-----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, PByr8cQEFWRir/nus8h0jj7RNq1lXmT6213FfyGju6N+rILPm8MyBQSev2UgbBQ3 p9Wdn6AKQRZn1H6LhCuNqw== 0001047469-98-037497.txt : 19981019 0001047469-98-037497.hdr.sgml : 19981019 ACCESSION NUMBER: 0001047469-98-037497 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19981016 SROS: NASD 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-1/A SEC ACT: SEC FILE NUMBER: 333-60427 FILM NUMBER: 98726802 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-1/A 1 S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 16, 1998 REGISTRATION NO. 333-60427 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- AMENDMENT NO. 4 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------- HEALTHEON CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 7374 94-3236644 (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, CA 95054 (408) 876-5000 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ------------------- W. MICHAEL LONG CHIEF EXECUTIVE OFFICER HEALTHEON CORPORATION 4600 PATRICK HENRY DRIVE SANTA CLARA, CA 95054 (408) 876-5000 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------- COPIES TO: LARRY W. SONSINI JACK DENNISON GORDON K. DAVIDSON STEVEN E. BOCHNER VICE PRESIDENT AND LAIRD H. SIMONS III MARK L. REINSTRA GENERAL COUNSEL JEFFREY R. VETTER Wilson Sonsini Goodrich & Rosati HEALTHEON CORPORATION CRAIG A. MENDEN Professional Corporation 4600 Patrick Henry Drive Fenwick & West LLP 650 Page Mill Road Santa Clara, CA 95054 Two Palo Alto Square Palo Alto, CA 94304-1050 (408) 876-5000 Palo Alto, CA 94306 (650) 493-9300 (650) 494-0600
------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT. ------------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / / - --------- If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / / - --------- If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / / - --------- If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: / / ------------------- 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EXPLANATORY NOTE This Registration Statement contains three forms of prospectuses: (1) one prospectus to be used in connection with an offering in the United States and Canada (the "U.S. Prospectus"), (2) one prospectus to be used in connection with a concurrent offering outside of the United States and Canada (the "International Prospectus"), and (3) the remaining prospectus to be used in connection with a non-underwritten sale of Common Stock to an entity controlled by James H. Clark, the Company's Chairman of the Board of Directors (the "Non-Underwritten Prospectus"). The U.S. Prospectus and the International Prospectus are identical in all respects except for the front cover page. The front cover page of the International Prospectus is included herein after the final page of the U.S. Prospectus and is labeled "Alternate Page for International Prospectus." The Non-Underwritten Prospectus is identical to the U.S. Prospectus, except for the front cover page and pages 2 and 75-79, which are included herein after the front page of the International Prospectus. Final forms of each of the Prospectuses will be filed with the Commission pursuant to Rule 424(b) promulgated under the Securities Act of 1933, as amended. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH JURISDICTION. PROSPECTUS (SUBJECT TO COMPLETION) ISSUED OCTOBER 16, 1998 7,287,500 SHARES [LOGO] COMMON STOCK ----------------- OF THE 7,287,500 SHARES OF COMMON STOCK OFFERED HEREBY, 5,830,000 SHARES ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS AND 1,457,500 SHARES ARE BEING OFFERED INITIALLY OUTSIDE OF THE UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS. ALL OF THE SHARES OF COMMON STOCK BEING OFFERED HEREBY ARE BEING SOLD BY THE COMPANY. THE COMPANY HAS REQUESTED THAT THE U.S. UNDERWRITERS RESERVE UP TO 1,088,500 SHARES OF COMMON STOCK FROM THE UNDERWRITTEN OFFERING TO BE OFFERED AT THE PUBLIC OFFERING PRICE TO CERTAIN PERSONS DESIGNATED BY THE COMPANY. SEE "UNDERWRITERS." IN ADDITION, JAMES H. CLARK, THE COMPANY'S CHAIRMAN OF THE BOARD OF DIRECTORS, HAS INDICATED THAT AN ENTITY THAT HE CONTROLS WILL PURCHASE DIRECTLY FROM THE COMPANY AN AGGREGATE OF 2,451,786 SHARES AT THE INITIAL PUBLIC OFFERING PRICE CONCURRENTLY WITH THE CLOSING OF THIS OFFERING. PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $6.00 AND $8.00 PER SHARE. SEE "UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS TO BE CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE. THE SHARES OF COMMON STOCK HAVE BEEN APPROVED FOR QUOTATION ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "HLTH" SUBJECT TO OFFICIAL NOTICE OF ISSUANCE. ------------------------ THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 4 HEREOF. ----------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. --------------------- PRICE $ A SHARE -------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS(1) COMPANY(2) --------------------- ----------------------- ----------------------- PER SHARE.................................... $ $ $ TOTAL(3)..................................... $ $ $
- ------------ (1) THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SEE "UNDERWRITERS." (2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $1,700,000. (3) THE COMPANY HAS GRANTED THE U.S. UNDERWRITERS AN OPTION, EXERCISABLE WITHIN 30 DAYS OF THE DATE HEREOF, TO PURCHASE UP TO AN AGGREGATE OF 978,750 ADDITIONAL SHARES AT THE PRICE TO PUBLIC, LESS UNDERWRITING DISCOUNTS AND COMMISSIONS, FOR THE PURPOSE OF COVERING OVER-ALLOTMENTS, IF ANY. IF THE U.S. UNDERWRITERS EXERCISE SUCH OPTION IN FULL, THE TOTAL PRICE TO PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS AND PROCEEDS TO COMPANY WILL BE $ , $ AND $ , RESPECTIVELY. SEE "UNDERWRITERS." ------------------------ THE SHARES ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND IF ACCEPTED BY THE UNDERWRITERS NAMED HEREIN AND SUBJECT TO APPROVAL OF CERTAIN LEGAL MATTERS BY FENWICK & WEST LLP, COUNSEL FOR THE UNDERWRITERS. IT IS EXPECTED THAT DELIVERY OF THE SHARES WILL BE MADE ON OR ABOUT , 1998 AT THE OFFICE OF MORGAN STANLEY & CO. INCORPORATED, NEW YORK, N.Y., AGAINST PAYMENT THEREFOR IN IMMEDIATELY AVAILABLE FUNDS. ------------------- MORGAN STANLEY DEAN WITTER GOLDMAN, SACHS & CO. HAMBRECHT & QUIST VOLPE BROWN WHELAN & COMPANY , 1998 NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------------- UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ------------------- FOR INVESTORS OUTSIDE THE UNITED STATES: NO ACTION HAS BEEN OR WILL BE TAKEN IN ANY JURISDICTION BY THE COMPANY OR BY ANY UNDERWRITER THAT WOULD PERMIT A PUBLIC OFFERING OF THE REGISTERED SECURITIES OR POSSESSION OR DISTRIBUTION OF THIS PROSPECTUS IN ANY JURISDICTION WHERE ACTION FOR THAT PURPOSE IS REQUIRED, OTHER THAN IN THE UNITED STATES. PERSONS INTO WHOSE POSSESSION THIS PROSPECTUS COMES ARE REQUIRED BY THE COMPANY AND THE UNDERWRITERS TO INFORM THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THE OFFERING OF THE REGISTERED SECURITIES AND THE DISTRIBUTION OF THIS PROSPECTUS. ------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary................ 3 Risk Factors...................... 4 The Company....................... 17 Use of Proceeds................... 18 Dividend Policy................... 18 Capitalization.................... 19 Dilution.......................... 20 Selected Consolidated Financial Data............................ 21 Management's Discussion and Analysis of Financial Condition and Results of Operations....... 23 Business.......................... 34 PAGE ---- Management........................ 48 Certain Transactions.............. 61 Principal Stockholders............ 65 Description of Capital Stock...... 67 Shares Eligible for Future Sale... 70 Certain United States Tax Consequences to Non-U.S. Holders of Common Stock................. 72 Underwriters...................... 75 Legal Matters..................... 78 Experts........................... 78 Additional Information............ 79 Index to Consolidated Financial Statements...................... F-1
--------------------- The Company intends to furnish its stockholders with annual reports containing consolidated financial statements audited by an independent public accounting firm and quarterly reports containing unaudited consolidated financial data for the first three quarters of each year. ------------------- The Company's executive offices are located at 4600 Patrick Henry Drive, Santa Clara, California 95054. Its telephone number at this location is 408-876-5000. ------------------- Healtheon, Healtheon's logo, Virtual Healthcare Network, VHN and ProviderLink are trademarks of the Company. SBCL SCAN is a trademark of SmithKline Beecham Clinical Laboratories, Inc., and each other trademark, trade name or service mark of any other company appearing in this Prospectus is the property of its holder. ------------------- UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS (i) ASSUMES THE SALE OF 2,451,786 SHARES OF COMMON STOCK IN THE RELATED SALE, (ii) ASSUMES NO EXERCISE OF THE U.S. UNDERWRITERS' OVER-ALLOTMENT OPTION, (iii) GIVES EFFECT TO THE FILING, PRIOR TO THE CLOSING OF THIS OFFERING, OF A CERTIFICATE OF INCORPORATION AUTHORIZING 150,000,000 SHARES OF COMMON STOCK AND 5,000,000 SHARES OF UNDESIGNATED PREFERRED STOCK AND (iv) GIVES EFFECT TO A 5,000,000 SHARE INCREASE IN THE NUMBER OF SHARES RESERVED UNDER THE COMPANY'S 1996 STOCK PLAN (THE "1996 PLAN") AND THE RESERVATION OF 1,000,000 SHARES OF COMMON STOCK FOR FUTURE ISSUANCE UNDER THE COMPANY'S 1998 EMPLOYEE STOCK PURCHASE PLAN (THE "1998 PURCHASE PLAN"). IN THIS PROSPECTUS, UNLESS THE CONTEXT OTHERWISE INDICATES, REFERENCES TO "HEALTHEON" OR THE "COMPANY" ARE TO HEALTHEON CORPORATION, A DELAWARE CORPORATION, AND ITS CONSOLIDATED SUBSIDIARIES. --------------------- CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR, AND PURCHASE, SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS." DESCRIPTION OF ARTWORK At the top of the page there is a colored band with the Healtheon name and logo on the left and the text "Pioneering the use of the Internet to simplify workflows, decrease costs, and improve the quality of patient care throughout the healthcare industry." On the middle left is the heading "Healtheon's Virtual Healthcare Networks" over a cloud labeled "Internet" with the Healtheon logo superimposed. The cloud has pictures of a telephone, a handheld computing device, a television with internet access, and a computer monitor. The cloud is connected to four photographs by lightning bolts. The upper left picture shows images from a laboratory and has the heading "Suppliers" with the subheadings "Laboratories, Pharmacies, Mail Order Drug and Pharmacy Benefit Managers." The upper right picture is of doctors and has the heading "Providers" with the subheadings "Physicians, Hospitals, Integrated Delivery Networks, Independent Practice Associations and Practice Management Companies." The lower left picture shows patients and has the heading "Consumers" with the subheadings "Employers", Government Agencies, Individuals and Benefit Brokers." The lower right picture shows business people and has the heading "Payors" with the subheadings "Government Agencies, Insurance Companies, Managed Care Companies, and Preferred Provider Organizations." On the middle right are two layers of plugs which connect the Healtheon logo identified as the "Healtheon Platform." This section has the heading "The Healtheon Platform" and is connected by a colored band to the cloud on the left. The upper level of plugs is identified as applications and has plugs for "Claims, Transcription, Authorizing, Workflow Engine, M.D. Search, Referrals, Reporting, Rules Engine, Registration, Eligibility, Person