<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 17, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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>
LARRY W. SONSINI, ESQ. H. BRYAN IVES III, ESQ. MARK J. TANNENBAUM, ESQ.
MARTIN W. KORMAN, ESQ. C. MARK KELLY, ESQ. KAREN C. WIEDEMANN, ESQ.
DANIEL R. MITZ, ESQ. CATHERINE L. AMSPACHER, ESQ. REBOUL, MACMURRAY, HEWITT,
MARK L. REINSTRA, ESQ. NELSON MULLINS RILEY & SCARBOROUGH, MAYNARD & KRISTOL
WILSON SONSINI GOODRICH & ROSATI L.L.P. 45 ROCKEFELLER PLAZA
PROFESSIONAL CORPORATION BANK OF AMERICA CORPORATE CENTER NEW YORK, NY 10111
650 PAGE MILL ROAD SUITE 2600 (212) 841-5700
PALO ALTO, CA 94304 100 NORTH TRYON STREET
(650) 493-9300 CHARLOTTE, NC 28202-4000
(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>
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- ----------------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) SHARE PRICE REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock $0.0001 par value(1).... 79,606,928 shares $76.5625(4) $6,094,905,425 $1,694,384
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock $0.0001 par value(2).... 101,137,570 shares not applicable $ 119,396,546(5) $ 33,193
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock $0.0001 par value(3).... 9,852,950 shares not applicable $ 478,226,051(6) $ 132,946
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</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) 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.
(3) 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.
(4) 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.
(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) 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.
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.
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<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, 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. While
your vote is not required for that acquisition, you should be aware that if that
acquisition is completed, MEDE AMERICA will become a wholly owned subsidiary of
Healtheon/ WebMD, and MEDE AMERICA stockholders will receive Healtheon/WebMD
common stock.
Following the reorganization, the WebMD merger and the acquisition of MEDE
AMERICA, 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. YOUR VOTE IS VERY IMPORTANT. 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 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, Healtheon stockholders will own approximately 49.5%, WebMD
stockholders will own approximately 44.4% and MEDE AMERICA stockholders
will own approximately 6.1% 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 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 a proposed acquisition by
Healtheon/WebMD of MEDE AMERICA. While your vote is not required for that
acquisition, you should be aware that if that acquisition is completed, MEDE
AMERICA will also become a wholly owned subsidiary of Healtheon/WebMD, and MEDE
AMERICA stockholders will receive Healtheon/WebMD common stock.
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. YOUR VOTE IS VERY IMPORTANT. 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. The reorganization agreement is included as
Annex B to the attached proxy statement/prospectus. 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 acquisition of MEDE AMERICA, Healtheon stockholders
will own approximately 49.5%, WebMD stockholders will own approximately
44.4% and MEDE AMERICA stockholders will own approximately 6.1% 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 consummation of the reorganization, which payments may otherwise be
deemed to constitute "parachute payments" pursuant to Section 280G of
the Internal Revenue Code of 1986, as amended.
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.
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<PAGE> 6
[MEDE LOGO]
90 MERRICK AVENUE, SUITE 501
EAST MEADOW, NEW YORK 11554
, 1999
Dear 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 lower of the ten-day average closing price of Healtheon common stock for
the period ending on July 30, 1999 and for the period ending two days prior to
the stockholders' meeting is greater than $63.70 or 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 Healtheon-WebMD reorganization. While your vote is not required for
that reorganization, you should be aware that if that reorganization is
completed, WebMD will also become a wholly owned subsidiary of Healtheon/ WebMD.
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 28 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.
YOUR VOTE IS VERY IMPORTANT.
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. The reorganization
agreement is included as Annex B to the attached proxy
statement/prospectus. 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. The exchange ratio is subject to
adjustment as described in the attached proxy statement/prospectus.
Following the merger and the completion by Healtheon/WebMD of its
acquisition of WebMD, MEDE AMERICA stockholders will own approximately
6.1%, Healtheon stockholders will own approximately 49.5% and WebMD
stockholders will own approximately 44.4% 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
PROXY STATEMENT/PROSPECTUS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
QUESTIONS AND ANSWERS FOR HEALTHEON AND WEBMD
STOCKHOLDERS.............................................. 1
QUESTIONS AND ANSWERS FOR MEDE AMERICA STOCKHOLDERS......... 5
SUMMARY OF THE PROXY STATEMENT/PROSPECTUS................... 8
The Companies............................................. 8
Structure of the Reorganizations.......................... 9
Summary of the Healtheon-WebMD reorganization............. 10
Summary of the MEDE America reorganization................ 16
Selected Historical and Selected Unaudited Pro Forma
Condensed Combined Financial Data...................... 22
Comparative Historical and Unaudited Pro Forma Per Share
Data................................................... 26
RISK FACTORS................................................ 28
THE HEALTHEON MEETING....................................... 43
THE WEBMD MEETING........................................... 45
THE MEDE AMERICA MEETING.................................... 48
THE HEALTHEON-WEBMD REORGANIZATION.......................... 50
Background of the Healtheon-WebMD reorganization and
related agreements..................................... 50
Joint reasons for the Healtheon-WebMD reorganization...... 52
Healtheon's reasons for the Healtheon-WebMD
reorganization......................................... 53
Recommendation of Healtheon's board of directors.......... 53
WebMD's reasons for the Healtheon-WebMD reorganization.... 54
Recommendation of WebMD's board of directors.............. 55
Opinion of Healtheon's financial advisor.................. 55
Opinion of WebMD's financial advisor...................... 61
Modification of vesting of employee stock options......... 67
Interests of certain directors, officers and affiliates in
the Healtheon-WebMD reorganization..................... 68
Completion and effectiveness of the Healtheon merger and
the WebMD merger....................................... 69
Structure of the Healtheon-WebMD reorganization and
conversion of WebMD common stock and Healtheon common
stock and treatment of WebMD preferred stock........... 69
Healtheon/WebMD's strategic alliances with and investments
from Microsoft and other partners...................... 70
Exchange of Healtheon and WebMD stock certificates for
Healtheon/WebMD stock certificates..................... 71
No dividends.............................................. 72
Material U.S. federal income tax considerations of the
Healtheon-WebMD reorganization......................... 72
Accounting treatment of the Healtheon-WebMD
reorganization......................................... 74
Regulatory filings and approvals required to complete the
Healtheon-WebMD reorganization......................... 74
Restrictions on sales of shares by affiliates of WebMD and
Healtheon.............................................. 75
Listing on the Nasdaq National Market of Healtheon/WebMD
common stock to be issued in the Healtheon-WebMD
reorganization......................................... 75
Rights of dissenting WebMD stockholders................... 75
</TABLE>
i
<PAGE> 9
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Operations after the Healtheon-WebMD reorganization....... 77
THE HEALTHEON-WEBMD REORGANIZATION AGREEMENT................ 78
HEALTHEON/WEBMD RELATED TRANSACTION AGREEMENTS.............. 84
WebMD stockholders' voting agreement and conversion
agreement.............................................. 84
Healtheon stockholders' voting agreement.................. 84
Microsoft shareholder agreement........................... 85
THE MEDE AMERICA REORGANIZATION............................. 86
Background of the MEDE AMERICA reorganization............. 86
Joint reasons for the MEDE AMERICA reorganization......... 88
MEDE AMERICA's reasons for the MEDE AMERICA
reorganization......................................... 88
Recommendation of MEDE AMERICA's board of directors....... 90
Opinion of MEDE AMERICA's financial advisor............... 90
Interests of certain persons in the MEDE AMERICA
reorganization......................................... 95
Completion and effectiveness of the MEDE AMERICA
reorganization......................................... 96
Structure of the MEDE AMERICA reorganization and
conversion of MEDE AMERICA common stock................ 96
Exchange of MEDE AMERICA stock certificates for
Healtheon/WebMD stock certificates..................... 97
Material U.S. federal income tax considerations of the
MEDE AMERICA reorganization............................ 97
Accounting treatment of the MEDE AMERICA reorganization... 99
Regulatory filings and approvals required to complete the
MEDE AMERICA reorganization............................ 99
Restrictions on sales of shares by affiliates of MEDE
AMERICA and Healtheon.................................. 100
Listing on the Nasdaq National Market of Healtheon common
stock to be issued in the MEDE AMERICA
reorganization......................................... 100
Delisting and deregistration of MEDE AMERICA common stock
after the MEDE AMERICA reorganization.................. 100
Operations after the MEDE AMERICA reorganization.......... 100
THE MEDE AMERICA REORGANIZATION AGREEMENT................... 101
MEDE AMERICA RELATED TRANSACTION AGREEMENTS................. 108
MEDE AMERICA voting agreement............................. 108
MEDE AMERICA registration rights agreement................ 108
COMPARATIVE PER SHARE MARKET PRICE DATA..................... 109
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION............................................... 110
COMPARISON OF RIGHTS OF HOLDERS OF WEBMD CAPITAL STOCK AND
HEALTHEON/WEBMD COMMON STOCK.............................. 126
COMPARISON OF RIGHTS OF HOLDERS OF MEDE AMERICA COMMON STOCK
AND HEALTHEON/WEBMD COMMON STOCK.......................... 139
MANAGEMENT OF HEALTHEON/WEBMD............................... 143
CERTAIN INFORMATION REGARDING HEALTHEON..................... 145
Healtheon's business...................................... 145
Market for Healtheon's common stock and related
stockholder matters.................................... 154
</TABLE>
ii
<PAGE> 10
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Healtheon selected consolidated financial data............ 156
Healtheon management's discussion and analysis of
financial condition and results of operations.......... 157
Healtheon's management.................................... 168
Certain relationships and related transactions............ 179
Share ownership by Healtheon's principal stockholders,
management and directors............................... 182
CERTAIN INFORMATION REGARDING WEBMD......................... 185
WebMD's business.......................................... 185
WebMD selected consolidated financial data................ 198
WebMD management's discussion and analysis of financial
condition and results of operations.................... 199
WebMD's management........................................ 208
Certain relationships and related transactions............ 214
Share ownership by WebMD's principal stockholders,
management and directors............................... 217
CERTAIN INFORMATION REGARDING MEDE AMERICA.................. 220
MEDE AMERICA's business................................... 220
MEDE AMERICA selected consolidated financial data......... 227
MEDE AMERICA management's discussion and analysis of
financial condition and results of operations.......... 229
Share ownership by MEDE AMERICA's principal stockholders,
management and directors............................... 245
ADDITIONAL MATTERS BEING SUBMITTED TO A VOTE OF ONLY
HEALTHEON STOCKHOLDERS.................................... 247
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE
ACT....................................................... 250
LEGAL OPINION............................................... 250
EXPERTS..................................................... 250
STOCKHOLDER PROPOSALS....................................... 251
WHERE YOU CAN FIND MORE INFORMATION......................... 253
</TABLE>
<TABLE>
<S> <C> <C>
ANNEX A The Healtheon-WebMD Reorganization Agreement................
ANNEX B The MEDE AMERICA Reorganization Agreement...................
ANNEX C Opinion of Healtheon Financial Advisor......................
ANNEX D Opinion of WebMD Financial Advisor..........................
ANNEX E Opinion of MEDE AMERICA Financial Advisor...................
ANNEX F Georgia Business Corporation Code Sections 14-2-1301 through
14-2-1332...................................................
</TABLE>
iii
<PAGE> 11
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 9).
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 which is discussed further below,
the former stockholders of Healtheon will own approximately 49.5%, the former
stockholders of WebMD will own approximately 44.4% and the former
stockholders of MEDE AMERICA will own approximately 6.1% of Healtheon/WebMD.
For a more complete description of the Healtheon-WebMD reorganization, see
the section entitled "The Healtheon-WebMD reorganization" on page 50.
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. PLEASE DO NOT SEND YOUR
HEALTHEON STOCK CERTIFICATES.
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 WebMD common stock and
Healtheon
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<PAGE> 12
common stock" on page 9. PLEASE DO NOT SEND YOUR WEBMD STOCK CERTIFICATES AT
THIS TIME.
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 WebMD merger 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 WebMD merger, 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 WebMD
merger.
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 WebMD merger, in which
case options and warrants to purchase such series shall become by their terms
options and warrants for Healtheon/WebMD common stock. Upon completion of the
reorganization, options granted under the Sapient Option Plan to acquire
Series B preferred stock will become exercisable for Healtheon/WebMD common
stock.
Q: WHAT IS THE MEDE AMERICA REORGANIZATION?
A: Healtheon has also agreed to a reorganization with MEDE AMERICA, which is
described in this proxy statement/prospectus. The Healtheon-WebMD
reorganization does not depend on Healtheon's reorganization with MEDE
AMERICA. However, you should be aware that if the MEDE AMERICA reorganization
is completed, MEDE AMERICA will become another subsidiary of the combined
Healtheon/WebMD, and MEDE AMERICA stockholders will become stockholders of
Healtheon/WebMD.
This proxy statement/prospectus is also being sent to stockholders of MEDE
AMERICA. Unless stated otherwise, information provided in this proxy
statement/prospectus assumes completion of the MEDE AMERICA reorganization.
Where appropriate, we have indicated where information pertaining to
Healtheon and WebMD does not give effect to the merger with MEDE AMERICA.
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 unanimously
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 WebMD merger.
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.
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<PAGE> 13
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
28.
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.
For a more complete description of voting at the Healtheon meeting, see the
section entitled "Proxies" on page 44.
For a more complete description of voting at the WebMD meeting, see the
section entitled "Proxies" on page 46.
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 44.
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 46.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the reorganization is completed, we will send you written
instructions for exchanging your 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 80.
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. 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 stockholders, see the section entitled "Material U.S. federal income
tax consequences of the Healtheon-WebMD reorganization" on page 72.
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.
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<PAGE> 14
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 75.
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 merger.
WebMD stockholders should call L. Scott Askins, Vice President and Corporate
Counsel, at (404) 479-7600 with any questions about the WebMD merger.
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 253.
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<PAGE> 15
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. (See
diagrams on page 9.)
For a more complete description of the reorganization, see the section
entitled "The MEDE AMERICA reorganization" on page 86.
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 and MEDE AMERICA. 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 and MEDE AMERICA will remain in
the 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 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. Adjustments
to the exchange ratio are based on the lower of the average closing price of
Healtheon common stock for the ten day period ending July 30, 1999 or two
business days before the MEDE AMERICA stockholders meeting. MEDE AMERICA
stockholders will receive cash based on the market price of Healtheon/WebMD
common stock instead of any fractional share.
Example: If the lower 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 consecutive trading day period ending July 30, 1999,
Healtheon may adjust the exchange ratio to an amount calculated by dividing
25.50 by such 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 has
the right to terminate the reorganization agreement at such time.
Example: If the average Healtheon closing sale price is $35 for the ten
consecutive days ending July 30, 1999 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. If the average Healtheon closing sale price two days prior to
the special meeting is higher than $35, the exchange ratio remains 0.7286.
However, if the average price is lower than $35, then Healtheon may elect to
increase the exchange ratio to an amount equal to $25.50 divided by such
lower average price.
If the average closing sale price of Healtheon common stock is higher than
$63.70 during both ten consecutive trading day periods, MEDE AMERICA may
adjust the exchange ratio to an amount calculated by dividing $42 by the
lower average closing sale price. This
5
<PAGE> 16
adjustment would decrease the number of shares issued to MEDE AMERICA
stockholders in the reorganization. If MEDE AMERICA does not elect to adjust
the exchange ratio, Healtheon has the right to terminate the reorganization
agreement prior to the MEDE AMERICA stockholder meeting.
Example: If the lower average Healtheon closing sale price is $65 and you own
100 shares of MEDE AMERICA common stock, and if MEDE AMERICA adjusts the
exchange ratio, then the new exchange ratio is 0.6462. You will receive 64
shares of Healtheon/WebMD common stock and a check for the market value of
the 0.62 fractional share of Healtheon/WebMD common stock. We calculated the
exchange ratio by dividing 42 by $65.
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>
May 1999........................ $100.63 $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.
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 reorganization.
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 90.
Q: ARE THERE RISKS I SHOULD CONSIDER IN DECIDING WHETHER TO VOTE FOR THE MEDE
AMERICA REORGANIZATION?
A: Yes. For example, after the exchange ratio is set, the number of shares of
Healtheon/ WebMD common stock that MEDE AMERICA stockholders will receive may
not change even if the market price of Healtheon common stock increases or
decreases before the completion of the reorganization. We urge you to obtain
current market quotations of Healtheon common stock and MEDE AMERICA common
stock.
In evaluating the reorganization, you should carefully consider these and
other factors discussed in the section entitled "Risk Factors" on page 28.
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 reorganization.
For a more complete description of voting at the meeting, see the section
entitled "Proxies" on page 49.
6
<PAGE> 17
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.
For a more complete description of how to change your vote, see the section
entitled "Proxies" on page 49.
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.
For a more complete description of voting shares held in "street name," see
the section entitled "Proxies" on page 49.
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 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 97.
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
merger.
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 253.
7
<PAGE> 18
SUMMARY OF THE PROXY STATEMENT/PROSPECTUS
This proxy statement/prospectus pertains to the reorganization of Healtheon
and WebMD as well as the reorganization of Healtheon and MEDE AMERICA, and is
being sent to the stockholders of all three 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 and
MEDE AMERICA.
THE COMPANIES
[HEALTHEON LOGO]
HEALTHEON CORPORATION
4600 Patrick Henry Drive
Santa Clara, CA 95054
(408) 876-5000
http://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
http://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.
[LOGO]
MEDE AMERICA CORPORATION
90 Merrick Avenue, Suite 501
East Meadow, NY 11554
(516) 542-4500
http://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.
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<PAGE> 19
STRUCTURE OF THE REORGANIZATIONS
The transactions contemplated by the Healtheon-WebMD reorganization and the
MEDE AMERICA 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 six smaller squares. From left to
right, these six squares contain the words "Healtheon," "Healtheon Merger Sub,"
"WebMD," "WebMD Merger Sub," "MEDE Merger Sub" and "MEDE AMERICA," respectively.
A line extends from the "Healtheon/WebMD" rectangle to each of the following
three squares: "Healtheon Merger Sub," "WebMD Merger Sub" and "MEDE 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; and from the
"MEDE Merger Sub" square to the "MEDE AMERICA" 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 three smaller
squares. From left to right, these three squares contain the words "Healtheon,"
"WebMD" and MEDE AMERICA," respectively. A line extends from each of these three
squares to the "Healtheon/WebMD" rectangle. Finally, the footnote at the bottom
of this diagram read: "*assumes conversion of all WebMD preferred stock."
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<PAGE> 20
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. Following the reorganization,
Healtheon stockholders will be deemed to have automatically exchanged their
shares for shares of Healtheon/WebMD common stock, and WebMD common stockholders
will be entitled to exchange their shares for shares of Healtheon/WebMD common
stock.
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 78.
(See diagrams on page 9).
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 28, and "Joint reasons for the Healtheon-WebMD
reorganization" on page 52.
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
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<PAGE> 21
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
- 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
- Healtheon's and WebMD's respective representations and warranties in the
Healtheon-WebMD reorganization agreement must be true and correct,
subject to materiality qualifications
- no material adverse effect shall have occurred with respect to Healtheon
or WebMD
- Healtheon and WebMD must have complied in all material respects with
their respective agreements and covenants in the Healtheon-WebMD
reorganization agreement
- 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 rights of appraisal or
dissenters rights with respect to the WebMD merger
- WebMD's legal counsel shall have delivered a legal opinion to Healtheon
- 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.
For a more complete description of the conditions to completion of the
reorganization, see the section entitled "Conditions to completion of the
Healtheon-WebMD reorganization" on page 80.
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 are entitled to cast
one vote per share of Healtheon common stock owned as of [ ] 1999,
the record date. Healtheon stockholders holding [ ]% of outstanding
Healtheon common stock as of the record date have agreed to vote in favor of the
Healtheon merger. Directors and officers of Healtheon collectively beneficially
owned approximately [ ]% of the outstanding Healtheon common stock as of the
record date.
A majority of the votes entitled to be cast by the holders of WebMD's (i)
common stock and Series A preferred stock, (ii) Series B common stock, and (iii)
Series C and E common stock, each voting as separate voting groups, must vote in
favor of the reorganization agreement and the WebMD merger. 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 some
holders of WebMD's preferred stock, these votes 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 43 and "Votes required; voting agreements; conversion
agreements" on page 45.
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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, except that this right to terminate
is not available to any party whose material breach of the agreement has
resulted in the failure of the Healtheon-WebMD reorganization to occur on
or before December 15, 1999
- by Healtheon or WebMD, if a court or governmental authority enjoins,
restrains or 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 82.
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 Proposal
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 "Termination
of the Healtheon-WebMD reorganization agreement," on page 82.
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 reorganization. Additional holders of WebMD
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
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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 reorganization 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 84 and "WebMD
stockholders' voting agreement and conversion agreement" on page 84.
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, Arnold, , , , ,
, , and 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 of
Healtheon/WebMD; and W. Michael Long, the current Chief Executive Officer of
Healtheon, will be Chairman and Chief Operating Officer of Healtheon/WebMD.
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 acquisitions 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.
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 C and
Annex D, 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.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE HEALTHEON-WEBMD REORGANIZATION
We have structured the Healtheon-WebMD reorganization so that, in general,
Healtheon and its stockholders and WebMD and its stockholders will not recognize
gain or loss for U.S. federal income tax purposes in the Healtheon-WebMD
reorganization, except for taxes payable because of cash received by WebMD
stockholders instead of fractional shares or received after the exercise of
dissenters' rights. It is a condition to the
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Healtheon-WebMD reorganization that each of the companies receive legal opinions
to this effect.
For a more complete description of the tax consequences of the
Healtheon-WebMD reorganization see the section entitled "Material U.S. federal
income tax consequences of the Healtheon-WebMD reorganization" on page 72.
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 74.
INTERESTS OF CERTAIN PERSONS IN THE HEALTHEON-WEBMD REORGANIZATION
When considering the recommendations of Healtheon's and WebMD's boards of
directors, you should be aware that certain Healtheon and WebMD directors,
officers and stockholders have interests in the reorganization that are
different from, or are in addition to, yours. These interests include:
- 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.
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. It is anticipated that , ,
, , , , and
will also serve on the board of directors.
- 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 certain of their executive officers regarding their potential roles
in the combined companies.
- 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
a strategic relationship with Microsoft, a current stockholder of WebMD
that will own approximately 17% of the Healtheon/ WebMD common stock
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 70.
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 and other related parties will make 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 the
applicable waiting periods have expired or terminated. The Department of
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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 74.
