-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MhlQvQAO2Ee6mg5gWry/3F4bAAECbMM5DGcamTw7QDpaXSF93BCzOPMeM2g4xVkU nlQmJjw+9ooniHVi/G15fQ== 0000950144-99-011580.txt : 20000211 0000950144-99-011580.hdr.sgml : 20000211 ACCESSION NUMBER: 0000950144-99-011580 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 22 FILED AS OF DATE: 19990930 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEALTHEON CORP CENTRAL INDEX KEY: 0001009575 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 943236644 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-86685 FILM NUMBER: 99720848 BUSINESS ADDRESS: STREET 1: 4600 PATRICK HENY DRIVE CITY: SANTA CLARA STATE: CA ZIP: 95054 BUSINESS PHONE: 4088765000 MAIL ADDRESS: STREET 1: 4600 PATRICK HENY DRIVE CITY: SANTA CLARA STATE: CA ZIP: 95054 S-4/A 1 HEALTHEON CORPORATION 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 30, 1999 REGISTRATION NO. 333-86685 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- AMENDMENT NO. 1 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ HEALTHEON CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 7372 94-323664 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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) W. MICHAEL LONG CHIEF EXECUTIVE OFFICER HEALTHEON CORPORATION 4600 PATRICK HENRY DRIVE SANTA CLARA, CALIFORNIA 95054 (408) 876-5000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: LARRY W. SONSINI, ESQ. H. BRYAN IVES III, ESQ. MARK J. TANNENBAUM, ESQ. WILLIAM G. ROCHE, ESQ. MARTIN W. KORMAN, ESQ. C. MARK KELLY, ESQ. REBOUL, MACMURRAY, STACEY K. GEER, ESQ. DANIEL R. MITZ, ESQ. CATHERINE L. AMSPACHER, ESQ. HEWITT, KING & SPALDING MARK L. REINSTRA, ESQ. NELSON MULLINS RILEY & SCARBOROUGH, MAYNARD & KRISTOL 191 PEACHTREE STREET WILSON SONSINI GOODRICH & L.L.P. 45 ROCKEFELLER PLAZA ATLANTA, GA 30303 ROSATI BANK OF AMERICA CORPORATE CENTER NEW YORK, NY 10111 (404) 572-4600 PROFESSIONAL CORPORATION SUITE 2600 (212) 841-5700 650 PAGE MILL ROAD 100 NORTH TRYON STREET PALO ALTO, CA 94304 CHARLOTTE, NC 28202-4000 (650) 493-9300 (704) 417-3000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: Upon consummation of the WebMD merger 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 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TO BE REGISTERED REGISTERED OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION FEE SHARE PRICE - ---------------------------------------------------------------------------------------------------------------------------------- Common Stock $0.0001 par value(1).... 109,198,304 shares not applicable $ 119,396,546(2) (3) - ---------------------------------------------------------------------------------------------------------------------------------- Common Stock $0.0001 par value(4).... 9,852,950 shares not applicable $ 478,226,051(5) (3) - ---------------------------------------------------------------------------------------------------------------------------------- Common Stock $0.0001 par value(6).... 2,621,676 shares not applicable $ 8,553,622(7) (3) - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
(1) 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. (2) Pursuant to Rule 457(f)(2) under the Securities Act of 1933, as amended (the "Act"), the maximum aggregate offering price has been calculated based on the book value of WebMD as of April 30, 1999. (3) A filing fee of $1,862,901 has previously been paid by Healtheon/WebMD Corporation (Registration No. 333-80863). (4) 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. (5) 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. (6) Represents the number of shares of the Common Stock of the Registrant which may be issued to stockholders of Greenberg News Networks, Inc., a Delaware corporation, pursuant to the transactions described herein. (7) Pursuant to Rule 457(f)(2) under the Act, the maximum aggregate offering price has been calculated based on the book value of Greenberg News as of June 30, 1999. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 HEALTHEON LOGO ------------------------- NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD , 1999 AT 8:00 A.M. To Our Stockholders: An annual 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 8:00 a.m., Pacific time, for the following purposes: 1. To approve the issuance of 1.796 shares of Healtheon common stock for each share of outstanding WebMD, Inc. common stock in the merger of a wholly owned subsidiary of Healtheon/WebMD with and into WebMD. Following the merger and assuming the completion of the proposed acquisitions of MEDE AMERICA Corporation and Greenberg News Network, Inc., which is referred to as Medcast, Healtheon stockholders will own approximately 49.0%, WebMD stockholders will own approximately 43.3%, MEDE AMERICA stockholders will own approximately 6.0% and Medcast stockholders will own approximately 1.7% of Healtheon/WebMD. 2. To consider and vote upon a proposal to amend Healtheon's certificate of incorporation, if the WebMD merger is completed, to (a) change the corporate name of Healtheon to Healtheon/WebMD Corporation and (b) increase the authorized number of shares of common stock from 150,000,000 shares to 600,000,000 shares. 3. To elect three Class I directors of Healtheon, each to serve a three-year term, or until his or her successor has been elected and qualified or until his or her earlier resignation or removal. 4. To amend Healtheon's bylaws to (a) provide that directors may be removed only with cause and (b) modify the advance notice provisions for board nominations and other stockholder proposals. 5. To amend Healtheon's 1996 stock plan, if the WebMD merger 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. 6. To amend Healtheon's 1998 employee stock purchase plan to (a) increase the number of shares of common stock reserved under the plan by 1,000,000 and (b) change the formula for annually increasing the number of shares available to be issued under the plan. 7. 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 merger 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. 3 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 merger agreement with Healtheon Corporation and approve a merger that will cause WebMD to become a wholly owned subsidiary of Healtheon, which will change its corporate name to Healtheon/WebMD Corporation upon completion of the WebMD merger. In the WebMD merger, Healtheon will issue 1.796 shares of its common stock for each outstanding share of WebMD common stock after conversion of all outstanding WebMD preferred stock. Following the merger and assuming Healtheon's completion of the proposed acquisitions of MEDE AMERICA Corporation and Greenberg News Networks, Inc., which is referred to as Medcast, Healtheon stockholders will own approximately 49.0%, WebMD stockholders will own approximately 43.3%, MEDE AMERICA stockholders will own approximately 6.0% and Medcast stockholders will own approximately 1.7% of the combined company. 2. Consider and vote on a proposal to approve the acceleration of vesting provisions in stock options held by some WebMD employees as a result of the completion of the merger so that WebMD will be able to deduct compensation expense relating to these options. 3. Transact any other business that properly comes before the special meeting or any adjournments or postponements thereof. The accompanying proxy statement/prospectus describes the merger agreement and the proposed mergers 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. 4 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 merger agreement with Healtheon Corporation and approve a merger that will cause MEDE AMERICA to become a wholly owned subsidiary of Healtheon, which will change its corporate name to Healtheon/WebMD Corporation upon completion of the WebMD merger. In the MEDE AMERICA merger, Healtheon will issue 0.6593 shares of Healtheon/WebMD common stock for each outstanding share of MEDE AMERICA common stock unless the exchange ratio is adjusted as described in the attached proxy statement/prospectus. Following the merger and Healtheon's completion of the proposed acquisitions of WebMD, Inc. and Greenberg News Networks, Inc., which is referred to as Medcast, MEDE AMERICA stockholders will own approximately 6.0%, Healtheon stockholders will own approximately 49.0%, WebMD stockholders will own approximately 43.3% and Medcast stockholders will own approximately 1.7% of the combined company. 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 merger agreement and the proposed mergers 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. 5 [MEDCAST LOGO] [GREENBERG NEWS LOGO] 1175 PEACHTREE STREET, SUITE 2400 ATLANTA, GEORGIA 30361 ------------------------ NOTICE OF SPECIAL MEETING OF STOCKHOLDERS ------------------------ To Our Stockholders: A special meeting of stockholders of Greenberg News Networks, Inc., which is referred to as Medcast, will be held at 8:00 a.m., Eastern time, on , 1999, at the offices of King & Spalding, located at 191 Peachtree Street, Atlanta, Georgia, to: 1. Consider and vote on a proposal to approve and adopt a merger agreement and approve a merger that will cause Medcast to become a wholly owned subsidiary of Healtheon, which will change its corporate name to Healtheon/WebMD Corporation upon completion of the WebMD merger. In the Medcast merger, Healtheon will issue between 0.5385 and 0.5483 of a share of its common stock for each outstanding share of Medcast common stock, after conversion of all outstanding shares of Medcast preferred stock. The exchange ratio is based on a formula that is described in the attached proxy statement/prospectus. Following the merger and assuming Healtheon's completion of the proposed acquisitions of WebMD, Inc. and MEDE AMERICA Corporation, Medcast stockholders will own approximately 1.7%, Healtheon stockholders will own approximately 43.3%, WebMD stockholders will own approximately 49.0% and MEDE AMERICA stockholders will own approximately 6.0% of the combined company. 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 merger agreement and the proposed mergers in more detail. We encourage you to read the entire document carefully. We have fixed the close of business on , 1999 as the record date for the determination of our stockholders entitled to vote at this meeting. By Order of the Board of Directors of Greenberg News Networks, Inc. Gordon T. Wyatt Chief Financial Officer and Corporate Secretary Atlanta, Georgia , 1999 TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE MEETING, PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE POSTAGE PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING. YOU MAY REVOKE YOUR PROXY AT ANY TIME BEFORE IT IS VOTED. 6 THE INFORMATION IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. HEALTHEON CORPORATION MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS JOINT PROXY STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION DATED SEPTEMBER , 1999 PROXY STATEMENT/PROSPECTUS HEALTHEON CORPORATION WEBMD, INC. MEDE AMERICA CORPORATION GREENBERG NEWS NETWORKS, INC. (MEDCAST) PROPOSED MERGERS The boards of directors of Healtheon Corporation and WebMD, Inc. have approved a merger agreement pursuant to which WebMD will merge with a subsidiary of Healtheon. Upon completion of the merger, Healtheon will change its corporate name to Healtheon/WebMD Corporation, WebMD will become a wholly owned subsidiary of Healtheon/WebMD, and WebMD stockholders will receive 1.796 shares of Healtheon/ WebMD common stock for each share of capital stock held by them, after conversion of all outstanding shares of WebMD preferred stock. This proxy statement/prospectus refers to Healtheon upon completion of the WebMD merger as Healtheon/WebMD and to its common stock upon completion of the WebMD merger as Healtheon/WebMD common stock. The boards of directors of Healtheon and MEDE AMERICA Corporation have approved a merger agreement pursuant to which MEDE AMERICA will merge with a second subsidiary of Healtheon resulting in MEDE AMERICA becoming a wholly owned subsidiary of Healtheon. Upon completion of the merger, MEDE AMERICA stockholders will receive 0.6593 shares of Healtheon/WebMD for each share of MEDE AMERICA held by them. Please note that this exchange ratio could increase if Healtheon's average common stock price is below $38.68 during the ten-day period ending two business days before the MedE AMERICA meeting and Healtheon agrees to modify the exchange ratio. The boards of directors of Healtheon, WebMD and Greenberg News Networks, Inc., which is referred to as Medcast, have approved a merger agreement pursuant to which Medcast will merge with a third subsidiary of Healtheon, resulting in Medcast becoming a wholly owned subsidiary of Healtheon/WebMD. Upon completion of the merger, Medcast stockholders will receive between 0.5385 and 0.5483 of a share of Healtheon/WebMD common stock for each share of Medcast common stock, after conversion of all outstanding shares of Medcast preferred stock. The WebMD merger and the MEDE AMERICA merger are independent of one another. The Medcast merger with Healtheon, however, is dependent on the WebMD merger, but is not dependent on the MEDE AMERICA merger. Consequently, there are five possible outcomes for these transactions which are described in this proxy statement/prospectus: - Healtheon and WebMD - Healtheon, WebMD and MEDE AMERICA - Healtheon, WebMD, MEDE AMERICA and Medcast - Healtheon and MEDE AMERICA - Healtheon, WebMD and Medcast The Unaudited Pro Forma Condensed Combined Financial Information beginning on page 142 illustrates each of these possible outcomes. Additional information about the possible combination of the businesses of Healtheon and WebMD can be found by reading the sections entitled "Information Regarding Healtheon" and "Information Regarding WebMD" beginning on pages 194 and 236, respectively. Additional information about the possible combination of the businesses of Healtheon, WebMD and MEDE AMERICA can be found by reading the sections referred to above together with the section entitled "Information Regarding MEDE AMERICA" beginning on page 269. Additional information about the possible combination of the businesses of Healtheon, WebMD, MEDE AMERICA and Medcast can be found by reading the sections referred to above together with the section entitled "Information Regarding Medcast" beginning on page 297. Additional information regarding the possible combination of the businesses of Healtheon and MEDE AMERICA can be found by reading the information regarding those businesses beginning on pages 194 and 269 and information regarding the possible combination of the businesses of Healtheon, WebMD and Medcast can be found by reading the information regarding those businesses beginning on pages 194, 236 and 297. This proxy statement/prospectus is also the prospectus of Healtheon regarding its common stock to be issued to stockholders of WebMD, MEDE AMERICA and Medcast in exchange for their shares in connection with the mergers. The shares to be issued in connection with the mergers or upon the exercise of converted options will be listed, subject to official notice of issuance, on the Nasdaq National Market under the symbol "HLTH." NEITHER THE SECURITIES AND EXCHANGE COMMISSION, NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROXY STATEMENT/ PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. 7 PROXY STATEMENT/PROSPECTUS TABLE OF CONTENTS
PAGE ---- QUESTIONS AND ANSWERS FOR HEALTHEON AND WEBMD STOCKHOLDERS.............................................. 1 QUESTIONS AND ANSWERS FOR MEDE AMERICA STOCKHOLDERS......... 4 QUESTIONS AND ANSWERS FOR MEDCAST STOCKHOLDERS.............. 7 SUMMARY OF THE PROXY STATEMENT/PROSPECTUS................... 9 The companies............................................. 9 Structure of the mergers.................................. 11 Summary of the WebMD merger............................... 12 Summary of the MEDE AMERICA merger........................ 16 Summary of the Medcast merger............................. 20 Selected historical and selected unaudited pro forma condensed combined financial data...................... 23 Comparative historical and unaudited pro forma per share data................................................... 27 RISK FACTORS................................................ 29 THE HEALTHEON MEETING....................................... 43 THE WEBMD MEETING........................................... 46 THE MEDE AMERICA MEETING.................................... 49 THE MEDCAST MEETING......................................... 51 THE WEBMD MERGER............................................ 54 Background of the WebMD merger and related agreements..... 54 Joint reasons for the WebMD merger........................ 57 Healtheon's reasons for the WebMD merger.................. 58 Recommendation of Healtheon's board of directors.......... 59 WebMD's reasons for the WebMD merger...................... 59 Recommendation of WebMD's board of directors.............. 61 Opinion of Healtheon's financial advisor.................. 61 Opinion of WebMD's financial advisor...................... 67 Modification of vesting of employee stock options......... 74 Interests of directors, officers and affiliates in the WebMD merger........................................... 74 Completion and effectiveness of the WebMD merger.......... 75 Structure of the WebMD merger and conversion of WebMD common stock and preferred stock....................... 75 Healtheon/WebMD's strategic alliances with and investments from Microsoft and other partners...................... 75 Exchange of WebMD stock certificates for Healtheon/WebMD stock certificates..................................... 77 No dividends.............................................. 77 Material U.S. federal income tax considerations of the WebMD merger........................................... 78 Accounting treatment of the WebMD merger.................. 80 Regulatory filings and approvals required to complete the WebMD merger........................................... 80 Restrictions on sales of shares by affiliates of WebMD and Healtheon.............................................. 80 Listing on the Nasdaq National Market of Healtheon/WebMD common stock to be issued in WebMD merger.............. 80 Operations after the WebMD merger......................... 81 Rights of dissenting WebMD stockholders................... 81
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PAGE ---- THE WEBMD MERGER AGREEMENT.................................. 84 WEBMD RELATED TRANSACTION AGREEMENTS........................ 90 WebMD stockholders' voting agreement and conversion agreement.............................................. 90 Healtheon stockholders' voting agreement.................. 91 Microsoft shareholder agreement........................... 91 McKessonHBOC agreement.................................... 91 THE MEDE AMERICA MERGER..................................... 93 Background of the MEDE AMERICA merger..................... 93 Joint reasons for the MEDE AMERICA merger................. 95 MEDE AMERICA's reasons for the MEDE AMERICA merger........ 96 Recommendation of MEDE AMERICA's board of directors....... 97 Opinion of MEDE AMERICA's financial advisor............... 98 Interests of directors, officers and affiliates in the MEDE AMERICA merger.................................... 103 Completion and effectiveness of the MEDE AMERICA merger... 104 Structure of the MEDE AMERICA merger and conversion of MEDE AMERICA common stock.............................. 104 Exchange of MEDE AMERICA stock certificates for Healtheon/WebMD stock certificates..................... 105 Material U.S. federal income tax considerations of the MEDE AMERICA merger.................................... 105 Accounting treatment of the MEDE AMERICA merger........... 107 Regulatory filings and approvals required to complete the MEDE AMERICA merger.................................... 107 Restrictions on sales of shares by affiliates of MEDE AMERICA and Healtheon.................................. 108 Listing on the Nasdaq National Market of Healtheon common stock to be issued in the MEDE AMERICA merger.......... 108 Delisting and deregistration of MEDE AMERICA common stock after the MEDE AMERICA merger.......................... 108 Operations after the MEDE AMERICA merger.................. 108 THE MEDE AMERICA MERGER AGREEMENT........................... 109 MEDE AMERICA RELATED TRANSACTION AGREEMENTS................. 116 MEDE AMERICA voting agreement............................. 116 MEDE AMERICA registration rights agreement................ 116 THE MEDCAST MERGER.......................................... 117 Background of the Medcast merger.......................... 117 Joint reasons for the Medcast merger...................... 118 Medcast's reasons for the Medcast merger.................. 119 Recommendation of Medcast's board of directors............ 120 Opinion of Medcast's financial advisor.................... 120 Interests of directors, officers and affiliates in the Medcast merger......................................... 123 Completion and effectiveness of the Medcast merger........ 124 Structure of the Medcast merger and conversion of Medcast capital stock.......................................... 124 Adjustment to preferred stock conversion ratios........... 125 Purchase price adjustment................................. 125 The exchange ratio........................................ 126 Exchange of Medcast stock certificates for Healtheon/WebMD stock certificates..................................... 126
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PAGE ---- Material U.S. federal income tax considerations of the Medcast merger......................................... 127 Accounting treatment of the Medcast merger................ 129 Regulatory filings and approvals required to complete the Medcast merger......................................... 129 Restrictions on sales of shares by affiliates of Medcast and Healtheon/WebMD.................................... 129 Listing on the Nasdaq National Market of Healtheon/WebMD common stock to be issued in the Medcast merger........ 129 Operations after the Medcast merger....................... 130 Rights of dissenting Medcast stockholders................. 130 THE MEDCAST MERGER AGREEMENT................................ 133 MEDCAST VOTING AGREEMENTS................................... 140 COMPARATIVE PER SHARE MARKET PRICE DATA..................... 141 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION............................................... 142 COMPARISON OF RIGHTS OF HOLDERS OF HEALTHEON/WEBMD COMMON STOCK, WEBMD CAPITAL STOCK, MEDE AMERICA COMMON STOCK AND MEDCAST CAPITAL STOCK..................................... 175 INFORMATION REGARDING HEALTHEON............................. 194 Healtheon's business...................................... 194 Market for Healtheon's common stock and related stockholder matters.................................... 203 Healtheon selected consolidated financial data............ 205 Healtheon management's discussion and analysis of financial condition and results of operations.......... 206 Healtheon's management.................................... 217 Healtheon's related party transactions.................... 229 Share ownership by Healtheon's principal stockholders, management and directors............................... 232 INFORMATION REGARDING WEBMD................................. 236 WebMD's business.......................................... 236 WebMD selected consolidated financial data................ 247 WebMD management's discussion and analysis of financial condition and results of operations.................... 248 WebMD's management........................................ 257 WebMD's related party transactions........................ 263 Share ownership by WebMD's principal stockholders, management and directors............................... 266 INFORMATION REGARDING MEDE AMERICA.......................... 269 MEDE AMERICA's business................................... 269 MEDE AMERICA selected consolidated financial data......... 277 MEDE AMERICA management's discussion and analysis of financial condition and results of operations.......... 279 Share ownership by MEDE AMERICA's principal stockholders, management and directors............................... 294 INFORMATION REGARDING MEDCAST............................... 297 Medcast's business........................................ 297 Medcast's selected financial data......................... 304 Medcast management's discussion and analysis of financial condition and results of operations.................... 305 Share ownership by Medcast's principal stockholders, management and directors............................... 311 ADDITIONAL MATTERS BEING SUBMITTED TO A VOTE OF ONLY HEALTHEON STOCKHOLDERS.................................... 314
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PAGE ---- LEGAL OPINION............................................... 323 EXPERTS..................................................... 326 WHERE YOU CAN FIND MORE INFORMATION......................... 328
ANNEX A The WebMD Merger Agreement, as amended ANNEX B The MEDE AMERICA Merger Agreement, as amended ANNEX C The Medcast Merger Agreement ANNEX D Opinion of Healtheon Financial Advisor ANNEX E Opinion of WebMD Financial Advisor ANNEX F Opinion of MEDE AMERICA Financial Advisor ANNEX G Opinion of Medcast Financial Advisor ANNEX H Georgia Business Corporation Code Sections 14-2-1301 through 14-2-1332 ANNEX I Delaware General Corporation Law Section 262
iv 11 QUESTIONS AND ANSWERS FOR HEALTHEON AND WEBMD STOCKHOLDERS Q: WHAT IS THE WEBMD MERGER? A: The boards of directors of Healtheon and WebMD have voted to combine the businesses of Healtheon and WebMD. To combine the companies, WebMD will merge with a subsidiary of Healtheon and Healtheon will change its corporate name to Healtheon/WebMD Corporation, resulting in WebMD becoming a wholly owned subsidiary of Healtheon/ WebMD. (See diagrams on page 11). After the WebMD merger, assuming completion of the proposed combinations of Healtheon/WebMD with each of MEDE AMERICA and Medcast, which are discussed further below, the stockholders of Healtheon will own approximately 49.0%, the former stockholders of WebMD will own approximately 43.3%, the former stockholders of MEDE AMERICA will own approximately 6.0% and the former stockholders of Medcast will own approximately 1.7% of Healtheon/ WebMD. For a more complete description of the WebMD merger, see the section entitled "The WebMD merger" on page 54. Q: WHAT WILL WEBMD COMMON STOCKHOLDERS RECEIVE IN THE MERGER? A: When the WebMD merger is completed, holders of each series of WebMD common stock will receive 1.796 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 merger the stockholder will receive 179 shares of Healtheon/WebMD common stock and a check for the market value of the 0.6 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 merger. For a more complete description of what WebMD stockholders will receive in the WebMD merger, see the section entitled "Structure of the WebMD merger and conversion of WebMD common stock and preferred stock" on page 75. Q: WHAT WILL WEBMD PREFERRED STOCKHOLDERS RECEIVE IN THE MERGER? A. This depends on when the holders of WebMD's preferred stock elect to convert their shares into WebMD common stock: - Those WebMD preferred stockholders who convert before the record date for the WebMD stockholders meeting will receive 1.796 shares of the Healtheon/WebMD common stock for each share of WebMD common stock that they receive upon conversion, unless they vote against the merger and perfect their dissenters' appraisal rights under Georgia law. See page 81 below for a description of dissenters' appraisal rights. - Those WebMD preferred stockholders who convert after the record date for the WebMD stockholders meeting, but before the merger, will receive 1.796 shares of Healtheon/WebMD common stock for each share of WebMD common stock, and except for the holders of WebMD Series A preferred stock, will not be entitled to vote on the merger and will not have dissenters' appraisal rights. Holders of WebMD preferred stock have executed conversion agreements under which they have agreed that unless they execute a separate agreement in which they agree to convert their WebMD preferred stock immediately prior to the effective time of the merger, their WebMD preferred stock will be automatically converted into WebMD common stock immediately prior to the record date for the WebMD stockholders meeting. Directors, executive officers and affiliates who have signed voting agreements have also agreed to convert any shares of WebMD preferred stock which they own into WebMD common stock immediately prior to the effective time of the 1 12 merger and conditioned upon its closing. These directors, executive officers and affiliates, together with the parties which have signed conversion agreements, represent a majority of the outstanding shares of each series of WebMD preferred stock. Because all of the shares of each Series of WebMD preferred stock are automatically converted to common stock when the holders of a majority of the shares in each such series make the election to convert, all of the shares of WebMD preferred stock will be converted either prior to the record date or prior to the effective time of the merger, depending on the decision of those holders who have executed voting and conversion agreements. Holders of the WebMD preferred stock will be advised by a supplemental mailing on the record date whether their shares of preferred stock have been converted to common stock prior to the record date thus entitling them to vote on the merger. Holders of options and warrants for WebMD preferred stock will hold options and warrants as appropriate to purchase shares of Healtheon/WebMD common stock after the completion of the merger. Q: WHAT ARE THE MEDE AMERICA AND MEDCAST MERGERS A: Healtheon has also agreed to a merger with MEDE AMERICA, and Healtheon and WebMD have agreed to a merger with Greenberg News Networks, Inc., which is referred to as Medcast. These mergers are described in this proxy statement/prospectus. The WebMD merger does not depend on Healtheon's merger with MEDE AMERICA or on Healtheon's merger with Medcast. However, the Medcast merger with Healtheon does depend on the WebMD merger. Consequently, there are five possible combinations that you should consider: - Healtheon and WebMD - Healtheon, WebMD and MEDE AMERICA - Healtheon, WebMD, MEDE AMERICA and Medcast. - Healtheon and MEDE AMERICA - Healtheon, WebMD and Medcast You should be aware that if the MEDE AMERICA and Medcast mergers are completed, these companies will become wholly owned subsidiaries of Healtheon/ WebMD, and MEDE AMERICA and Medcast stockholders will become stockholders of Healtheon/WebMD. This proxy statement/prospectus is also being sent to stockholders of MEDE AMERICA and Medcast. Unless stated otherwise, information provided in this proxy statement/prospectus assumes completion of the MEDE AMERICA and Medcast mergers. Where appropriate, we have indicated where information pertaining to Healtheon and WebMD does not give effect to the mergers with MEDE AMERICA or Medcast. Q: DOES THE BOARD OF DIRECTORS OF HEALTHEON RECOMMEND VOTING IN FAVOR OF THE WEBMD MERGER? A: Yes. After careful consideration, Healtheon's board of directors recommends that its stockholders vote in favor of the issuance of shares of Healtheon/WebMD common stock to the stockholders of WebMD in the merger. Q: DOES THE BOARD OF DIRECTORS OF WEBMD RECOMMEND VOTING IN FAVOR OF THE WEBMD MERGER? A: Yes. After careful consideration, WebMD's board of directors unanimously recommends that its stockholders vote in favor of the WebMD merger agreement and the proposed WebMD merger. Q: ARE THERE RISKS I SHOULD CONSIDER IN DECIDING WHETHER TO VOTE FOR THE WEBMD MERGER? A: Yes. In evaluating the WebMD merger, you should carefully consider the factors discussed in the section entitled "Risk Factors" on page 29. 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 proposals to be voted on at the meeting. For a more complete description of voting at the Healtheon meeting, see the section entitled "Proxies" on page 44. 2 13 For a more complete description of voting at the WebMD meeting, see the section entitled "Proxies" on page 47. 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 47. Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW? A: No. After the merger is completed, we will send WebMD stockholders written instructions for exchanging their stock certificates for Healtheon/WebMD stock certificates. Healtheon stockholders need not exchange their stock certificates for Healtheon/WebMD stock certificates. Q: WHEN DO YOU EXPECT THE WEBMD MERGER TO BE COMPLETED? A: We are working toward completing the WebMD merger as quickly as possible. We hope to complete the merger early in the fourth calendar quarter of 1999. For a more complete description of the conditions to the WebMD merger, see the section entitled "Conditions to completion of the WebMD merger" on page 86. Q: WILL I RECOGNIZE AN INCOME TAX GAIN OR LOSS ON THE WEBMD MERGER? A: WebMD stockholders will not recognize gain or loss for U.S. federal income tax purposes if the merger is completed, except that WebMD stockholders will recognize gain or loss with respect to cash received instead of fractional shares or received after the exercise of appraisal rights. However, all stockholders are urged to consult their own tax advisor to determine their particular tax consequences. For a more complete description of the tax consequences to Healtheon and WebMD stockholders, see the section entitled "Material U.S. federal income tax consequences of the WebMD merger" on page 78. Q: AM I ENTITLED TO DISSENTERS' OR APPRAISAL RIGHTS? A: Under Georgia law, holders of WebMD common stock and WebMD Series A preferred stock are entitled to appraisal rights in the WebMD merger. Under Delaware law, holders of Healtheon stock are not entitled to dissenters' or appraisal rights in the WebMD merger. For a description of appraisal rights for WebMD stockholders, see the section entitled "Rights of Dissenting WebMD stockholders" on page 81. Q: WHO SHOULD I CALL WITH QUESTIONS? A: Healtheon stockholders should call Rene Hartmann of Alexander Ogilvey at (415) 923-1660 with any questions about the merger. WebMD stockholders should call L. Scott Askins, Vice President and Corporate Counsel of WebMD, at (404) 479-7600 with any questions about the 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 328. 3 14 QUESTIONS AND ANSWERS FOR MEDE AMERICA STOCKHOLDERS Q: WHAT IS THE MEDE AMERICA MERGER? 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, MEDE AMERICA will merge with a subsidiary of Healtheon and Healtheon will change its corporate name to Healtheon/WebMD Corporation if the WebMD merger is completed, resulting in MEDE AMERICA becoming a wholly owned subsidiary of Healtheon/WebMD. The MEDE AMERICA merger does not depend on the WebMD merger or the Medcast merger. (See diagrams on page 11.) For a more complete description of the merger, see the section entitled "The MEDE AMERICA merger" on page 93. Q: WHAT WILL MEDE AMERICA STOCKHOLDERS RECEIVE IN THE MERGER? A: When the merger is completed, MEDE AMERICA stockholders will receive, subject to upward adjustment in the circumstances described below, 0.6593 shares of Healtheon/ WebMD common stock in exchange for each share of MEDE AMERICA common stock. Healtheon/WebMD will not issue fractional shares. Adjustment of the exchange ratio may be made if the average closing price of Healtheon common stock for the ten-day period ending two business days before the MEDE AMERICA stockholders meeting is less than $38.68. MEDE AMERICA stockholders will receive cash based on the market price of Healtheon/WebMD common stock instead of any fractional share. Example: If the average Healtheon closing sale price is $50 and you own 100 shares of MEDE AMERICA common stock, then after the merger you will receive 65 shares of Healtheon/WebMD common stock and a check for the market value of the 0.93 fractional share of Healtheon/WebMD common stock. If the average closing sale price of Healtheon common stock is less than $38.68 during the ten-day period ending two business days before the MEDE AMERICA stockholders meeting, Healtheon may adjust the exchange ratio to an amount calculated by dividing 25.50 by this average closing sale price. This adjustment would increase the number of shares issued to MEDE AMERICA stockholders in the merger. If Healtheon does not elect to adjust the exchange ratio, MEDE AMERICA would have the right to terminate the merger agreement at this time. Example: If the average Healtheon closing sale price is $35 for the ten-day period ending two business days before the MedE AMERICA stockholders meeting and you own 100 shares of MEDE AMERICA common stock, and if Healtheon adjusts the exchange ratio, then the new exchange ratio would be 0.7286. You would receive 72 shares of Healtheon/WebMD common stock and a check for the market value of the 0.86 fractional share of Healtheon/WebMD common stock. We calculated the exchange ratio by dividing $25.50 by $35. However, if Healtheon does not adjust the exchange ratio, the MedE AMERICA board of directors may decide to terminate the merger agreement prior to the stockholders meeting. If the MedE AMERICA board of directors does not terminate the merger agreement, the exchange ratio will be 0.6593, and after the merger 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. 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 merger. Healtheon's stock price has been volatile and economic and market circumstances are subject to change. As an example, the following table sets forth the high and low closing sale prices per share of Healtheon 4 15 common stock on the Nasdaq National Market during the indicated months.
CLOSING SALE PRICES PER SHARE OF HEALTHEON COMMON STOCK ----------------- MONTH HIGH LOW ----- ------- ------ September 1999.................. $ 46.38 $33.25 August 1999..................... $ 46.38 $30.06 July 1999....................... $ 77.63 $50.25 June 1999....................... $ 88.88 $72.38 May 1999........................ $105.00 $39.94 April 1999...................... $ 58.28 $45.25 March 1999...................... $ 46.38 $25.50 February 1999................... $ 31.38 $24.00
The following chart indicates the number of shares of Healtheon/WebMD common stock to be received for each share of MEDE AMERICA common stock assuming different ten-day average prices.
HEALTHEON IF HEALTHEON IF HEALTHEON TEN-DAY DOES NOT ADJUST DOES ADJUST AVERAGE PRICE EXCHANGE RATIO EXCHANGE RATIO ------------- --------------- -------------- $25 0.6593 1.0200 $30 0.6593 0.8500 $35 0.6593 0.7286 $40 0.6593 not applicable $45 0.6593 not applicable $50 0.6593 not applicable
If the Healtheon ten-day average price is greater than or equal to $40, neither party would have the right to adjust the 0.6593 exchange ratio. If Healtheon does not elect to adjust the 0.6593 exchange ratio, MEDE AMERICA would have a right to terminate the merger agreement. For a more complete description of what you will receive in the merger, see the section entitled "Structure of the MEDE AMERICA merger and conversion of MEDE AMERICA common stock" on page 104. After the close of business on the last day of the ten-day period during which the average Healtheon closing price is determined, MEDE AMERICA stockholders may obtain information relating to any adjustment of the exchange ratio by calling . Q: DOES THE BOARD OF DIRECTORS OF MEDE AMERICA RECOMMEND VOTING IN FAVOR OF THE MEDE AMERICA MERGER? A: Yes. After careful consideration, MEDE AMERICA's board of directors unanimously recommends that its stockholders vote in favor of the merger agreement and the proposed merger. For a more complete description of the recommendation of the board of directors of MEDE AMERICA, see the sections entitled "MEDE AMERICA's reasons for the MEDE AMERICA merger" on page 96 and "Recommendation of MEDE AMERICA's board of directors" on page 97. Q: ARE THERE RISKS I SHOULD CONSIDER IN DECIDING WHETHER TO VOTE FOR THE MEDE AMERICA MERGER? A: Yes. In evaluating the MEDE AMERICA merger, you should carefully consider the factors discussed in the section entitled "Risk Factors" on page 29. In addition, this proxy statement/prospectus contains information regarding two additional mergers: the WebMD merger and the Medcast merger. Consequently, there are three possible combinations that you should consider: - Healtheon, WebMD and MEDE AMERICA - Healtheon, WebMD, MEDE AMERICA and Medcast. - Healtheon and MEDE AMERICA 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 merger agreement and approval of the merger. For a more complete description of voting at the meeting, see the section entitled "Proxies" on page 52. Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE? A: If you want to change your vote, send the secretary of MEDE AMERICA a later-dated, signed proxy card before the meeting or attend the meeting in person. You may also revoke your proxy by sending written notice to the secretary of MEDE AMERICA before the meeting. MEDE AMERICA stockholders who have signed voting agreements may not revoke 5 16 the proxies given by them in the voting agreement. For a more complete description of how to change your vote, see the section entitled "Proxies" on page 52. 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 52. Q: SHOULD I SEND IN MY MEDE AMERICA STOCK CERTIFICATES NOW? A: No. After the merger 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 MERGER TO BE COMPLETED? A: We are working toward completing the MEDE AMERICA merger as quickly as possible. We hope to complete the merger early in the fourth calendar quarter of 1999. For a more complete description of the conditions to the MEDE AMERICA merger, see the section entitled "Conditions to completion of the MEDE AMERICA merger" on page 112. Q: WILL I RECOGNIZE AN INCOME TAX GAIN OR LOSS ON THE MEDE AMERICA MERGER? A: MEDE AMERICA stockholders will not recognize gain or loss for U.S. federal income tax purposes if the merger is completed, 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 merger" on page 105. Q: AM I ENTITLED TO DISSENTERS' OR APPRAISAL RIGHTS? A: Under Delaware law, holders of MEDE AMERICA common stock are not entitled to dissenters' or appraisal rights in the merger. Q: WHO SHOULD I CALL WITH QUESTIONS? A: MEDE AMERICA stockholders should call Mitchell Sepaniak, MEDE AMERICA Investor Relations at (770) 416-0673, ext. 1106 with any questions about the MEDE AMERICA 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 328. 6 17 QUESTIONS AND ANSWERS FOR MEDCAST STOCKHOLDERS Q: WHAT IS THE MEDCAST MERGER? A: The boards of directors of each of Healtheon, WebMD and Medcast have voted to combine the businesses of Healtheon, WebMD and Medcast. To combine the companies, WebMD will merge with a subsidiary of Healtheon and Healtheon will change its corporate name to Healtheon/WebMD Corporation, and Medcast will merge with a second subsidiary of Healtheon/WebMD, resulting in each of WebMD and Medcast becoming wholly owned subsidiaries of Healtheon/WebMD. It is also expected that MEDE AMERICA will merge with a third subsidiary of Healtheon/WebMD and become a wholly owned subsidiary of Healtheon/WebMD. (See diagrams on page 11.) For a more complete description of the merger, see the section entitled "The Medcast merger" on page 117. Q: DOES THE MEDCAST MERGER DEPEND ON THE WEBMD MERGER OR THE MEDE AMERICA MERGER? A: The combination of Medcast with a wholly owned subsidiary of Healtheon is dependent on the simultaneous or prior completion of the WebMD merger. If the WebMD merger does not occur, Medcast will instead merge with a subsidiary of WebMD, and will separately seek your approval for that merger. This proxy statement/prospectus does not describe the alternative Medcast merger with WebMD. The Medcast merger does not depend on the MEDE AMERICA merger. When determining whether to vote for the transaction, you should evaluate the combined company with and without the addition of MEDE AMERICA. Q: WHAT WILL MEDCAST STOCKHOLDERS RECEIVE IN THE MERGER? A: When the merger is completed, Medcast stockholders will receive approximately 0.5483 shares of Healtheon/WebMD common stock in exchange for each share of Medcast common stock they own, after conversion of any shares of Medcast preferred stock they own. Healtheon/ WebMD will not issue fractional shares, but instead will pay Medcast stockholders cash based on a price per share of $81.98 for any fractional share. Holders of options or warrants to purchase shares of Medcast common stock will hold options or warrants to purchase shares of Healtheon/WebMD common stock after completion of the merger. For a more complete description of what you will receive in the merger, see the section entitled "Structure of the Medcast merger and conversion of Medcast capital stock" on page 124. Q: DOES THE BOARD OF DIRECTORS OF MEDCAST RECOMMEND VOTING IN FAVOR OF THE MEDCAST MERGER? A: Yes. After careful consideration, Medcast's board of directors unanimously recommends that its stockholders vote in favor of the merger agreement and the proposed merger. For a more complete description of the recommendation of the board of directors of Medcast, see the sections entitled "Medcast's reasons for the Medcast merger" on page 119 and "Recommendation of Medcast's board of directors" on page 120. Q: ARE THERE RISKS I SHOULD CONSIDER IN DECIDING WHETHER TO VOTE FOR THE MEDCAST MERGER? A: Yes. In evaluating the Medcast merger, you should carefully consider the factors discussed in the section entitled "Risk Factors" on page 29. Q: WHAT DO I NEED TO DO NOW? A: Many Medcast stockholders have previously executed an irrevocable proxy in favor of Alan N. Greenberg. If you have not previously executed an irrevocable proxy, you are receiving a proxy with this proxy statement/ prospectus. Mail your signed proxy card in the enclosed return envelope as soon as possible so that your shares may be represented at your meeting. PLEASE NOTE THAT ALL HOLDERS OF SERIES A PREFERRED STOCK AND SERIES C PREFERRED STOCK ARE CONTRACTUALLY OBLIGATED TO VOTE IN FAVOR OF THE MERGER. If you do not include instructions on how to vote your properly signed proxy, your shares will be voted "FOR" approval and adoption of the merger agreement and approval of the merger. 7 18 For a more complete description of voting at the meeting, see the section entitled "Proxies" on page 58. For a description of the contractual obligation of the Series A and Series C preferred stockholders to vote in favor of the merger, see the section entitled "Medcast stockholders agreements" on page 52. Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE? A: If you have not previously executed an irrevocable proxy and you want to change your vote, send the secretary of Medcast a later-dated, signed proxy card before the meeting or attend the meeting in person. You may also revoke your proxy by sending written notice to the secretary of Medcast before the meeting. For a more complete description of how to change your vote, see the section entitled "Proxies" on page 52. Q: SHOULD I SEND IN MY MEDCAST STOCK CERTIFICATES NOW? A: No. After the merger is completed, we will send you written instructions for exchanging your Medcast stock certificates for Healtheon/ WebMD stock certificates. Q: WHEN DO YOU EXPECT THE MEDCAST MERGER TO BE COMPLETED? A: We are working toward completing the Medcast merger as quickly as possible. We hope to complete the merger early in the fourth calendar quarter of 1999. For a more complete description of the conditions to the Medcast merger, see the section entitled "Completion and effectiveness of the Medcast merger" on page 124. Q: WILL I RECOGNIZE AN INCOME TAX GAIN OR LOSS ON THE MEDCAST MERGER? A: Medcast stockholders will not recognize gain or loss for U.S. federal income tax purposes if the merger is completed, except that Medcast stockholders will recognize gain or loss with respect to cash received instead of fractional shares or received after the exercise of dissenters' rights. However, Medcast stockholders are urged to consult their own tax advisor to determine their particular tax consequences. For a more complete description of the tax consequences, see the section entitled "Material U.S. federal income tax consequences of the Medcast merger" on page 127. Q: AM I ENTITLED TO DISSENTERS' OR APPRAISAL RIGHTS? A: Under Delaware law, holders of Medcast capital stock are entitled to dissenters' rights in the merger. For a detailed description of these rights, see "The Medcast merger -- Rights of dissenting Medcast stockholders" on page 130. Q: WHO SHOULD I CALL WITH QUESTIONS? A: Medcast stockholders should call Gordon T. Wyatt, Chief Financial Officer and Corporate Secretary of Medcast, at (404) 266-8500 with any questions about the Medcast 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 328. 8 19 SUMMARY OF THE PROXY STATEMENT/PROSPECTUS This proxy statement/prospectus pertains to the mergers of each of WebMD, MEDE AMERICA and Medcast with Healtheon, and is being sent to the stockholders of all of the companies. Unless stated otherwise, information in this proxy statement/prospectus assumes that the combined company, to be known as Healtheon/WebMD, will consist of Healtheon, WebMD, MEDE AMERICA and Medcast. THE COMPANIES [HEALTHEON LOGO] HEALTHEON CORPORATION 4600 Patrick Henry Drive Santa Clara, CA 95054 (408) 876-5000 www.healtheon.com Healtheon is pioneering the use of the Internet to simplify workflows, decrease costs and contribute to the quality of patient care throughout the healthcare industry. Healtheon has designed and developed the Healtheon platform, an Internet-based information and transaction platform that allows Healtheon to create Virtual Healthcare Networks, or VHNs, that facilitate and streamline interactions among the myriad participants in the healthcare industry. The Healtheon VHN solution includes a suite of services delivered through applications operating on Healtheon's Internet-based platform. Healtheon's solution enables the secure exchange of information among disparate healthcare information systems and supports a broad range of healthcare transactions, including enrollment, eligibility determination, referrals and authorizations, laboratory and diagnostic test ordering, clinical data retrieval and claims processing. Healtheon was founded in 1995. [WebMD LOGO] WEBMD, INC. 400 The Lenox Building 3399 Peachtree Road NE Atlanta, Georgia 30326 (404) 479-7600 www.webmd.com WebMD provides web-based services to healthcare professionals and consumers under its WebMD brand name. WebMD's subscription-based professional web site includes access to electronic data interchange services, enhanced communications services, healthcare-related information and other web-based services that are useful to healthcare professionals. WebMD designed its professional web site to simplify healthcare practices by integrating multiple administrative, communications and research functions into a single, easy to use web-based solution. WebMD's free consumer web site includes access to premium, branded healthcare-related information, personalized, targeted information about specific health conditions and content-specific online communities that allow consumers to participate in real-time discussions and support networks via the web. WebMD designed its consumer web site to assist consumers in making informed healthcare decisions. WebMD commercially launched its Internet-based services in October 1998. WebMD was incorporated in 1996. 9 20 [MEDE LOGO] MEDE AMERICA CORPORATION 90 Merrick Avenue, Suite 501 East Meadow, NY 11554 (516) 542-4500 www.medeamerica.com MEDE AMERICA is a leading provider of electronic data interchange, or EDI, products and services to a broad range of providers and payers in the healthcare industry. MEDE AMERICA offers an integrated suite of EDI solutions that allows hospitals, pharmacies, physicians, dentists and other healthcare providers and provider groups to electronically edit, process and transmit claims, eligibility and enrollment data, track claims submissions throughout the claims payment process and obtain faster reimbursement for their services. In addition to offering greater processing speed, MEDE AMERICA's EDI products reduce processing costs, increase collection rates and result in more accurate data interchange. MEDE AMERICA was founded in 1995. [GNN LOGO] [MEDCAST LOGO] GREENBERG NEWS NETWORKS, INC. 1175 Peachtree Street, Suite 2400 Atlanta, Georgia 30361 (404) 266-8500 www.medcast.com Greenberg News Networks, Inc., which is referred to as Medcast, is a leading provider of medical news, information, educational programs and services designed for physicians and other healthcare professionals. Medcast's product, Medcast Networks, is downloaded to the hard drives of its users' personal computers via the Internet and can be accessed using standard PC architecture. With Medcast, physicians may also obtain continuing medical education credits and can easily access information provided by specialty medical associations and leading academic institutions. To date, Medcast has developed five physician specialty networks: Medcast Cardiology, Medcast Psychiatry, Medcast Oncology, Medcast Endocrinology and Medcast Elite Primary Care. Medcast was founded in 1997. FORWARD-LOOKING STATEMENTS IN THIS PROXY STATEMENT/PROSPECTUS This proxy statement/prospectus contains forward-looking statements. These statements include statements with respect to Healtheon's, WebMD's, MEDE AMERICA's and Medcast's financial condition, results of operations and business and on the expected impact of the mergers described in this proxy statement/prospectus on Healtheon/WebMD's financial performance. Words such as anticipates, expects, intends, plans, believes, seeks, estimates and similar expressions identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements. These risks and uncertainties include: - the possibility that the mergers will not be consummated - the possibility that the anticipated benefits from the mergers will not be fully realized - the possibility that costs or difficulties related to the integration of our businesses will be greater than expected - other risk factors as may be detailed from time to time in Healtheon's and MEDE AMERICA's public announcements and filings with the Securities and Exchange Commission. In evaluating the mergers, you should carefully consider the discussion of these and other factors in the section entitled "Risk Factors" on page 29. 10 21 STRUCTURE OF THE MERGERS The transactions contemplated by the WebMD merger, the MEDE AMERICA merger and the Medcast merger are illustrated by the first diagram below and the structure of Healtheon/WebMD following the mergers is illustrated by the second diagram below. The figure entitled "Structure of the Mergers" consists of two diagrams: the first depicts the structure of the companies prior to the mergers; the second depicts the structure of the companies after the mergers. The first diagram, entitled "Prior to Mergers," has one large rectangle at the top center with the word "Healtheon" in it. Centered beneath this rectangle is a single row of six smaller squares. From left to right, these six squares contain the words "WebMD," "WebMD Merger Sub," "MEDE Merger Sub," "MEDE AMERICA," "Medcast Merger Sub" and "Medcast," respectively. A line extends from the "Healtheon" rectangle to each of the following three squares: "WebMD Merger Sub," "MEDE Merger Sub" and "Medcast Merger Sub." An arrow extends from the "WebMD Merger Sub" square to the "WebMD" square; from the "MEDE Merger Sub" square to the "MEDE AMERICA" square; and from the "Medcast Merger Sub" square to the "Medcast" square. The second diagram, entitled "After Mergers," has one large ellipse at the top center with the words "Current stockholders of Healtheon and former stockholders of WebMD and MEDE AMERICA" in it. Centered beneath this ellipse is a single, large rectangle with the words "Healtheon/WebMD (which changed its name from Healtheon Corporation)" 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 "WebMD," MEDE AMERICA," and "Medcast," respectively. A line extends from each of these three squares to the "Healtheon/WebMD" rectangle. 11 22 SUMMARY OF THE WEBMD MERGER THE WEBMD MERGER In the WebMD merger, WebMD will merge with a subsidiary of Healtheon, which will change its corporate name to Healtheon/WebMD Corporation, resulting in WebMD becoming a wholly owned subsidiary of Healtheon/WebMD. (See diagrams on page 11). This proxy statement/prospectus refers to Healtheon upon completion of the WebMD merger as Healtheon/WebMD and its common stock upon completion of the WebMD merger as Healtheon/WebMD common stock. The WebMD merger agreement as well as an amendment to that agreement are attached to this proxy statement/prospectus as Annex A. We encourage you to read it carefully. The WebMD merger agreement is more fully discussed on page 84. We believe the WebMD merger will provide Healtheon/WebMD with the opportunity to realize several benefits relating to the operations and relationships of the combined company. For a detailed description of these benefits, see the section entitled "Joint reasons for the WebMD merger" on page 57. The potential benefits of the WebMD merger may not be achieved. For a more complete description of the risks, see the sections entitled "Risk Factors" on page 29, and "Joint reasons for the WebMD merger" on page 57. CONDITIONS TO COMPLETION OF THE WEBMD MERGER Healtheon's and WebMD's respective obligations to complete the WebMD merger are subject to the satisfaction or waiver of closing conditions. 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 WebMD merger is not conditioned upon completion of the MEDE AMERICA merger or the Medcast merger. For a detailed description of the conditions to completion of the WebMD merger, see the section entitled "Conditions to completion of the WebMD merger" on page 86. VOTE REQUIRED FOR APPROVAL The holders of a majority of the outstanding shares of Healtheon common stock must approve the issuance of Healtheon/WebMD common stock in the WebMD merger. Healtheon stockholders holding % of outstanding Healtheon common stock as of the record date have agreed to vote in favor of this proposal. Healtheon stockholders are entitled to cast one vote per share of Healtheon common stock owned as of 1999, the record date. A majority of the votes entitled to be cast by the following holders of WebMD's stock, each voting as separate voting groups, must vote in favor of the merger agreement and the WebMD merger: - common stock and Series A preferred stock, voting together - Series B common stock - Series C and E common stock, voting together As a result of voting agreements that have been signed by WebMD directors, executive officers and affiliates and the conversion agreements that have been signed by holders of WebMD's preferred stock, the votes required to approve the merger are assured. For a more complete description of the vote required for approval of the WebMD merger see the sections entitled "Vote and quorum required" on page 44 and "Votes required; voting agreements; conversion agreements" on page 46. TERMINATION OF THE WEBMD MERGER AGREEMENT The WebMD merger agreement may be terminated under limited circumstances. For a detailed description of the manner in which the WebMD merger agreement may be terminated, see the section entitled "Termination of the WebMD merger agreement" on page 88. NO OTHER NEGOTIATIONS INVOLVING WEBMD WebMD agreed that until the completion of the WebMD merger or unless Healtheon consents in writing, WebMD and its subsidiaries will use commercially reasonable efforts not to solicit, or 12 23 take other actions related to, any transaction other than the WebMD merger. For a detailed description of these limitations on WebMD's actions with respect to other transactions, see the sections entitled "No other negotiations involving WebMD," on page 85. 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 issuance of shares of Healtheon/WebMD common stock in the merger. Jeffrey T. Arnold, Finn Partners, Lucius E. Burch, III, Burch House, L.P., J.T. Arnold Enterprises LLLP, K. Robert Drauqhon, U. Bertram Ellis, Jr., J. Rex Fuqua, Fuqua Holdings I, L.P., S. Taylor Glover, Jouko J. Rissanen, STG Partners, LP, Glenn W. Sturm, Premiere Technologies, Inc., Microsoft and HBO & Company, each of whom are either directors, executive officers or affiliates of WebMD, entered into voting agreements in which they have agreed to vote their shares of common stock in favor of the merger and to convert any shares of WebMD preferred stock which they own into WebMD Series D common stock immediately prior to the effective time of the merger and conditioned upon the closing of the merger. Additional holders of WebMD preferred stock have entered into conversion agreements in which they have agreed that after the date of this proxy statement/prospectus and prior to , 1999 either they will enter into voting agreements to cause their preferred stock to be converted into Series D common stock or their preferred stock will be automatically converted into Series D common stock as of the day prior to the record date. By virtue of these voting agreements, the required vote for the merger is assured. As a result of the conversion agreements and the voting agreements, each share of WebMD preferred stock will be converted into one share of Series D common stock prior to the effective time of the merger and, accordingly, into 1.796 shares of Healtheon/ WebMD common stock in the merger. For a more complete description of the voting agreements, see the sections entitled "Healtheon stockholders' voting agreement" on page 91 and "WebMD stockholders' voting agreement and conversion agreement" on page 90. 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 merger and convert any shares of WebMD preferred stock which it owns into WebMD common stock immediately prior to the effective time of the merger and conditional upon its closing. As of the date of this proxy statement/prospectus, Microsoft beneficially owned 14,920,466 shares, including shares issuable upon exercise of warrants, of WebMD capital stock which represented approximately 34.8% 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 merger approximately 33.3% of WebMD for approximately $359.9 million. In connection with these purchases and the merger, Microsoft, Healtheon and WebMD have also agreed to expand Microsoft's strategic relationship with Healtheon/WebMD following the mergers. Microsoft will be entitled to nominate one member to the Healtheon/WebMD board of directors. In addition, Healtheon/WebMD and Microsoft will enter into revenue sharing arrangements. For a more complete description of the strategic relationship between Healtheon/WebMD and Microsoft after the mergers, see "Healtheon/WebMD's strategic alliances with and investments from Microsoft and other partners" beginning on page 75. DIRECTORS AND EXECUTIVE OFFICERS OF HEALTHEON/ WEBMD FOLLOWING THE WEBMD MERGER Following the merger, the board of directors of Healtheon/WebMD will consist of nine members, four designated by Healtheon, four designated by WebMD, and one designated by Microsoft. W. Michael Long, James H. Clark, L. John Doerr and William W. McGuire, MD, will serve as designees of Healtheon, Jeffrey T. 13 24 Arnold, Eric J. Gleacher, William P. Payne and U. Bertram Ellis, Jr. will serve as designees of WebMD, and will serve as designee of Microsoft. Following the merger, Mr. Arnold, the current Chairman and Chief Executive Officer of WebMD, will be Chief Executive Officer and a director of Healtheon/WebMD; and Mr. Long, the current Chief Executive Officer of Healtheon, will be Chairman and Chief Operating Officer of Healtheon/WebMD. OPINIONS OF HEALTHEON'S AND WEBMD'S FINANCIAL ADVISORS In deciding to approve the WebMD merger, Healtheon's board of directors considered an opinion from its financial advisors, Morgan Stanley & Co. Incorporated, as to the fairness of the exchange ratio from a financial point of view to Healtheon. In connection with the WebMD merger, WebMD's board considered the opinion of BancBoston Robertson Stephens Inc. as to the fairness, from a financial point of view, of the exchange ratio to the holders of WebMD common stock. The full text of the written opinions of the financial advisors are attached to the back of this document as Annex D and Annex E, and should be read carefully in their entireties for a description of the assumptions made, matters considered and limitations on the review undertaken. The opinion of Morgan Stanley is directed to the Healtheon board and the opinion of BancBoston Robertson Stephens is directed to the WebMD board, and these opinions do not constitute a recommendation as to how to vote to any stockholders with respect to any matter relating to the proposed merger. ACCOUNTING TREATMENT OF THE WEBMD MERGER We intend to account for the WebMD merger 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 merger see the section entitled "Accounting treatment of the WebMD merger" on page 80. INTERESTS OF DIRECTORS, OFFICERS AND AFFILIATES IN THE WEBMD MERGER When considering the recommendations of Healtheon's and WebMD's boards of directors, you should be aware that some Healtheon and WebMD directors, officers and affiliates have interests in the merger that are different from, or are in addition to, yours. These interests include: - 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 merger. However, if Mr. Arnold is terminated other than for cause by Healtheon/WebMD following the merger, 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 WebMD merger, Healtheon/ WebMD will expand its strategic relationship with Microsoft, a current stockholder of WebMD that will beneficially own approximately 16.8% of the Healtheon/ WebMD common stock on a fully diluted basis following the merger. 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 75. For a more complete description of the interests of related persons in the WebMD merger, see the section entitled "Interests of directors, officers and affiliates in the WebMD merger" on page 74. ANTITRUST APPROVAL REQUIRED TO COMPLETE THE WEBMD MERGER The WebMD merger is subject to antitrust laws. Healtheon, WebMD, Jeffrey T. Arnold and Microsoft have made the required filings with the Department of Justice and the Federal Trade Commission and the applicable waiting periods have expired. Other applicable stockholders of WebMD have also made the required filings but as of the date of this proxy statement/prospectus 14 25 these waiting periods have not yet 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 WebMD merger at any time before or after its completion. For a more complete description of the antitrust approvals required in connection with the WebMD merger, see the section entitled "Regulatory filings and approvals required to complete the WebMD merger" on page 80. RESTRICTIONS ON THE ABILITY TO SELL HEALTHEON/ WEBMD STOCK All shares of Healtheon/WebMD common stock received by WebMD stockholders in connection with the WebMD merger 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 80. 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 WebMD merger, 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 141. 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 WebMD merger. In particular, you should read the documents attached to this proxy statement/prospectus, including the merger agreement, which is attached as Annex A, the opinion of Morgan Stanley, which is attached as Annex D, and the opinion of BancBoston Robertson Stephens, which is attached as Annex E. 15 26 SUMMARY OF THE MEDE AMERICA MERGER THE MEDE AMERICA MERGER In the merger, MEDE AMERICA will merge with a subsidiary of Healtheon, which will change its corporate name to Healtheon/WebMD Corporation in connection with the WebMD merger, and as a result MEDE AMERICA will become a subsidiary of Healtheon/WebMD. (See diagrams on page 11). This proxy statement/prospectus refers to Healtheon upon completion of the WebMD merger as Healtheon/WebMD and its common stock upon completion of the WebMD merger as Healtheon/WebMD common stock. The merger agreement is attached to this proxy statement/prospectus as Annex B. We encourage you to read the merger agreement carefully. The merger agreement is more fully discussed on page 109. We believe the merger will provide Healtheon/WebMD with the opportunity to realize several benefits relating to the operations of the combined company. For a detailed description of these benefits, see the section entitled "MEDE AMERICA's reasons for the MEDE AMERICA merger" on page 96. The potential benefits of the merger may not be achieved. For a more complete description of the risks, see the sections entitled "Risk Factors" on page 29, and "MEDE AMERICA's reasons for the MEDE AMERICA merger" on page 96. CONDITIONS TO COMPLETION OF THE MEDE AMERICA MERGER Healtheon's and MEDE AMERICA's respective obligations to complete the merger are subject to the satisfaction or waiver of closing conditions. If either Healtheon or MEDE AMERICA waives any conditions, these parties 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 merger is not conditioned upon the completion of the WebMD merger or the Medcast merger. For a detailed description of the conditions to completion of the MEDE AMERICA merger, see the section entitled "Conditions to completion of the MEDE AMERICA merger" on page 112. VOTE REQUIRED FOR APPROVAL The holders of a majority of the outstanding shares of MEDE AMERICA common stock must approve and adopt the merger 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 merger see the section entitled "Vote and quorum required" on page 49. TERMINATION OF THE MEDE AMERICA MERGER AGREEMENT The merger agreement may be terminated under limited circumstances at any time before the completion of the merger. For a detailed description of the manner in which the merger agreement may be terminated, see the section entitled "Termination of the MEDE AMERICA merger agreement" on page 113. TERMINATION FEE If the merger agreement is terminated because MEDE AMERICA stockholders do not approve and adopt the merger agreement and approve the merger, or if the merger is not completed by December 15, 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 merger agreement involving MEDE AMERICA and a party other than Healtheon must be publicly proposed before the termination of the merger agreement. Furthermore, for the termination fee to become payable, 16 27 MEDE AMERICA must enter into an agreement for or complete an extraordinary transaction within 12 months following termination of the merger agreement. In addition, subject to qualifications, MEDE AMERICA will pay Healtheon a termination fee of $15 million if the merger agreement is terminated because MEDE AMERICA's board of directors fails to recommend that MEDE AMERICA stockholders approve and adopt the merger agreement and the merger or 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 114. NO OTHER NEGOTIATIONS INVOLVING MEDE AMERICA MEDE AMERICA agreed that until the completion of the merger or unless Healtheon consents in writing, MEDE AMERICA will not directly or indirectly take any specified actions with respect to any "acquisition proposal," as defined in the MEDE AMERICA merger agreement included as Annex B to this proxy statement/prospectus. However, notwithstanding these restrictions, MEDE AMERICA may, if necessary to comply with its fiduciary obligations under Delaware law and subject to other qualifications, furnish information and engage in discussions or negotiations in response to unsolicited proposals for business combinations and acquisitions which the board of directors of MEDE AMERICA determines, in its reasonable judgement, to be more favorable to MEDE AMERICA than the terms of the merger with Healtheon. MEDE AMERICA has agreed to promptly inform Healtheon as to any acquisition proposal, request for non-public information or inquiry which MEDE AMERICA believes would lead to an acquisition proposal. MEDE AMERICA has agreed to inform Healtheon of the status and details of any acquisition proposal. For a more complete description of these limitations on MEDE AMERICA's actions with respect to an acquisition proposal, see the section entitled "No other negotiations involving MEDE AMERICA," on page 110. THE VOTING AGREEMENT MEDE AMERICA stockholders Welsh, Carson, Anderson & Stowe V, L.P., Welsh, Carson, Anderson & Stowe VI, L.P., WCAS Information Partners L.P., WCAS Capital Partners II, L.P., William Blair Capital Partners V, L.P. and William Blair Leveraged Capital Fund, Limited Partnership, who collectively held 47.4% of the MEDE AMERICA common stock as of the record date, entered into a voting agreement with Healtheon. The voting agreement requires these 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 merger agreement and approval of the merger. For a more complete description of the voting agreement see the section entitled "MEDE AMERICA voting agreement" on page 116. 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. For a more complete description of the registration rights agreement see the section entitled "MEDE AMERICA registration rights agreement" on page 116. OPINION OF MEDE AMERICA'S FINANCIAL ADVISOR In connection with the MEDE AMERICA merger, the MEDE AMERICA board received a written opinion from Salomon Smith Barney Inc. as to the fairness, from a financial point of view, 17 28 of the exchange ratio to the holders of MEDE AMERICA common stock. The full text of Salomon Smith Barney's written opinion is attached to the back of this document as Annex F, and should be read carefully in its entirety for a description of the assumptions made, matters considered and limitations on the review undertaken. Salomon Smith Barney's opinion is directed to the MEDE AMERICA board and does not constitute a recommendation to any stockholder with respect to any matter relating to the merger. ACCOUNTING TREATMENT OF THE MEDE AMERICA MERGER We intend to account for the merger 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 merger, see the section entitled "Accounting treatment of the MEDE AMERICA merger" on page 107. INTERESTS OF DIRECTORS, OFFICERS AND AFFILIATES IN THE MEDE AMERICA MERGER When considering the recommendations of MEDE AMERICA's board of directors, you should be aware that some of the MEDE AMERICA directors, officers and affiliates have interests in the merger that are different from, or are in addition to, yours. These interests include: - Welsh, Carson, Anderson & Stowe and William Blair & Co., L.L.C. will have the right to jointly select one nominee to the Healtheon/WebMD board of directors after the merger so long as they continue to hold in excess of 25% of the shares they receive in the merger. William Blair & Co., L.L.C. has waived its right to participate in the selection of a nominee to the Healtheon/WebMD 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. - Funds affiliated with Welsh, Carson, Anderson & Stowe and William Blair & Co., L.L.C. will receive registration rights for the Healtheon/WebMD shares they receive in the merger. 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. - 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 the designee of Medic. For a more complete description of the interests of persons in the merger, see the section entitled "Interests of directors, officers and affiliates in the MEDE AMERICA merger" on page 103. ANTITRUST APPROVAL REQUIRED TO COMPLETE THE MEDE AMERICA MERGER The MEDE AMERICA merger is subject to antitrust laws. Healtheon, MEDE AMERICA and the applicable stockholders of 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 merger at any time before or after its completion. For a more complete description of the antitrust approvals required in connection with the merger see the section entitled "Regulatory filings and approvals required to complete the MEDE AMERICA merger" on page 107. RESTRICTIONS ON THE ABILITY TO SELL HEALTHEON/ WEBMD STOCK All shares of Healtheon common stock received by MEDE AMERICA stockholders in connection with the merger will be freely transferable unless the holder is considered an affiliate of either Healtheon/WebMD or MEDE AMERICA under the Securities Act of 1933. 18 29 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 108. 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 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 141. 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 merger. In particular, you should read the documents attached to this proxy statement/prospectus, including the merger agreement, which is attached as Annex B, and the opinion of Salomon Smith Barney, which is attached as Annex F. 19 30 SUMMARY OF THE MEDCAST MERGER THE MEDCAST MERGER In the merger, Medcast will merge with a subsidiary of Healtheon/WebMD, and as a result Medcast will become a subsidiary of Healtheon/ WebMD. (See diagrams on page 11.) This proxy statement/prospectus refers to Healtheon upon completion of the WebMD merger as Healtheon/ WebMD and its common stock upon completion of the WebMD merger as Healtheon/WebMD common stock. The merger agreement is attached to this proxy statement/prospectus as Annex C. We encourage you to read it carefully. The merger agreement is more fully discussed on page 133. We believe the merger will provide Healtheon/WebMD with the opportunity to realize several benefits relating to the operations of the combined company. For a detailed description of these benefits, see the section entitled "Medcast's reasons for the Medcast merger" on page 119. The potential benefits of the merger may not be achieved. For a more complete description of the risks, see the sections entitled "Risk Factors" on page 29, and "Medcast's reasons for the Medcast merger" on page 119. CONDITIONS TO COMPLETION OF THE MEDCAST MERGER Our respective obligations to complete the merger and the other transactions contemplated by the merger agreement are subject to the satisfaction or waiver of conditions. The Medcast merger is not conditioned upon the completion of the MEDE AMERICA merger. For a detailed description of the conditions to completion of the Medcast merger, see the section entitled "Conditions to completion of the Medcast merger" on page 137. VOTE REQUIRED FOR APPROVAL The merger agreement must be approved and adopted, and the merger must be approved, by the holders of a majority of the outstanding shares of: - Medcast common stock, Series B preferred stock and Series C preferred stock, voting together - Medcast Series A preferred stock voting as a separate group Holders of Medcast common stock are entitled to cast one vote per share of Medcast common stock held as of , 1999, the record date. Holders of Series A preferred stock, Series B preferred stock and Series C preferred stock are entitled to cast one vote per share of common stock into which the preferred stock held as of the record date is convertible. Medcast stockholders holding approximately % of Medcast common stock, including common stock issuable upon conversion of all outstanding shares of preferred stock, as of the record date have agreed to vote in favor of the merger. Directors and executive officers of Medcast collectively beneficially owned approximately 66.1% of the outstanding Medcast common stock as of the record date, assuming conversion of all outstanding shares of preferred stock. Medcast stockholders holding approximately % of the outstanding Series A preferred stock as of the record date have agreed to vote in favor of the merger. Directors and executive officers of Medcast collectively beneficially owned approximately % of the outstanding Series A preferred stock as of the record date. For a more complete description of the vote required for approval of the merger see the section entitled "Vote and quorum required; voting agreements" on page 51. TERMINATION OF THE MEDCAST MERGER AGREEMENT The merger agreement may be terminated under limited circumstances at any time prior to the merger. For a detailed description of the manner in which the merger agreement may be terminated, see the section entitled "Termination of the Medcast merger agreement" on page 138. NO OTHER NEGOTIATIONS INVOLVING MEDCAST Medcast agreed not to directly or indirectly take any specified actions with respect to any acquisition proposal. 20 31 Medcast has agreed to promptly inform Healtheon and WebMD as to any acquisition proposal, or request for non-public information or inquiry which Medcast believes would lead to an acquisition proposal. Medcast has also agreed to inform Healtheon and WebMD of the status and details of any acquisition proposal. For a more complete description of the limitations on Medcast's actions with respect to an acquisition proposal, see the section entitled "No other negotiations involving Medcast" on page 134. THE VOTING AGREEMENTS Medcast stockholders Medcast Networks, L.P., Stephens Group, Inc., Noro-Moseley Partners IV, L.P., Noro-Moseley Partners IVB, L.P., Richland Ventures, L.P. and Richland Ventures II, L.P. have entered into voting agreements with Healtheon and WebMD which require them to vote in favor of the merger. These stockholders have sufficient votes to approve the merger under Delaware law and Medcast's certificate of incorporation. For a more complete description of the voting agreements see the section entitled "Medcast voting agreements" on page 140. THE ESCROW ARRANGEMENT Ten percent of the shares of Healtheon/ WebMD common stock to be received in the merger by stockholders of Medcast will be delivered to an escrow agent. These shares will be subject to indemnification claims by Healtheon/WebMD for breaches of the merger agreement by Medcast, and will be held in escrow for one year, plus any additional periods necessary to resolve claims existing at that time. Healtheon/WebMD will have a claim for indemnification against the shares in escrow to the extent that the aggregate amount of all its losses, expenses, liabilities and other damages arising out of breaches of the merger agreement by Medcast exceed $500,000. For a more complete description of the escrow arrangement, see the section entitled "Escrow and indemnification of Healtheon/WebMD" on page 135. OPINION OF MEDCAST'S FINANCIAL ADVISOR In connection with the merger, the Medcast board received a written opinion from Hambrecht & Quist LLC as to the fairness, from a financial point of view, of the consideration to be received by the holders of Medcast capital stock in the merger. The full text of Hambrecht & Quist's written opinion dated June 30, 1999 is attached to this proxy statement/prospectus as Annex G. It should be read carefully in its entirety for a description of the assumptions made, matters considered and limitations on the review undertaken. Hambrecht & Quist's opinion is directed to the Medcast board of directors and does not constitute a recommendation to any stockholder with respect to any matter relating to the proposed merger. DEVELOPMENT STAGE COMPANY Medcast is a development stage company which has not generated significant revenue. Medcast has not developed a model to generate revenue as a stand alone entity. For a more complete description of Medcast, see "Information regarding WebMD" on page 297. ACCOUNTING TREATMENT OF THE MEDCAST MERGER We intend to account for the merger 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 merger see the section entitled "Accounting treatment of the Medcast merger" on page 129. INTERESTS OF DIRECTORS, OFFICERS AND AFFILIATES IN THE MEDCAST MERGER When considering the recommendation of Medcast's board of directors, you should be aware that certain directors and executive officers of Medcast have interests in the merger different from, or in addition to, yours. For a detailed description of the interests of related parties in the merger, see the section entitled "Interests of directors, officers and affiliates in the Medcast merger" on page 123. 21 32 RESTRICTIONS ON THE ABILITY TO SELL HEALTHEON/ WEBMD STOCK All shares of Healtheon/WebMD common stock received by Medcast stockholders in connection with the merger will be freely transferable unless the holder is considered an affiliate of either Healtheon/WebMD or Medcast under the Securities Act. For a complete description of transfer restrictions applicable to our affiliates, see the section entitled "Restrictions on sales of shares by affiliates of Medcast and Healtheon/WebMD" on page 129. MARKET PRICE INFORMATION Shares of Healtheon common stock are listed on the Nasdaq National Market. On June 30, 1999, the last full trading day prior to the public announcement of the proposed Medcast merger, Healtheon's common stock closed at $77.00 per share. On , 1999, Healtheon's common stock closed at $ per share. We urge you to obtain current market quotations. Medcast's capital stock is not publicly traded. For a more complete description of market price information see the section entitled "Comparative per share market price data" on page 141. 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 merger agreement. In particular, you should read the documents attached to this proxy statement/prospectus, including the merger agreement, which is attached as Annex C, and the opinion of Hambrecht & Quist, which is attached as Annex G. 22 33 SELECTED HISTORICAL AND SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA The following selected historical financial data of Healtheon, WebMD, MEDE AMERICA and Medcast have been derived from their respective historical financial statements, and should be read in conjunction with those financial statements and the related notes which are included elsewhere in this proxy statement/prospectus. The selected unaudited pro forma condensed combined financial data of Healtheon, WebMD, MEDE AMERICA and Medcast are derived from the unaudited pro forma condensed combined financial information, which gives effect to the transactions as purchases, and should be read in conjunction with the unaudited pro forma condensed combined financial information and related notes, which are included elsewhere in this prospectus/proxy statement. For pro forma purposes, Healtheon's historical statement of operations for the year ended December 31, 1998, WebMD's statement of operations for the year ended December 31, 1998, after giving effect to the acquisition of Sapient Health Network, Inc. and Direct Medical Knowledge, Inc., MEDE AMERICA's statement of operations for the twelve months ended December 31, 1998, after giving effect to the acquisition of Healthcare Interchange, Inc., and Medcast's historical statement of operations for the twelve months ended December 31, 1998 have been combined to give effect to the mergers as if they had occurred on January 1, 1998. Healtheon's historical statement of operations for the six months ended June 30, 1999, WebMD's historical statement of operations for the six months ended June 30, 1999, MEDE AMERICA's historical statement of operations for the six months ended June 30, 1999 and Medcast's historical statement of operations for the six months ended June 30, 1999 have been combined to give effect to the mergers as if they had occurred on January 1, 1999. The unaudited pro forma combined condensed balance sheet data assumes that the WebMD, MEDE AMERICA and Medcast mergers took place as of June 30, 1999 and combine Healtheon's, WebMD's, MEDE AMERICA's and Medcast's historical balance sheets at that date. The total estimated purchase prices of the WebMD, MEDE AMERICA and Medcast mergers 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 mergers, 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. 23 34 HEALTHEON'S SELECTED HISTORICAL FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ------------------------------------------------------ -------------------- 1998 1997 1996 1995 1994 1999 1998 -------- -------- -------- ------- ------- -------- -------- (UNAUDITED) HISTORICAL STATEMENTS OF OPERATIONS DATA: Revenues................. $ 48,838 $ 13,390 $ 11,013 $ 2,175 $ 190 $ 40,253 $ 20,653 Loss from operations..... (53,948) (25,423) (16,541) (3,936) (3,118) (37,316) (21,827) Net loss applicable to common stockholders.... (54,048) (28,005) (18,606) (4,458) (3,426) (36,134) (22,331) Basic and diluted net loss per common share.................. (1.54) (3.88) (2.83) (0.85) (0.55) (1.27) Shares used in computing basic and diluted net loss per common share.................. 34,987 7,223 6,583 5,246 66,286 17,632
AS OF DECEMBER 31, ---------------------------------------------------- JUNE 30, 1998 1997 1996 1995 1994 1999 ------- ------- -------- ------- ------- ----------- (UNAUDITED) HISTORICAL BALANCE SHEET DATA: Cash, cash equivalents and short-term investments.......................... $36,817 $21,804 $ 7,539 $ 9,386 $ 4,186 $ 47,353 Working capital........................ 27,934 14,790 2,505 7,244 4,226 37,796 Total assets........................... 79,940 53,747 34,407 10,801 5,379 108,028 Long-term obligations, net of current portion.............................. 2,984 932 1,210 -- 63 2,609 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) 81,773
WEBMD'S SELECTED HISTORICAL FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PERIOD FROM INCEPTION (APRIL 21, SIX MONTHS ENDED YEARS ENDED DECEMBER 31, 1994) TO JUNE 30, ------------------------------------- DECEMBER 31, ------------------ 1998 1997 1996 1995 1994 1999 1998 -------- ------- ------- ------ ------------ -------- ------- (UNAUDITED) (UNAUDITED) HISTORICAL STATEMENTS OF OPERATIONS DATA: Revenues.............................. $ 408 $ -- $ -- $ -- $ -- $ 4,406 $ -- Loss from operations.................. (23,036) (2,594) -- -- -- (61,702) (4,520) Loss from continuing operations....... (23,175) (3,319) -- -- -- (60,160) (4,824) Net loss applicable to common stockholders........................ (18,546) (4,349) (1,682) (39) (40) (480,872) (6,058) Net loss per share -- continuing operations.......................... (2.08) (0.40) -- Basic and diluted net loss per common share............................... (1.52) (0.52) (0.64) (0.04) (0.04) (37.31) (0.53) Shares used in computing basic and diluted net loss per common share... 12,196 8,300 2,612 1,000 1,000 12,889 11,436
AS OF DECEMBER 31, ----------------------------------- JUNE 30, 1998 1997 1996 1995 1994 1999 ------- ------ ------ ---- ----------- ----------- (UNAUDITED) (UNAUDITED) HISTORICAL BALANCE SHEET DATA: Cash and cash equivalents.............. $ 6,226 $2,696 $ -- $ -- $ -- $237,835 Working capital........................ 4,313 2,532 -- -- -- 302,971 Total assets........................... 18,245 9,190 3,497 638 213 591,448 Long-term obligations, net of current portion.............................. -- 2,965 -- -- -- 271 Total stockholders' equity (net capital deficiency).......................... 5,286 3,036 558 (32) (31) 574,504
24 35 MEDE AMERICA'S SELECTED HISTORICAL FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED JUNE 30, ------------------------------------------------------- 1999 1998 1997 1996 1995 ------- -------- -------- -------- -------- HISTORICAL STATEMENTS OF OPERATIONS DATA: Revenues....................................... $55,213 $ 42,290 $ 35,279 $ 31,768 $ 16,246 Income (loss) from operations.................. 2,271 (1,382) (8,165) (18,340) (16,342) Loss before extraordinary item................. (948) (5,035) (8,833) (19,330) (16,601) Net loss applicable to common stockholders..... (4,011) (7,435) (11,233) (21,730) (16,628) Basic and diluted net loss per common share: Loss before extraordinary item................. (0.28) (1.31) (2.07) (4.14) (3.17) Net income (loss) applicable to common stockholders................................. (0.47) (1.31) (2.07) (4.14) (3.17) Shares used in computing basic and diluted net loss per common share........................ 8,615 5,679 5,425 5,245 5,238
AS OF JUNE 30, ------------------------------------------------------- 1999 1998 1997 1996 1995 ------- -------- -------- -------- -------- HISTORICAL BALANCE SHEET DATA: Cash and cash equivalents...................... $ 4,119 $ 2,950 $ 1,919 $ 2,639 $ 8,554 Working capital (deficit)...................... 11,206 2,345 (2,567) (4,207) 504 Total assets................................... 78,709 59,394 48,090 43,031 59,511 Long-term debt, including current portion...... 5,136 41,324 25,161 11,601 5,805 Redeemable cumulative preferred stock.......... -- 31,223 28,823 26,423 24,023 Total stockholders' equity (net capital deficiency).................................. 63,665 (24,692) (17,438) (8,472) 12,942
MEDCAST'S SELECTED HISTORICAL FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, ------------------- ------------------- 1998 1997 1999 1998 -------- ------- -------- ------- (UNAUDITED) HISTORICAL STATEMENTS OF OPERATIONS DATA: Revenues.................................................... $ -- $ -- $ 48 $ -- Loss from operations........................................ (14,657) (1,960) (18,832) (3,302) Net loss applicable to common stockholders.................. (18,535) (1,960) (77,195) (3,556) Basic and diluted net loss per common share................. (9.72) (1.11) (40.66) (1.86) Shares used in computing basic and diluted net loss per common share.............................................. 1,906 1,762 1,899 1,916
AS OF DECEMBER 31, ------------------- JUNE 30, 1998 1997 1999 -------- ------- ----------- (UNAUDITED) HISTORICAL BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $ 8,273 $ 34 $ 10,628 Working capital (deficit)................................... 5,365 (1,959) 5,497 Total assets................................................ 11,259 63 14,624 Long-term debt, including current portion................... 372 -- 988 Redeemable preferred stock.................................. 26,591 -- 85,130 Total stockholders' equity (net capital deficiency)......... (18,901) (1,929) (76,451)
25 36 HEALTHEON/WEBMD SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA(1) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED 1998 JUNE 30, 1999 ------------ ---------------- (UNAUDITED) (UNAUDITED) UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues.................................................... $ 102,587 $ 74,940 Loss from operations........................................ (1,355,470) (728,553) Net loss applicable to common stockholders.................. (1,379,917) (889,460) Basic and diluted net loss per common share................. (12.59) (6.31) Shares used in computing basic and diluted net loss per common share.............................................. 109,566 140,865
AS OF JUNE 30, 1999 ----------- (UNAUDITED) UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $ 434,935 Working capital............................................. 402,970 Total assets................................................ 4,702,724 Long-term obligations, net of current portion............... 8,638 Total stockholders' equity.................................. 4,549,036
- ------------------------ (1) For detailed information see "Unaudited pro forma condensed combined financial information" on pages 142 through 174. 26 37 COMPARATIVE HISTORICAL AND UNAUDITED PRO FORMA PER SHARE DATA The following table sets forth: (1) historical net loss per share and historical net tangible book value per share data of Healtheon (2) historical net loss per share and historical net tangible book value per share of WebMD (3) historical net loss per share and historical net tangible book value per share data of MEDE AMERICA (4) historical net loss per share and historical net tangible book value per share data of Medcast (5) unaudited pro forma condensed combined net loss per share and unaudited pro forma condensed combined net tangible book value per share data of Healtheon/WebMD after giving effect to the WebMD merger, the MEDE AMERICA merger and the Medcast merger (6) unaudited pro forma condensed combined net loss per share and unaudited pro forma condensed combined net tangible book value per share data of Healtheon/WebMD after giving effect to the WebMD merger and the MEDE AMERICA merger (7) unaudited pro forma condensed combined net loss per share and unaudited pro forma condensed combined net tangible book value per share of Healtheon/WebMD after giving effect to the WebMD merger and the Medcast merger (8) unaudited pro forma condensed combined net loss per share and unaudited pro forma condensed combined net tangible book value per share of Healtheon/WebMD after giving effect to the WebMD merger (9) unaudited pro forma condensed combined net loss per share and unaudited pro forma condensed combined net tangible book value per share data of Healtheon after giving effect to the MEDE AMERICA merger (10) unaudited equivalent pro forma condensed combined net loss per share and unaudited equivalent pro forma condensed combined net tangible book value per share data of WebMD assuming the MEDE AMERICA merger does not occur (11) unaudited equivalent pro forma condensed combined net loss per share and unaudited equivalent pro forma condensed combined net tangible book value per share data of MEDE AMERICA based on the exchange ratio of 0.6593 shares of Healtheon's common stock for each share of MEDE AMERICA's common stock. See "The WebMD merger" on page 54 and "The MEDE AMERICA merger" on page 93. The information in the table should be read in conjunction with the historical financial statements of Healtheon, WebMD, MEDE AMERICA and Medcast and the related notes incorporated by reference in this proxy statement/prospectus and the unaudited pro forma condensed combined financial information and related notes included elsewhere in this proxy statement/prospectus. The unaudited pro forma condensed combined financial information is not necessarily indicative of the net loss per share or book value per share that would have been achieved had the mergers been consummated as of the beginning of 27 38 the periods presented and should not be construed as representative of these amounts for any future dates or periods.
HISTORICAL --------------------------------------- MEDE HEALTHEON WEBMD AMERICA MEDCAST (1) (2) (3) (4) --------- ------- ------- ------- Net loss per share -- basic and diluted for the: Year Ended December 31, 1998........................... $(1.54) $ (1.52) $(1.16) $ (9.72) Equivalent pro forma net loss per share for the year ended December 31, 1998: WebMD.................................................. MedE America........................................... Medcast................................................ Six Months Ended June 30, 1999......................... (0.55) (37.31) (0.06) (40.66) Equivalent pro forma net loss per share for the six months ended June 30, 1999: WebMD.................................................. MedE America........................................... Medcast................................................ Book value per share at June 30, 1999................... 0.84 11.87 (0.64) (53.21) Equivalent pro forma book value per share at June 30, 1999: WebMD.................................................. MedE America........................................... Medcast................................................ PRO FORMA CONDENSED COMBINED OF HEALTHEON/WEBMD INCLUDING: ------------------------------------------------------------ HEALTHEON WEBMD HEALTHEON MEDE WEBMD HEALTHEON HEALTHEON AMERICA MEDE WEBMD HEALTHEON MEDE MEDCAST AMERICA MEDCAST WEBMD AMERICA (5) (6) (7) (8) (9) --------- --------- --------- --------- ------------ Net loss per share -- basic and diluted for the: Year Ended December 31, 1998........................... $(12.59) $(12.12) $(12.37) $(11.85) $(4.28) Equivalent pro forma net loss per share for the year ended December 31, 1998: WebMD.................................................. (7.01) (6.75) (6.89) (6.60) N/A MedE America........................................... (19.10) (18.39) N/A N/A (6.49) Medcast................................................ (22.97) N/A (22.55) N/A N/A Six Months Ended June 30, 1999......................... (6.31) (6.05) (6.26) (5.97) (1.3 1) Equivalent pro forma net loss per share for the six months ended June 30, 1999: WebMD.................................................. (4.58) (4.45) (4.62) (4.49) N/A MedE America........................................... (12.60) (12.25) N/A N/A (2.01) Medcast................................................ (15.15) N/A (15.30) N/A N/A Book value per share at June 30, 1999................... 4.51 4.64 4.86 5.00 0.64 Equivalent pro forma book value per share at June 30, 1999: WebMD.................................................. 2.51 2.58 2.71 2.78 N/A MedE America........................................... 6.84 7.03 N/A N/A 0.97 Medcast................................................ 8.23 N/A 8.87 N/A N/A
- ------------------------- - - Historical net tangible book value per share is computed by dividing stockholders' equity less goodwill and other intangible assets by the number of shares of common stock outstanding at the end of each period. - - The pro forma condensed combined book value per share is computed by dividing pro forma stockholders' equity less goodwill and other intangible assets, including the effect of pro forma adjustments, by the pro forma number of shares of Healtheon/WebMD common stock which would have been outstanding had the mergers been consummated as of June 30, 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 1.796 shares of Healtheon/WebMD common stock for each share of WebMD common stock. - - The MEDE AMERICA equivalent pro forma condensed combined per share amounts are calculated by multiplying the pro forma condensed combined book value per share amounts by the exchange ratio of 0.6593 shares of Healtheon/WebMD common stock for each share of MEDE AMERICA common stock. - - The Medcast equivalent pro forma condensed combined per share amounts are calculated by multiplying the pro forma condensed combined book value per share amounts by the expected exchange ratio of 0.5483 shares of Healtheon/WebMD common stock for each share of Medcast capital stock. 28 39 RISK FACTORS The mergers involve a high degree of risk. By voting in favor of the WebMD merger, the MEDE AMERICA merger or the Medcast merger, you will be choosing to invest in Healtheon common stock, which is referred to upon completion of the WebMD merger as 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 mergers. HEALTHEON, WEBMD, MEDE AMERICA AND MEDCAST HAVE INCURRED AND HEALTHEON/WEBMD WILL CONTINUE TO INCUR SUBSTANTIAL LOSSES Healtheon began operations in January 1996 and has incurred net losses from operations in each fiscal period since its inception. WebMD commercially launched its Internet-based services in October 1998 and has incurred net losses from operations since that time. MEDE AMERICA was formed in March 1995 and has incurred net losses from operations in each fiscal period since its inception. Medcast was formed in January 1997 and has incurred net losses from operations in each fiscal period since its inception. As of March 31, 1999, the four companies combined had accumulated losses of approximately $308 million. In addition, Healtheon/WebMD currently intends to invest heavily in acquisitions, infrastructure development, applications development and sales and marketing in order to extend its services to a growing number of potential customers and partners. If the WebMD merger, the MEDE AMERICA merger or the Medcast merger occurs, the purchase price of these acquisitions will be amortized over the useful life of the tangible and intangible assets. We currently anticipate that this amortization will cause Healtheon/WebMD to incur significant net losses for the next several years. We expect that Healtheon/WebMD will incur increasing net operating losses and negative cash flows for the foreseeable future and may never be profitable. THE BUSINESS OF PROVIDING SERVICES OVER THE INTERNET IS DIFFICULT TO EVALUATE AND THE HEALTHEON/WEBMD BUSINESS MODEL IS UNPROVEN Because each of Healtheon, WebMD, MEDE AMERICA and Medcast recently began operations, it is difficult to evaluate their businesses and prospects. Healtheon/WebMD's revenue and income potential is unproven and its business model is emerging. Healtheon/WebMD's pro forma historical financial information is of limited value in projecting future operating results because of no operating history as a combined organization and the emerging nature of its markets. Healtheon/WebMD will initially derive a substantial portion of its revenue from non-Internet network services, from development and consulting services and from managing and operating its customers' information technology infrastructures. Healtheon/WebMD may never achieve favorable operating results or profitability. HEALTHEON/WEBMD'S QUARTERLY OPERATING RESULTS MAY VARY, WHICH COULD AFFECT THE MARKET PRICE OF ITS COMMON STOCK Fluctuations in Healtheon/WebMD's quarterly results could adversely affect the market price of Healtheon/WebMD's common stock in a manner unrelated to its long-term operating performance. Healtheon/WebMD expects to increase activities and spending in substantially all operational areas and 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. 29 40 HEALTHEON/WEBMD'S FUTURE RESULTS OF OPERATIONS MAY MATERIALLY DIFFER FROM THOSE PROJECTED IN THE PRO FORMA ACCOUNTING PRESENTATION Healtheon/WebMD has allocated the total estimated purchase price for WebMD, MEDE AMERICA and Medcast on a preliminary basis to assets and liabilities based on Healtheon/WebMD's best estimates of the fair value of these assets and liabilities, with the excess costs over the net assets acquired allocated to goodwill and other intangible assets. These allocations are subject to change pending a final determination and analysis of the total purchase prices and the fair value of the assets acquired and liabilities assumed. The impact of these changes could be material to Healtheon/WebMD's future results of operations. HEALTHEON/WEBMD WILL INCUR SIGNIFICANT EXPENSE TO ACQUIRE SUBSCRIBERS AND PROMOTE ITS SERVICES Healtheon/WebMD intends to use a significant portion of the proceeds from recent sales of WebMD capital stock to fund branding and advertising, including promotional arrangements. These increased expenses may not lead to increased revenues, subscribers or users. Agreements and promotional arrangements with strategic partners often require payments in various forms, including royalties, license fees and other significant guaranteed amounts on a per subscriber or a minimum dollar amount basis over terms ranging from one to three years. Some of these payments must be made whether or not Healtheon/ WebMD ever uses services under these agreements. Healtheon/WebMD must also fund some of the rebates and costs that its strategic partners offer and incur in connection with the promotion of WebMD. Promotional arrangements currently require, and future arrangements may require, Healtheon/WebMD to pay amounts that can be recouped only if subscribers maintain and use a subscription and pay all required subscription fees for an extended period of time. 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. WebMD estimates that as of June 30, 1999, it was committed to make the following aggregate payments under its strategic agreements:
PERIOD AMOUNT ------ ------------- July - December 1999........................................ $37.3 million 2000........................................................ 72.5 million 2001........................................................ 78.3 million 2002........................................................ 40.4 million 2003........................................................ 34.4 million
HEALTHEON/WEBMD'S ABILITY TO GENERATE REVENUES WILL SUFFER IF IT DOES NOT QUICKLY EXPAND ITS SUITE OF APPLICATIONS Healtheon currently offers a limited number of applications on its platform and many of WebMD's service offerings are not fully developed or launched. Healtheon/WebMD must quickly introduce new applications and services, such as site-wide search capability on its web site, secure e-mail services, online laboratory test results and ordering and streaming audio and video features. If Healtheon/WebMD cannot improve the functionality of the suite of WebMD Internet applications and successfully launch these services in a timely manner, it will not be able to retain subscribers whose subscriptions are initially paid for by Healtheon/WebMD's strategic partners once those subscribers are required to pay for their subscriptions themselves or to attract other subscribers who will pay for their subscriptions. WebMD expects that its advertising and sponsorship revenues will be dependent on the level of usage of its services by subscribers, and believes that levels of usage will not increase unless it improves functionality. Healtheon/WebMD will not have the internal resources and specialized healthcare expertise to develop all these applications and services independently. Consequently, it must rely on a combination of internal development, strategic relationships, licensing and acquisitions to develop these applications and services. Each of Healtheon/WebMD's applications, regardless of how it was developed, must be integrated and customized to operate with existing customer legacy computer systems and Healtheon/WebMD's platform. Developing, integrating and customizing these applications and services will be time consuming, and these applications and services may never achieve market acceptance, which could also cause Healtheon/ WebMD's business to suffer. 30 41 HEALTHEON/WEBMD WILL BE DEPENDENT ON STRATEGIC RELATIONSHIPS TO GENERATE SOME OF ITS REVENUE Healtheon/WebMD's ability to generate revenues will suffer if it cannot establish and maintain strategic relationships Healtheon/WebMD must establish and maintain strategic relationships with leaders in a number of healthcare and Internet industry segments. Currently, Healtheon receives a significant amount of its revenues from four strategic partners. UnitedHealth Group, SmithKline Labs, which was recently acquired by Quest Diagnostics, Inc., Brown & Toland and Beech Street each accounted for more than 10% of Healtheon's revenues for the six months ended June 30, 1999, and together accounted for approximately 81.6% of Healtheon's revenues for the same time period. On a pro forma basis after giving effect to the mergers with WebMD, MEDE AMERICA and Medcast, these four strategic partners would together account for approximately 43.9% of Healtheon/WebMD's pro forma revenues for the six months ended June 30, 1999. For a more complete description of Healtheon's strategic relationships, see the section entitled "Healtheon's business -- Strategic relationships" beginning on page 199. DuPont and Premiere Technologies each accounted for more than 10% of WebMD's revenues for the six months ended June 30, 1999. For a more complete description of WebMD's strategic relationships, see the section entitled "WebMD's business -- Strategic relationships" beginning on page 240. Healtheon/WebMD expects that its strategic alliances with UnitedHealth Group, SmithKline Labs, Brown & Toland, Beech Street, DuPont and Microsoft may provide significant revenues to Healtheon/WebMD in the future. These relationships are critical to Healtheon/WebMD's success because Healtheon/WebMD believes that these relationships will provide additional subscribers to WebMD and will generate acceptance of Healtheon/WebMD's platform, applications and services. Healtheon/WebMD may not be able to establish commercial acceptance of its platform, applications and services unless it maintains these existing strategic relationships, and establishes and maintains additional strategic relationships. Healtheon/WebMD has limited experience with strategic partners To date, Healtheon, WebMD, MEDE AMERICA and Medcast 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 and Internet industry participants. Healtheon/WebMD may compete with potential strategic partners Entering into strategic relationships in the future is complicated because some of Healtheon's, WebMD's, MEDE AMERICA's and Medcast's current and future strategic partners may decide to compete with Healtheon/WebMD and some strategic relationships may put Healtheon/WebMD in competition with existing strategic partners or customers. In addition, Healtheon/WebMD may not be able to maintain or establish relationships with key participants in the healthcare and Internet industries if Healtheon, WebMD, MEDE AMERICA or Medcast has established relationships with competitors of these key participants. Consequently, it is important that Healtheon/WebMD is perceived as independent of any particular strategic partner or customer. Moreover, many potential partners may resist working with Healtheon/WebMD until its applications and services have been successfully introduced and have achieved market acceptance. Healtheon/WebMD has granted exclusive rights to strategic partners Exclusive rights that WebMD has granted to market its services in the infertility, obstetrics, gynecology, cardiology, orthopaedics, cardiothoracic 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, and to enter into strategic relationships with other strategic partners. HEALTHEON/WEBMD'S ABILITY TO GENERATE REVENUES WILL SUFFER IF IT CANNOT RETAIN SUBSCRIBERS Healtheon/WebMD expects to generate a significant portion of its revenues from subscriptions, primarily from revenues generated from Microsoft's and DuPont's sponsorship of WebMD subscriptions. 31 42 Healtheon/WebMD must retain subscribers in order to generate subscription revenues. In addition, Healtheon/WebMD's ability to generate advertising and sponsorship revenues and transaction revenues will be dependent on the number of subscribers and level of usage by those subscribers. Healtheon/WebMD cannot guarantee that it will be able to retain existing subscribers. In particular, Healtheon/WebMD cannot guarantee that it will retain subscribers whose subscriptions are initially paid for by Healtheon/WebMD's strategic partners once those subscribers are required to pay for their subscriptions themselves or that these subscribers will actually use its services. HEALTHEON/WEBMD WILL FACE TECHNICAL, OPERATIONAL AND STRATEGIC CHALLENGES THAT MAY PREVENT IT FROM SUCCESSFULLY INTEGRATING HEALTHEON, WEBMD, MEDE AMERICA AND MEDCAST The mergers involve risks related to the integration and management of acquired technology, operations and personnel. The integration of Healtheon, WebMD, MEDE AMERICA and Medcast will be a complex, time consuming and expensive process and may disrupt Healtheon/WebMD's business if not completed in a timely and efficient manner. Following the mergers, Healtheon/WebMD must operate as a combined organization utilizing common information and communication systems, operating procedures, financial controls and human resources practices. Healtheon/WebMD may encounter substantial difficulties, costs and delays involved in integrating the operations of Healtheon, WebMD, MEDE AMERICA and Medcast, including: - potential incompatibility of business cultures - perceived adverse changes in business focus - potential conflicts in sponsor, advertising or strategic relationships - the loss of key employees and diversion of the attention of management from other ongoing business concerns Following the completion of the mergers, Healtheon/WebMD intends to develop and launch an integrated web site and product offering which utilizes the majority of the companies' products and services, including Healtheon's Internet-based information and transaction platform, WebMD's brand awareness, marketing strategy and strategic relationships, MEDE AMERICA'S base of healthcare providers and payer institutions and Medcast's daily medical news. Healtheon/WebMD cannot guarantee that the integrated web site will be successfully launched in a timely manner, if at all. HEALTHEON/WEBMD'S BUSINESS WILL SUFFER IF IT FAILS TO SUCCESSFULLY INTEGRATE ANY ACQUIRED TECHNOLOGIES AND COMPANIES IN THE FUTURE Integrating any newly acquired organizations and technologies into Healtheon/WebMD in the future could be expensive, time consuming and may strain its resources. Future acquisitions could divert management's attention from other business concerns and expose it to unforeseen liabilities or risks associated with entering new markets. In addition, Healtheon/WebMD may lose key employees while integrating these new companies. Healtheon/WebMD may also lose its current customers if any acquired companies have relationships with competitors of Healtheon/WebMD's customers. Consequently, Healtheon/WebMD may not be successful in integrating acquired businesses or technologies and may not achieve anticipated revenue and cost benefits. Healtheon/WebMD also cannot guarantee that these acquisitions will result in sufficient revenues or earnings to justify its investment in, or expenses related to, these acquisitions or that any synergies will develop. The healthcare industry is consolidating and Healtheon/WebMD expects that it will face intensified competition for acquisitions, especially from larger, better-funded organizations. If Healtheon/WebMD fails to execute its acquisition strategy successfully for any reason, its business will suffer significantly. FUTURE ACQUISITIONS COULD DILUTE OUR STOCKHOLDERS AND COULD RESULT IN ADVERSE ACCOUNTING CONSEQUENCES 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 32 43 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. SALES OF LARGE AMOUNTS OF HEALTHEON/WEBMD SHARES FOLLOWING THE MERGERS COULD ADVERSELY 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 mergers. 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 mergers, 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 initial public offerings, and there was no public market for the capital stock of WebMD. After the mergers, all of the shares of Healtheon/WebMD will be eligible for immediate sale. However, shares held by affiliates of the companies 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. HEALTHEON/WEBMD'S BUSINESS WILL SUFFER IF IT FAILS TO MANAGE ITS GROWTH Healtheon, WebMD, MEDE AMERICA and Medcast have rapidly and significantly expanded their operations and Healtheon/WebMD expects to continue to do so. This growth has placed a significant strain on each company's managerial, operational, financial and other resources and is expected to continue to strain the resources of Healtheon/WebMD. If Healtheon/WebMD is unable to respond to and manage this expected growth, then the quality of its services and its results of operations could be materially adversely affected. Healtheon's, WebMD's, MEDE AMERICA's and Medcast's current information systems, procedures and controls may not continue to support Healtheon/WebMD's operations, and may hinder its ability to exploit the market for healthcare applications and services. Healtheon/WebMD is in the process of evaluating its accounting and management information systems and anticipates that it may implement new systems within the next twelve months. Healtheon/WebMD could experience interruptions to its business while it transitions to new systems. Healtheon/WebMD cannot guarantee that its systems, procedures and controls will be adequate to support expansion of our operations. HEALTHEON/WEBMD'S BUSINESS WILL SUFFER IF COMMERCIAL USERS AND SUBSCRIBERS DO NOT ACCEPT INTERNET SOLUTIONS Healtheon/WebMD's business model depends on the adoption of Internet solutions by commercial users and subscribers. Healtheon/WebMD's ability to generate revenues could suffer dramatically if Internet solutions are not accepted or not perceived to be effective. The Internet may not prove to be a viable commercial marketplace for a number of reasons, including: - inadequate development of the necessary infrastructure for communication speed, access and server reliability - security and confidentiality concerns relating to conducting transactions over the Internet - lack of development of complementary products, such as high-speed modems and high-speed communication lines - delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity 33 44 The Internet infrastructure may be unable to support the demands placed on it by continued growth and use of the Internet. The adoption of Internet solutions by healthcare participants will require the acceptance of a new way of conducting business and exchanging information. The healthcare industry, in particular, relies on legacy systems that may be unable to benefit from Healtheon/WebMD's Internet-based platform. To maximize the benefits of Healtheon/WebMD's platform, healthcare participants must be willing to allow sensitive information to be stored in Healtheon/WebMD's databases. Healtheon/ WebMD can process transactions for healthcare participants that maintain information on their own proprietary databases. However, the benefits of Healtheon/WebMD's connectivity and sophisticated information management solution are limited under these circumstances. Customers using legacy and client-server systems may refuse to adopt new systems when they have made extensive investment in hardware, software and training for older systems. PERFORMANCE PROBLEMS WITH HEALTHEON/WEBMD'S SYSTEMS COULD DAMAGE ITS BUSINESS Healtheon/WebMD's customer satisfaction and its business could be harmed if Healtheon/WebMD or its customers experience system delays, failures or loss of data. Healtheon, WebMD, MEDE AMERICA and Medcast currently process substantially all their customer transactions and data at their respective facilities. Although Healtheon, WebMD, MEDE AMERICA and Medcast have safeguards for emergencies, they do not have backup facilities to process information if these facilities are not functioning. The occurrence of a major catastrophic event or other system failure at any of Healtheon/WebMD's facilities could interrupt data processing or result in the loss of stored data. PERFORMANCE PROBLEMS WITH THE SYSTEMS OF HEALTHEON/WEBMD'S SERVICE AND CONTENT PROVIDERS COULD HARM HEALTHEON/WEBMD'S BUSINESS Healtheon/WebMD will depend on service and content providers to provide information and data feeds on a timely basis. Healtheon/WebMD's web sites could experience disruptions or interruptions in service due to the failure or delay in the transmission or receipt of this information. In addition, Healtheon/WebMD's customers will depend on Internet service providers, online service providers and other web site operators for access to our web sites. All of these providers have experienced significant outages in the past and could experience outages, delays and other difficulties in the future due to system failures unrelated to our systems. Any significant interruptions in our services or increases in response time could result in a loss of potential or existing customers, strategic partners, advertisers or sponsors and, if sustained or repeated, could reduce the attractiveness of Healtheon/WebMD's services. IF HEALTHEON/WEBMD SYSTEMS EXPERIENCE SECURITY BREACHES OR ARE OTHERWISE PERCEIVED TO BE INSECURE, HEALTHEON/WEBMD'S REPUTATION WILL SUFFER A material security breach could damage Healtheon/WebMD's reputation or result in liability. Healtheon/WebMD will retain confidential customer and patient information in its processing centers. Healtheon/WebMD may be required to spend significant capital and other resources to protect against security breaches or to alleviate problems caused by breaches. Any well-publicized compromise of Internet security could deter people from using the Internet or from conducting transactions that involve transmitting confidential information, including confidential healthcare information. Therefore, it is critical that these facilities and infrastructure remain secure and are perceived by the marketplace to be secure. Despite the implementation of security measures, this infrastructure may be vulnerable to physical break-ins, computer viruses, programming errors, attacks by third parties or similar disruptive problems. HEALTHEON/WEBMD'S BUSINESS WILL BE HARMED IF IT IS UNSUCCESSFUL IN RESPONDING TO RAPID TECHNOLOGY CHANGES IN ITS MARKETS. 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 34 45 technological developments and changing customer needs. In addition, Healtheon/WebMD's applications and services offerings may become obsolete due to the adoption of new technologies or standards. HEALTHEON/WEBMD'S PLATFORM INFRASTRUCTURE AND SCALABILITY ARE NOT PROVEN AND IT MAY FAIL TO RESPOND TO NEW GROWTH So far, Healtheon and WebMD have processed a limited number and variety of transactions over their platforms. Similarly, a limited number of healthcare participants use these platforms. Healtheon/ WebMD's systems may not accommodate increased use while maintaining acceptable overall performance. MEDE AMERICA, by contrast, currently processes approximately 950,000 transactions per business day. Healtheon/WebMD must continue to expand and adapt its network infrastructure to accommodate additional users, increased transaction volumes and changing customer requirements. This expansion and adaptation will be expensive and will divert Healtheon/WebMD's attention from other activities. PROBLEMS RELATING TO THE YEAR 2000 ISSUE COULD ADVERSELY AFFECT HEALTHEON/WEBMD'S BUSINESS Some of Healtheon/WebMD's software programs may not recognize calendar dates beginning in the Year 2000. As a result of this problem, some of these systems could fail to operate or fail to produce correct results. Accordingly, Healtheon, WebMD, MEDE AMERICA and Medcast are reviewing their internal computer programs and systems to determine if they will be Year 2000 compliant. Healtheon, WebMD, MEDE AMERICA and Medcast presently believe that their computer systems will be Year 2000 compliant in a timely manner or, in the alternative, that contingency plans are in place for any systems that may not be compliant. Nevertheless, undetected errors or defects may remain. Furthermore, Healtheon/WebMD will depend on third party suppliers for most of the services it provides. Healtheon, WebMD, MEDE AMERICA and Medcast are in the process of contacting any third party suppliers regarding their Year 2000 readiness. If these parties are affected by the Year 2000 problem, Healtheon/WebMD's ability to provide services to its subscribers may be impaired. For further information, see the sections entitled "Healtheon management's discussion and analysis of financial condition and results of operations -- Year 2000 compliance" on page 214, "WebMD management's discussion and analysis of financial condition and results of operations -- Year 2000 compliance" on page 252, "MEDE AMERICA management's discussion and analysis of financial condition and results of operations -- Year 2000 compliance" on page 290 and "Medcast management's discussion and analysis of financial condition and results of operations -- Year 2000 compliance" on page 309. IF HEALTHEON/WEBMD IS UNABLE TO GENERATE SIGNIFICANT ADVERTISING REVENUES, ITS FUTURE RESULTS OF OPERATIONS WILL BE MATERIALLY ADVERSELY AFFECTED Healtheon/WebMD will derive a portion of its revenues from advertising on its web sites. Significant advertising revenues have not been earned by WebMD, and Healtheon/WebMD may not be able to generate significant advertising revenues. No standards have been widely accepted to measure the effectiveness of web advertising. If no standards develop, existing advertisers may not continue their current level of web advertising, and advertisers that have traditionally relied on other advertising media may be reluctant to advertise on the web. Advertisers that already have invested substantial resources in other advertising methods may be reluctant to adopt a new strategy. Healtheon/WebMD's business would be adversely affected if the market for web advertising fails to develop or develops more slowly than expected. Different pricing models are used to sell advertising on the web. It is difficult to predict which, if any, will emerge as the industry standard. This makes it difficult to project future advertising revenues. The level of subscriber usage for Healtheon/WebMD's services is likely to be a factor in determining advertising rates, and Healtheon/WebMD cannot predict whether those subscribers whose subscriptions are paid for by strategic partners will actually use Healtheon/WebMD's services. 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. 35 46 HEALTHEON/WEBMD PLANS TO GENERATE A PORTION OF ITS REVENUE FROM HEALTHCARE TRANSACTIONS ON ITS WEB SITES, AND ITS FUTURE REVENUES WILL BE MATERIALLY ADVERSELY AFFECTED IF IT DOES NOT SIGNIFICANTLY INCREASE THE NUMBER OF TRANSACTIONS THAT OCCUR ON ITS WEB SITES Neither Healtheon nor WebMD has earned any Internet transaction revenues to date, and we cannot guarantee that Healtheon/WebMD will be able to generate significant transaction revenues in the future. Healtheon/WebMD has developed relationships with service providers to offer healthcare products and services through direct links from its web sites to their web sites. However, there is no established business model for the sale of healthcare products or services over the Internet. Accordingly, Healtheon/WebMD has no significant experience in the sale of products or services online and the development of relationships with providers of such products and services, nor can we predict the rate at which our customers will elect to engage in this form of commerce or the compensation that we will receive for enabling these transactions. HEALTHEON/WEBMD'S REVENUES WILL BE CONCENTRATED IN A FEW CUSTOMERS, AND ITS ABILITY TO GENERATE REVENUE WOULD SUFFER IF IT LOST ANY OF THESE CUSTOMERS Healtheon/WebMD expects that it will generate a significant portion of its revenue from a small number of customers for the next few years. If Healtheon/WebMD does not generate as much revenue from these customers as it expects, or if it loses any of these customers, Healtheon/WebMD's revenue will be significantly reduced which would harm its business. Currently, Healtheon receives a significant amount of its revenue from four customers. UnitedHealth Group, SmithKline Labs, which was recently acquired by Quest Diagnostics, Inc., Brown & Toland and Beech Street together accounted for approximately 81.6% of Healtheon's revenues for the six months ended June 30, 1999. On a pro forma basis after giving effect to the mergers with WebMD, MEDE AMERICA and Medcast, these four customers would together account for approximately 43.9% of Healtheon/WebMD's pro forma revenues for the six months ended June 30, 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. IF HEALTHEON/WEBMD IS NOT SUCCESSFUL IN ESTABLISHING ITS BRAND, ITS ABILITY TO GENERATE REVENUES WOULD BE HARMED Healtheon/WebMD must establish its brand in order to increase its number of users and increase its online traffic. For Healtheon/WebMD to be successful in establishing its brand: - participants in the healthcare industry must perceive Healtheon/WebMD as offering quality, cost-effective products and services - healthcare consumers must perceive Healtheon/WebMD as offering relevant, reliable healthcare information from trustworthy sources - medical suppliers, pharmaceutical companies and other vendors to the healthcare community must perceive the Healtheon/WebMD web site as an effective marketing and sales channel for their products and services Healtheon/WebMD may need to substantially increase its marketing budget to generate brand recognition and brand loyalty. Healtheon/WebMD's ability to generate revenues may be affected if it cannot increase awareness of its brand. If its branding strategy is not successful, these marketing expenses may never be recovered. In addition, even if brand recognition increases, Healtheon/WebMD's number of subscribers or users may not increase. Further, Healtheon/WebMD's web sites will be more attractive to healthcare advertisers and sponsors if it has a large number of users with demographic characteristics that are desirable to advertisers and sponsors. Therefore, Healtheon/WebMD intends to introduce additional or enhanced services in the future in an effort to retain its current users and attract new users. 36 47 LENGTHY SALES AND IMPLEMENTATION CYCLES FOR HEALTHEON/WEBMD'S SOLUTIONS COULD ADVERSELY AFFECT ITS REVENUE GROWTH A key element of Healtheon/WebMD's strategy is to market its solutions directly to large healthcare organizations. Healtheon/WebMD will be unable to control many of the factors that will influence its customers' buying decisions. Healtheon/WebMD expects that the sales and implementation process will be lengthy and will involve a significant technical evaluation and commitment of capital and other resources by its customers. The sale and implementation of its solutions are subject to delays due to its customers' internal budgets and procedures for approving large capital expenditures and deploying new technologies within their networks. Healtheon/WebMD will need to expend substantial resources to integrate its applications with the existing legacy and client-server architectures of large healthcare organizations. Healtheon/WebMD has limited experience in integrating its applications with large, complex architectures, and it may experience delays in the integration process. These delays would, in turn, delay its ability to generate revenue from these applications and could adversely affect its results of operations. HEALTHEON/WEBMD WILL FACE SIGNIFICANT COMPETITION The market for healthcare information services is intensely competitive, rapidly evolving and subject to rapid technological change. Many of Healtheon's competitors have greater financial, technical, product development, marketing and other resources than Healtheon/WebMD will have. These organizations may be better known and have more customers than Healtheon/WebMD will have. Many of Healtheon/ WebMD's competitors have also announced or introduced Internet strategies that will compete with Healtheon/WebMD's applications and services. Healtheon/WebMD may be unable to compete successfully against these organizations. Healtheon/WebMD has many competitors, including: - healthcare information software vendors, including McKessonHBOC and Shared Medical Systems Corporation - healthcare electronic data interchange companies, including ENVOY Corporation, a subsidiary of Quintiles Transnational Corp., and National Data Corporation - large information technology consulting service providers, including Andersen Consulting, International Business Machines Corporation and Electronic Data Systems Corporation - small regional organizations - online services or web sites targeted to the healthcare industry, physicians and healthcare consumers generally, including allhealth.com, drkoop.com, drweil.com, healthcentral.com, medcareonline.com, mediconsult.com, medscape.com, onhealth.com, po.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 and other high-traffic web sites 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 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's reputation and brand name could be adversely affected if it experiences difficulties in introducing new services, if its services are not accepted by subscribers or consumers, if it is required to discontinue existing services or if its services do not function properly. 37 48 HEALTHEON/WEBMD'S BUSINESS COULD BE ADVERSELY AFFECTED AS A RESULT OF POLITICAL, REGULATORY, ECONOMIC OR OTHER CHANGES IN THE HEALTHCARE INDUSTRY The healthcare industry is highly regulated and is subject to changing political, economic and regulatory influences. These factors affect the purchasing practices and operation of healthcare organizations. Changes in current healthcare financing and reimbursement systems could cause Healtheon/ WebMD to make unplanned modifications of applications or services, or result in delays or cancellations of orders or in the revocation of endorsement of Healtheon/WebMD's applications and services by healthcare participants. Federal and state legislatures have periodically considered programs to reform or amend the U.S. healthcare system at both the federal and state level. These programs may contain proposals to increase governmental involvement in healthcare, lower reimbursement rates or otherwise change the environment in which healthcare industry participants operate. Healthcare industry participants may respond by reducing their investments or postponing investment decisions, including investments in Healtheon/WebMD's applications and services. Healtheon/WebMD does not know what effect any proposals would have on its business. THE TREND TOWARD CONSOLIDATION IN THE HEALTHCARE INDUSTRY COULD LEAD TO LOWER MARGINS FOR HEALTHEON/ WEBMD Many healthcare providers are consolidating to create integrated healthcare delivery systems with greater market power. These providers may try to use their market power to negotiate price reductions for Healtheon/WebMD's applications and services. If Healtheon/WebMD is forced to reduce its prices, its operating margins would decrease. As the healthcare industry consolidates, competition for customers will become more intense and the importance of acquiring each customer will become greater. GOVERNMENT REGULATION COULD ADVERSELY AFFECT HEALTHEON/WEBMD'S BUSINESS Healtheon/WebMD's business will be subject to government regulation. Existing as well as new laws and regulations could adversely affect its business. Laws and regulations may be adopted with respect to the Internet or other on-line services covering issues such as: - user privacy - pricing - content - copyrights - distribution - characteristics and quality of products and services Regulation regarding patient confidentiality 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. 38 49 Emerging standards required by healthcare laws Legislation currently being considered at the federal level could affect Healtheon/WebMD's business. For example, the Health Insurance Portability and Accountability Act of 1996 mandates the use of standard transactions, standard identifiers, security and other provisions by the year 2000. Healtheon/ WebMD will design its platform and applications to comply with these proposed regulations; however, until these regulations become final, they could change, which could cause Healtheon/WebMD to use additional resources to revise its platform and applications and lead to delays. In addition, Healtheon/ WebMD's success depends on other healthcare participants complying with these regulations. Possible federal and state healthcare regulation Both federal and state laws prohibit the offer, payment or receipt of remuneration to induce referrals to entities providing healthcare services or goods. Although the applicability of these laws to Healtheon/ WebMD's services is unclear, a state or federal regulatory agency may allege that Healtheon/WebMD's relationship with one or more of its strategic partners that sponsor Healtheon/WebMD subscriptions and that deliver healthcare services or goods violate any of these laws. In the event that this determination is made, Healtheon/WebMD could be subjected to fines and other costs and could be required to revise or terminate that portion of its business. Possible regulation by the U.S. Food and Drug Administration Some computer applications and software are considered medical devices and are subject to regulation by the U.S. Food and Drug Administration, or the FDA. None of Healtheon, WebMD, MEDE AMERICA or Medcast believes that its current applications or services are subject to FDA regulation. Healtheon/WebMD may expand its application and service offerings into areas that subject it to FDA regulation. Healtheon/WebMD has no experience in complying with FDA regulations. Healtheon/ WebMD believes that complying with FDA regulations would be time consuming, burdensome and expensive and could delay its introduction of new applications or services. HEALTHEON/WEBMD MAY FACE LIABILITIES DUE TO ERRORS IN ITS PRODUCTS Many of Healtheon/WebMD's strategic relationships and services agreements involve providing critical information technology services to Healtheon/WebMD's clients' businesses. Although Healtheon/ WebMD and its customers will test its applications, they may contain defects or result in system failures that could cause the failure to deliver correct information in a timely manner. Patients of Healtheon/WebMD's physician customers could be harmed if information critical to their proper care is not delivered in a timely manner or if incorrect information is delivered. Healtheon/WebMD's insurance may not protect it from this risk. Many of Healtheon/WebMD's contracts 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. THIRD PARTIES MAY BRING CLAIMS AGAINST HEALTHEON/WEBMD AS A RESULT OF CONTENT PROVIDED ON ITS WEB SITES, WHICH MAY BE EXPENSIVE AND TIME CONSUMING TO DEFEND 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. 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. Healtheon/WebMD could also be subject to liability for content that may be accessible 39 50 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. HEALTHEON/WEBMD'S BUSINESS WILL BE ADVERSELY AFFECTED IF IT CANNOT ATTRACT AND RETAIN KEY PERSONNEL Healtheon/WebMD future operating results will substantially depend on the ability of its officers and key employees to manage changing business conditions and to implement and improve its technical, administrative, financial control and reporting systems. Healtheon/WebMD needs to attract, integrate, motivate and retain additional highly skilled technical people. In particular, Healtheon/WebMD needs to attract experienced professionals capable of developing, selling and installing complex healthcare information systems. Healtheon/WebMD faces intense competition for these people. If the WebMD merger occurs, Healtheon/WebMD's executive management team, including Jeffrey T. Arnold, the designated Chief Executive Officer of Healtheon/WebMD, and W. Michael Long, its designated Chairman and Chief Operating Officer, will be critical to Healtheon/WebMD's success. IF HEALTHEON/WEBMD IS UNABLE TO MAINTAIN ITS RELATIONSHIPS WITH CONTENT PROVIDERS, ITS BUSINESS COULD BE ADVERSELY AFFECTED WebMD relies on independent content providers for the majority of the clinical, educational and other general healthcare information that it provides through its web site. Any failure by these parties to develop and maintain high quality, attractive content could result in user dissatisfaction, could inhibit Healtheon/ WebMD's ability to add users and could dilute the Healtheon/WebMD brand name. WebMD has entered into strategic relationships with several companies to obtain content for WebMD, and Healtheon/WebMD intends to enter into additional relationships in the future. Healtheon/WebMD must maintain WebMD's existing relationships with these content providers and build new relationships with other content providers. WebMD's agreements with content providers are short-term and non-exclusive. Termination of one or more significant content provider agreements would decrease the selection of healthcare-related news and information which can be offered to subscribers and consumers. Healtheon/WebMD's competitors could offer content that is similar or the same as that provided on the WebMD web site. If this information is readily available elsewhere, including on other web sites at a reduced cost or free of charge, Healtheon/ WebMD may lose subscribers. In addition, WebMD depends on content providers to deliver high quality content from reliable sources and to continually upgrade their content in response to subscriber and consumer demand and evolving healthcare industry trends. 40 51 OFFICERS AND DIRECTORS OF HEALTHEON, WEBMD, MEDE AMERICA AND MEDCAST MAY HAVE DIFFERENT INTERESTS FROM YOURS The directors and officers of Healtheon, WebMD, MEDE AMERICA and Medcast may have interests in the mergers and may participate in arrangements that are different from, or are in addition to, those of Healtheon, WebMD, MEDE AMERICA and Medcast stockholders generally. For further information regarding these interests, see the sections entitled "Interests of directors, officers and affiliates in the WebMD merger" on page 74, "Interests of directors, officers and affiliates in the MEDE AMERICA merger" on page 103, and "Interests of directors, officers and affiliates in the Medcast merger" on page 123. 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 merger, stockholders of MEDE AMERICA will be entitled to receive 0.6593 of a share of Healtheon/WebMD common stock per MEDE AMERICA share, subject to adjustment based on changes in the market price of Healtheon's common stock prior to the stockholders' meeting. If the ten-day average closing price of Healtheon's common stock price for the period ending two days before the stockholders' meeting is less than $38.68, then the actual number of shares MEDE AMERICA stockholders will receive in the MEDE AMERICA merger 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 merger 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 merger. 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 merger or the market price for Healtheon common stock after the completion of the merger. WE ENCOURAGE YOU TO OBTAIN CURRENT MARKET QUOTATIONS OF HEALTHEON COMMON STOCK AND MEDE AMERICA COMMON STOCK. YOU MAY NOT KNOW THE NUMBER OF SHARES OF HEALTHEON/WEBMD COMMON STOCK TO BE ISSUED TO MEDCAST STOCKHOLDERS UNTIL AS LATE AS THE DAY OF THE MEDCAST MERGER Upon the completion of the Medcast merger, stockholders of Medcast will be entitled to receive approximately 0.5483 shares of Healtheon/WebMD common stock for each share of Medcast common stock they own after conversion of any shares of Medcast preferred stock they own. The exchange ratio is based on a formula that is more fully described under the heading "Structure of the Medcast merger and conversion of Medcast common stock." The share price of Healtheon common stock is subject to price fluctuations in the market for publicly-traded equity securities and has experienced significant volatility. We cannot predict the market prices for Healtheon common stock at any time before the completion of the merger or the market price for Healtheon/WebMD common stock after the completion of the merger. WE ENCOURAGE YOU TO OBTAIN CURRENT MARKET QUOTATIONS OF HEALTHEON COMMON STOCK. BENEFITS OF WEBMD MERGER MAY NOT BE AVAILABLE TO MEDE AMERICA OR MEDCAST STOCKHOLDERS None of the benefits identified by Healtheon and WebMD as reasons for the merger will be realized by MEDE AMERICA and Medcast stockholders if the WebMD merger is not completed. Nevertheless, the MEDE AMERICA merger is not conditioned on the WebMD merger. HEALTHEON'S STOCK PRICE COULD BE ADVERSELY AFFECTED IF THE WEBMD MERGER IS NOT COMPLETED If the WebMD merger does not occur, Healtheon's stock price may decline. Nevertheless, neither the MEDE AMERICA merger nor the determination of the exchange ratio for the MEDE AMERICA merger 41 52 is dependent on the closing of the WebMD merger. The Medcast merger, however, is dependent on the closing of the WebMD merger. BENEFITS OF MEDE AMERICA MERGER MAY NOT BE AVAILABLE TO WEBMD OR MEDCAST STOCKHOLDERS None of the benefits identified by Healtheon and MEDE AMERICA as reasons for the merger will be realized by WebMD or Medcast stockholders if the MEDE AMERICA merger is not completed. Nevertheless, neither the WebMD merger nor the Medcast merger is conditioned on the MEDE AMERICA merger. BENEFITS OF MEDCAST MERGER MAY NOT BE AVAILABLE TO HEALTHEON OR MEDE AMERICA STOCKHOLDERS None of the benefits identified as reasons for the Medcast merger will be realized by Healtheon or MEDE AMERICA stockholders if the Medcast merger is not completed. Nevertheless, the WebMD merger and MEDE AMERICA merger are not conditioned on the Medcast merger. 42 53 THE HEALTHEON MEETING DATE, TIME AND PLACE OF HEALTHEON'S ANNUAL 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 issuance of 1.796 shares of Healtheon/WebMD common stock for each share of outstanding WebMD, Inc. common stock in the merger of a wholly owned subsidiary of Healtheon/WebMD with and into WebMD as contemplated by the Agreement and Plan of Reorganization dated as of May 20, 1999, as amended, among Healtheon, WebMD and Water Acquisition Corp. Following the WebMD merger and assuming the completion of the proposed acquisitions of MEDE AMERICA and Medcast, Healtheon stockholders will own approximately 49.0%, WebMD stockholders will own approximately 43.3%, MEDE AMERICA stockholders will own approximately 6.0% and Medcast stockholders will own approximately 1.7% of the combined Healtheon/WebMD. 2. To consider and vote upon a proposal to amend Healtheon's certificate of incorporation if the WebMD merger is completed to (a) change the corporate name of Healtheon to Healtheon/WebMD Corporation and (b) increase the authorized number of shares of common stock from 150,000,000 shares to 600,000,000 shares. 3. To elect three Class I directors of Healtheon, each to serve a three-year term, or until his successor has been elected and qualified or until his earlier resignation or removal. 4. To amend Healtheon's bylaws to (a) provide that directors may be removed only with cause and (b) to modify the advance notice provisions for board nominations and other stockholder proposals. 5. To amend Healtheon's 1996 Stock Plan, if the WebMD merger 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. 6. To amend Healtheon's 1998 employee stock purchase plan to (a) increase the number of shares of common stock reserved under the plan and (b) change the formula for annually increasing the number of shares available to be issued under the plan. 7. 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. 43 54 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 WebMD merger will be approved. ABSTENTIONS; BROKER NON-VOTES Abstentions will be included in determining the number of shares present and voting at the meeting and will have the same effect as votes against the proposals. In the event that a broker, bank, custodian, nominee or other record holder of Healtheon common stock indicates on a proxy that it does not have discretionary authority to vote shares on a particular matter, which is called a broker non-vote, those shares will not be considered for purposes of determining the number of shares entitled to vote with respect to a particular proposal on which the broker has expressly not voted, but will be counted for purposes of determining the presence or absence of a quorum for the transaction of business. EXPENSES OF PROXY SOLICITATION Healtheon will pay the expenses of soliciting proxies to be voted at the meeting. Following the original mailing of the proxies and other soliciting materials, Healtheon and its agents also may solicit proxies by mail, telephone, telegraph or in person. Following the original mailing of the proxies and other soliciting materials, Healtheon will request brokers, custodians, nominees and other record holders of Healtheon common stock to forward copies of the proxy and other soliciting materials to persons for whom they hold shares of Healtheon common stock and to request authority for the exercise of proxies. In these cases, Healtheon upon the request of the record holders, will reimburse such holders for their reasonable expenses. PROXIES The proxy accompanying this proxy statement/prospectus is solicited on behalf of the Healtheon board of directors for use at the meeting. Please complete, date and sign the accompanying proxy and promptly return it in the enclosed envelope or otherwise mail it to Healtheon. All properly signed proxies that Healtheon receives prior to the vote at the meeting and that are not revoked will be voted at the meeting according to the instructions indicated on the proxies or, if no direction is indicated, to approve the Healtheon merger. You may revoke it at any time before it is exercised at the meeting by taking any of the following actions: - delivering to the secretary of Healtheon, by any means, including facsimile, a written notice, bearing a date later than the date of the proxy, stating that the proxy is revoked - signing and delivering a proxy relating to the same shares and bearing a later date prior to the vote at the meeting - attending the meeting and voting in person, although attendance at the meeting will not, by itself, revoke a proxy Please note, however, that if your shares are held of record by a broker, bank or other nominee and that stockholder wishes to vote at the meeting, the stockholder must bring to the meeting a letter from the broker, bank or other nominee confirming your beneficial ownership of the shares. 44 55 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 proposals to be considered at the meeting. 45 56 THE WEBMD MEETING DATE, TIME AND PLACE OF WEBMD'S SPECIAL MEETING , 1999 10:00 a.m., Eastern time 400 The Lenox Building 3399 Peachtree Road NE Atlanta, Georgia 30326 PURPOSE OF THE SPECIAL MEETING The purpose of the WebMD stockholders' meeting is to vote on the following WebMD proposals: 1. To approve and adopt the WebMD merger agreement and approve the WebMD merger, 2. To approve the modification of accelerated vesting provisions in WebMD options to acquire an aggregate of 1,131,394 shares of WebMD common stock held by five WebMD employees as a result of the completion of the WebMD merger so that WebMD will not be prevented from deducting compensation expense relating to these options, and 3. To transact any other business that properly comes before the special meeting or any adjournments or postponements thereof. MAILING DATE AND RECORD DATE This proxy statement/prospectus is being mailed initially to all stockholders of record of WebMD as of the date of this proxy statement/prospectus. 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, voting together - Series B common stock - Series C and E common stock each voting as a separate voting group. As of the date of this proxy statement/prospectus, 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 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 46 57 acceleration provisions would be modified if proposal 2 is approved 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, have granted irrevocable proxies to the board of directors of Healtheon to vote their shares of common stock for the WebMD proposals and have agreed to convert any shares of WebMD preferred stock which they own into WebMD common stock immediately prior to the effective time of the merger and conditioned upon the closing of the merger. Under the merger 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. Additional holders WebMD's preferred stock have entered into conversion agreements providing that after the date of the proxy statement/prospectus and prior to , 1999 they either will enter into voting agreements and grant proxies to the board of directors of Healtheon to vote their preferred stock so as to cause it to be converted into Series D common stock prior to the effective time of the WebMD merger, or their preferred shares will be automatically converted into WebMD Series D common stock on the day prior to the record date. By virtue of the voting agreements and these conversion agreements, all of the shares of WebMD 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. APPRAISAL RIGHTS Only the holders of WebMD common stock and Series A preferred stock will be entitled to appraisal rights under Georgia law. Holders of other series of preferred stock must convert their preferred stock prior to the record date for the WebMD stockholders' meeting if they want to exercise dissenters' appraisal rights. For more information regarding the rights of dissenting WebMD stockholders, see the section entitled "Rights of dissenting WebMD stockholders" on page 81. PROXIES All shares of WebMD common stock and preferred stock that are entitled to vote and are represented at the WebMD stockholders' meeting by properly executed proxies received prior to or at the WebMD stockholders' meeting and not duly and timely revoked will be voted at the WebMD stockholders' meeting in accordance with the instructions indicated on the proxies. If no instructions are indicated, the proxies will be voted for both WebMD proposals. Execution of a proxy does not affect a stockholder's right to attend the meeting and, other than in the case of irrevocable proxies executed in connection with the voting agreements, does not prevent the stockholder from voting in person at the meeting. Any proxy, other than those executed in connection with the execution of a voting agreement, may be revoked by a stockholder at any time before it is exercised by delivering a written revocation or a later-dated proxy to the secretary of WebMD, or by attending the meeting and voting in person. Any written notice of revocation or subsequent proxy should be sent so as to be delivered to WebMD at 400 The Lenox Building, 3399 Peachtree Road NE, Atlanta GA 30326, attention: Corporate Secretary, or hand-delivered to the corporate secretary of WebMD, in each case at or before the taking of the vote at the WebMD stockholders' meeting. RECOMMENDATION OF WEBMD BOARD OF DIRECTORS The WebMD board of directors has unanimously approved the WebMD merger agreement and the WebMD merger and has determined that the WebMD merger is fair to, and in the best interest of, WebMD and its stockholders. THE WEBMD BOARD UNANIMOUSLY RECOMMENDS A VOTE IN FAVOR OF APPROVAL AND ADOPTION OF THE WEBMD MERGER AGREEMENT AND APPROVAL OF THE WEBMD MERGER. 47 58 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 WebMD merger -- Modification of vesting of employee stock options" on page 74 and has determined that this acceleration is in the best interest of WebMD and its stockholders. THE WEBMD BOARD UNANIMOUSLY RECOMMENDS A VOTE IN FAVOR OF APPROVAL OF THE MODIFICATION OF ACCELERATED VESTING PROVISIONS IN THESE WEBMD STOCK OPTIONS HELD BY THESE WEBMD EMPLOYEES. 48 59 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 merger agreement with Healtheon Corporation and approve a merger that will cause MEDE AMERICA to become a wholly owned subsidiary of Healtheon, which will change its corporate name to Healtheon/ WebMD Corporation. The MEDE AMERICA merger agreement is attached to this proxy statement/ prospectus as Annex B. See the sections entitled "The MEDE AMERICA merger" on page 93 and "The MEDE AMERICA merger agreement" on page 109. In the merger, you will receive 0.6593 shares of Healtheon/WebMD common stock for each share of MEDE AMERICA common stock you own, subject to adjustment if the ten-day average closing price of Healtheon common stock for the period ending two days prior to the MEDE AMERICA stockholders' meeting is less than $38.68. This adjustment to the exchange ratio is more fully described in the section entitled "Structure of the merger and conversion of MEDEAMERICA common stock" on page 104 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 merger 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 116. 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. 49 60 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. 50 61 THE MEDCAST MEETING DATE, TIME AND PLACE OF MEDCAST'S SPECIAL MEETING , 1999 8:00 a.m., Eastern Time King & Spalding 191 Peachtree Street Atlanta, Georgia 30303 PURPOSE OF THE SPECIAL MEETING The special meeting is being held so you can consider and vote upon a proposal to approve and adopt a merger agreement with Healtheon Corporation, WebMD, Inc. and a newly formed subsidiary of Healtheon, which will change its corporate name to Healtheon/WebMD Corporation, and approve a merger that will cause Medcast to become a wholly owned subsidiary of Healtheon/WebMD. The Medcast merger agreement is attached to this proxy statement/prospectus as Annex C. For a detailed description of the Medcast merger and the merger agreement, see the sections entitled "The Medcast merger" on page 117 and "The Medcast merger agreement" on page 133. In the merger, you will receive approximately 0.5483 shares of Healtheon/WebMD common stock for each share of Medcast common stock you own, after conversion of any shares of preferred stock you own. The exchange ratio is based on a formula that is more fully described in the section entitled "Structure of the Medcast merger and conversion of Medcast capital stock" on page 124 of this proxy statement/ prospectus. On , 1999, Healtheon common stock closed at $ per share. RECORD DATE AND OUTSTANDING SHARES Only holders of record of Medcast capital stock at the close of business on the record date are entitled to notice of and to vote at the meeting. As of the close of business on the record date, the following shares of Medcast capital stock were outstanding:
NUMBER OF SHARES OUTSTANDING HOLDERS OF RECORD ---------------- ----------------- Common stock................................... 1,915,235 18 Series A preferred stock....................... 1,913,044 22 Series B preferred stock....................... 109,765 1 Series C preferred stock....................... 388,747 29
Each holder of common stock is entitled to one vote for each share of Medcast common stock held as of the record date. Each holder of Series A preferred stock, Series B preferred stock and Series C preferred stock is entitled to cast one vote per share of common stock into which the preferred stock held as of the record date is convertible. VOTE AND QUORUM REQUIRED; VOTING AGREEMENTS The merger agreement must be approved and adopted, and the merger must be approved, by the holders of a majority of the outstanding shares of: - Medcast common stock, Series B preferred stock and Series C preferred stock, voting together - Medcast Series A preferred stock voting as a separate group The required quorum for the transaction of business at the meeting is a majority of the shares of Medcast common stock outstanding on the record date and shares of common stock into which the Series B preferred stock and Series C preferred stock outstanding on the record date are convertible and a majority of the shares of Series A preferred stock outstanding on the record date. 51 62 On the record date, directors and executive officers of Medcast as a group beneficially owned 2,994,136 shares of Medcast common stock, assuming conversion of all outstanding preferred stock, or approximately 66.1% of the outstanding shares on that date. Stockholders beneficially owning 2,755,819 shares of Medcast common stock, assuming conversion of all outstanding preferred stock, or approximately 59.9% of the outstanding shares on the record date, have executed voting agreements with Healtheon and WebMD, under which they have agreed to vote their shares in favor of the reorganization. These stockholders beneficially own 1,073,909 shares of Medcast Series A preferred stock, or approximately 56.1% of the outstanding shares on the record date. For a detailed description of the voting agreements, see "Medcast voting agreements" on page 140. ABSTENTIONS Abstentions will be included in determining the number of shares present and voting at the meeting and will have the same effect as votes against the merger. MEDCAST STOCKHOLDERS AGREEMENTS The holders of 453,200 shares of the outstanding common stock of Medcast have executed a stockholders agreement that provides that Alan N. Greenberg, the Chief Executive Officer of Medcast, may require these stockholders to take all steps reasonably necessary or desirable to consummate a merger of Medcast with a bona fide third party. Further, these stockholders have agreed to vote all of their shares of common stock in favor of any merger transaction and have executed irrevocable proxies in favor of Mr. Greenberg. Therefore, these stockholders will not receive a proxy with respect to the Medcast merger. The holders of all of the outstanding shares of Series A preferred stock and Series C preferred stock of Medcast have executed a stockholders agreement that provides that if the stockholders of Medcast holding at least 66 2/3% of the outstanding common stock approve a change of control transaction that meets requirements specified in the agreement, then Medcast may require each holder of Series A preferred stock and Series C preferred stock to approve the transaction. Alan N. Greenberg, who controls the vote of in excess of 66 2/3% of the outstanding common stock, has agreed to vote in favor of the Medcast merger. THEREFORE, ALL HOLDERS OF SERIES A PREFERRED STOCK AND SERIES C PREFERRED STOCK ARE CONTRACTUALLY OBLIGATED TO VOTE IN FAVOR OF THE MERGER. DISSENTERS' RIGHTS Holders of Medcast capital stock are entitled to dissenters' rights with respect to the merger. For a detailed description of dissenters' rights, see "Rights of dissenting Medcast stockholders" on page 130. Annex I includes the complete text of the provisions of Delaware law that grant dissenters rights. PROXIES The proxy accompanying this proxy statement/prospectus is solicited on behalf of the Medcast board of directors for use at the meeting. Medcast stockholders that have not previously executed an irrevocable proxy in favor of Alan N. Greenberg are requested to complete, date and sign the accompanying proxy and promptly return it in the enclosed envelope or otherwise mail it to Medcast. All properly signed proxies received by Medcast prior to the vote at the meeting that are not revoked will be voted at the meeting according to the instructions indicated on the proxies or, if no direction is indicated, to approve the merger. Medcast stockholders that have not previously executed an irrevocable proxy in favor of Alan N. Greenberg may revoke their proxy at any time before it is exercised at the meeting, by taking any of the following actions: - delivering to the secretary of Medcast, by any means, including facsimile, a written notice, bearing a date later than the date of the proxy, stating that the proxy is revoked - signing and so delivering a proxy relating to the same shares and bearing a later date prior to the vote at the meeting, or 52 63 - attending the meeting and voting in person, although attendance at the meeting will not, by itself, revoke a proxy HOLDERS OF MEDCAST CAPITAL STOCK SHOULD NOT SEND ANY CERTIFICATES REPRESENTING MEDCAST CAPITAL STOCK. FOLLOWING THE EFFECTIVE TIME OF THE MERGER, HOLDERS OF MEDCAST CAPITAL STOCK WILL RECEIVE INSTRUCTIONS FOR THE SURRENDER AND EXCHANGE OF THEIR STOCK CERTIFICATES. 53 64 THE WEBMD MERGER This section of the proxy statement/prospectus describes the proposed WebMD merger. While we believe that the description covers the material terms of the merger 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 WEBMD MERGER AND RELATED AGREEMENTS During the fourth quarter of 1998, Healtheon concluded that the development of healthcare consumer and physician web sites would accelerate the adoption of its Internet-based information and transaction platform. In early April, Healtheon with its advisors identified WebMD's consumer and physician focus, as well as strategic relationships and brand awareness, as complementary to Healtheon's consumer and physician web site efforts. As a result, Healtheon determined that it should approach WebMD to evaluate a potential partnership. On April 8, 1999 Mr. Long called Mr. Arnold. That evening, Mr. Long and Mr. Arnold met for dinner in Atlanta, Georgia to discuss the strategic objectives of Healtheon and WebMD and to discuss a partnership between the two companies. At the invitation of Mr. Long, James H. Clark, Healtheon's Chairman, Mr. Long, Mr. Arnold and a representative from BancBoston Robertson Stephens met for dinner in Atlanta, Georgia on the evening of April 11, 1999 and discussed the businesses of Healtheon and WebMD and the potential of a business combination between the two companies. At that time, WebMD was concluding negotiations with Microsoft for a $100 million purchase by Microsoft of WebMD's Series E convertible preferred stock at an effective price of $54.17 per common share as well as the terms of a strategic relationship between Microsoft and WebMD. Moreover, on April 10, 1999, Microsoft had commenced a tender offer for approximately 27.8% of the equity interests in WebMD for $54.17 per common share. A condition to Microsoft's obligation to purchase shares in the tender offer was that WebMD not authorize, propose or announce any significant business combination. In addition, the terms of the Series E preferred stock that Microsoft had agreed to purchase from WebMD gave Microsoft the right to approve business combinations involving WebMD. Accordingly, WebMD informed Healtheon of this restriction and informed Microsoft of the discussions held on April 11, 1999. Furthermore, WebMD at that time had filed a registration statement for an initial public offering of its common stock, which Healtheon management viewed as a strategic alternative for WebMD to a merger with Healtheon, and which contributed in part to Healtheon management's decision to move ahead quickly with merger discussions. 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 WebMD merger. On April 26, 1999, Mr. Long and Mr. Clark met with representatives from Morgan Stanley in Los Angeles, California to discuss the merits of a merger between Healtheon and WebMD. At this meeting, the participants also discussed transaction terms that Healtheon and WebMD would need to agree to for the merger to proceed. These transaction terms included valuation, management of the combined company, headquarters location and transaction structure. Later that day, Mr. Long, Mr. Clark and L. John Doerr, a director of Healtheon, met with Mr. Arnold for dinner to discuss a potential combination between the two companies. Principal business 54 65 terms of a combination were discussed at this meeting, but no agreements were made between the two companies. On April 27, 1999, Mr. Clark delivered a letter to Mr. Arnold outlining terms of a potential business combination for purposes of continuing and focusing the earlier discussions. At the invitation of Mr. Arnold, on May 3, 1999, Mr. Clark, Mr. Long and a representative from Morgan Stanley met for dinner in Atlanta, Georgia with Mr. Arnold, other senior executives of WebMD and WebMD outside directors U. Bertram Ellis, Jr., S. Taylor Glover and Jouko J. Rissanen for the purpose of discussing the potential benefits of a business combination. On May 4, 1999 in the offices of WebMD, Mr. Long, Mr. Clark and a representative from Morgan Stanley met with Mr. Arnold, other representatives of WebMD's senior management team and BancBoston Robertson Stephens to discuss the terms of a possible business combination between Healtheon and WebMD. In addition, on May 4, Mr. Long, Mr. Clark, other members of Healtheon's senior management team and representatives from Morgan Stanley conducted business due diligence on WebMD. On May 5, 1999, Mr. Long, Mr. Clark and representatives from Morgan Stanley met with Mr. Arnold, other members of WebMD's senior management team as well as WebMD's financial advisors to discuss terms of a possible business combination between Healtheon and WebMD. At this meeting, the parties agreed to an outline for a possible combination of the two companies. It was agreed that a potential combination between Healtheon and WebMD should be structured as a merger with each set of shareholders owning approximately 50% of the pro forma company. In addition, at this meeting it was discussed that Mr. Long would become Chairman and Chief Operating Officer of Healtheon/WebMD and Mr. Arnold would become Chief Executive Officer. On May 6, 1999, Healtheon and WebMD signed a Mutual Non-disclosure Agreement. On May 6 and 7, 1999, senior executives of both companies and their respective legal and financial advisors met in Palo Alto, California to continue due diligence and the process of negotiating the terms of the transaction. These discussions continued through the following week in Palo Alto, California. Although Microsoft was not a direct participant in the negotiations between Healtheon and WebMD regarding the material provisions of the merger agreement, Microsoft's concurrence in the transaction was essential because Microsoft had the right to block the merger under its prior agreements with WebMD relating to its tender offer and purchase of Series E preferred stock. In addition Healtheon's and WebMD's managements believed that it was important for the surviving company to have significant available cash on hand and therefore considered, Microsoft's agreement to 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 to be a significant financial endorsement of the transaction as well as an important source of post-merger cash. Concurrently with the negotiations with WebMD, Healtheon conducted negotiations with Microsoft relating to the future relationship between Microsoft and the combined company, the results of which are discussed under "Healtheon/WebMD's strategic alliances with and investments from Microsoft and other partners" on page 75. Had these negotiations not been successful, Microsoft might have used its rights to block the merger and would not have been willing to invest an additional $150 million in the combined company. Without Microsoft's agreement for both the additional $150 million investment and the revised strategic relationship, Healtheon may not have proceeded with the WebMD merger. On May 13, 1999, Healtheon's board of directors held a special meeting to discuss the proposed business combination with WebMD. At this meeting, Healtheon's senior management and financial and legal advisors presented to the board the principal terms of the proposed combination with WebMD that was under discussion and the status of business, financial and legal due diligence of the transaction. On May 14, 1999, it was reported in the press that Healtheon and WebMD were having discussions concerning a possible business combination. Over the weekend of May 15 - 16, 1999, and into the following week the senior executives, attorneys and financial advisors for Healtheon and WebMD continued to work to 55 66 finalize the WebMD merger agreement and other documents evidencing the various arrangements, including the Microsoft investment and revisions to its strategic relationship as well as the investments by and contracts with the other purchasers of WebMD's Series E preferred stock. On May 16, 1999, Healtheon's board of directors held a special meeting to discuss the progress of negotiations of the definitive agreement, ultimately adjourning the meeting until a later time. On May 17, 1999, Healtheon's board of directors reconvened the special meeting of the board at which the board reviewed with its senior management and financial and legal advisors the results of the negotiations with WebMD. At this meeting, representatives of Morgan Stanley presented its financial analysis of the proposed transaction and expressed their opinion that the exchange ratio provided for by the merger agreement was fair from a financial point of view to Healtheon. Healtheon's board reviewed a draft of the merger 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 merger, the merger 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 WebMD merger. From May 16 to May 18, 1999, Healtheon's management met with representatives of McKessonHBOC to determine whether McKessonHBOC would agree to vote for the WebMD merger, and to modify its strategic relationship with WebMD to eliminate any potential obligation of WebMD to provide web-enabled access to specific McKessonHBOC products and services on an exclusive basis. By mid-morning, May 19, 1999 it became apparent that these discussions would not result in an agreement with McKessonHBOC. As an inducement to Healtheon to proceed with the proposed merger, WebMD and Healtheon reached an understanding to proceed in good faith to negotiate with McKessonHBOC to amend the exclusivity provisions prior to the closing of the merger in exchange for issuance of rights to acquire new shares of WebMD. Healtheon and WebMD also reached an understanding that if they were able to reach a mutually acceptable agreement with McKessonHBOC prior to the consummation of the merger that required the issuance of additional equity greater than the rights that McKesson then had to purchase 1,295,565 shares of WebMD for $54.17 per share, the resulting incremental dilution would be shared one-third by Healtheon and two-thirds by WebMD and accordingly would result in a reduction of the exchange ratio. In the evening of May 19, 1999, Healtheon's board convened a special meeting to discuss the results of the McKessonHBOC discussions and further negotiations with WebMD subsequent to the May 17, 1999 board approval, including revising the structure of the transaction from a merger of WebMD into a subsidiary of Healtheon to a merger of WebMD and Healtheon into separate subsidiaries of Healtheon/WebMD. After posing questions to representatives of management and Wilson Sonsini Goodrich & Rosati and following discussions, the board approved the transaction, subject to satisfactory completion of final details of the merger agreement within the guidelines approved by the board. 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 approximately $100.0 million to $250.0 million, with the additional approximately $150.0 million conditioned upon the closing of the merger, and for a total of up to approximately $150.0 million of investments by Intel Corporation, Excite Inc., SOFTBANK America Inc., Covad Communications Group, Inc., Superior Consultant Holdings Corporation, The Reader's Digest Association, Inc. and Dell USA, L.P., an investment vehicle for Dell Computer Corporation. At the WebMD board meeting held on the morning of May 19, 1999, WebMD senior management and Nelson Mullins Riley & Scarborough, L.L.P., WebMD's legal counsel discussed the results of the 56 67 negotiations with Healtheon and the terms of the proposed merger 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 merger 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 merger agreement and a representative from Nelson Mullins Riley & Scarborough 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 merger and the merger 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 merger agreement. During the evening of May 19, 1999 and continuing through the early morning of May 20, 1999 the negotiations of the merger agreement were completed, including the revision of the merger structure and the understanding with Healtheon that any incremental dilution resulting from any future agreement with McKessonHBOC would be shared one-third by Healtheon and two-thirds by WebMD and could result in a reduction in the exchange ratio. The special committee heard an updated financial analysis and opinion from BancBoston Robertson Stephens, an explanation by a representative of Nelson Mullins Riley & Scarborough of the revised merger structure and understanding with Healtheon concerning potential dilution from any possible future agreement with McKesson HBOC, 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 merger agreement and related documents, and the merger agreement and the WebMD merger were ratified and approved by the unanimous vote of the WebMD board. On September 7, 1999, the WebMD board met to consider approval of an agreement with McKessonHBOC providing for a comprehensive restructuring of the previous agreements between WebMD and McKessonHBOC which would involve the issuance by WebMD of warrants giving McKessonHBOC the right to purchase 4,688,049 shares of WebMD common stock. This agreement is described in more detail below under "WebMD transaction agreements -- McKessonHBOC agreement." At the meeting a representative of Nelson, Mullins, Riley & Scarborough described the proposed McKessonHBOC agreement and its effect on the exchange ratio pursuant to previous understanding with Healtheon. In addition, a representative of BancBoston Robertson Stephens presented a financial analysis of the results at the issuance of the warrants and confirmed that the reduction of the exchange ratio that would result from the issuance of the warrants was within the range of exchange ratios considered by BancBoston Robertson Stephens in rendering its fairness opinion to the board on May 19, 1999. Following these presentations and discussions, the WebMD board unanimously approved the McKessonHBOC agreement dated as of September 1, 1999 and the amendment to the merger agreement dated as of September 1, 1999 to effect the agreed upon resulting reduction in the exchange ratio from 1.815 to 1.796. JOINT REASONS FOR THE WEBMD MERGER Healtheon's and WebMD's boards of directors have determined that the WebMD merger is fair to, and in the best interests of, the stockholders of their respective companies. They concluded that the combined company following the WebMD merger 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 57 68 - the combination of two leading providers of end-to-end Internet solutions to the healthcare industry will better position Healtheon/WebMD to achieve increased subscriber penetration among physicians, payers, providers and other healthcare industry participants - expanding each company's connected network of customers and strategic partners, accelerating Healtheon/WebMD's efforts toward achieving broad acceptance in the healthcare industry and strengthening its competitive position. Healtheon/WebMD is expected to offer connectivity and transactions for physicians, consumers and healthcare institutions over a network consisting of approximately 540 payers, 180,000 physicians, 1,100 hospitals, 42,000 pharmacies, 10,000 dentists and 200 affiliate partners - increasing Healtheon/WebMD's transaction volume - broadening each company's offerings of Internet-based healthcare-related transactions services, and creating enhanced cross-selling opportunities - increasing the speed at which Internet transaction processing streamlines inefficient manual and paper-based processes - enhancing the quality and depth of patient-doctor communications - creating a strong combined management team HEALTHEON'S REASONS FOR THE WEBMD MERGER At the meeting held on May 19, 1999, the board of directors of Healtheon concluded that the WebMD merger was in the best interests of Healtheon and determined to recommend that the stockholders approve the stockholder proposals relating to the merger. The decision of the board of directors of Healtheon was based upon several potential benefits of the merger, including the following, the order of which does not necessarily reflect their relative significance: - EXPANSION OF BUSINESS MODEL TO INCLUDE CONSUMER AND HEALTHCARE PROFESSIONAL WEB SITES. To date, Healtheon has focused primarily on the development and deployment of a transaction "engine" and related software applications to facilitate Internet based healthcare transactions between payers, providers and institutions. Examples of Internet-based healthcare transactions that Healtheon intends to facilitate include the following: enrollment, eligibility determination, referrals and authorizations, laboratory and diagnostic test ordering, clinical data retrieval and claims processing. To date, WebMD has focused its efforts on the development of consumer and healthcare professional web sites that provide authoritative content, on line communities, practice management services and personalized service to both healthcare professionals and consumers. Healtheon believes that the WebMD Internet applications directed toward physicians and consumers will be essential to accelerating Healtheon sponsored transactions, as physicians today initiate most healthcare transactions, with consumers' choice playing an increasing role. - CREATION OF COMPLETE END-TO-END HEALTHCARE E-COMMERCE SOLUTION. Healtheon believes that, through the WebMD merger, 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. 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. - INVESTMENTS BY STRATEGIC PARTNERS. The recent investments of approximately $257.5 million by Microsoft and other strategic partners in WebMD and the prospects of an additional $150.0 million 58 69 investment by Microsoft upon the completion of the WebMD merger would provide Healtheon/WebMD with significant liquidity to finance its operations. - 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 merger. After taking into consideration all of the factors set forth above, Healtheon's board concluded that the merger was fair to, and in the best interests, of Healtheon and that Healtheon should proceed with the merger. 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 merger is in the best interests of Healtheon and recommends that they vote for approval and adoption of the merger agreement, and approval of the issuance of shares in the WebMD merger. In considering the recommendation of the Healtheon board with respect to the merger, you should be aware that one director of Healtheon has interests in the merger 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 WebMD merger" on page 74. WEBMD'S REASONS FOR THE WEBMD MERGER In addition to the anticipated joint benefits described above, WebMD's board of directors believes that the following are additional reasons the WebMD merger will be beneficial to WebMD and for stockholders of WebMD to vote for approval of the merger agreement and the WebMD merger: - the implied value of the WebMD merger consideration on the date of the merger agreement of $144.13, which is based on the closing price of Healtheon common stock on the day prior to the WebMD board's approval of the merger, represented a premium to the $54.17 price per common share that Microsoft agreed to pay for its initial strategic investment and in its tender offer - the opportunity of WebMD stockholders to participate in the potential growth of Healtheon/ WebMD following the WebMD merger or to realize their investment by selling their Healtheon/ WebMD shares in a public market - the liquidity afforded WebMD's stockholders upon exchange of their shares in WebMD, which are not publicly traded, for shares in Healtheon/WebMD, which are publicly traded - the greater liquidity anticipated to be afforded WebMD's stockholders upon the closing of the WebMD merger as compared to the closing of WebMD's own previously proposed initial public offering because a larger number of shares of Healtheon/WebMD are anticipated to be outstanding after the merger than would be outstanding after a WebMD initial public offering and the resulting 59 70 likelihood of greater trading volume and increased coverage by investment research and analyst reports In reaching its decision to approve the merger agreement and the proposed merger, the WebMD board of directors consulted with WebMD's management, as well as with its financial and legal advisors, and considered a number of factors, including the following: - The WebMD board of directors reviewed various historical information concerning WebMD's and Healtheon's respective businesses, financial performances and conditions, operations, technologies, management teams and competitive positions. The WebMD board of directors considered available information on Healtheon including its Registration Statement on Form S-1 and subsequent fiscal quarters as filed with the Securities and Exchange Commission. In addition, the board of directors instructed management and BancBoston Robertson Stephens to conduct additional due diligence on Healtheon's financial condition and prospects and the results of that due diligence were reported to the board of directors. Based in part upon these factors, the WebMD board of directors believes that a merger with Healtheon would be advisable and fair to and in the best interests of WebMD and WebMD's stockholders. - The WebMD board of directors viewed the terms of the merger agreement, including the parties' representations, warranties and covenants, the conditions to their respective obligations and the termination provisions, as reasonable in light of the entire transaction. WebMD's board also considered the provisions in the merger agreement that prohibited solicitation of third-party bids and the acceptance, approval or recommendation of any unsolicited third-party bids. The WebMD board of directors considered that the provisions in the merger agreement for the benefit of WebMD reasonably protected the interests of WebMD stockholders, and those for the benefit of Healtheon did not present any significant impediments to proceeding with the transaction considering all of the circumstances. - The WebMD board of directors considered favorably the detailed financial analyses and pro forma and other information relating to the two companies presented by BancBoston Robertson Stephens, including the opinion of BancBoston Robertson Stephens that the WebMD exchange ratio was fair to WebMD stockholders from a financial point of view. This opinion is subject to assumptions and limitations noted in the opinion and described under "Opinion of WebMD's financial advisor," and stockholders should carefully read both that section and the opinion which is attached to this document as Annex D. The opinion of BancBoston Robertson Stephens is directed to WebMD's board of directors and does not constitute a recommendation to stockholders of WebMD on how they should vote at, or take any other action in connection with, the special meeting for the WebMD merger. The WebMD board of directors viewed the analyses and opinion of an independent, internationally recognized financial advisor such as BancBoston Robertson Stephens to be important factors in reaching a determination that the transaction should be approved. - The WebMD board received reports from WebMD's management and its financial advisor as to the results of their due diligence investigation of Healtheon, which consisted of a review of publicly available information and research analyst reports and meetings with members of Healtheon's management. These reports indicated no significant issues that would preclude the WebMD board's approval of the merger. - The WebMD board of directors considered favorably that upon the closing of the WebMD merger an additional approximately $150.0 million would be invested by Microsoft and the strategic relationship with Microsoft would be expanded to the extent described in the section entitled "Healtheon/WebMD's strategic alliance with and investments from Microsoft and other partners on page . - The WebMD board of directors also identified and considered a variety of potentially negative factors in its deliberations concerning the merger, including: - the risk to WebMD's stockholders that the value to be received in the merger could decline significantly from the indicated value on the date of the reorganization agreement due to 60 71 potential declines in the trading price of Healtheon stock, which has been volatile since Healtheon's initial public offering - the challenges of integrating a business such as WebMD with a company such as Healtheon and the attendant risk that the potential benefits sought in the merger might not be fully realized - the possibility that the merger might not be consummated and the effect of public announcement of the merger on: - WebMD's ability to expand its existing strategic relationships and attract new strategic partners and distribution channels - WebMD's ability to attract and retain key management, sales and marketing and technical personnel - the progress of potential and actual strategic relationships with third parties who may view working with Healtheon differently than working with WebMD - the risk that despite the efforts of Healtheon/WebMD, key technical and management personnel might not remain employed by Healtheon/WebMD - risks associated with fluctuations in Healtheon's stock price prior to closing of the merger - various other risks The WebMD board also considered what alternatives existed to the merger, including reviewing the prospects for WebMD as an independent company. In light of the factors described above, the WebMD board determined that the value and benefits available to WebMD stockholders from the merger exceeded the potential they might realize from WebMD's continuing as an independent company. This discussion of the information and factors considered by the WebMD board is not intended to be exhaustive but is believed to include all material factors considered by WebMD's board. In view of the complexity and wide variety of information and factors, both positive and negative, considered by the WebMD board, it did not find it practical to quantify, rank or otherwise assign relative or specific weights to the factors considered. In addition, the WebMD board did not reach any specific conclusion with respect to each of the factors considered, or any aspect of any particular factor, but, rather, conducted an overall analysis of the factors described above, including discussions with WebMD's management and legal, financial and accounting advisors. In considering the factors described above, individual members of the WebMD board may have given different weight to different factors. The WebMD board considered all these factors as a whole and believed the factors supported its determination to approve the merger. After taking into consideration all of the factors set forth above, WebMD's board concluded that the merger was fair to, and in the best interests, of WebMD and its stockholders and that WebMD should proceed with the merger. 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 WebMD merger is in the best interests of the WebMD stockholders and unanimously recommends that you vote for approval and adoption of the merger agreement and approval of the WebMD merger. In considering the recommendation of the WebMD board with respect to the merger, you should be aware that some directors and officers of WebMD have interests in the merger that are different from, or are in addition to the interests of WebMD stockholders generally. For information regarding the interests of these directors and officers, see the section entitled "Interests of directors, officers and affiliates in the WebMD merger" on page 74. 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 WebMD merger. 61 72 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, based upon and subject to the various considerations set forth in the opinion, the exchange ratio pursuant to the merger agreement was fair from a financial point of view to Healtheon. Morgan Stanley subsequently confirmed its May 17, 1999 opinion by delivering to the Healtheon board of directors a written opinion dated as of May 20, 1999. You should consider the following when reading the discussion of the Healtheon's financial advisor in this document. - While we believe that this discussion is materially complete, you are urged to read the full text of the written opinion of Morgan Stanley dated May 20, 1999 that is attached as Annex C to this document and sets forth, among other things, the assumptions made, procedures followed, matters considered and limitations on the scope of the review undertaken by Morgan Stanley in rendering its opinion - Morgan Stanley's opinion is directed to the Healtheon board of directors and addresses only the fairness of the exchange ratio pursuant to the merger 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 merger and does not constitute a recommendation to any holder of Healtheon common stock as to how to vote at the Healtheon special meeting In connection with rendering its opinion, Morgan Stanley, among other things: - reviewed publicly available financial statements and other information of Healtheon, including the pro forma impact of Healtheon's proposed acquisition of MEDE AMERICA, referred to as Pro Forma Healtheon - reviewed internal financial statements and other financial and operating data concerning WebMD and Pro Forma Healtheon prepared by the managements of WebMD and Healtheon, respectively - analyzed financial projections pro forma for the investments made by Microsoft and other investors pursuant to the investment agreement, as well as other investments by other investors as contemplated by the merger 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 merger - 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 merger, 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 merger, 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 - reviewed the pro forma impact of the merger on the income statement of Pro Forma Healtheon 62 73 - 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 merger agreement and the investment agreement, as well as documents related to the merger and the strategic investments - reviewed the registration statement on Form S-1 of WebMD (File No. 333-7135) filed with the Securities and Exchange Commission, as amended on February 26, 1999, as well as documents related to that registration statement - performed such other analysis and considered such other factors as Morgan Stanley deemed appropriate Morgan Stanley assumed and relied upon, without independent verification, the accuracy and completeness of the information reviewed by it for the purposes of its opinion. With respect to the internal financial statements and other financial and operating data, including forecasts, and discussions relating to the strategic, financial and operational benefits anticipated from the strategic investments and from the merger 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 merger - 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 merger will be treated as a tax-free reorganization and/or exchange, pursuant to the tax code and will be consummated in accordance with the terms set forth in the merger 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 merger. 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. 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. This analysis of comparable companies includes a review of the ratios of market valuation to various financial statistics. The companies used in the peer group comparison include: - Electronic Commerce Companies - Amazon.com, Inc. - eBay Inc. - Priceline.com Incorporated 63 74 - 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:
AGGREGATE VALUE/REVENUE ------------------------ CALENDAR YEAR ------------------------ 1999 E 2000 E -------- -------- 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
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 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. 64 75 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:
PRESENT VALUE OF REVENUE MULTIPLE RANGE DISCOUNT RATES FULLY DILUTED EQUITY VALUE - ---------------------- -------------- -------------------------- 20.0 - 30.0x 35.0% - 50.0% $4.0 billion to $10.5 billion
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:
PRESENT VALUE OF P/E MULTIPLE RANGE DISCOUNT RATES FULLY DILUTED EQUITY VALUE - ------------------ -------------- -------------------------- 50.0 - 80.0x 25.0% - 50.0% $1.3 billion to $9.4 billion
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:
PRESENT VALUE OF REVENUE MULTIPLE RANGE DISCOUNT RATES FULLY DILUTED EQUITY VALUE ---------------------- -------------- -------------------------- 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
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:
PRESENT VALUE OF P/E MULTIPLE RANGE DISCOUNT RATES FULLY DILUTED EQUITY VALUE ------------------ -------------- -------------------------- 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
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:
PRESENT VALUE OF P/E MULTIPLE RANGE DISCOUNT RATES FULLY DILUTED EQUITY VALUE ------------------ -------------- -------------------------- 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
Preliminary initial public offering valuation. Morgan Stanley performed an analysis of the estimated initial public offering valuation of WebMD based on aggregate value as a multiple of a range of estimated calendar year 2000 revenues. Morgan Stanley observed the following implied initial public offering valuation, assuming calendar year 2000 revenue multiples of approximately 20 to 30:
REVENUE MULTIPLE RANGE FULLY DILUTED EQUITY VALUE - ---------------------- -------------------------- 20.0 - 30.0x $3.0 billion to $6.0 billion
65 76 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:
% CONTRIBUTION BY --------------------------- PRO FORMA HEALTHEON WEBMD ------------------- ----- 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%
Pro forma reorganization analysis. Morgan Stanley analyzed the pro forma impact of the merger 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 merger 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 merger 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 merger agreement from a financial point of view to Healtheon 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 merger 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 merger. 66 77 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 merger. Consequently, the Morgan Stanley analyses as described above should not be viewed as determinative of the opinion of the Healtheon board of directors with respect to the exchange ratio or of whether the Healtheon board of directors would have been willing to agree to a different exchange ratio. The Healtheon board of directors retained Morgan Stanley based upon Morgan Stanley's qualifications, experience and expertise. Morgan Stanley is an internationally recognized investment banking and advisory firm. Morgan Stanley, as part of its investment banking business, is continuously engaged in the valuation of businesses and securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and valuations for corporate, estate and other purposes. In the past, Morgan Stanley and its affiliates have provided financing and advisory services for Healtheon, Microsoft and other parties to the strategic investments and have received fees for rendering these services. Morgan Stanley is also an equity owner of Healtheon as a result in Morgan Stanley's participation in a private placement. In the ordinary course of Morgan Stanley's trading and brokerage activities, Morgan Stanley or its affiliates may at any time hold long or short positions, may trade or otherwise effect transactions, for its own account or for the account of customers in the equity securities of Healtheon, Microsoft or any of the other parties to the strategic investments. Under the engagement letter, Morgan Stanley provided financial advisory services and a financial fairness opinion in connection with the merger, and Healtheon agreed to pay Morgan Stanley a fee of approximately $20 million, with the exact amount to be determined by a formula using the average of the average price of Healtheon common stock over a period of time before the date of announcement and before the date of closing. In the past, Morgan Stanley has been paid approximately $800,000 for financing services. In addition, Healtheon has also agreed to indemnify Morgan Stanley and its affiliates, their respective directions, officers, agents and employees and each person, if any controlling Morgan Stanley or any of its affiliates against liabilities and expenses, including liabilities under the federal securities laws, arising out of Morgan Stanley's engagement. OPINION OF WEBMD'S FINANCIAL ADVISOR On March 12, 1999, WebMD and BancBoston Robertson Stephens executed an engagement letter, which was supplemented by a letter dated April 20, 1999, pursuant to which BancBoston Robertson Stephens was engaged to render an opinion as to the fairness of the exchange ratio, from a financial point of view, to the stockholders of WebMD. On May 19, 1999 at a meeting of the WebMD board held to evaluate the proposed merger, 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. BancBoston Robertson Stephens subsequently confirmed by delivery of an oral confirmation to the WebMD board on September 7, 1999 that the analysis underlying its written opinion dated May 19, 1999 supported a range of exchange ratios from 1.750 to 1.815 depending on whether an agreement could be reached amending WebMD's agreements with McKessonHBOC. For purposes of the confirmation of its written opinion dated May 19, 1999, BancBoston Robertson Stephens reviewed the factors considered and assumptions made in connection with the earlier opinion, but did not update the material analysis performed. 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. 67 78 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 merger 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 merger. The BancBoston Robertson Stephens opinion does not address: - the relative merits of the merger and any other transactions - business strategies discussed by the WebMD board as alternatives to the merger, or - the underlying business decision of the WebMD board to proceed with the merger 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 merger 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 68 79 - prepared an analysis of WebMD with respect to an initial public offering - participated in discussions and negotiations among representatives of WebMD and Healtheon and their financial and legal advisors - made other studies and inquiries, and reviewed other data as BancBoston Robertson Stephens deemed relevant In BancBoston Robertson Stephens' review and analysis and in arriving at its opinion, BancBoston Robertson Stephens assumed and relied upon the accuracy and completeness of all of the financial and other information provided to it including information furnished to BancBoston Robertson Stephens orally or otherwise discussed with BancBoston Robertson Stephens by management of WebMD and Healtheon, or publicly available and has neither attempted to verify, nor assumed responsibility for verifying, any of such information. BancBoston Robertson Stephens has relied upon the assurances of management of WebMD and Healtheon that neither is aware of any facts that would make such information inaccurate or misleading. Furthermore, BancBoston Robertson Stephens did not obtain or make, or assume any responsibility for obtaining or making, any independent evaluation or appraisal of the properties, assets or liabilities, contingent or otherwise, of WebMD or Healtheon, nor was BancBoston Robertson Stephens furnished with any such evaluation or appraisal. With respect to the financial forecasts and projections, and the assumptions and bases for the financial forecasts and projections, for each of WebMD and Healtheon that BancBoston Robertson Stephens has reviewed, upon the advice of the managements of WebMD and Healtheon, BancBoston Robertson Stephens has assumed that: - these forecasts and projections have been reasonably prepared in good faith on the basis of reasonable assumptions - these forecasts and projections reflect the best currently available estimates and judgments as to the future financial condition and performance of WebMD and Healtheon BancBoston Robertson Stephens has assumed that: - the merger will be consummated upon the terms set forth in the merger agreement without material alteration - the merger 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 merger will be treated as a transaction in which no gain or loss will be recognized for U.S. federal income tax purposes - the historical financial statements of each of WebMD and Healtheon reviewed by BancBoston Robertson Stephens have been prepared and fairly presented in accordance with GAAP consistently applied BancBoston Robertson Stephens has relied as to all legal matters relevant to rendering its opinion on the advice of its counsel. Although developments following the date of the BancBoston Robertson Stephens opinion may affect the opinion, BancBoston Robertson Stephens assumed no obligation to update, revise or reaffirm its opinion. The opinion is necessarily based upon market, economic and other conditions as in effect on, and information made available to BancBoston Robertson Stephens as of the date of the opinion. It should be understood that subsequent developments may affect the conclusion expressed in the opinion and that BancBoston Robertson Stephens has disclaimed any undertaking or obligation to advise any person of any change in any matter affecting the opinion which may come or be brought to BancBoston Robertson Stephens' attention after the date of the opinion. BancBoston Robertson Stephens' opinion is limited to the fairness, from a financial point of view and as of the date thereof, to the 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. 69 80 BancBoston Robertson Stephens does not express any opinion as to: - the value of any employee agreement or other arrangement entered into in connection with the WebMD merger - any tax or other consequences that might result from the WebMD merger, or - what the value of Healtheon/WebMD common stock will be when issued to WebMD's stockholders pursuant to the WebMD merger or the price at which the shares of Healtheon/ WebMD common stock that are issued pursuant to the WebMD merger may be traded in the future The following is a summary of the material financial analysis performed by BancBoston Robertson Stephens in connection with rendering the BancBoston Robertson Stephens opinion. The summary of the financial analysis is not a complete description of all of the analyses performed by BancBoston Robertson Stephens. Certain of the information in this section is presented in a tabular form. In order to better understand the financial analysis by BancBoston Robertson Stephens, these tables must be read together with the text of each summary. The BancBoston Robertson Stephens opinion is based upon the totality of the various analyses performed by BancBoston Robertson Stephens and no particular portion of the analyses has any merit standing alone. Comparable companies analysis. Using publicly available information, BancBoston Robertson Stephens analyzed, among other things, the market values plus net debt, referred to as total capitalization, of WebMD and of publicly traded companies involved in Internet businesses, including those involved in the consumer Internet community market, the health content/connectivity market, the business and e-commerce market, and other online specific content providers, including: - America Online - Lycos - theglobe.com - Yahoo! - Xoom.com - Healtheon - Mediconsult.com - OnHealth Network - Critical Path - Exodus - Inktomi - VerticalNet - CNET - Preview Travel - SportsLine, USA 70 81 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:
IMPLIED ESTIMATED TOTAL CAPITALIZATION/ MEAN IMPLIED MEAN PRICE IMPLIED MEAN CALENDAR YEAR CALENDAR YEAR MULTIPLE EQUITY VALUE ($MM) PER SHARE EXCHANGE RATIO ------------- ------------------------------- ------------------------ ---------- -------------- 2000................. 16.0x - 26.0x $3,739.6 $ 74.55 0.929x 1999................. 35.0x - 55.0x $2,462.4 $ 54.43 0.678x Mean for 1999-2000 $ 64.49 0.804x Implied offer price on May 19, 1999 $144.13 1.796
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:
MARKET CAPITALIZATION/ IMPLIED EQUITY PRICE PER IMPLIED EXCHANGE ESTIMATED REVENUE VALUE SHARE RATIO --------------------- -------------- --------- ---------------- Estimated based on calendar year 2000........................... 18.0x - 20.0x $3,013.4 $ 63.11 0.786x Implied offer price on May 19, 1999........................... -- $8,154.7 $144.13 1.796x
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) 71 82 - 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 $40.05 and 0.499x and of $53.31 and 0.664x, respectively.
MULTIPLE RANGE MEAN -------------------- PER SHARE IMPLIED LOW HIGH MEAN PRICE EXCHANGE RATIO ---- ---- ---- --------- -------------- Total capitalization to calendar year 2000 revenues................ 10.0x 25.0x 12.5x $53.31 0.664x Total capitalization to calendar year 1999 revenues................ 15.0x 35.0x 25.0x $40.05 0.499x
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.
MICROSOFT MULTIPLE RANGE EQUITY VALUE PER SHARE IMPLIED TENDER OFFER MEAN MEAN PRICE EXCHANGE RATIO - ------------ -------------- ------------ --------- -------------- $2,100 35% $2,839.2 $60.37 0.752x $2,100 95% $4,084.5 $79.99 0.997x
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 range from 20.5% to 22.2% dilutive to the combined company's revenue per share, the WebMD merger could range from 51.0% to 52.1% accretive to the combined company's cash earnings per share in calendar year 2000. The factors that would affect the potential accretion or dilution in the combined company's revenue per share include, among other things, the respective company's 1999 and 2000 revenue growth rates and the amount of revenue synergies realized, while the potential accretion or dilution in the combined company's cash earnings per share would also depend significantly upon the amount of operating synergies realized. The actual results achieved by the combined company may vary from projected results and the variations may be material. Contribution analysis. BancBoston Robertson Stephens estimated that WebMD's contribution to revenues for calendar years 1998, 1999 and 2000 would imply an exchange ratio of, 0.021x, 0.536x and 1.251x, respectively, indicating that the deal exchange ratio of 1.796x represents a 8,398%, 235% and 44% 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. 72 83 While the foregoing summary describes analyses and factors that BancBoston Robertson Stephens deemed material in its presentation to the WebMD board, it is not a comprehensive description of all analyses and factors considered by BancBoston Robertson Stephens. The preparation of a fairness opinion is a complex process that involves various determinations as to the most appropriate and relevant methods of financial analysis and the application of these methods to the particular circumstances and, therefore, such an opinion is not readily susceptible to summary description. BancBoston Robertson Stephens believes that its analyses must be considered as a whole and that selecting portions of its analyses and of the factors considered by it, without considering all analyses and factors, would create an incomplete view of the evaluation process underlying the BancBoston Robertson Stephens opinion. Several analytical methodologies were employed and no one method of analysis should be regarded as critical to the overall conclusion reached by BancBoston Robertson Stephens. Each analytical technique has inherent strengths and weaknesses, and the nature of the available information may further affect the value of particular techniques. The conclusions reached by BancBoston Robertson Stephens are based on all analyses and factors taken as a whole and also on application of BancBoston Robertson Stephens own experience and judgment. Such conclusions may involve significant elements of subjective judgment and qualitative analysis. BancBoston Robertson Stephens therefore gives no opinion as to the value or merit standing alone of any one or more parts of the analyses it performed. In performing its analyses, BancBoston Robertson Stephens considered general economic, market and financial conditions and other matters, many of which are beyond the control of WebMD and Healtheon. The analyses performed by BancBoston Robertson Stephens are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than those suggested by such analyses. Accordingly, analyses relating to the value of a business do not purport to be appraisals or to reflect the prices at which the business actually may be purchased. Furthermore, no opinion is being expressed as to the prices at which shares of Healtheon common stock may be traded at any future time. Fees and indemnification. The BancBoston Robertson Stephens engagement letter provides that, for its services, BancBoston Robertson Stephens is entitled to receive a transaction fee of up to a maximum of $15,000,000, dependent on the outcome of the assignment and the aggregate transaction value at closing, which includes a $500,000 opinion fee paid upon delivery of the BancBoston Robertson Stephens opinion. WebMD has not paid any other fees to BancBoston Robertson Stephens over the past two years. WebMD has also agreed to reimburse BancBoston Robertson Stephens for limited out-of-pocket expenses, including legal fees, and to indemnify and hold harmless BancBoston Robertson Stephens and its affiliates and any person, director, employee or agent of BancBoston Robertson Stephens or any of its affiliates, or any person controlling BancBoston Robertson Stephens or its affiliates for losses, claims, damages, expenses and liabilities relating to or arising out of services provided by BancBoston Robertson Stephens as financial advisor to WebMD. The terms of the fee arrangement with BancBoston Robertson Stephens, which WebMD and BancBoston Robertson Stephens believe are customary in transactions of this nature, were negotiated at arm's length between WebMD and BancBoston Robertson Stephens, and the WebMD board was aware of such fee arrangements, including the fact that a significant portion of the fees payable to BancBoston Robertson Stephens is contingent upon completion of the WebMD merger. BancBoston Robertson Stephens and its affiliates have provided financial advisory and financing services for WebMD, including other advisory work relating to the investment in WebMD by Microsoft, and advisory work relating to other strategic minority investments, including those by SOFTBANK Corporation, Intel Corporation, Covad Communications, Inc., Excite, Inc., and Superior Consultant Holdings Corporation, for which BancBoston Robertson Stephens will receive fees of approximately $15,000,000. BancBoston Robertson Stephens was retained based on BancBoston Robertson Stephens' experience as a financial advisor in connection with mergers and acquisitions and in securities valuations generally, as well as BancBoston Robertson Stephens' investment banking relationship and familiarity with WebMD. BancBoston Robertson Stephens is a nationally recognized investment banking firm. As part of its investment banking business, BancBoston Robertson Stephens is frequently engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, secondary distributions of securities, private placements and other purposes. BancBoston Robertson 73 84 Stephens may actively trade the equity securities of Healtheon for its own account and for the account of its customers and, accordingly, may at any time hold a long or short position in such securities. MODIFICATION OF VESTING OF EMPLOYEE STOCK OPTIONS Under their employment or option agreements, options to acquire 923,067 shares of WebMD common stock held by Jeffery T. Arnold, 138,460 shares held by John Danaher, WebMD's chief medical officer, and 69,867 shares held by three sales and marketing employees that are currently unvested will vest upon the completion of the reorganization. Mr. Arnold has agreed and WebMD will request that the other employees agree to modify these vesting provisions so that the options will not vest upon the completion of the merger but will vest if thereafter the employees are terminated other than for cause, and in the case of Mr. Arnold, if his duties, responsibilities or authority is diminished. In addition, Mr. Arnold has agreed and the other employees will be requested to agree to subject these modified vesting arrangements to a vote of the stockholders as described in the section entitled "The WebMD Meeting -- votes required; voting agreements; conversion agreements" on page 46. Absent these modifications, the options would vest upon the consummation of the merger, 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 WEBMD MERGER In accordance with the terms of the WebMD merger 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 Microsoft. It is expected that Jeffrey T. Arnold, the current Chairman of the Board and Chief Executive Officer of WebMD, William P. Payne, U. Bertram Ellis, Jr. and Eric J. Gleacher will join the Healtheon/WebMD board of directors as the representatives of WebMD and W. Michael Long, the current Chief Executive Officer of Healtheon, James H. Clark, L. John Doerr and William W. McGuire will join the Healtheon/WebMD board of directors as the representatives of Healtheon. In connection with the WebMD merger, Mr. Arnold will be offered a position as the Chief Executive Officer of Healtheon/WebMD and Mr. Long will be offered a position as the Chairman of the Board and Chief Operating Officer of Healtheon/WebMD. In addition, Healtheon and WebMD are currently in the process of negotiating with some of their executive officers regarding their potential roles in the combined companies. They are currently unable to predict the outcome of these discussions. The WebMD merger 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 WebMD merger, 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 mergers 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 75. 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 WebMD merger 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 74 85 the exclusivity for telecommunications services. Boland T. Jones is the President and Chief Executive Officer of Premiere Technologies and a WebMD board member. William P. Payne is Vice Chairman of Premiere Technologies and Chairman of one of its subsidiaries. Mr. Payne is also the Vice Chairman of WebMD. COMPLETION AND EFFECTIVENESS OF THE 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 WebMD merger agreement by the stockholders of WebMD and Healtheon and approval of the WebMD merger by the stockholders of WebMD and the issuance of shares of Healtheon/WebMD common stock to the WebMD stockholders by the stockholders of Healtheon. The WebMD merger will become effective upon the filing of the certificate of merger with the State of Georgia. STRUCTURE OF THE WEBMD MERGER AND CONVERSION OF WEBMD COMMON STOCK AND PREFERRED STOCK Pursuant to the WebMD merger agreement, the WebMD merger sub will be merged with and into WebMD, the result of which will be that WebMD will be a subsidiary of Healtheon/WebMD. Healtheon/ WebMD will continue to be traded on the Nasdaq National Market and will be held by the stockholders of Healtheon and the stockholders of WebMD. Accordingly, the business of Healtheon/WebMD will initially consist primarily of holding the capital stock of WebMD and operating the current business of Healtheon, and WebMD will continue to operate its current business. Upon completion of the WebMD merger, each outstanding share of WebMD common stock will be converted into a right to receive 1.796 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 and voting agreements that have been signed by the holders of a majority of the outstanding shares of WebMD's preferred stock, the preferred stock will be converted into WebMD common stock prior to the effective time of the WebMD merger and will therefore receive 1.796 shares of Healtheon/WebMD common stock for each share of WebMD common stock received upon the conversion. HEALTHEON/WEBMD'S STRATEGIC ALLIANCES WITH AND INVESTMENTS FROM MICROSOFT AND OTHER PARTNERS As of May 6, 1999, WebMD and Microsoft entered into a five-year strategic alliance, which is subject to renewal in Microsoft's discretion, under which: - WebMD will develop, host, maintain on its servers and provide all content for a health channel for MSN, MSNBC and WebTV. A minimum of 80% of all consumer health-related content and services on MSN must be derived from the MSN health channel. - Microsoft will pay WebMD the first $100.0 million of the revenues from banner and other advertising on the three Microsoft health channels and revenues from e-commerce transactions generated by these health channels. Thereafter, Microsoft will share with WebMD 50% of these revenues. WebMD will pay Microsoft a commission of 25% of the first $100.0 million of revenues. - Microsoft will sponsor up to 5.0 million subscriber/months of subscriptions to the WebMD healthcare professional web site, which will require Microsoft to pay $29.95 per month for or sell these subscriptions and may result in up to $149.8 million in revenues to WebMD over the five-year term of the agreement. 75 86 - WebMD will share with Microsoft 50% of its revenues from banner and other advertising and sponsorships generated by these Microsoft-sponsored subscriptions and by DuPont-sponsored subscriptions to WebMD's healthcare professional web site, until Microsoft receives its payments for WebMD subscriptions it sponsors and then will share 25% of these revenues thereafter. WebMD will share with Microsoft 15% of its revenues from e-commerce transactions and from services not included as part of the base subscription fees generated by these Microsoft-sponsored subscriptions and by DuPont-sponsored subscriptions. WebMD will also share with Microsoft a percentage of its sponsorship revenues generated by DuPont-sponsored subscriptions, excluding revenues relating to base subscription fees. - Microsoft has agreed to deliver a minimum of 125.0 million impressions to the health channel per year of the term of the agreement. - WebMD will pay Microsoft an aggregate of $162.0 million in license fees over the five-year term. - WebMD and Microsoft each has committed co-marketing funds of at least $50.0 million over the first two years of the term of the agreement. - WebMD will provide Microsoft with access to an aggregate of $100.0 million of advertising space on WebMD's web site over the five-year term. - WebMD will pay Microsoft a $5 commission for each Microsoft-sponsored subscriber/month, and WebMD has committed training funds of $50 for each Microsoft-sponsored subscriber. - WebMD will utilize Microsoft operating systems and other technologies, including Microsoft Windows, Microsoft Office, Microsoft BackOffice, Microsoft Commerce Server, and Microsoft Visual Studio, to operate and maintain the health channel and WebMD's web site. - WebMD will incorporate a healthcare technology section on its healthcare professionals web site promoting Microsoft and Microsoft authorized independent software vendors. - Microsoft and its affiliates will be the sole providers of some non-healthcare related content and services for WebMD's consumer web site and, for those WebMD subscribers who purchase Internet access from WebMD, the sole providers of Internet access. - WebMD may not provide health-related content or services or license co-branded or third party-branded web sites with specified entities, including some Internet and healthcare companies, without Microsoft's consent in some cases or without providing Microsoft notice and offering the same content or services on the health channel or allowing Microsoft to provide its products or services on the web sites in other cases. - Microsoft may reduce the amount of content and services provided by WebMD on the MSN health channel from 80% to 50% if: - WebMD's consumer web site is not ranked the third, second and first ranked consumer health site by December 31, 1999, July 31, 2000 and December 31, 2000, respectively, or - the MSN health channel does not have an average number of page views per unique user per month that is equal to or above the average number of page views for health sections of other portal and health web sites, as determined by Media Metrix. The strategic alliance agreement provides that Microsoft will place a link from its MSN.com home page, promote the health channel on the MSN.com in a manner equivalent to all other major MSN topic specific offerings and provide a guaranteed minimum amount of advertising for the health channel. Microsoft has also agreed to promote the WebMD brand by providing a joint credit on each page of the health channel. 76 87 Healtheon, WebMD and Microsoft have agreed to assign WebMD's rights and obligations under its strategic alliance with Microsoft to Healtheon/WebMD upon the completion of the WebMD merger and to expand this relationship to provide that: - Microsoft will be entitled to nominate one member to the Healtheon/WebMD board of directors. - Any of Microsoft's rights with respect to WebMD's web site will also apply to Healtheon's web sites. - Healtheon/WebMD will share with Microsoft 15% of its revenues from transaction fees related to claims submissions, claims status inquiries and eligibility inquiries generated through the health channel for MSN, MSNBC and WebTV. - Microsoft and Healtheon will integrate independent software vendor applications and systems for transaction processing into Healtheon's web sites. On June 11, 1999, Microsoft completed the purchase of 202,930 shares of WebMD Series F preferred stock tendered by its stockholders pursuant to an offer to purchase for an effective price of $54.17 per share which was commenced on April 10, 1999. In addition, in May 1999, Microsoft purchased from WebMD 184,604 shares of Series E preferred stock for approximately $100.0 million representing an effective price of $54.17 per WebMD common share and was issued a warrant to acquire 7,614,916 shares of WebMD common stock at $54.17 per share. On May 20, 1999, Microsoft committed to acquire another 276,906 shares of Series E preferred stock upon the completion of the WebMD merger for approximately $150.0 million representing an effective price of $54.17 per WebMD common share. Microsoft will beneficially own approximately 16.0% of the fully diluted Healtheon/WebMD common stock following the completion of the mergers. In connection with the Microsoft investment, Intel Corporation, Excite, Inc., SOFTBANK America Inc., Covad Communications Group, Inc., Superior Consultant Holdings Corporation, The Reader's Digest Association, Inc. and Dell USA, L.P., an investment vehicle for Dell Computer Corporation, purchased a total of 272,292 shares of WebMD Series E preferred stock and 184,604 shares of WebMD Series D common stock for approximately $157.5 million. Some of these investors have also entered into strategic relationships with WebMD. For a complete description of these relationships, see the section entitled "Information Regarding WebMD -- WebMD's business -- Strategic relationships" on page 240. EXCHANGE OF WEBMD STOCK CERTIFICATES FOR HEALTHEON/WEBMD 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 merger 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. NO DIVIDENDS WebMD stockholders are not entitled to receive any dividends or other distributions on Healtheon/ WebMD common stock until the WebMD merger 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 77 88 the amount of any dividends or other distributions, without interest, with a record date after the completion of the merger 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 WEBMD MERGER This section summarizes material U.S. federal income tax considerations relevant to the merger that apply to WebMD stockholders. This discussion is based on existing provisions of the Internal Revenue Code, existing treasury regulations and current administrative rulings and court decisions, all of which are subject to change. Any such change, which may or may not be retroactive, could alter the tax consequences of the merger to you. The Internal Revenue Service may adopt a contrary position. We do not discuss all U.S. federal income tax considerations that may be relevant to you in light of your particular circumstances. Factors that could alter the tax consequences of the merger to you include: - if you are a dealer in securities - if you are a tax-exempt organization - if you are subject to the alternative minimum tax provisions of the tax code - if you are a foreign person or entity - if you are a financial institution or insurance company - if you do not hold your WebMD 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 WebMD shares as part of an integrated investment, including a "straddle," comprised of shares of WebMD capital stock and one or more other positions, or - if you hold WebMD shares subject to the constructive sale provisions of Section 1259 of the tax code In addition, we do not discuss the tax consequences of the merger under foreign, state or local tax laws, the tax consequences of transactions effectuated prior or subsequent to, or concurrently with, the merger, whether or not any of these transactions are undertaken in connection with the merger, including without limitation any transaction in which 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 WebMD capital stock. ACCORDINGLY, WE URGE YOU TO CONSULT YOUR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO YOU OF THE MERGER. Tax implications for WebMD and WebMD stockholders Counsel to Healtheon, Wilson Sonsini Goodrich & Rosati, and counsel to WebMD, Nelson Mullins Riley & Scarborough, L.L.P., are of the opinion that the merger of WebMD with a wholly owned 78 89 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: - 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 WebMD stockholders for a fractional share of Healtheon/WebMD common stock should be treated as if such fractional share had been issued in the WebMD merger and then redeemed by Healtheon/WebMD. The WebMD stockholders should recognize gain or loss with respect to these cash payments, measured by the difference, if any, between the amount of cash received and the basis in such fractional share. - WebMD stockholders who exercise appraisal rights and receive payment for such stock in cash should generally recognize gain or loss for federal income tax purposes, measured by the difference, if any, between the amount of cash received and the basis in such shares, provided that the payment is not treated as a dividend distribution for tax purposes. A sale of WebMD shares pursuant to an exercise of appraisal rights should generally not be treated as a dividend if, as a result of such exercise, the stockholder owns no shares of Healtheon/WebMD or WebMD stock, either actually or constructively. - The aggregate tax basis of the Healtheon/WebMD common stock received by holders of WebMD common stock will be the same as the aggregate tax basis of the WebMD common stock surrendered in exchange for the Healtheon/WebMD common stock. - The holding period of the Healtheon/WebMD common stock received by holders of WebMD stock in the WebMD merger will include the period the exchanged WebMD common stock was considered to be held, provided that the WebMD common stock surrendered is held as a capital asset at the time of the WebMD merger. - WebMD will not recognize gain solely as a result of the WebMD merger. Limitations on the tax opinions WebMD has not requested a ruling from the IRS with regard to any of the federal income tax consequences of the WebMD merger. The opinions described above do not bind the IRS nor preclude it from adopting a contrary position. These opinions are subject to qualifications and are conditioned upon assumptions, including the truth and accuracy of representations provided by the parties to the WebMD merger agreement. Consequences of a contrary IRS determination A successful IRS challenge to the status of the WebMD merger as a reorganization would result in a WebMD stockholder recognizing gain or loss with respect to each share of WebMD stock surrendered. 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 WebMD merger, 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 WebMD merger. Even if the WebMD merger qualifies as a reorganization, 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 WebMD stock was treated as receiving, directly or indirectly, consideration other than Healtheon/WebMD common stock in exchange for the holder's WebMD common stock. All or a portion of those gain amounts may be taxable as ordinary income. 79 90 ACCOUNTING TREATMENT OF THE WEBMD MERGER We intend to account for the WebMD merger 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 WEBMD MERGER 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, Jeffrey T. Arnold and Microsoft have filed the required information and materials with the Department of Justice and the Federal Trade Commission and these waiting periods have expired. Other applicable stockholders of WebMD, along with Healtheon, have also filed the required information and materials but as of the date of this proxy statement/prospectus these waiting periods have not yet expired. The requirements of Hart-Scott-Rodino will be satisfied if the merger is completed within one year from the termination of all applicable waiting periods. 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 merger. 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 merger could be made and we may not prevail. We are not aware of any other material governmental or regulatory approval required for completion of the merger, other than the effectiveness of the registration statement of which this proxy statement/prospectus is a part, and compliance with applicable corporate laws of Delaware and Georgia. RESTRICTIONS ON SALES OF SHARES BY AFFILIATES OF WEBMD AND HEALTHEON The shares of Healtheon/WebMD common stock to be issued in the merger will be registered under the Securities Act. These shares will be freely transferable under the Securities Act, except for shares of Healtheon/WebMD common stock issued to or held by any person who is an affiliate of either of WebMD or Healtheon. Persons who may be deemed to be affiliates include individuals or entities that control, are controlled by, or are under common control of either of WebMD or Healtheon and may include some of their respective officers and directors, as well as their respective principal stockholders. Affiliates may not sell their shares of Healtheon/WebMD common stock acquired in the merger except pursuant to: - an effective registration statement under the Securities Act covering the resale of those shares, - an exemption under paragraph (d) of Rule 145 under the Securities Act, or - any other applicable exemption under the Securities Act. LISTING ON THE NASDAQ NATIONAL MARKET OF HEALTHEON/WEBMD COMMON STOCK TO BE ISSUED IN WEBMD MERGER 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. 80 91 OPERATIONS AFTER THE WEBMD MERGER Following the merger, WebMD will continue its operations as a subsidiary of Healtheon/WebMD. The stockholders of 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. See "Comparison of Rights of Holders of Healtheon/WebMD Common Stock, WebMD Capital Stock, MEDE AMERICA Common Stock and Medcast Capital Stock" on page 175. 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 merger 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 merger agreement 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 merger agreement or the WebMD merger. The written objection requirement referred to above will not be satisfied under Georgia law by merely voting against the merger 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 merger agreement and the WebMD merger are approved by the WebMD stockholders, WebMD is required to send a written dissenters' notice to each of the dissenting stockholders who filed a written notice of his intent to dissent and did not vote in favor of the merger. The dissenters' notice must: - state where the dissenting stockholders' first payment demand must be sent and where and when certificates for certificated shares must be deposited - inform the holders of uncertificated shares to what extent transfer of such shares will be restricted after payment demand is made - state the date by which WebMD must receive the first payment demand, which date shall be fixed by WebMD and shall not be fewer than 30 nor more than 60 days after the date the dissenters' notice is delivered - contain a copy of Georgia law relating to dissenters' rights Any dissenting stockholder who voted for or consented in writing to the merger 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 81 92 the WebMD stockholders vote to approve the merger agreement. The dissenters' notice will be sent to each dissenting stockholder at his or her address as it appears in the stock transfer books of WebMD or at any other address the dissenting stockholder supplies by notice to WebMD. Each dissenting stockholder to whom WebMD sends a dissenter's notice must make a first payment demand for his or her shares by written notice to WebMD and deposit his or her share certificates in accordance with the terms of the dissenters' notice. The first payment demand must contain the name and address of the dissenting stockholder, the number of shares as to which the dissenting stockholder is demanding payment and a demand for payment to the dissenting stockholder of the fair value of his or her shares. Any dissenting stockholder who does not submit a first payment demand or deposit their shares as set forth in the dissenters' notice shall lose their rights to dissent and shall not be entitled to payment for his or her shares pursuant to the dissenters' rights provisions of Georgia law. Within ten days of the later of the closing the WebMD merger or WebMD's receipt of the first payment demand, WebMD shall offer to pay the dissenting stockholders who have complied with the provisions of Georgia law the amount WebMD estimates to be the fair value of the shares plus accrued interest. WebMD's offer of payment must be accompanied by: - WebMD's balance sheet as of the fiscal year ended not more than 16 months before the date of payment, an income statement for that year, a statement of changes in stockholders' equity for that year and the latest available interim financial statements, if any - a statement of WebMD's estimate of the fair value of the shares - an explanation of how the interest was calculated - a statement of the dissenting stockholder's right to demand payment of a different amount if the dissenting stockholder is dissatisfied with the offer - a copy of Article 13 of Georgia law If a dissenting stockholder accepts WebMD's offer by providing written notice to WebMD within 30 days after the date the offer is made or is deemed to have accepted such offer by failure to respond within said 30 days, WebMD shall make payment for the dissenting stockholder's shares within 60 days after the date WebMD made the offer or the date on which the WebMD merger occurs, whichever date is later. If the WebMD merger is not effected within 60 days after the first payment demand and the deposit of share certificates, WebMD must return the deposited share certificates and release the transfer restrictions imposed on uncertificated shares. If, after such return and release, the WebMD merger is effectuated, WebMD must send a new dissenters' notice and repeat the payment demand procedure described above. If a dissenting stockholder is dissatisfied with WebMD's offer of payment or the merger does not occur and WebMD does not return the deposited certificates within 60 days after the date set for making the first payment demand, a dissenting stockholder may make a second payment demand to WebMD in writing of his or her own estimate of the fair value of his or her shares and the amount of interest due. A dissenting stockholder waives his or her right to demand payment of a different amount than that offered by WebMD and is deemed to have accepted the amount offered by WebMD unless the dissenting stockholder makes a second payment demand within 30 days after the date WebMD makes its offer. In the event a dissenting stockholder's second payment demand remains unsettled within 60 days after WebMD receives the dissenting stockholder's second payment demand, WebMD shall commence a nonjury equitable valuation proceeding in the Superior Court of Fulton County, Georgia to determine the fair value of the shares and accrued interest. WebMD shall make all dissenting stockholders whose second payment demand remains unsettled parties to the court proceeding. In the proceeding, the court will fix a value of the shares and may appoint one or more appraisers to receive evidence and recommend a decision on the question of fair value. If WebMD does not commence the proceeding within 60 days after receiving the dissenting stockholder's second payment demand, WebMD shall pay each dissenting stockholder whose 82 93 second payment demand remains unsettled the amount demanded by each dissenting stockholder in his or her second payment demand. The determination of a "fair value" necessarily involves matters of judgment upon which reasonable persons may disagree. Georgia law provides that, for purposes of dissenters' rights, the value of the WebMD stock is determined immediately before the consummation of the WebMD merger and that the fair value excludes any appreciation or depreciation in anticipation of the WebMD merger. Any dissenting stockholder who perfects his or her right to be paid the value of his or her shares will recognize taxable gain or loss upon receipt of cash for the shares for U.S. federal income tax purposes. For a more complete description of the federal income tax consequences of the WebMD merger, see the section entitled "Material U.S. federal income tax considerations of the WebMD merger" on page 78. 83 94 THE WEBMD MERGER AGREEMENT REPRESENTATIONS AND WARRANTIES Healtheon and WebMD each made representations and warranties in the WebMD merger agreement regarding aspects of their respective businesses, financial condition, structure and other facts pertinent to the WebMD merger, 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 WebMD merger. The representations and warranties in the WebMD merger agreement are complicated and not easily summarized. The merger agreement is attached to this proxy statement/prospectus as Annex A and we urge you to read it carefully, including the sections of the agreement entitled "Representations and Warranties of the Company" and "Representations and Warranties of Healtheon and Merger Sub." CONDUCT OF BUSINESS BEFORE COMPLETION OF THE WEBMD MERGER Healtheon and WebMD each agreed that until the completion of the WebMD merger 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 merger 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 merger - the liquidation or restructuring of, or merger involving, Healtheon or WebMD - the acquisition of assets or other entities - the disposition of assets - the incurrence of indebtedness - entering into, material modification or termination of contracts - accounting policies and procedures - actions that would jeopardize the tax treatment of the merger 84 95 The agreements related to the conduct of each party's business in the merger agreement are complicated and not easily summarized. You are urged to carefully read the sections of the merger agreement entitled "Conduct prior to the effective time." NO OTHER NEGOTIATIONS INVOLVING WEBMD Until the WebMD merger is completed or the merger 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 WEBMD STOCK OPTIONS AND WARRANTS Upon completion of the WebMD merger, each outstanding option or warrant to purchase WebMD capital 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 WebMD common stock that could have been obtained before the WebMD merger upon the exercise of each option or warrant times the 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 merger divided by the exchange ratio, rounded to the nearest whole cent. 85 96 The terms of each option and the 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 merger, each outstanding award, including restricted stock, stock equivalents and stock units, under any employee incentive or benefit plans, programs or arrangements maintained by 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 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 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, William P. Payne, U. Bertram Ellis, Jr. and Eric J. Gleacher, four of whom shall have been designated by the board of directors or Healtheon, including W. Michael Long, James H. Clark, L. John Doerr and William W. McGuire and one of whom will be designated by Microsoft. After the reorganization, Mr. 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 Mr. 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 WEBMD MERGER Our respective obligations to complete the WebMD merger and the other transactions contemplated by the merger agreement are subject to the satisfaction or waiver of each of the following conditions before completion of the merger: - the merger agreement must be approved and adopted by the requisite vote of Healtheon's and WebMD's stockholders, the merger must be approved by the requisite vote of the outstanding shares of WebMD stock and the issuance of shares of Healtheon/WebMD common stock to the WebMD stockholders must be approved the requisite vote of the outstanding shares of Healtheon stock. - no law, regulation or order must be enacted or issued which has the effect of making the mergers illegal or otherwise prohibiting completion of the merger substantially on the terms contemplated by the merger agreement - all applicable waiting periods under applicable antitrust laws must have expired or been terminated - Healtheon and WebMD must each receive from their respective tax counsel, an opinion to the effect that the merger will constitute a reorganization within the meaning of Section 368(a) of the tax 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 merger must be authorized for listing on Nasdaq, subject to notice of issuance 86 97 WebMD's obligations to complete the WebMD merger and the other transactions contemplated by the merger 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 merger 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 merger agreement to be performed or complied with by WebMD at or before completion of the WebMD merger - no material adverse effect with respect to WebMD shall have occurred since May 20, 1999 and be continuing - WebMD shall have obtained all consents, waivers and approvals required in connection with the WebMD merger - no stockholder, taken together with its affiliates, of WebMD shall beneficially own, or have the right to beneficially own, at any time in the future, 40% or more of the outstanding shares of WebMD stock on a fully diluted, as converted basis - no more than 0.66% of the shares of WebMD capital stock on fully diluted, as converted basis shall have perfected rights of appraisal or dissenters rights with respect to the WebMD merger - WebMD's legal counsel shall have delivered a legal opinion - WebMD shall have provide Healtheon with reasonably satisfactory evidence that, with limited exceptions, all material rights of stockholders and obligations of WebMD under any stockholder agreement in its capacity as a stockholder shall have terminated 87 98 - WebMD shall have received a $150 million investment from Microsoft upon completion of the WebMD merger. - 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 WEBMD MERGER AGREEMENT The merger agreement may be terminated at any time prior to completion of the WebMD merger, whether before or after approval and adoption of the merger agreement and approval of the merger 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 merger 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 merger 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 merger agreement and the merger 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 merger 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 merger agreement - by Healtheon or WebMD, if the merger agreement and the merger 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 merger 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 merger agreement - by WebMD, upon a breach of any representation, warranty, covenant or agreement of Healtheon in the merger agreement, or if any of Healtheon's representations or warranties are or become untrue so that the corresponding condition to completion of the merger 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 merger agreement, or if any of WebMD'S representations or warranties are or become untrue so that the corresponding condition to completion of the merger 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 merger agreement if the breach or inaccuracy is cured prior to December 15, 1999. 88 99 EXTENSION, WAIVER AND AMENDMENT OF THE WEBMD MERGER AGREEMENT We may amend the merger agreement before completion of the merger 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 merger 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 merger agreement. 89 100 WEBMD RELATED TRANSACTION AGREEMENTS WEBMD STOCKHOLDERS' VOTING AGREEMENT AND CONVERSION AGREEMENT Jeffrey T. Arnold, Finn Partners, Lucius E. Burch, III, Burch House, L.P., J.T. Arnold Enterprises LLLP, K. Robert Draughon, U. Bertram Ellis, Jr., J. Rex Fuqua, Fuqua Holdings I, L.P., S. Taylor Glover, Jouko Rissanen, STG Partners, LP, Glenn W. Sturm, Premiere Technologies, Inc., Microsoft and HBO & Company, each of whom 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 - in favor of the conversion of WebMD preferred stock into Series D common stock immediately prior to and contingent on the WebMD merger - in favor of the acceleration of the vesting provisions in certain WebMD options - against any proposal in opposition to the WebMD merger or other action inconsistent with completing the WebMD merger The voting agreements also contain an irrevocable election to convert any WebMD preferred stock held by the stockholder into WebMD common stock immediately prior to the WebMD merger. Some holders of WebMD 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 preferred stock to permit the automatic conversion of each series of preferred stock into Series D common stock upon the election by the holders of a majority of the outstanding shares of that series - no sooner than three business days after the mailing of this proxy statement/prospectus, to either: - execute a voting agreement in the same form as the voting agreement described above, or - be deemed to have irrevocably elected to convert their preferred stock into WebMD common stock effective as of the day immediately prior to the record date of the WebMD stockholder meeting As a result of the voting agreements and the conversion agreements, WebMD has sufficient votes to approve the merger agreement and the proposed merger to the extent required under Georgia law. The WebMD stockholders who have executed voting agreements or conversion agreements also agreed not to transfer or encumber their WebMD shares covered by those agreements. None of the WebMD stockholders were paid any consideration for entering into the voting agreements or conversion agreements, although WebMD did enter into: - a letter of understanding with Premiere Technologies, Inc. described above under the section entitled "Interests of certain directors, officers and affiliates in the WebMD merger" concerning its strategic relationship with WebMD following the WebMD merger in connection with obtaining Premiere's voting agreement, and - an agreement with HBO & Company described below under the sections entitled "McKesson HBOC agreement" regarding its strategic relationship and investment rights with WebMD following the WebMD merger. The voting and conversion agreements will terminate upon the earlier to occur of: - the termination of the merger agreement in accordance with its terms, or - the completion of the merger 90 101 HEALTHEON STOCKHOLDERS' VOTING AGREEMENT Some Healtheon stockholders have entered into a voting agreement with WebMD. The voting agreement requires these Healtheon stockholders to vote all of the shares of Healtheon common stock beneficially owned by them in favor of the merger. As of the record date, the Healtheon stockholders who entered into the voting agreement collectively beneficially owned shares, including shares issuable upon exercise of warrants, of Healtheon common stock which represented approximately shares of the outstanding Healtheon 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 merger 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 merger and to convert any shares of WebMD preferred stock which it owns into WebMD common stock immediately prior to the effective time of the merger and conditioned upon its closing, unless there are material amendments to the merger agreement after September 1999. As of the record date, Microsoft beneficially owned 14,352,976 shares, including shares issuable upon exercise of warrants, of WebMD capital stock which represented approximately 34.8% 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 merger. Microsoft further agreed, effective with the merger, 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 merger agreement in accordance with its terms, or - the completion of the merger MCKESSONHBOC AGREEMENT On September 1, 1999, McKessonHBOC and HBO & Company entered into an agreement with WebMD and Healtheon that: - terminates the prior strategic agreements between WebMD and McKessonHBOC, which had provided that WebMD would provide web-enabled access to McKessonHBOC's products and services, in some cases on an exclusive basis, and that McKessonHBOC would market WebMD subscriptions 91 102 - substitutes for the prior arrangements WebMD's agreement to provide web-enabled access to McKessonHBOC's medical/surgical supply catalog on a nonexclusive basis for no cost for a period of one year after the WebMD merger, and, in the event that McKessonHBOC elects to continue this access, for up to four additional years at prices and terms no less favorable than offered by WebMD to distributors of similar products or services - requires McKessonHBOC to license to WebMD on a royalty-free basis clinical reference service content for a period of one year - provides for an immediate cash payment by McKessonHBOC to WebMD of $3.6 million and obligates WebMD to pay for any physician subscriptions to WebMD's products and services previously obtained by McKessonHBOC - obligates HBOC convert its WebMD preferred stock into WebMD common stock prior to the effective time of the WebMD merger and to vote for the merger - terminates the rights that HBOC would have had to purchase an additional 1,295,565 shares of WebMD common stock for $54.17 per share - in consideration for this revised relationship, provides for the issuance by WebMD of warrants to HBOC to acquire 4,688,049 shares of WebMD nonvoting common stock, which WebMD warrants will be assumed by Healtheon in the merger and become exercisable for shares of Healtheon common stock at the following per share exercise prices: - 3,300,000 shares at $50.86 - 5,000,000 shares at $30.16 - 119,734 shares at $11.14 92 103 THE MEDE AMERICA MERGER This section of the proxy statement/prospectus describes certain aspects of the proposed MEDE AMERICA merger, including the merger agreement and related agreements. While we believe that the description covers the material terms of the MEDE AMERICA merger 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 merger. BACKGROUND OF THE MEDE AMERICA MERGER 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 merger 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, 93 104 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 merger - possible post-merger employment arrangements with key employees of MEDE AMERICA - treatment of MEDE AMERICA stock options - the scope of the "fiduciary out" provisions of the merger agreement, which would permit the board of directors to respond to unsolicited offers under limited circumstances - the circumstances under which the merger agreement could be terminated by either party - the request of Healtheon for voting agreements with the major stockholders of MEDE AMERICA On April 14, 1999, the MEDE AMERICA board of directors met to discuss the progress of the transaction. At this meeting, MEDE AMERICA's legal advisors discussed the board's fiduciary duties in considering a strategic business combination and strategic alternatives and discussed the terms of the draft merger 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 merger agreement. The MEDE AMERICA board met again on April 16, 1999 to assess the status of the transaction. At this meeting, MEDE AMERICA's senior management and legal and financial advisors reviewed: - the status of negotiations of the proposed transaction - the results of the due diligence evaluation of Healtheon - the benefits and risks of the transaction with Healtheon - the principal terms of the draft merger agreement and related documents. The board directed Mr. Staudt and MEDE AMERICA's legal and financial advisors to continue the negotiations. Negotiations of a definitive merger 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 merger. 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 merger 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 merger 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 merger 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 merger agreement, the stock option agreement and related documents. After considering the terms of the proposed transaction, the Healtheon board of directors determined that the merger was fair to Healtheon and that 94 105 the proposed merger was in the best interests of Healtheon. The Healtheon board of directors then unanimously approved the merger agreement and its exhibits, including the stock option agreement, and the merger. On April 20, 1999, the merger agreement was executed and a joint press release was issued prior to the opening of trading on April 21, 1999. In June 1999, following the announcement of the proposed WebMD merger, Mr. de Nicola, on behalf of the MEDE AMERICA board, requested that Healtheon agree to amend the collar arrangement to prevent MEDE AMERICA stockholders from being prejudiced by the likely delay in the closing of the MEDE AMERICA merger caused by the WebMD merger. Healtheon and MEDE AMERICA agreed to base the adjustments to the exchange ratio on the lower of the average closing price of Healtheon common stock for the ten business days ending July 30, 1999 or the ten day period ending two business days before the MEDE AMERICA stockholders meeting, and to extend the final date for the consummation of the MEDE AMERICA merger from September 30, 1999 to December 15, 1999. On August 2, 1999, the MEDE AMERICA board met together with its financial and legal advisors, to consider the impact of the proposed mergers, WebMD and Medcast on the board's recommendation of the MEDE AMERICA merger, and to formally approve the amendment of the merger agreement. Salomon Smith Barney reviewed the updated financial analyses it had performed, taking into consideration the proposed mergers of WebMD and Medcast, and rendered to the MEDE AMERICA board an oral opinion, subject to review of definitive documentation of the amendment and other customary matters, as to the fairness of the modified exchange ratio from a financial point of view. The MEDE AMERICA board thereafter unanimously reconfirmed its approval of the transaction and the amended merger agreement. JOINT REASONS FOR THE MEDE AMERICA MERGER MEDE AMERICA's and Healtheon's boards of directors have determined that the MEDE AMERICA merger is in the best interests of the stockholders of their respective companies. They concluded that the combined company following the merger 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 Internet-based connections to payers and other institutions and transactions for physicians, consumers and healthcare institutions over a network consisting of approximately 650 payers, 180,000 physicians, 1,100 hospitals, 46,000 pharmacies, 11,000 dentists and 200 affiliate partners - increase each company's transaction volume - position Healtheon/WebMD to migrate MEDE AMERICA's non-Internet-based dedicated networks 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 - promote the growth of electronic prescription transmission service offerings because of MEDE AMERICA's strong physician and pharmacy customer base, on the provider side, and its direct connections with payers - create a strong combined management team 95 106 MEDE AMERICA'S REASONS FOR THE MEDE AMERICA MERGER 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 MERGER 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 merger. In reaching its decision, the MEDE AMERICA board identified several potential benefits of the merger in addition to the joint benefits identified above, including the following: - the combination with Healtheon will allow MEDE AMERICA to access internet e-commerce technology at a faster pace than could be achieved through internal development, enabling MEDE AMERICA to accelerate growth in internet transaction volume and related revenues - the merger will enable MEDE AMERICA to gain access to a broad network of strategic partnerships and relationships which have been developed by Healtheon, as well as WebMD. This factor was viewed as significant, in light of the trend toward consolidation and strategic partnerships in the electronic data interchange industry. - the implied value of the merger consideration on the date of the merger agreement, which was $30.14 and represented a premium of approximately 37% over the market price of MEDE AMERICA's stock immediately before the announcement of the transaction and 132% over the price to the public in MEDE AMERICA's IPO, which had occurred two months before - the opinion of Salomon Smith Barney as to the fairness, from a financial point of view, of the exchange ratio to the holders of MEDE AMERICA common stock. This opinion is subject to assumptions and limitations noted in the opinion and described under "Opinion of MEDE AMERICA's financial advisor," and stockholders should carefully read both that section and the opinion of Salomon Smith Barney, which is attached to this document as Annex F - the opportunity afforded to MEDE AMERICA stockholders to participate in the potential growth of the combined company following the merger or to realize their investment in a market that has been more active and liquid than the market for MEDE AMERICA stock - the tax-free nature of the merger, which will allow MEDE AMERICA stockholders to defer tax on gains until they sell the Healtheon/WebMD stock they receive in the merger - the terms and conditions of the merger agreement, addressing the purchase price protection and the provisions which would permit MEDE AMERICA to pursue and accept other proposals - the proposed mergers of WebMD and Medcast, including WebMD's relationship with Microsoft and Microsoft's potential investment in WebMD, could potentially allow the combined company to provide a broader range of products and give the combined company a larger customer base The MEDE AMERICA board also identified and considered a variety of potential negative factors in its deliberations concerning the merger, including, but not limited to: - the risk to MEDE AMERICA's stockholders that the value to be received in the merger could decline significantly due to potential declines in the trading price of Healtheon stock. The extreme volatility of Healtheon's stock price, the limited public float and the large number of shares that were to become free of lock-up restrictions and eligible for public sale at the end of the six month period following Healtheon's IPO, all contributed to increasing this risk. - the possibility that the $15.0 million termination fee could have the effect of discouraging more favorable offers - the loss of control over the future operations of MEDE AMERICA following the merger 96 107 - the impact of the loss of MEDE AMERICA's status as an independent company on MEDE AMERICA's stockholders, optionholders, employees and customers - the risk that the potential strategic benefits sought in the MEDE AMERICA merger might not be realized - the possibility that the MEDE AMERICA merger might not be consummated and the potential adverse effects of the public announcement of the MEDE AMERICA merger on: - MEDE AMERICA's sales and operating results - MEDE AMERICA's ability to attract and retain key employees - MEDE AMERICA's overall competitive position - the risk that, despite the efforts of Healtheon and MEDE AMERICA, key technical and management personnel might not remain employees of Healtheon/WebMD following the closing of the merger - the transaction costs expected to be incurred in connection with the merger transactions and the other risks described under "Risk Factors" beginning on page 29. After due consideration, the MEDE AMERICA board concluded that the risks associated with the proposed MEDE AMERICA merger were outweighed by the potential benefits of the merger. During the process of evaluating the Healtheon offer, the MEDE AMERICA's board also considered the provisions of the merger agreement that prohibited solicitation of third-party bids and the acceptance, approval or recommendation of any unsolicited third-party bids. After fully discussing these matters during its deliberations, the MEDE AMERICA board determined that the benefits of the Healtheon offer justified these conditions and proceeded to approve the merger. The foregoing discussion of the information and factors considered by the MEDE AMERICA board is not intended to be exhaustive but is believed to include all material factors considered by MEDE AMERICA's board. In view of the complexity and wide variety of information and factors, both positive and negative, considered by the MEDE AMERICA board, it did not find it practical to quantify, rank or otherwise assign relative or specific weights to the factors considered. In addition, the MEDE AMERICA board did not reach any specific conclusion with respect to each of the factors considered, or any aspect of any particular factor, but, rather, conducted an overall analysis of the factors described above, including thorough discussions with MEDE AMERICA's management and legal, financial and accounting advisors. In considering the factors described above, individual members of the MEDE AMERICA board may have given different weight to different factors. The MEDE AMERICA board of directors considered all these factors as a whole and believed the factors supported its determination to approve the MEDE AMERICA merger. After taking into consideration all of the factors set forth above, MEDE AMERICA's board concluded that the MEDE AMERICA merger was fair to, and in the best interests of, MEDE AMERICA and its stockholders and that MEDE AMERICA should proceed with the MEDE AMERICA merger. 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 MERGER IS IN YOUR BEST INTERESTS AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE MERGER. In considering the recommendation of the MEDE AMERICA board of directors with respect to the MEDE AMERICA merger, you should be aware that certain directors and officers of MEDE AMERICA have interests in the merger that are different from, or are in addition to the interests of MEDE AMERICA stockholders generally. For a description of these interests, see the section entitled "Interests of directors, officers and affiliates in the MEDE AMERICA merger" on page 103. 97 108 OPINION OF MEDE AMERICA'S FINANCIAL ADVISOR Salomon Smith Barney was retained by MEDE AMERICA to act as its financial advisor in connection with the proposed MEDE AMERICA merger. 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 merger, 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 merger agreement, to the effect that, as of the date of the written opinion and based on and subject to the matters stated in the opinion, the exchange ratio was fair, from a financial point of view, to the holders of MEDE AMERICA common stock. Salomon Smith Barney confirmed this opinion by delivery of a written opinion dated August 2, 1999, the date of the amendment to the merger agreement. For purposes of its opinion dated August 2, 1999, Salomon Smith Barney reviewed the factors considered and assumptions made, and updated the material analyses performed, in connection with its earlier opinion. In arriving at its opinion, Salomon Smith Barney: - reviewed the 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 the management of MEDE AMERICA and Healtheon provided to or otherwise discussed with Salomon Smith Barney, including information relating to strategic implications and operational benefits anticipated to result from the merger - 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 merger - 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 merger on Healtheon - conducted other analyses and examinations and considered other financial, economic and market criteria as Salomon Smith Barney deemed appropriate in arriving at its opinion In rendering its opinion, Salomon Smith Barney assumed and relied, without independent verification, on the accuracy and completeness of all financial and other information and data that it reviewed or considered. With respect to these financial forecasts and other information and data, the managements of MEDE AMERICA and Healtheon advised Salomon Smith Barney that they were reasonably prepared on bases reflecting the best currently available estimates and judgments of the managements of MEDE AMERICA and Healtheon as to the future financial performance of MEDE AMERICA and Healtheon and the strategic implications and operational benefits anticipated to result from the merger. Salomon Smith Barney assumed, with MEDE AMERICA's consent, that the merger will be treated as a "tax-free" reorganization for federal income tax purposes. Salomon Smith Barney also assumed, with MEDE AMERICA's consent, that the proposed WebMD and MedCast transactions will be completed 98 109 consistent with their terms in all material respects and, to the extent relevant to its analysis evaluated Healtheon pro forma for those transactions. Salomon Smith Barney's opinion relates to the relative values of MEDE AMERICA and Healtheon. Salomon Smith Barney did not express any opinion as to what the value of Healtheon common stock actually will be when issued to MEDE AMERICA stockholders in the merger or the prices at which the Healtheon common stock will trade after 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, and did not make any physical inspection of the properties or assets of MEDE AMERICA or Healtheon. In connection with its opinion, Salomon Smith Barney was not requested to, and did not, solicit third party indications of interest in the possible acquisition of all or a part of MEDE AMERICA; however, Salomon Smith Barney, at the request of MEDE AMERICA, did solicit third party indications of interest in the possible acquisition of MEDE AMERICA prior to MEDE AMERICA's initial public offering in February 1999. Salomon Smith Barney expressed no view as to, and its opinion does not address, the relative merits of the 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. Salomon Smith Barney's opinion was necessarily based on information available, and financial, stock market and other conditions and circumstances existing and disclosed, to Salomon Smith Barney as of the date of its opinion. Although Salomon Smith Barney evaluated the exchange ratio from a financial point of view, Salomon Smith Barney was not asked to and did not recommend the specific consideration payable in the merger, which was determined through negotiation between MEDE AMERICA and Healtheon. No other instructions or limitations were imposed by MEDE AMERICA on Salomon Smith Barney with respect to the investigations made or procedures followed by Salomon Smith Barney in rendering its opinion. MEDE AMERICA selected Salomon Smith Barney based on its experience, expertise and familiarity with MEDE AMERICA and its business. Salomon Smith Barney is an internationally recognized investment banking firm that regularly engages in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive bids, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes. THE FULL TEXT OF SALOMON SMITH BARNEY'S OPINION DATED AUGUST 2, 1999, WHICH DESCRIBES THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED TO THIS DOCUMENT AS ANNEX F AND INCORPORATED BY REFERENCE IN THIS DOCUMENT. SALOMON SMITH BARNEY'S OPINION IS DIRECTED TO THE MEDE AMERICA BOARD AND RELATES ONLY TO THE FAIRNESS OF THE EXCHANGE RATIO FROM A FINANCIAL POINT OF VIEW, DOES NOT ADDRESS ANY OTHER ASPECT OF THE MERGER OR ANY RELATED TRANSACTION AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER WITH RESPECT TO ANY MATTER RELATING TO THE PROPOSED MERGER. In preparing its opinion, Salomon Smith Barney performed a variety of financial and comparative analyses, including those described below relating to Salomon Smith Barney's opinion dated August 2, 1999. The summary of these analyses is not a complete description of the analyses underlying Salomon Smith Barney's opinion. The preparation of a fairness opinion is a complex analytic process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, a fairness opinion is not readily susceptible to summary description. Salomon Smith Barney's opinion was not based on any single factor or analysis, but rather on the totality of the factors considered and analyses performed. Accordingly, Salomon Smith Barney believes that its analyses must be considered as a whole and that selecting portions of its analyses and factors or focusing on information presented in tabular format, without considering all analyses and factors or the narrative description of the analyses, could create a misleading or incomplete view of the processes underlying its analyses and opinion. The order in which Salomon Smith Barney's analyses are described, and the results derived from its analyses, do not represent the relative weight or importance given to the analyses by Salomon Smith Barney. 99 110 In its analyses, Salomon Smith Barney considered industry performance, general business, economic, market and financial conditions and other matters existing as of the date of its opinion, many of which are beyond the control of MEDE AMERICA and Healtheon. No company, transaction or business used in those analyses as a comparison is identical to MEDE AMERICA, Healtheon or the proposed merger, nor is an evaluation of those analyses entirely mathematical; rather, the analyses involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the acquisition, public trading or other values of the companies, business segments or transactions being analyzed. The estimates contained in Salomon Smith Barney's analyses and the valuation ranges resulting from any particular analysis are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by its analyses. In addition, analyses relating to the value of businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold. Accordingly, Salomon Smith Barney's analyses and estimates are inherently subject to substantial uncertainty. Salomon Smith Barney's opinion and analyses were only one of many factors considered by the MEDE AMERICA board in its evaluation of the 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 merger. The following is a summary of the material financial analyses performed by Salomon Smith Barney in connection with the rendering of its opinion dated August 2, 1999. THE FINANCIAL ANALYSES SUMMARIZED BELOW INCLUDE INFORMATION PRESENTED IN TABULAR FORMAT. IN ORDER TO FULLY UNDERSTAND SALOMON SMITH BARNEY'S FINANCIAL ANALYSES, THE TABLES MUST BE READ TOGETHER WITH THE TEXT OF EACH SUMMARY. THE TABLES ALONE DO NOT CONSTITUTE A COMPLETE DESCRIPTION OF THE FINANCIAL ANALYSES. CONSIDERING THE DATA SET FORTH BELOW WITHOUT CONSIDERING THE FULL NARRATIVE DESCRIPTION OF THE FINANCIAL ANALYSES, INCLUDING THE METHODOLOGIES AND ASSUMPTIONS UNDERLYING THE ANALYSES, COULD CREATE A MISLEADING OR INCOMPLETE VIEW OF SALOMON SMITH BARNEY'S FINANCIAL ANALYSES. MEDE AMERICA public market analysis Salomon Smith Barney derived an implied equity reference range for MEDE AMERICA by performing a public market analysis. A public market analysis provides a valuation range based, among other things, on the trading multiples of a group of publicly traded peer companies. Salomon Smith Barney compared financial information of MEDE AMERICA with similar information for the following two groups of publicly traded companies: Healthcare Electronic Data Interchange Companies - MedQuist Inc. - National Data Corporation - QuadraMed Corporation Other Electronic Data Interchange Companies - Harbinger Corp. - QRS Corporation - Sterling Commerce, Inc. Salomon Smith Barney compared, among other things, market prices as a multiple of estimated calendar years 1999 and 2000 earnings per share, adjusted for after-tax amortization related to purchase accounting, and firm value, calculated as equity value, plus debt, less cash, as a multiple of estimated calendar year 1999 earnings before interest, taxes, depreciation and amortization, commonly known as EBITDA. All multiples were based on closing stock prices on July 28, 1999. Estimated financial data for the selected companies were based on publicly available research analysts' estimates and estimated 100 111 financial data for MEDE AMERICA were based on internal estimates of the management of MEDE AMERICA. Applying a range of selected multiples of estimated calendar years 1999 and 2000 adjusted earnings per share and estimated calendar year 1999 EBITDA for the selected companies, excluding QuadraMed Corporation whose financial statistics were significantly more depressed than those of the other selected companies, to corresponding financial data of MEDE AMERICA resulted in an implied equity reference range for MEDE AMERICA of approximately $18.56 to $22.29 per share, as compared to the equity value implied by the exchange ratio of approximately $34.65 per share based on the closing stock price of Healtheon common stock on July 28, 1999. Precedent transactions analysis Salomon Smith Barney derived an implied per share equity reference range for MEDE AMERICA by performing a precedent transactions analysis. A precedent transaction analysis provides a valuation range based, among other things, on the purchase prices paid in transactions involving peer companies in the same or similar industries as the company or business segment analyzed. Using publicly available information, Salomon Smith Barney reviewed the purchase prices and implied transaction value multiples paid or proposed to be paid in the following seven selected transactions:
ACQUIROR TARGET -------- ------ - - 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)
Salomon Smith Barney compared the firm values implied by the purchase prices in the selected transactions as multiples of, among other things, latest 12 months revenues and EBITDA. All multiples were based on financial information available at the announcement date of the relevant transaction. Applying a range of selected multiples for the selected transactions of latest 12 months revenues and EBITDA to calendar year 1998 revenues and estimated calendar year 1999 EBITDA of MEDE AMERICA resulted in an implied equity reference range for MEDE AMERICA of approximately $21.88 to $27.48 per share, as compared to the equity value implied by the exchange ratio of approximately $34.65 per share based on the closing stock price of Healtheon common stock on July 28, 1999. Discounted cash flow analysis Salomon Smith Barney derived an implied per share equity reference range for MEDE AMERICA by performing a five-year discounted cash flow analysis, based on internal estimates of the management of MEDE AMERICA, on the stand-alone unlevered free cash flows of MEDE AMERICA. A discounted cash flow analysis determines the net present value of the projected free cash flows of a company or business segment. The range of estimated terminal values for MEDE AMERICA was calculated by applying terminal value multiples of 13.0x to 17.0x, with particular focus on terminal value multiples of 14.0x to 16.0x, to MEDE AMERICA's projected 2003 EBITDA. The cash flows and terminal values were discounted to present value using discount rates ranging from 12% to 14%, with particular focus on discount rates of 12.5% to 13.5%. 101 112 Based on terminal multiples of 14.0x to 16.0x and discount rates of 12.5% to 13.5%, this analysis resulted in an implied equity reference range for MEDE AMERICA of approximately $26.59 to $30.51 per share, as compared to the equity value implied by the exchange ratio of approximately $34.65 per share based on the closing stock price of Healtheon common stock on July 28, 1999. Premiums analysis Salomon Smith Barney analyzed the premiums implied by the exchange ratio in the merger based on the closing stock price of Healtheon common stock on July 28, 1999, April 20, 1999 and based on the closing stock prices of MEDE AMERICA common stock on the date of its initial public offering, over the 10 day trading period ended April 20, 1999. This analysis indicated the following implied premiums:
IMPLIED PREMIUM FOR MEDE AMERICA AT PERIOD EXCHANGE RATIO ------ ------------------- Initial public offering of MEDE AMERICA on February 1, 1999...................................................... 166.5% 10 trading day average ended April 20, 1999................. 73.8% April 20, 1999.............................................. 57.1% July 28, 1999............................................... 15.3%
Historical exchange ratio analysis Salomon Smith Barney reviewed the relationship between the daily closing prices of MEDE AMERICA common stock and Healtheon common stock during the periods beginning on the date of Healtheon's initial public offering on February 11, 1999 through April 20, 1999 and from April 20, 1999 through July 28, 1999. Implied historical exchange ratios for this analysis were determined by dividing the price per share of MEDE AMERICA common stock by the price per share of Healtheon common stock over the relevant periods. The following compares the exchange ratio in the merger with the high, low and average of these implied historical exchange ratios:
FEBRUARY 11, 1999 APRIL 20, 1999 TO TO APRIL 20, 1999 JULY 28, 1999 ----------------- -------------- High...................................... 0.728 0.602 Low....................................... 0.286 0.338 Average................................... 0.465 0.464 Merger Exchange Ratio..................... 0.6593
Pro forma earnings per share impact on Healtheon Salomon Smith Barney analyzed the potential pro forma financial effects of the merger, taken together with the proposed WebMD and Medcast transactions, on, among other things, Healtheon's estimated earnings per share for calendar years 1999 and 2000. Estimated financial data used in this analysis were based on internal estimates of the managements of MEDE AMERICA, Healtheon, WebMD and Medcast without giving effect to potential synergies that may result from the merger or the WebMD and Medcast transactions. The results of this 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 MEDE AMERICA has agreed to pay Salomon Smith Barney upon completion of the merger an aggregate financial advisory fee equal to 0.7% of the total consideration, including liabilities assumed, 102 113 payable in connection with the merger. MEDE AMERICA has also agreed to reimburse Salomon Smith Barney for its travel and other out-of-pocket expenses, including the fees and expenses of its legal counsel, and to indemnify Salomon Smith Barney and related persons against liabilities, including liabilities under the federal securities laws, arising out of its engagement. Salomon Smith Barney has advised MEDE AMERICA that, in the ordinary course of business, Salomon Smith Barney and its affiliates may actively trade or hold the securities of MEDE AMERICA and Healtheon for their own account or for the account of customers and, accordingly, may at any time hold a long or short position in those securities. Salomon Smith Barney has in the past provided investment banking services to MEDE AMERICA unrelated to the proposed merger, having acted as a managing underwriter for MEDE AMERICA's initial public offering for which Salomon Smith Barney received total underwriting discounts and commissions of approximately $2.2 million. In addition, Salomon Smith Barney and its affiliates, including Citigroup Inc. and its affiliates, may maintain relationships with MEDE AMERICA, Healtheon and their respective affiliates. INTERESTS OF DIRECTORS, OFFICERS AND AFFILIATES IN THE MEDE AMERICA MERGER 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 merger 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 merger. - 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 merger, 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 merger, any options that were held by those employees prior to the completion of the merger will vest fully. - Vesting of Warrants. Medic Computer Systems, Inc. holds a warrant to purchase 1,250,000 shares of MEDE AMERICA common stock that would vest at the time the merger is completed. One of the members of the MEDE AMERICA board of directors, Alan Winchester, sits as a designee of Medic - Transaction Fee. If the MEDE AMERICA merger is completed, William Blair & Co., L.L.C. will receive a transaction fee of 0.05% of the MEDE AMERICA merger 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 merger agreement and the merger than if they did not hold these interests. 103 114 COMPLETION AND EFFECTIVENESS OF THE MEDE AMERICA MERGER The merger will be completed when all of the conditions to completion of the merger are satisfied or waived, including approval and adoption of the merger 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 MERGER 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 merger as a wholly owned subsidiary of Healtheon/WebMD. Upon completion of the merger, 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 merger will depend upon the average closing price of Healtheon common stock as reported on Nasdaq for the ten trading day period ending two days before the date of the MEDE AMERICA stockholder meeting. - If the average closing sale price of Healtheon common stock for such period is equal to or greater than $38.68, the exchange ratio in the merger will be 0.6593 - If the average closing sale price of Healtheon common stock for the ten day period ending two days before the special meeting is less than $38.68, Healtheon may elect to adjust the exchange ratio no later than 24 hours prior to the MEDE AMERICA stockholder meeting, to equal the quotient obtained by dividing $25.50 by this lower average price The following chart indicates the number of shares of Healtheon/WebMD common stock to be received for each share of MEDE AMERICA common stock assuming different ten-day average prices.