Index, Enrollment, Lab Orders and Prescriptions." There is a plug called "New Applications" over an arrow coming from three sources -- "Healtheon Applications, 3rd Party Applications and Legacy Applications." The lower level of plugs is identified as "Data Objects." One plug, labeled "Data", is over an arrow coming from two sources -- "Legacy Databases" and "Private Networks." The large Healtheon logo is surrounded by an inner band labeled "Security" and an outer band labeled "Flexibility - Usability - Sealability - Availability - Extensibility - Manageability - Performance - Fault Tolerance." The bottom of the page has a large arrow going from left to right with the heading "Enabling a New Model for Managing Healthcare Information and Transactions." To the left of the arrow is the term "Fragmented Legacy Software", and to the right is the term "Network Services Model." Inside the arrow is the following text: "HEALTHEON'S VIRTUAL HEALTHCARE NETWORKS connect providers, payors, consumers and suppliers over the public Internet or private intranets, and provide services and applications that enable the secure exchange of information, transactions and simplified workflows across the healthcare industry. At the center of these networks is THE HEALTHEON PLATFORM, an open framework for providing mission-critical applications and supporting complex healthcare transactions, while at the same time ensuring scalability, availability and security." PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION INCLUDING "RISK FACTORS" AND THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. THE COMPANY 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 and developed an Internet-based information and transaction platform (the "Healtheon Platform") that allows it to create Virtual Healthcare Networks ("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'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 provides its own applications on the Healtheon Platform and also enables third-party applications to operate on the platform. In addition to Virtual Healthcare Networks, Healtheon provides comprehensive consulting, development, implementation and network management services to enable its customers to take full advantage of the capabilities of the Healtheon Platform. To date, the Company's revenue has been derived primarily from non-Internet network services, development and consulting services and from management and operation of customers' information technology infrastructure. The Company has established strategic relationships with leading healthcare companies, including United HealthCare Corporation, SmithKline Beecham Clinical Laboratories, Inc., Brown & Toland Physician Services Organization and Beech Street Corporation, to enhance its application portfolio, provide important specialized industry expertise, increase its market penetration and generate revenue. An investment in the Common Stock offered hereby involves risks and uncertainties, including the risks that the healthcare industry may be resistant to the adoption of new information technology due to concerns about government regulation, patient confidentiality and security. See "Risk Factors." THE OFFERING Common Stock offered: U.S. offering...................................................... 5,830,000 shares International offering............................................. 1,457,500 shares Total............................................................ 7,287,500 shares Common Stock to be outstanding after the offering(1)................. 61,444,233 shares Use of proceeds...................................................... To retire short-term debt and for general corporate purposes, including working capital and capital expenditures. See "Use of Proceeds." Proposed Nasdaq National Market symbol............................... "HLTH"
SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, -------------------------------- ---------------------- 1995 1996 1997 1997 1998 ------- ---------- ---------- ----------- -------- (RESTATED) (RESTATED) (RESTATED) (UNAUDITED) CONSOLIDATED STATEMENT OF OPERATIONS DATA(2): Revenue................................................... $ 2,175 $ 11,013 $ 13,390 $ 4,286 $ 20,653 Loss from operations...................................... (3,936) (16,541) (25,423) (12,697) (21,827) Net loss applicable to common stockholders................ $(4,458) $(18,606) $(28,005) $(14,177) $(22,331) Basic and diluted net loss per common share............... $ (.85) $ (2.83) $ (3.88) $ (1.97) $ (1.27) Weighted-average shares outstanding used in computing basic and diluted net loss per common share(3)........... 5,246 6,583 7,223 7,193 17,632 Pro forma basic and diluted net loss per common share (unaudited)(4)........................................... $ (.56) $ (.46) Shares used in computing pro forma basic and diluted net loss per common share (unaudited)(3)..................... 44,715 46,631
JUNE 30, 1998 ----------------------- ACTUAL AS ADJUSTED(4) ------- -------------- (UNAUDITED) BALANCE SHEET DATA(2): Cash, cash equivalents and short-term investments................................. $12,801 $ 76,079 Working capital.............................. 2,560 65,838 Total assets................................. 49,410 112,688 Long-term obligations, net of current portion..................................... 1,459 1,459 Stockholders' equity......................... 31,715 94,993
- ------------- (1) Based on the number of shares outstanding as of June 30, 1998. Excludes (i) 8,997,995 shares of Common Stock issuable upon the exercise of options then outstanding, with a weighted average exercise price of $1.17 per share, (ii) 6,022,523 shares reserved for issuance under the 1996 Plan and the 1998 Purchase Plan, (iii) 2,077,240 shares of Common Stock issuable upon the exercise of warrants then outstanding, with a weighted average exercise price of $2.81 per share and 500,000 shares of Common Stock to be subject to a warrant with an exercise price of $10.40 per share issuable to a customer and (iv) 1,600,000 shares of Common Stock issued in connection with the acquisition of Metis, LLC in August 1998, of which 476,548 shares will be issued to employees pursuant to restricted stock purchase agreements subject to a lapsing right of repurchase, at the option of the Company, over the respective vesting periods. Includes 2,451,786 shares to be sold in a non-underwritten transaction (the "Related Sale") to an entity controlled by James H. Clark, the Company's Chairman of the Board of Directors. In July and September 1998, the Company granted options to purchase Common Stock and issued shares of Common Stock pursuant to restricted stock agreements equal to a total of 3,433,500 shares of Common Stock with a weighted-average exercise or purchase price of $5.44 per share. The Company estimates that it will record deferred compensation during the three months ending September 30, 1998 of approximately $6.0 million with regard to these grants and issuances. See "Management -- Employee Benefit Plans," "Description of Capital Stock" and Notes 10, 11, 15 and 16 of Notes to Consolidated Financial Statements. (2) The consolidated financial data reflects the business combination of Healtheon and ActaMed Corporation ("ActaMed"), which was accounted for as a pooling of interests for accounting purposes. All statements of operations prior to the acquisition on May 19, 1998 have been restated to reflect the combined results of Healtheon and ActaMed from inception. The consolidated statement of operations data for the year ended December 31, 1995 are derived solely from the ActaMed statement of operations for such period because Healtheon did not commence operations until January 1996. See Notes 1 and 2 of Notes to Consolidated Financial Statements for a discussion of the accounting for the acquisition of ActaMed. (3) See Note 1 of Notes to Consolidated Financial Statements for an explanation of shares used in computing basic and diluted net loss per common share. (4) As adjusted to give effect to (i) the sale of the shares of Common Stock offered by the Company in its underwritten initial public offering (the "Underwritten Offering") at an assumed initial public offering price of $7.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company and (ii) the Related Sale (assuming an initial public offering price of $7.00 per share) and the application of the net proceeds therefrom. See "Use of Proceeds" and "Capitalization." 3 RISK FACTORS IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS CONTEMPLATED BY THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE DISCUSSED BELOW AND ELSEWHERE IN THIS PROSPECTUS. LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT AND UNPROVEN BUSINESS MODEL. The Company was founded in December 1995, commenced operations in January 1996 and, until late 1997, had not recognized substantial revenue and was considered to be in the development stage. In May 1998, the Company acquired ActaMed Corporation ("ActaMed"). As a result of the limited operating history of Healtheon and ActaMed as a combined entity and the emerging nature of the markets in which the Company operates, the Company's historical financial data is of limited value in projecting future operating results. The combined Company's limited revenue to date has been derived primarily from proprietary non-Internet network services offered by ActaMed, development and consulting services and from management and operation of customers' information technology infrastructure. The Company has incurred net losses since inception and, as of June 30, 1998, had an accumulated deficit of $71.7 million. The Company intends to continue investing heavily in acquisitions, infrastructure development, application development and sales and marketing. As a result, the Company expects to incur substantial operating losses at least through 1999 and there can be no assurance that the Company will ever achieve significant revenue or profitability or that, if significant revenue and profitability are achieved, they can be sustained. The Company's business model is still in an emerging stage, and revenue and income potential from the Company's business is unproven, making an evaluation of the Company and its prospects difficult. Investors should not use the Company's past results as a basis to predict future performance. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." EMERGING MARKET; UNCERTAIN ACCEPTANCE BY THE HEALTHCARE INDUSTRY. The healthcare industry in general has been extremely resistant to adopting new information technology solutions. Electronic information exchange and transaction processing by the healthcare industry is still developing, and complexities in the nature and types of transactions that must be processed have hindered the development and acceptance of information technology solutions. There can be no assurance that conversion from traditional methods to electronic information exchange will continue to occur or that any such conversion will occur as rapidly as the Company anticipates. Even if the conversion does occur as rapidly as the Company anticipates, there can be no assurance that healthcare industry participants will use the Company's applications and services. Healtheon's success is dependent on its ability to attract a significant number of customers from the healthcare industry. There can be no assurance that the Company will be successful in achieving widespread acceptance of its applications and services or in achieving market share before competitors offer products, applications or services with features similar to those of the Company's current or proposed offerings. The Company's business plan is based on its belief that the value and market appeal of its solution will grow as the number of participants and the scope of the transaction services available on the Company's platform increase. If a significant number of participants fail to adopt the Company's information technology solutions or adopt such solutions more slowly than anticipated, the number of transactions conducted over the Company's platform will be lower than expected and the Company may not achieve the critical mass of users it believes is necessary to enable the success of its applications and services. The Company anticipates generating a substantial portion of its revenue from subscription and transaction-based fees. Consequently, any significant shortfall in the number of users or transactions occurring over the Company's platform from those anticipated by the Company could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Industry Background." 