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 75.
FORWARD LOOKING STATEMENTS IN THIS PROSPECTUS/PROXY STATEMENT
This proxy statement/prospectus contains forward-looking statements. These
statements include statements with respect to Healtheon's and WebMD's financial
condition, results of operations and business and on the expected impact of the
Healtheon-WebMD reorganization 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:
- risks associated with Healtheon/WebMD's history of losses, expectation of
future losses and its unproven business record
- risks associated with integrating the operations of the companies and any
future acquired companies
- risks associated with Healtheon/WebMD's dependence on strategic partners
and other parties over whom we have little control
- other risk factors as may be detailed from time to time in
Healtheon/WebMD's or Healtheon's public announcements and filings with
the Securities and Exchange Commission
In evaluating the Healtheon-WebMD reorganization, you should carefully
consider the discussion of these and other factors in the section entitled "Risk
Factors" on page 28.
COMPARATIVE 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 109.
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
C, and the opinion of BancBoston Robertson Stephens, which is attached as Annex
D.
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SUMMARY OF THE MEDE AMERICA REORGANIZATION
THE MEDE AMERICA REORGANIZATION
In the reorganization, MEDE AMERICA will merge with a wholly owned
subsidiary of Healtheon/WebMD, and as a result MEDE AMERICA will become a wholly
owned subsidiary of Healtheon/WebMD.
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 101.
We believe the reorganization will provide the combined company 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 additional risks relating to the combined company's business
The potential benefits of the reorganization may not be achieved. See the
section entitled "Risk Factors" on page 28, and "MEDE AMERICA's reasons for the
MEDE AMERICA reorganization" on page 88.
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
- our respective representations and warranties in the reorganization
agreement must be true and correct
- no material adverse effect shall have occurred with respect to Healtheon
or MEDE AMERICA
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- we must have complied in all material respects with our respective
agreements in the reorganization agreement
- Healtheon must obtain the consent of its current registration rights
holders to grant registration rights to the parties to the registration
rights agreement
- 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.
For a more complete description of the conditions to completion of the
merger, see the section entitled "Conditions to completion of the MEDE AMERICA
reorganization" on page 104.
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 September
30, 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 September 30, 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
MEDE AMERICA is entitled to adjust the exchange ratio in the reorganization
if the lower average price of Healtheon's stock for the ten trading day periods
ending on July 30, 1999 and ending two days prior to the meeting is greater than
$63.70, and Healtheon is entitled to adjust the exchange ratio if the lower
average price of its stock is less than $38.68. If either party is entitled to
adjust the exchange ratio and chooses not to do so, the other party 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 105.
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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 September 30, 1999,
MEDE AMERICA may be obligated to pay Healtheon a 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 of the nature
specified in the reorganization agreement 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
- 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 107.
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
- 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
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 an unsolicited "Superior Offer", which includes
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
"Termination of the MEDE AMERICA reorganization agreement," on page 105.
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,
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L.P. and William Blair Leveraged Capital Fund,
Limited Partnership entered into a voting agreement with Healtheon. The voting
agreement requires these 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.
The MEDE AMERICA stockholders who entered into the voting agreement
collectively held approximately 47.4% of the outstanding MEDE AMERICA common
stock as of the record date.
For a more complete description of the voting agreement see the section
entitled "MEDE AMERICA voting agreement" on page 108.
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 merger
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.
The MEDE AMERICA stockholders who entered into the registration rights
agreement collectively held approximately [47.4%] of the outstanding MEDE
AMERICA common stock as of the record date.
For a more complete description of the registration rights agreement see
the section entitled "MEDE AMERICA registration rights agreement" on page 108.
OPINION OF MEDE AMERICA'S FINANCIAL ADVISOR
In connection with the 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 dated
April 20, 1999 is attached to the back of this document as Annex E, 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
proposed merger.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MEDE AMERICA REORGANIZATION
We have structured the reorganization so that, in general, MEDE AMERICA and
its stockholders will not recognize gain or loss for U.S. federal income tax
purposes in the reorganization, except for taxes payable because of cash
received by MEDE AMERICA stockholders instead of fractional shares. It is a
condition to the reorganization that we receive legal opinions to this effect.
For a more complete description of the tax consequences of the
reorganization see the section entitled "Material U.S. federal income tax
consequences of the MEDE AMERICA reorganization" on page 97.
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 99.
INTERESTS OF CERTAIN PERSONS IN THE MEDE AMERICA REORGANIZATION
When considering the recommendations of Healtheon's and MEDE AMERICA's
boards of directors, you should be aware that certain Healtheon and MEDE AMERICA
directors and officers 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
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right to jointly select one nominee to the Healtheon 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
AMERICA and is also a principal of William Blair & Co., L.L.C.
- Employees of MEDE AMERICA will receive options to purchase 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. [Healtheon deal?] 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 merger 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 certain persons in the
MEDE AMERICA reorganization" on page 95.
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.
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 100.
FORWARD LOOKING STATEMENTS IN THIS PROSPECTUS/PROXY STATEMENT
This proxy statement/prospectus contains forward-looking statements. These
statements include statements with respect to Healtheon's and MEDE AMERICA's
financial condition, results of operations and business and on the expected
impact of the reorganization on Healtheon/WebMD's financial performance. Words
such as anticipates, expects, intends, plans,
20
<PAGE> 31
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 value of the Healtheon/WebMD common stock to be
issued to MEDE AMERICA stockholders in the reorganization will increase
or decrease prior to completion of the reorganization
- the possibility that the reorganization or the Healtheon-WebMD
reorganization will not be consummated
- the possibility that the anticipated benefits from the reorganization, or
the Healtheon-WebMD reorganization 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 MEDE AMERICA's
and Healtheon's public announcements and filings with the Securities and
Exchange Commission
In evaluating the reorganization, you should carefully consider the
discussion of these and other factors in the section entitled "Risk Factors" on
page 28.
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 proposed merger, 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 109.
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 E.
21
<PAGE> 32
SELECTED HISTORICAL AND SELECTED UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL DATA
The following selected historical financial data of Healtheon, WebMD and
MEDE AMERICA has 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 and MEDE AMERICA 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 and Direct Medical Knowledge) and MEDE AMERICA's statement of
operations for the twelve months ended December 31, 1998 (after giving effect to
the acquisition of Healthcare Interchange, Inc.) 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 and MEDE AMERICA'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 and MEDE AMERICA reorganizations took place as of March 31, 1999 and
combine Healtheon's, WebMD's and MEDE AMERICA's historical balance sheets at
that date.
The total estimated purchase prices of the WebMD and MEDE AMERICA
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.
22
<PAGE> 33
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>
23
<PAGE> 34
<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>
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>
24
<PAGE> 35
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
------------ ------------------
<S> <C> <C>
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $ 102,587 $ 34,789
Loss from operations........................................ (2,422,553) (612,722)
Net loss applicable to common stockholders.................. (2,426,236) (614,918)
Basic and diluted net loss per common share................. (22.97) (4.61)
Shares used in computing basic and diluted net loss per
common share.............................................. 105,636 133,314
</TABLE>
<TABLE>
<CAPTION>
AS OF
MARCH 31,
1999
----------
<S> <C>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 461,890
Working capital............................................. 395,903
Total assets................................................ 7,733,477
Long-term obligations, net of current portion............... 10,030
Total stockholders' equity.................................. 7,602,707
</TABLE>
- ------------------------
(1) For detailed information see "Unaudited Pro Forma Condensed Combined
Financial Information" on pages 110 through 125.
25
<PAGE> 36
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) 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 Healtheon-MEDE AMERICA reorganization;
(5) 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;
(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 after giving effect to the MEDE AMERICA reorganization;
(7) 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; and
(8) 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
.6593 shares of Healtheon's common stock for each share of MEDE
AMERICA's common stock. See "The Healtheon-WebMD Reorganization" and
"The MEDE AMERICA Reorganization."
The information in the table should be read in conjunction with the
historical financial statements of Healtheon/WebMD and MEDE AMERICA 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 PRO
PRO FORMA CONDENSED FORMA WEBMD
CONDENSED COMBINED CONDENSED EQUIVALENT
COMBINED OF COMBINED PRO FORMA MEDE
OF HEALTHEON/ OF CONDENSED AMERICA
HISTORICAL HEALTHEON/ WEBMD HEALTHEON/ COMBINED EQUIVALENT
---------------------------- WEBMD (WITHOUT WEBMD (WITHOUT PRO FORMA
MEDE WITH MEDE MEDE (WITHOUT MEDE CONDENSED
HEALTHEON WEBMD AMERICA AMERICA) AMERICA) WEBMD) AMERICA) COMBINED
(1) (2) (3) (4) (5) (6) (7) (8)
--------- ------ ------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <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) $(22.97) $(23.64) $(4.25)
Three Months Ended March 31,
1999....................... (0.30) (1.46) (0.13) (4.61) (4.68) (0.70)
Book value per share at March
31, 1999..................... 1.04 5.38 0.98 4.55 5.72 0.71 10.38 0.47
</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.
26
<PAGE> 37
- - 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 common stock which would have been outstanding had the
merger been consummated as of March 31, 1999.
- - 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 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 .6593 shares of Healtheon common stock
for each share of MEDE AMERICA common stock.
27
<PAGE> 38
RISK FACTORS
The reorganizations involve a high degree of risk. By voting in favor of
the Healtheon-WebMD reorganization or the MEDE AMERICA 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.
GENERAL RISKS RELATING TO THE PROPOSED REORGANIZATIONS
HEALTHEON, WEBMD AND MEDE AMERICA 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.
As of March 31, 1999, the three companies combined had accumulated losses of
$218 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 or the MEDE AMERICA 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 and MEDE AMERICA 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
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, including:
- changes in its strategic relationships;
- future acquisitions and unexpected delays and costs with integrating
these businesses;
- entry into new healthcare markets;
- new applications and services;
- software defects, delays in development and other quality factors;
- customer demand for Healtheon/WebMD's applications and services;
28
<PAGE> 39
- mix and variation of subscriber, advertising, sponsorship, consulting and
transaction revenues;
- our success in establishing and strengthening brand awareness;
- the ability to meet project milestones or customer expectations;
- the mix of consulting and transaction fee revenue;
- variability in demand for Internet-based healthcare solutions;
- changes within the healthcare industry; and
- seasonality of demand.
In addition, Healtheon/WebMD will be dependent 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/
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
and MEDE AMERICA 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 OUR SERVICES
Healtheon/WebMD intends to use a significant portion of the proceeds from
WebMD's sale of its capital stock to fund branding and advertising, including
promotional arrangements. 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 certain 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 that vary based on usage by subscribers. Healtheon/WebMD
anticipates 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. These guaranteed
payments, promotions and
29
<PAGE> 40
other arrangements may require Healtheon/WebMD to incur significant expenses
with no guarantee of revenues.
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 our
services, and the level of usage is likely to be a primary factor in determining
the amount of advertising, sponsorship and transaction revenues.
HEALTHEON/WEBMD MAY BE UNABLE TO GENERATE SIGNIFICANT ADVERTISING REVENUES
Healtheon/WebMD will derive a portion of its revenues from advertising on
the WebMD Web site. 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.
THE HEALTHCARE INDUSTRY MAY NOT ACCEPT HEALTHEON/WEBMD'S SOLUTIONS
To be successful, 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. 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
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it believes is necessary to become successful. 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
Healtheon/WebMD's financial results.
HEALTHEON/WEBMD WILL RELY ON STRATEGIC RELATIONSHIPS TO GENERATE REVENUE
To be successful, Healtheon/WebMD must establish and maintain strategic
relationships with leaders in a number of healthcare industry segments. This is
critical to Healtheon/WebMD's success 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 the Healtheon/WebMD brand; and
- generate revenue.
Entering into strategic relationships is complicated because some of
Healtheon's, WebMD's and MEDE AMERICA'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 establish relationships with key
participants in the healthcare industry if Healtheon, WebMD or MEDE AMERICA 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 and MEDE AMERICA have
established only a limited number of strategic 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. If Healtheon/WebMD loses any of these
strategic relationships, fails to obtain modifications of existing relationships
or fails to establish additional relationships, or if Healtheon's strategic
partners fail to actively pursue additional business relationships and
partnerships, Healtheon/WebMD would not be able to execute its business plan and
its business would suffer significantly.
On February 9, 1999, SmithKline Beecham announced that it has agreed to
sell SmithKline Beecham Clinical Laboratories, Inc., or SmithKline Labs, to
Quest Diagnostics, Incorporated. SmithKline Labs has been one of
Healtheon/WebMD's strategic partners since December 1997, and its relationship
with them has been beneficial. Healtheon's agreements with SmithKline Labs will
remain in effect as a result of the acquisition. However, Healtheon/WebMD will
need to work with a new business partner, which involves new risks including
different customer requirements and working relationships. In addition,
Healtheon/ WebMD's ability to take advantage of its relationship with SmithKline
Labs may be impaired because the attention of management of the combining
companies may be diverted during and after SmithKline Labs' acquisition.
Healtheon/WebMD may not experience increased use of its platform, applications
and services even if it establishes and maintains these strategic relationships.
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.
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THE REORGANIZATIONS COULD HARM KEY THIRD PARTY RELATIONSHIPS
The present and potential relationship of Healtheon, WebMD and MEDE AMERICA
with sponsors, content providers, advertisers, users and subscribers may be
harmed by the proposed reorganizations. Uncertainties regarding sponsorship,
joint venture overlap and new service development following the mergers may
cause these parties to delay decisions regarding these relationships. Any
changes in these relationships could harm Healtheon/WebMD's business.
HEALTHEON, WEBMD AND MEDE AMERICA MAY LOSE CONTRACTUAL RIGHTS DUE TO THE
REORGANIZATIONS
Healtheon, WebMD and MEDE AMERICA have contracts with many suppliers,
customers and other business partners. Some of these contracts require
Healtheon, WebMD and MEDE AMERICA 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 and MEDE AMERICA have agreed to seek to secure the necessary
consents, waivers and approvals. However, Healtheon, WebMD and MEDE AMERICA may
not be able to obtain all of the necessary consents, waivers and approvals.
Failure to do so could harm Healtheon/WebMD's business.
In addition, each of Healtheon, WebMD and MEDE AMERICA 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 party. We may not successfully resolve these conflicts and failure
to do so could harm Healtheon/WebMD's business.
OFFICERS AND DIRECTORS OF BOTH COMPANIES HAVE DIFFERENT INTERESTS FROM YOURS
The directors and officers of Healtheon, WebMD and MEDE AMERICA have
certain interests in the reorganizations and participate in arrangements that
are different from, or are in addition to, those of Healtheon, WebMD and MEDE
AMERICA stockholders generally. These include:
- Board of Directors. Messrs. Long, Arnold, ,
, , , ,
, and will serve on the Board of
Healtheon/WebMD. Messrs. Long, , and
serve on Healtheon's board and Mr. Arnold,
, and serve on WebMD's
board.
- 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 vest.
- Microsoft. 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.
- Premiere Technologies. Premiere Technologies, Inc. and WebMD entered into
an amendment to their co-marketing and integration agreement in
connection with obtaining Premiere's 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. Boland T. Jones is the
President and Chief Executive Officer of Premiere 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.
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- 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 merger. 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 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.
HEALTHEON/WEBMD'S BUSINESS WILL SUFFER IF IT DOES NOT EXPAND ITS SUITE OF
APPLICATIONS
Healtheon/WebMD's business will suffer if it does not expand the breadth of
its applications quickly. 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 future success depends on quickly
introducing new applications and services in several healthcare segments. Most
of WebMD's subscribers were acquired through promotional arrangements which do
not require the subscribers to use or pay for their WebMD subscriptions. If
Healtheon/WebMD cannot improve the functionality of the suite of WebMD Internet
applications, it will not be able to sustain or increase subscriber or
advertising revenue. 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/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
expensive and time consuming. Even if Healtheon/ WebMD is successful, 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. In
May 1998 Healtheon acquired ActaMed Corporation, and in August 1998 acquired
substantially all the assets of Metis, LLC. In January 1999, WebMD acquired
Sapient Health Network, Inc. and Direct Medical Knowledge, Inc. 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
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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 WILL FACE TECHNICAL, OPERATIONAL AND STRATEGIC CHALLENGES THAT
MAY PREVENT IT FROM SUCCESSFULLY INTEGRATING HEALTHEON, WEBMD AND MEDE AMERICA
The reorganizations involve risks related to the integration and management
of acquired technology, operations and personnel. The integration of Healtheon,
WebMD and MEDE AMERICA 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 and MEDE AMERICA,
including:
- potential incompatibility of business cultures
- perceived adverse changes in business focus
- potential conflicts in sponsor, advertising or content relationships
- the loss of key employees and diversion of the attention of management
from other ongoing business concerns.
HEALTHEON/WEBMD MUST MANAGE ITS GROWTH
Healtheon, WebMD and MEDE AMERICA have rapidly and significantly expanded
their operations and expect 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. We expect that this growth will continue and that
Healtheon/WebMD will hire a significant number of new employees to support its
business.
Healtheon's, WebMD's and MEDE AMERICA'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.
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. If Healtheon/WebMD is unable to respond to and manage
changing business conditions, then the quality of its services and its results
of operations could be materially adversely affected.
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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 the subscribers. Healtheon/WebMD's business
could suffer dramatically if Internet solutions are not accepted or not
perceived to be effective. The Internet may not prove to be a viable commercial
marketplace for a number of reasons, including:
- inadequate development of the necessary infrastructure for communication
speed, access and server reliability;
- security and confidentiality concerns;
- lack of development of complementary products, such as high-speed modems
and high-speed communication lines;
- implementation of competing technologies;
- delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity; and
- governmental regulation.
Healtheon/WebMD expects Internet use to grow in number of users and volume
of traffic. The Internet infrastructure may be unable to support the demands
placed on it by this continued growth. Growth in the demand for
Healtheon/WebMD's applications and services depends on the adoption of Internet
solutions by healthcare participants, which requires the acceptance of a new way
of conducting business and exchanging information. The healthcare industry, in
particular, relies on legacy systems that may be unable to benefit from
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 OR SECURITY 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 and MEDE AMERICA currently process substantially all
their customer transactions and data at their respective facilities. Although
Healtheon and WebMD 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 our systems. These
connections, in turn, depend on the efficient operation of Web browsers,
Internet service providers and Internet backbone service providers, all of which
have had periodic operational problems or experienced outages.
A material security breach could damage 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.
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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
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.
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 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.
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 subscribers and consumers will depend on Internet service
providers, online service providers and other Web site operators for access to
our Web sites. All of them 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 subscribers, consumers, strategic partners, advertisers or sponsors
and, if sustained or repeated, could reduce the attractiveness of Healtheon/
WebMD's services.
HEALTHEON/WEBMD'S REVENUES WILL BE CONCENTRATED IN A FEW 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 and MEDE AMERICA, 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.
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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/WebMD's competitors have greater financial, technical, product
development, marketing and other resources than Healtheon/WebMD will have. These
organizations may 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; and
- 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; and
- Web search and retrieval services and other high-traffic Web sites.
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
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Healtheon/WebMD's applications and services. Healtheon/WebMD does not know what
effect any proposals would have on its business.
Many healthcare providers are consolidating to create integrated healthcare
delivery systems with greater market power. These providers may try to use their
market power to negotiate price reductions for 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; and
- characteristics and quality of products and services.
Moreover, the applicability to the Internet of existing laws in various
jurisdictions governing issues such as property ownership, sales and other
taxes, libel and personal privacy is uncertain and may take years to resolve.
Demand for 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 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.
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.
Some computer applications and software are considered medical devices and
are subject to regulation by the United States Food and Drug Administration, or
the FDA. None of Healtheon, WebMD or MEDE AMERICA 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.
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HEALTHEON/WEBMD MAY FACE PRODUCT-RELATED LIABILITIES
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 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
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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's success will depend significantly on its senior
management team and other key employees. 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. WebMD has entered 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's success
depends significantly on its ability to maintain WebMD's existing relationships
with these content providers and to 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. Any failure by these parties to develop
and maintain high quality, attractive content could result in subscriber and
consumer dissatisfaction, could inhibit Healtheon/WebMD's ability to add
subscribers and consumers and could dilute the WebMD brand name.
SOME OF WEBMD'S SERIES A PREFERRED STOCK AND SERIES B PREFERRED STOCK MAY REMAIN
OUTSTANDING FOLLOWING THE WEBMD MERGER
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 WebMD
merger, 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. 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
managers.
Healtheon, WebMD and McKessonHBOC have been discussing the modification of
the existing strategic relationship between WebMD and McKessonHBOC as well as
McKessonHBOC's rights to
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purchase additional equity in WebMD and whether McKessonHBOC will convert its
Series A and Series B preferred stock into common stock of WebMD and thus
receive Healtheon-WebMD common stock in the reorganization.
YOU SHOULD NOT RELY ON REPORTS IN THE PRESS REGARDING OUR BUSINESS BECAUSE THEY
MAY BE INACCURATE
Healtheon, WebMD and MEDE AMERICA have received, and may continue to
receive, a high degree of media coverage. Some of this media coverage has
included, and future media coverage may include, inaccurate or incomplete
information and forward-looking statements that involve numerous risks and
uncertainties.
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 lower of the ten day average closing price of Healtheon's common stock
price for the period ending July 30, 1999 and the period ending two days before
the stockholders' meeting is greater than $63.70 or 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.
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 and MEDE AMERICA 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.
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ADDITIONAL RISKS IF THE HEALTHEON-WEBMD REORGANIZATION DOES NOT CLOSE
MEDE AMERICA stockholders should consider these additional risks if the
Healtheon-WebMD reorganization does not occur.
BENEFITS OF HEALTHEON-WEBMD REORGANIZATION NOT AVAILABLE TO MEDE AMERICA
STOCKHOLDERS
None of the benefits identified by Healtheon and WebMD as reasons for the
merger will be realized by MEDE AMERICA stockholders if the Healtheon-WebMD
reorganization is not completed. Nevertheless, the MEDE AMERICA reorganization
is not conditioned on the Healtheon-WebMD reorganization.
POTENTIAL IMPACT ON HEALTHEON STOCK PRICE
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 merger
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.
ADDITIONAL RISKS IF MEDE AMERICA REORGANIZATION DOES NOT CLOSE
WebMD stockholders should consider the following additional risk if the
MEDE AMERICA reorganization does not occur.