HEALTHEON IF HEALTHEON IF HEALTHEON TEN-DAY DOES NOT ADJUST DOES ADJUST AVERAGE PRICE EXCHANGE RATIO EXCHANGE RATIO - ------------- --------------- -------------- $25 0.6593 1.0200 $30 0.6593 0.8500 $35 0.6593 0.7286 $40 0.6593 not applicable $45 0.6593 not applicable $50 0.6593 not applicable
If Healtheon does not elect to adjust the exchange ratio, MEDE AMERICA would have a right to terminate the merger agreement. If the merger agreement is terminated under these circumstances, the MEDE AMERICA stockholders' vote would not take place and the merger would be abandoned. If the Healtheon ten-day average price is greater than or equal to $40, neither party would have a right to adjust the 0.6593 exchange ratio. Under Healtheon's merger agreement with WebMD, Healtheon may not agree to an increase of the exchange ratio if the increase would result in the issuance of more than 2 million additional shares of Healtheon common stock to MEDE AMERICA stockholders unless Healtheon has obtained WebMD's prior written consent. In view of the number of MEDE AMERICA shares, stock options and warrants outstanding, this 2 million additional share amount would be exceeded if the ten-day average price of Healtheon common stock is less than $32.23. The exchange ratio will also be adjusted to reflect the effect of any stock split, reverse stock split, stock dividend, merger, reorganization, recapitalization, reclassification or other like change with respect to 104 115 Healtheon common stock or MEDE AMERICA common stock occurring prior to the completion of the merger. 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 merger 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 merger. 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 merger 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 merger 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 MERGER This section summarizes material U.S. federal income tax considerations relevant to the merger that apply to MEDE AMERICA stockholders. This discussion is based on existing provisions of the Internal Revenue Code, existing treasury regulations and current administrative rulings and court decisions, all of which are subject to change. Any such change, which may or may not be retroactive, could alter the tax consequences of the merger to you. The Internal Revenue Service may adopt a contrary position. We do not discuss all U.S. federal income tax considerations that may be relevant to you in light of your particular circumstances. Factors that could alter the tax consequences of the merger to you include: - if you are a dealer in securities - if you are a tax-exempt organization - if you are subject to the alternative minimum tax provisions of the tax code - if you are a foreign person or entity 105 116 - 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 tax code In addition, we do not discuss the tax consequences of the merger under foreign, state or local tax laws, the tax consequences of transactions effectuated prior or subsequent to, or concurrently with, the merger, whether or not any such transactions are undertaken in connection with the merger, 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 MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO YOU OF THE MERGER. Tax implications for MEDE AMERICA and MEDE AMERICA stockholders Counsel to Healtheon, Wilson Sonsini Goodrich & Rosati, and counsel to MEDE AMERICA, Reboul, MacMurray, Hewitt, Maynard & Kristol, are of the opinion that the merger of MEDE AMERICA with a wholly owned subsidiary of Healtheon/WebMD will be a "reorganization" for U.S. federal income tax purposes within the meaning of section 368(a) of the Internal Revenue Code. This means that: - MEDE AMERICA stockholders will not recognize gain or loss when they receive Healtheon/ WebMD common stock solely in exchange for their shares of MEDE AMERICA common stock in the MEDE AMERICA merger, except on cash received for a fractional share of Healtheon/ WebMD common stock - Cash payments received by MEDE AMERICA stockholders for a fractional share of Healtheon/ WebMD common stock should be treated as if such fractional share had been issued in the merger and then redeemed by Healtheon/WebMD. You should recognize gain or loss with respect to such cash payment, measured by the difference, if any, between the amount of cash received and the basis in such fractional share - The aggregate tax basis of the Healtheon/WebMD common stock received by holders of MEDE AMERICA common stock will be the same as the aggregate tax basis of the MEDE AMERICA stock surrendered in the exchange - The holding period of the Healtheon/WebMD common stock received by holders of MEDE AMERICA stock in the MEDE AMERICA merger will include the period the exchanged MEDE AMERICA stock was considered to be held, provided that the MEDE AMERICA stock surrendered is held as a capital asset at the time of the MEDE AMERICA merger - MEDE AMERICA will not recognize gain solely as a result of the MEDE AMERICA merger 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 merger. The opinions described above do not bind the IRS nor preclude it from adopting a contrary position. These opinions are subject to qualifications and are conditioned upon assumptions, including the truth and 106 117 accuracy of representations provided by Healtheon, MEDE AMERICA and the subsidiary of Healtheon formed to effect the MEDE AMERICA merger. Consequences of a contrary IRS determination A successful IRS challenge to the reorganization status of the MEDE AMERICA merger 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 WebMD merger, 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 merger. Even if the MEDE AMERICA merger 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 MERGER Healtheon and MEDE AMERICA intend to account for the merger as a purchase for financial reporting and accounting purposes, under generally accepted accounting principles. After the merger, 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 MERGER 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, MEDE AMERICA and the applicable stockholders of MEDE AMERICA have filed the required information and materials with the Department of Justice and the Federal Trade Commission and the applicable waiting period has expired. The requirements of Hart-Scott-Rodino will be satisfied if the merger is completed within one year from the termination of the waiting period. The Antitrust Division of the Department of Justice or the Federal Trade Commission may challenge the 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. Certain other persons could take action under the antitrust laws, including seeking to enjoin the merger. 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 merger 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 merger, 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. 107 118 RESTRICTIONS ON SALES OF SHARES BY AFFILIATES OF MEDE AMERICA 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 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 merger except pursuant to: - an effective registration statement under the Securities Act covering the resale of those shares, - an exemption under paragraph (d) of Rule 145 under the Securities Act, or - any other applicable exemption under the Securities Act. LISTING ON THE NASDAQ NATIONAL MARKET OF HEALTHEON COMMON STOCK TO BE ISSUED IN THE MEDE AMERICA MERGER 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 the Nasdaq National Market, subject to official notice of issuance. DELISTING AND DEREGISTRATION OF MEDE AMERICA COMMON STOCK AFTER THE MEDE AMERICA MERGER If the merger 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 MERGER Following the merger, MEDE AMERICA will continue its operations as a wholly owned subsidiary of Healtheon/WebMD. The stockholders of MEDE AMERICA will become stockholders of Healtheon/ WebMD, and their rights as stockholders will be governed by the Healtheon/WebMD certificate of incorporation, the Healtheon/WebMD bylaws and the laws of the State of Delaware. For a description of the differences in the rights of stockholders of MEDE AMERICA and Healtheon/WebMD, see "Comparison of rights of holders of Healtheon/WebMD common stock, WebMd capital stock, MEDE AMERICA common stock and Medcast capital stock" on page 175. 108 119 THE MEDE AMERICA MERGER AGREEMENT REPRESENTATIONS AND WARRANTIES Healtheon and MEDE AMERICA each made representations and warranties in the merger agreement regarding aspects of their businesses, financial condition, structure and other facts pertinent to the merger, 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 merger and the fairness opinion received by MEDE AMERICA from its financial advisor. The representations and warranties in the merger agreement are complicated and not easily summarized. The merger agreement is attached to this proxy statement/prospectus as Annex B and we urge you to read it carefully, including the sections of the merger 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 MERGER MEDE AMERICA agreed that until the completion of the merger 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 merger or unless Healtheon consents in writing, MEDE AMERICA and its subsidiaries would conduct their business in compliance with specific restrictions relating to the following: - the issuance and redemption of securities - employees and employee benefits and remuneration - MEDE AMERICA's intellectual property - the issuance of dividends or other distributions - modification of MEDE AMERICA's certificate of incorporation and bylaws - the liquidation or restructuring of, or merger involving, MEDE AMERICA - the acquisition of assets or other entities - capital expenditures - the disposition of MEDE AMERICA's assets - the incurrence of indebtedness - entrance into, modification or termination of contracts - accounting policies and procedures - actions which would jeopardize the tax treatment of the merger 109 120 The agreements related to the conduct of MEDE AMERICA's business in the merger agreement are complicated and not easily summarized. You are urged to carefully read the sections of the merger agreement entitled "Conduct of business by the company." HEALTHEON'S CONDUCT OF BUSINESS BEFORE COMPLETION OF THE MEDE AMERICA MERGER Healtheon agreed that until the completion of the merger 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 merger. NO OTHER NEGOTIATIONS INVOLVING MEDE AMERICA Until the merger is completed or the merger agreement is terminated, MEDE AMERICA has agreed not to directly or indirectly take any of the following actions: - solicit, initiate, encourage or induce any "acquisition proposal", as defined below - participate in any discussions or negotiations regarding any acquisition proposal - disclose any non-public information with respect to any acquisition proposal - take any other action to facilitate any inquiries or the making of any proposal that constitutes or may reasonably be expected to lead to any acquisition proposal - engage in discussions with any person with respect to any acquisition proposal - approve, endorse or recommend any acquisition proposal - enter into any letter of intent or similar document or any contract, agreement or commitment relating to any "acquisition transaction", as defined below Notwithstanding the limitations on MEDE AMERICA's actions, MEDE AMERICA may furnish information and engage in negotiations in response to an unsolicited, bona fide "superior offer", as defined below, made by a third party, provided that MEDE AMERICA's board has concluded, on the advice of outside counsel, that: - such action is necessary to comply with its fiduciary obligations - MEDE AMERICA notifies Healtheon/WebMD beforehand, and enters into a confidentiality agreement with such third party having terms no less favorable to MEDE AMERICA than those contained in its confidentiality agreement with Healtheon/WebMD - MEDE AMERICA provides any nonpublic information disclosed to the third party to Healtheon/WebMD A superior offer is any of the following transactions which the board of MEDE AMERICA determines, after consultation with a financial adviser of national reputation, is more favorable to MEDE AMERICA's stockholders than the MEDE AMERICA merger: - any merger or consolidation in which the MEDE AMERICA stockholders before the transaction hold less than 50% of the equity interest in the surviving entity - any sale or other disposition of assets of MEDE AMERICA representing in excess of 85% of the fair market value of MEDE AMERICA's business - the acquisition by any person or group of ownership of 85% or more of the then outstanding stock of MEDE AMERICA 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 110 121 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 merger 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 merger. TREATMENT OF MEDE AMERICA STOCK OPTIONS AND WARRANTS Upon completion of the merger, 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 merger 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 merger, each outstanding award, including restricted stock, stock equivalents and stock units, under any employee incentive or benefit plans, programs or arrangements maintained by MEDE AMERICA which provide for grants of equity-based awards will be amended or converted into a similar instrument of Healtheon, with certain adjustments to preserve their value. The other terms of each MEDE AMERICA award, and the plans or agreements under which they were issued, will continue to apply in accordance with their terms, except that Healtheon has agreed to provide for the options of any employees who are terminated without cause or are constructively terminated within two years following the merger 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. 111 122 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 merger. 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 MERGER Our respective obligations to complete the merger and the other transactions contemplated by the merger agreement are subject to the satisfaction or waiver of each of the following conditions before completion of the merger: - the merger agreement must be approved and adopted and the merger 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 merger 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/WebMD and MEDE AMERICA must each receive from their respective tax counsel, an opinion to the effect that the merger will constitute a reorganization within the meaning of Section 368(a) of the tax 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 merger must be authorized for listing on Nasdaq, subject to notice of issuance MEDE AMERICA's obligations to complete the merger and the other transactions contemplated by the merger agreement are subject to the satisfaction or waiver of each of the following additional conditions before completion of the merger: - Healtheon/WebMD's representations and warranties must be true and correct as of April 20, 1999 and as of the date the merger is to be completed, subject to certain exceptions, as if made as of that time except: - to the extent Healtheon/WebMD's representations and warranties address matters only as of a particular date, they must be true and correct as of that date - if any of these representations and warranties are not true and correct but the effect in each case, and in the aggregate, of the inaccuracies of these representations and breaches of these warranties, other than that concerning Healtheon/WebMD's board approval, which must be true and correct in all material respects, is not and does not have a material adverse effect on Healtheon/WebMD, then this condition will be deemed satisfied - Healtheon/WebMD must perform or comply in all material respects with all of its agreements and covenants required by the merger agreement to be performed or complied with by Healtheon/WebMD at or before completion of the merger - 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 112 123 Healtheon/WebMD's obligations to complete the merger and the other transactions contemplated by the merger agreement are subject to the satisfaction or waiver of each of the following additional conditions before completion of the merger: - MEDE AMERICA's representations and warranties must be true and correct as of April 20, 1999 and as of the date the merger 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 merger agreement to be performed or complied with by MEDE AMERICA at or before completion of the merger - 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 MERGER AGREEMENT The merger agreement may be terminated at any time prior to completion of the merger, whether before or after approval and adoption of the merger agreement and approval of the merger by MEDE AMERICA stockholders: - by mutual consent of Healtheon/WebMD and MEDE AMERICA - by Healtheon/WebMD or MEDE AMERICA, if the merger is not completed before December 15, 1999 except that the right to terminate the merger 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 merger to occur on or before December 15, 1999 and such action or failure to act constitutes a material breach of the merger agreement - by Healtheon/WebMD or MEDE AMERICA, if there is any order of a court or governmental authority having jurisdiction over either of us permanently enjoining, restraining or prohibiting the completion of the merger which is final and nonappealable - by Healtheon/WebMD or MEDE AMERICA, if the merger 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 merger 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 merger agreement 113 124 - by Healtheon/WebMD, at any time prior to the adoption and approval of the merger agreement and the merger 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 merger 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 merger agreement, or if any of Healtheon/ WebMD's representations or warranties are or become untrue so that the corresponding condition to completion of the merger 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 merger agreement if the breach or inaccuracy is cured prior to December 15, 1999 - by Healtheon/WebMD, upon a breach of any representation, warranty, covenant or agreement on the part of MEDE AMERICA set forth in the merger agreement, or if any of MEDE AMERICA's representations or warranties are or become untrue so that the corresponding condition to completion of the merger 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 merger agreement if the breach or inaccuracy is cured prior to December 15, 1999 - by MEDE AMERICA, if the average trading price of Healtheon's common stock for the ten trading day period ending two days prior to the MEDE AMERICA stockholders meeting is less than $38.68 and Healtheon/WebMD does not elect to adjust the exchange ratio The board of directors of MEDE AMERICA would have a fiduciary duty to its stockholders in evaluating whether to exercise its termination rights under these circumstances. In making this evaluation, the board would take into account all relevant facts and circumstances existing at the time, including: - the then-existing stock prices of Healtheon and MEDE AMERICA in light of overall market factors - the expected benefits of the merger balanced against the perceived risks - the available opportunities for alternative business combinations and strategic alliances versus the prospects for continuation as an independent company with growth through internal expansion and acquisition 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 merger 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 merger agreement or the approval of the merger - MEDE AMERICA enters into a letter of intent accepting an acquisition proposal 114 125 - 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 merger agreement is terminated by either Healtheon/WebMD or MEDE AMERICA because the merger has not been consummated by December 15, 1999 or because the required approval of MEDE AMERICA stockholders is not obtained, and, in either event, prior to that termination a third party has publicly announced an acquisition proposal, and within 12 months following that termination, MEDE AMERICA consummates a company acquisition, or enters into an agreement providing for a "company acquisition", as defined below, MEDE AMERICA will pay to Healtheon/WebMD a termination fee of $15 million promptly, but not later than, two days after the consummation of the company acquisition or the entry by MEDE AMERICA into that agreement. A company acquisition is any of the following: - a merger, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction involving MEDE AMERICA pursuant to which the stockholders of MEDE AMERICA immediately preceding such transaction hold less than 50% of the aggregate equity interests in the surviving or resulting entity of such transaction - a sale or other disposition by MEDE AMERICA of assets representing in excess of 50% of the aggregate fair market value of MEDE AMERICA's business immediately prior to such sale - the acquisition by any person or group, including by way of a tender offer or an exchange offer or issuance by MEDE AMERICA, directly or indirectly, of beneficial ownership or a right to acquire beneficial ownership of shares representing in excess of 50% of the voting power of the then outstanding shares of capital stock of MEDE AMERICA EXTENSION, WAIVER AND AMENDMENT OF THE MEDE AMERICA MERGER AGREEMENT We may amend the merger agreement before completion of the merger 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 merger 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 merger agreement. 115 126 MEDE AMERICA RELATED TRANSACTION AGREEMENTS MEDE AMERICA VOTING AGREEMENT Healtheon required MEDE AMERICA stockholders Welsh, Carson, Alexander & Stowe V, L.P., Welsh, Carson, Anderson & Stowe VI, L.P., WCAS Information Partners L.P., WCAS Capital Partners II, L.P., William Blair Capital Partners V, L.P. and William Blair Leveraged Capital Fund, Limited Partnership to enter into a voting agreement. The voting agreement requires these MEDE AMERICA stockholders to vote all of the shares of MEDE AMERICA common stock beneficially owned by them in favor of the merger. 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 merger agreement in accordance with its terms, or - the completion of the merger 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 merger within three months after the merger and an additional 3,000,000 shares within six months after the merger. 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 merger. 116 127 THE MEDCAST MERGER This section of the proxy statement/prospectus describes certain aspects of the proposed Medcast merger, including the merger agreement and related agreements. While we believe that the description covers the material terms of the Medcast merger 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 merger. BACKGROUND OF THE MEDCAST MERGER In April 1999, the board of directors of Medcast decided to evaluate the interest of potential buyers in a strategic combination or other business combination and engaged Hambrecht & Quist to act as Medcast's financial advisor for this purpose. Russell R. French, a member of Medcast's board of directors, contacted Jeffrey T. Arnold, the Chief Executive Officer of WebMD, to discuss the possibility of a strategic alliance or business combination. At a meeting on April 20, 1999, Messrs. French and Arnold discussed the potential benefits and synergies of a strategic relationship and decided that further discussions should be pursued. Later that day, several representatives of WebMD met with representatives of Medcast at the Medcast offices to review Medcast's product and operations. Alan N. Greenberg, the Chief Executive Officer of Medcast, and Nan Kirstin-Forte, the President of Programming and Development of Medcast, met with Mr. Arnold and Reginald R. Bradford, the Vice President of Marketing of WebMD, on April 24, 1999 in Carefree, Arizona to discuss a possible transaction. At that meeting, it was agreed that additional WebMD representatives would visit Medcast's offices. On April 29, 1999, a number of WebMD representatives visited Medcast's offices for a formal presentation and review of Medcast and its operations. Following the meeting, WebMD indicated that it was interested in pursuing further discussions concerning a possible transaction and requested that Medcast agree not to pursue other business combinations for 30 days in order to permit WebMD sufficient time to negotiate a transaction with Medcast. On April 30, 1999, Medcast agreed to negotiate with WebMD on an exclusive basis through May 19, 1999 and Medcast and WebMD entered into a mutual non-disclosure agreement. In early May 1999, Mr. Arnold advised Mr. Greenberg that WebMD was in discussions with Healtheon about a possible combination between Healtheon and WebMD. Messrs. Arnold and Greenberg discussed the possible impact of the proposed WebMD merger on a potential Medcast-WebMD transaction. In late May, Medcast and WebMD recommenced discussions concerning their possible transaction in light of the pending WebMD merger. At a meeting on May 28, 1999, WebMD made a proposal to acquire Medcast for Healtheon/WebMD stock, subject to completion of its due diligence, review of Medcast's operations and negotiation of a mutually acceptable definitive merger agreement. On June 7, 1999, WebMD, together with its legal and financial advisors, commenced its due diligence review of Medcast. At the same time, representatives of both parties began negotiations concerning the terms of a definitive merger agreement. The negotiations included discussions of the principal terms and conditions, including - the proposed exchange ratio of Medcast stock for Healtheon/WebMD stock - the scope of the representations and warranties to be made by each of the parties - the terms and conditions under which Healtheon/WebMD could assert claims for breaches of representations and warranties by Medcast and the means by which those claims would be satisfied - the conditions to closing the merger 117 128 - the terms and conditions under which WebMD would acquire Medcast if the WebMD merger did not occur - possible post-merger employment arrangements between key employees of Medcast and Healtheon/ WebMD - treatment of Medcast stock options - the circumstances under which the merger agreement could be terminated by either party The Medcast board of directors met on June 28, 1999, together with its financial and legal advisors, to consider the proposed merger and merger agreement with Healtheon/WebMD. At this meeting, Medcast's legal advisors discussed the board's fiduciary duties considering a strategic business combination and strategic alternatives. Medcast's legal advisors also reviewed the principal terms and conditions of the draft merger agreement and related documents and reviewed the open issues that were still under discussion with WebMD and Healtheon. Management reviewed the status of negotiations and analyzed its reasons for favoring the proposed transaction. Hambrecht & Quist reviewed the financial and strategic analyses it performed in connection with its evaluation of the proposed transaction and rendered to the Medcast board of directors an oral opinion, subject to review of final documentation and other customary matters, as to the fairness, from a financial point of view, of the transaction to the stockholders of Medcast. Following discussion and review of questions addressed to management and its financial and legal advisors, the board of directors unanimously approved the merger agreement and the Medcast merger and authorized Messrs. Greenberg and French to negotiate the remaining issues with representatives of WebMD and Healtheon. On June 23, 1999, WebMD's board of directors held a special meeting to discuss the proposed business combination with Medcast. At this meeting, WebMD's senior management and inside legal counsel presented to the board the terms of the proposed merger with Medcast and the status of business, financial and legal due diligence of the transaction. In addition, the WebMD board reviewed a draft of the merger agreement. Following these presentations and other discussions, the WebMD board approved by unanimous vote the terms of the merger and the merger agreement substantially in the form presented and authorized senior management to negotiate the remaining issues and to enter into the merger agreement and related documents. On June 30, 1999, there was a special meeting of the board of directors of Healtheon which included a discussion of the Medcast merger agreement and related transactions. The Healtheon board of directors reviewed a draft of the Medcast merger agreement and related documents. After considering the terms of the proposed transaction, the Healtheon board of directors determined that the merger was fair to Healtheon and that the proposed merger was in the best interest of Healtheon. The Healtheon board of directors then unanimously approved the merger agreement and exhibits thereto, and the merger. The parties completed negotiation of the terms of the definitive merger agreement after the close of business on June 30, 1999 and executed the merger agreement and related documents. A press release concerning the Medcast merger was made before the open of business on July 1, 1999. JOINT REASONS FOR THE MEDCAST MERGER WebMD's, Healtheon's and Medcast's boards of directors have determined that the Medcast merger is fair to, and in the best interests of, the stockholders of their respective companies. They concluded that the combined company following the Medcast merger would have the potential to realize long-term improved operating and financial results and a stronger competitive position. Potential mutual benefits include: - the combination of Medcast's brand recognition and strategic relationships directed toward physicians with Healtheon/WebMD's brand recognition and strategic relationships directed toward both physicians and consumers and its e-commerce platform and industry relationships will enable 118 129 the combined company to move toward the goal of offering a comprehensive, integrated web-based solution for the administrative, communications and information needs of the healthcare industry - broadening each company's offerings of Internet-based healthcare related content offerings and creating cross-selling opportunities - creating a strong combined management team - the combination of leading providers of Internet solutions to the healthcare industry will better position the combined company to achieve subscriber penetration among physicians, payers, providers, consumers, and other healthcare industry participants - enhancing the means by which the each company delivers content and services to physicians MEDCAST'S REASONS FOR THE MEDCAST MERGER At the meeting of the board of directors held June 28, 1999, the board of directors of Medcast concluded that the merger was in the best interests of Medcast and determined to recommend the merger to the stockholders of Medcast. The decision of the board of directors of Medcast was based upon several potential benefits of the merger, including the following, which are listed in no particular order of significance: - the liquidity afforded Medcast's stockholders upon exchange of their shares in Medcast, which are not publicly traded, for shares in Healtheon/WebMD, which will be publicly traded - the opportunity of Medcast stockholders to participate in the potential growth of Healtheon/ WebMD following the Medcast merger or to realize their investment by selling their Healtheon/ WebMD shares in a public market - the value of the aggregate Medcast merger consideration on the date of the merger agreement of approximately $214.9 million based on the average of the closing price of Healtheon common stock over the 10 trading days immediately prior to the execution of the merger agreement - the oral opinion of Hambrecht & Quist LLC, Medcast's financial advisor, which was directed toward Medcast's board of directors only and not in any way as a recommendation to the Medcast stockholders, that the Medcast merger agreement and merger were fair to the Medcast stockholders from a financial point of view, subject to assumptions and limitations given in that opinion - participation in Healtheon/WebMD's complete end-to-end healthcare e-commerce solution. The healthcare information technology industry is changing quickly and is becoming more competitive. Medcast believes that, through the completion of the WebMD merger, Healtheon/WebMD will create a leading end-to-end healthcare e-commerce solution with the ability to facilitate business to business, consumer-to-business and business-to consumer transactions - access to strategic alliances. WebMD currently has relationships with Microsoft, Excite@Home, Lycos, SOFTBANK, DuPont, Intel, and other leading institutions. In addition, many of these leading companies are investors in WebMD. Medcast expects these strategic alliances to 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 technology platform - access to subscribers. Some of WebMD's strategic partners sponsor subscriptions for physician subscribers, which provide a cross-selling opportunity for the Medcast service - creating leverage. The combined company will have greater leverage with pharmaceutical companies and other potential sponsors and strategic partners There are potential risks to the merger, including: - technical, operational, regulatory and strategic challenges to integrating Medcast and Healtheon/ WebMD 119 130 - the possible termination of Medcast's office lease as a result of the merger - volatility of Healtheon/WebMD's stock price affecting the ability of Medcast stockholders to realize the value of the consideration as measured prior to closing - the additional risks relating to the combined company's business Medcast stockholders should consider that the potential benefits of the merger may not be achieved. RECOMMENDATION OF MEDCAST'S BOARD OF DIRECTORS After carefully evaluating these factors, both positive and negative, the board of directors of Medcast has determined that the Medcast merger is in your best interests and unanimously recommends that you vote for approval and adoption of the merger agreement and approval of the merger. In considering the recommendation of the Medcast board of directors with respect to the Medcast merger, you should be aware that directors and executive officers of Medcast have interests in the merger that are different from, or are in addition to the interests of Medcast stockholders generally. Please see the section entitled "Interests of directors, officers and affiliates in the Medcast merger" on page 123. OPINION OF MEDCAST'S FINANCIAL ADVISOR The board of directors engaged Hambrecht & Quist to act as its financial advisor in connection with the merger and to render an opinion as to the fairness from a financial point of view to the holders of the outstanding shares of capital stock of Medcast of the consideration to be received by such stockholders in connection with the proposed merger. If the WebMD merger is not completed, Medcast's board of directors has approved a merger with a subsidiary of WebMD. Hambrecht & Quist rendered its oral opinion on June 28, 1999 to the board of directors that, as of that date, the consideration to be received by the holders of the Medcast stock in the merger was fair to such holders from a financial point of view. A copy of Hambrecht & Quist's written opinion dated June 30, 1999, which sets forth the assumptions made, the matters considered, the scope and limitations of the review undertaken and the procedures followed by Hambrecht & Quist is attached as Annex G to this proxy statement/prospectus. Medcast stockholders are advised to read this opinion in its entirety. Stockholders should note that the opinion expressed by Hambrecht & Quist was provided for the information of the board of directors of Medcast in its evaluation of the merger and does not constitute a recommendation to any stockholder as to how that stockholder should vote with respect to the merger. No limitations were placed on Hambrecht & Quist by the board of directors of Medcast with respect to the investigation made or the procedures followed in preparing and rendering its opinion. IN CONNECTION WITH ITS REVIEW OF THE MEDCAST MERGER, AND IN ARRIVING AT ITS OPINION, HAMBRECHT & QUIST, AMONG OTHER THINGS: - reviewed the publicly available consolidated financial statements of Healtheon and WebMD, with and without MEDE AMERICA financial results, for recent years and interim periods to date and other relevant financial and operating data of Healtheon and WebMD, including their respective capital structures, with and without MEDE AMERICA financial information, that was made available to Hambrecht & Quist from published sources and from the internal records of WebMD - reviewed internal financial and operating information, including projections, relating to WebMD prepared by the management of WebMD - reviewed financial and operating information, including publicly-available projections, relating to Healtheon - reviewed financial and operating information, including publicly-available projections, relating to MEDE AMERICA - discussed the business, financial condition and prospects of Healtheon/WebMD with members of senior management of WebMD 120 131 - reviewed internal financial and operating information, including projections, relating to Medcast prepared by the senior management of Medcast - discussed the business, financial condition and prospects of Medcast with members of senior management of Medcast - reviewed the recent reported prices and trading activity for the common stock of Healtheon and compared such information and financial information for Healtheon with similar information for other companies engaged in businesses considered comparable - reviewed the financial terms, to the extent publicly available, of comparable merger and acquisition transactions - reviewed the draft merger agreement - performed such other analyses and examinations and considered such other information, financial studies, analyses and investigations and financial, economic and market data as Hambrecht & Quist deemed relevant In rendering its opinion, Hambrecht & Quist assumed and relied upon the accuracy and completeness of all of the information concerning Medcast, Healtheon, WebMD and MEDE AMERICA considered in connection with its review of the Medcast merger, and Hambrecht & Quist did not assume any responsibility for independent verification of that information. Hambrecht & Quist did not prepare any independent valuation or appraisal of any of the assets or liabilities of Medcast, Healtheon, WebMD, and MEDE AMERICA, nor did Hambrecht & Quist conduct a physical inspection of the properties and facilities of any of the companies. With respect to the financial forecasts and projections made available to Hambrecht & Quist and used in its analysis, Hambrecht & Quist assumed that they reflected the best then currently available estimates and judgments of the expected future financial performance of Medcast, Healtheon, WebMD and MEDE AMERICA. For purposes of its opinion, Hambrecht & Quist assumed that none of Medcast, Healtheon, WebMD and MEDE AMERICA was a party to any pending transactions, including external financings, recapitalizations or material merger discussions, other than the transactions described in this proxy statement/prospectus, the transactions contemplated by the reorganization agreement, and those activities undertaken in the ordinary course of conducting their respective businesses. Its opinion was necessarily based upon market, economic, financial and other conditions as they then existed and could be evaluated as of the date of the opinion and any change in such conditions would require a reevaluation of its opinion. Hambrecht & Quist expressed no opinion as to the price at which Healtheon/WebMD common stock will trade subsequent to the effective time of the Medcast merger. In rendering its opinion, Hambrecht & Quist assumed that the Medcast merger will be consummated substantially on the terms discussed in the merger agreement, without any waiver of any material terms or conditions by any party. Hambrecht & Quist was not requested to, and did not, solicit indications of interest from any other parties in connection with a possible acquisition of, or business combination with, Medcast. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. The summary of the Hambrecht & Quist analyses set forth below does not purport to be a complete description of the analyses underlying the Hambrecht & Quist opinion. In arriving at its opinion, Hambrecht & Quist did not attribute any particular weight to any analysis or factor considered by it, but rather made qualitative judgments as to the significance and relevance of each analysis and factor. Accordingly, Hambrecht & Quist believes that its analyses and the summary set forth below must be considered as a whole and that selecting portions of its analyses, without considering all analyses, or of the summary set forth below, without considering all factors and analyses, could create an incomplete view of the processes underlying the analyses set forth in the Hambrecht & Quist presentation to the board of directors and the Hambrecht & Quist opinion. In performing its analyses, Hambrecht & Quist made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of Medcast, Healtheon, WebMD and MEDE AMERICA. THE ANALYSES PERFORMED BY HAMBRECHT & QUIST AS SUMMARIZED BELOW ARE NOT 121 132 NECESSARILY INDICATIVE OF ACTUAL VALUES OR ACTUAL FUTURE RESULTS, WHICH MAY BE SIGNIFICANTLY MORE OR LESS FAVORABLE THAN SUGGESTED BY SUCH ANALYSES. ADDITIONALLY, ANALYSES RELATING TO THE VALUES OF BUSINESSES DO NOT PURPORT TO BE APPRAISALS OR TO REFLECT THE PRICES AT WHICH BUSINESSES ACTUALLY MAY BE SOLD. Transaction analysis. Hambrecht & Quist reviewed and analyzed the proposed terms of the Medcast merger and understands that the terms of the merger agreement provide, among other things, that Healtheon/WebMD will purchase all the outstanding common stock of Medcast, including all preferred stock, options regardless of whether they are exercisable, and warrants convertible into common stock, at a price of approximately $215 million in Healtheon/WebMD stock. For purposes of its opinion, Hambrecht & Quist assumed that the Medcast merger will qualify as a tax-free merger under the tax code for the stockholders of Medcast and that the merger will be accounted for as a purchase. In determining the fairness of the consideration offered to the stockholders of Medcast by Healtheon, Hambrecht & Quist considered selected deal specific, company and market information. This information, not in any particular order of importance, included: - the aggregate consideration to be paid for Medcast, a business which is very early-stage, has not generated significant revenue to date and does not have a developed revenue model to generate revenue in the foreseeable future as a stand-alone entity - the difficulty Medcast might have raising capital at an attractive valuation to meet its operating needs and projected cash requirements given its history of operating losses, lack of a developed revenue generating strategy as a stand-alone entity and potential risks relating to the increasing competitive nature of the healthcare and Internet content and services industries, including both the number of companies providing health information as well as the amount of capital such companies have raised to build brands and establish leading positions - the unlikelihood that another potential acquirer of similar quality offering equal or greater consideration in the near future would materialize - the overall trends in the public equity market environment in general and specific trading valuations of companies comparable to Medcast, Healtheon and WebMD which support the consideration Medcast is to receive from Healtheon and WebMD. No information related to the overall market environment or related to selected companies used in the above consideration is directly comparable to Medcast, Healtheon, WebMD or the merger. An analysis of the results of the foregoing market and company information is not mathematical and involves complex considerations and judgments concerning differences in financial and operating characteristics of the companies and other factors that could affect the public trading values of the companies or company to which they are compared. The foregoing description of Hambrecht & Quist's opinion is qualified in its entirety by reference to the full text of the opinion, which is attached as Annex G to this proxy statement/prospectus. Prior relationship and terms of engagement. Hambrecht & Quist, as part of its investment banking services, is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, strategic transactions, corporate restructurings, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. The board of directors of Medcast selected Hambrecht & Quist to serve as its financial advisor in connection with the merger because it is an internationally recognized investment banking firm whose professionals have substantial experience in merger and acquisition transactions and transactions similar to the merger. In the past, Hambrecht & Quist has provided investment banking and other financial advisory services to Healtheon and during 1998 and 1999 it received an aggregate of $310,000 in fees for rendering these services. In the ordinary course of business, Hambrecht & Quist acts as a market maker and broker in the publicly traded securities of Healtheon for which it receives customary compensation, and it provides research coverage for Healtheon. In the ordinary course of business, Hambrecht & Quist actively trades in the equity and derivative securities of Healtheon for its own account and for the accounts of its customers and, accordingly, may at any time hold a long or short position in such securities. Hambrecht & Quist may in the future provide additional investment banking or other financial advisory services to Healtheon/WebMD. 122 133 Under the terms of Hambrecht & Quist's engagement, Medcast has agreed to pay Hambrecht & Quist an advisory fee of 1.75% of the Medcast merger transaction value. For this purpose, the merger transaction value is calculated using the value of Healtheon/WebMD common stock to be received by Medcast stockholders in the merger at the closing. Based upon an assumed per share value for Healtheon/ WebMD common stock of $36.25, which is the closing price per share of Healtheon common stock on September 28, 1999, the Hambrecht & Quist fee would be approximately $1,663,000. The actual fee will vary based on the value of the Healtheon/WebMD common stock at the time of the merger. A substantial portion of this fee will not be paid unless and until the merger is completed. The advisory fee includes a fee of $400,000 relating to the issuance of the fairness opinion, which will be paid whether or not the Medcast merger is consummated. Medcast has agreed to reimburse Hambrecht & Quist for its reasonable out of pocket expenses, and to indemnify Hambrecht & Quist against certain liabilities, including liabilities under the federal securities laws or relating to or arising out of Hambrecht & Quist's engagement as financial advisor. The amount of compensation to be paid to Hambrecht & Quist was determined by negotiations between the board of directors of Medcast and Hambrecht & Quist. INTERESTS OF DIRECTORS, OFFICERS AND AFFILIATES IN THE MEDCAST MERGER When considering the recommendation of Medcast's board of directors, Medcast stockholders should be aware that some of the directors, executive officers and affiliates of Medcast have interests in the merger and have arrangements that are different from, or are in addition to, those of Medcast stockholders generally. These include: - Employment agreements. The following executive officers have employment agreements with Medcast that are implicated by the merger - Mark Dailey, Chief Operating Officer -- Mr. Dailey's employment agreement provides for severance if: - Medcast fails to renew his agreement in accordance with its terms - if he is terminated by Medcast without cause, or - if he terminates his employment for "good reason," which includes being assigned to a different position that results in a material reduction in title, responsibility, duties or authority We do not know what position, if any, Mr. Dailey will have with Healtheon/WebMD and its subsidiaries after the merger or whether he will attempt to terminate his employment if asked to accept a different position. Mr. Dailey's severance, if required, includes the acceleration of all of his unvested options and the continued payment of his base salary for the remaining initial term of his employment agreement or 12 months from the date of termination, whichever is later. Mr. Dailey's base salary is $225,000 per year, subject to adjustments for inflation. The initial term of his employment agreement expires on January 4, 2002. - Gordon T. Wyatt, Chief Financial Officer -- Mr. Wyatt's employment agreement provides for severance if: - Medcast fails to renew his agreement in accordance with its terms - if he is terminated by Medcast without cause, or - if he terminates his employment for "good reason," which includes being assigned to a different position that results in a material reduction in title, responsibility, duties or authority We do not know what position, if any, Mr. Wyatt will have with Healtheon/WebMD and its subsidiaries after the merger or whether he will attempt to terminate his employment if asked to accept a different position. Mr. Wyatt's severance, if required, includes the acceleration of all of his unvested options and the continued payment of his base salary for the remaining 123 134 initial term of his employment agreement or 12 months from the date of termination, whichever is later. Mr. Wyatt's base salary is $150,000 for year one, $175,000 for year two and $200,000 for year three, subject to adjustments for inflation. The initial term of his employment agreement expires on April 1, 2001. - Potential vesting of options. The Medcast stock option plan provides that all unvested options under the plan will immediately vest upon the closing of the merger. Messrs. Dailey and Wyatt, each executive officers of Medcast, hold options that will accelerate as of the merger. - Transaction fee. If the Medcast merger is completed, Stephens, Inc., an affiliate of Stephens Group, Inc. and an affiliate of Medcast, will receive a transaction fee of 0.25% of the Medcast merger transaction value. For this purpose, the merger transaction value is calculated using the value of Healtheon/WebMD common stock at the time of the merger. Based upon an assumed per share value for Healtheon/WebMD common stock of $36.25, which is the closing price per share of Healtheon common stock on September 28, 1999, the Stephens' fee would be approximately $238,000. The actual fee will vary based on the value of the Healtheon/WebMD common stock at the time of the merger. As a result of all of the above, the related parties could be more likely to vote to approve the merger agreement and the merger than if these interests did not exist. COMPLETION AND EFFECTIVENESS OF THE MEDCAST MERGER The merger will be completed when all of the conditions to completion of the merger are satisfied or waived, including approval of the merger agreement and the merger by the stockholders of Medcast. The merger will become effective upon the filing of a certificate of merger with the State of Delaware. STRUCTURE OF THE MEDCAST MERGER AND CONVERSION OF MEDCAST CAPITAL STOCK A newly formed and wholly owned subsidiary of Healtheon/WebMD, will be merged with and into Medcast. As a result of the merger, the separate corporate existence of the subsidiary will cease and Medcast will survive the merger as a wholly owned subsidiary of Healtheon/WebMD. Immediately prior to the merger, each share of Medcast Series A, Series B and Series C preferred stock then outstanding will be converted into shares of Medcast common stock according to the conversion rates set forth in their respective certificates of designation, and then each outstanding share of Medcast common stock will be automatically canceled and converted into the right to receive a specific number of shares of Healtheon/WebMD common stock. The number of shares of Healtheon/WebMD common stock that will be issued in exchange for each outstanding share of Medcast common stock is referred to as the exchange ratio. The exchange ratio will be adjusted to reflect the effect of any stock split, stock dividend, contribution of shares or similar recapitalization with respect to Healtheon/WebMD common stock occurring prior to the completion of the merger. We agreed upon an exchange ratio that is based upon the aggregate number of shares of Healtheon/ WebMD common stock that Healtheon/WebMD was willing to issue in the merger for all of the outstanding equity of Medcast. This number of shares was 2,621,676. This number is subject to minor downward adjustments as discussed under the heading "Purchase price adjustment" below. The final exchange ratio is calculated by dividing 2,621,676 by the sum of: - the number of shares of Medcast common stock outstanding as of the date of the merger after giving effect to the conversion of all outstanding shares of Medcast preferred stock into Medcast common stock as discussed below plus - the total number of shares of Medcast common stock issuable upon exercise of options and warrants of Medcast outstanding as of the merger as determined in accordance with the treasury method. 124 135 The exact exchange ratio is therefore subject to variations based upon: - adjustments to the conversion ratios of the outstanding Medcast preferred stock - the purchase price adjustment described under the heading "Purchase price adjustment" below and - whether the holders of options and warrants exercise those convertible securities prior to the merger. Any option or warrant exercises also may affect the conversion of Medcast preferred stock into Medcast common stock. ADJUSTMENT TO PREFERRED STOCK CONVERSION RATIOS The certificate of designation for the Medcast Series A preferred stock provides that each share of Series A preferred stock will convert into one share of Medcast common stock, except upon the occurrence of specified events. Prior to the merger, the only events that will change this conversion ratio are the exercise by Hamilton M. Jordan and Tom Cohen of warrants to purchase in excess of 23,913 shares of Medcast common stock in the aggregate and the exercise by Gordon T. Wyatt, the chief financial officer of Medcast, of any of his stock options prior to the merger. Mr. Wyatt holds currently exercisable options to purchase 21,521 shares of Medcast common stock. We anticipate that Messrs. Jordan and Cohen will exercise their warrants prior to the merger. In the event that exercises of warrants and/or options occur, each share of the Series A preferred stock will convert into a number of shares of Medcast common stock equal to the number of shares of Medcast common stock outstanding after such exercises, excluding the first 23,913 shares issued under Messrs. Jordan's and Cohen's warrants, divided by the number of shares of common stock outstanding immediately prior to such exercises. The following calculations discuss the possible changes in the conversion of the Series A preferred stock: - assuming that none of the holders of such convertible securities exercise their options or warrants prior to the merger, each share of Series A preferred stock will convert into one share of Medcast common stock - assuming that Messrs. Jordan and Cohen exercise their warrants in full but Mr. Wyatt does not exercise any of his options prior to the merger, each share of Series A preferred stock will convert into 1.0125 shares of Medcast common stock - assuming that Messrs. Jordan and Cohen exercise their warrants in full and Mr. Wyatt exercises his options to the fullest extent possible prior to the merger, each share of Series A preferred stock will convert into 1.0237 shares of Medcast common stock The certificate of designation for the Medcast Series B preferred stock provides that each share of Series B preferred stock will convert into one share of Medcast common stock in connection with the merger. The certificate of designation for the Medcast Series C preferred stock provides that each share of Series C preferred stock will convert into 1.4593 shares of Medcast common stock. PURCHASE PRICE ADJUSTMENT The Medcast stock option plan provides that each unvested option granted under the plan will accelerate and vest in full upon a change in control of Medcast, and provides that the board of directors of Medcast may terminate an option 90 days after a change in control to the extent it has not been exercised. 125 136 Prior to the merger, we will seek to obtain waivers from the holders of these options that will provide for: - a waiver of acceleration of vesting of the options for the merger and any future change in control - termination of the board of directors' ability to terminate the options 90 days after the merger or any future change in control - the acceleration of vesting of the options upon a termination of the option holder's employment by Medcast or its affiliates without cause after the merger, which options will remain exercisable for 90 days after a holder's termination of employment and will then terminate To the extent that we do not obtain waivers from the holders of unvested options that account for at least 66% of the "spread" between the aggregate market value of the shares subject to the unvested options minus the aggregate exercise price for the unvested options, excluding options held by Mr. Dailey, the number of shares used to calculate the exchange ratio will be reduced by an amount equal to the amount of such shortfall divided by $81.98. The market value of the shares subject to the unvested options are valued per share at $81.98 multiplied by the exchange ratio. The amount of this reduction will be decreased by the number of shares associated with the amount of "spread" associated with Mr. Wyatt's options if the number of shares used to calculate the exchange ratio is reduced as a result of Mr. Wyatt's failure to execute an amendment to his employment agreement as discussed below. If Mr. Wyatt does not execute an amendment to his employment agreement in the form previously provided to Mr. Wyatt and Medcast, the number of shares used to calculate the exchange ratio will be reduced by 6,404. The maximum reduction in the number of shares used to calculate the exchange ratio as a result of Mr. Wyatt's employment agreement amendment and the option waivers is 19,588. THE EXCHANGE RATIO Based on the expected adjustments to the preferred stock conversion ratio and the possible purchase price adjustments discussed above, we expect the exchange ratio for the Medcast merger to be between 0.5385 and 0.5483 of a share of Healtheon/WebMD common stock for each outstanding share of Medcast common stock. Throughout this proxy statement/prospectus, whenever we provide that holders of Medcast common stock will receive approximately 0.5483 shares of Healtheon/WebMD common stock for each share of Medcast common stock that they own, we have assumed the following: - Messrs. Jordan and Cohen exercise warrants to purchase an aggregate of 47,826 shares of common stock prior to the merger - Mr. Wyatt does not exercise any options to purchase shares of common stock prior to the merger - the purchase price is not adjusted as described above under the heading "Purchase price adjustment" EXCHANGE OF MEDCAST STOCK CERTIFICATES FOR HEALTHEON/WEBMD STOCK CERTIFICATES When the merger is completed, Healtheon/WebMD's exchange agent will mail to Medcast stockholders a letter of transmittal and instructions for use in surrendering Medcast stock certificates in exchange for Healtheon/WebMD stock certificates. When Medcast stockholders deliver their Medcast stock certificates to the exchange agent along with an executed letter of transmittal and any other required documents, their Medcast stock certificates will be canceled and Medcast stockholders will receive Healtheon/WebMD stock certificates. No certificate representing fractional shares of Healtheon/WebMD common stock will be issued in connection with the merger. Instead Medcast stockholders will receive cash, without interest, in lieu of a fraction of a share of Healtheon/WebMD common stock. 126 137 YOU SHOULD NOT SUBMIT YOUR MEDCAST STOCK CERTIFICATES FOR EXCHANGE UNTIL YOU RECEIVE THE TRANSMITTAL INSTRUCTIONS AND A FORM OF LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT. Medcast stockholders are not entitled to receive any dividends or other distributions on Healtheon/WebMD common stock until the merger is completed and they have surrendered their Medcast stock certificates in exchange for Healtheon/WebMD stock certificates. Subject to the effect of applicable laws, promptly following surrender of Medcast stock certificates and the issuance of the corresponding Healtheon/WebMD certificates, Medcast stockholders will be paid the amount of any dividends or other distributions, without interest, with a record date after the completion of the merger that were previously paid with respect to their whole shares of Healtheon/WebMD common stock. At the appropriate payment date, Medcast stockholders will also receive the amount of any dividends or other distributions, without interest, with a record date after the completion of the merger and a payment date after they exchange their Medcast stock certificates for Healtheon/WebMD stock certificates. Healtheon/WebMD will only issue Medcast stockholders a Healtheon/WebMD stock certificate or a check in lieu of a fractional share in a name in which the surrendered Medcast stock certificate is registered. MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS OF THE MEDCAST MERGER This section summarizes material U.S. federal income tax considerations relevant to the merger that apply to Medcast stockholders. This discussion is based on existing provisions of the tax code, existing Treasury regulations and current administrative rulings and court decisions, all of which are subject to change. Any such change, which may or may not be retroactive, could alter the tax consequences of the merger to you. The Internal Revenue Service may adopt a contrary position. We do not discuss all U.S. federal income tax considerations that may be relevant to you in light of your particular circumstances. Factors that could alter the tax consequences of the merger to you include: - if you are a dealer in securities - if you are a tax-exempt organization - if you are subject to the alternative minimum tax provisions of the tax code - if you are a foreign person or entity - if you are a financial institution or insurance company - if you do not hold your Medcast shares as capital assets - if you acquired your shares in connection with stock option or stock purchase plans or in other compensatory transactions - if you hold Medcast shares as part of an integrated investment, including a "straddle", comprised of shares of Medcast capital stock and one or more other positions - if you hold Medcast shares subject to the constructive sale provisions of Section 1259 of the tax code In addition, we do not discuss the tax consequences of the merger under foreign, state or local tax laws, the tax consequences of transactions effectuated prior or subsequent to, or concurrently with, the merger, whether or not any such transactions are undertaken in connection with the merger, including without limitation any transaction in which Medcast shares are acquired or shares of Healtheon/WebMD common stock are disposed of, or the tax consequences to holders of options or warrants to acquire Medcast capital stock. Accordingly, we urge you to consult your own tax advisors as to the specific tax consequences of the merger, including the applicable federal, state, local and foreign tax consequences to you of the merger. 127 138 Tax implications of the conversion of Medcast preferred stock For federal income tax purposes, no gain or loss should be recognized by the holders of Medcast preferred stock upon the conversion of their shares of preferred stock into shares of Medcast common stock immediately prior to the Medcast merger. Shares of Medcast common stock that are treated as having been received by a stockholder upon conversion of Medcast preferred stock immediately prior to the Medcast merger should have the same tax basis as the stockholder's basis in the shares of Medcast preferred stock that were converted, and the holding period of the shares of Medcast common stock deemed to have been received upon conversion of a stockholder's shares of Medcast preferred stock should include the holding period of the shares of Medcast preferred stock that were converted. Tax implications for Medcast and Medcast stockholders Counsel to WebMD, Alston & Bird LLP, and counsel to Medcast, King & Spalding, are of the opinion that the merger of Medcast with a wholly owned subsidiary of Healtheon/WebMD will be a "reorganization" for U.S. federal income tax purposes within the meaning of section 368(a) of the tax code. This means that, subject to the limitations and qualifications described below: - Medcast stockholders will not recognize gain or loss when they receive Healtheon/WebMD common stock solely in exchange for their shares of Medcast common stock in the Medcast merger. - Cash payments received by Medcast stockholders for a fractional share of Healtheon/WebMD common stock should be treated as if such fractional share had been issued in the 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 Medcast capital stock will be the same as the aggregate tax basis of the Medcast stock surrendered in the exchange. - The holding period of the Healtheon/WebMD common stock received by holders of Medcast stock in the merger will include the period the exchanged Medcast stock was considered to be held, provided that the Medcast stock surrendered is held as a capital asset at the time of the Medcast merger. - Cash received by a dissenting Medcast stockholder in satisfaction of appraisal rights will result in the recognition of gain or loss for federal income tax purposes, measured by the difference between the amount of cash received and the basis of the Medcast common stock surrendered. - Medcast will not recognize gain solely as a result of the receipt of substantially all of the assets and liabilities of the newly formed wholly owned subsidiary of Healtheon/WebMD or the distribution of Healtheon/WebMD common stock to the Medcast stockholders pursuant to the Medcast merger. Limitations on the tax opinions Medcast has not requested a ruling from the Internal Revenue Service with regard to any of the federal income tax consequences of the Medcast merger. The opinions described above do not bind the Internal Revenue Service nor preclude it from adopting a contrary position. These opinions are subject to qualifications, are conditioned upon assumptions and are based upon factual representations made to each of Alston & Bird LLP and King & Spalding by the parties to the merger agreement. The opinions may not be relied upon if these factual representations are incorrect or incomplete. 128 139 Certain tax implication of the escrow arrangement As discussed in more detail below under the heading "The Medcast merger agreement -- Escrow and indemnification of Healtheon/WebMD" on page 140, a total of 10% of the shares of Healtheon/WebMD common stock to be received in the Medcast merger will be delivered to an escrow agent and will be subject to indemnification claims by Healtheon/WebMD for breaches of the merger agreement by Medcast. If any of the shares of Healtheon/WebMD common stock issued in the Medcast merger are returned to Healtheon/WebMD from escrow, no gain or loss should be recognized by the former stockholders of Medcast with respect to such shares. In addition, a former Medcast stockholder's tax basis in any shares of Healtheon/WebMD common stock so returned to Healtheon/WebMD should be added to the tax basis of the stockholder's remaining shares of Healtheon/WebMD common stock received in the Medcast merger. ACCOUNTING TREATMENT OF THE MEDCAST MERGER Healtheon/WebMD and Medcast intend to account for the merger as a purchase for financial reporting and accounting purposes, under generally accepted accounting principles. After the merger, the results of operations of Medcast will be included in the consolidated financial statements of Healtheon/WebMD. The purchase price will be allocated based on the fair values of the assets acquired and the liabilities assumed. Any excess of cost over fair value of the net tangible assets of Medcast acquired will be recorded as goodwill and other intangible assets and will be amortized by charges to operations under generally accepted accounting principles. These allocations will be made based upon valuations and other studies that have not yet been finalized. REGULATORY FILINGS AND APPROVALS REQUIRED TO COMPLETE THE MEDCAST MERGER Neither Healtheon/WebMD nor Medcast is aware of any 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 law of Delaware. RESTRICTIONS ON SALES OF SHARES BY AFFILIATES OF MEDCAST AND HEALTHEON/WEBMD The shares of Healtheon/WebMD common stock to be issued in the 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 Healtheon/WebMD or Medcast. Persons who may be deemed to be affiliates include individuals or entities that control, are controlled by, or are under common control of either Healtheon/WebMD or Medcast and may include some of their respective officers and directors, as well as their respective principal stockholders. Affiliates may not sell their shares of Healtheon/WebMD common stock acquired in the merger except pursuant to: - an effective registration statement under the Securities Act covering the resale of those shares - an exemption under paragraph (d) of Rule 145 under the Securities Act, or - any other applicable exemption under the Securities Act The merger agreement requires Medcast to deliver letters executed by affiliates of Medcast providing that such affiliates will not transfer their shares of Healtheon/WebMD common stock in violation of Rule 145 under the Securities Act. LISTING ON THE NASDAQ NATIONAL MARKET OF HEALTHEON/WEBMD COMMON STOCK TO BE ISSUED IN THE MEDCAST MERGER 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 the Nasdaq National Market, subject to official notice of issuance. 129 140 OPERATIONS AFTER THE MEDCAST MERGER Following the merger, Medcast will continue its operations as a wholly owned subsidiary of Healtheon/WebMD. The stockholders of Medcast will become stockholders of Healtheon/WebMD, and their rights as stockholders will be governed by the Healtheon/WebMD certificate of incorporation, the Healtheon/WebMD bylaws and the laws of the State of Delaware. For a description of the rights of stockholders of Medcast and Healtheon/WebMD, see "Comparison of Rights of Holders of Healtheon Common Stock, Healtheon/WebMD Common Stock, WebMD Capital Stock, MEDE AMERICA Common Stock and Medcast Capital Stock" on page 175. RIGHTS OF DISSENTING MEDCAST STOCKHOLDERS Pursuant to section 262 of the Delaware law, a dissenting Medcast stockholder who desires to object to the Medcast merger and to receive the fair value of his or her shares of Medcast stock in cash by following the procedure described below may do so by complying with the provisions of Delaware law pertaining to the exercise of dissenters' rights. Only those Medcast stockholders entitled to vote on the merger agreement and the Medcast merger are entitled to dissent and receive the fair value of their shares. As more fully discussed in the section entitled "The Medcast meeting -- Vote and quorum required," all of the holders of Medcast's capital stock are entitled to vote on the merger agreement and the merger and all of the holders may dissent and receive the fair value of their shares. The following is a summary of the provisions of Delaware law and it is qualified in its entirety by reference to Delaware law. A copy of the relevant provisions is attached to this proxy statement/prospectus as Annex I. A written demand for appraisal of shares of Medcast capital stock must be delivered to Medcast by a Medcast stockholder seeking appraisal before the vote on the merger agreement is taken. The written demand must be separate from any proxy or vote abstaining from or voting against approval and adoption of the merger agreement. Voting against approval and adoption of the merger agreement, abstaining from voting or failing to vote with respect to approval and adoption of the merger agreement will not constitute a demand for appraisal within the meaning of Section 262. By voting against approval and adoption of the merger agreement or by abstaining from voting in favor of the merger agreement, a Medcast stockholder may preserve his or her rights of appraisal as a dissenting stockholder. Medcast stockholders electing to exercise their appraisal rights under Section 262 must not vote for approval and adoption of the merger agreement. A vote by a Medcast stockholder against approval and adoption of the merger agreement is not required in order for a Medcast stockholder to exercise appraisal rights. However, if a Medcast stockholder returns a signed proxy but does not specify a vote against approval and adoption of the merger agreement or a direction to abstain, the proxy, if not revoked, will be voted for approval and adoption of the merger agreement, which will have the effect of waiving such Medcast stockholder's appraisal rights. A demand for appraisal will be sufficient if it reasonably informs Medcast of the identity of the Medcast stockholder and that such Medcast stockholder intends thereby to demand appraisal. If the Medcast capital stock is owned of record in a fiduciary capacity, such as by a trustee, guardian, or custodian, such demand must be executed by the fiduciary. If the Medcast capital stock is owned of record by more than one person, as in a joint tenancy or tenancy in common, such demand must be executed by all joint owners. An authorized agent, including an agent for two or more joint owners, may execute the demand for appraisal for a Medcast stockholder of record; however, the agent must identify the record owner or owners and expressly disclose the fact that, in exercising the demand, he or she is acting as agent for the record owner or owners. A Medcast stockholder who elects to exercise appraisal rights should mail or deliver his or her written demand to Medcast at its executive offices set forth under the caption "Summary of the proxy statement/prospectus -- The Companies -- Medcast" on page 10 in this proxy statement/prospectus or deliver such demand to Medcast at Medcast's special meeting. The demand should specify such Medcast stockholder's name and mailing address and the number of shares of Medcast capital stock owned. It is 130 141 the responsibility of each Medcast stockholder electing to exercise appraisal rights to ensure that the written demand is received by Medcast before the vote is taken at Medcast's special meeting. Within 10 days after the effective time of the merger, Healtheon/WebMD must provide notice to all Medcast stockholders who have complied with Section 262(d), summarized above, and have not voted for approval of the merger agreement. Within 120 days after the effective time of the merger, any Medcast stockholder who has complied with the provisions of Sections 262(a) and (d), summarized above, is entitled, upon written request, to receive from Healtheon/WebMD a statement setting forth the aggregate number of shares of Medcast capital stock not voted in favor of approval and adoption of the merger agreement and with respect to which demands for appraisal have been received and the aggregate number of holders of such shares. Such statement must be mailed within 10 days after the written request for it has been received by Healtheon/ WebMD or within 10 days after expiration of the time for delivery of demands for appraisal under Section 262(d), whichever is later. Within 120 days after the effective time of the merger, either Healtheon/WebMD or any holder of Medcast capital stock who has complied with the required conditions of Sections 262(a) and (d) and who is otherwise entitled to appraisal rights may file a petition in the Court of Chancery of the State of Delaware demanding a determination of the fair value of the shares of any dissenting Medcast stockholders. If a petition for an appraisal is timely filed, at a hearing on such petition, the court will determine which Medcast stockholders are entitled to appraisal rights and will appraise the shares of Medcast capital stock owned by such Medcast stockholders, determining the fair value of such shares, exclusive of any element of value arising from the accomplishment or expectation of the merger, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value. In determining fair value, the court is to take into account all relevant factors. In Weinberger v. UOP, Inc., decided in 1983, the Delaware Supreme Court, in the context of litigation involving holders of common stock of a Delaware corporation, expanded the factors that could be considered in determining fair value in an appraisal proceeding, stating that "proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court" should be considered, and that "[f]air price obviously requires consideration of all relevant factors involving the value of a company . . . ." The Delaware Supreme Court stated that in making this determination of fair value the court must consider market value, asset value, dividends, earnings prospects, the nature of the enterprise and any other facts which could be ascertained as of the date of the relevant merger which throw any light on future prospects of the merged corporation. In Weinberger, the Delaware Supreme Court held that "elements of future value, including the nature of the enterprise, which are known or susceptible of proof as of the date of the merger and not the product of speculation, may be considered." Medcast stockholders considering seeking appraisal should be aware that the fair value of their shares determined under Section 262 could be more than, the same as or less than the value of the consideration they are to receive under the merger agreement if they do not seek appraisal of their shares. Both fairness opinions and appraisal proceedings review many different aspects of a company's financial and business circumstances under accepted valuation techniques, but the perspectives differ. A determination that a transaction is fair from a financial point of view may be based on a finding that the price term of a transaction falls within a range of values that would be fair for other companies involved in similar types of transactions and circumstances. Such a finding does not determine what the best possible price would be, but looks at the transaction as a whole and determines whether entering the transaction is a reasonable business decision. In reaching the determination that an offered price is fair from a financial point of view, consideration is given to the fact that a purchaser of an entire company may be willing to pay a "control premium" in excess of the fair market value of the stock. A determination of fair value in an appraisal proceeding attempts to reduce all of the elements of value of a company to a set amount rather than focusing on the range of values in similar transactions. A judicial finding of fair value attempts to ensure that each dissenting stockholder receives the substantial equivalent of his proportionate interest in a company before the merger occurred. An appraisal proceeding does not attempt to consider the effects, if any, of the merger transaction itself on the value of the stock of a company. 131 142 The cost of the appraisal proceeding may be determined by the court and taxed against the parties as the court deems equitable in the circumstances. Upon application of a dissenting Medcast stockholder, the court may order that all or a portion of the expenses incurred by any dissenting stockholder in connection with the appraisal proceeding, including without limitation reasonable attorney's fees and the fees and expenses of experts, be charged against the value of shares of Medcast capital stock entitled to appraisal. In the absence of such a determination or assessment, each party bears its own expenses. A Medcast stockholder who has duly demanded appraisal in compliance with Section 262 will not, after the effective time of the merger, have any rights in respect of shares subject to such demand except for appraisal rights and the right to receive payment of dividends or other distributions, if any, on such shares payable to Medcast stockholders of record as of a date prior to the effective time. At any time within 60 days after the effective time of the merger, a Medcast stockholder will have the right to withdraw his or her demand for appraisal and to accept the terms of the merger; after this period, the Medcast stockholder may withdraw his or her demand for appraisal only with the consent of Healtheon/WebMD. If no petition for appraisal is filed with the court within 120 days after the effective time of the merger, the Medcast stockholder's rights to appraisal will cease. As Healtheon/WebMD has no obligation to file such a petition, a Medcast stockholder who desires such a petition to be filed is advised to file it on a timely basis. No petition timely filed in the court demanding appraisal may be dismissed as to a Medcast stockholder without the approval of the court, and such approval may be conditioned upon such terms as the court deems just. The provisions of Section 262 are technical in nature and complex. Medcast stockholders desiring to exercise appraisal rights and obtain appraisal of the fair value of their Medcast capital stock should consult counsel, since failure to comply strictly with the provisions of Section 262 may defeat their appraisal rights. 132 143 THE MEDCAST MERGER AGREEMENT Healtheon and WebMD are parties to the merger agreement. In the event that the WebMD merger agreement is terminated prior to the completion of the WebMD merger, the merger agreement will terminate as to Healtheon, and WebMD will acquire Medcast on the terms provided in the merger agreement. The terms of a Medcast merger with WebMD are not identical to the terms described in this proxy statement/prospectus for Healtheon/WebMD's acquisition of Medcast. WebMD and Medcast will contact the holders of Medcast capital stock in the event that WebMD becomes the acquiror of Medcast under the merger agreement. If this occurs, this proxy statement/prospectus will cease to be effective for purposes of consummating the Medcast merger with WebMD and you will receive a new proxy statement/prospectus or similar materials from Medcast and WebMD describing the terms of the merger agreement as they relate to WebMD's acquisition of Medcast. REPRESENTATIONS AND WARRANTIES WebMD and Medcast each made representations and warranties in the merger agreement regarding aspects of their businesses, financial condition, structure and other facts pertinent to the merger, including: - capitalization - changes in our businesses - intellectual property used in our businesses - tax matters - litigation In general, the representations and warranties of Medcast are more detailed and cover topics not covered by the WebMD representations and warranties. Such additional representations and warranties regarding the business of Medcast not given by WebMD include: - real and personal property leases - accounts receivable - proprietary software of Medcast - year 2000 compliance - material contracts - benefit plans In addition, Medcast made additional representations and warranties regarding the fairness opinion received by Medcast from its financial advisor and state anti-takeover laws. Healtheon also makes representations and warranties in the merger agreement regarding aspects of its organization, structure and other facts pertinent to the merger, including: - capitalization - the contents of Healtheon's filings with the Securities and Exchange Commission The representations and warranties in the merger agreement are complicated and not easily summarized. The merger agreement is attached to this proxy statement/prospectus as Annex C and we urge you to read it carefully, including the sections of the merger agreement entitled "Representations and Warranties of GNN", "Representations and Warranties of WebMD", "Representations and Warranties of Newco" and "Representations and Warranties of Purchaser and Merger Corp." 133 144 MEDCAST'S CONDUCT OF BUSINESS BEFORE COMPLETION OF THE MEDCAST MERGER Medcast agreed that until the completion of the merger Medcast will: - conduct its business as presently conducted and refrain from entering into any transactions or contracts other than in the ordinary course of business, or even if in the ordinary course of business not in excess of $50,000 individually - consult with Healtheon and WebMD prior to undertaking new business opportunities outside the ordinary course of business - confer on a regular basis with representatives of Healtheon and WebMD as to material matters and the general status of ongoing business operations - notify Healtheon and WebMD of any material change in the course of its business Medcast also agreed that until the completion of the merger or unless Healtheon and WebMD consent in writing, Medcast would conduct its business in compliance with specific restrictions relating to the following: - employees and employee benefits and remuneration - the incurrence of indebtedness - capital expenditures - strategic alliances, sponsorship agreements and distribution, sale, license or marketing agreements - modification of Medcast's certificate of incorporation and bylaws - accounting policies and procedures - the issuance and redemption of securities - the issuance of dividends or other distributions - making any loans - the disposition of Medcast's assets - Medcast's intellectual property - the acquisition of assets or other entities whether by merger or otherwise - entrance into, modification or termination of contracts - actions which would cause the representations and warranties regarding Medcast's business, financial condition and structure in the reorganization agreement to be untrue or incorrect in any material respect The agreements related to the conduct of Medcast's business in the merger agreement are complicated and not easily summarized. You are urged to carefully read the sections of the merger agreement entitled "Conduct of Business Pending Consummation." NO OTHER NEGOTIATIONS INVOLVING MEDCAST Until the merger is completed or the merger agreement is terminated, Medcast has agreed not to directly or indirectly take any of the following actions: - solicit, initiate, encourage or induce any "acquisition proposal," as defined below - participate in any discussions or negotiations regarding any acquisition proposal - disclose any non-public information to any person with respect to any acquisition proposal - take any other action to facilitate any inquiries or the making of any proposal that constitutes or may reasonably be expected to lead to any acquisition proposal - engage in discussions with any person with respect to any acquisition proposal - approve, endorse or recommend any acquisition proposal 134 145 - enter into any letter of intent or similar document or any contract, agreement or commitment relating to any "acquisition transaction," as defined below Medcast has agreed to promptly inform Healtheon and WebMD as to any acquisition proposal, or request for non-public information or inquiry which Medcast believes would lead to an acquisition proposal, including the identity of the person, entity or group making the acquisition proposal, request or inquiry and the material terms of the acquisition proposal, request or inquiry. Medcast has agreed to inform Healtheon and WebMD of the status and details of any acquisition proposal. An acquisition proposal is any offer or proposal relating to any acquisition transaction, other than an offer or proposal from Healtheon. An acquisition transaction is any transaction or series of related transactions involving any of the following: - the acquisition or purchase of more than a 5% interest in the total outstanding voting securities of Medcast - any tender offer or exchange offer, that, if consummated, would result in any person or group beneficially owning 5% or more of the total outstanding voting securities of Medcast - any merger, consolidation, business combination or similar transaction involving Medcast - any sale, lease outside the ordinary course of business, acquisition or disposition of more than 5% of the assets of Medcast - any liquidation or dissolution of Medcast ESCROW AND INDEMNIFICATION OF HEALTHEON/WEBMD A total of 10% of your shares of Healtheon/WebMD common stock to be received in the merger will be delivered to an escrow agent. Such shares will be subject to indemnification claims by Healtheon/WebMD for breaches of the merger agreement by Medcast. Prior to the completion of the merger, a national bank, acting as escrow agent, and your representatives will execute an escrow agreement in the form specified in the merger agreement for this escrow. By approval of the merger agreement, you will designate Alan N. Greenberg, Russell R. French and Doug Martin collectively as your representatives for all matters arising under the escrow agreement and the merger agreement, including defending and settling claims against your shares held in escrow. All decisions of the representatives must be made by a majority of the representatives. None of the representatives will be liable to you for any actions or omissions in their capacity as representatives unless they were taken or omitted in bad faith and constituted willful default or gross negligence. If any representative resigns, dies or becomes unable to act as a representative, a majority of the members of the board of directors of Medcast prior to the merger will name his successor from among the former stockholders of Medcast. Your shares will be held in escrow for one year, plus any additional periods necessary to resolve unresolved claims in existence at the expiration of a year. Healtheon/WebMD will have a claim for indemnification against the shares in escrow to the extent that the aggregate amount of all of its losses, expenses, liabilities and other damages arising out of breaches of the merger agreement by Medcast exceed $500,000. For purposes of determining whether Medcast breached any of its representations and warranties in the merger agreement, exceptions and qualifications for material, materiality, material adverse effect and similar expressions will be disregarded. If Healtheon/WebMD has a valid claim for indemnification, the escrow agent will return to Healtheon/WebMD a number of shares of Healtheon/WebMD common stock equal to the amount of the claim divided by the value per share of Healtheon/WebMD common stock, which the merger agreement deems to be $81.98, and Healtheon/WebMD will cancel and retire any such shares. 135 146 You will receive the cash dividends for any shares held in escrow. In addition, your representatives will be entitled to instruct the escrow agent as to the exercise of any voting rights for the shares held in escrow, provided such instructions are received at least five days prior to the relevant meeting date. Any additional securities issued in respect of the shares held in escrow in a stock split, stock dividend, stock combination or similar recapitalization will be added to the shares in escrow and the value per share will be proportionately adjusted to reflect such events for purposes of determining the number of shares to be cancelled and retired for valid Healtheon/WebMD indemnification claims. Any shares remaining in escrow at the expiration of the term of the escrow will be distributed to you pro rata based upon the amount of shares you received in the merger. The terms of the escrow and the indemnification of Healtheon/WebMD are complicated and not easily summarized. You are urged to read carefully the sections of the merger agreement entitled "Escrow; Shareholder Representative." MEDCAST'S EMPLOYEE BENEFIT PLANS Individuals who are employed by Medcast when the merger is completed will become employees of Healtheon/WebMD or one of its subsidiaries, although Healtheon/WebMD may terminate these employees at any time. The employees of Medcast will be provided employee benefits based on the positions they hold with Healtheon/WebMD and its subsidiaries after the merger on terms and conditions which are substantially similar in the aggregate to those provided by Healtheon/WebMD and its subsidiaries to their similarly situated employees after the merger. TREATMENT OF MEDCAST STOCK OPTIONS AND WARRANTS Upon completion of the merger, each outstanding option or warrant to purchase Medcast common stock will be converted, in accordance with its terms, into an option or warrant, as the case may be, to purchase the number of shares of Healtheon/WebMD common stock equal to the number of shares of Medcast common stock that could have been obtained before the merger upon the exercise of each option or warrant times the exchange ratio, rounded down to the nearest whole share. The exercise price will be equal to the exercise price per share of Medcast common stock subject to the option or warrant before conversion divided by the exchange ratio, rounded up to the nearest whole cent. The other terms of each Medcast option and the plans or agreements under which they were issued, will continue to apply in accordance with their terms, except that Medcast has agreed to seek waivers from the holders of all options that will vest or accelerate vesting in connection with or as a result of the merger or any future "change of control" as defined in the Medcast stock option plan. Medcast will also execute each of these waivers in order to eliminate the provision in the Medcast stock option plan that would give the board of directors of Medcast the option of terminating all of the options issued under such plan 90 days after completion of the merger. In addition, each holder of an option that executes a waiver will also be granted the right to exercise his or her options in full if his or her employment is terminated without cause by Medcast or one of its affiliates after completion of the merger for a period of 90 days after such termination. If the option holder does not execute his or her options during such 90 day period, the options will terminate. Healtheon/WebMD intends to file a registration statement on Form S-8, if available, with respect to the shares of Healtheon/WebMD common stock issuable with respect to options under the Medcast stock option plan. Healtheon/WebMD will maintain the effectiveness of that registration statement for as long as any of the options remain outstanding. 136 147 CONDITIONS TO COMPLETION OF THE MEDCAST MERGER Our respective obligations to complete the merger and the other transactions contemplated by the merger agreement are subject to the satisfaction or waiver of each of the following conditions before completion of the merger: - the merger agreement and the merger must be approved by the stockholders of Medcast as and to the extent required by Delaware law and Medcast's governing instruments - any applicable waiting periods under applicable antitrust laws must have expired or been terminated - no law, regulation or order or other action of any court or governmental authority shall be enacted or issued which has the effect of making the merger illegal or otherwise prohibits or restricts completion of the merger and other transactions contemplated by the merger agreement - WebMD and Medcast must each receive from their respective tax counsel an opinion to the effect that the merger will constitute a merger within the meaning of Section 368(a) of the tax code. However, if counsel to either WebMD or Medcast does not render this opinion, this condition will be satisfied if counsel to the other party renders the opinion to such party - the shares of Healtheon/WebMD common stock to be issued in the merger must be authorized for listing on the Nasdaq Stock Market, subject to notice of issuance and the registration statement that contains this proxy statement/prospectus shall have been declared effective by the Securities and Exchange Commission and no stop order suspending the effectiveness of that registration statement shall have been issued by the Securities and Exchange Commission Healtheon's obligations to complete the merger and the other transactions contemplated by the merger agreement are subject to the satisfaction or waiver of each of the following additional conditions before completion of the merger: - Medcast's representations and warranties must be true and correct in all material respects as of June 30, 1999 and as of the date the merger is to be completed as if made as of such time except: - to the extent Medcast's representations and warranties address matters only as of a particular date, they must be true and correct as of that date - if any of these representations and warranties are qualified as to material, materiality, material adverse effect or similar expressions or are subject to similar type exceptions, those representations and warranties shall be true and correct in all respects - Medcast must perform or comply in all material respects with all of its agreements and covenants required by the merger agreement to be performed or complied with by Medcast at or before completion of the merger - Medcast's legal counsel shall have delivered a legal opinion pertaining to certain items - Medcast shall have delivered all of its books and records to Healtheon - the directors of Medcast shall have resigned as of the completion of the merger - no material adverse effect with respect to Medcast shall have occurred since June 30, 1999 - no more than 2.0% of the shares of Medcast capital stock shall have elected to seek statutory dissenter's rights with respect to the merger - the WebMD merger must be completed simultaneously with or prior to the completion of the merger, or Medcast will instead merge with WebMD - Medcast shall have provided Healtheon a certificate that shares of Medcast's capital stock do not constitute "U.S. real property" under the Internal Revenue Code 137 148 - Medcast's certified public accountants shall have delivered a comfort letter with respect to financial information relating to Medcast included in the registration statement of which this proxy statement/prospectus is a part - at least 95.0% of the outstanding shares of Medcast capital stock shall have voted to approve the Medcast merger and the merger agreement - a majority of the Medcast board of directors, other than the directors elected by holders of Medcast Series A preferred stock, and a majority of the holders of the Medcast common stock and Series B preferred stocks voting together as a class, shall have approved an adjustment to the conversion price of the Medcast Series C preferred stock such that it converts into Medcast common stock immediately prior to converting into Healtheon common stock in the merger - Medcast shall have obtained written terminations of the Medcast stockholders agreement dated February 18, 1998 from the holders of at least 90.0% of the shares of the Medcast Series A preferred stock that have executed such agreement and from the holders of at least 90.0% of the shares of the Medcast Series C preferred stock that have executed such agreement - Medcast shall have given notice of the non-renewal of a distribution agreement Medcast's obligations to complete the merger and the other transactions contemplated by the merger agreement are subject to the satisfaction or waiver of each of the following additional conditions before completion of the merger: - Healtheon's and WebMD's representations and warranties must be true and correct in all material respects as of June 30, 1999 and as of the date the merger is to be completed as if made as of that time except: - to the extent Healtheon's or WebMD's representations and warranties address matters only as of a particular date, they must be true and correct as of that date - if any of these representations and warranties are qualified as to material, materiality, material adverse effect or similar expressions or are subject to similar type exceptions, those representations and warranties shall be true and correct in all respects - Healtheon must perform or comply 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, taken as a whole with its subsidiaries, which will be deemed to include WebMD and MEDE AMERICA, shall have occurred since June 30, 1999 A material adverse effect is any event, change or occurrence which, individually or taken together with any other event, change or occurrence, has a material adverse impact on the financial position, business or results of operations of an entity and its subsidiaries, taken as a whole, or the ability of such entity to perform its obligations under the merger agreement or to consummate the merger or other transactions contemplated by the merger agreement. TERMINATION OF THE MEDCAST MERGER AGREEMENT The merger agreement may be terminated at any time prior to completion of the merger, whether before or after approval of the merger agreement and the merger by Medcast stockholders: - by mutual consent of Healtheon, WebMD and Medcast - by Healtheon and WebMD, acting together, or Medcast, if the merger is not completed by a termination date mutually agreed to by the parties; such termination date is the earlier of the 30th day after the completion of the WebMD merger and December 15, 1999 138 149 - by Healtheon and WebMD, acting together, in the event of a breach by Medcast of any representation, warranty, covenant or other agreement in the merger agreement such that Medcast would be unable to satisfy the conditions to completion of the merger regarding the accuracy of its representations and warranties or performance of its agreements and covenants. However, if the breach is curable through the exercise of commercially reasonable efforts, and Medcast continues to exercise reasonable efforts, Healtheon and WebMD may not terminate the merger agreement prior to the termination date specified above - by Medcast in the event of a breach by Healtheon or WebMD of any representation, warranty, covenant or other agreement in the merger agreement such that Healtheon or WebMD would be unable to satisfy the conditions to completion of the merger regarding the accuracy of its representations and warranties or performance of its agreements and covenants. However, if the breach is curable through the exercise of commercially reasonable efforts, and Healtheon or WebMD continues to exercise reasonable efforts, Medcast may not terminate the merger agreement prior to the termination date specified above - by Healtheon and WebMD, acting together, or Medcast, if there is any order, decree or ruling or other action of any governmental authority having the effect of permanently restraining, enjoining or otherwise prohibiting the merger which is final and non-appealable - by Healtheon and WebMD, acting together, if the board of directors of Medcast fails to call a meeting of its stockholders for the purpose of approving the merger at least ten days prior to the termination date discussed above or affirms, recommends or authorizes Medcast to enter into any other acquisition proposal - by Healtheon and WebMD, acting together, if the board of directors of Medcast adversely withdraws, modifies or changes it approval or recommendation of the merger A party's ability to terminate the reorganization agreement is limited if it is in breach of the merger agreement. EXTENSION, WAIVER AND AMENDMENT OF THE MEDCAST MERGER AGREEMENT We may amend the merger agreement before completion of the merger 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 merger 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 merger agreement. 139 150 MEDCAST VOTING AGREEMENTS This section of the proxy statement/prospectus describes voting agreements related to the Medcast merger agreement. While we believe that this description covers the material terms of these agreements, this summary may not contain all of the information that is important to you. Healtheon and WebMD required Medcast stockholders Medcast Networks, L.P., Stephens Group, Inc., Noro-Moseley Partners IV, L.P., Noro-Moseley Partners IVB, L.P., Richland Ventures, L.P. and Richland Ventures II, L.P. to enter into voting agreements. The voting agreements require these Medcast stockholders to vote all of the shares of Medcast capital stock beneficially owned by them in favor of the merger. As of the record date, the Medcast stockholders who entered into the voting agreements collectively beneficially owned - 1,357,209 shares of Medcast common stock which represents approximately 70.9% of the outstanding shares of common stock - 1,073,909 shares of Medcast Series A preferred stock which represents approximately 56.1% of the outstanding shares of Series A preferred stock - 109,765 shares of Medcast Series B preferred stock which represents 100.0% of the outstanding shares of Series B preferred stock - 138,099 shares of the Medcast Series C preferred stock which represents approximately 35.5% of the outstanding shares of Series C preferred stock Such shares have sufficient votes to approve the merger agreement and the merger to the extent required under Delaware law and Medcast's certificate of incorporation. None of the Medcast stockholders who are parties to a voting agreement were paid additional consideration in connection with entering into the voting agreement. Each Medcast stockholder who is a party to a voting agreement agreed not to sell the Medcast stock owned, controlled or acquired, either directly or indirectly, by that person until the termination of the voting agreements. Each voting agreement will terminate upon the earlier to occur of: - the termination of the merger agreement in accordance with its terms, or - the completion of the merger 140 151 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.
MEDE AMERICA HEALTHEON COMMON STOCK COMMON STOCK ---------------- ----------------- HIGH LOW HIGH LOW ------ ------ ------- ------ Year Ending December 31, 1999: First Quarter........................................ $21.50 $11.88 $ 49.38 $21.75 Second Quarter....................................... 37.75 17.38 105.00 39.94 Third Quarter (through , 1999)................
The following table sets forth the closing prices per share of Healtheon common stock and MEDE AMERICA common stock as reported on the Nasdaq National Market on April 20, 1999, the business day preceding public announcement that Healtheon and MEDE AMERICA had entered into the merger agreement, and on , 1999, the last full trading day for which closing prices were available at the time of the printing of this proxy statement/prospectus. This table also sets forth the equivalent price per share of MEDE AMERICA common stock on those dates. The equivalent price per share is equal to the closing price of a share of Healtheon common stock on that date multiplied by 0.6593, the number of shares of Healtheon common stock to be issued in exchange for each share of MEDE AMERICA common stock, assuming no adjustment to the exchange ratio as provided for in the MEDE AMERICA merger agreement.
MEDE AMERICA HEALTHEON EQUIVALENT PER COMMON STOCK COMMON STOCK SHARE PRICE ------------ ------------ -------------- April 20, 1999.................................... $22.06 $45.72 $30.14 , 1999.............................
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 merger, discounted primarily for the uncertainties associated with the merger. 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 merger or as to the market price of Healtheon common stock at any time after the merger. You may receive less than or more than 0.6593 of a share of Healtheon/WebMD common stock for each share of your MEDE AMERICA common stock depending on the average closing sale price of Healtheon common stock for the ten trading day periods ending two days prior to the stockholders' meeting. See "Structure of the MEDE AMERICA merger and conversion of MEDE AMERICA common stock" on page 108 of this proxy statement/prospectus for further information. HEALTHEON AND MEDE AMERICA HAVE NEVER PAID CASH DIVIDENDS ON THEIR RESPECTIVE SHARES OF CAPITAL STOCK. PURSUANT TO THE MEDE AMERICA MERGER AGREEMENT, MEDE AMERICA HAS AGREED NOT TO PAY CASH DIVIDENDS PENDING THE CONSUMMATION OF THE MERGER, WITHOUT WRITTEN CONSENT OF HEALTHEON/WEBMD. 141 152 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION The following unaudited pro forma condensed combined financial information gives effect to: 1. The proposed WebMD merger, the MEDE AMERICA merger and the Medcast merger using the purchase accounting method, based on preliminary allocations of the total estimated purchase prices. The historical financial information has been derived from the respective historical financial statements of Healtheon, WebMD, MEDE AMERICA and Greenberg News Networks, which is referred to as Medcast, and should be read in conjunction with such financial statements and the related notes included in this proxy statement/prospectus. 2. The proposed WebMD and MEDE AMERICA mergers using the purchase accounting method, based on preliminary allocations of the total estimated purchase prices. The historical financial information has been derived from the respective historical financial statements of Healtheon, WebMD and MEDE AMERICA, and should be read in conjunction with such financial statements and the related notes included in this proxy statement/prospectus. 3. The proposed WebMD and the Medcast mergers using the purchase accounting method, based on preliminary allocations of the total estimated purchase prices. The historical financial information has been derived from the respective historical financial statements of Healtheon, WebMD and Medcast, and should be read in conjunction with such financial statements and the related notes included in this proxy statement/prospectus. 4. The proposed WebMD merger only, using the purchase accounting method, based on a preliminary allocation of the total estimated purchase price. The historical financial information has been derived from the respective historical financial statements of Healtheon and WebMD, and should be read in conjunction with such financial statements and the related notes included in this proxy statement/prospectus. 5. The proposed MEDE AMERICA merger only, using the purchase accounting method, based on a preliminary allocation of the total estimated purchase price. The historical financial information has been derived from the respective historical financial statements of Healtheon and MEDE AMERICA, and should be read in conjunction with such financial statements and the related notes included in this proxy statement/prospectus. 6. WebMD's acquisitions of Direct Medical Knowledge, Inc. and Sapient Health Network, Inc. in January 1999, using the purchase accounting method. 7. MEDE AMERICA's acquisition of Healthcare Interchange, Inc. in October 1998, using the purchase accounting method. The unaudited pro forma condensed combined balance sheets have been prepared assuming the mergers took place as of June 30, 1999 and allocate the total estimated purchase prices to the fair values of assets and liabilities of the acquired companies based on preliminary valuations. The unaudited pro forma condensed combined statements of operations combine Healtheon's, WebMD's, MEDE AMERICA's and Medcast's historical statements of operations and give effect to the mergers, including the amortization of goodwill and other intangible assets resulting from the mergers, as if they occurred on January 1, 1998, for the twelve months ended December 31, 1998 and on January 1, 1999 for the six months ended June 30, 1999. The MEDE AMERICA financial information has been recast to conform to Healtheon's December 31 fiscal year end. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 1998 combines the audited historical consolidated statement of operations of Healtheon for the year ended December 31, 1998, the audited historical consolidated statement of operations of WebMD, after giving effect to the acquisitions of Sapient Health Network, Inc. and Direct Medical Knowledge, Inc. -- the entities were acquired by WebMD in January 1999, for the year ended December 31, 1998, the unaudited historical consolidated statement of operations of MEDE AMERICA, after giving effect to the acquisition of Healthcare Interchange, Inc. -- 142 153 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (CONTINUED) this entity was acquired by MEDE AMERICA in October 1998, for the twelve months ended December 31, 1998 and the audited historical statement of operations of Medcast for the year ended December 31, 1998. The total estimated purchase prices of WebMD, MEDE AMERICA and Medcast have been allocated on a preliminary basis to assets and liabilities based on management's estimates of their fair values with the excess costs over the net assets acquired allocated to goodwill and other intangible assets. These allocations are subject to change pending a final determination and analysis of the total purchase prices and the fair values of the assets acquired and liabilities assumed. The impact of such changes could be material. The unaudited pro forma condensed combined information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have actually occurred if the mergers, 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. 143 154 HEALTHEON/WEBMD CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINED WITH WEBMD, MEDE AMERICA AND MEDCAST BALANCE SHEET (IN THOUSANDS) ASSETS
AS OF JUNE 30, 1999 ---------------------------------------------------------------------------- MEDE PRO FORMA PRO FORMA HEALTHEON WEBMD AMERICA MEDCAST ADJUSTMENTS COMBINED --------- -------- -------- -------------- ----------- ---------- Current assets: Cash, cash equivalents and short-term investments.......................... $ 47,353 $237,835 $ 4,119 $ 10,628 $ 135,000(5) $ 434,935 Accounts receivable, net............... 11,623 3,976 15,966 30 -- 31,595 Current portion of prepaid software licenses, content, and services...... -- 77,306 -- -- -- 77,306 Other current assets................... 2,466 577 1,067 124 -- 4,234 --------- -------- -------- -------- ---------- ---------- Total current assets............. 61,442 319,694 21,152 10,782 135,000 548,070 -- Property and equipment, net.............. 18,261 7,164 5,164 2,566 -- 33,155 Prepaid software licenses, content and services, net of current portion....... -- 215,655 -- -- -- 215,655 Goodwill and other intangible assets, net.................................... 22,390 46,663 48,202 -- 3,869,780(2) 3,892,170 (94,865)(4) Other assets............................. 5,935 2,272 4,191 1,276 -- 13,674 --------- -------- -------- -------- ---------- ---------- Total assets..................... $ 108,028 $591,448 $78,709 $ 14,624 $3,909,915 $4,702,724 ========= ======== ======== ======== ========== ========== Current liabilities: Notes payable.......................... $ 890 $ -- $ -- $ 205 $ -- $ 1,095 Accounts payable....................... 5,790 10,320 2,640 4,928 -- 23,678 Accrued liabilities.................... 13,580 2,067 6,957 -- 89,500(1) 112,104 Current portion of lease obligations... 2,229 325 349 124 -- 3,027 Deferred revenue....................... 1,157 3,961 -- 28 -- 5,146 --------- -------- -------- -------- ---------- ---------- Total current liabilities........ 23,646 16,673 9,946 5,285 89,500 145,050 Long term obligations.................... 2,609 271 5,098 660 -- 8,638 Stockholders' equity: Preferred stock........................ -- 510,398 -- 85,135 (595,533)(3) -- Common stock........................... 7 289,582 132 19 8(1) 15 (289,733)(3) Paid in capital........................ 229,849 -- 116,343 -- 4,332,255(1) 4,697,104 (116,343)(3) 135,000(5) Deferred compensation.................. (8,521) (841) -- (725) 1,566(3) (8,521) Retained earnings (accumulated deficit)............................. (139,562) (224,635) (52,810) (75,750) 353,195(3) (139,562) --------- -------- -------- -------- ---------- ---------- Total stockholders' equity....... 81,773 574,504 63,665 8,679 3,820,415 4,549,036 --------- -------- -------- -------- ---------- ---------- Total liabilities and stockholders' equity........... $ 108,028 $591,448 $78,709 $ 14,624 $3,909,915 $4,702,724 ========= ======== ======== ======== ========== ==========
See accompanying notes. 144 155 HEALTHEON/WEBMD CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINED WITH WEBMD, MEDE AMERICA AND MEDCAST STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 1998 ------------------------------------------------------------------ WEBMD MEDE AMERICA ----------------------------------------- ---------- PRO FORMA PRO FORMA ADJUSTMENTS COMBINED HEALTHEON HISTORICAL (I) (I) HISTORICAL --------- ---------- -------------- ----------- ---------- Revenue.......................... $ 48,838 $ 408 $ 878 $ 1,286 $48,180 Operating costs and expenses: Cost of operations............. 43,014 -- -- -- 18,426 Development and engineering.... 19,002 7,484 3,332 10,816 4,346 Sales, general and administrative............... 23,095 13,862 5,350 19,212 17,354 Depreciation and amortization................. 17,675 2,098 15,041 17,139 7,832 -------- -------- -------- -------- ------- Total operating costs and expenses................... 102,786 23,444 23,723 47,167 47,958 -------- -------- -------- -------- ------- Income (loss) from operations.... (53,948) (23,036) (22,845) (45,881) 222 Interest, net.................... 790 (139) (422) (561) (4,417) Dividends on preferred stock..... (890) -- -- -- (2,400) Gain on disposal of discontinued operations, net................ -- 7,709 -- 7,709 -- Extraordinary loss............... -- (930) -- (930) -- Accretion of redeemable warrants and preferred stock to redemption value............... -- (2,150) -- (2,150) -- -------- -------- -------- -------- ------- Net loss applicable to common stockholders................... $(54,048) $(18,546) $(23,267) $(41,813) $(6,595) ======== ======== ======== ======== ======= Basic and diluted net loss per common share................... $ (1.54) $ (1.52) $ (3.43) $ (1.16) ======== ======== ======== ======= Weighted-average shares outstanding used in computing basic and diluted net loss per common share................... 34,987 12,196 12,196 5,684 ======== ======== ======== ======= YEAR ENDED DECEMBER 31, 1998 ------------------------------------------------------------------------ MEDE AMERICA ------------------------------ PRO FORMA PRO FORMA ADJUSTMENTS COMBINED PRO FORMA PRO FORMA (II) (II) MEDCAST ADJUSTMENTS COMBINED --------------- ------------ -------- ----------- ----------- Revenue.......................... $ 4,283 $52,463 $ -- $ -- $ 102,587 Operating costs and expenses: Cost of operations............. 1,493 19,919 3,644 -- 66,577 Development and engineering.... -- 4,346 633 -- 34,797 Sales, general and administrative............... 2,602 19,956 10,126 -- 72,389 Depreciation and amortization................. 941 8,773 254 1,240,453(A) 1,284,294 ------- ------- -------- ----------- ----------- Total operating costs and expenses................... 5,036 52,994 14,657 1,240,453 1,458,057 ------- ------- -------- ----------- ----------- Income (loss) from operations.... (753) (531) (14,657) (1,240,453) (1,355,470) Interest, net.................... (834) (5,251) 713 -- (4,309) Dividends on preferred stock..... -- (2,400) (21,477)(D) (24,767) Gain on disposal of discontinued operations, net................ -- -- -- -- 7,709 Extraordinary loss............... -- -- -- -- (930) Accretion of redeemable warrants and preferred stock to redemption value............... -- -- (4,591) 4,591(C) (2,150) ------- ------- -------- ----------- ----------- Net loss applicable to common stockholders................... $(1,587) $(8,182) $(18,535) $(1,257,339) $(1,379,917) ======= ======= ======== =========== =========== Basic and diluted net loss per common share................... $ (1.44) $ (9.72) $ (12.59) ======= ======== =========== Weighted-average shares outstanding used in computing basic and diluted net loss per common share................... 5,684 1,906 109,566(B) ======= ======== ===========
- ------------------------- (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. See page 170 for additional information. (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 page 172 for additional information. See accompanying notes. 145 156 HEALTHEON/WEBMD CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINED WITH WEBMD, MEDE AMERICA AND MEDCAST STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED JUNE 30, 1999 ------------------------------------------------------------------------ MEDE PRO FORMA PRO FORMA HEALTHEON WEBMD AMERICA MEDCAST ADJUSTMENTS COMBINED --------- --------- ------- -------- ----------- ----------- Revenue........................... $ 40,253 $ 4,406 $30,233 $ 48 $ -- $ 74,940 Operating costs and expenses: Cost of operations.............. 33,432 -- 10,926 8,091 -- 52,449 Development and engineering..... 14,255 16,956 2,095 607 -- 33,913 Sales, general and administrative................ 19,787 40,714 10,689 9,777 -- 80,967 Depreciation and amortization... 10,095 8,438 4,686 405 612,540(A) 636,164 -------- --------- ------- -------- ----------- ----------- Total operating costs and expenses............... 77,569 66,108 28,396 18,880 612,540 803,493 -------- --------- ------- -------- ----------- ----------- Income (loss) from operations..... (37,316) (61,702) 1,837 (18,832) (612,540) (728,553) Interest, net..................... 1,182 1,542 (648) 176 -- 2,252 Dividends on preferred stock...... -- (139,281) (244) -- (21,477)(D) (161,002) Extraordinary loss................ -- -- (1,619) -- -- (1,619) Accretion of redeemable warrants and preferred stock to redemption value................ -- (538) -- (58,539) 58,539(C) (538) -------- --------- ------- -------- ----------- ----------- Net loss applicable to common stockholders.................... $(36,134) $(199,979) $ (674) $(77,195) $ (575,478) $ (889,460) ======== ========= ======= ======== =========== =========== Basic and diluted net loss per common share.................... $ (0.55) $ (15.52) $(0.06) $ (40.66) $ (6.31) ======== ========= ======= ======== =========== Weighted-average shares outstanding used in computing basic and diluted net loss per common share.................... 66,286 12,889 11,626 1,899 140,865(B) ======== ========= ======= ======== ===========
See accompanying notes. 146 157 HEALTHEON/WEBMD CORPORATION NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED WITH WEBMD, MEDE AMERICA AND MEDCAST FINANCIAL INFORMATION The unaudited pro forma condensed combined financial information reflects the WebMD merger, the Medcast merger and MEDE AMERICA merger 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 mergers 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 June 30, 1999, have been calculated as if the mergers occurred on June 30, 1999 and are as follows: (1) To reflect the acquisition of all of the outstanding capital stock of WebMD, Medcast and MEDE AMERICA by exchanging shares of Healtheon/WebMD common stock in exchange for each share of WebMD, Medcast and MEDE AMERICA capital stock for a total estimated combined purchase price of approximately $4,412.7 million. The purchase consideration consists of the issuance of an estimated 74.6 million shares of Healtheon/WebMD's common stock with a fair value of approximately $2,828.4 million and the assumption of options and warrants to purchase 51.4 million shares of Healtheon common stock with a fair value of approximately $1,494.8 million and other related merger costs of approximately $89.5 million, consisting primarily of approximately $64.0 million in investment banking, legal, accounting and regulatory filing fees, and approximately $25.5 million in costs anticipated to be incurred for employee retention, work force reduction, facility consolidation and other merger related costs. WebMD has requested approval from shareholders to modify the accelerating vesting provision on 1,607,838 options held by five WebMD employees. If the proposal is approved, these options will not accelerate upon the merger. This modification will not cause a remeasurement as it does not result in the renewal of the options or an extension of their period. These options have an average remaining vesting of 2.5 years. The Medcast purchase price assumes: (i) the conversion of preferred stock to common under the following ratios: A 1 for 1.0125 B 1 for 1 C 1 for 1.4593 (ii) the exercise of warrants to purchase 47,826 shares of common stock. (iii) the purchase price is not adjusted for the impact of Medcast failing to obtain waivers of acceleration of vesting for the majority of its option holders. The purchase price does not presume the exercise of 21,521 shares of Medcast common stock held under options by Medcast's Chief Financial Officer. The exchange ratio used in computing the value of the Medcast transaction is approximately 0.5483 of a share of Healtheon/WebMD common stock for each outstanding share of Medcast common stock. The factors discussed in pages 124 to 126 of this proxy statement/prospectus may alter this ratio. Such alteration would not result in a material adjustment to the Medcast purchase price. 147 158 HEALTHEON/WEBMD CORPORATION NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED WITH WEBMD, MEDE AMERICA AND MEDCAST FINANCIAL INFORMATION (CONTINUED) Healtheon has requested waivers of acceleration provisions from holders of 352,103 Medcast options. If these waivers are obtained, such options will not accelerate upon the merger. These options have an average remaining vesting of approximately 2.5 years. The purchase price was determined as follows:
WEBMD MEDCAST MEDE AMERICA TOTAL ---------------------------- ---------------------------- ---------------------------- HEALTHEON/ EQUIVALENT FAIR VALUE EQUIVALENT FAIR VALUE EQUIVALENT FAIR VALUE WEBMD SHARES (IN THOUSANDS) SHARES (IN THOUSANDS) SHARES (IN THOUSANDS) SHARES ----------- -------------- ---------- --------------- ---------- --------------- ----------- Shares.................. 63,335,074 $2,183,872 2,509,654 $193,149 8,733,570 $451,389 74,578,298 Stock Options........... 14,441,692 439,324 188,452 5,597 1,117,566 29,188 15,747,710 Warrants................ 34,763,473 987,686 548 18 824,125 32,940 35,612,977 ----------- --------- ---------- ----------- Total Shares..... 112,540,239 2,698,654 10,675,261 125,938,985 =========== ========= ========== =========== Merger Costs............ 51,200 14,500 23,800 ---------- -------- -------- $3,662,082 $213,264 $537,317 ========== ======== ======== AGGREGATE FAIR VALUE (IN THOUSANDS) --------------- Shares.................. $2,828,410 Stock Options........... 474,109 Warrants................ 1,020,644 Total Shares..... Merger Costs............ 89,500 ---------- $4,412,663 ==========
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 mergers were announced, which was May 20, 1999 for WebMD, July 1, 1999 for Medcast and April 21, 1999 for MEDE AMERICA. The estimated fair value of the options and warrants to be assumed is based on the Black-Scholes model using the following assumptions: - Expected lives of one-half to 5 years - Expected volatility factor of 1.0 - Risk-free interest rate of 4.5% - Expected dividend rate of 0% Due to the amendment to the Healtheon/WebMD merger agreement dated as of September 1, 1999 providing for a change in the exchange ratio, the purchase price for WebMD has been amended. The purchase price for MEDE AMERICA may be increased by 25% based upon the average closing price of Healtheon's stock for the 10 day period ending two days prior to the special meeting of MEDE AMERICA stockholders, if that lower average stock price is below $38.68. The preliminary purchase price of MEDE AMERICA includes the impact of the options issued to MEDE AMERICA employees to purchase 700,000 shares of Healtheon/WebMD common stock at the lower of $45.72 or the Healtheon stock price on the date of closing. On the date of the closing of the merger, any difference between the fair value of the shares at that date and the strike price of the awards will be treated as deferred compensation expense. The preliminary value of these awards is approximately $12 million using a black scholes valuation model, assuming (i) a volatility of 1.0, (ii) a life of 2.5 years, (iii) an interest rate of 4.5% and a stock price on the date of valuation of $32.125. (2) Recognition of the excess purchase price of approximately $3,869.8 million over the fair value of net tangible assets acquired, have been recorded as goodwill and other intangible assets. (3) To reflect the elimination of the historical stockholders' equity accounts of WebMD, Medcast and MEDE AMERICA. (4) To reflect the elimination of goodwill and other intangible assets on the balance sheets of WebMD and MEDE AMERICA as of the acquisition date. 148 159 HEALTHEON/WEBMD CORPORATION NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED WITH WEBMD, MEDE AMERICA AND MEDCAST 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 WebMD merger. The WebMD merger agreement requires that these investments be completed prior to the closing of the WebMD merger. In May and June of 1999, WebMD sold 456,896 shares of Series E preferred stock for approximately $250 million. Upon closing of the WebMD merger, 276,906 shares of Series E preferred stock will be sold for $150 million. The adjustments to the unaudited pro forma condensed combined statements of operations for the six months ended June 30, 1999 and year ended December 31, 1998, assume the mergers occurred as of January 1, 1999 and January 1, 1998, respectively, and are as follows: (A) To reflect the amortization of goodwill and other intangible assets resulting from the mergers. 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 74.6 million shares of Healtheon's common stock, as if the shares had been outstanding for the entire periods presented. The effect of stock options and warrants of WebMD, Medcast and MEDE AMERICA assumed in the mergers have not been included as their inclusion would be anti-dilutive. (C) To reflect the reversal of accretion on redeemable preferred stock, that is forfeited by redeemable preferred stockholders upon voting for and consummation of the Medcast merger. (D) To reflect the beneficial conversion feature related to the shares to be issued to Microsoft upon the consummation of the merger. Computed based on an assumed fair market value of $34.48 per share for Healtheon's common stock. 149 160 HEALTHEON/WEBMD CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINED WITH WEBMD AND MEDE AMERICA BALANCE SHEET (IN THOUSANDS) ASSETS
AS OF JUNE 30, 1999 ------------------------------------------------------------ MEDE PRO FORMA PRO FORMA HEALTHEON WEBMD AMERICA ADJUSTMENTS COMBINED --------- --------- -------- ----------- ---------- Current assets: Cash, cash equivalents and short-term investments..................................... $ 47,353 $ 237,835 $ 4,119 $ 135,000(5) $ 424,307 Accounts receivable, net.......................... 11,623 3,976 15,966 -- 31,565 Current portion of prepaid software licenses, content, and services........................... -- 77,306 -- -- 77,306 Other current assets.............................. 2,466 577 1,067 -- 4,110 -------- --------- -------- ----------- ---------- Total current assets....................... 61,442 319,694 21,152 135,000 537,288 -- Property and equipment, net......................... 18,261 7,164 5,164 -- 30,589 Prepaid software licenses, content, and services, net of current portion............................ -- 215,655 -- --(2) 215,655 Goodwill and other intangible assets, net........... 22,390 46,663 48,202 3,665,196(2) 3,687,586 (94,865)(4) Other assets........................................ 5,935 2,272 4,191 -- 12,398 -------- --------- -------- ----------- ---------- Total assets............................... $108,028 $ 591,448 $ 78,709 $ 3,705,331 $4,483,516 ======== ========= ======== =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable..................................... $ 890 $ -- $ -- $ -- $ 890 Accounts payable.................................. 5,790 10,320 2,640 -- 18,750 Accrued liabilities............................... 13,580 2,067 6,957 75,000(1) 97,604 Current portion of lease obligations.............. 2,229 325 349 -- 2,903 Deferred revenue.................................. 1,157 3,961 -- -- 5,118 -------- --------- -------- ----------- ---------- Total current liabilities.................. 23,646 16,673 9,946 75,000 125,265 Long term obligations............................... 2,609 271 5,098 -- 7,978 Stockholders' equity: Preferred stock................................... -- 510,398 -- (510,398)(3) -- Common stock...................................... 7 289,582 132 7(1) 14 (289,714)(3) Paid in capital................................... 229,849 -- 116,343 4,133,493(1) 4,498,342 (116,343)(3) 135,000(5) Deferred compensation............................. (8,521) (841) -- 841(3) (8,521) Retained earnings (accumulated deficit)........... (139,562) (224,635) (52,810) 277,445(3) (139,562) -------- --------- -------- ----------- ---------- Total stockholders' equity................. 81,773 574,504 63,665 3,630,331 4,350,273 -------- --------- -------- ----------- ---------- Total liabilities and stockholders' equity................................... $108,028 $ 591,448 $ 78,709 $ 3,705,331 $4,483,516 ======== ========= ======== =========== ==========
See accompanying notes. 150 161 HEALTHEON/WEBMD CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINED WITH WEBMD AND MEDE AMERICA STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 1998 ------------------------------------------------------------------ WEBMD MEDE AMERICA ----------------------------------------- ---------- PRO FORMA PRO FORMA ADJUSTMENTS COMBINED HEALTHEON HISTORICAL (I) (I) HISTORICAL --------- ---------- -------------- ----------- ---------- Revenue................................ $ 48,838 $ 408 $ 878 $ 1,286 $48,180 Operating costs and expenses: Cost of operations................... 43,014 -- -- -- 18,426 Development and engineering.......... 19,002 7,484 3,332 10,816 4,346 Sales, general and administrative.... 23,095 13,862 5,350 19,212 17,354 Depreciation and amortization........ 17,675 2,098 15,041 17,139 7,832 -------- -------- -------- -------- ------- Total operating costs and expenses......................... 102,786 23,444 23,723 47,167 47,958 -------- -------- -------- -------- ------- Income (loss) from operations.......... (53,948) (23,036) (22,845) (45,881) 222 Interest, net.......................... 790 (139) (422) (561) (4,417) Dividends on preferred stock........... (890) -- -- -- (2,400) Gain on disposal of discontinued operations, net...................... -- 7,709 -- 7,709 -- Extraordinary loss..................... -- (930) -- (930) -- Accretion of redeemable warrants to redemption value..................... -- (2,150) -- (2,150) -- -------- -------- -------- -------- ------- Net loss applicable to common stockholders......................... $(54,048) $(18,546) $(23,267) $(41,813) $(6,595) ======== ======== ======== ======== ======= Basic and diluted net loss per common share................................ $ (1.54) $ (1.52) $ (3.43) $ (1.16) ======== ======== ======== ======= Weighted-average shares outstanding used in computing basic and diluted net loss per common share............ 34,987 12,196 12,196 5,684 ======== ======== ======== ======= YEAR ENDED DECEMBER 31, 1998 ------------------------------------------------------------- MEDE AMERICA ------------------------------ PRO FORMA PRO FORMA ADJUSTMENTS COMBINED PRO FORMA PRO FORMA (II) (II) ADJUSTMENTS COMBINED --------------- ------------ ----------- ----------- 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 1,172,258(A) 1,215,845 ------- ------- ----------- ----------- Total operating costs and expenses......................... 5,036 52,994 1,172,258 1,375,205 ------- ------- ----------- ----------- Income (loss) from operations.......... (753) (531) (1,172,258) (1,272,618) Interest, net.......................... (834) (5,251) -- (5,022) Dividends on preferred stock........... -- (2,400) (21,477)(C) (24,767) 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) $(1,193,735) $(1,297,778) ======= ======= =========== =========== Basic and diluted net loss per common share................................ $ (1.44) $ (12.12) ======= =========== Weighted-average shares outstanding used in computing basic and diluted net loss per common share............ 5,684 107,056 ======= ===========
- ------------------------- (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. See page 170 for additional information. (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 page 172 for additional information. See accompanying notes. 151 162 HEALTHEON/WEBMD CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINED WITH WEBMD AND MEDE AMERICA STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED JUNE 30, 1999 -------------------------------------------------------------- MEDE PRO FORMA PRO FORMA HEALTHEON WEBMD AMERICA ADJUSTMENTS COMBINED --------- --------- ------- ----------- ----------- Revenue............................ $ 40,253 $ 4,406 $30,233 $ -- $ 74,892 Operating costs and expenses: Cost of operations............... 33,432 -- 10,926 -- 44,358 Development and engineering...... 14,255 16,956 2,095 -- 33,306 Sales, general and administrative................ 19,787 40,714 10,689 -- 71,190 Depreciation and amortization.... 10,095 8,438 4,686 578,442(A) 601,661 -------- --------- ------- --------- ----------- Total operating costs and expenses............... 77,569 66,108 28,396 578,442 750,515 -------- --------- ------- --------- ----------- Income (loss) from operations...... (37,316) (61,702) 1,837 (578,442) (675,623) Interest, net...................... 1,182 1,542 (648) -- 2,076 Dividends on preferred stock....... -- (139,281) (244) (21,477)(C) (161,002) Extraordinary loss................. -- -- (1,619) -- (1,619) Accretion of redeemable warrants to redemption value................. -- (538) -- -- (538) -------- --------- ------- --------- ----------- Net loss applicable to common stockholders..................... $(36,134) $(199,979) $ (674) $(599,919) $ (836,706) ======== ========= ======= ========= =========== Basic and diluted net loss per common share..................... $ (0.55) $ (15.52) $(0.06) $ (6.05) ======== ========= ======= =========== Weighted-average shares outstanding used in computing basic and diluted net loss per common share............................ 66,286 12,889 11,626 138,355(B) ======== ========= ======= ===========
See accompanying notes. 152 163 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 WebMD merger and MEDE AMERICA merger 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 mergers 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 June 30, 1999, have been calculated as if the mergers occurred on June 30, 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 $4,199.4 million. The purchase consideration consists of the issuance of an estimated 72.1 million shares of Healtheon/WebMD's common stock with a fair value of approximately $2,635.3 million and the assumption of options and warrants to purchase 51.2 million shares of Healtheon's common stock with a fair value of approximately $1,489.1 million and other related merger 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 merger related costs. WebMD has requested approval from shareholders to modify the accelerating vesting provision on 1,607,838 options held by five WebMD employees. If the proposal is approved these options will not accelerate upon the merger. This modification will not cause a measurement as it does not result in the renewal of the options or any extension of their period. These options have an average remaining vesting of 2.5 years. The purchase price was determined as follows:
WEBMD MEDE AMERICA ---------------------------- --------------------------- TOTAL AGGREGATE EQUIVALENT FAIR VALUE EQUIVALENT FAIR VALUE HEALTHEON/WEBMD FAIR VALUE SHARES (IN THOUSANDS) SHARES (IN THOUSANDS) SHARES (IN THOUSANDS) ----------- -------------- ---------- -------------- --------------- -------------- Shares............... 63,335,074 $2,183,872 8,733,570 $451,389 72,068,644 $2,635,261 Stock Options........ 14,441,692 439,324 1,117,566 29,188 15,559,258 468,512 Warrants............. 34,763,473 987,686 824,125 32,940 35,612,429 1,020,626 ----------- ---------- ----------- Total Shares.... 112,540,239 10,675,261 123,240,331 =========== ========== =========== Merger Costs......... 51,200 23,800 75,000 ---------- -------- ---------- $3,662,082 $537,317 $4,199,399 ========== ======== ==========
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 mergers 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 5 years - Expected volatility factor of 1.0 153 164 HEALTHEON/WEBMD CORPORATION NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED WITH WEBMD AND MEDE AMERICA FINANCIAL INFORMATION (CONTINUED) - Risk-free interest rate of 4.5% - Expected dividend rate of 0% Due to the amendment of the Healtheon/WebMD merger agreement and the change in the exchange ratio on September 7, 1999, the purchase price for WebMD has been amended. The purchase price for MEDE AMERICA may be increased by 25% based upon the average closing price of Healtheon's stock for the 10 day period ending two days prior to the special meeting of MEDE AMERICA stockholders, if that lower average stock price is below $38.68. The preliminary purchase price for MEDE AMERICA excludes the impact of the options issued to MEDE AMERICA employees to purchase 700,000 shares of Healtheon/WebMD's common stock at the lower of $45.72 or the Healtheon stock price on the date of closing. On the date of the closing of the merger, any difference between the fair value of the shares at that date and the strike price of the awards will be treated as deferred compensation expense. The preliminary value of these awards is approximately $12 million using a black scholes valuation model, assuming (i) a volatility of 1.0, (ii) a life of 2.5 years, (iii) an interest rate of 4.5% and a stock price on the date of valuation of $32.125. (2) Recognition of the excess purchase price of approximately $3,665.2 million over the fair value of net tangible assets acquired, have been recorded as goodwill and other intangible assets. (3) To reflect the elimination of the historical stockholders' equity accounts of WebMD and MEDE AMERICA. (4) To reflect the elimination of goodwill and other intangible assets on the balance sheets of WebMD and MEDE AMERICA as of the acquisition date. (5) To reflect the proceeds, net of offering costs, relating to the investments in capital stock made or to be made by strategic partners prior to the consummation of the WebMD merger. The WebMD merger agreement requires that these investments be completed prior to the closing of the WebMD merger. In May and June of 1999, WebMD sold 456,896 shares of Series E preferred stock for approximately $250 million. Upon closing of the WebMD merger, 276,906 shares of Series E preferred stock will be sold for $150 million. The adjustments to the unaudited pro forma condensed combined statements of operations for the six months ended June 30, 1999 and year ended December 31, 1998, assume the mergers occurred as of January 1, 1999 and January 1, 1998, respectively, and are as follows: (A) To reflect the amortization of goodwill and other intangible assets resulting from the mergers. 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 72.1 million shares of Healtheon 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 mergers have not been included as their inclusion would be anti-dilutive. (C) To reflect the beneficial conversion feature related to the shares to be issued to Microsoft upon the consummation of the merger. Computed based on an assumed fair market value of $34.48 per share for Healtheon's common stock. 154 165 HEALTHEON/WEBMD CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINED WITH WEBMD AND MEDCAST BALANCE SHEETS (IN THOUSANDS) ASSETS
AS OF JUNE 30, 1999 ------------------------------------------------- PRO FORMA PRO FORMA HEALTHEON WEBMD MEDCAST ADJUSTMENTS COMBINED --------- -------- -------- ----------- ---------- Current assets: Cash, cash equivalents and short-term investments........................... $ 47,353 $237,835 $ 10,628 $ 135,000(5) $ 430,816 Accounts receivable, net................ 11,623 3,976 30 15,629 ---- Current portion of prepaid software licenses, content, and services....... -- 77,306 -- -- 77,306 Other current assets.................... 2,466 577 124 -- 3,167 --------- -------- -------- ---------- ---------- Total current assets............. 61,442 319,694 10,782 135,000 526,918 Property and equipment, net............... 18,261 7,164 2,566 -- 27,991 Prepaid software licenses, content, and services, net of current portion........ 215,655 -- 215,655 Goodwill and other intangible assets, net..................................... 22,390 46,663 -- 3,347,926(2) 3,370,316 (46,663)(4) Other assets.............................. 5,935 2,272 1,276 -- 9,483 --------- -------- -------- ---------- ---------- Total assets..................... $ 108,028 $591,448 $ 14,624 $3,436,263 $4,150,363 ========= ======== ======== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable........................... $ 890 $ -- $ 205 $ -- $ 1,095 Accounts payable........................ 5,790 10,320 4,928 -- 21,038 Accrued liabilities..................... 13,580 2,067 -- 65,700(1) 81,347 Current portion of lease obligations.... 2,229 325 124 -- 2,678 Deferred revenue........................ 1,157 3,961 28 -- 5,146 --------- -------- -------- ---------- ---------- Total current liabilities........ 23,646 16,673 5,285 65,700 111,304 Long term obligations..................... 2,609 271 660 -- 3,540 Redeemable warrants....................... -- -- (3) -- Stockholders' equity: Preferred stock......................... -- 510,398 85,135 (595,533)(3) -- Common stock............................ 7 289,582 19 7(1) 14 (289,601)(3) Paid in capital......................... 229,849 -- -- 3,818,739 4,183,588 135,000(5) Deferred compensation................... (8,521) (841) (725) 1,566(3) (8,521) Retained earnings (accumulated deficit).............................. (139,562) (224,635) (75,750) 300,385(3) (139,562) --------- -------- -------- ---------- ---------- Total stockholders' equity....... 81,773 574,504 8,679 3,370,563 4,035,519 --------- -------- -------- ---------- ---------- Total liabilities and stockholders' equity........... $ 108,028 $591,448 $ 14,624 $3,436,263 $4,150,363 ========= ======== ======== ========== ==========
See accompanying notes. 155 166 HEALTHEON/WEBMD CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINED WITH WEBMD AND MEDCAST STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 1998 ------------------------------------------------------------------------------------------------- WEBMD ----------------------------------------- PRO FORMA PRO FORMA ADJUSTMENTS COMBINED PRO FORMA PRO FORMA HEALTHEON HISTORICAL (I) (I) MEDCAST ADJUSTMENTS COMBINED --------- ---------- -------------- ----------- ----------- ----------- ----------- Revenue...................... $ 48,838 $ 408 $ 878 $ 1,286 $ -- $ -- $ 50,124 Operating costs and expenses: Cost of operations......... 43,014 -- -- -- 3,644 -- 46,658 Development and engineering.............. 19,002 7,484 3,332 10,816 633 -- 30,451 Sales, general and administrative........... 23,095 13,862 5,350 19,212 10,126 -- 52,433 Depreciation and amortization............. 17,675 2,098 15,041 17,139 254 1,115,672(A) 1,150,740 -------- -------- -------- -------- ----------- ----------- ----------- Total operating costs and expenses............... 102,786 23,444 23,723 47,167 14,657 1,115,672 1,280,282 -------- -------- -------- -------- ----------- ----------- ----------- Income (loss) from operations................. (53,948) (23,036) (22,845) (45,881) (14,657) (1,115,672) (1,230,158) Interest, net................ 790 (139) (422) (561) 713 -- 942 Dividends on preferred stock...................... (890) -- -- -- -- (21,477)(D) (22,367) Gain on disposal of discontinued operations, net........................ -- 7,709 -- 7,709 -- -- 7,709 Extraordinary loss........... -- (930) -- (930) -- -- (930) Accretion of redeemable warrants and preferred stock to redemption value...................... -- (2,150) -- (2,150) (4,591) 4,591(C) (2,150) -------- -------- -------- -------- ----------- ----------- ----------- Net loss applicable to common stockholders'.............. $(54,048) $(18,546) $(23,267) $(41,813) $ (18,535) $(1,132,558) $(1,246,954) ======== ======== ======== ======== =========== =========== =========== Basic and diluted net loss per common share........... $ (1.54) $ (1.52) $ (3.43) $ (9.72) $ (12.37) ======== ======== ======== =========== =========== Weighted-average shares outstanding used in computing basic and diluted net loss per common share...................... 34,987 12,196 12,196 1,906 100,832(B) ======== ======== ======== =========== ===========
- ------------------------- (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 page 170 for additional information. See accompanying notes. 156 167 HEALTHEON/WEBMD CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINED WITH WEBMD AND MEDCAST STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED JUNE 30, 1999 --------------------------------------------------------------- PRO FORMA PRO FORMA HEALTHEON WEBMD MEDCAST ADJUSTMENTS COMBINED --------- --------- -------- ----------- ----------- Revenue............................. $ 40,253 $ 4,406 $ 48 $ -- $ 44,707 Operating costs and expenses: Cost of operations................ 33,432 -- 8,091 -- 41,523 Development and engineering....... 14,255 16,956 607 -- 31,818 Sales, general and administrative................. 19,787 40,714 9,777 -- 70,278 Depreciation and amortization..... 10,095 8,438 405 550,984(A) 569,922 -------- --------- -------- --------- ----------- Total operating costs and expenses..................... 77,569 66,108 18,880 550,984 713,541 -------- --------- -------- --------- ----------- Income (loss) from operations....... (37,316) (61,702) (18,832) (550,984) (668,834) Interest, net....................... 1,182 1,542 176 -- 2,900 Dividends on preferred stock........ -- (139,281) -- (21,477)(D) (160,758) Accretion of redeemable warrants and preferred stock to redemption value............................. -- (538) (58,539) 58,539(C) (538) -------- --------- -------- --------- ----------- Net loss applicable to common stockholders...................... $(36,134) $(199,979) $(77,195) $(513,922) $ (827,230) ======== ========= ======== ========= =========== Basic and diluted net loss per common share...................... $ (0.55) $ (15.52) $ (40.66) $ (6.26) ======== ========= ======== =========== Weighted-average shares outstanding used in computing basic and diluted net loss per common share............................. 66,286 12,889 1,899 132,131(B) ======== ========= ======== ===========
See accompanying notes. 157 168 HEALTHEON/WEBMD CORPORATION NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED WITH WEBMD AND MEDCAST FINANCIAL INFORMATION The unaudited pro forma condensed combined financial information reflects the WebMD merger and the Medcast merger 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 merger 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 June 30, 1999, have been calculated as if the merger occurred on June 30, 1999 and are as follows: (1) To reflect the acquisition of all of the outstanding capital stock of WebMD and Medcast by exchanging 1.796 shares of Healtheon/WebMD common stock for each share of WebMD capital stock and 0.5483 shares of Healtheon/WebMD common stock for each share of Medcast common stock, after conversion of all preferred stock into common stock for a total estimated purchase price of approximately $3,875.3 million. The purchase consideration consists of the issuance of an estimated 65.8 million shares of Healtheon/WebMD's common stock with a fair value of approximately $2,377.0 million and the assumption of options and warrants to purchase 49.4 million shares of Healtheon/WebMD's common stock with a fair value of approximately $1,432.6 million and other related merger costs of approximately $65.7 million, consisting primarily of approximately $51.6 million in investment banking, legal, accounting and regulatory filing fees, and approximately $14.1 million in costs anticipated to be incurred for employee retention, work force reduction, facility consolidation and other merger related costs. WebMD has requested approval from shareholders to modify the accelerating vesting provision on 1,607,838 options held by five WebMD employees. If the proposal is approved, these options will not accelerate upon the merger. This modification will not cause a remeasurement as it does not result in the renewal of the options or an extension of their period. These options have an average remaining vesting of 2.5 years. The Medcast purchase price assumes: (i) the conversion of preferred stock to common under the following ratios: A 1 for 1.0125 B 1 for 1 C 1 for 1.4593 (ii) the exercise of warrants to purchase 47.826 shares of common stock (iii) the purchase price is not adjusted for the impact of Medcast failing to obtain waivers of acceleration of vesting for the majority of its option holders. The purchase price does not presume the exercise of 21,521 shares of Medcast common stock held under options by Medcast's Chief Financial Officer. The exchange ratio used in computing the value of the Medcast transaction is approximately 0.5483 of a share of Healtheon/WebMD common stock for each outstanding share of Medcast common stock. The factors discussed in pages 122 to 124 of this proxy statement/prospectus may alter this ratio. Such alteration would not result in a material adjustment to the Medcast purchase price. Healtheon has requested waivers of acceleration provisions from holders of 352,103 Medcast options. If these waivers are obtained, such options will not accelerate upon the merger. These options have an average remaining vesting of approximately 2.5 years. 158 169 HEALTHEON/WEBMD CORPORATION NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED WITH WEBMD AND MEDCAST FINANCIAL INFORMATION (CONTINUED) The purchase price was determined as follows:
WEBMD MEDCAST ---------------------------- --------------------------- TOTAL AGGREGATE EQUIVALENT FAIR VALUE EQUIVALENT FAIR VALUE HEALTHEON/WEBMD FAIR VALUE SHARES (IN THOUSANDS) SHARES (IN THOUSANDS) SHARES (IN THOUSANDS) ----------- -------------- ---------- -------------- --------------- -------------- Shares................ 63,335,074 $2,183,872 2,509,654 $193,149 65,844,728 $2,377,021 Stock options......... 14,441,692 439,324 188,452 5,597 14,630,144 444,921 Warrants.............. 34,763,473 987,686 548 18 34,764,021 987,704 ----------- --------- ----------- Total shares... 112,540,239 2,698,654 115,238,893 =========== ========= =========== Merger Costs.......... 51,200 14,500 65,700 ---------- -------- ---------- $3,662,082 $213,264 $3,875,346 ========== ======== ==========
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 mergers were announced, which was May 20, 1999 for WebMD and July 1, 1999 for Medcast. The estimated fair value of the options and warrants to be assumed is based on the Black-Scholes model using the following assumptions: - Expected lives of one-half to 5 years - Expected volatility factor of 1.0 - Risk-free interest rate of 4.5% - Expected dividend rate of 0% Due to the amendment to the Healtheon/WebMD merger agreement dated as of September 1, 1999 providing for a change in the exchange ratio, the purchase price for WebMD has been amended. (2) Recognition of the excess purchase price of approximately $3,347.9 million over the fair value of net tangible assets acquired, has been recorded as goodwill and other intangible assets. (3) To reflect the elimination of the historical stockholders' equity accounts of WebMD and Medcast. (4) To reflect the elimination of goodwill and other intangible assets on the balance sheet of WebMD as of the acquisition date. (5) To reflect the proceeds, net of offering costs, relating to investments in capital stock made or to be made by strategic partners prior to the consummation of the merger. The merger agreement requires that these investments be completed prior to the closing of the merger. In May and June of 1999, WebMD sold 456,896 shares of Series E preferred stock for approximately $250 million. Upon closing of the WebMD merger, 276,906 shares of Series E preferred stock will be sold for approximately $150 million. The adjustments to the unaudited pro forma condensed combined statements of operations for the six months ended June 30, 1999 and year ended December 31, 1998, assume the merger occurred as of January 1, 1999 and January 1, 1998, respectively, and are as follows: (A) To reflect the amortization of goodwill and other intangible assets resulting from the merger. The goodwill and other intangible assets are being amortized over periods of approximately 159 170 HEALTHEON/WEBMD CORPORATION NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED WITH WEBMD AND MEDCAST FINANCIAL INFORMATION (CONTINUED) 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 65.8 million shares of Healtheon's common stock, as if the shares had been outstanding for the entire periods presented. The effect of stock options and warrants of WebMD and Medcast assumed in the merger have not been included as their inclusion would be anti-dilutive. (C) To reflect the reversal of accretion on redeemable preferred stock, that is forfeited by redeemable preferred stockholders upon voting for and consummation of the Medcast merger. (D) To reflect the beneficial conversion feature related to the shares to be issued to Microsoft upon the consummation of the merger. Computed based on an assumed fair market value of $34.48 per share for Healtheon's common stock. 160 171 HEALTHEON/WEBMD CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINED WITH WEBMD BALANCE SHEETS (IN THOUSANDS) ASSETS
AS OF JUNE 30, 1999 ---------------------------------------------------- PRO FORMA PRO FORMA HEALTHEON WEBMD ADJUSTMENTS COMBINED --------- -------- ----------- ---------- Current assets: Cash, cash equivalents and short-term investments........................... $ 47,353 $237,835 $ 135,000(5) $ 420,188 Accounts receivable, net................. 11,623 3,976 -- 15,599 Current portion of prepaid software licenses, content, and services....... -- 77,306 -- 77,306 Other current assets..................... 2,466 577 -- 3,043 --------- -------- ---------- ---------- Total current assets............. 61,442 319,694 135,000 516,136 Property and equipment, net................ 18,261 7,164 -- 25,425 Prepaid software licenses, content and services, net of current portion......... -- 215,655 -- 215,655 Goodwill and other intangible assets, net...................................... 22,390 46,663 3,143,342(2) 3,165,732 (46,663)(4) Other assets............................... 5,935 2,272 -- 8,207 --------- -------- ---------- ---------- Total assets..................... $ 108,028 $591,448 $3,231,679 $3,931,155 ========= ======== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable............................ $ 890 $ -- $ -- $ 890 Accounts payable......................... 5,790 10,320 -- 16,110 Accrued liabilities...................... 13,580 2,067 51,200(1) 66,847 Current portion of lease obligations..... 2,229 325 -- 2,554 Deferred revenue......................... 1,157 3,961 -- 5,118 --------- -------- ---------- ---------- Total current liabilities........ 23,646 16,673 51,200 91,519 Long term obligations...................... 2,609 271 -- 2,880 Redeemable warrants........................ -- -- (3) -- Stockholders' equity: Preferred stock.......................... -- 510,398 (510,398)(3) -- Common stock............................. 7 289,582 6(1) 13 (289,582)(3) Paid in capital.......................... 229,849 -- 3,619,977(1) 3,984,826 135,000(5) Deferred compensation.................... (8,521) (841) 841(3) (8,521) Retained earnings (accumulated deficit).............................. (139,562) (224,635) (224,635)(3) (139,562) --------- -------- ---------- ---------- Total stockholders' equity....... 81,773 574,504 3,180,479 3,836,756 --------- -------- ---------- ---------- Total liabilities and stockholders' equity........... $ 108,028 $591,448 $3,231,679 $3,931,155 ========= ======== ========== ==========
See accompanying notes. 161 172 HEALTHEON/WEBMD CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINED WITH WEBMD STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 1998 ------------------------------------------------------------------- WEBMD ----------------------------------------- PRO FORMA PRO FORMA ADJUSTMENTS COMBINED PRO FORMA PRO FORMA HEALTHEON HISTORICAL (I) (I) ADJUSTMENTS COMBINED --------- ---------- -------------- ----------- ----------- ----------- 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 1,047,478(A) 1,082,292 -------- -------- -------- -------- ----------- ----------- Total operating costs and expenses............... 102,786 23,444 23,723 47,167 1,047,478 1,197,431 -------- -------- -------- -------- ----------- ----------- Income (loss) from operations................. (53,948) (23,036) (22,845) (45,881) (1,047,478) (1,147,307) Interest, net................ 790 (139) (422) (561) -- 229 Dividends on preferred stock...................... (890) -- -- -- (21,477)(C) (22,367) 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) $(1,068,955) $(1,164,816) ======== ======== ======== ======== =========== =========== Basic and diluted net loss per common share........... $ (1.54) $ (1.52) $ (3.43) $ (11.85) ======== ======== ======== =========== Weighted-average shares outstanding used in computing basic and diluted net loss per common share...................... 34,987 12,196 12,196 98,322(B) ======== ======== ======== ===========
- ------------------------- (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 page 170 for additional information. See accompanying notes. 162 173 HEALTHEON/WEBMD CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINED WITH WEBMD STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED JUNE 30, 1999 ---------------------------------------------------- PRO FORMA PRO FORMA HEALTHEON WEBMD ADJUSTMENTS COMBINED --------- --------- ----------- ----------- Revenue................................... $ 40,253 $ 4,406 $ -- $ 44,659 Operating costs and expenses: Cost of operations...................... 33,432 -- -- 33,432 Development and engineering............. 14,255 16,956 -- 31,211 Sales, general and administrative....... 19,787 40,714 -- 60,501 Depreciation and amortization........... 10,095 8,438 516,886(A) 535,419 -------- --------- ----------- ----------- Total operating costs and expenses... 77,569 66,108 516,886 660,563 -------- --------- ----------- ----------- Income (loss) from operations............. (37,316) (61,702) (516,886) (615,904) Interest, net............................. 1,182 1,542 -- 2,724 Dividends on preferred stock.............. -- 139,281 (21,477)(C) (160,758) Accretion of redeemable warrants to redemption value........................ -- (538) -- (538) -------- --------- ----------- ----------- Net loss applicable to common stockholders............................ $(36,134) $(199,979) $ (538,363) $ (774,476) ======== ========= =========== =========== Basic and diluted net loss per common share................................... $ (0.55) $ 15.52 $ (5.97) ======== ========= =========== Weighted-average shares outstanding used in computing basic and diluted net loss per common share........................ 66,286 12,889 129,621(B) ======== ========= ===========
See accompanying notes. 163 174 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 WebMD merger 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 merger 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 June 30, 1999, have been calculated as if the merger occurred on June 30, 1999 and are as follows: (1) To reflect the acquisition of all of the outstanding capital stock of WebMD by exchanging 1.796 shares of Healtheon/WebMD common stock for each share of WebMD capital stock for a total estimated purchase price of approximately $3,662.1 million. The purchase consideration consists of the issuance of an estimated 63.3 million shares of Healtheon/WebMD's common stock with a fair value of approximately $2,183.9 million and the assumption of options and warrants to purchase 49.2 million shares of Healtheon/WebMD's common stock with a fair value of approximately $1,427.0 million and other related merger 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 merger related costs. WebMD has requested approval from shareholders to modify the accelerating vesting provision on options held by five WebMD employees. If the proposal is approved these options will not accelerate upon the merger. This modification will not cause a measurement as it does not result in the renewal of the options or any extension of their period. These options have an average remaining vesting of 2.5 years. The purchase price was determined as follows:
TOTAL WEBMD HEALTHEON/WEBMD FAIR VALUE SHARES SHARES (IN THOUSANDS) ---------- --------------- --------------- Shares issued............................... 35,264,518 63,335,074 $2,183,872 Stock options assumed....................... 8,041,031 14,441,692 439,324 Warrants assumed............................ 19,356,054 34,763,473 987,686 ---------- ----------- Total shares...................... 62,661,603 112,540,239 ========== =========== Merger costs................................ 51,200 ---------- $3,662,082 ==========
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 merger 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 5 years - Expected volatility factor of 1.0 - Risk-free interest rate of 4.5% - Expected dividend rate of 0% 164 175 HEALTHEON/WEBMD CORPORATION NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED WITH WEBMD FINANCIAL INFORMATION (CONTINUED) Due to the amendment of the Healtheon/WebMD merger agreement and the change in the exchange ratio on September 7, 1999, the purchase price for WebMD has been amended. (2) Recognition of the excess purchase price of approximately $3,143.3 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 merger. The merger agreement requires that these investments be completed prior to the closing of the merger. In May and June of 1999, WebMD sold 456,896 shares of Series E preferred stock for approximately $250 million. Upon closing of the WebMD merger, 276,906 shares of Series E preferred stock will be sold for $150 million. The adjustments to the unaudited pro forma condensed combined statements of operations for the six months ended June 30, 1999 and year ended December 31, 1998, assume the merger occurred as of January 1, 1999 and January 1, 1998, respectively, and are as follows: (A) To reflect the amortization of goodwill and other intangible assets resulting from the merger. 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 63.3 million shares of Healtheon'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 merger have not been included as their inclusion would be anti-dilutive. (C) To reflect the beneficial conversion feature related to the shares to be issued to Microsoft upon the consummation of the merger. Computed based on an assumed fair market value of $34.48 per share for Healtheon's common stock. 165 176 HEALTHEON/WEBMD CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINED WITH MEDE AMERICA BALANCE SHEET (IN THOUSANDS) ASSETS
AS OF JUNE 30, 1999 -------------------------------------------------- MEDE PRO FORMA PRO FORMA HEALTHEON AMERICA ADJUSTMENTS COMBINED --------- -------- ----------- --------- Current assets: Cash, cash equivalents and short-term investments..................................... $ 47,353 $ 4,119 $ -- $ 51,472 Accounts receivable, net........................... 11,623 15,966 -- 27,589 Current portion of prepaid software licenses, content, and services........................... -- -- -- -- Other current assets............................... 2,466 1,067 -- 3,533 --------- -------- --------- --------- Total current assets............................ 61,442 21,152 -- 82,594 -- Property and equipment, net.......................... 18,261 5,164 -- 23,425 Prepaid software licenses, content, and services, net of current portion................................. -- -- -- -- Goodwill and other intangible assets, net............ 22,390 48,202 521,854(2) 544,244 (48,202)(4) Other assets......................................... 5,935 4,191 -- 10,126 --------- -------- --------- --------- Total assets.................................. $ 108,028 $ 78,709 $ 473,652 $ 660,389 ========= ======== ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable...................................... $ 890 $ -- $ -- $ 890 Accounts payable................................... 5,790 2,640 -- 8,430 Accrued liabilities................................ 13,580 6,957 23,800(1) 44,337 Current portion of lease obligations............... 2,229 349 -- 2,578 Deferred revenue................................... 1,157 -- -- 1,157 --------- -------- --------- --------- Total current liabilities....................... 23,646 9,946 23,800 57,392 Long term obligations................................ 2,609 5,098 -- 7,707 Stockholders' equity: Common stock....................................... 7 132 1(1) 8 (132)(3) Paid in capital.................................... 229,849 116,343 513,516(1) 743,365 (116,343)(3) Deferred compensation.............................. (8,521) -- -- (8,521) Retained earnings (accumulated deficit)............ (139,562) (52,810) 52,810(3) (139,562) --------- -------- --------- --------- Total stockholders' equity...................... 81,773 63,665 449,852 595,290 --------- -------- --------- --------- Total liabilities and stockholders' equity.... $ 108,028 $ 78,709 $ 473,652 $ 660,389 ========= ======== ========= =========
See accompanying notes. 166 177 HEALTHEON/WEBMD CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINED WITH MEDE AMERICA STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 1998 --------------------------------------------------------------------------------- MEDE AMERICA ----------------------------------------- PRO FORMA PRO FORMA ADJUSTMENTS COMBINED PRO FORMA PRO FORMA HEALTHEON HISTORICAL (I) (I) ADJUSTMENTS COMBINED --------- ---------- -------------- ----------- ----------- --------- 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 8,773 124,781(A) 151,229 -------- ------- ------- ------- --------- --------- Total operating costs and expenses....................... 102,786 47,958 5,036 52,994 124,781 280,561 -------- ------- ------- ------- --------- --------- Income (loss) from operations............. (53,948) 222 (753) (531) (124,781) (179,260) 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) $(124,781) $(187,011) ======== ======= ======= ======= ========= ========= Basic and diluted net loss per common share................................... $ (1.54) $ (1.16) $ (1.44) $ (4.28) ======== ======= ======= ========= Weighted-average shares outstanding used in computing basic and diluted net loss per common share........................ 34,987 5,684 5,684 43,721(B) ======== ======= ======= =========
- ------------------------- (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 page 174 for additional information. See accompanying notes. 167 178 HEALTHEON/WEBMD CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINED WITH MEDE AMERICA STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED JUNE 30, 1999 -------------------------------------------------- MEDE PRO FORMA PRO FORMA HEALTHEON AMERICA ADJUSTMENTS COMBINED --------- ------- ----------- --------- Revenue................................... $ 40,253 $ 30,233 $ -- $ 70,486 Operating costs and expenses: Cost of operations...................... 33,432 10,926 -- 44,358 Development and engineering............. 14,255 2,095 -- 16,350 Sales, general and administrative....... 19,787 10,689 -- 30,476 Depreciation and amortization........... 10,095 4,686 61,556(A) 76,337 -------- -------- -------- -------- Total operating costs and expenses...................... 77,569 28,396 61,556 167,521 -------- -------- -------- -------- Income (loss) from operations............. (37,316) 1,837 (61,556) (97,035) Interest, net............................. 1,182 (648) -- 534 Dividends on preferred stock.............. -- (244) -- (244) Extraordinary loss........................ -- (1,619) -- (1,619) -------- -------- -------- -------- Net loss applicable to common stockholders............................ $(36,134) $ (674) $(61,556) $(98,364) ======== ======== ======== ======== Basic and diluted net loss per common share................................... $ (0.55) $ (0.06) $ (1.31) ======== ======== ======== Weighted-average shares outstanding used in computing basic and diluted net loss per common share........................ 66,286 11,626 75,020 ======== ======== ========
See accompanying notes. 168 179 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 merger 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 merger 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 June 30, 1999, have been calculated as if the merger occurred on June 30, 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 $537.3 million. The purchase consideration consists of the issuance of an estimated 8.7 million shares of Healtheon/WebMD's common stock with a fair value of approximately $451.4 million and the assumption of options and warrants to purchase 1.9 million shares of Healtheon/WebMD's common stock with a fair value of approximately $62.1 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 merger related costs. The purchase price was determined as follows:
MEDE TOTAL AMERICA HEALTHEON/WEBMD FAIR VALUE SHARES SHARES (IN THOUSANDS) ---------- --------------- -------------- Shares issued............................... 13,246,731 8,733,570 $451,389 Stock options assumed....................... 633,347 1,117,566 29,188 Warrants assumed............................ 1,250,000 824,125 32,940 ---------- ---------- Total shares...................... 15,130,078 10,675,261 ========== ========== Merger costs................................ 23,800 -------- $537,317 ========
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 merger was announced, which was April 21, 1999. The estimated fair value of the options and warrants to be assumed is based on the Black-Scholes model using the following assumptions: - Expected lives of one-half to 2.5 years - Expected volatility factor of 1.0 - Risk-free interest rate of 4.5% - Expected dividend rate of 0% The purchase price for MEDE AMERICA may be increased by 25% based upon the average closing price of Healtheon's stock for the 10 day period ending two days prior to the special meeting of MEDE AMERICA stockholders, if that lower average stock price is below $38.68. 169 180 HEALTHEON/WEBMD CORPORATION NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED WITH MEDE AMERICA FINANCIAL INFORMATION (CONTINUED) The preliminary purchase price for MEDE AMERICA excludes the impact of the options issued to MEDE AMERICA employees to purchase 700,000 shares of Healtheon common stock at the lower of $45.72 or the Healtheon stock price on the date of closing. On the date of the closing of the merger, any difference between the fair value of the shares at that date and the strike price of the awards will be treated as deferred compensation expense The preliminary value of these awards is approximately $12 million using a black scholes valuation model, assuming (i) a volatility of 1.0, (ii) a life of 2.5 years, (iii) an interest rate of 4.5% and a stock price on the date of valuation of $32.125. (2) Recognition of the excess purchase price of approximately $521.9 million over the fair value of net tangible assets acquired, has been recorded as goodwill and other intangible assets. (3) To reflect the elimination of the historical stockholders' equity accounts of MEDE AMERICA. (4) To reflect the elimination of goodwill and other intangible assets on the balance sheet of MEDE AMERICA as of the acquisition date. The adjustments to the unaudited pro forma condensed combined statements of operations for the six months ended June 30, 1999 and year ended December 31, 1998, assume the merger occurred as of January 1, 1999 and January 1, 1998, respectively, and as follows: (A) To reflect the amortization of goodwill and other intangible assets resulting from the merger. 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 8.7 million shares of Healtheon 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 merger have not been included as their inclusion would be anti-dilutive. 170 181 HEALTHEON/WEBMD CORPORATION WEBMD UNAUDITED PRO FORMA CONDENSED COMBINED WITH DIRECT MEDICAL KNOWLEDGE, INC. AND SAPIENT HEALTH NETWORK, INC. STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 1998 ----------------------------------------------------------------------------- SAPIENT DIRECT MEDICAL HEALTH DIRECT SAPIENT KNOWLEDGE NETWORK MEDICAL HEALTH PRO FORMA PRO FORMA PRO FORMA WEBMD KNOWLEDGE NETWORK ADJUSTMENTS ADJUSTMENTS COMBINED -------- --------- -------- --------------- ----------- --------- Revenue..................... $ 408 $ 338 $ 540 $ -- $ -- $ 1,286 Operating costs and expenses: Cost of operations........ -- -- -- -- -- -- Development and engineering............ 7,484 1,063 2,269 -- -- 10,816 Sales, general and administrative......... 13,862 1,800 3,550 -- -- 19,212 Depreciation and amortization........... 2,098 513 343 3,546(A) 10,639(A) 17,139 -------- ------- ------- ------- -------- -------- Total operating costs and expenses........ 23,444 3,376 6,162 3,546 10,639 47,167 -------- ------- ------- ------- -------- -------- Income (loss) from operations................ (23,036) (3,038) (5,622) (3,546) (10,639) (45,881) Interest, net............... (139) 5 (427) -- -- (561) Gain on disposal of discontinued operations, net....................... 7,709 -- -- -- -- 7,709 Extraordinary loss.......... (930) -- -- -- -- (930) Accretion of redeemable warrants to redemption value..................... (2,150) -- -- -- -- (2,150) -------- ------- ------- ------- -------- -------- Net loss applicable to common stockholders....... $(18,546) $(3,033) $(6,049) $(3,546) $(10,639) $(41,813) ======== ======= ======= ======= ======== ======== Basic and diluted net loss per common share.......... $ (1.52) $ (3.43) ======== ======== Weighted-average shares outstanding used in computing basic and diluted net loss per common share.............. 12,196 12,196(B) ======== ========
171 182 HEALTHEON/WEBMD CORPORATION NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED WITH DIRECT MEDICAL KNOWLEDGE, INC. AND SAPIENT HEALTH NETWORK, INC. STATEMENT OF OPERATIONS FOR WEBMD CORPORATION The unaudited pro forma condensed combined statement of operations reflects WebMD's acquisitions of Direct Medical Knowledge, Inc. and Sapient Health Network, Inc. and gives effect to certain reclassifications to the historical financial statements to conform the presentation of the historical operations of the merged companies. In January 1999, WebMD acquired Direct Medical Knowledge in exchange for 494,018 shares of Series B preferred stock valued at $20 per share in a transaction accounted for as a purchase. WebMD recorded $13.6 million in goodwill and other intangible assets, which will be amortized over three years. WebMD also acquired Sapient Health Network for 1,619,190 shares of Series B Preferred Stock valued at $20 per share in a transaction accounted for as a purchase. WebMD recorded $38.3 million in goodwill and other intangible assets, which will be amortized over three years. The pro forma adjustments to the unaudited pro forma condensed combined statement of operations have been calculated as if the acquisition occurred on January 1, 1998 as described below: (A) Reflects a year of amortization of the excess of the purchase price over the fair value of net assets acquired which is being amortized over three years. (B) Basic and diluted net loss per common share has not been adjusted to reflect the issuance of WebMD's Series B preferred stock, nor does it reflect the stock options and warrants of Direct Medical Knowledge and Sapient Health Network assumed in the acquisitions as the inclusion of these securities would be anti-dilutive. 172 183 HEALTHEON/WEBMD CORPORATION MEDE AMERICA UNAUDITED PRO FORMA CONDENSED COMBINED WITH HEALTHCARE INTERCHANGE, INC. STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
TWELVE MONTHS ENDED DECEMBER 31, 1998 ------------------------------------------------------- MEDE HEALTHCARE PRO FORMA PRO FORMA AMERICA INTERCHANGE(1) ADJUSTMENTS COMBINED ------- -------------- ----------- --------- Revenue................................... $48,180 $4,283 $ -- $52,463 Operating costs and expenses: Cost of operations...................... 18,426 1,493 -- 19,919 Development and engineering............. 4,346 -- -- 4,346 Sales, general and administrative....... 17,354 2,602 -- 19,956 Depreciation and amortization........... 7,832 145 796(A) 8,773 ------- ------ ------- ------- Total operating costs and expenses...................... 47,958 4,240 796 52,994 ------- ------ ------- ------- Income (loss) from operations............. 222 43 (796) (531) Interest, net............................. (4,417) (226) (608)(B) (5,251) Dividends on preferred stock.............. (2,400) -- -- (2,400) ------- ------ ------- ------- Net loss applicable to common stockholders............................ $(6,595) $ (183) $(1,404) $(8,182) ======= ====== ======= ======= Basic and diluted net loss per common share................................... $ (1.16) $ (1.44) ======= ======= Weighted-average shares outstanding used in computing basic and diluted net loss per common share........................ 5,684 5,684 ======= =======
- --------------- (1) Reflects the historical results for the 10 months ended October 31, 1998. 173 184 HEALTHEON/WEBMD CORPORATION NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED WITH HEALTHCARE INTERCHANGE, INC. STATEMENT OF OPERATIONS FOR MEDE AMERICA CORPORATION The unaudited pro forma condensed combined statement of operations reflects MEDE AMERICA's acquisition of Healthcare Interchange, Inc. and gives effect to certain reclassifications to the historical financial statements to conform the presentation of the historical operations of the merged companies. MEDE AMERICA acquired the net assets of Healthcare Interchange, Inc. in exchange for $11.7 million in cash on October 30, 1998. The acquisition was accounted for as a purchase and, accordingly, the results of operations of Healthcare Interchange have been included in the consolidated statement of operations commencing on the date of acquisition. The purchased intangibles of approximately $2.7 million were recorded and are being amortized on a straight-line basis over a useful life of five years. Goodwill of $8.2 million was recorded and is being amortized on a straight-line basis over a useful life of 20 years. The pro forma adjustments to the unaudited pro forma condensed combined statement of operations have been calculated as if the acquisition occurred on January 1, 1998 as described below: (A) Reflects amortization for 10 months of the excess of the purchase price over the fair value of net assets acquired which is being amortized over five years for intangibles and 20 years for goodwill. (B) Represents 10 months of interest expense on $11.7 million of borrowings under a credit facility used to fund the Healthcare Interchange acquisition at a composite interest rate of 6.22%. 174 185 COMPARISON OF RIGHTS OF HOLDERS OF HEALTHEON/WEBMD COMMON STOCK, WEBMD CAPITAL STOCK, MEDE AMERICA COMMON STOCK AND MEDCAST CAPITAL STOCK WebMD's articles of incorporation and bylaws and Georgia law currently govern the rights of stockholders of WebMD. After the completion of the WebMD merger, 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 WebMD merger the rights of WebMD common stockholders will be governed by Delaware law, rather than Georgia law. The rights of stockholders of MEDE AMERICA are currently governed by MEDE AMERICA's certificate of incorporation, which has been amended and restated, and MEDE AMERICA's bylaws. After the completion of the MEDE AMERICA merger, MEDE AMERICA stockholders will become stockholders of Healtheon/WebMD. Because MEDE AMERICA and Healtheon/WebMD are both Delaware corporations, after the MEDE AMERICA merger the rights of MEDE AMERICA stockholders will continue to be governed by Delaware law. The rights of stockholders of Medcast are currently governed by Medcast's certificate of incorporation, which has been amended, and Medcast's bylaws. After the completion of the Medcast merger, Medcast stockholders will become stockholders of Healtheon/WebMD. Because Medcast and Healtheon/WebMD are both Delaware corporations, after the Medcast merger the rights of Medcast stockholders will continue to be governed by Delaware law. The rights of stockholders of Healtheon/WebMD will be governed by Healtheon/WebMD's certificate of incorporation, Healtheon/WebMD's bylaws and Delaware law. The following chart summarizes certain differences among the rights of the stockholders of the four companies under their certificates of incorporation, bylaws and laws of their states of incorporation. 175 186
HEALTHEON/WEBMD WEBMD --------------- ----- (DELAWARE) (GEORGIA) Common stock One class is issued and Five classes are issued and outstanding. Holders are entitled outstanding. The terms of the to one vote per share. common stock are described below this table. Preferred stock The Healtheon/WebMD certificate The WebMD articles of of incorporation authorizes the incorporation authorized for board of directors to issue issuance 10,000,000 shares of shares of preferred stock in one preferred stock. WebMD currently or more series and to fix the has 9,172,000 shares of preferred designations, preferences, powers stock designated in series. The and rights of the shares to be terms of the preferred stock are included in each series. The described below this table. Healtheon/WebMD certificate of incorporation reserves for issuance 5,000,000 shares of preferred stock. Special meeting of stockholders Under Delaware law, a special Under Georgia law, a special meeting of stockholders may be meeting of stockholders may be called by the board of directors called by the board of directors or any other person authorized to or any other person authorized to do so in the certificate of do so in the articles of incorporation or the bylaws. incorporation or the bylaws. In Healtheon/WebMD's bylaws addition, Georgia law provides authorize the board of directors, that a special meeting of the president of Healtheon/ stockholders may also be called WebMD, or one or more by the holders of at least 25%, stockholders holding shares in or such greater or lesser the aggregate entitled to cast no percentages as the articles of less than 10% of the votes at incorporation or bylaws provide, that meeting to call a special of all votes entitled to be cast meeting of stockholders. on any issue proposed to be considered at a special meeting. WebMD's bylaws allow the WebMD board of directors, the chairman of the board, the chief executive officer of WebMD, or the holders of shares representing at least a majority of the votes entitled to be cast on each issue presented at such meeting to call a meeting of stockholders or any class or series of stockholders. Action by written consent lieu of Under Delaware law, stockholders Under Georgia law, stockholders a stockholders' meeting may take action by written may take action by written consent in lieu of voting at a consent in lieu of voting at a stockholders meeting. Delaware stockholders meeting. Under law permits a corporation, Georgia law, all actions taken by pursuant to a provision in such written consent must be unanimous corporation's certificate of unless the articles of incorporation, to eliminate the incorporation provide otherwise. ability of stockholders to act by WebMD's articles provide that all written consent. actions by stockholders shall be Healtheon/WebMD's certificate of taken at a meeting of the incorporation eliminates the stockholders. ability of stockholders to act by written consent. MEDE AMERICA MEDCAST ------------ ------- (DELAWARE) (DELAWARE) Common stock One class is issued and One class is issued and outstanding. Holders are entitled outstanding. Holders are entitled to one vote per share. to one vote per share. Preferred stock The MEDE AMERICA certificate of The Medcast certificate of incorporation authorizes the incorporation authorized for board of directors to issue issuance 10,000,000 shares of shares of preferred stock in one preferred stock. Medcast or more series and to fix the currently has 2,522,809 shares of designations, preferences, powers preferred stock designated in and rights of the shares to be series. The terms of the included in each series. The MEDE preferred stock are described AMERICA certificate of below this table. incorporation reserves for issuance 5,000,000 shares of preferred stock. Special meeting of stockholders See the description of Delaware See the description of Delaware law contained under the law contained under the "Healtheon/ WebMD" heading. MEDE "Healtheon/ WebMD" heading. AMERICA's bylaws authorize the Special meetings of Medcast may chairman of the board of be called by Medcast's board of directors, the president of MEDE directors or by written request AMERICA or a majority of MEDE of the holders of a majority of AMERICA's directors to call a the voting power of Medcast's special meeting of stockholders. outstanding capital stock. Action by written consent lieu of See the description of Delaware See the description of Delaware a stockholders' meeting law contained under the law contained under the "Healtheon/ WebMD" heading. MEDE "Healtheon/ WebMD" heading. AMERICA stockholders may take Medcast stockholders may take action without a meeting by action without a meeting by written consent of the holders of written consent of the holders of outstanding stock having the outstanding stock having the number of votes that would be number of votes that would be necessary to take such an action necessary to take such an action at a meeting at which all shares at a meeting at which all shares entitled to vote were present and entitled to vote were present and voted. voted.
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HEALTHEON/WEBMD WEBMD --------------- ----- (DELAWARE) (GEORGIA) Voting by written ballot Under Delaware law, the right to Georgia law does not contain a vote by written ballot may be provision regarding voting by restricted if so provided in the written ballot and the WebMD certificate of incorporation. articles and bylaws do not Healtheon/WebMD's certificate of specify any rules for accepting incorporation and bylaws do not voice or ballot votes. restrict the right to vote by ballot. Record date for determining The Healtheon/WebMD bylaws The WebMD bylaws provide that the stockholders provide that the board of board of directors may fix a directors may fix a record date record date that: that: - in the case of determination of the stockholders entitled to vote - in the case of determination of at any meeting of stockholders the stockholders entitled to vote or adjournment of any meeting, at any meeting of stockholders shall not be more than 70 days, or adjournment of any meeting, nor less than 10 days before shall not be more than 60 days, the date of the meeting nor less than 10 days before the date of the meeting - in the case of any other action, shall not be more than 70 - in the case of any other days prior to such other action action, shall not be more than 60 days prior to such other action Furthermore, the bylaws provide that if the board of directors Furthermore, the bylaws provide does not fix a record date in the that if the board of directors manner described above, then: does not fix a record date in the manner described above, then: - the record date for determining stockholders entitled to notice - the record date for determining of or to vote at a meeting of stockholders entitled to notice stockholders shall be at the of or to vote at a meeting of close of business on the day stockholders shall be at the next preceding the day on which close of business on the day notice is given, or, if notice next preceding the day on which is waived, at the close of notice is given, or, if notice business on the day next is waived, at the close of preceding the day on which the business on the day next meeting is held preceding the day on which the meeting is held - the record date for determining stockholders for any other - the record date for determining purpose shall be at the close stockholders for any other of business on the same day on purpose shall be at the close which the board of directors of business on the same day on adopts the related resolution. which the board of directors adopts the related resolution. MEDE AMERICA MEDCAST ------------ ------- (DELAWARE) (DELAWARE) Voting by written ballot See the description of Delaware See the description of Delaware law contained under the law contained under the "Healtheon/ WebMD" heading. MEDE "Healtheon/ WebMD" heading. AMERICA's bylaws provide that a Medcast's bylaws provide that a vote at a stockholders' meeting vote at a stockholders' meeting need not be by written ballot need not be by written ballot unless so demanded by a unless so demanded by a stockholder present in person or stockholder present in person or by proxy at the meeting, or if so by proxy at the meeting, or if so directed by the chairman of the directed by Medcast's board of meeting. directors. Record date for determining The MEDE AMERICA bylaws provide The Medcast bylaws provide that stockholders that the board of directors may the board of directors may fix a fix a record date that: record date that: - in the case of determination of - in the case of determination of the stockholders entitled to vote the stockholders entitled to vote at any meeting of stockholders at any meeting of stockholders or adjournment of any meeting, or adjournment of any meeting, shall not be more than 60 days, shall not be more than 60 days, nor less than 10 days before nor less than 10 days before the date of the meeting the date of the meeting - in the case of any other - in the case of any other action, shall not be more than 60 action, shall not be more than 60 days prior to such other days prior to such other action action. Furthermore, the bylaws provide Furthermore, the bylaws provide that if the Medcast board of that if the board of directors directors does not fix a record does not fix a record date in the date in the manner described manner described above, then: above, then the record date for determining stockholders for - the record date for determining any other purpose will be at stockholders entitled to notice the close of business on the of or to vote at a meeting of same day on which the board of stockholders shall be at the directors adopts the related close of business on the day resolution. 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.
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HEALTHEON/WEBMD WEBMD --------------- ----- (DELAWARE) (GEORGIA) Advance notice provisions for The Healtheon/WebMD bylaws The WebMD bylaws provide that if board nomination and other require that nominations of the board of directors does not stockholder business -- annual persons for election to the board fix a record date in the manner meetings of directors and the proposal of described above, then: business to be considered at any meeting of stockholders must be - the record date for determining made by: stockholders entitled to notice of or to vote at a meeting of - the corporation's notice of stockholders shall be the date on meeting, which notice of a stockholders' meeting is mailed - the board of directors, or - the record date for determining - a stockholder who gives proper stockholders entitled to notice. receive dividends shall be the date on which the board of Assuming Healtheon proposal 3 is directors adopts a resolution approved, if made by a declaring a dividend stockholder, the proposal or nomination must be made by - the record date for determining advance written notice given to stockholders for any other Healtheon/WebMD between 60 and 90 purpose shall be the date on days prior to the meeting of which the action is taken that stockholders. requires a determination notice of a proposal or nomination must be delivered not earlier than the close of business on the seventh day following the day on which the notice of the meeting is mailed. The bylaws require that nominations of persons for election to the board of directors and the proposal of business to be considered at an annual meeting of stockholders must be made by the board of directors, the chairman of board, the Chief Operating Officer or by a stockholder who gives proper notice. If made by a stockholder, the proposal or nomination must be made by advance written notice given to WebMD between 60 and 90 days prior to the first anniversary of the preceding year's annual meeting of stockholders. Advance notice provisions for The Healtheon/WebMD bylaws The WebMD bylaws provide that, at board nomination and other provide for the same requirements special meetings of stockholders, stockholder business -- special for raising business at special the only business that can be meetings meetings of stockholders as for conducted will be the items of raising business at annual business set forth in the notice meetings. of the special meeting. Number of directors The Healtheon/WebMD bylaws The WebMD bylaws provide that the provide that the board of board of directors shall consist directors shall consist of not of not more than 15 directors. fewer than six and not more than 11 directors. MEDE AMERICA MEDCAST ------------ ------- (DELAWARE) (DELAWARE) Advance notice provisions for The MEDE AMERICA bylaws require The Medcast bylaws do not contain board nomination and other that nominations of persons for advance notice provisions for stockholder business -- annual election to the board of nominations for election to the meetings directors and the proposal of board of directors. business to be considered at an annual meeting of stockholders must be made by the board of directors or the chairman of the meeting or by a stockholder who gives proper notice. If made by a stockholder, the proposal or nomination must be made by advance written notice given to MEDE AMERICA between 60 and 90 days prior to the first anniversary of the preceding year's annual meeting of stockholders. Advance notice provisions for The MEDE AMERICA bylaws provide The Medcast bylaws do not contain board nomination and other that, at special meetings of advance notice provisions for stockholder business -- special stockholders, the only business stockholder business at special meetings that can be conducted will be the meetings. items of business set forth in the notice of the special meeting. Number of directors The MEDE AMERICA bylaws provide The Medcast bylaws provide that that the board of directors shall the board of directors will consist of not fewer than three consist of one or more members. and not more than 11 directors.
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HEALTHEON/WEBMD WEBMD --------------- ----- (DELAWARE) (GEORGIA) Classified board of directors Delaware law provides that a Georgia law each provide that a corporation's board of directors corporation's board of directors may be divided into various may be divided into various classes with staggered terms of classes with staggered terms of office. The board of directors of office. The board of directors of Healtheon/WebMD is divided into WebMD is divided into three three classes, as nearly equal in classes, as nearly equal in size size as possible, with one class as possible, with one class being being elected annually. elected annually. WebMD directors Healtheon/WebMD directors are are elected to a term of three elected to a term of three years years and until their successors and until their successors are are elected and qualified. elected and qualified. Removal of directors Assuming Healtheon proposal 3 is Under Georgia law, if a director approved, under Delaware law, is elected by a voting group, except as otherwise provided in only the stockholders of that the corporation's certificate of voting group may participate in incorporation, a director of a the vote to remove such director. corporation that has a classified Under Georgia law, except as board of directors may be removed otherwise provided in the only with cause. In addition, corporation's articles of under Delaware law, when a incorporation, a director of a corporation's certificate of corporation that has a classified incorporation provides that board of directors may be removed holders of a series or class, only with cause. The WebMD bylaws voting as a class or series, are provide that any director, or the entitled to elect one or more entire WebMD board of directors, directors, then any director may may be removed with cause by the be removed, without cause, only stockholders, provided that by the applicable vote of holders directors elected by a particular of shares of that class or voting group may be removed only series. The Healtheon/WebMD by the stockholders in that bylaws provide that any director voting group. WebMD's bylaws do or the entire board of directors not allow directors to be removed may be removed, with cause, by without cause. the holders of a majority of the shares then entitled to vote at an election of directors. MEDE AMERICA MEDCAST ------------ ------- (DELAWARE) (DELAWARE) Classified board of directors See the description of Delaware See the description of Delaware law contained under the law contained under the "Healtheon/ WebMD" heading. MEDE "Healtheon/ WebMD" heading. AMERICA's directors are not Medcast's directors are not divided into classes. MEDE divided into classes. 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 See the description of Delaware See the description of Delaware law contained under the law contained under the "Healtheon/WebMD" heading. The "Healtheon/WebMD" heading. The MEDE AMERICA bylaws provide that Medcast bylaws provide that any any director or the entire board director or the entire board of of directors may be removed, with directors may be removed, with or without cause, by an action by cause, by the holders of a the holders of a majority of the majority of the shares then shares present in person or by entitled to vote at an election proxy at a stockholders' meeting of directors. and entitled to vote or by proper written consent of the stockholders.
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HEALTHEON/WEBMD WEBMD --------------- ----- (DELAWARE) (GEORGIA) Board of director vacancies Under Delaware law, vacancies and Under Georgia law, unless the newly created directorships may articles of incorporation or a be filled by a majority of the bylaw adopted by the stockholders directors then in office, even provides otherwise, vacancies and though less than a quorum, unless newly created directorships maybe otherwise provided in the filled by the stockholders, by certificate of incorporation or the board of directors, or by a bylaws, and unless the majority of the directors certificate of incorporation remaining in office if such directs that a particular class directors constitute less than a of stock is to elect such quorum, unless the director was director, in which case any other elected by a voting group, in directors elected by such class, which case the stockholders of or a sole remaining director so such voting group or the elected, may fill such vacancy. remaining directors elected by The Healtheon/WebMD bylaws such voting group may fill such provide that vacancies on the vacancy. WebMD's bylaws provided board of directors may only be that a vacancy may be filled by filled by the vote of the the affirmative vote of a majority of directors remaining majority of the remaining in office. directors, provided that if the vacant office was held by a director elected by a particular voting group, only the holder of shares of such voting group or the remaining directors elected by such voting group may fill the vacancy, provided further that if there is no remaining director elected by such voting group, the other remaining directors may fill the vacancy during an interim period before the stockholders of the applicable voting group act to fill the vacancy. Notice of special meetings of the The Healtheon/WebMD bylaws The WebMD bylaws provide that board of directors provide that the Chief Executive special meetings may be called by Officer may call special meetings the chairman of the board, the of the board of directors upon Chief Operating Officer or by a three days notice of the meeting. majority of the directors upon The president or secretary may one day's notice of the meeting. call special meetings upon the written request of two directors and upon three days notice of the meeting. Approval of loans to officers The Healtheon/WebMD bylaws The WebMD bylaws do not provide that Healtheon may lend specifically address loans to money to or otherwise assist any officers or employees. officer or other employee whenever the directors judge such a loan or assistance reasonably to be expected to benefit the corporation. MEDE AMERICA MEDCAST ------------ ------- (DELAWARE) (DELAWARE) Board of director vacancies See the description of Delaware See the description of Delaware law contained under the law contained under the "Healtheon/WebMD" heading. The "Healtheon/WebMD" heading. The MEDE AMERICA bylaws provide that Medcast bylaws provide that vacancies on the board of vacancies on the board of directors resulting from death, directors may be filled by the resignation or removal shall only vote of the majority of directors be filled by the vote of a remaining in office. 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 The MEDE AMERICA bylaws provide The Medcast bylaws provide that board of directors that special meetings may be special meetings may be called by called by the Chairman of the the chairman of the board, the board, the President or by a secretary or by the written majority of the directors. Notice request of two or more directors. of such a meeting must be mailed Notice of such a meeting must be at least five days before the mailed at least 72 hours before date of the meeting, or delivered the time of the meeting, or by telephone, telegraph, cable, delivered by telephone, telecopy radio or wireless no later than or personal service no later than one day before the date of the 24 hours before the time of the meeting. meeting. Approval of loans to officers The MEDE AMERICA bylaws do not The Medcast bylaws do not specifically address loans to specifically address loans to officers or employees. officers or employees.
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HEALTHEON/WEBMD WEBMD --------------- ----- (DELAWARE) (GEORGIA) Indemnification The Healtheon/WebMD certificate The WebMD bylaws provide that the of incorporation and bylaws corporation may pay all expenses provides that the directors and incurred by a director or officer officers shall be indemnified to in defending any proceeding the fullest extent authorized within the scope of the bylaw against any action, indemnification provisions. The proceeding or suit brought WebMD bylaws provide that payment against such a person by reason of expenses in advance of the of the fact that he or she is or final disposition of an action was a director or officer of the shall be authorized by the board corporation or serves or served of directors in some at any other enterprise as at the circumstances and may be request of the corporation. The authorized by the board of Healtheon/WebMD bylaws provide directors in other circumstances that the corporation may pay all upon receipt of an affirmation by expenses incurred by a director the director or officer that he or officer in defending any or she has met the applicable proceeding within the scope of standard of conduct. the indemnification provisions. Limitations on liability The Healtheon/WebMD certificate The WebMD articles of of incorporation limits or incorporation eliminate a eliminates, to the fullest extent director's personal liability for permitted by Delaware law, the monetary damages to WebMD or any personal liability of a director of its stockholders for any to Healtheon/WebMD or its breach of duties of such stockholders for monetary damages position, except that such for breach of fiduciary duty as a liability is not eliminated for: director. Under Delaware law, such provision may not eliminate - any appropriation, in violation or limit director monetary of such director's duties, of any liability for: business opportunity of WebMD - breaches of the director's duty - acts or omission which involve of loyalty to the corporation or intentional misconduct or a its stockholders knowing violation of law - acts or omissions not in good - liability for unlawful faith involving intentional distributions misconduct or knowing violations of law - any transaction from which the director received an improper - the payment of unlawful personal benefit. dividends or unlawful stock repurchases or redemptions, or WebMD's articles of incorporation provide that if at any time - transaction in which the Georgia law is amended to further director received an improper eliminate or limit the liability personal benefit. of a director, then the liability of each director of WebMD shall be eliminated or limited to the fullest extent permitted thereby. MEDE AMERICA MEDCAST ------------ ------- (DELAWARE) (DELAWARE) Indemnification The MEDE AMERICA certificate of The Medcast bylaws provide that incorporation and bylaws provide its directors and officers will that the directors and officers be indemnified to the fullest shall be indemnified to the extent authorized by law against fullest extent authorized bylaw any action, proceeding or suit against any action, proceeding or brought against such a person by suit brought against such a reason of the fact that he or she person by reason of the fact that is or was a director or officer he or she is or was a director or of the corporation or serves or officer of the corporation or served at any other enterprise as serves or served at any other at the request of the enterprise as at the request of corporation. The Medcast bylaws the corporation. The MEDE AMERICA provide that the corporation may bylaws provide that the further pay all expenses incurred corporation may pay all expenses by a director or officer in incurred by a director or officer defending any proceeding within in defending any proceeding the scope of the indemnification within the scope of the provisions. The Medcast bylaws indemnification provisions. The also provide that payment of MEDE AMERICA bylaws provide that expenses in advance of the final payment of expenses in advance of disposition of an action may be the final disposition of an authorized by the board of action may be authorized by the directors upon receipt of an board of directors upon receipt undertaking by the director or of an undertaking by the director officer to repay the amount or officer to repay the amount unless it is determined that he unless it is determined that he or she is entitled to be or she is entitled to be indemnified by the corporation. indemnified by the corporation. Limitations on liability The MEDE AMERICA certificate of The Medcast certificate of incorporation provides that no incorporation provides that no director shall be personally director will be personally liable to the corporation or any liable to the corporation or any of its stockholders for monetary of its stockholders for monetary damages for breach of the damages for breach of the director's fiduciary duty. The director's fiduciary duty. The MEDE AMERICA certificate of Medcast certificate of incorporation does not limit incorporation does not limit liability: liability: - for a director's breach of his - for a director's breach of his or her duty of loyalty to the or her duty of loyalty to the corporation or its stockholders corporation or its stockholders - for acts or omissions not in - for acts or omissions not in good faith or which involve good faith or which involve intentional misconduct or a intentional misconduct or a knowing violation of the law knowing violation of the law - under Section 174 of the DGCL, - under Section 174 of Delaware or law, or - for any transaction from which - for any transaction from which the director derived an improper the director derived an improper personal benefit. personal benefit. The Medcast certificate of incorporation limits liability of the directors to the fullest extent permitted by Delaware law.
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HEALTHEON/WEBMD WEBMD --------------- ----- (DELAWARE) (GEORGIA) Stockholder approval of certain Under Delaware law, "business Under Georgia law, "business business combinations combinations" by corporations combinations" by corporations with "interested stockholders" with "interested stockholders" are subject to a moratorium of are subject to a moratorium of three or five years, three or five years, respectively, unless specified respectively, unless specified conditions are met. The conditions are met. The prohibited transactions include, prohibited transactions include a a merger with, disposition of merger with, disposition of assets to, or the issuance of assets to, or the issuance of stock to, the interested stock to, the interested stockholder, or certain stockholder, or certain transactions that have the effect transactions that have the effect of increasing the proportionate of increasing the proportionate share of the outstanding share of the outstanding securities held by the interested securities held by the interested stockholder. Under Delaware law, stockholder. Under Georgia law, an interested stockholder may an interested stockholder may avoid the prohibition against avoid the prohibition against effecting certain significant effecting certain significant transactions with the corporation transactions with the corporation if the board of directors, prior if the board of directors, prior to the time such stockholder to the time such stockholder becomes an interested becomes an interested stockholder stockholder, approves such approves such transaction or the transaction or the transaction by transaction by which such which such stockholder becomes an stockholder becomes an interested interested stockholder or if at stockholder. The similar or subsequent to such time the provisions of Georgia law do not board of directors and the apply to a Georgia corporation stockholders approve such unless it has affirmatively transaction. These provisions of elected in its bylaws to be Delaware law apply to a Delaware governed by them. The WebMD corporation unless the bylaws do not currently contain a corporation "opts out" of the provision electing to be governed provisions in its certificate of by the similar provisions of incorporation or bylaws. Georgia law. Georgia law also Healtheon/WebMD has not opted out contains a provision concerning of these provisions in its "fair price requirements" which certificate of incorporation or if elected by a Georgia bylaws and consequently is corporation in its bylaws imposes subject to these provisions. 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. MEDE AMERICA MEDCAST ------------ ------- (DELAWARE) (DELAWARE) Stockholder approval of certain See the description of Delaware See the description of Delaware business combinations law contained under the law contained under the "Healtheon/ WebMD" heading. MEDE "Healtheon/ WebMD" heading. AMERICA has not opted out of the Medcast has not opted out of the provisions of Delaware law in its provisions of Delaware law in its certificate of incorporation or certificate of incorporation or bylaws and consequently is bylaws and consequently is subject to these provisions. subject to these provisions.
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HEALTHEON/WEBMD WEBMD --------------- ----- (DELAWARE) (GEORGIA) Par value, dividends and The concepts of par value, Georgia law dispenses with the repurchases of shares capital and surplus are retained concept of par value of shares under Delaware law. Delaware law for most purposes as well as permits a corporation to declare statutory definitions of capital, and pay dividends out of surplus surplus and the like. Under or, if there is no surplus, out Georgia law, a corporation may of the net profits for the fiscal make distributions to its year in which the dividend is stockholders subject to any declared and/or for the preceding restrictions imposed in the fiscal year as long as the amount corporation's articles of of capital of the corporation incorporation, except that no following the declaration and distribution may be made if as a payment of the dividend is not result the corporation would not less than the aggregate amount of be able to pay its debts as they the capital represented by the become due in the usual course of issued and outstanding stock of business or its total assets all classes having a preference would be less than the sum of its upon the distribution of assets. total liabilities plus the amount In addition, Delaware law that would be needed, if the generally provides that a corporation were to be dissolved corporation may redeem or at the time of the distribution, repurchase its shares only if to satisfy the preferential such redemption or repurchase rights upon dissolution of would not impair the capital of stockholders whose preferential the corporation. Notwithstanding rights are superior to those the foregoing, a Delaware receiving the distribution. A corporation may redeem or Georgia corporation may acquire repurchase shares having a its own shares and shares so preference upon the distribution acquired will constitute of any of its assets if such authorized but unissued shares, shares will be retired upon unless the articles of acquisition, and provided that, incorporation provide that such after the reduction in capital shares become treasury shares or made in connection with such prohibit the reissuance of retirement of shares, the reacquired shares. If such corporation's remaining assets reissuance is prohibited, the are sufficient to pay any debts number of authorized shares will not otherwise provided for. be reduced by the number of shares reacquired. MEDE AMERICA MEDCAST ------------ ------- (DELAWARE) (DELAWARE) Par value, dividends and See the description of Delaware See the description of Delaware repurchases of shares law contained under the law contained under the "Healtheon/ WebMD" heading. "Healtheon/ WebMD" heading.
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HEALTHEON/WEBMD WEBMD --------------- ----- (DELAWARE) (GEORGIA) Dissenters' or appraisal rights Under Delaware law, a stockholder Under Georgia law, a stockholder of a corporation participating in of a corporation participating in certain major corporate certain major corporate transactions may be entitled to transactions may be entitled to dissenters' or appraisal rights dissenters' or appraisal rights pursuant to which such pursuant to which such stockholder may receive cash in stockholder may receive cash in the amount of the fair value of the amount of the fair value of his or her shares in lieu of the his or her shares in lieu of the consideration he or she would consideration he or she would otherwise receive in the otherwise receive in the transaction. Under Delaware law, transaction. such rights are not available: Under Georgia law, dissenters' - with respect to the sale, lease rights are available in the event or exchange of all or of any of the following corporate substantially all of the assets actions: of a corporation or an amendment to the corporation's - a merger if the approval of the certificate of incorporation stockholders is required for such merger and the stockholder - with respect to a merger or is entitled to vote on the consolidation by a corporation merger or if the corporation is the shares of which are either a subsidiary that is merged listed on a national securities with its parent exchange or held of record by more than 2,000 stockholders if - a share exchange in which the such stockholders are required corporation's shares will be to receive only shares of the acquired, if the stockholder is surviving corporation, shares entitled to vote on the share of any other corporation which exchange are either listed on a national securities exchange or held of - a sale or exchange of all or record by more than 2,000 substantially all of the assets holders, cash in lieu of of a corporation, if a fractional shares or a stockholder vote is required, combination of the foregoing, other than a sale pursuant to a or court order or a sale for cash the proceeds of which will be - to stockholders of a distributed to the stockholders corporation surviving the merger within one year if no vote of the stockholder of the surviving corporation is - an amendment of the articles of required to approve the merger incorporation that adversely because the merger does not affects rights relating to such amend the certificate of stockholder's shares, or incorporation, and each share of the surviving corporation - any corporate action taken outstanding prior to the merger pursuant to a stockholder vote is an identical outstanding or to the extent the articles of treasury share after the incorporation, bylaws or a merger, and the number of resolution of the board of shares to be issued in the directors provides that voting merger does not exceed 20% of or nonvoting stockholders are the shares of the surviving entitled to dissent and obtain corporation outstanding payment for their shares. This immediately prior to the right is not available when the merger. affected shares are listed on a national securities exchange or held of record by more than 2,000 stockholders unless the articles of incorporation or a resolution of the board of directors approving the transaction provide otherwise, or in a plan of merger or share exchange the holders of such shares are required to accept anything other MEDE AMERICA MEDCAST ------------ ------- (DELAWARE) (DELAWARE) Dissenters' or appraisal rights See the description of Delaware See the description of Delaware law contained under the law contained under the "Healtheon/ WebMD" heading. "Healtheon/ WebMD" heading.
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HEALTHEON/WEBMD WEBMD --------------- ----- (DELAWARE) (GEORGIA) than shares of the surviving corporation or another publicly held corporation which at the effective date of the merger or share exchange are either listed on a national securities exchange or held of record by more than 2,000 stockholders, except for payments in lieu of fractional shares. Appraisal rights are available to the holders of the common stock and holders of the Series A preferred stock of WebMD with respect to the WebMD merger. Stockholder derivative suits Under Delaware law, a stockholder Under Georgia law, a stockholder may only bring a derivative may not commence or maintain a action on behalf of the derivative proceeding unless the corporation if the stockholder stockholder was a stockholder of was a stockholder at the time of the corporation at the time of the transaction in question or the act or omission complained of his or her stock thereafter or became a stockholder through devolved upon him or her by transfer by operation of law from operation of law. 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. MEDE AMERICA MEDCAST ------------ ------- (DELAWARE) (DELAWARE) Stockholder derivative suits See the description of Delaware See the description of Delaware law contained under the law contained under the "Healtheon/ WebMD" heading. "Healtheon/ WebMD" heading.
185 196 DESCRIPTION OF WEBMD'S COMMON STOCK WebMD has six classes of common stock: common stock without series designation, Series B common stock, Series C common stock, Series D common stock, Series E common stock and Series F common stock. The holders of common stock without series designation are entitled to one vote for each share held; the holders of all other series of common stock are entitled to no voting rights except as required by Georgia law. Stockholders may not cumulate votes in connection with the election of directors. The holders of common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the board of directors. In the event of a liquidation, dissolution or winding up of WebMD, the holders of each share of Series B common stock, Series C common stock and Series E common stock are entitled to be paid first out of the assets of WebMD available for distribution to holders of WebMD's capital stock of all classes or series, before any sums are paid to the holders of the common stock without series designation, the Series D common stock or the Series F 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. DESCRIPTION OF WEBMD'S PREFERRED STOCK WebMD's Series A preferred stock, Series B preferred stock, Series C preferred stock, Series D preferred stock, Series E preferred stock, and Series F preferred stock have the rights, preferences and privileges set forth below: Series A preferred stock. The holders of Series A preferred stock are entitled to one vote per share, on an as if converted to common stock basis, on all matters to be voted upon by the stockholders and are entitled, as a class, to elect one member of the WebMD board of directors, but are not 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: - amend its articles of incorporation or bylaws if such action would alter the preferences, rights, privileges or powers of, or restrictions for the benefit of, the holders of the Series A preferred stock - create any new series of capital stock or increase the authorized amount of any series of capital stock, unless such series ranks junior to the Series A preferred stock with respect to dividends and distribution of assets upon liquidation, dissolution or winding up - increase or decrease the authorized number of shares of Series A preferred stock - take any action that would alter the preferences, rights, privileges or powers of, or restrictions for the benefit of, the holders of the Series A preferred stock in such a manner as would require the vote of the holders of the Series A preferred stock as a voting group under Georgia law, or - redeem or otherwise acquire for value any shares of its capital stock, except pursuant to stock option and other employee stock plans or pursuant to the exercise of an existing right of first refusal. The holders of Series A preferred stock are not entitled to receive dividends, but if dividends are declared or paid with respect to any share of any series of common stock, an equal dividend must be declared or paid for each share of Series A preferred stock, on an as if converted to common stock basis. In the event of a liquidation, dissolution or winding up of WebMD, the holder of each share of Series A preferred stock is entitled to receive, at their election, in exchange for and in redemption of such share, 186 197 prior to any distributions to the holders of any capital stock ranking junior to the Series A preferred stock that portion of such funds equal to the number of shares of common stock into which such share of Series A preferred stock is convertible, divided by the sum of the aggregate number of shares of common stock into which all shares of Series A preferred stock are convertible, plus all other shares of common stock outstanding, plus all other shares of capital stock of WebMD outstanding which are entitled to participate in the proceeds of a liquidation, dissolution or winding up. The amount payable with respect to each share of Series A preferred stock will be increased, if necessary, to equal the sum of $15.00, adjusted to give effect to any subdivisions or combinations of the common stock, $10.83 after giving effect to the April 9, 1999 dividend, plus any declared but unpaid dividends. If the assets of WebMD are insufficient to permit the payment in full to the holders of the Series A preferred stock, then the assets shall be distributed ratably among the holders thereof. There are no other redemption or sinking fund provisions applicable to the Series A preferred stock. The Series A preferred stock is convertible into common stock without series designation at any time at the option of the holder. In addition, all outstanding shares of Series A preferred stock are to be converted into common stock without series designation at the election of the holders of a majority of the shares of Series A preferred stock then outstanding or upon the closing of the first underwritten public offering of equity securities of WebMD. Each share of Series A preferred stock is convertible into one share of common stock without series designation. The conversion rate and conversion price are subject to adjustment upon the occurrence of certain events, including subdivisions or combinations of common stock without series designation, dividends and distributions payable in any series of common stock or in other securities convertible into any series of stock without any payment therefore, in each case without a corresponding subdivision, combination, dividend or distribution with respect to the Series A preferred stock, and issuances of any series of common stock or any series or other securities convertible into any series of common stock at a price less than the conversion price then in effect. The Series A preferred stock has no preemptive rights or subscription rights. Series B preferred stock. The holders of Series B preferred stock are generally not entitled to vote, except that if WebMD does not consummate an initial public offering within one year of the issuance of any share of Series B preferred stock, the holders would be entitled to one vote per share, on an as if converted to common stock basis, on all matters to be voted upon by the stockholders. Also, without the vote of the holders of a majority of the shares of Series B preferred stock outstanding, or a greater percentage if required by Georgia law, WebMD may not: - amend its articles of incorporation or bylaws if such action would alter the preferences, rights, privileges or powers of, or restrictions for the benefit of, the holders of the Series B preferred stock - create any new series of capital stock or increase the authorized amount of any series of capital stock, unless such series ranks junior to or on a parity with the Series B preferred stock with respect to dividends and distribution of assets upon liquidation, dissolution or winding up - increase or decrease the authorized number of shares of Series B preferred stock - take any action that would alter the preferences, rights, privileges or powers of, or restrictions for the benefit of, the holders of the Series B preferred stock in such a manner as would require the vote of the holders of the Series B preferred stock as a voting group under Georgia law, or - redeem or otherwise acquire for value any shares of its capital stock, except pursuant to stock option and other employee stock plans or pursuant to the exercise of an existing right of first refusal. The holders of Series B preferred stock are not entitled to receive dividends, but if dividends are declared or paid with respect to any share of any series of common stock, an equal dividend must be declared or paid for each share of Series B preferred stock, on an as if converted to common stock basis. No dividends may be paid with respect to the Series B preferred stock until dividends have been paid with respect to the Series A preferred stock. In the event of a liquidation, dissolution or winding up of WebMD, the holder of each share of Series B preferred stock is entitled to receive, at their election, in exchange for and in redemption of such share, on a parity with the holders of any capital stock ranking on 187 198 a parity with the Series B preferred stock that portion of such funds equal to the number of shares of common stock into which such share of Series B preferred stock is convertible, divided by the sum of the aggregate number of shares of common stock into which all shares of Series B preferred stock are convertible, plus all other shares of common stock of all series outstanding, plus all other shares of capital stock of WebMD outstanding which are entitled to participate in the proceeds of a liquidation, dissolution or winding up. The amount payable with respect to each share of Series B preferred stock will be increased, if necessary, to equal the sum of the issue price of such share, as adjusted to give effect to any subdivisions or combinations of the common stock, plus any declared but unpaid dividends. No amounts may be paid to the holders of the Series B preferred stock until all amounts have been paid to the holders of the Series A preferred stock. If the assets distributable to the holders of the Series B preferred stock of WebMD are insufficient to permit the payment in full to the holders of the Series B preferred stock, then the assets shall be distributed ratably among them. There are no other redemption or sinking fund provisions applicable to the Series B preferred stock. The Series B preferred stock is convertible into common stock without series designation at any time after the anniversary of the date of issuance of such share at the option of the holder. In addition, all outstanding shares of Series B preferred stock are to be converted into common stock without series designation at the election of the holders of a majority of the shares of Series B preferred stock then outstanding or upon the closing of the first underwritten public offering of equity securities of WebMD. Each share of Series B preferred stock is convertible into one share of common stock without series designation. The conversion rate and conversion price are subject to adjustment upon the occurrence of certain events, including subdivisions or combinations of common stock without series designation, dividends and distributions payable in any series of common stock or in other securities convertible into any series of common stock without any payment therefore, in each case without a corresponding subdivision, combination, dividend or distribution with respect to the Series B preferred stock, and issuances of common stock of any series or other securities convertible into any series of common stock at a price less than the conversion price then in effect. The Series B preferred stock has no preemptive rights or subscription rights. Series C preferred stock. The rights of the holders of Series C preferred stock are identical to the rights of the holders of the Series B preferred stock. Series D preferred stock. The holders of Series D preferred stock are generally not entitled to vote, except that if WebMD does not consummate an initial public offering within one year of the issuance of any share of Series D preferred stock, or on such earlier date on which the holders of common stock of any series other than the common stock without series designation or the holders of the Series A preferred stock obtain such rights, the holder of such share would be entitled to one vote per share, on an as if converted to common stock basis, on all matters to be voted upon by the stockholders. Also, without the vote of the holders of a majority of the shares of Series D preferred stock outstanding, or a greater percentage if required by Georgia law, WebMD may not: - amend its articles of incorporation or bylaws if such action would alter the preferences, rights, privileges or powers of, or restrictions for the benefit of, the holders of the Series D preferred stock - create any new series of capital stock or increase the authorized amount of any series of capital stock, unless such series ranks junior to or on a parity with the Series D preferred stock with respect to dividends and distribution of assets upon liquidation, dissolution or winding up - increase or decrease the authorized number of shares of Series D preferred stock - take any action that would alter the preferences, rights, privileges or powers of, or restrictions for the benefit of, the holders of the Series D preferred stock in such a manner as would require the vote of the holders of the Series D preferred stock as a voting group under Georgia law, or - redeem or otherwise acquire for value any shares of its capital stock, except pursuant to stock option and other employee stock plans or pursuant to the exercise of an existing right of first refusal. 188 199 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 maybe paid with respect to the Series D preferred stock until dividends have been paid with respect to the Series A preferred stock. The holders of the Series D preferred stock are also entitled to a proportionate and corresponding distribution in the event of a distribution to holders of common stock of any series consisting of securities of another person, evidence of indebtedness issued by WebMD or another person or assets. In the event of a liquidation, dissolution or winding up of WebMD, the holder of each share of Series D preferred stock is entitled to receive, at their election, in exchange for and in redemption of that share, on a parity with the holders of any capital stock ranking on a parity with, and prior to any capital stock ranking junior to, the Series D preferred stock that portion of such funds equal to the number of shares of common stock into which such share of Series D preferred stock is convertible, divided by the number of shares of common stock outstanding and into which any securities convertible into common stock of any series are convertible. The amount payable to with respect to each share of Series D preferred stock will be increased, if necessary, to equal the sum of $100, adjusted to give effect to any subdivisions or combinations of the common stock, plus any declared but unpaid dividends. No amounts may be paid to the holders of the Series D preferred stock until all amounts have been paid to the holders of the Series A preferred stock. If the assets of WebMD are insufficient to permit the payment in full to the holders of the Series D preferred stock, then the assets distributable to the holders of the Series D preferred stock shall be distributed ratably among them. There are no other redemption or sinking fund provisions applicable to the Series D preferred stock. The Series D preferred stock is convertible into common stock without series designation at the option of the holder at any time after the earliest to occur of: - March 1, 2000 - any reclassification or change of the common stock without series designation - any merger or consolidation of WebMD in which WebMD is not the surviving entity - any sale of all or substantially all of the assets of WebMD. In addition, all outstanding shares of Series D preferred stock are to be converted into common stock without series designation at the election of the holders of a majority of the shares of Series D preferred stock then outstanding or upon the closing of the first underwritten public offering of equity securities of WebMD. Each share of Series D preferred stock is convertible into five shares of common stock without series designation. The conversion rate and conversion price are subject to adjustment upon the occurrence of certain events, including subdivisions or combinations of common stock without series designation, dividends and distributions payable in any series of common stock or in other securities convertible into any series of common stock without any payment therefore, in each case without a corresponding subdivision, combination, dividend or distribution with respect to the Series D preferred stock, and issuances of common stock of any series or other securities convertible into any series of common stock without series designation at a price less than the conversion price then in effect. The Series D preferred stock has no preemptive rights or subscription rights. Series E preferred stock. The holders of Series E preferred stock are generally not entitled to vote, except without the vote of the holders of a majority of the shares of Series E preferred stock outstanding, or a greater percentage if required by Georgia law, WebMD may not: - amend its articles of incorporation or bylaws if such action would alter the preferences, rights, privileges or powers of, or restrictions for the benefit of, the holders of the Series E preferred stock - create any new series of capital stock or increase the authorized amount of any series of capital stock, unless such series ranks junior to or on a parity with the Series E preferred stock with respect to dividends and distribution of assets upon liquidation, dissolution or winding up 189 200 - increase or decrease the authorized number of shares of Series E preferred stock - take any action that would alter the preferences, rights, privileges or powers of, or restrictions for the benefit of, the holders of the Series E preferred stock in such a manner as would require the vote of the holders of the Series E preferred stock as a voting group under Georgia law - redeem or otherwise acquire for value any shares of its capital stock, except pursuant to stock option and other employee stock plans or pursuant to the exercise of an existing right of first refusal - enter into certain transactions having the effect of a change of control of WebMD, or - create any new series of capital stock or increase the authorized amount of any series of capital stock, ranking junior to or on a parity with the Series E preferred stock with respect to dividends and distribution of assets upon liquidation, dissolution or winding up, if the holders thereof would beneficially own more shares of capital stock, on an as if converted to common stock basis, than Microsoft and its permitted transferees. The holders of Series E preferred stock are not entitled to receive dividends, but if dividends are declared or paid with respect to any series of common stock or any other securities entitled to participate in the earnings or assets of WebMD, other than the Series A preferred stock, an equal dividend must be declared or paid for each share of Series E preferred stock. No dividends maybe 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, that portion of such funds equal to the number of shares of common stock into which such share of Series E preferred stock is convertible, divided by the number of shares of common stock of all series outstanding and into which any securities convertible into common stock of any series are convertible. The amount payable to with respect to each share of Series E preferred stock will be increased, if necessary, to equal the sum of $541.70, adjusted to give effect to any subdivisions or combinations of the common stock without series designation, plus any declared but unpaid dividends. No amounts may be paid to the holders of the Series E preferred stock until all amounts have been paid to the holders of the Series A preferred stock. If the assets of WebMD are insufficient to permit the payment in full to the holders of the Series E preferred stock, then the assets shall be distributed ratably among them. There are no other redemption or sinking fund provisions applicable to the Series E preferred stock. The Series E preferred stock is convertible into common stock without series designation at the option of the holder at any time after January 15, 2000. In addition, after such time, all outstanding shares of Series E preferred stock are to be converted into common stock without series designation at the election of the holders of a majority of the shares of Series E preferred stock then outstanding or upon the closing of the first underwritten public offering of equity securities of WebMD. Each share of Series E preferred stock is convertible into ten shares of common stock without series designation. The conversion rate and conversion price are subject to adjustment upon the occurrence of certain events, including subdivisions or combinations of common stock without series designation, dividends and distributions payable in any series of common stock or in other securities convertible into any series of common stock without any payment therefore, in each case without a corresponding subdivision, combination, dividend or distribution with respect to the Series E preferred stock, and issuances of common stock of any series or other securities convertible into any series of common stock without series designation at a price less than the conversion price then in effect. In addition, if WebMD has not sold any shares of any series of common stock pursuant to an effective registration statement by January 15, 2000, the conversion price shall be adjusted to 71.72% of the conversion price then in effect, with the result of increasing the number of shares of common stock without series designation into which 190 201 each share of Series E preferred stock may be converted. The Series E preferred stock has no preemptive rights or subscription rights. Series F preferred stock. The rights of the holders of Series F preferred stock are identical to the rights of the holders of the Series E preferred stock except as set forth below. The holders of Series F preferred stock are not entitled to receive dividends, but if dividends are declared or paid with respect to any series of common stock, an equal dividend must be declared or paid for each share of Series F preferred stock. The holders of the Series F preferred stock are also entitled to a proportionate and corresponding distribution in the event of a distribution to holders of common stock of any series consisting of securities of another person, evidence of indebtedness issued by WebMD or another person or assets. In the event of a liquidation, dissolution or winding up of WebMD, the holder of each share of Series F preferred stock is entitled to receive, at their election, in exchange for and in redemption of such share, on a parity with the holders of any capital stock ranking on a parity with, and prior to any capital stock ranking junior to, the Series F preferred stock that portion of such funds equal to the number of shares of common stock without series designation into which such share of Series F preferred stock is convertible, divided by the number of shares of common stock of all series outstanding and into which any securities convertible into common stock of any series are convertible. No amounts may be paid to the holders of the Series F preferred stock until all amounts have been paid to the holders of the Series A preferred stock, the Series B preferred stock, the Series C preferred stock, the Series D preferred stock and the Series E preferred stock. If the assets of WebMD are insufficient to permit the payment in full to the holders of the Series F preferred stock, then the assets distributable to the holders of the Series F preferred stock shall be distributed ratably to them. There are no other redemption or sinking fund provisions applicable to the Series F preferred stock. 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 maybe converted. The Series F preferred stock has no preemptive rights or subscription rights. DESCRIPTION OF MEDCAST'S PREFERRED STOCK Medcast's Series A preferred stock, Series B preferred stock, and Series C preferred stock, are referred to in this section collectively as the "preferred stock," have the rights, preferences and privileges set forth below: Dividend rights. If Medcast declares a dividend on the common stock, the holders of preferred stock are entitled to receive pro rata cumulative cash dividends on each share of preferred stock as if the shares of preferred stock were converted into common stock immediately prior to the record date for payment of any cash dividend on the common stock. The holders of the Series A preferred stock and Series C preferred stock will receive dividends in preference to the holders of Series B preferred stock, common stock and any other securities to which the Series A preferred stock and Series C preferred stock rank prior. As long as the Series A preferred stock and Series C preferred stock remain outstanding, Medcast is not permitted to pay any dividends on the Series B preferred stock or the common stock unless Medcast first pays the full amount of the dividend required to be paid on the Series A preferred stock and Series C preferred stock, as described in the first sentence of this paragraph. Liquidation preference. In the event of any liquidation, dissolution or winding up of Medcast, the holders of the preferred stock will be entitled to receive certain liquidation preferences. A merger or consolidation of Medcast with or into any other entity, unless the stockholders of Medcast own more than 50% of the voting securities of the resulting entity, or sale of all or substantially all of Medcast's assets, will be deemed a liquidation unless the merger, consolidation or sale of assets constitutes a "qualified sale." A "qualified sale" with respect to the Series A preferred stock is a sale of Medcast in which the holders of shares of Series A preferred stock receive at least $23 for each share of Series A preferred stock 191 202 or for that number of shares of common stock into which each share of Series A preferred stock is convertible. A "qualified sale" with respect to the Series C preferred stock is a sale of Medcast in which the holders of shares of Series C preferred stock receive at least $65.59 for each of Series C preferred stock or for that number of shares of common stock into which each share of Series C preferred stock is convertible. If a sale of Medcast would not otherwise result in a qualified sale, Medcast may elect to adjust the conversion price for the Series A and Series C preferred stock as is necessary to cause the sale to constitute a qualified sale. To make this election, a majority of the board of directors of Medcast, other than the directors elected by the holders of shares of Series A preferred stock, must approve the election and submit the election to the holders of the common stock and Series B preferred stock for approval. The Medcast reorganization described in this proxy statement/prospectus will be a qualified sale with respect to the Series A preferred stock. The reorganization agreement provides that board of directors of Medcast will recommend, and the holders of a majority of the common stock and Series B preferred stock will approve, an election to cause the Medcast reorganization to constitute a qualified sale with respect to the Series C preferred stock. Voting rights. The preferred stock votes together with the common stock as a single class on all matters to be voted upon by the stockholders, except for those matters as to which the Series A preferred stock or the Series C preferred stock vote as a separate class or as described above regarding the qualified sale. Holders of preferred stock are entitled to cast that number of votes equal to the number of shares of common stock into which their preferred stock is then convertible. Medcast is not permitted to take any of the following actions without the prior written consent of the holders of a majority of the then outstanding Series A preferred stock voting as a separate class. The first, second, fourth, fifth and seventh bullet points below also require the prior written consent of the holders of a majority of the then outstanding Series C preferred stock voting as a separate class: - amend the certificate of incorporation or bylaws of Medcast in a manner that would affect the rights, preferences, powers or privileges of the Series A preferred stock, or the Series C preferred stock, as appropriate, other than an amendment that would either create common stock and Series B preferred stock or increase the number of authorized shares of common stock - enter into any voluntary liquidation, dissolution or winding up of Medcast - enter into any merger or consolidation of Medcast into or with any other corporation or entity, or a sale, assignment or transfer of all or substantially all of the assets of Medcast - apply any of the assets of Medcast to the redemption, retirement, purchase or other acquisition, directly or indirectly, of any shares of common stock and Series B preferred stock - create, authorize or issue any security ranking senior to the Series A preferred stock, or the Series C preferred stock, as appropriate, with respect to payment of dividends, distribution of assets or redemption - engage in any transaction with an Affiliate of Medcast, as defined in the certificate of designations for the Series A preferred stock - declare a dividend on any common stock and Series B preferred stock - incur debt greater than $5 million in any one transaction or series of related transactions - enter into a single transaction or series of related transactions involving the commitment of greater than $2 million The holders of Series A preferred stock and Series C preferred stock are contractually obligated to approve the Medcast reorganization pursuant to the stockholders agreement among Alan N. Greenberg, Medcast Networks, L.P., and the holders of preferred stock. Voluntary conversion rights. Each share of preferred stock is convertible at the option of the holder thereof at any time into shares of common stock at the then applicable conversion rate. The conversion rate for the preferred stock is one for one, representing a conversion price of $11.50 per share of common 192 203 stock for each share of Series A preferred stock, and $46.85 per share of common stock for each share of Series C preferred stock. Mandatory conversion. Each share of preferred stock will automatically convert into shares of common stock at the then applicable conversion rate if any of the following events occurs: - Medcast closes an underwritten public offering meeting specified price per share and gross proceeds thresholds with respect to each of the Series A preferred stock and Series C preferred stock - Medcast achieves an annual cash flow from operations in excess of $25 million as determined in accordance with generally accepted accounting principles and reflecting on Medcast's audited annual financial statements, or - approval of a qualified sale of Medcast as described above Anti-dilution provisions. The conversion price of each share of preferred stock is subject to adjustment for changes in Medcast's capitalization, stock splits, combinations, stock dividends and to prevent dilution in the event Medcast issues additional shares of common stock or common stock equivalents at a purchase price per share less than the applicable conversion price for each series of preferred stock. In addition, the conversion price of the Series A preferred stock will be reduced upon the exercise of options granted to Mark Dailey and Gordon Wyatt and certain warrants held by Tom Cohen and Hamilton Jordan. Additional adjustments. Sales of Medcast. In the event of a sale of Medcast which results in aggregate gross proceeds in excess of $250 million or in the case of an initial public offering which results in an implied valuation of Medcast's outstanding equity of at least $250 million, the Series A conversion rate will be reduced by certain multipliers depending on the aggregate gross proceeds or implied valuation, as applicable. Certain conversions of Series A preferred stock. If Medcast closes a public offering which is a mandatory conversion event for the Series A Preferred Stock but not the Series C preferred stock, then a holder of Series A preferred stock may delay mandatory conversion with respect to all of its Series A preferred stock until a mandatory conversion event occurs with respect to the Series C preferred stock, or the approval by Medcast's stockholders of a qualified sale with respect to the Series A preferred stock; provided that the terms of that holder's non-converted Series A preferred stock will be amended automatically to make certain adjustments to its liquidation preference and redemption amount Redemption. At any time on or after February 14, 2004, any holder of Series A preferred stock may elect to require Medcast to repurchase all or some of the shares of Series A preferred stock held by that holder at a redemption price equal to the greater of the sum of $11.50 plus a return of 8% per year, compounded annually, and the average of the fair market value of such shares determined as of two dates in the preceding two calendar quarters. At any time after April 6, 2005, any holder of Series C preferred stock may elect to require Medcast to repurchase all or some of the shares of Series C preferred stock held by that holder at $46.85 per share. The fair market value of the shares to be redeemed will be determined by an appraisal conducted by an appraiser agreed upon by Medcast and the holders of a majority of the shares to be redeemed. The determination of fair market value by such appraisal will not include any discount for minority interests. Medcast will pay the redemption prices either 100% in cash or, at Medcast's option, 33% in cash and 67% by issuing a two-year note bearing interest at the prime rate plus 2%, payable in two equal annual installments of principal plus accrued interest on each of the first and second anniversaries of the date of issuance of the note. The note will be secured by a first lien pledge on the shares of preferred stock redeemed. 193 204 INFORMATION REGARDING HEALTHEON HEALTHEON'S BUSINESS Healtheon believes a significant opportunity exists to leverage the power of the Internet to provide secure, open, universally accessible network services that connect participants and automate the flow of information and documents, or workflows, throughout the healthcare delivery process. Healtheon believes that such a solution has the potential to create significant improvements in the way that information is used by the healthcare system, enabling improved workflows, better decision-making and, ultimately, higher quality care at a lower cost. Healtheon's proposed mergers with WebMD, MEDE AMERICA and Medcast expand its ability to connect the various participants in the healthcare market. Medcast provides daily medical news and additional content that can be channeled to physicians and consumers, making the web site offering more attractive. MEDE AMERICA provides a targeted base of healthcare providers and a broad base of payer institutions, which makes these services more attractive to physicians and other providers who are seeking transactions and connectivity from a concentrated source instead of multiple sources. WebMD provides brand awareness, a marketing strategy and strategic relationships that will allow the combined companies to target those participants and make them aware of the broad service offerings. 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, 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 its Internet-based platform. Healtheon VHNs enable providers, payers, hospitals, consumers, laboratories and other healthcare industry participants to exchange information and conduct transactions with each other over the Internet. Healtheon VHNs allow for the secure exchange of information among disparate healthcare information systems and support a broad range of healthcare transactions, including: - enrollment in health plans - determination of eligibility of patients to receive care - referrals and authorizations to additional providers - ordering of laboratory and diagnostic tests and reporting of results - clinical data retrieval - processing of payment claims Healtheon provides its own applications on the Healtheon Platform and also enables third-party applications to operate on its platform. The Healtheon VHN 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 194 205 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. High degree of security. To enable the use of the Internet for transmission of highly sensitive and confidential data, Healtheon utilizes advanced technology designed to ensure a high degree of security. This technology includes strict authentication requirements, sophisticated data encryption techniques, system-wide network security monitoring and tightly controlled physical security systems. These safeguards are designed to provide a secure environment for the exchange of confidential patient and customer data. The Healtheon Platform is designed to enable compliance with proposed government standards under the Health Insurance Portability and Accountability Act of 1996, which mandate the acceptance by payers of electronic transactions as well as the use of standard transactions, standard identifiers and security features by the year 2000. Increased accuracy and timeliness of information. The Healtheon VHN solution is designed to increase information flows among all healthcare participants, which ultimately results in more timely and appropriate treatments. For example, on-line access to accurate, up-to-date eligibility information facilitates patients' access to care on a more timely basis, reduces frustration and costs and increases the likelihood that providers will be compensated for their services in a timely manner. Similarly, using Healtheon's VHN solution, consumers will have greater access to their healthcare information, thereby enabling them to become more active participants in the provision of their own healthcare. Healtheon's services Healtheon offers a suite of healthcare transaction and information services delivered over the Internet or over private intranets and other networks. These network-based services are provided by software applications operating on or interfacing with the Healtheon platform, which is designed to provide connectivity across the healthcare industry and enable a broad array of secure, mission-critical healthcare transactions. Healtheon offers its network-based transaction and information services on a per transaction or subscription fee basis. Healtheon believes that this pricing model reduces the initial investment required for physicians, small organizations and individuals to obtain the benefits of high-end information technology systems. In addition to its platform and Internet-based applications, Healtheon provides comprehensive consulting and implementation services to enable its customers to take full advantage of the capabilities of Healtheon's platform. Healtheon provides a broad range of applications and services that support key healthcare transactions. The components of these application suites can be combined and modified, or supplemented with new application components, to provide custom solutions for large, complex, multi-entity business enterprises. These applications and services are typically sold on a transaction or subscription fee basis, which varies across customers and market segments. The following chart summarizes the key transactions supported by Healtheon, organized by business function. 195 206 HEALTHEON'S SET OF SERVICES
- ------------------------------------------------------------------------------------------------------------------------------- CUSTOMERS/ NAME OF BUSINESS FUNCTION USERS TRANSACTIONS SUPPORTED HEALTHEON SERVICE - ------------------------------------------------------------------------------------------------------------------------------- Membership services Consumers Payers - Enrollment in health plans Benefit - Comparison/selection of multiple Central health plans - Provider search, selection, change - Benefits inquiries under enrolled plans - Messaging between consumers, payers and employers - ------------------------------------------------------------------------------------------------------------------------------- Healthcare administration and Payers Providers - Eligibility for care determination/ Healtheon financial management authorization Practice - Approval of referrals to other Healtheon providers ProviderWorks* - Claims submission and status ProviderLink - Confirmation of payment to providers - Provider directories* - Provider files-management* - Information reporting to providers - Claims repricing* - ------------------------------------------------------------------------------------------------------------------------------- Clinical information services Providers Suppliers - Patient identification and encounter Healtheon Dx history SCAN+ - Patient registration GMPI+ - Lab test orders and results - Text document/transcription distribution - ------------------------------------------------------------------------------------------------------------------------------- Online consumer information Consumers - Access to licensed dictionaries and Healtheon encyclopedias, medical news and other Consumer reference sources Portal - Customized wellness assessments - Food label and nutritional library - Secure communications and transactions with providers and health plans* - -------------------------------------------------------------------------------------------------------------------------------
* Under development + Not Internet-enabled The primary applications and services currently available or under development are described in greater detail below. Certain of these applications were acquired by Healtheon and are not yet Internet-enabled; Healtheon is currently redeveloping or replacing these applications to integrate them with the Healtheon Platform. Membership services. Healtheon provides membership services through its Benefit Central service. The Benefit Central service utilizes internally developed applications operating on the Healtheon platform. The service provides Internet-based connectivity between healthcare payers and consumers and supports transactions such as selection of health plans and providers, enrollment for benefits, benefit inquiries and messaging between consumers, payers and employers. Benefit Central users also receive Healtheon's Health Risk Appraisal service, which provides consumer education in wellness and health risks. Healtheon has contracted to deploy its Benefit Central service directly and through aggregators to 50 companies, covering approximately 190,000 members. Healthcare administration and financial management. Healtheon supports or will support healthcare administration and financial management transactions through its ProviderLink, Healtheon Practice and Healtheon ProviderWorks services. ProviderLink was licensed by Healtheon's ActaMed subsidiary from 196 207 UnitedHealth Group. Healtheon has developed a software interface between the Healtheon platform and ProviderLink to integrate ProviderLink with Healtheon's network-based services. ProviderLink is used by providers to support transactions and workflows with payers. ProviderLink supports transactions such as eligibility determinations, claims submission and status, and confirmation of payment to providers. For example, physicians use ProviderLink to determine eligibility of patients to receive care and to submit health claims to payers. ProviderLink is currently deployed in over 4,850 active provider sites in more than 20 major markets, and processes over 3.7 million transactions per month. This product is currently generating significant transaction volumes and revenues. 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 reporting on directories of providers. Providers using the Healtheon Practice service receive real-time patient eligibility verifications and referral authorizations over the Healtheon VHN. Healtheon is developing Healtheon ProviderWorks, a new Internet-based payer service, with support from Beech Street Corporation, one of Healtheon's strategic partners. Healtheon ProviderWorks is designed to support the creation and management of networks of providers. The service is designed to manage large, complex provider directories and files, manage provider relationships and contracts and perform certain claim processing functions, such as claim repricing. For a more complete description, see the section entitled "-- Strategic relationships" on page 199. Clinical information services. Healtheon's SCAN product supports ordering and distribution of clinical tests and test results between SmithKline Beecham Clinical Laboratories, Inc., or SmithKline Labs, and providers using SmithKline Labs' services. ActaMed acquired the SCAN application from SmithKline Labs. SCAN is deployed on approximately 5,100 installed workstations serving physicians throughout the United States. SCAN is not Internet-enabled; however, Healtheon is developing a new Internet-enabled application called Healtheon Dx, that will combine the functionality of SCAN and ProviderLink. For a more complete description, see the section entitled "-- Strategic Relationships" on page 199. This product is currently generating significant transaction volumes and revenues. Healtheon's Global Master Person Index, or GMPI, enables the unique identification of a patient and reconciliation of multiple records for the same patient contained on diverse information systems. GMPI also supports access to patient data and registration information as well as clinical records. GMPI is an application that was developed by ActaMed and that is not yet compatible for use over the Internet. Healtheon intends to adapt and implement GMPI functionality on the Healtheon platform. Online consumer information. Healtheon's recently introduced consumer portal provides individual consumers with an authoritative source for healthcare information and is intended to extend Healtheon's transaction services directly to individual consumers. The Consumer Portal provides access to medical dictionaries and encyclopedias, medical news, a food label and nutritional library and customized wellness assessments. A majority of this information is provided by third parties. These sources include: Miller-Keane Encyclopedia & Dictionary of Medicine, Nursing & Allied Health; Dorland's Illustrated Medical Dictionary; Citizen 1's CitiLine index of authoritative medical information; Adam.com's Hypertext Medical Encyclopedia; and links to medical headlines via the New York Times Syndicate. Healtheon's business partners can integrate the consumer portal into their own sites to provide their consumers with a single point of entry into the healthcare community. Healtheon expects to expand its Consumer Portal to support secure communications and transactions between consumers and their providers and health plans. Other services. Healtheon also provides professional services to its customers to enable them to define, develop and implement network-based information systems that leverage the capabilities of the Healtheon platform. These services are typically sold on a fixed fee or time and materials basis. These services include consulting on information systems strategy related to the use of the Internet and secure 197 208 networks, including design of information systems functional specifications, mapping and redesign of business processes and identification of enterprise transformation and training requirements to take advantage of increased connectivity. Healtheon also provides custom development of applications and enables the deployment of Healtheon services and integration with legacy information technology systems. In addition, Healtheon provides management services of its customers' networks on a temporary or transitional basis. Healtheon believes that its success is partially dependent upon its ability to introduce new applications in several healthcare markets in a relatively short period of time. Healtheon is currently generating significant revenues from these services. Customers and markets Healtheon's target customers include providers, payers, suppliers and consumers. Because Healtheon believes that the value and benefit of Healtheon's services are directly related to both the number of participants using Healtheon VHNs and the breadth of functionality supported, it intends initially to focus on selected regions where it can quickly gain significant market acceptance. Healtheon is presently targeting a number of regional markets across the United States. Providers. Healtheon's target provider customers include aggregators of individual physicians such as large medical groups, independent practice associations, physician practice management companies and other large, organized physician entities. In particular, Healtheon seeks to form strategic relationships with providers with a high degree of involvement in managed care, especially providers that are involved in activities such as capitation, which require them to bear some level of insurance risk for each enrolled patient. Healtheon's services for these providers include benefit eligibility determinations, referrals and authorizations, claims processing, ordering of clinical tests and delivery of results and maintenance of patient histories. Healtheon also targets as potential customers large integrated delivery networks that combine multiple healthcare facilities, such as hospitals, outpatient facilities, labs and diagnostic centers, and affiliate with physicians and physician groups to coordinate care, contract for managed care lives and manage healthcare resource utilization. Healtheon offers these customers the following services: patient identification, patient registration, ordering of clinical tests and delivery of results and distribution of text documents across the network. Healtheon's current customers in this category include Brown & Toland, Baylor Health Care System, Hill Physician Group, Promina Health System and the Greater Dayton Area Hospital Association. Payers. Healtheon's target payer customers include managed care organizations, indemnity insurers, third-party administrators and federal and state governmental agencies. Healtheon targets managed care organization customers, such as mid-sized to large HMOs and preferred provider organizations, also referred to as 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 198 209 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. Some 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 mergers will own approximately 6.3% of Healtheon/WebMD'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 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 mergers will own approximately 4.4% of Healtheon/WebMD'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 199 210 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. 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 identification and has one or more roles that define the types of 200 211 functionality and data access available. All Healtheon's applications record logging information, creating an audit trail, and protect privacy by encrypting sensitive data. Healtheon also uses a multi-layered firewall complex to secure the Healtheon network infrastructure. In addition, network vulnerability scanners are used on a regular basis to actively monitor security status. Healtheon's physical security systems at its Santa Clara facility consist of comprehensive physical controls and multi-layered internal network and information system safeguards. The physical controls include using fingerprint authentication, dual-level access points, and multiple alarm systems. Scalability. The Healtheon platform utilizes CORBA-based middleware, which enables a highly scalable distributed applications infrastructure. The platform enables an application to run simultaneously on multiple host systems, allowing for large numbers of simultaneous users while at the same time optimizing network performance and resource utilization. In addition, the Healtheon platform has been designed to transparently deploy new services and hardware while existing applications remain operational. Finally, the Healtheon platform reduces communications bottlenecks resulting from limited numbers of connections to database servers through intelligent management of database connections and object caches that reduce the need to query database servers for frequently used data. Rapid application development and integration. The Healtheon platform is designed to enable rapid application development and integration. The platform supports object-oriented programming, which accelerates the design process through object reuse. Healtheon maintains a comprehensive set of object libraries, called core services, that allows developers to build complex applications rapidly. The platform is also designed for deploying applications developed by third parties with relative ease. The platform interfaces with legacy systems by accepting industry standard ANSI X.12 and HL7 electronic data interchange formats. High availability. The Healtheon platform architecture is designed to ensure high availability through the replication of applications and other software services, failure detection and automatic restart of failed services and applications. Running multiple copies of a service or application removes any single point of failure within the system and ensures that at least some copies of a service will be available while others may have failed. In addition, the servers that host Healtheon applications are duplicated to provide redundancy. Healtheon uses duplicate fiber optic cable connections to Sprint and WorldCom to ensure highly-available access to the Internet. Healtheon's platform uses a mix of fault-tolerant hardware, redundant equipment and back-up power systems. Manageability. The Healtheon management framework provides a single image view of all Healtheon services, thus simplifying administration in a distributed environment. Healtheon services can be managed from a web-based management station. The Healtheon management and administration framework monitors service performance and generates event notifications of system abnormalities. Disaster recovery plans. Although Healtheon believes its operations facilities are highly resistant to systems failure and sabotage, it has developed, and is in the process of implementing, a disaster recovery and contingency operations plan. In addition, all of Healtheon's services are linked to advanced storage systems that provide data protection through techniques such as replication. Healtheon also maintains on-site backup power systems. 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 201 212 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 June 30, 1999, Healtheon had 275 employees and independent contractors in customer support functions, including network services, provider services and customer support services. Sales and marketing Healtheon's direct sales force targets significant potential customers in each market segment by region. In certain instances, Healtheon's direct sales force works with brokers, value added resellers and systems integrators to deliver complete solutions for major customers. In addition, senior management plays an active role in the sales process by cultivating industry contacts. Healtheon markets its applications 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 June 30, 1999, Healtheon employed 140 sales executives, account managers, direct sales representatives and sales support personnel. Development and engineering Healtheon believes that its future success will depend in large part on its ability to continue to maintain and enhance its platform, applications and services. To this end, Healtheon leverages the modular nature of its platform architecture to enable it to develop new applications and services rapidly. Healtheon has developed applications and services both independently and through acquisitions. Healtheon will continue to work closely with other companies in its applications development efforts. Healtheon has several significant projects currently in development. These include the continued enhancement of the platform architecture, development of new services such as Healtheon Practice, Healtheon ProviderWorks and Healtheon Dx, and integration of ActaMed's platform, network and associated services. As of June 30, 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 six months ended June 30, 1999 and $3.7 million in the six months ended June 30, 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 202 213 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. Employees As of June 30, 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 Healtheon's common stock and, therefore, no quoted market prices for our common stock are available for the years ended December 31, 1998 and 1997. The following table lists quarterly information on the price range of 203 214 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:
HIGH LOW ------- ------ Fiscal Year Ended December 31, 1999: First Quarter............................................. $ 49.38 $21.75 Second Quarter............................................ 105.00 39.94 Third Quarter (through September 29, 1999)................ 77.63 30.06
On , 1999, there were holders of record of Healtheon's common stock. Because many of such shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. The market price of Healtheon's common stock has fluctuated since the date of its initial public offering and is likely to fluctuate in the future. Factors that may have a significant effect on the market price of our common stock include: - actual or anticipated quarterly variations in our operating results - changes in expectations of future financial performance or changes in estimates of securities analysts - announcements of technological innovations - announcements relating to strategic relationships - customer relationship developments - conditions affecting the Internet or healthcare industries, in general The stock market in general, and the market for technology and Internet-related companies in particular, has experienced extreme volatility that often has been unrelated to the operating performance of particular companies. These broad market and industry fluctuations many adversely affect the trading price of Healtheon's common stock, regardless of Healtheon's actual operating performance. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted. If this were to happen to Healtheon, litigation would be expensive and would divert management's attention. Healtheon has never declared or paid any cash dividends on our common stock or other securities and does not anticipate paying cash dividends in the foreseeable future. 204 215 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 six-month periods ended June 30, 1999 and 1998 and the balance sheet data as of June 30, 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.
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, -------------------------------------------------- ------------------- 1998 1997 1996 1995 1994 1999 1998 -------- -------- -------- ------- ------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenue.................................. $ 48,838 $ 13,390 $ 11,013 $ 2,175 $ 190 $ 40,253 $ 20,653 Loss from operations..................... (53,948) (25,423) (16,541) (3,936) (3,118) (37,316) (21,827) Net loss applicable to common stockholders........................... $(54,048) $(28,005) $(18,606) $(4,458) $(3,426) $(36,134) $(22,331) Basic and diluted net loss per common share.................................. $ (1.54) $ (3.88) $ (2.83) $ (0.85) $ (0.55) $ (1.27) Weighted-average shares outstanding used in computing basic and diluted net loss per common share....................... 34,987 7,223 6,583 5,246 66,286 17,632
AS OF DECEMBER 31, AS OF ---------------------------------------------------- JUNE 30, 1998 1997 1996 1995 1994 1999 ------- ------- -------- ------- ------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments............................. $36,817 $21,804 $ 7,539 $ 9,386 $ 4,186 $ 47,353 Working capital........................... 27,934 14,790 2,505 7,244 4,226 37,796 Total assets.............................. 79,940 53,747 34,407 10,801 5,379 108,028 Long-term obligations, net of current portion................................. 2,984 932 1,210 -- 63 2,609 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) 81,773
205 216 HEALTHEON MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Healtheon is pioneering the use of the Internet to simplify workflows, decrease costs and improve the quality of patient care throughout the healthcare industry. Healtheon's Virtual Healthcare Network, or VHN, solution enables the secure exchange of information among a wide array of disparate healthcare information systems and provides a framework for a broad range of healthcare transactions. Healtheon was incorporated in December 1995, commenced operations in January 1996 and until late 1997 had not recognized substantial revenue and was therefore considered to be in the development stage. In May 1998, Healtheon acquired ActaMed, which was incorporated in 1992. The acquisition of ActaMed was accounted for as a pooling of interests. The financial information presented reflects the combined financial position and results of operations of Healtheon and ActaMed for all dates and periods presented. Healtheon's revenue to date has been derived primarily from proprietary non-Internet network services offered by ActaMed and from management and operation of customers' information technology, or IT, infrastructure. In March 1996, ActaMed acquired EDI Services, or EDI, a wholly-owned subsidiary of UnitedHealth Group, in a transaction accounted for as a purchase. Accordingly, the operations of EDI are included in Healtheon's consolidated statements of operations beginning in March 1996. In August 1998, Healtheon acquired substantially all of the assets of Metis, LLC, a leading consulting, design and development firm focused on Internet and intranet-based solutions for medical centers and integrated delivery networks. In connection with this acquisition, Healtheon issued 1,600,000 shares of its common stock, of which 200,000 shares are held in escrow to secure indemnification obligations. Of the total shares issued, 476,548 shares were issued to certain employees under restricted stock purchase agreements subject to a lapsing right of repurchase, at Healtheon's option, over the agreements' respective vesting periods. The Metis acquisition was treated as a tax-free reorganization and was accounted for as a purchase. Because Healtheon has recently begun operations, it is difficult to evaluate its business and prospects. Healtheon's revenue and income potential is unproven and its business model is still emerging. Healtheon's historical financial information is of limited value in projecting its future operating results because of its limited operating history as a combined organization and the emerging nature of its markets. Healtheon began operations in January 1996 and until recently had not earned significant revenue. Healtheon has lost money since it began operations and, as of June 30, 1999, it had an accumulated deficit of $139.6 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 six months of 1999, and together accounted for approximately 81% of Healtheon's total revenue in 1998. Healtheon expects that a small number of customers will continue to account for a substantial portion of its revenue for the foreseeable future. The loss of one or more of Healtheon's significant customers, or a decline in the volume of business generated by these customers, could have a material adverse effect on Healtheon's business, financial condition and results of operations. Cost of operations consist of costs related to services Healtheon provides to customers and costs associated with the operation and maintenance of its networks. These costs include salaries and related expenses for consulting and development personnel, network operations personnel and customer support personnel; telecommunication costs; maintenance of network equipment; amortization of certain intangible assets; a portion of facilities expenses; and leased personnel and facilities costs. Given Healtheon's limited operating history, changes in revenue mix, limited history of Internet-based network services, recent investments in personnel, amortization of infrastructure investments and evolving business model, Healtheon believes that analysis of historical cost of operations as a percentage of revenue is not 206 217 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. 207 218 RESULTS OF OPERATIONS The following table sets forth certain data expressed as a percentage of total revenue for the periods indicated.
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, -------------------------- ---------------- 1998 1997 1996 1999 1998 ------ ------ ------ ------ ------ Revenue: Services.................................... 55.5% 32.1% 16.3% 45.9% 52.7% Services to related parties................. 42.9 54.6 38.5 50.3 45.4 Software licenses........................... 1.6 13.3 45.2 3.8 1.9 ------ ------ ------ ------ ------ 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 39.6 50.6 Cost of services to related parties......... 33.0 48.8 44.7 43.5 30.9 Cost of software licenses................... -- -- 1.5 -- -- ------ ------ ------ ------ ------ Total cost of operations............ 88.1 78.0 60.6 83.1 81.5 Development and engineering................... 38.9 91.6 75.7 35.4 38.7 Sales, general and administrative............. 47.3 75.4 76.3 49.2 56.3 Depreciation and amortization................. 32.9 44.8 37.7 25.1 29.1 Write-off of offering costs................... 3.3 -- -- -- -- ------ ------ ------ ------ ------ Total operating costs and expenses.......................... 210.5 289.9 250.3 192.8 205.6 ------ ------ ------ ------ ------ Loss from operations........................ (110.5) (189.9) (150.3) (92.8) (105.6) Interest income............................... 2.6 4.6 4.9 3.6 3.1 Interest expense.............................. (1.0) (2.4) (0.5) (0.6) (1.2) Dividends on ActaMed's convertible redeemable preferred stock............................. (1.8) (21.4) (23.1) -- (4.3) ------ ------ ------ ------ ------ Net loss.................................... (110.7)% (209.1)% (169.0)% (89.8)% (108.0)% ====== ====== ====== ====== ======
Six months ended June 30, 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 June 30, 1999, Healtheon had deferred revenue of approximately $1.2 million. Total revenue increased to $40.3 million in the six months ended June 30, 1999 from $20.7 million in the six months ended June 30, 1998. Revenue from the service agreements with UnitedHealth and SmithKline Labs increased to $20.3 million in the six months ended June 30, 1999, compared to $9.4 million in the six months ended June 30, 1998. Increased transaction-based services under the 208 219 UnitedHealth Group agreement, and additional revenue from the January 1999 services agreement with SmithKline Labs, which was phased in during the first quarter of 1999 contributed to the significant increases in revenue. 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. In December 1996, through a subsidiary, Healtheon entered into an agreement to license its newly granted patent to International Business Machines Corporation, or IBM. 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, Healtheon issued IBM a five-year warrant to purchase 282,522 shares of its common stock at a price of $7.97 per share. Because of the extended payment terms and the subsidiary's contentious relationship with IBM, we concluded collection was not assured and, accordingly, we were recognizing this revenue as the proceeds were collected. In January 1999, Healtheon announced an enhanced relationship with IBM, where both parties agreed to jointly market and sell each company's products to their healthcare customers. Since then, Healtheon has been in further discussions with IBM on additional strategic opportunities, and as a part of these discussions, in June 1999 Healtheon has amended the agreement with IBM such that the remaining payment stream was discounted by 10.5% ($149,000) in exchange for immediate payment of the revised balance due, resulting in the recognition of the remaining deferred revenue. As a result, Healtheon recognized revenue of $1.3 million and $1.5 million in the three and six months ended June 30, 1999 and $0.2 million and $0.4 million in the three and six months ended June 30, 1998. We do not currently anticipate that we will earn a material amount of revenue from software licenses in the foreseeable future. Cost of operations. Cost of operations increased to $33.4 million in the six months ended June 30, 1999 from $16.8 million in the six months ended June 30, 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 $14.3 million in the six months ended June 30, 1999 and $8.0 million in the six months ended June 30, 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 $19.8 million in the six months ended June 30, 1999 from $11.6 million in the six months ended June 30, 1998. The amortization of deferred stock compensation expense was $4.2 million in the six months ended June 30, 1999, compared to $1.1 million in the comparable period of the prior year. The remainder of the increase resulted from salaries and related costs of added sales and administrative 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 six months 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 June 30, 1999 was $8.5 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 $3.4 million during the remainder of 1999, $3.3 million in 2000, $1.4 million in 2001 and $.4 million for 2002. 209 220 Depreciation and amortization. Depreciation and amortization was $10.1 million in the six months ended June 30, 1999 and $6.0 million in the six months ended June 30, 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 two 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 $1.4 million in the first six months of 1999 and $0.6 million in the first six months 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. 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 $0.9 million were charged against income in the consolidated statements of operations in the first quarter of 1998. None of the dividends were paid, and, in conjunction with approving the acquisition of ActaMed by Healtheon, ActaMed's preferred stockholders waived their right to receive the dividends, which totaled $7.5 million at the time of the acquisition. The ActaMed preferred stockholders received an aggregate of 17.3 million shares of Healtheon common stock in exchange for their ActaMed convertible redeemable preferred stock. Years ended December 31, 1998, 1997 and 1996 Revenue. At December 31, 1998, Healtheon had deferred revenue of approximately $1.9 million. Total revenue increased to $48.8 million in 1998 from $13.4 million in 1997 and $11.0 million in 1996. Revenue from services was $27.1 million in 1998, $4.3 million in 1997 and $1.8 million in 1996. The significant increase in services revenue in these periods was principally due to new contracts with Brown & Toland Physician Services Organization, or Brown & Toland, and Beech Street Corporation, or Beech Street, for the management and operation of their information technology, or IT, infrastructure beginning in late 1997. To provide these services, Healtheon utilizes its own personnel, outside contractors and 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. 210 221 ActaMed entered into a national marketing and licensing agreement, or the Agreement, with International Business Machines Corporation in 1995 that granted IBM a nonexclusive, nontransferable right to market ActaMed's software and services for a total of $6.3 million. Under the agreement, Healtheon recognized software license revenue of approximately $1.2 million in 1997 and approximately $3.4 million in 1996, upon delivery of the software. All revenue under the agreement had been recognized by the end of 1997. In December 1996, ActaMed entered into a new agreement, or the license, to license its newly granted patent to IBM. As part of the license, IBM agreed to pay $4.8 million over a four-year period, $1.0 million in December 1996 and the remaining balance in 48 equal monthly installments commencing in January 1997. Additionally, in conjunction with the license, IBM was issued a five-year warrant to purchase 282,522 shares of common stock at a price of $7.97 per share. Because of the extended payment terms and ActaMed's contentious relationship with IBM, ActaMed concluded that the license fee was not assured of collection and, accordingly, Healtheon is recognizing this revenue as the proceeds are collected. Healtheon recognized revenue from the License of $.8 million in 1998, $.8 million in 1997 and $1.0 million in 1996. Deferred revenue at December 31, 1998 included $1.6 million related to the license. Healtheon does not expect that it will earn a material amount of revenue from software licenses in the foreseeable future. Cost of operations. Total cost of operations was $43.0 million in 1998, $10.4 million in 1997 and $6.7 million in 1996. Cost of services increased to $26.9 million in 1998 from $3.9 million in 1997 and $1.6 million in 1996. The increases included costs of leased personnel and facilities utilized to provide IT services totaling $11.8 million in 1998 and $1.9 million in 1997 as well as costs related to development services of $6.5 million in 1998 and $.2 million in 1997. The remainder of the increase resulted from increased personnel and expansion of Healtheon's network infrastructure to support current customers and future business activities. Healtheon believes that its margin on services revenue will continue to be negative until revenue from other than IT and development services increases. Cost of services to related parties was $16.1 million in 1998, $6.5 million in 1997 and $4.9 million in 1996. The increase in 1998 over 1997 was due to higher personnel and network operation costs required to support increased transactions from Healtheon's SCAN services under the services agreement with SmithKline Labs, and the increase in 1997 over 1996 was due to increased transaction volume under the United Health Group agreement. Development and engineering. Development and engineering expense was $19.0 million in 1998, $12.3 million in 1997 and $8.3 million in 1996. The increase was the result of a significant increase in the number of engineers engaged in the development of Healtheon's applications and services. Sales, general and administrative. Sales, general and administrative expense increased to $23.1 million in 1998 from $10.1 million in 1997 and $8.4 million in 1996. The amortization of deferred stock compensation expense accounted for $2.8 million of the increase in 1998 and $.6 million of the increase in 1997. In addition, 1998 includes $.8 million of costs related to the merger with ActaMed. Substantially all of the remainder of the increase in both 1998 and 1997 resulted from salaries and related support costs for added sales personnel and executive management. Deferred stock compensation represents the difference between the purchase or exercise price of certain restricted stock and stock option grants and the deemed fair value of Healtheon's common stock at the time of those grants. Healtheon recorded deferred stock compensation of $8.2 million in 1998 and $2.7 million in 1997. The deferred stock compensation balance at December 31, 1998 was $6.9 million. From January 1, 1999 through February 10, 1999, the date of Healtheon's initial public offering, Healtheon granted additional stock options for which it recorded approximately $6.3 million of additional deferred stock compensation. The deferred stock compensation balance will be amortized based on a graded vesting method over the vesting period, generally four years, of the option or restricted stock grants. Amortization is estimated to total $7.8 million for 1999, $3.5 million for 2000, $1.5 million for 2001 and $.4 million for 2002. 211 222 Depreciation and amortization. Depreciation and amortization of intangible assets was $16.1 million in 1998, $6.0 million in 1997 and $4.2 million in 1996. The intangible assets include those arising from the acquisitions of EDI from UnitedHealth Group in March 1996 and of Metis in August 1998 as well as certain intangible assets related to the technology rights acquired related to the SCAN services agreement with SmithKline Labs in December 1997. Property and equipment is being depreciated over the estimated useful life of the related assets, generally three to seven years, while the intangible assets are generally being amortized over a three-year life. Although the services and license agreement entered into with UnitedHealth Group in connection with the acquisition of EDI has a five year term, Healtheon determined that a three year amortization period was appropriate for the EDI-related assets due to the price renegotiation required by such agreement, the probability that the purchased technology and software would be replaced within three years and the uncertain profitability of the agreement after the price renegotiation. Similarly, although the services agreement entered into with SmithKline Labs in connection with the acquisition of the SCAN-related assets has a five year term, Healtheon determined that a three year amortization period was appropriate for the SCAN related assets due to the price renegotiation required by such agreement, the probability that the purchased technology and software would be replaced within three years and the uncertain profitability of the agreement after the price renegotiation. There can be no assurance that Healtheon's services to UnitedHealth Group and SmithKline Labs will be profitable after the price renegotiations required by the agreements, particularly given the 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 Healtheon's 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 $0.8 million in 1998, $0.3 million in 1997 and $0.5 million in 1996. The 1998 increase was due to higher average cash balances resulting from the proceeds of Healtheon's $25.0 million preferred stock financing in October 1997 and its $46.1 million preferred stock financing in October 1998. Healtheon expects that net interest income may increase in the near term as the proceeds of its initial public offering in February 1999 are invested. Dividends on ActaMed's convertible redeemable preferred stock. Because dividends on ActaMed's convertible redeemable preferred stock were cumulative whether declared or not, ActaMed accrued the dividends on a quarterly basis. Dividends of $.9 million in 1998, $2.9 million in 1997 and $2.5 million in 1996 were charged against income in the consolidated statements of operations. Income taxes. At December 31, 1998, Healtheon had net operating loss carryforwards for federal income tax purposes of approximately $76.5 million and federal tax credits of approximately $1.8 million, both expiring from 2009 through 2018. Of these net operating losses, approximately $19.9 million relates to a consolidated subsidiary. This loss carryforward is available only to offset future taxable income of that subsidiary. Because of the "change of ownership" provisions of the Internal Revenue Code, a portion of Healtheon's net operating loss carryforwards and tax credit carryforwards may be subject to an annual limitation regarding their utilization against taxable income in future periods. Thus, a portion of these carryforwards may expire before becoming available to reduce future income tax liabilities. LIQUIDITY AND CAPITAL RESOURCES In February 1999, Healtheon completed the initial public offering of its common stock and realized net proceeds from the offering of approximately $41.4 million. Prior to the offering, Healtheon had funded its operations since inception primarily through the private placement of equity securities, through which it had raised net proceeds of $106.2 million through December 31, 1998. Healtheon had also financed its 212 223 operations through equipment lease financing and bank borrowings. As of June 30, 1999, Healtheon had outstanding equipment lease liabilities of $4.8 million and notes payable of $0.9 million. As of June 30, 1999, Healtheon had approximately $47.4 million of cash, cash equivalents and short-term investments. Cash used in operating activities was $24.5 million in the first six months of 1999 and $9.1 million in the first six months of 1998. The cash used during these periods was primarily attributable to net losses. These losses were principally related to increased expenses as described more fully above in the section entitled "-- Results of operations" on page 207. 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 $7.3 million in the first six months of 1999 and $2.7 million in the first six months of 1998. Due to cash in excess of the amounts needed for operations for the next 90 days, Healtheon will, from time to time, purchase short-term investments. In the first six months of 1999, Healtheon used $16.4 million of cash to purchase short-term investments and realized $22.7 million in cash from maturities of its short-term investments. In the first six months of 1998, Healtheon used $3.5 million of cash to purchase short-term investments and realized $7.1 million in cash from maturities of its short-term investments. Investments in property and equipment, excluding equipment acquired under capital leases, and internally developed software were $6.3 million in 1998, $2.8 million in 1997 and $2.0 million in 1996. In 1997, Healtheon used $5.3 million of cash to purchase short-term investments. In 1998, Healtheon purchased an additional $22.5 million of short-term investments and realized $10.4 million in cash from maturities of its short-term investments. Healtheon had no purchases or maturities of short-term investments in 1996. We invest our excess cash in short-term investments and will continue to do so in the future. Healtheon is not assured of having excess cash balances in the future, so purchases of short-term investments cannot be assured. Cash provided by financing activities was $41.5 million in the first six months 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, partially offset by payments totaling $1.4 million on capital lease obligations and line of credit borrowings. Financing activities provided $2.8 million of cash in the first six months of 1998, resulting primarily from proceeds from the issuance of preferred and common stock, offset in part by payments on 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 June 30, 1999, Healtheon did not have any material commitments for capital expenditures. Healtheon's principal commitments at June 30, 1999 consisted of obligations under operating and capital leases and notes payable. 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 through the end of the year. However, Healtheon may need to raise additional funds 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. However, with the completion of the merger with WebMD, Healtheon will have, on a combined basis, sufficient cash resources to meet its needs for at least the next twelve months and for some extended time beyond that. 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. In the event the WebMD merger is not completed, 213 224 Healtheon may be required to raise additional funds in the first quarter of 2000. There can be no assurance that additional funding, if needed, will be available on terms acceptable to Healtheon, or at all. YEAR 2000 COMPLIANCE Many currently installed computer systems and software products are unable to distinguish between twentieth century dates and twenty-first century dates. As a result, many companies' software and computer systems may need to be upgraded or replaced to comply with these "Year 2000" requirements. Healtheon's business is dependent on the operation of numerous systems that could potentially be impacted by Year 2000 related problems. Those systems include, among others: hardware and software systems used by Healtheon to deliver services to its customers, including Healtheon's proprietary software systems as well as hardware and software supplied by third parties; communications networks, such as the Internet and private intranets, which Healtheon depends on to provide electronic transactions to its customers; the internal systems of its customers and suppliers; the hardware and software systems Healtheon uses internally in the management of its business; and non-information technology systems and services Healtheon uses in its business, such as telephone systems and building systems. Healtheon has reviewed the proprietary software systems Healtheon uses to deliver services to its customers. Although Healtheon believes that its internally developed applications and systems are designed to be Year 2000 compliant, Healtheon utilizes third-party equipment and software that may not be Year 2000 compliant. In January 1999, Healtheon acquired certain electronic laboratory connectivity devices from SmithKline Labs. SmithKline has warranted these services to be Year 2000 compliant. Also, two 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. 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 214 225 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 in the final stages of remediation of all its applications, internal IT systems, and non-IT systems. It is estimated that 98% of the remediation phase has been completed with the anticipated completion date in early fourth quarter of 1999. Additionally, the final stage of Healtheon's Year 2000 overall project includes the development of business continuity plans which are expected to be completed by mid fourth quarter of 1999. An independent Year 2000 audit will also be performed with the objective of achieving Year 2000 certification by an industry leading expert group. However, Healtheon is unable to make contingency plans for the failure of any significant number of the computers constituting the Internet to properly process dates for the Year 2000 resulting in a system-wide slowdown or breakdown. Any failure by Healtheon to address any unforeseen Year 2000 issue could adversely affect Healtheon's businesses, 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 three months. 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 215 226 June 30, 1999. This table does not include money market funds because those funds are not subject to market risk.