4 RELIANCE ON STRATEGIC RELATIONSHIPS. The Company is substantially dependent on establishing and maintaining strategic relationships with multiple healthcare industry leaders in a number of healthcare segments to extend the reach of Healtheon's applications and services to the various participants in the healthcare industry, to obtain specialized healthcare expertise, to develop and deploy new applications, to establish the Healtheon brand and to generate revenue. The Company has limited experience in establishing and maintaining strategic relationships with healthcare industry participants. The Company's ability to build strategic relationships is complicated by the fact that some of the Company's partners and potential partners are possible competitors of the Company. In addition, as the Company builds relationships with particular partners, it may become difficult or impossible for the Company to build relationships with competitors of these partners which may also be key participants in the healthcare industry. Consequently, it is important that the Company be perceived as independent of any particular customer or partner. Moreover, many potential partners may be hesitant to work with the Company until the Company's applications and services have been successfully introduced and have achieved market acceptance. The Company's success will depend both on the success of the other parties to these strategic relationships and on the ability of these other parties to drive increased adoption and usage of the Company's platform, applications and services. Failure of one or more of the Company's strategic relationships to increase the adoption and usage of the Company's platform, applications and services could have a material adverse effect on the Company's business, financial condition and results of operations. To date, the Company has established only a limited number of strategic relationships, and the loss of any of these strategic relationships, the failure to enter into new strategic relationships in the Company's target markets or the failure of the Company's strategic partners to actively pursue these relationships could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Strategy" and "-- Strategic Relationships." NEED TO EXPAND SUITE OF APPLICATIONS. The Company 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. The Company currently offers a limited number of applications on its platform. The Company does not have the internal resources and specialized healthcare expertise to develop all such applications independently and, consequently, must rely on a combination of internal development, strategic relationships, licensing and acquisitions. Each of these methods has risks, including the risk of unanticipated costs and delays. See "-- Reliance on Strategic Relationships" and "-- Risks Associated with Acquisitions." Any such applications, whether developed internally by the Company or licensed or acquired from third parties, must be integrated and customized to operate with existing customer legacy systems and the Company's platform. These development, integration and customization efforts will require significant expenditures by the Company, and there can be no assurance that the Company will be able to develop such additional applications and services or to integrate or customize such applications and services in a timely manner, or at all. Even if the Company is able to develop and introduce additional applications for the Healtheon Platform, there can be no assurance that these new applications will achieve market acceptance. The inability of Healtheon to significantly expand the breadth of applications available on its platform in a timely manner, or the failure of new applications introduced by the Company to achieve market acceptance, could have a material adverse effect on the Company's business, financial condition and results of operations. RISKS ASSOCIATED WITH ACQUISITIONS. A principal component of the Company's growth strategy is the acquisition of other healthcare technology companies and technologies to increase the number and variety of applications on the Company's platform and to increase the Company's customer base. For example, in May 1998, Healtheon acquired ActaMed, and in August 1998 the Company acquired substantially all the assets of Metis, LLC. The Company's ability to expand successfully through acquisitions depends on many factors, including the identification of applications, technologies or businesses that are complementary to those of Healtheon, the integration of disparate technologies and corporate cultures and the operation of a geographically dispersed company. In addition, acquisitions could divert management's attention from 5 other business concerns, expose the Company to unforeseen liabilities or risks associated with entering markets in which the Company may have no direct prior experience or to risks associated with the market acceptance of acquired applications and technologies, or result in the loss of key employees of the Company or the acquired company. See "-- Dependence on Key Personnel." The Company's future performance will depend on its ability to integrate the organizations and technologies acquired by the Company, which, even if successful, may take a significant period of time, will place a significant strain on the Company's resources, and could subject the Company to additional expenses during the integration process. In addition, existing or potential customers might be threatened by certain strategic relationships that acquired companies have with competitors of Healtheon's customers. As a result, there can be no assurance that the Company will be able to integrate any acquired businesses or technologies successfully or in a timely manner, to operate any acquired businesses on a profitable basis, or to achieve operating synergies necessary to make the acquisitions successful. There is significant competition for acquisition opportunities, which may intensify due to increasing consolidation in the healthcare industry. The Company competes for acquisition opportunities with other companies that have significantly greater financial and managerial resources than the Company. The Company's inability to identify appropriate acquisition opportunities, consummate acquisitions or integrate acquired applications, technologies, operations, personnel or businesses successfully could have a material adverse effect on the Company's business, financial condition and results of operations. Healtheon intends to use its securities as consideration for future acquisitions, which may result in potentially dilutive issuances of securities. To date, the Company has not used cash as acquisition consideration; to the extent the Company chooses to do so in the future, the Company may be required to obtain additional financing, and there can be no assurance that such financing will be available on favorable terms, if at all. In addition, Healtheon may be required to amortize significant amounts of goodwill and other intangible assets in connection with future acquisitions and may incur additional compensation expenses which could have a material adverse effect on the Company's results of operations. See "-- Future Capital Needs; Uncertainty of Additional Financing." MANAGEMENT OF GROWTH. The Company has rapidly and significantly expanded its operations and anticipates that significant future expansion will be required. Such growth has placed, and is expected to continue to place, a significant strain on the Company's managerial, operational, financial and other resources. As of June 30, 1998, the Company had grown to 379 employees, from 109 employees on December 31, 1997, primarily as a result of its acquisition of ActaMed in May 1998, which resulted in the addition of 196 employees. In addition, the Company has only recently hired its Chief Financial Officer, as well as other members of senior management. The Company expects that continued hiring of new personnel will be required to support its business. The Company is in the process of evaluating its accounting and management information systems and anticipates that it may implement new systems within the next 12 months. The Company could experience interruptions to its business in transitioning to new systems. There can be no assurance that the Company's systems, procedures or controls will continue to be adequate to support the Company's operations or that the Company's management will be able to achieve the rapid execution necessary to exploit the market for the Company's applications and services. See "Management." UNCERTAIN ADOPTION OF INTERNET SOLUTIONS. Growth in the market for the Company's applications and services will depend upon the adoption of Internet solutions by healthcare participants. The adoption of Internet solutions for commerce and communications requires the acceptance of a new way of conducting business and exchanging information. The healthcare industry, in particular, relies on legacy systems that may be unable to benefit from Healtheon's Internet-based platform. The Internet may not prove to be a viable commercial marketplace for a number of reasons, including inadequate development of the necessary infrastructure, security concerns, lack of development of complementary products, such as high speed modems and high speed communication lines, implementation of competing technologies, delays in the development or adoption of new standards and protocols required to handle increased levels of 6 Internet activity and governmental regulation. The Internet has experienced, and is expected to continue to experience, significant growth in the number of users and volume of traffic. There can be no assurance that Internet infrastructure will continue to be able to support the demands placed on it by this continued growth. If critical issues concerning the ability of Internet solutions to improve business processes are not resolved or if the necessary infrastructure is not developed, the Company's business, financial condition and results of operations will be materially adversely affected. The adoption of the Company's solution depends upon the acceptance of network computing, in which computers with relatively little software and storage capacity use Internet protocol networks to access software functions and databases that are contained on remote servers. Although the Company's applications and services can generally accommodate legacy and client-server systems, customers using these systems may be reluctant to adopt new systems when they have made extensive investment in hardware, software and training for older systems. Furthermore, although aspects of the network computing model exist today, large-scale implementation is untested. Problems with speed, access, server reliability, security