BENEFITS OF MEDE AMERICA MERGER NOT AVAILABLE TO WEBMD STOCKHOLDERS
None of the benefits identified by Healtheon and MEDE AMERICA as reasons
for the merger will be realized by WebMD stockholders if the MEDE AMERICA
reorganization is not completed. Nevertheless, the Healtheon-WebMD
reorganization is not conditioned on the MEDE AMERICA 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, Healtheon stockholders will own approximately 49.5% and WebMD
stockholders will own approximately 44.4% 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 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 such
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 purposes of the WebMD stockholders' meeting are to vote on the
following WebMD proposals:
Proposal 1 -- to approve and adopt the Healtheon-WebMD reorganization
agreement and approve the WebMD merger, and
Proposal 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
consummation of the WebMD merger, which payments may otherwise be deemed to
constitute "parachute payments" pursuant to Internal Revenue Code section
280G.
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; and
- 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.
Certain holders of WebMD's preferred stock have entered into conversion
agreements providing that after , 1999 and prior to , 1999
either (a) they 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 (b) their preferred shares will be automatically converted into WebMD
Series D common stock on the day prior to the record date. By virtue of the
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.
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 called "Rights of dissenting WebMD stockholders"
on page 75.
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 such proxies. If no such instructions are
indicated, such 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.
RECOMMENDATION OF WEBMD BOARD OF DIRECTORS
The WebMD board of directors has unanimously approved the Healtheon-WebMD
reorganization agreement and the transactions contemplated thereby and has
determined that the WebMD merger is fair
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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 -- vesting of certain employee options" and has determined that such
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 CERTAIN 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
86 and "The MEDE AMERICA reorganization agreement" on page 101.
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 lower ten-day average closing price of Healtheon common stock
for the periods ending July 30, 1999 and ending two days prior to the MEDE
AMERICA stockholders' meeting is greater than $63.70 or 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
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
108.
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 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
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 outline the potential terms of a
merger between Healtheon and WebMD. 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.
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
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 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
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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 terms of the proposed combination with WebMD 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 proposed business combination
transaction, 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.
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 Wilson Sonsini Goodrich & Rosati and following
discussions, the board approved the transaction.
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
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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 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.
- 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
critical mass 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.
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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 mission-critical transaction engine and
related applications to facilitate Internet based healthcare transactions
between payers, providers and institutions. 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 physician
and consumer portals 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.
- 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
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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 68.
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 opinion of BancBoston Robertson Stephens, WebMD's financial advisor,
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 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; and
- 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.
The WebMD board also identified and considered a variety of potential
negative factors concerning the reorganization, including, but not limited to:
- 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 potential difficulty of sharing of control over the future operations
of Healtheon/WebMD following the reorganization, including the difficulty
of integrating personnel, administrative functions and strategic
relationships;
- the risk that the potential strategic benefits sought in the
reorganization might not be realized;
- the possibility that the WebMD merger might not be consummated and the
potential adverse effects of the public announcement of the merger on:
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(a) WebMD's ability to leverage its existing strategic relationships and
attract new strategic partners and distribution channels;
(b) WebMD's ability to obtain additional subscribers to its services;
(c) WebMD's ability to acquire other businesses useful or complementary to
its business;
(d) WebMD's ability to attract and retain key employees; and
(e) WebMD's overall competitive position.
- the risk that, despite the efforts of Healtheon and WebMD, key technical
and management personnel might not remain employees of Healtheon/WebMD
following the closing of the reorganization; and
- the other risks more fully described under the section entitled "Risk
Factors" beginning on page .
After due consideration, the WebMD board concluded that the risks
associated with the proposed reorganization were outweighed by the potential
benefits.
During the process of evaluating the reorganization, WebMD's board also
considered the provisions of the reorganization agreement that prohibited
solicitation of third-party bids and the acceptance, approval or recommendation
of any unsolicited third-party bids and determined that the benefits of the
reorganization with Healtheon justified these conditions and proceeded to
approve the reorganization.
The foregoing 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 certain 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. Please see the section
entitled "Interests of directors, officers and affiliates in the Healtheon-WebMD
reorganization" on page 68.
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 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,
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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.
- 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.
- The summary of the opinion of Morgan Stanley set forth in this document,
while materially complete, is qualified in its entirety by reference to
the full text of the opinion.
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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- 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 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 the foregoing; and
- 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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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> 69
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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<PAGE> 70
Preliminary IPO Valuation. Morgan Stanley performed an analysis of the
estimated IPO 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 IPO 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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<PAGE> 71
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 customary fee. 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 (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. BancBoston Robertson Stephens
also assisted WebMD's management in the negotiations leading to an agreement on
principal structural terms of the transaction.
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<PAGE> 72
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;
- 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;
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<PAGE> 73
- 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; and
- made such other studies and inquiries, and reviewed such 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 therefor, 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:
- such forecasts and projections have been reasonably prepared in good
faith on the basis of reasonable assumptions; and
- such 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; and
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 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.
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<PAGE> 74
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 (the "Total Capitalization") of WebMD and of publicly traded
companies involved in Internet businesses, including those involved in the
consumer portal 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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<PAGE> 75
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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<PAGE> 76
- 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 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.
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,
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<PAGE> 77
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 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 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,
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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 above under "The WebMD
Meeting -- votes required; voting agreements; conversion agreements." 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 certain 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 70.
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 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.
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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;
- 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;
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- 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; and
- 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, McKessonHBOC, 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; and
- 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 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 revenues generated by the health
channel;
- Microsoft will sponsor up to 5.0 million subscriber/months of WebMD
subscriptions;
- WebMD will make Microsoft technology its primary technology platform for
the health channel and WebMD's Web site;
- Microsoft and its affiliates will be sole providers of some Internet
services and content to WebMD;
- WebMD and Microsoft have committed co-marketing funds and advertising
space on their respective Web sites; and
- WebMD and Microsoft share revenues derived from WebMD subscriptions
sponsored by Microsoft and DuPont.
The strategic alliance agreement provides that for a five year period,
WebMD will develop, host and maintain a health channel that Microsoft will offer
as a link from the MSN.com home page, and Microsoft will promote the health
channel on the MSN web site 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 provided.
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 which was commenced on April 10,
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1999. In addition, Microsoft purchased from WebMD in May 184,604 shares of
Series E preferred stock for $100 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 $150 million representing
an effective price of $54.17 per WebMD common share. Microsoft will beneficially
own approximately 17.2% of the outstanding 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 make the Microsoft technology platform its primary
technology platform.
In connection with the Microsoft investment, Intel Corporation, Excite
@Home Inc., Covad Communications Group, Inc., SOFTBANK America, 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 276,906 shares of WebMD Series E preferred stock and 184,604 shares of
WebMD Series D common stock for $160 million. These investors have also entered
into strategic relationships with WebMD regarding various aspects of online and
media distribution. For a complete description of these relationships, see the
section entitled "Information Regarding WebMD -- Strategic Relationships."
Because of these purchases, 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 exercisable for 636,980 shares of Series D common stock for an
exercise price of $54.17 per share for aggregate consideration of $21,910,411
representing an effective price per common share of $54.17. 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 F preferred
stock for an aggregate price of $13,605,879 representing an effective price per
common share of $54.17. McKessonHBOC 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.
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.
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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
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 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 Internal Revenue 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 such transactions are undertaken in connection with the merger,
including 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
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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, subject to the
limitations and qualifications described below in this section:
- 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; and
- 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, subject to the
limitations and qualifications described below in this section:
- 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 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 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 considered to be held, provided that the
WebMD common stock surrendered is held as a capital asset at the time of
the WebMD merger; and
- 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.
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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 related parties
will file the required information and materials with the Department of Justice
and the Federal Trade Commission. The requirements of Hart-Scott-Rodino will 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 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.
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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
(1) an effective registration statement under the Securities Act covering the
resale of those shares, (2) an exemption under paragraph (d) of Rule 145 under
the Securities Act or (3) 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.
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 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 (a)
state where the dissenting stockholders' first payment demand must be sent and
where and when
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certificates for certificated shares must be deposited, (b) inform the holders
of uncertificated shares to what extent transfer of such shares will be
restricted after payment demand is made, (c) 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, and (d) 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 (a) 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; (b)
a statement of WebMD's estimate of the fair value of the shares; (c) an
explanation of how the interest was calculated; (d) a statement of the
dissenting stockholder's right to demand payment of a different amount if the
dissenting stockholder is dissatisfied with the offer; and (e) 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
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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 Consequences of the
Healtheon -- WebMD reorganization" on page 72.
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 126.
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THE HEALTHEON-WEBMD REORGANIZATION AGREEMENT
This section of the proxy statement/prospectus describes the
Healtheon-WebMD reorganization agreement. While we believe that the description
covers the material terms of the reorganization agreement, this summary may not
contain all of the information that is important to you. The reorganization
agreement is attached to this proxy statement/prospectus as Annex A and we urge
you to read it carefully.
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. You are urged to carefully
read 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
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- the incurrence of indebtedness
- entering into, material modification or termination of contracts
- 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
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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 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
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- 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
- 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
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- WebMD shall have obtained all consents, waivers and approvals required in
connection with the WebMD merger
- 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 pertaining to
certain items
- 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 an investment from Microsoft pursuant to the
terms of the Investment Agreement dated May 12, 1999 in an amount equal
to $150 million
- 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
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- 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. 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
This section of the proxy statement/prospectus describes agreements related
to the merger agreement, including the WebMD stockholders' voting and conversion
agreements, the Healtheon stockholders' voting agreement and the Microsoft
stockholder agreement. While we believe that these descriptions cover the
material terms of these agreements, these summaries may not contain all of the
information that is important to you.
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; and
- 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; and
- 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.
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.
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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 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; and
- 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 (1) the status of negotiations of the proposed
transaction, (2) the results of the due diligence evaluation of Healtheon, (3)
the benefits and risks of the transaction with Healtheon, and (4) 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 fair to
Healtheon and that the proposed reorganization was in the best interests of
Healtheon. The
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Healtheon board of directors then unanimously approved the reorganization
agreement and exhibits thereto, 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.
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
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:
(1) 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;
(2) MEDE AMERICA's management's view of the financial condition, results of
operations, assets, liabilities, businesses and prospects of Healtheon
and its industry after giving effect to the reorganization;
(3) current market conditions and historical trading information with
respect to Healtheon's common stock;
(4) comparable merger transactions; and
(5) the terms and conditions of the merger agreement taken as a whole.
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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:
(1) 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;
(2) the implied value of the merger consideration on the date of the
reorganization agreement ($30.14), which 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;
(3) 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;
(4) 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; and
(5) 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.
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:
(1) 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;
(2) the loss of control over the future operations of MEDE AMERICA
following the reorganization;
(3) the impact of the loss of MEDE AMERICA's status as an independent
company on MEDE AMERICA's stockholders, optionholders, employees and
customers;
(4) the risk that the potential strategic benefits sought in the MEDE
AMERICA reorganization might not be realized;
(5) 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:
(a) MEDE AMERICA's sales and operating results;
(b) MEDE AMERICA's ability to attract and retain key employees; and
(c) MEDE AMERICA's overall competitive position;
(6) 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; and
(7) the transaction costs expected to be incurred in connection with
the reorganization transactions and the other risks described under "Risk
Factors" beginning on page 28.
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,
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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.
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. Please see the section entitled "Interests
of certain persons in the MEDE AMERICA reorganization" on page 95.
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 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 merger. 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 upon 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.
In arriving at its opinion, Salomon Smith Barney:
- reviewed the merger 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 were provided
to or otherwise discussed with Salomon Smith Barney by the
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managements of MEDE AMERICA and Healtheon, including information relating
to strategic implications and operational benefits anticipated to result
from the reorganization;
- reviewed the financial terms of the merger as described in the merger
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; and
- 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, 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 Salomon Smith Barney. 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 the consent of MEDE AMERICA, that the
reorganization will be treated as a "tax-free" reorganization for federal income
tax purposes. 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 pursuant to the reorganization or the prices at which the
Healtheon common stock will trade subsequent to the merger. 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
nor did Salomon Smith Barney 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 upon 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.
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Salomon Smith Barney is an internationally recognized investment banking
firm and was selected by MEDE AMERICA based on its experience, expertise and
familiarity with MEDE AMERICA and its business. Salomon Smith Barney 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 WRITTEN OPINION DATED APRIL 20,
1999, WHICH DESCRIBES THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS
ON THE REVIEW UNDERTAKEN, IS ATTACHED TO THIS DOCUMENT AS ANNEX E AND SHOULD BE
READ CAREFULLY IN ITS ENTIRETY. 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. THE SUMMARY OF SALOMON SMITH BARNEY'S OPINION INCLUDED
IN THIS DOCUMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF
THE OPINION.
In preparing its opinion, Salomon Smith Barney performed a variety of
financial and comparative analyses, including those described below. 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. 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 on or about April 20, 1999, 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
reorganization, 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 merger 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. CERTAIN OF
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
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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
- 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 April 20, 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 to corresponding financial data of MEDE AMERICA resulted in
an implied reference range for MEDE AMERICA of approximately $16.28 to $20.24
per share, as compared to the equity value implied by the exchange ratio of
approximately $30.14 per share based on the closing stock price of Healtheon
common stock on April 20, 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>
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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 calendar
years 1998 and 1999 EBITDA of MEDE AMERICA resulted in an implied 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 $30.14 per
share based on the closing stock price of Healtheon common stock on April 20,
1999.
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 11.0x to 15.0x, with
particular focus on terminal value multiples of 12.0x to 14.0x, to the projected
2003 EBITDA of MEDE AMERICA. 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 12.0x to 14.0x and discount rates of 12.5%
to 13.5%, this analysis resulted in an implied per share equity reference range
for MEDE AMERICA of approximately $23.24 to $27.06 per share, as compared to the
equity value implied by the exchange ratio of approximately $30.14 per share
based on the closing stock price of Healtheon common stock on April 20, 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
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
ending April 20, 1999. This analysis indicated the following implied premiums:
<TABLE>
<CAPTION>
MEDE AMERICA AT
EXCHANGE RATIO
---------------
<S> <C>
Implied premium to initial public offering of MEDE AMERICA
on February 1, 1999....................................... 131.9%
Implied premium to 10 trading day average ending April 20,
1999...................................................... 51.2%
Implied premium on April 20, 1999........................... 36.6%
</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 period
beginning on the date of Healtheon's initial public offering on February 11,
1999 through April 20, 1999 and the implied historical exchange ratios
determined by dividing the price per share of MEDE AMERICA common stock by the
price per share of Healtheon common stock over that period. The following
compares the exchange ratio in the reorganization with the high, low and average
of such historical exchange ratios:
<TABLE>
<CAPTION>
HIGH HISTORICAL LOW HISTORICAL AVERAGE HISTORICAL MERGER
EXCHANGE RATIO EXCHANGE RATIO EXCHANGE RATIO EXCHANGE RATIO
--------------- -------------- ------------------ --------------
<S> <C> <C> <C>
0.719 0.278 0.463 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 on, among other things, Healtheon's earnings per share for
calendar years 1999 and 2000, based on internal estimates of the managements of
MEDE AMERICA and Healtheon and without giving effect to potential synergies that
may result from the merger. The results of the pro forma merger analysis
suggested that the merger 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
Pursuant to the terms of its engagement, 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 aggregate consideration, including
liabilities assumed, payable in connection with the merger. MEDE AMERICA has
also agreed to reimburse Salomon Smith Barney for travel and other out-of-pocket
expenses incurred by Salomon Smith Barney in performing its services, 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, for which services Salomon Smith Barney has received
compensation. 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 CERTAIN PERSONS 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 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.
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- 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 periods ending on July 30, 1999 and ending two days before the
date of the MEDE AMERICA stockholder meeting.
- If the lower average closing sale price of Healtheon common stock for
such periods is between $38.68 and $63.70, the exchange ratio in the
reorganization will be 0.6593.
- If the average closing price of Healtheon common stock is less than
$38.68 for the period ending July 30, 1999, Healtheon may adjust the
exchange ratio within the next 24 hour period, to equal the quotient
obtained by dividing $25.50 by such average price. 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 the average price for the
July 30 period, Healtheon may elect to further 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 such lower average
price.
- If the average price for the July 30 period is equal to or greater than
$38.68, but the average closing sale price for the ten day period ending
two days prior to the special meeting is less than $38.68, Healtheon may
adjust the exchange ratio no later than 24 hours prior to the MEDE
AMERICA stockholders meeting to equal the quotient obtained by dividing
$25.50 by such lower average sale price.
- If the lower average closing sale price of Healtheon common stock is
greater than $63.70, for the ten consecutive trading day periods, MEDE
AMERICA may adjust the exchange ratio no later than
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24 hours prior to the MEDE AMERICA stockholder meeting, to equal the
quotient obtained by dividing $42.00 by such 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.
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.
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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;
- 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, subject
to the limitations and qualifications described below in this section:
- 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; and
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- 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 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. We 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,
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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 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 (1) an effective
registration statement under the Securities Act covering the resale of those
shares, (2) an exemption under paragraph (d) of Rule 145 under the Securities
Act or (3) 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. See "Comparison of
rights of holders of MEDE AMERICA common stock and Healtheon/WebMD common stock"
on page 139.
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THE MEDE AMERICA REORGANIZATION AGREEMENT
This section of the proxy statement/prospectus describes the MEDE AMERICA
reorganization agreement. While we believe that the description covers the
material terms of the reorganization agreement, this summary may not contain all
of the information that is important to you. The reorganization agreement is
attached to this proxy statement/prospectus as Annex B and we urge you to read
it carefully.
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. You are urged to carefully read 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
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- capital expenditures
- the disposition of MEDE AMERICA's assets
- the incurrence of indebtedness
- entrance into, modification or termination of contracts
- 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" 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; and
- 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;
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- 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.
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
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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.
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
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- 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
- 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 September 30, 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 September 30, 1999
and such action or failure to act constitutes a material breach of the
reorganization agreement
105
<PAGE> 116
- 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 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 September 30, 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
September 30, 1999
- by Healtheon/WebMD, if the lower average trading price of its common
stock for the ten trading day periods ending July 30, 1999 and ending two
days prior to the MEDE AMERICA stockholders meeting is greater than
$63.70 and MEDE AMERICA does not elect to adjust the exchange ratio
- by MEDE AMERICA, if the average trading price of Healtheon's common stock
for either of the ten trading day periods ending July 30, 1999 and 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
106
<PAGE> 117
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 (1) the reorganization has not
been consummated by September 30, 1999 or (2) the failure to obtain the required
approval of MEDE AMERICA stockholders, 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,
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 merger
provided we comply with applicable state law in so doing.
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.
107
<PAGE> 118
MEDE AMERICA RELATED TRANSACTION AGREEMENTS
This section of the proxy statement/prospectus describes agreements related
to the MEDE AMERICA reorganization agreement, including the MEDE AMERICA
stockholders' voting agreement, and the registration rights agreement. While we
believe that these descriptions cover the material terms of these agreements,
these summaries may not contain all of the information that is important to you.
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.
108
<PAGE> 119
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 (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 (1) April 20, 1999, the business day preceding public announcement
that Healtheon and MEDE AMERICA had entered into the merger agreement and (2)
[ ], 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 lower
average closing sale price of Healtheon common stock for the ten trading day
periods ending on July 30, 1999 and ending two days prior to the stockholders'
meeting. See "Structure of the MEDE AMERICA reorganization and conversion of
MEDE AMERICA common stock" on page 96 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.
109
<PAGE> 120
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 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.
2. 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.
3. 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.
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 and MEDE AMERICA'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, and the unaudited historical 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.
The total estimated purchase prices of WebMD and MEDE AMERICA 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.
110
<PAGE> 121
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 7,112,691(2) 7,137,519
(99,511)(4)
Other assets......................... 3,657 43,556 4,429 -- 51,642
--------- -------- -------- ---------- ----------
Total assets............... $ 121,055 $135,328 $ 78,914 $7,398,180 $7,733,477
========= ======== ======== ========== ==========
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 7,121,969(1) 7,735,802
(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 7,326,978 7,602,707
--------- -------- -------- ---------- ----------
Total liabilities and
stockholders' equity..... $ 121,055 $135,328 $ 78,914 $7,398,180 $7,733,477
========= ======== ======== ========== ==========
</TABLE>
See accompanying notes.
111
<PAGE> 122
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) $ (1.16)
======== ======== =======
Weighted-average shares
outstanding used in computing
basic and diluted net loss per
common share................... 34,987 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 2,322,193(A) 2,365,780
------- ------- ----------- -----------
Total operating costs and
expenses................... 5,036 52,994 2,322,193 2,525,140
------- ------- ----------- -----------
Income (loss) from operations.... (753) (531) (2,322,193) (2,422,553)
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) $(2,322,193) $(2,426,236)
======= ======= =========== ===========
Basic and diluted net loss per
common share................... $ (22.97)
===========
Weighted-average shares
outstanding used in computing
basic and diluted net loss per
common share................... 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.
112
<PAGE> 123
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 2,375 576,705(A) 587,810
-------- -------- ------- ---------- ----------
Total operating costs and
expenses............... 36,682 20,475 13,649 576,705 647,511
-------- -------- ------- ---------- ----------
Income (loss) from operations...... (19,127) (18,017) 1,127 (576,705) (612,722)
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) $ (576,705) $ (614,918)
======== ======== ======= ========== ==========
Basic and diluted net loss per
common share..................... $ (0.30) $ (1.46) $(0.13) $ (4.61)
======== ======== ======= ==========
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.
113
<PAGE> 124
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 13.2 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 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%
The purchase price for MEDE AMERICA may be increased or decreased by 25%
based upon the lower average closing price of Healtheon's stock for the
10 day periods ending July 30, 1999 and ending two days prior to the
special meeting of MEDE AMERICA stockholders, if that lower average
stock price exceeds $63.70 or is below $38.39.
(2) Recognition of the excess purchase price of approximately $7,112.7
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.
114
<PAGE> 125
HEALTHEON/WEBMD CORPORATION
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED WITH WEBMD AND MEDE AMERICA FINANCIAL INFORMATION (CONTINUED)
(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.
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 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.
115
<PAGE> 126
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 6,600,071(2) 6,624,899
(50,861)(4)
Other assets.............................. 3,657 43,556 -- 47,213
--------- -------- ---------- ----------
Total assets.................... $ 121,055 $135,328 $6,934,210 $7,190,593
========= ======== ========== ==========
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 -- 6,620,449(1) 7,234,282
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 6,886,808 7,101,186
--------- -------- ---------- ----------
Total liabilities and
stockholders' equity.......... $ 121,055 $135,328 $6,934,210 $7,190,593
========= ======== ========== ==========
</TABLE>
See accompanying notes.