MATURING IN THREE MONTHS FAIR OR LESS VALUE ----------- ------- (DOLLARS IN THOUSANDS) Included in cash and cash equivalents....................... $31,899 $31,899 Weighted-average interest rates............................. 4.96% Included in short-term investments.......................... $11,112 $11,112 Weighted-average interest rates............................. 5.05%
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. 216 227 HEALTHEON'S MANAGEMENT The following table sets forth certain information regarding Healtheon's current executive officers and directors:
NAME AGE POSITION ---- --- -------- James H. Clark..................... 55 Chairman of the Board of Directors W. Michael Long.................... 48 Chief Executive Officer and Director Steve Curd......................... 40 Executive Vice President and Chief Operating Officer Stephen D. Smith................... 51 Executive Vice President, Worldwide Sales and Marketing Mark Bailey........................ 40 Vice President, Business Development Kallen Chan........................ 44 Corporate Controller Theresa Dadone-Carlsted............ 44 Vice President, Human Resources Jack Dennison...................... 42 Vice President and General Counsel Dennis Drislane.................... 50 Vice President, National Accounts Edward Fotsch, M.D................. 42 Vice President, Member Organizations Nancy Ham.......................... 38 Vice President, Connectivity and Institutional Services Krishna Kolluri.................... 35 Vice President, Provider Enterprise Services Matthew Moore...................... 34 Vice President, Consumer Direct Pavan Nigam........................ 40 Vice President, Chief Technology Officer Charles Saunders, M.D.............. 44 Vice President, Strategic Planning and Medical Director John L. Westermann III............. 54 Vice President, Chief Financial Officer, Secretary and Treasurer L. John Doerr...................... 48 Director Thomas A. Jermoluk................. 43 Director C. Richard Kramlich................ 64 Director William W. McGuire, M.D............ 51 Director Laura D'Andrea Tyson............... 52 Director Tadataka Yamada, M.D............... 54 Director
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. 217 228 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. 218 229 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. 219 230 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, Amazon.com, Inc., Intuit Inc., Platinum Software Corporation and Sun Microsystems, Inc. He holds a B.S.E.E. and an M.E.E. from Rice University and an M.B.A. from Harvard Business School. Thomas A. Jermoluk has served as a director of Healtheon since February 1999. Mr. Jermoluk has been Chairman of the Board of Excite@Home since he joined @Home in July 1996 and was Chief Executive Officer of @Home until its merger with Excite in May 1999. From 1994 to July 1996, he was President and, from 1992 to July 1996, he was Chief Operating Officer of Silicon Graphics, Inc., a visual computing company. From 1991 to 1994, Mr. Jermoluk was Executive Vice President of Silicon Graphics, and, from 1988 to 1991, he was Vice President and General Manager of Silicon Graphics' Advanced System Division. From October 1993 to August 1996, he was a member of the board of directors of Silicon Graphics. Prior to joining Silicon Graphics in 1986, Mr. Jermoluk managed a variety of hardware and software development projects at Hewlett-Packard Company and Bell Laboratories. He currently serves on the board of directors of Forte Software, Inc. Mr. Jermoluk holds B.S. and M.S. degrees in Computer Science from Virginia Tech. C. Richard Kramlich has served as a director of Healtheon since July 1996. Mr. Kramlich is the co-founder and has been a general partner of New Enterprise Associates, a venture capital firm, since 1978. He is a director of Ascend Communications, Inc., Com 21, Inc., Lumisys, Inc., Silicon Graphics, Inc., and Chalone Wine Group, Inc. Mr. Kramlich holds a B.A. from Northwestern University and an M.B.A. from Harvard Business School. William W. McGuire, M.D. has served as a director of Healtheon since Healtheon acquired ActaMed in May 1998. He has been the President of UnitedHealth Group since 1989 and the Chief Executive Officer and Chairman of the Board of Directors of UnitedHealth Group since 1991. Prior to this, Dr. McGuire was Executive Vice President and Chief Operating Officer of UnitedHealth Group. Prior to this time, he served as President and Chief Operating Officer of Peak Health Plan. Before becoming President and Chief Operating Officer, he held a number of other positions within that organization. Dr. McGuire practiced medicine in Colorado, specializing in cardiopulmonary medicine. He holds a B.A. from the University of Texas and an M.D. from the University of Texas Medical Branch. Laura D'Andrea Tyson has served as a director of Healtheon since February 1999. Dr. Tyson has been the Dean of the Haas School of Business Administration at the University of California at Berkeley since 1996. Dr. Tyson served as National Economic Advisor to the President of the United States from March 1995 to December 1996 and as Chair of the White House Council of Economic Advisers from 1993 to 1995. She also served as a member of the President's National Security Council and Domestic Policy Council. Dr. Tyson was Director of the Institute of International Studies from 1990 to 1992, and Research Director of The Berkeley Roundtable on the International Economy from 1986 to 1992, at the University of California, Berkeley, where she was also a professor of economics and business administration. Dr. Tyson is also a director of Ameritech Corporation, Eastman Kodak Company, Human Genome Sciences, Inc. and Morgan Stanley. She holds a B.A. in Economics from Smith College and a Ph.D. in Economics from the Massachusetts Institute of Technology. Tadataka Yamada, M.D. has served as a director of Healtheon since Healtheon acquired ActaMed in May 1998. Dr. Yamada has been Chairman Research and Development, Pharmaceuticals of SmithKline Beecham since February 1999 and has been a non-executive director of SmithKline Beecham's Board of Directors since February 1994. Dr. Yamada was President and Executive Director of SmithKline Beecham HealthCare Services from February 1996 to February 1999. From June 1990 to February 1996, Dr. Yamada was Chairman of the Internal Medicine department and Physician-in-Chief of the University of Michigan Medical Center. Prior to that time, Dr. Yamada was a Professor and Chief of the Gastroenterology Division at the University of Michigan Medical School's Internal Medicine department. Prior to his work at the University of Michigan, Dr. Yamada was an associate professor of medicine at the 220 231 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 DIRECTOR DESIGNEES Upon completion of the WebMD merger, the board of directors will be reconstituted to include the following directors of Healtheon: W. Michael Long, James H. Clark, L. John Doerr and William W. McGuire, M.D. In addition, the following directors of WebMD will also be members of the Healtheon/WebMD board after the WebMD merger: Jeffrey T. Arnold, William P. Payne and U. Bertram Ellis, Jr. In addition, the following individuals will be directors of the Healtheon/WebMD board following the WebMD merger:
NAME AGE POSITION - ---- --- -------- Eric J. Gleacher.......................... 45 director
Eric J. Gleacher will be a director of Healtheon/WebMD upon the closing of the WebMD merger. Mr. Gleacher is Chief Executive Officer and Chairman of the Board of Gleacher & Co. LLC, a merchant banking and mergers and acquisitions advisory firm, which he founded in 1990. Prior to founding Gleacher & Co. LLC, Mr. Gleacher served as a Managing Director at Morgan Stanley from 1983 until 1990, and served as Global Head of Mergers and Acquisitions from 1984 until 1990. From 1968 until 1983, Mr. Gleacher worked at Lehman Brothers, where he founded the Mergers and Acquisitions Department and served as General Partner from 1973 until 1983. He is a member of the Executive Committee and is Chairman of the Finance and Investment Committees of the U.S. Golf Association. BOARD OF DIRECTORS' COMMITTEES The board met twelve times, including telephone conference meetings during 1998. No director attended fewer than 75% of the aggregate of the total number of meetings of the board held during the period for which he or she was a director and the total number of meetings held by all committees of the board on which he or she served during the period that the director served. 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 compensation 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 221 232 options under the 1996 stock plan, and outside directors receive stock options pursuant to automatic grants of stock options under the 1996 stock plan. In July 1998, Healtheon granted to each of Drs. McGuire and Yamada an option to purchase 30,000 shares of its common stock under the 1996 stock plan with an exercise price equal to $7.00 per share. In October 1998, Drs. McGuire and Yamada each agreed to exchange his option for a new option with an exercise price of $3.55 per share, reflecting the fair market value of Healtheon's common stock on that date as determined by the board of directors after taking into account Healtheon's financial results and prospects. In connection with this repricing, the vesting of the options for Drs. McGuire and Yamada was restarted. Therefore, 25% of their shares will vest in October 1999, and the remainder will vest ratably over the subsequent three years provided that they remain directors of Healtheon. In January 1999, Healtheon granted to each of Dr. Clark, Mr. Doerr, Mr. Kramlich, Dr. McGuire, Mr. Sadler and Dr. Yamada an option to purchase 20,000 shares of its common stock under the 1996 stock plan with an exercise price equal to $3.55 per share. In February 1999, Healtheon granted to each of Mr. Jermoluk and Dr. Tyson an option to purchase 30,000 shares of its common stock under the 1996 stock plan with an exercise price equal to $5.85 per share. The board also determined that under the 1996 stock plan each outside director will automatically receive an option to purchase 20,000 shares of common stock annually on January 1. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Dr. McGuire, a member of the compensation committee, is the Chairman and Chief Executive Officer of UnitedHealth Group, which, with its affiliates, beneficially owns approximately 12.7% of Healtheon's common stock, and has entered into the UnitedHealth Group agreement and certain other agreements with Healtheon. For a more complete description, see "Healtheon's related party transactions" on page 229. 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 - 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, 222 233 judgments, fines, settlements, and other amounts incurred in connection with any proceeding arising by reason of the fact that he or she is or was an agent of Healtheon: - a current or past director or officer of Healtheon or any subsidiary of Healtheon - a current or past director or officer of another enterprise who served at the request of Healtheon - a current or past director or officer of a corporation that was a predecessor corporation of Healtheon or any of its subsidiaries or of another enterprise at the request of a predecessor corporation or subsidiary Healtheon has entered into indemnification agreements with each of its directors and executive officers to give them additional contractual assurances regarding the scope of the indemnification described above and to provide additional procedural protections. These agreements, among other things, indemnify Healtheon's directors and executive officers for certain expenses, including attorneys' fees, judgments, fines, penalties and settlement amounts incurred by them in any action or proceeding arising out of their services to Healtheon, its subsidiaries or any other enterprise to which they provide services at Healtheon's request. In addition, Healtheon has obtained directors' and officers' insurance providing indemnification for Healtheon's directors, officers and certain employees for certain liabilities. Healtheon believes that these indemnification provisions and agreements are necessary to attract and retain qualified directors and officers. The limited liability and indemnification provisions in Healtheon's certificate of incorporation and bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duty and may reduce the likelihood of derivative litigation against directors and officers, even though a derivative action, if successful, might otherwise benefit Healtheon and it stockholders. Furthermore, a stockholder's investment in Healtheon may be adversely affected to the extent Healtheon pays the costs of settlement and damage awards against directors and officers of Healtheon under these indemnification provisions. At present, there is no pending or threatened litigation or proceeding involving any director, officer or employee of Healtheon where indemnification is expected to be required or permitted, and Healtheon is not aware of any threatened litigation or proceeding that might result in a claim for indemnification. 223 234 EXECUTIVE COMPENSATION The following table sets forth information concerning the compensation earned for services rendered to Healtheon in 1998 by Healtheon's Chief Executive Officer and Healtheon's four other most highly compensated executive officers who earned more than $100,000 in 1998 and were serving as executive officers at the end of 1998, referred to in the sections entitled "Executive compensation" and "Share ownership by principal stockholders, management and directors of Healtheon" as the "named executive officers." Under the rules of the Securities and Exchange Commission, this table does not include certain perquisites and other benefits received by the named executive officers which do not exceed the lesser of $50,000 or 10% of any such officer's salary and bonus disclosed in this table. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ANNUAL COMPENSATION --------------------- ------------------------ SECURITIES UNDERLYING NAME AND PRINCIPAL POSITION SALARY($) BONUS($)(1) OPTIONS(#) --------------------------- --------- ----------- --------------------- 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
- ------------------------- (1) Includes bonuses paid in both 1998 and 1999 related to services provided in 1998. (2) Mr. Hoover resigned from Healtheon in May 1999. (3) Includes 100,000 shares underlying an option granted in 1998 that was cancelled under a stock option repricing exchange program in October 1998. OPTION GRANTS IN FISCAL 1998 The following table sets forth certain information for the year ended December 31, 1998, with respect to grants of stock options to each of the named executive officers. All options granted by Healtheon in 1998 were granted under its 1996 stock plan. These options have a term of 10 years and generally vest over four years -- 25% at the end of one year and 1/48 per month thereafter. Healtheon granted options to purchase common stock and issued shares of common stock under restricted stock purchase agreements equal to a total of 8,652,907 shares during 1998. This amount includes 2,057,950 shares underlying options granted and 568,732 shares issued under restricted stock purchase agreements in connection with a repricing program in October 1998 and on December 14, 1998. Options were granted at an exercise price equal to the fair market value of Healtheon's common stock, as determined in good faith by the board of directors. The board of directors determined the fair market value based on Healtheon's financial results and prospects, the share price derived for arms-length transactions, and evaluations conducted by valuation experts. Potential realizable values are net of exercise price before taxes, and are based on the assumption that the common stock of Healtheon appreciates at the annual rate shown, compounded annually, from the date of grant until the expiration of the ten-year term. These numbers are calculated based on Securities 224 235 and Exchange Commission requirements and do not reflect Healtheon's projection or estimate of future stock price growth.
% 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% ---- ---------- ---------- -------------- ---------- ---------- ------------ 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
- ------------------------- (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 $8.00 per share and are net of the option exercise price.
SHARES NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED ACQUIRED UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT ON AT DECEMBER 31, 1998 DECEMBER 31, 1998 EXERCISE VALUE -------------------------------- ------------------------------ NAME (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- -------- ----------- ------------ -------------- ----------- ------------- 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
- ------------------------- (1) Based on a value of $3.55 per share, the fair market value of the common stock at June 2, 1998 as determined by the board of directors, minus the exercise price. (2) Represents shares issuable upon exercise of a warrant issued to Mr. Long upon commencement of his employment with Healtheon. (3) Based on value of $4.50 per share, the fair market value of the common stock at July 8, 1998 as determined by the board of directors, minus the exercise price. Except in the case of Mr. Hoover and Mr. Long, options shown above were granted under the 1996 stock plan and vest at a rate of 25% of the shares on the first anniversary of the date of grant and 1/48 of the shares each month thereafter. An option to purchase 80,000 shares of common stock held by Mr. Hoover was granted under the 1996 stock plan and vests as is described above. Mr. Hoover also holds fully vested options to purchase 593,268 shares granted under the ActaMed 1992, 1993 Class B common and 1994 stock option plans. These options were assumed by Healtheon upon the consummation of the acquisition of ActaMed. The option granted to Mr. Long vested immediately as to 25% of the shares and vests ratably each month during the second through fourth years of his employment as to the remainder of the shares. COMPENSATION ARRANGEMENTS WITH EXECUTIVE OFFICERS In July 1997, Healtheon and Mr. Long entered into an employment agreement under which Mr. Long became the President and Chief Executive Officer of Healtheon. Healtheon granted Mr. Long an option to purchase 2,500,000 shares of common stock, 25% of which vested immediately, and the remainder of 225 236 which vests ratably each month during the second through the fourth years of his employment. In addition, Mr. Long purchased 250,000 shares for $500,000, $499,750 of which was represented by a promissory note to Healtheon, and was issued a warrant to purchase an additional 750,000 shares at an exercise price of $2.00 per share. The shares issuable upon exercise of this warrant are subject to a right of repurchase commencing on Mr. Long's employment start date and lapsing as to 31,250 shares each month. The employment agreement provides that should Mr. Long leave Healtheon because he is no longer offered a position with similar responsibility due to a change of control of Healtheon, Mr. Long's option vests immediately as to 625,000 shares and Healtheon's repurchase right lapses. Additionally, if Healtheon terminates Mr. Long's employment without cause, he will receive six months' salary in installments, his option will vest immediately as to 625,000 shares and Healtheon's repurchase right will lapse. EMPLOYEE BENEFIT PLANS 1996 Healtheon stock plan. In February 1996 the board adopted, and Healtheon's stockholders approved, the 1996 stock plan. Healtheon initially reserved for issuance 9,000,000 shares of common stock under the 1996 stock plan. In March 1998, the board and the stockholders each approved an amendment to the 1996 stock plan to increase the number of shares of common stock reserved under the plan to 10,000,000 shares. In July 1998, the board approved, and in October 1998 the stockholders approved, an amendment to increase the number of shares of common stock issuable under the 1996 stock plan to 15,000,000 shares plus annual increases equal to the lesser of 5% of the outstanding shares or a lesser amount determined by the board. In January 1999, an additional 3,107,321 shares were reserved for issuance under the 1996 plan under the annual increase provision. In February 1999, the board and the stockholders approved an amendment to limit the automatic annual increase provision to a maximum of 9,000,000 shares. In February 1999, the board and the stockholders also approved an amendment to increase the number of shares reserved for issuance under the 1996 stock plan by an additional 1,000,000 shares. Unless terminated sooner, the 1996 Plan will terminate automatically in February 2006. The 1996 stock plan provides for the discretionary grant of incentive stock options, within the meaning of Section 422 of the tax code to employees and for the grant of nonstatutory stock options and stock purchase rights to employees, directors and consultants. The 1996 stock plan also provides for annual grants of options to purchase 5,000 shares of common stock to each of the outside directors. The 1996 stock plan may be administered by the board or a committee of the board, which is referred to, as applicable, as the administrator. The administrator has the power to determine the terms of the options or stock purchase rights granted, including the exercise price of the options or stock purchase rights, the number of shares subject to each option or stock purchase right, the exercisability thereof, and the form of consideration payable upon such exercise. In addition, the administrator has the authority to amend, suspend or terminate the 1996 stock plan, provided that no share of common stock previously issued and sold or any option previously granted under the 1996 stock plan is affected. The exercise price of all incentive stock options granted under the 1996 stock plan must be at least equal to the fair market value of the common stock on the date of grant. The exercise price of nonstatutory stock options and stock purchase rights granted under the 1996 stock plan is determined by the administrator, but with respect to nonstatutory stock options intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the tax code, the exercise price must be at least equal to the fair market value of the common stock on the date of grant. With respect to any participant who owns stock possessing more than 10% of the voting power of all classes of Healtheon's outstanding capital stock, the exercise price of any incentive stock option granted must be at least equal 110% of the fair market value on the grant date and its term must not exceed five years. The term of all other options granted under the 1996 stock plan may not exceed ten years. Options generally vest as to 25% at the end of the first year and monthly thereafter over a period of three years so that the entire option is vested after four years, based upon the optionee's continued employment or consulting relationship with Healtheon. In the case of stock purchase rights, unless the administrator determines otherwise, the restricted stock purchase agreement will grant Healtheon a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's employment or consulting relationship with Healtheon for any 226 237 reason, including death or disability. The purchase price for shares repurchased pursuant to a restricted stock purchase agreement must be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to Healtheon. The repurchase option will lapse at a rate determined by the administrator. Options and stock purchase rights granted under the 1996 stock plan are generally not transferable by the optionee, and each option and stock purchase right is exercisable during the lifetime of the optionee only by the optionee. Options granted under the 1996 stock plan must generally be exercised within 30 days after the end of optionee's status as an employee, director or consultant of Healtheon, or within one year after such optionee's termination by disability or death, respectively, but in no event later than the expiration of the option's term. The 1996 stock plan provides that, in the event of a merger of Healtheon with or into another corporation, each outstanding option and stock purchase right must be assumed or an equivalent option substituted by the successor corporation. If the outstanding options and stock purchase rights are not assumed or substituted by the successor corporation, the outstanding options and stock purchase rights will terminate. ActaMed stock option plans. In connection with its acquisition of ActaMed in a merger, Healtheon assumed the outstanding options of ActaMed under the following ActaMed stock option plans, which are collectively referred to as the ActaMed plans: ActaMed Corp. 1992 stock option plan, ActaMed Corp. 1993 Class B common stock option plan, ActaMed Corp. 1994 stock option plan, ActaMed Corp. 1995 stock option plan, ActaMed Corp. 1996 stock option plan, ActaMed Corp. 1997 stock option plan and ActaMed Corp. 1996 director stock option plan. The following options held by directors and executive officers of Healtheon were assumed by Healtheon: options to purchase 1,424,216 shares of ActaMed common stock held by Michael Hoover, options to purchase 250,000 shares of ActaMed common stock held by Nancy Ham, options to purchase 80,000 shares of ActaMed common stock held by J. Philip Hardin, and options to purchase 220,000 shares of ActaMed common stock held by John R. Hughes, Jr. As a result of the merger, each option to purchase shares of ActaMed common stock now represents an option to purchase a number of shares of Healtheon common stock equal to .6272 times the number of shares of ActaMed common stock originally subject to the option at the per share exercise price equal to the original per share exercise price divided by .6272. Healtheon will make no further grants under the ActaMed plans. However, each assumed ActaMed option continues to have and remains subject to substantially the terms and conditions of the applicable ActaMed plan under which such option was originally granted as in effect immediately prior to the merger. Generally, options granted under the ActaMed plans will automatically terminate ten years following their issuance. Options granted under the ActaMed plans generally are not transferable by the optionee, and must generally be exercised within 30 days after the end of the optionee's status as an employee or consultant of Healtheon or within 90 days after such optionee's termination by disability or death, respectively, but in no event later than the expiration of the option's term. Generally, in the event of any merger, sale of stock, consolidation, liquidation, recapitalization, reclassification, stock split up, combination of shares, share exchange, stock dividend, or transaction having a similar effect, where Healtheon does not remain in existence, the administrator may: - declare that all ActaMed options shall vest in full and be exercisable for a period of 30 days following written notice from the administrator, after which all ActaMed options shall terminate - provide that all ActaMed options shall be assumed by the successor corporation, or - provide for a combination of the above. 1998 employee stock purchase plan. Healtheon's 1998 employee stock purchase plan, or the 1998 purchase plan, was adopted by the board in September 1998, and approved by the stockholders in October 1998. A total of 1,000,000 shares of common stock has been reserved for issuance under the 1998 purchase plan, plus annual increases equal to the lesser of 500,000 shares, 0.5% of the outstanding shares on such date, or a lesser amount determined by the board. 227 238 The 1998 purchase plan contains consecutive, overlapping, 24 month offering periods. Each offering period includes four six-month purchase periods. The offering periods generally start on the first trading day on or after May 1 and November 1 of each year, except for the first such offering period which commences on the first trading day on or after the effective date of this offering and ends on the last trading day on or before October 31, 2000. Employees are eligible to participate if they are employed by Healtheon or any participating subsidiary for at least 20 hours per week and more than five months in any calendar year. However, an employee may not be granted an option to purchase stock under the 1998 purchase plan if the employee immediately after grant would own stock possessing 5% or more of the total combined voting power or value of all classes of the capital stock of Healtheon, or holds rights to purchase stock under any employee stock purchase plans of Healtheon that together accrue at a rate which exceeds $25,000 worth of stock for each calendar year. The 1998 purchase plan permits each participant to purchase common stock through payroll deductions of up to 15% of the participant's compensation. Compensation for these purposes is defined as the participant's base straight time gross earnings and commissions but excludes payments for overtime, shift premium, incentive compensation, incentive payments, bonuses and other compensation. The maximum number of shares a participant may purchase during a single purchase period is 5,000 shares. Amounts deducted and accumulated by the participant are used to purchase shares of common stock at the end of each purchase period. The price of stock purchased under the 1998 purchase plan is 85% of the lower of the fair market value of the common stock at the beginning of the offering period or at the end of the purchase period. In the event the fair market value at the end of a purchase period is less than the fair market value at the beginning of the offering period, the participants will be withdrawn from the current offering period following exercise and automatically re-enrolled in a new offering period. The new offering period will use the lower fair market value as of the first date of the new offering period to determine the purchase price for future purchase periods. Participants may end their participation at any time during an offering period, and they will be paid their payroll deductions to date. Participation ends automatically upon termination of employment with Healtheon. Rights granted under the 1998 purchase plan are not transferable by a participant other than by will or the laws of descent and distribution. The 1998 purchase plan provides that, in the event of a merger of Healtheon with or into another corporation or a sale of substantially all of Healtheon's assets, each outstanding option may be assumed or substituted for by the successor corporation. If the successor corporation refuses to assume or substitute for the outstanding options, the offering period then in progress will be shortened and a new exercise date will be set. The 1998 purchase plan will terminate in 2008. The board has the authority to amend or terminate the 1998 purchase plan, except that no amendment or termination may adversely affect any outstanding options under the 1998 purchase plan. The board may alter the purchase price for any offering period or shorten an offering period at any time without consent of the stockholders or of any participants. 401(k) Plan. Healtheon participates in a tax-qualified employee savings and retirement plan, or the 401(k) plan, which covers all of Healtheon's full-time employees who have completed three months of service. Under the 401(k) plan, eligible employees may defer up to 20% of their pre-tax earnings, subject to the Internal Revenue Service's annual contribution limit. The 401(k) plan permits additional discretionary matching contributions by Healtheon on behalf of all participants in the 401(k) plan in such a percentage amount as may be determined annually by the Board. To date, Healtheon has made no matching contributions. The 401(k) plan is intended to qualify under Section 401 of the tax 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. 228 239 HEALTHEON'S RELATED PARTY TRANSACTIONS Since January 1, 1998, there has not been nor is there currently proposed any transaction or series of similar transactions to which Healtheon or any of its subsidiaries was or is to be a party in which the amount involved exceeds $60,000 and in which any director, executive officer, holder of more than 5% of the common stock of Healtheon or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest other than compensation agreements and other arrangements, which are described where required in the section entitled "-- Executive compensation," and the transactions described below. ActaMed Corporation acquisition On May 19, 1998, Healtheon acquired ActaMed in a merger. In connection with the merger, Healtheon issued 23,271,355 shares of its common stock in exchange for all of the issued and outstanding capital stock of ActaMed, and assumed all options to purchase ActaMed common stock. The merger was treated as a tax-free reorganization and as a "pooling-of-interests" transaction for accounting and financial reporting purposes. All of the then outstanding shares of preferred stock of Healtheon were converted into shares of common stock of Healtheon upon the consummation of the merger. Transactions with directors, executive officers and 5% stockholders On May 19, 1998, in connection with the ActaMed merger, each outstanding share of preferred stock of Healtheon converted into one share of common stock and each outstanding warrant to purchase shares of Healtheon's preferred stock converted into a warrant to purchase shares of Healtheon's common stock. 1998 Series A preferred stock. On November 3, 1998 and November 6, 1998, Healtheon sold an aggregate of 7,683,341 shares of its Series A preferred stock for $6.00 per share. Among the purchasers were the following 5% stockholders and entities affiliated with directors of Healtheon, who purchased the number of shares indicated: - Atherton Properties Partnership, LP, an entity controlled by Dr. Clark and affiliated with Kathy Clark and Michael Clark -- 166,667 shares; - Kathy Clark -- 166,667 shares; - Michael James Clark Trust -- 166,667 shares; - HLM Partners VII, LP, of which UnitedHealth Group is a limited partner -- 166,667 shares; - KPCB Java Fund -- 416,667 shares; - Kleiner Perkins Caufield & Byers -- 375,000 shares; - KPCB Life Sciences Zaibatsu Fund II -- 41,667 shares; - Monaco Partners, LP, an entity wholly controlled by Dr. Clark -- 2,850,000 shares; and - New Enterprise Associates VI, LP -- 416,667 shares. Upon the closing of Healtheon's initial public offering in February 1999, each share of Series A preferred stock converted into one share of common stock. Sadler relationships. Companies affiliated with Mr. P.E. Sadler, a former director, had agreements with ActaMed whereby ActaMed provided office space, phone facilities and computer network support. ActaMed was paid approximately $204,000 in 1998 under those agreements. Mr. Sadler resigned from the board of directors on June 30, 1999. 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 229 240 equal to Mr. Curd's purchase price of the residence plus the cost of any improvements. Additionally, Healtheon will reimburse Mr. Curd for the amount of taxes payable by him for his residence as well as resulting from the loan. Excite@Home ownership of WebMD stock. Excite@Home purchased 46,151 shares of WebMD Series E preferred stock in May 1999 for an effective price of $54.17 per share, and will receive approximately 837,640 shares of Healtheon/WebMD common stock in the WebMD merger. Thomas Jermoluk, a director of Healtheon, is the Chairman of Excite@Home. Gleacher services agreement. Gleacher & Co. LLC, formerly Gleacher NatWest, Inc., provides financial advisory services to WebMD and will continue to provide these services to Healtheon/WebMD. WebMD and Gleacher entered into a two-year agreement relating to these services, and WebMD issued a warrant to purchase 1,038,450 shares of WebMD Series D common stock, which will be assumed by Healtheon/WebMD. The warrants vested as to 692,300 shares on January 29, 1999 and will vest as to 346,150 shares on January 29, 2000 and have an exercise price of $14.44 per share and a term of five years. Eric J. Gleacher, who has been identified as a future director of Healtheon/WebMD, is the Chairman and Chief Executive Officer of Gleacher & Co. LLC. Business relationships SmithKline Labs 1997-1998 services agreements. Prior to the acquisition of ActaMed by Healtheon, ActaMed entered into a series of agreements, referred to as 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 230 241 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 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. For a more complete discussion see "-- Healtheon management's discussion and analysis of financial condition and results of operations -- Overview" and Note 2 of Notes to Healtheon's consolidated financial statements. 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. 231 242 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 September 1, 1999 by: - each person who is known by Healtheon to own beneficially more than 5% of Healtheon's common stock - each director of Healtheon - each of the named executive officers - all directors and executive officers of Healtheon as a group The number and percentage of Healtheon shares beneficially owned prior to the reorganization are based on 71,770,818 shares of common stock outstanding as of September 1, 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 September 1, 1999 are deemed to be outstanding and beneficially owned by the person holding the options or warrants for the purpose of computing the number of shares beneficially owned and the percentage ownership of that person. The shares subject to options or warrants held by a person are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. Except as indicated in the footnotes to this table, and subject to applicable community property laws, these persons have sole voting and investment power with respect to all shares of Healtheon's common stock shown as beneficially owned by them. Percentage of ownership is based on the following exchange ratios: - 1.796 shares of Healtheon/WebMD common stock for each share of WebMD common stock outstanding on September 1, 1999, assuming the conversion of all shares of WebMD preferred stock into common stock immediately prior to that date and including the additional 276,906 shares of Series E preferred stock to be purchased by Microsoft - 0.5483 shares of Healtheon/WebMD common stock for each share of Medcast common stock outstanding on September 1, 1999 assuming the conversion of all shares of Medcast preferred stock into common stock immediately prior to that date - 0.6593 shares of Healtheon/WebMD common stock for each share of MEDE AMERICA common stock outstanding on September 1, 1999 assuming the exercise of all options and warrants that are currently exercisable or are exercisable within 60 days of September 1, 1999 Further, percentage of ownership is based on: - an estimated 135,083,566 shares of Healtheon/WebMD common stock outstanding following the WebMD merger - an estimated 137,566,997 shares of Healtheon/WebMD common stock outstanding following the WebMD and Medcast mergers - an estimated 80,495,897 shares of Healtheon/WebMD common stock outstanding following the MEDE AMERICA merger - an estimated 143,808,645 shares of Healtheon/WebMD common stock outstanding following the WebMD and MEDE AMERICA mergers - an estimated 146,292,075 shares of Healtheon/WebMD common stock outstanding following all the mergers 232 243
HEALTHEON SHARES BENEFICIALLY OWNED PRIOR TO THE WEBMD MERGER ------------------------------------------------- NAME AND ADDRESS OF COMMON EXERCISABLE EXERCISABLE BENEFICIAL OWNER STOCK WARRANTS OPTIONS PERCENT ------------------- ----------- ----------- ----------- ------- Entities associated with James H. Clark(1)......................... 11,846,265 -- -- 16.5% c/o Healtheon Corporation 4600 Patrick Henry Drive Santa Clara, CA 95054 Entities associated with UnitedHealth Group(2)............ 8,986,687 -- -- 12.5 9900 Bren Road East 300 Opus Center Minnetonka, MN 55343 William W. McGuire, M.D.(2)...... 8,986,687 -- 7,500 12.5 9900 Bren Road East 300 Opus Center Minnetonka, MN 55343 Entities associated with Kleiner Perkins Caufield & Byers(3)...... 7,226,473 1,029,359 -- 11.3 2750 Sand Hill Road Menlo Park, CA 94025 L. John Doerr(3)................. 7,082,473 1,029,359 -- 11.3 2750 Sand Hill Road Menlo Park, CA 94025 SmithKline Beecham Corporation(4)................... 6,251,003 -- -- 8.7 1201 South Collegeville Road Collegeville, PA 19426 Tadataka Yamada(4)............... 6,251,003 -- 7,500 8.7 1201 South Collegeville Road Collegeville, PA 19426 P. E. Sadler(5)................... 5,001,993 -- -- 7.0 c/o Healtheon Corporation 7000 Central Parkway, Suite 600 Atlanta, GA 30328 Entities associated with New Enterprise Associates, L.P.(6)... 3,743,590 11,979 -- 5.2 1119 St. Paul Street Baltimore, MD 21202 C. Richard Kramlich(6)........... 3,743,590 11,979 -- 5.2 1119 St. Paul Street Baltimore, MD 21202 W. Michael Long................... 765,378 750,000 606,249 2.9 Michael K. Hoover(7).............. 96,378 -- 465,768 * Dennis Drislane(8)................ 550,901 -- -- * Pavan Nigam(9).................... 471,240 -- 164,062 * Thomas A. Jermoluk(10)............ 489,534 -- -- * Charles Saunders.................. 172,402 -- 35,714 * Laura D'Andrea Tyson.............. -- -- -- * All executive officers and directors as a group (24 persons)......................... 46,967,790 1,791,338 1,646,839 67.0 PERCENT OF HEALTHEON/WEBMD SHARES BENEFICIALLY OWNED AFTER -------------------------------------------------------------------------------------------- THE HEALTHEON- THE WEBMD AND NAME AND ADDRESS OF THE WEBMD WEBMD AND THE MEDE MEDE AMERICA ALL THE BENEFICIAL OWNER MERGER MEDCAST MERGERS AMERICA MERGER MERGERS MERGERS ------------------- --------------- --------------- ------------------ --------------- ------------------ Entities associated with James H. Clark(1)......................... 8.8% 8.6% 14.7% 8.2% 8.1% c/o Healtheon Corporation 4600 Patrick Henry Drive Santa Clara, CA 95054 Entities associated with UnitedHealth Group(2)............ 6.7 6.5 11.2 6.2 6.1 9900 Bren Road East 300 Opus Center Minnetonka, MN 55343 William W. McGuire, M.D.(2)...... 6.7 6.5 11.2 6.2 6.1 9900 Bren Road East 300 Opus Center Minnetonka, MN 55343 Entities associated with Kleiner Perkins Caufield & Byers(3)...... 6.1 6.0 10.1 5.7 5.6 2750 Sand Hill Road Menlo Park, CA 94025 L. John Doerr(3)................. 6.1 6.0 10.1 5.7 5.6 2750 Sand Hill Road Menlo Park, CA 94025 SmithKline Beecham Corporation(4)................... 4.6 4.5 7.8 4.3 4.3 1201 South Collegeville Road Collegeville, PA 19426 Tadataka Yamada(4)............... 4.6 4.5 7.8 4.3 4.3 1201 South Collegeville Road Collegeville, PA 19426 P. E. Sadler(5)................... 3.7 3.6 6.2 3.5 3.4 c/o Healtheon Corporation 7000 Central Parkway, Suite 600 Atlanta, GA 30328 Entities associated with New Enterprise Associates, L.P.(6)... 2.8 2.7 4.7 2.6 2.6 1119 St. Paul Street Baltimore, MD 21202 C. Richard Kramlich(6)........... 2.8 2.7 4.7 2.6 2.6 1119 St. Paul Street Baltimore, MD 21202 W. Michael Long................... 1.6 1.5 2.6 1.5 1.4 Michael K. Hoover(7).............. * * * * * Dennis Drislane(8)................ * * * * * Pavan Nigam(9).................... * * * * * Thomas A. Jermoluk(10)............ 1.0 * * * * Charles Saunders.................. * * * * * Laura D'Andrea Tyson.............. * * * * * All executive officers and directors as a group (24 persons)......................... 36.4 35.7 60.1 34.2 33.7
- ------------------------- * Less than 1% 233 244 (1) Represents: - 166,667 shares held of record by Atherton Properties Partnership, LP - 1,000,000 shares held of record by Dr. Clark as trustee of the James H. Clark and Nancy Rutter Clark Revocable Trust - 1,017,229 shares held of record by Clark Ventures - 300,000 shares held of record by JHC Investments, LLC - 9,362,369 shares held of record by Monaco Partners, LP. Dr. Clark wholly controls Atherton Properties Partnership, LP, Clark Ventures, JHC Investments, LLC and Monaco Partners, LP. Dr. Clark is a director of Healtheon. (2) Represents: - 6,538,276 shares held of record by UnitedHealth Group - 502,069 shares held of record by United HealthCare Services, Inc., a subsidiary of UnitedHealth Group - 676,262 shares held of record by HLM Partners VII, L.P., of which UnitedHealth Group is a limited partner - 1,270,080 shares held of record by Validus, L.P., of which UnitedHealth Group is the sole limited partner UnitedHealth Group disclaims beneficial ownership of shares held by both limited partnerships except to the extent of its pecuniary interests in the entities. Dr. McGuire, a director of Healtheon, is the President, Chief Executive Officer and Chairman of UnitedHealth Group. Dr. McGuire disclaims beneficial ownership of all shares held by UnitedHealth Group. (3) Represents: - 5,572,863 shares held of record directly by Kleiner Perkins Caufield & Byers VII L.P. (KPCB VII) - 1,275,736 shares held of record by KPCB Java Fund - 352,874 shares held of record by KPCB Life Sciences Zaibatsu Fund II - 25,000 shares held of record by KPCB VIII Associates (KPCB VIII). KPCB Life Sciences Zaibatsu Fund II and KPCB VII are wholly controlled by KPCB VII Associates L.P. KPCB Java Fund is controlled by KPCB VIII. L. John Doerr, a general partner of KPCB VIII and KPCB VII Associates, L.P., is a director of Healtheon. Mr. Doerr disclaims beneficial ownership of shares held by these entities except to the extent of his pecuniary interest in the entities (4) Represents 6,251,003 shares held of record by SmithKline Beecham Corporation. Dr. Yamada, a director of Healtheon, is Chairman Research and Development, Pharmaceuticals of SmithKline Beecham and a director of SmithKline Beecham. Dr. Yamada disclaims beneficial ownership of all shares held by SmithKline Beecham and SmithKline Labs. (5) Represents 2,975,140 shares held of record by P. E. Sadler and 2,026,853 shares held of record by SFA Limited Partnership, of which P. E. Sadler is a general partner. Mr. Sadler resigned from the board of directors of Healtheon on June 30, 1999. (6) Represents 3,723,590 shares held of record directly by New Enterprise Associates VI, L.P., or New Enterprise Associates VI, and 20,000 shares held of record by NEA Ventures 1996, L.P., which is controlled by New Enterprise Associates VI. Mr. Kramlich is a partner of New Enterprise Associates VI. Mr. Kramlich disclaims beneficial ownership of shares held by these entities except to the extent of his pecuniary interest in the entities. (7) Represents 93,878 shares held of record directly by Mr. Hoover and 2,500 shares held by Nicholas D. Hoover for which Mr. Hoover is custodian. Mr. Hoover resigned as President and a director of Healtheon in May 1999. 234 245 (8) Includes 240,626 shares held by Mr. Drislane that will remain subject to a right of repurchase by Healtheon 60 days after September 1, 1999. (9) Includes 65,626 shares that will remain subject to a right of repurchase by Healtheon 60 days after September 1, 1999. (10) Includes 461,510 shares of WebMD held of record by Excite@Home, which upon the merger will become 828,872 shares of Healtheon of which Mr. Jermoluk is Chairman of the board of directors. Mr. Jermoluk disclaims beneficial ownership of shares held by Excite@Home. 235 246 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. WebMD's proposed merger with Healtheon and the MedE America and Medcast mergers will allow it to capitalize on WebMD's brand awareness and provide significant content and connectivity to the various participants in the healthcare market. Medcast provides daily medical news and additional content that can be channeled to physicians and consumers, making the web site offering more attractive. MedE America provides a targeted base of healthcare providers and a broad base of payer institutions, which makes these services more attractive to physicians and other providers who are seeking transactions and connectivity from a concentrated source instead of multiple sources. Healtheon provides an Internet-based information and transaction platform that will allow it to deploy healthcare technology applications for use though its web site. The WebMD solution WebMD provides healthcare professionals a single, easy to use web-based solution that integrates and helps manage their administrative, communications and information functions. WebMD provides healthcare consumers with free access to a broad range of healthcare-related information and online healthcare communities. Benefits to healthcare professionals A single point of access. WebMD reduces the need for healthcare professionals to use multiple administrative, communications and information services by integrating these services via the Internet. WebMD believes that it provides healthcare professionals with the ability to adopt web-based technology with a minimum of difficulty and expense. Premium services and content. WebMD provides a suite of premium services and content, including electronic data interchange services, the Virtual Receptionist unified messaging platform, WebMD's OnCall physician-only answering service, customized physician web sites and content from recognized market leaders. WebMD intends to enhance its current services and content and offer additional services and content in the future. Ease of use. WebMD provides its services via the standardized interface of web browsers. Therefore, subscribers who use WebMD's services do not require training on multiple proprietary devices. Competitive pricing. WebMD offers a bundle of services at a price that it believes is competitive with the price healthcare professionals would pay for these services if purchased individually. Benefits to healthcare consumers Premium content. WebMD provides healthcare consumers with a single point of access to health and wellness databases, reference materials and other publications developed and maintained by third party content providers with which WebMD has established relationships. Consumers can use this free information to educate themselves on healthcare-related matters in order to make better informed 236 247 healthcare decisions. In addition, WebMD can deliver personalized content and e-mail updates based on a consumer's specific profile and can search and retrieve relevant healthcare information from the web. Online healthcare communities. WebMD provides access to online communities that provide consumers with personalized information about their health conditions and allow them to participate in message boards, real-time chat rooms and support networks via the web. In addition, online communities provide member-generated content based on shared experiences. WebMD currently offers access to over 40 online communities focused on chronic health conditions and health topics and intends to introduce additional communities in the future. Convenience and reliability. WebMD provides consumers access to 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 a WebMD subscription, their patients can obtain office hours, location and other information without having to place a telephone call to the physician's office. WebMD services The WebMD web site includes subscription-based services for healthcare professionals and a free health and wellness center for consumers. Subscribers and consumers can access WebMD's services by using commonly available web browsers and any personal computer with Internet access. Beginning in the second quarter of 1999, WebMD began generating significant revenue from its web site. WebMD currently offers its healthcare professional subscribers two monthly service packages: WebMD, which includes all of the following services, except the physician-only answering service, and WebMD OnCall, which also includes WebMD's physician-only answering service. The majority of the services and content currently offered by WebMD are provided through its strategic relationships. For a more complete description of these relationships, see the section entitled "-- Strategic relationships" on page 240. Healthcare professionals who subscribe to WebMD's services have access to multiple areas on the WebMD web site, including: 237 248 OFFICE
- ---------------------------------------------------------------------------------------------- PRODUCT OR SERVICE FEATURES BENEFITS - ---------------------------------------------------------------------------------------------- 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, fax or utilize experienced e-mail professionals to assist both 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, and a physician search tool - ---------------------------------------------------------------------------------------------- Supplies Provides online access to Allows healthcare ordering of medical and professionals to order medical surgical supplies from and surgical supplies McKessonHBOC conveniently 24 hours a day, seven days a week - ---------------------------------------------------------------------------------------------- Peer forums Offers physician-only peer Physicians can exchange forums focused on different information with colleagues in specialties their specialty - ----------------------------------------------------------------------------------------------
238 249 LIBRARY
- ---------------------------------------------------------------------------------------------- PRODUCT OR SERVICE FEATURES BENEFITS - ---------------------------------------------------------------------------------------------- Physician references Provides access to topical, Allows physicians quick access daily medical news, to reliable clinical and comprehensive physician research information necessary reference and patient for their practice and education databases, medical easy-to-understand patient encyclopedias, journals, education materials dictionaries and directories from well-recognized sources - ---------------------------------------------------------------------------------------------- MedBookStore Provides online access to a Allows healthcare medical bookstore professionals to purchase current medical texts and journals online - ----------------------------------------------------------------------------------------------
CLASSROOM
- ---------------------------------------------------------------------------------------------- PRODUCT OR SERVICE FEATURES BENEFITS - ---------------------------------------------------------------------------------------------- Continuing medical education Offers continuing medical Provides physicians with the courses education courses in a variety opportunity to obtain required of practice areas educational credits conveniently - ----------------------------------------------------------------------------------------------
CAREER CENTER
- ---------------------------------------------------------------------------------------------- PRODUCT OR SERVICE FEATURES BENEFITS - ---------------------------------------------------------------------------------------------- Placement and recruitment Offers online access to Allows healthcare services permanent and temporary career professionals to search, apply placement and recruitment for and post permanent and services temporary positions online and provides access to a variety of career-related resources, such as state licensure guidelines and relocation information - ----------------------------------------------------------------------------------------------
MY DESK
- ---------------------------------------------------------------------------------------------- PRODUCT OR SERVICE FEATURES BENEFITS - ---------------------------------------------------------------------------------------------- Leisure content and services Provides access to financial Provides financial products, services and products, as well insurance at discounted rates as news, stock and sports and convenient access to information leisure information - ----------------------------------------------------------------------------------------------
WebMD also offers subscribers of either service package the option of also subscribing to premium services for additional transaction or monthly fees, including: - dictation and transcription services, which provides physicians with electronic delivery and accessibility of transcribed reports dictated via the telephone - coding compliance monitor, which allows physicians to compare their coding practices against peer group benchmarks and payer standards Consumer services Healthcare consumers have free access to the health and wellness center on WebMD's web site. 239 250 HEALTH AND WELLNESS CENTER
- ---------------------------------------------------------------------------------------------- PRODUCT OR SERVICE FEATURES BENEFITS - ---------------------------------------------------------------------------------------------- Premium healthcare content Consolidates patient education Healthcare consumers have free information and healthcare access to numerous sources of news, including information reliable consumer-oriented for people with health healthcare resources reviewed conditions or concerns, by medical professionals wellness content, including fitness and nutrition, drug references and medical encyclopedias - ---------------------------------------------------------------------------------------------- Online communities Offers online communities Consumers may develop loyalty focused on chronic health to their online community conditions and women's health which we believe translates topics into more frequent usage by consumers and longer stays on our web site - ---------------------------------------------------------------------------------------------- Chat rooms and message boards Offers multiple message boards Consumers can share including "ask our experts," experiences and exchange chat rooms and at least one information with other members scheduled live chat event per who share their health week with guests including condition or concern physicians and other healthcare professionals - ---------------------------------------------------------------------------------------------- Personalized information Searches and retrieves Consumers can receive relevant healthcare healthcare information that is information from premium and tailored to their health proprietary content based on a condition or concern and, member's profile and provides through updated profiles, personalized e-mail updates to continue to receive new and community members compelling content - ----------------------------------------------------------------------------------------------
Strategic relationships WebMD has entered into strategic relationships for distribution, services and content. WebMD believes that these relationships will enable it to rapidly develop and distribute its services, enhance the WebMD brand, generate traffic on its web site and capitalize on additional distribution and revenue opportunities. Although WebMD views its strategic relationships as a key factor in its overall business strategy and in the development and commercialization of its services and relies on its strategic partners for most of the services and content it provides, WebMD cannot guarantee that its strategic partners will view their relationships with WebMD as significant to their own business or that they will not reassess their commitment to WebMD in the future. WebMD's principal strategic relationships include the following: Online and media distribution partners Microsoft. Microsoft is a leading provider of software for personal computers and the owner and operator of the MSN network of web sites. WebMD has entered into a significant strategic alliance with Microsoft. For a complete description of the Microsoft relationship, see the section entitled, "Healtheon/ WebMD strategic alliances with and investments from Microsoft and other partners" on page 75. 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. 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. 240 251 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. Reader's Digest. The Reader's Digest Association, Inc. has entered into a strategic relationship with WebMD regarding WebMD's development of a co-branded health web site. The relationship also provides for the advertising and promotion of WebMD in Reader's Digest magazine, and WebMD's purchase of these magazines for its subscribers. Healthcare distribution partners DuPont. DuPont is a leading provider of life sciences products, including pharmaceuticals and nutritional products and services. DuPont has agreed to sponsor WebMD subscriptions. In addition, DuPont will be the exclusive provider of life sciences content and has agreed to consult with WebMD on the development of a pharmacy channel on WebMD's web site. 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, which are discussed in more detail above under "WebMD related transaction agreements -- McKessonHBOC agreement," WebMD has agreed to provide web-enabled access to McKessonHBOC's medical/surgical supply catalog. Service and content providers Premiere Technologies. Premiere Technologies, Inc. is a leading provider of enhanced communications services. WebMD uses Premiere Communications, Inc.'s, a subsidiary of Premiere Technologies, computer telephony platform and private frame relay network to provide enhanced communications services through its Virtual Receptionist service offering. iXL. WebMD provides customized web sites for physicians through its relationship with iXL. iXL also provides Web development and physician web site hosting services to WebMD. 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. 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 and MedQuist, WebMD has agreed to bear some of the cost associated with these promotional offers or to compensate these partners for each subscriber that WebMD 241 252 obtains through their marketing efforts or to make guaranteed payments to some of its distribution partners and service and content providers. WebMD intends to enter into similar promotional arrangements in the future. WebMD has also issued warrants in connection with entering into some of its strategic alliances, such as its alliances with Microsoft, DuPont and McKessonHBOC. For a more complete description of these arrangements, see the section entitled "-- WebMD management's discussion and analysis of financial condition and results of operation -- Promotional arrangements" and "-- Guaranteed payments" on page 249. 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 online and offline, including the alliance with CNN which provides for online advertising and for the promotion of WebMD on television and radio. WebMD plans to continue to allocate significant resources to marketing its services. Customer service and support WebMD believes that effective customer service is essential to attracting and retaining subscribers and consumers. WebMD provides ongoing telephone support through its customer service and sales support centers which are accessible by a toll-free call and are available from 8:00 a.m. to 8:00 p.m., Eastern time Monday through Friday. WebMD's live operators screen all requests for telephone support and direct the call to the appropriate customer service personnel. Technical support personnel are responsible for consulting with WebMD's strategic partners regarding technical support issues and for resolving technical problems encountered by users, strategic partners or other parties. Competition Web-based services. The market for web-based services and products is relatively new, intensely competitive and rapidly changing. Since the Internet's commercialization in the early 1990's, the number of web sites on the Internet competing for users' attention has proliferated with no substantial barriers to entry. WebMD expects competition in the markets in which it competes to increase significantly as new companies enter these markets and current competitors expand their product lines and services. Competition may also increase as a result of industry consolidation. Many of these potential competitors are likely to enjoy substantial competitive advantages, including: - greater resources that they can devote to the development, promotion and sale of their services - longer operating histories - greater financial, technical and marketing resources - greater name recognition - larger subscriber and consumer bases WebMD does not know whether its current or potential competitors will develop products and services comparable or superior to WebMD's products and services or adapt more quickly than WebMD to new technologies, evolving industry trends or changing Internet user preferences. Increased competition could result in price reductions, reduced margins or loss of market share, any of which would significantly harm WebMD. 242 253 WebMD competes, directly and indirectly, for subscribers, consumers, content and service providers, advertisers, sponsors and acquisition candidates with the following categories of companies: In addition, with regard to its electronic data interchange service offering, WebMD also competes with providers of electronic data interchange terminals that provide access to a single service, such as those provided by VeriFone Inc. WebMD generally does not have the contractual right to prevent its subscribers from terminating their service or changing to a competing service. WebMD believes that the principal competitive factors in attracting and retaining healthcare professional subscribers are brand recognition and the depth, breadth and timeliness of its services and content. Other important factors in attracting and retaining healthcare professionals as subscribers include the ease of use, quality and cost of WebMD's services. WebMD believes that the principal competitive factors that attract advertisers include price, the number of healthcare professionals who subscribe to WebMD, the traffic on its web site, the demographics of its subscriber and consumer bases and the creative implementation of advertisement placements. Communications and information services. WebMD also competes in the communications and information services markets. These markets are also intensely competitive, rapidly evolving and subject to rapid technological change. Other providers currently offer each of the individual services and certain combinations of the services that WebMD offers. WebMD's voice mail service offering competes 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. 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 requirement that WebMD comply with any new legislation or regulation, or any unanticipated application or interpretation of existing laws, could harm WebMD's business. 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 243 254 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. The proposed Health Information Modernization and Security Act would provide for establishing standards and requirements for the electronic transmission of health information. Both federal and state laws prohibit the offer, payment or receipt of remuneration to induce referrals to entities providing healthcare services or goods. Although the applicability of these laws to WebMD's services is unclear, a state or federal regulatory agency may allege that WebMD's relationship with one or more of its strategic partners that sponsor WebMD subscriptions and that deliver healthcare services or goods violate any of these laws. In the event that this determination is made, WebMD could be subjected to fines and other costs and could be required to revise or terminate that portion of its business. Privacy and confidentiality related regulation. Internet user privacy has become an issue both in the United States and abroad. The Federal Trade Commission is considering adopting regulations regarding the collection and use of personal identifying information obtained from individuals when accessing web sites. Any legislation or regulations of this nature could affect the way WebMD conducts its business, especially its collection or use of personal information, and could harm its business. Numerous state and federal laws govern the collection, dissemination use and confidentiality of patient identifiable health information. Many states have laws and regulations that protect the confidentiality of medical records or medical information. In addition, the Health Insurance Portability and Accountability Act of 1996 mandates the Secretary of the Department of Health and Human Services to promulgate federal regulations addressing the online collection, dissemination, use and confidentiality of patient identifiable health information. The application of these laws to the personal information WebMD collects could create potential liability under such laws. 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 244 255 Homepage" and "WebRN." On August 10, 1999, the Patent & Trademark Office cleared the "Web-MD" mark for a notice of publication for opposition prior to final registration. WebMD cannot guarantee that the "Web-MD" mark will not be opposed by a third party during the publication process or that it will be cleared by final registration. WebMD has applied for registration of the service marks "WebMD," "Health has a Homepage" and "WebRN" in approximately 75 foreign countries. WebMD cannot guarantee that it will be able to secure registration for these marks in the United States or in foreign countries. WebMD has also registered the domain name "webmd.com." The steps WebMD has taken to protect its proprietary rights may not be adequate, and WebMD may not be able to secure trademark or service mark registrations for marks in the United States 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. 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 June 30, 1999, WebMD employed 213 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 245 256 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. No further action has been taken by the OIG. 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 these 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. 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. 246 257 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 six months ended June 30, 1998 and 1999 and the selected balance sheet data as of December 31, 1994 and 1995 and June 30, 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 six months ended June 30, 1999 are not necessarily indicative of the results for a full year. The following data should be read in conjunction with "-- WebMD management's discussion and analysis of financial condition and results of operations" and WebMD's consolidated financial statements and related notes thereto included elsewhere in this proxy statement/prospectus.
PERIOD FROM INCEPTION (APRIL 21, SIX MONTHS ENDED YEAR ENDED DECEMBER 31, 1994) TO JUNE 30, ------------------------------------- DECEMBER 31, ------------------- 1998 1997 1996 1995 1994 1999 1998 -------- ------- ------- ------ ------------ --------- ------- (UNAUDITED) (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) HISTORICAL STATEMENTS OF OPERATIONS DATA: Revenues......................................... $ 408 $ -- $ -- $ -- $ -- $ 4,406 $ -- Operating loss................................... (23,036) (2,594) -- -- -- (60,160) (4,520) Net loss applicable to common stockholders....... $(18,546) $(4,349) $(1,682) $ (39) $ (40) $(199,979) $(6,058) Net loss per common stockholder.................. $ (1.52) $ (0.52) $ (0.64) $(0.04) $(0.04) $ (15.52) $ (0.53) Shares used in computing basic and diluted net loss per common share(2)....................... 12,196 8,300 2,612 1,000 1,000 12,889 11,436
AS OF DECEMBER 31, AS OF ------------------------------------------------------ JUNE 30, 1998 1997 1996 1995 1994 1999 ----------- ------ ------ ----------- ---- ----------- (UNAUDITED) (UNAUDITED) (IN THOUSANDS) HISTORICAL BALANCE SHEET DATA: Cash and cash equivalents........................... $ 6,226 $2,696 $ -- $ -- $ -- $237,835 Working capital..................................... 4,313 2,532 -- -- -- 323,077 Total assets........................................ 18,245 9,190 3,497 638 213 591,448 Long-term debt, net of discount(3).................. -- 2,965 -- -- -- -- Total stockholders' equity (net capital deficiency)....................................... 5,286 3,036 558 (32) (31) 574,504
- ------------------------- (1) WebMD was incorporated in October 1996. 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. WebMD'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, UltraScan, 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. 247 258 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 web-based services to healthcare professionals and healthcare consumers under its WebMD brand name. WebMD's subscription-based professional web site includes access to electronic data interchange services, enhanced communications services, healthcare-related information and other web- based services that are useful to healthcare professionals. WebMD designed its professional web site to simplify healthcare practices by integrating multiple administrative, communications and research functions into a single, easy to use web-based solution. WebMD's free consumer web site includes access to premium, branded healthcare-related information, personalized, targeted information about specific health conditions and content-specific online communities that allow consumers to participate in real-time discussions and support networks via the web. WebMD designed its consumer web site to assist consumers in making informed healthcare decisions. WebMD was formerly engaged in the cardiac monitoring business, and WebMD has only recently begun implementing its new Internet-based business model. WebMD's activities to date have primarily consisted of licensing and creating content, negotiating relationships with strategic partners, engaging in marketing and branding promotions, recruiting personnel and raising capital. WebMD commercially launched its Internet-based services in October 1998. Acquisitions On December 31, 1998, WebMD acquired substantially all of the assets and assumed some liabilities of certifiedemail.com, Inc. in exchange for 50,000 shares of WebMD's Series D common stock. On January 22, 1999, WebMD acquired Direct Medical Knowledge for 494,018 shares of WebMD's Series B preferred stock. In addition, WebMD converted existing Direct Medical Knowledge options and warrants into options and warrants to acquire 181,323 shares of WebMD's Series B preferred stock. At closing, WebMD forgave $300,000 in liabilities which Direct Medical Knowledge owed to WebMD. 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 $2.7 million of liabilities of Sapient Health Network. Series D common stock and Series B preferred stock exchanged in these acquisitions were valued at $20 per share which was determined to be the fair market value of these securities by WebMD's board in the absence of a liquid market based on recent sales of similar securities to third parties. As a result of the Sapient Health Network and Direct Medical Knowledge acquisitions, WebMD recorded an aggregate of $51.9 million in goodwill and other intangible assets in the first quarter of 1999, which WebMD will amortize on a straight-line basis over a three-year period. Stock dividend On April 9, 1999, WebMD's board of directors declared a stock dividend of 0.03846 shares of Series F preferred stock, which is convertible into common stock on a ten-for-one basis, for each share of WebMD capital stock outstanding. On an as converted to common basis, all shareholders received a 0.3846 dividend, which increased the outstanding common on an as converted basis by 38.46%. Because the dividend triggered anti-dilution provisions, WebMD's board approved in-kind adjustments to the applicable WebMD option and warrants outstanding on April 9, 1999 to reflect the stock dividend, regardless of whether these options and warrants were vested. The dividend adjustments to the options and warrants were vested or will vest according to the same vesting schedule as the underlying options and 248 259 warrants. Unless otherwise indicated, the impact of the stock dividend on options and warrants 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. A subscription to WebMD OnCall also includes WebMD's physician-only answering service. WebMD's current base subscription fees for WebMD are $29.95 per month and for WebMD OnCall are $99.95 per month. The WebMD OnCall package and the Virtual Receptionist service offering require subscribers to pay additional transaction fees, and the WebMD OnCall package provides subscribers with the option of also subscribing to paging services for additional monthly fees. For a description of the service offerings included as part of the base subscription fees for WebMD and WebMD OnCall packages, see the section entitled "WebMD's Business -- WebMD services" on page 237. The WebMD and WebMD OnCall packages generally require a 12-month service period and are generally terminable upon 90 days prior written notice. In addition to the base subscription fees, WebMD offers to subscribers of either service package the option of also subscribing to premium services, such as dictation and transcription and the coding compliance monitor, for additional transaction or monthly fees. Promotional arrangements WebMD currently funds promotions of its services through its distribution relationships with Microsoft, DuPont and McKessonHBOC. 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 these arrangements. WebMD's promotional arrangements include the sponsorship of WebMD subscriptions by some of WebMD's strategic partners. 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 recognizes 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 and sponsorship revenues that it can derive. Guaranteed payments At June 30, 1999, WebMD estimates that it will make the following aggregate guaranteed payments under its current strategic agreements:
PERIOD AMOUNT ------ ------------- July - December 1999...................................... $37.3 million 2000...................................................... 72.5 million 2001...................................................... 78.3 million 2002...................................................... 40.4 million 2003...................................................... 34.4 million
Most of WebMD's current strategic agreements with its distribution partners contain revenue sharing arrangements which generally provide for WebMD to share advertising, sponsorship or transaction net revenues, ranging from 15% to as much as 100%, with the strategic partner. In addition, some strategic 249 260 partner agreements and promotional arrangements require payments on a per subscriber basis. WebMD may enter into additional promotional arrangements with current and future strategic partners that may require it to pay consideration in amounts that significantly exceed the amounts WebMD is required to pay under its current arrangements. These guaranteed payments and promotional and other arrangements may require WebMD to incur significant expenses. WebMD cannot guarantee that it will generate sufficient revenues to offset these expenses. Revenues and results of operations WebMD derives its revenues primarily from subscriptions, advertising, sponsorship, third-party carriage fees and other services generated by the WebMD web site and its co-branded web sites. Subscription revenue is recognized based on the monthly subscription fee. All significant subscription revenues from WebMD's web site have been attributable to base subscription fees. WebMD does not allocate subscription revenue among the various service offerings included as part of the base subscription fee. Revenues related to advertising and WebMD's various Internet-based administrative, communication and information services are recognized when the services are performed or provided. Revenues from fixed fee content carriage agreements are recognized ratably over the related agreement term. WebMD anticipates that revenues from its Internet operations will consist primarily of revenues from subscribers, including revenues generated from Microsoft's and DuPont's sponsorship of WebMD subscriptions. If WebMD is successful in building its subscriber base and brand recognition and increasing traffic on its web site, WebMD expects advertising, sponsorship and transaction revenues to increase as a percentage of total revenues. Some of WebMD's strategic partner agreements provide for WebMD to share revenues from advertising, sponsorships and transactions with the strategic partner. WebMD has incurred net operating losses and negative cash flows from operating activities since its inception. As of June 30, 1999, WebMD had an accumulated deficit of $224.6 million. WebMD has not achieved profitability, and WebMD expects to incur increasing net operating losses and negative cash flows from operations 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 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 250 261 dates prior to such sale of assets. As of June 30, 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 six months ended June 30, 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 six months ended June 30, 1999, WebMD generated $408,000 and $4.4 million of revenues, respectively. WebMD did not generate any revenues from its continuing operations for the year ended December 31, 1997 and for the six months ended June 30, 1998. Revenues for the six months ended June 30, 1999 increased primarily due to the commercial launch of WebMD's Internet-based services and consisted of $2.0 million from services to a related party, $1.9 million in subscription revenues and $516,000 in advertising and sponsorship revenues. Operating expenses Product development and content. Product development and content costs consist of web development fees, content license fees, fees to service providers and salaries and related expenses. Product development costs are expensed as incurred. Content costs are recognized ratably over the term of the license agreement, generally ranging from one to five years. Product development and content costs were $7.5 million and $566,000 for the years ended December 31, 1998 and 1997, respectively, and $17.0 million and $1.9 million for the six months ended June 30, 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 website, and content license fees of $1.4 million and other research and development. Product development and content costs increased for the six months ended June 30, 1999 primarily due to content license fees of $6.9 million, $3.5 million in salaries and related expenses of development personnel, fees of $3.1 million for development of WebMD's web site and $1.6 million in information systems consulting services. 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 $32.2 million and $646,000 for the six months ended June 30, 1999 and 1998, respectively. In 1998, sales and marketing expense increased primarily due to $2.2 million in salaries and related expenses of sales personnel and $1.5 million related to WebMD's branding and advertising campaign. Sales and marketing costs increased for the six months ended June 30, 1999 primarily due to $24.5 million in payments to WebMD's consumer portal distribution partners, including promotional arrangements, $4.9 million related to its branding and advertising campaign and increased marketing efforts in connection with the distribution of its services and $2.7 million in salaries and related expenses of sales personnel. General and administrative. General and administrative expenses consist primarily of salaries, non-cash compensation charges and related expenses for executive and administrative functions and other expenses. General and administrative expenses were $10.1 million and $1.8 million for the years ended December 31, 1998 and 1997, respectively, and $8.6 million and $1.9 million for the six months ended June 30, 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 251 262 exercise price less than the fair market value of WebMD's capital stock on the date of issuance, $2.7 million in salaries and related expenses for additional executive and administrative personnel, $1.7 million for contract labor and $1.7 million in professional fees. General and administrative costs increased for the six months ended June 30, 1999 primarily due to $3.5 million in salaries and related expenses for additional administrative and executive personnel and $2.3 million in professional fees and contract labor. Write down of customer terminals. For the year ended December 31, 1998, WebMD recorded a charge of $1.8 million to write down computer terminals to their net realizable value. WebMD previously offered computer terminals with some of its promotional packages or as an option for an additional fee. In 1998, WebMD changed its service offerings to no longer offer computer terminals to its subscribers and has sold all terminals previously held in inventory. Depreciation and amortization. Depreciation and amortization expense consists of the depreciation of property and equipment and the amortization of intangible assets. Depreciation and amortization was $303,000 and $9,000 for the years ended December 31, 1998 and 1997, respectively, and $8.4 million and $48,000 for the six months ended June 30, 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 six months ended June 30, 1999, WebMD recorded $7.2 million in amortization expense in connection with the acquisitions of Sapient Health Network, Direct Medical Knowledge and certifiedemail.com. WebMD will amortize the remaining $46.6 million in intangible assets on a straight-line basis over the remainder of its three-year life. Net interest income or expense. Net interest income or expense consists primarily of interest paid on loans from related parties, loans that have been repaid and interest earned on cash balances. Net interest expense was $139,000 and $725,000 for the years ended December 31, 1998 and 1997, respectively. Net interest income was $1.5 million for the six months ended June 30, 1999 and net interest expense was $304,000 for the six months ended June 30. Net interest expense decreased for the year ended December 31, 1998 due to the repayment of an aggregate of $6.0 million in loans from Sirrom Investments, Inc. and a $509,605 loan from a related party and interest earned on WebMD's investment of cash received from the sale of its cardiac monitoring assets and the sale of its capital stock. Net interest income increased for the six months ended June 30, 1999 due to 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 June 30, 1999, WebMD had total net operating loss carryforwards for federal and state income tax purposes of $75.4 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. 252 263 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 557,490 shares of Series D common stock. In July 1998, WebMD borrowed an additional $2.0 million from Sirrom as bridge financing prior to the closing of the sale of WebMD's cardiac monitoring operations to Matria. WebMD used $6.0 million of the proceeds from the sale of its cardiac operations to repay the loans from Sirrom. Sale of WebMD's cardiac monitoring operations. Effective as of July 1, 1998, WebMD sold substantially all of its cardiac monitoring assets to Matria for an aggregate purchase price of $17.0 million in cash and up to $6.0 million additional contingent consideration payable subject to Matria's achievement during calendar year 1999 of certain revenue goals in the operation of the purchased assets. In July 1998, WebMD used $2.7 million of the proceeds for settlement costs of a dissenting stockholder law suit related to Endeavor. For a more complete description of the lawsuit, see "WebMD's management -- Compensation committee interlocks and insider participation -- Dissenting stockholder lawsuit" on page 259. 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 $15.7 million and $5.8 million, respectively, from the sale of its capital stock. During the six months ended June 30, 1999 and 1998, WebMD received $299.1 million and $3.6 million, respectively, from the sale of its capital stock. Sources and uses of liquidity As of June 30, 1999, WebMD's primary source of liquidity consisted of $237.8 million in cash and cash equivalents. WebMD had working capital of $303.0 million at June 30, 1999. 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 $58.5 million and $4.4 million for the six months ended June 30, 1999 and 1998, respectively. The principal uses of cash in operating activities by 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 operating activities by continuing operations during the six months ended June 30, 1999 were to fund WebMD's net loss of $60.2 million and an increase in prepaid software licenses, content and services of $20.6 million, which was partially offset by $8.4 million in depreciation and amortization, and $11.1 million in non-cash amortization of equity issued for services. Net cash provided by investing activities for the year ended December 31, 1998 was $9.5 million, and net cash used in investing activities was $1.6 million for the year ended December 31, 1997. Net cash used in investing activities was $6.7 million and $2.3 million for the six months ended June 30, 1999 and 1998, respectively. 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 six months ended June 30, 1999 primarily related to purchases of property and equipment and payments associated with acquisitions. 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 $296.8 million and $3.8 million for the six months ended June 30, 1999 and 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 offset by the repayment of the $6.0 million loan from Sirrom. Financing activities during the six months ended June 30, 1999 consisted primarily of proceeds from the issuance of equity securities, partially offset by a $2.3 million repayment of assumed borrowings from acquisitions. 253 264 As of June 30, 1999, WebMD had material commitments of approximately $3.6 million for capital expenditures relating to the acquisition of computer equipment. If the WebMD merger 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. In addition, 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 WebMD merger is not consummated and WebMD determines that it will require additional funds to support operations or the expansion of its business, WebMD may sell additional equity, issue debt or convertible securities or obtain credit facilities through financial institutions. The sale of additional equity or convertible securities will result in additional dilution to WebMD's stockholders. There can be no assurance that additional financing, if required, will be available to WebMD in amounts or on terms acceptable to WebMD. YEAR 2000 COMPLIANCE Some computers, software and other equipment include programming code in which calendar year data is abbreviated to only two digits. As a result of this design decision, some of these systems could fail to operate or fail to produce correct results if "00" is interpreted to mean 1900, rather than 2000. These problems are widely expected to increase in frequency and severity as the year 2000 approaches and are commonly referred to as the "Year 2000 problem." State of readiness. The Year 2000 problem could affect computers, software and other equipment that WebMD uses. WebMD has completed a review of its internal computer programs and systems to determine if they will be Year 2000 compliant. WebMD believes that its computer systems will be Year 2000 compliant by November 1999. However, while WebMD does not expect the cost of these efforts to be material to its financial position or any year's operating results, WebMD cannot provide you with any assurance to this effect. Internal infrastructure. WebMD has reviewed all of the major computers, software applications and related equipment that WebMD uses in connection with its internal operations and determined that, with the exception of its telephone system, which it intends to replace, no modifications, upgrades or replacements are required to minimize the possibility of a material disruption to its business. WebMD has started modifying, upgrading and replacing systems that it has identified as potentially being adversely affected. WebMD expects to complete this process by November 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 and content it provides. If these parties are affected by the Year 2000 problem, WebMD's ability to provide services and content to its 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 and Premiere Technologies addressing their Year 2000 readiness. Based on these responses, WebMD believes these service and content providers will be Year 2000 ready. However, WebMD has limited or no control over the actions of its service and content providers. Therefore, while WebMD expects that it will be able to resolve any significant Year 2000 problems with its systems, WebMD cannot guarantee that its service and content providers will resolve any or all Year 2000 problems with their systems before the occurrence of a material disruption to WebMD's business. Any failure of these third 254 265 parties to resolve Year 2000 problems with their systems in a timely manner could have a material adverse effect on WebMD's business, financial condition or operating results. Most likely consequences of Year 2000 problems. WebMD expects to identify and resolve all Year 2000 problems that could materially adversely affect its business, financial condition or operating results. However, WebMD believes that it will not be possible to determine with complete certainty that all Year 2000 problems affecting WebMD have been identified or corrected. The number of devices that could be affected and the interactions among these devices are simply too numerous. In addition, WebMD cannot accurately predict how many failures related to the Year 2000 problem will occur or the severity, duration or financial consequences of such failures. As a result, WebMD could possibly suffer the following consequences: - a significant number of operational inconveniences and inefficiencies for WebMD, its service and content providers and subscribers and users that may divert time and attention and financial and human resources from WebMD's ordinary business activities - a lesser number of serious system failures that may require significant efforts by WebMD, its service and content providers or WebMD's subscribers and users to prevent or alleviate material business disruptions Contingency plans. WebMD is currently developing contingency plans to be implemented as part of its efforts to identify and correct Year 2000 problems affecting its internal systems. WebMD expects to complete its contingency plans by the end of the third quarter of 1999. Depending on the systems affected, these plans could include: - accelerated replacement of affected equipment or software - short to medium-term use of backup equipment and software - increased work hours for our personnel or use of contract personnel to correct on an accelerated schedule any Year 2000 problems which arise or to provide manual workarounds for information systems - other similar approaches If WebMD is required to implement any of these contingency plans, such plans could have a material adverse effect on its financial condition or operating results. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997. SFAS No. 131 establishes standards for disclosures about operating segments, products and services, geographic areas and major customers. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK WebMD's financial instruments consist of cash that is invested in institutional money market funds. At June 30, 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 June 30, 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 255 266 period from inception, May 24, 1995, through December 31, 1996 contained no adverse opinion or disclaimer of opinion. The opinion was qualified as to the uncertainty of Direct Medical Knowledge's ability to continue as a going concern. In connection with these audits and through February 23, 1997, there had been no disagreements with Berg & Company on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement if not resolved to the satisfaction of Berg & Company would have caused them to make reference thereto in their report on the financial statements for such periods. The decision to change accounting firms was approved by Direct Medical Knowledge's management. Direct Medical Knowledge has requested that Berg & Company furnish it with a letter addressed to the Securities and Exchange Commission stating whether or not it agrees with the above statements. A copy of that letter, dated June 15, 1999, is filed as an exhibit to the registration statement of which the proxy statement/prospectus forms a part. Direct Medical Knowledge engaged PricewaterhouseCoopers LLP as its new independent accountants as of February 23, 1997. During the period from inception, May 24, 1995, through February 23, 1997, Direct Medical Knowledge had not consulted with PricewaterhouseCoopers LLP on items which were or should have been subject to Statement of Auditing Standards No. 50, or concerned the subject matter of a disagreement or reportable event with Berg & Company. 256 267 WEBMD'S MANAGEMENT The following table sets forth certain information regarding WebMD's current executive officers and directors:
NAME AGE POSITION ---- --- -------- Jeffrey T. Arnold(1)............. 29 Chairman of the Board and Chief Executive Officer William P. Payne................. 52 Vice Chairman of the Board K. Robert Draughon............... 39 Chief Financial Officer W. Michael Heekin(1)............. 46 Executive Vice President, General Counsel, Secretary and Director Lucius E. Burch, III(2).......... 56 Director U. Bertram Ellis, Jr............. 45 Director J. Rex Fuqua..................... 48 Director S. Taylor Glover(3).............. 48 Director Boland T. Jones(1)............... 39 Director Jouko J. Rissanen(2)............. 53 Director Glenn W. Sturm(1)................ 45 Director
- ------------------------- (1) Member of executive committee of the board of directors. (2) Member of compensation committee of the board of directors. (3) Member of audit committee of the board of directors. Jeffrey T. Arnold, WebMD's founder, has served as Chairman of the Board and Chief Executive Officer of WebMD since its inception in October 1996. In addition, Mr. Arnold served as its President from its inception until September 1997. From April 1994 until Endeavor's merger with WebMD in March 1997, Mr. Arnold served in various capacities at Endeavor, including as Chairman and Chief Executive Officer. Mr. Arnold also serves on the board of directors of iXL and Premiere Technologies. William P. Payne has served as Vice Chairman of WebMD since September 1998. Mr. Payne also serves as Vice Chairman of Premiere Technologies and as Chairman of Orchestrate.com, Inc., a subsidiary of Premiere Technologies. From February 1997 to June 1998, Mr. Payne was a Vice Chairman of NationsBank Corporation. He was President and Chief Executive Officer of the Atlanta Committee for the Olympic Games from 1991 to 1997. Mr. Payne is also a director of Premiere Technologies, Anheuser-Busch Companies, Inc., Jefferson-Pilot Corporation, ACSYS, Inc. and Cousins Properties, Inc. K. Robert Draughon has served as Chief Financial Officer of WebMD since February 1998. From January 1988 to February 1998, he served as Chief Investment Officer for Fuqua Capital Corporation, a private investment firm based in Atlanta, Georgia. Mr. Draughon also serves on the board of directors of XRT, Corp. and NuSoft Technologies, Inc. W. Michael Heekin has served as an Executive Vice President of WebMD since November 1998 and as General Counsel since January 1999. Mr. Heekin served as Chief Operating Officer of WebMD from August 1997 to November 1998. Mr. Heekin has also served as one of WebMD's directors and as Secretary of WebMD since September 1997. From March 1993 to August 1997, Mr. Heekin served as Senior Vice President and Corporate Secretary of American Heritage Life Investment Corporation. Prior to March 1993, Mr. Heekin served as an Associate Dean of Florida State University College of Law. Lucius E. Burch, III has served as one of WebMD's directors since its inception. He served as President from 1981 to 1994 and has been Chairman from 1994 to present of Massey Burch Investment Group, Inc., a private venture fund. Mr. Burch also serves on the board of directors of QMS, Inc., Norrell Corporation and Physicians Resource Group, Inc. 257 268 U. Bertram Ellis, Jr. has served as one of WebMD's directors since June 1997. Since April 1996, he has served as Chairman and Chief Executive Officer of iXL. Mr. Ellis founded and served as President of Ellis Communications, Inc., an owner of television and radio stations, from 1993 to 1996. J. Rex Fuqua has served as one of WebMD's directors since February 1997. Mr. Fuqua has been President and Chief Executive Officer of Fuqua Capital Corporation since 1989. Mr. Fuqua is also Managing Director of Fuqua Ventures LLC, a firm which invests in emerging technology companies. Mr. Fuqua serves on the board of directors of Aaron Rents, Inc. and Graham-Field Health Products, Inc. Mr. Fuqua also serves on the board of directors of Convergence.com Corporation, a privately-held broadband Internet access company. S. Taylor Glover has served as one of WebMD's directors since September 1997. Mr. Glover has served in various capacities at Merrill Lynch Pierce Fenner & Smith Incorporated since 1973, most recently as Senior Vice President -- Investments of the Private Client Group. Mr. Glover also serves on the board of directors of Gaston-Loughlin, Inc., a privately-held workers compensation managed care company, and Convergence.com. Boland T. Jones has served as one of WebMD's directors since August 1998. Since 1990, Mr. Jones has served as Chairman of the Board and Chief Executive Officer of Premiere Technologies. Mr. Jones also serves on the board of directors of Intellivoice Communications, Inc., a privately-held developer of speech applications and Internet telephony, and Webforia, a privately-held developer and provider of Internet tools for users to search, catalog and group information. Jouko J. Rissanen has served as one of WebMD's directors since its inception. Mr. Rissanen has founded several medical companies, including Cardiac Systems, Inc., Ocudyne, Inc., Occumedics, Inc., MedFusion, Inc. and Sensor Technology, Inc. He served as President of Sensor Technology, Inc. from 1987 to 1994, at which time the company was sold to Eli Lilly and Company. Currently, Mr. Rissanen is an individual investor and land developer, and serves as a consultant to Guidant Corporation. Mr. Rissanen also serves on the board of directors of J&C Nationwide. Glenn W. Sturm has served as one of WebMD's directors since February 1997. Mr. Sturm is a partner in the law firm of Nelson Mullins Riley & Scarborough, L.L.P., where he serves as Corporate Chairman and as a member of the Executive Committee. Mr. Sturm is a director of Phoenix International Ltd., Inc., The InterCept Group, Inc. and Towne Services, Inc. Mr. Sturm is a principal in Centaurus Ventures, a recently formed venture fund which invests in and advises electronic commerce, transaction processing and computer telephony companies. WebMD's board is divided into three classes, and each class serves for a staggered three-year term, or until successors of such class have been elected and qualified. Messrs. Arnold, Heekin and Jones are Class I directors and serve until the annual meeting of stockholders held in 2000. Messrs. Burch, Glover, Payne and Rissanen are Class II directors and serve until the annual meeting of stockholders held in 2001. Messrs. Ellis, Fuqua and Sturm are Class III directors and serve until the annual meeting of stockholders held in 2002. At each annual meeting of stockholders, a class of directors is elected for a three-year term to succeed the directors or director of the same class whose terms are then expiring. To the extent there is an increase in the number of directors, the WebMD board will distribute the additional directorships among the three classes so that, as nearly as possible, each class will consist of an equal number of directors. Executive officers of WebMD are elected by the board on an annual basis and serve until the next annual meeting of WebMD's board and until their successors have been duly elected and qualified. There are no family relationships among any of WebMD's executive officers or directors. BOARD OF DIRECTORS' COMMITTEES WebMD's board of directors has established an executive committee, audit committee and compensation committee. Messrs. Arnold, Heekin, Jones and Sturm are members of the executive committee, which exercises the power of WebMD's board of directors between board meetings, subject to 258 269 limitations. Mr. Glover is currently the only member of the audit committee, which reviews WebMD's audit functions, including its accounting and financial reporting practices, the adequacy its system of internal accounting controls, the quality and integrity of its financial statements and relations with its independent auditors. Messrs. Burch and Rissanen are members of the compensation committee, which establishes the compensation of WebMD's executive officers, including salaries, bonuses, commissions, benefit plans and compensation issues and administers WebMD's stock incentive plan. DIRECTOR COMPENSATION WebMD awards options to purchase common stock to non-employee directors for their service on the board of directors. Each non-employee director received a grant of options to acquire 27,692 shares of Series D common stock at an exercise price of $10.83 per share on November 13, 1998, the date WebMD's director option plan was approved. Each non-employee director received a grant of options to acquire 6,923 shares of Series D common stock at an exercise price of $14.44 on January 1, 1999. WebMD reimburses its directors for out-of-pocket expenses incurred in connection with their rendering of services as directors. WebMD has not paid and does not intend to pay cash fees to our directors for attendance at meetings. Effective May 22, 1998, William P. Payne became an employee and the Chairman of the Board of Orchestrate.com, a wholly-owned subsidiary of Premiere Technologies. As Chairman of Orchestrate.com, one of Mr. Payne's principal duties is to assist WebMD in the development of WebMD's business for the purpose of increasing revenue opportunities for Premiere Technologies and enhancing the value of Premiere Technologies' investment in WebMD. In consideration of Mr. Payne's devotion of up to 60% of his time directly to WebMD's business, WebMD reimburses Premiere Technologies $375,000 per year for Mr. Payne's salary, $125,000 per year for Mr. Payne's minimum bonus and $6,000 per year for Mr. Payne's automobile allowance, each for the balance of Mr. Payne's two-year employment with Orchestrate.com. In addition, WebMD granted Mr. Payne options to acquire 276,920 shares of Series D common stock with an exercise price of $1.44 per share. WebMD also reimburses Mr. Payne for any expenses he incurs in discharging his duties to WebMD. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The compensation committee of WebMD's board of directors was formed on September 17, 1998. The current members of the compensation committee are Lucius E. Burch, III and Jouko J. Rissanen. Neither Messrs. Burch nor Rissanen has been an officer or employee of WebMD at any time. For the six months ended June 30, 1999 and for years ended December 31, 1996, 1997 and 1998, WebMD paid approximately $2,300, $2,100, $5,000 and $4,800, respectively, in health, life and dental insurance premiums for Mr. Rissanen and his wife. In August 1996, Mr. Rissanen loaned $200,000 to Endeavor pursuant to an oral agreement. In March 1998, pursuant to a conversion of debt, indemnification and release agreement among WebMD, Endeavor, Mr. Rissanen and Finn Partners, a general partnership of which Mr. Rissanen is the managing partner and in which he owns a 16.7% interest, the parties agreed to convert such debt into 100,000 shares of Series D common stock which were issued to Finn Partners. In January 1997, WebMD loaned Jeffrey T. Arnold $4,000 to purchase 4,000,000 shares of common stock without series designation, Mr. Rissanen $1,400 to purchase 1,400,000 shares of Series B common stock and Mr. Burch $1,000 to purchase 1,000,000 shares of Series C common stock. These unsecured loans were evidenced by promissory notes bearing interest at the rate of 8.75% per annum. Principal and interest on the loans have been paid in full. Dissenting stockholder lawsuit. In March 1997, a majority of the stockholders of Endeavor approved and adopted a plan and agreement of merger providing for the merger of Endeavor into QDS Acquisition Corporation, a wholly owned subsidiary of WebMD. Prior to this merger, the stockholders of Endeavor consisted of Messrs. Arnold, Rissanen and Burch, Robert A. Frist, and nine physicians. Messrs. Arnold, 259 270 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. Therefore, WebMD's board of directors was required to approve the merger. The merger was approved unanimously by the board, which at that time consisted of Messrs. Arnold, Rissanen, Burch and Frist and three other individuals. In addition, at the time of the merger, WebMD's four largest stockholders were Messrs. Arnold, Rissanen, Burch and Frist, and the sole voting stockholder was Mr. Arnold. In July 1998, WebMD paid an aggregate of $2.7 million to settle the dissenters' rights action and entered into a consulting agreement with one of the dissenting stockholders. EXECUTIVE COMPENSATION The following table sets forth all compensation awarded to, earned by or paid for services rendered to WebMD in all capacities during the fiscal year ended December 31, 1998 by WebMD's Chief Executive Officer and each of WebMD's other two highest paid executive officers whose total compensation exceeded $100,000, referred to in this section and the section entitled "-- Share ownership by WebMD's principal stockholders, management and directors" on page 264 as "named executive officers." SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ------------ ANNUAL COMPENSATION SECURITIES ------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY($) BONUS OPTIONS(#) COMPENSATION --------------------------- --------- ------ ------------ ------------ 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
Mr. Arnold's annual salary consists of $180,000 in base salary plus $34,302 representing forgiveness of indebtedness owed to WebMD and an amount paid to Mr. Arnold sufficient to pay the tax due on such forgiveness of indebtedness. For more information see the section entitled "-- WebMD's related party transactions," on page 270. "All other compensation" consists of amounts paid for car allowances. OPTION GRANTS IN FISCAL 1998 The following table sets forth information concerning grants of stock options to the named executive officers during the fiscal year ended December 31, 1998:
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% ---- ---------- ------------- --------- ---------- ------------- ------------- 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........ -- -- -- -- -- --
Most 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 260 271 fiscal year is based on a total of 3,123,840 options granted to all employees during the fiscal year ended December 31, 1998. All options were granted at an exercise price equal to the fair market value of the common stock on the date of grant. Potential realizable values are computed by (a) multiplying the number of shares of common stock subject to a given option by the exercise price and (b) assuming that the aggregate stock value derived from that calculation compounds at the annual rate of 5% and 10% for the remainder of the four-year term of the option. In accordance with the rules of the Securities and Exchange Commission, the potential realizable values for such options shown in the table are based on assumed rates of stock price appreciation of 5% and 10% compounded annually from the date the respective options were granted to their expiration date. These assumed rates of appreciation do not represent our estimate or projection of the appreciation of shares of our common stock. The following table sets forth information concerning exercisable and unexercisable stock options held as of December 31, 1998 by each of the named executive officers. No options were exercised by the named executive officers in 1998. AGGREGATE OPTION EXERCISES IN FISCAL 1998 AND FISCAL YEAR END OPTION VALUES
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 ---- ----------- ------------- ----------- ------------- 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
The value of unexercised in-the-money options at December 31, 1998 was determined by subtracting the exercise price from $14.44 per share, the fair market value of WebMD capital stock at December 31, 1998 as determined in good faith by the WebMD board. EMPLOYMENT AGREEMENTS WebMD has an employment agreement effective September 30, 1998 with Jeffrey T. Arnold. His employment agreement has a two-year term and renews for consecutive one-year terms, unless either party gives 360-days notice prior to the expiration of any term. WebMD pays Mr. Arnold an annual salary of $180,000, and WebMD may pay him an annual bonus as determined by the board, or the compensation committee, Mr. Arnold has agreed not to compete with WebMD during the term of his employment and for one year after his termination. If WebMD terminates Mr. Arnold without cause, Mr. Arnold will be entitled to 12 months' salary as severance. WebMD granted Mr. Arnold options to acquire 1,384,600 shares of Series D common stock in his employment agreement. His options vest one-third on the date of grant and one-sixth, one-sixth and one-third on the first three anniversaries of the date of grant. All of Mr. Arnold's options will immediately vest and become exercisable in the event of a change of control, whether by contract, ownership of voting securities or otherwise, of the direct or indirect power to direct the management and policies of WebMD. A change of control will be deemed to have occurred if any person or entity that is not on the date of his employment agreement the beneficial owner of any securities becomes the beneficial owner of 20% or more of the combined voting power of WebMD's outstanding voting securities which would have the right to vote for the election of WebMD's directors. In connection with the WebMD merger, Mr. Arnold agreed to waive any change of control vesting which would occur as a result of the merger. If Mr. Arnold is terminated after the merger 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 261 272 $150,000, respectively, and WebMD may pay either of them an annual bonus as determined by WebMD's board of directors or the compensation committee. They have each agreed not to compete with WebMD during the term of their employment and for one year thereafter. If WebMD terminates either of them without cause, they will be entitled to 12 month's salary as severance. WebMD granted Messrs. Draughon and Heekin options to acquire 366,919 and 415,380 shares, respectively, of Series D common stock. Their options vest one-third on the date of employment and one-sixth, one-sixth and one-third on the first three anniversaries of the date of their initial employment. OPTION PLANS Stock incentive plan. In September 1997, the WebMD board of directors adopted and WebMD's stockholders approved its stock incentive plan under which 6,000,000 shares of common stock of WebMD are available to be granted to employees, consultants and others rendering services to WebMD. WebMD's stock incentive plan is effective as of January 1, 1997 by its terms. In September 1998 and April 1999, the WebMD board adopted certain amendments to the stock incentive plan, which provided, in part, for the increase in the number of authorized shares of common stock under the stock incentive plan to 5,000,000 and 6,000,000, respectively. In March 1999, the WebMD board adopted amendments to the stock incentive plan which provided for estate and gift planning transfers approved by the compensation committee. The amendments to the stock incentive plan were approved by the WebMD's stockholders in January 1999 and March 1999, respectively. In April 1999, WebMD's board adjusted the shares of common stock underlying the awards in connection with WebMD's stock dividend. Options may be either incentive stock options within the meaning of Section 422 of the tax code, which permits the deferral of taxable income related to the exercise of such options, or nonqualified options not entitled to such deferral. Incentive stock options may only be granted to employees. In addition, the stock incentive plan allows for the award of restricted stock. WebMD's stock incentive plan is administered by the WebMD board and the compensation committee. Subject to the provisions of the stock incentive plan, the WebMD board and the compensation committee, in their discretion, select the recipients of awards and the number of options granted thereunder and determine other matters including vesting and exercisability schedules, the exercise price of options, which cannot be less than 100% of the fair market value of the common stock on the date of grant for all stock options and the duration of awards. As of August 5, 1999 WebMD options to acquire 6,383,543 shares of Series D common stock of WebMD were outstanding under the stock incentive plan. In addition, WebMD assumed options to acquire an aggregate of 362,276 shares of Series B preferred stock in connection with the Sapient Health Network and Direct Medical Knowledge acquisitions. Director option plan. In November 1998, WebMD's board adopted WebMD's director option plan, which was approved by WebMD's stockholders in January 1999. The director option plan provides for non-qualified stock options to be granted to WebMD's non-employee directors. The director option plan authorizes the issuance of up to 1,000,000 shares of common stock pursuant to options having an exercise price equal to the fair market value of the common stock on the date the options are granted. In April 1999, WebMD's board adjusted the shares of common stock underlying the options in connection with WebMD's stock dividend. The director option plan provides for an initial grant of options to acquire 20,000 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 20,000 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 5,000 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 262 273 period. As of August 5, 1999, options to acquire 307,696 shares of Series D common stock were outstanding under the director option plan. WEBMD'S RELATED PARTY TRANSACTIONS In July 1996, WebMD's subsidiary Endeavor, loaned Jeffrey T. Arnold, Chairman and Chief Executive Officer of WebMD, $57,142 to purchase 2,500,000 shares of common stock of Endeavor. This loan is evidenced by a full-recourse promissory note bearing interest at 8.5% per annum. The principal and accrued interest were payable in 24 equal installments beginning on August 1, 1996 and continuing on the first day of each month thereafter until the indebtedness is paid in full. In March 1997, the terms of this note were modified to provide that the obligation to make payments on the note began on July 1, 1997 rather than August 1, 1996. The principal and interest on the note are payable in 24 equal installments of $2,381. During Mr. Arnold's employment and through December 31, 1998, he paid principal and interest of $52,015. As of June 1999, this note was repaid full. In August 1997, J. Rex Fuqua and S. Taylor Glover, directors of WebMD, loaned WebMD $100,000. The interest rate on these loans was 8.5% per annum. In September 1997, WebMD repaid $100,350 to each of Mr. Fuqua and Mr. Glover as payment in full. In connection with these loans, WebMD granted to each of Messrs. Fuqua and Glover an option to purchase 13,846 shares of Series D common stock at a price of $1.44 per share. These options were immediately exercisable, remain exercisable for three years and expire upon the WebMD merger. In December 1997, Premiere Technologies purchased 1,100,000 shares of Series E common stock for $2.2 million. 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 $2.0 million. In April 1998, Premiere Technologies exercised the warrant in full. Premiere Technologies subsequently transferred all of its WebMD stock to its wholly owned subsidiary, PTEKVentures.com, Inc. Boland T. Jones, a director of WebMD, is the Chairman and Chief Executive Officer of Premiere Technologies and Jeffrey T. Arnold, WebMD's Chairman and Chief Executive Officer is a director of Premiere Technologies. WebMD also subleases the space for its corporate headquarters and call center in Atlanta, Georgia from Premiere Communications, a subsidiary of Premiere Technologies. The term of the sublease ends on February 1, 2000, with an option to renew the lease term for one additional year. The sublease requires monthly payments by WebMD to Premiere Technologies of $36,466.50 and the payment of additional costs and expenses. WebMD also leases equipment and other personal property necessary for the operation of its call center from Premiere Communications. The term of this lease ends on February 1, 2000, with an option to renew the lease term for one additional year. This lease requires monthly payments by WebMD to Premiere Technologies of $24,311. For six months ended June 30, 1999 and the year ended December 31, 1998, WebMD paid an aggregate of $364,665 and $607,775, respectively under this lease. In addition, WebMD leases the use of an airplane on an hourly basis from a limited liability company that is owned 99.0% by Boland T. Jones, a director of WebMD and Chairman and Chief Executive Officer of Premiere Technologies, and 1.0% by Premiere Technologies. The term of the lease is month-to-month. For the six months ended June 30, 1999, WebMD paid approximately $400,000 under this lease. WebMD provides its subscribers with Premiere Technologies' enhanced communications services. WebMD's agreement with Premiere Technologies is effective until January 31, 2001 and contains minimum commitments for per account and transaction payments by WebMD to Premiere Technologies. The minimum commitments began at $10,000 per month as of September 1998. For each month following September 1998, the minimum commitments increase by $10,000 per month to a maximum of $80,000 per month in April 1999 and thereafter. WebMD's agreement with Premiere Technologies also provides for a $350,000 fee for the development of the Orchestrate platform for WebMD which was paid by WebMD in January 1998. WebMD paid a $100,000 fee in November 1998 to Premiere Technologies to integrate the Orchestrate service and its services. In addition, the agreement requires that WebMD spend $750,000 for joint marketing efforts with Premiere Technologies. Premiere Technologies and WebMD entered into an amendment to their agreement in connection with obtaining Premiere Technologies' 263 274 agreement to vote for 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, HBO & Company purchased 667,000 shares of Series A preferred stock for $10.0 million. In connection with this investment, HBO & Company also received a warrant to purchase 415,380 shares of Series A preferred stock with an exercise price of $13.00 per share, which HBO & Company exercised in April 1999. On January 27, 1999, HBO & Company also purchased 650,000 shares of Series C preferred stock for $13.0 million. 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 HBO & Company on May 22, 1999, because WebMD failed to complete an initial public offering by that date. On September 1, 1999, WebMD and Healtheon entered into an agreement with McKessonHBOC and HBO & Company providing for a termination of the prior strategic agreements between WebMD and McKessonHBOC, the substitution of a much more limited relationship, the elimination of rights that McKessonHBOC had to purchase additional equity in WebMD and the issuance of warrants to HBO & Company to purchase shares of WebMD common stock. For more information concerning this agreement, see the section entitled "WebMD related transaction agreements -- McKessonHBOC agreement" on page 89. In May 1999, Microsoft purchased 184,604 shares of Series E preferred stock of WebMD. On June 11, 1999, Microsoft purchased 273,214 shares of Series F preferred stock of WebMD pursuant to an offer to purchase. Microsoft is committed to acquire an additional 276,906 shares of Series E preferred stock upon the completion of the WebMD merger. For a complete description of the Microsoft relationship, see the section entitled, "Healtheon/WebMD's strategic alliances with and investments from Microsoft and other partners" on page 75. All sales of capital stock were made at a price per share equal to the fair market value of such stock on the date of sale as determined by WebMD's board of directors. Some of the transactions described above may be on terms more favorable to officers, directors and principal stockholders than they could obtain in a transaction with an unaffiliated party. WebMD has adopted a policy requiring that all material transactions between WebMD and its officers, directors or other affiliates must be approved by a majority of the disinterested members of our board of directors and be on terms no less favorable to WebMD than could be obtained from unaffiliated third parties. WebMD's director Glenn W. Sturm is a partner in the law firm of Nelson Mullins Riley & Scarborough, L.L.P., where he serves as Corporate Chairman and a member of its executive committee. Nelson Mullins serves as WebMD's primary law firm. On December 1, 1998, WebMD employed Jay P. Gilbertson as President and Chief Operating Officer. On June 4, 1999, WebMD informed Mr. Gilbertson that it intended to terminate his employment, which the WebMD board did on June 15, 1999. WebMD and Mr. Gilbertson have not reached agreement on the terms of his termination. Effective July 27, 1999, Mr. Gilbertson resigned as a director of WebMD. Mr. Gilbertson served as a director of WebMD from August 1998 to November 1998 as a representative 264 275 of McKessonHBOC's subsidiary, HBOC, and he was reappointed to the board in connection with his employment by WebMD in January 1999. For more information concerning Messrs. Arnold and Rissanen, see the section entitled "WebMD's management -- Compensation committee interlocks and insider participation" on page 257. For more information concerning Mr. Payne, see the section entitled "WebMD's management -- Director compensation on page 259." 265 276 SHARE OWNERSHIP BY WEBMD'S PRINCIPAL STOCKHOLDERS, MANAGEMENT AND DIRECTORS The following table sets forth certain information with respect to the beneficial ownership of WebMD's outstanding capital stock as of September 1, 1999, and as adjusted to reflect the WebMD merger, by: - each person or entity known by WebMD to be the beneficial owner of more than 5% of the outstanding shares of WebMD capital stock - each of WebMD's directors and named executive officers - all of WebMD's directors and executive officers as a group Unless otherwise indicated, the address of each of the beneficial owners identified is c/o WebMD, Inc., 400 The Lenox Building, 3399 Peachtree Road, NE, Atlanta, Georgia 30326. Except as otherwise indicated, such beneficial owners have sole voting and investment power with respect to all shares of common stock owned by them, subject to community property laws where applicable. Percentage of ownership is based on 35,252,087 shares of WebMD common stock outstanding on September 1, 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 September 1, 1999. Percentage of ownership is also based on the following exchange ratios: - 1.796 shares of Healtheon/WebMD common stock for each share of WebMD common stock outstanding on September 1, 1999, assuming the conversion of all shares of WebMD preferred stock into common stock immediately prior to that date and including the additional 276,906 shares of Series E preferred stock to be purchased by Microsoft upon the WebMD closing - 0.5483 shares of Healtheon/WebMD common stock for each share of Medcast common stock outstanding on September 1, 1999 assuming the conversion of all shares of Medcast preferred stock into common stock immediately prior to that date - 0.6593 shares of Healtheon/WebMD common stock for each share of MEDE AMERICA common stock outstanding on September 1, 1999, assuming the exercise of all options and warrants that are currently exercisable or are exercisable within 60 days of September 1, 1999 Further, percentage of ownership is based on: - an estimated 135,083,566 shares of Healtheon/WebMD common stock outstanding following the WebMD merger - an estimated 137,566,997 shares of Healtheon/WebMD common stock outstanding following the WebMD and Medcast mergers - an estimated 143,808,645 shares of Healtheon/WebMD common stock outstanding following the WebMD and MEDE AMERICA mergers - an estimated 146,292,075 shares of Healtheon/WebMD common stock outstanding following all the mergers 266 277
WEBMD SHARES BENEFICIALLY OWNED PRIOR TO THE WEBMD MERGER ----------------------------------------------- COMMON EXERCISABLE EXERCISABLE NAME AND ADDRESS OF BENEFICIAL OWNER STOCK WARRANTS OPTIONS PERCENT - ------------------------------------ ---------- ----------- ----------- ------- Microsoft Corporation... 6,644,400 7,614,916 -- 33.3% One Microsoft Way Redmond, WA 98052 E.I. du Pont de Nemours and Company............... 180,000 5,538,400 -- 14.0 1007 Market Street Wilmington, DE 19898 Jeffrey T. Arnold(1).... 3,621,080 -- 461,533 11.5 HBO & Company(2)........ 2,515,820 4,688,049 -- 18.0 301 Perimeter Center North Atlanta, Georgia 30346 Boland T. Jones(3)...... 2,958,890 -- 34,615 8.5 Premiere Technologies, Inc.... 2,675,050 -- -- 7.6 600 The Lenox Building 3399 Peachtree Road, NE Atlanta, GA 30326 Jouko J. Rissanen(4).... 2,261,530 -- 34,615 6.5 Finn Partners(4)........ 1,500,000 -- 34,615 4.3 Lucius E. Burch III(5)... 1,384,600 -- 34,615 4.0 J. Rex Fuqua(6)......... 599,900 -- 96,922 2.0 S. Taylor Glover(7)..... 509,305 -- 48,461 1.6 William P. Payne........ -- -- 303,856 * U. Bertram Ellis, Jr.... 240,000 -- 34,615 * Glenn W. Sturm.......... 118,460 -- 34,615 * W. Michael Heekin....... -- -- 219,231 * K. Robert Draughon...... 50,000 -- 150,832 * All directors and executives as a group (11 persons).... 11,743,765 0 1,453,910 37.2 PERCENT OF HEALTHEON/WEBMD SHARES BENEFICIALLY OWNED AFTER --------------------------------------------- THE THE WEBMD WEBMD AND MEDE THE WEBMD AND MEDCAST AMERICA ALL THE NAME AND ADDRESS OF BENEFICIAL OWNER MERGER MERGERS MERGERS MERGERS - ------------------------------------ --------- ----------- --------- ------- Microsoft Corporation... 17.2% 16.9% 16.3% 16.0% One Microsoft Way Redmond, WA 98052 E.I. du Pont de Nemours and Company............... 7.1 7.0 6.7 6.6 1007 Market Street Wilmington, DE 19898 Jeffrey T. Arnold(1).... 5.4 5.3 5.1 5.0 HBO & Company(2)........ 9.0 8.9 8.5 8.4 301 Perimeter Center North Atlanta, Georgia 30346 Boland T. Jones(3)...... 4.0 3.9 3.7 3.7 Premiere Technologies, Inc.... 3.6 3.5 3.3 3.3 600 The Lenox Building 3399 Peachtree Road, NE Atlanta, GA 30326 Jouko J. Rissanen(4).... 3.1 3.0 2.9 2.8 Finn Partners(4)........ 2.0 2.0 1.9 1.8 Lucius E. Burch III(5)... 1.9 1.9 1.8 1.7 J. Rex Fuqua(6)......... * * * * S. Taylor Glover(7)..... * * * * William P. Payne........ * * * * U. Bertram Ellis, Jr.... * * * * Glenn W. Sturm.......... * * * * W. Michael Heekin....... * * * * K. Robert Draughon...... * * * * All directors and executives as a group (11 persons).... 17.5 17.1 16.5 16.1
- ------------------------- * Less than 1% of the outstanding WebMD capital stock. (1) Includes: - 2,816,154 shares held of record - 507,700 shares held of record by Arnold Family Irrevocable Trust - 276,920 shares held of record by JT Arnold Enterprises LLLP, of which Mr. Arnold is a general partner and in which he owns a 3% interest with his wife - 20,306 shares held by his wife. Other than 8,308 shares held by JT Arnold Enterprises LLLP attributable to Mr. Arnold, he disclaims beneficial ownership of the shares held by Arnold Family Irrevocable Trust and JT Arnold Enterprises LLLP. (2) Includes 69,230 contingent shares to be received by HBO & Company. (3) Includes: - 244,380 shares held of record - 39,460 shares held of record by Andrea L. Jones, as trustee of the 1997 Jones Family Trust - 2,675,050 shares held of record by PTEKVentures.com, Inc., a wholly owned subsidiary of Premiere Technologies. Mr. Jones is Chairman of the Board and Chief Executive Officer of Premiere Technologies. Mr. Jones disclaims beneficial ownership of the shares held by the 1997 Jones Family Trust and PTEKVentures.com. (4) Includes: - 761,530 shares held of record - 1,500,000 shares held of record by Finn Partners, of which Mr. Rissanen is the managing general partner and in which he owns a one-third interest along with his wife. Other than 500,000 shares held by Finn Partners attributable to Mr. Rissanen, he disclaims beneficial ownership of the shares held by Finn Partners. 267 278 (5) Includes: - 553,840 shares held of record - 830,760 shares held of record by Burch House, L.P., of which Mr. Burch is the managing partner and in which he owns a one-sixth interest. Other than the 138,460 shares held by Burch House, L.P. attributable to Mr. Burch, he disclaims beneficial ownership of the shares held by Burch House, L.P. (6) Includes: - 438,410 shares held of record - 161,490 shares held of record by Fuqua Holdings I, L.P., of which Fuqua Holdings, Inc. is the general partner and Mr. Fuqua is the President (7) Includes: - 469,305 shares held of record - 40,000 shares held of record by STG Partners, LP, 1% of which is owned by STG Management, LLC as general partner and of which Mr. Taylor and his wife are members. Mr. Taylor is also Chief Executive Officer of STG Management, LLC. Other than the 485 shares held by STG Partners, LP attributable to Mr. Taylor, he disclaims beneficial ownership of shares held by STG Partners, LP. 268 279 INFORMATION REGARDING MEDE AMERICA MEDE AMERICA'S BUSINESS MEDE AMERICA is a leading provider of electronic data interchange products and services to a broad range of providers and payers in the healthcare industry. MEDE AMERICA offers an integrated set of electronic data interchange solutions that allows hospitals, pharmacies, physicians, dentists and other healthcare providers and provider groups to electronically edit, process and transmit claims, eligibility and enrollment data, track claims submissions throughout the claims payment process and obtain faster reimbursement for their services. In addition to offering greater processing speed, MEDE AMERICA'S electronic data interchange products and services reduce processing costs, increase collection rates and result in more accurate data interchange. MEDE AMERICA maintains over 650 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 June 30, 1999, MEDE AMERICA processed approximately 1,000,000 transactions per day for over 82,000 providers located in all 50 states. MEDE AMERICA'S proposed merger with Healtheon and the WebMD and Medcast mergers significantly expands MEDE AMERICA'S ability to access the various participants in the healthcare market and provide them with a back-end connectivity to execute transactions. Medcast provides daily medical news and additional content that can be channeled to physicians and consumers, making the combined product offering more attractive. WebMD provides brand awareness, a marketing strategy and strategic relationships that will allow the combined companies to target those participants and make them aware of the broad service offerings. Healtheon provides an Internet-based information and transaction platform that will allow it to deploy healthcare technology applications for use through its web site and leverage the MEDE AMERICA connectivity. MEDE AMERICA was formed in March 1995 through the consolidation and subsequent spin-off of three subsidiaries of CES, in connection with the acquisition by First Data Corporation of CES' credit card processing business. The three subsidiaries, MEDE AMERICA, Inc., MPC, and Wellmark, which comprised the healthcare services business of CES, historically provided electronic data interchange services to hospitals and physicians. Since MEDE AMERICA'S formation, it has expanded both through internal growth and the acquisition of six healthcare transaction processing businesses. As part of its strategy of providing an integrated set of electronic data interchange products and services to a broad range of healthcare providers, MEDE AMERICA has focused on acquisitions that provide entry into new markets or expand its product set. Competitive strengths MEDE AMERICA believes that it has several competitive strengths which will enable it to capitalize on the significant growth opportunities in the healthcare electronic data interchange marketplace. Comprehensive set of electronic data interchange products and services. MEDE AMERICA has followed a strategy of developing or acquiring electronic data interchange products and services that may be provided to a broad range of healthcare clients. MEDE AMERICA's products incorporate open architecture designs and what MEDE AMERICA regard as "best of breed" technology. Its products may be purchased as modular additions to the client's existing data storage and retrieval system, or as part of a comprehensive electronic data interchange processing system. These products also provide to the client the capability and the required security to transmit or receive electronic data interchange transactions across the Internet. They are designed to be compatible with a broad variety of hospital, medical, pharmacy and dental practice management and billing systems. In addition, new products can be added to respond to changing client requirements, and the scalability of MEDE AMERICA's products permits the client to accommodate increasing transaction volumes without requiring substantial new investments in software and hardware. 269 280 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 June 30, 1999, MEDE AMERICA's highly diversified client base consisted of approximately 46,000 pharmacies, 11,000 dental offices, 1,100 hospitals and clinics and 24,000 physicians. Direct relationships with providers and payers. MEDE AMERICA has developed over 650 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. These direct relationships with providers and payers distinguish MEDE AMERICA from suppliers of EDI healthcare services who have contractual relationships only with clearinghouses and practice management system vendors. MEDE AMERICA's direct relationships with the end users provides it with a more decentralized customer base to which a variety of related services, such as prescription scripting and enrollment and eligibility verification, may be offered, and offers the opportunity to achieve deeper penetration of its provider base. There are many competitors in the marketplace who have the ability to capture claims or other transactions from providers. However, there are very few companies who have the dedicated connections with multiple payers. It is this direct connectivity that distinguishes MEDE AMERICA in the market and makes its services more desirable. Focus on client service. MEDE AMERICA has focused on implementing a wide range of client service and support functions. These support activities include the use of automated client service tracking software, expanded client help desk and account executive support functions, and extensive client feed-back mechanisms. This focus has enhanced MEDE AMERICA's awareness of client needs and improved its ability to respond to those needs. Leading technology and product platforms. MEDE AMERICA recognizes the critical role of technology and telecommunications platforms to ensure reliable and high quality service. Over the past two years, it has invested significant capital in new hardware and software systems resulting in an estimated threefold increase in transaction processing capacity. MEDE AMERICA has designed its products on a modular client/server model, using open architecture and commonly available hardware, with redundant processing capabilities. The redundancies in MEDE AMERICA's computing capacity and its dual-site operations enable it to provide uninterrupted processing and data transmission with little, if any, downtime. Experienced management team. Each member of MEDE AMERICA's senior management team has over 15 years of experience in the information technology and transaction processing industries and has extensive background in working with emerging companies in the information processing industry. MEDE AMERICA believes that the range and depth of its senior management team position it to address the evolving requirements of its clients and to manage the growth required to meet its strategic goals. MEDE America's electronic data interchange products and services MEDE AMERICA's products and services enable its healthcare clients to process and transmit transactions more efficiently and accurately, reducing costs and increasing overall processing speed. They include a variety of software applications that perform discrete functions for healthcare providers. As more fully described in the table below, MEDE AMERICA'S products and services offer the following features: - transmitting healthcare provider claims for payment to payers for processing and reimbursement - editing, formatting and screening claims data to meet the particular requirements of particular payers - tracking claims of payment through the payment process 270 281 - verifying patient eligibility for reimbursement from Medicaid and private payers - verifying patient eligibility for benefits and processing enrollment applications for Medicaid programs - transmitting prescriptions electronically between physicians and pharmacies MEDE AMERICA's products and services can generally be used individually or in conjunction with other MEDEAMERICA products and services or the products of other vendors. They incorporate open architecture designs and what MEDE AMERICA regards as superior technology and may be purchased as modular additions to existing data storage and retrieval systems or as part of a comprehensive electronic data interchange processing system. Open architecture systems are designed to be compatible with a broad variety of hospital, medical, pharmacy and dental practice management and billing systems. In addition, new products can be added to respond to changing client requirements. The scalability of MEDE AMERICA's products permits its clients to accommodate increasing transaction volumes without substantial new investments in software and hardware. The following table illustrates the breadth of MEDE AMERICA's product and service offerings: MEDE AMERICA'S SET OF EDI PRODUCTS AND SERVICES
- ---------------------------------------------------------------------------------------------------------------------------- NAME OF PRODUCT/SERVICE DESCRIPTION OF AND MARKETS SERVED PRODUCT/SERVICE FEATURES CLIENT BENEFITS - ---------------------------------------------------------------------------------------------------------------------------- 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 an aggregate basis, pharmacy - Improves accounts receivable Pharmacy prescriptions and performs non-electronic management and accelerates cash flow reconciliation and payer accounts receivable through faster claim reimbursement. management. - Reduces administrative expenses. Claims Tracking -- - Tracks and provides a lock box service for payer - Improves accounts receivable Dental reimbursements. management and accelerates cash flow. - ---------------------------------------------------------------------------------------------------------------------------- Eligibility verification MEDE Eligibility -- - Verifies patients' eligibility for specific - Reduces costs by minimizing fraud. All markets healthcare benefits for Medicaid and commercial - Ensures patient services are supported payers. by a designated health benefit plan. - Reduces administrative expenses. - ---------------------------------------------------------------------------------------------------------------------------- Medicaid enrollment Medicaid - Processes and tracks Medicaid enrollment - Reduces expenses through on-line Enrollment Manage- applications allowing for the verification and application process. ment System (MEMS) processing of Medicaid claims. Utilized by - Reduces application processing time. -- Medical hospitals and government agencies in New York, - Improves Medicaid claims billing and New Jersey and California. collection. - Reduces bad debt. - ---------------------------------------------------------------------------------------------------------------------------- Transaction switching MEDE Xchange -- - Routes real-time and batch transaction data from - Reduces costs. All markets clients to facilitate transaction transmission - Increases network availability and to payers. reliability. - Supports a broad array of access methods. - Provides extensive payer connectivity. - ----------------------------------------------------------------------------------------------------------------------------
271 282
- ---------------------------------------------------------------------------------------------------------------------------- NAME OF PRODUCT/SERVICE DESCRIPTION OF AND MARKETS SERVED PRODUCT/SERVICE FEATURES CLIENT BENEFITS - ---------------------------------------------------------------------------------------------------------------------------- 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 electronic - Processes data relating to referrals, encounters - Reduces practice expense and improves data interchange and benefit precertifications. efficiency and patient relations. transactions -- All markets - ----------------------------------------------------------------------------------------------------------------------------
In addition, through its direct connections with insurance companies, Medicare and Medicaid agencies, Blue Cross and Blue Shield systems and other third party payers, as well as indirect connections with payers through other healthcare claims processors, MEDE AMERICA acts as a clearinghouse for claims routed to it by other processors and intermediaries for transmission to payers. This is accomplished through a dedicated network maintained by MEDE AMERICA consisting of dialup connections, lease lines via common carriers, such as AT&T, Sprint and GTE, and computer networks, such as Compuserve, which may be accessed by other processors and clearinghouses. Clients MEDE AMERICA markets its products primarily to hospitals, pharmacies, physicians, dentists and other healthcare providers and provider groups, including HMOs, PPOs and healthcare practice management vendors, renters of and process transactions for providers in all 50 states. MEDE AMERICA believes it is one of the largest pharmacy transaction in the U.S. based on the total number of transactions processed, serving more than 46,000 pharmacies in various electronic data interchange capacities. MEDE AMERICA has a strong presence in the medical market in New York, New Jersey, California, Florida, Minnesota, Missouri and Ohio, currently providing electronic data interchange services to more than 1,100 272 283 hospitals and clinics, and 24,000 physicians. In the dental market, it serves more than 11,000 dental offices. No single client of ours accounted for more than 1.5% of MEDE AMERICA's revenues in fiscal year 1999. Sales, marketing and client services MEDE AMERICA markets its products through a national sales and marketing organization consisting of 99 associates organized according to market, client type and product category. It also has a client services organization consisting of 65 associates dedicated to help desk and client support functions. A significant component of compensation for all sales personnel is performance based, although it bases quotas and bonuses on a number of factors in addition to actual sales, such as client satisfaction and collection of receivables. MEDE AMERICA's marketing efforts include direct sales, telesales, strategic partnerships with healthcare vendors, trade shows, direct marketing, telemarketing, the Internet, and specific advertising and marketing campaigns where appropriate. In the medical and pharmacy markets, MEDE AMERICA's current strategic business alliances include relationships with some of the country's largest hospitals, hospital networks, hospital information systems vendors, practice management software vendors, pharmacy chains, healthcare organizations and payers. MEDE AMERICA also maintain strategic alliances with certain state Medicaid programs. MEDE AMERICA's strategic alliances with vendors, distributors and dealers of practice management software have played an important role in building relationships with individual and small groups of physicians, pharmacies and dentists. These companies promote MEDE AMERICA's electronic data interchange products as modular additions to their practice management software. MEDE AMERICA has also won endorsements from 18 state dental associations, representing nearly half of all dentists in practice today. Its sales channels include targeting dental practice management companies and payer-driven programs aimed at their network providers. Research and development As of June 30, 1999, MEDE AMERICA employed 91 people in the areas of product design, research and development, and 38 people in the areas of quality assurance and technical support. MEDE AMERICA's product development strategy is focused on continuous enhancement of its existing products to increase their functionality and ease of use, and the development of new products for additional electronic data interchange transactions and telecommunications offerings. Research and development expenditures totaled $2.1 million in fiscal 1996, $3.3 million in fiscal 1997, $3.9 million in fiscal 1998 and $4.4 million in fiscal 1999. For a more complete description, see "MEDE AMERICA management's discussion and analysis of financial condition and results of operations" on page 279. Technology and operations Since the beginning of fiscal 1996, MEDE AMERICA has spent over 5.1 million on new hardware and software data center improvements. MEDE AMERICA estimates that it is currently operating at approximately one-third of its operating capacity. Advanced open architecture MEDE AMERICA's products and applications offer clients the benefits of an "open architecture" EDI system. As a result, a client's system can expand or change without incurring significant incremental capital expenditures for hardware or software. The architecture of MEDE AMERICA's systems also 273 284 improves reliability and connectivity, and facilitates the cross selling of its products, in part because of the following characteristics: - SCALABILITY. Products that are scalable whose capacity can be expanded by additions, or reduced by subtractions, without having to replace the original product with a new one. MEDE AMERICA's systems are designed to take full advantage of the client/server environment, UNIX operating systems and Redundant Array of Inexpensive Disks, referred to in this section entitled "MEDE AMERICA's business" as RAID technology, allowing clients to expand MEDE AMERICA's processing capacity. - MODULARITY. Systems that are modular are designed as a number of components that can be added or subtracted without having to replace other components. MEDE AMERICA's client/server systems has been developed with discrete functionality that can be replicated and utilized with additional hardware. This modularity enables us to optimize application and hardware performance. - REDUNDANCY. The implementation of a dual site, geographically dispersed On-Line Transaction Processing, referred to in this section entitled "MEDE AMERICA's business" as "OLTP" switch in Twinsburg, Ohio and Mitchel Field, New York and RAID technology for batch processing significantly reduces the risk of business interruption. Each of its sites is designed to be entirely self-supporting. - OPEN SYSTEMS. Through the use of an open systems architecture, MEDE AMERICA can add new functionality to a wide variety of software applications and hardware without re-designing its products. - INDUSTRY STANDARDS. Through the adoption and active use of pertinent standards for healthcare EDI processing, MEDE AMERICA can support client and payer processing requirements and provide standard interfaces to other EDI processing organizations. - EASE OF USE. MEDE AMERICA's products are either Windows-based or are based on a similar graphical user interface and function in UNIX, Novell and Windows NT operating environments, thereby enhancing ease of use by MEDE AMERICA's clients. Competition Competition in the market for MEDE AMERICA's products and services is intense and is expected to increase. The electronic data interchange market is characterized by rapidly changing technology, evolving user needs and frequent introduction of new products. Many of MEDE AMERICA's competitors and potential competitors have significantly greater financial, technical, product development, marketing and other resources and market recognition than it does. In addition, many of its competitors also currently have, or may develop or acquire, substantial installed client bases in the healthcare industry. As a result of these factors, MEDE AMERICA's competitors may be able to respond more quickly to new or emerging technologies, changes in client requirements and political, economic or regulatory changes in the healthcare industry, and may be able to devote greater resources to the development, promotion and sale of their products than it can. MEDE AMERICA's principal competitors include: - National Data Corporation, Envoy Corporation, a subsidiary of Quintiles Transnational Corp., and SSI, Inc. in claims processing and eligibility verification; - QuadraMed Corporation in claims processing; - Medifax, Inc. and HDX Healthcare Data Exchange Corporation in eligibility verification; and - Envoy Corporation in the dental market. MEDE AMERICA also may face potential competition from other companies not currently involved in healthcare electronic data transmission, which may enter the market as electronic data interchange 274 285 becomes more established. MEDE AMERICA believes that existing and potential clients in the healthcare electronic data interchange market evaluate the products and services of competing EDI providers on the basis of the compatibility of the provider's software, cost, ease of installation, the range of applications available, the quality of service and the degree of payer connectivity. Employees As of June 30, 1999, MEDE AMERICA employed 416 people, including 112 in operations, 101 in sales and marketing, 67 in client services, 93 in research and development, 33 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:
ESTIMATED MONTHLY TRANSACTION OWNED/LEASED FACILITY PERSONNEL TRANSACTION TYPE CAPACITY EXPIRATION DATE -------- --------- ---------------- ----------- --------------- Ohio (Primary Medical and 143 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) 66 Dental claims 1,600,000 January 2001 Corporate Headquarters, Sales & 152 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) 16 Claims N/A(1) May 2005
- ------------------------- (1) All claims of this facility are outsourced to a third party processor. Intellectual property MEDE AMERICA considers its methodologies, computer software and many of its databases to be proprietary. MEDE AMERICA relies on a combination of trade secrets, copyright and trademark laws, contractual provisions and technical measures to protect its rights in various methodologies, systems, products and databases. MEDE AMERICA has no patents covering its software technology. Due to the nature of its application software, MEDE AMERICA believes that patent and trade secret protection are less significant than its ability to further develop, enhance and modify its current products. However, any infringement or misappropriation of its proprietary software and databases could disadvantage MEDE AMERICA in its efforts to retain and attract new clients in a highly competitive market and could cause us to lose revenues or incur substantial litigation expense. MEDE AMERICA seeks to protect its proprietary information through nondisclosure agreements with its consultants, clients and potential clients, and limits access to, and distribution of, its proprietary information. Substantial litigation regarding intellectual property rights exists in the software industry, and MEDE AMERICA expects that software products may be increasingly subject to third-party infringement claims as the number of competitors in MEDE AMERICA's industry segment grows and the functionality of products overlaps. Although MEDE AMERICA believes that its products do not infringe on the intellectual rights of others, there can be no assurance that such a claim will not be asserted against it in the future, or that a license or similar agreement will be available on reasonable terms in the event of an unfavorable ruling on any such claim. 275 286 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 MEDE AMERICA is for $2.0 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 July 15, the plaintiff notified MEDE AMERICA in writing that he had decided not to pursue the 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 MEDE AMERICA 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 MEDE AMERICA 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 MEDE AMERICA believes to be a fair resolution of the issue. MEDE AMERICA has responded to NDC's complaint, denying the allegations, and intends to vigorously contest the action. 276 287 MEDE AMERICA SELECTED CONSOLIDATED FINANCIAL DATA The statement of operations data presented below for the years ended June 30, 1997, 1998 and 1999 and the balance sheet data as of June 30, 1998 and 1999 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 1996 and the balance sheet data as of June 30, 1995, 1996 and 1997 are derived from, and qualified by reference to, the audited consolidated financial statements of MEDE AMERICA not included herein. 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.
YEAR ENDED JUNE 30, ----------------------------------------------------- 1995 1996 1997 1998 1999 -------- -------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues(1)............................................... $ 16,246 $ 31,768 $ 35,279 $42,290 $55,213 Operating Expenses: Operations.............................................. 9,753 19,174 16,817 16,958 20,621 Sales, marketing and client services.................... 3,615 7,064 8,769 10,765 12,819 Research and development................................ 2,051 2,132 3,278 3,941 4,365 General and administrative.............................. 3,119 6,059 5,263 4,865 5,678 Depreciation and amortization........................... 2,995 5,176 5,460 7,143 8,771 Merger expenses......................................... -- -- -- -- 688 Write-down of intangible assets......................... 8,191(2) 9,965(3) -- -- -- Acquired in-process research and development(4)......... -- -- 1,556 -- -- Other charges(5)........................................ 2,864 538 2,301 -- -- -------- -------- -------- ------- ------- Total operating expenses.................................. 32,588 50,108 43,444 43,672 52,942 -------- -------- -------- ------- ------- Income (loss) from operations............................. (16,342) (18,340) (8,165) (1,382) 2,771 Other (income) expenses................................... -- 313 (893) (12) -- Interest expense, net..................................... 189 584 1,504 3,623 2,922 -------- -------- -------- ------- ------- Loss before provision for income taxes and extraordinary item...................................... (16,531) (19,237) (8,776) (4,993) (651) Provision for income taxes................................ 70 93 57 42 297 -------- -------- -------- ------- ------- Loss before extraordinary item............................ (16,601) (19,330) (8,833) (5,035) (948) Extraordinary item........................................ -- -- -- -- (1,619) Preferred stock dividends................................. (27) (2,400) (2,400) (2,400) (1,444) -------- -------- -------- ------- ------- Net loss applicable to common stockholders................ $(16,628) $(21,730) $(11,233) $(7,435) $(4,011) ======== ======== ======== ======= ======= Basic and diluted net loss per common share: Loss before extraordinary item.......................... $ (3.17) $ (4.14) $ (2.07) $ (1.31) $ (0.28) Extraordinary item...................................... -- -- -- -- (0.19) -------- -------- -------- ------- ------- Net loss applicable to common stockholders.............. $ (3.17) $ (4.14) $ (2.07) $ (1.31) $ (0.47) ======== ======== ======== ======= ======= Weighted and average common shares outstanding -- Basic and diluted....................................... 5,238 5,245 5,425 5,679 8,615 ======== ======== ======== ======= =======
AS OF JUNE 30, ------------------------------------------------- 1995 1996 1997 1998 1999 ------- ------- -------- -------- ------- (IN THOUSANDS) HISTORICAL BALANCE SHEET DATA: Cash, cash equivalents and short-term investments......... $ 8,554 $ 2,639 $ 1,919 $ 2,950 $ 4,119 Working capital........................................... 504 (4,207) (2,567) 2,345 11,206 Total assets.............................................. 59,511 43,031 48,090 59,394 78,709 Long-term debt, including current portion................. 5,805 11,601 25,161 41,324 5,136 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) 63,665
- ------------------------- (1) 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 277 288 included in the statement of operations data, were $1,709,000, $3,617,000, $2,252,000, $241,000 and $0 in the fiscal years ended June 30, 1995, 1996, 1997, 1998 and 1999, respectively. (2) Reflects the write-off of goodwill related to the acquisitions of MPC and Wellmark. (3) Reflects the write-down of costs relating to client lists and related allocable goodwill obtained in the acquisition of MEDE OHIO. (4) Reflects the write-off of acquired in-process research and development costs upon the consummation of the TCS acquisition. (5) Reflects expenses of $2,864,000 relating to the spin-off of MEDE AMERICA by CES in the fiscal year ended June 30, 1995 and expenses recorded relating to contingent consideration paid to former owners of acquired businesses of $538,000 and $2,301,000 in the fiscal years ended June 30, 1996 and 1997, respectively. 278 289 MEDE AMERICA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW MEDE AMERICA is a leading provider of electronic data interchange products and services to a broad range of providers and payers in the healthcare provider industry. MEDE AMERICA's integrated set of electronic data interchange solutions and services allows hospitals, pharmacies, physicians, dentists and other healthcare providers and provider groups to electronically edit, process and transmit claims, eligibility and enrollment data, track claims submissions throughout the claims payment process and obtain faster reimbursement for their services. Currently, MEDE AMERICAprocesses approximately 1,000,000 transactions per business day for over 82,000 providers located in all 50 states. MEDE AMERICA was formed in March 1995 through the consolidation and subsequent spin-off of three subsidiaries of CES, in connection with the acquisition by First Data Corporation of CES' credit card processing business. The three subsidiaries, MEDE AMERICA, Inc., MPC and Wellmark, which comprised the healthcare services business of CES, historically provided electronic data interchange services to hospitals and physicians. Their combined financial results were reflected in the fiscal 1995 financial statements on a full year basis. Since its formation, MEDE AMERICA has expanded both through internal growth and the acquisition of six healthcare transaction processing businesses. As part of its strategy of providing an integrated set of electronic data interchange products to a broad range of healthcare providers, MEDE AMERICA has focused on acquisitions that provide entry into new markets or expand its product set. MEDE AMERICA has accounted for all acquisitions under the purchase method of accounting. MEDE AMERICA has actively pursued the integration of its acquisitions and, in the process, has either divested, closed or modified various operations of the acquired entities in order to eliminate non-core or redundant operations and achieve cost savings and operating efficiencies. These integration activities impacted MEDE AMERICA's financial results in the fiscal years ended June 30, 1995, 1996, 1997, 1998 and 1999 and are ongoing. 279 290 The following table summarizes MEDE AMERICA's acquisitions and divested products and operations:
- ---------------------------------------------------------------------------------------------------------------------------------- PRIMARY PRODUCTS OF DIVESTED PRODUCTS OF DATE FOUNDING/ACQUIRED FOUNDING/ACQUIRED FOUNDING COMPANIES ACQUIRED MARKET COMPANY COMPANY DATE DIVESTED - ---------------------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------------------
(1) Represents date acquired by CES. In March 1995, MEDE AMERICA's largest stockholder acquired all of the outstanding shares of MEDE OHIO, formerly known as General Computer Corporation, for a cash purchase price of approximately $22,593,000, including transaction expenses. The largest stockholder subsequently merged MEDE OHIO into MEDE AMERICA. The purchase price MEDE AMERICA paid for MEDE OHIO to its largest stockholder was equal to the purchase price paid by the largest stockholder. MEDE OHIO develops electronic data interchange systems for the pharmacy market and provides transaction switching/routing services. At the time of its acquisition, MEDE OHIO had been incurring significant losses for over two years and was in very poor financial condition. The acquisition was accounted for under the purchase method and MEDE AMERICA recorded total intangible assets of $25,814,000, consisting of $892,000 of software which was completed and not in-process at the time of the acquisition, $2,527,000 of client lists and $22,395,000 of goodwill. During fiscal year 1996, MEDE AMERICA wrote-down $9,965,000 of costs relating to client lists and related allocable goodwill due to a loss of approximately 25% of the acquired MEDE OHIO client base. The loss of this significant portion of MEDE OHIO's client base was primarily due to problems MEDE AMERICA experienced in the post-merger integration of MEDE OHIO's operations into MEDE AMERICA's operations. This post-merger integration process took place during the same general time period in which MEDE AMERICA was spun-off from CES and a new management team was installed at MEDE AMERICA. MEDE AMERICA is generally amortizing the software over three years and the remaining value of client lists is being amortized over five years. The goodwill is being amortized over 20 years. In June 1995, MEDE AMERICA acquired substantially all of the assets of Latpon for a cash purchase price of approximately $2,470,000, plus the assumption of approximately $963,000 of liabilities consisting primarily of long-term debt. Latpon, a developer of claims processing software, provided electronic data interchange transaction processing services to hospitals and hospital-based physician groups. Latpon also provided electronic and manual business office administrative services. The acquisition was accounted for under the purchase method and MEDE AMERICA recorded total intangible assets of 280 291 $2.3 million, consisting of $993,000 of software and client lists and $1.3 million of goodwill. MEDE AMERICA is generally amortizing the software over five years and are amortizing the client lists and goodwill over five years and 20 years, respectively. In October 1995, MEDE AMERICA acquired two commonly-owned companies, EC&F, an all payer electronic data interchange dental claims processor, and Premier, a dental practice management software vendor. The acquisitions were funded with an initial cash payment of $4.0 million, including transaction expenses, and contingent earn-out payments based on the achievement of certain EBITDA growth targets by the EC&F business over three one-year periods ending on September 30, 1998. MEDE AMERICA recorded expenses of $538,000 during fiscal year 1996 relating to the first such period and an aggregate $2.3 million during fiscal year 1997 primarily relating to the second and third such periods. At the conclusion of the earn-out period, it was determined that no additional earn-out payments would be required. The acquisitions of EC&F and Premier were accounted for under the purchase method and MEDE AMERICA recorded total intangible assets of $4.4 million, consisting of $764,000 of software, and $3.6 million of goodwill. MEDE AMERICA generally is amortizing the software over three years and are amortizing the goodwill over 20 years. MEDE AMERICA sold Premier in January 1997 for a cash payment of $388,000. There was no gain or loss on the sale of Premier. In February 1997, MEDE AMERICA acquired certain assets of TCS, a provider of pharmacy switching and PBM transaction processing systems and services for pharmacies and eligibility verification services for physicians, for a total cash payment of $11.5 million, including transaction expenses. The acquisition was accounted for under the purchase method and MEDE AMERICA recorded total intangible assets of $11.1 million, consisting of $1.6 million of in-process research and development, $3.0 million of software and $6.5 million of goodwill. As of the date of the acquisition, MEDE AMERICA wrote off the acquired in-process research and development which had not reached technological feasibility and had no alternative future use. MEDE AMERICA generally is amortizing the software over three years and are amortizing the goodwill over seven years. The in-process research and development acquired from TCS consisted of advanced Windows software technology for PC and client server platforms for healthcare electronic data interchange transactions. Products under development included a plan member eligibility verification product for workers compensation, a medical claims processing system to meet the HCFA 1500 electronic data interchange industry standard and a switching system for internet claims from retail pharmacies. At the time of the acquisition, MEDE AMERICA estimated that continued development activities for six months to one year resulting in additional estimated research and development costs of $460,000 would be required in order to prove feasibility and bring the project to commercial viability. It was the opinion of management that such projects had an above average probability of successful completion and could contribute to revenue, profit and cash flow within 18 to 24 months from the date of purchase. At this time, all three projects are substantially complete. However, any or all of these projects could fail to produce an economic gain. Such failure, if encountered, would not affect MEDE AMERICA's current product set and financial results, but would decrease its opportunities for growth. Estimated costs to complete the acquired in-process research and development projects as of the date of acquisition were as follows: ESTIMATED RESEARCH AND DEVELOPMENT EXPENSE (IN THOUSANDS)
WORKERS COMP. HCFA 1500 PHARMACY TOTAL ------------- --------- -------- ----- Fiscal 1997..................................... $ 58 $ 70 $ 65 $193 Fiscal 1998..................................... 80 97 90 267 Fiscal 1999..................................... -- -- -- -- ---- ---- ---- ---- Total...................................... $138 $167 $155 $460 ==== ==== ==== ====
281 292 Prior to the completion of the acquisition, TCS had incurred development costs of $67,000, for the workers compensation eligibility product, $125,000 for HCFA 1500 and $56,000 for the internet pharmacy claims product, the three in-process research and development projects shown above. MEDE AMERICA determined the value of the purchased in-process technologies by estimating the projected net cash flows related to each of the in-process products. The resulting net cash flows were then discounted back to their net present values. The amount of the write-off of in-process research and development costs was then limited to the portion allocable to pre-acquisition development costs incurred by TCS versus post-acquisition costs incurred by us. The net cash flows were based on management's estimates of the costs necessary to complete the development of the products, the revenues that would be earned after commercial availability and the estimated operating expenses associated with those revenues. The projections were based on the following principal assumptions: For the workers compensation eligibility product, the projections assumed commercial availability in January 1998 and revenue growth from $431,000 in fiscal 1998 to $1.3 million in fiscal 2002, an annual rate increase of approximately 25%. For HCFA 1500, the projections assumed commercial availability in March 1998. It was assumed that revenues from the HCFA 1500 product would grow from $1.4 million in fiscal 1998 to $5.5 million in fiscal 2002, increasing at an annual rate of 50% in the first year of commercial availability, 35% in the second year and at a rate of 25% per year thereafter. For the internet pharmacy claims product, the projections assumed commercial availability in December 1997. It was assumed that revenues from the internet pharmacy claims product would grow from $41,000 in fiscal 1997 to approximately $3.2 million in fiscal 2002, increasing at an annual rate of approximately 35% in the first year of commercial availability, 30% in the second year and at a rate of 25% per year thereafter. In all three cases, post-development operating expenses, including sales, advertising and promotion and general and administrative costs, were projected to grow at the rate of 10% per year between fiscal 1999 and 2002. No significant synergies were projected for any of the three in-process products because MEDE AMERICA had no comparable products in the market or in development and no penetration in the products' prospective user bases. The projected net cash flows for the in-process products were discounted to their present values using a discount rate of 18%. Such discount rate was composed of two factors: MEDE AMERICA's estimated weighted average cost of capital, which is 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 June 30, 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 June 30, 1999. However, MEDE AMERICA believes that, over time and with increased marketing effort, this product will achieve commercial viability. The introduction of the HCFA 1500 product experienced roll out delays. As a result of the merger agreement between Healtheon and MEDE AMERICA and the anticipated integration of their operations, the commercialization of the HCFA 1500 product has been suspended and is expected to be integrated with the Healtheon platform at a later date. 282 293 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 20% of the revenues projected for it at the time of the acquisition for fiscal 1999. The commercial introduction of this product was delayed due to changes in the Department of Health and Human Services standards governing the use of the Internet to process pharmacy claims and uncertainty over the privacy standards that will ultimately prevail. MEDE AMERICA has participated in the debate on the appropriate standards, which is ongoing. Although MEDE AMERICA is currently processing transactions with this product for a small number of pharmacy clients, it is unable to predict the effect of the final regulations on the pharmacy internet product acquired from TCS. Although any or all of these projects could fail to generate significant returns for MEDE AMERICA and such failure could render the TCS acquisition less valuable to us than had been anticipated, such failure would not affect MEDE AMERICA's current set of products or, in MEDE AMERICA's opinion, have a material impact on its results of operations or overall financial condition. In November 1997, MEDE AMERICA acquired certain assets and assumed certain liabilities of Stockton, a provider of PBM transaction processing systems and related services for the pharmacy market. Stockton was purchased for an initial cash payment of $10.7 million including transaction expenses, and a contingent earnout payment based upon the achievement of certain revenue growth targets. Based on revenues recorded through September 30, 1998 by Stockton, MEDE AMERICA has accrued additional contingent consideration of $2.0 million as of September 30, 1998 which was treated as additional purchase price and was, therefore, added to goodwill. Based upon revenue generated, MEDE AMERICA made a payment of approximately $1.8 million to the selling shareholders on February 23, 1999. Certain additional funds totalling approximately $100,000 were placed in escrow as being in dispute pursuant to the earn-out provisions. Depending on the outcome of litigation between the selling shareholders of Stockton and one of its customers, those funds will be released accordingly. The acquisition was accounted for under the purchase method and MEDE AMERICA recorded total intangible assets of $10.4 million, consisting of $2.1 million of software and client lists and $8.3 million of goodwill. MEDE AMERICA is generally amortizing the software over five years and is amortizing the client lists and goodwill over five years and 20 years, respectively. In October 1998, MEDE AMERICA acquired HII, a provider of electronic data interchange transaction processing services to hospitals and physician groups in Missouri, Kansas and Illinois. Prior to the purchase of HII, Intercare and Telemedical, two unrelated healthcare services divisions, were divested from HII in separate transactions. MEDE AMERICA did not acquire such businesses or any proceeds from the disposition of those businesses. HII was purchased for a total cash payment of approximately $11.7 million, including transaction expenses. The acquisition was accounted for under the purchase method and MEDE AMERICA recorded total intangible assets of approximately $11.0 million, consisting of $2.7 million of client lists and approximately $8.3 million of goodwill. MEDE AMERICA is amortizing the client lists over five years and goodwill over 20 years. Medic agreement On July 17, 1998, MEDE AMERICA entered into a transaction processing agreement with Medic Computer Systems, Inc., a subsidiary of Misys plc that develops and licenses software for healthcare providers, principally physicians, MSOs and PPMs. Under the processing agreement, MEDE AMERICA will undertake certain software development obligations, and on July 1, 1999, it will become the exclusive processor, subject to certain exceptions, of medical reimbursement claims for Medic's subscribers submitted to payers with whom MEDE AMERICA has or establishes connectivity. Under the processing agreement, MEDE AMERICA will be entitled to revenues to be paid by payers, in respect of which a commission is payable to Medic, as well as fees to be paid by Medic. The processing agreement sets forth detailed performance criteria and development and implementation timetables, inability to meet these criteria may result in financial penalties or give Medic a right to terminate this agreement. The agreement may also be terminated by Medic within a period of eight months after a change of control of MEDE AMERICA. The processing agreement is for a fixed term of five years, with annual renewals thereafter. 283 294 Contemporaneously, to ensure a close working relationship between the parties, on July 17, 1998 MEDE AMERICA granted to Medic a warrant to acquire 1,250,000 shares of MEDE AMERICA's common stock, at a per share exercise price equal to the price of the common stock to the public in the initial public offering or, in the event that the initial public offering was not completed by March 31, 1999 at an exercise price equal to $8 per share. The Medic warrant contains customary weighted average antidilution provisions. The Medic warrant vests over a two year period, subject to acceleration upon a change of control, and may be exercised up to five years after issuance. The Medic warrant was valued at $3.9 million using the Black-Scholes Option Pricing Model and is recorded in other assets. The Medic warrant is being amortized over the life of the processing agreement, five years. MEDE AMERICA and certain principal stockholders have agreed that following the completion of the initial public offering and until the earlier of the termination of the processing agreement or the disposition by Medic and its affiliates of at least 25% of the shares of common stock issuable under the Medic warrant, Medic shall have the right to designate one director to MEDE AMERICA's board of directors. Medic named a designee effective February 12, 1999. Revenues Revenues are derived from the sale of transaction processing products and services primarily on a fee-for-transaction basis. Transaction fees vary depending upon transaction type and service provided. MEDE AMERICA currently receives fees from providers for the majority of its transactions including claims processing, eligibility verification, claims switching, pharmacy script processing and tracking and Medicaid enrollment. It also receives fees from payers for the transmission of electronic claims and formulary payments from pharmaceutical manufacturers relating to its PBM script processing and management reporting services. These transaction-based revenues comprise the predominant portion of MEDE AMERICA's total revenues and tend to be recurring. Other revenue is derived from one-time payments related to installation and implementation services, software license fees and sales of computers and related hardware. For a more complete description, see the section entitled "MEDE AMERICA's business -- Set of electronic data interchange products and services" on page 276. Transaction-based revenues and related formulary services revenues, to the extent applicable, which collectively constitute the majority of MEDE AMERICA's total revenues, are recognized at the time the transactions are processed and the services are provided. Revenues associated with software support and implementation fees, each constituting less than 3% of MEDE AMERICA's revenues for the fiscal years ended June 30, 1998 and 1999, are recognized ratably over the contract period or as the service is provided. Revenue from licensing of software, which also constituted less than 3% of its total revenues for the fiscal years ended June 30, 1998 and 1999, is recognized upon installation if it is determined that MEDE AMERICA has no significant remaining obligations and collectibility of the resulting receivable is considered probable. Operating expenses Operations expense. Operations expense consists of: - data and voice telecommunications expense - salaries and benefits for operations employees - other costs associated with transaction processing and services provided to clients, such as - network and telecommunications - maintenance - computer operations - systems administration, facilities and other additional indirect expenses 284 295 Since 1996, operations expense as a percentage of revenues and operations expense per transaction have declined as a result of MEDE AMERICA's integration and restructuring efforts and increased operating leverage. Restructuring charges recorded in connection with its integration activities have resulted in variability in its quarterly operating results. Sales, marketing and client services expense. Sales, marketing and client services expense consists primarily of salaries, benefits, commissions and related indirect costs and expenditures for marketing programs, trade shows, advertising, help desk software and related client communications. As MEDE AMERICA continues to implement its growth strategy, sales, marketing and client services expenses are expected to continue to increase. Research and development expense. Research and development expense consists primarily of salaries, benefits and related indirect expenses associated with the design, research and development of new products and enhancements to existing current products. The development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility has been established. After technological feasibility has been established, any additional software development costs are capitalized in accordance with Statement of Financial Accounting Standards, referred to as "SFAS", No. 86, "Accounting For the Cost of Computer Software To Be Sold, Leased or Otherwise Marketed." Amortization of purchased software and technology and of capitalized software development costs is provided on a product-by-product basis at the greater of the amount computed using the ratio of current revenues for a product to the total of current and anticipated future revenues or the straight-line method over the remaining estimated economic life of the product. Generally, an original estimated economic life of three to five years is assigned to purchased software and technology and an original estimated economic life of five years is assigned to capitalized software development costs. Amortization begins in the period in which the related product is available for general release to customers. During the fiscal years ended June 30, 1998 and 1999, MEDE AMERICA capitalized $462,000 and $1,602,000, respectively, of software development costs for projects for which technological feasibility has been established but were not yet available for client release. Prior to July 1, 1997, MEDE AMERICA did not have any software development projects for which significant development costs were incurred between the establishment of technological feasibility and general client release of the product. MEDE AMERICA believes that the development of enhanced and new product offerings are essential to remaining competitive and it expects that development expenses will increase in the future. General and administrative expense. General and administrative expense primarily consists of salaries, benefits and related indirect costs for the administrative, executive, finance, legal, human resources and internal systems personnel, as well as accounting and legal fees. As MEDE AMERICA implement its growth strategy, general and administrative expenses are expected to increase. Depreciation and amortization expense. MEDE AMERICA depreciates the cost of its tangible capital assets on a straight-line basis over the estimated economic life of the asset: three to five years for computer equipment, five years for furniture and fixtures, and 20 to 25 years for buildings and improvements. Acquisition-related intangible assets, which include the value of software and client lists, are amortized based on the estimated useful economic life of the asset at the time of acquisition, and therefore will vary among acquisitions. MEDE AMERICA recorded amortization expense relating to goodwill and other intangible assets of $3.7 million during the fiscal year ended June 30, 1997, $5.0 million during the fiscal year ended June 30, 1998, and $6.6 million during the fiscal year ended June 30, 1999. 285 296 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.
YEAR ENDED JUNE 30, ---------------------------- 1996 1997 1998 1999 ---- ---- ---- ---- Revenues.................................................... 100% 100% 100% 100% Operating Expenses: Operations................................................ 60 48 40 37 Sales, marketing and client services...................... 22 25 25 23 Research and development.................................. 7 9 9 8 General and administrative................................ 19 15 12 10 Depreciation and amortization............................. 16 15 17 16
Year ended June 30, 1999 compared to year ended June 30, 1998 Revenues for the fiscal year ended June 30, 1999 were $55.2 million, compared to $42.3 million in fiscal 1998, an increase of $12.9 million or 31%. $6.6 million of the increase was attributable to growth of the existing business, and $6.3 million to incremental revenue from the acquisitions of The Stockton Group in November 1997 and HII in October 1998. MEDE AMERICA processed 314.5 million transactions in 1999, compared to 235.0 million transactions processed in fiscal 1998, an increase of 79.5 million transactions or 34%. Of the increase, 84% resulted from the addition of new clients and the increased transaction volume from existing clients, and 16% from the incremental transactions from the acquisition of Stockton and HII. The average price per transaction received by MEDE AMERICA in fiscal year 1999 declined by 6% compared with 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. Operating Expenses Operations expense was $20.6 million in fiscal year 1999, compared to $17.0 million in fiscal 1998, an increase of $3.7 million or 22%. As a percentage of revenues, operations expense decreased from 40% in fiscal 1998 to 37% in fiscal 1999. Of the increase, $2.3 million in operations expense was due to the higher volume of transactions processed and $1.3 million was due to the acquisitions of Stockton in November 1997 and HII in October 1998. The decrease in operations expense as a percentage of revenues was primarily due to operations leverage from systems consolidation for the recent acquisitions and the effects of ongoing cost reduction programs. Sales, marketing and client services expense was $12.8 million in fiscal 1999 compared to $10.8 million in fiscal 1998, an increase of $2.0 million or 19%. As a percentage of revenues, sales, marketing and client services expense decreased from 25% in fiscal 1998, to 23% in fiscal 1999. Of the increase in sales, marketing and client services, $1.2 million expense was attributable to the increase in revenue from existing clients, and $840,000 was attributable 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 $4.4 million in fiscal 1999, compared to $3.9 million in fiscal 1998, an increase of $424,000 or 11%. As a percentage of revenues, research and development expense decreased from 9% for the fiscal year 1998 to 8% for fiscal 1999. MEDE AMERICA capitalized $1,602,000 and $462,000 of software development costs in fiscal 1999 and 1998 years respectively. The increase in research and development costs in the fiscal 1999 year was 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 286 297 connections. In addition, Year 2000 compliance expenditures amounted to $693,000 and $180,000 in fiscal years 1999 and 1998, respectively. General and administrative expense was $5.7 million and $4.9 million in fiscal 1999 and 1998, respectively, representing an increase of $813,000 or 17%. Of the increase, $568,000 was due to the Stockton acquisition and $245,000 was due to the HII acquisition. As a percentage of revenues, general and administrative expense decreased from 12% for fiscal 1998 to 10% for fiscal 1999 due to consolidation from recent acquisitions. Depreciation and amortization expense was $8.8 million and $7.1 million in the fiscal years 1999 and 1998, respectively, representing an increase of $1.6 million or 23%. Of the increase, $783,000 in depreciation and amortization expense was attributable to the HII acquisition and $521,000 was due to the Stockton acquisition. As a percentage of revenues, depreciation and amortization expense decreased to 16% in fiscal year 1999 from 17% in fiscal year 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. 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. 287 298 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 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. 288 299 General and administrative expense was $5.3 million for the fiscal year ended June 30, 1997 compared to $6.1 million in fiscal 1996, representing a decrease of 13%. As a percentage of revenues, general and administrative expense decreased from 19% in fiscal 1996 to 15% in fiscal 1997. These decreases were primarily a result of consolidation and integration activities. Depreciation and amortization expense was $5.5 million for fiscal year ended June 30, 1997 compared to $5.2 million in fiscal 1996, representing an increase of 5%. As a percentage of revenues, depreciation and amortization expense decreased from 16% in fiscal 1996 to 15% in fiscal 1997. Acquisition-related expenses for the fiscal year ended June 30, 1997 included a $1.6 million write-off related to in-process research and development from the acquisition of TCS for software that had not achieved technological feasibility and had no alternative use and a contingent earnout charge of $2.3 million recorded by us in connection with the EC&F purchase agreement. In addition, in fiscal 1997, MEDE AMERICA recorded a gain of $885,000 from a sale of securities. See Note 12 of MEDE AMERICA notes to consolidated financial statements. During the fiscal year ended June 30, 1996, MEDE AMERICA wrote down approximately $10.0 million of costs relating to client lists and related allocable goodwill obtained in the acquisition of MEDE OHIO. Such intangible assets were written down to the net present value of the estimated future cash flows to be derived from these clients as of June 30, 1996. The write-down was required due to a loss of approximately 25% of the acquired MEDE OHIO client base. In addition, a contingent earnout charge of $538,000 was recorded in connection with the EC&F purchase agreement during the fiscal year ended June 30, 1996. LIQUIDITY AND CAPITAL RESOURCES Since inception, MEDE AMERICA has used capital from external sources to fund its internal growth and operations and to make acquisitions. Prior to its initial public offering, such capital requirements were provided by MEDE AMERICA's four principal stockholders, through periodic purchases of its debt and equity securities and MEDE AMERICA's credit facility. Since June 30, 1995 an investment fund affiliated with Welsh, Carson, Anderson and Stowe, or WCAS, has purchased a senior subordinated note in the principal amount of $25.0 million and 370,993 shares of common stock from MEDE AMERICA for an aggregate $25.0 million, which was used in connection with the acquisition of Time-Share Computer 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 June 30, 1999, MEDE AMERICA had outstanding borrowings of $4.5 million under the credit facility. Such borrowings bore interest at a weighted average rate of 7.4% per year as of June 30, 1999. If the MEDE AMERICA reorganization is completed, it is expected that the credit facility will be terminated. On February 5, 1999, MEDE AMERICA consummated an initial public offering of 5,307,710 shares of common stock at a price of $13.00 per share, which included 692,310 shares that were subject to the underwriters' overallotment option, which was exercised in full. The net proceeds to MEDE AMERICA were approximately $61.9 million, after deducting the underwriting discount and offering expenses payable by MEDE AMERICA. The net proceeds to us were used to prepay approximately $25.2 million of outstanding principal and accrued interest on MEDE AMERICA's outstanding 10% senior subordinated 289 300 note due February 1, 2002 and repay approximately $28.3 million of outstanding indebtedness and accrued interest under MEDE AMERICA's credit facility. MEDE AMERICA used the remaining $8.4 million of net proceeds to pay a portion of outstanding accrued dividends on its preferred stock, and approximately $301,000 of accrued dividends were converted into 23,124 shares of common stock. In addition, in connection with the initial public offering all outstanding shares of preferred stock were converted into 1,845,815 shares of common stock at the initial public offering price of $13.00 per share. In connection with the prepayment of the senior subordinated note and the establishment of a 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 June 30, 1999, MEDE AMERICA had cash and cash equivalents of $4.1 million and net working capital of $8.5 million. Net cash used in operations was $1.5 million for the year ended June 30, 1999. The $1.5 million net cash used in operations in the 1999 fiscal year resulted primarily from increased investments in accounts receivable of $2.9 million, formulary receivables of $2.4 million, resulting from growth in the pharmacy business, and other assets of $686,000, as well as a decrease in accounts payable and accrued expenses of $3.9 million due to the timing of payments, partially offset by $8.5 million of income from operations, after adding back non-cash charges. Cash used for investment purposes was $14.6 million in the year ended June 30, 1999. Cash used for investment purposes during the fiscal year ended June 30, 1999 was primarily used to acquire HII for $11.4 million, net of cash acquired, and to fund capital expenditures of $1.4 million and additions to intangible assets of $1.8 million. MEDE AMERICA expects to pay at least $2.0 million per year for the foreseeable future for capital investment to support growth in transaction processing. Cash provided by financing activities was $17.3 million for the fiscal year ended June 30, 1999. Cash provided by financing activities during the fiscal year ended June 30, 1999 was primarily provided from net proceeds from the initial public offering of $61.8 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 a wholly-owned subsidiary of Healtheon entered into the MEDE AMERICA merger agreement, pursuant to which the acquisition subsidiary will be merged with and into MEDE AMERICA, with MEDE AMERICA being the surviving corporation of the merger. Upon consummation of the merger, the separate existence of the acquisition subsidiary will 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 merger 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 290 301 Year 2000 expenditures prior to August 1, 1998 amounted to approximately $225,000; expenditures from August 1, 1998 through June 30, 1999 totaled approximately $693,000. MEDE AMERICA completed its assessment of whether it will have to modify or replace portions of its software and its products, services and internal systems so that they will function properly with respect to dates in the Year 2000 and thereafter. In addition to its general Year 2000 compliance review, MEDE AMERICA specifically identified several areas which were not Year 2000 compliant as of November 30, 1998: - its PBM system in Ohio - the UNIX operating platform software used in connection with its pharmacy practice management system - the UNIX operating platform software utilized in its pharmacy transaction switching With the exception of the Ohio PBM system, MEDE AMERICA believes its internally developed software and systems are Year 2000 compliant. Remediation and implementation MEDE AMERICA has developed a remediation program to correct the Year 2000 problems it has identified. PBM clients who utilize MEDE AMERICA's PBM system in Ohio are being migrated to the PBM system it acquired from Stockton, which MEDE AMERICA has tested and found to be Year 2000 compliant. Migration of these clients has begun, with 41% of the client base migrated as of August 26, 1999. The migration process is scheduled for completion in September 1999. Clients who wish to continue to utilize the PBM System in Ohio will be permitted to do so through the end of 1999, but not after. For retail pharmacy practice management clients, MEDE AMERICA's remediation program consists of providing a Year 2000 compliant version of the UNIX software to replace the older non-compliant version which is no longer being supported by the vendor, as well as software upgrades, with discounted hardware packages to enable such clients to utilize the Year 2000 compliant system. MEDE AMERICA has completed upgrades for 191 clients, and has scheduled upgrades for an additional 22 clients, with 12 clients still in the sales process. A version of the UNIX operating platform software used in pharmacy transaction switching, 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 been successfully completed. During its assessment phase, MEDE AMERICA identified potentially Year 2000 non-compliant "non-information technology" systems, such as embedded microcontrollers. Accordingly, it is replacing its older and potentially non-compliant computer and telecommunications hardware with hardware that is Year 2000 compliant. These expenditures are being made in the general course of MEDE AMERICA's renovation and modernization program, and as such are accounted for as ordinary capital expenditures instead of Year 2000 expenses. In October 1998, MEDE AMERICA acquired HII. HII's EDI products and services fall into three categories: - physician claims processing, both small-and large-group - hospital claims processing - claims data transmission including extraction and transmission of claim data to a third party data analyst. Based on its review at the time of the acquisition, MEDE AMERICA determined that none of HII's products is Year 2000 compliant. MEDE AMERICA has completed the programming necessary to modify HII's common carrier and Internet-based claims processing system for small physician groups to make the products Year 2000 compliant. Clients are being selected for beta-testing. It has also modified HII's payer data transmission products to make such products Year 2000 compliant. MEDE AMERICA is migrating HII's claims processing for hospitals and large physician groups to its MEDE Claim product. Currently, 291 302 30 clients have installed the MEDE Claim product, 21 more are under contract, 29 have declined to migrate to the system, and 7 have committed verbally to upgrade. 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. As of August 26, 1997, clients representing approximately $1.4 million in revenue were still in the migration process. 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. As of August 26, 1999, clients representing $83,000 in revenue had not yet upgraded to the Year 2000 compliant retail system. 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. As of August 26, 1999, clients representing $935,000 in revenue had decided not to migrate to the MEDE Claim solution. 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 $873,000 had been expended through June 30, 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 82,000 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 MEDE AMERICA product 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 to perform inspections and testing of all public payers. This plan includes both random and announced system and site testing. Contingencies MEDE AMERICA believes that the most likely worst case Year 2000 scenario would include the following: - one or more parts of MEDE AMERICA's software and operating systems would operate incorrectly; - one or more of MEDE AMERICA's payers would be unable to receive transactions; and - one or more of MEDE AMERICA's providers/clients would not have completed internal Year 2000 conversions. It is possible that failures of MEDE AMERICA's software or operating systems could cause MEDE AMERICA's clients to either terminate their contracts with us and sue us for damages. Also, if MEDE AMERICA fails to achieve Year 2000 compliance by September 30, 1999, such failure could constitute a default under its credit facility, which could in turn have a material adverse effect on MEDE AMERICA's business, financial condition and results of operations. MEDE AMERICA has completed the assessment of 292 303 its critical hardware and software and believes that the assessment has revealed all significant Year 2000 problems, that such problems will be capable of remediation, and that its software and hardware will perform substantially as planned when Year 2000 processing begins. Although it may experience Year 2000 problems, based on its assessment and remediation program to date, MEDE AMERICA believes that Year 2000 compliance issues will not have a material adverse effect on its business, financial condition or prospects and will not, therefore, result in a default under the Year 2000 compliance covenant in its credit facility. However, due to the uncertainties that are inherent in addressing the Year 2000 problem, MEDE AMERICA may experience unforeseen Year 2000 problems, which problems could have a material adverse effect on MEDE AMERICA's business, financial condition and results of operations. As contingency planning, MEDE AMERICA has three available options should certain functions not operate properly on January 1, 2000. - MEDE AMERICA has developed its internal systems in such a manner as to allow such systems to accept non-Year 2000 compliant data, and convert such data based on defaults and algorithms developed in conjunction with the providers to Year 2000 compatible formats. This methodology is applicable for claims, eligibility and enrollment transactions. - For payers, in the event a payer is unable to accept EDI claims, MEDE AMERICA currently has the capability, internally and, if necessary with support from an outside vendor, to print paper claims forms from supplied provider data and to send those claims in paper form to non-Year 2000 compliant payers. - For medical claims, a bulletin board system acquired in the HII transaction could be utilized by clients, with minimal programming set up, as a means of transmitting claims to us via common carriers and the Internet. IMPACT OF INFLATION Inflation has not had a material impact on MEDE AMERICA's historical operations or financial condition. RECENT ACCOUNTING PRONOUNCEMENTS In fiscal 1999, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") and Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"). Each of these statements required additional disclosure in the Company's consolidated financial statements. SFAS 130 had no effect on the Company's financial statements as the Company had no components of comprehensive income. SFAS 131 did not have a material effect on the Company's consolidated financial position or results of operations. Recent pronouncements of the Financial Accounting Standards Board ("FASB") which are not required to be adopted at this date include, Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") and Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133 -- an amendment of FASB Statement No. 133" ("SFAS 137"). SFAS 137 is effective for fiscal years beginning after June 15, 2000. Based upon current data the adoption of this pronouncement is not expected to have a material impact on the Company's consolidated financial statements. NET OPERATING LOSSES As of June 30, 1999, 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 2014. Because of certain changes in ownership, as defined in the tax 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. 293 304 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 September 1, 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 - all directors and executive officers of MEDE AMERICA as a group Unless otherwise indicated below, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. This table includes percentage ownership data reflecting ownership both before and after consummation of the merger with Healtheon. Percentage of ownership is based on 13,233,852 shares of common stock of MEDE AMERICA outstanding on September 1, 1999. Beneficial ownership by a person assumes the exercise of all options and warrants held by such person that are currently exercisable or are exercisable within 60 days of such date. Unless otherwise indicated, the entities and individuals identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to community property laws, where applicable. Percentage of ownership is also based on: - an exchange ratio of 0.6593 shares of Healtheon/WebMD common stock for each share of MEDE AMERICA common stock outstanding on September 1, 1999 - an exchange ratio of 1.796 shares of Healtheon/WebMD common stock for each share of WebMD common stock outstanding on September 1, 1999, assuming the conversion of all shares of WebMD preferred stock into common stock immediately prior to that date and including the additional 276,906 shares of Series E preferred stock to be purchased by Microsoft - an exchange ratio of 0.5483 shares of Healtheon/WebMD common stock for each share of Medcast common stock outstanding on September 1, 1999, assuming the conversion of all shares of Medcast preferred stock into common stock immediately prior to that date Further, percentage of ownership is based on: - an estimated 80,495,897 shares of Healtheon/WebMD common stock outstanding following the MEDE AMERICA merger - an estimated 143,808,645 shares of Healtheon/WebMD common stock outstanding following the WebMD and MEDE AMERICA mergers - an estimated 146,292,075 shares of Healtheon/WebMD common stock outstanding following all the mergers
PERCENT OF HEALTHEON/WEBMD SHARES BENEFICIALLY MEDE AMERICA SHARES BENEFICIALLY OWNED OWNED AFTER PRIOR TO THE MEDE AMERICA MERGER -------------------------------------- ----------------------------------------------- THE MEDE THE HEALTHEON AND NAME AND ADDRESS OF COMMON EXERCISABLE EXERCISABLE AMERICA MEDE AMERICA ALL THE BENEFICIAL OWNER STOCK WARRANTS OPTIONS PERCENT MERGER MERGERS MERGERS ------------------- --------- ----------- ----------- ------- -------- ----------------- ------- Welsh, Carson, Anderson & Stowe(1)........................... 5,511,262 67,240 -- 41.9% 4.6% 2.6% 2.5% 320 Park Avenue, 25th Floor New York, NY 10019 William Blair & Co., L.L.C.(2)............................ 874,370 16,810 -- 6.7 * * * 222 West Adams Street Chicago, Illinois 60606
294 305
PERCENT OF HEALTHEON/WEBMD SHARES BENEFICIALLY MEDE AMERICA SHARES BENEFICIALLY OWNED OWNED AFTER PRIOR TO THE MEDE AMERICA MERGER -------------------------------------- ----------------------------------------------- THE MEDE THE HEALTHEON AND NAME AND ADDRESS OF COMMON EXERCISABLE EXERCISABLE AMERICA MEDE AMERICA ALL THE BENEFICIAL OWNER STOCK WARRANTS OPTIONS PERCENT MERGER MERGERS MERGERS ------------------- --------- ----------- ----------- ------- -------- ----------------- ------- Thomas P. Staudt....................... 206,708 -- 43,646 1.9 * * * Richard P. Bankosky.................... 58,328 -- -- * * * * James T. Stinton....................... 21,803 -- 7,500 * * * * William M. McManus..................... 32,356 -- 437 * * * * Linda K. Ryan.......................... 505 -- 2,793 * * * * Roger L. Primeau....................... 2,250 -- 12,772 * * * * Thomas E. McInerney(3)................. 5,368,399 67,240 -- 40.9 4.4 2.5 2.4 320 Park Avenue, 25th Floor New York, NY 10019 Anthony J. de Nicola(4)................ 2,838,925 -- -- 21.5 2.3 1.3 1.3 320 Park Avenue, 25th Floor New York, NY 10019 Timothy M. Murray(5)................... 871,106 16,810 -- 6.7 * * * 222 West Adams Street Chicago, Illinois 60606 Alan Winchester(6)..................... 15,000 625,000 -- 4.6 * * * 8601 Six Forks Road Suite 300 Raleigh, NC 27615 All current directors and executive officers as a group (10 persons)..... 6,722,582 709,050 67,148 53.5 6.1 3.4 3.4
- ------------------------- * Represents beneficial ownership of less than 1% of the common stock. (1) Includes: - 2,447,546 shares of common stock held by WCAS V - 2,462,851 shares of common stock held by WCAS VI - 59,223 shares of common stock held by WCAS Information Partners L.P. - 370,993 shares of common stock held by WCAS CP II - 170,649 shares of common stock held by individual partners of WCAS Such partners are also partners of the sole general partner of each of the foregoing limited partnerships. The respective general partners of WCAS V, WCAS VI, WCAS Info. and WCAS CP II are WCAS V Partners, WCAS VI Partners, L.P., WCAS INFO Partners and WCAS CP II Partners. The individual partners of each of these partnerships include some or all of Patrick J. Welsh, Russell L. Carson, Bruce K. Anderson, Richard H. Stowe, Thomas E. McInerney, Andrew M. Paul, Robert A. Minicucci, Anthony J. de Nicola, Laura M. VanBuren, Charles G. Moore, III, James B. Hoover and Paul B. Queally. The partners of WCAS who are also directors of MEDE AMERICA are Thomas E. McInerney and Anthony J. de Nicola. Each of the foregoing persons may be deemed to be the beneficial owner of the common stock owned by WCAS. (2) Includes: - 572,429 shares of common stock held by Blair V - 298,677 shares of common stock held by Blair LCF - 3,264 shares of common stock held by an individual affiliated with WBCP. Timothy M. Murray, a partner of WBCP, is also a director of MEDE AMERICA and may be deemed to be a beneficial owner of MEDE AMERICA's common stock owned by WBCP. (3) Includes: - 2,447,546 shares of common stock held by WCAS V - 2,462,851 shares of common stock held by WCAS VI 295 306 - 59,223 shares of common stock held by WCAS Info. - 370,993 shares of common stock held by WCAS CP II Mr. McInerney disclaims beneficial ownership of such shares. (4) Includes: - 2,462,851 shares of common stock held by WCAS VI. - 370,993 shares of common stock held by WCAS CP II. Mr. de Nicola disclaims beneficial ownership of such shares. (5) Includes: - 572,429 shares of common stock held by Blair V. - 298,677 shares of common stock held by Blair LCF. Mr. Murray disclaims beneficial ownership of such shares. (6) The warrants are held by Medic Computer Systems, Inc. Mr. Winchester disclaims beneficial ownership of such shares. 296 307 INFORMATION REGARDING MEDCAST MEDCAST'S BUSINESS Greenberg News Networks, Inc., which is referred to as Medcast, is a leading provider of medical news, information, educational programs and services designed for physicians and other healthcare professionals through its product, Medcast Networks. Medcast Networks is delivered directly to users' personal computers via the Internet and can be accessed using standard personal computers. Medcast's content is updated throughout the day and can be used in conjunction with the vast resources available on the web. Medcast's daily broadcasts, disease tutorials and expert commentary address the latest medical news issues that are critical to physicians. With Medcast, physicians may also obtain continuing medical education credits and can easily access information provided by specialty medical associations and leading academic institutions. Medcast, a development stage company, has not generated significant revenue to date and does not have a developed model to generate revenue in the foreseeable future as a stand-alone entity. For a monthly subscription fee, Medcast provides physicians with a customized user interface for their computers, Medcast software and ongoing support and maintenance services. Medcast offers users two types of subscription packages. One type of subscription includes a personal computer equipped with Medcast software and Internet access. The other subscription package includes Medcast software and Internet access only. Medcast content is downloaded to subscribers computers via the Internet. Medcast does not currently operate a web site which is accessible to non-subscribers. Medcast's medical news team, consisting of over 60 professionals including researchers, reporters, writers, graphic designers and medical advisors, creates daily content that is medically-reviewed and graphically rich. To date, Medcast has developed five specialty networks: Medcast Cardiology, Medcast Psychiatry, Medcast Oncology, Medcast Endocrinology and Medcast Elite Primary Care, and it has a subscriber base of approximately 7,400 signed contracts. To distribute Medcast Networks, Medcast has built a sales and service organization of over 100 representatives that cover approximately 65 of the largest U.S. markets. Medcast's proposed mergers with Healtheon/WebMD and the MEDE AMERICA merger significantly expands Medcast's ability to drive medical information content to the various participants in the healthcare market. MEDE AMERICA provides a targeted base of healthcare providers and a broad base of payer institutions, which makes the overall service offering more attractive to physicians and other providers who are seeking transactions and connectivity from a concentrated source instead of multiple sources. WebMD provides brand awareness, a marketing strategy and strategic relationships that will allow the combined companies to target those participants and give them access to the broad service offerings. Healtheon provides an Internet-based information and transaction platform that will allow it to deploy healthcare technology applications for use through its web site and enhance the delivery of Medcast's content. The Medcast solution Medcast aims to meet the increasing information and education demands of today's physicians and healthcare professionals as well as the marketing needs of sponsors. Medcast benefits a variety of parties within the healthcare spectrum, including physicians, sponsors, hospitals, medical institutions and patients. Benefits to subscribers include: - Clinically-relevant medical information delivered daily - Specialty-specific continuing medical education courses - Multimedia patient education tools - Access to the Internet - General interest content related to subscribers' travel, leisure and business interests 297 308 Benefits to sponsors would include: - Electronic delivery of tailored marketing messages to a highly targeted audience - Ability to run interactive promotional campaigns - Opportunity to rapidly launch new marketing programs - Ability to track aggregate user activity Products and services Medcast provides subscribers with daily medical news, information, educational programs and services designed for physicians and other healthcare professionals. Each subscriber specifies their medical specialty at registration. The physician receives a product configuration designed for their primary specialty, but also may elect to receive other medical specialty news networks at no extra charge. The physician's specialty would determine which sponsor advertisements and promotions are displayed. Each day, the editorial and programming staff creates a graphically rich program that is compressed and automatically downloaded nightly. When the physician arrives for work, his or her Medcast screensaver is running with fresh news and information. At the touch of the keyboard or mouse, a Medcast Greeter Box appears with the user's name and lists daily news items and other content features. A graphic on the screen also invites the physician to start "Today's Daily Broadcast." The physician can play the broadcast or go directly to the main interface screen for access to a variety of channels. In addition to being updated automatically, Medcast may be updated on demand throughout the day. Each subscribing physician can customize professional and personal news, information and education among more than 40 content channels on the Medcast system with different configurations to fit their preferences at any time. Medcast Networks offers the following general categories of information: - Medical news - Medical information and reference data - Medical education - World and national news - Personal information MEDICAL NEWS Top Stories. Over 90% of the content on Medcast's Top Stories channel is written by Medcast's news staff and is prepared on a daily basis. Each day, Top Stories presents 10 to 20 breaking medical news stories. If a major medical story breaks in a leading print or broadcast news publication, Medcast typically covers it the same day. Expert commentary enhances these stories, coming in the form of audio interviews that are incorporated into these stories. Specialty Medical. Specialty Medical channels present daily original medical news stories based on the latest medical research and medical conferences. These channels currently include Cardiology, Endocrinology, Oncology, Elite Primary Care and Psychiatry. Medical associations such as the American College of Cardiology also appear on specialty channels, with seamless links to their own channels on Medcast. MD Business. The MD Business channel includes a combination of stories from renowned columnists on health policy, practice management, coding and reimbursement and other areas affecting the administration of a medical practice. Selected content from PR Newswire, Bloomberg(R) News, Associated Press, Reuters Health and American Health Line is also available. Media Alert. Media Alert summarizes leading medical stories appearing in popular broadcast and print media, enabling Medcast physicians to prepare for their patients' questions and concerns. 298 309 MEDICAL INFORMATION AND REFERENCE DATA MD Library. MD Library offers access to over nine million medical articles through the National Library of Medicine's "Medline," as well as other important databases. The Disease Updates channel consists of write-ups on common diseases and disorders created for Medcast by leading physicians. These updates contain current medical understanding with references and candid expert opinion from renown medical leaders. The One-Minute consult channel contains quick reference information developed daily that include a printable question and answer sheet about individual diseases for patients. The Patient Demos channel contains original animations designed for physicians to help their patients understand disease processes and medical procedures. Community. Community is a resource for keeping current and connected with the world of medicine. As of June 30, 1999, Johns Hopkins Medicine and the American College of Cardiology had their own Medcast channels. The most up-to-date press releases from more than 60 medical societies and associations are available in the Collegium channel, as well as links to each individual association or society website. In the Meetings channel, regional, national and international medical meetings and conferences are listed and linked. The Resources channel includes additional links to governmental agencies, medical boards and accreditation agencies, and guides to other trustworthy medical content on the Web. Market Research. The Market Research channel contains Today's Poll, which is tied to daily news. Results are posted daily and past polls are archived. Additionally, physicians may periodically participate in in-depth surveys and evaluations. MEDICAL EDUCATION Medcast provides an easy way for physicians to earn between 65 and 300 free accredited continuing medical education credits annually via its Just-in-Time continuing medical education courses that are tied to daily medical news. Medcast partners and sponsors may also bring longer format continuing medical information programs to the Medcast system at little or no cost. WORLD AND NATIONAL NEWS Medcast editors hand-pick stories each day from The New York Times. Subscribers also have access to CNN World News, CNN Weather and CNN Sports, each of which can be updated throughout the day. PERSONAL INFORMATION Investing. Medcast's Investing channel provides personal financial news and information, including a portfolio tracker. Each day, nine to ten original financial news stories are provided by TheStreet.com, and 10 to 15 stories are picked from Bloomberg(R) News. Connoisseur. The Connoisseur channel provides information about travel, music, golf, books and wine. National Geographic Traveler provides content on travel. Rolling Stone presents a selection of current music reviews, as well as access to their web site and a hotlink to purchase compact discs. The Books channel integrates The New York Times book reviews and the ability to buy discounted best sellers online with Ingram/BuyBooks.com, while MedBookStore.com offers physicians a discount on medical books. The Wine channel offers reviews from The New York Times. OTHER FEATURES Medcast Networks also includes the following features: - Interactive Sponsor Window -- Promotional and advertising messages play continuously on the physician's desktop. Sponsor advertisements and promotions are interspersed with Medcast promotional messages and advertisements, academic institution messages and medical association 299 310 messages. A user can click on an advertisement and the corresponding information appears in the Medcast content window. The user can continue to interact with the new content window that has appeared or can easily click on another Medcast channel of interest - Medcast screensaver, with news and information and interactive sponsor window - Medcast wallpaper to give a branded look and feel to the physicians' desktop - Medcast start up and shut down screens - Personalized Medcast e-mail address Medcast production Medcast's editorial and production team, consisting of over 60 professionals, includes dedicated medical doctors, Masters and PhD level medical editors, writers, illustrators and roving reporters. The team has been producing daily medical news since September 1998. Medcast's medical news center is in its Atlanta, Georgia headquarters with a bureau located in the National Press Building in Washington, D.C. The daily production cycle is similar to that of any news gathering organization and the daily medical editing mirrors that of any scientific journal. Morning editorial meetings establish story direction and allocate production resources, while at the same time Medcast's unique daily content integration strategy commences: the selection of the medical news stories that will contain Medcast's originally-written "Just In Time CME(TM)," "1-Minute Consult(TM)" and "Physician Poll." A series of production and editorial deadlines are met throughout the day as stories come in, continuing medical education tests are reviewed by Medcast's continuing medical education consortium, 1-Minute Consults are written, medical illustrations are created, the Daily Broadcast soundtrack is voiced and recorded and the images are edited, and Medcast staff physicians edit articles and review the work of illustrators, artists, editors and narrators. Late afternoon, early evening and finally mid- evening deadlines are met leaving time for one last medical editorial review prior to the "publishing" of each customized download for the next morning. Sales, marketing and support Medcast has a dedicated sales and service organization consisting of over 100 professionals covering approximately 65 of the largest U.S. markets. Its sales professionals meet with physicians, conduct product training and maintain relationships with subscribers. Technology Medcast has designed its Medcast software in an open architecture framework such that the ability to extend and upgrade exists in concert with enhancements to leading industry standards. Because Medcast owns its software code, it can control the quality of the software and provide needed flexibility. The following are Medcast's key technology features: - Multi-media rich graphics, which include intricate medical illustrations and images, downloaded via an optimized delivery system with advanced compression - Off-line interactivity enabling the user to view articles and submit information instantaneously through the computer's hard drive - Built into the Medcast software, through Microsoft's Foundation Class, is a browser window utilizing Internet Explorer's standard interface. As Internet Explorer is upgraded, Medcast is also upgraded. Server architecture and broadcast center. Medcast's server architecture delivers four to six megabytes of compressed information daily to each of its users via the Internet. Medcast believes that its broadcast center is a reliable, mission-critical facility, which consists of multiple, redundant Sun Solaris Servers running Oracle 8 Database engines and is equipped with temperature monitoring, security and fire- 300 311 protection systems. All load balancing and firewall protection are handled via industry standard security systems. Client application. Medcast's software runs on Windows 95/98 or Windows NT operating systems and utilizes Microsoft's Visual C/C++ technology for maximum flexibility and speed. Medcast uses the Internet for delivery of its product. All communication between the client and server is performed via standard Web protocol, known as HTTP, which provides Medcast flexibility in large installations. Medcast serves the following configurations: - Single-user physician. - Physicians on a local area network with a high bandwidth, constant Internet connection, which require installation of software, hardware and an Ethernet card for local area network access. - Large multi-user installation with high bandwidth Internet access, which requires the installation of a custom server designed to serve all subscribers on the local area network. Medical board of advisors The Medcast Networks Medical Advisory Board consists of an expert representative for each of Medcast's specialty networks as well as multidisciplinary medical experts who represent other important aspects of medicine, such as public health, health economics, drug regulatory affairs, health policy and patient education. The nomination and recruitment of a board member originates within Medcast Networks' executive and editorial staff. Final board selections are made by Medcast's Chief Medical Officer and Medcast's President of Programming and Development. The Medcast Networks Medical Advisory Board meets at least once annually, and in addition, there may be other scheduled telephone conference calls. Members are paid an honorarium and are also reimbursed for expenses incurred in traveling to and from advisory board meetings each year. If members are not permitted to accept the honorarium, the check is made payable to the board member's charity of choice. Board members are asked to sign a financial disclosure and conflict of interest statement, stating that they do not have a material, direct or indirect, interest in any competing product. Unless otherwise authorized, each Medical Advisory Board member agrees to keep confidential all financial, marketing, and proprietary information provided by Medcast. Competition The market for Internet services and products is relatively new, intensely competitive and rapidly changing. Medcast competes, directly and indirectly, with the following categories of companies: - publishers and distributors of traditional offline media, including those targeted to physicians - online services or web sites targeted to the healthcare industry generally - vendors of healthcare information, products and services distributed through other means, including direct sales, mail and fax messaging - other services that are designed to enable companies to market their products to physicians Medcast believes that the principal competitive factors in attracting and retaining physician subscribers are the depth, breadth and timeliness of services and content and the ability to offer compelling content and services. Other important factors in attracting and retaining physician professionals include ease of use, ability to access information quickly, quality of service and cost. Medcast believes that the principal competitive factors that will attract sponsors include price, the ability to access physicians in specified specialties and the number of physicians who subscribe to Medcast Networks. To be competitive, Medcast must continually enhance its existing content and introduce transactional services. Many of Medcast's current and potential competitors have greater resources to devote to the development, promotion and sale of their services; longer operating histories; greater financial, technical 301 312 and marketing resources; greater name recognition; and larger subscriber bases than Medcast and, therefore, have a significantly greater ability to attract subscribers and advertisers. Many of these competitors may be able to respond more quickly than Medcast to new or emerging technologies in the Internet and changes in Internet user requirements and to devote greater resources than Medcast to the development, promotion and sale of their services. In addition, in some cases Medcast does not have contractual rights to prevent its strategic partners from entering into competing businesses or directly competing with Medcast. There can be no assurance that Medcast's current or potential competitors will not develop products and services comparable or superior to those developed by Medcast or adapt more quickly than Medcast to new technologies, evolving industry trends or changing Internet user preferences. Increased competition could result in price reductions, reduced margins or loss of market share, any of which would materially and adversely affect Medcast's business, financial condition and operating results. There can be no assurance that Medcast will be able to compete successfully against current and future competitors, or that competitive pressures faced by Medcast will not have a material adverse effect on its business, financial condition and operating results. Intellectual property Medcast's success and ability to compete are dependent upon its marketing and continued development of the Medcast Network. To protect its technology, Medcast relies primarily on copyright, trade secret and trademark laws. Medcast generally enters into confidentiality agreements with its subcontractors, consultants and corporate partners, and generally controls access to and distribution of its software, documentation and other proprietary information. Governmental regulation Medcast is not currently subject to direct regulation by any domestic or foreign governmental agency, other than regulations applicable to businesses generally, and laws or regulations directly applicable to access to online commerce. However, due to the increasing popularity and use of the Internet and other online services, it is possible that laws and regulations will be adopted with respect to the Internet or other online services covering issues such as user privacy, pricing, content, taxation, copyrights, distribution and characteristics and quality of products and services. Food and Drug Administration. All promotional materials placed on Medcast by pharmaceutical or other companies that make health care products are subject to regulation by the U.S. Food and Drug Administration, known as the FDA. The FDA has very strict standards that apply to such advertising, including requirements that there be contained within each promotional piece a disclosure of risk information and also a linkage to full prescribing information. The FDA scrutinizes all such promotional materials carefully, and frequently takes enforcement actions against companies and products in violation of the regulations. All promotional materials issued by pharmaceutical companies, including those displayed on Medcast Networks, must be submitted to the FDA at the time of first use. In addition, the FDA is in the process of drafting a guidance that applies to Internet promotion. This guidance will set forth more specific criteria for promotion of health care products on Internet-type services. Medcast has made clear to its sponsors that compliance with the FDA requirements will be the responsibility of the sponsor of the promotional activity. There currently is major litigation that may affect FDA's policies and enforcement of its advertising and promotion rules. This litigation deals with the ability of pharmaceutical companies to promote their products for uses not specifically approved by the FDA, referred to as off-label uses. As a result of the ongoing litigation, the FDA has not enforced its off-label promotion policy with the vigor that it might employ if the litigation did not exist. A ruling in favor of the FDA in this case could lead to more aggressive enforcement by the FDA of its off-label promotion regulations. In addition, the legal case has raised questions about the FDA's policies regarding the promotion of pharmaceutical and other health care products in continuing medical education programs. A ruling in favor of the FDA in the ongoing litigation could cause the FDA to pursue more aggressively its enforcement of its regulation regarding continuing medical education, and could lead to new requirements for companies wishing to sponsor such programs. 302 313 Finally, the FDA has assumed jurisdiction over all promotional materials issued by regulated companies that appear over the Internet. The FDA currently is developing a policy statement to set forth its views on such materials. An adverse policy could place new restrictions on the way that pharmaceutical and medical device products are promoted over the Internet, which has the potential to affect the content of materials placed on the Internet. Federal Trade Commission. The Federal Trade Commission Act prohibits the dissemination of false, deceptive, misleading and unfair advertising, and grants the Federal Trade Commission, known as the FTC, enforcement powers to impose and seek civil and criminal penalties, consumer redress, injunctive relief and other remedies upon persons who disseminate prohibited advertisements. Medcast could be subject to liability under the FTC Act if it was found to have participated in creating and/or disseminating a prohibited advertisement with knowledge, or had reason to know that the advertising was false or deceptive. The FTC requires advertising in all media, including the Internet, to have substantiation for claims made. The FTC recently brought several actions against companies for allegedly deceptive advertising via the Internet. If any advertising of a non-pharmaceutical nature appears on Medcast, it would be subject to the FTC rules and regulations. Employees As of June 30, 1999, Medcast had 224 full-time employees, of whom 52 were engaged in content creation, 105 in sales and marketing, 27 in support, 29 in technology and 11 in finance, administration and operations. Medcast also retains by contract other individuals that provide editorial services. None of Medcast's employees is represented by a labor union. Medcast believes that its employee relations are good. Facilities Medcast leases approximately 28,000 square feet of office space for its executive offices in Atlanta, Georgia. This lease expires in August 2003. In addition, Medcast has a news bureau in Washington, D.C. consisting of 150 square feet of leased space. Legal proceedings Medcast is not a party to any litigation that it believes could have a material adverse effect on it or its business. 303 314 MEDCAST SELECTED FINANCIAL DATA The selected financial data of Medcast for the period from January 8, 1997 to December 31, 1997 and year ended December 31, 1998 and as of December 31, 1997 and 1998 are derived from Medcast's audited financial statements. The selected statement of operations data for the six months ended June 30, 1998 and 1999 and the selected balance sheet data as of June 30, 1999 were derived from unaudited financial statements of Medcast. In the opinion of management, the unaudited financial statements have been prepared on the same basis as the audited financial statements and include all adjustments consisting only of normal recurring adjustments necessary for a fair presentation of the information set forth therein. The results of operations for the six months ended June 30, 1999 are not necessarily indicative of the results for a full year. The following data should be read in conjunction with "Medcast management's discussion and analysis of financial condition and results of operations" and Medcast's financial statements and related notes thereto included elsewhere in this proxy statement/prospectus.
PERIOD FROM INCEPTION (JANUARY 8, SIX MONTHS ENDED 1997 TO YEAR ENDED JUNE 30, DECEMBER 31, DECEMBER 31, ------------------- 1997 1998 1998 1999 ------------ ------------ -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) HISTORICAL STATEMENTS OF OPERATIONS DATA: Revenues.......................................... $ -- $ -- $ -- $ 48 Loss from operations.............................. (1,960) (14,657) (3,302) (18,832) Net loss applicable to common stockholders........ $(1,960) $(18,535) $ (3,556) $(77,195) Basic and diluted net loss per common share....... $ (1.11) $ (9.72) $ (1.86) $ (40.66) Shares used in computing basic and diluted net loss per common share(2)........................ 1,762 1,906 1,916 1,899
AS OF DECEMBER 31, --------------------------- AS OF 1997 1998 JUNE 30, 1999 ------------ ------------ ------------------- (IN THOUSANDS) HISTORICAL BALANCE SHEET DATA: Cash, cash equivalents and short-term investments..................................... $ 34 $ 8,273 $ 10,629 Working capital (deficit)......................... (1,959) 5,365 5,497 Total assets...................................... 63 11,259 14,624 Long-term debt, including current portion......... -- 372 988 Redeemable preferred stock........................ -- 26,591 85,130 Total stockholders' equity (net capital deficiency)..................................... (1,929) (18,901) (76,451)
304 315 MEDCAST MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with Medcast's financial statements and the related notes thereto included elsewhere in this proxy statement/prospectus. OVERVIEW Greenberg News Networks, Inc., which is referred to as Medcast, is a leading provider of medical news, information, educational programs and services designed for physicians and other healthcare professionals through its product, Medcast Networks. Medcast Networks is delivered to our users' personal computers via the Internet and can be accessed using standard personal computers. Medcast's content is updated throughout the day and can be used in conjunction with the vast resources available on the web. Medcast's daily broadcasts, disease tutorials and expert commentary address the latest medical news issues that are critical to physicians. With Medcast, physicians may also obtain continuing medical education credits and can easily access information provided by specialty medical associations and leading academic institutions. Medcast was incorporated in Delaware in January 1997. During 1998, Medcast hired its first reporters and writers. It began publishing and broadcasting in September 1998. Following a series of initial tests at over 900 sites, Medcast launched its product consisting of five medical networks in March 1999. To enhance its sales and marketing efforts, Medcast grew its sales team from two at March 31, 1998 to over 100 at June 30, 1999. Its subscriber base has grown to approximately 7,400 signed contracts and approximately 2,100 installed subscribers at the end of June 1999. Medcast is in the process of installing the remaining 5,300 physicians, or backlog. Medcast's backlog at June 30, 1999 is not necessarily indicative of future backlog amounts. Medcast currently derives all of its revenue from subscription fees. Revenue derived from the sale of subscriptions is recognized ratably over the period that services are provided to the subscriber. Medcast offers physicians three-year subscriptions for $25 per month, or $35 per month, which include a personal computer equipped with Medcast software and Internet access. The $35 per month three-year subscription includes a faster computer with more memory than the computer included in the $25 per month subscription. Physicians that already have computers that meet Medcast's specifications can subscribe to receive Medcast content and Internet access for one year at a rate of $10 per month. Medcast purchases the computers provided to subscribers directly and has expensed these computers upon installation. It is not certain at this time whether Medcast will provide computers to new subscribers. Internet service is generally provided through one principal service provider for all subscribers, and fees for such service are paid directly by Medcast. Deferred revenue relates to subscription fees for which amounts have been billed or collected but for which revenue has not been recognized. Cost of revenue represents expenses incurred for installing and training subscribers and for production, delivery and support of our daily medical news and education service to subscribers. The costs incurred to install and train subscribers and to operate Medcast's news and publishing operations, and delivery and support costs to Medcast's subscriber base, consist of: - payroll and related expense - cost of personal computers for subscribers and related installation expenses - expenses for news, databases, continuing medical education courses and graphical images provided by third parties - Medcast's computer room and Internet service provider costs - expenses incurred for customer support services provided to subscribers Sales and marketing expenses represent costs incurred in selling, and in marketing Medcast. Sales and marketing expenses consist primarily of 305 316 - payroll and related expense - consulting fees for marketing and market research activities - travel and entertainment expenses - advertising expenses for marketing programs incurred in promoting Medcast. For the foreseeable future, Medcast expects its sales and marketing expenses to be substantial as it continues to build its brand and subscriber base. Research and development expenses consist primarily of payroll and related expense associated with development of software and new technologies to enhance Medcast service and performance. Product development expenses for existing networks are relatively fixed, though there are some variable costs related to increased subscriber base and use of the product. For new networks and product features and web-based offerings under development, expenses may vary dramatically based on scope of technology changes, volume of features and functions and complexity of software integration. General and administrative expenses consist primarily of: - payroll and related expenses for executive, finance and administrative personnel - professional fees - other corporate expenses, including office and furniture rent Medcast has only a limited operating history upon which you can evaluate its business and prospects. It has not achieved profitability, and it expects to continue to incur net losses in 1999 and subsequent fiscal periods. Medcast expects to continue to incur significant operating expenses and, as a result, will need to generate significant revenues to achieve profitability. Even if Medcast does achieve profitability, it may be unable to sustain or increase profitability on a quarterly or annual basis in the future. Medcast believes that quarter-to-quarter comparisons of our operating results may not be a good indication of its future performance, nor would its operating results for any particular quarter be indicative of future operating results. RESULTS OF OPERATIONS Total revenue Medcast began recognizing subscriber revenue in the first quarter of 1999. Medcast did not charge its beta users. For the six months ended June 30, 1999, revenue was $48,000. Cost of revenue Cost of revenue was $654,000 for the six months ended June 30, 1998 and $8.1 million for the six months ended June 30, 1999. Of the $7.4 million increase, $3.3 million was due to providing personal computers and installation and training to subscribers, and the remaining increase was primarily attributable to higher costs incurred to operate its news and publishing operations, and delivery and support costs resulting from Medcast moving from development in 1998 to product launch in March 1999. Medcast incurred no costs of revenue for the year ended December 31, 1997 because it was in an early stage of development. Cost of revenue was $5.0 million for the year ended December 31, 1998. The increase was attributable to $1.4 million in subscriber personal computers and installation and training costs, and the remaining increase of $3.6 million was primarily attributable to higher costs incurred to operate its news and publishing operations, and delivery and support costs resulting from Medcast moving from inception in 1997 to development in 1998. Medcast anticipates that its cost of revenue will continue to increase significantly as it continues to expand and broaden its subscriber base and its news, publishing, and delivery operations. 306 317 Sales and marketing Sales and marketing expense was $746,000 for the six months ended June 30, 1998 and $6.6 million for the six months ended June 30, 1999. Of the $5.9 million increase, $3.0 million was due to an increase in compensation and benefits, $1.1 million was due to an increase in consulting fees associated with marketing Medcast Networks, including $819,000 attributable to stock option accretion for consultants, $884,000 was due to travel expenses and $585,000 was due to print advertising and public relations for the launch of Medcast. Sales and marketing expense was $282,000 for the year ended December 31, 1997 and $5.4 million for the year ended December 31, 1998. Of the $5.1 million increase, $2.2 million was due to an increase in compensation and benefits, $1.1 million was due to print advertising and public relations for the launch of Medcast, $657,000 was due to travel expenses, $438,000 was due to recruiting expenses and $509,000 was due to an increase in consulting fees associated with marketing Medcast Networks. Research and development Research and development expense was $237,000 for the six months ended June 30, 1998 and $607,000 for the six months ended June 30, 1999. The increase was due primarily to increases in salaries and related expenses to increase Medcast's software development and engineering staff to develop the Medcast software and distribution technologies. Research and development was $815,000 for the year ended December 31, 1997 and $633,000 for the year ended December 31, 1998. The decrease year to year resulted primarily from significant, non-recurring outside contractor fees incurred during 1997 to build the initial prototype of Medcast Networks, including prototype content, software, graphics and user interface design. General and administrative General and administrative expenses were $1.7 million for the six months ended June 30, 1998 and $3.1 million for the six months ended June 30, 1999. The increase of $1.4 million was due primarily to an increase in salaries and related benefits of $513,000 and an increase in occupancy and insurance costs of $442,000, both of which to support the expansion of Medcast's operations. General and administrative expenses were $852,000 for the year ended December 31, 1997 and $3.3 million for the year ended December 31, 1998. Of the $2.4 million increase, $1.6 million resulted from an increase in professional and consulting fees to support the expansion of Medcast's operations, including $565,000 associated with financing activities, and $489,000 of the increase resulted from higher occupancy and insurance costs attributable to expansion of the Medcast business. Medcast anticipates that its general and administrative expenses will continue to increase significantly as it continues to expand and broaden its operations. Depreciation and amortization Depreciation and amortization expense consists of depreciation of property and equipment. Depreciation and amortization expense was $17,000 for the six months ended June 30, 1998 and $405,000 for the six months ended June 30, 1999. Depreciation and amortization expense was $11,000 for the year ended December 31, 1997 and $254,000 for the year ended December 31, 1998. Depreciation and amortization increased due to purchases of property and equipment for the expansion of Medcast. Medcast anticipates that depreciation and amortization costs will continue to grow in absolute dollars due to hardware and software costs associated with the continued expansion of Medcast Networks. Net interest and other income or expense Net interest and other income was $366,000 for the six months ended June 30, 1998 and $176,000 for the six months ended June 30, 1999. There was no interest and other income or expense for the year ended December 31, 1997. For the year ended December 31, 1998, net interest and other income totaled $713,000. This represented interest earned on cash balances. 307 318 Income taxes There were no provisions for federal or state income taxes recorded because Medcast incurred net operating losses of approximately $14.9 million through June 30, 1999, which will begin to expire in 2013. LIQUIDITY AND CAPITAL RESOURCES Since inception, Medcast has financed its operations primarily through private placements of preferred stock, which have resulted in aggregate proceeds of approximately $41.4 million. To a lesser degree, Medcast has also funded its operations through equipment lease borrowings and financing arrangements totaling approximately $1.2 million. In April 1999, Medcast obtained $18.1 million in net proceeds from the sale of Series C preferred stock and also obtained approximately $725,000 through the sale and leaseback of certain computer equipment, as described below. Medcast has provided a letter of credit of $691,863, secured by a pledge of an equivalent amount from Medcast's short-term investment account, to the lessor of Medcast's headquarter facilities. As of July 31, 1999, Medcast's primary source of liquidity consisted of cash and cash equivalents and short-term investments on hand totaling approximately $8.1 million. Medcast has historically purchased computers to provide to its physician subscribers. In March 1999, Medcast decided to instead lease these computers. On April 1, 1999, it entered into a sale and leaseback agreement pursuant to which it sold a third party leasing company approximately $725,000 worth of computers. Monthly rental payments total approximately $25,165, and are payable monthly in advance plus applicable taxes. Medcast's operating activities have used cash during each fiscal quarter since inception. Net cash used in operating activities increased from $2.5 million in the six months ended June 30, 1998 to $15.1 million in the six months ended June 30, 1999, reflecting increasing net losses principally related to increased expenditures to support Medcast's growth. During the year ended December 31, 1998, cash used in operating activities totaled $11.3 million. This resulted primarily from a net loss of $13.9 million, which was caused by increased expenditures to support Medcast's growth and an increase in prepaid expenses and other assets of $657,000, offset by an increase of $2.8 million in accrued expenses from December 31, 1997, $254,000 of depreciation and amortization expense in 1998, and $268,000 of compensation expense related to stock options and warrants in 1998. During the year ended December 31, 1997, cash used in operating activities of $1.5 million resulted primarily from a net loss of $2.0 million, offset in part by an increase of $430,000 in accounts payable and accrued expenses. Cash used by investing activities for the six months ended June 30, 1999 totaled $3.1 million, derived primarily from an increase in short term investments of $2.1 million and purchases of property and equipment of $1.0 million. Cash used in investing activities for the six months ended June 30, 1998 totaled $18.7 million, consisting primarily of an increase in short-term investments. Cash used in investing activities for the year ended December 31, 1997 was $11,000 and for the year ended December 31, 1998 was approximately $7.7 million. Cash used in investing activities, other than increases in short-term investments, was principally for the purchase of computer equipment and software for internal use to support Medcast's growth, as well as office furniture and fixtures, and leasehold improvements. The increase in cash used in investing activities resulted from increased purchases of computer equipment, software, and office furniture to support Medcast's growth and headquarter leasehold improvements during 1998 totaling $1.7 million and an increase of $6.0 million in short-term investments. Cash provided by financing activities for the six months ended June 30, 1999 totaled $18.5 million, resulting primarily from the sale of $18.1 million of Series C preferred stock and $616,000 provided through a sale and leaseback financing agreement. Approximately $305,000 was used to increase restricted cash balances pledged to secure a letter of credit on the headquarters facility. Cash provided by financing activities totaled $21.3 million for the six months ended June 30, 1998 and was attributable principally to the sale of Series A preferred stock. Cash provided by financing activities was $21.3 million in 1998 and $1.6 million in 1997. In 1998, $22.0 million was provided from the sale of Medcast's Series A preferred stock, approximately $387,000 was used to increase restricted cash balances pledged to secure a letter of 308 319 credit on the headquarters facility lease and $300,000 was used to repay a stockholder loan. In 1997, $1.6 million was provided from borrowings from its principal stockholder, of which $1.3 million was converted into Series B preferred stock during 1998 and the remaining balance was repaid. Medcast's growth and capital requirements depend on numerous factors, including market acceptance of Medcast's products, the resources Medcast devotes to developing, marketing, selling, and supporting its products and the timing and extent of establishing strategic business relationships. Medcast expects to devote substantial capital resources to hire and expand its marketing and sales, support, and product development and publishing organizations, to expand marketing programs, and for other general corporate activities. YEAR 2000 COMPLIANCE Medcast is currently in the process of addressing the Year 2000 problem, which is the result of computer programs being written using two digits rather than four to define the applicable year. As a result, computer applications and software may recognize an input of two zeros (00) as the year 1900. This incorrect date recognition could cause systems and software malfunctions that may have a material adverse effect on business operations. This potential problem could affect not only Medcast's internal information systems but also those of third parties, such as clients and vendors using information systems that may interact with or affect Medcast's operations. Readiness. Medcast is currently performing a review of various software applications and computer infrastructure that are likely to be affected by the Year 2000 problem. IT systems refer to all pre-packaged and internally developed software applications and programs and related computer hardware as well as telephone communication systems. Non-IT systems are not being reviewed. Non-IT systems refer to various equipment and devices that may have embedded computer language. The IT systems review will be completed using Medcast's employees and various computer products. Medcast's review is conducted in phases. First, all relevant computer systems are being assessed as to functionality and to determine Year 2000 compliance. Medcast estimates that it's assessment of IT systems is approximately 70% complete and anticipates completing the assessment in August, 1999. To date, no production dependent system, hardware or software, have been found to be non-compliant. For any remaining systems and software found to be non-compliant or in need of upgrading, corrective steps will be taken. Corrective steps primarily relate to developing, modifying, and purchasing system software and hardware. Second, Medcast will perform validation testing on IT systems and anticipates that it will complete validation testing in August, 1999. Finally, Medcast anticipates that it will implement any appropriate solutions prior to October, 1999. Medcast presently believes that the Year 2000 problem will not pose significant operational problems for its IT systems. Medcast has significantly completed its survey of all material third party IT systems vendors to determine their Year 2000 compliance status and has received certificates, where possible, as to their compliance. Medcast is requiring that significant clients and vendors certify those products and services to be Year 2000 compliant. However, there can be no assurance that the information systems provided by or utilized by other companies which affect Medcast's operations will be timely revised in such a way as to allow them to continue normal business operations or furnish products, services or data to Medcast without disruption. No estimates can be made as to any potential adverse impact resulting from the failure of any third party vendor or service provider to be Year 2000 compliant. If the Year 2000 problem has a material adverse effect on the business operations or financial condition of third parties with which Medcast has material relationships, such as vendors, service providers, and suppliers, the Year 2000 problem could also harm Medcast's business, results of operations and financial condition. For example, Medcast relies on IT systems to provide web publishing and hosting functions. If the hardware or software running these functions is found to be non-compliant, Medcast would have to make significant changes to its product to enable delivery. At a minimum, this would consist of rolling-back the dates included within the Medcast product such that the product could be delivered, but would include date errors. As a further example, Medcast utilizes database software to store and publish content. If this software is found to be non-complaint, Medcast would have to move all the data currently stored in this database into a different 309 320 database product. Both of the above examples would require significant time and effort to implement, and no estimates can be made as to any potential adverse impact on Medcast by virtue of either example occurring. Last, Medcast, product is delivered via the Internet. To the extent the Year 2000 problem causes material failures in the Internet, delivery of the Medcast product could be materially and adversely affect or stopped altogether, which could have a material adverse effect on Medcast's results of operation or financial condition. Cost of Compliance. Medcast is currently hiring employees who will be available to assist in the validation and implementation stage of its Year 2000 review. Preliminary cost estimates for Year 2000 compliance are in the range of $75,000 to $100,000. To date, Medcast has incurred approximately $50,000 of this estimated cost. Medcast expects the majority of the remaining costs to be incurred by the third quarter of 1999. Medcast's Year 2000 project costs are not expected to have a material impact on its results of operation or financial condition. Risk and Contingency Plans. Medcast's IT systems identified as non-compliant are being repaired or replaced. Medcast expects these replacements to be substantially completed by year-end 1999. If needed conversions to Medcast's IT systems are not made on a timely basis or Medcast's significant clients or vendors fail to make such remediations and conversions on a timely basis, it could have a material adverse effect on Medcast's results of operation or financial condition. As described above, Medcast has a contingency plan in place if the IT systems for web hosting or database systems are found to be non- compliant. 310 321 SHARE OWNERSHIP BY MEDCAST'S PRINCIPAL STOCKHOLDERS, MANAGEMENT AND DIRECTORS The following table sets forth certain information concerning the beneficial ownership of Medcast's common stock as of September 1, 1999 for the following: - each person or entity known to Medcast to beneficially own at least 5.0% of the outstanding shares of Medcast's common stock - each of Medcast's current directors and executive officers - all executive officers and directors as a group Unless otherwise indicated, the address of each of the beneficial owners identified is c/o Greenberg News Networks, Inc., 1175 Peachtree Street, 100 Colony Square, Suite 2400, Atlanta, GA 30361. Except as otherwise indicated, such beneficial owners have sole voting and investment power with respect to all shares of common stock owned by them, subject to community property law where applicable. Percentage of ownership is based on 4,529,328 shares of Medcast common stock outstanding as of July 1, 1999, assuming the conversion of all shares of Medcast preferred stock into common stock immediately prior to that date. Shares not outstanding but deemed beneficially owned by virtue of the right of a person or member of a group to acquire them within 60 days are treated as outstanding only when determining the amount and percent owned by such group. The percentage of shares beneficially owned accounts for conversion of each share of Series A preferred stock into 1.0125 shares of common stocks assuming exercise of the warrants held by Tom Cohen and Hamilton M. Jordan. See the section entitled "Structure of the Medcast merger and conversion of Medcast capital stock" on page 124. Percentage of shares beneficially owned accounts for each share of Series C preferred stock converting into common stock at a rate of 1.4593 shares of common stock for each share of Series C preferred stock. Percentage of ownership is also based on: - an exchange ratio of 1.796 shares of Healtheon/WebMD common stock for each share of WebMD common stock outstanding on September 1, 1999, assuming the conversion of all shares of WebMD preferred stock into common stock immediately prior to that date and including the additional 276,906 shares of Series E preferred stock to be purchased by Microsoft - an exchange ratio of 0.6593 shares of Healtheon/WebMD common stock for each share of MEDE AMERICA common stock outstanding on September 1, 1999, assuming the exercise of all options and warrants that are currently exercisable or are exercisable within 60 days of September 1, 1999 - An exchange ratio of 0.5483 shares of Healtheon/WebMD common stock for each share of Medcast common stock outstanding on September 1, 1999 assuming the conversion of all shares of Medcast preferred stock into common stock immediately prior to that date Further, percentage of ownership is based on: - and estimated 137,566,997 shares of Healtheon/WebMD common stock outstanding following the WebMD and Medcast mergers - an estimated 146,292,075 shares of Healtheon/WebMD common stock outstanding following all the mergers 311 322
NAME AND ADDRESS OF MEDCAST SHARES BENEFICIALLY OWNED BENEFICIAL OWNER PRIOR TO THE MEDCAST MERGER ------------------- ----------------------------------------------------------------------------------- COMMON SERIES A SERIES B SERIES C EXERCISABLE EXERCISABLE STOCK PREFERRED PREFERRED PREFERRED WARRANTS OPTIONS PERCENT --------- --------- --------- --------- ----------- ----------- ------- DIRECTORS AND EXECUTIVE OFFICERS: Alan Greenberg(1)(2).................. 1,259,383 -- 109,765 -- -- -- 30.2% William Longley(2).................... 270,000 -- -- -- -- -- 6.0 Gordon Wyatt.......................... -- -- -- -- -- 21,521 * Mark Dailey........................... -- -- -- -- -- -- * Doug Martin(3)(4)..................... -- 869,566 -- 42,689 -- -- 20.8 Stephens Group, Inc. 111 Center Street Little Rock, Arkansas 72201 Russell French(5)..................... -- 260,870 -- 42,689 -- -- 7.2 Noro-Moseley Partners IV, L.P. 9 North Parkway Square 4200 Northside Parkway, N.W. Atlanta, Georgia 78327 Hamilton M. Jordan(2)................. 10,000 -- -- -- 26,087 1,500 * Tom Cohen(2).......................... 5,000 -- -- -- 21,739 -- * All executive officers and directors as a group (8 persons).............. 1,544,383 1,130,436 109,765 85,378 47,826 23,021 66.1 5% STOCKHOLDERS: Medcast Networks, L.P................. 1,259,383 -- 109,765 -- -- -- 30.2 Stephens Group, Inc.(4)............... -- 869,566 -- 42,689 -- -- 20.8 111 Center Street Little Rock, Arkansas 72201 Entities associated with Mike Devlin(6)........................... 97,826 152,174 -- 168,986 -- -- 11.0 Suite 120 10 Burton Hills Boulevard Nashville, Tennessee 37215 Mike Devlin(6)........................ 97,826 152,174 -- 175,389 -- -- 11.2 Suite 120 10 Burton Hills Boulevard Nashville, Tennessee 37215 Entities associated with D. Robert Crants III(6)............. 97,826 152,174 -- 168,986 -- -- 11.0 Suite 120 10 Burton Hills Boulevard Nashville, Tennessee 37215 D. Robert Crants III(6)............... 97,826 152,174 -- 175,389 -- -- 11.2 Suite 120 10 Burton Hills Boulevard Nashville, Tennessee 37215 MKFJ-IV, L.L.C........................ -- 260,870 -- 42,689 -- -- 7.2 Noro-Moseley Partners IV, L.P. 9 North Parkway Square 4200 Northside Parkway, N.W. Atlanta, Georgia 78327 Jack Tyrell(7)........................ 97,826 173,913 -- 64,034 -- -- 8.1 Suite 200 200 31st Avenue Nashville, Tennessee 37203-1205 W. Patrick Ortale III(7).............. 97,826 173,913 -- 64,034 -- -- 8.1 Suite 200 200 31st Avenue Nashville, Tennessee 37203-1205 Noro-Moseley Partners IV, L.P......... -- 260,870 -- 32,017 -- -- 6.9 9 North Parkway Square 4200 Northside Parkway, N.W. Richland Ventures II, L.P............. -- 173,913 -- 42,689 -- -- 5.3 Suite 200 200 31st Avenue Nashville, Tennessee 37203-1205 PERCENT OF HEALTHEON/WEBMD SHARES BENEFICIALLY NAME AND ADDRESS OF OWNED AFTER THE BENEFICIAL OWNER ------------------------- ------------------- HEALTHEON-WEBMD AND MEDCAST ALL THE MERGERS MERGERS --------------- ------- DIRECTORS AND EXECUTIVE OFFICERS: Alan Greenberg(1)(2).................. * * William Longley(2).................... * * Gordon Wyatt.......................... * * Mark Dailey........................... * * Doug Martin(3)(4)..................... * * Stephens Group, Inc. 111 Center Street Little Rock, Arkansas 72201 Russell French(5)..................... * * Noro-Moseley Partners IV, L.P. 9 North Parkway Square 4200 Northside Parkway, N.W. Atlanta, Georgia 78327 Hamilton M. Jordan(2)................. * * Tom Cohen(2).......................... * * All executive officers and directors as a group (8 persons).............. 1.6 1.5 5% STOCKHOLDERS: Medcast Networks, L.P................. * * Stephens Group, Inc.(4)............... * * 111 Center Street Little Rock, Arkansas 72201 Entities associated with Mike Devlin(6)........................... * * Suite 120 10 Burton Hills Boulevard Nashville, Tennessee 37215 Mike Devlin(6)........................ Suite 120 10 Burton Hills Boulevard Nashville, Tennessee 37215 Entities associated with D. Robert Crants III(6)............. * * Suite 120 10 Burton Hills Boulevard Nashville, Tennessee 37215 D. Robert Crants III(6)............... Suite 120 10 Burton Hills Boulevard Nashville, Tennessee 37215 MKFJ-IV, L.L.C........................ * * Noro-Moseley Partners IV, L.P. 9 North Parkway Square 4200 Northside Parkway, N.W. Atlanta, Georgia 78327 Jack Tyrell(7)........................ * * Suite 200 200 31st Avenue Nashville, Tennessee 37203-1205 W. Patrick Ortale III(7).............. * * Suite 200 200 31st Avenue Nashville, Tennessee 37203-1205 Noro-Moseley Partners IV, L.P......... * * 9 North Parkway Square 4200 Northside Parkway, N.W. Richland Ventures II, L.P............. * * Suite 200 200 31st Avenue Nashville, Tennessee 37203-1205
- --------------- * Less than 1% (1) Includes 1,259,383 shares of common stock beneficially owned by Medcast Networks, L.P. Mr. Greenberg is the General Partner of Medcast Networks, L.P. Excludes shares of common stock for which Mr. Greenberg holds an irrevocable proxy. 312 323 (2) Mr. Greenberg has been granted an irrevocable proxy to vote an aggregate of 453,200 shares of common stock owned by certain stockholders. The proxy may be exercised in connection with any action to be taken by stockholders. (3) Represents shares beneficially owned by Stephens Group, Inc. Mr. Martin is a Sr. Vice President of Stephens Group, Inc. and directs the vote of the shares beneficially owned by Stephens Group, Inc. (4) Includes an aggregate of 230,439 shares of Series A preferred stock and 11,313 shares of Series C preferred stock that Stephens Group, Inc. has transferred to various affiliated persons and entities. (5) Represents shares beneficially owned by MKFJ-IV, L.L.C. as the general partner of Noro-Moseley Partners IV, L.P. and Noro-Moseley Partners IVB, L.P. Mr. French is a member of MKFJ-IV, L.L.C. and directs the vote of the shares it beneficially owns. (6) Mr. Devlin and Mr. Crants share voting and investment power over the shares held by the entities controlled by them. (7) Represents shares beneficially owned by Richland Ventures L.P. and Richland Ventures II, L.P. Mr. Tyrell and Mr. Ortale share voting and investment power over the shares beneficially owned by both limited partnerships. 313 324 ADDITIONAL MATTERS BEING SUBMITTED TO A VOTE OF ONLY HEALTHEON STOCKHOLDERS PROPOSAL 2 -- APPROVAL OF AMENDMENTS TO HEALTHEON'S CERTIFICATE OF INCORPORATION. Healtheon's board of directors determined that if the WebMD merger is completed, it is in the best interests of Healtheon and its stockholders to amend Healtheon's certificate of incorporation to: - change the corporate name in connection with the merger to Healtheon/WebMD Corporation - increase the authorized number of shares of common stock to 600,000,000 shares Healtheon's certificate of incorporation currently authorizes the issuance of 150,000,000 shares of common stock, with a par value of $0.0001 per share and 5,000,000 shares of preferred stock with a par value of $0.0001 per share. The number of shares of preferred stock would remain unchanged. As of September , 1999, Healtheon had: - shares of common stock outstanding - no shares of preferred stock outstanding - shares reserved for future issuance upon the exercise of currently outstanding options - shares subject to issuance upon the exercise of currently outstanding warrants Based upon these share numbers, Healtheon currently has shares of common stock remaining available for other purposes. Therefore, Healtheon does not currently have a sufficient number of shares authorized for issuance in connection with the mergers. Healtheon's board of directors believes that the availability of additional authorized shares will provide it with flexibility to issue securities for other proper corporate purposes that may be identified in the future, such as to acquire other companies, to raise equity capital, to adopt additional employee benefit plans or reserve additional shares for issuance under these plans. No additional action or authorization by Healtheon stockholders would be necessary prior to the issuance of these additional shares, unless required by applicable law or the rules of any stock exchange or national securities association trading system on which Healtheon's common stock is then listed or quoted. Healtheon stockholders do not have preemptive rights with respect to Healtheon's common stock. Should Healtheon's board of directors elect to issue additional shares of common stock, existing stockholders would not have any preferential rights to purchase shares. Therefore, additional issuances of common stock by Healtheon could have a dilutive effect on the earnings per share, voting power and stock holdings of current stockholders. In addition, the proposed increase in the authorized number of shares of Healtheon common stock could, under some circumstances, have an anti-takeover effect, although this is not the intention of this proposal. For example, in the event of a hostile attempt to take over control of Healtheon, it may be possible for Healtheon to seek to impede the attempt by issuing shares of its common stock, which could dilute the voting power of the other outstanding shares and increase the potential cost to acquire control of Healtheon. Therefore, the increase in authorized shares may have the effect of discouraging unsolicited takeover attempts. By potentially discouraging unsolicited takeover attempts, the increase in the authorized number of shares may limit the opportunity for Healtheon's stockholders to dispose of their shares at the higher price generally available in takeover attempts or that may be available under a merger proposal. The proposed amendment may have the effect of permitting Healtheon's management, including its board of directors, to retain its position, and place it in a better position to resist changes that stockholders may wish to make if they are dissatisfied with the conduct of Healtheon's business. However, Healtheon's board of directors is not aware of any attempt to take control of Healtheon and has not presented this proposal with the intent that it be used as a type of anti-takeover device. 314 325 If the amendments to the certificate of incorporation are adopted, stockholders of Healtheon will not be required to exchange outstanding stock certificates of Healtheon common stock for new Healtheon/WebMD stock certificates. THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE AMENDMENTS TO HEALTHEON'S CERTIFICATE OF INCORPORATION. PROPOSAL NO. 3 -- ELECTION OF DIRECTORS Healtheon's amended and restated bylaws currently authorize no fewer than six and no more than eleven directors. Healtheon's board is currently comprised of eight members. After the closing of the WebMD merger, the board of Healtheon/WebMD will consist of nine members, W. Michael Long, James H. Clark, L. John Doerr and William W. McGuire, M.D. have been designated by Healtheon, Jeffrey T. Arnold, Eric J. Gleacher, William P. Payne and U. Bertram Ellis, Jr. have been designated by WebMD, and has been designated by Microsoft. A vote for the issuance of shares in the WebMD merger will constitute a vote for these directors. A director serves in office until his or her respective successor is duly elected and qualified or until his or her earlier death or resignation. The bylaws divide the board into three classes: Class I, Class II and Class III, with members of each class serving staggered three-year terms. One class of directors is elected by the stockholders at each annual meeting to serve a three-year term or until their successors are duly elected and qualified. The Class I directors will be W. Michael Long, James H. Clark and Jeffrey T. Arnold and their term will expire in 2002. The Class II directors will be L. John Doerr, Eric J. Gleacher and William P. Payne and their term will expire in 2001. The Class III directors will be U. Bertram Ellis, Jr., William W. McGuire, M.D. and and their term will expire in 2000. If any nominee for any reason is unable to serve, or for good cause will not serve, as a director, the proxies may be voted for such substitute nominee as the proxy holder may determine. At the Healtheon meeting, Healtheon stockholders will be asked to elect three directors who will become the Class I directors of Healtheon on December 16, 1999, unless the WebMD merger closes before that time. The names of the nominees for election as Class I directors at the meeting are identified below. The Class I directors have terms that will expire in 2002.
