, $53 and $62 during the years ended December 31, 1996, 1997
and the period from January 1, 1998 through June 30, 1998, respectively, and
have been reflected in cash flows from operating activities of discontinued
operations.
In connection with the acquisition of QDS by the Company, certain
shareholders of QDS asserted their rights granted under Georgia law to dissent
with regard to such action and to demand payment for the fair value of their
shares in exchange for the surrender of such shares. In accordance with Georgia
law, the Company offered to pay the former shareholders approximately $400 for
their interest in QDS. The former shareholders rejected that offer. On August 1,
1997, in accordance with statutory provisions relating to the valuation process,
QDS filed a complaint against the dissenting shareholders for the judicial
appraisal of their shares. In July 1998, the Company paid the former
shareholders of QDS approximately $2,700 in settlement of the dissenters' rights
action. This payment is reflected as a reduction to the gain on disposal of
discontinued operations.
3. ACQUISITION
In December 1998, the Company acquired substantially all of the net assets
of certifiedemail.com, Inc. ("certifiedemail.com") for 50,000 shares of the
Company's Series D common stock. In connection
F-42
<PAGE> 387
WEBMD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
with the acquisition, the Company assumed accounts payable of approximately $100
and forgave a note receivable from certifiedemail.com for approximately $230.
The acquisition has been accounted for as a purchase and the excess of cost over
fair value of the net assets acquired of approximately $1,060 has been recorded
as goodwill and is being amortized on a straight-line basis over a three-year
period. Pro forma results are not presented for this acquisition as they are not
significant during the years presented.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- MARCH 31,
1997 1998 1999
------ ------ ---------
<S> <C> <C> <C>
Computer equipment and purchased software................... $ 23 $3,110 $4,882
Furniture and fixtures...................................... 53 420 758
Property and equipment from discontinued operations......... 4,263 -- --
------ ------ ------
4,339 3,530 5,640
Less accumulated depreciation............................... (3) (390) (801)
Less accumulated depreciation from discontinued
operations................................................ (983) -- --
------ ------ ------
Property and equipment, net................................. $3,353 $3,140 $4,839
====== ====== ======
</TABLE>
5. WRITE-DOWN OF CUSTOMER TERMINALS
During 1998, the Company purchased customer terminals which were to be
included as promotional arrangements with certain subscribers. Due to a change
in the Company's strategy, the Company recorded a charge of approximately $1,795
to write-down customer terminals to their net realizable value of $620. The net
realizable value, which was determined by a third party offer, is included in
other assets. The customer terminals were sold subsequent to year end.
6. COMMITMENTS
CONTENT AND STRATEGIC ALLIANCE COMMITMENTS
The Company has agreements with various content providers and strategic
partners whereby the Company is committed to pay certain amounts in connection
with content and services obtained for use on the Company's Web site and certain
distribution arrangements. The Company has recorded $538 and $1,122 as product
development and content costs related to these agreements during 1997 and 1998,
respectively. The Company's non-cancelable future commitments under these
agreements, a certain portion with shareholders of the Company, as of December
31, 1998, are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 9,358
2000........................................................ 4,405
2001........................................................ 3,300
2002........................................................ 120
2003........................................................ 30
-------
$17,213
=======
</TABLE>
Additionally, the Company has committed to spend $750 prior to February
2001 relating to promotional arrangements associated with one of its strategic
alliances with a shareholder.
F-43
<PAGE> 388
WEBMD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
On December 31, 1998, the Company entered into an agreement with a related
party to purchase software licenses which are to be provided to certain of the
Company's subscribers. The total commitment was $5,000 for 10,000 licenses and
was paid subsequent to year end. The Company recorded this obligation in prepaid
software licenses and accrued expenses.
OPERATING LEASE COMMITMENTS
The Company leases its facilities and certain office equipment under
operating lease agreements expiring through 2001. Lease expense was
approximately $204 and $541 for the years ended December 31, 1997 and 1998,
respectively. At December 31, 1998, future minimum lease commitments under
operating leases, a significant portion of which are with a shareholder, are as
follows:
<TABLE>
<S> <C>
1999........................................................ $ 956
2000........................................................ 342
2001........................................................ 88
2002........................................................ 26
2003........................................................ 26
------
$1,438
======
</TABLE>
Additionally, certain UltraScan equipment leases with total lease
commitments of $678 as of December 31, 1998, are under guarantee by the Company.
These leases expire through 2002.
In April 1998, a primary vendor of QDS and Telemedics took occupancy of
space previously occupied by the Company under a sublease agreement for which
the Company is a guarantor. Total lease commitments under this lease as of
December 31, 1998 are $326 and the lease expires in 2001.
7. LONG-TERM DEBT
During 1997 the Company borrowed $4,000 from Sirrom Capital Corporation
("Sirrom"), with interest payable monthly at 13.5%, and principal due on August
1, 2002. On July 8, 1998, the Company borrowed an additional $2,000 from an
affiliate of Sirrom, Sirrom Investment, Inc. Finance costs related to the
initial Sirrom debt instrument totaling $124 were capitalized during 1997 and
amortized over five years. On July 22, 1998, the Company repaid all outstanding
borrowings from Sirrom. In connection with the retirement of these borrowings,
the Company recognized an extraordinary loss of $930, which included the
remaining balance of the capitalized finance costs.
8. RETIREMENT PLAN
The Company has a defined contribution 401(k) plan. The plan is for the
benefit of generally all employees 21 years of age or older with at least six
months of employment and permits voluntary employee contributions and Company
profit sharing contributions. The Company has not made any such contributions to
the plan through December 31, 1998.
9. RELATED PARTY TRANSACTIONS
In July 1996, the Company loaned an officer of the Company $57 to purchase
5,000 shares of common stock. This loan is evidenced by a full recourse
promissory note bearing interest at 8.5% per annum originally due in July 1998,
but modified in March 1997 to be due in July 1999. Through December 31, 1998,
the officer paid $52 in principal and interest. The note was repaid in full at
June 30, 1999.
F-44
<PAGE> 389
WEBMD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In August 1996, QDS received a $200 loan from a shareholder for working
capital needs. The indebtedness bore no interest and was payable on demand. In
February 1998, the Company converted the indebtedness into 100,000 shares of
Series D common stock.
In August 1997, the Company received loans of $100 each from two
shareholders of the Company. Each unsecured loan was evidenced by a promissory
note payable and paid in full during 1997. In conjunction with these loans, the
Company granted each of the two shareholders the option to purchase 13,486
shares of Series D common stock of the Company at an exercise price of $1.44 per
share. In connection with these options, the Company recorded their fair value,
as determined by the minimum value method, as additional interest expense.
During 1998, the Company purchased services from iXL Enterprises, Inc.
("iXL") in the amount of $4,448. A board member of the Company is Chairman of
iXL.
The Company provides its subscribers with certain of Premiere's enhanced
communications services at additional cost to the subscribers. These services
are marketed through joint marketing efforts. A board member of the Company is
the Chairman of Premiere.
10. SHAREHOLDERS' EQUITY
COMMON STOCK
As discussed in Note 1, the merger between the Company and QDS has been
accounted for as a reverse acquisition/recapitalization and, as a result, for
comparative purposes, the financial statements, including equity transactions,
have been presented as if the Company and QDS were a single entity for all
periods presented. Shares were issued to founders of Endeavor in exchange for
nominal consideration.
In October 1998, the Company issued 30,000 shares of its Series D common
stock in exchange for corporate communication services to be provided through
April 1999. The Company has recorded the shares at $405, which approximated
their fair market value on the date of issuance, and is amortizing the value to
sales and marketing expense over the term of the agreement. During 1998, the
Company recorded $270 of sales and marketing expense related to this agreement.
The Company has authorized and issued shares of common stock (no
designation), Series B, C, D and E common stock. The rights of the series are
identical except that (i) Series B, C, D and E common stock are non-voting and
(ii) Series B, C and E common stock have a liquidation preference of $0.29,
$1.00 and $1.00 per share, respectively. Upon a liquidation of the Company, if
the assets of the Company are insufficient to permit full payment of the
liquidation preference after payment of preferred stock liquidation preference,
then the assets of the Company available for such distribution shall be
distributed pro rata based on the relative liquidation preferences.
Upon the effective date of a public offering of the Company's common stock,
the common stock (no designation) Series B, C, D and E common stock will be
automatically converted into one series of voting common stock.
PREFERRED STOCK
The Company's Board of Directors has authorized 10,000,000 shares of
preferred stock, with 1,600,000 of such shares designated as Series A preferred
stock, 3,400,000 of such shares designated as Series B preferred stock,
2,000,000 of such shares designated as Series C preferred stock, 200,000 of such
shares designated as Series D preferred stock, 792,000 of such shares designated
as Series E preferred stock, and 1,180,000 of such shares designated as Series F
preferred stock.
F-45
<PAGE> 390
WEBMD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
During 1998, the Company sold 801,000 shares of its Series A preferred
stock for $15.00 per share. In connection with the sale of the Series A
preferred stock, the Company has agreed to issue additional shares of Series A
preferred stock should the Company not complete an initial public offering by
certain dates as follows: 30,000 shares on March 1, 1999, 150,000 shares on May
22, 1999, 10,000 shares on September 1, 1999 and 50,000 shares on November 22,
1999.
As described in the Company's Articles of Incorporation, the holders of
Series A, B and C preferred stock have the right to convert all or part of such
shares into common stock on a one-for-one basis. The holders of Series D
preferred stock have the right to convert all or part of such shares into common
stock at any time after March 1, 2000, a change to common stock series without
designation, a merger where WebMD is not the surviving entity, or a sale of
substantially all of the company on a five-for-one basis. The holders of the
Series E Preferred Stock and the Series F Preferred Stock have the right to
convert all or part of such shares into common stock any time after January 15,
2000 on a ten-for-one basis.
The Series A, B, C, D, E and F preferred stock provide for a preference
upon liquidation.
Outstanding shares of the Company's preferred stock were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1998 1999
------------ ------------ ---------
<S> <C> <C> <C>
Series A......................................... -- 801,000 801,000
Series B......................................... -- -- 2,440,636
Series C......................................... -- -- 1,008,750
Series D......................................... -- -- 200,000
Series E......................................... -- -- --
Series F......................................... 404,092 480,243 1,487,143
------- --------- ---------
404,092 1,281,243 5,937,529
======= ========= =========
</TABLE>
STOCK WARRANTS
On August 29, 1997, the Company borrowed $4,000 from Sirrom. In connection
with the loan, Sirrom received a warrant to purchase 771,901 shares of the
Company's Series D common stock for $0.01 per share. Of the $4,000 in
borrowings, $1,110 was allocated to the value of the warrant and recorded as a
separate component of equity. The warrant expires on August 1, 2002. In
connection with the warrant, $75 and $105 was amortized to interest expense
during 1997 and 1998, respectively.
Sirrom has the option to require the Company to redeem the warrants for a
period of 30 days after the exercise period in August 2002, at a purchase price
equal to fair market value, as defined. Upon completion of an initial public
offering by the Company, the redemption right terminates. Accordingly, in
periods prior to an initial public offering, the Company has accounted for the
warrants as temporary equity. The excess of the redemption value over the
carrying value is being accrued by periodic charges to accumulated deficit over
the redemption period. This accrual amounted to $2,150 for 1998. Upon the
exercise or completion of an initial public offering, the value of the warrants
will be transferred to permanent equity.
In December 1997, the Company granted a warrant to purchase 1,384,600
shares of the Company's Series E common stock for $1.44 per share to Premiere
Technologies, Inc. ("Premiere"). The warrant was
F-46
<PAGE> 391
WEBMD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
issued in connection with a sale of the Company's Series E common stock and the
fair value of the warrant of $45 was recorded as issuance cost. On April 29,
1998, Premiere exercised its option in full.
In connection with the sale of QDS and Telemedics, the Company issued a
warrant to purchase 110,768 shares of the Company's Series D common stock to
Matria at the lesser of $14.44 or the initial public offering price should the
Company complete an initial public offering. The warrant will be exercisable in
full on the earlier of the completion of an initial public offering or June 30,
1999 and expires five years from the issuance date.
In connection with sales of its Series A preferred stock, the Company also
issued warrants to purchase a total of 498,456 shares of the Company's Series A
preferred stock at the lesser of the price at a public offering or $13.00 per
share. The warrants expire on August 24, 2001 with respect to 415,380 shares and
on September 1, 2001 with respect to 83,076 shares.
STOCK OPTION PLAN
Effective January 1, 1997, the Board of Directors and shareholders of the
Company adopted the 1997 Stock Incentive Plan (the "1997 Plan"), which provides
for issuance of stock options and restricted stock awards to employees,
directors, consultants and advisors. The Board of Directors and shareholders of
the Company amended and restated the 1997 Plan on September 17, 1998. Options
may be granted under the 1997 Plan with an exercise price not less than the fair
value of the Company's common stock on the date of the grant, as determined by
the Board of Directors or a committee of the Board, in the absence of a readily
available market for the Company's stock. Options become exercisable and expire
as determined by the Board of Directors or a committee of the Board (generally
over 2 to 7 years).
Effective November 13, 1998, the Board of Directors and shareholders of the
Company adopted the Director Stock Option Plan ("the Director Plan"), which
provides for issuance of stock options to non-employee directors. Options are
granted automatically to existing directors on the date of adoption and
subsequently upon election as a director of the Company and at January 1 of each
calendar year with an exercise price not less than the fair value of the
Company's common stock on the date of the grant. Options are vested immediately
and become exercisable six months from the date of grant and expire in ten
years.
Pro forma information regarding net income and loss per share is required
by SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method. The fair value for these
options was estimated at the date of grant using a minimum value pricing model
with the following weighted average assumptions for 1997 and 1998: risk-free
interest rates of 6.2% and 5.4%; no dividend yield; and an expected life of an
option of four years.
Option valuation models used under SFAS 123 were developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require input
of highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options granted to employees are amortized to expense over the vesting period.
The weighted average fair value per option granted in 1997 and 1998 was $0.32
and $1.56, respectively. The Company's pro forma net loss would have been
F-47
<PAGE> 392
WEBMD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
$(4,514) and $(17,173) and net loss per share would have been $(0.54) and
$(1.40), for the years ended December 31, 1997 and 1998, respectively.
The following stock options were outstanding to employees, directors, and
other third parties:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS EXERCISE PRICE PER SHARE
----------------- ------------------------
<S> <C> <C>
Outstanding at January 1, 1997........................... -- $ --
Granted.................................................. 2,353,820 1.44
---------
Balance at December 31, 1997............................. 2,353,820 1.44
Granted.................................................. 3,802,294 1.44 - 14.44
Canceled................................................. (69,230) 1.44
---------
Balance at December 31, 1998............................. 6,086,884 1.44 - 14.44
Granted.................................................. 2,275,129 14.44
Assumed in acquisitions.................................. 260,694 1.31 - 11.64
Cancelled................................................ -- --
Exercised................................................ (4,982) 1.32 - 6.01
---------
Balance at March 31, 1999 (unaudited).................... 8,617,725 $1.31 - 14.44
=========
Exercisable at December 31, 1998......................... 2,715,748 $1.44 - $10.83
=========
</TABLE>
The following tables summarize information concerning currently outstanding
and exercisable options at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------ -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE OUTSTANDING PRICE
- --------------- ----------- ---------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 1.44 - $ 2.89 3,193,070 2.51 $ 1.49 1,732,683 $ 2.80
$10.83 - $14.44 2,893,814 4.30 10.93 983,065 10.83
--------- ---------
6,086,884 3.36 5.98 2,715,748 5.08
========= =========
</TABLE>
Certain options and warrants were issued with exercise prices below the
then fair market value or were issued at fair market value to third parties. In
connection with these issuances, the Company recognized $11 and $3,226 in
compensation expense during 1997 and 1998, respectively. Certain sales
representatives of the Company entered into agreements that did not fix the
number of options to purchase shares until certain goals are met. Because the
exercise price of these options is fixed but the number of shares is variable,
the Company recorded compensation expense relating to these options to the
extent the fair market value of the underlying stock was in excess of the
exercise price at the time the number of shares was determined. All options
issued to sales representatives were fixed during 1998 and thus the number of
shares became determinable.
F-48
<PAGE> 393
WEBMD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
11. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward........................... $ 1,966 $ 5,234
Allowance for bad debts................................... 456 --
Stock option compensation................................. -- 1,102
Write-down of customer terminals -- 682
Valuation allowance....................................... (2,116) (6,431)
------- -------
306 587
Deferred tax liability:
Depreciation.............................................. 306 587
------- -------
$ -- $ --
======= =======
</TABLE>
At December 31, 1998 the Company has total net operating loss carryforwards
for federal and state income tax purposes of approximately $13,721 that expire
in years 2010 through 2013.
Utilization of the Company's net operating loss carryforwards may be
subject to an annual limitation due to the "change of ownership" provisions of
the Internal Revenue Code and similar state provisions. The annual limitation
may result in the expiration of net operating losses and credits before
utilization. For financial reporting purposes, a valuation allowance has been
recognized to reduce the net deferred tax assets to zero due to uncertainties
with respect to the Company's ability to generate taxable income in the future
sufficient to realize the benefit of deferred income tax assets.
<TABLE>
<CAPTION>
1996 1997 1998
----- ------- -------
<S> <C> <C> <C>
Tax at statutory rate................................... $(572) $(1,479) $(5,575)
State taxes, net of federal benefit..................... (67) (174) (656)
Permanent differences................................... 8 197 1,916
Valuation allowance..................................... 631 1,456 4,315
----- ------- -------
$ -- $ -- $ --
===== ======= =======
</TABLE>
12. STOCK DIVIDEND
On April 9, 1999, the Board of Directors declared a dividend of 0.03846
shares of a new series of preferred stock, Series F, which is convertible into
10 shares of common stock. The financial statements have been presented to
reflect this dividend in all periods as an increase to the outstanding shares of
preferred stock. The dollar amounts attributable to each series of common and
preferred stock have also been adjusted to reflect this dividend.
Also in connection with the stock dividend described above, the option and
warrants outstanding were adjusted in kind to reflect this dividend.
F-49
<PAGE> 394
WEBMD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
13. EVENTS SUBSEQUENT TO DECEMBER 31, 1998 -- UNAUDITED
Acquisitions
On January 22, 1999, the Company acquired Direct Medical Knowledge, Inc.
("DMK"), a publisher of healthcare information over the Internet, for 494,018
shares of Series B preferred stock valued at approximately $9,880. In addition,
the Company converted existing DMK options and warrants into options and
warrants to acquire 181,323 shares of Series B preferred stock valued at
approximately $2,467. At closing, the Company forgave $300 of amounts owed by
DMK to the Company which is reflected in other current assets as of December 31,
1998. The transaction was accounted for as a purchase. As a result of this
purchase, the Company recorded $13,590 in goodwill and other intangible assets,
which will be amortized over 3 years.
On January 25, 1999, the Company acquired Sapient Health Network, Inc.
("SHN"), a designer and manager of Web-based communities for healthcare
consumers, for 1,619,190 shares of Series B preferred stock valued at
approximately $32,384. In addition, the Company converted existing SHN options
and warrants into options and warrants to acquire 180,953 shares of Series B
preferred stock valued at approximately $2,910. The transaction was accounted
for as a purchase. As a result of this purchase, the Company recorded $38,326 in
goodwill and other intangible assets, which will be amortized over 3 years.
The acquisitions are reflected in the financial statements from the date of
acquisition. The value assigned to the Series B preferred stock issued in these
acquisitions, was determined by management and the Board of Directors based on
recent sales of similar securities, in the absence of a readily trading market.
Strategic Relationships and Distribution Agreements and other Equity
Transactions
In April 1999, Sirrom exercised its warrant to purchase 771,901 shares of
common stock.
Subsequent to year end, the Company entered into various agreements with
service and content providers and distribution partners whereby the Company has
committed to pay certain amounts in connection with content and services
obtained for use on the Company's Web site and certain distribution
arrangements.
During the first quarter of 1999, the Company sold approximately 1.7
million shares of common and preferred stock for approximately $34,000.
On January 27, 1999, the Company issued warrants to purchase 1,038,450
shares of Series D common stock to Gleacher NatWest, Inc. ("Gleacher NatWest").
These warrants vest 692,300 on January 29, 1999 and 346,150 on January 29, 2000
and have an exercise term of five years. The agreement requires Gleacher NatWest
to perform financial advisory services over a two year period. If Gleacher
NatWest fails to perform under the agreement, they forfeit the unvested options
and pay the Company a cash penalty.
On March 1, 1999, the Company issued 200,000 shares of Series D preferred
stock in connection with a strategic alliance, which is convertible into
1,000,000 shares of common stock. The value attributed to this issuance was
$20,000, based on the value of capital stock sold in recent transactions.
In addition, in March 1999, the Company entered into a five-year, strategic
content and distribution alliance with E.I. du Pont Nemours and Company
("DuPont"). In exchange for this agreement, DuPont has received warrants to
purchase 5,538,400 shares of the Company's Series D common stock at $14.44 per
share.
F-50
<PAGE> 395
WEBMD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In connection with these strategic relationships and distribution
agreements, the Company has committed to make payments from March 31, 1999
through 2003 of approximately $300,000.
During the three months ended March 31, 1999 revenue in the amount of
$1,865 was attributable to related parties.
In connection with a sale of Series A preferred stock during 1998, the
Company issued 180,000 shares of Series A preferred stock subsequent to year end
for no additional consideration. The Company recorded the value attributed to
these shares as a reduction to the initial transaction.
Pending Acquisition of WebMD Stock
On May 20, 1999 the Company announced that it had entered into an agreement
to merge with Healtheon Corporation ("Healtheon"). Under the terms of the
agreement, Healtheon will exchange 1.8150 shares of common stock for each share
of the Company's stock. The transaction is preliminarily valued at approximately
$6,671,600. The acquisition, which is expected to be accounted for using the
purchase method of accounting, is anticipated to be completed in the third
quarter of 1999.
F-51
<PAGE> 396
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
MEDE America Corporation
We have audited the accompanying consolidated balance sheets of MEDE
America Corporation and subsidiaries (the "Company") as of June 30, 1997 and
1998, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
June 30, 1998. 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.
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 MEDE America Corporation and
subsidiaries as of June 30, 1997 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1998 in conformity with generally accepted accounting principles.
As discussed in Note 13, the accompanying 1997 and 1998 consolidated
financial statements have been restated.
DELOITTE & TOUCHE LLP
Jericho, New York
August 5, 1998
(February 5, 1999 as to Note 1.b.,
October 30, 1998 as to Note 2.d.,
January 26, 1999 as to Note 6.b.,
and December 11, 1998 as to Note 13)
F-52
<PAGE> 397
MEDE AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND 1998
AND MARCH 31, 1999 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30,
-------------------- MARCH 31,
1997 1998 1999
-------- -------- -----------
(AS RESTATED, (UNAUDITED)
SEE NOTE 13)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................ $ 1,919 $ 2,950 $ 4,042
Accounts receivable, less allowance for doubtful accounts
of $1,716, $997 and $643, respectively................ 6,318 7,920 10,422
Formulary receivables.................................... 405 2,341 4,910
Inventory................................................ 172 211 263
Prepaid expenses and other current assets................ 486 537 774
-------- -------- --------
Total current assets.................................. 9,300 13,959 20,411
PROPERTY AND EQUIPMENT -- Net (Notes 3 and 6).............. 5,517 4,711 5,424
GOODWILL -- Net (Notes 1 and 2)............................ 27,465 34,753 41,585
OTHER INTANGIBLE ASSETS -- Net (Notes 1 and 4)............. 5,357 5,501 7,065
OTHER ASSETS (Note 11)..................................... 451 470 4,429
-------- -------- --------
TOTAL................................................. $ 48,090 $ 59,394 $ 78,914
======== ======== ========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable......................................... $ 2,134 $ 3,630 $ 3,466
Accrued expenses and other current liabilities (Note
5).................................................... 9,195 7,715 7,148
Current portion of long-term debt (Note 6)............... 538 269 425
-------- -------- --------
Total current liabilities............................. 11,867 11,614 11,039
-------- -------- --------
LONG-TERM DEBT (Note 6).................................... 24,623 41,055 6,346
-------- -------- --------
OTHER LONG-TERM LIABILITIES................................ 215 194 178
-------- -------- --------
SERIES A REDEEMABLE CUMULATIVE PREFERRED STOCK:
$.01 par value; 250 shares authorized; 240 shares issued
and outstanding as of June 30, 1997 and 1998
(aggregate liquidation value of $23,996 plus accrued
dividends) (Notes 8 and 9)............................ 28,823 31,223 --
-------- -------- --------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' (DEFICIT) EQUITY:
Common stock, $.01 par value; 6,329 shares authorized as
of June 30, 1997 and 1998 and 30,000 shares authorized
as of March 31, 1999; 5,671, 5,685 and 12,997 shares
issued and outstanding, respectively.................. 57 57 130
Additional paid-in capital............................... 27,713 25,584 114,660
Accumulated deficit...................................... (45,208) (50,243) (53,439)
Deferred compensation (Note 8)........................... -- (90) --
-------- -------- --------
Total stockholders' (deficit) equity.................. (17,438) (24,692) 61,351
-------- -------- --------
TOTAL................................................. $ 48,090 $ 59,394 $ 78,914
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-53
<PAGE> 398
MEDE AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
AND NINE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
AND 1999 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
----------------------------- -----------------------
1996 1997 1998 1998 1999
-------- -------- ------- ------------- -------
<S> <C> <C> <C> <C> <C>
(AS RESTATED, (AS RESTATED,
SEE NOTE 13) SEE NOTE 13)
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES.................................... $ 31,768 $ 35,279 $42,290 $30,189 $39,756
OPERATING EXPENSES:
Operations................................ 19,174 16,817 16,958 12,485 14,975
Sales, marketing and client services...... 7,064 8,769 10,765 7,769 9,456
Research and development (Note 1)......... 2,132 3,278 3,941 2,886 3,379
General and administrative................ 6,059 5,263 4,865 3,307 4,138
Depreciation and amortization............. 5,176 5,460 7,143 5,248 6,460
Contingent consideration paid to former
owners of acquired businesses (Note
2)..................................... 538 2,301 -- -- --
Write-down of intangible assets (Note
1)..................................... 9,965 -- -- -- --
Acquired in-process research and
development (Note 2)................... -- 1,556 -- -- --
-------- -------- ------- ------- -------
Total operating expenses............... 50,108 43,444 43,672 31,695 38,408
-------- -------- ------- ------- -------
(LOSS) INCOME FROM OPERATIONS............... (18,340) (8,165) (1,382) (1,506) 1,348
OTHER (INCOME) EXPENSE (Note 12)............ 313 (893) (12) 13 --
INTEREST EXPENSE, Net....................... 584 1,504 3,623 2,470 2,822
-------- -------- ------- ------- -------
LOSS BEFORE PROVISION FOR INCOME TAXES...... (19,237) (8,776) (4,993) (3,989) (1,474)
PROVISION FOR INCOME TAXES (Note 7)......... 93 57 42 37 103
-------- -------- ------- ------- -------
LOSS BEFORE EXTRAORDINARY ITEM.............. (19,330) (8,833) (5,035) (4,026) (1,577)
EXTRAORDINARY ITEM.......................... -- -- -- -- (1,619)
-------- -------- ------- ------- -------
NET LOSS.................................... (19,330) (8,833) (5,035) (4,026) (3,196)
PREFERRED STOCK DIVIDENDS................... (2,400) (2,400) (2,400) (1,800) (1,444)
-------- -------- ------- ------- -------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS.............................. $(21,730) $(11,233) $(7,435) $(5,826) $(4,640)
======== ======== ======= ======= =======
BASIC AND DILUTED NET LOSS PER COMMON SHARE:
LOSS BEFORE EXTRAORDINARY ITEM............ $ (4.14) $ (2.07) $ (1.31) $ (1.03) $ (0.42)
EXTRAORDINARY ITEM........................ -- -- -- -- (0.23)
-------- -------- ------- ------- -------
NET LOSS.................................. $ (4.14) $ (2.07) $ (1.31) $ (1.03) $ (0.65)
======== ======== ======= ======= =======
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING -- BASIC AND DILUTED.......... 5,245 5,425 5,679 5,677 7,116
======== ======== ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-54
<PAGE> 399
MEDE AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
AND NINE MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL STOCKHOLDERS'
COMMON STOCK PAID-IN ACCUMULATED DEFERRED EQUITY
SHARES AMOUNT CAPITAL DEFICIT COMPENSATION (DEFICIT)
------------ ------ ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JULY 1, 1995................ 5,237 $ 52 $ 29,935 $(17,045) $ -- $ 12,942
Net loss and comprehensive
income........................... -- -- -- (19,330) -- (19,330)
Preferred stock dividends.......... -- -- (2,400) -- -- (2,400)
Issuance of warrants............... -- -- 121 -- -- 121
Exercise of stock options.......... 43 1 194 -- -- 195
------- ---- -------- -------- ----- --------
BALANCE, JUNE 30, 1996............... 5,280 53 27,850 (36,375) -- (8,472)
Net loss and comprehensive income
(as restated, see Note 13)....... -- -- (8,833) -- (8,833)
Preferred stock dividends.......... -- -- (2,400) -- -- (2,400)
Issuance of common stock........... 371 4 2,121 -- -- 2,125
Issuance of warrants............... -- -- 52 -- -- 52
Exercise of stock options.......... 20 -- 90 -- -- 90
------- ---- -------- -------- ----- --------
BALANCE, JUNE 30, 1997 (as restated,
see Note 13)....................... 5,671 57 27,713 (45,208) -- (17,438)
Net loss and comprehensive income
(as restated, see Note 13)....... -- -- (5,035) -- (5,035)
Preferred stock dividends.......... -- -- (2,400) -- -- (2,400)
Issuance of warrants............... -- -- 98 -- -- 98
Exercise of stock options.......... 14 -- 65 -- -- 65
Issuance of stock options (Note
8)............................... -- -- 108 -- (108) --
Amortization of deferred
compensation..................... -- -- -- -- 18 18
------- ---- -------- -------- ----- --------
BALANCE, JUNE 30, 1998 (as restated,
see Note 13)....................... 5,685 57 25,584 (50,243) (90) (24,692)
Net loss and comprehensive
income........................... -- -- -- (3,196) -- (3,196)
Preferred stock dividends.......... -- -- (1,444) -- -- (1,444)
Initial public offering (Note 1)... 5,308 53 61,815 -- -- 61,868
Exercise of warrants............... 63 1 (1) -- -- --
Conversion of preferred stock and
accrued dividends (Note 9)....... 1,869 18 24,278 -- -- 24,296
Issuance of warrants............... 4,096 -- -- 4,096
Exercise of stock options.......... 72 1 332 -- -- 333
Amortization of deferred
compensation..................... -- -- -- -- 90 90
------- ---- -------- -------- ----- --------
BALANCE, March 31, 1999
(unaudited)........................ $12,997 $130 $114,660 $(53,439) $ -- $ 61,351
======= ==== ======== ======== ===== ========
</TABLE>
See notes to consolidated financial statements.
F-55
<PAGE> 400
MEDE AMERICA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1996, 1997 AND 1998 AND NINE MONTHS ENDED
MARCH 31, 1998 (UNAUDITED) AND 1999 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED JUNE 30, MARCH 31,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(AS RESTATED, SEE NOTE 13)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(19,330) $ (8,833) $ (5,035) $ (4,026) $ (3,196)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Extraordinary item........................................ -- -- -- -- 1,619
Depreciation and amortization............................. 5,176 5,585 7,502 5,498 6,685
Provision for doubtful accounts........................... 406 316 464 265 291
Write-down of intangible assets........................... 9,965 -- -- -- --
Acquired in-process research and development.............. -- 1,556 -- -- --
(Gain) loss on sale of assets............................. 313 (8) 13 13 --
Non-cash compensation expense............................. -- -- 18 18 90
Changes in operating assets and liabilities net of effects
of businesses acquired:
Accounts receivable....................................... 977 (861) (2,065) (1,410) (2,011)
Formularly receivables.................................... (74) (331) (1,936) (1,097) (2,569)
Inventory................................................. 262 (45) (40) (68) (52)
Prepaid expenses and other current assets................. (179) 175 (51) (3) (193)
Other assets.............................................. 243 13 19 118 (642)
Accounts payable and accrued expenses and other current
liabilities............................................. 997 (629) (1,368) (3,696) (2,603)
Other long-term liabilities............................... (409) (958) (21) 546 (16)
-------- -------- -------- -------- --------
Net cash used in operating activities..................... (1,653) (4,020) (2,500) (3,842) (2,597)
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash acquired............... (3,648) (11,450) (10,674) (10,674) (11,428)
Purchases of property and equipment....................... (1,271) (1,477) (913) (646) (1,107)
Additions to goodwill and other intangible assets......... -- (143) (699) (492) (1,003)
Proceeds from sale of property and equipment.............. -- 461 182 182 --
Proceeds from sale of net assets of Premier............... -- 388 -- -- --
-------- -------- -------- -------- --------
Net cash used in investing activities..................... (4,919) (12,221) (12,104) (11,630) (13,538)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Due to stockholders....................................... (4,484) -- -- -- --
Issuance of Senior Subordinated Note...................... -- 22,875 -- -- --
Issuance of common stock.................................. -- 2,125 -- -- --
Net proceeds (repayments) under Credit Facility........... 8,250 (8,250) 16,725 15,925 (10,725)
Principal repayments of debt.............................. (2,852) (801) (588) (508) (25,533)
Principal repayments of capital lease obligations......... (452) (518) (567) (449) (345)
Exercise of stock options................................. 195 90 65 40 333
Payment of preferred dividends............................ -- -- -- -- (8,371)
Net proceeds from initial public offering................. -- -- -- -- 61,868
-------- -------- -------- -------- --------
Net cash provided by financing activities................. 657 15,521 15,635 15,008 17,227
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (5,915) (720) 1,031 (464) 1,092
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 8,554 2,639 1,919 1,919 2,950
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 2,639 $ 1,919 $ 2,950 $ 1,455 $ 4,042
======== ======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.................................................. $ 394 $ 1,541 $ 3,018 $ 1,734 $ 3,338
======== ======== ======== ======== ========
Income taxes.............................................. $ 69 $ 111 $ 102 $ 95 $ 7
======== ======== ======== ======== ========
Non-cash investing and financing activities:
Assets acquired under capital leases or by incurring
debt.................................................... $ 205 $ 129 $ 278 $ 120 $ 408
======== ======== ======== ======== ========
Issuance of warrants...................................... $ 121 $ 52 $ 98 $ 98 $ 4,094
======== ======== ======== ======== ========
</TABLE>
F-56
<PAGE> 401
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
AND NINE MONTHS ENDED MARCH 31, 1998 AND 1999
(INFORMATION AS IT RELATES TO THE NINE MONTHS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED)
1. DESCRIPTION OF PRESENTATION, BASIS OF PRESENTATION, AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Description of Business -- MEDE America Corporation and subsidiaries
(the "Company") is a leading provider of electronic data interchange ("EDI")
products and services to a broad range of providers and payors in the healthcare
industry. The Company's integrated suite of EDI products and services permits
hospitals, pharmacies, physicians, dentists, and other healthcare providers and
provider groups to electronically edit, process and transmit claims, eligibility
and enrollment data, track claims submissions through the claims payment process
and obtain faster reimbursement for their services.
b. Basis of Presentation -- The accompanying consolidated financial
statements include the accounts of MEDE America Corporation and its wholly-owned
subsidiaries: MEDE America, Inc. ("MEDE"), Medical Processing Center, Inc.
("MPC"), Wellmark Incorporated ("Wellmark"), Electronic Claims and Funding, Inc.
("EC&F"), Premier Dental Systems Corp. ("Premier"), Healthcare Interchange, Inc.
("HII"), and MEDE America Corporation of Ohio, Inc. ("MEDE OHIO") (formerly
General Computer Corporation). MPC, Wellmark, and MEDE formerly constituted the
healthcare information services business unit of Card Establishment Services
("CES"). On March 9, 1995, CES was acquired by First Data Corporation. Prior to
this transaction, the former owners of CES spun off the healthcare information
services business unit as a new company with MEDE America Corporation formed to
serve as the holding company (the "Spin-off"). Because there was no change in
ownership as a result of this Spin-off, the accompanying consolidated financial
statements accounted for MEDE, MPC, and Wellmark on an historical cost basis.
Effective July 1, 1997, MEDE, MPC, Wellmark, and EC&F were merged into MEDE
America Corporation.
The Company has instituted certain cost reduction programs. The Company
anticipates that these programs, when coupled with the Company's revolving
credit facility, will enable the Company to satisfy its short-term cash flow and
working capital requirements at least through fiscal 1999. Additionally, the
Company has received support from certain of its stockholders in the past and
believes that continued support would be available if necessary to meet cash
flow and working capital requirements. However, such stockholders are under no
legal obligation to provide such support and, given the successful consummation
of the IPO (as herein defined), such stockholders may elect not to do so (see
Note 8).
On February 5, 1999, the Company consummated an initial public offering
("IPO") of 5,307,710 shares of common stock at a price of $13.00 per share
(including 692,310 shares that were subject to the underwriters' overallotment
option, which was exercised in full). The net proceeds to the Company were
approximately $61,868,000 (after deducting the underwriting discount and
offering expenses payable by the Company). The net proceeds to the Company were
used to (i) prepay approximately $25,236,000 of outstanding principal and
accrued interest on its outstanding 10% Senior Subordinated Note due February 1,
2002 and (ii) repay approximately $28,261,000 of outstanding indebtedness and
accrued interest under its revolving credit facility (the "Credit Facility").
The remaining $8,371,000 of net proceeds was used to pay a portion of the
accrued dividends on the Company's preferred stock, and the remainder of such
accrued dividends (approximately $301,000) was converted into 23,124 shares of
Common Stock. In addition, in connection with the IPO, all outstanding shares of
preferred stock were converted into 1,845,815 shares of common stock at the IPO
price of $13.00 per share.
F-57
<PAGE> 402
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
AND NINE MONTHS ENDED MARCH 31, 1998 AND 1999
(INFORMATION AS IT RELATES TO THE NINE MONTHS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED)
In connection with the prepayment of the Senior Subordinated Note and the
establishment of the New Credit Facility (as defined herein), the Company
recorded an extraordinary charge of approximately $1.6 million relating to the
write-off of the remaining discount on the Senior Subordinated Note and deferred
financing costs.
c. Principles of Consolidation -- All significant intercompany transactions
and balances are eliminated in consolidation.
d. Revenue Recognition -- Transaction and related formularly services
revenues (if applicable) are recognized at the time the transactions are
processed and the services are rendered. Other service revenues (including
post-contract customer support) and other revenues (including revenues relating
to insignificant obligations at the time sales are recorded) are recognized
ratably over applicable contractual periods or as service is provided. Revenue
from the licensing of software is recognized only after it is determined that
the Company has no significant remaining obligations and that collectibility of
the resulting receivable is probable. Revenue from hardware sales is recognized
when the hardware is shipped.
e. Cash and Cash Equivalents -- The Company considers all highly liquid
instruments with original maturity dates of three months or less to be
components of cash and cash equivalents.
f. Accounts Receivable -- Accounts receivable are due primarily from
companies in the healthcare industry. Credit is extended based on an evaluation
of the customer's financial condition, and generally collateral is not required.
g. Formularly Receivables -- Formularly receivables represent amounts due
for pharmacy related services provided to Practice Benefit Management ("PBM")
clients. Services include prescription processing from EDI transactions and
collecting and distributing pharmaceutical company fees for sponsored programs
to the PBM client. The Company submits processed transactions qualifying for
formularly incentive fees to various intermediaries who have PBM program
services contracts with pharmaceutical manufacturers on a quarterly basis, in
arrears. The intermediaries consolidate formularly transactions from various
processors and, in turn, submit such transactions to the pharmaceutical
manufacturers for payment. The additional processing and reconciliation time of
the consolidators and pharmaceutical companies results in a collection cycle for
the Company of 7-12 months.
h. Inventory -- Inventory is stated at the lower of cost (first-in,
first-out) or market.
i. Property and Equipment -- Property and equipment is stated at cost less
accumulated depreciation and amortization, and is depreciated using the
straight-line method over the estimated useful lives of the related assets.
j. Goodwill -- Goodwill represents the excess of cost over the fair value
of net assets acquired and is amortized on a straight-line basis over 7 to 20
years. Accumulated amortization amounted to $3,451,000 and $5,864,000 as of June
30, 1997 and 1998, respectively.
k. Other Intangible Assets -- Other intangible assets include purchased
client lists, purchased software and technology, and capitalized software
development costs. Purchased client lists are amortized on a straight-line basis
over three to five years. Amortization of purchased software and technology and
of capitalized software development costs is provided on a product-by-product
basis at the greater of the amount computed using (a) the ratio of current
revenues for a product to the total of current and anticipated future revenues
or (b) the straight-line method over the remaining estimated economic life of
F-58
<PAGE> 403
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
AND NINE MONTHS ENDED MARCH 31, 1998 AND 1999
(INFORMATION AS IT RELATES TO THE NINE MONTHS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED)
the product. Generally, an original estimated economic life of three to five
years is assigned to purchased software and technology and an original estimated
economic life of five years is assigned to capitalized software development
costs. Amortization begins in the period in which the related product is
available for general release to customers.
l. Software Development Costs -- The development of new software products
and enhancements to existing software products are expensed as incurred until
technological feasibility has been established. After technological feasibility
is established, any additional costs are capitalized in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting For the
Cost of Computer Software To Be Sold, Leased or Otherwise Marketed." During the
year ended June 30, 1998, the Company capitalized $462,000 of software
development costs on a project for which technological feasibility had been
established but was not yet available for customer release. Prior to July 1,
1997, the Company did not have any software development projects for which
significant development costs were incurred between the establishment of
technological feasibility and general customer release of the product.
m. Impairment of Long-Lived Assets -- In accordance with SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," the Company continually evaluates whether events and
circumstances have occurred that indicate the remaining estimated useful life of
goodwill and/or other intangible assets may warrant revision or that all or a
portion of the remaining balance may not be recoverable.
As a result of this evaluation process, during the fiscal year ended June
30, 1996, the Company wrote-down approximately $9,965,000 of costs relating to
client lists and related allocable goodwill obtained in the acquisition of MEDE
OHIO. Such intangible assets were written down to the net present value of the
estimated future cash flows to be derived from these clients as of June 30,
1996. The write-down was required due to a loss of approximately 25% of the
acquired MEDE OHIO client base.
n. Income Taxes -- The Company accounts for income taxes under SFAS No.
109, "Accounting For Income Taxes," which requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been included in the Company's financial statements or tax returns. Under
this method, deferred tax assets and liabilities are determined based on the
differences between the financial accounting and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
o. Use of Estimates in the Preparation of Financial Statements -- 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 assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
p. Unaudited Interim Financial Statements -- In the opinion of management,
the unaudited consolidated financial statements for the nine months ended March
31, 1998 and 1999 are presented on a basis consistent with the audited
consolidated financial statements and reflect all adjustments, consisting of
only normal recurring adjustments, necessary for a fair presentation of the
results thereof. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the entire year.
F-59
<PAGE> 404
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
AND NINE MONTHS ENDED MARCH 31, 1998 AND 1999
(INFORMATION AS IT RELATES TO THE NINE MONTHS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED)
q. Comprehensive Income -- In 1999, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income". This statement establishes rules for the
reporting of comprehensive income and its components. Comprehensive income, as
presented in the consolidated Statement of Stockholders' Equity (Deficit) is
equivalent to net income as the Company has no other items of comprehensive
income. The adoption of SFAS No. 130 had no impact on total shareholders'
equity.
r. Reclassifications -- Certain amounts in prior years' financial
statements have been reclassified to conform with the 1998 presentation.
2. ACQUISITIONS
a. EC&F and Premier -- In October 1995, the Company acquired all of the
outstanding shares of EC&F and Premier, which companies had common ownership,
for a cash purchase price of approximately $4,050,000, including transaction
expenses. The transaction was financed through loans obtained from the Company's
majority stockholder. Such loans were subsequently repaid with borrowings under
the Company's Credit Facility (as herein defined). In addition, the Company is
contingently liable for additional consideration if certain earnings levels are
attained relating to EC&F during the three-year period following the
consummation of the transaction. At June 30, 1996, the Company accrued $538,000
in connection with the contingent liability relating to earnings levels attained
during the first year. At June 30, 1997, the Company accrued a settlement
totaling $2,216,000 relating to the contingent liability for the second and
third years. Such accruals of contingent considerations were recorded as
compensation expense as these contingent payments were made to former
shareholders of EC&F and Premier who were required by the stock purchase
agreement to remain in the Company's employ during the period in which the
contingent consideration was to be earned. Purchased software and technology was
valued at $764,000 and generally is being amortized over three years. EC&F and
Premier are developers of electronic systems which provide EDI services to the
dental industry. In March 1997, the Company sold the operating net assets of
Premier for $540,000, including the buyer's assumption of $152,000 of Premier
liabilities. There was no gain or loss on the sale of such net assets.
b. TCS -- In February 1997, the Company purchased certain assets of
Time-Share Computer Systems, Inc. ("TCS") for $11,465,000, including transaction
expenses. Purchased in-process research and development, which had not reached
technological feasibility and had no alternative future use amounted to
$1,556,000 and was charged to operations at the acquisition date. Purchased
software and technology was valued at $2,984,000 and generally is being
amortized over three years. TCS provides data processing and information
management services to healthcare providers and pharmacies through integrated
electronic data interchange systems. The acquisition was financed by a portion
of the proceeds from the Senior Subordinated Note and Share Purchase Agreement
(as hereinafter defined) (Note 6).
c. Stockton -- In November 1997, the Company purchased certain assets and
assumed certain liabilities of The Stockton Group, Inc. ("Stockton") for a cash
purchase price of $10,674,000, including transaction expenses. In addition, the
Company is contingently liable for additional consideration of up to $2,600,000
(plus interest at an annual rate of 7.25%) if Stockton's revenue during the
12-month period ended September 30, 1998 is at least $5,000,000. Based on
revenues recorded through September 30, 1998 by Stockton, the Company has
accrued additional contingent consideration of $2,022,000 as of September 30,
1998, which was treated as additional purchase price and was, therefore, added
to goodwill. Purchased software and technology and client lists were valued at
$1,230,000 and $903,000, respectively, and generally are being amortized over
five years. Stockton is engaged in the business of providing EDI
F-60
<PAGE> 405
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
AND NINE MONTHS ENDED MARCH 31, 1998 AND 1999
(INFORMATION AS IT RELATES TO THE NINE MONTHS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED)
and transaction processing services to the healthcare industry. The transaction
was financed through borrowings under the Company's Credit Facility.
d. HII -- On October 30, 1998, the Company acquired all the outstanding
shares of capital stock of Healthcare Interchange, Inc. ("HII"), a St. Louis,
Missouri-based provider of EDI transaction processing services to hospitals and
physician groups in Missouri, Kansas and Illinois. Prior to the acquisition of
HII, two unrelated healthcare services divisions, Intercare and Telemedical,
were divested from HII in separate transactions. HII was purchased for a total
cash payment of approximately $11,718,000, including transaction expenses and
was financed with borrowings under the Credit Facility. Purchased client lists
were valued at $2,713,000 and are being amortized over five years.
These acquisitions were recorded using the purchase method of accounting
and, accordingly, the results of operations of these acquired companies are
included in the consolidated results of operations of the Company since the
dates of their respective acquisitions. The purchase price of each acquisition
has been allocated to the respective net assets acquired based upon their fair
values. Goodwill, which represents the excess of cost over the estimated fair
value of the net assets acquired, for these transactions were as follows: EC&F
and Premier -- $3,586,000; TCS -- $6,525,000, Stockton -- $8,281,000 and HII --
$8,329,000. Goodwill is being amortized over 20 years except for the goodwill
recorded in connection with the acquisition of TCS which is being amortized over
seven years.
The following unaudited pro forma information for the year ended June 30,
1998 and the nine months ended March 31, 1998 includes the operations of the
Company, inclusive of the operations of both Stockton and HII as if the
acquisitions had occurred as of July 1, 1997. The unaudited pro forma
information for the nine months ended March 31, 1999 includes the operations of
the Company, inclusive of the operations of HII as if the acquisition had
occurred at July 1, 1998. This pro forma information gives effect to the
amortization expense associated with goodwill and other intangible assets
acquired, adjustments related to the fair market value of the assets and
liabilities acquired, interest expense related to financing the acquisitions and
related income tax effects.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31,
JUNE 30, ------------------
1998 1998 1999
---------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues............................................. $48,880 $35,522 $41,532
======= ======= =======
Loss from operations................................. $(1,034) $(1,146) $ 690
======= ======= =======
Loss before extraordinary item....................... $(5,695) $(4,492) $(2,479)
======= ======= =======
Loss before extraordinary item applicable to common
stock.............................................. $(8,095) $(6,292) $(3,923)
======= ======= =======
Basic and diluted loss before extraordinary item per
share.............................................. $ (1.43) $ (1.11) $ (0.55)
======= ======= =======
</TABLE>
F-61
<PAGE> 406
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
AND NINE MONTHS ENDED MARCH 31, 1998 AND 1999
(INFORMATION AS IT RELATES TO THE NINE MONTHS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED)
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
USEFUL LIVES
(IN YEARS) 1997 1998
------------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Land................................................. $ 210 $ 104
Building and improvements............................ 20-25 2,190 2,193
Furniture and fixtures............................... 5 1,150 1,240
Computer equipment................................... 3-5 5,696 6,747
------ -------
9,246 10,284
Less accumulated depreciation and amortization....... 3,729 5,573
------ -------
Property and equipment -- net........................ $5,517 $ 4,711
====== =======
</TABLE>
4. OTHER INTANGIBLE ASSETS
Other intangible assets consist of the following:
<TABLE>
<CAPTION>
1997 1998
------ ------
(IN THOUSANDS)
<S> <C> <C>
Purchased client lists..................................... $2,989 $3,893
Less, accumulated amortization............................. 1,518 2,220
------ ------
1,471 1,673
------ ------
Purchased software and technology.......................... 6,859 8,288
Less, accumulated amortization............................. 2,973 4,922
------ ------
3,886 3,366
------ ------
Software development costs................................. -- 462
------ ------
Other intangible assets -- net............................. $5,357 $5,501
====== ======
</TABLE>
Subsequent to the issuance of the June 30, 1997 financial statements, the
Company's management determined that a lower discount rate should have been
utilized to value purchased software and technology acquired in the TCS
acquisition. As a result, the Company reclassified $343,000 from goodwill to
purchased software and technology.
F-62
<PAGE> 407
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
AND NINE MONTHS ENDED MARCH 31, 1998 AND 1999
(INFORMATION AS IT RELATES TO THE NINE MONTHS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED)
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
<TABLE>
<CAPTION>
1997 1998
------ ------
(IN THOUSANDS)
<S> <C> <C>
Accrued wages and related employee benefits................ $1,010 $1,609
Rebate liability........................................... 488 291
Pharmacy claims liability.................................. 576 604
Accrued professional fees.................................. 795 364
Deferred revenue........................................... 749 614
Accrued reorganization costs(a)............................ 1,005 --
Due to former owners of acquired business.................. 2,216 1,945
Accrued litigation settlement.............................. 860 --
Accrued interest........................................... 5 864
Other...................................................... 1,491 1,424
------ ------
Total................................................. $9,195 $7,715
====== ======
</TABLE>
- -------------------------
(a) As a result of the Spin-off (Note 1), the Company recorded a charge
amounting to $2,864,000 during the year ended June 30, 1995. Such charge
represented amounts to be paid to former stockholders of MedE (who remained
as executives of MedE) pursuant to contractual agreements which require such
payments to be made upon a change in control. The net present value of
remaining payments totaled $1,005,000 as of June 30, 1997, which was
included in accrued reorganization costs.
F-63
<PAGE> 408
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
AND NINE MONTHS ENDED MARCH 31, 1998 AND 1999
(INFORMATION AS IT RELATES TO THE NINE MONTHS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED)
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------ MARCH 31,
1997 1998 1999
------- ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Senior subordinated note less unamortized discount
of $2,000,000 and $1,641,000 at June 30, 1997 and
1998, respectively(a)............................. $23,000 $23,359 $ --
Credit Facility(b).................................. -- 16,725 6,000
Obligations under capital leases(c)................. 769 436 518
Loan payable relating to an acquisition,
collateralized by $224,000 of certificates of
deposits at June 30, 1998 due in quarterly
payments ranging from $15,000 to $25,000 through
February 2002, interest at 6.7 percent............ 342 271 192
Note payable, in connection with the sale of certain
assets due in monthly installments of $6,000
through January 2000, interest at 6.8 percent..... 180 114 61
Notes payable to former shareholders of EC&F, repaid
in 1998........................................... 95 -- --
Note payable, collateralized by land and building of
MEDE OHIO, due in monthly installments of $19,000
through July 2000, interest at 12.5 percent....... 592 419 --
Note payable to bank, repaid in 1998................ 173 -- --
Other............................................... 10 -- --
------- ------- ------
25,161 41,324 6,771
Less current portion................................ 538 269 425
------- ------- ------
Total..................................... $24,623 $41,055 $6,346
======= ======= ======
</TABLE>
- -------------------------
(a) On February 14, 1997, the Company entered into an agreement with an
affiliate of certain shareholders of the Company under which the Company
issued a $25,000,000 senior subordinated note (the "Senior Subordinated
Note") and 370,993 shares of its common stock valued at $2,125,000
(representing the estimated fair value of the common stock) for total
consideration of $25,000,000 (the "Senior Subordinated Note and Share
Purchase Agreement"). The $2,125,000 relating to the shares of common stock
was recorded as a discount on the Senior Subordinated Note and was amortized
over the term of the Senior Subordinated Note. The Senior Subordinated Note
bore interest at the rate of 10% per annum, payable quarterly. One half of
the principal sum was due on February 14, 2001, and the second half was due
on February 14, 2002. The terms of the Senior Subordinated Note and Share
Purchase Agreement placed restrictions on the consolidation, merger, or sale
of the Company, indebtedness, and the payment of any cash dividends. The
Senior Subordinated Note was repaid in February 1999 with a portion of the
proceeds of the IPO. In connection with the repayment of the Senior
Subordinated Note, the Company recorded an extraordinary charge of
$1,619,000 relating to the write-off of the remaining discount on the Senior
Subordinated Note.
(b) On January 26, 1999, the Company entered into a Credit Agreement (the "New
Credit Facility") The New Credit Facility provides for a $25,000,000
revolving credit facility that matures on
F-64
<PAGE> 409
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
AND NINE MONTHS ENDED MARCH 31, 1998 AND 1999
(INFORMATION AS IT RELATES TO THE NINE MONTHS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED)
January 26, 2002. Borrowings under the New Credit Facility bear interest at
either the bank's base rate, as defined, plus .75 percent or an offshare
rate, as defined, plus 1.75 percent. The weighted average interest rate on
outstanding borrowings at March 31, 1999 was 7.4 percent. The Company is
required to pay a commitment fee of 0.5 percent per annum on the unused
portion of the New Credit Facility. The New Credit Facility is not
guaranteed by any third party, but is secured by substantially all of the
Company's assets, including the stock of the Company's subsidiaries. The New
Credit Facility contains various covenants and conditions, including those
relating to Year 2000 compliance, changes in control and management and
restrictions on the payments of dividends on the common stock [and requires
the Company to maintain certain leverage and interest coverage rates and
places restrictions on additional investments and indebtedness]. The closing
of the New Credit Facility occurred simultaneously with the IPO.
The New Credit Facility replaced the Company's existing revolving line of
credit from a bank (the "Credit Facility") which was last amended on October
7, 1998 to increase the maximum borrowings to $36,000,000. All borrowings
under the Credit Facility were guaranteed by certain stockholders of the
Company. In consideration for the granting of such guarantees, the
stockholders were issued warrants to purchase 52,530 shares (valued at
$121,000), 18,330 shares (valued at $52,000), 34,200 shares (valued at
$98,000), and 84,050 shares (valued at $171,000) of the Company's common
stock during the years ended June 30, 1996, 1997 and 1998 and the nine
months ended March 31, 1999, respectively. All warrants issued were valued
using the Black-Scholes Option Pricing Model. The aggregate fair value of
these warrants was recorded in other assets as deferred financing costs and
was amortized over the life of the agreement.
Maturities of long-term debt as of June 30, 1998 are as follows:
<TABLE>
<CAPTION>
DISCOUNT
YEAR ENDING JUNE 30, GROSS ON NOTE NET
-------------------- ------- -------------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
1999.......................................... $ 664 $ 395 $ 269
2000.......................................... 17,164 437 16,727
2001.......................................... 12,594 483 12,111
2002.......................................... 12,543 326 12,217
------- ------ -------
Total......................................... $42,965 $1,641 $41,324
======= ====== =======
</TABLE>
Based upon the borrowing rates currently available to the Company for loans
with similar terms, the fair value of the Company's debt approximates the
carrying amounts.
7. INCOME TAXES
The provision for income taxes for the fiscal years ended June 30, 1996,
1997 and 1998 consists entirely of current state income taxes.
F-65
<PAGE> 410
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
AND NINE MONTHS ENDED MARCH 31, 1998 AND 1999
(INFORMATION AS IT RELATES TO THE NINE MONTHS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED)
The provision for income taxes varies from the amount computed by applying
the statutory U.S. Federal income tax rate to the loss before provision for
income taxes as a result of the following:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. Federal statutory rate................... $(6,541) $(2,984) $(1,698)
Increases (reductions) due to:
Nondeductible expenses...................... 3,674 293 238
State taxes................................. 93 57 42
Net operating losses not producing current
tax benefits............................. 2,867 2,691 1,460
------- ------- -------
Total............................... $ 93 $ 57 $ 42
======= ======= =======
</TABLE>
The net deferred tax asset is comprised of the following:
<TABLE>
<CAPTION>
1997 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable.................................... $ 685 $ 399
Property and equipment................................. (61) 176
Goodwill............................................... 2,488 2,786
Other intangible assets................................ 366 459
Accrued expenses and other current liabilities......... 1,264 617
Net operating loss carryforwards....................... 12,656 14,552
-------- --------
17,398 18,989
Less valuation allowance............................... (17,398) (18,989)
-------- --------
Total........................................ $ -- $ --
======== ========
</TABLE>
The valuation allowance increased during the years ended June 30, 1997 and
1998 primarily as a result of additional net operating loss carryforwards and
net deductible temporary differences, for which realization was not considered
to be more likely than not. In the event that the tax benefits relating to the
valuation allowance are subsequently realized, approximately $5,600,000 of
benefits would reduce goodwill.
As of June 30, 1998, the Company had Federal net operating loss
carryforwards of approximately $36,380,000. Such loss carryforwards expire in
the fiscal years 2005 through 2013. Because of the changes in ownership, as
defined in the Internal Revenue Code, which occurred during 1995 and 1996,
certain net operating loss carryforwards are subject to annual limitations.
8. STOCKHOLDERS' EQUITY
a. Stock Option and Restricted Stock Purchase Plan -- In March 1995, the
Company established a stock option and restricted stock purchase plan (the
"Stock Plan"). The Stock Plan permits the granting of any or all of the
following types of awards: incentive stock options ("ISOs"); nonqualified stock
options ("NQSO"); or restricted stock. The Stock Plan authorizes the issuance of
655,000 shares of common stock. ISOs may not be granted at a price less than the
fair market value of the Company's common stock on the date of grant (or 110
percent of the fair market value in the case of persons holding ten percent or
more of the voting stock of the Company) and expire not more than ten years from
the date of grant (five
F-66
<PAGE> 411
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
AND NINE MONTHS ENDED MARCH 31, 1998 AND 1999
(INFORMATION AS IT RELATES TO THE NINE MONTHS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED)
years in the case of ISOs granted to persons holding ten percent or more of the
voting stock of the Company). The vesting period relating to the ISOs is
determined by the Option Committee of the Board of Directors at the date of
grant. The exercise price, expiration date, and vesting period relating to NQSOs
are determined by the Option Committee of the Board of Directors at the date of
grant.
The table below summarizes the activity of the Stock Plan for the years
ended June 30, 1996, 1997 and 1998.
<TABLE>
<CAPTION>
WEIGHTED
NUMBER EXERCISE AVERAGE
OF PRICE EXERCISE
SHARES RANGE PRICE
------- ------------- ---------
<S> <C> <C> <C>
Balance, July 1, 1995............................. 480,316 $4.58 $4.58
Options granted................................. 117,950 $4.58 $4.58
Options exercised............................... (42,556) $4.58 $4.58
Canceled/lapsed................................. (91,217) $4.58 $4.58
------- ------------- -----
Balance, June 30, 1996............................ 464,493 $4.58 $4.58
Options granted................................. 51,059 $4.58 - $5.73 $5.17
Options exercised............................... (19,642) $4.58 $4.58
Canceled/lapsed................................. (65,684) $4.58 $4.58
------- ------------- -----
Balance, June 30, 1997............................ 430,226 $4.58 - $5.73 $4.64
Options granted................................. 81,926 $5.73 $5.73
Options exercised............................... (14,054) $4.58 - $5.73 $4.62
Canceled/lapsed................................. (15,057) $4.58 - $5.73 $4.62
------- ------------- -----
Balance, June 30, 1998............................ 483,041 $4.58 - $5.73 $4.84
======= ============= =====
</TABLE>
During March 1998, the Company granted 47,565 options at an exercise price
of $5.73 per share. The Company later determined that the value of the Company's
stock at the date of grant was $8.00. As a result, the Company recorded a
deferred compensation charge of $108,000 relating to the granting of these
options, of which $18,000 was amortized during the year ended June 30, 1998.
Effective August 31, 1998, the Company accelerated the vesting of these options
and, therefore, amortized the remaining balance.
Significant option groups outstanding at June 30, 1998 and related weighted
average price and life information were as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- -------------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$4.58 375,804 7.4 $4.58 202,069 $4.58
$5.73 107,237 9.6 $5.73 10,689 $5.73
------- -------
483,041 7.9 $4.84 212,758 $4.64
======= =======
</TABLE>
F-67
<PAGE> 412
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
AND NINE MONTHS ENDED MARCH 31, 1998 AND 1999
(INFORMATION AS IT RELATES TO THE NINE MONTHS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED)
The Company applies APB opinion No. 25 and related interpretations in
accounting for its Option Plan. Accordingly, no compensation cost has been
recognized. If compensation cost for the Company's stock options had been
determined consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net loss and net loss per share for the years ended
June 30, 1996, 1997 and 1998 would have been as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net loss -- as reported.............................. $(19,330) $(8,833) $(5,035)
Net loss -- pro forma................................ (19,345) (8,887) (5,105)
Basic and diluted net loss per share -- as
reported........................................... (4.14) (2.07) (1.31)
Basic and diluted net loss per share -- pro forma.... (4.15) (2.08) (1.32)
</TABLE>
The weighted average fair value of the options granted for the years ended
June 30, 1996, 1997, and 1998 is estimated at $1.56, $1.83, and $1.92 on the
date of grant (using the minimum value option pricing model) with the following
weighted average assumptions for the years ended June 30, 1996, 1997, and 1998,
respectively: a risk-free interest rate of 5.93%, 6.39%, and 5.86%; an expected
option life of seven years and no expected volatility or dividend yield. As
required by SFAS No. 123, the impact of outstanding nonvested stock options
granted prior to July 1, 1995 has been excluded from the pro forma calculation;
accordingly, the 1996, 1997 and 1998 pro forma adjustments are not indicative of
future period pro forma adjustments when the calculation will apply to all
applicable stock options.
b. Net income (loss) per share -- In 1997, the Company adopted SFAS No.
128, "Earnings Per Share." Basic income per share is determined by using the
weighted average number of shares of common stock outstanding during each
period. Diluted income per share further assumes the issuance of common shares
for all dilutive outstanding stock options and warrants as calculated using the
treasury stock method. Basic and diluted earnings per share are the same for all
of the periods presented because the effect of including outstanding options and
warrants would be antidilutive. The calculation for the years ended June 30,
1996, 1997 and 1998 and the nine months ended March 31, 1998 and 1999 was as
follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1996 1997 1998
----------------------------- ----------------------------- ----------------------------
PER-SHARE PER-SHARE PER-SHARE
LOSS SHARES AMOUNT LOSS SHARES AMOUNT LOSS SHARES AMOUNT
-------- ------ --------- -------- ------ --------- ------- ------ ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net loss............. $(19,330) $ (8,833) $(5,035)
Less: Preferred
dividends.......... (2,400) (2,400) (2,400)
-------- -------- -------
Basic and diluted net
loss per share..... $(21,730) 5,245 $(4.14) $(11,233) 5,425 $(2.07) $(7,435) 5,679 $(1.31)
======== ===== ====== ======== ===== ====== ======= ===== ======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
1999 1998
------------------------------ ------------------------------
PER-SHARE PER-SHARE
LOSS SHARES AMOUNT LOSS SHARES AMOUNT
------- ------ --------- ------- ------ ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net loss................................... $(4,026) $(3,196)
Less: Preferred dividends.................. (1,800) (1,444)
------- -------
Basic and diluted net loss per share....... $(5,826) 5,677 $(1.03) $(4,640) 7,116 $(0.65)
======= ===== ====== ======= ====== ======
</TABLE>
F-68
<PAGE> 413
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
AND NINE MONTHS ENDED MARCH 31, 1998 AND 1999
(INFORMATION AS IT RELATES TO THE NINE MONTHS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED)
c. Reverse Stock Split and Increase in Authorized Common Stock and
Preferred Stock -- On July 27, 1998, the Company amended and restated its
certificate of incorporation in order to, among other things, effect a reverse
stock split of all issued and outstanding common shares at the rate of 1 for
4.5823, which decreased the number of issued and outstanding shares as of June
30, 1998 from approximately 26,050,000 to approximately 5,685,000. This stock
split has been retroactively reflected in the accompanying financial statements
for all periods presented. The Company also increased the number of shares of
authorized common stock to 30,000,000 and the number of shares of authorized
preferred stock to 5,000,000, of which 250,000 were designated as relating to
Series A redeemable cumulative preferred stock (Note 9).
d. Recapitalization -- In conjunction with the IPO and as provided for in
the Company's July 27, 1998 amendment and restatement of its certificate of
incorporation, the Company contemplates a recapitalization of its capital stock
(the "Recapitalization"). The Recapitalization involved the conversion of all
outstanding preferred stock into common stock (based upon liquidation value as
defined in Note 9) and the exercise of all outstanding warrants other than the
Medic Warrant (as herein defined) and warrants to purchase 84,050 shares of
common stock issued on October 7, 1998. (See Note 6.b.). The preferred stock
conversion was effected based upon the IPO price per share of $13.00 per share
and was converted into 1,845,815 shares of common stock. In addition, $301,000
of accrued dividends on the preferred stock were converted into 23,124 shares of
common stock. The warrants were converted, in a cashless exercise, into 63,398
shares of common stock.
e. Stock Purchase Plan -- In June, 1998, the Board has approved the 1998
Employee Stock Purchase Plan (the "Purchase Plan"). Employees of the Company,
including directors of the Company who are employees, are eligible to
participate in quarterly plan offerings in which payroll deductions may be used
to purchase shares of common stock. The purchase price of such shares is the
lower of 85 percent of the fair market value of the common stock on the day the
offering commences and 85 percent of the fair market value of the common stock
on the date the offering terminates. The first offering period under the
Purchase Plan commenced upon completion of the IPO.
f. In June 1998, the Board approved the 1998 Stock Option and Restricted
Stock Purchase Plan (the "New Stock Plan"). The New Stock Plan permits the
granting of any or all of the following types of awards: incentive stock
options; nonqualified stock options; restricted stock; or other stock-based
awards, to officers, employees, directors, consultants and advisors of the
Company. The New Stock Plan authorizes the issuance of 1,500,000 shares of
common stock. Options to purchase an aggregate 400,000 shares of common stock
pursuant to the New Stock Plan were granted to certain employees of the Company
(including certain executive officers) upon consummation of the IPO. Such
options, which include both incentive and non-qualified stock options, have an
exercise price equal to the price to the public in the IPO and generally vest
ratably over four years from the date of grant except that the initial
installment of options granted to certain executive officers vested immediately
upon consummation of the IPO.
9. SERIES A REDEEMABLE CUMULATIVE PREFERRED STOCK
As of June 30, 1998, the Company had outstanding 239,956 shares of
preferred stock. The preferred stock was subject to mandatory redemption in two
equal installments on May 31, 2001 and 2002; however, the Company was able to
redeem the preferred stock in whole at any time or in part from time to time at
its option. The redemption price, as well as liquidation value, of the preferred
stock was $100 per share plus any accrued but unpaid dividends. Dividends on
this preferred stock, which were cumulative, were
F-69
<PAGE> 414
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
AND NINE MONTHS ENDED MARCH 31, 1998 AND 1999
(INFORMATION AS IT RELATES TO THE NINE MONTHS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED)
payable, if declared, at $10 per share per annum. All shares of preferred stock
were converted into common stock in connection with the Recapitalization and
$301,000 of accrued dividends on the preferred stock were converted into 63,398
shares of common stock. The remaining accrued dividends were paid with a portion
of the net proceeds of the IPO (see Note 8.d.).
10. COMMITMENTS AND CONTINGENCIES
a. Leases -- The Company leases certain offices and equipment under
operating leases. The minimum noncancelable lease payments are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
--------------------
<S> <C>
1999...................................................... $1,405
2000...................................................... 1,351
2001...................................................... 919
2002...................................................... 654
Thereafter................................................ 348
------
Total minimum lease payments.............................. $4,677
======
</TABLE>
Rent expense for the years ended June 30, 1996, 1997 and 1998 was $853,000,
$1,309,000, and $1,307,000, respectively.
b. Litigation -- The Company is engaged in various litigation in the
ordinary course of business. Management, based upon the advice of legal counsel,
is of the opinion that the amounts which may be awarded or assessed in
connection with these matters, if any, will not have a material effect on the
consolidated financial position or results of operations.
c. Employment Contracts -- The Company has employment contracts with
certain of its employees with annual remuneration ranging from $95,000 to
$110,000. Future minimum payments under these contracts are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
--------------------
<S> <C>
1999...................................................... $206
2000...................................................... 79
----
$285
====
</TABLE>
d. Defined Contribution Plans -- The Company maintained four defined
contribution plans (the "Plans") for all eligible employees, as defined by the
Plans until April 1, 1996. On April 1, 1996, the Company combined the Plans into
one defined contribution plan (the "New Plan"). The Company previously made
matching contributions at various percentages to three of the Plans in
accordance with the respective Plan documents and currently makes matching
contributions to the New Plan in an amount equal to fifty percent of the
employee salary deductions to a maximum of four percent of the employees salary
in accordance with the New Plan document. The Company incurred $197,000,
$227,000, and $194,000 for employer contributions to the Plans/New Plan for the
years ended June 30, 1996, 1997 and 1998, respectively.
e. Service Agreements -- The Company has entered into service agreements
with telecommunications providers which require the Company to utilize certain
minimum levels of the services of such providers.
F-70
<PAGE> 415
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
AND NINE MONTHS ENDED MARCH 31, 1998 AND 1999
(INFORMATION AS IT RELATES TO THE NINE MONTHS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED)
These agreements expire through November 2001. The Company was in compliance
with the terms of these agreements as of June 30, 1998. The minimum annual
amounts under these agreements are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
--------------------
<S> <C>
1999...................................................... $1,795
2000...................................................... 1,497
2001...................................................... 1,429
2002...................................................... 543
------
Total..................................................... $5,264
======
</TABLE>
11. TRANSACTION PROCESSING AGREEMENT
On July 17, 1998, the Company entered into a transaction processing
agreement (the "Processing Agreement") with Medic Computer Systems, Inc.
("Medic"), a subsidiary of Mysys plc that develops and licenses software for
healthcare providers, principally physicians, MSO's and PPM's. Under the
Processing Agreement, the Company will undertake certain software development
obligations, and on July 1, 1999 it will become the exclusive processor (subject
to certain exceptions) of medical reimbursement claims for Medic's subscribers
submitted to payors with whom MedE has or establishes connectivity. Under the
Processing Agreement, the Company will be entitled to revenues to be paid by
payors (in respect of which a commission is payable to Medic) as well as certain
fees to be paid by Medic, including a $500,000 service fee to be paid in eight
equal quarterly payments beginning on September 30, 1998. The Processing
Agreement sets forth detailed performance criteria, and development and
processing milestones. Inability to meet these criteria or milestones may result
in financial penalties or give Medic a right to terminate this agreement.
Conversely, if MedE exceeds certain processing milestones, it will be entitled
to performance awards based upon a predetermined formula. The Processing
Agreement is for a fixed term of five years, with annual renewals thereafter
(unless either party elects to terminate), and during such period, MedE is
required to provide system maintenance and support, including any necessary or
appropriate upgrades, as defined.
Revenue received under the Processing Agreement which are based on
transactions processed will be recognized as such transactions are processed by
MedE. Performance awards, if any, will be recognized when earned; and the
service fee will be recognized ratably over the five-year term of the agreement,
in accordance with Statement of Position ("SOP") 97-2, "Software Revenue
Recognition," and SOP 98-9, "Software Revenue Recognition With Respect To
Certain Transactions." Software development costs incurred under the Processing
Agreement will be recognized in accordance with SFAS No. 86 as described in Note
1.1. All other costs relating to the Processing Agreement will be recognized as
incurred, except for any penalties which will be recognized when and if they are
both probable of being incurred and estimable in accordance with SFAS No. 5,
"Accounting For Contingencies".
Contemporaneously, to ensure a close working relationship between the
parties, on July 17, 1998, the Company granted to Medic a warrant (the "Medic
Warrant") to acquire 1,250,000 shares of the Company's common stock, at a per
share exercise price equal to the price of the common stock to the public in the
IPO or, in the event that the IPO is not completed by March 31, 1999 at an
exercise price equal to $8 per share. The Medic Warrant vests over a two-year
period and may be exercised up to five years after issuance. The Medic Warrant
was valued at $3,925,000 using the Black-Scholes Option Pricing
F-71
<PAGE> 416
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
AND NINE MONTHS ENDED MARCH 31, 1998 AND 1999
(INFORMATION AS IT RELATES TO THE NINE MONTHS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED)
Model and assuming that the underlying value of MedE's common stock was equal to
the $13 IPO price per share, a risk-free interest rate of 5.47 percent, an
expected warrant life of five years, a volatility rate of 39 percent and no
dividend yield. The Medic Warrant is recorded in other assets and is being
amortized over the life of the Processing Agreement, five years. The Medic
Warrant contains customary weighted average antidilution provisions. The Company
and certain principal stockholders have agreed that following the completion of
the IPO and until the earlier of the termination of the Processing Agreement or
the disposition by Medic and its affiliates of at least 25 percent of the shares
of common stock issuable under the Medic Warrant, Medic shall have the right to
designate one director to the Company's Board of Directors.
12. OTHER INCOME
In February 1997, the Company exercised 26,712 options to purchase common
shares of First Data Corporation and subsequently sold the common shares
resulting in a pre-tax gain of $885,000. Such options were issued to former
employees of the Company prior to the Spin-off but reverted to the Company upon
the termination of these employees.
13. RESTATEMENT
Subsequent to the issuance of the Company's consolidated financial
statements for the fiscal year ended 1998, the Company's management determined
that it was necessary to revise the valuation of the write-off of in-process
research and development incurred in connection with the TCS acquisition in
February 1997. As a result, the Company's financial statements for the fiscal
years ended June 30, 1997 and 1998 have been restated from the amounts
previously reported in order to reflect the effects of the adjustment to the
write-off of in-process research and development. Such write-off, which occurred
during the year ended June 30, 1997, was reduced from $4,354,000 to $1,556,000.
As a result, goodwill was increased by $2,798,000. The effect of the restatement
is as follows:
<TABLE>
<CAPTION>
1997 1998
--------------------------- ---------------------------
AS PREVIOUSLY AS PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED
------------- ----------- ------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
AT JUNE 30:
Goodwill....................................... $ 24,834 $ 27,465 $ 32,522 $ 34,753
Accumulated deficit............................ (47,839) (45,208) (52,474) (50,243)
FOR THE YEAR ENDED JUNE 30:
Depreciation and amortization.................. 5,293 5,460 6,743 7,143
Acquired in-process research and development... 4,354 1,556 -- --
Net loss....................................... (11,464) (8,833) (4,635) (5,035)
Net loss applicable to common stockholders..... (13,864) (11,233) (7,035) (7,435)
Basic and diluted net loss per common share.... $ (2.56) $ (2.07) $ (1.24) $ (1.31)
</TABLE>
14. SUBSEQUENT EVENTS (UNAUDITED)
On April 20, 1999, the Company, Healtheon Corporation ("Healtheon") and
Merc Acquisition Corp., a wholly-owned subsidiary of Healtheon ("Merger Sub")
entered into an Agreement and Plan of Reorganization (the "Merger Agreement"),
pursuant to which Merger Sub will be merged with and into the Company, with the
Company being the surviving corporation of such merger (the "Merger"). The
F-72
<PAGE> 417
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
AND NINE MONTHS ENDED MARCH 31, 1998 AND 1999
(INFORMATION AS IT RELATES TO THE NINE MONTHS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED)
Merger Agreement was amended on June 17, 1999. Upon consummation of the Merger,
the separate existence of Merger Sub will cease, and the existing stockholders
of the Company will become stockholders of Healtheon in accordance with the
terms of the Merger Agreement.
The consideration for the Merger will consist of newly-issued shares of
Healtheon common stock, par value $.0001 per share ("Healtheon Common Stock"),
having an aggregate value of approximately $460 million, based upon the closing
sales price of $45.69 per share for the Healtheon Common Stock as reported on
Nasdaq on April 20, 1999. At the effective time of the Merger, each outstanding
share of common stock, par value $.01 per share, of the Company ("Company Common
Stock") will be converted into the right to receive 0.6593 shares of Healtheon
Common Stock (the "Exchange Ratio"), subject to adjustment as described below.
In the event that the 10 day average closing price for Healtheon Common
Stock for the periods ending two days prior to the date the Company's
shareholders meet to authorize the merger (the "Meeting Price"), is less than
$38.68 per share, Healtheon has the right to adjust the Exchange Ratio to a
ratio equal to $25.50 divided by the applicable price or, if the Healtheon
chooses not to exercise such option, the Company can terminate the Merger
Agreement.
The consummation of the Merger is subject to certain conditions, including,
among other things, approval by the stockholders of the Company and the receipt
of all necessary regulatory approvals pursuant to the Hart-Scott-Rodino
Antitrust Improvement Act of 1976, as amended. Pursuant to the Merger Agreement,
Healtheon and the Company will prepare and file a proxy statement/prospectus to
be mailed to stockholders in connection with calling a meeting of the
stockholders of the Company to vote on the Merger.
F-73
<PAGE> 418
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Greenberg News Networks, Inc.:
We have audited the accompanying balance sheets of Greenberg News Networks,
Inc. (a development stage company) (the "Company") as of December 31, 1997 and
1998 and the related statements of operations, stockholders' equity, and cash
flows for the period January 8, 1997 (date of inception) to December 31, 1997,
for the year ended December 31, 1998, and for the period January 8, 1997 (date
of inception) to December 31, 1998. 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 audit.
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 financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1997 and 1998
and the results of its operations and its cash flows for the period January 8,
1997 (date of inception) to December 31, 1997, for the year ended December 31,
1998, and for the period January 8, 1997 (date of inception) to December 31,
1998, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
February 26, 1999
(June 30, 1999 as to Note 9)
F-74
<PAGE> 419
GREENBERG NEWS NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1998 1999
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................... $ 33,829 $ 2,268,670 $ 122,129
Short-term investments.............................. 6,004,000
Accounts receivable................................. 33,150
Prepaid and other assets............................ 408,078 100,723
----------- ------------ ------------
Total current assets............................. 33,829 8,680,748 256,002
PROPERTY AND EQUIPMENT -- Net......................... 29,576 1,942,924 1,980,767
RESTRICTED CASH....................................... 387,000 666,088
OTHER ASSETS.......................................... 248,546 263,063
----------- ------------ ------------
$ 63,405 $ 11,259,218 $ 3,165,920
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses............... $ 430,299 $ 3,196,155 $ 2,941,531
Notes payable to shareholder........................ 1,562,300
Capital lease obligations........................... 119,980 119,983
----------- ------------ ------------
Total current liabilities........................ 1,992,599 3,316,135 3,061,514
CAPITAL LEASE OBLIGATIONS............................. 252,460 224,477
----------- ------------ ------------
Total liabilities................................ 1,992,599 3,568,595 3,285,991
COMMITMENTS AND CONTINGENCIES (Note 3)
REDEEMABLE PREFERRED STOCK -- Series A, $.01 par
value, outstanding zero, 1,913,044 and 1,913,044
(unaudited) shares, respectively, and a liquidation
value of $24,172,719 at December 31, 1998 and
$24,796,555 (unaudited) at March 31, 1999........... 26,591,312 89,626,111
STOCKHOLDERS' EQUITY:
Preferred stock -- Series B, $.01 par value,
outstanding zero, 109,765 and 109,765
(unaudited), respectively, and a liquidation
value of $1,262,300 at December 31, 1998 and
$1,262,300 (unaudited) at March 31, 1999......... 1,098 1,098
Common stock, $.01 par value; authorized 10,000,
10,000,000, and 10,000,000 (unaudited) shares,
respectively, outstanding 1,000, 1,915,235, and
1,915,235 (unaudited) shares, respectively....... 10 19,152 19,152
Additional paid-in capital.......................... 30,890 -- --
Unamortized restricted stock award.................. (231,671) (584,001)
Accumulated deficit during development stage........ (1,960,094) (18,689,268) (89,182,431)
----------- ------------ ------------
Total stockholders' equity (deficit)........ (1,929,194) (18,900,689) (89,746,182)
----------- ------------ ------------
$ 63,405 $ 11,259,218 $ 3,165,920
=========== ============ ============
</TABLE>
See notes to financial statements.
F-75
<PAGE> 420
GREENBERG NEWS NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD PERIOD
JANUARY 8, 1997 JANUARY 8, 1997
(DATE OF YEAR (DATE OF THREE MONTHS THREE MONTHS
INCEPTION) TO ENDED INCEPTION) TO ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1997 1998 1998 1998 1999
--------------- ------------ --------------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Sponsorship revenue.............. $ -- $ -- $ -- $ -- $ --
Subscriber revenue............... -- -- -- -- 7,695
----------- ------------ ------------ ----------- ------------
Total revenue.................. -- -- -- -- 7,695
OPERATING EXPENSES:
Cost of revenue.................. -- 3,643,904 3,643,904 62,190 2,146,857
Research and development......... 814,821 632,819 1,447,640 25,504 258,952
Sales and marketing.............. 281,843 6,787,879 7,069,722 128,385 4,392,998
General and administrative....... 852,318 3,338,229 4,190,547 1,066,023 1,025,553
Depreciation and amortization.... 11,112 254,174 265,286 3,500 179,107
----------- ------------ ------------ ----------- ------------
Total costs and expenses....... 1,960,094 14,657,005 16,617,099 1,285,602 8,003,467
----------- ------------ ------------ ----------- ------------
LOSS FROM OPERATIONS............... (1,960,094) (14,657,005) (16,617,099) (1,285,602) (7,995,772)
INTEREST EXPENSE................... -- (43,386) (43,386) -- (16,639)
INTEREST INCOME.................... -- 756,639 756,639 128,931 65,845
----------- ------------ ------------ ----------- ------------
LOSS BEFORE INCOME TAXES........... (1,960,094) (13,943,752) (15,903,846) (1,156,671) (7,946,566)
INCOME TAX EXPENSE................. -- -- -- -- --
----------- ------------ ------------ ----------- ------------
NET LOSS........................... (1,960,094) (13,943,752) (15,903,846) (1,156,671) (7,946,566)
ACCRETION OF PREFERRED STOCK....... -- (4,591,306) (4,591,306) (180,603) (63,034,799)
----------- ------------ ------------ ----------- ------------
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS..................... $(1,960,094) $(18,535,058) $(20,495,152) $(1,337,274) $(70,981,365)
=========== ============ ============ =========== ============
Loss per common share -- basic and
diluted.......................... $ (1.11) $ (9.72) $ (0.69) $ (37.06)
=========== ============ =========== ============
Weighted-average common shares
outstanding -- basic and
diluted.......................... 1,762,146 1,906,492 1,940,239 1,915,235
=========== ============ =========== ============
</TABLE>
See notes to financial statements.
F-76
<PAGE> 421
GREENBERG NEWS NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD JANUARY 8, 1997 (DATE OF INCEPTION)
TO DECEMBER 31, 1998 AND (UNAUDITED) THE THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
REDEEMABLE STOCKHOLDERS' EQUITY
SECURITIES -----------------------------------------------------------------------------
----------- UNAMORTIZED
SERIES A SERIES B ADDITIONAL RESTRICTED
PREFERRED PREFERRED COMMON PAID-IN STOCK ACCUMULATED
STOCK STOCK STOCK CAPITAL AWARD DEFICIT TOTAL
----------- --------- ------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of 1,000 shares of
common stock................... $ 10 $ 1,107 $ 1,117
Contribution of property and
equipment by principal
stockholder.................... 29,783 29,783
Net loss, January 8, 1997 to
December 31, 1997.............. $ (1,960,094) (1,960,094)
----------- ------ ------- ----------- --------- ------------ ------------
BALANCE -- December 31, 1997....... 10 30,890 (1,960,094) (1,929,194)
Cash contribution by principal
stockholder.................... 32,875 32,875
2,000-for-one stock split........ 19,990 (19,990) --
Issuance of 1,913,044 shares of
Series A preferred stock....... $22,000,006
Conversion of 109,765 shares of
common stock and note payable
to shareholder of $1,262,300 to
109,765 shares Series B
preferred stock................ $1,098 (1,098) 1,262,300 1,262,300
Issuance of restricted stock in
connection with services
provided....................... 250 316,000 (210,838) 105,412
Issuance of purchase warrants for
48,826 shares of common stock
in connection with services
provided....................... 134,021 134,021
Issuance of options for 7,348
shares of common stock in
connection with services
provided....................... 28,955 28,955
Amortization of restricted stock
award.......................... 20,833 (20,833) --
Accretion of Series A preferred
stock.......................... 4,591,306 (1,805,884) (2,785,422) (4,591,306)
Net loss......................... (13,943,752) (13,943,752)
----------- ------ ------- ----------- --------- ------------ ------------
BALANCE -- December 31, 1998....... 26,591,312 1,098 19,152 0 (231,671) (18,689,268) (18,900,689)
Amortization of restricted stock
award -- (Unaudited)........... 352,330 (352,330)
Compensation related to stock
options issued (Unaudited)..... 135,872 135,872
Accretion of Series A Preferred
Stock -- (Unaudited)........... 63,034,799 (488,202) (62,546,597) (63,034,799)
Net loss (Unaudited)............. (7,946,566) (7,946,566)
----------- ------ ------- ----------- --------- ------------ ------------
BALANCE -- March 31, 1999
(Unaudited)...................... $89,626,111 $1,098 $19,152 $ -- $(584,001) $(89,182,431) $(89,746,182)
=========== ====== ======= =========== ========= ============ ============
</TABLE>
See notes to financial statements.
F-77
<PAGE> 422
GREENBERG NEWS NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD PERIOD
JANUARY 8, 1997 JANUARY 8, 1997
(DATE OF (DATE OF THREE MONTHS THREE MONTHS
INCEPTION) TO YEAR ENDED INCEPTION) TO ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1997 1998 1998 1998 1999
--------------- ------------ --------------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss................................... $(1,960,094) $(13,943,752) $(15,903,846) $ (1,156,671) $(7,946,566)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization............ 11,112 254,174 265,286 3,500 179,107
Loss on disposal of property and
equipment.............................. 6,168 6,168 12,718
Issuance of stock options and stock
purchase warrants in connection with
services provided...................... 268,388 268,388 131,011 135,872
Changes in assets and liabilities:
Accounts receivable.................... (33,150)
Prepaid and other assets............... (408,078) (408,078) (19,084) 292,838
Accounts payable and accrued
expenses............................ 430,299 2,765,856 3,196,155 (94,312) (280,379)
Unearned revenue....................... 25,755
Other assets........................... (248,546) (248,546)
----------- ------------ ------------ ------------ -----------
Net cash used in operating
activities........................ (1,518,683) (11,305,790) (12,824,473) (1,135,556) (7,613,805)
INVESTING ACTIVITIES:
(Increase) decrease in short-term
investments.............................. (6,004,000) (6,004,000) (19,423,765) 6,004,000
Acquisition of property and equipment...... (10,905) (1,715,544) (1,726,449) (13,290) (229,668)
----------- ------------ ------------ ------------ -----------
Net cash provided (used) in
investing activities.............. (10,905) (7,719,544) (7,730,449) (19,437,055) 5,774,332
FINANCING ACTIVITIES:
Increase in restricted cash................ (387,000) (387,000) (387,000) (279,088)
Repayment of capital lease obligations..... (85,706) (85,706) (27,980)
Proceeds from issuance of common stock..... 1,117 1,117
Proceeds from issuance of notes payable.... 1,562,300 1,562,300
Proceeds from sale of preferred stock...... 22,000,006 22,000,006 22,000,006
Cash contribution from principal
stockholder.............................. 32,875 32,875 32,875
Repayment of stockholder loan.............. (300,000) (300,000) (300,000)
----------- ------------ ------------ ------------ -----------
Net cash provided (used) by
financing activities.............. 1,563,417 21,260,175 22,823,592 21,345,881 (307,068)
----------- ------------ ------------ ------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................ 33,829 2,234,841 2,268,670 773,270 (2,146,541)
CASH AND CASH EQUIVALENTS:
Beginning of period........................ -- 33,829 -- 33,829 2,268,670
----------- ------------ ------------ ------------ -----------
End of period.............................. $ 33,829 $ 2,268,670 $ 2,268,670 $ 807,099 $ 122,129
=========== ============ ============ ============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION -- Cash paid during the period
for interest............................... $ 43,386 $ 43,386 $ 16,639
============ ============ ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Property and equipment acquired under
capital leases........................... $ 458,146 $ 458,146 $ 28,594
============ ============ ============
Property and equipment contributed by
principal stockholder.................... $ 29,783 $ 29,783
=========== ============
Conversion of note payable to principal
stockholder to Series B preferred
stock.................................... $ 1,262,300 $ 1,262,300 $ 1,262,300
============ ============ ============
Issuance of common stock, stock options,
and stock purchase warrants in connection
with services provided................... $ 268,388 $ 268,388 $ 131,011 $ 135,872
============ ============ ============ ===========
</TABLE>
See notes to financial statements.
F-78
<PAGE> 423
GREENBERG NEWS NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1998 AND MARCH 31, 1999 (UNAUDITED),
FOR THE PERIOD JANUARY 8, 1997 (DATE OF INCEPTION)
TO DECEMBER 31, 1997, FOR THE YEAR ENDED DECEMBER 31, 1998,
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization -- Greenberg News Networks, Inc. (the "Company") was
incorporated in Delaware on January 8, 1997. The Company, based in Atlanta,
Georgia, has been in the development stage since its formation. The Company is
primarily engaged in providing medical news, information, and educational
programs and services via the Internet to physicians and other health care
providers under the Medcast brand name. The Medcast product was in use by
approximately 500 physicians at December 31, 1998. As the service was still in
"Beta Phase," the Company has recorded no revenue through December 31, 1998.
Use of 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 and accompanying notes. Actual results could differ from those
estimates.
Stock Split -- On February 9, 1998, the Company effected a 2,000-for-one
stock split in the form of a stock dividend. This resulted in the issuance of
1,999,000 additional shares of common stock and the transfer of $19,990 from
paid-in capital to common stock. All references to per share amounts throughout
this report have been restated to reflect this stock split.
Investments -- 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. At December 31, 1998, the Company's short-term
investment portfolio consisted of debt securities classified as held-to-
maturity and is presented at amortized cost, which approximates fair value.
Property and Equipment -- Property and Equipment is stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets ranging from 3 to 5 years.
Leasehold improvements are depreciated over the lesser of the asset's useful
life or the remaining lease term.
Other Assets -- Other assets consist primarily of employee advances,
deposits, and computers purchased by the Company to be used by physicians. These
computers have been expensed when delivered to the physician.
Nonmonetary Transactions -- Common stock, common stock options, and common
stock purchase warrants issued for goods or services are recorded at estimated
market value.
Product Development -- Costs incurred related to the development of the
Greenberg News product have been charged to expense as incurred.
Cash Equivalents and Restricted Cash -- All highly liquid instruments with
an original maturity of three months or less are considered cash equivalents.
Restricted cash is pledged to secure a letter of credit provided in lieu of a
security deposit under an operating lease.
Stock Based Compensation -- The Company accounts for stock-based employee
compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to
Employees ("APB 25"), and complies with the disclosure provisions of Statement
of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock Based
Compensation. Under APB 25, compensation cost is recognized over the vesting
period based on the
F-79
<PAGE> 424
GREENBERG NEWS NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1997 AND 1998 AND MARCH 31, 1999 (UNAUDITED),
FOR THE PERIOD JANUARY 8, 1997 (DATE OF INCEPTION)
TO DECEMBER 31, 1997, FOR THE YEAR ENDED DECEMBER 31, 1998,
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
difference, if any, on the date of grant between the fair value of the Company's
stock and the amount an employee must pay to acquire the stock.
Basic and Diluted Net Income (Loss) Per Common Share -- Basic net income
(loss) per common share is computed using the weighted-average number of shares
outstanding during the period. Diluted net income (loss) per common share is
computed using the weighted-average number of common and common equivalent
shares outstanding during the period. Common equivalent shares consist of the
incremental common shares issuable upon conversion of convertible preferred
stock (using the if-converted method) and shares issuable upon the exercise of
stock options and warrants (using the treasury stock method). Common equivalent
shares of 1,812,278, 1,005,655 and 1,926,514 for the year ended December 31,
1998 and the three months ended March 31, 1998 and 1999, respectively, were
excluded from the computation as their effect was anti-dilutive.
Fair Value of Financial Instruments -- The carrying values of cash and cash
equivalents, short-term investments, and accounts payable approximate fair value
because of the short maturity of these instruments. The carrying value of the
Company's obligations under capital leases also approximates fair value, as the
related interest rate is similar to the rates being offered to the Company.
Impairment of Long-Lived Assets -- In accordance with the provisions of
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to Be Disposed Of, the Company reviews long-lived assets for impairment
when events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Any impairment losses are reported in the period
in which the recognition criteria are first applied based on the fair value of
the asset.
Recent Pronouncements -- In June 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 130, Reporting Comprehensive Income. SFAS 130 is
designed to improve the reporting of changes in equity from period to period. As
the Company has no components of other comprehensive income, adoption of SFAS
130 did not have an impact on the Company's financial statements.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements for periods beginning after December 15,
1997. The Statement requires that business segment financial information be
reported in the financial statements utilizing the management approach. The
management approach is defined as the manner in which management organizes the
segments within the enterprise for making operating decisions and assessing
performance. Since the Company is organized as, and operates in, a single
business segment that provides medical news, information and education programs
and services to physicians and other health care providers, this Statement did
not have an impact on financial reporting for the periods presented.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 establishes methods of accounting
for derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities, and is effective for fiscal
years beginning after June 15, 2000. The Company has not determined what effect,
if any, adoption of SFAS 133 will have on the Company's financial statements.
Interim Financial Statements -- The accompanying unaudited interim
financial statements as of March 31, 1999 and the three months ended March 31,
1999 and 1998 reflect, in the opinion of
F-80
<PAGE> 425
GREENBERG NEWS NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1997 AND 1998 AND MARCH 31, 1999 (UNAUDITED),
FOR THE PERIOD JANUARY 8, 1997 (DATE OF INCEPTION)
TO DECEMBER 31, 1997, FOR THE YEAR ENDED DECEMBER 31, 1998,
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
management, all adjustments necessary for a fair presentation of the interim
financial statements. All such adjustments are of a normal and recurring nature.
2. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1998 consists of the
following:
<TABLE>
<CAPTION>
1997 1998
-------- ----------
<S> <C> <C>
Computer equipment..................................... $ 38,974 $1,492,709
Leasehold improvements................................. 1,714 184,508
Office equipment....................................... 527,831
-------- ----------
40,688 2,205,048
Less accumulated depreciation.......................... (11,112) (262,124)
-------- ----------
Total........................................ $ 29,576 $1,942,924
======== ==========
</TABLE>
Depreciation expense on computer equipment, leasehold improvements, and
office equipment for the period January 8, 1997 (date of inception) to December
31, 1997, the year ended December 31, 1998 and the period January 8, 1997 (date
of inception) to December 31, 1998 was $11,112, $254,174, and $265,286,
respectively.
Included in property and equipment at December 31, 1998 were assets
acquired under capital lease obligations with a cost of $458,146 and accumulated
depreciation at December 31, 1998 of $44,091.
3. COMMITMENTS AND CONTINGENCIES
Leases -- The Company leases facilities and equipment primarily under
long-term operating leases and capital lease agreements. Future minimum payments
under noncancelable operating leases and capital leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
- ------------ -------- ----------
<S> <C> <C>
1999........................................................ $181,426 $ 305,289
2000........................................................ 181,426 311,898
2001........................................................ 97,071 311,589
2002........................................................ 18,666 309,581
2003........................................................ 4,667 77,442
-------- ----------
Total............................................. $483,256 $1,315,799
==========
Less amounts representing interest and taxes................ 110,816
--------
Present value of capital lease payments..................... $372,440
========
</TABLE>
The Company's rental expense under operating leases for the period January
8, 1997 (date of inception) to December 31, 1997, the year ended December 31,
1998, and the period January 8, 1997 (date of inception) to December 31, 1998,
was $56,544, $192,401, and $248,945, respectively.
F-81
<PAGE> 426
GREENBERG NEWS NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1997 AND 1998 AND MARCH 31, 1999 (UNAUDITED),
FOR THE PERIOD JANUARY 8, 1997 (DATE OF INCEPTION)
TO DECEMBER 31, 1997, FOR THE YEAR ENDED DECEMBER 31, 1998,
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
Letter of Credit -- The Company has a letter of credit agreement at
December 31, 1998, to back certain operating leases. The letter of credit amount
at December 31, 1998, was $386,614. As required by the letter of credit
agreement, the Company had $387,000 in restricted cash at December 31, 1998.
Johns Hopkins Medicine -- On July 10, 1998, the Company entered into a
transaction with Johns Hopkins Medicine ("Johns Hopkins") to develop a Johns
Hopkins channel on Medcast.
The agreement provides for nonrefundable payments as follows:
$75,000 upon execution of the agreement
$31,000 per quarter for four quarters beginning October 1, 1998
$43,000 per quarter for four quarters beginning October 1, 1999
$50,000 per quarter for four quarters beginning October 1, 2000
The Company also issued 25,000 shares of common stock to Johns Hopkins.
These shares have restrictions that limit the sale or transfer of the shares and
will be forfeited if Johns Hopkins does not comply with the contractual terms.
The restrictions are removed on one-third of the shares upon execution of the
agreement, on one-third of the shares on the first anniversary of the agreement,
and with respect to the final one-third of the shares on the second anniversary
of the agreement. If the agreement terminates prior to the second anniversary,
the unvested shares may be repurchased by the Company for $1.00 per share.
The Company recognized expense of $298,533 in connection with this
agreement. Additional expense will be recorded in subsequent periods based on
additional vesting and the related fair value of the stock at the vesting date.
The agreement may be extended for an additional two years at a cost of
$225,000 payable on January 1, 2002 and $250,000 payable January 1, 2003, with
further automatic extensions in two-year increments until termination by either
party.
Employment Agreements -- The Company has employment agreements with certain
of its officers, the terms of which expire at various times through January 3,
2002. Such agreements provide for minimum salary levels, adjusted annually by
specified amounts, as well as for incentive bonuses that are payable on approval
by the Compensation Committee of the Board. The aggregate commitment for future
salaries at December 31, 1998, excluding bonuses, was $1,850,000. The agreements
also provide for severance benefits.
Consulting Agreement -- The Company has entered into a consulting agreement
with a Director that calls for monthly payments and provides for additional
incentive compensation based on developing relationships with pharmaceutical
company accounts. The incentive compensation consists of a stated percentage of
revenues generated by the accounts and the issuance of stock options or
warrants. The agreement is cancelable by either party on thirty days' notice.
4. RELATED PARTY TRANSACTIONS
During the fiscal year ended December 31, 1997, the Chief Executive Officer
and Principal Stockholder loaned the Company $1,562,300, bearing interest at
6.0% per annum, pursuant to two demand notes. In February 1998, the Chairman
exchanged such notes and 109,765 shares of common stock for 109,765 shares of
Series B Preferred Stock and $300,000 in cash.
F-82
<PAGE> 427
GREENBERG NEWS NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1997 AND 1998 AND MARCH 31, 1999 (UNAUDITED),
FOR THE PERIOD JANUARY 8, 1997 (DATE OF INCEPTION)
TO DECEMBER 31, 1997, FOR THE YEAR ENDED DECEMBER 31, 1998,
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
5. INCOME TAXES
Due to the Company's operating losses, there was no provision for income
taxes for any of the periods presented.
At December 31, 1998, the Company has available, for federal and state
income tax purposes, net operating loss ("NOL") carryforwards of approximately
$14.9 million, which begin to expire in 2013. These losses may be offset against
future taxable income, if any, during the carryforward period.
The tax effects of temporary differences that give rise to deferred tax
assets at December 31, 1997 and 1998, are as follows:
<TABLE>
<CAPTION>
1997 1998
--------- -----------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities................................ $ 158,000 $ 116,640
Net operating loss carryforwards................... 590,601 5,938,124
Property and equipment............................. 159,570
Other.............................................. 31,037 122,610
--------- -----------
Total gross deferred tax assets................. 779,638 6,336,944
Deferred tax liability -- prepaid assets............. (39,862)
Less valuation allowance............................. (779,638) (6,297,082)
--------- -----------
Net deferred tax assets......................... $ -- $ --
========= ===========
</TABLE>
Due to uncertainty regarding ultimate realization, the net deferred tax
assets of $779,638 and $6,257,220 at December 31, 1997 and 1998, respectively,
have been offset by an equal valuation allowance which increased $779,638 and
$5,517,444 for the period January 8, 1997 (date of inception) to December 31,
1997, and the year ended December 31, 1998, respectively.
6. STOCKHOLDERS' EQUITY AND PREFERRED STOCK
Common Stock -- At December 31, 1997 and 1998, the Company's authorized
$.01 par value common stock authorized was 10,000 and 10,000,000 shares,
respectively, with 1,000 and 1,915,235 shares issued and outstanding,
respectively. Certain of the shares issued and outstanding have restrictions
which limit the sale or transfer of the shares and provide for forfeiture if the
holder terminates their employment with the Company. Shares under restriction at
December 31, 1997 and December 31, 1998, were 115 and 126,000 respectively. At
December 31, 1998, 1,000,000 shares were reserved for the exercise of issued and
unissued common stock options and warrants.
Preferred Stock -- In January 1998, the Company's stockholders approved an
amendment and restatement of the certificate of incorporation which authorized
10,000,000 shares of preferred stock, $.01 par, with rights and preference to be
determined by the Board of Directors. At December 31, 1998, 1,913,044 and
109,765 shares of Series A preferred stock and Series B preferred stock,
respectively, were issued and outstanding.
F-83
<PAGE> 428
GREENBERG NEWS NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1997 AND 1998 AND MARCH 31, 1999 (UNAUDITED),
FOR THE PERIOD JANUARY 8, 1997 (DATE OF INCEPTION)
TO DECEMBER 31, 1997, FOR THE YEAR ENDED DECEMBER 31, 1998,
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
The rights, preferences, and privileges of the preferred stockholders are
as follows:
- Dividends -- The holders of Series A and Series B preferred stock are
entitled to dividends when and as declared by the Board of Directors,
equal to the cumulative cash dividends in respect of each such share in
such amount as the holder thereof would receive if such share were
converted to common stock. No dividends have been declared through
December 31, 1998.
- Liquidation -- Holders of the Series A preferred stock are entitled to a
preference in liquidation to Series B preferred stock and common
stockholders of $11.50 (the original issuance price) per share, plus all
declared but unpaid dividends, plus a preferred return of 11.5% per annum
on the original issuance price. Holders of Series B preferred stock are
entitled to a preference in liquidation to the common stockholders equal
to the original issuance price ($11.50 per share) plus all declared but
unpaid dividends. At December 31, 1998, the aggregate liquidation value
of preferred stock was $25,435,019. After the above amounts have been
paid on the preferred stock, the remaining assets are distributed to the
holders of the common stock.
- Conversion and Registration -- The Series A and Series B preferred shares
are convertible, at the option of the holders, at any time, into shares of
common stock at a ratio of 1:1. Conversion is automatic immediately prior
to the closing of an underwritten public offering of the Company's common
shares for aggregate proceeds equal to or exceeding $20,000,000, with an
offering price of not less than $23.00 per share.
Conversion is also mandatory if the Company achieves an annual cash flow
from operations of $25.0 million or the stockholders approve a sale whereby the
preferred holders would receive at least $23.00 per share.
The conversion ratio for the Series A preferred stock is adjusted based on
the aggregate gross proceeds in the event of a sale of the Company (whether in
the form of a merger, consolidation, sale of assets, initial public offering, or
sale of outstanding stock). The conversion rates are as follows:
<TABLE>
<CAPTION>
CONVERSION
AGGREGATE PROCEEDS RATE
- ------------------ ----------
<S> <C>
$250,000,000 to $500,000,000......................... .960791:1
$500,000,000 to $750,000,000......................... .923015:1
$750,000,000 to $1,000,000,000....................... .851577:1
Over $1,000,000,000.................................. .785143:1
</TABLE>
- Redemption -- The Series A preferred stock is redeemable, in whole or in
part, at the option of the holder at any time after February 14, 2004. The
redemption is effective upon 30 days' written notice, at a per share price
equal to the greater of the original issue price of each share plus 8.0%
per annum from the original issue date or the fair market value. This
redemption value has been accreted in the accompanying financial
statements through March 31, 1999.
- Voting -- Each share of preferred stock is entitled to vote on an "as
converted" basis along with common stockholders. Series A and Series B
preferred stockholders vote together with common stockholders except for
certain matters as to which the Series A preferred stockholders vote as a
F-84
<PAGE> 429
GREENBERG NEWS NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1997 AND 1998 AND MARCH 31, 1999 (UNAUDITED),
FOR THE PERIOD JANUARY 8, 1997 (DATE OF INCEPTION)
TO DECEMBER 31, 1997, FOR THE YEAR ENDED DECEMBER 31, 1998,
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
separate class. The affirmative consent of a majority of the outstanding
shares of Series A preferred, voting as a separate class, is required for
any of the following actions:
- Amending the Certificate or Bylaws of the Company which would affect
the rights, preferences, or privileges of the Series A preferred
stockholders.
- Any voluntary liquidation, dissolution, or winding up of the Company
or any merger or consolidation with another corporation, or a sale,
assignment, or transfer of all or substantially all of the assets of
the Company.
- Application of any of the Company's assets to the redemption,
retirement, purchase, or other acquisition of any of the Company's
junior securities.
- Action to create, authorize, or issue any senior securities.
- Any transactions with an affiliate of the Company as defined.
- Declaration of a dividend on any junior securities.
- An action to incur debt greater than $5,000,000 in a single
transaction or series of related transactions.
- An action to approve any single transaction or series of related
transactions involving a commitment greater than $2,000,000.
7. STOCK OPTION AND PURCHASE WARRANTS
Stock Options -- The 1997 Stock Option Plan (the "Plan") allows for the
issuance of incentive stock options and nonqualified stock options to purchase a
maximum of 1,000,000 shares of the Company's Common Stock. Under the Plan,
incentive stock options may be granted to employees, directors, and officers of
the Company, and nonqualified stock options may be granted to consultants,
employees, directors, and officers of the Company. Generally, the options become
exercisable over four years and expire ten years from the date of grant. Options
granted under the Plan must be issued at prices not less than 100% and 85%, for
incentive and nonqualified stock options, respectively, of the fair market value
of the stock on the date of grant as determined by the Board of Directors.
Options granted to shareholders who own greater than 10% of the outstanding
stock are for periods not to exceed five years and must be issued at prices not
less than 110% of the fair market value of the stock.
Activity under the Plan for options issued to employees is summarized as
follows:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED-AVERAGE
OUTSTANDING EXERCISE PRICE
----------- ----------------
<S> <C> <C>
Balance at December 31, 1997....................... -- --
Granted............................................ 140,815 $11.90
Exercised.......................................... -- --
Forfeited.......................................... -- --
------- ------
Balance at December 31, 1998....................... 140,815 $11.90
======= ======
</TABLE>
F-85
<PAGE> 430
GREENBERG NEWS NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1997 AND 1998 AND MARCH 31, 1999 (UNAUDITED),
FOR THE PERIOD JANUARY 8, 1997 (DATE OF INCEPTION)
TO DECEMBER 31, 1997, FOR THE YEAR ENDED DECEMBER 31, 1998,
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
The following table summarizes information concerning outstanding and
exercisable employee options at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------
NUMBER WEIGHTED-
OUTSTANDING AVERAGE WEIGHTED-
AS OF REMAINING AVERAGE
DECEMBER 31, LIFE EXERCISE
RANGE OF EXERCISE PRICE 1998 (IN YEARS) PRICE
- ----------------------- ------------ ---------- ---------
<S> <C> <C> <C>
$11.50........................................ 116,729 9.4 $11.50
$12.50........................................ 1,000 9.8 12.50
$13.90........................................ 23,086 9.7 13.90
</TABLE>
At December 31, 1998, 12,934 employee options under the Plan were
exercisable with a weighted-average exercise price of $11.50.