116
<PAGE> 127
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 2,199,721(A) 2,234,535
-------- -------- -------- -------- ----------- -----------
Total operating costs and
expenses................. 102,786 23,444 23,723 47,167 2,199,721 2,349,674
-------- -------- -------- -------- ----------- -----------
Income (loss) from
operations................... (53,948) (23,036) (22,845) (45,881) (2,199,721) (2,299,550)
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) $(2,199,721) $(2,295,582)
======== ======== ======== ======== =========== ===========
Basic and diluted net loss per
common share................. $ (1.54) $ (1.52) $ (23.64)
======== ======== ===========
Weighted-average shares
outstanding used in computing
basic and diluted net loss
per common share............. 34,987 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.
117
<PAGE> 128
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 3,502 546,504(A) 555,234
-------- -------- --------- ---------
Total operating costs and expenses....... 36,682 20,475 546,504 603,661
-------- -------- --------- ---------
Income (loss) from operations................. (19,127) (18,017) (546,504) (583,648)
Interest, net................................. 558 214 -- 772
Accretion of redeemable warrants to redemption
value....................................... -- (538) -- (538)
-------- -------- --------- ---------
Net loss applicable to common stockholders.... $(18,569) $(18,341) $(546,504) $(583,414)
======== ======== ========= =========
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.
118
<PAGE> 129
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
11.7 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 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%
(2) Recognition of the excess purchase price of approximately $6,600.0
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.
119
<PAGE> 130
HEALTHEON/WEBMD CORPORATION
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED WITH WEBMD FINANCIAL INFORMATION (CONTINUED)
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 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.
120
<PAGE> 131
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.
121
<PAGE> 132
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) $ (4.25)
======== ======= =========
Weighted-average shares
outstanding used in computing
basic and diluted net loss per
common share.................. 34,987 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.
122
<PAGE> 133
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.
123
<PAGE> 134
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 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 or decreased by 25%
based upon the lower average closing price of Healtheon's stock for the
10 day periods ending July 30, 1999 and ending two days prior to the
special meeting of MEDE AMERICA stockholders, if that lower average
stock price exceeds $63.70 or is below $38.39.
(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.
124
<PAGE> 135
HEALTHEON/WEBMD CORPORATION
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED WITH MEDE AMERICA FINANCIAL INFORMATION (CONTINUED)
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 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.
125
<PAGE> 136
COMPARISON OF RIGHTS OF HOLDERS OF
WEBMD CAPITAL STOCK AND
HEALTHEON/WEBMD COMMON STOCK
This section of the proxy statement/prospectus describes certain
differences between WebMD capital stock and Healtheon/WebMD common stock. While
we believe that the description covers the material differences between the two,
this summary may not contain all of the information that is important to WebMD
stockholders, including the certificate of incorporation and bylaws of
Healtheon/WebMD and the articles of incorporation and bylaws of WebMD. WebMD
stockholders should read this entire document and the other documents referred
to carefully for a more complete understanding of the differences between 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.
DESCRIPTION OF HEALTHEON/WEBMD CAPITAL STOCK
The authorized capital stock of Healtheon/WebMD consists of 600,000,000
shares of common stock, par value $0.0001 per share, and 10,000,000 shares of
preferred stock, par value $0.0001 per share.
Healtheon/WebMD Common Stock
As of June 15, 1999, no shares of common stock were outstanding. After
giving effect to the transactions contemplated by the reorganizations, there
will be approximately 144,000,000 shares of common stock outstanding. The
holders of common stock are entitled to one vote per share on all matters to be
voted upon by the stockholders. 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 out of funds legally available therefor. In
the event of a liquidation, dissolution or winding up of Healtheon/WebMD, the
holders of common stock are entitled to share ratably in all assets remaining
after payment of liabilities and payment of liquidation preferences to holders
of preferred stock, if any. The Healtheon/WebMD 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. All
outstanding shares of common stock are fully paid and non-assessable, and the
shares of common stock to be outstanding upon completion of the WebMD
reorganization will be fully paid and non-assessable.
Preferred Stock
Healtheon/WebMD has 10,000,000 shares of preferred stock authorized, of
which no shares are outstanding. The Healtheon/WebMD board has the authority to
issue these shares of preferred stock in one or more series and to fix the
rights, preferences, privileges and restrictions, qualifications and limitations
granted to or imposed upon any unissued and undesignated shares of preferred
stock and to fix the number of shares constituting any series and the
designations of such series, without any further vote or action by the
stockholders, subject to applicable stock exchange rules. The Healtheon/WebMD
board, without stockholder approval, subject to applicable stock exchange rules,
can issue preferred stock with voting and conversion rights which could
adversely affect the voting power or other rights of the holders of
126
<PAGE> 137
common stock and the issuance of preferred stock may have the effect of
delaying, deferring or preventing a change in control of Healtheon/WebMD.
Transfer Agent and Registrar
The Transfer Agent and Registrar of Healtheon/WebMD common stock is
American Stock Transfer Trust Company and its telephone number is 800/937-5449.
DESCRIPTION OF HEALTHEON CAPITAL STOCK
The authorized capital stock of Healtheon consists of 150,000,000 shares of
common stock, par value $0.0001 per share, and 5,000,000 shares of preferred
stock, par value $0.0001 per share. In all other respects, the capital stock of
Healtheon is identical to the capital stock of Healtheon/WebMD described above.
DESCRIPTION OF WEBMD CAPITAL STOCK
The authorized capital stock of WebMD consists of 75,000,000 shares of
common stock, without par value and without series designation; 3,000,000
shares, without par value, designated as Series B common stock; 1,500,000
shares, without par value, designated as Series C common stock; 15,000,000
shares, without par value, designated as Series D common stock; 2,500,000
shares, without par value, designated as Series E common stock; and 10,000,000
shares of preferred stock, without par value per share, 1,600,000 of which are
designated as Series A preferred stock, 3,400,000 of which are designated as
Series B preferred stock, 2,000,000 of which are designated as Series C
preferred stock, 200,000 of which are designated as Series D preferred stock,
792,000 of which are designated as Series E preferred stock and 1,180,000 of
which are designated as Series F preferred stock.
WebMD Common Stock
As of June 15, 1999, 13,338,899 shares of common stock were outstanding, of
which 2,500,000 were shares of common stock without series designation,
1,400,000 were shares of Series B common stock, 1,500,000 were shares of Series
C common stock, 5,838,899 were shares of Series D common stock, and 2,100,000
were shares of Series E common stock. The holders of common stock without series
designation are entitled to one vote per share on all matters to be voted upon
by the stockholders; 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 out of funds legally
available therefor. 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.
WebMD Preferred Stock
As of June 15, 1999, 7,074,817 shares of WebMD preferred stock were
outstanding, of which 1,281,000 were shares of Series A preferred stock,
3,036,597 were shares of Series B preferred stock,
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1,008,750 were shares of Series C preferred stock, 200,000 were shares of Series
D preferred stock, 733,802 were shares of Series E preferred stock and 814,668
were shares of Series F preferred stock.
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 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 (1) 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, (2) 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, (3) increase
or decrease the authorized number of shares of Series A preferred stock, (4)
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 (5) 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, from any funds legally available for distribution to
stockholders, that portion of such funds equal to (1) the number of shares of
common stock into which such share of Series A preferred stock is convertible,
divided by (2) 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.
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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 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 (1) 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,
(2) 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, (3) increase or decrease the
authorized number of shares of Series B preferred stock, (4) 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 (5) 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, from
any funds legally available for distribution to stockholders, that portion of
such funds equal to (1) the number of shares of common stock into which such
share of Series B preferred stock is convertible, divided by (2) 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 a price less than the conversion
price then in effect. The Series B preferred stock has no preemptive rights or
subscription rights.
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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
(1) 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, (2) 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, (3) increase or decrease the authorized number of
shares of Series D preferred stock, (4) 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 (5) 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, from any funds legally available for distribution to
stockholders, that portion of such funds equal to (1) the number of shares of
common stock into which such share of Series D preferred stock is convertible,
divided by (2) 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.
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 (1) March 1, 2000, (2) any reclassification or change of the common
stock without series designation, (3) any merger or consolidation of WebMD in
which WebMD is not the surviving entity and (4) 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
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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 (1) 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, (2) 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, (3) increase or decrease the authorized number of shares of Series E
preferred stock, (4) 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, (5)
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, (6) enter into certain
transactions having the effect of a change of control of WebMD, or (7) 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 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, from any funds legally available for distribution to
stockholders, that portion of such funds equal to (1) the number of shares of
common stock into which such share of Series E preferred stock is convertible,
divided by (2) 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
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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, from any funds legally available for distribution to
stockholders, that portion of such funds equal to (1) the number of shares of
common stock without series designation into which such share of Series F
preferred stock is convertible, divided by (2) 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.
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.
COMPARISON OF CAPITAL STOCK OF HEALTHEON/WEBMD AND WEBMD
After consummation of the WebMD merger, the holders of WebMD common stock
will receive Healtheon/WebMD common stock under the terms of the reorganization
agreement and become stockholders of Healtheon/WebMD and holders of WebMD
preferred stock will continue to hold WebMD preferred stock. The rights of the
holders of WebMD common stock and preferred stock are presently governed by
Georgia law and by WebMD's amended and restated articles of incorporation and
WebMD's amended and restated bylaws and the rights of the holders of WebMD
preferred stock will continue to be governed by Georgia law, the WebMD articles
and the WebMD bylaws. As stockholders of Healtheon/ WebMD, the rights of the
holders of the WebMD common stock will be governed by Delaware law and
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by Healtheon/WebMD's amended and restated certificate of incorporation and
Healtheon/WebMD's bylaws. The following discussion summarizes the material
differences between the rights of holders of WebMD common stock and preferred
stock and the rights of holders of Healtheon/WebMD common stock, and the
material differences between the charters and bylaws of WebMD and
Healtheon/WebMD. This summary does not purport to be complete and is qualified
by reference to Healtheon/WebMD's certificate and Healtheon/WebMD's bylaws,
WebMD's articles and WebMD's bylaws and the relevant provisions of Delaware and
Georgia law.
Size of the Board of Directors. Healtheon/WebMD's bylaws provide for a
board of directors of not less than six nor more than eleven directors. The
Healtheon/WebMD board has the sole authority to determine the number of
directors and may increase or decrease the number of directors from time to
time, but a decrease in the number of directors may not have the effect of
shortening the term of any incumbent director. WebMD's bylaws provide for a
board of directors consisting of a maximum of fifteen members. The WebMD board
of directors may change the number of directors from time to time by resolution
so long as the number does not exceed fifteen, provided that a decrease in the
number of directors (if more than one director is elected by a resolution of the
board of directors or the stockholders) will not have the effect of shortening
the term of an incumbent director.
Loans to Officers and Employees. Under Delaware law, a corporation may make
loans to, guarantee the obligations of or otherwise assist its officers or other
employees and those of its subsidiaries (including directors who are also
officers or employees) when such action, in the judgment of the directors, may
reasonably be expected to benefit the corporation. Georgia law does not contain
a similar provision.
Voting by 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.
Cumulative Voting. In an election of directors under cumulative voting,
each share of stock normally having one vote is entitled to a number of votes
equal to the number of directors to be elected. A stockholder may then cast all
such votes for a single candidate or may allocate them among as many candidates
as the stockholder chooses. Under Delaware law, cumulative voting in the
election of directors is not available unless specifically provided for in the
certificate of incorporation. According to Georgia law, unless otherwise
provided in the articles of incorporation, shareholders do not have a right to
cumulate their votes for directors. Healtheon/WebMD has not provided for
cumulative voting in Healtheon/ WebMD's Certificate and cumulative voting is
therefore not available to Healtheon/WebMD's stockholders. WebMD has not
provided for cumulative voting in WebMD's Articles and cumulative voting is
therefore not available to WebMD's stockholders.
Classified Board of Directors. A classified board of directors is one on
which a certain number of the directors are elected on a rotating basis each
year. This method of electing directors makes changes in the composition of the
board of directors, and thus a potential change in control of a corporation, a
lengthier and more difficult process. Delaware and Georgia law both permit, but
do not require, a classified board of directors, with staggered terms under
which one-half or one-third of the directors are elected for terms of two or
three years, respectively. The Healtheon/WebMD Board is classified in accordance
with its certificate into three classes, with directors assigned to each class
in accordance with a resolution or resolutions adopted by the board of
directors. Each class is elected to a three-year term, with the term of office
of one class expiring each year. The WebMD board is divided into three classes
of directors, with each class as nearly equal in number as possible, and each
serving for staggered three year terms.
Power to Call Special Stockholders' Meetings; Advance Notice of Stockholder
Business and Nominees. 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.
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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. Healtheon/WebMD's bylaws require 90 days advance notice
in proper written form of stockholder nominees for election as director or
stockholder business to be brought before a meeting and provide that no such
business shall be conducted at a stockholder meeting unless the stockholder
follows the procedures set forth in the Healtheon/WebMD bylaws. 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. WebMD's bylaws contain no advance notice provisions similar to
those contained in Healtheon/WebMD's bylaws with respect to special meetings of
stockholders.
Elimination of Actions by Written Consent of Stockholders. 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.
Stockholder Approval of Certain Business Combinations. In the last several
years, a number of states have adopted special laws designed to make certain
kinds of "unfriendly" corporate takeovers, or other transactions involving a
corporation and one or more of its significant stockholders, more difficult.
Under Delaware and Georgia law, certain "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 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.
Share Purchase Rights Plans. Neither Healtheon/WebMD nor WebMD has adopted
a "poison pill" rights plan.
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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. A director of a corporation that does not have a
classified board of directors or cumulative voting may be removed, with or
without cause, with the approval of a majority of the outstanding shares
entitled to vote. If cumulative voting is authorized, a director may not be
removed if the number of votes sufficient to elect such director is voted
against his removal. 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. Delaware law does not permit directors to
remove other directors. Healtheon/WebMD's bylaws provide that a director may be
removed with or without cause by the holders of a majority of the outstanding
shares of all classes of capital stock of the corporation entitled to vote in
the election of directors. WebMD's 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.
Filling Vacancies on the Board of Directors. 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). Healtheon/WebMD's bylaws provide that vacancies may be filled by
a majority of the directors then in office, though less than a quorum, unless
the board of directors determines by resolution that any such vacancy shall be
filled by the stockholders. 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.
Indemnification and Limitation of Liability. Delaware and Georgia have
similar laws relating to indemnification by a corporation of its officers,
directors, employees and other agents. The laws of both states permit
corporations to adopt a provision in their charters eliminating the liability of
a director to the corporation or its stockholders for monetary damages for
breach of the director's fiduciary duty of care. There are nonetheless certain
differences between the laws of the two states with respect to indemnification
and limitation of 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 (i) breaches of the director's duty of
loyalty to the corporation or its stockholders; (ii) acts or omissions not in
good faith involving intentional misconduct or knowing violations of law; (iii)
the payment of unlawful dividends or unlawful stock repurchases or redemptions;
or (iv) transaction in which the director received an improper personal benefit.
Such limitation of liability provisions do not affect the availability of
non-monetary remedies such as injunctive relief or rescission.
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
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(i) any appropriation, in violation of such director's duties, of any business
opportunity of WebMD, (ii) acts or omission which involve intentional misconduct
or a knowing violation of law, (iii) liability for unlawful distributions and
(iv) 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.
Delaware law states that the indemnification provided by statute shall not
be deemed exclusive of any other rights under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise. Healtheon/WebMD's
certificate contains a provision providing that Healtheon/WebMD must indemnify
its directors and officers to the fullest extent permissible under Delaware law.
WebMD's bylaws state that the indemnification provided thereby shall not be
deemed exclusive of any other rights under any bylaw, resolution or agreement
approved or ratified by the holders of a majority of the shares entitled to vote
thereon.
Inspection of Stockholders List. Both Delaware and Georgia law allow
stockholders to inspect and copy the stockholders list for a purpose reasonably
related to such person's interest as a stockholder.
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 (i)
surplus or (ii) 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 (or shares
of common stock, if there are no such shares of preferred stock) 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, after giving it
effect: (i) the corporation would not be able to pay its debts as they become
due in the usual course of business, or (ii) the corporation's total assets
would be less than the sum of its total liabilities plus (unless the articles of
incorporation permit otherwise) 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.
Stockholder Voting on Mergers and Similar Transactions. Delaware law
requires that the holders of a majority of the outstanding voting shares of the
acquiring and target corporations approve statutory mergers. Delaware law does
not provide explicitly for share exchanges. Delaware law does not require a
stockholder vote of the surviving corporation in a merger (unless the
corporation provides otherwise in its certificate of incorporation) if: (i) the
merger agreement does not amend the existing certificate of incorporation; (ii)
each share of the surviving corporation outstanding before the merger is equal
to an identical outstanding or treasury share of the surviving corporation after
merger; and (iii) the number of shares to be issued by the surviving corporation
in the merger does not exceed 20% of the shares
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outstanding immediately prior to the merger. The Healtheon/WebMD certificate
does not contain a provision which alters the voting requirements with respect
to mergers.
Georgia law contains a similar exception to its voting requirements for
mergers and share exchanges where (i) the articles of incorporation of the
surviving corporation will not differ from its articles before the merger; (ii)
each stockholder of the surviving corporation whose shares were outstanding
immediately before the merger will hold the same number and type of shares
immediately after the merger; (iii) the number and kind of shares outstanding
immediately after the merger, plus the number and kind of shares issuable as a
result of the merger, do not exceed the total number and kind of shares of the
surviving corporation authorized by its articles of incorporation immediately
before the merger.
Georgia law generally requires the affirmative vote of a majority of all
votes entitled to be cast on the matter, voting as a single group, to approve
mergers and share exchanges. Delaware and Georgia law both require that a sale
of all or substantially all of a corporation's assets be approved by a majority
of the outstanding voting shares of the corporation transferring such assets.
WebMD's articles provide that the holders of a majority of the Series E
preferred stock, voting together as a single class, and the holders of a
majority of WebMD's Series F preferred stock, voting together as a single class,
are required to approve certain mergers and similar transactions.
Interested Director Transactions. Under both Delaware and Georgia law,
certain contracts or transactions in which one or more of a corporation's
directors has an interest are not void or voidable because of such interest,
provided that certain conditions, such as obtaining the required approvals and
fulfilling the requirements of good faith and full disclosure are met. With
certain exceptions, the conditions are substantially similar under Delaware and
Georgia law.
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. Under Delaware law, such rights are not available (1) 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 (unless otherwise provided in the corporation's certificate of
incorporation); (2) 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 (3) 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: (1) 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, (2) a share exchange in which the corporation's shares will be acquired,
if the stockholder is entitled to vote on the share exchange, (3) 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, (4) an amendment of the articles of incorporation that
adversely affects rights relating to such stockholder's shares or (5) 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 (1) the articles of
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incorporation or a resolution of the board of directors approving the
transaction provide otherwise, or (2) 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.
Dissolution. Under Delaware law, unless a majority of the whole board of
directors approves a proposal to dissolve, a dissolution must be approved by
stockholders holding 100% of the total voting power of the corporation. Only if
a dissolution is initially approved by a majority of the whole board of
directors may it be approved by a simple majority of the corporation's
outstanding shares of capital stock entitled to vote thereon. Delaware law
allows a Delaware corporation to include in its certificate of incorporation a
super majority voting requirement in connection with dissolutions initiated by
the board of directors. Healtheon/WebMD's certificate contains no such super
majority voting requirements. Georgia law requires approval of the board of
directors (unless the board elects because of a conflict of interest or other
special circumstances to make no recommendation) and the holders of a majority
of all the votes entitled to be cast (unless the articles of incorporation
require a greater vote or voting by groups) for voluntary dissolution of a
corporation. WebMD's articles contain no such super majority or voting group
voting requirement.
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
This section of the proxy statement/prospectus describes certain
differences between MEDE AMERICA common stock and Healtheon/WebMD common stock.
While we believe that the description covers the material differences between
the two, this summary may not contain all of the information that is important
to MEDE AMERICA stockholders, including the certificates of incorporation and
bylaws of each company. MEDE AMERICA stockholders should read this entire
document and the other documents referred to carefully for a more complete
understanding of the differences between 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, as 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 the Delaware General Corporation Law, or the DGCL. 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.
CLASSES OF 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.
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 STOCKHOLDER'S 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's 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 (1) the corporation's notice of meeting,
(2) the board of directors or (3) 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 (1) the board of directors or the
chairman of the meeting or (2) 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 6 and not more than 11 directors.
The MEDE AMERICA bylaws provide that the board of directors shall consist
of not fewer than 3 and not more than 11 directors.
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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, (1) 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 (2) 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.
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/
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WebMD certificate of incorporation and the MEDE AMERICA certificate of
incorporation each reserve for issuance 5,000,000 shares of preferred stock.
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, however, (1) for a director's breach of his or her
duty of loyalty to the corporation or its stockholders, (2) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of the law, (3) under Section 174 of the DGCL or (4) 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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MANAGEMENT OF HEALTHEON/WEBMD
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information as of June 16, 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 "Certain Information Regarding Healtheon" on
page 145 and "Certain Information Regarding WebMD" on page 185.
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; and
- 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 "Certain Information Regarding
Healtheon" on page 145 and "Certain Information Regarding WebMD" on page 185.
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CERTAIN INFORMATION REGARDING HEALTHEON
FORWARD-LOOKING STATEMENTS
Except for historical information, this proxy statement/prospectus contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
forward-looking statements involve risks and uncertainties, including, among
other things, statements regarding anticipated costs and expenses, revenue mix,
product and service development, relationships with strategic partners and plans
for addressing Year 2000 issues. These forward-looking statements include, among
others, those statements including the words "expects," "anticipates,"
"intends," "believes" and similar language. Actual results may differ
significantly from those projected in the forward-looking statements. Factors
that might cause or contribute to such differences include, but are not limited
to, those discussed in the section "Risk Factors."
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 workflows throughout the healthcare
delivery process. Healtheon believes that such a solution has the potential to
create significant improvements in the way that information is used by the
healthcare system, enabling improved workflows, better decision-making and,
ultimately, higher quality care at a lower cost.