NAME AGE POSITION - ---- --- -------- James H. Clark............................... 55 Chairman of the board of directors L. John Doerr................................ 48 Director C. Richard Kramlich.......................... 64 Director
PROPOSAL 4 -- APPROVAL OF AMENDMENTS TO HEALTHEON'S BYLAWS Healtheon's board of directors determined that it is in the best interests of Healtheon and its stockholders to amend Healtheon's bylaws to: - provide that directors can be removed only for cause - clarify the advance notice provisions for board nominations and other stockholder proposals The amendment will prevent directors from being removed without cause. By eliminating the ability to remove members of Healtheon's board of directors without cause, it would become more difficult for stockholders to replace board members. Consequently, it would be more difficult for a hostile party to take over control of Healtheon. The amendment provides that stockholder proposals or nominations for director must be made by advance written notice provided to Healtheon between 60 and 90 days prior to the 315 326 meeting of stockholders. In addition, the proposed amendment clarifies a clerical error relating to stockholder notice. THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE AMENDMENTS TO HEALTHEON'S BYLAWS. PROPOSAL 5 -- 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. As of , 1999, shares have been issued pursuant to the 1996 stock plan and shares are available for issuance. Set forth below is a summary of the principal features of the 1996 stock plan. Healtheon will provide, without charge, to each person to whom a proxy statement/prospectus is delivered, upon request of and by first class mail within three business days of receipt of the request, a copy of the 1996 stock plan. Any request should be directed as follows: Secretary, Healtheon Corporation, 4600 Patrick Henry Drive, Santa Clara, California 95054; telephone number (408) 876-5000. SUMMARY OF THE 1996 STOCK PLAN General. The purpose of the 1996 stock plan is to attract and retain the best available personnel for positions of substantial responsibility with Healtheon, to provide additional incentive to the employees, directors and consultants of Healtheon and to promote the success of Healtheon's business. Options and stock purchase rights may be granted under the 1996 stock plan. Options granted under the 1996 stock plan may be either incentive stock options, as defined in Section 422 of the tax code, or nonstatutory stock options. Administration. The stock plan may generally be administered by the board or a committee appointed by the board, as applicable, the administrator. Eligibility and limitations. Nonstatutory stock options and stock purchase rights may be granted under the 1996 stock plan to employees, directors and consultants of Healtheon and any parent or subsidiary of Healtheon. Incentive stock options may be granted only to employees. The administrator, in its discretion, selects the employees, directors and consultants to whom options and stock purchase rights may be granted, the time or times at which such options and stock purchase rights shall be granted, and the number of shares subject to each such grant. Section 162(m) of the tax code places limits on the deductibility for federal income tax purposes of compensation paid to certain executive officers of Healtheon. In order to preserve Healtheon's ability to deduct the compensation income associated with options and stock purchase rights granted to such persons, the 1996 stock plan provides that no employee, director or consultant may be granted, in any fiscal year of Healtheon, options and stock purchase rights to purchase more than 500,000 shares of common stock. Notwithstanding this limit, however, in connection with such individual's initial employment with the he or she may be granted options or stock purchase rights to purchase up to an additional 500,000 shares of common stock. Terms and conditions of options. Each option is evidenced by a stock option agreement between Healtheon and the optionee, and is subject to the following additional terms and conditions: - 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% 316 327 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. - Exercise of options and form of consideration. The administrator determines when options become exercisable, and may in its discretion, accelerate the vesting of any outstanding option. Stock options granted under the 1996 stock plan generally vest and become exerciseable over four years. The means of payment for shares issued upon exercise of an option is specified in each option agreement. The 1996 stock plan permits payment to be made by cash, check, promissory note, other shares of common stock of Healtheon, with some restrictions, cashless exercises, a reduction in the amount of any company liability to the optionee, any other form of consideration permitted by applicable law, or any combination thereof. - Term of option. The term of an incentive stock option may be no more than ten years from the date of grant; provided that in the case of an incentive stock option granted to a 10% stockholder, the term of the option may be no more than five years from the date of grant. No option may be exercised after the expiration of its term. - Termination of employment. If an optionee's employment or consulting relationship terminates for any reason, other than death or disability, then all options held by the optionee under the 1996 stock plan expire on the earlier of the date set forth in his or her notice of grant or the expiration date of such option. To the extent the option is exercisable at the time of termination, the optionee may exercise all or part of his or her option at any time before termination. - Death or disability. If an optionee's employment or consulting relationship terminates as a result of death or disability, then all options held by such optionee under the 1996 plan on the earlier of 12 months from the date of such termination or the expiration date of such option. The optionee, or the optionee's estate or the person who acquires the right to exercise the option by bequest or inheritance, may exercise all or part of the option at any time before such expiration to the extent that the option was exercisable at the time of such termination. - Nontransferability of options. Options granted under the 1996 stock plan are not transferable other than by will or the laws of descent and distribution, and may be exercised during the optionee's lifetime only by the optionee, unless otherwise determined by the administrator. - Other provisions. The stock option agreement may contain other terms, provisions and conditions not inconsistent with the 1996 stock plan as may be determined by the administrator. Stock purchase rights. In the case of stock purchase rights, unless the administrator determines otherwise, the restricted stock purchase agreement shall grant Healtheon a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's employment with Healtheon for any reason. The purchase price for shares repurchased pursuant to the restricted stock purchase agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to Healtheon. The repurchase option shall lapse at a rate determined by the administrator. Adjustments upon changes in capitalization. In the event that the stock of Healtheon changes by reason of any stock split, reverse stock split, stock dividend, combination, reclassification or other similar change in the capital structure of Healtheon effected without the receipt of consideration, appropriate adjustments shall be made in the number and class of shares of stock subject to the 1996 stock plan, the number and class of shares of stock subject to any option or stock purchase right outstanding under the 1996 stock plan, and the exercise price of any such outstanding option or stock purchase right. In the event of a liquidation or dissolution, the administrator shall notify each optionee at least fifteen days prior to such action, and any unexercised options or stock purchase rights will terminate immediately prior thereto. In connection with any merger, consolidation, acquisition of assets or like occurrence involving Healtheon, each outstanding option or stock purchase right may be assumed or an equivalent option or 317 328 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 1996 stock plan. The board may amend, alter, suspend or terminate the 1996 stock plan, or any part thereof, at any time and for any reason. However, Healtheon shall obtain shareholder approval for any amendment to the 1996 stock plan to the extent necessary to comply with applicable laws. No such action by the board of directors or stockholders may alter or impair any option or stock purchase right previously granted under the 1996 stock plan without the written consent of the optionee. Unless terminated earlier, the 1996 stock plan shall terminate ten years from the date of its approval by the stockholders or the board of directors of Healtheon, whichever is earlier. FEDERAL INCOME TAX CONSEQUENCES Incentive stock options. An optionee who is granted an incentive stock option does not recognize taxable income at the time the option is granted or upon its exercise, although the exercise may subject the optionee to the alternative minimum tax. Upon a disposition of the shares more than two years after grant of the option and one year after exercise of the option, any gain or loss is treated as long-term capital gain or loss. If these holding periods are not satisfied, the optionee recognizes ordinary income at the time of disposition equal to the difference between the exercise price and the lower of the fair market value of the shares at the date of the option exercise or the sale price of the shares. Any gain or loss recognized on such a premature disposition of the shares in excess of the amount treated as ordinary income is treated as long-term or short-term capital gain or loss, depending on the holding period. A different rule for measuring ordinary income upon such a premature disposition may apply if the optionee is also an officer, director, or 10% shareholder of Healtheon. Net capital gains on shares held for more than 12 months are taxed at a maximum rate of 20%. Capital losses are allowed in full against capital gains and up to $3,000 against other income. Healtheon is generally entitled to a deduction in the same amount as the ordinary income recognized by the optionee. Nonstatutory stock options. An optionee does not recognize any taxable income at the time he or she is granted a nonstatutory stock option. Upon exercise, the optionee recognizes taxable income generally measured by the excess of the then fair market value of the shares over the exercise price. Any taxable income recognized in connection with an option exercise by an employee of Healtheon is subject to tax withholding by Healtheon. Healtheon is generally entitled to a deduction in the same amount as the ordinary income recognized by the optionee. Upon a disposition of such shares by the optionee, any difference between the sale price and the optionee's exercise price, to the extent not recognized as taxable income as provided above, is treated as long-term or short-term capital gain or loss, depending on the holding period. Net capital gains on shares held for more than 12 months are taxed at a maximum rate of 20%. Capital losses are allowed in full against capital gains and up to $3,000 against other income. Stock purchase rights. Stock purchase rights will generally be taxed in the same manner as nonstatutory stock options. However, restricted stock is generally purchased upon the exercise of a stock purchase right. At the time of purchase, restricted stock is subject to a "substantial risk of forfeiture" within the meaning of Section 83 of the tax code. As a result, the purchaser will not recognize ordinary income at the time of purchase. Instead, the purchaser will recognize ordinary income on the dates when the stock ceases to be subject to a substantial risk of forfeiture. The stock will generally cease to be subject to a substantial risk of forfeiture when it is no longer subject to Healtheon's right to repurchase the stock upon the purchaser's termination of employment with Healtheon. At such times, the purchaser will recognize ordinary income measured as the difference between the purchase price and the fair market value of the stock on the date the stock is no longer subject to a substantial risk of forfeiture. The purchaser may accelerate to the date of purchase his or her recognition of ordinary income, if any, and the beginning of any capital gain holding period by timely filing an election pursuant to Section 83(b) of the tax code. In such event, the ordinary income recognized, if any, is measured as the 318 329 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 1996 STOCK PLAN. IT DOES NOT PURPORT TO BE COMPLETE, AND DOES NOT DISCUSS THE TAX CONSEQUENCES OF THE EMPLOYEE'S OR CONSULTANT'S DEATH OR THE PROVISIONS OF THE INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR FOREIGN COUNTRY IN WHICH THE EMPLOYEE OR CONSULTANT MAY RESIDE. THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE AMENDMENT TO THE 1996 STOCK PLAN. 319 330 PROPOSAL 6 -- APPROVAL OF AMENDMENT TO THE 1998 EMPLOYEE STOCK PURCHASE PLAN Healtheon's board of directors determined that it is in the best interests of Healtheon and its stockholders to amend Healtheon's 1998 employee stock purchase plan: - to increase the number of shares reserved under the employee stock purchase plan by 1,000,000 shares - to change the formula for annually increasing the number of shares available to be issued under the plan. If Healtheon's stockholders approve the amendment to the employee stock purchase plan, the total number of shares available to be issued under the plan will be 2,000,000, plus annual increases on the first day of each fiscal year equal to the lesser of (a) 1,000,000 shares (b) 0.5% of the outstanding shares on such date, or (c) a lesser amount determined by Healtheon's board of directors. As of July 31, 1999, 207,252 shares have been issued pursuant to the employee stock purchase plan and 792,748 shares are available for issuance. Healtheon's stockholders are being asked to approve the increase in the number of shares reserved under the employee stock purchase plan. Healtheon's board of directors believes that the amendment to the employee stock purchase plan is needed to provide Healtheon with greater flexibility to attract and retain employees in the future, which may include current and future employees of Healtheon, WebMD, MEDE AMERICA and Medcast. Set forth below is a summary of the principal features of the employee stock purchase plan. Healtheon will provide without charge, to each person to whom a proxy statement/prospectus is delivered, upon request and by first class mail within three days of receipt of the request, a copy of the employee stock purchase plan. Any 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 EMPLOYEE STOCK PURCHASE PLAN General Healtheon's employee stock purchase plan was adopted by its board of directors and approved by its stockholders in September 1998. The purpose of the employee stock purchase plan is to provide employees with an opportunity to purchase Healtheon's common stock through payroll deductions. Administration The employee stock purchase plan may be administered by the board of directors or a committee appointed by the board of directors. All questions of interpretation or application of the employee stock purchase plan are determined by the board of directors or its appointed committee, and its decisions are final, conclusive and binding upon all participants. Eligibility Each employee of Healtheon or its designated subsidiaries, whose customary employment with Healtheon or its designated subsidiaries is at least 20 hours per week and more than five months in any calendar year, is eligible to participate in the employee stock purchase plan; except that no employee shall be granted an option under the employee stock purchase plan: - to the extent that, immediately after the grant, such employee would own 5% of either the voting power or value of the stock of Healtheon or any of its subsidiaries, or - to the extent that his or her rights to purchase stock under all employee stock employee stock purchase plans of Healtheon or its subsidiaries accrues at a rate which exceeds $25,000 worth of 320 331 stock, determined at the fair market value of the shares at the time such option is granted, for each calendar year. Offering period The employee stock purchase plan has consecutive and overlapping 24-month offering periods that begin every six months. Each 24 month offering period includes four six-month purchase periods, during which payroll deductions are accumulated and, at the end of which, shares of common stock are purchased with a participant's accumulated payroll deductions. The board of directors has the power to change the duration of future offering periods, if such change is made at least five days prior to the scheduled beginning of the first offering period to be affected. Special additional offering periods also may be created to allow immediate participation in the plan by individuals who become our employees due to a merger or other acquisition by Healtheon. To participate in the employee stock purchase plan, an eligible employee must authorize payroll deductions pursuant to the employee stock purchase plan. Such payroll deductions may not exceed 15% of a participant's compensation during the offering period. Once an employee becomes a participant in the employee stock purchase plan, the employee automatically will participate in each successive offering period until the employee withdraws from the employee stock purchase plan or the employee's employment with Healtheon and its designated subsidiaries terminates. At the beginning of each offering period, each participant automatically is granted an option to purchase shares of Healtheon's common stock. The option expires at the end of the offering period or upon termination of employment, whichever is earlier, but is exercised at the end of each purchase period to the extent of the payroll deductions accumulated during such purchase period. Purchase price Shares of our common stock may be purchased under the employee stock purchase plan at a purchase price not less than 85% of the lesser of the fair market value of our common stock on: - the first day of the offering period, or - the last day of the purchase period. The fair market value of our common stock on any relevant date will be the closing price per share as reported on the Nasdaq National Market, or the mean of the closing bid and asked prices, if no sales were reported, as quoted on such exchange or reported in The Wall Street Journal. The number of shares of our common stock a participant purchases in each offering period is determined by dividing the total amount of payroll deductions withheld from the participant's compensation prior to the last day of the purchase period by the purchase price. Payment of purchase price and payroll deductions The purchase price of the shares is accumulated by payroll deductions throughout each purchase period. The number of shares of our common stock a participant may purchase in each purchase period during an offering period is determined by dividing the total amount of payroll deductions withheld from the participant's compensation during that purchase period by the purchase price; provided, however, that a participant may not purchase more than 5,000 shares each purchase period. During the offering period, a participant may discontinue his or her participation in the employee stock purchase plan, and may decrease or increase the rate of payroll deductions in an offering period within limits set by the administrator. All payroll deductions made for a participant are credited to the participant's account under the employee stock purchase plan, are withheld in whole percentages only and are included with the general funds of Healtheon. Funds received by Healtheon pursuant to exercises under the employee stock purchase plan are also used for general corporate purposes. A participant may not make any additional payments into his or her account. 321 332 Withdrawal Generally, a participant may withdraw from an offering period at any time by written notice without affecting his or her eligibility to participate in future offering periods. However, once a participant withdraws from a particular offering period, that participant may not participate again in the same offering period. To participate in a subsequent offering period, the participant must deliver to Healtheon a new subscription agreement. Termination of employment Termination of a participant's employment for any reason, including disability or death, or the failure of the participant to remain in the continuous scheduled employ of Healtheon or its designated subsidiaries for at least 20 hours per week, cancels his or her option and participation in the employee stock purchase plan immediately. In such event, the payroll deductions credited to the participant's account will be returned to him or her or, in the case of death, to the person or persons entitled thereto as provided in the employee stock purchase plan. Adjustments upon changes in capitalization, dissolution, liquidation, merger or asset sale Changes in capitalization. Subject to any required action by the stockholders of Healtheon, the number of shares reserved under the employee stock purchase plan as well as the price per share of common stock covered by each option under the employee stock purchase plan which has not yet been exercised shall be proportionately adjusted for any increase or decrease in the number of issued shares of common stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the common stock, or any other increase or decrease in the number of shares of common stock effected without receipt of consideration by Healtheon. Such adjustment shall be made by the board of directors, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by Healtheon of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of common stock subject to an option. Dissolution or liquidation. In the event of the proposed dissolution or liquidation of Healtheon, any offering period will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the board of directors. Merger or asset sale. In the event of any merger, consolidation, acquisition of assets or like occurrence involving Healtheon, each option under the employee stock purchase plan shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation. In the event the successor corporation refuses to assume or substitute for the options, the board of directors shall shorten any purchase periods and offering periods then in progress by setting a new exercise date and any offering periods shall end on the new exercise date. The new exercise date shall be prior to the merger, consolidation or asset sale. If the board of directors shortens any purchase periods and offering periods then in progress, the board of directors shall notify each participant in writing, at least ten business days prior to the new exercise date, that the exercise date has been changed to the new exercise date and that the option will be exercised automatically on the new exercise date, unless the participant has already withdrawn from the offering period. The board of directors may, if it so determines in the exercise of its sole discretion, also make provision for adjusting the number of shares reserved under the employee stock purchase plan, as well as the price per share of common stock covered by each outstanding option, in the event Healtheon effects one or more reorganizations, recapitalization, rights offerings or other increases or reductions of shares of its outstanding common stock, and in the event of Healtheon being consolidated with or merged into any other corporation. 322 333 Amendment and termination of the plan The board of directors may at any time terminate or amend the employee stock purchase plan. An offering period may be terminated by the board of directors at the end of any purchase period if the board of directors determines that termination of the employee stock purchase plan is in the best interests of Healtheon and its stockholders. Generally, no such termination can affect options previously granted. No amendment shall be effective unless it is approved by the holders of a majority of the votes cast at a duly held stockholders' meeting, if such amendment would require stockholder approval in order to comply with Section 423 of the tax code. The employee stock purchase plan will terminate in 2008. Certain federal income tax information The following brief summary of the effect of federal income taxation upon the participant and Healtheon with respect to the shares purchased under the employee stock purchase plan does not purport to be complete, and does not discuss the tax consequences of a participant's death or the income tax laws of any state or foreign country in which the participant may reside. The employee stock purchase plan, and the right of participants to make purchases thereunder, is intended to qualify under the provisions of Sections 421 and 423 of the tax code. Under these provisions, no income will be taxable to a participant until the shares purchased under the employee stock purchase plan are sold or otherwise disposed of. Upon sale or other disposition of the shares, the participant will generally be subject to tax in an amount that depends upon the holding period. If the shares are sold or otherwise disposed of more than two years from the first day of the applicable offering period and one year from the applicable date of purchase, the participant will recognize ordinary income measured as the lesser of (a) the excess of the fair market value of the shares at the time of such sale or disposition over the purchase price, or (b) an amount equal to 15% of the fair market value of the shares as of the first day of the applicable offering period. Any additional gain will be treated as long-term capital gain. If the shares are sold or otherwise disposed of before the expiration of these holding periods, the participant will recognize ordinary income generally measured as the excess of the fair market value of the shares on the date the shares are purchased over the purchase price. Any additional gain or loss on such sale or disposition will be long-term or short-term capital gain or loss, depending on the holding period. Healtheon generally is not entitled to a deduction for amounts taxed as ordinary income or capital gain to a participant except to the extent of ordinary income recognized by participants upon a sale or disposition of shares prior to the expiration of the holding periods described above. THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE AMENDMENT TO THE 1998 EMPLOYEE STOCK PURCHASE PLAN. LEGAL OPINION The validity of the shares of Healtheon common stock offered by this proxy statement/prospectus will be passed upon for Healtheon by Wilson Sonsini Goodrich & Rosati, Professional Corporation. REPORT OF THE COMPENSATION COMMITTEE The compensation committee of the board of directors of Healtheon administers its executive compensation program. The current members of the compensation committee are James H. Clark, L. John Doerr, C. Richard Kramlich and William W. McGuire, M.D. Each of these persons is a non-employee director within the meaning of Section 16 of the Securities Exchange Act of 1934 and an "outside director" within the meaning of Section 162(m) of the tax code. None of Mr. Clark, Mr. Doerr, Mr. Kramlich or Dr. McGuire has any interlocking relationships as defined by the Securities and Exchange Commission. 323 334 GENERAL COMPENSATION PHILOSOPHY The role of the compensation committee is to set the salaries and other compensation of the executive officers and certain other key employees of Healtheon, and to make grants under, and to administer, the stock option and other executive officer equity and bonus plans. Healtheon's compensation philosophy for executive officers is to relate compensation to corporate performance and increases in stockholder value, while providing a total compensation package that is competitive and enables Healtheon to attract, motivate, reward and retain key executives and employees. Accordingly, each executive officer's compensation package may, in one or more years, be comprised of the following three elements: - base salary that is designed primarily to be competitive with base salary levels in effect at high technology companies in the Silicon Valley that are of comparable size to Healtheon and with which Healtheon competes for executive personnel - annual variable performance awards, such as bonuses, payable in cash and tied to the achievement of performance goals, financial or otherwise, established by the compensation committee - long-term stock-based incentive awards which strengthen the mutuality of interests between the executive officers and Healtheon's stockholders EXECUTIVE COMPENSATION Base salary. Salaries for executive officers for 1998 were generally determined on an individual basis by evaluating each executive's scope of responsibility, performance, prior experience and salary history, as well as the salaries for similar positions at comparable companies. In addition, Healtheon's human resources department provided information to the compensation committee regarding salary range guidelines for specific positions. Annual incentive awards. Healtheon has established a management incentive plan. Some employees, including executive officers, are eligible to participate in this plan. Target bonuses are established based on a percentage of base salary and become payable upon the achievement of specified total company financial goals and personal and team objectives. The compensation committee administers this plan with regard to the executive officers. Long-term incentive awards. The compensation committee believes that equity-based compensation in the form of stock options links the interests of executive officers with the long-term interests of Healtheon's stockholders and encourages executive officers to remain in Healtheon's employ. Stock options generally have value for executive officers only if the price of Healtheon's stock increases above the fair market value on the grant date and the officer remains in Healtheon's employ for the period required for the shares to vest. Healtheon grants stock options in accordance with the 1996 stock plan. In 1998, stock options were granted to certain executive officers as incentives for them to become employees or to aid in the retention of executive officers and to align their interests with those of the stockholders. Stock options typically have been granted to executive officers when the executive first joins Healtheon, in connection with a significant change in responsibilities and, occasionally, to achieve equity within a peer group. The compensation committee may, however, grant additional stock options to executive officers for other reasons. The number of shares subject to each stock option granted is within the discretion of the compensation committee and is based on anticipated future contribution and ability to impact Healtheon's results, past performance or consistency within the officer's peer group. In 1998, the compensation committee considered these factors, as well as the number of unvested option shares held by the officer as of the date of grant. At the discretion of the compensation committee, executive officers may also be granted stock options to provide greater incentives to continue their employment with Healtheon and to strive to increase the value of Healtheon's common stock. The stock options generally become exercisable over a four-year period and are granted at a price that is equal to the fair market value of Healtheon's common stock on the date of grant. 324 335 CHIEF EXECUTIVE OFFICER COMPENSATION Mr. Long's base salary, target bonus, bonus paid and long-term incentive awards for 1998 were determined by the compensation committee in a manner consistent with the factors described above. TAX CODE SECTION 162(m) LIMITATION Section 162(m) of the tax code limits the tax deduction to $1.0 million for compensation paid to certain executives of public companies. Having considered the requirements of Section 162(m), the compensation committee believes that grants made pursuant to the 1996 stock plan meet the requirements that such grants be "performance based" and are, therefore, exempt from the limitations on deductibility. Historically, the combined salary and bonus of each executive officer has been below the $1.0 million limit. The compensation committee's present intention is to comply with Section 162(m) unless the compensation committee feels that required changes would not be in the best interest of Healtheon or its stockholders. Compensation Committee James H. Clark L. John Doerr C. Richard Kramlich William W. McGuire, M.D. STOCK PRICE PERFORMANCE GRAPH 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 year ended December 31, 1998. Because there were no quoted market prices for our common stock for the year ended December 31, 1998, information regarding cumulative total stockholder return on Healtheon's common stock for that period, whether presented on a stand-alone basis or in comparison with the Nasdaq Composite Index or other indices, would not be meaningful. STOCKHOLDER PROPOSALS FOR THE 2000 ANNUAL MEETING OF STOCKHOLDERS Proposals of stockholders of Healtheon which are intended to be presented by such stockholders at Healtheon's next annual meeting of stockholders to be held in 2000 must be received by Healtheon in a reasonable time before a solicitation is made, and in any event not later than January 6, 2000, in order that they may be considered for possible inclusion in the proxy statement and form of proxy relating to that meeting. In addition, Healtheon's bylaws establish an advance notice procedure with regard to stockholder proposals not included in Healtheon's proxy statement, to be brought before an annual meeting of stockholders. For nominations or other business to be properly brought before the meeting by a stockholder, such stockholder must provide written notice delivered to the secretary of Healtheon at least 60 days and not more than 90 days in advance of the annual meeting date, which notice must contain specified information concerning the matters to be brought before such meeting and concerning the stockholder proposing such matters. All notices of proposals by stockholders, whether or not included in Healtheon's proxy materials, should be sent to Healtheon Corporation, 4600 Patrick Henry Drive, Santa Clara, California 95054. The attached proxy card grants the proxy holders discretionary authority to vote on any matter raised at the meeting. If a stockholder intends to submit a proposal at the next annual meeting of stockholders which is not eligible for inclusion in the proxy statement relating to that meeting, the stockholder must 325 336 give notice to Healtheon in accordance with the requirements set forth in the Securities Exchange Act of 1934 no later than March 15, 2000. If a stockholder does not comply with the foregoing notice provision, the proxy holders will be allowed to use their discretionary voting authority when and if the proposal is raised at the next annual meeting of stockholders. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16 of the Securities Exchange Act of 1934 requires Healtheon's directors and officers, and persons who own more than 10% of Healtheon's common stock to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission and the Nasdaq Stock Market. These persons are required by Securities and Exchange Commission regulations to furnish Healtheon with copies of all Section 16(a) forms that they file. Healtheon's directors and officers and 10% stockholders were not subject to the requirements of Section 16 of the Securities Exchange Act of 1934 until February 10, 1999, the effective date of Healtheon's initial public offering. Therefore, no Section 16(a) forms were filed for the year ended December 31, 1998. ADDITIONAL INFORMATION INFORMATION REGARDING INDEPENDENT AUDITORS Healtheon's board has selected Ernst & Young LLP as its principal independent auditors to perform the audit of Healtheon's financial statements for fiscal 1999. Ernst &Young LLP audited Healtheon's financial statements for Healtheon's fiscal years ended December 31, 1997 and 1998. Representatives of Ernst & Young LLP are expected to be present at the Healtheon stockholders meeting and will be given an opportunity to make a statement at the Healtheon stockholders meeting if they desire to do so, and should be available to respond to appropriate questions. EXPERTS The consolidated financial statements of Healtheon Corporation at December 31, 1998 and 1997, and for the three years in the period ended December 31, 1998 appearing in this proxy statement/prospectus have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein which, as to the year ended December 31, 1996, is based in part on the report of Deloitte & Touche LLP, independent auditors. The consolidated financial statements referred to above are included in reliance upon such reports given upon the authority of such firms as experts in accounting and auditing. The consolidated financial statements of ActaMed Corporation for the year ended December 31, 1996, which are not separately presented in this proxy statement/prospectus, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein. Such financial statements are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. 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 LLP, independent auditors, appearing elsewhere herein, and upon the authority of said firm as 326 337 experts in accounting and auditing. The report of KPMG 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, 1998 and 1999 and for each of the three years in the period ended June 30, 1999 included in this proxy statement/prospectus, have 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 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 consolidated financial statements have been included herein and in the registration statement in reliance upon the report of KPMG LLP, appearing herein, and upon the authority of said firm as experts in accounting and auditing. The financial statements of Greenberg News Networks, Inc., which is referred to as Medcast (a development stage company) as of December 31, 1997 and 1998 and for the period January 8, 1997 (date of inception) to December 31, 1997, for the year ended December 31, 1998, and for the period January 8, 1997 (date of inception) to December 31, 1998 included in this proxy statement/prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein and have been so included in reliance upon such report given upon their authority as experts in accounting and auditing. 327 338 WHERE YOU CAN FIND MORE INFORMATION Reports, proxy statements and other Reports, proxy statements and other information regarding Healtheon may be information concerning MEDE AMERICA may inspected at: be inspected at: The National Association of The National Association of Securities Securities Dealers Dealers 1735 K Street, N.W. 1735 K Street, N.W. Washington, D.C. 20006 Washington, D.C. 20006 Requests for documents relating to Requests for documents relating to MEDE Healtheon should be directed to: AMERICA should be directed to: Healtheon Corporation MEDE AMERICA Corporation 4600 Patrick Henry Drive 90 Merrick Avenue, Suite 501 Santa Clara, California 95054 East Meadow, New York 11554 (408) 876-5000 (516) 542-4500
Each of Healtheon and MEDE AMERICA file reports, proxy statements and other information with the Securities and Exchange Commission. Copies of our reports, proxy statements and other information may be inspected and copied at the public reference facilities maintained by the Securities and Exchange Commission: 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
Copies of these materials can also be obtained by mail at prescribed rates from the Public Reference Section of the Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 or by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains a website that contains reports, proxy statements and other information regarding each of us. The address of the Securities and Exchange Commission website is http://www.sec.gov. Healtheon has filed a registration statement under the Securities Act with the Securities and Exchange Commission with respect to Healtheon's common stock to be issued to WebMD stockholders, MEDE AMERICA stockholders and Medcast stockholders in the merger. This proxy statement/prospectus constitutes the prospectus of Healtheon filed as part of the registration statement. This proxy statement/prospectus does not contain all of the information set forth in the registration statement because certain parts of the registration statement are omitted as provided by the rules and regulations of the Securities and Exchange Commission. You may inspect and copy the registration statement at any of the addresses listed above. THIS DOCUMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, THE HEALTHEON 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 HEALTHEON WAS PROVIDED BY HEALTHEON; 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 MEDE AMERICA AND ITS SUBSIDIARIES WAS PROVIDED BY MEDE AMERICA; AND THE INFORMATION CONTAINED IN THIS DOCUMENT WITH RESPECT TO MEDCAST WAS PROVIDED BY MEDCAST. 328 339 HEALTHEON/WEBMD CORPORATION INDEX TO FINANCIAL STATEMENTS
PAGE ----- 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-35 Consolidated Statements of Shareholders' Equity........... F-36 Consolidated Statements of Cash Flows..................... F-38 Notes to Consolidated Financial Statements................ F-39 MEDE AMERICA CORPORATION: Independent Auditors' Report.............................. F-58 Consolidated Balance Sheets............................... F-59 Consolidated Statements of Operations..................... F-60 Consolidated Statements of Stockholders' Equity (Deficit).............................................. F-61 Consolidated Statements of Cash Flows..................... F-62 Notes to Consolidated Financial Statements................ F-63 GREENBERG NEWS NETWORKS, INC. (REFERRED TO AS MEDCAST): Independent Auditors' Report.............................. F-78 Balance Sheets............................................ F-79 Statements of Operations.................................. F-80 Statements of Stockholders' Equity........................ F-81 Statements of Cash Flows.................................. F-82 Notes to Financial Statements............................. F-83 DIRECT MEDICAL KNOWLEDGE, INC.: Reports of Independent Accountants........................ F-93 Balance Sheets............................................ F-96 Statements of Operations.................................. F-97 Statements of Changes in Shareholders' Equity (Deficit)... F-98 Statements of Cash Flows.................................. F-99 Notes to Financial Statements............................. F-100 SAPIENT HEALTH NETWORK, INC.: Independent Auditors' Report.............................. F-108 Balance Sheets............................................ F-109 Statements of Operations.................................. F-110 Statements of Shareholders' Deficit....................... F-111 Statements of Cash Flows.................................. F-112 Notes to Financial Statements............................. F-113
F-1 340
PAGE ----- THE STOCKTON GROUP, INC.: Independent Auditors' Report.............................. F-126 Statements of Income...................................... F-127 Notes to Financial Statement.............................. F-128 HEALTHCARE INTERCHANGE, INC.: Independent Auditors' Report.............................. F-130 Consolidated Balance Sheets............................... F-131 Consolidated Statements of Operations..................... F-132 Consolidated Statements of Stockholders' Equity (Deficit).............................................. F-133 Consolidated Statements of Cash Flows..................... F-134 Notes to Consolidated Financial Statements................ F-135
F-2 341 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-3 342 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-4 343 HEALTHEON CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) ASSETS
DECEMBER 31, JUNE 30, --------------------- 1999 1998 1997 ----------- --------- -------- (UNAUDITED) Current assets: Cash and cash equivalents................................. $ 36,241 $ 19,389 $ 16,504 Short-term investments.................................... 11,112 17,428 5,300 Accounts receivable, net of allowance for doubtful accounts of $352 in 1999, $152 in 1998 and $71 in 1997.................................................... 7,137 4,594 2,723 Due from related parties.................................. 4,486 3,360 1,533 Other current assets...................................... 2,466 706 527 --------- --------- -------- Total current assets...................................... 61,442 45,477 26,587 Property and equipment, net................................. 18,261 12,285 5,500 Intangible assets, net...................................... 22,390 19,868 18,768 Other assets................................................ 5,935 2,310 2,892 --------- --------- -------- $ 108,028 $ 79,940 $ 53,747 ========= ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) Current liabilities: Borrowings under line of credit........................... $ 890 $ 1,213 $ 3,425 Accounts payable.......................................... 5,790 5,178 2,225 Accrued compensation...................................... 3,634 2,424 448 Other accrued liabilities................................. 9,946 4,559 1,265 Current portion of capital lease obligations.............. 2,229 2,295 1,038 Deferred revenue.......................................... 1,157 1,874 3,396 --------- --------- -------- Total current liabilities................................. 23,646 17,543 11,797 Capital lease obligations, net of current portion........... 2,609 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 (aggregate liquidation preference of $51,065,000 at December 31, 1997)........................................ -- -- 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 (aggregate liquidation preference of $46,101,000 and $43,233,000 at December 31, 1998 and 1997, respectively)..................................... -- 46,101 43,756 Common stock, $.0001 par value; 1999: 150,000,000 shares authorized; 71,059,044 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................................ 229,849 123,670 4,502 Note receivable from officer.............................. -- -- (349) Deferred stock compensation............................... (8,521) (6,935) (2,151) Accumulated deficit....................................... (139,562) (103,428) (55,689) --------- --------- -------- Total stockholders' equity (net capital deficiency)....... 81,773 59,413 (9,930) --------- --------- -------- $ 108,028 $ 79,940 $ 53,747 ========= ========= ========
See accompanying notes. F-5 344 HEALTHEON CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ------------------------------ ------------------- 1998 1997 1996 1999 1998 -------- -------- -------- -------- -------- (UNAUDITED) Revenue: Services.............................. $ 27,102 $ 4,301 $ 1,795 $ 18,463 $ 10,893 Services to related parties........... 20,956 7,309 4,237 20,272 9,370 Software licenses..................... 780 1,780 4,981 1,518 390 -------- -------- -------- -------- -------- Total revenue......................... 48,838 13,390 11,013 40,253 20,653 Operating costs and expenses: Cost of operations: Cost of services................... 26,907 3,910 1,590 15,940 10,455 Cost of services to related parties.......................... 16,107 6,536 4,919 17,492 6,391 Cost of software licenses.......... -- -- 160 -- -- -------- -------- -------- -------- -------- Total cost of operations........... 43,014 10,446 6,669 33,432 16,846 Development and engineering........... 19,002 12,267 8,332 14,255 7,999 Sales, general and administrative..... 23,095 10,096 8,400 19,787 11,631 Depreciation and amortization......... 16,055 6,004 4,153 10,095 6,004 Write-off of offering costs........... 1,620 -- -- -- -- -------- -------- -------- -------- -------- Total operating costs and expenses.... 102,786 38,813 27,554 77,569 42,480 -------- -------- -------- -------- -------- Loss from operations.................... (53,948) (25,423) (16,541) (37,316) (21,827) Interest income......................... 1,262 611 539 1,436 637 Interest expense........................ (472) (323) (56) (254) (251) Dividends on ActaMed's convertible redeemable preferred stock............ (890) (2,870) (2,548) -- (890) -------- -------- -------- -------- -------- Net loss................................ $(54,048) $(28,005) $(18,606) $(36,134) $(22,331) ======== ======== ======== ======== ======== Basic and diluted net loss per common share................................. $ (1.54) $ (3.88) $ (2.83) $ (0.55) $ (1.27) ======== ======== ======== ======== ======== Weighted-average shares outstanding used in computing basic and diluted net loss per common share................. 34,987 7,223 6,583 66,286 17,632 ======== ======== ======== ======== ========
See accompanying notes. F-6 345 HEALTHEON CORPORATION CONSOLIDATED STATEMENT OF CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) (IN THOUSANDS, EXCEPT SHARE DATA)
CONVERTIBLE REDEEMABLE CONVERTIBLE NOTE PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE ---------------------- ---------------------- ------------------- PAID-IN FROM SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL OFFICER ----------- -------- ----------- -------- ---------- ------ ---------- ---------- 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 -- TOTAL DEFERRED STOCKHOLDERS' STOCK ACCUM- EQUITY (NET COMPEN- ULATED CAPITAL SATION DEFICIT DEFICIENCY) -------- --------- ------------- 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)
See accompanying notes. F-7 346 HEALTHEON CORPORATION CONSOLIDATED STATEMENT OF CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA)
CONVERTIBLE REDEEMABLE CONVERTIBLE PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL ---------------------- ---------------------- ------------------- PAID-IN SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL ----------- -------- ----------- -------- ---------- ------ ---------- 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 -- -- -- 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.............................. -- -- -- -- -- -- -- 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 TOTAL NOTE DEFERRED STOCKHOLDERS' RECEIVABLE STOCK ACCUM- EQUITY (NET FROM COMPEN- ULATED CAPITAL OFFICER SATION DEFICIT DEFICIENCY) ---------- -------- --------- ------------- 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........................... (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............ -- -- -- 6,500 Issuance of Series D convertible preferred stock for cash............. -- -- -- 25,000 Issuance of Series D convertible redeemable preferred stock for asset purchase............................. -- -- -- -- Repayment of note receivable from officer.............................. 151 -- -- 151 Dividends accrued on convertible redeemable preferred stock........... -- -- -- -- Deferred stock compensation............ -- (2,713) -- -- Amortization of deferred stock compensation......................... -- 562 -- 562 ----- -------- --------- -------- Balances at December 31, 1997.......... (349) (2,151) (55,689) (9,930)
See accompanying notes. F-8 347 HEALTHEON CORPORATION CONSOLIDATED STATEMENT OF CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA)
CONVERTIBLE REDEEMABLE CONVERTIBLE NOTE PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE ---------------------- ---------------------- ------------------- PAID-IN FROM SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL OFFICER ----------- -------- ----------- -------- ---------- ------ ---------- ---------- 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 -- TOTAL DEFERRED STOCKHOLDERS' STOCK ACCUM- EQUITY (NET COMPEN- ULATED CAPITAL SATION DEFICIT DEFICIENCY) -------- --------- ------------- 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
See accompanying notes. F-9 348 HEALTHEON CORPORATION CONSOLIDATED STATEMENT OF CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA)
CONVERTIBLE REDEEMABLE CONVERTIBLE NOTE PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE ---------------------- ---------------------- ------------------- PAID-IN FROM SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL OFFICER ----------- -------- ----------- -------- ---------- ------ ---------- ---------- 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)..................... -- -- -- -- 1,114,001 -- 438 -- Issuance of common stock under employee stock purchase plan (unaudited)..................... -- -- -- -- 207,252 -- 1,409 -- 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 -- Adjustment to deferred stock compensation for terminations... -- -- -- -- -- -- (474) -- Amortization of deferred stock compensation (unaudited)........ -- -- -- -- -- -- -- -- ----------- -------- ----------- -------- ---------- -- -------- ----- Balances at June 30, 1999 (unaudited)..................... -- $ -- -- $ -- 71,059,044 $7 $229,849 $ -- =========== ======== =========== ======== ========== == ======== ===== TOTAL DEFERRED STOCKHOLDERS' STOCK ACCUM- EQUITY (NET COMPEN- ULATED CAPITAL SATION DEFICIT DEFICIENCY) -------- --------- ------------- Balances at December 31, 1998..... $ (6,935) $(103,428) $ 59,413 Net loss and comprehensive loss (unaudited)..................... -- (36,134) (36,134) Issuance of common stock for option exercises by employees (unaudited)..................... -- -- 438 Issuance of common stock under employee stock purchase plan (unaudited)..................... -- -- 1,409 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) -- -- Adjustment to deferred stock compensation for terminations... 474 -- -- Amortization of deferred stock compensation (unaudited)........ 4,201 -- 4,201 -------- --------- -------- Balances at June 30, 1999 (unaudited)..................... $ (8,521) $(139,562) $ 81,773 ======== ========= ========
See accompanying notes. F-10 349 HEALTHEON CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ------------------------------ ------------------- 1998 1997 1996 1999 1998 -------- -------- -------- -------- -------- (UNAUDITED) Cash flows from operating activities: Net loss.................................................... $(54,048) $(28,005) $(18,606) $(36,134) $(22,331) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of intangibles............................... 13,382 7,564 5,402 6,615 6,027 Depreciation.............................................. 6,198 1,755 964 4,180 2,066 Amortization of deferred stock compensation............... 3,376 562 -- 4,201 1,142 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) (3,669) (1,386) Other assets............................................ 420 (224) (325) (6,252) 595 Accounts payable........................................ 2,857 751 1,139 612 908 Accrued compensation and other liabilities.............. 4,996 345 800 6,597 2,905 Deferred revenue........................................ (1,522) (1,285) 3,078 (717) 61 -------- -------- -------- -------- -------- Net cash used in operating activities....................... (26,961) (16,354) (9,566) (24,519) (9,123) -------- -------- -------- -------- -------- Cash flows from investing activities: Purchase of short-term investments.......................... (22,529) (5,300) -- (16,353) (3,483) Maturities of short-term investments........................ 10,401 -- -- 22,669 7,057 Decrease (increase) in restricted cash...................... -- (867) -- 867 -- Purchases of property and equipment......................... (6,340) (2,817) (2,027) (7,311) (2,664) 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) (128) 910 -------- -------- -------- -------- -------- 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) -- -- (323) 48 Proceeds from line of credit borrowings from related party..................................................... 1,000 -- -- -- 1,000 Payments of line of credit borrowings from related party.... (1,000) -- -- -- (1,000) Proceeds from issuance of preferred stock................... 48,135 29,530 11,107 -- 2,034 Proceeds from issuance of common stock, net of repurchases............................................... 3,673 266 144 43,245 913 Payments on note receivable from officer.................... 349 151 -- -- 349 Principal payments of capital lease obligations............. (979) (748) (218) (1,424) (560) -------- -------- -------- -------- -------- Net cash from financing activities.......................... 48,966 34,594 11,063 41,498 2,784 -------- -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents........ 2,885 8,965 (1,847) 16,851 (5,429) 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 $ 36,240 $ 11,075 ======== ======== ======== ======== ======== Supplemental disclosure of cash flow information: Interest paid............................................. $ 350 $ 252 $ 56 $ 261 $ 259 ======== ======== ======== ======== ======== Supplemental schedule of noncash investing and financing activities: Equipment acquired under capital lease obligations........ $ 4,236 $ 774 $ 2,083 $ 983 $ 1,604 ======== ======== ======== ======== ======== 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 $ -- $ -- $ 2,800 ======== ======== ======== ======== ======== Issuance of common stock for asset purchases.............. $ 13,220 $ -- $ -- $ 11,000 $ 4,900 ======== ======== ======== ======== ======== Deferred stock compensation related to options granted.... $ 8,160 $ 2,713 $ -- $ 6,261 $ 2,402 ======== ======== ======== ======== ======== Conversion of convertible redeemable preferred and convertible preferred stock to common stock............. $ 94,119 $ -- $ -- $ 46,101 $ 94,119 ======== ======== ======== ======== ========
See accompanying notes. F-11 350 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 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-12 351 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 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):
DECEMBER 31, JUNE 30, ------------------ 1999 1998 1997 ----------- ------- ------- (UNAUDITED) Cash equivalents: Corporate and other non-government debt securities..................................... $35,239 $16,858 $12,704 Money market funds................................ 1,002 43 3,429 ------- ------- ------- 36,241 16,901 16,133 Short-term investments: Government securities............................. 7,123 -- -- Corporate and other non-government debt securities..................................... 3,989 17,428 5,300 ------- ------- ------- 11,112 17,428 5,300 ------- ------- ------- $47,353 $34,329 $21,433 ======= ======= =======
Net unrealized gains (losses) were immaterial at June 30, 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 our 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 June 30, 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-13 352 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 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 six months ended June 30, 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 $782,000 for the six months ended June 30, 1998 and zero for the six months ended June 30, 1999. 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' information technology, or 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 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 F-14 353 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 IS UNAUDITED) applications. We utilize our own personnel, certain outside contractors and certain personnel and facilities of the customers that are leased under contract terms to us for these services. The cost of these leased customer personnel and facilities is included as part of the total costs of the IT and development services that we bill to the customers. In the six months ended June 30, 1999 and 1998, we recognized revenue of approximately $9,279,000 and $7,304,000 for the IT services and approximately $3,273,000 and $2,497,000 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 $6,321,000 in the six months ended June 30, 1999, $6,088,000 in the six months ended June 30, 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, through a subsidiary, Healtheon 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 $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 the subsidiary's contentious relationship with IBM, we concluded collection was not assured and, accordingly, we were recognizing this revenue as the proceeds were collected. In January 1999, we announced an enhanced relationship with IBM, where both parties agreed to jointly market and sell each company's products to their healthcare customers. Since then, we have been in further discussions with IBM on additional strategic opportunities, and as a part of these discussions, in June, 1999 we amended the agreement with IBM such that the remaining payment stream was discounted by 10.5% ($149,000) in exchange for immediate payment of the revised balance due, resulting in the recognition of the remaining deferred revenue. As a result, we recognized revenue of $1,518,000 in the six months ended June 30, 1999 and $390,000 in the six months ended June 30, 1998. We recognized revenue from the License of $780,000 in fiscal 1998, $780,000 in fiscal 1997 and $995,000 in fiscal 1996. Accounts receivable included $1,275,000 at June 30, 1999, $815,000 at December 31, 1998 and $738,000 at December 31, 1997 due from IBM. Other assets included $900,000 at December 31, 1998 and $1,715,000 F-15 354 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 IS UNAUDITED) at December 31, 1997 due from IBM. Deferred revenue included $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. 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 $200,000 in the first six months of fiscal 1999, $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 zero in the first six months of fiscal 1999, $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-16 355 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 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):
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ------------------------------ ------------------- 1998 1997 1996 1999 1998 -------- -------- -------- -------- -------- (UNAUDITED) Net loss................................ $(54,048) $(28,005) $(18,606) $(36,134) $(22,331) ======== ======== ======== ======== ======== Basic and diluted: Weighted-average shares of common stock outstanding.................. 36,418 8,621 7,398 67,362 18,999 Less: Weighted-average shares subject to repurchase...................... (1,431) (1,398) (815) (1,076) (1,367) -------- -------- -------- -------- -------- Weighted-average shares used in computing basic and diluted net loss per common share...................... 34,987 7,223 6,583 66,286 17,632 ======== ======== ======== ======== ======== Basic and diluted net loss per common share................................. $ (1.54) $ (3.88) $ (2.83) $ (0.55) $ (1.27) ======== ======== ======== ======== ========
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 18,060,021 in the six months ended March 31, 1999, 12,397,571 in the six 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 June 30, 1999 and for the six months ended June 30, 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. The interim results are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending December 31, 1999. 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-17 356 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 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-18 357 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 IS UNAUDITED) Intangible assets arising from the acquisition of EDI at March 31, 1996 are summarized as follows (in thousands):
AMORTIZATION PERIOD ------------ 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 =======
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): Net revenue................................................. $ 12,031 ======== Net loss.................................................... $(20,492) ======== Basic and diluted net loss per common share................. $ (3.11) ========
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):
FOUR MONTHS ENDED YEARS ENDED DECEMBER 31, APRIL 30, ------------------------ 1998 1997 1996 ----------- ---------- ---------- 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) ======== ======== ========
There were no intercompany transactions between the two companies or significant conforming accounting adjustments. F-19 358 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 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, 1998 and 1,336,209 shares of our common stock in June, 1998. 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-20 359 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 IS UNAUDITED) 4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following (in thousands):
DECEMBER 31, ----------------- 1998 1997 ------- ------ 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 ======= ======
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):
DECEMBER 31, AMORTIZATION JUNE 30 -------------------- PERIOD 1999 1998 1997 ------------ ----------- -------- -------- (UNAUDITED) 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 15,343 15,668 8,012 Other................................ 2-3 years 3,249 2,924 1,541 -------- -------- -------- 53,907 44,770 31,580 Less accumulated amortization........ (31,517) (24,902) (12,812) -------- -------- -------- $ 22,390 $ 19,868 $ 18,768 ======== ======== ========
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-21 360 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 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):
OPERATING CAPITAL LEASES LEASES --------- ------- 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 ======
7. BRIDGE LOANS AND NOTE RECEIVABLE FROM OFFICER In 1997, Healtheon borrowed $2,000,000 from certain stockholders in the form of 6% convertible promissory notes in contemplation of the Series C convertible preferred stock offering. These notes were converted into 800,000 shares of Series C convertible preferred stock upon the closing of that offering. Warrants to purchase 61,947 shares of Series B convertible preferred stock were issued in connection with the notes (see Note 10). In July 1997, in consideration of 250,000 shares of Series B convertible preferred stock issued to an officer, we received a one-year, full-recourse, noninterest-bearing promissory note for $500,000. At December 31, 1998, the note had been paid in full. In March 1999, Healtheon loaned $2.5 million to an officer for the purchase of a residence upon relocation to the San Francisco Bay Area. The loan is secured by a first priority lien on certain residential real property. The loan does not bear interest and must be repaid by the officer upon the earlier of the end of five years, the sale of the residence, or the discontinuation of the officer's employment with Healtheon. The officer must apply to the loan any proceeds received from the sale of Healtheon common stock resulting from the exercise of the officer's stock options. Healtheon has agreed to repurchase the residence from the officer upon request at a price equal to the officer's purchase price of the residence plus the cost of any improvements. Additionally, Healtheon has agreed to reimburse the officer for the amount of taxes payable by the officer for his residence as well as resulting from the loan. On a quarterly basis, compensation expense is recorded for the amount of interest that would be payable had the loan been on commercial terms. In addition, reimbursements for taxes payable by the officer for the residence will be treated as compensation expense. F-22 361 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 IS UNAUDITED) 8. LINES OF CREDIT In September 1997, Healtheon entered into a line of credit agreement with a bank that allows us to borrow up to $2,101,000. Amounts borrowed under this agreement bear interest at the bank's prime rate (7.75% at December 31, 1998). Interest is payable monthly with payments commencing on September 30, 1997. The line of credit availability declines over the term to $1,215,000 at December 31, 1998 and $547,000 at December 31, 1999, and expires on September 5, 2000. The amount outstanding is collateralized by certain assets. At June 30, 1999, $890,000 was outstanding under this agreement, and at December 31, 1998, $1,213,000 was outstanding under the agreement. In December 1997, we entered into a loan agreement with a bank that allowed us to borrow up to $2,250,000. Amounts borrowed under this loan agreement bore interest at the bank's prime rate (7.75% at December 31, 1998). The loan was personally guaranteed by a stockholder until the acquisition of ActaMed in May 1998. In May 1998, concurrent with the removal of the stockholder guarantee, the interest rate was increased to the bank's prime rate plus 1.5%. Interest was payable monthly with payments commencing on January 31, 1998. The principal balance of the loan was repaid in full in August 1998. In February 1998, we entered into a $2,000,000 line of credit agreement with a stockholder. We borrowed $1,000,000 under the agreement, which was repaid with interest at 10% per annum in May 1998. 9. CONVERTIBLE REDEEMABLE PREFERRED STOCK A summary of ActaMed's 8% cumulative convertible redeemable preferred stock is as follows.
DECEMBER 31, 1997 ---------------------------------------- SHARES ISSUED AND LIQUIDATION AUTHORIZED OUTSTANDING PREFERENCE ---------- ----------- ----------- 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 ========== ========== ===========
In March 1998, an additional 763,548 shares of Series D convertible redeemable preferred stock were issued in connection with the asset acquisition from SmithKline Labs (see Note 3). Dividends on each Series were cumulative whether or not declared and are shown as a charge against income in the accompanying financial statements. On May 19, 1998, in connection with the acquisition of ActaMed by Healtheon, the convertible redeemable preferred stockholders waived payment of all accrued and unpaid dividends. Preferred holders voted generally on an as-if converted basis. In addition, a majority approval of the four Series was required to approve certain transactions. The Series A, B, C and D cumulative convertible redeemable preferred stockholders were entitled to receive, upon liquidation, an amount per share equal to the issuance price, plus all accrued but unpaid dividends. Common stockholders would then have received $5,000,000. Any remaining proceeds would then have been distributed pro rata to the stockholders, subject only to the Series A holders' right to receive sufficient funds to provide a 20% return on their original investment. Each Series was redeemable at up to one-third of the originally issued shares per year commencing in years six, seven and eight after the issue date at a redemption price equal to the issue price plus all F-23 362 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 IS UNAUDITED) accrued but unpaid dividends. On May 19, 1998, all outstanding shares of convertible redeemable preferred stock were converted into 17,252,408 shares of common stock in connection with the acquisition of ActaMed by Healtheon. 10. STOCKHOLDERS' EQUITY Initial Public Offering On February 10, 1999, Healtheon completed its initial public offering. We sold 5,750,000 shares of common stock to the public and realized net proceeds of $41,398,000. Convertible Preferred Stock In October 1998, the Board of Directors authorized 8,285,007 shares of convertible preferred stock and designated all of these shares as Series A. In November 1998, we issued 7,683,341 shares of Series A convertible preferred stock for $46,101,000 of cash proceeds. The Series A convertible preferred stockholders are entitled to non-cumulative dividends of $.405 per share per annum, and liquidation rights per share equal to the issuance price plus all declared but unpaid dividends. Each share of Series A preferred stock is convertible into one share of common stock. The Series A preferred stock has voting rights equal to the common stock issuable upon conversion. Upon the closing of our initial public offering in February 1999, all of the outstanding shares of Series A preferred stock were converted into shares of common stock. At December 31, 1997, Healtheon was authorized to issue 48,020,000 shares of convertible preferred stock, designated in series. A summary of convertible preferred stock was as follows:
DECEMBER 31, 1997 ---------------------------------------- ISSUED SHARES AND LIQUIDATION DESIGNATED OUTSTANDING PREFERENCE ---------- ----------- ----------- 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 ========== ========== ===========
Series A and Series B convertible preferred shares included 20,000 and 25,000 shares, respectively, that were issued for services rendered. On May 19, 1998, all outstanding shares of convertible preferred stock were converted into shares of common stock on a one-for-one basis at the election of the holders in connection with Healtheon's acquisition of ActaMed. Concurrently with the conversion, all outstanding warrants to purchase Series B preferred stock were converted into warrants to purchase the same number of shares of common stock. Series A, B, C and D convertible preferred stockholders were entitled to noncumulative dividends of $0.03375, $0.135, $0.16875 and $0.351, respectively, per share per annum. No dividends were declared through the date of conversion. The Series A, B, C and D convertible preferred stockholders were entitled to receive, upon liquidation, an amount per share equal to the issuance price, plus all declared but unpaid dividends. The Series A, B, C and D convertible preferred stockholders had voting rights equal to the common shares issuable upon conversion. F-24 363 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 IS UNAUDITED) All outstanding shares of preferred stock were converted into common stock in connection with our initial public offering. Preferred Stock In July 1998, the Board of Directors approved a resolution authorizing Healtheon to issue up to 5,000,000 shares of preferred stock. This resolution became effective upon the date of our initial public offering, February 10, 1999. Warrants In November 1996, Healtheon issued a warrant to a venture capital investor to purchase 1,000,000 shares of Series B convertible preferred stock at an exercise price of $2.00 per share for services rendered by the investor on Healtheon's behalf. A then partner of the venture capital firm assumed the role of President and Chief Executive Officer for Healtheon from our inception through June 1997. The warrant was immediately exercisable and expires three years from the date of issuance. We recorded a charge of $500,000 representing the fair value of the warrant issued and services received based on a valuation obtained from an independent appraiser utilizing a modified Black-Scholes option pricing model. This warrant was outstanding at December 31, 1997 and in May 1998 was converted to a warrant to purchase common stock. It remained outstanding at December 31, 1998. In November 1996, we granted a warrant to one of our directors to purchase 1,000,000 shares of Series B convertible preferred stock at an exercise price of $2.00 per share, the fair value of Series B convertible preferred stock at the date of issuance. The warrant vests over a period of 18 months from the date of issuance. The term of the warrant is three years. This warrant was outstanding at December 31, 1997 and was exercised in full in May 1998. In December 1996, we issued a warrant to a customer to purchase 282,522 shares of common stock at a price of $7.97 per share. The warrant expires in December 2001. This warrant was outstanding at December 31, 1998. In July 1997, we issued a warrant to an officer, in connection with his employment, to purchase 750,000 shares of Series B convertible preferred stock at an exercise price of $2.00 per share, the fair value of Series B convertible preferred stock at the date of issuance. The warrant expires three years from issuance, and shares purchased under the warrant are subject to repurchase by Healtheon, at our option, upon termination of employment. Shares under the warrant vest ratably over a period of two years from the date of grant. This warrant was outstanding at December 31, 1997 and in May 1998 was converted to a warrant to purchase common stock. It remained outstanding at December 31, 1998. In July 1997, we issued warrants to purchase a total of 61,947 shares of Series B convertible preferred stock to certain investors in connection with a bridge financing. The warrants expire four years from issuance and are exercisable at $2.00 per share. The value of these warrants, approximately $64,000, was expensed as a cost of financing. All of these warrants were outstanding at December 31, 1997. In May 1998, warrants to purchase 17,229 shares of Series B convertible preferred stock were exercised and the remainder of the warrants, which were outstanding at December 31, 1998, were converted to warrants to purchase 44,718 shares of common stock. In December 1998, as part of a service agreement with a customer, we issued to the customer a warrant to purchase 500,000 shares of common stock with an exercise price of $10.40 per share. The warrant vests as to 200,000 shares in December 1999 and as to an additional 100,000 shares in December 2000, 2001 and 2002. The warrant expires in March 2003. The services are anticipated to be provided by F-25 364 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 IS UNAUDITED) the customer to Healtheon through at least December 31, 2002. In the event that the customer terminates the service agreement prior to December 31, 2002, the customer is obligated to pay Healtheon a breakage fee. This breakage fee represents a significant economic penalty for nonperformance under the service agreement. The value of the warrant at the date of issuance was approximately $830,000. This amount will be amortized over the life of the service agreement. At June 30, 1999, a total of $692,000 remained to be amortized over the remaining life of the service agreement. At December 31, 1998, we had reserved 2,577,240 shares of our common stock for issuance upon exercise of the outstanding warrants for common stock. 11. STOCK-BASED COMPENSATION Stock Option Plans Under the 1996 Stock Plan, or the 1996 Plan, which was adopted in February 1996, the Board of Directors may grant options to purchase common stock or issue common stock subject to a restricted stock purchase agreement to eligible participants. Options granted may be either incentive stock options or nonstatutory stock options and are exercisable within the times or upon the events determined by the Board of Directors as specified in each option agreement. Options vest over a period of time as determined by the Board of Directors, generally four years. The term of the 1996 Plan is ten years. At December 31, 1998, a total of 15,000,000 shares had been reserved under the 1996 Plan and 1,237,424 shares remained available for future grant under the 1996 Plan. The number of shares reserved under the 1996 Plan is subject to an annual increase equal to the lesser of 5% of the outstanding common shares or a lesser amount determined by the Board of Directors. In January 1999, an additional 3,107,321 shares were reserved under the 1996 Plan under the annual increase provision. In February 1999, the Board of Directors and the stockholders approved an amendment to increase the number of shares reserved for issuance under the 1996 Plan by an additional 1,000,000 shares. On October 20, 1998, we offered our employees who were granted options from July 1998 through October 1998 the ability to cancel their original option grant in exchange for a new option agreement with a new vesting start date and an option price of $3.55 per share; the deemed fair value of Healtheon common stock on that date was $4.80. A total of 3,380,200 option shares with exercise prices of $4.50, $6.30, $7.00 and $8.00 were eligible to be repriced. A total of 2,057,950 option shares were cancelled and reissued. In connection with the acquisition of ActaMed, Healtheon assumed all the outstanding options issued under the ActaMed stock option plans, after the application of the exchange ratio, and reserved 3,100,489 shares of common stock for issuance upon exercise of the assumed options. No further options can be granted under these plans. At the time of the acquisition, options for 2,717,269 shares were fully vested. The remainder of the shares vest based upon annual cliffs over a five-year period from the date of grant. Shares issued subject to restricted stock purchase agreements totaled 1,098,732 in 1998, 850,000 in 1997 and 1,806,000 in 1996. All of these shares were issued to employees for cash. The common stock is subject to repurchase at the original exercise price until vested, at our option. The shares vest over a period of time as determined by the Board of Directors for each individual purchase agreement, generally four years. During 1998, 259,896 shares were repurchased from terminated employees and 613,542 shares were repurchased in 1997. In addition, on December 14, 1998, 455,000 shares of common stock issued in July 1998 subject to restricted stock purchase agreements were rescinded as part of the repricing program. Shares subject to repurchase totaled approximately 1,247,000 at December 31, 1998, approximately 1,430,000 at December 31, 1997 and approximately 1,660,000 at December 31, 1996. F-26 365 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 IS UNAUDITED) The following table summarizes stock option activity:
WEIGHTED-AVERAGE NUMBER OF EXERCISE PRICE SHARES PER SHARE ---------- ---------------- 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)................................... 4,469,475 9.77 Exercised (unaudited)................................. (1,114,001) .38 Canceled (unaudited).................................. (366,279) 2.59 ========== Options outstanding at June 30, 1999 (unaudited)........ 14,501,995 $4.55 ==========
YEARS ENDED DECEMBER 31, ------------------------- 1998 1997 1996 ----- ----- ----- Weighted-average fair value of options granted.............. $.67 $.18 $.15 ==== ==== ====
The following table summarizes information regarding options outstanding and exercisable at December 31, 1998:
WEIGHTED- AVERAGE WEIGHTED- REMAINING WEIGHTED- AVERAGE CONTRACTUAL AVERAGE NUMBER EXERCISE LIFE NUMBER PRICE EXERCISE PRICES OUTSTANDING PRICE (IN YEARS) EXERCISABLE EXERCISE --------------- ----------- --------- ----------- ----------- --------- $ .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 ========== =========
We recorded deferred stock compensation of approximately in $6,261,000 in the six months ended June 30, 1999, $8,160,000 in 1998 and $2,713,000 in 1997. These amounts represented the difference F-27 366 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 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 $4,201,000 in the six months ended June 30, 1999, $3,376,000 in 1998 and $562,000 in 1997 based on a graded vesting method. At June 30, 1999, we had a total of approximately $8,521,000 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.
YEARS ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 -------- -------- -------- 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) ======== ======== ========
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. A total of 207,252 shares were issued under this plan during the six months ended June 30, 1999. 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-28 367 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 IS UNAUDITED) purposes. Significant components of Healtheon's deferred tax assets (liabilities) were as follows (in thousands):
DECEMBER 31, -------------------- 1998 1997 -------- -------- 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..................... $ -- $ -- ======== ========
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-29 368 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 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):
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, ------------------ ----------------------------- 1999 1998 1998 1997 1996 ------- ------- ------- ------- ------- (UNAUDITED) Healthcare transactions and information services........... $30,974 $13,349 $33,777 $11,290 $11,013 Information technology operations management..................... 9,279 7,304 15,061 2,100 -- ------- ------- ------- ------- ------- Total revenue.................... $40,253 $20,653 $48,838 $13,390 $11,013 ======= ======= ======= ======= =======
Geographic Information Healtheon operates primarily within the United States and to date has derived nearly all of its revenue from within the United States. All of our assets are located within the United States. Major Customers For the six months ended June 30, 1999, four customers accounted for 33%, 20%, 17% and 11% 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 less than $38.39 as determined by a formula just prior to closing, for each share of MEDE stock. The transaction is preliminarily valued at approximately $525.3 million. The acquisition, which will be accounted for using the purchase method of accounting, is anticipated to be completed in F-30 369 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 IS UNAUDITED) late third quarter or early in the fourth quarter of 1999. The transaction is subject to customary closing conditions, including approval by MEDE stockholders, and is subject to regulatory review. WebMD Merger On May 20, 1999 Healtheon announced that it had entered into an agreement to merge with 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 original agreement, Healtheon was to exchange 1.8150 shares of common stock for each share of WebMD stock. The transaction was preliminarily valued at approximately $7,649 million. The acquisition, which will be accounted for using the purchase method of accounting, is anticipated to be completed in late third quarter or early in the fourth quarter of 1999. The transaction is subject to customary closing conditions, including approval by WebMD and Healtheon stockholders, and is subject to regulatory review. Due to an amendment of the Healtheon/WebMD merger agreement on September 1, 1999, and a resulting change in the exchange ratio to 1.796 shares of Healtheon stock for each share of WebMD stock, the purchase price will be materially amended as it will be based on Healtheon's average stock price for the five days preceding and following September 1, 1999. Medcast Acquisition On June 30, 1999, we entered into an agreement to acquire Greenberg News Network, Inc., owners of Medcast Networks ("Medcast"), a leading Internet-based medical news and information service. Pursuant to the Agreement and Plan of Merger, we will enter into a strategic business combination with Medcast, conditioned upon and concurrent with the closing of our previously agreed to merger with WebMD. Under the terms of the agreement, Healtheon/WebMD Corporation will exchange 0.5483 shares of common stock for each share of Medcast stock. The transaction is preliminary valued at approximately $215.0 million. The acquisition, which will be accounted for using the purchase method of accounting, is anticipated to be completed in late third quarter or early fourth quarter of 1999. The transaction is subject to customary closing conditions, including approval by Medcast stockholders, and is subject to regulatory review. F-31 370 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 13, as to which the date is April 9, 1999 F-32 371 WEBMD, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31, ------------------ JUNE 30, 1997 1998 1999 ------- -------- ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 2,696 $ 6,226 $ 237,835 Accounts receivable....................................... -- -- 3,892 Current portion of note receivable........................ 100 102 84 Current portion of prepaid software licenses, content and services -- related parties............................. -- 5,000 58,755 Current portion of prepaid software licenses, content and services................................................ -- -- 18,551 Other current assets...................................... 53 2,684 577 ------- -------- --------- Total current assets.................................... 2,849 14,012 319,694 Property and equipment, net................................. 73 3,140 7,164 Prepaid software licenses, content and services, net of current portion -- related parties................................ -- -- 206,017 Prepaid software licenses, content and services, net of current portion........................................... -- -- 9,638 Other assets................................................ -- -- 2,272 Intangibles, net............................................ 118 1,060 46,663 Note receivable, less current portion....................... 106 33 -- ------- -------- --------- Total assets from continuing operations..................... 3,146 18,245 591,448 Total assets from discontinued operations................... 6,044 -- -- ------- -------- --------- Total assets.............................................. $ 9,190 $ 18,245 $ 591,448 ======= ======== ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable............................................ $ 317 $ 3,101 $ 10,320 Accrued expenses............................................ -- 5,711 2,067 Leases payable.............................................. -- -- 325 Deferred revenue............................................ -- 887 3,961 ------- -------- --------- Total current liabilities................................. 317 9,699 16,673 Leases payable, net of current portion...................... -- -- 271 Notes payable, net of discount.............................. 2,965 -- -- ------- -------- --------- Total liabilities from continuing operations................ 3,282 9,699 16,944 Total liabilities from discontinued operations.............. 1,762 -- -- ------- -------- --------- Total liabilities.................................. 5,044 9,699 16,944 Warrants with redemption feature............................ 1,110 3,260 --
See accompanying notes. F-33 372 WEBMD, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31, ------------------ JUNE 30, 1997 1998 1999 ------- -------- ----------- (UNAUDITED) LIABILITIES AND SHAREHOLDERS' EQUITY (CONTINUED) Shareholders' equity: Preferred stock; no par value; 10,000,000 shares authorized: Series A, voting; 0, 801,000 and 1,281,000 shares issued and outstanding at December 31, 1997, 1998 and June 30, 1999, respectively, liquidation preference of $12,015 and $17,415 at December 31, 1998 and June 30, 1999, respectively............................... -- 12,015 26,140 Series B, non-voting; 0, 0 and 3,037,910 shares issued and outstanding at December 31, 1997, 1998 and June 30, 1999, respectively, liquidation preference of $64,176 at June 30, 1999............................. -- -- 64,176 Series C, non-voting; 0, 0 and 1,008,750 shares issued and outstanding at December 31, 1997, 1998 and June 30, 1999, respectively, liquidation preference of $20,175 at June 30, 1999............................. -- -- 20,175 Series D, non-voting; 0, 0 and 200,000 shares issued and outstanding at December 31, 1997, 1998 and June 30, 1999, respectively, liquidation preference of $20,000 at June 30, 1999............................. -- -- 20,000 Series E, non-voting; 0, 0 and 456,896 shares issued and outstanding at December 31, 1997, 1998 and June 30, 1999, respectively, liquidation preference of $247,501 at June 30, 1999............................ -- -- 247,501 Series F, non-voting; 0, 0 and 816,900 shares issued and outstanding at December 31, 1997, 1998 and June 30, 1999, respectively, liquidation preference of $0 at June 30, 1999..................................... -- -- 132,406 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, 1998 and June 30, 1999, respectively....... 1,260 1,260 1,050 Series B, non-voting; 1,400,000 shares issued and outstanding.......................................... 400 400 400 Series C, non-voting; 1,500,000 shares issued and outstanding.......................................... 707 707 707 Series D, non-voting; 3,506,805, 4,486,805 and 5,855,130 shares issued and outstanding at December 31, 1997, 1998 and June 30, 1999, respectively....... 4,832 12,412 283,270 Series E, non-voting; 1,100,000, 2,100,000 and 2,100,000 shares issued and outstanding at December 31, 1997, 1998 and June 30, 1999, respectively....... 2,155 4,155 4,155 Deferred compensation..................................... (8) (1,007) (841) Stock subscription receivables............................ (200) -- -- Accumulated deficit....................................... (6,110) (24,656) (224,635) ------- -------- --------- Total shareholders' equity................................ 3,036 5,286 574,504 ------- -------- --------- Total liabilities and shareholders' equity......... $ 9,190 $ 18,245 $ 591,448 ======= ======== =========
See accompanying notes. F-34 373 WEBMD, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ------------------------------------- ------------------------- 1996 1997 1998 1998 1999 ---------- ---------- ----------- ----------- ----------- (UNAUDITED) Revenue: Revenue from related parties.... $ -- $ -- $ 150 $ -- $ 1,999 Revenue from unrelated parties...................... -- -- 258 -- 2,407 ---------- ---------- ----------- ----------- ----------- Total revenue........... -- -- 408 -- 4,406 Operating costs and expenses: Product development and content...................... -- 566 7,484 1,889 16,956 Sales and marketing............. -- 213 3,739 646 32,159 General and administrative...... -- 1,806 10,123 1,937 8,555 Depreciation and amortization... -- 9 303 48 8,438 Write-down of customer terminals.................... -- -- 1,795 -- -- ---------- ---------- ----------- ----------- ----------- Total operating expenses.............. -- 2,594 23,444 4,520 66,108 ---------- ---------- ----------- ----------- ----------- Operating loss.................... -- (2,594) (23,036) (4,520) (61,702) Interest (expense) income, net.... -- (725) (139) (304) 1,542 ---------- ---------- ----------- ----------- ----------- Net loss from continuing operations...................... -- (3,319) (23,175) (4,824) (60,160) Discontinued operations: Loss from discontinued operations................... (1,682) (1,195) -- (159) -- 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) (4,983) (60,160) Extraordinary loss on early extinguishment of notes payable...................... -- -- (930) -- -- ---------- ---------- ----------- ----------- ----------- Net loss.......................... (1,682) (4,349) (16,396) (4,983) (60,160) Accretion of warrants with redemption feature.............. -- -- (2,150) (1,075) (538) Non-cash preferred stock dividend........................ -- -- -- -- (130,556) Deemed dividend on preferred stock........................... -- -- -- -- (8,725) ---------- ---------- ----------- ----------- ----------- Net loss applicable to common shareholders.................... $ (1,682) $ (4,349) $ (18,546) $ (6,058) $ (199,979) ========== ========== =========== =========== =========== Net loss per share (basic and diluted): Continuing operations........... $ -- $ (0.40) $ (2.08) $ (0.52) $ (15.52) 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) $ (0.53) $ (15.52) ========== ========== =========== =========== =========== Weighted average common shares outstanding..................... 2,611,918 8,300,261 12,195,680 11,435,990 12,889,100 ========== ========== =========== =========== ===========
See accompanying notes. F-35 374 WEBMD, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
COMMON STOCK ------------------------------------------------------------------------------------ COMMON STOCK SERIES B SERIES C SERIES D ------------------- ------------------ ------------------ -------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ---------- ------ --------- ------ --------- ------ --------- -------- Balance at January 1, 1996 (Combined).......................... 1,000,000 $ 48 -- $ -- -- $ -- -- $ -- Stock subscription receivable including non-cash compensation charge of 1,371................... 2,500,000 1,428 -- -- -- -- -- -- Issuance of stock for cash.......... -- -- 700,000 400 250,000 500 -- -- Transfer of common stock series..... (500,000) (207) -- -- 500,000 207 -- -- Net loss............................ -- -- -- -- -- -- -- -- ---------- ------ --------- ---- --------- ---- --------- -------- Balance at December 31, 1996 (Combined).......................... 3,000,000 1,269 700,000 400 750,000 707 -- -- Issuance of Endeavor stock to founders.......................... 2,000,000 -- 700,000 -- 750,000 -- -- -- Dissent of QDS minority shareholders...................... (1,000,000) (9) -- -- -- -- -- -- 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....... -- -- -- -- -- -- 100,000 200 Issuance of stock for cash, net of issuance costs of $45...................... -- -- -- -- -- -- 1,897,500 3,596 Issuance of stock upon conversion of note payable...................... -- -- -- -- -- -- 509,305 1,018 Issuance of stock options........... -- -- -- -- -- -- -- 18 Non-cash stock option compensation...................... -- -- -- -- -- -- -- -- Payment of stock subscription receivable........................ -- -- -- -- -- -- -- -- Net loss............................ -- -- -- -- -- -- -- -- ---------- ------ --------- ---- --------- ---- --------- -------- Balance at December 31, 1997......... 3,000,000 1,260 1,400,000 400 1,500,000 707 3,506,805 4,832 Issuance of stock upon exercise of warrants.......................... -- -- -- -- -- -- -- -- Issuance of stock and warrants to third parties for cash including non-cash compensation charge of $149.............................. -- -- -- -- -- -- 800,000 1,850 Issuance of stock upon conversion of note payable...................... -- -- -- -- -- -- 100,000 200 Issuance of preferred stock for cash.............................. -- -- -- -- -- -- -- -- Issuance of stock for services...... -- -- -- -- -- -- 30,000 405 Issuance of stock for acquisition... -- -- -- -- -- -- 50,000 900 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 1,260 1,400,000 400 1,500,000 707 4,486,805 12,412 Issuance of stock upon exercise of options (unaudited)............... -- -- -- -- -- -- 561,001 957 Issuance of stock upon exercise of warrants (unaudited).............. -- -- -- -- -- -- 580,220 4,840 Issuance of stock for cash (unaudited)....................... -- -- -- -- -- -- 194,604 10,200 Issuance of preferred stock for cash (unaudited)....................... -- -- -- -- -- -- -- -- Issuance of stock for goods and services (unaudited).............. -- -- -- -- -- -- -- -- Issuance of stock in connection with strategic alliances (unaudited)... -- -- -- -- -- -- 100,000 2,000 Issuance of stock, options and warrants for acquisitions (unaudited)....................... -- -- -- -- -- -- -- -- Issuances of warrants for services (unaudited)....................... -- -- -- -- -- -- -- 254,153 Issuance of warrant in connection with a strategic alliance (unaudited)....................... -- -- -- -- -- -- -- 263 Non-cash compensation expense (unaudited)....................... -- -- -- -- -- -- -- -- Transfer of common stock series (unaudited)....................... (500,000) (210) -- -- -- -- 500,000 210 Accretion of warrants with redemption feature (unaudited).... -- -- -- -- -- -- -- -- Deemed dividend on preferred stock (unaudited)....................... -- -- -- -- -- -- -- -- Dividend of preferred stock (unaudited)....................... -- -- -- -- -- -- -- -- Transfer of Series (unaudited)...... -- -- -- -- -- -- (567,500) (1,765) Net loss (unaudited)................ -- -- -- -- -- -- -- -- ---------- ------ --------- ---- --------- ---- --------- -------- Balance at June 30, 1999 (unaudited)......................... 2,500,000 $1,050 1,400,000 $400 1,500,000 $707 5,855,130 $283,270 ========== ====== ========= ==== ========= ==== ========= ======== COMMON STOCK ------------------ SERIES E ------------------ SHARES AMOUNT --------- ------ Balance at January 1, 1996 (Combined).......................... -- $ -- Stock subscription receivable including non-cash compensation charge of 1,371................... -- -- 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 of $45...................... 1,100,000 2,155 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 2,155 Issuance of stock upon exercise of warrants.......................... 1,000,000 2,000 Issuance of stock and warrants to third parties for cash including non-cash compensation charge of $149.............................. -- -- 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 4,155 Issuance of stock upon exercise of options (unaudited)............... -- -- Issuance of stock upon exercise of warrants (unaudited).............. -- -- Issuance of stock for cash (unaudited)....................... -- -- Issuance of preferred stock for cash (unaudited)....................... -- -- Issuance of stock for goods and services (unaudited).............. -- -- Issuance of stock in connection with strategic alliances (unaudited)... -- -- Issuance of stock, options and warrants for acquisitions (unaudited)....................... -- -- Issuances of warrants for services (unaudited)....................... -- -- Issuance of warrant in connection with a strategic alliance (unaudited)....................... -- -- Non-cash compensation expense (unaudited)....................... -- -- Transfer of common stock series (unaudited)....................... -- -- Accretion of warrants with redemption feature (unaudited).... -- -- Deemed dividend on preferred stock (unaudited)....................... -- -- Dividend of preferred stock (unaudited)....................... -- -- Transfer of Series (unaudited)...... -- Net loss (unaudited)................ -- -- --------- ------ Balance at June 30, 1999 (unaudited)......................... 2,100,000 $4,155 ========= ======
See accompanying notes. F-36 375 WEBMD, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
PREFERRED STOCK --------------------------------------------------------------- SERIES A SERIES B SERIES C ------------------- ------------------- ------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT --------- ------- --------- ------- --------- ------- Balance at January 1, 1996 (Combined).................... -- $ -- -- $ -- -- $ -- Stock subscription receivable including a non-cash compensation charge of 1,371.......................... -- -- -- -- -- -- 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 of $45................................................... -- -- -- -- -- -- 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............................. -- -- -- -- -- -- Issuance of stock upon exercise of warrants............. -- -- -- -- -- -- Issuance of stock and warrants including non-cash compensation charge of $149........................... -- -- -- -- -- -- Issuance of stock upon conversion of note payable....... -- -- -- -- -- -- Issuance of preferred stock for cash.................... 801,000 12,015 -- -- -- -- 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............................. 801,000 12,015 -- -- -- -- Issuance of stock upon exercise of options (unaudited)........................................... -- -- 70,692 239 -- -- Issuance of stock upon exercise of warrants (unaudited)........................................... 300,000 5,400 -- -- -- -- Issuance of stock for cash (unaudited).................. -- -- -- -- -- -- Issuance of preferred stock for cash (unaudited)........ -- -- 860,000 17,200 828,750 16,575 Issuance of stock for goods and services (unaudited).... -- -- -- -- 180,000 3,600 Issuance of stock in connection with strategic alliances (unaudited)........................................... -- -- -- -- -- -- Issuance of stock, options and warrants for acquisitions (unaudited)........................................... -- -- 2,113,208 46,822 -- -- Issuance of warrants for services (unaudited)........... -- -- -- -- -- -- Issuance of warrant in connection with a strategic alliance (unaudited).................................. -- -- -- -- -- -- Non-cash compensation expense (unaudited)............... -- -- -- -- -- -- Transfer of common stock series (unaudited)............. -- -- -- -- -- -- Accretion of warrants with redemption feature (unaudited)........................................... -- -- -- -- -- -- Deemed dividend on preferred stock (unaudited).......... 180,000 8,725 -- -- -- -- Dividend of preferred stock (unaudited)................. -- -- -- -- -- -- Transfer of series (unaudited).......................... -- -- (5,990) (85) -- -- Net loss (unaudited).................................... -- -- -- -- -- -- --------- ------- --------- ------- --------- ------- Balance at June 30, 1999 (unaudited)..................... 1,281,000 $26,140 3,037,910 $64,176 1,008,750 $20,175 ========= ======= ========= ======= ========= ======= PREFERRED STOCK ------------------------------------------------------------- SERIES D SERIES E SERIES F ----------------- ------------------ -------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ------- ------- ------- -------- --------- -------- Balance at January 1, 1996 (Combined).................... -- $ -- -- $ -- -- $ -- Stock subscription receivable including a non-cash compensation charge of 1,371.......................... -- -- -- -- -- -- 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 of $45................................................... -- -- -- -- -- -- 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............................. -- -- -- -- -- -- Issuance of stock upon exercise of warrants............. -- -- -- -- -- -- Issuance of stock and warrants including non-cash compensation charge of $149........................... -- -- -- -- -- -- 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............................. -- -- -- -- -- -- Issuance of stock upon exercise of options (unaudited)........................................... -- -- -- -- -- -- Issuance of stock upon exercise of warrants (unaudited)........................................... -- -- -- -- -- -- Issuance of stock for cash (unaudited).................. -- -- -- -- -- -- Issuance of preferred stock for cash (unaudited)........ -- -- 456,896 247,501 -- -- Issuance of stock for goods and services (unaudited).... -- -- -- -- -- -- Issuance of stock in connection with strategic alliances (unaudited)........................................... 200,000 20,000 -- -- -- -- Issuance of stock, options and warrants for acquisitions (unaudited)........................................... -- -- -- -- -- -- Issuance of warrants for services (unaudited)........... -- -- -- -- -- -- Issuance of warrant in connection with a strategic alliance (unaudited).................................. -- -- -- -- -- -- Non-cash compensation expense (unaudited)............... -- -- -- -- -- -- Transfer of common stock series (unaudited)............. -- -- -- -- -- -- Accretion of warrants with redemption feature (unaudited)........................................... -- -- -- -- -- -- Deemed dividend on preferred stock (unaudited).......... -- -- -- -- -- Dividend of preferred stock (unaudited)................. -- -- -- -- 759,551 130,556 Transfer of series (unaudited).......................... -- -- -- -- 57,349 1,850 Net loss (unaudited).................................... -- -- -- -- -- -- ------- ------- ------- -------- --------- -------- Balance at June 30, 1999 (unaudited)..................... 200,000 $20,000 456,896 $247,501 816,900 $132,406 ======= ======= ======= ======== ========= ======== STOCK TOTAL DEFERRED SUBSCRIPTION ACCUMULATED SHAREHOLDERS' COMPENSATION RECEIVABLE DEFICIT EQUITY ------------ ------------ ----------- ------------- Balance at January 1, 1996 (Combined).................... $ -- $ -- $ (79) $ (31) Stock subscription receivable including a non-cash compensation charge of 1,371.......................... -- (57) -- 1,371 Issuance of stock for cash.............................. 900 Transfer of common stock series......................... -- -- -- -- Net loss................................................ -- -- (1,682) (1,682) ------ ----- --------- -------- Balance at December 31, 1996 (Combined).................. -- (57) (1,761) 558 Issuance of Endeavor stock to founders.................. -- -- -- -- Dissent of QDS minority shareholders.................... -- -- -- (9) Cancellation of the stock of QDS........................ -- -- -- -- Issuance of Endeavor stock in exchange for QDS stock.... -- -- -- -- Transfer of common stock series......................... -- -- -- -- Stock subscription receivable........................... -- (200) -- -- Issuance of stock for cash, net of issuance costs of $45................................................... -- -- -- 5,751 Issuance of stock upon conversion of note payable....... -- -- -- 1,018 Issuance of stock options............................... (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............................. (8) (200) (6,110) 3,036 Issuance of stock upon exercise of warrants............. -- -- -- 2,000 Issuance of stock and warrants including non-cash compensation charge of $149........................... -- -- -- 1,850 Issuance of stock upon conversion of note payable....... -- -- -- 200 Issuance of preferred stock for cash.................... -- -- -- 12,015 Issuance of stock for services.......................... -- -- -- 405 Issuance of stock for acquisition....................... -- -- -- 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............................. (1,007) -- (24,656) 5,286 Issuance of stock upon exercise of options (unaudited)........................................... -- -- -- 1,196 Issuance of stock upon exercise of warrants (unaudited)........................................... -- -- -- 10,240 Issuance of stock for cash (unaudited).................. -- -- -- 10,200 Issuance of preferred stock for cash (unaudited)........ -- -- -- 281,276 Issuance of stock for goods and services (unaudited).... -- -- -- 3,600 Issuance of stock in connection with strategic alliances (unaudited)........................................... -- -- -- 22,000 Issuance of stock, options and warrants for acquisitions (unaudited)........................................... -- -- -- 46,822 Issuance of warrants for services (unaudited)........... -- -- -- 254,153 Issuance of warrant in connection with a strategic alliance (unaudited).................................. -- -- -- 263 Non-cash compensation expense (unaudited)............... 166 -- -- 166 Transfer of common stock series (unaudited)............. -- -- -- -- Accretion of warrants with redemption feature (unaudited)........................................... -- -- (538) (538) Deemed dividend on preferred stock (unaudited).......... -- -- (8,725) -- Dividend of preferred stock (unaudited)................. -- -- (130,556) -- Transfer of series (unaudited).......................... -- -- -- -- Net loss (unaudited).................................... -- -- (60,160) (60,160) ------ ----- --------- -------- Balance at June 30, 1999 (unaudited)..................... $ (841) $ -- $(224,635) $574,504 ====== ===== ========= ========
See accompanying notes. F-37 376 WEBMD, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------- ------------------ 1996 1997 1998 1998 1999 ------- ------- -------- ------- -------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net loss.................................................. $(1,682) $(4,349) $(16,396) $(4,983) $(60,160) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization........................... -- 9 303 57 8,438 Gain on disposal of discontinued operations............. -- (165) (7,709) -- -- Extraordinary loss on early extinguishment of notes payable............................................... -- -- 930 -- -- Loss on equity investment............................... -- -- -- -- 191 Non-cash compensation expense........................... 1,371 11 3,375 46 166 Non-cash interest expense............................... -- 593 105 90 -- Non-cash amortization of equity issued for services..... -- -- 405 -- 11,125 Changes in operating assets and liabilities, net of business acquired: Accounts receivable................................... -- -- -- -- (3,808) Other current assets.................................. -- (53) (2,861) 5 2,273 Prepaid software licenses, content and services....... -- -- -- -- (20,555) Other assets.......................................... -- -- -- -- 2,072 Accounts payable and accrued expenses................. -- 317 3,396 345 (1,305) Deferred revenue...................................... -- -- 887 -- 3,074 ------- ------- -------- ------- -------- Net cash used in operating activities by continuing operations.............................................. (311) (3,637) (17,565) (4,440) (58,489) Net cash provided by (used in) operating activities of discontinued operations................................. 256 (249) (361) 863 -- ------- ------- -------- ------- -------- Net cash used in operating activities..................... (55) (3,886) (17,926) (3,577) (58,489) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment....................... -- (76) (2,688) (1,215) (4,043) Purchases of property and equipment for discontinued operations.............................................. (2,325) (1,713) (1,787) (1,102) -- Payment of dissenters' claim.............................. -- -- (2,653) -- -- Payments associated with acquisitions..................... -- -- -- -- (2,676) Proceeds received on note receivable...................... -- -- 71 39 51 Proceeds from sale of discontinued operations............. -- 200 16,597 -- -- ------- ------- -------- ------- -------- Net cash (used in) provided by investing activities....... (2,325) (1,589) 9,540 (2,278) (6,668) CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from sale of common stock.................... 900 5,751 1,701 3,560 10,200 Net proceeds from sale of preferred stock................. -- -- 12,015 -- 281,276 Net proceeds from exercise of warrants.................... -- -- 2,000 -- 6,441 Net proceeds from exercise of options..................... -- -- -- -- 1,196 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) -- (2,347) Amounts received on stock subscriptions................... -- 57 200 200 -- Deferred financing costs.................................. -- (124) -- -- -- ------- ------- -------- ------- -------- Net cash provided by financing activities of continuing operations.............................................. 900 9,684 11,916 3,760 296,766 Net cash provided by (used in) financing activities of discontinued operations................................. 1,480 (1,513) -- (201) -- ------- ------- -------- ------- -------- Net cash provided by financing activities................. 2,380 8,171 11,916 3,559 296,766 ------- ------- -------- ------- -------- Net increase (decrease) in cash and cash equivalents...... -- 2,696 3,530 (2,296) 231,609 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 $ 400 $237,835 ======= ======= ======== ======= ======== SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Equipment acquired under capital lease obligations........ $ -- $ -- $ -- $ -- $ 1,064 ======= ======= ======== ======= ======== Issuance of note receivable for sale of Ultrascan......... $ -- $ 200 $ -- $ -- $ -- ======= ======= ======== ======= ======== Issuance of preferred stock for acquisitions.............. $ -- $ -- $ -- $ -- $ 46,822 ======= ======= ======== ======= ======== Issuance of common stock for acquisition.................. $ -- $ -- $ 900 $ -- $ -- ======= ======= ======== ======= ======== Issuance of stock in connection with strategic alliances............................................... $ -- $ -- $ -- $ -- $ 2,001 ======= ======= ======== ======= ======== Issuance of equity instruments for software licenses, content and services.................................... $ -- $ -- $ 405 $ -- $280,016 ======= ======= ======== ======= ======== Conversion of notes payable to common stock, including non-cash interest charge................................ $ -- $ 1,018 $ 200 $ 200 $ -- ======= ======= ======== ======= ======== Deemed dividend on preferred stock........................ $ -- $ -- $ -- $ -- $ 8,725 ======= ======= ======== ======= ======== Preferred stock dividend.................................. $ -- $ -- $ -- $ -- $130,556 ======= ======= ======== ======= ========
See accompanying notes. F-38 377 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., ("ETI"), 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, ETI, at the time a newly formed entity, acquired Quality Diagnostic Services, Inc. ("QDS") through the exchange of 2,000,000 shares of the Company's common stock, no designation, 700,000 shares of the Company's Series B common stock and 750,000 shares of the Company's Series C common stock for identical amounts of QDS stock of the same series designation. 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 QDS operations 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. At December 31, 1998, 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, accounts receivable and accounts payable approximate their fair values due to the short-term nature of these financial F-39 378 WEBMD, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) instruments. The carrying amount reported in the balance sheet for long-term debt approximates its fair value based on discounted cash flows. 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 of the Company's website and systems, license fees for content acquisition and third party website development services. Product development costs are charged to operations as incurred. Content costs are amortized over the term of the content license agreement or over the useful life of the content (if the term of the content provided is indefinite) on a straight-line basis. Amortization periods have generally ranged from six months to five years. Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," requires the capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based upon the Company's product development process, technological feasibility is established upon the completion of a working model. Costs incurred by the Company between completion of a working model and the point at which the product is ready for general release have not been significant. ADVERTISING COSTS Advertising costs are charged to expense in the period the costs are incurred. Advertising expense for the years ended December 31, 1996, 1997 and 1998 was $0, $164 and $604, respectively. INCOME TAXES Income taxes have been provided using the liability method in accordance with SFAS No. 109, "Accounting for Income Taxes." REVENUE RECOGNITION The Company derives its revenue primarily from subscriptions, advertising, third-party carriage fees, and other services generated by the WebMD website and its co-branded websites. Subscription revenue is recognized based on the monthly subscription fee. Revenues related to advertising and the Company's various Internet-based administrative, communication and information services are recognized when the services are performed or provided. Revenues from fixed fee content carriage agreements are recognized ratably over the related contract term. The Company has entered into agreements that provide for the placement and sponsorship of subscriptions, co-promotion and marketing rights, and website content licenses. Under such agreements, F-40 379 WEBMD, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) the Company generally pays a fee for co-promotion services and branding rights and generally shares in the advertising and e-commerce revenues generated by the co-branded websites and web pages. Several of these relationships include the issuance of equity securities by the Company. Amounts received for sponsored subscriptions prior to the placement of the related subscriptions are recorded as deferred revenue and are recognized as the subscriptions are placed. The Company assesses the likelihood that all subscriptions under the agreement will ultimately be placed during the contract period. To the extent that the Company determines that the sponsored subscriptions will not be placed, the related deferred revenue and assets associated with that agreement are reduced. STOCK SPLIT On October 2, 1997, the Company effected a one-for-two reverse stock split. The share and per share amounts in the financial statements have been retroactively adjusted for the reverse stock split. NET LOSS PER SHARE In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), and in February 1998, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 98 related to SFAS 128. SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is similar to the previously reported fully diluted earnings per share. The Company's common stock equivalents were antidilutive and therefore were not included in the computation of weighted average shares used in computing diluted loss per share. Options and warrants to purchase 4,510,321 and 8,160,309 shares of common stock with a weighted average exercise price of $1.20 and $4.59 per share, outstanding in 1997 and 1998, respectively, and 30,000 shares of restricted common stock issued during 1998 were not included in the computation of diluted loss per share because the Company reported a loss and, therefore, the effect would be antidilutive. STOCK BASED COMPENSATION Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123") sets forth accounting and reporting standards for stock-based employee compensation plans. As permitted by SFAS 123, the Company continues to account for stock option grants in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations (collectively "APB 25"). Under APB 25, no compensation expense is recognized for stock options granted to employees at fair market value. Certain stock, stock options and warrants were granted with exercise prices below the then fair market value or at fair market value to third parties. In connection with these issuances, the Company recognized $1,371, $11 and $3,226 in compensation expense during 1996, 1997 and 1998, respectively. FAIR VALUE OF EQUITY INSTRUMENTS The values assigned to stock issued for acquisitions and equity instruments issued for content, licenses and services were determined by management and the Board of Directors based on recent sales of similar securities, in the absence of a readily trading market. F-41 380 WEBMD, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 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 June 30, 1999 and for the six months ended June 30, 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 110,768 shares of the Company's Series D common stock (see Note 11). 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. 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 for $400. 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. F-42 381 WEBMD, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Balance sheet information for QDS, Telemedics and Ultrascan is provided as follows:
DECEMBER 31, 1997 ------------ 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 ======
Supplemental cash flow information from the operations of QDS, Telemedics and Ultrascan is provided as follows:
YEAR ENDED DECEMBER 31, --------------------------- 1996 1997 1998 ------- ------- ----- 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 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......... $(1,287) $(1,391) $(299) ======= ======= ===== CASH FLOWS FROM FINANCING ACTIVITIES 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......... $ 1,480 $(1,513) $ -- ======= ======= =====
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. F-43 382 WEBMD, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) In connection with the acquisition of QDS by the Company on March 26, 1997, 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 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. PREPAID SOFTWARE LICENSES, CONTENT AND SERVICES In connection with obtaining software licenses, content and development services, the Company paid cash or issued equity instruments to certain service providers including related parties. The amount of payments made or the fair value of equity instruments issued has been capitalized and is being amortized over the agreement term. Prepaid costs by category are summarized as follows:
DECEMBER 31, JUNE 30, 1998 1999 ------------ ----------- (UNAUDITED) CURRENT PORTION Content..................................................... $ -- $ 3,728 Services.................................................... -- 2,031 Distribution................................................ -- 70,022 Promotions.................................................. 5,000 1,475 ------ -------- $5,000 $ 77,256 ====== ======== LONG-TERM PORTION Content..................................................... $ -- $ 8,438 Services.................................................... -- 1,200 Distribution................................................ -- 206,067 Promotions.................................................. -- -- ------ -------- $ -- $215,705 ====== ========
There were no prepaid software licenses, content and services balances as of December 31, 1996 and 1997. F-44 383 WEBMD, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 5. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, --------------- JUNE 30, 1997 1998 1999 ------ ------ ----------- (UNAUDITED) Computer equipment and purchased software................. $ 23 $3,110 $ 7,649 Furniture and fixtures.................................... 53 420 871 Property and equipment from discontinued operations....... 4,263 -- -- ------ ------ ------- 4,339 3,530 8,520 Less accumulated depreciation............................. (3) (390) (1,356) Less accumulated depreciation from discontinued operations.............................................. (983) -- -- ------ ------ ------- Property and equipment, net............................... $3,353 $3,140 $ 7,164 ====== ====== =======
6. WRITE-DOWN OF CUSTOMER TERMINALS During 1998, the Company purchased customer terminals which were to be included as promotional arrangements with certain subscribers. Due to a change in the Company's strategy, the Company recorded a charge of approximately $1,795 to write-down customer terminals to their net realizable value of $620. The net realizable value, which was determined by a third party offer, is included in other assets. The customer terminals were sold subsequent to year end. 7. 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 website 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 are as follows:
DECEMBER 31, JUNE 30, 1998 1999 ------------ ----------- (UNAUDITED) 1999.................................................. $ 9,358 $ 37,300 2000.................................................. 4,405 72,500 2001.................................................. 3,300 78,300 2002.................................................. 120 40,400 2003.................................................. 30 34,400 ---------- ---------- $ 17,213 $ 262,900 ========== ==========
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 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. F-45 384 WEBMD, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 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: 1999........................................................ $ 956 2000........................................................ 342 2001........................................................ 88 2002........................................................ 26 2003........................................................ 26 ------ $1,438 ======
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. 8. 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. 9. 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. 10. RELATED PARTY TRANSACTIONS In July 1996, the Company loaned an officer of the Company $57 to purchase 2,500,000 shares of common stock. This loan is evidenced by a full recourse promissory note bearing interest at 8.5% per annum originally due in July 1998, but modified in March 1997 to be due in July 1999. Through December 31, 1998, the officer paid $52 in principal and interest. The note was repaid in full at June 30, 1999. In connection with the sale of stock, a charge of $1,371 was recorded as non-cash compensation in 1996. 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. F-46 385 WEBMD, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) In August 1997, the Company received loans of $100 each from two shareholders of the Company. Each unsecured loan was evidenced by a promissory note payable and paid in full during 1997. In conjunction with these loans, the Company granted each of the two shareholders the option to purchase 13,486 shares of Series D common stock of the Company at an exercise price of $1.44 per share. In connection with these options, the Company recorded their fair value, as determined by the minimum value method, as additional interest expense. During 1998, the Company purchased services from iXL Enterprises, Inc. ("iXL") in the amount of $4,448. A board member of the Company is Chairman of iXL. The Company provides its subscribers with Premiere's enhanced communications services. The Company's agreement with Premiere is effective until January 31, 2001 and contains minimum commitments for per account and transaction payments by the Company to Premiere. These minimum commitments total $2,600, $3,267, $2,817 and $2,667 during 1999, 2000, 2001 and 2002, respectively. The Company's agreement with Premiere also provides for the development of the Orchestrate platform for the Company. A board member of the Company is the Chairman of Premiere. McKessonHBOC, a shareholder of the Company, has agreed to market the Company's subscriptions to integrated delivery networks, hospitals, physician offices, pharmacies, pharmaceutical companies and medical and surgical supply manufacturers. The Company has agreed to provide web-enabled access to McKessonHBOC products and services. Also, see Note 14. 11. 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. F-47 386 WEBMD, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 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. The rights of the preferred stock series are identical except that (i) Series A preferred stock are voting and (ii) Series A preferred stock has liquidation preference over holders of any junior ranking capital stock. Upon a liquidation of the Company, if the assets of the Company are insufficient to permit full payment of the liquidation preference of each series, then the assets of the Company available for such distribution shall be distributed pro rata based on the relative liquidation preferences. 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. Also, see Note 14. As described in the Company's Articles of Incorporation, the holders of Series A, B and C preferred stock have the right to convert all or part of such shares into common stock on a one-for-one basis. The holders of Series D preferred stock have the right to convert all or part of such shares into common stock at any time after March 1, 2000, a change to common stock series without designation, a merger where WebMD is not the surviving entity, or a sale of substantially all of the company on a five-for-one basis. The holders of the Series E Preferred Stock and the Series F Preferred Stock have the right to convert all or part of such shares into common stock any time after January 15, 2000 on a ten-for-one basis. The Series A, B, C, D, E and F preferred stock provide for a preference upon liquidation. STOCK WARRANTS On August 29, 1997, the Company borrowed $4,000 from Sirrom. In connection with the loan, Sirrom received a warrant to purchase 557,490 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 based on the then fair value of Series D common stock and recorded as temporary equity due to its redemption feature. 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. Also, see Note 14. In December 1997, the Company granted a warrant to purchase 1,000,000 shares of the Company's Series E common stock for $2.00 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. F-48 387 WEBMD, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 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 HBO & Company to purchase a total of 498,456 shares of the Company's Series A preferred stock at the lesser of the price at a public offering or $13.00 per share. The warrants expire on August 24, 2001 with respect to 415,380 shares and on September 1, 2001 with respect to 83,076 shares. STOCK OPTION PLAN Effective January 1, 1997, the Board of Directors and shareholders of the Company adopted the 1997 Stock Incentive Plan (the "1997 Plan"), which provides for issuance of stock options and restricted stock awards to employees, directors, consultants and advisors. The Board of Directors and shareholders of the Company amended and restated the 1997 Plan on September 17, 1998. Options may be granted under the 1997 Plan with an exercise price not less than the fair value of the Company's common stock on the date of the grant, as determined by the Board of Directors or a committee of the Board, in the absence of a readily available market for the Company's stock. Options become exercisable and expire as determined by the Board of Directors or a committee of the Board (generally over 2 to 7 years). Effective November 13, 1998, the Board of Directors and shareholders of the Company adopted the Director Stock Option Plan ("the Director Plan"), which provides for issuance of stock options to non-employee directors. Options are granted automatically to existing directors on the date of adoption and subsequently upon election as a director of the Company and at January 1 of each calendar year with an exercise price not less than the fair value of the Company's common stock on the date of the grant. Options are vested immediately and become exercisable six months from the date of grant and expire in ten years. Pro forma information regarding net income and loss per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method. The fair value for these options was estimated at the date of grant using a minimum value pricing model with the following weighted average assumptions for 1997 and 1998: risk-free interest rates of 6.2% and 5.4%; no dividend yield; and an expected life of an option of four years. Option valuation models used under SFAS 123 were developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options granted to employees are amortized to expense over the vesting period. The weighted average fair value per option granted in 1997 and 1998 was $0.32 and $1.56, respectively. The Company's pro forma net loss would have been $(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-49 388 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:
NUMBER OF OPTIONS EXERCISE PRICE PER SHARE ----------------- ------------------------ 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.................................................. 2,514,834 14.44 Assumed in acquisitions.................................. 362,276 1.31 - 11.64 Exercised................................................ (123,849) 1.32 - 6.01 --------- Balance at June 30, 1999 (unaudited)..................... 8,840,145 $1.31 - 14.44 ========= Exercisable at December 31, 1998......................... 2,715,748 $1.44 - $10.83 =========
The following tables summarize information concerning currently outstanding and exercisable options at December 31, 1998:
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 - --------------- ----------- ---------------- --------- ----------- --------- $ 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 ========= =========
Certain options were issued with exercise prices of $2 per share which was below the then fair market value which ranged from $3 to $15 per share. In connection with these issuances, the Company recorded deferred compensation based on the intrinsic value of $18 and $4,225 related to 152,306 and 480,579 options in 1997 and 1998, respectively. Non-cash compensation expense of $11 and $3,226 was recognized during 1997 and 1998, respectively, based on the vesting periods which range from 1 to 3 years. 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-50 389 WEBMD, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 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 and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows:
DECEMBER 31, ------------------ 1997 1998 ------- ------- 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 ------- ------- $ -- $ -- ======= =======
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.
1996 1997 1998 ----- ------- ------- 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 ----- ------- ------- $ -- $ -- $ -- ===== ======= =======
13. 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 common stock on a ten-for-one basis, for each share of capital stock outstanding. On an as converted to common basis, all shareholders received a .3846 dividend, which thereby would increase the outstanding common on an as converted basis by 38.46%. In connection with the dividend, the Company recorded a preferred dividend of $130,556 for the six month period ended June 30, 1999. Because the dividend triggered anti-dilution provisions, the Company's board approved in-kind adjustments to the applicable option and warrants outstanding on April 9, 1999 to reflect the stock dividend, regardless of whether these options and warrants were vested. The dividend adjustment to the options and warrants were vested or will vest according to the same vesting schedule as the underlying F-51 390 WEBMD, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) options and warrants. Unless otherwise indicated, the impact of the stock dividend on options and warrants has been reflected as if it had occurred for all periods presented. 14. EVENTS SUBSEQUENT TO DECEMBER 31, 1998 -- UNAUDITED Acquisitions On January 22, 1999, the Company acquired Direct Medical Knowledge, Inc. ("DMK"), a publisher of healthcare information over the Internet, for 494,018 shares of Series B preferred stock valued at approximately $9,880. In addition, the Company converted existing DMK options and warrants into options and warrants to acquire 181,323 shares of Series B preferred stock valued at approximately $2,467, for a combined value of $12,347. The estimated fair value of the options and warrants assumed was based on the Black-Scholes option pricing model using the following assumptions: expected lives of one-half to 2.5 years, expected volatility factor of .5, risk-free interest rate of 4.5%, and expected dividend rate of 0%. At closing, the Company forgave $300 of amounts owed by DMK to the Company which is reflected in other current assets as of December 31, 1998. The transaction was accounted for as a purchase. As a result of this purchase, the Company recorded $13,590 in goodwill and other intangible assets, which will be amortized over 3 years. On January 25, 1999, the Company acquired Sapient Health Network, Inc. ("SHN"), a designer and manager of Web-based communities for healthcare consumers, for 1,619,190 shares of Series B preferred stock valued at approximately $32,384. In addition, the Company converted existing SHN options and warrants into options and warrants to acquire 180,953 shares of Series B preferred stock valued at approximately $2,091, for a combined value of $34,475. The estimated fair value of the options and warrants assumed was based on the Black-Scholes model using the following assumptions: expected lives of one-half to 2.5 years, expected volatility factor of .5, risk-free interest rate of 4.5%, and expected dividend rate of 0%. At closing, the Company paid $2,676 relating to obligations of SHN. The transaction was accounted for as a purchase. As a result of this purchase, the Company recorded $38,326 in goodwill and other intangible assets, which will be amortized over 3 years. The acquisitions are reflected in the financial statements from the date of acquisition. The following pro forma information gives effect to the acquisitions of DMK and SHN as if such transaction had occurred as of the beginning of 1998 (in thousands, except per share data, unaudited): Net revenue................................................. $ 1,286 -------- Loss from operations........................................ $(45,881) ======== Net loss applicable to common stockholders.................. $(41,813) ======== Basic and diluted net loss per common share................. $ (3.43) ========
Strategic Relationships and Distribution Agreements and other Equity Transactions In April 1999, Sirrom exercised its warrant to purchase 557,490 shares of common stock. Additionally, warrants to purchase 22,730 shares of common stock were exercised by third parties during the first six months of 1999. On April 30, 1999, 300,000 shares of the Company's Series A preferred stock were purchased through the exercise of a warrant by HBO & Company. During the first six months of 1999, 70,692 shares of the Company's Series B preferred stock were issued through the exercise of employee options. The exercise price totaled approximately $239. F-52 391 WEBMD, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) During the first six months of 1999, the Company sold at fair market value 194,604 shares of Series D common stock, 860,000 shares of Series B preferred stock, 828,750 shares of Series C preferred stock and 456,896 shares of Series E preferred stock (Series E preferred stock is convertible on a ten-to-one basis into common) for $10,200, $17,200, $16,575 and $247,501, respectively. On January 27, 1999, the Company issued warrants to purchase 1,038,450 shares of Series D common stock to Gleacher NatWest, Inc., currently known as Gleacher & Co. LLC ("Gleacher"). 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 to perform financial advisory services over a two-year period. If Gleacher fails to perform under the agreement, they forfeit the unvested options and pay the Company a cash penalty of up to $3,400. The value attributed to this issuance was $4,688 and was determined by the Black-Scholes option pricing model using the following assumptions: risk free interest rate of 5.75%; 0.5 volatility; no dividend yield; and an expected life of the warrant of two years and will be amortized over the 2 year life of the agreement. In connection with a sale of Series A preferred stock during 1998, the Company was required to issue an additional 180,000 shares of Series A preferred stock subsequent to year end for no additional consideration because the Company did not complete an initial public offering by the issuance date of the shares. The Company recorded non-cash deemed dividends on preferred stock totaling $8,700 representing the beneficial conversion to these shareholders as a result of this transaction. The amount of the dividend is equal to the fair value of the additional shares issued as of the dates issued. On January 28, 1999, the Company entered into a strategic alliance by acquiring a 30% equity interest in J&C Nationwide, Inc. for 100,000 shares of the Company's Series D common stock valued at $2,000. Microsoft Corporation ("Microsoft") In May 1999, the Company and Microsoft entered into a five-year strategic alliance, under which the Company will develop, host and maintain on its servers a health channel for MSN, MSNBC and WebTV. In addition, Microsoft will pay the Company 100% of the revenues from banner and other advertising on the health channel and from e-commerce transactions generated by the health channel up to an aggregate of $100,000 over the term of the agreement, and then will share revenues equally thereafter with the Company. Microsoft will also sponsor up to 5.0 million subscriber/months of subscriptions to the Company healthcare professional website. The Company will share with Microsoft between 25% and 50% of its revenues from banner and other advertising generated by certain subscribers based on the yearly volume. In addition, the Company will share with Microsoft 15% of its revenue from e-commerce transactions generated by these certain subscribers. Microsoft has committed to provide a minimum of 125 million impressions to the health channel per year for the term of the agreement. Over the term of the agreement, the Company will pay Microsoft an aggregate of $162,000 in license fees and provide access to an aggregate of $100,000 of advertising space on the Company's web site. In addition, Microsoft and the Company have each committed co-marketing funds of $50,000 over the first two years of the agreement. On June 11, 1999, Microsoft completed the purchase of 269,045 shares of the Company's Series F preferred stock tendered by the Company's stockholders pursuant to an offer to purchase for an effective price of $54.17 per common equivalent shares which was commenced on April 10, 1999. In May 1999, Microsoft purchased from the Company 184,604 shares of Series E preferred stock for approximately $100.0 million representing an effective price of $54.17 per common equivalent share and was issued a warrant to acquire 7,614,916 shares of the Company's common stock at $54.17 per share. On May 20, F-53 392 WEBMD, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999, Microsoft committed to acquire another 276,906 shares of Series E preferred stock upon the completion of the transaction with Healtheon described below for approximately $150,000. As described in Note 1, the stock was sold at its fair value. The warrants were valued at $209,000 using the Black-Scholes option pricing model using the following assumptions: expected life of five years, expected volatility factor of .5, risk-free interest rate of 5.94%, and expected dividend rate of 0%. In connection with the Microsoft investment, Intel Corporation, Excite@Home Inc., SOFTBANK America Inc., Covad Communications Group, Inc., Superior Consultant Holdings Corporation, The Reader's Digest Association, Inc. and Dell USA, L.P., an investment vehicle for Dell Computer Corporation, purchased a total of 272,292 shares of WebMD Series E preferred stock and 184,604 shares of the Company's Series D common stock for approximately $157,500. Premiere In May 1999, Premiere and the Company entered into an amendment to their agreement (see Note 10) in connection with obtaining Premiere Technologies' agreement to vote for the WebMD merger discussed below. The amendment requires the Company to use its best efforts to cause Healtheon/ WebMD to honor the rights and obligations under that agreement, including the exclusivity of telecommunications services. No other consideration was exchanged. E.I. DuPont de Nemours and Company ("DuPont") In January 1999 and March 1999, the Company entered into a series of agreements with DuPont under which the Company and DuPont will collaborate in the areas of marketing, technology, competencies, and healthcare industry access in the life sciences area of the Company's website. In January 1999, the Company issued 180,000 shares of Series C preferred stock to DuPont valued at $20 per share. DuPont agreed to sponsor 10,000 subscriptions to the Company's basic physician website beginning in March 1999. In March 1999, the Company and DuPont entered into a five-year collaboration agreement under which DuPont agreed to be the exclusive provider of life science content for the website and WebMD. DuPont also agreed to certain co-promotion, marketing and banner rights on WebMD's websites. DuPont will pay the Company carriage fees totaling $26,000 over a three-year period. DuPont will pay an additional $14,000 if aggregate traffic on WebMD's consumer site and co-branded sites exceeds 75 million page views per month, over a three month period specified levels prior to the 18th month of the agreement term. In addition, DuPont has agreed to sponsor approximately 6 million subscription months during the five-year term of the agreement. The Company and DuPont will share the revenues generated by the website for advertising, third-party carriage fees, and e-commerce. DuPont's share of the revenues generally ranges from 25% to 75%, depending on the type of revenue. The Company is not required under the agreements to provide any minimum level of traffic to its website. To the extent additional carriage fees are earned, they will be recognized over the remaining term of the agreement. In connection with the agreement, DuPont has agreed to provide consulting services to the Company in connection with the development of a pharmaceutical channel over the eight-month period beginning in May 1999. The Company will recognize the related content and development expense as incurred. The Company will recognize its share of the website revenue under the existing revenue recognition policies described in Note 1. F-54 393 WEBMD, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) In connection with these agreements, the Company issued a warrant to DuPont to purchase 4 million shares of Series D common stock at $20.00 per share. The warrant is immediately vested and exercisable for a period of five years. The fair value of the warrant at the date of issuance of $40,400 is being amortized on a straight-line basis to content and development expense over the five-year term of the agreements. The fair value of the warrant was determined using the Black-Scholes option pricing model using the following assumptions: expected life of 5 years, volatility of .5, risk-free interest rate of 5.75% and an expected dividend yield of zero. Excite@Home In May 1999, the Company entered into a three-year services agreement with Excite@Home under which the Company will create a co-branded health channel and on-line health-related communities for Excite@Home. The Company will be the exclusive provider of health content on the Excite@Home network. Excite@Home has guaranteed a minimum level of impressions throughout the Excite@Home network and the Company has agreed to pay carriage fees over the term of the agreement which will be recorded as sales and marketing expense based on the impressions delivered in the period. Excite@Home and the Company will share the advertising revenue generated by the co-branded website. Lycos, Inc. ("Lycos") In March 1999, the Company entered into a three-year services agreement with Lycos under which the Company will create a co-branded website for use by Lycos as the exclusive source of healthcare content for the health channels of the Lycos network. Lycos and the Company will co-promote the site and Lycos has guaranteed a minimum level of impressions throughout the Lycos network. The Company has agreed to pay Lycos aggregate carriage fees over the term of the agreement which will be recorded as sales and marketing expense based on the impressions delivered in the period. The Company will receive all revenues up to a fixed amount and then will share the advertising revenue generated by the co-branded website with Lycos. In addition, the Company agrees to share the non-advertising and non-e-commerce revenue earned and generated from the users of the co-branded channel. The Company will recognize its share of the website revenue under the existing revenue recognition policies described in Note 1. The Reader's Digest Association, Inc. ("Reader's Digest") In July 1999, the Company entered into a design and development agreement with Reader's Digest. Under the agreement, the Company and Reader's Digest will develop and co-host a co-branded website for Reader's Digest, which will incorporate content from both parties. The term of the agreement is three years and may be extended to five years at the option of Reader's Digest. The agreement requires the Company to use advertising inventory to co-promote the website and the WebMD/Reader's Digest relationship. The Company has guaranteed a specified number of impressions for such co-promotion purposes. The Company has committed to purchase advertising in the Reader's Digest magazine during the first two years of the term of the agreement at a discount of at least 40% of Reader's Digest's effective rates when the advertising is placed. The Company has also committed to purchase, at a discounted subscription rate, a minimum number of Reader's Digest magazines for distribution by Reader's Digest to physician subscribers to the website in the five-year period following the launch of the website. Reader's Digest will place, at its cost, certain WebMD advertising in each copy of Reader's Digest published in the two-year period following the execution of the agreement. The Company will record sales and marketing expense as F-55 394 WEBMD, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) advertising is placed in the Reader's Digest magazine and as the magazines are distributed to website subscribers. The Company and Reader's Digest will share in the net advertising revenue from all advertising on the Reader's Digest health website, Reader's Digest modules, Reader's Digest features or Reader's Digest pages displayed on the WebMD website and participating co-branded sites. The Company will receive a share of net sales revenue from sales of Reader's Digest products purchased by users who link to the Reader's Digest bookstore from the WebMD site. The Company will recognize its share of the website revenue under the existing revenue recognition policies described in Note 1. In addition, in July 1999, pursuant to a stock purchase agreement entered into in April 1999, Reader's Digest purchased 23,999 shares of Series E preferred stock at $54.17 per share, the fair value on the date of issuance, for a total investment of $13,000. Cable News Network LP, LLLP ("CNN") In March 1999, the Company entered into a three-year agreement with CNN which provides for certain WebMD promotional, advertising and branding campaigns on CNN properties and co-promotion of the Company's health information. The agreement applies to health information appearing across the majority of the CNN properties. CNN also has agreed to run on-air promotional spots highlighting WebMD across the CNN properties. Under the agreement, the Company also has committed to purchase a minimum amount of advertising on CNN properties over the term of the agreement. In consideration of the branding and promotion obligations, the Company issued to CNN 200,000 shares of Series D preferred stock (convertible on a five-to-one basis into common stock) with an aggregate value of $20,000. The value of the preferred stock issued to CNN has been recorded as a prepaid asset and will be amortized to sales and marketing expense on a straight-line basis over the three-year term of the agreement. The fees paid for advertising will be expensed when the advertising is purchased and aired. CNN Interactive Pursuant to a binding memorandum of understanding dated December 1998, the Company entered into a three-year website content agreement in August 1999 with CNN Interactive, a division of CNN. Under the agreement, the Company will be the exclusive provider of health content on the CNN Interactive website and CNN Interactive will be the exclusive provider of news content on the WebMD physician website. In addition, the Company is obligated to provide a minimum number of health-related stories per week to CNN Interactive. CNN Interactive has guaranteed a minimum number of impressions in the health section of the CNN Interactive website over the first two years of the agreement. The Company will pay promotional fees over the term of the agreement. Promotional fees will be charged to content and development expense as the guaranteed impressions are used. In the event that traffic on the website does not meet specified levels in years one and two, the agreement may be terminated by either party. The revenue sharing provisions in the strategic agreements described above generally provide for WebMD's sharing of net revenue ranging from 15% to as much as 100% with the other party in the agreement. Pending Merger with Healtheon 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 original agreement, Healtheon was to exchange approximately 1.8150 shares of common stock for each share of the Company's stock. The F-56 395 WEBMD, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) transaction was preliminarily valued at approximately $7,649,000. 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. Due to an amendment of the Healtheon/WebMD merger agreement on September 1, 1999, and a resulting change in the exchange ratio to 1.796 shares of Healtheon stock for each share of WebMD stock, the purchase price will be materially amended as it will be based on Healtheon's average stock price for the five days preceding and following September 1, 1999. Immediately preceding the proposed merger, Microsoft Corporation has agreed to invest $150,000 in WebMD capital stock. In connection with this investment, WebMD may record a charge relating to the beneficial conversion feature of the stock if the price per share of Healtheon common stock is less than $30.16 at the effective time of the WebMD merger. McKessonHBOC On September 1, 1999, McKessonHBOC and HBO & Company entered into an agreement with WebMD and Healtheon that: (1) terminates the prior strategic agreements between WebMD and McKessonHBOC, as described in Note 10, which had previously provided that WebMD would provide web-enabled access to McKessonHBOC's products and services and that McKessonHBOC would market WebMD subscriptions; (2) requires that WebMD will provide web-enabled access to McKessonHBOC's medical/surgical supply catalog on a nonexclusive basis for no cost for a period of one year after the WebMD merger; (3) requires McKessonHBOC to license to WebMD on a royalty-free basis clinical reference service content for a period of one year; (4) provides for an immediate cash payment by McKessonHBOC to WebMD of $3.6 million and obligates WebMD to pay for any physician subscriptions to WebMD's products and services previously obtained by McKessonHBOC; (5) obligates HBOC to convert its WebMD preferred stock into WebMD common stock prior to the effective time of the WebMD merger and to vote for the merger; (6) and terminates the rights that HBOC would have had to purchase an additional 1,295,565 shares of WebMD common stock for $54.17 per share. In connection with the revision, the Company issued 4,688,049 warrants with exercise prices between $20.00 and $90.34 to McKessonHBOC. The value of these warrants was determined to be $115,300 using the Black-Scholes valuation method. The effect of this revision will be accounted for in the third quarter of 1999. F-57 396 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of MEDE AMERICA Corporation We have audited the accompanying consolidated balance sheets of MEDE AMERICA Corporation and subsidiaries (the "Company") as of June 30, 1998 and 1999, 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, 1999. 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, 1998 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1999 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Jericho, New York August 27, 1999 F-58 397 MEDE AMERICA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 1998 AND 1999 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JUNE 30 -------------------- 1998 1999 -------- -------- ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 2,950 $ 4,119 Accounts receivable, less allowance for doubtful accounts of $997 and $636, respectively......................... 7,920 11,253 Formulary receivables..................................... 2,341 4,713 Inventory................................................. 211 264 Prepaid expenses and other current assets................. 537 803 -------- -------- Total current assets................................... 13,959 21,152 PROPERTY AND EQUIPMENT -- Net (Notes 3 and 6)............... 4,711 5,164 GOODWILL -- Net (Notes 1 and 2)............................. 34,753 41,048 OTHER INTANGIBLE ASSETS -- Net (Notes 1 and 4).............. 5,501 7,154 OTHER ASSETS................................................ 470 4,191 -------- -------- TOTAL.................................................. $ 59,394 $ 78,709 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable.......................................... $ 3,630 $ 2,640 Accrued expenses and other current liabilities (Note 5)... 7,715 6,957 Current portion of long-term debt (Note 6)................ 269 349 -------- -------- Total current liabilities.............................. 11,614 9,946 -------- -------- LONG-TERM DEBT (Note 6)..................................... 41,055 4,787 -------- -------- OTHER LONG-TERM LIABILITIES (Note 2)........................ 194 311 -------- -------- SERIES A REDEEMABLE CUMULATIVE PREFERRED STOCK: $.01 par value; 250 shares authorized; 240 shares issued and outstanding as of 1998 (aggregate liquidation value of $23,996 plus accrued dividends) (Note 9)............ 31,223 -- -------- -------- COMMITMENTS AND CONTINGENCIES (Note 10) STOCKHOLDERS' EQUITY (DEFICIT): Common stock, $.01 par value; 30,000 shares authorized; 5,685 and 13,224 shares issued and outstanding, respectively........................................... 57 132 Additional paid-in capital................................ 25,584 116,343 Accumulated deficit....................................... (50,243) (52,810) Deferred compensation (Note 8)............................ (90) -- -------- -------- Total stockholders' equity (deficit)................... (24,692) 63,665 -------- -------- TOTAL.................................................. $ 59,394 $ 78,709 ======== ========
See notes to consolidated financial statements. F-59 398 MEDE AMERICA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 1997, 1998 AND 1999 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED JUNE 30 ------------------------------ 1997 1998 1999 -------- ------- ------- REVENUES.................................................... $ 35,279 $42,290 $55,213 -------- ------- ------- OPERATING EXPENSES: Operations................................................ 16,817 16,958 20,621 Sales, marketing and client services...................... 8,769 10,765 12,819 Research and development (Note 1)......................... 3,278 3,941 4,365 General and administrative................................ 5,263 4,865 5,678 Depreciation and amortization............................. 5,460 7,143 8,771 Merger expenses (Note 1).................................. -- -- 688 Contingent consideration paid to former owners of acquired businesses (Note 2).................................... 2,301 -- -- Acquired in-process research and development (Note 2)..... 1,556 -- -- -------- ------- ------- Total operating expenses............................... 43,444 43,672 52,942 -------- ------- ------- INCOME (LOSS) FROM OPERATIONS............................... (8,165) (1,382) 2,271 OTHER INCOME (Note 12)...................................... (893) (12) -- INTEREST EXPENSE, Net....................................... 1,504 3,623 2,922 -------- ------- ------- LOSS BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY ITEM...................................................... (8,776) (4,993) (651) PROVISION FOR INCOME TAXES (Note 7)......................... 57 42 297 -------- ------- ------- LOSS BEFORE EXTRAORDINARY ITEM.............................. (8,833) (5,035) (948) EXTRAORDINARY ITEM (Note 6)................................. -- -- (1,619) -------- ------- ------- NET LOSS.................................................... (8,833) (5,035) (2,567) PREFERRED STOCK DIVIDENDS................................... (2,400) (2,400) (1,444) -------- ------- ------- NET LOSS APPLICABLE TO COMMON STOCKHOLDERS.................. $(11,233) $(7,435) $(4,011) ======== ======= ======= BASIC AND DILUTED LOSS PER COMMON SHARE Loss before extraordinary item............................ $ (2.07) $ (1.31) $ (0.28) Extraordinary item........................................ -- -- (0.19) -------- ------- ------- Net loss.................................................. $ (2.07) $ (1.31) $ (0.47) ======== ======= ======= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -- BASIC AND DILUTED.......................... 5,425 5,679 8,615 ======== ======= =======
See notes to consolidated financial statements. F-60 399 MEDE AMERICA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED JUNE 30, 1997, 1998 AND 1999 (IN THOUSANDS)
COMMON STOCK ADDITIONAL TOTAL --------------- PAID-IN ACCUMULATED DEFERRED STOCKHOLDERS' SHARES AMOUNT CAPITAL DEFICIT COMPENSATION EQUITY (DEFICIT) ------ ------ ---------- ----------- ------------ ---------------- BALANCE, JULY 1, 1996................ 5,280 $ 53 $ 27,850 $(36,375) $ -- $ (8,472) Net loss and comprehensive income........................... -- -- -- (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............... 5,671 57 27,713 (45,208) -- (17,438) Net loss and comprehensive income........................... -- -- -- (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.......... -- -- 108 -- (108) -- Amortization of deferred compensation..................... -- -- -- -- 18 18 ------ ---- -------- -------- ----- -------- BALANCE, JUNE 30, 1998............... 5,685 57 25,584 (50,243) (90) (24,692) Net loss and comprehensive income........................... -- -- -- (2,567) -- (2,567) Preferred stock dividends and dividends (Note 9)............... -- -- (1,444) -- -- (1,444) Conversion of preferred stock...... 1,869 18 24,278 -- -- 24,296 Issuance of warrants............... -- -- 4,096 -- -- 4,096 Initial public offering (Note 1)... 5,308 53 61,764 -- -- 61,817 Exercise of stock options.......... 286 3 1,851 -- -- 1,854 Exercise of warrants............... 63 1 (1) -- -- -- Employee stock purchase plan....... 13 -- 215 -- -- 215 Amortization of deferred compensation..................... -- -- -- -- 90 90 ------ ---- -------- -------- ----- -------- BALANCE, June 30, 1999............... 13,224 $132 $116,343 $(52,810) $ -- $ 63,665 ====== ==== ======== ======== ===== ========
See notes to consolidated financial statements. F-61 400 MEDE AMERICA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1997, 1998 AND 1999 (IN THOUSANDS)
YEAR ENDED JUNE 30 ------------------------------ 1997 1998 1999 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $ (8,833) $ (5,035) $ (2,567) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization........................... 5,585 7,502 8,996 Extraordinary item...................................... -- -- 1,619 Provision for doubtful accounts......................... 316 464 391 Acquired in-process research and development............ 1,556 -- -- (Gain) loss on sale of assets........................... (8) 13 -- Non-cash compensation expense........................... -- 18 90 Changes in operating assets and liabilities, net of effects of businesses acquired: Accounts receivable................................... (861) (2,065) (2,942) Formularly receivables................................ (331) (1,936) (2,372) Inventory............................................. (45) (40) (53) Prepaid expenses and other current assets............. 175 (51) (222) Other assets.......................................... 13 19 (686) Accounts payable and accrued expenses and other current liabilities.................................. (629) (1,368) (3,867) Other long-term liabilities........................... (958) (21) 117 -------- -------- -------- Net cash used in operating activities.............. (4,020) (2,500) (1,496) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Business acquisitions, net of cash acquired............... (11,450) (10,674) (11,428) Purchases of property and equipment....................... (1,477) (913) (1,400) Additions to goodwill and other intangible assets......... (143) (699) (1,823) Proceeds from sale of property and equipment.............. 461 182 38 Proceeds from sale of net assets of Premier............... 388 -- -- -------- -------- -------- Net cash used in investing activities.............. (12,221) (12,104) (14,613) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from initial public offering of common stock................................................... -- -- 61,818 Payment of preferred stock dividends...................... -- -- (8,371) Issuance of Senior Subordinated Note...................... 22,875 -- -- Issuance of common stock.................................. 2,125 -- -- Net proceeds (repayments) under New Credit Facility/Credit Facility................................................ (8,250) 16,725 (12,225) Principal repayments of debt.............................. (801) (588) (25,571) Principal repayments of capital lease obligations......... (518) (567) (442) Exercise of stock options and employee stock purchase plan.................................................... 90 65 2,069 -------- -------- -------- Net cash provided by financing activities.......... 15,521 15,635 17,278 -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (720) 1,031 1,169 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 2,639 1,919 2,950 -------- -------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 1,919 $ 2,950 $ 4,119 ======== ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest................................................ $ 1,541 $ 3,018 $ 3,483 ======== ======== ======== Income taxes............................................ $ 111 $ 102 $ 143 ======== ======== ======== Non-cash investing and financing activities: Assets acquired under capital leases.................... $ 129 $ 278 $ 408 ======== ======== ======== Issuance of warrants.................................... $ 52 $ 98 $ 4,096 ======== ======== ========
See notes to consolidated financial statements. F-62 401 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1997, 1998 AND 1999 1. DESCRIPTION OF BUSINESS, 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. 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 $61,817,000 (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 $8,320,000 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. 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. 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"). The Merger Agreement was amended as of August 2, 1999. Upon consummation of the Healtheon/WebMD merger, Healtheon will be renamed Healtheon/WebMD. The Company will merge with a subsidiary of Healtheon/WebMD, resulting in the Company becoming a subsidiary of Healtheon/WebMD. The consideration for the merger will consist of newly-issued shares of Healtheon/WebMD common stock, par value $.0001 per share ("Healtheon/WebMD Common Stock"), having an aggregate value of F-63 402 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JUNE 30, 1997, 1998 AND 1999 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/WebMD Common Stock (the "Exchange Ratio"), subject to adjustment as described below. In the event that the 10 day average closing price for Healtheon Common Stock for the periods ending two days prior to the date the Company's shareholders meet to authorize the merger (the "Meeting Price"), is less than $38.68 per share, Healtheon has the right to adjust the Exchange Ratio to a ratio equal to $25.50 divided by the applicable price or, if the Healtheon chooses not to exercise such option, the Company can terminate the Merger Agreement. The consummation of the merger is subject to certain conditions, including, among other things, approval by the stockholders of the Company and the receipt of all necessary regulatory approvals pursuant to the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended. Pursuant to the Merger Agreement, Healtheon and the Company will prepare and file a proxy statement/prospectus to be mailed to stockholders in connection with calling a meeting of the stockholders of the Company to vote on the merger. 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 on a quarterly basis, in arrears, processed transactions qualifying for formulary incentive fees to various intermediaries who have PBM program services contracts with pharmaceutical manufacturers. These intermediaries consolidate formulary 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. F-64 403 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JUNE 30, 1997, 1998 AND 1999 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 $5,864,000 and $8,706,000 as of June 30, 1998 and 1999, 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. l. Software Development Costs -- The development of new software products and enhancements to existing software products is 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 years ended June 30, 1998 and 1999, the Company capitalized $462,000 and $1,602,000, respectively, of software development costs on projects for which technological feasibility had been established but were 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. 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. 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. F-65 404 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JUNE 30, 1997, 1998 AND 1999 q. Reclassifications -- Certain amounts in prior years' financial statements have been reclassified to conform with the 1999 presentation. 2. ACQUISITIONS a. EC&F and Premier -- In October 1995, the Company acquired all of the outstanding shares of EC&F and Premier, which companies had common ownership, for a cash purchase price of approximately $4,050,000, including transaction expenses. The transaction was financed through loans obtained from the Company's majority stockholder. Such loans were subsequently repaid with borrowings under the Company's Credit Facility (as hereinafter defined). In addition, the Company was contingently liable for additional consideration if certain earnings levels were 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 consideration 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 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 was 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 was at least $5,000,000. Based on revenues generated through September 30, 1998, the Company has recorded additional consideration of $2,022,000, 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 $11,781,000, 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. F-66 405 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JUNE 30, 1997, 1998 AND 1999 These acquisitions were recorded using the purchase method of accounting and, accordingly, the results of operations of these acquired companies are included in the consolidated results of operations of the Company since the dates of their respective acquisitions. The purchase price of each acquisition has been allocated to the respective net assets acquired based upon their fair values. Goodwill, which represents the excess of cost over the estimated fair value of the net assets acquired, for these transactions were as follows: EC&F and Premier -- $3,586,000; TCS -- $6,525,000, Stockton -- $8,281,000, and HII -- $8,319,000. 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 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 pro forma information for the year ended June 30, 1999 includes the operations of the Company , inclusive of the operations of HII as if the acquisition had occurred at July 1, 1997. This pro forma information gives effect to the amortization expenses 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.
YEAR ENDED JUNE 30 ------------------ 1998 1999 ------- ------- (IN THOUSANDS) Revenues.................................................... $48,880 $56,989 ======= ======= Income (Loss) from operations............................... $(1,034) $ 1,612 ======= ======= Loss before extraordinary item.............................. $(5,695) $(1,848) ======= ======= Loss before extraordinary item applicable to common stock... $(8,095) $(3,292) ======= ======= Basic and diluted loss before extraordinary item per share..................................................... $ (1.43) $ (0.21) ======= =======
3. PROPERTY AND EQUIPMENT
JUNE 30 USEFUL LIVES ------------------ (IN YEARS) 1998 1999 ------------ ------- ------- (IN THOUSANDS) Land................................................ $ 104 $ 104 Building and improvements........................... 20-25 2,193 2,327 Furniture and fixtures.............................. 5 1,240 1,743 Computer equipment.................................. 3-5 6,747 8,616 ------- ------- 10,284 12,790 Less accumulated depreciation and amortization...... 5,573 7,626 ------- ------- Property and equipment -- net....................... $ 4,711 $ 5,164 ======= =======
F-67 406 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JUNE 30, 1997, 1998 AND 1999 4. OTHER INTANGIBLE ASSETS Other intangible assets consist of the following:
JUNE 30 ---------------- 1998 1999 ------ ------ (IN THOUSANDS) Purchased client lists...................................... $3,893 $6,606 Less, accumulated amortization.............................. 2,220 3,317 ------ ------ 1,673 3,289 ------ ------ Purchased software and technology........................... 8,288 9,449 Less, accumulated amortization.............................. 4,922 7,597 ------ ------ 3,366 1,852 ------ ------ Software development costs.................................. 462 2,064 Less, accumulated amortization.............................. -- 51 ------ ------ 462 2,013 ------ ------ Other intangible assets - net............................... $5,501 $7,154 ====== ======
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consist of the following:
JUNE 30 ---------------- 1998 1999 ------ ------ (IN THOUSANDS) Accrued wages and related employee benefits................. $1,609 $2,408 Rebate liability............................................ 291 1,875 Accrued professional fees................................... 364 879 Deferred revenue............................................ 614 527 Pharmacy claims liability................................... 604 132 Due to former owners of acquired business................... 1,945 -- Accrued interest............................................ 864 -- Other....................................................... 1,424 1,136 ------ ------ Total............................................. $7,715 $6,957 ====== ======
F-68 407 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JUNE 30, 1997, 1998 AND 1999 6. LONG-TERM DEBT Long-term debt consists of the following:
JUNE 30 ----------------- 1998 1999 ------- ------ (IN THOUSANDS) Senior subordinated note less unamortized discount of $1,641,000 at June 30, 1998(a)............................ $23,359 $ -- New Credit Facility/Credit Facility(b)...................... 16,725 4,500 Obligations under capital leases(c)......................... 436 403 Loan payable relating to an acquisition, collateralized by $149,000 of certificates of deposits at June 30, 1999 due in quarterly payments ranging from $15,000 to $25,000 through February 2002, interest at 6.7 percent............ 271 190 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............................. 114 43 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............................ 419 -- ------- ------ 41,324 5,136 Less current portion........................................ 269 349 ------- ------ Total............................................. $41,055 $4,787 ======= ======
- ------------------------- (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 being 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 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 $1,416,000 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 0.75% or an offshore rate, as defined, plus 1.75%. The weighted average interest rate on outstanding borrowings at June 30, 1999 was 7.05 percent. The Company is required to pay a commitment fee of 0.50% per annum on the unused portion of the New Credit Facility. The New Credit Facility is not guaranteed by any third party, but is secured by substantially all of the Company's assets, including the stock of the Company's subsidiaries. The New Credit Facility contains various covenants and conditions, including those relating to Year 2000 compliance, changes in control and management and restrictions on the payments of dividends on the common stock and requires the Company to maintain certain leverage and interest coverage rates and places restrictions on additional investments and indebtedness. The closing of the New Credit Facility occurred simultaneously with the IPO. F-69 408 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JUNE 30, 1997, 1998 AND 1999 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 30, 1997 to increase the maximum borrowings to $20,000,000. 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 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, 1997, 1998 and 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. In connection with the repayment of the Senior Subordinated Note discussed above, the Company recorded an extraordinary charge of $203,000 relating to the write-off of these warrants. (c) The Company leases certain computer and office equipment under capital lease arrangements expiring through 2002. The gross value of the equipment held under capital leases was $2,406,000 and $2,972,000 as of June 30, 1998 and 1999, respectively, and the related accumulated amortization was $2,211,000 and $2,600,000, respectively. Maturities of long-term debt as of June 30, 1999 are as follows (in thousands):
YEAR ENDING JUNE 30, -------------------- 2000........................................................ $ 349 2001........................................................ 189 2002........................................................ 4,586 2003........................................................ 12 ------ Total....................................................... $5,136 ======
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, 1997, 1998 and 1999 consists entirely of current state franchise 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:
1997 1998 1999 ------- ------- ------- (IN THOUSANDS) U.S. Federal statutory rate........................... $(2,984) $(1,698) $ (873) Increases (reductions) due to: Nondeductible expenses.............................. 293 238 333 State taxes......................................... 57 42 297 Net operating losses not producing current tax benefits......................................... 2,691 1,460 540 ------- ------- ------- Total....................................... $ 57 $ 42 $ 297 ======= ======= =======
F-70 409 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JUNE 30, 1997, 1998 AND 1999 The net deferred tax asset is comprised of the following:
1998 1999 -------- -------- (IN THOUSANDS) Accounts receivable......................................... $ 399 $ 256 Property and equipment...................................... 176 (488) Goodwill.................................................... 2,786 4,156 Other intangible assets..................................... 459 539 Accrued expenses and other current liabilities.............. 617 424 Net operating loss carryforwards............................ 14,552 14,555 -------- -------- 18,989 19,442 Less valuation allowance.................................... (18,989) (19,442) -------- -------- Total............................................. $ -- $ -- ======== ========
The valuation allowance increased during the years ended June 30, 1998 and 1999 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, 1999, the Company had Federal net operating loss carryforwards of approximately $36,400,000. Such loss carryforwards expire in the fiscal years 2005 through 2014. 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 Plans -- 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 (the "Board") 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. 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. F-71 410 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JUNE 30, 1997, 1998 AND 1999 The table below summarizes the activity of the Stock Plan and the New Stock Plan, collectively (the "Stock Plans") for the years ended June 30, 1997, 1998 and 1999:
WEIGHTED NUMBER EXERCISE AVERAGE OF PRICE EXERCISE SHARES RANGE PRICE -------- -------------- -------- Balance, July 1, 1996........................... 451,404 $4.58 $ 4.58 Options granted............................... 51,059 $4.58 - $5.73 $ 5.17 Options exercised............................. (10,912) $4.58 $ 4.58 Canceled...................................... (76,598) $4.58 $ 4.58 -------- -------------- ------ Balance, June 30, 1997.......................... 414,953 $4.58 - $5.73 $ 4.65 Options granted............................... 81,926 $5.73 $ 5.73 Options exercised............................. (11,739) $4.58 $ 4.58 Canceled...................................... (15,930) $4.58 - $5.73 $ 4.60 -------- -------------- ------ Balance, June 30, 1998.......................... 469,210 $4.58 - $5.73 $ 4.84 Options granted............................... 461,500 $13.00 $13.00 Options exercised............................. (295,131) $4.58 - $13.00 $ 6.44 Canceled...................................... (4,364) $4.58 - $13.00 $ 5.32 -------- -------------- ------ Balance, June 30, 1999.......................... 631,215 $4.58 - $13.00 $10.05 ======== ============== ======
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, 1999 and related weighted average price and life information were as follows:
WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE - -------------- ----------- ------------ ------------- ----------- -------- $4.58 - $5.73 232,415 7.0 $4.58 - $4.99 55,348 $ 4.79 $13.00 398,800 9.6 $13.00 14,000 $13.00 ------- ------ ------ 631,215 $10.06 69,348 $ 6.45 ======= ====== ======
The Company applies APB opinion No. 25 and related interpretations in accounting for its Plans. 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, 1997, 1998 and 1999 would have been as follows:
1997 1998 1999 ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net loss -- as reported............................... $(8,833) $(5,035) $(2,597) Net loss -- pro forma................................. (8,887) (5,105) (3,220) Basic and diluted net loss per share -- as reported... (2.07) (1.31) (0.47) Basic and diluted net loss per share -- pro forma..... (2.08) (1.32) (0.54)
F-72 411 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JUNE 30, 1997, 1998 AND 1999 The weighted average fair value of the options granted for the years ended June 30, 1997, 1998 and 1999 is estimated at $1.83, $1.92 and $11.41 on the date of grant using the minimum value option pricing model in 1997 and 1998 and the Black Scholes Model in 1999, with the following weighted average assumptions for the years ended June 30, 1997, 1998 and 1999, respectively: a risk-free interest rate of 6.39%, 5.86%, and 5.4%; an expected option life of seven years; a volatility factor of 0%, 0% and 109% and no 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 1997, 1998 and 1999 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, 1997, 1998 and 1999 was as follows:
YEAR ENDED JUNE 30 ------------------------------------------------------------------------------------------- 1997 1998 1999 ----------------------------- ---------------------------- ---------------------------- PER SHARE PER SHARE PER SHARE LOSS SHARES AMOUNT LOSS SHARES AMOUNT LOSS SHARES AMOUNT -------- ------ --------- ------- ------ --------- ------- ------ --------- (IN THOUSANDS) Loss before extraordinary item........................ $ (8,833) $(5,035) $ (948) Less: Preferred dividends..... (2,400) (2,400) (1,444) -------- ----- ------ ------- ----- ------ ------- ----- ------ Loss before extraordinary item per share................... $(11,233) 5,425 $(2.07) $(7,435) 5,679 $(1.31) $(2,392) 8,615 $(0.27) ======== ===== ====== ======= ===== ====== ======= ===== ======
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 completed a recapitalization of its capital stock (the "Recapitalization"). The Recapitalization involved the conversion of all outstanding preferred stock into common stock (based upon liquidation value as defined in Note 9) and the exercise of all outstanding warrants other than the Medic Warrant (as herein defined) and warrants to purchase 84,050 shares of common stock issued on October 7, 1998 (see Note 6.b.). The preferred stock conversion was effected based upon the IPO price per share of $13.00 per share and was converted into 1,845,815 shares of common stock. In addition, $301,000 of accrued dividends on the preferred stock were converted into 23,124 shares of common stock. The warrants were converted, in a cashless exercise, into 63,398 shares of common stock. F-73 412 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JUNE 30, 1997, 1998 AND 1999 e. Stock Purchase Plan -- In June 1998, the Board 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 or 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 the completion 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):
YEAR ENDING JUNE 30, -------------------- 2000........................................................ $1,859 2001........................................................ 1,660 2002........................................................ 1,079 2003........................................................ 672 Thereafter.................................................. 618 ------ Total minimum lease payments................................ $5,888 ======
Rent expense for the years ended June 30, 1997, 1998 and 1999 was $1,309,000, $1,307,000, and $1,443,000, respectively. b. Litigation -- The Company is engaged in various litigation in the ordinary course of business. Management, based upon the advice of legal counsel, is of the opinion that the amounts which may be awarded or assessed in connection with these matters, if any, will not have a material effect on the consolidated financial position or results of operations. c. Employment Contract -- The Company has an employment contract expiring on June 30, 2000 with a non-executive employee with annual enumeration of $110,000. The minimum payment under this contract as of June 30, 1999 is $79,000. d. Defined Contribution Plan -- The Company maintains a defined contribution plan (the "Contribution Plan") for all eligible employees, as defined by the Contribution Plan. The Company currently makes matching contributions to the Contribution 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 Contribution Plan document. The Company incurred $227,000, $194,000, and $210,000 for employer contributions to the Contribution Plan for the years ended June 30, 1997, 1998 and 1999, respectively. F-74 413 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JUNE 30, 1997, 1998 AND 1999 e. Service Agreements -- The Company has entered into service agreements with telecommunications providers which require the Company to utilize certain minimum monthly amounts 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, 1999. The minimum annual amounts under these agreements are as follows (in thousands):
YEAR ENDING JUNE 30, -------------------- 2000........................................................ $1,428 2001........................................................ 1,376 2002........................................................ 543 ------ Total....................................................... $3,347 ======
11. TRANSACTION PROCESSING AGREEMENT On July 17, 1998, the Company entered into a transaction processing agreement (the "Processing Agreement") with Medic Computer Systems, Inc. ("Medic"), a subsidiary of Mysys plc that develops and licenses software for healthcare providers, principally physicians, MSO's and PPM's. Under the Processing Agreement, the Company will undertake certain software development obligations, and on July 1, 1999 it will become the exclusive processor (subject to certain exceptions) of medical reimbursement claims for Medic's subscribers submitted to payors with whom MedE has or establishes connectivity. Under the Processing Agreement, the Company will be entitled to revenues to be paid by payors (in respect of which a commission is payable to Medic) as well as certain fees to be paid by Medic, including a $500,000 service fee to be paid in eight equal quarterly payments beginning on September 30, 1998. The Processing Agreement sets forth detailed performance criteria, and development and processing milestones. Inability to meet these criteria or milestones may result in financial penalties or give Medic a right to terminate this agreement. Conversely, if MedE exceeds certain processing milestones, it will be entitled to performance awards based upon a predetermined formula. The Processing Agreement is for a fixed term of five years, with annual renewals thereafter (unless either party elects to terminate), and during such period, MedE is required to provide system maintenance and support, including any necessary or appropriate upgrades, as defined. Revenue received under the Processing Agreement which are based on transactions processed will be recognized as such transactions are processed by MedE. Performance awards, if any, will be recognized when earned; and the service fee will be recognized ratably over the five-year term of the agreement, in accordance with Statement of Position ("SOP") 97-2, "Software Revenue Recognition," and SOP 98-9, "Software Revenue Recognition With Respect To Certain Transactions." Software development costs incurred under the Processing Agreement will be recognized in accordance with SFAS No. 86 as described in Note 1.l All other costs relating to the Processing Agreement will be recognized as incurred, except for any penalties which will be recognized when and if they are both probable of being incurred and estimable in accordance with SFAS No. 5, "Accounting For Contingencies". Contemporaneously, to ensure a close working relationship between the parties, on July 17, 1998, the Company granted to Medic a warrant (the "Medic Warrant") to acquire 1,250,000 shares of the Company's common stock, at a per share exercise price equal to the price of the common stock to the public in the IPO. 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 assuming that the underlying value of MedE's common stock was equal to the $13 IPO price per share, a risk-free interest rate of 5.47 percent, an expected warrant life of five years, a volatility rate of 39 percent and no dividend yield. The Medic Warrant is recorded in other assets and is being amortized F-75 414 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JUNE 30, 1997, 1998 AND 1999 over the five year life of the Processing Agreement. The Medic Warrant contains customary weighted average antidilution provisions. The Company and certain principal stockholders have agreed that following the completion of the IPO and until the earlier of the termination of the Processing Agreement or the disposition by Medic and its affiliates of at least 25 percent of the shares of common stock issuable under the Medic Warrant, Medic shall have the right to designate one director to the Company's Board of Directors. 12. OTHER INCOME In February 1997, the Company exercised 26,712 options to purchase common shares of First Data Corporation and subsequently sold the common shares resulting in a pre-tax gain of $885,000. Such options were issued to former employees of the Company prior to the Spin-off but reverted to the Company upon the termination of these employees. 11. INDUSTRY SEGMENTS In 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which established standards for the way in which public business enterprises report information about operating segments in annual financial statements. The Company operates in two reportable segments; medical/dental and pharmacy. Summarized financial information concerning the Company's reportable segments is shown in the following table. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The "Corporate" Column includes corporate related items not allocated to reportable segments and the elimination of intercompany transactions. Identifiable assets are those tangible and intangible assets used in operations in each reportable segment.
MEDICAL/ DENTAL PHARMACY CORPORATE TOTAL -------- -------- --------- ------- YEAR ENDED JUNE 30, 1997 Total revenues..................................... $20,050 $15,229 -- $35,279 Interest expense................................... $ 147 $ 156 $ 1,201 $ 1,504 Depreciation and amortization expense.............. $ 3,204 $ 2,113 $ 143 $ 5,460 (Loss) income before provision for income taxes and extraordinary item............................... $(1,535) $(2,202) $(5,039) $(8,776) (Benefit) Provision for income taxes............... $ (4) -- $ 61 $ 57 Capital expenditures............................... $ 609 $ 868 -- $ 1,477 Identifiable assets................................ $18,926 $27,758 $ 1,406 $48,090
MEDICAL/ DENTAL PHARMACY CORPORATE TOTAL -------- -------- --------- ------- YEAR ENDED JUNE 30, 1998 Total revenues..................................... $21,960 $20,330 -- $42,290 Interest expense................................... $ 91 $ 234 $ 3,298 $ 3,623 Depreciation and amortization expense.............. $ 3,286 $ 3,764 $ 93 $ 7,143 Income (loss) before provision for income taxes and extraordinary item............................... $ (79) $ (266) $ (4,648) $(4,993) Provision for income taxes......................... $ 15 -- $ 27 $ 42 Capital expenditures............................... $ 330 -- $ 583 $ 913 Identifiable assets................................ $20,677 $40,681 $ (1,964) $59,394
F-76 415 MEDE AMERICA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED JUNE 30, 1997, 1998 AND 1999
MEDICAL/ DENTAL PHARMACY CORPORATE TOTAL -------- -------- --------- ------- YEAR ENDED JUNE 30, 1999 Total revenues..................................... $29,174 $26,039 -- $55,213 Interest expense................................... $ 240 $ 313 $ 2,369 $ 2,922 Depreciation and amortization expense.............. $ 3,995 $ 3,924 $ 892 $ 8,771 Income (loss) before provision for income taxes and extraordinary item............................... $ 1,747 $ 2,003 $(5,401) $ (561) Provision for income taxes......................... $ 38 $ 112 $ 147 $ 297 Capital expenditures............................... $ 739 $ 590 $ 71 $ 1,400 Identifiable assets................................ $42,489 $40,683 $(4,463) $78,709
F-77 416 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Greenberg News Networks, Inc.: We have audited the accompanying balance sheets of Greenberg News Networks, Inc. (a development stage company) (the "Company") as of December 31, 1997 and 1998 and the related statements of operations, stockholders' equity, and cash flows for the period January 8, 1997 (date of inception) to December 31, 1997, for the year ended December 31, 1998, and for the period January 8, 1997 (date of inception) to December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1997 and 1998 and the results of its operations and its cash flows for the period January 8, 1997 (date of inception) to December 31, 1997, for the year ended December 31, 1998, and for the period January 8, 1997 (date of inception) to December 31, 1998, in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Atlanta, Georgia February 26, 1999 (June 30, 1999 as to Note 9) F-78 417 GREENBERG NEWS NETWORKS, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS
DECEMBER 31, DECEMBER 31, JUNE 30, 1997 1998 1999 ------------ ------------ ------------ (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents........................... $ 33,829 $ 2,268,670 $ 2,547,156 Short-term investments.............................. 6,004,000 8,081,362 Accounts receivable................................. 30,185 Prepaid and other assets............................ 408,078 123,647 ----------- ------------ ------------ Total current assets............................. 33,829 8,680,748 10,782,350 PROPERTY AND EQUIPMENT -- Net......................... 29,576 1,942,924 2,565,460 RESTRICTED CASH....................................... 387,000 691,863 OTHER ASSETS.......................................... 248,546 584,323 ----------- ------------ ------------ $ 63,405 $ 11,259,218 $ 14,623,996 =========== ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses............... $ 430,299 $ 3,196,155 $ 4,928,500 Notes payable to shareholder........................ 1,562,300 Unearned revenue.................................... 27,715 Current portion of note payable..................... 204,766 Capital lease obligations........................... 119,980 124,211 ----------- ------------ ------------ Total current liabilities........................ 1,992,599 3,316,135 5,285,192 NOTE PAYABLE.......................................... 468,515 CAPITAL LEASE OBLIGATIONS............................. 252,460 190,970 ----------- ------------ ------------ Total liabilities................................ 1,992,599 3,568,595 5,944,677 COMMITMENTS AND CONTINGENCIES (Note 3) REDEEMABLE PREFERRED STOCK -- Series A, $.01 par value, outstanding zero, 1,913,044 and 1,913,044 (unaudited) shares, respectively, and a liquidation value of $24,172,719 at December 31, 1998 and $25,444,966 (unaudited) at June 30, 1999............ 26,591,312 85,130,458 STOCKHOLDERS' EQUITY: Preferred stock -- Series B, $.01 par value, outstanding zero, 109,765 and 109,765 (unaudited), respectively, and a liquidation value of $1,262,300 at December 31, 1998 and $1,262,300 (unaudited) at June 30, 1999.......... 1,098 1,098 Preferred stock -- Series C, $.01 par value, outstanding zero, zero, and 388,747, respectively, and a liquidation value of $18,212,797 (unaudited) at June 30, 1999......... 3,887 Common stock, $.01 par value; authorized 10,000, 10,000,000, and 10,000,000 (unaudited) shares, respectively, outstanding 1,000, 1,915,235, and 1,915,235 (unaudited) shares, respectively....... 10 19,152 19,152 Additional paid-in capital.......................... 30,890 -- -- Unamortized restricted stock award.................. (231,671) (725,297) Accumulated deficit during development stage........ (1,960,094) (18,689,268) (75,749,979) ----------- ------------ ------------ Total stockholders' equity (deficit)........ (1,929,194) (18,900,689) (76,451,139) ----------- ------------ ------------ $ 63,405 $ 11,259,218 $ 14,623,996 =========== ============ ============
See notes to financial statements. F-79 418 GREENBERG NEWS NETWORKS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS
PERIOD PERIOD PERIOD JANUARY 8, 1997 JANUARY 8, 1997 JANUARY 8, 1997 (DATE OF YEAR (DATE OF SIX MONTHS SIX MONTHS (DATE OF INCEPTION) TO ENDED INCEPTION) TO ENDED ENDED INCEPTION) DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30, TO JUNE 30, 1997 1998 1998 1998 1999 1999 --------------- ------------ --------------- ----------- ------------ ----------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) REVENUE: Sponsorship revenue......... $ -- $ -- $ -- $ -- $ -- $ -- Subscriber revenue.......... -- -- -- -- 47,785 47,785 ----------- ------------ ------------ ----------- ------------ ------------ Total revenue............. -- -- -- OPERATING EXPENSES: Cost of revenue............. -- 5,027,758 5,027,758 654,477 8,091,163 13,118,921 Research and development.... 814,821 632,819 1,447,640 237,136 607,043 2,054,683 Sales and marketing......... 281,843 5,404,025 5,685,868 745,532 6,645,442 12,331,310 General and administrative............ 852,318 3,338,229 4,190,547 1,648,429 3,130,768 7,321,315 Depreciation and amortization.............. 11,112 254,174 265,286 16,918 405,068 670,354 ----------- ------------ ------------ ----------- ------------ ------------ Total costs and expenses................ 1,960,094 14,657,005 16,617,099 3,302,492 18,879,484 35,496,583 ----------- ------------ ------------ ----------- ------------ ------------ LOSS FROM OPERATIONS.......... (1,960,094) (14,657,005) (16,617,099) (3,302,492) (18,831,699) (35,448,798) INTEREST EXPENSE.............. -- (43,386) (43,386) -- (43,129) (86,515) INTEREST INCOME............... -- 756,639 756,639 365,819 219,219 975,858 ----------- ------------ ------------ ----------- ------------ ------------ LOSS BEFORE INCOME TAXES...... (1,960,094) (13,943,752) (15,903,846) (2,936,673) (18,655,609) (34,559,455) INCOME TAX EXPENSE............ -- -- -- -- -- -- ----------- ------------ ------------ ----------- ------------ ------------ NET LOSS...................... (1,960,094) (13,943,752) (15,903,846) (2,936,673) (18,655,609) (34,559,455) ACCRETION OF PREFERRED STOCK....................... -- (4,591,306) (4,591,306) (619,397) (58,539,146) (63,130,452) ----------- ------------ ------------ ----------- ------------ ------------ NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS......... $(1,960,094) $(18,535,058) $(20,495,152) $(3,556,070) $(77,194,755) $(97,689,907) =========== ============ ============ =========== ============ ============ Loss per common share -- basic and diluted................. $ (1.11) $ (9.72) $ (1.86) $ (40.66) =========== ============ =========== ============ Weighted-average common shares outstanding -- basic and diluted..................... 1,762,146 1,906,492 1,916,312 1,898,568 =========== ============ =========== ============
See notes to financial statements. F-80 419 GREENBERG NEWS NETWORKS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY PERIOD JANUARY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1998 AND (UNAUDITED) THE SIX MONTHS ENDED JUNE 30, 1999
REDEEMABLE STOCKHOLDERS' EQUITY SECURITIES -------------------------------------------------------------- ----------- UNAMORTIZED SERIES A SERIES B SERIES C ADDITIONAL RESTRICTED PREFERRED PREFERRED PREFERRED COMMON PAID-IN STOCK STOCK STOCK STOCK STOCK CAPITAL AWARD ----------- --------- --------- ------- -------------- ----------- Issuance of 1,000 shares of common stock........................... $ 10 $ 1,107 Contribution of computers, furniture and equipment by principal stockholder........... 29,783 Net loss, January 8, 1997 to December 31, 1997............... ----------- ------ ------ ------- -------------- --------- BALANCE -- December 31, 1997........ 10 30,890 Cash contribution by principal stockholder..................... 32,875 2,000-for-one stock split......... 19,990 (19,990) Issuance of 1,913,044 shares of Series A preferred stock........ $22,000,006 Conversion of 109,765 shares of common stock and note payable to shareholder of $1,262,300 to 109,765 shares Series B preferred stock................. $1,098 (1,098) 1,262,300 Issuance of 25,000 shares of restricted stock in connection with services provided.......... 250 316,000 $(210,838) Issuance of purchase warrants for 48,826 shares of common stock in connection with services provided........................ 134,021 Issuance of options for 7,348 shares of common stock in connection with services provided........................ 28,955 Amortization of restricted stock award........................... 20,833 (20,833) Accretion of Series A preferred stock........................... 4,591,306 (1,805,884) Net loss.......................... ----------- ------ ------ ------- -------------- --------- BALANCE -- December 31, 1998........ 26,591,312 1,098 19,152 0 (231,671) Issuance of 388,747 shares of Series C preferred stock, net of offering costs -- (Unaudited)... $3,887 18,141,040 Amortization and compensation related to restricted stock award -- (Unaudited)............ 1,027,323 (493,626) Compensation related to stock options issued -- (Unaudited)... 965,681 Accretion of Series A Preferred Stock -- (Unaudited)............ 58,539,146 (20,134,044) Net loss (Unaudited).............. ----------- ------ ------ ------- -------------- --------- BALANCE -- June 30, 1999 (Unaudited)....................... $85,130,458 $1,098 $3,887 $19,152 $ -- $(725,297) =========== ====== ====== ======= ============== ========= STOCKHOLDERS' EQUITY --------------------------- ACCUMULATED DEFICIT TOTAL ------------ ------------ Issuance of 1,000 shares of common stock........................... $ 1,117 Contribution of computers, furniture and equipment by principal stockholder........... 29,783 Net loss, January 8, 1997 to December 31, 1997............... $ (1,960,094) (1,960,094) ------------ ------------ BALANCE -- December 31, 1997........ (1,960,094) (1,929,194) Cash contribution by principal stockholder..................... 32,875 2,000-for-one stock split......... -- Issuance of 1,913,044 shares of Series A preferred stock........ Conversion of 109,765 shares of common stock and note payable to shareholder of $1,262,300 to 109,765 shares Series B preferred stock................. 1,262,300 Issuance of 25,000 shares of restricted stock in connection with services provided.......... 105,412 Issuance of purchase warrants for 48,826 shares of common stock in connection with services provided........................ 134,021 Issuance of options for 7,348 shares of common stock in connection with services provided........................ 28,955 Amortization of restricted stock award........................... -- Accretion of Series A preferred stock........................... (2,785,422) (4,591,306) Net loss.......................... (13,943,752) (13,943,752) ------------ ------------ BALANCE -- December 31, 1998........ (18,689,268) (18,900,689) Issuance of 388,747 shares of Series C preferred stock, net of offering costs -- (Unaudited)... 18,144,927 Amortization and compensation related to restricted stock award -- (Unaudited)............ 533,697 Compensation related to stock options issued -- (Unaudited)... 965,681 Accretion of Series A Preferred Stock -- (Unaudited)............ (38,405,102) (58,539,146) Net loss (Unaudited).............. (18,655,609) (18,655,609) ------------ ------------ BALANCE -- June 30, 1999 (Unaudited)....................... $(75,749,979) $(76,451,139) ============ ============
See notes to financial statements. F-81 420 GREENBERG NEWS NETWORKS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS
PERIOD PERIOD PERIOD JANUARY 8, 1997 JANUARY 8, 1997 JANUARY 8, 1997 (DATE OF (DATE OF SIX MONTHS SIX MONTHS (DATE OF INCEPTION) TO YEAR ENDED INCEPTION) TO ENDED ENDED INCEPTION) TO DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30, JUNE 30, 1997 1998 1998 1998 1999 1999 --------------- ------------ --------------- ------------ ------------ --------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) OPERATING ACTIVITIES: Net loss..................... $(1,960,094) $(13,943,752) $(15,903,846) $ (2,936,673) $(18,655,609) $ (34,559,455) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............. 11,112 254,174 265,286 16,918 405,068 670,354 Loss on disposal of property and equipment... 6,168 6,168 5,848 12,719 18,887 Issuance of stock options, stock purchase warrants and restricted stock in connection with services provided................. 268,388 268,388 155,999 1,499,378 1,767,766 Changes in assets and liabilities: Accounts receivable...... (30,185) (30,185) Prepaid and other assets................. (408,078) (408,078) (48,912) 284,431 (123,647) Accounts payable and accrued expenses....... 430,299 2,765,856 3,196,155 345,852 1,732,345 4,928,500 Unearned revenue......... 27,715 27,715 Other assets............. (248,546) (248,546) (335,777) (584,323) ----------- ------------ ------------ ------------ ------------ ------------- Net cash used in operating activities........... (1,518,683) (11,305,790) (12,824,473) (2,460,968) (15,059,915) (27,884,388) INVESTING ACTIVITIES: (Increase) decrease in short-term investments..... (6,004,000) (6,004,000) (18,336,191) (2,077,362) (8,081,362) Acquisition of property and equipment.................. (10,905) (1,715,544) (1,726,449) (349,230) (1,040,323) (2,766,772) ----------- ------------ ------------ ------------ ------------ ------------- Net cash used in investing activities........... (10,905) (7,719,544) (7,730,449) (18,685,421) (3,117,685) (10,848,134) FINANCING ACTIVITIES: Increase in restricted cash....................... (387,000) (387,000) (387,000) (304,863) (691,863) Repayment of capital lease obligations................ (85,706) (85,706) (2,382) (57,259) (142,965) Repayment of note payable.... (51,414) (51,414) Proceeds from issuance of common stock............... 1,117 1,117 1,117 Proceeds from issuance of notes payable.............. 1,562,300 1,562,300 724,695 2,286,995 Proceeds from sale of preferred stock............ 22,000,006 22,000,006 22,000,006 18,144,927 40,144,933 Net cash contribution from principal stockholder...... 32,875 32,875 32,875 32,875 Repayment of stockholder loan....................... (300,000) (300,000) (300,000) (300,000) ----------- ------------ ------------ ------------ ------------ ------------- Net cash provided by financing activities........... 1,563,417 21,260,175 22,823,592 21,343,499 18,456,086 41,279,678 ----------- ------------ ------------ ------------ ------------ ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... 33,829 2,234,841 2,268,670 197,110 278,486 2,547,156 CASH AND CASH EQUIVALENTS: Beginning of period.......... -- 33,829 -- 33,829 2,268,670 -- ----------- ------------ ------------ ------------ ------------ ------------- End of period................ $ 33,829 $ 2,268,670 $ 2,268,670 $ 230,939 $ 2,547,156 $ 2,547,156 =========== ============ ============ ============ ============ ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -- Cash paid during the period for interest..................... $ 43,386 $ 43,386 ============ ============ SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Property and equipment acquired under capital leases..................... $ 458,146 $ 458,146 $ 40,662 $ 458,146 ============ ============ ============ ============= Property and equipment contributed by principal stockholder................ $ 29,783 $ 29,783 $ 29,783 =========== ============ ============= Conversion of note payable to principal stockholder to Series B preferred stock... $ 1,262,300 $ 1,262,300 $ 1,262,300 $ 1,262,300 ============ ============ ============ ============= Issuance of common stock, stock options, stock purchase warrants and restricted stock in connection with services provided................... $ 268,388 $ 268,388 $ 155,999 $ 1,499,378 $ 1,767,766 ============ ============ ============ ============ =============
See notes to financial statements. F-82 421 GREENBERG NEWS NETWORKS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999 (UNAUDITED), FOR THE PERIOD JANUARY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999 (UNAUDITED), FOR THE YEAR ENDED DECEMBER 31, 1998, AND THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED) 1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Organization -- Greenberg News Networks, Inc. (the "Company") was incorporated in Delaware on January 8, 1997. The Company, based in Atlanta, Georgia, has been in the development stage since its formation. The Company is primarily engaged in providing medical news, information, and educational programs and services via the Internet to physicians and other health care providers under the Medcast brand name. The Medcast product was in use by approximately 500 physicians at December 31, 1998. As the service was still in "Beta Phase," the Company has recorded no revenue through December 31, 1998. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Stock Split -- On February 9, 1998, the Company effected a 2,000-for-one stock split in the form of a stock dividend. This resulted in the issuance of 1,999,000 additional shares of common stock and the transfer of $19,990 from paid-in capital to common stock. All references to per share amounts throughout this report have been restated to reflect this stock split. Investments -- Management determines the appropriate classification of debt and equity securities at the time of purchase and reevaluates such designation as of each balance sheet date. At December 31, 1998, the Company's short-term investment portfolio consisted of debt securities classified as held-to- maturity and is presented at amortized cost, which approximates fair value. Property and Equipment -- Property and Equipment is stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets ranging from 3 to 5 years. Leasehold improvements are depreciated over the lesser of the asset's useful life or the remaining lease term. Other Assets -- Other assets consist primarily of employee advances, deposits, and computers purchased by the Company to be used by physicians. These computers have been expensed when delivered to the physician. Nonmonetary Transactions -- Common stock, common stock options, and common stock purchase warrants issued for goods or services are recorded at estimated market value. Product Development -- Costs incurred related to the development of the Greenberg News product have been charged to expense as incurred. Cash Equivalents and Restricted Cash -- All highly liquid instruments with an original maturity of three months or less are considered cash equivalents. Restricted cash is pledged to secure a letter of credit provided in lieu of a security deposit under an operating lease. Stock Based Compensation -- The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees ("APB 25"), and complies with the disclosure provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock Based Compensation. Under APB 25, compensation cost is recognized over the vesting period based on the F-83 422 GREENBERG NEWS NETWORKS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999 (UNAUDITED), FOR THE PERIOD JANUARY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999 (UNAUDITED), FOR THE YEAR ENDED DECEMBER 31, 1998, AND THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED) difference, if any, on the date of grant between the fair value of the Company's stock and the amount an employee must pay to acquire the stock. Revenue Recognition -- The Company currently derives all of its revenue from subscription fees. The Company recognizes revenue derived from the sale of subscriptions ratably over the period that services are provided to the subscriber. Basic and Diluted Net Income (Loss) Per Common Share -- Basic net income (loss) per common share is computed using the weighted-average number of shares outstanding during the period. Diluted net income (loss) per common share is computed using the weighted-average number of common and common equivalent shares outstanding during the period. Common equivalent shares consist of the incremental common shares issuable upon conversion of convertible preferred stock (using the if-converted method) and shares issuable upon the exercise of stock options and warrants (using the treasury stock method). Common equivalent shares of 1,812,278, 1,452,356 and 2,420,708 for the year ended December 31, 1998 and the six months ended June 30, 1998 and 1999, respectively, were excluded from the computation as their effect was anti-dilutive. Restricted shares outstanding of 16,667, zero, and 16,667 for the year ended December 31, 1998 and the six months ended June 30, 1998 and 1999, respectively, were also excluded from the computation as their effect was anti-dilutive. Fair Value of Financial Instruments -- The carrying values of cash and cash equivalents, short-term investments, and accounts payable approximate fair value because of the short maturity of these instruments. The carrying value of the Company's obligations under capital leases also approximates fair value, as the related interest rate is similar to the rates being offered to the Company. Impairment of Long-Lived Assets -- In accordance with the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of, the Company reviews long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Any impairment losses are reported in the period in which the recognition criteria are first applied based on the fair value of the asset. Recent Pronouncements -- In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, Reporting Comprehensive Income. SFAS 130 is designed to improve the reporting of changes in equity from period to period. As the Company has no components of other comprehensive income, adoption of SFAS 130 did not have an impact on the Company's financial statements. In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements for periods beginning after December 15, 1997. The Statement requires that business segment financial information be reported in the financial statements utilizing the management approach. The management approach is defined as the manner in which management organizes the segments within the enterprise for making operating decisions and assessing performance. Since the Company is organized as, and operates in, a single business segment that provides medical news, information and education programs and services to physicians and other health care providers, this Statement did not have an impact on financial reporting for the periods presented. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133 establishes methods of accounting for derivative financial instruments and hedging F-84 423 GREENBERG NEWS NETWORKS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999 (UNAUDITED), FOR THE PERIOD JANUARY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999 (UNAUDITED), FOR THE YEAR ENDED DECEMBER 31, 1998, AND THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED) activities related to those instruments as well as other hedging activities, and is effective for fiscal years beginning after June 15, 2000. The Company has not determined what effect, if any, adoption of SFAS 133 will have on the Company's financial statements. Interim Financial Statements -- The accompanying unaudited interim financial statements as of June 30, 1999, the six months ended June 30, 1999 and 1998 and the period January 8, 1997 (date of inception) to June 30, 1999 reflect, in the opinion of management, all adjustments necessary for a fair presentation of the interim financial statements. All such adjustments are of a normal and recurring nature. 2. PROPERTY AND EQUIPMENT Property and equipment at December 31, 1997 and 1998 consists of the following:
1997 1998 -------- ---------- Computer equipment..................................... $ 38,974 $1,492,709 Leasehold improvements................................. 1,714 184,508 Office equipment....................................... 527,831 -------- ---------- 40,688 2,205,048 Less accumulated depreciation.......................... (11,112) (262,124) -------- ---------- Total........................................ $ 29,576 $1,942,924 ======== ==========
Depreciation expense on computer equipment, leasehold improvements, and office equipment for the period January 8, 1997 (date of inception) to December 31, 1997, the year ended December 31, 1998 and the period January 8, 1997 (date of inception) to December 31, 1998 was $11,112, $254,174, and $265,286, respectively. Included in property and equipment at December 31, 1998 were assets acquired under capital lease obligations with a cost of $458,146 and accumulated depreciation at December 31, 1998 of $44,091. 3. COMMITMENTS AND CONTINGENCIES Leases -- The Company leases facilities and equipment primarily under long-term operating leases and capital lease agreements. Future minimum payments under noncancelable operating leases and capital leases are as follows:
YEAR ENDING CAPITAL OPERATING DECEMBER 31, LEASES LEASES - ------------ -------- ---------- 1999........................................................ $181,426 $ 305,289 2000........................................................ 181,426 311,898 2001........................................................ 97,071 311,589 2002........................................................ 18,666 309,581 2003........................................................ 4,667 77,442 -------- ---------- Total............................................. 483,256 $1,315,799 ========== Less amounts representing interest and taxes................ 110,816 -------- Present value of capital lease payments..................... $372,440 ========
F-85 424 GREENBERG NEWS NETWORKS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999 (UNAUDITED), FOR THE PERIOD JANUARY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999 (UNAUDITED), FOR THE YEAR ENDED DECEMBER 31, 1998, AND THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED) The Company's rental expense under operating leases for the period January 8, 1997 (date of inception) to December 31, 1997, the year ended December 31, 1998, and the period January 8, 1997 (date of inception) to December 31, 1998, was $56,544, $192,401, and $248,945, respectively. Letter of Credit -- The Company has a letter of credit agreement at December 31, 1998, to back certain operating leases. The letter of credit amount at December 31, 1998, was $386,614. As required by the letter of credit agreement, the Company had $387,000 in restricted cash at December 31, 1998. Johns Hopkins Medicine -- On July 10, 1998, the Company entered into a transaction with Johns Hopkins Medicine ("Johns Hopkins") to provide and approve content for a Johns Hopkins channel on Medcast. The agreement has an initial term of three years. The agreement provides for nonrefundable payments as follows which are expensed as incurred: $75,000 upon execution of the agreement $31,000 per quarter for four quarters beginning October 1, 1998 $43,000 per quarter for four quarters beginning October 1, 1999 $50,000 per quarter for four quarters beginning October 1, 2000 The Company also issued 25,000 shares of common stock to Johns Hopkins. These shares have restrictions that limit the sale or transfer of the shares and will be forfeited if Johns Hopkins does not comply with the contractual terms. The restrictions are removed on one-third of the shares upon execution of the agreement, on one-third of the shares on the first anniversary of the agreement, and with respect to the final one-third of the shares on the second anniversary of the agreement. As of December 31, 1998 16,667 shares issued under this agreement have such restrictions. If the agreement terminates prior to the second anniversary, the unvested shares may be repurchased by the Company for $1.00 per share. Content fees are recognized ratably over the service term. Expenses associated with the issuance of the restricted stock is recognized at the fair value of the shares when the restrictions are removed. Expense is also recognized ratably for the remaining restricted shares based on the then-current fair value. The Company recognized expense of $298,533 for the year ended December 31, 1998 and $508,822 for the six months ended June 30, 1999 in connection with this agreement. Additional expense will be recorded in subsequent periods based on additional vesting and the related fair value of the stock at the vesting date. The agreement may be extended for an additional two years at a cost of $225,000 payable on January 1, 2002 and $250,000 payable January 1, 2003, with further automatic extensions in two-year increments until termination by either party. Employment Agreements -- The Company has employment agreements with certain of its officers, the terms of which expire at various times through January 3, 2002. Such agreements provide for minimum salary levels, adjusted annually by specified amounts, as well as for incentive bonuses that are payable on approval by the Compensation Committee of the Board. The aggregate commitment for future salaries at December 31, 1998, excluding bonuses, was $1,850,000. The agreements also provide for severance benefits. Consulting Agreement -- The Company has entered into a consulting agreement with a Director that calls for monthly payments and provides for additional incentive compensation based on developing relationships with pharmaceutical company accounts. The incentive compensation consists of a stated percentage of revenues generated by the accounts and the future issuance of stock options or warrants. The F-86 425 GREENBERG NEWS NETWORKS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999 (UNAUDITED), FOR THE PERIOD JANUARY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999 (UNAUDITED), FOR THE YEAR ENDED DECEMBER 31, 1998, AND THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED) agreement is cancelable by either party on thirty days' notice. For the year ended December 31, 1998, the Company recognized expense of $60,000 under this agreement and no options or warrants had been issued. 4. RELATED PARTY TRANSACTIONS During the fiscal year ended December 31, 1997, the Chief Executive Officer and Principal Stockholder loaned the Company $1,562,300, bearing interest at 6.0% per annum, pursuant to two demand notes. In February 1998, the Chairman exchanged such notes and 109,765 shares of common stock for 109,765 shares of Series B Preferred Stock and $300,000 in cash. 5. INCOME TAXES Due to the Company's operating losses, there was no provision for income taxes for any of the periods presented. At December 31, 1998, the Company has available, for federal and state income tax purposes, net operating loss ("NOL") carryforwards of approximately $14.9 million, which begin to expire in 2013. These losses may be offset against future taxable income, if any, during the carryforward period. The tax effects of temporary differences that give rise to deferred tax assets at December 31, 1997 and 1998, are as follows:
1997 1998 --------- ----------- Deferred tax assets: Accrued liabilities................................ $ 158,000 $ 116,640 Net operating loss carryforwards................... 590,601 5,938,124 Property and equipment............................. 159,570 Other.............................................. 31,037 122,610 --------- ----------- Total gross deferred tax assets................. 779,638 6,336,944 Deferred tax liability -- prepaid assets............. (39,862) Less valuation allowance............................. (779,638) (6,297,082) --------- ----------- Net deferred tax assets......................... $ -- $ -- ========= ===========
Due to uncertainty regarding ultimate realization, the net deferred tax assets of $779,638 and $6,297,082 at December 31, 1997 and 1998, respectively, have been offset by an equal valuation allowance which increased $779,638 and $5,517,444 for the period January 8, 1997 (date of inception) to December 31, 1997, and the year ended December 31, 1998, respectively. 6. STOCKHOLDERS' EQUITY AND PREFERRED STOCK Common Stock -- At December 31, 1997 and 1998, the Company's authorized $.01 par value common stock authorized was 10,000 and 10,000,000 shares, respectively, with 1,000 and 1,915,235 shares issued and outstanding, respectively. Certain of the shares issued and outstanding to employees in conjunction with the original capitalization of the Company have restrictions which limit the sale or transfer of the shares and provide for forfeiture if the holder terminates their employment with the F-87 426 GREENBERG NEWS NETWORKS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999 (UNAUDITED), FOR THE PERIOD JANUARY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999 (UNAUDITED), FOR THE YEAR ENDED DECEMBER 31, 1998, AND THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED) Company. As discussed in Note 3, an additional 16,667 shares issued to Johns Hopkins were also restricted. Employee shares under restriction at December 31, 1997 and December 31, 1998, were 229,500 and 126,000 respectively. At December 31, 1998, 1,000,000 shares were reserved for the exercise of issued and unissued common stock options and warrants. Preferred Stock -- In January 1998, the Company's stockholders approved an amendment and restatement of the certificate of incorporation which authorized 10,000,000 shares of preferred stock, $.01 par, with rights and preference to be determined by the Board of Directors. At December 31, 1998, 1,913,044 and 109,765 shares of Series A preferred stock and Series B preferred stock, respectively, were issued and outstanding. The rights, preferences, and privileges of the preferred stockholders are as follows: - Dividends -- The holders of Series A and Series B preferred stock are entitled to dividends when and as declared by the Board of Directors, equal to the cumulative cash dividends in respect of each such share in such amount as the holder thereof would receive if such share were converted to common stock. No dividends have been declared through December 31, 1998. - Liquidation -- Holders of the Series A preferred stock are entitled to a preference in liquidation to Series B preferred stock and common stockholders of $11.50 (the original issuance price) per share, plus all declared but unpaid dividends, plus a preferred return of 11.5% per annum on the original issuance price. Holders of Series B preferred stock are entitled to a preference in liquidation to the common stockholders equal to the original issuance price ($11.50 per share) plus all declared but unpaid dividends. At December 31, 1998, the aggregate liquidation value of preferred stock was $25,435,019. After the above amounts have been paid on the preferred stock, the remaining assets are distributed to the holders of the common stock. - Conversion and Registration -- The Series A and Series B preferred shares are convertible, at the option of the holders, at any time, into shares of common stock at a ratio of 1:1. Conversion is automatic immediately prior to the closing of an underwritten public offering of the Company's common shares for aggregate proceeds equal to or exceeding $20,000,000, with an offering price of not less than $23.00 per share. Conversion is also mandatory if the Company achieves an annual cash flow from operations of $25.0 million or the stockholders approve a sale whereby the preferred holders would receive at least $23.00 per share. The conversion ratio for the Series A preferred stock is adjusted based on the aggregate gross proceeds in the event of a sale of the Company (whether in the form of a merger, consolidation, sale of assets, initial public offering, or sale of outstanding stock). The conversion rates are as follows:
CONVERSION AGGREGATE PROCEEDS RATE - ------------------ ---------- $250,000,000 to $500,000,000......................... .960791:1 $500,000,000 to $750,000,000......................... .923015:1 $750,000,000 to $1,000,000,000....................... .851577:1 Over $1,000,000,000.................................. .785143:1
F-88 427 GREENBERG NEWS NETWORKS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999 (UNAUDITED), FOR THE PERIOD JANUARY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999 (UNAUDITED), FOR THE YEAR ENDED DECEMBER 31, 1998, AND THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED) - Redemption -- The Series A preferred stock is redeemable, in whole or in part, at the option of the holder at any time after February 14, 2004. The redemption is effective upon 30 days' written notice, at a per share price equal to the greater of the original issue price of each share plus 8.0% per annum from the original issue date or the fair market value. This redemption value has been accreted in the accompanying financial statements. The fair value of the Series A preferred stock was $13.90 and $44.50 per share at December 31, 1998 and June 30, 1999, respectively. The Company determines fair value based on third party transactions involving the Company's equity instruments. - Voting -- Each share of preferred stock is entitled to vote on an "as converted" basis along with common stockholders. Series A and Series B preferred stockholders vote together with common stockholders except for certain matters as to which the Series A preferred stockholders vote as a separate class. The affirmative consent of a majority of the outstanding shares of Series A preferred, voting as a separate class, is required for any of the following actions: - Amending the Certificate or Bylaws of the Company which would affect the rights, preferences, or privileges of the Series A preferred stockholders. - Any voluntary liquidation, dissolution, or winding up of the Company or any merger or consolidation with another corporation, or a sale, assignment, or transfer of all or substantially all of the assets of the Company. - Application of any of the Company's assets to the redemption, retirement, purchase, or other acquisition of any of the Company's junior securities. - Action to create, authorize, or issue any senior securities. - Any transactions with an affiliate of the Company as defined. - Declaration of a dividend on any junior securities. - An action to incur debt greater than $5,000,000 in a single transaction or series of related transactions. - An action to approve any single transaction or series of related transactions involving a commitment greater than $2,000,000. 7. STOCK OPTION AND PURCHASE WARRANTS Stock Options -- The 1997 Stock Option Plan (the "Plan") allows for the issuance of incentive stock options and nonqualified stock options to purchase a maximum of 1,000,000 shares of the Company's Common Stock. Under the Plan, incentive stock options may be granted to employees, directors, and officers of the Company, and nonqualified stock options may be granted to consultants, employees, directors, and officers of the Company. Generally, the options become exercisable over four years and expire ten years from the date of grant. Options granted under the Plan must be issued at prices not less than 100% and 85%, for incentive and nonqualified stock options, respectively, of the fair market value of the stock on the date of grant as determined by the Board of Directors. Options granted to shareholders F-89 428 GREENBERG NEWS NETWORKS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999 (UNAUDITED), FOR THE PERIOD JANUARY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999 (UNAUDITED), FOR THE YEAR ENDED DECEMBER 31, 1998, AND THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED) who own greater than 10% of the outstanding stock are for periods not to exceed five years and must be issued at prices not less than 110% of the fair market value of the stock. Activity under the Plan for options issued to employees is summarized as follows:
OPTIONS WEIGHTED-AVERAGE OUTSTANDING EXERCISE PRICE ----------- ---------------- Balance at December 31, 1997....................... -- -- Granted............................................ 140,815 $11.90 Exercised.......................................... -- -- Forfeited.......................................... -- -- ------- ------ Balance at December 31, 1998....................... 140,815 $11.90 ======= ======
The following table summarizes information concerning outstanding and exercisable employee options at December 31, 1998:
OPTIONS OUTSTANDING ------------------------------------- NUMBER WEIGHTED- OUTSTANDING AVERAGE WEIGHTED- AS OF REMAINING AVERAGE DECEMBER 31, LIFE EXERCISE RANGE OF EXERCISE PRICE 1998 (IN YEARS) PRICE - ----------------------- ------------ ---------- --------- $11.50........................................ 116,729 9.4 $11.50 $12.50........................................ 1,000 9.8 12.50 $13.90........................................ 23,086 9.7 13.90
At December 31, 1998, 12,934 employee options under the Plan were exercisable with a weighted-average exercise price of $11.50. Nonemployee Stock Options -- During 1998, the Company issued 7,348 stock options under the Plan to nonemployees in exchange for services received or to be received. The options have a weighted-average exercise price of $12.48 and a weighted-average fair value of $5.16 per option on the grant date. The weighted-average fair value was determined using the Black-Scholes valuation model with the following assumptions: no dividend yield, no volatility, a risk-free interest rate range of 4.8% to 5.8% depending on the grant date, and an expected life of 10 years. These options will be fully vested by August 2000. In conjunction with the issuance of these options, the Company recognized expense of $28,955 in 1998 based on the fair value of options which have vested or partially vested. Additional expense will be recorded in subsequent periods for a portion of a 3,000 of the options based on additional vesting and the related fair value of the underlying stock. F-90 429 GREENBERG NEWS NETWORKS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999 (UNAUDITED), FOR THE PERIOD JANUARY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999 (UNAUDITED), FOR THE YEAR ENDED DECEMBER 31, 1998, AND THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED) Specifically: - 4,348 options were issued in connection with a Compensation and Release Agreement dated May 15, 1998 to a principal in an outside consulting firm in exchange for the right to hire several employees of the firm who had worked on software development for the Company and also as partial consideration for the developed software which was purchased by the Company under the Compensation and Release Agreement. - 2,000 options were issued to an outside graphical consultant who performed services to the Company during 1997, 1998, and 1999 in consideration for a covenant not to compete with the Company through August 2000. - 1,000 options were issued to an outside medical consultant in connection with services performed since January 1998 in consideration for a covenant not to compete with the Company through December 1999. As of December 31, 1998, 851,837 options were available for future grant under the Plan. Stock Compensation -- The Company accounts for stock-based compensation in accordance with the provisions of APB 25. Had compensation expense been determined based on the fair value at the grant dates, as prescribed in SFAS 123, the Company's results would have been as follows for the year ended December 31, 1998: Net loss.................................................... $(14,025,412) Net loss attributable to common stockholders................ $(18,616,718) Net loss per common share -- basic and diluted.............. $ (9.76)
The weighted-average fair value of the options granted during 1998 is estimated at $5.10 per share, on the date of grant using the Black-Scholes valuation model with the following assumptions: no dividend yield, no volatility, a risk-free interest rate range of 4.8% to 5.8% depending on grant date, and an expected life of 10 years. Stock Purchase Warrants -- During 1998, the Company issued 48,826 warrants, which were immediately exercisable, to certain consultants and vendors in exchange for services received. These warrants are exerciseable over five years from the date of grant. Each warrant represents the right to purchase one share of the Company's common stock at a weighted-average exercise price of $11.52 until expiration. The estimated weighted-average fair value at the date of issuance was $2.74 per warrant. The estimated weighted-average fair value was determined using the Black-Scholes valuation model with the following assumptions: no dividend yield, no volatility, a risk-free interest rate range of 5.4% to 5.5% depending on the grant date, and an expected life of five years. The Company recognized expense of $134,021 in conjunction with the issuance of the stock purchase warrants. 8. DEVELOPMENT STAGE COMPANY The Company is in the development stage and, to date, has generated no revenues, has incurred expenses, and has sustained losses. Consequently, its operations are subject to all of the risks inherent in the establishment of a new business enterprise. As a result of the start-up nature of its business, the Company can be expected to sustain substantial operating losses for at least the next several years. The F-91 430 GREENBERG NEWS NETWORKS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) AS OF DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999 (UNAUDITED), FOR THE PERIOD JANUARY 8, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999 (UNAUDITED), FOR THE YEAR ENDED DECEMBER 31, 1998, AND THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED) Company's continuation as a going concern is dependent upon its ability to obtain additional equity investment and ultimately to attain successful operations. Management is continuing its efforts to obtain additional funds so that the Company can meet its obligations and sustain operations and has an arrangement with WebMD to provide additional funding to the Company, if needed, until the merger is consummated (see Note 9). 9. SUBSEQUENT EVENT In April 1999, the Company sold 388,747 shares of its Series C Preferred Stock to 29 investors at $46.85 per share, convertible into common stock at a ratio of 1:1. The conversion ratio for the Series C Preferred is subject to adjustment if GNN issues stock in a transaction that dilutes the Series C Preferred Stock, pursuant to customary anti-dilution provisions. In addition, the certificate of designations for the Series C Preferred originally provided that the conversion price of the Series C Preferred would be adjusted unless GNN satisfied either a "contracts condition" by July 31, 1999, or an "IPO condition" by October 1, 1999. However, the Series C Preferred Stock certificate of designations was subsequently amended to eliminate the adjustment to the conversion price provided for in the preceding sentence (the anti-dilution provisions continue in effect). Holders of the Series C Preferred Stock are entitled to a preference in liquidation to Series B preferred stock and common stockholders at $46.85 (the original issuance price). On June 30, 1999, the Company, Healtheon Corporation ("Healtheon"), Healtheon/WebMD Corporation ("Healtheon/WebMD"), WebMD, Inc. ("WebMD"), and GNN Merger Corp., a wholly owned subsidiary of Healtheon/WebMD ("Merger Sub") entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which Merger Sub will be merged with and into the Company, with the Company being the surviving corporation of such merger (the "Merger"). Upon consummation of the Merger, the separate existence of Merger Sub will cease, and the existing stockholders of the Company will become stockholders of Healtheon/WebMD in accordance with the terms of the Merger Agreement. Healtheon/WebMD is a newly formed parent corporation that may acquire Healtheon and WebMD upon the closing of a transaction contemplated by an Agreement and Plan of Reorganization between Healtheon and WebMD dated as of May 20, 1999. The consideration for the Merger will consist of newly issued shares of Healtheon/WebMD common stock ("Healtheon/WebMD Common Stock"), having an aggregate value of approximately $214.9 million, based upon the average closing sales price of $81.98 per share for the Healtheon Common Stock as reported for the ten trading days on NASDAQ ending on June 30, 1999. At the effective time of the Merger, each outstanding share of common stock of the Company ("Company Common Stock") will be converted into the right to receive 0.5483 shares of Healtheon/WebMD Common Stock (the "Exchange Ratio"), subject to adjustment as described below. The consummation of the Merger is subject to certain conditions, including, among other things, approval by the stockholders of the Company and the receipt of all necessary regulatory approvals, if any, pursuant to the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended. Pursuant to the Merger Agreement, Healtheon, WebMD, Healtheon/WebMD and the Company will prepare and file a proxy statement/prospectus to be mailed to stockholders in connection with calling a meeting of the stockholders of the Company to vote on the Merger. F-92 431 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-93 432 REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors Direct Medical Knowledge, Inc. We have audited the accompanying balance sheet of Direct Medical Knowledge, Inc., a development stage company (the Company) as of December 31, 1996, and the related statements of operations, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the management of Direct Medical Knowledge, Inc. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Direct Medical Knowledge, Inc., at December 31, 1996, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ BERG & COMPANY San Francisco, California February 7, 1997 F-94 433 REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors Direct Medical Knowledge, Inc. We have audited the accompanying balance sheet of Direct Medical Knowledge, Inc., a development stage company (the Company) as of December 31, 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-95 434 DIRECT MEDICAL KNOWLEDGE, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS DECEMBER 31, 1997 AND 1998 (DOLLARS IN THOUSANDS)
1997 1998 ------- ------- 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 ======= =======
The accompanying notes are an integral part of these financial statements. F-96 435 DIRECT MEDICAL KNOWLEDGE, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)
MAY 24, 1995 (DATE OF YEAR ENDED DECEMBER 31, INCORPORATION) TO --------------------------- DECEMBER 31, 1998 1997 1996 1998 ------- ------- ----- ----------------- 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) ======= ======= ===== =======
The accompanying notes are an integral part of these financial statements. F-97 436 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)
CONVERTIBLE PREFERRED STOCK --------------------------------------- COMMON STOCK SERIES A SERIES B COMMON RECEIVABLE ------------------ ------------------ ------------------ STOCK FROM SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT WARRANTS SHAREHOLDER --------- ------ --------- ------ --------- ------ -------- ------------ 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 $ -- ========= === ========= ====== ========= ====== === ===== DEFICIT ACCUMULATED TOTAL DURING THE SHAREHOLDERS' DEVELOPMENT EQUITY STAGE (DEFICIT) ----------- ------------- 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) ======= =======
The accompanying notes are an integral part of these financial statements. F-98 437 DIRECT MEDICAL KNOWLEDGE, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
MAY 24, 1995 (DATE OF INCORPORATION) TO 1998 1997 1996 DECEMBER 31, 1998 ------- ------- ------- ----------------- 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 ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements. F-99 438 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:
DIRECT MEDICAL KNOWLEDGE, INC. EQUIVALENT SHARE OF WEBMD CAPITAL STOCK SERIES B PREFERRED STOCK ------------------------------ ------------------------- Common Stock and Options.................................... 0.11274380 Series A Convertible Preferred Stock........................ 0.16867768 Series B Convertible Preferred Stock........................ 0.22225378
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-100 439 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-101 440 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-102 441 DIRECT MEDICAL KNOWLEDGE, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
DECEMBER 31, --------------- 1998 1997 ----- ------ 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 ===== ======
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:
FOR THE YEAR ENDED DECEMBER 31, ------------------------- 1998 1997 1996 ------- ----- ----- 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 ======= ===== =====
The primary components of the net deferred tax asset are:
1998 1997 1996 ------- ----- ----- 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...................................... $ -- $ -- $ -- ======= ===== =====
Due to uncertainty surrounding the realization of deferred tax assets, the Company has recorded a valuation allowance against its net deferred tax asset. F-103 442 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:
FOR THE YEAR ENDED DECEMBER 31, ------------------------- 1998 1997 1996 ------- ----- ----- 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 ======= ===== =====
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:
OPERATING LEASES --------- 1999........................................................ $198 2000........................................................ 198 2001........................................................ 198 2002........................................................ 182 ---- Total minimum lease payments................................ $776 ====
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-104 443 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-105 444 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.