and public acceptance of Internet protocol networks could materially adversely affect the adoption of Internet-based systems such as the Company's platform. For the Healtheon Platform to be as successful as the Company desires, healthcare participants must be willing to allow sensitive information to be stored in Healtheon's databases. Although Healtheon processes transactions for healthcare participants that maintain information on proprietary systems, the benefits of connectivity and sophisticated information management that the Company provides are limited under such circumstances. If any of the foregoing limits the acceptance or effectiveness of network computing, the Company's business, financial condition and results of operations could be materially and adversely affected. SECURITY, NETWORK AND CONFIDENTIALITY RISKS. Critical issues concerning the use of Internet solutions including security, reliability and confidentiality remain unresolved and may affect the growth and use of such solutions to solve business problems. If these issues are not addressed successfully, the Internet may prove not to be a viable means of conducting complex business transactions, which would have a material adverse effect on the Company's business, financial condition and results of operations. The Company currently processes substantially all its customer transactions and data at its facilities in Santa Clara, California and Atlanta, Georgia. Although the Company has safeguards for emergencies, the Company has no mirror processing site to which processing could be transferred in the case of a catastrophic event at either of these facilities. Consequently, transactions supported in one facility cannot be supported in the Company's other facility should a catastrophic event occur. The occurrence of a major catastrophic event at either the Santa Clara or the Atlanta facility could lead to an interruption of data processing or loss of stored data and could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the ability of the Company to process health-related transactions is dependent on the efficient operation of the Internet connections from customers to its systems. Such connections, in turn, are dependent upon efficient operation of Web browsers, Internet service providers and Internet backbone service providers, all of which have had periodic operational problems or experienced outages in the past. Any such problems or outages could adversely affect customer satisfaction with the Company's applications and services, which could have a material adverse effect on the Company's business, financial condition and results of operations. The Company retains confidential customer and patient information in its processing centers. Therefore, it is critical that the Company's facilities and infrastructure remain secure and that its facilities and infrastructure are perceived by the marketplace to be secure. Despite the implementation of security measures, the Company's infrastructure may be vulnerable to physical break-ins, computer viruses, programming errors, attacks by third parties or similar disruptive problems. Any material security breach could result in liability to the Company and damage to its reputation. There can be no assurance that the Company will be successful in maintaining the security of its operations or the data stored at its processing centers. 7 RAPID TECHNOLOGICAL CHANGE; NEW APPLICATION AND SERVICES INTRODUCTIONS. The emerging market for healthcare information exchange and transaction processing is characterized by rapid technological developments, frequent new product introductions and evolving industry standards. The emerging nature of this market and its rapid evolution will require that the Company 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 applications and services 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 the Company's competitors and market acceptance. There can be no assurance that the Company will be successful in developing and marketing new applications and services that respond to competitive and technological developments and changing customer needs. The failure of the Company to develop and introduce new applications and services successfully on a timely basis and to achieve market acceptance for such applications and services could have a material adverse effect on the Company'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 the Company to adapt its applications and services. Moreover, there is a risk that a competitor's product might become the standard for healthcare information services. See "Business -- Healtheon's Services" and "-- Development and Engineering." UNPROVEN PLATFORM INFRASTRUCTURE AND SCALABILITY. To date, the type and volume of transactions processed over the Company's platform and the number of healthcare participants connected to it have been relatively limited. The Company must continue to expand and adapt its network infrastructure to accommodate additional users, increased transaction volumes and changing customer requirements. The expansion, adaptation and maintenance of the Company's network infrastructure will require substantial financial, operational and management resources. Increased usage will place additional stress upon the Company's network hardware and traffic management systems. Due to the limited deployment of the Company's services to date, the ability of the Company's networks to connect and manage a substantially larger number of customers and transactions at high transmission speeds is as yet unknown, and the Company faces risks related to the networks' abilities to scale to expected customer levels while maintaining sufficient performance. Many of the Company's services agreements contain performance standards, and the failure by the Company to meet these standards could result in the termination of these agreements, which could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company will be able to expand or adapt its network infrastructure to meet additional demand or its customers' changing requirements on a timely basis and at a commercially reasonable cost, or at all. If the Company's platform architecture is unable to scale to support the variety and number of transactions and healthcare participants anticipated, the Company's business, financial condition and results of operations would be materially adversely affected. CUSTOMER CONCENTRATION AND RELATED PARTY REVENUE. Four customers have historically accounted for the substantial majority of the Company's revenue. United HealthCare Corporation ("United HealthCare"), SmithKline Beecham Clinical Laboratories, Inc. ("SmithKline Labs"), Brown & Toland Physician Services Organization ("Brown & Toland") and Beech Street Corporation ("Beech Street") each accounted for over 10% and collectively accounted for over 90% of the Company's total revenue for the six months ended June 30, 1998. In addition, United HealthCare and Brown & Toland, each accounted for over 10% and collectively accounted for approximately 70% of the Company's total revenue for the year ended December 31, 1997. In addition, related party customers, including United HealthCare and SmithKline Labs, accounted for 55% and 45% of the Company's total revenue for the year ended December 31, 1997 and the six months ended June 30, 1998, respectively. United HealthCare and SmithKline Labs will own approximately 13.7% and 6.9%, respectively, of the Company's Common Stock after the Underwritten Offering and the Related Sale. The Company expects that a small number of 8 customers will continue to account for a substantial portion of the Company's total revenue for the foreseeable future. The loss of one or more of the Company's significant customers, or the failure of the Company to generate anticipated revenue from these customers, could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Strategic Relationships." COMPETITION. The market for healthcare information services is intensely competitive, rapidly evolving and subject to rapid technological change. Many of the Company's actual and potential competitors have announced or introduced Internet strategies. The Company's competitors can be divided into several groups: healthcare information software vendors, including HBO & Company and Shared Medical Systems Corporation; healthcare electronic data interchange companies, including ENVOY Corporation and National Data Corporation; and large information technology consulting service providers, including Andersen Consulting, International Business Machines Corporation and Electronic Data Systems Corporation. Each of these companies is expected to compete with the Company within certain segments of the healthcare information technology market. Furthermore, major software information systems companies and others, including those specializing in the healthcare industry that are not presently offering applications competitive with those offered by the Company, may enter the Company's markets. In some cases, large customers may have the ability to compete directly with the Company as well. The Company also competes with smaller regional competitors. Many of the Company's competitors and potential competitors have significantly greater financial, technical, product development, marketing and other resources and greater market recognition than the Company. Many of the Company's competitors also currently have, or may develop or acquire, substantial installed customer bases in the healthcare industry. As a result of these factors, the Company's competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion and sale of their applications or services than the Company. There can be no assurance that the Company will be able to compete successfully against current and future competitors or that competitive pressures faced by the Company will not materially adversely affect its business, financial condition and results of operations. CHANGES IN THE HEALTHCARE INDUSTRY. The healthcare industry is highly regulated and is subject to changing political, economic and regulatory influences that may affect the procurement practices and operation of healthcare organizations. Changes in current healthcare financing and reimbursement systems could result in the need for unplanned enhancements of applications or services, in delays or cancellations of orders or in the revocation of endorsement of the Company'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 react to these proposals and the uncertainty surrounding such proposals by curtailing or deferring investments, including investments in the Company's applications and services. The Company cannot predict what impact, if any, such proposals or healthcare reforms might have on the Company. In addition, many healthcare providers are consolidating to create integrated healthcare delivery systems with greater regional market power. As a result, these emerging systems could have greater bargaining power, which might lead to price erosion for the Company's applications and services. The failure of the Company to maintain adequate price levels could have a material adverse effect on the Company's business, financial condition and results of operations. As the number of healthcare delivery enterprises decreases due to further industry consolidation, each new customer will become more significant and competition for such customer, will become greater. GOVERNMENT REGULATION. Laws and regulations may be adopted with respect to the Internet or other on-line services covering issues such as user privacy, pricing, content, copyrights, distribution and characteristics and quality of products and services. The adoption of any additional laws or regulations may 9 impede