The Healtheon Virtual Healthcare Network
Healtheon is pioneering the use of the Internet to simplify workflows,
decrease costs and improve the quality of patient care throughout the healthcare
industry. Healtheon has designed an Internet-based information and transaction
platform that allows it to create Virtual Healthcare Networks that facilitate
and streamline interactions among the myriad participants in the healthcare
industry. The Healtheon VHN solution includes a suite of services delivered
through applications operating on its Internet-based platform. Healtheon VHNs
enable the secure exchange of information among disparate healthcare information
systems and support a broad range of healthcare transactions, including
enrollment, eligibility determination, referrals and authorizations, laboratory
and diagnostic test ordering, clinical data retrieval and claims processing.
Healtheon provides its own applications on the Healtheon Platform and also
enables third-party applications to operate on its platform. The Healtheon
Virtual Healthcare Network solution provides the following key benefits:
Elimination of Unnecessary or Redundant Efforts. The Healtheon VHN solution
is designed to reduce paper-based transactions, eliminate redundant data entry,
shorten cycle times and decrease the communication inefficiencies created by
isolated proprietary systems. Healtheon believes that by decreasing redundant
tasks, errors, delays and unnecessary tests and procedures, it can create
efficiencies and reduce costs across the healthcare industry.
Extendibility Across the Continuum of Healthcare. Healtheon leverages the
Internet to provide an open, low-cost information and transaction platform
capable of extending across a wide range of healthcare market segments. The
Healtheon VHN solution is designed to interconnect a broad range of practice
management, managed care, human resources and laboratory information systems.
Healtheon expects the benefits of its solution to increase as it adds customers,
enabling each user to exchange more data and complete more transactions with a
greater number and broader range of other healthcare industry participants.
Scalability and Flexibility. The Healtheon VHN solution is designed to
support Healtheon's customers as their businesses grow and evolve. The Healtheon
Platform is designed to scale to accommodate high 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. 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/
BUSINESS FUNCTION USERS TRANSACTIONS SUPPORTED HEALTHEON SERVICE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Membership Services Consumers Payers - Enrollment Benefit
- Plan comparison/selection Central
- Provider search, selection, change
- Benefits inquiry
- Messaging
- -------------------------------------------------------------------------------------------------------------------------------
Healthcare Administration and Payers Providers - Eligibility determination Healtheon
Financial Management - Referrals Practice
- Authorization Healtheon
- Claims submission and status ProviderWorks*
- Remittance advice ProviderLink
- Provider directories*
- Provider files-management*
- Reporting
- Claims repricing*
- Clinical information
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
CUSTOMERS/
BUSINESS FUNCTION USERS TRANSACTIONS SUPPORTED HEALTHEON SERVICE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Clinical Information Services Providers Suppliers - Patient identification and encounter Healtheon Dx*
history SCAN+
- Patient registration GMPI+
- Lab 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 and benefit inquiries. 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 Benefits Administration
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 remittance
advice. For example, physicians use ProviderLink to determine eligibility of
patients to receive care and to submit health claims to payers. ProviderLink is
currently deployed in over 4,850 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 partners. Healtheon Practice, which
is in production, is designed to provide all of the functionality of
ProviderLink and also support referrals, authorization, and provider directories
reporting. Providers using the Healtheon Practice service 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."
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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, currently
in beta testing, that will combine the functionality of SCAN and ProviderLink.
See "-- Strategic Relationships."
Healtheon's Global Master Person Index, or "GMPI," enables the unique
identification of a patient and reconciliation of multiple records for the same
patient contained on diverse information systems. GMPI also supports access to
patient data and registration information as well as clinical records. GMPI is
an object-oriented application developed by ActaMed and is not yet
Internet-enabled. Healtheon intends to adapt and implement GMPI functionality on
the Healtheon Platform.
Online Consumer Information. Healtheon's recently introduced Consumer
Portal provides individual consumers with an authoritative source for healthcare
information and is intended to extend Healtheon's transaction services directly
to individual consumers. The Consumer Portal provides access to medical
dictionaries and encyclopedias, medical news, a food label and nutritional
library and customized wellness assessments. These sources include: Miller-Keane
Encyclopedia & Dictionary of Medicine, Nursing & Allied Health; Dorland's
Illustrated Medical Dictionary; Citizen 1's CitiLine index of authoritative
medical information; A.D.A.M.'s Hypertext Medical Encyclopedia; and Links to
medical headlines via the New York Times Syndicate. Healtheon's business
partners can integrate the Consumer Portal into their own sites to provide their
consumers with a single point of entry into the healthcare community.
Healtheon expects to expand its Consumer Portal to support secure
communications and transactions between consumers and their providers and health
plans.
Other Services. Healtheon also provides professional services to its
customers to enable them to define, develop and implement network-based
information systems that leverage the capabilities of the Healtheon Platform.
These services are typically sold on a fixed fee or time and materials basis.
These services include consulting on information systems strategy related to the
use of the Internet and secure networks, including design of information systems
functional specifications, mapping and redesign of business processes and
identification of enterprise transformation and training requirements to take
advantage of increased connectivity. Healtheon also provides custom development
of applications and enables the deployment of Healtheon services and integration
with legacy information technology systems. In addition, Healtheon provides
transitional network management services of its customers' networks. Healtheon
believes that its success is partially dependent upon its ability to introduce
new applications in several healthcare markets in a relatively short period of
time.
Customers and Markets
Healtheon's target customers include providers, payers, suppliers and
consumers. Because Healtheon believes that the value and benefit of Healtheon's
services are directly related to both the number of participants using Healtheon
VHNs and the breadth of functionality supported, it intends initially to focus
on selected regions where it can quickly gain significant market acceptance.
Healtheon is presently targeting a number of regional markets across the United
States.
Providers. Healtheon's target provider customers include aggregators of
individual physicians such as large medical groups, independent practice
associations, physician practice management companies and other large, organized
physician entities. In particular, Healtheon seeks to form strategic
relationships with providers with a high degree of involvement in managed care,
especially providers that are involved in activities such as capitation, which
require them to bear some level of insurance risk for each enrolled patient.
Healtheon's services for these providers include benefit eligibility
determinations, referrals and authorizations, claims processing, ordering of
clinical tests and delivery of results and maintenance of patient histories.
Healtheon also targets as potential customers large integrated delivery networks
that combine multiple healthcare facilities, such as hospitals, outpatient
facilities, labs and diagnostic centers,
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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 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
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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.
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.
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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 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.
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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 complementary brokers, value added resellers and systems
integrators to deliver complete solutions for major customers. In addition,
senior management plays an active role in the sales process by cultivating
industry contacts. Healtheon markets its applications and services through
direct sales contacts, strategic relationships, the sales and marketing
organizations of its strategic partners, participation in trade shows, articles
in industry publications and by leveraging its existing client base. Healtheon
attends a number of major trade shows each year and has begun to sponsor
executive conferences, which feature industry experts who address the
information systems needs of large healthcare organizations. Healtheon supports
its sales force with technical personnel who perform demonstrations of
Healtheon's applications and assist clients in determining the proper hardware
and software configurations. Healtheon's executive sales and marketing
management is located in its Santa Clara, California headquarters and in its
Atlanta, Georgia, Minneapolis, Minnesota and San Francisco, California
facilities, while its account representatives are deployed across the United
States. As of March 31, 1999, Healtheon employed 140 sales executives, account
managers, direct sales representatives and sales support personnel.
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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.
Intellectual Property
Healtheon relies upon a combination of trade secret, copyright and
trademark laws, license agreements, confidentiality procedures, employee
nondisclosure agreements and technical measures to maintain the secrecy of its
intellectual property. Healtheon believes that patent, trade secret and
copyright protection are less significant to Healtheon's success than its
ability to further develop applications. Healtheon has several trademarks in the
United States and internationally.
Competition
The market for healthcare information services is intensely competitive,
rapidly evolving and subject to rapid technological change. Many of Healtheon's
actual and potential competitors have announced or introduced Internet
strategies. Healtheon's competitors can be divided into several groups:
healthcare information software vendors, including HBO & Company, which was
recently acquired by McKesson Corporation, one of the country's largest drug
wholesalers, and Shared Medical Systems Corporation; healthcare electronic data
interchange companies, including ENVOY Corporation, which was recently
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acquired by Quintiles Transnational Corp., and National Data Corporation; and
large information technology consulting service providers, including Andersen
Consulting, International Business Machines Corporation and Electronic Data
Systems Corporation. Each of these companies can be expected to compete with
Healtheon within certain segments of the healthcare information technology
market. Furthermore, major software information systems companies and others,
including those specializing in the healthcare industry that are not presently
offering applications that compete with those offered by Healtheon, may enter
Healtheon's markets. In some cases, large customers may have the ability to
compete directly with Healtheon as well. Healtheon also competes with smaller
regional competitors. Many of Healtheon's competitors and potential competitors
have significantly greater financial, technical, product development, marketing
and other resources and greater market recognition than Healtheon. Many of
Healtheon's competitors also currently have, or may develop or acquire,
substantial installed customer bases in the healthcare industry. As a result of
these factors, Healtheon's competitors may be able to respond more quickly to
new or emerging technologies and changes in customer requirements or to devote
greater resources to the development, promotion and sale of their applications
or services than Healtheon. There can be no assurance that Healtheon will be
able to compete successfully against current and future competitors or that
competitive pressures faced by Healtheon will not materially adversely affect
its business, financial condition and results of operations.
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,
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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 (through [ ] 1999)........................ [ ] [ ]
</TABLE>
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; and
- conditions affecting the Internet or healthcare industries, in general.
The trading price of Healtheon's common stock may be volatile. The stock
market in general, and the market for technology and Internet-related companies
in particular, has experienced extreme volatility that often has been unrelated
to the operating performance of particular companies. These broad market and
industry fluctuations 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
You should read the following discussion in conjunction with Healtheon's
consolidated financial statements and notes thereto. The following discussion
contains forward-looking statements that involve risks and uncertainties.
Healtheon's actual results could differ materially from the results contemplated
by these forward-looking statements as a result of certain factors discussed
below in "Risk Factors" and elsewhere in this proxy statement/prospectus.
OVERVIEW
Healtheon is pioneering the use of the Internet to simplify workflows,
decrease costs and improve the quality of patient care throughout the healthcare
industry. Healtheon's 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 certain 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
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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
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. Healtheon earns revenue from services and services to related
parties, both of 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 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
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$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.
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. These increases resulted from higher personnel
and network operation costs required to support increased transactions from
Healtheon's SCAN services under the Services Agreement with SmithKline Labs as
well as increased transaction volume under the UnitedHealth 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
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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 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. 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.
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
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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. In the
first quarter of 1999, Healtheon used $15.1 million of cash to purchase
short-term investments and realized $7.8 million in cash from maturities of its
short-term investments. In the first quarter of 1998, Healtheon used $3.1
million of cash to purchase short-term investments and realized $7.1 million in
cash from maturities of its short-term investments. 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.
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
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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 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
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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
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>
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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.................... 47 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............. 53 Vice President, Chief Financial Officer, Secretary
and Treasurer
L. John Doerr...................... 47 Director
Thomas A. Jermoluk................. 43 Director
C. Richard Kramlich................ 64 Director
William W. McGuire, M.D............ 51 Director
P.E. Sadler........................ 64 Director
Laura D'Andrea Tyson............... 51 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.
P. E. Sadler has served as a director of Healtheon since Healtheon acquired
ActaMed in May 1998. He was Chairman of the Board of ActaMed from the time that
he helped co-found it in 1992 until it was acquired by Healtheon, and served as
its Chief Executive Officer from 1992 until May 1996. Prior to founding ActaMed,
Mr. Sadler founded MicroBilt Corporation, a computer processing company, and
served as its Chairman, Chief Executive Officer and President from 1981 until
MicroBilt was acquired by First Financial Management Corporation, or FFMC, in
1989. Following the acquisition of MicroBilt, he served as President of the
MicroBilt division of FFMC until 1991. Mr. Sadler also served on the board of
KnowledgeWare, Inc. from 1990 to 1995. Mr. Sadler holds a B.A. in business and
economics from Vanderbilt University.
Laura D'Andrea Tyson has served as a director of Healtheon since February
1999. Dr. Tyson has been the Dean of the Haas School of Business Administration
at the University of California at Berkeley since 1996. Dr. Tyson served as
National Economic Advisor to the President of the United States from March 1995
to December 1996 and as Chair of the White House Council of Economic Advisers
from 1993 to 1995. She also served as a member of the President's National
Security Council and Domestic Policy Council. Dr. Tyson was Director of the
Institute of International Studies from 1990 to 1992, and Research Director of
The Berkeley Roundtable on the International Economy from 1986 to 1992, at the
University of California, Berkeley, where she was also a professor of economics
and business administration. 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.
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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 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 Plan, and outside directors receive stock options
pursuant to automatic grants of stock options under the 1996 Plan.
In July 1998, Healtheon granted to each of Drs. McGuire and Yamada an
option to purchase 30,000 shares of its common stock under the 1996 Plan with an
exercise price equal to $7.00 per share. In October 1998, Drs. McGuire and
Yamada each agreed to exchange his option for a new option with an exercise
price of $3.55 per share, reflecting the fair market value of Healtheon's common
stock on that date as determined by the Board of Directors after taking into
account Healtheon's financial results and prospects. In connection with this
repricing, the vesting of the options for Drs. McGuire and Yamada was restarted.
Therefore, 25% of their shares will vest in October 1999, and the remainder will
vest ratably over the subsequent three years 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 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 Plan with an exercise price equal to $5.85 per share. The
Board also determined that under the 1996 Plan each outside director will
automatically receive an option to purchase 20,000 shares of common stock
annually on January 1.
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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 "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.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
Healtheon's Certificate of Incorporation and Bylaws limit or eliminate the
personal liability of its directors for monetary damages for breach of the
directors' fiduciary duty of care. The duty of care generally requires that,
when acting on behalf of the corporation, directors exercise an informed
business judgment based on all material information reasonably available to
them. Consequently, a director or officer will not be personally liable to
Healtheon or its stockholders for monetary damages for breach of fiduciary duty
as a director, except for
- any breach of the director's duty of loyalty to Healtheon or its
stockholders;
- acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases, redemptions
or other distributions; and
- any transaction from which the director derived an improper personal
benefit.
These provisions are permitted under Delaware law.
Healtheon's Certificate of Incorporation also provides that Healtheon will
indemnify, to the fullest extent permitted by law, any person made or threatened
to be made a party to any action or proceeding by reason of the fact that he or
she is or was a director or officer of Healtheon or serves or served at any
other enterprise as a director, officer or employee at Healtheon's request.
Healtheon's Bylaws provide that Healtheon will, to the maximum extent and
in the manner permitted by Delaware law, indemnify each of the following persons
against expenses, including attorneys' fees, judgments, fines, settlements, and
other amounts incurred in connection with any proceeding arising by reason of
the fact that he or she is or was an agent of Healtheon:
- a current or past director or officer of Healtheon or any subsidiary of
Healtheon;
- a current or past director or officer of another enterprise who served at
the request of Healtheon; or
- a current or past director or officer of a corporation that was a
predecessor corporation of Healtheon or any of its subsidiaries or of
another enterprise at the request of a predecessor corporation or
subsidiary.
Healtheon 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.
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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.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
earned for services rendered to Healtheon in 1998 by (1) Healtheon's Chief
Executive Officer and (2) Healtheon's four other most highly compensated
executive officers who earned more than $100,000 in 1998 and were serving as
executive officers at the end of 1998 (collectively, the "Named Executive
Officers"). Under the rules of the Securities and Exchange Commission, this
table does not include certain perquisites and other benefits received by the
Named Executive Officers which do not exceed the lesser of $50,000 or 10% of any
such officer's salary and bonus disclosed in this table.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ---------------------
------------------------ SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($)(1) OPTIONS(#)
--------------------------- --------- ----------- ---------------------
<S> <C> <C> <C>
W. Michael Long................................... $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
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equal to the fair market value of Healtheon's common stock, as determined in
good faith by the Board of Directors. The Board of Directors determined the fair
market value based on Healtheon's financial results and prospects, the share
price derived for arms-length transactions, and evaluations conducted by
valuation experts. Potential realizable values are net of exercise price before
taxes, and are based on the assumption that the common stock of Healtheon
appreciates at the annual rate shown, compounded annually, from the date of
grant until the expiration of the ten-year term. These numbers are calculated
based on Securities and Exchange Commission requirements and do not reflect
Healtheon's projection or estimate of future stock price growth.
<TABLE>
<CAPTION>
% 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. See "-- Compensation
Arrangements with Executive Officers."
(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
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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 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 Stock Plan. In February 1996 the Board adopted, and Healtheon's
stockholders approved, the 1996 Plan. Healtheon initially reserved for issuance
9,000,000 shares of common stock under the 1996 Plan. In March 1998, the Board
and the stockholders each approved an amendment to the 1996 Plan to increase the
number of shares of common stock reserved under the plan to 10,000,000 shares.
In July 1998, the Board approved, and in October 1998 the stockholders approved,
an amendment to increase the number of shares of common stock issuable under the
1996 Plan to 15,000,000 shares plus annual increases equal to the lesser of (1)
5% of the outstanding shares or (2) a lesser amount determined by the Board. In
January 1999, an additional 3,107,321 shares were reserved for issuance under
the 1996 Plan under the annual increase provision. 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 Plan by an additional 1,000,000 shares.
Unless terminated sooner, the 1996 Plan will terminate automatically in February
2006. The 1996 Plan provides for the discretionary grant of incentive stock
options, within the meaning of Section 422 of the Internal Revenue Code of 1986,
the "Code," to employees and for the grant of nonstatutory stock options and
stock purchase rights, "SPRs," to employees, directors and consultants. The 1996
Plan also provides for annual grants of options to purchase 5,000 shares of
common stock to each of the outside directors.
The 1996 Plan may be administered by the Board or a committee of the Board,
as applicable, the "Administrator". The Administrator has the power to determine
the terms of the options or SPRs granted, including the exercise price of the
options or SPRs, the number of shares subject to each option or SPR, the
exercisability thereof, and the form of consideration payable upon such
exercise. In addition, the Administrator has the authority to amend, suspend or
terminate the 1996 Plan, provided that no share of common stock previously
issued and sold or any option previously granted under the 1996 Plan is
affected.
The exercise price of all incentive stock options granted under the 1996
Plan must be at least equal to the fair market value of the common stock on the
date of grant. The exercise price of nonstatutory stock options and SPRs granted
under the 1996 Plan is determined by the Administrator, but with respect to
nonstatutory stock options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the exercise
price must be at least equal to the fair market value of the common stock on the
date of grant. With respect to any participant who owns stock possessing more
than 10% of the voting power of all classes of Healtheon's outstanding capital
stock, the exercise price of any incentive stock option granted must be at least
equal 110% of the fair market value on the grant date and its term must not
exceed five years. The term of all other options granted under the 1996 Plan may
not
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exceed ten years. Options generally vest as to 25% at the end of the first year
and monthly thereafter over a period of three years so that the entire option is
vested after four years, based upon the optionee's continued employment or
consulting relationship with Healtheon.
In the case of SPRs, unless the Administrator determines otherwise, the
restricted stock purchase agreement will grant Healtheon a repurchase option
exercisable upon the voluntary or involuntary termination of the purchaser's
employment or consulting relationship with Healtheon for any reason, including
death or disability. The purchase price for shares repurchased pursuant to a
restricted stock purchase agreement must be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to Healtheon. The repurchase option will lapse at a rate determined by the
Administrator.
Options and SPRs granted under the 1996 Plan are generally not transferable
by the optionee, and each option and SPR is exercisable during the lifetime of
the optionee only by the optionee. Options granted under the 1996 Plan must
generally be exercised within 30 days after the end of optionee's status as an
employee, director or consultant of Healtheon, or within one year after such
optionee's termination by disability or death, respectively, but in no event
later than the expiration of the option's term.
The 1996 Plan provides that, in the event of a merger of Healtheon with or
into another corporation, each outstanding option and SPR must be assumed or an
equivalent option substituted by the successor corporation. If the outstanding
options and SPRs are not assumed or substituted by the successor corporation,
the outstanding options and SPRs will terminate.
ActaMed Stock Option Plans. In connection with its acquisition of ActaMed
in a merger, Healtheon assumed the outstanding options of ActaMed under the
following ActaMed stock option plans, 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 (1) declare that all ActaMed options shall vest in full and be exercisable
for a period of thirty (30) days following written notice from the
Administrator, after which all ActaMed options shall terminate, (2) provide that
all ActaMed options shall be assumed by the successor corporation, or (3)
provide for a combination of the above.
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
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Purchase Plan, plus annual increases equal to the lesser of (1) 500,000 shares,
(2) .5% of the outstanding shares on such date or (3) a lesser amount determined
by the Board.
The 1998 Purchase Plan contains consecutive, overlapping, twenty-four month
offering periods. Each offering period includes four six-month purchase periods.
The offering periods generally start on the first trading day on or after May 1
and November 1 of each year, except for the first such offering period which
commences on the first trading day on or after the effective date of this
offering and ends on the last trading day on or before October 31, 2000.
Employees are eligible to participate if they are employed by Healtheon or
any participating subsidiary for at least 20 hours per week and more than five
months in any calendar year. However, an employee may not be granted an option
to purchase stock under the 1998 Purchase Plan if the employee (1) immediately
after grant would own stock possessing 5% or more of the total combined voting
power or value of all classes of the capital stock of Healtheon, or (2) holds
rights to purchase stock under any employee stock purchase plans of Healtheon
that together accrue at a rate which exceeds $25,000 worth of stock for each
calendar year. The 1998 Purchase Plan permits each participant to purchase
common stock through payroll deductions of up to 15% of the participant's
"compensation." Compensation is defined as the participant's base straight time
gross earnings and commissions but excludes payments for overtime, shift
premium, incentive compensation, incentive payments, bonuses and other
compensation. The maximum number of shares a participant may purchase during a
single purchase period is 5,000 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each purchase period. The price of stock
purchased under the 1998 Purchase Plan is 85% of the lower of the fair market
value of the common stock (1) at the beginning of the offering period or (2) at
the end of the purchase period. In the event the fair market value at the end of
a purchase period is less than the fair market value at the beginning of the
offering period, the participants will be withdrawn from the current offering
period following exercise and automatically re-enrolled in a new offering
period. The new offering period will use the lower fair market value as of the
first date of the new offering period to determine the purchase price for future
purchase periods. Participants may end their participation at any time during an
offering period, and they will be paid their payroll deductions to date.
Participation ends automatically upon termination of employment with Healtheon.