WEIGHTED SHARES NUMBERS OF AVERAGE AVAILABLE OPTIONS EXERCISE FOR GRANT OUTSTANDING PRICE --------- ----------- -------- 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 ======== ======== ======
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-106 445 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:
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 - --------------- ------------------ ---------------- ---------------- ------------ ---------------- $0.205 576,723 9.41 $0.205 113,568 $0.205
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:
1998 1997 ------ ------ Net loss as reported........................................ $3,034 $1,430 Pro forma net loss.......................................... 3,089 1,433
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:
1998 1997 ---- ---- Weighted average risk-free interest rate.................... 5.13 6.12 Expected dividend yield..................................... -- -- Expected option life in years............................... 2.00 5.00
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-107 446 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. As discussed in note 16 to the financial statements, the financial statements as of and for the year ended December 31, 1998 have been restated. 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 LLP Portland, Oregon November 18, 1998 F-108 447 SAPIENT HEALTH NETWORK, INC. BALANCE SHEETS
SEPTEMBER 30, --------------------------- DECEMBER 31, 1997 1998 1998 ------------ ------------ ------------ (UNAUDITED) 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 $ 1,952,766 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.............................. -- 5,294,966 4,484,177 Line of credit............................................ 600,000 600,000 500,000 ------------ ------------ ------------ Total current liabilities.......................... 1,274,215 7,173,714 7,667,092 Obligations under capital leases, net of current installments.............................................. 298,248 171,024 151,628 ------------ ------------ ------------ Total liabilities.................................. 1,572,463 7,344,738 7,818,720 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................................ 863,482 884,620 915,150 Stock warrants............................................ -- 537,446 544,614 Accumulated deficit....................................... (6,023,491) (11,170,236) (14,002,365) ------------ ------------ ------------ Total shareholders' deficit........................ (5,157,130) (9,745,186) (12,539,558) ------------ ------------ ------------ Total liabilities, redeemable preferred stock and shareholders' deficit............................ $ 1,065,089 $ 2,593,734 $ 1,510,412 ============ ============ ============
See accompanying notes to financial statements. F-109 448 SAPIENT HEALTH NETWORK, INC. STATEMENTS OF OPERATIONS
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) 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) (684,721) (32,192) (346,313) ----------- ----------- ----------- ----------- ----------- Net loss before provision for income taxes................. (1,168,475) (4,510,590) (4,802,319) (960,197) (2,723,449) Provision for income taxes... -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- Net loss................ (1,168,475) (4,510,590) (4,802,319) (960,197) (2,723,449) 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) $(5,146,745) $(1,046,304) $(2,832,129) =========== =========== =========== =========== =========== Net loss per common share -- basic and diluted.......... $ (0.58) $ (2.40) $ (2.49) $ (0.52) $ (1.32) 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
See accompanying notes to financial statements. F-110 449 SAPIENT HEALTH NETWORK, INC. STATEMENTS OF SHAREHOLDERS' DEFICIT
PREFERRED STOCK STOCK SERIES A COMMON STOCK ADDITIONAL SUBSCRIPTION ---------------- ------------------ PAID-IN NOTE ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL WARRANTS RECEIVABLE DEFICIT ------- ------ --------- ------ ---------- -------- ------------ ------------ Balance, at November 21, 1995 (date of inception)............... -- $ -- -- $ -- $ -- $ -- $ -- $ -- Preferred stock -- less issuance costs........................... 850,000 850 -- -- 806,647 -- -- -- Common stock issued............... -- -- 2,002,000 -- 2,002 -- (2,002) -- Consulting expense on stock option grants.......................... -- -- -- -- 105,925 -- -- -- Net loss.......................... -- -- -- -- -- -- -- (1,168,475) ------- ---- --------- ------ -------- -------- ------- ------------ Balance at September 30, 1996....... 850,000 850 2,002,000 2,002 912,572 -- (2,002) (1,168,475) Exercise of stock options......... -- -- 27,100 27 2,683 -- -- 2,710 Consulting expense on stock option grants.......................... -- -- -- -- 42,558 -- -- -- Adjustment to consulting expense on stock options................ -- -- -- -- (94,331) -- -- -- Repayment of stock subscription note receivable................. -- -- -- -- -- -- 2,002 -- Accretion of Series B preferred stock dividends................. -- -- -- -- -- -- -- (344,426) Net loss.......................... -- -- -- -- -- -- -- (4,510,590) ------- ---- --------- ------ -------- -------- ------- ------------ Balance at September 30, 1997....... 850,000 850 2,029,100 2,029 863,482 -- -- (6,023,491) Exercise of stock options......... -- -- 104,460 105 14,032 -- -- -- Issuance of stock warrants........ -- -- -- -- -- 537,446 -- -- Consulting expense on stock option grants.......................... -- -- -- -- 7,106 -- -- -- Accretion of Series B preferred stock dividends................. -- -- -- -- -- -- -- (344,426) Net loss.......................... -- -- -- -- -- -- -- (4,802,319) ------- ---- --------- ------ -------- -------- ------- ------------ Balance at September 30, 1998....... 850,000 850 2,133,560 2,134 884,620 537,446 -- (11,170,236) Exercise of stock options (unaudited)..................... -- -- 59,681 59 6,805 -- -- -- Consulting expenses on stock option grants (unaudited)....... -- -- -- -- 23,725 -- -- -- Issuance of stock warrants (unaudited)..................... -- -- -- -- -- 7,168 -- -- Accretion of Series B preferred stock dividends (unaudited)..... -- -- -- -- -- -- -- (108,680) Net loss (unaudited).............. -- -- -- -- -- -- -- (2,723,449) ------- ---- --------- ------ -------- -------- ------- ------------ Balance at December 31, 1998 (unaudited)....................... 850,000 $850 2,193,241 $2,193 $915,150 $544,614 $ -- $(14,002,365) ======= ==== ========= ====== ======== ======== ======= ============ TOTAL SHAREHOLDERS' DEFICIT ------------- Balance, at November 21, 1995 (date of inception)............... $ -- Preferred stock -- less issuance costs........................... 807,497 Common stock issued............... -- Consulting expense on stock option grants.......................... 105,925 Net loss.......................... (1,168,475) ------------ Balance at September 30, 1996....... (255,053) Exercise of stock options......... Consulting expense on stock option grants.......................... 42,558 Adjustment to consulting expense on stock options................ (94,331) Repayment of stock subscription note receivable................. 2,002 Accretion of Series B preferred stock dividends................. (344,426) Net loss.......................... (4,510,590) ------------ Balance at September 30, 1997....... (5,157,130) Exercise of stock options......... 14,137 Issuance of stock warrants........ 537,446 Consulting expense on stock option grants.......................... 7,106 Accretion of Series B preferred stock dividends................. (344,426) Net loss.......................... (4,802,319) ------------ Balance at September 30, 1998....... (9,745,186) Exercise of stock options (unaudited)..................... 6,864 Consulting expenses on stock option grants (unaudited)....... 23,725 Issuance of stock warrants (unaudited)..................... 7,168 Accretion of Series B preferred stock dividends (unaudited)..... (108,680) Net loss (unaudited).............. (2,723,449) ------------ Balance at December 31, 1998 (unaudited)....................... $(12,539,558) ============
See accompanying notes to financial statements. F-111 450 SAPIENT HEALTH NETWORK, INC. STATEMENTS OF CASH FLOWS
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) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss........................................ $(1,168,475) $(4,510,590) $(4,802,319) $ (960,197) $ (2,723,449) 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 interest expense..................... -- -- 286,741 -- 228,829 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 =========== =========== =========== =========== ============
See accompanying notes to financial statements. F-112 451 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-113 452 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-114 453 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-115 454 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-116 455 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:
1997 1998 ---------- ---------- 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 ========== ==========
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:
YEAR ENDING SEPTEMBER 30: 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 ========
(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-117 456 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 less an unamortized discount of $228,829. 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:
THE PERIOD FROM NOVEMBER 21, 1995 YEARS ENDED (DATE OF INCEPTION) SEPTEMBER 30, THROUGH -------------- SEPTEMBER 30, 1996 1997 1998 ------------------- ----- ----- 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) ----- ----- ----- --% --% --% ===== ===== =====
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-118 457 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:
1997 1998 ----------- ----------- 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................................ $ -- $ -- =========== ===========
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-119 458 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:
THE PERIOD FROM NOVEMBER 21, 1995 (DATE OF INCEPTION) THROUGH YEARS ENDED SEPTEMBER SEPTEMBER 30, 30, ------------------- 1996 1997 1998 ------------- -------- -------- Dividend yield........................................ -- -- -- Expected volatility................................... 100% 100% 100% Risk-free interest rate............................... 5.7% 6% 6.5% Expected life......................................... 10 years 10 years 10 years
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:
THE PERIOD FROM NOVEMBER 21, 1995 (DATE OF INCEPTION) YEARS ENDED THROUGH SEPTEMBER 30, SEPTEMBER 30, -------------------------- 1996 1997 1998 ------------- ----------- ----------- Net loss: As reported............................... $(1,168,475) $(4,510,590) $(4,802,319) Pro forma................................. $(1,169,822) $(4,518,701) $(4,817,699)
F-120 459 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:
WEIGHTED- AVERAGE NUMBER OF EXERCISE SHARES PRICE --------- --------- 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 ========= ====
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-121 460 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-122 461 SAPIENT HEALTH NETWORK, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1997 AND 1998 AND DECEMBER 31, 1998 (UNAUDITED) The value of the common stock warrants issued in 1997 was approximately $10,000. The assumptions used to value the warrants using the Black Scholes model were as follows: Dividend yield of zero, expected volatility 100%, risk-free interest rate of 6.0% and an expected life of 5 years. During fiscal 1998, in connection with the convertible promissory note financing, the Company issued 871,226 warrants to purchase Series B Preferred Stock to investors. The warrants are exercisable at a price of $1.54 per share within ten years from date of issuance, and were valued using the Black Scholes model, however the warrants were not recorded separately in the financial statements. The value of the preferred stock warrants issued in 1997 and 1998 was approximately $80,000 and $460,000, respectively. The assumptions used to value the warrants using the Black Scholes model were as follows: dividend yield of zero, expected volatility 100%, risk-free interest rate of 6.5% and an expected life of 10 years. The holders/subscribers of shares of stock and stock warrants are subject to the restrictions set forth in Shareholder Agreements/Subscription Agreements. The terms of these agreements primarily relate to the right of first refusal. Before any common shareholder may sell or otherwise transfer any share of common stock, such shares shall first be offered to the Company. (10) RETIREMENT BENEFIT PLAN The Company sponsors a defined contribution 401(k) plan (the Retirement Plan). Employees who are at least 21 years old are eligible to participate in the Retirement Plan beginning the month subsequent to employment. Participants may defer up to 15% of eligible compensation. Currently, the Company does not provide matching contributions for the Retirement Plan. (11) COMMITMENTS AND CONTINGENCIES Leases The company leases office space under a non-cancelable operating leases which expire at various times through May 2004. Future minimum lease payments under the operating lease is as follows: 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 ==========
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. F-123 462 SAPIENT HEALTH NETWORK, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1997 AND 1998 AND DECEMBER 31, 1998 (UNAUDITED) (12) CUSTOMER INFORMATION The Company had one customer that accounted for approximately 25% and 59% in 1997 and 1998, respectively, of the Company's revenues. (13) RISK OF TECHNOLOGICAL CHANGE Contingencies and Factors that Could Affect Future Results A substantial portion of the Company's revenues each year are generated from the development of websites and market research performed over the Internet. In the extremely competitive industry environment in which the Company operates, such product generation, development and marketing processes are uncertain and complex, requiring accurate prediction of demand as well as successful management of various development risks inherent to the Internet. In light of these dependencies, it is possible that failure to successfully manage future changes in technology with respect to the Internet could have long-term impact on the Company's growth and results of operations. (14) SUBSEQUENT EVENTS The convertible promissory notes issued October 1997 were converted on October 9, 1998 to 732,895 shares of Series B Preferred Stock at $1.54 per share. The $600,000 bank line of credit, due October 1998, was subsequently amended. The new Agreement reduced the line to $500,000 and extends maturity through December 31, 1998. A warrant to purchase 16,234 shares of Series B Preferred Stock was granted in consideration for this Amendment. The fair value of the warrant of approximately $7,200 was calculated using the Black-Scholes pricing model under SFAS 123 and will be expensed in the first quarter of the fiscal year ending September 30, 1999. (15) UNAUDITED RECENT DEVELOPMENT On January 25, 1999, WebMD acquired all the issued and outstanding shares of the Company's common and preferred stock for 1,619,190 shares of WebMD's Series B preferred stock. F-124 463 SAPIENT HEALTH NETWORK, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1997 AND 1998 AND DECEMBER 31, 1998 (UNAUDITED) (16) RESTATEMENT The accompanying financial statements as of and for the periods indicated below have been restated to reflect the fair value of warrants issued during 1998:
AS PREVIOUSLY REPORTED RESTATED -------------------------------------- -------------------------------------- SEPTEMBER 30, 1998 DECEMBER 31, 1998 SEPTEMBER 30, 1998 DECEMBER 31, 1998 ------------------ ----------------- ------------------ ----------------- (UNAUDITED) (UNAUDITED) BALANCE SHEET: Convertible promissory notes....................... $ 5,523,795 $ 4,484,177 $ 5,294,966 $ 4,484,177 Total liabilities............. 7,573,567 7,818,450 7,344,738 7,818,720 Additional paid-in capital.... 906,496 944,194 884,620 915,150 Stock warrants................ -- -- 537,446 544,614 Accumulated deficit........... (10,883,495) (13,486,795) (11,170,236) (14,002,365) Total shareholders' deficit... (9,974,015) (12,539,558) (9,745,186) (12,539,558)
AS PREVIOUSLY REPORTED RESTATED --------------------------------------- --------------------------------------- YEAR ENDING THREE MONTHS ENDED YEAR ENDING THREE MONTHS ENDED SEPTEMBER 30, 1998 DECEMBER 31, 1998 SEPTEMBER 30, 1998 DECEMBER 31, 1998 ------------------ ------------------ ------------------ ------------------ (UNAUDITED) (UNAUDITED) STATEMENT OF OPERATIONS: Interest expense........... 347,980 117,484 684,721 346,313 Net loss................... (4,515,578) (2,494,620) (4,802,319) (2,723,449) Net loss attributed to common shareholders...... (4,860,004) (2,603,300) (5,146,745) (2,832,129) Net loss per common share -- basic and diluted.................. $ (2.35) $ (1.21) $ (2.49) $ (1.32)
F-125 464 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholder of The Stockton Group, Inc.: We have audited the accompanying statement of income of The Stockton Group, Inc. (the "Company") for the year ended June 30, 1997. This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statement of income is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statement of income. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall statement of income presentation. We believe that our audit of the statement of income provides a reasonable basis for our opinion. In our opinion, such statement of income presents fairly, in all material respects, the results of operations of the Company for the year ended June 30, 1997 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Charlotte, North Carolina October 7, 1997 F-126 465 THE STOCKTON GROUP, INC. STATEMENTS OF INCOME YEAR ENDED JUNE 30, 1997 AND THE THREE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
YEAR ENDED THREE MONTHS ENDED JUNE 30, 1997 SEPTEMBER 30, 1997 ------------- ------------------ (UNAUDITED) 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 =========== ==========
See notes to financial statement. F-127 466 THE STOCKTON GROUP, INC. NOTES TO FINANCIAL STATEMENT YEAR ENDED JUNE 30, 1997 AND THE THREE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED) (INFORMATION AS IT RELATES TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED) 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business -- The Stockton Group, Inc. (the "Company"), was incorporated as an S Corporation in the State of South Carolina in July 1993. The Company provides computer-based prescription drug claims processing to Pharmaceutical Benefit Managers ("PBMs"), Health Maintenance Organizations ("HMOs"), Preferred Provider Organizations ("PPOs"), insurance companies, Third-Party Administrators ("TPAs"), self-insured employers, and Taft-Hartley Funds. The Company's services range from claims processing to full-service program management, including eligibility verification, drug coverages and exclusions, concurrent utilization review, drug pricing verification, supply limitations and other applicable plan design requirements. The Company supports a network of over 40,000 pharmacies nationwide. In addition to claims processing fees, the Company receives rebate revenue from drug manufacturers for prescription drug transactions that are processed through the Company's system. Use of Estimates in the Preparation of Financial Statements -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Major Customers -- For the year ended June 30, 1997, three customers accounted for approximately 15%, 12% and 10%, respectively, of total revenues. Revenue Recognition -- Revenue from prescription drug claims processing services and rebates from drug manufacturers are recognized when the services are delivered. Property and Equipment -- Property and equipment is depreciated using the double-declining balance method over the estimated useful lives of the related assets. Assets under capital leases are depreciated using the straight-line method over the lease term. Income Taxes -- The Company has elected to be taxed as an S Corporation, and as such its income is included in the current taxable income of its stockholder. Accordingly, no provision has been made in the accompanying financial statements for federal or state income taxes. Unaudited Interim Financial Statement -- In the opinion of management, the unaudited statement of income for the three months ended September 30, 1997 is presented on a basis consistent with the audited statement of income and reflects all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results thereof. The results of operations for the three months ended September 30, 1997 is not necessarily indicative of the results to be expected for the entire year. 2. NOTE PAYABLE TO STOCKHOLDER The Company had a note payable to stockholder with an outstanding principal balance of $359,621 at June 30, 1997. The note bore interest at a rate of prime plus .25% (8.75% at June 30, 1997). 3. LEASE COMMITMENTS The Company leased certain equipment under operating leases expiring at various dates through April 2000. Rent expense for the year ended June 30, 1997 was approximately $12,000. F-128 467 THE STOCKTON GROUP, INC. NOTES TO FINANCIAL STATEMENT -- (CONTINUED) YEAR ENDED JUNE 30, 1997 AND THE THREE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED) (INFORMATION AS IT RELATES TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED) In addition, the Company leased its office facility and certain computer and office equipment under capital lease arrangements with interest rates ranging from 14.5% to 25%, expiring through July 2011. The lease arrangement for the office facility was with a corporation in which the Company's sole stockholder holds an ownership interest. 4. STOCK-BASED COMPENSATION ARRANGEMENTS During 1994, the Company granted a key employee the right to acquire common stock equivalent to a 25% equity ownership in the Company at no cost. The shares have not yet been issued. At the date of the grant, the Company recorded compensation cost equal to the fair market value of shares to be awarded to the executive. During 1997, the Company entered into an employment agreement with another new key executive. Among other things, the agreement granted the executive the right to acquire a 10% equity ownership in the Company at a nominal cost ($1.00) or, if the Company is sold within one year, to receive 10% of the sales proceeds as defined. Accordingly, the Company has recorded compensation cost in 1997, equal to the estimated cash settlement to be paid to the executive based upon the anticipated proceeds from the sale of the Company. (See Note 5). 5. SUBSEQUENT EVENT In November 1997, the Company sold certain computer equipment, intangible assets and the operations of the Company to MEDE America Corporation. All other assets and liabilities remained with the Company. The purchase price was $10,400,000 in cash. In addition, the purchase agreement requires additional consideration of up to $2,600,000 (plus interest at an annual rate of 7.25%) to be paid if Stockton's revenue during the 12-month period ended September 30, 1998 is at least $5,000,000. F-129 468 INDEPENDENT AUDITORS' REPORT The Board of Directors Healthcare Interchange, Inc.: We have audited the accompanying consolidated balance sheet of Healthcare Interchange, Inc. and subsidiary (Company) as of June 30, 1998, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for the nine-month period ended June 30, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As described in notes 3 and 15, on October 30, 1998, the Company completed the sale of its financial transactions business to MEDE America and the disposal of the assets and operations of the discontinued Telemedical and Intercare segments. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Healthcare Interchange, Inc. and subsidiary as of June 30, 1998, and the results of their operations and their cash flows for the nine-month period ended June 30, 1998, in conformity with generally accepted accounting principles. KPMG LLP St. Louis, Missouri September 8, 1998, except as to notes 3 and 15, which are as of October 30, 1998 F-130 469 HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
JUNE 30, SEPTEMBER 30, 1998 1998 ----------- ------------- (UNAUDITED) 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 =========== ===========
See accompanying notes to consolidated financial statements. F-131 470 HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
NINE-MONTH THREE-MONTH PERIOD ENDED PERIOD ENDED JUNE 30, 1998 SEPTEMBER 30, 1998 ------------- ------------------ (UNAUDITED) 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 =========== ==========
See accompanying notes to consolidated financial statements. F-132 471 HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) NINE-MONTH PERIOD ENDED JUNE 30, 1998 AND THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1998 (UNAUDITED)
TOTAL COMMON STOCK ADDITIONAL STOCKHOLDERS' PREFERRED ------------ PAID-IN ACCUMULATED EQUITY STOCK CLASS A CLASS B CLASS C CAPITAL DEFICIT (DEFICIT) --------- ------- ------- ------- ---------- ----------- ------------- 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) ======= ======= ======= ======= ========== =========== ===========
See accompanying notes to consolidated financial statements. F-133 472 HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE-MONTH THREE-MONTH PERIOD ENDED PERIOD ENDED JUNE 30, 1998 SEPTEMBER 30, 1998 ------------- ------------------ (UNAUDITED) 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 =========== =========
See accompanying notes to consolidated financial statements. F-134 473 HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 AND FOR THE NINE-MONTH PERIOD ENDED JUNE 30, 1998 1. ORGANIZATION AND BUSINESS Healthcare Interchange, Inc. was incorporated in 1991 and began operations in 1992. Healthcare Interchange, Inc. and subsidiary (Company) is in the business of providing electronic health data network services to a national clientele through three operating segments; financial transactions, medical televideo, and intercare. The financial transactions segment processes electronic claims for health care providers. The medical televideo segment develops, sells, and services televideo and minor medical equipment through a wholly owned subsidiary, HII Telemedical Corp. (Telemedical). The Intercare segment (Intercare) began operations in fiscal 1997, providing electronic claims processing and data analysis for health care providers. Prior to October 1, 1996, Intercare was a development stage enterprise. The consolidated financial statements at June 30, 1998 include the accounts of Healthcare Interchange, Inc. and its wholly owned domestic subsidiary after elimination of intercompany accounts and transactions. The Company's fiscal year end is September 30. Unaudited Interim Consolidated Financial Statements -- The consolidated balance sheet of the Company as of September 30, 1998 and the related consolidated statements of operations, changes in stockholders' equity (deficit) and cash flows for the three-month period ended September 30, 1998 included in the accompanying consolidated financial statements, which are unaudited, include the accounts of Healthcare Interchange, Inc. and its wholly-owned subsidiary. All significant intercompany accounts have been eliminated in consolidation. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included. Adjustments consist only of normal recurring items. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Cash and Cash Equivalents -- The Company considers cash equivalents to be securities held for cash management purposes having original maturities of three months or less at the time of investment. b. Inventories -- Inventories are stated at the lower of cost or market. Cost is determined principally using the specific identification method. Inventories at June 30, 1998 are comprised principally of raw materials. c. Property, Equipment and Computer Software -- Property, equipment and computer software are carried at cost. Depreciation and amortization is calculated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the lease term or estimated useful life of the asset. Costs associated with the internal development of software are capitalized once the marketability and technological feasibility of the software have been established. The property, equipment and computer software are depreciated on the straight-line basis over the following useful lives:
YEARS ----- Building.................................................... 28 Leasehold improvements...................................... 10 Furniture................................................... 7 Communications equipment.................................... 5 Computers and data handling equipment....................... 5 Purchased computer software................................. 5 Developed computer software................................. 3
F-135 474 HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1998 AND FOR THE NINE-MONTH PERIOD ENDED JUNE 30, 1998 d. Income Taxes -- Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those differences are expected to be recovered or settled. e. Revenue Recognition -- The Company recognizes revenue from the sale of its services in the period that the services are delivered or provided. Unearned income on service contracts is amortized by the straight-line method over the term of the contracts. Revenue from the sale of the Company's products is recognized in the period that the products are shipped to the customers. f. Stock-Based Compensation -- The Company uses the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related interpretations in accounting for its stock options. The Company has adopted the pro forma disclosures-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." g. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the period. Actual results may differ from those estimates. 3. DISCONTINUED OPERATIONS In fiscal 1999, the Company's Board of Directors approved a plan to discontinue the operations of its Televideo and Intercare operating segments; and on September 17, 1998, signed a letter of intent to sell substantially all the assets of the financial transactions business to MEDE America Corporation (MEDE America). See note 15. The Company's consolidated financial statements as of June 30, 1998 and for the nine-month period then ended include a charge of $2,073,601 to provide for an after-tax loss on the disposal of the discontinued operations, including estimated operating losses of $342,971 through the expected date of disposal. Operating results for the nine-month period ended June 30, 1998 and financial position as of June 30, 1998 of the discontinued segments are summarized below: Results of operations:
NINE-MONTH PERIOD ENDED JUNE 30, 1998 ------------------- Net revenues............................................... $ 528,552 Loss from discontinued operations.......................... (4,100,385) ===========
F-136 475 HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1998 AND FOR THE NINE-MONTH PERIOD ENDED JUNE 30, 1998 Financial position:
AS OF JUNE 30, 1998 ------------- Current: Accounts receivable, net............................... $162,271 Inventories............................................ 74,501 -------- $236,772 ======== Non-current -- property, equipment and computer software, net.................................................... $176,455 ========
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: 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 =======
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: 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 ==========
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-137 476 HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1998 AND FOR THE NINE-MONTH PERIOD ENDED JUNE 30, 1998 a fixed prime less 0.5% (8.0% at June 30, 1998) and requires monthly payments of interest, with the balance due on November 4, 1998. The average outstanding borrowings on the revolving credit facility was $500,000 at a weighted average interest weight of 8.1% for the nine-month period ended June 30, 1998. The revolving credit facility had a balance of $500,000 at June 30, 1998. On June 4, 1997, the Company entered into a revolving credit facility with a local bank which allows the Company to draw up to a maximum of $2,500,000. The revolving credit facility bears an interest rate of prime less 0.625% (7.88% at June 30, 1998), requires monthly payments of interest, and is secured by substantially all assets of the Company with the balance due on December 31, 1999. The average outstanding borrowings on the revolving credit facility was approximately $877,000 at a weighted average interest rate of 8.0% for the nine-month period ended June 30, 1998. The revolving credit facility had a balance of $1,010,000 at June 30, 1998. As of June 30, 1998, the carrying value of the Company's revolving credit facilities approximated fair value based upon borrowing rates currently available for debt instruments with similar remaining terms and maturities. The Company's $750,000 revolving credit facility and notes payable are secured by substantially all of the Company's assets. Additionally, the $500,000 and $2,500,000 revolving credit facilities are guaranteed by two of the Company's stockholders. The Company's commitment agreement with the local bank for the notes payable and revolving credit facilities contains restrictive covenants which include the maintenance of minimum tangible net worth, as defined, and certain financial ratios. The Company failed to meet certain covenant requirements which has placed the Company in technical default. Consequently, the Company has classified the entire outstanding balance of borrowings under the notes payable and revolving credit facilities as a current liability. 7. NOTES PAYABLE On February 28, 1995, the Company entered into a $300,000 note payable with a local bank. The note was paid in full by the Company in February 1998. The note payable accrued interest at a fixed rate of 9.0% and required monthly payments of principal and interest. On May 30, 1995, the Company entered into a $170,000 note payable with a local bank. The note bears interest at a fixed rate of 9.75%, requires monthly payments of principal and interest, with the balance due on May 30, 2000, and is secured by substantially all assets of the Company. The note is payable on demand, and accordingly, is classified as a current liability. The balance at June 30, 1998 was $73,751. 8. RELATED PARTY TRANSACTIONS During the nine-month period ended June 30, 1998, two stockholders provided network and other services to the Company. Total expenses incurred by the Company for these services totaled approximately $116,000 for the nine-month period ended June 30, 1998. At June 30, 1998, the Company owed approximately $152,000, to these stockholders for such services. Revenue received from services provided to stockholders totaled approximately $844,000 for the nine-month period ended June 30, 1998. Due from stockholders represents amounts receivable for services provided to the stockholders. F-138 477 HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1998 AND FOR THE NINE-MONTH PERIOD ENDED JUNE 30, 1998 9. LEASE COMMITMENTS The Company leases certain office space and equipment under various lease agreements. Rent expense of the continuing operations of the Company totaled $183,291 for the nine-month period ended June 30, 1998. Future minimum lease payments under noncancellable operating leases with maturities in excess of one year related to continuing operations are as follows: 1999........................................................ $238,240 2000........................................................ 240,133 2001........................................................ 212,320 2002........................................................ 208,969 2003........................................................ 199,460 Thereafter.................................................. 395,841
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-139 478 HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1998 AND FOR THE NINE-MONTH PERIOD ENDED JUNE 30, 1998 Aggregate information relating to stock option activity under the 1994 Plan and 1997 Plan for the nine-month period ended June 30, 1998 is as follows: 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
Aggregate information relating to stock options outstanding and stock options exercisable at June 30, 1998 is a follows: OPTIONS OUTSTANDING:
WEIGHTED AVERAGE OUTSTANDING AT REMAINING EXERCISE PRICE JUNE 30, 1998 CONTRACTUAL LIFE - -------------- -------------- ---------------- $ 24 9,999 6.25 100 12,850 9.25 ------ 22,849 ======
OPTIONS EXERCISABLE:
WEIGHTED AVERAGE OUTSTANDING AT REMAINING EXERCISE PRICE JUNE 30, 1998 CONTRACTUAL LIFE - -------------- -------------- ---------------- $24 9,999 3.72
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:
NINE-MONTH PERIOD ENDED JUNE 30, 1998 ------------------- Risk-free interest rate.................................... 8.5% Dividend yield............................................. 0.0% Volatility factor.......................................... 0.0% Weighted average expected life............................. 10 years
F-140 479 HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1998 AND FOR THE NINE-MONTH PERIOD ENDED JUNE 30, 1998 The Company's pro forma net loss compared to reported amounts are as follows:
NINE-MONTH PERIOD ENDED JUNE 30, 1998 ------------------- 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
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: Expected provision at statutory rate........................ $ 140,610 Nondeductible meals and entertainment....................... 9,894 State income taxes.......................................... 5,624 Change in valuation allowance............................... (156,128) --------- $ -- =========
F-141 480 HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1998 AND FOR THE NINE-MONTH PERIOD ENDED JUNE 30, 1998 The tax effects of temporary differences that give rise to the deferred tax assets and liability as of June 30, 1998 are as follows:
CURRENT NONCURRENT --------- ----------- 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)....................... $ -- -- ========= ===========
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-142 481 HEALTHCARE INTERCHANGE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1998 AND FOR THE NINE-MONTH PERIOD ENDED JUNE 30, 1998 15. EVENTS SUBSEQUENT TO BALANCE SHEET DATE Sale of Company's Capital Stock -- On October 30, 1998, the Company completed the sale of its financial transactions business to MEDE America. This transaction was effected through the sale of the Company's capital stock to MEDE America for cash of $11.6 million. Proceeds from the sale were used as follows: 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 ===========
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-143 482 ANNEX A AGREEMENT AND PLAN OF REORGANIZATION BY AND AMONG HEALTHEON CORPORATION WATER ACQUISITION CORP. AND WEBMD, INC. DATED AS OF MAY 20, 1999 483 TABLE OF CONTENTS
PAGE ---- 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
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PAGE ---- 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
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PAGE ---- 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
-IV- 486 INDEX OF EXHIBITS 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
***** -i- 487 AGREEMENT AND PLAN OF REORGANIZATION This AGREEMENT AND PLAN OF REORGANIZATION is made and entered into as of May 20, 1999, among Healtheon Corporation, a Delaware corporation ("PARENT"), Water Acquisition Corp., a Georgia corporation and a wholly-owned subsidiary of Parent ("MERGER SUB"), and WebMD, Inc., a Georgia corporation (the "COMPANY"). RECITALS A. Upon the terms and subject to the conditions of this Agreement and in accordance with the Georgia Business Corporation Code ("GEORGIA LAW"), Parent, Merger Sub and the Company intend to enter into a business combination transaction. B. The Board of Directors of the Company (i) has determined that the Merger (as defined in Section 1.1) is consistent with and in furtherance of the long-term business strategy of the Company and fair to, and in the best interests of, the Company and its stockholders, (ii) has approved this Agreement, the Merger and the other transactions contemplated by this Agreement and (iii) has determined to recommend that the stockholders of the Company adopt and approve this Agreement and approve the Merger. C. The Board of Directors of Parent (i) has determined that the Merger (as defined in Section 1.1) is consistent with and in furtherance of the long-term business strategy of Parent and fair to, and in the best interests of, Parent and its stockholders, (ii) has approved this Agreement, the Merger and the other transactions contemplated by this Agreement, and (iii) has determined to recommend that the stockholders of Parent approve the issuance of shares of Parent Common Stock (as defined below) pursuant to the Merger. D. Concurrently with the execution of this Agreement, and as a condition and inducement to Parent's and Company's respective willingness to enter into this Agreement, certain stockholders of the Company are entering into Voting Agreements in substantially the form attached hereto as Exhibit A-1 (the "COMPANY VOTING AGREEMENTS"), certain stockholders of the Company are entering into Conversion Agreements in substantially the form attached hereto as Exhibits B-1, B-2, B-3, and B-4 (the "COMPANY CONVERSION AGREEMENTS"), and Microsoft Corporation ("MICROSOFT") is entering into a Stockholder Agreement (the "MICROSOFT AGREEMENT") in substantially the form of Exhibit C, (Exhibit C is included in the definition of Company Voting Agreements for the purposes hereof). Certain Stockholders of Parent are entering into Voting Agreements in substantially the form attached hereto as Exhibit D (the "PARENT VOTING AGREEMENTS"). E. The parties intend, by executing this Agreement, to adopt a plan of reorganization within the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the "CODE"). NOW, THEREFORE, in consideration of the covenants, promises and representations set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: ARTICLE I THE MERGER 1.1 The Merger. At the Effective Time (as defined in Section 1.2) and subject to and upon the terms and conditions of this Agreement and the applicable provisions of Georgia Law, Merger Sub shall be merged with and into the Company (the "MERGER"), the separate corporate existence of Merger Sub shall cease and the Company shall continue as the surviving corporation. The Company, as the surviving -1- 488 corporation after the Merger, is hereinafter sometimes referred to as the "SURVIVING CORPORATION". Notwithstanding the foregoing: (a) Parent and the Company may, at any time prior to the mailing of the Proxy Statement/ Prospectus (as defined in Section 2.19 below), mutually agree to change the structure of the Merger to a forward triangular merger with the Company merging with and into Merger Sub and Merger Sub surviving the Merger. In such event, Merger Sub, as the surviving corporation after the Merger, is hereinafter sometimes referred to as the "SURVIVING CORPORATION". (b) Parent or the Company may, at any time prior to the mailing of the Proxy Statement/ Prospectus, reasonably require that the structure of the Merger be pursuant to a new Delaware corporation referred to herein as Newco would be formed by Parent and the Company solely for the purpose of the transactions contemplated hereunder; (i) a newly formed, wholly owned subsidiary of Newco incorporated in Delaware would be merged with and into Parent, with Parent being the surviving corporation of such merger (the "PARENT MERGER"), and all outstanding shares of Parent Common Stock would be converted, on a share for share basis, into shares of Newco Common Stock having identical rights, preferences and privileges, as shares of Parent Common Stock; and (ii) another newly formed, wholly owned subsidiary of Newco incorporated in Georgia would be merged with and into the Company, with the Company being the surviving corporation of such merger (the "COMPANY MERGER"), and all outstanding shares of Company Capital Stock will be automatically converted into the right to receive shares of Newco Common Stock in the same manner specified in Section 1.6(a) below as if the Newco Common Stock were Parent Common Stock; provided that each share of any series or class of Company Capital Stock that, as a separate voting group under Georgia Law has a right to approve the Company Merger as a separate voting group, does not in fact approve the Company Merger (a "NON APPROVING SERIES") outstanding prior to the Company Merger would remain outstanding as a share of the applicable series or class in the Company thereafter. For federal income tax purposes, it is intended that the Parent Merger and the Company Merger qualify as a reorganization under the provisions of Section 368(a) of the Internal Revenue Code and/or as an exchange under the provisions of Section 351(a) of the Internal Revenue Code. For purposes of this Agreement, the Parent Voting Agreements, the Company Voting Agreements and the Company Conversion Agreements, the term Merger as used herein and therein shall be deemed to mean the Parent Merger and/or the Company Merger, as applicable. If the alternative in this paragraph (b) is applicable, the parties shall execute an appropriate amendment to this Agreement to effect such changes as are necessary and appropriate to effect the structure of the Merger described in this paragraph and to provide that Newco shall cause the Company to honor the Company's warrants and to provide shares of Newco common stock upon exercise of such securities. 1.2 Effective Time; Closing. Subject to the provisions of this Agreement, the parties hereto shall cause the Merger to be consummated by filing Articles of Merger with the Secretary of State of the State of Georgia in accordance with the relevant provisions of Georgia Law (the "ARTICLES OF MERGER") (the time of such filing with the Secretary of State of the State of Georgia (or such later time as may be agreed in writing by the Company and Parent and specified in the Articles of Merger) being the "EFFECTIVE TIME") as soon as practicable on or after the Closing Date (as herein defined). Unless the context otherwise requires, the term "AGREEMENT" as used herein refers collectively to this Agreement and Plan of Reorganization and the Articles of Merger. The closing of the Merger (the "CLOSING") shall take place at the offices of Wilson Sonsini Goodrich & Rosati, Professional Corporation, at a time and date to be specified by the parties, which shall be no later than the second business day after the satisfaction or waiver of the conditions set forth in Article VI, or at such other time, date and location as the parties hereto agree in writing (the "CLOSING DATE"). 1.3 Effect of the Merger. At the Effective Time, the effect of the Merger shall be as provided in this Agreement and the applicable provisions of Georgia Law. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time all the property, rights, privileges, powers and franchises of the Company and Merger Sub shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and Merger Sub shall become the debts, liabilities and duties of the Surviving Corporation. -2- 489 1.4 Certificate of Incorporation; Bylaws. (a) Subject to Section 5.11, at the Effective Time, the Articles of Incorporation of Merger Sub, as in effect immediately prior to the Effective Time, shall be the Articles of Incorporation of the Surviving Corporation until thereafter amended as provided by law and such Articles of Incorporation of the Surviving Corporation; provided, however, that at the Effective Time the Articles of Incorporation of the Surviving Corporation shall be amended so that the name of the Surviving Corporation shall be "WebMD, Inc." (b) The Bylaws of Merger Sub, as in effect immediately prior to the Effective Time, shall be, at the Effective Time, the Bylaws of the Surviving Corporation until thereafter amended. 1.5 Directors and Officers. The initial directors of the Surviving Corporation shall be the directors of Merger Sub immediately prior to the Effective Time, until their respective successors are duly elected or appointed and qualified. The initial officers of the Surviving Corporation shall be the officers of the Company immediately prior to the Effective Time, until their respective successors are duly appointed. 1.6 Effect on Capital Stock. Subject to the terms and conditions of this Agreement, at the Effective Time, by virtue of the Merger and without any action on the part of Merger Sub, the Company or the holders of any of the following securities, the following shall occur: (a) Conversion of Company Capital Stock. Each share of Common Stock of the Company ("COMPANY COMMON STOCK") issued and outstanding immediately prior to the Effective Time, other than any Dissenting Shares (as defined in Section 1.7(a) hereof), and other than any shares of the Company Capital Stock to be canceled pursuant to Section 1.6(b), will be canceled and extinguished and automatically converted, without regard to any conversion rights contained in the Company's Articles of Incorporation, into the right to receive 1.815 shares of Parent Common Stock (the "EXCHANGE RATIO") (subject to Section 1.6(f)) upon surrender of the certificate representing such share of the Company Capital Stock in the manner provided in Section 1.7 (or in the case of a lost, stolen or destroyed certificate, upon delivery of an affidavit (and bond, if required) in the manner provided in Section 1.10). Each share of Preferred Stock of the Company ("COMPANY PREFERRED STOCK" and together with the Company Common Stock, the "COMPANY CAPITAL STOCK") issued and outstanding immediately prior to the Effective Time (other than Dissenting Shares) will be cancelled and extinguished and automatically converted without regard to any conversion rights or rights to receive any liquidation or other preference contained in the Company's Articles of Incorporation into the right to receive a number of shares of Parent Common Stock equal to (i) the Exchange Ratio (subject to Section 1.6(f)) multiplied by (ii) the number of shares of Company Common Stock into which such share of Company Preferred Stock is convertible immediately prior to the Effective Time (without giving effect to any limitations on the exercise of such conversion right), upon surrender of the certificate representing such Company Preferred Stock, in the manner provided in Section 1.7 (or in the case of a lost, stolen or destroyed certificate, upon delivery of an affidavit (and bond) if required) in the manner provided in Section 1.10. If any shares of Company Capital Stock outstanding immediately prior to the Effective Time (but giving effect to the Merger) are unvested or are subject to a repurchase option, risk of forfeiture or other similar condition under any applicable restricted stock purchase agreement or other similar agreement with the Company, then the shares of Parent Common Stock issued in exchange for such shares of Company Capital Stock will also be unvested and subject to the same repurchase option, risk of forfeiture or other similar condition (except as provided in the applicable agreement or plan), and the certificates representing such shares of Parent Common Stock may accordingly be marked with appropriate legends. The Company shall take all action that may be necessary to ensure that, from and after the Effective Time, Parent or the Surviving Corporation is entitled to exercise any such repurchase option or other right set forth in any such restricted stock purchase agreement or other similar agreement. (b) Cancellation of Parent-Owned Stock. Each share of Company Capital Stock held by the Company or owned by Merger Sub, Parent or any direct or indirect wholly-owned subsidiary of the Company or of Parent immediately prior to the Effective Time shall be canceled and extinguished without any conversion thereof. -3- 490 (c) Stock Options; Employee Stock Purchase Plans; Warrants. At the Effective Time, all options to purchase Company Capital Stock then outstanding under the WebMD, Inc. Amended and Restated 1997 Stock Incentive Plan (the "1997 Plan"), the Director Stock Option Plan of WebMD, Inc. (the "Director Plan"), the Direct Medical Knowledge, Inc. 1997 Stock Option/Stock Issuance Plan, which was assumed by the Company in connection with its acquisition of Director Medical Knowledge, Inc. (the "DMK Plan"), the Sapient Health Network, Inc. 1996 Stock Incentive Plan, which the Company assumed in connection with its acquisition of Sapient Health Network, Inc. (the "SHN Plan"), and the Employment Agreement dated as of September 30, 1998 between the Company and Jeffrey T. Arnold (the "ARNOLD EMPLOYMENT AGREEMENT" and, together with the 1997 Plan, the Director Plan, the DMK Plan and the SHN Plan, the "COMPANY STOCK OPTION PLANS") shall be assumed by Parent in accordance with Section 5.9 hereof. At the Effective Time, the issued and outstanding warrants to purchase Company Capital Stock set forth on Part 2.2 of the Company Schedules (collectively, the "WARRANTS") shall be, in connection with the Merger, assumed by Parent in accordance with Section 5.9. Part 2.2 of the Company Schedules describes, with respect to each warrant outstanding, the number of shares of Company Capital Stock into which such warrant may be exercised, the exercise price, the name and address of the holder of record, the grant date, the termination date, whether such warrant has registration rights, and, if applicable, a description of such registration rights and whether cashless exercise of such warrant is permissible. (d) Capital Stock of Merger Sub. Each share of Common Stock of Merger Sub (the "MERGER SUB COMMON STOCK") issued and outstanding immediately prior to the Effective Time shall be converted into one validly issued, fully paid and nonassessable share of Common Stock of the Surviving Corporation. Each certificate evidencing ownership of shares of Merger Sub Common Stock shall evidence ownership of such shares of capital stock of the Surviving Corporation. (e) Fractional Shares. No fraction of a share of Parent Common Stock will be issued by virtue of the Merger, but in lieu thereof each holder of shares of Company Capital Stock who would otherwise be entitled to a fraction of a share of Parent Common Stock (after aggregating all fractional shares of Parent Common Stock that otherwise would be received by such holder) shall, upon surrender of such holder's Certificate(s) (as defined in Section 1.8(c)), receive from Parent an amount of cash (rounded to the nearest whole cent), without interest, equal to the product of (i) such fraction, multiplied by (ii) the average closing price of one share of Parent Common Stock for the ten (10) most recent days that Parent Common Stock has traded ending on the trading day ending one day prior to the Closing Date, as reported on the Nasdaq National Market System ("NASDAQ"). (f) Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted to reflect appropriately the effect of any stock split, reverse stock split, stock dividend (including any dividend or distribution of securities convertible into Parent Common Stock or Company Capital Stock), reorganization, recapitalization, reclassification or other like change with respect to Parent Common Stock or Company Capital Stock occurring on or after the date hereof and prior to the Effective Time. 1.7 Dissenting Shares. (a) Notwithstanding any other provisions of this Agreement to the contrary, any shares of Company Capital Stock held by a holder who has exercised dissenters' rights for such shares in accordance with Georgia Law and who, as of the Effective Time, has not effectively withdrawn or lost such dissenters' rights ("DISSENTING SHARES"), shall not be converted into or represent a right to receive the consideration for Company Capital Stock set forth in Section 1.6 hereof, but the holder thereof shall only be entitled to such rights as are provided by Georgia Law. (b) Notwithstanding the provisions of Section 1.7(a) hereof, if any holder of Dissenting Shares shall effectively withdraw or lose (through failure to perfect or otherwise) such holder's dissenters' rights under Georgia Law, then, as of the later of the Effective Time and the occurrence of such event, such holder's shares shall automatically be converted into and represent only the right to receive the consideration for Company Capital Stock set forth in Section 1.6 hereof, without interest thereon, upon surrender of the certificate representing such shares. -4- 491 (c) The Company shall give Parent (i) prompt notice of any written demand for appraisal received by the Company pursuant to the applicable provisions of Georgia Law; and (ii) the opportunity to participate in all negotiations and proceedings with respect to such demands. The Company shall not, except with the prior written consent of Parent, make any payment with respect to any such demands or offer to settle or settle any such demands. 1.8 Surrender of Certificates. (a) Exchange Agent. Parent shall select an institution reasonably satisfactory to the Company to act as the exchange agent (the "EXCHANGE AGENT") in the Merger. (b) Parent to Provide Common Stock. Promptly after the Effective Time, Parent shall make available to the Exchange Agent for exchange in accordance with this Article I, the shares of Parent Common Stock issuable pursuant to Section 1.6 in exchange for outstanding shares of Company Capital Stock, and cash in an amount sufficient for payment in lieu of fractional shares pursuant to Section 1.6(e) and any dividends or distributions which holders of shares of Company Capital Stock may be entitled pursuant to Section 1.8(d). (c) Exchange Procedures. Promptly after the Effective Time, Parent shall cause the Exchange Agent to mail to each holder of record (as of the Effective Time) of a certificate or certificates (the "CERTIFICATES") which immediately prior to the Effective Time represented outstanding shares of Company Capital Stock whose shares were converted into the right to receive shares of Parent Common Stock pursuant to Section 1.6, cash in lieu of any fractional shares pursuant to Section 1.6(f) and any dividends or other distributions pursuant to Section 1.8(d), (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent and shall be in such form and have such other provisions as Parent may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for certificates representing shares of Parent Common Stock, cash in lieu of any fractional shares pursuant to Section 1.6(e) and any dividends or other distributions pursuant to Section 1.8(d). Upon surrender of Certificates for cancellation to the Exchange Agent or to such other agent or agents as may be appointed by Parent, together with such letter of transmittal, duly completed and validly executed in accordance with the instructions thereto, the holders of such Certificates shall be entitled to receive in exchange therefor certificates representing the number of whole shares of Parent Common Stock, payment in lieu of fractional shares which such holders have the right to receive pursuant to Section 1.6(e) and any dividends or distributions payable pursuant to Section 1.8(d), and the Certificates so surrendered shall forthwith be canceled. Until so surrendered, outstanding Certificates will be deemed from and after the Effective Time, for all corporate purposes, subject to Section 1.8(d) as to the payment of dividends, to evidence the ownership of the number of full shares of Parent Common Stock, into which such shares of Company Capital Stock shall have been so converted and the right to receive an amount in cash in lieu of the issuance of any fractional shares in accordance with Section 1.6(e) and any dividends or distributions payable pursuant to Section 1.8(d). (d) Distributions With Respect to Unexchanged Shares. No dividends or other distributions declared or made after the date of this Agreement with respect to Parent Common Stock with a record date after the Effective Time will be paid to the holders of any unsurrendered Certificates with respect to the shares of Parent Common Stock represented thereby until the holders of record of such Certificates shall surrender such Certificates. Subject to applicable law, following surrender of any such Certificates, the Exchange Agent shall deliver to the record holders thereof, without interest, certificates representing whole shares of Parent Common Stock issued in exchange therefor along with payment in lieu of fractional shares pursuant to Section 1.6(e) hereof and the amount of any such dividends or other distributions with a record date after the Effective Time payable with respect to such whole shares of Parent Common Stock. (e) Transfers of Ownership. If certificates for shares of Parent Common Stock are to be issued in a name other than that in which the Certificates surrendered in exchange therefor are registered, it will be a condition of the issuance thereof that the Certificates so surrendered will be properly endorsed and -5- 492 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 -6- 493 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 -7- 494 1,180,000 shares of Series F Preferred Stock are authorized of which 751,546 shares would be issued and outstanding assuming No Tender or Exercise and 1,034,725 shares would be issued and outstanding assuming a Full Tender and Exercise. Subject to the assumptions set forth above, there are no other authorized, issued or outstanding shares of capital stock of the Company. All of the outstanding shares of Company Capital Stock have been duly authorized and validly issued, and are fully paid and nonassessable. As of the date of this Agreement, there are no shares of Company Capital Stock held in treasury by the Company. Upon consummation of the Merger, (A) the shares of Parent Common Stock issued in exchange for any shares of Company Capital Stock that are subject to a Contract pursuant to which the Company has the right to repurchase, redeem or otherwise reacquire any shares of Company Capital Stock will, without any further act of Parent, the Company or any other person, become subject to the restrictions, conditions and other provisions contained in such Contract, and (B) Parent will automatically succeed to and become entitled to exercise the Company's rights and remedies under any such Contract. (b) As of the date of this Agreement and assuming No Tender or Exercise, 8,869,896 shares of Company Capital Stock are subject to issuance pursuant to outstanding options to purchase Company Capital Stock under the Company Stock Option Plans of which (i) 6,916,272 shares of Series D Common Stock are subject to issuance (and reserved for issuance) pursuant to outstanding options to purchase Series D Common Stock under the 1997 Plan, (ii) 311,535 shares of Series D Common Stock are subject to issuance (and reserved for issuance) pursuant to options to purchase Series D Common Stock under the Director Plan, (iii) 257,489 shares of Series B Preferred Stock are subject to issuance (and reserved for issuance) pursuant to outstanding options to purchase Series B Preferred Stock under the DMK Plan and the SHN Plan and (iv) 1,384,600 shares of Series D Common Stock are subject to issuance (and reserved for issuance) pursuant to outstanding options to purchase Series D Common Stock under the Arnold Employment Agreement (stock options granted by the Company pursuant to the Company Stock Option Plans are referred to in this Agreement as "COMPANY OPTIONS"). As of the date of this Agreement and assuming a Full Tender and Exercise, 7,800,592 shares of Company Capital Stock are subject to issuance pursuant to outstanding options to purchase Company Capital Stock under the Company Stock Option Plans. As of the date of this Agreement and assuming No Tender or Exercise, 13,157,283 shares of Company Capital Stock are subject to issuance pursuant to the exercise of warrants as set forth on Part 2.2 of the Company Schedules, of which (i) 12,494,916 shares of Series D Common Stock are subject to issuance pursuant to the exercise of warrants as set forth on Part 2.2 of the Company Schedules; (ii) 260,000 shares of Series A Preferred Stock are subject to issuance pursuant to the exercise of warrants as set forth on Part 2.2 of the Company Schedules; (iii) 12,286 shares of Series B Preferred Stock are subject to issuance pursuant to the exercise of warrants as set forth on Part 2.2 of the Company Schedules; (iv) 200,000 shares of Series C Preferred Stock are subject to issuance pursuant to the exercise of warrants as set forth on Part 2.2 of the Company Schedules, and (v) 190,081 shares of Series F Preferred Stock are subject to issuance pursuant to the exercise of warrants as set forth on Part 2.2 of the Company Schedules. As of the date of this Agreement and assuming a Full Tender and Exercise, 856,538 shares of Company Capital Stock are subject to issuance pursuant to the exercise of the Warrants. Each Company Option and Warrant by its terms may be treated in and by virtue of the Merger strictly in accordance with the terms of Section 5.9(a) or 5.9(c) as appropriate, without any requirement that any holder of any such Warrant or Company Option (or any other party) receive any notice or be required to consent in any manner. Part 2.2(b) of the Company Schedules sets forth the following information with respect to each Company Option outstanding as of the date of this Agreement assuming No Tender or Exercise and a Full Tender and Exercise: (i) the name and address of the optionee; (ii) the particular plan pursuant to which such Company Option was granted; (iii) the number of shares of Company Common Stock subject to such Company Option; (iv) the exercise price of such Company Option; (v) the date on which such Company Option was granted; (vi) the applicable vesting schedule; (vii) the date on which such Company Option expires; and (viii) whether the exercisability of such option will be accelerated in any way by the transactions contemplated by this Agreement, and indicates the extent of acceleration. The Company has made available to Parent accurate and complete copies of all stock option plans pursuant to which the Company has granted stock options that are currently outstanding and the -8- 495 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, -9- 496 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. -10- 497 (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 -11- 498 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. -12- 499 (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 -13- 500 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. -14- 501 (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 -15- 502 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 -16- 503 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 -17- 504 (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 -18- 505 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 -19- 506 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 -20- 507 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. -21- 508 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. -22- 509 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. -23- 510 (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 -24- 511 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 -25- 512 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. -26- 513 (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. -27- 514 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. -28- 515 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 -29- 516 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. -30- 517 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 -31- 518 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; -32- 519 (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 -33- 520 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; -34- 521 (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 -35- 522 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 -36- 523 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. -37- 524 (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 -38- 525 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 -39- 526 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 -40- 527 (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 -41- 528 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. -42- 529 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. -43- 530 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. -44- 531 (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. -45- 532 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 -46- 533 understood that Parent may not terminate this Agreement pursuant to this paragraph (g) if it shall have materially breached this Agreement or if such breach by the Company is cured prior to the End Date). 7.2 Notice of Termination; Effect of Termination. Any termination of this Agreement under Section 7.1 above will be effective immediately upon the delivery of a valid written notice of the terminating party to the other parties hereto. In the event of the termination of this Agreement as provided in Section 7.1, this Agreement shall be of no further force or effect, except (i) as set forth in Section 5.4, this Section 7.2, Section 7.3 and Article 8 (miscellaneous), each of which shall survive the termination of this Agreement, and (ii) nothing herein shall relieve any party from liability for any willful breach of this Agreement. No termination of this Agreement shall affect the obligations of the parties contained in the Confidentiality Agreement, all of which obligations shall survive termination of this Agreement in accordance with their terms. 7.3 Fees and Expenses. All fees and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses whether or not the Merger is consummated; provided, however, that Parent and the Company shall share equally all fees and expenses, other than attorneys' and accountants fees and expenses, incurred in relation to the printing and filing (with the SEC) of the Prospectus/Proxy Statement (including any preliminary materials related thereto) and the Registration Statement (including financial statements and exhibits) and any amendments or supplements thereto. 7.4 Amendment. Subject to applicable law, this Agreement may be amended by the parties hereto at any time prior to the Effective Time by execution of an instrument in writing signed on behalf of each of Parent and the Company. 7.5 Extension; Waiver. At any time prior to the Effective Time any party hereto may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties made to such party contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions for the benefit of such party contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. Delay in exercising any right under this Agreement shall not constitute a waiver of such right. ARTICLE VIII GENERAL PROVISIONS 8.1 Non-Survival of Representations and Warranties. The representations and warranties of the Company, Parent and Merger Sub contained in this Agreement shall terminate at the Effective Time, and only the covenants that by their terms survive the Effective Time shall survive the Effective Time. 8.2 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by commercial delivery service, or sent via telecopy (receipt confirmed) to the parties at the following addresses or telecopy numbers (or at such other address or telecopy numbers for a party as shall be specified by like notice): if to Parent or Merger Sub, to: Healtheon Corporation 4600 Patrick Henry Road Santa Clara, CA 95054 Attention: Jack Dennison, General Counsel Telephone No.: (408) 876-5000 Telecopy No.: (408) 876-5175 -47- 534 with a copy to: Wilson Sonsini Goodrich & Rosati Professional Corporation 650 Page Mill Road Palo Alto, California 94304-1050 Attention: Larry W. Sonsini Marty W. Korman Daniel R. Mitz Telephone No.: (650) 493-9300 Telecopy No.: (650) 493-6811 If to the Company, to: WebMD, Inc. 400 The Lenox Building 3399 Peachtree Road NE Atlanta, GA 30326 Attention: W. Michael Heekin, Executive Vice President, Strategic Relations Telephone No.: (404) 479-7600 Telecopy No.: (404) 479-7651 with copies to: Nelson Mullins Riley & Scarborough, L.L.P. Bank of America Corporate Center Suite 2600 Charlotte, North Carolina 28204 Atlanta, GA 30309 Attention: H. Bryan Ives III C. Mark Kelly Telephone No.: (704) 417-3000 Telecopy No.: (704) 377-4814 Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, New York 10019 Attention: Eric S. Robinson, Esq. Telephone No.: (212) 403-1000 Telecopy No.: (212) 403-2000 8.3 Interpretation; Knowledge. (a) When a reference is made in this Agreement to Exhibits, such reference shall be to an Exhibit to this Agreement unless otherwise indicated. When a reference is made in this Agreement to Sections, such reference shall be to a Section of this Agreement unless otherwise indicated the words "INCLUDE," "INCLUDES" and "INCLUDING" when used herein shall be deemed in each case to be followed by the words "without limitation." The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. When reference is made herein to "THE BUSINESS OF" an entity, such reference shall be deemed to include the business of all direct and indirect subsidiaries of such entity. Reference to the subsidiaries of an entity shall be deemed to include all direct and indirect subsidiaries of such entity. (b) For purposes of this Agreement the term "KNOWLEDGE" means with respect to a party hereto, with respect to any matter in question, that any of the Chief Executive Officer, Chief Financial Officer, General Counsel or Controller of such party, has actual knowledge of such matter. -48- 535 (c) For purposes of this Agreement, the term "MATERIAL ADVERSE EFFECT" when used in connection with an entity means any change, event, violation, inaccuracy, circumstance or effect that is materially adverse to the business, assets (including intangible assets), financial condition or results of operations of such entity taken as a whole with its subsidiaries. (d) For purposes of this Agreement, the term "PERSON" shall mean any individual, corporation (including any non-profit corporation), general partnership, limited partnership, limited liability partnership, joint venture, estate, trust, company (including any limited liability company or joint stock company), firm or other enterprise, association, organization, entity or Governmental Entity. 8.4 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party, it being understood that all parties need not sign the same counterpart. 8.5 Entire Agreement; Third Party Beneficiaries. This Agreement and the documents and instruments and other agreements among the parties hereto as contemplated by or referred to herein, including the Company Schedules and the Parent Schedules (a) constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, it being understood that the Confidentiality Agreement shall continue in full force and effect until the Closing and shall survive any termination of this Agreement; and (b) are not intended to confer upon any other person any rights or remedies hereunder, except as specifically provided in Section 5.11. 8.6 Severability. In the event that any provision of this Agreement or the application thereof, becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement will continue in full force and effect and the application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. The parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of such void or unenforceable provision. 8.7 Remedies. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such party, and the exercise by a party of any one remedy will not preclude the exercise of any other remedy. 8.8 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts of law thereof. 8.9 Rules of Construction. The parties hereto agree that they have been represented by counsel during the negotiation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document. 8.10 Assignment. No party may assign either this Agreement or any of its rights, interests, or obligations hereunder without the prior written approval of the other parties. Subject to the preceding sentence, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. 8.11 WAIVER OF JURY TRIAL. EACH OF PARENT, THE COMPANY AND MERGER SUB HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE ACTIONS OF PARENT, THE COMPANY OR MERGER SUB IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT HEREOF. -49- 536 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized respective officers as of the date first written above. HEALTHEON CORPORATION By: --------------------------------------- Name: ------------------------------------- Title: -------------------------------------- WATER ACQUISITION CORP. By: --------------------------------------- Name: ------------------------------------- Title: -------------------------------------- WEBMD, INC. By: --------------------------------------- Name: ------------------------------------- Title: -------------------------------------- **** REORGANIZATION AGREEMENT **** -50- 537 LIMITED WAIVER AND FIRST AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION THIS LIMITED WAIVER AND FIRST AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION (the "First Amendment") is made and entered into as of September 1, 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 Parent, Merger Sub and the Company entered into the Agreement and Plan of Reorganization dated May 20, 1999 (the "Merger Agreement") and desire to waive or amend certain provisions of the Merger Agreement in accordance with the terms of this First Amendment. Capitalized terms used herein which are not otherwise defined shall have the meanings set forth in the Merger Agreement. NOW, THEREFORE, for good and valuable consideration, the parties hereto, intending to be legally bound, agree as follows: 1. Stock Options. Part 2.2(b) of the Company Schedules (Option Schedule) is hereby amended to reflect that the Company Options held by Robert K. Draughon and Michael W. Heekin will not be accelerated as a result of the transactions contemplated by the Merger Agreement. 2. Stockholder Vote. Part 2.4 of the Company Schedules (Requisite Vote of Stockholders to Approve Agreement) is hereby deleted in its entirety and Part 2.4 of the Company Schedules attached hereto is substituted in lieu thereof to accurately reflect the requisite vote of the stockholders of the Company to approve and adopt the Merger Agreement and the Merger. 3. Medcast Transaction. On June 30, 1999 Healtheon/WebMD Corporation, a Delaware corporation ("Healtheon/WebMD"), agreed to acquire Greenberg News Networks, Inc. ("Medcast") pursuant to an Agreement and Plan of Reorganization by and among Healtheon/WebMD, Parent, the Company and Medcast (the "Medcast Agreement"). In connection therewith: (a) Notwithstanding Sections 4.1(f) and (h) and Sections 4.2(f) and (h) of the Merger Agreement, the Company and Parent agree to acquire Medcast and consummate the transactions contemplated by the Medcast Agreement. (b) The Medcast Agreement and the disclosure letter of Medcast attached to the Medcast Agreement is attached hereto as Annex I, and is incorporated by reference in the Parent Schedules and the Company Schedules. Any disclosure contained in Annex I shall be deemed to be disclosed in any appropriate section or sections of the Parent Schedules and the Company Schedules to the extent the Healtheon/WebMD, Parent or the Company has agreed to consummate, or does consummate, the acquisition of Medcast. The accuracy or completeness of any information or disclosure contained in Annex I is confirmed only as of the date of the Medcast Agreement. (c) Provided that the Merger Agreement has not been terminated in accordance with its terms, the Company and Parent shall act jointly with respect to any matter calling for action by the Company pursuant to the Medcast Agreement and any exhibit thereto. (d) The number of stock options for Company Common Stock (700,000 as appropriately adjusted for stock splits and the like) that the Company is permitted to issue pursuant to Section 4.1(f) of the Merger Agreement is hereby reduced by the number of shares that the Company commits to granting to certain employees of Medcast after the consummation of the acquisition of Medcast. The Company currently anticipates that the number of shares of -51- 538 Company Common Stock that such employees of Medcast will receive is 300,000 (as appropriately adjusted for stock splits and the like). 4. Gilbertson Termination. Notwithstanding Section 4.1 of the Merger Agreement, Parent hereby consents to the termination of Jay Gilbertson as the President and Chief Operating Officer of the Company. 5. Modification of McKesson Strategic Relationships. (a) Notwithstanding Section 4.1 of the Merger Agreement, Parent hereby consents to the modification of the strategic relationships with McKesson HBOC, Inc. ("McKesson") and its subsidiary, HBO & Company ("HBOC"), pursuant to the terms and conditions set forth in the Agreement dated as of September 1, 1999 (the "McKesson Agreement") among McKesson, HBOC, the Company, Parent and Healtheon/WebMD, including the issuance of warrants entitling HBOC to acquire (A) 1,837,417 shares of the Company's Series F Common Stock at a price per share equal to $91.34, (B) 2,783,965 shares of the Company's Series F Common Stock at a price per share equal to $54.17 and (C) 66,667 shares of the Company's Series F Common Stock at a price per share equal to $20.00. As a result of the McKesson Agreement and the Exchange Ratio Side Letter dated May 20, 1999 between the Company and Parent, Section 1.6(a) of the Merger Agreement is hereby amended by deleting "1.815" in the fifth (5th) line and substituting in lieu thereof "1.796" as the Exchange Ratio. The Company Schedules and the Parent Schedules are hereby amended to give effect to the matters, terms and conditions set forth in the McKesson Agreement. (b) Notwithstanding Section 4.1(g) of the Merger Agreement, Parent hereby consents to the amendment to the Articles of Incorporation of the Company, in the form attached as Exhibit 2.4 to the McKesson Agreement, to create 5,000,000 shares of Series F Common Stock of the Company which will be reserved for issuance to HBOC upon exercise of the warrants issued pursuant to the McKesson Agreement. 6. Sale of Series E Preferred Stock; Issuance of McKesson Warrants. Section 4.1(f) of the Merger Agreement is hereby amended by deleting the word "and" immediately before (iv) and inserting after "6.3(j)" the following phrases: ", and (v) the issuance of up to 4,614 shares of the Company's Series E Preferred Stock to investors other than Microsoft at a price per share not less than $541.70 pursuant to the Investment Agreement." 7. Strategic Investors. Section 6.3(j) of the Merger Agreement is hereby deleted in its entirety and the following Section 6.3(j) is inserted in lieu thereof: "(j) Strategic Investors. (i) By June 30, 1999, the Company shall have received an amount equal to $147,500,576 in exchange for the sale of 272,292 shares of the Company's Series E Preferred Stock to investors other than Microsoft pursuant to the Investment Agreement, and (ii) by June 30, 1999, the Company shall have received an amount equal to $9,999,998 in exchange for the sale of 184,604 shares of the Company's Series D Common Stock to investors other than Microsoft pursuant to an agreement substantially similar to the Investment Agreement." 8. MEDE AMERICA Amendment. Notwithstanding Section 4.2(n) of the Merger Agreement, the Company hereby consents to the amendment of the MEDE Agreement pursuant to the terms and conditions set forth in the First Amendment dated August 2, 1999 (the "MEDE Amendment") among Parent, MEDE AMERICA and Merc Acquisition Corp. Notwithstanding the MEDE Amendment, the provisions of Section 4.2(k) of the Merger Agreement shall remain in full force and effect. 9. Limitation of Waiver. Without limiting the generality of the provisions of Section 7.5 to the Merger Agreement, the waivers and agreements set forth above shall be limited to the matters expressly covered, and nothing in this First Amendment shall be deemed to constitute a waiver or -52- 539 modification of any other term, provision or condition of the Merger Agreement. Except as expressly set forth herein, the terms, provisions and conditions of the Merger Agreement shall remain in full force and effect and in all other respects are hereby ratified and confirmed. 10. General Provisions. (a) On and after the date hereof, each reference in the Merger Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import referring to the Merger Agreement shall mean and be a reference to the Merger Agreement as amended by the First Amendment. (b) This First Amendment may be executed in any number of counterparts, and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts taken together shall constitute but one and the same agreement. This First Amendment shall become effective upon the execution of a counterpart by Parent, the Merger Sub and the Company. (c) This First Amendment 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. (d) The Merger Agreement, this First Amendment and the documents and instruments and other agreements among the parties hereto as contemplated by or referred to therein, including the Company Schedules and the Parent Schedules (i) 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 the Merger Agreement; and (ii) are not intended to confer upon any other person any rights or remedies thereunder or hereunder, except as specifically provided in Section 5.11 of the Merger Agreement. (e) In the event that any provision of this First Amendment or the application thereof, becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this First Amendment 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 First Amendment 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. (f) The parties hereto agree that they have been represented by counsel during the negotiation and execution of this First Amendment 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. (g) 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 FIRST AMENDMENT OR THE ACTIONS OF PARENT, THE COMPANY OR MERGER SUB IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT HEREOF. -53- 540 IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be executed and delivered by their authorized respective officers as of the date first written above. HEALTHEON CORPORATION By: -------------------------------------- Name: -------------------------------------- Title: -------------------------------------- WATER ACQUISITION CORP. By: -------------------------------------- Name: -------------------------------------- Title: -------------------------------------- WEBMD, INC. By: -------------------------------------- Name: -------------------------------------- Title: -------------------------------------- -54- 541 PART 2.4 REQUISITE VOTE OF STOCKHOLDERS TO APPROVE AGREEMENT 1. A majority of the issued and outstanding shares of (i) Common Stock of the Company without series designation, (ii) Series B Common Stock, (iii) Series C Common Stock, (iv) Series D Common Stock, (v) Series E Common Stock, (vi) Series F Common Stock, and (vii) Series A Preferred Stock (on an as converted to Common Stock basis), voting together as a single voting group. 2. A majority of the issued and outstanding shares of Series B Common Stock. 3. A majority of the issued and outstanding shares of (i) Series C Common Stock and (ii) Series E Common Stock, voting together as a single voting group. -55- 542 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 543 TABLE OF CONTENTS
PAGE ---- ARTICLE I THE MERGER............................................... 1 The Merger.................................................. 1 1.1 Effective Time; Closing..................................... 1 1.2 Effect of the Merger........................................ 2 1.3 Certificate of Incorporation; Bylaws........................ 2 1.4 Directors and Officers...................................... 2 1.5 Effect on Capital Stock..................................... 2 1.6 Surrender of Certificates................................... 4 1.7 No Further Ownership Rights in Company Common Stock......... 5 1.8 Lost, Stolen or Destroyed Certificates...................... 5 1.9 Tax Consequences............................................ 5 1.10 Taking of Necessary Action; Further Action.................. 5 1.11 ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY........... 5 Organization of the Company................................. 6 2.1 Company Capital Structure................................... 6 2.2 Obligations With Respect to Capital Stock................... 7 2.3 Authority; Non-Contravention................................ 8 2.4 SEC Filings; Company Financial Statements................... 9 2.5 Absence of Certain Changes or Events........................ 9 2.6 Taxes....................................................... 10 2.7 Title to Properties; Absence of Liens and Encumbrances...... 11 2.8 Intellectual Property....................................... 12 2.9 Compliance; Permits; Restrictions........................... 14 2.10 Litigation.................................................. 14 2.11 Brokers' and Finders' Fees.................................. 15 2.12 Transactions with Affiliates................................ 15 2.13 Employee Benefit Plans...................................... 15 2.14 Environmental Matters....................................... 18 2.15 Year 2000 Compliance........................................ 18 2.16 Agreements, Contracts and Commitments....................... 18 2.17 Change of Control Payments.................................. 20 2.18 Disclosure.................................................. 20 2.19 Board Approval.............................................. 20 2.20 Opinion of Financial Advisor................................ 20 2.21 Restrictions on Business Activities......................... 20 2.22 Insurance................................................... 20 2.23 State Takeover Statutes..................................... 20 2.24 ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER 21 SUB............................................................... Organization of Parent...................................... 21 3.1 Parent Capital Structure.................................... 21 3.2 Obligations With Respect to Capital Stock................... 22 3.3 Authority; Non-Contravention................................ 22 3.4 SEC Filings; Parent Financial Statements.................... 23 3.5 Absence of Certain Changes or Events........................ 24 3.6 Taxes....................................................... 24 3.7 Title to Properties; Absence of Liens and Encumbrances...... 25 3.8 Intellectual Property....................................... 25 3.9 Compliance; Permits; Restrictions........................... 26 3.10 Litigation.................................................. 27 3.11 Brokers' and Finders' Fees.................................. 27 3.12
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PAGE ---- Environmental Matters....................................... 27 3.13 Year 2000 Compliance........................................ 27 3.14 Agreements, Contracts and Commitments....................... 28 3.15 Disclosure.................................................. 28 3.16 Board Approval.............................................. 28 3.17 Fairness Opinion............................................ 28 3.18 Organization of Merger Sub.................................. 28 3.19 ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME..................... 28 Conduct of Business by the Company.......................... 28 4.1 Conduct of Business by Parent............................... 30 4.2 ARTICLE V ADDITIONAL AGREEMENTS.................................... 30 Prospectus/Proxy Statement; Registration Statement; Other 5.1 Filings; Board Recommendations.............................. 30 Meeting of Company Stockholders............................. 31 5.2 Confidentiality; Access to Information...................... 33 5.3 No Solicitation............................................. 33 5.4 Public Disclosure........................................... 34 5.5 Reasonable Efforts; Notification............................ 34 5.6 Third Party Consents........................................ 35 5.7 Stock Options; Warrants and Employee Benefits............... 35 5.8 Form S-8.................................................... 36 5.9 Indemnification............................................. 36 5.10 Nasdaq Listing.............................................. 37 5.11 Acceleration of Employee Stock Option Vesting............... 37 5.12 FIRPTA Compliance........................................... 37 5.13 Board of Directors.......................................... 37 5.14 Company Affiliates; Restrictive Legend...................... 37 5.15 ARTICLE VI CONDITIONS TO THE MERGER................................ 38 Conditions to Obligations of Each Party to Effect the 6.1 Merger...................................................... 38 Additional Conditions to Obligations of the Company......... 38 6.2 Additional Conditions to the Obligations of Parent and 6.3 Merger Sub.................................................. 39 ARTICLE VII TERMINATION, AMENDMENT AND WAIVER...................... 39 Termination................................................. 39 7.1 Notice of Termination; Effect of Termination................ 41 7.2 Fees and Expenses........................................... 41 7.3 Amendment................................................... 42 7.4 Extension; Waiver........................................... 42 7.5 ARTICLE VIII GENERAL PROVISIONS.................................... 42 Non-Survival of Representations and Warranties.............. 42 8.1 Notices..................................................... 42 8.2 Interpretation; Knowledge................................... 43 8.3 Counterparts................................................ 43 8.4 Entire Agreement; Third Party Beneficiaries................. 43 8.5 Severability................................................ 44 8.6 Other Remedies; Specific Performance........................ 44 8.7 Governing Law............................................... 44 8.8 Rules of Construction....................................... 44 8.9 Assignment.................................................. 44 8.10 WAIVER OF JURY TRIAL........................................ 44 8.11
-ii- 545 INDEX OF EXHIBITS Exhibit A Company Voting Agreement -iii- 546 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 -1- 547 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. -2- 548 (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. -3- 549 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 -4- 550 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 -5- 551 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 -6- 552 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 -7- 553 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 -8- 554 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 -9- 555 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. -10- 556 (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, -11- 557 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. -12- 558 (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. -13- 559 (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. -14- 560 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; -15- 561 (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 -16- 562 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 -17- 563 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 -18- 564 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). -19- 565 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. -20- 566 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 -21- 567 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 -22- 568 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. -23- 569 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. -24- 570 (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, -25- 571 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. -26- 572 (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 -27- 573 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 -28- 574 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; -29- 575 (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 -30- 576 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, -31- 577 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. -32- 578 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, -33- 579 "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, -34- 580 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 -35- 581 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). -36- 582 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." -37- 583 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 -38- 584 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 -39- 585 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 -40- 586 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 -41- 587 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 -42- 588 (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 -43- 589 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. -44- 590 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 **** -45- 591 AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF REORGANIZATION AMENDMENT NO. 1 dated as of August 2, 1999 to the AGREEMENT AND PLAN OF REORGANIZATION dated as of April 20, 1999 (the "MERGER AGREEMENT"), by and 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"). Capitalized terms used in this Amendment that are not defined herein have the meanings attributed to them in the Merger Agreement. WITNESSETH: WHEREAS Parent, Merger Sub and the Company have entered into the Merger Agreement providing for the merger of Merger Sub with and into the Company; WHEREAS the parties have determined to amend certain provisions of the Merger Agreement which provide for adjustments of the Exchange Ratio; WHEREAS the parties also wish to change the End Date set forth in Section 7.1(b) of the Merger Agreement, to extend it to December 15, 1999; WHEREAS, Parent has entered into an Agreement and Plan of Reorganization dated as of April 20, 1999 with Web/MD, Inc., a Georgia corporation ("WEBMD"), and Water Acquisition Corp., a Georgia corporation and a wholly-owned subsidiary of Parent, and an Agreement and Plan of Merger dated as of June 30, 1999 with Greenberg News Network Inc., WebMD and Healtheon/WebMD Corporation, a newly formed Delaware corporation ("HEALTHEON/WEBMD"), which agreements contemplate the possibility that Parent will be reorganized so that Parent will become a wholly-owned subsidiary of Healtheon/WebMD; and WHEREAS, Parent and the Company wish to amend the Merger Agreement to permit the Company to be merged with a wholly-owned subsidiary of Healtheon/WebMD rather than Parent if such reorganization is effected. NOW, THEREFORE, in accordance with Section 7.4 of the Merger Agreement, the parties do hereby agree as follows: 1. Amendment to Merger Agreement. (a) Subparagraph (iii) of paragraph (f) of Section 1.6 of the Merger Agreement is deleted in its entirety. (b) Paragraph (b) of Section 7.1 of the Merger Agreement is amended by deleting "September 30, 1999" and replacing it with "December 15, 1999". All references to the "End Date" in the Merger Agreement and the other agreements, instruments and documents executed and delivered in connection therewith, shall hereafter refer to December 15, 1999. (c) Paragraph (i) of Section 7.1 of the Merger Agreement is deleted in its entirety. 2. Healtheon/WebMD Reorganization. (a) In the event that Parent and WebMD determine to reorganize in a holding company structure (the "REORGANIZATION"), for the purpose of the transactions contemplated under the Merger Agreement; (i) a newly formed, wholly owned subsidiary of Healtheon/ WebMD 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 Healtheon/WebMD common stock having substantially identical rights, preferences and privileges, as shares of Parent Common Stock; and (ii) all of the shares of capital stock of Merger Sub shall be transferred to Healtheon/WebMD and Merger Sub would be merged with and into the Company, with the Company being the surviving corporation of such merger (the "COMPANY MERGER") in accordance with Article I of the Merger Agreement (b) If the Reorganization occurs prior to the Closing of the Company Merger, for purposes of Section 1.6 and Section 5.8 of the Merger Agreement, the term "Parent" shall mean Healtheon/WebMD, 1 592 the term "Parent Common Stock" shall mean Healtheon/WebMD common stock, and all outstanding shares of Company Common Stock will be automatically converted in to the right to receive shares of Healtheon/WebMD Common Stock in the same manner specified in Section 1.6(a) of the Merger Agreement as if the Healtheon/WebMD Common Stock were Parent Common Stock. (c) For Federal income tax purposes, it is intended that each of the Parent Merger and the Company Merger qualify as a reorganization under the provisions of Section 368(a) of the Internal Revenue Code. (d) For purposes of the Merger Agreement, the Voting Agreement dated as of April 20, 1999 among Parent and the stockholders of the Company named therein, and the Registration Rights Agreement dated as of April 20, 1999 among Parent and the stockholders of the Company named therein, the term "Merger" as used herein and therein shall be deemed to mean the Parent Merger and/or the Company Merger, as applicable. 6. The Merger Agreement, as amended by this Amendment, has been approved and adopted by the respective Boards of Directors of Parent, Merger Sub, the Company and Healtheon/WebMD. 7. Except as amended hereby, the terms of the Merger Agreement shall be unchanged and remain in full force and effect. This Amendment No. 1 shall be effective as of the day and year first above written. This Amendment may be executed in any manner of counterparts, all of which taken together shall constitute one and the same instrument. IN WITNESS WHEREOF, each of Parent, Merger Sub, the Company and Healtheon/WebMD has executed this Amendment No. 1 to the Merger Agreement on and as of the day and year first above written. HEALTHEON CORPORATION By: ------------------------------------ MERC ACQUISITION CORPORATION By: ------------------------------------ MEDE AMERICA CORPORATION. By: ------------------------------------ HEALTHEON/WEBMD CORPORATION By: ------------------------------------ 2 593 ANNEX C AGREEMENT AND PLAN OF MERGER AMONG HEALTHEON CORPORATION WEBMD, INC. HEALTHEON/WEBMD CORPORATION GNN MERGER CORP. AND GREENBERG NEWS NETWORKS, INC. DATED AS OF JUNE 30, 1999 594 TABLE OF CONTENTS
PAGE ---- ARTICLE 1 TRANSACTIONS AND TERMS OF MERGER.......................... 1 1.1 Merger...................................................... 1 1.2 Time and Place of Closing................................... 1 1.3 Effective Time.............................................. 2 1.4 WebMD Acquisition -- Terms of Merger........................ 2 ARTICLE 2 TERMS OF MERGER........................................... 2 2.1 Charter..................................................... 2 2.2 Bylaws...................................................... 2 2.3 Directors and Officers...................................... 2 2.4 Tax-Free Reorganization..................................... 3 ARTICLE 3 MANNER OF CONVERTING SHARES............................... 3 3.1 Conversion of Shares........................................ 3 3.2 Anti-Dilution Provisions.................................... 3 3.3 Shares Held by GNN.......................................... 3 3.4 Dissenting Stockholders..................................... 3 3.5 Fractional Shares........................................... 4 3.6 Conversion of GNN Options................................... 4 3.7 GNN Warrants................................................ 5 ARTICLE 4 EXCHANGE OF SHARES........................................ 6 4.1 Exchange Procedures......................................... 6 4.2 Rights of Former GNN Stockholders........................... 6 4.3 Escrow Shares............................................... 7 ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF GNN..................... 7 5.1 Organization, Standing, and Power........................... 7 5.2 Authorization of Agreement; No Breach....................... 7 5.3 Capital Stock............................................... 8 5.4 GNN Subsidiaries............................................ 8 5.5 Financial Statements........................................ 8 5.6 Absence of Undisclosed Liabilities.......................... 9 5.7 Absence of Changes.......................................... 9 5.8 Indebtedness................................................ 10 5.9 Tax Matters................................................. 10 Real Property............................................... 11 5.10 Personal Property........................................... 12 5.11 Intellectual Property....................................... 12 5.12 Accounts Receivable......................................... 13 5.13 The Proprietary Software; Year 2000 Compliance.............. 13 5.14 Insurance................................................... 14 5.15 Compliance with Laws........................................ 14 5.16 Environmental Matters....................................... 15 5.17 Litigation and Claims....................................... 15 5.18 Contracts and Commitments................................... 16 5.19 Powers of Attorney.......................................... 17 5.20 Benefit Plans............................................... 17 5.21 Remuneration................................................ 20 5.22 Interested Transactions..................................... 20 5.23 Subscription Agreements..................................... 20 5.24
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PAGE ---- Statements True and Correct................................. 20 5.25 Tax Treatment............................................... 21 5.26 State Takeover Laws......................................... 21 5.27 Restrictions of Business Activities......................... 21 5.28 Fairness Opinion............................................ 21 5.29 GNN Disclosure Letter....................................... 22 5.30 ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF WEBMD................... 22 6.1 Organization, Standing, and Power........................... 22 6.2 Authorization of Agreement; No Breach....................... 22 6.3 Capital Stock............................................... 22 6.4 WebMD Subsidiaries.......................................... 23 6.5 Financial Statements........................................ 23 6.6 Absence of Undisclosed Liabilities.......................... 24 6.7 Absence of Certain Changes or Events........................ 24 6.8 Tax Matters................................................. 24 6.9 Intellectual Property....................................... 25 Insurance................................................... 26 6.10 Compliance with Laws........................................ 26 6.11 Legal Proceedings........................................... 26 6.12 Statements True and Correct................................. 26 6.13 Tax Matters................................................. 27 6.14 WebMD Disclosure Letter..................................... 27 6.15 ARTICLE 7 REPRESENTATIONS AND WARRANTIES OF NEWCO................... 27 7.1 Organization, Standing, and Power........................... 27 7.2 Authorization of Agreement; No Breach....................... 27 7.3 Capital Stock............................................... 28 7.4 Healtheon SEC Filings; Financial Statements................. 28 7.5 Tax Matters................................................. 28 ARTICLE 8 REPRESENTATIONS AND WARRANTIES OF PURCHASER AND MERGER 28 CORP............................................................... 8.1 Purchaser Common Stock...................................... 28 8.2 Meeting Materials; Registration Statement................... 28 8.3 Authority of Merger Corp.................................... 29 ARTICLE 9 CONDUCT OF BUSINESS PENDING CONSUMMATION.................. 29 9.1 Conduct of GNN Business..................................... 29 9.2 Adverse Changes in Condition................................ 31 ARTICLE 10 ADDITIONAL AGREEMENTS.................................... 31 Stockholder Approval; Registration Statement................ 31 10.1 Applications 10.3 Filings with State Offices................ 33 10.2 Filings with State Offices.................................. 33 10.3 Agreement as to Efforts to Consummate....................... 33 10.4 Investigation and Confidentiality........................... 33 10.5 Access to Information....................................... 34 10.6 No Shop..................................................... 34 10.7 Tax Treatment............................................... 34 10.8 Employee Benefits........................................... 34 10.9 Voting Agreement............................................ 34 10.10 Accredited Investor Questionnaire and Stockholder 10.11 Representation Agreement.................................... 35 Registration of Shares...................................... 35 10.12 Blue Sky Laws............................................... 35 10.13
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PAGE ---- Non-solicitation of Employees............................... 35 10.14 WebMD Election for Registration............................. 35 10.15 Press Releases.............................................. 36 10.16 Statements and Information Regarding WebMD.................. 36 10.17 Employee Confidentiality and Assignment Agreement........... 36 10.18 Directors and Officers Indemnification...................... 36 10.19 ARTICLE 11 CONDITIONS PRECEDENT TO OBLIGATIONS TO CONSUMMATE........ 37 Conditions to Obligations of Each Party..................... 37 11.1 Conditions to Obligations of Purchaser...................... 37 11.2 Conditions to Obligations of GNN............................ 39 11.3 ARTICLE 12 TERMINATION.............................................. 40 Termination................................................. 40 12.1 Effect of Termination....................................... 42 12.2 Termination as to Newco and Healtheon....................... 42 12.3 ARTICLE 13 MISCELLANEOUS............................................ 42 Definitions................................................. 42 13.1 Brokers and Finders......................................... 47 13.2 Entire Agreement............................................ 48 13.3 Amendments.................................................. 48 13.4 Waivers..................................................... 48 13.5 Assignment.................................................. 48 13.6 Notices..................................................... 49 13.7 Governing Law............................................... 49 13.8 Counterparts................................................ 49 13.9 Captions.................................................... 50 13.10 Interpretations............................................. 50 13.11 Enforcement of Agreement.................................... 50 13.12 Severability................................................ 50 13.13 Facsimile Signatures........................................ 50 13.14 Nonsurvival of Representations and Warranties............... 50 13.15 ARTICLE 14 ESCROW; SHAREHOLDER REPRESENTATIVE....................... 50 Escrow Arrangements......................................... 50 14.1 Definitions................................................. 51 14.2 Notice of Claim............................................. 52 14.3 Procedure With Respect to Disputed Indemnifiable Loss....... 52 14.4 Employment of Counsel....................................... 53 14.5 Term; Expiration; Limits.................................... 53 14.6 Dividends; Voting Rights; Additional Shares................. 55 14.7 Escrow Agent................................................ 55 14.8 Representative.............................................. 56 14.9 Representative Expenses..................................... 57 14.10
-iii- 597 EXHIBITS Exhibit 10.10(a) -- Parties to Voting Agreements Exhibit 10.10(b) -- Voting Agreement Exhibit 10.11(a) -- Accredited Investor Questionnaire Exhibit 10.11(b) -- Stockholder Representation Agreement Exhibit 10.12 -- Registration of Shares Exhibit 11.2(d) -- Opinion of King & Spalding
-iv- 598 AGREEMENT AND PLAN OF MERGER This Agreement and Plan of Merger (this "AGREEMENT") is made and entered into as of June 30, 1999, by and among HEALTHEON CORPORATION ("HEALTHEON"), a Delaware corporation having its principal office located in Santa Clara, California; HEALTHEON/WEBMD CORPORATION ("NEWCO"), a Delaware corporation having its principal office located in Santa Clara, California; WEBMD, INC. ("WEBMD"), a Georgia corporation having its principal office located in Atlanta, Georgia; GNN MERGER CORP. ("MERGER CORP."), a Delaware corporation having its principal office located in Atlanta, Georgia; and GREENBERG NEWS NETWORKS, INC. ("GNN"), a Delaware corporation having its principal office located in Atlanta, Georgia. PREAMBLE WebMD, Healtheon and Water Acquisition Corp. entered into an Agreement and Plan of Reorganization dated as of May 20, 1999 (as it may be subsequently amended, the "HEALTHEON/WEBMD AGREEMENT"). Newco is a newly formed parent corporation that may acquire Healtheon and WebMD upon the closing of the transaction contemplated by the Healtheon/WebMD Agreement. The Boards of Directors of Newco, Healtheon, WebMD, Merger Corp., a wholly owned subsidiary of Newco, and GNN are of the opinion that the transactions described herein are in the best interests of the parties and their respective stockholders. This Agreement provides for the acquisition of GNN by Newco or Healtheon at the discretion of WebMD and Healtheon pursuant to the merger of Merger Corp. with and into GNN. At the Effective Time of such merger, the outstanding shares of the capital stock of GNN shall be converted into the right to receive shares of Common Stock of Newco or Healtheon (except as provided herein). As a result, stockholders of GNN shall become stockholders of Newco or Healtheon and GNN shall conduct its business and operations as a wholly owned subsidiary of Newco or Healtheon. The transactions described in this Agreement are subject to the approval of the stockholders of GNN and the satisfaction of certain other conditions described in this Agreement. It is the intention of the parties to this Agreement that the Merger shall qualify as a "REORGANIZATION" within the meaning of Section 368(a) of the Internal Revenue Code for federal income tax purposes. It is the intent of the parties hereto that if the transactions contemplated by the Healtheon/WebMD Agreement are not consummated, WebMD shall acquire GNN on terms as set forth herein. Certain terms used in this Agreement are defined in Section 13.1 of this Agreement. NOW, THEREFORE, in consideration of the above and the mutual warranties, representations, covenants and agreements set forth herein, the parties agree as follows: ARTICLE 1 TRANSACTIONS AND TERMS OF MERGER 1.1 Merger. Subject to the terms and conditions of this Agreement, at the Effective Time, Merger Corp. shall be merged with and into GNN in accordance with the applicable provisions of the GCLSD (the "MERGER"). GNN shall be the Surviving Corporation resulting from the Merger and shall continue its operations as a wholly owned Subsidiary of Newco and shall continue to be governed by the Laws of the State of Delaware. The Merger shall be consummated pursuant to the terms of this Agreement, which has been approved and adopted by the respective Boards of Directors of Newco, WebMD, Merger Corp. and GNN. 1.2 Time and Place of Closing. The closing of the transactions contemplated herein (the "CLOSING") will take place at the time and date of the closing of the transactions contemplated by the Healtheon/WebMD Agreement (the "CLOSING DATE"), subject to the satisfaction or waiver of the conditions set forth in Sections 11.1, 11.2 and 11.3. The place of Closing shall be at the offices of Alston -1- 599 & Bird LLP, One Atlantic Center, 1201 West Peachtree Street, Atlanta, Georgia 30309-3424, or such other place as may be mutually agreed upon by the Parties. 1.3 Effective Time. Subject to the provisions of this Agreement, the Surviving Corporation shall file the Certificate of Merger executed in accordance with the relevant provisions of the GCLSD and the Parties shall make all other filings or recordings required under the GCLSD as soon as practicable on or after the Closing Date. The Merger and other transactions contemplated by this Agreement shall become effective on the date and at the time the Certificate of Merger reflecting the Merger becomes effective with the Secretary of State of the State of Delaware (the "EFFECTIVE TIME"). 1.4 WebMD Acquisition -- Terms of Merger. If and only if this Agreement is terminated as to Newco, Healtheon and Merger Corp. as provided in Section 12.3 hereto: (a) WebMD, instead of Newco, will acquire GNN, subject to the terms and conditions herein; (b) The Parties hereto agree to substitute a newly created, wholly owned Subsidiary of WebMD incorporated under the laws of the State of Delaware (the "WEBMD MERGER SUB") for the Merger Corp. as a party hereto, and agree to execute all documents reasonably required to effect such substitution; provided that the Parties agree to execute an amendment to this Agreement to provide for the merger of GNN with and into WebMD Merger Sub (a "FORWARD MERGER") but preserving to the fullest extent possible the financial and legal terms of the Merger and other transactions described herein; (c) All references to Newco in this Article 1, shall be deemed to be references to WebMD, mutatis mutandis; and (d) The first sentence of Section 1.2 will not be binding on the Parties, and the Closing will take place at the date and time specified by WebMD and GNN, which (subject to the satisfaction or waiver of the conditions set forth in Sections 11.2 and 11.3) shall be no later than the second business day after the satisfaction of the conditions set forth in Section 11.1. In no event will the terms and conditions of this Agreement create, or be deemed to create, any obligation on the part of either Newco or WebMD to take any action, or refrain from taking any action, with respect to the Healtheon/WebMD Agreement or the transactions contemplated thereby. ARTICLE 2 TERMS OF MERGER 2.1 Charter. The Certificate of Incorporation of GNN in effect immediately prior to the Effective Time shall be the Certificate of Incorporation of the Surviving Corporation with the following amendment: all Articles of the Certificate of Incorporation other than Article I shall be deleted in their entirety and replaced by Articles 2 through 10 of the Certificate of Incorporation of Merger Corp. Such Certificate of Incorporation (as so amended) shall remain the Certificate of Incorporation of Surviving Corporation until otherwise amended or repealed. 2.2 Bylaws. The Bylaws of GNN in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation with the following amendment: all of the Bylaws shall be deleted in their entirety and replaced by the Bylaws of Merger Corp. Such Bylaws (as so amended) shall remain the Bylaws of Surviving Corporation until otherwise amended or repealed. 2.3 Directors and Officers. The directors of Merger Corp. in office immediately prior to the Effective Time, together with such additional persons as may thereafter be elected, shall serve as the directors of the Surviving Corporation from and after the Effective Time in accordance with the Bylaws of the Surviving Corporation. The officers of Merger Corp. in office immediately prior to the Effective Time, together with such additional persons as may thereafter be elected, shall serve as the officers of the Surviving Corporation from and after the Effective Time in accordance with the Bylaws of the Surviving Corporation. -2- 600 2.4 Tax-Free Reorganization. The parties intend to adopt this Agreement as a plan of reorganization under Section 368(a) of the Internal Revenue Code. ARTICLE 3 MANNER OF CONVERTING SHARES 3.1 Conversion of Shares. Subject to the provisions of this Article 3, at the Effective Time, by virtue of the Merger and without any action on the part of the Parties or the stockholders of any of the Parties, the shares of the constituent corporations of the Merger shall be converted as follows: (a) Each share of Merger Corp. Common Stock issued and outstanding at the Effective Time shall be converted into and become one (1) fully paid and nonassessable share of Surviving Corporation Common Stock. (b) (1) Each share of GNN Series A Preferred Stock, GNN Series B Preferred Stock and GNN Series C Preferred Stock shall cease to be outstanding and shall be converted into shares of GNN Common Stock according to their respective conversion rates as set forth in their respective Certificates of Designation, and then (2) excluding treasury shares and excluding shares held by stockholders who perfect their statutory dissenters' rights as provided in Section 3.4 of this Agreement, each share of GNN Common Stock (including shares of GNN Common Stock created as a result of the conversion of GNN Series A Preferred Stock, GNN Series B Preferred Stock and GNN Series C Preferred Stock as described immediately above in this sentence) issued and outstanding at the Effective Time shall cease to be outstanding and shall be converted into and exchanged, subject to Section 4.3 hereof, for the right to receive either: (i) if Newco is the Purchaser, that number of shares of Newco Common Stock equal to the Newco Stock Amount divided by the sum of (x) the total number of shares of GNN Common Stock outstanding as of the Effective Time (after giving effect to the conversion of all shares of GNN Series A Preferred Stock, GNN Series B Preferred Stock and GNN Series C Preferred Stock described above) plus (y) the total number of shares of GNN Common Stock issuable upon the exercise of Options and GNN Warrants outstanding as of the Effective Time as determined in accordance with the Treasury Method (the "Newco Stock Exchange Ratio"); or (ii) if WebMD is the Purchaser, that number of shares of WebMD Non-Voting Common Stock equal to the WebMD Stock Amount divided by the sum of (x) the total number of shares of GNN Common Stock outstanding as of the Effective Time (after giving effect to the conversion of all shares of GNN Series A Preferred Stock, GNN Series B Preferred Stock and GNN Series C Preferred Stock described above) plus (y) the total number of shares of GNN Common Stock issuable upon the exercise of Options and GNN Warrants outstanding as of the Effective Time as determined in accordance with the Treasury Method (the "WEBMD STOCK EXCHANGE RATIO"). 3.2 Anti-Dilution Provisions. In the event Purchaser changes the number of shares of Purchaser Common Stock issued and outstanding prior to the Effective Time as a result of a stock split, stock dividend, combination of shares or similar recapitalization with respect to such stock (an "ANTI-DILUTION EVENT") and the record date therefor (in the case of a stock dividend) or the effective date thereof (in the case of a stock split or similar recapitalization for which a record date is not established) shall be prior to the Effective Time, the Purchaser Stock Exchange Ratio shall be proportionately adjusted to the extent not otherwise adjusted in the formulas set forth in Section 3.1(b). 3.3 Shares Held by GNN. Each share of GNN Capital Stock held in treasury by GNN, shall be canceled and retired at the Effective Time and no consideration shall be issued in exchange therefor. 3.4 Dissenting Stockholders. Any holder of shares of GNN Capital Stock who perfects its dissenters' rights in accordance with and as contemplated by Section 262 of the GCLSD shall not be converted into Purchaser Common Stock but instead shall be entitled to receive such consideration as determined pursuant to such provision of the GCLSD; provided, that no such payment shall be made to -3- 601 any dissenting stockholder unless and until such dissenting stockholder has complied with the applicable provisions of the GCLSD and surrendered to the Surviving Corporation the certificate or certificates representing the shares for which payment is being made. In the event that a dissenting stockholder of GNN fails to perfect, or effectively withdraws or loses, its right to appraisal and payment for its shares under Section 262 of the GCLDS, Purchaser shall issue and deliver the number of shares of Purchaser Common Stock to which such holder of shares of GNN Capital Stock would otherwise be entitled under this Article 3 (without interest) upon surrender by such holder of the certificate or certificates representing such shares held by such holder (subject to the escrow provisions of Section 4.3 hereof). 3.5 Fractional Shares. No certificates representing fractional shares of Purchaser Common Stock will be issued as a result of the Merger. Each holder of shares of GNN Capital Stock exchanged pursuant to the Merger who would otherwise have been entitled to receive a fraction of a share of Purchaser Common Stock shall receive, in lieu thereof, cash (rounded to the nearest whole cent and without interest) in an amount equal to such fractional part of a share of Purchaser Common Stock multiplied by the Conversion Price. No such holder will be entitled to dividends, voting rights, or any other rights as a stockholder in respect of any fractional shares. 3.6 Conversion of GNN Options. (a) At the Effective Time, each option granted by GNN to purchase shares of GNN Common Stock, which is outstanding immediately prior thereto (an "OPTION" or, collectively, the "OPTIONS"), granted by GNN under the GNN Stock Plan or otherwise, whether or not exercisable, shall be converted into and become rights with respect to Purchaser Common Stock, and Purchaser shall assume each Option, in accordance with the terms of the GNN Stock Plan (in the case of Options granted under the GNN Stock Plan) and stock option agreement by which it is evidenced, except that from and after the Effective Time, (i) Purchaser and its Compensation Committee shall be substituted for GNN and the Committee of GNN's Board of Directors (including, if applicable, the entire Board of Directors of GNN) administering the GNN Stock Plan, (ii) each Option assumed by Purchaser may be exercised solely for shares of Purchaser Common Stock, (iii) the number of shares of Purchaser Common Stock subject to such Option shall be equal to the number of whole shares (rounded down to the nearest whole share) of GNN Common Stock subject to such Option immediately prior to the Effective Time multiplied by the Purchaser Stock Exchange Ratio, and (iv) the per share exercise price under each such Option shall be adjusted by dividing the per share exercise price under each such Option by the Purchaser Stock Exchange Ratio and rounding up to the nearest whole cent. Notwithstanding the provisions of clauses (iii) and (iv) of the first sentence of this Section 3.6(a), each Option which is an "INCENTIVE STOCK OPTION" shall be adjusted as required by Section 424 of the Internal Revenue Code, and the regulations promulgated thereunder, so as not to constitute a modification, extension or renewal of such Option, within the meaning of Section 424(h) of the Internal Revenue Code. (b) Prior to the Closing, GNN will use its commercially reasonable efforts to (i) obtain and deliver to Purchaser all necessary consents or releases from any and all holders of Options as are necessary to waive any vesting or acceleration of vesting of any and all unvested Options in connection with or as a result of the Merger or any future "CHANGE OF CONTROL" (as defined in the GNN Stock Plan) (an "ACCELERATION WAIVER"), and (ii) obtain an amendment to Gordon Wyatt's Employment Agreement in the form of Section 3.6 to the WebMD Disclosure Letter executed and delivered by Mr. Wyatt prior to the Closing (the "WYATT EMPLOYMENT AGREEMENT"). (i) The Parties will calculate the aggregate "OPTION PRICE SPREAD" for all outstanding GNN Options. The Option Price Spread per share is equal to (1) the excess of the fair market value of a share of GNN Common Stock (which is equal to the Conversion Price multiplied by the Purchaser Stock Exchange Ratio), over the option exercise price, multiplied by (2) the percentage of the Option not vested immediately prior to the Closing (without acceleration of vesting under the GNN Stock Plan). For example, assuming the fair market value of a share of GNN Common Stock is $30.00, an Option for 100 shares at $10.00 per share that is one-quarter vested immediately prior to Closing would have an Option Price Spread of $1,500.00. -4- 602 (ii) If GNN obtains Acceleration Waivers covering less than 66% of the aggregate Option Price Spread (the "TARGET SPREAD REDUCTION AMOUNT") prior to Closing, then the excess of the Target Spread Reduction Amount over the Option Price Spread covered by Acceleration Waivers obtained by GNN prior to Closing will constitute the "SPREAD REDUCTION SHORTFALL". (iii) If either (1) Mr. Wyatt does not deliver an executed Wyatt Employment Agreement prior to Closing, or (2) GNN does not obtain Acceleration Waivers prior to the Closing covering at least the Target Spread Reduction Amount, then the Newco Stock Amount or WebMD Stock Amount (as appropriate) will be equal to (A) $214,925,000, minus (1) 50% of the Spread Reduction Shortfall (if any), and (2) $525,000 (if Mr. Wyatt does not deliver the Wyatt Employment Agreement), divided by (B) the Conversion Price. If Mr. Wyatt does not deliver the Wyatt Employment Agreement (and the WebMD Stock Amount is reduced as set forth above), then the Target Spread Reduction Amount shall be reduced by the Option Price Spread of Options held by Mr. Wyatt. (iv) The Parties agree that the Surviving Corporation will execute the Acceleration Waivers solely in order to agree to eliminate Section 14 of the GNN Stock Plan from the terms of each Option covered by an Acceleration Waiver and to insert a provision into each such Option that provides that if the holder of such Option is an employee of the Surviving Corporation (or one of its Affiliates) whose employment is terminated after the Effective Time, the Option will vest to the extent not previously vested upon such termination and will be exercisable for a period of 90 days following such termination after which time the Option will terminate. (c) As soon as practicable after the Effective Time, Purchaser shall deliver to the holders of Options appropriate notices setting forth such holders' rights pursuant to the GNN Stock Plan and the agreements evidencing the grants of such Options shall continue in effect on the same terms and conditions (subject to adjustments required by this Section 3.6 after giving effect to the Merger and the provisions set forth above). If necessary, Purchaser shall comply with the terms of the GNN Stock Plan (except as provided in Section 3.6(b) above) and ensure, to the extent lawful and practicable, and subject to the provisions of the GNN Stock Plan, that Options which qualified as incentive stock options prior to the Effective Time of the Merger continue to qualify as incentive stock options after the Effective Time of the Merger. (d) Purchaser shall take all corporate action necessary to reserve for issuance a sufficient number of shares of Purchaser Common Stock for delivery upon the exercise of Options. (e) If Newco is the Purchaser, Newco agrees to file, if available for use by Newco, a registration statement on Form S-8 for the shares of Newco Common Stock issuable with respect to the Options as soon as is reasonably practicable after the Effective Time and intends to maintain the effectiveness of such registration statement thereafter for so long as any such Options remain outstanding. If WebMD is the Purchaser, WebMD agrees that if WebMD completes an initial public offering after the Effective Time, then at such time as WebMD shall file a registration on Form S-8 for the option plans of WebMD, WebMD shall also file a registration statement on Form S-8 for the shares of WebMD capital stock issuable with respect to the Options as soon as reasonably practicable after the Effective Time and intends to maintain the effectiveness of such registration statement thereafter for so long as any of such Options remain outstanding. 3.7 GNN Warrants. (a) At the Effective Time, Purchaser shall assume the obligations of GNN under the GNN common stock purchase warrants outstanding at the Effective Time ("GNN WARRANTS") and thereafter, upon exercise, the warrantholder shall receive the number of shares of Purchaser Common Stock equal to the product of (i) the Purchaser Stock Exchange Ratio and (ii) the number of shares of GNN Common Stock for which such GNN Warrant could have been exercised immediately prior to the Merger. The per share exercise price under each such GNN Warrant shall be adjusted by dividing the per share exercise price under each such GNN Warrant by the Purchaser Stock Exchange Ratio and rounding up to the nearest whole cent. -5- 603 (b) As soon as practicable after the Effective Time of the Merger, Purchaser shall deliver to the holders of the GNN Warrants appropriate notices setting forth such holders' rights pursuant to the applicable warrant agreements with respect thereto to the extent required by the terms of the warrant agreements with respect thereto. (c) Purchaser shall take all corporate action necessary to reserve for issuance a sufficient number of shares of Purchaser Common Stock for delivery upon exercise of the GNN Warrants. ARTICLE 4 EXCHANGE OF SHARES 4.1 Exchange Procedures. Promptly after the Effective Time, Purchaser and the Surviving Corporation shall cause the exchange agent selected by Purchaser (the "EXCHANGE AGENT") to mail to the former holders of GNN Capital Stock appropriate transmittal materials (which shall specify that delivery shall be effected, and risk of loss and title to the certificates theretofore representing shares of GNN Capital Stock shall pass, only upon proper delivery of such certificates to the Exchange Agent). After the Effective Time, each former holder of shares of GNN Capital Stock (other than shares to be canceled pursuant to Section 3.3 of this Agreement or as to which statutory dissenters' rights have been perfected as provided in Section 3.4 of this Agreement) issued and outstanding at the Effective Time shall surrender the certificate or certificates representing such shares to the Exchange Agent and shall promptly upon surrender thereof receive in exchange therefor the consideration provided in Section 3.1 of this Agreement. To the extent required by Section 3.5 of this Agreement, each former holder of shares of GNN Capital Stock issued and outstanding at the Effective Time also shall receive, upon surrender of the certificate or certificates representing such shares, cash in lieu of any fractional share of Purchaser Common Stock to which such holder may be otherwise entitled (without interest). Purchaser shall not be obligated to deliver the consideration to which any former holder of GNN Capital Stock is entitled as a result of the Merger until such holder surrenders his certificate or certificates representing the shares of GNN Capital Stock for exchange as provided in this Section 4.1 or such holder provides an appropriate affidavit regarding loss of such certificate and an indemnification for loss in favor of Purchaser in such sum as it may reasonably request. The certificate or certificates of GNN Capital Stock so surrendered shall be duly endorsed as the Exchange Agent may require. Any other provision of this Agreement notwithstanding, neither Purchaser, the Surviving Corporation nor the Exchange Agent shall be liable to a holder of GNN Capital Stock for any amounts paid or property properly delivered in good faith to a public official pursuant to any applicable abandoned property Law. 4.2 Rights of Former GNN Stockholders. At the Effective Time, the stock transfer books of GNN shall be closed and no transfer of GNN Capital Stock by any such former holder shall thereafter be made or recognized. Until surrendered for exchange in accordance with the provisions of Section 4.1 of this Agreement, each certificate theretofore representing shares of GNN Capital Stock (other than shares to be canceled pursuant to Sections 3.3 and 3.4 of this Agreement) shall from and after the Effective Time represent for all purposes only the right to receive the consideration provided in Sections 3.1 and 3.5 of this Agreement in exchange therefor. Former stockholders of record of GNN will not be entitled to vote or give their consent after the Effective Time at any meeting or action by written consent of Purchaser stockholders until such holders have exchanged their certificates representing GNN Capital Stock for certificates representing Purchaser Common Stock in accordance with the provisions of this Agreement. If a dividend or other distribution is declared by Purchaser on the Purchaser Common Stock, the record date for which is at or after the Effective Time, the declaration shall include dividends or other distributions on all shares issuable pursuant to this Agreement, but no dividend or other distribution payable to the holders of record of Purchaser Common Stock as of any time subsequent to the Effective Time shall be delivered to the holder of any certificate representing shares of GNN Capital Stock issued and outstanding at the Effective Time until such holder surrenders such certificate for exchange as provided in Section 4.1 of this Agreement. However, upon surrender of such certificate, both the Purchaser Common Stock certificate (together with all such undelivered dividends or other distributions without interest) and any undelivered -6- 604 cash payments to be paid for fractional share interests (without interest) shall be promptly delivered and paid with respect to each share represented by such certificate. 4.3 Escrow Shares. At the Effective Time, Purchaser shall issue an aggregate number of shares of Purchaser Common Stock equal to ten percent (10%) of the total number of shares of Purchaser Common Stock issuable pursuant to Section 3.1 hereof as adjusted pursuant to Section 3.2 (the "Escrow Shares") to be held in escrow pursuant to Article 14 and the terms of an Escrow Agreement substantially in the form of Article 14 hereto. In the event of any discrepancy between the terms of the Escrow Agreement and Article 14, Article 14 of this Agreement shall control. The portion of the Escrow Shares issued and contributed on behalf of each holder of GNN Capital Stock shall be in proportion to the aggregate number of shares of Purchaser Common Stock which such holder would otherwise be entitled to receive under Article 3 by virtue of ownership of GNN Capital Stock. ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF GNN Except as set forth in Sections to the letter delivered to Healtheon and WebMD on or prior to the date of this Agreement (the "GNN DISCLOSURE LETTER") as specified below, GNN hereby represents and warrants to Healtheon, WebMD and Merger Corp. as follows as of the date hereof and the Closing Date: 5.1 Organization, Standing, and Power. GNN is a corporation duly organized, validly existing, and in good standing under the Laws of the State of Delaware, and has the corporate power and authority to carry on its business as it has been and is now being conducted and to own, lease and operate its Assets. GNN is duly qualified or licensed to transact business as a foreign corporation and is in good standing in all jurisdictions where the character of its Assets or the nature or conduct of its business requires it to be so qualified or licensed, except for such jurisdictions in which the failure to be so qualified or licensed is not reasonably likely to have, in the aggregate, a Material Adverse Effect on GNN. Copies of the certificate of incorporation and all amendments thereto of GNN and the bylaws, as amended, of GNN and copies of the corporate minutes (or resolutions adopted by the stockholders or Board of Directors and all committees thereof) of GNN, which have been made available to WebMD for review, are true and complete, in all Material respects, as in effect on the date of this Agreement, and accurately reflect all proceedings of the stockholders and Board of Directors (and all committees thereof) of GNN. The stock record books of GNN, which have been made available to WebMD for review, contain true and complete records of the stock ownership of GNN and all prior transfers of the shares of its capital stock. 5.2 Authorization of Agreement; No Breach. The execution, delivery and performance of this Agreement have been duly authorized by all necessary corporate action of GNN, other than the meeting (or written consent) of the stockholders of GNN to approve this Agreement to be held pursuant to Section 10.1. This Agreement constitutes, and all agreements and other instruments and documents to be executed and delivered by GNN pursuant to this Agreement will constitute, legal, valid and binding obligations of GNN enforceable against GNN in accordance with their respective terms, except to the extent such enforceability is subject to (i) Laws of general application relating to bankruptcy, insolvency, moratorium and the relief of debtors and (ii) the availability of specific performance, injunctive relief or other equitable remedies. The execution, delivery and performance of this Agreement and the agreements and other documents and instruments to be executed and delivered by GNN pursuant to this Agreement and the consummation of the transactions contemplated hereby and thereby will not, subject to obtaining the consents identified or contemplated herein (including without limitation all filings or consents under the HSR Act, the Securities Law and state securities Laws, and the rules and regulations of the NASD and the Nasdaq Stock Market with respect to the securities issued under the Registration Statement), (i) violate or result in a breach of or Default under the certificate of incorporation or bylaws of GNN; (ii) to the knowledge of GNN, violate any Law, Order, administrative decision or award of any court, arbitrator, mediator, tribunal or Regulatory Authority applicable to or binding upon GNN or upon its Assets or business; (iii) conflict with or constitute a Default under any Material Contract to which GNN -7- 605 is a party or by which GNN is bound; or (iv) create a Material Lien upon the Assets or business of GNN. 5.3 Capital Stock. As of the date hereof, the authorized capital stock of GNN consists of (i) 10,000,000 shares of GNN Common Stock, of which 1,915,235 shares are issued and outstanding and none of which are held as treasury shares, and (ii) 10,000,000 shares of GNN Preferred Stock, of which (a) 1,913,044 shares are designated Series A Preferred Stock, of which 1,913,044 are issued and outstanding and none of which are held as treasury shares, (b) 109,765 shares are designated Series B Preferred Stock, of which 109,765 are issued and outstanding and none of which are held as treasury shares and (c) 500,000 shares are designated Series C Preferred Stock, of which 388,747 are issued and outstanding and none of which are held as treasury shares. GNN has no other capital stock authorized, issued or outstanding. All of such shares are duly and validly issued and outstanding, are fully paid and non-assessable, and were issued pursuant to a valid exemption from registration under the 1933 Act and all applicable state securities Laws. Except as set forth in Section 5.3 of the GNN Disclosure Letter, there are no outstanding warrants, options, rights (including outstanding rights to demand registration or to sell in connection with a registration by GNN under the 1933 Act), calls or other commitments of any nature relating to the GNN Capital Stock to which GNN is a party, and there are no outstanding securities of GNN convertible into or exchangeable for shares of GNN Capital Stock or any other capital stock ("GNN Equity Rights"). If Newco is the Purchaser or if WebMD is the Purchaser and makes the WebMD Election as provided in Section 10.15, neither GNN nor Purchaser nor any of their Affiliates will have any obligations under any GNN Registration Rights Agreement (as defined in Section 11.2) after the Effective Time and any such agreements will have no further force and effect after the Effective Time. Neither GNN nor Purchaser nor any of their Affiliates will have any obligations under the Stockholder Agreement (as defined in Section 11.2) after the Effective Time and such agreement will have no further force and effect after the Effective Time. All of such GNN Equity Rights were issued or granted pursuant to a valid exemption from registration under the 1933 Act and all applicable state securities Laws. Except as set forth in Section 5.3 of the GNN Disclosure Letter, GNN has no knowledge of any voting agreements or voting trusts between or among any Person or Persons relating to GNN or the GNN Capital Stock. Except as provided in the GNN Stock Plan and the Warrants, GNN is not obligated to issue or repurchase any shares of GNN Capital Stock for any purpose, and to the knowledge of GNN no Person has entered into any Contract or option or any right or privilege (whether preemptive or contractual) capable of becoming a Contract or option for the purchase, subscription or issuance of any unissued shares, or other securities of GNN. As a result of the Merger and the other transactions contemplated herein, immediately prior to the Effective Time, (i) pursuant to the Certificates of Designations of the Series A Convertible Preferred Stock of GNN (the "GNN SERIES A PREFERRED STOCK") and the Series B Convertible Preferred Stock of GNN (the "GNN SERIES B PREFERRED STOCK"), all outstanding shares of GNN Series A Preferred Stock and Series B Preferred Stock will convert into shares of GNN Common Stock as set forth in their respective Certificates of Designations, and (ii) pursuant to the Certificate of Designation of the Series C Convertible Preferred Stock of GNN (the "GNN SERIES C PREFERRED STOCK"), all outstanding shares of GNN Series C Stock will convert into shares of GNN Common Stock as set forth in the Certificate of Designations of the GNN Series C Preferred Stock so long as a majority of GNN's Board of Directors (other than those Directors elected by the holders of GNN Series A Preferred Stock) and a majority of the holders of the GNN Common Stock and the GNN Series B Preferred Stock, voting together as a class, approve an adjustment to the conversion price of the GNN Series C Preferred Stock such that the transactions described herein will be deemed a "QUALIFIED SALE" as defined in the Certificate of Designations for the GNN Series C Preferred Stock. 5.4 GNN Subsidiaries. GNN does not own, directly or indirectly, any capital stock or other equity or ownership or proprietary interest in any Person. 5.5 Financial Statements. (a) Section 5.5 of the GNN Disclosure Letter contains true and correct copies of the (i) audited balance sheets of GNN as of December 31, 1998 and 1997, and the audited statements of -8- 606 income and audited statements of cash flows for the year ended December 31, 1998 and for the period from January 8, 1997 (inception) to December 31, 1997 and (ii) unaudited balance sheet of GNN as of May 31, 1999 and unaudited statement of income and statement of cash flow for the five months ended May 31, 1999 (collectively, (i) and (ii), the "GNN FINANCIAL STATEMENTS"). (b) The GNN Financial Statements (i) are in accordance with the books and records of GNN, which books and records are complete and correct in all Material respects and have been maintained in accordance with reasonable business practices; (ii) present fairly the financial condition, Assets and Liabilities of GNN, as of the respective dates indicated and the results of operations and cash flows for the respective periods indicated; (iii) have been prepared in accordance with GAAP consistently applied throughout the periods involved, except for the omission of notes to interim unaudited statements, and except that interim unaudited statements are subject to normal year end adjustments which will not, individually or in the aggregate, be Material; and (iv) reflect adequate reserves for all known Material Liabilities and reasonably anticipated losses required to be recorded under GAAP. 5.6 Absence of Undisclosed Liabilities. Except as disclosed on the May 31, 1999 GNN Financial Statements, GNN does not have any Undisclosed Liabilities, except for unpaid Liabilities incurred since May 31, 1999 and on or prior to the date hereof, in the ordinary course of business and not involving Funded Debt and which are not, individually, in excess of $50,000. 5.7 Absence of Changes. Since May 31, 1999 there has not been any transaction or occurrence in which GNN has: (a) issued or delivered or agreed to issue or deliver any capital stock or other securities (whether stock, bonds, debentures or other corporate securities) or granted or agreed to grant any options or rights to purchase any securities or borrowed or agreed to borrow any Funded Debt; (b) incurred or become subject to, or agreed to incur or become subject to, any Material Liability other than in the ordinary course of business; (c) discharged or satisfied any Lien or paid any Material Liability other than (i) current liabilities shown on the balance sheet as of May 31, 1999 included in the GNN Financial Statements, (ii) current liabilities incurred since that date in the ordinary course of business, or (iii) Funded Debt shown on such balance sheet or incurred since May 31, 1999 and set forth on Section 5.8 of the GNN Disclosure Letter; (d) declared, set aside or made, or agreed to declare, set aside or make any payments or dividends or any distribution with respect to GNN Capital Stock or purchased, redeemed or otherwise acquired, directly or indirectly, or agreed to purchase, redeem or acquire, any shares of capital stock or other securities; (e) mortgaged, pledged, subjected or agreed to subject, any of its Assets, tangible or intangible, to any Lien, except for any Liens regarding current real and personal property taxes not yet due and payable; (f) sold, assigned or transferred (or agreed so to do) any of its tangible Assets, or canceled or agreed to cancel any debts or claims, except, in each case, in the ordinary course of business; (g) sold, assigned or transferred any patents, trademarks, trade names, copyrights or other intangible Assets; (h) suffered any damage, destruction or loss, whether or not covered by insurance, which Materially and adversely affected the Assets or business of GNN, or suffered any extraordinary losses or waived any rights of substantial value, whether or not in the ordinary course of business; (i) increased the rate of compensation payable or to become payable by it to any of its officers, directors, employees or agents, or agreed so to do, except general hourly rate increases and normal merit increases for employees and agents other than officers in the ordinary course of business consistent with past practice; -9- 607 (j) terminated or amended any Material Contract, license or other instrument to which it is a party or suffered any loss or termination or threatened loss or termination, of any existing business arrangement, the termination or loss of which, individually or in the aggregate, could result in a Material Adverse Effect on GNN; (k) through negotiation or otherwise, made any commitment or incurred any Liability, whether or not enforceable, to any labor organization; (l) except for any year-end compensation bonuses to be paid consistent with past practice, if any, made or agreed to make any accrual or arrangement for or payment of any bonus or special compensation of any kind to any officer, director, employee or agent; (m) directly or indirectly paid or entered into a Contract to pay any severance or termination pay to any officer, director, employee or agent; (n) changed any of the accounting principles followed by it or the methods of applying such principles; (o) reclassified its shares of capital stock into a different number of shares; (p) made or approved the making of any capital expenditure exceeding the amount of $50,000 in any instance; (q) except in the ordinary course of business, loaned funds to or increased the aggregate amount of existing loans to any Person; (r) experienced any development, quality assurance or network operations problems that has had, or is reasonably likely to have, a Material Adverse Effect on GNN; (s) suffered or experienced any other event, change or occurrence (other than events or conditions affecting the economy generally) which has had, or is reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on GNN; (t) acquired a new business of any Person or acquired (by any means, whether by merger, asset purchase, stock purchase or otherwise) substantially all of the Assets or securities of any other Person; or (u) agreed to take any action listed in this Section 5.7. 5.8 Indebtedness. Section 5.8 of the GNN Disclosure Letter lists all Funded Debt of GNN as of the date hereof, setting forth the principal amounts outstanding, per annum interest rates and maturity dates for all such indebtedness. All of the indebtedness (including Funded Debt) of GNN as of the respective dates of the GNN Financial Statements and as of the date of this Agreement is accurately reflected in the GNN Financial Statements, and with respect to any Funded Debt, GNN is not in breach or Default in any Material respect under any of the terms or conditions set forth in the loan documents or any other document or instrument related thereto. All of the Funded Debt of GNN is prepayable at any time without penalty or premium at the option of the obligor. The transactions contemplated in this Agreement will not result in any penalty or incurrence of any additional obligation or change of any terms with respect to any such indebtedness. GNN does not have any indebtedness to any Affiliate, employee, officer, director or 5% or greater stockholder of GNN. 5.9 Tax Matters. (a) GNN has timely filed all federal, state, local and foreign returns, estimates, information statements and reports ("RETURNS") relating to Taxes required to be filed by GNN with any Tax authority, except such Returns which are not Material to GNN. GNN has paid all Taxes shown to be due on such Returns. (b) GNN as of the Effective Time will have withheld with respect to its employees all federal and state income Taxes, Taxes pursuant to the Federal Insurance Contribution Act ("FICA"), Taxes pursuant to the Federal Unemployment Tax Act ("FUTA") and other Taxes required to be withheld. -10- 608 (c) GNN has not been delinquent in the payment of any Tax nor is there any Tax deficiency outstanding, proposed or assessed against GNN, nor has GNN executed any unexpired waiver of any statute of limitations on or extending the period for the assessment or collection of any Tax. (d) No audit or other examination of any Return of GNN by any Tax authority is presently in progress, nor has GNN been notified of any request for such an audit or other examination. (e) No adjustment relating to any Returns filed by GNN has been proposed in writing formally or informally by any Tax authority to GNN or any representative thereof. (f) GNN does not have any Liability for unpaid Taxes which has not been accrued for or reserved on the GNN Financial Statements, whether asserted or unasserted, contingent or otherwise, which is Material to GNN, other than any Liability for unpaid Taxes that may have accrued since the date of the GNN Financial Statements in connection with the operation of the business of GNN in the ordinary course. (g) There is no agreement, plan, arrangement or other Contract to which GNN is a party as of the date of this Agreement, including but not limited to the provisions of this Agreement, covering any employee or former employee of GNN that, individually or collectively, could give rise to the payment of any amount that would not be deductible pursuant to Sections 280G, 404 or 162(m) of the Internal Revenue Code. (h) GNN has not filed any consent agreement under Section 341(f) of the Internal Revenue Code or agreed to have Section 341(f)(2) of the Internal Revenue Code apply to any disposition of a subsection (f) asset (as defined in Section 341(f)(4) of the Internal Revenue Code) owned by GNN. (i) GNN is not party to nor has any obligation under any tax-sharing, tax indemnity or tax allocation agreement, arrangement or other Contract. (j) Except as may be required as a result of the Merger, GNN has not been and will not be required to include any adjustment in Taxable income for any Tax period (or portion thereof) pursuant to Section 481 or Section 263A of the Internal Revenue Code or any comparable provision under state or foreign Tax Laws as a result of transactions, events or accounting methods employed prior to the Closing. (k) None of GNN's Assets are tax exempt use property within the meaning of Section 168(h) of the Internal Revenue Code. (l) GNN is not subject to (i) any foreign Tax holidays, (ii) any intercompany transfer pricing agreements, or other arrangements that have been established by GNN with any Tax authority and (iii) any expatriate programs or policies affecting GNN. (m) GNN is not, and has not been at any time, a "United States real property holding corporation" within the meaning of Section 897(c)(2) of the Internal Revenue Code. 5.10 Real Property. (a) GNN does not own any real property. True and correct copies of all real property leases of GNN have been provided or made available to WebMD. Each of such leases is in full force and effect on the date hereof, except as the validity of such leases may be affected by actions, events or conditions involving only the other party thereto, and to the knowledge of GNN no such actions, events or conditions have occurred or exist. No Default by GNN under any of the terms or conditions set forth in any of the foregoing leases has occurred or been asserted by any party. The continuation, validity and effectiveness of the terms and conditions of such leases will not be Materially adversely affected by the transactions contemplated by this Agreement. (b) To the knowledge of GNN, all improvements on the real estate leased to or used by GNN Materially conform to all applicable state and local Laws, zoning and building ordinances and health and safety ordinances, and the property is zoned for the various purposes for which the real estate and improvements thereon are presently being used. -11- 609 (c) Each of the leased premises is in satisfactory condition and repair consistent with the uses to which they are being put. (d) No proceedings for the taking of any of such leased real property by eminent domain by any Regulatory Authority are pending or, to the knowledge of GNN, threatened. 5.11 Personal Property. (a) True and correct copies of all leases for personal property (except miscellaneous leases of office machinery, fixtures or any leases having future minimum lease payments of less than $25,000) used or employed by GNN have been provided or made available to WebMD. Each of such leases is in full force and effect on the date hereof, except as the validity of such leases may be affected by actions, events or conditions affecting the other party thereto, and to the knowledge of GNN no such actions, events or conditions exists or has occurred. No Default by GNN under any of the terms or conditions set forth in any of the foregoing leases has occurred or been asserted by any party. The continuation, validity and effectiveness of such leases will not be adversely affected by the transactions contemplated by this Agreement. Except as disclosed in Section 5.11 of the GNN Disclosure Letter, GNN does not lease any personal property as lessor. (b) All Material items of personal property and leasehold improvements owned or leased by GNN are shown on or reflected in the unaudited balance sheet of GNN as of May 31, 1999, included in the GNN Financial Statements, are in satisfactory operating condition and in a state of reasonable maintenance and repair, consistent with the uses to which they are being put. 5.12 Intellectual Property. (a) Section 5.12 of the GNN Disclosure Letter contains a true and complete list of all Registered Intellectual Property owned by or exclusively licensed to GNN on the date hereof, and, with respect to Registered Intellectual Property owned by GNN, specifies the jurisdictions in which each such item of Registered Intellectual Property has been issued or registered or in which an application for issuance or registration has been filed, including the respective registration or application numbers. GNN owns good and exclusive title to or has licensed (sufficient for the conduct of its business as currently conducted and as proposed to be conducted), each Material item of Intellectual Property used by GNN free and clear of any Lien (excluding licenses and related restrictions). GNN is the exclusive owner of, and has good title (free and clear of all Liens) to, all (i) trademarks and trade names used in connection with the operation or conduct of the business of GNN, including the sale of products or the provisions of services, and (ii) copyrighted works that are GNN products or which GNN otherwise purports to own. Neither GNN or, to the knowledge of GNN, its predecessors has misused or infringed on the Intellectual Property of others, and none of the Intellectual Property as used in the business conducted by GNN infringes or will infringe upon or otherwise violates or will violate the Intellectual Property of others or constitutes or will constitute unfair competition or trade practices under any applicable Law, nor has any Person asserted a claim of such infringement or violation of Intellectual Property or unfair competition or trade practices against GNN. GNN is not obligated to pay any royalties to any Person with respect to any Intellectual Property in excess of $5,000.00 per year. GNN has not transferred ownership of, licensed or sublicensed its rights in any Intellectual Property, except non-exclusive licenses in the ordinary course of business, forms of which license agreements and a list of which licensees, GNN has delivered or made available to WebMD. (b) To the knowledge of GNN, no officer, director or employee of GNN has entered into any Contract currently in effect other than on behalf of GNN and with GNN's authorization, which requires such officer, director or employee to assign any interest in any Intellectual Property or which restricts or prohibits such officer, director or employee from engaging in activities competitive with GNN. To the extent that any Material Intellectual Property has been developed or created by a third party for GNN, GNN has a written agreement with such third party with respect thereto and GNN thereby either (i) has obtained ownership of, and is the exclusive owner of; or (ii) has obtained a license (sufficient for the conduct of its business as currently conducted and as proposed to be conducted) to all such third party's -12- 610 Intellectual Property in such work, material or invention by operation of law or by valid assignment, to the fullest extent it is legally possible to do so. (c) GNN is listed in the records of the appropriate United States, state or foreign agency as the sole owner of record for each application and registration of Registered Intellectual Property listed in Section 5.12 of the GNN Disclosure Letter. Each Material item of Registered Intellectual Property owned by GNN is valid and subsisting, all necessary registration, maintenance and renewal fees currently due in connection with such registration, maintenance and renewal fees currently due in connection with such Registered Intellectual Property have been made and all necessary documents, recordations and certificates in connection with such Registered Intellectual Property have been filed with the relevant patent, copyright, trademark or other Regulatory Authorities for the purposes of maintaining such Registered Intellectual Property in the jurisdictions listed in Section 5.12 of the GNN Disclosure Letter. There is no pending written threat received by GNN of, or to the knowledge of GNN, any verbal threat of opposition, interference or cancellation in, a proceeding before any court or registration authority in any jurisdiction against the applications or registrations listed in Section 5.12 of the GNN Disclosure Letter, or, to the knowledge of GNN, against any Intellectual Property exclusively licensed to GNN. (d) There are no settlements, forbearances to sue, consents, judgments, or other Orders of which GNN is a party or of which it is aware and which (i) restrict GNN's rights to use any Intellectual Property owned by or licensed to GNN, (ii) restrict GNN's business in order to accommodate a third party's intellectual property rights or (iii) permit third parties to use any Intellectual Property owned or controlled by GNN. To the knowledge of GNN, no Person has infringed or misappropriated or is infringing or misappropriating any Intellectual Property used by GNN in the conduct of its business. (e) The consummation of the transactions contemplated hereby will not result in the Material loss or impairment of GNN's right to own or use any Intellectual Property or result in GNN's granting to any third party any right to or with respect to any Material Intellectual Property, nor will require the consent of any Regulatory Authority or other third party in respect of any Intellectual Property. 5.13 Accounts Receivable. The accounts receivable of GNN as of May 31, 1999, as reflected in the GNN Financial Statements (net of reserves reflected in such GNN Financial Statements), to the extent uncollected on the date hereof, and the accounts receivable reflected on the books of GNN on the date hereof, are validly existing and represent monies due for goods sold and delivered or services performed, and the value of such accounts receivable as shown in the GNN Financial Statements are, in the aggregate, net of adequate reserves for doubtful and uncollectible accounts as determined in accordance with GAAP. There are no refunds, discounts or other adjustments payable with respect to any such accounts receivable, and there are no defenses, rights of set-off, assignments, restrictions, encumbrances, or conditions enforceable by third parties on or affecting any of the foregoing. 5.14 The Proprietary Software; 2000 Year liance. (a) The proprietary computer software of GNN owned by GNN (and not licensed from any other party) included in the Intellectual Property of GNN (the "GNN Software") performs substantially in accordance with its documentation, is free of material defects in operation, is in machine-readable form, and contains all current revisions of such software, and includes all computer programs, materials, tapes, object and source codes and other written materials related to the GNN Software. GNN has delivered to WebMD complete and correct copies of all user and technical documentation related to the GNN Software. (b) Neither GNN nor, to the knowledge of GNN, any employee or agent thereof has developed or assisted in the enhancement of the GNN Software except for enhancements included in the GNN Software as delivered to WebMD pursuant hereto. (c) To GNN's knowledge, no employee of GNN is, or is now expected to be, in Default under any term of any employment Contract, agreement or arrangement relating to the GNN Software or noncompetition arrangement, or any other Contract or any restrictive covenant relating to the GNN Software or its development or exploitation. The GNN Software was developed entirely by the employees -13- 611 of GNN during the time they were employees only of GNN or by consultants who assigned in writing all of their rights in the GNN Software to GNN. (d) All right, title and interest in and to the GNN Software is owned by GNN, free and clear of all Liens, is fully transferable to Purchaser or Merger Corp., and no party other than GNN has any interest in the GNN Software, including without limitation, any Lien, license, contingent interest or otherwise, or will have any right, title or interest in and to the GNN Software after the Merger. The preceding sentence and the last sentence of this paragraph (d) shall not include licenses to the GNN Software made in the ordinary course of business, forms of which license agreements GNN has made available to WebMD. GNN's development or sale of the GNN Software did and does not violate any rights of any other Person and GNN has not received any written communication alleging such a violation. GNN does not have any obligation to compensate any Person for the development, use, sale or exploitation of the GNN Software. GNN has not granted to any other Person any license, option or other right to develop, use, sell or exploit in any manner the GNN Software, whether requiring the payment of royalties or not. (e) GNN has kept secret and has not disclosed the source code for the GNN Software to any Person other than certain employees of GNN. GNN has taken commercially reasonable measures to protect the confidential and proprietary nature of the GNN Software. There have been no patents applied for and no copyrights registered by GNN or to GNN's knowledge for any part of the GNN Software. To the knowledge of GNN, there are no trademark rights of any Person other than GNN in the name "GREENBERG NEWS NETWORKS" "MEDCAST" or "MEDCAST NETWORKS". (f) All copies of the GNN Software embodied in physical form and in GNN's control will be delivered to Purchaser at or prior to the Closing. (g) Except in the ordinary course of business, GNN has not given any warranties to any third parties with respect to the products or services offered by it. With respect to any such warranties given in the ordinary course of business, GNN has either delivered or made available to WebMD copies of all such agreements granting any such warranty. (h) The GNN Software and GNN internal systems have been designed to insure date time entry recognition, calculations that accommodate same century and multi-century formulas and date values, leap year recognition and calculations, and date data interface values that reflect the century. The GNN Software and GNN internal systems manage and manipulate data involving dates and times, including single century formulas and multi-century formulas, and do not cause an abnormal ending scenario within the application or generate incorrect values or invalid results involving such dates. 5.15 Insurance. All of the Assets and business of GNN of an insurable nature and of a character usually insured by companies of similar size and in similar businesses are insured in such amounts and against such losses, casualties or risks as is usual in such companies and for such Assets and business. A complete and accurate list of all insurance policies held by GNN and now in force (including, without limitation, property damage, public liability, communications liability, worker's compensation, fidelity bonds, errors and omissions, theft, forgery and other coverage) is set forth in Section 5.15 of the GNN Disclosure Letter, and, true and correct copies of all such policies, have been made available to WebMD. All such policies are in full force and effect and the premiums due thereon have been timely paid. GNN is not now in Default regarding the provisions of any such policy, nor have they failed to give any notice or present any Material claim thereunder in due and timely fashion. The consummation of the transactions contemplated by this Agreement will not constitute a Default under, or otherwise affect the coverage under any such insurance policies. There is no Material claim by GNN pending under any insurance policies of GNN as to which coverage has been questioned, denied or disputed by the underwriters of such policies. 5.16 Compliance with Laws. (a) GNN has in effect all Material Permits necessary for it to own, lease or operate its Assets and to carry on its business as now conducted. GNN is not in violation in any Material respect of any Laws, Orders or Permits applicable to its business or employees conducting its business. No notice or -14- 612 warning from any Regulatory Authority with respect to any failure or alleged failure of GNN to comply with any Law has been received by GNN, nor, to the knowledge of GNN, is any such notice or warning proposed or threatened. (b) No consent or approval of, prior filing with or notice to, or other action by, any Regulatory Authority or any other third party is required in connection with the execution and delivery of this Agreement or any agreement or other instrument to be executed and delivered pursuant to this Agreement by GNN or the consummation of the transactions provided for herein or therein except for such consents and approvals that have been obtained and filings, notices and other actions that have been taken or made, the filing of the Certificate of Merger with the State of Delaware, HSR Act filings as contemplated under Section 10.2 and such consents and approvals as may be required under Securities Laws and state securities Laws. (c) To the knowledge of GNN, there are no capital expenditures in excess of $100,000 in the aggregate that GNN anticipates will be required to be made in connection with the business of GNN as now conducted in order to comply with any existing Laws or other governmental requirements applicable to the business of GNN as now conducted including, without limitation, requirements relating to occupational health and safety. "CAPITAL EXPENDITURES" shall have the same meaning as it has in the GNN Financial Statements if and to the extent that the treatment thereof is in accordance with GAAP. (d) Neither GNN nor, to the knowledge of GNN, any officer, director, employee, agent or other representative thereof acting or purporting to act on behalf of any such entity or any business enterprise with which GNN has been associated or affiliated, has, directly or indirectly, made or authorized any payment, contribution or gift of money, property, or services, in violation of applicable law (i) as a kickback or bribe to any person, or (ii) to any political organization or the holder of, or any aspirant to, any elective or appointive office of any nation, state, political subdivision thereof, or other governmental body or instrumentality. 5.17 Environmental Matters. (a) There is no Litigation with respect to the ownership, use, condition or operation of any of the Assets held for use or sale by GNN or any of its predecessors related to or arising under any Environmental Law in any court or before or by any Regulatory Authority or private arbitration tribunal (hereinafter collectively referred to as "ENVIRONMENTAL LITIGATION"). There are no existing violations of Environmental Laws by GNN with respect to the ownership, use, condition, lease or operation of real property formerly held for use or sale by any of its predecessors other than violations which would not, either individually or in the aggregate, have a Material Adverse Effect on GNN. Neither GNN nor, to the knowledge of GNN, any of its predecessors has used any Assets or premises thereof for the handling, treatment, storage, or disposal of any Hazardous Substances except in compliance with all applicable Environmental Laws. No written notice, or other communication from any court or Regulatory Authority, official or instrumentality, of any alleged violation of any Environmental Law has been communicated to management of GNN or any predecessor or, to the knowledge of GNN, filed with respect to the use, ownership, condition, operation, or disposal of any of the Assets or premises of GNN or any Assets or premises formerly held for use or sale by GNN or, to the knowledge of GNN, any of its predecessors. To the knowledge of GNN, no basis exists for the allegation of any such violations. (b) To the knowledge of GNN, no building or other improvement or any premises owned, leased, operated or managed by GNN contains any asbestos-containing materials. (c) Copies of any environmental audits or environmental surveys of any real estate owned or leased by GNN are attached to Section 5.17 of the GNN Disclosure Letter. 5.18 Litigation and Claims. There are no outstanding Orders or administrative decisions to which GNN is subject, and, except as disclosed on Section 5.18 of the GNN Disclosure Letter, there is no Litigation pending or, to GNN's knowledge, threatened against or relating to GNN or its Assets or businesses. GNN has not been advised by any attorney representing any such entity that there are any "LOSS CONTINGENCIES" (as defined in Statement of Financing Accounting Standards No. 5 issued by the -15- 613 Financial Accounting Standards Board in March 1975 ("FASB 5")), which would be required by FASB 5 to be disclosed or accrued in the GNN Financial Statements. 5.19 Contracts and Commitments. (a) Section 5.19 (a) of the GNN Disclosure Letter lists all of the following Contracts to which GNN is a party or by which GNN benefits or is subject (or by which its Assets are subject), all of which have been made available to WebMD for review: (i) any Contract for the employment of any officer, director, employee or consultant that is not terminable at will; (ii) any Contract for the purchase, sale, production, supply, maintenance or support, whether on a continuing basis or otherwise, of goods or services of any type involving in any one case (or group of related Contracts) $100,000 or more; (iii) any (A) Contract or license to which GNN is a party (1) with respect to any Intellectual Property of GNN licensed or transferred to any third party (other than end user licenses in the ordinary course of business), or (2) pursuant to which any third party has licensed or transferred any Intellectual Property to GNN (other than shrink wrap and similar widely available commercial end user licenses), or (B) other Material Contract related to Intellectual Property used by GNN in its business as currently conducted; (iv) any sales or vendor Contract or sub-contract involving in any one case (or group of related Contracts) $100,000 or more; (v) any Contract not made in the ordinary course of business, including but not limited to any management agreements; (vi) any Contracts pursuant to which any of GNN's product or pages therein are linked with other web sites or pages therein; Contracts with web site hosts or Internet access providers; Contracts regarding data center hosting or security; Contracts relating to advertising or sponsorships; Contracts providing for the use, display or distribution of third party content, information or data or the provision of services through GNN's product; Contracts regarding continuing medical education programs; Contracts regarding the establishment or maintenance of networks, telecommunication links, virtual private networks or other similar non-public networks; (vii) any Contracts that are, in the reasonable opinion of GNN, Materially adverse, onerous or otherwise harmful to GNN's business, operations or Assets; (viii) any strategic alliance agreements; (ix) any Contracts upon which the business, rights or Assets, or condition, financial or otherwise, of GNN depends or which involve payments of greater than $50,000; (x) any Contract currently in force relating to the disposition or acquisition by GNN after the date of this Agreement of any amount of Assets not in the ordinary course of business or pursuant to which GNN has a Material ownership interest in any Person, joint venture or other business enterprise; (xi) any joint marketing or development agreement currently in force under which GNN has continuing obligations to jointly market any product, technology or service; (xii) any Contract currently in force to provide services or goods to any third party for any product or technology that is Material to GNN; (xiii) any Contract currently in force to sell or distribute any GNN products, services or technology except agreements with distributors or sales representatives in the normal course of business cancelable without penalty upon 90 days or less notice and substantially in the form previously provided to WebMD; and -16- 614 (xiv) any mortgage, indenture, guarantee, loans or credit agreements, security agreements or other agreements or instrument relating to Funded Debt. (b) Except as to Contracts that are cancelable at will or upon 30 days' notice or less, (i) each of the Contracts described in this Section 5.19 is in full force and effect on the date hereof, except as the validity of such Contracts may be affected by actions, events or conditions involving only the other party thereto, none of which actions, events or conditions have, to the knowledge of GNN, occurred or exist, (ii) no material Default under any of the terms or conditions set forth in any of the Contracts to which GNN is a party or any document or instrument related thereto has occurred or been asserted by any party, (iii) there has been no actual, or to the knowledge of GNN, threatened termination, cancellation or limitation of any of the Contracts listed in Section 5.19(a) of the GNN Disclosure Letter and (iv) the continuation, validity and effectiveness of such Contracts, and all other Material terms thereof, will not be affected by the transactions contemplated by this Agreement. Except as set forth in Section 5.19(b) of the GNN Disclosure Letter, no Contract described in this Section 5.19 requires the consent of any party to its assignment in connection with the transactions contemplated hereby. 5.20 Powers of Attorney. GNN has not given or granted any power of attorney, whether limited or general, to any Person that is continuing in effect. 5.21 Benefit Plans. (a) Definitions. With the exception of the definition of "AFFILIATE" set forth in Section 5.21(a)(i) below (which definition shall apply only to this Section 5.21), for purposes of this Agreement, the following terms shall have the meanings set forth below: (i) "AFFILIATE" shall mean any other person or entity under common control with GNN within the meaning of Section 414(b), (c), (m) or (o) of the Internal Revenue Code and the regulations issued thereunder; (ii) "GNN EMPLOYEE PLAN" shall mean any plan, program, policy, practice, Contract, agreement or other arrangement providing for compensation, severance, termination pay, deferred compensation, performance awards, stock or stock-related awards, fringe benefits or other employee benefits or remuneration of any kind, whether written or unwritten or otherwise, funded or unfunded, including without limitation, each "EMPLOYEE BENEFIT PLAN," within the meaning of Section 3(3) of ERISA which is or has been maintained, contributed to, or required to be contributed to, by GNN Affiliate for the benefit of any Employee, or with respect to which GNN or any Affiliate has or may have any Liability or obligation; (iii) "COBRA" shall mean the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended; (iv) "DOL" shall mean the Department of Labor; (v) "EMPLOYEE" shall mean any current or former employee, consultant or director of GNN or any Affiliate; (vi) "EMPLOYEE AGREEMENT" shall mean each management, employment, severance, consulting, relocation, repatriation, expatriation, visas, work permit or other agreement, Contract or understanding between GNN or any Affiliate and any Employee or consultant; (vii) "FMLA" shall mean Family Medical Leave Act of 1993, as amended; (viii) "INTERNATIONAL EMPLOYEE PLAN" shall mean each GNN Employee Plan that has been adopted or maintained by GNN or any Affiliate, whether informally or formally, or with respect to which GNN or any Affiliate will or may have any Liability, for the benefit of Employees who perform services outside the United States; (ix) "IRS" shall mean the Internal Revenue Service; -17- 615 (x) "MULTIEMPLOYER PLAN" shall mean any "PENSION PLAN" (as defined below) which is a "multiemployer plan," as defined in Section 3(37) of ERISA; (xi) "PBGC" shall mean the Pension Benefit Guaranty Corporation; and (xii) "PENSION PLAN" shall mean each GNN Employee Plan which is an "EMPLOYEE PENSION BENEFIT PLAN," within the meaning of Section 3(2) of ERISA. (b) Disclosure Letter. Section 5.21 of the GNN Disclosure Letter contains an accurate and complete list of each GNN Employee Plan and each Employee Agreement under each GNN Employee Plan or Employee Agreement. GNN does not have any plan or commitment to establish any new GNN Employee Plan or Employee Agreement, to modify any GNN Employee Plan or Employee Agreement (except to the extent required by Law or to conform any such GNN Employee Plan or Employee Agreement to the requirements of any applicable Law, in each case as previously disclosed to Purchase in writing, or as required by this Agreement), or to enter into any GNN Employee Plan or Employee Agreement, nor does it have any intention or commitment to do any of the foregoing. (c) Documents. GNN has provided to WebMD: (i) correct and complete copies of all documents embodying to each GNN Employee Plan and each Employee Agreement including (without limitation) all amendments thereto, all related trust documents and written interpretations thereof; (ii) the most recent annual actuarial valuations, if any, prepared for each GNN Employee Plan; (iii) the three (3) most recent annual reports (Form Series 5500 and all schedules and financial statements attached thereto), if any, required under ERISA or the Internal Revenue Code in connection with each GNN Employee Plan or related trust; (iv) if the GNN Employee Plan is funded, the most recent annual and periodic accounting of GNN Employee Plan assets; (v) the most recent summary plan description together with the summary(ies) of Material modifications thereto, if any, required under ERISA with respect to each GNN Employee Plan or related trust; (vi) all IRS determination, opinion, notification and advisory letters, and rulings relating to GNN Employee Plans and copies of all applications and correspondence to or from the IRS or the DOL with respect to GNN Employee Plan; (vii) all Material written agreements and Contracts relating to each GNN Employee Plan, including, but not limited to, administrative service agreements, group annuity Contracts and group insurance Contracts; (viii) all communications material to any Employee or Employees relating to any GNN Employee Plan and any proposed Employee Plans, in each case, relating to any amendments, terminations, establishments, increases or decreases in benefits, acceleration of payments or vesting schedules or other events which would result in any Material Liability to the GNN; (ix) all correspondence to or from any governmental agency relating to any Employee Plan; (x) all COBRA forms and related notices; (xi) all policies pertaining to fiduciary Liability insurance covering the fiduciaries for each GNN Employee Plan; (xii) all discrimination tests for each GNN Employee Plan for the most recent plan year; and (xiii) all registration statements, annual reports (Form 11-K and all attachments thereto) and prospectuses prepared in connection with each GNN Employee Plan. (d) Employee Plan Compliance. (i) GNN has performed in all Material respects all obligations required to be performed by it under, is not in default or violation of, and has no knowledge of any default or violation by any other party to each GNN Employee Plan, and each GNN Employee Plan has been established and maintained in all Material respects in accordance with its terms and in compliance with all applicable Laws, including but not limited to ERISA or the Internal Revenue Code; (ii) each GNN Employee Plan intended to qualify under Section 401(a) of the Internal Revenue Code and each trust intended to qualify under Section 501(a) of the Internal Revenue Code has either received a favorable determination, opinion, notification or advisory letter from the IRS with respect to each such Plan as to its qualified status under the Internal Revenue Code, including all amendments to the Internal Revenue Code effected by the Tax Reform Act of 1986 and subsequent legislation, or has remaining a period of time under applicable Treasury regulations or IRS pronouncements in which to apply for such a letter and made any amendments necessary to obtain a favorable determination as to the qualified status of each such GNN Employee Plan; (iii) no "PROHIBITED TRANSACTION," within the meaning of Section 4975 of the Internal Revenue Code or Sections 406 and 407 of ERISA, and not otherwise exempt under Section 408 -18- 616 of ERISA, has occurred with respect to any GNN Employee Plan; (iv) there are no actions, suits or claims pending, or, to the knowledge of GNN, threatened or reasonable anticipated (other than routine claims for benefits) against any GNN Employee Plan or against the assets of any GNN Employee Plan; (v) each GNN Employee Plan can be amended, terminated or otherwise discontinued in accordance with its terms, without Liability to Purchaser or any of its Affiliates (other than ordinary administration expenses); (vi) there are no audits, inquiries or proceedings pending or, to the knowledge of GNN or any Affiliates, threatened by the IRS or DOL with respect to any GNN Employee Plan; and (vii) neither GNN nor any Affiliate is subject to any penalty or tax with respect to any GNN Employee Plan under Section 502(i) of ERISA or Sections 4975 through 4980 of the Internal Revenue Code. (e) Pension Plans. Neither GNN nor any Affiliate has ever maintained, established, sponsored, participated in, or contributed to, any Pension Plan which is subject to Title IV of ERISA or Section 412 of the Internal Revenue Code. (f) Multiemployer Plans. At no time has GNN or any Affiliate contributed to or been obligated to contribute to any Multiemployer Plan. (g) No Post-Employment Obligations. No GNN Employee Plan provides, or has any Liability to provide, retiree life insurance, retiree health or other retiree employee welfare benefits to any person for any reason, except as may be required by COBRA or other applicable Law, and GNN has never represented, promised or contracted (whether in oral or written form) to any Employee (either individually or to Employees as a group) or any other person that such Employee(s) or other person would be provided with retiree life insurance, retiree health or other retiree employee welfare benefit, except to the extent required by Law. (h) COBRA, etc. Neither GNN nor any Affiliate has, prior to the Effective Time, and in any Material respect, violated any of the health care continuation requirements of COBRA, the requirements of FMLA, the requirements of the Women's Health and Cancer Rights Act, the requirements of the Newborns' and Mothers' Health Protection Act of 1996, or any similar provisions of state Law applicable to its Employees. (i) Effect of Transaction. The execution of this Agreement and the consummation of the transactions contemplated hereby will not (either alone or upon the occurrence of any additional or subsequent events) constitute an event under any GNN Employee Plan, Employee Agreement, trust or loan that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any Employee (except as waived as set forth in Section 3.6(b)). (j) Employment Matters. The GNN: (i) is in compliance in all Material respects with all applicable Laws respecting employment, employment practices, terms and conditions of employment and wages and hours, in each case, with respect to Employees; (ii) has withheld and reported all amounts required by Law or by agreement to be withheld and reported with respect to wages, salaries and other payments to Employees; (iii) is not liable for any arrears of wage or any taxes or any penalty for failure to comply with any of the foregoing; and (iv) is not liable for any Material payment to any trust or other fund or to any Regulatory Authority, with respect to unemployment compensation benefits, social security or there benefits or obligations for Employees (other than routine payments to be made in the normal course of business and consistent with past practice). There are no pending, threatened or reasonable anticipated claims or actions against GNN under any workers' compensation policy or long-term disability policy. To GNN's knowledge, no employee of GNN has violated any employment contract, nondisclosure agreement or noncompetition agreement by which such employee is bound due to such employee being employed by GNN and disclosing to GNN or using trade secrets or proprietary information of any other person or entity. (k) Labor. No work stoppage or labor strike against GNN is pending, threatened or reasonably anticipated. GNN does not know of any activities or proceedings of any labor union to organize any employees. There are no actions, suits, claims, labor disputes or grievances pending, or, to the knowledge -19- 617 of GNN, threatened or reasonable anticipated relating to any labor, safety or discrimination matters involving any Employee, including, without limitation, charges of unfair labor practices or discrimination complaints, which, if adversely determined, would individually or in the aggregate, result in any Material Liability to GNN. GNN has not engaged in any unfair labor practices within the meaning of the National Labor Relations Act. GNN is not presently, nor has it been in the past, a party to, or bound by, any collective bargaining agreement or union contact with respect to Employees and no collective bargaining agreement is being negotiated by GNN. (l) International Employee Plan. GNN has never established, maintained or administered any International Employee Plan. 5.22 Remuneration. GNN has provided WebMD with a complete and accurate schedule of the direct compensation (including wages, salaries and actual or anticipated bonuses), plus a description of other annual benefits not made available to the other employees generally, to be paid in the current fiscal year to (i) all of the officers and directors of GNN; and (ii) all of the employees of GNN who received or will be receiving in excess of $50,000 (excluding commission and bonus compensation) during such year. No unpaid salary, other than for the immediately preceding pay period and other than pursuant to the existing deferred compensation plans of GNN is now payable to any of such officers, directors or employees. 5.23 Interested Transactions. (a) Except for or in connection with reasonable expenses or advancement of expenses incurred in the ordinary course of business for relocation of employees, GNN is not currently a party to any Contract, loan or other transaction with any of the following persons, or in which any of the following persons have any direct or indirect interest (other than as a stockholder or employee of GNN): (i) Any Affiliate, director, officer, employee of GNN or stockholder of GNN; (ii) To the knowledge of GNN, any of the spouses, parents, siblings, children, aunts, uncles, nieces, nephews, in-laws and grandparents of any of the Persons described in clause (i); or (iii) Any Person in which any of the Persons described in clauses (i) or (ii) has a beneficial interest (other than in a corporation whose shares are publicly traded and in which such Persons own beneficially in the aggregate no more than 5% of the outstanding equity interest). (b) None of the stockholders of GNN is an employee, consultant, partner, principal, director or Affiliate of any business entity which is engaged in a business which competes with or is similar to the business of GNN. 5.24 Subscription Agreements. As of the date hereof, GNN has executed subscription agreements with 7,400 physicians and has installed the GNN Software for, and is providing the GNN product to, 2,100 physicians. Except as a result of the transactions contemplated herein, GNN has no knowledge of any facts or circumstances which are reasonably likely to result in a reduction in the number of subscription agreements to which GNN is a party following the consummation of the transactions contemplated herein. The forms of subscription agreements have been provided to WebMD and each physician subscriber has entered into an agreement in substantially the form of the agreement provided to WebMD. Each of the subscription agreements is valid and enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally. 5.25 Statements True and Correct. (a) No certificate, schedule, or other exhibit furnished or to be furnished by GNN to WebMD or Newco pursuant to the terms of this Agreement (including the GNN Disclosure Letter) contains or will contain any untrue statement of Material fact or will omit to state a Material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. -20- 618 (b) If an Information Statement is distributed for the Stockholder Meeting as described under Section 10.1 hereof, (i) none of the information to be supplied by GNN or on behalf of GNN for inclusion or incorporation by reference in the Information Statement to be mailed to GNN's Stockholders in connection with the Stockholders Meeting will, when such documents are first mailed to the Stockholders of GNN, at the time of the Stockholders Meeting or at the Effective Time, contain any untrue statement of a Material fact or omit to state any Material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, and (ii) as to matters respecting it, the Information Statement will comply as to form in all Material respects with the provisions of the 1933 Act and the 1934 Act, as applicable, and the rules and regulations promulgated by the SEC thereunder. If at any time prior to the Effective Time any event relating to GNN or any of its respective Affiliates, officers or directors should be discovered by GNN which should be set forth in an amendment or a supplement to the Information Statement, GNN will promptly inform Purchaser. Notwithstanding the foregoing, GNN makes no representation or warranty with respect to any information supplied by any other Person that is contained in the Information Statement. (c) If a Registration Statement is filed in connection with the Merger and a Proxy Statement/ Prospectus is distributed for the Stockholders Meeting as described under Section 10.1 hereof, then: None of the information to be supplied by or on behalf of GNN for inclusion in the Registration Statement to be filed by Purchaser with the SEC will, at the time such Registration Statement becomes effective under the 1933 Act, contain any untrue statement of a Material fact or omit to state any Material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. None of the information to be supplied by GNN or on behalf of GNN for inclusion or incorporation by reference in the Proxy Statement/Prospectus to be mailed to GNN's Stockholders in connection with the Stockholders Meeting will, at the time such documents are filed, when such documents are first mailed to the Stockholders of GNN, at the time of the Stockholders Meeting or at the Effective Time, contain any untrue statement of a Material fact or omit to state any Material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. As to matters respecting GNN, the Registration Statement and Proxy Statement/Prospectus will comply as to form in all Material respects with the provisions of the 1933 Act and the 1934 Act, as applicable, and the rules and regulations promulgated by the SEC thereunder. Notwithstanding the foregoing, GNN makes no representation or warranty with respect to any information supplied by Purchaser or Merger Corp. that is contained in the Registration Statement. 5.26 Tax Treatment. Neither GNN nor, to the knowledge of GNN, any Affiliate of GNN has taken any action or has any knowledge of any fact or circumstance that is reasonably likely to prevent the transactions contemplated hereby, including the Merger, from qualifying as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code. 5.27 State Takeover Laws. GNN has taken all necessary action to exempt the transactions contemplated by this Agreement from any applicable state takeover Law including Section 203 of the GCLSD. 5.28 Restrictions of Business Activities. There is no Contract or order binding upon GNN or to which GNN is a party (i) which has or could reasonably be expected to have the effect of prohibiting or Materially impairing a current business practice of GNN, any acquisition by GNN of any Assets Material to GNN or the conduct of business by GNN as currently conducted or (ii) that contains any covenants not to compete or otherwise limits GNN's right in any way to engage in any line of business, or (iii) that is an exclusive Contract or otherwise restricts GNN's suppliers of content for GNN products or Assets or Intellectual Property (including but not limited to exclusive distribution agreements). 5.29 Fairness Opinion. GNN's Board of Directors has received an oral opinion from H&Q, dated as of June 28, 1999, to the effect that as of June 28, 1999, the Purchaser Stock Exchange Ratio is fair to the Stockholders from a financial point of view, a written copy of which will be delivered to Newco and WebMD promptly after receipt by GNN. -21- 619 5.30 GNN Disclosure Letter. Matters disclosed on each Section of the GNN Disclosure Letter shall be deemed disclosed only for purposes of the matters to be disclosed in such Section and shall not be deemed to be disclosed for any other purpose. ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF WEBMD Except as set forth in Sections to the letter delivered to GNN on or prior to the date of this Agreement (the "WEBMD DISCLOSURE LETTER") as specified below WebMD hereby represents and warrants to GNN as follows as of the date hereof and the Closing Date: 6.1 Organization, Standing, and Power. Each of WebMD and its Subsidiaries is a corporation duly organized, validly existing, and in good standing under the Laws of the state of its incorporation, and has the power and authority to carry on its business as it has been and is now being conducted and to own, lease and operate its Assets. Except as set forth in Section 6.1 of the WebMD Disclosure Letter, each of WebMD and its Subsidiaries is duly qualified or licensed to transact business as a foreign corporation and is in good standing in all jurisdictions where the character of its Assets or the nature or conduct of its business requires it to be so qualified or licensed, except for such jurisdictions in which the failure to be so qualified or licensed is not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on WebMD. Copies of the articles or certificate of incorporation and all amendments thereto of WebMD and its Subsidiaries and the bylaws, as amended, of WebMD and its Subsidiaries and copies of the corporate minutes (or resolutions adopted by the shareholders or Board of Directors and all committees thereof) of WebMD and its Subsidiaries, which have been made available to GNN for review, are true and complete, in all Material respects, as in effect on the date of this Agreement, and accurately reflect all proceedings of the shareholders and Board of Directors (and all committees thereof) of WebMD and its Subsidiaries. The stock record books of WebMD and its Subsidiaries, which have been made available to GNN for review, contain true and complete records of the stock ownership of WebMD and all prior transfers of the shares of its capital stock. 6.2 Authorization of Agreement; No Breach. The execution, delivery and performance of this Agreement has been duly authorized by all necessary corporate action of WebMD. This Agreement constitutes, and all agreements and other instruments and documents to be executed and delivered by WebMD pursuant to this Agreement will constitute, legal, valid and binding obligations of WebMD enforceable against WebMD in accordance with their respective terms, except to the extent such enforceability is subject to (i) Laws of general application relating to bankruptcy, insolvency, moratorium and the relief of debtors and (ii) the availability of specific performance, injunctive relief or other equitable remedies. Except as set forth in Section 6.2 of the WebMD Disclosure Letter, the execution, delivery and performance of this Agreement and the agreements and other documents and instruments to be executed and delivered by WebMD pursuant to this Agreement and the consummation of the transactions contemplated hereby and thereby will not, subject to obtaining the consents identified or contemplated herein (including without limitation all filings or consents under the HSR Act, the Securities Law and state securities Laws, and the rules and regulations of the NASD and the Nasdaq Stock Market with respect to the securities issued under the Registration Statement), (i) violate or result in a breach of or Default under the articles or certificate of incorporation or bylaws of WebMD or any of its Subsidiaries or any other Material Contract to which WebMD or any of its Subsidiaries is a party or is bound; (ii) to the knowledge of WebMD and its Subsidiaries, violate any Law, Order, administrative decision or award of any court, arbitrator, mediator, tribunal or Regulatory Authority applicable to or binding upon WebMD or its Subsidiaries or upon their respective securities, Assets or business; or (iii) create a Material Lien upon the securities, Assets or business of WebMD or any of its Subsidiaries. 6.3 Capital Stock. As of the date hereof, the authorized capital stock of WebMD consists of (a) 75,000,000 shares designated Common Stock (without designation as to series), of which 2,455,334 shares are issued and outstanding and none of which are issued and held as treasury shares, (b) 3,000,000 shares designated Common Stock Series B, of which 1,400,000 are issued and outstanding and none of -22- 620 which are issued and held as treasury shares, (c) 1,500,000 shares designated Common Stock Series C, of which 1,500,000 are issued and outstanding and none of which are issued and held as treasury shares, (d) 15,000,000 shares designated Common Stock Series D, of which 5,899,796 are issued and outstanding and none of which are issued and held as treasury shares, (e) 2,500,000 shares designated Common Stock Series E, of which 2,100,000 are issued and outstanding and none of which are issued and held as treasury shares; and (f) 10,000,000 shares designated as Preferred Stock, of which (i) 1,600,000 shares are designated Series A Preferred Stock, of which 1,341,000 are issued and outstanding and none of which are issued and held as treasury shares, (ii) 3,400,000 shares are designated Series B Preferred Stock, of which 3,042,135 are issued and outstanding and none of which are issued and held as treasury shares, (iii) 2,000,000 shares are designated Series C Preferred Stock, of which 1,008,750 are issued and outstanding and none of which are issued and held as treasury shares, (iv) 200,000 shares are designated Series D Preferred Stock, of which 200,000 are issued and outstanding and none of which are issued and held as treasury shares, (v) 792,000 shares are designated Series E Preferred Stock, of which 456,896 are issued and outstanding and none of which are issued and held as treasury shares, and (vi) 1,180,000 shares are designated Series F Preferred Stock, of which 816,975 are issued and outstanding and none of which are issued and held as treasury shares. WebMD has no other capital stock authorized, issued or outstanding. All of such shares are duly and validly issued and outstanding, and are fully paid and non-assessable and were issued pursuant to an exemption from registration under the 1933 Act and all applicable state securities Laws. Except as contemplated by this Agreement, there are no outstanding warrants, options, rights (including outstanding rights to demand registration or to sell in connection with a registration by WebMD under the 1933 Act), calls or other commitments of any nature relating to WebMD capital stock to which WebMD is a party, and there are no outstanding securities of WebMD convertible into or exchangeable for shares of WebMD Common Stock or any other capital stock of WebMD. All of such WebMD warrants, options, rights calls or other commitments were issued or granted pursuant to a valid exemption from registration under the 1933 Act and all applicable state securities Laws. Except in connection with the Healtheon/WebMD Agreement and the transactions contemplated therein, WebMD and its Subsidiaries have no knowledge of any voting agreements or voting trusts between or among any Person or Persons relating to WebMD, WebMD capital stock or any of its Subsidiaries. WebMD is not obligated to issue or repurchase any shares of its capital stock for any purpose, and, to the knowledge of WebMD, no Person has entered into any Contract or option or any right or privilege (whether preemptive or contractual) capable of becoming a Contract or option for the purchase, subscription or issuance of any unissued shares, or other securities of WebMD. 6.4 WebMD Subsidiaries. Section 6.4 of the WebMD Disclosure Letter contains a true and correct list of each Subsidiary of WebMD. All of the outstanding shares of capital stock of each such Subsidiary are duly and validly issued and outstanding, are fully paid and non-assessable, and were issued pursuant to a valid exemption from registration under the 1933 Act, and all applicable state securities Laws, and are owned of record and beneficially by WebMD, free and clear of any and all Liens. No shares of capital stock of any Subsidiary are reserved for issuance and there are no outstanding options, warrants, rights, subscriptions, claims of any character, Contracts, obligations, convertible or exchangeable securities or other commitments, contingent or otherwise, relating to the capital stock of any Subsidiary, pursuant to which any Subsidiary is or may become obligated to issue or exchange any share of capital stock. Except as set forth in Section 6.4 of the WebMD Disclosure Letter, neither WebMD nor any Subsidiary owns, directly or indirectly, any capital stock or other equity or ownership or proprietary interest in any Person. 6.5 Financial Statements. (a) Section 6.5 of the WebMD Disclosure Letter contains true and correct copies of the (i) audited consolidated balance sheets of WebMD as of December 31, 1998, 1997 and 1996, and the audited consolidated statements of income and audited consolidated statements of cash flows for the years ended December 31, 1998, 1997 and 1996 and (ii) the unaudited balance sheet of WebMD as of March 31, 1999 and the unaudited consolidated statements of income and unaudited statements of cash flows for the three months ended March 31, 1999 and 1998 (collectively, (i) and (ii), the "WEBMD FINANCIAL STATEMENTS"). -23- 621 (b) The WebMD Financial Statements (i) are in accordance with the books and records of WebMD and its Subsidiaries, which books and records are complete and correct in all Material respects and have been maintained in accordance with reasonable business practices; (ii) present fairly the consolidated financial condition, Assets and Liabilities of WebMD and its Subsidiaries, taken as a whole, as of the respective dates indicated and the results of operations and cash flows for the respective periods indicated; (iii) have been prepared in accordance with GAAP consistently applied throughout the periods involved, except for the omission of notes to interim unaudited consolidated statements and except that interim unaudited statements are subject to normal year end adjustments which will not, individually or in the aggregate, be Material; and (iv) reflect adequate reserves for all known Material Liabilities and reasonably anticipated losses required to be recorded under GAAP. 6.6 Absence of Undisclosed Liabilities. Except as disclosed in Section 6.6 of the WebMD Disclosure Letter or on the March 31, 1999 WebMD Financial Statements, as of the date hereof neither WebMD nor any of its Subsidiaries has any Undisclosed Liabilities, except for unpaid liabilities and obligations incurred since March 31, 1999, in the ordinary course of business or which are not, in the aggregate, Material to WebMD and its Subsidiaries, taken as a whole. 6.7 Absence of Certain Changes or Events. Since March 31, 1999, except as disclosed on Section 6.7 of the WebMD Disclosure Letter, there have been no events, changes or occurrences (other than events or conditions affecting the economy generally) which have had, or are reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on WebMD. 6.8 Tax Matters. (a) WebMD has timely filed all federal, state, local and foreign Returns relating to Taxes required to be filed by WebMD with any Tax authority, except such Returns which are not Material to WebMD. WebMD has paid all Taxes shown to be due on such Returns. (b) WebMD as of the Effective Time will have withheld with respect to its employees all federal and state income Taxes, Taxes pursuant to FICA, Taxes pursuant to FUTA and other Taxes required to be withheld. (c) WebMD has not been delinquent in the payment of any Tax nor is there any Tax deficiency outstanding, proposed or assessed against WebMD, nor has WebMD executed any unexpired waiver of any statute of limitations on or extending the period for the assessment or collection of any Tax. (d) No audit or other examination of any Return of WebMD by any Tax authority is presently in progress, nor has WebMD been notified of any request for such an audit or other examination. (e) No adjustment relating to any Returns filed by WebMD has been proposed in writing formally or informally by any Tax authority to WebMD or any representative thereof. (f) WebMD does not have any Liability for unpaid Taxes which has not been accrued for or reserved on the WebMD Financial Statements, whether asserted or unasserted, contingent or otherwise, which is Material to WebMD, other than any Liability for unpaid Taxes that may have accrued since the date of the WebMD Financial Statements in connection with the operation of the business of WebMD in the ordinary course. (g) There is no Contract, agreement, plan, arrangement or other Contract to which WebMD is a party as of the date of this Agreement, including but not limited to the provisions of this Agreement, covering any employee or former employee of WebMD that, individually or collectively, could give rise to the payment of any amount that would not be deductible pursuant to Sections 280G, 404 or 162(m) of the Internal Revenue Code. (h) WebMD has not filed any consent agreement under Section 341(f) of the Internal Revenue Code or agreed to have Section 341(f)(2) of the Internal Revenue Code apply to any disposition of a subsection (f) asset (as defined in Section 341(f)(4) of the Internal Revenue Code) owned by WebMD. -24- 622 (i) WebMD is not party to nor has any obligation under any tax-sharing, tax indemnity or tax allocation agreement, arrangement or other Contract. (j) Except as may be required as a result of the Merger, the WebMD has not been and will not be required to include any adjustment in Taxable income for any Tax period (or portion thereof) pursuant to Section 481 or Section 253A of the Internal Revenue Code or any comparable provision under state or foreign Tax Laws as a result of transactions, events or accounting methods employed prior to the Closing. (k) None of WebMD's Assets are tax exempt use property within the meaning of Section 168(h) of the Internal Revenue Code. (l) WebMD is not subject to (i) any foreign Tax holidays, (ii) any intercompany transfer pricing agreements, or other arrangements that have been established by WebMD with any Tax authority and (iii) any expatriate programs or policies affecting WebMD. (m) WebMD is not, and has not been at any time, a "United States real property holding corporation" within the meaning of Section 897(c)(2) of the Internal Revenue Code. 6.9 Intellectual Property. (a) Section 6.9 of the WebMD Disclosure Letter contains a true and complete list of all Registered Intellectual Property owned by or exclusively licensed to WebMD on the date hereof, and, with respect to Registered Intellectual Property owned by WebMD, specifies the jurisdictions in which each such item of Registered Intellectual Property has been issued or registered or in which an application for issuance or registration has been filed, including the respective registration or application numbers. WebMD owns good and exclusive title to or has licensed (sufficient for the conduct of its business as currently conducted and as proposed to be conducted), each Material item of Intellectual Property used by WebMD free and clear of any Lien (excluding licenses and related restrictions). WebMD is the exclusive owner of, and has good title (free and clear of all Liens) to, all (i) trademarks and trade names used in connection with the operation or conduct of the business of WebMD, including the sale of products or the provisions of services, and (ii) copyrighted works that are WebMD products or which WebMD otherwise purports to own. Neither WebMD or, to the knowledge of WebMD, its predecessors has misused or infringed on the Intellectual Property of others, and none of the Intellectual Property as used in the business conducted by WebMD infringes or will infringe upon or otherwise violates or will violate the Intellectual Property of others or constitutes or will constitute unfair competition or trade practices under any applicable Law, nor has any Person asserted a claim of such infringement or violation of Intellectual Property or unfair competition or trade practices against WebMD. WebMD has not transferred ownership of, licensed or sublicensed its rights in any Intellectual Property, except non-exclusive licenses in the ordinary course of business. (b) To the extent that any Material Intellectual Property has been developed or created by a third party for WebMD, WebMD has a written agreement with such third party with respect thereto and WebMD thereby either (i) has obtained ownership of, and is the exclusive owner of; or (ii) has obtained a license (sufficient for the conduct of its business as currently conducted and as proposed to be conducted) to all such third party's Intellectual Property in such work, material or invention by operation of law or by valid assignment, to the fullest extent it is legally possible to do so. (c) WebMD is listed in the records of the appropriate United States, state or foreign agency as the sole owner of record for each application and registration of Registered Intellectual Property listed in Section 6.9 of the WebMD Disclosure Letter. Each Material item of Registered Intellectual Property owned by WebMD is valid and subsisting, all necessary registration, maintenance and renewal fees currently due in connection with such registration, maintenance and renewal fees currently due in connection with such Registered Intellectual Property have been made and all necessary documents, recordations and certificates in connection with such Registered Intellectual Property have been filed with the relevant patent, copyright, trademark or other Regulatory Authorities for the purposes of maintaining such Registered Intellectual Property in the jurisdictions listed in Section 6.9 of the WebMD Disclosure Letter. There is no pending written threat received by WebMD of, or to the knowledge of WebMD, any -25- 623 verbal threat of opposition, interference or cancellation in, a proceeding before any court or registration authority in any jurisdiction against the applications or registrations listed in Section 6.9 of the WebMD Disclosure Letter, or, to the knowledge of WebMD, against any Intellectual Property exclusively licensed to WebMD. (d) There are no settlements, forbearances to sue, consents, judgments, or other Orders of which WebMD is a party or of which it is aware and which (i) restrict WebMD's rights to use any Intellectual Property owned by or licensed to WebMD, (ii) restrict WebMD's business in order to accommodate a third party's intellectual property rights or (iii) permit third parties to use any Intellectual Property owned or controlled by WebMD. To the knowledge of WebMD, no Person has infringed or misappropriated or is infringing or misappropriating any Intellectual Property used by WebMD in the conduct of its business. (e) The consummation of the transactions contemplated hereby will not result in the Material loss or impairment of WebMD's right to own or use any Intellectual Property or result in WebMD's granting to any third party any right to or with respect to any Material Intellectual Property, nor will require the consent of any Regulatory Authority or other third party in respect of any Intellectual Property. 6.10 Insurance. All of the Assets and business of WebMD and its Subsidiaries of an insurable nature and of a character usually insured by companies in similar businesses are insured in such amounts and against such losses, casualties or risks as is usual in such companies and for such Assets and business. There is no Material claim by WebMD or any of its Subsidiaries pending under any Material insurance policies of WebMD and its Subsidiaries as to which coverage has been questioned, denied or disputed by the underwriters of such policies. 6.11 Compliance with Laws. (a) Each of WebMD and its Subsidiaries has in effect all Material Permits necessary for it to own, lease or operate its Assets and to carry on its business as now conducted. Except as disclosed in Section 6.11 of the WebMD Disclosure Letter, neither WebMD nor any of its Subsidiaries is in violation in any Material respect of any Laws, Orders or Permits applicable to its business or employees conducting its business. No notice or warning from any Regulatory Authority with respect to any failure or alleged failure of WebMD or any of its Subsidiaries to comply with any Law has been received by WebMD, nor, to the knowledge of WebMD, is any such notice or warning proposed or threatened. (b) Except as set forth in Section 6.11 of the WebMD Disclosure Letter, no consent or approval of, prior filing with or notice to, or other action by, any Regulatory Authority or any other third party is required in connection with the execution and delivery of this Agreement or any assignment, agreement or other instrument to be executed and delivered pursuant to this Agreement by WebMD or the consummation of the transactions provided for herein or therein except for such consents and approvals that have been obtained and filings, notices and other actions that have been taken or made, the filing of the Certificate of Merger with the State of Delaware, HSR Act filings as contemplated under Section 10.2 and under Securities Laws and state securities Laws. 6.12 Legal Proceedings. There are no outstanding Orders or administrative decisions to which WebMD or any of its Subsidiaries is subject, and, except as disclosed in Section 6.12 of the WebMD Disclosure Letter, there is no Litigation pending or, to WebMD's knowledge, threatened against or relating to WebMD or any of its Subsidiaries or their respective Assets or businesses which could reasonably be expected to be, individually or in the aggregate, Material to WebMD and its Subsidiaries taken as a whole. Except as disclosed in Section 6.12 of the WebMD Disclosure Letter, neither WebMD nor any of its Subsidiaries have been advised by any attorney representing any such entity that there are any "LOSS CONTINGENCIES" as defined in FASB 5, which would be required by FASB 5 to be disclosed or accrued in the WebMD Financial Statements and which are not so disclosed or accrued. 6.13 Statements True and Correct. No certificate, schedule or other exhibit furnished or to be furnished by WebMD or any Affiliate thereof to GNN pursuant to the terms of this Agreement (including the WebMD Disclosure Letter) contains or will contain any untrue statement of Material fact or will omit -26- 624 to state a Material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 6.14 Tax Matters. Neither WebMD nor, to the knowledge of WebMD, any Affiliate of WebMD has taken any action or has any knowledge of any fact or circumstance that is reasonably likely to prevent the transactions contemplated hereby, including the Merger, from qualifying as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code. 6.15 WebMD Disclosure Letter. Matters disclosed on each Section of the WebMD Disclosure Letter shall be deemed disclosed only for purposes of the matters to be disclosed in such Section and shall not be deemed to be disclosed for any other purpose. ARTICLE 7 REPRESENTATIONS AND WARRANTIES OF NEWCO Except as otherwise provided in Newco's Registration Statement (Registration No. 333-80863) on Form S-4 as filed on June 17, 1999, and all amendments and supplements thereto including any amendment or new registration statement in which Healtheon is the registrant (collectively referred to herein as "NEWCO'S REGISTRATION STATEMENT"), Newco hereby represents and warrants to GNN as follows as of the date hereof and (if Newco is the Purchaser) the Closing Date: 7.1 Organization, Standing, and Power. Newco is a corporation duly organized, validly existing, and in good standing under the Laws of the State of Delaware, and has the power and authority to carry on its business as it has been and is now being conducted and to own, lease and operate its Assets. Each of Newco and its Subsidiaries is duly qualified or licensed to transact business as a foreign corporation and is in good standing in all jurisdictions where the character of its Assets or the nature or conduct of its business requires it to be so qualified or licensed, except for such jurisdictions in which the failure to be so qualified or licensed is not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on Newco. Newco was formed solely for the purpose of engaging in the transactions contemplated by the Healtheon/WebMD Agreement. As of the date hereof, Newco has not engaged in any business activity of any type whatsoever except in connection with its organization and the transactions contemplated by or related to the Healtheon/WebMD Agreement and this Agreement. 7.2 Authorization of Agreement; No Breach. The execution, delivery and performance of this Agreement has been duly authorized by all necessary corporate action of Newco. This Agreement constitutes, and all agreements and other instruments and documents to be executed and delivered by Newco pursuant to this Agreement will constitute, legal, valid and binding obligations of Newco enforceable against Newco in accordance with their respective terms, except to the extent such enforceability is subject to (i) Laws of general application relating to bankruptcy, insolvency, moratorium and the relief of debtors and (ii) the availability of specific performance, injunctive relief or other equitable remedies. Except in such case, individually or in the aggregate, that will not result in a Material Adverse Effect on Newco, the execution, delivery and performance of this Agreement and the agreements and other documents and instruments to be executed and delivered by Newco pursuant to this Agreement and the consummation of the transactions contemplated hereby and thereby will not, subject to obtaining the consents identified or contemplated herein (including without limitation all filings or consents under the HSR Act, the Securities Law and state securities Laws, and the rules and regulations of the NASD and the Nasdaq Stock Market with respect to the securities issued under the Registration Statement), (i) violate or result in a breach of or Default under the certificate of incorporation or bylaws of Newco or any of its Subsidiaries or any other Material Contract to which Newco or any of its Subsidiaries is a party or is bound; (ii) to the knowledge of Newco and its Subsidiaries, violate any Law, Order, administrative decision or award of any court, arbitrator, mediator, tribunal or Regulatory Authority applicable to or binding upon Newco or its Subsidiaries or upon their respective securities, Assets or business; or (iii) create a Material Lien upon the securities, Assets or business of Newco or any of its Subsidiaries. -27- 625 7.3 Capital Stock. As of June 15, 1999, the authorized capital stock of Newco consisted of 600,000,000 shares designated Common Stock (without designation as to series), none of which were then issued and outstanding or held as treasury shares, and 10,000,000 shares designated as Preferred Stock, none of which were then issued and outstanding or held as treasury shares. 7.4 Healtheon SEC Filings; Financial Statements. (a) Healtheon has filed all forms, reports and documents required to be filed by Healtheon with the SEC since January 1, 1999. All such required forms, reports and documents filed with the SEC as of the date of this Agreement are referred to herein as the "HEALTHEON SEC REPORTS"). As of their respective dates, (or, if amended, as of the respective dates of such amendments), Healtheon SEC Reports (i) were prepared in accordance and complied as to form in all Material respects with the requirements of the 1933 Act, or the 1934 Act, as the case may be, and the rules and regulations of the SEC thereunder applicable to such Healtheon SEC Reports and (ii) did not at the time they were filed contain any untrue statement of a Material fact or omit to state a Material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (b) Each of the consolidated financial statements (including, in each case, any related notes thereto) contained in the Healtheon SEC Reports (the "Healtheon Financials"), (i) complied as to form in all Material respects with the published rules and regulations of the SEC with respect thereto; (ii) was prepared in accordance with GAAP applied on a consistent basis throughout the periods involved (except as may be indicated in the notes thereto or, in the case of unaudited interim financial statements, as may be permitted by the SEC on Form 10-Q under the 1934 Act) and (iii) fairly presented the consolidated financial position of Healtheon and its Subsidiaries as at the respective dates thereof and the consolidated results of Healtheon operations and cash flows for the periods indicated, except that the unaudited interim financial statements may not contain footnotes and were or are subject to normal and recurring year-end adjustments. 7.5 Tax Matters. Neither Newco nor, to the knowledge of Newco, any Affiliate of Newco has taken any action or has any knowledge of any fact or circumstance that is reasonably likely to prevent the transactions contemplated hereby, including the Merger, from qualifying as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code. ARTICLE 8 REPRESENTATIONS AND WARRANTIES OF PURCHASER AND MERGER CORP. Purchaser and Merger Corp. hereby represent and warrant to GNN as follows as of the date hereof and as of the Closing Date: 8.1 Purchaser Common Stock. The shares of Purchaser Common Stock to be issued in accordance with the terms and provisions of this Agreement will, when so issued, be duly authorized, validly issued, fully paid and non-assessable. 8.2 Meeting Materials; Registration Statement (a) If an Information Statement is distributed for the Stockholders Meeting as described under Section 10.1 hereof, (i) none of the information to be supplied by or on behalf of Purchaser for inclusion or incorporation by reference in the Information Statement to be mailed to GNN's Stockholders in connection with the Stockholders Meeting will, when such documents are first mailed to the Stockholders of GNN, at the time of the Stockholders Meeting or at the Effective Time, contain any untrue statement of a Material fact or omit to state any Material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, and (ii) as to matters respecting it, the Information Statement will comply as to form in all Material respects with the provisions of the 1933 Act and the 1934 Act, as applicable, and the rules and regulations promulgated by the SEC thereunder. If at any time prior to the Effective Time any event relating to -28- 626 Purchaser, Merger Corp. or any of their respective Affiliates, officers or directors should be discovered by Purchaser or Merger Corp. which should be set forth in an amendment or a supplement to the Information Statement, Purchaser or Merger Corp. will promptly inform GNN. Notwithstanding the foregoing, Purchaser and Merger Corp. make no representation or warranty with respect to any information supplied by GNN that is contained in the Information Statement. (b) If a Registration Statement is filed in connection with the Merger and a Proxy Statement/ Prospectus is distributed for the Stockholders Meeting as described under Section 10.1 hereof, then: None of the information to be supplied by or on behalf of Purchaser for inclusion in the Registration Statement to be filed by Purchaser with the SEC will, at the time such Registration Statement becomes effective under the 1933 Act, contain any untrue statement of a Material fact or omit to state any Material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. None of the information to be supplied by or on behalf of Purchaser for inclusion or incorporation by reference in the Proxy Statement/Prospectus to be mailed to GNN's Stockholders in connection with the Stockholders Meeting will, at the time such documents are filed, when such documents are first mailed to the Stockholders of GNN, at the time of the Stockholders Meeting or at the Effective Time, contain any untrue statement of a Material fact or omit to state any Material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. As to matters respecting it, the Registration Statement and Proxy Statement/ Prospectus will comply as to form in all Material respects with the provisions of the 1933 Act and the 1934 Act, as applicable, and the rules and regulations thereunder. Notwithstanding the foregoing, Purchaser and Merger Corp. make no representation or warranty with respect to any information supplied by other Person that is contained in the Registration Statement. 8.3 Authority of Merger Corp. Merger Corp is a corporation duly organized, validly existing and in good standing under the Laws of the State of Delaware as a wholly owned Subsidiary of Purchaser. The authorized capital stock of Merger Corp. consists of 1,000 shares of Merger Corp. Common Stock, of which 100 shares are validly issued and outstanding, fully paid and nonassessable and is owned by Purchaser free and clear of any Lien. Merger Corp. has the corporate power and authority necessary to execute, deliver and perform its obligations under this Agreement and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated herein, including the Merger, have been duly and validly authorized by all necessary corporate action in respect thereof on the part of Merger Corp. This Agreement represents a legal, valid, and binding obligation of Merger Corp., enforceable against Merger Corp. in accordance with its terms. ARTICLE 9 CONDUCT OF BUSINESS PENDING CONSUMMATION 9.1 Conduct of GNN Business. Except as set forth in Section 9.1 of the GNN Disclosure Letter, prior to the Closing Date, except with the prior written consent of WebMD and (if this Agreement has not been terminated as to Newco and Healtheon under Section 12.3) Healtheon, and except as necessary to effect the transactions contemplated in this Agreement, GNN shall: (a) conduct its business in substantially the same manner as presently being conducted and refrain from entering into any transaction or Contract other than in the ordinary course of business (or, even if in the ordinary course of business, not in excess of $50,000 individually), and not make any Material change in its methods of management, marketing, accounting, or operations; (b) consult with WebMD and (if this Agreement has not been terminated as to Newco and Healtheon under Section 12.3) Healtheon prior to undertaking any new business opportunity outside the ordinary course of business and not undertake such new business opportunity; -29- 627 (c) confer on a regular basis with one or more designated representatives of WebMD and (if this Agreement has not been terminated as to Newco and Healtheon under Section 12.3) Healtheon to report Material operational matters and to report the general status of ongoing business operations; (d) notify WebMD and (if this Agreement has not been terminated as to Newco and Healtheon under Section 12.3) Healtheon of any unexpected Material change in the normal course of business or in the operation of its Assets, including any Material decrease in the number of subscription agreements to which GNN is a party, and notify WebMD and (if this Agreement has not been terminated as to Newco and Healtheon under Section 12.3) Healtheon of any governmental complaints, investigations or hearings (or communications indicating that the same may be contemplated), adjudicatory proceedings or submissions involving any Material property or other Asset, and GNN agrees to keep WebMD and Healtheon fully informed of such events and permit WebMD's and Healtheon's representatives prompt access to all materials prepared in connection therewith, except for any materials that are protected by the attorney-client privilege, provided that in such event WebMD and Healtheon are advised of all material facts concerning such privileged materials; (e) not enter into any new employment Contract or make any commitment to employees (including any commitment to pay severance, retirement or other benefits) except in the ordinary course of business and consistent with past practice; (f) not increase the compensation (including fringe benefits) payable or to become payable to any officer, director, employee, agent or independent contractor of GNN, except general hourly rate increases and normal merit increases for employees other than officers made in the ordinary course of business and consistent with past practice; (g) except in the ordinary course of business, not (i) create or incur any indebtedness (or, even if in the ordinary course of business, not in excess of $50,000 in the aggregate), or (ii) release or create any Liens of any nature whatsoever; (h) except in the ordinary course of business and, even if in the ordinary course of business, then not in an amount to exceed $50,000 in the aggregate, not make or commit to make any capital expenditure, or enter into any lease of capital equipment as lessee or lessor; (i) not enter into, terminate or materially amend any strategic alliance agreement or sponsorship agreement or any other Contract relating to the distribution, sale, license or marketing by third parties of GNN's products; (j) not amend the Certificate of Incorporation, Bylaws or other governing instruments of GNN; (k) not make any changes in its accounting methods or practices or revalue its Assets, except for changes in its tax accounting methods or practices that may be necessitated by changes in applicable tax Laws; (l) except for this Agreement, and except for shares of GNN Common Stock which may be issued upon the exercise or conversion of the Options, GNN Warrants, GNN Series A Preferred Stock, GNN Series B Preferred Stock or GNN Series C Preferred Stock, not issue, sell, pledge, encumber, authorize the issuance of, enter into any Contract to issue, sell, pledge, encumber, or authorize the issuance of, or otherwise permit to become outstanding, any additional shares of GNN Capital Stock, or any stock appreciation rights, or any option, warrant, conversion, or other right to acquire any such stock, or any security convertible into any such stock, or pay or declare or agree to pay or declare any dividend or other distribution with respect to any GNN Capital Stock; (m) not take any action, or omit to take any action, which would cause the representations and warranties contained in Article 5 to be untrue or incorrect in any Material respect; (n) not make any loan to any Person or increase the aggregate amount of any loan currently outstanding to any Person, except for usual and customary advances to employees made in the ordinary course of business; -30- 628 (o) not sell any Material Asset or make any Material commitment relating to its Assets other than in the ordinary course of business or enter into or terminate any lease of real estate; (p) not purchase or redeem, or agree to purchase or redeem, any security of GNN (including any share of GNN Capital Stock); (q) not waive any stock repurchase rights, accelerate, amend or change the period of exercisability of options or restricted stock, reprice options granted under any employee, consultant, director, or other stock plans or authorized cash payments in exchange for any options granted under any of such plans; (r) not grant any severance or termination pay to any officer or employee except pursuant to written agreements outstanding or policies existing on the date hereof and as previously disclosed in writing or made available to WebMD or adopt any new severance plan; (s) not transfer or license to any Person or otherwise extend, amend or modify any rights to the Intellectual Property of GNN, or enter into any grants of future patent rights, other than nonexclusive end-user licenses in the ordinary course of business consistent with past practice, or enter into any subscription agreements; (t) not acquire or agree to acquire or be acquired by merging or consolidating with, or by purchasing any Person, interest in, portion of or the capital or the Assets of, or by any other manner, any business or any Person or division thereof, otherwise acquire or agree to acquire any Assets which are Material, individually or in the aggregate, to the business of GNN or enter into any joint ventures, strategic partnerships or alliances; (u) not Materially modify or amend, or terminate any Material Contract or agreement to which GNN is a party or waive, release, or assign any Material rights or claims thereunder, in any such case in a manner Materially adverse to WebMD or Healtheon; and (v) not make any agreement or commitment which will result in or cause to occur a violation of any of the items contained in paragraphs (a) through (u) above. 9.2 Adverse Changes in Condition. Each Party agrees (i) to give written notice promptly to the other Parties upon becoming aware of the occurrence or impending occurrence of any event or circumstance relating to it or any of its Subsidiaries which (i) is reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on it, or (ii) would cause or constitute a breach of any of its representations, warranties, agreements or covenants contained herein, such that the conditions set forth in Sections 11.2(a) and (b) or Sections 11.3(a) and (b) with respect to such Party (as appropriate) would not be satisfied as of the time of such breach or as of the time of such representation or warranty shall have become untrue, and (2) to use its reasonable efforts to prevent or promptly to remedy the same. ARTICLE 10 ADDITIONAL AGREEMENTS 10.1 Stockholder Approval; Registration Statement. (a) Unless this Agreement is terminated in accordance with its terms, the Board of Directors of GNN shall unanimously recommend to Stockholders the approval of this Agreement and the Merger and the Board of Directors and officers of GNN shall use their reasonable best efforts to obtain such Stockholders' approval. GNN will take all action necessary and in accordance with GCLSD and its Certificate of Incorporation and Bylaws to convene a meeting of GNN's Stockholders to consider adoption and approval of this Agreement and approval of the Merger (the "STOCKHOLDERS MEETING") to be held as promptly as practicable, in any event, within 45 days after the declaration of the effectiveness of the Registration Statement (unless WebMD is the Purchaser and does not make the WebMD Election, in which case it shall be held in any event within 45 days after the Agreement terminates as to Newco under Section 12.3). GNN will use its reasonable best efforts to solicit from its Stockholders proxies in favor of -31- 629 the adoption and approval of this Agreement and the approval of the Merger, including the Escrow Agreement and the election of the Representative as representative of the Stockholders for purposes of the Escrow Agreement, and will take all other action necessary or advisable to secure the vote or consent of its Stockholders required by GCLSD to obtain such approvals and shall ensure that the Stockholders Meeting is called, noticed, convened, held and conducted, and that all proxies solicited by GNN in connection with the Stockholders Meeting are solicited, in compliance with the GCLSD, GNN's Certificate of Incorporation and Bylaws, and all other applicable legal requirements. GNN's obligation to call, give notice, convene and hold the GNN Stockholders Meeting in accordance with this Section 10.1 shall not be limited to or otherwise affected by the commencement, disclosure, announcement or submission to GNN of any Acquisition Proposal. (b) If Newco is the Purchaser, as promptly as possible after the execution of this Agreement, GNN, Newco and WebMD shall prepare and Newco shall file with the SEC the Proxy Statement/Prospectus and Newco will prepare and file with the SEC the Registration Statement in which the Proxy Statement/Prospectus will be included as a prospectus; provided that GNN acknowledges and agrees that Newco's obligations with respect to the Registration Statement and the Proxy Statement/Prospectus herein may be satisfied by amending Newco's Registration Statement to include the Shares issued in connection with the Merger. Each of the Parties hereto shall provide promptly to the other such information concerning its business and financial statements and affairs as, in the reasonable judgment of the providing Party or its counsel, may be required or appropriate for inclusion in the Proxy Statement/Prospectus and the Registration Statement or in any amendments or supplements thereto, and to cause its counsel and auditors to cooperate with the others' counsel and auditors in preparation of the Proxy Statement/Prospectus and the Registration Statement. Each of the Parties hereto will respond to any comments to the SEC, will use its respective commercially reasonable efforts to have the Registration Statement declared effective under the 1933 Act as promptly as practicable after such filing and GNN will cause the Proxy Statement/Prospectus to be mailed to GNN's Stockholders at the earliest practicable time after the Registration Statement is declared effective by the SEC. Each of the Parties hereto will cause all documents that it is responsible for filing with the SEC to comply in all Material respects with all applicable requirements of Law and the rules and regulations promulgated thereunder. Whenever any event occurs which is required to be set forth in an amendment or supplement to the Proxy Statement/Prospectus or the Registration Statement, the Parties hereto, as the case may be, will promptly inform the other Parties hereto of such occurrence and cooperate in filing with the SEC or its staff or any other governmental officials, and/or mailing to GNN's Stockholders, such amendment or supplement. (c) In connection with the Stockholders Meeting, if WebMD does not make the WebMD Election as described in Section 10.15, (i) WebMD and GNN shall prepare an Information Statement and mail such Information Statement to GNN's Stockholders a reasonable period prior to such Stockholders Meeting, and (ii) the Parties shall furnish to each other all information concerning them that the other may reasonably request in connection with such Information Statement. (d) Not later than thirty (30) days prior to the Stockholders Meeting, GNN shall deliver to WebMD and Newco a list of persons who may be deemed to be, in GNN's reasonable judgment, affiliates of GNN within the meaning of Rule 145 under the 1933 Act (each, a "GNN Affiliate"). GNN will provide Newco and WebMD with such information and documents as either such Party shall reasonably request for purposes of reviewing such list. Purchaser shall be entitled to place appropriate legends with respect to the restrictions imposed by Rule 145 under 1933 Act on the certificates evidencing any Purchaser Common Stock to be received by a GNN Affiliate pursuant to the terms hereof, and, in the reasonable judgment of GNN, to issue appropriate stop transfer instructions to the transfer agent of Purchaser Common Stock. In addition, GNN shall deliver to the Purchaser at or prior to the Closing a written agreement, in form reasonably satisfactory to Purchaser and customary for transactions of this type, providing that the GNN Affiliate will not sell, pledge, transfer or otherwise dispose of shares of Purchaser Common Stock to be received by such GNN Affiliate in the Merger except in compliance with applicable provisions of the 1933 Act and the rules and regulations thereunder, including without limitation Rule 145. -32- 630 The Purchaser shall not be required to maintain the effectiveness of the Registration Statement for purposes of any resale by any GNN Affiliate. 10.2 Applications. Healtheon, Newco and/or WebMD (as appropriate) shall promptly prepare and file, and GNN shall cooperate in the preparation and, where appropriate, filing of, applications with any Regulatory Authorities having jurisdiction over the transactions contemplated by this Agreement seeking the requisite Consents necessary to consummate the transactions contemplated by this Agreement. To the extent required by the HSR Act, each of the Parties will promptly file with the United States Federal Trade Commission and the United States Department of Justice the notification and report form required for the transactions contemplated hereby and any supplemental or additional information which may reasonably be requested in connection therewith pursuant to the HSR Act and will comply in all material respects with the requirements of the HSR Act. The Parties shall deliver to each other copies of all filings, correspondence and orders to and from all Regulatory Authorities in connection with the transactions contemplated hereby. Notwithstanding anything herein to the contrary, nothing in this Agreement shall be deemed to require Healtheon, Newco, WebMD, GNN or any Subsidiary or Affiliate of any such Party to agree to any divestiture by itself or any of its Affiliates of shares of capital stock or of any business or Assets, or the imposition of any Material limitation the ability of any of them to conduct their businesses or to own or exercise control of such Assets or stock. 10.3 Filings with State Offices. Upon the terms and subject to the conditions of this Agreement, the Surviving Corporation shall execute and file the Certificate of Merger with the Secretary of State of the State of Delaware in connection with the Closing. 10.4 Agreement as to Efforts to Consummate. Subject to the terms and conditions of this Agreement, each Party agrees to use, and to cause its Subsidiaries to use, its reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper, or advisable under applicable Laws to consummate and make effective, as soon as practicable after the date of this Agreement, the transactions contemplated by this Agreement, including using its reasonable efforts to lift or rescind any Order adversely affecting its legal ability to consummate the transactions contemplated herein and to cause to be satisfied the conditions referred to in Article 11 of this Agreement; provided, that nothing herein shall preclude either Party from exercising its rights under this Agreement. Each Party shall use, and shall cause each of its Subsidiaries to use, its reasonable efforts to obtain all Consents necessary or desirable for the consummation of the transactions contemplated by this Agreement (including without limitation any Consents listed in Section 5.19(b) of the GNN Disclosure Letter). In connection with and without limiting the foregoing, GNN and its Board of Directors shall, if any state takeover statute or similar Law is or becomes applicable to the Merger, this Agreement or any of the transactions contemplated by this Agreement, use all commercially reasonable efforts to insure that the Merger and the other transactions contemplated by this Agreement may be consummated as promptly as practicable on the terms contemplated by this Agreement and otherwise to minimize the effect of such Law on the Merger, this Agreement and the transactions contemplated hereby. 10.5 Investigation and Confidentiality. (a) Prior to the Effective Time, WebMD and GNN shall keep each other advised of all Material developments relevant to its business and to consummation of the Merger and shall permit each other to make or cause to be made such investigation of the business and properties of it and its Subsidiaries and of their respective financial and legal conditions as the other reasonably request, provided that such investigation shall be reasonably related to the transactions contemplated hereby and shall not interfere unnecessarily with normal operations. No investigation by WebMD or GNN under this Section 10.5 shall affect the representations and warranties of the other Parties. (b) Each Party shall, and shall cause its advisers and agents to, maintain the confidentiality of all confidential information furnished to it by the other Parties concerning its and its Subsidiaries' businesses, operations, and financial positions and shall not use or disclose such information for any purpose except in furtherance of the transactions contemplated by this Agreement. If this Agreement is terminated prior to the Effective Time, each Party shall promptly return or certify the destruction of all -33- 631 documents and copies thereof, and all work papers containing confidential information received from the other Party. 10.6 Access to Information. GNN shall afford Healtheon and WebMD and their accountants, counsel and other representatives, reasonable access during normal business hours and upon reasonable notice during the period prior to the Effective Time to (i) all of GNN's properties, books, contracts, commitments and records, (ii) all other information concerning the business, properties and personnel (subject to restrictions imposed by applicable Law) of GNN as Healtheon or WebMD may reasonably request and (iii) all officers and, as scheduled through officers, key employees of GNN. GNN agrees to provide to Healtheon and WebMD and their accountants, counsel and other representatives copies of internal financial statements (including returns and supporting documentation) promptly upon request. No information or knowledge obtained in any investigation pursuant to this Section 10.6 shall affect or be deemed to modify any representation or warranty contained herein or the conditions to the obligations of the Parties to consummate the Merger. 10.7 No Shop. (a) From and after the date of this Agreement until the Effective Time or termination of this Agreement pursuant to Article 12, GNN will not, nor will it authorize or permit any Affiliate or Representative retained by it to, directly or indirectly, (i) solicit, initiate, encourage or induce the making, submission or announcement of any Acquisition Proposal; (ii) participate in any discussions or negotiations regarding, or furnish to any Person any non-public information with respect to, or take any other action to facilitate any inquiries or the making of any proposal that constitutes or may reasonably be expected to lead to, any Acquisition Proposal; (iii) engage in discussions with any Person with respect to any Acquisition Proposal, except as to the existence of these provisions; (iv) approve, endorse or recommend any Acquisition Proposal; or (v) enter into any letter of intent or similar document or any Contract contemplating or otherwise relating to any Acquisition Transaction. GNN will immediately cease any and all existing activities, discussions or negotiations with any parties conducted heretofore with respect to any Acquisition Proposal. Without limiting the foregoing, it is understood that any violation of the restrictions set forth in the preceding two sentences by any officer, director or employee of GNN or any of its Subsidiaries or any investment banker, attorney or other advisor or Representative of GNN or any of its Subsidiaries shall be deemed to be a breach of this Section 10.7 by GNN. (b) In addition to the obligations of GNN set forth in paragraph (a) of this Section 10.7, GNN as promptly as practicable shall advise WebMD and (if this Agreement has not been terminated as to Newco and Healtheon under Section 12.3) Healtheon orally and in writing of any request for non-public information which GNN reasonably believes would lead to an Acquisition Proposal or to any Acquisition Transaction, or any inquiry with respect to or which GNN reasonably should believe would lead to any Acquisition Proposal, the Material terms and conditions of such request, Acquisition Proposal or inquiry, and the identity of the Person or group making any such request, Acquisition Proposal or inquiry. GNN will keep Purchaser informed as promptly as practicable in all Material respects of the status and details (including Material amendments or proposed Material amendments) of any such request, Acquisition Proposal or inquiry. 10.8 Tax Treatment. Each of the Parties undertakes and agrees to use its reasonable efforts to take no action which would cause the Merger not to qualify for treatment as a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code for federal income tax purposes. 10.9 Employee Benefits. Following the Effective Time, Purchaser shall provide to officers and employees of GNN employee benefits based on the positions they hold with the Purchaser and/or its Subsidiaries after the Effective Time under employee benefit plans on terms and conditions which are substantially similar in the aggregate to those provided by Purchaser and its Subsidiaries to their similarly situated officers and employees after the Effective Time. 10.10 Voting Agreement. Simultaneously with the execution and delivery of this Agreement, each of the Persons listed on Exhibit 10.10(a) has executed and delivered a Voting Agreement in the form of -34- 632 Exhibit 10.10(b) hereto pursuant to which such Person has agreed, among other things, to vote all shares of GNN Capital Stock held of record by such Person and all shares of GNN Capital Stock for which such Person has been granted a proxy in favor of the Merger at the Stockholders Meeting (the "Voting Agreements"). GNN hereby represents and warrants to Purchaser that the shares of GNN Capital Stock subject to the Voting Agreements have sufficient votes to approve the Merger and the Agreement for all purposes under the GCLSD and GNN's Certificate of Incorporation and Bylaws. 10.11 Accredited Investor Questionnaire and Stockholder Representation Agreement. GNN shall use its reasonable efforts to: (i) if WebMD is the Purchaser and does not make the WebMD Election described in Section 10.15, cause each Stockholder and (ii) cause each holder of Options or GNN Warrants whose exercise of such Option or GNN Warrant following the Effective Time would not be exempt from registration under the 1933 Act pursuant to Rule 701 of the 1933 Act, to promptly execute and deliver to Purchaser prior to the Closing an Accredited Investor Questionnaire and Stockholder Representation Agreement in the form of Exhibits 10.11(a) and 10.11(b), respectively, hereto. 10.12 Registration of Shares. If WebMD is the Purchaser and does not make the WebMD Election described in Section 10.15, the Stockholders shall be entitled to registration rights as set forth in Exhibit 10.12 hereto. 10.13 Blue Sky Laws. Purchaser shall take such reasonable steps as may be necessary to comply with the securities and blue sky laws of all jurisdictions which are applicable to the issuance of the Purchaser Common Stock in connection with the Merger. GNN shall use its reasonable efforts to assist Purchaser as may be necessary to register, or qualify for valid exemptions from, the issuance of Purchaser Common Stock in the Merger under the securities and blue sky laws of all jurisdictions which are applicable in connection with such issuance, including, if requested by Purchaser after consultation with counsel, the appointment of a "PURCHASER REPRESENTATIVE" for non-accredited investors who are not sophisticated investors under Regulation D of the 1933 Act. 10.14 Non-solicitation of Employees. Until the Effective Time or, in the event this Agreement is terminated without completion of the Merger, for a period of one year from the date hereof, neither Healtheon, WebMD, Newco nor GNN will solicit for employment any current employee of the other Parties or any Subsidiary of the other Parties unless such employee has been terminated previously by his or her employer nor make any offer to such employee without prior notice to his or her employer; provided that in no event will a general solicitation for employment (whether by general advertisement in any media or otherwise) be a violation of this Section 10.14. 10.15 WebMD Election for Registration. In the event that this Agreement is terminated as to Newco and Healtheon pursuant to Section 12.3 hereof, the Parties agree that the shares of Purchaser Common Stock to be issued in the Merger will not be registered under the 1933 Act or any state securities laws unless otherwise elected by WebMD under this Section 10.15. WebMD, in its sole discretion, may elect within 30 days after this Agreement is terminated as to Newco and Healtheon pursuant to Section 12.3 hereof to file the Registration Statement and the provisions of Section 10.1(b) shall apply to WebMD (instead of Newco), mutatis mutandis (the "WEBMD ELECTION"); provided that the Proxy Statement/Prospectus and Registration Statement shall be prepared and filed as promptly as practicable after WebMD makes the WebMD Election. If WebMD does not make the WebMD Election, GNN acknowledges and agrees that WebMD shall be entitled to postpone the distribution of the Information Statement for a reasonable period of time upon advice of counsel until WebMD and GNN have obtained, or have agreed to obtain prior to Closing, all documents and other items necessary to ensure that the offering of securities pursuant to the Merger be exempt from registration under Section 5 of the 1933 Act and all relevant state securities laws, including, but not limited to, documentation similar to that described in Section 10.11 and 10.13. -35- 633 10.16 Press Releases. Prior to the Effective Time, WebMD, GNN and (if this Agreement has not been terminated as to Newco and Healtheon under Section 12.3) Healtheon shall consult with each other as to the form and substance of any press release or other public disclosure related to this Agreement or any other transaction contemplated hereby and no Party shall issue any press release or make any other public disclosure without the prior approval of the other Parties and (if this Agreement has not been terminated as to Newco and Healtheon under Section 12.3) Healtheon (which approval shall not be unreasonably withheld); provided, that nothing in this Section 10.16 shall be deemed to prohibit any Party from making any disclosure which its counsel deems necessary or advisable in order to satisfy such Party's disclosure obligations imposed by Law. 10.17 Statements and Information Regarding WebMD. GNN acknowledges that, from time to time, statements about WebMD may be made by third parties, in writing or otherwise, that may purport to contain information about WebMD, including in newspaper articles, Internet chat rooms and, except as provided below, other publications and communications, and that such statements have been and may be incorrect or inaccurate in several Material respects. GNN agrees that neither WebMD nor any of its Affiliates or representatives has made any representation or warranty as to the accuracy or completeness of any such information or statements. Furthermore, GNN has not relied, and will not rely, upon any such statements in making any decision in connection with the consummation of the Merger and other transactions contemplated by this Agreement; rather, the only representations or statements that GNN has relied upon or will rely upon will be those made by WebMD, as set forth in this Agreement. 10.18 Employee Confidentiality and Assignment Agreement. GNN agrees to use its commercially reasonable efforts to cause all of its current employees and consultants to execute, to the extent they have not already done so, an Employee Confidentiality and Assignment Agreement (with Intellectual Property assignment provisions) in substantially the form currently used by WebMD. 10.19 Directors and Officers Indemnification. (a) After the Effective Time, Purchaser will (and will cause any successor, whether by merger, stock purchase, or asset purchase, to), to the fullest extent permitted by Law, indemnify and hold harmless each present and former director or officer of GNN (collectively, the "INDEMNIFICATION PARTIES") against all costs and expenses (including reasonable attorneys' fees), judgements, fines, losses, claims, damages, Liabilities and settlement amounts paid in connection with any action, claim, suit, investigation, or proceeding (whether arising before or after the Effective Time), whether civil, administrative or investigative, arising out of or pertaining to any action or omission in their capacity as an officer, director, employee, agent, or other person to whom this Section applies, in each case occurring before the Effective Time (including the transactions contemplated by this Agreement). (b) For a period of two (2) years after the Effective Time, Purchaser will cause the Surviving Corporation to use its commercially reasonable efforts to maintain in effect, if available, directors' and officers' liability insurance covering those persons who are currently covered by GNN's directors' and officers' liability insurance policy on terms comparable to those applicable to the current directors and officers of GNN; provided, however, that in no event will Purchaser or Surviving Corporation be required to expend an annual premium for such coverage in excess of $23,000 (or such coverage as is available for such annual premium). -36- 634 ARTICLE 11 CONDITIONS PRECEDENT TO OBLIGATIONS TO CONSUMMATE 11.1 Conditions to Obligations of Each Party. The respective obligations of each Party to perform this Agreement and consummate the Merger and the other transactions contemplated hereby are subject to the satisfaction of the following conditions, unless waived by the Parties pursuant to Section 13.5 of this Agreement: (a) Stockholder Approval. The stockholders of GNN shall have approved this Agreement, and the consummation of the transactions contemplated hereby, including the Merger, as and to the extent required by Law and by the provisions of any governing instruments. (b) Regulatory Approvals. All waiting periods, if any, under the HSR Act relating to the transactions contemplated hereby will have expired or terminated early and all Material foreign antitrust approvals required to be obtained prior to the Merger in connection with the transactions contemplated hereby shall have been obtained. (c) Legal Proceedings. No court or governmental or Regulatory Authority of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any Law or Order (whether temporary, preliminary or permanent) or taken any other action which prohibits, restricts or makes illegal consummation of the transactions contemplated by this Agreement. (d) Tax Opinion. Each of Purchaser and GNN shall have received the opinion of Alston & Bird LLP or King & Spalding, respectively, to the effect that the Merger will constitute a tax-free reorganization within the meaning of 368(a) of the Internal Revenue Code, which opinion shall be in form and substance reasonably satisfactory to Purchaser and GNN, respectively; provided, however, that if counsel to either Purchaser or GNN does not render such opinion, this condition shall nonetheless be deemed to be satisfied with respect to such Party if counsel to the other Party renders such opinion to such Party. In rendering such opinion, Alston & Bird LLP and/or King & Spalding shall be entitled rely upon representations of the Parties hereto reasonably satisfactory in form and substance to such counsel. The Parties to this Agreement agree to make reasonable representations as required by Alston & Bird LLP and/or King & Spalding for the purpose of rendering such opinion(s). (e) Registration Statement; Nasdaq. In the event that the Registration Statement is filed in connection with the shares of Purchaser Common Stock to be issued in the Merger, (i) all of the shares of Purchaser Common Stock to be issued in connection with the Merger shall be authorized for quotation on the Nasdaq Stock Market upon notice of issuance, and (ii) the SEC shall have declared the Registration Statement effective and no stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued, and no proceeding for that purpose, or similar proceeding with respect to the Proxy Statement/Prospectus, shall have been initiated or threatened in writing by the SEC. 11.2 Conditions to Obligations of Purchaser. The obligations of Purchaser to perform this Agreement and consummate the Merger and the other transactions contemplated hereby are subject to the satisfaction of the following conditions, unless waived by Purchaser pursuant to Section 13.5 of this Agreement: (a) Representations and Warranties. The representations and warranties of GNN set forth or referred to in this Agreement shall be true and correct in all Material respects (except that those representations and warranties which are qualified as to Material, Materiality, Material Adverse Effect or similar expressions, or are subject to the same or similar type exceptions, shall be true and correct in all respects) as of the date of this Agreement and as of the Effective Time with the same effect as though all such representations and warranties had been made on and as of the Effective Time (provided that representations and warranties which are confined to a specified date shall speak only as of such date). (b) Performance of Agreements and Covenants. Each and all of the agreements and covenants of GNN to be performed and complied with pursuant to this Agreement and the other agreements -37- 635 contemplated hereby prior to the Effective Time shall have been duly performed and complied with in all Material respects. (c) Certificates. GNN shall have delivered to Purchaser (i) a certificate, dated as of the Effective Time and signed on its behalf by its president and its chief financial officer, to the effect that the conditions of its obligations set forth in Section 11.2(a) and 11.2(b) of this Agreement have been satisfied, and (ii) certified copies of resolutions duly adopted by GNN's Board of Directors and stockholders evidencing the taking of all corporate action necessary to authorize the execution, delivery and performance of this Agreement, and the consummation of the transactions contemplated hereby, all in such reasonable detail as Purchaser and its counsel shall reasonably request. (d) Opinion of Counsel. Purchaser shall have received an opinion of King & Spalding, counsel to GNN, dated as of the Closing, in the form reasonably satisfactory to Purchaser, as to the matters set forth in Exhibit 11.2(d). (e) Delivery of Documents. GNN shall have delivered all of its books and records to Purchaser including, but not limited to, (i) all corporate and other records of GNN and each Subsidiary and their respective predecessors, including the minute books, stock books, stock transfer registers, books of account, leases and Contracts, deeds and title documents, and GNN Financial Statements; and (ii) such other documents or certificates as shall be reasonably requested by Purchaser. (f) Resignation of GNN Directors. On or prior to the Closing Date, GNN shall have delivered to Purchaser evidence satisfactory to Purchaser of the resignation of the directors of GNN effective as of the Closing Date. (g) Escrow Agreement. The Escrow Agreement shall have been executed and delivered by the Representative (as defined in Section 14.2) and a national bank as escrow agent in substantially the form contemplated in Article 14 hereto, with any changes thereto being only such changes which relate specifically to the Escrow Agent and which changes are reasonably acceptable to Purchaser. (h) No Material Adverse Effect. There shall not have been any Material Adverse Effect with respect to GNN, between the date hereof and the Closing Date, and GNN shall have delivered to Purchaser a certificate, dated as of the Closing Date, signed by its president and chief financial officer certifying to such effect. (i) Accredited Investor Questionnaire and Stockholder Representation Agreements. If WebMD is the Purchaser and does not make the WebMD Election described in Section 10.15, then: (i) Each Stockholder of GNN and each holder of an Option or GNN Warrant (excluding each holder of Options and/or GNN Warrants whose exercise of all of the Options and GNN Warrants held by such holder will be exempt from registration under the 1933 Act pursuant to Rule 701 of the 1933 Act) who has not provided to WebMD an Accredited Investor Questionnaire in the form previously provided to GNN certifying that such Stockholder is an "ACCREDITED INVESTOR" as defined in Rule 501(a) under the 1933 Act shall have either (i) appointed a "PURCHASER REPRESENTATIVE" as set forth under Rule 501(h) and 506(b)(2)(ii) under the 1933 Act, or (ii) delivered to WebMD a Stockholder Representation Agreement certifying as to the sophistication of the investor and other reasonably related matters set forth therein; and (ii) As of the Effective Time, GNN shall not have more than thirty-five (35) Stockholders and holders of Options or GNN Warrants (in the aggregate) who are non-accredited investors under Rule 501(a) and (e) under the 1933 Act (in the event of non-receipt of an Accredited Investor Questionnaire, such holder shall be deemed to be a non-accredited investor), excluding for purposes of this calculation each holder of Options and/or GNN Warrants whose exercise of all of the Options and GNN Warrants held by such holder will be exempt from registration under the 1933 Act pursuant to Rule 701 of the 1933 Act. -38- 636 (j) Dissenting Stockholders. Holders of less than two percent (2.0%) of the GNN Capital Stock shall have elected to seek their statutory dissenters' rights as provided in Section 3.4 of this Agreement. (k) Healtheon/WebMD Agreement. If the Purchaser is Newco, the transactions contemplated by the Healtheon/WebMD Agreement must be consummated (the "Healtheon Closing") simultaneously with, or prior to, the Closing. (l) FIRPTA. GNN shall deliver to a Purchaser a properly executed statement that the shares of GNN's Capital Stock do not constitute "U.S. real property interests," as defined in Section 897(c) of the Internal Revenue Code. Such statement shall be in a form reasonably acceptable to Purchaser and in accordance with the requirements of Treasury Regulation Section 1.1445-2(c)(3). In addition, simultaneously with delivery of such statement, GNN shall provide to Purchaser, as agent for GNN, a form of notice to the Internal Revenue Service in accordance with the requirements of Treasury Regulation Section 1.897-2(h), along with written authorization for Purchaser to deliver such form of notice to the Internal Revenue Service on behalf of GNN upon the Closing. (m) Comfort Letter. GNN shall cause its certified public accountants to deliver a comfort letter, in form and substance customary for transactions of this type and reasonably satisfactory to Purchaser, with respect to financial information relating to GNN included in the Registration Statement. (n) Approval; Qualified Sale Election: At least ninety-five percent (95%) of the outstanding shares of GNN Capital Stock shall have voted to approve the Merger and this Agreement at the Stockholders Meeting. In addition, a majority of GNN's Board of Directors (other than those Directors elected by the holders of GNN Series A Preferred Stock) and a majority of the holders of the GNN Common Stock and the GNN Series B Preferred Stock, voting together as a class, shall have approved an adjustment to the conversion price of the GNN Series C Preferred Stock such that the transactions described herein will be deemed a "QUALIFIED SALE" as defined in the Certificate of Designation for the GNN Series C Preferred Stock. (o) Stockholder Agreement. GNN shall obtain written terminations and releases of the terms of the Stockholders Agreement dated February 18, 1998 among Alan Greenberg, Medcast Networks, L.P., and the holders of GNN Series A Preferred Stock, and subsequently executed by holders of GNN Series C Preferred Stock ("STOCKHOLDER AGREEMENT") from the holders of at least ninety percent (90%) of the shares of GNN Series A Preferred Stock that have executed such Stockholder Agreement and from the holders of at least ninety percent (90%) of the shares of GNN Series C Preferred Stock that have executed such Stockholder Agreement. (p) Registration Rights Agreements. If WebMD is the Purchaser and does not make the WebMD Election under Section 10.15, GNN shall cause the termination as of immediately prior to the Effective Time of all rights of any stockholder of GNN under any Contract that grants any registration rights under the 1933 Act or any other state or federal securities Laws to any stockholder of GNN (the "GNN REGISTRATION RIGHTS AGREEMENTS"), and provide WebMD evidence reasonably satisfactory to WebMD that the Registration Rights Agreements have been terminated. (q) Contract Terminations. GNN shall either terminate prior to the Closing, or be entitled to terminate without expense or penalty and in its sole discretion within thirty days' after the Effective Time, each Contract listed on Section 11.2 of the GNN Disclosure Letter and shall provide evidence of such termination(s) or termination right(s) reasonably satisfactory to the Purchaser. 11.3 Conditions to Obligations of GNN. The obligations of GNN to perform this Agreement and consummate the Merger and the other transactions contemplated hereby are subject to the satisfaction of the following conditions, unless waived by GNN pursuant to Section 13.5 of this Agreement: (a) Representations and Warranties. The representations and warranties of WebMD and (solely if Newco is the Purchaser) Newco set forth or referred to in this Agreement shall be true and correct in all Material respects (except that those representations and warranties which are qualified as to Material, -39- 637 Materiality, Material Adverse Effect or similar expressions, or are subject to the same or similar type exceptions, shall be true and correct in all respects) as of the date of this Agreement and as of the Effective Time with the same effect as though all such representations and warranties had been made on and as of the Effective Time (provided that representations and warranties which are confined to a specified date shall speak only as of such date). (b) Performance of Agreements and Covenants. Each and all of the agreements and covenants of Purchaser to be performed and complied with pursuant to this Agreement and the other agreements contemplated hereby prior to the Effective Time shall have been duly performed and complied with. (c) Certificates. Purchaser shall have delivered to GNN (i) a certificate, dated as of the Effective Time and signed on its behalf by its chief executive officer and its chief financial officer, to the effect that the conditions of its obligations set forth in Section 11.3(a) and 11.3(b) of this Agreement have been satisfied, provided (if Newco or Healtheon is the Purchaser) WebMD (and not Newco) shall deliver this certificate as to Section 11.3(a) to the extent of WebMD's representations and warranties), and (ii) certified copies of resolutions duly adopted by Purchaser's Board of Directors and Merger Corp.'s Board of Directors and sole shareholder evidencing the taking of all corporate action necessary to authorize the execution, delivery and performance of this Agreement, and the consummation of the transactions contemplated hereby, all in such reasonable detail as GNN and its counsel shall request. (d) No Material Adverse Change. There shall not have been any Material Adverse Effect with respect to Purchaser between the date hereof and the Closing Date, and Purchaser shall have delivered to GNN a certificate, dated as of the Closing Date, signed by its chief executive officer and chief financial officer certifying to such effect; provided that it is agreed and acknowledged by Newco that if Newco is the Purchaser and the Closing occurs simultaneously with the Healtheon Closing, WebMD, Healtheon or Healtheon and any other Person acquired by Newco on the Closing Date shall be deemed to be Subsidiaries of Newco for purposes of determining whether a Material Adverse Effect with respect to Purchaser shall have occurred. ARTICLE 12 TERMINATION 12.1 Termination. Notwithstanding any other provision of this Agreement, and notwithstanding the approval of this Agreement by the stockholders of GNN, this Agreement may be terminated and the Merger abandoned at any time prior to the Effective Time: (a) By mutual consent of the Boards of Directors of Healtheon, WebMD and GNN or, if this Agreement has been terminated as to Newco and Healtheon under Section 12.3, by mutual consent of the Boards of Directors of WebMD and GNN; or (b) By Healtheon and WebMD (jointly) or, if this Agreement has been terminated as to Newco and Healtheon under Section 12.3, WebMD individually (provided that the terminating Party is not then in Material breach of any representation, warranty, covenant, or other agreement contained in this Agreement) in the event of a breach by GNN of any representation or warranty contained in this Agreement such that the conditions in Section 11.2(a) with respect to GNN would not be satisfied as of the time of such breach, provided that if such breach is curable through the exercise of commercially reasonable efforts by GNN, then the terminating party or parties may not terminate this Agreement under this Section 12.1(b) prior to the Purchaser End Date provided GNN continues to exercise commercially reasonable efforts to cure such breach; or (c) By GNN (provided that GNN is not then in Material breach of any representation, warranty, covenant, or other agreement contained in this Agreement) in the event of a breach by Newco or WebMD of any representation or warranty contained in this Agreement such that the conditions in Section 11.3(a) with respect to Purchaser would not be satisfied as of the time of such breach, provided that if such breach is curable through the exercise of commercially reasonable efforts by Newco and/or -40- 638 WebMD, then the terminating party may not terminate this Agreement under this Section 12.1(c) prior to the Purchaser End Date provided the breaching party continues to exercise commercially reasonable efforts to cure such breach; provided breaches by Newco do not give rise to a termination right for GNN after this Agreement is terminated as to Newco under Section 12.3 hereof; or (d) By Healtheon and WebMD (jointly) or, if this Agreement has been terminated as to Newco and Healtheon under Section 12.3, WebMD individually (provided that the terminating Party is not then in Material breach of any representation, warranty, covenant, or other agreement contained in this Agreement) in the event of a breach by GNN of any covenant or agreement contained in this Agreement such that the conditions in Section 11.2(b) with respect to GNN would not be satisfied as of the time of such breach, provided that if such breach is curable through the exercise of commercially reasonable efforts by GNN, then the terminating party or parties may not terminate this Agreement under this Section 12.1(d) prior to the Purchaser End Date provided GNN continues to exercise commercially reasonable efforts to cure such breach; or (e) By GNN (provided that GNN is not then in Material breach of any representation, warranty, covenant, or other agreement contained in this Agreement) in the event of a breach by Newco or WebMD of any covenant or agreement contained in this Agreement such that the conditions in Section 11.3(b) with respect to Purchaser would not be satisfied as of the time of such breach, provided that if such breach is curable through the exercise of commercially reasonable efforts by Newco and/or WebMD, then the terminating party may not terminate this Agreement under this Section 12.1(e) prior to the Purchaser End Date provided the breaching party continues to exercise commercially reasonable efforts to cure such breach; provided breaches by Newco do not give rise to a termination right for GNN after this Agreement is terminated as to Newco under Section 12.3 hereof; or (f) By (1) Healtheon and WebMD (jointly) or, if this Agreement has been terminated as to Newco and Healtheon under Section 12.3, WebMD individually or (2) GNN (provided that the terminating Party is not then in Material breach of any representation, warranty, covenant, or other agreement contained in this Agreement) in the event any Regulatory Authority whose consent is required for consummation of the Merger and the other transactions contemplated hereby shall have an order, decree, or ruling or taking any other action, in any case having the effect of permanently restraining, enjoining or otherwise prohibiting the Merger, which order, decree, ruling or other action is final and nonappealable; or (g)(i) If this Agreement has not been terminated as to Newco and Healtheon under Section 12.3, by (1) Healtheon and WebMD (jointly) or (2) GNN in the event that the Merger shall not have been consummated by the earlier of (i) the thirtieth (30th) day after the Healtheon Closing and (ii) December 15, 1999 (the earlier of such dates is referred to herein as the "Newco End Date"), if the failure to consummate the transactions contemplated hereby on or before such date is not caused by any breach of this Agreement by the Party(ies) electing to terminate pursuant to this Section 12.1(g); or (ii) If this Agreement has been terminated as to Newco and Healtheon under Section 12.3, by (1) WebMD or (2) GNN in the event that the Merger shall not have been consummated by February 15, 2000 (the "WEBMD END DATE"), if the failure to consummate the transactions contemplated hereby on or before such date is not caused by any breach of the Agreement by the Party electing to terminate pursuant to this Section 12.1(g); or (h) By Healtheon and WebMD (jointly) or, if this Agreement has been terminated as to Newco and Healtheon under Section 12.3, WebMD individually if the Board of Directors of GNN shall fail to call a Stockholders Meeting or solicit consents for the purpose of approving the Merger at least 10 days prior to the date set forth in Section 12.1(g) (provided that the failure to call such meeting is not the result of a breach by Newco or WebMD of any representation, warranty, covenant or agreement that would entitle GNN to terminate this Agreement pursuant to Section 12.1(c) or (e) above) or shall have affirmed, recommended or authorized entering into any other Acquisition Proposal or other transaction involving a merger, share exchange, consolidation or transfer of substantially all of the Assets of GNN; or -41- 639 (i) By Healtheon and WebMD (jointly) or, if this Agreement has been terminated as to Newco and Healtheon under Section 12.3, WebMD individually, if the Board of Directors of GNN shall withdraw, modify or change its approval or recommendation to the GNN Stockholders of this Agreement or the Merger and related transactions in a manner adverse to Healtheon, Newco or WebMD. 12.2 Effect of Termination. In the event of the termination and abandonment of this Agreement pursuant to Section 12.1 of this Agreement, this Agreement shall become void and have no effect, except that (i) the provisions of this Section 12.2 and Article 13 and Section 10.5(b) and 10.14 of this Agreement shall survive any such termination and abandonment, and (ii) a termination pursuant to of this Agreement (except for a termination under Section 12.1(a)) shall not relieve a breaching Party from Liability for an uncured willful breach of a representation, warranty, covenant, or agreement giving rise to such termination. 12.3 Termination as to Newco and Healtheon. If the Healtheon/WebMD Agreement is terminated for any reason prior to the consummation of the transactions contemplated therein and prior to the Closing, this Agreement shall be deemed terminated as to Newco and Healtheon. In the event of the termination of this Agreement as to Newco and Healtheon as provided in this Section 12.3, Newco and Healtheon shall cease to be bound by this Agreement, except that the provisions of Sections 1.4, 10.5(b), 10.14 and 12.3 and Article 13 of this Agreement shall survive any such termination and continue to bind Newco and Healtheon, and no Party hereunder shall have any Liability in connection with the terms and conditions of this Agreement applicable to or binding upon Newco or Healtheon. In the event of the termination of the Healtheon/WebMD Agreement, neither Healtheon, WebMD nor Newco shall have any Liability for any reason under this Agreement ARTICLE 13 MISCELLANEOUS 13.1 Definitions. (a) Except as otherwise provided herein, the capitalized terms set forth below shall have the following meanings: "ACQUISITION PROPOSAL" shall mean any proposal (other than an offer or proposal by Purchaser) relating to any Acquisition Transaction. "ACQUISITION TRANSACTION" shall mean any transaction or series of related transactions involving: (A) any purchase from GNN or acquisition by any Person or "group" (as defined under Section 13(d) of the 1934 Act and the rules and regulations thereunder) of more than a 5% interest in the total outstanding voting securities of GNN or any tender offer or exchange offer that if consummated would result in any Person or "group" (as defined under Section 13(d) of the 1934 Act and the rules and regulations thereunder) beneficially owning 5% or more of the total outstanding voting securities of GNN or any merger, consolidation, business combination or similar transaction involving GNN; (B) any sale, lease (other than in the ordinary course of business), exchange, transfer, license (other than in the ordinary course of business), acquisition or disposition of more than 5% of the Assets of GNN; or (C) any liquidation or dissolution of GNN. "AFFILIATE" of a Person shall mean: (i) any other Person directly, or indirectly through one or more intermediaries, controlling, controlled by or under common control with such Person; (ii) any officer, director, partner, employer, or direct or indirect beneficial owner of any 10% or greater equity or voting interest of such Person; or (iii) any other Person for which a Person described in clause (ii) acts in any such capacity. "AGREEMENT" shall mean this Agreement and Plan of Merger, including the Exhibits and Disclosure Letters delivered pursuant hereto and incorporated herein by reference. -42- 640 "ASSETS" of a Person shall mean all of the assets, properties, businesses and rights of such Person of every kind, nature, character and description, whether real, personal or mixed, tangible or intangible, accrued or contingent, or otherwise relating to or utilized in such Person's business, directly or indirectly, in whole or in part, whether or not carried on the books and records of such Person, and whether or not owned in the name of such Person or any Affiliate of such Person and wherever located. "CERTIFICATE OF MERGER" shall mean the Certificate of Merger to be executed by the Surviving Corporation and filed with the Secretary of State of the State of Delaware relating to the Merger as contemplated by Section 1.1 of this Agreement. "CLOSING DATE" shall mean the date on which the Closing occurs. "CONSENT" shall mean any consent, approval, authorization, clearance, exemption, waiver, or similar affirmation by any Person pursuant to any Contract, Law, Order, or Permit. "CONTRACT" shall mean any written or oral agreement, arrangement, commitment, contract, indenture, instrument, lease, obligation, plan, restriction, understanding or undertaking of any kind or character, or other document to which any Person is a party or that is binding on any Person or its capital stock, Assets or business. "CONVERSION PRICE" shall mean either $81.98 (the "HEALTHEON TRADING PRICE"), or the Healtheon Trading Price multiplied by the number of shares of Healtheon common stock each share of WebMD common stock is convertible into immediately prior to the termination of this Agreement as to Newco under Section 12.3 hereof if WebMD is the Purchaser. "DEFAULT" shall mean (i) any breach or violation of or default under any Contract, Order or Permit, (ii) any occurrence of any event that with the passage of time or the giving of notice or both would constitute a breach or violation of or default under any Contract, Order or Permit, or (iii) any occurrence of any event that with or without the passage of time or the giving of notice would give rise to a right to terminate or revoke, change the current terms of, or renegotiate, or to accelerate, increase, or impose any Liability under, any Contract, Order or Permit. "ENVIRONMENTAL LAWS" shall mean all Laws relating to pollution or protection of human health or the environment (including ambient air, surface water, ground water, land surface or subsurface strata) and which are administered, interpreted or enforced by the United States Environmental Protection Agency and state and local agencies with jurisdiction over, and including common law in respect of, pollution or protection of the environment, including the Comprehensive Environmental Response Compensation and Liability Act, as amended, 42 U.S.C. 9601 et seq. ("CERCLA"), the Resource Conservation and Recovery Act, as amended, 42 U.S.C. 6901 et seq. ("RCRA"), and other Laws relating to emissions, discharges, releases or threatened releases of any Hazardous Substance, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of any Hazardous Substance. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "EXHIBITS" shall mean the Exhibits so marked, copies of which are attached to this Agreement. Such Exhibits are hereby incorporated by reference herein and made a part hereof, and may be referred to in this Agreement and any other related instrument or document without being attached hereto. "FUNDED DEBT" shall mean any outstanding indebtedness for funds borrowed (including leases required to be capitalized under GAAP) of such Party or its Subsidiaries, except Funded Debt between such parties, representing borrowing, but excluding trade payables. "GAAP" shall mean generally accepted accounting principles, consistently applied during the periods involved. "GCLSD" shall mean the General Corporation Law of the State of Delaware. -43- 641 "GNN CAPITAL STOCK" shall mean the GNN Common Stock and the GNN Preferred Stock. "GNN COMMON STOCK" shall mean the GNN common stock, $0.01 par value per share. "GNN PREFERRED STOCK" shall mean the GNN Series A Preferred Stock, $0.01 par value per share, the GNN Series B Preferred Stock, $0.01 par value per share and the GNN Series C Preferred Stock, $0.01 par value per share. "GNN STOCK PLAN" shall mean the existing stock option plan of GNN designated as follows: Greenberg News Networks, Inc. 1997 Stock Option Plan. "HSR ACT" shall mean Section 7A of the Clayton Act, as added by Title II of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder. "HAZARDOUS MATERIAL" shall mean (i) any hazardous substance, hazardous Material, hazardous waste, regulated substance or toxic substance (as those terms are defined by any applicable Environmental Laws) and (ii) any chemicals, pollutants, contaminants, petroleum, petroleum products, or oil (and specifically shall include asbestos requiring abatement, removal or encapsulation pursuant to the requirements of Regulatory Authorities and any polychlorinated biphenyls). "INFORMATION STATEMENT" shall mean any proxy or information statement, prospectus, memorandum and/or other materials sent to the Stockholders in connection with the Stockholders meeting if WebMD is the Purchaser and does not make the WebMD Election described in Section 10.15. "INTELLECTUAL PROPERTY" shall mean any or all of the following and all rights in, arising out of, or associated therewith: (i) all United States, international and foreign patents and applications therefor and all reissues, divisions, renewals, extensions, provisionals, continuations and continuations-in-part thereof; (ii) all inventions (whether patentable or not), invention disclosures, improvements, trade secrets, proprietary information, know how, technology, technical data and customer lists, and all documentation relating to any of the foregoing; (iii) all copyrights, copyrights registrations and applications therefore, and all other rights corresponding thereto throughout the world; (iv) all industrial designs and any registrations and applications therefor throughout the world; (v) all trade names, logos, URLs, common law trademarks and service marks, trademark and service mark registrations and applications therefor throughout the world; (vi) all databases and data collections and all rights therein throughout the world; (viii) all moral and economic rights of authors and inventors, however denominated, throughout the world, and (viii) any similar or equivalent rights to any of the foregoing anywhere in the world. "INTERNAL REVENUE CODE" shall mean the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder. "LAW" shall mean any code, law, ordinance, regulation, reporting or licensing requirement, rule, or statute applicable to a Person or its Assets, Liabilities or business, including those promulgated, interpreted or enforced by any Regulatory Authority. "LIABILITY" shall mean any direct or indirect, primary or secondary, liability, indebtedness, obligation, penalty, cost or expense (including costs of investigation, collection and defense), claim, deficiency, guaranty or endorsement of or by any Person (other than endorsements of notes, bills, checks, and drafts presented for collection or deposit in the ordinary course of business) of any type, whether accrued, absolute or contingent, liquidated or unliquidated, matured or unmatured, or otherwise. "LIEN" shall mean any conditional sale agreement, default of title, easement, encroachment, encumbrance, hypothecation, infringement, lien, mortgage, pledge, reservation, restriction, security interest, title retention or other security arrangement, or any adverse right or interest, charge, or claim of any nature whatsoever of, on, or with respect to any Asset, other than (i) Liens for current property Taxes not yet due and payable, (ii) Liens reflected on the GNN Financial Statements and (iii) Liens which do not materially detract from the value or Materially interfere with the present use of the Asset subject thereto or affected thereby. -44- 642 "LITIGATION" shall mean any action, suit, arbitration, cause of action, claim, complaint, criminal prosecution, demand letter, governmental or other examination or investigation, hearing, inquiry, administrative or other proceeding, or notice (written or oral) by any Person alleging potential Liability or requesting information relating to or affecting a Party, its business, its Assets (including Contracts related to it), or the transactions contemplated by this Agreement. "MATERIAL" for purposes of this Agreement shall be determined in light of the facts and circumstances of the matter in question; provided that any specific monetary amount stated in this Agreement shall determine materiality in that instance. "MATERIAL ADVERSE EFFECT" on a Party shall mean an event, change or occurrence which, individually or together with any other event, change or occurrence, has a Material adverse impact on (i) the financial position, business, or results of operations of such Party and its Subsidiaries, taken as a whole, or (ii) the ability of such Party to perform its obligations under this Agreement or to consummate the Merger or the other transactions contemplated by this Agreement; provided that if WebMD is the Purchaser, "Material Adverse Effect" shall not be deemed to include events, changes or occurrences (x) generally affecting the healthcare information technology industry, or (y) generally affecting the overall U.S. economy. "MERGER CORP. COMMON STOCK" shall mean the $0.01 par value common stock of Merger Corp. "NEWCO COMMON STOCK" shall mean the $0.0001 par value common stock of Newco. "NEWCO STOCK AMOUNT" shall mean 2,621,676 assuming Newco is the Purchaser, except as otherwise provided in Section 3.6(b). "1933 ACT" shall mean the Securities Act of 1933, as amended. "1934 ACT" shall mean the Securities Exchange Act of 1934, as amended. "ORDER" shall mean any administrative decision or award, decree, injunction, judgment, order, quasi-judicial decision or award, ruling, or writ of any federal, state, local or foreign or other court, arbitrator, mediator, tribunal, administrative agency or Regulatory Authority. "PARTY" shall mean either Healtheon, Newco, GNN, Merger Corp. or WebMD, and "PARTIES" shall mean all of Healtheon, Newco, GNN, Merger Corp. and WebMD. "PERMIT" shall mean any federal, state, local, and foreign governmental approval, authorization, certificate, easement, filing, franchise, license, notice, permit, or right to which any Person is a party or that is or may be binding upon or inure to the benefit of any Person or its securities, Assets or business. "PERSON" shall mean a natural person or any legal, commercial or governmental entity, such as, but not limited to, a corporation, general partnership, joint venture, limited partnership, limited liability company, trust, business association, group acting in concert, or any person acting in a representative capacity. "PROXY STATEMENT/PROSPECTUS" shall mean the Proxy Statement/Prospectus contained in the Registration Statement and distributed to the stockholders of GNN when and if contemplated by Section 10.1. "PURCHASER" shall mean the Party that acquires GNN hereunder, either Newco, Healtheon or WebMD. "PURCHASER END DATE" shall mean either (i) the Newco End Date if this Agreement has not terminated as to Newco and Healtheon under Section 12.3 or (ii) the WebMD End Date if this Agreement has terminated as to Newco under Section 12.3. -45- 643 "PURCHASER COMMON STOCK" shall mean either (i) Newco Common Stock if Newco is the Purchaser, or (ii) WebMD Non-Voting Common Stock if WebMD is the Purchaser. "PURCHASER STOCK EXCHANGE RATIO" shall mean either (i) Newco Stock Exchange Ratio if Newco is the Purchaser, or (ii) WebMD Stock Exchange Ratio if WebMD is the Purchaser. "REGISTERED INTELLECTUAL PROPERTY" means all Intellectual Property that is the subject of an application, certificate, filing, registration or other document issued, filed with or recorded by any Regulatory Authority. "REGISTRATION STATEMENT" shall mean the registration statement on such form as Purchaser determines is applicable filed with the SEC by Purchaser in connection with the registration of shares of Purchaser Common Stock for issuance pursuant to the Merger if Newco is the Purchaser or WebMD is the Purchaser and makes the WebMD Election as described in Section 10.15. "REGULATORY AUTHORITIES" shall mean, collectively, the Federal Trade Commission, the United States Department of Justice, and all foreign, federal, state and local regulatory agencies and other governmental entities or bodies having jurisdiction over the Parties and their respective Assets, businesses and/or Subsidiaries, including the NASD and the SEC. "REPRESENTATIVE" shall mean any investment banker, financial advisor, attorney, accountant, consultant, or other representative of a Person. "SEC" shall mean the Securities and Exchange Commission. "SECURITIES LAWS" shall mean the 1933 Act, the 1934 Act, the Investment Company Act of 1940, as amended, the Investment Advisors Act of 1940, as amended, the Trust Indenture Act of 1939, as amended, and the rules and regulations of any Regulatory Authority promulgated thereunder. "STOCKHOLDERS MEETING" shall mean the meeting of the Stockholders of GNN to be held pursuant to Section 10.1 of this Agreement, including any adjournment or adjournments thereof. "STOCKHOLDERS" shall mean the holders of GNN Capital Stock. "SUBSIDIARIES" shall mean all those corporations, partnerships, associations, or other entities of which the entity in question owns or controls 50% or more of the outstanding equity securities either directly or through an unbroken chain of entities as to each of which 50% or more of the outstanding equity securities is owned directly or indirectly by its parent; provided, there shall not be included any such entity acquired through foreclosure or any such entity the equity securities of which are owned or controlled in a fiduciary capacity. "SURVIVING CORPORATION" shall mean GNN as the surviving corporation resulting from the Merger. "SURVIVING CORPORATION COMMON STOCK" shall mean the common stock of GNN as the Surviving Corporation in the Merger. "TAX" or "TAXES" shall mean any and all federal, state, local and foreign taxes, assessments and other governmental charges, duties, impositions and liabilities relating to taxes, including taxes based upon or measured by gross receipts, income, profits, sales, use and occupation, and value added, ad valorem, transfer, franchise, withholding, payroll, recapture, employment, excise and property taxes, together with all interest, penalties and additions imposed with respect to such amounts; (ii) any liability for the payment of any amounts of the type described in clause (i) as a result of being a member of an affiliated, consolidated, combined or unitary group for any period; and (iii) any liability for the payment of any amounts of the type described in clause (i) or (ii) as a result of any express or implied obligation to indemnify any other person or as a result of any obligations under any agreements or arrangements with any other person or as a result of any obligations under any agreements or arrangements with any other person with respect to such amounts and including any liability for taxes of a predecessor entity. -46- 644 "UNDISCLOSED LIABILITIES" shall mean any Liability or obligation of a Party to this Agreement, whether accrued, liquidated, unliquidated, absolute, contingent, matured, unmatured or otherwise that is not fully reflected or reserved against in their respective financial statements or fully disclosed in Section 5.6 of the GNN Disclosure Letter (with respect to Undisclosed Liabilities of GNN) or in Section 6.6 of the WebMD Disclosure Letter (with respect to Undisclosed Liabilities of WebMD). "WEBMD NON-VOTING COMMON STOCK" shall mean the no par value Series D Non-Voting Common Stock of WebMD. "WEBMD STOCK AMOUNT" shall mean the number of shares of WebMD Non-Voting Common Stock determined by dividing $214,925,000 by the Conversion Price assuming WebMD is the Purchaser, except as otherwise provided in Section 3.6(b). (b) In addition to the terms defined in Section 11.1 (a) above, the terms set forth below shall have the meanings ascribed thereto in the referenced sections: Anti-Dilution Event............................ Section 3.2 Benefit Plans.................................. Section 5.21 Capital Expenditures........................... Section 5.16(c) Closing........................................ Section 1.2 Closing Date................................... Section 1.2 Effective Time................................. Section 1.3 Environmental Litigation....................... Section 5.17 ERISA Plan..................................... Section 5.21 Escrow Agreement............................... Section 4.3 Escrow Shares.................................. Section 4.3 Exchange Agent................................. Section 4.1 FASB 5......................................... Section 5.18 FICA........................................... Section 5.9 Forward Merger................................. Section 1.4(b) FUTA........................................... Section 5.9 GNN Equity Rights.............................. Section 5.3 GNN Financial Statement........................ Section 5.5 GNN Warrants................................... Section 3.7 Healtheon...................................... Preamble Healtheon Closing.............................. Section 11.2(k) Merger......................................... Section 1.1 Multiemployer Plan............................. Section 5.21(a) Newco End Date................................. Section 12.1(g) Newco Stock Exchange Ratio..................... Section 3.1 Newco's Registration Statement................. Article 7 Options........................................ Section 3.6 Returns........................................ Section 5.9 WebMD End Date................................. Section 12.1(g) WebMD Merger Sub............................... Section 1.4(b) WebMD Stock Exchange Ratio..................... Section 3.1
(c) Any singular term in this Agreement shall be deemed to include the plural, and any plural term the singular. Whenever the words "INCLUDE," "INCLUDES" or "INCLUDING" are used in this Agreement, they shall be deemed followed by the words "WITHOUT LIMITATION." 13.2 Brokers and Finders. Except for Hambrecht & Quist ("H&Q") and Stephens, Inc. ("Stephens") as to GNN, each of the Parties represents and warrants that neither it nor any of its -47- 645 officers, directors, employees, or Affiliates has employed any broker or finder or incurred any Liability for any financial advisory fees, investment bankers' fees, brokerage fees, commissions, or finders' fees in connection with this Agreement or the transactions contemplated hereby. In the event of a claim by any broker or finder based upon his or its representing or being retained by or allegedly representing or being retained by Newco, GNN or WebMD, each of Newco, GNN and WebMD, as the case may be, agrees to indemnify and hold the other Parties harmless of and from any Liability in respect of any such claim. GNN hereby represents warrants to all of the other Parties hereto that copies of all of its Contracts with H&Q and Stephens have been delivered to Newco and WebMD prior to execution of this Agreement. 13.3 Entire Agreement. Except as otherwise expressly provided herein, this Agreement (including the documents and instruments referred to herein) constitutes the entire agreement between the Parties with respect to the transactions contemplated hereunder and supersedes all prior arrangements or understandings with respect thereto, written or oral. Nothing in this Agreement expressed or implied, is intended to confer upon any Person, other than the Parties or their respective successors, any rights, remedies, obligations, or liabilities under or by reason of this Agreement. 13.4 Amendments. To the extent permitted by Law, this Agreement may be amended by a subsequent writing signed by each of the Parties upon the approval of the Boards of Directors of each of the Parties, whether before or after stockholder approval of this Agreement has been obtained; provided, that after any such approval by the holders of GNN Common Stock, there shall be made no amendment that pursuant to the GCLSD requires further approval by such stockholders without the further approval of such stockholders. 13.5 Waivers. (a) Prior to or at the Effective Time, Healtheon and WebMD (jointly), or if this Agreement has been terminated as to Newco and Healtheon under Section 12.3, WebMD individually, acting through their respective Boards of Directors, chief executive officers or other authorized officers, shall have the right to waive any Default in the performance of any term of this Agreement by GNN, to waive or extend the time for the compliance or fulfillment by GNN of any and all of its obligations under this Agreement, and to waive any or all of the conditions precedent to the obligations of Purchaser under this Agreement, except any condition which, if not satisfied, would result in the violation of any Law. No such waiver shall be effective unless in writing signed by a duly authorized officer of Newco, Healtheon and/or WebMD (as provided above). (b) Prior to or at the Effective Time, GNN, acting through its Board of Directors, chief executive officer or other authorized officer, shall have the right to waive any Default in the performance of any term of this Agreement by Purchaser, to waive or extend the time for the compliance or fulfillment by Purchaser of any and all of its obligations under this Agreement, and to waive any or all of the conditions precedent to the obligations of GNN under this Agreement, except any condition which, if not satisfied, would result in the violation of any Law. No such waiver shall be effective unless in writing signed by a duly authorized officer of GNN, and any waiver by GNN of a Default or condition precedent of Newco will not, if this Agreement is subsequently terminated as to Newco and Healtheon under Section 12.3, be a waiver of the same Default or condition precedent of WebMD. (c) The failure of any Party at any time or times to require performance of any provision hereof shall in no manner affect the right of such Party at a later time to enforce the same or any other provision of this Agreement. No waiver of any condition or of the breach of any term contained in this Agreement in one or more instances shall be deemed to be or construed as a further or continuing waiver of such condition or breach or a waiver of any other condition or of the breach of any other term of this Agreement. 13.6 Assignment. Except as expressly contemplated hereby, neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any Party hereto (whether by operation of Law or otherwise) without the prior written consent of the other Party; provided that Newco may assign all of its rights and obligations hereunder to Healtheon in the event that Healtheon acquires WebMD -48- 646 under the Healtheon/WebMD Agreement instead of Newco, or in the event that Healtheon and WebMD agree that Healtheon shall acquire WebMD and Healtheon files a Registration Statement to effect such transaction in which event WebMD and GNN agree to execute any documents reasonably requested by Healtheon to evidence the substitution of Healtheon and a wholly owned Subsidiary of Healtheon for Newco and Merger Corp. as Parties to this Agreement; provided further that GNN hereby agrees that upon such an assignment Section 7.3 and the last two sentences of Section 7.1 shall be deemed deleted from this Agreement. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the Parties and their respective successors and assigns. 13.7 Notices. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered by hand, by facsimile transmission, by registered or certified mail, postage pre-paid, or by courier or overnight carrier, to the persons at the addresses set forth below (or at such other address as may be provided hereunder), and shall be deemed to have been delivered as of the date so delivered: GNN: Greenberg News Networks, Inc. 1175 Peachtree Street 100 Colony Square, Suite 2400 Atlanta, Georgia 30361 Telecopy Number: (404) 541-2096 Attention: Mr. Alan N. Greenberg Copy to Counsel: King & Spalding 191 Peachtree Street Atlanta, Georgia 30303-1763 Telecopy Number: (404) 572-5145 Attention: William G. Roche, Esq. Newco or Healtheon: Healtheon/WebMD Corporation c/o Healtheon Corporation 4600 Patrick Henry Road Santa Clara, California 95054 Telecopy Number: (408) 876-5175 Attention: Jack Dennison Copy to Counsel: Wilson Sonsini Goodrich & Rosati Professional Corporation 650 Page Mill Road Palo Alto, California 94304-1050 Telecopy Number: (650) 493-6811 Attention: Larry Sonsini; Marty Korman; Daniel Mitz WebMD: WebMD, Inc. 400 The Lenox Building 3399 Peachtree Road, NE Atlanta, Georgia 30326 Telecopy Number: (404) 479-7603 Attention: Mr. W. Michael Heekin Copy to Counsel: Alston & Bird LLP One Atlantic Center 1201 W. Peachtree Street Atlanta, Georgia 30309 Telecopy Number: (404) 881-4777 Attention: J. Vaughan Curtis, Esq.