Nonemployee Stock Options -- During 1998, the Company issued 7,348 stock
options under the Plan to nonemployees in exchange for services received or to
be received. The options have a weighted-average exercise price of $12.48 and a
weighted-average fair value of $5.16 per option on the grant date. The
weighted-average fair value was determined using the Black-Scholes valuation
model with the following assumptions: no dividend yield, no volatility, a
risk-free interest rate range of 4.8% to 5.8% depending on the grant date, and
an expected life of 10 years. These options will be fully vested by August 2000.
In conjunction with the issuance of these options, the Company recognized
expense of $28,955 in 1998 based on the fair value of options which have vested
or partially vested. Additional expense will be recorded in subsequent periods
based on additional vesting and the related fair value of the underlying stock.
As of December 31, 1998, 851,837 options were available for future grant
under the Plan.
Stock Compensation -- The Company accounts for stock-based compensation in
accordance with the provisions of APB 25. Had compensation expense been
determined based on the fair value at the grant dates, as prescribed in SFAS
123, the Company's results would have been as follows for the year ended
December 31, 1998:
<TABLE>
<S> <C>
Net loss.................................................... $(14,025,412)
Net loss attributable to common stockholders................ $(18,616,718)
Net loss per common share -- basic and diluted.............. $ (9.76)
</TABLE>
The weighted-average fair value of the options granted during 1998 is
estimated at $5.10 per share, on the date of grant using the Black-Scholes
valuation model with the following assumptions: no dividend yield, no
volatility, a risk-free interest rate range of 4.8% to 5.8% depending on grant
date, and an expected life of 10 years.
Stock Purchase Warrants -- During 1998, the Company issued 48,826 warrants
to certain consultants and vendors in exchange for services received. These
warrants are exerciseable over five years from the date of grant. Each warrant
represents the right to purchase one share of the Company's common stock at a
weighted-average exercise price of $11.52 until expiration. The estimated
weighted-average fair value at the date of issuance was $2.74 per warrant. The
estimated weighted-average fair value was determined using the Black-Scholes
valuation model with the following assumptions: no dividend yield, no
volatility, a risk-free interest rate range of 5.4% to 5.5% depending on the
grant date, and an expected life of five years.
F-86
<PAGE> 431
GREENBERG NEWS NETWORKS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AS OF DECEMBER 31, 1997 AND 1998 AND MARCH 31, 1999 (UNAUDITED),
FOR THE PERIOD JANUARY 8, 1997 (DATE OF INCEPTION)
TO DECEMBER 31, 1997, FOR THE YEAR ENDED DECEMBER 31, 1998,
AND THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
The Company recognized expense of $134,021 in conjunction with the issuance of
the stock purchase warrants.
8. DEVELOPMENT STAGE COMPANY
The Company is in the development stage and, to date, has generated no
revenues, has incurred expenses, and has sustained losses. Consequently, its
operations are subject to all of the risks inherent in the establishment of a
new business enterprise. As a result of the start-up nature of its business, the
Company can be expected to sustain substantial operating losses for at least the
next several years. The Company's continuation as a going concern is dependent
upon its ability to obtain additional equity investment and ultimately to attain
successful operations. Management is continuing its efforts to obtain additional
funds so that the Company can meet its obligations and sustain operations.
9. SUBSEQUENT EVENT
In April 1999, the Company sold 388,747 shares of its Series C Preferred
Stock to 29 investors at $46.85 per share, convertible into common stock at a
ratio of 1:1. The conversion ratio may be adjusted under certain circumstances.
Holders of the Series C Preferred Stock are entitled to a preference in
liquidation to Series B preferred stock and common stockholders at $46.85 (the
original issuance price).
On June 30, 1999, the Company, Healtheon Corporation ("Healtheon"),
Healtheon/WebMD Corporation ("Healtheon/WebMD"), WebMD, Inc. ("WebMD"), and GNN
Merger Corp., a wholly owned subsidiary of Healtheon/WebMD ("Merger Sub")
entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant
to which Merger Sub will be merged with and into the Company, with the Company
being the surviving corporation of such merger (the "Merger"). Upon consummation
of the Merger, the separate existence of Merger Sub will cease, and the existing
stockholders of the Company will become stockholders of Healtheon/WebMD in
accordance with the terms of the Merger Agreement. Healtheon/WebMD is a newly
formed parent corporation that may acquire Healtheon and WebMD upon the closing
of a transaction contemplated by an Agreement and Plan of Reorganization between
Healtheon and WebMD dated as of May 20, 1999.
The consideration for the Merger will consist of newly issued shares of
Healtheon/WebMD common stock ("Healtheon/WebMD Common Stock"), having an
aggregate value of approximately $214.9 million, based upon the average closing
sales price of $81.98 per share for the Healtheon Common Stock as reported for
the ten trading days on NASDAQ ending on June 30, 1999. At the effective time of
the Merger, each outstanding share of common stock of the Company ("Company
Common Stock") will be converted into the right to receive 0.5483 shares of
Healtheon/WebMD Common Stock (the "Exchange Ratio"), subject to adjustment as
described below.
The consummation of the Merger is subject to certain conditions, including,
among other things, approval by the stockholders of the Company and the receipt
of all necessary regulatory approvals, if any, pursuant to the Hart-Scott-Rodino
Antitrust Improvement Act of 1976, as amended. Pursuant to the Merger Agreement,
Healtheon, WebMD, Healtheon/WebMD and the Company will prepare and file a proxy
statement/prospectus to be mailed to stockholders in connection with calling a
meeting of the stockholders of the Company to vote on the Merger.
F-87
<PAGE> 432
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Direct Medical Knowledge, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations and retained earnings and of cash flows present fairly, in all
material respects, the financial position of Direct Medical Knowledge, Inc., a
development stage company (the Company), at December 31, 1998 and 1997, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, and for the period from May 24, 1995 (date of
incorporation) to December 31, 1998, in conformity with generally accepted
accounting principles. 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. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
The financial statements of the Company for the period from May 24, 1995
(date of incorporation) to December 31, 1996 were audited by other auditors,
whose reports expressed an unqualified opinion on those statements. Our opinion,
in so far as it relates to the amounts included for the period from May 24, 1995
(date of incorporation) to December 31, 1996, is based solely on the reports of
the other auditors.
The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has sustained recurring losses and negative
cash flows from operations that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ PRICEWATERHOUSECOOPERS LLP
San Francisco, California
February 19, 1999
F-88
<PAGE> 433
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Direct Medical Knowledge, Inc.
We have audited the accompanying balance sheet of Direct Medical Knowledge,
Inc., a development stage company (the Company) as of December 31, 1996, and the
related statements of operations, stockholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
management of Direct Medical Knowledge, Inc. Our responsibility is to express an
opinion on these financial statements based on our audit.
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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Direct Medical Knowledge,
Inc., at December 31, 1996, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
/s/ BERG & COMPANY
San Francisco, California
February 7, 1997
F-89
<PAGE> 434
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Direct Medical Knowledge, Inc.
We have audited the accompanying balance sheet of Direct Medical Knowledge,
Inc., a development stage company (the Company) as of December 31, 1995, and the
related statements of operations, stockholders' equity, and cash flows for the
period from May 24, 1995 (date of incorporation) to December 31, 1995. These
financial statements are the responsibility of the management of Direct Medical
Knowledge, Inc. Our responsibility is to express an opinion of these 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Direct Medical Knowledge,
Inc., at December 31, 1995, and the results of its operations and its cash flows
for the period from May 24, 1995 (date of incorporation) to December 31, 1995 in
conformity with generally accepted accounting principles.
/s/ BERG & COMPANY
San Francisco, California
January 16, 1999
F-90
<PAGE> 435
DIRECT MEDICAL KNOWLEDGE, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,082 $ 209
Accounts receivable, trade................................ 6 41
Accounts receivable, shareholder.......................... 69 25
Prepaid expenses.......................................... 9 18
------- -------
Total current assets.............................. 1,166 293
Property and equipment, net................................. 709 558
Intangibles, net............................................ 14 --
Content license fees, net................................... 67 81
Other assets, net........................................... 26 42
------- -------
Total assets...................................... $ 1,982 $ 974
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 243 $ 667
Accounts payable, related party........................... -- 237
Accrued expenses.......................................... 13 161
Deferred revenue.......................................... 30 --
Senior secured promissory note, current portion........... -- 166
Notes payable to shareholder.............................. -- 500
------- -------
Total current liabilities......................... 286 1,731
------- -------
Senior secured promissory note, less current portion........ -- 291
------- -------
Total liabilities................................. 286 2,022
Commitments (Note 5)
Shareholders' equity:
Common stock, no par value; authorized 5,000,000 shares;
1,046,233 and 1,048,667 shares issued and outstanding
at December 31, 1998 and 1997, respectively............ 5 11
Note receivable from shareholder.......................... (250) --
Convertible preferred stock, no par value; authorized
2,600,000 shares; 2,536,071 shares issued and
outstanding; liquidation preference of $4,073 at
December 31, 1998 and 1997............................. 4,098 4,098
Warrants for purchase of common stock..................... -- 34
Deficit accumulated during the development stage.......... (2,157) (5,191)
------- -------
Total shareholders' equity (deficit).............. 1,696 (1,048)
------- -------
Total liabilities and shareholders' equity
(deficit)........................................ $ 1,982 $ 974
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-91
<PAGE> 436
DIRECT MEDICAL KNOWLEDGE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MAY 24, 1995
(DATE OF
YEAR ENDED DECEMBER 31, INCORPORATION) TO
--------------------------- DECEMBER 31,
1998 1997 1996 1998
------- ------- ----- -----------------
<S> <C> <C> <C> <C>
Revenues, including shareholder revenues of $184
in 1998, $424 in 1997, $0 in 1996 and $608
from inception to December 31, 1998........... $ 338 $ 592 $ 350 $ 1,280
------- ------- ----- -------
Operating expenses:
Cost of revenues........................... 71 48 24 143
Product development costs.................. 992 762 340 2,132
General and administrative................. 1,385 699 311 2,495
Depreciation and amortization.............. 513 337 78 930
Sales and marketing........................ 415 221 72 731
------- ------- ----- -------
Total operating expenses.............. 3,376 2,067 825 6,431
------- ------- ----- -------
Operating loss........................... (3,038) (1,475) (475) (5,151)
Interest and other income (expense), net........ 5 46 12 62
------- ------- ----- -------
Net loss before income taxes............. (3,033) (1,429) (463) (5,089)
Income tax expense.............................. (1) (1) (1) (4)
------- ------- ----- -------
Net loss................................. $(3,034) $(1,430) $(464) $(5,093)
======= ======= ===== =======
Preferred stock dividend........................ -- (44) (54) (98)
------- ------- ----- -------
Net loss attributable to common stock.... $(3,034) $(1,474) $(518) $(5,191)
======= ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-92
<PAGE> 437
DIRECT MEDICAL KNOWLEDGE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM MAY 24, 1995 (DATE OF INCORPORATION) TO DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
---------------------------------------
COMMON STOCK SERIES A SERIES B COMMON RECEIVABLE
------------------ ------------------ ------------------ STOCK FROM
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT WARRANTS SHAREHOLDER
--------- ------ --------- ------ --------- ------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, May 24, 1995 (date of
incorporation)................. -- -- -- -- -- -- --
Issuance of common stock for
cash $0.00001 per share in
October 1995................. 1,000,000 --
Issuance of Series A
convertible preferred stock
for cash at $1.00 per share
in December 1995............. 300,000 $ 300
Net loss for the period........
--------- --- --------- ------ --------- ------ --- -----
Balance, December 31, 1995....... 1,000,000 -- 300,000 300 -- -- --
Conversion of Series A
convertible preferred stock
into common stock in January
1996......................... 25,000 -- (25,000) --
Issuance of Series A
convertible preferred stock
for cash at $1.00 per share
in May 1996.................. 200,000 200
Issuance of Series A
convertible preferred stock
for cash at $1.00 per share
July 1996.................... 500,000 500
Declaration of Series A
convertible preferred stock
dividends in December
1996.........................
Net loss for the year..........
--------- --- --------- ------ --------- ------ --- -----
Balance, December 31, 1996....... 1,025,000 -- 975,000 1,000 -- -- --
Issuance of common stock
through exercise of stock
options $0.205 per share..... 23,667 $ 5
Declaration of Series A
convertible preferred stock
dividends in July 1997.......
Issuance of Series A
convertible preferred stock
in lieu of dividends payable
in July 1997................. 97,658 98
Issuance of Series B
convertible preferred stock
for cash and note receivable
at $2.05 per share in July
1997......................... 1,463,413 $3,000 $(750)
Payment on shareholder note
receivable................... 500
Net loss for the year..........
--------- --- --------- ------ --------- ------ --- -----
Balance, December 31, 1997....... 1,048,667 5 1,072,658 1,098 1,463,413 3,000 (250)
Issuance of common stock
through exercise of stock
options at $0.205 per
share........................ 2,441 --
Repurchase of nonvested shares
of common stock at $0.205 per
share........................ (4,875) (1)
Issuance of non-qualified stock
options to consultants....... 7
Issuance of warrants for common
stock in connection with
convertible promissory
notes........................ 34
Payments on shareholder note
receivable................... 250
Net loss for the year..........
--------- --- --------- ------ --------- ------ --- -----
Balance, December 31, 1998....... 1,046,233 $11 1,072,658 $1,098 1,463,413 $3,000 $34 $ --
========= === ========= ====== ========= ====== === =====
<CAPTION>
DEFICIT
ACCUMULATED TOTAL
DURING THE SHAREHOLDERS'
DEVELOPMENT EQUITY
STAGE (DEFICIT)
----------- -------------
<S> <C> <C>
Balance, May 24, 1995 (date of
incorporation)................. -- --
Issuance of common stock for
cash $0.00001 per share in
October 1995................. --
Issuance of Series A
convertible preferred stock
for cash at $1.00 per share
in December 1995............. $ 300
Net loss for the period........ $ (165) (165)
------- -------
Balance, December 31, 1995....... (165) 135
Conversion of Series A
convertible preferred stock
into common stock in January
1996......................... --
Issuance of Series A
convertible preferred stock
for cash at $1.00 per share
in May 1996.................. 200
Issuance of Series A
convertible preferred stock
for cash at $1.00 per share
July 1996.................... 500
Declaration of Series A
convertible preferred stock
dividends in December
1996......................... (54) (54)
Net loss for the year.......... (464) (464)
------- -------
Balance, December 31, 1996....... (683) 317
Issuance of common stock
through exercise of stock
options $0.205 per share..... 5
Declaration of Series A
convertible preferred stock
dividends in July 1997....... (44) (44)
Issuance of Series A
convertible preferred stock
in lieu of dividends payable
in July 1997................. 98
Issuance of Series B
convertible preferred stock
for cash and note receivable
at $2.05 per share in July
1997......................... 2,250
Payment on shareholder note
receivable................... 500
Net loss for the year.......... (1,430) (1,430)
------- -------
Balance, December 31, 1997....... (2,157) 1,696
Issuance of common stock
through exercise of stock
options at $0.205 per
share........................ --
Repurchase of nonvested shares
of common stock at $0.205 per
share........................ (1)
Issuance of non-qualified stock
options to consultants....... 7
Issuance of warrants for common
stock in connection with
convertible promissory
notes........................ 34
Payments on shareholder note
receivable................... 250
Net loss for the year.......... (3,034) (3,034)
------- -------
Balance, December 31, 1998....... $(5,191) $(1,048)
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-93
<PAGE> 438
DIRECT MEDICAL KNOWLEDGE, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MAY 24, 1995
(DATE OF
INCORPORATION) TO
1998 1997 1996 DECEMBER 31, 1998
------- ------- ------- -----------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................ $(3,034) $(1,430) $ (464) $(5,093)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization of property and
equipment....................................... 344 228 64 638
Amortization of content license fees.............. 166 104 9 279
Amortization of organization costs................ 14 5 5 24
Expense of issuing options for services........... 7 -- -- 7
Warrants issued with convertible notes............ 34 -- -- 34
Impairment loss on property and equipment......... 121 -- -- 121
Changes in operating assets and liabilities:
Accounts receivable, trade...................... (35) (6) -- (41)
Accounts receivable, shareholder................ 44 (69) -- (25)
Prepaid expenses................................ (9) (1) (4) (18)
Other assets.................................... (16) (8) (15) (66)
Accounts payable and accrued expenses........... 572 90 135 828
Accounts payable -- related party, net.......... 237 -- -- 237
Deferred revenue................................ (30) (95) 125 --
------- ------- ------- -------
Total adjustments............................ 1,449 248 319 2,018
------- ------- ------- -------
Net cash used in operating activities........ (1,585) (1,182) (145) (3,075)
------- ------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment.................. (98) (468) (502) (1,101)
Purchase of content licenses........................ (180) (123) (57) (360)
------- ------- ------- -------
Net cash used in investing activities........ (278) (591) (559) (1,461)
------- ------- ------- -------
Cash flows from financing activities:
Borrowings under senior secured promissory note..... 297 -- -- 297
Repayment under senior secured promissory note...... (56) -- -- (56)
Borrowings under convertible promissory note........ 500 -- -- 500
Proceeds from issuance of stock..................... -- 2,255 700 3,255
Repurchase of common stock.......................... (1) -- -- (1)
Advances from shareholders.......................... -- 250 -- 294
Repayment of shareholder advances................... -- (250) (39) (294)
Payments on shareholder note receivable............. 250 500 -- 750
------- ------- ------- -------
Net cash provided by financing activities.... 990 2,755 661 4,745
------- ------- ------- -------
Net increase in cash......................... (873) 982 (43) 209
Cash and cash equivalents, beginning of period........ 1,082 100 143 --
------- ------- ------- -------
Cash and cash equivalents, end of period.............. $ 209 $ 1,082 $ 100 $ 209
======= ======= ======= =======
Supplemental cash flow information and non cash
activities:
Declaration of dividends payable.................... $ -- $ 44 $ 54 $ 98
======= ======= ======= =======
Issuance of convertible preferred stock to
extinguish dividends payable...................... $ -- $ 98 $ -- $ 98
======= ======= ======= =======
Issuance of convertible preferred stock for note
receivable........................................ $ -- $ 750 $ -- $ 750
======= ======= ======= =======
Interest paid....................................... $ 33 $ 1 $ 1 $ 36
======= ======= ======= =======
Income taxes paid................................... $ 1 $ 1 $ 1 $ 3
======= ======= ======= =======
Warrants issued with convertible promissory note.... $ 34 $ -- $ -- $ 34
======= ======= ======= =======
Equipment acquired in exchange for senior secured
promissory note................................... $ 216 $ -- $ -- $ 216
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-94
<PAGE> 439
DIRECT MEDICAL KNOWLEDGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. COMPANY BACKGROUND
Description of business:
Direct Medical Knowledge, Inc. ("the Company") was incorporated on May 24,
1995 to provide individualized, customized medical and health information to
individuals through contracts with major health providers. The Company uses web
technology, electronic retrieval, and on-line support groups to deliver health
information over the internet. Since its incorporation, the Company has focused
on developing its products and marketing strategy and recruiting human
resources. It has not generated a significant amount of revenue and,
accordingly, is a development stage company.
Need for additional capital and sale of the company
The Company's financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has sustained recurring
losses and negative cash flows from operations. The Company's continued
existence is dependent upon its ability to increase operating revenues and/or
raise additional equity financing. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
In January 1999, the shareholders approved the merger of the Company with a
wholly-owned subsidiary of WebMD, Inc. ("WebMD"). WebMD provides administrative,
communications and information services to healthcare professionals via the
internet, as well as healthcare information services to consumers. Under the
terms of the merger agreement, shares of the Company's capital stock will be
exchanged for 469,018 shares of WebMD Series B Preferred Stock as set forth
below. Outstanding options and warrants to purchase the Company's common stock
will be assumed by WebMD and will be subject to the same terms and conditions,
with the exception that they will be exercisable for 130,957 shares of WebMD
Series B Preferred Stock based upon the exchange ratio set forth below for the
Company's common stock. The $500 Convertible Promissory Note outstanding as of
the date of the merger will be exchanged for 25,000 shares of WebMD Series B
Preferred Stock.
The ratios for the exchange of the Company's capital stock for shares of
WebMD Series B Preferred Stock are as follows:
<TABLE>
<CAPTION>
DIRECT MEDICAL KNOWLEDGE, INC. EQUIVALENT SHARE OF WEBMD
CAPITAL STOCK SERIES B PREFERRED STOCK
------------------------------ -------------------------
<S> <C>
Common Stock and Options.................................... 0.11274380
Series A Convertible Preferred Stock........................ 0.16867768
Series B Convertible Preferred Stock........................ 0.22225378
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
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 assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-95
<PAGE> 440
DIRECT MEDICAL KNOWLEDGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Business risks and credit concentrations
The Company operates in the internet content industry segment which is new,
rapidly evolving and highly competitive. The Company relies on third party
suppliers of health information content. There can be no assurance that the
Company will be able to continue product development and secure content
sufficient to support its operations.
The Company performs ongoing credit evaluations of its customers' financial
condition. It generally requires no collateral and maintains reserves for
potential credit losses on customer accounts, when necessary. Management
estimates that no such reserves are warranted at December 31, 1998 or December
31, 1997. At December 31, 1998, one shareholder comprises 38% of accounts
receivable and, with one other customer, accounted for 100% of revenue for the
year then ended.
The same two customers accounted for 100% of revenue for the year ended
December 31, 1997 and 1996, while the shareholder and two other customers
accounted for 100% of revenue for the period from May 24, 1995 (date of
incorporation) to December 31, 1998.
Cash and cash equivalents
The Company considers all highly liquid monetary instruments with an
original maturity of three months or less to be cash equivalents. Substantially
all of the Company's cash is held at one major financial institution.
Content license fees
License fees for website content are capitalized and amortized over the
life of the license. During 1997, most license agreements covered one year
periods with the option to renew annually. During 1998, the Company began
transitioning to two to five year agreements. Accumulated content license fee
amortization totaled $72 and $113, at December 31, 1998 and 1997, respectively.
Property and equipment
Property and equipment are stated at cost. Maintenance and repairs are
charged to operations as incurred. Depreciation and amortization are determined
on the straight-line method over the estimated useful lives of the related
assets, which range from three to five years. When assets are retired or
otherwise disposed of, the cost and accumulated depreciation and amortization
are removed from the accounts, and any resulting gain or loss is reflected in
operations in the period realized.
Impairment of long-lived assets
Statement of Financial Accounting Standards No. 121 (SFAS No. 121),
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of, requires that long-lived assets and certain intangible assets be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. If undiscounted expected future
cash flows are less than the carrying value of the assets, an impairment loss is
to be recognized based on the fair value of the assets. The Company considers
the requirements of SFAS No. 121 on an ongoing basis. During 1998, losses of
$121 were recognized on obsolete website equipment and software to be disposed
of and were accounted for under general and administrative expenses. No
impairment losses were recognized in prior periods.
F-96
<PAGE> 441
DIRECT MEDICAL KNOWLEDGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Revenue recognition
Revenue from report orders is recognized upon delivery of the corresponding
report. Support services, including revenue from marketing and distribution
agreements with ongoing support requirements, are recognized ratably over the
life of the contract. Revenue from website development is recognized using the
percentage-of-completion method. Amounts billed in excess of revenue earned and
advance payments are deferred and recorded as revenues when earned.
Content development
The Company expenses content development costs as incurred.
Income taxes
In accordance with Statement of Financial Accounting Standards No. 109
(SFAS No. 109), Accounting for Income Taxes, deferred income taxes are
recognized for the differences between the tax basis of assets and liabilities
and their financial reporting amounts based on enacted tax laws and statutory
tax rates applicable to the periods in which the differences are expected to
affect taxable income. A valuation allowance is recognized for deferred tax
assets when it is more likely than not that some portion or all of the deferred
tax asset will not be realized. Income tax expense is comprised of tax payable
or refundable for the current period plus the change during the period in
deferred tax assets and liabilities.
Recently issued accounting pronouncements
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. The Company has not yet determined the
impact of adopting SOP 98-1, which will be effective for the Company's year
ending December 31, 1999.
On April 3, 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, (SOP 98-5) Reporting on the Costs of Start-Up
Activities, which provides guidance on the financial reporting of start-up costs
and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. SOP 98-5 is effective for
financial statements for fiscal years beginning after December 15, 1998. As the
Company has not capitalized such costs to date, the adoption of SOP 98-5 is not
expected to have an impact on the financial statements of the Company.
F-97
<PAGE> 442
DIRECT MEDICAL KNOWLEDGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1998 1997
----- ------
<S> <C> <C>
Computer equipment and purchased software................... $ 222 $ 162
Website equipment and software.............................. 267 507
Furniture and fixtures...................................... 269 259
Leasehold improvements...................................... 44 75
----- ------
802 1,003
Accumulated depreciation and amortization................... (244) (294)
----- ------
Property and equipment, net................................. $ 558 $ 709
===== ======
</TABLE>
Depreciation expense amounted to $335, $198 and $62 for the years ended
December 31, 1998, 1997 and 1996, respectively, and $597 for the period from May
24, 1995 (date of incorporation) to December 31, 1998. Amortization expense for
leasehold improvements was $9, $30 and $1 for the years ended December 31, 1998,
1997 and 1996, respectively, and $41 for the period from May 24, 1995 (date of
incorporation) to December 31, 1998.
4. INCOME TAXES
The provision for income taxes are summarized as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------
1998 1997 1996
------- ----- -----
<S> <C> <C> <C>
Current tax expense:
Federal................................................ $ -- $ -- $ --
State.................................................. 1 1 1
Deferred tax expense:
Federal................................................ (1,026) (577) (164)
State.................................................. (177) (76) (44)
Valuation allowance for deferred tax assets................. 1,203 653 208
------- ----- -----
$ 1 $ 1 $ 1
======= ===== =====
</TABLE>
The primary components of the net deferred tax asset are:
<TABLE>
<CAPTION>
1998 1997 1996
------- ----- -----
<S> <C> <C> <C>
Net operating loss carryforwards............................ $ 2,119 $ 910 $ 282
Other....................................................... (2) 4 --
------- ----- -----
2,117 914 282
Valuation allowance......................................... (2,117) (914) (262)
------- ----- -----
-- -- 20
Deferred tax liability...................................... -- -- (20)
------- ----- -----
Net deferred tax asset...................................... $ -- $ -- $ --
======= ===== =====
</TABLE>
Due to uncertainty surrounding the realization of deferred tax assets, the
Company has recorded a valuation allowance against its net deferred tax asset.
F-98
<PAGE> 443
DIRECT MEDICAL KNOWLEDGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 1998, the Company has net operating loss carryforwards
of approximately $5,160 for federal income tax purposes. These carryforwards
expire in years 2010 through 2018. In addition, the Company has carryforwards of
approximately $5,156 as of December 31, 1998 for California franchise tax
purposes, expiring in 2003.
As a result of changes in the Company's ownership, the amount of loss
carryforwards available to offset future federal and state taxable income may be
limited by IRS Code Section 382 pursuant to the Tax Reform Act of 1986. The
amount of such limitation, if any, has not been determined.
A reconciliation of the provision for income taxes to the federal statutory
rate is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------
1998 1997 1996
------- ----- -----
<S> <C> <C> <C>
Provision computed at federal statutory rate................ $(1,032) $(564) $(167)
State taxes, net of federal tax benefit..................... (177) (75) (43)
Change in valuation allowance............................... 1,203 653 208
Permanent difference........................................ 1 1 1
Others...................................................... 6 (14) 2
------- ----- -----
Net tax provision........................................... $ 1 $ 1 $ 1
======= ===== =====
</TABLE>
5. COMMITMENTS
Lease Obligations
The Company leases office facilities under noncancelable operating leases.
Minimum future payments under these lease agreements for the years ending
December 31 are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
1999........................................................ $198
2000........................................................ 198
2001........................................................ 198
2002........................................................ 182
----
Total minimum lease payments................................ $776
====
</TABLE>
The Company's rental expense for office facilities was approximately $204,
$86 and $36 for the years ended December 31, 1998, 1997 and 1996, respectively,
and $342 for the period from May 24, 1995 (date of incorporation) to December
31, 1998.
Content Licenses
The Company has entered into license agreements for the use of copyrighted
content on its website. Minimum future payments due under these license
agreements are $38, all due in 1999.
6. SENIOR SECURED PROMISSORY NOTE
In February 1998, the Company obtained a one million dollar credit facility
to finance equipment purchases through December 31, 1998. Borrowings under this
facility are executed as 36 month promissory notes collateralized by the
purchased equipment. Interest accrues at an effective rate of 18% per annum.
Borrowings under this facility were $457 as of December 31, 1998.
F-99
<PAGE> 444
DIRECT MEDICAL KNOWLEDGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. NOTE AND WARRANT PURCHASE AGREEMENT
In September 1998, the Company entered into a Note and Warrant Purchase
Agreement, (the "Agreement") with a shareholder, whereby the Company may borrow
up to a maximum of $500 under Convertible Promissory Notes (the "Notes"). Each
of the Notes is non-interest bearing, has a term of six months and, in the event
the Company issues shares of its Preferred Stock during the term of the Notes,
is convertible into that Preferred Stock at a conversion price equal to the
price per share paid by investors purchasing the preferred stock. Warrants to
purchase common stock of the Company are attached to each of the Notes. Each of
the Warrants allows the holder to purchase one share of common stock for each
dollar borrowed at an exercise price of $0.25 per share and is exercisable for a
period of five years. As of December 31, 1998, the Company had borrowed $500 and
issued warrants to purchase 500,000 shares of common stock under the Agreement.
The fair value of the warrants of $34 was included in the statement of
operations as interest expense, and was determined using a Black-Scholes model
applying a risk-free interest-rate of 5.05%, and a zero percent dividend yield.
Because the Company does not have actively traded equity securities, volatility
is not considered in determining the fair value of these warrants.
8. CONVERTIBLE PREFERRED STOCK
The Company is authorized to issue up to 2,600,000 shares of no par
preferred stock in one or more series. The Company has designated 1,100,000 of
the preferred shares as Series A and 1,500,000 as Series B.
Series A and Series B preferred shareholders are entitled to receive, when
and if declared by the Board of Directors, out of funds legally available, a
preferential, noncumulative annual cash dividend of $0.08 per share and $0.16
per share, respectively. Preferred shareholders are also entitled to participate
in cash dividends paid to common shareholders in an amount per share as would be
payable on the number of whole shares of common stock into which the preferred
shares could be converted. So long as any preferred shares are outstanding, no
cash or property dividends may be declared or paid on common stock until all
preferred stock dividends have been paid or declared and set apart. Through
December 31, 1998, $98 in Series A dividends have been declared, and 97,658
shares of Series A preferred stock have been issued in lieu of cash dividends.
Concurrent with the issuance of Series B preferred stock, the Company's Articles
of Incorporation were amended to eliminate mandatory dividend provisions on
Series A preferred stock.
Preferred shareholders are entitled to vote together with the holders of
common stock. The number of votes equals the number of whole shares of common
stock into which each holder's preferred shares could be converted. So long as
at least 100,000 shares of Series A remain outstanding, Series A shareholders
are collectively entitled to elect one director. So long as at least 100,000
shares of Series B remain outstanding, Series B shareholders are collectively
entitled to elect one director. Common shareholders are also collectively
entitled to elect one director. All shareholders are collectively entitled to
elect the remaining directors. Certain transactions which could affect the
relative rights and privileges of preferred shareholders, as defined in the
Articles of Incorporation, require majority approval by Series A shareholders
and 60% approval by Series B shareholders, respectively. Certain other
transactions require approval by not less than two-thirds of Series A
shareholders.
At the option of the shareholder, preferred shares are convertible into
common stock at any time on a one-for-one basis, subject to certain adjustments.
Series A and Series B preferred shares are automatically converted into common
stock on a one-for-one basis, subject to certain adjustments, in the event of a
public offering with gross proceeds of at least $15 million and a per share
price of at least $7, subject to certain adjustments, or upon the consent by 50%
of Series A shareholders or by 60% of Series B
F-100
<PAGE> 445
DIRECT MEDICAL KNOWLEDGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
shareholders, respectively for each series. Any declared and unpaid dividends
must be paid upon automatic conversion. The Company has reserved sufficient
common shares for conversion.
In the event of any liquidation, dissolution or winding up of the Company,
preferred shareholders are entitled to receive an amount equal to $1.00 per
share of Series A and $2.05 per share of Series B plus all declared and unpaid
dividends on a pari passu basis prior and in preference to any distributions to
common shareholders. After payment has been made to the preferred shareholders,
any remaining assets will be distributed ratably to all shareholders in
proportion to the amount of stock owned by each shareholder. If the Company's
assets are insufficient to provide for the full preference amount for the
preferred stock outstanding, then such assets will be distributed ratably among
preferred shareholders in proportion to the amount of such stock owned by each
preferred shareholder.
9. STOCK OPTION PLAN
The Company has a Stock Option Plan (the "Plan") under which the Board of
Directors may grant common stock options to employees, directors and
consultants. Under the Plan, options generally vest 20% one year from the
vesting commencement with an additional 2% vesting each month thereafter. A
total of 750,000 shares of the Company's common stock have been reserved for
issuance under the Plan. Shares sold under the Plan are subject to various
restrictions as to resale and right of repurchase by the Company.
Options under the Plan may be either "incentive stock options" or
"nonqualified stock options" as defined under Section 422 of the Internal
Revenue Code. Options shall be exercisable within the periods or upon the events
determined by the Board of Directors or a committee appointed by the Board of
Directors as set forth by a written stock option grant, provided however, that
no option shall become exercisable after the expiration of 10 years from the
date the option is granted. Additionally, no option granted to a person who
directly or by attribution owns more than 10% of the total combined voting power
of all classes of stock of the Company shall be exercisable after the expiration
of five years from the date the option is granted. Vested options held by
individuals upon termination of their relationship with the Company may be
exercised no later than three months following the date of termination or twelve
months following death or disability until expiration of the option.
The following table summarizes activity under the Company's stock option
plan for the years ended December 31, 1998 and 1997. There was no activity under
the Plan in prior periods.
<TABLE>
<CAPTION>
WEIGHTED
SHARES NUMBERS OF AVERAGE
AVAILABLE OPTIONS EXERCISE
FOR GRANT OUTSTANDING PRICE
--------- ----------- --------
<S> <C> <C> <C>
Reserved for issuance...................................... 350,000 -- $ --
Granted.................................................... (297,600) 297,600 0.205
Exercised.................................................. -- (23,667) 0.205
Cancelled or forfeited..................................... 18,833 (18,833) 0.205
-------- -------- ------
Balances as of December 31,1997............................ 71,233 255,100 0.205
-------- -------- ------
Reserved for issuance...................................... 400,000 -- --
Granted.................................................... (449,541) 449,541 0.205
Exercised.................................................. -- (2,441) 0.205
Cancelled or forfeited..................................... 125,477 (125,477) 0.205
-------- -------- ------
Balances as of December 31,1998............................ 147,169 576,723 0.205
======== ======== ======
</TABLE>
Of the options exercised during 1997 and 1998, 6,876 are unvested and are
subject to repurchase by the Company at the exercise price.
F-101
<PAGE> 446
DIRECT MEDICAL KNOWLEDGE, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information with respect to stock options
outstanding and exercisable at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED
-------------------------------------------------------- -------------------------------
WEIGHTED AVERAGE NUMBER
NUMBER OUTSTANDING REMAINING VESTED AT
RANGE OF AT DECEMBER 31, CONTRACTUAL LIFE WEIGHTED AVERAGE DECEMBER 31, WEIGHTED AVERAGE
EXERCISE PRICES 1998 (YEARS) EXERCISE PRICE 1997 EXERCISE PRICE
- --------------- ------------------ ---------------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
$0.205 576,723 9.41 $0.205 113,568 $0.205
</TABLE>
The Company has elected to follow Accounting Principles board Opinion No.
25 (APB No. 25), Accounting for Stock Options Issued to Employees and related
interpretations in accounting for its employee stock options. Under APB No. 25,
compensation expense is recognized based on the amount by which the fair value
of the underlying common stock exceeds the exercise price of the stock options
at the measurement date, which in the case of employee stock options is
typically the date of grant.
SFAS No. 123, Accounting for Stock-Based Compensation, encourages adoption
of a fair value-based method for valuing the cost of stock-based compensation.
However, it allows companies to continue to use the intrinsic value method under
APB No. 25 for options granted to employees and to disclose pro forma net
earnings and earnings per share in accordance with SFAS No. 123. Had
compensation cost for the Company's stock-based compensation plans been
determined consistent with SFAS No. 123, the Company's net earnings would have
been as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Net loss as reported........................................ $3,034 $1,430
Pro forma net loss.......................................... 3,089 1,433
</TABLE>
The weighted average fair value of stock options granted during 1998 and
1997 was $0.11 and $0.048, respectively.
The effects of applying SFAS No. 123 for the pro forma disclosures are not
representative of the effects expected on reported net earnings and earnings per
share in future years, since valuations are based on highly subjective
assumptions about the future, including stock price volatility and exercise
patterns.
The Company used the Black-Scholes option pricing model to determine the
fair value of grants made in 1998 and 1997. The following assumptions were
applied in determining the pro forma compensation cost:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Weighted average risk-free interest rate.................... 5.13 6.12
Expected dividend yield..................................... -- --
Expected option life in years............................... 2.00 5.00
</TABLE>
Because the Company does not have actively traded equity securities,
volatility is not considered in determining the fair value of stock-based awards
to employees.
10. SUBSEQUENT EVENTS
Stock options
Subsequent to December 31, 1998 options to purchase 85,064 shares of the
Company's common stock were granted to employees, directors and consultants at
an exercise price of $0.205 per share.
F-102
<PAGE> 447
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Sapient Health Network, Inc.:
We have audited the accompanying balance sheets of Sapient Health Network,
Inc. (the Company) as of September 30, 1997 and 1998, and the related statements
of operations, shareholders' deficit, and cash flows for the period from
November 21, 1995 (date of inception) through September 30, 1996 and each of the
years in the two-year period ended September 30, 1998. 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.
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, the financial statements referred to above present fairly,
in all material respects, the financial position of Sapient Health Network, Inc.
as of September 30, 1997 and 1998, and the results of its operations and its
cash flows for the period from November 21, 1995 (date of inception) through
September 30, 1996 and each of the years in the two-year period ended September
30, 1998 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
Sapient Health Network, Inc. will continue as a going concern. As discussed in
note 2 to the financial statements, the Company has incurred losses since
inception and has a net capital deficiency; these conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in note 2 to the financial
statements. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ KPMG PEAT MARWICK LLP
Portland, Oregon
November 18, 1998
F-103
<PAGE> 448
SAPIENT HEALTH NETWORK, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------- DECEMBER 31,
1997 1998 1998
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 117,671 $ 1,159,659 $ 278,859
Accounts receivable....................................... 2,113 34,555 4,411
Unbilled revenue.......................................... -- 536,333 490,050
Prepaid expenses and other current assets................. 6,021 30,981 10,493
------------ ------------ ------------
Total current assets............................... 125,805 1,761,528 783,813
Property and equipment, net................................. 635,569 505,790 429,207
Restricted investment....................................... 200,000 200,000 200,000
Other assets, net........................................... 35,681 57,908 23,558
Deposits.................................................... 68,034 68,508 73,834
------------ ------------ ------------
Total assets....................................... $ 1,065,089 $ 2,593,734 $ 1,510,412
============ ============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 412,310 $ 476,527 $ 1,952,496
Accrued liabilities....................................... 59,953 81,087 74,218
Deferred revenue.......................................... -- 506,333 469,500
Current installments of obligations under capital
leases.................................................. 201,952 214,801 186,431
Convertible promissory notes.............................. -- 5,523,795 4,484,177
Line of credit............................................ 600,000 600,000 500,000
------------ ------------ ------------
Total current liabilities.......................... 1,274,215 7,402,543 7,666,822
Obligations under capital leases, net of current
installments.............................................. 298,248 171,024 151,628
------------ ------------ ------------
Total liabilities.................................. 1,572,463 7,573,567 7,818,450
Commitments and contingencies
Redeemable preferred stock; aggregate liquidation preference
$13,559,467:
Series C, $.001 par value. Authorized 1,200,000 shares; no
shares issued and outstanding........................... -- -- --
Series B, $.001 par value. Authorized 6,000,000 shares;
issued and outstanding 2,811,680 shares on September 30,
1997 and 1998, respectively and 3,544,575 shares
(unaudited) at December 31, 1998........................ 4,649,756 4,994,182 6,231,250
Shareholders' deficit:
Convertible preferred stock; aggregate liquidation
preference $850,000:
Series A, $.001 par value. Authorized, issued and
outstanding 850,000 shares on September 30, 1997 and
1998 and December 31, 1998
(unaudited), respectively............................. 850 850 850
Common stock, $.001 par value. Authorized 15,000,000
shares; issued and outstanding 2,029,100 and 2,133,560
shares on September 30, 1997 and 1998 and 2,193,241
shares (unaudited) at December 31, 1998, respectively... 2,029 2,134 2,193
Additional paid-in capital................................ 863,482 906,496 944,194
Accumulated deficit....................................... (6,023,491) (10,883,495) (13,486,795)
------------ ------------ ------------
Total shareholders' deficit........................ (5,157,130) (9,974,015) (12,539,558)
------------ ------------ ------------
Total liabilities, redeemable preferred stock and
shareholders' deficit............................ $ 1,065,089 $ 2,593,734 $ 1,510,142
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-104
<PAGE> 449
SAPIENT HEALTH NETWORK, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 21,
1995 (DATE OF THREE MONTHS ENDED
INCEPTION) THROUGH YEARS ENDED SEPTEMBER 30, DECEMBER 31,
SEPTEMBER 30, ------------------------- -------------------------
1996 1997 1998 1997 1998
------------------ ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Market research............ $ -- $ -- $ 160,750 $ -- $ 39,268
Sponsorship................ -- 75,418 190,000 9,375 157,500
Other revenue.............. -- 762 2,016 156 15
----------- ----------- ----------- ----------- -----------
Total revenue...... -- 76,180 352,766 9,531 196,783
----------- ----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing........ 171,134 562,085 543,449 110,200 158,202
Community/content
development............. 308,160 1,126,024 1,142,165 217,155 327,353
Research and development... 260,147 1,467,348 1,041,168 262,733 239,323
General and
administrative.......... 410,529 1,413,332 1,802,290 350,070 1,849,041
----------- ----------- ----------- ----------- -----------
Total operating
expenses......... 1,149,970 4,568,789 4,529,072 940,158 2,573,919
----------- ----------- ----------- ----------- -----------
Loss from operations.... (1,149,970) (4,492,609) (4,176,306) (930,627) (2,377,136)
Other income (expense):
Interest income............ -- 68,887 8,708 2,622 --
Interest expense........... 18,505 (86,868) (347,980) (32,192) (117,484)
----------- ----------- ----------- ----------- -----------
Net loss before
provision for income
taxes................. (1,168,475) (4,510,590) (4,515,578) (960,197) (2,494,620)
Provision for income taxes... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Net loss................ (1,168,475) (4,510,590) (4,515,578) (960,197) (2,494,620)
Accretion of Series B
preferred stock
dividends.................. -- (344,426) (344,426) (86,107) (108,680)
----------- ----------- ----------- ----------- -----------
Net loss attributed to
common shareholders... $(1,168,475) $(4,855,016) $(4,860,004) $(1,046,304) $(2,603,300)
=========== =========== =========== =========== ===========
Net loss per common share --
basic and diluted.......... $ (0.58) $ (2.40) $ (2.35) $ (0.52) $ (1.21)
Shares used in computing net
loss per common share --
basic and diluted.......... 2,002,000 2,019,113 2,069,072 2,019,113 2,143,291
</TABLE>
See accompanying notes to financial statements.
F-105
<PAGE> 450
SAPIENT HEALTH NETWORK, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
PREFERRED STOCK STOCK
SERIES A COMMON STOCK ADDITIONAL SUBSCRIPTION TOTAL
---------------- ------------------ PAID-IN NOTE ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT DEFICIT
------- ------ --------- ------ ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, at November 21, 1995
(date of inception).......... -- $ -- -- $ -- $ -- $ -- $ -- $ --
Preferred stock -- less
issuance costs............. 850,000 850 -- -- 806,647 -- -- 807,497
Common stock issued.......... -- -- 2,002,000 2,002 -- (2,002) -- --
Consulting expense on stock
option grants.............. -- -- -- -- 105,925 -- -- 105,925
Net loss..................... -- -- -- -- -- -- (1,168,475) (1,168,475)
------- ---- --------- ------ -------- ------- ------------ ------------
Balance at September 30,
1996......................... 850,000 850 2,002,000 2,002 912,572 (2,002) (1,168,475) (255,053)
Exercise of stock options.... -- -- 27,100 27 2,683 -- -- 2,710
Consulting expense on stock
option grants.............. -- -- -- -- 42,558 -- -- 42,558
Adjustment to consulting
expense on stock options... -- -- -- -- (94,331) -- -- (94,331)
Repayment of stock
subscription note
receivable................. -- -- -- -- -- 2,002 -- 2,002
Accretion of Series B
preferred stock
dividends.................. -- -- -- -- -- -- (344,426) (344,426)
Net loss..................... -- -- -- -- -- -- (4,510,590) (4,510,590)
------- ---- --------- ------ -------- ------- ------------ ------------
Balance at September 30,
1997......................... 850,000 850 2,029,100 2,029 863,482 -- (6,023,491) (5,157,130)
Exercise of stock options.... -- -- 104,460 105 14,032 -- -- 14,137
Issuance of stock warrants... -- -- -- -- 21,876 -- -- 21,876
Consulting expense on stock
option grants.............. -- -- -- -- 7,106 -- -- 7,106
Accretion of Series B
preferred stock
dividends.................. -- -- -- -- -- -- (344,426) (344,426)
Net loss..................... -- -- -- -- -- -- (4,515,578) (4,515,578)
------- ---- --------- ------ -------- ------- ------------ ------------
Balance at September 30,
1998......................... 850,000 850 2,133,560 2,134 906,496 -- (10,883,495) (9,974,015)
Exercise of stock options
(unaudited)................ -- -- 59,681 59 6,805 -- -- 6,864
Consulting expenses on stock
option grants
(unaudited)................ -- -- -- -- 23,725 -- -- 23,725
Issuance of stock warrants
(unaudited)................ -- -- -- -- 7,168 -- -- 7,168
Accretion of Series B
preferred stock dividends
(unaudited)................ -- -- -- -- -- -- (108,680) (108,680)
Net loss (unaudited)......... -- -- -- -- -- -- (2,494,620) (2,494,620)
------- ---- --------- ------ -------- ------- ------------ ------------
Balance at December 31, 1998
(unaudited).................. 850,000 $850 2,193,241 $2,193 $944,194 $ -- $(13,486,795) $(12,539,558)
======= ==== ========= ====== ======== ======= ============ ============
</TABLE>
See accompanying notes to financial statements.
F-106
<PAGE> 451
SAPIENT HEALTH NETWORK, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 21,
1995 (DATE OF THREE MONTHS ENDED
INCEPTION) THROUGH YEARS ENDED SEPTEMBER 30, DECEMBER 31,
SEPTEMBER 30, ------------------------- --------------------------
1996 1997 1998 1997 1998
------------------ ----------- ----------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................ $(1,168,475) $(4,510,590) $(4,515,578) $ (960,197) $ (2,494,620)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 43,936 204,105 326,058 98,943 90,921
Loss on disposal of property and equipment.... -- 1,659 -- -- --
Non-cash consulting expense for stock option
grants...................................... 105,925 (51,773) 7,106 -- 23,725
Change in assets and liabilities:
Accounts receivable......................... -- (2,113) (32,442) (2,415) 30,144
Unbilled revenue............................ -- -- (536,333) -- 46,283
Prepaid expenses and other current assets... (31,166) 4,396 (24,960) (46,014) 20,488
Deposits.................................... (64,321) (3,713) (474) -- (5,326)
Restricted investment....................... -- (200,000) -- -- --
Accounts payable............................ 209,283 203,027 64,217 (29,769) 1,475,969
Accrued liabilities......................... 22,537 37,416 21,134 1,804 (6,869)
Deferred revenue............................ -- -- 506,333 15,000 (36,833)
----------- ----------- ----------- ----------- ------------
Net cash used in operating activities........... (882,281) (4,317,586) (4,184,939) (922,648) (856,118)
----------- ----------- ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment.......... (47,384) (169,958) (74,290) -- (10,204)
(Increase) decrease in other assets related to
patents....................................... -- (25,997) (5,089) (23,044) 30,216
----------- ----------- ----------- ----------- ------------
Net cash (used in) provided by investing
activities.................................... (47,384) (195,955) (79,379) (23,044) 20,012
----------- ----------- ----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of stock subscription note
receivable.................................... -- 2,002 -- -- --
Borrowings (repayments) under bank line of
credit........................................ -- 600,000 -- -- (100,000)
Principal payments on capital leases............ (28,256) (128,406) (225,415) -- (47,766)
Proceeds from preferred and common stock
offerings..................................... 807,497 2,710 14,137 -- 6,864
Proceeds from redeemable preferred stock
offering...................................... 165,000 4,140,330 -- -- --
Borrowings under convertible promissory notes
and accrued interest.......................... -- -- 5,523,795 1,020,000 89,040
Proceeds from issuance of warrants.............. -- -- 21,876 -- 7,168
Increase in other assets related to financing
costs......................................... -- -- (28,087) -- --
----------- ----------- ----------- ----------- ------------
Net cash provided by (used in) financing
activities.................................... 944,241 4,616,636 5,306,306 1,020,000 (44,694)
----------- ----------- ----------- ----------- ------------
Net increase (decrease) in cash................. 14,576 103,095 1,041,988 74,308 (880,800)
Cash at beginning of period..................... -- 14,576 117,671 117,671 1,159,659
----------- ----------- ----------- ----------- ------------
Cash at end of period........................... $ 14,576 $ 117,671 $ 1,159,659 $ 191,979 $ 278,859
=========== =========== =========== =========== ============
SUPPLEMENTAL DISCLOSURES:
Cash paid during year for interest.............. $ 18,505 $ 86,868 $ 114,907 $ -- $ --
=========== =========== =========== =========== ============
Non-cash investing and financing activities:
Equipment acquired under capital lease
obligations................................. $ 321,603 $ 335,259 $ 111,040 $ 62,957 $ --
=========== =========== =========== =========== ============
Accretion of redemption preference............ $ -- $ 344,426 $ 344,426 $ 86,107 $ 108,680
=========== =========== =========== =========== ============
Conversion of promissory notes to redeemable
preferred stock............................. $ -- $ -- $ -- $ -- $ 1,128,388
=========== =========== =========== =========== ============
</TABLE>
See accompanying notes to financial statements.
F-107
<PAGE> 452
SAPIENT HEALTH NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1998
AND DECEMBER 31, 1998 (UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Sapient Health Network, Inc. (the Company), an Oregon Corporation, was
founded in November 1995 and creates online disease specific patient communities
on the World Wide Web, through which it brings members personalized,
condition-specific information and interactive community features. The Company
provides members with an extensive reference library, in-depth reports on
current topics and daily news articles from Reuters Medical News. Through
message boards and live chat rooms, members can share personal experiences and
coping strategies and provide each other emotional support. The Company hosts
ten online communities for patients interested in asthma, breast cancer,
cardiovascular disease, depression, diabetes, fibromyalagia (FMS) chronic
fatigue immune dysfunction syndrome, hepatitis C, prostate cancer, obesity,
women's health and kidney failure.
For the period November 31, 1995 (date of inception) through September 30,
1996 and the year ended September 30, 1997, the Company was a development stage
enterprise.
Unaudited Quarterly Information
The financial information included herein for the three-month periods ended
December 31, 1997 and 1998 is unaudited; however, such information reflects all
adjustments consisting only of normal recurring adjustments which are, in the
opinion of management, necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods. The
interim consolidated financial statements should be read in conjunction with the
financial statements and the notes included in the financial statements. The
results of operations for the interim period presented are not necessarily
indicative of the results to be expected for the full year.
Revenue Recognition
Revenue from market research contracts is recognized upon delivery and
acceptance of the product by the customer. The amount of revenue for specific
projects is determined by market pricing models or associated direct costs of
the delivered and accepted product.
Revenue from sponsorship contracts for Web development and related
activities, which includes banner advertising, development of the interview
profile, and reporting of data and site activity, is recognized in time
milestones, usually prorated over the length of the agreement. Revenue from
additional specified projects within the sponsorship contract is determined by
precedent pricing models or associated direct costs of the project, and
recognized when delivered and accepted by the customer. These additional
projects could consist of clinical trial recruitments and additional focus group
interviews as well as other customer specific requests.
Deferred revenue and unbilled revenue represent amounts to be recognized
and billed upon project completion or upon achievement of project milestones.
Contracts may have termination and refund provisions that require payment for
all work completed through date of termination notice. Contracts may have
nonrefundable fees due upon signing associated with upfront set up costs that
are not related to project milestones or product deliverables. These fees are
recognized upon signing.
All of the Company's revenues for the years ended September 30, 1997 and
1998 were from sales in the U.S.
F-108
<PAGE> 453
SAPIENT HEALTH NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1998
AND DECEMBER 31, 1998 (UNAUDITED)
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is calculated on the straight-line method over the estimated useful
life of the assets, generally three years. Property and equipment held under
capital leases and leasehold improvements are amortized based on the
straight-line method over the shorter of the lease term or estimated useful life
of the assets, generally three years.
Maintenance and repairs are charged to expense as incurred. Major repairs
and improvements are capitalized and depreciated.
Restricted Investment
The Company has a certificate of deposit held by a bank as collateral for a
$200,000 standby letter of credit for costs incurred by the landlord, for the
Company's office space remodeling.
Other Assets
Other assets consist primarily of patents and legal costs to obtain
financing. Patents are amortized using the straight-line method over the
estimated future economic benefit, which is generally three years. Financing
costs are amortized over the life of the loan unless conversion is expected
within a twelve month period, in which case they are netted against the proceeds
upon conversion. Amortization expense for the period from November 21, 1995
(date of inception) through September 30, 1996 and the years ended September 30,
1997 and 1998 was $3,029, $8,036 and $10,949, respectively. Accumulated
amortization at September 30, 1997 and 1998 was $11,065 and $22,014,
respectively.
Research and Development Expenditures
The Company incurs research and development expenses relating to the
development of its product. All research and development costs are expensed as
incurred.
Capitalized Software
Under Statement of Financial Accounting Standards No. 86, software
development costs are to be capitalized beginning when a product's technological
feasibility has been established and ending when a product is made available for
general release to customers. The establishment of technological feasibility of
the Company's products has occurred shortly before general release and,
accordingly, no costs have been capitalized.
Management Estimates
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 assets and liabilities.
Estimates and assumptions are also used in the disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
financial statement carrying amounts of existing assets and liabilities
F-109
<PAGE> 454
SAPIENT HEALTH NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1998
AND DECEMBER 31, 1998 (UNAUDITED)
and their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. Valuation
allowances are established to reduce deferred tax assets to the amount expected
to be realized.
Stock-Based Compensation
The Company accounts for stock-based compensation using Statement of
Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based
Compensation. This statement permits a company to choose either a fair-value
based method of accounting for its stock-based compensation arrangements or to
comply with the current Accounting Principles Board Opinion 25 (APB Opinion 25)
intrinsic-value-based method adding pro-forma disclosures of net loss computed
as if the fair-value-based method had been applied in the financial statements.
The Company applies SFAS No. 123 by retaining the APB Opinion 25 method of
accounting for stock-based compensation for employees with annual pro-forma
disclosures of net loss. Stock-based compensation for non-employees is accounted
for using the fair-value-based method.
Net Loss Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share ("SFAS No. 128"). SFAS No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary and fully diluted earnings per share, outstanding
nonvested shares are not included in the computations of basic and diluted
earnings per share until the time-based vesting restriction has lapsed. Basic
earnings per share also excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, accounts receivable,
accounts payable, capital leases, convertible promissory notes and the line of
credit. At September 30, 1997 and 1998, the fair value of the Company's
receivables, payables, line of credit, capital lease obligations and convertible
promissory notes approximated fair value.
Advertising
The Company expenses the costs of advertising when the costs are incurred.
Advertising expense was approximately $2,000, $229,000 and $519,000 for the
period from November 21, 1995 (date of inception) through September 30, 1996 and
the years ended September 30, 1997 and 1998, respectively.
Reclassifications
Certain amounts for 1996 and 1997 have been reclassified to conform to the
presentation for 1998. Such reclassifications have no effect on previously
reported results of operations.
Effect of Recent Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income, which establishes requirements for
disclosure of comprehensive income. The
F-110
<PAGE> 455
SAPIENT HEALTH NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1998
AND DECEMBER 31, 1998 (UNAUDITED)
objective of SFAS 130 is to report all changes in equity that result from
transactions and economic events other than transactions with owners.
Comprehensive income is the total of net income and all other non-owner changes
in equity. SFAS 130 is effective for fiscal years beginning after December 15,
1997. Reclassification of earlier financial statements for comparative purposes
is required. The Company does not expect implementation to have a significant
impact on its financial statements.
Also in June 1997, the FASB issued SFAS No. 131, Disclosure about Segments
of an Enterprise and Related Information. SFAS 131 requires public companies to
report certain information about their operating segments in a complete set of
financial statements to shareholders. It also requires reporting of certain
enterprise-wide information about the company's products and services, its
activities in different geographic areas and its reliance on major customers.
The basis for determining the company's operating segments is the manner in
which management operates the business. SFAS 131, is effective for fiscal years
beginning after December 15, 1997. The Company does not expect implementation to
have a significant impact on its financial statements.
In October 1997, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 97-2, Software Revenue
Recognition,which provides guidance on applying generally accepted accounting
principles in recognizing revenue of software transactions. The Company adopted
SOP 97-2 on January 1, 1998. The impact to the Company's financial statements
was not material.
Related to the SOP 97-2, the AICPA issued SOP 98-4 Deferral of the
Effective Date of a Provision of SOP 97-2, Software Revenue Recognition. SOP
98-4 defers for the one year, the application of several paragraphs and examples
in SOP 97-2 that limit the definition of vendor specific objective evidence of
the fair value of various elements in a multiple element arrangement. The impact
on the Company's financial statements is not expected to be material.
In April 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-5, Reporting on the Costs of Start-Up Activities.
The SOP requires that costs incurred during start-up activities, including
organizational costs, be expensed as incurred. SOP 98-5 is effective for
financial statements for fiscal years beginning after December 15, 1998.
Restatement of previously issued financial statements is not permitted. The
Company does not expect implementation to have a significant impact on its
financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability at its fair value. The
standard also requires that changes in the derivatives' fair value be recognized
currently in the results of operations unless specific hedge accounting criteria
are met. SFAS 133 is effective for fiscal years beginning after June 15, 1999.
The Company does not expect SFAS 133 to have a material impact on its financial
statements.
(2) LIQUIDITY
To meet the cash flow needs of the Company in fiscal 1999, the Company will
need to issue additional equity securities, borrow additional funds, or obtain
other financing. The Company has no commitments for additional financing and
there can be no assurance that such financing will be available on satisfactory
terms, if at all. The accompanying financial statements have been prepared on
the basis that the Company will be able to meet its cash needs and continue as a
going concern. See note 15.
F-111
<PAGE> 456
SAPIENT HEALTH NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1998
AND DECEMBER 31, 1998 (UNAUDITED)
(3) PROPERTY AND EQUIPMENT
Property and equipment at September 30, consists of the following:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Computers and related equipment..................... $ 814,260 $ 998,368
Furniture and office equipment...................... 21,690 15,532
Leasehold improvements.............................. 36,595 43,975
---------- ----------
872,545 1,057,875
Less accumulated depreciation and amortization...... (236,976) (552,085)
---------- ----------
$ 635,569 $ 505,790
========== ==========
</TABLE>
Depreciation and amortization expense on property and equipment was
$40,907, $196,069 and $315,109 for the period from November 21, 1995 (date of
inception) through September 30, 1996 and the years ended September 30, 1997 and
1998, respectively.
(4) CAPITAL LEASES
The Company is obligated for equipment under various capital leases that
expire at various dates through 2001. These leases are secured by the related
equipment. At September 30, 1997 and 1998, the gross amount of the equipment
acquired under capital leases was $656,862 and $774,386, respectively, and
related accumulated amortization was $187,466 and $472,564, respectively.
Amortization of assets held under capital leases is included with
depreciation and amortization expense in the accompanying financial statements.
Future minimum capital lease payments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30:
<S> <C>
1999................................................... $241,978
2000................................................... 142,396
2001................................................... 39,077
--------
Total minimum lease payments...................... 423,451
Less amount representing interest...................... (37,626)
--------
Present value of net minimum capital lease
payments............................................ 385,825
Less current installments of obligations under capital
leases................................................ (214,801)
--------
Obligations under capital leases, net of current
installments........................................ $171,024
========
</TABLE>
(5) LINE OF CREDIT
The Company utilizes a $600,000 revolving line of credit agreement with a
bank at an annual interest rate of prime plus 1% (9.5% at September 30, 1998).
Amounts outstanding under the line of credit were $600,000 at September 30, 1997
and 1998, respectively. The bank holds a security interest in the Company's
assets throughout the term of this loan, due October 1, 1998. The line was
renewed subsequent to year end, as discussed in note 14.
F-112
<PAGE> 457
SAPIENT HEALTH NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1998
AND DECEMBER 31, 1998 (UNAUDITED)
(6) CONVERTIBLE PROMISSORY NOTES
The Company issued the following convertible promissory notes in fiscal
1998:
- In October 1997, $1,020,000 at 10% interest per annum, principal and
interest converted to Series B Preferred Stock in October 1998. (See note
14)
- In March 1998, $2,000,000 in senior debt at 8% interest per annum, with
the lender having the option to convert principal amount into equivalent
equity securities (as described below) at due date in March 1999.
- In July 1998, $2,275,400 at 8% per annum, principal and interest to
convert to equivalent equity securities (as described below) in January
1999.
The outstanding balance at September 30, 1998 includes accrued interest
payable on these notes. The March and July debt is convertible into a subsequent
planned preferred stock series at a per share price of the new preferred stock
equity financing or would be converted upon maturity of the notes into Series B
redeemable Preferred Stock at $1.54 per share.
(7) INCOME TAXES
Due to the Company's losses before provision for income taxes in each
period since inception there has been no provision for federal and state income
taxes for the period from November 21, 1995 (date of inception) through
September 30, 1996 and the years ended September 30, 1997 and 1998.
The reconciliation of the statutory federal income tax rates to the
Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
THE PERIOD FROM
NOVEMBER 21, 1995 YEARS ENDED
(DATE OF INCEPTION) SEPTEMBER 30,
THROUGH --------------
SEPTEMBER 30, 1996 1997 1998
------------------- ----- -----
<S> <C> <C> <C>
Federal statutory rate............................. (34.0)% (34.0)% (34.0)%
State income taxes, net of federal benefit......... (4.4) (4.4) (4.4)
Change in valuation allowance...................... 38.5 39.3 39.2
Other, net......................................... (0.1) (0.9) (0.8)
----- ----- -----
--% --% --%
===== ===== =====
</TABLE>
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-113
<PAGE> 458
SAPIENT HEALTH NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1998
AND DECEMBER 31, 1998 (UNAUDITED)
purposes. The tax effects of significant items comprising the Company's deferred
tax assets as of September 30 are as follows:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
DEFERRED TAX ASSETS:
Net operating loss carryforwards.......................... $ 1,840,300 $ 3,653,900
Option compensation....................................... 57,000 31,000
Amortization of startup and organizational costs.......... 278,300 210,000
Research and experimentation credits...................... 56,000 87,800
Other..................................................... 15,800 13,900
----------- -----------
2,247,400 3,996,600
Valuation allowance....................................... (2,222,800) (3,992,700)
----------- -----------
Net deferred tax assets................................ 24,600 3,900
DEFERRED TAX LIABILITIES:
Depreciation and amortization............................. (24,600) (3,900)
----------- -----------
Net deferred tax assets................................ $ -- $ --
=========== ===========
</TABLE>
The valuation allowance for deferred tax assets as of September 30, 1997
and 1998, was $2,222,800 and $3,992,700, respectively. The net change in the
total valuation allowance for the period November 21, 1995 (date of inception)
through September 30, 1996 and the years ended September 30, 1997 and 1998, was
an increase of $450,000, $1,772,800 and $1,769,900, respectively.
At September 30, 1998, the Company has net operating loss carryforwards of
approximately $9,526,000 and research and experimentation credit carryforwards
of $87,800 to offset future federal taxable income and income taxes, if any,
through 2017. As defined in Internal Revenue Section 382, the utilization of a
portion of the net operating loss and credit carryforwards may be limited due to
a change in ownership caused by additional investors, occurring on November 1,
1996. The Company believes no additional ownership changes have occurred,
however a formal analysis has not been completed.
(8) STOCK OPTION PLAN
Effective January 30, 1996, the Company adopted a Stock Option Plan (the
Plan) which provides for the granting of stock options to employees, directors
and consultants within the meaning of Section 442 of the Internal Revenue Code,
and non-statutory stock options. The right to exercise these options vests from
zero to forty-eight months. The Company has reserved 1,500,000 shares of common
stock for issuance upon exercise of options granted under the Plan.
As of September 30, 1998, 1,097,409 options remain outstanding pursuant to
the Plan. The per share weighted-average fair value of stock options granted
during the period from November 21, 1995 (date of inception) through September
30, 1996 and the years ended 1997 and 1998 were $.10, $.16 and $.27,
F-114
<PAGE> 459
SAPIENT HEALTH NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1998
AND DECEMBER 31, 1998 (UNAUDITED)
respectively, on the date of grant using the Black-Scholes pricing model with
the following weighted-average assumptions:
<TABLE>
<CAPTION>
THE PERIOD
FROM
NOVEMBER
21,
1995 (DATE OF
INCEPTION)
THROUGH YEARS ENDED
SEPTEMBER SEPTEMBER 30,
30, -------------------
1996 1997 1998
------------- -------- --------
<S> <C> <C> <C>
Dividend yield........................................ -- -- --
Expected volatility................................... 100% 100% 100%
Risk-free interest rate............................... 5.7% 6% 6.5%
Expected life......................................... 10 years 10 years 10 years
</TABLE>
The total value of options granted during the period September 21, 1995
(date of inception) through September 30, 1996 and for the years ended September
30, 1997 and 1998 were $18,281, $36,691 and $35,681, respectively, which would
be amortized on a straight-line basis over the vesting period of the options
(typically four years).
The Company applies Accounting Principle Bulletin Opinion No. 25 in
accounting for stock options issued to employees and directors under the Plan,
accordingly, no compensation cost has been recognized for these stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under Statement of
Financial Accounting Standards (SFAS) No. 123 the Company's net loss would have
been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
THE PERIOD
FROM
NOVEMBER 21,
1995 (DATE OF
INCEPTION) YEARS ENDED
THROUGH SEPTEMBER 30,
SEPTEMBER 30, --------------------------
1996 1997 1998
------------- ----------- -----------
<S> <C> <C> <C>
Net loss:
As reported............................... $(1,168,475) $(4,510,590) $(4,515,578)
Pro forma................................. $(1,169,822) $(4,518,701) $(4,530,958)
</TABLE>
F-115
<PAGE> 460
SAPIENT HEALTH NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1998
AND DECEMBER 31, 1998 (UNAUDITED)
Activity under the Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- ---------
<S> <C> <C>
Options outstanding at January 30, 1996
(date of the Plan adoption)................................. -- $ --
Granted..................................................... 396,125 .10
Exercised................................................... -- --
Canceled.................................................... -- --
--------- ----
Options outstanding at September 30, 1996................... 396,125 .10
Granted..................................................... 652,239 .16
Exercised................................................... (27,100) .10
Canceled.................................................... (68,246) .10
--------- ----
Options outstanding at September 30, 1997................... 953,018 .14
Granted..................................................... 379,375 .27
Exercised................................................... (104,460) .14
Canceled.................................................... (130,524) .12
--------- ----
Options outstanding at September 30, 1998................... 1,097,409 $.19
========= ====
</TABLE>
At September 30, 1998, the weighted-average exercise price and
weighted-average remaining contractual life of outstanding options was $.19 and
nine years, respectively.
At September 30, 1998, 603,282 outstanding options were currently
exercisable, and the weighted-average exercise price of these options was $.14.
(9) REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' DEFICIT
Preferred Stock
The Company is authorized to issue up to 10,000,000 shares of preferred
stock. During fiscal 1998, the Company amended its articles of incorporation to
designate a new series of preferred stock, designated as Series C preferred
stock, and to amend certain terms of the rights, privileges and preferences of
its Series B preferred stock. Following such amendment, the Company had three
series of convertible preferred stock, designated as Series A, B and C preferred
stock. The Company's Series B and C preferred stock is redeemable as described
more fully below. The material rights, preferences, privileges and restrictions
for each series of preferred stock are summarized below:
Dividends
Holders of the Series B and C preferred stock shall be entitled to receive
cumulative dividends of eight percent (8%) of the original issue per share price
of each such series per share per annum prior and in preference to the holders
of any other stock of the Company. Such cumulative dividends shall cease to
accrue when the balance of such cumulative dividends, whether paid or unpaid,
equals, in the aggregate, two times the respective original issue price of the
Series B and C preferred stock. The holders of the Series B and C preferred
stock are also entitled to receive an amount equal per share to any dividend
declared and paid to holders of the Company's common stock. The holders of the
Series A preferred stock
F-116
<PAGE> 461
SAPIENT HEALTH NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1998
AND DECEMBER 31, 1998 (UNAUDITED)
are entitled to receive an amount equal per share to any dividend declared and
paid to holders of the Company's common stock.
Liquidation Preferences
Upon the occurrence of a liquidation event, such as a dissolution of the
Company or a merger or sale of assets, the holders of Series C preferred stock
shall be entitled to receive in preference to holders of Series A and B
preferred stock and common stock an amount equal to the proportion that the
Series C preferred stock represents to the fully diluted capital stock of the
Company, the holders of Series B preferred stock shall be entitled to receive in
preference to holders of Series A preferred stock and common stock an amount
equal to the original issue price of the Series B preferred stock, the holders
of Series A preferred stock shall be entitled to receive in preference to
holders of common stock an amount equal to up to the original issue price of the
Series A preferred stock, the holders of Series B preferred stock shall be
entitled to then receive in preference to the holders of common stock up to an
amount equal to two times the original issue price of the Series B preferred
stock, and thereafter, the holders of Series A, B and C preferred stock shall
share any remaining proceeds on a pro rata basis with the holders of common
stock based on the number of shares of common stock held by each, assuming full
conversion of the Series A, B and C preferred stock.
Conversion
Holders of the Series A, B and C preferred stock may convert all or part of
their shares at any time after the date of issuance into such number of common
stock as is determined by multiplying such number of shares by the series
conversion rate in effect at the time. Conversion is automatic upon the closing
of an IPO of the Company's common stock at a price of not less than $6.16 per
share and with aggregate gross proceeds of not less than $20,000,000 or by
written consent or agreement of the holders of two-thirds of the outstanding
shares of Series A, B and C preferred stock voting together as a single class.
Redemption
The Company shall redeem the Series B and C preferred stock at the option
of the holders of such preferred stock after September 30, 2001 and before
September 30, 2004, subject to reasonable financial stability considerations,
payable in eight equal quarterly installments. The holders of the Series B and C
preferred stock shall be entitled to a redemption price per share equal to the
original issuance price, plus accrued and unpaid dividends with respect to such
shares.
Common Stock
The Company is authorized to issue up to 15,000,000 shares of common stock.
The common stock shareholders have voting rights and, subject to any
preferential rights granted to any series of preferred shareholders, are
entitled to receive distributions legally payable to shareholders upon
liquidation of the Company.
Warrants
During fiscal 1997, the Company issued warrants to investors. Each warrant
permits the holder to purchase one share of the Company's common stock. At
September 30, 1998 warrants to purchase 67,788 shares and 34,016 shares at
exercise prices of $2.25 and $0.16, respectively were outstanding. Each of the
warrants are exercisable within five years from the date of purchase, and were
valued using the Black Scholes model, however the warrants were not recorded
separately in the financial statements.
F-117
<PAGE> 462
SAPIENT HEALTH NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1998
AND DECEMBER 31, 1998 (UNAUDITED)
The value of the common stock warrants issued in 1997 was approximately
$10,000. The assumptions used to value the warrants using the Black Scholes
model were as follows: Dividend yield of zero, expected volatility 100%,
risk-free interest rate of 6.0% and an expected life of 5 years.
During fiscal 1998, in connection with the convertible promissory note
financing, the Company issued 871,226 warrants to purchase Series B Preferred
Stock to investors. The warrants are exercisable at a price of $1.54 per share
within ten years from date of issuance, and were valued using the Black Scholes
model, however the warrants were not recorded separately in the financial
statements.
The value of the preferred stock warrants issued in 1997 and 1998 was
approximately $80,000 and $460,000, respectively. The assumptions used to value
the warrants using the Black Scholes model were as follows: dividend yield of
zero, expected volatility 100%, risk-free interest rate of 6.5% and an expected
life of 10 years.
The holders/subscribers of shares of stock and stock warrants are subject
to the restrictions set forth in Shareholder Agreements/Subscription Agreements.
The terms of these agreements primarily relate to the right of first refusal.
Before any common shareholder may sell or otherwise transfer any share of common
stock, such shares shall first be offered to the Company.
(10) RETIREMENT BENEFIT PLAN
The Company sponsors a defined contribution 401(k) plan (the Retirement
Plan). Employees who are at least 21 years old are eligible to participate in
the Retirement Plan beginning the month subsequent to employment. Participants
may defer up to 15% of eligible compensation. Currently, the Company does not
provide matching contributions for the Retirement Plan.
(11) COMMITMENTS AND CONTINGENCIES
Leases
The company leases office space under a non-cancelable operating leases
which expire at various times through May 2004.
Future minimum lease payments under the operating lease is as follows:
<TABLE>
<S> <C>
YEAR ENDING SEPTEMBER 30:
1999................................................... $ 264,212
2000................................................... 273,012
2001................................................... 273,012
2002................................................... 273,012
2003................................................... 273,012
Thereafter............................................. 182,008
----------
$1,538,268
==========
</TABLE>
Total rent expense under operating leases was $18,284, $93,011 and $230,182
for the period from November 21, 1995 (date of inception) through September 30,
1996 and for the years ended September 30, 1997 and 1998, respectively.
F-118
<PAGE> 463
SAPIENT HEALTH NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1998
AND DECEMBER 31, 1998 (UNAUDITED)
Litigation
From time to time the Company may be involved in various legal actions in
the normal course of business. Management is of the opinion that the outcome of
such actions will not have a material adverse effect on the Company's financial
condition.
(12) CUSTOMER INFORMATION
The Company had one customer that accounted for approximately 25% and 59%
in 1997 and 1998, respectively, of the Company's revenues.
(13) RISK OF TECHNOLOGICAL CHANGE
Contingencies and Factors that Could Affect Future Results
A substantial portion of the Company's revenues each year are generated
from the development of websites and market research performed over the
Internet. In the extremely competitive industry environment in which the Company
operates, such product generation, development and marketing processes are
uncertain and complex, requiring accurate prediction of demand as well as
successful management of various development risks inherent to the Internet. In
light of these dependencies, it is possible that failure to successfully manage
future changes in technology with respect to the Internet could have long-term
impact on the Company's growth and results of operations.
(14) SUBSEQUENT EVENTS
The convertible promissory notes issued October 1997 were converted on
October 9, 1998 to 732,895 shares of Series B Preferred Stock at $1.54 per
share.
The $600,000 bank line of credit, due October 1998, was subsequently
amended. The new Agreement reduced the line to $500,000 and extends maturity
through December 31, 1998. A warrant to purchase 16,234 shares of Series B
Preferred Stock was granted in consideration for this Amendment. The fair value
of the warrant of approximately $7,200 was calculated using the Black-Scholes
pricing model under SFAS 123 and will be expensed in the first quarter of the
fiscal year ending September 30, 1999.
(15) UNAUDITED RECENT DEVELOPMENT
On January 25, 1999, WebMD acquired all the issued and outstanding shares
of the Company's common and preferred stock for 1,619,190 shares of WebMD's
Series B preferred stock.
F-119
<PAGE> 464
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
The Stockton Group, Inc.:
We have audited the accompanying statement of income of The Stockton Group,
Inc. (the "Company") for the year ended June 30, 1997. This financial statement
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement 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 statement of income is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement of income. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall statement of income presentation.
We believe that our audit of the statement of income provides a reasonable basis
for our opinion.
In our opinion, such statement of income presents fairly, in all material
respects, the results of operations of the Company for the year ended June 30,
1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
October 7, 1997
F-120
<PAGE> 465
THE STOCKTON GROUP, INC.
STATEMENTS OF INCOME
YEAR ENDED JUNE 30, 1997 AND THE THREE MONTHS
ENDED SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
JUNE 30, 1997 SEPTEMBER 30, 1997
------------- ------------------
(UNAUDITED)
<S> <C> <C>
REVENUES.................................................... $ 3,801,953 $1,056,748
OPERATING EXPENSES:
Operations................................................ (563,295) (137,495)
Sales, marketing, and client services..................... (899,366) (203,133)
Research and development.................................. (103,153) (24,405)
General and administrative................................ (159,517) (72,425)
Non-cash stock compensation (Note 4)...................... (1,280,000) --
Depreciation and amortization............................. (109,336) (37,411)
----------- ----------
Total operating expenses.......................... (3,114,667) (474,869)
----------- ----------
INCOME FROM OPERATIONS...................................... 687,286 581,879
INTEREST EXPENSE............................................ (111,260) (22,574)
OTHER INCOME................................................ 11,229 8,020
----------- ----------
NET INCOME (Note 1)......................................... $ 587,255 $ 567,325
=========== ==========
</TABLE>
See notes to financial statement.
F-121
<PAGE> 466
THE STOCKTON GROUP, INC.
NOTES TO FINANCIAL STATEMENT
YEAR ENDED JUNE 30, 1997 AND THE THREE MONTHS ENDED
SEPTEMBER 30, 1997 (UNAUDITED)
(INFORMATION AS IT RELATES TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997 IS
UNAUDITED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business -- The Stockton Group, Inc. (the "Company"), was
incorporated as an S Corporation in the State of South Carolina in July 1993.
The Company provides computer-based prescription drug claims processing to
Pharmaceutical Benefit Managers ("PBMs"), Health Maintenance Organizations
("HMOs"), Preferred Provider Organizations ("PPOs"), insurance companies,
Third-Party Administrators ("TPAs"), self-insured employers, and Taft-Hartley
Funds. The Company's services range from claims processing to full-service
program management, including eligibility verification, drug coverages and
exclusions, concurrent utilization review, drug pricing verification, supply
limitations and other applicable plan design requirements. The Company supports
a network of over 40,000 pharmacies nationwide.
In addition to claims processing fees, the Company receives rebate revenue
from drug manufacturers for prescription drug transactions that are processed
through the Company's system.
Use of Estimates in the Preparation of Financial Statements -- 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 assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Major Customers -- For the year ended June 30, 1997, three customers
accounted for approximately 15%, 12% and 10%, respectively, of total revenues.
Revenue Recognition -- Revenue from prescription drug claims processing
services and rebates from drug manufacturers are recognized when the services
are delivered.
Property and Equipment -- Property and equipment is depreciated using the
double-declining balance method over the estimated useful lives of the related
assets. Assets under capital leases are depreciated using the straight-line
method over the lease term.
Income Taxes -- The Company has elected to be taxed as an S Corporation,
and as such its income is included in the current taxable income of its
stockholder. Accordingly, no provision has been made in the accompanying
financial statements for federal or state income taxes.
Unaudited Interim Financial Statement -- In the opinion of management, the
unaudited statement of income for the three months ended September 30, 1997 is
presented on a basis consistent with the audited statement of income and
reflects all adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation of the results thereof. The results of
operations for the three months ended September 30, 1997 is not necessarily
indicative of the results to be expected for the entire year.
2. NOTE PAYABLE TO STOCKHOLDER
The Company had a note payable to stockholder with an outstanding principal
balance of $359,621 at June 30, 1997. The note bore interest at a rate of prime
plus .25% (8.75% at June 30, 1997).
3. LEASE COMMITMENTS
The Company leased certain equipment under operating leases expiring at
various dates through April 2000. Rent expense for the year ended June 30, 1997
was approximately $12,000.
F-122
<PAGE> 467
THE STOCKTON GROUP, INC.
NOTES TO FINANCIAL STATEMENT -- (CONTINUED)
YEAR ENDED JUNE 30, 1997 AND THE THREE MONTHS ENDED
SEPTEMBER 30, 1997 (UNAUDITED)
(INFORMATION AS IT RELATES TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997 IS
UNAUDITED)
In addition, the Company leased its office facility and certain computer
and office equipment under capital lease arrangements with interest rates
ranging from 14.5% to 25%, expiring through July 2011. The lease arrangement for
the office facility was with a corporation in which the Company's sole
stockholder holds an ownership interest.
4. STOCK-BASED COMPENSATION ARRANGEMENTS
During 1994, the Company granted a key employee the right to acquire common
stock equivalent to a 25% equity ownership in the Company at no cost. The shares
have not yet been issued. At the date of the grant, the Company recorded
compensation cost equal to the fair market value of shares to be awarded to the
executive.
During 1997, the Company entered into an employment agreement with another
new key executive. Among other things, the agreement granted the executive the
right to acquire a 10% equity ownership in the Company at a nominal cost ($1.00)
or, if the Company is sold within one year, to receive 10% of the sales proceeds
as defined. Accordingly, the Company has recorded compensation cost in 1997,
equal to the estimated cash settlement to be paid to the executive based upon
the anticipated proceeds from the sale of the Company. (See Note 5).
5. SUBSEQUENT EVENT
In November 1997, the Company sold certain computer equipment, intangible
assets and the operations of the Company to MEDE America Corporation. All other
assets and liabilities remained with the Company. The purchase price was
$10,400,000 in cash. In addition, the purchase agreement requires additional
consideration of up to $2,600,000 (plus interest at an annual rate of 7.25%) to
be paid if Stockton's revenue during the 12-month period ended September 30,
1998 is at least $5,000,000.
F-123
<PAGE> 468
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Healthcare Interchange, Inc.:
We have audited the accompanying consolidated balance sheet of Healthcare
Interchange, Inc. and subsidiary (Company) as of June 30, 1998, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the nine-month period ended June 30, 1998. These consolidated
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 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 consolidated 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 audit provides a reasonable basis
for our opinion.
As described in notes 3 and 15, on October 30, 1998, the Company completed
the sale of its financial transactions business to MEDE America and the disposal
of the assets and operations of the discontinued Telemedical and Intercare
segments.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Healthcare
Interchange, Inc. and subsidiary as of June 30, 1998, and the results of their
operations and their cash flows for the nine-month period ended June 30, 1998,
in conformity with generally accepted accounting principles.
KPMG LLP
St. Louis, Missouri
September 8, 1998, except as to notes 3 and 15,
which are as of October 30, 1998
F-124
<PAGE> 469
HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1998 1998
----------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 140,042 $ 38,083
Service accounts receivable, less allowance for doubtful
accounts of $30,709 and $32,207 (unaudited),
respectively........................................... 616,044 556,025
Due from stockholders..................................... 105,483 104,505
Inventories............................................... 13,286 12,822
Net current assets of discontinued operations............. 236,772 243,960
Prepaid expenses.......................................... 62,472 16,929
----------- -----------
Total current assets.............................. 1,174,099 972,324
Property, equipment and computer software, net.............. 611,578 576,559
Other assets................................................ 26,246 25,537
Net non-current assets of discontinued operations........... 176,455 176,455
----------- -----------
$ 1,988,378 $ 1,750,875
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Revolving credit facilities............................... $ 2,260,000 $ 2,260,000
Notes payable............................................. 73,751 64,701
Accounts payable.......................................... 1,162,125 956,320
Accounts payable to stockholders.......................... 151,705 183,376
Dividends payable......................................... 70,313 93,750
Accrued expenses and other liabilities.................... 865,935 612,745
----------- -----------
Total current liabilities......................... 4,583,829 4,170,892
----------- -----------
Stockholders' equity (deficit):
Cumulative redeemable convertible preferred stock, $1 par
value; 62,500 shares authorized, issued, and
outstanding............................................ 62,500 62,500
Common stock:
Class A -- $1 par value; 66,250 shares authorized,
35,000 shares issued and outstanding................ 35,000 35,000
Class B -- $1 par value; 66,250 shares authorized,
35,000 shares issued and outstanding................ 35,000 35,000
Class C -- $1 par value; 30,000 shares authorized,
20,001 shares issued and outstanding................ 20,001 20,001
Additional paid-in capital................................ 3,016,898 2,993,461
Accumulated deficit....................................... (5,764,850) (5,565,979)
----------- -----------
Total stockholders' equity (deficit).............. (2,595,451) (2,420,017)
----------- -----------
$ 1,988,378 $ 1,750,875
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-125
<PAGE> 470
HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE-MONTH THREE-MONTH
PERIOD ENDED PERIOD ENDED
JUNE 30, 1998 SEPTEMBER 30, 1998
------------- ------------------
(UNAUDITED)
<S> <C> <C>
Revenues:
Claims service revenue.................................... $ 2,814,030 $1,032,672
Claim service revenue from stockholders................... 843,787 258,506
Other revenue............................................. 69,137 20,597
----------- ----------
3,726,954 1,311,775
----------- ----------
Operating expenses:
Operating expenses........................................ 1,285,832 479,003
Sales, marketing and client service....................... 993,512 263,320
General and administrative................................ 752,033 248,032
Depreciation and amortization............................. 131,806 43,761
Provision for doubtful accounts........................... 2,000 14,896
----------- ----------
3,165,183 1,049,012
----------- ----------
Operating income....................................... 561,771 262,763
Interest expense............................................ 148,213 63,892
----------- ----------
Income from continuing operations...................... 413,558 198,871
Discontinued operations:
Loss from operations of discontinued segments............. (2,026,784) --
Loss on disposal of segments (including $342,971 for
operating losses during phase-out period).............. (2,073,601) --
----------- ----------
Net income (loss)........................................... (3,686,827) 198,871
Preferred stock dividends declared.......................... (70,313) (23,437)
----------- ----------
Net income (loss) attributable to common stockholders....... $(3,757,140) $ 175,434
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-126
<PAGE> 471
HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
NINE-MONTH PERIOD ENDED JUNE 30, 1998 AND
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
PREFERRED ------------ PAID-IN ACCUMULATED EQUITY
STOCK CLASS A CLASS B CLASS C CAPITAL DEFICIT (DEFICIT)
--------- ------- ------- ------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30,
1997................. $62,500 $35,000 $35,000 $20,001 $3,087,211 $(2,078,023) $ 1,161,689
Preferred stock
dividends declared... -- -- -- -- (70,313) -- (70,313)
Net loss............... -- -- -- -- -- (3,686,827) (3,686,827)
------- ------- ------- ------- ---------- ----------- -----------
Balance, June 30,
1998................. 62,500 35,000 35,000 20,001 3,016,898 (5,764,850) (2,595,451)
Preferred stock
dividends declared
(unaudited).......... -- -- -- -- (23,437) -- (23,437)
Net income
(unaudited).......... -- -- -- -- -- 198,871 198,871
------- ------- ------- ------- ---------- ----------- -----------
Balance, September 30,
1998 (unaudited)..... $62,500 $35,000 $35,000 $20,001 $2,993,461 $(5,565,979) $(2,420,017)
======= ======= ======= ======= ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-127
<PAGE> 472
HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE-MONTH THREE-MONTH
PERIOD ENDED PERIOD ENDED
JUNE 30, 1998 SEPTEMBER 30, 1998
------------- ------------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(3,686,827) $ 198,871
Loss on disposal of segments.............................. 2,073,601 --
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 390,821 43,761
Provision for doubtful accounts........................ 40,013 14,896
Increase (decrease) in cash from changes in assets and
liabilities:
Service accounts receivable.......................... 523,789 37,935
Due from stockholders................................ 181,781 978
Inventories.......................................... (19,378) 464
Prepaid expenses..................................... 32,102 45,543
Accounts payable..................................... 819,323 (197,571)
Accrued expenses and other liabilities............... 45,013 (229,753)
----------- ---------
Net cash provided by (used in) operating
activities...................................... 400,238 (84,876)
----------- ---------
Cash flows from investing activities:
Purchases of property and equipment....................... (276,548) (8,742)
Capitalized software development expenditures............. (293,442) --
Other non-current assets.................................. 1,297 709
----------- ---------
Net cash used in investing activities............. (568,693) (8,033)
----------- ---------
Cash flows from financing activities:
Advances on revolving credit facilities................... 350,000 --
Payments on notes payable................................. (71,490) (9,050)
Dividends paid on cumulative convertible preferred
stock.................................................. (23,437) --
----------- ---------
Net cash provided by (used in) financing
activities...................................... 255,073 (9,050)
----------- ---------
Net increase (decrease) in cash and cash
equivalents..................................... 86,618 (101,959)
Cash and cash equivalents, beginning of period.............. 53,424 140,042
----------- ---------
Cash and cash equivalents, end of period.................... $ 140,042 $ 38,083
=========== =========
Noncash investing activities:
Write-offs of long-term assets due to disposal of
segments............................................... $ 1,208,989 $ --
=========== =========
Accrual for operating losses of discontinued segments
during phase-out period................................ $ 342,971 $ --
=========== =========
Supplemental disclosure of cash flow information -- cash
paid for interest......................................... $ 148,212 $ 55,448
=========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-128
<PAGE> 473
HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND FOR THE NINE-MONTH
PERIOD ENDED JUNE 30, 1998
1. ORGANIZATION AND BUSINESS
Healthcare Interchange, Inc. was incorporated in 1991 and began operations
in 1992. Healthcare Interchange, Inc. and subsidiary (Company) is in the
business of providing electronic health data network services to a national
clientele through three operating segments; financial transactions, medical
televideo, and intercare. The financial transactions segment processes
electronic claims for health care providers. The medical televideo segment
develops, sells, and services televideo and minor medical equipment through a
wholly owned subsidiary, HII Telemedical Corp. (Telemedical). The Intercare
segment (Intercare) began operations in fiscal 1997, providing electronic claims
processing and data analysis for health care providers. Prior to October 1,
1996, Intercare was a development stage enterprise.
The consolidated financial statements at June 30, 1998 include the accounts
of Healthcare Interchange, Inc. and its wholly owned domestic subsidiary after
elimination of intercompany accounts and transactions. The Company's fiscal year
end is September 30.
Unaudited Interim Consolidated Financial Statements -- The consolidated
balance sheet of the Company as of September 30, 1998 and the related
consolidated statements of operations, changes in stockholders' equity (deficit)
and cash flows for the three-month period ended September 30, 1998 included in
the accompanying consolidated financial statements, which are unaudited, include
the accounts of Healthcare Interchange, Inc. and its wholly-owned subsidiary.
All significant intercompany accounts have been eliminated in consolidation. In
the opinion of management, all adjustments necessary for a fair presentation of
such financial statements have been included. Adjustments consist only of normal
recurring items.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Cash and Cash Equivalents -- The Company considers cash equivalents to
be securities held for cash management purposes having original maturities of
three months or less at the time of investment.
b. Inventories -- Inventories are stated at the lower of cost or market.
Cost is determined principally using the specific identification method.
Inventories at June 30, 1998 are comprised principally of raw materials.
c. Property, Equipment and Computer Software -- Property, equipment and
computer software are carried at cost. Depreciation and amortization is
calculated using the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the shorter of the lease term
or estimated useful life of the asset. Costs associated with the internal
development of software are capitalized once the marketability and technological
feasibility of the software have been established.
The property, equipment and computer software are depreciated on the
straight-line basis over the following useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Building.................................................... 28
Leasehold improvements...................................... 10
Furniture................................................... 7
Communications equipment.................................... 5
Computers and data handling equipment....................... 5
Purchased computer software................................. 5
Developed computer software................................. 3
</TABLE>
F-129
<PAGE> 474
HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND FOR THE NINE-MONTH
PERIOD ENDED JUNE 30, 1998
d. Income Taxes -- Deferred tax assets and liabilities are recognized for
the estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those differences are
expected to be recovered or settled.
e. Revenue Recognition -- The Company recognizes revenue from the sale of
its services in the period that the services are delivered or provided. Unearned
income on service contracts is amortized by the straight-line method over the
term of the contracts.
Revenue from the sale of the Company's products is recognized in the period
that the products are shipped to the customers.
f. Stock-Based Compensation -- The Company uses the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25), and related interpretations in accounting for its
stock options. The Company has adopted the pro forma disclosures-only provisions
of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation."
g. Use of Estimates -- 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 assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements. Estimates also affect the reported amounts of revenues
and expenses during the period. Actual results may differ from those estimates.
3. DISCONTINUED OPERATIONS
In fiscal 1999, the Company's Board of Directors approved a plan to
discontinue the operations of its Televideo and Intercare operating segments;
and on September 17, 1998, signed a letter of intent to sell substantially all
the assets of the financial transactions business to MEDE America Corporation
(MEDE America). See note 15.
The Company's consolidated financial statements as of June 30, 1998 and for
the nine-month period then ended include a charge of $2,073,601 to provide for
an after-tax loss on the disposal of the discontinued operations, including
estimated operating losses of $342,971 through the expected date of disposal.
Operating results for the nine-month period ended June 30, 1998 and
financial position as of June 30, 1998 of the discontinued segments are
summarized below:
Results of operations:
<TABLE>
<CAPTION>
NINE-MONTH PERIOD
ENDED JUNE 30, 1998
-------------------
<S> <C>
Net revenues............................................... $ 528,552
Loss from discontinued operations.......................... (4,100,385)
===========
</TABLE>
F-130
<PAGE> 475
HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND FOR THE NINE-MONTH
PERIOD ENDED JUNE 30, 1998
Financial position:
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1998
-------------
<S> <C>
Current:
Accounts receivable, net............................... $162,271
Inventories............................................ 74,501
--------
$236,772
========
Non-current -- property, equipment and computer software,
net.................................................... $176,455
========
</TABLE>
4. SERVICE ACCOUNTS RECEIVABLE
A summary of activity in the allowance for doubtful accounts of the
continuing operations of the Company for the nine-month period ended June 30,
1998 is summarized as follows:
<TABLE>
<S> <C>
Balance at beginning of period.............................. $52,238
Provision for doubtful accounts............................. 2,000
Accounts written-off........................................ (23,529)
-------
Balance at end of period.................................... $30,709
=======
</TABLE>
5. PROPERTY, EQUIPMENT AND COMPUTER SOFTWARE
Property, equipment and computer software of the continuing operations of
the Company as of June 30, 1998 are as follows:
<TABLE>
<S> <C>
Land........................................................ $ 7,652
Building.................................................... 30,610
Leasehold improvements...................................... 64,220
Furniture................................................... 453,499
Communications equipment.................................... 165,127
Computers and data handling equipment....................... 436,435
Computer software........................................... 160,724
----------
1,318,267
Less accumulated depreciation and amortization.............. 706,689
----------
$ 611,578
==========
</TABLE>
6. REVOLVING CREDIT FACILITIES
On November 4, 1996, the Company entered into a revolving credit facility
with a local bank which allows the Company to borrow up to a maximum of
$750,000. The revolving credit facility bears interest at a fixed prime plus 1%
(9.5% at June 30, 1998) and requires monthly payments of interest. The due date
on the revolving credit facility has been extended from the original December
31, 1997 due date and is now due on October 31, 1998. The average outstanding
borrowings on the revolving credit facility arrangement was $750,000 at a
weighted average interest weight of 9.6% for the nine-month period ended June
30, 1998. The revolving credit facility had a balance of $750,000 at June 30,
1998.
On November 4, 1996, the Company entered into a revolving credit facility
with a local bank which allows the Company to borrow up to a maximum of
$500,000. The revolving credit facility bears interest at
F-131
<PAGE> 476
HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND FOR THE NINE-MONTH
PERIOD ENDED JUNE 30, 1998
a fixed prime less 0.5% (8.0% at June 30, 1998) and requires monthly payments of
interest, with the balance due on November 4, 1998. The average outstanding
borrowings on the revolving credit facility was $500,000 at a weighted average
interest weight of 8.1% for the nine-month period ended June 30, 1998. The
revolving credit facility had a balance of $500,000 at June 30, 1998.
On June 4, 1997, the Company entered into a revolving credit facility with
a local bank which allows the Company to draw up to a maximum of $2,500,000. The
revolving credit facility bears an interest rate of prime less 0.625% (7.88% at
June 30, 1998), requires monthly payments of interest, and is secured by
substantially all assets of the Company with the balance due on December 31,
1999. The average outstanding borrowings on the revolving credit facility was
approximately $877,000 at a weighted average interest rate of 8.0% for the
nine-month period ended June 30, 1998. The revolving credit facility had a
balance of $1,010,000 at June 30, 1998.
As of June 30, 1998, the carrying value of the Company's revolving credit
facilities approximated fair value based upon borrowing rates currently
available for debt instruments with similar remaining terms and maturities. The
Company's $750,000 revolving credit facility and notes payable are secured by
substantially all of the Company's assets. Additionally, the $500,000 and
$2,500,000 revolving credit facilities are guaranteed by two of the Company's
stockholders.
The Company's commitment agreement with the local bank for the notes
payable and revolving credit facilities contains restrictive covenants which
include the maintenance of minimum tangible net worth, as defined, and certain
financial ratios. The Company failed to meet certain covenant requirements which
has placed the Company in technical default. Consequently, the Company has
classified the entire outstanding balance of borrowings under the notes payable
and revolving credit facilities as a current liability.
7. NOTES PAYABLE
On February 28, 1995, the Company entered into a $300,000 note payable with
a local bank. The note was paid in full by the Company in February 1998. The
note payable accrued interest at a fixed rate of 9.0% and required monthly
payments of principal and interest.
On May 30, 1995, the Company entered into a $170,000 note payable with a
local bank. The note bears interest at a fixed rate of 9.75%, requires monthly
payments of principal and interest, with the balance due on May 30, 2000, and is
secured by substantially all assets of the Company. The note is payable on
demand, and accordingly, is classified as a current liability. The balance at
June 30, 1998 was $73,751.
8. RELATED PARTY TRANSACTIONS
During the nine-month period ended June 30, 1998, two stockholders provided
network and other services to the Company. Total expenses incurred by the
Company for these services totaled approximately $116,000 for the nine-month
period ended June 30, 1998. At June 30, 1998, the Company owed approximately
$152,000, to these stockholders for such services.
Revenue received from services provided to stockholders totaled
approximately $844,000 for the nine-month period ended June 30, 1998. Due from
stockholders represents amounts receivable for services provided to the
stockholders.
F-132
<PAGE> 477
HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND FOR THE NINE-MONTH
PERIOD ENDED JUNE 30, 1998
9. LEASE COMMITMENTS
The Company leases certain office space and equipment under various lease
agreements. Rent expense of the continuing operations of the Company totaled
$183,291 for the nine-month period ended June 30, 1998.
Future minimum lease payments under noncancellable operating leases with
maturities in excess of one year related to continuing operations are as
follows:
<TABLE>
<S> <C>
1999........................................................ $238,240
2000........................................................ 240,133
2001........................................................ 212,320
2002........................................................ 208,969
2003........................................................ 199,460
Thereafter.................................................. 395,841
</TABLE>
10. STOCKHOLDERS' EQUITY
Each share of cumulative convertible preferred stock (Preferred Stock) held
and issuable to common holders requires a $1.50 annual dividend. Preferred Stock
is redeemable, at the option of the Company, for cash of $24 per share plus
unpaid dividends quarterly. Each share of Preferred Stock is convertible, at the
option of the holder, into a share of common stock (the class of common stock
the holder already owns) upon change in control of the Company or sale of
substantially all the Company's assets, as defined in the Company's Articles of
Incorporation. The Company has reserved 31,250 shares of Class A and Class B
common stock for the purpose of effecting the conversion of the Preferred Stock.
Pursuant to an agreement between all stockholders and the Company, all
preferred and common stock outstanding is subject to certain restrictions on
disposition and transfer. The stockholder agreement requires that stockholders
must first offer shares to be sold or transferred to other stockholders and/or
the Company in accordance with terms specified in the stockholder agreement.
11. EMPLOYEE STOCK OPTION PLANS
1994 Stock Option Plan -- On March 22, 1994, the Board of Directors of the
Company adopted the 1994 Stock Option Plan (1994 Plan) pursuant to which
incentive stock options may be granted to employees or directors. Under the 1994
Plan, options to purchase 12,000 shares of Class C common stock may be granted
for a term not to exceed 10 years (five years with respect to a stockholder who
owns more than 10% of the capital stock of the Company) and must be granted
within 10 years from the date of adoption of the 1994 Plan. The exercise price
of all stock options must be at least equal to the fair market value (110% of
fair market value for a stockholder who owns more than 10% of the capital stock
of the Company) of the shares on the date granted.
1997 Stock Option Plan -- On October 30, 1997, the Company's Board of
Directors adopted a second stock option plan, the 1997 Stock Option Plan (1997
Plan). The purpose of the 1997 Plan is to provide additional employee
incentives. Under the 1997 Plan, up to 24,000 options to purchase Class C common
stock may be granted. The other significant provisions under the 1997 Plan are
similar to those under the 1994 Plan, as described above.
F-133
<PAGE> 478
HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND FOR THE NINE-MONTH
PERIOD ENDED JUNE 30, 1998
Aggregate information relating to stock option activity under the 1994 Plan
and 1997 Plan for the nine-month period ended June 30, 1998 is as follows:
<TABLE>
<S> <C>
Number of shares under stock options:
Outstanding at beginning of period........................ 9,999
Granted................................................... 12,850
-------
Outstanding at end of period.............................. 22,849
=======
Exercisable at end of period.............................. 9,999
=======
Weighted average exercise price:
Granted................................................... $ 100
Outstanding at end of period.............................. 66.74
Exercisable at end of period.............................. 24.00
</TABLE>
Aggregate information relating to stock options outstanding and stock
options exercisable at June 30, 1998 is a follows:
OPTIONS OUTSTANDING:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OUTSTANDING AT REMAINING
EXERCISE PRICE JUNE 30, 1998 CONTRACTUAL LIFE
- -------------- -------------- ----------------
<S> <C> <C>
$ 24 9,999 6.25
100 12,850 9.25
------
22,849
======
</TABLE>
OPTIONS EXERCISABLE:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OUTSTANDING AT REMAINING
EXERCISE PRICE JUNE 30, 1998 CONTRACTUAL LIFE
- -------------- -------------- ----------------
<S> <C> <C>
$24 9,999 3.72
</TABLE>
No compensation expense relating to stock option grants was recorded in the
nine-month period ended June 30, 1998 as the option exercise prices were equal
to the estimated fair value at the dates of grant.
Pro forma information regarding loss and loss per share is required by SFAS
No. 123, and has been determined as if the Company had accounted for its stock
options under the fair value method of SFAS No. 123. However, the full impact of
calculating compensation cost for stock options under SFAS No. 123 is not
reflected in the pro forma net loss amounts presented below as compensation cost
does not reflect options granted prior to October 1, 1996 which vest subsequent
to that date. The fair value for options granted in the nine-month period ended
June 30, 1998 was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
NINE-MONTH PERIOD
ENDED JUNE 30, 1998
-------------------
<S> <C>
Risk-free interest rate.................................... 8.5%
Dividend yield............................................. 0.0%
Volatility factor.......................................... 0.0%
Weighted average expected life............................. 10 years
</TABLE>
F-134
<PAGE> 479
HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND FOR THE NINE-MONTH
PERIOD ENDED JUNE 30, 1998
The Company's pro forma net loss compared to reported amounts are as
follows:
<TABLE>
<CAPTION>
NINE-MONTH PERIOD
ENDED JUNE 30, 1998
-------------------
<S> <C>
Net loss:
As reported.............................................. $(3,686,827)
Pro forma................................................ (3,783,647)
Weighted average fair value per share of options granted
during the year.......................................... 56.31
</TABLE>
12. EMPLOYEE BENEFIT PLAN
The Company maintains a qualified, contributory, 401(k) profit-sharing plan
covering substantially all employees. Employees are allowed to contribute
between 1% and 15% of their compensation to the plan, not to exceed the
statutory maximum. The plan provides for contributions by the Company of 50% of
the first 6% of an employee's salary deferral. The plan also provides for
discretionary contributions by the Company in such amounts as the Board of
Directors may annually determine. There were no discretionary contributions made
in the nine-month period ended June 30, 1998. Expense associated with the plan
for continuing operations of the Company totaled $39,371 for the nine-month
period ended June 30, 1998.
13. INCOME TAXES
No provision for income taxes was recorded for the nine-month period ended
June 30, 1998, as substantially all income tax attributable to continuing and
discontinued operations was offset by the utilization of net operating loss
carryforwards.
The difference between the effective income tax rate applied to income from
continuing operations for financial statement purposes and the U.S. federal
income tax rate of 34% for the nine-month period ended June 30, 1998 is as
follows:
<TABLE>
<S> <C>
Expected provision at statutory rate........................ $ 140,610
Nondeductible meals and entertainment....................... 9,894
State income taxes.......................................... 5,624
Change in valuation allowance............................... (156,128)
---------
$ --
=========
</TABLE>
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<PAGE> 480
HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND FOR THE NINE-MONTH
PERIOD ENDED JUNE 30, 1998
The tax effects of temporary differences that give rise to the deferred tax
assets and liability as of June 30, 1998 are as follows:
<TABLE>
<CAPTION>
CURRENT NONCURRENT
--------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......................... $ -- $ 1,362,687
Provision for doubtful accounts.......................... 11,669 --
Deferred income.......................................... 21,563 --
Loss on discontinued operations.......................... 787,968 --
Other.................................................... 2,949 --
--------- -----------
824,149 1,362,687
Less valuation allowance................................. (824,149) (1,332,185)
--------- -----------
-- 30,502
Deferred tax liability -- excess of tax over financial
statement fixed assets................................ -- (30,502)
--------- -----------
Net deferred tax asset (liability)....................... $ -- --
========= ===========
</TABLE>
SFAS No. 109 requires that a valuation allowance be established for
deferred tax assets if, based on the weight of evidence, it is more likely than
not that some portion or all of the deferred tax asset will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. The Company has approximately $3,500,000 of net
operating loss carryforwards for income tax purposes, which will begin to expire
in the year 2009.
14. YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a "00" date as
the year 1900 rather than the year 2000. This could result in computer system
failures or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions or engage in normal
business activities. The Company has developed a Year 2000 remediation plan and
has begun testing and converting its computer systems and applications in order
to identify and solve significant Year 2000 issues. In addition, the Company is
discussing with its vendors the possibility of any communication difficulties or
other disruptions that may affect the Company.
F-136
<PAGE> 481
HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998 AND FOR THE NINE-MONTH
PERIOD ENDED JUNE 30, 1998
15. EVENTS SUBSEQUENT TO BALANCE SHEET DATE
Sale of Company's Capital Stock -- On October 30, 1998, the Company
completed the sale of its financial transactions business to MEDE America. This
transaction was effected through the sale of the Company's capital stock to MEDE
America for cash of $11.6 million. Proceeds from the sale were used as follows:
<TABLE>
<S> <C>
Repayment of borrowings under revolving credit facilities
and notes payable, including accrued interest............. $ 2,339,990
Payment of certain accrued expenses and other liabilities... 1,299,982
Deposit into escrow account related to post-sale
contingencies............................................. 400,000
Distributions to stockholders............................... 7,560,028
-----------
$11,600,000
===========
</TABLE>
Disposition of Discontinued Operations -- Prior to the closing of the sale,
the Company disposed of the assets and operations of the discontinued Televideo
and Intercare segments. Substantially all assets and a contract of Televideo
were transferred to a former employee in settlement of a legal action, and the
stock of the Televideo subsidiary was distributed to the Company's stockholders.
The assets and operations of Intercare were sold to Providers Edge Incorporated,
a corporation formed by certain former Intercare employees. The accounts
payable, accrued liabilities, and borrowings related to Televideo and Intercare
were retained by the Company.
F-137
<PAGE> 482
ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
HEALTHEON CORPORATION
WATER ACQUISITION CORP.
AND
WEBMD, INC.
DATED AS OF MAY 20, 1999
<PAGE> 483
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I THE MERGER............................................... 1
1.1 The Merger.................................................. 1
1.2 Effective Time; Closing..................................... 2
1.3 Effect of the Merger........................................ 2
1.4 Certificate of Incorporation; Bylaws........................ 3
1.5 Directors and Officers...................................... 3
1.6 Effect on Capital Stock..................................... 3
1.7 Dissenting Shares........................................... 4
1.8 Surrender of Certificates................................... 5
1.9 No Further Transfers of Company Capital Stock............... 6
1.10 Lost, Stolen or Destroyed Certificates...................... 6
1.11 Tax Consequences............................................ 6
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY........... 6
2.1 Organization of the Company................................. 6
2.2 Company Capital Structure................................... 7
2.3 Obligations With Respect to Capital Stock................... 9
2.4 Authority; Non-Contravention................................ 10
2.5 SEC Filings; Company Financial Statements; Offer to
Purchase.................................................... 11
2.6 Absence of Certain Changes or Events........................ 12
2.7 Taxes....................................................... 12
2.8 Title to Properties; Absence of Liens and Encumbrances...... 13
2.9 Intellectual Property....................................... 14
2.10 Compliance; Permits; Restrictions........................... 16
2.11 Litigation.................................................. 16
2.12 Brokers' and Finders' Fees.................................. 17
2.13 Interested Party Transactions............................... 17
2.14 Employee Benefit Plans...................................... 17
2.15 Environmental Matters....................................... 20
2.16 Year 2000 Compliance........................................ 20
2.17 Agreements, Contracts and Commitments....................... 21
2.18 Change of Control Payments.................................. 22
2.19 Disclosure.................................................. 22
2.20 Board Approval.............................................. 22
2.21 Fairness Opinion............................................ 22
2.22 Restrictions on Business Activities......................... 22
2.23 Insurance................................................... 22
2.24 State Takeover Statutes..................................... 23
2.25 Representations Complete.................................... 23
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER 23
SUB...............................................................