Rights granted under the 1998 Purchase Plan are not transferable by a
participant other than by will or the laws of descent and distribution. The 1998
Purchase Plan provides that, in the event of a merger of Healtheon with or into
another corporation or a sale of substantially all of Healtheon's assets, each
outstanding option may be assumed or substituted for by the successor
corporation. If the successor corporation refuses to assume or substitute for
the outstanding options, the offering period then in progress will be shortened
and a new exercise date will be set. The 1998 Purchase Plan will terminate in
2008. The Board has the authority to amend or terminate the 1998 Purchase Plan,
except that no amendment or termination may adversely affect any outstanding
options under the 1998 Purchase Plan. The Board may alter the purchase price for
any offering period or shorten an offering period at any time without consent of
the stockholders or of any participants.
401(k) Plan. Healtheon participates in a tax-qualified employee savings and
retirement plan, or the "401(k) Plan," which covers all of Healtheon's full-time
employees who have completed three months of service. Under the 401(k) Plan,
eligible employees may defer up to 20% of their pre-tax earnings, subject to the
Internal Revenue Service's annual contribution limit. The 401(k) Plan permits
additional discretionary matching contributions by Healtheon on behalf of all
participants in the 401(k) Plan in such a percentage amount as may be determined
annually by the Board. To date, Healtheon has made no matching contributions.
The 401(k) Plan is intended to qualify under Section 401 of the Code, as
amended, so that contributions by employees or by Healtheon to the 401(k) Plan,
and income earned on plan contributions, are not taxable to employees until
withdrawn from the 401(k) Plan, and so that contributions by Healtheon, if any,
will be deductible by Healtheon when made. The trustee under the 401(k) Plan, at
the direction of each participant, invests the assets of the 401(k) Plan in any
of a number of investment options.
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CERTAIN RELATIONSHIPS AND RELATED 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 (1) compensation agreements and other arrangements, which are
described where required in "Executive Compensation" and (2) 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. Sadler 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.
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,
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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.
Certain 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
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
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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 "Management's Discussion and Analysis -- 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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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; and
- all directors and executive officers of Healtheon as a group.
<TABLE>
<CAPTION>
HEALTHEON/
HEALTHEON SHARES WEBMD SHARES HEALTHEON/
HEALTHEON SHARES BENEFICIALLY OWNED BENEFICIALLY OWNED WEBMD SHARES
BENEFICIALLY OWNED AFTER THE AFTER THE MEDE BENEFICIALLY OWNED
PRIOR TO THE HEALTHEON/WEBMD AMERICA AFTER ALL THE
REORGANIZATION(1) REORGANIZATION(2) REORGANIZATION(3) REORGANIZATIONS(4)
NAME OF -------------------- ------------------ ------------------ ------------------
BENEFICIAL OWNER NUMBER PERCENT PERCENT PERCENT PERCENT
---------------- ---------- ------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Entities associated with James H.
Clark(5)................................... 11,702,265 16.5% 8.7% 14.7% 8.2%
Entities associated with UnitedHealth
Group(6)................................... 8,986,687 12.7 6.7 11.3 6.3
William W. McGuire, M.D.(6)................ 8,986,687 12.7 6.7 11.3 6.3
Entities associated with Kleiner Perkins
Caufield & Byers(7)........................ 8,111,832 11.3 6.0 10.0 5.6
L. John Doerr(7)........................... 8,111,832 11.3 6.0 10.0 5.6
SmithKline Beecham Corporation(8)........... 6,251,003 8.8 4.6 7.8 4.4
Tadataka Yamada(8)......................... 6,251,003 8.8 4.6 7.8 4.4
P. E. Sadler(9)............................. 5,001,993 7.0 3.7 6.3 3.5
Entities associated with New Enterprise
Associates, L.P.(10)....................... 3,755,569 5.3 2.8 4.7 2.6
C. Richard Kramlich(10).................... 3,755,569 5.3 2.8 4.7 2.6
W. Michael Long(11)......................... 2,251,378 3.1 1.7 2.8 1.6
Michael K. Hoover(12)....................... 712,979 1.0 0.5 0.9 0.5
Dennis Drislane(13)......................... 550,901 * * * *
Pavan Nigam(14)............................. 607,177 * * * *
Thomas A. Jermoluk.......................... 489,534 * 1.0(15) * *
Charles Saunders(16)........................ 161,690 * * * *
Laura D'Andrea Tyson........................ -- * * * *
All officers and directors as a group ([24]
persons)(17)............................... 50,219,877 67.5 36.4 60.5 34.2
</TABLE>
- -------------------------
* Less than one percent
(1) The number and percentage of shares beneficially owned 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.
(2) Percentage of ownership is 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 (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);
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- an estimated 134,826,836 shares of Healtheon/WebMD common stock
outstanding following the Healtheon-WebMD reorganization.
(3) Percentage of ownership is based on:
- an exchange ratio of .6593 shares of Healtheon/WebMD common stock for
each share of MEDE AMERICA common stock outstanding on June 15, 1999;
- an estimated 79,739,379 shares of Healtheon/WebMD common stock
outstanding following the MEDE AMERICA reorganization.
(4) Percentage of ownership is based on:
- the exchange ratios of Healtheon/WebMD common stock for each share of
WebMD capital stock and MedE AMERICA common stock as explained in Notes
(2) and (3) above;
- an estimated 143,536,528 shares of Healtheon/WebMD common stock
outstanding following all the reorganizations.
(5) 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 and 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. The address for Dr. Clark is c/o Healtheon
Corporation, 4600 Patrick Henry Drive, Santa Clara, CA 95054. The address
for Clark Ventures and Monaco Partners, LP is 777 East Williams Street,
Suite 201, Carson City, NV 89701.
(6) 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 and 1,270,080 shares
held of record by Validus, L.P., of which UnitedHealth Group is the sole
limited partner. 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. UnitedHealth Group's address is 9900 Bren Road East,
300 Opus Center, Minnetonka, MN 55343.
(7) 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 and 25,000 shares held of record by KPCB VIII Associates
(KPCB VIII). Also represents 976,423 shares subject to warrants held of
record by KPCB VII, and 52,936 shares subject to warrants held of record by
KPCB Life Sciences Zaibatsu Fund II L.P., all of which are exercisable
within 60 days of May 31, 1999. 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. Kleiner Perkins
Caufield & Byers' address is 2750 Sand Hill Road, Menlo Park, CA 94025.
(8) 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. SmithKline Beecham's address is 1201 South Collegeville
Road, Collegeville, PA 19426. Dr. Yamada disclaims beneficial ownership of
all shares held by SmithKline Beecham and SmithKline Labs.
(9) Represents 2,975,140 shares held of record by P. E. Sadler and 2,026,853
shares held of record by SFA Limited Partnership, of which P. E. Sadler is
a general partner. Mr. Sadler is a director of Healtheon. Mr. Sadler's
address is c/o Healtheon Corporation, 7000 Central Parkway, Suite 600,
Atlanta, GA 30328.
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(10) Represents 3,723,590 shares held of record directly by New Enterprise
Associates VI, L.P., or New Enterprise Associates VI, 11,979 shares subject
to warrants held of record by New Enterprise Associates VI exercisable
within 60 days of May 31, 1999, 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. New Enterprise
Associates VI's address is 1119 St. Paul Street, Baltimore, MD 21202.
(11) Includes 750,000 shares subject to a warrant held of record by Mr. Long and
450,000 shares subject to an option held of record by Mr. Long, in each
case exercisable within 60 days of May 31, 1999. Mr. Long is the Chief
Executive Officer and a director of Healtheon.
(12) Represents 93,878 shares held of record directly by Mr. Hoover, 2,500
shares held by Nicholas D. Hoover for which Mr. Hoover is custodian, and
616,601 shares subject to options held of record by Mr. Hoover that are
exercisable within 60 days of May 31, 1999. Mr. Hoover resigned as
President and a director of Healtheon in May, 1999.
(13) 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. Mr. Drislane
is Vice President, National Accounts.
(14) Includes 135,937 shares subject to options held of record by Mr. Nigam that
are exercisable within 60 days of May 31, 1999. Also includes 65,626 shares
that will remain subject to a right of repurchase by Healtheon 60 days
after May 31, 1999. Mr. Nigam is the Vice President, Engineering of
Healtheon.
(15) 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.
(16) Includes 10,716 shares subject to options held of record by Dr. Saunders
that are exercisable within 60 days of May 31, 1999. Dr. Saunders is the
Vice President, Strategic Planning and Medical Director of Healtheon.
(17) Includes all shares described in the above footnotes and includes an
additional 1,883,060 shares held by other executive officers, of which
1,369,227 shares were outstanding as of May 31, 1999 and 513,833 shares are
subject to options or warrants that are exercisable within 60 days of May
31, 1999.
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CERTAIN 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, our WebMD 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 and proprietary content. WebMD provides healthcare consumers with a
single point of access to premium and proprietary health and wellness content.
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 37 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 our 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." Healthcare professionals who
subscribe to WebMD's services have access to multiple areas on the WebMD Web
site, including:
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 Web sites Allows physicians to develop Allows physicians 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, governmental and
regulatory compliance
standards and pharmaceutical
updates
- ----------------------------------------------------------------------------------------------
</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
medical news, comprehensive to reliable clinical and
physician reference databases, research information necessary
medical encyclopedias, for their practice
journals, 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 easily and
conveniently
- ----------------------------------------------------------------------------------------------
Interactive dissectible Offers Web-enabled interactive Healthcare professionals can
anatomy dissectible anatomy software, use the images for their own
including a comprehensive reference and to prepare
digital database of detailed presentations for peers and
anatomical images patients
- ----------------------------------------------------------------------------------------------
</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 intends to offer healthcare professionals who subscribe to WebMD
access to the following additional services and content in connection with some
of its current strategic relationships:
- online ordering of medical and surgical supplies and equipment and access
to clinical references, including a patient advice database, through its
relationship with McKessonHBOC;
- online medical dictation and transcription services through its
relationship with Transcriptions, Ltd., a wholly owned subsidiary of
MedQuist, Inc.;
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- coding and billing compliance for fraud and abuse audit purposes through
its relationship with Physicians Data Network, Inc.;
- online lab test results and ordering through its relationship with
Advanced Health Technologies Corporation;
- specialty physician newsletters and continuing medical education courses
through its relationship with Advanced Health Consultants, Inc., a
Thomson Healthcare company; and
- streaming audio and video features for continuing medical education
courses through its relationship with iXL Enterprises, Inc.
WebMD offers some of its services to subscribers for additional transaction
or monthly fees. If a prospective subscriber is not connected to the Internet,
WebMD can offer dial-up Internet access. WebMD also provides optional access to
paging services in connection with the WebMD OnCall package.
Consumer services
Healthcare consumers have free access to the health and wellness center on
the WebMD Web site.
HEALTH AND WELLNESS CENTER
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
PRODUCT OR SERVICE FEATURES BENEFITS
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
Premium and proprietary Consolidates patient education Healthcare consumers have free
healthcare content 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 37 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 Offers multiple message boards Consumers can share
including "ask our experts," experiences and exchange
chat rooms and at least one information in a private
scheduled live chat event per environment with other members
week with guests including who share their health
physicians, social boards condition or concern
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 37 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.
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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, 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.
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 Alliance with Microsoft."
Excite@Home. Excite@Home is a global Internet media company offering
consumers and advertisers comprehensive Internet navigator services with
extensive personalization and targeting capabilities. Excite@Home has agreed to
position WebMD as the exclusive provider of health content on the Excite
network. In addition, WebMD has entered into several agreements with Excite@Home
and MatchLogic, Inc., a wholly owned subsidiary of Excite@Home, regarding the
online advertisement and promotion of WebMD.
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.
E*TRADE. E*TRADE Group, Inc., a leading provider of branded online
investing services, has agreed to purchase WebMD subscriptions for physicians
who open E*TRADE accounts. In addition, E*TRADE is the exclusive provider of
online investing services to WebMD subscribers.
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. In addition, Reader's Digest will provide content on WebMD's
consumer 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.
SOFTBANK. WebMD has entered into a strategic relationship with an affiliate
of SOFTBANK Holdings, Inc. regarding the formation of a joint venture for the
provision of healthcare and medical information in Japan.
CompuServe. CompuServe Interactive Services, Inc., a provider of Internet
access to consumers, has agreed to feature WebMD as the anchor tenant on the
"compuserve.com" health channel. In addition, WebMD has agreed to market
CompuServe as its exclusive Internet service provider for subscribers in need of
Internet services, Internet access and customer support.
Real Select. Real Select, Inc. is the operator of "realtor.com," the
official Web site of the National Association of Realtors. Real Select has
agreed to feature WebMD as its premier provider of health and medical related
information in its health care channel within its resource center.
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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.
Premier. Premier, Inc. is a leading alliance for non-profit hospitals and
healthcare systems. Provider Select, Inc., a subsidiary of Premier, has agreed
to market WebMD subscriptions to its affiliated physicians.
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.
ENVOY. ENVOY Corporation, a subsidiary of Quintiles Transnational, Inc., is
a leading provider of electronic data interchange and transaction processing
services. ENVOY has agreed to use its direct and indirect sales force to market
WebMD.
DePuy Orthopaedics. DePuy Orthopaedics, Inc., a Johnson & Johnson company,
is a leading manufacturer and distributor of orthopaedic devices and supplies.
DePuy has agreed to market WebMD to its existing customer base of orthopaedic
specialists.
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 and WebMD has agreed to favorable pricing terms for these
subscriptions and 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 above under "Healtheon/WebMD's
strategic alliances with and investments from Microsoft and other partners."
Service relationships
Premiere Technologies. Premiere Technologies, Inc. is a leading provider of
enhanced communications services. WebMD uses Premiere Communications, Inc.'s, a
wholly owned subsidiary of Premiere Technologies, computer telephony platform
and private frame relay network to provide enhanced communications services
through its Virtual Receptionist service offering.
Intel. Intel Corporation and its subsidiaries design, develop, manufacture
and market computer components and related products at various levels of
integration. Intel has entered into a strategic relationship with WebMD
regarding Intel's development of digital certificates for use by WebMD
subscribers for authentication and verification purposes.
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J&C Nationwide. Nationwide Medical Services, Inc., d/b/a J&C Nationwide, is
a healthcare professional placement and staffing services provider. WebMD has
created a career center within WebMD in connection with its strategic
relationship with J&C Nationwide.
Physicians Data Network. WebMD intends to provide coding and billing
compliance for fraud and abuse audit purposes to subscribers through its
strategic relationship with Physicians Data Network., Inc.
Medsite Publishing. WebMD provides subscribers access to "medbookstore.com"
for purchases of medical texts and journals online through its strategic
relationship with Medsite Publishing, Inc.
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.
AHT. Advanced Health Technologies Corporation is a leading provider of lab
connectivity services. WebMD intends to provide online lab test ordering and
results through its relationship with AHT.
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 broadband connectivity to WebMD's subscribers.
Security First. WebMD provides access to Internet banking services through
its relationship with Security First Network Bank, F.S.B.
DoubleClick. WebMD obtains Internet advertising solutions through its
relationship with DoubleClick, Inc.
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. WebMD will provide specialty physician newsletters
and continuing medical education courses through its relationship with Advanced
Health Consultants, Inc., a Thomson Healthcare company.
Ovid. WebMD provides searchable medical journal abstracts through its
relationship with Ovid Technologies, Inc.
Reuters. Reuters Health Information Services, Inc. provides WebMD with
topical medical and healthcare news.
InteliHealth. InteliHealth, Inc. provides WebMD with resources including,
information regarding regulatory and governmental compliance standards and
pharmaceutical updates.
adam.com adam.com is a leading developer of anatomical and medical content
and software.
Medirisk. Medirisk, Inc. is a leading provider of analytical databases and
software for the healthcare industry. WebMD provides a fee schedule analyzer,
which allows physicians to compare fees with reimbursements rates in their
specific geographic market, through its relationship with Medirisk.
HealthGate. HealthGate Data Corporation provides WebMD with online
physician reference databases, including MEDLINE and other National Library of
Medicine databases. HealthGate also provides WebMD with weekly editions of its
Healthy Living "webzines."
Medical Communications Network. Medical Communications Network, Inc., a
leading publisher of healthcare reference materials, provides WebMD with monthly
articles from Physician's Practice Digest.
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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, and may issue in the future, warrants in connection with entering into
strategic alliances, such as its alliances with Microsoft, DuPont, McKessonHBOC
and Premier. For a more complete description, see the section entitled "WebMD
Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Promotional arrangements" and "-- Guaranteed payments."
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 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.
Through CompuServe, WebMD will provide 24-hour customer service for WebMD
subscribers who use CompuServe as their Internet service provider.
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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; and
- 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:
- online services or Web sites targeted to the healthcare industry and
healthcare consumers generally, including medscape.com, pol.net,
mediacareonline.com, mediconsult.com, betterhealth.com, drkoop.com,
onhealth.com, iVillage.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; and
- Web search and retrieval services and other high-traffic Web sites.
In addition, with regard to its electronic data interchange service offering,
WebMD also competes with providers of single function electronic data
interchange terminals, 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 WebMD, the traffic on
its Web site, the demographics of its subscriber and consumer bases and the
creative implementation of advertisement placements.
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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 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.
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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." By letter dated July 6, 1998, the Patent & Trademark Office refused
registration of the "Web-MD" mark when used on or in connection with WebMD's
services. WebMD responded to the Patent & Trademark Office's refusal of
registration and was orally informed that the service mark "Web-MD" has been
cleared for publication for opposition. 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 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.
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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 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
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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 "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 Web-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.
Recent acquisitions
Sapient Health Network. Sapient Health Network designed and managed
Web-based communities targeted at healthcare consumers and sold market research
and data products, advertising sponsorships and other online services. Business
Week named Sapient Health Network's Web site one of the best new Web sites of
1998. 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 Sapient
Health Network's existing 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. This
acquisition was accounted for using the purchase method of accounting.
Direct Medical Knowledge. Direct Medical Knowledge was a publisher of
healthcare information via the Internet through its electronic library of
healthcare information which was customized for consumers through its
proprietary personalization software. On January 22, 1999, WebMD acquired Direct
Medical Knowledge in exchange 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 forgave $300,000 of debt
payable by Direct Medical Knowledge to WebMD. This acquisition was accounted for
using the purchase method of accounting.
Charges in connection with acquisitions. 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
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option and warrant outstanding on April 9, 1999 to reflect the stock dividend,
regardless of whether these options and warrants were vested and exercisable.
Unless otherwise indicated, the stock dividend has been reflected as if it had
occurred for all periods presented.
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; and
- 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, MedQuist and E*TRADE. 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>
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. Advance billings and collections
relating to future access services will be recorded as deferred revenue and
recognized when revenue is earned. 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.
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.
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
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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
increased primarily due to the launch of WebMD's Internet-based services.
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. 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 the WebMD 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. Sales and marketing costs increased primarily due
to payments to WebMD's consumer portal distribution partners, including
promotional arrangements, its branding and advertising campaign and increased
marketing efforts in connection with the distribution of its services.
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, $2.0 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 salaries and related expenses
for additional administrative and executive personnel.
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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.
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.
Interest expense, net. Interest income (expense), net consists primarily of
interest paid on loans from related parties, loans that have been repaid and
interest earned on cash balances. Interest income (expense), net was $(139,000)
and $(725,000) for the years ended December 31, 1998 and 1997, respectively, and
$214,000 and $(146,000) for the three months ended March 31, 1999 and 1998,
respectively. Interest income (expense), net 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. Interest income
(expense), net 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 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
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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." 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.
Recent 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 also 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 certain 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 $20.00 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.
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 (used in) investing activities was $9.5 million and
$(1.6) million for the years ended December 31, 1998 and 1997, respectively, and
$(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
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
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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.
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."
Assessment. 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 in a timely
manner. 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 believes that it has identified
substantially all of the major computers, software applications and related
equipment that WebMD uses in connection with its internal operations that must
be modified, upgraded or replaced 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.
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, ENVOY, Premiere Technologies, MedQuist,
AHT, Physicians Data Network and J&C Nationwide 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.
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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; and
- 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 (1) accelerated replacement of affected equipment or
software; (2) short to medium-term use of backup equipment and software; (3)
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; and (4) 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"). 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.
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
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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 (1) were or should
have been subject to Statement of Auditing Standards No. 50 or (2) 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
executive officers and directors as of June , 1999.
<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
Albert J. Bergonzi(2)............ 49 Director
Lucius E. Burch, III(3).......... 56 Director
U. Bertram Ellis, Jr............. 45 Director
J. Rex Fuqua..................... 48 Director
Jay P. Gilbertson................ 38 Director
S. Taylor Glover(2).............. 48 Director
Boland T. Jones(1)............... 39 Director
Jouko J. Rissanen(3)............. 53 Director
Glenn W. Sturm(1)................ 45 Director
</TABLE>
- -------------------------
(1) Member of executive committee of the board of directors.
(2) Member of audit committee of the board of directors.
(3) Member of compensation 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 wholly owned 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.
Albert J. Bergonzi has served as one of WebMD's directors since December
1998. Since 1985, Mr. Bergonzi has served in various positions at McKessonHBOC,
most recently as Group President, Information Technology Business.
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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.
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 Enterprises. 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.
Jay P. Gilbertson has served as a director of WebMD as representative of
HBOC, a wholly owned subsidiary of McKessonHBOC, from August 1998 to November
1998. Mr. Gilbertson was reappointed to the board in January 1999. From December
1998 to June 1999, he served as President and Chief Operating Officer of WebMD.
From January 1993 to November 1998, Mr. Gilbertson served in various positions
with HBOC, including President, Co-Chief Operating Officer, Chief Financial
Officer, Treasurer and Principal Accounting Officer. Mr. Gilbertson also serves
on the board of directors of Anacomp, Inc.
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.
The WebMD 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. Bergonzi, 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
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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 certain limitations.
Messrs. Bergonzi and Glover are members 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 the WebMD, Inc.
Amended and Restated 1997 Stock Incentive Plan, as amended, in accordance with
the terms thereof.
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 the Director
Option Plan of WebMD, Inc. 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. See "-- Option Plans -- Director Option
Plan." 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,
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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, WebMD's
wholly owned subsidiary, with Endeavor surviving. Prior to this merger, the
stockholders of Endeavor 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
$100,000 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) 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 "Certain Relationships and Related
Transactions." "All other compensation" consists of amounts paid for car
allowances.