13.8 Governing Law. This Agreement shall be governed by and construed in accordance with the Laws of the State of Delaware, without regard to any applicable conflicts of Laws. 13.9 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. -49- 647 13.10 Captions. The captions contained in this Agreement are for reference purposes only and are not part of this Agreement. 13.11 Interpretations. Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against any party, whether under any rule of construction or otherwise. No party to this Agreement shall be considered the draftsman. The parties acknowledge and agree that this Agreement has been reviewed, negotiated and accepted by all parties and their attorneys and shall be construed and interpreted according to the ordinary meaning of the words used so as fairly to accomplish the purposes and intentions of all parties hereto. 13.12 Enforcement of Agreement. The Parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court of the United States or any state having jurisdiction, this being in addition to any other remedy to which they are entitled at law or in equity. 13.13 Severability. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only so broad as is enforceable. 13.14 Facsimile Signatures. Any signature page delivered by a facsimile or telecopy machine will be binding to the same extent as an original signature page. Any Party who delivers such a signature page agrees to later deliver an original counterpart to any Party which requests it. 13.15 Nonsurvival of Representations and Warranties. None of the representations and warranties of Newco in this Agreement will survive the Effective Time of the Merger. None of the representations and warranties of WebMD in this Agreement will survive the Effective Time of the Merger if WebMD makes the WebMD Election under Section 10.15. If WebMD does not make the WebMD Election, the representations and warranties of WebMD in this Agreement will survive the Effective Time of the Merger for one (1) year as and to the extent contemplated in Article 14. The representations and warranties of GNN in this Agreement will survive the Effective Time of the Merger for one (1) year as and to the extent contemplated in Article 14. Nothing in this Section 13.15 shall limit any covenant or agreement of the Parties which by its terms contemplates performance after the Effective Time. ARTICLE 14 ESCROW; SHAREHOLDER REPRESENTATIVE 14.1 Escrow Arrangements. (a) Escrow Fund. At the Effective Time, each Stockholder will be deemed to have received and consented to the deposit with the Escrow Agent (as defined below) of the Escrow Shares pursuant to the Escrow Agreement, without any act required on the part of the Stockholder. As soon as practicable after the Effective Time, the Escrow Shares, without any act required on the part of any Stockholder, will be deposited with an escrow agent acceptable to Purchaser and the Representative (as defined below) as Escrow Agent (the "ESCROW AGENT"), such deposit to constitute an escrow fund (the "ESCROW FUND") to be governed by the terms set forth herein. The portion of the Escrow Amount contributed on behalf of each Stockholder shall be in proportion to the aggregate Purchaser Common Stock which such holder would otherwise be entitled to receive under Section 3.1, which respective percentage interest (the "PERCENTAGE INTEREST") will be determined as of the Effective Time and set forth on an exhibit to the Escrow Agreement. The Escrow Fund shall be contributed entirely out of the shares of Purchaser Common Stock issuable upon the Merger in respect of GNN Capital Stock. From and after the Effective Time, the Escrow Fund shall be available to compensate and indemnify Purchaser and the Surviving Corporation and their respective officers, directors, employees, representatives, agents, stockholders -50- 648 controlling persons and Affiliates (each a "PURCHASER INDEMNITEE") against and for any Loss suffered or incurred by a Purchaser Indemnitee, as and when due, which arises out of or results from a breach of any of the representations, warranties, covenants or agreements of GNN set forth in this Agreement or in any document delivered by GNN pursuant to this Agreement; provided, however, that for purposes of determining whether or not GNN has breached any of its representations and warranties in this Agreement, exceptions and qualifications for Material, Materiality or Material Adverse Effect and similar expressions shall be disregarded. A Purchaser Indemnitee may not receive any shares from the Escrow Fund unless and until a Loss Notice or Loss Notices (as defined below) identifying Indemnifiable Losses, the aggregate amount of which exceed $500,000 have been delivered to the Escrow Agent pursuant to the terms hereof; in such case, an Indemnitee may recover from the Escrow Fund its Losses in excess of $500,000 in accordance with the terms and provisions of this Article 14. (b) Additional Shares. If this Agreement is terminated as to Newco and Healtheon under Section 12.3, and the transactions contemplated hereby are consummated and WebMD acquires GNN as set forth herein, then from and after the Effective Time WebMD shall issue up to an aggregate maximum number of shares of WebMD Non-Voting Common Stock equal to ten percent (10%) of the total number of shares of WebMD Non-Voting Common Stock issuable pursuant to Section 3.1 hereof as adjusted pursuant to Section 3.2 (the "ADDITIONAL SHARES") to compensate and indemnify the Stockholders against and for any Loss suffered or incurred by the Stockholders (collectively in their capacity as stockholders of GNN) ("STOCKHOLDER INDEMNITIES"), as and when due, which arises out of or results from a breach of any of the representations, warranties, covenants, or agreements of WebMD or Surviving Corporation (but excluding any Losses against which a Purchaser Indemnitee may be indemnified under Section 14.1(a) above, ignoring any time limits, limitations on amount, deductibles and other restrictions set forth in this Article 14) set forth in this Agreement or any document delivered by WebMD or Surviving Corporation pursuant to this Agreement; provided, however, that for purposes of determining whether or not WebMD or Surviving Corporation has breached any of its representations and warranties in the Agreement, exceptions for Material, Materiality or Material Adverse Effect and similar expressions shall be disregarded. The Stockholder Indemnitees will not be entitled to receive any indemnity under this Section 14.2 unless and until their collective Losses exceed $500,000. 14.2 Definitions. As used in this Article 14, the following terms shall have the following meanings: (a) "DISPUTED LOSS NOTICE" shall mean a Loss Notice that is disputed by the Indemnitor by delivery of a Protest Notice. (b) "ESCROW SHARES" shall mean a number of shares equal to ten percent (10%) of the aggregate number of shares of Purchaser Common Stock issuable pursuant to Section 3.1 hereto which shall be issued and placed in Escrow (plus any additional shares as may be issued upon any Anti-Dilution Event effected by Purchaser after the Effective Time or Additional Shares pursuant to Section 14.7). (c) "INDEMNIFIABLE LOSS" shall mean any Loss for which an Indemnitee may be compensated and indemnified pursuant to Sections 14.1 and 14.8(b) hereof. The amount of recovery for any Indemnifiable Loss shall be reduced by any insurance proceeds received as a result of any such Indemnifiable Loss. (d) "INDEMNITEE" shall mean any Purchaser Indemnitee or the Stockholder Indemnitees entitled to indemnification under this Article 14. (e) "INDEMNITOR" shall mean any Party obligated to indemnify an Indemnitee under this Article 14. (f) "LOSS" shall mean any direct or indirect demand, claim, obligation, assessment, loss, Liability, damage (including special and consequential damages), cost or expense, including without limitation, penalties, fines, or interest on any amount payable to a third party as a result of the foregoing, and any legal or other expense reasonably incurred in connection with investigating or defending any claim or action, whether or not resulting in any Liability. -51- 649 (g) "LOSS NOTICE" shall mean a written notice, as prescribed in Section 14.3 hereof, provided by an Indemnitee to the Indemnitor and (if the Indemnitee is a Purchaser Indemnitee) the Escrow Agent (i) stating the Indemnitee has paid or properly accrued or reasonably anticipates that it will have to pay or accrue an Indemnifiable Loss or potential Indemnifiable Loss, (ii) setting forth in reasonable detail the individual items comprising such Indemnifiable Loss, the date each such item was paid or properly accrued, or the basis for such anticipated liability, and the nature of the misrepresentation, breach of warranty or covenant to which such item is related, and (iii) to the extent the amount of the Indemnifiable Loss or potential Indemnifiable Loss is reasonably calculable, an estimate of the number of Escrow Shares (if the Indemnitee is a Purchaser Indemnitee) or Additional Shares (if the Indemnitees are the Stockholder Indemnitees) to be delivered to an Indemnitee with respect to such Indemnifiable Loss or potential Indemnifiable Loss. (h) "REPRESENTATIVE" shall mean Alan N. Greenberg, Russell R. French and Doug Martin (collectively) or any of their successors appointed in accordance with Section 14.9 of this Agreement. (i) "REPRESENTATIVE EXPENSES" shall mean expenses, including reasonable attorneys fees and other expenses, of the Representative, in an amount up to $10,000, incurred in connection with his obligations under this Agreement. (j) "PROTEST NOTICE" shall mean a written notice, as prescribed in Section 14.3 hereof, provided by the an Indemnitor to an Indemnitee and (if the Indemnitee is a Purchaser Indemnitee) the Escrow Agent if the Indemnitor disputes any Loss Notice received from an Indemnitee. (k) "VALUE PER SHARE" shall mean the Conversion Price. 14.3 Notice of Claim. If an Indemnitee incurs or has reason to believe it may incur an Indemnifiable Loss, or should an Indemnitee negotiate a proposed settlement in satisfaction of a potential Indemnifiable Loss, it shall promptly provide a Loss Notice to the Indemnitor and (if the Indemnitee is a Purchaser Indemnitee) the Escrow Agent. If the Indemnitor disputes the amount sought under any such Loss Notice or otherwise disputes the right of the Indemnitee to be indemnified hereunder, the Indemnitor shall provide the Indemnitee and (if the Indemnitee is a Purchaser Indemnitee) the Escrow Agent a Protest Notice within thirty (30) days of the date any such Loss Notice is received by the Indemnitor. If no Protest Notice is received by the Indemnitee and (if the Indemnitee is a Purchaser Indemnitee) the Escrow Agent within thirty (30) days from the date on which any Loss Notice is received by the Indemnitor, or if a Protest Notice is received and the dispute is resolved in favor of the Indemnitee after following the procedures set forth below, then (i) if the Indemnitee is a Purchaser Indemnitee, the Escrow Agent shall cause to be delivered to Purchaser and Purchaser shall promptly cancel and retire that number of Escrow Shares as shall equal the number of Escrow Shares (rounded to the next highest whole number) that, when multiplied by the Value Per Share, equals the amount of Indemnifiable Loss sought by or awarded to the Indemnitee, and (ii) if the Indemnitees are Stockholder Indemnitees, WebMD shall cause to be issued and delivered to the Escrow Agent that number of Additional Shares as shall equal the number of Additional Shares (rounded to the next highest whole number) that, when multiplied by the Value Per Share, equals the amount of the Indemnifiable Loss sought by or awarded to the Stockholder Indemnities. If the Indemnitee and (if the Indemnitee is a Purchaser Indemnitee) the Escrow Agent receive a Protest Notice within such 30-day period, the Escrow Agent shall not deliver any Escrow Shares until receipt by it of written instructions (i) signed by the Representative and a duly authorized officer of the Indemnitee; or (ii) signed by an arbitration panel that has considered and resolved such dispute as provided in Section 14.4 below, which sets forth the number of Escrow Shares, if any, to be delivered to the Indemnitee in accordance with this paragraph. After delivery of any Escrow Shares to a Purchaser Indemnitee in accordance with this paragraph, the Escrow Agent shall be reissued a certificate in respect of any remaining Escrow Shares. 14.4 Procedure With Respect to Disputed Indemnifiable Loss. A Disputed Loss Notice may be resolved by the agreement of the Indemnitor and the Indemnitee, in which case (if the Indemnitee is a Purchaser Indemnitee) written notice of such agreement shall be promptly provided to the Escrow Agent, together with a statement of the agreed upon amount to be reimbursed to the Indemnitee. If the -52- 650 Indemnitor and the Indemnitee are unable to resolve a Disputed Loss Notice within sixty (60) days of delivery of the Protest Notice, then such Disputed Loss Notice shall be submitted to arbitration in accordance with the then-current commercial arbitration rules of the American Arbitration Association ("AAA"). If a Disputed Loss Notice is to be arbitrated, the Indemnitor shall select one arbitrator, the Indemnitee(s) shall select one arbitrator, and the two arbitrators so chosen shall select a third. Any decision of the arbitration panel shall require the vote of at least two (2) of such arbitrators and shall be deemed conclusive and each party shall be deemed to have waived any rights to appeal therefrom. In any arbitration pursuant to this Section 14.4, an Indemnitee shall be deemed to be the prevailing party if the arbitrators award the Indemnitee(s) at least fifty percent (50%) of the amount in dispute, plus any amounts not in dispute; otherwise, the Indemnitor shall be deemed to be the prevailing party. The non-prevailing party to an arbitration shall pay its own expenses, the fees of each arbitrator, the administrative costs of the arbitration (including the administrative fee of AAA), and the expenses, including without limitation, reasonable attorneys' fees and costs, incurred by the other party to the arbitration. If resolution of a Disputed Loss Notice is not made within ninety (90) days of the date of the Protest Notice as provided in this Section 14.4, then (if the Indemnitee is a Purchaser Indemnitee) the Escrow Agent may, in its sole discretion, either (i) continue to hold the Escrow Shares undisbursed until such time as the disputing parties agree in writing as to a proper disposition of such Escrow Shares, or (ii) if such agreement is not forthcoming, the Escrow Agent shall be entitled to tender into the registry or custody of any court of competent jurisdiction all money or property in its hand under the terms of this Agreement, and, upon the advice of counsel, may take such other legal action as may be appropriate or necessary, whereupon the parties hereto agree Escrow Agent shall be discharged from all further duties under the Escrow Agreement. The filing of any such legal proceedings shall not deprive Escrow Agent of its compensation earned prior to such filing. 14.5 Employment of Counsel. The Indemnitor may control the defense of any third party claim with respect to which an Indemnifiable Loss has been asserted except to the extent any such claim seeks non-monetary remedies in which case the Indemnitee may control the defense of such elements of the claim that involve non-monetary remedies. Notwithstanding the foregoing, if the aggregate amount of all such third party and indemnity claims plus the aggregate good faith estimates of the reasonable expenses to defend such claims exceed the number of remaining Escrow Shares (if the Indemnitee is a Purchaser Indemnitee) or the remaining Additional Shares (if the Indemnitees are the Stockholder Indemnitee(s) multiplied by the Value Per Share, the Indemnitee(s)) may control the defense of all such third party and general indemnity claims which have been brought under this Agreement, provided that the Indemnitees may not settle a third party claim without the approval of the Indemnitor, which approval shall not be unreasonably withheld, except to the extent any such claim seeks non-monetary remedies in which case the Indemnitee(s) may settle such claims without the approval of the Indemnitor to the extent that such claims involve non-monetary remedies. When the Indemnitee is in control of the defense of such a claim, the Indemnitor may, at its expense, and when the Indemnitor is in control of the defense of a claim, the Indemnitee may, at its expense (which expenses shall not be treated as a Loss hereunder), participate in the defense of any litigation or claim. 14.6 Term; Expiration; Limits. (a) Term -- General. With respect to the indemnity obligations set forth in Section 14.1 hereof and the availability of the Escrow Fund and Additional Shares to compensate and indemnify an Indemnitee, the term of escrow for the Escrow Shares and WebMD's obligation to issue any Additional Shares shall commence on the Closing Date of the Merger and shall terminate one (1) year after the Effective Time. Purchaser and the Representative shall provide written notice to the Escrow Agent upon expiration of the escrow for the Escrow Shares. (b) Expiration of Term -- No Claim Pending. If at the expiration of the term provided in Section 14.6(a) above, either (i) no Loss Notice has been received with respect to an Indemnifiable Loss; or (ii) any Loss Notice that has been received has been finally resolved in accordance with this Agreement and no litigation or claim is pending for which an Indemnitee may be entitled to indemnification hereunder, the Escrow Agent shall (i) deliver to the transfer agent for Purchaser Common -53- 651 Stock for issuance to each Stockholder, a certificate representing the number of such shares equal to the aggregate number of the Escrow Shares subject to the escrow which term is expiring and then remaining in escrow times the Percentage Interest for such Stockholder, and (ii) deliver to each Stockholder, any cash in the Escrow Fund times the Percentage Interest for such Stockholder. The Representative and Purchaser shall provide written notice to the Escrow Agent which sets forth the number of Escrow Shares to be delivered as provided in the foregoing sentence. Any such delivery of Purchaser Common Stock shall be of full shares and any fractional portions shall be rounded to a whole number by the Escrow Agent so that the number of shares remaining in escrow to be delivered will be fully allocated among such Stockholders. (c) Expiration of Term -- Claim Pending. If at the expiration of the term provided in Section 14.6(a) above, any claim is pending under Section 14.1 for which a Loss Notice has been delivered to the Indemnitor prior to such expiration and for which an Indemnitee would be entitled to indemnification if such claim were resolved adversely to Indemnitor, then (i) if the Indemnitee is a Purchaser Indemnitee, the Escrow Agent shall retain in such escrow that number of shares of Purchaser Common Stock as shall equal the number of Escrow Shares (rounded to the next highest whole number) that, when multiplied by the Value Per Share, equals any amount set forth by such Indemnitee in the Loss Notices with respect to such claims (the "RETAINED SHARES"), and (ii) if any claim pending is being asserted by the Stockholder Indemnitees, WebMD shall remain obligated to issue up to that number of shares of WebMD Non-Voting Stock as shall equal the number of Additional Shares (rounded to the next highest whole number) that when multiplied by the Value Per Share, equals any amount set forth by the Stockholder Indemnitees in the Loss Notices with respect to such claims solely to the extent that it is finally determined that WebMD is obligated to issue such Additional Shares to satisfy its obligations under this Article 14. In the event that any claim pending at the expiration of the term provided in Section 14.6(a) above is asserted by the Purchaser Indemnitee, the number of Escrow Shares, less the number of Retained Shares, shall then be distributed to the GNN Stockholders as set forth in Section 14.6(b) above. Upon the resolution of any claim for which shares were retained in escrow at the expiration of the term set forth in Section 14.6(a) and receipt of written notice from Purchaser and the Representative to such effect, the Escrow Agent shall cancel the appropriate number of Retained Shares (if any) and shall distribute any remaining Retained Shares held with respect to such claim to the GNN Stockholders as set forth in Section 14.6(b) above. (d) Effect of Final Delivery. Notwithstanding the expiration of the term set forth in Section 14.6(b) above, the provisions of Article 14 of this Agreement shall continue in full force and effect until the Escrow Agent has delivered all of the Escrow Shares pursuant to the terms hereof and all claims pending at the expiration of such term are finally resolved. After all of such shares have been so delivered and such claims resolved, all rights, duties and obligations of the respective parties under this Article 14 shall terminate. (e) Maximum Liability and Remedies. If the Closing occurs, except for remedies based upon fraud and except for equitable remedies (including temporary restraining orders, injunctive relief and specific performance), (i) the rights of Purchaser Indemnitees to make claims on the Escrow Shares pursuant to this Agreement shall be the sole and exclusive remedy of Purchaser Indemnitees with respect to any breach of a representation, warranty, covenant or agreement made by GNN under this Agreement or in any certificate or the GNN Disclosure Letter delivered by GNN pursuant to this Agreement or against GNN in connection with the Merger, and (ii) the rights of the Stockholder Indemnitees to make claims on the Additional Shares pursuant to this Agreement shall be the sole and exclusive remedy of the Stockholder Indemnitees with respect to any breach of a representation, warranty, covenant or agreement made by WebMD under this Agreement or in any document delivered by WebMD or the Surviving Corporation pursuant to this Agreement or against WebMD or Surviving Corporation in connection with the Merger. -54- 652 14.7 Dividends; Voting Rights; Additional Shares. (a) Cash Dividends; Voting Rights. The Escrow Agent shall distribute promptly any and all cash dividends or other cash income with respect to the Escrow Shares to the GNN Stockholders at their addresses of record and in accordance with their Percentage Interest in the Escrow Fund (which amounts shall also be allocable to the GNN Stockholders for tax reporting purposes). By written notice signed by the Representative, the Representative shall have the right to direct the Escrow Agent as to the exercise of any voting rights with respect to such Escrow Shares (if any) held by the Escrow Agent on behalf of the GNN Stockholders, and the Escrow Agent shall comply with such directions if received from the Representative at least five (5) days prior to the date of the meeting at which such vote is to be taken. (b) Stock Splits; Stock Dividends. In the event of any Anti-Dilution Event with respect to Purchaser Common Stock that becomes effective during the term of this Agreement, the additional shares so issued (if any) with respect to the Escrow Shares shall be added to the Escrow Shares and any other references herein to a specific number of shares of Purchaser Common Stock and the Value Per Share shall be proportionately adjusted. (c) Additional Shares. Any Additional Shares issued pursuant to this Article 14 prior to the expiration of the term set forth in Section 14.6(a) hereof, shall be issued to the Escrow Agent and become a part of the Escrow Fund. Any Additional Shares issued by WebMD pursuant to this Article 14 after the expiration of the term set forth in Section 14.6(a) hereof in accordance with Section 14.6(c) shall be issued by WebMD to the Stockholders, with each such Stockholder receiving a certificate representing such shares equal to the aggregate number of Additional Shares issued multiplied by the Percentage Interest for such Stockholder. Any such additional issuance of WebMD Non-Voting Common Stock shall be of full shares and any fractional portion shall be rounded to a whole number at the direction of the Representative such that the number of shares issued will be fully allocated among the Stockholders. 14.8 Escrow Agent. (a) Liability. In performing any of its duties under the Escrow Agreement and in accordance with the terms of this Agreement, or upon the claimed failure to perform its duties thereunder, the Escrow Agent shall not be liable to anyone for any damages, losses or expenses which they may incur as a result of the Escrow Agent so acting, or failing to act; provided, however, that Escrow Agent shall be liable for damages arising out of its willful default or gross negligence under the Escrow Agreement. Accordingly, by virtue of approving the Merger in accordance with this Agreement, each Party shall be deemed to have consented and agreed that the Escrow Agent shall not incur any such Liability with respect to (i) any action taken or omitted to be taken in good faith upon advice of its counsel or counsel for Indemnitor or the Indemnitee(s) given with respect to any questions relating to the duties and responsibilities of the Escrow Agent hereunder; or (ii) any action taken or omitted to be taken in reliance upon any document, including any written notice or instructions provided for in this Agreement or the Escrow Agreement, not only as to its due execution and to the validity and effectiveness of its provisions, but also as to the truth and accuracy of any information contained therein, which the Escrow Agent shall in good faith believe to be genuine, to have been signed or presented by the purported proper person or persons and to conform with the provisions of this Agreement and the Escrow Agreement. Written instructions provided to Escrow Agent hereunder by Purchaser and/or the Representative shall be signed by the "AUTHORIZED REPRESENTATIVE" as identified on a schedule to the Escrow Agreement attached hereto. The limitation of liability provisions of this Section 14.8 shall survive the termination of this Agreement, the Escrow Agreement and the resignation or removal of the Escrow Agent. (b) Indemnification of Escrow Agent. Purchaser and the Stockholders, hereby, jointly and severally, agree to indemnify and hold harmless the Escrow Agent against any and all losses, claims, damages, Liabilities and expenses, including, without limitation, reasonable costs of investigation and counsel fees and disbursements (both at the trial and appellate levels) which may be imposed on Escrow Agent or incurred by it in connection with its acceptance of appointment as Escrow Agent or the performance of its duties (except in connection with the willful default or gross negligence of the Escrow -55- 653 Agent), including, without limitation, any litigation arising from this Agreement or the Escrow Agreement, or involving the subject matter thereof. The indemnity provisions of this Section 14.8 shall survive the termination of this Agreement, the Escrow Agreement and the resignation or removal of the Escrow Agent. (c) Resignation. The Escrow Agent shall be able to resign at any time from its obligations under the Escrow Agreement by providing written notice to the parties thereto. Such resignation shall be effective not later than sixty (60) days after such written notice has been given. The Escrow Agent shall have no responsibility for the appointment of a successor escrow agent. If a successor escrow agent is not selected within sixty (60) days of the resignation of Escrow Agent, the Escrow Agent shall have the right to institute a Bill of Interpleader or other appropriate judicial proceeding in any court of competent jurisdiction, and shall be entitled to tender into the registry or custody of any court of competent jurisdiction all money or property in its hand under the terms of this Agreement, whereupon the Parties hereto agree Escrow Agent shall be discharged from all further duties under this Agreement and the Escrow Agreement. The filing of any such legal proceedings shall not deprive Escrow Agent of its compensation earned prior to such filing. The Escrow Agent may be removed for cause by Purchaser or the Representative. The removal of the Escrow Agent shall not deprive the Escrow Agent of its compensation earned prior to such removal. (d) Expenses of Escrow Agent. Purchaser shall be liable for the fees and expenses of the Escrow Agent. Escrow Agent shall bill Purchaser for the amount of such fees and expenses and Purchaser shall pay the fees and expenses to Escrow Agent. 14.9 Representative. (a) Representative; Power and Authority. In the event the Merger is approved by the Stockholders, effective upon such vote, and without further act of any GNN Stockholder, Alan N. Greenberg, Russell R. French and Doug Martin (collectively) shall be appointed as agent and attorney-in-fact for each stockholder of GNN (except such GNN Stockholders, if any, as shall have perfected their appraisal or dissenters' rights under Delaware law), for and on behalf of each such GNN Stockholder, with full power and authority to represent the GNN Stockholders and their successors with respect to all matters arising under this Agreement and the Escrow Agreement, and all actions taken by the Representative hereunder shall be binding upon such GNN Stockholders and their successors as if expressly ratified and confirmed in writing by each of them. Without limiting the generality of the foregoing, the Representative shall have full power and authority, on behalf of all the GNN Stockholders and their successors, to interpret all the terms and provisions of this Agreement, to dispute or fail to dispute any claim of Indemnifiable Loss against the Escrow Shares made by an Indemnitee, to assert claims of Indemnifiable Loss against the Additional Shares, to negotiate and compromise any dispute which may arise under this Agreement, to sign any releases or other documents with respect to any such dispute, and to authorize delivery of Escrow Shares in satisfaction (partial or otherwise) of by a Purchaser Indemnitee or any other payments to be made with respect thereto. All determinations of the Representative shall be decided by a majority thereof in the event there is more than one Representative. (b) Resignation; Successors. The Representative, or any successor hereafter appointed, may resign and shall be discharged of his duties hereunder upon the appointment of a successor Representative as hereinafter provided. In case of such resignation, or in the event of the death or inability to act of the Representative, a successor shall be named from among the GNN Stockholders by a majority of the members of the Board of Directors of GNN who served on such board prior to the Merger. Each such successor Representative shall have all the power, authority, rights and privileges hereby conferred upon the original Representative, and the term "REPRESENTATIVE" as used herein shall be deemed to include such successor Representative. (c) Liability. In performing any of his duties under this Agreement, or upon the claimed failure to perform his duties hereunder, the Representative shall not be liable to the Stockholders or anyone else for any damages, losses or expenses which they may incur as a result of any act, or failure to act under this Agreement or the Escrow Agreement; provided, however, that the Representative shall be liable for -56- 654 damages arising out of actions or omissions that both (i) were taken or omitted not in good faith and (ii) constituted willful default or gross negligence under this Agreement or the Escrow Agreement. Accordingly, the Representative shall not incur any such Liability with respect to (i) any action taken or omitted to be taken in good faith upon advice of his counsel given with respect to any questions relating to the duties and responsibilities of the Representative hereunder; or (ii) any action taken or omitted to be taken in reliance upon any document, including any written notice or instructions provided for in this Agreement or the Escrow Agreement, not only as to its due execution and to the validity and effectiveness of its provisions, but also as to the truth and accuracy of any information contained therein, which the Representative shall in good faith believe to be genuine, to have been signed or presented by the purported proper person or persons and to conform with the provisions of this Agreement and the Escrow Agreement. The limitation of liability provisions of this Section 14.9 shall survive the termination of this Agreement and the resignation of the Representative. 14.10 Representative Expenses. Purchaser shall pay Representative Expenses in an amount up to $10,000. [Signatures on next page.] -57- 655 IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be executed on its behalf by officers thereunto as of the day and year first above written. GREENBERG NEWS NETWORKS, INC. By: /s/ ALAN N. GREENBERG --------------------------------------- Alan N. Greenberg Title: Chief Executive Officer HEALTHEON CORPORATION By: /s/ JACK DENNISON --------------------------------------- Jack Dennison Title: Vice President HEALTHEON/WEBMD CORPORATION By: /s/ JACK DENNISON --------------------------------------- Jack Dennison Title: Vice President WEBMD, INC. By: /s/ JEFF ARNOLD --------------------------------------- Jeff Arnold Title: Chief Executive Officer GNN MERGER CORP. By: /s/ JACK DENNISON --------------------------------------- Jack Dennison Title: Vice President -58- 656 [LETTERHEAD OF MORGAN STANLEY & CO. INCORPORATED] ANNEX D May 20, 1999 Board of Directors Healtheon Corporation 4600 Patrick Henry Road Santa Clara, CA 95054 Members of the Board: We understand that Healtheon Corporation ("Healtheon"), WebMD, Inc. ("WebMD"), and Water Acquisition Corp. ("Merger Sub"), a wholly-owned subsidiary of Healtheon, entered into an Agreement and Plan of Reorganization, dated May 20, 1999 (the "Reorganization Agreement"), which provides, among other things, for the merger or other business combination as contemplated by the Agreement (the "Reorganization") of Merger Sub and WebMD. Pursuant to the Reorganization, each outstanding share of common stock, no par value, of WebMD (the "WebMD Common Stock"), other than shares held in treasury or held by Healtheon or any subsidiary of WebMD or Healtheon or as to which dissenters' rights have been perfected, will be converted into the right to receive 1.815 shares (the "Exchange Ratio") of common stock, par value $0.0001 per share of Healtheon (the "Healtheon Common Stock"). The terms and conditions of the Reorganization are more fully set forth in the Reorganization Agreement. We also understand that, in connection with the execution and delivery of the Reorganization Agreement: (i) WebMD will enter into voting and conversion agreements with certain stockholders of WebMD; (ii) WebMD will enter into a stockholder agreement with Microsoft Corporation ("Microsoft"); and (iii) Healtheon will enter into voting agreements with certain stockholders of Healtheon. We further understand, that among the conditions to the Reorganization, WebMD will have received investments (the foregoing, collectively, the "Strategic Investments"): (i) from Microsoft pursuant to the terms of the investment agreement dated May 12, 1999 among WebMD, Microsoft and certain other parties named therein (the "Investment Agreement") in an amount equal to $150,000,000 in exchange for 276,906 shares of Series E Preferred Stock of WebMD (the "Series E Preferred Stock"); (ii) from investors other than Microsoft pursuant to the Investment Agreement in an amount equal to $114,500,000 in exchange for 211,372 shares of Series E Preferred Stock; and (iii) from investors other than Microsoft pursuant to one or more agreements in substantially the same form as the Investment Agreement in an amount equal to $35,000,000 in exchange for 65,534 shares of Series E Preferred Stock; We also note that Microsoft has commenced a tender offer (the "Microsoft Tender Offer") for all outstanding shares of Series F Preferred Stock of WebMD pursuant to an Offer to Purchase dated April 10, 1999 (the "Offer to Purchase") and that the consummation of such Microsoft Tender Offer is not a condition to the consummation of the Reorganization. You have asked for our opinion as to whether the Exchange Ratio pursuant to the Agreement is fair from a financial point of view to Healtheon. 657 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. 658 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 659 ANNEX E May 20, 1999 Board of Directors WebMD, Inc. 400 The Lenox Building 3399 Peachtree Road NE Atlanta, GA 30326 Members of the Board: We understand that WebMD, Inc. ("WebMD"), Healtheon Corporation ("Healtheon"), Water Acquisition Corp. (a wholly owned subsidiary of Healtheon, "Merger Sub") and WebMD principal stockholders are proposing to enter into an Agreement and Plan of Reorganization (the "Agreement") which will provide, among other things, for the merger (the "Merger") of Merger Sub with and into WebMD. Upon consummation of the Merger, WebMD will become a wholly owned subsidiary of Healtheon. Under the terms set forth in the Agreement, at the effective time of the Merger, each outstanding share of common stock of WebMD, no par value ("WebMD Common Stock"), other than certain shares to be canceled pursuant to the Agreement and shares held by stockholders who properly exercise dissenters' rights ("Dissenting Shares"), will be converted into the right to receive such number of shares that shall be no less than 1.750 and no more than 1.815, depending on the satisfactory amendment of certain provisions of the McKessonHBOC Agreement (the "Exchange Ratio"), of the common stock of Healtheon, par value $0.0001 per share ("Healtheon Common Stock"). We also understand that, based on preliminary discussions with McKessonHBOC, the Exchange Ratio is anticipated to be 1.796. 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; 660 Board of Directors WebMD, Inc. May 20, 1999 Page 2 (viii) compared the financial terms of the Merger with the financial terms, to the extent publicly available, of other transactions that we deemed relevant; (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 661 Board of Directors WebMD, Inc. May 20, 1999 Page 3 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 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. 662 ANNEX F [LETTERHEAD OF SALOMON SMITH BARNEY INC.] August 2, 1999 The Board of Directors MEDE America Corporation 90 Merrick Avenue East Meadow, New York 11554 Members of the Board: You have requested our opinion as to the fairness, from a financial point of view, to the holders of the common stock of MEDE America Corporation ("MEDE AMERICA") of the Exchange Ratio (defined below) provided for in the Agreement and Plan of Reorganization, dated as of April 20, 1999, as amended as of August 2, 1999 (the "Agreement"), among Healtheon Corporation ("Healtheon"), Merc Acquisition Corp., a wholly owned subsidiary of Healtheon ("Merger Sub"), and MEDE AMERICA. As more fully described in the Agreement, (i) Merger Sub will be merged with and into MEDE AMERICA (the "Merger") and (ii) each outstanding share of the common stock, par value $0.01 per share, of MEDE AMERICA (the "MEDE AMERICA Common Stock") will be converted into the right to receive 0.6593 (the "Exchange Ratio") of a share of the common stock, par value $0.0001 per share, of Healtheon (the "Healtheon Common Stock"), subject to adjustment, as specified in the Agreement, in the event that the 10 day average closing price for Healtheon Common Stock for the period ending two days prior to MEDE AMERICA'S stockholders' meeting in respect of the Merger is less than $38.68. The Agreement further provides that if, prior to the consummation of the Merger, Healtheon is reorganized into a holding company structure as a result of which the outstanding shares of Healtheon Common Stock are converted into shares of a newly formed parent company ("Newco"), then such shares of MEDE AMERICA Common Stock will instead be converted in the Merger into shares of the common stock of Newco ("Newco Common Stock") in the same manner as if the Newco Common Stock were Healtheon Common Stock. In arriving at our opinion, we reviewed the Agreement and held discussions with certain senior officers, directors and other representatives and advisors of MEDE AMERICA and certain senior officers and other representatives and advisors of Healtheon concerning the businesses, operations and prospects of MEDE AMERICA and Healtheon. We examined certain publicly available business and financial information relating to MEDE AMERICA and Healtheon as well as certain financial forecasts and other information and data for MEDE AMERICA and Healtheon which were provided to or otherwise discussed with us by the respective managements of MEDE AMERICA and Healtheon, including information relating to certain strategic implications and operational benefits anticipated to result from the Merger. We reviewed the financial terms of the Merger as set forth in the Agreement in relation to, among other things: current and historical market prices and trading volumes of the MEDE AMERICA Common Stock and Healtheon Common Stock; the historical and projected earnings and other operating data of MEDE AMERICA and Healtheon; and the capitalization and financial condition of MEDE AMERICA and Healtheon. We considered, to the extent publicly available, the financial terms of other transactions recently effected which we considered relevant in evaluating the Merger and analyzed certain financial, stock market and other publicly available information relating to the businesses of other companies whose operations we considered relevant in evaluating those of MEDE AMERICA and Healtheon. We also evaluated the potential pro forma financial impact of the Merger on Healtheon. In addition to the foregoing, we conducted such other analyses and examinations and considered such other financial, economic and market criteria as we deemed appropriate in arriving at our opinion. In rendering our opinion, we have assumed and relied, without independent verification, upon the accuracy and completeness of all financial and other information and data publicly available or furnished to or otherwise reviewed by or discussed with us. With respect to financial forecasts and other information 663 The Board of Directors MEDE AMERICA Corporation August 2, 1999 Page 2 and data provided to or otherwise reviewed by or discussed with us, we have been advised by the managements of MEDE AMERICA and Healtheon that such forecasts and other information and data were reasonably prepared on bases reflecting the best currently available estimates and judgments of the managements of MEDE AMERICA and Healtheon as to the future financial performance of MEDE AMERICA and Healtheon and the strategic implications and operational benefits anticipated to result from the Merger. We have assumed, with your consent, that the Merger will be treated as a tax-free reorganization for federal income tax purposes. We also have assumed, with your consent, that the transactions which Healtheon has publicly announced with WebMD, Inc. and Greenberg News Networks, Inc. will be consummated in all material respects in accordance with their respective terms and, to the extent relevant to our analysis, have evaluated Healtheon pro forma for such transactions. Our opinion, as set forth herein, relates to the relative values of MedE America and Healtheon. We are not expressing any opinion as to what the value of the Healtheon Common Stock or Newco Common Stock actually will be when issued to MEDE AMERICA stockholders pursuant to the Merger or the price at which the Healtheon Common Stock or Newco Common Stock will trade subsequent to the Merger. We have not made or been provided with an independent evaluation or appraisal of the assets or liabilities (contingent or otherwise) of MEDE AMERICA or Healtheon nor have we made any physical inspection of the properties or assets of MEDE AMERICA or Healtheon. In connection with our opinion, we were not requested to, and we did not, solicit third party indications of interest in the possible acquisition of all or a part of MEDE AMERICA; however, we did, at the request of MEDE AMERICA, solicit third party indications of interest in the possible acquisition of MEDE AMERICA prior to MEDE AMERICA's initial public offering in February 1999. We express no view as to, and our opinion does not address, the relative merits of the Merger as compared to any alternative business strategies that might exist for MEDE AMERICA or the effect of any other transaction in which MEDE AMERICA might engage. Our opinion is necessarily based upon information available to us, and financial, stock market and other conditions and circumstances existing and disclosed to us, as of the date hereof. Salomon Smith Barney Inc. has acted as financial advisor to MEDE AMERICA in connection with the proposed Merger and will receive a fee for such services, a significant portion of which is contingent upon the consummation of the Merger. We have in the past provided certain investment banking services to MEDE AMERICA unrelated to the proposed Merger, for which services we have received compensation. In the ordinary course of our business, we and our affiliates may actively trade or hold the securities of MEDE AMERICA and Healtheon for our own account or for the account of our customers and, accordingly, may at any time hold a long or short position in such securities. In addition, we and our affiliates (including Citigroup Inc. and its affiliates) may maintain relationships with MEDE AMERICA, Healtheon and their respective affiliates. Our advisory services and the opinion expressed herein are provided for the information of the Board of Directors of MEDE AMERICA in its evaluation of the proposed Merger, and our opinion is not intended to be and does not constitute a recommendation to any stockholder as to how such stockholder should vote on the proposed Merger. Based upon and subject to the foregoing, our experience as investment bankers, our work as described above and other factors we deemed relevant, we are of the opinion that, as of the date hereof, the Exchange Ratio is fair, from a financial point of view, to the holders of MEDE AMERICA Common Stock. Very truly yours, SALOMON SMITH BARNEY INC. 664 ANNEX G [HAMBRECHT & QUIST LLC LETTERHEAD] June 30, 1999 Confidential The Board of Directors Greenberg News Networks, Inc. 1175 Peachtree Street, Suite 2400 Atlanta, GA 30361 Gentlemen: You have requested our opinion as to the fairness from a financial point of view to the holders of the outstanding shares of capital stock (the "Capital Stock") of Greenberg News Networks, Inc. ("GNN" or the "Company") of the consideration to be received by such stockholders in connection with two possible proposed merger transactions. The proposed original merger transaction contemplates a merger of GNN Merger Corp. ("Merger Sub"), a wholly owned subsidiary of Healtheon Corporation ("Healtheon") or Healtheon/WebMD Corporation ("Healtheon/WebMD"), with and into GNN (the "Proposed Original Transaction"). The proposed alternative merger transaction, to be completed if and only if the Proposed Original Transaction is terminated as to Healtheon, Healtheon/WebMD and Merger Sub, contemplates a merger of WebMD Merger Sub, a wholly-owned subsidiary of WebMD, Inc., with GNN (the "Proposed Alternative Transaction" and, together with the Proposed Original Transaction, the "Proposed Transactions"). Either the Proposed Original Transaction or the Proposed Alternative Transaction, as the case may be, shall be entered into pursuant to the Agreement and Plan of Merger dated as of June 30, 1999, among Healtheon Corporation, WebMD, Inc., Healtheon/WebMD Corporation, GNN Merger Corp., and Greenberg News Networks, Inc. (the "Agreement"). We understand that the terms of the Agreement provide, among other things, that Healtheon, Healtheon/WebMD or WebMD, as the case may be, will purchase all the outstanding common stock of GNN (including all preferred stock, options (regardless of whether such options are exerciseable) and warrants convertible into common stock) at a price of approximately $214.9 million in Healtheon, Healtheon/WebMD, or WebMD stock, as the case may be, pursuant to the terms of the Proposed Original Transaction or the Proposed Alternative Transaction as more fully set forth in the Agreement. For purposes of this opinion, we have assumed that either the Proposed Original Transaction or the Proposed Alternative Transaction, as the case may be, will qualify as a tax-free reorganization under the United States Internal Revenue Code for the stockholders of the Company and that either the Proposed Original Transaction or the Proposed Alternative Transaction, as the case may be, will be accounted for as a purchase. Hambrecht & Quist LLC ("Hambrecht & Quist"), as part of its investment banking services, is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, strategic transactions, corporate restructurings, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. We have acted as a financial advisor to the Board of Directors of GNN in connection with the Proposed Transactions, and we will receive a fee for our services, which include the rendering of this opinion. In the past, we have provided investment banking and other financial advisory services to Healtheon and have received fees for rendering these services. In the ordinary course of business, Hambrecht & Quist acts as a market maker and broker in the publicly traded securities of Healtheon and receives customary compensation in connection therewith, and also provides research coverage for Healtheon. In the ordinary 665 The Board of Directors Greenberg News Networks, Inc. Page 2 course of business, Hambrecht & Quist actively trades in the equity and derivative securities of Healtheon for its own account and for the accounts of its customers and, accordingly, may at any time hold a long or short position in such securities. Hambrecht & Quist may in the future provide additional investment banking or other financial advisory services to Healtheon/WebMD. In connection with our review of the Proposed Transactions, and in arriving at our opinion, we have, among other things: (i) reviewed the publicly available consolidated financial statements of Healtheon, WebMD and Healtheon/WebMD (with and without certain MEDE AMERICA financial results) for recent years and interim periods to date and certain other relevant financial and operating data of WebMD and Healtheon/WebMD (including their respective capital structures and, in the case of Healtheon/WebMD, with and without certain MEDE AMERICA financial information) made available to us from published sources and from the internal records of WebMD; (ii) reviewed certain internal financial and operating information, including certain projections, relating to WebMD prepared by the management of WebMD; (iii) reviewed certain financial and operating information, including certain publicly-available projections, relating to Healtheon; (iv) reviewed certain financial and operating information, including certain publicly-available projections, relating to MEDE AMERICA; (v) discussed the business, financial condition and prospects of Healtheon/WebMD with certain members of senior management of WebMD; (vi) reviewed certain internal financial and operating information, including certain projections, relating to GNN prepared by the senior management of GNN; (vii) discussed the business, financial condition and prospects of GNN with certain members of senior management of GNN; (viii) reviewed the recent reported prices and trading activity for the common stock of Healtheon and compared such information and certain financial information for Healtheon with similar information for certain other companies engaged in businesses we consider comparable; (ix) reviewed the financial terms, to the extent publicly available, of certain comparable merger and acquisition transactions; (x) reviewed the Agreement dated as of June 30, 1999; (xi) performed such other analyses and examinations and considered such other information, financial studies, analyses and investigations and financial, economic and market data as we deemed relevant. In rendering our opinion, we have assumed and relied upon the accuracy and completeness of all of the information concerning GNN, Healtheon, WebMD, MEDE AMERICA and Healtheon/WebMD considered in connection with our review of the Proposed Transactions, and we have not assumed any responsibility for independent verification of such information. We have not prepared any independent valuation or appraisal of any of the assets or liabilities of GNN, Healtheon, WebMD and MEDE AMERICA, nor have we conducted a physical inspection of the properties and facilities of any of the companies. With respect to the financial forecasts and projections made available to us and used in our analysis, we have assumed that they reflect the best currently available estimates and judgments of the 666 The Board of Directors Greenberg News Networks, Inc. Page 3 expected future financial performance of GNN, Healtheon, WebMD and MEDE AMERICA. For purposes of this opinion, we have assumed that none of GNN, Healtheon, WebMD and MEDE AMERICA is a party to any pending transactions, including external financings, recapitalizations or material merger discussions, other than the transactions described in the Healtheon/WebMD Corporation Registration Statement on Form S-4 as filed with the SEC on June 17, 1999 (the "Proxy Statement/Prospectus"), the Proposed Transactions pursuant to the Agreement, and those activities undertaken in the ordinary course of conducting their respective businesses. Our opinion is necessarily based upon market, economic, financial and other conditions as they exist and can be evaluated as of the date of this letter and any change in such conditions would require a reevaluation of this opinion. We express no opinion as to the price at which Healtheon/WebMD common stock will trade subsequent to the Effective Time (as defined in the Agreement). In rendering this opinion, we have assumed that the Proposed Original Transaction or the Proposed Alternative Transaction, as the case may be, will be consummated substantially on the terms discussed in the Agreement, without any waiver of any material terms or conditions by any party thereto. We were not requested to, and did not, solicit indications of interest from any other parties in connection with a possible acquisition of, or business combination with, GNN. It is understood that this letter is for the information of the Board of Directors only and may not be used for any other purpose without our prior written consent. This letter does not constitute a recommendation to any stockholder as to how such stockholder should vote on the Proposed Transactions. Based upon and subject to the foregoing and after considering such other matters as we deem relevant, we are of the opinion that as of the date hereof the consideration to be received by the holders of the Capital Stock in the Proposed Original Transaction or the Proposed Alternative Transaction, as the case may be, is fair to such holders from a financial point of view. Very truly yours, HAMBRECHT & QUIST LLC By: /s/ MARK J. ZANOLI ------------------------------------ Mark J. Zanoli Managing Director 667 ANNEX H ARTICLE 13 OF THE GEORGIA BUSINESS CORPORATION CODE RELATING TO RIGHTS OF DISSENTING SHAREHOLDERS Official Code of Georgia Annotated Copyright 1982-1996 State of Georgia. CODE OF GEORGIA TITLE 14. CORPORATIONS, PARTNERSHIPS, AND ASSOCIATIONS CHAPTER 2. BUSINESS CORPORATIONS ARTICLE 13. DISSENTERS' RIGHTS PART 1. RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES CURRENT THROUGH THE END OF 1995 EXTRAORDINARY SESSION OF THE GENERAL ASSEMBLY 14-2-1301 Definitions. As used in this article, the term: (1) "Beneficial shareholder" means the person who is a beneficial owner of shares held in a voting trust or by a nominee as the record shareholder. (2) "Corporate action" means the transaction or other action by the corporation that creates dissenters' rights under Code Section 14-2-1302. (3) "Corporation" means the issuer of shares held by a dissenter before the corporate action, or the surviving or acquiring corporation by merger or share exchange of that issuer. (4) "Dissenter" means a shareholder who is entitled to dissent from corporate action under Code Section 14-2-1302 and who exercises that right when and in the manner required by Code Sections 14- 2-1320 through 14-2-1327. (5) "Fair value," with respect to a dissenter's shares, means the value of the shares immediately before the effectuation of the corporate action to which the dissenter objects, excluding any appreciation or depreciation in anticipation of the corporate action. (6) "Interest" means interest from the effective date of the corporate action until the date of payment, at a rate that is fair and equitable under all the circumstances. (7) "Record shareholder" means the person in whose name shares are registered in the records of a corporation or the beneficial owner of shares to the extent of the rights granted by a nominee certificate on file with a corporation. (8) "Shareholder" means the record shareholder or the beneficial shareholder. (Code 1981, Sec. 14-2-1301, enacted by Ga. L. 1988, p. 1070, Sec. 1; Ga. L.1993, p. 1231, Sec. 16.) 14-2-1302. Right to dissent. (a) A record shareholder of the corporation is entitled to dissent from, and obtain payment of the fair value of his shares in the event of, any of the following corporate actions: (1) Consummation of a plan of merger to which the corporation is a party: (A) If approval of the shareholders of the corporation is required for the merger by Code Section 14-2-1103 or 14-2-1104 or the articles of incorporation and the shareholder is entitled to vote on the merger; or (B) If the corporation is a subsidiary that is merged with its parent under Code Section 14-2-1104; (2) Consummation of a plan of share exchange to which the corporation is a party as the corporation whose shares will be acquired, if the shareholder is entitled to vote on the plan; 668 (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. 669 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. 670 (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. 671 (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, 672 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.) 673 ANNEX I TITLE 8, DELAWARE CODE CHAPTER 1: GENERAL CORPORATION LAW SUBCHAPTER IX: MERGER OR CONSOLIDATION Sec. 262. APPRAISAL RIGHTS. (a) Any stockholder of a corporation of this State who holds shares of stock on the date of the making of a demand pursuant to the provisions of subsection (d) of this section with respect to such shares, who continuously holds such shares through the effective date of the merger or consolidation, who has otherwise complied with the provisions of subsection (d) of this Section and who has neither voted in favor of the merger or consolidation nor consented thereto in writing pursuant to Sec. 228 of this Chapter shall be entitled to an appraisal by the Court of Chancery of the fair value of his shares of stock under the circumstances described in subsections (b) and (c) of this Section. (b) Appraisal rights shall be available for the shares of any class or series of stock or a constituent corporation in a merger or consolidation to be effected pursuant to Sections 251, 252, 254, 257, 258 or 263 of this title: (1) Provided, however, that no appraisal rights under this section shall be available for the shares of any class or series of stock which, at the record date fixed to determine the stockholders entitled to receive notice of and to vote at the meeting of stockholders to act upon the agreement of merger or consolidation, were either (i) listed on a national securities exchange or (ii) held of record by more than 2,000 stockholders; and further provided that no appraisal rights shall be available for any shares of stock of the constituent corporation surviving a merger if the merger did not require for its approval the vote of the stockholders of the surviving corporation as provided in subsection (f) of Sec. 251 of this title. (2) Notwithstanding paragraph (1) of this subsection, appraisal rights under this section shall be available for the shares of any class or series of stock of a constituent corporation if the holders thereof are required by the terms of an agreement of merger or consolidation pursuant to Sections 251, 252, 254, 257 and 258 of this title to accept for such stock anything except: a. Shares of stock of the corporation surviving or resulting from such merger or consolidation; b. Shares of stock of any other corporation which at the effective date of the merger or consolidation will be either listed on a national securities exchange or held of record by more than 2,000 stockholders; c. Cash in lieu of fractional shares of the corporations described in the foregoing subparagraphs a. and b. of this paragraph; or d. Any combination of the shares of stock and cash in lieu of fractional shares described in the foregoing subparagraphs a., b., and c. of this paragraph. (3) In the event all of the stock of a subsidiary Delaware corporation party to a merger effected under Sec. 253 of this title is not owned by the parent corporation immediately prior to the merger, appraisal rights shall be available for the shares of the subsidiary Delaware corporation. (c) Any corporation may provide in its certificate of incorporation that appraisal rights under this section shall be available for the shares of any class or series of its stock as a result of an amendment to its certificate of incorporation, any merger or consolidation in which the corporation is a constituent corporation or the sale of all or substantially all of the assets of the corporation. If the certificate of incorporation contains such a provision, the procedures of this section, including those set forth in subsections (d) and (e) of this section, shall apply as nearly as is practicable. -1- 674 (d) Appraisal rights shall be perfected as follows: (1) If a proposed merger or consolidation for which appraisal rights are provided under this section is to be submitted for approval at a meeting of stockholders, the corporation not less than 20 days prior to the meeting, shall notify each of its stockholders entitled to such appraisal rights that appraisal rights are available for any or all of the shares of the constituent corporations, and shall include in such notice a copy of this section. Each stockholder electing to demand the appraisal of his shares shall deliver to the corporation, before the taking of the vote on the merger or consolidation, a written demand for appraisal of his shares. Such demand will be sufficient if it reasonably informs the corporations of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of his shares. A proxy or vote against the merger or consolidation shall not constitute such a demand. A stockholder electing to take such action must do so by a separate written demand as herein provided. Within 10 days after the effective date of such merger or consolidation, the surviving or resulting corporation shall notify each stockholder of each constituent corporation who has complied with this subsection and has not voted in favor of or consented to the merger or consolidation of the date that the merger or consolidation has become effective; or (2) If the merger or consolidation was approved pursuant to Sec. 228 or 253 of this title, the surviving or resulting corporation, either before the effective date of the merger or consolidation or within 10 days thereafter, shall notify each of the stockholders entitled to appraisal rights of the effective date of the merger or consolidation and that appraisal rights are available for any or all of the shares of the constituent corporation, and shall include in such notice a copy of this section. The notice shall be sent by certified or registered mail, return receipt requested, addressed to the stockholder at his address as it appears on the records of the corporation. Any stockholder entitled to appraisal rights may, within 20 days after the date of mailing of the notice, demand in writing from the surviving or resulting corporation the appraisal of his shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends to demand the appraisal of his shares. (e) Within 120 days after the effective date of the merger or consolidation; the surviving or resulting corporation or any stockholder who has complied with subsections (a) and (d) hereof and who is otherwise entitled to appraisal rights, may file a petition in the Court of Chancery demanding a determination of the value of the stock of all such stockholders. Notwithstanding the foregoing, at any time within 60 days after the effective date of the merger or consolidation, any stockholder shall have the right to withdraw his demand for appraisal and to accept the terms offered upon the merger or consolidation. Within 120 days after the effective date of the merger or consolidation, any stockholder who has complied with the requirements of subsections (a) and (d) hereof, upon written request, shall be entitled to receive from the corporation surviving the merger or resulting from the consolidation a statement setting forth the aggregate number of shares not voted in favor of the merger or consolidation and with respect to which demands for appraisal have been received and the aggregate number of holders of such shares. Such written statement shall be mailed to the stockholder within 10 days after his written request for such a statement is received by the surviving or resulting corporation or within 10 days after expiration of the period for delivery of demands for appraisal under subsection (d) hereof, whichever is later. (f) Upon the filing of any such petition by a stockholder, service of a copy thereof shall be made upon the surviving or resulting corporation, which shall within 20 days after such service file in the office of the Register in Chancery in which the petition was filed a duly verified list containing the names and addresses of all stockholders who have demanded payment for their shares and with whom agreements as to the value of their shares have not been reached by the surviving or resulting corporation. If the petition shall be filed by the surviving or resulting corporation, the petition shall be accompanied by such a duly verified list. The Register in Chancery, if so ordered by the Court, shall give notice of the time and place fixed for the hearing of such petition by registered or certified mail to the surviving or resulting corporation and to the stockholders shown on the list at the addresses therein stated. Such notice shall also be given by 1 or more publications at least 1 week before the day of the hearing, in a newspaper of general circulation published in the City of Wilmington, Delaware or such publication as the Court deems -2- 675 advisable. The forms of the notices by mail and by publication shall be approved by the Court, and the costs thereof shall be borne by the surviving or resulting corporation. (g) At the hearing on such petition, the Court shall determine the stockholders who have complied with this section and who have become entitled to appraisal rights. The Court may require the stockholders who have demanded an appraisal for their shares and who hold stock represented by certificates to submit their certificates of stock of the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any stockholder fails to comply with such direction, the Court may dismiss the proceedings as to such stockholder. (h) After determining the stockholders entitled to an appraisal, the Court shall appraise the shares, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value. In determining such fair value, the Court shall take into account all relevant factors. In determining the fair rate of interest, the Court may consider all relevant factors, including the rate of interest which the surviving or resulting corporation would have had to pay to borrow money during the pendency of the proceeding. Upon application by the surviving or resulting corporation or by any stockholder entitled to participate in the appraisal proceeding, the Court may, in its discretion, permit discovery or other pretrial proceedings and may proceed to trial upon the appraisal prior to the final determination of the stockholder entitled to an appraisal. Any stockholder whose name appears on the list filed by the surviving or resulting corporation pursuant to subsection (f) of this section and who has submitted his certificate of stock to the Register in Chancery, if such is required, may participate fully in all proceedings until it is finally determined that he is not entitled to appraisal rights under this section. (i) The Court shall direct the payment of the fair value of the shares, together with interest, if any, by the surviving or resulting corporation to the stockholders entitled thereto. Interest may be simple or compound, as the Court may direct. Payment shall be so made to each such stockholder, in the case of holders of uncertificated stock forthwith, and in the case of holders of shares represented by certificates upon the surrender to the corporation of the certificates representing such stock. The Court's decree may be enforced as other decrees in the Court of Chancery may be enforced, whether such surviving or resulting corporation be a corporation of this State or of any state. (j) The costs of the proceeding may be determined by the Court and taxed upon the parties as the Court deems equitable in the circumstances. Upon application of a stockholder, the Court may order all or a portion of the expenses incurred by any stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorney's fees and the fees and expenses of experts, to be charged pro rata against the value of all the shares entitled to an appraisal. (k) From and after the effective date of the merger or consolidation, no stockholder who has demanded his appraisal rights as provided in subsection (d) of this section shall be entitled to vote such stock for any purpose or to receive payment of dividends or other distributions on the stock (except dividends or other distributions payable to stockholders of record at a date which is prior to the effective date of the merger or consolidation); provided, however, that if no petition for an appraisal shall be filed within the time provided in subsection (e) of this section, or if such stockholder shall deliver to the surviving or resulting corporation a written withdrawal of his demand for an appraisal and an acceptance of the merger or consolidation, either within 60 days after the effective date of the merger or consolidation as provided in subsection (e) of this section or thereafter with the written approval of the corporation, then the right of such stockholder to an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery shall be dismissed as to any stockholder without the approval of the Court, and such approval may be conditioned upon such terms as the Court deems just. (l) The shares of the surviving or resulting corporation to which the shares of such objecting stockholders would have been converted had they assented to the merger or consolidation shall have the status of authorized and unissued shares of the surviving or resulting corporation. -3- 676 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware 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 law, and the Registrant has entered into agreements with its officers, directors and certain key employees implementing such indemnification. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS
EXHIBIT SEQUENTIAL NO. DESCRIPTION PAGE NUMBER - -------- ----------- ----------- 2.1 Agreement and Plan of Reorganization dated as of May 20, 1999, as amended, by and among Registrant, Healtheon Corporation, WebMD, Inc., Water Acquisition Corp. and Hydrogen Acquisition Corp. (see Annex A).................... 2.2 Agreement and Plan of Reorganization dated as of April 20, 1999, as amended, by and among Healtheon Corporation, Mets Acquisition Corp. and MEDE AMERICA Corporation (see Annex B).......................................................... 2.3 Agreement and Plan of Merger dated as of June 30, 1999 among Healtheon Corporation, WebMD, Inc., Registrant, GNN Merger Corp. and Greenberg News Networks, Inc. (see Annex C)....... 2.4+ Agreement and Plan of Reorganization, dated as of February 24, 1998, by the Registrant, MedNet Acquisition Corp. and ActaMed Corporation......................................... 2.5+ Agreement and Plan of Merger, dated as of March 1, 1996, by and among Act Corporation, EDI Acquisition, Inc, UHC Green Acquisition, Inc and United HealthCare Corporation, including amendment......................................... 2.6+ Asset Purchase Agreement, dated June 25, 1998, among the Registrant, Metis Acquisition Corp and Metis, LLC........... 3.1+ Amended and Restated Certificate of Incorporation of the Registrant, as currently in effect.......................... 3.2+ Bylaws of the Registrant, as currently in effect............ 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+++ Form of Tax Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.................................... 8.2+++ Form of Tax Opinion of Nelson Mullins Riley & Scarborough, L.L.P. ..................................................... 8.3+++ Form of Tax Opinion of Reboul, MacMurray, Hewitt, Maynard & Kristol..................................................... 8.4+++ Form of Tax Opinion of King & Spalding...................... 8.5+++ Form of Tax Opinion of Alston & Bird LLP 10.1+ Form of Indemnification Agreement to be entered into by the Registrant with each of its directors and officers.......... 10.2+ Healtheon Corporation 1996 Stock Plan and form of Stock Option Agreement............................................
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EXHIBIT SEQUENTIAL NO. DESCRIPTION PAGE NUMBER - -------- ----------- ----------- 10.3+ ActaMed Corp. 1997 Stock Option Plan........................ 10.4+ ActaMed Corp. 1996 Stock Option Plan........................ 10.5+ ActaMed Corp. 1995 Stock Option Plan........................ 10.6+ ActaMed Corp. 1994 Stock Option Plan........................ 10.7+ ActaMed Corp. 1993 Class B Common Stock Option Plan......... 10.8+ ActaMed Corp. 1992 Stock Option Plan........................ 10.9+ ActaMed Corp. 1996 Director Stock Option Plan, as amended... 10.10+ Amended and Restated Investors' Rights Agreement dated as of January 28, 1998 among the Registrant and certain of the Registrant's security holders............................... 10.11+ Lease Agreement, dated December 2, 1997, between Larvan Properties and Registrant, including addenda................ 10.12+ Lease Agreement, dated November 6, 1995, as amended, between ActaMed Corporation and ZML-Central Park L.L.C., including addenda..................................................... 10.13*+ Services and License Agreement, dated April 4, 1996, between ActaMed Corporation and United HealthCare Corporation....... 10.14*+ Services Agreement, dated as of December 31, 1997, as amended, between ActaMed Corporation and SmithKline Beecham Clinical Laboratories, Inc.................................. 10.15*+ Assets Purchase Agreement, dated as of December 31, 1997, as amended, between ActaMed Corporation and SmithKline Beecham Clinical Laboratories, Inc. ................................ 10.16*+ License Agreement, dated as of December 31, 1997, between ActaMed Corporation and SmithKline Beecham Clinical Laboratories, Inc. ......................................... 10.17*+ Development Agreement, dated as of October 31, 1997, between ActaMed Corporation and SmithKline Beecham Clinical Laboratories, Inc. ......................................... 10.18*+ Services, Development and License Agreement dated as of December 15, 1997, between the Registrant and Beech Street Corporation................................................. 10.19*+ Services, Development and License Agreement dated as of September 30, 1997, between the Registrant and Brown & Toland Physician Services Organization...................... 10.20+ Amended and Restated Securities Purchase Agreement, dated as of August 15, 1996, between the Registrant and investor..... 10.21+ Amended and Restated Series B Preferred Stock Purchase Agreement dated October 31, 1996, between the Registrant and investors................................................... 10.22+ Form of Series B Preferred Stock Purchase Warrant between the Registrant and certain of the Registrant's investors.... 10.23+ Series C Preferred Stock Purchase Agreement dated July 25, 1997, between the Registrant and investors.................. 10.24+ Series D Preferred Stock Purchase Agreement dated October 13, 1997, between the Registrant and investors.............. 10.25+ Full Recourse Promissory Note dated as of July 11, 1997, between the Registrant and W. Michael Long.................. 10.26+ Form of Promissory Note for Bridge Financing................ 10.27+ W. Michael Long Employment Agreement........................ 10.29+ Healtheon Corporation 1998 Employee Stock Purchase Plan.....
II-2 678
EXHIBIT SEQUENTIAL NO. DESCRIPTION PAGE NUMBER - -------- ----------- ----------- 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* Distribution and Cross Promotion Agreement dated May 6, 1999 between Microsoft Corporation, WebTV Networks, Inc., MSNBC Interactive News, L.L.C. and WebMD, Inc. ................... 10.34* Agreement, dated May 19, 1999, between the Registrant, WebMD, Inc. and Microsoft Corporation....................... 10.35 Agreement dated September 1, 1999, between the Registrant, WebMD, Inc., Healtheon/WebMD, Inc., McKesson HBOC, Inc., HBO & Company, Access Health, Inc. and National Health Enhancements Systems, Inc................................... 10.36 Investment Agreement dated May 12, 1999, between WebMD, Inc., Microsoft Corporation and each of the other persons listed on Schedule I thereto................................ 10.37 Services Agreement dated January 27, 1999 between WebMD, Inc. and Gleacher NatWest, Inc., currently known as Gleacher & Co., LLC.................................................. 10.38 Warrant to Purchase Securities of WebMD, Inc. dated January 27, 1999 issued to Gleacher NatWest, Inc., currently known as Gleacher & Co., LLC...................................... 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 LLP, independent auditors................... 23.8 Consent of Deloitte & Touche LLP, independent auditors...... 23.9 Consent of KPMG LLP, independent auditors................... 23.10 Letter to Securities and Exchange Commission from Berg & Company LLP................................................. 23.11+++ Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (in Exhibit 5.1)................................ 23.12 Consent of Deloitte & Touche LLP, independent auditors...... 23.13 Consent of Jeffrey T. Arnold................................ 23.14 Consent of William P. Payne................................. 23.15 Consent of U. Bertram Ellis, Jr. ........................... 23.16 Consent of Eric J. Gleacher................................. 24.1+++ Power of Attorney (see page II- )..........................
II-3 679
EXHIBIT SEQUENTIAL NO. DESCRIPTION PAGE NUMBER - -------- ----------- ----------- 99.1+++ Form of Proxy card for Registrant 99.2+++ Form of Proxy card for WebMD, Inc. 99.3+++ Form of Proxy card for MEDE AMERICA Corporation 99.4+++ Form of Proxy card for Greenberg News Networks, Inc.
- --------------- * Confidential treatment was received, or is requested, with respect to certain portions of this document. + Incorporated by reference to Healtheon's Registration Statement on Form S-1 filed January 14, 1999. ** To be filed by amendment. ++ Incorporated by reference to Healtheon's Amendment No. 1 to its Registration Statement on Form S-1 filed February 4, 1999. +++ Previously filed. (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 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. II-4 680 (5) The undersigned Registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective. (6) The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in the Registration Statement shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 681 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THE 30TH DAY OF SEPTEMBER 1999. HEALTHEON CORPORATION By: /s/ JOHN L. WESTERMANN III ------------------------------------ John L. Westermann III Vice President, Chief Financial Officer, Secretary and Treasurer 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:
SIGNATURE CAPACITY DATE --------- -------- ---- * Chief Executive Officer September 30, 1999 - ------------------------------------ and Director (W. Michael Long) (principal executive officer) /s/ JOHN L. WESTERMANN III Vice President, Chief Financial September 30, 1999 - ------------------------------------ Officer, Secretary and Treasurer (John L. Westermann III) (principal financial and accounting officer) * Chairman of the Board September 30, 1999 - ------------------------------------ (James H. Clark) * Director September 30, 1999 - ------------------------------------ (L. John Doerr) * Director September 30, 1999 - ------------------------------------ (Thomas A. Jermoluk) * Director September 30, 1999 - ------------------------------------ (C. Richard Kramlich) Director - ------------------------------------ (William W. McGuire, M.D.) Director - ------------------------------------ (Laura D'Andres Tyson) Director - ------------------------------------ (Tadataka Yamada, M.D.) * /s/ JOHN L. WESTERMANN III - ------------------------------------ John L. Westerman III Attorney-in-Fact
II-6 682 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT DESCRIPTION - -------- ------------------- 2.1 Agreement and Plan of Reorganization dated as of May 20, 1999, as amended, by and among Registrant, Healtheon Corporation, WebMD, Inc., Water Acquisition Corp. and Hydrogen Acquisition Corp. (see Annex A) 2.2 Agreement and Plan of Reorganization dated as of April 20, 1999, as amended, by and among Healtheon Corporation, Mets Acquisition Corp. and MEDE AMERICA Corporation (see Annex B) 2.3 Agreement and Plan of Merger dated as of June 30, 1999 among Healtheon Corporation, WebMD, Inc., Registrant, GNN Merger Corp. and Greenberg News Networks, Inc. (see Annex C) 2.4+ Agreement and Plan of Reorganization, dated as of February 24, 1998, by the Registrant, MedNet Acquisition Corp. and ActaMed Corporation 2.5+ Agreement and Plan of Merger, dated as of March 1, 1996, by and among Act Corporation, EDI Acquisition, Inc, UHC Green Acquisition, Inc and United HealthCare Corporation, including amendment 2.6+ Asset Purchase Agreement, dated June 25, 1998, among the Registrant, Metis Acquisition Corp and Metis, LLC 3.1+ Amended and Restated Certificate of Incorporation of the Registrant, as currently in effect 3.2+ Bylaws of the Registrant, as currently in effect 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+++ Form of Tax Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation 8.2+++ Form of Tax Opinion of Nelson Mullins Riley & Scarborough, L.L.P. 8.3+++ Form of Tax Opinion of Reboul, MacMurray, Hewitt, Maynard & Kristol 8.4+++ Form of Tax Opinion of King & Spalding 8.5+++ Form of Tax Opinion of Alston & Bird LLP 10.1+ Form of Indemnification Agreement to be entered into by the Registrant with each of its directors and officers 10.2+ Healtheon Corporation 1996 Stock Plan and form of Stock Option Agreement 10.3+ ActaMed Corp. 1997 Stock Option Plan 10.4+ ActaMed Corp. 1996 Stock Option Plan 10.5+ ActaMed Corp. 1995 Stock Option Plan 10.6+ ActaMed Corp. 1994 Stock Option Plan 10.7+ ActaMed Corp. 1993 Class B Common Stock Option Plan 10.8+ ActaMed Corp. 1992 Stock Option Plan 10.9+ ActaMed Corp. 1996 Director Stock Option Plan, as amended 10.10+ Amended and Restated Investors' Rights Agreement dated as of January 28, 1998 among the Registrant and certain of the Registrant's security holders 10.11+ Lease Agreement, dated December 2, 1997, between Larvan Properties and Registrant, including addenda 10.12+ Lease Agreement, dated November 6, 1995, as amended, between ActaMed Corporation and ZML-Central Park L.L.C., including addenda 10.13*+ Services and License Agreement, dated April 4, 1996, between ActaMed Corporation and United HealthCare Corporation
683
EXHIBIT NUMBER EXHIBIT DESCRIPTION - -------- ------------------- 10.14*+ Services Agreement, dated as of December 31, 1997, as amended, between ActaMed Corporation and SmithKline Beecham Clinical Laboratories, Inc. 10.15*+ Assets Purchase Agreement, dated as of December 31, 1997, as amended, between ActaMed Corporation and SmithKline Beecham Clinical Laboratories, Inc. 10.16*+ License Agreement, dated as of December 31, 1997, between ActaMed Corporation and SmithKline Beecham Clinical Laboratories, Inc. 10.17*+ Development Agreement, dated as of October 31, 1997, between ActaMed Corporation and SmithKline Beecham Clinical Laboratories, Inc. 10.18*+ Services, Development and License Agreement dated as of December 15, 1997, between the Registrant and Beech Street Corporation 10.19*+ Services, Development and License Agreement dated as of September 30, 1997, between the Registrant and Brown & Toland Physician Services Organization 10.20+ Amended and Restated Securities Purchase Agreement, dated as of August 15, 1996, between the Registrant and investor. 10.21+ Amended and Restated Series B Preferred Stock Purchase Agreement dated October 31, 1996, between the Registrant and investors 10.22+ Form of Series B Preferred Stock Purchase Warrant between the Registrant and certain of the Registrant's investors 10.23+ Series C Preferred Stock Purchase Agreement dated July 25, 1997, between the Registrant and investors 10.24+ Series D Preferred Stock Purchase Agreement dated October 13, 1997, between the Registrant and investors 10.25+ Full Recourse Promissory Note dated as of July 11, 1997, between the Registrant and W. Michael Long 10.26+ Form of Promissory Note for Bridge Financing 10.27+ W. Michael Long Employment Agreement 10.29+ Healtheon Corporation 1998 Employee Stock Purchase Plan 10.30+ Series A Preferred Stock Purchase Agreement, dated as of October 31, 1998, between the Registrant and investors 10.31*++ Asset Purchase Agreement, dated December 31, 1998, between the Registrant and SmithKline Beecham Clinical Laboratories, Inc. 10.32*++ Services Agreement dated January 19, 1999, between the Registrant and SmithKline Beecham Clinical Laboratories, Inc. 10.33* Distribution and Cross Promotion Agreement dated May 6, 1999 between Microsoft Corporation, WebTV Networks, Inc., MSNBC Interactive News, L.L.C. and WebMD, Inc. 10.34* Agreement, dated May 19, 1999, between the Registrant, WebMD, Inc. and Microsoft Corporation 10.35 Agreement dated September 1, 1999, between the Registrant, WebMD, Inc., Healtheon/WebMD, Inc., McKesson HBOC, Inc., HBO & Company, Access Health, Inc., and National Health Enhancements Systems, Inc. 10.36 Investment Agreement dated May 12, 1999, between WebMD, Inc., Microsoft Corporation and each of the other persons listed on Schedule I thereto 10.37 Services Agreement dated January 27, 1999 between WebMD, Inc. and Gleacher NatWest, Inc., currently known as Gleacher & Co. LLC 10.38 Warrant to Purchase Securities of WebMD, Inc. dated January 27, 1999 issued to Gleacher NatWest, Inc., currently known as Gleacher & Co. LLC 23.1 Consent of Ernst & Young LLP, independent auditors
684
EXHIBIT NUMBER EXHIBIT DESCRIPTION - -------- ------------------- 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 LLP, independent auditors 23.8 Consent of Deloitte & Touche LLP, independent auditors 23.9 Consent of KPMG LLP, independent auditors 23.10 Letter to Securities and Exchange Commission from Berg & Company LLP 23.11+++ Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (in Exhibit 5.1) 23.12 Consent of Deloitte & Touche LLP, independent auditors 23.13 Consent of Jeffrey T. Arnold 23.14 Consent of William P. Payne 23.15 Consent of U. Bertram Ellis, Jr. 23.16 Consent of Eric J. Gleacher 24.1+++ Power of Attorney (see page II- ) 99.1+++ Form of Proxy card for Registrant 99.2+++ Form of Proxy card for WebMD, Inc. 99.3+++ Form of Proxy card for MEDE AMERICA Corporation 99.4+++ Form of Proxy card for Greenberg News Networks, Inc.
- --------------- * 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. +++ Previously filed. EX-10.33 2 DISTRIBUTION AND CROSS PROMOTION AGMT, 5/6/1999 1 CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. DISTRIBUTION AND CROSS PROMOTION AGREEMENT This DISTRIBUTION AND CROSS PROMOTION AGREEMENT ("Agreement"), by and between MICROSOFT CORPORATION ("Microsoft"), a Washington corporation with its principal offices at One Microsoft Way, Redmond, WA 98052, WEBTV NETWORKS, INC. ("WebTV"), a California corporation and a wholly-owned subsidiary of the Microsoft Corporation, 1250 Charleston Avenue, Mt. View, CA 94043, MSNBC INTERACTIVE NEWS, L.L.C. ("MSNBC"), a Delaware limited liability company, with its principal office at One Microsoft Way, Redmond, WA 98052-6399; and WEBMD, INC. ("WebMD"), a Georgia corporation with its principal offices at 400 The Lenox Building, 3399 Peachtree Road NE Atlanta, Georgia 30326 is made and entered into as of the later of the two signature dates ("Execution Date") below and shall be effective as of May 6, 1999 (the "Effective Date"). RECITALS WHEREAS, WebMD owns and operates a network of sites on the World Wide Web currently titled "WebMD," with a home page currently located at http://www.webmd.com, which site is devoted to providing individuals, healthcare providers, and others with a comprehensive range of healthcare-related information and services; WHEREAS, the WebMD Site is currently divided into a freely accessible section aimed at individuals seeking healthcare information for themselves and family members, and a subscription-based section containing healthcare information and services targeted at physicians; WHEREAS, Microsoft owns and operates a network of Web sites currently titled "MSN," with a home page currently located at http://www.msn.com, which network includes a variety of topic-specific offerings; WHEREAS, the parties desire to develop a new topic-specific offering for MSN, WebTV and MSNBC on health-related issues incorporating content from the WebMD Consumer Site (as defined below); WHEREAS, the parties further desire to provide various links between pages located on the MSN, WebTV, and MSNBC health channels and other MSN, WebTV, and MSNBC sites and pages, to pages located on the WebMD Site (including without limitation the Medical Professionals Section (as defined below)), and vice versa; WHEREAS, the parties further desire to set forth the terms under which Microsoft will sponsor a fixed number of membership subscriptions to the Medical Professionals Section of the WebMD Site, and WebMD will share certain revenues generated by the Medical Professionals Section of the WebMD Site; and WHEREAS, the parties also desire to promote certain of each other's products and services and a broad technology platform for providing healthcare related information and services. NOW, THEREFORE, in consideration of the mutual promises set forth herein, the parties hereby agree as follows: 1. DEFINITIONS 1.1 "MSN HEALTH SECTION" shall mean internet web pages containing health-related information and services for consumers which is to be located at http://www.health.msn.com or such other similar or replacement universal resource locator ("URL") which Microsoft may determine from time to time in its sole discretion. The MSN Health Section may be titled the "MSN Health Channel" or such other name as Microsoft may in its sole discretion determine. 1 2 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 1.2 "SPECIFICATIONS" shall mean the content specifications ("Content Specifications") and the technical specifications ("Technical Specifications") for the Health Channel attached hereto as Exhibits A-1 and A-2, respectively, and any modifications thereto that are made in accordance with Section 2.1 below. With respect to the WebTV Health Channel and the MSNBC Health Section, as discussed in Section 3.1 below, the Specifications shall mean the relevant provisions of Exhibits A-1 and A-2 (as identified in Section 3.1), together with any other Specifications provided by WebTV and MSNBC, respectively. 1.3 "NETWORK FRAMEWORK" shall mean the page formatting requirements provided in the SDK, and the In Service Promotion Box, whether or not included in such SDK. The Network Framework shall also include all necessary coding for ad-serving, whether or not included in the SDK. 1.4 "MSN.COM SOFTWARE DEVELOPMENT KIT" OR "SDK" shall mean the software development kit provided by Microsoft to WebMD and other licensed MSN web site developers containing the Network Framework and other information and materials necessary for WebMD and such other developers to distribute their content within MSN, including all revisions, upgrades, updates, and new versions of such SDK. This definition shall include similar SDKs provided by WebTV and/or MSNBC for the WebTV Health Channel and MSNBC Health Section, respectively, as discussed in Section 3.1 below. 1.5 "IN SERVICE PROMOTION BOX" shall mean the promotional box featured on each page within MSN that contains a rotating promotional link to other content within MSN. An example of the current In Service Promotion Box is attached hereto as Exhibit B. 1.6 "USER INFORMATION" shall mean both Aggregate Information and Personal Information pertaining to an end user ("User"). 1.7 "AGGREGATE INFORMATION" shall mean information that describes the habits, usage patterns and/or demographics of Users as a group but does not indicate the identity of any particular User, and information about an individual User presented in a form distinguishable from information relating to other Users but not in a form that enables the recipient to personally identify any User. 1.8 "PERSONAL INFORMATION" shall mean information about a User permitting such User to be specifically identified and may include, but not be limited to (i) User name, (ii) User email or postal address, and the (iii) User's personally identifying transaction data. In no event, however, shall Personal information include confidential health care information regulated by federal or state law. 1.9 "MSN YELLOW PAGES" shall mean that section of the MSN Site (currently contained within and served by MSN Sidewalk) that provides end users with a directory listing of certain contact and business information (e.g., addresses, phone numbers) for certain companies, and professionals, including without limitation physicians, pharmacies, nutrition centers, other healthcare related businesses, etc. 1.10 "ADVERTISING" shall mean advertising, promotions, sponsorships, ecommerce distribution opportunities and all other revenue generating placements and services ("Advertising"). 1.11 "MICROSOFT TECHNOLOGY PLATFORM" shall mean those Microsoft technologies that are recommended pursuant to the MCS Agreement (as defined in Section 4 below), which may include one or more of the following technologies: Microsoft BackOffice and any of its components, Windows NT Server, SQL Server, Commerce Server, Site Server, Microsoft Windows Media Player, Microsoft Internet Explorer, MSN Messenger Service, Microsoft Outlook and Outlook Express for an email client or other such appropriate Microsoft email technology (except as prevented by existing contracts as of the Execution Date), including any updates and upgrades thereto released during the term. 1.12 "MICROSOFT REVENUE" shall mean all recognized net revenue (i.e., gross revenue less any direct product costs, as applicable) earned and billed during the Term of this Agreement, (i) that is received by Microsoft from (a) Advertising on the MSN Health Section including any and all localized versions of the MSN Health 2 3 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Section for which WebMD is providing a Localized Health Channel pursuant to Section 2.3 below, (b) transactions or placements in the health shopping area of MSN Shopping (based on the proportion of traffic coming from the MSN Health Section) and (c) Advertising placed/sold by Microsoft on the WebMD Site as provided in this Agreement; (ii) that is received by MSNBC from Advertising on the MSNBC Health Section including any and all localized versions of the MSNBC for which WebMD is providing localized healthcare related information for consumers pursuant to Section 2.3 below; and (iii) that is received by WebTV from Advertising on a WebTV Health Channel. In the case of contracts that include elements outside the MSN Health Section, MSNBC Health Section, and/or WebTV Health Channel, Microsoft Revenue shall include the share of revenue received by Microsoft that is attributable to the relevant MSN Health Section, MSNBC Health Section, and/or WebTV Health Channel. 1.13 "WEBMD CONSUMER SITE" shall mean that part of the WebMD Web site currently located at the URL http://www.webmd.com or any successor site(s) thereof which is directed at a consumer market. 1.14 "WEBMD SITE" shall mean the WebMD Web site currently located at the URL http://www.webmd.com or any successor site(s) thereof, including but not limited to the WebMD Consumer Site, the Medical Professionals Section, any and all Localized WebMD Sites (as defined in Section 2.3(c)(ii) below). 1.15 "MEDICAL PROFESSIONALS SECTION" shall mean that part of the WebMD Site currently located at the URL http://www.webmd.com or any successor site(s) thereof that targets medical professionals, including without limitation the Non-Health Related Section and the Health Related Section. As of the Effective Date, the Medical Professionals Section targets medical physicians, but the Medical Professionals Section shall also include comparable WebMD Site pages targeted at other specific sectors of the professional medical community (e.g., nurses, dentists). 1.16 "MSN SITE" shall mean all web sites in the msn.com domain. 1.17 "HOUSE ADVERTISING INVENTORY" shall mean the specific amount of regular advertising inventory on the MSN Site, or on the Link Exchange network of sites, for which Microsoft owns or controls the advertising inventory, that is specifically set aside by Microsoft to promote topic-specific areas and other features of the MSN Site, and all inventory specially created for this purpose. For example, as of the Effective Date, House Advertising Inventory includes the In Service Promotion Box, blue banner at the top of the MSN Site home page, and the "Today on MSN" module. As of the Effective Date, Microsoft estimates that House Advertising Inventory comprises approximately 10% of the total advertising inventory on the MSN Site and on the Link Exchange network of sites, for which Microsoft owns or controls the advertising inventory. The parties acknowledge and agree, however, that such percentage may increase or decrease during the Term of this Agreement, and that Microsoft is not bound to maintain the House Advertising Inventory at any particular percentage of the total advertising inventory. 1.18 "NON-HEALTH RELATED SECTION" shall mean that part(s) of the Medical Professionals Section designed to present to End User Members offers, services and information, currently of a non-health-related type, which part (a) is currently called "My Desk" and previously was called "the Lounge," but may be called by other names during the course of this Agreement, and (b) may include multiple parts of the Medical Professionals Section without limitation. 1.19 "HEALTH RELATED SECTION" shall mean that part(s) of the Medical Professionals Section designed to present to End User Members health-related resource and reference materials, offers, services and information, which part (a) is currently called the "Health Related Section," but may be called by other names during the course of this Agreement, and (b) may include multiple parts of the Medical Professionals Section without limitation. 1.20 "HEALTH CHANNEL" shall mean internet web pages containing health-related information and services for consumers, which Health Channel is to be developed and managed between the parties pursuant to the terms of this Agreement, and shall at all times during the Term provide the content for approximately eighty percent (80%) of the sections on the MSN Health Section, subject to the following: such percentage may be increased at any time by Microsoft in its sole discretion but may only be decreased by mutual agreement of the parties. International versions of the Health Channel that are authorized under Section 2.3 of this Agreement may appear 3 4 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. within different URLs and names than those contained in the definition of the MSN Health Section, as determined by Microsoft in its sole discretion. 1.21 "YEAR" shall mean a twelve month period. For purposes of this Agreement, Year 1 shall mean the twelve month period commencing on the Effective Date, Year 2 shall mean the twelve month period commencing on the first year anniversary of the Effective Date, Year 3 shall mean the twelve month period commencing on the second anniversary of the Effective Date, and so on. 1.22 "WEBMD BASIC MEMBERSHIPS" means any subscription entered into by a registered End User Member to access the Medical Professionals Section. The term "WebMD Basic Memberships" does not include any subscription offerings that do not include access to the Medical Professionals Section. 1.23 "WEBMD MEMBERSHIP MONTH" means one month of a WebMD Basic Membership entered into by an End User Member. 1.24 "MICROSOFT-SPONSORED WEBMD MEMBERSHIPS" means each WebMD Membership Month that Microsoft sponsors pursuant to the terms of this Agreement. Microsoft-sponsored WebMD Memberships shall not include any WebMD Membership Months under a WebMD Membership that has been cancelled, terminated, or remained inactive during any four months period of the membership. 1.25 "BASE MEMBERSHIP FEE" shall mean the lesser of (i) $29.95 per month or (ii) the lowest rate that WebMD offers WebMD Memberships to any other third party (including without limitation to other third party sponsors) during the Term of this Agreement. 1.26 "END USER MEMBERS" means end users who access the Medical Professionals Section of the WebMD Site. 1.27 "WEBMD ADVERTISING/SPONSORSHIP REVENUES" means all recognized revenue earned and billed during the Term of this Agreement that is received by WebMD from advertising, promotions, sponsorships and any other revenue-generating placements or services, excluding Upsell Revenues and excluding E-Commerce Revenues, on the Medical Professionals Section of the WebMD Site and on any third party branded and/or co-branded versions of the Medical Professionals Section or any successor site(s). 1.28 "WEBMD UPSELL REVENUES" means all recognized net revenue (i.e., gross revenue less any direct product costs other than costs of distribution) earned and billed during the Term of this Agreement, excluding E-Commerce Revenue, (a) that is received by WebMD from the sale of WebMD Basic Memberships for the Medical Professionals Section of the WebMD Site and for any third party branded and/or co-branded versions of the Medical Professionals Section or any successor site(s), excluding the Base Membership Fee, and (b) that is received by WebMD from the sale of WebMD offerings or WebMD services that are not provided as part of the WebMD Basic Membership such as for example, WebMD OnCall, Virtual Receptionist Minutes, Transcription Services, and any other value-added services excluded from the WebMD Basic Membership for the Medical Professionals Section of the WebMD Site and for any third party branded and/or co-branded versions of the Medical Professionals Section or any successor site(s). 1.29 "WEBMD E-COMMERCE REVENUES" means all recognized net revenue (i.e., gross revenue less any direct product costs other than costs of distribution) earned and billed during the Term of this Agreement that is received by WebMD from electronic commerce distribution opportunities and electronic commerce service offerings on the Medical Professionals Section of the WebMD Site and on any third party branded and/or co-branded versions of the Medical Professionals Section or any successor site(s). WebMD E-Commerce Revenues include, without limitation, revenues generated from EDI transactions, communication of lab results, medical records, and clinical reports, as well as sales of medical supplies, pharmaceuticals and nutraceuticals. 4 5 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 2. HEALTH CHANNEL REQUIREMENTS AND RELATIONSHIP WITH MSN HEALTH SECTION 2.1 DEVELOPMENT AND MAINTENANCE. WebMD shall develop, maintain, and host the Health Channel and the home page of the MSN Health Section in accordance with this Section 2 and the Specifications. Further, WebMD's development, maintenance, hosting, servicing, support and all other activities with respect to the Health Channel (including without limitation those versions of the Health Channel provided to WebTV and MSNBC) and the home page of the MSN Health Section, and the content, materials, features, technology or services included therein or associated therewith, shall at all times be equal or superior to that (a) of the WebMD Site, (b) to that received from WebMD by other WebMD co-branded channels, and (c) to that received by any third party to whom WebMD provides similar content, materials, features, technology or services. (A) LAUNCH. The parties agree to cooperate in good faith to create a "transition page" that will be available within forty-eight (48) hours following the Effective Date so that users may access the WebMD Site from the MSN Site. WebMD agrees to launch (i.e. make available to the public) the Health Channel no later than the earlier of July 1, 1999 or the launch of any other health-related content, features or services on behalf of any third party (except content provided to Lycos pursuant to a contract in effect as of the Execution Date), and that upon such launch each page in the first two levels of the Health Channel shall incorporate the Network Frameworks in accordance with the Technical Specifications. WebMD further agrees that within seventy five (75) days following the Effective Date and thereafter during the Term of this Agreement, all pages on all levels within the Health Channel shall incorporate the Network Frameworks in accordance with the Technical Specifications and shall otherwise comply with the Specifications. (B) MODIFYING THE SPECIFICATIONS. The Content Specifications may be modified by mutual agreement of the parties, which agreement shall not be unreasonably withheld by any party. WebMD shall implement any such modifications pursuant to a schedule agreed upon by the parties. The parties agree to review the Content Specifications at least quarterly to assess the quality and competitiveness of and overall strategy for the Health Channel. The first such review shall occur within thirty (30) days following the Effective Date. The Technical Specifications may be modified pursuant to Exhibit A-2 and otherwise by mutual agreement of the parties, which agreement shall not be unreasonably withheld by any party. (C) MICROSOFT OVERSIGHT AND CONTENT. (I) Microsoft has the right, in its sole discretion, to require WebMD to remove content from the Health Channel. In the event that Microsoft determines in its sole discretion that the presence of certain content on the Health Channel poses an immediate concern, WebMD shall remove such content within twenty-four hours of Microsoft's written request. Where Microsoft does not consider content to pose an immediate concern, but nonetheless determines, in its sole discretion, that content should be removed, WebMD shall remove such content within such longer period of time as Microsoft reasonably determines is appropriate. (II) Microsoft may request that WebMD cover certain topics, content, features, events or other areas or material on the Health Channel. If Microsoft makes such a request in writing, WebMD shall respond within ten (10) business days whether WebMD desires to provide such content, features, events or other areas or material. If WebMD agrees to provide such topics, content, features, events or other areas or material, WebMD shall incorporate such topics, content, features, events or other areas or material into the Health Channel as soon as commercially reasonable following such agreement but in no event within more than forty-five (45) days from the time it agrees to provide such topics, content, features, events or other areas or material. If WebMD declines to provide the topics, content, features, events or other areas or material or fails to provide it within the requisite amount of time, then Microsoft shall be free to provide the topics, content, features, events or other areas or material (either directly or through a third party), and 5 6 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. WebMD shall cooperate with Microsoft to incorporate such topics, content, features, events or other areas or material into the Health Channel within ten (10) business days of Microsoft's providing the topics, content, features, events or other areas or material to WebMD for incorporation or such other reasonable period of time as the parties mutually agree. In addition to the foregoing, WebMD shall incorporate any legal or other notices onto the Health Channel that Microsoft in its sole discretion considers necessary, within twenty-four (24) hours of Microsoft's written request. The parties shall meet on a regular basis, but in no event less frequently than once each calendar quarter to discuss the Health Channel and the WebMD Site, provided that the first such meeting shall take place no later than twenty (20) business days from the Execution Date, and further provided that in addition to any other obligations it has to Microsoft, WebMD shall use reasonable efforts to incorporate into the Health Channel any topics, content, features, events or other areas or material etc. that Microsoft suggests during such meetings according to the same schedule as is set forth above in this Section. (III) Recognizing the importance of maintaining the strength, market presence, integrity and positive user experience of the Health Channel, WebMD will consult with Microsoft before removing or modifying any material topics, content, features, events or other areas or material on the Health Channel. (IV) Further, subject to the terms of this Agreement, including but not limited to this Section 2.1 and the Dispute Mechanism set out in Exhibit A-1(2), if WebMD has included a section for a particular topic as part of the Health Channel, then Microsoft shall not include a section covering the same topic in the non-Health Channel portion of the MSN Health Section. In addition, if Microsoft has included a section for a particular topic in the non-Health Channel portion of the MSN Health Section then, subject to any contracts in existence between Microsoft and any third party concerning the provision of such section or any part thereof, in the event that WebMD later proposes providing a section for such topic as part of the Health Channel, Microsoft and WebMD shall use commercially reasonable efforts to combine Microsoft's existing section and WebMD's proposed section so that they are offered as one, or alternatively if mutually agreed between the parties replace Microsoft's section with WebMD's section. Finally, at Microsoft's request and discretion, WebMD may provide content, features, technology, or services, etc. to Microsoft for inclusion in the non-Health Channel Section of the MSN Health Section in a way that distinguishes it from those included in the Health Channel. (D) ADVERTISING/REVENUE GENERATION SPACE. The Health Channel shall include Advertising space as specified in the Specifications and/or Network Frameworks. In addition, WebMD shall accommodate all requests from Microsoft for additional Advertising space on the Health Channel to support the goal of revenue maximization, and shall implement such requests as soon as reasonable. (E) MSNBC CONTENT. WebMD shall include that health news and editorial that is provided to WebMD by MSNBC, on all versions of the Health Channel. Unless otherwise specified by MSNBC and Microsoft, MSNBC shall be the sole provider of health news and editorial that is provided on the Health Channel. 2.2 BRANDING. The Health Channel shall include a joint credit immediately below the Network Framework header but otherwise at the top of the page, on all Web pages included within the Health Channel, which credit shall read Health Channel "by WebMD" or such other word or words as are mutually approved by the parties, and shall be at least as prominent as the Microsoft branding appearing in the Network Framework header. All use of Microsoft's names, brands (including without limitation MSN) or logo(s) as may be authorized by Microsoft under this Agreement shall be in accordance with the trademark License granted in Section 11 of this Agreement and/or the Logo Guidelines (attached as Exhibit D), as appropriate. 6 7 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 2.3 INTERNATIONAL DISTRIBUTION OF THE HEALTH CHANNEL. (A) NEW MARKETS PROVIDED BY WEBMD. (I) In the event that WebMD seeks to create localized health-related content for consumers, for a topic specific, front page offering on local MSN portals ("Localized Health Channel") in a given market, WebMD shall submit written notice ("New Market Notice") of same to the appropriate Microsoft contact, as designated by Microsoft, which New Market Notice shall include a detailed description of WebMD's plans for such market. The market identified in such WebMD notice shall be deemed a "Targeted Market." Microsoft agrees that, subject to (A) the terms of contracts existing as of the Execution Date, (B) the provisions of this Section 2.3, and/or (C) a determination by Microsoft that the proposal described in the New Market Notice is not commercially reasonable for the given market (but in no event, however, shall Microsoft's determination be based on whether Microsoft could obtain greater consideration from a party other than WebMD for a localized health channel, and further in no event shall Microsoft require WebMD to make any additional payments with regard to providing a Localized Health Channel for such Targeted Market), WebMD will become the provider of a Localized Health Channel on the MSN portal for such Targeted Market. Subject to and not including any content provided under the terms of any contracts existing as of the date of the New Market Notice, the Localized Health Channel shall at all times provide the content for approximately eighty percent (80%) of the sections on any localized MSN Health Section for a Targeted Market provided that such percentage may be increased at any time by Microsoft in its sole discretion but may only be decreased by mutual agreement of the parties. Microsoft shall notify WebMD within ten (10) business days of the New Market Notice if WebMD's proposal is rejected. WebMD shall only submit New Market Notices within sixty (60) days of the Effective Date or during the first week of any calendar quarter during the Term, provided that WebMD may not submit any New Market Notices during the last six months of the Term. (II) Once approved, if WebMD fails to make the localized content for any Targeted Market available for incorporation onto the relevant MSN portal within a reasonable period of time following but in no event more than six months of the New Market Notice (which deadline may be extended by mutual agreement of the parties), such Targeted Market shall be removed from the Targeted Market list, the foregoing restriction in sub-Section 2.3(a)(i) above on Microsoft shall no longer apply and WebMD may not deliver another New Market Notice with respect to such market. (III) For all intents and purposes under this Agreement, any Localized Health Channels provided by WebMD hereunder shall be deemed included in the definition of and considered part of the Health Channel under this Agreement, and the parties rights and obligations with respect to such Localized Health Channels shall be the same as they are with regard to the Health Channel, provided that Sections 3.6, 3.7, and 3.8 of this Agreement shall only apply with regard to Localized Health Channels if and when a localized version of the relevant Microsoft technology or property is available, and if the criteria set forth in the relevant sections are satisfied. (B) RIGHT OF FIRST REFUSAL. Subject to the terms of contracts existing as of the Execution Date, in the event that (i) Microsoft desires to create a Localized Health Channel as part of a localized MSN Health Section for a particular market, other than a current Targeted Market; or (ii) a third party offers Microsoft the opportunity to obtain a Localized Health Channel in a market other than a current Targeted Market; then Microsoft will so notify WebMD in writing ("MS Market Notice") and provide WebMD with the opportunity to provide such Localized Health Channel (on at least the same terms and conditions as offered by the third party for category (ii)). WebMD will respond affirmatively or negatively to such MS Market Notice within ten (10) business days of receipt thereof. If WebMD agrees to provide such content, then (x) WebMD shall make such localized content available for incorporation as a Localized Health Channel onto the relevant MSN portal within the time frame set forth in the MS Market Notice, but not less than forty-five (45) days from the date of the MS Market Notice and (y) subject to contracts 7 8 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. existing as of the Effective Date, the Localized Health Channel shall at all times provide the content for approximately eighty percent (80%) of the sections on any localized MSN Health Section, provided that such percentage may be increased at any time by Microsoft in its sole discretion but may only be decreased by mutual agreement of the parties. If WebMD declines an opportunity to provide localized content under this Section 2.3(b) or fails to provide it within the time frame set forth in the MS Market Notice, then Microsoft may itself or through third parties develop such a Localized Health Channel for the MSN portal in the relevant market ("MS Market"), in which case WebMD may not deliver a New Market Notice with respect to such market and Microsoft is not required to provide any further MS Market Notice with respect to such Market. Notwithstanding the foregoing, the definition of "Microsoft Revenues" shall be extended to include corresponding revenues derived from such Localized Health Channel. (C) INTERNATIONAL BUSINESS DEVELOPMENT AND LOCALIZATION SUPPORT. (I) Microsoft agrees to use reasonable efforts to support WebMD's expansion of its online services into international markets by providing consultation within the market and making introductions within the market to local contacts where relevant. Further, Microsoft will assign a business development manager located in mutually agreed upon markets to have, at a minimum, quarterly meetings in the market with WebMD personnel, to provide to WebMD certain standard reports developed by Microsoft regarding the market and the local MSN portal (which reports shall be treated as Microsoft or WebMD Confidential Information, as appropriate, in accordance with Section 10 below), and to make introductions to local contacts in particular markets where Microsoft has such contacts. (II) Microsoft agrees to use reasonable efforts to support WebMD's expansion of its online services into international markets ("Localized WebMD Sites") by providing reasonable consultation on localization strategy and techniques to the level that Microsoft reasonably believes is reasonably necessary for WebMD to reasonably make available to end users localized language sites in Germany, France, the United Kingdom and Switzerland by the one (1) year anniversary of the Effective Date; provided that Microsoft shall in no way be responsible for WebMD's failure to make such sites available within the specified time. (D) NON-LOCALIZED INTERNATIONAL CONTENT. Microsoft will work with WebMD during the first 30 days following the Effective Date to discuss opportunities for offering worldwide non-localized Health Channel content as part of a potential international front page offering on the topic of health on existing international MSN portals ("Worldwide Non-Local Offering"), as relevant and appropriate, and subject to the approval of the local portal programming managers which such approval shall not be unreasonably withheld. Any such international health topic area shall be non-exclusive and shall not be considered part of the Health Channel for the purposes of this Agreement, nor will the markets in which it may be offered be deemed a Targeted Market. The definition of "Microsoft Revenue" shall be extended to include corresponding revenues derived from such Worldwide Non-Local Offering. Without limiting the non-exclusivity with respect to any specific market described above, provided that the parties are offering a Worldwide Non-Local Offering under this Section within one hundred eighty (180) days of the Execution Date, then, subject to any agreements in effect as of the Execution Date, Microsoft shall not enter into any other agreements with third parties for a Worldwide Non-Local Offering. (E) INTEGRATION. WebMD acknowledges that the international MSN Web Sites are run on different platforms and with different tools than the United States version. When WebMD does create a Localized Health Channel and/or Worldwide Non-local Offering for a given market in accordance with this Section 2.3, such content shall be integrated into the local MSN portal in accordance with the requirements for the local MSN portal. (F) CHANNEL PROMOTION. In the event that WebMD creates Localized Health Channels pursuant to this Section 2.3, Microsoft agrees to promote such Channels in the same manner as it promotes other front page links on the relevant local MSN portal, and WebMD agrees to promote the Localized Health Channel on its localized WebMD Consumer Site in the relevant market in the same fashion as it promotes the Health Channel on the WebMD Consumer Site in the United States. In addition, Microsoft 8 9 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. shall promote health-related Web events in each Localized Health Channel to the extent and a number of times, if at all, that Microsoft reasonably determines are appropriate for each market. The content of such health-related Web events shall be provided by WebMD and subject to Microsoft's approval, in its sole discretion. (G) EXPRESSLY EXCLUDED MARKETS. Notwithstanding any other provision in this Agreement, in no event shall any rights or obligations under this Agreement apply to Australia, New Zealand, or Papua New Guinea. 2.4 INTEGRATION/CROSS PROMOTION/ADVERTISING REQUIREMENTS. (A) STANDARD INTEGRATION INTO MSN AND BASIC PROMOTION. Microsoft shall offer the MSN Health Section as a front page link on the MSN.com home page. As a front page link, the MSN Health Section will be promoted on the MSN Site in a manner equivalent to all other major topic specific offerings. This promotion may include without limitation, for as long as any front page link receives such promotion: (I) providing a front page link to the MSN Health Section on the MSN.com home page. (II) displaying the MSN Health Section at the bottom of Network Framework as one of the MSN services, for as long as such listings include all front page links in the Network Framework. (III) receiving general cross-linking across the MSN Health Section (including the Health Channel pages on a pro-rata basis with all other pages in the MSN Health Section) and other MSN front page links. (IV) the Health Channel receiving an average of 2% of the House Advertising Inventory in (with the specific type of inventory to be in Microsoft's discretion), which shall in all cases include no less than 125,000,000 impressions per year, together with equal opportunity for the Health Channel to participate in other advertising elements in the House Advertising Inventory that are provided to all other front page links, subject to Microsoft's standard selection processes. WebMD will present to Microsoft (a) WebMD's proposed advertisements to be placed in the Health Channel's portion of the House Advertising Inventory specified herein, and (b) WebMD's proposed promotional priorities for the Health Channel and WebMD's proposed specific wording for such promotions. Notwithstanding the foregoing, Microsoft reserves final editorial discretion and approval over the advertisements and promotions for the Health Channel including those placed under this sub-Section (iv). (V) equal opportunity for the MSN Health Section to participate in all limited-time editorial packages on the MSN Site offered to other front page links. From time to time, Microsoft shall develop a certain topical theme ("Editorial Package") such as, by way of an example, "Technology," "Holiday," "Resolutions 99," and "Love Month," during which time WebMD shall be given the opportunity to submit Health Channel content relevant to the Editorial Package. Should Microsoft, at its discretion, decide to accept the submitted Health Channel content with the Editorial Package, it will promote the Health Channel's content associated with the Editorial Package. (VI) inclusion of a MSN Health Section content module as a personalization option on the "personalize page" in the current version of MSN, for so long as such feature exists and beginning when Microsoft next has a reasonable opportunity to modify the personalization platform in such fashion in its sole discretion. 9 10 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. (VII) in the next version of MSN Search, prioritized inclusion of promotion and links to the MSN Health Section in health-related searches, to the extent other front page links are offered such prioritization. (B) ADDITIONAL PROMOTIONAL PROGRAMS. In addition to the basic promotion described above, Microsoft shall provide the Health Channel with the following additional promotional opportunities: (I) ADDITIONAL ADVERTISING INVENTORY. Microsoft agrees to provide the Health Channel with an additional average of 2% of the House Advertising Inventory (for a total of at least an average of 4%) (with the specific type of inventory to be in Microsoft's discretion), which shall in all cases include no less than 125,000,000 impressions per year. WebMD will present to Microsoft WebMD's proposed advertisements to be placed in the Health Channel's portion of the House Advertising Inventory specified herein. Notwithstanding the foregoing, Microsoft reserves final editorial discretion and approval over the advertisements for the Health Channel including those placed under this sub-Section (i). (II) PROMOTION OF HEALTH RELATED WEB EVENTS. Microsoft agrees to promote to users of Windows Media Player at least one Health Channel-related Web event per month during the Term of this Agreement through the MSN Web Events front page link and across other MSN front page links, for as long as a MSN Web Events front page link exists. The amount and nature of such promotion shall be at Microsoft's discretion. (III) ADDITIONAL INTEGRATION WITH OTHER MSN CHANNELS. Microsoft will endeavor to provide the Health Channel with specific distribution opportunities with certain MSN channels such as, by way of example, "Women Central," "Travel," and "Sports." The final nature of such distribution opportunities for the Health Channel, if at all, will be subject to discussion and final approval of Microsoft. (IV) SHOPPING AREA FOR HEALTH CHANNEL. Microsoft agrees to provide a link from the health shopping area of the MSN Shopping area to the MSN Health Section. (C) RELATIONSHIP OF HEALTH CHANNEL TO OTHER PARTS OF THE MSN HEALTH SECTION. For purposes of this Section 2.4, the Health Channel shall be treated equal to or better than any other third party, non-Microsoft affiliate, provider of content for the MSN Health Section. (D) MICROSOFT'S ADVERTISING ON THE WEBMD SITE. WebMD shall provide Microsoft with access to sufficient Advertising space on the WebMD Site as is commercially reasonably necessary to permit Microsoft to meet each of its Guarantees (e.g., First Year Guarantee, Section Year Guarantee, Third Year Guarantee, etc.) as set forth in Section 12.2 below and the unlimited right to place Advertising in such Advertising space on the WebMD Site. During the thirty (30) days following the Execution Date the parties shall mutually agree on how to manage the available Advertising inventory on the WebMD Site and on the rates for such space, which rates shall be commercially reasonable. Microsoft will not be permitted to make placements of health care related Advertising on the WebMD Site without WebMD's express approval. All revenue generated from such placements shall be considered Microsoft Revenue. WebMD shall at a minimum include an amount of Advertising space on the WebMD Site that is equal to or greater than that provided on the Health Channel and shall accommodate all requests from Microsoft for additional Advertising space on the WebMD Site. Notwithstanding the foregoing, in no event shall WebMD be required to create new categories of Advertising space under this Section. 10 11 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 2.5 RESTRICTIONS. (A) ON WEBMD. WebMD agrees not to provide any health- related content, features, services, technology, etc. to * or any * affiliated companies, including without limitation * or *, for distribution on the Internet, without Microsoft's prior written consent, except that WebMD may, pursuant to an agreement in effect between WebMD and * as of the Execution Date, provide up to three page levels of co-branded, health-related content to * for distribution on the Internet. Further, in the event that WebMD enters into an agreement with any other third party to provide health-related content for distribution on the Internet, WebMD agrees to provide Microsoft with thirty (30) days prior written notice before the launch of such health-related content on the Internet, and WebMD shall not offer such third parties health-related content that has not also been previously or concurrently made available to the Health Channel. (B) ON MICROSOFT. Microsoft agrees that, except with regard to content provided by MSNBC and content provided by Microsoft or third parties pursuant to this Agreement, including Sections 2.1 and 2.3 above and Sections 3.3 and 3.5 below, WebMD shall be the sole provider of health-related information on the Health Channel. 2.6 USER INFORMATION. (A) OWNERSHIP/USE. Microsoft and WebMD shall jointly own any and all User Information (i) collected by WEBMD from Users of the Health Channel as well as Users of the WebMD Consumer Site whose use of the WebMD Site originated on the Health Channel or any MSN Site, (ii) relating to End User Members with Microsoft-sponsored WebMD Memberships, and (iii) relating to End User Members who receive WebMD Memberships through Microsoft or Microsoft distribution partners, and WebMD shall provide such User Information to Microsoft on a monthly basis in such format as reasonably requested by Microsoft. Likewise, Microsoft shall provide any User Information it collects on the Health Channel to WebMD on a monthly basis in such format as is reasonably requested by WebMD. WebMD may use the User Information during the Term of this Agreement solely for the purpose of fulfilling the product or service for which the information was collected, provided, however, that such information shall be treated in the same fashion as Confidential Information pursuant to Section 10 below and specifically, without limitation, shall not be provided to any third party nor used on behalf of any third party, including but not limited to, for promoting or advertising any third party, without Microsoft's prior written consent. Notwithstanding the foregoing, Microsoft hereby approves WebMD using and providing to third parties Aggregate Information to be used in research projects. Any other use of the User Information during the Term by WebMD shall be by mutual agreement of the parties. Upon termination of this Agreement, each party may retain the User Information collected pursuant to this Agreement and no party shall restrict the other's use in any way and WebMD shall provide to Microsoft all User Information pertaining to the MSN Users of the WebMD Health Communities (as defined in Section 3.7 below), provided that WebMD may not provide such User Information to any third party nor use such User Information on behalf of any third party, including but not limited to, for promoting or advertising any third party, without Microsoft's prior written consent. For the avoidance of doubt, except where the parties jointly use the User Information, each party shall be responsible for ensuring that its own use of the User Information complies with all User consent requirements, including but not limited to as provided in Section 2.6(b) below. (B) CONSENT. In addition to the foregoing, any collection, disclosure or use of Personal Information by WebMD shall be subject to the Users' consent, and the business practices and User privacy policies of the site from which it is collected (e.g., the Health Channel, an MSN Site, WebMD Consumer Site or Medical Professionals Section). The business practices and policies of each such site shall permit, as their default, WebMD to grant Microsoft the rights required by this Section 2.6, unless the User specifically requests otherwise, and in all cases shall comply with any applicable laws governing the collection, dissemination and use thereof. "Consent" as used in this Agreement shall mean the approval of an adult, and in the case of minor children, the approval of the child's parent or legal guardian. WebMD and Microsoft shall mutually agree on the Health Channel user interface for the collection of Personal Information. Microsoft shall determine the privacy policy for the Health Channel. 11 12 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 3. OTHER MICROSOFT RELATED PROPERTIES 3.1 WEBTV/MSNBC. (A) WEBTV (I) WEBTV HEALTH CHANNEL. WebMD shall develop, maintain, and host the health channel for WebTV ("WebTV Health Channel"). Subject to any inconsistencies with the provisions of this Section 3.1(a) (in which case the terms of this Section 3.1(a) shall control) and subject to agreements in effect as of the Execution Date, the following Sections of this Agreement shall apply to WebTV and WebMD with regard to such WebTV Health Channel: Sections 2.1, 2.6, 3.5, 9, 10, 11.1(c)-(d), 11.2(a)-(b), 12.9, 13, 14.6, 15, 16, 18, Exhibit A-1 paragraphs (A)(3)-(5) and (C), and Exhibit A-2. (II) WEBTV. As part of meeting their obligations under Section 3.1(a) above, WebMD and WebTV shall meet during the first ninety days after the Effective Date ("WebTV Exploratory Period") to discuss in good faith the specific processes and requirements for development, maintenance, and hosting by WebMD of a WebTV Health Channel. If the parties fail to come to agreement during the WebTV Exploratory Period, then no party shall have any further obligation to the other with regard to a WebTV Health Channel. (III) MINIMUM CONTENT REQUIREMENTS. If WebMD creates a WebTV Health Channel by agreement with WebTV pursuant to Section 3.1(a)(i) and (ii) above, all content, materials, features, technology, services, etc. included by WebMD within the WebTV Health Channel (a) shall be the sole responsibility of WebMD and shall be developed and maintained in accordance with Section B of Exhibit A-1, (b) shall be relevant to the topic and particular section of the WebTV Health Channel in which they are included, (c) shall be of high quality in all ways, including with respect to editorial content and volume, as determined by comparison to other sources of similar information available on the Internet and in no event shall the WebTV Health Channel contain a smaller volume of pages as the WebMD Consumer Site or Health Channel contains, unless approved or requested byWebTV, (d) shall be comparable or superior to the health related content available on the top five (5) ranked (by Media Metrix or such other industry standard as is available for the platform provided by WebTV) Internet portal/network sites available on the platform provided by WebTV with respect to at a minimum the following factors: (i) substance, quality, volume, (ii) breadth and depth of content, (iii) tools and functionality, (iv) personalization, (v) appeal and ease of use of user interface, (e) shall be regularly updated by WebMD so as to meet the requirements of sub-sections (b), (c) and (d) above and end-users preferences, and (f) subject to the foregoing requirements in (a)-(e), shall be the same or substantially similar as (i.e., in substance, a mirror of) the materials available to end users accessing the WebMD Consumer Site at any time during the Term of this Agreement. With respect to this subsection 3.1(a), WebTV shall have the right and obligation to invoke the Dispute Mechanism set forth in Exhibit A-1(2). (B) MSNBC (I) MSNBC HEALTH CHANNEL. MSNBC shall develop, maintain, host and--except as specifically set out in this Agreement--in all ways have sole discretion and control over all aspects of that section of the MSNBC Web site (currently located at http://www.msnbc.com or such other URL as MSNBC shall determine in its sole discretion) or any successor site(s) thereof ("MSNBC Site") dedicated to providing health related information and services for consumers ("MSNBC Health Section") including but not limited to its content, features, technologies, services, etc., its appropriate frameworks and Specifications (including content Specifications and technical Specifications). Subject to any inconsistencies with the provisions of this Section 3.1(b) (in which case the terms of this Section 3.1(b) shall control) and subject to agreements in effect as 12 13 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. of the Execution Date, the following Sections of this Agreement shall apply to MSNBC and WebMD with regard to such MSNBC Health Section: Sections 2.1; 2.3(a), (b), (e), and (g); 2.6, 3.5, 9, 10, 11.1(c), 11.2(a)-(b), 12.9, 13, 14.6, 15, 16, 18, Exhibit A-1 paragraphs (A)(3)-(5) and (C), and Exhibit A-2. (II) Subject to contracts in existence as of the Execution Date, WebMD shall be the primary provider of health care related information other than (A) news and editorial, (B) content from NBC News and MSNBC cable, and (C) wire and WSJ/Dow Jones services on the MSNBC Health Section. (III) Notwithstanding sub-Section 3.1(b)(ii) above, MSNBC shall create a special WebMD section (the "MSNBC Health Channel") of the MSNBC Health Section and MSNBC shall have the sole discretion to include or not include any content, features, technologies, services, etc. provided by WebMD on the MSNBC Health Channel. (IV) Without limiting or modifying in any way sub-Section 3.1(b)(ii) above, with respect to contracts in existence as of the execution Date between MSNBC and third parties for the provision of healthcare related information to MSNBC for the MSNBC Health Channel, at the natural termination or expiration of each such contract (which shall be determined under such contracts and as between MSNBC and WebMD in MSNBC's sole discretion), MSNBC shall use commercially reasonable efforts to replace such third party healthcare related information with healthcare related information provided by WebMD. For the avoidance of doubt, content, features, and anything in those areas specified in sub-Section 3.1(b)(ii)(A)-(C) above are not subject to replacement by WebMD content. (V) WebMD will provide such support as is required to assist MSNBC in incorporating the MSNBC Health Channel or links thereto into the MSNBC Health Section, including but not limited to incorporating such MSNBC frameworks or Advertising space as may be required to include WebMD's healthcare related information in the MSNBC Health Channel. (VI) MSNBC may request that WebMD cover certain topics, content, features, events or other areas or material for inclusion in the MSNBC Health Channel. If MSNBC makes such a request in writing, WebMD shall respond within ten (10) business days whether WebMD desires to provide such content, features, events or other areas or material. If WebMD agrees to provide such topics, content, features, events or other areas or material, WebMD shall provide such topics, content, features, events or other areas or material for incorporation into the MSNBC Health Channel as soon as commercially reasonable following such agreement but in no event within more than forty-five (45) days from the time it agrees to provide such topics, content, features, events or other areas or material. If WebMD declines to provide the topics, content, features, events or other areas or material or fails to provide it within the requisite amount of time, then MSNBC shall be free to provide the topics, content, features, events or other areas or material (either directly or through a third party). In addition to the foregoing, WebMD shall incorporate any legal or other notices onto all or any part that WebMD provides for the MSNBC Health Channel that MSNBC in its sole discretion considers necessary, within twenty-four (24) hours of MSNBC's written request. The parties shall meet on a regular basis, but in no event less frequently than once each calendar quarter to discuss the MSNBC Health Section, the MSNBC Health Channel and the WebMD Site, provided that the first such meeting shall take place no later than sixty (60) business days from the Execution Date, and further provided that in addition to any other obligations it has to MSNBC, WebMD shall use reasonable efforts to provide to MSNBC for incorporation into the MSNBC Health Channel any topics, content, features, events or other areas or material etc. that MSNBC suggests during such meetings according to the same schedule as is set forth above in this Section. 13 14 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. (VII) MINIMUM CONTENT REQUIREMENTS. All content, materials, features, technology, services, etc. provided by WebMD for the MSNBC Health Channel or the WebMD section of the MSNBC Health Channel (a) shall be the sole responsibility of WebMD and shall be developed and maintained in accordance with Section B of Exhibit A-1, (b) shall be relevant to the topic and particular section of the MSNBC Health Channel in which they are included, (c) shall be of high quality in all ways, including with respect to editorial content and volume, as determined by comparison to other sources of similar information available on the Internet and in no event shall the MSNBC Health Channel have access to a smaller volume of pages as the WebMD Consumer Site or Health Channel contains, unless approved or requested by Microsoft or NBC, (d) shall be comparable or superior to the health related content available on the top five (5) ranked (by Media Metrix) Internet portal/network sites with respect to at a minimum the following factors: (i) substance, quality, volume, (ii) breadth and depth of content, (iii) tools and functionality, (iv) personalization, (v) appeal and ease of use of user interface, (e) shall be regularly updated by WebMD so as to meet the requirements of sub-sections (b), (c) and (d) above and end-users preferences, and (f) subject to the foregoing requirements in (a)-(e), that available for MSNBC to incorporate into the MSNBC Health Channel shall be the same or substantially similar as (i.e., in substance, a mirror of) the materials available to end users accessing the WebMD Consumer Site at any time during the Term of this Agreement. With respect to sub-Sections (c) and (d) above of this sub-Section (vii), MSNBC shall have the right and obligation to invoke the Dispute Mechanism set forth in Exhibit A-1(2). (VIII) BRANDING AND PROMOTION. Subject to contracts in existence as of the Execution Date, (A) MSNBC shall include on each page of the MSNBC Health Channel a WebMD credit as reasonably mutually determined by the parties, and on every page of the MSNBC Health Channel WebMD will receive branding above the fold in a mutually agreeable position, such branding element shall link to an appropriate page in the MSN Health Section, (B) MSNBC shall include a link to the MSNBC Health Section on the front page of the MSNBC Site and each other page of the MSNBC Site that includes links to the other topic specific front page links, (C) MSNBC shall include a secondary-level navigation link to the MSN Health Section on each page of the MSNBC Site, (D) on each page of the MSNBC Health Channel, MSNBC shall include a link to that part of the MSN Health Section covering the relevant information as on the MSNBC Health Section page, and (E) MSNBC shall provide the MSNBC Health Channel with a rotation of at least one promotion on the front page of the MSNBC Site each day subject to MSNBC's sole editorial discretion to feature other news, information, events, etc., for example to accommodate news cycles and breaking news events. (IX) TERM. Notwithstanding any other provision of this Agreement, the term of this Agreement solely with respect to the MSNBC Health Channel shall expire three (3) years following the Effective Date, unless earlier terminated as provided under Section 13 below. 3.2 INTERNET ACCESS. Subject to WebMD's contractual obligations to Compuserve as of the Execution Date, WebMD agrees that Microsoft's MSN Internet Access ("MSN IA") shall be the sole internet access service advertised, promoted and/or distributed by WebMD, including on the WebMD Site, and including, but not limited to with respect to narrow band, broadband or otherwise, provided that the parties shall consult and may agree on alternative broadband providers. Within thirty (30) days following the Effective Date, WebMD shall deliver to Microsoft a marketing plan ("MSN IA Marketing Plan") containing WebMD's general proposal for advertising, promoting and/or distributing MSN Internet Access during the first six months of the Term of this Agreement. Two months in advance of the following six month period and of each remaining six month period thereafter during the Term of the Agreement, WebMD shall present to Microsoft an update to the MSN IA Marketing Plan to cover the subsequent six months. The MSN IA Marketing Plan shall be subject to Microsoft's approval, which approval shall not be unreasonably withheld, and shall include at least one promotional event each quarter. Microsoft and WebMD will mutually determine which parts of the MSN IA Plan and each updated MSN IA Plan will be implemented in what time frame, what changes, if any, will be made to the proposed programs during each six month period and which party will be responsible for what aspects of each program. The parties shall work together to create and 14 15 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. distribute the elements for all such promotions with WebMD creating, maintaining, hosting and distributing those materials necessary to implement such promotion, and Microsoft providing the Internet Access package offer, fulfilling the offers as set forth herein and maintaining the customer service relationship. Microsoft commits to include the following as part of the Internet Access package offered to WebMD users subscribing to MSN IA as a result of one of the programs agreed on pursuant to this Section 3.2: (A) Unlimited monthly Internet access according to MSN's standard terms and conditions at a price to be determined by Microsoft in its sole discretion, provided that Microsoft currently intends to charge WebMD participants in the approved MSN IA programs described herein no more than the standard consumer pricing; (B) Default home page is the current standard default available from MSN, provided that Microsoft agrees to provide a co-branded or redirect to the WebMD home page by no later than September, 1999; and (C) Multiple email accounts including an MSN email account and unlimited Hotmail accounts. Microsoft shall provide co-branded marketing sign-up packages to all WebMD participants in the approved MSN IA programs described herein, including CD's, mailing and packaging materials. Such marketing sign-up packages will be provided at Microsoft's expense for the first 1,000,000 marketing sign-up packages and postage costs for up to 500,000 marketing sign-up packages. Expenses for providing additional marketing sign-up packages and postage costs shall be borne by WebMD. With respect to User Information, the provisions of Section 2.6 above and Section 11.4 below shall apply. In the event that Microsoft intends in its sole discretion to stop offering MSN IA, Microsoft shall give WebMD at least ninety (90) days' advance written notice of its intention, and WebMD shall immediately stop offering any MSN IA programs and no party shall have any further obligations under this Section 3.2. 3.3 HEALTH CHANNEL DIRECTORY. The only health care-related directory(ies) included on the Health Channel shall be those health care-related directory(ies) designated by Microsoft from time to time during the Term in its sole discretion, which may include, without limitation: (a) Microsoft's health care-related directory (currently part of the MSN Yellow Pages) as it exists from time to time during the Term or any part or successor thereof; (b) WebMD's health care-related directory as it exists from time to time during the Term or any part or successor thereof; (c) any health care-related directory provided by some third party; or (d) any combination of (a), (b) and (c) immediately above. The parties agree that Microsoft may, in its discretion, create a combined health care-related directory for the Health Channel that incorporates WebMD's health care-related directory listings. In the event that Microsoft elects to create such a combined directory, the parties shall work together in good faith to do so. WebMD shall include the health care-related directory(ies) designated by Microsoft in the Health Channel. 3.4 OTHER MICROSOFT PROPERTIES. Except as prevented by any contracts between WebMD and third parties existing as of the Execution Date, WebMD agrees that Microsoft and its affiliates shall be the sole providers of third party content, features, services, etc. for the WebMD Site (including specifically without limitation the Non-Health Related Section and the Health Related Section), in all areas for which Microsoft or its affiliates owns or controls such content, features or services, etc.; such content, features and services, etc. shall at a minimum include travel (e.g., Microsoft Expedia), automotive (e.g., Carpoint), real estate (e.g., Home Advisor), money, investing and finance (e.g., Money, Investor), entertainment and directories (e.g. Sidewalk including but not limited to MSN Yellow Pages), reference (e.g., Encarta), movies (e.g., Sidewalk), news (e.g., MSNBC); provided that WebMD may elect in its sole discretion not to provide content, features or services for any area. The foregoing shall exclude, however, solely with regard to the Health Related Section of the Medical Professional Section, any Microsoft content, features, or services that are predominantly health care related, unless mutually agreed upon by the parties. In the event that WebMD makes available to end users any non-web-based email technology, whether through the distribution of work stations or otherwise, Microsoft shall be the sole provider of such technology for such distribution and shall provide such technology under standard terms and conditions for such distribution; provided that such Microsoft technology be Microsoft Outlook or such other Microsoft technology designated by Microsoft. Without limitation, being the "sole provider" means that WebMD shall not place, distribute, advertise, market, link to, refer to or otherwise include the content, features or services, etc. of any party other than Microsoft. 15 16 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 3.5 MSN MODULE. (A) WebMD shall include a module for MSN ("MSN Module") either above the fold of a 640 x 480 screen size resolution with a standard browser configuration, or on the second screen (of a 640 x 480 screen size resolution with a standard browser configuration), on each page of the WebMD Site, which MSN Module shall be in a form determined by Microsoft in its sole discretion. The MSN Module may be modified from time to time as determined by Microsoft in its sole discretion and WebMD shall replace any existing MSN Module with any such updated MSN Module within a reasonable time following Microsoft's notice of such modifications. The MSN Module may at a minimum include a "Go to MSN" logo link, two (2) rotating text links from a pool of five (5) text links, and a single promotional text link, which text links will be mutually determined by Microsoft and WebMD. An example of what the MSN Module may look like appears in the mock-up attached hereto as Exhibit C. The MSN Module and any modification thereto shall be subject to Microsoft's written approval. WebMD's placement and use of the "Go to MSN" logo link shall be in accordance with the Logo Guidelines attached hereto as Exhibit D. (B) The only search service(s) included on the Health Channel shall be the search service(s) designated by Microsoft from time to time during the Term in its sole discretion, which may include, without limitation: (i) Microsoft's MSN Web Search as it exists from time to time during the Term or any part or successor thereof; (ii) WebMD's search service and technology as it exists from time to time during the Term or any part or successor thereof; (iii) any search service or technology provided by some third party; or (iv) any combination of (i), (ii) and (iii) immediately above. At Microsoft's sole discretion, Microsoft may create a combined search service for the Health Channel that incorporates WebMD's search services. In the event that Microsoft elects to create such a combined service, the parties shall work together in good faith to do so. At Microsoft's request, WebMD shall provide Microsoft with database mapping from technical disease names to common names for use in MSN Web Search. WebMD shall include the search service designated by Microsoft in the Health Channel. 3.6 MICROSOFT ONLINE ID PROGRAM. WebMD agrees to test, evaluate, and use, take sign ups for and accept the Ids for Microsoft's proprietary authentication service ("Passport") on both the Health Channel and the WebMD Site, and all of WebMD's existing profiling and authentication mechanisms will also take sign ups for and accept the Ids for Passport. WebMD shall use Passport in accordance with the terms of the Microsoft Online ID Evaluation Program Agreement attached hereto as Exhibit E and such further standard terms and conditions that are offered in addition to or as a replacement for those currently contained in such agreement. The parties acknowledge and agree that WebMD may accept other authentication mechanisms on the WebMD Site. WebMD agrees, however, that Passport will be the only authentication mechanism distributed (i.e., take sign ups) on the Health Channel and WebMD Consumer Site other than WebMD's proprietary authentication mechanisms. WebMD's obligations under this Section 3.6 shall extend to any localized WebMD Consumer Site, to the extent that a localized version of Passport is available for the relevant market. 3.7 MSN COMMUNITIES. Microsoft agrees to migrate, as soon as commercially feasible, users of the current Microsoft owned and moderated health-related communities found within Microsoft's MSN Web Communities channel, over to the WebMD health-related communities on the WebMD Site ("WebMD Health Communities") provided that, for the avoidance of doubt, no party shall have any obligations hereunder with respect to user-created communities in the MSN Web Communities channel. WebMD shall create and manage only one section devoted to health-related communities which shall be the WebMD Health Communities and all health-related communities created and/or managed by WebMD shall be part of the WebMD Health Communities. At all times during the Term the WebMD Health Communities shall have no less than eighty (80) distinct communities by the end of Year 1. Microsoft shall promote, as soon as commercially feasible as determined by Microsoft in its sole discretion, the WebMD Health Community from its MSN Web Communities channel by providing, among other things, hypertext address links, equally prominent promotion with other Microsoft-owned and moderated communities. WebMD agrees to promote non-health related Microsoft-owned and moderated MSN Web Communities on the WebMD Site and the Health Channel in a manner such that promotion of such communities shall be as prominent and in all places as any promotion of any other comparable non-health related communities, and otherwise where appropriate with the content and context, on the WebMD Site and Health Channel respectively. 16 17 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. At a minimum, WebMD shall include on each page of the WebMD Health Communities area a text link to the MSN Web Communities channel, the text of which shall be mutually agreed upon. WebMD agrees that, as soon as commercially feasible, the Health Channel Community shall be available to end users in a read-only format as well as a participatory format, and that any Health Channel users who desire to only read files in the Health Channel Community shall not be required to formally join the Health Channel Community by filling out a user questionnaire. WebMD shall incorporate the Network Frameworks on each WebMD Health Communities' page served to users that originate from the Health Channel in accordance with the SDK and the WebMD Health Communities shall otherwise be presented to end users so that it resembles and functions like the non-health related communities found within Microsoft's MSN Web Communities channel. For purposes of clarity, the Health Channel shall include the WebMD Health Communities. The provisions of this Section 3.7 shall apply to any localized WebMD Consumer Site, to the extent that local MSN Web Communities are available for the relevant market, and subject to the approval of the local MSN portal manager. WebMD shall develop, maintain, and host those things necessary and reasonably requested by Microsoft to implement the foregoing. 3.8 OTHER MICROSOFT INTERNET SERVICES. Except as prevented by any contracts between WebMD and third parties existing as of the Execution Date, upon notice from Microsoft that any such service or technology is available for distribution, WebMD agrees, as soon as commercially feasible, to prominently implement on the WebMD Site, and prominently provide end users with access from the WebMD Site to, each Microsoft Internet service and technology that is available on the MSN Site, including, but not limited to, MSN Web Search, Microsoft Chat, MSN Messenger Service, Hotmail, a Microsoft business, e-commerce, communication service and technology, which includes a common format and process for exchanging products, business information, promotional information and other business data over the Internet, and a Microsoft web hosting service and technology, which includes software and tools that enable web site creation and hosting, and all other Microsoft Internet services not otherwise specifically addressed in other Sections of this Agreement that are available on the MSN Site ("Other Microsoft Internet Services") pursuant to Microsoft's standard user interface and distribution terms. To such end, Microsoft shall provide WebMD with such materials, technology and support as it routinely provides to other third parties distributing such technologies. In the event that WebMD offers Other Microsoft Internet Services on the WebMD Site in accordance with the foregoing, WebMD shall not promote any competing technology on the WebMD Site, other than during a commercially reasonable transition period for discontinuing any such promotion. WebMD's obligations under this Section 3.8 are subject to WebMD's contractual obligations existing as of the Effective Date, and shall extend to any localized WebMD Consumer Site, to the extent that a localized version of the Other Microsoft Internet Services is available for the relevant market. WebMD shall develop, maintain, and host that which is necessary and reasonably requested by Microsoft to implement the services and technologies specified in this Section 3.8. Upon mutual agreement, the parties shall work together and with appropriate third parties to create appropriate industry standards. 4. USE/PROMOTION OF MICROSOFT TECHNOLOGY PLATFORM 4.1 USE OF THE MICROSOFT TECHNOLOGY PLATFORM. WebMD agrees, at WebMD's expense, to make Microsoft technology, including the Microsoft Technology Platform, WebMD's primary technology platform for developing, staging, operating and maintaining both the front and back ends of the Health Channel and the WebMD Site in accordance with this Section 4. 4.2 MCS CONSULTING AGREEMENT. In conjunction with its obligations in Section 4.1 above, WebMD agrees to convert, at WebMD's expense and within one year of the Effective Date, any current operating systems and other technology identified pursuant to the MCS review described herein used in developing, staging, operating, and maintaining the WebMD Site over to a PC-based platform that uses relevant Microsoft technology, including the Microsoft Technology Platform products. Such conversion shall be sufficiently comprehensive so that the majority of WebMD's systems shall utilize Microsoft technology, including the Microsoft Technology Platform products, and will consist of an architectural review of existing systems, and the development and implementation of a transition plan in conjunction with Microsoft Consulting Services ("MCS") as further set forth in the MCS agreement and work order ("Work Order") attached hereto as Exhibit F (collectively "MCS Agreement"). WebMD agrees to engage MCS pursuant to the MCS Agreement to assist WebMD in conducting the architectural review, developing a transition plan, and implementing such transition plan. This conversion shall include integration of 17 18 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Microsoft products that contain substantively similar functionality as the following combination of products: Internet Information Server, Site Server, SQL Server, Windows NT Server, and Microsoft's messaging technologies, including updates and upgrades thereto. WebMD and Microsoft agree to commence the architectural review as more fully described in the Work Order, within forty five (45) days of the Effective Date and to complete the architectural review within forty five (45) days of commencement. Based on the outcome of the architectural review, the parties shall agree within one additional week on a transition schedule ("Transition Schedule"), which shall include at a minimum an agreed upon additional MCS work order ("Transition Schedule Work Order") detailing the parties' responsibilities under the Transition Schedule. The transition shall be completed no later than 360 days following the Effective Date, unless the parties agree otherwise in the Transition Schedule. In the event that any delays caused by MCS result in a delay in any deadline or schedule described herein, such deadline or schedule shall be revised to take into account the MCS-caused delays. 4.3 PROMOTION OF MICROSOFT TECHNOLOGY PLATFORM. WebMD agrees that, once the conversion process described in Section 4.2 above has been completed, Microsoft may reference the WebMD Site in promotional and marketing materials as a showcase or reference site for Microsoft technology used by WebMD. Further, WebMD agrees to prominently promote the Microsoft technology, including the Microsoft Technology Platform products, used by WebMD by prominently mentioning such products in WebMD marketing materials including those aimed at physicians and consumers, including without limitation in press releases, sales literature, and promotional brochures. Prior to the completion of the conversion process described in Section 4.2 above, WebMD agrees to prominently promote the Microsoft technology, including the Microsoft Technology Platform products, as preferred by WebMD by prominently mentioning such products in WebMD marketing materials including those aimed at physicians and consumers, including without limitation in press releases, sales literature, and promotional brochures. 4.4 MCS CONSULTANT EXPENSE. Notwithstanding anything to the contrary in Section 4.1 and 4.2 above and the attached MCS Agreement, its attached Work Order or any subsequent Work Order, in exchange for all amounts paid to Microsoft by WebMD for Microsoft Consulting Services under Section 4.1 and 4.2, the MCS Agreement and all Work Orders, Microsoft shall provide over the Term of the Agreement Advertising, marketing and/or promotional programs for content and/or services on the WebMD Site by Microsoft or any party referred by Microsoft in a total value of no less than the amount, matched dollar for dollar, of the payments made by WebMD for MCS Consulting Services up to two million five hundred thousand dollars ($2,500,000). For the avoidance of doubt, WebMD will be responsible for all reasonable travel and associated expenses incurred in the delivery of all MCS services, including, but not limited to, the consultant hours and additional consultant hours specified above. 4.5 WEBMD ADOPTION AND PROMOTION OF MICROSOFT TECHNOLOGIES. WebMD shall adopt, and Microsoft and WebMD will work together to promote and establish, Microsoft's interoperability framework for healthcare ("MICROSOFT HEALTHCARE INTEROPERABILITY FRAMEWORK"). The Microsoft Healthcare Interoperability Framework is a multilevel standard designed to provide interoperability between applications and systems across desktops PCs, servers, networks, and legacy systems in the healthcare industry. The Microsoft Healthcare Interoperability Framework includes the Active X for Healthcare standard and BizTalk (which together include components of COM, DCOM, COM+, and XML or other enhancements). 4.6 ELECTRONIC COMMERCE PLATFORMS. Over an agreed-upon period of time, Microsoft will use reasonable efforts to facilitate dialog among other key industry partners on the development of multiple electronic commerce platforms that bridge Physicians, Hospitals, Payors, Employers and Suppliers and the integration of such platforms with the Medical Professionals Section's functionality. 4.7 DISTRIBUTED APPLICATIONS. Microsoft will use reasonable efforts to encourage its major ISV alliance partners to develop key distributed applications based on Microsoft technologies that would operate in conjunction with the functionality and content of the WebMD Site, including the development of distributed applications that would reside within the employer domain and that would provide enhanced positioning to WebMD as an intranet-based offering. 18 19 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 4.8 BILLING INITIATIVES. Microsoft will use reasonable efforts to explore the development of an electronic EOB delivery system for implementation on the Medical Professionals Section, based on available technology. 5. MARKETING/HEALTHCARE TECHNOLOGY AREA WebMD agrees, for the term of this Agreement, to incorporate a "Healthcare Technology" section into the Medical Professionals Section no more than two levels down from the top level page of the Medical Professionals Section, that provides tips and background information about Microsoft technology and exclusively promotes Microsoft technologies and Microsoft authorized independent software vendors. The Healthcare Technology section shall be located above-the-fold (at a screen resolution of 640 x 480 with a standard browser configuration) wherever placed. Further, WebMD agrees to prominently integrate links to the Healthcare Technology section from other parts of the WebMD Site where technology in the healthcare industry is discussed. The content, layout and presentation of the Healthcare Technology section shall be determined by Microsoft, provided that WebMD shall have the right to approve such content, layout and presentation, which approval shall not be unreasonably withheld. 6. SALES OBLIGATIONS 6.1 HEALTH CHANNEL ADVERTISING. Microsoft shall be solely responsible for selling and managing all Advertising on the Health Channel. Microsoft and WebMD will meet regularly to discuss sales strategies for selling Advertising to hospitals, HMOs, clinics, pharmaceutical companies, medical device companies, medical/surgical supply companies, life sciences companies, pharmacies, and health insurance companies. 6.2 CO-MARKETING COMMITMENT. Microsoft shall itself, or shall ensure that the Authorized Transferees (as defined in the Master Agreement entered into as of April 10, 1999 between the parties) or other third parties , provide, during the period beginning on the Effective Date and ending on the second year anniversary of the Effective Date, a combined total value of no less than fifty million dollars ($50,000,000), and WebMD shall provide a total of no less than the same amount matched dollar for dollar, on Advertising, marketing and/or promotional programs for content and/or services reflecting the combined brands of WebMD and the other parties' contributing money to each such program and approved in advance by all of the parties' contributing money to each such program. For example, such programs may be co-presented by WebMD and MSN, or Web MD and Microsoft, or WebMD and Authorized Transferees, or WebMD and a Microsoft independent software vendor ("ISV"), or WebMD, MSN and an Authorized Transferee, etc. All such programs shall be presented in offline (i.e., not on the Internet) arenas, e.g., on air, trade shows, print medium, etc., or online as mutually agreed between the parties. The parties agree that fifty percent (50%) of the amounts spent under this Section shall be devoted to demand-generation marketing campaigns for those specific Microsoft distribution partners identified by Microsoft. 7. MICROSOFT-SPONSORED WEBMD MEMBERSHIPS 7.1 GENERAL. Microsoft agrees to sponsor up to five (5) million WebMD Membership Months during the Term of this Agreement, including without limitation two hundred and fifty thousand (250,0000) WebMD Memberships in calendar year 1999 and seven hundred and fifty thousand (750,0000) WebMD Memberships in calendar year 2000, pursuant to the terms and conditions set forth in this Section 7. As used herein, the term "sponsor" means that Microsoft will pay WebMD the Base Membership Fee for each such WebMD Membership, in accordance with Section 12.4 below. If, at any time during the Term of this Agreement, however, WebMD no longer implements a subscription revenue model, or ceases to engage in product upsell or ecommerce transactions, Microsoft and WebMD will make a commensurate modification to the obligation set forth in this Section 7.1, which modification shall take into consideration the loss of these revenue streams and Microsoft's ability to recoup amounts paid hereunder, provided that in no circumstances shall Microsoft's obligation set forth in this Section 7.1 be increased beyond the five (5) million WebMD Membership Months contemplated herein. 7.2 DISTRIBUTION PLAN. The parties agree to cooperate in good faith to develop a mutually agreed upon plan for promoting, offering, and distributing the Microsoft-sponsored WebMD Memberships ("DISTRIBUTION PLAN"). Notwithstanding Section 7.1, no Microsoft-sponsored WebMD Memberships shall be offered under this 19 20 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Agreement until the parties have agreed upon the Distribution Plan. The Distribution Plan will include, among other elements, the following: (A) estimates of the number of Microsoft-sponsored WebMD Memberships to be in effect on a quarterly basis during the Term of this Agreement, and steps to be taken by WebMD to promote active usage of the Medical Professionals Section by End User Members and potential End User Members; (B) in any given year during the first three years of the Term (including without limitation the calendar year 2000), no more than one million (1,000,000) Microsoft-sponsored WebMD Memberships shall be provided; (C) all promotions and offerings of Microsoft-sponsored WebMD Memberships shall require a minimum twelve (12) month subscription; (D) if an End User Member with a Microsoft-sponsored WebMD Membership fails to access the Medical Professionals Section at least once every four (4) months, then such End User Member's WebMD Membership shall no longer qualify as a Microsoft-sponsored WebMD Membership and Microsoft shall no longer be required to sponsor such End User Member's Membership even if WebMD allows the End User Member to continue to access the Medical Professionals Section; (E) Microsoft shall be entitled to offer Microsoft- sponsored WebMD Memberships, directly or indirectly through third parties, to End User Members; and (F) for each End User Member of a Microsoft-sponsored WebMD Membership, a plan for WebMD to devote at least fifty dollars ($50) on training on the use of the Medical Professionals Section. 7.3 WARRANT AGREEMENT. Notwithstanding the foregoing, in the event that the agreement regarding the issuance of certain warrants from WebMD to Microsoft (which agreement is under final negotiation by the parties as of May 3, 1999) ("WARRANT AGREEMENT") is not executed by the parties within ten (10) days of the execution of this Agreement, then, at Microsoft's option, the provisions of this Section 7 and the provisions in Section 12.4 shall be null and void and neither party shall have any further obligation or liability under such Sections. 8. MICROSOFT TRAINING AND PROMOTION OF WEBMD SERVICE 8.1 INTERNAL MICROSOFT TRAINING. Microsoft shall use reasonable efforts to promote the functionality offered by the Medical Professionals Section of the WebMD Site to those portions of Microsoft's sales and marketing force that specifically target healthcare customers or Microsoft independent software vendors that create software specifically designed for healthcare customers using Microsoft products. 8.2 MARKETING PLAN. The parties agree to cooperate in good faith to develop a mutually agreed upon plan for promoting the WebMD Site and related services ("MARKETING PLAN"). The Marketing Plan will include, among other elements, the following: (A) Microsoft will use reasonable efforts to jointly call, with WebMD's sales force, Microsoft's fifty (50) largest enterprise customers (by headcount), as appropriate, for the purposes of promoting a WebMD/MSN solution as an intranet application, as soon as practicable given product development and planning considerations; (B) Microsoft will include, at no charge to WebMD, WebMD banners, as approved by Microsoft, in the printed version of the Medical Industry Directory and feature WebMD on the www.microsoft.com/industry/health web site, subject to Microsoft's standard terms, policies and editorial considerations applicable to third party banners and features; (C) Microsoft will use reasonable efforts to assist WebMD in submitting editorial content to the editors of Windows in Healthcare magazine; and 20 21 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. (D) Microsoft and WebMD, together with such other Microsoft healthcare channel partners as Microsoft and WebMD mutually agree upon, will commit to have joint booth space at mutually acceptable strategic Microsoft Partner Pavilions at selected healthcare tradeshows sponsored by Microsoft or where Microsoft has a significant presence. Examples of potential tradeshows include HIMSS, NMHCC, MGMA, and the Windows on Healthcare Conference. 9. PROPRIETARY RIGHTS The parties agree that except as expressly licensed to WebMD in this Agreement or a separate license agreement, Microsoft, WebTV, and MSNBC, respectively, shall retain all right, title, and interest in any and all materials delivered by Microsoft, WebTV and MSNBC to WebMD pursuant to this Agreement. The parties further agree that except as expressly licensed to Microsoft, WebTV, and MSNBC in this Agreement or a separate license agreement, WebMD and/or its suppliers shall retain all right, title and interest in and to the WebMD Content (as defined in Section 14.1 below). No party shall have any rights to any materials, content, feature or technology, etc. provided by the other party hereunder except as specifically provided in this Agreement and shall not alter, modify, copy, edit, format, translate, create derivative works of or otherwise use any materials, content, feature or technology, etc. provided by the other party except as explicitly provided herein or approved in advance in writing by the other party. If any parties agree to jointly develop any content, materials, services, technology, features or otherwise, ownership of such development shall be detailed in a separate agreement prior to the start of any development. 10. CONFIDENTIALITY 10.1 Microsoft, WebTV, MSNBC, and WebTV acknowledge and agree that the terms and conditions of the Microsoft Corporation Non-Disclosure Agreement dated as of even date herewith ("NDA"), attached hereto as Exhibit H, are incorporated into this Agreement and that all of the terms of this Agreement (including but not limited to its existence) and all discussions and negotiations related thereto are considered Confidential Information as defined in the NDA. In the event that any of the incorporated terms of the NDA are inconsistent with or conflict with this Agreement, then the terms of this Agreement shall control. 10.2 Each Party may disclose the terms and conditions of this Agreement to its employees, affiliates and its immediate legal and financial consultants on a need to know basis as required in the ordinary course of that Party's business, provided that such employees, affiliates and/or legal and/or financial consultants agree in writing in advance of disclosure to be bound by this Section 11, and may disclose Confidential Information as required by government or judicial order, provided each Party gives the other Party prompt notice of such order and complies with any protective order (or equivalent) imposed on such disclosure. Further, the parties acknowledge that this Agreement, or portions thereof, may be required under applicable law to be disclosed, as part of or an exhibit to a party's required public disclosure documents. If any party is advised by its legal counsel that such disclosure is required, it will notify the other in writing and the parties will jointly seek confidential treatment of this Agreement to the maximum extent reasonably possible, in documents approved by both parties and filed with the applicable governmental or regulatory authorities. The parties may disclose Aggregate Information subject to any User-initiated or other prohibition contemplated under Section 2.6. The parties may disclose any Personal Information as permitted by the User to whom it pertains, subject to Section 2.6. 10.3 Each Party acknowledges that monetary damages may not be a sufficient remedy for unauthorized disclosure or use of Confidential Information and that each Party may seek, without waiving any other rights or remedies, such injunctive or equitable relief as may be deemed proper by a court of competent jurisdiction. 21 22 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 11. LICENSES 11.1 BY MICROSOFT/MSNBC. (A) TRADEMARK LICENSE. (I) Microsoft hereby grants to WebMD a non-exclusive, non-transferable, personal license to use the Microsoft MSN logos as provided by Microsoft under this Agreement for use as part of the Network Frameworks header and footer (the "MSN Logos"), and any other Microsoft trademark or logo as may be provided by written notice from Microsoft for use under this Agreement (the Microsoft Marks"), solely in connection with the Health Channel and in accordance with the terms of this Agreement, including the use specifications in Exhibit G. Except as provided in this Trademark License, this Agreement does not grant WebMD any right, title, interest, or license in or to any of Microsoft's names, logos, trade dress, designs, or other trademarks. Unless otherwise provided herein or agreed upon by the parties, WebMD's use shall be mutually approved in advance. (II) WebMD acknowledges, as between WebMD and Microsoft, Microsoft's sole ownership of the MSN Logos and Microsoft Marks worldwide and all associated goodwill. WebMD's use of the MSN Logos and Microsoft Marks, as between the parties, shall inure solely to the benefit of Microsoft. WebMD hereby assigns and shall assign in the future to Microsoft all rights it may acquire by operation of law or otherwise in the MSN Logos and Microsoft Marks, including all applications or registrations therefore, along with the goodwill associated therewith. (III) WebMD shall fully correct and remedy any deficiencies in its use of the MSN Logos, Microsoft Marks and/or the quality of the Health Channel where the MSN Logos or Microsoft Marks appear, upon reasonable notice from Microsoft. (IV) Microsoft shall have the sole right to and in its sole discretion may commence, prosecute or defend, and control any action concerning the MSN Logos or Microsoft Marks. WebMD shall not during the Term of this Agreement contest the validity of, by act or omission jeopardize, or take any action inconsistent with, Microsoft's rights or goodwill in the MSN Logos or Microsoft Marks in any country, including attempted registration of the MSN Logos or Microsoft Marks, or use or attempted registration of any mark confusingly similar thereto. (B) DISTRIBUTION OF THE MSN INTERNET TECHNOLOGIES. Microsoft grants to WebMD a limited, non-exclusive, non-transferable, royalty-free license to use, copy, execute, display, perform, and distribute the object code version of the client software ("Client Software"), if any, for each MSN Internet Service solely to provide such Client Software to end-users in conjunction with such end user's use of each respective MSN Internet Service from within the Health Channel and WebMD Site; provided that any inconsistency between this Section 11.1(b) and any license grant specifically contained in any Exhibit or any documentation provided with any Client Software shall be resolved in favor of such Exhibit or documentation. The following restrictions apply to the license granted in the preceding paragraph: (I) WebMD shall not use the Client Software for any purpose other than as set forth in this Agreement. (II) WebMD shall not rent, lease, sell, sublicense, assign, or otherwise transfer the Client Software. (III) WebMD may not reverse engineer, decompile or disassemble any Client Software or any components thereof. 22 23 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. (IV) WebMD may not distribute any Client Software on a stand-alone basis, e.g., other than in conjunction with the Health Channel and/or the WebMD Site. (V) WebMD shall maintain and not alter or remove any copyright, trademark, and other protective notices contained in the Client Software. (VI) WebMD's distribution of the Client Software shall be pursuant to a license agreement that shall include: (A) a license grant with a statement of ownership consistent with the terms of this Agreement; (B) a prohibition against reverse engineering, decompiling and disassembly of code; (C) a disclaimer of all express and implied warranties and conditions; (D) a disclaimer of direct, indirect, consequential, incidental, or special damages on behalf of WebMD's suppliers; (D) the U.S. Government restricted rights clause as provided herein and (E) a prohibition against further redistribution of the Client Software by end users. All rights not expressly granted herein are reserved by Microsoft. Microsoft and its suppliers shall retain title and all ownership rights to the Client Software. (C) DISTRIBUTION OF MSNBC CONTENT. MSNBC licenses to WebMD solely such rights as are necessary for WebMD to incorporate the MSNBC content into, and use MSNBC content as part of the Health Channel pursuant to Section 2.1(e) above, and solely in accordance with MSNBC's specific instructions with regard to any specific content. All rights not expressly granted herein are reserved by MSNBC. MSNBC and its suppliers shall retain title and all ownership rights to the MSNBC content. (D) WEBTV TRADEMARK LICENSE. In accordance with the development, hosting, and maintenance of a WebTV Health Channel pursuant to Section 3.1(a) above, WebTV and WebMD shall enter into a separate agreement regarding any use by WebMD of any WebTV trademarks on or in association with such WebTV Health Channel, as the parties may mutually agree. 11.2 BY WEBMD. (A) TRADEMARK LICENSE. (I) WebMD hereby grants to Microsoft, MSNBC, and WebTV a non-exclusive, non-transferable, personal license to use the WebMD logos (the "WebMD Logos") attached hereto as Exhibit I, and any other WebMD trademark or logo as may be provided by written notice from WebMD for use under this Agreement (the "WebMD Marks"), solely in connection with the Health Channel, WebTV Health Channel, MSNBC Health Section, and Microsoft's distribution of WebMD Offerings and in accordance with the terms of this Agreement. Except as provided in this Trademark License, this Agreement does not grant Microsoft any right, title, interest, or license in or to any of WebMD's names, logos, trade dress, designs, or other trademarks. Unless otherwise provided herein or agreed upon by the parties, Microsoft's use shall be mutually approved in advance. (II) Microsoft, WebTV and MSNBC acknowledge, as between Microsoft, WebTV, MSNBC and WebMD only, WebMD's sole ownership of the WebMD Logos and WebMD Marks worldwide and all associated goodwill. Microsoft's, WebTV's, and MSNBC's use of the WebMD Logos and WebMD Marks, as between the parties, shall inure solely to the benefit of WebMD. Microsoft, WebTV and MSNBC hereby assign and shall assign in the future to WebMD all rights they may acquire by operation of law or otherwise in the WebMD Logos and WebMD Marks, including all applications or registrations therefore, along with the goodwill associated therewith. (III) Microsoft, WebTV, and MSNBC shall fully correct and remedy any deficiencies in their respective use of the WebMD Logos and WebMD Marks and/or the quality of the Health Channel, WebTV Health Channel, or MSNBC Health Channel (respectively) or co-branded 23 24 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. offerings that incorporate all or portions of the Healthcare Professionals Section (with regard to Microsoft) where the WebMD Logos and/or WebMD Marks appear, upon reasonable notice from WebMD. (IV) WebMD shall have the sole right to and in its sole discretion may commence, prosecute or defend, and control any action concerning the WebMD Logos and WebMD Marks. Neither Microsoft, WebTV or MSNBC shall during the Term of this Agreement contest the validity of, by act or omission jeopardize, or take any action inconsistent with, WebMD's rights or goodwill in the WebMD Logos or WebMD Marks in any country, including attempted registration of the WebMD Logos or WebMD Marks, or use or attempted registration of any mark confusingly similar thereto. (B) DISTRIBUTION OF THE HEALTH CHANNEL. Except as prevented by any contracts between WebMD and third parties existing as of the Execution Date, WebMD licenses to Microsoft, MSNBC and WebTV all such rights as are necessary to permit each of them, on a worldwide basis, to use, copy, modify (subject to the terms of this Agreement), translate, execute, display, perform, distribute, transmit, broadcast in any fashion, through any means, to any party, as part of the MSN Site, WebTV, the MSNBC Site or other similar Microsoft, WebTV or MSNBC offering (e.g., on a portable device), the Health Channel, including, but not limited to all content, features, technologies, materials, components, branding, and other parts thereof and including but not limited to by way of Microsoft, WebTV, and/or MSNBC hosting the Health Channel on servers owned or designated by Microsoft, WebTV, and/or MSNBC. For avoidance of doubt, Microsoft Revenue shall include recognized net revenue earned and billed during the Term of this Agreement that is received by Microsoft, WebTV and MSNBC from Advertising on similar Microsoft, WebTV or MSNBC offerings (as referenced above) that incorporate the Health Channel pursuant to the terms of this Section 11.2(b). Notwithstanding the foregoing, within thirty (30) days of the Execution Date, WebMD shall provide Microsoft, MSNBC and WebTV with a list of all content, features, technologies, materials, components, branding, and other parts on the WebMD Site and Health Channel for which WebMD, pursuant to agreements in effect as of the Execution Date, cannot provide the foregoing rights ("Excluded Content"). WebMD shall use best efforts to, within one year of the Execution Date, either obtain comparable replacement content for such Excluded Content, or to otherwise obtain the necessary rights so that WebMD can grant Microsoft, MSNBC and WebTV the foregoing rights to such Excluded Content. (C) DISTRIBUTION OF MEDICAL PROFESSIONALS SECTION. During the Term of this Agreement, WebMD shall not, directly or indirectly, license, or agree to provide a WebMD Offering (as defined below) (i) to or in conjunction with any of the companies listed in Exhibit J-1, or (ii) that contain branding or co-branding promoting or highlighting the company(ies) listed in Exhibit J-1. During the Term of this Agreement, if WebMD, directly or indirectly, licenses, or agrees to provide a WebMD Offering (i) to or in conjunction with any of the companies listed in Exhibit J-2 or (ii) that contain branding or co-branding promoting or highlighting the company(ies) in Exhibit J-2, then WebMD shall inform and allow Microsoft to propose the incorporation of Microsoft's products and services in such WebMD Offering. WebMD shall keep Microsoft reasonably informed regarding all WebMD Offerings planned or under development. For the purposes of this Agreement, "WEBMD OFFERING" mean any co-branded or third party-branded Internet, intranet, broadcast or other electronic offering of health-related content, features, services, or technology that incorporates all or portions of the Medical Professionals Section. In addition, WebMD hereby licenses to Microsoft all such rights as are necessary to permit Microsoft to use, copy, execute, display, perform, distribute, transmit, and/or broadcast in any fashion, through any means, to any party, WebMD Offerings, including upon mutual agreement of the parties, distribution by Microsoft or its licensees hosting such WebMD Offerings on servers owned or designated by Microsoft or its licensees. 12. PAYMENTS In addition to payments required elsewhere in this Agreement and under the MCS Agreement, WebMD agrees to pay Microsoft the amounts set forth in this Section 12. 24 25 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 12.1 ADVANCE PAYMENT FROM WEBMD TO MICROSOFT. (A) YEARS 1 TO 5. In consideration for the rights granted hereunder, WebMD hereby agrees to pay Microsoft the following non-refundable yearly sums to be paid in equal quarterly installments within each Year, with the first installment due on the Effective Date (or the appropriate anniversary thereof) and subsequent installments due each ninety days thereafter for the remainder of the Term until paid: (I) In Year 1: a total of Twenty Nine Million Dollars ($29,000,000) ("First Year Fee") in Seven Million Two Hundred Fifty Thousand Dollar ($7,250,000) installments; (II) In Year 2: a total of Thirty One Million Five Hundred Thousand Dollars ($31,500,000) ("Second Year Fee") in Seven Million Eight Hundred Seventy Five Thousand Dollar ($7,875,000) installments; (III) In Year 3: a total of Thirty Four Million Dollars ($34,000,000) ("Third Year Fee") in Eight Million Five Hundred Thousand Dollar ($8,500,000) installments; (IV) In Year 4: a total of Thirty Two Million Five Hundred Thousand Dollars ($32,500,000) ("Fourth Year Fee") in Eight Million One Hundred Twenty Five Thousand Dollar ($8,125,000) installments; (V) In Year 5: a total of Thirty Five Million Dollars ($35,000,000) ("Fifth Year Fee") in Eight Million Seven Hundred Fifty Thousand Dollar ($8,750,000) installments. (VI) Notwithstanding the foregoing, in the event an agreement providing for an investment by Microsoft of a minimum of One Hundred Million Dollars ($100,000,000) in WebMD ("Investment Agreement") is not executed by the parties on the Execution Date of this Agreement, then, at WebMD's option, the first and second installments due under this Section 12.1(a), will be due on the earlier of the occurrence of any of the following: (1) The execution by the parties of the Investment Agreement; or (2) WebMD's closing of an initial offering to the public of its common stock pursuant to a registration statement effective under the Securities Act of 1933, as amended ("IPO") or the closing of any other private or public financing by WebMD; or (3) Any transaction under which there is a change in control of WebMD, excluding the acquisition of WebMD by Healtheon Corporation but otherwise including without limitation (a) a merger or any other combination of WebMD with another party where the shareholders of WebMD prior to such merger or combination own less than sixty-five percent (65%) of the merged or combined entity after such merger or combination; (b) any transaction or series of transactions whereby a third party acquires direct or indirect power to control the management and policies of WebMD, as applicable, whether through the acquisition of voting securities, by contract, or otherwise; (c) the sale or other transfer of any part of the WebMD Site or any other substantial portion of WebMD assets (whether in a single transaction or series of transactions), subject to Section 18.3 below. If WebMD delays payment of the first and second installments in accordance with this Section 12.1(a)(vi), then Microsoft may in its discretion delay payment of the First Year Guarantee and Second Year Guarantee (as defined below) for an equal period. 25 26 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. (B) ADVANCE PAYMENT FOR EXTENDED TERM/PAYMENTS FROM MICROSOFT. In the event that Microsoft elects to extend this Agreement pursuant to Section 13.2 below, WebMD hereby agrees to pay Microsoft the following non-refundable yearly sums to be paid in equal quarterly installments within each Year, with the first installment due on the appropriate anniversary of the Effective Date and subsequent installments due each ninety days thereafter for the remainder of the Extended Term until paid: (I) In Year 6: a total of Thirty Seven Million Five Hundred Thousand Dollars ($37,500,000) ("Sixth Year Fee"), in Nine Million Three Hundred Seventy Five Thousand Dollar ($9,375,000) installments; (II) In Year 7: a total of Forty Million Dollars ($40,000,000) ("Seventh Year Fee"), in Ten Million Dollar ($10,000,000) installments. 12.2 MICROSOFT REPORTS AND ADDITIONAL PAYMENTS. Within forty five (45) days following the end of each quarter of each Year (or as may be otherwise mutually agreed between the parties to satisfy WebMD's SEC reporting requirements), Microsoft will submit to WebMD a written report detailing Microsoft's Revenues for the preceding fiscal quarter ("Microsoft Revenue Reports"). In consideration for the rights granted by WebMD in the Warrant Agreement, Microsoft agrees to make the payments described below, which payments shall be submitted contemporaneously with the Microsoft Revenue Report for the last quarter of each Year, as appropriate. (A) PAYMENTS BY MICROSOFT TO WEBMD IN YEARS 1 TO 5. (I) During Year 1 of this Agreement, Microsoft agrees to pay WebMD one hundred percent (100%) of the Microsoft Revenues, until such time as WebMD has received a total amount equal to the First Year Fee, at which time Microsoft agrees to pay WebMD fifty percent (50%) of the Microsoft Revenues as detailed in the Year 1 Revenue Reports for the remainder of Year 1; provided that if WebMD's portion of the Microsoft Revenues in Year 1 is less than Twenty Two Million Five Hundred Thousand Dollars ($22,500,000) ("First Year Guarantee"), Microsoft will provide WebMD with the positive difference between the First Year Guarantee and WebMD's portion of the Microsoft Revenues; (II) During Year 2 of this Agreement, Microsoft agrees to pay WebMD one hundred percent (100%) of the Microsoft Revenues, until such time as WebMD has received a total amount equal to the Second Year Fee, at which time Microsoft agrees to pay WebMD fifty percent (50%) of the Microsoft Revenues as detailed in the Year 2 Revenue Reports for the remainder of Year 2; provided that if WebMD's portion of the Microsoft Revenues in Year 2 is less than Twenty Two Million Five Hundred Thousand Dollars ($22,500,000) ("Second Year Guarantee"), Microsoft will provide WebMD with the positive difference between the Second Year Guarantee and WebMD's portion of the Microsoft Revenues; (III) During the Year 3 of this Agreement, Microsoft agrees to pay WebMD one hundred percent (100%) of the Microsoft Revenues, until such time as WebMD has received a total amount equal to the Third Year Fee, at which time Microsoft agrees to pay WebMD fifty percent (50%) of the Microsoft Revenues as detailed in the Year 3 Revenue Reports for the remainder of Year 3; provided that if WebMD's portion of the Microsoft Revenues in Year 3 is less than Twenty Million Dollars ($20,000,000) ("Third Year Guarantee"), Microsoft will provide WebMD with the positive difference between the Third Year Guarantee and WebMD's portion of the Microsoft Revenues; (IV) During the Year 4 of this Agreement, Microsoft agrees to pay WebMD one hundred percent (100%) of the Microsoft Revenues, until such time as WebMD has received a total amount equal to the Fourth Year Fee, at which time Microsoft agrees to pay WebMD fifty percent (50%) of the Microsoft Revenues as detailed in the Year 4 Revenue Reports for the remainder of Year 4; provided that if WebMD's portion of the Microsoft Revenues in Year 4 is less than Seventeen Million Five Hundred Thousand Dollars ($17,500,000) ("Fourth Year 26 27 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Guarantee"), Microsoft will provide WebMD with the positive difference between the Fourth Year Guarantee and WebMD's portion of the Microsoft Revenues; (V) During the Year 5 of this Agreement, Microsoft agrees to pay WebMD one hundred percent (100%) of the Microsoft Revenues, until such time as WebMD has received a total amount equal to the Fifth Year Fee, at which time Microsoft agrees to pay WebMD fifty percent (50%) of the Microsoft Revenues as detailed in the Year 5 Revenue Reports for the remainder of Year 5; provided that if WebMD's portion of the Microsoft Revenues in Year 5 is less than Seven Million Five Hundred Thousand ($17,500,000) ("Fifth Year Guarantee"), Microsoft will provide WebMD with the positive difference between the Fifth Year Guarantee and WebMD's portion of the Microsoft Revenues. (B) PAYMENTS BY MICROSOFT TO WEBMD IN THE EXTEND TERM. During Year 6, if any, of the Term of this Agreement, Microsoft agrees to pay WebMD one hundred percent (100%) of the Microsoft Revenues until such time as WebMD has received a total amount equal to the Sixth Year Fee, at which time Microsoft agrees to pay WebMD fifty percent (50%) of the Microsoft Revenue as detailed in the Year 6 Revenue Reports for the remainder of Year 6. During Year 7, if any, of the Term of this Agreement, Microsoft agrees to pay WebMD one hundred percent (100%) of the Microsoft Revenues until such time as WebMD has received a total amount equal to the Seventh Year Fee, at which time Microsoft agrees to pay WebMD fifty percent (50%) of the Microsoft Revenue as detailed in the Year 7 Revenue Report for the remainder of Year 7. 12.3 WEBMD ADDITIONAL PAYMENTS. WebMD agrees to make the following additional payments, which payments shall be submitted within forty five (45) days following the end of the last quarter of each Year, as appropriate: During the each Year of the Term of this Agreement, WebMD agrees to pay Microsoft a sales commission of twenty five percent (25%) of all amounts paid to WebMD by Microsoft under Section 12.2(a) above up to the applicable yearly guarantee (i.e., in Year 1 the First Year Guarantee, in Year 2 the Second Year Guarantee, etc.). 12.4 PAYMENTS FOR MICROSOFT SPONSORSHIP COMMITMENT (A) WEBMD REPORTS AND INVOICE. On a quarterly basis, WebMD shall provide Microsoft with a report ("WEBMD QUARTERLY REPORT") that contains the following information, in accordance with any reporting forms that may be provided by Microsoft: (i) the number of Microsoft-sponsored WebMD Memberships during the just-completed quarter (including initial date of registration, End User Member location, and identity of party(ies) that assisted in the distribution of the End User Member's Microsoft-sponsored WebMD Membership); (ii) the amount payable by Microsoft based upon (i) the total number of Microsoft-sponsored WebMD Memberships during the just-completed quarter and (ii) the Base Membership Fee; (iii) the total number of Microsoft-sponsored WebMD Memberships sponsored by Microsoft since the Effective Date; and (iv) the amount of Promotional Payments due from WebMD to Microsoft in accordance with Section 12.4(b) below. WebMD shall send the WebMD Quarterly Reports and corresponding invoices to Microsoft no later than thirty days following the end of each fiscal quarter. (B) PAYMENT BY MICROSOFT. Microsoft agrees to pay invoices properly submitted in accordance with this Section 12.4 within forty five (45) days after Microsoft's receipt of the same. 27 28 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 12.5 DISTRIBUTION PAYMENTS BY WEBMD. To facilitate distribution of WebMD Memberships by Microsoft, WebMD agrees to pay Microsoft or Microsoft's designee $5 for each WebMD Membership Month that Microsoft sponsors hereunder ("DISTRIBUTION Payments"). Such payments shall be due, with regard to the Microsoft-sponsored WebMD Memberships in effect during a given quarter, thirty (30) days after issuance of the WebMD Quarterly Report for such quarter. Following written notice by Microsoft, WebMD shall direct all or some of the Distribution Payments due hereunder to third parties designated by Microsoft. 12.6 REVENUE SHARING FOR MEDICAL PROFESSIONALS SECTION. (A) WEBMD ADVERTISING/SPONSORSHIP REVENUES. WebMD will pay Microsoft fifty percent (50%) of all WebMD Advertising/Sponsorship Revenues pertaining to or derived from the Microsoft-sponsored WebMD Memberships and DuPont-sponsored WebMD memberships until such time as Microsoft has recouped, through the payments contemplated by this Section 12.6(a), all amounts paid by Microsoft to WebMD for Microsoft-sponsored WebMD Memberships provided under this Agreement, at which point WebMD will pay Microsoft twenty five percent (25%) of all WebMD Advertising/Sponsorship Revenues pertaining to or derived from the Microsoft-sponsored WebMD Memberships and DuPont-sponsored WebMD memberships for the remainder of the Term of this Agreement. If WebMD agrees to pay any third party a greater percentage of WebMD Advertising/Sponsorship Revenues than the then-current percentage of WebMD Advertising/Sponsorship Revenues to be paid to Microsoft hereunder, the percentage of WebMD Advertising/Sponsorship Revenues to be paid to Microsoft hereunder shall automatically be increased to equal the highest percentage of WebMD Advertising/Sponsorship Revenues to be paid to any third party. (B) WEBMD UPSELL REVENUES. WebMD will pay Microsoft fifteen percent (15.0%) of all WebMD Upsell Revenues pertaining to or derived from the Microsoft-sponsored WebMD Memberships and DuPont-sponsored WebMD memberships, during the Term of this Agreement. If WebMD agrees to pay any third party a greater percentage of WebMD Upsell Revenues than the percentage of WebMD Upsell Revenues to be paid to Microsoft hereunder, then the percentage of WebMD Upsell Revenues to be paid to Microsoft hereunder shall automatically be increased to equal the highest percentage of WebMD Upsell Revenues to be paid to any third party. (C) WEBMD E-COMMERCE REVENUES. WebMD will pay Microsoft fifteen percent (15.0%) of all WebMD E-Commerce Revenues pertaining to or derived from the Microsoft-sponsored WebMD Memberships and DuPont-sponsored WebMD memberships, during the Term of this Agreement. If WebMD agrees to pay any third party a greater percentage of WebMD E-Commerce Revenues than the percentage of WebMD E-Commerce Revenues to be paid to Microsoft hereunder, then the percentage of WebMD E-Commerce Revenues to be paid to Microsoft hereunder shall automatically be increased to equal the highest percentage of WebMD E-Commerce Revenues to be paid to any third party. (D) CALCULATION AND PAYMENTS. On a quarterly basis, WebMD shall provide Microsoft with a written statement together with payment for the amounts shown thereby to be due to Microsoft under this Section 12.6. Such statement shall be in a format approved by Microsoft that details, at a minimum, (i) the aggregate WebMD Advertising/Sponsorship Revenues, WebMD Upsell Revenues, and WebMD E-Commerce Revenues for the just completed quarter; (ii) Microsoft's allocated portion of such revenues; and (iii) such other information as Microsoft deems necessary to determine the amounts payable to Microsoft under this Section 12.6 12.7 GENERAL. Receipt or acceptance by the parties of any reports furnished pursuant to this Agreement or any sums paid hereunder shall not preclude such party from questioning the correctness thereof at any time, up to six (6) months after receipt of the report or payment, and in the event that any mistake is discovered in any such report or payment, and the party making the mistake is apprised of it, such party shall immediately rectify the mistake. 12.8 AUDITS. 28 29 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. (A) BY WEBMD. During the Term of this Agreement, Microsoft agrees to keep all usual and proper records and books of account and all usual and proper entries and other documentation relating to Microsoft Revenue and all payments to be made by Microsoft hereunder. During the Term and for a period of six (6) months following the expiration or termination of this Agreement, WebMD shall have the right to cause an audit and/or inspection to be made of such records of Microsoft in order to verify statements issued by Microsoft and Microsoft's compliance with the terms of this Agreement. Any such audit shall be conducted by an independent certified public accountant selected by WebMD (other than on a contingent fee basis) and reasonably acceptable to Microsoft. Any audit and/or inspection shall be conducted during regular business hours at Microsoft's facilities upon at least thirty (30) days prior written notice. Such audits shall be made no more often than once every twelve (12) months. (B) BY MICROSOFT. During the Term of this Agreement, WebMD agrees to keep all usual and proper records and books of account and all usual and proper entries and other documentation relating to the WebMD Quarterly Reports and all user and other reports submitted or to be submitted by WebMD hereunder. During the Term and for a period of six (6) months following the expiration or termination of this Agreement, Microsoft shall have the right to cause an audit and/or inspection to be made of such records of WebMD in order to verify statements issued by WebMD and WebMD's compliance with the terms of this Agreement. Any such audit shall be conducted by an independent certified public accountant selected by Microsoft (other than on a contingent fee basis) and reasonably acceptable to WebMD. Any audit and/or inspection shall be conducted during regular business hours at WebMD's facilities upon at least thirty (30) days prior written notice. Such audits shall be made no more often than once every twelve (12) months. 12.9 COSTS. Except as expressly provided herein, all costs incurred by any party in fulfilling any of its obligations under this Agreement shall be borne by that party, without reimbursement from the other party. 13. TERM/DEFAULT/TERMINATION 13.1 TERM. This Agreement shall commence on the Effective Date and continue, except as provided in Section 3.1(b)(ix) above, for a period of five (5) years following the earlier of (a) the thirtieth day following the Effective Date or (b) the date on which the transition page (referenced in Section 2.1(a)) is publicly available, unless earlier terminated or extended as provided in this Section 13 (the "Term"). 13.2 RENEWAL. The Term of this Agreement can be extended by Microsoft in its sole discretion for successive additional periods of one (1) year each ("Extended Term") pursuant to the same terms and conditions set forth herein. To exercise the foregoing renewal option, Microsoft shall provide WebMD with written notice of same at least ninety (90) days prior to the expiration of the original Term of this Agreement. 13.3 TERMINATION FOR CAUSE (A) BY MICROSOFT/WEBMD. In addition to any other rights and/or remedies that such party may have under the circumstances, all of which are expressly reserved, and except as expressly provided in Section 13.3(b) below, Microsoft and WebMD may terminate this Agreement at any time if: (I) the other party (i.e., Microsoft or WebMD) is in material breach of any warranty, representation, term, condition or covenant of this Agreement, other than those contained in Section 10, and fails to cure that breach within forty-five (45) days after written notice thereof; or (II) The other party is in material breach of Section 10; or (III) the other party becomes insolvent or makes any assignment for the benefit of creditors or similar transfer evidencing insolvency; or suffers or permits the commencement of any form of insolvency or receivership proceeding; or has any petition under any bankruptcy law 29 30 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. filed against it, which petition is not dismissed within sixty (60) days of such filing; or has a trustee or receiver appointed for its business or assets or any part thereof. (B) BY WEBTV, MSNBC, WEBMD. (I) Notwithstanding any other provision of this Agreement, and in addition to any other rights and/or remedies that such party may have under the circumstances, WebMD shall be entitled to terminate this Agreement solely with respect to the WebTV Health Channel, at any time if WebTV is in material breach of any warranty, representation, term, condition or covenant made by WebTV under this Agreement, other than those contained in Section 10, and fails to cure that breach within forty-five (45) days after written notice thereof, or is in material breach of Section 10. Further, WebMD shall be entitled to terminate this Agreement solely with respect to the MSNBC Health Section, at any time if MSNBC is in material breach of any warranty, representation, term, condition or covenant made by MSNBC under this Agreement, other than those contained in Section 10, and fails to cure that breach within forty-five (45) days after written notice thereof, or is in material breach of Section 10. (II) Correspondingly, in addition to any other rights and/or remedies that such party may have under the circumstances, WebTV shall be entitled to terminate this Agreement solely with respect to the WebTV Health Channel, at any time if WebMD is in material breach of any warranty, representation, term, condition or covenant made by WebMD under this Agreement solely with regard to the WebTV Health Channel, other than those contained in Section 10, and fails to cure that breach within forty-five (45) days after written notice thereof, or is in material breach of Section 10 (with regard to WebTV confidential information), and neither MSNBC nor Microsoft shall have a right of termination with regard to any such breach. Further, in addition to any other rights and/or remedies that such party may have under the circumstances, MSNBC shall be entitled to terminate this Agreement solely with respect to the MSNBC Health Section, at any time if WebMD is in material breach of any warranty, representation, term, condition or covenant made by WebMD under this Agreement solely with regard to the MSNBC Health Section, other than those contained in Section 10, and fails to cure that breach within forty-five (45) days after written notice thereof, or is in material breach of Section 10 (with regard to MSNBC confidential information), and neither WebTV nor Microsoft shall have a right of termination with regard to any such breach. For purposes of clarification, nothing herein shall limit Microsoft's right of termination under Section 3.3(a) above with regard to any material breach by WebMD that affects more than the WebTV Health Channel or the MSNBC Health Section. (C) SURVIVAL. Termination under Sections 13.3(a)(i)-(iii), and 13(b) shall be effective immediately upon written notice. In the event of termination hereunder, the following sections shall survive: Section 2.6 (as appropriate as provided therein), the first sentence of Section 4.3, Sections 9, 10, 12.8, 13.4, 14, 15, 18.2, 18.4, and 18.5. 13.4 EFFECT OF TERMINATION. (A) Upon termination, and subject to Section 13.3(b) above, each Party shall, at the other Party's direction, return or certify destruction of Confidential Information of such other Party. No Party shall be liable to the other for damages of any sort resulting solely from terminating this Agreement in accordance with its terms. If Microsoft terminates this Agreement pursuant to Section 13.3 on any date that is more than ninety (90) days after the Effective Date, then WebMD shall pay Microsoft all sums due and owing as of the date of termination, and further shall pay Microsoft two additional quarterly installments on the Advance Payments set forth in Section 12.1(a) or 12.1(b) (whichever section is applicable as of the date of termination). If WebMD terminates this Agreement pursuant to Section 13.3 on any date that is more than ninety (90) days after the Effective Date, then Microsoft shall pay WebMD all sums due and owing as of the date of termination, and further shall pay WebMD an amount equal to two times the average amount 30 31 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. of Microsoft Revenue paid to WebMD under Section 12.2 above over the two quarters immediately preceding the quarter in which the termination occurs (i.e., [(Microsoft Revenue 1st Preceding Quarter + Microsoft Revenue for 2nd Preceding Quarter) / 2] x 2). (B) Upon expiration or termination of this Agreement, each party shall provide reasonable assistance to the other for such reasonable time and upon such terms and conditions as shall be mutually agreed upon in order to assure an orderly transition and wind down in such a manner as shall minimize disruption to the Users. The goal of the parties is to ensure a smooth and seamless transition for the user to maintain a high level of customer satisfaction. Subject to the foregoing, following expiration or termination of this Agreement, WebMD shall immediately provide Microsoft, WebTV, and MSNBC with all User Information WebMD collected prior to the expiration and termination which WebMD is required to provide under Sections 2.6 and 3.1(a) and (b) above. To the extent such rights have been or are obtained from User and subject to Section 2.6, each party may retain and continue to use all User Information in its possession following the expiration or termination of the Agreement. 14. WARRANTIES AND INDEMNIFICATION. 14.1 WEBMD WARRANTIES. WebMD warrants and represents that: (i) it has sufficient authority to enter into this Agreement and to grant the rights set forth herein; (ii) it has not previously and will not grant any rights to any third party that are inconsistent with the rights granted to Microsoft, MSNBC and/or WebTV herein; (iii) all materials delivered by WebMD to Microsoft and/or included in the Health Channel pursuant to this Agreement, excluding content provided by Microsoft (directly or through a third party) or MSNBC and used in accordance with their instructions ("WebMD Content") are owned or licensed by WebMD and do not infringe the copyrights, trademarks, service marks or any other personal or proprietary right of any third party; (iv) to the best of WebMD's knowledge after reasonable inquiry, the WebMD Site and Health Channel and all actions occurring on the WebMD Site and Health Channel are in compliance with all applicable laws, including, but not limited to laws governing confidential health care information (i.e., the Health Insurance Portability and Accountability Act of 1996 (HIPAA)); and (v) the Health Channel and all WebMD Content contained therein comply with the Specifications; (vi) WebMD will not upload or permit any upload of any messages, data, images or programs, excluding those provided to WebMD by Microsoft and uploaded in accordance with all Microsoft's directions, to the Health Channel or any Microsoft property or equipment, that would violate the property rights of others, including unauthorized copyrighted text, images, programs or trade secrets or other confidential and/or proprietary information, or trademarks or service marks used in an infringing fashion; (vii) the WebMD Content, to the best of WebMD's knowledge after reasonable inquiry, is factually accurate and does not contain any information, instruction or formula that might be injurious to anyone's physical well-being, and that it does not, and its use by Microsoft as permitted in this Agreement will not, defame or disparage any third party; (viii) WebMD shall be a member in good standing in the TRUSToE privacy program by the earlier of the Effective Date or the availability of the transition page described in Section 2.1(a) above, and shall remain such or be a member in good standing of another industry-recognized online privacy organization during the Term, WebMD shall adhere to information gathering, dissemination, privacy protection and other practices specified in the TRUSToE license agreement available at http://www.truste.org, as such agreement may be amended from time to time or such other organization's license, and with respect to the Health Channel, WebMD's policy program shall be consistent with the privacy policy displayed to end-users as part of the template; and (ix) WebMD has the right to include all parts, including but not limited to content, materials and services, and excluding Advertising, of the WebMD Consumer Site in the Health Channel and the right to grant to Microsoft all rights granted by WebMD to Microsoft under this Agreement, subject only to contracts in existence as of the Execution Date which create the limitations set forth in Exhibit __ hereto. 14.2 MICROSOFT, MSNBC AND WEBTV WARRANTIES. Microsoft warrants and represents that: (i) it has sufficient authority to enter into this Agreement, (ii) all materials delivered by Microsoft to WebMD pursuant to this Agreement (excluding any trademarks and logos) do not infringe the copyrights, trademarks, service marks or any other personal or proprietary right of any third party; (iii) to the best of its knowledge after reasonable inquiry, MSN and all actions occurring on the foregoing are in compliance with all applicable laws; and (iv) Microsoft is a member in good standing in the TRUSToE privacy program, and shall remain such or be a member in good standing of another industry-recognized online privacy organization during the Term of this Agreement, and Microsoft shall adhere to information gathering, dissemination, privacy protection and other practices specified in the TRUSToE 31 32 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. license agreement available at http://www.truste.org, as such agreement may be amended from time to time or such other organization's license. MSNBC warrants and represents that it has sufficient authority to enter into this Agreement. WebTV warrants and represents that it has sufficient authority to enter into this Agreement. 14.3 INDEMNIFICATION BY WEBMD. WebMD will indemnify Microsoft, MSNBC and WebTV from and against any loss, claim, liability, damage, action or cause of action (including, without limitation, reasonable attorneys' fees) brought against Microsoft by a third party and arising from or related to (a) the WebMD Content; (b) any materials or data provided by WebMD or at WebMD's direction to Microsoft; (c) any act or omission which if true would be a breach by WebMD of this Agreement; (d) any claim that the WebMD Site or Health Channel, or any action occurring on the WebMD Site or Health Channel, violates any applicable laws; (e) any claim that WebMD Content on the Health Channel is not factually accurate or contains information, instructions or formulas that are injurious to person's physical well-being, or defame or disparage a third party; (f) any information subject to HIPAA regulation or (g) the Medical Professionals Section; provided that Microsoft cooperates as set forth in Section 14.5. Microsoft reserves the right to immediately discontinue the placement of the Health Channel or to otherwise require the removal of any portion of the Health Channel and/or any links to the WebMD Site as provided in this Agreement, pending the satisfactory resolution of such matter, in the event that Microsoft receives a claim from a third party which alleges that the Health Channel, or any part thereof, or a section of the WebMD Site directly linked to by Microsoft or any portion thereof or any materials delivered hereunder: (a) violates any applicable laws, and/or (b) infringes the copyrights, trademarks, service marks or any other proprietary right of any third party; provided that Microsoft in good faith believes that such allegation has merit and provided that Microsoft may only discontinue or remove the relevant portion of the Health Channel or links impacted by or referenced in the claim. 14.4 INDEMNIFICATION BY MICROSOFT. Microsoft will indemnify WebMD from and against any loss, claim, liability, damage, action or cause of action (including, without limitation, reasonable attorneys' fees) brought against WebMD by a third party and arising from or related to any material contained within the Network Framework, any materials provided by Microsoft to WebMD, or any breach by Microsoft of the foregoing warranties, provided that WebMD cooperates as set forth in Section 14.5. WebMD reserves the right to immediately replace the relevant content from the Health Channel as provided in this Agreement, pending the satisfactory resolution of such matter, in the event that WebMD receives a claim from a third party which alleges that the Health Channel or any portion thereof or any materials delivered hereunder: (a) violates any applicable laws, and/or (b) infringes the copyrights, trademarks, service marks or any other proprietary right of any third party; provided that WebMD in good faith believes that such allegation has merit. 14.5 INDEMNIFICATION PROCESS. If any action shall be brought against a Party (the "Claimant") in respect to which indemnity may be sought from the another Party (the "Indemnifying Party") pursuant to the provisions of this Section, the Claimant shall promptly notify the Indemnifying Party in writing, specifying the nature of the action and the total monetary amount sought or other such relief as is sought therein. The Claimant shall cooperate with the Indemnifying Party at the Indemnifying Party's expense in all reasonable respects in connection with the defense of any such action. The Indemnifying Party may upon written notice to Claimant undertake to control and conduct all proceedings or negotiations in connection therewith, assume and control the defense thereof, and if it so undertakes, it shall also undertake all other required steps or proceedings to settle or defend any such action, including the employment of counsel which shall be reasonably satisfactory to Claimant, and payment of all reasonably incurred expenses. Claimant shall have the right to employ separate counsel to provide input into the defense, at Claimant's own cost. The Indemnifying Party shall reimburse Claimant upon demand for any payments made or loss suffered by it at any time after the date of tender, based upon the judgment of any court of competent jurisdiction or pursuant to a bona fide compromise or settlement of claims, demands, or actions, in respect to any damages to which the foregoing relates. The Indemnifying Party shall not settle any claim or action under this Section 14.5 on Claimant's behalf without first obtaining Claimant's written permission, which permission shall not be unreasonably withheld. 14.6 PRODUCTS OR SERVICES DELIVERED UNDER THE TERMS OF THIS AGREEMENT SHALL BE SUBJECT TO THE TERMS OF THE LIMITED WARRANTY STATEMENT, IF ANY, SPECIFIED BY THE DELIVERING PARTY FOR THE SPECIFIC PRODUCT OR SERVICE. CERTAIN SOFTWARE 32 33 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. PRODUCTS MAY BE PROVIDED TO THE OTHER PARTY "AS IS" WITHOUT WARRANTY OR CONDITION OF ANY KIND, IF SO DESIGNATED BY THE LICENSOR. FOR SUCH PRODUCTS, THE ENTIRE RISK AS TO THE RESULTS AND PERFORMANCE OF SUCH SOFTWARE IS ASSUMED BY THE RECEIVING PARTY AND ITS CUSTOMERS AND SUBLICENSEES, IF ANY. THE WARRANTIES SET FORTH IN SECTIONS 14.1, 14.2, AND THIS SECTION 14.6 ARE THE ONLY WARRANTIES MADE BY THE PARTIES. EACH PARTY DISCLAIMS ANY AND ALL OTHER WARRANTIES OR REPRESENTATION EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY, TITLE, AND FITNESS FOR A PARTICULAR PURPOSE. NO PARTY WARRANTS THAT ACCESS TO OR USE OF THE SITES OR CHANNELS WILL BE UNINTERRUPTED OR ERROR-FREE, OR THAT ANY SOFTWARE OR SERVICES WILL MEET ANY PARTICULAR CRITERIA OF PERFORMANCE OR QUALITY. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, WEBMD EXPRESSLY ACKNOWLEDGES AND AGREES THAT, EXCEPT AS EXPRESSLY PROVIDED HEREIN, MICROSOFT HAS NOT MADE ANY EXPRESS OR IMPLIED REPRESENTATIONS, ASSURANCES AND/OR WARRANTIES REGARDING THE NUMBER OF CLICK THROUGHS OR WEBMD SITE WEB PAGE VIEWS WHICH MAY BE GENERATED BY THE PLACEMENT OF LINKS HEREUNDER AND THAT WEBMD HAS NOT RELIED ON ANY STATEMENTS BY MICROSOFT OR ANY THIRD PARTIES IN RELATION THERETO IN ENTERING INTO THIS AGREEMENT. 15. LIMITATION OF LIABILITIES NO PARTY SHALL BE LIABLE TO THE OTHER FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, PUNITIVE OR SPECIAL DAMAGES, ARISING OUT OF OR RELATED TO THIS AGREEMENT INCLUDING, WITHOUT LIMITATION, DAMAGES FOR LOSS OF BUSINESS PROFITS, BUSINESS INTERRUPTION, LOSS OF BUSINESS INFORMATION, AND THE LIKE, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. THIS SECTION SHALL NOT APPLY TO ANY PARTY'S (A) ABILITY TO OBTAIN INJUNCTIVE OR OTHER EQUITABLE RELIEF; (B) OBLIGATIONS UNDER SECTION 10 OR THE NDA; AND (C) INDEMNIFICATION OBLIGATIONS UNDER SECTION 14. 16. NON-EXCLUSIVITY; PRESS RELEASES 16.1 Except as specifically stated herein, nothing in this Agreement will be construed as restricting any Party's ability to acquire, license, develop, manufacture or distribute for itself, or have others acquire, license, develop, manufacture or distribute for itself, content, software, news, sites, search services, search results or the like, which is the same or similar to that contemplated by this Agreement, or to market, promote and distribute same in addition to that contemplated by this Agreement. 16.2 No party will issue any press release or make any public announcement(s) relating in any way whatsoever to this Agreement or the relationship established by this Agreement without the express prior written consent of the other party, which consent shall not be unreasonably withheld. However, the parties acknowledge that this Agreement, or portions thereof, may be required under applicable law to be disclosed, as part of or an exhibit to a party's required public disclosure documents. If any party is advised by its legal counsel that such disclosure is required, it will notify the other in writing and the parties will jointly seek confidential treatment of this Agreement to the maximum extent reasonably possible, in documents approved by both parties and filed with the applicable governmental or regulatory authorities. 33 34 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 17. INSURANCE 17.1 Effective with the inception and throughout the Term of this Agreement, WebMD shall procure and maintain the following insurance coverage. Such insurance shall be in a form and with insurers reasonably acceptable to Microsoft, and shall comply with the following minimum requirements: Commercial General Liability Insurance of the Occurrence Form with policy limits of not less Three Million Dollars ($3,000,000) combined single limit each occurrence for Bodily Injury and Property Damage combined, and Two Million Dollars ($2,000,000) Personal and Advertising Injury Limit; and 17.2 WebMD shall procure and maintain the following insurance coverage. Such insurance shall be in a form and with insurers reasonably acceptable to Microsoft, and shall comply with the following minimum requirements: Errors & Omissions Liability / Professional Liability Insurance with policy limits of not less than Four Million Dollars ($4,000,000) each claim with a deductible of not more than $50,000.00. Such insurance shall include coverage for infringement of proprietary rights of any third party, including without limitation copyright and trademark infringement as related to WebMD's performance under this Agreement. The Errors & Omissions Liability / Professional Liability Insurance retroactive coverage date will be no later than the Effective Date of this Agreement. Upon expiration or termination of this Agreement, WebMD will maintain an extended reporting period providing that the claims first made and reported to the insurance WebMD within one year after the end of this Agreement will be deemed to have been made during the policy period. Promptly upon execution of the Agreement, WebMD shall provide to Microsoft proof evidencing full compliance with the insurance requirements set forth herein. WebMD shall notify Microsoft in writing if WebMD's insurance coverage is to be canceled or materially altered so as to not comply with the requirements of this section with such notice to provided be no later than the later of (i) at least thirty (30) days in advance of the cancellation or (ii) twenty-four (24) hours after WebMD receives notice of the cancellation. 18. GENERAL PROVISIONS 18.1 INDEPENDENT CONTRACTORS. The Parties are independent contractors with respect to each other, and nothing in this Agreement shall be construed as creating an employer-employee relationship, a partnership, agency relationship or a joint venture between the Parties. 18.2 GOVERNING LAW. This Agreement shall be governed by the laws of the State of New York as though entered into by New York residents and to be performed entirely within the State of New York. The parties consent to exclusive jurisdiction and venue in the state and federal courts sitting in New York. In any action or suit to enforce any right or remedy under this Agreement or to interpret any provision of this Agreement, the prevailing Party shall be entitled to recover its costs, including reasonable attorneys' fees. 18.3 ASSIGNMENT. No party may transfer, assign or sublicense this Agreement, or any rights and/or obligations hereunder, whether by contract or by operation of law, except with the express written consent of the other parties, and any attempted transfer, assignment or sublicense by a party in violation of this Section shall be void and shall constitute a material default and breach of this Agreement. For purposes of this Agreement, an "transfer" under this Section shall be deemed to include, without limitation, the following: (a) a merger or any other combination of an entity with another party where the shareholders of WebMD prior to such merger or combination own less than sixty-five percent (65%) of the merged or combined entity after such merger or combination; (b) any transaction or series of transactions whereby a third party acquires direct or indirect power to control the management and policies of WebMD or Microsoft, as applicable, whether through the acquisition of voting securities, by contract, or otherwise; (c) the sale or other transfer of any part of the business obligated or benefiting from this Agreement or any other substantial portion of assets (whether in a single transaction or series of transactions), or (d) the transfer of any rights or obligations in the course of a liquidation or other similar reorganization of an entity. Subject to the provisions of this Section, this Agreement shall be binding upon and inure to the benefit of each party and their respective successors and assigns. Any transfer, assignment or sublicense approved by a party will at a minimum require that the party to which this Agreement, or any rights and/or obligations hereunder, is transferred, assigned or sublicensed succeeds the transferring, assigning, or sublicensing 34 35 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. party as to all obligations (including the obligations set forth in this Section 18.3) of the transferring, assigning or sublicensing party. 18.4 CONSTRUCTION. In the event that any provision of this Agreement conflicts with governing law or if any provision is held to be null, void or otherwise ineffective or invalid by a court of competent jurisdiction, (i) such provision shall be deemed to be restated to reflect as nearly as possible the original intentions of the Parties in accordance with applicable law, and (ii) the remaining terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect. This Agreement has been negotiated by the Parties and their respective counsel and will be interpreted fairly in accordance with its terms and without any strict construction in favor of or against any party. The section headings used in this Agreement are intended for convenience only and shall not be deemed to affect in any manner the meaning or intent of this Agreement or any provision hereof. 18.5 NOTICES. All notices and requests in connection with this Agreement shall be given in writing and shall be deemed given as of the day they are received either by messenger, delivery service, or in the United States of America mail, postage prepaid, certified or registered, return receipt requested, and addressed as follows:
To WebMD: To Microsoft: WebMD, Inc. Microsoft Corporation 400 The Lenox Building One Microsoft Way 3399 Peachtree Road NE Redmond, WA 98052-6399 Atlanta, Georgia 30326 Phone: 404.479.7600 Phone: 425.882.8080 Fax: 404.479.7603 Fax: 425.936.7329 Attention: General Counsel Attention: Senior Business Dev't Mgr./Finance Copy to: Chief Financial Officer Copy to: Law & Corporate Affairs, US Legal (not effective for notice purposes) Fax: 425.936.7409 To MSNBC: To WebTV: -------- -------- MSNBC WebTV Networks, Inc. One Microsoft Way 1250 Charleston Avenue Redmond, WA 98052 Mt. View, CA 94043 Attention: Dir. Business Dev't Attention: V.P. Network Media Group Phone: 425.882.8080 Phone: 650.614.6012 Fax: 425.936.7329 Fax: 650.463.1529 Copy to: Microsoft Law & Copy to: Corporate Counsel Corporate Affairs, US Legal Fax: 650.614.2782 Fax: 425.936.7409
or to such other address as a Party may designate pursuant to this notice provision. 18.6 EXHIBITS. The following Exhibits are part of this Agreement and are hereby incorporated by reference: Exhibit A-1 Health Channel Content Specifications Exhibit A-2 Health Channel Technical Specifications Exhibit B In Service Promotion Box Exhibit C MSN Module Exhibit D Logo Guidelines Exhibit E MS Online ID Evaluation Program
35 36 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Exhibit F MCS Agreement and Work Order Exhibit G Use Specifications for the MSN Logos Exhibit H Non-Disclosure Agreement Exhibit I WebMD Logos Exhibit J-1 Medical Professionals Section List #1 Exhibit J-2 Medical Professionals Section List #2
18.7 ENTIRE AGREEMENT. This Agreement shall not be effective until signed by both Parties. This Agreement constitutes the entire agreement between the Parties with respect to the subject matter hereof and supersedes all prior and contemporaneous agreements or communications. This Agreement shall not be modified except by a written agreement dated subsequent to the date of this Agreement and signed on behalf of WebMD and Microsoft by their respective duly authorized representatives. No waiver of any breach of any provision of this Agreement shall constitute a waiver of any prior, concurrent or subsequent breach of the same or any other provisions hereof, and no waiver shall be effective unless made in writing and signed by an authorized representative of the waiving party. [remainder of page intentionally left blank] 36 37 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. The parties have caused this Agreement to be executed by their duly authorized representatives as of the Effective Date.
MICROSOFT CORPORATION WEBMD, INC. By /s/ Laura Jennings By /s/ W. Michael Heekin ----------------------------------- -------------------------------------------- Name (Print) Laura Jennings Name (Print) W. Michael Heekin --------------------------------- ------------------------------------------ Title Vice President Title Executive Vice President and Secretary -------------------------------- ----------------------------------------- Date 6/4/99 Date 5/10/99 ----------------------------------- ------------------------------------------ MSNBC INTERACTIVE NEWS, L.L.C WEBTV NETWORKS, INC. (Signing solely with regard to Sections 2.1, (Signing solely with regard to Sections 2.1, 2.6, 3.5, 2.3(a), (b), (e), and (g), 2.6, 3.5, 9, 10, 11.1(c), 9, 10, 11.1(c)-(d), 11.2(a)-(b), 12.9, 13, 14.6, 15, 16, 18, 11.2(a)-(b), 12.9, 13, 14.6, 15, 16, 18, Exhibit A-1 paragraphs(A)(3)-(5)and (C), and Exhibit A-2 Exhibit A-1 paragraphs (A)(3)-(5) and (C), and Exhibit A-2) By /s/ John C. Nicol By /s/ Vce Poletto -------------------------------- ------------------------------------------- Name (Print) John C. Nicol Name (Print) Vce Poletto -------------------------------- ----------------------------------------- Title General Manager Title VP -------------------------------- --------------------------------------- Date 5/26/99 Date 6/1/99 -------------------------------- ----------------------------------------
37 38 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Exhibit A-1 Health Channel Content Specifications A. General Content Requirements: 1. Layout of the Health Channel and Home Page of the MSN Health Section: WebMD shall ensure that the layout and presentation of materials within the Health Channel, including the amount and placement of advertising and all other space, will be consistent with the Network Frameworks and SDK as further described in this Agreement and otherwise as mutually approved between the parties. For the avoidance of doubt, all WebMD materials available to end users whose access to such materials originates on the Health Channel or on any MSN Site or page thereof shall be displayed to such end user in the Network Framework. WebMD shall include, at a minimum, a 468 x 60 pixel banner space at the top of every page so that it is visible above-the-fold at a screen resolution of 640 x 480 with a standard browser configuration. Microsoft and WebMD shall work together to determine the layout and presentation of the home page of the MSN Health Section so that it is consistent with the layout and presentation of the Health Channel and all other aspects of the MSN Health Section, subject to Microsoft's final approval. 2. Content for the Health Channel: Except as otherwise specifically provided in this Agreement, all content, materials, features, technology, services, etc. included by WebMD within the Health Channel (a) shall be the sole responsibility of WebMD and shall be developed and maintained in accordance with Section B of this Exhibit A-1, (b) shall be relevant to the topic and particular section of the Health Channel in which they are included, (c) shall be of high quality in all ways, including with respect to editorial content and volume, as determined by comparison to other sources of similar information available on the Internet and in no event shall the Health Channel contain a smaller volume of pages as the WebMD Consumer Site contains as of the Effective Date of this Agreement, (d) shall be comparable or superior to the health related content available on the top five (5) ranked (by Media Metrix) Internet portal/network sites with respect to at a minimum the following factors: (i) substance, quality, volume, (ii) breadth and depth of content, (iii) tools and functionality, (iv) personalization, (v) appeal and ease of use of user interface, (e) shall be updated by WebMD (A) regularly so as to meet the requirements of sub-sections (b), (c) and (d) above and end-users preferences, including as further described in this Exhibit A-1, and (B) daily to keep the content new and interesting, and (f) subject to the foregoing requirements in (a)-(e), the Health Channel shall be the same or substantially similar as (i.e., in substance, a mirror of) that which is available to end users accessing the WebMD Consumer Site at any time during the Term of this Agreement. Without limitation, WebMD shall include in the Health Channel all material and content contained in the WebMD Consumer Site, including, but not limited to, all material and content provided to WebMD for the WebMD Consumer Site by third parties subject to the following: (x) this requirement shall not apply to material and content that may not be provided to WebMD as a result of contracts in effect as of the Execution Date, (y) with respect to contracts with third parties entered into after the Execution Date, WebMD shall obtain all rights necessary to include such third parties material and content on the Health Channel, and (z) with respect to material and content not included in the Health Channel as a result of (x) above, WebMD shall secure and include equivalent (e.g., those elements described in sub-Section (d) above) material and content for the Health Channel. Dispute Mechanism: In the event that Microsoft, MSNBC or WebTV reasonably believes that WebMD is in material breach of sub-Sections (b) and/or (c) above with respect to the Health Channel or any part(s) thereof, Microsoft will notify WebMD and WebMD shall notify Microsoft within three (3) business days whether WebMD agrees or disagrees with Microsoft, MSNBC or WebTV. If WebMD agrees with Microsoft, MSNBC or WebTV and the parties mutually agree on what modifications shall be made, then WebMD shall have forty five (45) days to make such modification and bring the Health Channel or the relevant part(s) into compliance with such sub-sections. In the event that WebMD disagrees with Microsoft, MSNBC or WebTV or the parties do not mutually agree on what modifications should be made, the parties shall mutually agree on an independent third party to review the Health Channel's, or such part(s)'s, compliance with such sub-Sections. If such independent third party determines that the Health Channel or any part does not meet the requirements of such sub-Sections, Microsoft shall have the right to provide or obtain from any other source replacement content, features, technology, services, etc. and at Microsoft's, MSNBC's or WebTV's request as appropriate WebMD shall host such replacement content, features, technology, services etc. as part of the Health Channel. For the avoidance 38 39 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. of doubt, Microsoft, MSNBC and/or WebTV may opt to include such replacement content, features, technology, services, etc. as part of the non-Health Channel section of the MSN Health Section. 3. Disclaimer: WebMD shall ensure that the Health Channel shall include a prominently placed welcome notice to all parties that enter the Health Channel that includes the following (or such other disclaimer as may be provided by Microsoft from time to time): "We hope that you find the materials in this service to be a helpful source of information about health-related topics. While we endeavor to keep this information accurate and current, you should keep in mind that our information may contain errors or be incomplete in some respects. Most importantly, information about health and medical matters should not be confused with health or medical advice, which is ultimately an opinion or recommendation as to the proper course of action based on the facts of your specific circumstances. These materials cannot provide you with health or medical advice: only your health care provider can do that. The information contained in this web site is not a substitute for medical advice. Please consult your health care provider before beginning any health related program." 4. References to the Channel: In creating the Health Channel from the WebMD Consumer Site, WebMD shall (a) revise any references that are made in the Health Channel to the WebMD Consumer Site to refer instead to the Health Channel; and (b) obtain Microsoft's prior written approval for those and other references made by WebMD to the Health Channel (e.g., on the Health Channel itself or on the WebMD Site). 5. Links. WebMD shall not include any links from within the Health Channel to the WebMD Site without Microsoft's prior written approval. WebMD shall include links from the Health Channel to other MSN properties upon request by Microsoft. B. The WebMD Development Process In general, the WebMD observes the development process, strategy, content, features, and functionality set forth in this Subsection B with regard to the WebMD Site, and WebMD shall observe the same development process, strategy, content, features, and functionality with regard to the Health Channel except as otherwise expressly provided in this Agreement. Outline of process: Marketing or user feature idea. Research and testing of the proposed initiatives. Design concepts and more testing. Formal specifications & scheduling. Implementation and testing. Release. Regular reviews & updates. WebMD usually observes a 60 to 90 day formal schedule for updating our online service with either new features or improvements that have gone through the above process. Our list of prospective additions is usually longer than what can be implemented on the next release. This allows WebMD to begin planning for additional releases past the nearest one on the horizon. A big component of how WebMD approaches new features is through market research and testing. Given the competition for space in each release, it is essential only those features which have been tested for user acceptance, etc. make it to the release stage. This focus on testing also allows for flexibility in scheduling new features. If a new feature set appears and needs to be moved up the list because of encouraging test results, our development process allows for the addition of the new item. Conversely, if a feature is planned but does not test well, then the latitude exists to drop it and consider other things. Overview 39 40 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. For an individual, the complexity of consumer healthcare devolves into four spheres: 1). Multiple roles; 2). The ongoing need for information from a variety of sources on a wide array of subjects delivered on a customized basis; 3). The diminution of traditional sources and authorities (e.g. doctors and nurses); 4). The corresponding rise of a feeling that, in self-defense, an individual needs to assert themselves to get the best results. At the household level the key decision-maker for consumer health is a woman 30's-50's who is dealing with a number of health issues both major and minor on a weekly/monthly basis. Our perspective (driven by our experience as well as research) on this person is that she acts as the primary actor for herself as well as an intermediary for a circle of dependent actors (spouse, children, parents, friends, etc.) who look to her for information. Obviously, the use of the Internet to deliver healthcare experiences and information to consumers could be a huge boon. In our opinion, this has not happened yet. The typical approach has either been heavily content driven (put a lot of content and references online) or community oriented (start a message board). However, the simple question of what spectrum of information, connections with other people, and services do healthcare consumers want and need has not been addressed yet in an integrated fashion. Summary of the Service "There is a place where people come together to find information and discuss important health issues with their family and community. A place to share experiences with others and with informed professionals and to find resources" "WebMD is that place." WebMD's strategy will be to build a healthcare portal that is "the place to be." The idea is that of a health place that is extremely targeted and informative yet reassuring and comforting to a consumer. It signifies "home", "trust", "stickiness", and a starting point for all healthcare interactions. It also fits with the idea of a specific, personalized home page/health service that builds over time since the strategy of personalization is to create a barrier to exit for members. The overall tone, look, and feel of the site will be designed to match the type of traffic that will be hitting that particular part of the service. For example, if someone is visiting the unregistered part of the service, and is not a member, the look and feel will be geared to an upbeat, almost spritely approach. It will not be quite as fluffy and Cosmopolitan-like as a Thrive, but it will not be somber and depressing like some of the other more intense health sites. Conversely, if it is someone who is going directly to a deeper tier area (Breast cancer), they will be presented with a slightly more serious approach than the generalized part of the service. For registered members, the personalized home page will be very warm, approachable and homelike. Within the WebMD service, the consumer health portal will have its own name, positioning and branding and yet will link back and support the overall WebMD branding. The overall construction of the site will be comprised of 5 tiers. The outermost tier (T1) represents our audience development tactics that will find potential members of the service, attract them to the service (T2), register them (T3-T5), and then keep them over time (T3-T5). The T1 methods WebMD will use to attract audiences to the service will include on-air calls to action (e.g., the CNN relationship); PR; relationships with other offline aggregators (support groups, non-profits); selective purchases of targeted portal banners; affiliations with other health oriented sites, USENET groups, bulletin boards, etc. Tiers 2-5 (T2-T5) represent the actual service itself. In general, the construction of the service should be in such a way as to provide a landing pad for the various types of traffic the service will receive and convert it into active members. Secondly, the service should provide an easy point of entry for returning existing members. Lastly, the goal of all four tiers (T2-T5) should be to always obtain more information from the member so as to deliver a more personalized service. 40 41 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. T2 is the "general" part of the service. It does not require registration. It casts the widest net for new members as the audience feeds it will receive will be broadly distributed in their interests. It rewards visitors by providing a variety of content and references (to quickly answer questions), quick search capabilities of internal resources as well as selected parts of the internet ("The best health search on the planet"), teasers on events (a variety of chats with experts and famous health care personalities), and access to locator services (find a doctor, etc..). It invites people to join to receive more information, periodic updates, personalized service, etc. T3 is the registration-lite portion of the service. The goal will be to get people to register (screen name, password, e-mail address) for a content or news feed, message board(s), event(s) (chat, streaming video event), updates, etc.. The approach is low-level and non-threatening. It should be seen as an easy entry method to start a personalization dialog with subsequent interactions and follow-up messaging. From an audience development standpoint, there may be several hundred external T1 calls to action that immediately direct people to T3 and bypass entry through T2. An example would be to market a chat with the world's expert on HIV therapeutics through a spot on CNN, a posting on an event board, and listings in newspaper and TV Guide. The call to action would put the prospective members into the T3 part of the service (e.g. the event) versus pushing them through T2. T4 is registration heavy and probably has our hardest core, most active members. They have arrived to this level by extensive use of personalization and repeat usage of the service. They may have come in through T2, T3 migration, or directly through registration in one of many intensive, specialized services. An example of a T2, T3 bypass strategy here would be working with the American Diabetes Association (ADA) to provide a specialized information and community service to their members. The members attracted through this method would go directly to T4 diabetes. T5 is a sub-section of T4 in that this could be a group that subscribes to or pays for additional services and benefits. In summary, the goal with the five tiers is to attract potential audiences and have them become registered members. The tactics will be to provide multiple points of entry that are best suited for the groups WebMD will be attracting. Once someone has registered with the service, the goal then becomes personalizing the service to increase retention and improve financial returns through market research, targeted sponsorship, and e-commerce opportunities. Of course, a consistent thread of thought running through this is a focus and emphasis on privacy protection and trust. Detailed Features & Functionality Except as otherwise provided in this Agreement and subject to Microsoft's right to reject any part thereof, WebMD will supply to Microsoft as part of the Health Channel the Content, Community, Commerce, Services and Other Transactions, Customization/Personalization, Metrics set out below, or its equivalent, meaning at a minimum comparable or superior to in substance, quality, volume, breadth and depth of content, tools and functionality, personalization, appeal and ease of use of user interface, etc.. The source of all content and materials contained Health Channel by WebMD (unless otherwise requested by Microsoft) will be only from un-biased, non-corporate sources and all such sources are subject to Microsoft's approval, provided that Microsoft shall not unreasonably withhold approval of any un-biased, non-corporate source. Content
- ---------------------------------------------------------------------------------------------------------------------- Feature Release Tier Details - ------------------ ----------------- -------------------------- ------------------------------------------------------ News Current Tier 2: Home page Current Sources include Reuters Health News, Healthscout, and proprietary news and features created by WebMD, provided that subject to contracts existing as of the Execution Date, MSNBC shall be the sole provider of news for the Health Channel unless otherwise approved by Microsoft Current sources provide 50+ health news articles per
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day. Will have access to additional sources through CNN or the equivalent, provided that subject to contracts existing as of the Execution Date, MSNBC shall be the sole provider of news for the Health Channel unless otherwise approved by Microsoft. - ------------------ ----------------- -------------------------- ------------------------------------------------------ Reference Current Tier 2: Home page Content acquired from multiple sources Presented in various navigational schema: Health Topics A-Z, Medical Encyclopedia, Self-Care Advisor, Drug Reference, Etc. DMK database has over 8,000 articles SHN database has over 15,000 articles Databases from Intelihealth and other providers represent an additional 30,000 plus articles Acquisition efforts continuous & on-going - ------------------ ----------------- -------------------------- ------------------------------------------------------ General Search Current Tier 2: Home page, Provides non-integrated search of reference, news, throughout service and chat events - ------------------ ----------------- -------------------------- ------------------------------------------------------ Member's only Current Tier 3, Tier 4 - Provides all of General Search, plus searching of search throughout message board posts, web - ------------------ ----------------- -------------------------- ------------------------------------------------------ Integrated Possibly 3/12 All tiers throughout Allows user to search on any database of content search release or later throughout the service as well as throughout the rest of the internet. Results will lead to invitation to join if registration is required for certain content - ------------------ ----------------- -------------------------- ------------------------------------------------------ Related Current Tier 3 and 4 throughout Allows user to get list of documents related in Documents concept and content to any content currently being (Librarian or viewed, including message board posts, chat "Exemplar transcripts, etc. searching") - ------------------ ----------------- -------------------------- ------------------------------------------------------ Ask an Expert Current Tier 2 (read only), Tier These features are designed to add both personality 3 & 4: ability to ask and depth to the service. Currently utilized in questions disease-specific categories, this will be enhanced over time to include "celebrity" experts (e.g. Dr. Ruth, Dr. Weil, equivalent others) and broaden its appeal. - ------------------ ----------------- -------------------------- ------------------------------------------------------ Wellness Some current Tier 2, with supporting Wellness information is a broad category to describe content more slated for features and information provided to a "well" (vs. an ill) release communities on Tier 3 consumer. It will included features, message boards, through out and 4 and chats on fitness, sports, sexuality, nutrition, etc 1999 - ------------------ ----------------- -------------------------- ------------------------------------------------------ Natural Some current Tier 2, with supporting Natural medicine coverage could be considered a more subset medicine more slated for features and of Wellness above, but many consumers both in the "well" release communities on Tier 3 and in the "ill" population identify themselves with through out and 4 natural or alternative or complementary therapies. 1999 Providing specific content navigation and community features for this population will yield significant loyalty and repeat usage - ------------------ ----------------- -------------------------- ------------------------------------------------------ Community - ------------------ ----------------- -------------------------- ------------------------------------------------------ Feature Release Tier Details - ------------------ ----------------- -------------------------- ------------------------------------------------------ Topics covered Current and Tier 3 and 4 Currently manage 10 separate communities covering a in community future total of 18 conditions.
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Community Slated to add 17 tier 3 and tier 4 communities in 3/99, including: Allergies, Alzheimers, Back Pain, Cholesterol Reducer, GI/Heartburn, HIV/AIDS, Hypertension, Impotence, Menopause/HRT, Migraines, Multiple Sclerosis, Osteoporosis, Otitis Media, Parkinsons, Schizophrenia, Smoking Cessation After 3/99, adding significant number (100-140) of community features for Tier 3 level, including sexuality, natural medicine, sports medicine, fitness, etc. - ------------------ ----------------- -------------------------- ------------------------------------------------------ Message Current Tier 3 and 4 throughout, Currently 30 disease-specific message boards moderated by Boards eventual read-only WebMD staff Adding several hundred more message boards access for Tier 2 during 1999 Message board technology includes search capability, integration into "Librarian" function, integration into complete WebMD personalization features (see below), ability to list messages by author, and linkages to other types of content. - ------------------ ----------------- -------------------------- ------------------------------------------------------ 24 hour chat Current Tier 3 and 4 throughout Currently run approximately 20 chat rooms using rooms iChat, subject to WebMD's obligation hereunder to use Microsoft Chat technologies. Chat rooms are unmoderated and including Private room creation functions. - ------------------ ----------------- -------------------------- ------------------------------------------------------ Live chat events Current Tier 3 and 4 Currently host approximately 50 text-chat events per month. Guests are experts from various geographies and institutional affiliations. Currently relationships in place with UCSF and OHSU schools of nursing for chat guests. Managed by a WebMD funded faculty position at UCSF. Academic affiliates will grow substantially Throughout 1999 WebMD will target "celebrity" experts for live events By end of 1999 will add up to 10 live audio/video streaming events which shall be available using Microsoft's Windows Media Player - ------------------ ----------------- -------------------------- ------------------------------------------------------ Behavioral Currently in Tier 4 and Tier 5 Doing research with faculty at OHSU in running health research phase, behavioral modification classes (smoking cessation, interventions full roll out weight management, etc.) in an online environment by end of 1999 First test was "Healthier Holidays Club" weight control group that ran with 12 participants from 11/98 - 1/99. More programs in smoking cessation etc. on the way. - ------------------ ----------------- -------------------------- ------------------------------------------------------ Commerce, Services and Other Transactions - ------------------ ----------------- -------------------------- ------------------------------------------------------ Feature Release Tier Details - ------------------ ----------------- -------------------------- ------------------------------------------------------ Participation in Current Throughout Relationships in place with Amazon, Powells.com affiliate Mechanism in place for future affiliate relationships programs - ------------------ ----------------- -------------------------- ------------------------------------------------------ Online drugstore Target Date: Throughout Either through partnerships with PlanetRx.com, May 99, drugstore.com or equivalent others, or through
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- ------------------ ----------------- -------------------------- ------------------------------------------------------ At the latest: proprietary developments with critical partners, WebMD will October 31, 1999 provide a mechanism for purchasing any over the counter item typically found in a drug store, as well as purchasing prescription drugs and refilling existing prescriptions online. - ------------------ ----------------- -------------------------- ------------------------------------------------------ Home medical Target Date: Throughout Similar to drugstore applications, WebMD plans on supplies May 99, At the exploring the market for home health products and latest October offering purchasing opportunities to our members 31, 1999 through WebMD - ------------------ ----------------- -------------------------- ------------------------------------------------------ Directories Target Date: Throughout Allow users to look up healthcare resources by type, May 99, At the location, reputation etc. latest, June Works for hospitals, MDs, alternative care providers 30, 1999 Possible source for additional revenue - ------------------ ----------------- -------------------------- ------------------------------------------------------ View lab test Possibly by end Tier 4 & 5 Gives user the ability to request lab results, results of 1999. Goal either through MD (who might need to be a WebMD to complete no subscriber) or directly from lab. later than 2000 Depends heavily on relationships with lab companies, privacy issues, etc. - ------------------ ----------------- -------------------------- ------------------------------------------------------ Scheduling with Possibly by end Tier 4 & 5 Tricky - requires access to doctor's scheduling doctor, other of 1999 Goal to system, verification, etc. practitioners complete no later than 2000 - ------------------ ----------------- -------------------------- ------------------------------------------------------ Keep personal, Possibly by end Tier 4 & 5 This feature becomes particularly useful if the family medical of 1999 Goal to online medical record is viable in the clinical record complete no setting - which may take a while later than 2000 - ------------------ ----------------- -------------------------- ------------------------------------------------------ Customization/Personalization - ------------------ ----------------- -------------------------- ------------------------------------------------------ Feature Release Tier Details - ------------------ ----------------- -------------------------- ------------------------------------------------------ My Desk Current Tier 4 & 5 Allows any registered user to build new desk drawers and store articles in each drawer. The Librarian functionality appears in the drawer to point to related documents based on every article in the drawer. - ------------------ ----------------- -------------------------- ------------------------------------------------------ Suggested news Current Tier 4 & 5 At the beginning of each registered and profiled member's WebMD session they are directed to suggested news - headlines culled from today's news feed that are most relevant to their particular health profile - ------------------ ----------------- -------------------------- ------------------------------------------------------ Suggested Current Tier 4 & 5 Similar to suggested news, registered/profiled message board members are invited to join message board threads discussions that are relevant to them - ------------------ ----------------- -------------------------- ------------------------------------------------------ "Integrated" Summer 1999 Tier 4 & 5 Ability for one WebMD member to have multiple condition or profiles treatment based profiles, and multiple "roles" (e.g. diagnosed, concerned, caregiver, other) represented in one membership. This will allow our primary target (women who are primary healthcare decision-maker in household) to manage health information and support for the multiple individuals in their lives.
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- ------------------ ----------------- -------------------------- ------------------------------------------------------ Additional Throughout 1999 Tier 4 & 5 Alexandria allows WebMD to perform any comparison applications of WebMD wishes - content to content, profile to the WebMD content, profile to profile. This allows the "Alexandria" addition of collaborative filtering, and other types platform of personalization, automated group building or information organization. - ------------------ ----------------- -------------------------- ------------------------------------------------------
C. Metrics 1. Customer Satisfaction: WebMD's goal is that the WebMD Consumer Site will be the third ranked health site by December 31, 1999, the second ranked consumer health site by July 31, 2000, and the first ranked consumer health site by December 31, 2000, as measured against the health sections of other Internet portal sites and general consumer health sites on the Internet. WebMD will monitor customer satisfaction under this paragraph 1 using quantitative research reported every six months starting on the date that is six months from the Effective Date, which research shall measure all important customer metrics, including, but not limited to: awareness, image, satisfaction and likelihood to actually use. WebMD will include additional customer metrics at Microsoft's request, and no metric once measured may be removed without the mutual agreement of the parties. 2. Pages Viewed. By December 31, 1999 the MSN Health Section will have an average number of pages viewed per unique user per month that is equal to or above the average number of pages viewed for health sections of other Internet portal sites and other Internet health sites, as determined by Media Matrix (or some other mutually agreed upon industry analyst). By mutual agreement this metric may be changed for another measure of User involvement on the MSN Health Section as compared to other health sites and sections on competitive networks and the Internet. 3. Focus Group Research. WebMD will conduct focus group research once each 6 months of each Year and will conduct usability research prior to each release (e.g., T1, T2, T3, etc.) of the Health Channel. WebMD will share the results of this research with Microsoft, and WebMD and Microsoft will mutually agree to a plan and schedule to implement findings from this research that are commercially reasonable to implement to improve the offerings of the Health Channel. 4. Failure to Meet Metrics. In the event that WebMD fails to meet any of the obligations in the Metrics section of this Exhibit A-1, the parties shall meet within twenty (20) business days of a notice from any party. At such meeting, WebMD shall present a plan for compliance, including the timeframe therefore, and Microsoft shall approve such plan or suggest an alternative plan. If the parties fail to reach agreement on a plan for compliance (either as proposed by WebMD or Microsoft), WebMD will have 120 days from the meeting to comply. If WebMD fails to comply within such time frame (or within the timeframe of any agreed upon plan for compliance), the Health Channel may be reduced by Microsoft down to a minimum of 50% of the MSN Health Section at Microsoft's discretion, and Microsoft will have the option to fill the non-Health Channel sections of the MSN Health Section with any programming, content, or partnerships that Microsoft considers appropriate in its sole discretion. Notwithstanding the foregoing, nothing herein shall be deemed to limit any remedy either party may have under this Agreement or otherwise. 45 46 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Exhibit A-2 Health Channel Technical Specifications Network Framework/In Service Promotion Requirements. WebMD shall incorporate the Network Frameworks on each page within the Health Channel in accordance with the MSN.COM Software Development Kit. Microsoft may modify the Network Framework in its sole discretion, and WebMD shall implement such modifications pursuant to the terms of the SDK within the same time frame as required for other channels within the MSN Site. WebMD shall also comply with the style guidelines and other applicable terms set forth in the MSN.COM SDK in creating the Health Channel, and WebMD shall incorporate the In Service Promotion Box on each page within the Health Channel in the manner provided by Microsoft. All traffic will be redirected from health.msn.com (or such other URL(s) as may ultimately be allocated to the Health Channel) to WebMD's servers where the Health Channel's fully Frameworked pages will be served (as described above); provided that Microsoft may opt in its discretion to host all or any part of the Health Channel by giving WebMD thirty (30) days written notice of each exercise of its option; and further provided that WebMD will provide all such reasonable support and assistance as is necessary to enable Microsoft to so host by the end of the thirty (30) day notice period or such other period as is mutually agreed by the parties. Microsoft requires that WebMD maintain certain minimum standards for connectivity and availability (these requirements may be updated by Microsoft from time to time by written notice from Microsoft to WebMD, and WebMD shall implement such modifications within 30 days following such notice): All pages of the Health Channel must begin loading quickly (within 5 seconds on a 28.8bps modem measured as a rolling weekly average). All pages of the Health Channel must be reachable/available 99.8% of the time, subject to reasonable regularly scheduled maintenance of which Microsoft is notified in writing on a monthly basis at least five (5) business days in advance of each calendar month. Such notice shall include at a minimum all work to be done and the estimated down time. WebMD's servers must be capable of handling all traffic that the Health Channel will send WebMD, and in any case no less than a minimum of 7 million page-views per week as of the Effective Date and at all times during the Term, which such number of page views shall increase (but not decrease without Microsoft's approval) at a rate equal to that necessary to accommodate traffic resulting from the increased traffic to the MSN Site on a month to month basis, and shall at a minimum be no less than 14 million by the first day of Year 3 and 21 million by the first day of Year 5. Domain Name. Microsoft will register and maintain domain names for the Health Channel. WebMD will insure that the domain name specified by Microsoft is displayed in the user's browser URL window when a user is accessing any part of the Health Channel. Statistical and Other Reporting. WebMD agrees to provide page view, unique user reporting and other statistical reporting for the Health Channel, as specified by Microsoft in writing from time to time under this Agreement. Such information shall be recorded on a calendar monthly basis. WebMD shall provide such information to Microsoft within seven (7) days of the end of each calendar month. WebMD shall have 30 days to implement any changes in such reporting requirements. As an alternative, WebMD agrees to incorporate Microsoft's WebStats technology on the WebMD servers used to host the Health Channel for the purpose of statistical tracking of users on the Health Channel. WebMD shall provide Microsoft with monthly system maintenance schedule as provided in Section 1 of this Exhibit A-2. WebMD shall provide Microsoft with a daily and also a weekly content refresh schedule, which such schedule shall be provided in writing at least forty-eight (48) hours in advance of the planned refresh time. Browser Viewing. WebMD agrees that the Health Channel, as served by WebMD servers, will be easily viewable on all popular browsers, including but not limited to Internet Explorer, Netscape Navigator and WebTV. Also, users of Windows, Macintosh, Linux and Unix systems should all be able to view pages served by WebMD. (A complete list of required browser and platform support is contained in the MSN SDK currently found at 46 47 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. http://partner.msn.com). In no event will WebMD make any technology decision that renders the content viewing experience of Internet Explorer users on the Health Channel to be inferior to the viewing experience of users elsewhere on the MSN Site. Ad Server. WebMD shall comply with Microsoft's specifications to configure the Health Channel to call the ad server(s) specified by Microsoft to display Advertising provided by Microsoft under this Agreement. Service and Support. WebMD will follow the procedures and provide the information set forth below in the event of any site failure(s) or decline(s) in performance. The parties shall work together to expand the procedures set forth below within ninety (90) days of the Effective Date as reasonably necessary to ensure that Microsoft is notified of all site failure(s) or decline(s) in performance. WebMD shall notify Microsoft within thirty (30) minutes of any site outages. WebMD will send such notification to a an email address or alias and phone/pager # designated by Microsoft. In the event of a system outage, WebMD will post and serve to users attempting to reach the Health Channel a message page in all ways mutually acceptable to both parties which such message page will be posted within one (1) hour of WebMD discovering the outage and shall remain in place until such outage has ceased. WebMD and Microsoft shall mutually agree on a escalation process which shall include at a minimum additional email, phone and pager contacts, as appropriate, for escalation of site problems between the parties. During any site failure or decline in performance, WebMD shall give Microsoft regular notification of the status of the problem and the problem resolution activities until the situation has ceased. The frequency of the notification will depend on the severity of the problem with more regular notice being given for a more sever problem. Following resolution of any site failure or decline in performance, WebMD will provide Microsoft with reports detailing the fault or problem events on a bi-weekly or monthly basis as determined by Microsoft in each situation. Following the resolution of any site failure or decline in performance, WebMD will provide Microsoft with a report(s) of all remedial actions taken and preventive measures taken to avoid similar fault conditions or problems in the future. All bug fixes and site changes shall be completed within a reasonable period of time under the circumstances of each situation and WebMD shall provide Microsoft with a report of all material fixes and changes on a monthly basis. WebMD shall provide Microsoft with all assistance needed by Microsoft to provide end users with information about service, performance, bug fixes, content updates and any other area concerning the Health Channel, including but not limited to answers to frequently asked questions and service notices. In the event that WebMD fails to meet any of the obligations in this Service and Support section (including any expanded obligations) of this Exhibit A-2, the parties shall meet within twenty (20) business days of a notice from any party. At such meeting, WebMD shall present a plan for compliance with the above service and support requirements (including any expanded obligations) including the timeframe therefore and Microsoft shall approve such plan or suggest an alternative plan. If the parties fail to reach agreement on an alternative plan, WebMD shall have sixty (60) days from the meeting to comply with the above service and support requirements (including any expanded obligations); provided that if WebMD fails to comply, Microsoft shall be released from its obligations to meet any and all Guarantees under Section 12.2 (e.g., the First Year Guarantee, Second Year Guarantee, Third Year Guarantee, etc.) for the Year in which the failure first occurs. 47 48 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Exhibit B In Service Promo [GRAPHIC OMITTED] Graphic shows screenshot of a current example of an in service promotion box to be featured on each page within MSN's web site. 48 49 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Exhibit C MSN Module [GRAPHIC OMITTED] Graphic shows an example of an MSN module which will include a "Go to MSN" logo link. 49 50 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Exhibit D Logo Guidelines (for use of MSN link logos provided per Section 3 of the Agreement) 1. WebMD may display only the "Go to MSN" link logo, or other MSN link logos, as provided by Microsoft from time to time under the Agreement ("Logos"). 2. WebMD may only display the Logos on the WebMD Site as provided in the Agreement, and not in any other manner. The Logos must always be active links to the MSN Site at http://www.msn.com/. 3. GIF files for the Logos include the words "Go to MSN" or similar wording, describing the significance of the Logos on the WebMD Site (i.e., the Logos are links to MSN or references to MSN features, not endorsements of the WebMD Site). WebMD may not remove or alter these, or any other element of the Logos. 4. WebMD may only display the Logos on web pages that include the Network Frameworks and must be placed at the bottom of such pages. WebMD's company name or logo must appear at least as prominent as the Logos. WebMD may not display the Logos in any manner that implies affiliation with, sponsorship, endorsement, or license by Microsoft, except as contemplated in the Agreement. 5. Each Logo must appear by itself, with a minimum spacing (the height of the Logo) around the Logo to separate it from other graphic or textual elements on your page. The Logos may not be used as a feature or design element of any other logo. 6. WebMD may not alter the Logos in any manner, including size, proportions, colors, elements, etc., or animate, morph or otherwise distort its perspective or two-dimensional appearance. 7. WebMD may not display the Logos on any site that disparages Microsoft or its products or services, infringes any Microsoft intellectual property or other rights, or violates any law of any jurisdiction. 8. These Logo Guidelines do not grant a license or any other right in Microsoft's logos or trademarks. Microsoft reserves the right in its sole discretion to terminate or modify permission to display the Logos at any time. Microsoft reserves the right to take action against any use that does not conform to these Logo Guidelines, infringes any Microsoft intellectual property or other right, or violates other applicable law. 9. MICROSOFT DISCLAIMS ANY WARRANTIES THAT MAY BE EXPRESS OR IMPLIED BY LAW REGARDING THE LOGOS, INCLUDING WARRANTIES AGAINST INFRINGEMENT. 50 51 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Exhibit E MS Online ID Evaluation Program Agreement This evaluation agreement ("Agreement") is made by and between MICROSOFT CORPORATION, One Microsoft Way, Redmond, WA 98052 ("Microsoft") and WebMD Inc., 400 The Lenox Building, 3399 Peachtree Road NE Atlanta, Georgia 30326 ("Company") as of the later of the two signature dates (the "Effective Date"). WHEREAS, Microsoft desires that Company test, utilize and evaluate the software associated with Microsoft's proprietary authentication service currently known as Microsoft Online ID and the associated SDK (the "Product"); and WHEREAS, Company desires to test, utilize and evaluate the Product in anticipation of participating in the full Microsoft Online ID program when, and if, such program is generally released to the market. NOW THEREFORE, the parties agree as follows: 1. EVALUATION LICENSE (a) Company shall implement the Product and all upgrades and fixes provided by Microsoft within a test version of the Health Channel and the WebMD Site ("Company Site"), such implementation shall be in compliance with the standard SDK provided with the Product. Upon Microsoft's direction, Company shall implement the Product on the version of Company's Site that is available to the general public. In connection with such implementation, Microsoft grants to Company a limited, non-exclusive, nontransferable, royalty-free license to use the Product on Company's CPUs and any accompanying printed materials ("Documentation"), for the purpose of developing the Company Site to ensure compatibility with the Product and testing and evaluating the Product and associated applications created by Company that are required to be integrated with the Product. All other rights are reserved to Microsoft. Company shall not use the Product for any purpose other than as set forth in this Agreement. Company shall not rent, lease, sell, sublicense, assign, or otherwise transfer the Product or the Documentation. Company may not reverse engineer, decompile, or disassemble the Product, except to the extent that the foregoing restriction is expressly prohibited by local law. Microsoft and its suppliers shall retain title and all ownership rights to the Product. (b) Company agrees to provide reasonable feedback to Microsoft, including but not limited to usability, bug reports and test results, with respect to the testing of the Product, within fifteen (15) days of Company's receipt of the Product and each upgrade and fix. Company will use reasonable efforts to review and comment on all Documentation supplied. All bug reports, test results and other feedback made by Company shall be the property of Microsoft and may be used by Microsoft for any purpose it sees fit. Due to the nature of the development work, Microsoft is not certain as to when errors or discrepancies in the Product may be corrected; however Microsoft will provide Company with all bug fixes and upgrades as such items become available and Company agrees to implement said fixes and upgrades within ten (10) days of receipt. 2. PRIVACY POLICY Company acknowledges that the privacy of end-users' personal information is a core component of the Microsoft Online ID program. Company represents that it is either currently or will become, prior to the implementation of the Product on the version of Company's Site that is available to the general public, a participant in an industry recognized independent privacy program, such as the TRUSTe Program or the BBBOnline Privacy Seal Program, which: (a) requires an approved privacy policy to be posted within the Company Site in a manner that is readily accessible to the end-users; (b) requires Company to obtain explicit consent to any usage of their personal information for any purpose other than described in Company's privacy policy; (c) provides for a dispute resolution method with adequate enforcement mechanisms; (d) reviews, monitors and enforces the standards set by the program; and (e) requires Company to comply with additional privacy standards which may become recognized by the industry from time to time. All versions of Company Site utilizing the Product shall comply with the standards set by such independent privacy program. 51 52 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 3. MICROSOFT SERVICES (a) Microsoft shall provide a mechanism and user interface (the "Sign Up Mechanism") which will allow end-users to participate in the Microsoft Online ID program and obtain appropriate user names and passwords upon accessing Company Site. (b) Microsoft shall provide authentication services for end-users entering the Company site who have a Microsoft Online ID. If such end-user has not yet obtained a Microsoft Online ID the end-user will be directed to the Sign Up Mechanism described in Section 3(a). (c) During the authentication process, Microsoft shall provide Company with the core profile information contained within the Microsoft Online ID database as determined by Microsoft in its sole discretion (the "Core Profile"). 4. INFORMATION USAGE (a) Company may use the information in the Core Profile in perpetuity for any purpose provided that Company complies with the requirements set forth in Sections 2 and 7. (b) Microsoft shall provide Company with a list of the information contained within the Core Profile and if Company receives updated or additional Core Profile information from an end-user then Company agrees to provide end-users with the option of updating this information in the central Microsoft Online ID Core Profile. The Product will provide a standard Microsoft Online ID update mechanism to facilitate updates to the Microsoft Online ID Core Profile. 5. DESIGN AND USER INTERFACE (a) Prior to the implementation of the Product on the version of the Company Site which is available to the general public, Microsoft may request compliance with certain additional design and user interface guidelines ("Microsoft Online ID UI Guidelines") not included within the SDK, including but not limited to Microsoft Online ID logo placement, text copy, links, and input boxes (e.g. for sign in). Within ten (10) days of Company's receipt of the Microsoft Online ID UI Guidelines, Company shall implement the specified user interface and comply with the specifications set forth in such guidelines. (b) Microsoft will include Company's logo within the Sign Up Mechanism, in connection with such use Company hereby grants Microsoft a non-exclusive, royalty free, worldwide limited right to use and display Company's name and logo. Microsoft will provide logo specifications to the Company and the Company agrees to provide the requested logos to Microsoft on a timely basis. 6. PRODUCT MAINTENANCE AND SUPPORT Microsoft shall use commercially reasonable efforts to provide technical support for the Product. Microsoft agrees to designate one primary contact person that will be responsible for coordinating all technical support inquires and responses and Company agrees to designate one primary contact person that will be responsible for sending inquiries to and receiving responses from the designated Microsoft person. 7. TERM OF AGREEMENT (a) The term of this Agreement shall commence on the Effective Date and shall continue for an initial period of six (6) months provided that the term shall automatically renew for additional one (1) month periods unless terminated as otherwise provided for in this Agreement, amended or superceded by further agreement. Either party may terminate this Agreement at any time, with or without cause, upon sixty (60) days prior written notice; 52 53 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. provided that neither party may terminate this Agreement under this sentence prior to the termination of the MSN Channel and Cross Promotion Agreement ("Channel Agreement") entered into of even date herewith. (b) In addition to any other rights and/or remedies that either party may have under the circumstances, all of which are expressly reserved, either party may terminate this Agreement immediately upon written notice at any time if the other party is in material breach of any material warranty, representation, term, condition or covenant of this Agreement and fails to cure that breach within five (5) days after written notice thereof, provided that if WebMD is the terminating party, such material breach must also be a material breach of the Channel Agreement and WebMD must also simultaneously terminate such Channel Agreement. (c) Upon the termination of this Agreement, Company shall: (i) promptly cease using the Product and return to Microsoft, or certify destruction of, all full or partial copies of the Product, Documentation and related materials provided by Microsoft; (ii) notify end-users that the Company site is no longer utilizing the Microsoft Online ID authentication service; and (iii) discontinue the use of all Core Profile information; provided that Company may continue to use the Core Profile information if Company continues to comply with the terms of Section 2. (d) In the event of termination or expiration of this Agreement for any reason each and every clause which by its nature is intended to survive the termination of this Agreement including, without limitation, Sections 7 through 12 shall survive termination. Neither party shall be liable to the other for damages of any sort resulting solely from terminating this Agreement in accordance with its terms. 8. CONFIDENTIALITY (a) The Product, including its existence and features, are proprietary and confidential information to Microsoft and its suppliers. Company agrees not to disclose or provide the Product, Documentation, or any information relating to the Product (including the existence of the Product, features, or the results of use or testing) to any third party (except as otherwise necessary to operate Company's Web site). If Microsoft and Company have entered into a Microsoft Non-Disclosure Agreement, Microsoft and Company agree that the terms of such agreement shall be deemed incorporated herein, and further, that all terms and conditions of this Agreement shall be deemed Confidential Information as defined therein. If Microsoft and Company have not entered into a Microsoft Non-Disclosure Agreement, then Company agrees that at all times during the term of this Agreement, and for five (5) years thereafter, Company will hold in strictest confidence, and will not use or disclose to any third party, any confidential information of Microsoft. The term "confidential information of Microsoft" shall mean all non-public information that Microsoft designates as being confidential, or which, under the circumstances of disclosure ought to be treated as confidential. "Confidential information of Microsoft" includes, without limitation, the terms and conditions of this Agreement, information relating to released or unreleased Microsoft software or hardware products, marketing or promotion of any Microsoft product, business policies or practices of Microsoft, customers or suppliers of Microsoft, or information received from others that Microsoft is obligated to treat as confidential. If Company has any questions as to what comprises such confidential information, Company agrees to consult with Microsoft. "Confidential information of Microsoft" shall not include information that was known to Company prior to Microsoft's disclosure to Company, or information that becomes publicly available through no fault of Company. (b) Unless Company receives prior written authorization from MS, Company may disclose the Product only to its employees or sub-contractors who have a need to know in order to assist in Company's testing and evaluation of the Product, provided that: (1) such employee's or sub-contractor's use of the Product takes place solely at the location where Company's CPUs reside; and (2) Company has executed appropriate written agreements with such employees and sub-contractors sufficient to enable it to comply with the terms of this Agreement. Upon Microsoft's request, Company shall provide to Microsoft a list of all employees and sub-contractors granted access to the Product hereunder. 53 54 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 9. PRESS RELEASES/MARKETING PARTICIPATION. (a) Microsoft will issue an initial press release relating to the establishment of the Microsoft Online ID Evaluation Program, which will describe the relationship between Microsoft and the third parties participating in the program, including Company. Company may be provided with an opportunity to provide a quote and/or information to be included in such initial press release. Except as specified above, neither party will issue any press release or make any public announcement(s) relating in any way whatsoever to this Agreement or the relationship established by this Agreement without the express prior written consent of the other party, which consent shall not be unreasonably withheld, provided that Microsoft may make informational references to the Microsoft Online ID Evaluation Program and Company's participation in such program in other publicity and press releases without obtaining Company's consent. (b) Company agrees to participate in all marketing programs for the Microsoft Online ID program as reasonably requested by Microsoft. Microsoft shall be solely responsible for any and all costs associated with any marketing program for the Microsoft Online ID program which may be incurred by Company provided that such costs have been pre-approved in writing by Microsoft. 10. DISCLAIMER OF WARRANTY THE PRODUCT IS DEEMED ACCEPTED BY COMPANY. THE PRODUCT IS PROVIDED "AS IS" WITHOUT WARRANTY OF ANY KIND. MICROSOFT FURTHER DISCLAIMS ALL WARRANTIES, INCLUDING WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. THE ENTIRE RISK ARISING OUT OF THE USE OR PERFORMANCE OF THE PRODUCT AND DOCUMENTATION REMAINS WITH COMPANY. IN NO EVENT SHALL MICROSOFT OR ITS SUPPLIERS BE LIABLE FOR ANY CONSEQUENTIAL, INCIDENTAL, DIRECT, INDIRECT, SPECIAL, PUNITIVE, OR OTHER DAMAGES WHATSOEVER (INCLUDING, WITHOUT LIMITATION, DAMAGES FOR LOSS OF BUSINESS PROFITS, BUSINESS INTERRUPTION, LOSS OF BUSINESS INFORMATION, OR OTHER PECUNIARY LOSS) ARISING OUT OF THE USE OF OR INABILITY TO USE THE PRODUCT OR DOCUMENTATION, EVEN IF MICROSOFT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 11. EXPORT RESTRICTIONS Company acknowledges that the Product is subject to the export control laws and regulations of the U.S.A., and any amendments thereof. Company confirms that with respect to the Product it will not export or re-export them, directly or indirectly, either to (i) any countries that are subject to U.S.A. export restrictions, (ii) any end user who Company knows or has reason to know will utilize them in the design, development or production of nuclear, chemical or biological weapons; or (iii) any end user who has been prohibited from participating in the U.S.A. export transactions by any federal agency of the U.S.A. government. Company further acknowledges that the Product may include technical data subject to export and re-export restrictions imposed by U.S.A. law. 12. GENERAL 12.1 Independent Contractors. The parties are independent contractors with respect to each other, and nothing in this Agreement shall be construed as creating an employer-employee relationship, a partnership, agency relationship or a joint venture between the parties. 12.2 Governing Law. This Agreement shall be governed by the laws of the State of New York as though entered into by New York residents and to be performed entirely within the State of New York. The parties consent to exclusive jurisdiction and venue in the state and federal courts sitting in New York. In any action or suit to enforce any right or remedy under this Agreement or to interpret any provision of this Agreement, the prevailing party shall be entitled to recover its costs, including reasonable attorneys' fees. 54 55 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 12.3 Assignment. This Agreement and any rights and/or obligations hereunder may be assigned by Microsoft but may not be assigned by Company without Microsoft's prior written approval. Any attempted assignment, sub-license, transfer, encumbrance or other disposal without such consent shall be void and shall constitute a material default and breach of this Agreement. 12.4 Construction. In the event that any provision of this Agreement conflicts with governing law or if any provision is held to be null, void or otherwise ineffective or invalid by a court of competent jurisdiction, (i) such provision shall be deemed to be restated to reflect as nearly as possible the original intentions of the Parties in accordance with applicable law, and (ii) the remaining terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect. This Agreement has been negotiated by the parties and their respective counsel and will be interpreted fairly in accordance with its terms and without any strict construction in favor of or against either party. The section headings used in this Agreement are intended for convenience only and shall not be deemed to affect in any manner the meaning or intent of this Agreement or any provision hereof. 12.5 Notices. All notices and requests in connection with this Agreement shall be given in writing and shall be deemed given as of the day they are received either by messenger, delivery service, or in the United States of America mails, postage prepaid, certified or registered, return receipt requested, and addressed as follows: To Company: To Microsoft: WebMD, Inc. Microsoft Corporation 3399 Peachtree Road NE One Microsoft Way Atlanta, Georgia 30326 Redmond, WA 98052-6399 Attn: Product Manager - Web Essentials Phone: (404) 479-7600 Phone: 425-882-8080 Fax: (404) 479-7603 Fax: 425-936-7329 Attention General Counsel Copy to: Law & Corporate Affairs, US Legal Fax: (425) 936-7409
or to such other address as a party may designate pursuant to this notice provision. 12.6 Entire Agreement. This Agreement does not constitute an offer by Microsoft and it shall not be effective until signed by both parties. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous agreements or communications. This Agreement shall not be modified except by a written agreement dated subsequent to the date of this Agreement and signed on behalf of Company and Microsoft by their respective duly authorized representatives. No waiver of any breach of any provision of this Agreement shall constitute a waiver of any prior, concurrent or subsequent breach of the same or any other provisions hereof, and no waiver shall be effective unless made in writing and signed by an authorized representative of the waiving party. The parties have caused this Agreement to be executed by their duly authorized representatives as of the Effective Date. MICROSOFT CORPORATION WEBMD, INC. /s/ Laura Jennings /s/ W. Michael Heekin By By Laura Jennings W. Michael Heekin Name (Print) Name (Print) 55 56 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Title Vice President Title Executive Vice President and Secretary Date 6/4/99 Date 5/10/99 56 57 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Exhibit F MCS Agreement and Work Order MICROSOFT MASTER CONSULTING SERVICES AGREEMENT This Microsoft Master Consulting Services Agreement ("Agreement") is made as of the Effective Date indicated below by and between Microsoft Corporation, a Washington corporation, and WebMD, Inc., a Georgia, corporation ("Customer"). This Agreement sets forth the general terms and conditions under which Microsoft Corporation, either on its own behalf or through one or more divisions or, for services to be provided outside of the United States, subsidiaries (collectively, "Microsoft"), will provide consulting services to Customer and its Affiliates. Microsoft agrees that any of Customer's Affiliates shall have the right (but not the obligation) to submit Work Orders to Microsoft under the terms and conditions of this Agreement. All references to "Customer" in this Agreement shall be deemed to include the Affiliate placing the Work Order. Such Work Orders shall be subject to the terms and conditions of this Agreement and as to such Work Orders, the Affiliate becomes "Customer" hereunder. "Affiliate" means any person, partnership, joint venture, corporation or other form of enterprise, domestic or foreign, including, but not limited to, subsidiaries, which directly or indirectly Control, are Controlled by, or are under common Control with Customer. "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and operating policies of the entity in respect of which the determination is being made, through the ownership of more than fifty percent (50%) of its voting or equity securities, contract, voting trust or otherwise. 1. CONSULTING SERVICES AND FEES. a. Microsoft, through its Microsoft Consulting Services division ("MCS"), shall perform the consulting services for Customer specified in work orders (each a "Work Order") that may be entered into pursuant to this Agreement from time to time ("Services"). Neither Microsoft nor Customer shall be obligated to enter into any Work Order. b. Customer shall pay Microsoft the fees identified on each Work Order for Services rendered, and the reasonable out-of-pocket travel and living expenses incurred by MCS consultants during performance of a Work Order. Payment shall be made to Microsoft within thirty (30) days of the date of Microsoft's invoice. Microsoft shall not change its fees during the term of a Work Order, unless otherwise agreed by Microsoft and Customer, but may adjust fees prior to entering any new Work Order. Microsoft's fees do not include any taxes, duties, tariffs or other governmental charges or expenses imposed in connection with this Agreement (including, without limitation, any value added taxes), and such taxes shall be billed to and paid by Customer. Microsoft shall be responsible for all taxes based upon its personal property ownership and net income. A finance charge of one and one-half percent (1.5%) per month or the highest amount allowed by law, whichever is less, will be assessed on all payments that are past due. Any amount outstanding for more than sixty (60) days after the date of invoice shall constitute a material breach on the part of Customer. 2. RIGHTS IN PROGRAMS AND DATA. The rights in programs and data shall be specified in each Work Order. 3. CONFIDENTIALITY. a. Confidential Information. Except as otherwise specified herein, Microsoft and Customer each expressly undertake to retain in confidence all information transmitted to it by the other party pursuant to this Agreement that the disclosing party identifies as being proprietary and/or confidential or that, by the nature of the circumstances surrounding the disclosure, ought in good faith to be treated as proprietary and/or confidential ("Confidential Information"), and will make no use of such Confidential Information except under the terms and during the existence of this Agreement. Information disclosed by Microsoft, in any form, regarding pre-release 57 58 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. products, access numbers and passwords provided to Customer by Microsoft, shall be Microsoft Confidential Information. Microsoft and Customer shall treat the terms and conditions of this Agreement as confidential; however, either party may disclose such information in confidence to its immediate legal and financial consultants as required in the ordinary course of that party's business. The receiving party's obligation hereunder shall extend for five (5) years following the disclosure of the Confidential Information. Customer shall cause its Affiliates to retain Microsoft Confidential Information in accordance with the terms of this Section 3. b. Exclusions. Confidential Information shall not include any information that: (i) is at the time of disclosure or subsequently becomes publicly available without the receiving party's breach of any obligations owed the disclosing party; (ii) became known to the receiving party prior to the disclosing party's disclosure of such information to the receiving party; (iii) became known to the receiving party from a source other than the disclosing party other than by the breach of an obligation of confidentiality owed to the disclosing party; or (iv) is independently developed by the receiving party. c. Independent Development; Residuals. The terms of confidentiality under this Agreement shall not be construed to limit Microsoft's or Customer's right to independently develop or acquire products without use of the other party's Confidential Information. Further, Microsoft or Customer shall be free to use for any purpose the residuals resulting from access to or work with such Confidential Information, provided that such party shall maintain the confidentiality of the Confidential Information as provided herein. The term "residuals" means technical information related to computer software technology in non-tangible form, which may be retained by persons who have had access to the Confidential Information, including ideas, concepts, know-how or techniques contained therein. Neither Microsoft nor Customer shall have any obligation to limit or restrict the assignment of such persons or to pay royalties for any work resulting from the use of residuals. However, the foregoing shall not be deemed to grant to either Microsoft or Customer a license under the other party's copyrights or patents. d. Customer Information. Customer grants to Microsoft the right to use technical information for problem resolution, internal troubleshooting, product functionality enhancements and fixes, and Knowledge Base articles. Microsoft will not identify Customer or publish any of Customer's Confidential Information in any Knowledge Base article. 4. LIMITED WARRANTIES. Microsoft warrants that the Consulting Services will be performed using generally accepted industry standards and practices. 5. LIMITATION OF WARRANTIES. THE LIMITED WARRANTIES SET FORTH ABOVE ARE EXCLUSIVE AND ARE IN LIEU OF ALL OTHER WARRANTIES AND CONDITIONS, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE WITH RESPECT TO THE SERVICES OR PRODUCTS PROVIDED UNDER THIS AGREEMENT, THE PERFORMANCE OF MATERIALS OR PROCESSES DEVELOPED OR PROVIDED UNDER THIS AGREEMENT, OR AS TO THE RESULTS WHICH MAY BE OBTAINED THEREFROM, AND ALL IMPLIED WARRANTIES AND CONDITIONS OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE AND NON-INFRINGEMENT. MICROSOFT SHALL NOT BE LIABLE FOR ANY SERVICES OR PRODUCTS PROVIDED BY THIRD PARTY VENDORS, DEVELOPERS OR CONSULTANTS IDENTIFIED OR REFERRED TO COMPANY BY MICROSOFT UNLESS SUCH THIRD PARTY SERVICES ARE PROVIDED UNDER WRITTEN AGREEMENT WITH MICROSOFT. 6. LIMITATION OF LIABILITY. a. Limitation. Microsoft' total liability under this Agreement shall be limited to the total amount actually paid by Customer to Microsoft under the applicable Work Order. b. Exclusion of Certain Damages. TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, IN NO EVENT SHALL MICROSOFT, MICROSOFT SUBSIDIARIES OR THEIR RESPECTIVE SUPPLIERS BE LIABLE TO COMPANY FOR ANY INCIDENTAL, CONSEQUENTIAL, INDIRECT, SPECIAL, OR PUNITIVE DAMAGES (INCLUDING, BUT NOT LIMITED TO, LOST PROFITS, BUSINESS INTERRUPTION, LOSS OF BUSINESS INFORMATION OR OTHER PECUNIARY LOSS) 58 59 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. REGARDLESS OF WHETHER SUCH LIABILITY IS BASED ON BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY, BREACH OF WARRANTIES, FAILURE OF ESSENTIAL PURPOSE OR OTHERWISE AND EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 7. TERM AND TERMINATION. a. Term. This Agreement shall remain in effect until terminated by either Microsoft or Customer as provided herein; provided that neither party may terminate this Agreement prior to the termination of the MSN Channel and Cross Promotion Agreement entered into of even date herewith. The term of any Work Order shall be as provided therein; provided that neither party may terminate any incomplete Work Order prior to the termination of the MSN Channel and Cross Promotion Agreement ("Channel Agreement") entered into of even date herewith. Termination of this Agreement shall terminate all outstanding Work Orders between Microsoft and Customer. b. Termination. Subject to Section 7(a) above, Customer may terminate this Agreement or any Work Order without cause by giving Microsoft thirty (30) days written notice. Either Microsoft or Customer may terminate this Agreement or any Work Order if the other party is in material breach or default of any obligation hereunder, which breach or default is not cured within thirty (30) days notice of such breach, provided that such material breach or default is also a material breach or default of the Channel Agreement and the terminating party simultaneously terminates such agreement. Customer shall pay all fees to Microsoft for Services performed and expenses incurred which have accrued through the date of termination. c. Survival. Sections 1(b), 2, 3, 4, 5, 6, 7(b), 7(c), 8, and 10 of this Agreement and any provisions specified as surviving in a Work Order shall survive any termination of this Agreement and termination or expiration of any Work Order. 8. NOTICES. All notices, authorizations, and requests in connection with this Agreement shall be deemed given on the day they are (i) deposited in the mails, postage prepaid, certified or registered, return receipt requested; or (ii) sent by air express courier (e.g., DHL, Federal Express or Airborne), charges prepaid, return receipt requested; and addressed as follows:
- --------------------------------------------------------------------------------------------------- To Customer: To Microsoft: WebMD Inc. Microsoft Corporation 400 The Lenox Building One Microsoft Way 3399 Peachtree Road NE Redmond, WA 98052-6399 Atlanta, Georgia 30326 Attention: General Counsel Phone: 425-882-8080 Phone: 404-479-7600 Fax: 425-936-7329 Fax: 404-479-7603 cc: Law and Corporate Affairs One Microsoft Way Redmond, WA 98052-6399 - ---------------------------------------------------------------------------------------------------
9. INSURANCE. At all times when Microsoft will be performing Services on Customer's premises pursuant to this Agreement, Microsoft will procure and maintain the following insurance coverage: a. Commercial General Liability covering bodily injury and property damage liability with a limit of not less than $1,000,000 each occurrence; b. Workers' Compensation (or maintenance of a legally permitted and governmentally-approved program of self-insurance) covering Microsoft employees pursuant to applicable state workers' compensation laws for work-related injuries suffered by employees of Microsoft; c. Employer's Liability with limits of not less than $1,000,000 each accident; and 59 60 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. d. Software Errors and Omissions Liability covering damages arising out of negligent acts, errors, or omissions committed by Microsoft or its employees in the performance of this Agreement, with a limit of liability of not less than $2,000,000 each claim. Microsoft will provide Customer with certificates of insurance evidencing this coverage on request. 10. MISCELLANEOUS. a. No Assignment. This Agreement and any rights or obligations hereunder shall not be assigned by contract or by operation of law without the prior written agreement of the other party. Microsoft may use subcontractors to deliver the Services, provided that Microsoft shall remain liable to Customer, in accordance with this Agreement, for all Services provided to Customer. The Services are provided solely for the benefit of Customer and its Affiliates, as applicable. b. Applicable Law. This Agreement shall be governed by the laws of the State of New York, and the parties further consent to the exclusive jurisdiction by the state and federal courts sitting in the State of New York. Any action of any kind by any party against another party arising as a result of this Agreement must be commenced within two (2) years from the date the right, claim, demand, or cause of action shall first accrue. c. Entire Agreement. This Agreement and the Work Orders constitute the entire agreement between Microsoft and Customer, and merge all prior and contemporaneous communications, with respect to the Services provided hereunder. The terms on any purchase order or other form submitted by Customer shall not apply to this Agreement or any of the Services. This Agreement can be modified only by later written agreement signed by both Microsoft and Customer. In the event of a conflict between this Agreement and any Work Order, the terms of this Agreement shall control. d. Compliance with Laws. Microsoft and Customer shall comply with all applicable laws and regulations with respect to this Agreement. Customer acknowledges that the Services and the related software and other materials are subject to United States export control laws and regulations, and Customer confirms that it will not export or re-export them, directly or indirectly, either to (i) any countries that are subject to U.S. export restrictions (currently including, but not necessarily limited to, Cuba, Iran, Iraq, Libya, North Korea, Syria and Sudan), or to any national of any such country, wherever located, who intends to transmit or transport the services or materials back to such country; or (ii) any end-user whom Customer knows or has reason to know will utilize them in the design, development or production of nuclear, chemical or biological weapons, or (iii) any end-user who has been prohibited from participating in U.S. export transactions by any federal agency of the U.S. Government. e. Severability/Waiver. If a court holds that any provision of this Agreement to be illegal, invalid or unenforceable, the remaining provisions shall remain in full force and effect. No waiver of any breach of this Agreement shall be a waiver of any other breach, and no waiver shall be effective unless made in writing and signed by an authorized representative of the waiving party. f. Independent Contractor. Microsoft shall act at all times as an independent contractor, and shall be responsible for any and all social security, unemployment, workers' compensation and other withholding taxes for any and all of its employees. g. Cost or Pricing Data. Microsoft will not, under any circumstances, be obligated to perform Services that would require the submission of cost or pricing data (as defined by U.S. Government regulations) or be obligated to provide such data. h. Force Majeure. Except for Customer's obligation to pay for services already performed by Microsoft, if either party is prevented from complying, either totally or in part, with any of the terms or provisions of this Agreement by reason of fire, flood, storm, strike, lockout or other labor trouble, riot, war, rebellion, accident or other acts of God, then upon written notice to the other party, the requirements of this Agreement, or the affected 60 61 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. provisions hereof to the extent affected, shall be suspended during the period of such disability. During such period, the party not prevented from complying as aforesaid may seek to have its needs (which would otherwise be met 61 62 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. hereunder) met by or through others without liability hereunder. The party prevented from complying shall make all reasonable efforts to remove such disability within thirty (30) days of giving such notice. i. English Language Governs. The parties have requested that this Agreement be drawn up in English; les parties ont exiges que cette entente soit redigee en anglais. IN WITNESS WHEREOF, the parties have agreed to the terms and conditions of this Agreement as of the Effective Date indicated below. MICROSOFT CORPORATION By: /s/ Laura Jennings ------------------------------------------------------------- Print Name: Laura Jennings ----------------------------------------------------- Title: Vice President ---------------------------------------------------------- Date: 6/4/99 ----------------------------------------------------------- WEBMD INC. By: /s/ W. Michael Heekin ------------------------------------------------------------- Print Name: W. Michael Heekin ----------------------------------------------------- Title: Executive Vice President ---------------------------------------------------------- Date: 5/9/99 ----------------------------------------------------------- 62 63 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. MICROSOFT CONSULTING SERVICES MASTER SERVICE AGREEMENT WORK ORDER NO. - (MCS Health Care Practice) This Work Order is made pursuant to the Microsoft Master Consulting Services Agreement (the "Agreement") effective on , by and between WebMD ("Customer") and Microsoft Corporation ("Microsoft") and is incorporated therein by reference. Capitalized terms not otherwise defined have the meanings provided in the Agreement. 1. Services. MCS shall perform the services identified below for Customer. Dates provided herein are estimates only. Services shall not include development of, and Microsoft shall not deliver, any software, computer program or code under this Work Order. MCS shall perform the services as described in Section 4.2 of the MSN Channel and Cross Promotion Agreement ("Promotion Agreement") between the parties dated as of even date herewith, including specifically the architectural review phase of the current WebMD technical platform in order to develop the vision and scope of the Transition Schedule Work Order to be executed by the parties and the implementation of the Microsoft technology, including the Microsoft Technology Platform, phase. WebMD shall ensure both under this work order and under the Transition Schedule Work Order: 1) that adequate WebMD technical resources are assigned to the migration effort; 2) that a core WebMD technical team is adequately training on NT and Internet Information Server; 3) that a WebMD operations team is available to assume responsibility for the operations and management of the production site; 4) that WebMD assigns a key manager to act as the MCS contact for the project; 5) that WebMD provides MCS with access to the source code and design documentation to the existing site and applications; 6) that WebMD provides for all hardware and software necessary to support the production environment; and 7) that Web MD will contract with Microsoft Premier Support Services for technical product support. The dates set out in Section 4.2 of the Promotion Agreement by which each party must complete a task shall be met by such party as part of this Work Order. The parties agree that the estimated time to complete the architectural review contemplated hereunder is 160 hours. The product of the architectural review shall be at a minimum the Transition Schedule and the Transition Schedule Work Order. The parties shall complete the tasks specified in Section 2.5 of the meet the dates specified in the Promotion Agreement. 2. Rates. The hourly rates shown below shall be applicable to this Work Order. Any total fee stated herein is an estimate only. The total estimated fee for this project is $33,600, based on the estimated 160 hours of service in the 45 day time period, plus travel and expenses. Project expense will be charged to WebMD in addition to project fees.