3.1 Organization of Parent...................................... 23
3.2 Parent Capital Structure.................................... 23
3.3 Obligations With Respect to Capital Stock................... 24
3.4 Authority; Non-Contravention................................ 24
3.5 SEC Filings; Parent Financial Statements.................... 25
3.6 Absence of Certain Changes or Events........................ 26
3.7 Taxes....................................................... 26
3.8 Title to Properties; Absence of Liens and Encumbrances...... 27
3.9 Intellectual Property....................................... 28
3.10 Compliance; Permits; Restrictions........................... 29
</TABLE>
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<PAGE> 484
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
3.11 Litigation.................................................. 29
3.12 Brokers' and Finders' Fees.................................. 29
3.13 Environmental Matters....................................... 29
3.14 Year 2000 Compliance........................................ 30
3.15 Agreements, Contracts and Commitments....................... 30
3.16 Disclosure.................................................. 30
3.17 Board Approval.............................................. 30
3.18 Fairness Opinion............................................ 30
3.19 Restrictions on Business Activities......................... 31
3.20 Interested Party Transactions............................... 31
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME..................... 31
4.1 Conduct of Business by the Company.......................... 31
4.2 Conduct of Business by Parent............................... 33
ARTICLE V ADDITIONAL AGREEMENTS.................................... 35
5.1 Prospectus/Proxy Statement; Registration Statement; Other
Filings; Board Recommendations.............................. 35
5.2 Meeting of Company Stockholders............................. 36
5.3 Meeting of Parent Stockholders.............................. 37
5.4 Confidentiality; Access to Information...................... 38
5.5 No Solicitation............................................. 38
5.6 Public Disclosure........................................... 39
5.7 Reasonable Efforts; Notification............................ 39
5.8 Third Party Consents........................................ 40
5.9 Stock Options, Warrants and Employee Benefits............... 40
5.10 Form S-8.................................................... 41
5.11 Indemnification............................................. 41
5.12 Board of Directors of Combined Company...................... 41
5.13 Officers of the Combined Company............................ 41
5.14 Change of Name; Increase of Authorized Shares............... 41
5.15 Headquarters of Combined Company............................ 42
5.16 Branding.................................................... 42
5.17 Nasdaq Listing.............................................. 42
5.18 Company Affiliate Agreement................................. 42
5.19 Comfort Letters............................................. 42
5.20 Stockholder Agreements...................................... 42
5.21 FIRPTA Compliance........................................... 42
5.22 Additional Stockholder Vote................................. 43
ARTICLE VI CONDITIONS TO THE MERGER................................ 43
6.1 Conditions to Obligations of Each Party to Effect the
Merger...................................................... 43
6.2 Additional Conditions to Obligations of the Company......... 44
6.3 Additional Conditions to the Obligations of Parent and
Merger Sub.................................................. 44
ARTICLE VII TERMINATION, AMENDMENT AND WAIVER...................... 46
7.1 Termination................................................. 46
7.2 Notice of Termination; Effect of Termination................ 47
7.3 Fees and Expenses........................................... 47
7.4 Amendment................................................... 47
7.5 Extension; Waiver........................................... 47
ARTICLE VIII GENERAL PROVISIONS.................................... 47
8.1 Non-Survival of Representations and Warranties.............. 47
8.2 Notices..................................................... 47
8.3 Interpretation; Knowledge................................... 48
</TABLE>
-III-
<PAGE> 485
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
8.4 Counterparts................................................ 49
8.5 Entire Agreement; Third Party Beneficiaries................. 49
8.6 Severability................................................ 49
8.7 Remedies.................................................... 49
8.8 Governing Law............................................... 49
8.9 Rules of Construction....................................... 49
8.10 Assignment.................................................. 49
8.11 WAIVER OF JURY TRIAL........................................ 49
</TABLE>
-IV-
<PAGE> 486
INDEX OF EXHIBITS
<TABLE>
<S> <C>
Exhibit A Form of Company Voting Agreement
Exhibits B-1,
B-2, B-3 and
B-4 Forms of Company Conversion Agreements
Exhibit C Form of Microsoft Stockholder
Agreement
Exhibit D Form of Parent Voting Agreement
</TABLE>
*****
-i-
<PAGE> 487
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION is made and entered into as of
May 20, 1999, among Healtheon Corporation, a Delaware corporation ("PARENT"),
Water Acquisition Corp., a Georgia corporation and a wholly-owned subsidiary of
Parent ("MERGER SUB"), and WebMD, Inc., a Georgia corporation (the "COMPANY").
RECITALS
A. Upon the terms and subject to the conditions of this Agreement and in
accordance with the Georgia Business Corporation Code ("GEORGIA LAW"), Parent,
Merger Sub and the Company intend to enter into a business combination
transaction.
B. The Board of Directors of the Company (i) has determined that the Merger
(as defined in Section 1.1) is consistent with and in furtherance of the
long-term business strategy of the Company and fair to, and in the best
interests of, the Company and its stockholders, (ii) has approved this
Agreement, the Merger and the other transactions contemplated by this Agreement
and (iii) has determined to recommend that the stockholders of the Company adopt
and approve this Agreement and approve the Merger.
C. The Board of Directors of Parent (i) has determined that the Merger (as
defined in Section 1.1) is consistent with and in furtherance of the long-term
business strategy of Parent and fair to, and in the best interests of, Parent
and its stockholders, (ii) has approved this Agreement, the Merger and the other
transactions contemplated by this Agreement, and (iii) has determined to
recommend that the stockholders of Parent approve the issuance of shares of
Parent Common Stock (as defined below) pursuant to the Merger.
D. Concurrently with the execution of this Agreement, and as a condition
and inducement to Parent's and Company's respective willingness to enter into
this Agreement, certain stockholders of the Company are entering into Voting
Agreements in substantially the form attached hereto as Exhibit A-1 (the
"COMPANY VOTING AGREEMENTS"), certain stockholders of the Company are entering
into Conversion Agreements in substantially the form attached hereto as Exhibits
B-1, B-2, B-3, and B-4 (the "COMPANY CONVERSION AGREEMENTS"), and Microsoft
Corporation ("MICROSOFT") is entering into a Stockholder Agreement (the
"MICROSOFT AGREEMENT") in substantially the form of Exhibit C, (Exhibit C is
included in the definition of Company Voting Agreements for the purposes
hereof). Certain Stockholders of Parent are entering into Voting Agreements in
substantially the form attached hereto as Exhibit D (the "PARENT VOTING
AGREEMENTS").
E. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "CODE").
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of Georgia Law, Merger Sub shall be merged with and into
the Company (the "MERGER"), the separate corporate existence of Merger Sub shall
cease and the Company shall continue as the surviving corporation. The Company,
as the surviving
-1-
<PAGE> 488
corporation after the Merger, is hereinafter sometimes referred to as the
"SURVIVING CORPORATION". Notwithstanding the foregoing:
(a) Parent and the Company may, at any time prior to the mailing of the
Proxy Statement/ Prospectus (as defined in Section 2.19 below), mutually agree
to change the structure of the Merger to a forward triangular merger with the
Company merging with and into Merger Sub and Merger Sub surviving the Merger. In
such event, Merger Sub, as the surviving corporation after the Merger, is
hereinafter sometimes referred to as the "SURVIVING CORPORATION".
(b) Parent or the Company may, at any time prior to the mailing of the
Proxy Statement/ Prospectus, reasonably require that the structure of the Merger
be pursuant to a new Delaware corporation referred to herein as Newco would be
formed by Parent and the Company solely for the purpose of the transactions
contemplated hereunder; (i) a newly formed, wholly owned subsidiary of Newco
incorporated in Delaware would be merged with and into Parent, with Parent being
the surviving corporation of such merger (the "PARENT MERGER"), and all
outstanding shares of Parent Common Stock would be converted, on a share for
share basis, into shares of Newco Common Stock having identical rights,
preferences and privileges, as shares of Parent Common Stock; and (ii) another
newly formed, wholly owned subsidiary of Newco incorporated in Georgia would be
merged with and into the Company, with the Company being the surviving
corporation of such merger (the "COMPANY MERGER"), and all outstanding shares of
Company Capital Stock will be automatically converted into the right to receive
shares of Newco Common Stock in the same manner specified in Section 1.6(a)
below as if the Newco Common Stock were Parent Common Stock; provided that each
share of any series or class of Company Capital Stock that, as a separate voting
group under Georgia Law has a right to approve the Company Merger as a separate
voting group, does not in fact approve the Company Merger (a "NON APPROVING
SERIES") outstanding prior to the Company Merger would remain outstanding as a
share of the applicable series or class in the Company thereafter. For federal
income tax purposes, it is intended that the Parent Merger and the Company
Merger qualify as a reorganization under the provisions of Section 368(a) of the
Internal Revenue Code and/or as an exchange under the provisions of Section
351(a) of the Internal Revenue Code. For purposes of this Agreement, the Parent
Voting Agreements, the Company Voting Agreements and the Company Conversion
Agreements, the term Merger as used herein and therein shall be deemed to mean
the Parent Merger and/or the Company Merger, as applicable. If the alternative
in this paragraph (b) is applicable, the parties shall execute an appropriate
amendment to this Agreement to effect such changes as are necessary and
appropriate to effect the structure of the Merger described in this paragraph
and to provide that Newco shall cause the Company to honor the Company's
warrants and to provide shares of Newco common stock upon exercise of such
securities.
1.2 Effective Time; Closing. Subject to the provisions of this Agreement,
the parties hereto shall cause the Merger to be consummated by filing Articles
of Merger with the Secretary of State of the State of Georgia in accordance with
the relevant provisions of Georgia Law (the "ARTICLES OF MERGER") (the time of
such filing with the Secretary of State of the State of Georgia (or such later
time as may be agreed in writing by the Company and Parent and specified in the
Articles of Merger) being the "EFFECTIVE TIME") as soon as practicable on or
after the Closing Date (as herein defined). Unless the context otherwise
requires, the term "AGREEMENT" as used herein refers collectively to this
Agreement and Plan of Reorganization and the Articles of Merger. The closing of
the Merger (the "CLOSING") shall take place at the offices of Wilson Sonsini
Goodrich & Rosati, Professional Corporation, at a time and date to be specified
by the parties, which shall be no later than the second business day after the
satisfaction or waiver of the conditions set forth in Article VI, or at such
other time, date and location as the parties hereto agree in writing (the
"CLOSING DATE").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement and the applicable provisions of Georgia
Law. Without limiting the generality of the foregoing, and subject thereto, at
the Effective Time all the property, rights, privileges, powers and franchises
of the Company and Merger Sub shall vest in the Surviving Corporation, and all
debts, liabilities and duties of the Company and Merger Sub shall become the
debts, liabilities and duties of the Surviving Corporation.
-2-
<PAGE> 489
1.4 Certificate of Incorporation; Bylaws.
(a) Subject to Section 5.11, at the Effective Time, the Articles of
Incorporation of Merger Sub, as in effect immediately prior to the Effective
Time, shall be the Articles of Incorporation of the Surviving Corporation until
thereafter amended as provided by law and such Articles of Incorporation of the
Surviving Corporation; provided, however, that at the Effective Time the
Articles of Incorporation of the Surviving Corporation shall be amended so that
the name of the Surviving Corporation shall be "WebMD, Inc."
(b) The Bylaws of Merger Sub, as in effect immediately prior to the
Effective Time, shall be, at the Effective Time, the Bylaws of the Surviving
Corporation until thereafter amended.
1.5 Directors and Officers. The initial directors of the Surviving
Corporation shall be the directors of Merger Sub immediately prior to the
Effective Time, until their respective successors are duly elected or appointed
and qualified. The initial officers of the Surviving Corporation shall be the
officers of the Company immediately prior to the Effective Time, until their
respective successors are duly appointed.
1.6 Effect on Capital Stock. Subject to the terms and conditions of this
Agreement, at the Effective Time, by virtue of the Merger and without any action
on the part of Merger Sub, the Company or the holders of any of the following
securities, the following shall occur:
(a) Conversion of Company Capital Stock. Each share of Common Stock of
the Company ("COMPANY COMMON STOCK") issued and outstanding immediately prior to
the Effective Time, other than any Dissenting Shares (as defined in Section
1.7(a) hereof), and other than any shares of the Company Capital Stock to be
canceled pursuant to Section 1.6(b), will be canceled and extinguished and
automatically converted, without regard to any conversion rights contained in
the Company's Articles of Incorporation, into the right to receive 1.815 shares
of Parent Common Stock (the "EXCHANGE RATIO") (subject to Section 1.6(f)) upon
surrender of the certificate representing such share of the Company Capital
Stock in the manner provided in Section 1.7 (or in the case of a lost, stolen or
destroyed certificate, upon delivery of an affidavit (and bond, if required) in
the manner provided in Section 1.10). Each share of Preferred Stock of the
Company ("COMPANY PREFERRED STOCK" and together with the Company Common Stock,
the "COMPANY CAPITAL STOCK") issued and outstanding immediately prior to the
Effective Time (other than Dissenting Shares) will be cancelled and extinguished
and automatically converted without regard to any conversion rights or rights to
receive any liquidation or other preference contained in the Company's Articles
of Incorporation into the right to receive a number of shares of Parent Common
Stock equal to (i) the Exchange Ratio (subject to Section 1.6(f)) multiplied by
(ii) the number of shares of Company Common Stock into which such share of
Company Preferred Stock is convertible immediately prior to the Effective Time
(without giving effect to any limitations on the exercise of such conversion
right), upon surrender of the certificate representing such Company Preferred
Stock, in the manner provided in Section 1.7 (or in the case of a lost, stolen
or destroyed certificate, upon delivery of an affidavit (and bond) if required)
in the manner provided in Section 1.10. If any shares of Company Capital Stock
outstanding immediately prior to the Effective Time (but giving effect to the
Merger) are unvested or are subject to a repurchase option, risk of forfeiture
or other similar condition under any applicable restricted stock purchase
agreement or other similar agreement with the Company, then the shares of Parent
Common Stock issued in exchange for such shares of Company Capital Stock will
also be unvested and subject to the same repurchase option, risk of forfeiture
or other similar condition (except as provided in the applicable agreement or
plan), and the certificates representing such shares of Parent Common Stock may
accordingly be marked with appropriate legends. The Company shall take all
action that may be necessary to ensure that, from and after the Effective Time,
Parent or the Surviving Corporation is entitled to exercise any such repurchase
option or other right set forth in any such restricted stock purchase agreement
or other similar agreement.
(b) Cancellation of Parent-Owned Stock. Each share of Company Capital
Stock held by the Company or owned by Merger Sub, Parent or any direct or
indirect wholly-owned subsidiary of the Company or of Parent immediately prior
to the Effective Time shall be canceled and extinguished without any conversion
thereof.
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<PAGE> 490
(c) Stock Options; Employee Stock Purchase Plans; Warrants. At the
Effective Time, all options to purchase Company Capital Stock then outstanding
under the WebMD, Inc. Amended and Restated 1997 Stock Incentive Plan (the "1997
Plan"), the Director Stock Option Plan of WebMD, Inc. (the "Director Plan"), the
Direct Medical Knowledge, Inc. 1997 Stock Option/Stock Issuance Plan, which was
assumed by the Company in connection with its acquisition of Director Medical
Knowledge, Inc. (the "DMK Plan"), the Sapient Health Network, Inc. 1996 Stock
Incentive Plan, which the Company assumed in connection with its acquisition of
Sapient Health Network, Inc. (the "SHN Plan"), and the Employment Agreement
dated as of September 30, 1998 between the Company and Jeffrey T. Arnold (the
"ARNOLD EMPLOYMENT AGREEMENT" and, together with the 1997 Plan, the Director
Plan, the DMK Plan and the SHN Plan, the "COMPANY STOCK OPTION PLANS") shall be
assumed by Parent in accordance with Section 5.9 hereof. At the Effective Time,
the issued and outstanding warrants to purchase Company Capital Stock set forth
on Part 2.2 of the Company Schedules (collectively, the "WARRANTS") shall be, in
connection with the Merger, assumed by Parent in accordance with Section 5.9.
Part 2.2 of the Company Schedules describes, with respect to each warrant
outstanding, the number of shares of Company Capital Stock into which such
warrant may be exercised, the exercise price, the name and address of the holder
of record, the grant date, the termination date, whether such warrant has
registration rights, and, if applicable, a description of such registration
rights and whether cashless exercise of such warrant is permissible.
(d) Capital Stock of Merger Sub. Each share of Common Stock of Merger
Sub (the "MERGER SUB COMMON STOCK") issued and outstanding immediately prior to
the Effective Time shall be converted into one validly issued, fully paid and
nonassessable share of Common Stock of the Surviving Corporation. Each
certificate evidencing ownership of shares of Merger Sub Common Stock shall
evidence ownership of such shares of capital stock of the Surviving Corporation.
(e) Fractional Shares. No fraction of a share of Parent Common Stock
will be issued by virtue of the Merger, but in lieu thereof each holder of
shares of Company Capital Stock who would otherwise be entitled to a fraction of
a share of Parent Common Stock (after aggregating all fractional shares of
Parent Common Stock that otherwise would be received by such holder) shall, upon
surrender of such holder's Certificate(s) (as defined in Section 1.8(c)),
receive from Parent an amount of cash (rounded to the nearest whole cent),
without interest, equal to the product of (i) such fraction, multiplied by (ii)
the average closing price of one share of Parent Common Stock for the ten (10)
most recent days that Parent Common Stock has traded ending on the trading day
ending one day prior to the Closing Date, as reported on the Nasdaq National
Market System ("NASDAQ").
(f) Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted
to reflect appropriately the effect of any stock split, reverse stock split,
stock dividend (including any dividend or distribution of securities convertible
into Parent Common Stock or Company Capital Stock), reorganization,
recapitalization, reclassification or other like change with respect to Parent
Common Stock or Company Capital Stock occurring on or after the date hereof and
prior to the Effective Time.
1.7 Dissenting Shares.
(a) Notwithstanding any other provisions of this Agreement to the
contrary, any shares of Company Capital Stock held by a holder who has exercised
dissenters' rights for such shares in accordance with Georgia Law and who, as of
the Effective Time, has not effectively withdrawn or lost such dissenters'
rights ("DISSENTING SHARES"), shall not be converted into or represent a right
to receive the consideration for Company Capital Stock set forth in Section 1.6
hereof, but the holder thereof shall only be entitled to such rights as are
provided by Georgia Law.
(b) Notwithstanding the provisions of Section 1.7(a) hereof, if any
holder of Dissenting Shares shall effectively withdraw or lose (through failure
to perfect or otherwise) such holder's dissenters' rights under Georgia Law,
then, as of the later of the Effective Time and the occurrence of such event,
such holder's shares shall automatically be converted into and represent only
the right to receive the consideration for Company Capital Stock set forth in
Section 1.6 hereof, without interest thereon, upon surrender of the certificate
representing such shares.
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<PAGE> 491
(c) The Company shall give Parent (i) prompt notice of any written
demand for appraisal received by the Company pursuant to the applicable
provisions of Georgia Law; and (ii) the opportunity to participate in all
negotiations and proceedings with respect to such demands. The Company shall
not, except with the prior written consent of Parent, make any payment with
respect to any such demands or offer to settle or settle any such demands.
1.8 Surrender of Certificates.
(a) Exchange Agent. Parent shall select an institution reasonably
satisfactory to the Company to act as the exchange agent (the "EXCHANGE AGENT")
in the Merger.
(b) Parent to Provide Common Stock. Promptly after the Effective Time,
Parent shall make available to the Exchange Agent for exchange in accordance
with this Article I, the shares of Parent Common Stock issuable pursuant to
Section 1.6 in exchange for outstanding shares of Company Capital Stock, and
cash in an amount sufficient for payment in lieu of fractional shares pursuant
to Section 1.6(e) and any dividends or distributions which holders of shares of
Company Capital Stock may be entitled pursuant to Section 1.8(d).
(c) Exchange Procedures. Promptly after the Effective Time, Parent shall
cause the Exchange Agent to mail to each holder of record (as of the Effective
Time) of a certificate or certificates (the "CERTIFICATES") which immediately
prior to the Effective Time represented outstanding shares of Company Capital
Stock whose shares were converted into the right to receive shares of Parent
Common Stock pursuant to Section 1.6, cash in lieu of any fractional shares
pursuant to Section 1.6(f) and any dividends or other distributions pursuant to
Section 1.8(d), (i) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon delivery of the Certificates to the Exchange Agent and shall be in
such form and have such other provisions as Parent may reasonably specify) and
(ii) instructions for use in effecting the surrender of the Certificates in
exchange for certificates representing shares of Parent Common Stock, cash in
lieu of any fractional shares pursuant to Section 1.6(e) and any dividends or
other distributions pursuant to Section 1.8(d). Upon surrender of Certificates
for cancellation to the Exchange Agent or to such other agent or agents as may
be appointed by Parent, together with such letter of transmittal, duly completed
and validly executed in accordance with the instructions thereto, the holders of
such Certificates shall be entitled to receive in exchange therefor certificates
representing the number of whole shares of Parent Common Stock, payment in lieu
of fractional shares which such holders have the right to receive pursuant to
Section 1.6(e) and any dividends or distributions payable pursuant to Section
1.8(d), and the Certificates so surrendered shall forthwith be canceled. Until
so surrendered, outstanding Certificates will be deemed from and after the
Effective Time, for all corporate purposes, subject to Section 1.8(d) as to the
payment of dividends, to evidence the ownership of the number of full shares of
Parent Common Stock, into which such shares of Company Capital Stock shall have
been so converted and the right to receive an amount in cash in lieu of the
issuance of any fractional shares in accordance with Section 1.6(e) and any
dividends or distributions payable pursuant to Section 1.8(d).
(d) Distributions With Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the date of this Agreement with
respect to Parent Common Stock with a record date after the Effective Time will
be paid to the holders of any unsurrendered Certificates with respect to the
shares of Parent Common Stock represented thereby until the holders of record of
such Certificates shall surrender such Certificates. Subject to applicable law,
following surrender of any such Certificates, the Exchange Agent shall deliver
to the record holders thereof, without interest, certificates representing whole
shares of Parent Common Stock issued in exchange therefor along with payment in
lieu of fractional shares pursuant to Section 1.6(e) hereof and the amount of
any such dividends or other distributions with a record date after the Effective
Time payable with respect to such whole shares of Parent Common Stock.
(e) Transfers of Ownership. If certificates for shares of Parent Common
Stock are to be issued in a name other than that in which the Certificates
surrendered in exchange therefor are registered, it will be a condition of the
issuance thereof that the Certificates so surrendered will be properly endorsed
and
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otherwise in proper form for transfer and that the persons requesting such
exchange will have paid to Parent or any agent designated by it any transfer or
other taxes required by reason of the issuance of certificates for shares of
Parent Common Stock in any name other than that of the registered holder of the
Certificates surrendered, or established to the satisfaction of Parent or any
agent designated by it that such tax has been paid or is not payable.
(f) Required Withholding. Each of the Exchange Agent, Parent and the
Surviving Corporation shall be entitled to deduct and withhold from any
consideration payable or otherwise deliverable pursuant to this Agreement to any
holder or former holder of Company Capital Stock such amounts as may be required
to be deducted or withheld therefrom under the Code or under any provision of
state, local or foreign tax law or under any other applicable Legal Requirement
(as defined in Section 2.2(c)). To the extent such amounts are so deducted or
withheld, such amounts shall be treated for all purposes under this Agreement as
having been paid to the person to whom such amounts would otherwise have been
paid.
(g) No Liability. Notwithstanding anything to the contrary in this
Section 1.8, neither the Exchange Agent, Parent, the Surviving Corporation nor
any party hereto shall be liable to a holder of shares of Parent Common Stock or
Company Capital Stock for any amount properly paid to a public official pursuant
to any applicable abandoned property, escheat or similar law.
1.9 No Further Transfers of Company Capital Stock. There shall be no
further recordation of transfers on the stock books of the Surviving Corporation
of shares of Company Capital Stock which were outstanding immediately prior to
the Effective Time. If after the Effective Time Certificates are presented to
the Surviving Corporation for any reason, they shall be canceled and exchanged
as provided in this Article I.
1.10 Lost, Stolen or Destroyed Certificates. In the event any Certificates
shall have been lost, stolen or destroyed, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed Certificates, upon the making of an
affidavit of that fact by the holder thereof, such shares of Parent Common
Stock, cash for fractional shares, if any, as may be required pursuant to
Section 1.6(e) and any dividends or distributions payable pursuant to Section
1.8(d); provided, however, that Parent may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed Certificates to deliver a bond in such sum as it may reasonably direct
as indemnity against any claim that may be made against Parent, the Company or
the Exchange Agent with respect to the Certificates alleged to have been lost,
stolen or destroyed.
1.11 Tax Consequences. It is intended by the parties hereto that the
Merger shall constitute a reorganization within the meaning of Section 368 of
the Code. The parties hereto adopt this Agreement as a "plan of reorganization"
within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the United States
Income Tax Regulations.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
As of the date hereof and as of the Closing Date, the Company represents
and warrants to Parent and Merger Sub, subject to the exceptions disclosed in
writing in the disclosure letter and referencing a specific representation
supplied by the Company to Parent dated as of the date hereof and certified by a
duly authorized officer of the Company (the "COMPANY SCHEDULES"), as follows:
2.1 Organization of the Company.
(a) The Company has no subsidiaries, except for the corporations
identified in Part 2.1(a)(i) of the Company Schedules; and neither the Company
nor any of the other corporations identified in Part 2.1(a)(i) of the Company
Schedules owns any capital stock of, or any equity interest of any nature in,
any other entity, other than the entities identified in Part 2.1(a)(ii) of the
Company Schedules. (Where appropriate, the Company and each of its subsidiaries
are referred to singularly and/or collectively in this Agreement as the
"COMPANY"). The Company has not agreed and is not obligated to make, nor
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bound by any written, oral or other agreement, contract, subcontract, lease,
binding understanding, instrument, note, option, warranty, purchase order,
license, sublicense, insurance policy, benefit plan or legally binding
commitment or undertaking of any nature, as in effect as of the date hereof or
as may hereinafter be in effect ("CONTRACT") under which Contract it may become
obligated to make, any future investment in or capital contribution to any other
entity. The Company has not, at any time, been a general partner of any general
partnership, limited partnership or other entity.
(b) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation and has
all necessary power and authority: (i) to conduct its business in the manner in
which its business is currently being conducted; (ii) to own and use its assets
in the manner in which its assets are currently owned and used; and (iii) to
perform its obligations under all Contracts by which it is bound.
(c) The Company is qualified to do business as a foreign corporation,
and is in good standing, under the laws of all jurisdictions where the nature of
its business requires such qualification and where the failure to so qualify
would have a Material Adverse Effect (as defined in Section 8.3) on the Company.
(d) The Company has delivered or made available to Parent a true and
correct copy of the Articles of Incorporation and Bylaws of the Company and
similar governing instruments of each of its subsidiaries, each as amended to
date (collectively, the "COMPANY CHARTER DOCUMENTS"), and each such instrument
is in full force and effect. The Company is not in violation of any of the
provisions of the Company Charter Documents.
2.2 Company Capital Structure.
(a) The authorized capital stock of the Company consists of (i)
97,000,000 shares of Company Common Stock, 75,000,000 of which are shares of
Common Stock, no par value per share (the "COMMON STOCK"), 3,000,000 of which
are shares of Common Stock Series B, no par value per share (the "SERIES B
COMMON STOCK"), 1,500,000 of which are shares of Common Stock Series C, no par
value per share (the "SERIES C COMMON STOCK"), 15,000,000 of which are shares of
Common Stock Series D, no par value per share (the "SERIES D COMMON STOCK"), and
2,500,000 of which are shares of Common Stock Series E, no par value per share
(the "SERIES E COMMON STOCK"); and (ii) 10,000,000 shares of Company Preferred
Stock. As of the date of this Agreement, 2,500,000 shares of Common Stock are
issued and outstanding; 1,400,000 shares of Series B Common Stock are issued and
outstanding; 1,500,000 shares of Series C Common Stock are issued and
outstanding; 5,654,192 shares of Series D Common Stock would be issued and
outstanding assuming (A) no shares of Series F Preferred Stock are tendered to
Microsoft pursuant to the Offer to Purchase (as defined in Section 2.5(c)) and
(B) no Company Options or Warrants are exercised in order to effect a tender of
the Series F Preferred Stock to Microsoft ("No Tender or Exercise") and
12,164,916 would be issued and outstanding assuming (A) all shares of Series F
Preferred Stock are tendered to Microsoft pursuant to the Offer to Purchase and
(B) the Company Options or Warrants are exercised in order to effect a full
tender of the Series F Preferred Stock to Microsoft ("Full Tender and
Exercise"); and 2,100,000 shares of Series E Common Stock are issued and
outstanding. As of the date of this Agreement, 1,600,000 shares of Series A
Convertible Preferred Stock, no par value per share (the "SERIES A PREFERRED
STOCK"), are authorized, of which 1,131,000 would be issued and outstanding
assuming No Tender or Exercise and 1,191,000 would be issued and outstanding,
assuming a Full Tender and Exercise; 3,400,000 shares of Series B Convertible
Preferred Stock, no par value per share (the "SERIES B PREFERRED STOCK"), are
authorized, of which 3,036,596 would be issued and outstanding assuming No
Tender or Exercise and 3,048,871 would be issued and outstanding assuming a Full
Tender and Exercise; 2,000,000 shares of Series C Convertible Preferred Stock,
no par value per share (the "SERIES C PREFERRED STOCK"), are authorized, of
which 1,008,750 would be issued and outstanding assuming No Tender or Exercise,
and 1,108,750 would be issued and outstanding assuming a Full Tender and
Exercise; 200,000 shares of Series D Convertible Preferred Stock, no par value
per share (the "SERIES D PREFERRED STOCK"), are authorized, of which 200,000 are
issued and outstanding; 792,000 shares of Series E Preferred Stock are
authorized, of which 184,604 are issued and outstanding; and
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1,180,000 shares of Series F Preferred Stock are authorized of which 751,546
shares would be issued and outstanding assuming No Tender or Exercise and
1,034,725 shares would be issued and outstanding assuming a Full Tender and
Exercise. Subject to the assumptions set forth above, there are no other
authorized, issued or outstanding shares of capital stock of the Company. All of
the outstanding shares of Company Capital Stock have been duly authorized and
validly issued, and are fully paid and nonassessable. As of the date of this
Agreement, there are no shares of Company Capital Stock held in treasury by the
Company. Upon consummation of the Merger, (A) the shares of Parent Common Stock
issued in exchange for any shares of Company Capital Stock that are subject to a
Contract pursuant to which the Company has the right to repurchase, redeem or
otherwise reacquire any shares of Company Capital Stock will, without any
further act of Parent, the Company or any other person, become subject to the
restrictions, conditions and other provisions contained in such Contract, and
(B) Parent will automatically succeed to and become entitled to exercise the
Company's rights and remedies under any such Contract.
(b) As of the date of this Agreement and assuming No Tender or Exercise,
8,869,896 shares of Company Capital Stock are subject to issuance pursuant to
outstanding options to purchase Company Capital Stock under the Company Stock
Option Plans of which (i) 6,916,272 shares of Series D Common Stock are subject
to issuance (and reserved for issuance) pursuant to outstanding options to
purchase Series D Common Stock under the 1997 Plan, (ii) 311,535 shares of
Series D Common Stock are subject to issuance (and reserved for issuance)
pursuant to options to purchase Series D Common Stock under the Director Plan,
(iii) 257,489 shares of Series B Preferred Stock are subject to issuance (and
reserved for issuance) pursuant to outstanding options to purchase Series B
Preferred Stock under the DMK Plan and the SHN Plan and (iv) 1,384,600 shares of
Series D Common Stock are subject to issuance (and reserved for issuance)
pursuant to outstanding options to purchase Series D Common Stock under the
Arnold Employment Agreement (stock options granted by the Company pursuant to
the Company Stock Option Plans are referred to in this Agreement as "COMPANY
OPTIONS"). As of the date of this Agreement and assuming a Full Tender and
Exercise, 7,800,592 shares of Company Capital Stock are subject to issuance
pursuant to outstanding options to purchase Company Capital Stock under the
Company Stock Option Plans. As of the date of this Agreement and assuming No
Tender or Exercise, 13,157,283 shares of Company Capital Stock are subject to
issuance pursuant to the exercise of warrants as set forth on Part 2.2 of the
Company Schedules, of which (i) 12,494,916 shares of Series D Common Stock are
subject to issuance pursuant to the exercise of warrants as set forth on Part
2.2 of the Company Schedules; (ii) 260,000 shares of Series A Preferred Stock
are subject to issuance pursuant to the exercise of warrants as set forth on
Part 2.2 of the Company Schedules; (iii) 12,286 shares of Series B Preferred
Stock are subject to issuance pursuant to the exercise of warrants as set forth
on Part 2.2 of the Company Schedules; (iv) 200,000 shares of Series C Preferred
Stock are subject to issuance pursuant to the exercise of warrants as set forth
on Part 2.2 of the Company Schedules, and (v) 190,081 shares of Series F
Preferred Stock are subject to issuance pursuant to the exercise of warrants as
set forth on Part 2.2 of the Company Schedules. As of the date of this Agreement
and assuming a Full Tender and Exercise, 856,538 shares of Company Capital Stock
are subject to issuance pursuant to the exercise of the Warrants. Each Company
Option and Warrant by its terms may be treated in and by virtue of the Merger
strictly in accordance with the terms of Section 5.9(a) or 5.9(c) as
appropriate, without any requirement that any holder of any such Warrant or
Company Option (or any other party) receive any notice or be required to consent
in any manner. Part 2.2(b) of the Company Schedules sets forth the following
information with respect to each Company Option outstanding as of the date of
this Agreement assuming No Tender or Exercise and a Full Tender and Exercise:
(i) the name and address of the optionee; (ii) the particular plan pursuant to
which such Company Option was granted; (iii) the number of shares of Company
Common Stock subject to such Company Option; (iv) the exercise price of such
Company Option; (v) the date on which such Company Option was granted; (vi) the
applicable vesting schedule; (vii) the date on which such Company Option
expires; and (viii) whether the exercisability of such option will be
accelerated in any way by the transactions contemplated by this Agreement, and
indicates the extent of acceleration. The Company has made available to Parent
accurate and complete copies of all stock option plans pursuant to which the
Company has granted stock options that are currently outstanding and the
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form of all stock option agreements evidencing such options. All shares of
Company Capital Stock subject to issuance as aforesaid, upon issuance on the
terms and conditions specified in the instruments pursuant to which they are
issuable, would be duly authorized, validly issued, fully paid and
nonassessable. Except as set forth in Part 2.2(b)(i) of the Company Schedules,
there are no commitments or agreements of any character to which the Company is
bound obligating the Company to accelerate the vesting of any Company Option as
a result of the Merger. As of the date of this Agreement the following
conversion ratios (the "CONVERSION RATIOS") are applicable to the Company
Preferred Stock, (a) each share of Series A Preferred Stock, each share of
Series B Preferred Stock and each share of Series C Preferred Stock converts
into one share of Company Common Stock, (b) each share of Series D Preferred
Stock converts into five shares of Company Common Stock and (c) each share of
Series E Preferred Stock and each share of Series F Preferred Stock converts
into ten shares of Company Common Stock. The number of additional shares of
Company Capital Stock that would be issuable as a result of any adjustments in
such Conversion Ratios between the date of this Agreement and the Effective Time
shall not exceed 400,000 shares of Company Common Stock on an as-converted
basis.
(c) All outstanding shares of Company Capital Stock, all outstanding
Company Options, all outstanding warrants and all outstanding shares of capital
stock of each subsidiary of the Company have been issued and granted in
compliance with (i) all applicable securities laws and other applicable Legal
Requirements (as defined below) and (ii) all requirements set forth in
applicable Contracts. For the purposes of this Agreement, "LEGAL REQUIREMENTS"
means any federal, state, local, municipal, foreign or other law, statute,
constitution, principle of common law, resolution, ordinance, code, edict,
decree, rule, regulation, ruling or requirement issued, enacted, adopted,
promulgated, implemented or otherwise put into effect by or under the authority
of any Governmental Entity (as defined below).
(d) On May 14, 1999, the Company received $99,999,986.80 in exchange for
the sale of 184,604 shares of Series E Preferred Stock to Microsoft.
2.3 Obligations With Respect to Capital Stock. Except as set forth in
Section 2.2 above (including any exercise or conversion of Company Capital
Stock, Company Options and Warrants referred to in Section 2.2), as of the date
hereof there are no equity securities, partnership interests or similar
ownership interests of any class of any Company equity security, or any
securities exchangeable or convertible into or exercisable for such equity
securities, partnership interests or similar ownership interests, issued,
reserved for issuance or outstanding. Except for securities the Company owns
free and clear of all claims and Encumbrances, directly or indirectly through
one or more subsidiaries, and except for shares of capital stock or other
similar ownership interests of certain subsidiaries of the Company that are
owned by certain nominee equity holders as required by the applicable law of the
jurisdiction of organization of such subsidiaries (which shares or other
interests do not materially affect the Company's control of such subsidiaries),
as of the date of this Agreement, there are no equity securities, partnership
interests or similar ownership interests of any class of equity security of any
subsidiary of the Company, or any security exchangeable or convertible into or
exercisable for such equity securities, partnership interests or similar
ownership interests, issued, reserved for issuance or outstanding. For the
purposes of this Agreement "ENCUMBRANCES" means any lien, pledge, hypothecation,
charge, mortgage, security interest, encumbrance, claim, infringement,
interference, option, right of first refusal, preemptive right, community
property interest or restriction of any nature (including any restriction on the
voting of any security, any restriction on the transfer of any security or other
asset, any restriction on the receipt of any income derived from any asset, any
restriction on the use of any asset and any restriction on the possession,
exercise or transfer of any other attribute of ownership of any asset). Except
as set forth in Part 2.3 of the Company Schedules or as set forth in Section 2.2
hereof, there are no subscriptions, options, warrants, equity securities,
partnership interests or similar ownership interests, calls, rights (including
preemptive rights), commitments or agreements of any character to which the
Company or any of its subsidiaries is a party or by which it is bound obligating
the Company or any of its subsidiaries to issue, deliver or sell, or cause to be
issued, delivered or sold, or repurchase, redeem or otherwise acquire, or cause
the repurchase, redemption or acquisition of, any shares of capital stock,
partnership interests or similar ownership interests of the Company or any of
its subsidiaries or obligating the Company or any of its subsidiaries to grant,
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extend, accelerate the vesting of or enter into any such subscription, option,
warrant, equity security, call, right, commitment or agreement. As of the date
of this Agreement, except as contemplated by this Agreement, there are no
registration rights and there is, except for the Company Voting Agreements and
the Company Conversion Agreements, no voting trust, proxy, rights plan,
antitakeover plan or other agreement or understanding to which the Company is a
party or by which it is bound with respect to any equity security of any class
of the Company or with respect to any equity security, partnership interest or
similar ownership interest of any class of any of its subsidiaries. The
requisite vote of the stockholders of the Company to approve and adopt this
Agreement and approve the Merger under each of the Company Charter Documents and
Georgia Law, including, without limitation the treatment of Company Capital
Stock as set forth in Section 1.6(a), are set forth on Part 2.4 of the Company
Schedules. Stockholders of the Company that have executed the Company Voting
Agreements and the Company Conversion Agreements, together with Parent's rights
under Section 5.2(c), represent sufficient voting power to approve the Merger
and this Agreement under the Company Charter Documents and Georgia Law. If all
of the shares subject to such executed Company Voting Agreements are voted in
accordance with the terms of the Company Voting Agreements and all of the shares
subject to such Company Conversion Agreements are converted pursuant to the
terms thereof, together with Parent's rights under Section 5.2(c), the condition
set forth in Section 6.1(a) of this Agreement would be satisfied at the
Company's Stockholder's Meeting (as defined in Section 5.2). If Parent exercises
its option pursuant to Section 5.2(c), the option will be valid, binding and
enforceable and Parent will have all voting rights (which rights will be valid,
binding and enforceable) with respect to shares of Company Capital Stock, issued
or issuable upon exercise of such option.
2.4 Authority; Non-Contravention.
(a) The Company has all requisite corporate power and authority to enter
into this Agreement and to consummate the transactions contemplated hereby and
thereby. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of the Company, subject only to the approval and
adoption of this Agreement and the approval of the Merger by the Company's
stockholders and the filing of the Articles of Merger pursuant to Georgia Law.
This Agreement has been duly executed and delivered by the Company and, assuming
due execution and delivery by Parent and Merger Sub, constitutes a valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms, except as enforceability may be limited by bankruptcy and other
similar laws and general principles of equity. The execution and delivery of
this Agreement by the Company does not, and the performance of this Agreement by
the Company will not, (i) conflict with or violate the Company Charter
Documents; (ii) subject to obtaining the approval and adoption of this Agreement
and the approval of the Merger by the Company's stockholders as contemplated in
Section 5.2 and compliance with the requirements set forth in Section 2.4(b)
below, conflict with or violate any law, rule, regulation, order, judgment or
decree applicable to the Company or any of its subsidiaries or by which the
Company or any of its subsidiaries or any of their respective properties is
bound or affected; or (iii) result in any material breach of or constitute a
material default (or an event that with notice or lapse of time or both would
become a material default) under, or impair the Company's rights or alter the
rights or obligations of any third party under, or give to others any rights of
termination, amendment, acceleration or cancellation of, or result in the
creation of a material lien or Encumbrance on any of the material properties or
assets of the Company or any of its subsidiaries pursuant to, any material note,
bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise, concession, or other instrument or obligation to which the Company or
any of its subsidiaries is a party or by which the Company or any of its
subsidiaries or its or any of their respective assets are bound or affected.
Part 2.4(b) of the Company Schedules lists all consents, waivers and approvals
under any of the Company's or any of its subsidiaries' agreements, contracts,
licenses or leases required to be obtained in connection with the consummation
of the transactions contemplated hereby, which, if individually or in the
aggregate not obtained, would result in a material loss of benefits to the
Company, Parent or the Surviving Corporation as a result of the Merger.
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(b) No consent, approval, order or authorization of, or registration,
declaration or filing with any court, administrative agency or commission or
other governmental authority or instrumentality, foreign or domestic
("GOVERNMENTAL ENTITY"), is required to be obtained or made by the Company in
connection with the execution and delivery of this Agreement or the consummation
of the Merger, except for (i) the filing of the Articles of Merger with the
Secretary of State of the State of Georgia; (ii) the filing of the
Prospectus/Proxy Statement (as defined in Section 2.19) with the Securities and
Exchange Commission ("SEC") in accordance with the Securities Exchange Act of
1934, as amended (the "EXCHANGE ACT"); (iii) such consents, approvals, orders,
authorizations, registrations, declarations and filings as may be required under
applicable federal, foreign and state securities (or related) laws and the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
ACT"), and the securities or antitrust laws of any foreign country; and (iv)
such other consents, authorizations, filings, approvals and registrations which
if not obtained or made would not be material to the Company or have a material
adverse effect on the ability of the parties hereto to consummate the Merger.
2.5 SEC Filings; Company Financial Statements; Offer to Purchase.
(a) The Company has filed a Form S-1 (File No. 333-7135), as amended on
February 26, 1999, (the "COMPANY FORM S-1") with the SEC and has made available
to Parent such Form S-1 in the form filed with the SEC. As of February 26, 1999,
the Company Form S-1 was prepared in accordance with and complied in all
material respects with the requirements of the Securities Act of 1933, as
amended (the "SECURITIES ACT") and the rules and regulations of the SEC
thereunder applicable to such Company Form S-1. Neither the Company nor any of
its subsidiaries is required to file any forms, reports or other documents with
the SEC. The Company filed a request with the SEC on May 13, 1999 to withdraw
the Company Form S-1 from registration.
(b) Part 2.5 of the Company Schedules sets forth the Company's audited
balance sheet as of December 31, 1997 and as of December 31, 1998 (the "COMPANY
BALANCE SHEET") and the related audited statements of income and cash flow for
the three year periods ending December 31, 1998 (the "COMPANY AUDITED
FINANCIALS") and the Company's unaudited balance sheet as of March 31, 1999 and
the related unaudited statements of income and cash flow for the three months
then ended (the "COMPANY UNAUDITED FINANCIALS" together with the Company Audited
Financials, the "COMPANY FINANCIALS"). The Company Financials and each of the
consolidated financial statements contained in the Company Form S-1 (including,
in each case, any related notes thereto) (together, the "COMPANY FINANCIAL
STATEMENTS"), (i) complied as to form in all material respects with the
published rules and regulations of the SEC with respect thereto; (ii) were
prepared in accordance with United States generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes thereto or, in the case of
unaudited interim financial statements, as may be permitted by the SEC on Form
10-Q under the Exchange Act); and (iii) fairly present the consolidated
financial position of the Company and its subsidiaries as at the respective
dates thereof and the consolidated results of the Company's operations and cash
flows for the periods indicated, except that the unaudited interim financial
statements may not contain footnotes and were or are subject to normal and
recurring year-end adjustments. Except as disclosed in the Company Financial
Statements, since the date of the Company Balance Sheet neither the Company nor
any of its subsidiaries has any liabilities required under GAAP to be set forth
on a balance sheet (absolute, accrued, contingent or otherwise) which are,
individually or in the aggregate, material to the business, results of
operations or financial condition of the Company and its subsidiaries taken as a
whole, except for liabilities incurred since the date of the Company Balance
Sheet in the ordinary course of business consistent with past practices.
(c) The Company's response to the Offer to Purchase For Cash of Any and
All Shares of Series F Preferred Shares of the Company by Microsoft dated April
10, 1999 (the "OFFER TO PURCHASE") distributed to the stockholders of the
Company in connection with Microsoft's offer to purchase Company Capital Stock
at the time it was initially mailed to the stockholders of the Company complied
in all material respects with all applicable law, including all applicable rules
and regulations promulgated under the Exchange Act and the Company will continue
to comply in all material respects with applicable laws, rules and regulations
with respect to the Offer to Purchase as the same may be extended or amended
from
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time to time and its response thereto. The maximum number of shares of Series F
Preferred Stock of the Company that any officer, director or other affiliate of
the Company is permitted to tender to Microsoft pursuant to the Offer to
Purchase is set forth on Part 2.5(c) of the Company Schedules.
2.6 Absence of Certain Changes or Events. Since the date of the Company
Balance Sheet to the date of this Agreement there has not been: (i) any Material
Adverse Effect on the Company; (ii) any declaration, setting aside or payment of
any dividend on, or other distribution (whether in cash, stock or property) in
respect of, any of the Company's or any of its subsidiaries' capital stock, or
any purchase, redemption or other acquisition by the Company of any of the
Company's capital stock or any other securities of the Company or its
subsidiaries or any options, warrants, calls or rights to acquire any such
shares or other securities except for repurchases from employees following their
termination pursuant to the terms of their pre-existing stock option or purchase
agreements; (iii) any split, combination or reclassification of any of the
Company's or any of its subsidiaries' capital stock; (iv) any granting by the
Company or any of its subsidiaries of any increase in compensation or fringe
benefits, except for normal increases of cash compensation in the ordinary
course of business consistent with past practice, or any payment by the Company
or any of its subsidiaries of any bonus, except for bonuses made in the ordinary
course of business consistent with past practice, or any granting by the Company
or any of its subsidiaries of any increase in severance or termination pay or
any entry by the Company or any of its subsidiaries into any currently effective
employment, severance, termination or director, officer or other employee
indemnification agreement or any other employment or consulting related
agreement the benefits of which are contingent or the terms of which are
materially altered upon the occurrence of a transaction involving the Company of
the nature contemplated hereby; (v) entry by the Company or any of its
subsidiaries into any licensing or other agreement with regard to the
acquisition or disposition of any material Intellectual Property (as defined in
Section 2.9) other than licenses in the ordinary course of business consistent
with past practice; (vi) any amendment or consent with respect to any material
licensing; (vii) any material change by the Company in its accounting methods,
principles or practices, except as required by concurrent changes in GAAP; or
(viii) any revaluation by the Company of any of its assets, including, without
limitation, writing down the value of capitalized inventory or writing off notes
or accounts receivable other than in the ordinary course of business consistent
with past practice.
2.7 Taxes.
(a) Definition of Taxes. For the purposes of this Agreement, "TAX" or
"TAXES" refers to any and all federal, state, local and foreign taxes,
assessments and other governmental charges, duties, impositions and liabilities
relating to taxes, including taxes based upon or measured by gross receipts,
income, profits, sales, use and occupation, and value added, ad valorem,
transfer, franchise, withholding, payroll, recapture, employment, excise and
property taxes, together with all interest, penalties and additions imposed with
respect to such amounts; (ii) any liability for the payment of any amounts of
the type described in clause (i) as a result of being a member of an affiliated,
consolidated, combined or unitary group for any period; and (iii) any liability
for the payment of any amounts of the type described in clause (i) or (ii) as a
result of any express or implied obligation to indemnify any other person or as
a result of any obligations under any agreements or arrangements with any other
person with respect to such amounts and including any liability for taxes of a
predecessor entity.
(b) Tax Returns and Audits.
(i) The Company and each of its subsidiaries have timely filed all
federal, state, local and foreign returns, estimates, information statements and
reports ("RETURNS") relating to Taxes required to be filed by the Company and
each of its subsidiaries with any Tax authority, except such Returns which are
not material to the Company. The Company and each of its subsidiaries have paid
all Taxes shown to be due on such Returns.
(ii) The Company and each of its subsidiaries as of the Effective
Time will have withheld with respect to its employees all federal and state
income taxes, Taxes pursuant to the Federal Insurance Contribution Act ("FICA"),
Taxes pursuant to the Federal Unemployment Tax Act ("FUTA") and other Taxes
required to be withheld.
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(iii) Neither the Company nor any of its subsidiaries has been
delinquent in the payment of any Tax nor is there any Tax deficiency
outstanding, proposed or assessed against the Company or any of its
subsidiaries, nor has the Company or any of its subsidiaries executed any
unexpired waiver of any statute of limitations on or extending the period for
the assessment or collection of any Tax.
(iv) No audit or other examination of any Return of the Company or
any of its subsidiaries by any Tax authority is presently in progress, nor has
the Company or any of its subsidiaries been notified of any request for such an
audit or other examination.
(v) No adjustment relating to any Returns filed by the Company or any
of its subsidiaries has been proposed in writing formally or informally by any
Tax authority to the Company or any of its subsidiaries or any representative
thereof.
(vi) Neither the Company nor any of its subsidiaries has any
liability for unpaid Taxes which has not been accrued for or reserved on the
Company Balance Sheet, whether asserted or unasserted, contingent or otherwise,
which is material to the Company, other than any liability for unpaid Taxes that
may have accrued since the date of the Company Balance Sheet in connection with
the operation of the business of the Company and its subsidiaries in the
ordinary course.
(vii) There is no contract, agreement, plan or arrangement to which
the Company is a party as of the date of this Agreement, including but not
limited to the provisions of this Agreement, covering any employee or former
employee of the Company or any of its subsidiaries that, individually or
collectively, could give rise to the payment of any amount that would not be
deductible pursuant to Sections 280G, 404 or 162(m) of the Code.
(viii) Neither the Company nor any of its subsidiaries has filed any
consent agreement under Section 341(f) of the Code or agreed to have Section
341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as
defined in Section 341(f)(4) of the Code) owned by the Company.
(ix) Neither the Company nor any of its subsidiaries is party to or
has any obligation under any tax-sharing, tax indemnity or tax allocation
agreement or arrangement.
(x) Except as may be required as a result of the Merger, the Company
and its subsidiaries have not been and will not be required to include any
adjustment in Taxable income for any Tax period (or portion thereof) pursuant to
Section 481 or Section 263A of the Code or any comparable provision under state
or foreign Tax laws as a result of transactions, events or accounting methods
employed prior to the Closing.
(xi) None of the Company's or its subsidiaries' assets are tax exempt
use property within the meaning of Section 168(h) of the Code.
(xii) The Company is not subject to (A) any foreign Tax holidays, (B)
any intercompany transfer pricing agreements, or other arrangements that have
been established by the Company or any of its subsidiaries with any Tax
authority and (C) any expatriate programs or policies affecting the Company or
any of its subsidiaries.
(xiii) The Company is not, and has not been at any time, a "United
States real property holding corporation" within the meaning of Section
897(c)(2) of the Code.
2.8 Title to Properties; Absence of Liens and Encumbrances.
(a) Part 2.8(a) of the Company Schedules lists the real property
interests owned by the Company as of the date of this Agreement. Part 2.8(a)(i)
of the Company Schedules lists all real property leases to which the Company is
a party as of the date of this Agreement and each amendment thereto that is in
effect as of the date of this Agreement. All such current leases are in full
force and effect, are valid and effective in accordance with their respective
terms, and there is not, under any of such leases, any existing default or event
of default (or event which with notice or lapse of time, or both, would
constitute a default) that would give rise to a material claim. Other than the
leaseholds created under the
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real property leases identified in Part 2.8(a)(i) of the Company Schedules, the
Company owns no interest in real property.
(b) The Company has good and valid title to, or, in the case of leased
properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and mixed, used or held for use in its
business, free and clear of any liens, pledges, charges, claims, security
interests or other encumbrances of any sort ("LIENS"), except as reflected in
the Company Financials and except for liens for taxes not yet due and payable
and such Liens or other imperfections of title and encumbrances, if any, which
are not material in character, amount or extent, and which do not materially
detract from the value, or materially interfere with the present use, of the
property subject thereto or affected thereby.
2.9 Intellectual Property. For the purposes of this Agreement, the
following terms have the following definitions:
"INTELLECTUAL PROPERTY" shall mean any or all of the following and all
rights in, arising out of, or associated therewith: (i) all United States,
international and foreign patents and applications therefor and all
reissues, divisions, renewals, extensions, provisionals, continuations and
continuations-in-part thereof; (ii) all inventions (whether patentable or
not), invention disclosures, improvements, trade secrets, proprietary
information, know how, technology, technical data and customer lists, and
all documentation relating to any of the foregoing; (iii) all copyrights,
copyrights registrations and applications therefor, and all other rights
corresponding thereto throughout the world; (iv) all industrial designs and
any registrations and applications therefor throughout the world; (v) all
trade names, logos, URLs, common law trademarks and service marks,
trademark and service mark registrations and applications therefor
throughout the world; (vi) all databases and data collections and all
rights therein throughout the world; (vii) all moral and economic rights of
authors and inventors, however denominated, throughout the world, and
(viii) any similar or equivalent rights to any of the foregoing anywhere in
the world.
"COMPANY INTELLECTUAL PROPERTY" shall mean any Intellectual Property
that is owned by, or exclusively licensed to, the Company.
"REGISTERED INTELLECTUAL PROPERTY" means all United States,
international and foreign: (i) patents and patent applications (including
provisional applications); (ii) registered trademarks, applications to
register trademarks, intent-to-use applications, or other registrations or
applications related to trademarks; (iii) registered copyrights and
applications for copyright registration; and (iv) any other Intellectual
Property that is the subject of an application, certificate, filing,
registration or other document issued, filed with, or recorded by any
state, government or other public legal authority.
"COMPANY REGISTERED INTELLECTUAL PROPERTY" means all of the Registered
Intellectual Property owned by, or filed in the name of, the Company.
(a) No material Company Intellectual Property or product or service of
the Company is subject to any proceeding or outstanding decree, order, judgment,
agreement, or stipulation restricting in any manner the use, transfer, or
licensing thereof by the Company, or which may affect the validity, use or
enforceability of such Company Intellectual Property.
(b) Part 2.9(b) of the Company Schedules is a complete and accurate list
of all Company Registered Intellectual Property and specifies, where applicable,
the jurisdictions in which each such item of Company Registered Intellectual
Property has been issued or registered or in which an application for such
issuance and registration has been filed, including the respective registration
or application numbers. Each material item of Company Registered Intellectual
Property is valid and subsisting, all necessary registration, maintenance and
renewal fees currently due in connection with such Registered Intellectual
Property have been made and all necessary documents, recordations and
certificates in connection with such Registered Intellectual Property have been
filed with the relevant patent, copyright, trademark or other authorities in the
United States or foreign jurisdictions, as the case may be, for the purposes of
maintaining such Registered Intellectual Property.
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(c) The Company owns and has good and exclusive title to, or has license
(sufficient for the conduct of its business as currently conducted and as
proposed to be conducted) to, each material item of Company Intellectual
Property or other Intellectual Property used by the Company free and clear of
any lien or encumbrance (excluding licenses and related restrictions); and the
Company is the exclusive owner of all trademarks and trade names used in
connection with the operation or conduct of the business of the Company,
including the sale of any products or the provision of any services by the
Company.
(d) The Company owns exclusively, and has good title to, all copyrighted
works that are Company products or which the Company otherwise expressly
purports to own.
(e) To the extent that any material Intellectual Property has been
developed or created by a third party for the Company, the Company has a written
agreement with such third party with respect thereto and the Company thereby
either (i) has obtained ownership of, and is the exclusive owner of; or (ii) has
obtained a license (sufficient for the conduct of its business as currently
conducted and as proposed to be conducted) to all such third party's
Intellectual Property in such work, material or invention by operation of law or
by valid assignment, to the fullest extent it is legally possible to do so.
(f) The Company has not transferred ownership of, or granted any
exclusive license with respect to, any Intellectual Property that is or was
material to the Company Intellectual Property, to any third party.
(g) The Company Schedules list all material contracts, licenses and
agreements to which the Company is a party (i) with respect to Company
Intellectual Property licensed or transferred to any third party (other than
end-user licenses in the ordinary course); or (ii) pursuant to which a third
party has licensed or transferred any material Intellectual Property to the
Company.
(h) All material contracts, licenses and agreements relating to the
Company Intellectual Property are in full force and effect. The consummation of
the transactions contemplated by this Agreement will neither violate nor result
in the breach, modification, cancellation, termination, or suspension of such
contracts, licenses and agreements. The Company is in material compliance with,
and has not materially breached any term any of such contracts, licenses and
agreements and, to the knowledge of the Company, all other parties to such
contracts, licenses and agreements are in compliance with, and have not
materially breached any term of, such contracts, licenses and agreements.
Following the Closing Date, the Surviving Corporation will be permitted to
exercise all of the Company's rights under such contracts, licenses and
agreements to the same extent the Company would have been able to had the
transactions contemplated by this Agreement not occurred and without the payment
of any additional amounts or consideration other than ongoing fees, royalties or
payments which the Company would otherwise be required to pay.
(i) The operation of the business of the Company as such business
currently is conducted, including the Company's design, development,
manufacture, marketing and sale of the products or services of the Company
(including with respect to products currently under development) has not, does
not and will not infringe or misappropriate the Intellectual Property of any
third party or constitute unfair competition or trade practices under the laws
of any jurisdiction.
(j) The Company has not received notice from any third party that the
operation of the business of the Company or any act, product or service of the
Company, infringes or misappropriates the Intellectual Property of any third
party or constitutes unfair competition or trade practices under the laws of any
jurisdiction.
(k) Except as set forth in Part 2.9(k) of the Company Schedules and to
the knowledge of the Company, no person has infringed or misappropriated or is
infringing or misappropriating any Company Intellectual Property.
(l) The Company has taken reasonable steps to protect the Company's
rights in the Company's confidential information and trade secrets that it
wishes to protect or any trade secrets or confidential information of third
parties provided to the Company, and, without limiting the foregoing, the
Company
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has and enforces, or prior to the Closing will have and will enforce, a policy
requiring each employee and contractor to execute a proprietary
information/confidentiality agreement substantially in the form provided to
Parent and all current and former employees and contractors of the Company have
executed such an agreement, except where the failure to do so is not reasonably
expected to be material to the Company.
(m) Neither this Agreement nor the transactions contemplated by this
Agreement, including the transfer to Surviving Corporation by operation of law
or otherwise of any contracts or agreements to which the Company is a party,
will result in the Company's granting to any third party any right to or with
respect to any material Intellectual Property right owned by, or licensed to,
either of them.
2.10 Compliance; Permits; Restrictions.
(a) Neither the Company nor any of its subsidiaries is, in any material
respect, in conflict with, or in default or in violation of (i) any law, rule,
regulation, order, judgment or decree applicable to the Company or any of its
subsidiaries or by which the Company or any of its subsidiaries or any of their
respective properties is bound or affected; or (ii) any material note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which the Company or any of its subsidiaries
is a party or by which the Company or any of its subsidiaries or its or any of
their respective properties is bound or affected, except for conflicts,
violations and defaults that (individually or in the aggregate) would not cause
the Company to lose any material benefit or incur any material liability. No
investigation or review by any Governmental Entity is pending or, to the
Company's knowledge, has been threatened in a writing delivered to the Company,
against the Company or any of its subsidiaries, nor, to the Company's knowledge,
has any Governmental Entity indicated an intention to conduct an investigation
of the Company or any of its subsidiaries. There is no material agreement,
judgment, injunction, order or decree binding upon the Company or any of its
subsidiaries which has or could reasonably be expected to have the effect of
prohibiting or materially impairing any business practice of the Company or any
of its subsidiaries, any acquisition of material property by the Company or any
of its subsidiaries or the conduct of business by the Company as currently
conducted.
(b) The Company and its subsidiaries hold, to the extent legally
required, all permits, licenses, variances, exemptions, orders and approvals
from Governmental Entities that are material to and required for the operation
of the business of the Company as currently conducted (collectively, the
"Company Permits"). The Company and its subsidiaries are in compliance in all
material respects with the terms of the Company Permits, except where the
failure to be in compliance with the terms of the Company Permits would not be
material to the Company.
2.11 Litigation. Except as disclosed in Part 2.11 of the Company
Schedules, there are no claims, suits, actions or proceedings pending or, to the
knowledge of the Company, threatened against, relating to or affecting the
Company or any of its subsidiaries, before any court, governmental department,
commission, agency, instrumentality or authority, or any arbitrator that seeks
to restrain or enjoin the consummation of the transactions contemplated by this
Agreement or which could reasonably be expected, either singularly or in the
aggregate with all such claims, actions or proceedings, to be material to the
Company. No Governmental Entity has at any time challenged or questioned in a
writing delivered to the Company the legal right of the Company to design,
manufacture, offer or sell any of its products or services in the present manner
or style thereof. As of the date hereof, to the knowledge of the Company, no
event has occurred, and no claim, dispute or other condition or circumstance
exists, that will, or that would reasonably be expected to, cause or provide a
bona fide basis for a director or executive officer of the Company to seek
indemnification from the Company.
Except as disclosed in Part 2.11 of the Company Schedules, the Company has
never been subject to an audit, compliance review, investigation or like
contract review by the GSA office of the Inspector General or other Governmental
Entity or agent thereof in connection with any government contract (a
"GOVERNMENT AUDIT"), to the Company's knowledge no Government Audit is
threatened or reasonably anticipated, and in the event of such Government Audit,
to the knowledge of the Company no basis exists for a finding of noncompliance
with any material provision of any government contract or a refund of any
amounts paid or owed by any Governmental Entity pursuant to such government
contract. For each item
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disclosed in the Company Schedule pursuant to this Section 2.11 a true and
complete copy of all correspondence and documentation with respect thereto has
been provided to Parent.
2.12 Brokers' and Finders' Fees. Except for fees payable to BancBoston
Robertson Stephens Inc. and Gleacher & Co. LLC pursuant to an engagement letters
dated March 12, 1999 and April 20, 1999, in the case of BancBoston Robertson
Stephens, LLC, and January 27, 1999, in the case of Gleacher & Co. LLC, copies
of which has been provided to Parent, the Company has not incurred, nor will it
incur, directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or any similar charges in connection with this Agreement or
any transaction contemplated hereby.
2.13 Interested Party Transactions. There are no transactions involving
the Company of a nature that would be required to be described under Item 404 of
Regulation S-K promulgated under the Securities Act if such item were applicable
to the Company.
2.14 Employee Benefit Plans.
(a) Definitions. With the exception of the definition of "Affiliate" set
forth in Section 2.14(a)(i) below (which definition shall apply only to this
Section 2.14), for purposes of this Agreement, the following terms shall have
the meanings set forth below:
(i) "AFFILIATE" shall mean any other person or entity under common
control with the Company within the meaning of Section 414(b), (c), (m) or (o)
of the Code and the regulations issued thereunder;
(ii) "COMPANY EMPLOYEE PLAN" shall mean any plan, program, policy,
practice, contract, agreement or other arrangement providing for compensation,
severance, termination pay, deferred compensation, performance awards, stock or
stock-related awards, fringe benefits or other employee benefits or remuneration
of any kind, whether written or unwritten or otherwise, funded or unfunded,
including without limitation, each "employee benefit plan," within the meaning
of Section 3(3) of ERISA which is or has been maintained, contributed to, or
required to be contributed to, by the Company or any Affiliate for the benefit
of any Employee, or with respect to which the Company or any Affiliate has or
may have any liability or obligation;
(iii) "COBRA" shall mean the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended;
(iv) "DOL" shall mean the Department of Labor;
(v) "EMPLOYEE" shall mean any current or former employee, consultant,
or director of the Company or any Affiliate;
(vi) "EMPLOYEE AGREEMENT" shall mean each management, employment,
severance, consulting, relocation, repatriation, expatriation, visas, work
permit or other agreement, contract or understanding between the Company or any
Affiliate and any Employee or consultant;
(vii) "ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended;
(viii) "FMLA" shall mean the Family Medical Leave Act of 1993, as
amended;
(ix) "INTERNATIONAL EMPLOYEE PLAN" shall mean each Company Employee
Plan that has been adopted or maintained by the Company or any Affiliate,
whether informally or formally, or with respect to which the Company or any
Affiliate will or may have any liability, for the benefit of Employees who
perform services outside the United States;
(x) "IRS" shall mean the Internal Revenue Service;
(xi) "MULTIEMPLOYER PLAN" shall mean any "Pension Plan" (as defined
below) which is a "multiemployer plan," as defined in Section 3(37) of ERISA;
(xii) "PBGC" shall mean the Pension Benefit Guaranty Corporation; and
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(xiii) "PENSION PLAN" shall mean each Company Employee Plan which is
an "employee pension benefit plan," within the meaning of Section 3(2) of ERISA.
(b) Schedule. Part 2.14(b) of the Company Schedules contain an accurate
and complete list of each Company Employee Plan and each Employee Agreement
under each Company Employee Plan or Employee Agreement. The Company does not
have any plan or commitment to establish any new Company Employee Plan or
Employee Agreement, to modify any Company Employee Plan or Employee Agreement
(except to the extent required by law or to conform any such Company Employee
Plan or Employee Agreement to the requirements of any applicable law, in each
case as previously disclosed to Parent in writing, or as required by this
Agreement), or to enter into any Company Employee Plan or Employee Agreement,
nor does it have any intention or commitment to do any of the foregoing.
(c) Documents. The Company has provided to Parent: (i) correct and
complete copies of all documents embodying to each Company Employee Plan and
each Employee Agreement including (without limitation) all amendments thereto,
all related trust documents and written interpretations thereof; (ii) the most
recent annual actuarial valuations, if any, prepared for each Company Employee
Plan; (iii) the three (3) most recent annual reports (Form Series 5500 and all
schedules and financial statements attached thereto), if any, required under
ERISA or the Code in connection with each Company Employee Plan or related
trust; (iv) if the Company Employee Plan is funded, the most recent annual and
periodic accounting of Company Employee Plan assets; (v) the most recent summary
plan description together with the summary(ies) of material modifications
thereto, if any, required under ERISA with respect to each Company Employee Plan
or related trust; (vi) all IRS determination, opinion, notification and advisory
letters, and rulings relating to Company Employee Plans and copies of all
applications and correspondence to or from the IRS or the DOL with respect to
any Company Employee Plan; (vii) all material written agreements and contracts
relating to each Company Employee Plan, including, but not limited to,
administrative service agreements, group annuity contracts and group insurance
contracts; (viii) all communications material to any Employee or Employees
relating to any Company Employee Plan and any proposed Company Employee Plans,
in each case, relating to any amendments, terminations, establishments,
increases or decreases in benefits, acceleration of payments or vesting
schedules or other events which would result in any material liability to the
Company; (ix) all correspondence to or from any governmental agency relating to
any Company Employee Plan; (x) all COBRA forms and related notices; (xi) all
policies pertaining to fiduciary liability insurance covering the fiduciaries
for each Company Employee Plan; (xii) all discrimination tests for each Company
Employee Plan for the most recent plan year; and (xiii) all registration
statements, annual reports (Form 11-K and all attachments thereto) and
prospectuses prepared in connection with each Company Employee Plan.
(d) Employee Plan Compliance. (i) The Company has performed in all
material respects all obligations required to be performed by it under, is not
in default or violation of, and has no knowledge of any default or violation by
any other party to each Company Employee Plan, and each Company Employee Plan
has been established and maintained in all material respects in accordance with
its terms and in compliance with all applicable laws, statutes, orders, rules
and regulations, including but not limited to ERISA or the Code; (ii) each
Company Employee Plan intended to qualify under Section 401(a) of the Code and
each trust intended to qualify under Section 501(a) of the Code has either
received a favorable determination, opinion, notification or advisory letter
from the IRS with respect to each such Plan as to its qualified status under the
Code, including all amendments to the Code effected by the Tax Reform Act of
1986 and subsequent legislation, or has remaining a period of time under
applicable Treasury regulations or IRS pronouncements in which to apply for such
a letter and make any amendments necessary to obtain a favorable determination
as to the qualified status of each such Company Employee Plan; (iii) no
"prohibited transaction," within the meaning of Section 4975 of the Code or
Sections 406 and 407 of ERISA, and not otherwise exempt under Section 408 of
ERISA, has occurred with respect to any Company Employee Plan; (iv) there are no
actions, suits or claims pending, or, to the knowledge of the Company,
threatened or reasonably anticipated (other than routine claims for benefits)
against any Company Employee Plan or against the assets of any Company Employee
Plan; (v) each Company Employee Plan can be amended, terminated or otherwise
discontinued in accordance with its
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terms, without liability to Parent, the Company or any of its Affiliates (other
than ordinary administration expenses); (vi) there are no audits, inquiries or
proceedings pending or, to the knowledge of the Company or any Affiliates,
threatened by the IRS or DOL with respect to any Company Employee Plan; and
(vii) neither the Company nor any Affiliate is subject to any penalty or tax
with respect to any Company Employee Plan under Section 502(i) of ERISA or
Sections 4975 through 4980 of the Code.
(e) Pension Plans. Neither the Company nor any Affiliate has ever
maintained, established, sponsored, participated in, or contributed to, any
Pension Plan which is subject to Title IV of ERISA or Section 412 of the Code.
(f) Multiemployer Plans. At no time has the Company or any Affiliate
contributed to or been obligated to contribute to any Multiemployer Plan.
(g) No Post-Employment Obligations. No Company Employee Plan provides,
or has any liability to provide, retiree life insurance, retiree health or other
retiree employee welfare benefits to any person for any reason, except as may be
required by COBRA or other applicable statute, and the Company has never
represented, promised or contracted (whether in oral or written form) to any
Employee (either individually or to Employees as a group) or any other person
that such Employee(s) or other person would be provided with retiree life
insurance, retiree health or other retiree employee welfare benefit, except to
the extent required by statute.
(h) COBRA, etc. Neither the Company nor any Affiliate has, prior to the
Effective Time, and in any material respect, violated any of the health care
continuation requirements of COBRA, the requirements of FMLA, the requirements
of the Women's Health and Cancer Rights Act, the requirements of the Newborns'
and Mothers' Health Protection Act of 1996, or any similar provisions of state
law applicable to its Employees.
(i) Effect of Transaction. The execution of this Agreement and the
consummation of the transactions contemplated hereby will not (either alone or
upon the occurrence of any additional or subsequent events) constitute an event
under any Company Employee Plan, Employee Agreement, trust or loan that will or
may result in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any Employee.
(j) Employment Matters. The Company: (i) is in compliance in all
material respects with all applicable foreign, federal, state and local laws,
rules and regulations respecting employment, employment practices, terms and
conditions of employment and wages and hours, in each case, with respect to
Employees; (ii) has withheld and reported all amounts required by law or by
agreement to be withheld and reported with respect to wages, salaries and other
payments to Employees; (iii) is not liable for any arrears of wages or any taxes
or any penalty for failure to comply with any of the foregoing; and (iv) is not
liable for any material payment to any trust or other fund or to any
governmental or administrative authority, with respect to unemployment
compensation benefits, social security or other benefits or obligations for
Employees (other than routine payments to be made in the normal course of
business and consistent with past practice). There are no pending, threatened or
reasonably anticipated claims or actions against the Company under any worker's
compensation policy or long-term disability policy. To the Company's knowledge,
no employee of the Company has violated any employment contract, nondisclosure
agreement or noncompetition agreement by which such employee is bound due to
such employee being employed by the Company and disclosing to the Company or
using trade secrets or proprietary information of any other person or entity.
(k) Labor. No work stoppage or labor strike against the Company is
pending, threatened or reasonably anticipated. The Company does not know of any
activities or proceedings of any labor union to organize any Employees. There
are no actions, suits, claims, labor disputes or grievances pending, or, to the
knowledge of the Company, threatened or reasonably anticipated relating to any
labor, safety or discrimination matters involving any Employee, including,
without limitation, charges of unfair labor practices or discrimination
complaints, which, if adversely determined, would, individually or in the
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aggregate, result in any material liability to the Company. Neither the Company
nor any of its subsidiaries has engaged in any unfair labor practices within the
meaning of the National Labor Relations Act. The Company is not presently, nor
has it been in the past, a party to, or bound by, any collective bargaining
agreement or union contract with respect to Employees and no collective
bargaining agreement is being negotiated by the Company.
(l) International Employee Plan. Each International Employee Plan has
been established, maintained and administered in compliance with its terms and
conditions and with the requirements prescribed by any and all statutory or
regulatory laws that are applicable to such International Employee Plan.
Furthermore, no International Employee Plan has unfunded liabilities, that as of
the Effective Time, will not be offset by insurance or fully accrued. Except as
required by law, no condition exists that would prevent the Company or Parent
from terminating or amending any International Employee Plan at any time for any
reason.
2.15 Environmental Matters.
(a) Hazardous Material. Except as would not result in material liability
to the Company, no underground storage tanks and no amount of any substance that
has been designated by any Governmental Entity or by applicable federal, state
or local law to be radioactive, toxic, hazardous or otherwise a danger to health
or the environment, including, without limitation, PCBs, asbestos, petroleum,
urea-formaldehyde and all substances listed as hazardous substances pursuant to
the Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, or defined as a hazardous waste pursuant to the United States
Resource Conservation and Recovery Act of 1976, as amended, and the regulations
promulgated pursuant to said laws, but excluding office and janitorial supplies,
(a "HAZARDOUS MATERIAL") are present, as a result of the actions of the Company
or any of its subsidiaries or any affiliate of the Company, or, to the Company's
knowledge, as a result of any actions of any third party or otherwise, in, on or
under any property, including the land and the improvements, ground water and
surface water thereof, that the Company or any of its subsidiaries has at any
time owned, operated, occupied or leased.
(b) Hazardous Materials Activities. Except as would not result in a
material liability to the Company (in any individual case or in the aggregate)
(i) neither the Company nor any of its subsidiaries has transported, stored,
used, manufactured, disposed of, released or exposed its employees or others to
Hazardous Materials in violation of any law in effect on or before the Closing
Date, and (ii) neither the Company nor any of its subsidiaries has disposed of,
transported, sold, used, released, exposed its employees or others to or
manufactured any product containing a Hazardous Material (collectively
"HAZARDOUS MATERIALS ACTIVITIES") in violation of any rule, regulation, treaty
or statute promulgated by any Governmental Entity in effect prior to or as of
the date hereof to prohibit, regulate or control Hazardous Materials or any
Hazardous Material Activity.
(c) Permits. The Company and its subsidiaries currently hold all
environmental approvals, permits, licenses, clearances and consents (the
"COMPANY ENVIRONMENTAL PERMITS") necessary for the conduct of the Company's and
its subsidiaries' Hazardous Material Activities and other businesses of the
Company and its subsidiaries as such activities and businesses are currently
being conducted.
(d) Environmental Liabilities. No action, proceeding, revocation
proceeding, amendment procedure, writ or injunction is pending, and to the
Company's knowledge, no action, proceeding, revocation proceeding, amendment
procedure, writ or injunction has been threatened by any Governmental Entity
against the Company or any of its subsidiaries in a writing delivered to the
Company concerning any Company Environmental Permit, Hazardous Material or any
Hazardous Materials Activity of the Company or any of its subsidiaries. The
Company is not aware of any fact or circumstance which could involve the Company
or any of its subsidiaries in any environmental litigation or impose upon the
Company any material environmental liability.
2.16 Year 2000 Compliance. The Company's products and internal systems
have been designed to ensure date and time entry recognition, calculations that
accommodate same century and multi-century formulas and date values, leap year
recognition and calculations, and date data interface values that reflect
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the century. The Company's products and internal systems manage and manipulate
data involving dates and times, including single century formulas and
multi-century formulas, and do not cause an abnormal ending scenario within the
application or generate incorrect values or invalid results involving such
dates.
2.17 Agreements, Contracts and Commitments. Except as otherwise set forth
in Part 2.17 of the Company Schedules, as of the date hereof neither the Company
nor any of its subsidiaries is a party to or is bound by:
(a) any employment or consulting agreement, contract or commitment with
any officer or director or higher level employee or member of the Company's
Board of Directors, other than those that are terminable by the Company or any
of its subsidiaries on no more than thirty days notice without liability or
financial obligation, except to the extent general principles of wrongful
termination law may limit the Company's or any of its subsidiaries' ability to
terminate employees at will;
(b) any agreement of indemnification or any guaranty other than any
agreement of indemnification entered into in connection with the sale or license
of software products in the ordinary course of business;
(c) any agreement, contract or commitment containing any covenant
limiting in any respect the right of the Company or any of its subsidiaries to
engage in any line of business or to compete with any person or granting any
exclusive distribution rights;
(d) any agreement, contract or commitment currently in force relating to
the disposition or acquisition by the Company or any of its subsidiaries after
the date of this Agreement of a material amount of assets not in the ordinary
course of business or pursuant to which the Company has any material ownership
interest in any corporation, partnership, joint venture or other business
enterprise other than the Company's subsidiaries;
(e) any joint marketing or development agreement currently in force
under which the Company or any of its subsidiaries have continuing material
obligations to jointly market any product, technology or service and which may
not be canceled without penalty upon notice of 90 days or less, or any material
agreement pursuant to which the Company or any of its subsidiaries have
continuing material obligations to jointly develop any intellectual property
that will not be owned, in whole or in part, by the Company or any of its
subsidiaries and which may not be canceled without penalty upon notice of 90
days or less;
(f) any agreement, contract or commitment currently in force to provide
source code to any third party for any product or technology that is material to
the Company and its subsidiaries taken as a whole; or
(g) any agreement or plan, including, without limitation, any stock
option plan, stock appreciation right plan or stock purchase plan, any of the
benefits of which will be increased, or the vesting of benefits of which will be
accelerated, by the occurrence of any of the transactions contemplated by this
Agreement or the value of any of the benefits of which will be calculated on the
basis of any of the transactions contemplated by this Agreement;
(h) any agreement, contract or commitment currently in force to sell or
distribute any Company products, service or technology except agreements with
distributors or sales representatives in the normal course of business
cancelable without penalty upon notice of ninety (90) days or less and
substantially in the form previously provided to Parent;
(i) any mortgages, indentures, guarantees, loans or credit agreements,
security agreements or other agreements or instruments relating to the borrowing
of money or extension of credit;
(j) any settlement agreement entered into within five (5) years prior to
the date of this Agreement; or
(k) any other agreement, contract or commitment that has a value of
$100,000 or more individually.
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Neither the Company nor any of its subsidiaries, nor to the Company's
knowledge any other party to a Company Contract (as defined below), is in
breach, violation or default under, and neither the Company nor any of its
subsidiaries has received written notice that it has breached, violated or
defaulted under, any of the material terms or conditions of any of the material
agreements, contracts or commitments to which the Company or any of its
subsidiaries is a party or by which it is bound (any such agreement, contract or
commitment, a "COMPANY CONTRACT") in such a manner as would permit any other
party to cancel or terminate any such Company Contract, or would permit any
other party to seek material damages or other remedies (for any or all of such
breaches, violations or defaults, in the aggregate).
2.18 Change of Control Payments. Part 2.18 of the Company Schedules sets
forth each plan or agreement pursuant to which any amounts may become payable
(whether currently or in the future) to current or former employees and
directors of the Company as a result of or in connection with the Merger.
2.19 Disclosure. None of the information supplied or to be supplied by or
on behalf of the Company for inclusion or incorporation by reference in the
registration statement on Form S-4 (or similar successor form) to be filed with
the SEC by Parent in connection with the issuance of Parent Common Stock in the
Merger (the "REGISTRATION STATEMENT") will, at the time the Registration
Statement becomes effective under the Securities Act, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they are made, not misleading. None of
the information supplied or to be supplied by or on behalf of the Company for
inclusion or incorporation by reference in the Prospectus/Proxy Statement to be
filed with the SEC as part of the Registration Statement (the "PROSPECTUS/PROXY
STATEMENT"), will, at the time the Prospectus/Proxy Statement is mailed to the
stockholders of the Company or Parent, at the time of the Company Stockholders'
Meeting (as defined in Section 5.2) or Parent Stockholders' Meeting (as defined
in Section 5.3) or as of the Effective Time, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they are made, not misleading. The Prospectus/Proxy
Statement will comply as to form in all material respects with the provisions of
the Exchange Act and the rules and regulations promulgated by the SEC
thereunder, except that no representation or warranty is made by the Company
with respect to statements made or incorporated by reference therein based on
information supplied by or on behalf of Parent for inclusion or incorporation by
reference in the Prospectus/Proxy Statement.
2.20 Board Approval. The Board of Directors of the Company has, as of the
date of this Agreement, determined (i) that the Merger is fair to, and in the
best interests of the Company and its stockholders; and (ii) to recommend that
the stockholders of the Company approve and adopt this Agreement and approve the
Merger.
2.21 Fairness Opinion. The Company's Board of Directors has received an
opinion from BancBoston Robertson Stephens Inc., dated as of the date hereof, to
the effect that as of the date hereof, the Exchange Ratio is fair to the
Company's stockholders from a financial point of view, a written copy of which
will be delivered to Parent promptly after receipt by the Company.
2.22 Restrictions on Business Activities. Except as set forth in Section
2.22 of the Company Schedule, there is no agreement, commitment, judgment,
injunction, order or decree binding upon the Company or to which the Company is
a party which has or could reasonably be expected to have the effect of
prohibiting or materially impairing any business practice of the Company, any
acquisition by the Company of property material to it or the conduct of business
by the Company as currently conducted.
2.23 Insurance. The Company maintains insurance policies and fidelity
bonds covering the assets, business, equipment, properties, operations,
employees, officers and directors of the Company and its subsidiaries
(collectively, the "Insurance Policies") which are of the type and in amounts
customarily carried by persons conducting businesses similar to those of the
Company and its subsidiaries. There is no material claim by the Company or any
of its subsidiaries pending under any of the material Insurance Policies as to
which coverage has been questioned, denied or disputed by the underwriters of
such policies or bonds.
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2.24 State Takeover Statutes. No state takeover statute or similar statute
or regulation applies to or purports to apply to the Merger, this Agreement and
the Company Voting Agreements or the transactions contemplated by this Agreement
and the Company Voting Agreements.
2.25 Representations Complete. As of the date of this Agreement, the
representations and warranties made by the Company (as modified by the Company
Schedules) in this Agreement, or any statements made in any exhibit, schedule or
certificate furnished by the Company pursuant to this Agreement do not contain
any untrue statement of a material fact, or do not omit to state any material
fact necessary in order to make the statements contained herein, in the light of
the circumstances under which they are made, not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
As of the date hereof and as of the Closing Date, Parent and Merger Sub
represent and warrant to the Company, subject to the exceptions disclosed in
writing in the disclosure letter and referencing a specific representation
supplied by Parent and Merger Sub to the Company dated as of the date hereof and
certified by a duly authorized officer of Parent (the "PARENT SCHEDULES"), as
follows:
3.1 Organization of Parent.
(a) Except as set forth on Part 3.1(a) of the Parent Schedules, as of
the date of this Agreement Parent does not own any capital stock of, or any
equity interest of any nature in, any other entity, except for passive
investments in equity interests of public companies as part of the cash
management program of Parent. (Where appropriate, Parent and each of its
subsidiaries are referred to singularly and/or collectively in this Agreement as
the "PARENT"). Parent has not agreed and is not obligated to make, nor bound by
any contract under which contract it may become obligated to make, any future
investment in or capital contribution to any other entity. Parent has not, at
any time, been a general partner of any general partnership, limited partnership
or other entity.
(b) Parent is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has all
necessary power and authority: (i) to conduct its business in the manner in
which its business is currently being conducted; (ii) to own and use its assets
in the manner in which its assets are currently owned and used; and (iii) to
perform its obligations under all Contracts by which it is bound.
(c) Parent is qualified to do business as a foreign corporation, and is
in good standing, under the laws of all jurisdictions where the nature of its
business requires such qualification and where the failure to so qualify would
have a Material Adverse Effect on Parent.
(d) Parent has delivered or made available to the Company a true and
correct copy of the Certificate of Incorporation and Bylaws of Parent and
similar governing instruments of each of its subsidiaries, each as amended to
date (collectively, the "PARENT CHARTER DOCUMENTS"), and each such instrument is
in full force and effect. Parent is not in violation of any of the provisions of
the Parent Charter Documents.
3.2 Parent Capital Structure.
(a) As of the date of this Agreement, the authorized capital stock of
Parent consists of: (i) 150,000,000 shares of Common Stock, $0.0001 par value,
of which an aggregate of 70,976,757 shares of Parent Common Stock (plus any
shares of Parent Common Stock issued upon exercise of Parent Options (as defined
in Section 3.2(b)) since May 14, 1999 were issued and outstanding; and (ii)
5,000,000 shares of Preferred Stock, $0.0001 par value per share, none of which
shares have been issued or are outstanding as of the date of this Agreement. All
of the outstanding shares of Parent's Common Stock have been duly authorized and
validly issued, and are fully paid and nonassessable.
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(b) As of the date of this Agreement: (i) an aggregate of 14,407,958
shares of Parent Common Stock less any shares of Parent Common Stock subject to
Parent Options that have been exercised since May 14, 1999 are subject to
issuance pursuant to outstanding options to purchase Parent Common Stock under
Parent's stock option plans; (ii) 1,413,458 shares of Common Stock are reserved
for future issuance under Parent's 1996 Stock Plan (the "PARENT PURCHASE PLAN");
and (iii) 792,748 shares of Common Stock are reserved for issuance under
Parent's 1998 Employee Stock Purchase Plan. (Stock options granted by Parent
pursuant to Parent's stock option plans are referred to in this Agreement as
"PARENT OPTIONS"). Parent has made available to the Company accurate and
complete copies of all stock option plans pursuant to which Parent has granted
stock options that are currently outstanding as of the date of this Agreement
and the form of all stock option agreements evidencing such options. All shares
of Parent Common Stock subject to issuance as aforesaid, upon issuance on the
terms and conditions specified in the instruments pursuant to which they are
issuable, would be duly authorized, validly issued, fully paid and
nonassessable.
(c) As of the date of this Agreement, 2,577,240 shares of Parent Common
Stock are subject to issuance pursuant to outstanding warrants to purchase
Common Stock.
(d) All outstanding shares of Parent Common Stock, all outstanding
Parent Options, and all outstanding shares of capital stock of each subsidiary
of Parent have been issued and granted in compliance with (i) all applicable
securities laws and other applicable Legal Requirements and (ii) all
requirements set forth in applicable Contracts.
3.3 Obligations With Respect to Capital Stock. Except as set forth in
Section 3.2 above, as of the date of this Agreement, there are no equity
securities, partnership interests or similar ownership interests of any class of
Parent equity security, or any securities exchangeable or convertible into or
exercisable for such equity securities, partnership interests or similar
ownership interests, issued, reserved for issuance or outstanding. Except for
securities Parent owns free and clear of all claims and Encumbrances, directly
or indirectly through one or more subsidiaries, and except for shares of capital
stock or other similar ownership interests of certain subsidiaries of Parent
that are owned by certain nominee equity holders as required by the applicable
law of the jurisdiction of organization of such subsidiaries (which shares or
other interests do not materially affect Parent's control of such subsidiaries),
as of the date of this Agreement, there are no equity securities, partnership
interests or similar ownership interests of any class of equity security of any
subsidiary of Parent, or any security exchangeable or convertible into or
exercisable for such equity securities, partnership interests or similar
ownership interests, issued, reserved for issuance or outstanding. Except as set
forth in Part 3.3 of the Parent Schedules or Section 3.2 above, as of the date
of this Agreement, there are no subscriptions, options, warrants, equity
securities, partnership interests or similar ownership interests, calls, rights
(including preemptive rights), commitments or agreements of any character to
which Parent or any of its subsidiaries is a party or by which it is bound
obligating Parent or any of its subsidiaries to issue, deliver or sell, or cause
to be issued, delivered or sold, or repurchase, redeem or otherwise acquire, or
cause the repurchase, redemption or acquisition of, any shares of capital stock,
partnership interests or similar ownership interests of Parent or any of its
subsidiaries or obligating Parent or any of its subsidiaries to grant, extend,
accelerate the vesting of or enter into any such subscription, option, warrant,
equity security, call, right, commitment or agreement. As of the date of this
Agreement, except as contemplated by this Agreement, there are no registration
rights and, except for the Parent Voting Agreement, there is no voting trust,
proxy, rights plan, antitakeover plan or other agreement or understanding to
which Parent is a party or by which it is bound with respect to any equity
security of any class of Parent or with respect to any equity security,
partnership interest or similar ownership interest of any class of any of its
subsidiaries. Stockholders of Parent will not be entitled to dissenters' rights
under applicable state law in connection with the Merger.
3.4 Authority; Non-Contravention.
(a) Parent has all requisite corporate power and authority to enter into
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
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corporate action on the part of Parent, subject only to the approval of the
Parent Proposals (as defined in Section 5.3) by Parent's stockholders and the
filing of the Articles of Merger pursuant to Georgia Law. A vote of the holders
of a majority of the outstanding shares of Parent Common Stock is sufficient for
Parent's stockholders to approve the Parent Proposals. Stockholders of the
Company that have executed Parent Voting Agreements represent sufficient voting
power to approve the Parent Proposals under the Parent Charter Documents and
Delaware Law. This Agreement has been duly executed and delivered by Parent
and/or Merger Sub, execution and delivery by the Company, constitute a valid and
binding obligation of Parent and/or Merger Sub, enforceable against Parent
and/or Merger Sub in accordance with their respective terms, except as
enforceability may be limited by bankruptcy and other similar laws and general
principles of equity. The execution and delivery of this Agreement by Parent and
Merger Sub do not, and the performance of this Agreement by Parent and Merger
Sub will not, (i) subject to filing an amendment to Parent's Certificate of
Incorporation to increase the number of authorized shares of Parent Common Stock
and Preferred Stock of Parent and to change Parent's corporate name, conflict
with or violate the Parent Charter Documents; (ii) subject to obtaining the
approval of the issuance of the shares of Parent Common Stock pursuant to the
Merger by Parent's stockholders as contemplated in Section 5.3 and compliance
with the requirements set forth in Section 3.4(b) below, conflict with or
violate any law, rule, regulation, order, judgment or decree applicable to
Parent or any of its subsidiaries or by which Parent or any of its subsidiaries
or any of their respective properties are bound or affected; or (iii) result in
any material breach of or constitute a material default (or an event that with
notice or lapse of time or both would become a material default) under, or
impair Parent's rights or alter the rights or obligations of any third party
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a material lien or Encumbrance on
any of the material properties or assets of Parent or any of its subsidiaries
pursuant to, any material note, bond, mortgage, indenture, contract, agreement,
lease, license, permit, franchise, concession, or other instrument or obligation
to which Parent or any of its subsidiaries is a party or by which Parent or any
of its subsidiaries or its or any of their respective assets are bound or
affected.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with any Governmental Entity, is required to be obtained
or made by Parent in connection with the execution and delivery of this
Agreement or the consummation of the Merger, except for (i) the filing of the
Articles of Merger with the Secretary of State of the State of Georgia; (ii) the
filing of the Registration Statement and the Prospectus/Proxy Statement in
accordance with the Securities Act and the Exchange Act, respectively; (iii)
filing an amendment to Parent's Certificate of Incorporation to increase the
number of authorized shares of Parent Common Stock and Preferred Stock of
Parent, (iv) filing an amendment to Parent's Certificate of Incorporation to
change Parent's corporate name (subject to and conditional upon effectiveness of
the Merger); (v) such consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
federal, foreign and state securities (or related) laws and the HSR Act, and the
securities or antitrust laws of any foreign country; and (vi) such other
consents, authorizations, filings, approvals and registrations which if not
obtained or made would not be material to Parent or have a material adverse
effect on the ability of the parties hereto to consummate the Merger.
3.5 SEC Filings; Parent Financial Statements.
(a) Parent has filed all forms, reports and documents required to be
filed by Parent with the SEC since January 1, 1999 and has made available to the
Company such forms, reports and documents in the form filed with the SEC. All
such required forms, reports and documents (including those that Parent may file
subsequent to the date hereof) filed with the SEC as of the date of this
Agreement are referred to herein as the "PARENT SEC REPORTS"). As of their
respective dates (or, if amended, as of the repurchase dates of such
amendments), Parent SEC Reports (i) were prepared in accordance and complied as
to form in all material respects with the requirements of the Securities Act, or
the Exchange Act, as the case may be, and the rules and regulations of the SEC
thereunder applicable to such Parent SEC Reports and (ii) did not at the time
they were filed contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary in order to make the
statements
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therein, in the light of the circumstances under which they were made, not
misleading. None of Parent's subsidiaries is required to file any forms, reports
or other documents with the SEC.
(b) Each of the consolidated financial statements (including, in each
case, any related notes thereto) contained in the Parent SEC Reports (the
"PARENT FINANCIALS"), (i) complied as to form in all material respects with the
published rules and regulations of the SEC with respect thereto; (ii) was
prepared in accordance with United States generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes thereto or, in the case of
unaudited interim financial statements, as may be permitted by the SEC on Form
10-Q under the Exchange Act) and (iii) fairly presented the consolidated
financial position of Parent and its subsidiaries as at the respective dates
thereof and the consolidated results of Parent's operations and cash flows for
the periods indicated, except that the unaudited interim financial statements
may not contain footnotes and were or are subject to normal and recurring
year-end adjustments. The balance sheet of Parent contained in Parent's
Quarterly Report on Form 10-Q for its quarter ended as of March 31, 1999 is
hereinafter referred to as (the "PARENT BALANCE SHEET"). Except as disclosed in
the Parent Financials, since the date of the Parent Balance Sheet neither Parent
nor any of its subsidiaries has any liabilities required under GAAP to be set
forth on a balance sheet (absolute, accrued, contingent or otherwise) which are,
individually or in the aggregate, material to the business, results of
operations or financial condition of Parent and its subsidiaries taken as a
whole, except for liabilities incurred since the date of the Parent Balance
Sheet in the ordinary course of business consistent with past practices.
3.6 Absence of Certain Changes or Events. From the date of Parent Balance
Sheet to the date of this Agreement there has not been: (i) any Material Adverse
Effect on Parent; (ii) any declaration, setting aside or payment of any dividend
on, or other distribution (whether in cash, stock or property) in respect of,
any of Parent's or any of its subsidiaries' capital stock, or any purchase,
redemption or other acquisition by Parent of any of Parent's capital stock or
any other securities of Parent or its subsidiaries or any options, warrants,
calls or rights to acquire any such shares or other securities except for
repurchases from employees following their termination pursuant to the terms of
their pre-existing stock option or purchase agreements; (iii) any split,
combination or reclassification of any of Parent's or any of its subsidiaries'
capital stock; (iv) any granting by Parent or any of its subsidiaries of any
increase in compensation or fringe benefits, except for normal increases of cash
compensation in the ordinary course of business consistent with past practice,
or any payment by Parent or any of its subsidiaries of any bonus, except for
bonuses made in the ordinary course of business consistent with past practice
and grants of Parent Options, or any granting by Parent or any of its
subsidiaries of any increase in severance or termination pay or any entry by
Parent or any of its subsidiaries into any currently effective employment,
severance, termination or director, officer or other employee indemnification
agreement or any other employment or consulting related agreement the benefits
of which are contingent or the terms of which are materially altered upon the
occurrence of a transaction involving Parent of the nature contemplated hereby;
(v) entry by Parent or any of its subsidiaries into any licensing or other
agreement with regard to the acquisition or disposition of any material
Intellectual Property (as defined in Section 2.9) other than licenses in the
ordinary course of business consistent with past practice; (vi) any amendment or
consent with respect to any licensing agreement filed or required to be filed by
Parent with the SEC; (vii) any material change by Parent in its accounting
methods, principles or practices, except as required by concurrent changes in
GAAP, or (viii) any revaluation by Parent of any of its assets, including,
without limitation, writing down the value of capitalized inventory or writing
off notes or accounts receivable other than in the ordinary course of business.
3.7 Taxes.
(a) Tax Returns and Audits.
(i) Parent and each of its subsidiaries have timely filed all Returns
relating to Taxes required to be filed by Parent and each of its subsidiaries
with any Tax authority, except such Returns which are not material to Parent,
and have paid all Taxes shown to be due on such Returns.
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(ii) Parent and each of its subsidiaries as of the Effective Time
will have withheld with respect to its employees all federal and state income
taxes, Taxes pursuant to FICA, Taxes pursuant to the FUTA and other Taxes
required to be withheld.
(iii) Neither Parent nor any of its subsidiaries has been delinquent
in the payment of any Tax nor is there any Tax deficiency outstanding, proposed
or assessed against Parent or any of its subsidiaries, nor has Parent or any of
its subsidiaries executed any unexpired waiver of any statute of limitations on
or extending the period for the assessment or collection of any Tax.
(iv) No audit or other examination of any Return of Parent or any of
its subsidiaries by any Tax authority is presently in progress, nor has Parent
or any of its subsidiaries been notified of any request for such an audit or
other examination.
(v) No adjustment relating to any Returns filed by Parent or any of
its subsidiaries has been proposed in writing formally or informally by any Tax
authority to Parent or any of its subsidiaries or any representative thereof.
(vi) Neither Parent nor any of its subsidiaries has any liability for
unpaid Taxes which has not been accrued for or reserved on Parent Balance Sheet,
whether asserted or unasserted, contingent or otherwise, which is material to
Parent, other than any liability for unpaid Taxes that may have accrued since
the date of Parent Balance Sheet in connection with the operation of the
business of Parent and its subsidiaries in the ordinary course.
(vii) There is no contract, agreement, plan or arrangement to which
Parent is a party as of the date of this Agreement, including but not limited to
the provisions of this Agreement, covering any employee or former employee of
Parent or any of its subsidiaries that, individually or collectively, could give
rise to the payment of any amount that would not be deductible pursuant to
Sections 280G, 404 or 162(m) of the Code.
(viii) Neither Parent nor any of its subsidiaries has filed any
consent agreement under Section 341(f) of the Code or agreed to have Section
341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as
defined in Section 341(f)(4) of the Code) owned by Parent.
(ix) Neither Parent nor any of its subsidiaries is party to or has
any obligation under any tax-sharing, tax indemnity or tax allocation agreement
or arrangement.
(x) Except as may be required as a result of the Merger, Parent and
its subsidiaries have not been and will not be required to include any
adjustment in Taxable income for any Tax period (or portion thereof) pursuant to
Section 481 or Section 263A of the Code or any comparable provision under state
or foreign Tax laws as a result of transactions, events or accounting methods
employed prior to the Closing.
(xi) None of Parent's or its subsidiaries' assets are tax exempt use
property within the meaning of Section 168(h) of the Code.
3.8 Title to Properties; Absence of Liens and Encumbrances.
(a) All of Parent's current leases with respect to real property are in
full force and effect, are valid and effective in accordance with their
respective terms, and there is not, under any of such leases, any existing
default or event of default (or event which with notice or lapse of time, or
both, would constitute a default) that would give rise to a material claim. As
of the date of this Agreement, other than the leaseholds created under real
property leases, Parent owns no interest in real property.
(b) Parent has good and valid title to, or, in the case of leased
properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and mixed, used or held for use in its
business, free and clear of any Liens, except as reflected in Parent Financials
and except for Liens for taxes not yet due and payable and such Liens or other
imperfections of title and encumbrances, if any, which are not material in
character, amount or extent, and which do not materially detract from the value,
or materially interfere with the present use, of the property subject thereto or
affected thereby.
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3.9 Intellectual Property. For the purposes of this Agreement, the
following terms have the following definitions:
"PARENT INTELLECTUAL PROPERTY" means any Intellectual Property that is
owned by, or exclusively licensed to, Parent.
"PARENT REGISTERED INTELLECTUAL PROPERTY" means all of the Registered
Intellectual Property owned by, or filed in the name of, Parent.
(a) No material Parent Intellectual Property or product or service of
Parent is subject to any proceeding or outstanding decree, order, judgment,
agreement, or stipulation restricting in any manner the use, transfer, or
licensing thereof by Parent, or which may affect the validity, use or
enforceability of such Parent Intellectual Property.
(b) Each material item of Parent Registered Intellectual Property is
valid and subsisting, all necessary registration, maintenance and renewal fees
currently due in connection with such Registered Intellectual Property have been
made and all necessary documents, recordations and certificates in connection
with such Registered Intellectual Property have been filed with the relevant
patent, copyright, trademark or other authorities in the United States or
foreign jurisdictions, as the case may be, for the purposes of maintaining such
Registered Intellectual Property.
(c) Parent owns and has good and exclusive title to, or has license
(sufficient for the conduct of its business as currently conducted and as
proposed to be conducted) to, each material item of Parent Intellectual Property
or Intellectual Property used by Parent free and clear of any Lien or
Encumbrance (excluding licenses and related restrictions); and Parent is the
exclusive owner of all trademarks and trade names used in connection with the
operation or conduct of the business of Parent, including the sale of any
products or the provision of any services by Parent.
(d) To the extent that any material Intellectual Property has been
developed or created by a third party for Parent, Parent has a written agreement
with such third party with respect thereto and Parent thereby either (i) has
obtained ownership of, and is the exclusive owner of, or (ii) has obtained a
license (sufficient for the conduct of its business as currently conducted and
as proposed to be conducted) to all such third party's Intellectual Property in
such work, material or invention by operation of law or by valid assignment, to
the fullest extent it is legally possible to do so.
(e) The operation of the business of Parent as such business currently
is conducted, including Parent's design, development, manufacture, marketing and
sale of the products or services of Parent (including with respect to products
currently under development) has not, does not and will not infringe or
misappropriate the Intellectual Property of any third party or constitute unfair
competition or trade practices under the laws of any jurisdiction.
(f) Parent has not received notice from any third party that the
operation of the business of Parent or any act, product or service of Parent,
infringes or misappropriates the Intellectual Property of any third party or
constitutes unfair competition or trade practices under the laws of any
jurisdiction.
(g) To the knowledge of Parent, no person has or is infringing or
misappropriating any Parent Intellectual Property.
(h) Parent has taken reasonable steps to protect Parent's rights in
Parent's confidential information and trade secrets that it wishes to protect or
any trade secrets or confidential information of third parties provided to
Parent, and, without limiting the foregoing, Parent has and enforces a policy
requiring each employee and contractor to execute a proprietary
information/confidentiality agreement substantially in the form provided to the
Company and all current and former employees and contractors of Parent have
executed such an agreement, except where the failure to do so is not reasonably
expected to be material to Parent.
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3.10 Compliance; Permits; Restrictions.
(a) Neither Parent nor any of its subsidiaries is, in any material
respect, in conflict with, or in default or in violation of (i) any law, rule,
regulation, order, judgment or decree applicable to Parent or any of its
subsidiaries or by which Parent or any of its subsidiaries or any of their
respective properties is bound or affected; or (ii) any material note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which Parent or any of its subsidiaries is a
party or by which Parent or any of its subsidiaries or its or any of their
respective properties is bound or affected, except for conflicts, violations and
defaults that (individually or in the aggregate) would not cause Parent to lose
any material benefit or incur any material liability. No investigation or review
by any Governmental Entity is pending or, to Parent's knowledge, has been
threatened in a writing delivered to Parent against Parent or any of its
subsidiaries, nor, to Parent's knowledge, has any Governmental Entity indicated
an intention to conduct an investigation of Parent or any of its subsidiaries.
There is no material agreement, judgment, injunction, order or decree binding
upon Parent or any of its subsidiaries which has or could reasonably be expected
to have the effect of prohibiting or materially impairing any business practice
of Parent or any of its subsidiaries, any acquisition of material property by
Parent or any of its subsidiaries or the conduct of business by Parent as
currently conducted.
(b) Parent and its subsidiaries hold, to the extent legally required,
all permits, licenses, variances, exemptions, orders and approvals from
Governmental Entities that are material to and required for the operation of the
business of Parent as currently conducted (collectively, the "PARENT PERMITS").
Parent and its subsidiaries are in compliance in all material respects with the
terms of Parent Permits, except where the failure to be in compliance with the
terms of Parent Permits would not be material to Parent.
3.11 Litigation. Except as disclosed in Part 3.11 of the Parent Schedules,
there are no claims, suits, actions or proceedings pending or, to the knowledge
of Parent, threatened against, relating to or affecting Parent or any of its
subsidiaries, before any court, governmental department, commission, agency,
instrumentality or authority, or any arbitrator that seeks to restrain or enjoin
the consummation of the transactions contemplated by this Agreement or which
could reasonably be expected, either singularly or in the aggregate with all
such claims, actions or proceedings, to be material to Parent. No Governmental
Entity has at any time challenged or questioned in a writing delivered to Parent
the legal right of Parent to design, manufacture, offer or sell any of its
products or services in the present manner or style thereof. As of the date
hereof, to the knowledge of Parent, no event has occurred, and no claim, dispute
or other condition or circumstance exists, that will, or that would reasonably
be expected to, cause or provide a bona fide basis for a director or executive
officer of Parent to seek indemnification from Parent.
3.12 Brokers' and Finders' Fees. Except for fees payable to Morgan Stanley
& Co. Incorporated, Parent has not incurred, nor will it incur, directly or
indirectly, any liability for brokerage or finders' fees or agents' commissions
or any similar charges in connection with this Agreement or any transaction
contemplated hereby. Parent shall provide Company a copy of an engagement letter
with Morgan Stanley & Co. Incorporated promptly after it is executed.
3.13 Environmental Matters
(a) Hazardous Material. Except as would not result in material liability
to Parent, no Hazardous Materials are present, as a result of the actions of
Parent or any of its subsidiaries or any affiliate of Parent, or, to Parent's
knowledge, as a result of any actions of any third party or otherwise, in, on or
under any property, including the land and the improvements, ground water and
surface water thereof, that Parent or any of its subsidiaries has at any time
owned, operated, occupied or leased.
(b) Hazardous Materials Activities. Except as would not result in a
material liability to Parent (in any individual case or in the aggregate) (i)
neither Parent nor any of its subsidiaries has transported, stored, used,
manufactured, disposed of, released or exposed its employees or others to
Hazardous Materials in violation of any law in effect on or before the Closing
Date; and (ii) neither Parent nor any of its subsidiaries has disposed of,
transported, sold, used, released, exposed its employees or others to or
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manufactured any product containing a Hazardous Material in violation of any
rule, regulation, treaty or statute promulgated by any Governmental Entity in
effect prior to or as of the date hereof to prohibit, regulate or control
Hazardous Materials or any Hazardous Material Activity.
(c) Permits. Parent and its subsidiaries currently hold all
environmental approvals, permits, licenses, clearances and consents (the "PARENT
ENVIRONMENTAL PERMITS") necessary for the conduct of Parent's and its
subsidiaries' Hazardous Material Activities and other businesses of Parent and
its subsidiaries as such activities and businesses are currently being
conducted.
(d) Environmental Liabilities. No action, proceeding, revocation
proceeding, amendment procedure, writ or injunction is pending, and to Parent's
knowledge, no action, proceeding, revocation proceeding, amendment procedure,
writ or injunction has been threatened by any Governmental Entity against Parent
or any of its subsidiaries in a writing delivered to Parent concerning any
Parent Environmental Permit, Hazardous Material or any Hazardous Materials
Activity of Parent or any of its subsidiaries. Parent is not aware of any fact
or circumstance which could involve Parent or any of its subsidiaries in any
environmental litigation or impose upon Parent any material environmental
liability.
3.14 Year 2000 Compliance. Parent's products and internal systems have
been designed to ensure date and time entry recognition, calculations that
accommodate same century and multi-century formulas and date values, leap year
recognition and calculations, and date data interface values that reflect the
century. Parent's products and internal systems manage and manipulate data
involving dates and times, including single century formulas and multi-century
formulas, and do not cause an abnormal ending scenario within the application or
generate incorrect values or invalid results involving such dates.