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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>
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 (1) multiplying the number of shares of common
stock subject to a given option by the exercise price and (2) 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
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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 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
1997 Stock Incentive Plan. In September 1997, the WebMD board of directors
adopted and WebMD's stockholders approved the WebMD, Inc. 1997 Stock Incentive
Plan under which 2,769,200 shares of common stock of WebMD are available to be
granted to employees, consultants and others rendering services to WebMD. The
1997 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
1997 Stock Incentive Plan, which provided, in part, for the increase in the
number of authorized shares of common stock under the 1997 Stock Incentive Plan
to 6,923,000 and 8,307,600, respectively. In March 1999, the WebMD board adopted
amendments to the 1997 Stock Incentive Plan which provided for estate and gift
planning transfers approved by the compensation committee. The amendments to the
1997 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 1997 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.
The 1997 Stock Incentive Plan is administered by the WebMD board and the
compensation committee. Subject to the provisions of the 1997 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 (1) vesting and exercisability schedules, (2)
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 (3) the
duration of awards.
As of June 15, 1999, the Company had granted options to purchase
shares of Series D common stock of WebMD outstanding under the 1997 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.
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Director Option Plan. In November 1998, WebMD's board adopted the Director
Option Plan of WebMD, Inc., 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 termination of service or death, or unless such
option is fully exercised prior to the end of the option period. As of June 15,
1999, options to acquire shares of Series D common stock were outstanding
under the Director Option Plan.
CERTAIN RELATIONSHIPS AND RELATED 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 promissory note bearing
interest at 8.5% per annum. The principal and accrued interest are payable in 24
equal installments of $2,597.43 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, WebMD paid Mr. Arnold $52,015 in additional compensation, which Mr. Arnold
has repaid to WebMD in payment of the obligations under the above-referenced
note. In addition, WebMD paid Mr. Arnold $11,814 for tax payment obligations
incurred by Mr. Arnold as a result of this additional compensation. As of March
31, 1999, $7,141 remained outstanding under this note.
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 a wholly owned 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 a
wholly owned subsidiary of Premiere Technologies. 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
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$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.
WebMD provides its subscribers with Premiere Technologies' enhanced
communications services. WebMD's agreement with a wholly owned subsidiary of
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' 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. See "WebMD's Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview -- Promotional
arrangements." Jay P. Gilbertson, a director of WebMD and former President and
Chief Operating Officer of WebMD from December, 1998 to June 1999, was President
and Co-Chief Operating Officer and Chief Financial Officer of HBOC, a
predecessor company of McKessonHBOC, prior to November 1998. Albert J. Bergonzi
has been a director of WebMD since November 1998 and is the Group President,
Information Technology Business of McKessonHBOC.
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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 (1) be approved by a majority of the
disinterested members of our Board of Directors, and (2) 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 is currently WebMD's law firm.
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. Mr. Gilbertson continues to serve as a director of WebMD.
For more information concerning Messrs. Arnold and Rissanen, see the
section entitled "WebMD's Management -- Compensation Committee Interlocks and
Insider Participation." For more information concerning Mr. Payne, see the
section entitled "WebMD's Management -- Director Compensation."
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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; and
- all of WebMD's directors and executive officers as a group.
<TABLE>
<CAPTION>
HEALTHEON/WEBMD
WEBMD SHARES SHARES BENEFICIALLY HEALTHEON/WEBMD
BENEFICIALLY OWNED AFTER THE SHARES BENEFICIALLY
OWNED PRIOR TO THE HEALTHEON/WEBMD OWNED AFTER ALL THE
REORGANIZATIONS(2) REORGANIZATIONS(2)(3) REORGANIZATIONS(4)
-------------------- --------------------- -------------------
NAME OF BENEFICIAL OWNER(1) NUMBER PERCENT PERCENT PERCENT
--------------------------- ---------- ------- ------- -------
<S> <C> <C> <C> <C>
Microsoft Corporation(5)............ 14,920,467 34.9% 18.2% 17.2%
E.I. du Pont de Nemours and
Company(6)........................ 5,718,400 14.1 7.2 6.8
Jeffrey T. Arnold(7)................ 4,176,919 11.7 5.6 5.3
Boland T. Jones(8).................. 2,993,505 8.5 4.0 3.8
Premiere Technologies, Inc.(9)...... 2,675,047 7.6 3.6 3.4
Albert J. Bergonzi(10).............. 3,617,005 10.1 4.8 4.5
HBO & Company of Georgia(11)........ 3,582,390 10.0 4.8 4.5
Jouko J. Rissanen(12)............... 2,873,045 8.2 3.9 3.6
Finn Partners(12)................... 2,076,900 5.9 2.8 2.6
Lucius E. Burch III(13)............. 1,419,215 4.0 1.9 1.8
J. Rex Fuqua(14).................... 696,822 2.0 0.9 0.9
Jay P. Gilbertson(15)............... 628,200 1.8 0.8 0.8
S. Taylor Glover(16)................ 557,765 1.6 0.8 0.7
William P. Payne(17)................ 303,855 * * *
U. Bertram Ellis, Jr.(18)........... 274,615 * * *
Glenn W. Sturm(19).................. 153,075 * * *
W. Michael Heekin(20)............... 219,230 * * *
K. Robert Draughon(21).............. 200,833 * * *
All directors and executives as a
group
(13 persons)(22).................. 18,144,084 50.4 24.1 22.7
</TABLE>
- -------------------------
* Less than 1% of the outstanding WebMD capital stock.
(1) 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.
(2) 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.
(3) Percentage of ownership is 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
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WebMD preferred stock into common stock immediately prior to that
date (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 estimated 134,826,836 shares of Healtheon/WebMD common stock
outstanding following the Healtheon-WebMD reorganization.
(4) Percentage of ownership is 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 (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 estimated 143,536,528 shares of Healtheon/WebMD common stock
outstanding following all the reorganizations.
(5) The address of Microsoft is One Microsoft Way, Redmond, Washington
98052-5399. Includes (a) 7,305,551 shares held of record and (b) 7,614,916
shares subject to presently exercisable warrants.
(6) The address of DuPont is 1007 Market Street, Wilmington, Delaware 19898.
Includes (a) 180,000 shares held of record and (b) 5,538,400 shares subject
to presently exercisable warrants.
(7) Includes (a) 2,910,459 shares held of record; (b) 507,700 shares held of
record by Arnold Family Irrevocable Trust; (c) 276,920 shares held of
record by JT Arnold Enterprises LLLP; (d) 20,307 shares held by Margaret M.
Arnold; and (e) 461,533 shares subject to presently exercisable options.
Mr. Arnold disclaims beneficial ownership of the shares held by Arnold
Family Irrevocable Trust and JT Arnold Enterprises LLLP.
(8) Includes (a) 244,382 shares held of record; (b) 39,461 shares held of
record by Andrea L. Jones, as trustee of the 1997 Jones Family Trust; (c)
34,615 shares subject to presently exercisable options; and (d) 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 Premiere Technologies.
(9) The address of Premiere Technologies is 600 The Lenox Building, 3399
Peachtree Road, NE, Atlanta, Georgia 30326.
(10) Includes (a) 34,615 shares subject to presently exercisable options, (b)
2,876,180 shares held of record and 636,980 shares subject to presently
exercisable warrants and 69,230 contingent shares, to be received by HBO &
Company of Georgia, a wholly owned subsidiary of McKessonHBOC, of which Mr.
Bergonzi is Group President, Information Technology Business. Mr. Bergonzi
disclaims beneficial ownership of the shares held by HBO & Company of
Georgia.
(11) The address of HBO & Company of Georgia, a wholly owned subsidiary of
McKessonHBOC, is 301 Perimeter Center North, Atlanta, Georgia 30346.
Includes (a) 2,876,180 shares held of record and (b) 636,980 shares subject
to presently exercisable warrants and 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.
(12) Includes (a) 761,530 shares held of record; (b) 34,615 shares subject to
presently exercisable options; and (c) 2,076,900 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 the
692,300 shares held by Finn Partners attributable to Mr. Rissanen, he
disclaims beneficial ownership of the shares held by Finn Partners.
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<PAGE> 229
(13) Includes (a) 553,840 shares held of record; (b) 830,760 shares held of
record by Burch House, LP; and (c) 34,615 shares subject to presently
exercisable options. Mr. Burch disclaims beneficial ownership of the shares
held by Burch House, LP.
(14) Includes (a) 438,410 shares held of record; (b) 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; and (c) 96,922 shares
subject to presently exercisable options.
(15) Includes 628,200 shares subject to presently exercisable options. Does not
include 276,920 options forfeited upon the termination of Mr. Gilbertson's
employment.
(16) Includes (a) 469,310 shares held of record; (b) 39,994 shares held of
record by STG Partners, LP; and (c) 48,461 shares subject to presently
exercisable options. Mr. Glover disclaims beneficial ownership of the
shares held by STG Partners, LP.
(17) Includes 303,855 shares subject to presently exercisable options.
(18) Includes (a) 240,000 shares held of record and (b) 34,615 shares subject to
presently exercisable options.
(19) Includes (a) 118,400 shares held of record and (b) 34,615 shares subject to
presently exercisable options.
(20) Includes 219,230 shares subject to presently exercisable options.
(21) Includes (a) 50,000 shares held of record and (b) 150,833 shares subject to
presently exercisable options.
(22) Includes 2,116,724 shares subject to presently exercisable options.
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CERTAIN INFORMATION REGARDING MEDE AMERICA
MEDE AMERICA'S BUSINESS
MEDE AMERICA is a leading provider of EDI products and services to a broad
range of providers and payers in the healthcare industry. MEDE AMERICA offers an
integrated set 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 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 EDI 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
EDI 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 EDI marketplace.
Comprehensive Set of EDI Products and Services. MEDE AMERICA has followed a
strategy of developing or acquiring EDI 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 EDI processing system. These products also provide to the client
the capability and the required security to transmit or receive EDI 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 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
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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 EDI 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 EDI products
incorporate open architecture designs and what it regards as "best of breed"
technology and may be purchased as modular additions to existing data storage
and retrieval systems or as part of a comprehensive EDI processing system. 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. 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.
- ----------------------------------------------------------------------------------------------------------------------------
Other Claim Services
MEDE Assist -- - Bills, on a batch basis, pharmacy prescriptions - Improves accounts receivable
Pharmacy and performs non-electronic reconciliation and management and accelerates cash flow
payer accounts receivable management. through faster claim reimbursement.
- Reduces administrative expenses.
Claims Tracking -- - Tracks and provides a lock box service for payer - Improves accounts receivable
Dental reimbursements. management and accelerates cash flow.
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
NAME OF PRODUCT/SERVICE DESCRIPTION OF
AND MARKETS SERVED PRODUCT/SERVICE FEATURES CLIENT BENEFITS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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.
including dial-up, dial to packet, ISDN and
frame relay.
- ----------------------------------------------------------------------------------------------------------------------------
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.
- ----------------------------------------------------------------------------------------------------------------------------
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 EDI - Processes data relating to referrals, encounters - Reduces practice expense and improves
Transactions -- and benefit precertifications. efficiency and patient relations.
All Markets
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
222
<PAGE> 233
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) and process
transactions for providers in all 50 states. MEDE AMERICA believes it is one of
the largest pharmacy transaction routers in the U.S. (based on volume) serving
more than 42,000 pharmacies in various EDI capacities. MEDE AMERICA has a strong
presence in the medical market in New York, New Jersey, California, Florida,
Minnesota, and Ohio, currently providing EDI 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 EDI 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 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 EDI transactions and telecommunications offerings.
In MEDE AMERICA's 1996, 1997 and 1998 fiscal years, research and
development expenditures totaled $2,132,000, $3,278,000 and $3,941,000,
respectively. For the nine months ended March 31, 1999, research and development
expenditures totaled $3,379,000. See "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.
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<PAGE> 234
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. MEDE AMERICA's systems are designed to take full advantage
of the client/server environment, UNIX operating systems and Redundant
Array of Inexpensive Disks ("RAID") technology, allowing clients to
expand MEDE AMERICA's processing capacity.
- MODULARITY. 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 ("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 applications without re-designing
its applications or architecture.
- 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.
- EASE OF USE. MEDE AMERICA's products are either Windows-based or
GUI-based 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 EDI 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 EDI becomes more established. MEDE AMERICA believes that existing
and potential clients in the healthcare EDI market evaluate the products and
services of competing EDI providers on the basis of the compatibility of the
provider's
224
<PAGE> 235
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.
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 mainframe
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.
225
<PAGE> 236
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.
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.
226
<PAGE> 237
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>
227
<PAGE> 238
<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 (i) expenses of $2,864,000 relating to the spin-off of MEDE AMERICA
by CES in the fiscal year ended June 30, 1995 and (ii) 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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<PAGE> 239
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, called
EDI, products and services to a broad range of providers and payers in the
healthcare provider industry. MEDE AMERICA's integrated set of EDI 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 EDI 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 EDI 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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<PAGE> 240
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 EDI 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 (primarily long-term debt).
Latpon, a developer of claims processing software, provided EDI transaction
processing services to hospitals and hospital-based physician groups. Latpon
also provided electronic and manual business office administrative services. The
acquisition was accounted for under the purchase
230
<PAGE> 241
method and MEDE AMERICA recorded total intangible assets of $2,291,000,
consisting of $993,000 of software and client lists and $1,298,000 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 EDI dental claims processor, and Premier, a dental practice
management software vendor. The acquisitions were funded with an initial cash
payment of $4,050,000, 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 $2,301,000 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 $4,350,000, consisting of
$764,000 of software, and $3,586,000 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 $11,465,000, including transaction expenses. The acquisition was
accounted for under the purchase method and MEDE AMERICA recorded total
intangible assets of $11,065,000, consisting of $1,556,000 of in-process
research and development, $2,984,000 of software and $6,525,000 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 EDI transactions. Products under development included: (1) a plan
member eligibility verification product for workers compensation; (2) a medical
claims processing system to meet the HCFA 1500 EDI industry standard; and (3) 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, $125,000 and $56,000, respectively, for the workers
compensation eligibility product, HCFA 1500 and 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 HCFA 1500 product experienced roll out delays and is expected to be
commercially introduced in the Spring of 1999. MEDE AMERICA believes that, in
time, this product will achieve commercial viability.
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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 adversely affected by recent revisions in regulatory standards
which limit the use of the internet to process pharmacy claims. MEDE AMERICA is
currently processing transactions with this product for a small number of
pharmacy clients.
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 $10,674,000 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 $2,022,000 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 $10,414,000, consisting of $2,133,000 of software and
client lists and $8,281,000 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 EDI 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 $11,718,000, including transaction expenses. The acquisition was
accounted for under the purchase method and MEDE AMERICA recorded total
intangible assets of approximately $11,013,000, consisting of $2,713,000 of
client lists and approximately $8,300,000 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
the Company. The processing agreement is for a fixed term of five years, with
annual renewals thereafter.
Contemporaneously, to ensure a close working relationship between the
parties, on July 17, 1998 the Company granted to Medic a warrant to acquire
1,250,000 shares of the Company's common stock, at a
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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 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
$3,925,000 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 IPO 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 EDI systems equipment sales.
See "Business -- Set of EDI Products and Services."
Transaction-based revenues and related formulary services revenues (if
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, and
- other costs associated with transaction processing and services provided
to clients, such as
-- network and telecommunications,
-- maintenance,
-- computer operations, and
-- systems administration, facilities and other additional indirect
expenses.
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.
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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 (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 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 $3,708,000 and $5,064,000 during the fiscal years ended
June 30, 1997 and 1998, respectively, and 4,927,000 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%. The increase was primarily attributable to
growth of the existing business and to incremental revenue from the acquisition
of The Stockton Group in November 1997 and HII in October 1998. The Company
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%. The increase resulted from the
incremental transactions from the acquisition of Stockton and HII, 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. The increase in operations
expense was primarily due to the acquisition of Stockton in November 1997 and
HII in October 1998, and to the higher volume of transactions processed. 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 13% 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. The increase in sales, marketing and
client services expense was primarily 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 25% and 37%, 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 (1) MEDE
AMERICA's four principal stockholders, through periodic purchases of its debt
and equity securities and (2) 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-
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Share Computer 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.
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 (1) 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 (2) 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 (as a result of 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 expect 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
IPO 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 has 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 has specifically identified several areas which are 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; and
- 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.
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 14% of the client base migrated. The
migration process is scheduled for completion in August 1999. 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 130 clients, and has scheduled upgrades for an additional
40 clients, with 55 clients still in the sales process. A version of the UNIX
operating platform software used in pharmacy transaction switching,
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which the manufacturer represents to be Year 2000 compliant, was released in
December 1998. Testing of that operating platform software on MEDE AMERICA's
hardware, with its pharmacy transaction switching software, has begun. The
software performed correctly on test equipment, and is currently in test on
production hardware. Testing is scheduled for completion in June 1999.
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: (1) physician claims processing (small-and
large-group), (2) hospital claims processing and (3) claims data transmission
(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 also intends to
modify HII's payer data transmission products to make such products Year 2000
compliant. These modifications are scheduled to be completed in July 1999. 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).
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
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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 the type described in clause (1) of the
preceding sentence 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 the New 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 the
New 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.
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
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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.
<TABLE>
<CAPTION>
HEALTHEON/WEBMD HEALTHEON/WEBMD
SHARES SHARES
BENEFICIALLY OWNED BENEFICIALLY
MEDE AMERICA SHARES AFTER THE OWNED
BENEFICIALLY OWNED PRIOR TO MEDE AMERICA AFTER ALL THE
THE REORGANIZATION(1) REORGANIZATION(2) REORGANIZATIONS(3)
---------------------------- ------------------ ------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT PERCENT PERCENT
------------------------------------ ------------ ---------- ------- -------
<S> <C> <C> <C> <C>
Welsh, Carson, Anderson & Stowe(4)...... 5,578,502 42.0% 4.6% 2.6%
320 Park Avenue, 25th Floor
New York, NY 10019
William Blair & Co., L.L.C.(5).......... 891,180 6.7 0.7 0.4
222 West Adams Street
Chicago, Illinois 60606
Thomas P. Staudt(6)..................... 250,354 1.9 0.2 0.1
Richard P. Bankosky..................... 58,328 * * *
James T. Stinton(7)..................... 29,303 * * *
William M. McManus(8)................... 32,793 * * *
Linda K. Ryan(9)........................ 3,298 * * *
Roger L. Primeau(10).................... 15,022 * * *
Thomas E. McInerney(11)................. 5,435,639 40.9 4.5 2.5
320 Park Avenue, 25th Floor
New York, NY 10019
Anthony J. de Nicola(12)................ 2,838,925 21.5 2.3 1.3
320 Park Avenue, 25th Floor
New York, NY 10019
Timothy M. Murray(13)................... 887,916 6.7 0.7 0.4
222 West Adams Street
Chicago, Illinois 60606
Alan Winchester(14)..................... 640,000 4.6 0.5 0.3
8601 Six Forks Road
Suite 300
Raleigh, NC 27615
All current directors and executive 7,498,780 53.6 6.2 3.4
officers as a group (10
persons)(15)..........................
</TABLE>
- -------------------------
* Represents beneficial ownership of less than 1% of the Common Stock.
(1) Percentage of ownership is based on 13,210,513 shares of common stock
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
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with respect to all shares shown as beneficially owned by them, subject to
community property laws, where applicable.
(2) Percentage of ownership is 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 estimated 79,739,379 shares of Healtheon/WebMD common stock
outstanding following the MEDE AMERICA reorganization.
(3) Percentage of ownership is 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 (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 .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 estimated 143,536,528 shares of Healtheon/WebMD common stock
outstanding following all the reorganizations.
(4) 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, and warrants to purchase up to 67,240 shares of common
stock held by WCAS V. 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.
(5) 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, and warrants to purchase up to 16,810
shares of common stock held by Blair V. 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.
(6) Includes options to purchase up to 43,646 shares of common stock.
(7) Includes options to purchase up to 7,500 shares of common stock.
(8) Includes options to purchase up to 437 shares of common stock.
(9) Includes options to purchase up to 2,793 shares of common stock.
(10) Includes options to purchase up to 12,772 shares of common stock.
(11) 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
Info., 370,993 shares of common stock held by WCAS CP II, and warrants to
purchase up to 67,240 shares of common stock held by WCAS V. Mr. McInerney
disclaims beneficial ownership of such shares.
(12) Includes 2,462,851 shares of common stock held by WCAS VI and 370,993
shares of common stock held by WCAS CP II. Mr. de Nicola disclaims
beneficial ownership of such shares.
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(13) Includes 572,429 shares of common stock held by Blair V, 298,677 shares of
common stock held by Blair LCF, and warrants to purchase up to 16,810
shares of common stock held by Blair V. Mr. Murray disclaims beneficial
ownership of such shares.
(14) Includes warrants to purchase up to 625,000 shares of common stock held by
Medic Computer Systems, Inc. Mr. Winchester disclaims beneficial ownership
of such shares.
(15) Includes an aggregate of 776,198 shares subject to options and warrants
that may be exercised within 60 days after June 15, 1999. Also includes
shares as to which beneficial ownership is disclaimed as noted above.
ADDITIONAL MATTERS BEING SUBMITTED TO A
VOTE OF ONLY HEALTHEON STOCKHOLDERS
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 PLAN
General. The purpose of the 1996 Plan, or the "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 Plan. Options granted
under the Plan may be either "incentive stock options," as defined in Section
422 of the tax code, or nonstatutory stock options.
Administration. The 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 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 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.
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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.
(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 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 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 (10) 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 (5) 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 Plan expire on
the earlier of (1) the date set forth in his or her notice of grant or (2)
the expiration date of such option. To the extent the option is exercisable
at the time of such 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 Plan expire on the earlier of (1)
12 months from the date of such termination or (2) 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 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 Plan as may be
determined by the Administrator.
Stock Purchase Rights. In the case of SPRs, 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 Plan, the number and
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class of shares of stock subject to any option or stock purchase right
outstanding under the 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 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 Plan. The Board may amend, alter, suspend
or terminate the Plan, or any part thereof, at any time and for any reason.
However, Healtheon shall obtain shareholder approval for any amendment to the
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 Plan without the written consent of
the optionee. Unless terminated earlier, the 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
(1) the fair market value of the shares at the date of the option exercise or
(2) 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 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
249
<PAGE> 260
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 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 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 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.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Securities Exchange Act requires Healtheon's directors
and executive officers, and persons who own more than 10% of Healtheon's common
stock, to file with the Securities and Exchange Commission initial reports of
ownership on a Form 3 and reports of changes in ownership of common stock and
other equity securities of Healtheon on a Form 4 or Form 5. Officers, directors
and 10% stockholders are required by SEC regulations to furnish Healtheon with
copies of all Section 16(a) forms they file.