Staff Level Rate/hour Enterprise Program Manager $210.00 Senior Consultant - Infrastructure $210.00 Consultant - Infrastructure $180.00 Senior Consultant - Development $210.00 Consultant - Development $180.00 Principal Consultant $250.00 Managing Consultant $250.00
Microsoft shall determine in its sole discretion what personnel is required to complete the work contemplated by this Work Order and may use third parties, as determined by MCS in its sole discretion, to complete any work. 63 64 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Microsoft shall invoice Customer monthly for services performed and expenses incurred during the previous period. Microsoft invoices for payment should be directed to Customer's representative for payment at the address shown below (Customer to provide). Contact: David Lubinski Mailstop (if any): Address: 5080 Spectrum Drive, Suite 900E Telephone: (972) 716-2629 City: Addison Fax: (972) 233-7280 State: TX Zip:75001 Email: davidlu@microsoft.com
Purchase Order No. (if any): 3. Commencement Date. Services under this Work Order will begin on the date that is within 45 days of the Effective Date of the Promotion Agreement. The Expiration Date of this Work Order is upon completion of the work contemplated in this Work Order, which in no event shall be less than 360 days from the Effective Date, or such later date as the Work contemplated by this Work Order has been completed. 4. Ownership and License. The copyright in that specific set of tangible written materials developed by Microsoft at the specific direction of Customer and provided to Customer in the course of performance under this Work Order ("Materials") shall be owned by Customer, and Microsoft hereby assigns all right, title and interest in such copyright to Customer. Customer agrees to use Materials only for Customer's internal business purposes and not for resale or distribution outside of Customer. Notwithstanding the above, the parties agree that Microsoft reserves the right to use for any purpose subsets or modules of the Materials which by themselves provide generic technical information not unique to Customer's business. Customer may sublicense the rights granted hereunder to its affiliates (i.e., any entity controlling, controlled by, or under common control with, Customer). All rights not expressly granted, are reserved. THEREFORE, the parties have executed this Work Order in duplicate originals. MICROSOFT CORPORATION WebMD, Inc. INC. By /S/ Laura Jennings By /s/ W. Michael Heekin Name (Print) Laura Jennings Name (Print) W. Michael Heekin Title Vice President Title Executive Vice President and Secretary Date 6/9/99 Date 5/10/99 64 65 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Exhibit G Use Specifications for the MSN Logos WebMD may use the MSN Logos solely in the Network Frameworks header and footer as approved in advance by Microsoft, only on the WebMD Site where the Health Channel appears. WebMD's name, logo, or trademark must appear on any site where the MSN Logo is used, with wording such as "Content by WebMD" as provided in Section 2.2 of the Agreement, and WebMD's name, logo, or trademark must be at least as prominent as the MSN Logos. The MSN Logos may not be used in any manner that expresses or might imply Microsoft's affiliation, sponsorship, endorsement, certification, or approval, other than as contemplated by the Agreement. WebMD shall not use the MSN Logos in association with any third party trademarks in a manner that might suggest co-branding or otherwise create potential confusion as to source or sponsorship of the Health Channel or ownership of the MSN Logos. The MSN Logos may not be included in any non-Microsoft trade name, business name, domain name, product or service name, logo, trade dress, design, slogan, or other trademark. WebMD may use the MSN Logos only as provided by Microsoft electronically or in hard copy form. Except for size subject to the restrictions herein, the MSN Logos may not be altered in any manner, including proportions, colors, elements, etc., or animated, morphed, or otherwise distorted in perspective or dimensional appearance. The MSN Logos may not be combined with any other symbols, including words, logos, icons, graphics, photos, slogans, numbers, or other design elements. The MSN Logos (including but not limited to Microsoft's logos, logotypes, trade dress, and other elements of product packaging and web sites) may not be imitated in any WebMD materials. The MSN Logos may not be used as a design feature in any materials. The MSN Logos must stand alone. A minimum amount of empty space must surround each MSN Logo separating it from any other object, such as type, photography, borders, edges, and so on. The required area of empty space around the MSN Logos must be 1/2x, where x equals the height of the MSN Logo. Each use of the MSN Logo must include the notice: "Microsoft and MSN are registered trademarks or trademarks of Microsoft Corporation in the United States and other countries and the MSN logo is used under license from owner". 65 66 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Exhibit H MICROSOFT CORPORATION NON-DISCLOSURE AGREEMENT (STANDARD RECIPROCAL) THIS AGREEMENT (the "Agreement") is made between MICROSOFT CORPORATION, a Washington corporation, and WebMD INC. ("COMPANY") and entered into this 10th day of February, 1999. In consideration of the mutual promises and covenants contained in this Agreement, the mutual disclosure of confidential information to each other, the parties hereto agree as follows: 1. Confidential Information and Confidential Materials (a) "Confidential Information" means nonpublic information that Disclosing Party designates as being confidential or which, under the circumstances surrounding disclosure ought to be treated as confidential. "Confidential Information" includes, without limitation, information relating to released or unreleased Disclosing Party software or hardware products, the marketing or promotion of any Disclosing Party product, Disclosing Party's business policies or practices, and information received from others that Disclosing Party is obligated to treat as confidential. Confidential Information disclosed to Receiving Party by any Disclosing Party Subsidiary and/or agents is covered by this Agreement. (b) Confidential Information shall not include any information that: (i) is or subsequently becomes publicly available without Receiving Party's breach of any obligation owed Disclosing Party; (ii) became known to Receiving Party prior to Disclosing Party's disclosure of such information to Receiving Party; (iii) became known to Receiving Party from a source other than Disclosing Party other than by the breach of an obligation of confidentiality owed to Disclosing Party; or (iv) is independently developed by Receiving Party. (c) "Confidential Materials" shall mean all tangible materials containing Confidential Information, including without limitation written or printed documents and computer disks or tapes, whether machine or user readable. 2. Restrictions (a) Receiving Party shall not disclose any Confidential Information to third parties for five (5) years following the date of its disclosure by Disclosing Party to Receiving Party, except to Receiving Party's consultants as provided below. However, Receiving Party may disclose Confidential Information in accordance with judicial or other governmental order, provided Receiving Party shall give Disclosing Party reasonable notice prior to such disclosure and shall comply with any applicable protective order or equivalent. (b) Receiving Party shall take reasonable security precautions, at least as great as the precautions it takes to protect its own confidential information, to keep confidential the Confidential Information. Receiving Party may disclose Confidential Information or Confidential Material only to Receiving Party's employees or consultants on a need-to-know basis. Receiving Party will have executed or shall execute appropriate written agreements with its employees and consultants sufficient to enable it to comply with all the provisions of this Agreement. (c) Confidential Information and Confidential Materials may be disclosed, reproduced, summarized or distributed only in pursuance of Receiving Party's business relationship with Disclosing Party, and only as otherwise provided hereunder. Receiving Party agrees to segregate all such Confidential Materials from the confidential materials of others in order to prevent commingling. (d) Receiving Party may not reverse engineer, decompile or disassemble any software disclosed to Receiving Party. 3. Rights and Remedies 66 67 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. (a) Receiving Party shall notify Disclosing Party immediately upon discovery of any unauthorized use or disclosure of Confidential Information and/or Confidential Materials, or any other breach of this Agreement by Receiving Party, and will cooperate with Disclosing Party in every reasonable way to help Disclosing Party regain possession of the Confidential Information and/or Confidential Materials and prevent its further unauthorized use. (b) Receiving Party shall return all originals, copies, reproductions and summaries of Confidential Information or Confidential Materials at Disclosing Party's request, or at Disclosing Party's option, certify destruction of the same. (c) Receiving Party acknowledges that monetary damages may not be a sufficient remedy for unauthorized disclosure of Confidential Information and that Disclosing Party shall be entitled, without waiving any other rights or remedies, to such injunctive or equitable relief as may be deemed proper by a court of competent jurisdiction. (d) Disclosing Party may visit Receiving Party's premises, with reasonable prior notice and during normal business hours, to review Receiving Party's compliance with the terms of this Agreement. 4. Miscellaneous (a) All Confidential Information and Confidential Materials are and shall remain the property of Disclosing Party. By disclosing information to Receiving Party, Disclosing Party does not grant any express or implied right to Receiving Party to or under Disclosing Party patents, copyrights, trademarks, or trade secret information. (b) If either party provides pre-release software as Confidential Information or Confidential Materials under this Agreement, such pre-release software is provided "as is" without warranty of any kind. Receiving Party agrees that neither Disclosing Party nor its suppliers shall be liable for any damages whatsoever relating to Receiving Party's use of such pre-release software. (c) Any software and documentation provided under this Agreement is provided with RESTRICTED RIGHTS. Use, duplication, or disclosure by the Government is subject to restrictions as set forth in subparagraph (c)(1)(ii) of The Rights in Technical Data and Computer Software clause at DFARS 252.227-7013 or subparagraphs (c)(1) and (2) of the Commercial Computer Software -- Restricted Rights at 48 CFR 52.227-19, as applicable. Manufacturer is Microsoft Corporation/One Microsoft Way/Redmond, WA 98052-6399. (d) Both parties agree that they do not intend nor will they, directly or indirectly, export or re-export (i) any Confidential Information or Confidential Materials, or (ii) any product (or any part thereof), process or service that is the direct product of the Confidential Information or Materials to (A) any country that is subject to U.S. export restrictions (currently including, but not necessarily limited to, Iran, Iraq, Syria, Cuba, North Korea, Libya, and Sudan), or to any national of any such country, wherever located, who intends to transmit or transport the products back to such country; (B) to any end-user who either party knows or has reason to know will utilize them in the design, development or production of nuclear, chemical or biological weapons; or (C) to any end-user who has been prohibited from participating in U.S. export transactions by any federal agency of the U.S. government. (e) The terms of confidentiality under this Agreement shall not be construed to limit either party's right to independently develop or acquire products without use of the other party's Confidential Information. Further, either party shall be free to use for any purpose the residuals resulting from access to or work with such Confidential Information, provided that such party shall maintain the confidentiality of the Confidential Information as provided herein. The term "residuals" means information in non-tangible form, which may be retained by persons who have had access to the Confidential Information, including ideas, concepts, know-how or techniques contained therein. Neither party shall have any obligation to limit or restrict the assignment of such persons or to pay royalties for any work resulting from the use of residuals. However, the foregoing shall not be deemed to grant to either party a license under the other party's copyrights or patents. (f) This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof. It shall not be modified except by a written agreement dated subsequent to the date of this Agreement and signed by both parties. None of the provisions of this Agreement shall be deemed to have been waived by any act or acquiescence on the part of Disclosing Party, its agents, or employees, but only by an instrument in writing signed by an authorized officer of Disclosing 67 68 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Party. No waiver of any provision of this Agreement shall constitute a waiver of any other provision(s) or of the same provision on another occasion. 68 69 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. (g) If either party employs attorneys to enforce any rights arising out of or relating to this Agreement, the prevailing party shall be entitled to recover reasonable attorneys' fees. This Agreement shall be construed and controlled by the laws of the State of Washington, and both parties further consent to jurisdiction by the state and federal courts sitting in the State of Washington. Process may be served on either party by U.S. Mail, postage prepaid, certified or registered, return receipt requested, or by such other method as is authorized by the Washington Long Arm Statute. (h) Subject to the limitations set forth in this Agreement, this Agreement will inure to the benefit of and be binding upon the parties, their successors and assigns. (i) If any provision of this Agreement shall be held by a court of competent jurisdiction to be illegal, invalid or unenforceable, the remaining provisions shall remain in full force and effect. (j) All obligations created by this Agreement shall survive change or termination of the parties' business relationship. 5. Suggestions and Feedback Either party may from time to time provide suggestions, comments or other feedback to the other party with respect to Confidential Information provided originally by the other party (hereinafter "Feedback"). Both parties agree that all Feedback is and shall be entirely voluntary and shall not, absent separate agreement, create any confidentiality obligation for the Receiving Party. However, the Receiving Party shall not disclose the source of any feedback without the providing party's consent. Feedback shall be clearly designated as such and, except as otherwise provided herein, each party shall be free to disclose and use such Feedback as it sees fit, entirely without obligation of any kind to the other party. The foregoing shall not, however, affect either party's obligations hereunder with respect to Confidential Information of the other party. IN WITNESS WHEREOF, the parties hereto have executed this Agreement. COMPANY: WebMD, Inc. MICROSOFT CORPORATION Address: By: /s/ Laura Jennings Name: Laura Jenning By: /s/ W. Michael Heekin Title: Vice President Name: W. Michael Heekin Date: 6/4/99 Title: Executive Vice President and Secretary MS Contact: Date: 5/10/99 69 70 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Exhibit I WebMD Logos [GRAPHIC OMITTED] Graphic shows screenshot from WebMD's web site, including WebMD's logo. 70 71 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Exhibit J-1 Medical Professionals Section List #1 * 71 72 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Exhibit J-2 Medical Professionals Section List #2 * 72 EX-10.34 3 AGREEMENT, DATED MAY 19, 1999 1 CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. May 19, 1999 Mike Long Chief Executive Officer Healtheon Corporation 4600 Patrick Henry Drive Santa Clara, CA 95054 Dear Mike: This letter of agreement ("LOA") is entered into as of May 19, 1999 ("Effective Date") and sets out the principal terms and objectives and obligations of Healtheon Corporation ("Healtheon"), WebMD, Inc. ("WebMD") and Microsoft Corporation ("Microsoft") with respect to the strategic relationship which will exist between the parties in the event that Healtheon acquires WebMD (with whom Microsoft has existing contractual and equity relationships), pursuant to an Agreement and Plan of Reorganization under negotiation as of the date of this LOA or otherwise ( the "H-W Transaction"). All of the terms set forth in this LOA will need to be memorialized in a definitive written agreement(s) (the "Agreement") satisfactory in form and substance to each party. The legal obligations of each party with respect to the terms and conditions set forth in this LOA will be solely as specified in this LOA. Each party agrees to work together in good faith with the goal of concluding such Agreement no later than May 30, 1999 or such other time as the parties mutually agree. This LOA shall be legally binding until such time as the parties execute the Agreement or such other time as the parties may mutually agree, provided that if negotiations are terminated following the public announcement that the H-W Transaction will not proceed, this LOA will have no legal effect. 1. DEFINITIONS. 1.1 "ASSIGNEE" means Healtheon, or in the case of a merger between Healtheon and WebMD or some other process by which Healtheon is not the parent company resulting from the H-W Transaction, that H-W Entity. 1.2 "HEALTHEON SITE" means the Healtheon Web site currently located at the URL http://www.healtheon.com or any successor site(s) or version(s) (e.g., localized for an international market, distributed to a specific user group, etc.) thereof, including but not limited to the Healtheon Consumer Site and the Healtheon Professionals Section. 1.3 "HEALTHEON CONSUMER SITE" shall mean that part of the Healtheon Site currently located at the URL http://www.healtheon.com or any successor site(s) or version(s) thereof which is directed at a consumer market. 1.4 "HEALTHEON PROFESSIONALS SECTION" shall mean that part of the Healtheon Site currently located at the URL http://www.healtheon.com or any successor site(s) or version(s) thereof that targets medical professional market. 1.5 "H-W ENTITY" means the parent company resulting from the H-W Transaction (which is expected to be Healtheon) in the event the H-W Transaction results in a parent-subsidiary structure; otherwise, H-W Entity means the surviving legal entity following the closing of the H-W Transaction, or the acquiring party in the event that the H-W Transaction is structured as a purchase of assets. 2. ASSIGNMENT OF DISTRIBUTION AND CROSS PROMOTION AGREEMENT. Healtheon, Microsoft and WebMD agree that upon closing of the H-W Transaction and completion of all necessary regulatory requirements (a) WebMD will 2 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. assign to the Assignee, all of WebMD's rights and obligations under the Distribution and Cross Promotion Agreement dated as of May 7, 1999 between Microsoft, WebMD, WebTV and MSNBC ("WebMD Agreement"), (b) the Assignee will accept such assignment and all such obligations thereunder, except as modified under this LOA or as otherwise agreed by Microsoft, (c) the Assignee will be fully and solely responsible for all obligations of WebMD under the WebMD Agreement, and (d) all references in the WebMD Agreement to WebMD will mean Assignee and all references in this LOA to Healtheon shall mean Assignee. Microsoft agrees to approve and secure such other agreements as are necessary to approve (as required to satisfy the requirements of Section 18.3 of the WebMD Agreement) such assignment by WebMD. Each party agrees to execute such documents as are necessary to give effect to the foregoing and such in a form as mutually agreed between the parties. 3. MODIFICATIONS TO THE WEBMD AGREEMENT. Effective upon the closing of the H-W Transaction, the parties hereby amend the WebMD Agreement as set forth below. In the event of any inconsistency between the provisions of the WebMD Agreement and this LOA, the provisions of this LOA shall control: 3.1 All obligations with respect to the WebMD Site, e.g., as set forth in Sections 3.2 (Internet Access), 3.4 (Other Microsoft Properties), and 3.5 (MSN Module) of the WebMD Agreement, as such may be modified by this LOA, will apply to both the WebMD Site and to the Healtheon Site and any successors or parts thereof. 3.2 With respect to and without limiting anything contained in Section 3.3 of the WebMD Agreement, in the event that Microsoft elects to create a combined health care-related directory for the Health Channel (as defined in the WebMD Agreement), Healtheon's health care-related directory listings shall also be made available for inclusion in such directory. 3.3 Without limiting anything contained in the WebMD Agreement, with respect to any rights Microsoft, MSNBC and/or WebTV has with respect to the WebMD Consumer Site (as defined in the WebMD Agreement), Microsoft, MSNBC and/or WebTV shall also have such rights with respect to the Healtheon Consumer Site (e.g., the Health Channel (as defined in the WebMD Agreement) shall include content, features, technology and the like from the Healtheon Consumer Site) subject to any agreements Healtheon or WebMD has with third parties in existence as of the Effective Date. Without limiting anything contained in the WebMD Agreement, with respect to any rights Microsoft, MSNBC and/or WebTV has with respect to the WebMD Medical Professionals Section (as defined in the WebMD Agreement), Microsoft, MSNBC and/or WebTV shall also have such rights with respect to the Healtheon Professionals Section to the extent that Healtheon is able to provide such rights under its agreements with third parties in existence as of the Effective Date. In all agreements executed with third parties after the Effective Date, Healtheon shall exercise best efforts to obtain the foregoing rights for Microsoft, except that, Healtheon's obligation as set forth in this Section 3.3 shall not apply to content, features and technology that it may create for a custom project so long as such content, features and technology are not included on the Healtheon Site or WebMD Site. In addition, Healtheon will provide significant online and offline promotional opportunities surrounding the successful positioning and launch of Healtheon's Community Directory Services ("CDS"). CDS is defined as a regional directory and information service comprising physicians and healthcare institutions that will include a vehicle for health care institutions and providers to publish information about themselves to the local community, affording them the opportunity to interact directly with consumers; it will include the ability for MSN-generated consumers and professionals to link to healthcare transactions on the Healtheon website, thereby creating a transaction revenue stream for MSN. This ability to do a locally-directed search which facilitates consumer to physician transactions and communications will be unique to the CDS exclusively distributed on MSN; provided, however, that Healtheon may offer the CDS on the Healtheon Site, but may not offer or provide the CDS to any third party sites. Within the proposed CDS, Healtheon will enable broader e-commerce capabilities to complement the core Healtheon transaction sets. This includes linking the participating CDS firms with a buying/selling environment for supplies, services and goods. Participation in the broader CDS will be key to driving commerce within the Mall area of the MSN Site and in Microsoft's discretion, within the Mall area of the Healtheon site, which, in Microsoft's discretion, shall also be accessible and promoted from the Health Channel or other Microsoft Internet properties. 3.4 TRANSACTION REVENUES. In addition to those amounts set out in the WebMD Agreement, Healtheon will pay Microsoft a royalty in consideration of Microsoft's distribution of the Health Channel and other Healtheon consumer and business to business services. Such royalty shall be equal to 15% of Healtheon "Net Transaction Revenues" for "Electronic Transactions" that originate on the Health Channel or other Microsoft 2 3 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. properties. "Electronic Transactions" means electronic transactions between healthcare institutions (e.g. payers and providers) or between consumers and healthcare institutions, and suppliers and healthcare institutions such as, but not limited to, claims submissions, claims status inquiries and eligibility inquiries. Electronic Transactions will include the EDI transaction set currently processed by Healtheon and any additions to that transaction set that Healtheon may make during the term of the WebMD Agreement. The parties will prepare and agree upon a written schedule listing all Electronic Transactions and update such schedule from time to time as new transactions become available. "Net Transaction Revenues" means the gross fees paid to Healtheon for such transactions less direct, variable expenses paid to third parties incurred to process such transactions. Specific examples of these expenses include: a. Commercial EDI Claim: PMS vendor transmits claim from provider office to Healtheon; Healtheon pays PMS vendor $.10 for such claim; Healtheon routes claim on to commercial insurance company; Insurance company pays Healtheon $.35 for such transaction. Healtheon has gross fees for such transaction of $.35, direct variable expenses paid to third parties of $.10, and Net Transaction Revenues" of $.25. b. Medicare EDI Claim: PMS vendor transmits claim to Healtheon; PMS vendor pays Healtheon $.30 to accept such claim; Healtheon routes claim to clearinghouse; Healtheon pays clearinghouse $.10 to accept such claim. Healtheon has gross fees of $.30, direct variable expenses of $.10, and Net Transaction Revenues of $.20. c. Laboratory Transaction: Provider office transmits order for clinical lab test to Healtheon; Healtheon transmits order to Clinical Lab; Clinical Lab transmits result to Healtheon; Healtheon transmits results to provider. Clinical Lab pays Healtheon $.40. No third party fees are paid. Net Transaction Revenues are $.40. 3.5 Healtheon shall exercise best efforts to meet the obligations as specified in the Migration Plan to be developed pursuant to Section 11 below. In the event that Healtheon fails to meet its obligations under the preceding sentence, Microsoft shall notify Healtheon of such failure and Healtheon shall have a 90 day period in which to cure such failure. For purposes of this Section 3.5, "cure" shall mean that Healtheon has demonstrated substantial visible progress toward the goals as outlined in the Migration Plan. If, at the end of such 90 day cure period, Healtheon has failed to cure such failure, Microsoft shall have the right to immediately suspend its obligation under Section 12.2(a) of the WebMD Agreement to pay the positive difference between the applicable Year Guarantee (i.e. the First Year Guarantee, Second Year Guarantee, etc.) and WebMD's portion of the Microsoft Revenues until such time as Healtheon has cured such failure (the "Suspension Period"). For each day of a Suspension Period, the applicable Year Guarantee shall be reduced by 1/365th and such amount shall be forfeited by Healtheon. The remedy provided for in this Section 3.5 is not meant to waive any other rights or remedies available at law or equity. 3.6 In addition to and without limiting anything contained in Section 2.5 of the WebMD Agreement, Healtheon agrees not to provide the CDS or any part thereof to any third party, for distribution on the Internet, without Microsoft's prior written consent. Further, in the event that Healtheon enters into an agreement with any other third party to provide consumer health-related content for distribution on the Internet, Healtheon agrees to provide Microsoft with thirty (30) days prior written notice before the launch of such consumer health-related content on the Internet, and Healtheon shall not offer such third parties consumer health-related content that has not also been previously or concurrently made available to Microsoft. Nothing in this Section 3.6 is intended to prevent Healtheon from placing advertisements on the Top Ten Portal Sites or other third party sites. Microsoft shall have the right to distribute Healtheon's Community Directory Service, but shall not be obligated to include it on any Other Microsoft Properties (as defined in Section 3.12 below). 3.7 BASIC MEMBERSHIP FEE. Section 1.25 of the WebMD Agreement is amended to read as follows: "BASE MEMBERSHIP FEE" shall mean the lesser of (i) $29.95 per month or (ii) the lowest rate that WebMD offers WebMD Memberships to any other third party (including without limitation to other third party sponsors) during the Term of this Agreement (excluding third party agreements for lower rates executed prior to the Effective Date). 3 4 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 3.8 WEBMD ADVERTISING/SPONSORSHIP REVENUES. The parties agree that WebMD Advertising/Sponsorship Revenues, WebMD Upsell Revenues, and WebMD E-Commerce Revenues do not include the Base Membership Fees (or similar membership fees, however they may be structured in the future; provided, however, that the definition of such membership fees may not be the same or substantially similar to the definitions of WebMD Upsell Revenue, WebMD E-Commerce Revenue or WebMD Advertising Sponsorship Revenues as defined in the WebMD Agreement) paid by End User Members, or paid by Microsoft, DuPont or other underwriters of WebMD memberships. 3.9 HEALTH CHANNEL REQUIREMENTS. The parties agree to the following points of clarification, which shall override any conflicting provisions of the WebMD Agreement: 3.9.1 Healtheon may create custom web sites or portals for its healthcare institution customers (for example, without limitation, providers such as Baylor Healthcare or payers such as United Healthcare), and Healtheon will not be required to provide to Microsoft or notify Microsoft of the content or features of such custom web sites. Healtheon will promote Microsoft technology to its customers, including the use of Microsoft platforms for such custom web sites. Healtheon will advise Microsoft on the extent of Healtheon customer usage of Microsoft technology on an aggregate basis to the best of Healtheon's knowledge. By way of example, Healtheon will provide Microsoft with a list of names of those customers for whom Healtheon builds such custom web sites or portals based on Microsoft technology, including what percentage of all custom web sites and portals built by Healtheon such customers represent, subject to any confidentiality obligations of Healtheon. 3.9.2 In the event that Healtheon desires to offer to third parties advertisements and sponsorships on the Health Channel, it shall notify Microsoft of such desire and the parties shall meet to discuss Healtheon's proposal in this regard. The parties shall agree in advance in writing on a plan detailing agreed upon packages and sales plans for such advertisements and sponsorships. Nothing in this Section 3.9.2 is intended to impair or in any way diminish Microsoft's rights under Section 6.1 of the WebMD Agreement. 3.10 INTERNATIONAL DISTRIBUTION. The parties agree that the provisions of Section 2.3 of the WebMD Agreement apply only to markets outside of the United States. 3.11 USER INFORMATION. 3.11.1 OWNERSHIP/USE. Microsoft and Assignee shall jointly own any and all User Information collected by either party from Users of the Health Channel and the party collecting such User Information will use commercially reasonable efforts to obtain from such Users the right to share such User Information with the other party, provided that each such User shall in all cases be given the right to opt out of any use (including sharing between the parties) of any of such Users' Personal Information. Microsoft and Assignee shall jointly own any and all User Information collected from (a) all Users of the WebMD Consumer Site and Healtheon Consumer Site whose use of either such site originated on the Health Channel or any MSN Site, (b) all End User Members with Microsoft-sponsored WebMD Memberships, and (c) relating to End User Members who receive WebMD Memberships through Microsoft or Microsoft distribution partners, provided that they party collecting such User Information will use commercially reasonable efforts to obtain from such Users the right to share User Information with the other party, provided further that (i) each such User shall in all cases be given the right to opt out of any use (including the sharing between the parties) of any of such Users' Personal Information. The collecting party of any such User Information described herein shall provide such User Information to the other party on a monthly basis in such format as reasonably requested by such other part. As between the parties, each party may use the User Personal Information in its possession solely for the purpose of fulfilling the product or service for which the information was collected and otherwise as requested by a User concerning such User's Personal Information, provided, however, that subject to any such User request all User Information shall be treated in the same fashion as Confidential Information pursuant to Section 10 below and specifically, without limitation, shall not be provided to any third party nor used on behalf of any third party, including but not limited to, for promoting or advertising any third party, without the other party's prior written consent. Notwithstanding the foregoing, each party hereby approves the other party using and providing to 4 5 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. third parties Aggregate Information to be used in research projects and statistical reporting. Any other use of the User Information during the Term shall be by mutual agreement of the parties. As between the parties, upon termination of this Agreement, (x) each party may retain the User Information in its possession and no party shall restrict the other's use in any way and (y) the collecting party shall provide to the other party all User Information pertaining to the MSN Users of the WebMD Health Communities (as defined in Section 3.7 of the WebMD Agreement). 3.11.2 Notwithstanding anything contained in sub-Section 3.11.1 above, (i) neither party shall be required to provide User Information to the other party if doing so would violate the End User's instructions, applicable laws or regulations, (ii) Healtheon will not be required to provide to, or to attempt to obtain User consent to provide to, Microsoft, WebTV or MSNBC any information that is subject to HIPAA or any other law or regulation pertaining to the protection of medical records, and (iii) subject to subsection 3.11.2(i) and (ii), Healtheon shall use best efforts to provide Microsoft with all User Information associated with non-medical record Internet and Web site usage, CDS, health communities directory, and use relating to any Microsoft provided services including but not limited to, Other Microsoft Internet Services, Other Microsoft Properties, MSN IA, Passport, and WebMD Health Communities. 3.11.3 Except where the parties jointly use the User Information (and thus jointly obtain the user's permission and are jointly responsible for such use), each party shall be responsible for ensuring that its own use of the User Information (i) complies with all User consent requirements, including but not limited to as provided in Section 3.11.4 below, and (ii) complies with all applicable laws and regulations, including concerning the security, confidentiality, use or possession of User Information. 3.11.4 CONSENT. In addition to the foregoing, any collection, disclosure or use of Personal Information by either party shall be subject to the User's consent, and the business practices and User privacy policies of the site from which it is collected (e.g., the Health Channel, an MSN Site, WebMD Consumer Site or Medical Professionals Section). The business practices and policies of each such site shall permit, as their default, the collecting party to grant the other party the rights required by this Section 3.11, unless the User specifically requests otherwise, and in all cases shall comply with any applicable laws governing the collection, dissemination and use thereof. "Consent" as used in this Agreement shall mean the approval of an adult, and in the case of minor children, the approval of the child's parent or legal guardian. WebMD and Microsoft shall mutually agree on the Health Channel user interface for the collection of Personal Information. Microsoft shall determine the privacy policy for the Health Channel. Assignee shall determine the privacy policy for the WebMD Site and Healtheon Site. 3.12 OTHER MICROSOFT PROPERTIES. Except as prevented by any contracts between Healtheon and third parties existing as of the Effective Date, Healtheon agrees that Microsoft and its affiliates shall be the sole providers of consumer Internet information and services for the Healtheon Site and WebMD Site (including specifically without limitation the Non-Health Related Section and the Health Related Section), in all areas for which Microsoft or its affiliates owns or controls such content, features or services, etc. as of the Effective Date (the "Other Microsoft Properties"). As of the Effective Date, the Other Microsoft Properties shall be deemed to include travel (e.g., Microsoft Expedia), automotive (e.g., Carpoint), real estate (e.g., Home Advisor), money, investing and finance (e.g., Money, Investor), entertainment and directories (e.g. Sidewalk including but not limited to MSN Yellow Pages), reference (e.g., Encarta), movies (e.g., Sidewalk), news (e.g., MSNBC), email (e.g., Hotmail), messenger, (e.g., MSN Messenger Service), calendar (e.g., Microsoft Calendar), search (e.g., MSN Web Search), chat (e.g., Microsoft Chat), personal web pages, and community technology; provided that Healtheon may elect in its sole discretion not to provide content, features or services for any area. For content, features or services for areas not included in the Other Microsoft Properties ("New Microsoft Properties"), if Microsoft or its affiliates make publicly available such content, features or services before Healtheon, Healtheon agrees that, where commercially reasonable, Microsoft and its affiliates shall be the sole providers of such New Microsoft Properties for the Healtheon Site and WebMD Site. For purposes of the immediately preceding sentence, "commercially reasonable" shall mean those situations where Healtheon (1) has already made substantial progress toward an alternate solution and (2) has previously made a significant investment in or contractual commitment to that alternative solution. For New Microsoft Properties that Microsoft or its affiliates make publicly available after Healtheon makes publicly available substantially similar content, features or services, Microsoft and its affiliates shall be the sole providers of such new Microsoft Properties for the Healtheon Site and WebMD Site only upon mutual agreement of the parties. 5 6 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. The foregoing shall exclude, however, any Microsoft content, features, or services that are predominantly health care related, unless mutually agreed upon by the parties. Except as prevented by any contracts in existence as of the Effective Date, in the event that Healtheon makes available to end users any non-web-based email technology, whether through the distribution of work stations or otherwise, Microsoft shall be the sole provider of such technology for such distribution and shall provide such technology under standard terms and conditions for such distribution; provided that such Microsoft technology be Microsoft Outlook or such other Microsoft technology designated by Microsoft. Without limitation, being the "sole provider" means that Healtheon shall not place, distribute, advertise, market, link to, refer to or otherwise include the content, features or services, etc. of any party other than Microsoft. 3.13 MSN MODULE. The provisions of Section 3.5 of the WebMD Agreement do not apply to the Medical Professionals Section of the WebMD Site or Healtheon Site. 3.14 DISTRIBUTION OF MEDICAL PROFESSIONALS SECTION. Exhibit J-1 of the WebMD Agreement is amended by deleting Healtheon and IBM from such Exhibit. In the event that Healtheon determines that it will outsource its data center, Healtheon agrees that Microsoft may nominate vendors to bid on such opportunity and that Healtheon will provide such vendors a reasonable and equal opportunity to bid. In addition, the last sentence of Section 11.2(c) of the WebMD Agreement is hereby modified to read as follows: In addition, in the event that the parties mutually agree to allow a third party to host WebMD Offerings, WebMD hereby licenses to Microsoft and/or such third party all such rights as are necessary to permit Microsoft and such third parties to use, copy, execute, display, perform, distribute, transmit, and/or broadcast the agreed upon WebMD Offerings as necessary for Microsoft and/or such third party(ies) to host such WebMD Offerings. 3.15 WEBMD ADDITIONAL PAYMENTS. In order to resolve an ambiguity in the wording of Section 12.3 of the WebMD Agreement, the parties agree that the amount on which the 25% commission is paid under Section 12.3 is capped at the applicable yearly guarantee and the commission is thereby capped at 25% of the applicable yearly guarantee. 3.16 PAYMENTS FOR MICROSOFT SPONSORSHIP COMMITMENT. Section 12.4(a) (iv) of the WebMD Agreement is hereby amended to read as follows: the amount of Distribution Payments due from WebMD to Microsoft in accordance with Section 12.5 below. 3.17 WARRANTIES. (a) Subsection 14.1(ii) of the WebMD Agreement is amended to read as follows: except for those agreements identified in Exhibit F attached hereto, it has not previously and will not grant any rights to any third party that are inconsistent with the rights granted to Microsoft, MSNBC and/or WebTV herein; (b) Subsection 14.1(vii) is amended to read as follows: (vii) the WebMD Content, to the best of WebMD's knowledge after reasonable inquiry, is factually accurate and does not contain any information, instruction or formula that might be injurious to anyone's physical well-being, and that it does not, and its use by Microsoft as permitted in this Agreement will not, defame or disparage any third party. Notwithstanding the foregoing, the parties acknowledge that Healtheon's failure to review content provided by Healtheon or WebMD for accuracy (including, but not limited to, medical content) shall not constitute a breach of this Section 14.1(vii); provided, however, that nothing in this Section 14.1(vii) is intended to, nor shall it, in any way lessen or otherwise impact Healtheon's warranty or indemnification obligations set forth in Section 14.3 below. 3.18 CONTENT SPECIFICATIONS. It is understood that the provisions of Exhibit A-1 of the WebMD Agreement do not apply to the Medical Professionals Section of the WebMD Site or Healtheon Site. 6 7 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 4. MICROSOFT ONLINE ID PROGRAM. Healtheon agrees to test, evaluate, and use, take sign ups for and accept the IDs for Microsoft's proprietary authentication service ("Microsoft Passport") on both the Health Channel (as provided in the WebMD Agreement) and on the Healtheon Site and the WebMD Site, and all of WebMD's existing profiling and authentication mechanisms will also take sign ups for and accept the IDs for Passport. Healtheon shall use Microsoft Passport in accordance with the terms of the then-current Microsoft Online ID Evaluation Program Agreement attached hereto as Exhibit A and such further standard terms and conditions that are offered from time to time in addition to or as a replacement for those currently contained in such agreement. The parties acknowledge and agree that Healtheon may accept other authentication mechanisms on the Healtheon Site and WebMD Site. Healtheon agrees, however, that Microsoft Passport will be the only authentication mechanism distributed (i.e., take sign ups) on the Health Channel (as provided in the WebMD Agreement) and on the Healtheon Consumer Site and WebMD Consumer Site other than any Healtheon proprietary authentication mechanisms existing as of the Effective Date or as mutually agreed between the parties. Healtheon's obligations under this Section 4 shall extend to any localized WebMD Consumer Site, to the extent that a localized version of Passport is available for the relevant market. In the event that Healtheon reasonably believes that Microsoft Passport does not meet its reasonable quality and service standards, or that it fails to comply with identified legal requirements, Healtheon shall notify Microsoft of the details of such concerns and Microsoft shall have ninety days in which to resolve such concerns. In the event that Passport does not meet such reasonable quality and service standards or Microsoft determines, in its sole discretion, that it is not commercially reasonable to modify Passport in such a manner as to resolve such concerns, then Healtheon shall be permitted to distribute and accept other mechanisms for the purposes identified in Healtheon's notice to Microsoft on the WebMD Site or the Healtheon Site. 5. OTHER MICROSOFT INTERNET SERVICES. Except as prevented by any contracts between Healtheon and third parties existing as of the Effective Date, upon notice from Microsoft that any such service or technology is available for distribution, Healtheon agrees, as soon as commercially feasible, to prominently implement on the Healtheon Site, and prominently provide end users with access from the Healtheon Site to, each Microsoft Internet service and technology that is available on the MSN Site as of the Effective Date, including, but not limited to services and technologies included within the Other Microsoft Properties, a Microsoft business, e-commerce, communication service and technology, which includes a common format and process for exchanging products, business information, promotional information and other business data over the Internet, and a Microsoft web hosting service and technology, which includes software and tools that enable web site creation and hosting, and all other Microsoft Internet services not otherwise specifically addressed in other Sections of this Agreement that are available on the MSN Site as of the Effective Date ("Other Microsoft Internet Services") pursuant to Microsoft's standard user interface and distribution terms. For services or technologies not included in the Other Microsoft Internet Services ("New Microsoft Internet Services"), if Microsoft or its affiliates make publicly available such services or technology before Healtheon, Healtheon agrees that, where commercially reasonable, Microsoft and its affiliates shall be the sole providers of such New Microsoft Internet Services for the Healtheon Site and WebMD Site. For purposes of the immediately preceding sentence, "commercially reasonable" shall mean those situations where Healtheon (1) has already made substantial progress toward an alternate solution and (2) has previously made a significant investment in or contractual commitment to that alternative solution. For New Microsoft Internet Services that Microsoft or its affiliates make publicly available after Healtheon makes publicly available substantially similar services or technology, Microsoft and its affiliates shall be the sole providers of such new Microsoft Internet Services for the Healtheon Site and WebMD Site only upon mutual agreement of the parties. To such end, Microsoft shall provide Healtheon with such materials, technology and support as it routinely provides to other third parties distributing such technologies. In the event that Healtheon offers Other Microsoft Internet Services or New Microsoft Internet Services on the Healtheon Site in accordance with the foregoing, Healtheon shall not promote any competing technology on the Healtheon Site, other than during a commercially reasonable transition period for discontinuing any such promotion. Healtheon's obligations under this Section 5 are subject to Healtheon's contractual obligations existing as of the Effective Date, and shall extend to any version of the Healtheon Site localized for any international market and to any version(s) of the Healtheon Site, to the extent that a localized version of any Other Microsoft Internet Service(s) or New Microsoft Internet Service(s) is available for the relevant market. Healtheon shall develop, maintain, and host that which is necessary and reasonably requested by Microsoft to implement the services and technologies specified in this Section 5. Upon mutual agreement, the parties shall work together and with appropriate third parties to create appropriate industry standards. 6. SECURE MESSAGING AND NOTIFICATION SERVICES. The parties agree that within thirty days of the Effective Date, they will meet to discuss and determine whether to create a mutually agreed plan pursuant to which they will 7 8 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. pursue opportunities for Healtheon in the following areas: (i) offering of Healtheon's secure messaging service to HotMail users; and (ii) joint development and provision of notification services (e.g., schedule an appointment, prescription refill reminders) to Health Channel users, including integration of such services into other MSN properties such as personalization services and Hotmail. 7. MICROSOFT ADCU OBJECTIVES. 7.1 PRESS RELEASE. Consistent with the technology and platform commitments made in the WebMD Agreement, simultaneously with the announcement of the H-W Transaction or at such other time as Microsoft and Healtheon mutually agree, Microsoft and Healtheon will jointly develop a public press release announcing Healtheon's long-term commitment to Microsoft's technology and platform and articulating the benefits of building a healthcare portal and transaction solution on Microsoft technology. In addition, Healtheon agrees to issue additional subsequent press releases and public announcements pertaining to successes or milestones of events utilizing Microsoft technology no less frequently than once per quarter or as otherwise mutually agreed between the parties, provided that such releases shall be at a time and in a form mutually agreed between the parties. 7.2 ISV INTEGRATION. Understanding that Microsoft currently works with over 460 healthcare independent software vendors ("ISVs"), Microsoft and Healtheon agree to cooperate in good faith to develop a plan ("Plan 1") for integrating existing ISV applications and systems for transaction processing into the Healtheon solution for health care (including but not limited to use of the Healtheon Site and Healtheon healthcare transaction solutions) (i.e., to make compatible with the back end Healtheon technology). The Plan 1 will be completed within thirty (30) days of the Effective Date and will incorporate the following components: 7.2.1 A clear value proposition to ISVs that positions Healtheon, to the extent reasonably possible consistent with Healtheon's business plan, as a healthcare web portal providing content, community, and services. In the event that Microsoft reasonably determines that Healtheon's owning (whether through building or acquiring) any line of business application designed to replace (rather than supplement or interface to) traditional software applications falling within one or more of the Core Categories is contrary to the parties' goals and intent with regard to the ISVs under the WebMD Agreement and this Agreement, Microsoft shall notify Healtheon of such determination. Microsoft shall notify Healtheon of such determination within 15 days after Healtheon notifies Microsoft of Healtheon's intent to build or acquire any such line of business application. The parties shall have a 45-day period following notice of such determination in which to work together to reach consensus on whether the particular line of business application materially conflicts with such goals and intent and how to resolve such conflict. If Healtheon becomes the owner of a line of business application in a Core Category as a result of a business acquisition, merger or other business combination, the resolution of such conflict would include a reasonable transition period of 180 days for Healtheon to harmonize such line of business application with the objectives of this agreement or dispose of such application; provided, however, that Microsoft shall have the right to notify third parties of the resolution at any point following the 45th day of such 180 day period. The preceding sentence shall not impact Microsoft's termination right set out below if the parties are unable to resolve the conflict within the 45-day period. "Core Categories" is defined to mean (1) Hospital Based Applications: patient accounting, medical records, enterprise resource planning, pharmacy laboratory, radiology, and materials management; (2) Physician Practice Management Applications: billing and scheduling; (3) Electronic Medical Records (defined as the legal electronic clinical documents used by clinicians within healthcare organizations); and (4) Managed Care/Payor Claims Administration Solutions. In the event that by the end of such 45-day period, the parties are unable to reach agreement on a resolution, Microsoft shall have fifteen days immediately following the end of such 45-day period in which to exercise its right to terminate this Agreement and the WebMD Agreement. In the event that Microsoft exercises such termination right, the parties shall cooperate in good faith for 120 days following the date on which Microsoft exercises such right to wind down the parties' relationship, including without limitation, working to notify customers, transferring end users in the event of any kind of joint relationship, agreeing on joint messaging and press releases. 7.2.2 A tiered approach to the market based on the ISVs value to Healtheon and Microsoft moving forward. 7.2.3 A mutually agreed upon list of the top ISVs in the acute, ambulatory, and payor segments and PMS vendors. 8 9 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 7.2.4 The details of a road show where both Healtheon and Microsoft meet with each of the agreed strategic ISVs to present the value proposition and obtain ISV commitments. 7.2.5 A rapid integration methodology (outlined in the Section 11 below (MCS and Technology Commitments)) that provides value to the ISVs moving forward. 7.2.6 A detailed joint Microsoft and Healtheon proposal to be presented to the ISVs regarding how to integrate the Healtheon solution for healthcare (including but not limited to use of the Healtheon Site and Healtheon healthcare transaction solutions) into the ISVs' line of business applications and offering the ISVs a Microsoft software subscription model to the extent that it exists that can be resold by the ISVs within their respective client bases. Such detailed joint proposal shall at a minimum include a description of the Healtheon Integration Platform ("HIP"). No later than the completion of the work outlined in the Migration Plan described in Section 11, HIP shall be based on the Microsoft Technology Platform and the Microsoft Healthcare Interoperability Framework. The scope of HIP includes: (I) Webtop integration framework for integrating third-party info-services (addresses issues such as common login, context-sharing, personalization etcetera); (II) secure messaging standard; (III) common document distribution framework; (IV) common role-based security and authentication model; (V) data exchange interface for back-end integrations with third-party systems such as PMS, MCS, Payor, Membership, Lab, PBM and HRIS systems; (VI) standard mechanism for interfacing with other EDI gateways; (VII) data standards for administrative and clinical information; and (VIII) middleware-level integration standard. Microsoft will work with Healtheon to include HIP as relevant in Microsoft's other standards initiatives. Microsoft will promote interfacing to Healtheon's Internet transaction services through the Microsoft COM-based interfaces to be included in HIP, at such time as such interfaces are completed to the parties' reasonable satisfaction, as a healthcare industry standard means for ISVs to web enable their applications with Healtheon. 7.2.7 Participation by both parties in the development of standard interface library(ies) for ISVs, legacy systems, etc. to support broad industry positioning. To that end, Healtheon shall adopt, and Microsoft and Healtheon will work together to promote and establish HIP and the Microsoft Healthcare Interoperability Framework (as defined in the WebMD Agreement). The Microsoft Healthcare Interoperability Framework is a multilevel standard designed to provide interoperability between applications and systems across desktops PCs, servers, networks, and legacy systems in the healthcare industry. The Microsoft Healthcare Interoperability Framework includes the Active X for Healthcare standard and BizTalk (which together include components of COM, DCOM, COM+, and XML or other enhancements). 7.2.8 Participation by both parties in an ISV advisory board or steering committee which will include representatives of the top (measured in terms of physician distribution commitment) four ISVs that use and promote the Healtheon Site. Plan 1 will provide at a minimum for calls to be made to the ISVs listed in Exhibit B. Microsoft will position the Healtheon solution for healthcare (including but not limited to use of the Healtheon Site and Healtheon healthcare transaction solutions) as a broad electronic health ("E-Health") strategy that provides healthcare content, community, and services and will use reasonable efforts to encourage its major ISV alliance partners to develop and integrate key distributed applications based on Microsoft technologies that would operate in conjunction with the functionality and content of the Healtheon Site. Healtheon will do such things as are commercially reasonable to permit existing ISVs to integrate their applications into the Healtheon solution for health care (including but not limited to integration into the Healtheon Site and Healtheon healthcare transaction solutions). 7.3 MICROSOFT PRODUCT LICENSING COMMITMENT. Healtheon will agree to work with Microsoft in establishing a mutually agreed upon plan ("Plan 2") with respect to potentially incorporating a Microsoft software subscription model into its overall service offering. This Plan 2 shall include a definition of the products involved (i.e. IE, MSN, Office, BackOffice), pricing methodologies, as well as specific mechanics for deployment and periodic reporting to ADCU of sales influenced by Healtheon. This Plan 2 will be completed within thirty (30) days of the Effective Date. Plan 2 will include new subscription model pricing, if available, for Healtheon customers and a commission structure to incent Healtheon to distribute Microsoft software. 9 10 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 7.4 LIMITATIONS. Subject to contracts in existence as of the Effective Date, during the Term of this LOA and the Agreement, Healtheon shall not, directly or indirectly, license, or agree to provide a Healtheon Offering (as defined below) (i) to or in conjunction with any of the companies listed in Exhibit C, or (ii) that contain branding or co-branding promoting or highlighting the company(ies) listed in Exhibit C. Subject to contracts in existence as of the Effective Date, during the Term of this LOA and the Agreement, if Healtheon, directly or indirectly, licenses, or agrees to provide a Healtheon Offering (i) to or in conjunction with any of the companies listed in Exhibit C or (ii) that contain branding or co-branding promoting or highlighting the company(ies) in Exhibit C, then Healtheon shall inform and allow Microsoft to propose the incorporation of Microsoft's products and services in such Healtheon Offering. Healtheon shall keep Microsoft reasonably informed regarding all Healtheon Offerings planned or under development, subject to confidentiality requirements and obligations to third parties. The foregoing sentence does not apply to custom developments for Healtheon customers. For the purposes of this Agreement, "Healtheon Offering" means any co-branded or third party-branded Internet, intranet, broadcast or other electronic offering of health-related content, features, services, or technology that incorporates all or portions of the Healtheon Site. In addition, in the event that the parties mutually agree to allow a third party to host Healtheon Offerings, Healtheon hereby licenses to Microsoft and/or such third party all such rights as are necessary to permit Microsoft and such third parties to use, copy, execute, display, perform, distribute, transmit, and/or broadcast the agreed upon Healtheon Offerings as necessary for Microsoft and/or such third party(ies) to host such Healtheon Offerings. 8. BOARD REPRESENTATION. As part of its equity stake in Healtheon, Microsoft will be entitled to nominate one member of the Healtheon Board of Directors. At its next meeting of shareholders, Healtheon's board shall recommend to its shareholders the election of a nominee designated by Microsoft (the "Microsoft Designee") to the Healtheon Board of Directors. Further, upon the expiration of the Microsoft Designee's term, or the resignation of the Microsoft Designee from the Board of Directors, Healtheon's board shall recommend the election of the Microsoft Designee (or any substitute identified by Microsoft) at the next meeting of its shareholders following such expiration or resignation. In addition, Microsoft will have the right to designate one board observer.. 9. HEALTHEON MANAGEMENT. The parties acknowledge and agree that it is anticipated that Mike Long will the Chairman and Chief Operating Officer of the H-W Entity, and that Jeff Arnold will be the Chief Executive Officer of the H-W Entity. 10. OTHER RIGHTS. From time to time, in the event Healtheon receives a term sheet, expression of interest or verbal offer from a third party for a business combination (as defined in Rule 145 under the Securities Exchange Act of 1934, that Healtheon does not within 48 hours reject) resulting in a 40% or greater change in ownership of Healtheon, Healtheon shall promptly notify Microsoft of the identity of the third party and the terms of the offer. Healtheon may not enter a binding agreement with any party within 10 business days after the time Microsoft is first given notice of the offer to acquire the company, unless the delay would, in the written opinion of Healtheon's outside legal counsel, result in the breach of the directors' fiduciary duties. 11. MCS AND TECHNOLOGY COMMITMENTS. 11.1 MICROSOFT TECHNOLOGY PLATFORM. Section 1.11 of the WebMD Agreement is amended to read as follows: "MICROSOFT TECHNOLOGY PLATFORM" shall mean those Microsoft technologies commonly referred to as: Microsoft Windows, Microsoft Office, Microsoft BackOffice and any of its components, Microsoft Commerce Server, Microsoft Visual Studio and COM, including any updates and upgrades thereto released during the term. 11.2 ADOPTION AND USE OF MICROSOFT TECHNOLOGY PLATFORM. Healtheon agrees to make the Microsoft Technology Platform Healtheon's primary platform for the development of all new services, defined as those Healtheon services not in existence or under development as of the Effective Date. However, there will be well-defined quality of service checkpoints in the development timeline to address any issues with respect to the ability of the Microsoft Technology Platform to meet commercial readiness standards for quality, functionality and reliability. 10 11 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 11.3 MIGRATION OF EXISTING SERVICES. Healtheon will migrate its existing services to the Microsoft Technology Platform in carefully planned phases. As part of the MCS engagement referenced in Section 11.4 below, Healtheon and Microsoft will mutually agree on a phased migration plan which will be based on, without limitation, the following: quality, functionality and reliability of the applicable Microsoft technology; the business ramifications to Healtheon and its customers of the migration; and the degree and manageability of the risks involved (the "Migration Plan"). Healtheon and Microsoft will develop and agree on a detailed Migration Plan no later than 90 days immediately following the Effective Date. The Migration Plan will include, at a minimum, the Healtheon services selected as candidates for migration, an anticipated migration schedule, Healtheon's anticipated internal use needs for Microsoft software products, and the estimated costs of migrating the selected services. The parties expect initially to migrate one service at a time and anticipate that migration of all selected services could require up to three years, but in any event, all migration of services shall be completed no later than three years from the Effective Date. The Migration Plan will include regular quality of service checkpoints to ensure that the applicable technology meets the agreed upon requirements for quality, functionality and reliability. The primary components of the Migration Plan will be jointly reviewed and revised as necessary at meetings between the parties held no less often than quarterly. Healtheon shall make best efforts to meet the requirements of the Migration Plan, including without limitation, the anticipated schedule and cost estimate. 11.4 MCS ENGAGEMENT. No later than thirty days immediately following the Effective Date, Healtheon agrees to execute the Microsoft Master Services Agreement ("MSA") attached hereto as Exhibit D, pursuant to which it will engage all Microsoft Consulting Services ("MCS") and Microsoft Premier Support Services as provided for under this Agreement. Healtheon agrees to engage MCS to undertake development of the Migration Plan identified in Section 11.3 above, as further set forth in the MSA and MCS work order ("Work Order") attached hereto as Exhibit D. Any and all MCS services to be engaged by Healtheon pursuant to this Agreement and/or the WebMD Agreement shall be set forth in a Work Order pursuant to the MSA, which Work Order shall be mutually agreed upon and executed by the parties prior to the commencement of any such MCS services. 11.5 COST OF MIGRATION. Microsoft will provide financial assistance for Healtheon's migration to Microsoft technology as follows: 11.5.1 MICROSOFT SOFTWARE FOR INTERNAL USE. Microsoft will support Healtheon's adoption of the Microsoft Technology Platform for internal use by providing, at no cost to Healtheon, certain Microsoft software licenses as set forth in Exhibit G attached hereto and any other Microsoft software licenses reasonably required and agreed between the parties. Such software shall be used solely for internal development purposes and internal use and not for use in Healtheon's production environment or operations. Microsoft's obligation to provide such software licenses is expressly subject to and conditioned on Healtheon's purchase of maintenance for such software licenses during the Term, as follows. No later than 90 days immediately following the Effective Date, Healtheon will execute a Microsoft Enterprise Select Agreement or Microsoft Select Agreement (the "Enterprise Agreement") pursuant to which it will acquire the software licenses and maintenance as provided in this Section 11.5.1. Healtheon acknowledges and agrees that for any initial licenses that Microsoft provides during the first year of the term of this Agreement, Healtheon shall purchase maintenance as provided in the Enterprise Agreement for a minimum period of three years. In the event that, at Healtheon's request, Microsoft agrees to provide additional software licenses at no initial cost to Healtheon during the second or third year of the term, Healtheon shall purchase maintenance under the Enterprise Agreement for such additional licenses for a minimum of two years from the date on which Microsoft grants any such license. Additional licenses granted in year three of the term will, subject to the purchase of the relevant maintenance by Healtheon pursuant to the Enterprise Agreement, be enrolled under either (i) the Enterprise Agreement as extended into a fourth year or (ii) a new mutually agreed Select or Open License Agreement, providing in either case for maintenance for such licenses for a minimum of two years from the date on which Microsoft grants any such license. 11.5.2 COSTS OF EXISTING HEALTHEON SOFTWARE. To the extent that prior to the Effective Date Healtheon has made an investment in software products that it will no longer be able to utilize as a result of the requirements and obligations of this Agreement (the "Obsolete Software"), Microsoft agrees to provide Healtheon with Microsoft software products sufficient to replace such Obsolete Software. In addition, to the extent that after the Effective Date and before the completion of the migration at the end of the third 11 12 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. year of the term, Healtheon is required to acquire additional non-Microsoft software products to support its non-migrated services (the "Additional Obsolete Software"), Microsoft shall provide Healtheon with replacement Microsoft software products as such products become obsolete; provided, however, that Healtheon notifies Microsoft of any such Additional Obsolete Software. Microsoft's payment obligation under this Section 11.5.2 shall be subject to mutual agreement by the parties of relevant costs intended to be covered under this section and receipt by Microsoft from Healtheon of appropriate documentation substantiating such costs. 11.5.3 HARDWARE AND TRAINING. Subject to all applicable legal restrictions, Microsoft shall exercise best efforts to work with Healtheon to provide it with access to the favorable discounts available from hardware suppliers with whom Microsoft has ongoing business relationships. Microsoft shall exercise best efforts to assist Healtheon in establishing relationships with Microsoft Certified Technical Education Centers ("CTECs") to assist Healtheon in obtaining favorable discounts for training services related to Microsoft software products. 11.5.4 MCS CONSULTANT EXPENSE. The parties agree that the dollar limit of Two Million Five Hundred Dollars (US$2,500,000) as provided in Section 4.4 of the WebMD Agreement shall be increased to Five Million Dollars (US$5,000,000). All other terms and conditions of Section 4.4 shall remain the same. 11.5.5 OTHER FUNDING. Microsoft will make funding available to Healtheon during the first three years of the term in an amount not to exceed Fifteen Million Dollars (US$15,000,000). If it is mutually agreed that additional funding is required, Microsoft will make up to an additional Five Million Dollars (US$5,000,000) available during such period. The parties currently anticipate that part of such amount shall be available to Healtheon in each of the first two years of the term. Beginning on the third anniversary of the Effective Date, Healtheon will begin to make royalty payments to Microsoft based on a to-be-agreed upon revenue stream, that will enable Microsoft to recover the amounts made available to Healtheon under this Section 11.5.5, plus a mutually agreed upon rate of return, no later than the fifth anniversary of the Effective Date. Microsoft's obligation to provide any funding under this Section 11.5.5 is expressly subject to and conditioned upon the parties reaching mutual agreement on the terms and conditions of a funding plan within sixty days immediately following the Effective Date. Failure to agree on the terms of funding as provided for in this Section 11.5.5 shall not in any way impact or alleviate Healtheon's other obligations under this LOA. Other key terms of the funding plan shall include: - If Microsoft terminates the WebMD Agreement and/or this LOA due to a breach by Healtheon, Healtheon will, within 30 days of the date of termination, provide the aggregate amount of the funding back to Microsoft plus a mutually agreed upon rate of return. - The funding relationship shall not be assigned without Microsoft's prior written consent. In the event the relationship is assigned without Microsoft's consent, Healtheon will, within 30 days of the date of assignment, provide the aggregate amount of the funding back to Microsoft plus a mutually agreed upon rate of return. - The parties will identify an alternate revenue stream which can be used to accelerate royalty payments in the event that it appears, at the end of the third or fourth year of the term, that Microsoft will not recover the funding plus the agreed upon rate of return by the end of the fifth year of the term. - Microsoft agrees to work with Healtheon to provide the most favorable accounting treatment. Healtheon's obligations covered under this Section 11 are not conditional on this Section 11.5.5 to the extent that Microsoft and Healtheon cannot agree on the funding terms as principally outlined above in this Section 11.5.5. 11.6 MICROSOFT PREMIER SUPPORT. No later than thirty days immediately following the Effective Date, Healtheon shall purchase Microsoft Premier Support Services for Developers, Level B, pursuant to the terms of the 12 13 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. MSA at standard rates for such services. Healtheon shall maintain such Premier support services at least at the level specified in this Section 11.6 for a minimum period of three years. 11.7 To the extent that any of the provisions of this Section 11 are inconsistent or conflict with the provisions of Section 4 of the WebMD Agreement, the parties agree that the terms of this Section 11 shall control. 12. GENERAL TERMS AND CONDITIONS 12.1 PROPRIETARY RIGHTS. Each party agrees that except as expressly licensed to another party, each party shall retain all right, title, and interest in any and all materials it delivers to any other party for use under this LOA or the Agreement and no other party shall alter, modify, copy, edit, format, translate, create derivative works of or otherwise use any materials, content, feature or technology, etc. without express written approval. If any parties agree to jointly develop any content, materials, services, technology, features or otherwise, ownership of such development shall be specifically detailed in an appropriate agreement prior to the start of any development. 12.2 CONFIDENTIALITY. Each party acknowledges and agree that the terms and conditions of the Microsoft Corporation Non-Disclosure Agreement dated as of even date herewith ("NDA"), attached hereto as Exhibit E, is incorporated into this Agreement and that all of the terms of this LOA and of the Agreement (including but not limited to its existence) and all discussions and negotiations related thereto are considered Confidential Information as defined in the NDA. In the event that any of the incorporated terms of the NDA are inconsistent with or conflict with this Agreement, then the terms of this Agreement shall control. 12.3 TRADEMARKS. Any use of a party's names, brands or logo(s) shall be pursuant to appropriate agreements and guidelines regarding such use. 12.4 DISTRIBUTION OF CONTENT AND MSN INTERNET TECHNOLOGIES. Healtheon's distribution of any Microsoft, WebTV or MSNBC content and the MSN Internet Technologies shall be pursuant to appropriate agreements and guidelines regarding such distribution. 12.5 PRODUCTS OR SERVICES DELIVERED UNDER THE TERMS OF THIS AGREEMENT SHALL BE SUBJECT TO THE TERMS OF THE LIMITED WARRANTY STATEMENT, IF ANY, SPECIFIED BY THE DELIVERING PARTY FOR THE SPECIFIC PRODUCT OR SERVICE. CERTAIN SOFTWARE PRODUCTS MAY BE PROVIDED TO THE OTHER PARTY "AS IS" WITHOUT WARRANTY OR CONDITION OF ANY KIND, IF SO DESIGNATED BY THE LICENSOR. FOR SUCH PRODUCTS, THE ENTIRE RISK AS TO THE RESULTS AND PERFORMANCE OF SUCH SOFTWARE IS ASSUMED BY THE RECEIVING PARTY AND ITS CUSTOMERS AND SUBLICENSEES, IF ANY. THE WARRANTIES SET FORTH IN SECTIONS IN THIS SECTION 12.6 OR ELSEWHERE IN THIS LOA OR THE AGREEMENT ARE THE ONLY WARRANTIES MADE BY THE PARTIES. EACH PARTY DISCLAIMS ANY AND ALL OTHER WARRANTIES OR REPRESENTATION EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY, TITLE, AND FITNESS FOR A PARTICULAR PURPOSE. NO PARTY WARRANTS THAT ACCESS TO OR USE OF THE SITES OR CHANNELS WILL BE UNINTERRUPTED OR ERROR-FREE, OR THAT ANY SOFTWARE OR SERVICES WILL MEET ANY PARTICULAR CRITERIA OF PERFORMANCE OR QUALITY. 12.6 LIMITATION OF LIABILITIES. NO PARTY SHALL BE LIABLE TO THE OTHER FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, PUNITIVE OR SPECIAL DAMAGES, ARISING OUT OF OR RELATED TO THIS AGREEMENT INCLUDING, WITHOUT LIMITATION, DAMAGES FOR LOSS OF BUSINESS PROFITS, BUSINESS INTERRUPTION, LOSS OF BUSINESS INFORMATION, AND THE LIKE, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. THIS SECTION SHALL NOT APPLY TO ANY PARTY'S (A) ABILITY TO OBTAIN INJUNCTIVE OR OTHER EQUITABLE RELIEF; (B) OBLIGATIONS UNDER SECTION 10 OR THE NDA; AND (C) INDEMNIFICATION OBLIGATIONS UNDER SECTION 14. 12.7 INSURANCE. Healtheon shall procure and during the Term maintain such insurance in a form and with insurers reasonably acceptable to Microsoft, as is required by Microsoft, which shall in no event be less than that required of WebMD under the WebMD Agreement. 13 14 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 12.8 INDEPENDENT CONTRACTORS. The parties are independent contractors with respect to each other, and nothing in this LOA or the Agreement shall be construed as creating an employer-employee relationship, a partnership, agency relationship or a joint venture between the parties. 12.9 GOVERNING LAW. This LOA and the Agreement shall be governed by the laws of the State of New York as though entered into by New York residents and to be performed entirely within the State of New York. The parties consent to exclusive jurisdiction and venue in the state and federal courts sitting in New York. In any action or suit to enforce any right or remedy under this Agreement or to interpret any provision of this Agreement, the prevailing party shall be entitled to recover its costs, including reasonable attorneys' fees. 12.10 ASSIGNMENT. No party may transfer, assign or sublicense this LOA or the Agreement, or any rights and/or obligations hereunder, whether by contract or by operation of law, except with the express written consent of the other parties, and any attempted transfer, assignment or sublicense by a party in violation of this Section shall be void and shall constitute a material default and breach of this Agreement. 12.11 CONSTRUCTION. In the event that any provision of this LOA or the Agreement conflict with governing law or if any provision is held to be null, void or otherwise ineffective or invalid by a court of competent jurisdiction, (i) such provision shall be deemed to be restated to reflect as nearly as possible the original intentions of the Parties in accordance with applicable law, and (ii) the remaining terms, provisions, covenants and restrictions of this LOA or the Agreement shall remain in full force and effect. This LOA or the Agreement has been negotiated by the parties and their respective counsel and will be interpreted fairly in accordance with its terms and without any strict construction in favor of or against any party. 12.12 NOTICES. All notices and requests in connection with this Agreement shall be given in writing and shall be deemed given as of the day they are received either by messenger, delivery service, or in the United States of America mail, postage prepaid, certified or registered, return receipt requested, and addressed as follows: To Microsoft: To Healtheon: Microsoft Corporation Healtheon Corporation One Microsoft Way 4600 Patrick Henry Drive Redmond, WA 98052-6399 Santa Clara, CA 95054 Phone: 425.882.8080 Phone: 408.876.5000 Fax: 425.936.7329 Fax: 408.876.5010 Attention: Attention: Chief Executive Officer Copy to: Law & Corporate Affairs, US Legal Copy to: General Counsel Fax: 425.936.7409 Fax: 408.876.5450
or to such other address as a party may designate pursuant to this notice provision. 12.13 ENTIRE AGREEMENT. This LOA and the Agreement shall not be effective until signed by both parties. This LOA constitutes the entire agreement between the parties with respect to the subject matter hereof, supersedes all prior and contemporaneous agreements or communications and shall not be superceded except by execution of the Agreement. This LOA shall not be modified except by a written agreement dated subsequent to the date of this LOA and signed on behalf of by each party by their respective duly authorized representatives. No waiver of any breach of any provision of this LOA shall constitute a waiver of any prior, concurrent or subsequent breach of the same or any other provisions hereof, and no waiver shall be effective unless made in writing and signed by an authorized representative of the waiving party. 14 15 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. If the foregoing is acceptable to you, please execute it where indicated below. Very truly yours, /s/ Laura Jennings Laura Jennings Vice President Microsoft Corporation ACKNOWLEDGED AND AGREED HEALTHEON CORPORATION. By /s/ Jack Dennison Name (Print) Jack Dennison Title Vice President Date 6/10/99 WEBMD, INC. By /s/ W. Michael Heekin Name (Print) W. Michael Heekin Title Executive V.P. Date 5/28/99 15 16 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Exhibit A MS ONLINE ID EVALUATION PROGRAM AGREEMENT This evaluation agreement ("Agreement") is made by and between MICROSOFT CORPORATION, One Microsoft Way, Redmond, WA 98052 ("Microsoft") and HEALTHEON, CORPORATION, 4600 Patrick Henry Drive Santa Clara, CA 95054 ("Company") as of the later of the two signature dates (the "Effective Date"). WHEREAS, Microsoft desires that Company test, utilize and evaluate the software associated with Microsoft's proprietary authentication service currently known as Microsoft Online ID and the associated SDK (the "Product"); and "WHEREAS, Company desires to test, utilize and evaluate the Product in anticipation of participating in the full Microsoft Online ID program when, and if, such program is generally released to the market. NOW THEREFORE, the parties agree as follows: 1. EVALUATION LICENSE (a) Company shall implement the Product and all upgrades, fixes and versions provided by Microsoft within a test version the Healtheon ("Company Site"), such implementation shall be in compliance with the standard SDK provided with the Product. Upon Microsoft's direction, Company shall implement the Product on the version of Company's Site that is available to the general public. In connection with such implementation, Microsoft grants to Company a limited, non-exclusive, nontransferable, royalty-free license to use the Product on Company's CPUs and any accompanying printed materials ("Documentation"), for the purpose of developing the Company Site to ensure compatibility with the Product and testing and evaluating the Product and associated applications created by Company that are required to be integrated with the Product. All other rights are reserved to Microsoft. Company shall not use the Product for any purpose other than as set forth in this Agreement. Company shall not rent, lease, sell, sublicense, assign, or otherwise transfer the Product or the Documentation. Company may not reverse engineer, decompile, or disassemble the Product, except to the extent that the foregoing restriction is expressly prohibited by local law. Microsoft and its suppliers shall retain title and all ownership rights to the Product. (b) Company agrees to provide reasonable feedback to Microsoft, including but not limited to usability, bug reports and test results, with respect to the testing of the Product, within fifteen (15) days of Company's receipt of the product and each upgrade and fix. Company-will use reasonable efforts to review and comment on all Documentation supplied. All bug reports, test results and other feedback made by Company shall be the property of Microsoft and may be used by Microsoft for any purpose it sees fit. Due to the nature of the development work, Microsoft is not certain as to when errors or discrepancies in the Product may be corrected; however Microsoft will provide Company with all bug fixes and upgrades as such items become available and Company agrees to implement said fixes and upgrades within ten (10) days of receipt. 2. PRIVACY POLICY Company acknowledges that the privacy of end-users' personal information is a core component of the Microsoft Online ID program. Company represents that it is either currently or will become, prior to the implementation of the Product on the version of Company's Site that is available to the general public, a participant in an industry recognized independent privacy program, such as the TRUSTe Program or the BBBOnline Privacy Seal Program, which: (a) requires an approved privacy policy to be posted within the Company Site in a manner that is readily accessible to the end-users; (b) requires Company to obtain explicit consent to any usage of their personal information for any purpose other than described in Company's privacy policy; (c) provides for a dispute resolution method with adequate enforcement mechanisms; (d) reviews, monitors and enforces the standards set by the program, and (e) requires Company to comply with additional privacy standards which may become recognized by the industry from time to time. All versions of Company Site utilizing the Product shall comply with the standards set by such independent privacy program. 16 17 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 3. MICROSOFT SERVICES (a) Microsoft shall provide a mechanism and user interface (the "Sign Up Mechanism") which will allow end-users to participate in the Microsoft Online ID program and obtain appropriate user names and passwords upon accessing Company Site. (b) Microsoft shall provide authentication services for end-users entering the Company site who have a Microsoft Online ID. If such end-user has not yet obtained a Microsoft Online ID the end-user will be directed to the Sign Up Mechanism described in Section 3(a). (c) During the authentication process, Microsoft shall provide Company with the core profile information contained within the Microsoft Online ID database as determined by Microsoft in its sole discretion (the "Core Profile"). 4. INFORMATION USAGE (a) Company may use the information in the Core Profile in perpetuity for any purpose provided that Company complies with the requirements set forth in Sections 2 and 7. (b) Microsoft shall provide Company with a list of the information contained within the Core Profile and if Company receives updated or additional Core Profile information from an end-user then Company agrees to provide end-users with the option of updating this information in the central Microsoft Online ID Core Profile. The Product will provide a standard Microsoft Online ID update mechanism to facilitate updates to the Microsoft Online ID Core Profile. 5. DESIGN AND USER INTERFACE (a) Prior to the implementation of the Product on the version of the Company Site which is available to the general public, Microsoft may request compliance with certain additional design and user interface guidelines ("Microsoft Online ID UI Guidelines") not included within the SDK, including but not limited to Microsoft Online ID logo placement, text copy, links, and input boxes (e.g. for sign in). Within ten (10) days of Company's receipt of the Microsoft Online ID UI Guidelines, Company shall implement the specified user interface and comply with the specifications set forth in such guidelines. (b) Microsoft will include Company's logo within the Sign Up Mechanism, in connection with such use Company hereby grants Microsoft a non-exclusive, royalty free, worldwide limited right to use and display Company's name and logo. Microsoft will provide logo specifications to the Company and the Company agrees to provide the requested logos to Microsoft on a timely basis. 6. PRODUCT MAINTENANCE AND SUPPORT Microsoft shall use commercially reasonable efforts to provide technical support for the Product. Microsoft agrees to designate one primary contact person that will be responsible for coordinating all technical support inquires and responses and Company agrees to designate one primary contact person that will be responsible for sending inquiries to and receiving responses from the designated Microsoft person. 7. TERM OF AGREEMENT (a) The term of this Agreement shall commence on the Effective Date and shall continue for an initial period of six (6) months provided that the term shall automatically renew for additional one (1) month periods unless terminated as otherwise provided for in this Agreement, amended or superceded by further agreement. Either party may terminate this Agreement at any time, with or without cause, upon sixty (60) days prior written notice; provided that neither party may terminate this Agreement under this sentence prior to the termination of the MSN Channel and Cross Promotion Agreement ("Channel Agreement") entered into of even date herewith. 17 18 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. (b) In addition to any other rights and/or remedies that either party may have under the circumstances, all of which are expressly reserved, either party may terminate this Agreement immediately upon written notice at any time if the other party is in material breach of any material warranty, representation, term, condition or covenant of this Agreement and fails to cure that breach within five (5) days after written notice thereof, provided that if Company is the terminating party, such material breach must also be a material breach of the LOA or the Agreement (as defined in the LOA to which this document is attached), as applicable and Company must also simultaneously terminate such LOA or Agreement, as applicable. (c) Upon the termination of this Agreement, Company shall: (i) promptly cease using the Product and return to Microsoft, or certify destruction of, all full or partial copies of the Product, Documentation and related materials provided by Microsoft; (ii) notify end-users that the Company site is no longer utilizing the Microsoft Online ID authentication service; and (iii) discontinue the use of all Core Profile information; provided that Company may continue to use the Core Profile information if Company continues to comply with the terms of Section 2. (d) In the event of termination or expiration of this Agreement for any reason each and every clause which by its nature is intended to survive the termination of this Agreement including, without limitation, Sections 7 through 12 shall survive termination. Neither party shall be liable to the other for damages of any sort resulting solely from terminating this Agreement in accordance with its terms. 8. CONFIDENTIALITY (a) The Product, including its existence and features, are proprietary and confidential information to Microsoft and its suppliers. Company agrees not to disclose or provide the Product, Documentation, or any information relating to the Product (including the existence of the Product, features, or the results of use or testing) to any third party (except as otherwise necessary to operate Company's Web site). If Microsoft and Company have entered into a Microsoft Non-Disclosure Agreement, Microsoft and Company agree that the terms of such agreement shall be deemed incorporated herein, and further, that all terms and conditions of this Agreement shall be deemed Confidential Information as defined therein. If Microsoft and Company have not entered into a Microsoft Non-Disclosure Agreement, then Company agrees that at all times during the term of this Agreement, and for five (5) years thereafter, Company will hold in strictest confidence, and will not use or disclose to any third party, any confidential information of Microsoft. The term "confidential information of Microsoft" shall mean all non-public information that Microsoft designates as being confidential, or which, under the circumstances of disclosure ought to be treated as confidential. "Confidential information of Microsoft" includes, without limitation, the terms and conditions of this Agreement, information relating to released or unreleased Microsoft software or hardware products, marketing or promotion of any Microsoft product, business policies or practices of Microsoft, customers or suppliers of Microsoft, or information received from others that Microsoft is obligated to treat as confidential. If Company has any questions as to what comprises such confidential information, Company agrees to consult with Microsoft. "Confidential information of Microsoft" shall not include information that was known to Company prior to Microsoft's disclosure to Company, or information that becomes publicly available through no fault of Company. (b) Unless Company receives prior written authorization from MS, Company may disclose the Product only to its employees or sub-contractors who have a need to know in order to assist in Company's testing and evaluation of the Product, provided that: (1) such employee's or sub-contractors use of the Product takes place solely at the location where Company's CPUs reside; and (2) Company has executed appropriate written agreements with such employees and sub-contractors sufficient to enable it to comply with the terms of this Agreement. Upon Microsoft's request, Company shall provide to Microsoft a list of all employees and sub-contractors granted access to the Product hereunder. 18 19 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 9. PRESS RELEASES/MARKETING PARTICIPATION. (a) Microsoft will issue an initial press release relating to the establishment of the Microsoft Online ID Evaluation Program, which will describe the relationship between Microsoft and the third parties participating in the program, including Company. Company may be provided with an opportunity to provide a quote and/or information to be included in such initial press release. Except as specified above, neither party will issue any press release or make any public announcement(s) relating in any way whatsoever to this Agreement or the relationship established by this Agreement without the express prior written consent of the other party, which consent shall not be unreasonably withheld, provided that Microsoft may make informational references to the Microsoft Online ID Evaluation Program and Company's participation in such program in other publicity and press releases without obtaining Company's consent. (b) Company agrees to participate in all marketing programs for the Microsoft Online ID program as reasonably requested by Microsoft. Microsoft shall be solely responsible for any and all costs associated with any marketing program for the Microsoft Online ID program which may be incurred by Company provided that such costs have been pre-approved in writing by Microsoft. 10. DISCLAIMER OF WARRANTY THE PRODUCT IS DEEMED ACCEPTED BY COMPANY. THE PRODUCT IS PROVIDED "AS IS" WITHOUT WARRANTY OF ANY KIND. MICROSOFT FURTHER DISCLAIMS ALL WARRANTIES, INCLUDING WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. THE ENTIRE RISK ARISING OUT OF THE USE OR PERFORMANCE OF THE PRODUCT AND DOCUMENTATION REMAINS WITH COMPANY. IN NO EVENT SHALL MICROSOFT OR ITS SUPPLIERS BE LIABLE FOR ANY CONSEQUENTIAL, INCIDENTAL, DIRECT, INDIRECT, SPECIAL, PUNITIVE, OR OTHER DAMAGES WHATSOEVER (INCLUDING, WITHOUT LIMITATION, DAMAGES FOR LOSS OF BUSINESS PROFITS, BUSINESS INTERRUPTION, LOSS OF BUSINESS INFORMATION, OR OTHER PECUNIARY LOSS) ARISING OUT OF THE USE OF OR INABILITY TO USE THE PRODUCT OR DOCUMENTATION, EVEN IF MICROSOFT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. The foregoing notwithstanding, Microsoft agrees to defend, at its expense, any suit or proceeding brought against Company or its parent or subsidiaries for violation of legally protected rights of any third parties, including but not limited to, patent, copyright, trade secret, unfair competition or any and all other claims arising out of the receipt, reliance upon or use by Company or its parent or subsidiaries of the Product which such reliance on or use is in all ways consistent with Microsoft's representations and instructions (if any). Microsoft's agreement to defend and its obligation to indemnify Company and its parent and subsidiaries extends to direct, indirect, punitive and any and all other damages awarded in any such proceedings, as well as reasonable attorneys' fees, provided that Company or its parent or subsidiaries shall (a) provide reasonable information and assistance to Microsoft at Microsoft's expense in defense of such claim, and (b) at Microsoft's request, will immediately stop using and/or offering the Product in any way, including deleting references to the Product from marketing, advertising and Company's Web sites(s). 11. EXPORT RESTRICTIONS Company acknowledges that the Product is subject to the export control laws and regulations of the U.S.A., and any amendments thereof. Company confirms that with respect to the Product it will not export or re-export them, directly or indirectly, either to (i) any countries that are subject to U.S.A. export restrictions, (ii) any end user who Company knows or has reason to know will utilize them in the design, development or production of nuclear, chemical or biological weapons; or (iii) any end user who has been prohibited from participating in the U.S.A. export transactions by any federal agency of the U.S.A. government. Company further acknowledges that the Product may include technical data subject to export and re-export restrictions imposed by U.S.A. law. 19 20 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 12. GENERAL 12.1 Independent Contractors. The parties are independent contractors with respect to each other, and nothing in this Agreement shall be construed as creating an employer-employee relationship, a partnership, agency relationship or a joint venture between the parties. 12.2 Governing Law. This Agreement shall be governed by the laws of the State of New York as though entered into by New York residents and to be performed entirely within the State of New York. The parties consent to exclusive jurisdiction and venue in the state and federal courts sitting in New York. In any action or suit to enforce any right or remedy under this Agreement or to interpret any provision of this Agreement, the prevailing party shall be entitled to recover its costs, including reasonable attorneys' fees. 12.3 Assignment. This Agreement and any rights and/or obligations hereunder may be assigned by Microsoft but may not be assigned by Company without Microsoft's prior written approval. Any attempted assignment, sublicense, transfer, encumbrance or other disposal without such consent shall be void and shall constitute a material default and breach of this Agreement. 12.4 Construction. In the event that any provision of this Agreement conflicts with governing law or if any provision is held to be null, void or otherwise ineffective or invalid by a court of competent jurisdiction, (i) such provision shall be deemed to be restated to reflect as nearly as possible the original intentions of the Parties in accordance with applicable law, and (ii) the remaining terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect. This Agreement has been negotiated by the parties and their respective counsel and will be interpreted fairly in accordance with its terms and without any strict construction in favor of or against either party. The section headings used in this Agreement are intended for convenience only and shall not be deemed to affect in any manner the meaning or intent of this Agreement or any provision hereof. 12.5 Notices. All notices and requests in connection with this Agreement shall be given in writing and shall be deemed given as of the day they are received either by messenger, delivery service, or in the United States of America mails, postage prepaid, certified or registered, return receipt requested, and addressed as follows: To Company: To Microsoft: Healtheon Corporation Microsoft Corporation 4600 Patrick Henry Drive One Microsoft Way Santa Clara, CA 95054 Redmond, WA 98052-6399 Attn: Product Manager - Web Essentials Phone: Phone: 425-882-8080 Fax: Fax: 425-936-7329 Attention General Counsel Copy to: Law & Corporate Affairs, US Legal Fax (425) 936-7409 or to such other address as a party, may designate pursuant to this notice provision. 12.6 Entire Agreement. This Agreement does not constitute an offer by Microsoft and it shall not be effective until signed by both parties. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous agreements or communications. This Agreement shall not be modified except by a written agreement dated subsequent to the date of this Agreement and signed on behalf of Company and Microsoft by their respective duly authorized representatives. No waiver of any breach of any provision of this Agreement shall constitute a waiver of any prior, concurrent or subsequent breach of the same or any other provisions hereof, and no waiver shall be effective unless made in writing and signed by an authorized representative of the waiving party. 20 21 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. The parties have caused this Agreement to be executed by their duly authorized representatives as of the Effective Date. MICROSOFT CORPORATION HEALTHEON CORPORATION /s/ Laura Jennings /s/ Jack Dennison - ------------------------------- -------------------------------- By By Laura Jennings Jack Dennison - ------------------------------- -------------------------------- Name(Print) Name (Print) Vice President Vice President - ------------------------------- -------------------------------- Title Title 6/29/99 6/29/99 - ------------------------------- -------------------------------- Date Date 21 22 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. EXHIBIT B * 22 23 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. EXHIBIT C * 23 24 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. EXHIBIT D MCS AGREEMENT AND WORK ORDER MICROSOFT MASTER SERVICES AGREEMENT This Microsoft Master Services Agreement ("Agreement") is made as of the Effective Date indicated below by and between Microsoft Corporation, a Washington corporation, and Healtheon Corporation, a ____________ corporation ("Company"). This Agreement sets forth the general terms and conditions under which Microsoft Corporation, either on its own behalf or through one or more divisions or, for services to be provided outside of the United States, subsidiaries (collectively, "MS"), will provide consulting and support services to Company and its Affiliates. MS agrees that any of Company's Affiliates shall have the right (but not the obligation) to submit Work Orders and Services Descriptions to MS under the terms and conditions of this Agreement. All references to "Company" in this Agreement shall be deemed to include the Affiliate placing the Work Order and/or Services Description. Such Work Orders and Services Descriptions shall be subject to the terms and conditions of this Agreement and as to such Work Orders and Services Descriptions, the Affiliate becomes "Company" hereunder. "Affiliate" means any person, partnership, joint venture, corporation or other form of enterprise, domestic or foreign, including, but not limited to, subsidiaries, which directly or indirectly Control, are Controlled by, or are under common Control with Company. "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and operating policies of the entity in respect of which the determination is being made, through the ownership of more than fifty percent (50%) of its voting or equity securities, contract, voting trust or otherwise. 1. CONSULTING SERVICES. MS, through its Microsoft Consulting Services division ("MCS"), shall perform the consulting services for Company specified in work orders (each a "Work Order") that may be entered into pursuant to this Agreement from time to time ("Consulting Services"). Neither MS nor Company shall be obligated to enter into any Work Order. The rights in programs and data produced pursuant to the Consulting Services shall be specified in each Work Order. 2. PREMIER SUPPORT SERVICES. MS, through its Enterprise Customer Unit ("ECU"), shall perform the support services for Company specified in Premier Support Services Description(s) (each a "Services Description") that may be entered into pursuant to this Agreement from time to time ("Premier Support Services," together with the Consulting Services, the "Services"). Neither MS nor Company shall be obligated to enter into any Services Description. The provision of Premier Support Services shall be subject to the following additional terms and conditions: a. Changes in Premier Support Services. MS reserves the right to change the products supported under a Services Description during the term of the Services Description. MS may discontinue support for a product, provided that Company will be given six (6) months notice of that discontinuance. As an exception to the foregoing, should support for a product be discontinued by MS because it has been sold to another company, MS will provide written notice of the sale to Company and, at MS' option and in its sole discretion, either arrange for the acquiring company to begin providing support for that product immediately upon the date of notice, or provide continued support for that product for ninety.(90) days from the date of notice. MS may add support for new products during the term of a Services Description pursuant to the terms and conditions of this Agreement. b. Right of Refusal. If MS determines that an implementation of MS products is not effectively supportable, MS may refuse to provide Company with Premier Support Services for that implementation. If MS makes such a determination, Company shall have thirty (30) days after MS's notice to modify the implementation so as to make it effectively supportable. If the implementation is not modified to be supportable within thirty (30) days, MS will no longer be obligated to support that implementation. c. Ownership and License. Company's use of any bug fixes, workarounds, patches, beta fixes and beta builds (as applicable) or other software that MS provides to Company in the course of the provision of Premier Support Services (collectively, the "ECU Software") shall be in accordance with the terms of the end user license agreement or other license agreement governing the MS product for which the ECU Software is furnished. If not provided for a specific MS product, Company's use shall be in accordance with the terms of the end user license agreement packaged with such ECU Software, and/or any other terms expressly set forth by MS in writing; provided that if such ECU Software is not packaged with a license agreement then such ECU Software will be subject to the following restrictions: (i) the ECU Software may not be reverse engineered, decompiled or disassembled, except to the extent the foregoing restriction is expressly forbidden by applicable law; (ii) the ECU Software may not be loaned, sold, rented, leased, transferred or otherwise distributed to another user; (iii) MS may terminate Company's use of the ECU Software if Company fails to comply with the terms and conditions of these restrictions; (iv) THE ECU SOFTWARE IS PROVIDED "AS-IS", WITHOUT WARRANTY OF ANY KIND; and (v) the ECU Software and any documentation accompanying it are provided with RESTRICTED RIGHTS. Use, duplication, or disclosure by the U.S. Government is subject to restrictions as set forth in subparagraph (c)(1)(ii) of the Rights in Technical Data and Computer Software clause at DFARS 252-227-7013 or subparagraphs (c)(1) and (2) of the Commercial Computer Software-Restricted Rights at 48 CFR 52.227-19, 24 25 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. as applicable. Manufacturer is Microsoft Corporation/One Microsoft Way/Redmond, WA. 98052-6399. All rights not expressly granted are reserved. d. Licensed Product. MS will provide Premier Support Services only for products published by Microsoft Corporation, validly licensed and unaltered. 3. FEES. Company shall pay MS the fees identified on each Work Order and/or Services Description for Services rendered, and the reasonable out-of-pocket travel and living expenses incurred during the performance of the Services. Payment shall be made to MS within thirty (30) days of the date of MS's invoice. MS shall not change its fees during the term of a Work Order or a Services Description, unless otherwise agreed by MS and Company, but may adjust fees prior to entering any new Work Order or Services Description. MS's fees do not include any taxes, duties, tariffs or other governmental charges or expenses imposed in connection with this Agreement (including, without limitation, any value added taxes), and such taxes shall be billed to and paid by Company. MS shall be responsible for all taxes based upon its personal property ownership and net income. A finance charge of one and one-half percent (1.5%) per month or the highest amount allowed by law, whichever is less, will be assessed on all payments that are past due. Any amount outstanding for more than sixty (60) days after the date of invoice shall constitute a material breach on the part of Company. 4. CONFIDENTIALITY. a. Confidential Information. Except as otherwise specified herein, MS and Company each expressly undertake to retain in confidence all information transmitted to it by the other party pursuant to this Agreement that the disclosing party identifies as being proprietary and/or confidential or that, by the nature of the circumstances surrounding the disclosure, ought in good faith to be treated as proprietary and/or confidential ("Confidential Information"), and will make no use of such Confidential Information except under the terms and during the existence of this Agreement. Information disclosed by MS, in any form, regarding pre-release products, access numbers and passwords provided to Company by MS, shall be MS Confidential Information. MS and Company shall treat the terms and conditions of this Agreement as confidential; however, either party may disclose such information in confidence to its immediate legal and financial consultants as required in the ordinary course of that party's business. The receiving party's obligation hereunder shall extend for five (5) years following the disclosure of the Confidential Information. Company shall cause its Affiliates to retain MS Confidential Information in accordance with the terms of this Section 4. b. Exclusions. Confidential Information shall not include any information that: (i) is at the time of disclosure or subsequently becomes publicly available without the receiving party's breach of any obligations owed the disclosing party; (ii) became known to the receiving party prior to the disclosing party's disclosure of such information to the receiving party; (iii) became known to the receiving party from a source other than the disclosing party other than by the breach of an obligation of confidentiality owed to the disclosing party; or (iv) is independently developed by the receiving party. c. Independent Development; Residuals. The terms of confidentiality under this Agreement shall not be construed to limit MS's or Company's right to independently develop or acquire products without use of the other party's Confidential Information. Further, MS or Company shall be free to use for any purpose the residuals resulting from access to or work with such Confidential Information, provided that such party shall maintain the confidentiality of the Confidential Information as provided herein. The term "residuals" means technical information related to computer software technology in non-tangible form, which may be retained by persons who have had access to the Confidential Information, including ideas, concepts, know-how or techniques contained therein. Neither MS nor Company shall have any obligation to limit or restrict the assignment of such persons or to pay royalties for any work resulting from the use of residuals. However, the foregoing shall not be deemed to grant to either MS or Company a license under the other party's copyrights or patents. d. Company Information. Company grants to MS the right to use technical information relating to Microsoft software products, either standing alone or as such software products may be combined with or interact with other software and hardware products, for problem resolution, internal troubleshooting, product functionality enhancements and fixes, and Knowledge Base articles. MS will not identify Company or publish any of Company's Confidential Information in any Knowledge Base article. 5. LIMITED WARRANTIES. a. Consulting Services. MS warrants that the Consulting Services will be performed using generally accepted industry standards and practices. b. Premier Support Services. MS warrants that the Premier Support Services shall be substantially as described in this Agreement and the applicable Services Description, and that MS will use commercially reasonable efforts in addressing all support problems. 25 26 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 6. LIMITATION OF WARRANTIES. THE LIMITED WARRANTIES SET FORTH ABOVE ARE EXCLUSIVE AND ARE IN LIEU OF ALL OTHER WARRANTIES AND CONDITIONS, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE WITH RESPECT TO THE SERVICES OR PRODUCTS PROVIDED UNDER THIS AGREEMENT, THE PERFORMANCE OF MATERIALS OR PROCESSES DEVELOPED OR PROVIDED UNDER THIS AGREEMENT, OR AS TO THE RESULTS WHICH MAY BE OBTAINED THEREFROM, AND ALL IMPLIED WARRANTIES AND CONDITIONS OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE AND NON-INFRINGEMENT. MS SHALL NOT BE LIABLE FOR ANY SERVICES OR PRODUCTS PROVIDED BY THIRD PARTY VENDORS, DEVELOPERS OR CONSULTANTS IDENTIFIED OR REFERRED TO COMPANY BY MS UNLESS SUCH THIRD PARTY SERVICES ARE PROVIDED UNDER WRITTEN AGREEMENT WITH MS. 7. LIMITATION OF LIABILITY. a. Limitation. MS' total liability under this Agreement shall be limited to the total amount actually paid by Company to MS under the applicable Work Order or Services Description. b. Exclusion of Certain Damages. TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, IN NO EVENT SHALL MS, MS SUBSIDIARIES OR THEIR RESPECTIVE SUPPLIERS BE LIABLE TO COMPANY FOR ANY INCIDENTAL, CONSEQUENTIAL, INDIRECT, SPECIAL, OR PUNITIVE DAMAGES (INCLUDING, BUT NOT LIMITED TO. LOST PROFITS, BUSINESS INTERRUPTION, LOSS OF BUSINESS INFORMATION OR OTHER PECUNIARY LOSS) REGARDLESS OF WHETHER SUCH LIABILITY IS BASED ON BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY, BREACH OF WARRANTIES, FAILURE OF ESSENTIAL PURPOSE OR OTHERWISE AND EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 8. TERM AND TERMINATION. a. Term. This Agreement shall remain in effect until terminated by either MS or Company as provided herein. The term of any Work Order or Services Description shall be as provided therein Termination of this Agreement shall terminate all outstanding Work Orders and Services Descriptions between MS and Company. b. Termination. Company may terminate this Agreement any Work Order or Services Description without cause by giving MS thirty (30) days written notice. Either MS or Company may terminate this Agreement or any Work Order or Services Description if the other party is in material breach or default of any obligation hereunder, which breach or default is not currently within thirty (30) days notice of such breach. Company shall pay all fees to MS for Services performed and expenses incurred which have accrued through the date of termination. c. Survival. Sections 2(c), 3, 4, 5, 6, 7, 8(b), 8(c), 9, and 11 of this Agreement and any provisions specified as surviving in a Work Order or Services Description shall survive any termination of this Agreement and termination or expiration of any Work Order or Services Description. 9. NOTICES. All notices, authorizations, and requests in connection with this Agreement shall be deemed given on the day they are (i) deposited in the mails, postage prepaid, certified or registered, return receipt requested; or (ii) sent by air express courier (e.g., DHL, Federal Express or Airborne), charges prepaid, return receipt requested; and addressed as follows: To Company: To Microsoft: Healtheon Corporation Microsoft Corporation - ---------------------------------- 4600 Patrick Henry Drive One Microsoft Way - ---------------------------------- Santa Clara, CA 95054 Redmond, WA 98052-6399 - ---------------------------------- Attention: Jack Dennison Attention: David Lubinski ----------------------- ---------------------------- Phone: 408-876-5140 Phone: 972-716-2629 ----------------------- ---------------------------- Fax: 408-876-5450 Fax: 972-233-7280 ----------------------- ---------------------------- cc: Law and Corporate Affairs One Microsoft Way Redmond, WA 98052-6399 10. INSURANCE. At all times when MS will be performing Services on Company's premises pursuant to this Agreement. MS will procure and maintain the following insurance coverage: 26 27 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. a. Commercial General Liability covering bodily injury and property damage liability with a limit of not less than $1,000,000 each occurrence; b. Workers' Compensation (or maintenance of a legally permitted and governmentally-approved program of self-insurance) covering MS employees pursuant to applicable state workers' compensation laws for work-related injuries suffered by employees of MS; c. Employer's Liability with limits of not less than $1,000,000 each accident; and d. Software Errors and Omissions Liability covering damages arising out of negligent acts, errors, or omissions committed by MS or its employees in the performance of this Agreement, with a limit of liability of not less than S2,000,000 each claim. MS will provide Company with certificates of insurance evidencing this coverage on request. 11. MISCELLANEOUS. a. No Assignment. This Agreement and any rights or obligations hereunder shall not be assigned by contract or by operation of law without the prior written agreement of the other party. MS may use subcontractors to deliver the Services, provided that MS shall remain liable to Company, in accordance with this Agreement, for all Services provided to Company. The Services are provided solely for the benefit of Company and its Affiliates, as applicable. Unless specifically permitted by NIS in writing, the Services and the software and materials provided thereunder may not be transferred or sold by Company to any non-Affiliate third party. b. Applicable Law. This Agreement shall be governed by the laws of the State of Washington, and Company. further consents to the exclusive jurisdiction by the state and federal courts sitting in the State of Washington. Any action of any kind by any party against another party arising as a result of this Agreement must be commenced within two (2) years from the date the right, claim, demand, or cause of action shall first accrue. c. Entire Agreement. This Agreement and the Services Descriptions and Work Orders constitute the entire agreement between MS and Company, and merge all prior and contemporaneous communications, with respect to the Services provided hereunder. The terms on any purchase order or other form submitted by Company shall not apply to this Agreement or any of the Services. This Agreement can be modified only by written agreement signed by both MS and Company. In the event of a conflict between this Agreement and any Services Description or Work Order, the terms of this Agreement shall control. d. Compliance with Laws. MS and Company shall comply with all applicable laws and regulations with respect to this Agreement. Company acknowledges that the Services and the related software and other materials are subject to United States export control laws and regulations, and Company confirms that it will not export or re-export them, directly or indirectly, either to (i) any countries that are subject to U.S. export restrictions (currently including, but not necessarily limited to, Cuba, Iran, Iraq, Libya, North Korea, Syria and Sudan), or to any national of any such country, wherever located, who intends to transmit or transport the Services or related software and other materials back to such country; or (ii) any end-user whom Company knows or has reason to know will utilize them in the design, development or production of nuclear, chemical or biological weapons, or (iii) any end-user who has been prohibited from participating in U.S. export transactions by any federal agency of the U.S. Government. e. Severability/Waiver. If a court holds any provision of this Agreement to be illegal, invalid or unenforceable, the remaining provisions shall remain in full force and effect. No waiver of any breach of this Agreement shall be a waiver of any other breach, and no waiver shall be effective unless made in writing and signed by an authorized representative of the waiving party. f. Independent Contractor. MS shall act at all times as an independent contractor, and shall be responsible for any and all social security, unemployment, workers' compensation and other withholding taxes for any and all of its employees. g. Cost or Pricing Data. MS will not, under any circumstances, be obligated to perform Services that would require the submission of cost or pricing data (as defined by U.S. Government regulations) or be obligated to provide such data. h. Force Majeure. Except for Company's obligation to pay for services already performed by MS, if either party is prevented from complying, either totally or in part, with any of the terms or provisions of this Agreement by reason of fire, flood, storm, strike, lockout or other labor trouble, riot, war, rebellion, accident or other acts of God, then upon written notice to the other party, the requirements of this Agreement, or the affected provisions hereof to the extent affected, shall be suspended during the period of such disability. During such period, the party not prevented from complying as aforesaid may seek to have its needs (which would otherwise be met hereunder) not by or through others without liability hereunder. The party 27 28 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. prevented from complying shall make all reasonable efforts to remove such disability within thirty (30) days of giving such notice. i. English Language Governs. The parties have requested that this Agreement be drawn up in English; les parties ont exiges que cette entente soit redigee en anglais. IN WITNESS WHEREOF, the parties have agreed to the terms and conditions of this Agreement as of the Effective Date indicated below. MICROSOFT CORPORATION Corporate Name of Company By: /s/ Kennon S. Grose By: /s/ Jack Dennison ----------------------------- ----------------------------------- Kennon S. Grose Jack Dennison - --------------------------------- --------------------------------------- Name (Print) Name (Print) General Manager Vice President - --------------------------------- --------------------------------------- Title Title 5/20/99 June 25, 1999 - --------------------------------- --------------------------------------- Effective Date Date 28 29 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. MICROSOFF CONSULTING SERVICES MASTER SERVICE AGREEMENT WORK ORDER NO. 001 - (MCS HEALTH CARE PRACTICE) MICROSOFT CONSULTING SERVICES MASTER SERVICE AGREEMENT WORK ORDER NO. 001 - (MCS HEALTH CARE PRACTICE) This Work Order is made pursuant to the Microsoft Master Consulting Services Agreement (the "Agreement") effective on May 20, 1999, by and between Healtheon Corporation ("Customer") and Microsoft Corporation ("Microsoft") and is incorporated therein by reference. Capitalized terms not otherwise defined have the meanings provided in the Agreement. 1. SERVICES. MCS shall perform the services identified below for Customer. Dates provided herein are estimates only. Services shall not include development of, and Microsoft shall not deliver, any software, computer program or code under this Work Order. MCS shall assist with the architectural review phase of the current Healtheon technical platform in order to develop the vision and scope of the Microsoft Technology Platform Migration Work Order to be executed by the parties and the implementation of the Microsoft technology, including the Microsoft Technology Platform Migration Work Order. Customer shall ensure both under this work order and under the Microsoft Technology Platform Migration Work Order: 1) that adequate Customer technical resources are assigned to the migration effort; 2) that a core Customer technical team is adequately training on NT and Internet Information Server; 3) that a Customer operations team is available to assume responsibility for the operations and management of the production site; 4) that Customer assigns a key manager to act as the MCS contact for the project; 5) that Customer provides MCS with access to the source code and design documentation to the existing site and applications; 6) that Customer provides for all hardware and software necessary to support the production environment; and 7) that Customer will have acquired sufficient Microsoft Premier Support Services for technical product support. The parties agree that the estimated time to complete the architectural review contemplated hereunder is 320 hours. The product of the architectural review shall be at a minimum the Migration Plan and the Microsoft Technology Platform Migration Work Order. 2. RATES. The hourly rates shown below shall be applicable to this Work Order. Any total fee stated herein is an estimate only. The total estimated fee for this project is $67,200, based on the estimated 320 hours of service in the 90 day time period, plus travel and expenses. Project expense will be charged to Customer in addition to project fees. STAFF LEVEL RATE/HOUR --------------------------------------------- Enterprise Program Manager $210.00 ------------------------------------------- Senior Consultant - Infrastructure $210.00 ------------------------------------------- Consultant - Infrastructure $180.00 ------------------------------------------- Senior Consultant - Development $210.00 ------------------------------------------- Consultant - Development $180.00 ------------------------------------------- Principal Consultant $250.00 ------------------------------------------- Managing Consultant $250-00 -------------------------------------------
Microsoft shall determine in its sole discretion what personnel is required to complete the work contemplated by this Work Order and may use third parties, as determined by MCS in its sole discretion, to complete any work. 29 30 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Microsoft shall invoice Customer monthly for services performed and expenses incurred during the previous period. Microsoft invoices for payment should be directed to Customer's representative for payment at the address shown below (Customer to provide). Contact: David Lubinski Mailstop (if any): Address: 5080 Spectrum Drive, Suite 900E Telephone: (972) 716-2629 City: Addison Fax: (972) 233-7280 State: TX Zip: 75001 Email: davidlu@microsoft.com Purchase Order No. (if any): 3. COMMENCEMENT DATE. Services under this Work Order will begin on the date that is within 45 days of the Effective Date of the Promotion Agreement. The Expiration Date of this Work Order is upon completion of the work contemplated in this Work Order, which in no event shall exceed 90 days from the Effective Date. 4. OWNERSHIP AND LICENSE. The copyright in that specific set of tangible written materials developed by Microsoft at the specific direction of Customer and provided to Customer in the course of performance under this Work Order ("Materials") shall be owned by Customer, and Microsoft hereby assigns all right, title and interest in such copyright to Customer. Customer agrees to use Materials only for Customer's internal business purposes and not for resale or distribution outside of Customer. Notwithstanding the above, the parties agree that Microsoft reserves the right to use for any purpose subsets or modules of the Materials which by themselves provide generic technical information not unique to Customer's business. Customer may sublicense the rights granted hereunder to its affiliates (i.e., any entity controlling, controlled by, or under common control with, Customer). All rights not expressly granted, are reserved. THEREFORE, the parties have executed this Work Order in duplicate originals. MICROSOFT CORPORATION Corporate Name of Company By: /s/ David Lubinski By: /s/ Jack Dennison ----------------------------- ----------------------------------- Signature Signature David Lubinksi Jack Dennison - ------------------------------------------------------------------------------- Name (Print) Name (Print) Practice Manager Vice President - --------------------------------- --------------------------------------- Title Title May 20, 1999 June 25, 1999 - --------------------------------- --------------------------------------- Effective Date Date 30 31 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. EXHIBIT E MICROSOFT CORPORATION NON-DISCLOSURE AGREEMENT (STANDARD RECIPROCAL) THIS AGREEMENT (the "Agreement") is made between MICROSOFT CORPORATION, a Washington corporation, and Healtheon Corporation ("COMPANY") and entered into this 19th day of May, 1999. In consideration of the mutual promises and covenants contained in this Agreement, the mutual disclosure of confidential information to each other, the parties hereto agree as follows: 1. Confidential Information and Confidential Materials (a) "Confidential Information" means nonpublic information that Disclosing Party designates as being confidential or which, under the circumstances surrounding disclosure ought to be treated as confidential. "Confidential Information" includes, without limitation, information relating to released or unreleased Disclosing Party software or hardware products, the marketing or promotion of any Disclosing Party product, Disclosing Party's business policies or practices, and information received from others that Disclosing Party is obligated to treat as confidential. Confidential Information disclosed to Receiving Party by any Disclosing Party Subsidiary and/or agents is covered by this Agreement. (b) Confidential Information shall not include any information that: (i) is or subsequently becomes publicly available without Receiving Party's breach of any obligation owed Disclosing Party; (ii) became known to Receiving Party prior to Disclosing Party's disclosure of such information to Receiving Party; (iii) became known to Receiving Party from a source other than Disclosing Party other than by the breach of an obligation of confidentiality owed to Disclosing Party; or (iv) is independently developed by Receiving Party. (c) "Confidential Materials" shall mean all tangible materials containing Confidential Information, including without limitation written or printed documents and computer disks or tapes, whether machine or user readable. 2. Restrictions (a) Receiving Party shall not disclose any Confidential Information to third parties for five (5) years following the date of its disclosure by Disclosing Party to Receiving Party, except to Receiving Party's consultants as provided below. However, Receiving Party may disclose Confidential Information in accordance with judicial or other governmental order, provided Receiving Party shall give Disclosing Party reasonable notice prior to such disclosure and shall comply with any applicable protective order or equivalent. (b) Receiving Party shall take reasonable security precautions, at least as great as the precautions it takes to protect its own confidential information, to keep confidential the Confidential Information. Receiving Party may disclose Confidential Information or Confidential Material only to Receiving Party's employees or consultants on a need-to-know basis. Receiving Party will have executed or shall execute appropriate written agreements with its employees and consultants sufficient to enable it to comply with all the provisions of this Agreement. (c) Confidential Information and Confidential Materials may be disclosed, reproduced, summarized or distributed only in pursuance of Receiving Party's business relationship with Disclosing Party, and only as otherwise provided hereunder. Receiving Party agrees to segregate all such Confidential Materials from the confidential materials of others in order to prevent commingling. (d) Receiving Party may not reverse engineer, decompile or disassemble any software disclosed to Receiving Party. 3. Rights and Remedies (a) Receiving Party shall notify Disclosing Party immediately upon discovery of any unauthorized use or disclosure of Confidential Information and/or Confidential Materials, or any other breach of this Agreement by Receiving Party, and will 31 32 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. cooperate with Disclosing Party in every reasonable way to help Disclosing Party regain possession of the Confidential Information and/or Confidential Materials and prevent its further unauthorized use. (b) Receiving Party shall return all originals, copies, reproductions and summaries of Confidential Information or Confidential Materials at Disclosing Party's request, or at Disclosing Party's option, certify destruction of the same. (c) Receiving Party acknowledges that monetary damages may not be a sufficient remedy for unauthorized disclosure of Confidential Information and that Disclosing Party shall be entitled, without waiving any other rights or remedies, to such injunctive or equitable relief as may be deemed proper by a court of competent jurisdiction. (d) Disclosing Party may visit Receiving Party's premises, with reasonable prior notice and during normal business hours, to review Receiving Party's compliance with the terms of this Agreement. 4. Miscellaneous (a) All Confidential Information and Confidential Materials are and shall remain the property of Disclosing Party. By disclosing information to Receiving Party, Disclosing Party does not grant any express or implied right to Receiving Party to or under Disclosing Party patents, copyrights, trademarks, or trade secret information. (b) If either party provides pre-release software as Confidential Information or Confidential Materials under this Agreement, such pre-release software is provided "as is" without warranty of any kind. Receiving Party agrees that neither Disclosing Party nor its suppliers shall be liable for any damages whatsoever relating to Receiving Party's use of such pre-release software. (c) Any software and documentation provided under this Agreement is provided with RESTRICTED RIGHTS. Use, duplication, or disclosure by the Government is subject to restrictions as set forth in subparagraph (c)(1)(ii) of The Rights in Technical Data and Computer Software clause at DFARS 252.227-7013 or subparagraphs (c)(1) and (2) of the Commercial Computer Software -- Restricted Rights at 48 CFR 52.227-19, as applicable. Manufacturer is Microsoft Corporation/One Microsoft Way/Redmond, WA 98052-6399. (d) Both parties agree that they do not intend nor will they, directly or indirectly, export or re-export (i) any Confidential Information or Confidential Materials, or (ii) any product (or any part thereof), process or service that is the direct product of the Confidential Information or Materials to (A) any country that is subject to U.S. export restrictions (currently including, but not necessarily limited to, Iran, Iraq, Syria, Cuba, North Korea, Libya, and Sudan), or to any national of any such country, wherever located, who intends to transmit or transport the products back to such country; (B) to any end-user who either party knows or has reason to know will utilize them in the design, development or production of nuclear, chemical or biological weapons; or (C) to any end-user who has been prohibited from participating in U.S. export transactions by any federal agency of the U.S. government. (e) The terms of confidentiality under this Agreement shall not be construed to limit either party's right to independently develop or acquire products without use of the other party's Confidential Information. Further, either party shall be free to use for any purpose the residuals resulting from access to or work with such Confidential Information, provided that such party shall maintain the confidentiality of the Confidential Information as provided herein. The term "residuals" means information in nontangible form, which may be retained by persons who have had access to the Confidential Information, including ideas, concepts, know-how or techniques contained therein. Neither party shall have any obligation to limit or restrict the assignment of such persons or to pay royalties for any work resulting from the use of residuals. However, the foregoing shall not be deemed to grant to either party a license under the other party's copyrights or patents. (f) This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof. It shall not be modified except by a written agreement dated subsequent to the date of this Agreement and signed by both parties. None of the provisions of this Agreement shall be deemed to have been waived by any act or acquiescence on the part of Disclosing Party, its agents, or employees, but only by an instrument in writing signed by an authorized officer of Disclosing Party. No waiver of any provision of this Agreement shall constitute a waiver of any other provision(s) or of the same provision on another occasion. 32 33 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. (g) If either party employs attorneys to enforce any rights arising out of or relating to this Agreement, the prevailing party shall be entitled to recover reasonable attorneys' fees. This Agreement shall be construed and controlled by the laws of the State of Washington, and both parties further consent to jurisdiction by the state and federal courts sitting in the State of Washington. Process may be served on either party by U.S. Mail, postage prepaid, certified or registered, return receipt requested, or by such other method as is authorized by the Washington Long Arm Statute. (h) Subject to the limitations set forth in this Agreement, this Agreement will inure to the benefit of and be binding upon the parties, their successors and assigns. (i) If any provision of this Agreement shall be held by a court of competent jurisdiction to be illegal, invalid or unenforceable, the remaining provisions shall remain in full force and effect. (j) All obligations created by this Agreement shall survive change or termination of the parties' business relationship. 5. Suggestions and Feedback Either party may from time to time provide suggestions, comments or other feedback to the other party with respect to Confidential Information provided originally by the other party (hereinafter "Feedback"). Both parties agree that all Feedback is and shall be entirely voluntary and shall not, absent separate agreement, create any confidentiality obligation for the Receiving Party. However, the Receiving Party shall not disclose the source of any feedback without the providing party's consent. Feedback shall be clearly designated as such and, except as otherwise provided herein, each party shall be free to disclose and use such Feedback as it sees fit, entirely without obligation of any kind to the other party. The foregoing shall not, however, affect either party's obligations hereunder with respect to Confidential Information of the other party. IN WITNESS WHEREOF, the parties hereto have executed this Agreement. COMPANY: Healtheon Corporation MICROSOFT CORPORATION -------------------------- Address: 4600 Patrick Henry Drive By: /s/ Laura Jennings -------------------------- ----------------------------- Santa Clara, CA 95054 -------------------------- By: /s/ Jack Dennison Name: Laura Jennings -------------------------- ----------------------------- Name: Jack Dennison Title: Vice President -------------------------- -------------------------- Title: Vice President Date: 6/22/99 -------------------------- --------------------------- Date: June 25, 1999 MS Contact: -------------------------- --------------------- 33 34 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Exhibit F List of Healtheon Third Party Agreements 34 35 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Exhibit G Estimated Healtheon Internal Use Software License Grant
Initial License Estimated Initial License Microsoft Product Name: Quantity: Retail Price: Estimated Value: - ----------------------------------------------------------------------------------------------------- BackOffice Server # of $2,499 $ development servers BackOffice Client Access # of $4,179 $ Licenses (20 Clients Pak) developers & testers est. 500 Windows NT Workstation # of $ 319 $ developers & testers est. 500 Windows 9x # of $ 209 $ employees excluding developers Office 97 Developer's Edition # of $ 799 $ developers <500 Microsoft Visual Studio Est. 500 $1,499 $ Enterprise Edition Microsoft Site Server # of $3,920 $ Enterprise development servers Office 2000 # of $ employees MS Project Est. 50 $ Total $
EX-10.35 4 AGREEMENT, DATED SEPTEMBER 1, 1999 1 FINAL AGREEMENT This Agreement (this "AGREEMENT") is entered into as of this 1st day of September, 1999, by and among WebMD, Inc., a Georgia corporation ("WEBMD"), McKesson HBOC, Inc., a Delaware corporation ("MCKESSON"), HBO & Company, a Delaware corporation ("HBOC") and a wholly owned subsidiary of McKesson and successor by merger to HBO & Company of Georgia (McKesson and HBOC being referred to collectively herein as "MCKHBOC"), and, for purposes of Section 2, Section 3.2, Section 3.4, Section 3.6 and Section 4.1 of this Agreement only, Healtheon Corporation, a Delaware corporation ("HEALTHEON"), and Healtheon/WebMD Corporation, a Delaware corporation ("HEALTHEON/WEBMD"). RECITALS A. As of December 30, 1997, Endeavor Technologies, Inc., a Georgia corporation and predecessor to WebMD, and National Health Enhancement Systems, Inc., formerly wholly owned subsidiary of McKesson which has since been merged into HBOC ("NHES"), entered into a License Agreement (the "ENDEAVOR/NHES LICENSE AGREEMENT"). On October 23, 1998, WebMD and HBOC entered into a Strategic Distribution Alliance Agreement (the "STRATEGIC DISTRIBUTION ALLIANCE AGREEMENT"). On November 3, 1998, the Strategic Distribution Alliance Agreement was amended by an addendum (the "ADDENDUM"). The Strategic Distribution Alliance Agreement was further amended by a letter effective December 31, 1998 (the "DECEMBER LETTER AGREEMENT"). On January 20, 1999, McKesson and WebMD entered into a certain letter agreement (the "JANUARY LETTER AGREEMENT"). The Endeavor/NHES License Agreement, the Strategic Distribution Alliance Agreement, the Addendum, the December Letter Agreement and the January Letter Agreement are referred to herein as the "STRATEGIC AGREEMENTS." B. As of March 31, 1999, Access Health, Inc., which has since been merged into HBOC ("ACCESS"), and WebMD entered into the following agreements relating to certain clinical reference products as set forth on Attachment II and Exhibit A, respectively of the agreements described in clauses (1) and (2) herein (the "CLINICAL REFERENCE PRODUCTS") and related domain names and trademarks: (1) a License Agreement whereby the Clinical Reference Products were licensed by Access to WebMD; (2) an Option Agreement whereby Access granted WebMD an option to purchase certain related domain names and trademark rights; (3) an Option Agreement whereby Access granted WebMD an option to purchase the Clinical Reference Products; and (4) an agreement creating a grant-back license from WebMD to Access contingent upon WebMD's exercise of the option to purchase the Clinical Reference Products. The foregoing agreements, as they may have been supplemented or amended, are referred to herein as the "PRODUCT AGREEMENTS." C. Pursuant to an Investment Agreement dated August 24, 1998, amended by an amendment dated October 23, 1998 and an amendment dated January 28, 1999 (together, the "SERIES A INVESTMENT AGREEMENT"), HBOC purchased 667,000 shares of Series A Preferred Stock of WebMD, received a warrant (the "SERIES A WARRANT") for 300,000 shares of Series A Preferred Stock of WebMD and received a performance warrant (the "PERFORMANCE WARRANT") for up to 200,000 shares of Series A Preferred Stock of WebMD. In addition, pursuant to the Series A Investment Agreement, HBOC was granted the right to receive up to an additional 200,000 shares of Series A Preferred Stock of WebMD in the event that WebMD did not complete an Initial Public Offering (as defined in the 2 Series A Investment Agreement) prior to certain specified dates. As of the date hereof, HBOC has received 150,000 of these shares and will be entitled to receive an additional 50,000 shares if WebMD has not completed an Initial Public Offering prior to November 22, 1999 (the "ADDITIONAL DELAY SHARES"). D. On January 28, 1999, HBOC purchased 650,000 shares of Series B Preferred Stock of WebMD pursuant to an Investment Agreement of that date (the "SERIES B INVESTMENT AGREEMENT"). The Series A Investment Agreement, Series B Investment Agreement, the Series A Warrant and the Performance Warrant are referred to herein as the "WEBMD INVESTMENT DOCUMENTS." E. On April 9, 1999, WebMD declared a stock dividend of .03846 shares of its Series F preferred stock ("SERIES F PREFERRED STOCK") with respect to each outstanding share of capital stock of WebMD and made a proportionate adjustment to the Series A Warrant in lieu of providing HBOC with advance notice of such dividend (as required by the Series A Warrant). No adjustment was made to the Performance Warrant as no adjustment was provided for in the terms of the Performance Warrant. On April 30, 1999, HBOC exercised the Series A Warrant and received 300,000 shares of Series A Preferred Stock and 11,538 shares of Series F Preferred Stock. F. In a series of transactions commencing May 12, 1999, WebMD sold to Microsoft Corporation and other strategic purchasers an aggregate of 461,510 shares of its Series E Preferred Stock at a per share price of $541.70, 184,604 shares of its Series D Common Stock for a per share price of $54.17 and a warrant (to Microsoft) to purchase 7,614,916 shares of Series D Common Stock. WebMD's Series E Preferred Stock is convertible on a one-for-ten basis into WebMD's Common Stock. As a result of these sales and pursuant to the rights of HBOC contained in the WebMD Investment Documents, HBOC has the right (the "HBOC PURCHASE RIGHTS") to purchase 38,773 shares of Series E Preferred Stock of WebMD, 16,745 shares of Series D Common Stock of WebMD and a warrant exercisable for 636,980 shares of Series D Common Stock, which right shall become exercisable for a ten day period upon notice by WebMD to HBOC, which notice WebMD has not yet given. G. On March 1, 1999, WebMD issued 200,000 shares of its Series D Preferred Stock to Cable News Network LP, LLP ("CNN") in exchange for promotional considerations described in the Agreement for Branding and On-Air Promotion dated as of January 28, 1999 between CNN and WebMD. On March 30, 1999, WebMD issued to E.I. du Pont de Nemours and Company ("DUPONT") a warrant to purchase 4,000,000 shares of WebMD's Series D Common Stock in exchange for a Collaboration Agreement between WebMD and DuPont dated March 30, 1999. HBOC has contended that it has a right to purchase a proportional amount of the Series D Preferred Stock issued to CNN and the warrant to purchase Series D Common Stock issued to DuPont (the "DISPUTED HBOC PURCHASE RIGHTS"). WebMD believes that HBOC has no such rights. H. The Performance Warrant provides that the right to purchase 66,666 shares of Series A Preferred Stock of WebMD potentially issuable pursuant thereto shall vest and become exercisable on March 31, 1999 if the joint marketing efforts of HBOC and WebMD generated for WebMD gross revenues of $1,000,000 for the twelve months ended March 31, 1999. By letter from its counsel dated April 30, 1999, HBOC has contended that the Performance Warrant became vested and exercisable with respect to such shares because it believes that such criteria were met. WebMD does not believe that such criteria were met. 2 3 I. On May 20, 1999, WebMD entered into an Agreement and Plan of Reorganization (as the same may be amended from time to time, the "HEALTHEON-WEBMD REORGANIZATION AGREEMENT") with Healtheon which provides for the combination of the businesses of WebMD and Healtheon. The Healtheon-WebMD Reorganization Agreement provides for such transaction to be effected through one of two structures: a subsidiary of Healtheon/WebMD may be merged with and into Healtheon and another subsidiary of Healtheon/WebMD merged into WebMD ("REORGANIZATION STRUCTURE ONE") or a subsidiary of Healtheon may be merged with and into WebMD ("REORGANIZATION STRUCTURE TWO"). On June 17, 1999, Healtheon/WebMD filed a Registration Statement on Form S-4 (File No. 333-80863) (as the same may be amended from time to time, the "HEALTHEON/WEBMD REGISTRATION STATEMENT") with the Securities and Exchange Commission (the "COMMISSION") describing Reorganization Structure One as well as the acquisition by Healtheon/WebMD of the business of MEDE AMERICA Corporation, a Delaware corporation; it is anticipated that if the transaction is to be effected through Reorganization Structure Two, the Healtheon/WebMD Registration Statement will be amended to reflect that, among other things, Healtheon will be the issuer of the securities registered pursuant thereto. The transactions described in the Healtheon-WebMD Reorganization Agreement and in the Healtheon/WebMD Registration Statement, as the same may be amended from time to time, are referred to herein as the "REORGANIZATION." J. In anticipation of the consummation of the Reorganization, the parties to this Agreement desire to modify the Strategic Agreements, the Product Agreements and the WebMD Investment Documents and to provide for McKesson's and HBOC's concurrence with and support of the transactions contemplated by the Reorganization. NOW, THEREFORE, it is agreed as follows: 1. TERMINATION OF CERTAIN AGREEMENTS; NEW ARRANGEMENTS. 1.1 TERMINATION OF STRATEGIC AGREEMENTS; NEW STRATEGIC ARRANGEMENTS. The parties to this Agreement include all of the parties to each of the Strategic Agreements. As of the date of this Agreement, each of the Strategic Agreements shall be, without the need for any further action on the part of any party, terminated and shall be of no further force and effect. No party to any Strategic Agreement shall have any further rights or obligations with respect to such Strategic Agreement or be required from and after the termination thereof pursuant to this Section 1.1, to take, or refrain from taking, any action whatsoever pursuant to such Strategic Agreement. In lieu of the Strategic Agreements, WebMD and McKHBOC hereby agree to the provisions set forth on EXHIBIT 1.1 which shall become effective as of the date hereof. Except as set forth in EXHIBIT 1.1, as of the date of this Agreement, each party hereby fully releases the other party from any and all obligations, and agrees not to seek any costs, damages or other compensation from the other party under any legal theory including, without limitation, breach of contract, breach of warranty, restitution or quantum meruit, arising from the Strategic Agreements or termination thereof. 1.2 TERMINATION OF PRODUCT AGREEMENTS; NEW PRODUCT ARRANGEMENTS. The parties to this Agreement include all of the parties to each of the Product Agreements. As of the date of this Agreement, each of the Product Agreements shall be, without the need for any further action on the part of any party, terminated and shall be of no further force and effect. No party to any Product Agreement shall have any further rights or obligations with respect to such Product Agreement or be required from and after the termination thereof pursuant to this Section 3 4 1.2, to take, or refrain from taking, any action whatsoever pursuant to such Product Agreement. In lieu of the Product Agreements, WebMD and McKHBOC hereby agree to the provisions set forth on EXHIBIT 1.2, which shall become effective as of the date this Agreement is entered into. In accordance with the foregoing, immediately upon execution of this Agreement, all right, title and interest that was granted to WebMD under the Product Agreements shall revert to McKHBOC without the need for any further action on the part of any party. WebMD hereby represents and warrants that it has made no grants or transfers to any third party of or under any right, title or interest pursuant to the Product Agreements and hereby quitclaims all such right, title and interest to McKHBOC. Except as set forth in EXHIBIT 1.2, each party hereby fully releases the other party from any and all obligations, and agrees not to seek any costs, damages or other compensation from the other party under any legal theory including, without limitation, breach of contract, breach of warranty, restitution or quantum meruit, arising from the Product Agreements or termination thereof. 2. ISSUANCE AND DELIVERY OF WARRANTS. 2.1. ISSUANCE OF WARRANTS. In exchange for the relinquishment of the HBOC Purchase Rights and the Disputed HBOC Purchase Rights and in consideration for the additional covenants and agreements of McKHBOC contained herein, WebMD agrees to issue to HBOC upon execution of this Agreement: (i) a warrant to purchase 1,837,417 shares of the Common Stock Series F, no par value per share, of WebMD (the "SERIES F COMMON STOCK") (which (A) shall be exercisable at a per share price of $91.34, or (B) if exercised after the closing of the Reorganization (the "HEALTHEON-WEBMD CLOSING"), and subject to adjustment as described below, shall be exercisable for: (x) 3,300,000 shares of common stock, par value $0.0001 per share, of Healtheon/WebMD (the "HEALTHEON/WEBMD COMMON STOCK"), at a per share price of $50.86 in the event the Reorganization is effected through Reorganization Structure One, or (y) 3,300,000 shares of common stock, par value $0.0001 per share, of Healtheon (the "HEALTHEON COMMON STOCK"), at a per share price of $50.86 in the event the Reorganization is effected through Reorganization Structure Two, (ii) a warrant to purchase 2,783,965 shares of Series F Common Stock (which (A) shall be exercisable at a price per share equal to $54.17, or (B) if exercised after the Healtheon-WebMD Closing, and subject to adjustment as described below, shall be exercisable for: (x) 5,000,000 shares of Healtheon/WebMD Common Stock at a price per share equal to $30.16 in the event the Reorganization is effected through Reorganization Structure One, or (y) 5,000,000 shares of Healtheon Common Stock at a price per share equal to $30.16 the event the Reorganization is effected through Reorganization Structure Two) and (iii) a warrant to purchase 66,667 shares of Series F Common Stock (which (A) shall be exercisable at a price per share equal to $20.00, or (B) if exercised after the Healtheon-WebMD Closing, and subject to adjustment as described below, shall be exercisable for: (x) 119,734 shares of Healtheon/WebMD Common Stock at a price per share equal to $11.14 in the event the Reorganization is effected through Reorganization Structure One, or (y) 119,734 shares of Healtheon Common Stock at a price per share equal to $11.14 in the event the Reorganization is effected through Reorganization Structure Two)(collectively, the "NEW WARRANTS"), each of which shall be in the form of EXHIBIT 2.1 hereto. The number of shares of Healtheon/WebMD Common Stock or Healtheon Common Stock to be issued upon exercise of the New Warrants in the event the New Warrants are exercised after the Healtheon-WebMD Closing and the exercise price thereof as set forth in this Section 2.1 gives effect, in each case, to the reduction in the exchange ratio resulting from the transactions described in this Agreement as set forth in Section 3.6. To the extent the exchange ratio is changed by agreement among the parties to the Healtheon-WebMD Reorganization Agreement after the date hereof, the number of shares of Healtheon/WebMD Common Stock or 4 5 Healtheon Common Stock for which the New Warrants may be exercised and the exercise price thereof shall be adjusted to reflect the revised exchange ratio, except that any further reduction in the exchange ratio as a result of or arising out of this Agreement shall not result in any modification of the number of shares of Healtheon/WebMD Common Stock or Healtheon Common Stock to be issued upon the exercise of the New Warrants or any adjustment to the exercise price. WebMD shall reserve and keep available for issuance at all times, free from any liens or encumbrances, preemptive rights, rights of first refusal or redemption rights, such number of its authorized but unissued shares of Series F Common Stock (or Common Stock without Series designation if the New Warrants become exercisable for such stock pursuant to Section 2.4 below) as is sufficient to permit exercise in full of each of the New Warrants in accordance with the terms thereof. All shares of Series F Common Stock that are so issuable shall, when issued upon exercise and payment therefor, be fully and validly issued and fully paid and non-assessable. Upon the Healtheon-WebMD Closing, Healtheon/WebMD (in the event the Reorganization is effected through Reorganization Structure One) or Healtheon (in the event the Reorganization is effected through Reorganization Structure Two) shall assume all obligations of WebMD with respect to the New Warrants, and the New Warrants shall be exercisable for shares of Healtheon/WebMD Common Stock or Healtheon Common Stock, as applicable, as provided in this Section 2.1. 2.2. DELIVERY OF WARRANTS. Subject to Section 3.2 below, WebMD shall deliver the New Warrants to HBOC concurrently with the execution of this Agreement. 2.3. REGISTRATION RIGHTS AGREEMENT. Upon the issuance of the New Warrants, WebMD shall enter into a Registration Rights Agreement with HBOC substantially in the form of EXHIBIT 2.3 hereto. 2.4. CREATION OF SERIES F COMMON STOCK. Prior to the execution of this Agreement, the Board of Directors of WebMD approved the Articles of Amendment to the Amended and Restated Articles of Incorporation of WebMD in the form attached hereto as EXHIBIT 2.4 ("Articles of Amendment") and called a meeting of the holders of WebMD's Common Stock without Series designation and Series A Preferred Stock for the purpose of adopting such Articles of Amendment. WebMD shall use its best commercial efforts to hold such meeting and cause such Articles of Amendment to be adopted and when adopted shall file such Articles of Amendment with the Secretary of State of the State of Georgia. HBOC agrees to vote its shares of Series A Preferred Stock in favor of the adoption of such Articles of Amendment and to waive notice of the shareholders meeting if requested to do so by WebMD. In the event such Articles of Amendment are not so filed prior to September 20, 1999, then anything in this Agreement or the New Warrants to the contrary notwithstanding, the New Warrants shall be exercisable for Common Stock of WebMD without Series designation if exercised prior to the Healtheon-WebMD Closing and all references to "Common Stock" in the New Warrant shall mean Common Stock of WebMD without Series designation. 3. HEALTHEON/WEBMD REORGANIZATION. 3.1. VOTING AGREEMENT. HBOC agrees to execute, simultaneously with the execution of this Agreement, a Voting Agreement substantially in the form of EXHIBIT 3.1 hereof. 3.2. HART-SCOTT-RODINO. In the event that the acquisition of the New Warrants or the shares issuable upon exercise of the New Warrants by HBOC pursuant to this Agreement would require any filing by McKHBOC under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR ACT"), then before such New Warrants or shares shall be issued to HBOC, McKesson shall prepare and 5 6 file with the United States Federal Trade Commission and the Antitrust Division of the United States Department of Justice Notification and Report Forms as an "acquiring person" as required by the HSR Act. Each of WebMD, Healtheon and Healtheon/WebMD shall cooperate with McKesson in making any such filing, and shall make any filing required of any of them in connection therewith, promptly and shall furnish McKesson such information and commercially reasonable assistance as necessary for any such filing. 3.3. TERMINATION OF CERTAIN AGREEMENTS; SPECIAL COVENANTS. (a) Effective on the date hereof, (i) HBOC agrees to take all such action requested by WebMD so that each of the Restated Stockholders Agreement dated October 18, 1996, as amended (the "WEBMD RESTATED STOCKHOLDERS AGREEMENT"), and the Shareholders Agreement dated August 24, 1998, as amended (the "WEBMD SHAREHOLDERS AGREEMENT"), shall be terminated and of no further force and effect without the need for any further action on the part of any party thereto and (ii) subject to Section 3.3(b) below, all rights and obligations of the parties pursuant to each of the WebMD Investment Documents (including, without limitation, the Performance Warrant and the HBOC Purchase Rights) shall be terminated and of no further force and effect. WebMD and McKHBOC hereby waive any claim that such party may have with respect to any alleged breach of any of the Strategic Agreements, the Product Agreements, the WebMD Restated Stockholders Agreement, the WebMD Shareholders Agreement and the WebMD Investment Documents arising prior to the date hereof. (b) WebMD acknowledges that McKHBOC has agreed to the termination of the WebMD Restated Stockholders Agreement, the WebMD Shareholders Agreement and the WebMD Investment Documents prior to the Healtheon-WebMD Closing based on its understanding that, as of the date hereof, (i) WebMD has not granted any currently outstanding preemptive rights to purchase its capital stock to any person, and (ii) WebMD has not granted to any person registration rights with respect to its capital stock which are more favorable than the registration rights currently held by McKHBOC. If at any time after the date hereof, WebMD grants preemptive rights to acquire any of its capital stock, and if the Healtheon-WebMD Reorganization Agreement is terminated, WebMD shall grant to McKHBOC preemptive rights on terms equivalent to those granted to such other person(s). WebMD further covenants that if the Healtheon-WebMD Reorganization Agreement is terminated, then McKHBOC shall continue to have the information and access rights set forth in Sections 7.1.1, 7.1.2 and 7.1.4(a) and (c) of the Series A Investment Agreement as long as it owns at least 1% of the capital stock of WebMD on a fully diluted basis and McKHBOC agrees that it shall continue to be bound by the confidentiality obligations in Section 7.3 of the Series A Investment Agreement. WebMD further covenants that if the Healtheon-WebMD Reorganization Agreement is terminated, and if at any time after the date hereof WebMD grants any registration rights to any person with respect to its capital stock, then WebMD shall promptly (and in any event within five days after being requested by McKHBOC) provide McKHBOC with copies of all agreements pertaining to the registration of shares of WebMD's capital stock under the Securities Act of 1933, as amended, and applicable state securities laws, and permit McKHBOC to elect in writing within 30 days after WebMD has provided such copies to McKHBOC to have the WebMD capital stock owned by it treated as registrable securities under or otherwise covered by the provisions of any one of such agreements as McKHBOC shall elect in lieu of the Registration Rights Agreement, it being understood that if McKHBOC does not make such election, it shall retain all of its rights pursuant to the Registration Rights Agreement. Upon any such election WebMD shall enter into a new registration rights agreement with McKHBOC and the Registration Rights Agreement shall thereafter be of no further force and effect. 3.4. VOTING; FURTHER ACTIONS. Pursuant and subject to the terms of the Voting Agreement, HBOC agrees to vote all of its shares of capital stock of WebMD entitled to vote "for" the 6 7 Reorganization and all transactions contemplated thereby upon which such shares may be entitled to vote. McKHBOC agrees to take any further action reasonably requested by WebMD to facilitate the Healtheon-WebMD Closing. Each of WebMD, Healtheon and Healtheon/WebMD shall use its commercial best efforts to obtain and assist HBOC in obtaining promptly all necessary waivers, consents and approvals from any governmental authority or any other person for any exercise by HBOC of its rights under this Agreement, or the New Warrants, and to take such other actions as may reasonably be requested by HBOC to effect the purposes of this Agreement, or the New Warrants. The period of time provided for any closing of the transactions pursuant to such rights may, at the option of HBOC, be extended as necessary in order to obtain any such waivers, consents and approvals. 3.5. ADDITIONAL DELAY SHARES. WebMD hereby agrees that, notwithstanding any other provision of this Agreement to the contrary, HBOC shall have the right to receive the Additional Delay Shares if WebMD has not completed an Initial Public Offering prior to November 22, 1999. 3.6. ADJUSTMENT TO EXCHANGE RATIO. The transactions contemplated by this Agreement will result in a change in the ratio at which shares of WebMD common stock will be exchanged for shares of Healtheon/WebMD Common Stock (in the event the Reorganization is effected through Reorganization Structure One) or Healtheon Common Stock (in the event the Reorganization is effected through Reorganization Structure Two) such that, upon consummation of the Reorganization and subject to any other changes in the Exchange Ratio agreed to among the parties to the Healtheon-WebMD Reorganization Agreement after the date hereof, each share of WebMD common stock and each share of WebMD preferred stock (following its conversion to common stock) will be exchanged for (x) 1.796 shares of Healtheon/WebMD Common Stock, in the event the Reorganization is effected through Reorganization Structure One, or (y) 1.796 shares of Healtheon Common Stock, in the event the Reorganization is effected through Reorganization Structure Two. Nothing in this Agreement shall preclude the amendment of the Healtheon-WebMD Reorganization Agreement or require the consent or approval of McKHBOC to any such amendment, including any amendment to the Exchange Ratio, provided, however, that without the written consent of McKHBOC no amendment to the Healtheon-WebMD Reorganization Agreement shall amend, modify or change the shares of capital stock obtainable upon the exercise of the warrants to be delivered hereunder in a manner that is adverse to the holder of such warrants unless such amendment, modification or change is uniformly applicable to all of the holders of such class and series of capital stock. 4. REPRESENTATIONS AND WARRANTIES. 4.1. REPRESENTATIONS AND WARRANTIES OF WEBMD AND HEALTHEON. WebMD hereby represents and warrants to McKHBOC with respect to itself and Healtheon/WebMD, and Healtheon hereby separately represents and warrants to McKHBOC with respect to itself and Healtheon/WebMD as follows: 4.1.1. Organization and Standing. Each of WebMD, Healtheon and Healtheon/WebMD 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 this Agreement and/or the Healtheon-WebMD Reorganization Agreement. Each of WebMD, Healtheon and Healtheon/WebMD 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 result in any change, event, violation, inaccuracy, 7 8 circumstance or effect that is materially adverse to the business, assets (including intangible assets), financial condition or results of operations of WebMD, Healtheon or Healtheon/WebMD, as applicable, taken as a whole with its respective subsidiaries. 4.l.2. Authorization; Enforceability. All action on the part of WebMD, Healtheon and Healtheon/WebMD necessary for the authorization, execution, delivery and performance of all their respective obligations under this Agreement or any document contemplated hereby has been taken. This Agreement, when executed and delivered by each of WebMD, Healtheon and Healtheon/WebMD, will constitute the valid and binding obligation of such party, and will be enforceable against it in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency or other laws affecting the enforcement of creditors' rights generally, and except that the availability of the remedy of specific performance or other equitable relief is subject to the discretion of the court before which any proceeding therefor may be brought. 4.1.3. Capitalization. As of the date of this Agreement, (i) the capitalization of WebMD is as set forth on EXHIBIT 4.1(A) hereto. The representations and warranties given by Healtheon to WebMD regarding Healtheon's capitalization set forth in Section 3.2 of the Healtheon-WebMD Reorganization Agreement were true and correct as of the date thereof in all material respects. 4.1.4 Compliance with Other Instruments. The execution, delivery and performance of and compliance with this Agreement, the Registration Rights Agreement and the New Warrants and the issuance of the shares of Series F Common Stock, Healtheon Common Stock or Healtheon/WebMD Common Stock upon the exercise thereof will not result in any violation or be in conflict with or constitute a default (with or without notice or lapse of time or both) under, or give rise to a right of termination, cancellation or acceleration or the loss of any material benefit under: (i) any of the terms or provisions of the Certificate of Incorporation or Bylaws of WebMD, Healtheon or Healtheon/WebMD (or any comparable organizational documents of such companies' subsidiaries), or (ii) any mortgage, indenture, license, lease, contract, agreement or instrument to which any of WebMD, Healtheon, Healtheon/WebMD, or any of their respective subsidiaries is a party, or (iii) any judgment, order, decree, statue, law, ordinance, rule or regulation applicable to WebMD, Healtheon, Healtheon/WebMD, or any of their respective subsidiaries, properties or assets, or (iv) result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of WebMD, Healtheon, Healtheon/WebMD, or any of their respective subsidiaries pursuant to any such term or provision. 4.1.5. Offering. Subject to the accuracy of the representations of McKHBOC set forth in Section 4.2 below, the issuance of the New Warrants and the securities issuable upon exercise of the New Warrants pursuant to this Agreement constitute transactions exempt from the registration requirements of Section 5 of the Securities Act of 1933, as amended (the "SECURITIES ACT"). 4.1.6. Validity of Stock. The shares of Series F Common Stock, Healtheon Common Stock or Healtheon/WebMD Common Stock, as applicable, issuable upon exercise of the New Warrants, when issued, sold and delivered in compliance with the provisions of this Agreement and the New Warrants, will be duly authorized, validly issued, fully paid and nonassessable, will be free of any liens or encumbrances, and will not be subject to any preemptive rights, rights of first refusal or redemption rights. 4.1.7. No Other Agreements. Except as evidenced in this Agreement, the Strategic Agreements, the WebMD Investment Documents, the Product Agreements, the WebMD Restated 8 9 Stockholders Agreement, the WebMD Shareholders Agreement, WebMD's articles of incorporation and WebMD's bylaws in effect on the date hereof, there are no other agreements, arrangements, understandings, contracts, obligations or liabilities between or among WebMD, Healtheon, Healtheon/WebMD, or any of their respective subsidiaries or predecessor entities, on one hand, and McKesson, HBOC, or any of their respective subsidiaries or predecessor entities, on the other hand. 4.2. REPRESENTATIONS AND WARRANTIES OF MCKHBOC. Each of McKesson and HBOC represents and warrants to WebMD, Healtheon and Healtheon/WebMD as follows: 4.2.1. Organization and Standing. Each of McKesson and HBOC 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 this Agreement. Each of McKesson and HBOC 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 result in 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 McKesson or HBOC, as applicable, taken as a whole with its subsidiaries. 4.2.2. Authorization; Enforceability. All action on the part of McKHBOC necessary for the authorization, execution, delivery and performance of all obligations of McKHBOC under this Agreement or any document contemplated hereby has been taken. This Agreement, when executed and delivered by each of McKesson and HBOC, will constitute the valid and binding obligation of McKesson and HBOC and is enforceable against each of them in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency or other laws affecting the enforcement of creditors' rights generally, and except that the availability of the remedy of specific performance or other equitable relief is subject to the discretion of the court before which any proceeding therefor may be brought. 4.2.3. No Other Agreements. Except as evidenced in this Agreement, the Strategic Agreements, the Product Agreements, the WebMD Investment Documents, the WebMD Restated Stockholders Agreement, the WebMD Shareholders Agreement, WebMD's articles of incorporation and WebMD's bylaws in effect on the date hereof, there are no other agreements, arrangements, understandings, contracts, obligations or liabilities between or among WebMD, Healtheon, Healtheon/WebMD or any of their respective subsidiaries or predecessor entities, on one hand, and McKesson, HBOC or any of their subsidiaries or predecessor entities, on the other hand. 4.2.4. Experience; Investment. HBOC is acquiring the New Warrants and the shares issuable upon exercise of the New Warrants solely for its own account, not as a nominee or agent, and not with a view to, or for sale in connection with, any distribution thereof, as that term is used under the Securities Act. HBOC represents that it is an "accredited investor" within the meaning of Rule 501(a)(3) of Regulation D promulgated by the Commission under the Securities Act. In addition, HBOC represents that it relied upon no form of general solicitation or general advertising from WebMD or its representatives in connection with the issuance of the New Warrants, the Warrant Shares or other securities. 4.2.5. Registration under the Securities Act. McKHBOC understands that: (a) neither the issuance of the New Warrants nor the shares issuable upon exercise of the New Warrants has been 9 10 registered under the Securities Act or applicable state securities laws, in reliance upon exemptions from the registration provisions of the Securities Act and applicable state securities laws, (b) the New Warrants or the Warrant Shares received by HBOC must be held by it indefinitely unless the sale or transfer thereof is subsequently registered under the Securities Act and applicable state securities laws or an exemption from such registration is available, and the certificates or documents representing the New Warrants and the Warrant Shares will be legended to reflect such restrictions, (c) except as set forth in the Registration Rights Agreement, WebMD is under no obligation to register any Warrant Shares on HBOC's behalf or to assist it in complying with any exemption from registration, and (d) the officers of WebMD will rely in part upon the representations and warranties made by McKHBOC in this Agreement in order to establish such exemption from the registration provisions of the Securities Act and applicable state securities laws. 4.2.6. Transfer. HBOC will not transfer any New Warrant or Warrant Shares without registration under the Securities Act and applicable state securities laws unless the transfer is exempt from registration under the Securities Act and such laws. 5. MISCELLANEOUS. 5.1. GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of Georgia, without regard to its principles of conflicts of laws. 5.2. SURVIVAL. The representations, warranties, covenants and agreements made herein shall survive any investigation made by any party hereto and the closing of the transactions contemplated hereby. 5.3. ASSIGNMENT. This Agreement may not be assigned by any party hereto. Notwithstanding the foregoing, (i) with the express written consent of WebMD, which consent shall not be unreasonably withheld, McKHBOC may assign its rights and obligations pursuant to Section 1 in connection with a sale by McKHBOC of all or substantially all of the assets of the McKHBOC subsidiary or business unit to which those rights and obligations relate, (ii) with the express written consent of McKHBOC, which consent shall not be unreasonably withheld, WebMD may assign its rights and obligations pursuant to Section 1 in connection with a sale of all or substantially all of the assets of WebMD or the WebMD subsidiary or business unit to which those rights and obligations relate, (iii) this Agreement may be assigned by WebMD, without the consent of McKesson, to either Healtheon or Healtheon/WebMD upon the Healtheon-WebMD Closing, and (vi) this Agreement may be assigned by McKesson or HBOC to a directly or indirectly wholly owned subsidiary of McKesson or HBOC, provided that McKesson or HBOC, as applicable, shall remain primarily liable for all of its obligations hereunder. 5.4. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement among the parties with regard to the subjects hereof and thereof. Neither this Agreement nor any term hereof may be amended, waived, discharged or terminated except by a written instrument signed by McKesson, HBOC and a representative of WebMD so authorized by its Board of Directors. 5.5. NOTICES. All notices and other communications required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or three (3) business days following deposit with the United States Postal Service, by certified mail, return receipt requested, postage prepaid, or otherwise delivered by hand or by messenger, as follows: 10 11 If to WebMD: WebMD, Inc. 400 The Lenox Building 3399 Peachtree Road Atlanta, Georgia 30326 Attention: W. Michael Heekin, Esq. With a copy to: Nelson Mullins Riley & Scarborough, L.L.P. Bank of America Corporate Center Suite 2600 100 North Tryon Street Charlotte, North Carolina 28202 Attention: H. Bryan Ives III, Esq. C. Mark Kelly, Esq. If to Healtheon or Healtheon/WebMD: Healtheon Corporation 4600 Patrick Henry Road Santa Clara CA 95054 Attention: Jack Dennison, Esq. With a copy to: Wilson, Sonsini, Goodrich & Rosati 650 Page Mill Road Palo Alto, CA 94304-1050 Attention: Larry W. Sonsini, Esq. Martin W. Korman, Esq. Daniel R. Mitz, Esq. If to McKHBOC: McKesson HBOC, Inc. One Post Street San Francisco, California 94104 Attention: General Counsel With a copy to: Jones, Day, Reavis & Pogue 3500 SunTrust Plaza 303 Peachtree Street Atlanta, Georgia 30308-3242 Attention: Robert W. Smith, Esq. and Skadden, Arps, Slate, Meagher & Flom LLP 525 University Avenue, Suite 220 Palo Alto, CA 94301 Attention: Kenton J. King, Esq. or at such other address as any party shall have furnished to the other parties in writing. 11 12 5.6. AGENT'S FEES. Each party (i) represents and warrants that it has retained no finder or broker in connection with the transactions contemplated by this Agreement (except, in the case of McKHBOC, for Goldman Sachs, or as otherwise disclosed to the other party hereto as of the date hereof), and (ii) hereby agrees to indemnify and to hold the other party harmless of and from any liability for commissions or compensation in the nature of an agent's, finder's or broker's fee to any broker or other person or firm (and the cost and expenses of defending against such liability or asserted liability) for which said party is responsible. 5.7. EXPENSES. Each party shall bear its own expenses and legal fees (and expenses and disbursements of its legal counsel) incurred on its behalf with respect to this Agreement and the transactions contemplated hereby. 5.8. CONSTRUCTION OF CERTAIN TERMS. The titles of the articles, sections, and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 5.9. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 5.10. ENFORCEMENT. 5.10.1. Remedies at Law or in Equity. If WebMD or McKHBOC shall default in any of its obligations under this Agreement or if any representation or warranty made by or on behalf of such party in this Agreement or in any certificate, report or other instrument delivered under or pursuant to any term hereof shall be untrue or misleading in any material respect as of the date of this Agreement or as of the date it was made, furnished or delivered, McKHBOC or WebMD, respectively, may proceed to protect and enforce its rights by suit in equity or action at law, whether for the specific performance of any term contained in this Agreement, injunction against the breach of any such term or in furtherance of the exercise of any power granted in this Agreement, or to enforce any other legal or equitable right of such party or to take any one of more of such actions. 5.10.2. Remedies Cumulative; Waiver. No remedy referred to herein or in any exhibit hereto is intended to be exclusive, but each shall be cumulative and in addition to any other remedy referred to above or otherwise available to a party at law or in equity. No express or implied waiver by any party of any default shall be a waiver of any future or subsequent default. The failure or delay of any party in exercising any rights granted it hereunder shall not constitute a waiver of any such right and any single or partial exercise of any particular right by such party shall not exhaust the same or constitute a waiver of any other right provided herein. 5.11. TIMELY PERFORMANCE. Time is of the essence as to the performance of the obligations required of the respective parties under this Agreement. 5.12. NO JOINT VENTURE. Nothing in this Agreement shall be deemed to constitute WebMD and McKHBOC as partners, agents or joint venturers. 5.13. SEVERABILITY. In the event any one or more of the provisions contained in this Agreement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. The parties shall endeavor in good faith negotiations to replace the invalid, illegal or 12 13 unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. [SIGNATURES FOLLOW ON THE NEXT PAGE] 13 14 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date and year first above written. WEBMD, INC. By: /s/ W. Michael Heekin ----------------------------------------- Its: W. Michael Heekin Exec. VP MCKESSON HBOC, INC. By: /s/ David L. Mahoney ----------------------------------------- Its: Co-Chief Executive Officer HBO & COMPANY By: /s/ Heidi Yodiesty ----------------------------------------- Its: Chief Financial Officer For purposes of Section 2.1, Section 2.2, Section 2.3, Section 3.2, Section 3.4, Section 3.6 and Section 4.1 of this Agreement only: HEALTHEON CORPORATION By: /s/ W. Michael Long ----------------------------------------- Its: HEALTHEON/WEBMD CORPORATION By: /s/ W. Michael Long ----------------------------------------- Its: 14 15 EXHIBIT 1.1 NEW STRATEGIC ARRANGEMENTS 1.1.1 CONTINUING OBLIGATIONS OF WEBMD Notwithstanding the termination of the Strategic Agreements, the parties hereby agree that WebMD shall continue to have the following obligations hereunder: (a) WebMD shall provide a direct link to McKesson's online General Medical-medical/surgical supply catalog and the functionality provided with respect thereto by McKesson's web server from a WebMD web site on a nonexclusive basis. Such access shall be implemented via a link which is at least as prominent as that on which any other medical/surgical supplier appears on WebMD's web site, to applications running on web servers operated by or for McKHBOC, and shall not require that any McKHBOC applications be present on WebMD servers. If there are no other links to medical/surgical suppliers on any WebMD web site, then the McKesson medical/surgical link shall be on the highest level on which links to other third party electronic commerce activities appear on WebMD's web site. The parties understand and agree that in addition to medical/surgical supplies, the General Medical catalog includes a limited number of pharmaceuticals. To the extent that, after the date hereof, the pharmaceuticals offered by McKHBOC through that catalog exceed to any material extent the nature and scope of the pharmaceuticals currently offered by McKesson through that catalog, WebMD shall not be obligated to offer such pharmaceuticals through its direct link to the extent of such excess. (b) The access described above shall be provided without charge to McKHBOC, until the earlier of December 31, 2000 or one (1) year after the consummation of the transactions contemplated by the Healtheon-WebMD Reorganization Agreement. Thereafter, provided that WebMD is charging third parties for allowing such access to their products or services on WebMD web sites, in the event McKHBOC elects to continue such access, WebMD may charge McKHBOC a fee for allowing such access in an amount no less favorable, and on no less favorable terms, than those offered by WebMD to any other distributor offering products or services similar to those offered by McKHBOC through the link provided hereunder. (c) Notwithstanding the foregoing, in the event that a WebMD customer requests in writing that McKHBOC products or services be blocked from the customer's co-branded version of any WebMD web site, WebMD shall be permitted to comply with such request ten (10) business days after providing written notice thereof to McKHBOC, which notice shall include a copy of the customer's written request for blocking. (d) To the extent that WebMD has developed prior to the date hereof any applications, including any technology specific thereto, used to effect the web access described in Section 1.1.1(a) for McKHBOC products and services, (i) McKHBOC shall have a royalty-free right and license to use such applications, and (ii) to the extent such applications were developed based on McKHBOC's proprietary information, McKHBOC shall have a perpetual, royalty-free and exclusive (even as to the licensor) right and license to use such applications. (e) WebMD acknowledges and agrees that, as between McKHBOC and WebMD, McKHBOC owns the data for all transactions between McKHBOC and its customers or potential customers (whether or not they originate on a WebMD site); provided, however, that WebMD shall 16 continue to have the right to use any WebMD member identification data for internal administrative purposes, including, but not limited to, authentication of such members and ,provided further, that any data necessary for purposes of determining charges pursuant to Section 1.1.1(b) above may be used by WebMD for such purpose. (f) The total amount expended by WebMD to the date hereof to web-enable McKHBOC products and services pursuant to paragraph 3(b) of the January Letter Agreement is $1 million (the "AMOUNT EXPENDED"). The difference between WebMD's $5 million commitment under said paragraph and the Amount Expended shall be referred to hereinafter as the "DEVELOPMENT CREDIT." As of the date this Agreement is entered into, whether or not the Reorganization is completed, McKHBOC hereby releases WebMD from any further obligation to fund development under such paragraph, in consideration of WebMD's agreement to offset the Development Credit against the amount expended by WebMD under the Product Agreements, as described in Section 1.1.1(a) hereof. (g) Upon the execution of this Agreement, McKHBOC shall pay to WebMD an amount equal to $3.6 million, less $117,000 (representing a credit for 325 subscriptions placed by McKHBOC) for a net amount under this paragraph (g) of $3,483,000, in respect of McKHBOC's obligation pursuant to the Strategic Agreements to sponsor certain WebMD subscriptions. After the date hereof and upon presentation of reasonably satisfactory documentation, WebMD shall pay to McKHBOC for each physician subscription to WebMD's products and services obtained by McKHBOC prior to the date hereof (other than the 325 subscriptions referenced and accounted for above) compensation at the rates specified and subject to the terms and provisions contained in the Strategic Agreements. (h) The provisions of contained in Sections 1.1.1(a), (b), and (c) and in clause 1.1.1(d)(i) of this Exhibit 1.1 shall terminate on the fifth anniversary date of the Healtheon-WebMD Closing, or if there is no such closing, on the fifth anniversary date of this Agreement; provided, however, if there are any applications licensed under clause (d)(i) McKHBOC shall have the right to continue to license such applications on terms no less favorable than those offered to third parties for similar licensed applications. 1.1-2 17 EXHIBIT 1.2 NEW PRODUCT ARRANGEMENTS 1.2.1 REFUND. Upon the execution of this Agreement, McKHBOC shall refund to WebMD an amount equal to: (i) $6 million, representing all payments by WebMD to McKHBOC pursuant to such Product Agreements, less (ii) the Development Credit. As a result of this Section 1.2.1 and Section 1.1.1 (f) and (g) the net amount payable by McKHBOC to WebMD on the date hereof is $5,483,000, which shall be paid by McKHBOC within one business day following the date hereof, by wire transfer of immediately available funds pursuant to the wire transfer instructions provided by WebMD to McKHBOC. 1.2.2 PRODUCT LICENSE. McKHBOC hereby grants to WebMD a fully paid-up, nonexclusive, worldwide, license (without the right to sublicense) for a term of one year commencing on the date hereof to use the Clinical Reference Products, in the form in which such Clinical Reference Products are manufactured and distributed as of the date hereof, in connection with WebMD's operation of its business, in an HTML or other Internet-enabled format. The foregoing license includes no obligation by McKHBOC to provide any maintenance or support (whether to WebMD or to customers of WebMD) for the Clinical Reference Products. Such license shall be transferable only to WebMD's parent corporation or any direct or indirect subsidiary of WebMD's parent corporation, or, with McKHBOC's written consent (which shall not be unreasonably withheld) in connection with the sale or other transfer of all or a significant portion of WebMD's business. 1.2.3 TRADEMARK LICENSE. McKHBOC hereby grants to WebMD a fully paid-up, nonexclusive, worldwide, license (without the right to sublicense) to use McKHBOC's trademarks and service marks (including but not limited to McKHBOC's brands, logos, and slogans) (collectively, the "MCKHBOC MARKS") solely in connection with the product license set forth above. WebMD shall use the McKHBOC Marks in accordance with reasonable guidelines established by McKHBOC from time to time. WebMD shall comply with McKHBOC's reasonable requirements concerning the nature and quality of the goods and services provided by WebMD under the McKHBOC Marks. WebMD shall submit to McKHBOC copies of all materials using the McKHBOC Marks for approval prior to using, distributing, or otherwise publicly exhibiting such materials. WebMD shall not use any of the McKHBOC Marks in any manner likely to confuse, mislead, or deceive the public. WebMD acknowledges that WebMD's use of the McKHBOC Marks shall inure to the benefit of McKHBOC, and that WebMD shall not acquire any rights in the McKHBOC Marks by virtue of such use. 1.2.4 INTELLECTUAL PROPERTY INDEMNIFICATION. McKHBOC agrees to indemnify, defend and hold harmless WebMD from and against any claim asserted or suit or proceeding brought against WebMD asserting that the Clinical Reference Products, or any portion or use thereof, infringes a United States patent, trademark, copyright or trade secret of a third party, provided McKHBOC is given reasonably prompt notice of, and full and complete authority, information and assistance in the defense of, such claim, suit or proceeding once presented to WebMD in writing. McKHBOC shall not be responsible for the cost of any settlement of any such claim, suit or proceeding made by WebMD without the written consent of McKHBOC. In addition, and at the expense of McKHBOC, in the event there has been or McKHBOC reasonably believes that there may be an injunction issued that prohibits or restricts WebMD's use of the Clinical Reference Products (or any portion thereof), McKHBOC may either procure for WebMD the right to continue using the same, or replace or modify the same so that it becomes non-infringing, provided that such modification or replacement has the same functional 18 characteristics as the allegedly infringing version. WebMD may engage its own counsel, at its expense, to advise WebMD in connection with any such claim, suit or proceeding. McKHBOC shall cooperate with WebMD and its counsel in such activities. McKHBOC shall not be liable to WebMD under the terms of this Section or otherwise to the extent any infringement, claim, suit or proceeding is based upon the use of any Clinical Reference Product in violation of this Agreement or arises from a customization of the Clinical Reference Products performed by McKHBOC for WebMD based upon WebMD's ideas, designs or specifications, or performed by WebMD. 1.2-2 19 EXHIBIT 2.1 FORM OF WARRANT THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE FEDERAL SECURITIES ACT OF 1933, AS AMENDED, THE GEORGIA SECURITIES ACT OF 1973, AS AMENDED, OR THE SECURITIES LAWS OF ANY OTHER STATE. THIS WARRANT AND ANY OF SUCH SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED IN THE ABSENCE OF REGISTRATION UNDER SAID ACTS AND ALL OTHER APPLICABLE SECURITIES LAWS UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE. THIS WARRANT IS SUBJECT TO THE RESTRICTIONS ON EXERCISE AND TRANSFER CONTAINED IN ARTICLE IV HEREOF. WARRANT TO PURCHASE SHARES OF COMMON STOCK OF WEBMD, INC. DATE OF ISSUANCE: ___________, 1999 THIS CERTIFIES that, for value received, WebMD, Inc., a Georgia corporation (the "COMPANY"), hereby grants to HBO & Company, a Delaware corporation, or its registered assigns (the "HOLDER"), the right to purchase, at any time and from time to time after the Initial Exercise Date and prior to the Expiration Date, up to _____________ shares in the aggregate of its Common Stock Series F, without par value per share (the "COMMON Stock"), subject to the terms and conditions set forth herein. This warrant is hereinafter referred to as the "WARRANT." ARTICLE I CERTAIN DEFINITIONS For all purposes of this Warrant, unless the context otherwise requires, the following terms shall have the following respective meanings: "ACT": the federal Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder, all as the same shall be in effect at the time. "COMMON STOCK": as defined on the first page hereof. "COMMISSION": the Securities and Exchange Commission or any other federal agency then administering the Act. 20 "COMPANY": WebMD, Inc., a Georgia corporation, located at 400 The Lenox Building, 3399 Peachtree Road, Atlanta, Georgia, 30326. "DATE OF ISSUANCE": the issue date of this Warrant, as set forth on the first page hereof. "EXERCISE PRICE": $________ per Stock Unit. "EXPIRATION DATE": as defined in Article VII hereof. "FAIR MARKET VALUE": (a) in the case of securities for which a public market exists as to the twenty (20) trading days preceding the date as of which valuation is required, the average of (i) each day's closing prices regular way for such securities as reported by the New York Stock Exchange, (ii) if such securities are not traded on such Exchange, each day's closing sale price for such securities as reported by the Nasdaq Stock Market, or (iii) if such securities are not traded on such Exchange or Market, each day's closing prices regular way for such securities as reported by a national securities exchange on which such securities are traded or each day's mean of the closing bid and ask prices for such securities as reported by Nasdaq, wherever the average trading volume over such period is higher; and (b) in the case of securities for which no public market exists, an amount equal to the current fair market value of such securities as determined in good faith by the board of directors of the Company. "HOLDER": as defined on the first page hereof. "INITIAL EXERCISE DATE": The earlier of (i) the filing of the Articles of Amendment (as defined in the Agreement pursuant to which this Warrant was issued) or (ii) September 21, 1999. "PERSON": any individual, corporation, partnership, limited liability company, trust, unincorporated organization and any government, and any political subdivision, instrumentality or agency thereof. "REGISTRATION RIGHTS AGREEMENT": Registration Rights Agreement dated as of even date herewith between the Company and the Holder. "STOCK UNIT": one share of Common Stock, as such stock is constituted on the Date of Issuance and thereafter the number of shares of Common Stock as shall result from the adjustments specified in Article V. "WARRANT": as defined on the first page hereof. "WARRANT OFFICE": as defined in Section 3.1. "WARRANT SHARES": the shares of Common Stock underlying the Stock Units purchasable by the Holder upon the exercise of this Warrant. 2.1-2 21 ARTICLE II EXERCISE OF WARRANT 2.1 METHOD OF EXERCISE. To exercise this Warrant, the Holder shall deliver to the Company at the Warrant Office designated pursuant to Section 3.1, (a) a Notice of Exercise substantially in the form attached hereto as Exhibit A duly executed after the Initial Exercise Date by the Holder specifying the number of Warrant Shares to be purchased, (b) payment of an amount equal to the aggregate Exercise Price for all such Warrant Shares, which shall be made (i) in cash or by certified or bank cashier's check payable to the order of the Company or by wire transfer of immediately available funds, (ii) by delivery to the Company of that number of shares of capital stock of the Company (not including any Warrant Shares purchasable or purchased upon the exercise of this Warrant) having a value computed based upon the then-current fair market value as determined in good faith by the Company's Board of Directors equal to the then applicable Exercise Price multiplied by the number of Warrant Shares being purchased, (iii) by delivery (on a form prescribed by the Company) of an irrevocable direction to a securities broker approved by the Company to sell all or part of the Warrant Shares being purchased (provided that the Warrant Shares may be freely sold by such broker) and to deliver all or a portion of such sales proceeds to the Company in satisfaction of the Exercise Price, (iv) by delivery of an irrevocable notice to the Company that the Holder is waiving and relinquishing the right to purchase a specified number of Warrant Shares subject to this Warrant which number is set forth in the notice, with a fair market value as of the date of exercise equal to the Exercise Price, which fair market value shall be equal to the fair market value of the underlying Warrant Shares being relinquished minus the Exercise Price of such shares, and (c) this Warrant. The number of Warrant Shares to be purchased in any exercise hereunder shall be no fewer than [500,000, IN THE CASE OF THE WARRANT TO PURCHASE 1,837,417 SHARES OF COMMON STOCK AND THE WARRANT TO PURCHASE 2,783,965 SHARES OF; AND 50,000, IN THE CASE OF THE WARRANT TO PURCHASE 66,667 SHARES OF COMMON STOCK] or the total number of Warrant Shares available for purchase at the date of exercise, whichever is less. The Company shall, as promptly as practicable, and in any event within five (5) days thereafter, cause to be issued and delivered to the Holder (or its nominee) or the transferee designated in the Notice of Exercise a certificate or certificates representing the number of Warrant Shares specified in the Notice of Exercise. The stock certificate or certificates so delivered shall be in denominations of shares as may be specified in said notice and shall be issued in the name of the Holder, subject to the limitations on transfer contained elsewhere herein, or such other name as shall be designated in said notice. At the time of delivery of the certificate or certificates, appropriate notation shall be made on the Warrant Shares Purchase Schedule attached to this Warrant designating the number of shares purchased, and this Warrant shall then be returned to the Holder if this Warrant has been exercised only in part. The Holder or transferee so designated in the Notice of Exercise shall be deemed to have become the Holder of record of such Warrant Shares for all purposes as of the close of business on the date on which the Notice of Exercise is delivered to the Warrant Office, provided that an amount equal to the aggregate Exercise Price and this Warrant shall have also been delivered to the Company. The Company shall pay all expenses, taxes (excluding capital gains and income taxes) and other charges payable in connection with the preparation, issuance and delivery of stock certificates, except that, in case stock certificates shall be registered in a name or names other than the name of the Holder, funds sufficient to pay all stock transfer taxes payable upon the issuance of stock certificates shall be paid by the Holder promptly upon receipt of a written request of the Company therefor. 2.2 SHARES TO BE FULLY PAID AND NON-ASSESSABLE. All Warrant Shares issued upon the exercise of this Warrant and the payment therefor shall be validly issued, fully paid, non-assessable and free from preemptive rights. 2.1-3 22 2.3 NO FRACTIONAL SHARES TO BE ISSUED. The Company shall not be required upon any exercise of this Warrant to issue a certificate representing any fraction of a share of Common Stock. If any fraction of a share of Common Stock would be deliverable upon exercise of this Warrant, the Company may, in lieu of delivering such fraction of a share of Common Stock, make a cash payment to the Holder in an amount equal to the same fraction of the Fair Market Value per share determined as of the business day immediately preceding the date of exercise of such Warrant. 2.4 LEGEND ON WARRANT SHARES. Each certificate for Warrant Shares issued upon exercise of this Warrant, unless at the time of exercise such shares are registered under the Act, shall bear substantially the following legend (and any additional legend required by any national securities exchanges upon which such shares may, at the time of such exercise, be listed or under applicable securities laws): "The securities represented by this certificate have not been registered under the federal Securities Act of 1933, as amended, or the Georgia Securities Act of 1973, as amended (the "Acts"), or the securities laws of any state. They may not be sold, transferred, assigned, pledged, hypothecated, encumbered, or otherwise disposed of unless, in the opinion of counsel reasonably acceptable to the issuer, such transfer would be pursuant to an effective registration statement under said Acts or pursuant to an exemption from such registration." Any certificate issued at any time in exchange or substitution for any certificate bearing such legend (except a new certificate issued upon completion of a public offering pursuant to a registration statement under the Act of the securities represented thereby) shall also bear the above legend unless, in the opinion of counsel to the Company, the securities represented thereby need no longer be subject to the restrictions on transferability. In addition, the provisions of Article IV shall be binding upon all subsequent holders of this Warrant. 2.5 ACKNOWLEDGMENT OF CONTINUING OBLIGATION. The Company shall, at the time of any exercise of this Warrant in whole or in part, upon request of the Holder, acknowledge in writing its continuing obligation to such holder in respect of any rights to which the Holder shall continue to be entitled after exercise in accordance with this Warrant; provided, however, that the failure of the Holder to make any such request shall not affect the continuing obligation of the Company to the Holder in respect of such rights. ARTICLE III WARRANT OFFICE; TRANSFER, DIVISION OR COMBINATION OF WARRANTS 3.1. WARRANT OFFICE. The Company shall maintain an office for certain purposes specified herein (the "WARRANT OFFICE"), which office shall initially be the Company's location set forth in Article I hereof, and may subsequently be such other office of the Company, of any transfer agent of the Common Stock or of any option or warrant administrator regularly engaged by the Company, in each case within the continental United States as to which written notice has previously been given to all of the Holders of the Warrants. 2.1-4 23 3.2. OWNERSHIP OF WARRANT. The Company may deem and treat the Person in whose name this Warrant is registered as the Holder and owner hereof (notwithstanding any notations of ownership or writing hereon made by anyone other than the Company) for all purposes and shall not be affected by any notice to the contrary, until presentation of this Warrant for registration of transfer as provided in this Article III. 3.3. TRANSFER OF WARRANT. The Company agrees to maintain at the Warrant Office books for the registration of permitted transfers of this Warrant. Subject to the provisions of Article IV, this Warrant and all rights hereunder are transferable, in whole or in part, on the books at that office, upon surrender of this Warrant at that office, together with a written assignment of this Warrant duly executed by the Holder or his, her or its duly authorized agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of the transfer. Subject to Article IV, upon surrender and payment, the Company shall execute and deliver a new Warrant in the name of the assignee, noting thereon the number of Warrant Shares theretofore purchased under this Warrant, and this Warrant shall promptly be canceled. To the extent this Warrant is transferred in part, the Company shall execute and deliver a new Warrant in the name of the Holder for the balance of the Warrant Shares not transferred to the assignee. A Warrant may be exercised by a new Holder for the purchase of shares of Common Stock without having a new warrant issued. 3.4. DIVISION OR COMBINATION OF WARRANTS. Except as provided in Section 3.3 above, this Warrant may not be divided or combined with any other warrant. 3.5. EXPENSES OF DELIVERY OF WARRANTS. The Company shall pay all expenses, taxes (other than transfer taxes), and other charges payable in connection with the preparation, issuance and delivery of new Warrants hereunder. ARTICLE IV RESTRICTIONS ON EXERCISE AND TRANSFER 4.1. RESTRICTIONS ON EXERCISE AND TRANSFER. Notwithstanding any provisions contained in this Warrant to the contrary, this Warrant shall not be exercisable or transferable except upon the conditions specified in this Article IV, which conditions are intended, among other things, to insure compliance with the provisions of the Act in respect of the exercise or transfer of the Warrant. The Holder, by acceptance hereof, agrees that he, she or it will not exercise or transfer this Warrant prior to delivery to the Company of any required opinion of the Holder's counsel (as the opinion and counsel are described in Section 4.2 hereof). 4.2. OPINION OF COUNSEL. In connection with any exercise or transfer of this Warrant, the following provisions shall apply: 4.2.1. If, in the written opinion of counsel to the Holder (which opinion and counsel must be reasonably acceptable to the Company), the proposed exercise or transfer of this Warrant may be effected without registration of this Warrant or the Common Stock issuable hereunder under the Act, the Holder shall be entitled to exercise or transfer this Warrant as proposed. In no event shall the Company be obligated (i) to effect a registration under the Act or any state securities law so as to permit the proposed exercise or transfer of this Warrant, or (ii) to qualify to do business or to file a general consent to service of process in any state or other jurisdiction where the Company has not already done so; provided, however, that the Company shall have the obligation to register the shares 2.1-5 24 of Common Stock issuable upon exercise of this Warrant on the terms set forth in the Registration Rights Agreement. 4.2.2. If in the opinion of such counsel, the proposed exercise or transfer of this Warrant may not be effected without registration of this Warrant under the Act, the Holder shall not be entitled to exercise or transfer this Warrant until registration is effective or until exercise or transfer may be effected without registration, in the opinion of such counsel as set forth in Section 4.2.1 above. ARTICLE V ADJUSTMENTS 5.1. ADJUSTMENTS TO NUMBER OF STOCK UNITS. The number of shares of Common Stock comprising a Stock Unit shall be subject to adjustment from time to time as set forth in this Section 5.1. 5.1.1. Stock Dividends, Subdivision and Combination. In case at any time or from time to time the Company shall: (i) take a record of the holders of its common stock of any series for the purpose of entitling them to receive a dividend payable in, or other distribution of, the capital stock of any series, (ii) subdivide its outstanding shares of common stock of any series into a larger number of shares of common stock of any series, or (iii) combine its outstanding shares of common stock of any series into a smaller number of shares of common stock of any series; then the number of shares of Common Stock comprising a Stock Unit immediately after the happening of any such event shall be adjusted so as to consist of the number of shares of Common Stock (or in the case of clause (i) above, the number of shares of Common Stock or other capital stock) that a record holder of the number of shares of Common Stock comprising a Stock Unit immediately prior to the happening of such event would own or be entitled to receive after the happening of such event. The adjustments required by this subsection shall be made whenever and as often as any specified event requiring an adjustment shall occur. 5.1.2. Certain Other Dividends and Distributions. In case at any time or from time to time the Company shall take a record of the holders of its common stock of any series for the purpose of entitling them to receive any dividend or other distribution of (i) cash (other than a cash distribution made as a dividend payable out of the net earnings or net profits of the Company realized during the year of such distribution or the last preceding year and accumulated net earnings or net profits of the Company from the date hereof to the time of such distribution, computed in accordance with generally accepted accounting principles employed by the Board of Directors of the Company for purposes of financial reports to shareholders of the Company), or (ii) any evidences of its indebtedness, any shares of its stock or any other securities or property of any nature whatsoever (other than cash); 2.1-6 25 then at least five (5) business days prior to the record date to determine shareholders entitled to receive such dividend or distribution, the Company shall give notice of such proposed dividend or distribution to the Holder for the purpose of enabling the Holder to exercise the same, and thereby participate in such dividend or distribution. 5.1.3 Fractional Interests. In computing adjustments under this section, fractional interests in Common Stock shall be taken into account to the nearest one-thousandth of a share. 5.1.4. When Adjustment Not Required--Abandonment of Plan for Dividend and the Like. If the Company shall take a record of the holders of its common stock of any series for the purpose of entitling them to receive a dividend or distribution or subscription or purchase rights and shall, thereafter and before the distribution to shareholders thereof, legally abandon its plan to pay or deliver such dividend, distribution, subscription or purchase rights, then thereafter no adjustment shall be required by reason of the taking of such record and any such adjustment previously made in respect thereof shall be rescinded and annulled. 5.1.5. Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets. In case the Company shall reorganize its capital, reclassify its capital stock, merge or consolidate into another corporation, then the number of shares of stock purchasable upon exercise of this Warrant shall be adjusted to consist of the number of shares of stock or other securities that a record holder of the number of shares of Common Stock purchasable upon exercise of this Warrant immediately prior to such event would own or be entitled to receive immediately after such event. This provision shall apply to the merger of the Company pursuant to the Healtheon-WebMD Reorganization Agreement (as defined in the Agreement pursuant to which this Warrant was issued) in the manner provided in the Agreement pursuant to which this Warrant was issued. 5.2. NOTICE TO HOLDER. Whenever the Company takes any action that causes the composition of a Stock Unit to change under Sections 5.1, the Company shall provide the Holder with written notice of such change and the number of Warrant Shares for which this Warrant is or will become exercisable. Such notice will be provided not more than ten (10) days after any such action has occurred. ARTICLE VI ADDITIONAL NOTICES TO WARRANT HOLDER In addition to any other notice required hereunder, the Company shall provide the Holder with a copy of any notice that the Company is required to provide those Persons holding shares of Common Stock on the same date such Persons receive such notice. ARTICLE VII EXPIRATION This Warrant shall continue in effect until the earlier of (the "EXPIRATION DATE"): (i) the date on which the Warrant has been exercised or canceled pursuant to the terms hereof with respect to all of the Warrant Shares, and (ii) the fifth (5th) anniversary of the Date of Issuance. 2.1-7 26 ARTICLE VIII CERTAIN COVENANTS 8.1. COVENANTS OF THE COMPANY. The Company has taken all action necessary to authorize the issuance of this Warrant and the issuance of shares of Common Stock upon exercise hereof. The Company covenants and agrees that it will reserve and set apart and have at all times, free from preemptive rights, a number of shares of authorized but unissued Common Stock or other securities deliverable upon the exercise of this Warrant from time to time sufficient to enable it at any time to fulfill all its obligations hereunder. 8.2 COVENANTS OF THE HOLDER. In the event that the exercise of this Warrant for Common Stock would require any filing by the Holder under the Hart Scott Rodino Antitrust Improvements Act of 1976 or any successor law and rules and regulations issued pursuant to that Act or any successor law (the "HSR ACT"), then, before such exercise, either (i) the parties shall have been granted early termination of the waiting period under the HSR Act, or (ii) the applicable waiting period shall have expired without any agency having obtained injunctive relief with respect to the exercise of this Warrant. ARTICLE IX MISCELLANEOUS 9.1 ENTIRE AGREEMENT; GOVERNING LAW. This Warrant contains the entire agreement between the Holder and the Company with respect to the purchase of the Warrant Shares and supersedes all prior arrangements or understandings with respect thereto. This Warrant shall be governed by and construed under the laws of the State of Georgia, without regard to its principles of conflicts of laws. 9.2 WAIVER AND AMENDMENT. Any term or provision of this Warrant may be waived at any time by the party that is entitled to the benefits thereof, and any term or provision of this Warrant may be amended or supplemented at any time by agreement of the holder hereof and the Company, except that any waiver of any term or condition, or any amendment or supplementation, of this Warrant must be in writing. A waiver of any breach or failure to enforce any of the terms or conditions of this Warrant shall not in any way affect, limit or waive a party's rights hereunder at any time to enforce strict compliance thereafter with any term or condition of this Warrant. 9.3 ILLEGALITY. In the event that any one or more of the provisions contained in this Warrant shall be determined to be invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in any other respect and the remaining provisions of this Warrant shall not, at the election of the party for whom the benefit of the provision exists, be in any way impaired. 9.4 FILING OF WARRANT. A copy of this Warrant shall be filed in the records of the Company. 9.5 NOTICES. Any notice or other document required or permitted to be given or delivered to the Holder shall be delivered personally, or sent by certified or registered mail, to the Holder c/o 2.1-8 27 McKesson HBOC, Inc., One Post Plaza, San Francisco, California 94101, Attention: General Counsel, or at any more recent address of which any Holder shall have notified the Company in writing. Any notice or other document required or permitted to be given or delivered to the Company shall be delivered at, or sent by certified or registered mail to, the Warrant Office, attention: Chief Executive Officer, or such other address within the United States of America as shall have been furnished by the Company to the Holder hereof. 9.6 LIMITATION OF LIABILITY; NOT SHAREHOLDERS. No provision of this Warrant shall be construed as conferring upon the Holder the right to vote, consent, receive dividends or receive notice other than as herein expressly provided in respect of meetings of shareholders for the election of directors of the Company or any other matter whatsoever as a shareholder of the Company. No provision hereof, in the absence of affirmative action by the Holder to purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of such Holder for the purchase price of any Warrant Shares or as a shareholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. 9.7 LOSS, DESTRUCTION, ETC. OF WARRANT. Upon receipt of evidence satisfactory to the Company of the loss, theft, mutilation or destruction of the Warrant, and in the case of any such loss, theft or destruction, upon delivery of a bond of indemnity in such form and amount as shall be reasonably satisfactory to the Company, or in the event of such mutilation, upon surrender and cancellation of the Warrant, the Company shall make and deliver a new warrant, of like tenor, in lieu of such lost, stolen, destroyed or mutilated Warrant. Any Warrant issued under the provisions of this Section 9.7 in lieu of any Warrant alleged to be lost, destroyed or stolen, or in lieu of any mutilated Warrant, shall constitute an original contractual obligation on the part of the Company. [SIGNATURES FOLLOW ON THE NEXT PAGE] 2.1-9 28 IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in its name by its Chief Executive Officer and its corporate seal to be impressed hereon as of the ___ day of ______, 1999. [CORPORATE SEAL] WEBMD, INC. Attest: By: By: ----------------------------- --------------------------------- Name: Jeffrey T. Arnold --------------------------- Its: Chief Executive Officer Title: -------------------------- 2.1-10 29 WARRANT SHARES PURCHASE SCHEDULE
NO. OF SHARES PURCHASED DATE OF PURCHASE NOTATION BY COMPANY OFFICER - -------------------------------------- -------------------------- ----------------------------------------- - -------------------------------------- -------------------------- ----------------------------------------- - -------------------------------------- -------------------------- ----------------------------------------- - -------------------------------------- -------------------------- ----------------------------------------- - -------------------------------------- -------------------------- ----------------------------------------- - -------------------------------------- -------------------------- -----------------------------------------
2.1-11 30 EXHIBIT A NOTICE OF EXERCISE Dated: ----------------------- The undersigned hereby irrevocably elects to exercise its right to purchase _____ shares of the Common Stock, no par value per share, of WebMD, Inc., such right being pursuant to a Warrant dated _____________, 1999, as issued to HBO & Company, for up to ___________ shares of Common Stock (subject to adjustment in accordance with the terms of the Warrant), and remits herewith the sum of $_______ in payment for same in accordance with said Warrant. After giving effect to the foregoing election to exercise, there shall remain unexercised the right to purchase ________ shares of the Common Stock, no par value per share (subject to adjustment), under this Warrant. INSTRUCTIONS FOR REGISTRATION OF COMMON STOCK Name ------------------------------------------------------------------------- (Please typewrite or print in block letters) Address ----------------------------------------------------------------------- Signature: -------------------------------------------------------------------- Shares Heretofore Purchased Under Warrant: - ----------------------------------- 2.1-12 31 EXHIBIT 2.3 FORM OF REGISTRATION RIGHTS AGREEMENT WEBMD, INC. REGISTRATION RIGHTS AGREEMENT This REGISTRATION RIGHTS AGREEMENT (the "AGREEMENT") is made and entered into as of the ____ day of ______, 1999, between WebMD, Inc., a Georgia corporation (the "COMPANY"), and HBO & Company, a Delaware corporation ("HBOC"). RECITALS: A. HBOC is the holder of three Warrants entitling the holder thereof to purchase an aggregate of 4,688,049 shares of the Company's Series F Common Stock pursuant to an Agreement dated as of the date hereof among the Company, McKesson HBOC, Inc., a Delaware corporation, HBOC, Healtheon Corporation, a Delaware corporation ("HEALTHEON"), and Healtheon/WebMD Corporation, a Delaware corporation ("HEALTHEON/WEBMD"). B. HBOC is also the holder of 1,117,000 shares of the Company's Series A Preferred Stock, 650,000 shares of the Company's Series B Preferred Stock, 679,588 shares of the Company's Series F Preferred Stock and on November 22, 1999, will be entitled to receive an additional 50,000 shares of Series A Preferred Stock and 19,230 shares of Series F Preferred Stock if the Company has not completed an initial public offering (collectively, the "PREFERRED STOCK"). C The Company and HBOC desire to set forth the registration rights to be granted by the Company to HBOC. NOW, THEREFORE, in consideration of the mutual promises, representations, warranties, covenants, and conditions set forth herein and in the Agreement, the parties mutually agree as follows: AGREEMENT: 1. CERTAIN DEFINITIONS. As used in this Agreement, the following terms shall have the following respective meanings: "ARTICLES OF INCORPORATION" means the Amended and Restated Articles of Incorporation of the Company as filed with the Secretary of State of the State of Georgia, as amended from time to time. "COMMISSION" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "COMMON STOCK" shall mean the voting common stock, without designation as to series and without par value per share, of the Company and any and all shares of capital stock or other equity securities of: (i) the Company which are added to or exchanged or substituted for the Common Stock 32 by reason of the declaration of any stock dividend or stock split, the issuance of any distribution or the reclassification, readjustment, recapitalization or other such modification of the capital structure of the Company; (ii) any other corporation, now or hereafter organized under the laws of any state or other governmental authority, with which the Company is merged, which results from any consolidation or reorganization to which the Company is a party, or to which is sold all or substantially all of the shares or assets of the Company, if immediately after such merger, consolidation, reorganization or sale, the Company or any Stockholders of the Company own equity securities having in the aggregate more than fifty percent (50%) of the total voting power of such other corporation; or (iii) Healtheon Corporation, Healtheon/WebMD Corporation or other entity the securities of which are issued in exchange for the Common Stock of the Company pursuant to the Healtheon-WebMD Reorganization Agreement. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission promulgated thereunder. "FAMILY MEMBER" shall mean (a) with respect to any individual, such individual's spouse, any descendants (whether natural, adopted or in the process of adoption), any trust all of the beneficial interests of which are owned by any of such individuals or by any of such individuals together with any organization described in Code Section 501(c)(3), the estate of any such individual, and any corporation, association, partnership or limited liability company all of the equity interests of which are owned by those above described individuals, trusts or organizations and (b) with respect to any trust, the owners of the beneficial interests of such trust. "FORM S-3" means such form under the Securities Act as in effect on the date hereof or any registration form under the Securities Act subsequently adopted by the Commission which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the Commission. "HEALTHEON-WEBMD REORGANIZATION AGREEMENT" means the Agreement and Plan of Reorganization dated May 20, 1999, by and among Healtheon, WebMD and Water Acquisition Corp., a Georgia corporation. "HOLDER" shall mean HBOC or any of such Holder's respective successors and assigns who acquire rights in accordance with this Agreement with respect to the Registrable Securities directly or indirectly from such Holder. "INITIAL PUBLIC OFFERING" means the offer and sale by WebMD, Inc. of shares of its Common Stock in a transaction underwritten by an investment banking firm following the completion of which (i) the Common Stock will be listed for trading on any national securities exchange or (ii) there will be at least two market makers who are making a market in the Common Stock through the Nasdaq National Market System. "INITIATING HOLDERS" shall mean any Holder or Holders of not less than 50% of the then outstanding Registrable Securities. The terms "REGISTER", "REGISTERED" and "REGISTRATION" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement. 2.3-2 33 "REGISTRABLE SECURITIES" means shares of Common Stock issuable upon exercise of the Warrants, or upon the conversion of the Preferred Stock, excluding in all cases, however (including exclusion from the calculation of the number of outstanding Registrable Securities), any Registrable Securities sold by a person in a transaction (i) pursuant to a registration statement under Section 2 or 3 hereof or (ii) pursuant to Rule 144 (or any successor provision) of the Securities Act. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or any similar federal statute promulgated in replacement thereof, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "WARRANTS" shall mean the warrants to purchase an aggregate of up to 4,688,049 shares of Common Stock of the Company. 2. DEMAND REGISTRATION. In the event that at any time after February 10, 2000, the Company shall receive from Initiating Holders a written request that the Company effect a registration with respect to at least 1,000,000 shares of Common Stock that constitute Registrable Securities (as adjusted for stock splits, stock dividends, recapitalizations and similar events) the Company will: (a) promptly give written notice of the proposed registration to all other Holders so they may have an opportunity to consider joining in such registration, which they may do (subject to the terms and provisions of this Agreement) at their election within ten (10) days after receipt of the notice of the proposed registration by the Company; and (b) as soon as practicable, use its reasonable best efforts to effect such registration (including, without limitation, the execution of an undertaking to file post-effective amendments, appropriate qualification under applicable blue sky or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Act) as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request as are specified in a written request given within ten (10) days after receipt of notice from the Company pursuant to Section 2(a); provided that the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 2: (i) In any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; (ii) Prior to the date which is the earlier of (a) one hundred eighty (180) days following the effective date of the registration statement relating to an Initial Public Offering or (b) the release by the underwriters of such offering of the related lock-up agreements; 2.3-3 34 (iii) Within the one hundred twenty (120) day period immediately following the effective date of a registration statement pertaining to a firm commitment underwritten public offering of Common Stock for its own account or for the account of a shareholder (including any Holder) of the Company who has exercised a demand right to register shares of Common Stock (other than a registration relating solely to a Commission Rule 145 transaction, a registration relating solely to employee benefit plans, or a registration statement on Form S-3 (or any similar short-form registration statement)); (iv) Within the sixty (60) day period immediately following the effective date of a registration statement on Form S-3 (or any similar short-form registration statement) pertaining to a firm commitment underwritten public offering of Common Stock for its own account or for the account of another shareholder of the Company who has exercised a demand right to register shares of Common Stock (other than a registration relating solely to a Commission Rule 145 transaction or a registration relating solely to employee benefit plans); or (v) After the Company has effected two (2) registrations pursuant to this Section 2 and such registrations have been declared or ordered effective and have remained effective for a period of at least ninety (90) consecutive days. Subject to the foregoing clauses (i) through (v), the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable after receipt of the request of the Initiating Holders. The Initiating Holders may, at any time prior to the effective date of the registration statement relating to such registration, revoke such request, without liability (except as set forth in Section 6 hereof) to the Initiating Holders or any other Holders of Registrable Securities requested to be registered pursuant to Section 2(a) hereof, by providing a written notice to the Company revoking such request. Notwithstanding the above, the Company shall not be obligated to effect, or to take any action to effect, any registration pursuant to this Section 2 during the period starting with the date ninety (90) days prior to the Company's good faith estimate of the date of filing of (or in the case of any registration on Form S-3, forty-five (45) days prior), and ending on a date one hundred twenty(120) days after the effective date of (or in the case of any registration on Form S-3, sixty (60) days after), a Company-initiated registration statement in connection with a bona fide firm commitment underwritten registration for securities to be offered for the Company's own account (the "INTENDED REGISTRATION"); provided that the Company is actively employing in good faith all reasonable efforts to cause the Intended Registration to become effective and provided further that the Company gives notice to all Holders upon commencement of such period. The Holders shall be entitled to exercise their rights pursuant to Section 4 hereof with respect to an Intended Registration. An Intended Registration shall not be deemed to be a demand registration of the Holders pursuant to this Section 2. (c) Underwriting. If the Holders propose an underwritten offering, the sale of Registrable Securities pursuant to this Section 2 must be made by means of a firm commitment underwriting through underwriters who are reasonably acceptable to the Company and the holders of a majority of the Registrable Securities that are proposed to be distributed through such underwriting. The right of any Holder to registration pursuant to this Section 2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent requested by such Holder (unless mutually otherwise agreed by a majority in interest of the Holders and such Holder) to the extent provided herein. 2.3-4 35 The Company and all Holders proposing to distribute Registrable Securities through such underwriting shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting. Notwithstanding any other provision of this Section 2(c), if the underwriter determines that in its good faith view marketing factors require a limitation of the number of shares to be underwritten and so advises the Initiating Holders in writing, then the Initiating Holders shall so advise the Company and all Holders (except those Holders who have indicated to the Company their decision not to distribute any of their Registrable Securities through such underwriting) and the number of Registrable Securities that may be included in the registration and underwriting shall be allocated first to the Holders on a pro rata basis according to the number of Registrable Securities requested to be included by the Holders; second to the Company; and third to other shareholders of the Company who have requested to sell in the registration. No Registrable Securities excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. If at least eighty percent (80%) of the Registrable Securities requested to be registered by the Initiating Holders are not included in such registration, then the Initiating Holders may request that the Company effect an additional registration under the Securities Act of all or part of the Initiating Holders' Registrable Securities in accordance with the provisions of this Section 2, and the Company shall effect such additional registration. If any Holder disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the underwriter and the Initiating Holders. The Registrable Securities and/or other securities so withdrawn from such underwriting shall also be withdrawn from such registration; provided, however, that, if by the withdrawal of such Registrable Securities a greater number of Registrable Securities held by other Holders may be included in such registration (up to the maximum of any limitation imposed by the underwriters), then the Company shall offer to all Holders who have included Registrable Securities in the registration the right to include additional Registrable Securities in the same proportion used above in determining the underwriter limitation. If the underwriter has not limited the number of Registrable Securities to be underwritten, the Company may include securities for its own account or the account of others in such registration if the underwriter so agrees and if the number of Registrable Securities which would otherwise have been included in such registration and underwriting will not thereby be limited. (d) If the Company shall furnish to the Initiating Holders a certificate signed by the President of the Company stating that, in the good faith judgment of the Board of Directors of the Company, it would (because of the existence of, or in anticipation of, any acquisition, financing activity, or other transaction involving the Company, or the unavailability for reasons beyond the Company's control of any required financial statements, disclosure of information which is in its best interest not to publicly disclose, or any other event or condition of similar significance to the Company) be seriously detrimental to the Company and its shareholders for such registration statement to be filed on or before the date filing would be required and it is therefore essential to defer the filing of such registration statement, then the Company may direct that such request for registration be delayed for a period not in excess of ninety (90) days, such right to delay a request to be exercised by the Company not more than twice in any twelve (12) month period. (e) Effective Registration Statement. A demand registration requested pursuant to this Section 2 shall not be deemed to have been effected unless the registration statement relating thereto (i) has become effective under the Securities Act and any of the Registrable Securities of the Initiating Holders included in such registration have actually been sold thereunder, and (ii) has remained effective 2.3-5 36 for a period of at least ninety (90) days (or such shorter period in which all Registrable Securities included in such registration have actually been sold thereunder). 3. S-3 REGISTRATION. In case the Company shall receive from any Holder or Holders a written request or requests that the Company effect a registration on Form S-3 and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company will: (a) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders; and (b) as soon as practicable, and in any event within 30 days of the receipt of such notice, file a registration statement on Form S-3 and effect all other qualifications and compliances as may be so requested and as would permit or facilitate the sale, distribution, transfer or hedging (through market transactions using brokers, in a firm commitment underwriting, in negotiated transactions or otherwise) of all or such portion of such Holder's or Holders' Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within 15 days after receipt of such written notice from the Company; provided, that the Company shall not be obligated to effect any such registration, qualification or compliance pursuant to this Section 3: (i) if Form S-3 is not available for such offering by the Holders; (ii) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to register Registrable Securities and such other securities (if any) at an aggregate price to the public (net of any underwriters' discounts or commissions) of less than $20 million; (iii) if the Company has, within the twelve (12) month period preceding the date of such request, already effected three (3) registrations for the Holders pursuant to this Section 3; or (iv) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance. (c) Subject to the foregoing, the Company shall file a registration statement covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders and shall keep it continuously effective until such Registrable Securities have been sold pursuant thereto. (d) Notwithstanding the other provisions of this Section 3, the Company shall have the right to delay the filing of any registration statement on Form S-3 (an "S-3 REGISTRATION") otherwise required to be prepared and filed by the Company pursuant to this Section 3, or to suspend the use of any S-3 Registration, for a period not in excess of 60 days (a "S-3 BLACKOUT PERIOD") if the Company, in the good faith judgment of its Board of Directors, determines (because of the existence of, or in anticipation of, any acquisition, financing activity, or other transaction involving the Company, or the unavailability for reasons beyond the Company's control of any required financial statements, 2.3-6 37 disclosure of information which is in its best interest not to publicly disclose, or any other event or condition of similar significance to the Company) that the registration and distribution of the Registrable Securities to be covered by such S-3 Registration would be seriously detrimental to the Company and its shareholders, provided that the S-3 Blackout Period shall earlier terminate on the second business day following the completion or abandonment of the relevant financing, acquisition or other transaction or upon public disclosure by the Company or public admission by the Company of such material nonpublic information or such time as such material nonpublic information shall be publicly disclosed; and provided, further, that the Company shall furnish to the Holders a certificate of an executive officer of the Company to the effect that an event permitting a S-3 Blackout Period has occurred (and no other reason need be given). The Company will promptly give the Holders written notice of such determination and an approximation of the period of the anticipated delay; provided, however, that the aggregate number of days included in all S-3 Blackout Periods during any consecutive 12 months shall not exceed 180 days. Each Holder agrees to cease all disposition efforts under such S-3 Registration with respect to Registrable Securities held by such Holder immediately upon receipt of notice of the beginning of any S-3 Blackout Period. The Company shall provide written notice to the Holders of the end of each S-3 Blackout Period. 4. PIGGYBACK REGISTRATION. (a) If the Company shall determine to register for sale for cash any of its Common Stock, for its own account or for the account of others (other than the Holders), other than a registration relating solely to employee benefit plans or securities issued or issuable to employees, consultants (to the extent the securities owned or to be owned by such consultants could be registered on Form S-8) or any of their Family Members (including a registration on Form S-8), or a registration relating solely to a Commission Rule 145 transaction, a registration on Form S-4 in connection with a merger, acquisition, divestiture, reorganization or similar event, the Company promptly will give to each Holder written notice thereof and shall use its reasonable best efforts to include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within ten (10) days after receipt of such written notice from the Company, by any Holder or Holders. However, the Company may, without the consent of the Holders, withdraw such registration statement prior to its becoming effective if the Company has abandoned its proposal to register the securities proposed to be registered thereby. (b) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 4(a). In such event the right of any Holder to registration pursuant to Section 4(a) shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and any other shareholders of the Company distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. Notwithstanding any other provision of this Section 4(b), if the underwriter or the Company determines that marketing factors require a limitation of the number of shares to be underwritten, the underwriter may exclude some or all Registrable Securities from such registration and underwriting. The Company shall so advise all Holders (except those Holders who have indicated to the Company their decision not to distribute any of their Registrable Securities through such underwriting), and the number of shares of Registrable 2.3-7 38 Securities that may be included in the registration and underwriting, if any, shall be allocated among such Holders as follows: (i) In the event of a piggyback registration pursuant to Section 4(a) that is initiated by the Company, then the number of shares that may be included in the registration and underwriting shall be allocated first to the Company and then to all selling shareholders, including the Holders, who have requested to sell in the registration on a pro rata basis according to the number of shares requested to be included; and (ii) In the event of a piggyback registration pursuant to Section 4(a) that is initiated by the exercise of demand registration rights by a shareholder or shareholders of the Company, then the number of shares that may be included in the registration and underwriting shall be allocated first to such selling shareholders who exercised such demand and then to all selling shareholders, including the Holders, who have requested to sell in the registration, on a pro rata basis according to the number of shares requested to be included. (c) No Registrable Securities excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. If any Holder disapproves of the terms of any such underwriting, such person may elect to withdraw therefrom by written notice to the Company and the underwriter. The Registrable Securities and/or other securities so withdrawn from such underwriting shall also be withdrawn from such registration; provided, however, that, if by the withdrawal of such Registrable Securities a greater number of Registrable Securities held by other Holders may be included in such registration (up to the maximum of any limitation imposed by the underwriters), then the Company shall offer to all Holders who have included Registrable Securities in the registration the right to include additional Registrable Securities pursuant to the terms and limitations set forth herein in the same proportion used above in determining the underwriter limitation. 5. REGISTRATION PROCEDURES. In the case of each registration, qualification or compliance effected by the Company pursuant to Section 2, 3 or 4 hereof, the Company will keep each Holder advised in writing as to the initiation of each registration, qualification and compliance and as to the completion thereof. At its expense, the Company will use its reasonable best efforts to: (a) prepare and file with the Commission within ninety (90) days (or in the case of any registration on Form S-3, thirty (30) days) after receipt of a request for registration with respect to such Registrable Securities, a registration statement on any form for which the Company then qualifies or which counsel for the Company shall deem appropriate and which form shall be available for the sale of the Registrable Securities in accordance with the intended method(s) of distribution thereof, and use its best efforts to cause such registration statement to become and remain effective; provided that before filing with the Commission a registration statement or prospectus or any amendments or supplements thereto, including documents incorporated by reference after the initial filing of any registration statement, the Company shall (i) furnish to the underwriters, if any, and to one (1) counsel selected by the Holders of a majority of the Registrable Securities covered by such registration statement copies of all such documents proposed to be filed, which documents shall be subject to the review of the underwriters and such counsel, and (ii) notify each Holder of Registrable Securities covered by such registration statement of any stop order issued or threatened by the Commission and take all reasonable actions required to prevent the entry of such stop order or to remove it if entered; (b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such 2.3-8 39 registration statement effective for a period of not less than ninety (90) days or such shorter period which shall terminate when all Registrable Securities covered by such registration statement have been sold (but not before the expiration of the 90-day period referred to in Section 4(3) of the Securities Act and Rule 174, or any successor thereto, thereunder, if applicable), and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement during such period in accordance with the intended method(s) of disposition by the sellers thereof set forth in such registration statement; (c) furnish, without charge, to each Holder and each underwriter, if any, of Registrable Securities covered by such registration statement one (1) signed copy of such registration statement, each amendment and supplement thereto (including one (1) conformed copy to each Holder and one (1) signed copy to each managing underwriter and in each case including all exhibits thereto), and such number of copies of the prospectus included in such registration statement (including each preliminary prospectus and any other prospectus filed under Rule 424 under the Securities Act) as such Holders may request, in conformity with the requirements of the Securities Act, and such other documents as such Holder may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Holder, but only while the Company shall be required under the provisions hereof to cause the registration statement to remain effective; (d) use its best efforts to register or qualify such Registrable Securities under such other applicable securities or blue sky laws of such jurisdictions as any Holder, and underwriter, if any, of Registrable Securities covered by such registration statement reasonably requests as may be necessary for the marketability of the Registrable Securities (such request to be made by the time the applicable registration statement is deemed effective by the Commission) and do any and all other acts and things which may be reasonably necessary or advisable to enable such Holder and each underwriter, if any, to consummate the disposition in such jurisdictions of the Registrable Securities owned by such Holder; provided that the Company shall not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this paragraph (d), (ii) subject itself to taxation in any such jurisdiction, or (iii) consent to general service of process in any such jurisdiction; (e) use its best efforts to cause the Registrable Securities covered by such registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary by virtue of the business and operations of the Company to enable the Holder or Holders thereof to consummate the disposition of such Registrable Securities; (f) immediately notify the managing underwriter, if any, and each Holder of such Registrable Securities at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event which comes to the Company's attention if as a result of such event the prospectus included in such registration statement contains an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading and the Company shall promptly prepare and furnish to such Holder a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, unless suspension of the use of such prospectus otherwise is authorized herein or in the event of a S-3 Blackout Period, in which case no supplement or amendment need be furnished; 2.3-9 40 (g) use its best efforts to cause all such Registrable Securities covered by the registration statement to be listed on the Nasdaq Stock Market or the national securities exchange on which similar securities issued by the Company are then listed, and enter into such customary agreements including a listing application and indemnification agreement in customary form (provided that the applicable listing requirements are satisfied), and to provide a transfer agent and registrar for such Registrable Securities covered by such registration statement no later than the effective date of such registration statement; (h) enter into such customary agreements (including an underwriting agreement in customary form) and take all such other actions as the Initiating Holders or the underwriters retained by such Holders, if any, reasonably request in order to expedite or facilitate the disposition of such Registrable Securities, including customary indemnification; (i) make available for inspection during normal business hours by any Holder of Registrable Securities covered by such registration statement, any underwriter participating in any disposition pursuant to such registration statement, and any attorney, accountant or other agent retained by any such Holder or underwriter (collectively, the "INSPECTORS"), all financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries (collectively, "RECORDS"), if any, as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company's and its subsidiaries' officers, directors and employees to supply all information and respond to all inquiries reasonably requested by any such Inspector in connection with such registration statement. Notwithstanding the foregoing, the Company shall have no obligation to disclose any Records to the Inspectors in the event the Company determines that such disclosure is reasonably likely to have an adverse effect on the Company's ability to assert the existence of an attorney-client privilege with respect thereto; (j) in the event that any contemplated public offering is underwritten, use its best efforts to obtain a "comfort" letter from the Company's independent public accountants in customary form and covering such matters of the type customarily covered by "comfort" letters as the Holders of a majority (by number of shares) of the Registrable Securities being sold reasonably request, and provided that such request is reasonable in the underwriter's point of view; (k) use its best efforts to obtain an obtain an opinion of counsel from the Company's counsel in customary form and covering such matters of the type customarily covered in opinions of counsel in connection with such transactions; 2.3-10 41 (l) comply, and continue to comply during the period that such registration statement is effective under the Securities Act, in all material respects with the Securities Act and the Securities Exchange Act of 1934 and with all applicable rules and regulations of the Commission with respect to the disposition of all securities covered by such registration statement, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve (12) months, but not more than eighteen (18) months, beginning with the first full calendar month after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act, and not file any amendment or supplement to such registration statement or prospectus to which Holder shall have reasonably objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act, having been furnished with a copy thereof at least five (5) business days prior to the filing thereof; and (m) in the event the offering is underwritten, develop a presentation reasonably acceptable to the underwriters to facilitate the offering and to make its chief executive officer and chief financial officer available for participation in such meetings and presentations (e.g., road show for the offering) at such locations (including Europe) as the underwriter reasonably requests. Each Holder of Registrable Securities agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 5(f) hereof, such Holder shall discontinue disposition of Registrable Securities pursuant to the registration statement covering such Registrable Securities until such Holder's receipt of the copies of the supplemented or amended prospectus contemplated by Section 5(f) hereof, and, if so directed by the Company, such Holder shall deliver to the Company (at the Company's expense) all copies (including, without limitation, any and all drafts), other than permanent file copies, then in such Holder's possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice. In the event the Company shall give any such notice, the period mentioned in Section 5(b) hereof shall be extended by the greater of (i) ten (10) business days or (ii) the number of days during the period from and including the date of the giving of such notice pursuant to Section 5(f) hereof to and including the date when each Holder of Registrable Securities covered by such registration statement shall have received the copies of the supplemented or amended prospectus contemplated by Section 5(f) hereof. 6. RULE 144. Notwithstanding anything to the contrary contained herein, no Holder shall have rights to a registration under Section 2, 3 or 4 hereof after the time that such Holder could sell, within ninety (90) days, all of its Registrable Securities pursuant to Rule 144(e) promulgated under the Securities Act or any successor rule thereto; provided that the Company hereby agrees to take the following actions to ensure the availability of Rule 144 to each such Holder (or such similar actions as shall be required under any successor rule thereto): (a) make and keep public information available as those terms are understood and defined in Rule 144; (b) use its best efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (c) so long as any Holder owns any Registrable Securities, furnish to a Holder upon request, a written statement by the Company as to its compliance with the reporting requirements of Rule 144 (at any time from and after ninety (90) days following the effective date of the registration statement relating to an Initial Public Offering), and of the Securities Act and the Exchange Act (at any 2.3-11 42 time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed as the Holder may reasonably request. 7. REGISTRATION EXPENSES. The Company shall pay all expenses in connection with any registration, including, without limitation, all registration, filing and NASD fees, printing expenses, all fees and expenses of complying with securities or blue sky laws, the fees and disbursements of one counsel for the Holders and the fees and disbursements of counsel for the Company and of its independent accountants; provided that, in any registration, each party shall pay for its own underwriting discounts and commissions and transfer taxes. The Company shall not, however, be required to pay for expenses of any registration proceeding begun pursuant to Section 2, 3 or 4 hereof, the request of which has been subsequently withdrawn by the Initiating Holders (unless the withdrawal is based upon material adverse information concerning the Company of which the Initiating Holders were unaware at the time of such request), in which case such expenses shall be borne by the Holders whose securities were to be included in the registration in proportion to the number of shares for which such registration was requested. 8. ASSIGNMENT OF RIGHTS. Any Holder may assign its rights under this Agreement to any party acquiring 2,400,000 shares or more of Registrable Securities; provided, however, that a Holder may assign its rights under this Agreement without such restrictions to a transferee or assignee that controls, is controlled by or is under common control with such Holder. 9. INFORMATION BY HOLDER. The Holder or Holders of Registrable Securities included in any registration shall furnish to the Company such information regarding such Holder or Holders and the distribution proposed by such Holder or Holders as the Company may request in writing. 10. "MARKET STAND OFF" AGREEMENT. Each Holder agrees not to sell or otherwise transfer or dispose of any Common Stock (or other securities) of the Company held by it during the 180 day period following the effective date of the Initial Public Offering if so requested by the Company and underwriters of Common Stock (or other securities) of the Company. The Company may impose stop transfer instructions with respect to the shares (or securities) subject to the foregoing restriction until the end of such period. 11. INDEMNIFICATION. (a) In the event of the offer and sale of Registrable Securities held by Holders under the 1933 Act, the Company shall, and hereby does, indemnify and hold harmless, to the fullest extent permitted by law, each Holder, its directors, officers, partners, each other person who participates as an underwriter in the offering or sale of such securities, and each other Person, if any, who controls or is under common control with such Holder or any such underwriter within the meaning of Section 15 of the 1933 Act, against any losses, claims, damages or liabilities, joint or several, and expenses to which the Holder or any such director, officer, partner or underwriter or controlling person may become subject under the 1933 Act or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such shares were registered under the 1933 Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein in light of the circumstances in which they 2.3-12 43 were made not misleading or any violation by the Company of any federal, state or common law rule or regulation applicable to the Company and relating to action required of or inaction by the Company in connection with any such registration, and the Company shall reimburse the Holder, and each such director, officer, partner, underwriter and controlling person for any legal or any other expenses reasonably incurred by them in connection with investigating, defending or settling any such loss, claim, damage, liability, action or proceeding; provided that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement in or omission or alleged omission from such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by or on behalf of such Holder specifically stating that it is for use in the preparation thereof. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Holders, or any such director, officer, partner, underwriter or controlling person and shall survive the transfer of such shares by the Holder. (b) The Company may require, as a condition to including any Registrable Securities to be offered by a Holder in any registration statement filed pursuant to this Agreement, that the Company shall have received an agreement from such Holder to be bound by the terms of this Section 11, including an undertaking reasonably satisfactory to it from such Holder, to indemnify and hold the Company, its directors and officers and each other Person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act, against any losses, claims, damages or liabilities, joint or several, to which the Company or any such director or officer or controlling person may become subject under the 1933 Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement in or omission or alleged omission from such registration statement, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information about such Holder as a Holder of the Company furnished to the Company through an instrument duly executed by such Holder specifically stating that it is for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement; provided, however, that such indemnity agreement found in this Section 11(b) shall in no event exceed the gross proceeds from the offering received by such Holder. Such indemnity shall remain in full force and effect, regardless of any investigation made by or on behalf of the Company or any such director, officer or controlling person and shall survive the transfer by any Holder of such shares. (c) Promptly after receipt by an indemnified party of notice of the commencement of any action or proceeding involving a claim referred to in Section 11(a) or (b) hereof (including any governmental action), such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the indemnifying party of the commencement of such action; provided that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under Section 11(a) or (b) hereof, except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist or the indemnified party may have defenses not available to the indemnifying party in respect of such claim, the indemnifying party shall be entitled to participate in and to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party and, after notice from the indemnifying party to such 2.3-13 44 indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof, unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties arises in respect of such claim after the assumption of the defenses thereof, other than reasonable costs of investigation. Neither an indemnified nor an indemnifying party shall be liable for any settlement of any action or proceeding effected without its consent. No indemnifying party shall, without the consent of the indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect of such claim or litigation. Notwithstanding anything to the contrary set forth herein, and without limiting any of the rights set forth above, in any event any party shall have the right to retain, at its own expense, counsel with respect to the defense of a claim. (d) The indemnification required by Section 11(a) and (b) hereof shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expenses, losses, damages or liabilities are incurred. (e) If the indemnification provided for in this Section 11 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage or expense referred to herein, the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage or expense as is appropriate to reflect the proportionate relative fault of the indemnifying party on the one hand and the indemnified party on the other (determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission relates to information supplied by the indemnifying party or the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission), or (ii) if the allocation provided by clause (i) above is not permitted by applicable law or provides a lesser sum to the indemnified party than the amount hereinafter calculated, not only the proportionate relative fault of the indemnifying party and the indemnified party, but also the relative benefits received by the indemnifying party on the one hand and the indemnified party on the other, as well as any other relevant equitable considerations. No indemnified party guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any indemnifying party who was not guilty of such fraudulent misrepresentation. (f) Other Indemnification. Indemnification similar to that specified in the preceding subsections of this Section 11 (with appropriate modifications) shall be given by the Company and each Holder of Registrable Securities with respect to any required registration or other qualification of securities under any federal or state law or regulation or governmental authority other than the Securities Act. 12. MISCELLANEOUS. (a) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Georgia applicable to contracts between Georgia residents entered into and to be performed entirely within the State of Georgia. (b) Successors and Assigns. Except as otherwise provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, executors and administrators of the parties hereto. In the event the Company merges with, or is otherwise acquired by, a direct or 2.3-14 45 indirect subsidiary of a publicly-traded company, the Company shall condition the merger or acquisition on the assumption by such parent company of the Company's obligations under this Agreement. (c) Entire Agreement. This Agreement constitutes the full and entire understanding and agreement between the parties with regard to the subjects hereof. (d) Notices, etc. All notices and other communications required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or three (3) business days following deposit with the United States Postal Service, by certified mail, return receipt requested, postage prepaid, or otherwise delivered by hand or by messenger, addressed: (a) if to the HBOC, c/o McKesson HBOC, Inc., One Post Street, San Francisco, California, 94104, Attention: General Counsel, with copies to Jones, Day, Reavis & Pogue, 3500 SunTrust Plaza, 303 Peachtree Street, Atlanta, Georgia, 30308-3242, Attention: Robert W. Smith, Esq. and Skadden, Arps, Slate, Meagher & Flom LLP, 525 University Avenue, Palo Alto, California, 94301, Attention: Kenton J. King, or (b) if to any other Holder of any Registrable Securities, at such address as such holder shall have furnished the Company in writing, or, until any such Holder so furnishes an address to the Company, then to and at the address of the last Holder of such Registrable Securities who has so furnished an address to the Company, or (c) if to the Company, at WebMD, Inc., 400 The Lenox Building, 3399 Peachtree Road, Atlanta, Georgia 30326, Attention: General Counsel, or at such other address as the Company shall have furnished to HBOC and each such other Holder in writing. (e) Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to any Holder of any Registrable Securities, upon any breach or default of the Company under this Agreement, shall impair any such right, power or remedy of such Holder nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereunder occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any Holder of any breach or default under this Agreement, or any waiver on the part of any Holder of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, or by law or otherwise afforded to any holder, shall be cumulative and not alternative. (f) Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument. (g) Severability. In the case any provision of this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. (h) Amendments. The provisions of this Agreement may be amended at any time and from time to time, and particular provisions of this Agreement may be waived, with and only with an agreement or consent in writing signed by the Company and by the holders of a majority of the number of shares of Registrable Securities (or securities convertible into Registrable Securities) outstanding as of the date of such amendment or waiver. HBOC acknowledges that by the operation of this Section 10(h), the holders of a majority of the outstanding Registrable Securities may have the right and power to diminish or eliminate all rights of HBOC under this Agreement. 2.3-15 46 [SIGNATURES FOLLOW ON THE NEXT PAGE] 2.3-16 47 IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the day and year first above written. WEBMD, INC. By: ----------------------------------------- Its: HBO & COMPANY By: ------------------------------------------ Its: The undersigned execute this Agreement for the purpose of acknowledging that upon the consummation of the transactions contemplated by the Healtheon-WebMD Reorganization Agreement either Healtheon Corporation or Healtheon/WebMD Corporation, which ever shall be the acquiror under the Healtheon-WebMD Reorganization Agreement, shall assume the obligations of WebMD, Inc. under this Agreement. HEALTHEON CORPORATION BY: ------------------------------------------ TITLE: --------------------------------------- HEALTHEON-WEBMD CORPORATION BY: ------------------------------------------ TITLE: --------------------------------------- 2.3-17 48 EXHIBIT 2.4 ARTICLES OF AMENDMENT ARTICLES OF AMENDMENT TO AMENDED AND RESTATED ARTICLES OF INCORPORATION OF WEBMD, INC. In accordance with Section 14-2-1003 of the Georgia Business Corporation Code (the "Code"), WebMD, Inc. (the "Corporation"), a corporation organized and existing under and by virtue of the Code, DOES HEREBY CERTIFY: 1. The name of the Corporation is WebMD, Inc. 2. Effective the date hereof, the first paragraph of Article Two of the Amended and Restated Articles of Incorporation of the Corporation is amended by deleting such paragraph in its entirety and substituting therefore the following: "The total number of shares of all classes which the Corporation has the authority to issue is 107,000,000, of which: (i) 70,000,000 shares of stock are designated as Common Stock (without designation as to series); (ii) 3,000,000 shares are designated as Common Stock Series B; (iii) 1,500,000 shares are designated as Common Stock Series C; (iv) 15,000,000 shares are designated as Common Stock Series D; (v) 2,500,000 shares are designated as Common Stock Series E; (vi) 5,000,000 shares are designated as Common Stock Series F; and (vii) 10,000,000 shares are designated as Preferred Stock. The designations, voting powers, preferences, relative rights, qualifications, limitations and restrictions of or on each class and series of stock are as follows:" 3. Effective the date hereof, Section A of Article Two of the Amended and Restated Articles of Incorporation of the Corporation is amended by deleting such paragraph in its entirety and substituting therefore the following: "A. Common Stock The Corporation's authorized and issued shares of Common Stock Series A are hereby renamed "Common Stock," without designation as to series. The Corporation is authorized to issue 70,000,000 shares of Common Stock, without par value per share. Each share of Common Stock shall be entitled to one vote. The Corporation is authorized to issue 3,000,000 shares of Common Stock Series B, without par value per share. The Common Stock Series B shall have rights that are identical to that of the Common Stock, except that (i) shares of Common Stock Series B shall have no 49 voting rights except as may be otherwise required by the Georgia Business Corporation Code, as amended (the "Act"); and (ii) in the event of any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, holders of each share of Common Stock Series B, Common Stock Series C and Common Stock Series E shall be entitled to be paid first out of the assets of the Corporation available for distribution to holders of the Corporation's capital stock of all classes or series, before any sums shall be paid or any assets distributed among the holders of the shares of Common Stock, Common Stock Series D or Common Stock Series F, in an amount equal to $0.285714 per share of Common Stock Series B. The Corporation is authorized to issue 1,500,000 shares of Common Stock Series C, without par value per share. The Common Stock Series C shall have rights that are identical to that of the Common Stock, except that (i) shares of Common Stock Series C shall have no voting rights except as may be otherwise required by the Act; and (ii) in the event of any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, holders of each share of Common Stock Series C, Common Stock Series B and Common Stock Series E shall be entitled to be paid first out of the assets of the Corporation available for distribution to holders of the Corporation's capital stock of all classes or series, before any sums shall be paid or any assets distributed among the holders of shares of Common Stock, Common Stock Series D or Common Stock Series F, in an amount equal to $1.00 per share of Common Stock Series C. The Corporation is authorized to issue 15,000,000 shares of Common Stock Series D, without par value per share. The Common Stock Series D shall have rights that are identical to that of the Common Stock, except that shares of Common Stock Series D shall have no voting rights except as may be otherwise required by the Act. The Corporation is authorized to issue 2,500,000 shares of Common Stock Series E, without par value per share. The Common Stock Series E shall have rights that are identical to that of the Common Stock, except that (i) shares of Common Stock Series E shall have no voting rights except as may be otherwise required by the Act; and (ii) in the event of any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, holders of each share of Common Stock Series E, Common Stock Series C and Common Stock Series B shall be entitled to be paid first out of the assets of the Corporation available for distribution to holders of the Corporation's capital stock of all classes or series, before any sums shall be paid or any assets distributed among the holders of shares of Common Stock, Common Stock Series D or Common Stock Series F, in an amount equal to $1.00 per share of Common Stock Series E. 2.4-2 50 The Corporation is authorized to issue 5,000,000 shares of Common Stock Series F, without par value per share. The Common Stock Series F shall have rights that are identical to that of the Common Stock, except that shares of Common Stock Series F shall have no voting rights except as may be otherwise required by the Act. If the assets of the Corporation are insufficient to permit the payment in full to the holders of the Common Stock Series B, Series C and Series E of the amounts distributable to such holders upon the liquidation, dissolution or winding-up of the Corporation, then the assets of the Corporation available for such distribution shall be distributed ratably among the holders of the Common Stock Series B, Common Stock Series C and Common Stock Series E based on the relative liquidation preferences of the Common Stock Series B, Common Stock Series C and Common Stock Series E. For purposes of effecting such ratable distribution between the Common Stock Series B, Common Stock Series C and Common Stock Series E, each share of Common Stock Series B will be entitled to $0.285714 per each $1.00 to be distributed to each share of Common Stock Series C or Common Stock Series E. Whenever a distribution provided for herein shall be paid in property other than cash, the value of such property shall be its fair market value as determined in good faith by the Board of Directors of the Corporation. Holders of Common Stock, whether with or without designation as to series, shall be entitled to receive such dividends and other distributions in cash, stock or property of the Corporation as may be declared by the Board of Directors from time to time out of funds of the Corporation legally available therefor. Immediately prior to the closing of an Initial Public Offering, each issued and outstanding share of Common Stock Series B, Common Stock Series C, Common Stock Series D, Common Stock Series E and Common Stock Series F will become and be, without further act by the holders of any Common Stock of the Corporation, whether with or without designation as to series, automatically converted into one share of Common Stock, without designation as to series, and the Board of Directors of the Corporation may thereafter at its election file Articles of Amendment to the Articles of Incorporation without further vote or action by the holders of any Common Stock of the Corporation, whether with or without designation as to series, confirming the elimination of the series designations of Common Stock, which amendment shall amend and restate the first sentence of Article II of the Corporation's Amended and Restated Articles of Incorporation to read in full as follows: 2.4-3 51 "The total number of shares of stock of all classes which the Corporation has the authority to issue is 85,000,000, of which 75,000,000 shares are designated as Common Stock and of which 10,000,000 shares are designated as Preferred Stock." and shall amend and restate Section A of Article II of the Corporation's Articles of Incorporation to read in full as follows: "The Corporation is authorized to issue 75,000,000 shares of Common Stock without par value per share. Each share of Common Stock shall be entitled to one vote." The term "Initial Public Offering" means the offer and sale by the Corporation of its equity securities in a transaction underwritten by an investment banking firm following the completion of which (i) such equity securities will be listed for trading on any national securities exchange or (ii) there will be at least two market makers who are making a market in such equity securities through the Nasdaq National Market System." 4. In accordance with Section 14-2-1003 of the Georgia Business Corporation Code, the amendment contained herein was duly adopted at a meeting of the Board of Directors held on August ___, 1998 and submitted to a vote of the shareholders entitled to vote thereon. Such shareholders duly adopted the amendment contained herein at a meeting held on August ___, 1999. [SIGNATURES FOLLOW ON THE NEXT PAGE] 2.4-4 52 IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment to be signed by the undersigned duly authorized officer, this _____ day of __________, 1999. WEBMD, INC. By: ----------------------------- Name (print): ------------------- Title: -------------------------- 2.4-5 53 EXHIBIT 3.1 FORM OF VOTING AGREEMENT VOTING AGREEMENT This Voting Agreement (this "AGREEMENT") is made and entered into as of ________, 1999, by and between Healtheon Corporation, a Delaware corporation ("HEALTHEON"), and HBO & Company, a Delaware corporation (the "SHAREHOLDER"), a shareholder of WebMD, Inc., a Georgia corporation (the "COMPANY"). RECITALS A. Healtheon, the Company and Water Acquisition Corp., a wholly owned subsidiary of Healtheon ("MERGER SUB"), entered into an Agreement and Plan of Reorganization dated as of May 20, 1999 (as the same may be amended from time to time, the "MERGER AGREEMENT"), which provides for the combination of the businesses of Healtheon and the Company. The Merger Agreement provides for such combination to be effected through one of two structures; a subsidiary of Healtheon/WebMD Corporation, a newly formed Delaware corporation ("HEALTHEON/WEBMD") may be merged with and into Healtheon and another subsidiary of Healtheon/WebMD merged into the Company ("REORGANIZATION STRUCTURE ONE") or Merger Subsidiary may be merged with and into the Company ("REORGANIZATION STRUCTURE TWO"). The merger of a subsidiary of Healtheon/WebMD into the Company (in the event the combination is effected through Reorganization Structure One) or the merger of Merger Sub into the Company (in the event the combination is effected through Reorganization Structure Two) is referred to herein as the "MERGER." B. Shareholder is the record holder of 967,000 shares of Series A Preferred Stock of the Company and 650,000 shares of Series B Preferred Stock of the Company. C. In consideration of one dollar ($1.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Shareholder is willing to agree to vote the Shares (as defined below) and the New Shares (as defined below) so as to facilitate consummation of the Merger. NOW, THEREFORE, intending to be legally bound, the parties agree as follows: 1. AGREEMENT TO VOTE SHARES; ADDITIONAL PURCHASES; TRANSFERS AND ENCUMBRANCE. 1.1 AGREEMENT TO VOTE SHARES. At every meeting of the shareholders of the Company called with respect to any of the following, and at every adjournment thereof, and on every action or approval by written consent of the shareholders or any group of shareholders of the Company with respect to any of the following, Shareholder shall cause the Shares and any New Shares (as defined below) to be voted: 54 (i) in favor of the adoption of the amendment to the Designations of the Preferences, Limitations and Relative Rights of the Series A Preferred Stock of the Company and the amendment to the Designations of the Preferences, Limitations and Relative Rights of the Series B Preferred Stock of the Company, each as set forth on Exhibit A hereto; (ii) in favor of approval of the Merger and the adoption and approval of the Merger Agreement, including all actions contemplated thereby; (iii) in favor of the conversion of all shares of preferred stock of the Company into shares of Common Stock immediately prior to, and contingent upon, the Closing of the Merger; (iv) in favor of approval of any payments, purchases, sales or accelerations of capital stock of the executive officers of the Company that may be deemed to constitute "parachute payments" pursuant to Section 280G of the Internal Revenue Code of 1986, as amended; (v) against approval of any proposal made in opposition to, or in competition with, consummation of the Merger and the Merger Agreement; and (vi) against any of the following actions (other than those actions that relate to the Merger and are contemplated by the Merger Agreement): (A) any merger, consolidation, business combination, sale of assets, reorganization or recapitalization of the Company with any party; (B) any dissolution, liquidation or winding up of the Company; (C) any joint venture or material strategic relationship with any party; (D) any material change in the capitalization of the Company or the Company's capital structure, except as contemplated by this Section 1.1 and Section 3 hereof or the Merger Agreement or any other voting agreement or conversion agreement entered into in connection therewith; or (E) any other action that is intended, or could reasonably be expected to impede, interfere with, delay, postpone, discourage or adversely affect the Merger or any of the transactions contemplated by the Merger Agreement. Notwithstanding the foregoing or any other provision contained in this Agreement, Shareholder shall not be obligated to vote in favor of the Merger and the adoption and approval of the Merger Agreement in the event the Exchange Ratio (as defined in the Merger Agreement) is reduced below 1.796. 1.2 DEFINITION. For purposes of this Agreement, "SHARES" shall mean all issued and outstanding shares of capital stock of the Company for which Shareholder is the beneficial owner or over which Shareholder has voting control, including any securities convertible into, or exercisable or exchangeable for shares of the Company's capital stock, all as set forth in the Recitals hereto. 1.3 ADDITIONAL PURCHASES. Shareholder agrees that any shares of capital stock of the Company that Shareholder purchases or with respect to which Shareholder otherwise acquires beneficial ownership or voting control after the execution of this Agreement and prior to the date of termination of this Agreement ("NEW Shares") shall be subject to the terms and conditions of this Agreement to the same extent as if they constituted Shares. 1.4 TRANSFER AND ENCUMBRANCE. Prior to the Merger, Shareholder agrees not to transfer, sell, exchange, pledge, gift, or otherwise dispose of or encumber (collectively, "TRANSFER") any of the 3.1-2 55 Shares or any New Shares or to discuss, negotiate, or make any offer or agreement relating thereto, other than to or with Healtheon or WebMD without the prior written consent of Healtheon, which consent shall not be withheld to the extent that such Transfer does not result in less than a majority of the outstanding shares of any class or series of capital stock of WebMD (computed assuming exercise of all outstanding options and warrants) being subject to provisions of this Agreement or a voting agreement substantially similar to this Agreement; provided that no person who is not an affiliate of WebMD as that term is used in Rule 145 of the Securities Act shall execute a voting agreement. Shareholder acknowledges that the intent of the foregoing sentence is to ensure that Healtheon retains the right under the Proxy (as defined in Section 2 hereof) to vote a sufficient number of the Shares and any New Shares in accordance with the terms of the Proxy to ensure the approval of the transactions contemplated by the Merger Agreement. 2. IRREVOCABLE PROXY. Concurrently with the execution of this Agreement, Shareholder agrees to deliver to Healtheon a proxy in the form attached hereto as Exhibit B (the "PROXY") with respect to the Shares and New Shares, which, subject to Section 7 hereof, shall be irrevocable to the fullest extent permitted by applicable law. 3. ELECTION TO CONVERT PREFERRED STOCK INTO COMMON STOCK. Effective immediately prior to the Effective Time (as defined in the Merger Agreement) of the Merger, Shareholder hereby irrevocably elects to convert all shares of all series of preferred stock of the Company held by Shareholder into shares of Common Stock of the Company in accordance with the Company's Articles of Incorporation, as amended through the consummation of the Merger. 4. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDER. (i) With respect to the Shares owned by Shareholder, Shareholder is the owner of the Shares free and clear of any liens, claims, options, charges or other encumbrances. (ii) Shareholder (A) has full authority to vote and direct the voting of the Shares; (B) does not beneficially own any securities of the Company other than the Shares indicated on the final page of this Agreement; and (C) has full power and authority to make, enter into and carry out the terms of this Agreement and the Proxy. (iii) Shareholder has been advised that (A) the issuance of shares of Healtheon/WebMD Common Stock (in the event the business combination is effected through Reorganization Structure One) or Healtheon Common Stock (in the event the combination is effected through Reorganization Structure Two) in connection with the Merger is expected to be effected pursuant to a Registration Statement on Form S-4 under the Securities Act of 1933, as amended (the "ACT"), and as such will not be deemed "restricted securities" within the meaning of Rule 144 promulgated thereunder and resale thereof shall be subject to the restrictions set forth in Rule 145 of the Act and (B) Shareholder may be deemed to be an affiliate of the Company, Healtheon and/or Healtheon/WebMD. Shareholder accordingly agrees not to sell, transfer or otherwise dispose of any Healtheon/WebMD Common Stock or Healtheon Common Stock issued to Shareholder in the Merger unless (x) such sale, transfer or other disposition is made in conformity with the requirements of Rule 145(d) promulgated under the Act and in effect on the date of such sale, transfer or other disposition, (y) an authorized representative of the SEC takes the position in writing to the effect that the SEC would take no action, or that the staff of the SEC would not recommend that the SEC take action, with respect to such sale, transfer or other disposition, and a copy of such written position ("NO ACTION 3.1-3 56 CORRESPONDENCE") is delivered to Healtheon/WebMD or Healtheon, as the case may be, or (z) Shareholder delivers to Healtheon/WebMD or Healtheon, as the case may be, a written opinion of counsel, reasonably acceptable to Healtheon/WebMD or Healtheon, as the case may be, in form and substance, that such sale, transfer or other disposition is otherwise exempt from registration under the Act. (iv) Healtheon/WebMD or Healtheon, as the case may be, will give stop transfer instructions to its transfer agent with respect to any Healtheon/WebMD Common Stock or Healtheon Common Stock received by Shareholder pursuant to the Merger and there will be placed on the certificates representing such Healtheon/WebMD Common Stock or Healtheon, as the case may be, 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, OR (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." The legend set forth above shall be removed (by delivery of a substitute certificate without such legend) and Healtheon/WebMD or Healtheon, as the case may be, shall instruct its transfer agent to remove such legend, if Shareholder delivers to Healtheon/WebMD or Healtheon, as the case may be, (A) satisfactory written evidence that the shares have been sold in compliance with Rule 145 (in which case, the substitute certificate will be issued in the name of the transferee), (B) a copy of the No Action Correspondence, (C) an opinion of counsel, in form and substance reasonably satisfactory to Healtheon/WebMD or Healtheon, as the case may be, to the effect that public sale of the shares by the holder thereof is no longer subject to Rule 145, or (D) a written request for removal of such legend after the earlier of (x) the inapplicability of Rule 145 by its terms, or (y) the effective date of any action by the SEC eliminating the restrictions upon sale, transfer or disposition under Rule 145 or otherwise rendering compliance with such restrictions unnecessary. 5. ADDITIONAL DOCUMENTS; SHAREHOLDER AGREEMENT. Shareholder and Healtheon hereby covenant and agree to execute and deliver any additional documents necessary or desirable, in the reasonable opinion of Healtheon or Shareholder, as the case may be, to carry out the intent of this Agreement. Shareholder agrees to take such action as may be required by it to terminate the Restated Stockholders Agreement dated October 18, 1996, as amended, and the Shareholders Agreement dated August 24, 1998, as amended, effective as of the consummation of the Merger. 6. CONSENT AND WAIVER. Shareholder hereby gives any consents or waivers that may otherwise be required for the consummation of the Merger under the terms of any agreements to which Shareholder is a party or pursuant to any rights Shareholder may have. 7. TERMINATION. This Agreement and the Proxy shall terminate and shall have no further force or effect as of the earlier to occur of (i) such date and time as the Merger shall become effective in accordance with the terms and provisions of the Merger Agreement (in which case the 3.1-4 57 provisions of Section 4 (iii) and (iv) above shall continue to apply) or (ii) such date and time as the Merger Agreement shall have been terminated in accordance with its terms. 8. MISCELLANEOUS. 8.1 FIDUCIARY OBLIGATIONS. Nothing in this Agreement shall be interpreted to limit the discharge of any fiduciary obligations of a director who is a designee of the Shareholder serving on the Board of Directors of the Company, solely in such designee's capacity as a director of the Company and not in the Shareholder's capacity as owner of its Shares. 8.2 SEVERABILITY. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, then the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 8.3 BINDING EFFECT AND ASSIGNMENT. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns and any person or entity to which legal or beneficial ownership of such Shares or New Shares shall pass whether by operation of law or otherwise, but, except as otherwise specifically provided herein, neither this Agreement nor any of the rights, interests or obligations of the parties hereto may be assigned by either of the parties without prior written consent of the other. 8.4 AMENDMENTS AND MODIFICATION. This Agreement may not be modified, amended, altered or supplemented except upon the execution and delivery of a written agreement executed by the parties hereto. 8.5 SPECIFIC PERFORMANCE; INJUNCTIVE RELIEF. The parties hereto acknowledge that Healtheon will be irreparably harmed and that there will be no adequate remedy at law for a violation of any of the covenants or agreements of Shareholder set forth herein. Therefore, it is agreed that, in addition to any other remedies that may be available to Healtheon upon any such violation, Healtheon shall have the right to enforce such covenants and agreements by specific performance, injunctive relief or by any other means available to Healtheon at law or in equity. 8.6 NOTICES. All notices, requests, claims, demands and other communications hereunder shall be in writing and sufficient if delivered in person or sent by overnight courier by a reputable carrier (prepaid) to the respective parties as follows: If to WebMD Healtheon Corporation or Healtheon: 4600 Patrick Henry Drive Santa Clara, California 95054 Attention: Jack Dennison, Esq. and WebMD, Inc. 400 The Lenox Building 3399 Peachtree Road Atlanta, Georgia 30326 3.1-5 58 Attention: W. Michael Heekin. Esq. With copies to: Nelson Mullins Riley & Scarborough, L.L.P. Bank of America Corporate Center Suite 2600 100 North Tryon Street Charlotte, North Carolina 28202 Attention: H. Bryan Ives III, Esq. C. Mark Kelly, Esq. and Wilson Sonsini Goodrich & Rosati, P.C. 650 Page Mill Road Palo Alto, California 94304-1050 Attention: Larry W. Sonsini, Esq. Martin W. Korman, Esq. Daniel R. Mitz, Esq. If to Shareholder: McKesson HBOC, Inc. One Post Street San Francisco, California 94104 Attention: General Counsel With a copy to: Jones, Day, Reavis & Pogue 3500 SunTrust Plaza 303 Peachtree Street Atlanta, Georgia 30308-3242 Attention: Robert W. Smith, Esq. and Skadden, Arps, Slate, Meagher & Flom LLP 525 University Avenue, Suite 220 Palo Alto, CA 94301 Attention: Kenton J. King, Esq. or to such other address as any party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall only be effective upon receipt. 8.7 GOVERNING LAW. This Agreement shall be governed by, and construed and enforced in accordance with, the internal laws of the State of Georgia (without regard to the principles of conflict of laws thereof). 8.8 ENTIRE AGREEMENT. This Agreement contains the entire understanding of the parties in respect of the subject matter hereof, and supersedes all prior negotiations and understandings between the parties with respect to such subject matter. 3.1-6 59 8.9 COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be an original, but all of which together shall constitute one and the same agreement. 8.10 EFFECT OF HEADINGS. The section headings herein are for convenience only and shall not affect the construction or interpretation of this Agreement. [SIGNATURES FOLLOW ON THE NEXT PAGE] 3.1-7 60 IN WITNESS WHEREOF, the parties have caused this Voting Agreement to be duly executed on the date and year first above written. WEBMD, INC. By: ----------------------------------------- Its: HEALTHEON CORPORATION By: ----------------------------------------- Its: HBO & COMPANY By: ------------------------------------------ Its: 3.1-8 61 EXHIBIT A AMENDMENT TO CERTIFICATES OF DESIGNATIONS AMENDMENT TO CERTIFICATE OF DESIGNATIONS OF SERIES A PREFERRED STOCK "RESOLVED, that the term "Common Stock" used in Subsection (d)(3)(A) in the Designations of Preferences, Limitations and Relative Rights of the Series A Preferred Stock of WebMD, Inc. contained in Article II.B of the Amended and Restated Articles of Incorporation is hereby amended to mean, for purposes of Subsection (d)(3)(A) only, the Common Stock Series D, no par value per share, of the Corporation." AMENDMENT TO CERTIFICATE OF DESIGNATIONS OF SERIES B PREFERRED STOCK "RESOLVED, that the term "Common Stock" used in Subsection (d)(3)(A) in the Designations of Preferences, Limitations and Relative Rights of the Series B Preferred Stock of WebMD, Inc. contained in Article II.B of the Amended and Restated Articles of Incorporation is hereby amended to mean, for purposes of Subsection (d)(3)(A) only, the Common Stock Series D, no par value per share, of the Corporation." 