the growth of the Internet or other on-line services, which could, in turn, decrease the demand for the Company's applications and services and increase the Company's cost of doing business, or otherwise have an adverse effect on the Company's business, financial condition and results of operations. For example, under current Health Care Financing Administration guidelines, Medicare eligibility information cannot be transmitted over the Internet. Moreover, the applicability to the Internet of existing laws in various jurisdictions governing issues such as property ownership, sales and other taxes, libel and personal privacy is uncertain and may take years to resolve. Any such new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to the Company's business, or the application of existing laws and regulations to the Internet and other online services could have a material adverse effect on the Company's business, financial condition and results of operations. The confidentiality of patient records and the circumstances under which such records may be released for inclusion in the Company's databases are subject to substantial regulation by state governments. These state laws and regulations govern both the disclosure and the use of confidential patient medical record information. Although compliance with these laws and regulations is at present principally the responsibility of the hospital, physician or other healthcare provider, regulations governing patient confidentiality rights are evolving rapidly. Additional legislation governing the dissemination of medical record information has been proposed at both the state and federal level. This legislation may require holders of such information to implement security measures that may require substantial expenditures by the Company. There can be no assurance that changes to state or federal laws will not materially restrict the ability of healthcare providers to submit information from patient records using the Company's applications. Legislation currently being considered at the federal level could impact the manner in which the Company conducts its business. For example, the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") mandates the use of standard transactions, standard identifiers, security and other provisions by the year 2000. The Company is designing its platform and applications to enable compliance with the proposed regulations; however, until such regulations become final, they could change, which could require the Company to expend additional resources to comply with the revised standards. In addition, the success of the Company's compliance efforts may be dependent on the success of healthcare participants in dealing with the standards. International regulations with respect to the Internet, privacy and transborder data flows are considerably more developed than such regulations in the United States. The Company intends to develop applications and services to be used on a worldwide basis and, consequently, will be required to comply with international regulations regarding the Internet and electronic commerce, as well as with U.S. regulations. The Company has not evaluated the effect that these regulations would have on its business, and there can be no assurance that such regulations will not have an adverse effect on the Company's ability to compete internationally. The United States Food and Drug Administration ("FDA") is responsible for assuring the safety and effectiveness of medical devices under the Federal Food, Drug and Cosmetic Act. Computer applications and software are considered medical devices and subject to regulation by the FDA when they are indicated, labeled or intended to be used in the diagnosis of diseases or other conditions, or in the cure, mitigation, treatment or prevention of disease, or are intended to affect the structure or function of the body. The Company does not believe that any of its current applications or services are subject to FDA jurisdiction or regulation; however, the Company plans to expand its application and service offerings into areas that may subject it to FDA regulation. The Company has no experience in complying with FDA regulations. Healtheon's compliance with FDA regulations could prove to be time consuming, burdensome and expensive, which could have a material adverse effect on the Company's ability to introduce new applications or services in a timely manner. VARIABILITY IN QUARTERLY OPERATING RESULTS. The Company's quarterly revenue and operating results have varied in the past and are likely to vary substantially in the future. Quarterly revenue and operating 10 results may fluctuate as a result of a number of factors, including: changes in relationships with the Company's present or prospective strategic partners; the timing and significance of any future acquisitions by the Company; the timing and significance of the entry by the Company into new healthcare markets; the timing and significance of new customer acquisitions; changes in the Company's application and service offerings; software defects, delays in application development and other quality factors; demand for the Company's applications and services; the ability of the Company to meet project milestones or otherwise meet customer expectations; the mix of consulting and transaction fee revenue recorded by the Company; variability in demand for Internet-based healthcare solutions; changes within the healthcare industry; and seasonality of demand. The Company intends to increase its marketing, sales, development and engineering, and administrative activities and to increase other operating expenses as required to integrate the operations, technologies and networks of recent and any future acquisitions and to expand its platform infrastructure and operations. The Company anticipates that these expenses could significantly precede any revenue generated by such increased spending. If the Company does not experience significantly increased revenue from these efforts, the Company's business, financial condition and results of operations could be materially and adversely affected. In addition, the Company's expense levels are based in part upon its expectations concerning future revenue and are relatively fixed in the short-term. Consequently, if the Company's revenue is below expectations in any period, the Company may not be able to adjust its spending levels in a timely manner, which could have an immediate and material adverse effect on the Company's business, financial condition and results of operations. For these and other reasons, in some future quarters, the Company's results of operations may fall below the expectations of securities analysts or investors, which could have a material adverse effect on the market price of the Company's Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." RISK OF PRODUCT-RELATED CLAIMS. Applications and services as complex as those offered or developed by the Company frequently contain defects or failures. There can be no assurance that, despite testing by the Company and potential customers, defects or errors will not occur in existing or new applications or that the Company's platform will not experience problems in security, availability, scalability or other critical features, any of which could result in loss of or delay in revenue, loss of market share, failure to achieve market acceptance, diversion of development resources, injury to the Company's reputation, or increased insurance costs, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, many of the Company's services agreements contain performance standards, and the failure by the Company to meet these standards could result in the early termination of these agreements, which could have a material adverse effect on the Company's business, financial condition and results of operation. Many of the Company's strategic relationships and services agreements involve the development, implementation and maintenance of Internet or electronic data interchange-based applications and services that are critical to the operations of its clients' businesses. In many cases, these services are provided within a complex environment of legacy or client-server systems or rely on third party applications. The Company's failure or inability to meet a client's expectations in the performance of its services (particularly with regard to proprietary information and patient records) could injure the Company's reputation or result in a claim for substantial damages against the Company, regardless of the Company's responsibility for such failure. In addition, if healthcare industry participants receive incorrect information or fail to receive required information in a timely manner, patient care may be adversely affected, which could lead to claims of liability against the Company. There can be no assurance that the Company's insurance would protect it from such risks. Any unauthorized disclosure or use of this confidential information could result in a claim for substantial damages. The Company attempts to limit contractually its damages arising from negligent acts, errors, mistakes or omissions in rendering its services; however, there can be no assurance that any contractual protections will be enforceable or would otherwise protect the Company from liability for damages. Although the 11 Company maintains general liability insurance coverage that it believes is adequate, including coverage for errors and omissions, there can be no assurance that such coverage will continue to be available on reasonable terms or will be available in sufficient amounts to cover one or more large claims, or that the insurer will not disclaim coverage as to any future claim. The successful assertion of one or more large claims against the Company, with respect to which the Company is uninsured or that exceed available insurance coverage or result in changes to the Company's insurance policies, including premium increases or the imposition of a large deductible or co-insurance requirements, could adversely affect the Company's business, financial condition and results of operations. DEPENDENCE ON PROPRIETARY TECHNOLOGY; POTENTIAL LITIGATION. The Company relies upon a combination of trade secret, copyright and trademark laws, license agreements, confidentiality procedures, employee nondisclosure agreements and technical measures to protect its intellectual property. Substantial litigation regarding intellectual property rights exists in the Company's industry, and the Company expects that its applications may be increasingly subject to third-party infringement claims as the number of competitors in the Company's industry grows and the functionality of applications overlaps. There can be no assurance that the Company will be able to prevent misappropriation of its intellectual property. Effective intellectual property protection may not be available in every country in which the Company intends to offer its services. There can be no assurance that the steps taken by the Company to protect its proprietary rights will be adequate or that third parties will not infringe or misappropriate the Company's copyrights, trademarks and similar proprietary rights, or that the Company will be able to detect unauthorized use of its intellectual property and take appropriate steps to enforce its rights. There can be no assurance that other parties will not assert infringement claims against the Company. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources by the Company. If it were determined that the Company infringed the intellectual property rights of third parties, the Company would be required to develop non-infringing technology, obtain a license to such intellectual property or cease selling the applications that contain the infringing intellectual property. There can be no assurance that the Company would be able to develop noninfringing technology or that it could obtain a license on commercially reasonable terms, or at all. Moreover, if it is determined that the Company infringed the intellectual property rights of others, it could be required to pay substantial damages, which could have a material adverse effect on the Company's business, financial condition and results of operations. LENGTHY SALES AND IMPLEMENTATION CYCLES FOR CERTAIN APPLICATIONS AND SERVICES. A key element of the Company's strategy is to market its applications and services directly to large healthcare organizations. Based on its sales experience to date, the Company expects that the sale and implementation of its applications to these large healthcare organizations will be lengthy and involve a significant technical evaluation and commitment of capital and other resources by these organizations. Therefore, the Company expects that the sale and implementation of the Company's healthcare applications and services will be subject to the risk of delays associated with customers' internal budgets and other procedures for approving large capital expenditures, deploying new technologies within their networks and testing and accepting new technologies that affect key operations. For these and other reasons, the sales and implementation cycles associated with certain of the Company's applications and services are expected to be unpredictable and are subject to a number of significant risks that are beyond the Company's control. In addition, the Company will be required to expend substantial resources to integrate its applications with the existing architectures of these large healthcare organizations. The Company has very limited experience in integrating its applications with large legacy and client-server architectures, and there can be no assurance that it will not experience delays in integrating its applications into these large healthcare organizations. Any delays in the Company's implementation of its applications would delay its ability to generate revenue from such applications. Because of the anticipated lengthy implementation cycle and the potentially large size of such orders, if orders forecasted for a specific customer for a particular quarter are not realized or revenue is not otherwise recognized in that quarter, the Company's business, financial condition and results of operations could be materially adversely affected. See "-- Variability in Quarterly 12 Operating Results" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." 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 such "Year 2000" requirements. The Company'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 the Company to deliver services to its customers (including the Company's proprietary software systems as well as hardware and software supplied by third parties); communications networks, such as the Internet and private intranets, which the Company depends on to provide electronic transactions to its customers; the internal systems of the Company's customers and suppliers; the hardware and software systems used internally by the Company in the management of its business; and non-information technology systems and devices used by the Company in its business, such as telephone systems and building systems. The Company has internally reviewed the proprietary software systems it uses to deliver services to its customers. Although the Company believes that its internally developed applications and systems are designed to be Year 2000 compliant, the Company utilizes third-party equipment and software that may not be Year 2000 compliant. Also, two systems acquired by ActaMed, specifically SBCL SCAN ("SCAN") and ProviderLink, which together accounted for approximately 47% of the Company's total revenue in the first six months of 1998, will require modifications to become Year 2000 compliant. The Company plans to release Year 2000 upgrades to these systems in late 1998 or early 1999. The Company estimates the cost of these Year 2000 upgrades to SCAN and ProviderLink to be less than $1.0 million. In addition, the Company's SCAN product is installed on approximately 4,400 Company-owned workstations located in provider offices. Many of these workstations are not Year 2000 compliant and must be upgraded or replaced by the Company. The Company expects the cost of such upgrades or replacements to be less than $1.0 million. However, the Company could experience delays and cost overruns in the development of these upgrades, such upgrades could contain defects and the Company could experience difficulties in getting the Company's installed base of physicians to implement these upgrades in a timely manner. If the Company experiences these or other difficulties in developing and deploying its Year 2000 upgrades, revenues from SCAN and ProviderLink could be significantly reduced, which could have a material adverse effect on the Company's business, financial condition and results of operations. Failure of such third-party or Healtheon equipment or software to operate properly with regard to the Year 2000 and thereafter could require the Company to incur unanticipated expenses to remedy any problems, which could have a material adverse effect on the Company's business, financial condition and results of operations. In certain of its agreements, the Company warrants that its applications and services are Year 2000 compliant. Failure of the Company's applications and services to be Year 2000 compliant could result in the termination of these agreements or in liability for damages, the occurrence of either of which could have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, the success of the Company'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 the Company's systems is difficult to determine. Customer difficulties due to Year 2000 issues could interfere with healthcare transactions or information, which might expose the Company to significant potential liability. If client failures result in the failure of Healtheon systems, the Company's business, financial condition and results of operations would be materially adversely affected. Furthermore, the purchasing patterns of these customers or potential customers may be affected by Year 2000 issues as companies expend significant resources to become Year 2000 compliant. The costs of becoming Year 2000 compliant for current or potential customers may result in reduced funds being available to purchase and implement the Company's applications and services. 13 The Company, with the assistance of an independent consulting firm specializing in Year 2000 issues, is conducting a formal assessment of its Year 2000 exposure in order to determine what steps beyond those identified by the Company's internal review may be advisable. The Company expects to complete such assessment in the fourth quarter of 1998. The Company does not presently have a contingency plan for handling Year 2000 problems that are not detected and corrected prior to their occurrence. Any failure of the Company to address unforeseen Year 2000 issues could adversely affect the Company's business, financial condition and results of operations. FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING. The Company currently anticipates that the net proceeds from the Underwritten Offering and the Related Sale, together with its available cash resources and credit facilities, will be sufficient to meet its presently anticipated working capital, capital expenditure and business expansion requirements for at least the next 12 months. However, the Company may need to raise additional funds prior to such time 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. The Company's future liquidity and capital requirements will depend upon numerous factors, including the success of the Company's existing and new application and service offerings and competing technological and market developments. The Company may be required to raise additional funds through public or private financing, strategic relationships or other arrangements. There can be no assurance that such additional funding, if needed, will be available on terms acceptable to the Company, or at all. NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF COMMON STOCK PRICE. Prior to the Underwritten Offering, there has been no public market for the Company's Common Stock, and there can be no assurance that an active public market for the Common Stock will develop or be sustained after this offering. The initial public offering price, which will be established by negotiation between the Company and the U.S. Underwriters of the Underwritten Offering based upon a number of factors, may not be indicative of prices that will prevail in the public market. See "Underwriters" or "Plan of Distribution" for a discussion of the factors to be considered in determining the initial public offering price. The stock market has experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of many technology companies and that often have been unrelated or disproportionate to the operating performance of such companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. In addition, the market price of the Company's Common Stock is likely to be highly volatile and could be subject to wide fluctuations in response to quarterly variations in operating results, announcements of technological innovations, announcements relating to strategic relationships of the Company, developments in the Company's relationships with its customers and conditions affecting the Internet or healthcare industries, in general, or other events or factors. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against such a company. Such litigation could result in substantial costs and the diversion of management's attention and resources, which would have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON KEY PERSONNEL. The Company's future success will be highly dependent on the performance of its senior management team and other key employees. The Company's success will also depend on its ability to attract, integrate, motivate and retain additional highly skilled technical personnel, particularly trained and experienced professionals capable of developing, selling and installing complex healthcare information systems. There is intense competition for personnel at all levels, including senior management and technical professionals. The Company's management believes that its executive management, including W. Michael Long, the Company's Chief Executive Officer, and Pavan Nigam, the Company's Vice President. Engineering, is critical to the success of Healtheon. The Company does not maintain key person life insurance for any of its officers or key employees. The loss of the services of any member of the Company's senior management team or other key employees or the failure of the Company to attract, integrate, motivate and retain additional key employees could have a material adverse effect on 14 the Company's business, financial condition and results of operations. See "Business -- Employees" and "Management." CERTAIN ANTI-TAKEOVER PROVISIONS. Certain provisions of the Company's Certificate of Incorporation and Bylaws could have the effect of delaying, deferring or preventing a change of control of the Company. These provisions provide, among other things, that the Board of Directors is divided into three classes to serve staggered three-year terms, that stockholders may not take actions by written consent and that the ability of stockholders to present proposals or director