3.15 Agreements, Contracts and Commitments. As of the date of this
Agreement, neither Parent nor any of its subsidiaries, nor to Parent's knowledge
any other party to a material Contract of Parent, is in breach, violation or
default under, and neither Parent nor any of its subsidiaries has received
written notice that it has breached, violated or defaulted under, any of the
material terms or conditions of any material Contract of Parent in such a manner
as would permit any other party to cancel or terminate any such material
Contract of Parent, or would permit any other party to seek material damages or
other remedies (for any or all of such breaches, violations or defaults, in the
aggregate).
3.16 Disclosure. None of the information to be supplied by or on behalf of
Parent for inclusion in the Registration Statement will, at the Registration
Statement becomes effective under the Securities Act, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they are made, not misleading. None of
the information to be supplied by or on behalf of Parent for inclusion or
incorporation by reference in the Prospectus/Proxy Statement will, at the time
the Prospectus/Proxy Statement is mailed to the stockholders of the Company or
Parent, at the time of the Company Stockholders' Meeting or Parent Stockholders'
Meeting or as of the Effective Time, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they are made, not misleading. The Registration
Statement and the Prospectus/Proxy Statement will comply as to form in all
material respects with the provisions of the Securities Act and the rules and
regulations promulgated by the SEC thereunder, except that no representation or
warranty is made by Parent with respect to statements made or incorporated by
reference therein based on information supplied by or on behalf of the Company
for inclusion or incorporation by reference in the Prospectus/Proxy Statement.
3.17 Board Approval. The Board of Directors of Parent has, as of the date
of this Agreement, determined to recommend that the stockholders of Parent
approve the Parent Proposals (as defined in Section 5.3) (other than the
proposed name change).
3.18 Fairness Opinion. Parent's Board of Directors has received an opinion
from Morgan Stanley & Co. Incorporated, dated as of the date hereof, to the
effect that as of the date hereof, the Exchange Ratio is fair to Parent from a
financial point of view, a written copy of which will be delivered to the
Company promptly after receipt by Parent of a copy of such opinion.
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3.19 Restrictions on Business Activities. Except as set forth in Part 3.19
of Parent Schedules, there is no agreement, commitment, judgment, injunction,
order or decree binding upon Parent or to which Parent is a party which has or
could reasonably be expected to have the effect of prohibiting or materially
impairing any business practice of Parent, any acquisition by Parent or the
conduct of business by Parent as currently conducted.
3.20 Interested Party Transactions. Except as set forth in Parent's SEC
Reports or in Parent's Proxy Statement for its 1999 Annual Meeting, since
January 1, 1999, there have been no transactions of a nature that would be
required to be described under Item 404 of Regulation S-K promulgated under the
Securities Act.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business by the Company. During the period from the date of
this Agreement and continuing until the earlier of the termination of this
Agreement pursuant to its terms or the Effective Time, the Company and each of
its subsidiaries shall carry on its business in compliance with all applicable
laws and regulations, pay its debts and taxes when due subject to good faith
disputes over such debts or taxes, pay or perform other material obligations
when due subject to good faith disputes over such obligations, and use its
commercially reasonable efforts consistent with past practices and policies to
(i) preserve intact its present business organization; (ii) keep available the
services of its present officers and employees; and (iii) preserve its
relationships with customers, suppliers, distributors, licensors, licensees, and
others with which it has business dealings.
In addition, except as permitted by the terms of this Agreement, and except
as provided in Article 4 of the Company Schedules, without the prior written
consent of Parent, during the period from the date of this Agreement and
continuing until the earlier of the termination of this Agreement pursuant to
its terms or the Effective Time, the Company shall not do any of the following
and shall not permit its subsidiaries to do any of the following:
(a) Waive any stock repurchase rights, accelerate, amend or change the
period of exercisability of options or restricted stock, or reprice options
granted under any employee, consultant, director or other stock plans or
authorize cash payments in exchange for any options granted under any of such
plans;
(b) Grant any severance or termination pay to any officer or employee
except pursuant to written agreements outstanding, or policies existing, on the
date hereof and as previously disclosed in writing or made available to Parent,
or adopt any new severance plan;
(c) Transfer or license to any person or entity or otherwise extend,
amend or modify in any material respect any rights to the Company Intellectual
Property, or enter into grants to future patent rights, other than non-exclusive
licenses in the ordinary course of business and consistent with past practice;
(d) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock, equity securities or property) in respect
of any capital stock or split, combine or reclassify any capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for any capital stock, other than the exercise of options or
warrants or conversions of securities outstanding on the date of this Agreement
or granted pursuant to Section 4.1(f)(i) below (including any exchange of Series
D Common Stock for Series F Preferred Stock in connection with the Offer to
Purchase);
(e) Purchase, redeem or otherwise acquire, directly or indirectly, any
shares of capital stock of the Company or its subsidiaries, except repurchases
of unvested shares at cost in connection with the termination of the employment
relationship with any employee pursuant to stock option or purchase agreements
in effect on the date hereof, other than the exercise of options or warrants or
conversions of securities outstanding on the date of this Agreement or granted
pursuant to Section 4.1(f)(i) (including
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any exchange of Series D Common Stock for Series F Preferred Stock in connection
with the Offer to Purchase);
(f) Issue, deliver, sell, authorize, pledge or otherwise encumber, any
shares of capital stock or any securities convertible into shares of capital
stock, or subscriptions, rights, warrants or options to acquire any shares of
capital stock or any securities convertible into shares of capital stock, or
enter into other agreements or commitments of any character obligating it to
issue any such shares or convertible securities, other than (i) stock options
for Company Common Stock pursuant to the Company Stock Option Plans granted to
employees of the Company to purchase up to 700,000 shares (as appropriately
adjusted for stock splits and the like) of Company Common Stock to employees of
the Company (other than officers of the Company) with strike prices no less than
the fair market value of the Parent Common Stock at the time of grant multiplied
by the Exchange Ratio and otherwise with vesting schedules and other terms and
conditions consistent with Parent's stock option grants to Parent's employees;
(ii) issuance of shares of the Company Common Stock and Series F Preferred Stock
pursuant to the exercise of stock options or warrants therefor outstanding as of
the date of this Agreement or granted pursuant to the preceding clause (i);
(iii) the exercise of options or warrants or conversions of securities
outstanding on the date of this Agreement or granted pursuant to clause (i)
above (including any exchange of Series D Common Stock for Series F Preferred
Stock in connection with the Offer to Purchase), and (iv) the issuance of shares
contemplated by Sections 6.3(i) and 6.3(j).
(g) Cause, permit or propose any amendments to its Articles of
Incorporation, Bylaws or other charter documents (or similar governing
instruments of any of its subsidiaries) except as set forth in the Company
Conversion Agreements;
(h) Acquire or agree to acquire or be acquired by merging or
consolidating with, or by purchasing any equity interest in or a portion of the
assets of, or by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof, or otherwise
acquire or agree to acquire any assets which are material, individually or in
the aggregate, to the business of the Company or enter into any material joint
ventures, strategic partnerships or alliances;
(i) Sell, lease, license, encumber or otherwise dispose of any
properties or assets which are material, individually or in the aggregate, to
the business of the Company, except sales of inventory and used equipment in the
ordinary course of business consistent with past practice;
(j) Incur any indebtedness for borrowed money or guarantee any such
indebtedness of another person, issue or sell any debt securities or options,
warrants, calls or other rights to acquire any debt securities of the Company,
enter into any "keep well" or other agreement to maintain any financial
statement condition or enter into any arrangement having the economic effect of
any of the foregoing other than (i) in connection with the financing of ordinary
course trade payables consistent with past practice or (ii) pursuant to existing
agreements disclosed in the Company Schedules in the ordinary course of
business;
(k) Adopt or amend any employee benefit plan or employee stock purchase
or employee stock option plan, or enter into any employment contract or
collective bargaining agreement (other than offer letters and letter agreements
entered into in the ordinary course of business consistent with past practice
with employees who are terminable "at will"), pay any special bonus or special
remuneration to any director or employee, or increase the salaries or wage rates
or fringe benefits (including rights to severance or indemnification) of its
directors, officers, employees or consultants other than in the ordinary course
of business, consistent with past practice, or change in any material respect
any management policies or procedures;
(l) Materially modify or amend, or terminate any Contract or other
material contract or agreement to which the Company or any subsidiary thereof is
a party or waive, release or assign any material rights or claims thereunder, in
any such case, in a manner materially adverse to the Company or Parent;
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(m) Enter into any contracts, agreements, or obligations relating to the
distribution, sale, license or marketing by third parties of the Company's
products or products licensed by the Company other than in the ordinary course
of business consistent with past practice;
(n) Materially revalue any of its assets or, except as required by GAAP,
make any change in accounting methods, principles or practices;
(o) Engage in any action that could reasonably be expected to cause the
Merger to fail to qualify as a "reorganization" under Section 368(a) of the
Code, whether or not otherwise permitted by the provisions of this Article IV;
(p) Permit Microsoft to increase the number of shares it is offering to
purchase pursuant to the Offer to Purchase or amend or modify the Offer to
Purchase in a manner knowingly materially adverse to Parent or the Company or in
a manner which knowingly would cause a material delay in the consummation of the
Merger; or
(q) Amend the Investment Agreement (as defined in Section 6.3(i)(a)) in
any manner, other than providing certain closing conditions set forth therein to
be applicable to the Purchasers (as defined therein).
(r) Agree in writing or otherwise to take any of the actions described
in (a) through (q) above.
4.2 Conduct of Business by Parent. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
pursuant to its terms or the Effective Time, Parent and each of its subsidiaries
shall carry on its business in compliance with all applicable laws and
regulations, pay its debts and taxes when due, subject to good faith disputes
over such debts or taxes, pay or perform other material obligations when due
subject to good faith disputes over such obligations, and use its commercially
reasonable efforts consistent with past practices and policies to (i) preserve
intact its present business organization; (ii) keep available the services of
its present officers and employees; and (iii) preserve its relationships with
customers, suppliers, distributors, licensors, licensees, and others with which
it has business dealings.
In addition, except as permitted by the terms of this Agreement, except as
provided in Article 4 of the Parent Schedules and, subject to subsection (k)
below, except as contemplated by the MEDE Agreement (as defined in subsection
(k) below), without the prior written consent of the Company, during the period
from the date of this Agreement and continuing until the earlier of the
termination of this Agreement pursuant to its terms or the Effective Time,
Parent shall not do any of the following:
(a) Waive any stock repurchase rights, accelerate, amend or change the
period of exercisability of options or restricted stock, or reprice options
granted under any employee, consultant, director or other stock plans or
authorize cash payments in exchange for any options granted under any of such
plans;
(b) Grant any severance or termination pay to any officer or employee
except pursuant to written agreements outstanding, or policies existing, on the
date hereof and as previously disclosed in writing or made available to the
Company, or adopt any new severance plan;
(c) Transfer or license to any person or entity or otherwise extend,
amend or modify in any material respect any rights to the Parent Intellectual
Property, or enter into grants to future patent rights, other than non-exclusive
licenses in the ordinary course of business and consistent with past practice;
(d) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock, equity securities or property) in respect
of any capital stock or split, combine or reclassify any capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for any capital stock, other than the exercise of options or
warrants or conversions of securities outstanding on the date of this Agreement
or granted pursuant to Section 4.2(f)(i) below or assumed pursuant to the MEDE
Agreement;
(e) Purchase, redeem or otherwise acquire, directly or indirectly, any
shares of capital stock of Parent or its subsidiaries, except repurchases of
unvested shares at cost in connection with the termination
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of the employment relationship with any employee pursuant to stock option or
repurchase agreements in effect on the date hereof, other than the exercise of
options or warrants or conversions of securities outstanding on the date of this
Agreement or granted pursuant to Section 4.2(f)(i) below or assumed pursuant to
the MEDE Agreement;
(f) Issue, deliver, sell, authorize, pledge or otherwise encumber any
shares of capital stock or any securities convertible into shares of capital
stock, or subscriptions, rights, warrants or options to acquire any shares of
capital stock or any securities convertible into shares of capital stock, or
enter into other agreements or commitments of any character obligating it to
issue any such shares or convertible securities, other than (i) stock options
for Parent Common Stock pursuant to stock options granted to employees of Parent
(other than officers of Parent) to purchase up to 1,400,000 (as appropriately
adjusted for stock splits and the like) shares of Parent Common Stock plus any
grants of stock options for Parent Common Stock as contemplated by the MEDE
Agreement; (ii) issuance of shares of Parent Common Stock pursuant to the
exercise of stock options or warrants therefor outstanding as of the date of
this Agreement or granted pursuant to the preceding clause (i) or warrants;
(iii) issuance of shares of Parent Common Stock to participants in the Parent
Purchase Plan pursuant to the terms thereof; (iv) subject to (k) below, issuance
of shares of Parent Common Stock in connection with mergers and acquisitions by
Parent publicly announced by Parent prior to the date hereof; and (v) the
exercise of options or warrants or conversions of securities outstanding on the
date of this Agreement or granted pursuant to subsection (i) above or assumed
pursuant to the MEDE Agreement.
(g) Except as contemplated by this Agreement, including increasing
Parent's authorized capitalization and changing Parent's corporate name, cause,
permit or propose any amendments to its Certificate of Incorporation, Bylaws or
other charter documents (or similar governing instruments of any of its
subsidiaries);
(h) Acquire or agree to acquire by merging or consolidating with, or by
purchasing any equity interest in or a portion of the assets of, or by any other
manner any business or any corporation, partnership, association or other
business organization or division thereof, or otherwise acquire or agree to
acquire any assets which are material, individually or in the aggregate, to the
business of Parent or enter into any material joint ventures, strategic
partnerships or alliances;
(i) Engage in any action that could reasonably be expected to cause the
Merger to fail to qualify as a "reorganization" under Section 368(a) of the
Code, whether or not otherwise permitted by the provisions of this Article IV;
(j) Materially revalue any of its assets or, except as required by GAAP,
make any change in accounting methods, principles or practices;
(k) Parent shall not agree to increase the exchange ratio into which the
outstanding shares of MEDE AMERICA Corporation convert into shares of Parent
Common Stock (the "MEDE Exchange Ratio") pursuant to Section 1.6 of the
Agreement and Plan of Reorganization (the "MEDE Agreement") among Parent, MEDE
AMERICA and Merc Acquisition Corp., dated April 20, 1999 such that the number of
shares of Parent Common Stock issuable pursuant to the MEDE Agreement would
exceed an amount equal to the sum of (i) the number of shares of Parent Common
Stock that Parent would be required to issue (or reserve for issuance for the
exercise of outstanding options, warrants and other rights) under the Mede
Agreement if the MEDE Exchange Ratio is not adjusted plus (ii) an amount equal
to an additional 2,000,000 shares of Parent Common Stock (as appropriately
adjusted for stock splits and the like);
(l) Incur any indebtedness for borrowed money or guarantee any such
indebtedness of another person, issue or sell any debt securities or options,
warrants, calls or other rights to acquire any debt securities of Parent, enter
into any "keep well" or other agreement to maintain any financial statement
condition or enter into any arrangement having the economic effect of any of the
foregoing other than (i) in connection with the financing of ordinary course
trade payables consistent with past practice; or (ii) pursuant to existing
agreements either disclosed in Parent SEC Reports or not material to Parent;
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(m) Adopt or amend any employee benefit plan or employee stock purchase
or employee stock option plan, or enter into any employment contract or
collective bargaining agreement (other than offer letters and letter agreements
entered into in the ordinary course of business consistent with past practice
with employees who are terminable "at will"), pay any special bonus or special
remuneration to any director or employee, or increase the salaries or wage rates
or fringe benefits (including rights to severance or indemnification) of its
directors, officers, employees or consultants other than in the ordinary course
of business, consistent with past practice, or change in any material respect
any management policies or procedures;
(n) Materially modify or amend or terminate any Contract or other
material contract or agreement to which the Parent or any subsidiary thereof is
a party or waive, release or assign any material rights or claims thereunder, in
any such case, in a manner materially adverse to Parent;
(o) Enter into any contracts, agreements, or obligations relating to the
distribution, sale, license or marketing by third parties of Parent's products
or products licensed by the Parent other than in the ordinary course of
business;
(p) Materially revalue any of its assets or, except as required by GAAP,
make any change in accounting methods, principles or practices;
(q) Selling any material portion of Parent's assets other than in the
ordinary course of business; or
(r) Agree in writing or otherwise to take any of the actions described
in Section 4.2(a) through (q) above.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Prospectus/Proxy Statement; Registration Statement; Other Filings;
Board Recommendations. As promptly as possible after the execution of this
Agreement, the Company and Parent shall prepare and Parent shall file with the
SEC the Prospectus/Proxy Statement, and Parent will prepare and file with the
SEC the Registration Statement in which the Prospectus/Proxy Statement will be
included as a prospectus. Each of Parent and the Company shall provide promptly
to the other such information concerning its business and financial statements
and affairs as, in the reasonable judgment of the providing party or its
counsel, may be required or appropriate for inclusion in the Proxy Statement and
the Registration Statement, or in any amendments or supplements thereto, and to
cause its counsel and auditors to cooperate with the other's counsel and
auditors in the preparation of the Proxy Statement and the Registration
Statement. Each of the Company and Parent will respond to any comments of the
SEC, will use its respective commercially reasonable efforts to have the
Registration Statement declared effective under the Securities Act as promptly
as practicable after such filing and each of the Company and Parent will cause
the Prospectus/Proxy Statement to be mailed to its respective stockholders at
the earliest practicable time after the Registration Statement is declared
effective by the SEC. As promptly as practicable after the date of this
Agreement, each of the Company and Parent will prepare and file (i) with the
United States Federal Trade Commission (the "FTC") and the Antitrust Division of
the United States Department of Justice ("DOJ") Notification and Report Forms
relating to the transactions contemplated herein as required by the HSR Act, as
well as comparable pre-merger notification forms required by the merger
notification or control laws and regulations of any applicable jurisdiction, as
agreed to by the parties (the "ANTITRUST FILINGS"); and (ii) any other filings
required to be filed by it under the Exchange Act, the Securities Act or any
other Federal, state or foreign laws relating to the Merger and the transactions
contemplated by this Agreement (the "OTHER FILINGS"). The Company and Parent
each shall promptly supply the other with any information which may be required
in order to effectuate any filings pursuant to this Section 5.1. Each of the
Company and Parent will notify the other promptly upon the receipt of any
comments from the SEC or its staff or any other government officials in
connection with any filing made pursuant hereto and of any request by the SEC or
its staff or any other government
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officials for amendments or supplements to the Registration Statement, the
Prospectus/Proxy Statement or any Antitrust Filings or Other Filing or for
additional information and will supply the other with copies of all
correspondence between such party or any of its representatives, on the one
hand, and the SEC, or its staff or any other government officials, on the other
hand, with respect to the Registration Statement, the Prospectus/Proxy
Statement, the Merger or any Antitrust Filing or Other Filing. Each of the
Company and Parent will cause all documents that it is responsible for filing
with the SEC or other regulatory authorities under this Section 5.1 to comply in
all material respects with all applicable requirements of law and the rules and
regulations promulgated thereunder. Whenever any event occurs which is required
to be set forth in an amendment or supplement to the Prospectus/Proxy Statement,
the Registration Statement or any Antitrust Filing or Other Filing, the Company
or Parent, as the case may be, will promptly inform the other of such occurrence
and cooperate in filing with the SEC or its staff or any other government
officials, and/or mailing to stockholders of the Company and/or Parent, such
amendment or supplement.
5.2 Meeting of Company Stockholders.
(a) Promptly after the date hereof, the Company will take all action
necessary in accordance with Georgia Law and its Articles of Incorporation and
Bylaws to convene a meeting of the Company's stockholders to consider adoption
and approval of this Agreement and approval of the Merger (the "COMPANY
STOCKHOLDERS' MEETING") to be held as promptly as practicable, and in any event
(to the extent permissible under applicable law) within 45 days after the
declaration of effectiveness of the Registration Statement. The Company shall
set the record date for the Company Stockholders' Meeting on the date which is
eight business days after the date the Prospectus/Proxy Statement is mailed to
the Company's stockholders. The Company will use its commercially reasonable
efforts to solicit from its stockholders proxies in favor of the adoption and
approval of this Agreement and the approval of the Merger and will take all
other action necessary or advisable to secure the vote or consent of its
stockholders required by Georgia Law to obtain such approvals. Notwithstanding
anything to the contrary contained in this Agreement, the Company may adjourn or
postpone the Company Stockholders' Meeting, but only to the extent necessary to
ensure that any necessary supplement or amendment to the Prospectus/Proxy
Statement is provided to Company stockholders in advance of a vote on the Merger
or, if as of the time for which Company Stockholders' Meeting is originally
scheduled (as set forth in the Prospectus/Proxy Statement) there are
insufficient shares of Company Capital Stock represented (either in person or by
proxy) to constitute a quorum necessary to conduct the business of the Company
Stockholders' Meeting. The Company shall ensure that the Company Stockholders'
Meeting is called, noticed, convened, held and conducted, and that all proxies
solicited by the Company in connection with the Company Stockholders' Meeting
are solicited, in compliance with the Georgia Law, the Company's Articles of
Incorporation and Bylaws, and all other applicable legal requirements. The
Company's obligation to call, give notice of, convene and hold the Company
Stockholders' Meeting in accordance with this Section 5.2(a) shall not be
limited to or otherwise affected by (except to the extent set forth in this
Section 5.2(a)) the commencement, disclosure, announcement or submission to the
Company of any Acquisition Proposal, or by any withdrawal, amendment or
modification of the recommendation of the Board of Directors of the Company with
respect to the Merger, this Agreement or the transactions contemplated hereby.
(b) The Board of Directors of the Company shall recommend that the
Company's stockholders vote in favor of and adopt and approve this Agreement and
approve the Merger at the Company Stockholders' Meeting or otherwise comply with
Section 14-2-1103 of Georgia Law (including without limitation subsection (b)(1)
thereof). Except as necessary so as not to breach its fiduciary duties to the
Company's stockholders under Georgia Law, the Prospectus/Proxy Statement shall
include a statement to the effect that the Board of Directors of the Company has
recommended that the Company's stockholders vote in favor of and adopt and
approve this Agreement and the Merger at the Company Stockholders' Meeting.
Except as necessary so as not to breach its fiduciary duties to the Company's
stockholders under Georgia Law, neither the Board of Directors of the Company
nor any committee thereof shall withdraw, amend or modify, or propose or resolve
to withdraw, amend or modify in a manner adverse to Parent, the recommendation
of the Board of Directors of the Company that the Company's stockholders vote in
favor of and adopt and approve this Agreement and the Merger. Notwithstanding
anything permitted by the
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foregoing, neither the Company nor its Board of Directors shall take any action
that would cause any Company Voting Agreement or Company Conversion Agreement to
be unenforceable in accordance with its terms under applicable law.
(c) If, on the date immediately prior to the record date for the Company
Stockholders Meeting, the shares of the Company Capital Stock subject to Company
Voting Agreements (including Company Voting Agreements entered into by parties
to Company Conversion Agreements) do not represent sufficient voting power to
approve the Merger (other than with respect to the required vote, if any, of the
Series A Preferred Stock or Series B Preferred Stock as separate voting groups),
then the Company will grant an option to Parent to purchase a sufficient number
of shares of Common Stock and/or Series F Preferred Stock, exercisable on the
record date at a price equal to $54.17 per share of Company Common Stock (on an
as-converted basis), payable by delivery of cash in the amount of the par value
per share of the shares purchased upon the exercise of such option(s), plus a
note of Parent with interest at 5% per annum for the remainder of the exercise
price, so as to provide such voting power. Any shares of Company Capital Stock
purchased pursuant to such option shall be subject to a put and call at the
exercise price of the option (payable by cancellation or return of the note, as
the case may be, together with cash in the amount of the cash purchase price) in
the event this Agreement is terminated prior to the Closing. The parties agree
to take such actions to ensure that the consummation of the transactions in this
Section (or such other substitute arrangements as the parties may mutually agree
to accomplish the purposes of this Section 5.2(c)) will not cause the Merger to
fail to constitute a tax-free transaction to the holders of Parent Common Stock
and Company Capital Stock under Section 368 or 351 of the Code.
5.3 Meeting of Parent Stockholders.
(a) Promptly after the date hereof, Parent will take all action
necessary in accordance with the Delaware Law and its Certificate of
Incorporation and Bylaws to convene a meeting of Parent's stockholders (the
"PARENT STOCKHOLDERS MEETING") to consider (i) the issuance of the shares of
Parent Common Stock pursuant to the Merger (the "FIRST PROPOSAL"); (ii) an
amendment to the Parent Certificate of Incorporation to increase the number of
shares of Parent Common Stock and Preferred Stock of Parent authorized
thereunder and (iii) an amendment to Parent's certificate of Incorporation to
change its corporate name (subject to and conditional upon the effectiveness of
the Merger) (collectively, the "PARENT PROPOSALS"), to be held as promptly as
practicable, and in any event (to the extent permissible under applicable law)
within 45 days after the declaration of effectiveness of the Registration
Statement. Parent will use its commercially reasonable efforts to solicit from
its stockholders proxies in favor of the Parent Proposals and will take all
other action necessary or advisable to secure the vote or consent of its
stockholders required by the rules of Nasdaq or Delaware Law to obtain such
approvals. Notwithstanding anything to the contrary contained in this Agreement,
Parent may adjourn or postpone the Parent Stockholders' Meeting, but only to the
extent necessary to ensure that any necessary supplement or amendment to the
Prospectus/Proxy Statement is provided to Parent's stockholders in advance of a
vote on the Parent Proposals or, if as of the time for which Parent
Stockholders' Meeting is originally scheduled (as set forth in the
Prospectus/Proxy Statement) there are insufficient shares of Parent Common Stock
represented (either in person or by proxy) to constitute a quorum necessary to
conduct the business of the Parent's Stockholders' Meeting. Parent shall ensure
that the Parent Stockholders' Meeting is called, noticed, convened, held and
conducted, that all proxies solicited by the Company in connection with the
Parent Stockholders' Meeting are solicited in compliance with the Delaware Law,
its Certificate of Incorporation and Bylaws, the rules of Nasdaq and all other
applicable legal requirements. Parent's obligation to call, give notice of,
convene and hold the Parent Stockholders' Meeting in accordance with Section
5.3(a) shall not be limited or otherwise affected (except to the extent set
forth in this Section 5.3(a)) by the commencement, disclosure, announcement or
submission to Parent of any offer or proposal to acquire securities or assets of
Parent or its subsidiaries or any merger, consolidation, business combination or
similar transaction involving Parent, or by the withdrawal, amendment or
modification of the recommendation of the Board of Directors of Parent with
respect to the Merger, the Parent Proposals, this Agreement or the transactions
contemplated hereby.
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(b) The Board of Directors of Parent shall recommend that Parent's
stockholders vote in favor of the Parent Proposals or otherwise comply with
Section 251(c) of Delaware Law. Except as necessary so as not to breach its
fiduciary duties to Parent's stockholders under Delaware Law, the
Prospectus/Proxy Statement shall include a statement to the effect that the
Board of Directors of Parent has recommended that Parent's stockholders vote in
favor of the Parent Proposals at the Parent Stockholders' Meeting. Except as
necessary so as not to breach its fiduciary duties to Parent's stockholders
under Delaware Law, neither the Board of Directors of Parent nor any committee
thereof shall withdraw, amend or modify, or propose or resolve to withdraw,
amend or modify in a manner adverse to the Company, the recommendation of the
Board of Directors of Parent that Parent's stockholders vote in favor of the
First Proposal. Except as provided in the previous sentence with respect to the
First Proposal, neither the Board of Directors of Parent nor any committee
thereof shall withdraw, amend or modify, or propose or resolve to withdraw,
amend or modify in a manner adverse to the Company, the recommendation of the
Board of Directors of Parent that Parent's stockholders vote in favor of the
Parent Proposals. Notwithstanding anything permitted by the foregoing, neither
Parent nor its Board of Directors shall take any action that would cause any
Parent Voting Agreement to be unenforceable in accordance with its terms under
applicable law.
5.4 Confidentiality; Access to Information.
(a) The parties acknowledge that the Company and Parent have previously
executed a Mutual Non-Disclosure Agreement, dated as of May 6, 1999 (the
"CONFIDENTIALITY AGREEMENT"), which Confidentiality Agreement will continue in
full force and effect in accordance with its terms.
(b) Access to Information. The Company and Parent will afford to each
other and each other's accountants, counsel and other representatives reasonable
access during normal business hours to the properties, books, records and
personnel of the Company or Parent, as the case may be, during the period prior
to the Effective Time to obtain all information concerning the business,
including the status of product development efforts, properties, results of
operations and personnel of the Company or Parent, as may be reasonably
requested. No information or knowledge obtained by Parent or the Company in any
investigation pursuant to this Section 5.4 will affect or be deemed to modify
any representation or warranty contained herein or the conditions to the
obligations of the parties to consummate the Merger.
5.5 No Solicitation.
(a) From and after the date of this Agreement until the Effective Time
or termination of this Agreement pursuant to Article VII, the Company and its
subsidiaries will not, nor will they authorize or permit any of their respective
officers, directors, affiliates or employees or any investment banker, attorney
or other advisor or representative retained by any of them to, directly or
indirectly, (i) solicit, initiate, encourage or induce the making, submission or
announcement of any Acquisition Proposal (as hereinafter defined); (ii)
participate in any discussions or negotiations regarding, or furnish to any
person any non-public information with respect to, or take any other action to
facilitate any inquiries or the making of any proposal that constitutes or may
reasonably be expected to lead to, any Acquisition Proposal; (iii) engage in
discussions with any person with respect to any Acquisition Proposal, except as
to the existence of these provisions; (iv) approve, endorse or recommend any
Acquisition Proposal; or (v) enter into any letter of intent or similar document
or any contract agreement or commitment contemplating or otherwise relating to
any Acquisition Transaction. The Company and its subsidiaries will immediately
cease any and all existing activities, discussions or negotiations with any
parties conducted heretofore with respect to any Acquisition Proposal. Without
limiting the foregoing, it is understood that any violation of the restrictions
set forth in the preceding two sentences by any officer, director or employee of
the Company or any of its subsidiaries or any investment banker, attorney or
other advisor or representative of the Company or any of its subsidiaries shall
be deemed to be a breach of this Section 5.5 by the Company.
For purposes of this Agreement, "ACQUISITION PROPOSAL" shall mean any offer
or proposal (other than an offer or proposal by Parent or the Offer to Purchase)
relating to any Acquisition Transaction. For purposes of this Agreement,
"ACQUISITION TRANSACTION" shall mean any transaction or series of related
transactions involving: (A) any purchase from the Company or acquisition by any
person or "group" (as
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defined under Section 13(d) of the Exchange Act and the rules and regulations
thereunder) of more than a 5% interest in the total outstanding voting
securities of the Company or any of its subsidiaries or any tender offer or
exchange offer that if consummated would result in any person or "group" (as
defined under Section 13(d) of the Exchange Act and the rules and regulations
thereunder) beneficially owning 5% or more of the total outstanding voting
securities of the Company or any of its subsidiaries or any merger,
consolidation, business combination or similar transaction involving the
Company; (B) any sale, lease (other than in the ordinary course of business),
exchange, transfer, license (other than in the ordinary course of business),
acquisition or disposition of more than 5% of the assets of the Company; or (C)
any liquidation or dissolution of the Company.
(b) In addition to the obligations of the Company set forth in paragraph
(a) of this Section 5.5, the Company as promptly as practicable shall advise
Parent orally and in writing of any request for non-public information which the
Company reasonably believes would lead to an Acquisition Proposal or to any
Acquisition Transaction, or any inquiry with respect to or which the Company
reasonably should believe would lead to any Acquisition Proposal, the material
terms and conditions of such request, Acquisition Proposal or inquiry, and the
identity of the person or group making any such request, Acquisition Proposal or
inquiry. The Company will keep Parent informed as promptly as practicable in all
material respects of the status and details (including material amendments or
proposed material amendments) of any such request, Acquisition Proposal or
inquiry.
(c) The parties acknowledge and agree that nothing set forth in this
Section 5.5 shall prohibit the Company from participating in discussions
regarding transactions that would be executed and consummated following the
Effective Time.
5.6 Public Disclosure. Parent and the Company will attempt to consult with
each other, and to the extent practicable, agree, before issuing any press
release or otherwise making any public statement with respect to the Merger,
this Agreement or any material transaction involving Parent or the Company and
will not issue any such press release or make any such public statement prior to
such consultation, except as may be required by law or any listing agreement
with a national securities exchange. With respect to the initial press release
announcing the Merger and this Agreement, the parties have agreed to the text of
the joint press release and will jointly announce the Merger and this Agreement.
Parent shall file this Agreement with the SEC on Form 8-K as soon as practicable
after the date of this Agreement and, in any event, within five business days
after the date of this Agreement.
5.7 Reasonable Efforts; Notification.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, each of the parties agrees to use all reasonable efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, and to assist
and cooperate with the other parties in doing, all things necessary, proper or
advisable to consummate and make effective, in the most expeditious manner
practicable, the Merger and the other transactions contemplated by this
Agreement, including using reasonable efforts to accomplish the following: (i)
the taking of all reasonable acts necessary to cause the conditions precedent
set forth in Article VI to be satisfied; (ii) the obtaining of all necessary
actions or nonactions, waivers, consents, approvals, orders and authorizations
from Governmental Entities and the making of all necessary registrations,
declarations and filings (including registrations, declarations and filings with
Governmental Entities, if any) and the taking of all reasonable steps as may be
necessary to avoid any suit, claim, action, investigation or proceeding by any
Governmental Entity; (iii) the obtaining of all necessary consents, approvals or
waivers from third parties; (iv) the defending of any suits, claims, actions,
investigations or proceedings, whether judicial or administrative, challenging
this Agreement or the consummation of the transactions contemplated hereby,
including seeking to have any stay or temporary restraining order entered by any
court or other Governmental Entity vacated or reversed; and (v) the execution or
delivery of any additional instruments necessary to consummate the transactions
contemplated by, and to fully carry out the purposes of, this Agreement. In
connection with and without limiting the foregoing, the Company and its Board of
Directors shall, if any state takeover statute or similar statute or regulation
is or becomes applicable to the Merger, this Agreement or any of the
transactions contemplated by this
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Agreement, use all reasonable efforts to ensure that the Merger and the other
transactions contemplated by this Agreement may be consummated as promptly as
practicable on the terms contemplated by this Agreement and otherwise to
minimize the effect of such statute or regulation on the Merger, this Agreement
and the transactions contemplated hereby. Notwithstanding anything herein to the
contrary, nothing in this Agreement shall be deemed to require Parent, the
Company or any subsidiary or affiliate thereof to agree to any divestiture by
itself or any of its affiliates of shares of capital stock or of any business,
assets or property, or the imposition of any material limitation on the ability
of any of them to conduct their businesses or to own or exercise control of such
assets, properties and stock.
(b) The Company shall give prompt notice to Parent of any representation
or warranty made by it contained in this Agreement becoming untrue or
inaccurate, or any failure of the Company to comply with or satisfy in any
material respect any covenant, condition or agreement to be complied with or
satisfied by it under this Agreement, in each case, such that the conditions set
forth in Section 6.3(a) or 6.3(b) would not be satisfied, provided, however,
that no such notification shall affect the representations, warranties,
covenants or agreements of the parties or the conditions to the obligations of
the parties under this Agreement.
(c) Parent shall give prompt notice to the Company of any representation
or warranty made by it or Merger Sub contained in this Agreement becoming untrue
or inaccurate, or any failure of Parent or Merger Sub to comply with or satisfy
in any material respect any covenant, condition or agreement to be complied with
or satisfied by it under this Agreement, in each case, such that the conditions
set forth in Section 6.2(a) or 6.2(b) would not be satisfied, provided, however,
that no such notification shall affect the representations, warranties,
covenants or agreements of the parties or the conditions to the obligations of
the parties under this Agreement.
5.8 Third Party Consents. As soon as practicable following the date
hereof, Parent and the Company will each use its commercially reasonable efforts
to obtain any consents, waivers and approvals under any of its or its
subsidiaries' respective agreements, contracts, licenses or leases required to
be obtained in connection with the consummation of the transactions contemplated
hereby.
5.9 Stock Options, Warrants and Employee Benefits.
(a) At the Effective Time, each outstanding Company Option, whether or
not exercisable and regardless of the respective exercise prices thereof, will
be assumed by Parent. Each Company Option so assumed by Parent under this
Agreement will continue to have, and be subject to, the same terms and
conditions set forth in the applicable Company Stock Option Plan immediately
prior to the Effective Time (including, without limitation, any repurchase
rights or vesting provisions, but giving effect to any accelerated vesting and
exercisability resulting from the Merger), except that (i) each Company Option
will be exercisable (or will become exercisable in accordance with its terms)
for that number of whole shares of Parent Common Stock equal to the product of
the number of shares of Company Common Stock that were issuable upon exercise of
such Company Option immediately prior to the Effective Time multiplied by the
Exchange Ratio, rounded down to the nearest whole number of shares of Parent
Common Stock; and (ii) the per share exercise price for the shares of Parent
Common Stock issuable upon exercise of such assumed Company Option will be equal
to the quotient determined by dividing the exercise price per share of Company
Common Stock at which such Company Option was exercisable immediately prior to
the Effective Time by the Exchange Ratio, rounded up to the nearest whole cent.
(b) It is intended that Company Options assumed by Parent shall qualify
following the Effective Time as incentive stock options as defined in Section
422 of the Code to the extent Company Options qualified as incentive stock
options immediately prior to the Effective Time and the provisions of this
Section 5.9 shall be applied consistent with such intent.
(c) At the Effective Time, the Warrants will be assumed by Parent. Each
Warrant so assumed by Parent under this Agreement will continue to have, and be
subject to, the same terms and conditions set forth in the applicable warrant
agreement immediately prior to the Effective Time (including, without
limitation, any repurchase rights or vesting provisions), except that (i) each
Warrant will be exercisable
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(or will become exercisable in accordance with its terms) for that number of
whole shares of Parent Common Stock equal to the product of (a) the number of
shares of Company Capital Stock that were issuable upon exercise of such Warrant
immediately prior to the Effective Time multiplied by (b) the number of shares
of Parent Common Stock into which such shares of Company Capital Stock would
have been converted pursuant to Section 1.6(a) had such shares been outstanding
immediately prior to the Effective Time (the "RATIO"), rounded to the nearest
whole number of shares of Parent Common Stock and (ii) the per share exercise
price for the share of Parent Common Stock issuable upon exercise of such
assumed Warrant will be equal to the quotient determined by dividing the
exercise price per share of Company Capital Stock at which such Warrant was
exercisable immediately prior to the Effective Time by the Ratio, rounded to the
nearest whole cent.
5.10 Form S-8. Parent agrees to file, if available for use by Parent, a
registration statement on Form S-8 for the shares of Parent Common Stock
issuable with respect to assumed Company Stock Options as soon as is reasonably
practicable after the Effective Time and intends to maintain the effectiveness
of such registration statement thereafter for so long as any of such options or
other rights remain outstanding.
5.11 Indemnification.
(a) From and after the Effective Time, Parent will cause the Surviving
Corporation to fulfill and honor in all respects the obligations of the Company
pursuant to any indemnification agreements between the Company and its directors
and officers as of the Effective Time (the "INDEMNIFIED PARTIES"). The Articles
of Incorporation and Bylaws of the Surviving Corporation will contain provisions
with respect to exculpation and indemnification that are at least as favorable
to the Indemnified Parties as those contained in the Articles of Incorporation
and Bylaws of the Company as in effect on the date hereof, which provisions will
not be amended, repealed or otherwise modified for a period of six years from
the Effective Time in any manner that would adversely affect the rights
thereunder of individuals who were directors, officers, employees or agents of
the Company, unless such modification is required by law.
(b) For a period of six years after the Effective Time, Parent will
cause the Surviving Corporation to use its commercially reasonable efforts to
maintain in effect, if available, directors' and officers' liability insurance
covering those persons who are currently covered by the Company's directors' and
officers' liability insurance policy on terms comparable to those applicable to
the current directors and officers of the Company; provided, however, that in no
event will Parent or the Surviving Corporation be required to expend an annual
premium for such coverage in excess of $225,000 (or such coverage as is
available for such annual premium).
5.12 Board of Directors of Combined Company. The Board of Directors of
Parent will take all actions necessary to cause the Parent's Board of Directors,
immediately after the Effective Time, to consist of nine persons, four of whom
shall have been designated by the Board of Directors of the Company prior to the
Effective Time (including Jeffrey T. Arnold) and four of whom shall have been
designated by the Board of Directors of Parent immediately prior to the
Effective Time (including W. Michael Long). In addition, Parent and the Company
by mutual agreement shall specify an additional person to serve on Parent's
Board of Directors effective immediately after the Effective Time. If, prior to
the Effective Time, any of the designees of Parent or the Company shall decline
or be unable to serve as a director of Parent immediately after the Merger,
Parent (if such person was designated by Parent) or the Company (if such person
was designated by the Company) shall designate another person to serve in such
person's stead.
5.13 Officers of the Combined Company. At the Effective Time W. Michael
Long will be offered a position as Chairman of the Board of Parent and Chief
Operating Officer and Jeffrey T. Arnold will be offered a position as Chief
Executive Officer of Parent.
5.14 Change of Name; Increase of Authorized Shares. Subject to the terms
hereof, at the Parent Stockholders Meeting, Parent shall propose and recommend
that its Certificate of Incorporation be amended at the Effective Time to change
its name to a name mutually agreeable to the Company and Parent. In addition, at
the Parent Stockholder Meeting, Parent shall propose and recommend that its
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Certificate of Incorporation be amended to increase the authorized number of
shares of Parent Common Stock thereunder to 450,000,000 shares and that the
authorized number of shares of Preferred Stock of Parent be increased to
10,000,000 shares, provided that Parent may propose and recommend an increase of
such lesser number as in good faith it determines (provided that, subject to the
terms hereof, such lesser number is not less than the number of shares required
to be issued or reserved for issuance by virtue of the Merger and the other
transactions contemplated hereby).
5.15 Headquarters of Combined Company. Immediately after the Effective
Time the headquarters of Parent and the Company shall be jointly located in
Atlanta, Georgia.
5.16 Branding. Immediately after the Effective Time of the Merger Parent
and the Surviving Corporation shall adopt WebMD as the brand name of Parent's
and the Surviving Corporation's products and services.
5.17 Nasdaq Listing. Parent agrees to use its commercially reasonable
efforts to authorize for listing on Nasdaq the shares of Parent Common Stock
issuable, and those required to be reserved for issuance, in connection with the
Merger, upon official notice of issuance.
5.18 Company Affiliate Agreement. Not later than 30 days prior to the
Company Stockholders' Meeting, the Company shall deliver to Parent a list of
those persons who may be deemed to be, in the Company's reasonable judgment,
affiliates of the Company within the meaning of Rule 145 promulgated under the
Securities Act (each a "COMPANY AFFILIATE"). The Company will provide Parent
with such information and documents as Parent reasonably requests for purposes
of reviewing such list. Parent will be entitled to place appropriate legends
with respect to the restrictions imposed by Rule 145 promulgated under the
Securities Act on the certificates evidencing any Parent Common Stock to be
received by a Company Affiliate pursuant to the terms of this Agreement, and, in
the reasonable judgment of Parent, to issue appropriate stop transfer
instructions to the transfer agent for the Parent Common Stock.
5.19 Comfort Letters. At the request of Parent, the Company shall cause
its Ernst & Young LLP, certified public accountants to Company, to deliver a
comfort letter, in form and substance reasonably satisfactory to Parent, with
respect to financial information relating to the Company included in the
Registration Statement. At the request of the Company, Parent shall cause Ernst
& Young LLP, certified public accountants to Parent, to deliver a comfort letter
in form and substance reasonably satisfactory to Company, with respect to
financial information relating to the Parent included in the Registration
Statement.
5.20 Stockholder Agreements. Except for the registration rights
arrangements described in the Company Schedules and except for rights described
in Part 6.2(h) of the Company Schedules, prior to the Effective Time the Company
shall use commercially reasonable efforts to terminate all material rights of a
stockholder and obligations of the Company under any stockholder or other
agreement entered into between the Company and the stockholder of the Company in
its capacity as a stockholder (and not as a provider of goods and services),
including, without limitation, rights of first refusal and information rights,
other than dissenter rights and the rights of the Company Capital Stock to
receive shares of Parent Common Stock in the Merger.
5.21 FIRPTA Compliance. On or prior to the Closing Date, the Company shall
deliver to Parent a properly executed statement that the shares of Company
Capital Stock do not constitute "U.S. real property interests," as defined in
Section 897(c) of the Code. Such statement shall be in a form reasonably
acceptable to Parent and in accordance with the requirements of Treasury
Regulation Section 1.897-2(h), for purposes of satisfying Parent's obligations
under Treasury Regulation Section 1.1445-2(c)(3). In addition, simultaneously
with delivery of such statement, the Company shall provide to Parent, as agent
for the Company, a form of notice to the Internal Revenue Service in accordance
with the requirements of Treasury Regulation Section 1.897-2(h), along with
written authorization for Parent to deliver such form of notice to the Internal
Revenue Service on behalf of the Company upon the Closing.
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5.22 Additional Stockholder Vote. The Company shall seek approval by the
requisite vote of its stockholders of the acceleration of stock options under
the Company Stock Option Plans as a result of the consummation of the Merger
that may be deemed to constitute "parachute payments" pursuant to Section 280(G)
of the Code, such that if such approval is obtained, all such accelerated
vesting resulting from the transactions contemplated hereby would not be deemed
to be "parachute payments" pursuant to Section 280(G) of the Code or would be
exempt from such treatment under Section 280(G) of the Code with respect to the
holders who have agreed to waive such acceleration in the absence of obtaining
such requisite vote.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Closing Date of the
following conditions:
(a) Company Stockholder Approval. This Agreement, including without
limitation the treatment of the Company Capital Stock as set forth in Section
1.6(a), shall have been approved and adopted, and the Merger shall have been
duly approved, by the requisite vote under applicable law and the Company's
Articles of Incorporation, by the stockholders of the Company.
(b) Parent Stockholder Approval. The Parent Proposals shall have been
duly approved by the requisite vote under applicable law, Nasdaq rules and
Parent's Certificate of Incorporation by the stockholders of Parent.
(c) Registration Statement Effective; Proxy Statement. The SEC shall
have declared the Registration Statement effective. No stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have been
issued and no proceeding for that purpose, and no similar proceeding in respect
of the Prospectus/Proxy Statement, shall have been initiated or threatened in
writing by the SEC.
(d) No Order; HSR Act. No Governmental Entity shall have enacted,
issued, promulgated, enforced or entered any statute, rule, regulation,
executive order, decree, injunction or other order (whether temporary,
preliminary or permanent) which is in effect and which has the effect of making
the Merger illegal or otherwise prohibiting consummation of the Merger. All
waiting periods, if any, under the HSR Act relating to the transactions
contemplated hereby will have expired or terminated early and all material
foreign antitrust approvals required to be obtained prior to the Merger in
connection with the transactions contemplated hereby shall have been obtained.
(e) Tax Opinions. Parent and the Company shall each have received
written opinions from their respective tax counsel (Wilson Sonsini Goodrich &
Rosati, Professional Corporation, and Nelson Mullins Riley & Scarborough,
L.L.P., respectively), in form and substance reasonably satisfactory to them, to
the effect that the Merger will constitute a tax-free reorganization within the
meaning of Section 368(a) of the Code and such opinions shall not have been
withdrawn; provided, however, that if the counsel to either Parent or the
Company does not render such opinion, this condition shall nonetheless be deemed
to be satisfied with respect to such party if counsel to the other party renders
such opinion to such party. The parties to this Agreement agree to make such
reasonable representations as requested by such counsel for the purpose of
rendering such opinions.
(f) Nasdaq Listing. The shares of Parent Common Stock to be issued in
the Merger shall have been authorized for listing on Nasdaq, subject to notice
of issuance.
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6.2 Additional Conditions to Obligations of the Company. The obligation of
the Company to consummate and effect the Merger shall be subject to the
satisfaction at or prior to the Closing Date of each of the following
conditions, any of which may be waived, in writing, exclusively by the Company:
(a) Representations and Warranties. Each representation and warranty of
Parent and Merger Sub contained in this Agreement (i) shall have been true and
correct as of the date of this Agreement and (ii) shall be true and correct on
and as of the Closing Date with the same force and effect as if made on the
Closing Date except, (A) in each case, or in the aggregate, as does not
constitute a Material Adverse Effect on Parent; provided, however, such Material
Adverse Effect qualification shall be inapplicable with respect to the
representations and warranties contained in Sections 3.2, 3.3, 3.17, 3.18 and
3.19 (which shall have been true and correct in all material respects as of the
date of this Agreement, and shall be true and correct in all material respects
on and as of the Closing Date (other than representations and warranties which
address matters only as of a particular date, which representations and
warranties shall be true and correct in all material respects as of such date),
and (B) for those representations and warranties which address matters only as
of a particular date (which representations shall have been true and correct
(subject to the materiality qualifications set forth in the preceding clause
(A)) as of such particular date) (it being understood that, for purposes of
determining the accuracy of such representations and warranties, any update of
or modification to the Parent Schedules made or purported to have been made
after the execution of this Agreement shall be disregarded). The Company shall
have received a certificate with respect to the foregoing signed on behalf of
Parent by an authorized officer of Parent.
(b) Agreements and Covenants. Parent and Merger Sub shall have performed
or complied in all material respects with all agreements and covenants required
by this Agreement to be performed or complied with by them on or prior to the
Closing Date, and the Company shall have received a certificate to such effect
signed on behalf of Parent by an authorized officer of Parent.
(c) Material Adverse Effect. No Material Adverse Effect with respect to
Parent shall have occurred since the date of this Agreement.
(d) Consents. Parent shall have obtained all consents, waivers and
approvals required in connection with the consummation of the transactions
contemplated hereby in connection with the agreements, contracts, licenses or
leases set forth on Schedule 6.2(d).
6.3 Additional Conditions to the Obligations of Parent and Merger Sub. The
obligations of Parent and Merger Sub to consummate and effect the Merger shall
be subject to the satisfaction at or prior to the Closing Date of each of the
following conditions, any of which may be waived, in writing, exclusively by
Parent:
(a) Representations and Warranties. Each representation and warranty of
the Company contained in this Agreement (i) shall have been true and correct as
of the date of this Agreement and (ii) shall be true and correct on and as of
the Closing Date with the same force and effect as if made on and as of the
Closing Date except (A) in each case, or in the aggregate, as does not
constitute a Material Adverse Effect on the Company; provided, however, such
Material Adverse Effect qualification shall be inapplicable with respect to the
representations and warranties contained in Sections 2.2, 2.3, 2.5(c), 2.20,
2.21 and 2.22 (which shall have been true and correct in all material respects
as of the date of this Agreement and shall be true and correct in all material
respects on and as of the Closing Date (other than representations and
warranties which address matters only as of a particular date, which
representations and warranties shall be true and correct in all material
respects as of such date), and (B) for those representations and warranties
which address matters only as of a particular date (which representations shall
have been true and correct (subject to the materiality qualifications set forth
in the preceding clause (A)) as of such particular date) (it being understood
that, for purposes of determining the accuracy of such representations and
warranties, any update of or modification to the Company Schedules made or
purported to have been made after the execution of this Agreement shall be
disregarded). Parent shall have received a certificate with respect to the
foregoing signed on behalf of the Company by an authorized officer of the
Company.
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(b) Agreements and Covenants. The Company shall have performed or
complied in all material respects with all agreements and covenants required by
this Agreement to be performed or complied with by it at or prior to the Closing
Date, and Parent shall have received a certificate to such effect signed on
behalf of the Company by an authorized officer of the Company.
(c) Material Adverse Effect. No Material Adverse Effect with respect to
the Company shall have occurred since the date of this Agreement.
(d) Consents. The Company shall have obtained all consents, waivers and
approvals required in connection with the consummation of the transactions
contemplated hereby in connection with the agreements, contracts, licenses or
leases set forth on Schedule 6.3(d).
(e) Ownership Limits. At the Effective Time, no stockholder (taken
together with its affiliates) of the Company shall beneficially own, or have the
right to beneficially own at any time in the future, forty percent (40%) or more
of the outstanding shares of Company Capital Stock on a fully diluted as
converted into Company Common Stock basis.
(f) Appraisal Rights. No more than 0.66% of the shares of Company
Capital Stock on a fully diluted as converted into Company Common Stock basis
outstanding immediately prior to the Effective Time shall have perfected or
shall have the right to perfect in the future rights of appraisal or dissenters'
rights with respect to the Merger.
(g) Legal Opinion. Nelson Mullins Riley & Scarborough, L.L.P., outside
counsel to the Company, shall have delivered a legal opinion to Parent, dated as
of the Closing Date, in a form reasonably acceptable to Parent, covering the
substance set forth on Schedule 6.3(g).
(h) Company Rights. The Company shall have provided Parent evidence
reasonably satisfactory to Parent that except for registration rights and except
for the rights specified in Part 6.2(h) of the Company Schedules, all material
rights of a stockholder and obligations of the Company under any stockholder or
other agreement entered into between the Company and a stockholder of the
Company in its capacity as a stockholder (and not as a provider of goods or
services), including without limitation rights of first refusal and information
rights, other than the dissenters' rights and the right of the holders of
Company Capital Stock to receive shares of Parent Common Stock, pursuant to the
terms of this Agreement, shall have terminated.
(i) Microsoft Arrangements. After the date of this Agreement and prior
to the Effective Time, the Company shall have received an investment from
Microsoft pursuant to the terms of the Investment Agreement dated May 12, 1999
among the Company, Microsoft and the Purchasers named therein (the "INVESTMENT
AGREEMENT") or other investors as permitted thereby in an amount equal to
$150,000,000 in exchange for 276,906 shares of the Company's Series E Preferred
Stock.
(j) Strategic Investors. (i) Within 10 days following the date of this
Agreement, the Company shall have received an amount equal to $114,500,000 in
exchange for the sale of 211,372 shares of the Company's Series E Preferred
Stock to investors other than Microsoft pursuant to the Investment Agreement,
and (ii) after the date of this Agreement and prior to the Effective Time, the
Company shall receive an amount equal to $35,500,000 in exchange for the sale of
65,534 shares of the Company's Series E Preferred Stock to investors other than
Microsoft in substantially the same form as the Investment Agreement.
(k) The Stockholder Agreement attached hereto as Exhibit C with
Microsoft shall be in full force and effect.
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ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after the requisite approvals of the
stockholders of the Company or Parent:
(a) by mutual written consent duly authorized by the Boards of Directors
of Parent and the Company;
(b) by either the Company or Parent if the Merger shall not have been
consummated by December 15, 1999 (the "END DATE") for any reason; provided,
however, that the right to terminate this Agreement under this Section 7.1(b)
shall not be available to any party whose action or failure to act has been a
principal cause of or resulted in the failure of the Merger to occur on or
before such date and such action or failure to act constitutes a material breach
of this Agreement;
(c) by either the Company or Parent if a Governmental Entity shall have
issued an order, decree or ruling or taken any other action, in any case having
the effect of permanently restraining, enjoining or otherwise prohibiting the
Merger, which order, decree, ruling or other action is final and nonappealable;
(d) by the Company or Parent if the required approval of the
stockholders of Parent contemplated by this Agreement shall not have been
obtained by reason of the failure to obtain the required vote at a meeting of
Parent stockholders duly convened therefor or at any adjournment thereof;
provided, however, that the right to terminate this Agreement under this Section
7.1(d) shall not be available to Parent where the failure to obtain Parent
stockholder approval shall have been caused by the action or failure to act of
Parent and such action or failure to act constitutes a material breach by Parent
of this Agreement.
(e) by the Company or Parent if the required approval of the
stockholders of the Company contemplated by this Agreement shall not have been
obtained by reason of the failure to obtain the required vote at a meeting of
the Company stockholders duly convened therefore or at any adjournment thereof;
provided, however, that the right to terminate this Agreement under this Section
7.1(e) shall not be available to the Company where the failure to obtain the
Company stockholder approval shall have been caused by the action or failure to
act of the Company and such action or failure to act constitutes a material
breach by the Company of this Agreement.
(f) by the Company, upon a breach of any representation, warranty,
covenant or agreement on the part of Parent set forth in this Agreement, or if
any representation or warranty of Parent shall have become untrue, in either
case such that the conditions set forth in Section 6.2(a) or Section 6.2(b)
would not be satisfied as of the time of such breach or as of the time such
representation or warranty shall have become untrue, provided that if such
inaccuracy in Parent's representations and warranties or breach by Parent is
curable by Parent through the exercise of its commercially reasonable efforts,
then the Company may not terminate this Agreement under this Section 7.1(f)
prior to the End Date, provided Parent continues to exercise commercially
reasonable efforts to cure such breach (it being understood that the Company may
not terminate this Agreement pursuant to this paragraph (f) if it shall have
materially breached this Agreement or if such breach by Parent is cured prior to
the End Date);
(g) by Parent, upon a breach of any representation, warranty, covenant
or agreement on the part of the Company set forth in this Agreement, or if any
representation or warranty of the Company shall have become untrue, in either
case such that the conditions set forth in Section 6.3(a) or Section 6.3(b)
would not be satisfied as of the time of such breach or as of the time such
representation or warranty shall have become untrue, provided, that if such
inaccuracy in the Company's representations and warranties or breach by the
Company is curable by the Company through the exercise of its commercially
reasonable efforts, then Parent may not terminate this Agreement under this
Section 7.1(g) prior to the End Date, provided the Company continues to exercise
commercially reasonable efforts to cure such breach (it being
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<PAGE> 533
understood that Parent may not terminate this Agreement pursuant to this
paragraph (g) if it shall have materially breached this Agreement or if such
breach by the Company is cured prior to the End Date).
7.2 Notice of Termination; Effect of Termination. Any termination of this
Agreement under Section 7.1 above will be effective immediately upon the
delivery of a valid written notice of the terminating party to the other parties
hereto. In the event of the termination of this Agreement as provided in Section
7.1, this Agreement shall be of no further force or effect, except (i) as set
forth in Section 5.4, this Section 7.2, Section 7.3 and Article 8
(miscellaneous), each of which shall survive the termination of this Agreement,
and (ii) nothing herein shall relieve any party from liability for any willful
breach of this Agreement. No termination of this Agreement shall affect the
obligations of the parties contained in the Confidentiality Agreement, all of
which obligations shall survive termination of this Agreement in accordance with
their terms.
7.3 Fees and Expenses. All fees and expenses incurred in connection with
this Agreement and the transactions contemplated hereby shall be paid by the
party incurring such expenses whether or not the Merger is consummated;
provided, however, that Parent and the Company shall share equally all fees and
expenses, other than attorneys' and accountants fees and expenses, incurred in
relation to the printing and filing (with the SEC) of the Prospectus/Proxy
Statement (including any preliminary materials related thereto) and the
Registration Statement (including financial statements and exhibits) and any
amendments or supplements thereto.
7.4 Amendment. Subject to applicable law, this Agreement may be amended by
the parties hereto at any time prior to the Effective Time by execution of an
instrument in writing signed on behalf of each of Parent and the Company.
7.5 Extension; Waiver. At any time prior to the Effective Time any party
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto and (iii)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party. Delay in exercising any right under this
Agreement shall not constitute a waiver of such right.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Non-Survival of Representations and Warranties. The representations
and warranties of the Company, Parent and Merger Sub contained in this Agreement
shall terminate at the Effective Time, and only the covenants that by their
terms survive the Effective Time shall survive the Effective Time.
8.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or sent via telecopy (receipt confirmed) to the parties at the
following addresses or telecopy numbers (or at such other address or telecopy
numbers for a party as shall be specified by like notice):
if to Parent or Merger Sub, to:
Healtheon Corporation
4600 Patrick Henry Road
Santa Clara, CA 95054
Attention: Jack Dennison, General Counsel
Telephone No.: (408) 876-5000
Telecopy No.: (408) 876-5175
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<PAGE> 534
with a copy to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Larry W. Sonsini
Marty W. Korman
Daniel R. Mitz
Telephone No.: (650) 493-9300
Telecopy No.: (650) 493-6811
If to the Company, to:
WebMD, Inc.
400 The Lenox Building
3399 Peachtree Road NE
Atlanta, GA 30326
Attention: W. Michael Heekin,
Executive Vice President, Strategic Relations
Telephone No.: (404) 479-7600
Telecopy No.: (404) 479-7651
with copies to:
Nelson Mullins Riley & Scarborough, L.L.P.
Bank of America Corporate Center
Suite 2600
Charlotte, North Carolina 28204
Atlanta, GA 30309
Attention: H. Bryan Ives III
C. Mark Kelly
Telephone No.: (704) 417-3000
Telecopy No.: (704) 377-4814
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Eric S. Robinson, Esq.
Telephone No.: (212) 403-1000
Telecopy No.: (212) 403-2000
8.3 Interpretation; Knowledge.
(a) When a reference is made in this Agreement to Exhibits, such
reference shall be to an Exhibit to this Agreement unless otherwise indicated.
When a reference is made in this Agreement to Sections, such reference shall be
to a Section of this Agreement unless otherwise indicated the words "INCLUDE,"
"INCLUDES" and "INCLUDING" when used herein shall be deemed in each case to be
followed by the words "without limitation." The table of contents and headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. When reference is
made herein to "THE BUSINESS OF" an entity, such reference shall be deemed to
include the business of all direct and indirect subsidiaries of such entity.
Reference to the subsidiaries of an entity shall be deemed to include all direct
and indirect subsidiaries of such entity.
(b) For purposes of this Agreement the term "KNOWLEDGE" means with
respect to a party hereto, with respect to any matter in question, that any of
the Chief Executive Officer, Chief Financial Officer, General Counsel or
Controller of such party, has actual knowledge of such matter.
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<PAGE> 535
(c) For purposes of this Agreement, the term "MATERIAL ADVERSE EFFECT"
when used in connection with an entity means any change, event, violation,
inaccuracy, circumstance or effect that is materially adverse to the business,
assets (including intangible assets), financial condition or results of
operations of such entity taken as a whole with its subsidiaries.
(d) For purposes of this Agreement, the term "PERSON" shall mean any
individual, corporation (including any non-profit corporation), general
partnership, limited partnership, limited liability partnership, joint venture,
estate, trust, company (including any limited liability company or joint stock
company), firm or other enterprise, association, organization, entity or
Governmental Entity.
8.4 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
8.5 Entire Agreement; Third Party Beneficiaries. This Agreement and the
documents and instruments and other agreements among the parties hereto as
contemplated by or referred to herein, including the Company Schedules and the
Parent Schedules (a) constitute the entire agreement among the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof, it being understood that the Confidentiality Agreement
shall continue in full force and effect until the Closing and shall survive any
termination of this Agreement; and (b) are not intended to confer upon any other
person any rights or remedies hereunder, except as specifically provided in
Section 5.11.
8.6 Severability. In the event that any provision of this Agreement or the
application thereof, becomes or is declared by a court of competent jurisdiction
to be illegal, void or unenforceable, the remainder of this Agreement will
continue in full force and effect and the application of such provision to other
persons or circumstances will be interpreted so as reasonably to effect the
intent of the parties hereto. The parties further agree to replace such void or
unenforceable provision of this Agreement with a valid and enforceable provision
that will achieve, to the extent possible, the economic, business and other
purposes of such void or unenforceable provision.
8.7 Remedies. Except as otherwise provided herein, any and all remedies
herein expressly conferred upon a party will be deemed cumulative with and not
exclusive of any other remedy conferred hereby, or by law or equity upon such
party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
8.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of law thereof.
8.9 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
8.10 Assignment. No party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other parties. Subject to the preceding sentence, this Agreement shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
8.11 WAIVER OF JURY TRIAL. EACH OF PARENT, THE COMPANY AND MERGER SUB
HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING
OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE ACTIONS OF PARENT, THE COMPANY OR MERGER SUB
IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT HEREOF.
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<PAGE> 536
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized respective officers as of the date first
written above.
HEALTHEON CORPORATION
By:
---------------------------------------
Name:
-------------------------------------
Title:
--------------------------------------
WATER ACQUISITION CORP.
By:
---------------------------------------
Name:
-------------------------------------
Title:
--------------------------------------
WEBMD, INC.
By:
---------------------------------------
Name:
-------------------------------------
Title:
--------------------------------------
**** REORGANIZATION AGREEMENT ****
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<PAGE> 537
ANNEX B
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
HEALTHEON CORPORATION
MERC ACQUISITION CORP.
AND
MEDE AMERICA CORPORATION
DATED AS OF APRIL 20, 1999
<PAGE> 538
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I THE MERGER............................................... 1
The Merger.................................................. 1
1.1
Effective Time; Closing..................................... 1
1.2
Effect of the Merger........................................ 2
1.3
Certificate of Incorporation; Bylaws........................ 2
1.4
Directors and Officers...................................... 2
1.5
Effect on Capital Stock..................................... 2
1.6
Surrender of Certificates................................... 4
1.7
No Further Ownership Rights in Company Common Stock......... 5
1.8
Lost, Stolen or Destroyed Certificates...................... 5
1.9
Tax Consequences............................................ 5
1.10
Taking of Necessary Action; Further Action.................. 5
1.11
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY........... 5
Organization of the Company................................. 6
2.1
Company Capital Structure................................... 6
2.2
Obligations With Respect to Capital Stock................... 7
2.3
Authority; Non-Contravention................................ 8
2.4
SEC Filings; Company Financial Statements................... 9
2.5
Absence of Certain Changes or Events........................ 9
2.6
Taxes....................................................... 10
2.7
Title to Properties; Absence of Liens and Encumbrances...... 11
2.8
Intellectual Property....................................... 12
2.9
Compliance; Permits; Restrictions........................... 14
2.10
Litigation.................................................. 14
2.11
Brokers' and Finders' Fees.................................. 15
2.12
Transactions with Affiliates................................ 15
2.13
Employee Benefit Plans...................................... 15
2.14
Environmental Matters....................................... 18
2.15
Year 2000 Compliance........................................ 18
2.16
Agreements, Contracts and Commitments....................... 18
2.17
Change of Control Payments.................................. 20
2.18
Disclosure.................................................. 20
2.19
Board Approval.............................................. 20
2.20
Opinion of Financial Advisor................................ 20
2.21
Restrictions on Business Activities......................... 20
2.22
Insurance................................................... 20
2.23
State Takeover Statutes..................................... 20
2.24
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER 21
SUB...............................................................
Organization of Parent...................................... 21
3.1
Parent Capital Structure.................................... 21
3.2
Obligations With Respect to Capital Stock................... 22
3.3
Authority; Non-Contravention................................ 22
3.4
SEC Filings; Parent Financial Statements.................... 23
3.5
Absence of Certain Changes or Events........................ 24
3.6
Taxes....................................................... 24
3.7
Title to Properties; Absence of Liens and Encumbrances...... 25
3.8
Intellectual Property....................................... 25
3.9
Compliance; Permits; Restrictions........................... 26
3.10
Litigation.................................................. 27
3.11
Brokers' and Finders' Fees.................................. 27
3.12
</TABLE>
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<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Environmental Matters....................................... 27
3.13
Year 2000 Compliance........................................ 27
3.14
Agreements, Contracts and Commitments....................... 28
3.15
Disclosure.................................................. 28
3.16
Board Approval.............................................. 28
3.17
Fairness Opinion............................................ 28
3.18
Organization of Merger Sub.................................. 28
3.19
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME..................... 28
Conduct of Business by the Company.......................... 28
4.1
Conduct of Business by Parent............................... 30
4.2
ARTICLE V ADDITIONAL AGREEMENTS.................................... 30
Prospectus/Proxy Statement; Registration Statement; Other
5.1 Filings; Board Recommendations.............................. 30
Meeting of Company Stockholders............................. 31
5.2
Confidentiality; Access to Information...................... 33
5.3
No Solicitation............................................. 33
5.4
Public Disclosure........................................... 34
5.5
Reasonable Efforts; Notification............................ 34
5.6
Third Party Consents........................................ 35
5.7
Stock Options; Warrants and Employee Benefits............... 35
5.8
Form S-8.................................................... 36
5.9
Indemnification............................................. 36
5.10
Nasdaq Listing.............................................. 37
5.11
Acceleration of Employee Stock Option Vesting............... 37
5.12
FIRPTA Compliance........................................... 37
5.13
Board of Directors.......................................... 37
5.14
Company Affiliates; Restrictive Legend...................... 37
5.15
ARTICLE VI CONDITIONS TO THE MERGER................................ 38
Conditions to Obligations of Each Party to Effect the
6.1 Merger...................................................... 38
Additional Conditions to Obligations of the Company......... 38
6.2
Additional Conditions to the Obligations of Parent and
6.3 Merger Sub.................................................. 39
ARTICLE VII TERMINATION, AMENDMENT AND WAIVER...................... 39
Termination................................................. 39
7.1
Notice of Termination; Effect of Termination................ 41
7.2
Fees and Expenses........................................... 41
7.3
Amendment................................................... 42
7.4
Extension; Waiver........................................... 42
7.5
ARTICLE VIII GENERAL PROVISIONS.................................... 42
Non-Survival of Representations and Warranties.............. 42
8.1
Notices..................................................... 42
8.2
Interpretation; Knowledge................................... 43
8.3
Counterparts................................................ 43
8.4
Entire Agreement; Third Party Beneficiaries................. 43
8.5
Severability................................................ 44
8.6
Other Remedies; Specific Performance........................ 44
8.7
Governing Law............................................... 44
8.8
Rules of Construction....................................... 44
8.9
Assignment.................................................. 44
8.10
WAIVER OF JURY TRIAL........................................ 44
8.11
</TABLE>
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INDEX OF EXHIBITS
Exhibit A Company Voting Agreement
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<PAGE> 541
ANNEX B
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION is made and entered into as of
April 20, 1999, among Healtheon Corporation, a Delaware corporation ("PARENT"),
Merc Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of
Parent ("MERGER SUB"), and MedE America Corporation, a Delaware corporation (the
"COMPANY").
RECITALS
A. Upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware General Corporation Law ("DELAWARE LAW"), Parent,
Merger Sub and the Company intend to enter into a business combination
transaction.
B. The Board of Directors of the Company (the "COMPANY BOARD") (i) has
determined that the Merger (as defined in Section 1.1) is consistent with and in
furtherance of the long-term business strategy of the Company and fair to, and
in the best interests of, the Company and its stockholders, (ii) has approved
this Agreement, the Merger and the other transactions contemplated by this
Agreement and (iii) has determined to recommend that the stockholders of the
Company adopt and approve this Agreement and approve the Merger.
C. The Board of Directors of Parent (i) has determined that the Merger (as
defined in Section 1.1) is consistent with and in furtherance of the long-term
business strategy of Parent and fair to, and in the best interests of, Parent
and its stockholders and (ii) has approved this Agreement, the Merger and the
other transactions contemplated by this Agreement.
D. Concurrently with the execution of this Agreement, and as a condition
and inducement to Parent's willingness to enter into this Agreement, certain
stockholders of the Company are entering into Voting Agreements in substantially
the form attached hereto as Exhibit A (the "COMPANY VOTING AGREEMENTS").
E. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "CODE").
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of Delaware Law, Merger Sub shall be merged with and into
the Company (the "MERGER"), the separate corporate existence of Merger Sub shall
cease and the Company shall continue as the surviving corporation. The Company
as the surviving corporation after the Merger is hereinafter sometimes referred
to as the "SURVIVING CORPORATION".
1.2 Effective Time; Closing. Subject to the provisions of this Agreement,
the parties hereto shall cause the Merger to be consummated by filing a
Certificate of Merger with the Secretary of State of the State of Delaware in
accordance with the relevant provisions of Delaware Law (the "CERTIFICATE OF
MERGER") (the time of such filing with the Secretary of State of the State of
Delaware (or such later time as may be agreed in writing by the Company and
Parent and specified in the Certificate of Merger) being the "EFFECTIVE TIME")
as soon as practicable on or after the Closing Date (as herein defined). Unless
the context otherwise requires, the term "AGREEMENT" as used herein refers
collectively to this Agreement and Plan of Reorganization and the Certificate of
Merger. The closing of the Merger (the "CLOSING") shall
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take place at the offices of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, at a time and date to be specified by the parties, which shall be
no later than the second business day after the satisfaction or waiver of the
conditions set forth in Article VI, or at such other time, date and location as
the parties hereto agree in writing (the "CLOSING DATE").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement and the applicable provisions of Delaware
Law. Without limiting the generality of the foregoing, and subject thereto, at
the Effective Time all the property, rights, privileges, powers and franchises
of the Company and Merger Sub shall vest in the Surviving Corporation, and all
debts, liabilities and duties of the Company and Merger Sub shall become the
debts, liabilities and duties of the Surviving Corporation.
1.4 Certificate of Incorporation; Bylaws.
(a) At the Effective Time, the Certificate of Incorporation of Merger
Sub, as in effect immediately prior to the Effective Time, shall be the
Certificate of Incorporation of the Surviving Corporation until thereafter
amended as provided by law and such Certificate of Incorporation of the
Surviving Corporation; provided, however, that at the Effective Time the
Certificate of Incorporation of the Surviving Corporation shall be amended so
that the name of the Surviving Corporation shall be "MedE America Corporation."
(b) The Bylaws of Merger Sub, as in effect immediately prior to the
Effective Time, shall be, at the Effective Time, the Bylaws of the Surviving
Corporation until thereafter amended.
1.5 Directors and Officers. The initial directors of the Surviving
Corporation shall be the directors of Merger Sub immediately prior to the
Effective Time, until their respective successors are duly elected or appointed
and qualified. The initial officers of the Surviving Corporation shall be the
officers of Merger Sub immediately prior to the Effective Time, until their
respective successors are duly appointed.
1.6 Effect on Capital Stock. At the Effective Time, by virtue of the
Merger and without any action on the part of Merger Sub, the Company or the
holders of any of the following securities, the following shall occur:
(a) Conversion of Company Common Stock. Subject to the provisions of
Section 1.6(f) below, each share of Common Stock of the Company ("COMPANY COMMON
STOCK") issued and outstanding immediately prior to the Effective Time, other
than any shares of the Company Common Stock to be canceled pursuant to Section
1.6(b), will be canceled and extinguished and automatically converted into the
right to receive that number of shares of Parent Common Stock equal to .6593
(the "EXCHANGE RATIO") upon surrender of the certificate representing such share
of the Company Common Stock in the manner provided in Section 1.7 (or in the
case of a lost, stolen or destroyed certificate, upon delivery of an affidavit
(and bond, if required) in the manner provided in Section 1.9). If any shares of
Company Common Stock outstanding immediately prior to the Effective Time are
unvested or are subject to a repurchase option, risk of forfeiture or other
condition under any applicable restricted stock purchase agreement or other
agreement with the Company, then the shares of Parent Common Stock issued in
exchange for such shares of Company Common Stock will also be unvested to the
same extent and subject to the same repurchase option, risk of forfeiture or
other condition, as applicable, and the certificates representing such shares of
Parent Common Stock may accordingly be marked with appropriate legends. The
Company shall take all action that may be necessary to ensure that, from and
after the Effective Time, Parent is entitled to exercise any such repurchase
option or other right set forth in any such restricted stock purchase agreement
or other agreement.
(b) Cancellation of Parent-Owned Stock. Each share of Company Common
Stock held by the Company or owned by Merger Sub, Parent or any direct or
indirect wholly-owned subsidiary of the Company or of Parent immediately prior
to the Effective Time shall be canceled and extinguished without any conversion
thereof.
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(c) Stock Options; Employee Stock Purchase Plans; Warrants.
(i) At the Effective Time, all options to purchase Company Common
Stock then outstanding under the Company's Stock Option and Restricted Stock
Purchase Plan and the Company's 1998 Stock Option and Restricted Stock Purchase
Plan (the "COMPANY STOCK OPTION PLANS") shall be assumed by Parent in accordance
with Section 5.8 hereof. Rights outstanding under the Company's 1998 Employee
Stock Purchase Plan (the "COMPANY PURCHASE PLAN") shall be treated as set forth
in Article V hereof.
(ii) At the Effective Time, the warrants issued by the Company and
set forth on Part 2.2 of the Company Schedules (which warrants entitle the
holders thereof as set forth on such Part 2.2 to purchase the number of shares
of Company Common Stock set forth on such Part 2.2) (collectively, the
"WARRANTS") shall be, subject to Section 5.8 hereof, either exercised or
terminated prior to the Effective Time or converted into Parent Common Stock as
of the Effective Time. Part 2.2 of the Company Schedules describes, with respect
to each warrant outstanding, the number of shares of Company Common Stock into
which such warrant may be exercised, the exercise price, the name of the holder
of record, the termination date, whether such warrant has registration rights,
and, if applicable, a complete description of such registration rights.
(d) Capital Stock of Merger Sub. Each share of Common Stock of Merger
Sub (the "MERGER SUB COMMON STOCK") issued and outstanding immediately prior to
the Effective Time shall be converted into one validly issued, fully paid and
nonassessable share of Common Stock of the Surviving Corporation. Each
certificate evidencing ownership of shares of Merger Sub Common Stock shall
evidence ownership of such shares of capital stock of the Surviving Corporation.
(e) Fractional Shares. No fraction of a share of Parent Common Stock
will be issued by virtue of the Merger, but in lieu thereof each holder of
shares of Company Common Stock who would otherwise be entitled to a fraction of
a share of Parent Common Stock (after aggregating all fractional shares of
Parent Common Stock that otherwise would be received by such holder) shall, upon
surrender of such holder's Certificate(s) (as defined in Section 1.7(c)),
receive from Parent an amount of cash (rounded to the nearest whole cent),
without interest, equal to the product of (i) such fraction, multiplied by (ii)
the average closing price of one share of Parent Common Stock for the ten (10)
most recent days that Parent Common Stock has traded ending on the trading day
ending one day prior to the Closing Date, as reported on the Nasdaq National
Market System ("NASDAQ").
(f) Adjustments to Exchange Ratio.
(i) The Exchange Ratio shall be adjusted to reflect appropriately the
effect of any stock split, reverse stock split, stock dividend (including any
dividend or distribution of securities convertible into Parent Common Stock or
Company Common Stock), reorganization, recapitalization, reclassification or
other like change with respect to Parent Common Stock or Company Common Stock
occurring on or after the date hereof and prior to the Effective Time.
(ii) In the event that the 10 day average closing price for Parent's
Common Stock (as reported on Nasdaq) for the period ending two days prior to the
date of the Company Stockholders' Meeting (the "MEETING PRICE") is less than
$38.68, then Parent may, in its sole discretion and no later than 24 hours prior
to the Stockholders Meeting, change the Exchange Ratio to a ratio equal to
$25.50 divided by the Meeting Price. In the event that the Meeting Price is less
than $38.68 and Parent does not exercise its right to change the Exchange Ratio,
then the Company may exercise its right to terminate the Agreement as provided
for in Section 7.1(h) hereof.
(iii) In the event that the Meeting Price is more than $63.70, then
the Company may, in its sole discretion and no later than 24 hours prior to the
Company Stockholders' Meeting, change the Exchange Ratio to a ratio equal to $42
divided by the Meeting Price. In the event that the Meeting Price is more than
$63.70 and the Company does not exercise its right to change the Exchange Ratio,
then Parent may exercise its right to terminate the Agreement as provided for in
Section 7.1(i) hereof.
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1.7 Surrender of Certificates.
(a) Exchange Agent. American Stock Transfer & Trust Company, Parent's
Transfer Agent, shall act as the exchange agent (the "EXCHANGE AGENT") in the
Merger.
(b) Parent to Provide Common Stock. Promptly after the Effective Time,
Parent shall make available to the Exchange Agent for exchange in accordance
with this Article I, the shares of Parent Common Stock issuable pursuant to
Section 1.6 in exchange for outstanding shares of Company Common Stock, and cash
in an amount sufficient for payment in lieu of fractional shares pursuant to
Section 1.6(e) and any dividends or distributions which holders of shares of
Company Common Stock may be entitled pursuant to Section 1.7(d).
(c) Exchange Procedures. Promptly after the Effective Time, Parent shall
cause the Exchange Agent to mail to each holder of record (as of the Effective
Time) of a certificate or certificates (the "CERTIFICATES") which immediately
prior to the Effective Time represented outstanding shares of Company Common
Stock whose shares were converted into the right to receive shares of Parent
Common Stock pursuant to Section 1.6, cash in lieu of any fractional shares
pursuant to Section 1.6(e) and any dividends or other distributions pursuant to
Section 1.7(d), (i) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon delivery of the Certificates to the Exchange Agent and shall be in
such form and have such other provisions as Parent may reasonably specify) and
(ii) instructions for use in effecting the surrender of the Certificates in
exchange for certificates representing shares of Parent Common Stock, cash in
lieu of any fractional shares pursuant to Section 1.6(e) and any dividends or
other distributions pursuant to Section 1.7(d). Upon surrender of Certificates
for cancellation to the Exchange Agent or to such other agent or agents as may
be appointed by Parent, together with such letter of transmittal, duly completed
and validly executed in accordance with the instructions thereto, the holders of
such Certificates shall be entitled to receive in exchange therefor certificates
representing the number of whole shares of Parent Common Stock into which their
shares of Company Common Stock were converted at the Effective Time, payment in
lieu of fractional shares which such holders have the right to receive pursuant
to Section 1.6(e) and any dividends or distributions payable pursuant to Section
1.7(d), and the Certificates so surrendered shall forthwith be canceled. Until
so surrendered, outstanding Certificates will be deemed from and after the
Effective Time, for all corporate purposes, subject to Section 1.7(d) as to the
payment of dividends, to evidence the ownership of the number of full shares of
Parent Common Stock into which such shares of Company Common Stock shall have
been so converted and the right to receive an amount in cash in lieu of the
issuance of any fractional shares in accordance with Section 1.6(e) and any
dividends or distributions payable pursuant to Section 1.7(d).
(d) Distributions With Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the date of this Agreement with
respect to Parent Common Stock with a record date after the Effective Time will
be paid to the holders of any unsurrendered Certificates with respect to the
shares of Parent Common Stock represented thereby until the holders of record of
such Certificates shall surrender such Certificates. Subject to applicable law,
following surrender of any such Certificates, the Exchange Agent shall deliver
to the record holders thereof, without interest, certificates representing whole
shares of Parent Common Stock issued in exchange therefor along with payment in
lieu of fractional shares pursuant to Section 1.6(e) hereof and the amount of
any such dividends or other distributions with a record date after the Effective
Time payable with respect to such whole shares of Parent Common Stock.
(e) Transfers of Ownership. If certificates for shares of Parent Common
Stock are to be issued in a name other than that in which the Certificates
surrendered in exchange therefor are registered, it will be a condition of the
issuance thereof that the Certificates so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the persons requesting such
exchange will have paid to Parent or any agent designated by it any transfer or
other taxes required by reason of the issuance of certificates for shares of
Parent Common Stock in any name other than that of the registered holder of the
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Certificates surrendered, or established to the satisfaction of Parent or any
agent designated by it that such tax has been paid or is not payable.
(f) Required Withholding. Each of the Exchange Agent, Parent and the
Surviving Corporation shall be entitled to deduct and withhold from any
consideration payable or otherwise deliverable pursuant to this Agreement to any
holder or former holder of Company Common Stock such amounts as may be required
to be deducted or withheld therefrom under the Code or under any provision of
state, local or foreign tax law or under any other applicable Legal Requirement
(as defined in Section 2.2). To the extent such amounts are so deducted or
withheld, such amounts shall be treated for all purposes under this Agreement as
having been paid to the person to whom such amounts would otherwise have been
paid.
(g) No Liability. Notwithstanding anything to the contrary in this
Section 1.7, neither the Exchange Agent, Parent, the Surviving Corporation nor
any party hereto shall be liable to a holder of shares of Parent Common Stock or
Company Common Stock for any amount properly paid to a public official pursuant
to any applicable abandoned property, escheat or similar law.
1.8 No Further Ownership Rights in Company Common Stock. All shares of
Parent Common Stock issued upon the surrender for exchange of shares of Company
Common Stock in accordance with the terms hereof (including any cash paid in
respect thereof pursuant to Section 1.6(e) and 1.7(d)) shall be deemed to have
been issued in full satisfaction of all rights pertaining to such shares of
Company Common Stock, and there shall be no further registration of transfers on
the records of the Surviving Corporation of shares of Company Common Stock which
were outstanding immediately prior to the Effective Time. If after the Effective
Time Certificates are presented to the Surviving Corporation for any reason,
they shall be canceled and exchanged as provided in this Article I.
1.9 Lost, Stolen or Destroyed Certificates. In the event any Certificates
shall have been lost, stolen or destroyed, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed Certificates, upon the making of an
affidavit of that fact by the holder thereof, certificates representing the
shares of Parent Common Stock into which the shares of Company Common Stock
represented by such Certificates were converted pursuant to Section 1.6, cash
for fractional shares, if any, as may be required pursuant to Section 1.6(e) and
any dividends or distributions payable pursuant to Section 1.7(d); provided,
however, that Parent may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
Certificates to deliver a bond in such sum as it may reasonably direct as
indemnity against any claim that may be made against Parent, the Surviving
Corporation or the Exchange Agent with respect to the Certificates alleged to
have been lost, stolen or destroyed.
1.10 Tax Consequences. It is intended by the parties hereto that the
Merger shall constitute a reorganization within the meaning of Section 368 of
the Code. The parties hereto adopt this Agreement as a "plan of reorganization"
within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the United States
Income Tax Regulations.
1.11 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of the Company and Merger Sub, the officers and directors of the
Company and Merger Sub will take all such lawful and necessary action, so long
as such action is consistent with this Agreement.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
As of the date hereof and as of the Closing Date (except as otherwise
contemplated herein), the Company represents and warrants to Parent and Merger
Sub, subject to the exceptions specifically
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disclosed in writing in the disclosure letter and referencing a specific
representation supplied by the Company to Parent dated as of the date hereof
(the "COMPANY SCHEDULES"), as follows:
2.1 Organization of the Company.
(a) The Company has no subsidiaries, except for the corporations
identified in Part 2.1(a)(i) of the Company Schedules; and neither the Company
nor any of the other corporations identified in Part 2.1(a)(i) of the Company
Schedules owns any capital stock of, or any equity interest of any nature in,
any other entity, other than the entities identified in Part 2.1(a)(ii) of the
Company Schedules, except for passive investments in equity interests of public
companies as part of the cash management program of the Company. Unless
otherwise indicated, references to the "Company" throughout this Agreement shall
mean the Company and its subsidiaries, taken as a whole. The Company has not
agreed and is not obligated to make, nor bound by any written, oral or other
agreement, contract, subcontract, lease, binding understanding, instrument,
note, option, warranty, purchase order, license, sublicense, insurance policy,
benefit plan or legally binding commitment or undertaking of any nature, as in
effect as of the date hereof or as may hereinafter be in effect ("CONTRACT")
under which Contract it may become obligated to make, any future investment in
or capital contribution to any other entity. Except as set forth in Part
2.1(a)(i) in the Company Schedules, the Company has not, at any time, been a
general partner of any general partnership, limited partnership or other entity.
(b) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation and has
all necessary corporate power and authority: (i) to conduct its business in the
manner in which its business is currently being conducted; (ii) to own and use
its assets in the manner in which its assets are currently owned and used; and
(iii) to perform its obligations under all Contracts by which it is bound.
(c) The Company is qualified to do business as a foreign corporation,
and is in good standing, under the laws of all jurisdictions where the nature of
its business requires such qualification and where the failure to so qualify
would have a Material Adverse Effect (as defined in Section 8.3) on the Company.
(d) The Company has delivered or made available to Parent a true and
correct copy of the Certificate of Incorporation and Bylaws of the Company and
similar governing instruments of each of its subsidiaries, each as amended to
date (collectively, the "COMPANY CHARTER DOCUMENTS"), and each such instrument
is in full force and effect. The Company is not in violation of any of the
provisions of the Company Charter Documents.
(e) The Company has delivered or made available to Parent all proposed
or considered amendments to the Company Charter Documents.
2.2 Company Capital Structure.
(a) The authorized capital stock of the Company consists of: (i)
30,000,000 shares of Company Common Stock, $0.01 par value, of which 13,006,557
shares have been issued and are outstanding as of the date of this Agreement;
and (ii) 5,000,000 shares of preferred stock, $0.01 par value, of which no
shares are outstanding as of the date of this Agreement. All of the outstanding
shares of capital stock of the Company have been duly authorized and validly
issued, and are fully paid and nonassessable. As of the date of this Agreement,
there are no shares of Company Common Stock held in treasury by the Company.
Upon consummation of the Merger, (A) the shares of Parent Common Stock issued in
exchange for any shares of Company Common Stock that are subject to a Contract
pursuant to which the Company has the right to repurchase, redeem or otherwise
reacquire any shares of Company Common Stock will, without any further act of
Parent, the Company or any other person, become subject to the restrictions,
conditions and other provisions contained in such Contract, and (B) Parent will
automatically succeed to and become entitled to exercise the Company's rights
and remedies under any such Contract.
(b) As of the date of this Agreement: (i) 836,814 shares of Company
Common Stock are subject to issuance pursuant to outstanding options to purchase
Company Common Stock under the
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Company Stock Option Plans; (ii) 300,000 shares of Company Common Stock are
reserved for future issuance under the Company Purchase Plan; and (iii)
1,334,050 shares of Company Common Stock are subject to issuance pursuant to
warrants to purchase Company Common Stock as set forth on Part 2.2 of the
Company Schedules. Stock options granted by the Company pursuant to the Company
Stock Option Plans are referred to in this Agreement as "COMPANY OPTIONS". Part
2.2(b) of the Company Schedules sets forth the following information with
respect to each Company Option outstanding as of the date of this Agreement: (i)
the name of the optionee; (ii) the particular plan pursuant to which such
Company Option was granted; (iii) the number of shares of Company Common Stock
subject to such Company Option; (iv) the exercise price of such Company Option;
(v) the date on which such Company Option was granted; (vi) the applicable
vesting schedule; (vii) the date on which such Company Option expires and (viii)
whether the exercisability of such option will be accelerated in any way by the
transactions contemplated by this Agreement, and indicates the extent of any
such acceleration. The Company has made available to Parent accurate and
complete copies of all stock option plans pursuant to which the Company has
granted stock options that are currently outstanding and the form of all stock
option agreements evidencing such options. All shares of Company Common Stock
subject to issuance as aforesaid, upon issuance on the terms and conditions
specified in the instruments pursuant to which they are issuable, would be duly
authorized, validly issued, fully paid and nonassessable. Except as set forth in
Part 2.2(b)(i) of the Company Schedules, there are no commitments or agreements
of any character to which the Company is bound obligating the Company to
accelerate the vesting of any Company Option as a result of the Merger.
(c) All outstanding shares of Company Common Stock, all outstanding
Company Options, and all outstanding shares of capital stock of each subsidiary
of the Company have been issued and granted in compliance with (i) all
applicable securities laws and other applicable Legal Requirements (as defined
below) and (ii) all requirements set forth in applicable Contracts. For the
purposes of this Agreement, "LEGAL REQUIREMENTS" means any federal, state,
local, municipal, foreign or other law, statute, constitution, principle of
common law, resolution, ordinance, code, edict, decree, rule, regulation, ruling
or requirement issued, enacted, adopted, promulgated, implemented or otherwise
put into effect by or under the authority of any Governmental Entity (as defined
below).
2.3 Obligations With Respect to Capital Stock. Except as set forth in Part
2.3 of the Company Schedules and as set forth in Section 2.2 above, there are no
equity securities, partnership interests or similar ownership interests of any
class of any Company equity security, or any securities exchangeable or
convertible into or exercisable for such equity securities, partnership
interests or similar ownership interests, issued, reserved for issuance or
outstanding. Except as set forth in Part 2.3 of the Company Schedules and except
for securities the Company owns free and clear of all claims and Encumbrances
(as defined below), directly or indirectly through one or more subsidiaries, and
except for shares of capital stock or other similar ownership interests of
certain subsidiaries of the Company that are owned by certain nominee equity
holders as required by the applicable law of the jurisdiction of organization of
such subsidiaries (which shares or other interests do not materially affect the
Company's control of such subsidiaries), as of the date of this Agreement, there
are no equity securities, partnership interests or similar ownership interests
of any class of equity security of any subsidiary of the Company, or any
security exchangeable or convertible into or exercisable for such equity
securities, partnership interests or similar ownership interests, issued,
reserved for issuance or outstanding. For the purposes of this Agreement
"ENCUMBRANCES" means any lien, pledge, hypothecation, charge, mortgage, security
interest, encumbrance, claim, infringement, interference, option, right of first
refusal, preemptive right, community property interest or restriction of any
nature (including any restriction on the voting of any security, any restriction
on the transfer of any security or other asset, any restriction on the receipt
of any income derived from any asset, any restriction on the use of any asset
and any restriction on the possession, exercise or transfer of any other
attribute of ownership of any asset). Except as set forth in Part 2.3 of the
Company Schedules or as set forth in Section 2.2 hereof, there are no
subscriptions, options, warrants, equity securities, partnership interests or
similar ownership interests, calls, rights (including preemptive rights),
commitments or agreements of any character to which the Company or any of its
subsidiaries is a party or by which it is bound obligating the Company or any of
its subsidiaries to issue, deliver or sell, or
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cause to be issued, delivered or sold, or repurchase, redeem or otherwise
acquire, or cause the repurchase, redemption or acquisition of, any shares of
capital stock, partnership interests or similar ownership interests of the
Company or any of its subsidiaries or obligating the Company or any of its
subsidiaries to grant, extend, accelerate the vesting of or enter into any such
subscription, option, warrant, equity security, call, right, commitment or
agreement. As of the date of this Agreement, except as set forth in Part 2.3 of
the Company Schedules and except as contemplated by this Agreement, there are no
registration rights and there is, except for the Company Voting Agreement and
except as set forth in Part 2.3 of the Company Schedules, no voting trust,
proxy, rights plan, antitakeover plan or other agreement or understanding to
which the Company is a party or by which it is bound with respect to any equity
security of any class of the Company or with respect to any equity security,
partnership interest or similar ownership interest of any class of any of its
subsidiaries. Stockholders of the Company will not be entitled to dissenters'
rights under applicable state law in connection with the Merger.
2.4 Authority; Non-Contravention.
(a) The Company has all requisite corporate power and authority to enter
into this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of the Company, subject only to the approval and
adoption of this Agreement and the approval of the Merger by the Company's
stockholders and the filing of the Certificate of Merger pursuant to Delaware
Law. A vote of the holders of a majority of the outstanding shares of the
Company Common Stock is sufficient for the Company's stockholders to approve and
adopt this Agreement and approve the Merger. This Agreement has been duly
executed and delivered by the Company and, assuming due execution and delivery
by Parent and Merger Sub, constitutes valid and binding obligations of the
Company, enforceable against the Company in accordance with its terms, except as
enforceability may be limited by bankruptcy and other similar laws and general
principles of equity. The execution and delivery of this Agreement by the
Company does not, and the performance of this Agreement by the Company will not,
(i) conflict with or violate the Company Charter Documents, (ii) subject to
obtaining the approval and adoption of this Agreement and the approval of the
Merger by the Company's stockholders as contemplated in Section 5.2 and
compliance with the requirements set forth in Section 2.4(b) below, conflict
with or violate any law, rule, regulation, order, judgment or decree applicable
to the Company or any of its subsidiaries or by which the Company or any of its
subsidiaries or any of their respective properties is bound or affected, or
(iii) except as set forth in Part 2.4(a) of the Company Schedules result in any
material breach of or constitute a material default (or an event that with
notice or lapse of time or both would become a material default) under, or
impair the Company's rights or alter the rights or obligations of any third
party under, or give to others any rights of termination, amendment,
acceleration or cancellation of, or result in the creation of a material lien or
Encumbrance on any of the material properties or assets of the Company or any of
its subsidiaries pursuant to, any material note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise, concession, or other
instrument or obligation to which the Company or any of its subsidiaries is a
party or by which the Company or any of its subsidiaries or its or any of their
respective assets are bound or affected. Part 2.4(a) of the Company Schedules
lists all consents, waivers and approvals under any of the Company's material
agreements, contracts, licenses or leases required to be obtained in connection
with the consummation of the transactions contemplated hereby, which, if
individually or in the aggregate not obtained, would result in a material loss
of benefits to the Company, Parent or the Surviving Corporation as a result of
the Merger.
(b) Except as set forth in Part 2.4(b) of the Company Schedules, no
consent, approval, order or authorization of, or registration, declaration or
filing with any court, administrative agency or commission or other governmental
authority or instrumentality, foreign or domestic ("GOVERNMENTAL ENTITY"), is
required to be obtained or made by the Company in connection with the execution
and delivery of this Agreement or the consummation of the Merger, except for (i)
the filing of the Certificate of Merger with the Secretary of State of the State
of Delaware, (ii) the filing of the Prospectus/Proxy Statement (as defined in
Section 2.19) with the Securities and Exchange Commission ("SEC") in accordance
with the
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Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), (iii) such
consents, approvals, orders, authorizations, registrations, declarations and
filings as may be required under applicable federal, foreign and state
securities (or related) laws and the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR ACT"), and the securities or antitrust laws of
any foreign country, and (iv) such other consents, authorizations, filings,
approvals and registrations which if not obtained or made would not be material
to the Company or Parent or have a material adverse effect on the ability of the
parties hereto to consummate the Merger.
2.5 SEC Filings; Company Financial Statements.
(a) The Company has filed all forms, reports and documents required to
be filed by the Company with the SEC since January 1, 1999. All such required
forms, reports and documents (including those that the Company may file
subsequent to the date hereof) are referred to herein as the "COMPANY SEC
REPORTS." As of their respective dates (or, if amended, as of the respective
dates of such amendments), the Company SEC Reports (i) complied as to form in
all material respects with the requirements of the Securities Act of 1933, as
amended (the "SECURITIES ACT"), or the Exchange Act, as the case may be, and the
rules and regulations of the SEC thereunder applicable to such Company SEC
Reports and (ii) did not at the time they were filed contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. None of
the Company's subsidiaries is required to file any forms, reports or other
documents with the SEC.
(b) Each of the consolidated financial statements (including, in each
case, any related notes thereto) contained in the Company SEC Reports (the
"COMPANY FINANCIALS"), including each Company SEC Reports filed after the date
hereof until the Closing, (i) complied as to form in all material respects with
the published rules and regulations of the SEC with respect thereto, (ii) was
prepared in accordance with United States generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes thereto or, in the case of
unaudited interim financial statements, as may be permitted by the SEC on Form
10-Q under the Exchange Act) and (iii) fairly presented the consolidated
financial position of the Company and its subsidiaries as at the respective
dates thereof and the consolidated results of the Company's operations and cash
flows for the periods indicated, except that the unaudited interim financial
statements may not contain footnotes and were or are subject to normal and
recurring year-end adjustments. The audited balance sheet of the Company as of
June 30, 1998 previously delivered to Parent by the Company and contained in the
Company SEC Reports as of December 31, 1998 is hereinafter referred to as the
"COMPANY BALANCE SHEET." Except as disclosed in the Company Financials or as
incurred in the ordinary course of business since the date of the Company
Balance Sheet, neither the Company nor any of its subsidiaries has any
liabilities of a nature required under GAAP to be set forth on a balance sheet
(absolute, accrued, contingent or otherwise) which are, individually or in the
aggregate, material to the business, results of operations or financial
condition of the Company and its subsidiaries taken as a whole.
(c) The Company has heretofore furnished to Parent a complete and
correct copy of any amendments or modifications, which have not yet been filed
with the SEC but which are required to be filed, to agreements, documents or
other instruments which previously had been filed by the Company with the SEC
pursuant to the Securities Act or the Exchange Act.
2.6 Absence of Certain Changes or Events. Since the date of the Company
Balance Sheet and except as set forth on Part 2.6 of the Company Schedules,
there has not been: (i) any Material Adverse Effect on the Company, (ii) any
declaration, setting aside or payment of any dividend on, or other distribution
(whether in cash, stock or property) in respect of, any of the Company's or any
of its subsidiaries' capital stock, or any purchase, redemption or other
acquisition by the Company of any of the Company's capital stock or any other
securities of the Company or its subsidiaries or any options, warrants, calls or
rights to acquire any such shares or other securities except for repurchases
from employees following their termination pursuant to the terms of their
pre-existing stock option or purchase agreements, (iii) any split, combination
or reclassification of any of the Company's or any of its subsidiaries' capital
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stock, (iv) any granting by the Company or any of its subsidiaries of any
increase in compensation or fringe benefits, except for normal increases of cash
compensation in the ordinary course of business consistent with past practice,
or any payment by the Company or any of its subsidiaries of any bonus, except
for bonuses made in the ordinary course of business consistent with past
practice, or any granting by the Company or any of its subsidiaries of any
increase in severance or termination pay or any entry by the Company or any of
its subsidiaries into any currently effective employment, severance, termination
or director, officer or other employee indemnification agreement or any other
employment or consulting related agreement the benefits of which are contingent
or the terms of which are materially altered upon the occurrence of a
transaction involving the Company of the nature contemplated hereby, (v) entry
by the Company or any of its subsidiaries into any licensing or other agreement
with regard to the acquisition or disposition of any material Intellectual
Property (as defined in Section 2.9) other than licenses in the ordinary course
of business consistent with past practice, (vi) any amendment or consent with
respect to any licensing agreement filed or required to be filed by the Company
with the SEC, (vii) any material change by the Company in its accounting
methods, principles or practices, except as required by concurrent changes in
GAAP, or (viii) any revaluation by the Company of any of its assets, including,
without limitation, writing down the value of capitalized inventory or writing
off notes or accounts receivable other than in the ordinary course of business
and consistent with past practice.
2.7 Taxes.
(a) Definition of Taxes. For the purposes of this Agreement, "TAX" or
"TAXES" refers to any and all federal, state, local and foreign taxes,
assessments and other governmental charges, duties, impositions and liabilities
relating to taxes, including taxes based upon or measured by gross receipts,
income, profits, sales, use and occupation, and value added, ad valorem,
transfer, franchise, withholding, payroll, recapture, employment, excise and
property taxes, together with all interest, penalties and additions imposed with
respect to such amounts; (ii) any liability for the payment of any amounts of
the type described in clause (i) as a result of being a member of an affiliated,
consolidated, combined or unitary group for any period; and (iii) any liability
for the payment of any amounts of the type described in clause (i) or (ii) as a
result of any express or implied obligation to indemnify any other person or as
a result of any obligations under any agreements or arrangements with any other
person with respect to such amounts and including any liability for taxes of a
predecessor entity.
(b) Tax Returns and Audits.
(i) The Company and each of its subsidiaries have timely filed all
federal, state, local and foreign returns, estimates, information statements and
reports ("RETURNS") relating to Taxes required to be filed by the Company and
each of its subsidiaries with any Tax authority, except such Returns which are
not material to the Company. The Company and each of its subsidiaries have paid
all Taxes shown to be due on such Returns.
(ii) The Company and each of its subsidiaries as of the Effective
Time will have withheld with respect to its employees all federal and state
income taxes, Taxes pursuant to the Federal Insurance Contribution Act ("FICA"),
Taxes pursuant to the Federal Unemployment Tax Act ("FUTA") and other Taxes
required to be withheld.
(iii) Neither the Company nor any of its subsidiaries has been
delinquent in the payment of any Tax nor is there any Tax deficiency
outstanding, proposed in writing (or otherwise, to the Company's knowledge,
proposed) or assessed against the Company or any of its subsidiaries, nor has
the Company or any of its subsidiaries executed any unexpired waiver of any
statute of limitations on or extending the period for the assessment or
collection of any Tax.
(iv) No audit or other examination of any Return of the Company or
any of its subsidiaries by any Tax authority is presently in progress, nor has
the Company or any of its subsidiaries been notified in writing (or otherwise,
to the Company's knowledge, notified) of any request for such an audit or other
examination.
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(v) No adjustment relating to any Returns filed by the Company or any
of its subsidiaries has been proposed in writing by any Tax authority to the
Company or any of its subsidiaries or any representative thereof.
(vi) Neither the Company nor any of its subsidiaries has any
liability for unpaid Taxes which has not been accrued for or reserved on the
Company Balance Sheet, whether asserted or unasserted, contingent or otherwise,
which is material to the Company, other than any liability for unpaid Taxes that
may have accrued since the date of the Company Balance Sheet in connection with
the operation of the business of the Company and its subsidiaries in the
ordinary course.
(vii) There is no contract, agreement, plan or arrangement to which
the Company is a party as of the date of this Agreement (excluding the effect,
if any, of the provisions of Section 5.12 hereof), including but not limited to
the provisions of this Agreement, covering any employee or former employee of
the Company or any of its subsidiaries that, individually or collectively, could
give rise to the payment of any amount that would not be deductible pursuant to
Sections 280G, 404 or 162(m) of the Code.
(viii) Neither the Company nor any of its subsidiaries has filed any
consent agreement under Section 341(f) of the Code or agreed to have Section
341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as
defined in Section 341(f)(4) of the Code) owned by the Company.
(ix) Neither the Company nor any of its subsidiaries is party to or
has any obligation under any tax-sharing, tax indemnity or tax allocation
agreement or arrangement.
(x) Except as may be required as a result of the Merger, the Company
and its subsidiaries have not been and will not be required to include any
adjustment in Taxable income for any Tax period (or portion thereof) pursuant to
Section 481 or Section 263A of the Code or any comparable provision under state
or foreign Tax laws as a result of transactions, events or accounting methods
employed prior to the Closing.
(xi) None of the Company's or its subsidiaries' assets are tax exempt
use property within the meaning of Section 168(h) of the Code.
(xii) Part 2.7 of the Company Schedules lists (A) any foreign Tax
holidays, (B) any intercompany transfer pricing agreements, or other
arrangements that have been established by the Company or any of its
subsidiaries with any Tax authority and (C) any expatriate programs or policies
affecting the Company or any of its subsidiaries.
(xiii) The Company is not, and has not been at any time, a "United
States real property holding corporation" within the meaning of Section
897(c)(2) of the Code.
2.8 Title to Properties; Absence of Liens and Encumbrances.
(a) Part 2.8(a)(i) of the Company Schedules lists the real property
interests owned by the Company as of the date of this Agreement. Part 2.8(a)(ii)
of the Company Schedules lists all real property leases to which the Company is
a party as of the date of this Agreement and each amendment thereto that is in
effect as of the date of this Agreement. All such current leases are in full
force and effect, are valid and effective in accordance with their respective
terms, and there is not, under any of such leases, any existing default or event
of default (or event which with notice or lapse of time, or both, would
constitute a default) that would give rise to a material claim. Other than as
disclosed in Part 2.8(a)(i) and (ii) of the Company Schedules, the Company owns
no interest in real property.
(b) The Company has good and valid title to, or, in the case of leased
properties and assets, valid leasehold interests in, all of its material
tangible properties and assets, real, personal and mixed, used or held for use
in its business, free and clear of any liens, pledges, charges, claims, security
interests or other encumbrances of any sort ("LIENS"), except as reflected in
the Company Financials and as set forth in Part 2.8(b) of the Company Schedules,
and except for liens for taxes not yet due and payable and such Liens or other
imperfections of title and encumbrances, if any, which are not material in
character,
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amount or extent, and which do not materially detract from the value, or
materially interfere with the present use, of the property subject thereto or
affected thereby.
2.9 Intellectual Property. For the purposes of this Agreement, the
following terms have the following definitions:
"INTELLECTUAL PROPERTY" shall mean any or all of the following and all
rights in, arising out of, or associated therewith: (i) all United States,
international and foreign patents and applications therefor and all
reissues, divisions, renewals, extensions, provisionals, continuations and
continuations-in-part thereof; (ii) all inventions (whether patentable or
not), invention disclosures, improvements, trade secrets, proprietary
information, know how, technology, technical data and customer lists, and
all documentation relating to any of the foregoing; (iii) all copyrights,
copyrights registrations and applications therefor, and all other rights
corresponding thereto throughout the world; (iv) all industrial designs and
any registrations and applications therefor throughout the world; (v) all
trade names, logos, URLs, common law trademarks and service marks,
trademark and service mark registrations and applications therefor
throughout the world; (vi) all databases and data collections and all
rights therein throughout the world; (vii) all moral and economic rights of
authors and inventors, however denominated, throughout the world, and
(viii) any similar or equivalent rights to any of the foregoing anywhere in
the world.
"COMPANY INTELLECTUAL PROPERTY" shall mean any Intellectual Property
that is owned by, or exclusively licensed to, the Company.
"REGISTERED INTELLECTUAL PROPERTY" means all United States,
international and foreign: (i) patents and patent applications (including
provisional applications); (ii) registered trademarks, applications to
register trademarks, intent-to-use applications, or other registrations or
applications related to trademarks; (iii) registered copyrights and
applications for copyright registration; and (iv) any other Intellectual
Property that is the subject of an application, certificate, filing,
registration or other document issued, filed with, or recorded by any
state, government or other public legal authority.
"COMPANY REGISTERED INTELLECTUAL PROPERTY" means all of the Registered
Intellectual Property owned by, or filed in the name of, the Company.
(a) Except as set forth in Part 2.9(a) of the Company Schedules, no
material Company Intellectual Property or product or service of the Company is
subject to any proceeding or outstanding decree, order, judgment, agreement, or
stipulation restricting in any manner the use, transfer, or licensing thereof by
the Company, or which may affect the validity, use or enforceability of such
Company Intellectual Property.