3.1-9 62 EXHIBIT B IRREVOCABLE PROXY The undersigned Shareholder of WebMD, Inc., a Georgia corporation (the "COMPANY"), hereby irrevocably appoints the directors on the Board of Directors of Healtheon Corporation, a Delaware corporation ("HEALTHEON"), and each of them, as the sole and exclusive attorneys and proxies of the undersigned, with full power of substitution and resubstitution, to the full extent of the undersigned's rights with respect to the voting of the Shares and New Shares (as each such term is defined in the Voting Agreement of even date between Healtheon and the Shareholder (the "VOTING AGREEMENT")) on the matters described below (and on no other matter), until such time as that certain Agreement and Plan of Reorganization dated as of May 20, 1999 among Healtheon, Water Acquisition Corp., a Georgia corporation ("MERGER SUB"), and the Company (the Agreement and Plan of Reorganization, as the same may be amended from time to time, is referred to herein as the "MERGER AGREEMENT"), shall be terminated in accordance with its terms or the Merger (as defined in the Merger Agreement) becomes effective. Upon the execution hereof, all prior proxies given by the undersigned with respect to the Shares and any and all other shares or securities issued or issuable in respect thereof on or after the date hereof are hereby revoked and no subsequent proxies will be given. This proxy is irrevocable (to the fullest extent permitted by law and subject to the termination of the Proxy as set forth in Section 7 of the Voting Agreement), is granted pursuant to the Voting Agreement, is granted in consideration of Healtheon entering into the Merger Agreement and is coupled with an interest. The attorneys and proxies named above will be empowered at any time prior to the earlier of termination of the Merger Agreement and the date on which the Merger becomes effective to exercise all voting rights (including, without limitation, the power to execute and deliver written consents with respect to the Shares and the New Shares) of the undersigned at every annual, special or adjourned meeting of the Company's shareholders, and in every written consent in lieu of such a meeting, or otherwise, to vote the Shares and the New Shares: (i) in favor of the adoption of the amendment to the Designations of the Preferences, Limitations and Relative Rights of the Series A Preferred Stock of the Company and the amendment to the Designations of the Preferences, Limitations and Relative Rights of the Series B Preferred Stock of the Company, each as set forth on Exhibit A hereto; (ii) in favor of approval of the Merger and the adoption and approval of the Merger Agreement, including all actions contemplated thereby; (iii) in favor of the conversion of all shares of preferred stock of the Company into shares of Common Stock immediately prior to, and contingent upon, the Closing of the Merger; (iv) in favor of approval of any payments, purchases, sales or accelerations of capital stock of the executive officers of the Company that may be deemed to constitute "parachute payments" pursuant to Section 280G of the Internal Revenue Code of 1986, as amended. (v) against approval of any proposal made in opposition to, or in competition with, consummation of the Merger and the Merger Agreement; and 3.1-10 63 (vi) against any of the following actions (other than those actions that relate to the Merger and are contemplated by the Merger Agreement): (A) any merger, consolidation, business combination, sale of assets, reorganization or recapitalization of the Company with any party; (B) any dissolution, liquidation or winding up of the Company; (C) any joint venture or material strategic relationship with any party; (D) any material change in the capitalization of the Company or the Company's capital structure, except as contemplated by the Merger Agreement and by Section 1.2(ii) and Section 3 of the Voting Agreement; or (E) any other action that is intended, or could reasonably be expected to impede, interfere with, delay, postpone, discourage or adversely affect the Merger or any of the transactions contemplated by the Merger Agreement. The attorneys and proxies named above may only exercise this proxy to vote the Shares and any New Shares subject hereto at any time prior to the earlier of termination of the Merger Agreement and the date on which the Merger becomes effective, at every annual, special or adjourned meeting of the shareholders of the Company and in every written consent in lieu of such meeting. The undersigned Shareholder may vote the Shares and New Shares on all other matters. Any obligation of the undersigned hereunder shall be binding upon the successors and assigns of the undersigned. This proxy is irrevocable and coupled with an interest. Dated: ____________, 1999 HBO & COMPANY By: ---------------------------------- Its: 3.1-11 64 EXHIBIT A TO IRREVOCABLE PROXY AMENDMENT TO CERTIFICATES OF DESIGNATIONS AMENDMENT TO CERTIFICATE OF DESIGNATIONS OF SERIES A PREFERRED STOCK "RESOLVED, that the term "Common Stock" used in Subsection (d)(3)(A) in the Designations of Preferences, Limitations and Relative Rights of the Series A Preferred Stock of WebMD, Inc. contained in Article II.B of the Amended and Restated Articles of Incorporation is hereby amended to mean, for purposes of Subsection (d)(3)(A) only, the Common Stock Series D, no par value per share, of the Corporation." AMENDMENT TO CERTIFICATE OF DESIGNATIONS OF SERIES B PREFERRED STOCK "RESOLVED, that the term "Common Stock" used in Subsection (d)(3)(A) in the Designations of Preferences, Limitations and Relative Rights of the Series B Preferred Stock of WebMD, Inc. contained in Article II.B of the Amended and Restated Articles of Incorporation is hereby amended to mean, for purposes of Subsection (d)(3)(A) only, the Common Stock Series D, no par value per share, of the Corporation." 3.1-12 65 EXHIBIT 4.1(A) CAPITALIZATION OF WEBMD As of August 30, 1999, the authorized and issued capital stock of WebMD consisted of (a) 75,000,000 shares designated common stock (without designation as to series), of which 2,455,334 shares were issued and outstanding and none of which were issued and held as treasury shares, (b) 3,000,000 shares designated common stock Series B, of which 1,400,000 were issued and outstanding and none of which were issued and held as treasury shares, (c) 1,500,000 shares designated common stock Series C, of which 1,500,000 were issued and outstanding and none of which were issued and held as treasury shares, (d) 15,000,000 shares designated common stock Series D, of which 5,939,883 were issued and outstanding and none of which were issued and held as treasury shares, (e) 2,500,000 shares designated common stock Series E, of which 2,100,000 were issued and outstanding and none of which were issued and held as treasury shares; and (f) 10,000,000 shares designated as preferred stock, of which (i) 1,600,000 shares were designated Series A preferred stock, of which 1,341,000 are issued and outstanding and none of which were issued and held as treasury shares, (ii) 3,400,000 shares were designated Series B preferred stock, of which 3,047,204 were issued and outstanding and none of which were issued and held as treasury shares, (iii) 2,000,000 shares were designated Series C preferred stock, of which 1,008,750 were issued and outstanding and none of which were issued and held as treasury shares, (iv) 200,000 shares were designated Series D preferred stock, of which 200,000 were issued and outstanding and none of which were issued and held as treasury shares, (v) 792,000 shares were designated Series E preferred stock, of which 456,896 were issued and outstanding and none of which were issued and held as treasury shares, and (vi) 1,180,000 shares were designated Series F preferred stock, of which 814,339 were issued and outstanding and none of which were issued and held as treasury shares. WebMD has no other capital stock authorized, issued or outstanding. All of such shares are duly and validly issued and outstanding, and are fully paid and non-assessable. As of August 30, 1999, there are outstanding options and warrants to purchase capital stock of WebMD, which in the aggregate on a fully vested, exercised and converted basis represent rights to acquire 23,211,888 shares of common stock of WebMD, exclusive of the right and obligation of Microsoft Corporation to purchase 276,906 shares of Series E preferred stock prior to and conditioned upon on the Healtheon-WebMD Closing. Since August 30, 1999, WebMD has not issued any capital stock except in connection with the exercise of options and warrants. 4.1 EX-10.36 5 INVESTMENT AGREEMENT, DATED MAY 12, 1999 1 EXHIBIT 10.36 INVESTMENT AGREEMENT THIS INVESTMENT AGREEMENT (this "Agreement") is made and entered into as of the 12th day of May, 1999, between WebMD, Inc., a Georgia corporation (the "Company"), Microsoft Corporation, a Washington corporation (the "Microsoft"), and each of the other persons listed on Schedule I hereto (the "Purchasers" and collectively with Microsoft, the "Investors"). 1. AUTHORIZATION; SALE AND ISSUANCE OF SECURITIES. 1.1 Authorization. The Company has authorized the sale and issuance of up to 792,000 shares of its Series E Preferred Stock, no par value per share (the "Series E Preferred Stock"), and the issuance of up to 1,180,000 shares of its Series F Preferred Stock, no par value per share (the "Series F Preferred Stock"), each having the rights, restrictions, privileges and preferences as set forth in the Company's Amendment to the Amended and Restated Articles of Incorporation, as amended, in substantially the form set forth in Exhibit 1.1 attached hereto. 1.2 Sale of Shares. Subject to the terms and conditions hereof, the Company shall issue and sell to the Investors, and the Investors shall purchase from the Company, up to 738,416 shares (collectively, the "Purchased Shares") of Series E Preferred Stock, in accordance with the following: 1.2.1 At the Initial Microsoft Closing (as defined below), Microsoft shall purchase 184,604 shares of Series E Preferred Stock for an aggregate purchase price of $99,999,986.80 (the "Initial Microsoft Purchase"); and 1.2.2 On the Investor Closing Date (as defined below), each Purchaser shall purchase (the "Purchaser Investment") the number of shares of Series E Preferred Stock set forth opposite its name on Schedule I hereto at a purchase price of $541.70 per share. Anything herein to the contrary notwithstanding, on or prior to May 17, 1999, the Company may designate one or more persons to become additional Purchasers to purchase shares of Series E Preferred Stock, provided that the Purchasers shall not purchase in the aggregate more than 276,906 shares of Series E Preferred Stock. The Company shall advise Microsoft from time to time regarding the status of persons who may become Purchasers hereunder. Each of the Additional Purchasers and the amount of shares to be purchased by each additional Purchaser shall be approved by Microsoft, which approval will not be unreasonably withheld. Any such additional Purchaser will become a Purchaser by executing and delivering to the Company a counterpart of this Agreement, whereupon the Company shall amend Schedule I attached hereto to give effect to any such Purchaser's agreement to purchase Series E Preferred Stock. 1.2.3 Following the Initial Microsoft Closing and at any time prior to: (i) the date on which any person (the "Acquirer") enters into a binding definitive agreement with the Company which sets forth a "Change of Control Transaction" (as defined below) and (ii) 2 November 10, 1999 (the earlier of such times being the "Expiration Time"), Microsoft shall have the right to purchase (the "Additional Microsoft Purchase") up to 276,906 additional shares of Series E Preferred Stock at a purchase price of $541.70 per share. The Company shall notify Microsoft at least 24 hours prior to the execution of such definitive agreement, which notice shall describe the material terms of such Change of Control Transaction. Microsoft shall notify the Company of its intention to exercise its right to effectuate the Additional Microsoft Purchase by written notice (the "Notice of Purchase") delivered on or prior to the Expiration Time, which notice shall specify the number of shares of Series E Preferred Stock to be purchased and the aggregate exercise price therefor and which may be conditioned on the execution of the definitive agreement with respect to such Change of Control Transaction. For purposes of the foregoing, a "Change of Control Transaction" shall mean any transaction or series of related transactions which result in (i) the acquisition of the Company by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation) that results in the Company's shareholders immediately prior to such transaction not holding (by virtue of such shares or securities issued solely with respect thereto) at least 60% of the voting power of the surviving or continuing entity, or (ii) a sale, conveyance or disposition of all or substantially all of the assets of the Company unless the Company's shareholders immediately prior to such transaction will, as a result of such sale, conveyance or disposition hold (by virtue of securities issued as consideration for such sale, conveyance or disposition) at least 60% of the voting power of the purchasing entity, or (iii) the effectuation by the Company or its shareholders of a transaction or series of related transactions that results in the Company's shareholders immediately prior to such transaction not holding (by virtue of such shares or securities issued solely with respect thereto) at least 60% of the voting power of the Company. 2. CLOSINGS; DELIVERIES; ADDITIONAL SHARES. 2.1 Closings. 2.1.1. The closing of the Initial Microsoft Purchase (the "Initial Microsoft Closing") shall be held at 10:00 a.m. Seattle Time on May 13, 1999 (the date of such Initial Microsoft Closing being referred to as the "Initial Microsoft Closing Date"). The Initial Microsoft Closing shall take place by exchanging facsimile signatures of the documents to be executed at the Initial Microsoft Closing. Each party covenants to deliver to the other party executed originals of documents executed by it or its agents by overnight courier the next business day. 2.1.2 The closing of the Purchaser Investment (the "Investor Closing") shall be held at such time and place as shall be designated by the Company, which in no event shall be later than May 21, 1999 (the date of such Investor Closing being referred to as the "Investor Closing Date"). The Investor Closing shall take place by exchanging facsimile signatures of the documents to be executed at the Investor Closing. Each party covenants to deliver to the other party executed originals of documents executed by it or its agents by overnight courier the next business day. 2 3 2.1.3 The closing of the Additional Microsoft Purchase (the "Second Microsoft Closing;" the Initial Microsoft Closing, the Investor Closing and the Second Microsoft Closing and are sometimes collectively referred to herein as the "Closings"), if any, shall be held at such time and place as shall be designated by Microsoft in the Notice of Purchase, which in no event shall be later than November 30, 1999, or, if a Change of Control Transaction has been publicly announced prior to November 10, 1999 as provided in Section 1.2.3 hereof, the day immediately prior to the consummation of the Change of Control Transaction (the date of such Second Microsoft Closing being referred to as the "Second Microsoft Closing Date"). The Second Microsoft Closing shall take place by exchanging facsimile signatures of the documents to be executed at the Second Microsoft Closing. Each party covenants to deliver to the other party executed originals of documents executed by it or its agents by overnight courier the next business day. 2.2 Deliveries at Initial Microsoft Closing. At the Initial Microsoft Closing, the Company shall deliver to Microsoft a certificate, issued in Microsoft's name, representing 184,604 Purchased Shares, and Microsoft shall deliver the purchase price to the Company by wire transfer in the amount of $99,999,986.80. In addition, the Company shall deliver to Microsoft such other instruments and documents as are described in Article 5 hereof, and Microsoft shall deliver to the Company such other instruments and documents as are described in Article 6 hereof. 2.3 Deliveries at Investor Closing. At the Investor Closing, the Company shall deliver to each Purchaser a certificate, issued in such Purchaser's name, representing that number of shares to be purchased as stated on Schedule I attached hereto, and such Purchaser shall deliver the purchase price to the Company by wire transfer. 2.4 Deliveries at Second Microsoft Closing. At the Second Microsoft Closing, the Company shall deliver to Microsoft a certificate, issued in Microsoft's name, representing that number of shares to be purchased as stated in the Notice of Purchase, and Microsoft shall deliver the purchase price to the Company by wire transfer. 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to each Investor as of the date hereof and as of the Initial Microsoft Closing and the Investor Closing that, except as set forth on the attached Disclosure Exhibits, (which Disclosure Exhibits may be updated by the Company with the written consent of Microsoft not less than 48 hours prior to the Investor Closing, provided that the Company may amend Section 3.4 without the consent of Microsoft to reflect such changes in capitalization as are contemplated by this Agreement): 3.1 Organization and Standing; Charter and Bylaws. The Company is a corporation duly organized and validly existing under the laws of the State of Georgia and is in good standing under such laws, and each of the Company's subsidiaries is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization. Each of the Company and its subsidiaries has all requisite power and authority and possesses all franchises, licenses, permits, authorizations and approvals from governmental authorities necessary to 3 4 enable it to use its corporate name and to own, lease or otherwise hold its properties and assets and to carry on its business as presently conducted and proposed to be conducted. Each of the Company and its subsidiaries is duly qualified to do business as a foreign corporation in each jurisdiction in which the nature of its business or the ownership, leasing or holding of its properties or assets requires qualification and where failure to do so would have a material adverse effect on the business, assets, condition (financial or otherwise) or results of operations of the Company and its subsidiaries, taken as a whole (a "Material Adverse Effect"). The Company has previously delivered to the Investors true and accurate copies of its Amended and Restated Articles of Incorporation, as amended (the "Articles"), and its Amended and Restated Bylaws, as presently in effect. The share certificate and transfer books and the minute books of the Company (which have been made available for inspection by the Investors and their representatives) are true and complete. 3.2 Corporate Power. The Company has all requisite legal and corporate power and authority to enter into this Agreement and the Registration Rights Agreements, to sell the Purchased Shares and to carry out and perform its other obligations under the terms of this Agreement and the Registration Rights Agreements. 3.3 Subsidiaries and Affiliates. Except as set forth in Disclosure Exhibit 3.3 attached hereto, the Company does not own or control, directly or indirectly, any interest or investment in any corporation, partnership, association or other form of business entity. The Company beneficially owns all the capital stock or other equity interests in each of the entities listed on Disclosure Exhibit 3.3. 3.4 Capitalization. On the Initial Microsoft Closing Date without giving effect to any shares of the capital stock of the Company owned in connection with the exercise of any options or warrants of the Company after April 10, 1999, the authorized capital stock of the Company shall consist of 107,000,000 shares of capital stock, of which: (a) 75,000,000 shares are designated as Common Stock, voting and without par value per share, of which 2,500,000 are issued and outstanding; (b) 3,000,000 have been designated as Common Stock Series B, nonvoting and without par value per share, of which 1,400,000 are issued and outstanding; (c) 1,500,000 shares have been designated as Common Stock Series C, nonvoting and without par value per share, of which 1,500,000 are issued and outstanding; (d) 15,000,000 shares have been designated as Common Stock Series D, nonvoting and without par value per share, of which 5,096,805 are issued and outstanding; (e) 2,500,000 shares have been designated as Common Stock Series E, nonvoting and without par value per share, of which 2,100,000 are issued and outstanding; and (f) 10,000,000 shares of preferred stock, of which (i) 1,600,000 shares have been designated as Series A Preferred Stock, without par value per share, and of which 831,000 shares are issued and outstanding, (ii) 3,400,000 shares have been designated as Series B Preferred Stock, of which 2,976,807 shares are issued and outstanding, (iii) 2,000,000 shares have been designated as Series C Preferred Stock, of which 1,008,750 shares are issued and outstanding, (iv) 200,000 shares have been designated as Series D Preferred Stock, all of which is issued and outstanding, (v) 792,000 shares have been designated as Series E Preferred Stock, none of which is issued and outstanding, and (vi) 1,180,000 shares have been designated as Series F Preferred Stock, of which 698,349 are issued and outstanding. The Company declared on April 9, 1999 a stock dividend in the 4 5 amount of .03846 shares of Series F Preferred Stock for each share of Common Stock (on a fully diluted as converted basis) of the Company outstanding on the date hereof (the "Series F Dividend"). All such issued and outstanding shares have been duly authorized and validly issued, are fully paid and nonassessable, and are owned beneficially and of record by the shareholders and in the amounts set forth in Disclosure Exhibit 3.4 attached hereto. Except as shown in Disclosure Exhibit 3.4 and as contemplated by this Agreement, there are no outstanding rights, options, warrants, conversion rights or agreements for the purchase or acquisition from the Company of any shares of its capital stock. 3.5 Authorization. All corporate action on the part of the Company and its directors, officers and shareholders and holders of contractual or other rights necessary for (i) the authorization, execution, delivery and performance of all its obligations under this Agreement and any document contemplated hereby, (ii) the establishment of the preferences, limitations and rights of the Series E Preferred Stock and the Series F Preferred Stock and the authorization, issuance and delivery by the Company of the Purchased Shares, (iii) the authorization and declaration of the Series F Dividend, and (iv) the authorization and reservation of the shares of the Common Stock issuable upon conversion of all such Series E Preferred Stock pursuant to the terms of the Company's Articles (the "Conversion Shares"), has been (or will be) taken prior to the Initial Microsoft Closing. This Agreement and the Registration Rights Agreements constitute (or will constitute upon execution and delivery) the legal, valid and binding obligations of the Company and are enforceable against it in accordance with their terms, except as enforceability may be limited by bankruptcy, insolvency or other laws affecting the enforcement of creditors' rights generally, and except that the availability of the remedy of specific performance or other equitable relief is subject to the discretion of the court before which any proceeding therefor may be brought. 3.6 Validity of Stock. The Purchased Shares will be duly authorized, validly issued, fully paid and nonassessable, will be free of any liens or encumbrances, and will not be subject to any preemptive rights, rights of first refusal or redemption rights, other than as expressly provided in Section 3.15 hereof, in the Articles or as will have been waived. The Conversion Shares have been duly and validly reserved, and neither they nor the issuance thereof are subject to any preemptive rights or rights of first refusal or redemption rights, and, upon issuance, they will be validly issued, fully paid and nonassessable. The Series F Preferred Stock has been duly and validly reserved and will be fully paid and nonassessable upon payment of the Series F Dividend. 3.7 Financial Statements. The Company has furnished the Investors with audited consolidated balance sheets of the Company and its subsidiaries as of December 31, 1996, 1997 and 1998 together with audited consolidated statements of income and cash flows for the three-year period ended December 31, 1998 (collectively referred to hereafter as the "Financial Statements"). The Financial Statements have been prepared in accordance with generally accepted accounting principles ("GAAP") consistently applied and fairly present the financial position of the Company and the results of its operations as of the dates and for the periods indicated. 5 6 3.8 Changes. Except as disclosed in Disclosure Exhibit 3.8 attached hereto and as disclosed in the Financial Statements, and other than changes or events which have affected the Internet portal (e.g., Yahoo and Excite) or vertical content aggregator sector (e.g., CNET and Sportsline USA) in general, since December 31, 1998, there has not been: 3.8.1 any change in the assets, liabilities, financial condition, or operations of the Company considered in the aggregate from that reflected in the Financial Statements, other than in the ordinary course of business consistent with past custom and practice (including with respect to quantity and frequency); 3.8.2 any materially adverse change (individually or in the aggregate) in the contingent obligations of the Company or any of its subsidiaries by way of guaranty, endorsement, indemnity, warranty, or otherwise; 3.8.3 any damage, destruction or loss that had a Material Adverse Effect on the Company or any of its subsidiaries, whether or not covered by insurance; 3.8.4 any loans made by the Company or any of its subsidiaries to its employees, officers, or directors or members of their immediate families other than travel and other commercially reasonable advances made in the ordinary course of business; 3.8.5 any declaration or payment of any dividend or other distribution of the assets of the Company, other than the Series F Dividend; 3.8.6 any other event or condition of any character that has had or could reasonably be expected to have a Material Adverse Effect on the Company or any of its subsidiaries; or 3.8.7 any agreement or commitment by the Company or any of its subsidiaries to do any of the things described in this Section 3.8. 3.9 Material Liabilities. Except (a) as disclosed in Disclosure Exhibit 3.9 attached hereto or as reflected in the Financial Statements, (b) for the obligations and liabilities incurred in the ordinary course of business since December 31, 1998, and (c) for obligations under contracts made in the ordinary course of business that would not be required by GAAP to be reflected in the Financial Statements or obligations under contracts listed on Disclosure Exhibit 3.10 attached hereto, neither the Company nor any subsidiary thereof has any material liabilities or obligations, absolute or contingent. 3.10 Contracts and Commitments. Other than this Agreement, the Registration Rights Agreements, the Cross Promotion Agreement (as defined below) and the Master Agreement dated as of the date hereof (the "Master Agreement") between Microsoft and the Company, the agreements contemplated thereby, and as set forth in Disclosure Exhibit 3.10 attached hereto, neither the Company nor any subsidiary thereof has any contracts, agreements or instruments to which it is a party and that involve either (a) a commitment by, or revenue to, the Company in excess of $25,000 annually, or (b) provisions restricting or affecting the development, manufacture or distribution of the Company's products or services. Except as 6 7 set forth in Disclosure Exhibit 3.10, all contracts, agreements or instruments to which each of the Company or its subsidiaries is a party are valid and binding upon the Company or a subsidiary thereof, as applicable, and the other parties thereto and are in full force and effect and enforceable in accordance with their terms, subject to bankruptcy, insolvency, reorganization, moratorium and similar laws of general application relating to or affecting creditors' rights and to general equitable principles, and neither the Company, its subsidiaries nor, to the Knowledge of the Company (as defined in Section 8.8 hereof), any other party to any such contract, agreement or instrument has breached any provision of, or is in default under, the terms thereof, and there are no claims or allegations of offset, defense, or counterclaims that would prevent the work in process of the Company or its subsidiaries or their contracts and agreements from maturing in due course into fully collectible accounts receivable. Except as set forth on Disclosure Exhibit 3.10, the Company and its subsidiaries have complied with all applicable statutes, ordinances, rules, regulations and orders relating to seeking, bidding, obtaining, performing under or otherwise complying with, contracts with governmental and quasi-governmental authorities, agencies or other entities. 3.11 Protection of Intellectual Property Generally. (a) Disclosure Exhibit 3.11 hereto sets forth a complete and correct list and summary description of all registered and material unregistered trademarks, trade or company names, service marks, service names, domain names, brand names and registrations, if any, therefor; all registered copyrights; and all patents and all patent applications, if any, in each case applicable to or used or intended to be used in the business of the Company or any of its subsidiaries, together with a complete list of all licenses granted by or to the Company or any of its subsidiaries with respect to any of the above. The Company has filed applications in the United States Patent and Trademark Office for registration of "Web-MD", "WebMD" and "WebMD OnCall" as service marks (the application for "Web-MD" was initially denied, but the Company filed a response on November 20, 1998), but otherwise the Company has not sought governmental protection by way of patent, trademark or copyright registration or application for the property listed in Disclosure Exhibit 3.11 hereto. Each of the Company and its subsidiaries validly owns or is validly licensed to use all inventions, processes, know-how, formulas, patterns, designs, and trade secrets that are used in the conduct of its business as now conducted or proposed to be conducted. All such rights and all rights listed in Disclosure Exhibit 3.11 hereto are valid and enforceable and are free from any security interest, lien or encumbrance or any default on the part of the Company or any of its subsidiaries, and are not now involved in any pending or, to the Knowledge of the Company, threatened interference proceeding. No option, license, sublicense or other agreement has been granted in respect of any patent, trademark, brand name, trade secret, copyright or pending application therefor listed in Disclosure Exhibit 3.11 hereto, except as noted in Disclosure Exhibit 3.11. Except as set forth on Disclosure Exhibit 3.11, none of the Company's or any of its subsidiaries' owned intellectual property infringes any patent, trademark, service mark, trade or company name or application therefor or any related technological right of any other person. None of the rights of the Company or any of its subsidiaries described in this Section 3.11 will be impaired in any way by the transactions provided for herein, and all of such rights will be fully enforceable by the Company or any of its subsidiaries after the Initial Microsoft Closing Date and after the Second Microsoft Closing Date without the consent or agreement of any other party. The 7 8 Company does not believe it is or will be necessary to utilize any inventions of any of its employees (or individuals it currently intends to hire) made prior to their employment by the Company. (b) The Company has all patents, patent applications, patent rights, trademarks, trademark registrations, trademark applications, licenses, brand names, trade names, service marks, all other names or slogans embodying business or product goodwill, copyrights, copyright registrations, computer programs, software (including all source code and object code, development documentation, programming tools, specifications, data, designs, trade secrets, technology, inventions, discoveries and improvements), know-how, proprietary rights, processes, confidential and proprietary information, and other intellectual property rights, whether or not subject to statutory registration or protection, required for use in its business as presently conducted or proposed to be conducted, except where the failure to have would not have a Material Adverse Effect on the Company. 3.12 Compliance with Other Instruments. The execution, delivery and performance of and compliance with this Agreement, the Registration Rights Agreements and the issuance of the Purchased Shares, the Conversion Shares and the Series F Preferred Stock pursuant to the Series F Dividend will not result in any violation or be in conflict with or constitute a default (with or without notice or lapse of time or both) under, or give rise to a right of termination, cancellation or acceleration or the loss of any material benefit under (i) any of the terms or provisions of the Articles or Bylaws of the Company (or comparable organizational documents of the Company's subsidiaries), or (ii) any mortgage, indenture, license, lease, contract, agreement or instrument to which the Company or any of its subsidiaries is a party, or (iii) any judgment, order, decree, statute, law, ordinance, rule or regulation applicable to the Company, its subsidiaries or their properties or assets, or (iv) result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company or any of its subsidiaries pursuant to any such term or provision. 3.13 Litigation and Other Proceedings. Except as disclosed in Disclosure Exhibit 3.13 attached hereto, there are no actions, proceedings or investigations pending against the Company or its properties or shareholders (or, to the Knowledge of the Company, any basis therefor or threat thereof) that, either in any case or in the aggregate, involve an amount in controversy in excess of $50,000 or could reasonably be expected to have a Material Adverse Effect on the Company and its subsidiaries taken as a whole, or result in any material impairment of the right or ability of the Company or any of its subsidiaries to carry on their business as now conducted, or in any material liability on the part of the Company or any of its subsidiaries, and none that challenges the validity of this Agreement or any action taken or to be taken in connection herewith. The foregoing includes, without limiting its generality, actions pending or, to the Knowledge of the Company, threatened (or any threat thereof) involving the prior employment of the Company's or any subsidiary's employees or their use in connection with the Company's or any subsidiary's business of any information or techniques allegedly proprietary to any of their former employers. 3.14 Employees. Except as disclosed in Disclosure Exhibit 3.14 attached hereto, neither the Company nor any subsidiary thereof has any employment contracts with any of its 8 9 employees not expressly terminable at will and no collective bargaining agreements covering any of its employees. Further, neither the Company nor any subsidiary thereof has any policies, procedures or handbooks providing for other than at-will employment. No employee, agent, consultant or contractor associated with any of the members of management or key personnel of the Company or its subsidiaries who has contributed to or participated in the conception and development of proprietary rights, including software, of the Company or its subsidiaries has asserted or threatened any claim against the Company or the applicable subsidiary in connection with such person's involvement in the conception and development of the software or other proprietary rights of the Company and its subsidiaries and, to the best knowledge of the Company after due inquiry, no such person has a reasonable basis for any such claim. The Company is not aware of any proposed, threatened or actual union organization activity affecting the Company's and its subsidiaries' current or prospective operations. The Company and its subsidiaries are in compliance in all material respects with all applicable laws respecting employment and employment practices, occupational safety and health standards, terms and conditions of employment and wages and hours, and are not engaged in any unfair labor practice. There is no unfair labor practice charge or complaint against the Company or any subsidiary pending or threatened before the National Labor Relations Board or any comparable state agency or authority. There is no labor strike, dispute, request for representation, slowdown or stoppage actually pending or threatened against or affecting the Company or any subsidiary. 3.15 Registration Rights; Stockholder Agreements. Except as provided for in the Registration Rights Agreements between the Company and the Investors, as such may be amended from time to time, and except as set forth in Disclosure Exhibit 3.15 attached hereto, (i) the Company is under no obligation to register any of its presently outstanding securities or any of its securities that may hereafter be issued pursuant to this or any other existing agreement, and (ii) the Company is not a party to and, to the Knowledge of the Company, there are no agreements among shareholders of the Company relating to voting or transfer of equity in the Company. 3.16 Governmental Consents. Except for the filing of a Form D with the Securities and Exchange Commission (the "Commission") and other filings required by the blue sky laws of the states where the Investors are located, no consent, approval or authorization of, or registration, declaration, designation, qualification or filing with, any governmental authority on the part of the Company is required in connection with the valid execution and delivery of this Agreement, the offer, sale or issuance of the Purchased Shares by the Company, the issuance by the Company of the Conversion Shares, the issuance of the Series F Preferred Stock pursuant to the Series F Dividend, or the consummation of any other transaction contemplated hereby. 3.17 Other Consents. All consents of third parties and any shareholders of the Company necessary for the execution, delivery and performance by the Company of this Agreement or the consummation of the transactions contemplated hereby have been (or will be) received prior to the Initial Microsoft Closing. 9 10 3.18 Title to Property and Assets. Except as disclosed in Disclosure Exhibit 3.18 attached hereto, each of the Company and its subsidiaries has good and marketable title to its material properties and assets and has good title to all its leasehold interests, in each case subject to no mortgage, pledge, lien, encumbrance or charge. All material tangible personal property owned by the Company and its subsidiaries is in good operating condition and repair, ordinary wear and tear excepted, and all material personal property leased by the Company and its subsidiaries is in all material respects in the condition required of such property by the terms of the lease applicable thereto during the term of such lease and upon the expiration thereof. 3.19 Insurance. The Company has valid, outstanding and enforceable liability, workmen's compensation, health, fire, general liability and casualty insurance policies. The fire and casualty insurance policies are in an amount sufficient to allow it to replace with proceeds from such insurance any of its material, tangible properties that might be damaged or destroyed. 3.20 Licenses and Permits; Compliance with Laws. Except as disclosed in Disclosure Exhibit 3.20 attached hereto, each of the Company and its subsidiaries holds all licenses, certificates, permits, franchises and rights from all appropriate federal, state or other public authorities necessary for the conduct of its business and the use of its assets. Except as disclosed in Disclosure Exhibit 3.20 attached hereto, each of the Company and its subsidiaries and their respective properties, assets, operations and businesses are in compliance (except where the Company reasonably believes such non-compliance will not have a Material Adverse Effect on the Company and its subsidiaries, taken as a whole) with all applicable statutes, laws, ordinances, rules, regulations and orders of any governmental authority. Further, except as disclosed in Disclosure Exhibit 3.20, the Company and its subsidiaries are not presently charged with or, to the Knowledge of the Company, under governmental investigation with respect to, any actual or alleged violation of any statute, law, ordinance, rule or regulation. To the Knowledge of the Company, the Company is not presently the subject of any pending or, to the Knowledge of the Company, threatened adverse proceeding by any regulatory authority having jurisdiction over its business, properties or operations. Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will result in the termination of any such license, certificate, permit, franchise or right held by the Company or its subsidiaries. 3.21 Tax Matters. Except as disclosed in Disclosure Exhibit 3.21 attached hereto, each of the Company and all members of any affiliated group within the meaning of Section 1504 of the Internal Revenue Code of 1986, as amended (an "Affiliated Group") has accurately prepared and timely filed all income and other tax returns, if any, that are required to be filed, and has paid, or made provision for the payment of, all taxes that have or may have become due pursuant to said returns or pursuant to any assessment that has or may be received from any taxing authority for the period through December 31, 1998, and there are no outstanding agreements by the Company or any member of any Affiliated Group for the extension of time for the assessment of any tax. The United States income tax returns of the Company or any member of any Affiliated Group have not been audited by the Internal Revenue Service. Except as disclosed in Disclosure Exhibit 3.21, no deficiency assessment or 10 11 proposed adjustment of the Company's or any member of any Affiliated Group's United States income tax or state or municipal taxes (if any) is pending, and the Company has no Knowledge of any proposed liability for any tax to be imposed upon the Company's or any member of any Affiliated Group's properties or assets for which there is not an adequate reserve reflected in the Financial Statements. 3.22 Employment; No Conflicting Agreements. Except as disclosed in Disclosure Exhibit 3.22 attached hereto, none of the officers, directors, and key employees of the Company or any of its subsidiaries is obligated under any contract (including licenses, covenants, or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would conflict with his or her obligation to use his or her best efforts to promote the interests of the Company or that would conflict with the business of the Company as the Company presently conducts the same. 3.23 Indebtedness to Directors and Officers; Interested Party Transactions. Except as disclosed in Disclosure Exhibit 3.23 attached hereto, the Company is not indebted to any of its directors or officers or party to any contract with any affiliate of its directors or officers, and, to the Knowledge of the Company, none of such directors or officers has a claim of any nature against the Company except for compensation due for past or current pay periods. To the Knowledge of the Company and except as disclosed in Disclosure Exhibit 3.23, no officer, director or holder of more than 5% of the capital stock of the Company or any "affiliate" or "associate" (as these terms are defined in Rule 405 promulgated under the Securities Act of 1933, as amended (the "Securities Act")) of any such person or entity or the Company has or has had, either directly or indirectly, (a) an interest in any person or entity that (i) furnishes or sells services or products that are furnished or sold or are proposed to be furnished or sold by the Company, or (ii) purchases from or sells or furnishes to the Company any goods or services, or (b) a beneficial interest in any contract or agreement to which the Company is a party or by which it may be bound or affected. Except as set forth in Disclosure Exhibit 3.23 hereto, there are no existing material arrangements or proposed material transactions between the Company and any officer, director, or holder of more than 5% of the capital stock of the Company or any affiliate or associate of any such person. 3.24 Employee Plans. Disclosure Exhibit 3.24 attached hereto lists all employee benefit plans as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974 ("ERISA") and all severance, bonus, retirement, pension, profit-sharing, deferred compensation plans and other similar fringe or employee benefit plans, programs or arrangements, and all employee or compensation agreements, written or otherwise, for the benefit of or relating to any employee of the Company (collectively, "Employee Plans"). The Company has complied with all terms and conditions of the Employee Plans, except where the violation would not have a Material Adverse Effect on the Company and its subsidiaries taken as a whole. The Company is in compliance with the provisions of ERISA and the regulations and published interpretations thereunder, except where the noncompliance would not have a Material Adverse Effect on the Company and its subsidiaries taken as a whole. 3.25 Customers and Suppliers. Except as disclosed in Disclosure Exhibit 3.25 attached hereto, no customer or supplier has taken, and neither the Company nor any of its 11 12 subsidiaries has received any notice or has any Knowledge that any customer or supplier of the Company or any of its subsidiaries contemplates taking, any steps that could disrupt the business relationship of the Company or any of its subsidiaries with such customer or supplier or could result in a diminution in the value of the Company or any of its subsidiaries in a manner that would have a Material Adverse Effect on the Company and its subsidiaries, taken as a whole. 3.26 Disclosure. The Company has not knowingly failed to disclose to the Investors any facts material to the Company and its subsidiaries, taken as a whole. No representation or warranty of the Company contained in this Agreement, and no statement contained in any document, certificate or schedule furnished or to be furnished by or on behalf of the Company to the Investors or any of their representatives pursuant to this Agreement, contains or will contain any untrue statement of a material fact or omits or will omit to state any material fact necessary, in light of the circumstances under which it was or will be made, in order to make the statements herein or therein not misleading. 4 REPRESENTATIONS AND WARRANTIES OF THE INVESTORS. Each of the Investors, severally and not jointly, represents and warrants to the Company, as of any of the Closing Dates on which such Investor purchases Purchased Shares, as follows: 4.1 Access to Information. 4.1.1 Such Investor acknowledges that the Company filed a Registration Statement on Form S-1 (No. 333-71359) with the Commission on January 28, 1999, which was amended on February 26, 1999, with respect to the initial public offering of the Company's Common Stock (the "Registration Statement"). Prior to any Investor (other than Microsoft) becoming a Purchaser hereunder, the Company shall withdraw such Registration Statement. Microsoft acknowledges that it had commenced discussions with the Company prior to the filing of the Registration Statement which discussions resulted directly in this Agreement and the other agreements between Microsoft and the Company contemplated by the Master Agreement. Each Purchaser represents and warrants that it became aware of the Company and the opportunity to become a Purchaser hereunder through Microsoft and not as a result of the Registration Statement or any advertising, news articles, internet chat rooms or other means of general solicitation . Each Investor represents that while it may have reviewed the Registration Statement, it has not relied on the Registration Statement for purposes of making its investment hereunder, but rather has had the opportunity to perform its own independent due diligence review of the Company and such Investor and its advisor or advisors, or a person or persons acting on its behalf, has had a reasonable opportunity to ask questions of and receive answers from the officers of the Company, concerning the business and financial condition of the Company and the terms and conditions of the offering of the Purchased Shares, and to obtain additional information, to the extent possessed or obtainable without unreasonable effort or expense by the officers of the Company. All such questions have been answered to the full satisfaction of such Investor. Microsoft acknowledges that the opportunity to enter into the Cross Promotion Agreement with the Company was an integral 12 13 part of its decision to purchase the Purchased Shares. Each Purchaser acknowledges that the opportunity to enter into a strategic operating agreement with the Company was an integral part of its decision to purchase the Purchased Shares. In addition, each Purchaser acknowledges that it has not relied on any due diligence, representations or other information or advice from Microsoft in making its investment decision to purchase the Purchased Shares hereunder. 4.1.2 Such Investor acknowledges that, from time to time, statements about the Company may be made by third parties, in writing or otherwise, that may purport to contain information about the Company, including in newspaper articles, internet chat rooms and, except as provided below, other publications and communications, and that such statements have been and may be incorrect or inaccurate in several material respects. Such Investor agrees that neither the Company nor any of its affiliates or representatives has made any representation or warranty as to the accuracy or completeness of any such information or statements. Furthermore, such Investor has not relied, and will not rely, upon any such statements in making any investment decision in connection with the Purchased Shares; rather, the only representations or statements that such Investor has relied upon or will rely upon will be those made by the Company in the Registration Statement, as set forth in this Agreement, and in the following parts of the Company's web site as it exists as of the date hereof: About WebMD (other than Featured Topics and the Press Releases), Learn More about WebMD, Meet our Strategic Partners, and Review our Products and Services. 4.2 Experience; Investment. Such Investor is acquiring the Purchased Shares solely for its own account, not as a nominee or agent, and not with a view to, or for sale in connection with, any distribution thereof, as that term is used under the Securities Act. Such Investor represents that such Investor is an "accredited investor" within the meaning of Rule 501(a)(3) of Regulation D promulgated by the Commission under the Securities Act and either it or persons in control of its investment decision have assets in excess of $100 million, and that it has been represented by counsel in connection with this investment, and either it or persons representing it have considerable experience in making investments of this nature. 4.3 Registration under the Securities Act. Such Investor understands that (a) neither the offering nor the sale of the Purchased Shares has been registered under the Securities Act or applicable state securities laws, in reliance upon exemptions from the registration provisions of the Securities Act and applicable state securities laws, (b) the Purchased Shares purchased by such Investor must be held by it indefinitely unless the sale or transfer thereof is subsequently registered under the Securities Act and applicable state securities laws or an exemption from such registration is available, and the certificates or documents representing all Purchased Shares will be legended to reflect such restrictions, (c) except as provided in the Registration Rights Agreements between the Company and the Investors, the Company is under no obligation to register any Purchased Shares, Conversion Shares on such Investor's behalf or to assist it in complying with any exemption from registration, and (d) the officers of the Company will rely in part upon the representations and warranties made by such Investor in this Agreement in order to establish such exemption from the registration provisions of the Securities Act and applicable state securities laws. 13 14 4.4 Transfer. Such Investor will not transfer any Purchased Shares or Conversion Shares without registration under the Securities Act and applicable state securities laws unless the transfer is exempt from registration under the Securities Act and such laws and is made in compliance with the legends contemplated by Section 8.10 herein. 4.5 Authorization. All action on the part of such Investor necessary for the authorization, execution, delivery and performance of all obligations of such Investor under this Agreement or any document contemplated hereby has been (or will be) taken prior to the Initial Microsoft Closing. This Agreement, when executed and delivered by such Investor, will constitute the valid and binding obligation of such Investor and is enforceable against it in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency or other laws affecting the enforcement of creditors' rights generally, and except that the availability of the remedy of specific performance or other equitable relief is subject to the discretion of the court before which any proceeding therefor may be brought. 5 CONDITIONS TO CLOSING OF THE INVESTORS. The obligation of Microsoft to purchase and pay for the Purchased Shares at the Initial Microsoft Closing is, at Microsoft's option, subject to the fulfillment on or prior to the Initial Microsoft Closing Date of the conditions specified below. The obligation of each Purchaser to purchase and pay for the Purchased Shares at the Investor Closing is, at such Purchaser's option, subject to fulfillment on or prior to the Investor Closing Date of the conditions specified in Sections 5.1, 5.2 and 5.9. The obligation of Microsoft to purchase and pay for the Purchased Shares at the Second Microsoft Closing is, at Microsoft's option, subject to the fulfillment on or prior to the Second Microsoft Closing Date of the conditions specified in Sections 5.11 and 5.12. 5.1 Representations and Warranties Correct. The representations and warranties made by the Company in Article 3 hereof, and with respect to the Initial Microsoft Closing only, in the Distribution and Cross Promotion Agreement effective as of May 6, 1999 ("Cross Promotion Agreement"), shall be true and correct on and as of the date hereof and the applicable Closing Date as though made on such date, but excluding any disclosures made by the Company in the Disclosure Exhibit delivered at least 48 hours prior to the Investor Closing Date. 5.2 Performance. All covenants, agreements and conditions contained in this Agreement to be performed or complied with by the Company on or prior to the applicable Closing Date shall have been performed or complied with in all respects. 5.3 Filing of Charter Amendment. The Amendment to the Amended and Restated Articles of Incorporation shall have been properly filed with the Secretary of State of the State of Georgia prior to the Initial Microsoft Closing Date. 5.4 Registration Rights Agreements. The Company shall have executed and delivered (i) a Registration Rights Agreement by and between the Company and Microsoft in the form attached hereto as Exhibit 5.4A (the "MS Registration Rights Agreement") and (ii) a Registration Rights Agreement among the Company and the Purchasers in the form attached 14 15 hereto as Exhibit 5.4B (the "Purchaser Registration Rights Agreement;" and together with the MS Registration Rights Agreement, the "Registration Rights Agreements"). 5.5 Cross Promotion Agreement. The Company shall have executed and delivered the Cross Promotion Agreement. All covenants, agreements and conditions contained in this Agreement and in the Cross Promotion Agreement to be performed or complied with by the Company on or prior to the Initial Microsoft Closing shall have been performed or complied with in all material respects. 5.6 Compliance Certificate. Unless the Closing Date is the same as the date of this Agreement, the Investors shall have received a certificate executed by the President of the Company, dated as of the Closing Date, certifying that the conditions specified in Sections 5.1, 5.2, 5.3 and 5.9 hereof have been fulfilled. 5.7 Opinion of Company's Counsel. The Investors shall have received from Nelson Mullins Riley & Scarborough, L.L.P., counsel to the Company, in form and substance reasonably satisfactory to the Investors and their counsel, a favorable opinion addressed to the Investors, dated as of the Initial Microsoft Closing Date. 5.8 Evidence of Consents. The Company shall have given the Investors evidence satisfactory to the Investors that it has received all necessary consents of third parties and shareholders of the Company, including HBO & Company of Georgia ("HBOC"), pursuant to Section 3.17 hereof, in order to consummate the transactions contemplated by this Agreement and the Exhibits hereto. 5.9 Injunctions, etc. No injunction or order of any governmental authority shall be in effect as of the applicable Closing, and no lawsuit, claim, proceeding or investigation shall be pending or threatened by or before any governmental authority as of the applicable Closing, which would restrain or prohibit the issuance and sale of the Purchased Shares or the Conversion Shares or the consummation of any of the other transactions contemplated by this Agreement or invalidate or suspend any provision of this Agreement, the Registration Rights Agreements, the Articles or the Cross Promotion Agreement. 5.10 Rights of First Refusal; Registration Rights. HBOC shall have waived its right of first refusal to acquire securities of the Company which are issued after the date hereof pursuant to Sections 9 of the Investment Agreement dated August 24, 1998, as amended (the "HBOC Investment Agreement) between the Company and HBOC. HBOC, Sirrom Investments, Inc., Premier Technologies, Inc., and Matria Healthcare, Inc. shall have waived any rights which such shareholders have pursuant to agreements with the Company (i) to limit the number of shares a selling shareholder may include in a piggyback registration to a number which is less than the number of securities included in such offering by any one of such shareholders unless all securities held by such shareholder and requested to be included in such offering are included therein and (ii) to restrict the ability of the Company to grant registration rights except as permitted by Section 11.3 of the HBOC Investment Agreement. 5.11 Change of Control Transaction. If the Second Microsoft Closing is a result of a Change of Control Transaction, the Company shall have consummated the Change of Control 15 16 Transaction and no material adverse amendment or modification shall have been made to the definitive agreement with respect thereto since its execution, without the consent of Microsoft. 5.12 Strategic Relationship. If the Second Microsoft Closing is a result of a Change of Control Transaction, Microsoft and the Acquirer in such Change of Control Transaction shall have entered into a mutually acceptable strategic relationship substantially in accordance with any memorandum of understanding between such parties executed on or before the Change of Control Transaction. 6 CONDITIONS TO CLOSING OF THE COMPANY. The obligation of the Company to sell the Purchased Shares at the Initial Microsoft Closing is subject to the fulfillment on or prior to the Initial Microsoft Closing Date of the conditions specified below. The obligation of the Company to sell the Purchased Shares at the Investor Closing and the Second Microsoft Closing is subject to fulfillment on or prior to the Investor Closing Date and the Second Microsoft Closing Date, respectively, of the conditions specified in Sections 6.1, 6.2 and 6.4. 6.1 Representations and Warranties Correct. The representations and warranties made by the Investors in Article 4 hereof and, with respect to the Initial Microsoft Closing only, the representations and warranties made by Microsoft in the Cross Promotion Agreement, shall be true and correct on and as of the date hereof and the applicable Closing Date as though made on such date. 6.2 Performance. All covenants, agreements and conditions contained in this Agreement to be performed by or complied with by the Investors and, with respect to the Initial Microsoft Closing only, all covenants, agreements and conditions contained in the Cross Promotion Agreement to be performed by or complied with by Microsoft, on or prior to the applicable Closing Date shall have been performed or complied with in all respects. 6.3 Registration Rights Agreements. The Investors shall have executed and delivered the Registration Rights Agreements. 6.4 Injunctions, etc. No injunction or order of any governmental authority shall be in effect as of the applicable Closing, and no lawsuit, claim, proceeding or investigation shall be pending or threatened by or before any governmental authority as of the applicable Closing, which would restrain or prohibit the issuance and sale of the Purchased Shares or the Conversion Shares or the consummation of any of the other transactions contemplated by this Agreement or invalidate or suspend any provision of this Agreement, the Registration Rights Agreements, the Articles or the Cross Promotion Agreement. 6.5 Cross Promotion Agreement. Microsoft shall have executed and delivered the Cross Promotion Agreement, with such changes as the Company and Microsoft shall agree after good faith negotiations. 16 17 7 COVENANTS. 7.1 Basic Information. Subject to Section 7.2 hereof: 7.1.1 As soon as practicable after the end of each fiscal year, and in any event within 90 days thereafter, beginning with the year ending December 31, 1999, the Company shall furnish to the Investors audited consolidated balance sheets of the Company and its subsidiaries, if any, as of the end of such fiscal year and audited consolidated statements of income and cash flow of the Company and its subsidiaries, if any, for such fiscal year, prepared in accordance with GAAP consistently applied and setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and certified by Ernst & Young, LLP or another independent public accounting firm, which shall also be one of the six largest firms of nationally recognized standing in the United States, or a firm acceptable to the Investors. 7.1.2 As soon as practicable after the end of each fiscal quarter, and in any event within 45 days thereafter, the Company shall furnish to the Investors consolidated balance sheets of the Company and its subsidiaries, if any, as of the end of such fiscal quarter, and consolidated statements of income and cash flow of the Company and its subsidiaries, if any, for such fiscal quarter and for the current fiscal year to date, prepared in accordance with GAAP consistently applied, with such statements certified by the chief financial officer of the Company as having been prepared in accordance with GAAP consistently applied, and accompanied by a brief narrative description of the Company's business activities during said quarter. 7.2 Suspension of Certain Covenants. The covenants set forth in Section 7.1 hereof, shall be suspended and be of no force or effect if the Company becomes subject to the reporting requirements of the federal Securities Exchange Act of 1934, as amended. 7.3 Hart-Scott-Rodino. 7.3.1 In the event that, under the designations of the Series E Preferred Stock contained in the Amendment to the Amended and Restated Articles of Incorporation, any Investor would acquire the right to vote such shares, because of the occurrence or nonoccurrence of a particular event, and the acquisition of such right would require any filing by such Investor under the Hart Scott Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), or the acquisition or disposition by any Investor of the Conversion Shares would require any such filing, then, before such voting right shall become effective, either (1) the parties shall have been granted early termination of the waiting period under the HSR Act, or (2) the applicable waiting period shall have expired without any agency having sought injunctive relief with respect to the effectiveness of the voting rights. Each of the Company and such Investors shall cooperate in making any such filing promptly and shall furnish one another such information and commercially reasonable assistance as necessary for any such filing. 7.3.2 In the event that the Company enters into an agreement that contemplates a Change of Control Transaction and, as a result, filings under the HSR Act are required as a condition to the closing of such transaction, then the Company and Microsoft covenant and 17 18 agree to cause the other party to the Change of Control agreement to covenant to file the information and documents required by HSR and to condition or delay any Change of Control until either (1) the parties shall have been granted early termination of any waiting period under the HSR Act, or (2) the applicable waiting period shall have expired without any agency having sought injunctive relief. In the event that the applicable HSR waiting periods have not expired 90 days after the initial HSR filing, then Microsoft's right and obligation to purchase Purchased Shares in the Additional Microsoft Purchase shall be converted into a right and obligation to purchase an equivalent number of nonvoting preferred stock that, by their terms, convert to voting common stock and have such terms as may be mutually agreed by Microsoft and the Company and an equivalent change shall be made to the consideration to be received with respect to the Purchased Shares in such Change of Control Transaction. 8 MISCELLANEOUS. 8.1 Governing Law. This Agreement shall be governed by and construed under the laws of the State of Georgia, without regard to its principles of conflicts of laws. 8.2 Survival. The representations, warranties, covenants and agreements made herein shall survive any investigation made by the Investors and the closing of the transactions contemplated hereby. 8.3 Assignment. This Agreement may not be assigned by any Purchaser without the express written consent of the Company (which consent may be granted or withheld in the sole discretion of the Company). This Agreement may not be assigned by the Company without the express written consent of each Investor except that the Company may assign this Agreement directly or indirectly by operation of law in connection with a Change of Control if the successor company or its parent company, which is a company whose securities are registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, execute a joinder to this Agreement as of the closing of any Change of Control. Notwithstanding the foregoing sentences, each Investor shall have the right to assign its right to purchase any or all of the Purchased Shares to one or more Authorized Transferees who agree to be bound by the terms and provisions of this Agreement. As used herein, an "Authorized Transferee" of an Investor shall mean a limited number of institutional accredited investors within the meaning of Rule 501 promulgated under the Securities Act of 1933, as amended, with gross assets in excess of $100,000,000 who became aware of the Company and the opportunity to acquire Series E Preferred Stock and Series F Preferred Stock as a result of contacts by such Investor and not as a result of the Registration Statement, the identity of which shall be reasonably acceptable to the Company. 8.4 Entire Agreement; Amendment. This Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement among the parties with regard to the subjects hereof and thereof. Neither this Agreement nor any term hereof may be amended, waived, discharged or terminated except by a written instrument signed by each Investor and a representative of the Company so authorized by its Board of Directors. 18 19 8.5 Notices. All notices and other communications required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or three (3) business days following deposit with the United States Postal Service, by certified mail, return receipt requested, postage prepaid, or otherwise delivered by hand or by messenger, addressed: (a) if to Microsoft, at Microsoft Corporation, One Microsoft Way, Redmond, Washington 98052-5399, Attn: Chief Financial Officer with a copy to General Counsel - Finance and Administration, and Preston Gates & Ellis LLP, 5000 Columbia Center, 701 Fifth Avenue, Seattle, Washington 98104, or (b) if to any Purchaser, at the address set forth opposite such Purchaser's name on Schedule I hereto, or (c) if to any other holder of any shares of Series E Preferred Stock or Conversion Shares, at such address as such holder shall have furnished the Company in writing, or, until any such holder so furnishes an address to the Company, then to and at the address of the last holder of such shares of Series E Preferred Stock or Conversion Shares who has so furnished an address to the Company, or (d) if to the Company, at WebMD, Inc., 400 The Lenox Building, 3399 Peachtree Road, Atlanta, Georgia 30326, Attn: General Counsel, with a copy to Nelson Mullins Riley & Scarborough, L.L.P., Bank of America Corporate Center, Suite 2600, 100 North Tryon Street, Charlotte, North Carolina 28202, Attn: H. Bryan Ives III and C. Mark Kelly, or at such other address as the Company shall have furnished to the Investors and each such other holder in writing. 8.6 Agent's Fees. Each party (a) represents and warrants that it has retained no finder or broker in connection with the transactions contemplated by this Agreement (except as disclosed to the other party hereto as of the date hereof), and (b) hereby agrees to indemnify and to hold the other party harmless of and from any liability for commissions or compensation in the nature of an agent's, finder's or broker's fee to any broker or other person or firm (and the cost and expenses of defending against such liability or asserted liability) for which said party is responsible. 8.7 Expenses. Each party shall bear its own expenses and legal fees (and expenses and disbursements of its legal counsel) incurred on its behalf with respect to this Agreement and the transactions contemplated hereby. 8.8 Construction of Certain Terms. The titles of the articles, sections, and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. For purposes of this Agreement, the terms "Company's Knowledge," "Knowledge of the Company" and "Knowledge" as applied to the Company means, as to a particular matter, the actual knowledge of the Company's executive officers and in-house corporate counsel. Wherever words "including", "include" or "includes" are used in this Agreement, they shall be deemed followed by the words "without limitation". References to any gender shall be deemed to mean any gender. 8.9 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 8.10 Legends. In addition to any legends required by the Securities Act or any applicable state securities laws, the Company shall place the following legend on the front or back of each certificate evidencing ownership of shares of Series E Preferred Stock: 19 20 The Corporation will furnish without charge to each shareholder who so requests a statement of the designations, relative rights, preferences and limitations applicable to each class, and series within a class, of capital stock of the Corporation and the variations in rights, preferences and limitations applicable to each series (and the authority of the Corporation's board of directors to determine variations for future series). The Company shall place legends on each certificate evidencing ownership of shares of Common Stock identical to those initially placed on the certificates for Series E Preferred Stock relating to the Securities Act and all applicable state securities laws. 8.11 Enforcement. 8.11.1 Remedies at Law or in Equity. If the Company shall default in any of its obligations under this Agreement or if any representation or warranty made by or on behalf of the Company in this Agreement or in any certificate, report or other instrument delivered under or pursuant to any term hereof shall be untrue or misleading in any material respect as of the date of this Agreement or as of the applicable Closing Date or as of the date it was made, furnished or delivered, each Investor may proceed to protect and enforce its rights by suit in equity or action at law, whether for the specific performance of any term contained in this Agreement, injunction against the breach of any such term or in furtherance of the exercise of any power granted in this Agreement, or to enforce any other legal or equitable right of such party or to take any one of more of such actions. 8.11.2 Remedies Cumulative; Waiver. No remedy referred to herein or in any exhibit hereto is intended to be exclusive, but each shall be cumulative and in addition to any other remedy referred to above or otherwise available to a party at law or in equity. No express or implied waiver by any party of any default shall be a waiver of any future or subsequent default. The failure or delay of any party in exercising any rights granted it hereunder shall not constitute a waiver of any such right and any single or partial exercise of any particular right by such party shall not exhaust the same or constitute a waiver of any other right provided herein. 8.12 Timely Performance. Time is of the essence as to the performance of the obligations required of the respective parties under this Agreement. 8.13 No Joint Venture. Nothing in this Agreement shall be deemed to constitute the Company and any Investor as partners, agents or joint venturers. 8.14 Severability. In the event any one or more of the provisions contained in this Agreement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. The parties shall endeavor in good faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. 20 21 8.15 Further Assurances. The Company shall use its best efforts to obtain and assist each Investor in obtaining promptly all necessary waivers, consents and approvals from any governmental authority or any other person (including the approval of the stockholders of the Company, if necessary) for any exercise by such Investor of its rights under this Agreement, the Registration Rights Agreements, the Purchased Shares, or the Conversion Shares and to take such other actions as may reasonably be requested by such Investor to effect the purpose of this Agreement or the Registration Rights Agreements. The period of time provided for any closing of the transactions pursuant to such rights may, at the option of each Investor, be extended as necessary in order to obtain any such waivers, consents and approvals. 21 22 SIGNATURE PAGE TO THE INVESTMENT AGREEMENT DATED MAY 12, 1999 AMONG WEBMD, INC., MICROSOFT CORPORATION AND THE PURCHASERS NAMED THEREIN THE COMPANY: WEBMD, INC. BY: /s/ Jeff Arnold ----------------------------------- ITS: Chief Executive Officer ------------------------------- MICROSOFT: MICROSOFT CORPORATION BY: /s/ Greg B. Maffie ------------------------------------ ITS: Senior Vice President - Finance -------------------------------- and Administration Chief Financial Officer 22 23 SIGNATURE PAGE TO THE INVESTMENT AGREEMENT DATED MAY 12, 1999 AMONG WEBMD, INC., MICROSOFT CORPORATION AND THE PURCHASERS NAMED THEREIN PURCHASERS: INTEL CORPORATION BY: /s/ Arnold Sodhani ------------------------------------- ITS: Vice President and Treasurer ---------------------------------- COVAD COMMUNICATIONS GROUP INC. BY: /s/ Robert Davenport ------------------------------------- ITS: EVP Business Development ---------------------------------- EXCITE, INC. BY: /s/ Mark C. Stevens ------------------------------------- ITS: Executive Vice President ---------------------------------- Business Affairs SOFTBANK AMERICA INC. BY: /s/ Stephen J. Murray ------------------------------------- ITS: Treasurer, SOFTBANK America, Inc. ---------------------------------- SUPERIOR CONSULTANT HOLDINGS CORPORATION BY: /s/ Susan M. Syner ------------------------------------- ITS: Vice President & CAO Corporate ---------------------------------- Secretary 23 24 SIGNATURE PAGE TO THE INVESTMENT AGREEMENT DATED MAY 12, 1999 AMONG WEBMD, INC., MICROSOFT CORPORATION AND THE PURCHASERS NAMED THEREIN DELL USA, L.P. BY: DELL GEN. P. CORP. ITS: GENERAL PARTNER BY: /s/ ----------------------------------- ITS: -------------------------------- THE READER'S DIGEST ASSOCIATION, INC. BY: /s/ ----------------------------------- ITS: -------------------------------- 24 25 SCHEDULE I LIST OF PURCHASERS
PURCHASER ADDRESSES NUMBER OF SHARES Intel Corporation 2200 Mission College Boulevard 26,768 Santa Clara, CA 95052 Covad Communications 2330 Central Expressway 27,691 Group Inc. Santa Clara, CA 95050 Excite Inc. 555 Broadway 46,151 Redwood City, CA 94063 SOFTBANK America Inc. 10 Langley Road 92,302 Suite 403 Newton Center, MA 02459 Superior Consultant 4000 Town Center 18,460 Holdings Corporation Suite 1100 Southfield, MI 48075 The Reader's Digest Reader's Digest Road 23,999 Association, Inc. Pleasantville, New York 10570-7000 Dell USA, L.P. One Dell Way 36,921 Round Rock, Texas 78682 [TO COME] 4,614 ------- Total 276,906 =======
26 ARTICLES OF AMENDMENT TO AMENDED AND RESTATED ARTICLES OF INCORPORATION OF WEBMD, INC. In accordance with Section 14-2-1006 of the Georgia Business Corporation Code (the "Code"), WebMD, Inc. (the "Corporation"), a corporation organized and existing under and by virtue of the Code, DOES HEREBY CERTIFY: 1. The name of the Corporation is WebMD, Inc. 2. The following resolution setting forth an amendment to the Corporation's Articles of Incorporation has been duly adopted by the Board of Directors: RESOLVED, THAT ARTICLE II.B OF THE AMENDED AND RESTATED ARTICLES OF INCORPORATION IS HEREBY AMENDED BY ADDING THE FOLLOWING PROVISIONS TO THE END THEREOF: "THE CORPORATION IS AUTHORIZED TO ISSUE 185,000 SHARES OF SERIES E CONVERTIBLE PREFERRED STOCK, WITHOUT PAR VALUE PER SHARE (THE "SERIES E PREFERRED STOCK") AND 1,180,000 SHARES OF SERIES F CONVERTIBLE PREFERRED STOCK, WITHOUT PAR VALUE PER SHARE (THE "SERIES F PREFERRED STOCK"). THE SERIES E PREFERRED STOCK AND THE SERIES F PREFERRED STOCK SHALL HAVE THE PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS SET FORTH ON EXHIBIT G TO THIS RESOLUTION." 3. The "Exhibit G" referenced in the foregoing resolution is included in these Articles of Amendment and is the same "Exhibit A" as is attached hereto. 4. The foregoing resolution containing the amendment was duly adopted on April 9, 1999, by the Corporation's Board of Directors in accordance with the provisions of Section 14-2-1002 of the Code. IN WITNESS WHEREOF, the Corporation has caused this Amendment to be signed by the undersigned duly authorized officer, this 12th day of April, 1999. WEBMD, INC. By: /s/ W. Michael Heekin -------------------------------- Name (print): W. Michael Heekin ---------------------- Title: Executive Vice President ----------------------------- 27 EXHIBIT A DESIGNATIONS OF PREFERENCES, LIMITATIONS, AND RELATIVE RIGHTS OF SERIES E PREFERRED STOCK OF WEBMD, INC. For the purposes of these Designations, the following terms shall have the meanings specified: "Any Common Stock" shall mean the Corporation's common stock, with or without series designation. "Articles of Incorporation" shall mean the Amended and Restated Articles of Incorporation of the Corporation, as amended from time to time. "Board of Directors" shall mean the board of directors of the Corporation. "Bylaws" shall mean the bylaws of the Corporation, as amended. "Common Equity" shall mean Any Common Stock and any other securities entitled generally to participate in the earnings or assets of the Corporation. "Common Stock" shall mean the voting common stock, without designation as to series and without par value per share, of the Corporation. "Common Stock Deemed Outstanding" shall mean the total number of outstanding shares of Any Common Stock plus the total number of shares of Any Common Stock of the Corporation into which all Common Stock Equivalents are exercisable or convertible, in each case other than shares held in the treasury of the Corporation. "Common Stock Equivalents" shall mean any securities or rights convertible or exercisable into or otherwise entitling the holder thereof, directly or indirectly, to receive additional shares of Any Common Stock. "Conversion Price" shall have the meaning provided in Subsection (d)(1) hereof. "Conversion Shares" shall mean the shares of Common Stock into which each share of Series E Preferred Stock is convertible pursuant to Section (d) of these Designations. "Corporation" shall mean WebMD, Inc., a Georgia corporation. "Designations" shall mean the terms, preferences, limitations and relative rights of the Series E Preferred Stock established hereby and set forth hereinafter. 28 "Initial Public Offering" shall have the meaning provided in the Articles of Incorporation. "Invested Amount" per share of Series E Preferred Stock shall mean $541.70 per share (as adjusted pursuant to Section (d)(5) hereof after the Original Issue Date). "Liquidation" shall have the meaning provided in Section (b) hereof. "Series E Preferred Stock" shall mean the 185,000 shares of Series E Preferred Stock, without par value per share, hereby designated. "Original Issue Date" shall mean, with respect to each share of Series E Preferred Stock, the date on which such share of Series E Preferred Stock is first issued by the Corporation. "Securities Act" shall mean the federal Securities Act of 1933, as amended. The Designations granted to and imposed upon the Series E Preferred Stock are as follows: (a) Dividend Rights. The holders of Series E Preferred Stock shall not be entitled to receive dividends; provided, however, that no dividend shall be paid on or declared and set apart for any share of Common Equity, other than the Series A Preferred Stock, for any period unless at the same time an equal dividend for the same dividend period shall be paid on or declared and set apart for each share of Series E Preferred Stock based on the number of Conversion Shares into which each share is then convertible. No dividends shall be paid with respect to the Series E Preferred Stock unless and until dividends have been declared and paid on the Corporation's Series A Preferred Stock in accordance with the Series A Preferred Stock Designations of Preferences, Limitations and Relative Rights. Dividends on shares of capital stock of the Corporation shall be payable only out of funds legally available therefor. (b) Liquidation Rights. In the event of the liquidation, dissolution or winding up for any reason, including, without limitation, bankruptcy, of the Corporation or any of the Corporation's subsidiaries, the assets of which constitute all or substantially all the assets of the business of the Corporation and its subsidiaries taken as a whole or such events specified in the next sentence (each such event referred to as a "Liquidation"), the holders of the outstanding shares of Series E Preferred Stock shall, at their election, be entitled to receive in exchange for and in redemption of each share of their Series E Preferred Stock, and on a parity with the holders of any capital stock ranking pari passu to (including the Series B, C and D Preferred Stock), and prior to any capital stock ranking junior to, the Series E Preferred Stock by reason of their ownership thereof, from any funds or assets legally available for distribution to shareholders that portion of such funds, proceeds or assets in an amount equal to a fraction, (1) the numerator of which is the number of Conversion Shares to which the holder of such share of Series E Preferred Stock would be entitled by virtue of 29 converting such share; and (2) the denominator of which is the Common Stock Deemed Outstanding immediately prior to such Liquidation; provided, however, that, notwithstanding the foregoing, the amount payable to such holder of a share of Series E Preferred Stock in the event of a Liquidation of the Corporation, as provided above, shall not be less than, and shall be increased if necessary (with sums payable to holders of shares of any other capital stock to be reduced ratably per share as necessary) to equal, the Invested Amount plus declared but unpaid dividends payable with respect to such Series E Preferred Stock; provided further, however, that no amount shall be paid with respect to the Series B, C, D or E Preferred Stock until the holders of the Corporation's Series A Preferred Stock have been paid in full all amounts owed upon a Liquidation to the holders of Series A Preferred Stock in accordance with the Series A Preferred Stock Designation of Preferences, Limitations and Relative Rights. A Liquidation shall also be deemed to have occurred upon (i) the acquisition of the Corporation by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation) that results in the Corporation's shareholders immediately prior to such transaction not holding (by virtue of such shares or securities issued solely with respect thereto) at least 50% of the voting power of the surviving or continuing entity, or (ii) a sale, conveyance or disposition of all or substantially all of the assets of the Corporation unless the Corporation's shareholders immediately prior to such transaction will, as a result of such sale, conveyance or disposition hold (by virtue of securities issued as consideration for such sale, conveyance or disposition) at least 50% of the voting power of the purchasing entity, or (iii) the effectuation by the Corporation or its stockholders of a transaction or series of related transactions that results in the Corporation's shareholders immediately prior to such transaction not holding (by virtue of such shares or securities issued solely with respect thereto) at least 50% of the voting power of the Corporation. To the extent necessary, the Corporation shall cause such actions to be taken by any of its subsidiaries so as to enable the proceeds of a Liquidation to be distributed to the holders of shares of Series E Preferred Stock in accordance with this Section (b). All the preferential amounts to be paid to the holders of Series E Preferred Stock under this Section (b) shall be paid or set apart for payment before the payment or setting apart for payment of any amount for, or the distribution of any assets of the Corporation to, the holders of shares of Any Common Stock or any class or series of stock of the Corporation ranking junior to Series E Preferred Stock in connection with a Liquidation as to which this Section (b) applies. If the assets or surplus funds to be distributed to the holders of Series E Preferred Stock are insufficient to permit the payment to such holders of the full amounts payable to such holders, the assets and surplus funds legally available for distribution shall be distributed ratably among the holders of Series E Preferred Stock in proportion to the full amount each such holder is otherwise entitled to receive. (c) Voting Rights. Except as provided by the Georgia Business Corporation Code or as otherwise expressly provided herein, the Series E Preferred Stock shall be non-voting; provided, however, that, with respect to special class voting arrangements, each holder of a 30 share of Series E Preferred Stock shall be entitled to the number of votes equal to the number of Conversion Shares into which such share of Series E Preferred Stock would be convertible under the circumstances described in Section (d) hereof on the record date for the vote or consent of shareholders. (d) Conversion. The holders of Series E Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (1) Conversion Rate. (A) For purposes of this Section (d), the shares of Series E Preferred Stock shall be convertible, at the times and under the conditions described in this Section (d) hereafter, at the rate (the "Conversion Rate") of one share of Series E Preferred Stock to the number of shares of Common Stock that equals the quotient obtained by dividing the Invested Amount by the Conversion Price (defined hereinafter). Thus, the number of shares of Common Stock to which a holder of Series E Preferred Stock shall be entitled upon any conversion provided for in this Section (d) shall be the product obtained by multiplying the Conversion Rate by the number of shares of Series E Preferred Stock being converted. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of the surrender of the shares of Series E Preferred Stock to be converted in accordance with the procedures described in Subsection (d)(4) below. The "Conversion Price" shall be equal to $54.17, except as otherwise adjusted as provided hereafter in this Section (d). The initial Conversion Rate shall be one share of Series E Preferred Stock for 10 shares of Common Stock. (B) No fractional shares of Common Stock shall be issued upon conversion of Series E Preferred Stock, and to the extent that the aggregate of all shares of Series E Preferred Stock surrendered at any one time by a single holder thereof would result in the issuance of a fractional share of Common Stock, such fractional share shall be redeemed in cash at the then effective Conversion Price per share, payable as promptly as possible when funds are legally available therefor. (2) Optional. Subject to Subsection (d)(3) below, each share of Series E Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the Effective Date (as defined in Subsection (d)(9) below) in whole or in part, at the office of the Corporation or any transfer agent for the Series E Preferred Stock, into Common Stock at the then effective Conversion Rate. (3) Automatic. (A) Should the holders of at least a majority of the then outstanding shares of Series E Preferred Stock so elect at any time after the Effective Date by delivery of written notice or notices to the Corporation, each and every 31 outstanding share of Series E Preferred Stock held by all holders of Series E Preferred Stock (whether or not so electing) shall automatically be converted into Common Stock at the then effective Conversion Rate. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of receipt of the last written notice described above necessary to effect such request by a majority of holders. Such conversion shall be automatic, without need for any further action by the holders of shares of Series E Preferred Stock and regardless of whether the certificates representing such shares are surrendered to the Corporation or its transfer agent; provided, however, that the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless certificates evidencing such shares of Series E Preferred Stock so converted are surrendered, or a notice that such certificates have been lost, stolen or destroyed shall have been given, to the Corporation in accordance with the procedures described in Subsection (d)(4) below. Upon the conversion of Series E Preferred Stock pursuant to this Subsection (d)(3)(A), the Corporation shall promptly send written notice thereof, by registered or certified mail, return receipt requested and postage prepaid, by hand delivery or by overnight delivery, to each holder of record of Series E Preferred Stock at his, her or its address then shown on the records of the Corporation, which notice shall state that certificates evidencing shares of Series E Preferred Stock must be surrendered at the office of the Corporation (or of its transfer agent for the Common Stock, if applicable) in the manner described in Subsection (d)(4) below. (B) The Corporation shall notify each holder of Series E Preferred Stock at least ninety (90) days prior to the anticipated effective date of a registration statement filed by the Corporation under the Securities Act covering an Initial Public Offering; provided that, in the event the Corporation contemplates that such registration statement will become effective at any time during the ninety (90)-day period following the Original Issue Date, the Corporation shall provide such notice to each holder of Series E Preferred Stock at least ten (10) days prior to such effective date. Upon the closing of, but effective immediately prior to, the first sale in an Initial Public Offering, each and every share of outstanding Series E Preferred Stock held by all holders of Series E Preferred Stock shall automatically be converted into Common Stock at the then effective Conversion Rate. Such conversion shall be automatic, without need for any further action by the holders of shares of Series E Preferred Stock and regardless of whether the certificates representing such shares are surrendered to the Corporation or its transfer agent; provided, however, that the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless certificates evidencing such shares of Series E Preferred Stock so converted are surrendered to the Corporation or the holder of record of such shares notifies the Corporation that such certificates have been lost, stolen or destroyed and executes an agreement to indemnify the Corporation from any loss incurred by it in connection with 32 such certificates, in each case in accordance with the procedures described in Subsection (d)(4) below. Upon the conversion of Series E Preferred Stock pursuant to this Subsection (d)(3)(B), the Corporation shall promptly send written notice thereof, by registered or certified mail, return receipt requested and postage prepaid, by hand delivery or by overnight delivery, to each holder of record of Series E Preferred Stock at his, her or its address then shown on the records of the Corporation, which notice shall state that certificates evidencing shares of Series E Preferred Stock must be surrendered at the office of the Corporation (or of its transfer agent for the Common Stock, if applicable) in the manner described in Subsection (d)(4) below. (4) Mechanics of Conversion. Before any holder of Series E Preferred Stock shall be entitled to receive certificates representing the shares of Common Stock into which shares of Series E Preferred Stock are converted in accordance with Subsections (d)(2) or (d)(3) above, such holder shall surrender the certificate or certificates for such shares of Series E Preferred Stock, duly endorsed, at the office of the Corporation or of any transfer agent for the Series E Preferred Stock, and shall give written notice to the Corporation at such office of the name or names in which such holder wishes the certificate or certificates for shares of Common Stock to be issued, if different from the name shown on the books and records of the Corporation (the "Conversion Notice"); provided, that in lieu of delivery of the certificates representing shares of Series E Preferred Stock, a holder may notify the Corporation that such certificates have been lost, stolen or destroyed and execute an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates. The Conversion Notice shall also contain such representations as may reasonably be required by the Corporation to the effect that the shares to be received upon conversion are not being acquired and will not be transferred in any way that might violate the then applicable securities laws. The Corporation shall, as soon as practicable thereafter and in no event later than thirty (30) days after the delivery of said certificates, issue and deliver at such office to such holder of Series E Preferred Stock, or to the nominee or nominees of such holder as provided in the Conversion Notice, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. The person or persons entitled to receive the shares of Common Stock issuable upon a conversion pursuant to Subsections (d)(2) or (d)(3) above shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of the effective date of conversion specified in such section. All certificates issued upon the exercise or occurrence of the conversion shall contain a legend governing restrictions upon such shares imposed by law or agreement of the holder or his, her or its predecessors. (5) Adjustment for Subdivisions or Combinations of Common Stock. In the event the Corporation at any time, or from time to time, after the Original Issue Date effects a subdivision or combination of Any Common Stock then outstanding into a greater or lesser number of shares without a proportionate and corresponding subdivision or combination of the outstanding Series E Preferred Stock, then and in each such event the Conversion Price shall be decreased or increased proportionately. 33 (6) Adjustments for Dividends, Distributions and Other Common Stock Equivalents. In the event that the Corporation at any time, or from time to time, after the Original Issue Date shall make or issue, or fix a record date to determine the holders of Any Common Stock or other Common Equity entitled to receive, a dividend or other distribution payable in additional shares of Any Common Stock or Common Stock Equivalents without payment of any consideration by such holder of such Common Stock Equivalents or the additional shares of Any Common Stock, and without a proportionate and corresponding dividend or other distribution to holders of Series E Preferred Stock, then and in each such event the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for subsequent adjustment of such number) of the type of Any Common Stock issuable in payment of such dividend or distribution or upon conversion or exercise of such Common Stock Equivalents shall be deemed, for purposes of this Subsection (d)(6), to be issued and outstanding as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date. In each such event the Conversion Price shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Conversion Price by a fraction, (A) the numerator of which shall be the Common Stock Deemed Outstanding immediately prior to the time of such issuance or the close of business on such record date; and (B) the denominator of which shall be the total number of shares of Common Stock Deemed Outstanding (not including any shares described in clause (ii) immediately below) immediately prior to the time of such issuance or the close of business on such record date, plus (ii) the number of shares of Any Common Stock issuable in payment of such dividend or distribution or upon conversion or exercise of such Common Stock Equivalents; provided, however, that (i) if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Conversion Price shall be adjusted pursuant to this Subsection (d)(6) as of the time of actual payment of such dividend or distribution; or (ii) if such Common Stock Equivalents provide, with the passage of time or otherwise, for any decrease in the number of shares of Any Common Stock issuable upon conversion or exercise thereof (or upon the occurrence of a record date with respect thereto), the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such decrease becoming effective, be recomputed to reflect such decrease insofar as it affects the rights of conversion or exercise of the Common Stock Equivalents then outstanding; or (iii) upon the expiration of any rights of conversion or exercise under any unexercised Common Stock Equivalents, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with 34 respect thereto), and any subsequent adjustments based thereon, shall, upon such expiration, be recomputed as if the only additional shares of Any Common Stock issued were the shares of such stock, if any, actually issued upon the conversion or exercise of such Common Stock Equivalents; or (iv) in the event of issuance of Common Stock Equivalents that expire by their terms not more than sixty (60) days after the date of issuance thereof, no adjustments of the Conversion Price shall be made until the expiration or exercise of all such Common Stock Equivalents, whereupon the adjustment otherwise required by this Subsection (d)(6) shall be made in the manner provided herein. (7) Adjustment of Conversion Rate for Diluting Issues. Except as otherwise provided in this Subsection (d)(7), in the event, and each time as, the Corporation sells or issues shares of Any Common Stock or Common Stock Equivalents following the Original Issue Date, at a per share consideration (as defined below) less than the Conversion Price then in effect, then the Conversion Price shall be adjusted as provided in this Subsection (d)(7). For purposes of the foregoing, the per share consideration with respect to the sale or issuance of a share of Any Common Stock shall be the price per share received by the Corporation, prior to the payment of any expenses, commissions, discounts and other applicable costs. With respect to the sale or issuance of Common Stock Equivalents that are convertible or exercisable into or exchangeable for Any Common Stock without further consideration, the per share consideration shall be determined by dividing the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for subsequent adjustment of such number) of Any Common Stock issuable, directly or indirectly with respect to such Common Stock Equivalents into the aggregate consideration received by the Corporation upon the sale or issuance of such Common Stock Equivalents. With respect to the issuance of all other Common Stock Equivalents, the per share consideration shall be determined by dividing the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for subsequent adjustment of such number) of Any Common Stock issuable with respect to such Common Stock Equivalents into the aggregate consideration received by the Corporation upon the sale or issuance of such Common Stock Equivalents plus the total consideration receivable by the Corporation upon conversion or exercise of such Common Stock Equivalents. The issuance of shares of Any Common Stock or Common Stock Equivalents for no consideration shall be deemed to be an issuance of shares of Any Common Stock at a per share consideration of $.01. In connection with the sale or issuance of Common Stock and/or Common Stock Equivalents for non-cash consideration, the amount of consideration shall be determined by the Board of Directors in good faith. As used herein, "Additional Shares of Common Stock" shall mean, with respect to such adjustments to be made to the Conversion Price, either shares of Any Common Stock issued subsequent to the Original Issue Date, or, with respect to the issuance of Common Stock Equivalents, the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for subsequent adjustment of such number) of Any Common Stock issuable in exchange for, upon conversion of, or upon exercise of such Common Stock Equivalents. 35 (A) Upon the issuance or sale by the Corporation of Additional Shares of Common Stock to the public pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "IPO Registration Statement"), either at a price per share to the public (the "IPO Price") less than 111% of the Conversion Price then in effect or where the midpoint of the price range set forth on the cover page of the prospectus forming a part of the IPO Registration Statement when such prospectus is first filed with the Securities and Exchange Commission (the "Filing Midpoint") is less than the Conversion Price then in effect, the Conversion Price shall be reduced to the lower of (i) 90% of the Conversion Price then in effect or (ii) the Conversion Price then in effect less 50% of the difference between the Conversion Price then in effect and the lesser of (A) 90% of the IPO Price or (B) the Filing Midpoint. (B) Upon each issuance or sale by the Corporation of Any Common Stock for a per share consideration less than the Conversion Price as in effect on the date of such issuance, the Conversion Price as in effect on such date shall be adjusted by multiplying it by a fraction: (i) the numerator of which shall be the total number of shares of Common Stock Deemed Outstanding immediately prior to the issuance or sale of such Additional Shares of Common Stock plus the number of shares of Any Common Stock that the aggregate net consideration received by the Corporation for the total number of such Additional Shares of Common Stock so issued or sold would purchase at the Conversion Price then in effect; and (ii) the denominator of which shall be the total number of shares of Common Stock Deemed Outstanding immediately prior to the issuance or sale of such Additional Shares of Common plus the number of shares of Any Common Stock so issued. (C) Upon each issuance or sale by the Corporation of Common Stock Equivalents that are exchangeable without further consideration into Common Stock, for a per share consideration less than the Conversion Price as in effect on the date of such issuance, the Conversion Price shall be adjusted as provided in paragraph (B) of this Subsection (d)(7) on the basis that the Additional Shares of Common Stock are to be treated as having been issued on the date of issuance or sale of the Common Stock Equivalents, and the aggregate consideration received by the Corporation for such Common Stock Equivalents shall be deemed to have been received for such Additional Shares of Common Stock. (D) Upon each issuance or sale by the Corporation of Common Stock Equivalents other than those described in paragraph (C) of this Subsection (d)(7) for a per share consideration less than the Conversion Price as in effect on the date of such issuance, the Conversion Price shall be adjusted as provided in 36 paragraph (B) of this Subsection (d)(7) on the basis that the Additional Shares of Common Stock are to be treated as having been issued on the date of issuance or sale of such Common Stock Equivalents, and the aggregate consideration received and receivable by the Corporation upon the sale and issuance and on conversion or exercise of such Common Stock Equivalents shall be deemed to have been received for such Additional Shares of Common Stock. (E) Once any Additional Shares of Common Stock have been treated as having been issued or sold for the purpose of this Subsection (d)(7), they shall be treated as issued and outstanding shares of Any Common Stock whenever any subsequent calculations must be made pursuant hereto; provided that on the expiration of any options, warrants or rights to purchase Additional Shares of Common Stock, the termination of any rights to convert or exchange for Additional Shares of Common Stock, or the expiration of any options or rights related to such convertible or exchangeable securities on account of which an adjustment in the Conversion Price has been made previously pursuant to this Subsection (d)(7), such Conversion Price shall forthwith be readjusted to the Conversion Price as would have obtained had the adjustment made upon the issuance of such options, warrants, rights, securities or options or rights related to such securities been made upon the basis of the issuance of only the number of shares of Any Common Stock actually issued upon the exercise of such options, warrants or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. (F) Upon each issuance or sale by the Corporation of Additional Shares of Common Stock in connection with any merger, consolidation or other reorganization in which the Corporation is the surviving corporation which results in an adjustment pursuant to this Subsection (d)(7), the amount of consideration received therefrom shall be deemed to be the fair market value, as determined in good faith by the Board of Directors, of such portion of the assets and business of the non-surviving person or persons as the Board of Directors determines in good faith to be attributable to such Additional Shares of Common Stock and evidence of such determination shall be filed with the minutes of the Corporation. (G) The foregoing notwithstanding, no adjustment of the Conversion Price shall be made pursuant to this Subsection (d)(7) as a result of the issuance of: (i) any shares of Common Stock upon the conversion of shares of Series E Preferred Stock; (ii) except as specifically contemplated by Subsection (d)(7)(A), securities of the Corporation offered to the public pursuant to an effective registration statement under the Securities Act; 37 (iii) the Corporation's securities pursuant to the acquisition by the Corporation of any product, technology, know-how or another corporation by merger, purchase of all or substantially all the securities or assets, or any other reorganization whereby the Corporation owns over fifty percent (50%) of the voting power of such corporation; (iv) any shares of Common Stock or Common Stock Equivalents pursuant to which the Conversion Price is adjusted under Subsection (5), (6), (8) or (9) of this Section (d) (including, without limitation, any shares of Common Stock or Common Stock Equivalents pursuant to which a proportionate and corresponding dividend is made to the holders of the Series E Preferred Stock as contemplated by Subsections (d)(6) or (8)); (v) any shares of Any Common Stock issued at any time following the Original Issue Date pursuant to options, warrants or rights granted either before or after the Original Issue Date to purchase shares of such series of Any Common Stock, less the number of any such options, warrants or rights that are repurchased by the Corporation, are canceled or expire, in each case in favor of employees, directors, officers or consultants of the Corporation or any subsidiary thereof pursuant to a stock option plan or agreement approved by the Board of Directors; provided, however, that such stock options thereunder, if granted after the Original Issue Date, are granted at a conversion or exercise price that the Board of Directors determines in good faith is not less than the fair market value of the securities into which they are exercisable as of the date of grant; or (vi) any shares of Any Common Stock issued pursuant to the exchange, conversion or exercise of any Common Stock Equivalents that have previously been incorporated into computations hereunder on the date when such Common Stock Equivalents were issued. (8) In-Kind Distributions. In the event the Corporation shall declare a distribution payable generally to holders of its outstanding shares of Common Equity in any securities of other persons, evidences of indebtedness issued by the Corporation or other persons or assets (excluding cash dividends) then, in each such case for the purpose of this subsection (d)(8) the holders of the Series E Preferred Stock shall be entitled to a proportionate of any such distribution as though they were the holders of the Conversion Shares as of the record date fixed for determination of the holders of Common Equity entitled to such distribution. (9) Adjustment of Conversion Shares--Delay Shares. In the event the Corporation has not issued or sold any Additional Shares of Common Stock to the public pursuant to an effective registration statement under the Securities Act of 1933, as amended, on or prior to the Effective Date, the Conversion Price then in effect shall 38 be adjusted to 71.72% of the Conversion Price then in effect. As used herein, the "Effective Date" shall mean January 15, 2000 plus the number of days during the period from and including (i) the date that Corporation receives notice from the Securities and Exchange Commission that the Corporation should discontinue the disposition of the Common Stock contemplated by the Registration Statement of the Corporation on Form S-1 (No. 333-71359), as amended, as a result of the issuance of the Series E Preferred Stock or the Series F Preferred Stock or the transactions contemplated by the Master Agreement dated as of April 10, 1999 (the "Master Agreement") between the Corporation and Microsoft Corporation to and including (ii) the date the Corporation can resume such disposition pursuant to such registration statement or another registration statement covering the sale of any Additional Common Stock to the public. Any adjustment in the Conversion Rate pursuant to this subsection (d)(9) shall not result in an adjustment to the Conversion Rate pursuant to subsection (d)(7) hereof or subsection (d)(7) of the Designations of Preferences, Limitations and Relative Rights of Series F Preferred Stock of WebMD, Inc., but the Conversion Rate as adjusted pursuant to this subsection (d)(9) shall become the Conversion Rate for purposes of any further adjustments under subsection (d)(7) hereof. (10) De Minimis Adjustments. No adjustment to the Conversion Price shall be made if such adjustment would result in a change in the Conversion Price of less than $.01. Any adjustment of less than $.01 that is not made shall be carried forward and shall be made at the time of and together with any subsequent adjustment that, on a cumulative basis, amounts to an adjustment of $.01 or more in the Conversion Price. (11) No Impairment. Except as provided in Section (e) hereof, the Corporation shall not, by amendment of the Articles of Incorporation or the Bylaws or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but shall at all times in good faith assist in the carrying out of all the provisions of this Section (d) and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Series E Preferred Stock against impairment. (12) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Section (d), the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and cause independent public accountants selected by the Corporation to verify such computation and prepare and furnish to each holder of Series E Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Series E Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Price and the Conversion Rate at that time in effect, and (iii) the number of shares of Common Stock and the amount, if 39 any, of other property that at that time would be received upon the conversion of Series E Preferred Stock. (13) Notices of Record Date. In the event of any taking by the Corporation of a record of the holders of any series or class of securities other than Series E Preferred Stock for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, any Common Stock Equivalents or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Corporation shall mail to each holder of Series E Preferred Stock, at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or rights, and the amount and character of such dividend, distribution or rights. (14) Reservation of Stock Issuable Upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the shares of the Series E Preferred Stock such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series E Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall be insufficient to effect the conversion of all then outstanding shares of the Series E Preferred Stock, the Corporation shall take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. (e) Protective Provisions. In addition to any other rights provided by law, so long as any shares of Series E Preferred Stock are then outstanding, except where the vote or written consent of the holders of a greater number of shares is required by law or by another provision of the Articles of Incorporation, without first obtaining the affirmative vote or written consent of the holders of a majority of the total number of shares of Series E Preferred Stock outstanding, voting together as a single class, the Corporation shall not, and shall cause its subsidiaries not to: (1) amend or repeal any provision of, or add any provision to, the Articles of Incorporation or the Bylaws, or file any certificate of designations, preferences, limitations and relative rights of any series or class of preferred stock, if such action would alter or change the preferences, rights, privileges or powers of, or restrictions provided for the benefit of holders of Series E Preferred Stock; (2) create or authorize the creation of any additional series or class of shares of stock, or increase the authorized amount of any series or class of capital stock, unless the same ranks junior or pari passu to the Series E Preferred Stock as to dividends and the distribution of assets upon a Liquidation of the Corporation; regardless of whether any such creation, authorization or increase shall be by means of amendment to the Articles of Incorporation, or by merger, consolidation or otherwise; 40 (3) increase or decrease the authorized number of shares of the Series E Preferred Stock; (4) take any action that would alter or change the preferences, rights, privileges or powers of, or restrictions provided for the benefit of holders of Series E Preferred Stock in one or more of the ways set forth in Section 14-2-1004(a) of the Code; (5) purchase, redeem or otherwise acquire for value any shares of any class of its capital stock or cause or permit any employee stock ownership plan, including any Employee Stock Ownership Plan as defined in ss. 4975(e)(7) of the Internal Revenue Code of 1986, as amended, to purchase shares of any class of its capital stock, except pursuant to a stock option or employee stock ownership plans or restricted stock agreements, or in exercise of any right of first refusal of the Corporation upon a proposed transfer that is, in each case, in existence on the Original Issue Date; provided, however that such restriction shall not apply in the event that either (i) the holders of Series E Preferred Stock are permitted to participate in such purchase, redemption or acquisition, each such holder being entitled to sell some or all of his, her or its pro rata portion of such capital stock based on the number of Conversion Shares held by such holder in proportion to the sum of the number of Conversion Shares and the number of shares of Any Common Stock then issued or issuable on a fully diluted basis, or (ii) such purchase, redemption or acquisition has received the prior affirmative vote or written consent of the holders of a majority of the total number of shares of Series E Preferred Stock outstanding, voting together as a single class; (6) enter into any transaction or series of related transactions which result in (i) the acquisition of the Corporation by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation) that results in the Corporation's shareholders immediately prior to such transaction not holding (by virtue of such shares or securities issued solely with respect thereto) at least 60% of the voting power of the surviving or continuing entity, or (ii) a sale, conveyance or disposition of all or substantially all of the assets of the Corporation unless the Corporation's shareholders immediately prior to such transaction will, as a result of such sale, conveyance or disposition hold (by virtue of securities issued as consideration for such sale, conveyance or disposition) at least 60% of the voting power of the purchasing entity, or (iii) the effectuation by the Corporation or its stockholders of a transaction or series of related transactions that results in the Corporation's shareholders immediately prior to such transaction not holding (by virtue of such shares or securities issued solely with respect thereto) at least 60% of the voting power of the Corporation; (7) create and issue any new class or series or issue additional shares (other than to shareholders of the Corporation (immediately prior to such issuance)) of any class or series of capital stock ranking pari passu to or junior to the Series E Preferred Stock or Any Common Stock in an amount which would result in the holders thereof 41 (other than to shareholders of the Corporation immediately prior to such issuance) having in the aggregate a greater number of shares on a Common Stock Deemed Outstanding basis than the total Common Stock Deemed Outstanding and held by Microsoft Corporation and its Authorized Transferees, as defined in the Master Agreement. (8) amend the provisions of this Section (e); provided, however, that the Corporation may amend the Corporation's Series A Preferred Stock to provide for a Liquidation as defined herein. (f) Notices. Any notice required by the provisions hereof to be given to the holders of shares of Series E Preferred Stock shall be deemed given on the third (3rd) business day following (and not including) the date on which such notice is deposited in the United States Mail, first-class, postage prepaid, and addressed to each holder of record at his, her or its address appearing on the books of the Corporation. Notice by any other means shall not be deemed effective until actually received. 42 DESIGNATIONS OF PREFERENCES, LIMITATIONS, AND RELATIVE RIGHTS OF SERIES F PREFERRED STOCK OF WEBMD, INC. The designations of preferences, limitations, and relative rights granted to and imposed upon the Series F Preferred Stock are identical to the designations of preferences, limitations, and relative rights of Series E Preferred Stock of WebMD, Inc., (the "Series E Designations"), except with respect to certain definitions, Dividend Rights, Liquidation Rights and Adjustment of Conversion Rate-Delay Shares. Whenever the Series E Designations refers to "Series E Preferred Stock," this Designation shall refer to the "Series F Preferred Stock," and the Series E Preferred Stock shall mean, for purposes of this Designation, the 1,180,000 shares of Series F Preferred Stock, without par value per share hereby designated. The Dividend Rights, Liquidation Rights and Adjustment of Conversion Rate-Delay Shares for the Series F Preferred Stock are as follows: (a) Dividend Rights. The holders of Series F Preferred Stock shall not be entitled to receive dividends; provided, however, that no dividend shall be paid on or declared and set apart for any share of Any Common Stock for any period unless at the same time an equal dividend for the same dividend period shall be paid on or declared and set apart for each share of Series E Preferred Stock based on the number of Conversion Shares into which each share is then convertible. Dividends on shares of capital stock of the Corporation shall be payable only out of funds legally available therefor. (b) Liquidation Rights. In the event of the liquidation, dissolution or winding up for any reason, including, without limitation, bankruptcy, of the Corporation or any of the Corporation's subsidiaries, the assets of which constitute all or substantially all the assets of the business of the Corporation and its subsidiaries taken as a whole or such events specified in the next sentence (each such event referred to as a "Liquidation"), the holders of the outstanding shares of Series F Preferred Stock shall be entitled to receive in exchange for and in redemption of each share of their Series F Preferred Stock from any funds or assets legally available for distribution to shareholders that portion of such funds, proceeds or assets in an amount equal to a fraction, (1) the numerator of which is the number of Conversion Shares to which the holder of such share of Series F Preferred Stock would be entitled by virtue of converting such share; and (2) the denominator of which is the Common Stock Deemed Outstanding immediately prior to such Liquidation; provided, however, that no amount shall be paid with respect to the Series F Preferred Stock until the holders of the Corporation's Series A, B, C, D and E Preferred Stock have been paid in full all amounts owed upon a Liquidation to the holders of Series A, B, C, D and E Preferred Stock in accordance with their respective Designations of Preferences, Limitations and Relative Rights. A Liquidation shall also be deemed to have occurred upon (i) the 1 43 acquisition of the Corporation by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation) that results in the Corporation's shareholders immediately prior to such transaction not holding (by virtue of such shares or securities issued solely with respect thereto) at least 50% of the voting power of the surviving or continuing entity, or (ii) a sale, conveyance or disposition of all or substantially all of the assets of the Corporation unless the Corporation's shareholders immediately prior to such transaction will, as a result of such sale, conveyance or disposition hold (by virtue of securities issued as consideration for such sale, conveyance or disposition) at least 50% of the voting power of the purchasing entity, or (iii) the effectuation by the Corporation or its stockholders of a transaction or series of related transactions that results in the Corporation's shareholders immediately prior to such transaction not holding (by virtue of such shares or securities issued solely with respect thereto) at least 50% of the voting power of the Corporation. (d)(9) Adjustment of Conversion Rate-Delay Shares. In the event the Corporation has not issued or sold any Additional Shares of Common Stock to the public pursuant to an effective registration statement under the Securities Act of 1933, as amended, on or prior to the Effective Date, the Conversion Price then in effect shall be adjusted to 86% of the Conversion Price then in effect. As used herein, the "Effective Date" shall mean January 15, 2000 plus the number of days during the period from and including (i) the date that Corporation receives notice from the Securities and Exchange Commission that the Corporation should discontinue the disposition of the Common Stock contemplated by the Registration Statement of the Corporation on Form S-1 (No. 333-71359), as amended, as a result of the issuance of the Series E Preferred Stock or the Series F Preferred Stock or the transactions contemplated by the Master Agreement dated as of April 10, 1999 (the "Master Agreement") between the Corporation and Microsoft Corporation to and including (ii) the date the Corporation can resume such disposition pursuant to such registration statement or another registration statement covering the sale of any Additional Common Stock to the public. Any adjustment in the Conversion Rate pursuant to this subsection (d)(9) hereof shall not result in an adjustment to the Conversion Rate pursuant to subsection (d)(7) hereof or subsection (d)(7) of the Series E Designations, but the Conversion Rate as adjusted pursuant to this subsection (d)(9) shall become the Conversion Rate for purposes of any further adjustments under subsection (d)(7) hereof. 2 44 ARTICLES OF AMENDMENT TO AMENDED AND RESTATED ARTICLES OF INCORPORATION OF WEBMD, INC. In accordance with Section 14-2-1006 of the Georgia Business Corporation Code (the "Code"), WebMD, Inc. (the "Corporation"), a corporation organized and existing under and by virtue of the Code, DOES HEREBY CERTIFY: 1. The name of the Corporation is WebMD, Inc. 2. The following resolutions setting forth amendments to the Corporation's Articles of Incorporation have been duly adopted by the Board of Directors: RESOLVED, THAT ARTICLE II.B OF THE AMENDED AND RESTATED ARTICLES OF INCORPORATION IS HEREBY AMENDED BY DELETING THE SENTENCE WHICH READS "THE CORPORATION IS AUTHORIZED TO ISSUE 185,000 SHARES OF SERIES E CONVERTIBLE PREFERRED STOCK, WITHOUT PAR VALUE PER SHARE (THE "SERIES E PREFERRED STOCK") AND 1,180,000 SHARES OF SERIES F CONVERTIBLE PREFERRED STOCK, WITHOUT PAR VALUE PER SHARE (THE "SERIES F PREFERRED STOCK")" AND INSERTING THE FOLLOWING SENTENCE IN LIEU THEREOF: "THE CORPORATION IS AUTHORIZED TO ISSUE 792,000 SHARES OF SERIES E CONVERTIBLE PREFERRED STOCK, WITHOUT PAR VALUE PER SHARE (THE "SERIES E PREFERRED STOCK") AND 1,180,000 SHARES OF SERIES F CONVERTIBLE PREFERRED STOCK, WITHOUT PAR VALUE PER SHARE (THE "SERIES F PREFERRED STOCK")." RESOLVED, that the definition of "Series E Preferred Stock" set forth in the Designations of Preferences, Limitations, and Relative Rights of Series E Preferred Stock Of WebMD, Inc. contained in Article II.B of the Amended and Restated Articles of Incorporation is hereby deleted in its entirety and the following is inserted in lieu thereof: ""SERIES E PREFERRED STOCK" SHALL MEAN THE 792,000 SHARES OF SERIES E PREFERRED STOCK, WITHOUT PAR VALUE PER SHARE, HEREBY DESIGNATED." 3. The foregoing resolutions containing the amendments were duly adopted on May 6, 1999, by the Corporation's Board of Directors in accordance with the provisions of Section 14-2-602 of the Code. 45 WEBMD, INC. REGISTRATION RIGHTS AGREEMENT FOR SERIES E AND SERIES F PREFERRED STOCK THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered into as of the 13th day of May, 1999, among WebMD, Inc., a Georgia corporation (the "Company"), and Microsoft Corporation, a Washington corporation (the "Purchaser"). RECITALS: A. The Purchaser has the right to purchase up to 461,510 shares of the Company's Series E Preferred Stock (the "Series E Preferred Stock") pursuant to an Investment Agreement dated as of May 12, 1999 (the "Series E Investment Agreement") between the Company and the Purchaser. B. The Purchaser has purchased a Warrant entitling the holder thereof to purchase 7,614,916 shares of the Company's (i) Common Stock Series D prior to the Initial Public Offering (as defined in the Articles of Incorporation) and (ii) Common Stock without series designation after the Initial Public Offering pursuant to a Warrant Agreement dated as of even date herewith (the "Warrant Agreement") between the Purchaser and the Company. C. The Purchaser has made an offer to all shareholders of the Company to purchase any and all shares of the Company's Series F Preferred Stock (the "Series F Preferred Stock") issued and outstanding as of the consummation of such offer pursuant to an Offer to Purchase dated April 10, 1999 (the "Offer to Purchase.") D. The Company and the Purchaser desire to set forth the registration rights to be granted by the Company to the Purchaser. NOW, THEREFORE, in consideration of the mutual promises, representations, warranties, covenants, and conditions set forth herein, in the Warrant Agreement and in the Series E Investment Agreement, the parties mutually agree as follows: AGREEMENT: 1. Certain Definitions. As used in this Agreement, the following terms shall have the following respective meanings: "Articles of Incorporation" means the Amended and Restated Articles of Incorporation of the Company as filed with the Secretary of State of the State of Georgia, as amended from time to time. 46 "Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "Common Stock" shall mean the voting common stock, without designation as to series and without par value per share, of the Company and any and all shares of capital stock or other equity securities of: (i) the Company which are added to or exchanged or substituted for the Common Stock by reason of the declaration of any stock dividend or stock split, the issuance of any distribution or the reclassification, readjustment, recapitalization or other such modification of the capital structure of the Company; and (ii) any other corporation, now or hereafter organized under the laws of any state or other governmental authority, with which the Company is merged, which results from any consolidation or reorganization to which the Company is a party, or to which is sold all or substantially all of the shares or assets of the Company, if immediately after such merger, consolidation, reorganization or sale, the Company or any Stockholders of the Company own equity securities having in the aggregate more than fifty percent (50%) of the total voting power of such other corporation. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission promulgated thereunder. "Family Member" shall mean (a) with respect to any individual, such individual's spouse, any descendants (whether natural, adopted or in the process of adoption), any trust all of the beneficial interests of which are owned by any of such individuals or by any of such individuals together with any organization described in Code Section 501(c)(3), the estate of any such individual, and any corporation, association, partnership or limited liability company all of the equity interests of which are owned by those above described individuals, trusts or organizations and (b) with respect to any trust, the owners of the beneficial interests of such trust. "Form S-3" means such form under the Securities Act as in effect on the date hereof or any registration form under the Securities Act subsequently adopted by the Commission which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the Commission. "Holder" shall mean the Purchaser or any of such Holder's respective successors and assigns who acquire rights in accordance with this Agreement with respect to the Registrable Securities directly or indirectly from such Holder. "Initial Public Offering" means the offer and sale of shares of Common Stock in a transaction underwritten by an investment banking firm following the completion of which (i) the Common Stock will be listed for trading on any national securities exchange or (ii) there will be at least two market makers who are making a market in the Common Stock through the Nasdaq National Market System. "Initiating Holders" shall mean any Holder or Holders of not less than 50% of the then outstanding Registrable Securities. 2 47 The terms "register", "registered" and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement. "Registrable Securities" means (i) shares of Common Stock into which the then outstanding Shares are convertible pursuant to the Articles of Incorporation and (ii) shares of Common Stock issuable upon exercise of the Warrant, excluding in all cases, however (including exclusion from the calculation of the number of outstanding Registrable Securities), any Registrable Securities sold by a person in a transaction (i) pursuant to a registration statement under Section 2, 3 or 4 hereof or (ii) pursuant to Rule 144 (or any successor provision) of the Securities Act. "Securities Act" shall mean the Securities Act of 1933, as amended, or any similar federal statute promulgated in replacement thereof, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Shares" shall mean the Series E Preferred Stock of the Company purchased or issued pursuant to the Series E Investment Agreement and the Series F Preferred Stock purchased by Purchaser pursuant to the Offer to Purchase. "Warrant" shall mean the warrant to purchase up to 7,614,916 shares of Common Stock of the Company purchased or issued pursuant to the Warrant Agreement. 2. Demand Registration. In case the Company shall receive from Initiating Holders a written request that the Company effect a registration with respect to at least 1,000,000 shares of Common Stock that constitute Registrable Securities (as adjusted for stock splits, stock dividends, recapitalizations and similar events) the Company will: (a) promptly give written notice of the proposed registration to all other Holders so they may have an opportunity to consider joining in such registration, which they may do (subject to the terms and provisions of this Agreement) at their election within ten (10) days after receipt of the notice of the proposed registration by the Company; and (b) as soon as practicable, use its reasonable best efforts to effect such registration (including, without limitation, the execution of an undertaking to file post-effective amendments, appropriate qualification under applicable blue sky or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Act) as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request as are specified in a written request given within ten (10) days after receipt of notice from the Company pursuant to Section 2(a); provided that the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 2: 3 48 (i) In any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; (ii) Prior to the date which is the earlier of (a) one hundred eighty (180) days following the effective date of the registration statement relating to an Initial Public Offering or (b) the release by the underwriters of such offering of the related lock-up agreements; (iii) Within the one hundred twenty (120) day period immediately following the effective date of a registration statement pertaining to a firm commitment underwritten public offering of Common Stock for its own account or for the account of a shareholder (including Purchaser) of the Company who has exercised a demand right to register shares of Common Stock (other than a registration relating solely to a Commission Rule 145 transaction, a registration relating solely to employee benefit plans, or a registration statement on Form S-3 (or any similar short-form registration statement)); (iv) Within the sixty (60) day period immediately following the effective date of a registration statement on Form S-3 (or any similar short-form registration statement) pertaining to a firm commitment underwritten public offering of Common Stock for its own account or for the account of another shareholder of the Company who has exercised a demand right to register shares of Common Stock (other than a registration relating solely to a Commission Rule 145 transaction or a registration relating solely to employee benefit plans); or (v) After the Company has effected three (3) registrations pursuant to this Section 2 and such registrations have been declared or ordered effective and have remained effective for a period of at least ninety (90) consecutive days. Subject to the foregoing clauses (i) through (v), the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable after receipt of the request of the Initiating Holders. The Initiating Holders may, at any time prior to the effective date of the registration statement relating to such registration, revoke such request, without liability (except as set forth in Section 6 hereof) to the Initiating Holders or any other Holders of Registrable Securities requested to be registered pursuant to Section 2(a) hereof, by providing a written notice to the Company revoking such request. Notwithstanding the above, the Company shall not be obligated to effect, or to take any action to effect, any registration pursuant to this Section 2 during the period starting with the date ninety (90) days prior to the Company's good faith estimate of the date of filing of (or in the case of any registration on Form S-3, forty-five (45) days prior), and ending on a date one hundred twenty(120) days after the effective date of (or in the case of any registration on Form S-3, ninety (90) days after), a Company-initiated registration statement in connection with a bona fide firm commitment underwritten registration for securities to be offered for the Company's own account (the "Intended Registration"); provided that the Company is actively 4 49 employing in good faith all reasonable efforts to cause the Intended Registration to become effective and provided further that the Company gives notice to all Holders upon commencement of such period. The Holders shall be entitled to exercise their rights pursuant to Section 4 hereof with respect to an Intended Registration. An Intended Registration shall not be deemed to be a demand registration of the Holders pursuant to this Section 2. (c) Underwriting. If the Holders propose an underwritten offering, the sale of Registrable Securities pursuant to this Section 2 must be made by means of a firm commitment underwriting through underwriters who are reasonably acceptable to the Company and the holders of a majority of the Registrable Securities that are proposed to be distributed through such underwriting. The right of any Holder to registration pursuant to this Section 2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent requested by such Holder (unless mutually otherwise agreed by a majority in interest of the Holders and such Holder) to the extent provided herein. The Company and all Holders proposing to distribute Registrable Securities through such underwriting shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting. Notwithstanding any other provision of this Section 2(c), if the underwriter determines that in its good faith view marketing factors require a limitation of the number of shares to be underwritten and so advises the Initiating Holders in writing, then the Initiating Holders shall so advise the Company and all Holders (except those Holders who have indicated to the Company their decision not to distribute any of their Registrable Securities through such underwriting) and the number of Registrable Securities that may be included in the registration and underwriting shall be allocated first to the Holders on a pro rata basis according to the number of Registrable Securities requested to be included by the Holders; second to the Company; and third to other shareholders of the Company who have requested to sell in the registration. No Registrable Securities excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. If at least eighty percent (80%) of the Registrable Securities requested to be registered by the Initiating Holders are not included in such registration, then the Initiating Holders may request that the Company effect an additional registration under the Securities Act of all or part of the Initiating Holders' Registrable Securities in accordance with the provisions of this Section 2, and the Company shall effect such additional registration. If any Holder disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the underwriter and the Initiating Holders. The Registrable Securities and/or other securities so withdrawn from such underwriting shall also be withdrawn from such registration; provided, however, that, if by the withdrawal of such Registrable Securities a greater number of Registrable Securities held by other Holders may be included in such registration (up to the maximum of any limitation imposed by the underwriters), then the Company shall offer to all Holders who have included Registrable Securities in the registration the right to include additional Registrable Securities in the same proportion used above in determining the underwriter limitation. 5 50 If the underwriter has not limited the number of Registrable Securities to be underwritten, the Company may include securities for its own account or the account of others in such registration if the underwriter so agrees and if the number of Registrable Securities which would otherwise have been included in such registration and underwriting will not thereby be limited. (d) If the Company shall furnish to the Initiating Holders a certificate signed by the President of the Company stating that, in the good faith judgment of the Board of Directors of the Company, it would (because of the existence of, or in anticipation of, any acquisition, financing activity, or other transaction involving the Company, or the unavailability for reasons beyond the Company's control of any required financial statements, disclosure of information which is in its best interest not to publicly disclose, or any other event or condition of similar significance to the Company) be seriously detrimental to the Company and its shareholders for such registration statement to be filed on or before the date filing would be required and it is therefore essential to defer the filing of such registration statement, then the Company may direct that such request for registration be delayed for a period not in excess of ninety (90) days, such right to delay a request to be exercised by the Company not more than twice in any twelve (12) month period. (e) Effective Registration Statement. A demand registration requested pursuant to this Section 2 shall not be deemed to have been effected unless the registration statement relating thereto (i) has become effective under the Securities Act and any of the Registrable Securities of the Initiating Holders included in such registration have actually been sold thereunder, and (ii) has remained effective for a period of at least ninety (90) days (or such shorter period in which all Registrable Securities included in such registration have actually been sold thereunder). 3. S-3 Registration. In case the Company shall receive from any Holder or Holders a written request or requests that the Company effect a registration on Form S-3 and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company will: (a) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders; and (b) as soon as practicable, and in any event within 30 days of the receipt of such notice, file a registration statement on Form S-3 and effect all other qualifications and compliances as may be so requested and as would permit or facilitate the sale, distribution, transfer or hedging (through market transactions using brokers, in a firm commitment underwriting, in negotiated transactions or otherwise) of all or such portion of such Holder's or Holders' Registrable Securities as are specified in such request, together with all or such portion of the 6 51 Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within 15 days after receipt of such written notice from the Company; provided, that the Company shall not be obligated to effect any such registration, qualification or compliance pursuant to this Section 3: (i) if Form S-3 is not available for such offering by the Holders; (ii) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to register Registrable Securities and such other securities (if any) at an aggregate price to the public (net of any underwriters' discounts or commissions) of less than $20 million; (iii) if the Company has, within the twelve (12) month period preceding the date of such request, already effected three (3) registrations for the Holders pursuant to this Section 1.3; or (iv) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance. (c) Subject to the foregoing, the Company shall file a registration statement covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders and shall keep it continuously effective until such Registrable Securities have been sold pursuant thereto. (d) Notwithstanding the other provisions of this Section 3, the Company shall have the right to delay the filing of any registration statement on Form S-3 (an "S-3 Registration") otherwise required to be prepared and filed by the Company pursuant to this Section 3, or to suspend the use of any S-3 Registration, for a period not in excess of 60 days (a "S-3 Blackout Period") if the Company, in the good faith judgment of its Board of Directors, determines (because of the existence of, or in anticipation of, any acquisition, financing activity, or other transaction involving the Company, or the unavailability for reasons beyond the Company's control of any required financial statements, disclosure of information which is in its best interest not to publicly disclose, or 7 52 any other event or condition of similar significance to the Company) that the registration and distribution of the Registrable Securities to be covered by such S-3 Registration would be seriously detrimental to the Company and its shareholders, provided that the S-3 Blackout Period shall earlier terminate on the second business day following the completion or abandonment of the relevant financing, acquisition or other transaction or upon public disclosure by the Company or public admission by the Company of such material nonpublic information or such time as such material nonpublic information shall be publicly disclosed; and provided, further, that the Company shall furnish to the Holders a certificate of an executive officer of the Company to the effect that an event permitting a S-3 Blackout Period has occurred (and no other reason need be given). The Company will promptly give the Holders written notice of such determination and an approximation of the period of the anticipated delay; provided, however, that the aggregate number of days included in all S-3 Blackout Periods during any consecutive 12 months shall not exceed 180 days. Each Holder agrees to cease all disposition efforts under such S-3 Registration with respect to Registrable Securities held by such Holder immediately upon receipt of notice of the beginning of any S-3 Blackout Period. The Company shall provide written notice to the Holders of the end of each S-3 Blackout Period. 4. Piggyback Registration. (a) If the Company shall determine to register for sale for cash any of its Common Stock, for its own account or for the account of others (other than the Holders), other than a registration relating solely to employee benefit plans or securities issued or issuable to employees, consultants (to the extent the securities owned or to be owned by such consultants could be registered on Form S-8) or any of their Family Members (including a registration on Form S-8), or a registration relating solely to a Commission Rule 145 transaction, a registration on Form S-4 in connection with a merger, acquisition, divestiture, reorganization or similar event, the Company promptly will give to each Holder written notice thereof and shall use its reasonable best efforts to include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within ten (10) days after receipt of such written notice from the Company, by any Holder or Holders. However, the Company may, without the consent of the Holders, withdraw such registration statement prior to its becoming effective if the Company has abandoned its proposal to register the securities proposed to be registered thereby. (b) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders 8 53 as a part of the written notice given pursuant to Section 4(a). In such event the right of any Holder to registration pursuant to Section 4(a) shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and any other shareholders of the Company distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. Notwithstanding any other provision of this Section 4(b), if the underwriter or the Company determines that marketing factors require a limitation of the number of shares to be underwritten, the underwriter may exclude some or all Registrable Securities from such registration and underwriting. The Company shall so advise all Holders (except those Holders who have indicated to the Company their decision not to distribute any of their Registrable Securities through such underwriting), and the number of shares of Registrable Securities that may be included in the registration and underwriting, if any, shall be allocated among such Holders as follows: (i) In the event of a piggyback registration pursuant to Section 4(a) that is initiated by the Company, then the number of shares that may be included in the registration and underwriting shall be allocated first to the Company and then to all selling shareholders, including the Holders, who have requested to sell in the registration on a pro rata basis according to the number of shares requested to be included; provided, however, that no allocation pursuant to this Section 4(b) shall have the effect of reducing the Shares sold by Holders to less than 20% of the proposed offering; and (ii) In the event of a piggyback registration pursuant to Section 4(a) that is initiated by the exercise of demand registration rights by a shareholder or shareholders of the Company (other than the Holders), then the number of shares that may be included in the registration and underwriting shall be allocated first to such selling shareholders who exercised such demand and then to all selling shareholders, including the Holders, who have requested to sell in the registration, on a pro rata basis according to the number of shares requested to be included; provided, however, that in no event shall the total number of shares included in the offering by any of HBO & Company of Georgia ("HBOC") and Premiere Technologies, Inc. ("Premiere") pursuant to a piggyback registration be less than the number of securities included in the offering by any other single selling shareholder pursuant to piggyback registration rights unless all securities held by HBOC and Premiere requested to be included in such offering are included in such offering or unless HBOC and Premiere waive such limitation or choose not to sell any shares in such registration, and the number of shares that Holders would otherwise be entitled to include in such registration may be reduced to give effect to this requirement. (c) No Registrable Securities excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. If any Holder disapproves of the terms of any such underwriting, such person may elect to withdraw therefrom by written notice to the Company and the underwriter. The Registrable Securities 9 54 and/or other securities so withdrawn from such underwriting shall also be withdrawn from such registration; provided, however, that, if by the withdrawal of such Registrable Securities a greater number of Registrable Securities held by other Holders may be included in such registration (up to the maximum of any limitation imposed by the underwriters), then the Company shall offer to all Holders who have included Registrable Securities in the registration the right to include additional Registrable Securities pursuant to the terms and limitations set forth herein in the same proportion used above in determining the underwriter limitation. 5. Registration Procedures. In the case of each registration, qualification or compliance effected by the Company pursuant to Section 2, 3 or 4 hereof, the Company will keep each Holder advised in writing as to the initiation of each registration, qualification and compliance and as to the completion thereof. At its expense, the Company will use its reasonable best efforts to: (a) prepare and file with the Commission within ninety (90) days (or in the case of any registration on Form S-3, thirty (30) days) after receipt of a request for registration with respect to such Registrable Securities, a registration statement on any form for which the Company then qualifies or which counsel for the Company shall deem appropriate, subject to Section 2 hereof, and which form shall be available for the sale of the Registrable Securities in accordance with the intended method(s) of distribution thereof, and use its best efforts to cause such registration statement to become and remain effective; provided that before filing with the Commission a registration statement or prospectus or any amendments or supplements thereto, including documents incorporated by reference after the initial filing of any registration statement, the Company shall (i) furnish to the underwriters, if any, and to one (1) counsel selected by the Holders of a majority of the Registrable Securities covered by such registration statement copies of all such documents proposed to be filed, which documents shall be subject to the review of the underwriters and such counsel, and (ii) notify each Holder of Registrable Securities covered by such registration statement of any stop order issued or threatened by the Commission and take all reasonable actions required to prevent the entry of such stop order or to remove it if entered; (b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period of not less than ninety (90) days or such shorter period which shall terminate when all Registrable Securities covered by such registration statement have been sold (but not before the expiration of the 90-day period referred to in Section 4(3) of the Securities Act and Rule 174, or any successor thereto, thereunder, if applicable), and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement during such period in accordance with the intended method(s) of disposition by the sellers thereof set forth in such registration statement; (c) furnish, without charge, to each Holder and each underwriter, if any, of Registrable Securities covered by such registration statement one (1) signed copy of such registration statement, each amendment and supplement thereto (including one (1) conformed 10 55 copy to each Holder and one (1) signed copy to each managing underwriter and in each case including all exhibits thereto), and such number of copies of the prospectus included in such registration statement (including each preliminary prospectus and any other prospectus filed under Rule 424 under the Securities Act) as such Holders may request, in conformity with the requirements of the Securities Act, and such other documents as such Holder may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Holder, but only while the Company shall be required under the provisions hereof to cause the registration statement to remain effective; (d) use its best efforts to register or qualify such Registrable Securities under such other applicable securities or blue sky laws of such jurisdictions as any Holder, and underwriter, if any, of Registrable Securities covered by such registration statement reasonably requests as may be necessary for the marketability of the Registrable Securities (such request to be made by the time the applicable registration statement is deemed effective by the Commission) and do any and all other acts and things which may be reasonably necessary or advisable to enable such Holder and each underwriter, if any, to consummate the disposition in such jurisdictions of the Registrable Securities owned by such Holder; provided that the Company shall not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this paragraph (d), (ii) subject itself to taxation in any such jurisdiction, or (iii) consent to general service of process in any such jurisdiction; (e) use its best efforts to cause the Registrable Securities covered by such registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary by virtue of the business and operations of the Company to enable the Holder or Holders thereof to consummate the disposition of such Registrable Securities; (f) immediately notify the managing underwriter, if any, and each Holder of such Registrable Securities at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event which comes to the Company's attention if as a result of such event the prospectus included in such registration statement contains an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading and the Company shall promptly prepare and furnish to such Holder a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, unless suspension of the use of such prospectus otherwise is authorized herein or in the event of a S-3 Blackout Period, in which case no supplement or amendment need be furnished; (g) use its best efforts to cause all such Registrable Securities covered by the registration statement to be listed on the Nasdaq Stock Market or the national securities exchange on which similar securities issued by the Company are then listed, and enter into such customary agreements including a listing application and indemnification agreement in 11 56 customary form (provided that the applicable listing requirements are satisfied), and to provide a transfer agent and registrar for such Registrable Securities covered by such registration statement no later than the effective date of such registration statement; (h) enter into such customary agreements (including an underwriting agreement in customary form) and take all such other actions as the Initiating Holders or the underwriters retained by such Holders, if any, reasonably request in order to expedite or facilitate the disposition of such Registrable Securities, including customary indemnification; (i) make available for inspection during normal business hours by any Holder of Registrable Securities covered by such registration statement, any underwriter participating in any disposition pursuant to such registration statement, and any attorney, accountant or other agent retained by any such Holder or underwriter (collectively, the "Inspectors"), all financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries (collectively, "Records"), if any, as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company's and its subsidiaries' officers, directors and employees to supply all information and respond to all inquiries reasonably requested by any such Inspector in connection with such registration statement. Notwithstanding the foregoing, the Company shall have no obligation to disclose any Records to the Inspectors in the event the Company determines that such disclosure is reasonably likely to have an adverse effect on the Company's ability to assert the existence of an attorney-client privilege with respect thereto; (j) in the event that any contemplated public offering is underwritten, use its best efforts to obtain a "comfort" letter from the Company's independent public accountants in customary form and covering such matters of the type customarily covered by "comfort" letters as the Holders of a majority (by number of shares) of the Registrable Securities being sold reasonably request, and provided that such request is reasonable in the underwriter's point of view; (k) use its best efforts to obtain an obtain an opinion of counsel from the Company's counsel in customary form and covering such matters of the type customarily covered in opinions of counsel in connection with such transactions; (l) comply, and continue to comply during the period that such registration statement is effective under the Securities Act, in all material respects with the Securities Act and the Securities Exchange Act of 1934 and with all applicable rules and regulations of the Commission with respect to the disposition of all securities covered by such registration statement, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve (12) months, but not more than eighteen (18) months, beginning with the first full calendar month after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act, and not file any amendment or supplement to such registration statement or prospectus to which Holder shall have reasonably objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements 12 57 of the Securities Act, having been furnished with a copy thereof at least five (5) business days prior to the filing thereof; and (m) in the event the offering is underwritten, develop a presentation reasonably acceptable to the underwriters to facilitate the offering and to make its chief executive officer and chief financial officer available for participation in such meetings and presentations (e.g., road show for the offering) at such locations (including Europe) as the underwriter reasonably requests. Each Holder of Registrable Securities agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 5(f) hereof, such Holder shall discontinue disposition of Registrable Securities pursuant to the registration statement covering such Registrable Securities until such Holder's receipt of the copies of the supplemented or amended prospectus contemplated by Section 5(f) hereof, and, if so directed by the Company, such Holder shall deliver to the Company (at the Company's expense) all copies (including, without limitation, any and all drafts), other than permanent file copies, then in such Holder's possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice. In the event the Company shall give any such notice, the period mentioned in Section 5(b) hereof shall be extended by the greater of (i) ten (10) business days or (ii) the number of days during the period from and including the date of the giving of such notice pursuant to Section 5(f) hereof to and including the date when each Holder of Registrable Securities covered by such registration statement shall have received the copies of the supplemented or amended prospectus contemplated by Section 5(f) hereof. 6. Rule 144. Notwithstanding anything to the contrary contained herein, no Holder shall have rights to a registration under Section 2, 3 or 4 hereof after the time that such Holder could sell, within ninety (90) days, all of its Registrable Securities pursuant to Rule 144(e) promulgated under the Securities Act or any successor rule thereto; provided that the Company hereby agrees to take the following actions to ensure the availability of Rule 144 to each such Holder (or such similar actions as shall be required under any successor rule thereto): (a) make and keep public information available as those terms are understood and defined in Rule 144; (b) use its best efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (c) so long as any Holder owns any Registrable Securities, furnish to a Holder upon request, a written statement by the Company as to its compliance with the reporting requirements of Rule 144 (at any time from and after ninety (90) days following the effective date of the registration statement relating to an Initial Public Offering), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting 13 58 requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed as the Holder may reasonably request. 7. Registration Expenses. The Company shall pay all expenses in connection with any registration, including, without limitation, all registration, filing and NASD fees, printing expenses, all fees and expenses of complying with securities or blue sky laws, the fees and disbursements of one counsel for the Holders and the fees and disbursements of counsel for the Company and of its independent accountants; provided that, in any registration, each party shall pay for its own underwriting discounts and commissions and transfer taxes. The Company shall not, however, be required to pay for expenses of any registration proceeding begun pursuant to Section 2, 3 or 4 hereof, the request of which has been subsequently withdrawn by the Initiating Holders (unless the withdrawal is based upon material adverse information concerning the Company of which the Initiating Holders were unaware at the time of such request), in which case such expenses shall be borne by the Holders whose securities were to be included in the registration in proportion to the number of shares for which such registration was requested. 8. Assignment of Rights. Any Holder may assign its rights under this Agreement to any party acquiring 2,400,000 shares or more of Registrable Securities; provided, however, that a Holder may assign its rights under this Agreement without such restrictions to a transferee or assignee that controls, is controlled by or is under common control with such Holder. 9. Information by Holder. The Holder or Holders of Registrable Securities included in any registration shall furnish to the Company such information regarding such Holder or Holders and the distribution proposed by such Holder or Holders as the Company may request in writing. 10. "Market Stand-off" Agreement. Each Holder agrees not to sell or otherwise transfer or dispose of any Common Stock (or other securities) of the Company held by it during the 180 day period following the effective date of the Initial Public Offering if so requested by the Company and underwriters of Common Stock (or other securities) of the Company. Each Holder further agrees not to sell or otherwise transfer or dispose of any Common Stock (or other securities) of the Company held by it during such period of time following the effective date of an underwritten public offering of the Company's securities as the underwriters in such underwritten offering deem appropriate; providing, however, that no such market stand off agreement shall be required of any Holder (i) who is not identified as a selling shareholder on the registration statement for such underwritten offering or any other registration statement filed by the Company pursuant to Sections 2, 3 or 4 hereof and (ii) unless the underwriters in such underwritten offering shall have requested that the Company's executive officers and directors enter into similar agreements; provided, however, that in no event shall such period be more than 90 days. The Company may impose stop-transfer instructions with respect to the shares (or securities) subject to the foregoing restriction until the end of such period. 14 59 11. Indemnification. (a) In the event of the offer and sale of Registrable Securities held by Holders under the 1933 Act, the Company shall, and hereby does, indemnify and hold harmless, to the fullest extent permitted by law, each Holder, its directors, officers, partners, each other person who participates as an underwriter in the offering or sale of such securities, and each other Person, if any, who controls or is under common control with such Holder or any such underwriter within the meaning of Section 15 of the 1933 Act, against any losses, claims, damages or liabilities, joint or several, and expenses to which the Holder or any such director, officer, partner or underwriter or controlling person may become subject under the 1933 Act or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such shares were registered under the 1933 Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein in light of the circumstances in which they were made not misleading or any violation by the Company of any federal, state or common law rule or regulation applicable to the Company and relating to action required of or inaction by the Company in connection with any such registration, and the Company shall reimburse the Holder, and each such director, officer, partner, underwriter and controlling person for any legal or any other expenses reasonably incurred by them in connection with investigating, defending or settling any such loss, claim, damage, liability, action or proceeding; provided that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement in or omission or alleged omission from such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by or on behalf of such Holder specifically stating that it is for use in the preparation thereof. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Holders, or any such director, officer, partner, underwriter or controlling person and shall survive the transfer of such shares by the Holder. (b) The Company may require, as a condition to including any Registrable Securities to be offered by a Holder in any registration statement filed pursuant to this Agreement, that the Company shall have received an agreement from such Holder to be bound by the terms of this Section 11, including an undertaking reasonably satisfactory to it from such Holder, to indemnify and hold the Company, its directors and officers and each other Person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act, against any losses, claims, damages or liabilities, joint or several, to which the Company or any such director or officer or controlling person may become subject under the 1933 Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement in or omission or alleged omission from such 15 60 registration statement, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information about such Holder as a Holder of the Company furnished to the Company through an instrument duly executed by such Holder specifically stating that it is for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement; provided, however, that such indemnity agreement found in this Section 11(b) shall in no event exceed the gross proceeds from the offering received by such Holder. Such indemnity shall remain in full force and effect, regardless of any investigation made by or on behalf of the Company or any such director, officer or controlling person and shall survive the transfer by any Holder of such shares. (c) Promptly after receipt by an indemnified party of notice of the commencement of any action or proceeding involving a claim referred to in Section 11(a) or (b) hereof (including any governmental action), such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the indemnifying party of the commencement of such action; provided that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under Section 11(a) or (b) hereof, except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist or the indemnified party may have defenses not available to the indemnifying party in respect of such claim, the indemnifying party shall be entitled to participate in and to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof, unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties arises in respect of such claim after the assumption of the defenses thereof, other than reasonable costs of investigation. Neither an indemnified nor an indemnifying party shall be liable for any settlement of any action or proceeding effected without its consent. No indemnifying party shall, without the consent of the indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect of such claim or litigation. Notwithstanding anything to the contrary set forth herein, and without limiting any of the rights set forth above, in any event any party shall have the right to retain, at its own expense, counsel with respect to the defense of a claim. (d) The indemnification required by Section 11(a) and (b) hereof shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expenses, losses, damages or liabilities are incurred. 16 61 (e) If the indemnification provided for in this Section 11 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage or expense referred to herein, the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage or expense as is appropriate to reflect the proportionate relative fault of the indemnifying party on the one hand and the indemnified party on the other (determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission relates to information supplied by the indemnifying party or the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission), or (ii) if the allocation provided by clause (i) above is not permitted by applicable law or provides a lesser sum to the indemnified party than the amount hereinafter calculated, not only the proportionate relative fault of the indemnifying party and the indemnified party, but also the relative benefits received by the indemnifying party on the one hand and the indemnified party on the other, as well as any other relevant equitable considerations. No indemnified party guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any indemnifying party who was not guilty of such fraudulent misrepresentation. (f) Other Indemnification. Indemnification similar to that specified in the preceding subsections of this Section 11 (with appropriate modifications) shall be given by the Company and each Holder of Registrable Securities with respect to any required registration or other qualification of securities under any federal or state law or regulation or governmental authority other than the Securities Act. 12. Miscellaneous (a) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Georgia applicable to contracts between Georgia residents entered into and to be performed entirely within the State of Georgia. (b) Successors and Assigns. Except as otherwise provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, executors and administrators of the parties hereto. In the event the Company merges with, or is otherwise acquired by, a direct or indirect subsidiary of a publicly-traded company, the Company shall condition the merger or acquisition on the assumption by such parent company of the Company's obligations under this Agreement. (c) Entire Agreement. This Agreement constitutes the full and entire understanding and agreement between the parties with regard to the subjects hereof. (d) Notices, etc. All notices and other communications required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or three (3) business days following deposit with the United States Postal Service, by certified mail, return receipt requested, postage prepaid, or otherwise delivered by hand or by 17 62 messenger, addressed: (a) if to the Purchaser, at Microsoft Corporation, One Microsoft Way, Redmond, Washington 98052-5399, Attn: Chief Financial Officer with a copy to General Counsel - Finance and Administration, and Preston Gates & Ellis LLP, 5000 Columbia Center, 701 Fifth Avenue, Seattle, Washington 98104, or (b) if to any other Holder of any Registrable Securities, at such address as such holder shall have furnished the Company in writing, or, until any such Holder so furnishes an address to the Company, then to and at the address of the last Holder of such Registrable Securities who has so furnished an address to the Company, or (c) if to the Company, at WebMD, Inc., 400 The Lenox Building, 3399 Peachtree Road, Atlanta, Georgia 30326, Attn: General Counsel, or at such other address as the Company shall have furnished to the Purchaser and each such other Holder in writing. (e) Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to any Holder of any Registrable Securities, upon any breach or default of the Company under this Agreement, shall impair any such right, power or remedy of such Holder nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereunder occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any Holder of any breach or default under this Agreement, or any waiver on the part of any Holder of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, or by law or otherwise afforded to any holder, shall be cumulative and not alternative. (f) Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument. (g) Severability. In the case any provision of this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. (h) Amendments. The provisions of this Agreement may be amended at any time and from time to time, and particular provisions of this Agreement may be waived, with and only with an agreement or consent in writing signed by the Company and by the holders of a majority of the number of shares of Registrable Securities (or securities convertible into Registrable Securities) outstanding as of the date of such amendment or waiver. The Purchaser acknowledges that by the operation of this Section 12(h), the holders of a majority of the outstanding Registrable Securities may have the right and power to diminish or eliminate all rights of the Purchaser under this Agreement. 18 63 This Registration Rights Agreement is hereby executed as of the date first above written. COMPANY: WEBMD, INC. By: ------------------------------- Jeffrey T. Arnold Chief Executive Officer PURCHASER: MICROSOFT CORPORATION By: ------------------------------- Its: ------------------------- 19 64 WEBMD, INC. REGISTRATION RIGHTS AGREEMENT FOR SERIES E PREFERRED STOCK THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered into as of the ___ day of May, 1999, among WebMD, Inc., a Georgia corporation (the "Company"), and the persons listed on Schedule I hereto (collectively, the "Purchasers"). RECITALS: A. The Purchasers have the right to purchase up to an aggregate of 276,906 shares of the Company's Series E Preferred Stock (the "Series E Preferred Stock") pursuant to an Investment Agreement dated as of May 12, 1999 (the "Series E Investment Agreement") among the Company, Microsoft Corporation and each of the Purchasers. B. The Company and the Purchasers desire to set forth the registration rights to be granted by the Company to the Purchasers. NOW, THEREFORE, in consideration of the mutual promises, representations, warranties, covenants, and conditions set forth herein and in the Series E Investment Agreement, the parties mutually agree as follows: AGREEMENT: 1. Certain Definitions. As used in this Agreement, the following terms shall have the following respective meanings: "Articles of Incorporation" means the Amended and Restated Articles of Incorporation of the Company as filed with the Secretary of State of the State of Georgia, as amended from time to time. "Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "Common Stock" shall mean the voting common stock, without designation as to series and without par value per share, of the Company and any and all shares of capital stock or other equity securities of: (i) the Company which are added to or exchanged or substituted for the Common Stock by reason of the declaration of any stock dividend or stock split, the issuance of any distribution or the reclassification, readjustment, recapitalization or other such modification of the capital structure of the Company; and (ii) any other corporation, now or hereafter organized under the laws of any state or other governmental authority, with which the Company is merged, which results from any consolidation or reorganization to which the 65 Company is a party, or to which is sold all or substantially all of the shares or assets of the Company, if immediately after such merger, consolidation, reorganization or sale, the Company or any Stockholders of the Company own equity securities having in the aggregate more than fifty percent (50%) of the total voting power of such other corporation. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission promulgated thereunder. "Family Member" shall mean (a) with respect to any individual, such individual's spouse, any descendants (whether natural, adopted or in the process of adoption), any trust all of the beneficial interests of which are owned by any of such individuals or by any of such individuals together with any organization described in Code Section 501(c)(3), the estate of any such individual, and any corporation, association, partnership or limited liability company all of the equity interests of which are owned by those above described individuals, trusts or organizations and (b) with respect to any trust, the owners of the beneficial interests of such trust. "Form S-3" means such form under the Securities Act as in effect on the date hereof or any registration form under the Securities Act subsequently adopted by the Commission which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the Commission. "Holder" shall mean any of the Purchasers or any of such Holder's respective successors and assigns who acquire rights in accordance with this Agreement with respect to the Registrable Securities directly or indirectly from such Holder. "Initial Public Offering" means the offer and sale of shares of Common Stock in a transaction underwritten by an investment banking firm following the completion of which (i) the Common Stock will be listed for trading on any national securities exchange or (ii) there will be at least two market makers who are making a market in the Common Stock through the Nasdaq National Market System. "Initiating Holders" shall mean any Holder or Holders of not less than 50% of the then outstanding Registrable Securities. The terms "register", "registered" and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement. "Registrable Securities" means shares of Common Stock into which the then outstanding Shares are convertible pursuant to the Articles of Incorporation, excluding in all cases, however (including exclusion from the calculation of the number of outstanding Registrable Securities), any Registrable Securities sold by a person in a transaction (i) pursuant to a registration statement under Section 2, 3 or 4 hereof or (ii) pursuant to Rule 144 (or any successor provision) of the Securities Act. 2 66 "Securities Act" shall mean the Securities Act of 1933, as amended, or any similar federal statute promulgated in replacement thereof, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Shares" shall mean the Series E Preferred Stock of the Company purchased or issued pursuant to the Series E Investment Agreement. 2. Demand Registration. In case the Company shall receive from Initiating Holders a written request that the Company effect a registration with respect to at least 1,000,000 shares of Common Stock that constitute Registrable Securities (as adjusted for stock splits, stock dividends, recapitalizations and similar events) the Company will: (a) promptly give written notice of the proposed registration to all other Holders so they may have an opportunity to consider joining in such registration, which they may do (subject to the terms and provisions of this Agreement) at their election within ten (10) days after receipt of the notice of the proposed registration by the Company; and (b) as soon as practicable, use its reasonable best efforts to effect such registration (including, without limitation, the execution of an undertaking to file post-effective amendments, appropriate qualification under applicable blue sky or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Act) as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request as are specified in a written request given within ten (10) days after receipt of notice from the Company pursuant to Section 2(a); provided that the Company shall not be obligated to take any action to effect any such registration, qualification or compliance pursuant to this Section 2: (i) In any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; (ii) Prior to the date which is the earlier of (a) one hundred eighty (180) days following the effective date of the registration statement relating to an Initial Public Offering or (b) the release by the underwriters of such offering of the related lock-up agreements; 3 67 (iii) Within the one hundred twenty (120) day period immediately following the effective date of a registration statement pertaining to a firm commitment underwritten public offering of Common Stock for its own account or for the account of another shareholder of the Company who has exercised a demand right to register shares of Common Stock (other than a registration relating solely to a Commission Rule 145 transaction, a registration relating solely to employee benefit plans, or a registration statement on Form S-3 (or any similar short-form registration statement)); (iv) Within the sixty (60) day period immediately following the effective date of a registration statement on Form S-3 (or any similar short-form registration statement) pertaining to a firm commitment underwritten public offering of Common Stock for its own account or for the account of another shareholder of the Company who has exercised a demand right to register shares of Common Stock (other than a registration relating solely to a Commission Rule 145 transaction or a registration relating solely to employee benefit plans); or (v) After the Company has effected three (3) registrations pursuant to this Section 2 and such registrations have been declared or ordered effective and have remained effective for a period of at least ninety (90) consecutive days. Subject to the foregoing clauses (i) through (v), the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable after receipt of the request of the Initiating Holders. The Initiating Holders may, at any time prior to the effective date of the registration statement relating to such registration, revoke such request, without liability (except as set forth in Section 6 hereof) to the Initiating Holders or any other Holders of Registrable Securities requested to be registered pursuant to Section 2(a) hereof, by providing a written notice to the Company revoking such request. Notwithstanding the above, the Company shall not be obligated to effect, or to take any action to effect, any registration pursuant to this Section 2 during the period starting with the date ninety (90) days prior to the Company's good faith estimate of the date of filing of (or in the case of any registration on Form S-3, forty-five (45) days prior), and ending on a date [one hundred twenty(120) days after the effective date of (or in the case of any registration on Form S-3, ninety (90) days after), a Company-initiated registration statement in connection with a bona fide firm commitment underwritten registration for securities to be offered for the Company's own account (the "Intended Registration"); provided that the Company is actively employing in good faith all reasonable efforts to cause the Intended Registration to become effective and provided further that the Company gives notice to all Holders upon commencement of such period. The Holders shall be entitled to exercise their rights pursuant to Section 4 hereof with respect to an Intended Registration. An Intended Registration shall not be deemed to be a demand registration of the Holders pursuant to this Section 2. (c) Underwriting. If the Holders propose an underwritten offering, the sale of Registrable Securities pursuant to this Section 2 must be made by means of a firm commitment underwriting through underwriters who are reasonably acceptable to the Company and the 4 68 holders of a majority of the Registrable Securities that are proposed to be distributed through such underwriting. The right of any Holder to registration pursuant to this Section 2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent requested by such Holder (unless mutually otherwise agreed by a majority in interest of the Holders and such Holder) to the extent provided herein. The Company and all Holders proposing to distribute Registrable Securities through such underwriting shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting. Notwithstanding any other provision of this Section 2(c), if the underwriter determines that in its good faith view marketing factors require a limitation of the number of shares to be underwritten and so advises the Initiating Holders in writing, then the Initiating Holders shall so advise the Company and all Holders (except those Holders who have indicated to the Company their decision not to distribute any of their Registrable Securities through such underwriting) and the number of Registrable Securities that may be included in the registration and underwriting shall be allocated first to the Holders on a pro rata basis according to the number of Registrable Securities requested to be included by the Holders; second to the Company; and third to other shareholders of the Company who have requested to sell in the registration. No Registrable Securities excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. If at least eighty percent (80%) of the Registrable Securities requested to be registered by the Initiating Holders are not included in such registration, then the Initiating Holders may request that the Company effect an additional registration under the Securities Act of all or part of the Initiating Holders' Registrable Securities in accordance with the provisions of this Section 2, and the Company shall effect such additional registration. If any Holder disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the underwriter and the Initiating Holders. The Registrable Securities and/or other securities so withdrawn from such underwriting shall also be withdrawn from such registration; provided, however, that, if by the withdrawal of such Registrable Securities a greater number of Registrable Securities held by other Holders may be included in such registration (up to the maximum of any limitation imposed by the underwriters), then the Company shall offer to all Holders who have included Registrable Securities in the registration the right to include additional Registrable Securities in the same proportion used above in determining the underwriter limitation. If the underwriter has not limited the number of Registrable Securities to be underwritten, the Company may include securities for its own account or the account of others in such registration if the underwriter so agrees and if the number of Registrable Securities which would otherwise have been included in such registration and underwriting will not thereby be limited. 5 69 (d) If the Company shall furnish to the Initiating Holders a certificate signed by the President of the Company stating that, in the good faith judgment of the Board of Directors of the Company, it would (because of the existence of, or in anticipation of, any acquisition, financing activity, or other transaction involving the Company, or the unavailability for reasons beyond the Company's control of any required financial statements, disclosure of information which is in its best interest not to publicly disclose, or any other event or condition of similar significance to the Company) be seriously detrimental to the Company and its shareholders for such registration statement to be filed on or before the date filing would be required and it is therefore essential to defer the filing of such registration statement, then the Company may direct that such request for registration be delayed for a period not in excess of ninety (90) days, such right to delay a request to be exercised by the Company not more than twice in any twelve (12) month period. (e) Effective Registration Statement. A demand registration requested pursuant to this Section 2 shall not be deemed to have been effected unless the registration statement relating thereto (i) has become effective under the Securities Act and any of the Registrable Securities of the Initiating Holders included in such registration have actually been sold thereunder, and (ii) has remained effective for a period of at least ninety (90) days (or such shorter period in which all Registrable Securities included in such registration have actually been sold thereunder). 3. S-3 Registration. In case the Company shall receive from any Holder or Holders a written request or requests that the Company effect a registration on Form S-3 and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company will: (a) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders; and (b) as soon as practicable, and in any event within 30 days of the receipt of such notice, file a registration statement on Form S-3 and effect all other qualifications and compliances as may be so requested and as would permit or facilitate the sale, distribution, transfer or hedging (through market transactions using brokers, in a firm commitment underwriting, in negotiated transactions or otherwise) of all or such portion of such Holder's or Holders' Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within 15 days after receipt of such written notice from the Company; provided, that the Company shall not be obligated to effect any such registration, qualification or compliance pursuant to this Section 3: (i) if Form S-3 is not available for such offering by the Holders; (ii) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to register Registrable Securities and such other securities (if any) at an aggregate price to the public (net of any underwriters' discounts or commissions) of less than $20 million; 6 70 (iii) if the Company has, within the twelve (12) month period preceding the date of such request, already effected three (3) registrations on Form S-3 for the Holders pursuant to this Section 1.3; or (iv) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance. (c) Subject to the foregoing, the Company shall file a registration statement covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders and shall keep it continuously effective until such Registrable Securities have been sold pursuant thereto. (d) Notwithstanding the other provisions of this Section 3, the Company shall have the right to delay the filing of any registration statement on Form S-3 (an "S-3 Registration") otherwise required to be prepared and filed by the Company pursuant to this Section 3, or to suspend the use of any S-3 Registration, for a period not in excess of 60 days (a "S-3 Blackout Period") if the Company, in the good faith judgment of its Board of Directors, determines (because of the existence of, or in anticipation of, any acquisition, financing activity, or other transaction involving the Company, or the unavailability for reasons beyond the Company's control of any required financial statements, disclosure of information which is in its best interest not to publicly disclose, or any other event or condition of similar significance to the Company) that the registration and distribution of the Registrable Securities to be covered by such S-3 Registration would be seriously detrimental to the Company and its shareholders, provided that the S-3 Blackout Period shall earlier terminate upon the completion or abandonment of the relevant financing, acquisition or other transaction or upon public disclosure by the Company or public admission by the Company of such material nonpublic information or such time as such material nonpublic information shall be publicly disclosed; and provided, further, that the Company shall furnish to the Holders a certificate of an executive officer of the Company to the effect that an event permitting a S-3 Blackout Period has occurred (and no other reason need be given). The Company will promptly give the Holders written notice of such determination and an approximation of the period of the anticipated delay; provided, however, that the aggregate number of days included in all S-3 Blackout Periods during any consecutive 12 months shall not exceed 180 days. Each Holder agrees to cease all disposition efforts under such S-3 Registration with respect to Registrable Securities held by such Holder immediately upon receipt of notice of the beginning of any S-3 Blackout Period. The Company shall provide written notice to the Holders of the end of each S-3 Blackout Period. 4. Piggyback Registration. (a) If the Company shall determine to register for sale for cash any of its Common Stock, for its own account or for the account of others (other than the Holders), other than a 7 71 registration relating solely to employee benefit plans or securities issued or issuable to employees, consultants (to the extent the securities owned or to be owned by such consultants could be registered on Form S-8) or any of their Family Members (including a registration on Form S-8), or a registration relating solely to a Commission Rule 145 transaction, a registration on Form S-4 in connection with a merger, acquisition, divestiture, reorganization or similar event, the Company promptly will give to each Holder written notice thereof and shall use its best efforts to include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within ten (10) days after receipt of such written notice from the Company, by any Holder or Holders. However, the Company may, without the consent of the Holders, withdraw such registration statement prior to its becoming effective if the Company has abandoned its proposal to register the securities proposed to be registered thereby. (b) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 4(a). In such event the right of any Holder to registration pursuant to Section 4(a) shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and any other shareholders of the Company distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. Notwithstanding any other provision of this Section 4(b), if the underwriter or the Company determines that marketing factors require a limitation of the number of shares to be underwritten, the underwriter may exclude some or all Registrable Securities from such registration and underwriting. The Company shall so advise all Holders (except those Holders who have indicated to the Company their decision not to distribute any of their Registrable Securities through such underwriting), and the number of shares of Registrable Securities that may be included in the registration and underwriting, if any, shall be allocated among such Holders as follows: (i) In the event of a piggyback registration pursuant to Section 4(a) that is initiated by the Company, then the number of shares that may be included in the registration and underwriting shall be allocated first to the Company and then to all selling shareholders, including the Holders, who have requested to sell in the registration on a pro rata basis according to the number of shares requested to be included; and 8 72 (ii) In the event of a piggyback registration pursuant to Section 4(a) that is initiated by the exercise of demand registration rights by a shareholder or shareholders of the Company (other than the Holders), then the number of shares that may be included in the registration and underwriting shall be allocated first to such selling shareholders who exercised such demand and then to all selling shareholders, including the Holders, who have requested to sell in the registration, on a pro rata basis according to the number of shares requested to be included; provided, however, that in no event shall the total number of shares included in the offering by any of HBO & Company of Georgia ("HBOC") and Premiere Technologies, Inc. ("Premiere") pursuant to a piggyback registration be less than the number of securities included in the offering by any other single selling shareholder pursuant to piggyback registration rights unless all securities held by HBOC and Premiere requested to be included in such offering are included in such offering or unless HBOC and Premiere waive such limitation or choose not to sell any shares in such registration, and the number of shares that Holders would otherwise be entitled to include in such registration may be reduced to give effect to this requirement. (c) No Registrable Securities excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. If any Holder disapproves of the terms of any such underwriting, such person may elect to withdraw therefrom by written notice to the Company and the underwriter. The Registrable Securities and/or other securities so withdrawn from such underwriting shall also be withdrawn from such registration; provided, however, that, if by the withdrawal of such Registrable Securities a greater number of Registrable Securities held by other Holders may be included in such registration (up to the maximum of any limitation imposed by the underwriters), then the Company shall offer to all Holders who have included Registrable Securities in the registration the right to include additional Registrable Securities pursuant to the terms and limitations set forth herein in the same proportion used above in determining the underwriter limitation. 5. Registration Procedures. In the case of each registration, qualification or compliance effected by the Company pursuant to Section 2, 3 or 4 hereof, the Company will keep each Holder advised in writing as to the initiation of each registration, qualification and compliance and as to the completion thereof. At its expense, the Company will use its best efforts to: (a) prepare and file with the Commission within ninety (90) days (or in the case of any registration on Form S-3, thirty (30) days) after receipt of a request for registration with respect to such Registrable Securities, a registration statement on any form for which the Company then qualifies or which counsel for the Company shall deem appropriate, subject to Section 2 hereof, and which form shall be available for the sale of the Registrable Securities in accordance with the intended method(s) of distribution thereof, and use its best efforts to cause such registration statement to become and remain effective; provided that before filing with the Commission a registration statement or prospectus or any amendments or supplements thereto, including documents incorporated by reference after the initial filing of any registration statement, the Company shall (i) furnish to the underwriters, if any, and to one (1) counsel 9 73 selected by the Holders of a majority of the Registrable Securities covered by such registration statement copies of all such documents proposed to be filed, which documents shall be subject to the review of the underwriters and such counsel, and (ii) notify each Holder of Registrable Securities covered by such registration statement of any stop order issued or threatened by the Commission and take all reasonable actions required to prevent the entry of such stop order or to remove it if entered; (b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period of not less than ninety (90) days or such shorter period which shall terminate when all Registrable Securities covered by such registration statement have been sold (but not before the expiration of the 90-day period referred to in Section 4(3) of the Securities Act and Rule 174, or any successor thereto, thereunder, if applicable), and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement during such period in accordance with the intended method(s) of disposition by the sellers thereof set forth in such registration statement; (c) furnish, without charge, to each Holder and each underwriter, if any, of Registrable Securities covered by such registration statement one (1) signed copy of such registration statement, each amendment and supplement thereto (including one (1) conformed copy to each Holder and one (1) signed copy to each managing underwriter and in each case including all exhibits thereto), and such number of copies of the prospectus included in such registration statement (including each preliminary prospectus and any other prospectus filed under Rule 424 under the Securities Act) as such Holders may request, in conformity with the requirements of the Securities Act, and such other documents as such Holder may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Holder, but only while the Company shall be required under the provisions hereof to cause the registration statement to remain effective; (d) use its best efforts to register or qualify such Registrable Securities under such other applicable securities or blue sky laws of such jurisdictions as any Holder, and underwriter, if any, of Registrable Securities covered by such registration statement reasonably requests as may be necessary for the marketability of the Registrable Securities (such request to be made by the time the applicable registration statement is deemed effective by the Commission) and do any and all other acts and things which may be reasonably necessary or advisable to enable such Holder and each underwriter, if any, to consummate the disposition in such jurisdictions of the Registrable Securities owned by such Holder; provided that the Company shall not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this paragraph (d), (ii) subject itself to taxation in any such jurisdiction, or (iii) consent to general service of process in any such jurisdiction; (e) use its best efforts to cause the Registrable Securities covered by such registration statement to be registered with or approved by such other governmental agencies 10 74 or authorities as may be necessary by virtue of the business and operations of the Company to enable the Holder or Holders thereof to consummate the disposition of such Registrable Securities; (f) immediately notify the managing underwriter, if any, and each Holder of such Registrable Securities at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event which comes to the Company's attention if as a result of such event the prospectus included in such registration statement contains an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading and the Company shall promptly prepare and furnish to such Holder a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, unless suspension of the use of such prospectus otherwise is authorized herein or in the event of a S-3 Blackout Period, in which case no supplement or amendment need be furnished; (g) use its best efforts to cause all such Registrable Securities covered by the registration statement to be listed on the Nasdaq Stock Market or the national securities exchange on which similar securities issued by the Company are then listed, and enter into such customary agreements including a listing application and indemnification agreement in customary form (provided that the applicable listing requirements are satisfied), and to provide a transfer agent and registrar for such Registrable Securities covered by such registration statement no later than the effective date of such registration statement; (h) enter into such customary agreements (including an underwriting agreement in customary form) and take all such other actions as the Initiating Holders or the underwriters retained by such Holders, if any, reasonably request in order to expedite or facilitate the disposition of such Registrable Securities, including customary indemnification; (i) make available for inspection during normal business hours by any Holder of Registrable Securities covered by such registration statement, any underwriter participating in any disposition pursuant to such registration statement, and any attorney, accountant or other agent retained by any such Holder or underwriter (collectively, the "Inspectors"), all financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries (collectively, "Records"), if any, as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company's and its subsidiaries' officers, directors and employees to supply all information and respond to all inquiries reasonably requested by any such Inspector in connection with such registration statement. Notwithstanding the foregoing, the Company shall have no obligation to disclose any Records to the Inspectors in the event the Company determines that such disclosure is reasonably likely to have an adverse effect on the Company's ability to assert the existence of an attorney-client privilege with respect thereto; 11 75 (j) use its best efforts to obtain a "comfort" letter from the Company's independent public accountants in customary form and covering such matters of the type customarily covered by "comfort" letters as the Holders of a majority (by number of shares) of the Registrable Securities being sold reasonably request, and provided that such request is reasonable in the underwriter's point of view; (k) use its best efforts to obtain an obtain an opinion of counsel from the Company's counsel in customary form and covering such matters of the type customarily covered in opinions of counsel in connection with such transactions; (l) comply, and continue to comply during the period that such registration statement is effective under the Securities Act, in all material respects with the Securities Act and the Securities Exchange Act of 1934 and with all applicable rules and regulations of the Commission with respect to the disposition of all securities covered by such registration statement, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve (12) months, but not more than eighteen (18) months, beginning with the first full calendar month after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act, and not file any amendment or supplement to such registration statement or prospectus to which Holder shall have reasonably objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act, having been furnished with a copy thereof at least five (5) business days prior to the filing thereof; and (m) in the event the offering is underwritten, develop a presentation reasonably acceptable to the underwriters to facilitate the offering and to make its chief executive officer and chief financial officer available for participation in such meetings and presentations (e.g., road show for the offering) at such locations (including Europe) as the underwriter reasonably requests. Each Holder of Registrable Securities agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 5(f) hereof, such Holder shall discontinue disposition of Registrable Securities pursuant to the registration statement covering such Registrable Securities until such Holder's receipt of the copies of the supplemented or amended prospectus contemplated by Section 5(f) hereof, and, if so directed by the Company, such Holder shall deliver to the Company (at the Company's expense) all copies (including, without limitation, any and all drafts), other than permanent file copies, then in such Holder's possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice. In the event the Company shall give any such notice, the period mentioned in Section 5(b) hereof shall be extended by the greater of (i) ten (10) business days or (ii) the number of days during the period from and including the date of the giving of such notice pursuant to Section 5(f) hereof to and including the date when each Holder of Registrable Securities covered by such registration statement shall have received the copies of the supplemented or amended prospectus contemplated by Section 5(f) hereof. 12 76 6. Rule 144. Notwithstanding anything to the contrary contained herein, no Holder shall have rights to a registration under Section 2, 3 or 4 hereof after the time that such Holder could sell, within thirty (30) days, all of its Registrable Securities pursuant to Rule 144(e) promulgated under the Securities Act or any successor rule thereto; provided that the Company hereby agrees to take the following actions to ensure the availability of Rule 144 to each such Holder (or such similar actions as shall be required under any successor rule thereto): (a) make and keep public information available as those terms are understood and defined in Rule 144; (b) use its best efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (c) so long as any Holder owns any Registrable Securities, furnish to a Holder upon request, a written statement by the Company as to its compliance with the reporting requirements of Rule 144 (at any time from and after ninety (90) days following the effective date of the registration statement relating to an Initial Public Offering), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed as the Holder may reasonably request. 7. Registration Expenses. The Company shall pay all expenses in connection with any registration, including, without limitation, all registration, filing and NASD fees, printing expenses, all fees and expenses of complying with securities or blue sky laws, the fees and disbursements of one counsel for the Holders and the fees and disbursements of counsel for the Company and of its independent accountants; provided that, in any registration, each party shall pay for its own underwriting discounts and commissions and transfer taxes. The Company shall not, however, be required to pay for expenses of any registration proceeding begun pursuant to Section 2, 3 or 4 hereof, the request of which has been subsequently withdrawn by the Initiating Holders (unless the withdrawal is based upon material adverse information concerning the Company of which the Initiating Holders were unaware at the time of such request), in which case such expenses shall be borne by the Holders whose securities were to be included in the registration in proportion to the number of shares for which such registration was requested. 8. Assignment of Rights. Any Holder may assign its rights under this Agreement to any party acquiring 250,000 shares or more of Registrable Securities; provided, however, that a Holder may assign its rights under this Agreement without such restrictions to a transferee or assignee that controls, is controlled by or is under common control with such Holder. 13 77 9. Information by Holder. The Holder or Holders of Registrable Securities included in any registration shall furnish to the Company such information regarding such Holder or Holders and the distribution proposed by such Holder or Holders as the Company may request in writing. 10. "Market Stand-off" Agreement. Each Holder agrees not to sell or otherwise transfer or dispose of any Common Stock (or other securities) of the Company held by it during the 180 day period following the effective date of the Initial Public Offering if so requested by the Company and underwriters of Common Stock (or other securities) of the Company. The Company may impose stop-transfer instructions with respect to the shares (or securities) subject to the foregoing restriction until the end of such period. 11. Indemnification. (a) In the event of the offer and sale of Registrable Securities held by Holders under the 1933 Act, the Company shall, and hereby does, indemnify and hold harmless, to the fullest extent permitted by law, each Holder, its directors, officers, partners, each other person who participates as an underwriter in the offering or sale of such securities, and each other Person, if any, who controls or is under common control with such Holder or any such underwriter within the meaning of Section 15 of the 1933 Act, against any losses, claims, damages or liabilities, joint or several, and expenses to which the Holder or any such director, officer, partner or underwriter or controlling person may become subject under the 1933 Act or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such shares were registered under the 1933 Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein in light of the circumstances in which they were made not misleading or any violation by the Company of any federal, state or common law rule or regulation applicable to the Company and relating to action required of or inaction by the Company in connection with any such registration, and the Company shall reimburse the Holder, and each such director, officer, partner, underwriter and controlling person for any legal or any other expenses reasonably incurred by them in connection with investigating, defending or settling any such loss, claim, damage, liability, action or proceeding; provided that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement in or omission or alleged omission from such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by or on behalf of such Holder specifically stating that it is for use in the preparation thereof. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Holders, or any such director, officer, partner, underwriter or controlling person and shall survive the transfer of such shares by the Holder. 14 78 (b) The Company may require, as a condition to including any Registrable Securities to be offered by a Holder in any registration statement filed pursuant to this Agreement, that the Company shall have received an agreement from such Holder to be bound by the terms of this Section 11, including an undertaking reasonably satisfactory to it from such Holder, to indemnify and hold the Company, its directors and officers and each other Person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act, against any losses, claims, damages or liabilities, joint or several, to which the Company or any such director or officer or controlling person may become subject under the 1933 Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement in or omission or alleged omission from such registration statement, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information about such Holder as a Holder of the Company furnished to the Company through an instrument duly executed by such Holder specifically stating that it is for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement; provided, however, that such indemnity agreement found in this Section 11(b) shall in no event exceed the gross proceeds from the offering received by such Holder. Such indemnity shall remain in full force and effect, regardless of any investigation made by or on behalf of the Company or any such director, officer or controlling person and shall survive the transfer by any Holder of such shares. (c) Promptly after receipt by an indemnified party of notice of the commencement of any action or proceeding involving a claim referred to in Section 11(a) or (b) hereof (including any governmental action), such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the indemnifying party of the commencement of such action; provided that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under Section 11(a) or (b) hereof, except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist or the indemnified party may have defenses not available to the indemnifying party in respect of such claim, the indemnifying party shall be entitled to participate in and to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof, unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties arises in respect of such claim after the assumption of the defenses thereof, other than reasonable costs of investigation. Neither an indemnified nor an indemnifying party shall be liable for any settlement of any action or proceeding effected without its consent. No indemnifying party shall, without the consent of the indemnified party, 15 79 consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect of such claim or litigation. Notwithstanding anything to the contrary set forth herein, and without limiting any of the rights set forth above, in any event any party shall have the right to retain, at its own expense, counsel with respect to the defense of a claim. (d) The indemnification required by Section 11(a) and (b) hereof shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expenses, losses, damages or liabilities are incurred. (e) If the indemnification provided for in this Section 11 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage or expense referred to herein, the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage or expense as is appropriate to reflect the proportionate relative fault of the indemnifying party on the one hand and the indemnified party on the other (determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission relates to information supplied by the indemnifying party or the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission), or (ii) if the allocation provided by clause (i) above is not permitted by applicable law or provides a lesser sum to the indemnified party than the amount hereinafter calculated, not only the proportionate relative fault of the indemnifying party and the indemnified party, but also the relative benefits received by the indemnifying party on the one hand and the indemnified party on the other, as well as any other relevant equitable considerations. No indemnified party guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any indemnifying party who was not guilty of such fraudulent misrepresentation. (f) Other Indemnification. Indemnification similar to that specified in the preceding subsections of this Section 11 (with appropriate modifications) shall be given by the Company and each Holder of Registrable Securities with respect to any required registration or other qualification of securities under any federal or state law or regulation or governmental authority other than the Securities Act. 12. Miscellaneous (a) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Georgia applicable to contracts between Georgia residents entered into and to be performed entirely within the State of Georgia. (b) Successors and Assigns. Except as otherwise provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, executors and administrators of the parties hereto. In the event the Company merges with, or is otherwise 16 80 acquired by, a direct or indirect subsidiary of a publicly-traded company, the Company shall condition the merger or acquisition on the assumption by such parent company of the Company's obligations under this Agreement. (c) Entire Agreement. This Agreement constitutes the full and entire understanding and agreement between the parties with regard to the subjects hereof. (d) Notices, etc. All notices and other communications required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or three (3) business days following deposit with the United States Postal Service, by certified mail, return receipt requested, postage prepaid, or otherwise delivered by hand or by messenger, addressed: (a) if to a Purchaser, at the address set forth opposite such Purchaser's name on Schedule I hereto, or (b) if to any other Holder of any Registrable Securities, at such address as such holder shall have furnished the Company in writing, or, until any such Holder so furnishes an address to the Company, then to and at the address of the last Holder of such Registrable Securities who has so furnished an address to the Company, or (c) if to the Company, at WebMD, Inc., 400 The Lenox Building, 3399 Peachtree Road, Atlanta, Georgia 30326, Attn: General Counsel, with a copy to Nelson Mullins Riley & Scarborough, L.L.P., Bank of America Corporate Center, Suite 2600, 100 North Tryon Street, Charlotte, North Carolina 28202, Attn: H. Bryan Ives III and C. Mark Kelly, or at such other address as the Company shall have furnished to the Purchasers and each such other Holder in writing. (e) Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to any Holder of any Registrable Securities, upon any breach or default of the Company under this Agreement, shall impair any such right, power or remedy of such Holder nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereunder occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any Holder of any breach or default under this Agreement, or any waiver on the part of any Holder of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, or by law or otherwise afforded to any holder, shall be cumulative and not alternative. (f) Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument. (g) Severability. In the case any provision of this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. (h) Amendments. The provisions of this Agreement may be amended at any time and from time to time, and particular provisions of this Agreement may be waived, with and 17 81 only with an agreement or consent in writing signed by the Company and by the holders of a majority of the number of shares of Registrable Securities (or securities convertible into Registrable Securities) outstanding as of the date of such amendment or waiver. The Purchasers acknowledge that by the operation of this Section 12(h), the holders of a majority of the outstanding Registrable Securities may have the right and power to diminish or eliminate all rights of any Purchaser under this Agreement. 18 82 SIGNATURE PAGE TO THE REGISTRATION RIGHTS AGREEMENT DATED MAY 24, 1999 AMONG WEBMD, INC., MICROSOFT CORPORATION AND THE PURCHASERS NAMED THEREIN IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the day and year first above written. THE COMPANY: WEBMD, INC. By: ----------------------------- Its: -------------------------- 19 83 SIGNATURE PAGE TO THE REGISTRATION RIGHTS AGREEMENT DATED MAY 24, 1999 AMONG WEBMD, INC., MICROSOFT CORPORATION AND THE PURCHASERS NAMED THEREIN PURCHASERS: INTEL CORPORATION BY: ---------------------------------------- ITS: ---------------------------------------- COVAD COMMUNICATIONS GROUP INC. BY: ---------------------------------------- ITS: ---------------------------------------- EXCITE, INC. BY: ---------------------------------------- ITS: ---------------------------------------- SOFTBANK AMERICA INC. BY: ---------------------------------------- ITS: ---------------------------------------- SUPERIOR CONSULTANT HOLDINGS CORPORATION BY: ---------------------------------------- ITS: ---------------------------------------- 20 84 SIGNATURE PAGE TO THE REGISTRATION RIGHTS AGREEMENT DATED MAY 24, 1999 AMONG WEBMD, INC., MICROSOFT CORPORATION AND THE PURCHASERS NAMED THEREIN THE READER'S DIGEST ASSOCIATION, INC. BY: ---------------------------------------- ITS: ---------------------------------------- 21 85 SCHEDULE I LIST OF PURCHASERS
PURCHASER ADDRESSES NUMBER OF SHARES Intel Corporation 2200 Mission College Boulevard 26,768 Santa Clara, CA 95052 Covad Communications 2330 Central Expressway 27,691 Group Inc. Santa Clara, CA 95050 Excite Inc. 555 Broadway 46,151 Redwood City, CA 94063 SOFTBANK America Inc. 10 Langley Road 92,302 Suite 403 Newton Center, MA 02459 Superior Consultant 4000 Town Center 18,460 Holdings Corporation Suite 1100 Southfield, MI 48075 The Reader's Digest Reader's Digest Road 23,999 Association, Inc. Pleasantville, New York 10570-7000 Dell USA, L.P. One Dell Way 36,921 Round Rock, Texas 78682 [TO COME] 4,614 ------- Total 276,906 =======
EX-10.37 6 SERVICES AGREEMENT DATED JANUARY 27, 1999 1 EXHIBIT 10.37 GLEACHER NATWEST Corporate & Investment Banking GLEACHER NATWEST INC. 660 MADISON AVENUE NEW YORK NY 10021-8405 212 418-4200 212 752-2711 FAX January 27, 1999 STRICTLY PRIVATE AND CONFIDENTIAL WebMD, Inc. 400 The Lenox Building 3399 Peachtree Road NE Atlanta, Georgia 30326 Attn: Jeffrey T. Arnold Chairman and Chief Executive Officer Dear Jeffrey: We are pleased to confirm the arrangements under which Gleacher NatWest Inc. ("Gleacher NatWest") and WebMD, Inc. ("WebMD" or the "Company") have entered into a strategic relationship pursuant to which Gleacher NatWest has (i) provided financial advisory services to the Company in connection with the Company's acquisitions of Sapient Health Network, Inc. ("SHN") and Direct Medical Knowledge, Inc. ("DMK"); and (ii) will provide financial advisory services to the Company in the future. The Company will compensate Gleacher NatWest (or its designees) for all such past and future services through the issuance of a Warrant (as defined herein) in lieu of any cash compensation. The terms of this relationship are as follows: 1. ADVISORY SERVICES. The period during which advisory services are to be rendered shall commence on the date hereof and end on the second anniversary of the date hereof, unless earlier terminated as provided herein (the "Advisory Period"). During the Advisory Period, Gleacher NatWest will act as financial advisor to the Company and render from time to time such financial advisory and investment banking services as may be appropriate and mutually agreed upon. Gleacher NatWest's principal objective is to assist the Company, as financial advisors, in the exploration and implementation of alternatives that maximize the ultimate per share value of the Company. In that regard, Gleacher NatWest expects its primary focus will be: (a) reviewing the strategic and capital needs of the Company, analyzing the alternatives for raising capital and assisting the Company in designing and implementing an appropriate capital structure; (b) providing, as requested from time to time, advice on evaluating, structuring, negotiating and executing any proposed acquisitions or divestitures by the Company; (c) providing, as requested from time to time, advice on evaluating, structuring, negotiating and executing any proposed strategic relationships to be entered into by the Company; (d) providing general advice to the Company on corporate governance matters and otherwise assisting the Company with respect to investor relations matters; and (e) providing access to office space and support. In connection with the foregoing, Gleacher NatWest will render, during the Advisory Period, such financial fairness opinions, in a form reasonably satisfactory to the Company and to Gleacher NatWest, as may be requested from time to time and be appropriate under the circumstances. No separate or additional fees shall be payable in connection with the rendering of any such opinion. 2 GLEACHER NATWEST WebMD, Inc. January 27, 1999 Page 2 Gleacher NatWest recognizes that the Company may from time to time desire and/or require the services of other investment banking and financial advisory firms. Gleacher NatWest will, as requested, assist the Company in its efforts to work with and to maximize the contribution which other firms can make to WebMD's future success. The Company recognizes that the advisory relationship is not an exclusive relationship for Gleacher NatWest or any of its personnel. Gleacher NatWest, however, will devote such time and resources as are customary for it in connection with an important assignment of this type. Gleacher NatWest also agrees to consult with the Company so as to avoid any conflicts of interest which may result from Gleacher NatWest performing investment banking assignments for any of the Company's major competitors. 2. ISSUANCE OF WARRANT. The Company will issue a warrant substantially in the form of Exhibit I attached hereto (the "Warrant") to Gleacher NatWest (or its designees), promptly following the execution of this letter agreement. The parties hereby acknowledge that Gleacher NatWest's right to purchase an aggregate of 100,000 shares of the up to 750,000 shares of Series D Common Stock covered in the Warrant relate to compensation for advisory services rendered by Gleacher NatWest to the Company in connection with the Company's acquisitions of SHN and DMK. OTHER MATTERS In addition to the Warrant issued to Gleacher NatWest, the Company agrees to reimburse Gleacher NatWest for all reasonable travel and other reasonable out-of-pocket expenses incurred by Gleacher NatWest in connection with Gleacher NatWest's engagement hereunder, including all reasonable fees and disbursements of Gleacher NatWest's legal counsel and any other professional advisors, provided that the retention of such professional advisors has been approved in advance by the Company. Gleacher NatWest and the Company will each use all reasonable efforts to prepare and execute the Warrant Agreement provided for in this letter agreement as promptly as possible following execution of this letter agreement. The Company recognizes and confirms that in advising the Company in completing its engagement hereunder, Gleacher NatWest will be using and relying on data, material and other information furnished to Gleacher NatWest by the Company. It is understood that in performing under this engagement Gleacher NatWest may reasonably rely upon any information so supplied without independent verification and that Gleacher NatWest shall not have any responsibility for such independent verification. As a condition to Gleacher NatWest's obligation to provide services hereunder, the Company represents, warrants and covenants to Gleacher NatWest that none of the information furnished to Gleacher NatWest by the Company or contained in the Company's filings under any federal or state securities laws shall include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading. Gleacher NatWest agrees that it will keep confidential and not disclose or permit its employees or representatives to disclose information received from the Company (other than to Gleacher NatWest employees involved in the performance of services hereunder or otherwise on a need-to-know basis), or otherwise use such information, except as contemplated in this letter agreement, as may be authorized by the Company in connection with Gleacher NatWest's performance of services hereunder, or as such disclosure may be required by law. 3 GLEACHER NATWEST WebMD, Inc. January 27, 1999 Page 3 The Company acknowledges that all advice given by Gleacher NatWest in connection with its engagement hereunder is intended solely for the benefit and use of the Board of Directors and senior management of WebMD. Except as may be required by applicable law, the Company agrees that no such advice shall be used for any other purpose or be reproduced, disseminated, quoted or referred to at any time, in any manner or for any purpose, nor shall any public references to Gleacher NatWest be made by or on behalf of the Company, in each case without Gleacher NatWest's prior written consent. Notwithstanding the foregoing, any fairness opinion rendered by Gleacher NatWest may be included in any proxy statement, or amendment thereto, filed by the Company in connection with any transaction provided that Gleacher NatWest has the opportunity to review and approve any disclosure or description of the opinion or Gleacher NatWest contained in such document. The Company recognizes that Gleacher NatWest has been retained only by the Company and that its engagement is not deemed to be on behalf of, and is not intended to confer any rights or bestow the status of third-party beneficiary upon, any shareholder or employee of the Company, or any other person not a party hereto as against Gleacher NatWest or any of its affiliates, their respective limited and general partners, directors, officers, agents and employees or each other person, if any, controlling Gleacher NatWest or any of its affiliates. Unless otherwise expressly stated in writing by Gleacher NatWest, no advice or opinions rendered to the Board of Directors or management of the Company during the course of the engagement hereunder shall constitute a recommendation to any other party and no one other than the Company, its directors and its senior management, is authorized to rely upon the engagement of Gleacher NatWest or any statements or conduct by Gleacher NatWest. Moreover, it is acknowledged that the relationship of Gleacher NatWest to the Company is that of an independent contractor, that the obligations and responsibilities of Gleacher NatWest to the Company are limited to those specifically set forth herein, and that Gleacher NatWest, by entering into this agreement and satisfying its obligations hereunder, does not assume any fiduciary duties with respect to the Company, its Board of Directors, its management, its employees or its shareholders. All decisions made with respect to potential financings and mergers and acquisition transactions, whether or not consistent with advice rendered by Gleacher NatWest, shall be those of the Board of Directors or management of the Company, as the case may be. In connection with matters described in this letter, the Company and Gleacher NatWest have entered into a separate letter agreement, dated the date hereof, providing for indemnification, contribution and reimbursement of Gleacher NatWest and certain other individuals and entities, a copy of which is attached hereto as Exhibit II. Any right to trial by jury with respect to any claim or action arising out of this agreement or conduct in connection with the engagement is hereby waived by the parties hereto and their affiliates. This agreement shall be deemed made in New York. This agreement and all controversies arising from or related to performance under this agreement shall be governed by the laws of the State of New York, without regard to such state's rules concerning conflicts of laws. All controversies arising from or related to performance under this agreement shall be adjudicated in State or Federal court within the State of New York. Gleacher NatWest may assign its right and obligations under this letter agreement to any partnership of which Gleacher NatWest is the general partner or to any other entity which succeeds to the business of Gleacher NatWest so long as Mr. Eric J. Gleacher is a principal of the successor entity, in each case, without the consent of the Company. The provisions of this agreement (including the attached letter 4 GLEACHER NATWEST WebMD, Inc. January 27, 1999 Page 4 agreement) shall be binding upon and inure to the benefit of any successors, assigns, heirs and personal representatives of the Company and Gleacher NatWest. Gleacher NatWest's services hereunder may be terminated by the Company for "Cause". For purposes of this letter agreement, "Cause" shall be defined as (i) the failure of Gleacher NatWest to meet performance expectations, as determined by the Company's President or Chief Financial Officer and communicated in reasonable detail in writing in a notice delivered to Gleacher NatWest (the "Deficiency Notice") or (ii) a material breach by Gleacher NatWest of its obligations under this letter agreement; provided however, that in the event of a termination for the failure to meet performance expectations, Gleacher NatWest shall be entitled to the cure provision set forth below. Upon deliver of a Deficiency Notice, Gleacher NatWest shall then have a period of 30 days after receipt of such Deficiency Notice in which to attempt to effect a cure of specified deficiencies. If at the end of such 30-day period no such cure has been effected in the good faith judgment of the Company's President or Chief Financial Officer, then this letter agreement shall be deemed terminated effective as of the date of Gleacher NatWest's receipt of such Deficiency Notice. Upon termination of Gleacher NatWest's services under this agreement by the Company for Cause, this agreement shall have no further force or effect that (i) any out-of-pocket expenses incurred by Gleacher NatWest prior to the date of termination which are required to be reimbursed hereunder shall be paid or reimbursed in accordance with the terms of this agreement; (ii) the confidentiality provisions of this agreement shall continue to apply for a period of two years following such termination; and (iii) the indemnity, contribution and other provisions as contained in the attached letter agreement shall continue to apply notwithstanding termination. In the event of termination of Gleacher NatWest's services under this agreement by the Company for Gleacher NatWest's failure to meet performance criteria hereunder, and if such termination is prior to the first anniversary hereof, the Warrant shall not be vested or exercisable for 250,000 shares of the up to 750,000 shares covered thereby. In the event of termination of Gleacher NatWest's services under this agreement by the Company for Cause due to a material breach by Gleacher NatWest of its obligations under this letter agreement solely as a result of Gleacher NatWest's willfull misconduct, gross negligence or failure to dedicate less than an aggregate of 100 hours per month of the business time of one or more qualified investment banking professionals to the performance of its services hereunder following a request therefor, (i) if such termination is prior to the first anniversary hereof, the Warrant shall not be vested or exercisable for 250,000 shares of the up to 750,000 shares covered thereby; and (ii) Gleacher NatWest shall be required to pay to the Company immediately in cash an amount equal to (x) $3,400,000, minus (y) $1,400,000 multiplied by a fraction, the numerator of which shall be the number of days that have elapsed following the date hereof prior to such termination, and the denominator of which shall be 720. 5 GLEACHER NATWEST WebMD, Inc. January 27, 1999 Page 5 If the terms of our relationship as set forth in this letter agreement are satisfactory, kindly sign the enclosed copy of this letter agreement and indemnification form and return them to Gleacher NatWest. We look forward to working with WebMD. Very truly yours, GLEACHER NATWEST INC. /s/ Eric J. Gleacher ------------------------------------------- Eric J. Gleacher Chairman and Chief Executive Officer /s/ Robert A. Engel ------------------------------------------- Robert A. Engel Managing Director Accepted and Agreed to: WEBMD, INC. By: /s/ Jeffrey T. Arnold ------------------------------------ Jeffrey T. Arnold Chairman and Chief Executive Officer 6 Gleacher NatWest Inc. GLEACHER NATWEST 660 Madison Avenue New York, New York 10021 Gentlemen: In connection with the activities of Gleacher NatWest Inc. ("Gleacher NatWest") pursuant to a letter agreement, dated as of the date hereof, between WebMD, Inc. (the "Company") and Gleacher NatWest, as the same may be amended from time to time, including without limitation any activities of Gleacher NatWest in connection with any transaction contemplated by such letter agreement, whether occurring before, at or after the date hereof, the Company agrees to indemnify and hold harmless Gleacher NatWest and its affiliates, the respective limited and general partners, directors, officers, agents and employees of Gleacher NatWest and their affiliates and each other person, if any, controlling Gleacher NatWest or any of its affiliates (hereinafter collectively referred to as the "indemnified parties"), to the full extent lawful, from and against any losses, damages, liabilities, expenses or claims (or actions in respect thereof, including, without limitation, shareholder and derivative actions and arbitration proceedings) related to or otherwise arising out of such engagement or Gleacher NatWest's role in connection therewith, and will promptly reimburse any indemnified party for all reasonable expenses (including reasonable counsel fees and disbursements) as they are incurred by any indemnified party in connection with investigating, preparing or defending any claim, action, proceeding or investigation, whether or not in connection with pending or threatened litigation to which any indemnified party is a party, arising in connection with or related to Gleacher NatWest's engagement or Gleacher NatWest's role in connection therewith. The Company will not, however, be responsible for any losses, damages, liabilities, expenses or claims which are finally judicially determined to have resulted primarily from Gleacher NatWest's bad faith or gross negligence. The Company also agrees that no indemnified party will have any liability (whether direct or indirect, in contract, tort or otherwise) to the Company for or in connection with such engagement except to the extent that a court of competent jurisdiction finally judicially determines that such liability for losses, damages, liabilities, expenses or claims incurred by the Company resulted primarily from Gleacher NatWest's bad faith or gross negligence. If multiple claims are brought against any indemnified party in an arbitration, with respect to at least one of which indemnification is permitted under applicable law and provided for under this agreement, the Company agrees that any arbitration award shall be conclusively deemed to be based on claims as to which indemnification is permitted and provided for, except to the extent the arbitration award expressly states that the award, or any portion thereof, is based solely on a claim as to which indemnification is not available. In the event that the foregoing indemnity is unavailable to any indemnified party for any reason or insufficient to hold any indemnified party harmless, then the Company agrees to contribute to any such losses, damages, liabilities, expenses, claims or actions and will do so in such proportion as is appropriate to reflect the relative benefits received (or anticipated to be received) by, and the relative fault of, the indemnified parties, on the one hand, and the Company and the Company's securityholders, on the other, as well as any other relevant equitable considerations, from any actual or proposed transaction. The Company and Gleacher NatWest agree that it would not be just and equitable if contribution were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above. The Company agrees that it will not, without the prior written consent of Gleacher NatWest, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not Gleacher NatWest is an actual or potential party to such claim or action) unless such settlement, compromise or consent includes an unconditional release of Gleacher NatWest from all liability arising out of such claim, action, suit or proceeding. The Company will also promptly reimburse Gleacher NatWest for all expenses (including counsel fees) as they are incurred in connection with investigating, preparing or defending, or providing evidence in, any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not Gleacher NatWest are actual or potential parties to such claim or action). The foregoing agreement shall be in addition to any rights that any indemnified party may have at common law or otherwise, and shall be in addition to any liability which the Company may otherwise have. The Company hereby consents to personal jurisdiction, service and venue in any court in which any claim which is subject to this agreement is brought against Gleacher NatWest or the Company. ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY CLAIM OR ACTION ARISING OUT OF THIS AGREEMENT IS WAIVED. Gleacher NatWest may assign its rights and obligations under this letter agreement to any partnership of which Gleacher NatWest is the general partner or to any other entity, of which Eric J. Gleacher is a partner or principal, which succeeds to the business of Gleacher NatWest, in each case, without the consent of the Company. This agreement shall remain in full force and effect following the completion or termination of Gleacher NatWest's engagement and shall be binding upon and inure to the benefit of any successors, assigns, heirs and personal representatives of the Company and any indemnified party. Very truly yours, Accepted: Accepted: WEBMD, INC. GLEACHER NATWEST INC. - ------------------------------------- ---------------------------------- By: /s/ W. Michael Heekin By: /s/ Robert A. Engel ---------------------------------- ------------------------------ Date: January 27, 1999 Date: January 27, 1999 - ------------------------------------- ---------------------------------- 7 GLEACHER & CO. GLEACHER & CO. LLC 660 MADISON AVENUE NEW YORK NY 10021-8405 212 418-4200 212 752-2711 FAX April 15, 1999 Strictly Private and Confidential Mr. Jeffrey T. Arnold Chairman and Chief Executive Officer WebMD, Inc. 400 The Lenox Building 3399 Peachtree Road NE Atlanta, Georgia 30326 Dear Jeffrey: Pursuant to the engagement letter and indemnity agreement dated January 27, 1999 between Gleacher NatWest Inc. and WebMD, Inc. (collectively, the "Agreements"), Gleacher NatWest Inc. will assign the Agreements to Gleacher Holdings LLC or its affiliates ("Gleacher") as of the closing of Gleacher's acquisition of the assets of Gleacher NatWest Inc. (the "Closing"). All of Gleacher NatWest Inc.'s rights, privileges, fees or other consideration pursuant to the Agreements shall belong solely to Gleacher as of the Closing. Sincerely, GLEACHER NATWEST INC. /s/ Jeffrey H. Tepper --------------------- Jeffrey H. Tepper Chief Operating Officer EX-10.38 7 WARRANT TO PURCHASE SECURITIES OF WEBMD, INC. 1 EXHIBIT 10.38 THIS WARRANT AND THE SHARES OF SERIES D COMMON STOCK OR COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE FEDERAL SECURITIES ACT OF 1933, AS AMENDED, THE GEORGIA SECURITIES ACT OF 1973, AS AMENDED, OR THE SECURITIES LAWS OF ANY OTHER STATE. THIS WARRANT AND ANY OF SUCH SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED IN THE ABSENCE OF REGISTRATION UNDER SAID ACTS AND ALL OTHER APPLICABLE SECURITIES LAWS UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE. THIS WARRANT IS SUBJECT TO THE RESTRICTIONS ON TRANSFER CONTAINED IN ARTICLE IV HEREOF. WARRANT TO PURCHASE SECURITIES OF WEBMD, INC. THIS CERTIFIES that, for value received, WebMD, Inc., a Georgia corporation (the "Company"), hereby agrees to grant to Gleacher NatWest Inc., a Delaware corporation, or its registered assigns (the "Holder"), the right to purchase up to 750,000 shares of Series D Common Stock, no par value per share (the "Series D Stock"), subject to the terms and conditions set forth herein. This warrant is hereinafter referred to as the "Warrant." ARTICLE I CERTAIN DEFINITIONS For all purposes of this Warrant, unless the context otherwise requires, the following terms shall have the following respective meanings: "Act": the federal Securities Act of 1933, as amended, or any similar federal statute, and the rules and regulations of the Commission promulgated thereunder, all as the same shall be in effect at the time. "Additional Shares of Common Stock": all shares of Common Stock issued by the Company after the date hereof. "Articles of Incorporation": the Amended and Restated Articles of Incorporation of the Company, as further amended from time to time. "Common Stock": unless otherwise indicated, the Company's authorized "Common Stock," no par value per share, without designation as to series, as it exists on the date hereof. "Commission": the Securities and Exchange Commission or any other federal agency then administering the Act. 2 "Company": WebMD, Inc., a Georgia corporation, located at 400 The Lenox Building, 3399 Peachtree Road, Atlanta, Georgia, 30326, and any other corporation assuming or required to assume the Warrant pursuant to Article V. "Convertible Securities": evidences of indebtedness, shares of stock or other securities that are convertible into or exchangeable for Additional Shares of Common Stock. "Exercise Price": $20.00 per share. "Fair Market Value": with respect to a share of Series D Stock or Common Stock, as the case may be: (i) prior to an Initial Public Offering, the fair market value shall equal $20.00 per share unless otherwise determined by the Board of Directors, in its sole discretion; or (ii) subsequent to an Initial Public Offering, the Market Price. "Gleacher NatWest": Gleacher NatWest Inc. "Holder": as defined on the first page hereof. "Initial Public Offering": as defined in the Company's Articles of Incorporation. "Letter Agreement": Letter Agreement dated January 27, 1999 between the Company and Gleacher NatWest regarding the provision of financial advisory services by Gleacher NatWest to the Company. "Market Price": with respect to a share of Common Stock on any business day following the Initial Public Offering: (a) if such security is listed or admitted for trading on any national securities exchange, the last sale price of such security, regular way, or the average of the closing bid and asked prices thereof if no such sale occurred, in each case as officially reported on the principal securities exchange on which such security is listed, or (b) if not reported as described in clause (a), the average of the closing bid and asked prices of such security in the over-the-counter market as shown by the National Association of Securities Dealers, Inc. Automated Quotation System, or any similar system of automated dissemination of quotations of securities prices then in common use, if so quoted, as reported by any member firm of the New York Stock Exchange selected by the Company, or (c) if not quoted as described in clause (b), the average of the closing bid and asked prices for such security as reported by the National Quotation Bureau Incorporated or any similar successor organization, as reported by any member firm of the New York Stock Exchange selected by the Company. If such security is quoted on a national securities or central market system in lieu of a market or quotation system described above, the closing price shall be determined in the manner set forth in clause (a) of the preceding sentence if actual transactions are reported and in the manner set forth in clause (b) of the preceding sentence if bid and asked prices are reported but actual transactions are not. 2 3 "Person": any individual, corporation, partnership, trust, unincorporated organization and any government, and any political subdivision, instrumentality or agency thereof. "Registration Rights Agreement" shall mean that certain Registration Rights Agreement dated as of January 13, 1999, to which Gleacher NatWest, the Company and certain other shareholders of the Company are parties. "Series D Stock": as defined on the first page hereof. Following the occurence of an Initial Public Offering, all references in this Warrant to "Series D Stock" shall be deemed to refer to Common Stock, by virtue of the automatic conversion of the Series D Stock into Common Stock that will occur pursuant to the Company's Articles of Incorporation. "Stock Unit": one share of Series D Stock, as such stock is constituted on the date hereof and thereafter the number of shares of Series D Stock as shall result from the adjustments specified in Article V. "Vesting Date": each date on which rights to purchase shares of Series D Stock pursuant to this warranty may vest. "Warrant Date": each date on which rights to purchase shares of Series D Stock pursuant to this Warrant may vest. "Warrant Office": as defined in Section 3.1. "Warrant Shares": the shares of Series D Stock or Common Stock, as the case may be, purchasable by the Holder upon the exercise of this Warrant. ARTICLE II EXERCISE OF WARRANT 2.1 Vesting and Exercisability. The right to purchase shares of Series D Stock shall vest and become exercisable in accordance with the following: (a) The right to purchase 500,000 shares of Series D Stock shall be granted and immediately vest and become exercisable on the date hereof. (b) The right to purchase 250,000 shares of Series D Stock shall be granted on the date hereof and shall immediately vest and become exercisable on the first anniversary of the date hereof, provided, however, that if the services of Gleacher NatWest under the Letter Agreement have been terminated by the Company prior to the first anniversary of the date hereof, such right to purchase 250,000 shares shall not vest and shall not become exercisable. (c) Absent an adjustment pursuant to the terms of this Warrant, the maximum aggregate number of shares of Series D Stock that may be subject to purchase hereunder shall be 750,000. 4 2.2 Method of Exercise. To the extent this Warrant is exercisable from time to time, to exercise this Warrant, the Holder shall deliver to the Company at the Warrant Officer designated to Section 3.1 (a) a Notice of Exercise substantially in the form attached hereto as Exhibit A duly executed by the Holder specifying the number of Warrant Shares to be purchased; (b) payment of an amount equal to the aggregate Exercise Price for all such Warrant Shares, which shall be made (i) in cash or by certified or bank cashier's check payable to the order of the Company, or (ii) by delivery to the Company of that number of shares of Series D Stock having a value computed based upon the Fair Market Value, equal to the then applicable Exercise Price multiplied by the number of Warrant Shares then being purchased, and (c) this Warrant. In the alternative, this Warrant may be exercised on a net basis, such that, without the exchange of any funds, the Holder receives that number of Warrant Shares subscribed to less that number of Warrant Shares having an aggregate value computed based upon the Fair Market Value equal to the aggregate Exercise Price that would otherwise have been paid by such Holder for the number of Warrant Shares subscribed to. The Company shall, as promptly as practicable, and in any event within five (5) days thereafter, cause to be issued and delivered to the Holder (or its nominee) or the transfer designated in the Notice of Exercise a certificate or certificates representing the number of Warrant Shares specified in the Notice of Exercise. The stock certificate or certificates so delivered shall be in denominations of shares as my be specified in said notice and shall be issued in the name of the Holder or such other name as shall be designated in said notice. At the time of delivery of the certificate or certificates, appropriate notation shall be made on the Warrant Shares Purchase Schedule attached to this Warrant designating the number of shares purchased, and this Warrant shall then be returned to the Holder if this Warrant has been exercised only in part. The Holder or transferee so designated in the Notice of Exercise shall be deemed to have become the Holder of such Warrant Shares for all purposes as of the close of business on the date on which the Notice of Exercise is delivered to the Warrant Office, provided that an amount equal to the aggregate Exercise Price and this Warrant shall have also been delivered to the Company. The Company shall pay all expenses, taxes, (excluding capital gains and income taxes) and other charges payable in connection with the preparation, issuance and delivery of stock certificates, except that, in case stock certificates shall be registered in a name or names other than the name of the Holder, funds sufficient to pay all stock transfer taxes payable upon the issuance of stock certificates shall be paid by the Holder promptly upon the receipt of a written request of the Company therefor. 2.3 Shares to be Fully Paid and Non-Assessable. All Warrant Shares issued upon the exercise of this Warrant shall validly issued, fully paid, non-assessable and free from preemptive rights. 2.4 No Fractional Shares to be Issued. The Company shall not be required upon any exercise of this Warrant to issue to certificate representing any fraction of a share of Series D Stock. 2.5. Legend on Warrant Shares. Each certificate for Warrant Shares issued upon exercise of this Warrant, unless at the time of exercise such shares are registered under the Act, shall bear substantially the following legend (and any additional legend required by any national securities exchanges upon which such shares may, at the time of such exercise, be listed or under applicable securities laws): 5 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE FEDERAL SECURITIES ACT OF 1933, AS AMENDED, OR THE GEORGIA SECURITIES ACT OF 1973, AS AMENDED ("THE ACTS"), OR THE SECURITIES LAWS OF ANY STATE. THEY MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED, ENCUMBERED, OR OTHERWISE DISPOSED OF UNLESS, IN THE OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE ISSUER, SUCH TRANSFER WOULD BE PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACTS OR PURSUANT TO AN EXEMPTION FROM SUCH REGISTRATION. Any certificate issued at any time in exchange or substitution for any certificate bearing such legend (except a new certificate issued upon completion of a public distribution pursuant to a registration statement under the Act of the securities represented thereby) shall also bear the above legend unless, in the opinion of counsel to the Company, the securities represented thereby need no longer be subject to the restrictions on transferability. In addition, the provisions of Article IV shall be binding upon all subsequent holders of this Warrant. 2.6 Acknowledgment of Continuing Obligation. The Company shall, at the time of any exercise of this Warrant in whole or in part, upon request of the Holder, acknowledge in writing its continuing obligation to such holder in respect of any rights to which the Holder shall continue to be entitled after exercise in accordance with this Warrant; provided, however, that the failure of the Holder to make any such request shall not affect the continuing obligation of the Company to the Holder in respect of such rights. ARTICLE III WARRANT OFFICE; TRANSFER, DIVISION OR COMBINATION OF WARRANTS 3.1 Warrant Office. The Company shall maintain an office for certain purposes specified herein (the "Warrant Office"), which office shall initially be the Company's location set forth in Article I hereof, and may subsequently be such other office of the Company or of any transfer agent of the Common Stock in the continental United States as to which written notice has previously been given to all of the Holders of the Warrants. 3.2 Ownership of Warrant. The Company may deem and treat the Person in whose name this Warrant is registered as the Holder and owner hereof (notwithstanding any notations of ownership or writing hereon made by anyone other than the Company) for all purposes and shall not be affected by any notice to the contrary, until presentation of this Warrant for registration of transfer as provided in this Article III. 3.3 Transfer of Warrant. The Company agrees to maintain at the Warrant Office books for the registration of permitted transfers of this Warrant. Subject to the provisions of 5 6 Article IV, this Warrant and all rights hereunder are transferable, in whole or in part, on the books at that office, upon surrender of this Warrant at that office, together with a written assignment of this Warrant duly executed by the Holder or his or its duly authorized agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of the transfer. Subject to Article IV, upon surrender and payment, the Company shall execute and deliver a new Warrant in the name of the assignee, noting thereon the number of Warrant Shares theretofore purchased under this Warrant, and this Warrant shall promptly be canceled. A warrant may be exercised by a new Holder for the purchase of shares of Series D Stock without having a new warrant issued. 3.4 Division or Combination of Warrants. This Warrant may not be divided or combined with any other warrant. 3.5 Expenses of Delivery of Warrants. The Company shall pay all expenses, taxes (other than transfer taxes), and other charges payable in connection with the preparation, issuance and delivery of new Warrants hereunder. ARTICLE IV RESTRICTION ON TRANSFER 4.1 Restrictions on Transfer. Notwithstanding any provisions contained in this Warrant to the contrary, this Warrant shall not be exercisable or transferable except upon the conditions specified in this Article IV, which conditions are intended, among other things, to insure compliance with the provisions of the Act in respect of the exercise or transfer of the Warrant. 4.2 Opinion of Counsel. In connection with any exercise or transfer of this Warrant, the following provisions shall apply: (a) If in the written opinion of counsel to the Holder delivered to the Company (which opinion and counsel must be reasonably acceptable to the Company), proposed exercise or transfer of this Warrant may be effected without registration of this Warrant or the Common Stock issuable hereunder under the Act, the Holder shall be entitled to exercise or transfer this Warrant as proposed. In no event shall the Company be obligated (i) to effect a registration under the Act or any state securities law so as to permit the proposed exercise or transfer of this Warrant or (ii) to qualify to do business or to file a general consent to service of process in any state or other jurisdiction; provided, however, that the Company shall have the obligation to register the shares of Common Stock issued upon exercise of this Warrant on the terms set forth in the Registration Rights Agreement. 2 7 (b) If in the opinion of such counsel, the proposed exercise or transfer of this Warrant may not be effected without registration of this Warrant under the Act, the Holder shall not be entitled to exercise or transfer this Warrant until registration is effective or until exercise or transfer may be effected without registration, in the opinion of such counsel as set forth in Section 4.2(a) above. ARTICLE V ADJUSTMENTS 5.1 Adjustments to Number of Stock Units. The number of shares of Series D Stock comprising a Stock Unit shall be subject to adjustment from time to time as set forth in this Section 5.1. (a) Stock Dividends, Subdivisions and Combination. In case at any time or from time to time the Company shall: (i) take a record of the holders of its Common Stock of any series for the purpose of entitling them to receive a dividend payable in, or other distribution of, Common Stock, or (ii) subdivide its outstanding shares of Common Stock into a larger number of shares of Common Stock, or (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock; then the number of shares of Series D Stock comprising a Stock Unit immediately after the happening of any such event shall be adjusted so as to consist of the number of shares of Series D Stock that a record holder of the number of shares of Series D Stock comprising a Stock Unit immediately prior to the happening of such event would own or be entitled to receive after the happening of such event. The adjustments required by this subsection shall be made whenever and as often as any specified event requiring an adjustment shall occur. (b) Certain Other Dividends and Distributions. In case at any time or from time to time the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive any dividend or other distribution of (i) cash (other than a cash distribution made as a dividend payable out of the net earnings or net profits of the Company realized during the year of such distribution or the last preceding year and accumulated net earnings or net profits of the Company from the date hereof to the time of such distribution, computed in accordance with generally accepted accounting principles employed by the Board of Directors of the Company for purposes of financial reports to shareholders of the Company); or 8 (ii) any evidences of its indebtedness, any shares of its stock or any other securities or property of any nature whatsoever (other than cash); then at least five (5) business days prior to the record date to determine shareholders entitled to receive such dividend or distribution, the Company shall give notice of such proposed dividend or distribution to the Holder for the purpose of enabling the Holder to exercise the same, and thereby participate in such dividend or distribution. (c) Issuance of Additional Shares. (i) In case at any time prior to the occurrence of the Initial Public Offering the Company shall (except as hereinafter provided) issue or sell any Additional Shares of Common Stock for a consideration per share less than the Exercise Price, then the number of shares of Series D Stock thereafter comprising a Stock Unit shall be adjusted to that number determined by multiplying the number of shares of Series D Stock comprising a Stock Unit immediately prior to such adjustment by a fraction (i) the numerator of which shall be the number of shares of Common Stock issued and outstanding plus the number of Additional Shares of Common Stock deemed to be outstanding pursuant to Subsection 5.1(d) immediately prior to the issuance of such Additional Shares of Common Stock plus the number of such Additional Shares of Common Stock so issued and (ii) the denominator of which shall be the number of shares of Common Stock issued and outstanding plus the number of Additional Shares of Common Stock deemed to be outstanding pursuant to Subsection 5.1(d) immediately prior to the issuance of such Additional Shares of Common Stock plus the number of shares of Common Stock that the aggregate consideration for the total number of such Additional Shares of Common Stock so issued would purchase at the Exercise Price. (ii) In case at any time after the date of the occurrence of the Initial Public Offering the Company shall (except as hereinafter provided) issue or sell any Additional Shares of Common Stock for a consideration per share less than the Market Price, then the number of shares of Common Stock thereafter comprising a Stock Unit shall be adjusted to that number determined by multiplying the number of shares of Common Stock comprising a Stock Unit immediately prior to such adjustment by a fraction (i) the numerator of which shall be the number of shares of Common Stock issued and outstanding plus the number of Additional Shares of Common Stock deemed to be outstanding pursuant to Subsection 5.1(d) immediately prior to the issuance of such Additional Shares of Common Stock plus the number of such Additional Shares of Common Stock so issued and (ii) the denominator of which shall be the number of shares of Common Stock issued and outstanding plus the number of Additional Shares of Common Stock deemed to be outstanding pursuant to Subsection 5.1(d) immediately prior to the issuance of such Additional Shares of Common Stock plus the number of shares of Common Stock that the aggregate consideration for the total number of such Additional Shares of Common Stock so issued would purchase at the Market Price. The provisions of this Subsection 5.1(c) shall not apply to any issuance of Additional Shares of Common Stock for which an adjustment is provided under Subsection 5.1(a). No adjustment of the number of shares of Series D Stock or Common Stock comprising a Stock Unit shall be made under this subsection upon the issuance of any Additional Shares of Common Stock that are 8 9 issued pursuant to the exercise of any warrants or other subscription or purchase rights or pursuant to the exercise of any conversion or exchange rights in any Convertible Securities, if any such adjustment shall previously have been made upon the issuance of such warrants or other rights or upon the issuance of such Convertible Securities (or upon the issuance of any warrant or other rights therefor) pursuant to Subsection 5.1(d). (d) Issuance of Warrants, Convertible Securities or Other Rights. In case at any time or from time to time the Company shall issue or sell any warrants or other rights to subscribe for or purchase any Additional Shares of Common Stock or any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the consideration per share for which Additional Shares of Common Stock may at any time thereafter be issuable pursuant to such warrants or other rights or pursuant to the terms of such Convertible Securities shall be lower than the Exercise Price, then the number of shares of Series D Stock thereafter comprising a Stock Unit shall be adjusted as provided in Subsection 5.1(c) and the aggregate consideration for such maximum number of Additional Shares of Common Stock shall be deemed to be the minimum consideration received and receivable by the Company for the issuance of such Additional Shares of Common Stock pursuant to such warrants or other rights or pursuant to the terms of such Convertible Securities. No adjustment of the number of shares of Series D Stock comprising a Stock Unit shall be made under this Subsection 5.1(d) upon the issuance of any Convertible Securities that are issued pursuant to the exercise of any warrants or other subscription or purchase rights therefor, if any such adjustment shall previously have been made upon the issuance of such warrants or other rights pursuant to this Subsection 5.1(d). (e) Superseding Adjustment of Stock Unit. If, at any time after any adjustment of the number of shares comprising a Stock Unit shall have been made pursuant to the foregoing Subsection 5.1(d) on the basis of the issuance of warrants or other rights or the issuance of other Convertible Securities, or after any new adjustments of the number of shares comprising a Stock Unit shall have been made pursuant to this Subsection 5.1(e), (i) such warrants or rights or the right of conversion or exchange in such other Convertible Securities shall expire, and a portion of such warrants or rights, or the right of conversion or exchange in respect of a portion of such other Convertible Securities, as the case may be, shall not have been exercised, and/or (ii) the consideration per share, for which shares of Common Stock are issuable pursuant to such warrants or rights or the terms of such other Convertible Securities, shall be increased for any reason, then such previous adjustment shall be rescinded and annulled and the Additional Shares of Common Stock that were deemed to have been issued by virtue of the computation made in connection with the adjustment so rescinded and annulled shall no longer be deemed to have been issued by virtue of such computation. Thereupon, a recomputation shall be made of the effect of such rights or options or other Convertible Securities on the basis of 10 (x) treating the number of Additional Shares of Common Stock, if any, theretofore actually issued or issuable pursuant to the previous exercise of such warrants or rights or such right of conversion or exchange, as having been issued on the date or dates of such exercise and for the consideration actually received and receivable therefor, and (y) treating any such warrants or rights or any such other Convertible Securities that then remain outstanding as having been granted or issued immediately after the time of such increase of the consideration per share for which shares of Common Stock are issuable under such warrants or rights or other Convertible Securities; and, if and to the extent called for by the foregoing provisions of this Section 5.1 on the basis aforesaid, a new adjustment of the number of shares comprising a Stock Unit shall be made, which new adjustment shall supersede the previous adjustment so rescinded and annulled. (f) Other Provisions Applicable to Adjustment Under This Section. The following provisions shall be applicable to the making of adjustments of the number of shares of Series D Stock comprising a Stock Unit hereinbefore provided for in this Section 5.1: (i) Treasury Stock. The sale or other disposition of any issued shares of Common Stock owned or held by or for the account of the Company shall be deemed an issuance thereof for the purposes of this Section 5.1. (ii) Computation of Consideration. To the extent that any Additional Shares of Common Stock or any Convertible Securities or any warrants or other rights to subscribe for or purchase any Additional Shares of Common Stock or any Convertible Securities shall be issued for a cash consideration, the consideration received by the Company therefor shall be deemed to be the amount of the cash received by the Company therefor, or, if such Additional Shares of Common Stock or Convertible Securities are offered by the Company for subscription, the subscription price, or, if such Additional Shares of Common Stock or Convertible Securities are sold to underwriters or dealers for public offering without a subscription offering, the initial public offering price, in any such case excluding any amounts paid or receivable for accrued interest or accrued dividends (but without deduction of any compensation, discounts or expenses paid or incurred by the Company for and in the underwriting of, or otherwise in connection with, the issuance thereof). To the extent that such issuance shall be for a consideration other than cash, then, except as herein otherwise expressly provided, the amount of such consideration shall be deemed to be the fair value of such consideration at the time of such issuance as determined in good faith by the Board of Directors of the Company (but without deduction of any compensation, discounts or expenses paid or incurred by the Company for and in the underwriting of, or otherwise in connection with, the issuance thereof). In case any Additional Shares of Common Stock or Convertible Securities or any warrants or other rights to subscribe for or purchase such Additional Shares of Common Stock or Convertible Securities shall be issued in connection with any merger in which the Company issues any securities, the amount of consideration therefor shall be deemed to be the fair value, as determined in good faith by the Board of Directors of the Company, of such portion of the assets and business of the nonsurviving corporation as such Board in good faith shall 11 determine to be attributable to such Additional Shares of Common Stock, Convertible Securities, warrants or other rights, as the case may be. In the event of any consolidation or merger of the Company in which the Company is not the surviving corporation or in the event of any sale of all or substantially all of the assets of the Company for stock or other securities of any corporation, the Company shall be deemed to have issued a number of Additional Shares of Common Stock or Convertible Securities of the other corporation computed on the basis of the actual exchange ratio on which the transaction was predicated, and the consideration received for such issuance shall be equal to the fair market value, as determined in good faith by the Board of Directors of the Company, on the date of such transaction, of such stock or securities of the other corporation, and if any such calculation results in adjustment of the number of shares of Series D Stock comprising a Stock Unit immediately prior to such merger, conversion or sale for purposes of this Subsection 5.1 (f), such merger, conversion or sale shall be deemed to have been made after giving effect to such adjustment. The consideration for any Additional Shares of Common Stock issuable pursuant to any warrants or other rights to subscribe for or purchase the same shall be the consideration received by the Company for issuing such warrants or other rights, plus the additional consideration payable to the Company upon the exercise of such warrants or other rights. The consideration for any Additional Shares of Common Stock issuable pursuant to the terms of any Convertible Securities shall be the consideration received by the Company for issuing any warrants or other rights to subscribe for or purchase such Convertible Securities, plus the consideration paid or payable to the Company in respect of the subscription for or purchase of such Convertible Securities, plus the additional consideration, if any, payable to the Company upon the exercise of the right of conversion or exchange in such Convertible Securities. (iii) When Adjustments to be Made. The adjustments required by the preceding subsections of this Section 5.1 shall be made whenever and as often as any specified event requiring an adjustment shall occur, except that no adjustment of the number of shares of Series D Stock comprising a Stock Unit that would otherwise be required shall be made (except in the case of a subdivision or combination of shares of the Series D Stock, as provided for in Subsection 5.1 (a)) unless and until such adjustment, either by itself or with other adjustments not previously made, adds or subtracts at least 1/20th of a share to or from the number of shares of Series D Stock comprising a Stock Unit immediately prior to the making of such adjustment. Any adjustment representing a change of less than such minimum amount (except as aforesaid) shall be carried forward and made as soon as such adjustment, together with other adjustments required by this section and not previously made, would result in a minimum adjustment. For the purpose of any adjustment, any specified event shall be deemed to have occurred at the close of business on the date of its occurrence. (iv) Fractional Interests. In computing adjustments under this section, fractional interests in Series D Stock shall be taken into account to the nearest one-thousandth of a share. (v) When Adjustment Not Required -- Abandonment of Plan for Dividend and the Like. If the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or distribution or subscription or purchase rights and shall, thereafter and before the distribution to shareholders thereof, legally abandon its plan to pay or deliver such dividend, distribution, subscription or purchase rights, then thereafter 12 no adjustment shall be required by reason of the taking of such record and any such adjustment previously made in respect thereof shall be rescinded and annulled. (g) REORGANIZATION, RECLASSIFICATION, MERGER, CONSOLIDATION OR DISPOSITION OF ASSETS. In case the Company shall reorganize its capital, reclassify its capital stock, merge or consolidate into another corporation, then the number of shares of stock purchasable upon exercise of this Warrant shall be adjusted to consist of the number of shares of stock or other securities that a record holder of the number of shares of Series D Stock purchasable upon exercise of this Warrant immediately prior to such event would own or be entitled to receive immediately after such event. (h) NO ADJUSTMENT. Notwithstanding the foregoing, an adjustment as provided in this Section 5.1 shall not be made if (a) the Company offers securities to the public pursuant to a registration statement under the Securities Act; (b) the Company issues securities pursuant to the acquisition by the Company of any product, technology, know-how or another corporation by merger, purchase of all or substantially all of the assets, or any other reorganization whereby the Company owns over fifty percent (50%) of the voting power of such corporation; (c) the Company issues shares of its capital stock in connection with any stock split, stock dividend or recapitalization by the Company; (d) the company issues any shares of common stock of the Company pursuant to options, warrants or rights granted before the date hereof, or granted before or after the date hereof if granted to purchase shares of such common stock in favor of employees, directors, officers, strategic partners or consultants of the Company or any subsidiary thereof pursuant to a stock option plan or agreement approved by the Company's Board of Directors; provided that such stock options thereunder, if granted after the date hereof, are granted at a conversion or exercise price that the Company's Board of Directors determines in good faith is not less than the fair market value of the securities into which they are exercisable as of the date of grant; or (e) the Company converts any securities into Common Stock pursuant to the Company's Articles of Incorporation, as amended. 5.2. NOTICE TO HOLDER. Whenever the Company takes any action that causes the composition of a Stock Unit to change under Sections 5.1(a) through 5.1(g), the Company shall provide the Holder with written notice of such change and the number of Warrant Shares for which this Warrant is or will become exercisable. Such notice will be provided not more than ten days after any such action has occurred. ARTICLE VI ADDITIONAL NOTICES TO WARRANT HOLDER In addition to any other notice required hereunder, the Company shall provide the Holder with a copy of any notice that the Company is required to provide those Persons holding shares of Series D Stock on the same date such persons receive such notice. 13 ARTICLE VII EXPIRATION Rights to purchase shares under this Warrant shall expire and may not be exercised after the fifth anniversary of their respective Vesting Dates. ARTICLE VIII CERTAIN COVENANTS OF THE COMPANY The Company has taken all action necessary to authorize the issuance of this Warrant and the issuance of shares of Series D Stock upon exercise hereof. The Company covenants and agrees that it will reserve and set apart and have at all times, free from preemptive rights, a number of shares of authorized but unissued Series D Stock or other securities deliverable upon the exercise of this Warrant from time to time sufficient to enable it at any time to fulfill all its obligations hereunder. ARTICLE IX MISCELLANEOUS 9.1. ENTIRE AGREEMENT. This Warrant and the Letter Agreement contain the entire agreement between the Holder and the Company with respect to the purchase of the Warrant Shares and supersedes all prior arrangements or understandings with respect thereto. 9.2. WAIVER AND AMENDMENT. Any term or provision of this Warrant may be waived at any time by the party that is entitled to the benefits thereof, and any term or provision of this Warrant may be amended or supplemented at any time by agreement of the holder hereof and the Company, except that any waiver of any term or condition, or any amendment or supplementation, of this Warrant must be in writing. A waiver of any breach or failure to enforce any of the terms or conditions of this Warrant shall not in any way affect, limit or waive a party's rights hereunder at any time to enforce strict compliance thereafter with any term or condition of this Warrant. In the event this Warrant is ever divided and held by more than one person, the "Holder" for such purposes shall mean the holders of a majority of the Warrant Shares. 9.3. ILLEGALITY. In the event that any one or more of the provisions contained in this Warrant shall be determined to be invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in any other respect and the remaining provisions of this Warrant shall not, at the election of the party for whom the benefit of the provision exists, be in any way impaired. 9.4. FILING OF WARRANT. A Copy of this Warrant shall be filed in the records of the Company. 14 9.5 Notice. Any notice or other document required or permitted to be given or delivered to the Holder shall be delivered personally, or sent by certified or registered mail, to the Holder or the 1st address shown on the books of the Company maintained at this Warrant Office for the registration of, ad the registration of transfer of, the Warrant or at any more recent address of which any Holder shall have notified the Company in writing. Any notice or other document required or permitted to be given or delivered to the Company shall be delivered at, or sent by certified or registered mail to, the Warrant Office, attention: Chief Executive Officer, or such other address within the United States of America as shall have been finished by the Company to the Holder hereof. 9.6 Limitation of Liability; Note Shareholders. No provision of this Warrant shall be construed as confirming upon the Holder the right to vote, consent, receive dividends, or receive notice other than as herein expressly provided in respect of meetings of shareholders for the election of directors of the Company or any other matter whatsoever as a shareholder of the Company. No provision hereof, in the absence of affirmative action by the Holder to purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of such Holder for the purchase price of any Warrant Shares or as a shareholder of the Company, whether such liability is asserted by the Company or by the creditors of the Company. 9.7 Loss, Destruction, Etc. of Warrant. Upon receipt of evidence satisfactory to the Company of the loss, theft, mutilation or destruction of the Warrant, and in the case of any such loss, theft or destruction, upon delivery of a bond of indemnity in such firm and amount shall be reasonably satisfactory to the Company, or in the event of such mutilation, upon surrender and cancellation of the Warrant, the Company shall make and deliver a new warrant, of like tenor, in lieu of such lost, stolen, destroyed or mutilated Warrant. Any Warrant issued under the provisions of this Section 9.7 in lieu of any Warrant alleged to be lost, destroyed or stolen, or in lieu of any mutilated Warrant, shall constitute an original contractual obligation on the part of the Company. IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in its name by its Chief Executive Officer and its corporate seal to be impressed hereon as of the 27th day of January, 1999. [CORPORATE SEAL] WEBMD, INC. Attest: By: /s/ W. Michael Heekin By: /s/ Jeffrey T. Arnold -------------------------------- ---------------------------------- Name: W. Michael Heekin Jeffrey T. Arnold, Chief Executive -------------------------------- Title: Executive Vice President -------------------------------- 15 WARRANT SHARES PURCHASE SCHEDULE
No. of Shares Purchased Date of Purchase Notation by Company Officer - --------------------------- ----------------------- --------------------------- - --------------------------- ----------------------- --------------------------- - --------------------------- ----------------------- --------------------------- - --------------------------- ----------------------- --------------------------- - --------------------------- ----------------------- --------------------------- - --------------------------- ----------------------- ---------------------------
16 EXHIBIT A TO WARRANT NOTICE OF EXERCISE Dated: -------------- The undersigned hereby irrevocably elects to exercise its right to purchase ______ shares of the [SERIES D STOCK] [COMMON STOCK], no par value per share, of WebMD, Inc., such right being pursuant to a Warrant dated __________ , 1999, as issued to Gleacher NatWest Inc., for up to _________ shares of such [SERIES D STOCK] [COMMON STOCK], and (i) remits herewith the sum of $_______ in payment for same in accordance with said warrant or (ii), in accordance with Section 2.2 of the Warrant, elects to receive such number of shares by having credited to the undersigned the Market Value (as such term is defined in the Warrant) of a sufficient number of additional shares of [SERIES D STOCK] [COMMON STOCK] for which the Warrant could otherwise be exercised such that such Market Value equals the Exercise Price for such shares of [SERIES D STOCK] [COMMON STOCK]. INSTRUCTIONS FOR REGISTRATION OF STOCK Name ---------------------------------------------------------------------------- (Please typewrite or print in block letters) Address ------------------------------------------------------------------------- Signature: --------------------- Shares Heretofore Purchased Under Warrant: - ---------------------------------------- EX-23.1 8 CONSENT OF ERNST & YOUNG LLP 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 Corporation that is made a part of the Registration Statement (Form S-4) and Prospectus of Healtheon Corporation for the registration of shares of its common stock. /s/ ERNST & YOUNG LLP Palo Alto, California September 29, 1999 EX-23.2 9 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 1 to Registration Statement No. 333-86685 of Healtheon 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 September 29, 1999 EX-23.3 10 CONSENT OF ERNST & YOUNG LLP 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 dated January 16, 1999, except for Note 13, as to which the date is April 9, 1999, with respect to the financial statements of WebMD, Inc. included in the Registration Statement (Form S-4) and related proxy statement/prospectus of Healtheon Corporation for the registration of shares of its common stock. /s/ Ernst & Young LLP Atlanta, Georgia September 29, 1999 EX-23.4 11 CONSENT OF DELOITTE & TOUCHE LLP 1 Exhibit 23.4 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of Healtheon Corporation on Form S-4 of our report dated August 27, 1999 relating to the consolidated financial statements of MedE America Corporation as of June 30, 1999 and 1998 and for each of the three years in the period ended June 30, 1999, appearing in the Proxy Statement/Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the hearing "Experts" in such Proxy Statement/Prospectus. /s/ DELOITTE & TOUCHE LLP Jericho, New York September 29, 1999 EX-23.5 12 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.5 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-4 of our report dated February 19, 1999 on our audits of the financial statements of Direct Medical Knowledge, Inc. We also consent to the references to our firm under the captions "Experts" and "WebMD Selected Consolidated Financial Data." /s/ PricewaterhouseCoopers LLP San Francisco, California September 29, 1999 EX-23.6 13 CONSENT OF BERG & COMPANY LLP 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 September 29, 1999 San Francisco, CA EX-23.7 14 CONSENT OF KPMG LLP 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 Corporation proxy statement/prospectus on Form S-4 filed with the Securities and Exchange Commission on or about September 29, 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's financial statements as of and for the year ended December 31, 1998 have been restated. 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 LLP Portland, Oregon September 29, 1999 EX-23.8 15 CONSENT OF DELOITTE & TOUCHE LLP 1 Exhibit 23.8 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of Healtheon Corporation on Form S-4 of our report dated October 7, 1997 relating to the statement of income of The Stockton Group, Inc. for the year ended June 30, 1997, appearing in the Proxy Statement/Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Proxy Statement/Prospectus. /s/ DELOITTE & TOUCHE LLP Charlotte, North Carolina September 29, 1999 EX-23.9 16 CONSENT OF KPMG LLP 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 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 Corporation filed on or about September 29, 1999 and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG LLP St. Louis, Missouri September 29, 1999 EX-23.10 17 LETTER TO THE SEC FROM BERG & COMPANY LLP 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 EX-23.12 18 CONSENT OF DELOITTE & TOUCHE LLP 1 Exhibit 23.12 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 1 to Registration Statement No. 333-86685 of Healtheon Corporation on Form S-4 of our report dated February 26, 1999 (June 30, 1999 as to Note 9 - Subsequent Event) relating to the balance sheets of Greenberg News Networks, Inc. (a development stage company) as of December 31, 1997 and 1998 and the related statements of operations, stockholders' equity, and cash flows for the period January 8, 1997 (date of inception) to December 31, 1997, for the year ended December 31, 1998, and for the period January 8, 1997 (date of inception) to December 31, 1998 appearing in this proxy statement/prospectus, which is part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such proxy statement/prospectus. /s/ DELOITTE & TOUCHE LLP Atlanta, Georgia September 29, 1999 EX-23.13 19 CONSENT OF JEFFREY T. ARNOLD 1 EXHIBIT 23.13 CONSENT OF JEFFREY T. ARNOLD The undersigned hereby consents, pursuant to Rule 438 of the Securities Act of 1933, as amended, to the references to him in the proxy statement prospectus constituting part of the Registration Statement on Form S-4 relating to the proposed merger of WebMD, Inc. and Healtheon Corporation, with respect to his being elected or appointed as a director of Healtheon/WebMD Corporation, under the circumstances described therein. /s/ JEFFREY T. ARNOLD ------------------------------------- Jeffrey T. Arnold September 29, 1999 EX-23.14 20 CONSENT OF WILLIAM P. PAYNE 1 Exhibit 23.14 CONSENT OF WILLIAM P. PAYNE The undersigned hereby consents, pursuant to Rule 438 of the Securities Act of 1933, as amended, to the references to him in the proxy statement prospectus constituting part of the Registration Statement on Form S-4 relating to the proposed merger of WebMD Inc. and Healtheon Corporation, with respect to his being elected or appointed as a director of Healtheon/WebMD Corporation, under the circumstances described therein. /s/ William P. Payne ----------------------- William P. Payne September 29, 1999 EX-23.15 21 CONSENT OF U. BERTRAM ELLIS, JR. 1 EXHIBIT 23.15 CONSENT OF U. BERTRAM ELLIS, JR. The undersigned hereby consents, pursuant to Rule 438 of the Securities Act of 1933, as amended, to the references to him in the proxy statement/ prospectus constituting part of the Registration Statement on Form S-4 relating to the proposed merger of WebMD, Inc. and Healtheon Corporation, with respect to his being elected or appointed as a director of Healtheon/WebMD Corporation, under the circumstances described therein. /s/ U. Bertram Ellis, Jr. ------------------------- U. Bertram Ellis, Jr. September 29, 1999 EX-23.16 22 CONSENT OF ERIC J. GLEACHER 1 EXHIBIT 23.16 CONSENT OF ERIC J. GLEACHER The undersigned hereby consents, pursuant to Rule 438 of the Securities Act of 1933, as amended, to the references to him in the proxy statement/prospectus constituting part of the Registration Statement on Form S-4 relating to the proposed merger of WebMD, Inc. and Healtheon Corporation, with respect to his being elected or appointed as a director of Healtheon/WebMD Corporation, under the circumstances described therein. /s/ Eric J. Gleacher ----------------------------------- Eric J. Gleacher September 29, 1999 -----END PRIVACY-ENHANCED MESSAGE-----