nominations at stockholder meetings is restricted. In addition, the Company is subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which will prohibit the Company from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Furthermore, the Company's Certificate of Incorporation and Bylaws provide that the Company will indemnify its directors and officers to the fullest extent permitted by Delaware law. The Company also intends to enter into separate indemnification agreements with its directors and executive officers. Such indemnification provisions and agreements may be broad enough to cover losses that such officers and directors may incur in connection with investigations and legal proceedings resulting from services performed in connection with takeover defense measures, and may have the effect of preventing changes in the management of the Company. See "Description of Capital Stock." In addition, the Board of Directors has the authority to issue up to 5,000,000 shares of Preferred Stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. SHARES ELIGIBLE FOR FUTURE SALE. Sales of a substantial number of shares of Common Stock in the public market following the Underwritten Offering could adversely affect the market price of the Company's Common Stock. The number of shares of Common Stock available for sale in the public market is limited by restrictions under the Securities Act of 1933, as amended (the "Securities Act"), and lock-up agreements executed by the security holders of the Company under which such security holders have agreed not to sell or otherwise dispose of any of their shares for a period of 180 days after the date of this Prospectus without the consent of Morgan Stanley & Co. Incorporated. Morgan Stanley & Co. Incorporated may, however, in its sole discretion and at any time without notice, release all or any portion of the shares subject to lock-up agreements. In addition to the 9,739,286 shares of Common Stock offered in the Underwritten Offering (assuming no exercise of the U.S. Underwriters' over-allotment option) and in the Related Sale, there will be 54,317,201 shares of Common Stock outstanding as of the date of this Prospectus. On the date of this Prospectus, 689,609 shares (in addition to 6,199,000 of the shares offered in the Underwritten Offering) will be eligible for immediate sale. Upon the expiration of lock-up agreements 180 days after the date of this Prospectus, an additional 53,214,440 shares (including 1,088,500 of the shares to be sold in the Underwritten Offering and the 2,451,786 shares to be sold in the Related Sale) will become eligible for sale in the public market, subject in the case of all but 9,748,934 shares to the volume limitations and other conditions of Rule 144 adopted under the Securities Act. In addition, the Company intends to file a registration statement on Form S-8 with the Securities and Exchange Commission shortly after this offering covering the 13,994,510 shares of Common Stock reserved for issuance under the 1996 Plan and the Company's 1998 Purchase Plan. The holders of approximately 43,218,397 shares of Common Stock are also entitled to certain rights with respect to registration of such shares of Common Stock for offer or sale to the public. If such holders, by exercising their registration rights, cause a large number of shares to be registered and sold in the public market, such sales could have a material adverse effect on the market price for the Company's Common Stock. 15 BENEFITS OF THE OFFERINGS TO AND CONTROL BY OFFICERS, DIRECTORS AND AFFILIATED ENTITIES. Upon the completion of the Underwritten Offering and the Related Sale, the present executive officers and directors of the Company and their affiliates will, in the aggregate, beneficially own 45,459,665 shares of Common Stock, which shares will represent approximately 67.5% of the Company's outstanding Common Stock (66.5% if the U.S. Underwriters' over-allotment option is exercised in full). Existing stockholders prior to the offerings have paid an average of $1.97 per share for the Common Stock held by them, as compared to an assumed initial public offering price of $7.00 per share, representing an increase in the market price per share of $5.03, or an aggregate increase of approximately $228.7 million. This offering will also create a public market for the resale, and substantially increase the market value, of shares held by existing investors. Furthermore, such persons, acting together, will be able to significantly influence the management and affairs of the Company and will have the ability to control all matters requiring stockholder approval, including the election and removal of directors and the approval of significant corporate transactions, such as a merger or consolidation of the Company or a sale of significantly all of the Company's assets. Such concentration of ownership may have the effect of delaying, deferring or preventing a change in control of the Company, and may adversely affect the market price of the Company's Common Stock and the voting and other rights of the Company's other stockholders. See "Principal Stockholders." 16 THE COMPANY 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 and developed an Internet-based information and transaction platform (the "Healtheon Platform") that allows it to create Virtual Healthcare Networks ("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'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 provides its own applications on the Healtheon Platform and also enables third-party applications to operate on the platform. In addition to Virtual Healthcare Networks, Healtheon provides comprehensive consulting, development, implementation and network management services to enable its customers to take full advantage of the capabilities of the Healtheon Platform. The Company has established strategic relationships with leading healthcare companies, including United HealthCare Corporation, SmithKline Beecham Clinical Laboratories, Inc., Brown & Toland Physician Services Organization and Beech Street Corporation, to enhance its application portfolio, provide important specialized industry expertise, increase its market penetration and generate revenue. The Internet's open architecture, universal accessibility and growing acceptance make it an increasingly important environment for business-to-business and business-to-consumer interaction. Use of the Internet is rapidly expanding from simple information publishing, messaging, and data gathering to critical business transactions and confidential communications. For many industries, the Internet is connecting previously disconnected business processes and allowing companies to automate workflows, lower distribution costs and extend their market reach. The Company believes the healthcare industry, because of its size, fragmentation and extreme dependence on information exchange, is particularly well suited to benefit from greater use of the Internet. The Healtheon Platform is designed to ensure security, scalability, reliability, availability and flexibility. The platform includes a CORBA-based distributed application framework that allows reliable, simultaneous access by large numbers of users. Open architecture and object-oriented design permit standards-based integration with legacy systems and third-party applications, and a combination of advanced technologies, including digital encryption, digital certificates and audit trail tracking, ensures security. The platform is deployed on redundant, fault tolerant servers with associated software to create 24-hour availability. Healtheon's objective is to become the leading provider of Internet-based transaction and information services to the healthcare industry. The Company's strategy includes leveraging Internet technology to provide secure transactions and communications among a broad range of healthcare participants, regardless of their computing platforms; expanding the functionality and transaction capability of its platform through the development, acquisition or enablement of Internet-based applications; forming additional strategic relationships to increase its portfolio of applications and services, to increase the number of connected healthcare participants and to provide specialized industry expertise for its new applications; targeting regional markets where it can gain critical mass, thereby expanding nationally region by region; and employing its usage-based business model to reduce the initial investment required by customers to obtain the benefits of high-end information technology systems and enable physicians, small organizations and individuals to gain access to advanced information systems for the first time. The Company was incorporated in Delaware in December 1995 and commenced operations in January 1996. In May 1998, the Company completed its acquisition of ActaMed, a leading provider of network services to the healthcare industry. In August 1998, the Company completed its acquisition of Metis, LLC, a leading consulting, design and development firm focused on Internet and intranet-based solutions for medical centers and integrated delivery networks. 17 USE OF PROCEEDS The net proceeds to the Company from the sale of the 7,287,500 shares of Common Stock offered in the Underwritten Offering and the sale of 2,451,786 shares of Common Stock in the Related Sale are estimated to be approximately $63.3 million (approximately $69.7 million if the U.S. Underwriters' over- allotment option is exercised in full), at an assumed initial public offering price of $7.00 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company. The principal purposes of this offering are to obtain additional capital, to create a public market for the Company's Common Stock, to enhance the ability of the Company to acquire other businesses, products or technologies, and to facilitate future access by the Company to public equity markets. The Company currently expects to use approximately $1.5 million of the net proceeds to retire short-term debt and use the remainder of the net proceeds of this offering for general corporate purposes, including working capital and capital expenditures. The Company may also use a portion of the net proceeds of this offering to acquire or invest in complementary businesses or technologies, although the Company has no present commitments or agreements with respect to any such acquisition or investment. However, the Company from time to time enters into nondisclosure agreements with third parties for the purpose of evaluating strategic transactions involving complementary businesses or technologies. Pending such uses, the Company intends to invest such funds in short-term, interest-bearing, investment grade securities. DIVIDEND POLICY The Company has never declared or paid any cash dividends on its Common Stock or other securities and does not intend to pay any cash dividends with respect to its Common Stock in the foreseeable future. The Company intends to retain any earnings for use in the operation of its business and to fund future growth. In addition, the terms of the Company's credit agreement prohibit the payment of cash dividends on its capital stock. 18 CAPITALIZATION The following table sets forth the total capitalization of the Company as of June 30, 1998 (i) on an actual basis and (ii) on an as adjusted basis to reflect the receipt by the Company of the estimated net proceeds from the sale of the 7,287,500 shares of Common Stock offered in the Underwritten Offering and the sale of 2,451,786 shares of the Common Stock in the Related Sale (at an assumed initial public offering price of $7.00 per share) and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company.