(b) Part 2.9(b) of the Company Schedules is a complete and accurate list
of all Company Registered Intellectual Property and specifies, where applicable,
the jurisdictions in which each such item of Company Registered Intellectual
Property has been issued or registered or in which an application for such
issuance and registration has been filed, including the respective registration
or application numbers. Each material item of Company Registered Intellectual
Property is valid and subsisting, all necessary registration, maintenance and
renewal fees currently due in connection with such Registered Intellectual
Property have been made and all necessary documents, recordations and
certificates in connection with such Registered Intellectual Property have been
filed with the relevant patent, copyright, trademark or other authorities in the
United States or foreign jurisdictions, as the case may be, for the purposes of
maintaining such Registered Intellectual Property.
(c) The Company owns and has good and exclusive title to, or has license
(sufficient for the conduct of its business as currently conducted and as
proposed to be conducted) to, each material item of Company Intellectual
Property or other Intellectual Property used by the Company free and clear of
any lien or encumbrance (excluding licenses and related restrictions); and the
Company is the exclusive owner of all trademarks and trade names used in
connection with the operation or conduct of the business of the Company,
including the sale of any products or the provision of any services by the
Company.
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(d) The Company owns exclusively, and has good title to, all copyrighted
works that are Company products or which the Company otherwise expressly
purports to own.
(e) To the extent that any material Intellectual Property has been
developed or created by a third party for the Company, the Company has a written
agreement with such third party with respect thereto and the Company thereby
either (i) has obtained ownership of, and is the exclusive owner of, or (ii) has
obtained a license (sufficient for the conduct of its business as currently
conducted and as proposed to be conducted) to all such third party's
Intellectual Property in such work, material or invention by operation of law or
by valid assignment, to the fullest extent it is legally possible to do so.
(f) Except as set forth in Part 2.9(f) of the Company Schedules, the
Company has not transferred ownership of, or granted any exclusive license with
respect to, any Intellectual Property that is or was material to the Company
Intellectual Property, to any third party.
(g) Except as set forth in Part 2.9(g) of the Company Schedules, the
Company Schedules list all material contracts, licenses and agreements to which
the Company is a party (i) with respect to Company Intellectual Property
licensed or transferred to any third party (other than end-user licenses in the
ordinary course); or (ii) pursuant to which a third party has licensed or
transferred any material Intellectual Property to the Company.
(h) Except as set forth in Part 2.9(h) of the Company Schedules, All
material contracts, licenses and agreements relating to the Company Intellectual
Property are in full force and effect. The consummation of the transactions
contemplated by this Agreement will neither violate nor result in the breach,
modification, cancellation, termination, or suspension of such contracts,
licenses and agreements. The Company is in material compliance with, and has not
materially breached any term any of such contracts, licenses and agreements and,
to the knowledge of the Company, all other parties to such contracts, licenses
and agreements are in compliance with, and have not materially breached any term
of, such contracts, licenses and agreements. Following the Closing Date, the
Surviving Corporation will be permitted to exercise all of the Company's rights
under such contracts, licenses and agreements to the same extent the Company
would have been able to had the transactions contemplated by this Agreement not
occurred and without the payment of any additional amounts or consideration
other than ongoing fees, royalties or payments which the Company would otherwise
be required to pay.
(i) Except as set forth in Part 2.9(i) of the Company Schedules, the
operation of the business of the Company as such business currently is
conducted, including the Company's design, development, manufacture, marketing
and sale of the products or services of the Company (including with respect to
products currently under development) has not, does not and will not infringe or
misappropriate the Intellectual Property of any third party or constitute unfair
competition or trade practices under the laws of any jurisdiction.
(j) Except as set forth in Part 2.9(j) of the Company Schedules, the
Company has not received notice from any third party that the operation of the
business of the Company or any act, product or service of the Company, infringes
or misappropriates the Intellectual Property of any third party or constitutes
unfair competition or trade practices under the laws of any jurisdiction.
(k) Except as set forth in Part 2.9(k) of the Company Schedules and to
the knowledge of the Company, no person has infringed or misappropriated or is
infringing or misappropriating any Company Intellectual Property.
(l) The Company has taken reasonable steps to protect the Company's
rights in the Company's confidential information and trade secrets that it
wishes to protect or any trade secrets or confidential information of third
parties provided to the Company, and, without limiting the foregoing, the
Company has and enforces, or prior to the Closing will have and will enforce, a
policy requiring each key employee and contractor to execute a proprietary
information/confidentiality agreement substantially in the form provided to
Parent and all current and former employees and contractors of the Company have
executed such an agreement, except where the failure to do so is not reasonably
expected to be material to the Company.
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<PAGE> 554
(m) Except as set forth in Part 2.9(m) of the Company Schedules, neither
this Agreement nor the transactions contemplated by this Agreement, including
the assignment to Parent by operation of law or otherwise of any contracts or
agreements to which the Company is a party, will result in (i) Parent's or the
Company's granting to any third party any right to or with respect to any
material Intellectual Property right owned by, or licensed to, either of them,
(ii) either the Parent's or the Company's being bound by, or subject to, any
non-compete or other material restriction on the operation or scope or their
respective businesses, or (iii) either the Parent's or the Company's being
obligated to pay any royalties or other material amounts to any third party in
excess of those payable by Parent or Company, respectively, prior to the
Closing.
2.10 Compliance; Permits; Restrictions.
(a) Neither the Company nor any of its subsidiaries is, in any material
respect, in conflict with, or in default or in violation of (i) any law, rule,
regulation, order, judgment or decree applicable to the Company or any of its
subsidiaries or by which the Company or any of its subsidiaries or any of their
respective properties is bound or affected, or (ii) any material note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which the Company or any of its subsidiaries
is a party or by which the Company or any of its subsidiaries or its or any of
their respective properties is bound or affected, except for conflicts,
violations and defaults that (individually or in the aggregate) would not cause
the Company to lose any material benefit or incur any material liability. No
investigation or review by any Governmental Entity is pending or, to the
Company's knowledge, has been threatened in a writing delivered to the Company,
against the Company or any of its subsidiaries, nor, to the Company's knowledge,
has any Governmental Entity indicated an intention to conduct an investigation
of the Company or any of its subsidiaries. There is no material agreement,
judgment, injunction, order or decree binding upon the Company or any of its
subsidiaries which has or could reasonably be expected to have the effect of
prohibiting or materially impairing any business practice of the Company or any
of its subsidiaries, any acquisition of material property by the Company or any
of its subsidiaries or the conduct of business by the Company as currently
conducted.
(b) The Company and its subsidiaries hold, to the extent legally
required, all permits, licenses, variances, exemptions, clearances, consents,
orders and approvals from Governmental Entities that are material to and
required for the operation of the business of the Company as currently conducted
(collectively, the "COMPANY PERMITS"). The Company and its subsidiaries are in
compliance in all material respects with the terms of the Company Permits,
except where the failure to be in compliance with the terms of the Company
Permits would not be material to the Company.
2.11 Litigation. Except as disclosed in Part 2.11 of the Company
Schedules, there are no claims, suits, actions or proceedings pending or, to the
knowledge of the Company, threatened against, relating to or affecting the
Company or any of its subsidiaries, before any court, governmental department,
commission, agency, instrumentality or authority, or any arbitrator that seeks
to restrain or enjoin the consummation of the transactions contemplated by this
Agreement or which could reasonably be expected, either singularly or in the
aggregate with all such claims, actions or proceedings, to be material to the
Company. No Governmental Entity has at any time challenged or questioned in a
writing delivered to the Company the legal right of the Company to design,
manufacture, offer or sell any of its products or services in the present manner
or style thereof. No action, proceeding, revocation proceeding, amendment
procedure, writ or injunction is pending, and to the Company's knowledge, no
action, proceeding, revocation proceeding, amendment procedure, writ or
injunction has been threatened by any Governmental Entity against the Company or
any of its subsidiaries in a writing delivered to the Company concerning any
environmental permit, Hazardous Material or any Hazardous Materials Activity (as
such terms are defined in Section 2.15 hereof) of the Company or any of its
subsidiaries. The Company is not aware of any fact or circumstance which could
involve the Company or any of its subsidiaries in any environmental litigation
or impose upon the Company any material environmental liability. As of the date
hereof, to the knowledge of the Company, no event has occurred, and no claim,
dispute or other condition or circumstance exists, that will, or that would
reasonably be expected to, cause or provide a bona fide basis for a director or
executive officer of the Company to seek indemnification from the Company.
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Except as disclosed in Part 2.11 of the Company Schedules, the Company has
never been subject to an audit, compliance review, investigation or like
contract review by the GSA office of the Inspector General or other Governmental
Entity or agent thereof in connection with any government contract (a
"GOVERNMENT AUDIT"), to the Company's knowledge no Government Audit is
threatened and in the event of such Government Audit, to the knowledge of the
Company no basis exists for a finding of noncompliance with any material
provision of any government contract or a refund of any amounts paid or owed by
any Governmental Entity pursuant to such government contract. For each item
disclosed in the Company Schedule pursuant to this Section 2.11 a true and
complete copy of all correspondence and documentation with respect thereto is
attached to such schedule.
2.12 Brokers' and Finders' Fees. Except for fees payable to (i) Salomon
Smith Barney Inc. pursuant to an engagement letter dated June 1, 1998 and
amended March 18, 1999 and (ii) Warburg Dillon Read LLC pursuant to an
engagement letter dated March 25, 1999, copies of which have been provided to
Parent, the Company has not incurred, nor will it incur, directly or indirectly,
any liability for brokerage or finders' fees or agents' commissions or any
similar charges in connection with this Agreement or any transaction
contemplated hereby.
2.13 Transactions with Affiliates. Except as set forth in the Company SEC
Reports, no event has occurred as of the date of this Agreement that would be
required to be reported by the Company pursuant to Item 404 of Regulation S-K
promulgated by the SEC. Part 2.13 of the Company Schedules identifies each
person who is an "affiliate" (as that term is used in Rule 145 promulgated under
the Securities Act) of the Company as of the date of this Agreement.
2.14 Employee Benefit Plans.
(a) Definitions. With the exception of the definition of "Affiliate" set
forth in Section 2.14(a)(i) below (which definition shall apply only to this
Section 2.14), for purposes of this Agreement, the following terms shall have
the meanings set forth below:
(i) "AFFILIATE" shall mean any other person or entity under common
control with the Company within the meaning of Section 414(b), (c), (m) or (o)
of the Code and the regulations issued thereunder;
(ii) "COMPANY EMPLOYEE PLAN" shall mean any plan, program, policy,
practice, contract, agreement or other arrangement providing for compensation,
severance, termination pay, performance awards, stock or stock-related awards,
fringe benefits or other employee benefits or remuneration of any kind, whether
written or unwritten or otherwise, funded or unfunded, including without
limitation, each "employee benefit plan," within the meaning of Section 3(3) of
ERISA which is or has been maintained, contributed to, or required to be
contributed to, by the Company or any Affiliate for the benefit of any Employee;
(iii) "COBRA" shall mean the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended;
(iv) "DOL" shall mean the Department of Labor;
(v) "EMPLOYEE" shall mean any current, former, or retired employee,
officer, or director of the Company or any Affiliate;
(vi) "EMPLOYEE AGREEMENT" shall mean each management, employment,
severance, consulting, relocation, repatriation, expatriation, visas, work
permit or similar agreement or contract between the Company or any Affiliate and
any Employee or consultant;
(vii) "ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended;
(viii) "FMLA" shall mean the Family Medical Leave Act of 1993, as
amended;
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(ix) "INTERNATIONAL EMPLOYEE PLAN" shall mean each Company Employee
Plan, if any, that has been adopted or maintained by the Company, whether
informally or formally, for the benefit of Employees outside the United States;
(x) "IRS" shall mean the Internal Revenue Service;
(xi) "MULTIEMPLOYER PLAN" shall mean any "Pension Plan" (as defined
below) which is a "multiemployer plan," as defined in Section 3(37) of ERISA;
(xii) "PBGC" shall mean the Pension Benefit Guaranty Corporation; and
(xiii) "PENSION PLAN" shall mean each Company Employee Plan which is
an "employee pension benefit plan," within the meaning of Section 3(2) of ERISA.
(b) Schedule. Part 2.14(b) of the Company Schedules contain an accurate
and complete list of each Company Employee Plan and each material Employee
Agreement. The Company does not have any plan or commitment to establish any new
Company Employee Plan, to modify any Company Employee Plan or Employee Agreement
(except to the extent required by law or to conform any such Company Employee
Plan or Employee Agreement to the requirements of any applicable law, in each
case as previously disclosed to Parent in writing, or as required by this
Agreement), or to enter into any Company Employee Plan or material Employee
Agreement, nor does it have any intention or commitment to do any of the
foregoing.
(c) Documents. The Company has provided to Parent: (i) correct and
complete copies of all documents embodying to each Company Employee Plan and
each Employee Agreement including all amendments thereto and written
interpretations thereof; (ii) the most recent annual actuarial valuations, if
any, prepared for each Company Employee Plan; (iii) if the Company Employee Plan
is funded, the most recent annual and periodic accounting of Company Employee
Plan assets; (iv) the most recent summary plan description together with the
summary of material modifications thereto, if any, required under ERISA with
respect to each Company Employee Plan; (v) all IRS determination, opinion,
notification and advisory letters, and rulings relating to Company Employee
Plans and copies of all applications and correspondence to or from the IRS or
the DOL with respect to any Company Employee Plan; (vi) all material written
agreements and contracts relating to each Company Employee Plan, including, but
not limited to, administrative service agreements, group annuity contracts and
group insurance contracts; (vii) all communications material to any Employee or
Employees relating to any Company Employee Plan and any proposed Company
Employee Plans, in each case, relating to any amendments, terminations,
establishments, increases or decreases in benefits, acceleration of payments or
vesting schedules or other events which would result in any material liability
to the Company; (viii) all COBRA forms and related notices; and (ix) all
registration statements and prospectuses prepared in connection with each
Company Employee Plan.
(d) Employee Plan Compliance. (i) The Company has performed in all
material respects all obligations required to be performed by it under, is not
in default or violation of, and has no knowledge of any default or violation by
any other party to each Company Employee Plan, and each Company Employee Plan
has been established and maintained in all material respects in accordance with
its terms and in compliance with all applicable laws, statutes, orders, rules
and regulations, including but not limited to ERISA or the Code; (ii) each
Company Employee Plan intended to qualify under Section 401(a) of the Code and
each trust intended to qualify under Section 501(a) of the Code has either
received a favorable determination letter from the IRS with respect to each such
Plan as to its qualified status under the Code, including all amendments to the
Code effected by the Tax Reform Act of 1986 and subsequent legislation, or has
remaining a period of time under applicable Treasury regulations or IRS
pronouncements in which to apply for such a determination letter and make any
amendments necessary to obtain a favorable determination; (iii) no "prohibited
transaction," within the meaning of Section 4975 of the Code or Sections 406 and
407 of ERISA, and not otherwise exempt under Section 408 of ERISA, has occurred
with respect to any Company Employee Plan; (iv) there are no actions, suits or
claims pending, or, to the knowledge of the Company, threatened or reasonably
anticipated (other than routine claims for
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benefits) against any Company Employee Plan or against the assets of any Company
Employee Plan; (v) each Company Employee Plan can be amended, terminated or
otherwise discontinued after the Effective Time in accordance with its terms,
without liability to Parent, the Company or any of its Affiliates (other than
ordinary administration expenses typically incurred in a termination event);
(vi) there are no audits, inquiries or proceedings pending or, to the knowledge
of the Company or any Affiliates, threatened by the IRS or DOL with respect to
any Company Employee Plan; and (vii) neither the Company nor any Affiliate is
subject to any penalty or tax with respect to any Company Employee Plan under
Section 402(i) of ERISA or Sections 4975 through 4980 of the Code.
(e) Pension Plans. Except as set forth in Part 2.14(e) of the Company
Schedules, the Company does not now, nor has it ever, maintained, established,
sponsored, participated in, or contributed to, any Pension Plan which is subject
to Title IV of ERISA or Section 412 of the Code.
(f) Multiemployer Plans. At no time has the Company contributed to or
been requested to contribute to any Multiemployer Plan.
(g) No Post-Employment Obligations. No Company Employee Plan provides,
or has any liability to provide, retiree life insurance, retiree health or other
retiree employee welfare benefits to any person for any reason, except as may be
required by COBRA or other applicable statute, and the Company has never
represented, promised or contracted (whether in oral or written form) to any
Employee (either individually or to Employees as a group) or any other person
that such Employee(s) or other person would be provided with retiree life
insurance, retiree health or other retiree employee welfare benefit, except to
the extent required by statute.
(h) COBRA. Neither the Company nor any Affiliate has, prior to the
Effective Time, and in any material respect, violated any of the health care
continuation requirements of COBRA, the requirements of FMLA or any similar
provisions of state law applicable to its Employees and the requirements of the
Women's Health and Cancer Rights Act and the Newborns' and Mothers' Health
Protection Act of 1996.
(i) Effect of Transaction. The execution of this Agreement and the
consummation of the transactions contemplated hereby will not (either alone or
upon the occurrence of any additional or subsequent events) constitute an event
under any Company Employee Plan, Employee Agreement, trust or loan that will or
may result in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any Employee.
(j) Employment Matters. The Company: (i) is in compliance in all
material respects with all applicable foreign, federal, state and local laws,
rules and regulations respecting employment, employment practices, terms and
conditions of employment and wages and hours, in each case, with respect to
Employees; (ii) has withheld all amounts required by law or by agreement to be
withheld from the wages, salaries and other payments to Employees; (iii) is not
liable for any arrears of wages or any taxes or any penalty for failure to
comply with any of the foregoing; and (iv) is not liable for any material
payment to any trust or other fund or to any governmental or administrative
authority, with respect to unemployment compensation benefits, social security
or other benefits or obligations for Employees (other than routine payments to
be made in the normal course of business and consistent with past practice).
There are no pending, threatened or reasonably anticipated claims or actions
against the Company under any worker's compensation policy or long-term
disability policy. To the Company's knowledge, no employee of the Company has
violated any employment contract, nondisclosure agreement or noncompetition
agreement by which such employee is bound due to such employee being employed by
the Company and disclosing to the Company or using trade secrets or proprietary
information of any other person or entity.
(k) Labor. No work stoppage or labor strike against the Company is
pending, threatened or reasonably anticipated. The Company does not know of any
activities or proceedings of any labor union to organize any Employees. There
are no actions, suits, claims, labor disputes or grievances pending, or, to the
knowledge of the Company, threatened or reasonably anticipated relating to any
labor, safety or
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discrimination matters involving any Employee, including, without limitation,
charges of unfair labor practices or discrimination complaints, which, if
adversely determined, would, individually or in the aggregate, result in any
material liability to the Company. Neither the Company nor any of its
subsidiaries has engaged in any unfair labor practices within the meaning of the
National Labor Relations Act. The Company is not presently, nor has it been in
the past, a party to, or bound by, any collective bargaining agreement or union
contract with respect to Employees and no collective bargaining agreement is
being negotiated by the Company.
(l) International Employee Plan. Each International Employee Plan, if
any, has been established, maintained and administered in material compliance
with its terms and conditions and with the requirements prescribed by any and
all statutory or regulatory laws that are applicable to such International
Employee Plan. Furthermore, no International Employee Plan, if any, has unfunded
liabilities, that as of the Effective Time, will not be offset by insurance or
fully accrued. Except as required by law, no condition exists that would prevent
the Company or Parent from terminating or amending an International Employee
Plan, if any, at any time for any reason.
2.15 Environmental Matters.
(a) Hazardous Material. Except as would not result in material liability
to the Company, no underground storage tanks and no amount of any substance that
has been designated by any Governmental Entity or by applicable federal, state
or local law to be radioactive, toxic, hazardous or otherwise a danger to health
or the environment, including, without limitation, PCBs, asbestos, petroleum,
urea-formaldehyde and all substances listed as hazardous substances pursuant to
the Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, or defined as a hazardous waste pursuant to the United States
Resource Conservation and Recovery Act of 1976, as amended, and the regulations
promulgated pursuant to said laws, but excluding office and janitorial supplies,
(a "HAZARDOUS MATERIAL") are present, as a result of the actions of the Company
or any of its subsidiaries or any affiliate of the Company, or, to the Company's
knowledge, as a result of any actions of any third party or otherwise, in, on or
under any property, including the land and the improvements, ground water and
surface water thereof, that the Company or any of its subsidiaries has at any
time owned, operated, occupied or leased.
(b) Hazardous Materials Activities. Except as would not result in a
material liability to the Company (in any individual case or in the aggregate)
(i) neither the Company nor any of its subsidiaries has transported, stored,
used, manufactured, disposed of, released or exposed its employees or others to
Hazardous Materials in violation of any law in effect on or before the Closing
Date, and (ii) neither the Company nor any of its subsidiaries has disposed of,
transported, sold, used, released, exposed its employees or others to or
manufactured any product containing a Hazardous Material (collectively
"HAZARDOUS MATERIALS ACTIVITIES") in violation of any rule, regulation, treaty
or statute promulgated by any Governmental Entity in effect prior to or as of
the date hereof to prohibit, regulate or control Hazardous Materials or any
Hazardous Material Activity.
2.16 Year 2000 Compliance. Except as disclosed in Part 2.16 of the Company
Schedules, the Company's products and internal systems have been designed to
ensure date and time entry recognition, calculations that accommodate same
century and multi-century formulas and date values, leap year recognition and
calculations, and date data interface values that reflect the century. The
Company's products and internal systems manage and manipulate data involving
dates and times, including single century formulas and multi-century formulas,
and do not cause an abnormal ending scenario within the application or generate
incorrect values or invalid results involving such dates.
2.17 Agreements, Contracts and Commitments. Except as otherwise set forth
in Part 2.17 of the Company Schedules, as of the date hereof neither the Company
nor any of its subsidiaries is a party to or is bound by:
(a) any employment or consulting agreement, contract or commitment with
any officer or director or higher level employee or member of the Company's
Board, other than those that are terminable by the Company or any of its
subsidiaries on no more than thirty (30) days' notice without liability or
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financial obligation, except to the extent general principles of wrongful
termination law may limit the Company's or any of its subsidiaries' ability to
terminate employees at will;
(b) any material agreement of indemnification or any material guaranty,
other than any agreement of indemnification entered into in connection with the
sale or license of software products in the ordinary course of business;
(c) any agreement, contract or commitment containing any covenant
limiting in any respect the right of the Company or any of its subsidiaries to
engage in any line of business or to compete with any person or granting any
exclusive distribution rights;
(d) any agreement, contract or commitment currently in force relating to
the disposition or acquisition by the Company or any of its subsidiaries after
the date of this Agreement of a material amount of assets not in the ordinary
course of business or pursuant to which the Company has any material ownership
interest in any corporation, partnership, joint venture or other business
enterprise other than the Company's subsidiaries;
(e) any joint marketing or development agreement currently in force
under which the Company or any of its subsidiaries have continuing material
obligations to jointly market any product, technology or service and which may
not be canceled without penalty upon notice of 90 days or less, or any material
agreement pursuant to which the Company or any of its subsidiaries have
continuing material obligations to jointly develop any intellectual property
that will not be owned, in whole or in part, by the Company or any of its
subsidiaries and which may not be canceled without penalty upon notice of 90
days or less;
(f) any agreement, contract or commitment currently in force to provide
source code to any third party for any product or technology that is material to
the Company and its subsidiaries taken as a whole;
(g) any agreement or plan, including, without limitation, any stock
option plan, stock appreciation right plan or stock purchase plan, any of the
benefits of which will be increased, or the vesting of benefits of which will be
accelerated, by the occurrence of any of the transactions contemplated by this
Agreement or the value of any of the benefits of which will be calculated on the
basis of any of the transactions contemplated by this Agreement;
(h) any agreement, contract or commitment currently in force to sell or
distribute any Company products, service or technology except agreements with
distributors or sales representatives in the normal course of business
cancelable without penalty upon notice of ninety (90) days or less and
substantially in the form previously provided to Parent;
(i) any mortgages, indentures, guarantees, loans or credit agreements,
security agreements or other agreements or instruments relating to the borrowing
of money or extension of credit;
(j) any settlement agreement entered into within five (5) years prior to
the date of this Agreement; or
(k) any other agreement, contract or commitment that has a value of
$100,000 or more individually.
Neither the Company nor any of its subsidiaries, nor to the Company's
knowledge any other party to a Company Contract (as defined below), is in
breach, violation or default under, and neither the Company nor any of its
subsidiaries has received written notice that it has breached, violated or
defaulted under, any of the material terms or conditions of any of the
agreements, contracts or commitments to which the Company or any of its
subsidiaries is a party or by which it is bound that are required to be
disclosed in the Company Schedules pursuant to clauses (a) through (k) above or
pursuant to Section 2.9 hereof or are required to be filed with any Company SEC
Report (any such agreement, contract or commitment, a "COMPANY CONTRACT") in
such a manner as would permit any other party to cancel or terminate any such
Company Contract, or would permit any other party to seek material damages or
other remedies (for any or all of such breaches, violations or defaults, in the
aggregate).
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2.18 Change of Control Payments. Part 2.18 of the Company Schedules sets
forth each plan or agreement pursuant to which any amounts may become payable
(whether currently or in the future) to current or former employees and
directors of the Company as a result of or in connection with the Merger.
2.19 Disclosure. None of the information supplied or to be supplied by or
on behalf of the Company for inclusion or incorporation by reference in the
registration statement on Form S-4 (or similar successor form) to be filed with
the SEC by Parent in connection with the issuance of Parent Common Stock in the
Merger (the "REGISTRATION STATEMENT") will, at the time the Registration
Statement is filed with the SEC or at the time it becomes effective under the
Securities Act, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in the light of the circumstances under which they are
made, not misleading. None of the information supplied or to be supplied by or
on behalf of the Company for inclusion or incorporation by reference in the
Prospectus/Proxy Statement to be filed with the SEC as part of the Registration
Statement (the "PROSPECTUS/PROXY STATEMENT"), will, at the time the
Prospectus/Proxy Statement is mailed to the stockholders of the Company, at the
time of the Company Stockholders' Meeting or as of the Effective Time, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they are made, not
misleading. The Prospectus/Proxy Statement will comply as to form in all
material respects with the provisions of the Exchange Act and the rules and
regulations promulgated by the SEC thereunder.
2.20 Board Approval. The Company's Board has, as of the date of this
Agreement, unanimously (i) determined that the Merger is fair to, and in the
best interests of the Company and its stockholders, (ii) approved and deemed
advisable, subject to stockholder approval, this Agreement and the transactions
contemplated hereby and (iii) determined to recommend that the stockholders of
the Company approve and adopt this Agreement and approve the Merger.
2.21 Opinion of Financial Advisor. The Company's Board has received an
opinion from Salomon Smith Barney Inc., dated the date of this Agreement, to the
effect that, as of such date, the Exchange Ratio is fair to the holders of the
Company Common Stock from a financial point of view, a copy of the written
opinion of which will be delivered to Parent after receipt thereof by the
Company.
2.22 Restrictions on Business Activities. Except as set forth in Section
2.22 of the Company Schedule, there is no agreement, commitment, judgment,
injunction, order or decree binding upon the Company or to which the Company is
a party which has or could reasonably be expected to have the effect of
prohibiting or materially impairing any business practice of the Company, any
acquisition of property by the Company or the conduct of business by the Company
as currently conducted.
2.23 Insurance. The Company maintains insurance policies and fidelity
bonds covering the assets, business, equipment, properties, operations,
employees, officers and directors of the Company and its subsidiaries
(collectively, the "Insurance Policies") which are of the type and in amounts
customarily carried by persons conducting businesses similar to those of the
Company and its subsidiaries. There is no material claim by the Company or any
of its subsidiaries pending under any of the material Insurance Policies as to
which coverage has been questioned, denied or disputed by the underwriters of
such policies or bonds.
2.24 State Takeover Statutes. No state takeover statute or similar statute
or regulation applies to or purports to apply to the Merger, this Agreement and
the Company Voting Agreements or the transactions contemplated by this Agreement
and the Company Voting Agreements.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
As of the date hereof and as of the Closing Date (except as otherwise
contemplated herein), Parent and Merger Sub represent and warrant to the
Company, subject to the exceptions specifically disclosed in writing in the
disclosure letter and referencing a specific representation supplied by Parent
and Merger Sub to the Company dated as of the date hereof (the "PARENT
SCHEDULES"), as follows:
3.1 Organization of Parent.
(a) Except as set forth on Part 3.1(a) of Parent Schedules and as of the
date of this Agreement, Parent does not own any capital stock of, or any equity
interest of any nature in, any other entity, except for passive investments in
equity interests of public companies as part of the cash management program of
Parent. Unless otherwise indicated, references to "Parent" throughout this
Agreement shall mean Parent and its subsidiaries, taken as a whole. As of the
date of this Agreement, Parent has not agreed and is not obligated to make, nor
bound by any contract under which contract it may become obligated to make, any
future investment in or capital contribution to any other entity. Parent has
not, at any time, been a general partner of any general partnership, limited
partnership or other entity.
(b) Parent is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has all
necessary power and authority: (i) to conduct its business in the manner in
which its business is currently being conducted; (ii) to own and use its assets
in the manner in which its assets are currently owned and used; and (iii) to
perform its obligations under all Contracts by which it is bound.
(c) Parent is qualified to do business as a foreign corporation, and is
in good standing, under the laws of all jurisdictions where the nature of its
business requires such qualification and where the failure to so qualify would
have a Material Adverse Effect (as defined in Section 8.3) on Parent.
(d) Parent has delivered or made available to the Company a true and
correct copy of the Certificate of Incorporation and Bylaws of Parent and
similar governing instruments of each of its subsidiaries, each as amended to
date (collectively, the "PARENT CHARTER DOCUMENTS"), and each such instrument is
in full force and effect. Parent is not in violation of any of the provisions of
Parent Charter Documents.
(e) Parent has delivered or made available to the Company all proposed
or considered amendments to Parent Charter Documents.
3.2 Parent Capital Structure.
(a) As of the date of this Agreement, the authorized capital stock of
Parent consists of: (i) 150,000,000 shares of Common Stock, $0.0001 par value,
of which 70,746,528 shares have been issued and are outstanding as of April 16,
1999; and (ii) 5,000,000 shares of Preferred Stock, $0.0001 par value per share,
none of which shares have been issued or are outstanding as of the date of this
Agreement. All of the outstanding shares of Parent's Common Stock have been duly
authorized and validly issued, and are fully paid and nonassessable.
(b) As of the date of this Agreement: (i) 14,513,047 shares of Parent
Common Stock are subject to issuance pursuant to outstanding options to purchase
Common Stock under Parent's stock option plans; (ii) 1,333,853 shares of Common
Stock are reserved for future issuance under Parent's 1996 Stock Plan (the
"PARENT PURCHASE PLAN"); and (iii) 1,000,000 shares of Common Stock are reserved
for issuance under Parent's 1998 Employee Stock Purchase Plan. (Stock options
granted by Parent pursuant to Parent's stock option plans are referred to in
this Agreement as "PARENT OPTIONS"). Parent has made available to the Company
accurate and complete copies of all stock option plans pursuant to which Parent
has granted stock options that are currently outstanding as of the date of this
Agreement and the form of all stock option agreements evidencing such options.
All shares of Parent Common Stock subject
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to issuance as aforesaid, upon issuance on the terms and conditions specified in
the instruments pursuant to which they are issuable, would be duly authorized,
validly issued, fully paid and nonassessable.
(c) As of the date of this Agreement, 2,577,240 shares of Parent Common
Stock are subject to issuance pursuant to outstanding warrants to purchase
Common Stock.
(d) All outstanding shares of Parent Common Stock, all outstanding
Parent Options, and all outstanding shares of capital stock of each subsidiary
of Parent have been issued and granted in compliance with (i) all applicable
securities laws and other applicable Legal Requirements and (ii) all
requirements set forth in applicable Contracts.
3.3 Obligations With Respect to Capital Stock. Except as set forth in Part
3.3 of Parent Schedules and as set forth in Section 3.2 above, as of the date of
this Agreement there are no equity securities, partnership interests or similar
ownership interests of any class of Parent equity security, or any securities
exchangeable or convertible into or exercisable for such equity securities,
partnership interests or similar ownership interests, issued, reserved for
issuance or outstanding. Except for securities Parent owns free and clear of all
claims and Encumbrances, directly or indirectly through one or more
subsidiaries, and except for shares of capital stock or other similar ownership
interests of certain subsidiaries of Parent that are owned by certain nominee
equity holders as required by the applicable law of the jurisdiction of
organization of such subsidiaries (which shares or other interests do not
materially affect Parent's control of such subsidiaries), as of the date of this
Agreement, there are no equity securities, partnership interests or similar
ownership interests of any class of equity security of any subsidiary of Parent,
or any security exchangeable or convertible into or exercisable for such equity
securities, partnership interests or similar ownership interests, issued,
reserved for issuance or outstanding. Except as set forth in Part 3.3 of Parent
Schedules or Section 3.2 above, as of the date of this Agreement there are no
subscriptions, options, warrants, equity securities, partnership interests or
similar ownership interests, calls, rights (including preemptive rights),
commitments or agreements of any character to which Parent or any of its
subsidiaries is a party or by which it is bound obligating Parent or any of its
subsidiaries to issue, deliver or sell, or cause to be issued, delivered or
sold, or repurchase, redeem or otherwise acquire, or cause the repurchase,
redemption or acquisition of, any shares of capital stock, partnership interests
or similar ownership interests of Parent or any of its subsidiaries or
obligating Parent or any of its subsidiaries to grant, extend, accelerate the
vesting of or enter into any such subscription, option, warrant, equity
security, call, right, commitment or agreement. As of the date of this
Agreement, except as contemplated by this Agreement and except as set forth in
Part 3.3 of Parent Schedules, there are no registration rights and there is no
voting trust, proxy, rights plan, antitakeover plan or other agreement or
understanding to which Parent is a party or by which it is bound with respect to
any equity security of any class of Parent or with respect to any equity
security, partnership interest or similar ownership interest of any class of any
of its subsidiaries. Stockholders of Parent will not be entitled to dissenters'
rights under applicable state law in connection with the Merger.
3.4 Authority; Non-Contravention.
(a) Parent and Merger Sub have all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Parent, subject only to the
filing of the Certificate of Merger pursuant to Delaware Law. This Agreement has
been duly executed and delivered by Parent and Merger Sub, upon due execution
and delivery by the Company, constitutes a valid and binding obligation of
Parent and Merger Sub, enforceable against Parent and Merger Sub in accordance
with its terms, except as enforceability may be limited by bankruptcy and other
similar laws and general principles of equity. The execution and delivery of
this Agreement by Parent and Merger Sub do not, and the performance of this
Agreement by Parent and Merger Sub will not, (i) conflict with Parent Charter
Documents, (ii) subject to compliance with the requirements set forth in Section
3.4(b) below, conflict with or violate any law, rule, regulation, order,
judgment or decree applicable to Parent or any of its subsidiaries or by which
Parent or any of its subsidiaries or any of their respective properties are
bound or affected, or (iii) result in
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<PAGE> 563
any material breach of or constitute a material default (or an event that with
notice or lapse of time or both would become a material default) under, or
impair Parent's rights or alter the rights or obligations of any third party
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a material lien or Encumbrance on
any of the material properties or assets of Parent or any of its subsidiaries
pursuant to, any material note, bond, mortgage, indenture, contract, agreement,
lease, license, permit, franchise, concession, or other instrument or obligation
to which Parent or any of its subsidiaries is a party or by which Parent or any
of its subsidiaries or its or any of their respective assets are bound or
affected.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with any Governmental Entity, is required to be obtained
or made by Parent in connection with the execution and delivery of this
Agreement or the consummation of the Merger, except for (i) the filing of the
Certificate of Merger with the Secretary of State of the State of Delaware (ii)
the filing of the Registration Statement and the Prospectus/Proxy Statement in
accordance with the Securities Act and the Exchange Act, respectively, (iii)
such consents, approvals, orders, authorizations, registrations, declarations
and filings as may be required under applicable federal, foreign and state
securities (or related) laws and the HSR Act, and the securities or antitrust
laws of any foreign country, and (iv) such other consents, authorizations,
filings, approvals and registrations which if not obtained or made would not be
material to Parent or have a material adverse effect on the ability of the
parties hereto to consummate the Merger.
3.5 SEC Filings; Parent Financial Statements.
(a) Parent has filed all forms, reports and documents required to be
filed by Parent with the SEC since January 1, 1999. All such required forms,
reports and documents (including those that Parent may file subsequent to the
date hereof) are referred to herein as the "PARENT SEC REPORTS"). As of their
respective dates (or, if amended, as of the respective dates of such
amendments), Parent SEC Reports (i) complied as to form in all material respects
with the requirements of the Securities Act, or the Exchange Act, as the case
may be, and the rules and regulations of the SEC thereunder applicable to such
Parent SEC Reports and (ii) did not at the time they were filed contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. None of
Parent's subsidiaries is required to file any forms, reports or other documents
with the SEC.
(b) Each of the consolidated financial statements (including, in each
case, any related notes thereto) contained in Parent SEC Reports (the "PARENT
FINANCIALS"), including each Parent SEC Report filed after the date hereof until
the Closing, (i) complied as to form in all material respects with the published
rules and regulations of the SEC with respect thereto, (ii) was prepared in
accordance with United States generally accepted accounting principles ("GAAP")
applied on a consistent basis throughout the periods involved (except as may be
indicated in the notes thereto or, in the case of unaudited interim financial
statements, as may be permitted by the SEC on Form 10-Q under the Exchange Act)
and (iii) fairly presented the consolidated financial position of Parent and its
subsidiaries as at the respective dates thereof and the consolidated results of
Parent's operations and cash flows for the periods indicated, except that the
unaudited interim financial statements may not contain footnotes and were or are
subject to normal and recurring year-end adjustments. The balance sheet of
Parent contained in Parent's annual report on Form 10-K for the year ended
December 31, 1998 is hereinafter referred to as (the "PARENT BALANCE SHEET").
Except as disclosed in Parent Financials or as incurred in the ordinary course
of business since the date of the Parent Balance Sheet, as of the date of this
Agreement neither Parent nor any of its subsidiaries has any liabilities
required under GAAP to be set forth on a balance sheet (absolute, accrued,
contingent or otherwise).
(c) Parent has heretofore furnished to the Company a complete and
correct copy of any amendments or modifications, which have not yet been filed
with the SEC but which are required to be filed, to agreements, documents or
other instruments which previously had been filed by Parent with the SEC
pursuant to the Securities Act or the Exchange Act.
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3.6 Absence of Certain Changes or Events. From the date of the Parent
Balance Sheet to the date of this Agreement, there has not been: (i) any
Material Adverse Effect on Parent, (ii) any declaration, setting aside or
payment of any dividend on, or other distribution (whether in cash, stock or
property) in respect of, any of Parent's or any of its subsidiaries' capital
stock, or any purchase, redemption or other acquisition by Parent of any of
Parent's capital stock or any other securities of Parent or its subsidiaries or
any options, warrants, calls or rights to acquire any such shares or other
securities except for repurchases from employees following their termination
pursuant to the terms of their pre-existing stock option or purchase agreements,
(iii) any split, combination or reclassification of any of Parent's or any of
its subsidiaries' capital stock, (iv) any granting by Parent or any of its
subsidiaries of any increase in compensation or fringe benefits, except for
normal increases of cash compensation in the ordinary course of business
consistent with past practice and grants of Parent Options, or any payment by
Parent or any of its subsidiaries of any bonus, except for bonuses made in the
ordinary course of business consistent with past practice, or any granting by
Parent or any of its subsidiaries of any increase in severance or termination
pay or any entry by Parent or any of its subsidiaries into any currently
effective employment, severance, termination or director, officer or other
employee indemnification agreement or any other employment or consulting related
agreement the benefits of which are contingent or the terms of which are
materially altered upon the occurrence of a transaction involving Parent of the
nature contemplated hereby, (v) entry by Parent or any of its subsidiaries into
any licensing or other agreement with regard to the acquisition or disposition
of any material Intellectual Property (as defined in Section 2.9) other than
licenses in the ordinary course of business consistent with past practice, (vi)
any amendment or consent with respect to any licensing agreement filed or
required to be filed by Parent with the SEC, (vii) any material change by Parent
in its accounting methods, principles or practices, except as required by
concurrent changes in GAAP, or (viii) any revaluation by Parent of any of its
assets, including, without limitation, writing down the value of capitalized
inventory or writing off notes or accounts receivable other than in the ordinary
course of business.
3.7 Taxes.
(a) Tax Returns and Audits.
(i) Parent and each of its subsidiaries have timely filed all Returns
relating to Taxes required to be filed by Parent and each of its subsidiaries
with any Tax authority, except such Returns which are not material to Parent,
and have paid all Taxes shown to be due on such Returns.
(ii) Parent and each of its subsidiaries as of the Effective Time
will have withheld with respect to its employees all federal and state income
taxes, Taxes pursuant to FICA, Taxes pursuant to the FUTA and other Taxes
required to be withheld.
(iii) Neither Parent nor any of its subsidiaries has been delinquent
in the payment of any Tax nor is there any Tax deficiency outstanding, proposed
in writing (or otherwise, to Parent's knowledge, proposed) or assessed against
Parent or any of its subsidiaries, nor has Parent or any of its subsidiaries
executed any unexpired waiver of any statute of limitations on or extending the
period for the assessment or collection of any Tax.
(iv) No audit or other examination of any Return of Parent or any of
its subsidiaries by any Tax authority is presently in progress, nor has Parent
or any of its subsidiaries been notified in writing (or otherwise, to Parent's
knowledge, notified) of any request for such an audit or other examination.
(v) No adjustment relating to any Returns filed by Parent or any of
its subsidiaries has been proposed in writing by any Tax authority to Parent or
any of its subsidiaries or any representative thereof.
(vi) Neither Parent nor any of its subsidiaries has any liability for
unpaid Taxes which has not been accrued for or reserved on Parent Balance Sheet,
whether asserted or unasserted, contingent or otherwise, which is material to
Parent, other than any liability for unpaid Taxes that may have accrued since
the date of Parent Balance Sheet in connection with the operation of the
business of Parent and its subsidiaries in the ordinary course.
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(vii) There is no contract, agreement, plan or arrangement to which
Parent is a party as of the date of this Agreement, including but not limited to
the provisions of this Agreement, covering any employee or former employee of
Parent or any of its subsidiaries that, individually or collectively, could give
rise to the payment of any amount that would not be deductible pursuant to
Sections 280G, 404 or 162(m) of the Code.
(viii) Neither Parent nor any of its subsidiaries has filed any
consent agreement under Section 341(f) of the Code or agreed to have Section
341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as
defined in Section 341(f)(4) of the Code) owned by Parent.
(ix) Neither Parent nor any of its subsidiaries is party to or has
any obligation under any tax-sharing, tax indemnity or tax allocation agreement
or arrangement.
(x) Except as may be required as a result of the Merger, Parent and
its subsidiaries have not been and will not be required to include any
adjustment in Taxable income for any Tax period (or portion thereof) pursuant to
Section 481 or Section 263A of the Code or any comparable provision under state
or foreign Tax laws as a result of transactions, events or accounting methods
employed prior to the Closing.
(xi) None of Parent's or its subsidiaries' assets are tax exempt use
property within the meaning of Section 168(h) of the Code.
(xii) Parent is not, and has not been at any time, a "United States
real property holding corporation" within the meaning of Section 897(c)(2) of
the Code.
3.8 Title to Properties; Absence of Liens and Encumbrances.
(a) All of Parent's current leases with respect to real property are in
full force and effect, are valid and effective in accordance with their
respective terms, and there is not, under any of such leases, any existing
default or event of default (or event which with notice or lapse of time, or
both, would constitute a default) that would give rise to a material claim. As
of the date of this Agreement, other than the leaseholds created under real
property leases, Parent owns no interest in real property.
(b) Parent has good and valid title to, or, in the case of leased
properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and mixed, used or held for use in its
business, free and clear of any Liens, except as reflected in Parent Financials
and except for Liens for taxes not yet due and payable and such Liens or other
imperfections of title and encumbrances, if any, which are not material in
character, amount or extent, and which do not materially detract from the value,
or materially interfere with the present use, of the property subject thereto or
affected thereby.
3.9 Intellectual Property. For the purposes of this Agreement, the
following terms have the following definitions:
"PARENT INTELLECTUAL PROPERTY" means any Intellectual Property that is
owned by, or exclusively licensed to, Parent.
"PARENT REGISTERED INTELLECTUAL PROPERTY" means all of the Registered
Intellectual Property owned by, or filed in the name of, Parent.
(a) No material Parent Intellectual Property or product or service of
Parent is subject to any proceeding or outstanding decree, order, judgment,
agreement, or stipulation restricting in any manner the use, transfer, or
licensing thereof by Parent, or which may affect the validity, use or
enforceability of such Parent Intellectual Property.
(b) Each material item of Parent Registered Intellectual Property is
valid and subsisting, all necessary registration, maintenance and renewal fees
currently due in connection with such Registered Intellectual Property have been
made and all necessary documents, recordations and certificates in connection
with such Registered Intellectual Property have been filed with the relevant
patent, copyright,
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trademark or other authorities in the United States or foreign jurisdictions, as
the case may be, for the purposes of maintaining such Registered Intellectual
Property.
(c) Parent owns and has good and exclusive title to, or has license
(sufficient for the conduct of its business as currently conducted and as
proposed to be conducted) to, each material item of Parent Intellectual Property
or Intellectual Property used by Parent free and clear of any Lien or
Encumbrance (excluding licenses and related restrictions); and Parent is the
exclusive owner of all trademarks and trade names used in connection with the
operation or conduct of the business of Parent, including the sale of any
products or the provision of any services by Parent.
(d) To the extent that any material Intellectual Property has been
developed or created by a third party for Parent, Parent has a written agreement
with such third party with respect thereto and Parent thereby either (i) has
obtained ownership of, and is the exclusive owner of, or (ii) has obtained a
license (sufficient for the conduct of its business as currently conducted and
as proposed to be conducted) to all such third party's Intellectual Property in
such work, material or invention by operation of law or by valid assignment, to
the fullest extent it is legally possible to do so.
(e) The operation of the business of Parent as such business currently
is conducted, including Parent's design, development, manufacture, marketing and
sale of the products or services of Parent (including with respect to products
currently under development) has not, does not and will not infringe or
misappropriate the Intellectual Property of any third party or constitute unfair
competition or trade practices under the laws of any jurisdiction.
(f) Parent has not received notice from any third party that the
operation of the business of Parent or any act, product or service of Parent,
infringes or misappropriates the Intellectual Property of any third party or
constitutes unfair competition or trade practices under the laws of any
jurisdiction.
(g) To the knowledge of Parent, no person has infringed or
misappropriated or is infringing or misappropriating any Parent Intellectual
Property.
(h) Parent has taken reasonable steps to protect Parent's rights in
Parent's confidential information and trade secrets that it wishes to protect or
any trade secrets or confidential information of third parties provided to
Parent, and, without limiting the foregoing, Parent has and enforces a policy
requiring each employee and contractor to execute a proprietary
information/confidentiality agreement substantially in the form provided to the
Company and all current and former employees and contractors of Parent have
executed such an agreement, except where the failure to do so is not reasonably
expected to be material to Parent.
3.10 Compliance; Permits; Restrictions.
(a) Neither Parent nor any of its subsidiaries is, in any material
respect, in conflict with, or in default or in violation of (i) any law, rule,
regulation, order, judgment or decree applicable to Parent or any of its
subsidiaries or by which Parent or any of its subsidiaries or any of their
respective properties is bound or affected, or (ii) any material note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which Parent or any of its subsidiaries is a
party or by which Parent or any of its subsidiaries or its or any of their
respective properties is bound or affected, except for conflicts, violations and
defaults that (individually or in the aggregate) would not cause Parent to lose
any material benefit or incur any material liability. No investigation or review
by any Governmental Entity is pending or, to Parent's knowledge, has been
threatened in a writing delivered to Parent against Parent or any of its
subsidiaries, nor, to Parent's knowledge, has any Governmental Entity indicated
an intention to conduct an investigation of Parent or any of its subsidiaries.
There is no material agreement, judgment, injunction, order or decree binding
upon Parent or any of its subsidiaries which has or could reasonably be expected
to have the effect of prohibiting or materially impairing any business practice
of Parent or any of its subsidiaries, any acquisition of material property by
Parent or any of its subsidiaries or the conduct of business by Parent as
currently conducted.
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(b) Parent and its subsidiaries hold, to the extent legally required,
all permits, licenses, variances, exemptions, orders and approvals from
Governmental Entities that are material to and required for the operation of the
business of Parent as currently conducted (collectively, the "PARENT PERMITS").
Parent and its subsidiaries are in compliance in all material respects with the
terms of Parent Permits, except where the failure to be in compliance with the
terms of Parent Permits would not be material to Parent.
3.11 Litigation. Except as disclosed in Part 3.11 of Parent Schedules,
there are no claims, suits, actions or proceedings pending or, to the knowledge
of Parent, threatened against, relating to or affecting Parent or any of its
subsidiaries, before any court, governmental department, commission, agency,
instrumentality or authority, or any arbitrator that seeks to restrain or enjoin
the consummation of the transactions contemplated by this Agreement or which
could reasonably be expected, either singularly or in the aggregate with all
such claims, actions or proceedings, to be material to Parent. No Governmental
Entity has at any time challenged or questioned in a writing delivered to Parent
the legal right of Parent to design, manufacture, offer or sell any of its
products or services in the present manner or style thereof. As of the date
hereof, to the knowledge of Parent, no event has occurred, and no claim, dispute
or other condition or circumstance exists, that will, or that would reasonably
be expected to, cause or provide a bona fide basis for a director or executive
officer of Parent to seek indemnification from Parent.
3.12 Brokers' and Finders' Fees. Except for fees payable to Morgan Stanley
& Co. Incorporated pursuant to an engagement letter dated April 19, 1999, a copy
of which has been provided to the Company, Parent has not incurred, nor will it
incur, directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or any similar charges in connection with this Agreement or
any transaction contemplated hereby.
3.13 Environmental Matters.
(a) Hazardous Material. Except as would not result in material liability
to Parent, no Hazardous Materials are present, as a result of the actions of
Parent or any of its subsidiaries or any affiliate of Parent, or, to Parent's
knowledge, as a result of any actions of any third party or otherwise, in, on or
under any property, including the land and the improvements, ground water and
surface water thereof, that Parent or any of its subsidiaries has at any time
owned, operated, occupied or leased.
(b) Hazardous Materials Activities. Except as would not result in a
material liability to Parent (in any individual case or in the aggregate) (i)
neither Parent nor any of its subsidiaries has transported, stored, used,
manufactured, disposed of, released or exposed its employees or others to
Hazardous Materials in violation of any law in effect on or before the Closing
Date, and (ii) neither Parent nor any of its subsidiaries has disposed of,
transported, sold, used, released, exposed its employees or others to or
manufactured any product containing a Hazardous Material in violation of any
rule, regulation, treaty or statute promulgated by any Governmental Entity in
effect prior to or as of the date hereof to prohibit, regulate or control
Hazardous Materials or any Hazardous Material Activity.
(c) Permits. Parent and its subsidiaries currently hold all
environmental approvals, permits, licenses, clearances and consents (the "PARENT
ENVIRONMENTAL PERMITS") necessary for the conduct of Parent's and its
subsidiaries' Hazardous Material Activities and other businesses of Parent and
its subsidiaries as such activities and businesses are currently being
conducted.
(d) Environmental Liabilities. No action, proceeding, revocation
proceeding, amendment procedure, writ or injunction is pending, and to Parent's
knowledge, no action, proceeding, revocation proceeding, amendment procedure,
writ or injunction has been threatened by any Governmental Entity against Parent
or any of its subsidiaries in a writing delivered to Parent concerning any
Parent Environmental Permit, Hazardous Material or any Hazardous Materials
Activity of Parent or any of its subsidiaries. Parent is not aware of any fact
or circumstance which could involve Parent or any of its subsidiaries in any
environmental litigation or impose upon Parent any material environmental
liability.
3.14 Year 2000 Compliance. Except as disclosed in Part 3.14 of the Parent
Schedules, Parent's products and internal systems have been designed to ensure
date and time entry recognition, calculations
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that accommodate same century and multi-century formulas and date values, leap
year recognition and calculations, and date data interface values that reflect
the century. Parent's products and internal systems manage and manipulate data
involving dates and times, including single century formulas and multi-century
formulas, and do not cause an abnormal ending scenario within the application or
generate incorrect values or invalid results involving such dates.
3.15 Agreements, Contracts and Commitments. As of the date of this
Agreement, neither Parent nor any of its subsidiaries, nor to Parent's knowledge
any other party to a material Contract of Parent, is in breach, violation or
default under, and neither Parent nor any of its subsidiaries has received
written notice that it has breached, violated or defaulted under, any of the
material terms or conditions of any material Contract of Parent in such a manner
as would permit any other party to cancel or terminate any such material
Contract of Parent, or would permit any other party to seek material damages or
other remedies (for any or all of such breaches, violations or defaults, in the
aggregate).
3.16 Disclosure. None of the information to be supplied by or on behalf of
Parent for inclusion in the Registration Statement will, at the time the
Registration Statement becomes effective under the Securities Act, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
the light of the circumstances under which they are made, not misleading. None
of the information to be supplied by or on behalf of Parent for inclusion or
incorporation by reference in the Prospectus/Proxy Statement will, at the time
the Prospectus/Proxy Statement is mailed to the stockholders of the Company, at
the time of the Company Stockholders' Meeting or as of the Effective Time,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they are made, not
misleading. The Registration Statement will comply as to form in all material
respects with the provisions of the Securities Act and the rules and regulations
promulgated by the SEC thereunder, except that no representation or warranty is
made by Parent with respect to statements made or incorporated by reference
therein based on information supplied by the Company for inclusion or
incorporation by reference in the Prospectus/Proxy Statement.
3.17 Board Approval. The Board of Directors of Parent has, as of the date
of this Agreement, approved the issuance of shares of Parent Common Stock in
connection with the Merger.
3.18 Organization of Merger Sub.
(a) Merger Sub is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation.
(b) Merger Sub was formed in order to effect the consummation of the
Merger, and as of the date of this Agreement has performed no other operations.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business by the Company. During the period from the date of
this Agreement and continuing until the earlier of the termination of this
Agreement pursuant to its terms or the Effective Time, the Company and each of
its subsidiaries shall, except to the extent that Parent shall otherwise consent
in writing, carry on its business, in all material respects, in the usual,
regular and ordinary course, in substantially the same manner as heretofore
conducted and in compliance with all applicable laws and regulations, pay its
debts and taxes when due subject to good faith disputes over such debts or
taxes, pay or perform other material obligations when due subject to good faith
disputes over such obligations, and use its commercially reasonable efforts
consistent with past practices and policies to (i) preserve intact its present
business organization, (ii) keep available the services of its present officers
and employees and (iii) preserve its relationships with customers, suppliers,
distributors, licensors, licensees, and others with which it has business
dealings. In addition, the Company will use reasonable efforts to promptly
notify
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Parent of any material event involving the Company's business or operations, to
the extent that the Company has knowledge of any such material event.
In addition, except as permitted by the terms of this Agreement, and except
as provided in Article 4 of the Company Schedules, without the prior written
consent of Parent, during the period from the date of this Agreement and
continuing until the earlier of the termination of this Agreement pursuant to
its terms or the Effective Time, the Company shall not do any of the following
and shall not permit its subsidiaries to do any of the following:
(a) Waive any stock repurchase rights, accelerate, amend or change the
period of exercisability of options or restricted stock, or reprice options
granted under any employee, consultant, director or other stock plans or
authorize cash payments in exchange for any options granted under any of such
plans;
(b) Grant any severance or termination pay to any officer or employee
except pursuant to written agreements outstanding, or policies existing, on the
date hereof and as previously disclosed in writing or made available to Parent,
or adopt any new severance plan;
(c) Transfer or license to any person or entity or otherwise extend,
amend or modify in any material respect any rights to the Company Intellectual
Property, or enter into grants to future patent rights, other than non-exclusive
licenses in the ordinary course of business and consistent with past practice;
(d) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock, equity securities or property) in respect
of any capital stock or split, combine or reclassify any capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for any capital stock;
(e) Purchase, redeem or otherwise acquire, directly or indirectly, any
shares of capital stock of the Company or its subsidiaries, except repurchases
of unvested shares at cost in connection with the termination of the employment
relationship with any employee pursuant to stock option or purchase agreements
in effect on the date hereof;
(f) Issue, deliver, sell, authorize, pledge or otherwise encumber, any
shares of capital stock or any securities convertible into shares of capital
stock, or subscriptions, rights, warrants or options to acquire any shares of
capital stock or any securities convertible into shares of capital stock, or
enter into other agreements or commitments of any character obligating it to
issue any such shares or convertible securities, other than (i) stock options
pursuant to the Company Stock Option Plans granted to new employees of the
Company to purchase up to 15,000 shares in the aggregate (as appropriately
adjusted for stock splits and the like) of Company Common Stock with strike
prices equal to the fair market value of the Company Common Stock at the time of
grant and otherwise with vesting schedules and other terms and conditions
consistent with past practice, (ii) issuance of shares of Company Common Stock
pursuant to the exercise of stock options therefor outstanding as of the date of
this Agreement or granted pursuant to the preceding clause (i), (iii) issuance
of shares of the Company Common Stock to participants in the Company Purchase
Plan pursuant to the terms thereof, and (iv) issuance of shares of Company
Common Stock pursuant to exercise of the Warrants;
(g) Cause, permit or propose any amendments to its Certificate of
Incorporation, Bylaws or other charter documents (or similar governing
instruments of any of its subsidiaries);
(h) Acquire or agree to acquire by merging or consolidating with, or by
purchasing any equity interest in or a portion of the assets of, or by any other
manner, any business or any corporation, partnership, association or other
business organization or division thereof, or otherwise acquire or agree to
acquire any assets which are material, individually or in the aggregate, to the
business of the Company or enter into any material joint ventures, strategic
partnerships or alliances;
(i) Sell, lease, license, encumber or otherwise dispose of any
properties or assets which are material, individually or in the aggregate, to
the business of the Company, except sales of inventory and used equipment in the
ordinary course of business consistent with past practice;
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(j) Incur any indebtedness for borrowed money or guarantee any such
indebtedness of another person, issue or sell any debt securities or options,
warrants, calls or other rights to acquire any debt securities of the Company,
enter into any "keep well" or other agreement to maintain any financial
statement condition or enter into any arrangement having the economic effect of
any of the foregoing other than (i) in connection with the financing of ordinary
course trade payables consistent with past practice or (ii) pursuant to existing
credit facilities in the ordinary course of business;
(k) Other than the payment of routine, annual bonuses to employees,
consistent with past practices, adopt or amend any employee benefit plan or
employee stock purchase or employee stock option plan, or enter into any
employment contract or collective bargaining agreement (other than offer letters
and letter agreements entered into in the ordinary course of business consistent
with past practice with employees who are terminable "at will"), pay any special
bonus or special remuneration to any director or employee, or increase the
salaries or wage rates or fringe benefits (including rights to severance or
indemnification) of its directors, officers, employees or consultants other than
in the ordinary course of business, consistent with past practice, or change in
any material respect any management policies or procedures;
(l) Make any individual or series of related payments outside of the
ordinary course of business in excess of $100,000;
(m) Except as set forth on Part 4.1(m) of the Company Schedules and
except for any modifications or amendments that are made in the ordinary course
of business consistent with past practice, modify, amend or terminate any
Company Contract or other material contract or agreement to which the Company or
any subsidiary thereof is a party or waive, release or assign any material
rights or claims thereunder;
(n) Enter into any contracts, agreements, or obligations relating to the
distribution, sale, license or marketing by third parties of the Company's
products or products licensed by the Company other than in the ordinary course
of business consistent with past practice;
(o) Revalue any of its assets or, except as required by GAAP, make any
change in accounting methods, principles or practices;
(p) Engage in any action that could reasonably be expected to cause the
Merger to fail to qualify as a "reorganization" under Section 368(a) of the
Code, whether or not otherwise permitted by the provisions of this Article IV;
or
(q) Engage in any action with the intent to directly or indirectly
adversely impact any of the transactions contemplated by this Agreement; or
(r) Hire any employee with an annual compensation level in excess of
$100,000; or
(s) Agree in writing or otherwise to take any of the actions described
in (a) through (r) above.
4.2 Conduct of Business by Parent. During the period from the date of this
Agreement and continuing until the earlier of the termination of this Agreement
pursuant to its terms or the Effective Time, except as permitted by the terms of
this Agreement and except as provided in Section 4.2 of the Parent Schedules,
without the prior written consent of Company, Parent shall not engage in any
action that could reasonably be expected to cause the Merger to fail to qualify
as a "reorganization" under Section 368(a) of the Code.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Prospectus/Proxy Statement; Registration Statement; Other Filings;
Board Recommendations. As promptly as practicable after the execution of this
Agreement, the Company and Parent will prepare and file with the SEC, the
Prospectus/Proxy Statement and Parent will prepare and file with the SEC the
Registration Statement in which the Prospectus/Proxy Statement will be included
as a prospectus. Each of
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the Company and Parent will respond to any comments of the SEC, will use its
respective commercially reasonable efforts to have the Registration Statement
declared effective under the Securities Act as promptly as practicable after
such filing and the Company will cause the Prospectus/Proxy Statement to be
mailed to its stockholders at the earliest practicable time after the
Registration Statement is declared effective by the SEC. As promptly as
practicable after the date of this Agreement, each of the Company and Parent
will prepare and file (i) with the United States Federal Trade Commission (the
"FTC") and the Antitrust Division of the United States Department of Justice
("DOJ") Notification and Report Forms relating to the transactions contemplated
herein as required by the HSR Act, as well as comparable pre-merger notification
forms required by the merger notification or control laws and regulations of any
applicable jurisdiction, as agreed to by the parties (the "ANTITRUST FILINGS")
and (ii) any other filings required to be filed by it under the Exchange Act,
the Securities Act or any other Federal, state or foreign laws relating to the
Merger and the transactions contemplated by this Agreement (the "OTHER
FILINGS"). The Company and Parent each shall promptly supply the other with any
information which may be required in order to effectuate any filings pursuant to
this Section 5.1. Each of the Company and Parent will notify the other promptly
upon the receipt of any comments from the SEC or its staff or any other
government officials in connection with any filing made pursuant hereto and of
any request by the SEC or its staff or any other government officials for
amendments or supplements to the Registration Statement, the Prospectus/Proxy
Statement or any Antitrust Filings or Other Filing or for additional information
and will supply the other with copies of all correspondence between such party
or any of its representatives, on the one hand, and the SEC, or its staff or any
other government officials, on the other hand, with respect to the Registration
Statement, the Prospectus/Proxy Statement, the Merger or any Antitrust Filing or
Other Filing. Each of the Company and Parent will cause all documents that it is
responsible for filing with the SEC or other regulatory authorities under this
Section 5.1 to comply in all material respects with all applicable requirements
of law and the rules and regulations promulgated thereunder. Whenever any event
occurs which is required to be set forth in an amendment or supplement to the
Prospectus/Proxy Statement, the Registration Statement or any Antitrust Filing
or Other Filing, the Company or Parent, as the case may be, will promptly inform
the other of such occurrence and cooperate in filing with the SEC or its staff
or any other government officials, and/or mailing to stockholders of the Company
and/or Parent, such amendment or supplement.
5.2 Meeting of Company Stockholders.
(a) Promptly after the date hereof, the Company will take all action
necessary in accordance with Delaware Law and its Certificate of Incorporation
and Bylaws to convene a meeting of the Company's stockholders to consider
adoption and approval of this Agreement and approval of the Merger (the "COMPANY
STOCKHOLDERS' MEETING") to be held as promptly as practicable, and in any event
(to the extent permissible under applicable law) within 45 days after the
declaration of effectiveness of the Registration Statement. Subject to Section
5.2(c) hereof, the Company will use its commercially reasonable efforts to
solicit from its stockholders proxies in favor of the adoption and approval of
this Agreement and the approval of the Merger and will take all other action
necessary or advisable to secure the vote or consent of its stockholders
required by the rules of Nasdaq or Delaware Law to obtain such approvals.
Notwithstanding anything to the contrary contained in this Agreement, the
Company may adjourn or postpone the Company Stockholders' Meeting to the extent
necessary to ensure that any necessary supplement or amendment to the
Prospectus/Proxy Statement is provided to the Company's stockholders in advance
of a vote on the Merger and this Agreement or, if as of the time for which the
Company Stockholders' Meeting is originally scheduled (as set forth in the
Prospectus/Proxy Statement) there are insufficient shares of Company Common
Stock represented (either in person or by proxy) to constitute a quorum
necessary to conduct the business of the Company's Stockholders' Meeting. The
Company shall ensure that the Company Stockholders' Meeting is called, noticed,
convened, held and conducted, and that all proxies solicited by the Company in
connection with the Company Stockholders' Meeting are solicited, in compliance
with the Delaware Law, the Company's Certificate of Incorporation and Bylaws,
the rules of Nasdaq and all other applicable legal requirements. The Company's
obligation to call, give notice of, convene and hold the Company Stockholders'
Meeting in accordance with this Section 5.2(a) shall not be limited to or
otherwise affected by the commencement, disclosure,
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announcement or submission to the Company of any Acquisition Proposal (as
defined in Section 5.4(a)), or by any withdrawal, amendment or modification of
the recommendation of the Company Board with respect to the Merger and/or this
Agreement; provided, however, if the Company terminates this Agreement pursuant
to Section 7.1(j) hereof, the Company not be obligated to convene and hold the
Company Stockholders' Meeting.
(b) Subject to Section 5.2(c) below: (i) the Company Board shall
unanimously recommend that the Company's stockholders vote in favor of and adopt
and approve this Agreement and approve the Merger at the Company Stockholders'
Meeting; (ii) the Prospectus/Proxy Statement shall include a statement to the
effect that the Company Board has unanimously recommended that the Company's
stockholders vote in favor of and adopt and approve this Agreement and the
Merger at the Company Stockholders' Meeting; and (iii) neither the Company Board
nor any committee thereof shall withdraw, amend or modify, or propose or resolve
to withdraw, amend or modify in a manner adverse to Parent, the unanimous
recommendation of the Company Board that the Company's stockholders vote in
favor of and adopt and approve this Agreement and the Merger.
(c) Nothing in this Agreement shall prevent the Company Board from
withholding, withdrawing, amending or modifying its unanimous recommendation in
favor of the Merger if (i) a Superior Offer (as defined below) is made to the
Company and is not withdrawn, (ii) the Company shall have provided written
notice to Parent (a "NOTICE OF SUPERIOR OFFER") advising Parent that the Company
has received a Superior Offer, specifying the material terms and conditions of
such Superior Offer and identifying the person or entity making such Superior
Offer, (iii) Parent shall not have, within five (5) business days of Parent's
receipt of the Notice of Superior Proposal, made an offer that the Company Board
by a majority vote determines in its good faith judgment (after consultation
with a financial adviser of nationally recognized reputation) to be at least as
favorable to the Company's stockholders as such Superior Proposal (it being
agreed that the Company Board shall convene a meeting to consider any such offer
by Parent promptly following the receipt thereof), (iv) the Company Board
concludes in good faith, after consultation with its outside counsel, that, in
light of such Superior Offer, the withholding, withdrawal, amendment or
modification of such recommendation is required in order for the Company Board
to comply with its fiduciary obligations to the Company's stockholders under
applicable law and (v) neither the Company nor any of its representatives shall
have violated any of the restrictions set forth in Section 5.4 or this Section
5.2. The Company shall provide Parent with at least three business days prior
notice (or such lesser prior notice as provided to the members of the Company's
Board but in no event less than twenty-four hours) of any meeting of the
Company's Board at which the Company's Board is reasonably expected to consider
any Acquisition Transaction (as defined below).
For purposes of this Agreement "SUPERIOR OFFER" shall mean an unsolicited,
bona fide written offer made by a third party (other than any current
stockholder of the Company who as of the date of this Agreement holds more than
5% of the Company's capital stock) to consummate any of the following
transactions: (i) a merger or consolidation involving the Company pursuant to
which the stockholders of the Company immediately preceding such transaction
hold less than 50% of the equity interest in the surviving or resulting entity
of such transaction, (ii) a sale or other disposition by Company of assets
(excluding inventory and used equipment sold in the ordinary course of business)
representing in excess of 85% of the fair market value of Company's business
immediately prior to such sale or (iii) the acquisition by any person or group
(including by way of a tender offer or an exchange offer), directly or
indirectly, of ownership of 85% of the then outstanding shares of capital stock
of the Company, on terms that the Company Board determines, in its reasonable
judgment (after consultation with a financial adviser of nationally recognized
reputation) and without violating the provisions of Section 5.4 below to be more
favorable to the Company stockholders than the terms of the Merger.
(d) Nothing contained in this Agreement shall prohibit the Company or
the Company Board from taking and disclosing to its stockholders a position
contemplated by Rules 14d-9 and 14e-2(a) promulgated under the Exchange Act.
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5.3 Confidentiality; Access to Information.
(a) The parties acknowledge that the Company and Parent have previously
executed a Confidentiality Agreement, dated as of April 1, 1999 (the
"CONFIDENTIALITY AGREEMENT"), which Confidentiality Agreement will continue in
full force and effect in accordance with its terms.
(b) Access to Information. The parties will afford to each other and
their respective accountants, counsel and other representatives reasonable
access during normal business hours to their respective properties, books,
records and personnel during the period prior to the Effective Time to obtain
all information concerning the business, including the status of product
development efforts, properties, results of operations and personnel of the
Company, as the other party may reasonably request. No information or knowledge
obtained by either party in any investigation pursuant to this Section 5.3 will
affect or be deemed to modify any representation or warranty contained herein or
the conditions to the obligations of the parties to consummate the Merger.
5.4 No Solicitation.
(a) From and after the date of this Agreement until the Effective Time
or termination of this Agreement pursuant to Article VII, the Company and its
subsidiaries will not, nor will they authorize or permit any of their respective
officers, directors, affiliates or employees or any investment banker, attorney
or other advisor or representative retained by any of them to, directly or
indirectly, (i) solicit, initiate, encourage or induce the making, submission or
announcement of any Acquisition Proposal (as hereinafter defined), (ii)
participate in any discussions or negotiations regarding, or furnish to any
person any non-public information with respect to, or take any other action to
facilitate any inquiries or the making of any proposal that constitutes or may
reasonably be expected to lead to, any Acquisition Proposal, (iii) engage in
discussions with any person with respect to any Acquisition Proposal, except as
to the existence of these provisions, (iv) approve, endorse or recommend any
Acquisition Proposal or (v) enter into any letter of intent or similar document
or any contract agreement or commitment contemplating or otherwise relating to
any Acquisition Transaction. Notwithstanding the foregoing, the Company may
(either directly or indirectly through its advisors or other intermediaries) (i)
furnish information regarding the Company and its businesses, properties,
operations and assets to a third party that has made an unsolicited written bona
fide Superior Offer prior to the Company Stockholders' Meeting; (ii) engage in
discussions or negotiations with such a third party relating to such Superior
Offer; and (iii) take any action required to be taken by the Company pursuant to
an order issued and not reversed, withdrawn or stayed by any court of competent
jurisdiction, provided, that, in each case only to the extent that: (A) the
Board of Directors of the Company shall have concluded in good faith on the
basis of written advice from outside counsel that such action is necessary in
order to comply with the fiduciary obligations of the Board of Directors under
applicable law; (B) neither the Company nor any representative of the Company
shall have violated any of the restrictions set forth in this Section 5.4; (C)
prior to furnishing such nonpublic information to, or entering into discussions
or negotiations with, such person or group, the Company gives Parent written
notice of the identity of such person or group and of the Company's intention to
furnish nonpublic information to, or enter into discussions or negotiations
with, such person or group and the Company receives from such person or group an
executed confidentiality agreement which shall be no less favorable to the
Company than the Confidentiality Agreement; and (D) contemporaneously with
furnishing any such nonpublic information to such person or group, the Company
furnishes such nonpublic information to Parent (to the extent such nonpublic
information has not been previously furnished by the Company to Parent). The
Company and its subsidiaries will immediately cease any and all existing
activities, discussions or negotiations with any parties conducted heretofore
with respect to any Acquisition Proposal. Without limiting the foregoing, it is
understood that any violation of the restrictions set forth in the preceding two
sentences by any officer, director or employee of the Company or any of its
subsidiaries or any investment banker, attorney or other advisor or
representative of the Company or any of its subsidiaries shall be deemed to be a
breach of this Section 5.4 by the Company.
For purposes of this Agreement, "ACQUISITION PROPOSAL" shall mean any offer
or proposal (other than an offer or proposal by Parent) relating to any
Acquisition Transaction. For purposes of this Agreement,
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"ACQUISITION TRANSACTION" shall mean any transaction or series of related
transactions involving: (A) any purchase from the Company or acquisition by any
person or "group" (as defined under Section 13(d) of the Exchange Act and the
rules and regulations thereunder) of more than a 5% interest in the total
outstanding voting securities of the Company or any of its subsidiaries or any
tender offer or exchange offer that if consummated would result in any person or
"group" (as defined under Section 13(d) of the Exchange Act and the rules and
regulations thereunder) beneficially owning 5% or more of the total outstanding
voting securities of the Company or any of its subsidiaries or any merger,
consolidation, business combination or similar transaction involving the
Company; (B) any sale, lease (other than in the ordinary course of business),
exchange, transfer, license (other than in the ordinary course of business),
acquisition or disposition of more than 5% of the assets of the Company; or (C)
any liquidation or dissolution of the Company.
(b) In addition to the obligations of the Company set forth in paragraph
(a) of this Section 5.4, the Company as promptly as practicable shall advise
Parent orally and in writing of any request for non-public information which the
Company reasonably believes would lead to an Acquisition Proposal or to any
Acquisition Transaction, or any inquiry with respect to or which the Company
reasonably should believe would lead to any Acquisition Proposal, the material
terms and conditions of such request, Acquisition Proposal or inquiry, and the
identity of the person or group making any such request, Acquisition Proposal or
inquiry. The Company will, consistent with the fiduciary duties of the Company's
Board, keep Parent informed as promptly as practicable in all material respects
of the status and details (including material amendments or proposed material
amendments) of any such request, Acquisition Proposal or inquiry.
5.5 Public Disclosure. Parent and the Company will attempt to consult with
each other, and to the extent practicable, agree, before issuing any press
release or otherwise making any public statement with respect to the Merger,
this Agreement or any Acquisition Proposal and will not issue any such press
release or make any such public statement prior to such consultation, except as
may be required by law or any listing agreement with a national securities
exchange. The parties have agreed to the text of the joint press release
announcing the signing of this Agreement.
5.6 Reasonable Efforts; Notification.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, each of the parties agrees to use all reasonable efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, and to assist
and cooperate with the other parties in doing, all things necessary, proper or
advisable to consummate and make effective, in the most expeditious manner
practicable, the Merger and the other transactions contemplated by this
Agreement, including using reasonable efforts to accomplish the following: (i)
the taking of all reasonable acts necessary to cause the conditions precedent
set forth in Article VI to be satisfied, (ii) the obtaining of all necessary
actions or nonactions, waivers, consents, approvals, orders and authorizations
from Governmental Entities and the making of all necessary registrations,
declarations and filings (including registrations, declarations and filings with
Governmental Entities, if any) and the taking of all reasonable steps as may be
necessary to avoid any suit, claim, action, investigation or proceeding by any
Governmental Entity, (iii) the obtaining of all necessary consents, approvals or
waivers from third parties, (iv) the defending of any suits, claims, actions,
investigations or proceedings, whether judicial or administrative, challenging
this Agreement or the consummation of the transactions contemplated hereby,
including seeking to have any stay or temporary restraining order entered by any
court or other Governmental Entity vacated or reversed and (v) the execution or
delivery of any additional instruments necessary to consummate the transactions
contemplated by, and to fully carry out the purposes of, this Agreement. In
connection with and without limiting the foregoing, the Company and the Company
Board shall, if any state takeover statute or similar statute or regulation is
or becomes applicable to the Merger, this Agreement or any of the transactions
contemplated by this Agreement, use all reasonable efforts to ensure that the
Merger and the other transactions contemplated by this Agreement may be
consummated as promptly as practicable on the terms contemplated by this
Agreement and otherwise to minimize the effect of such statute or regulation on
the Merger, this Agreement and the transactions contemplated hereby.
Notwithstanding anything herein to the contrary,
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nothing in this Agreement shall be deemed to require Parent or the Company or
any subsidiary or affiliate thereof to agree to any divestiture by itself or any
of its affiliates of shares of capital stock or of any material business, assets
or property, or the imposition of any material limitation on the ability of any
of them to conduct their businesses or to own or exercise control of such
assets, properties and stock.
(b) The Company shall give prompt notice to Parent of any representation
or warranty made by it contained in this Agreement becoming untrue or
inaccurate, or any failure of the Company to comply with or satisfy in any
material respect any covenant, condition or agreement to be complied with or
satisfied by it under this Agreement, in each case, such that the conditions set
forth in Section 6.3(a) or 6.3(b) would not be satisfied, provided, however,
that no such notification shall affect the representations, warranties,
covenants or agreements of the parties or the conditions to the obligations of
the parties under this Agreement.
(c) Parent shall give prompt notice to the Company of any representation
or warranty made by it or Merger Sub contained in this Agreement becoming untrue
or inaccurate, or any failure of Parent or Merger Sub to comply with or satisfy
in any material respect any covenant, condition or agreement to be complied with
or satisfied by it under this Agreement, in each case, such that the conditions
set forth in Section 6.2(a) or 6.2(b) would not be satisfied, provided, however,
that no such notification shall affect the representations, warranties,
covenants or agreements of the parties or the conditions to the obligations of
the parties under this Agreement.
5.7 Third Party Consents. As soon as practicable following the date
hereof, Parent and the Company will each use its commercially reasonable efforts
to obtain any consents, waivers and approvals under any of its or its
subsidiaries' respective agreements, contracts, licenses or leases required to
be obtained in connection with the consummation of the transactions contemplated
hereby.
5.8 Stock Options; Warrants and Employee Benefits.
(a) At the Effective Time, each outstanding Company Option, whether or
not exercisable and regardless of the respective exercise prices thereof, will
be assumed by Parent. Each Company Option so assumed by Parent under this
Agreement will continue to have, and be subject to, the same terms and
conditions set forth in the applicable Company Stock Option Plan and the related
option agreement immediately prior to the Effective Time (including, without
limitation, any repurchase rights or vesting provisions), except that (i) each
Company Option will be exercisable (or will become exercisable in accordance
with its terms) for that number of whole shares of Parent Common Stock equal to
the product of the number of shares of Company Common Stock that were issuable
upon exercise of such Company Option immediately prior to the Effective Time
multiplied by the Exchange Ratio, rounded down to the nearest whole number of
shares of Parent Common Stock and (ii) the per share exercise price for the
shares of Parent Common Stock issuable upon exercise of such assumed Company
Option will be equal to the quotient determined by dividing the exercise price
per share of Company Common Stock at which such Company Option was exercisable
immediately prior to the Effective Time by the Exchange Ratio, rounded up to the
nearest whole cent.
(b) It is intended that Company Options assumed by Parent shall qualify
following the Effective Time as incentive stock options as defined in Section
422 of the Code to the extent Company Options qualified as incentive stock
options immediately prior to the Effective Time and the provisions of this
Section 5.8 shall be applied consistent with such intent.
(c) Other than as specifically provided for in this Section 5.8, as soon
as practicable after the execution of this Agreement, the Company and Parent
shall confer and work together in good faith to agree upon mutually acceptable
employee benefit and compensation arrangements (and terminate the Company
Purchase Plan immediately prior to the Effective Time, if appropriate) so as to
provide benefits to the Company employees generally equivalent in the aggregate
to those provided to similarly situated employees of Parent.
(d) To the extent that the Warrants are not exercised, converted or
terminated concurrently with or prior to the Effective Time, at the Effective
Time, the Warrants will be assumed by Parent. Each
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Warrant so assumed by Parent under this Agreement will continue to have, and be
subject to, the same terms and conditions set forth in the applicable warrant
agreement immediately prior to the Effective Time (including, without
limitation, any repurchase rights or vesting provisions), except that (i) each
Warrant will be exercisable (or will become exercisable in accordance with its
terms) for that number of whole shares of Parent Common Stock equal to the
product of the number of share of Company Common Stock that were issuable upon
exercise of such Warrant immediately prior to the Effective Time multiplied by
the Exchange Ratio, rounded down to the nearest whole number of shares of Parent
Common Stock and (ii) the per share exercise price for the share of Parent
Common Stock issuable upon exercise of such assumed Warrant will be equal to the
quotient determined by dividing the exercise price per share of Company Common
Stock at which such Warrant was exercisable immediately prior to the Effective
Time by the Exchange Ratio, rounded up to the nearest whole cent.
(e) Prior to the Closing Date, Parent shall establish an employee stock
option plan substantially similar to the plans currently used to grant Parent
Options pursuant to which, following the Effective Time, Parent will grant stock
options to purchase an aggregate of 700,000 shares of Parent's Common Stock to
employees of the Company. The names of such employees and the number of options
to be granted to each employee will be determined prior to the Closing Date. All
such options shall have an exercise price equal to the closing price (as
reported on Nasdaq) of Parent's Common Stock on the date hereof. Such options
shall vest over a four-year period (25% of the shares thereto shall vest on the
first anniversary of the Closing Date and the remainder in equal monthly
increments thereafter). To the extent legally permissible and subject to
approval by the stockholders of Parent, all options granted pursuant to this
Section 5.8 (e) shall be incentive stock options as defined under Section 422 of
the Code.
(f) Parent hereby agrees that until December 31, 1999, it shall maintain
the "matching" feature of the Company's 401(k) plan, whereby, subject to certain
restrictions, the Company is obligated to make contributions to an employee's
401(k) account.
(g) Parent hereby agrees that from the Effective Time until the first
anniversary of the Closing Date, it shall maintain the Company's employee
severance policy.
5.9 Form S-8. Parent agrees to file a registration statement on Form S-8
for the shares of Parent Common Stock issuable with respect to assumed Company
Stock Options and options granted pursuant to Section 5.8(e) above as soon as is
reasonably practicable after the Effective Time and will use its reasonable best
efforts to maintain the effectiveness of such registration statement thereafter
for so long as any of such options or other rights remain outstanding.
5.10 Indemnification.
(a) From and after the Effective Time, Parent will cause the Surviving
Corporation to fulfill and honor in all respects the obligations of the Company
pursuant to any indemnification agreements between the Company and its directors
and officers as of the Effective Time (the "INDEMNIFIED PARTIES"). The
Certificate of Incorporation and Bylaws of the Surviving Corporation will
contain provisions with respect to exculpation and indemnification that are at
least as favorable to the Indemnified Parties as those contained in the
Certificate of Incorporation and Bylaws of the Company as in effect on the date
hereof, which provisions will not be amended, repealed or otherwise modified for
a period of six years from the Effective Time in any manner that would adversely
affect the rights thereunder of individuals who, immediately prior to the
Effective Time, were directors, officers, employees or agents of the Company,
unless such modification is required by law.
(b) For a period of three years after the Effective Time, Parent will
cause the Surviving Corporation to use its commercially reasonable efforts to
maintain in effect, if available, directors' and officers' liability insurance
covering those persons who are currently covered by the Company's directors' and
officers' liability insurance policy on terms comparable to those applicable to
the current directors and officers of the Company; provided, however, that in no
event will Parent or the Surviving Corporation be required to expend in excess
of 150% of the annual premium currently paid by the Company for such coverage
(or such coverage as is available for such 150% of such annual premium).
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<PAGE> 577
5.11 Nasdaq Listing. Parent agrees to authorize for listing on Nasdaq the
shares of Parent Common Stock issuable, and those required to be reserved for
issuance, in connection with the Merger, upon official notice of issuance.
5.12 Acceleration of Employee Stock Option Vesting. If at any time
following the Effective Time but prior to the date two (2) years following the
Effective Time, (i) Parent shall terminate any employee of the Company without
"cause" (as defined below) or (ii) any employee shall terminate his or her
employment with Parent following a "material reduction in the duties" or
compensation of such employee by Parent or the relocation of such employee to a
location more than 25 miles from such employee's existing work location, without
the employee's consent, Parent shall cause all stock options which were granted
to such employee by the Company prior to the date of this Agreement to become
fully exercisable upon such termination (it being understood that the options to
be granted by Parent pursuant to Section 5.8 hereof are excluded from this
provision). A "material reduction in the duties" of an employee means a
substantive reduction in duties, not a change in title or reporting hierarchy
occurring as a result of the Merger. For purposes of this Section 5.12, "cause"
shall mean (A) the continued poor performance by an employee of his or her
duties following notice and a reasonable period of time to correct such poor
performance; (B) an employee engaging in an act of dishonesty that is materially
and demonstrably injurious to the Company or Parent; or (C) the conviction of an
employee of a felony in respect of a dishonest or fraudulent act or other crime
of moral turpitude.
5.13 FIRPTA Compliance. On or prior to the Closing Date, the Company shall
deliver to Parent a properly executed statement, in a form reasonably acceptable
to Parent, that the Company Common Stock is not a "U.S. Real Property Interest"
as defined in and in accordance with the requirements of Treasury Regulation
Section 1.897-2(h)(2), for purposes of satisfying Parent's obligations under
Treasury Regulation Section 1.1445-2(c)(3).
5.14 Board of Directors. As soon as practicable following the Effective
Time and for so long as Welsh, Carson, Anderson & Stowe and William Blair & Co.,
L.L.C. (including such parties affiliated entities) collectively hold at least
25% of the Parent Common Stock issuable to them in the Merger, such entities
shall collectively have the right to nominate one representative to serve on
Parent's Board of Directors.
5.15 Company Affiliates; Restrictive Legend. Parent will give stop
transfer instructions to its transfer agent with respect to any Parent Common
Stock received pursuant to the Merger by any stockholder of the Company who may
reasonably be deemed to be an affiliate of the Company within the meaning of
Rule 145 promulgated under the Securities Act and there will be placed on the
certificates representing such Parent Common Stock, or any substitutions
therefor, a legend stating in substance:
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION
TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, APPLIES AND MAY ONLY BE TRANSFERRED (A) IN CONFORMITY WITH RULE
145(d) UNDER SUCH ACT, (B) IN ACCORDANCE WITH A WRITTEN OPINION OF
COUNSEL, REASONABLY ACCEPTABLE TO THE ISSUER IN FORM AND SUBSTANCE THAT
SUCH TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF
1933, AS AMENDED."
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ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Closing Date of the
following conditions:
(a) Company Stockholder Approval. This Agreement shall have been
approved and adopted, and the Merger shall have been duly approved, by the
requisite vote under applicable law, by the stockholders of the Company.
(b) Registration Statement Effective; Proxy Statement. The SEC shall
have declared the Registration Statement effective. No stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have been
issued and no proceeding for that purpose, and no similar proceeding in respect
of the Prospectus/Proxy Statement, shall have been initiated or threatened in
writing by the SEC.
(c) No Order; HSR Act. No Governmental Entity shall have enacted,
issued, promulgated, enforced or entered any statute, rule, regulation,
executive order, decree, injunction or other order (whether temporary,
preliminary or permanent) which is in effect and which has the effect of making
the Merger illegal or otherwise prohibiting consummation of the Merger. All
waiting periods, if any, under the HSR Act relating to the transactions
contemplated hereby shall have expired or terminated early and all material
foreign antitrust approvals required to be obtained prior to the Merger in
connection with the transactions contemplated hereby shall have been obtained.
(d) Tax Opinions. Parent and the Company shall each have received
written opinions from their respective tax counsel (Wilson Sonsini Goodrich &
Rosati, Professional Corporation, and Reboul, MacMurray, Hewitt, Maynard &
Kristol, respectively), in form and substance reasonably satisfactory to them,
to the effect that the Merger will constitute a tax-free reorganization within
the meaning of Section 368(a) of the Code and such opinions shall not have been
withdrawn; provided, however, that if the counsel to either Parent or the
Company does not render such opinion, this condition shall nonetheless be deemed
to be satisfied with respect to such party if counsel to the other party renders
such opinion to such party. The parties to this Agreement agree to make such
reasonable representations as requested by such counsel for the purpose of
rendering such opinions.
(e) Nasdaq Listing. The shares of Parent Common Stock to be issued in
the Merger shall have been authorized for listing on Nasdaq, subject to notice
of issuance.
6.2 Additional Conditions to Obligations of the Company. The obligation of
the Company to consummate and effect the Merger shall be subject to the
satisfaction at or prior to the Closing Date of each of the following
conditions, any of which may be waived, in writing, exclusively by the Company:
(a) Representations and Warranties. Each representation and warranty of
Parent and Merger Sub contained in this Agreement (i) shall have been true and
correct as of the date of this Agreement and (ii) shall be true and correct on
and as of the Closing Date with the same force and effect as if made on the
Closing Date except, (A) in each case, or in the aggregate, as does not
constitute a Material Adverse Effect on Parent and Merger Sub; provided,
however, such Material Adverse Effect qualification shall be inapplicable with
respect to the representations and warranties contained in Section 3.17, and (B)
for those representations and warranties which address matters only as of a
particular date (which representations shall have been true and correct (subject
to the qualifications set forth in the preceding clause (A)) as of such
particular date) (it being understood that, for purposes of determining the
accuracy of such representations and warranties, any update of or modification
to Parent Schedules made or purported to have been made after the date of this
Agreement shall be disregarded). The Company shall have received a certificate
with respect to the foregoing signed on behalf of Parent by an authorized
officer of Parent.
(b) Agreements and Covenants. Parent and Merger Sub shall have performed
or complied in all material respects with all agreements and covenants required
by this Agreement to be performed or
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complied with by them on or prior to the Closing Date, and the Company shall
have received a certificate to such effect signed on behalf of Parent by an
authorized officer of Parent.
(c) Material Adverse Effect. No Material Adverse Effect with respect to
Parent shall have occurred since the date of this Agreement.
(d) Consent. In order to permit the grant of registration rights to
certain holders of the Company Common Stock in accordance with the terms of that
certain Registration Rights Agreement of even date herewith to which Parent and
such holders are parties, Parent shall have obtained consents from certain of
its stockholders who, along with Parent, are parties to an Amended and Restated
Investors' Rights Agreement dated January 28, 1999, and such consent shall be
reasonably satisfactory to the Company.
6.3 Additional Conditions to the Obligations of Parent and Merger Sub. The
obligations of Parent and Merger Sub to consummate and effect the Merger shall
be subject to the satisfaction at or prior to the Closing Date of each of the
following conditions, any of which may be waived, in writing, exclusively by
Parent:
(a) Representations and Warranties. Each representation and warranty of
the Company contained in this Agreement (i) shall have been true and correct as
of the date of this Agreement and (ii) shall be true and correct on and as of
the Closing Date with the same force and effect as if made on and as of the
Closing Date except (A) in each case, or in the aggregate, as does not
constitute a Material Adverse Effect on the Company; provided, however, such
Material Adverse Effect qualification shall be inapplicable with respect to the
representations and warranties contained in Sections 2.2(a) and (b), 2.3, 2.20
and 2.21 and (B) for those representations and warranties which address matters
only as of a particular date (which representations shall have been true and
correct (subject to the qualifications set forth in the preceding clause (A)) as
of such particular date) (it being understood that, for purposes of determining
the accuracy of such representations and warranties, any update of or
modification to the Company Schedules made or purported to have been made after
the date of this Agreement shall be disregarded). Parent shall have received a
certificate with respect to the foregoing signed on behalf of the Company by an
authorized officer of the Company.
(b) Agreements and Covenants. The Company shall have performed or
complied in all material respects with all agreements and covenants required by
this Agreement to be performed or complied with by it at or prior to the Closing
Date, and Parent shall have received a certificate to such effect signed on
behalf of the Company by the Chief Executive Officer and the Chief Financial
Officer of the Company.
(c) Material Adverse Effect. No Material Adverse Effect with respect to
the Company and its subsidiaries shall have occurred since the date of this
Agreement.
(d) Termination of Certain Rights. Any and all agreements granting any
person or entity rights to register shares of the Company's capital stock with
the SEC or other Governmental Entity as well as any agreement granting any
person the right to nominate an individual to the Company's Board, shall be
terminated with no further force or effect.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after the requisite approvals of the
stockholders of the Company:
(a) by mutual written consent duly authorized by the Boards of Directors
of Parent and the Company;
(b) by either the Company or Parent if the Merger shall not have been
consummated by September 30, 1999 (the "END DATE") for any reason; provided,
however, that the right to terminate this Agreement under this Section 7.1(b)
shall not be available to any party whose action or failure to act has
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been a principal cause of or resulted in the failure of the Merger to occur on
or before such date and such action or failure to act constitutes a material
breach of this Agreement;
(c) by either the Company or Parent if a Governmental Entity shall have
issued an order, decree or ruling or taken any other action, in any case having
the effect of permanently restraining, enjoining or otherwise prohibiting the
Merger, which order, decree, ruling or other action is final and nonappealable;
(d) by the Company or Parent if the required approval of the
stockholders of the Company contemplated by this Agreement shall not have been
obtained by reason of the failure to obtain the required vote at a meeting of
the Company stockholders duly convened therefor or at any adjournment thereof;
provided, however, that the right to terminate this Agreement under this Section
7.1(d) shall not be available to the Company where the failure to obtain Company
stockholder approval shall have been caused by the action or failure to act of
the Company and such action or failure to act constitutes a material breach by
the Company of this Agreement.
(e) by Parent (at any time prior to the adoption and approval of this
Agreement and the Merger by the required vote of the stockholders of the
Company) if a Company Triggering Event (as defined below) shall have occurred;
(f) by the Company, upon a breach of any representation, warranty,
covenant or agreement on the part of Parent set forth in this Agreement, or if
any representation or warranty of Parent shall have become untrue, in either
case such that the conditions set forth in Section 6.2(a) or Section 6.2(b)
would not be satisfied as of the time of such breach or as of the time such
representation or warranty shall have become untrue, provided that if such
inaccuracy in Parent's representations and warranties or breach by Parent is
curable by Parent through the exercise of its commercially reasonable efforts,
then the Company may not terminate this Agreement under this Section 7.1(f)
prior to the End Date, provided Parent continues to exercise commercially
reasonable efforts to cure such breach (it being understood that the Company may
not terminate this Agreement pursuant to this paragraph (f) if it shall have
materially breached this Agreement or if such breach by Parent is cured prior to
the End Date);
(g) by Parent, upon a breach of any representation, warranty, covenant
or agreement on the part of the Company set forth in this Agreement, or if any
representation or warranty of the Company shall have become untrue, in either
case such that the conditions set forth in Section 6.3(a) or Section 6.3(b)
would not be satisfied as of the time of such breach or as of the time such
representation or warranty shall have become untrue, provided, that if such
inaccuracy in the Company's representations and warranties or breach by the
Company is curable by the Company through the exercise of its commercially
reasonable efforts, then Parent may not terminate this Agreement under this
Section 7.1(g) prior to the End Date, provided the Company continues to exercise
commercially reasonable efforts to cure such breach (it being understood that
Parent may not terminate this Agreement pursuant to this paragraph (g) if it
shall have materially breached this Agreement or if such breach by the Company
is cured prior to the End Date);
(h) by the Company prior to the Company Stockholders' Meeting in the
event the Meeting Price is less than $38.68 and Parent shall have elected not to
change the Exchange Ratio as provided for in Section 1.6(f)(ii) hereof;
(i) by Parent prior to the Company Stockholders' Meeting in the event
the Meeting Price exceeds $63.7099 and the Company shall have elected not to
change the Exchange Ratio as provided for in Section 1.6(f)(iii) hereof; and
(j) by the Company in the event that the Company Board determines (i)
that there is a Superior Offer that has not been withdrawn and (ii) that such
Superior Offer requires a modification in its recommendation to the Company's
stockholders in favor of the Merger and the Board so modifies its recommendation
in compliance with the terms of this Agreement.
For the purposes of this Agreement, a "COMPANY TRIGGERING EVENT" shall
be deemed to have occurred if: (i) the Company Board or any committee thereof
shall for any reason have withdrawn or shall
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<PAGE> 581
have amended or modified in a manner adverse to Parent its unanimous
recommendation in favor of, the adoption and approval of the Agreement or the
approval of the Merger; (ii) the Company shall have failed to include in the
Prospectus/Proxy Statement the unanimous recommendation of the Company Board in
favor of the adoption and approval of the Agreement and the approval of the
Merger; (iii) the Company Board or any committee thereof shall have approved or
recommended any Acquisition Proposal; (iv) the Company shall have entered into
any letter of intent or similar document or agreement, contract or commitment
accepting any Acquisition Proposal; or (v) a tender or exchange offer relating
to securities of the Company shall have been commenced by a Person unaffiliated
with Parent and the Company shall not have sent to its security holders pursuant
to Rule 14e-2 promulgated under the Securities Act, within ten (10) business
days after such tender or exchange offer is first published sent or given, a
statement disclosing that the Company recommends rejection of such tender or
exchange offer.
7.2 Notice of Termination; Effect of Termination. Any termination of this
Agreement under Section 7.1 above will be effective immediately upon the
delivery of a valid written notice of the terminating party to the other parties
hereto. In the event of the termination of this Agreement as provided in Section
7.1, this Agreement shall be of no further force or effect, except (i) as set
forth in Section 5.4, this Section 7.2, Section 7.3 and Article 8
(miscellaneous), each of which shall survive the termination of this Agreement,
and (ii) nothing herein shall relieve any party from liability for any willful
breach of this Agreement. No termination of this Agreement shall affect the
obligations of the parties contained in the Confidentiality Agreement, all of
which obligations shall survive termination of this Agreement in accordance with
their terms.
7.3 Fees and Expenses.
(a) General. Except as set forth in this Section 7.3, all fees and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses whether
or not the Merger is consummated; provided, however, that Parent and the Company
shall share equally all fees and expenses, other than attorneys' and accountants
fees and expenses, incurred in relation to the printing and filing (with the
SEC) of the Prospectus/Proxy Statement (including any preliminary materials
related thereto) and the Registration Statement (including financial statements
and exhibits) and any amendments or supplements thereto.
(b) Company Payments. In the event that this Agreement is terminated by
Parent or the Company, as applicable, pursuant to Sections 7.1(b), (d) (e), or
(j) the Company shall promptly, but in no event later than two days after the
date of such termination, pay Parent a fee equal to $15 million in immediately
available funds (the "TERMINATION FEE"); provided, that in the case of
termination under Section 7.1(b) or 7.1(d), such payment shall be made only if
following the date hereof and prior to the termination of this Agreement, a
third party has publicly announced an Acquisition Proposal and within 12 months
following the termination of this Agreement a Company Acquisition (as defined
below) is consummated or the Company enters into an agreement providing for a
Company Acquisition; provided, further that no termination by the Company giving
rise to the payment of the Termination Fee shall be effective until Parent
actually receives such fee. The Company acknowledges that the agreements
contained in this Section 7.3(b) are an integral part of the transactions
contemplated by this Agreement, and that, without these agreements, Parent would
not enter into this Agreement; accordingly, if the Company fails to pay in a
timely manner the amounts due pursuant to this Section 7.3(b) , and, in order to
obtain such payment, Parent makes a claim that results in a judgment against the
Company for the amounts set forth in this Section 7.3(b), the Company shall pay
to Parent its reasonable costs and expenses (including attorneys' fees and
expenses) in connection with such suit, together with interest on the amounts
set forth in this Section 7.3(b) at the prime rate of The Chase Manhattan Bank
in effect on the date such payment was required to be made. Payment of the fees
described in this Section 7.3(b) shall not be in lieu of damages incurred in the
event of breach of this Agreement. For the purposes of this Agreement "COMPANY
ACQUISITION" shall mean any of the following transactions (other than the
transactions contemplated by this Agreement); (i) a merger, consolidation,
business combination, recapitalization, liquidation, dissolution or similar
transaction involving the Company pursuant to which the stockholders of the
Company immediately preceding such transaction hold less than 50% of the
aggregate
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<PAGE> 582
equity interests in the surviving or resulting entity of such transaction, (ii)
a sale or other disposition by the Company of assets representing in excess of
50% of the aggregate fair market value of the Company's business immediately
prior to such sale or (iii) the acquisition by any person or group (including by
way of a tender offer or an exchange offer or issuance by the Company), directly
or indirectly, of beneficial ownership or a right to acquire beneficial
ownership of shares representing in excess of 50% of the voting power of the
then outstanding shares of capital stock of the Company.
7.4 Amendment. Subject to applicable law, this Agreement may be amended by
the parties hereto at any time by execution of an instrument in writing signed
on behalf of each of Parent and the Company.
7.5 Extension; Waiver. At any time prior to the Effective Time any party
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto and (iii)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party. Delay in exercising any right under this
Agreement shall not constitute a waiver of such right.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Non-Survival of Representations and Warranties. The representations
and warranties of the Company, Parent and Merger Sub contained in this Agreement
shall terminate at the Effective Time, and only the covenants that by their
terms survive the Effective Time shall survive the Effective Time.
8.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or sent via telecopy (receipt confirmed) to the parties at the
following addresses or telecopy numbers (or at such other address or telecopy
numbers for a party as shall be specified by like notice):
(a) if to Parent or Merger Sub, to:
Healtheon Corporation
4600 Patrick Henry Road
Santa Clara, California 95054
Attention: Mike Long
Telephone No.: (408) 876-5000
Telecopy No.: (650) 876-5175
with a copy to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Larry W. Sonsini
Daniel Mitz
Telephone No.: (650) 493-9300
Telecopy No.: (650) 493-6811
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<PAGE> 583
(b) if to the Company, to:
Mede America Corporation
90 Merrick Avenue
Suite 501
East Meadow, New York 11554
Attention: Thomas P. Staudt
Telephone No.: 516-542-4500
Telecopy No.: 516-542-4508
with a copy to:
Reboul, MacMurray, Hewitt, Maynard & Kristol
45 Rockefeller Plaza
New York, New York 10111
Attention: Mark J. Tannenbaum
Karen C. Wiedemann
Telephone No.: 212-841-5700
Telecopy No.: 212-841-5725
8.3 Interpretation; Knowledge.
(a) When a reference is made in this Agreement to Exhibits, such
reference shall be to an Exhibit to this Agreement unless otherwise indicated.
When a reference is made in this Agreement to Sections, such reference shall be
to a Section of this Agreement unless otherwise indicated the words "INCLUDE,"
"INCLUDES" and "INCLUDING" when used herein shall be deemed in each case to be
followed by the words "without limitation." The table of contents and headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. When reference is
made herein to "THE BUSINESS OF" an entity, such reference shall be deemed to
include the business of all direct and indirect subsidiaries of such entity.
Reference to the subsidiaries of an entity shall be deemed to include all direct
and indirect subsidiaries of such entity.
(b) For purposes of this Agreement the term "KNOWLEDGE" means with
respect to a party hereto, with respect to any matter in question, that any of
the executive officers and controller(s) of such party, has actual knowledge of
such matter.
(c) For purposes of this Agreement, the term "MATERIAL ADVERSE EFFECT"
when used in connection with an entity means any change, event, violation,
inaccuracy, circumstance or effect (collectively, "EVENT") that is materially
adverse to the business, assets (including intangible assets), capitalization,
financial condition or results of operations of such entity taken as a whole
with its subsidiaries; provided, that "Material Adverse Effect" shall not
include any decrease in the price of either party's stock as reported on Nasdaq
unless such decrease is coupled with an Event that is a Material Adverse Effect.
(d) For purposes of this Agreement, the term "PERSON" shall mean any
individual, corporation (including any non-profit corporation), general
partnership, limited partnership, limited liability partnership, joint venture,
estate, trust, company (including any limited liability company or joint stock
company), firm or other enterprise, association, organization, entity or
Governmental Entity.
8.4 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
8.5 Entire Agreement; Third Party Beneficiaries. This Agreement and the
documents and instruments and other agreements among the parties hereto as
contemplated by or referred to herein, including the Company Schedules, the
Parent Schedules and the Confidentiality Agreement (a) constitute the entire
agreement among the parties with respect to the subject matter hereof and
supersede all prior
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<PAGE> 584
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof, it being understood that the
Confidentiality Agreement shall continue in full force and effect until the
Closing and shall survive any termination of this Agreement; and (b) are not
intended to confer upon any other person any rights or remedies hereunder,
except as specifically provided in Section 5.10.
8.6 Severability. In the event that any provision of this Agreement or the
application thereof, becomes or is declared by a court of competent jurisdiction
to be illegal, void or unenforceable, the remainder of this Agreement will
continue in full force and effect and the application of such provision to other
persons or circumstances will be interpreted so as reasonably to effect the
intent of the parties hereto. The parties further agree to replace such void or
unenforceable provision of this Agreement with a valid and enforceable provision
that will achieve, to the extent possible, the economic, business and other
purposes of such void or unenforceable provision.
8.7 Other Remedies; Specific Performance. Except as otherwise provided
herein, any and all remedies herein expressly conferred upon a party will be
deemed cumulative with and not exclusive of any other remedy conferred hereby,
or by law or equity upon such party, and the exercise by a party of any one
remedy will not preclude the exercise of any other remedy. The parties hereto
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to seek an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the terms and provisions
hereof in any court of the United States or any state having jurisdiction, this
being in addition to any other remedy to which they are entitled at law or in
equity.
8.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of law thereof.
8.9 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
8.10 Assignment. No party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other parties. Subject to the preceding sentence, this Agreement shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
8.11 WAIVER OF JURY TRIAL. EACH OF PARENT, THE COMPANY AND MERGER SUB
HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING
OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE ACTIONS OF PARENT, THE COMPANY OR MERGER SUB
IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT HEREOF.
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<PAGE> 585
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized respective officers as of the date first
written above.
HEALTHEON CORPORATION
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
MERC ACQUISITION CORP.
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
MEDE AMERICA CORPORATION
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
**** REORGANIZATION AGREEMENT ****
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ANNEX C
AGREEMENT AND PLAN OF MERGER
AMONG
HEALTHEON CORPORATION
WEBMD, INC.
HEALTHEON/WEBMD CORPORATION
GNN MERGER CORP.
AND
GREENBERG NEWS NETWORKS, INC.
DATED AS OF JUNE 30, 1999
<PAGE> 587
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
ARTICLE 1 TRANSACTIONS AND TERMS OF MERGER.......................... 1
1.1 Merger...................................................... 1
1.2 Time and Place of Closing................................... 1
1.3 Effective Time.............................................. 2
1.4 WebMD Acquisition -- Terms of Merger........................ 2
ARTICLE 2 TERMS OF MERGER........................................... 2
2.1 Charter..................................................... 2
2.2 Bylaws...................................................... 2
2.3 Directors and Officers...................................... 2
2.4 Tax-Free Reorganization..................................... 3
ARTICLE 3 MANNER OF CONVERTING SHARES............................... 3
3.1 Conversion of Shares........................................ 3
3.2 Anti-Dilution Provisions.................................... 3
3.3 Shares Held by GNN.......................................... 3
3.4 Dissenting Stockholders..................................... 3
3.5 Fractional Shares........................................... 4
3.6 Conversion of GNN Options................................... 4
3.7 GNN Warrants................................................ 5
ARTICLE 4 EXCHANGE OF SHARES........................................ 6
4.1 Exchange Procedures......................................... 6
4.2 Rights of Former GNN Stockholders........................... 6
4.3 Escrow Shares............................................... 7
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF GNN..................... 7
5.1 Organization, Standing, and Power........................... 7
5.2 Authorization of Agreement; No Breach....................... 7
5.3 Capital Stock............................................... 8
5.4 GNN Subsidiaries............................................ 8
5.5 Financial Statements........................................ 8
5.6 Absence of Undisclosed Liabilities.......................... 9
5.7 Absence of Changes.......................................... 9
5.8 Indebtedness................................................ 10
5.9 Tax Matters................................................. 10
Real Property............................................... 11
5.10
Personal Property........................................... 12
5.11
Intellectual Property....................................... 12
5.12
Accounts Receivable......................................... 13
5.13
The Proprietary Software; Year 2000 Compliance.............. 13
5.14
Insurance................................................... 14
5.15
Compliance with Laws........................................ 14
5.16
Environmental Matters....................................... 15
5.17
Litigation and Claims....................................... 15
5.18
Contracts and Commitments................................... 16
5.19
Powers of Attorney.......................................... 17
5.20
Benefit Plans............................................... 17
5.21
Remuneration................................................ 20
5.22
Interested Transactions..................................... 20
5.23
Subscription Agreements..................................... 20
5.24
</TABLE>
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<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
Statements True and Correct................................. 20
5.25
Tax Treatment............................................... 21
5.26
State Takeover Laws......................................... 21
5.27
Restrictions of Business Activities......................... 21
5.28
Fairness Opinion............................................ 21
5.29
GNN Disclosure Letter....................................... 22
5.30
ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF WEBMD................... 22
6.1 Organization, Standing, and Power........................... 22
6.2 Authorization of Agreement; No Breach....................... 22
6.3 Capital Stock............................................... 22
6.4 WebMD Subsidiaries.......................................... 23
6.5 Financial Statements........................................ 23
6.6 Absence of Undisclosed Liabilities.......................... 24
6.7 Absence of Certain Changes or Events........................ 24
6.8 Tax Matters................................................. 24
6.9 Intellectual Property....................................... 25
Insurance................................................... 26
6.10
Compliance with Laws........................................ 26
6.11
Legal Proceedings........................................... 26
6.12
Statements True and Correct................................. 26
6.13
Tax Matters................................................. 27
6.14
WebMD Disclosure Letter..................................... 27
6.15
ARTICLE 7 REPRESENTATIONS AND WARRANTIES OF NEWCO................... 27
7.1 Organization, Standing, and Power........................... 27
7.2 Authorization of Agreement; No Breach....................... 27
7.3 Capital Stock............................................... 28
7.4 Healtheon SEC Filings; Financial Statements................. 28
7.5 Tax Matters................................................. 28
ARTICLE 8 REPRESENTATIONS AND WARRANTIES OF PURCHASER AND MERGER 28
CORP...............................................................