To Healtheon's knowledge, based solely on review of the copies of the
reports furnished to Healtheon and written representations from the executive
officers and directors, Healtheon believes that all Section 16(a) filing
requirements applicable to its officers, directors, and 10% stockholders were
met during 1998, except with respect to a late Form 4 filing by Thomas Jermoluk,
a director of Healtheon.
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
250
<PAGE> 261
statements are included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
The consolidated financial statements of 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.
STOCKHOLDER PROPOSALS
Under Rule 14a-8 of the Exchange Act, Healtheon stockholders may present
proper proposals for inclusion in Healtheon's proxy statement and for
consideration at the next annual meeting of its stockholders by submitting such
proposals to Healtheon in a timely manner. In order to be so included for
251
<PAGE> 262
the 1999 annual meeting, stockholder proposals must have been received by
Healtheon no later than , 1999, and must have otherwise complied
with the requirements of Rule 14a-8.
Under Rule 14a-8 of the Exchange Act, MEDE AMERICA stockholders may present
proper proposals for inclusion in MEDE AMERICA's proxy statement and for
consideration at the next annual meeting of its stockholders by submitting such
proposals to MEDE AMERICA in a timely manner. In order to be so included for the
1999 annual meeting, stockholder proposals must have been received by MEDE
AMERICA a reasonable time in advance of the meeting, and must have otherwise
complied with the requirements of Rule 14a-8.
252
<PAGE> 263
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>
We file reports, proxy statements and other information with the SEC.
Copies of our reports, proxy statements and other information may be inspected
and copied at the public reference facilities maintained by the SEC:
<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 SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549 or by calling the SEC at 1-800-SEC-0330. The SEC
maintains a website that contains reports, proxy statements and other
information regarding each of us. The address of the SEC website is
http://www.sec.gov.
Healtheon/WebMD has filed a registration statement under the Securities Act
with the SEC with respect to Healtheon/WebMD's common stock to be issued to
WebMD stockholders and MEDE AMERICA stockholders in the mergers. 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 SEC. 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 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 AND THE INFORMATION
CONTAINED IN THIS DOCUMENT WITH RESPECT TO MEDE AMERICA AND ITS SUBSIDIARIES WAS
PROVIDED BY MEDE AMERICA.
253
<PAGE> 264
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-51
Consolidated Balance Sheets............................... F-52
Consolidated Statements of Operations..................... F-53
Consolidated Statements of Stockholders' Equity
(Deficit).............................................. F-54
Consolidated Statements of Cash Flows..................... F-55
Notes to Consolidated Financial Statements................ F-56
DIRECT MEDICAL KNOWLEDGE, INC.:
Report of Independent Accountants......................... F-71
Balance Sheets............................................ F-74
Statements of Operations.................................. F-75
Statements of Changes in Shareholders' Equity............. F-76
Statements of Cash Flows.................................. F-77
Notes to Financial Statements............................. F-78
SAPIENT HEALTH NETWORK, INC.:
Independent Auditors' Report.............................. F-86
Balance Sheets............................................ F-87
Statements of Operations.................................. F-88
Statements of Shareholders' Deficit....................... F-89
Statements of Cash Flows.................................. F-90
Notes to Financial Statements............................. F-91
THE STOCKTON GROUP, INC.:
Independent Auditors' Report.............................. F-103
Statements of Income...................................... F-104
Notes to Financial Statement.............................. F-105
</TABLE>
F-1
<PAGE> 265
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
HEALTHCARE INTERCHANGE, INC.:
Independent Auditors' Report.............................. F-107
Consolidated Balance Sheets............................... F-108
Consolidated Statements of Operations..................... F-109
Consolidated Statements of Stockholders' Equity
(Deficit).............................................. F-110
Consolidated Statements of Cash Flows..................... F-111
Notes to Consolidated Financial Statements................ F-112
</TABLE>
F-2
<PAGE> 266
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> 267
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> 268
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> 269
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> 270
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> 271
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> 272
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> 273
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> 274
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> 275
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> 276
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> 277
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> 278
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> 279
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> 280
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> 281
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> 282
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> 283
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> 284
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> 285
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.
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
F-22
<PAGE> 286
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)
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 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.
F-23
<PAGE> 287
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)
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.
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.
F-24
<PAGE> 288
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)
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.
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
F-25
<PAGE> 289
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)
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. 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> 290
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> 291
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> 292
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> 293
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> 294
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> 295
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> 296
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> 297
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> 298
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> 299
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> 300
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> 301
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> 302
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 useful life of the content or
over the term of the content license agreement on a straight line basis.
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.
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
F-39
<PAGE> 303
WEBMD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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
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.
F-40
<PAGE> 304
WEBMD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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> 305
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> 306
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.
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.
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
F-43
<PAGE> 307
WEBMD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 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
F-44
<PAGE> 308
WEBMD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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.
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.
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 under certain circumstances, as defined in the Articles of Incorporation
on a five-for-one basis. The holders
F-45
<PAGE> 309
WEBMD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 under certain
circumstances, as defined in the Articles of Incorporation 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 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
F-46
<PAGE> 310
WEBMD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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
$(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.
F-47
<PAGE> 311
WEBMD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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> 312
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.
13. EVENTS SUBSEQUENT TO DECEMBER 31, 1998 -- UNAUDITED
Acquisitions
On January 22, 1999, the Company acquired Direct Medical Knowledge, Inc.
("DMK") for 494,018 shares of Series B preferred stock valued at $20 per share.
In addition, the Company converted existing DMK options and warrants into
options and warrants to acquire 181,323 shares of Series B preferred stock. At
closing, the Company forgave $300 of amounts owed by DMK to the Company which is
F-49
<PAGE> 313
WEBMD, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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") for 1,619,190 shares of Series B Preferred Stock valued at $20 per
share. In addition, the Company converted existing SHN options and warrants into
options and warrants to acquire 180,953 shares of Series B preferred stock. 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.
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.
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.
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-50
<PAGE> 314
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-51
<PAGE> 315
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-52
<PAGE> 316
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-53
<PAGE> 317
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-54
<PAGE> 318
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-55
<PAGE> 319
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-56
<PAGE> 320
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
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.
F-57
<PAGE> 321
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
F-58
<PAGE> 322
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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
F-59
<PAGE> 323
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
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>
F-60
<PAGE> 324
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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-61
<PAGE> 325
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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
F-62
<PAGE> 326
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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>
F-63
<PAGE> 327
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
F-64
<PAGE> 328
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
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>
F-65
<PAGE> 329
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
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
F-66
<PAGE> 330
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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
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<PAGE> 331
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. 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 Misys plc that develops and licenses software for
healthcare providers, principally physicians, MSOs and PPMs. 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 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 Processing Agreement is for a fixed term of five years, with
annual renewals thereafter (unless either party elects to terminate).
F-68
<PAGE> 332
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 Model and is
recorded in other assets. The Medic Warrant 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% 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"). Upon
F-69
<PAGE> 333
MEDE AMERICA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 July 30, 1999 (the "July 30 Price") and two days
prior to the date the Company's shareholders meet to authorize the merger (the
"Meeting Price"), is greater than $63.70 per share, the Company has the option
to adjust the Exchange Ratio to a ratio equal to $42 divided by the lower of the
July 30 Prices or the Meeting Price or, if the Company chooses not to exercise
such option, Healtheon can terminate the Merger Agreement. In the event that
either the July 30 Price or 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-70
<PAGE> 334
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-71
<PAGE> 335
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Direct Medical Knowledge, Inc.
We have audited the accompanying balance sheet of Direct Medical Knowledge,
Inc. (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.
As discussed in Note 1 (J) and Note 3, the Company previously recorded net
deferred tax assets due to net operating loss carryforwards from 1996 and 1995.
The Company has restated these financial statements to record a retroactive
valuation allowance against its net deferred tax assets. Additionally, the
Company is determined to be a development stage company. To reflect this change
in classification, the financial statements have been restated in accordance
with disclosure requirements for development stage companies.
/s/ BERG & COMPANY
San Francisco, California
February 7, 1997, except for Notes 8 and 9
as to which the date is January 16, 1999
F-72
<PAGE> 336
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-73
<PAGE> 337
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-74
<PAGE> 338
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-75
<PAGE> 339
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-76
<PAGE> 340
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-77
<PAGE> 341
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-78
<PAGE> 342
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-79
<PAGE> 343
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-80
<PAGE> 344
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-81
<PAGE> 345
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-82
<PAGE> 346
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-83
<PAGE> 347
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-84
<PAGE> 348
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-85
<PAGE> 349
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-86
<PAGE> 350
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-87
<PAGE> 351
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-88
<PAGE> 352
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-89
<PAGE> 353
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-90
<PAGE> 354
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-91
<PAGE> 355
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-92
<PAGE> 356
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-93
<PAGE> 357
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-94
<PAGE> 358
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-95
<PAGE> 359
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-96
<PAGE> 360
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-97
<PAGE> 361
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-98
<PAGE> 362
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-99
<PAGE> 363
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-100
<PAGE> 364
SAPIENT HEALTH NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1998
AND DECEMBER 31, 1998 (UNAUDITED)
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 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.
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.
F-101
<PAGE> 365
SAPIENT HEALTH NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997 AND 1998
AND DECEMBER 31, 1998 (UNAUDITED)
(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 will be 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-102
<PAGE> 366
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-103
<PAGE> 367
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-104
<PAGE> 368
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-105
<PAGE> 369
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-106
<PAGE> 370
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-107
<PAGE> 371
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-108
<PAGE> 372
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-109
<PAGE> 373
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-110
<PAGE> 374
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-111
<PAGE> 375
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-112
<PAGE> 376
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-113
<PAGE> 377
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-114
<PAGE> 378
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-115
<PAGE> 379
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-116
<PAGE> 380
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-117
<PAGE> 381
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>
F-118
<PAGE> 382
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-119
<PAGE> 383
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-120
<PAGE> 384
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> 385
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>
-II-
<PAGE> 386
<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> 387
<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> 388
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> 389
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> 390
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> 391
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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(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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(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 out standing 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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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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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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(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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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:
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WEBMD, INC.
By:
---------------------------------------
Name:
-------------------------------------
Title:
--------------------------------------
**** REORGANIZATION AGREEMENT ****
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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> 440
TABLE OF CONTENTS
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ARTICLE I THE MERGER............................................... 1
1.1 The Merger.................................................. 1
1.2 Effective Time; Closing..................................... 1
1,3 Effect of the Merger........................................ 2
1.4 Certificate of Incorporation; Bylaws........................ 2
1.5 Directors and Officers...................................... 2
1.6 Effect on Capital Stock..................................... 2
1.7 Surrender of Certificates................................... 4
1.8 No Further Ownership Rights in Company Common Stock......... 5
1.9 Lost, Stolen or Destroyed Certificates...................... 5
1.10 Tax Consequences............................................ 5
1.11 Taking of Necessary Action; Further Action.................. 5
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY........... 5
2.1 Organization of the Company................................. 6
2.2 Company Capital Structure................................... 6
2.3 Obligations With Respect to Capital Stock................... 7
2.4 Authority; Non-Contravention................................ 8
2.5 SEC Filings; Company Financial Statements................... 9
2.6 Absence of Certain Changes or Events........................ 9
2.7 Taxes....................................................... 10
2.8 Title to Properties; Absence of Liens and Encumbrances...... 11
2.9 Intellectual Property....................................... 12
2.10 Compliance; Permits; Restrictions........................... 14
2.11 Litigation.................................................. 14
2.12 Brokers' and Finders' Fees.................................. 15
2.13 Transactions with Affiliates................................ 15
2.14 Employee Benefit Plans...................................... 15
2.15 Environmental Matters....................................... 18
2.16 Year 2000 Compliance........................................ 18
2.17 Agreements, Contracts and Commitments....................... 18
2.18 Change of Control Payments.................................. 20
2.19 Disclosure.................................................. 20
2.20 Board Approval.............................................. 20
2.21 Opinion of Financial Advisor................................ 20
2.22 Restrictions on Business Activities......................... 20
2.23 Insurance................................................... 20
2.24 State Takeover Statutes..................................... 20
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER 21
SUB...............................................................
3.1 Organization of Parent...................................... 21
3.2 Parent Capital Structure.................................... 21
3.3 Obligations With Respect to Capital Stock................... 22
3.4 Authority; Non-Contravention................................ 22
3.5 SEC Filings; Parent Financial Statements.................... 23
3.6 Absence of Certain Changes or Events........................ 24
3.7 Taxes....................................................... 24
3.8 Title to Properties; Absence of Liens and Encumbrances...... 25
3.9 Intellectual Property....................................... 25
3.10 Compliance; Permits; Restrictions........................... 26
3.11 Litigation.................................................. 27
3.12 Brokers' and Finders' Fees.................................. 27
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<TABLE>
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<S> <C> <C>
3.13 Environmental Matters....................................... 27
3.14 Year 2000 Compliance........................................ 27
3.15 Agreements, Contracts and Commitments....................... 28
3.16 Disclosure.................................................. 28
3.17 Board Approval.............................................. 28
3.18 Fairness Opinion............................................ 28
3.19 Organization of Merger Sub.................................. 28
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME..................... 28
4.1 Conduct of Business by the Company.......................... 28
4.2 Conduct of Business by Parent............................... 30
ARTICLE V ADDITIONAL AGREEMENTS.................................... 30
5.1 Prospectus/Proxy Statement; Registration Statement; Other
Filings; Board Recommendations.............................. 30
5.2 Meeting of Company Stockholders............................. 31
5.3 Confidentiality; Access to Information...................... 33
5.4 No Solicitation............................................. 33
5.5 Public Disclosure........................................... 34
5.6 Reasonable Efforts; Notification............................ 34
5.7 Third Party Consents........................................ 35
5.8 Stock Options; Warrants and Employee Benefits............... 35
5.9 Form S-8.................................................... 36
5.10 Indemnification............................................. 36
5.11 Nasdaq Listing.............................................. 37
5.12 Acceleration of Employee Stock Option Vesting............... 37
5.13 FIRPTA Compliance........................................... 37
5.14 Board of Directors.......................................... 37
5.15 Company Affiliates; Restrictive Legend...................... 37
ARTICLE VI CONDITIONS TO THE MERGER................................ 38
6.1 Conditions to Obligations of Each Party to Effect the
Merger...................................................... 38
6.2 Additional Conditions to Obligations of the Company......... 38
6.3 Additional Conditions to the Obligations of Parent and
Merger Sub.................................................. 39
ARTICLE VII TERMINATION, AMENDMENT AND WAIVER...................... 39
7.1 Termination................................................. 39
7.2 Notice of Termination; Effect of Termination................ 41
7.3 Fees and Expenses........................................... 41
7.4 Amendment................................................... 42
7.5 Extension; Waiver........................................... 42
ARTICLE VIII GENERAL PROVISIONS.................................... 42
8.1 Non-Survival of Representations and Warranties.............. 42
8.2 Notices..................................................... 42
8.3 Interpretation; Knowledge................................... 43
8.4 Counterparts................................................ 43
8.5 Entire Agreement; Third Party Beneficiaries................. 43
8.6 Severability................................................ 44
8.7 Other Remedies; Specific Performance........................ 44
8.8 Governing Law............................................... 44
8.9 Rules of Construction....................................... 44
8.10 Assignment.................................................. 44
8.11 WAIVER OF JURY TRIAL........................................ 44
</TABLE>
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INDEX OF EXHIBITS
Exhibit A Company Voting Agreement
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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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(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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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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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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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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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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(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> 486
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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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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[LETTERHEAD OF MORGAN STANLEY & CO. INCORPORATED]
ANNEX C
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> 489
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> 490
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> 491
ANNEX D
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> 492
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> 493
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> 494
ANNEX E
[LETTERHEAD OF SALOMON SMITH BARNEY INC.]
April 20, 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 (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 or more than $63.70.
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
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. Our
opinion, as set forth herein, relates to the relative values of MedE
<PAGE> 495
The Board of Directors
MedE America Corporation
April 20, 1999
Page 2
America and Healtheon. We are not expressing any opinion as to what the value of
the Healtheon Common Stock actually will be when issued to MedE America
stockholders pursuant to the Merger or the price at which the Healtheon 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 also will receive a fee upon the delivery of this opinion. 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,
/s/ Salomon Smith Barney Inc.
SALOMON SMITH BARNEY INC.
<PAGE> 496
ANNEX F
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> 497
(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> 498
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> 499
(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> 500
(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> 501
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> 502
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 Healtheon/WebMD Corporation,
Healtheon Corporation, WebMD, Inc., Water Acquisition Corp.
and Hydrogen Acquisition Corp. .............................
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..........................
2.3+ Agreement and Plan of Reorganization, dated as of February
24, 1998, by the Registrant, MedNet Acquisition Corp. and
ActaMed Corporation.........................................
2.4+ 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.........................................
2.5+ Asset Purchase Agreement, dated June 25, 1998, among the
Registrant, Metis Acquisition Corp and Metis, LLC...........
3.2** Certificate of Incorporation of the Registrant..............
3.4** Bylaws of the Registrant, as currently in effect............
3.5** Bylaws of Registrant, to be effective upon completion of the
Healtheon-WebMD reorganization or Healtheon-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.....................................................
10.1+ Form of Indemnification Agreement to be entered into by the
Registrant with each of its directors and officers..........
10.2+ 1996 Stock Plan and form of Stock Option Agreement
thereunder..................................................
10.3+ ActaMed Corp. 1997 Stock Option Plan........................
10.4+ ActaMed Corp. 1996 Stock Option Plan........................
10.5+ ActaMed Corp. 1995 Stock Option Plan........................
10.6+ ActaMed Corp. 1994 Stock Option Plan........................
</TABLE>
II-1
<PAGE> 503
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NUMBER
- -------- ----------- -----------
<C> <S> <C>
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+ 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. .......................................................
</TABLE>
II-2
<PAGE> 504
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NUMBER
- -------- ----------- -----------
<C> <S> <C>
10.33*,** Agreement, dated May , 1999, between the Registrant and
Microsoft Corporation
15.1+ [Letter re Unaudited Interim Financial Information].........
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)................................
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.
+ 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
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
II-3
<PAGE> 505
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.
II-4
<PAGE> 506
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THE 17TH DAY OF JUNE
1999.
HEALTHEON CORPORATION
By: /s/ W. MICHAEL LONG
------------------------------------
W. Michael Long
Sole Director and Chief Operating
Officer
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that the person whose signature
appears below constitutes and appoints Jack Dennison and John L. Westermann III
and each of them, jointly and severally, as his attorneys-in-fact, each with
full power of substitution for him in any and all capacities, to sign any and
all amendments to this Registration Statement, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each said attorneys-in-fact or his substitute or substitutes, may do or cause to
be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ JEFFREY T. ARNOLD Chief Executive Officer June 17, 1999
- -------------------------------------- (principal executive officer)
(Jeffrey T. Arnold)
/s/ W. MICHAEL LONG Sole Director and Chief Operating June 17, 1999
- -------------------------------------- Officer (principal financial and
(W. Michael Long) accounting officer)
</TABLE>
II-5
<PAGE> 507
<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 Healtheon/WebMD Corporation,
Healtheon Corporation, WebMD, Inc., Water Acquisition Corp.
and Hydrogen Acquisition Corp.
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.
2.3+ Agreement and Plan of Reorganization, dated as of February
24, 1998, by the Registrant, MedNet Acquisition Corp. and
ActaMed Corporation.
2.4+ 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.
2.5+ Asset Purchase Agreement, dated June 25, 1998, among the
Registrant, Metis Acquisition Corp. and Metis, LLC.
3.2** Certificate of Incorporation of the Registrant.
3.4** Bylaws of the Registrant, as currently in effect
3.5** Bylaws of Registrant, to be effective upon completion of the
Healtheon-WebMD reorganization or Healtheon-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 Neslson Mullins Riley & Scarborough, L.L.P.
8.3** Tax Opinion of Reboul, MacMurray, Hewitt, Maynard & Kristol
10.1+ Form of Indemnification Agreement to be entered into by the
Registrant with each of its directors and officers
10.2+ 1996 Stock Plan and form of Stock Option Agreement
thereunder
10.3+ ActaMed Corp. 1997 Stock Option Plan
10.4+ ActaMed Corp. 1996 Stock Option Plan
10.5+ ActaMed Corp. 1995 Stock Option Plan
10.6+ ActaMed Corp. 1994 Stock Option Plan
10.7+ ActaMed Corp. 1993 Class B Common Stock Option Plan
10.8+ ActaMed Corp. 1992 Stock Option Plan
10.9+ ActaMed Corp. 1996 Director Stock Option Plan, as amended
10.10+ Amended and Restated Investors' Rights Agreement dated as of
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
</TABLE>
<PAGE> 508
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
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+ 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 , 1999, between the Registrant and
Microsoft Corporation
15.1+ [Letter re Unaudited Interim Financial Information]
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).
24.1 Power of Attorney (see page II- )
</TABLE>
- ---------------
* Confidential treatment was received with respect to certain portions of this
document.
** To be filed by amendment.
+ 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 5.1
June 16, 1999
Healtheon/WebMD Corporation
4600 Patrick Henry Drive
Santa Clara, CA 95054
RE: REGISTRATION STATEMENT ON FORM S-4
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-4 to be filed by you
with the Securities and Exchange Commission on or about June 17, 1999 (the
"Registration Statement") in connection with the registration under the
Securities Act of 1933, as amended, of 190,597,448 shares of your Series A
Common Stock (the "Shares"). As your legal counsel in connection with this
transaction, we have examined the proceedings taken and are familiar with the
proceedings proposed to be taken by you in connection with the issuance of the
Shares pursuant to the acquisition transaction set forth and described in the
Registration Statement.
It is our opinion that, when issued in the manner described in the
Registration Statement, the Shares will be legally and validly issued,
fully-paid and non-assessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name whenever appearing in the
Registration Statement and any amendments thereto.
Very truly yours,
--------------------------------
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE> 1
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.
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.
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.
KPMG LLP
St. Louis, Missouri
June 16, 1999
<PAGE> 1
Exhibit 23.10
BERG & COMPANY LLP
Consultants & Certified Public Accountants
260 California Street, Ninth Floor
San Francisco, California 94111
Phone 415.399.1330
Fax 415.399.9212
June 15, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Gentlemen:
We have read the disclosure captioned "Change in independent Accountants" in the
Registration statement on Form S-4 filed with the Securities and Exchange
Commission on or about June 17, 1999 of Healtheon/WebMD Corporation and agree
with the statements contained in the disclosure therein. We have no basis to
agree or disagree with other statements of the registrant contained therein.
/s/ BERG & COMPANY, LLP
Berg & Company, LLP