8.1 Purchaser Common Stock...................................... 28
8.2 Meeting Materials; Registration Statement................... 28
8.3 Authority of Merger Corp.................................... 29
ARTICLE 9 CONDUCT OF BUSINESS PENDING CONSUMMATION.................. 29
9.1 Conduct of GNN Business..................................... 29
9.2 Adverse Changes in Condition................................ 31
ARTICLE 10 ADDITIONAL AGREEMENTS.................................... 31
Stockholder Approval; Registration Statement................ 31
10.1
Applications 10.3 Filings with State Offices................ 33
10.2
Filings with State Offices.................................. 33
10.3
Agreement as to Efforts to Consummate....................... 33
10.4
Investigation and Confidentiality........................... 33
10.5
Access to Information....................................... 34
10.6
No Shop..................................................... 34
10.7
Tax Treatment............................................... 34
10.8
Employee Benefits........................................... 34
10.9
Voting Agreement............................................ 34
10.10
Accredited Investor Questionnaire and Stockholder
10.11 Representation Agreement.................................... 35
Registration of Shares...................................... 35
10.12
Blue Sky Laws............................................... 35
10.13
</TABLE>
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<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
Non-solicitation of Employees............................... 35
10.14
WebMD Election for Registration............................. 35
10.15
Press Releases.............................................. 36
10.16
Statements and Information Regarding WebMD.................. 36
10.17
Employee Confidentiality and Assignment Agreement........... 36
10.18
Directors and Officers Indemnification...................... 36
10.19
ARTICLE 11 CONDITIONS PRECEDENT TO OBLIGATIONS TO CONSUMMATE........ 37
Conditions to Obligations of Each Party..................... 37
11.1
Conditions to Obligations of Purchaser...................... 37
11.2
Conditions to Obligations of GNN............................ 39
11.3
ARTICLE 12 TERMINATION.............................................. 40
Termination................................................. 40
12.1
Effect of Termination....................................... 42
12.2
Termination as to Newco and Healtheon....................... 42
12.3
ARTICLE 13 MISCELLANEOUS............................................ 42
Definitions................................................. 42
13.1
Brokers and Finders......................................... 47
13.2
Entire Agreement............................................ 48
13.3
Amendments.................................................. 48
13.4
Waivers..................................................... 48
13.5
Assignment.................................................. 48
13.6
Notices..................................................... 49
13.7
Governing Law............................................... 49
13.8
Counterparts................................................ 49
13.9
Captions.................................................... 50
13.10
Interpretations............................................. 50
13.11
Enforcement of Agreement.................................... 50
13.12
Severability................................................ 50
13.13
Facsimile Signatures........................................ 50
13.14
Nonsurvival of Representations and Warranties............... 50
13.15
ARTICLE 14 ESCROW; SHAREHOLDER REPRESENTATIVE....................... 50
Escrow Arrangements......................................... 50
14.1
Definitions................................................. 51
14.2
Notice of Claim............................................. 52
14.3
Procedure With Respect to Disputed Indemnifiable Loss....... 52
14.4
Employment of Counsel....................................... 53
14.5
Term; Expiration; Limits.................................... 53
14.6
Dividends; Voting Rights; Additional Shares................. 55
14.7
Escrow Agent................................................ 55
14.8
Representative.............................................. 56
14.9
Representative Expenses..................................... 57
14.10
</TABLE>
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EXHIBITS
<TABLE>
<S> <C> <C>
Exhibit 10.10(a) -- Parties to Voting Agreements
Exhibit 10.10(b) -- Voting Agreement
Exhibit 10.11(a) -- Accredited Investor Questionnaire
Exhibit 10.11(b) -- Stockholder Representation Agreement
Exhibit 10.12 -- Registration of Shares
Exhibit 11.2(d) -- Opinion of King & Spalding
</TABLE>
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<PAGE> 591
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "AGREEMENT") is made and entered
into as of June 30, 1999, by and among HEALTHEON CORPORATION ("HEALTHEON"), a
Delaware corporation having its principal office located in Santa Clara,
California; HEALTHEON/WEBMD CORPORATION ("NEWCO"), a Delaware corporation having
its principal office located in Santa Clara, California; WEBMD, INC. ("WEBMD"),
a Georgia corporation having its principal office located in Atlanta, Georgia;
GNN MERGER CORP. ("MERGER CORP."), a Delaware corporation having its principal
office located in Atlanta, Georgia; and GREENBERG NEWS NETWORKS, INC. ("GNN"), a
Delaware corporation having its principal office located in Atlanta, Georgia.
PREAMBLE
WebMD, Healtheon and Water Acquisition Corp. entered into an Agreement and
Plan of Reorganization dated as of May 20, 1999 (as it may be subsequently
amended, the "HEALTHEON/WEBMD AGREEMENT"). Newco is a newly formed parent
corporation that may acquire Healtheon and WebMD upon the closing of the
transaction contemplated by the Healtheon/WebMD Agreement.
The Boards of Directors of Newco, Healtheon, WebMD, Merger Corp., a wholly
owned subsidiary of Newco, and GNN are of the opinion that the transactions
described herein are in the best interests of the parties and their respective
stockholders. This Agreement provides for the acquisition of GNN by Newco or
Healtheon at the discretion of WebMD and Healtheon pursuant to the merger of
Merger Corp. with and into GNN. At the Effective Time of such merger, the
outstanding shares of the capital stock of GNN shall be converted into the right
to receive shares of Common Stock of Newco or Healtheon (except as provided
herein). As a result, stockholders of GNN shall become stockholders of Newco or
Healtheon and GNN shall conduct its business and operations as a wholly owned
subsidiary of Newco or Healtheon. The transactions described in this Agreement
are subject to the approval of the stockholders of GNN and the satisfaction of
certain other conditions described in this Agreement. It is the intention of the
parties to this Agreement that the Merger shall qualify as a "REORGANIZATION"
within the meaning of Section 368(a) of the Internal Revenue Code for federal
income tax purposes.
It is the intent of the parties hereto that if the transactions
contemplated by the Healtheon/WebMD Agreement are not consummated, WebMD shall
acquire GNN on terms as set forth herein.
Certain terms used in this Agreement are defined in Section 13.1 of this
Agreement.
NOW, THEREFORE, in consideration of the above and the mutual warranties,
representations, covenants and agreements set forth herein, the parties agree as
follows:
ARTICLE 1
TRANSACTIONS AND TERMS OF MERGER
1.1 Merger. Subject to the terms and conditions of this Agreement, at the
Effective Time, Merger Corp. shall be merged with and into GNN in accordance
with the applicable provisions of the GCLSD (the "MERGER"). GNN shall be the
Surviving Corporation resulting from the Merger and shall continue its
operations as a wholly owned Subsidiary of Newco and shall continue to be
governed by the Laws of the State of Delaware. The Merger shall be consummated
pursuant to the terms of this Agreement, which has been approved and adopted by
the respective Boards of Directors of Newco, WebMD, Merger Corp. and GNN.
1.2 Time and Place of Closing. The closing of the transactions
contemplated herein (the "CLOSING") will take place at the time and date of the
closing of the transactions contemplated by the Healtheon/WebMD Agreement (the
"CLOSING DATE"), subject to the satisfaction or waiver of the conditions set
forth in Sections 11.1, 11.2 and 11.3. The place of Closing shall be at the
offices of Alston
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& Bird LLP, One Atlantic Center, 1201 West Peachtree Street, Atlanta, Georgia
30309-3424, or such other place as may be mutually agreed upon by the Parties.
1.3 Effective Time. Subject to the provisions of this Agreement, the
Surviving Corporation shall file the Certificate of Merger executed in
accordance with the relevant provisions of the GCLSD and the Parties shall make
all other filings or recordings required under the GCLSD as soon as practicable
on or after the Closing Date. The Merger and other transactions contemplated by
this Agreement shall become effective on the date and at the time the
Certificate of Merger reflecting the Merger becomes effective with the Secretary
of State of the State of Delaware (the "EFFECTIVE TIME").
1.4 WebMD Acquisition -- Terms of Merger. If and only if this Agreement is
terminated as to Newco, Healtheon and Merger Corp. as provided in Section 12.3
hereto:
(a) WebMD, instead of Newco, will acquire GNN, subject to the terms and
conditions herein;
(b) The Parties hereto agree to substitute a newly created, wholly owned
Subsidiary of WebMD incorporated under the laws of the State of Delaware (the
"WEBMD MERGER SUB") for the Merger Corp. as a party hereto, and agree to execute
all documents reasonably required to effect such substitution; provided that the
Parties agree to execute an amendment to this Agreement to provide for the
merger of GNN with and into WebMD Merger Sub (a "FORWARD MERGER") but preserving
to the fullest extent possible the financial and legal terms of the Merger and
other transactions described herein;
(c) All references to Newco in this Article 1, shall be deemed to be
references to WebMD, mutatis mutandis; and
(d) The first sentence of Section 1.2 will not be binding on the
Parties, and the Closing will take place at the date and time specified by WebMD
and GNN, which (subject to the satisfaction or waiver of the conditions set
forth in Sections 11.2 and 11.3) shall be no later than the second business day
after the satisfaction of the conditions set forth in Section 11.1.
In no event will the terms and conditions of this Agreement create, or
be deemed to create, any obligation on the part of either Newco or WebMD to take
any action, or refrain from taking any action, with respect to the
Healtheon/WebMD Agreement or the transactions contemplated thereby.
ARTICLE 2
TERMS OF MERGER
2.1 Charter. The Certificate of Incorporation of GNN in effect immediately
prior to the Effective Time shall be the Certificate of Incorporation of the
Surviving Corporation with the following amendment: all Articles of the
Certificate of Incorporation other than Article I shall be deleted in their
entirety and replaced by Articles 2 through 10 of the Certificate of
Incorporation of Merger Corp. Such Certificate of Incorporation (as so amended)
shall remain the Certificate of Incorporation of Surviving Corporation until
otherwise amended or repealed.
2.2 Bylaws. The Bylaws of GNN in effect immediately prior to the Effective
Time shall be the Bylaws of the Surviving Corporation with the following
amendment: all of the Bylaws shall be deleted in their entirety and replaced by
the Bylaws of Merger Corp. Such Bylaws (as so amended) shall remain the Bylaws
of Surviving Corporation until otherwise amended or repealed.
2.3 Directors and Officers. The directors of Merger Corp. in office
immediately prior to the Effective Time, together with such additional persons
as may thereafter be elected, shall serve as the directors of the Surviving
Corporation from and after the Effective Time in accordance with the Bylaws of
the Surviving Corporation. The officers of Merger Corp. in office immediately
prior to the Effective Time, together with such additional persons as may
thereafter be elected, shall serve as the officers of the Surviving Corporation
from and after the Effective Time in accordance with the Bylaws of the Surviving
Corporation.
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2.4 Tax-Free Reorganization. The parties intend to adopt this Agreement as
a plan of reorganization under Section 368(a) of the Internal Revenue Code.
ARTICLE 3
MANNER OF CONVERTING SHARES
3.1 Conversion of Shares. Subject to the provisions of this Article 3, at
the Effective Time, by virtue of the Merger and without any action on the part
of the Parties or the stockholders of any of the Parties, the shares of the
constituent corporations of the Merger shall be converted as follows:
(a) Each share of Merger Corp. Common Stock issued and outstanding at
the Effective Time shall be converted into and become one (1) fully paid and
nonassessable share of Surviving Corporation Common Stock.
(b) (1) Each share of GNN Series A Preferred Stock, GNN Series B
Preferred Stock and GNN Series C Preferred Stock shall cease to be outstanding
and shall be converted into shares of GNN Common Stock according to their
respective conversion rates as set forth in their respective Certificates of
Designation, and then (2) excluding treasury shares and excluding shares held by
stockholders who perfect their statutory dissenters' rights as provided in
Section 3.4 of this Agreement, each share of GNN Common Stock (including shares
of GNN Common Stock created as a result of the conversion of GNN Series A
Preferred Stock, GNN Series B Preferred Stock and GNN Series C Preferred Stock
as described immediately above in this sentence) issued and outstanding at the
Effective Time shall cease to be outstanding and shall be converted into and
exchanged, subject to Section 4.3 hereof, for the right to receive either:
(i) if Newco is the Purchaser, that number of shares of Newco Common
Stock equal to the Newco Stock Amount divided by the sum of (x) the total number
of shares of GNN Common Stock outstanding as of the Effective Time (after giving
effect to the conversion of all shares of GNN Series A Preferred Stock, GNN
Series B Preferred Stock and GNN Series C Preferred Stock described above) plus
(y) the total number of shares of GNN Common Stock issuable upon the exercise of
Options and GNN Warrants outstanding as of the Effective Time as determined in
accordance with the Treasury Method (the "Newco Stock Exchange Ratio"); or
(ii) if WebMD is the Purchaser, that number of shares of WebMD
Non-Voting Common Stock equal to the WebMD Stock Amount divided by the sum of
(x) the total number of shares of GNN Common Stock outstanding as of the
Effective Time (after giving effect to the conversion of all shares of GNN
Series A Preferred Stock, GNN Series B Preferred Stock and GNN Series C
Preferred Stock described above) plus (y) the total number of shares of GNN
Common Stock issuable upon the exercise of Options and GNN Warrants outstanding
as of the Effective Time as determined in accordance with the Treasury Method
(the "WEBMD STOCK EXCHANGE RATIO").
3.2 Anti-Dilution Provisions. In the event Purchaser changes the number of
shares of Purchaser Common Stock issued and outstanding prior to the Effective
Time as a result of a stock split, stock dividend, combination of shares or
similar recapitalization with respect to such stock (an "ANTI-DILUTION EVENT")
and the record date therefor (in the case of a stock dividend) or the effective
date thereof (in the case of a stock split or similar recapitalization for which
a record date is not established) shall be prior to the Effective Time, the
Purchaser Stock Exchange Ratio shall be proportionately adjusted to the extent
not otherwise adjusted in the formulas set forth in Section 3.1(b).
3.3 Shares Held by GNN. Each share of GNN Capital Stock held in treasury
by GNN, shall be canceled and retired at the Effective Time and no consideration
shall be issued in exchange therefor.
3.4 Dissenting Stockholders. Any holder of shares of GNN Capital Stock who
perfects its dissenters' rights in accordance with and as contemplated by
Section 262 of the GCLSD shall not be converted into Purchaser Common Stock but
instead shall be entitled to receive such consideration as determined pursuant
to such provision of the GCLSD; provided, that no such payment shall be made to
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any dissenting stockholder unless and until such dissenting stockholder has
complied with the applicable provisions of the GCLSD and surrendered to the
Surviving Corporation the certificate or certificates representing the shares
for which payment is being made. In the event that a dissenting stockholder of
GNN fails to perfect, or effectively withdraws or loses, its right to appraisal
and payment for its shares under Section 262 of the GCLDS, Purchaser shall issue
and deliver the number of shares of Purchaser Common Stock to which such holder
of shares of GNN Capital Stock would otherwise be entitled under this Article 3
(without interest) upon surrender by such holder of the certificate or
certificates representing such shares held by such holder (subject to the escrow
provisions of Section 4.3 hereof).
3.5 Fractional Shares. No certificates representing fractional shares of
Purchaser Common Stock will be issued as a result of the Merger. Each holder of
shares of GNN Capital Stock exchanged pursuant to the Merger who would otherwise
have been entitled to receive a fraction of a share of Purchaser Common Stock
shall receive, in lieu thereof, cash (rounded to the nearest whole cent and
without interest) in an amount equal to such fractional part of a share of
Purchaser Common Stock multiplied by the Conversion Price. No such holder will
be entitled to dividends, voting rights, or any other rights as a stockholder in
respect of any fractional shares.
3.6 Conversion of GNN Options.
(a) At the Effective Time, each option granted by GNN to purchase shares
of GNN Common Stock, which is outstanding immediately prior thereto (an "OPTION"
or, collectively, the "OPTIONS"), granted by GNN under the GNN Stock Plan or
otherwise, whether or not exercisable, shall be converted into and become rights
with respect to Purchaser Common Stock, and Purchaser shall assume each Option,
in accordance with the terms of the GNN Stock Plan (in the case of Options
granted under the GNN Stock Plan) and stock option agreement by which it is
evidenced, except that from and after the Effective Time, (i) Purchaser and its
Compensation Committee shall be substituted for GNN and the Committee of GNN's
Board of Directors (including, if applicable, the entire Board of Directors of
GNN) administering the GNN Stock Plan, (ii) each Option assumed by Purchaser may
be exercised solely for shares of Purchaser Common Stock, (iii) the number of
shares of Purchaser Common Stock subject to such Option shall be equal to the
number of whole shares (rounded down to the nearest whole share) of GNN Common
Stock subject to such Option immediately prior to the Effective Time multiplied
by the Purchaser Stock Exchange Ratio, and (iv) the per share exercise price
under each such Option shall be adjusted by dividing the per share exercise
price under each such Option by the Purchaser Stock Exchange Ratio and rounding
up to the nearest whole cent. Notwithstanding the provisions of clauses (iii)
and (iv) of the first sentence of this Section 3.6(a), each Option which is an
"INCENTIVE STOCK OPTION" shall be adjusted as required by Section 424 of the
Internal Revenue Code, and the regulations promulgated thereunder, so as not to
constitute a modification, extension or renewal of such Option, within the
meaning of Section 424(h) of the Internal Revenue Code.
(b) Prior to the Closing, GNN will use its commercially reasonable
efforts to (i) obtain and deliver to Purchaser all necessary consents or
releases from any and all holders of Options as are necessary to waive any
vesting or acceleration of vesting of any and all unvested Options in connection
with or as a result of the Merger or any future "CHANGE OF CONTROL" (as defined
in the GNN Stock Plan) (an "ACCELERATION WAIVER"), and (ii) obtain an amendment
to Gordon Wyatt's Employment Agreement in the form of Section 3.6 to the WebMD
Disclosure Letter executed and delivered by Mr. Wyatt prior to the Closing (the
"WYATT EMPLOYMENT AGREEMENT").
(i) The Parties will calculate the aggregate "OPTION PRICE SPREAD"
for all outstanding GNN Options. The Option Price Spread per share is equal to
(1) the excess of the fair market value of a share of GNN Common Stock (which is
equal to the Conversion Price multiplied by the Purchaser Stock Exchange Ratio),
over the option exercise price, multiplied by (2) the percentage of the Option
not vested immediately prior to the Closing (without acceleration of vesting
under the GNN Stock Plan). For example, assuming the fair market value of a
share of GNN Common Stock is $30.00, an Option for 100 shares at $10.00 per
share that is one-quarter vested immediately prior to Closing would have an
Option Price Spread of $1,500.00.
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(ii) If GNN obtains Acceleration Waivers covering less than 66% of
the aggregate Option Price Spread (the "TARGET SPREAD REDUCTION AMOUNT") prior
to Closing, then the excess of the Target Spread Reduction Amount over the
Option Price Spread covered by Acceleration Waivers obtained by GNN prior to
Closing will constitute the "SPREAD REDUCTION SHORTFALL".
(iii) If either (1) Mr. Wyatt does not deliver an executed Wyatt
Employment Agreement prior to Closing, or (2) GNN does not obtain Acceleration
Waivers prior to the Closing covering at least the Target Spread Reduction
Amount, then the Newco Stock Amount or WebMD Stock Amount (as appropriate) will
be equal to (A) $214,925,000, minus (1) 50% of the Spread Reduction Shortfall
(if any), and (2) $525,000 (if Mr. Wyatt does not deliver the Wyatt Employment
Agreement), divided by (B) the Conversion Price. If Mr. Wyatt does not deliver
the Wyatt Employment Agreement (and the WebMD Stock Amount is reduced as set
forth above), then the Target Spread Reduction Amount shall be reduced by the
Option Price Spread of Options held by Mr. Wyatt.
(iv) The Parties agree that the Surviving Corporation will execute
the Acceleration Waivers solely in order to agree to eliminate Section 14 of the
GNN Stock Plan from the terms of each Option covered by an Acceleration Waiver
and to insert a provision into each such Option that provides that if the holder
of such Option is an employee of the Surviving Corporation (or one of its
Affiliates) whose employment is terminated after the Effective Time, the Option
will vest to the extent not previously vested upon such termination and will be
exercisable for a period of 90 days following such termination after which time
the Option will terminate.
(c) As soon as practicable after the Effective Time, Purchaser shall
deliver to the holders of Options appropriate notices setting forth such
holders' rights pursuant to the GNN Stock Plan and the agreements evidencing the
grants of such Options shall continue in effect on the same terms and conditions
(subject to adjustments required by this Section 3.6 after giving effect to the
Merger and the provisions set forth above). If necessary, Purchaser shall comply
with the terms of the GNN Stock Plan (except as provided in Section 3.6(b)
above) and ensure, to the extent lawful and practicable, and subject to the
provisions of the GNN Stock Plan, that Options which qualified as incentive
stock options prior to the Effective Time of the Merger continue to qualify as
incentive stock options after the Effective Time of the Merger.
(d) Purchaser shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Purchaser Common Stock for delivery
upon the exercise of Options.
(e) If Newco is the Purchaser, Newco agrees to file, if available for
use by Newco, a registration statement on Form S-8 for the shares of Newco
Common Stock issuable with respect to the Options as soon as is reasonably
practicable after the Effective Time and intends to maintain the effectiveness
of such registration statement thereafter for so long as any such Options remain
outstanding. If WebMD is the Purchaser, WebMD agrees that if WebMD completes an
initial public offering after the Effective Time, then at such time as WebMD
shall file a registration on Form S-8 for the option plans of WebMD, WebMD shall
also file a registration statement on Form S-8 for the shares of WebMD capital
stock issuable with respect to the Options as soon as reasonably practicable
after the Effective Time and intends to maintain the effectiveness of such
registration statement thereafter for so long as any of such Options remain
outstanding.
3.7 GNN Warrants.
(a) At the Effective Time, Purchaser shall assume the obligations of GNN
under the GNN common stock purchase warrants outstanding at the Effective Time
("GNN WARRANTS") and thereafter, upon exercise, the warrantholder shall receive
the number of shares of Purchaser Common Stock equal to the product of (i) the
Purchaser Stock Exchange Ratio and (ii) the number of shares of GNN Common Stock
for which such GNN Warrant could have been exercised immediately prior to the
Merger. The per share exercise price under each such GNN Warrant shall be
adjusted by dividing the per share exercise price under each such GNN Warrant by
the Purchaser Stock Exchange Ratio and rounding up to the nearest whole cent.
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(b) As soon as practicable after the Effective Time of the Merger,
Purchaser shall deliver to the holders of the GNN Warrants appropriate notices
setting forth such holders' rights pursuant to the applicable warrant agreements
with respect thereto to the extent required by the terms of the warrant
agreements with respect thereto.
(c) Purchaser shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Purchaser Common Stock for delivery
upon exercise of the GNN Warrants.
ARTICLE 4
EXCHANGE OF SHARES
4.1 Exchange Procedures. Promptly after the Effective Time, Purchaser and
the Surviving Corporation shall cause the exchange agent selected by Purchaser
(the "EXCHANGE AGENT") to mail to the former holders of GNN Capital Stock
appropriate transmittal materials (which shall specify that delivery shall be
effected, and risk of loss and title to the certificates theretofore
representing shares of GNN Capital Stock shall pass, only upon proper delivery
of such certificates to the Exchange Agent). After the Effective Time, each
former holder of shares of GNN Capital Stock (other than shares to be canceled
pursuant to Section 3.3 of this Agreement or as to which statutory dissenters'
rights have been perfected as provided in Section 3.4 of this Agreement) issued
and outstanding at the Effective Time shall surrender the certificate or
certificates representing such shares to the Exchange Agent and shall promptly
upon surrender thereof receive in exchange therefor the consideration provided
in Section 3.1 of this Agreement. To the extent required by Section 3.5 of this
Agreement, each former holder of shares of GNN Capital Stock issued and
outstanding at the Effective Time also shall receive, upon surrender of the
certificate or certificates representing such shares, cash in lieu of any
fractional share of Purchaser Common Stock to which such holder may be otherwise
entitled (without interest). Purchaser shall not be obligated to deliver the
consideration to which any former holder of GNN Capital Stock is entitled as a
result of the Merger until such holder surrenders his certificate or
certificates representing the shares of GNN Capital Stock for exchange as
provided in this Section 4.1 or such holder provides an appropriate affidavit
regarding loss of such certificate and an indemnification for loss in favor of
Purchaser in such sum as it may reasonably request. The certificate or
certificates of GNN Capital Stock so surrendered shall be duly endorsed as the
Exchange Agent may require. Any other provision of this Agreement
notwithstanding, neither Purchaser, the Surviving Corporation nor the Exchange
Agent shall be liable to a holder of GNN Capital Stock for any amounts paid or
property properly delivered in good faith to a public official pursuant to any
applicable abandoned property Law.
4.2 Rights of Former GNN Stockholders. At the Effective Time, the stock
transfer books of GNN shall be closed and no transfer of GNN Capital Stock by
any such former holder shall thereafter be made or recognized. Until surrendered
for exchange in accordance with the provisions of Section 4.1 of this Agreement,
each certificate theretofore representing shares of GNN Capital Stock (other
than shares to be canceled pursuant to Sections 3.3 and 3.4 of this Agreement)
shall from and after the Effective Time represent for all purposes only the
right to receive the consideration provided in Sections 3.1 and 3.5 of this
Agreement in exchange therefor. Former stockholders of record of GNN will not be
entitled to vote or give their consent after the Effective Time at any meeting
or action by written consent of Purchaser stockholders until such holders have
exchanged their certificates representing GNN Capital Stock for certificates
representing Purchaser Common Stock in accordance with the provisions of this
Agreement. If a dividend or other distribution is declared by Purchaser on the
Purchaser Common Stock, the record date for which is at or after the Effective
Time, the declaration shall include dividends or other distributions on all
shares issuable pursuant to this Agreement, but no dividend or other
distribution payable to the holders of record of Purchaser Common Stock as of
any time subsequent to the Effective Time shall be delivered to the holder of
any certificate representing shares of GNN Capital Stock issued and outstanding
at the Effective Time until such holder surrenders such certificate for exchange
as provided in Section 4.1 of this Agreement. However, upon surrender of such
certificate, both the Purchaser Common Stock certificate (together with all such
undelivered dividends or other distributions without interest) and any
undelivered
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cash payments to be paid for fractional share interests (without interest) shall
be promptly delivered and paid with respect to each share represented by such
certificate.
4.3 Escrow Shares. At the Effective Time, Purchaser shall issue an
aggregate number of shares of Purchaser Common Stock equal to ten percent (10%)
of the total number of shares of Purchaser Common Stock issuable pursuant to
Section 3.1 hereof as adjusted pursuant to Section 3.2 (the "Escrow Shares") to
be held in escrow pursuant to Article 14 and the terms of an Escrow Agreement
substantially in the form of Article 14 hereto. In the event of any discrepancy
between the terms of the Escrow Agreement and Article 14, Article 14 of this
Agreement shall control. The portion of the Escrow Shares issued and contributed
on behalf of each holder of GNN Capital Stock shall be in proportion to the
aggregate number of shares of Purchaser Common Stock which such holder would
otherwise be entitled to receive under Article 3 by virtue of ownership of GNN
Capital Stock.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF GNN
Except as set forth in Sections to the letter delivered to Healtheon and
WebMD on or prior to the date of this Agreement (the "GNN DISCLOSURE LETTER") as
specified below, GNN hereby represents and warrants to Healtheon, WebMD and
Merger Corp. as follows as of the date hereof and the Closing Date:
5.1 Organization, Standing, and Power. GNN is a corporation duly
organized, validly existing, and in good standing under the Laws of the State of
Delaware, and has the corporate power and authority to carry on its business as
it has been and is now being conducted and to own, lease and operate its Assets.
GNN is duly qualified or licensed to transact business as a foreign corporation
and is in good standing in all jurisdictions where the character of its Assets
or the nature or conduct of its business requires it to be so qualified or
licensed, except for such jurisdictions in which the failure to be so qualified
or licensed is not reasonably likely to have, in the aggregate, a Material
Adverse Effect on GNN. Copies of the certificate of incorporation and all
amendments thereto of GNN and the bylaws, as amended, of GNN and copies of the
corporate minutes (or resolutions adopted by the stockholders or Board of
Directors and all committees thereof) of GNN, which have been made available to
WebMD for review, are true and complete, in all Material respects, as in effect
on the date of this Agreement, and accurately reflect all proceedings of the
stockholders and Board of Directors (and all committees thereof) of GNN. The
stock record books of GNN, which have been made available to WebMD for review,
contain true and complete records of the stock ownership of GNN and all prior
transfers of the shares of its capital stock.
5.2 Authorization of Agreement; No Breach. The execution, delivery and
performance of this Agreement have been duly authorized by all necessary
corporate action of GNN, other than the meeting (or written consent) of the
stockholders of GNN to approve this Agreement to be held pursuant to Section
10.1. This Agreement constitutes, and all agreements and other instruments and
documents to be executed and delivered by GNN pursuant to this Agreement will
constitute, legal, valid and binding obligations of GNN enforceable against GNN
in accordance with their respective terms, except to the extent such
enforceability is subject to (i) Laws of general application relating to
bankruptcy, insolvency, moratorium and the relief of debtors and (ii) the
availability of specific performance, injunctive relief or other equitable
remedies. The execution, delivery and performance of this Agreement and the
agreements and other documents and instruments to be executed and delivered by
GNN pursuant to this Agreement and the consummation of the transactions
contemplated hereby and thereby will not, subject to obtaining the consents
identified or contemplated herein (including without limitation all filings or
consents under the HSR Act, the Securities Law and state securities Laws, and
the rules and regulations of the NASD and the Nasdaq Stock Market with respect
to the securities issued under the Registration Statement), (i) violate or
result in a breach of or Default under the certificate of incorporation or
bylaws of GNN; (ii) to the knowledge of GNN, violate any Law, Order,
administrative decision or award of any court, arbitrator, mediator, tribunal or
Regulatory Authority applicable to or binding upon GNN or upon its Assets or
business; (iii) conflict with or constitute a Default under any Material
Contract to which GNN
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is a party or by which GNN is bound; or (iv) create a Material Lien upon the
Assets or business of GNN.
5.3 Capital Stock. As of the date hereof, the authorized capital stock of
GNN consists of (i) 10,000,000 shares of GNN Common Stock, of which 1,915,235
shares are issued and outstanding and none of which are held as treasury shares,
and (ii) 10,000,000 shares of GNN Preferred Stock, of which (a) 1,913,044 shares
are designated Series A Preferred Stock, of which 1,913,044 are issued and
outstanding and none of which are held as treasury shares, (b) 109,765 shares
are designated Series B Preferred Stock, of which 109,765 are issued and
outstanding and none of which are held as treasury shares and (c) 500,000 shares
are designated Series C Preferred Stock, of which 388,747 are issued and
outstanding and none of which are held as treasury shares. GNN has no other
capital stock authorized, issued or outstanding. All of such shares are duly and
validly issued and outstanding, are fully paid and non-assessable, and were
issued pursuant to a valid exemption from registration under the 1933 Act and
all applicable state securities Laws. Except as set forth in Section 5.3 of the
GNN Disclosure Letter, there are no outstanding warrants, options, rights
(including outstanding rights to demand registration or to sell in connection
with a registration by GNN under the 1933 Act), calls or other commitments of
any nature relating to the GNN Capital Stock to which GNN is a party, and there
are no outstanding securities of GNN convertible into or exchangeable for shares
of GNN Capital Stock or any other capital stock ("GNN Equity Rights"). If Newco
is the Purchaser or if WebMD is the Purchaser and makes the WebMD Election as
provided in Section 10.15, neither GNN nor Purchaser nor any of their Affiliates
will have any obligations under any GNN Registration Rights Agreement (as
defined in Section 11.2) after the Effective Time and any such agreements will
have no further force and effect after the Effective Time. Neither GNN nor
Purchaser nor any of their Affiliates will have any obligations under the
Stockholder Agreement (as defined in Section 11.2) after the Effective Time and
such agreement will have no further force and effect after the Effective Time.
All of such GNN Equity Rights were issued or granted pursuant to a valid
exemption from registration under the 1933 Act and all applicable state
securities Laws. Except as set forth in Section 5.3 of the GNN Disclosure
Letter, GNN has no knowledge of any voting agreements or voting trusts between
or among any Person or Persons relating to GNN or the GNN Capital Stock. Except
as provided in the GNN Stock Plan and the Warrants, GNN is not obligated to
issue or repurchase any shares of GNN Capital Stock for any purpose, and to the
knowledge of GNN no Person has entered into any Contract or option or any right
or privilege (whether preemptive or contractual) capable of becoming a Contract
or option for the purchase, subscription or issuance of any unissued shares, or
other securities of GNN. As a result of the Merger and the other transactions
contemplated herein, immediately prior to the Effective Time, (i) pursuant to
the Certificates of Designations of the Series A Convertible Preferred Stock of
GNN (the "GNN SERIES A PREFERRED STOCK") and the Series B Convertible Preferred
Stock of GNN (the "GNN SERIES B PREFERRED STOCK"), all outstanding shares of GNN
Series A Preferred Stock and Series B Preferred Stock will convert into shares
of GNN Common Stock as set forth in their respective Certificates of
Designations, and (ii) pursuant to the Certificate of Designation of the Series
C Convertible Preferred Stock of GNN (the "GNN SERIES C PREFERRED STOCK"), all
outstanding shares of GNN Series C Stock will convert into shares of GNN Common
Stock as set forth in the Certificate of Designations of the GNN Series C
Preferred Stock so long as a majority of GNN's Board of Directors (other than
those Directors elected by the holders of GNN Series A Preferred Stock) and a
majority of the holders of the GNN Common Stock and the GNN Series B Preferred
Stock, voting together as a class, approve an adjustment to the conversion price
of the GNN Series C Preferred Stock such that the transactions described herein
will be deemed a "QUALIFIED SALE" as defined in the Certificate of Designations
for the GNN Series C Preferred Stock.
5.4 GNN Subsidiaries. GNN does not own, directly or indirectly, any
capital stock or other equity or ownership or proprietary interest in any
Person.
5.5 Financial Statements.
(a) Section 5.5 of the GNN Disclosure Letter contains true and correct
copies of the (i) audited balance sheets of GNN as of December 31, 1998 and
1997, and the audited statements of
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income and audited statements of cash flows for the year ended December 31, 1998
and for the period from January 8, 1997 (inception) to December 31, 1997 and
(ii) unaudited balance sheet of GNN as of May 31, 1999 and unaudited statement
of income and statement of cash flow for the five months ended May 31, 1999
(collectively, (i) and (ii), the "GNN FINANCIAL STATEMENTS").
(b) The GNN Financial Statements (i) are in accordance with the books
and records of GNN, which books and records are complete and correct in all
Material respects and have been maintained in accordance with reasonable
business practices; (ii) present fairly the financial condition, Assets and
Liabilities of GNN, as of the respective dates indicated and the results of
operations and cash flows for the respective periods indicated; (iii) have been
prepared in accordance with GAAP consistently applied throughout the periods
involved, except for the omission of notes to interim unaudited statements, and
except that interim unaudited statements are subject to normal year end
adjustments which will not, individually or in the aggregate, be Material; and
(iv) reflect adequate reserves for all known Material Liabilities and reasonably
anticipated losses required to be recorded under GAAP.
5.6 Absence of Undisclosed Liabilities. Except as disclosed on the May 31,
1999 GNN Financial Statements, GNN does not have any Undisclosed Liabilities,
except for unpaid Liabilities incurred since May 31, 1999 and on or prior to the
date hereof, in the ordinary course of business and not involving Funded Debt
and which are not, individually, in excess of $50,000.
5.7 Absence of Changes. Since May 31, 1999 there has not been any
transaction or occurrence in which GNN has:
(a) issued or delivered or agreed to issue or deliver any capital stock
or other securities (whether stock, bonds, debentures or other corporate
securities) or granted or agreed to grant any options or rights to purchase any
securities or borrowed or agreed to borrow any Funded Debt;
(b) incurred or become subject to, or agreed to incur or become subject
to, any Material Liability other than in the ordinary course of business;
(c) discharged or satisfied any Lien or paid any Material Liability
other than (i) current liabilities shown on the balance sheet as of May 31, 1999
included in the GNN Financial Statements, (ii) current liabilities incurred
since that date in the ordinary course of business, or (iii) Funded Debt shown
on such balance sheet or incurred since May 31, 1999 and set forth on Section
5.8 of the GNN Disclosure Letter;
(d) declared, set aside or made, or agreed to declare, set aside or make
any payments or dividends or any distribution with respect to GNN Capital Stock
or purchased, redeemed or otherwise acquired, directly or indirectly, or agreed
to purchase, redeem or acquire, any shares of capital stock or other securities;
(e) mortgaged, pledged, subjected or agreed to subject, any of its
Assets, tangible or intangible, to any Lien, except for any Liens regarding
current real and personal property taxes not yet due and payable;
(f) sold, assigned or transferred (or agreed so to do) any of its
tangible Assets, or canceled or agreed to cancel any debts or claims, except, in
each case, in the ordinary course of business;
(g) sold, assigned or transferred any patents, trademarks, trade names,
copyrights or other intangible Assets;
(h) suffered any damage, destruction or loss, whether or not covered by
insurance, which Materially and adversely affected the Assets or business of
GNN, or suffered any extraordinary losses or waived any rights of substantial
value, whether or not in the ordinary course of business;
(i) increased the rate of compensation payable or to become payable by
it to any of its officers, directors, employees or agents, or agreed so to do,
except general hourly rate increases and normal merit increases for employees
and agents other than officers in the ordinary course of business consistent
with past practice;
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(j) terminated or amended any Material Contract, license or other
instrument to which it is a party or suffered any loss or termination or
threatened loss or termination, of any existing business arrangement, the
termination or loss of which, individually or in the aggregate, could result in
a Material Adverse Effect on GNN;
(k) through negotiation or otherwise, made any commitment or incurred
any Liability, whether or not enforceable, to any labor organization;
(l) except for any year-end compensation bonuses to be paid consistent
with past practice, if any, made or agreed to make any accrual or arrangement
for or payment of any bonus or special compensation of any kind to any officer,
director, employee or agent;
(m) directly or indirectly paid or entered into a Contract to pay any
severance or termination pay to any officer, director, employee or agent;
(n) changed any of the accounting principles followed by it or the
methods of applying such principles;
(o) reclassified its shares of capital stock into a different number of
shares;
(p) made or approved the making of any capital expenditure exceeding the
amount of $50,000 in any instance;
(q) except in the ordinary course of business, loaned funds to or
increased the aggregate amount of existing loans to any Person;
(r) experienced any development, quality assurance or network operations
problems that has had, or is reasonably likely to have, a Material Adverse
Effect on GNN;
(s) suffered or experienced any other event, change or occurrence (other
than events or conditions affecting the economy generally) which has had, or is
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on GNN;
(t) acquired a new business of any Person or acquired (by any means,
whether by merger, asset purchase, stock purchase or otherwise) substantially
all of the Assets or securities of any other Person; or
(u) agreed to take any action listed in this Section 5.7.
5.8 Indebtedness. Section 5.8 of the GNN Disclosure Letter lists all
Funded Debt of GNN as of the date hereof, setting forth the principal amounts
outstanding, per annum interest rates and maturity dates for all such
indebtedness. All of the indebtedness (including Funded Debt) of GNN as of the
respective dates of the GNN Financial Statements and as of the date of this
Agreement is accurately reflected in the GNN Financial Statements, and with
respect to any Funded Debt, GNN is not in breach or Default in any Material
respect under any of the terms or conditions set forth in the loan documents or
any other document or instrument related thereto. All of the Funded Debt of GNN
is prepayable at any time without penalty or premium at the option of the
obligor. The transactions contemplated in this Agreement will not result in any
penalty or incurrence of any additional obligation or change of any terms with
respect to any such indebtedness. GNN does not have any indebtedness to any
Affiliate, employee, officer, director or 5% or greater stockholder of GNN.
5.9 Tax Matters.
(a) GNN has timely filed all federal, state, local and foreign returns,
estimates, information statements and reports ("RETURNS") relating to Taxes
required to be filed by GNN with any Tax authority, except such Returns which
are not Material to GNN. GNN has paid all Taxes shown to be due on such Returns.
(b) GNN as of the Effective Time will have withheld with respect to its
employees all federal and state income Taxes, Taxes pursuant to the Federal
Insurance Contribution Act ("FICA"), Taxes pursuant to the Federal Unemployment
Tax Act ("FUTA") and other Taxes required to be withheld.
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(c) GNN has not been delinquent in the payment of any Tax nor is there
any Tax deficiency outstanding, proposed or assessed against GNN, nor has GNN
executed any unexpired waiver of any statute of limitations on or extending the
period for the assessment or collection of any Tax.
(d) No audit or other examination of any Return of GNN by any Tax
authority is presently in progress, nor has GNN been notified of any request for
such an audit or other examination.
(e) No adjustment relating to any Returns filed by GNN has been proposed
in writing formally or informally by any Tax authority to GNN or any
representative thereof.
(f) GNN does not have any Liability for unpaid Taxes which has not been
accrued for or reserved on the GNN Financial Statements, whether asserted or
unasserted, contingent or otherwise, which is Material to GNN, other than any
Liability for unpaid Taxes that may have accrued since the date of the GNN
Financial Statements in connection with the operation of the business of GNN in
the ordinary course.
(g) There is no agreement, plan, arrangement or other Contract to which
GNN is a party as of the date of this Agreement, including but not limited to
the provisions of this Agreement, covering any employee or former employee of
GNN that, individually or collectively, could give rise to the payment of any
amount that would not be deductible pursuant to Sections 280G, 404 or 162(m) of
the Internal Revenue Code.
(h) GNN has not filed any consent agreement under Section 341(f) of the
Internal Revenue Code or agreed to have Section 341(f)(2) of the Internal
Revenue Code apply to any disposition of a subsection (f) asset (as defined in
Section 341(f)(4) of the Internal Revenue Code) owned by GNN.
(i) GNN is not party to nor has any obligation under any tax-sharing,
tax indemnity or tax allocation agreement, arrangement or other Contract.
(j) Except as may be required as a result of the Merger, GNN has not
been and will not be required to include any adjustment in Taxable income for
any Tax period (or portion thereof) pursuant to Section 481 or Section 263A of
the Internal Revenue Code or any comparable provision under state or foreign Tax
Laws as a result of transactions, events or accounting methods employed prior to
the Closing.
(k) None of GNN's Assets are tax exempt use property within the meaning
of Section 168(h) of the Internal Revenue Code.
(l) GNN is not subject to (i) any foreign Tax holidays, (ii) any
intercompany transfer pricing agreements, or other arrangements that have been
established by GNN with any Tax authority and (iii) any expatriate programs or
policies affecting GNN.
(m) GNN is not, and has not been at any time, a "United States real
property holding corporation" within the meaning of Section 897(c)(2) of the
Internal Revenue Code.
5.10 Real Property.
(a) GNN does not own any real property. True and correct copies of all
real property leases of GNN have been provided or made available to WebMD. Each
of such leases is in full force and effect on the date hereof, except as the
validity of such leases may be affected by actions, events or conditions
involving only the other party thereto, and to the knowledge of GNN no such
actions, events or conditions have occurred or exist. No Default by GNN under
any of the terms or conditions set forth in any of the foregoing leases has
occurred or been asserted by any party. The continuation, validity and
effectiveness of the terms and conditions of such leases will not be Materially
adversely affected by the transactions contemplated by this Agreement.
(b) To the knowledge of GNN, all improvements on the real estate leased
to or used by GNN Materially conform to all applicable state and local Laws,
zoning and building ordinances and health and safety ordinances, and the
property is zoned for the various purposes for which the real estate and
improvements thereon are presently being used.
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(c) Each of the leased premises is in satisfactory condition and repair
consistent with the uses to which they are being put.
(d) No proceedings for the taking of any of such leased real property by
eminent domain by any Regulatory Authority are pending or, to the knowledge of
GNN, threatened.
5.11 Personal Property.
(a) True and correct copies of all leases for personal property (except
miscellaneous leases of office machinery, fixtures or any leases having future
minimum lease payments of less than $25,000) used or employed by GNN have been
provided or made available to WebMD. Each of such leases is in full force and
effect on the date hereof, except as the validity of such leases may be affected
by actions, events or conditions affecting the other party thereto, and to the
knowledge of GNN no such actions, events or conditions exists or has occurred.
No Default by GNN under any of the terms or conditions set forth in any of the
foregoing leases has occurred or been asserted by any party. The continuation,
validity and effectiveness of such leases will not be adversely affected by the
transactions contemplated by this Agreement. Except as disclosed in Section 5.11
of the GNN Disclosure Letter, GNN does not lease any personal property as
lessor.
(b) All Material items of personal property and leasehold improvements
owned or leased by GNN are shown on or reflected in the unaudited balance sheet
of GNN as of May 31, 1999, included in the GNN Financial Statements, are in
satisfactory operating condition and in a state of reasonable maintenance and
repair, consistent with the uses to which they are being put.
5.12 Intellectual Property.
(a) Section 5.12 of the GNN Disclosure Letter contains a true and
complete list of all Registered Intellectual Property owned by or exclusively
licensed to GNN on the date hereof, and, with respect to Registered Intellectual
Property owned by GNN, specifies the jurisdictions in which each such item of
Registered Intellectual Property has been issued or registered or in which an
application for issuance or registration has been filed, including the
respective registration or application numbers. GNN owns good and exclusive
title to or has licensed (sufficient for the conduct of its business as
currently conducted and as proposed to be conducted), each Material item of
Intellectual Property used by GNN free and clear of any Lien (excluding licenses
and related restrictions). GNN is the exclusive owner of, and has good title
(free and clear of all Liens) to, all (i) trademarks and trade names used in
connection with the operation or conduct of the business of GNN, including the
sale of products or the provisions of services, and (ii) copyrighted works that
are GNN products or which GNN otherwise purports to own. Neither GNN or, to the
knowledge of GNN, its predecessors has misused or infringed on the Intellectual
Property of others, and none of the Intellectual Property as used in the
business conducted by GNN infringes or will infringe upon or otherwise violates
or will violate the Intellectual Property of others or constitutes or will
constitute unfair competition or trade practices under any applicable Law, nor
has any Person asserted a claim of such infringement or violation of
Intellectual Property or unfair competition or trade practices against GNN. GNN
is not obligated to pay any royalties to any Person with respect to any
Intellectual Property in excess of $5,000.00 per year. GNN has not transferred
ownership of, licensed or sublicensed its rights in any Intellectual Property,
except non-exclusive licenses in the ordinary course of business, forms of which
license agreements and a list of which licensees, GNN has delivered or made
available to WebMD.
(b) To the knowledge of GNN, no officer, director or employee of GNN has
entered into any Contract currently in effect other than on behalf of GNN and
with GNN's authorization, which requires such officer, director or employee to
assign any interest in any Intellectual Property or which restricts or prohibits
such officer, director or employee from engaging in activities competitive with
GNN. To the extent that any Material Intellectual Property has been developed or
created by a third party for GNN, GNN has a written agreement with such third
party with respect thereto and GNN thereby either (i) has obtained ownership of,
and is the exclusive owner of; or (ii) has obtained a license (sufficient for
the conduct of its business as currently conducted and as proposed to be
conducted) to all such third party's
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Intellectual Property in such work, material or invention by operation of law or
by valid assignment, to the fullest extent it is legally possible to do so.
(c) GNN is listed in the records of the appropriate United States, state
or foreign agency as the sole owner of record for each application and
registration of Registered Intellectual Property listed in Section 5.12 of the
GNN Disclosure Letter. Each Material item of Registered Intellectual Property
owned by GNN is valid and subsisting, all necessary registration, maintenance
and renewal fees currently due in connection with such registration, maintenance
and renewal fees currently due in connection with such Registered Intellectual
Property have been made and all necessary documents, recordations and
certificates in connection with such Registered Intellectual Property have been
filed with the relevant patent, copyright, trademark or other Regulatory
Authorities for the purposes of maintaining such Registered Intellectual
Property in the jurisdictions listed in Section 5.12 of the GNN Disclosure
Letter. There is no pending written threat received by GNN of, or to the
knowledge of GNN, any verbal threat of opposition, interference or cancellation
in, a proceeding before any court or registration authority in any jurisdiction
against the applications or registrations listed in Section 5.12 of the GNN
Disclosure Letter, or, to the knowledge of GNN, against any Intellectual
Property exclusively licensed to GNN.
(d) There are no settlements, forbearances to sue, consents, judgments,
or other Orders of which GNN is a party or of which it is aware and which (i)
restrict GNN's rights to use any Intellectual Property owned by or licensed to
GNN, (ii) restrict GNN's business in order to accommodate a third party's
intellectual property rights or (iii) permit third parties to use any
Intellectual Property owned or controlled by GNN. To the knowledge of GNN, no
Person has infringed or misappropriated or is infringing or misappropriating any
Intellectual Property used by GNN in the conduct of its business.
(e) The consummation of the transactions contemplated hereby will not
result in the Material loss or impairment of GNN's right to own or use any
Intellectual Property or result in GNN's granting to any third party any right
to or with respect to any Material Intellectual Property, nor will require the
consent of any Regulatory Authority or other third party in respect of any
Intellectual Property.
5.13 Accounts Receivable. The accounts receivable of GNN as of May 31,
1999, as reflected in the GNN Financial Statements (net of reserves reflected in
such GNN Financial Statements), to the extent uncollected on the date hereof,
and the accounts receivable reflected on the books of GNN on the date hereof,
are validly existing and represent monies due for goods sold and delivered or
services performed, and the value of such accounts receivable as shown in the
GNN Financial Statements are, in the aggregate, net of adequate reserves for
doubtful and uncollectible accounts as determined in accordance with GAAP. There
are no refunds, discounts or other adjustments payable with respect to any such
accounts receivable, and there are no defenses, rights of set-off, assignments,
restrictions, encumbrances, or conditions enforceable by third parties on or
affecting any of the foregoing.
5.14 The Proprietary Software; 2000 Year liance.
(a) The proprietary computer software of GNN owned by GNN (and not
licensed from any other party) included in the Intellectual Property of GNN (the
"GNN Software") performs substantially in accordance with its documentation, is
free of material defects in operation, is in machine-readable form, and contains
all current revisions of such software, and includes all computer programs,
materials, tapes, object and source codes and other written materials related to
the GNN Software. GNN has delivered to WebMD complete and correct copies of all
user and technical documentation related to the GNN Software.
(b) Neither GNN nor, to the knowledge of GNN, any employee or agent
thereof has developed or assisted in the enhancement of the GNN Software except
for enhancements included in the GNN Software as delivered to WebMD pursuant
hereto.
(c) To GNN's knowledge, no employee of GNN is, or is now expected to be,
in Default under any term of any employment Contract, agreement or arrangement
relating to the GNN Software or noncompetition arrangement, or any other
Contract or any restrictive covenant relating to the GNN Software or its
development or exploitation. The GNN Software was developed entirely by the
employees
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of GNN during the time they were employees only of GNN or by consultants who
assigned in writing all of their rights in the GNN Software to GNN.
(d) All right, title and interest in and to the GNN Software is owned by
GNN, free and clear of all Liens, is fully transferable to Purchaser or Merger
Corp., and no party other than GNN has any interest in the GNN Software,
including without limitation, any Lien, license, contingent interest or
otherwise, or will have any right, title or interest in and to the GNN Software
after the Merger. The preceding sentence and the last sentence of this paragraph
(d) shall not include licenses to the GNN Software made in the ordinary course
of business, forms of which license agreements GNN has made available to WebMD.
GNN's development or sale of the GNN Software did and does not violate any
rights of any other Person and GNN has not received any written communication
alleging such a violation. GNN does not have any obligation to compensate any
Person for the development, use, sale or exploitation of the GNN Software. GNN
has not granted to any other Person any license, option or other right to
develop, use, sell or exploit in any manner the GNN Software, whether requiring
the payment of royalties or not.
(e) GNN has kept secret and has not disclosed the source code for the
GNN Software to any Person other than certain employees of GNN. GNN has taken
commercially reasonable measures to protect the confidential and proprietary
nature of the GNN Software. There have been no patents applied for and no
copyrights registered by GNN or to GNN's knowledge for any part of the GNN
Software. To the knowledge of GNN, there are no trademark rights of any Person
other than GNN in the name "GREENBERG NEWS NETWORKS" "MEDCAST" or "MEDCAST
NETWORKS".
(f) All copies of the GNN Software embodied in physical form and in
GNN's control will be delivered to Purchaser at or prior to the Closing.
(g) Except in the ordinary course of business, GNN has not given any
warranties to any third parties with respect to the products or services offered
by it. With respect to any such warranties given in the ordinary course of
business, GNN has either delivered or made available to WebMD copies of all such
agreements granting any such warranty.
(h) The GNN Software and GNN internal systems have been designed to
insure date time entry recognition, calculations that accommodate same century
and multi-century formulas and date values, leap year recognition and
calculations, and date data interface values that reflect the century. The GNN
Software and GNN internal systems manage and manipulate data involving dates and
times, including single century formulas and multi-century formulas, and do not
cause an abnormal ending scenario within the application or generate incorrect
values or invalid results involving such dates.
5.15 Insurance. All of the Assets and business of GNN of an insurable
nature and of a character usually insured by companies of similar size and in
similar businesses are insured in such amounts and against such losses,
casualties or risks as is usual in such companies and for such Assets and
business. A complete and accurate list of all insurance policies held by GNN and
now in force (including, without limitation, property damage, public liability,
communications liability, worker's compensation, fidelity bonds, errors and
omissions, theft, forgery and other coverage) is set forth in Section 5.15 of
the GNN Disclosure Letter, and, true and correct copies of all such policies,
have been made available to WebMD. All such policies are in full force and
effect and the premiums due thereon have been timely paid. GNN is not now in
Default regarding the provisions of any such policy, nor have they failed to
give any notice or present any Material claim thereunder in due and timely
fashion. The consummation of the transactions contemplated by this Agreement
will not constitute a Default under, or otherwise affect the coverage under any
such insurance policies. There is no Material claim by GNN pending under any
insurance policies of GNN as to which coverage has been questioned, denied or
disputed by the underwriters of such policies.
5.16 Compliance with Laws.
(a) GNN has in effect all Material Permits necessary for it to own,
lease or operate its Assets and to carry on its business as now conducted. GNN
is not in violation in any Material respect of any Laws, Orders or Permits
applicable to its business or employees conducting its business. No notice or
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warning from any Regulatory Authority with respect to any failure or alleged
failure of GNN to comply with any Law has been received by GNN, nor, to the
knowledge of GNN, is any such notice or warning proposed or threatened.
(b) No consent or approval of, prior filing with or notice to, or other
action by, any Regulatory Authority or any other third party is required in
connection with the execution and delivery of this Agreement or any agreement or
other instrument to be executed and delivered pursuant to this Agreement by GNN
or the consummation of the transactions provided for herein or therein except
for such consents and approvals that have been obtained and filings, notices and
other actions that have been taken or made, the filing of the Certificate of
Merger with the State of Delaware, HSR Act filings as contemplated under Section
10.2 and such consents and approvals as may be required under Securities Laws
and state securities Laws.
(c) To the knowledge of GNN, there are no capital expenditures in excess
of $100,000 in the aggregate that GNN anticipates will be required to be made in
connection with the business of GNN as now conducted in order to comply with any
existing Laws or other governmental requirements applicable to the business of
GNN as now conducted including, without limitation, requirements relating to
occupational health and safety. "CAPITAL EXPENDITURES" shall have the same
meaning as it has in the GNN Financial Statements if and to the extent that the
treatment thereof is in accordance with GAAP.
(d) Neither GNN nor, to the knowledge of GNN, any officer, director,
employee, agent or other representative thereof acting or purporting to act on
behalf of any such entity or any business enterprise with which GNN has been
associated or affiliated, has, directly or indirectly, made or authorized any
payment, contribution or gift of money, property, or services, in violation of
applicable law (i) as a kickback or bribe to any person, or (ii) to any
political organization or the holder of, or any aspirant to, any elective or
appointive office of any nation, state, political subdivision thereof, or other
governmental body or instrumentality.
5.17 Environmental Matters.
(a) There is no Litigation with respect to the ownership, use, condition
or operation of any of the Assets held for use or sale by GNN or any of its
predecessors related to or arising under any Environmental Law in any court or
before or by any Regulatory Authority or private arbitration tribunal
(hereinafter collectively referred to as "ENVIRONMENTAL LITIGATION"). There are
no existing violations of Environmental Laws by GNN with respect to the
ownership, use, condition, lease or operation of real property formerly held for
use or sale by any of its predecessors other than violations which would not,
either individually or in the aggregate, have a Material Adverse Effect on GNN.
Neither GNN nor, to the knowledge of GNN, any of its predecessors has used any
Assets or premises thereof for the handling, treatment, storage, or disposal of
any Hazardous Substances except in compliance with all applicable Environmental
Laws. No written notice, or other communication from any court or Regulatory
Authority, official or instrumentality, of any alleged violation of any
Environmental Law has been communicated to management of GNN or any predecessor
or, to the knowledge of GNN, filed with respect to the use, ownership,
condition, operation, or disposal of any of the Assets or premises of GNN or any
Assets or premises formerly held for use or sale by GNN or, to the knowledge of
GNN, any of its predecessors. To the knowledge of GNN, no basis exists for the
allegation of any such violations.
(b) To the knowledge of GNN, no building or other improvement or any
premises owned, leased, operated or managed by GNN contains any
asbestos-containing materials.
(c) Copies of any environmental audits or environmental surveys of any
real estate owned or leased by GNN are attached to Section 5.17 of the GNN
Disclosure Letter.
5.18 Litigation and Claims. There are no outstanding Orders or
administrative decisions to which GNN is subject, and, except as disclosed on
Section 5.18 of the GNN Disclosure Letter, there is no Litigation pending or, to
GNN's knowledge, threatened against or relating to GNN or its Assets or
businesses. GNN has not been advised by any attorney representing any such
entity that there are any "LOSS CONTINGENCIES" (as defined in Statement of
Financing Accounting Standards No. 5 issued by the
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Financial Accounting Standards Board in March 1975 ("FASB 5")), which would be
required by FASB 5 to be disclosed or accrued in the GNN Financial Statements.
5.19 Contracts and Commitments.
(a) Section 5.19 (a) of the GNN Disclosure Letter lists all of the
following Contracts to which GNN is a party or by which GNN benefits or is
subject (or by which its Assets are subject), all of which have been made
available to WebMD for review:
(i) any Contract for the employment of any officer, director,
employee or consultant that is not terminable at will;
(ii) any Contract for the purchase, sale, production, supply,
maintenance or support, whether on a continuing basis or otherwise, of goods or
services of any type involving in any one case (or group of related Contracts)
$100,000 or more;
(iii) any (A) Contract or license to which GNN is a party (1) with
respect to any Intellectual Property of GNN licensed or transferred to any third
party (other than end user licenses in the ordinary course of business), or (2)
pursuant to which any third party has licensed or transferred any Intellectual
Property to GNN (other than shrink wrap and similar widely available commercial
end user licenses), or (B) other Material Contract related to Intellectual
Property used by GNN in its business as currently conducted;
(iv) any sales or vendor Contract or sub-contract involving in any
one case (or group of related Contracts) $100,000 or more;
(v) any Contract not made in the ordinary course of business,
including but not limited to any management agreements;
(vi) any Contracts pursuant to which any of GNN's product or pages
therein are linked with other web sites or pages therein; Contracts with web
site hosts or Internet access providers; Contracts regarding data center hosting
or security; Contracts relating to advertising or sponsorships; Contracts
providing for the use, display or distribution of third party content,
information or data or the provision of services through GNN's product;
Contracts regarding continuing medical education programs; Contracts regarding
the establishment or maintenance of networks, telecommunication links, virtual
private networks or other similar non-public networks;
(vii) any Contracts that are, in the reasonable opinion of GNN,
Materially adverse, onerous or otherwise harmful to GNN's business, operations
or Assets;
(viii) any strategic alliance agreements;
(ix) any Contracts upon which the business, rights or Assets, or
condition, financial or otherwise, of GNN depends or which involve payments of
greater than $50,000;
(x) any Contract currently in force relating to the disposition or
acquisition by GNN after the date of this Agreement of any amount of Assets not
in the ordinary course of business or pursuant to which GNN has a Material
ownership interest in any Person, joint venture or other business enterprise;
(xi) any joint marketing or development agreement currently in force
under which GNN has continuing obligations to jointly market any product,
technology or service;
(xii) any Contract currently in force to provide services or goods to
any third party for any product or technology that is Material to GNN;
(xiii) any Contract currently in force to sell or distribute any GNN
products, services or technology except agreements with distributors or sales
representatives in the normal course of business cancelable without penalty upon
90 days or less notice and substantially in the form previously provided to
WebMD; and
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(xiv) any mortgage, indenture, guarantee, loans or credit agreements,
security agreements or other agreements or instrument relating to Funded Debt.
(b) Except as to Contracts that are cancelable at will or upon 30 days'
notice or less, (i) each of the Contracts described in this Section 5.19 is in
full force and effect on the date hereof, except as the validity of such
Contracts may be affected by actions, events or conditions involving only the
other party thereto, none of which actions, events or conditions have, to the
knowledge of GNN, occurred or exist, (ii) no material Default under any of the
terms or conditions set forth in any of the Contracts to which GNN is a party or
any document or instrument related thereto has occurred or been asserted by any
party, (iii) there has been no actual, or to the knowledge of GNN, threatened
termination, cancellation or limitation of any of the Contracts listed in
Section 5.19(a) of the GNN Disclosure Letter and (iv) the continuation, validity
and effectiveness of such Contracts, and all other Material terms thereof, will
not be affected by the transactions contemplated by this Agreement. Except as
set forth in Section 5.19(b) of the GNN Disclosure Letter, no Contract described
in this Section 5.19 requires the consent of any party to its assignment in
connection with the transactions contemplated hereby.
5.20 Powers of Attorney. GNN has not given or granted any power of
attorney, whether limited or general, to any Person that is continuing in
effect.
5.21 Benefit Plans.
(a) Definitions. With the exception of the definition of "AFFILIATE" set
forth in Section 5.21(a)(i) below (which definition shall apply only to this
Section 5.21), for purposes of this Agreement, the following terms shall have
the meanings set forth below:
(i) "AFFILIATE" shall mean any other person or entity under common
control with GNN within the meaning of Section 414(b), (c), (m) or (o) of the
Internal Revenue Code and the regulations issued thereunder;
(ii) "GNN EMPLOYEE PLAN" shall mean any plan, program, policy,
practice, Contract, agreement or other arrangement providing for compensation,
severance, termination pay, deferred compensation, performance awards, stock or
stock-related awards, fringe benefits or other employee benefits or remuneration
of any kind, whether written or unwritten or otherwise, funded or unfunded,
including without limitation, each "EMPLOYEE BENEFIT PLAN," within the meaning
of Section 3(3) of ERISA which is or has been maintained, contributed to, or
required to be contributed to, by GNN Affiliate for the benefit of any Employee,
or with respect to which GNN or any Affiliate has or may have any Liability or
obligation;
(iii) "COBRA" shall mean the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended;
(iv) "DOL" shall mean the Department of Labor;
(v) "EMPLOYEE" shall mean any current or former employee, consultant
or director of GNN or any Affiliate;
(vi) "EMPLOYEE AGREEMENT" shall mean each management, employment,
severance, consulting, relocation, repatriation, expatriation, visas, work
permit or other agreement, Contract or understanding between GNN or any
Affiliate and any Employee or consultant;
(vii) "FMLA" shall mean Family Medical Leave Act of 1993, as amended;
(viii) "INTERNATIONAL EMPLOYEE PLAN" shall mean each GNN Employee
Plan that has been adopted or maintained by GNN or any Affiliate, whether
informally or formally, or with respect to which GNN or any Affiliate will or
may have any Liability, for the benefit of Employees who perform services
outside the United States;
(ix) "IRS" shall mean the Internal Revenue Service;
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(x) "MULTIEMPLOYER PLAN" shall mean any "PENSION PLAN" (as defined
below) which is a "multiemployer plan," as defined in Section 3(37) of ERISA;
(xi) "PBGC" shall mean the Pension Benefit Guaranty Corporation; and
(xii) "PENSION PLAN" shall mean each GNN Employee Plan which is an
"EMPLOYEE PENSION BENEFIT PLAN," within the meaning of Section 3(2) of ERISA.
(b) Disclosure Letter. Section 5.21 of the GNN Disclosure Letter
contains an accurate and complete list of each GNN Employee Plan and each
Employee Agreement under each GNN Employee Plan or Employee Agreement. GNN does
not have any plan or commitment to establish any new GNN Employee Plan or
Employee Agreement, to modify any GNN Employee Plan or Employee Agreement
(except to the extent required by Law or to conform any such GNN Employee Plan
or Employee Agreement to the requirements of any applicable Law, in each case as
previously disclosed to Purchase in writing, or as required by this Agreement),
or to enter into any GNN Employee Plan or Employee Agreement, nor does it have
any intention or commitment to do any of the foregoing.
(c) Documents. GNN has provided to WebMD: (i) correct and complete
copies of all documents embodying to each GNN Employee Plan and each Employee
Agreement including (without limitation) all amendments thereto, all related
trust documents and written interpretations thereof; (ii) the most recent annual
actuarial valuations, if any, prepared for each GNN Employee Plan; (iii) the
three (3) most recent annual reports (Form Series 5500 and all schedules and
financial statements attached thereto), if any, required under ERISA or the
Internal Revenue Code in connection with each GNN Employee Plan or related
trust; (iv) if the GNN Employee Plan is funded, the most recent annual and
periodic accounting of GNN Employee Plan assets; (v) the most recent summary
plan description together with the summary(ies) of Material modifications
thereto, if any, required under ERISA with respect to each GNN Employee Plan or
related trust; (vi) all IRS determination, opinion, notification and advisory
letters, and rulings relating to GNN Employee Plans and copies of all
applications and correspondence to or from the IRS or the DOL with respect to
GNN Employee Plan; (vii) all Material written agreements and Contracts relating
to each GNN Employee Plan, including, but not limited to, administrative service
agreements, group annuity Contracts and group insurance Contracts; (viii) all
communications material to any Employee or Employees relating to any GNN
Employee Plan and any proposed Employee Plans, in each case, relating to any
amendments, terminations, establishments, increases or decreases in benefits,
acceleration of payments or vesting schedules or other events which would result
in any Material Liability to the GNN; (ix) all correspondence to or from any
governmental agency relating to any Employee Plan; (x) all COBRA forms and
related notices; (xi) all policies pertaining to fiduciary Liability insurance
covering the fiduciaries for each GNN Employee Plan; (xii) all discrimination
tests for each GNN Employee Plan for the most recent plan year; and (xiii) all
registration statements, annual reports (Form 11-K and all attachments thereto)
and prospectuses prepared in connection with each GNN Employee Plan.
(d) Employee Plan Compliance. (i) GNN has performed in all Material
respects all obligations required to be performed by it under, is not in default
or violation of, and has no knowledge of any default or violation by any other
party to each GNN Employee Plan, and each GNN Employee Plan has been established
and maintained in all Material respects in accordance with its terms and in
compliance with all applicable Laws, including but not limited to ERISA or the
Internal Revenue Code; (ii) each GNN Employee Plan intended to qualify under
Section 401(a) of the Internal Revenue Code and each trust intended to qualify
under Section 501(a) of the Internal Revenue Code has either received a
favorable determination, opinion, notification or advisory letter from the IRS
with respect to each such Plan as to its qualified status under the Internal
Revenue Code, including all amendments to the Internal Revenue Code effected by
the Tax Reform Act of 1986 and subsequent legislation, or has remaining a period
of time under applicable Treasury regulations or IRS pronouncements in which to
apply for such a letter and made any amendments necessary to obtain a favorable
determination as to the qualified status of each such GNN Employee Plan; (iii)
no "PROHIBITED TRANSACTION," within the meaning of Section 4975 of the Internal
Revenue Code or Sections 406 and 407 of ERISA, and not otherwise exempt under
Section 408
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of ERISA, has occurred with respect to any GNN Employee Plan; (iv) there are no
actions, suits or claims pending, or, to the knowledge of GNN, threatened or
reasonable anticipated (other than routine claims for benefits) against any GNN
Employee Plan or against the assets of any GNN Employee Plan; (v) each GNN
Employee Plan can be amended, terminated or otherwise discontinued in accordance
with its terms, without Liability to Purchaser or any of its Affiliates (other
than ordinary administration expenses); (vi) there are no audits, inquiries or
proceedings pending or, to the knowledge of GNN or any Affiliates, threatened by
the IRS or DOL with respect to any GNN Employee Plan; and (vii) neither GNN nor
any Affiliate is subject to any penalty or tax with respect to any GNN Employee
Plan under Section 502(i) of ERISA or Sections 4975 through 4980 of the Internal
Revenue Code.
(e) Pension Plans. Neither GNN nor any Affiliate has ever maintained,
established, sponsored, participated in, or contributed to, any Pension Plan
which is subject to Title IV of ERISA or Section 412 of the Internal Revenue
Code.
(f) Multiemployer Plans. At no time has GNN or any Affiliate contributed
to or been obligated to contribute to any Multiemployer Plan.
(g) No Post-Employment Obligations. No GNN Employee Plan provides, or
has any Liability to provide, retiree life insurance, retiree health or other
retiree employee welfare benefits to any person for any reason, except as may be
required by COBRA or other applicable Law, and GNN has never represented,
promised or contracted (whether in oral or written form) to any Employee (either
individually or to Employees as a group) or any other person that such
Employee(s) or other person would be provided with retiree life insurance,
retiree health or other retiree employee welfare benefit, except to the extent
required by Law.
(h) COBRA, etc. Neither GNN nor any Affiliate has, prior to the
Effective Time, and in any Material respect, violated any of the health care
continuation requirements of COBRA, the requirements of FMLA, the requirements
of the Women's Health and Cancer Rights Act, the requirements of the Newborns'
and Mothers' Health Protection Act of 1996, or any similar provisions of state
Law applicable to its Employees.
(i) Effect of Transaction. The execution of this Agreement and the
consummation of the transactions contemplated hereby will not (either alone or
upon the occurrence of any additional or subsequent events) constitute an event
under any GNN Employee Plan, Employee Agreement, trust or loan that will or may
result in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any Employee (except as waived as
set forth in Section 3.6(b)).
(j) Employment Matters. The GNN: (i) is in compliance in all Material
respects with all applicable Laws respecting employment, employment practices,
terms and conditions of employment and wages and hours, in each case, with
respect to Employees; (ii) has withheld and reported all amounts required by Law
or by agreement to be withheld and reported with respect to wages, salaries and
other payments to Employees; (iii) is not liable for any arrears of wage or any
taxes or any penalty for failure to comply with any of the foregoing; and (iv)
is not liable for any Material payment to any trust or other fund or to any
Regulatory Authority, with respect to unemployment compensation benefits, social
security or there benefits or obligations for Employees (other than routine
payments to be made in the normal course of business and consistent with past
practice). There are no pending, threatened or reasonable anticipated claims or
actions against GNN under any workers' compensation policy or long-term
disability policy. To GNN's knowledge, no employee of GNN has violated any
employment contract, nondisclosure agreement or noncompetition agreement by
which such employee is bound due to such employee being employed by GNN and
disclosing to GNN or using trade secrets or proprietary information of any other
person or entity.
(k) Labor. No work stoppage or labor strike against GNN is pending,
threatened or reasonably anticipated. GNN does not know of any activities or
proceedings of any labor union to organize any employees. There are no actions,
suits, claims, labor disputes or grievances pending, or, to the knowledge
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of GNN, threatened or reasonable anticipated relating to any labor, safety or
discrimination matters involving any Employee, including, without limitation,
charges of unfair labor practices or discrimination complaints, which, if
adversely determined, would individually or in the aggregate, result in any
Material Liability to GNN. GNN has not engaged in any unfair labor practices
within the meaning of the National Labor Relations Act. GNN is not presently,
nor has it been in the past, a party to, or bound by, any collective bargaining
agreement or union contact with respect to Employees and no collective
bargaining agreement is being negotiated by GNN.
(l) International Employee Plan. GNN has never established, maintained
or administered any International Employee Plan.
5.22 Remuneration. GNN has provided WebMD with a complete and accurate
schedule of the direct compensation (including wages, salaries and actual or
anticipated bonuses), plus a description of other annual benefits not made
available to the other employees generally, to be paid in the current fiscal
year to (i) all of the officers and directors of GNN; and (ii) all of the
employees of GNN who received or will be receiving in excess of $50,000
(excluding commission and bonus compensation) during such year. No unpaid
salary, other than for the immediately preceding pay period and other than
pursuant to the existing deferred compensation plans of GNN is now payable to
any of such officers, directors or employees.
5.23 Interested Transactions.
(a) Except for or in connection with reasonable expenses or advancement
of expenses incurred in the ordinary course of business for relocation of
employees, GNN is not currently a party to any Contract, loan or other
transaction with any of the following persons, or in which any of the following
persons have any direct or indirect interest (other than as a stockholder or
employee of GNN):
(i) Any Affiliate, director, officer, employee of GNN or stockholder
of GNN;
(ii) To the knowledge of GNN, any of the spouses, parents, siblings,
children, aunts, uncles, nieces, nephews, in-laws and grandparents of any of the
Persons described in clause (i); or
(iii) Any Person in which any of the Persons described in clauses (i)
or (ii) has a beneficial interest (other than in a corporation whose shares are
publicly traded and in which such Persons own beneficially in the aggregate no
more than 5% of the outstanding equity interest).
(b) None of the stockholders of GNN is an employee, consultant, partner,
principal, director or Affiliate of any business entity which is engaged in a
business which competes with or is similar to the business of GNN.
5.24 Subscription Agreements. As of the date hereof, GNN has executed
subscription agreements with 7,400 physicians and has installed the GNN Software
for, and is providing the GNN product to, 2,100 physicians. Except as a result
of the transactions contemplated herein, GNN has no knowledge of any facts or
circumstances which are reasonably likely to result in a reduction in the number
of subscription agreements to which GNN is a party following the consummation of
the transactions contemplated herein. The forms of subscription agreements have
been provided to WebMD and each physician subscriber has entered into an
agreement in substantially the form of the agreement provided to WebMD. Each of
the subscription agreements is valid and enforceable in accordance with its
terms, except as enforceability may be limited by bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally.
5.25 Statements True and Correct.
(a) No certificate, schedule, or other exhibit furnished or to be
furnished by GNN to WebMD or Newco pursuant to the terms of this Agreement
(including the GNN Disclosure Letter) contains or will contain any untrue
statement of Material fact or will omit to state a Material fact necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
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(b) If an Information Statement is distributed for the Stockholder
Meeting as described under Section 10.1 hereof, (i) none of the information to
be supplied by GNN or on behalf of GNN for inclusion or incorporation by
reference in the Information Statement to be mailed to GNN's Stockholders in
connection with the Stockholders Meeting will, when such documents are first
mailed to the Stockholders of GNN, at the time of the Stockholders Meeting or at
the Effective Time, contain any untrue statement of a Material fact or omit to
state any Material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading, and (ii) as to matters respecting it, the Information
Statement will comply as to form in all Material respects with the provisions of
the 1933 Act and the 1934 Act, as applicable, and the rules and regulations
promulgated by the SEC thereunder. If at any time prior to the Effective Time
any event relating to GNN or any of its respective Affiliates, officers or
directors should be discovered by GNN which should be set forth in an amendment
or a supplement to the Information Statement, GNN will promptly inform
Purchaser. Notwithstanding the foregoing, GNN makes no representation or
warranty with respect to any information supplied by any other Person that is
contained in the Information Statement.
(c) If a Registration Statement is filed in connection with the Merger
and a Proxy Statement/ Prospectus is distributed for the Stockholders Meeting as
described under Section 10.1 hereof, then:
None of the information to be supplied by or on behalf of GNN for
inclusion in the Registration Statement to be filed by Purchaser with the SEC
will, at the time such Registration Statement becomes effective under the 1933
Act, contain any untrue statement of a Material fact or omit to state any
Material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. None of the information to be supplied by GNN or on behalf of
GNN for inclusion or incorporation by reference in the Proxy
Statement/Prospectus to be mailed to GNN's Stockholders in connection with the
Stockholders Meeting will, at the time such documents are filed, when such
documents are first mailed to the Stockholders of GNN, at the time of the
Stockholders Meeting or at the Effective Time, contain any untrue statement of a
Material fact or omit to state any Material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. As to matters
respecting GNN, the Registration Statement and Proxy Statement/Prospectus will
comply as to form in all Material respects with the provisions of the 1933 Act
and the 1934 Act, as applicable, and the rules and regulations promulgated by
the SEC thereunder. Notwithstanding the foregoing, GNN makes no representation
or warranty with respect to any information supplied by Purchaser or Merger
Corp. that is contained in the Registration Statement.
5.26 Tax Treatment. Neither GNN nor, to the knowledge of GNN, any
Affiliate of GNN has taken any action or has any knowledge of any fact or
circumstance that is reasonably likely to prevent the transactions contemplated
hereby, including the Merger, from qualifying as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code.
5.27 State Takeover Laws. GNN has taken all necessary action to exempt the
transactions contemplated by this Agreement from any applicable state takeover
Law including Section 203 of the GCLSD.
5.28 Restrictions of Business Activities. There is no Contract or order
binding upon GNN or to which GNN is a party (i) which has or could reasonably be
expected to have the effect of prohibiting or Materially impairing a current
business practice of GNN, any acquisition by GNN of any Assets Material to GNN
or the conduct of business by GNN as currently conducted or (ii) that contains
any covenants not to compete or otherwise limits GNN's right in any way to
engage in any line of business, or (iii) that is an exclusive Contract or
otherwise restricts GNN's suppliers of content for GNN products or Assets or
Intellectual Property (including but not limited to exclusive distribution
agreements).
5.29 Fairness Opinion. GNN's Board of Directors has received an oral
opinion from H&Q, dated as of June 28, 1999, to the effect that as of June 28,
1999, the Purchaser Stock Exchange Ratio is fair to the Stockholders from a
financial point of view, a written copy of which will be delivered to Newco and
WebMD promptly after receipt by GNN.
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5.30 GNN Disclosure Letter. Matters disclosed on each Section of the GNN
Disclosure Letter shall be deemed disclosed only for purposes of the matters to
be disclosed in such Section and shall not be deemed to be disclosed for any
other purpose.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF WEBMD
Except as set forth in Sections to the letter delivered to GNN on or prior
to the date of this Agreement (the "WEBMD DISCLOSURE LETTER") as specified below
WebMD hereby represents and warrants to GNN as follows as of the date hereof and
the Closing Date:
6.1 Organization, Standing, and Power. Each of WebMD and its Subsidiaries
is a corporation duly organized, validly existing, and in good standing under
the Laws of the state of its incorporation, and has the power and authority to
carry on its business as it has been and is now being conducted and to own,
lease and operate its Assets. Except as set forth in Section 6.1 of the WebMD
Disclosure Letter, each of WebMD and its Subsidiaries is duly qualified or
licensed to transact business as a foreign corporation and is in good standing
in all jurisdictions where the character of its Assets or the nature or conduct
of its business requires it to be so qualified or licensed, except for such
jurisdictions in which the failure to be so qualified or licensed is not
reasonably likely to have, individually or in the aggregate, a Material Adverse
Effect on WebMD. Copies of the articles or certificate of incorporation and all
amendments thereto of WebMD and its Subsidiaries and the bylaws, as amended, of
WebMD and its Subsidiaries and copies of the corporate minutes (or resolutions
adopted by the shareholders or Board of Directors and all committees thereof) of
WebMD and its Subsidiaries, which have been made available to GNN for review,
are true and complete, in all Material respects, as in effect on the date of
this Agreement, and accurately reflect all proceedings of the shareholders and
Board of Directors (and all committees thereof) of WebMD and its Subsidiaries.
The stock record books of WebMD and its Subsidiaries, which have been made
available to GNN for review, contain true and complete records of the stock
ownership of WebMD and all prior transfers of the shares of its capital stock.
6.2 Authorization of Agreement; No Breach. The execution, delivery and
performance of this Agreement has been duly authorized by all necessary
corporate action of WebMD. This Agreement constitutes, and all agreements and
other instruments and documents to be executed and delivered by WebMD pursuant
to this Agreement will constitute, legal, valid and binding obligations of WebMD
enforceable against WebMD in accordance with their respective terms, except to
the extent such enforceability is subject to (i) Laws of general application
relating to bankruptcy, insolvency, moratorium and the relief of debtors and
(ii) the availability of specific performance, injunctive relief or other
equitable remedies. Except as set forth in Section 6.2 of the WebMD Disclosure
Letter, the execution, delivery and performance of this Agreement and the
agreements and other documents and instruments to be executed and delivered by
WebMD pursuant to this Agreement and the consummation of the transactions
contemplated hereby and thereby will not, subject to obtaining the consents
identified or contemplated herein (including without limitation all filings or
consents under the HSR Act, the Securities Law and state securities Laws, and
the rules and regulations of the NASD and the Nasdaq Stock Market with respect
to the securities issued under the Registration Statement), (i) violate or
result in a breach of or Default under the articles or certificate of
incorporation or bylaws of WebMD or any of its Subsidiaries or any other
Material Contract to which WebMD or any of its Subsidiaries is a party or is
bound; (ii) to the knowledge of WebMD and its Subsidiaries, violate any Law,
Order, administrative decision or award of any court, arbitrator, mediator,
tribunal or Regulatory Authority applicable to or binding upon WebMD or its
Subsidiaries or upon their respective securities, Assets or business; or (iii)
create a Material Lien upon the securities, Assets or business of WebMD or any
of its Subsidiaries.
6.3 Capital Stock. As of the date hereof, the authorized capital stock of
WebMD consists of (a) 75,000,000 shares designated Common Stock (without
designation as to series), of which 2,455,334 shares are issued and outstanding
and none of which are issued and held as treasury shares, (b) 3,000,000 shares
designated Common Stock Series B, of which 1,400,000 are issued and outstanding
and none of
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which are issued and held as treasury shares, (c) 1,500,000 shares designated
Common Stock Series C, of which 1,500,000 are issued and outstanding and none of
which are issued and held as treasury shares, (d) 15,000,000 shares designated
Common Stock Series D, of which 5,899,796 are issued and outstanding and none of
which are issued and held as treasury shares, (e) 2,500,000 shares designated
Common Stock Series E, of which 2,100,000 are issued and outstanding and none of
which are issued and held as treasury shares; and (f) 10,000,000 shares
designated as Preferred Stock, of which (i) 1,600,000 shares are designated
Series A Preferred Stock, of which 1,341,000 are issued and outstanding and none
of which are issued and held as treasury shares, (ii) 3,400,000 shares are
designated Series B Preferred Stock, of which 3,042,135 are issued and
outstanding and none of which are issued and held as treasury shares, (iii)
2,000,000 shares are designated Series C Preferred Stock, of which 1,008,750 are
issued and outstanding and none of which are issued and held as treasury shares,
(iv) 200,000 shares are designated Series D Preferred Stock, of which 200,000
are issued and outstanding and none of which are issued and held as treasury
shares, (v) 792,000 shares are designated Series E Preferred Stock, of which
456,896 are issued and outstanding and none of which are issued and held as
treasury shares, and (vi) 1,180,000 shares are designated Series F Preferred
Stock, of which 816,975 are issued and outstanding and none of which are issued
and held as treasury shares. WebMD has no other capital stock authorized, issued
or outstanding. All of such shares are duly and validly issued and outstanding,
and are fully paid and non-assessable and were issued pursuant to an exemption
from registration under the 1933 Act and all applicable state securities Laws.
Except as contemplated by this Agreement, there are no outstanding warrants,
options, rights (including outstanding rights to demand registration or to sell
in connection with a registration by WebMD under the 1933 Act), calls or other
commitments of any nature relating to WebMD capital stock to which WebMD is a
party, and there are no outstanding securities of WebMD convertible into or
exchangeable for shares of WebMD Common Stock or any other capital stock of
WebMD. All of such WebMD warrants, options, rights calls or other commitments
were issued or granted pursuant to a valid exemption from registration under the
1933 Act and all applicable state securities Laws. Except in connection with the
Healtheon/WebMD Agreement and the transactions contemplated therein, WebMD and
its Subsidiaries have no knowledge of any voting agreements or voting trusts
between or among any Person or Persons relating to WebMD, WebMD capital stock or
any of its Subsidiaries. WebMD is not obligated to issue or repurchase any
shares of its capital stock for any purpose, and, to the knowledge of WebMD, no
Person has entered into any Contract or option or any right or privilege
(whether preemptive or contractual) capable of becoming a Contract or option for
the purchase, subscription or issuance of any unissued shares, or other
securities of WebMD.
6.4 WebMD Subsidiaries. Section 6.4 of the WebMD Disclosure Letter
contains a true and correct list of each Subsidiary of WebMD. All of the
outstanding shares of capital stock of each such Subsidiary are duly and validly
issued and outstanding, are fully paid and non-assessable, and were issued
pursuant to a valid exemption from registration under the 1933 Act, and all
applicable state securities Laws, and are owned of record and beneficially by
WebMD, free and clear of any and all Liens. No shares of capital stock of any
Subsidiary are reserved for issuance and there are no outstanding options,
warrants, rights, subscriptions, claims of any character, Contracts,
obligations, convertible or exchangeable securities or other commitments,
contingent or otherwise, relating to the capital stock of any Subsidiary,
pursuant to which any Subsidiary is or may become obligated to issue or exchange
any share of capital stock. Except as set forth in Section 6.4 of the WebMD
Disclosure Letter, neither WebMD nor any Subsidiary owns, directly or
indirectly, any capital stock or other equity or ownership or proprietary
interest in any Person.
6.5 Financial Statements.
(a) Section 6.5 of the WebMD Disclosure Letter contains true and correct
copies of the (i) audited consolidated balance sheets of WebMD as of December
31, 1998, 1997 and 1996, and the audited consolidated statements of income and
audited consolidated statements of cash flows for the years ended December 31,
1998, 1997 and 1996 and (ii) the unaudited balance sheet of WebMD as of March
31, 1999 and the unaudited consolidated statements of income and unaudited
statements of cash flows for the three months ended March 31, 1999 and 1998
(collectively, (i) and (ii), the "WEBMD FINANCIAL STATEMENTS").
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(b) The WebMD Financial Statements (i) are in accordance with the books
and records of WebMD and its Subsidiaries, which books and records are complete
and correct in all Material respects and have been maintained in accordance with
reasonable business practices; (ii) present fairly the consolidated financial
condition, Assets and Liabilities of WebMD and its Subsidiaries, taken as a
whole, as of the respective dates indicated and the results of operations and
cash flows for the respective periods indicated; (iii) have been prepared in
accordance with GAAP consistently applied throughout the periods involved,
except for the omission of notes to interim unaudited consolidated statements
and except that interim unaudited statements are subject to normal year end
adjustments which will not, individually or in the aggregate, be Material; and
(iv) reflect adequate reserves for all known Material Liabilities and reasonably
anticipated losses required to be recorded under GAAP.
6.6 Absence of Undisclosed Liabilities. Except as disclosed in Section 6.6
of the WebMD Disclosure Letter or on the March 31, 1999 WebMD Financial
Statements, as of the date hereof neither WebMD nor any of its Subsidiaries has
any Undisclosed Liabilities, except for unpaid liabilities and obligations
incurred since March 31, 1999, in the ordinary course of business or which are
not, in the aggregate, Material to WebMD and its Subsidiaries, taken as a whole.
6.7 Absence of Certain Changes or Events. Since March 31, 1999, except as
disclosed on Section 6.7 of the WebMD Disclosure Letter, there have been no
events, changes or occurrences (other than events or conditions affecting the
economy generally) which have had, or are reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on WebMD.
6.8 Tax Matters.
(a) WebMD has timely filed all federal, state, local and foreign Returns
relating to Taxes required to be filed by WebMD with any Tax authority, except
such Returns which are not Material to WebMD. WebMD has paid all Taxes shown to
be due on such Returns.
(b) WebMD as of the Effective Time will have withheld with respect to
its employees all federal and state income Taxes, Taxes pursuant to FICA, Taxes
pursuant to FUTA and other Taxes required to be withheld.
(c) WebMD has not been delinquent in the payment of any Tax nor is there
any Tax deficiency outstanding, proposed or assessed against WebMD, nor has
WebMD executed any unexpired waiver of any statute of limitations on or
extending the period for the assessment or collection of any Tax.
(d) No audit or other examination of any Return of WebMD by any Tax
authority is presently in progress, nor has WebMD been notified of any request
for such an audit or other examination.
(e) No adjustment relating to any Returns filed by WebMD has been
proposed in writing formally or informally by any Tax authority to WebMD or any
representative thereof.
(f) WebMD does not have any Liability for unpaid Taxes which has not
been accrued for or reserved on the WebMD Financial Statements, whether asserted
or unasserted, contingent or otherwise, which is Material to WebMD, other than
any Liability for unpaid Taxes that may have accrued since the date of the WebMD
Financial Statements in connection with the operation of the business of WebMD
in the ordinary course.
(g) There is no Contract, agreement, plan, arrangement or other Contract
to which WebMD is a party as of the date of this Agreement, including but not
limited to the provisions of this Agreement, covering any employee or former
employee of WebMD that, individually or collectively, could give rise to the
payment of any amount that would not be deductible pursuant to Sections 280G,
404 or 162(m) of the Internal Revenue Code.
(h) WebMD has not filed any consent agreement under Section 341(f) of
the Internal Revenue Code or agreed to have Section 341(f)(2) of the Internal
Revenue Code apply to any disposition of a subsection (f) asset (as defined in
Section 341(f)(4) of the Internal Revenue Code) owned by WebMD.
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(i) WebMD is not party to nor has any obligation under any tax-sharing,
tax indemnity or tax allocation agreement, arrangement or other Contract.
(j) Except as may be required as a result of the Merger, the WebMD has
not been and will not be required to include any adjustment in Taxable income
for any Tax period (or portion thereof) pursuant to Section 481 or Section 253A
of the Internal Revenue Code or any comparable provision under state or foreign
Tax Laws as a result of transactions, events or accounting methods employed
prior to the Closing.
(k) None of WebMD's Assets are tax exempt use property within the
meaning of Section 168(h) of the Internal Revenue Code.
(l) WebMD is not subject to (i) any foreign Tax holidays, (ii) any
intercompany transfer pricing agreements, or other arrangements that have been
established by WebMD with any Tax authority and (iii) any expatriate programs or
policies affecting WebMD.
(m) WebMD is not, and has not been at any time, a "United States real
property holding corporation" within the meaning of Section 897(c)(2) of the
Internal Revenue Code.
6.9 Intellectual Property.
(a) Section 6.9 of the WebMD Disclosure Letter contains a true and
complete list of all Registered Intellectual Property owned by or exclusively
licensed to WebMD on the date hereof, and, with respect to Registered
Intellectual Property owned by WebMD, specifies the jurisdictions in which each
such item of Registered Intellectual Property has been issued or registered or
in which an application for issuance or registration has been filed, including
the respective registration or application numbers. WebMD owns good and
exclusive title to or has licensed (sufficient for the conduct of its business
as currently conducted and as proposed to be conducted), each Material item of
Intellectual Property used by WebMD free and clear of any Lien (excluding
licenses and related restrictions). WebMD is the exclusive owner of, and has
good title (free and clear of all Liens) to, all (i) trademarks and trade names
used in connection with the operation or conduct of the business of WebMD,
including the sale of products or the provisions of services, and (ii)
copyrighted works that are WebMD products or which WebMD otherwise purports to
own. Neither WebMD or, to the knowledge of WebMD, its predecessors has misused
or infringed on the Intellectual Property of others, and none of the
Intellectual Property as used in the business conducted by WebMD infringes or
will infringe upon or otherwise violates or will violate the Intellectual
Property of others or constitutes or will constitute unfair competition or trade
practices under any applicable Law, nor has any Person asserted a claim of such
infringement or violation of Intellectual Property or unfair competition or
trade practices against WebMD. WebMD has not transferred ownership of, licensed
or sublicensed its rights in any Intellectual Property, except non-exclusive
licenses in the ordinary course of business.
(b) To the extent that any Material Intellectual Property has been
developed or created by a third party for WebMD, WebMD has a written agreement
with such third party with respect thereto and WebMD thereby either (i) has
obtained ownership of, and is the exclusive owner of; or (ii) has obtained a
license (sufficient for the conduct of its business as currently conducted and
as proposed to be conducted) to all such third party's Intellectual Property in
such work, material or invention by operation of law or by valid assignment, to
the fullest extent it is legally possible to do so.
(c) WebMD is listed in the records of the appropriate United States,
state or foreign agency as the sole owner of record for each application and
registration of Registered Intellectual Property listed in Section 6.9 of the
WebMD Disclosure Letter. Each Material item of Registered Intellectual Property
owned by WebMD is valid and subsisting, all necessary registration, maintenance
and renewal fees currently due in connection with such registration, maintenance
and renewal fees currently due in connection with such Registered Intellectual
Property have been made and all necessary documents, recordations and
certificates in connection with such Registered Intellectual Property have been
filed with the relevant patent, copyright, trademark or other Regulatory
Authorities for the purposes of maintaining such Registered Intellectual
Property in the jurisdictions listed in Section 6.9 of the WebMD Disclosure
Letter. There is no pending written threat received by WebMD of, or to the
knowledge of WebMD, any
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verbal threat of opposition, interference or cancellation in, a proceeding
before any court or registration authority in any jurisdiction against the
applications or registrations listed in Section 6.9 of the WebMD Disclosure
Letter, or, to the knowledge of WebMD, against any Intellectual Property
exclusively licensed to WebMD.
(d) There are no settlements, forbearances to sue, consents, judgments,
or other Orders of which WebMD is a party or of which it is aware and which (i)
restrict WebMD's rights to use any Intellectual Property owned by or licensed to
WebMD, (ii) restrict WebMD's business in order to accommodate a third party's
intellectual property rights or (iii) permit third parties to use any
Intellectual Property owned or controlled by WebMD. To the knowledge of WebMD,
no Person has infringed or misappropriated or is infringing or misappropriating
any Intellectual Property used by WebMD in the conduct of its business.
(e) The consummation of the transactions contemplated hereby will not
result in the Material loss or impairment of WebMD's right to own or use any
Intellectual Property or result in WebMD's granting to any third party any right
to or with respect to any Material Intellectual Property, nor will require the
consent of any Regulatory Authority or other third party in respect of any
Intellectual Property.
6.10 Insurance. All of the Assets and business of WebMD and its
Subsidiaries of an insurable nature and of a character usually insured by
companies in similar businesses are insured in such amounts and against such
losses, casualties or risks as is usual in such companies and for such Assets
and business. There is no Material claim by WebMD or any of its Subsidiaries
pending under any Material insurance policies of WebMD and its Subsidiaries as
to which coverage has been questioned, denied or disputed by the underwriters of
such policies.
6.11 Compliance with Laws.
(a) Each of WebMD and its Subsidiaries has in effect all Material
Permits necessary for it to own, lease or operate its Assets and to carry on its
business as now conducted. Except as disclosed in Section 6.11 of the WebMD
Disclosure Letter, neither WebMD nor any of its Subsidiaries is in violation in
any Material respect of any Laws, Orders or Permits applicable to its business
or employees conducting its business. No notice or warning from any Regulatory
Authority with respect to any failure or alleged failure of WebMD or any of its
Subsidiaries to comply with any Law has been received by WebMD, nor, to the
knowledge of WebMD, is any such notice or warning proposed or threatened.
(b) Except as set forth in Section 6.11 of the WebMD Disclosure Letter,
no consent or approval of, prior filing with or notice to, or other action by,
any Regulatory Authority or any other third party is required in connection with
the execution and delivery of this Agreement or any assignment, agreement or
other instrument to be executed and delivered pursuant to this Agreement by
WebMD or the consummation of the transactions provided for herein or therein
except for such consents and approvals that have been obtained and filings,
notices and other actions that have been taken or made, the filing of the
Certificate of Merger with the State of Delaware, HSR Act filings as
contemplated under Section 10.2 and under Securities Laws and state securities
Laws.
6.12 Legal Proceedings. There are no outstanding Orders or administrative
decisions to which WebMD or any of its Subsidiaries is subject, and, except as
disclosed in Section 6.12 of the WebMD Disclosure Letter, there is no Litigation
pending or, to WebMD's knowledge, threatened against or relating to WebMD or any
of its Subsidiaries or their respective Assets or businesses which could
reasonably be expected to be, individually or in the aggregate, Material to
WebMD and its Subsidiaries taken as a whole. Except as disclosed in Section 6.12
of the WebMD Disclosure Letter, neither WebMD nor any of its Subsidiaries have
been advised by any attorney representing any such entity that there are any
"LOSS CONTINGENCIES" as defined in FASB 5, which would be required by FASB 5 to
be disclosed or accrued in the WebMD Financial Statements and which are not so
disclosed or accrued.
6.13 Statements True and Correct. No certificate, schedule or other
exhibit furnished or to be furnished by WebMD or any Affiliate thereof to GNN
pursuant to the terms of this Agreement (including the WebMD Disclosure Letter)
contains or will contain any untrue statement of Material fact or will omit
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to state a Material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
6.14 Tax Matters. Neither WebMD nor, to the knowledge of WebMD, any
Affiliate of WebMD has taken any action or has any knowledge of any fact or
circumstance that is reasonably likely to prevent the transactions contemplated
hereby, including the Merger, from qualifying as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code.
6.15 WebMD Disclosure Letter. Matters disclosed on each Section of the
WebMD Disclosure Letter shall be deemed disclosed only for purposes of the
matters to be disclosed in such Section and shall not be deemed to be disclosed
for any other purpose.
ARTICLE 7
REPRESENTATIONS AND WARRANTIES OF NEWCO
Except as otherwise provided in Newco's Registration Statement
(Registration No. 333-80863) on Form S-4 as filed on June 17, 1999, and all
amendments and supplements thereto including any amendment or new registration
statement in which Healtheon is the registrant (collectively referred to herein
as "NEWCO'S REGISTRATION STATEMENT"), Newco hereby represents and warrants to
GNN as follows as of the date hereof and (if Newco is the Purchaser) the Closing
Date:
7.1 Organization, Standing, and Power. Newco is a corporation duly
organized, validly existing, and in good standing under the Laws of the State of
Delaware, and has the power and authority to carry on its business as it has
been and is now being conducted and to own, lease and operate its Assets. Each
of Newco and its Subsidiaries is duly qualified or licensed to transact business
as a foreign corporation and is in good standing in all jurisdictions where the
character of its Assets or the nature or conduct of its business requires it to
be so qualified or licensed, except for such jurisdictions in which the failure
to be so qualified or licensed is not reasonably likely to have, individually or
in the aggregate, a Material Adverse Effect on Newco. Newco was formed solely
for the purpose of engaging in the transactions contemplated by the
Healtheon/WebMD Agreement. As of the date hereof, Newco has not engaged in any
business activity of any type whatsoever except in connection with its
organization and the transactions contemplated by or related to the
Healtheon/WebMD Agreement and this Agreement.
7.2 Authorization of Agreement; No Breach. The execution, delivery and
performance of this Agreement has been duly authorized by all necessary
corporate action of Newco. This Agreement constitutes, and all agreements and
other instruments and documents to be executed and delivered by Newco pursuant
to this Agreement will constitute, legal, valid and binding obligations of Newco
enforceable against Newco in accordance with their respective terms, except to
the extent such enforceability is subject to (i) Laws of general application
relating to bankruptcy, insolvency, moratorium and the relief of debtors and
(ii) the availability of specific performance, injunctive relief or other
equitable remedies. Except in such case, individually or in the aggregate, that
will not result in a Material Adverse Effect on Newco, the execution, delivery
and performance of this Agreement and the agreements and other documents and
instruments to be executed and delivered by Newco pursuant to this Agreement and
the consummation of the transactions contemplated hereby and thereby will not,
subject to obtaining the consents identified or contemplated herein (including
without limitation all filings or consents under the HSR Act, the Securities Law
and state securities Laws, and the rules and regulations of the NASD and the
Nasdaq Stock Market with respect to the securities issued under the Registration
Statement), (i) violate or result in a breach of or Default under the
certificate of incorporation or bylaws of Newco or any of its Subsidiaries or
any other Material Contract to which Newco or any of its Subsidiaries is a party
or is bound; (ii) to the knowledge of Newco and its Subsidiaries, violate any
Law, Order, administrative decision or award of any court, arbitrator, mediator,
tribunal or Regulatory Authority applicable to or binding upon Newco or its
Subsidiaries or upon their respective securities, Assets or business; or (iii)
create a Material Lien upon the securities, Assets or business of Newco or any
of its Subsidiaries.
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7.3 Capital Stock. As of June 15, 1999, the authorized capital stock of
Newco consisted of 600,000,000 shares designated Common Stock (without
designation as to series), none of which were then issued and outstanding or
held as treasury shares, and 10,000,000 shares designated as Preferred Stock,
none of which were then issued and outstanding or held as treasury shares.
7.4 Healtheon SEC Filings; Financial Statements.
(a) Healtheon has filed all forms, reports and documents required to be
filed by Healtheon with the SEC since January 1, 1999. All such required forms,
reports and documents filed with the SEC as of the date of this Agreement are
referred to herein as the "HEALTHEON SEC REPORTS"). As of their respective
dates, (or, if amended, as of the respective dates of such amendments),
Healtheon SEC Reports (i) were prepared in accordance and complied as to form in
all Material respects with the requirements of the 1933 Act, or the 1934 Act, as
the case may be, and the rules and regulations of the SEC thereunder applicable
to such Healtheon SEC Reports and (ii) did not at the time they were filed
contain any untrue statement of a Material fact or omit to state a Material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
(b) Each of the consolidated financial statements (including, in each
case, any related notes thereto) contained in the Healtheon SEC Reports (the
"Healtheon Financials"), (i) complied as to form in all Material respects with
the published rules and regulations of the SEC with respect thereto; (ii) was
prepared in accordance with GAAP applied on a consistent basis throughout the
periods involved (except as may be indicated in the notes thereto or, in the
case of unaudited interim financial statements, as may be permitted by the SEC
on Form 10-Q under the 1934 Act) and (iii) fairly presented the consolidated
financial position of Healtheon and its Subsidiaries as at the respective dates
thereof and the consolidated results of Healtheon operations and cash flows for
the periods indicated, except that the unaudited interim financial statements
may not contain footnotes and were or are subject to normal and recurring
year-end adjustments.
7.5 Tax Matters. Neither Newco nor, to the knowledge of Newco, any
Affiliate of Newco has taken any action or has any knowledge of any fact or
circumstance that is reasonably likely to prevent the transactions contemplated
hereby, including the Merger, from qualifying as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code.
ARTICLE 8
REPRESENTATIONS AND WARRANTIES OF PURCHASER AND MERGER CORP.
Purchaser and Merger Corp. hereby represent and warrant to GNN as follows
as of the date hereof and as of the Closing Date:
8.1 Purchaser Common Stock. The shares of Purchaser Common Stock to be
issued in accordance with the terms and provisions of this Agreement will, when
so issued, be duly authorized, validly issued, fully paid and non-assessable.
8.2 Meeting Materials; Registration Statement
(a) If an Information Statement is distributed for the Stockholders
Meeting as described under Section 10.1 hereof, (i) none of the information to
be supplied by or on behalf of Purchaser for inclusion or incorporation by
reference in the Information Statement to be mailed to GNN's Stockholders in
connection with the Stockholders Meeting will, when such documents are first
mailed to the Stockholders of GNN, at the time of the Stockholders Meeting or at
the Effective Time, contain any untrue statement of a Material fact or omit to
state any Material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading, and (ii) as to matters respecting it, the Information
Statement will comply as to form in all Material respects with the provisions of
the 1933 Act and the 1934 Act, as applicable, and the rules and regulations
promulgated by the SEC thereunder. If at any time prior to the Effective Time
any event relating to
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<PAGE> 619
Purchaser, Merger Corp. or any of their respective Affiliates, officers or
directors should be discovered by Purchaser or Merger Corp. which should be set
forth in an amendment or a supplement to the Information Statement, Purchaser or
Merger Corp. will promptly inform GNN. Notwithstanding the foregoing, Purchaser
and Merger Corp. make no representation or warranty with respect to any
information supplied by GNN that is contained in the Information Statement.
(b) If a Registration Statement is filed in connection with the Merger
and a Proxy Statement/ Prospectus is distributed for the Stockholders Meeting as
described under Section 10.1 hereof, then:
None of the information to be supplied by or on behalf of Purchaser
for inclusion in the Registration Statement to be filed by Purchaser with the
SEC will, at the time such Registration Statement becomes effective under the
1933 Act, contain any untrue statement of a Material fact or omit to state any
Material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. None of the information to be supplied by or on behalf of
Purchaser for inclusion or incorporation by reference in the Proxy
Statement/Prospectus to be mailed to GNN's Stockholders in connection with the
Stockholders Meeting will, at the time such documents are filed, when such
documents are first mailed to the Stockholders of GNN, at the time of the
Stockholders Meeting or at the Effective Time, contain any untrue statement of a
Material fact or omit to state any Material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. As to matters
respecting it, the Registration Statement and Proxy Statement/ Prospectus will
comply as to form in all Material respects with the provisions of the 1933 Act
and the 1934 Act, as applicable, and the rules and regulations thereunder.
Notwithstanding the foregoing, Purchaser and Merger Corp. make no representation
or warranty with respect to any information supplied by other Person that is
contained in the Registration Statement.
8.3 Authority of Merger Corp. Merger Corp is a corporation duly organized,
validly existing and in good standing under the Laws of the State of Delaware as
a wholly owned Subsidiary of Purchaser. The authorized capital stock of Merger
Corp. consists of 1,000 shares of Merger Corp. Common Stock, of which 100 shares
are validly issued and outstanding, fully paid and nonassessable and is owned by
Purchaser free and clear of any Lien. Merger Corp. has the corporate power and
authority necessary to execute, deliver and perform its obligations under this
Agreement and to consummate the transactions contemplated hereby. The execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated herein, including the Merger, have been duly and
validly authorized by all necessary corporate action in respect thereof on the
part of Merger Corp. This Agreement represents a legal, valid, and binding
obligation of Merger Corp., enforceable against Merger Corp. in accordance with
its terms.
ARTICLE 9
CONDUCT OF BUSINESS PENDING CONSUMMATION
9.1 Conduct of GNN Business. Except as set forth in Section 9.1 of the GNN
Disclosure Letter, prior to the Closing Date, except with the prior written
consent of WebMD and (if this Agreement has not been terminated as to Newco and
Healtheon under Section 12.3) Healtheon, and except as necessary to effect the
transactions contemplated in this Agreement, GNN shall:
(a) conduct its business in substantially the same manner as presently
being conducted and refrain from entering into any transaction or Contract other
than in the ordinary course of business (or, even if in the ordinary course of
business, not in excess of $50,000 individually), and not make any Material
change in its methods of management, marketing, accounting, or operations;
(b) consult with WebMD and (if this Agreement has not been terminated as
to Newco and Healtheon under Section 12.3) Healtheon prior to undertaking any
new business opportunity outside the ordinary course of business and not
undertake such new business opportunity;
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(c) confer on a regular basis with one or more designated
representatives of WebMD and (if this Agreement has not been terminated as to
Newco and Healtheon under Section 12.3) Healtheon to report Material operational
matters and to report the general status of ongoing business operations;
(d) notify WebMD and (if this Agreement has not been terminated as to
Newco and Healtheon under Section 12.3) Healtheon of any unexpected Material
change in the normal course of business or in the operation of its Assets,
including any Material decrease in the number of subscription agreements to
which GNN is a party, and notify WebMD and (if this Agreement has not been
terminated as to Newco and Healtheon under Section 12.3) Healtheon of any
governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), adjudicatory proceedings or
submissions involving any Material property or other Asset, and GNN agrees to
keep WebMD and Healtheon fully informed of such events and permit WebMD's and
Healtheon's representatives prompt access to all materials prepared in
connection therewith, except for any materials that are protected by the
attorney-client privilege, provided that in such event WebMD and Healtheon are
advised of all material facts concerning such privileged materials;
(e) not enter into any new employment Contract or make any commitment to
employees (including any commitment to pay severance, retirement or other
benefits) except in the ordinary course of business and consistent with past
practice;
(f) not increase the compensation (including fringe benefits) payable or
to become payable to any officer, director, employee, agent or independent
contractor of GNN, except general hourly rate increases and normal merit
increases for employees other than officers made in the ordinary course of
business and consistent with past practice;
(g) except in the ordinary course of business, not (i) create or incur
any indebtedness (or, even if in the ordinary course of business, not in excess
of $50,000 in the aggregate), or (ii) release or create any Liens of any nature
whatsoever;
(h) except in the ordinary course of business and, even if in the
ordinary course of business, then not in an amount to exceed $50,000 in the
aggregate, not make or commit to make any capital expenditure, or enter into any
lease of capital equipment as lessee or lessor;
(i) not enter into, terminate or materially amend any strategic alliance
agreement or sponsorship agreement or any other Contract relating to the
distribution, sale, license or marketing by third parties of GNN's products;
(j) not amend the Certificate of Incorporation, Bylaws or other
governing instruments of GNN;
(k) not make any changes in its accounting methods or practices or
revalue its Assets, except for changes in its tax accounting methods or
practices that may be necessitated by changes in applicable tax Laws;
(l) except for this Agreement, and except for shares of GNN Common Stock
which may be issued upon the exercise or conversion of the Options, GNN
Warrants, GNN Series A Preferred Stock, GNN Series B Preferred Stock or GNN
Series C Preferred Stock, not issue, sell, pledge, encumber, authorize the
issuance of, enter into any Contract to issue, sell, pledge, encumber, or
authorize the issuance of, or otherwise permit to become outstanding, any
additional shares of GNN Capital Stock, or any stock appreciation rights, or any
option, warrant, conversion, or other right to acquire any such stock, or any
security convertible into any such stock, or pay or declare or agree to pay or
declare any dividend or other distribution with respect to any GNN Capital
Stock;
(m) not take any action, or omit to take any action, which would cause
the representations and warranties contained in Article 5 to be untrue or
incorrect in any Material respect;
(n) not make any loan to any Person or increase the aggregate amount of
any loan currently outstanding to any Person, except for usual and customary
advances to employees made in the ordinary course of business;
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(o) not sell any Material Asset or make any Material commitment relating
to its Assets other than in the ordinary course of business or enter into or
terminate any lease of real estate;
(p) not purchase or redeem, or agree to purchase or redeem, any security
of GNN (including any share of GNN Capital Stock);
(q) not waive any stock repurchase rights, accelerate, amend or change
the period of exercisability of options or restricted stock, reprice options
granted under any employee, consultant, director, or other stock plans or
authorized cash payments in exchange for any options granted under any of such
plans;
(r) not grant any severance or termination pay to any officer or
employee except pursuant to written agreements outstanding or policies existing
on the date hereof and as previously disclosed in writing or made available to
WebMD or adopt any new severance plan;
(s) not transfer or license to any Person or otherwise extend, amend or
modify any rights to the Intellectual Property of GNN, or enter into any grants
of future patent rights, other than nonexclusive end-user licenses in the
ordinary course of business consistent with past practice, or enter into any
subscription agreements;
(t) not acquire or agree to acquire or be acquired by merging or
consolidating with, or by purchasing any Person, interest in, portion of or the
capital or the Assets of, or by any other manner, any business or any Person or
division thereof, otherwise acquire or agree to acquire any Assets which are
Material, individually or in the aggregate, to the business of GNN or enter into
any joint ventures, strategic partnerships or alliances;
(u) not Materially modify or amend, or terminate any Material Contract
or agreement to which GNN is a party or waive, release, or assign any Material
rights or claims thereunder, in any such case in a manner Materially adverse to
WebMD or Healtheon; and
(v) not make any agreement or commitment which will result in or cause
to occur a violation of any of the items contained in paragraphs (a) through (u)
above.
9.2 Adverse Changes in Condition. Each Party agrees (i) to give written
notice promptly to the other Parties upon becoming aware of the occurrence or
impending occurrence of any event or circumstance relating to it or any of its
Subsidiaries which (i) is reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on it, or (ii) would cause or constitute a
breach of any of its representations, warranties, agreements or covenants
contained herein, such that the conditions set forth in Sections 11.2(a) and (b)
or Sections 11.3(a) and (b) with respect to such Party (as appropriate) would
not be satisfied as of the time of such breach or as of the time of such
representation or warranty shall have become untrue, and (2) to use its
reasonable efforts to prevent or promptly to remedy the same.
ARTICLE 10
ADDITIONAL AGREEMENTS
10.1 Stockholder Approval; Registration Statement.
(a) Unless this Agreement is terminated in accordance with its terms,
the Board of Directors of GNN shall unanimously recommend to Stockholders the
approval of this Agreement and the Merger and the Board of Directors and
officers of GNN shall use their reasonable best efforts to obtain such
Stockholders' approval. GNN will take all action necessary and in accordance
with GCLSD and its Certificate of Incorporation and Bylaws to convene a meeting
of GNN's Stockholders to consider adoption and approval of this Agreement and
approval of the Merger (the "STOCKHOLDERS MEETING") to be held as promptly as
practicable, in any event, within 45 days after the declaration of the
effectiveness of the Registration Statement (unless WebMD is the Purchaser and
does not make the WebMD Election, in which case it shall be held in any event
within 45 days after the Agreement terminates as to Newco under Section 12.3).
GNN will use its reasonable best efforts to solicit from its Stockholders
proxies in favor of
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the adoption and approval of this Agreement and the approval of the Merger,
including the Escrow Agreement and the election of the Representative as
representative of the Stockholders for purposes of the Escrow Agreement, and
will take all other action necessary or advisable to secure the vote or consent
of its Stockholders required by GCLSD to obtain such approvals and shall ensure
that the Stockholders Meeting is called, noticed, convened, held and conducted,
and that all proxies solicited by GNN in connection with the Stockholders
Meeting are solicited, in compliance with the GCLSD, GNN's Certificate of
Incorporation and Bylaws, and all other applicable legal requirements. GNN's
obligation to call, give notice, convene and hold the GNN Stockholders Meeting
in accordance with this Section 10.1 shall not be limited to or otherwise
affected by the commencement, disclosure, announcement or submission to GNN of
any Acquisition Proposal.
(b) If Newco is the Purchaser, as promptly as possible after the
execution of this Agreement, GNN, Newco and WebMD shall prepare and Newco shall
file with the SEC the Proxy Statement/Prospectus and Newco will prepare and file
with the SEC the Registration Statement in which the Proxy Statement/Prospectus
will be included as a prospectus; provided that GNN acknowledges and agrees that
Newco's obligations with respect to the Registration Statement and the Proxy
Statement/Prospectus herein may be satisfied by amending Newco's Registration
Statement to include the Shares issued in connection with the Merger. Each of
the Parties hereto shall provide promptly to the other such information
concerning its business and financial statements and affairs as, in the
reasonable judgment of the providing Party or its counsel, may be required or
appropriate for inclusion in the Proxy Statement/Prospectus and the Registration
Statement or in any amendments or supplements thereto, and to cause its counsel
and auditors to cooperate with the others' counsel and auditors in preparation
of the Proxy Statement/Prospectus and the Registration Statement. Each of the
Parties hereto will respond to any comments to the SEC, will use its respective
commercially reasonable efforts to have the Registration Statement declared
effective under the 1933 Act as promptly as practicable after such filing and
GNN will cause the Proxy Statement/Prospectus to be mailed to GNN's Stockholders
at the earliest practicable time after the Registration Statement is declared
effective by the SEC. Each of the Parties hereto will cause all documents that
it is responsible for filing with the SEC to comply in all Material respects
with all applicable requirements of Law and the rules and regulations
promulgated thereunder. Whenever any event occurs which is required to be set
forth in an amendment or supplement to the Proxy Statement/Prospectus or the
Registration Statement, the Parties hereto, as the case may be, will promptly
inform the other Parties hereto of such occurrence and cooperate in filing with
the SEC or its staff or any other governmental officials, and/or mailing to
GNN's Stockholders, such amendment or supplement.
(c) In connection with the Stockholders Meeting, if WebMD does not make
the WebMD Election as described in Section 10.15, (i) WebMD and GNN shall
prepare an Information Statement and mail such Information Statement to GNN's
Stockholders a reasonable period prior to such Stockholders Meeting, and (ii)
the Parties shall furnish to each other all information concerning them that the
other may reasonably request in connection with such Information Statement.
(d) Not later than thirty (30) days prior to the Stockholders Meeting,
GNN shall deliver to WebMD and Newco a list of persons who may be deemed to be,
in GNN's reasonable judgment, affiliates of GNN within the meaning of Rule 145
under the 1933 Act (each, a "GNN Affiliate"). GNN will provide Newco and WebMD
with such information and documents as either such Party shall reasonably
request for purposes of reviewing such list. Purchaser shall be entitled to
place appropriate legends with respect to the restrictions imposed by Rule 145
under 1933 Act on the certificates evidencing any Purchaser Common Stock to be
received by a GNN Affiliate pursuant to the terms hereof, and, in the reasonable
judgment of GNN, to issue appropriate stop transfer instructions to the transfer
agent of Purchaser Common Stock. In addition, GNN shall deliver to the Purchaser
at or prior to the Closing a written agreement, in form reasonably satisfactory
to Purchaser and customary for transactions of this type, providing that the GNN
Affiliate will not sell, pledge, transfer or otherwise dispose of shares of
Purchaser Common Stock to be received by such GNN Affiliate in the Merger except
in compliance with applicable provisions of the 1933 Act and the rules and
regulations thereunder, including without limitation Rule 145.
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The Purchaser shall not be required to maintain the effectiveness of the
Registration Statement for purposes of any resale by any GNN Affiliate.
10.2 Applications. Healtheon, Newco and/or WebMD (as appropriate) shall
promptly prepare and file, and GNN shall cooperate in the preparation and, where
appropriate, filing of, applications with any Regulatory Authorities having
jurisdiction over the transactions contemplated by this Agreement seeking the
requisite Consents necessary to consummate the transactions contemplated by this
Agreement. To the extent required by the HSR Act, each of the Parties will
promptly file with the United States Federal Trade Commission and the United
States Department of Justice the notification and report form required for the
transactions contemplated hereby and any supplemental or additional information
which may reasonably be requested in connection therewith pursuant to the HSR
Act and will comply in all material respects with the requirements of the HSR
Act. The Parties shall deliver to each other copies of all filings,
correspondence and orders to and from all Regulatory Authorities in connection
with the transactions contemplated hereby. Notwithstanding anything herein to
the contrary, nothing in this Agreement shall be deemed to require Healtheon,
Newco, WebMD, GNN or any Subsidiary or Affiliate of any such Party to agree to
any divestiture by itself or any of its Affiliates of shares of capital stock or
of any business or Assets, or the imposition of any Material limitation the
ability of any of them to conduct their businesses or to own or exercise control
of such Assets or stock.
10.3 Filings with State Offices. Upon the terms and subject to the
conditions of this Agreement, the Surviving Corporation shall execute and file
the Certificate of Merger with the Secretary of State of the State of Delaware
in connection with the Closing.
10.4 Agreement as to Efforts to Consummate. Subject to the terms and
conditions of this Agreement, each Party agrees to use, and to cause its
Subsidiaries to use, its reasonable efforts to take, or cause to be taken, all
actions, and to do, or cause to be done, all things necessary, proper, or
advisable under applicable Laws to consummate and make effective, as soon as
practicable after the date of this Agreement, the transactions contemplated by
this Agreement, including using its reasonable efforts to lift or rescind any
Order adversely affecting its legal ability to consummate the transactions
contemplated herein and to cause to be satisfied the conditions referred to in
Article 11 of this Agreement; provided, that nothing herein shall preclude
either Party from exercising its rights under this Agreement. Each Party shall
use, and shall cause each of its Subsidiaries to use, its reasonable efforts to
obtain all Consents necessary or desirable for the consummation of the
transactions contemplated by this Agreement (including without limitation any
Consents listed in Section 5.19(b) of the GNN Disclosure Letter). In connection
with and without limiting the foregoing, GNN and its Board of Directors shall,
if any state takeover statute or similar Law is or becomes applicable to the
Merger, this Agreement or any of the transactions contemplated by this
Agreement, use all commercially reasonable efforts to insure that the Merger and
the other transactions contemplated by this Agreement may be consummated as
promptly as practicable on the terms contemplated by this Agreement and
otherwise to minimize the effect of such Law on the Merger, this Agreement and
the transactions contemplated hereby.
10.5 Investigation and Confidentiality.
(a) Prior to the Effective Time, WebMD and GNN shall keep each other
advised of all Material developments relevant to its business and to
consummation of the Merger and shall permit each other to make or cause to be
made such investigation of the business and properties of it and its
Subsidiaries and of their respective financial and legal conditions as the other
reasonably request, provided that such investigation shall be reasonably related
to the transactions contemplated hereby and shall not interfere unnecessarily
with normal operations. No investigation by WebMD or GNN under this Section 10.5
shall affect the representations and warranties of the other Parties.
(b) Each Party shall, and shall cause its advisers and agents to,
maintain the confidentiality of all confidential information furnished to it by
the other Parties concerning its and its Subsidiaries' businesses, operations,
and financial positions and shall not use or disclose such information for any
purpose except in furtherance of the transactions contemplated by this
Agreement. If this Agreement is terminated prior to the Effective Time, each
Party shall promptly return or certify the destruction of all
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documents and copies thereof, and all work papers containing confidential
information received from the other Party.
10.6 Access to Information. GNN shall afford Healtheon and WebMD and their
accountants, counsel and other representatives, reasonable access during normal
business hours and upon reasonable notice during the period prior to the
Effective Time to (i) all of GNN's properties, books, contracts, commitments and
records, (ii) all other information concerning the business, properties and
personnel (subject to restrictions imposed by applicable Law) of GNN as
Healtheon or WebMD may reasonably request and (iii) all officers and, as
scheduled through officers, key employees of GNN. GNN agrees to provide to
Healtheon and WebMD and their accountants, counsel and other representatives
copies of internal financial statements (including returns and supporting
documentation) promptly upon request. No information or knowledge obtained in
any investigation pursuant to this Section 10.6 shall affect or be deemed to
modify any representation or warranty contained herein or the conditions to the
obligations of the Parties to consummate the Merger.
10.7 No Shop.
(a) From and after the date of this Agreement until the Effective Time
or termination of this Agreement pursuant to Article 12, GNN will not, nor will
it authorize or permit any Affiliate or Representative retained by it to,
directly or indirectly, (i) solicit, initiate, encourage or induce the making,
submission or announcement of any Acquisition Proposal; (ii) participate in any
discussions or negotiations regarding, or furnish to any Person any non-public
information with respect to, or take any other action to facilitate any
inquiries or the making of any proposal that constitutes or may reasonably be
expected to lead to, any Acquisition Proposal; (iii) engage in discussions with
any Person with respect to any Acquisition Proposal, except as to the existence
of these provisions; (iv) approve, endorse or recommend any Acquisition
Proposal; or (v) enter into any letter of intent or similar document or any
Contract contemplating or otherwise relating to any Acquisition Transaction. GNN
will immediately cease any and all existing activities, discussions or
negotiations with any parties conducted heretofore with respect to any
Acquisition Proposal. Without limiting the foregoing, it is understood that any
violation of the restrictions set forth in the preceding two sentences by any
officer, director or employee of GNN or any of its Subsidiaries or any
investment banker, attorney or other advisor or Representative of GNN or any of
its Subsidiaries shall be deemed to be a breach of this Section 10.7 by GNN.
(b) In addition to the obligations of GNN set forth in paragraph (a) of
this Section 10.7, GNN as promptly as practicable shall advise WebMD and (if
this Agreement has not been terminated as to Newco and Healtheon under Section
12.3) Healtheon orally and in writing of any request for non-public information
which GNN reasonably believes would lead to an Acquisition Proposal or to any
Acquisition Transaction, or any inquiry with respect to or which GNN reasonably
should believe would lead to any Acquisition Proposal, the Material terms and
conditions of such request, Acquisition Proposal or inquiry, and the identity of
the Person or group making any such request, Acquisition Proposal or inquiry.
GNN will keep Purchaser informed as promptly as practicable in all Material
respects of the status and details (including Material amendments or proposed
Material amendments) of any such request, Acquisition Proposal or inquiry.
10.8 Tax Treatment. Each of the Parties undertakes and agrees to use its
reasonable efforts to take no action which would cause the Merger not to qualify
for treatment as a "reorganization" within the meaning of Section 368(a) of the
Internal Revenue Code for federal income tax purposes.
10.9 Employee Benefits. Following the Effective Time, Purchaser shall
provide to officers and employees of GNN employee benefits based on the
positions they hold with the Purchaser and/or its Subsidiaries after the
Effective Time under employee benefit plans on terms and conditions which are
substantially similar in the aggregate to those provided by Purchaser and its
Subsidiaries to their similarly situated officers and employees after the
Effective Time.
10.10 Voting Agreement. Simultaneously with the execution and delivery of
this Agreement, each of the Persons listed on Exhibit 10.10(a) has executed and
delivered a Voting Agreement in the form of
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Exhibit 10.10(b) hereto pursuant to which such Person has agreed, among other
things, to vote all shares of GNN Capital Stock held of record by such Person
and all shares of GNN Capital Stock for which such Person has been granted a
proxy in favor of the Merger at the Stockholders Meeting (the "Voting
Agreements"). GNN hereby represents and warrants to Purchaser that the shares of
GNN Capital Stock subject to the Voting Agreements have sufficient votes to
approve the Merger and the Agreement for all purposes under the GCLSD and GNN's
Certificate of Incorporation and Bylaws.
10.11 Accredited Investor Questionnaire and Stockholder Representation
Agreement. GNN shall use its reasonable efforts to:
(i) if WebMD is the Purchaser and does not make the WebMD Election
described in Section 10.15, cause each Stockholder and
(ii) cause each holder of Options or GNN Warrants whose exercise of
such Option or GNN Warrant following the Effective Time would not be exempt from
registration under the 1933 Act pursuant to Rule 701 of the 1933 Act,
to promptly execute and deliver to Purchaser prior to the Closing an Accredited
Investor Questionnaire and Stockholder Representation Agreement in the form of
Exhibits 10.11(a) and 10.11(b), respectively, hereto.
10.12 Registration of Shares. If WebMD is the Purchaser and does not make
the WebMD Election described in Section 10.15, the Stockholders shall be
entitled to registration rights as set forth in Exhibit 10.12 hereto.
10.13 Blue Sky Laws. Purchaser shall take such reasonable steps as may be
necessary to comply with the securities and blue sky laws of all jurisdictions
which are applicable to the issuance of the Purchaser Common Stock in connection
with the Merger. GNN shall use its reasonable efforts to assist Purchaser as may
be necessary to register, or qualify for valid exemptions from, the issuance of
Purchaser Common Stock in the Merger under the securities and blue sky laws of
all jurisdictions which are applicable in connection with such issuance,
including, if requested by Purchaser after consultation with counsel, the
appointment of a "PURCHASER REPRESENTATIVE" for non-accredited investors who are
not sophisticated investors under Regulation D of the 1933 Act.
10.14 Non-solicitation of Employees. Until the Effective Time or, in the
event this Agreement is terminated without completion of the Merger, for a
period of one year from the date hereof, neither Healtheon, WebMD, Newco nor GNN
will solicit for employment any current employee of the other Parties or any
Subsidiary of the other Parties unless such employee has been terminated
previously by his or her employer nor make any offer to such employee without
prior notice to his or her employer; provided that in no event will a general
solicitation for employment (whether by general advertisement in any media or
otherwise) be a violation of this Section 10.14.
10.15 WebMD Election for Registration. In the event that this Agreement is
terminated as to Newco and Healtheon pursuant to Section 12.3 hereof, the
Parties agree that the shares of Purchaser Common Stock to be issued in the
Merger will not be registered under the 1933 Act or any state securities laws
unless otherwise elected by WebMD under this Section 10.15. WebMD, in its sole
discretion, may elect within 30 days after this Agreement is terminated as to
Newco and Healtheon pursuant to Section 12.3 hereof to file the Registration
Statement and the provisions of Section 10.1(b) shall apply to WebMD (instead of
Newco), mutatis mutandis (the "WEBMD ELECTION"); provided that the Proxy
Statement/Prospectus and Registration Statement shall be prepared and filed as
promptly as practicable after WebMD makes the WebMD Election. If WebMD does not
make the WebMD Election, GNN acknowledges and agrees that WebMD shall be
entitled to postpone the distribution of the Information Statement for a
reasonable period of time upon advice of counsel until WebMD and GNN have
obtained, or have agreed to obtain prior to Closing, all documents and other
items necessary to ensure that the offering of securities pursuant to the Merger
be exempt from registration under Section 5 of the 1933 Act and all relevant
state securities laws, including, but not limited to, documentation similar to
that described in Section 10.11 and 10.13.
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10.16 Press Releases. Prior to the Effective Time, WebMD, GNN and (if this
Agreement has not been terminated as to Newco and Healtheon under Section 12.3)
Healtheon shall consult with each other as to the form and substance of any
press release or other public disclosure related to this Agreement or any other
transaction contemplated hereby and no Party shall issue any press release or
make any other public disclosure without the prior approval of the other Parties
and (if this Agreement has not been terminated as to Newco and Healtheon under
Section 12.3) Healtheon (which approval shall not be unreasonably withheld);
provided, that nothing in this Section 10.16 shall be deemed to prohibit any
Party from making any disclosure which its counsel deems necessary or advisable
in order to satisfy such Party's disclosure obligations imposed by Law.
10.17 Statements and Information Regarding WebMD. GNN acknowledges that,
from time to time, statements about WebMD may be made by third parties, in
writing or otherwise, that may purport to contain information about WebMD,
including in newspaper articles, Internet chat rooms and, except as provided
below, other publications and communications, and that such statements have been
and may be incorrect or inaccurate in several Material respects. GNN agrees that
neither WebMD nor any of its Affiliates or representatives has made any
representation or warranty as to the accuracy or completeness of any such
information or statements. Furthermore, GNN has not relied, and will not rely,
upon any such statements in making any decision in connection with the
consummation of the Merger and other transactions contemplated by this
Agreement; rather, the only representations or statements that GNN has relied
upon or will rely upon will be those made by WebMD, as set forth in this
Agreement.
10.18 Employee Confidentiality and Assignment Agreement. GNN agrees to use
its commercially reasonable efforts to cause all of its current employees and
consultants to execute, to the extent they have not already done so, an Employee
Confidentiality and Assignment Agreement (with Intellectual Property assignment
provisions) in substantially the form currently used by WebMD.
10.19 Directors and Officers Indemnification.
(a) After the Effective Time, Purchaser will (and will cause any
successor, whether by merger, stock purchase, or asset purchase, to), to the
fullest extent permitted by Law, indemnify and hold harmless each present and
former director or officer of GNN (collectively, the "INDEMNIFICATION PARTIES")
against all costs and expenses (including reasonable attorneys' fees),
judgements, fines, losses, claims, damages, Liabilities and settlement amounts
paid in connection with any action, claim, suit, investigation, or proceeding
(whether arising before or after the Effective Time), whether civil,
administrative or investigative, arising out of or pertaining to any action or
omission in their capacity as an officer, director, employee, agent, or other
person to whom this Section applies, in each case occurring before the Effective
Time (including the transactions contemplated by this Agreement).
(b) For a period of two (2) years after the Effective Time, Purchaser
will cause the Surviving Corporation to use its commercially reasonable efforts
to maintain in effect, if available, directors' and officers' liability
insurance covering those persons who are currently covered by GNN's directors'
and officers' liability insurance policy on terms comparable to those applicable
to the current directors and officers of GNN; provided, however, that in no
event will Purchaser or Surviving Corporation be required to expend an annual
premium for such coverage in excess of $23,000 (or such coverage as is available
for such annual premium).
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ARTICLE 11
CONDITIONS PRECEDENT TO OBLIGATIONS TO CONSUMMATE
11.1 Conditions to Obligations of Each Party. The respective obligations
of each Party to perform this Agreement and consummate the Merger and the other
transactions contemplated hereby are subject to the satisfaction of the
following conditions, unless waived by the Parties pursuant to Section 13.5 of
this Agreement:
(a) Stockholder Approval. The stockholders of GNN shall have approved
this Agreement, and the consummation of the transactions contemplated hereby,
including the Merger, as and to the extent required by Law and by the provisions
of any governing instruments.
(b) Regulatory Approvals. All waiting periods, if any, under the HSR Act
relating to the transactions contemplated hereby will have expired or terminated
early and all Material foreign antitrust approvals required to be obtained prior
to the Merger in connection with the transactions contemplated hereby shall have
been obtained.
(c) Legal Proceedings. No court or governmental or Regulatory Authority
of competent jurisdiction shall have enacted, issued, promulgated, enforced or
entered any Law or Order (whether temporary, preliminary or permanent) or taken
any other action which prohibits, restricts or makes illegal consummation of the
transactions contemplated by this Agreement.
(d) Tax Opinion. Each of Purchaser and GNN shall have received the
opinion of Alston & Bird LLP or King & Spalding, respectively, to the effect
that the Merger will constitute a tax-free reorganization within the meaning of
368(a) of the Internal Revenue Code, which opinion shall be in form and
substance reasonably satisfactory to Purchaser and GNN, respectively; provided,
however, that if counsel to either Purchaser or GNN does not render such
opinion, this condition shall nonetheless be deemed to be satisfied with respect
to such Party if counsel to the other Party renders such opinion to such Party.
In rendering such opinion, Alston & Bird LLP and/or King & Spalding shall be
entitled rely upon representations of the Parties hereto reasonably satisfactory
in form and substance to such counsel. The Parties to this Agreement agree to
make reasonable representations as required by Alston & Bird LLP and/or King &
Spalding for the purpose of rendering such opinion(s).
(e) Registration Statement; Nasdaq. In the event that the Registration
Statement is filed in connection with the shares of Purchaser Common Stock to be
issued in the Merger, (i) all of the shares of Purchaser Common Stock to be
issued in connection with the Merger shall be authorized for quotation on the
Nasdaq Stock Market upon notice of issuance, and (ii) the SEC shall have
declared the Registration Statement effective and no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have been
issued, and no proceeding for that purpose, or similar proceeding with respect
to the Proxy Statement/Prospectus, shall have been initiated or threatened in
writing by the SEC.
11.2 Conditions to Obligations of Purchaser. The obligations of Purchaser
to perform this Agreement and consummate the Merger and the other transactions
contemplated hereby are subject to the satisfaction of the following conditions,
unless waived by Purchaser pursuant to Section 13.5 of this Agreement:
(a) Representations and Warranties. The representations and warranties
of GNN set forth or referred to in this Agreement shall be true and correct in
all Material respects (except that those representations and warranties which
are qualified as to Material, Materiality, Material Adverse Effect or similar
expressions, or are subject to the same or similar type exceptions, shall be
true and correct in all respects) as of the date of this Agreement and as of the
Effective Time with the same effect as though all such representations and
warranties had been made on and as of the Effective Time (provided that
representations and warranties which are confined to a specified date shall
speak only as of such date).
(b) Performance of Agreements and Covenants. Each and all of the
agreements and covenants of GNN to be performed and complied with pursuant to
this Agreement and the other agreements
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contemplated hereby prior to the Effective Time shall have been duly performed
and complied with in all Material respects.
(c) Certificates. GNN shall have delivered to Purchaser (i) a
certificate, dated as of the Effective Time and signed on its behalf by its
president and its chief financial officer, to the effect that the conditions of
its obligations set forth in Section 11.2(a) and 11.2(b) of this Agreement have
been satisfied, and (ii) certified copies of resolutions duly adopted by GNN's
Board of Directors and stockholders evidencing the taking of all corporate
action necessary to authorize the execution, delivery and performance of this
Agreement, and the consummation of the transactions contemplated hereby, all in
such reasonable detail as Purchaser and its counsel shall reasonably request.
(d) Opinion of Counsel. Purchaser shall have received an opinion of King
& Spalding, counsel to GNN, dated as of the Closing, in the form reasonably
satisfactory to Purchaser, as to the matters set forth in Exhibit 11.2(d).
(e) Delivery of Documents. GNN shall have delivered all of its books and
records to Purchaser including, but not limited to, (i) all corporate and other
records of GNN and each Subsidiary and their respective predecessors, including
the minute books, stock books, stock transfer registers, books of account,
leases and Contracts, deeds and title documents, and GNN Financial Statements;
and (ii) such other documents or certificates as shall be reasonably requested
by Purchaser.
(f) Resignation of GNN Directors. On or prior to the Closing Date, GNN
shall have delivered to Purchaser evidence satisfactory to Purchaser of the
resignation of the directors of GNN effective as of the Closing Date.
(g) Escrow Agreement. The Escrow Agreement shall have been executed and
delivered by the Representative (as defined in Section 14.2) and a national bank
as escrow agent in substantially the form contemplated in Article 14 hereto,
with any changes thereto being only such changes which relate specifically to
the Escrow Agent and which changes are reasonably acceptable to Purchaser.
(h) No Material Adverse Effect. There shall not have been any Material
Adverse Effect with respect to GNN, between the date hereof and the Closing
Date, and GNN shall have delivered to Purchaser a certificate, dated as of the
Closing Date, signed by its president and chief financial officer certifying to
such effect.
(i) Accredited Investor Questionnaire and Stockholder Representation
Agreements. If WebMD is the Purchaser and does not make the WebMD Election
described in Section 10.15, then:
(i) Each Stockholder of GNN and each holder of an Option or GNN
Warrant (excluding each holder of Options and/or GNN Warrants whose exercise of
all of the Options and GNN Warrants held by such holder will be exempt from
registration under the 1933 Act pursuant to Rule 701 of the 1933 Act) who has
not provided to WebMD an Accredited Investor Questionnaire in the form
previously provided to GNN certifying that such Stockholder is an "ACCREDITED
INVESTOR" as defined in Rule 501(a) under the 1933 Act shall have either (i)
appointed a "PURCHASER REPRESENTATIVE" as set forth under Rule 501(h) and
506(b)(2)(ii) under the 1933 Act, or (ii) delivered to WebMD a Stockholder
Representation Agreement certifying as to the sophistication of the investor and
other reasonably related matters set forth therein; and
(ii) As of the Effective Time, GNN shall not have more than
thirty-five (35) Stockholders and holders of Options or GNN Warrants (in the
aggregate) who are non-accredited investors under Rule 501(a) and (e) under the
1933 Act (in the event of non-receipt of an Accredited Investor Questionnaire,
such holder shall be deemed to be a non-accredited investor), excluding for
purposes of this calculation each holder of Options and/or GNN Warrants whose
exercise of all of the Options and GNN Warrants held by such holder will be
exempt from registration under the 1933 Act pursuant to Rule 701 of the 1933
Act.
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(j) Dissenting Stockholders. Holders of less than two percent (2.0%) of
the GNN Capital Stock shall have elected to seek their statutory dissenters'
rights as provided in Section 3.4 of this Agreement.
(k) Healtheon/WebMD Agreement. If the Purchaser is Newco, the
transactions contemplated by the Healtheon/WebMD Agreement must be consummated
(the "Healtheon Closing") simultaneously with, or prior to, the Closing.
(l) FIRPTA. GNN shall deliver to a Purchaser a properly executed
statement that the shares of GNN's Capital Stock do not constitute "U.S. real
property interests," as defined in Section 897(c) of the Internal Revenue Code.
Such statement shall be in a form reasonably acceptable to Purchaser and in
accordance with the requirements of Treasury Regulation Section 1.1445-2(c)(3).
In addition, simultaneously with delivery of such statement, GNN shall provide
to Purchaser, as agent for GNN, a form of notice to the Internal Revenue Service
in accordance with the requirements of Treasury Regulation Section 1.897-2(h),
along with written authorization for Purchaser to deliver such form of notice to
the Internal Revenue Service on behalf of GNN upon the Closing.
(m) Comfort Letter. GNN shall cause its certified public accountants to
deliver a comfort letter, in form and substance customary for transactions of
this type and reasonably satisfactory to Purchaser, with respect to financial
information relating to GNN included in the Registration Statement.
(n) Approval; Qualified Sale Election: At least ninety-five percent
(95%) of the outstanding shares of GNN Capital Stock shall have voted to approve
the Merger and this Agreement at the Stockholders Meeting. In addition, a
majority of GNN's Board of Directors (other than those Directors elected by the
holders of GNN Series A Preferred Stock) and a majority of the holders of the
GNN Common Stock and the GNN Series B Preferred Stock, voting together as a
class, shall have approved an adjustment to the conversion price of the GNN
Series C Preferred Stock such that the transactions described herein will be
deemed a "QUALIFIED SALE" as defined in the Certificate of Designation for the
GNN Series C Preferred Stock.
(o) Stockholder Agreement. GNN shall obtain written terminations and
releases of the terms of the Stockholders Agreement dated February 18, 1998
among Alan Greenberg, Medcast Networks, L.P., and the holders of GNN Series A
Preferred Stock, and subsequently executed by holders of GNN Series C Preferred
Stock ("STOCKHOLDER AGREEMENT") from the holders of at least ninety percent
(90%) of the shares of GNN Series A Preferred Stock that have executed such
Stockholder Agreement and from the holders of at least ninety percent (90%) of
the shares of GNN Series C Preferred Stock that have executed such Stockholder
Agreement.
(p) Registration Rights Agreements. If WebMD is the Purchaser and does
not make the WebMD Election under Section 10.15, GNN shall cause the termination
as of immediately prior to the Effective Time of all rights of any stockholder
of GNN under any Contract that grants any registration rights under the 1933 Act
or any other state or federal securities Laws to any stockholder of GNN (the
"GNN REGISTRATION RIGHTS AGREEMENTS"), and provide WebMD evidence reasonably
satisfactory to WebMD that the Registration Rights Agreements have been
terminated.
(q) Contract Terminations. GNN shall either terminate prior to the
Closing, or be entitled to terminate without expense or penalty and in its sole
discretion within thirty days' after the Effective Time, each Contract listed on
Section 11.2 of the GNN Disclosure Letter and shall provide evidence of such
termination(s) or termination right(s) reasonably satisfactory to the Purchaser.
11.3 Conditions to Obligations of GNN. The obligations of GNN to perform
this Agreement and consummate the Merger and the other transactions contemplated
hereby are subject to the satisfaction of the following conditions, unless
waived by GNN pursuant to Section 13.5 of this Agreement:
(a) Representations and Warranties. The representations and warranties
of WebMD and (solely if Newco is the Purchaser) Newco set forth or referred to
in this Agreement shall be true and correct in all Material respects (except
that those representations and warranties which are qualified as to Material,
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Materiality, Material Adverse Effect or similar expressions, or are subject to
the same or similar type exceptions, shall be true and correct in all respects)
as of the date of this Agreement and as of the Effective Time with the same
effect as though all such representations and warranties had been made on and as
of the Effective Time (provided that representations and warranties which are
confined to a specified date shall speak only as of such date).
(b) Performance of Agreements and Covenants. Each and all of the
agreements and covenants of Purchaser to be performed and complied with pursuant
to this Agreement and the other agreements contemplated hereby prior to the
Effective Time shall have been duly performed and complied with.
(c) Certificates. Purchaser shall have delivered to GNN (i) a
certificate, dated as of the Effective Time and signed on its behalf by its
chief executive officer and its chief financial officer, to the effect that the
conditions of its obligations set forth in Section 11.3(a) and 11.3(b) of this
Agreement have been satisfied, provided (if Newco or Healtheon is the Purchaser)
WebMD (and not Newco) shall deliver this certificate as to Section 11.3(a) to
the extent of WebMD's representations and warranties), and (ii) certified copies
of resolutions duly adopted by Purchaser's Board of Directors and Merger Corp.'s
Board of Directors and sole shareholder evidencing the taking of all corporate
action necessary to authorize the execution, delivery and performance of this
Agreement, and the consummation of the transactions contemplated hereby, all in
such reasonable detail as GNN and its counsel shall request.
(d) No Material Adverse Change. There shall not have been any Material
Adverse Effect with respect to Purchaser between the date hereof and the Closing
Date, and Purchaser shall have delivered to GNN a certificate, dated as of the
Closing Date, signed by its chief executive officer and chief financial officer
certifying to such effect; provided that it is agreed and acknowledged by Newco
that if Newco is the Purchaser and the Closing occurs simultaneously with the
Healtheon Closing, WebMD, Healtheon or Healtheon and any other Person acquired
by Newco on the Closing Date shall be deemed to be Subsidiaries of Newco for
purposes of determining whether a Material Adverse Effect with respect to
Purchaser shall have occurred.
ARTICLE 12
TERMINATION
12.1 Termination. Notwithstanding any other provision of this Agreement,
and notwithstanding the approval of this Agreement by the stockholders of GNN,
this Agreement may be terminated and the Merger abandoned at any time prior to
the Effective Time:
(a) By mutual consent of the Boards of Directors of Healtheon, WebMD and
GNN or, if this Agreement has been terminated as to Newco and Healtheon under
Section 12.3, by mutual consent of the Boards of Directors of WebMD and GNN; or
(b) By Healtheon and WebMD (jointly) or, if this Agreement has been
terminated as to Newco and Healtheon under Section 12.3, WebMD individually
(provided that the terminating Party is not then in Material breach of any
representation, warranty, covenant, or other agreement contained in this
Agreement) in the event of a breach by GNN of any representation or warranty
contained in this Agreement such that the conditions in Section 11.2(a) with
respect to GNN would not be satisfied as of the time of such breach, provided
that if such breach is curable through the exercise of commercially reasonable
efforts by GNN, then the terminating party or parties may not terminate this
Agreement under this Section 12.1(b) prior to the Purchaser End Date provided
GNN continues to exercise commercially reasonable efforts to cure such breach;
or
(c) By GNN (provided that GNN is not then in Material breach of any
representation, warranty, covenant, or other agreement contained in this
Agreement) in the event of a breach by Newco or WebMD of any representation or
warranty contained in this Agreement such that the conditions in Section 11.3(a)
with respect to Purchaser would not be satisfied as of the time of such breach,
provided that if such breach is curable through the exercise of commercially
reasonable efforts by Newco and/or
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WebMD, then the terminating party may not terminate this Agreement under this
Section 12.1(c) prior to the Purchaser End Date provided the breaching party
continues to exercise commercially reasonable efforts to cure such breach;
provided breaches by Newco do not give rise to a termination right for GNN after
this Agreement is terminated as to Newco under Section 12.3 hereof; or
(d) By Healtheon and WebMD (jointly) or, if this Agreement has been
terminated as to Newco and Healtheon under Section 12.3, WebMD individually
(provided that the terminating Party is not then in Material breach of any
representation, warranty, covenant, or other agreement contained in this
Agreement) in the event of a breach by GNN of any covenant or agreement
contained in this Agreement such that the conditions in Section 11.2(b) with
respect to GNN would not be satisfied as of the time of such breach, provided
that if such breach is curable through the exercise of commercially reasonable
efforts by GNN, then the terminating party or parties may not terminate this
Agreement under this Section 12.1(d) prior to the Purchaser End Date provided
GNN continues to exercise commercially reasonable efforts to cure such breach;
or
(e) By GNN (provided that GNN is not then in Material breach of any
representation, warranty, covenant, or other agreement contained in this
Agreement) in the event of a breach by Newco or WebMD of any covenant or
agreement contained in this Agreement such that the conditions in Section
11.3(b) with respect to Purchaser would not be satisfied as of the time of such
breach, provided that if such breach is curable through the exercise of
commercially reasonable efforts by Newco and/or WebMD, then the terminating
party may not terminate this Agreement under this Section 12.1(e) prior to the
Purchaser End Date provided the breaching party continues to exercise
commercially reasonable efforts to cure such breach; provided breaches by Newco
do not give rise to a termination right for GNN after this Agreement is
terminated as to Newco under Section 12.3 hereof; or
(f) By (1) Healtheon and WebMD (jointly) or, if this Agreement has been
terminated as to Newco and Healtheon under Section 12.3, WebMD individually or
(2) GNN (provided that the terminating Party is not then in Material breach of
any representation, warranty, covenant, or other agreement contained in this
Agreement) in the event any Regulatory Authority whose consent is required for
consummation of the Merger and the other transactions contemplated hereby shall
have an order, decree, or ruling or taking any other action, in any case having
the effect of permanently restraining, enjoining or otherwise prohibiting the
Merger, which order, decree, ruling or other action is final and nonappealable;
or
(g)(i) If this Agreement has not been terminated as to Newco and
Healtheon under Section 12.3, by (1) Healtheon and WebMD (jointly) or (2) GNN in
the event that the Merger shall not have been consummated by the earlier of (i)
the thirtieth (30th) day after the Healtheon Closing and (ii) December 15, 1999
(the earlier of such dates is referred to herein as the "Newco End Date"), if
the failure to consummate the transactions contemplated hereby on or before such
date is not caused by any breach of this Agreement by the Party(ies) electing to
terminate pursuant to this Section 12.1(g); or
(ii) If this Agreement has been terminated as to Newco and Healtheon
under Section 12.3, by (1) WebMD or (2) GNN in the event that the Merger shall
not have been consummated by February 15, 2000 (the "WEBMD END DATE"), if the
failure to consummate the transactions contemplated hereby on or before such
date is not caused by any breach of the Agreement by the Party electing to
terminate pursuant to this Section 12.1(g); or
(h) By Healtheon and WebMD (jointly) or, if this Agreement has been
terminated as to Newco and Healtheon under Section 12.3, WebMD individually if
the Board of Directors of GNN shall fail to call a Stockholders Meeting or
solicit consents for the purpose of approving the Merger at least 10 days prior
to the date set forth in Section 12.1(g) (provided that the failure to call such
meeting is not the result of a breach by Newco or WebMD of any representation,
warranty, covenant or agreement that would entitle GNN to terminate this
Agreement pursuant to Section 12.1(c) or (e) above) or shall have affirmed,
recommended or authorized entering into any other Acquisition Proposal or other
transaction involving a merger, share exchange, consolidation or transfer of
substantially all of the Assets of GNN; or
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(i) By Healtheon and WebMD (jointly) or, if this Agreement has been
terminated as to Newco and Healtheon under Section 12.3, WebMD individually, if
the Board of Directors of GNN shall withdraw, modify or change its approval or
recommendation to the GNN Stockholders of this Agreement or the Merger and
related transactions in a manner adverse to Healtheon, Newco or WebMD.
12.2 Effect of Termination. In the event of the termination and
abandonment of this Agreement pursuant to Section 12.1 of this Agreement, this
Agreement shall become void and have no effect, except that (i) the provisions
of this Section 12.2 and Article 13 and Section 10.5(b) and 10.14 of this
Agreement shall survive any such termination and abandonment, and (ii) a
termination pursuant to of this Agreement (except for a termination under
Section 12.1(a)) shall not relieve a breaching Party from Liability for an
uncured willful breach of a representation, warranty, covenant, or agreement
giving rise to such termination.
12.3 Termination as to Newco and Healtheon. If the Healtheon/WebMD
Agreement is terminated for any reason prior to the consummation of the
transactions contemplated therein and prior to the Closing, this Agreement shall
be deemed terminated as to Newco and Healtheon. In the event of the termination
of this Agreement as to Newco and Healtheon as provided in this Section 12.3,
Newco and Healtheon shall cease to be bound by this Agreement, except that the
provisions of Sections 1.4, 10.5(b), 10.14 and 12.3 and Article 13 of this
Agreement shall survive any such termination and continue to bind Newco and
Healtheon, and no Party hereunder shall have any Liability in connection with
the terms and conditions of this Agreement applicable to or binding upon Newco
or Healtheon. In the event of the termination of the Healtheon/WebMD Agreement,
neither Healtheon, WebMD nor Newco shall have any Liability for any reason under
this Agreement
ARTICLE 13
MISCELLANEOUS
13.1 Definitions.
(a) Except as otherwise provided herein, the capitalized terms set forth
below shall have the following meanings:
"ACQUISITION PROPOSAL" shall mean any proposal (other than an offer
or proposal by Purchaser) relating to any Acquisition Transaction.
"ACQUISITION TRANSACTION" shall mean any transaction or series of
related transactions involving: (A) any purchase from GNN or acquisition by any
Person or "group" (as defined under Section 13(d) of the 1934 Act and the rules
and regulations thereunder) of more than a 5% interest in the total outstanding
voting securities of GNN or any tender offer or exchange offer that if
consummated would result in any Person or "group" (as defined under Section
13(d) of the 1934 Act and the rules and regulations thereunder) beneficially
owning 5% or more of the total outstanding voting securities of GNN or any
merger, consolidation, business combination or similar transaction involving
GNN; (B) any sale, lease (other than in the ordinary course of business),
exchange, transfer, license (other than in the ordinary course of business),
acquisition or disposition of more than 5% of the Assets of GNN; or (C) any
liquidation or dissolution of GNN.
"AFFILIATE" of a Person shall mean: (i) any other Person directly, or
indirectly through one or more intermediaries, controlling, controlled by or
under common control with such Person; (ii) any officer, director, partner,
employer, or direct or indirect beneficial owner of any 10% or greater equity or
voting interest of such Person; or (iii) any other Person for which a Person
described in clause (ii) acts in any such capacity.
"AGREEMENT" shall mean this Agreement and Plan of Merger, including
the Exhibits and Disclosure Letters delivered pursuant hereto and incorporated
herein by reference.
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"ASSETS" of a Person shall mean all of the assets, properties,
businesses and rights of such Person of every kind, nature, character and
description, whether real, personal or mixed, tangible or intangible, accrued or
contingent, or otherwise relating to or utilized in such Person's business,
directly or indirectly, in whole or in part, whether or not carried on the books
and records of such Person, and whether or not owned in the name of such Person
or any Affiliate of such Person and wherever located.
"CERTIFICATE OF MERGER" shall mean the Certificate of Merger to be
executed by the Surviving Corporation and filed with the Secretary of State of
the State of Delaware relating to the Merger as contemplated by Section 1.1 of
this Agreement.
"CLOSING DATE" shall mean the date on which the Closing occurs.
"CONSENT" shall mean any consent, approval, authorization, clearance,
exemption, waiver, or similar affirmation by any Person pursuant to any
Contract, Law, Order, or Permit.
"CONTRACT" shall mean any written or oral agreement, arrangement,
commitment, contract, indenture, instrument, lease, obligation, plan,
restriction, understanding or undertaking of any kind or character, or other
document to which any Person is a party or that is binding on any Person or its
capital stock, Assets or business.
"CONVERSION PRICE" shall mean either $81.98 (the "HEALTHEON TRADING
PRICE"), or the Healtheon Trading Price multiplied by the number of shares of
Healtheon common stock each share of WebMD common stock is convertible into
immediately prior to the termination of this Agreement as to Newco under Section
12.3 hereof if WebMD is the Purchaser.
"DEFAULT" shall mean (i) any breach or violation of or default under
any Contract, Order or Permit, (ii) any occurrence of any event that with the
passage of time or the giving of notice or both would constitute a breach or
violation of or default under any Contract, Order or Permit, or (iii) any
occurrence of any event that with or without the passage of time or the giving
of notice would give rise to a right to terminate or revoke, change the current
terms of, or renegotiate, or to accelerate, increase, or impose any Liability
under, any Contract, Order or Permit.
"ENVIRONMENTAL LAWS" shall mean all Laws relating to pollution or
protection of human health or the environment (including ambient air, surface
water, ground water, land surface or subsurface strata) and which are
administered, interpreted or enforced by the United States Environmental
Protection Agency and state and local agencies with jurisdiction over, and
including common law in respect of, pollution or protection of the environment,
including the Comprehensive Environmental Response Compensation and Liability
Act, as amended, 42 U.S.C. 9601 et seq. ("CERCLA"), the Resource Conservation
and Recovery Act, as amended, 42 U.S.C. 6901 et seq. ("RCRA"), and other Laws
relating to emissions, discharges, releases or threatened releases of any
Hazardous Substance, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of any
Hazardous Substance.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
"EXHIBITS" shall mean the Exhibits so marked, copies of which are
attached to this Agreement. Such Exhibits are hereby incorporated by reference
herein and made a part hereof, and may be referred to in this Agreement and any
other related instrument or document without being attached hereto.
"FUNDED DEBT" shall mean any outstanding indebtedness for funds
borrowed (including leases required to be capitalized under GAAP) of such Party
or its Subsidiaries, except Funded Debt between such parties, representing
borrowing, but excluding trade payables.
"GAAP" shall mean generally accepted accounting principles,
consistently applied during the periods involved.
"GCLSD" shall mean the General Corporation Law of the State of
Delaware.
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"GNN CAPITAL STOCK" shall mean the GNN Common Stock and the GNN
Preferred Stock.
"GNN COMMON STOCK" shall mean the GNN common stock, $0.01 par value
per share.
"GNN PREFERRED STOCK" shall mean the GNN Series A Preferred Stock,
$0.01 par value per share, the GNN Series B Preferred Stock, $0.01 par value per
share and the GNN Series C Preferred Stock, $0.01 par value per share.
"GNN STOCK PLAN" shall mean the existing stock option plan of GNN
designated as follows: Greenberg News Networks, Inc. 1997 Stock Option Plan.
"HSR ACT" shall mean Section 7A of the Clayton Act, as added by Title
II of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and
the rules and regulations promulgated thereunder.
"HAZARDOUS MATERIAL" shall mean (i) any hazardous substance,
hazardous Material, hazardous waste, regulated substance or toxic substance (as
those terms are defined by any applicable Environmental Laws) and (ii) any
chemicals, pollutants, contaminants, petroleum, petroleum products, or oil (and
specifically shall include asbestos requiring abatement, removal or
encapsulation pursuant to the requirements of Regulatory Authorities and any
polychlorinated biphenyls).
"INFORMATION STATEMENT" shall mean any proxy or information
statement, prospectus, memorandum and/or other materials sent to the
Stockholders in connection with the Stockholders meeting if WebMD is the
Purchaser and does not make the WebMD Election described in Section 10.15.
"INTELLECTUAL PROPERTY" shall mean any or all of the following and
all rights in, arising out of, or associated therewith: (i) all United States,
international and foreign patents and applications therefor and all reissues,
divisions, renewals, extensions, provisionals, continuations and
continuations-in-part thereof; (ii) all inventions (whether patentable or not),
invention disclosures, improvements, trade secrets, proprietary information,
know how, technology, technical data and customer lists, and all documentation
relating to any of the foregoing; (iii) all copyrights, copyrights registrations
and applications therefore, and all other rights corresponding thereto
throughout the world; (iv) all industrial designs and any registrations and
applications therefor throughout the world; (v) all trade names, logos, URLs,
common law trademarks and service marks, trademark and service mark
registrations and applications therefor throughout the world; (vi) all databases
and data collections and all rights therein throughout the world; (viii) all
moral and economic rights of authors and inventors, however denominated,
throughout the world, and (viii) any similar or equivalent rights to any of the
foregoing anywhere in the world.
"INTERNAL REVENUE CODE" shall mean the Internal Revenue Code of 1986,
as amended, and the rules and regulations promulgated thereunder.
"LAW" shall mean any code, law, ordinance, regulation, reporting or
licensing requirement, rule, or statute applicable to a Person or its Assets,
Liabilities or business, including those promulgated, interpreted or enforced by
any Regulatory Authority.
"LIABILITY" shall mean any direct or indirect, primary or secondary,
liability, indebtedness, obligation, penalty, cost or expense (including costs
of investigation, collection and defense), claim, deficiency, guaranty or
endorsement of or by any Person (other than endorsements of notes, bills,
checks, and drafts presented for collection or deposit in the ordinary course of
business) of any type, whether accrued, absolute or contingent, liquidated or
unliquidated, matured or unmatured, or otherwise.
"LIEN" shall mean any conditional sale agreement, default of title,
easement, encroachment, encumbrance, hypothecation, infringement, lien,
mortgage, pledge, reservation, restriction, security interest, title retention
or other security arrangement, or any adverse right or interest, charge, or
claim of any nature whatsoever of, on, or with respect to any Asset, other than
(i) Liens for current property Taxes not yet due and payable, (ii) Liens
reflected on the GNN Financial Statements and (iii) Liens which do not
materially detract from the value or Materially interfere with the present use
of the Asset subject thereto or affected thereby.
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"LITIGATION" shall mean any action, suit, arbitration, cause of
action, claim, complaint, criminal prosecution, demand letter, governmental or
other examination or investigation, hearing, inquiry, administrative or other
proceeding, or notice (written or oral) by any Person alleging potential
Liability or requesting information relating to or affecting a Party, its
business, its Assets (including Contracts related to it), or the transactions
contemplated by this Agreement.
"MATERIAL" for purposes of this Agreement shall be determined in
light of the facts and circumstances of the matter in question; provided that
any specific monetary amount stated in this Agreement shall determine
materiality in that instance.
"MATERIAL ADVERSE EFFECT" on a Party shall mean an event, change or
occurrence which, individually or together with any other event, change or
occurrence, has a Material adverse impact on (i) the financial position,
business, or results of operations of such Party and its Subsidiaries, taken as
a whole, or (ii) the ability of such Party to perform its obligations under this
Agreement or to consummate the Merger or the other transactions contemplated by
this Agreement; provided that if WebMD is the Purchaser, "Material Adverse
Effect" shall not be deemed to include events, changes or occurrences (x)
generally affecting the healthcare information technology industry, or (y)
generally affecting the overall U.S. economy.
"MERGER CORP. COMMON STOCK" shall mean the $0.01 par value common
stock of Merger Corp.
"NEWCO COMMON STOCK" shall mean the $0.0001 par value common stock of
Newco.
"NEWCO STOCK AMOUNT" shall mean 2,621,676 assuming Newco is the
Purchaser, except as otherwise provided in Section 3.6(b).
"1933 ACT" shall mean the Securities Act of 1933, as amended.
"1934 ACT" shall mean the Securities Exchange Act of 1934, as
amended.
"ORDER" shall mean any administrative decision or award, decree,
injunction, judgment, order, quasi-judicial decision or award, ruling, or writ
of any federal, state, local or foreign or other court, arbitrator, mediator,
tribunal, administrative agency or Regulatory Authority.
"PARTY" shall mean either Healtheon, Newco, GNN, Merger Corp. or
WebMD, and "PARTIES" shall mean all of Healtheon, Newco, GNN, Merger Corp. and
WebMD.
"PERMIT" shall mean any federal, state, local, and foreign
governmental approval, authorization, certificate, easement, filing, franchise,
license, notice, permit, or right to which any Person is a party or that is or
may be binding upon or inure to the benefit of any Person or its securities,
Assets or business.
"PERSON" shall mean a natural person or any legal, commercial or
governmental entity, such as, but not limited to, a corporation, general
partnership, joint venture, limited partnership, limited liability company,
trust, business association, group acting in concert, or any person acting in a
representative capacity.
"PROXY STATEMENT/PROSPECTUS" shall mean the Proxy
Statement/Prospectus contained in the Registration Statement and distributed to
the stockholders of GNN when and if contemplated by Section 10.1.
"PURCHASER" shall mean the Party that acquires GNN hereunder, either
Newco, Healtheon or WebMD.
"PURCHASER END DATE" shall mean either (i) the Newco End Date if this
Agreement has not terminated as to Newco and Healtheon under Section 12.3 or
(ii) the WebMD End Date if this Agreement has terminated as to Newco under
Section 12.3.
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"PURCHASER COMMON STOCK" shall mean either (i) Newco Common Stock if
Newco is the Purchaser, or (ii) WebMD Non-Voting Common Stock if WebMD is the
Purchaser.
"PURCHASER STOCK EXCHANGE RATIO" shall mean either (i) Newco Stock
Exchange Ratio if Newco is the Purchaser, or (ii) WebMD Stock Exchange Ratio if
WebMD is the Purchaser.
"REGISTERED INTELLECTUAL PROPERTY" means all Intellectual Property
that is the subject of an application, certificate, filing, registration or
other document issued, filed with or recorded by any Regulatory Authority.
"REGISTRATION STATEMENT" shall mean the registration statement on
such form as Purchaser determines is applicable filed with the SEC by Purchaser
in connection with the registration of shares of Purchaser Common Stock for
issuance pursuant to the Merger if Newco is the Purchaser or WebMD is the
Purchaser and makes the WebMD Election as described in Section 10.15.
"REGULATORY AUTHORITIES" shall mean, collectively, the Federal Trade
Commission, the United States Department of Justice, and all foreign, federal,
state and local regulatory agencies and other governmental entities or bodies
having jurisdiction over the Parties and their respective Assets, businesses
and/or Subsidiaries, including the NASD and the SEC.
"REPRESENTATIVE" shall mean any investment banker, financial advisor,
attorney, accountant, consultant, or other representative of a Person.
"SEC" shall mean the Securities and Exchange Commission.
"SECURITIES LAWS" shall mean the 1933 Act, the 1934 Act, the
Investment Company Act of 1940, as amended, the Investment Advisors Act of 1940,
as amended, the Trust Indenture Act of 1939, as amended, and the rules and
regulations of any Regulatory Authority promulgated thereunder.
"STOCKHOLDERS MEETING" shall mean the meeting of the Stockholders of
GNN to be held pursuant to Section 10.1 of this Agreement, including any
adjournment or adjournments thereof.
"STOCKHOLDERS" shall mean the holders of GNN Capital Stock.
"SUBSIDIARIES" shall mean all those corporations, partnerships,
associations, or other entities of which the entity in question owns or controls
50% or more of the outstanding equity securities either directly or through an
unbroken chain of entities as to each of which 50% or more of the outstanding
equity securities is owned directly or indirectly by its parent; provided, there
shall not be included any such entity acquired through foreclosure or any such
entity the equity securities of which are owned or controlled in a fiduciary
capacity.
"SURVIVING CORPORATION" shall mean GNN as the surviving corporation
resulting from the Merger.
"SURVIVING CORPORATION COMMON STOCK" shall mean the common stock of
GNN as the Surviving Corporation in the Merger.
"TAX" or "TAXES" shall mean any and all federal, state, local and
foreign taxes, assessments and other governmental charges, duties, impositions
and liabilities relating to taxes, including taxes based upon or measured by
gross receipts, income, profits, sales, use and occupation, and value added, ad
valorem, transfer, franchise, withholding, payroll, recapture, employment,
excise and property taxes, together with all interest, penalties and additions
imposed with respect to such amounts; (ii) any liability for the payment of any
amounts of the type described in clause (i) as a result of being a member of an
affiliated, consolidated, combined or unitary group for any period; and (iii)
any liability for the payment of any amounts of the type described in clause (i)
or (ii) as a result of any express or implied obligation to indemnify any other
person or as a result of any obligations under any agreements or arrangements
with any other person or as a result of any obligations under any agreements or
arrangements with any other person with respect to such amounts and including
any liability for taxes of a predecessor entity.
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"UNDISCLOSED LIABILITIES" shall mean any Liability or obligation of a
Party to this Agreement, whether accrued, liquidated, unliquidated, absolute,
contingent, matured, unmatured or otherwise that is not fully reflected or
reserved against in their respective financial statements or fully disclosed in
Section 5.6 of the GNN Disclosure Letter (with respect to Undisclosed
Liabilities of GNN) or in Section 6.6 of the WebMD Disclosure Letter (with
respect to Undisclosed Liabilities of WebMD).
"WEBMD NON-VOTING COMMON STOCK" shall mean the no par value Series D
Non-Voting Common Stock of WebMD.
"WEBMD STOCK AMOUNT" shall mean the number of shares of WebMD
Non-Voting Common Stock determined by dividing $214,925,000 by the Conversion
Price assuming WebMD is the Purchaser, except as otherwise provided in Section
3.6(b).
(b) In addition to the terms defined in Section 11.1 (a) above, the
terms set forth below shall have the meanings ascribed thereto in the referenced
sections:
<TABLE>
<S> <C>
Anti-Dilution Event............................ Section 3.2
Benefit Plans.................................. Section 5.21
Capital Expenditures........................... Section 5.16(c)
Closing........................................ Section 1.2
Closing Date................................... Section 1.2
Effective Time................................. Section 1.3
Environmental Litigation....................... Section 5.17
ERISA Plan..................................... Section 5.21
Escrow Agreement............................... Section 4.3
Escrow Shares.................................. Section 4.3
Exchange Agent................................. Section 4.1
FASB 5......................................... Section 5.18
FICA........................................... Section 5.9
Forward Merger................................. Section 1.4(b)
FUTA........................................... Section 5.9
GNN Equity Rights.............................. Section 5.3
GNN Financial Statement........................ Section 5.5
GNN Warrants................................... Section 3.7
Healtheon...................................... Preamble
Healtheon Closing.............................. Section 11.2(k)
Merger......................................... Section 1.1
Multiemployer Plan............................. Section 5.21(a)
Newco End Date................................. Section 12.1(g)
Newco Stock Exchange Ratio..................... Section 3.1
Newco's Registration Statement................. Article 7
Options........................................ Section 3.6
Returns........................................ Section 5.9
WebMD End Date................................. Section 12.1(g)
WebMD Merger Sub............................... Section 1.4(b)
WebMD Stock Exchange Ratio..................... Section 3.1
</TABLE>
(c) Any singular term in this Agreement shall be deemed to include the
plural, and any plural term the singular. Whenever the words "INCLUDE,"
"INCLUDES" or "INCLUDING" are used in this Agreement, they shall be deemed
followed by the words "WITHOUT LIMITATION."
13.2 Brokers and Finders. Except for Hambrecht & Quist ("H&Q") and
Stephens, Inc. ("Stephens") as to GNN, each of the Parties represents and
warrants that neither it nor any of its
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officers, directors, employees, or Affiliates has employed any broker or finder
or incurred any Liability for any financial advisory fees, investment bankers'
fees, brokerage fees, commissions, or finders' fees in connection with this
Agreement or the transactions contemplated hereby. In the event of a claim by
any broker or finder based upon his or its representing or being retained by or
allegedly representing or being retained by Newco, GNN or WebMD, each of Newco,
GNN and WebMD, as the case may be, agrees to indemnify and hold the other
Parties harmless of and from any Liability in respect of any such claim. GNN
hereby represents warrants to all of the other Parties hereto that copies of all
of its Contracts with H&Q and Stephens have been delivered to Newco and WebMD
prior to execution of this Agreement.
13.3 Entire Agreement. Except as otherwise expressly provided herein, this
Agreement (including the documents and instruments referred to herein)
constitutes the entire agreement between the Parties with respect to the
transactions contemplated hereunder and supersedes all prior arrangements or
understandings with respect thereto, written or oral. Nothing in this Agreement
expressed or implied, is intended to confer upon any Person, other than the
Parties or their respective successors, any rights, remedies, obligations, or
liabilities under or by reason of this Agreement.
13.4 Amendments. To the extent permitted by Law, this Agreement may be
amended by a subsequent writing signed by each of the Parties upon the approval
of the Boards of Directors of each of the Parties, whether before or after
stockholder approval of this Agreement has been obtained; provided, that after
any such approval by the holders of GNN Common Stock, there shall be made no
amendment that pursuant to the GCLSD requires further approval by such
stockholders without the further approval of such stockholders.
13.5 Waivers.
(a) Prior to or at the Effective Time, Healtheon and WebMD (jointly), or
if this Agreement has been terminated as to Newco and Healtheon under Section
12.3, WebMD individually, acting through their respective Boards of Directors,
chief executive officers or other authorized officers, shall have the right to
waive any Default in the performance of any term of this Agreement by GNN, to
waive or extend the time for the compliance or fulfillment by GNN of any and all
of its obligations under this Agreement, and to waive any or all of the
conditions precedent to the obligations of Purchaser under this Agreement,
except any condition which, if not satisfied, would result in the violation of
any Law. No such waiver shall be effective unless in writing signed by a duly
authorized officer of Newco, Healtheon and/or WebMD (as provided above).
(b) Prior to or at the Effective Time, GNN, acting through its Board of
Directors, chief executive officer or other authorized officer, shall have the
right to waive any Default in the performance of any term of this Agreement by
Purchaser, to waive or extend the time for the compliance or fulfillment by
Purchaser of any and all of its obligations under this Agreement, and to waive
any or all of the conditions precedent to the obligations of GNN under this
Agreement, except any condition which, if not satisfied, would result in the
violation of any Law. No such waiver shall be effective unless in writing signed
by a duly authorized officer of GNN, and any waiver by GNN of a Default or
condition precedent of Newco will not, if this Agreement is subsequently
terminated as to Newco and Healtheon under Section 12.3, be a waiver of the same
Default or condition precedent of WebMD.
(c) The failure of any Party at any time or times to require performance
of any provision hereof shall in no manner affect the right of such Party at a
later time to enforce the same or any other provision of this Agreement. No
waiver of any condition or of the breach of any term contained in this Agreement
in one or more instances shall be deemed to be or construed as a further or
continuing waiver of such condition or breach or a waiver of any other condition
or of the breach of any other term of this Agreement.
13.6 Assignment. Except as expressly contemplated hereby, neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by any Party hereto (whether by operation of Law or otherwise) without
the prior written consent of the other Party; provided that Newco may assign all
of its rights and obligations hereunder to Healtheon in the event that Healtheon
acquires WebMD
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under the Healtheon/WebMD Agreement instead of Newco, or in the event that
Healtheon and WebMD agree that Healtheon shall acquire WebMD and Healtheon files
a Registration Statement to effect such transaction in which event WebMD and GNN
agree to execute any documents reasonably requested by Healtheon to evidence the
substitution of Healtheon and a wholly owned Subsidiary of Healtheon for Newco
and Merger Corp. as Parties to this Agreement; provided further that GNN hereby
agrees that upon such an assignment Section 7.3 and the last two sentences of
Section 7.1 shall be deemed deleted from this Agreement. Subject to the
preceding sentence, this Agreement will be binding upon, inure to the benefit of
and be enforceable by the Parties and their respective successors and assigns.
13.7 Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered by hand, by
facsimile transmission, by registered or certified mail, postage pre-paid, or by
courier or overnight carrier, to the persons at the addresses set forth below
(or at such other address as may be provided hereunder), and shall be deemed to
have been delivered as of the date so delivered:
<TABLE>
<S> <C>
GNN: Greenberg News Networks, Inc.
1175 Peachtree Street
100 Colony Square, Suite 2400
Atlanta, Georgia 30361
Telecopy Number: (404) 541-2096
Attention: Mr. Alan N. Greenberg
Copy to Counsel: King & Spalding
191 Peachtree Street
Atlanta, Georgia 30303-1763
Telecopy Number: (404) 572-5145
Attention: William G. Roche, Esq.
Newco or Healtheon: Healtheon/WebMD Corporation
c/o Healtheon Corporation
4600 Patrick Henry Road
Santa Clara, California 95054
Telecopy Number: (408) 876-5175
Attention: Jack Dennison
Copy to Counsel: Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Telecopy Number: (650) 493-6811
Attention: Larry Sonsini; Marty Korman; Daniel Mitz
WebMD: WebMD, Inc.
400 The Lenox Building
3399 Peachtree Road, NE
Atlanta, Georgia 30326
Telecopy Number: (404) 479-7603
Attention: Mr. W. Michael Heekin
Copy to Counsel: Alston & Bird LLP
One Atlantic Center
1201 W. Peachtree Street
Atlanta, Georgia 30309
Telecopy Number: (404) 881-4777
Attention: J. Vaughan Curtis, Esq.
</TABLE>
13.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the Laws of the State of Delaware, without regard to any
applicable conflicts of Laws.
13.9 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
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<PAGE> 640
13.10 Captions. The captions contained in this Agreement are for reference
purposes only and are not part of this Agreement.
13.11 Interpretations. Neither this Agreement nor any uncertainty or
ambiguity herein shall be construed or resolved against any party, whether under
any rule of construction or otherwise. No party to this Agreement shall be
considered the draftsman. The parties acknowledge and agree that this Agreement
has been reviewed, negotiated and accepted by all parties and their attorneys
and shall be construed and interpreted according to the ordinary meaning of the
words used so as fairly to accomplish the purposes and intentions of all parties
hereto.
13.12 Enforcement of Agreement. The Parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any court of the United States
or any state having jurisdiction, this being in addition to any other remedy to
which they are entitled at law or in equity.
13.13 Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
13.14 Facsimile Signatures. Any signature page delivered by a facsimile or
telecopy machine will be binding to the same extent as an original signature
page. Any Party who delivers such a signature page agrees to later deliver an
original counterpart to any Party which requests it.
13.15 Nonsurvival of Representations and Warranties. None of the
representations and warranties of Newco in this Agreement will survive the
Effective Time of the Merger. None of the representations and warranties of
WebMD in this Agreement will survive the Effective Time of the Merger if WebMD
makes the WebMD Election under Section 10.15. If WebMD does not make the WebMD
Election, the representations and warranties of WebMD in this Agreement will
survive the Effective Time of the Merger for one (1) year as and to the extent
contemplated in Article 14. The representations and warranties of GNN in this
Agreement will survive the Effective Time of the Merger for one (1) year as and
to the extent contemplated in Article 14. Nothing in this Section 13.15 shall
limit any covenant or agreement of the Parties which by its terms contemplates
performance after the Effective Time.
ARTICLE 14
ESCROW; SHAREHOLDER REPRESENTATIVE
14.1 Escrow Arrangements.
(a) Escrow Fund. At the Effective Time, each Stockholder will be deemed
to have received and consented to the deposit with the Escrow Agent (as defined
below) of the Escrow Shares pursuant to the Escrow Agreement, without any act
required on the part of the Stockholder. As soon as practicable after the
Effective Time, the Escrow Shares, without any act required on the part of any
Stockholder, will be deposited with an escrow agent acceptable to Purchaser and
the Representative (as defined below) as Escrow Agent (the "ESCROW AGENT"), such
deposit to constitute an escrow fund (the "ESCROW FUND") to be governed by the
terms set forth herein. The portion of the Escrow Amount contributed on behalf
of each Stockholder shall be in proportion to the aggregate Purchaser Common
Stock which such holder would otherwise be entitled to receive under Section
3.1, which respective percentage interest (the "PERCENTAGE INTEREST") will be
determined as of the Effective Time and set forth on an exhibit to the Escrow
Agreement. The Escrow Fund shall be contributed entirely out of the shares of
Purchaser Common Stock issuable upon the Merger in respect of GNN Capital Stock.
From and after the Effective Time, the Escrow Fund shall be available to
compensate and indemnify Purchaser and the Surviving Corporation and their
respective officers, directors, employees, representatives, agents, stockholders
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<PAGE> 641
controlling persons and Affiliates (each a "PURCHASER INDEMNITEE") against and
for any Loss suffered or incurred by a Purchaser Indemnitee, as and when due,
which arises out of or results from a breach of any of the representations,
warranties, covenants or agreements of GNN set forth in this Agreement or in any
document delivered by GNN pursuant to this Agreement; provided, however, that
for purposes of determining whether or not GNN has breached any of its
representations and warranties in this Agreement, exceptions and qualifications
for Material, Materiality or Material Adverse Effect and similar expressions
shall be disregarded. A Purchaser Indemnitee may not receive any shares from the
Escrow Fund unless and until a Loss Notice or Loss Notices (as defined below)
identifying Indemnifiable Losses, the aggregate amount of which exceed $500,000
have been delivered to the Escrow Agent pursuant to the terms hereof; in such
case, an Indemnitee may recover from the Escrow Fund its Losses in excess of
$500,000 in accordance with the terms and provisions of this Article 14.
(b) Additional Shares. If this Agreement is terminated as to Newco and
Healtheon under Section 12.3, and the transactions contemplated hereby are
consummated and WebMD acquires GNN as set forth herein, then from and after the
Effective Time WebMD shall issue up to an aggregate maximum number of shares of
WebMD Non-Voting Common Stock equal to ten percent (10%) of the total number of
shares of WebMD Non-Voting Common Stock issuable pursuant to Section 3.1 hereof
as adjusted pursuant to Section 3.2 (the "ADDITIONAL SHARES") to compensate and
indemnify the Stockholders against and for any Loss suffered or incurred by the
Stockholders (collectively in their capacity as stockholders of GNN)
("STOCKHOLDER INDEMNITIES"), as and when due, which arises out of or results
from a breach of any of the representations, warranties, covenants, or
agreements of WebMD or Surviving Corporation (but excluding any Losses against
which a Purchaser Indemnitee may be indemnified under Section 14.1(a) above,
ignoring any time limits, limitations on amount, deductibles and other
restrictions set forth in this Article 14) set forth in this Agreement or any
document delivered by WebMD or Surviving Corporation pursuant to this Agreement;
provided, however, that for purposes of determining whether or not WebMD or
Surviving Corporation has breached any of its representations and warranties in
the Agreement, exceptions for Material, Materiality or Material Adverse Effect
and similar expressions shall be disregarded. The Stockholder Indemnitees will
not be entitled to receive any indemnity under this Section 14.2 unless and
until their collective Losses exceed $500,000.
14.2 Definitions. As used in this Article 14, the following terms shall
have the following meanings:
(a) "DISPUTED LOSS NOTICE" shall mean a Loss Notice that is disputed by
the Indemnitor by delivery of a Protest Notice.
(b) "ESCROW SHARES" shall mean a number of shares equal to ten percent
(10%) of the aggregate number of shares of Purchaser Common Stock issuable
pursuant to Section 3.1 hereto which shall be issued and placed in Escrow (plus
any additional shares as may be issued upon any Anti-Dilution Event effected by
Purchaser after the Effective Time or Additional Shares pursuant to Section
14.7).
(c) "INDEMNIFIABLE LOSS" shall mean any Loss for which an Indemnitee may
be compensated and indemnified pursuant to Sections 14.1 and 14.8(b) hereof. The
amount of recovery for any Indemnifiable Loss shall be reduced by any insurance
proceeds received as a result of any such Indemnifiable Loss.
(d) "INDEMNITEE" shall mean any Purchaser Indemnitee or the Stockholder
Indemnitees entitled to indemnification under this Article 14.
(e) "INDEMNITOR" shall mean any Party obligated to indemnify an
Indemnitee under this Article 14.
(f) "LOSS" shall mean any direct or indirect demand, claim, obligation,
assessment, loss, Liability, damage (including special and consequential
damages), cost or expense, including without limitation, penalties, fines, or
interest on any amount payable to a third party as a result of the foregoing,
and any legal or other expense reasonably incurred in connection with
investigating or defending any claim or action, whether or not resulting in any
Liability.
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<PAGE> 642
(g) "LOSS NOTICE" shall mean a written notice, as prescribed in Section
14.3 hereof, provided by an Indemnitee to the Indemnitor and (if the Indemnitee
is a Purchaser Indemnitee) the Escrow Agent (i) stating the Indemnitee has paid
or properly accrued or reasonably anticipates that it will have to pay or accrue
an Indemnifiable Loss or potential Indemnifiable Loss, (ii) setting forth in
reasonable detail the individual items comprising such Indemnifiable Loss, the
date each such item was paid or properly accrued, or the basis for such
anticipated liability, and the nature of the misrepresentation, breach of
warranty or covenant to which such item is related, and (iii) to the extent the
amount of the Indemnifiable Loss or potential Indemnifiable Loss is reasonably
calculable, an estimate of the number of Escrow Shares (if the Indemnitee is a
Purchaser Indemnitee) or Additional Shares (if the Indemnitees are the
Stockholder Indemnitees) to be delivered to an Indemnitee with respect to such
Indemnifiable Loss or potential Indemnifiable Loss.
(h) "REPRESENTATIVE" shall mean Alan N. Greenberg, Russell R. French and
Doug Martin (collectively) or any of their successors appointed in accordance
with Section 14.9 of this Agreement.
(i) "REPRESENTATIVE EXPENSES" shall mean expenses, including reasonable
attorneys fees and other expenses, of the Representative, in an amount up to
$10,000, incurred in connection with his obligations under this Agreement.
(j) "PROTEST NOTICE" shall mean a written notice, as prescribed in
Section 14.3 hereof, provided by the an Indemnitor to an Indemnitee and (if the
Indemnitee is a Purchaser Indemnitee) the Escrow Agent if the Indemnitor
disputes any Loss Notice received from an Indemnitee.
(k) "VALUE PER SHARE" shall mean the Conversion Price.
14.3 Notice of Claim. If an Indemnitee incurs or has reason to believe it
may incur an Indemnifiable Loss, or should an Indemnitee negotiate a proposed
settlement in satisfaction of a potential Indemnifiable Loss, it shall promptly
provide a Loss Notice to the Indemnitor and (if the Indemnitee is a Purchaser
Indemnitee) the Escrow Agent. If the Indemnitor disputes the amount sought under
any such Loss Notice or otherwise disputes the right of the Indemnitee to be
indemnified hereunder, the Indemnitor shall provide the Indemnitee and (if the
Indemnitee is a Purchaser Indemnitee) the Escrow Agent a Protest Notice within
thirty (30) days of the date any such Loss Notice is received by the Indemnitor.
If no Protest Notice is received by the Indemnitee and (if the Indemnitee is a
Purchaser Indemnitee) the Escrow Agent within thirty (30) days from the date on
which any Loss Notice is received by the Indemnitor, or if a Protest Notice is
received and the dispute is resolved in favor of the Indemnitee after following
the procedures set forth below, then (i) if the Indemnitee is a Purchaser
Indemnitee, the Escrow Agent shall cause to be delivered to Purchaser and
Purchaser shall promptly cancel and retire that number of Escrow Shares as shall
equal the number of Escrow Shares (rounded to the next highest whole number)
that, when multiplied by the Value Per Share, equals the amount of Indemnifiable
Loss sought by or awarded to the Indemnitee, and (ii) if the Indemnitees are
Stockholder Indemnitees, WebMD shall cause to be issued and delivered to the
Escrow Agent that number of Additional Shares as shall equal the number of
Additional Shares (rounded to the next highest whole number) that, when
multiplied by the Value Per Share, equals the amount of the Indemnifiable Loss
sought by or awarded to the Stockholder Indemnities. If the Indemnitee and (if
the Indemnitee is a Purchaser Indemnitee) the Escrow Agent receive a Protest
Notice within such 30-day period, the Escrow Agent shall not deliver any Escrow
Shares until receipt by it of written instructions (i) signed by the
Representative and a duly authorized officer of the Indemnitee; or (ii) signed
by an arbitration panel that has considered and resolved such dispute as
provided in Section 14.4 below, which sets forth the number of Escrow Shares, if
any, to be delivered to the Indemnitee in accordance with this paragraph. After
delivery of any Escrow Shares to a Purchaser Indemnitee in accordance with this
paragraph, the Escrow Agent shall be reissued a certificate in respect of any
remaining Escrow Shares.
14.4 Procedure With Respect to Disputed Indemnifiable Loss. A Disputed
Loss Notice may be resolved by the agreement of the Indemnitor and the
Indemnitee, in which case (if the Indemnitee is a Purchaser Indemnitee) written
notice of such agreement shall be promptly provided to the Escrow Agent,
together with a statement of the agreed upon amount to be reimbursed to the
Indemnitee. If the
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Indemnitor and the Indemnitee are unable to resolve a Disputed Loss Notice
within sixty (60) days of delivery of the Protest Notice, then such Disputed
Loss Notice shall be submitted to arbitration in accordance with the
then-current commercial arbitration rules of the American Arbitration
Association ("AAA"). If a Disputed Loss Notice is to be arbitrated, the
Indemnitor shall select one arbitrator, the Indemnitee(s) shall select one
arbitrator, and the two arbitrators so chosen shall select a third. Any decision
of the arbitration panel shall require the vote of at least two (2) of such
arbitrators and shall be deemed conclusive and each party shall be deemed to
have waived any rights to appeal therefrom. In any arbitration pursuant to this
Section 14.4, an Indemnitee shall be deemed to be the prevailing party if the
arbitrators award the Indemnitee(s) at least fifty percent (50%) of the amount
in dispute, plus any amounts not in dispute; otherwise, the Indemnitor shall be
deemed to be the prevailing party. The non-prevailing party to an arbitration
shall pay its own expenses, the fees of each arbitrator, the administrative
costs of the arbitration (including the administrative fee of AAA), and the
expenses, including without limitation, reasonable attorneys' fees and costs,
incurred by the other party to the arbitration. If resolution of a Disputed Loss
Notice is not made within ninety (90) days of the date of the Protest Notice as
provided in this Section 14.4, then (if the Indemnitee is a Purchaser
Indemnitee) the Escrow Agent may, in its sole discretion, either (i) continue to
hold the Escrow Shares undisbursed until such time as the disputing parties
agree in writing as to a proper disposition of such Escrow Shares, or (ii) if
such agreement is not forthcoming, the Escrow Agent shall be entitled to tender
into the registry or custody of any court of competent jurisdiction all money or
property in its hand under the terms of this Agreement, and, upon the advice of
counsel, may take such other legal action as may be appropriate or necessary,
whereupon the parties hereto agree Escrow Agent shall be discharged from all
further duties under the Escrow Agreement. The filing of any such legal
proceedings shall not deprive Escrow Agent of its compensation earned prior to
such filing.
14.5 Employment of Counsel. The Indemnitor may control the defense of any
third party claim with respect to which an Indemnifiable Loss has been asserted
except to the extent any such claim seeks non-monetary remedies in which case
the Indemnitee may control the defense of such elements of the claim that
involve non-monetary remedies. Notwithstanding the foregoing, if the aggregate
amount of all such third party and indemnity claims plus the aggregate good
faith estimates of the reasonable expenses to defend such claims exceed the
number of remaining Escrow Shares (if the Indemnitee is a Purchaser Indemnitee)
or the remaining Additional Shares (if the Indemnitees are the Stockholder
Indemnitee(s) multiplied by the Value Per Share, the Indemnitee(s)) may control
the defense of all such third party and general indemnity claims which have been
brought under this Agreement, provided that the Indemnitees may not settle a
third party claim without the approval of the Indemnitor, which approval shall
not be unreasonably withheld, except to the extent any such claim seeks
non-monetary remedies in which case the Indemnitee(s) may settle such claims
without the approval of the Indemnitor to the extent that such claims involve
non-monetary remedies. When the Indemnitee is in control of the defense of such
a claim, the Indemnitor may, at its expense, and when the Indemnitor is in
control of the defense of a claim, the Indemnitee may, at its expense (which
expenses shall not be treated as a Loss hereunder), participate in the defense
of any litigation or claim.
14.6 Term; Expiration; Limits.
(a) Term -- General. With respect to the indemnity obligations set forth
in Section 14.1 hereof and the availability of the Escrow Fund and Additional
Shares to compensate and indemnify an Indemnitee, the term of escrow for the
Escrow Shares and WebMD's obligation to issue any Additional Shares shall
commence on the Closing Date of the Merger and shall terminate one (1) year
after the Effective Time. Purchaser and the Representative shall provide written
notice to the Escrow Agent upon expiration of the escrow for the Escrow Shares.
(b) Expiration of Term -- No Claim Pending. If at the expiration of the
term provided in Section 14.6(a) above, either (i) no Loss Notice has been
received with respect to an Indemnifiable Loss; or (ii) any Loss Notice that has
been received has been finally resolved in accordance with this Agreement and no
litigation or claim is pending for which an Indemnitee may be entitled to
indemnification hereunder, the Escrow Agent shall (i) deliver to the transfer
agent for Purchaser Common
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Stock for issuance to each Stockholder, a certificate representing the number of
such shares equal to the aggregate number of the Escrow Shares subject to the
escrow which term is expiring and then remaining in escrow times the Percentage
Interest for such Stockholder, and (ii) deliver to each Stockholder, any cash in
the Escrow Fund times the Percentage Interest for such Stockholder. The
Representative and Purchaser shall provide written notice to the Escrow Agent
which sets forth the number of Escrow Shares to be delivered as provided in the
foregoing sentence. Any such delivery of Purchaser Common Stock shall be of full
shares and any fractional portions shall be rounded to a whole number by the
Escrow Agent so that the number of shares remaining in escrow to be delivered
will be fully allocated among such Stockholders.
(c) Expiration of Term -- Claim Pending. If at the expiration of the
term provided in Section 14.6(a) above, any claim is pending under Section 14.1
for which a Loss Notice has been delivered to the Indemnitor prior to such
expiration and for which an Indemnitee would be entitled to indemnification if
such claim were resolved adversely to Indemnitor, then (i) if the Indemnitee is
a Purchaser Indemnitee, the Escrow Agent shall retain in such escrow that number
of shares of Purchaser Common Stock as shall equal the number of Escrow Shares
(rounded to the next highest whole number) that, when multiplied by the Value
Per Share, equals any amount set forth by such Indemnitee in the Loss Notices
with respect to such claims (the "RETAINED SHARES"), and (ii) if any claim
pending is being asserted by the Stockholder Indemnitees, WebMD shall remain
obligated to issue up to that number of shares of WebMD Non-Voting Stock as
shall equal the number of Additional Shares (rounded to the next highest whole
number) that when multiplied by the Value Per Share, equals any amount set forth
by the Stockholder Indemnitees in the Loss Notices with respect to such claims
solely to the extent that it is finally determined that WebMD is obligated to
issue such Additional Shares to satisfy its obligations under this Article 14.
In the event that any claim pending at the expiration of the term provided in
Section 14.6(a) above is asserted by the Purchaser Indemnitee, the number of
Escrow Shares, less the number of Retained Shares, shall then be distributed to
the GNN Stockholders as set forth in Section 14.6(b) above. Upon the resolution
of any claim for which shares were retained in escrow at the expiration of the
term set forth in Section 14.6(a) and receipt of written notice from Purchaser
and the Representative to such effect, the Escrow Agent shall cancel the
appropriate number of Retained Shares (if any) and shall distribute any
remaining Retained Shares held with respect to such claim to the GNN
Stockholders as set forth in Section 14.6(b) above.
(d) Effect of Final Delivery. Notwithstanding the expiration of the term
set forth in Section 14.6(b) above, the provisions of Article 14 of this
Agreement shall continue in full force and effect until the Escrow Agent has
delivered all of the Escrow Shares pursuant to the terms hereof and all claims
pending at the expiration of such term are finally resolved. After all of such
shares have been so delivered and such claims resolved, all rights, duties and
obligations of the respective parties under this Article 14 shall terminate.
(e) Maximum Liability and Remedies. If the Closing occurs, except for
remedies based upon fraud and except for equitable remedies (including temporary
restraining orders, injunctive relief and specific performance), (i) the rights
of Purchaser Indemnitees to make claims on the Escrow Shares pursuant to this
Agreement shall be the sole and exclusive remedy of Purchaser Indemnitees with
respect to any breach of a representation, warranty, covenant or agreement made
by GNN under this Agreement or in any certificate or the GNN Disclosure Letter
delivered by GNN pursuant to this Agreement or against GNN in connection with
the Merger, and (ii) the rights of the Stockholder Indemnitees to make claims on
the Additional Shares pursuant to this Agreement shall be the sole and exclusive
remedy of the Stockholder Indemnitees with respect to any breach of a
representation, warranty, covenant or agreement made by WebMD under this
Agreement or in any document delivered by WebMD or the Surviving Corporation
pursuant to this Agreement or against WebMD or Surviving Corporation in
connection with the Merger.
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14.7 Dividends; Voting Rights; Additional Shares.
(a) Cash Dividends; Voting Rights. The Escrow Agent shall
distribute promptly any and all cash dividends or other cash income with respect
to the Escrow Shares to the GNN Stockholders at their addresses of record and in
accordance with their Percentage Interest in the Escrow Fund (which amounts
shall also be allocable to the GNN Stockholders for tax reporting purposes). By
written notice signed by the Representative, the Representative shall have the
right to direct the Escrow Agent as to the exercise of any voting rights with
respect to such Escrow Shares (if any) held by the Escrow Agent on behalf of the
GNN Stockholders, and the Escrow Agent shall comply with such directions if
received from the Representative at least five (5) days prior to the date of the
meeting at which such vote is to be taken.
(b) Stock Splits; Stock Dividends. In the event of any Anti-Dilution
Event with respect to Purchaser Common Stock that becomes effective during the
term of this Agreement, the additional shares so issued (if any) with respect to
the Escrow Shares shall be added to the Escrow Shares and any other references
herein to a specific number of shares of Purchaser Common Stock and the Value
Per Share shall be proportionately adjusted.
(c) Additional Shares. Any Additional Shares issued pursuant to this
Article 14 prior to the expiration of the term set forth in Section 14.6(a)
hereof, shall be issued to the Escrow Agent and become a part of the Escrow
Fund. Any Additional Shares issued by WebMD pursuant to this Article 14 after
the expiration of the term set forth in Section 14.6(a) hereof in accordance
with Section 14.6(c) shall be issued by WebMD to the Stockholders, with each
such Stockholder receiving a certificate representing such shares equal to the
aggregate number of Additional Shares issued multiplied by the Percentage
Interest for such Stockholder. Any such additional issuance of WebMD Non-Voting
Common Stock shall be of full shares and any fractional portion shall be rounded
to a whole number at the direction of the Representative such that the number of
shares issued will be fully allocated among the Stockholders.
14.8 Escrow Agent.
(a) Liability. In performing any of its duties under the Escrow
Agreement and in accordance with the terms of this Agreement, or upon the
claimed failure to perform its duties thereunder, the Escrow Agent shall not be
liable to anyone for any damages, losses or expenses which they may incur as a
result of the Escrow Agent so acting, or failing to act; provided, however, that
Escrow Agent shall be liable for damages arising out of its willful default or
gross negligence under the Escrow Agreement. Accordingly, by virtue of approving
the Merger in accordance with this Agreement, each Party shall be deemed to have
consented and agreed that the Escrow Agent shall not incur any such Liability
with respect to (i) any action taken or omitted to be taken in good faith upon
advice of its counsel or counsel for Indemnitor or the Indemnitee(s) given with
respect to any questions relating to the duties and responsibilities of the
Escrow Agent hereunder; or (ii) any action taken or omitted to be taken in
reliance upon any document, including any written notice or instructions
provided for in this Agreement or the Escrow Agreement, not only as to its due
execution and to the validity and effectiveness of its provisions, but also as
to the truth and accuracy of any information contained therein, which the Escrow
Agent shall in good faith believe to be genuine, to have been signed or
presented by the purported proper person or persons and to conform with the
provisions of this Agreement and the Escrow Agreement. Written instructions
provided to Escrow Agent hereunder by Purchaser and/or the Representative shall
be signed by the "AUTHORIZED REPRESENTATIVE" as identified on a schedule to the
Escrow Agreement attached hereto. The limitation of liability provisions of this
Section 14.8 shall survive the termination of this Agreement, the Escrow
Agreement and the resignation or removal of the Escrow Agent.
(b) Indemnification of Escrow Agent. Purchaser and the Stockholders,
hereby, jointly and severally, agree to indemnify and hold harmless the Escrow
Agent against any and all losses, claims, damages, Liabilities and expenses,
including, without limitation, reasonable costs of investigation and counsel
fees and disbursements (both at the trial and appellate levels) which may be
imposed on Escrow Agent or incurred by it in connection with its acceptance of
appointment as Escrow Agent or the performance of its duties (except in
connection with the willful default or gross negligence of the Escrow
-55-
<PAGE> 646
Agent), including, without limitation, any litigation arising from this
Agreement or the Escrow Agreement, or involving the subject matter thereof. The
indemnity provisions of this Section 14.8 shall survive the termination of this
Agreement, the Escrow Agreement and the resignation or removal of the Escrow
Agent.
(c) Resignation. The Escrow Agent shall be able to resign at any time
from its obligations under the Escrow Agreement by providing written notice to
the parties thereto. Such resignation shall be effective not later than sixty
(60) days after such written notice has been given. The Escrow Agent shall have
no responsibility for the appointment of a successor escrow agent. If a
successor escrow agent is not selected within sixty (60) days of the resignation
of Escrow Agent, the Escrow Agent shall have the right to institute a Bill of
Interpleader or other appropriate judicial proceeding in any court of competent
jurisdiction, and shall be entitled to tender into the registry or custody of
any court of competent jurisdiction all money or property in its hand under the
terms of this Agreement, whereupon the Parties hereto agree Escrow Agent shall
be discharged from all further duties under this Agreement and the Escrow
Agreement. The filing of any such legal proceedings shall not deprive Escrow
Agent of its compensation earned prior to such filing. The Escrow Agent may be
removed for cause by Purchaser or the Representative. The removal of the Escrow
Agent shall not deprive the Escrow Agent of its compensation earned prior to
such removal.
(d) Expenses of Escrow Agent. Purchaser shall be liable for the fees and
expenses of the Escrow Agent. Escrow Agent shall bill Purchaser for the amount
of such fees and expenses and Purchaser shall pay the fees and expenses to
Escrow Agent.
14.9 Representative.
(a) Representative; Power and Authority. In the event the Merger is
approved by the Stockholders, effective upon such vote, and without further act
of any GNN Stockholder, Alan N. Greenberg, Russell R. French and Doug Martin
(collectively) shall be appointed as agent and attorney-in-fact for each
stockholder of GNN (except such GNN Stockholders, if any, as shall have
perfected their appraisal or dissenters' rights under Delaware law), for and on
behalf of each such GNN Stockholder, with full power and authority to represent
the GNN Stockholders and their successors with respect to all matters arising
under this Agreement and the Escrow Agreement, and all actions taken by the
Representative hereunder shall be binding upon such GNN Stockholders and their
successors as if expressly ratified and confirmed in writing by each of them.
Without limiting the generality of the foregoing, the Representative shall have
full power and authority, on behalf of all the GNN Stockholders and their
successors, to interpret all the terms and provisions of this Agreement, to
dispute or fail to dispute any claim of Indemnifiable Loss against the Escrow
Shares made by an Indemnitee, to assert claims of Indemnifiable Loss against the
Additional Shares, to negotiate and compromise any dispute which may arise under
this Agreement, to sign any releases or other documents with respect to any such
dispute, and to authorize delivery of Escrow Shares in satisfaction (partial or
otherwise) of by a Purchaser Indemnitee or any other payments to be made with
respect thereto. All determinations of the Representative shall be decided by a
majority thereof in the event there is more than one Representative.
(b) Resignation; Successors. The Representative, or any successor
hereafter appointed, may resign and shall be discharged of his duties hereunder
upon the appointment of a successor Representative as hereinafter provided. In
case of such resignation, or in the event of the death or inability to act of
the Representative, a successor shall be named from among the GNN Stockholders
by a majority of the members of the Board of Directors of GNN who served on such
board prior to the Merger. Each such successor Representative shall have all the
power, authority, rights and privileges hereby conferred upon the original
Representative, and the term "REPRESENTATIVE" as used herein shall be deemed to
include such successor Representative.
(c) Liability. In performing any of his duties under this Agreement, or
upon the claimed failure to perform his duties hereunder, the Representative
shall not be liable to the Stockholders or anyone else for any damages, losses
or expenses which they may incur as a result of any act, or failure to act under
this Agreement or the Escrow Agreement; provided, however, that the
Representative shall be liable for
-56-
<PAGE> 647
damages arising out of actions or omissions that both (i) were taken or omitted
not in good faith and (ii) constituted willful default or gross negligence under
this Agreement or the Escrow Agreement. Accordingly, the Representative shall
not incur any such Liability with respect to (i) any action taken or omitted to
be taken in good faith upon advice of his counsel given with respect to any
questions relating to the duties and responsibilities of the Representative
hereunder; or (ii) any action taken or omitted to be taken in reliance upon any
document, including any written notice or instructions provided for in this
Agreement or the Escrow Agreement, not only as to its due execution and to the
validity and effectiveness of its provisions, but also as to the truth and
accuracy of any information contained therein, which the Representative shall in
good faith believe to be genuine, to have been signed or presented by the
purported proper person or persons and to conform with the provisions of this
Agreement and the Escrow Agreement. The limitation of liability provisions of
this Section 14.9 shall survive the termination of this Agreement and the
resignation of the Representative.
14.10 Representative Expenses. Purchaser shall pay Representative Expenses
in an amount up to $10,000.
[Signatures on next page.]
-57-
<PAGE> 648
IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be
executed on its behalf by officers thereunto as of the day and year first above
written.
GREENBERG NEWS NETWORKS, INC.
By: /s/ ALAN N. GREENBERG
---------------------------------------
Alan N. Greenberg
Title: Chief Executive Officer
HEALTHEON CORPORATION
By: /s/ JACK DENNISON
---------------------------------------
Jack Dennison
Title: Vice President
HEALTHEON/WEBMD CORPORATION
By: /s/ JACK DENNISON
---------------------------------------
Jack Dennison
Title: Vice President
WEBMD, INC.
By: /s/ JEFF ARNOLD
---------------------------------------
Jeff Arnold
Title: Chief Executive Officer
GNN MERGER CORP.
By: /s/ JACK DENNISON
---------------------------------------
Jack Dennison
Title: Vice President
-58-
<PAGE> 649
[LETTERHEAD OF MORGAN STANLEY & CO. INCORPORATED]
ANNEX D
May 20, 1999
Board of Directors
Healtheon Corporation
4600 Patrick Henry Road
Santa Clara, CA 95054
Members of the Board:
We understand that Healtheon Corporation ("Healtheon"), WebMD, Inc.
("WebMD"), and Water Acquisition Corp. ("Merger Sub"), a wholly-owned subsidiary
of Healtheon, entered into an Agreement and Plan of Reorganization, dated May
20, 1999 (the "Reorganization Agreement"), which provides, among other things,
for the merger or other business combination as contemplated by the Agreement
(the "Reorganization") of Merger Sub and WebMD. Pursuant to the Reorganization,
each outstanding share of common stock, no par value, of WebMD (the "WebMD
Common Stock"), other than shares held in treasury or held by Healtheon or any
subsidiary of WebMD or Healtheon or as to which dissenters' rights have been
perfected, will be converted into the right to receive 1.815 shares (the
"Exchange Ratio") of common stock, par value $0.0001 per share of Healtheon (the
"Healtheon Common Stock"). The terms and conditions of the Reorganization are
more fully set forth in the Reorganization Agreement.
We also understand that, in connection with the execution and delivery of
the Reorganization Agreement:
(i) WebMD will enter into voting and conversion agreements with certain
stockholders of WebMD;
(ii) WebMD will enter into a stockholder agreement with Microsoft
Corporation ("Microsoft"); and
(iii) Healtheon will enter into voting agreements with certain
stockholders of Healtheon.
We further understand, that among the conditions to the Reorganization,
WebMD will have received investments (the foregoing, collectively, the
"Strategic Investments"):
(i) from Microsoft pursuant to the terms of the investment agreement
dated May 12, 1999 among WebMD, Microsoft and certain other parties
named therein (the "Investment Agreement") in an amount equal to
$150,000,000 in exchange for 276,906 shares of Series E Preferred
Stock of WebMD (the "Series E Preferred Stock");
(ii) from investors other than Microsoft pursuant to the Investment
Agreement in an amount equal to $114,500,000 in exchange for 211,372
shares of Series E Preferred Stock; and
(iii) from investors other than Microsoft pursuant to one or more
agreements in substantially the same form as the Investment
Agreement in an amount equal to $35,000,000 in exchange for 65,534
shares of Series E Preferred Stock;
We also note that Microsoft has commenced a tender offer (the "Microsoft
Tender Offer") for all outstanding shares of Series F Preferred Stock of WebMD
pursuant to an Offer to Purchase dated April 10, 1999 (the "Offer to Purchase")
and that the consummation of such Microsoft Tender Offer is not a condition to
the consummation of the Reorganization.
You have asked for our opinion as to whether the Exchange Ratio pursuant to
the Agreement is fair from a financial point of view to Healtheon.
<PAGE> 650
Members of Board of Directors
May 20, 1999
Page 2
For purposes of the opinion set forth herein, we have, among other things:
(i) reviewed certain publicly available financial statements and other
information of Healtheon, including the pro forma impact of
Healtheon's proposed acquisition of Mede America Corporation ("Pro
Forma Healtheon");
(ii) reviewed certain internal financial statements and other financial
and operating data concerning WebMD and Pro Forma Healtheon prepared
by the managements of WebMD and Healtheon, respectively;
(iii) analyzed certain financial projections pro forma for the Strategic
Investments relating to WebMD prepared by the management of WebMD;
(iv) reviewed and discussed with the senior managements of Healtheon and
WebMD the strategic rationale for the Reorganization;
(v) discussed the past and current operations and financial condition and
the prospects of Healtheon, including information relating to certain
strategic, financial and operational synergies and benefits
anticipated from the Reorganization, with senior executives of
Healtheon;
(vi) discussed the past and current operations and financial condition and
the prospects of WebMD, including information relating to certain
strategic, financial and operational benefits anticipated from the
Reorganization, with senior executives of WebMD;
(vii) discussed the effect of the Strategic Investments on the business
and trading prospects of each of Pro Forma Healtheon and WebMD,
including information relating to certain strategic, financial and
operational benefits anticipated from each Strategic Investment,
with senior executives of Healtheon and WebMD, respectively;
(viii) discussed the effect of the Strategic Investments on the business
and trading prospects of Pro Forma Healtheon and WebMD pro forma for
the Reorganization, including information relating to certain
strategic, financial and operational benefits anticipated from each
Strategic Investment, with senior executives of Healtheon and WebMD;
(ix) reviewed the pro forma impact of the Reorganization on the income
statement of Pro Forma Healtheon;
(x) reviewed the reported prices and trading activity of the Healtheon
Common Stock;
(xi) compared the financial performance of Pro Forma Healtheon and WebMD
and the prices and trading activity of the Healtheon Common Stock
with that of certain publicly-traded companies comparable to
Healtheon and WebMD and their securities;
(xii) participated in negotiations and discussions among representatives
of Healtheon, WebMD and Microsoft and other investors to the
Strategic Investments and their respective advisors;
(xiii) reviewed the Reorganization Agreement, as well as certain other
documents related to the foregoing;
(xiv) reviewed the Offer to Purchase and the Form S-1 of WebMD filed with
the Securities and Exchange Commission (File No. 333-7135), as
amended on February 26, 1999, as well as certain documents related
to the foregoing; and
(xv) performed such other analysis and considered such other factors as we
have deemed appropriate.
<PAGE> 651
Members of Board of Directors
May 20, 1999
Page 3
We have assumed and relied upon, without independent verification, the
accuracy and completeness of the information reviewed by us for the purposes of
this opinion. With respect to the internal financial statements and other
financial and operating data, including forecasts, and discussions relating to
the strategic, financial and operational benefits anticipated from the Strategic
Investments and from the Reorganization provided by Healtheon and WebMD, we have
assumed that they have, in each case, been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the prospects
of Pro Forma Healtheon and WebMD. We have relied upon the assessment by the
managements of Healtheon and WebMD of their ability to retain key employees of
Pro Forma Healtheon and WebMD. We have also relied upon, without independent
verification, the assessment by the managements of Healtheon and WebMD of (i)
the strategic and other benefits expected to result from the Reorganization;
(ii) the timing and risks associated with the integration of Pro Forma Healtheon
and WebMD; and (iii) the validity of, and risks associated with, Pro Forma
Healtheon's and WebMD's existing and future products and technologies. We have
not made any independent valuation or appraisal of the assets or liabilities or
technology of Pro Forma Healtheon and WebMD, nor have we been furnished with any
such appraisals. In addition, we have assumed that the Reorganization will be
treated as a tax-free reorganization and/or exchange, pursuant to the Internal
Revenue Code of 1986 and will be consummated in accordance with the terms set
forth in the Reorganization Agreement. We have also assumed that all Strategic
Investments will be consummated in accordance with the terms of the Investment
Agreement, and that the Microsoft Tender Offer will not materially delay, or
otherwise have a material adverse effect on the consummation of the
Reorganization. Our opinion is necessarily based on financial, economic, market
and other conditions as in effect on, and the information made available to us
as of, the date hereof.
We have acted as financial advisor to the Board of Directors of Healtheon
in connection with this transaction and will receive a fee for our services. In
the past, Morgan Stanley & Co. Incorporated and its affiliates have provided
financing and advisory services for Healtheon, Microsoft and certain other
parties to the Strategic Investments and have received fees for the rendering of
these services. Morgan Stanley is also an equity owner of Healtheon as a result
in Morgan Stanley's participation in a private placement. In the ordinary course
of our business we may actively trade the securities of Healtheon, Microsoft or
any of the other parties to the Strategic Investments, for our own account and
for the accounts of our customers and, accordingly, may at any time hold a long
or short position in such securities.
It is understood that this letter is for the information of the Board of
Directors of Healtheon and may not be used for any other purpose without our
prior written consent. In addition, this opinion does not in any manner address
the prices at which the Healtheon Common Stock will actually trade following
consummation of the Reorganization, and Morgan Stanley expresses no opinion or
recommendation as to how the stockholders of Healtheon Common Stock and WebMD
Common Stock should vote at the shareholders' meetings held in connection with
the Reorganization.
Based upon and subject to the foregoing, we are of the opinion on the date
hereof that the Exchange Ratio pursuant to the Reorganization Agreement is fair
from a financial point of view to Healtheon.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: /s/ CHARLES R. CORY
------------------------------------
Charles R. Cory
Managing Director
<PAGE> 652
ANNEX E
May 20, 1999
Board of Directors
WebMD, Inc.
400 The Lenox Building
3399 Peachtree Road NE
Atlanta, GA 30326
Members of the Board:
We understand that WebMD, Inc. ("WebMD"), Healtheon Corporation
("Healtheon"), Water Acquisition Corp. (a wholly owned subsidiary of Healtheon,
"Merger Sub") and WebMD principal stockholders are proposing to enter into an
Agreement and Plan of Reorganization (the "Agreement") which will provide, among
other things, for the merger (the "Merger") of Merger Sub with and into WebMD.
Upon consummation of the Merger, WebMD will become a wholly owned subsidiary of
Healtheon. Under the terms set forth in the Agreement, at the effective time of
the Merger, each outstanding share of common stock of WebMD, no par value
("WebMD Common Stock"), other than certain shares to be canceled pursuant to the
Agreement and shares held by stockholders who properly exercise dissenters'
rights ("Dissenting Shares"), will be converted into the right to receive 1.815
shares (the "Exchange Ratio") of the common stock of Healtheon, par value
$0.0001 per share ("Healtheon Common Stock"). The terms and conditions of the
Merger are set out more fully in the Agreement.
You have asked us whether, in our opinion, the Exchange Ratio is fair from
a financial point of view and as of the date hereof to the "Holders of WebMD
Common Stock". The "Holders of WebMD Common Stock" shall be defined to include
all holders of WebMD Common Stock other than Healtheon, Merger Sub, any
affiliates of Healtheon or Merger Sub or holders of Dissenting Shares.
For purposes of this opinion we have, among other things:
(i) reviewed certain publicly available financial statements and other
business and financial information of Healtheon;
(ii) reviewed certain internal financial statements and other financial and
operating data concerning WebMD and Healtheon, including information
relating to certain strategic, financial and operational benefits
anticipated from the Merger, prepared by the managements of WebMD and
Healtheon, respectively;
(iii) reviewed certain financial forecasts and other forward looking
financial information prepared by the managements of WebMDand
Healtheon, respectively;
(iv) held discussions with the respective managements of WebMD and
Healtheon concerning the businesses, past and current operations,
financial condition and future prospects of both WebMD and Healtheon,
independently and combined, including discussions with the managements
of WebMD and Healtheon concerning cost savings and other synergies
that are expected to result from the Merger as well as their views
regarding the strategic rationale for the Merger;
(v) reviewed the financial terms and conditions set forth in the Agreement;
(vi) reviewed the stock price and trading history of Healtheon;
(vii) compared the financial performance of WebMD and Healtheon and the
prices and trading activity of Healtheon Common Stock with that of
certain other publicly traded companies comparable with WebMD and
Healtheon, respectively;
(viii) compared the financial terms of the Merger with the financial terms,
to the extent publicly available, of other transactions that we
deemed relevant;
<PAGE> 653
Board of Directors
WebMD, Inc.
May 20, 1999
Page 2
(ix) reviewed the pro forma impact of the Merger on Healtheon's revenues
and cash earnings per share;
(x) reviewed and considered in the analysis, information prepared by
members of management of WebMD and Healtheon relating to the relative
contributions of WebMD and Healtheon to the combined company;
(xi) prepared an analysis of WebMD with respect to an initial public
offering;
(xii) participated in discussions and negotiations among representatives of
WebMD and Healtheon and their financial and legal advisors; and
(xiii) made such other studies and inquiries, and reviewed such other data,
as we deemed relevant.
In our review and analysis, and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information provided to us (including information furnished to us orally or
otherwise discussed with us by management of WebMD and Healtheon) or publicly
available and have neither attempted to verify, nor assumed responsibility for
verifying, any of such information. We have relied upon the assurances of
management of WebMD and Healtheon that they are not aware of any facts that
would make such information inaccurate or misleading. Furthermore, we did not
obtain or make, or assume any responsibility for obtaining or making, any
independent evaluation or appraisal of the properties, assets or liabilities
(contingent or otherwise) of WebMD or Healtheon, nor were we furnished with any
such evaluation or appraisal. With respect to the financial forecasts and
projections (and the assumptions and bases therefor) for each of WebMD and
Healtheon that we have reviewed, upon the advice of the managements of WebMD and
Healtheon, we have assumed that such forecasts and projections have been
reasonably prepared in good faith on the basis of reasonable assumptions and
reflect the best currently available estimates and judgments as to the future
financial condition and performance of WebMD and Healtheon, respectively, and we
have further assumed that such projections and forecasts will be realized in the
amounts and in the time periods currently estimated. In this regard, we note
that each of WebMD and Healtheon face exposure to the Year 2000 problem. We have
not undertaken any independent analysis to evaluate the reliability or accuracy
of the assumptions made by the managements of WebMD and Healtheon with respect
to the potential effect that the Year 2000 problem might have on their
respective forecasts. We have assumed that the Merger will be consummated upon
the terms set forth in the Agreement without material alteration thereof,
including, among other things, that the Merger will be accounted for as a
"purchase method" business combination in accordance with U.S. generally
accepted accounting principles ("GAAP") and that the Merger will be treated as a
tax-free reorganization pursuant to the Internal Revenue Code of 1986, as
amended. In addition, we have assumed that the historical financial statements
of each of WebMD and Healtheon reviewed by us have been prepared and fairly
presented in accordance with U.S. GAAP consistently applied. We have also
assumed that the Exchange Ratio will not be reduced as a result of
indemnification or other provisions of the Agreement. We have relied as to all
legal matters relevant to rendering our opinion on the advice of counsel.
This opinion is necessarily based upon market, economic and other
conditions as in effect on, and information made available to us as of, the date
hereof. It should be understood that subsequent developments may affect the
conclusion expressed in this opinion and that we disclaim any undertaking or
obligation to advise any person of any change in any matter affecting this
opinion which may come or be brought to our attention after the date of this
opinion. Our opinion is limited to the fairness, from a financial point of view
and as to the date hereof, to the Holders of WebMD Common Stock of the Exchange
Ratio. We do not express any opinion as to (i) the value of any employee
agreement or other arrangement entered into in connection with the Merger, (ii)
any tax or other consequences that might
<PAGE> 654
Board of Directors
WebMD, Inc.
May 20, 1999
Page 3
result from the Merger or (iii) what the value of Healtheon Common Stock will be
when issued to WebMD's stockholders pursuant to the Merger or the price at which
the shares of Healtheon Common Stock that are issued pursuant to the Merger may
be traded in the future. Our opinion does not address the relative merits of the
Merger and the other business strategies that WebMD's Board of Directors has
considered or may be considering, nor does it address the decision of WebMD's
Board of Directors to proceed with the Merger.
In connection with the preparation of our opinion, we were not authorized
to solicit, and did not solicit, third-parties regarding alternatives to the
Merger.
We are acting as financial advisor to WebMD in connection with the Merger
and will receive (i) a fee contingent upon the delivery of this opinion and (ii)
an additional fee contingent upon the consummation of the Merger. In addition,
WebMD has agreed to indemnify us for certain liabilities that may arise out of
the rendering of this opinion. In the past, we have provided certain investment
banking services to WebMD for which we will be paid fees, including acting as
WebMD's exclusive financial advisor in connection with the tender offer
currently outstanding from Medicine Company ("Medicine") and the pending private
investments by, among others, Medicine. In the ordinary course of business, we
may trade in Healtheon's securities for our own account and the account of our
customers and, accordingly, may at any time hold a long or short position in
Healtheon's securities.
Our opinion expressed herein is provided for the information of the Board
of Directors of WebMD in connection with its evaluation of the Merger. Our
opinion is not intended to be and does not constitute a recommendation to any
stockholder of WebMD or Healtheon as to how such stockholder should vote, or
take any other action, with respect to the Merger. This opinion may not be
summarized, described or referred to or furnished to any party except with our
express prior written consent.
Based upon and subject to the foregoing considerations, it is our opinion
that, as of the date hereof, the Exchange Ratio is fair to the Holders of WebMD
Common Stock from a financial point of view.
Very truly yours,
/s/ BancBoston Robertson Stephens Inc.
<PAGE> 655
ANNEX F
[LETTERHEAD OF SALOMON SMITH BARNEY INC.]
August 2, 1999
The Board of Directors
MEDE America Corporation
90 Merrick Avenue
East Meadow, New York 11554
Members of the Board:
You have requested our opinion as to the fairness, from a financial point
of view, to the holders of the common stock of MEDE America Corporation ("MEDE
AMERICA") of the Exchange Ratio (defined below) provided for in the Agreement
and Plan of Reorganization, dated as of April 20, 1999, as amended as of August
2, 1999 (the "Agreement"), among Healtheon Corporation ("Healtheon"), Merc
Acquisition Corp., a wholly owned subsidiary of Healtheon ("Merger Sub"), and
MEDE AMERICA. As more fully described in the Agreement, (i) Merger Sub will be
merged with and into MEDE AMERICA (the "Merger") and (ii) each outstanding share
of the common stock, par value $0.01 per share, of MEDE AMERICA (the "MEDE
AMERICA Common Stock") will be converted into the right to receive 0.6593 (the
"Exchange Ratio") of a share of the common stock, par value $0.0001 per share,
of Healtheon (the "Healtheon Common Stock"), subject to adjustment, as specified
in the Agreement, in the event that the 10 day average closing price for
Healtheon Common Stock for the period ending two days prior to MEDE AMERICA'S
stockholders' meeting in respect of the Merger is less than $38.68. The
Agreement further provides that if, prior to the consummation of the Merger,
Healtheon is reorganized into a holding company structure as a result of which
the outstanding shares of Healtheon Common Stock are converted into shares of a
newly formed parent company ("Newco"), then such shares of MEDE AMERICA Common
Stock will instead be converted in the Merger into shares of the common stock of
Newco ("Newco Common Stock") in the same manner as if the Newco Common Stock
were Healtheon Common Stock.
In arriving at our opinion, we reviewed the Agreement and held discussions
with certain senior officers, directors and other representatives and advisors
of MEDE AMERICA and certain senior officers and other representatives and
advisors of Healtheon concerning the businesses, operations and prospects of
MEDE AMERICA and Healtheon. We examined certain publicly available business and
financial information relating to MEDE AMERICA and Healtheon as well as certain
financial forecasts and other information and data for MEDE AMERICA and
Healtheon which were provided to or otherwise discussed with us by the
respective managements of MEDE AMERICA and Healtheon, including information
relating to certain strategic implications and operational benefits anticipated
to result from the Merger. We reviewed the financial terms of the Merger as set
forth in the Agreement in relation to, among other things: current and
historical market prices and trading volumes of the MEDE AMERICA Common Stock
and Healtheon Common Stock; the historical and projected earnings and other
operating data of MEDE AMERICA and Healtheon; and the capitalization and
financial condition of MEDE AMERICA and Healtheon. We considered, to the extent
publicly available, the financial terms of other transactions recently effected
which we considered relevant in evaluating the Merger and analyzed certain
financial, stock market and other publicly available information relating to the
businesses of other companies whose operations we considered relevant in
evaluating those of MEDE AMERICA and Healtheon. We also evaluated the potential
pro forma financial impact of the Merger on Healtheon. In addition to the
foregoing, we conducted such other analyses and examinations and considered such
other financial, economic and market criteria as we deemed appropriate in
arriving at our opinion.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information and data publicly available or furnished to or otherwise reviewed by
or discussed with us. With respect to financial forecasts and other information
<PAGE> 656
The Board of Directors
MEDE AMERICA Corporation
August 2, 1999
Page 2
and data provided to or otherwise reviewed by or discussed with us, we have been
advised by the managements of MEDE AMERICA and Healtheon that such forecasts and
other information and data were reasonably prepared on bases reflecting the best
currently available estimates and judgments of the managements of MEDE AMERICA
and Healtheon as to the future financial performance of MEDE AMERICA and
Healtheon and the strategic implications and operational benefits anticipated to
result from the Merger. We have assumed, with your consent, that the Merger will
be treated as a tax-free reorganization for federal income tax purposes. We also
have assumed, with your consent, that the transactions which Healtheon has
publicly announced with WebMD, Inc. and Greenberg News Networks, Inc. will be
consummated in all material respects in accordance with their respective terms
and, to the extent relevant to our analysis, have evaluated Healtheon pro forma
for such transactions. Our opinion, as set forth herein, relates to the relative
values of MedE America and Healtheon. We are not expressing any opinion as to
what the value of the Healtheon Common Stock or Newco Common Stock actually will
be when issued to MEDE AMERICA stockholders pursuant to the Merger or the price
at which the Healtheon Common Stock or Newco Common Stock will trade subsequent
to the Merger. We have not made or been provided with an independent evaluation
or appraisal of the assets or liabilities (contingent or otherwise) of MEDE
AMERICA or Healtheon nor have we made any physical inspection of the properties
or assets of MEDE AMERICA or Healtheon. In connection with our opinion, we were
not requested to, and we did not, solicit third party indications of interest in
the possible acquisition of all or a part of MEDE AMERICA; however, we did, at
the request of MEDE AMERICA, solicit third party indications of interest in the
possible acquisition of MEDE AMERICA prior to MEDE AMERICA's initial public
offering in February 1999. We express no view as to, and our opinion does not
address, the relative merits of the Merger as compared to any alternative
business strategies that might exist for MEDE AMERICA or the effect of any other
transaction in which MEDE AMERICA might engage. Our opinion is necessarily based
upon information available to us, and financial, stock market and other
conditions and circumstances existing and disclosed to us, as of the date
hereof.
Salomon Smith Barney Inc. has acted as financial advisor to MEDE AMERICA in
connection with the proposed Merger and will receive a fee for such services, a
significant portion of which is contingent upon the consummation of the Merger.
We have in the past provided certain investment banking services to MEDE AMERICA
unrelated to the proposed Merger, for which services we have received
compensation. In the ordinary course of our business, we and our affiliates may
actively trade or hold the securities of MEDE AMERICA and Healtheon for our own
account or for the account of our customers and, accordingly, may at any time
hold a long or short position in such securities. In addition, we and our
affiliates (including Citigroup Inc. and its affiliates) may maintain
relationships with MEDE AMERICA, Healtheon and their respective affiliates.
Our advisory services and the opinion expressed herein are provided for the
information of the Board of Directors of MEDE AMERICA in its evaluation of the
proposed Merger, and our opinion is not intended to be and does not constitute a
recommendation to any stockholder as to how such stockholder should vote on the
proposed Merger.
Based upon and subject to the foregoing, our experience as investment
bankers, our work as described above and other factors we deemed relevant, we
are of the opinion that, as of the date hereof, the Exchange Ratio is fair, from
a financial point of view, to the holders of MEDE AMERICA Common Stock.
Very truly yours,
SALOMON SMITH BARNEY INC.
<PAGE> 657
ANNEX G
[HAMBRECHT & QUIST LLC LETTERHEAD]
June 30, 1999
Confidential
The Board of Directors
Greenberg News Networks, Inc.
1175 Peachtree Street, Suite 2400
Atlanta, GA 30361
Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to the holders of the outstanding shares of capital stock (the "Capital
Stock") of Greenberg News Networks, Inc. ("GNN" or the "Company") of the
consideration to be received by such stockholders in connection with two
possible proposed merger transactions. The proposed original merger transaction
contemplates a merger of GNN Merger Corp. ("Merger Sub"), a wholly owned
subsidiary of Healtheon Corporation ("Healtheon") or Healtheon/WebMD Corporation
("Healtheon/WebMD"), with and into GNN (the "Proposed Original Transaction").
The proposed alternative merger transaction, to be completed if and only if the
Proposed Original Transaction is terminated as to Healtheon, Healtheon/WebMD and
Merger Sub, contemplates a merger of WebMD Merger Sub, a wholly-owned subsidiary
of WebMD, Inc., with GNN (the "Proposed Alternative Transaction" and, together
with the Proposed Original Transaction, the "Proposed Transactions"). Either the
Proposed Original Transaction or the Proposed Alternative Transaction, as the
case may be, shall be entered into pursuant to the Agreement and Plan of Merger
dated as of June 30, 1999, among Healtheon Corporation, WebMD, Inc.,
Healtheon/WebMD Corporation, GNN Merger Corp., and Greenberg News Networks, Inc.
(the "Agreement").
We understand that the terms of the Agreement provide, among other things,
that Healtheon, Healtheon/WebMD or WebMD, as the case may be, will purchase all
the outstanding common stock of GNN (including all preferred stock, options
(regardless of whether such options are exerciseable) and warrants convertible
into common stock) at a price of approximately $214.9 million in Healtheon,
Healtheon/WebMD, or WebMD stock, as the case may be, pursuant to the terms of
the Proposed Original Transaction or the Proposed Alternative Transaction as
more fully set forth in the Agreement.
For purposes of this opinion, we have assumed that either the Proposed
Original Transaction or the Proposed Alternative Transaction, as the case may
be, will qualify as a tax-free reorganization under the United States Internal
Revenue Code for the stockholders of the Company and that either the Proposed
Original Transaction or the Proposed Alternative Transaction, as the case may
be, will be accounted for as a purchase.
Hambrecht & Quist LLC ("Hambrecht & Quist"), as part of its investment
banking services, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, strategic transactions,
corporate restructurings, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes. We have acted as a financial advisor to the Board of
Directors of GNN in connection with the Proposed Transactions, and we will
receive a fee for our services, which include the rendering of this opinion.
In the past, we have provided investment banking and other financial
advisory services to Healtheon and have received fees for rendering these
services. In the ordinary course of business, Hambrecht & Quist acts as a market
maker and broker in the publicly traded securities of Healtheon and receives
customary compensation in connection therewith, and also provides research
coverage for Healtheon. In the ordinary
<PAGE> 658
The Board of Directors
Greenberg News Networks, Inc.
Page 2
course of business, Hambrecht & Quist actively trades in the equity and
derivative securities of Healtheon for its own account and for the accounts of
its customers and, accordingly, may at any time hold a long or short position in
such securities. Hambrecht & Quist may in the future provide additional
investment banking or other financial advisory services to Healtheon/WebMD.
In connection with our review of the Proposed Transactions, and in arriving
at our opinion, we have, among other things:
(i) reviewed the publicly available consolidated financial statements of
Healtheon, WebMD and Healtheon/WebMD (with and without certain MEDE AMERICA
financial results) for recent years and interim periods to date and certain
other relevant financial and operating data of WebMD and Healtheon/WebMD
(including their respective capital structures and, in the case of
Healtheon/WebMD, with and without certain MEDE AMERICA financial information)
made available to us from published sources and from the internal records of
WebMD;
(ii) reviewed certain internal financial and operating information,
including certain projections, relating to WebMD prepared by the management of
WebMD;
(iii) reviewed certain financial and operating information, including
certain publicly-available projections, relating to Healtheon;
(iv) reviewed certain financial and operating information, including
certain publicly-available projections, relating to MEDE AMERICA;
(v) discussed the business, financial condition and prospects of
Healtheon/WebMD with certain members of senior management of WebMD;
(vi) reviewed certain internal financial and operating information,
including certain projections, relating to GNN prepared by the senior management
of GNN;
(vii) discussed the business, financial condition and prospects of GNN
with certain members of senior management of GNN;
(viii) reviewed the recent reported prices and trading activity for the
common stock of Healtheon and compared such information and certain financial
information for Healtheon with similar information for certain other companies
engaged in businesses we consider comparable;
(ix) reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions;
(x) reviewed the Agreement dated as of June 30, 1999;
(xi) performed such other analyses and examinations and considered such
other information, financial studies, analyses and investigations and financial,
economic and market data as we deemed relevant.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of all of the information concerning GNN, Healtheon, WebMD, MEDE
AMERICA and Healtheon/WebMD considered in connection with our review of the
Proposed Transactions, and we have not assumed any responsibility for
independent verification of such information. We have not prepared any
independent valuation or appraisal of any of the assets or liabilities of GNN,
Healtheon, WebMD and MEDE AMERICA, nor have we conducted a physical inspection
of the properties and facilities of any of the companies. With respect to the
financial forecasts and projections made available to us and used in our
analysis, we have assumed that they reflect the best currently available
estimates and judgments of the
<PAGE> 659
The Board of Directors
Greenberg News Networks, Inc.
Page 3
expected future financial performance of GNN, Healtheon, WebMD and MEDE AMERICA.
For purposes of this opinion, we have assumed that none of GNN, Healtheon, WebMD
and MEDE AMERICA is a party to any pending transactions, including external
financings, recapitalizations or material merger discussions, other than the
transactions described in the Healtheon/WebMD Corporation Registration Statement
on Form S-4 as filed with the SEC on June 17, 1999 (the "Proxy
Statement/Prospectus"), the Proposed Transactions pursuant to the Agreement, and
those activities undertaken in the ordinary course of conducting their
respective businesses. Our opinion is necessarily based upon market, economic,
financial and other conditions as they exist and can be evaluated as of the date
of this letter and any change in such conditions would require a reevaluation of
this opinion. We express no opinion as to the price at which Healtheon/WebMD
common stock will trade subsequent to the Effective Time (as defined in the
Agreement). In rendering this opinion, we have assumed that the Proposed
Original Transaction or the Proposed Alternative Transaction, as the case may
be, will be consummated substantially on the terms discussed in the Agreement,
without any waiver of any material terms or conditions by any party thereto. We
were not requested to, and did not, solicit indications of interest from any
other parties in connection with a possible acquisition of, or business
combination with, GNN.
It is understood that this letter is for the information of the Board of
Directors only and may not be used for any other purpose without our prior
written consent. This letter does not constitute a recommendation to any
stockholder as to how such stockholder should vote on the Proposed Transactions.
Based upon and subject to the foregoing and after considering such other
matters as we deem relevant, we are of the opinion that as of the date hereof
the consideration to be received by the holders of the Capital Stock in the
Proposed Original Transaction or the Proposed Alternative Transaction, as the
case may be, is fair to such holders from a financial point of view.
Very truly yours,
HAMBRECHT & QUIST LLC
By: /s/ MARK J. ZANOLI
------------------------------------
Mark J. Zanoli
Managing Director
<PAGE> 660
ANNEX H
ARTICLE 13 OF THE GEORGIA BUSINESS CORPORATION CODE
RELATING TO RIGHTS OF DISSENTING SHAREHOLDERS
Official Code of Georgia Annotated Copyright 1982-1996 State of Georgia.
CODE OF GEORGIA
TITLE 14. CORPORATIONS, PARTNERSHIPS, AND ASSOCIATIONS
CHAPTER 2. BUSINESS CORPORATIONS
ARTICLE 13. DISSENTERS' RIGHTS
PART 1. RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
CURRENT THROUGH THE END OF 1995 EXTRAORDINARY SESSION OF THE GENERAL ASSEMBLY
14-2-1301 Definitions.
As used in this article, the term:
(1) "Beneficial shareholder" means the person who is a beneficial owner
of shares held in a voting trust or by a nominee as the record shareholder.
(2) "Corporate action" means the transaction or other action by the
corporation that creates dissenters' rights under Code Section 14-2-1302.
(3) "Corporation" means the issuer of shares held by a dissenter before
the corporate action, or the surviving or acquiring corporation by merger or
share exchange of that issuer.
(4) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under Code Section 14-2-1302 and who exercises that right when
and in the manner required by Code Sections 14- 2-1320 through 14-2-1327.
(5) "Fair value," with respect to a dissenter's shares, means the value
of the shares immediately before the effectuation of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action.
(6) "Interest" means interest from the effective date of the corporate
action until the date of payment, at a rate that is fair and equitable under all
the circumstances.
(7) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
(8) "Shareholder" means the record shareholder or the beneficial
shareholder. (Code 1981, Sec. 14-2-1301, enacted by Ga. L. 1988, p. 1070, Sec.
1; Ga. L.1993, p. 1231, Sec. 16.)
14-2-1302. Right to dissent.
(a) A record shareholder of the corporation is entitled to dissent from,
and obtain payment of the fair value of his shares in the event of, any of the
following corporate actions:
(1) Consummation of a plan of merger to which the corporation is a
party:
(A) If approval of the shareholders of the corporation is
required for the merger by Code Section 14-2-1103 or 14-2-1104 or the articles
of incorporation and the shareholder is entitled to vote on the merger; or
(B) If the corporation is a subsidiary that is merged with its
parent under Code Section 14-2-1104;
(2) Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, if the shareholder
is entitled to vote on the plan;
<PAGE> 661
(3) Consummation of a sale or exchange of all or substantially all of
the property of the corporation if a shareholder vote is required on the sale or
exchange pursuant to Code Section 14-2-1202, but not including a sale pursuant
to court order or a sale for cash pursuant to a plan by which all or
substantially all of the net proceeds of the sale will be distributed to the
shareholders within one year after the date of sale;
(4) An amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it:
(A) Alters or abolishes a preferential right of the shares;
(B) Creates, alters, or abolishes a right in respect of
redemption, including a provision respecting a sinking fund for the redemption
or repurchase, of the shares;
(C) Alters or abolishes a preemptive right of the holder of the
shares to acquire shares or other securities;
(D) Excludes or limits the right of the shares to vote on any
matter, or to cumulate votes, other than a limitation by dilution through
issuance of shares or other securities with similar voting rights;
(E) Reduces the number of shares owned by the shareholder to a
fraction of a share if the fractional share so created is to be acquired for
cash under Code Section 14-2-604; or
(F) Cancels, redeems, or repurchases all or part of the shares of
the class; or
(5) Any corporate action taken pursuant to a shareholder vote to the
extent that Article 9 of this chapter, the articles of incorporation, bylaws, or
a resolution of the board of directors provides that voting or nonvoting
shareholders are entitled to dissent and obtain payment for their shares.
(b) A shareholder entitled to dissent and obtain payment for his shares
under this article may not challenge the corporate action creating his
entitlement unless the corporate action fails to comply with procedural
requirements of this chapter or the articles of incorporation or bylaws of the
corporation or the vote required to obtain approval of the corporate action was
obtained by fraudulent and deceptive means, regardless of whether the
shareholder has exercised dissenter's rights.
(c) Notwithstanding any other provision of this article, there shall be
no right of dissent in favor of the holder of shares of any class or series
which, at the record date fixed to determine the shareholders entitled to
receive notice of and to vote at a meeting at which a plan of merger or share
exchange or a sale or exchange of property or an amendment of the articles of
incorporation is to be acted on, were either listed on a national securities
exchange or held of record by more than 2,000 shareholders, unless:
(1) In the case of a plan of merger or share exchange, the holders of
shares of the class or series are required under the plan of merger or share
exchange to accept for their shares anything except shares of the surviving
corporation or another publicly held corporation which at the effective date of
the merger or share exchange are either listed on a national securities exchange
or held of record by more than 2,000 shareholders, except for scrip or cash
payments in lieu of fractional shares; or
(2) The articles of incorporation or a resolution of the board of
directors approving the transaction provides otherwise. (Code 1981, Sec.
14-2-1302, enacted by Ga. L. 1988, p. 1070, Sec. 1; Ga. L.1989, p. 946, Sec.
58.)
14-2-1303. Dissent by nominees and beneficial owners.
A record shareholder may assert dissenters' rights as to fewer than all the
shares registered in his name only if he dissents with respect to all shares
beneficially owned by any one beneficial shareholder and notifies the
corporation in writing of the name and address of each person on whose behalf he
asserts dissenters' rights.
<PAGE> 662
The rights of a partial dissenter under this Code section are determined as
if the shares as to which he dissents and his other shares were registered in
the names of different shareholders.
(Code 1981, Sec. 14-2-1303, enacted by Ga. L. 1988, p. 1070, Sec. 1.)
14-2-1320. Notice of dissenters' rights.
(a) If proposed corporate action creating dissenters' rights under Code
Section 14-2-1302 is submitted to a vote at a shareholders' meeting, the meeting
notice must state that shareholders are or may be entitled to assert dissenters'
rights under this article and be accompanied by a copy of this article.
(b) If corporate action creating dissenters' rights under Code Section
14-2-1302 is taken without a vote of shareholders, the corporation shall notify
in writing all shareholders entitled to assert dissenters' rights that the
action was taken and send them the dissenters' notice described in Code Section
14-2-1322 no later than ten days after the corporate action was taken.
(Code 1981, Sec. 14-2-1320, enacted by Ga. L. 1988, p. 1070, Sec. 1; Ga. L.1993,
p. 1231, Sec. 17.)
14-2-1321. Notice of intent to demand payment.
(a) If proposed corporate action creating dissenters' rights under Code
Section 14-2-1302 is submitted to a vote at a shareholders' meeting, a record
shareholder who wishes to assert dissenters' rights:
(1) Must deliver to the corporation before the vote is taken written
notice of his intent to demand payment for his shares if the proposed action is
effectuated; and
(2) Must not vote his shares in favor of the proposed action.
(b) A record shareholder who does not satisfy the requirements of
subsection (a) of this Code section is not entitled to payment for his shares
under this article.
(Code 1981, Sec. 14-2-1321, enacted by Ga. L. 1988, p. 1070, Sec. 1.)
Official Code of Georgia Annotated Copyright 1982-1996 State of Georgia.
14-2-1322. Dissenters' notice.
(a) If proposed corporate action creating dissenters' rights under Code
Section 14-2-1302 is authorized at a shareholders' meeting, the corporation
shall deliver a written dissenters' notice to all shareholders who satisfied the
requirements of Code Section 14-2-1321.
(b) The dissenters' notice must be sent no later than ten days after the
corporate action was taken and must:
(1) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(3) Set a date by which the corporation must receive the payment demand,
which date may not be fewer than 30 nor more than 60 days after the date the
notice required in subsection (a) of this Code section is delivered; and
(4) Be accompanied by a copy of this article.
(Code 1981, Sec. 14-2-1322, enacted by Ga. L. 1988, p. 1070, Sec. 1.)
14-2-1323. Duty to demand payment.
(a) A record shareholder sent a dissenters' notice described in Code
Section 14-2-1322 must demand payment and deposit his certificates in accordance
with the terms of the notice.
(b) A record shareholder who demands payment and deposits his shares under
subsection (a) of this Code section retains all other rights of a shareholder
until these rights are canceled or modified by the taking of the proposed
corporate action.
<PAGE> 663
(c) A record shareholder who does not demand payment or deposit his share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for his shares under this article.
(Code 1981, Sec. 14-2-1323, enacted by Ga. L. 1988, p. 1070, Sec. 1.)
14-2-1324. Share restrictions.
(a) The corporation may restrict the transfer of uncertificated shares from
the date the demand for their payment is received until the proposed corporate
action is taken or the restrictions released under Code Section 14-2-1326.
(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are canceled or modified by the taking of the proposed corporate action.
(Code 1981, Sec. 14-2-1324, enacted by Ga. L. 1988, p. 1070, Sec. 1.)
14-2-1325. Offer of payment.
(a) Except as provided in Code Section 14-2-1327, within ten days of the
later of the date the proposed corporate action is taken or receipt of a payment
demand, the corporation shall by notice to each dissenter who complied with Code
Section 14-2-1323 offer to pay to such dissenter the amount the corporation
estimates to be the fair value of his or her shares, plus accrued interest.
(b) The offer of payment must be accompanied by:
(1) The corporation's balance sheet as of the end of a fiscal year
ending not more than 16 months before the date of payment, an income statement
for that year, a statement of changes in shareholders' equity for that year, and
the latest available interim financial statements, if any;
(2) A statement of the corporation's estimate of the fair value of the
shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand payment under Code
Section 14-2-1327; and
(5) A copy of this article.
(c) If the shareholder accepts the corporation's offer by written notice to
the corporation within 30 days after the corporation's offer or is deemed to
have accepted such offer by failure to respond within said 30 days, payment for
his or her shares shall be made within 60 days after the making of the offer or
the taking of the proposed corporate action, whichever is later.
(Code 1981, Sec. 14-2-1325, enacted by Ga. L. 1988, p. 1070, Sec. 1; Ga. L.
1989, p. 946, Sec. 59; Ga. L. 1993, p. 1231, Sec. 18.)
14-2-1326. Failure to take action.
(a) If the corporation does not take the proposed action within 60 days
after the date set for demanding payment and depositing share certificates, the
corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
(b) If, after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under Code Section 14-2-1322 and repeat the payment demand
procedure.
<PAGE> 664
(Code 1981, Sec. 14-2-1326, enacted by Ga. L. 1988, p. 1070, Sec. 1; Ga. L.
1990, p. 257, Sec. 20.)
14-2-1327. Procedure if shareholder dissatisfied with payment or offer.
(a) A dissenter may notify the corporation in writing of his own estimate
of the fair value of his shares and amount of interest due, and demand payment
of his estimate of the fair value of his shares and interest due, if:
(1) The dissenter believes that the amount offered under Code Section
14-2-1325 is less than the fair value of his shares or that the interest due is
incorrectly calculated; or
(2) The corporation, having failed to take the proposed action, does not
return the deposited certificates or release the transfer restrictions imposed
on uncertificated shares within 60 days after the date set for demanding
payment.
(b) A dissenter waives his or her right to demand payment under this Code
section and is deemed to have accepted the corporation's offer unless he or she
notifies the corporation of his or her demand in writing under subsection (a) of
this Code section within 30 days after the corporation offered payment for his
or her shares, as provided in Code Section 14-2-1325.
(c) If the corporation does not offer payment within the time set forth in
subsection (a) of Code Section 14-2-1325:
(1) The shareholder may demand the information required under subsection
(b) of Code Section 14-2-1325, and the corporation shall provide the information
to the shareholder within ten days after receipt of a written demand for the
information; and
(2) The shareholder may at any time, subject to the limitations period
of Code Section 14-2-1332, notify the corporation of his own estimate of the
fair value of his shares and the amount of interest due and demand payment of
his estimate of the fair value of his shares and interest due.
(Code 1981, Sec. 14-2-1327, enacted by Ga. L. 1988, p. 1070, Sec. 1; Ga. L.
1989, p. 946, Sec. 60; Ga. L. 1990, p. 257, Sec. 21; Ga. L. 1993, p. 1231, Sec.
19.)
14-2-1330 Court action.
(a) If a demand for payment under Code Section 14-2-1327 remains unsettled,
the corporation shall commence a proceeding within 60 days after receiving the
payment demand and petition the court to determine the fair value of the shares
and accrued interest. If the corporation does not commence the proceeding within
the 60 day period, it shall pay each dissenter whose demand remains unsettled
the amount demanded.
(b) The corporation shall commence the proceeding, which shall be a nonjury
equitable valuation proceeding, in the superior court of the county where a
corporation's registered office is located. If the surviving corporation is a
foreign corporation without a registered office in this state, it shall commence
the proceeding in the county in this state where the registered office of the
domestic corporation merged with or whose shares were acquired by the foreign
corporation was located.
(c) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unsettled parties to the proceeding, which
shall have the effect of an action quasi in rem against their shares. The
corporation shall serve a copy of the petition in the proceeding upon each
dissenting shareholder who is a resident of this state in the manner provided
bylaw for the service of a summons and complaint, and upon each nonresident
dissenting shareholder either by registered or certified mail or by publication,
or in any other manner permitted by law.
(d) The jurisdiction of the court in which the proceeding is commenced
under subsection (b) of this Code section is plenary and exclusive. The court
may appoint one or more persons as appraisers to receive evidence and recommend
decision on the question of fair value. The appraisers have the powers described
in the order appointing them or in any amendment to it. Except as otherwise
provided in this chapter,
<PAGE> 665
Chapter 11 of Title 9, known as the "Georgia Civil Practice Act," applies to any
proceeding with respect to dissenters' rights under this chapter.
(e) Each dissenter made a party to the proceeding is entitled to judgment
for the amount which the court finds to be the fair value of his shares, plus
interest to the date of judgment.
(Code 1981, Sec. 14-2-1330, enacted by Ga. L. 1988, p. 1070, Sec. 1; Ga. L.1989,
p. 946, Sec. 61; Ga. L. 1993, p. 1231, Sec. 20.)
14-2-1331 Court costs and counsel fees.
(a) The court in an appraisal proceeding commenced under Code Section
14-2-1330 shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court, but not
including fees and expenses of attorneys and experts for the respective parties.
The court shall assess the costs against the corporation, except that the court
may assess the costs against all or some of the dissenters, in amounts the court
finds equitable, to the extent the court finds the dissenters acted arbitrarily,
vexatiously, or not in good faith in demanding payment under Code Section
14-2-1327.
(b) The court may also assess the fees and expenses of attorneys and
experts for the respective parties, in amounts the court finds equitable:
(1) Against the corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the requirements
of Code Sections 14-2-1320 through 14-2-1327; or
(2) Against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses are
assessed acted arbitrarily, vexatiously, or not in good faith with respect to
the rights provided by this article.
(c) If the court finds that the services of attorneys for any dissenter
were of substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the corporation, the
court may award to these attorneys reasonable fees to be paid out of the amounts
awarded the dissenters who were benefited.
(Code 1981, Sec. 14-2-1331, enacted by Ga. L. 1988, p. 1070, Sec. 1.)
14-2-1332 Limitation of actions.
No action by any dissenter to enforce dissenters' rights shall be brought
more than three years after the corporate action was taken, regardless of
whether notice of the corporate action and of the right to dissent was given by
the corporation in compliance with the provisions of
Code Section 14-2-1320 and Code Section 14-2-1322. (Code 1981, Sec. 14-2-1332,
enacted by Ga. L. 1988, p. 1070, Sec. 1.)
<PAGE> 666
ANNEX I
TITLE 8, DELAWARE CODE
CHAPTER 1: GENERAL CORPORATION LAW
SUBCHAPTER IX: MERGER OR CONSOLIDATION
Sec. 262. APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to the provisions of
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with the provisions of subsection (d) of this Section and
who has neither voted in favor of the merger or consolidation nor consented
thereto in writing pursuant to Sec. 228 of this Chapter shall be entitled to an
appraisal by the Court of Chancery of the fair value of his shares of stock
under the circumstances described in subsections (b) and (c) of this Section.
(b) Appraisal rights shall be available for the shares of any class or
series of stock or a constituent corporation in a merger or consolidation to be
effected pursuant to Sections 251, 252, 254, 257, 258 or 263 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock which, at the record
date fixed to determine the stockholders entitled to receive notice of and to
vote at the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or (ii)
held of record by more than 2,000 stockholders; and further provided that no
appraisal rights shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its approval
the vote of the stockholders of the surviving corporation as provided in
subsection (f) of Sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to Sections 251, 252,
254, 257 and 258 of this title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation;
b. Shares of stock of any other corporation which at the effective
date of the merger or consolidation will be either listed on a national
securities exchange or held of record by more than 2,000 stockholders;
c. Cash in lieu of fractional shares of the corporations described in
the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock and cash in lieu of
fractional shares described in the foregoing subparagraphs a., b., and c. of
this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
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(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation not less than 20 days prior to the meeting, shall
notify each of its stockholders entitled to such appraisal rights that appraisal
rights are available for any or all of the shares of the constituent
corporations, and shall include in such notice a copy of this section. Each
stockholder electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation, a
written demand for appraisal of his shares. Such demand will be sufficient if it
reasonably informs the corporations of the identity of the stockholder and that
the stockholder intends thereby to demand the appraisal of his shares. A proxy
or vote against the merger or consolidation shall not constitute such a demand.
A stockholder electing to take such action must do so by a separate written
demand as herein provided. Within 10 days after the effective date of such
merger or consolidation, the surviving or resulting corporation shall notify
each stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2) If the merger or consolidation was approved pursuant to Sec. 228 or
253 of this title, the surviving or resulting corporation, either before the
effective date of the merger or consolidation or within 10 days thereafter,
shall notify each of the stockholders entitled to appraisal rights of the
effective date of the merger or consolidation and that appraisal rights are
available for any or all of the shares of the constituent corporation, and shall
include in such notice a copy of this section. The notice shall be sent by
certified or registered mail, return receipt requested, addressed to the
stockholder at his address as it appears on the records of the corporation. Any
stockholder entitled to appraisal rights may, within 20 days after the date of
mailing of the notice, demand in writing from the surviving or resulting
corporation the appraisal of his shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and that
the stockholder intends to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or
consolidation; the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems
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advisable. The forms of the notices by mail and by publication shall be approved
by the Court, and the costs thereof shall be borne by the surviving or resulting
corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock of the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificate of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and in the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act. The
Registrant's Bylaws provide for the mandatory indemnification of its directors,
officers, employees and other agents to the maximum extent permitted by Delaware
General Corporation Law, and the Company has entered into agreements with its
officers, directors and certain key employees implementing such indemnification.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NUMBER
- -------- ----------- -----------
<C> <S> <C>
2.1 Agreement and Plan of Reorganization dated as of May 20,
1999, as amended, by and among Registrant, Healtheon
Corporation, WebMD, Inc., Water Acquisition Corp. and
Hydrogen Acquisition Corp. (see Annex A) ...................
2.2 Agreement and Plan of Reorganization dated as of April 20,
1999, by and among Healtheon Corporation, Mets Acquisition
Corp. and MEDE AMERICA Corporation (see Annex B)............
2.3 Agreement and Plan of Merger dated as of June 30, 1999 among
Healtheon Corporation, WebMD, Inc., Registrant, GNN Merger
Corp. and Greenberg News Networks, Inc. (see Annex C).......
2.4+ Agreement and Plan of Reorganization, dated as of February
24, 1998, by the Registrant, MedNet Acquisition Corp. and
ActaMed Corporation.........................................
2.5+ Agreement and Plan of Merger, dated as of March 1, 1996, by
and among Act Corporation, EDI Acquisition, Inc, UHC Green
Acquisition, Inc and United HealthCare Corporation,
including amendment.........................................
2.6+ Asset Purchase Agreement, dated June 25, 1998, among the
Registrant, Metis Acquisition Corp and Metis, LLC...........
3.1 Certificate of Incorporation of the Registrant..............
3.2 Bylaws of the Registrant, as currently in effect............
3.3 Bylaws of Registrant, to be effective upon completion of the
Healtheon-WebMD reorganization or MEDE AMERICA
reorganization..............................................
4.1+ Specimen Common Stock certificate...........................
5.1*** Form of Opinion in Wilson Sonsini Goodrich & Rosati,
Professional Corporation, regarding the legality of the
securities being issued.....................................
8.1** Tax Opinion of Wilson Sonsini Goodrich & Rosati,
Professional Corporation....................................
8.2** Tax Opinion of Nelson Mullins Riley & Scarborough, L.L.P....
8.3** Tax Opinion of Reboul, MacMurray, Hewitt, Maynard &
Kristol.....................................................
8.4** Tax Opinion of King & Spalding..............................
10.1+ Form of Indemnification Agreement to be entered into by the
Registrant with each of its directors and officers..........
10.2+ Healtheon Corporation 1996 Stock Plan and form of Stock
Option Agreement............................................
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NUMBER
- -------- ----------- -----------
<C> <S> <C>
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
January 28, 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 April 4, 1996, between
ActaMed Corporation and United HealthCare Corporation.......
10.14*+ Services Agreement, dated as of December 31, 1997, as
amended, between ActaMed Corporation and SmithKline Beecham
Clinical Laboratories, Inc..................................
10.15*+ Assets Purchase Agreement, dated as of December 31, 1997, as
amended, between ActaMed Corporation and SmithKline Beecham
Clinical Laboratories, Inc..................................
10.16*+ License Agreement, dated as of December 31, 1997, between
ActaMed Corporation and SmithKline Beecham Clinical
Laboratories, Inc...........................................
10.17*+ Development Agreement, dated as of October 31, 1997, between
ActaMed Corporation and SmithKline Beecham Clinical
Laboratories, Inc...........................................
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 investor. ...
10.21+ Amended and Restated Series B Preferred Stock Purchase
Agreement dated October 31, 1996, between the 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........................
10.29+ Healtheon Corporation 1998 Employee Stock Purchase Plan.....
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NUMBER
- -------- ----------- -----------
<C> <S> <C>
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. .......................................................
10.33*,** Agreement, dated May , 1999, between the Registrant and
Microsoft Corporation
23.1 Consent of Ernst & Young LLP, independent auditors..........
23.2 Consent of Deloitte & Touche LLP, independent auditors. ....
23.3 Consent of Ernst & Young LLP, independent auditors. ........
23.4 Consent of Deloitte & Touche LLP, independent auditors......
23.5 Consent of PricewaterhouseCoopers LLP, independent
auditors....................................................
23.6 Consent of Berg & Company LLP, independent certified public
accountants.................................................
23.7 Consent of KPMG Peat Marwick LLP, independent auditors......
23.8 Consent of Deloitte & Touche LLP, independent auditors......
23.9 Consent of KPMG LLP, independent auditors...................
23.10*** Letter to Securities and Exchange Commission from Berg &
Company LLP.................................................
23.11*** Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (in Exhibit 5.1)................................
23.12 Consent of Deloitte & Touche LLP, independent auditors......
24.1*** Power of Attorney...........................................
</TABLE>
- ---------------
* Confidential treatment was received, or is requested, with respect to
certain portions of this document.
** To be filed by amendment.
*** Previously filed.
+ Incorporated by reference to Healtheon's Registration Statement on Form S-1
filed January 14, 1999.
++ Incorporated by reference to Healtheon's Amendment No. 1 to its Registration
Statement on Form S-1 filed February 4, 1999.
(b) FINANCIAL STATEMENT SCHEDULES
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements, management's discussion and analysis or notes thereto.
ITEM 22. UNDERTAKINGS
(1) The undersigned Registrant hereby undertakes as follows: that prior to
any public offering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
undersigned Registrant undertakes that such offering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
(2) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
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<PAGE> 672
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment 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.
(3) Insofar as the indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to Directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, 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 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, 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 Act and will
be governed by the final adjudication of such issue.
(4) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
(5) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
(6) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the Registration
Statement 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-4
<PAGE> 673
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, ON THE FIFTH DAY OF AUGUST 1999.
HEALTHEON/WEBMD CORPORATION
By: /s/ JOHN L. WESTERMANN III
------------------------------------
John L. Westermann III
Vice President, Secretary and
Treasurer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS AMENDMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON
THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
* Chief Executive Officer August 5, 1999
- ------------------------------------- (principal executive officer)
(Jeffrey T. Arnold)
* Sole Director and Chief Operating August 5, 1999
- ------------------------------------- Officer (principal financial and
(W. Michael Long) accounting officer)
* By: /s/ JOHN L. WESTERMANN III
------------------------------
John L. Westermann III
Attorney-in-fact
</TABLE>
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<PAGE> 674
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
2.1 Agreement and Plan of Reorganization dated as of May 20,
1999, as amended, by and among Registrant, Healtheon
Corporation, WebMD, Inc., Water Acquisition Corp. and
Hydrogen Acquisition Corp. (see Annex A)
2.2 Agreement and Plan of Reorganization dated as of April 20,
1999, by and among Healtheon Corporation, Mets Acquisition
Corp. and MEDE AMERICA Corporation (see Annex B)
2.3 Agreement and Plan of Merger dated as of June 30, 1999 among
Healtheon Corporation, WebMD, Inc., Registrant, GNN Merger
Corp. and Greenberg News Networks, Inc. (see Annex C)
2.4+ Agreement and Plan of Reorganization, dated as of February
24, 1998, by the Registrant, MedNet Acquisition Corp. and
ActaMed Corporation
2.5+ Agreement and Plan of Merger, dated as of March 1, 1996, by
and among Act Corporation, EDI Acquisition, Inc, UHC Green
Acquisition, Inc and United HealthCare Corporation,
including amendment
2.6+ Asset Purchase Agreement, dated June 25, 1998, among the
Registrant, Metis Acquisition Corp and Metis, LLC
3.1 Certificate of Incorporation of the Registrant
3.2 Bylaws of the Registrant, as currently in effect
3.3 Bylaws of Registrant, to be effective upon completion of the
Healtheon-WebMD reorganization or MEDE AMERICA
reorganization
4.1+ Specimen Common Stock certificate
5.1*** Form of Opinion in Wilson Sonsini Goodrich & Rosati,
Professional Corporation, regarding the legality of the
securities being issued
8.1** Tax Opinion of Wilson Sonsini Goodrich & Rosati,
Professional Corporation
8.2** Tax Opinion of Nelson Mullins Riley & Scarborough, L.L.P.
8.3** Tax Opinion of Reboul, MacMurray, Hewitt, Maynard & Kristol
8.4** Tax Opinion of King & Spalding
10.1+ Form of Indemnification Agreement to be entered into by the
Registrant with each of its directors and officers
10.2+ Healtheon Corporation 1996 Stock Plan and form of Stock
Option Agreement
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
January 28, 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 April 4, 1996, between
ActaMed Corporation and United HealthCare Corporation
</TABLE>
<PAGE> 675
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
10.14*+ Services Agreement, dated as of December 31, 1997, as
amended, between ActaMed Corporation and SmithKline Beecham
Clinical Laboratories, Inc.
10.15*+ Assets Purchase Agreement, dated as of December 31, 1997, as
amended, between ActaMed Corporation and SmithKline Beecham
Clinical Laboratories, Inc.
10.16*+ License Agreement, dated as of December 31, 1997, between
ActaMed Corporation and SmithKline Beecham Clinical
Laboratories, Inc.
10.17*+ Development Agreement, dated as of October 31, 1997, between
ActaMed Corporation and SmithKline Beecham Clinical
Laboratories, Inc.
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 investor.
10.21+ Amended and Restated Series B Preferred Stock Purchase
Agreement dated October 31, 1996, between the 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
10.29+ Healtheon Corporation 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.
10.33*,** Agreement, dated May 19, 1999, between the Registrant and
Microsoft Corporation
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2 Consent of Deloitte & Touche LLP, independent auditors.
23.3 Consent of Ernst & Young LLP, independent auditors.
23.4 Consent of Deloitte & Touche LLP, independent auditors
23.5 Consent of PricewaterhouseCoopers LLP, independent auditors
23.6 Consent of Berg & Company LLP, independent certified public
accountants
23.7 Consent of KPMG Peat Marwick LLP, independent auditors
23.8 Consent of Deloitte & Touche LLP, independent auditors
23.9 Consent of KPMG LLP, independent auditors
23.10*** Letter to Securities and Exchange Commission from Berg &
Company LLP
23.11*** Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (in Exhibit 5.1)
23.12 Consent of Deloitte & Touche LLP, independent auditors
</TABLE>
<PAGE> 676
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
24.1*** Power of Attorney (see page II- )
</TABLE>
- ---------------
* Confidential treatment was received, or is requested, with respect to
certain portions of this document.
** To be filed by amendment.
*** Previously filed.
+ Incorporated by reference to Healtheon's Registration Statement on Form S-1
filed January 14, 1999.
++ Incorporated by reference to Healtheon's Amendment No. 1 to its Registration
Statement on Form S-1 filed February 4, 1999.
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
HEALTHEON/WEBMD CORPORATION
ARTICLE I
The name of this corporation is Healtheon/WebMD Corporation.
ARTICLE II
The address of the registered office of this corporation in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle, State of Delaware. The name of the registered
agent of the corporation at such location is The Corporation Trust Company.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
ARTICLE IV
This corporation is authorized to issue one class of stock to be
designated "Common Stock" and another class of stock to be designated "Preferred
Stock," the rights, preferences and privileges of which may from time to time be
determined by the Board of Directors. The total number of shares of Common Stock
that this corporation is authorized to issue is 600,000,000 with a par value of
$0.0001 per share. The total number of shares of Preferred Stock that this
corporation is authorized to issue is 10,000,000 with a par value of $0.0001 per
share.
ARTICLE V
The name and mailing address for the incorporator is as follows:
David Leibsohn, Esq.
C/o Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304-1050
<PAGE> 2
ARTICLE VI
To the fullest extent permitted by the General Corporation Law as the
same exists or as may hereafter be amended, a director of the corporation shall
not be personally liable to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director.
The corporation shall indemnify to the fullest extent permitted by law
any person made or threatened to be made a party to an action or proceeding,
whether criminal, civil, administrative or investigative, by reason of the fact
that he, his testator or intestate is or was a director or officer of the
corporation or any predecessor or the corporation or serves or served at any
other enterprise as a director, officer or employee at the request of the
corporation or any predecessor to the corporation.
Neither any amendment nor repeal of this Article VI, nor the adoption of
any provision of this Certificate of Incorporation inconsistent with this
Article VI, shall eliminate or reduce the effect of this Article VI, in respect
of any matter occurring, or any cause of action, suit, claim or proceeding that,
but for this Article VI, would accrue or arise, prior to such amendment, repeal
or adoption of an inconsistent provision.
ARTICLE VII
This corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute or this Certificate of Incorporation, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
ARTICLE VIII
In furtherance and not in limitation of powers conferred by statute, the
Board of Directors is expressly authorized to make, alter, amend or repeal the
Bylaws of the corporation.
ARTICLE IX
Section 1. At any time following the closing of the first sale of Common
Stock of the Corporation pursuant to a registration statement declared effective
by the Securities and Exchange Corporation under the Securities Act of 1933, as
amended, stockholders of the Corporation may not take any action by written
consent in lieu of a meeting and any action contemplated by stockholders after
such time must be taken at a duly called annual or special meeting of
stockholders.
Section 2. The number of directors which constitute the whole Board of
Directors of the Corporation shall be fixed exclusively by one or more
resolution adopted from time to time by the Board of Directors. The Board of
Directors shall be divided into three classes designated as Class I, Class II,
and Class III, respectively. Directors shall be assigned to each class in
accordance with a resolution or resolutions adopted by the Board of Directors.
At the first annual
2
<PAGE> 3
meeting of stockholders following the date hereof, the term of office of the
Class I directors shall expire and Class I directors shall be elected for a full
term of three years. At the second annual meeting of stockholders following the
date hereof, the term of office of the Class II directors shall expire and Class
II directors shall be elected for a full term of three years. At the third
annual meeting of stockholders following the date hereof, the term of office of
the Class III directors shall expire and Class III directors shall be elected
for a full term of three years. At each succeeding annual meeting of
stockholders, directors shall be elected for a full term of three years to
succeed the directors of the class whose terms expire at such annual meeting.
Section 3. Advance notice of new business and stockholder nominations
for the election of directors shall be given in the manner and to the extent
provided in the Bylaws of the Corporation.
ARTICLE X
Elections of directors need not be by written ballot unless the Bylaws
of this corporation shall so provide.
ARTICLE XI
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of this corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of this corporation.
ARTICLE XII
This corporation is to have perpetual existence.
***
3
<PAGE> 4
I, THE UNDERSIGNED, for the purpose of forming a corporation under the laws of
the State of Delaware, do make, file and record this Certificate, and do certify
that the facts herein stated are true, and I have accordingly hereunto set my
hand this 15th day of June, 1999.
/s/ David L. Leibsohn
----------------------------------------
David L. Leibsohn, Incorporator
4
<PAGE> 1
EXHIBIT 3.2
BYLAWS
OF
HEALTHEON/WEBMD CORPORATION
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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<S> <C> <C>
ARTICLE I CORPORATE OFFICES......................................................................1
1.1 REGISTERED OFFICE.................................................................1
1.2 OTHER OFFICES.....................................................................1
ARTICLE II MEETINGS OF STOCKHOLDERS..............................................................1
2.1 PLACE OF MEETINGS.................................................................1
2.2 ANNUAL MEETING....................................................................1
2.3 SPECIAL MEETING...................................................................2
2.4 NOTICE OF STOCKHOLDERS' MEETINGS..................................................2
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE......................................2
2.6 QUORUM............................................................................2
2.7 ADJOURNED MEETING; NOTICE.........................................................3
2.8 VOTING............................................................................3
2.9 WAIVER OF NOTICE..................................................................3
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING...........................3
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS.......................4
2.12 PROXIES...........................................................................5
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE.............................................5
ARTICLE III DIRECTORS............................................................................5
3.1 POWERS............................................................................5
3.2 NUMBER OF DIRECTORS...............................................................5
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS...........................6
3.4 RESIGNATION AND VACANCIES.........................................................6
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE..........................................7
3.6 FIRST MEETINGS....................................................................7
3.7 REGULAR MEETINGS..................................................................7
3.8 SPECIAL MEETINGS; NOTICE..........................................................7
3.9 QUORUM............................................................................8
3.10 WAIVER OF NOTICE..................................................................8
3.11 ADJOURNED MEETING; NOTICE.........................................................8
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING.................................8
3.13 FEES AND COMPENSATION OF DIRECTORS................................................9
3.14 REMOVAL OF DIRECTORS..............................................................9
</TABLE>
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<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
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<S> <C> <C>
ARTICLE IV COMMITTEES............................................................................9
4.1 COMMITTEES OF DIRECTORS...........................................................9
4.2 COMMITTEE MINUTES.................................................................9
4.3 MEETINGS AND ACTION OF COMMITTEES................................................10
ARTICLE V OFFICERS..............................................................................10
5.1 OFFICERS.........................................................................10
5.2 ELECTION OF OFFICERS.............................................................10
5.3 SUBORDINATE OFFICERS.............................................................10
5.4 REMOVAL AND RESIGNATION OF OFFICERS..............................................10
5.5 VACANCIES IN OFFICES.............................................................11
5.6 CHAIRMAN OF THE BOARD............................................................11
5.7 CHIEF EXECUTIVE OFFICER..........................................................11
5.8 VICE PRESIDENT...................................................................11
5.9 SECRETARY........................................................................12
5.10 CHIEF FINANCIAL OFFICER..........................................................12
5.11 ASSISTANT SECRETARY..............................................................12
5.12 AUTHORITY AND DUTIES OF OFFICERS.................................................13
ARTICLE VI INDEMNITY............................................................................13
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS........................................13
6.2 INDEMNIFICATION OF OTHERS........................................................13
6.3 INSURANCE........................................................................13
ARTICLE VII RECORDS AND REPORTS.................................................................14
7.1 MAINTENANCE AND INSPECTION OF RECORDS............................................14
7.2 INSPECTION BY DIRECTORS..........................................................14
7.3 ANNUAL STATEMENT TO STOCKHOLDERS.................................................15
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS...................................15
ARTICLE VIII GENERAL MATTERS....................................................................15
8.1 CHECKS...........................................................................15
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS.................................15
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES...........................................16
8.4 SPECIAL DESIGNATION ON CERTIFICATES..............................................16
8.5 LOST CERTIFICATES................................................................16
8.6 CONSTRUCTION; DEFINITIONS........................................................17
8.7 DIVIDENDS........................................................................17
8.8 FISCAL YEAR......................................................................17
8.9 SEAL.............................................................................17
</TABLE>
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<PAGE> 4
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
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<S> <C> <C>
8.10 TRANSFER OF STOCK................................................................17
8.11 STOCK TRANSFER AGREEMENTS........................................................17
8.12 REGISTERED STOCKHOLDERS..........................................................18
ARTICLE IX AMENDMENTS...........................................................................18
ARTICLE X DISSOLUTION...........................................................................18
ARTICLE XI CUSTODIAN............................................................................19
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES......................................19
11.2 DUTIES OF CUSTODIAN..............................................................19
</TABLE>
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<PAGE> 5
BYLAWS
OF
HEALTHEON/WEBMD CORPORATION
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE
The registered office of the corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The name of the registered
agent of the corporation at such location is The Corporation Trust Company.
1.2 OTHER OFFICES
The board of directors may at any time establish other offices at any
place or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at any place, within or outside
the State of Delaware, designated by the board of directors. In the absence of
any such designation, stockholders' meetings shall be held at the registered
office of the corporation.
2.2 ANNUAL MEETING
The annual meeting of stockholders shall be held each year on a date and
at a time designated by the board of directors. In the absence of such
designation, the annual meeting of stockholders shall be held on the second
Tuesday of May in each year at 10:00 a.m. However, if such day falls on a legal
holiday, then the meeting shall be held at the same time and place on the next
succeeding full business day. At the meeting, directors shall be elected and any
other proper business may be transacted.
<PAGE> 6
2.3 SPECIAL MEETING
A special meeting of the stockholders may be called at any time by the
board of directors, or by the chairman of the board, or by the president, or by
one or more stockholders holding shares in the aggregate entitled to cast not
more stockholders holding shares in the aggregate entitled to cast not less than
ten percent (10%) of the votes at that meeting.
If a special meeting is called by any person or persons other than the
board of directors or the president or the chairman of the board, then the
request shall be in writing, specifying the time of such meeting and the general
nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the chairman of the board, the president, any vice president or
the secretary of the corporation. The officer receiving the request shall cause
notice to be promptly given to the stockholders entitled to vote, in accordance
with the provisions of Sections 2.4 and 2.5 of these bylaws, that a meeting will
be held at the time requested by the person or persons calling the meeting, so
long as that time is not less than thirty-five (35) nor more than sixty (60)
days after the receipt of the request. If the notice is not given within twenty
(20) days after receipt of the request, then the person or persons requesting
the meeting may give the notice. Nothing contained in this paragraph of this
Section 2.3 shall be construed as limiting, fixing or affecting the time when a
meeting of stockholders called by action of the board of directors may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
All notices of meetings with stockholders shall be in writing and shall
be sent or otherwise given in accordance with Section 2.5 of these bylaws not
less than ten (10) nor more than sixty (60) days before the date of the meeting
to each stockholder entitled to vote at such meeting. The notice shall specify
the place, date, and hour of the meeting, and, in the case of a special meeting,
the purpose or purposes for which the meeting is called.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
2.6 QUORUM
The holders of a majority of the stock issued and outstanding and
entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the certificate of
incorporation. If, however, such quorum is not present or represented at any
meeting of the stockholders, then the stockholders entitled to vote thereat,
present in person or represented by proxy, shall have power to adjourn the
meeting from time to time, without notice other than
-2-
<PAGE> 7
announcement at the meeting, until a quorum is present or represented. At such
adjourned meeting at which a quorum is present or represented, any business may
be transacted that might have been transacted at the meeting as originally
noticed.
2.7 ADJOURNED MEETING; NOTICE
When a meeting is adjourned to another time or place, unless these
bylaws otherwise require, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the adjournment
is taken. At the adjourned meeting the corporation may transact any business
that might have been transacted at the original meeting. If the adjournment is
for more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.8 VOTING
The stockholders entitled to vote at any meeting of stockholders shall
be determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners
of stock and to voting trusts and other voting agreements).
At a stockholders' meeting at which directors are to be elected, or at
elections held under special circumstances, each stockholder shall be entitled
to one vote for each share of common stock held by such stockholder and to the
number of votes equal to the number of shares of common stock into which their
Preferred Stock is convertible on the appropriate record date. There shall be no
cumulative voting.
2.9 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these bylaws.
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise provided in the certificate of incorporation, any
action required to be taken at any annual or special meeting of stockholders of
a corporation, or any action that may be taken at any annual or special meeting
of such stockholders, may be taken without a meeting, without prior notice, and
without a vote if a consent in writing, setting forth the action so taken, is
signed by the
-3-
<PAGE> 8
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action which is consented to is such as
would have required the filing of a certificate under any section of the General
Corporation Law of Delaware if such action had been voted on by stockholders at
a meeting thereof, then the certificate filed under such section shall state, in
lieu of any statement required by such section concerning any vote of
stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
In order that the corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action.
If the board of directors does not so fix a record date:
(i) The record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held.
(ii) The record date for determining stockholders entitled to
express consent to corporate action in writing without a meeting, when no prior
action by the board of directors is necessary, shall be the day on which the
first written consent is expressed.
(iii) The record date for determining stockholders for any
other purpose shall be at the close of business on the day on which the board of
directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
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<PAGE> 9
2.12 PROXIES
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by a written proxy, signed by
the stockholder and filed with the secretary of the corporation, but no such
proxy shall be voted or acted upon after three (3) years from its date, unless
the proxy provides for a longer period. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the stockholder or the
stockholder's attorney-in-fact. The revocability of a proxy that states on its
face that it is irrevocable shall be governed by the provisions of Section
212(c) of the General Corporation Law of Delaware.
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the General Corporation Law of Delaware and
any limitations in the certificate of incorporation or these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
The exact number of directors of the corporation shall be one (1) until
changed, by a bylaw amendment to this Section 3.2, duly adopted by the board of
directors or by the stockholders. The number of directors may be changed by a
duly adopted amendment to the certificate of incorporation or by an amendment to
this bylaw duly adopted by the vote or written consent of the holders of a
-5-
<PAGE> 10
majority of the stock issued and outstanding and entitled to vote or by
resolution of a majority of the board of directors.
No reduction of the authorized number of directors shall have the effect
of removing any director before that director's term of office expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
Except as provided in Section 3.4 of these bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Directors need not be stockholders unless so required by the
certificate of incorporation or these bylaws, wherein other qualifications for
directors may be prescribed. Each director, including a director elected to fill
a vacancy, shall hold office until his successor is elected and qualified or
until his earlier resignation or removal.
Elections of directors need not be by written ballot.
3.4 RESIGNATION AND VACANCIES
Any director may resign at any time upon written notice to the
corporation. When one or more directors so resigns and the resignation is
effective at a future date, a majority of the directors then in office,
including those who have so resigned, shall have power to fill such vacancy or
vacancies, the vote thereon to take effect when such resignation or resignations
shall become effective, and each director so chosen shall hold office as
provided in this section in the filling of other vacancies.
Unless otherwise provided in the certificate of incorporation or these
bylaws:
(i) Vacancies and newly created directorships resulting from
any increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(ii) .Whenever the holders of any class or classes of stock
or series thereof are entitled to elect one or more directors by the provisions
of the certificate of incorporation, vacancies and newly created directorships
of such class or classes or series may be filled by a majority of the directors
elected by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these bylaws, or may apply
to the Court of Chancery for a decree
-6-
<PAGE> 11
summarily ordering an election as provided in Section 211 of the General
Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a majority of
the whole board (as constituted immediately prior to any such increase), then
the Court of Chancery may, upon application of any stockholder or stockholders
holding at least ten (10) percent of the total number of the shares at the time
outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office as aforesaid,
which election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
The board of directors of the corporation may hold meetings, both
regular and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or these
bylaws, members of the board of directors, or any committee designated by the
board of directors, may participate in a meeting of the board of directors, or
any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 FIRST MEETINGS
The first meeting of each newly elected board of directors shall be held
at such time and place as shall be fixed by the vote of the stockholders at the
annual meeting and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present. In the event of the failure of the stockholders to fix the
time or place of such first meeting of the newly elected board of directors, or
in the event such meeting is not held at the time and place so fixed by the
stockholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
board of directors, or as shall be specified in a written waiver signed by all
of the directors.
3.7 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice at
such time and at such place as shall from time to time be determined by the
board.
3.8 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors for any purpose or purposes
may be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two (2) directors.
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<PAGE> 12
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or by telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
3.9 QUORUM
At all meetings of the board of directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board of directors, except as may be
otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the board of
directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
3.10 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the directors, or members of a committee of directors, need be specified in
any written waiver of notice unless so required by the certificate of
incorporation or these bylaws.
3.11 ADJOURNED MEETING; NOTICE
If a quorum is not present at any meeting of the board of directors,
then the directors present thereat may adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum is
present.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise restricted by the certificate of incorporation or these
bylaws, any action required or permitted to be taken at any meeting of the board
of directors, or of any committee thereof, may be taken without a meeting if all
members of the board or committee, as the case may
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be, consent thereto in writing and the writing or writings are filed with the
minutes of proceedings of the board or committee.
3.13 FEES AND COMPENSATION OF DIRECTORS
Unless otherwise restricted by the certificate of incorporation or these
bylaws, the board of directors shall have the authority to fix the compensation
of directors.
3.14 REMOVAL OF DIRECTORS
Unless otherwise restricted by statute, by the certificate of
incorporation or by these bylaws, any director or the entire board of directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors.
No reduction of the authorized number of directors shall have the effect
of removing any director prior to the expiration of such director's term of
office.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may designate one (1) or more committees, each
committee to consist of one (1) or more directors of the corporation. The board
may designate one or more directors as alternate members of any committee, who
may replace any absent or disqualified member at any meeting of the committee.
In the absence or disqualification of a member of a committee, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not such member or members constitute a quorum, may unanimously appoint
another member of the board of directors to act at the meeting in the place of
any such absent or disqualified member. Any such committee, to the extent
provided in the resolution of the board of directors or in the bylaws of the
corporation, shall have and may exercise all the powers and authority of the
board of directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers that may require it; but no such committee shall have the power or
authority to (i) approve, adopt or recommend to the stockholders, any action or
matter expressly required by the General Corporation Law of Delaware to be
submitted to the stockholders for approval or (ii) adopt, amend or repeal any
bylaw of the corporation.
4.2 COMMITTEE MINUTES
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
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4.3 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Article III of these bylaws, Section
3.5 (place of meetings and meetings by telephone), Section 3.7 (regular
meetings), Section 3.8 (special meetings and notice), Section 3.9 (quorum),
Section 3.10 (waiver of notice), Section 3.11 (adjournment and notice of
adjournment), and Section 3.12 (action without a meeting), with such changes in
the context of those bylaws as are necessary to substitute the committee and its
members for the board of directors and its members; provided, however, that the
time of regular meetings of committees may also be called by resolution of the
board of directors and that notice of special meetings of committees shall also
be given to all alternate members, who shall have the right to attend all
meetings of the committee. The board of directors may adopt rules for the
government of any committee not inconsistent with the provisions of these
bylaws.
ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of the corporation shall be a president, one or more vice
presidents, a secretary, and a chief financial officer. The corporation may also
have, at the discretion of the board of directors, a chairman of the board, one
or more assistant vice presidents, assistant secretaries and any such other
officers as may be appointed in accordance with the provisions of Section 5.3 of
these bylaws. Any number of offices may be held by the same person.
5.2 ELECTION OF OFFICERS
The officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Sections 5.3 or 5.5 of these
bylaws, shall be chosen by the board of directors, subject to the rights, if
any, of an officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or empower the president to appoint,
such other officers and agents as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the board of directors may
from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of
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<PAGE> 15
directors at any regular or special meeting of the board or, except in the case
of an officer chosen by the board of directors, by any officer upon whom such
power of removal may be conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
Any vacancy occurring in any office of the corporation shall be filled
by the board of directors.
5.6 CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these bylaws. If there is no
president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.
5.7 CHIEF EXECUTIVE OFFICER
Subject to such supervisory powers, if any, as may be given by the board
of directors to the chairman of the board, if there be such an officer, the
Chief Executive Officer shall be the chief executive officer of the corporation
and shall, subject to the control of the board of directors, have general
supervision, direction, and control of the business and the officers of the
corporation. He shall preside at all meetings of the stockholders and, in the
absence or nonexistence of a chairman of the board, at all meetings of the board
of directors. He shall have the general powers and duties of management usually
vested in the office of president of a corporation and shall have such other
powers and duties as may be prescribed by the board of directors or these
bylaws.
5.8 VICE PRESIDENT
In the absence or disability of the Chief Executive Officer, the vice
presidents, if any, in order of their rank as fixed by the board of directors
or, if not ranked, a vice president designated by the board of directors, shall
perform all the duties of the president and when so acting shall have all the
powers of, and be subject to all the restrictions upon, the president. The vice
presidents shall have such other powers and perform such other duties as from
time to time may be prescribed for them respectively by the board of directors,
these bylaws, the president or the chairman of the board.
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<PAGE> 16
5.9 SECRETARY
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors, and stockholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at stockholders'
meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the corporation or at the office of the corporation's
transfer agent or registrar, as determined by resolution of the board of
directors, a share register, or a duplicate share register, showing the names of
all stockholders and their addresses, the number and classes of shares held by
each, the number and date of certificates evidencing such shares, and the number
and date of cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings
of the stockholders and of the board of directors required to be given by law or
by these bylaws. He shall keep the seal of the corporation, if one be adopted,
in safe custody and shall have such other powers and perform such other duties
as may be prescribed by the board of directors or by these bylaws.
5.10 CHIEF FINANCIAL OFFICER
The Chief Financial Officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The Chief Financial Officer shall deposit all money and other valuables
in the name and to the credit of the corporation with such depositaries as may
be designated by the board of directors. He shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all of his
transactions as Chief Financial Officer and of the financial condition of the
corporation, and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or these bylaws.
5.11 ASSISTANT SECRETARY
The assistant secretary, or, if there is more than one, the assistant
secretaries in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the secretary
and shall perform such other duties and have such other powers as the board of
directors or the stockholders may from time to time prescribe.
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5.12 AUTHORITY AND DUTIES OF OFFICERS
In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from time
to time by the board of directors or the stockholders.
ARTICLE VI
INDEMNITY
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall, to the maximum extent and in the manner permitted
by the General Corporation Law of Delaware, indemnify each of its directors and
officers against expenses (including attorneys' fees), judgments, fines,
settlements, and other amounts actually and reasonably incurred in connection
with any proceeding, arising by reason of the fact that such person is or was an
agent of the corporation. For purposes of this Section 6.1, a "director" or
"officer" of the corporation includes any person (i) who is or was a director or
officer of the corporation, (ii) who is or was serving at the request of the
corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was a director or officer of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the extent and in the manner
permitted by the General Corporation Law of Delaware, to indemnify each of its
employees and agents (other than directors and officers) against expenses
(including attorneys' fees), judgments, fines, settlements, and other amounts
actually and reasonably incurred in connection with any proceeding, arising by
reason of the fact that such person is or was an agent of the corporation. For
purposes of this Section 6.2, an "employee" or "agent" of the corporation (other
than a director or officer) includes any person (i) who is or was an employee or
agent of the corporation, (ii) who is or was serving at the request of the
corporation as an employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was an employee or agent of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.3 INSURANCE
The corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such, whether or not the
corporation would have the
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power to indemnify him against such liability under the provisions of the
General Corporation Law of Delaware.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The corporation shall, either at its principal executive office or at
such place or places as designated by the board of directors, keep a record of
its stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his position as a director. The Court of Chancery
is hereby vested with the exclusive jurisdiction to determine whether a director
is entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any
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limitations or conditions with reference to the inspection, or award such other
and further relief as the Court may deem just and proper.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, the president, any vice president, the Chief
Financial Officer, the secretary or assistant secretary of this corporation, or
any other person authorized by the board of directors or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority granted
herein may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
ARTICLE VIII
GENERAL MATTERS
8.1 CHECKS
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
The board of directors, except as otherwise provided in these bylaws,
may authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
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8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
The shares of a corporation shall be represented by certificates. Every
holder of stock represented by certificates shall be entitled to have a
certificate signed by, or in the name of the corporation by the chairman or
vice-chairman of the board of directors, or the president or vice-president, and
by the Chief Financial Officer or an assistant Chief Financial Officer, or the
secretary or an assistant secretary of such corporation representing the number
of shares registered in certificate form. Any or all of the signatures on the
certificate may be a facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
has ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the corporation with the same effect
as if he were such officer, transfer agent or registrar at the date of issue.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, the total amount of the consideration to be paid
therefor and the amount paid thereon shall be stated. Upon the declaration of
any dividend on fully paid shares, the corporation shall declare a dividend upon
partly paid shares of the same class, but only upon the basis of the percentage
of the consideration actually paid thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES
If the corporation is authorized to issue more than one class of stock
or more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.5 LOST CERTIFICATES
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and canceled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate or uncertificated shares.
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8.6 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these bylaws. Without limiting the generality of this
provision, the singular number includes the plural, the plural number includes
the singular, and the term "person" includes both a corporation and a natural
person.
8.7 DIVIDENDS
The directors of the corporation, subject to any restrictions contained
in the certificate of incorporation, may declare and pay dividends upon the
shares of its capital stock pursuant to the General Corporation Law of Delaware.
Dividends may be paid in cash, in property, or in shares of the corporation's
capital stock.
The directors of the corporation may set apart out of any of the funds
of the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
8.8 FISCAL YEAR
The fiscal year of the corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.
8.9 SEAL
This corporation may have a corporate seal, which may be adopted or
altered at the pleasure of the Board of Directors, and may use the same by
causing it or a facsimile thereof, to be impressed or affixed or in any other
manner reproduced.
8.10 TRANSFER OF STOCK
Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate, and record the transaction in its books.
8.11 STOCK TRANSFER AGREEMENTS
The corporation shall have power to enter into and perform any agreement
with any number of stockholders of any one or more classes of stock of the
corporation to restrict the transfer of shares of stock of the corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the General Corporation Law of Delaware.
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8.12 REGISTERED STOCKHOLDERS
The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE IX
AMENDMENTS
The original or other bylaws of the corporation may be adopted, amended
or repealed by the stockholders entitled to vote; provided, however, that the
corporation may, in its certificate of incorporation, confer the power to adopt,
amend or repeal bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend or repeal bylaws.
ARTICLE X
DISSOLUTION
If it should be deemed advisable in the judgment of the board of
directors of the corporation that the corporation should be dissolved, the
board, after the adoption of a resolution to that effect by a majority of the
whole board at any meeting called for that purpose, shall cause notice to be
mailed to each stockholder entitled to vote thereon of the adoption of the
resolution and of a meeting of stockholders to take action upon the resolution.
At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
Section 275 of the General Corporation Law of Delaware and setting forth the
names and residences of the directors and officers shall be executed,
acknowledged, and filed and shall become effective in accordance with Section
103 of the General Corporation Law of Delaware. Upon such certificate's becoming
effective in accordance with Section 103 of the General Corporation Law of
Delaware, the corporation shall be dissolved.
Whenever all the stockholders entitled to vote on a dissolution consent
in writing, either in person or by duly authorized attorney, to a dissolution,
no meeting of directors or stockholders shall be necessary. The consent shall be
filed and shall become effective in accordance with Section 103
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of the General Corporation Law of Delaware. Upon such consent's becoming
effective in accordance with Section 103 of the General Corporation Law of
Delaware, the corporation shall be dissolved. If the consent is signed by an
attorney, then the original power of attorney or a photocopy thereof shall be
attached to and filed with the consent. The consent filed with the Secretary of
State shall have attached to it the affidavit of the secretary or some other
officer of the corporation stating that the consent has been signed by or on
behalf of all the stockholders entitled to vote on a dissolution; in addition,
there shall be attached to the consent a certification by the secretary or some
other officer of the corporation setting forth the names and residences of the
directors and officers of the corporation.
ARTICLE XI
CUSTODIAN
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES
The Court of Chancery, upon application of any stockholder, may appoint
one or more persons to be custodians and, if the corporation is insolvent, to be
receivers, of and for the corporation when:
(i) at any meeting held for the election of directors the
stockholders are so divided that they have failed to elect successors to
directors whose terms have expired or would have expired upon qualification of
their successors; or
(ii) the business of the corporation is suffering or is
threatened with irreparable injury because the directors are so divided
respecting the management of the affairs of the corporation that the required
vote for action by the board of directors cannot be obtained and the
stockholders are unable to terminate this division; or
(iii) the corporation has abandoned its business and has
failed within a reasonable time to take steps to dissolve, liquidate or
distribute its assets.
11.2 DUTIES OF CUSTODIAN
The custodian shall have all the powers and title of a receiver
appointed under Section 291 of the General Corporation Law of Delaware, but the
authority of the custodian shall be to continue the business of the corporation
and not to liquidate its affairs and distribute its assets, except when the
Court of Chancery otherwise orders and except in cases arising under Sections
226(a)(3) or 352(a)(2) of the General Corporation Law of Delaware.
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CERTIFICATE OF ADOPTION OF
BYLAWS
OF
HEALTHEON/WEBMD CORPORATION
Adoption by Incorporator
The undersigned person appointed in the Certificate of Incorporation to
act as the Incorporator of Healtheon/WebMD Corporation hereby adopts the
foregoing bylaws, comprising nineteen (19) pages, as the Bylaws of the
corporation.
Executed this 15th day of June, 1999.
/s/ David L. Leibsohn
----------------------------------------
David L. Leibsohn, Incorporator
Certificate by Secretary of Adoption
The undersigned hereby certifies that he is the duly elected, qualified,
and acting Secretary of Healtheon/WebMD Corporation, a Delaware corporation, and
that the foregoing Bylaws, comprising nineteen (19) pages, were adopted as the
Bylaws of the corporation on June 15, 1999, by the person appointed in the
Certificate of Incorporation to act as the Incorporator of the corporation.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and
affixed the corporate seal this 15th day of June, 1999.
/s/ John L. Westermann III
----------------------------------------
John L. Westermann III, Secretary
<PAGE> 1
EXHIBIT 3.3
AMENDED AND RESTATED BYLAWS
OF
HEALTHEON/WEBMD CORPORATION
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
ARTICLE I
CORPORATE OFFICES......................................................................-1-
1.1 REGISTERED OFFICE...............................................................-1-
1.2 OTHER OFFICES...................................................................-1-
ARTICLE II
MEETINGS OF STOCKHOLDERS...............................................................-1-
2.1 PLACE OF MEETINGS...............................................................-1-
2.2 ANNUAL MEETING..................................................................-1-
2.3 SPECIAL MEETING.................................................................-1-
2.4 NOTICE OF STOCKHOLDERS' MEETINGS................................................-2-
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE....................................-2-
2.6 QUORUM..........................................................................-2-
2.7 ADJOURNED MEETING; NOTICE.......................................................-2-
2.8 VOTING..........................................................................-2-
2.9 WAIVER OF NOTICE................................................................-3-
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING ........................-3-
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS ....................-3-
2.12 PROXIES.........................................................................-4-
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE...........................................-4-
ARTICLE III
DIRECTORS..............................................................................-5-
3.1 POWERS..........................................................................-5-
3.2 NUMBER OF DIRECTORS.............................................................-5-
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS.........................-5-
3.4 RESIGNATION AND VACANCIES.......................................................-6-
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE........................................-6-
3.6 FIRST MEETINGS..................................................................-6-
3.7 REGULAR MEETINGS................................................................-6-
3.8 SPECIAL MEETINGS; NOTICE........................................................-6-
3.9 QUORUM..........................................................................-6-
3.10 WAIVER OF NOTICE................................................................-7-
3.11 ADJOURNED MEETING; NOTICE.......................................................-7-
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING...............................-7-
3.13 FEES AND COMPENSATION OF DIRECTORS..............................................-7-
3.14 APPROVAL OF LOANS TO OFFICERS...................................................-7-
3.15 REMOVAL OF DIRECTORS............................................................-8-
</TABLE>
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TABLE OF CONTENTS
(continued)
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ARTICLE IV
COMMITTEES.............................................................................-8-
4.1 COMMITTEES OF DIRECTORS.........................................................-8-
4.2 COMMITTEE MINUTES...............................................................-8-
4.3 MEETINGS AND ACTION OF COMMITTEES...............................................-9-
4.4 ADVISORY COMMITTEES.............................................................-9-
ARTICLE V
OFFICERS...............................................................................-9-
5.1 OFFICERS........................................................................-9-
5.2 ELECTION OF OFFICERS............................................................-9-
5.3 SUBORDINATE OFFICERS............................................................-9-
5.4 REMOVAL AND RESIGNATION OF OFFICERS............................................-10-
5.5 VACANCIES IN OFFICES...........................................................-10-
5.6 CHAIRMAN OF THE BOARD..........................................................-10-
5.7 CHIEF EXECUTIVE OFFICER........................................................-10-
5.8 PRESIDENT......................................................................-10-
5.9 VICE PRESIDENT.................................................................-11-
5.10 SECRETARY......................................................................-11-
5.11 CHIEF FINANCIAL OFFICER........................................................-11-
5.13 ASSISTANT SECRETARY............................................................-12-
5.14 ASSISTANT TREASURER............................................................-12-
5.15 AUTHORITY AND DUTIES OF OFFICERS...............................................-12-
ARTICLE VI
INDEMNITY.............................................................................-12-
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS......................................-12-
6.2 INDEMNIFICATION OF OTHERS......................................................-12-
6.3 INSURANCE......................................................................-13-
ARTICLE VII
RECORDS AND REPORTS...................................................................-13-
7.1 MAINTENANCE AND INSPECTION OF RECORDS..........................................-13-
7.2 INSPECTION BY DIRECTORS........................................................-14-
7.3 ANNUAL STATEMENT TO STOCKHOLDERS...............................................-14-
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS.................................-14-
</TABLE>
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<PAGE> 4
TABLE OF CONTENTS
(continued)
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ARTICLE VIII
GENERAL MATTERS.......................................................................-14-
8.1 CHECKS.........................................................................-14-
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS...............................-14-
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES.........................................-15-
8.4 SPECIAL DESIGNATION ON CERTIFICATES............................................-15-
8.5 LOST CERTIFICATES..............................................................-15-
8.6 CONSTRUCTION; DEFINITIONS......................................................-16-
8.7 DIVIDENDS......................................................................-16-
8.8 FISCAL YEAR....................................................................-16-
8.9 SEAL...........................................................................-16-
8.10 TRANSFER OF STOCK..............................................................-16-
8.11 STOCK TRANSFER AGREEMENTS......................................................-16-
8.12 REGISTERED STOCKHOLDERS........................................................-16-
ARTICLE IX
AMENDMENTS............................................................................-17-
ARTICLE X
DISSOLUTION...........................................................................-17-
ARTICLE XI
CUSTODIAN.............................................................................-17-
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES....................................-17-
11.2 DUTIES OF CUSTODIAN............................................................-18-
</TABLE>
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<PAGE> 5
AMENDED AND RESTATED BYLAWS
OF
HEALTHEON/WEBMD CORPORATION
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE
The registered office of the corporation shall be at Corporation Trust
Center, 1209 Orange Street, in the City of Wilmington, County of New Castle,
State of Delaware. The name of the registered agent of the corporation at such
location is The Corporation Trust Company.
1.2 OTHER OFFICES
The board of directors may at any time establish other offices at any
place or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at any place, within or outside
the State of Delaware, designated by the board of directors. In the absence of
any such designation, stockholders' meetings shall be held at the principal
office of the corporation.
2.2 ANNUAL MEETING
The annual meeting of stockholders shall be held each year on a date and
at a time designated by the board of directors.
2.3 SPECIAL MEETING
A special meeting of the stockholders may be called, at any time by the
board of directors, or by the president, or by one or more stockholders holding
shares in the aggregate entitled to cast not less than ten percent (10%) of the
votes at that meeting.
If a special meeting is called by any person or persons other than the
board of directors or the president or the chairman of the board, then the
request shall be in writing, specifying the time of such meeting and the general
nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the chairman of the board, the president, any vice president or
the secretary of the corporation. The
<PAGE> 6
officer receiving the request shall cause notice to be promptly given to the
stockholders entitled to vote, in accordance with the provisions of Sections 2.4
and 2.5 of these bylaws, that a meeting will be held at the time requested by
the person or persons calling the meeting, so long as that time is not less than
thirty-five nor more than sixty (60) days after the receipt of the request. If
the notice is not given within twenty (20) days after receipt of the request,
then the person or persons requesting the meeting may give the notice. Nothing
contained in this paragraph of this Section 2.3 shall be construed as limiting,
fixing or affecting the time when a meeting of stockholders called by action of
the board of directors may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
All notices of meetings with stockholders shall be in writing and shall
be sent or otherwise given in accordance with Section 2.5 of these bylaws not
less than ten (10) nor more than sixty (60) days before the date of the meeting
to each stockholder entitled to vote at such meeting. The notice shall specify
the place, date, and hour of the meeting, and, in the case of a special meeting,
the purpose or purposes for which the meeting is called.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
2.6 QUORUM
The holders of a majority of the stock issued and outstanding and
entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the certificate of
incorporation. If, however, such quorum is not present or represented at any
meeting of the stockholders, then the stockholders entitled to vote thereat,
present in person or represented by proxy, shall have power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum is present or represented. At such adjourned meeting at
which a quorum is present or represented, any business may be transacted that
might have been transacted at the meeting as originally noticed.
2.7 ADJOURNED MEETING; NOTICE
When a meeting is adjourned to another time or place, unless these
bylaws otherwise require, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the adjournment
is taken. At the adjourned meeting the corporation may transact any business
that might have been transacted at the original meeting. If the adjournment is
for more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.8 VOTING
The stockholders entitled to vote at any meeting of stockholders shall
be determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of
-2-
<PAGE> 7
Sections 217 and 218 of the General Corporation Law of Delaware (relating to
voting rights of fiduciaries, pledgors and joint owners of stock and to voting
trusts and other voting agreements).
Except as provided in the last paragraph of this Section 2.8, or as may
be otherwise provided in the certificate of incorporation, each stockholder
shall be entitled to one vote for each share of capital stock held by such
stockholder.
2.9 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these bylaws.
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Section 2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A
MEETING of the Bylaws of this corporation was removed, in its entirety,
effective as of the initial public offering of the corporation, by the Board of
Directors.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
In order that the corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action.
If the board of directors does not so fix a record date:
(i) The record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders shall be at the close of business on the
day next preceding the day on which notice is given, or, if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held.
(ii) The record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior action
by the board of directors is necessary, shall be the day on which the first
written consent is expressed.
(iii) The record date for determining stockholders for any other purpose
shall be at the close of business on the day on which the board of directors
adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
-3-
<PAGE> 8
2.12 PROXIES
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by a written proxy, signed by
the stockholder and filed with the secretary of the corporation, but no such
proxy shall be voted or acted upon after three (3) years from its date, unless
the proxy provides for a longer period. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the stockholder or the
stockholder's attorney-in-fact. The revocability of a proxy that states on its
face that it is irrevocable shall be governed by the provisions of Section
212(c) of the General Corporation Law of Delaware.
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
2.14 NOMINATIONS AND PROPOSALS
Nominations of persons for election to the board of directors of the
corporation and the proposal of business to be considered by the stockholders
may be made at any meeting of stockholders only (a) pursuant to the
corporation's notice of meeting, (b) by or at the direction of the board of
directors or (c) by any stockholder of the corporation who was a stockholder of
record at the time of giving of notice provided for in these bylaws, who is
entitled to vote at the meeting and who complies with the notice procedures set
forth in this Section 2.14.
For nominations or other business to be properly brought before a
stockholders meeting by a stockholder pursuant to clause (c) of the preceding
sentence, the stockholder must have given timely notice thereof in writing to
the secretary of the corporation and such other business must otherwise be a
proper matter for stockholder action. To be timely, a stockholder's notice shall
be delivered to the secretary at the principal executive offices of the
corporation not later than the close of business on the 60th day nor earlier
than the close of business on the 90th day prior to the meeting; provided,
however, that in the event that less than 65 days notice of the meeting is given
to stockholders, notice by the stockholder to be timely must be so delivered not
earlier than the close of business on the seventh (7th) day following the day on
which the notice of meeting was mailed. In no event shall the public
announcement of an adjournment of a stockholders meeting commence a new time
period for the giving of a stockholder's notice as described above. Such
stockholder's notice shall set forth (a) as to each person whom the stockholder
proposes to nominate for election or reelection as a director all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors in an election contest, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (or any successor thereto) and Rule 14a-11 thereunder
(or any successor thereto) (including such person's written consent to being
named in the proxy statement as a nominee and to serving as a director if
elected); (b) as to any other business that the stockholder proposes to bring
before the meeting, a brief description of the
-4-
<PAGE> 9
business desired to be brought before the meeting, the reasons for conducting
such business at the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal is
made; and (c) as to the stockholder giving the notice and the beneficial owner,
if any, on whose behalf the nomination or proposal is made (i) the name and
address of such stockholder, as they appear on the corporation's books, and of
such beneficial owner, and (ii) the class and number of shares of the
corporation which are owned beneficially and of record by such stockholder and
such beneficial owner. Notwithstanding any provision herein to the contrary, no
business shall be conducted at a stockholders meeting except in accordance with
the procedures set forth in this Section 2.14.
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the General Corporation Law of Delaware and
any limitations in the certificate of incorporation or these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
The number of directors of the corporation shall be not less than seven
(7) nor more than fifteen (15). The exact number of directors shall be set from
time to time by resolution of the board. This number may be changed, within the
limits specified above, by a duly adopted amendment to the certificate of
incorporation or by an amendment to this bylaw duly adopted by the vote or
written consent of the holders of a majority of the stock issued and outstanding
and entitled to vote or by resolution of a majority of the board of directors,
except as may be otherwise specifically provided by statute or by the
certificate of incorporation.
No reduction of the authorized number of directors shall have the effect
of removing any director before that director's term of office expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
The Board of Directors shall be divided into three classes designated as
Class I, Class II and Class III, respectively. Directors shall be assigned to
each class in accordance with a resolution or resolutions adopted by the Board
of Directors. At the first annual meeting of stockholders following the date
hereof, the term of office of the Class I directors shall expire and Class I
directors shall be elected for a full term of three years. At the second annual
meeting of stockholders following the date hereof, the term of office of the
Class II directors shall expire and Class II directors shall be elected for a
full term of three years. At the third annual meeting of stockholders following
the date hereof, the term of office of the Class III directors shall expire and
Class III directors shall be elected for a full term of three years. At each
succeeding annual meeting of stockholders, directors shall be elected for a full
term of three years to succeed the directors of the class whose terms expire at
such annual meeting.
Notwithstanding the foregoing provisions of this Section 3.3, each
director shall serve until his or her successor is duly elected and qualified or
until his or her death, resignation or removal. No
-5-
<PAGE> 10
decrease in the number of directors constituting the Board of Directors shall
shorten the term of any incumbent director.
3.4 RESIGNATION AND VACANCIES
Any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal, or other causes shall, unless the Board
of Directors determines by resolution that any such vacancies or newly created
directorships shall be filled by stockholders, except as otherwise provided by
law, be filled only by the affirmative vote of a majority of the remaining
directors then in office, even though less than a quorum of the Board of
Directors and not by the stockholders. Newly created directorships resulting
from any increase in the number of directors shall, unless the Board of
Directors determines by resolution that any such newly created directorship
shall be filled by the stockholders, be filled only by the affirmative vote of
the directors then in office, even though less than a quorum of the Board of
Directors and not by the stockholders. Any director elected in accordance with
the preceding sentence shall hold office for the remainder of the full term of
the class of directors in which the new directorship was created or the vacancy
occurred and until such director's successor shall have been elected and
qualified.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
The board of directors of the corporation may hold meetings, both
regular and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or these
bylaws, members of the board of directors, or any committee designated by the
board of directors, may participate in a meeting of the board of directors, or
any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 FIRST MEETINGS
The first meeting of each newly elected board of directors shall be held
at such time and place as shall be determined by the directors.
3.7 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice at
such time and at such place as shall from time to time be determined by the
board.
3.8 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors may be called by the chief
executive officer on three (3) days' notice to each director, either personally
or by mail, telegram, telex, or telephone; special meetings shall be called by
the president or secretary in like manner and on like notice on the written
request of two (2) directors unless the board consists of only one (1) director,
in which case special meetings shall be called by the president or secretary in
like manner and on like notice on the written request of the sole director.
3.9 QUORUM
At all meetings of the board of directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors
-6-
<PAGE> 11
present at any meeting at which there is a quorum shall be the act of the board
of directors, except as may be otherwise specifically provided by statute or by
the certificate of incorporation. If a quorum is not present at any meeting of
the board of directors, then the directors present thereat may adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum is present.
3.10 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the directors, or members of a committee of directors, need be specified in
any written waiver of notice unless so required by the certificate of
incorporation or these bylaws.
3.11 ADJOURNED MEETING; NOTICE
If a quorum is not present at any meeting of the board of directors,
then the directors present thereat may adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum is
present.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise restricted by the certificate of incorporation or these
bylaws, any action required or permitted to be taken at any meeting of the board
of directors, or of any committee thereof, may be taken without a meeting if all
members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.
3.13 FEES AND COMPENSATION OF DIRECTORS
Unless otherwise restricted by the certificate of incorporation or these
bylaws, the board of directors shall have the authority to fix the compensation
of directors.
3.14 APPROVAL OF LOANS TO OFFICERS
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
-7-
<PAGE> 12
3.15 REMOVAL OF DIRECTORS
Unless otherwise restricted by statute, by the certificate of
incorporation or by these bylaws, any director or the entire board of directors
may be removed, with cause, by the holders of a majority of the shares then
entitled to vote at an election of directors.
No reduction of the authorized number of directors shall have the effect
of removing any director prior to the expiration of such director's term of
office.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution passed by a majority of the
whole board, designate one or more committees, with each committee to consist of
one or more of the directors of the corpo ration. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
board of directors or in the bylaws of the corporation, shall have and may
exercise all the powers and authority of the board of directors in the
management of the business and affairs of the corporation, and may authorize the
seal of the corporation to be affixed to all papers that may require it; but no
such committee shall have the power or authority to (i) amend the certificate of
incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the board of directors as provided in Section 151(a) of the General
Corporation Law of Delaware, fix any of the preferences or rights of such shares
relating to dividends, redemption, dissolution, any distribution of assets of
the corporation or the conversion into, or the exchange of such shares for,
shares of any other class or classes or any other series of the same or any
other class or classes of stock of the corporation), (ii) adopt an agreement of
merger or consolidation under Sections 251 or 252 of the General Corporation Law
of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets, (iv)
recommend to the stockholders a dissolution of the corporation or a revocation
of a dissolution, or (v) amend the bylaws of the corporation; and, unless the
board resolution establishing the committee, the bylaws or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
4.2 COMMITTEE MINUTES
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
-8-
<PAGE> 13
4.3 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Article III of these bylaws, Section
3.5 (place of meetings and meetings by telephone), Section 3.7 (regular
meetings), Section 3.8 (special meetings and notice), Section 3.9 (quorum),
Section 3.10 (waiver of notice), Section 3.11 (adjournment and notice of
adjournment), and Section 3.12 (action without a meeting), with such changes in
the context of those bylaws as are necessary to substitute the committee and its
members for the board of directors and its members; provided, however, that the
time of regular meetings of committees may also be called by resolution of the
board of directors and that notice of special meetings of committees shall also
be given to all alternate members, who shall have the right to attend all
meetings of the committee. The board of directors may adopt rules for the
government of any committee not inconsistent with the provisions of these
bylaws.
4.4 ADVISORY COMMITTEES
The board of directors may, by resolution passed by a majority of the
whole board, designate one or more advisory committees, with each committee to
consist of one or more of the directors of the corporation or any other such
persons as the board may appoint. The board may designate one or more persons as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. Members who are not board members shall
not have the responsibilities or obligations of board members nor be deemed
directors of the corporation for any other purpose.
ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of the corporation shall be a chief executive officer
("CEO"), a president, one or more vice presidents, a secretary, a chief
financial officer ("CFO") and a treasurer. The corporation may also have, at the
discretion of the board of directors, a chairman of the board, one or more
assistant vice presidents, assistant secretaries, assistant treasurers, and any
such other officers as may be appointed in accordance with the provisions of
Section 5.3 of these bylaws. Any number of offices may be held by the same
person.
5.2 ELECTION OF OFFICERS
The officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Sections 5.3 or 5.5 of these
bylaws, shall be chosen by the board of directors, subject to the rights, if
any, of an officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or empower the CEO to appoint, such
other officers and agents as the business of the corporation may require, each
of whom shall hold office for such period, have such authority, and perform such
duties as are provided in these bylaws or as the board of directors may from
time to time determine.
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5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or
special meeting of the board or by any officer upon whom such power of removal
may be conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
Any vacancy occurring in any office of the corporation shall be filled
by the board of directors.
5.6 CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these bylaws. If there is no CEO,
then the chairman of the board shall also be the CEO of the corporation and
shall have the powers and duties prescribed in Section 5.7 of these bylaws.
5.7 CHIEF EXECUTIVE OFFICER
Subject to such supervisory powers, if any, as may be given by the board
of directors to the chairman of the board, if there be such an officer, the CEO
of the corporation shall, subject to the control of the board of directors, have
general supervision, direction, and control of the business and the officers of
the corporation. He shall preside at all meetings of the stockholders and, in
the absence or nonexistence of a chairman of the board, at all meetings of the
board of directors. He shall have the general powers and duties of management
usually vested in the CEO of a corporation, and shall have such other powers and
duties as may be prescribed by the board of directors or these bylaws.
5.8 PRESIDENT
The president may assume and perform the duties of the chief executive
officer in the absence or disability of the chief executive officer or whenever
the office of the chief executive officer is vacant. The president of the
corporation shall exercise and perform such powers and duties as may from time
to time be assigned to him by the board of directors, the CEO or as may be
prescribed by these bylaws. The president shall have authority to execute in the
name of the corporation bonds, contracts, deeds, leases and other written
instruments to be executed by the corporation. In the absence or nonexistence of
the chairman of the board and chief executive officer, he shall preside at all
meetings of the stockholders and, in the absence or nonexistence of a chairman
of the board and the chief executive officer, at all meetings of the board of
directors and shall perform such other duties as the board of directors may from
time to time determine.
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5.9 VICE PRESIDENT
In the absence or disability of the CEO and the president, the vice
presidents, if any, in order of their rank as fixed by the board of directors
or, if not ranked, a vice president designated by the board of directors, shall
perform all the duties of the president and when so acting shall have all the
powers of, and be subject to all the restrictions upon, the president. The vice
presidents shall have such other powers and perform such other duties as from
time to time may be prescribed for them respectively by the board of directors,
these bylaws, the president or the chairman of the board.
5.10 SECRETARY
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors, and shareholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at shareholders'
meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the corporation or at the office of the corporation's
transfer agent or registrar, as determined by resolu tion of the board of
directors, a share register, or a duplicate share register, showing the names of
all shareholders and their addresses, the number and classes of shares held by
each, the number and date of certificates evidencing such shares, and the number
and date of cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings
of the shareholders and of the board of directors required to be given by law or
by these bylaws. He shall keep the seal of the corporation, if one be adopted,
in safe custody and shall have such other powers and perform such other duties
as may be prescribed by the board of directors or by these bylaws.
5.11 CHIEF FINANCIAL OFFICER
The CFO shall keep and maintain, or cause to be kept and maintained,
adequate and correct books and records of accounts of the properties and
business transactions of the corporation, including accounts of its assets,
liabilities, receipts, disbursements, gains, losses, capital, retained earnings,
and shares. The books of account shall at all reasonable times be open to
inspection by any director. The CFO shall have such other powers and perform
such other duties as may be prescribed by the board of directors or these
bylaws.
5.12 TREASURER
The treasurer shall deposit all money and other valuables in the name
and to the credit of the corporation with such depositaries as may be designated
by the board of directors. He shall disburse the funds of the corporation as may
be ordered by the board of directors, shall render to the president and
directors, whenever they request it, an account of all of his transactions as
treasurer and of the financial condition of the corporation, and shall have such
other powers and perform such other duties as may be prescribed by the board of
directors or these bylaws.
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5.13 ASSISTANT SECRETARY
The assistant secretary, or, if there is more than one, the assistant
secretaries in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the secretary
and shall perform such other duties and have such other powers as the board of
directors or the stockholders may from time to time prescribe.
5.14 ASSISTANT TREASURER
The assistant treasurer, or, if there is more than one, the assistant
treasurers, in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election),
shall, in the absence of the treasurer or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the treasurer
and shall perform such other duties and have such other powers as the board of
directors or the stockholders may from time to time prescribe.
5.15 AUTHORITY AND DUTIES OF OFFICERS
In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from time
to time by the board of directors or the stockholders.
ARTICLE VI
INDEMNITY
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall, to the maximum extent and in the manner permitted
by the General Corporation Law of Delaware, indemnify each of its directors and
officers against expenses (including attorneys' fees), judgments, fines,
settlements, and other amounts actually and reasonably incurred in connection
with any proceeding, arising by reason of the fact that such person is or was an
agent of the corporation. For purposes of this Section 6.1, a "director" or
"officer" of the corporation includes any person (i) who is or was a director or
officer of the corporation or any subsidiary of the corporation, (ii) who is or
was serving at the request of the corporation as a director or officer of
another corporation, partnership, joint venture, trust or other enterprise, or
(iii) who was a director or officer of a corporation which was a predecessor
corporation of the corporation or any of its subsidiaries or of another
enterprise at the request of such predecessor corporation or subsidiary.
6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the extent and in the manner
permitted by the General Corporation Law of Delaware, to indemnify each of its
employees and agents (other than directors and officers) against expenses
(including attorneys' fees), judgments, fines, settlements, and other amounts
actually and reasonably incurred in connection with any proceeding, arising by
reason of the fact that such person is or was an agent of the corporation. For
purposes of this Section 6.2, an
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"employee" or "agent" of the corporation (other than a director or officer)
includes any person (i) who is or was an employee or agent of the corporation or
any subsidiary of the corporation, (ii) who is or was serving at the request of
the corporation as an employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, or (iii) who was an employee or agent
of a corporation which was a predecessor corporation of the corporation or any
of its subsidiaries or of another enterprise at the request of such predecessor
corporation or subsidiary.
6.3 INSURANCE
The corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation or its subsidiaries as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under the provisions of the General Corporation Law of Delaware.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The corporation shall, either at its principal executive office or at
such place or places as designated by the board of directors, keep a record of
its shareholders listing their names and addresses and the number and class of
shares held by each shareholder, a copy of these bylaws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
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7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his position as a director. The Court of Chancery
is hereby vested with the exclusive jurisdiction to determine whether a director
is entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, the CEO, the CFO or any other person
authorized by the board of directors or the CEO, is authorized to vote,
represent, and exercise on behalf of this corporation all rights incident to any
and all shares of any other corporation or corporations standing in the name of
this corporation. The authority granted herein may be exercised either by such
person directly or by any other person authorized to do so by proxy or power of
attorney duly executed by such person having the authority.
ARTICLE VIII
GENERAL MATTERS
8.1 CHECKS
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
The board of directors, except as otherwise provided in these bylaws,
may authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
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8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
The shares of a corporation shall be represented by certificates,
provided that the board of directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply to
shares represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman or vice-chairman of
the board of directors, or the president or vice-president, and by the treasurer
or an assistant treasurer, or the secretary or an assistant secretary of such
corporation representing the number of shares registered in certificate form.
Any or all of the signatures on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate has ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if he were such officer, transfer agent or
registrar at the date of issue.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES
If the corporation is authorized to issue more than one class of stock
or more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.5 LOST CERTIFICATES
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal represen tative, to give the corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate or uncertificated shares.
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8.6 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these bylaws. Without limiting the generality of this
provision, the singular number includes the plural, the plural number includes
the singular, and the term "person" includes both a corporation and a natural
person.
8.7 DIVIDENDS
The directors of the corporation, subject to any restrictions contained
in the certificate of incorporation, may declare and pay dividends upon the
shares of its capital stock pursuant to the General Corporation Law of Delaware.
Dividends may be paid in cash, in property, or in shares of the corporation's
capital stock.
The directors of the corporation may set apart out of any of the funds
of the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
8.8 FISCAL YEAR
The fiscal year of the corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.
8.9 SEAL
The seal of the corporation shall be such as from time to time may be
approved by the board of directors.
8.10 TRANSFER OF STOCK
Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate, and record the transaction in its books.
8.11 STOCK TRANSFER AGREEMENTS
The corporation shall have power to enter into and perform any agreement
with any number of shareholders of any one or more classes of stock of the
corporation to restrict the transfer of shares of stock of the corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the General Corporation Law of Delaware.
8.12 REGISTERED STOCKHOLDERS
The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
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ARTICLE IX
AMENDMENTS
The original or other bylaws of the corporation may be adopted, amended
or repealed by the stockholders or the board of directors.
ARTICLE X
DISSOLUTION
If it should be deemed advisable in the judgment of the board of
directors of the corporation that the corporation should be dissolved, the
board, after the adoption of a resolution to that effect by a majority of the
whole board at any meeting called for that purpose, shall cause notice to be
mailed to each stockholder entitled to vote thereon of the adoption of the
resolution and of a meeting of stockholders to take action upon the resolution.
At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
Section 275 of the General Corporation Law of Delaware and setting forth the
names and residences of the directors and officers shall be executed,
acknowledged, and filed and shall become effective in accordance with Section
103 of the General Corporation Law of Delaware. Upon such certificate's becoming
effective in accordance with Section 103 of the General Corporation Law of
Delaware, the corporation shall be dissolved.
Whenever all the stockholders entitled to vote on a dissolution consent
in writing, either in person or by duly authorized attorney, to a dissolution,
no meeting of directors or stockholders shall be necessary. The consent shall be
filed and shall become effective in accordance with Section 103 of the General
Corporation Law of Delaware. Upon such consent's becoming effective in
accordance with Section 103 of the General Corporation Law of Delaware, the
corporation shall be dissolved. If the consent is signed by an attorney, then
the original power of attorney or a photocopy thereof shall be attached to and
filed with the consent. The consent filed with the Secretary of State shall have
attached to it the affidavit of the secretary or some other officer of the
corporation stating that the consent has been signed by or on behalf of all the
stockholders entitled to vote on a dissolution; in addition, there shall be
attached to the consent a certification by the secretary or some other officer
of the corporation setting forth the names and residences of the directors and
officers of the corporation.
ARTICLE XI
CUSTODIAN
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES
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The Court of Chancery, upon application of any stockholder, may appoint
one or more persons to be custodians and, if the corporation is insolvent, to be
receivers, of and for the corporation when:
(i) at any meeting held for the election of directors the stockholders
are so divided that they have failed to elect successors to directors whose
terms have expired or would have expired upon qualification of their successors;
or
(ii) the business of the corporation is suffering or is threatened with
irreparable injury because the directors are so divided respecting the
management of the affairs of the corporation that the required vote for action
by the board of directors cannot be obtained and the stockholders are unable to
terminate this division; or
(iii) the corporation has abandoned its business and has failed within a
reasonable time to take steps to dissolve, liquidate or distribute its assets.
11.2 DUTIES OF CUSTODIAN
The custodian shall have all the powers and title of a receiver
appointed under Section 291 of the General Corporation Law of Delaware, but the
authority of the custodian shall be to continue the business of the corporation
and not to liquidate its affairs and distribute its assets, except when the
Court of Chancery otherwise orders and except in cases arising under Sections
226(a)(3) or 352(a)(2) of the General Corporation Law of Delaware.
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EXHIBIT 23.1
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 16, 1999, included in the proxy
statement/prospectus of Healtheon/WebMD Corporation that is made a part of the
Registration Statement (Form S-4) and Prospectus of Healtheon/WebMD Corporation
for the registration of shares of its common stock.
/s/ Ernst & Young LLP
Palo Alto, California
June 17, 1999
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Healtheon/WebMD
Corporation on Form S-4 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 statement of
operations, convertible redeemable preferred stock and stockholders' equity (net
capital deficiency), and cash flows of ActaMed Corporation and subsidiary for
the year ended December 31, 1996 (the consolidated financial statements for 1996
are not separately presented herein) appearing in this proxy
statement/prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
proxy statement/prospectus.
/s/ DELOITTE & TOUCHE LLP
Atlanta, Georgia
June 14, 1999
<PAGE> 1
EXHIBIT 23.3
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 on WebMD, Inc. dated January 16, 1999, except for Note 12, as
to which the date is April 9, 1999, included in the proxy statement/prospectus
of Healtheon/WebMD Corporation that is made a part of the Registration Statement
(Form S-4) and Prospectus of Healtheon/WebMD Corporation for the registration of
shares of its common stock.
/s/ Ernst & Young LLP
Atlanta, Georgia
June 14, 1999
<PAGE> 1
Exhibit 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Healtheon/WebMD
Corporation on Form S-4 of our report dated August 5, 1998 (October 7, 1998 as
to Note 6.b., December 11, 1998 as to Note 13 and January 29, 1999 as to note
14) (which expresses an unqualified opinion and includes an explanatory
paragraph relating to the restatement described in Note 13) relating to the
consolidated financial statements of MedE America Corporation as of June 30,
1997 and 1998 and for each of the three years in the period ended June 30,
1998, appearing in the Proxy Statement/Prospectus, which is part of this
Registration Statement.
We also consent to the reference to us under the hearing "Experts" in such
Proxy Statement/Prospectus.
/s/ DELOITTE & TOUCHE LLP
Jericho, New York
June 16, 1999
<PAGE> 1
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in the Health/WebMD Corporation proxy
statement/prospectus file on Form S-4 of our report dated February 19,
1999, on our audits of the financial statements of Direct Medical Knowledge,
Inc. as of December 31, 1997 and 1998, for each of the three years in the
period ended December 31, 1998 and for the period from May 24, 1995 (date of
incorporation) to December 31, 1998. The financial statements of Direct Medical
Knowledge, Inc. for the period from May 24, 1995 (date of incorporation) to
December 31, 1996 were audited by other auditors, and our report relies on the
report of these other auditors, in so far as it relates to this period. Our
report contains an explanatory paragraph about Direct Medical Knowledge, Inc.'s
recurring losses and negative cash flows from operations which raise
substantial doubt about Direct Medical Knowledge, Inc.'s ability to continue
as a going concern. We also consent to the reference to our firm under the
caption "Experts" and "Change in Independent Accountants".
/s/ PricewaterhouseCoopers LLP
San Francisco, California
June 14, 1999
<PAGE> 1
EXHIBIT 23.6
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 of our
report dated February 7, 1997, except for Note 1 (J), Note 3 and Note 5 as to
which the date is January 16, 1999 with respect to the Financial Statements of
Direct Medical Knowledge Inc. for the year ended December 31, 1996.
We also consent to the references to our report under the caption "Experts."
/s/ BERG & COMPANY LLP
Berg & Company LLP
June 15, 1999
San Francisco, CA
<PAGE> 1
EXHIBIT 23.7
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
WebMD Corporation:
We consent to the use of our report dated November 18, 1998 in the
Healtheon/WebMD Corporation proxy statement/prospectus on Form S-4 filed with
the Securities and Exchange Commission on or about June 17, 1999 relating to the
balance sheets of Sapient Health Network, Inc. as of September 30, 1997 and
1998, and related statements of operations, stockholders' deficit, and cash
flows for the period from November 21, 1995 (date of inception) through
September 30, 1996 and each of the years in the two-year period ended September
30, 1998 and to the reference to our firm under the heading "Experts" in the
Prospectus.
Our report dated November 18, 1998 contains an explanatory paragraph that states
that the Company has suffered recurring losses from operations and has a net
capital deficiency, which raises substantial doubt about its ability to continue
as a going concern. The financial statements do not include any adjustments that
might result from the outcome of that uncertainty.
/s/ KPMG Peat Marwick LLP
Portland, Oregon
June 17, 1999
<PAGE> 1
Exhibit 23.8
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Healtheon/WebMD
Corporation on Form S-4 of our report dated October 7, 1997 relating to the
statement of income of The Stockton Group, Inc. for the year ended June 30,
1997, appearing in the Proxy Statement/Prospectus, which is part of this
Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Proxy Statement/Prospectus.
/s/ DELOITTE & TOUCHE LLP
Charlotte, North Carolina
June 16, 1999
<PAGE> 1
EXHIBIT 23.9
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
HealthCare Interchange, Inc.:
We consent to the use, in registration statement on Form S-4 of Healtheon/WebMD
Corporation, of our audit report, dated September 8, 1998, except as to notes 3
and 15, which are as of October 30, 1998, on the consolidated balance sheet of
HealthCare Interchange, Inc. and subsidiary as of June 30, 1998 and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the nine-month period ended June 30, 1998, which report appears in the
Form S-4 of Healtheon/WebMD Corporation dated June 16, 1999 and to the reference
to our firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
St. Louis, Missouri
June 16, 1999
<PAGE> 1
Exhibit 23.12
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Healtheon/WebMD
Corporation on Form S-4 of our report dated February 26, 1999 (June 30, 1999 as
to Note 9 - Subsequent Event) relating to the balance sheets of Greenberg News
Networks, Inc. (a development stage company) as of December 31, 1997 and 1998
and the related statements of operations, stockholders' equity, and cash flows
for the period January 8, 1997 (date of inception) to December 31, 1997, for
the year ended December 31, 1998, and for the period January 8, 1997 (date of
inception) to December 31, 1998 appearing in this proxy statement/prospectus,
which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
proxy statement/prospectus.
/s/ DELOITTE & TOUCHE LLP
Atlanta, Georgia
August 3, 1999