JUNE 30, 1998 ----------------------- ACTUAL AS ADJUSTED ---------- ----------- (IN THOUSANDS) Capital lease obligations, net of current portion........................................ $ 1,459 $ 1,459 ---------- ----------- Stockholders' equity: Convertible Preferred Stock, $.0001 par value; no shares authorized, no shares issued or outstanding, actual; 5,000,000 shares authorized, no shares issued or outstanding, as adjusted.......................................................................... -- -- Common Stock, $.0001 par value; 75,000,000 shares authorized, 51,704,947 shares issued and outstanding, actual; 150,000,000 shares authorized, 61,444,233 shares issued and outstanding, as adjusted(1).......................................................... 5 6 Additional paid-in capital............................................................. 106,832 170,109 Deferred stock compensation............................................................ (3,411) (3,411) Accumulated deficit.................................................................... (71,711) (71,711) ---------- ----------- Total stockholders' equity........................................................... 31,715 94,993 ---------- ----------- Total capitalization............................................................... $ 33,174 $ 96,452 ---------- ----------- ---------- -----------
- --------- (1) Excludes (i) 8,997,995 shares of Common Stock issuable upon the exercise of options outstanding on June 30, 1998, with a weighted average exercise price of $1.17 per share, (ii) 6,022,523 shares reserved for issuance under the 1996 Plan and the 1998 Purchase Plan, (iii) 2,077,240 shares of Common Stock issuable upon the exercise of warrants then outstanding, with a weighted average exercise price of $2.81 per share, and 500,000 shares of Common Stock to be subject to a warrant with an exercise price of $10.40 per share issuable to a customer and (iv) 1,600,000 shares of Common Stock issued in connection with the acquisition of Metis, LLC in August 1998, of which 476,548 shares will be issued to certain employees pursuant to restricted stock purchase agreements subject to a lapsing right of repurchase, at the option of the Company, over the respective vesting periods. Includes 2,451,786 shares to be sold in the Related Sale. In July and September 1998, the Company granted options to purchase Common Stock and issued shares of Common Stock pursuant to restricted stock purchase agreements equal to a total of 3,433,500 shares of Common Stock with a weighted-average exercise or purchase price of $5.44 per share. The Company estimates that it will record deferred compensation during the three months ending September 30, 1998 of approximately $6.0 million with regard to these grants and issuances. See "Management -- Employee Benefit Plans," "Description of Capital Stock" and Notes 10, 11, 15 and 16 of Notes to Consolidated Financial Statements. 19 DILUTION The net tangible book value of the Company as of June 30, 1998 was approximately $13.5 million, or $.26 per share. "Net tangible book value" per share is determined by dividing the net tangible book value of the Company (total tangible assets less total liabilities) by the number of shares of Common Stock at that date. Dilution per share represents the difference between the amount per share paid by purchasers of shares of Common Stock in the offering made by the Company hereby and the net tangible book value per share of Common Stock immediately after completion of the Underwritten Offering and the Related Sale. After giving effect to the sale of 7,287,500 shares of Common Stock offered by the Company in the Underwritten Offering and to the sale of 2,451,786 shares of Common Stock in the Related Sale (at an assumed initial public offering price of $7.00 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company) and the application of the estimated net proceeds therefrom, the Company's net tangible book value at June 30, 1998 would have been $76.8 million, or $1.25 per share. This represents an immediate increase in pro forma net tangible book value to existing stockholders of $.99 per share and an immediate dilution to new investors of $5.75 per share. The following table illustrates the per share dilution: Assumed initial public offering price per share................... $ 7.00 Net tangible book value per share as of June 30, 1998........... $ .26 Increase per share attributable to new investors................ .99 ------ Net tangible book value per share after this offering............. 1.25 ------ Dilution per share to new public investors........................ $ 5.75 ------ ------
The following table sets forth, on a pro forma basis, as of June 30, 1998, the difference between the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by existing stockholders, by the investors in the Related Sale and by the new investors (at an assumed initial public offering price of $7.00 per share and before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company):
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ------------------------- --------------------------- PRICE PER NUMBER PERCENT AMOUNT PERCENT SHARE ------------ ----------- -------------- ----------- ----------- Existing stockholders..................... 51,704,947 84.1% $ 101,722,000 59.9% $ 1.97 New public investors...................... 7,287,500 11.9 51,012,500 30.0 7.00 Related Sale Investor..................... 2,451,786 4.0 17,162,502 10.1 7.00 ------------ ----- -------------- ----- Total................................... 61,444,233 100.0% $ 169,897,000 100.0% ------------ ----- -------------- ----- ------------ ----- -------------- -----
As of June 30, 1998, there were options outstanding to purchase a total of 8,997,995 shares of Common Stock, with a weighted average exercise price of $1.17 per share, and warrants to purchase a total of 2,077,240 shares of Common Stock, with a weighted average exercise price of $2.81 per share and 500,000 shares of Common Stock to be subject to a warrant with an exercise price of $10.40 per share issuable to a customer. In July and September 1998, the Company granted options to purchase Common Stock and issued shares of Common Stock pursuant to restricted stock agreements equal to a total of 3,433,500 shares of Common Stock, with a weighted average exercise or purchase price of $5.44 per share. To the extent that any of the outstanding options or warrants are exercised, there will be further dilution to new public investors. If all outstanding options and warrants (through September 15, 1998) were exercised, the dilution per share to new public investors would be $5.47. In addition, in August 1998, the Company issued 1,600,000 shares of Common Stock in connection with the acquisition of Metis, LLC in August 1998, of which 476,548 shares will be issued to certain employees pursuant to restricted stock purchase agreements subject to a lapsing right of repurchase, at the option of the Company, over the respective vesting periods. This transaction will also cause further dilution to new public investors. See "Capitalization," "Management -- Employee Benefit Plans," "Description of Capital Stock" and Notes 10, 11, 15 and 16 of Notes to Consolidated Financial Statements. 20 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and with the Consolidated Financial Statements and Notes thereto, which are included elsewhere in this Prospectus. During the six months ended June 30, 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 the Company and ActaMed. The consolidated statements of operations data for the three-year period ended December 31, 1997 and the six-month period ended June 30, 1998 and the consolidated balance sheet data at December 31, 1996 and 1997 and June 30, 1998 are derived from, and are qualified by reference to, the audited Consolidated Financial Statements included elsewhere in this Prospectus. The consolidated statements of operations data for the two-year period ended December 31, 1994 and the consolidated balance sheet data at December 31, 1993, 1994 and 1995 are derived from, and are qualified by reference to, audited Consolidated Financial Statements that are not included in this Prospectus. The statements of operations data for the six-month period ended June 30, 1997 are derived from unaudited financial statements included elsewhere in this Prospectus and, in the opinion of the Company, include all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of operations for this period. Historical operating results are not necessarily indicative of results in the future, and the results for interim periods are not necessarily indicative of the results that may be expected for the entire year.
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, --------------------------------------------------------- ---------------------- 1993 1994 1995 1996 1997 1997 1998 --------- --------- --------- ----------- ----------- ----------- --------- (RESTATED) (RESTATED) (RESTATED) (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENTS OF OPERATIONS DATA(1): Revenue: Services.................................... $ -- $ 190 $ 458 $ 1,795 $ 4,301 $ 656 $ 10,893 Services to related parties(2).............. -- -- -- 4,237 7,309 3,240 9,370 Software licenses........................... -- -- 1,717 4,981 1,780 390 390 --------- --------- --------- ----------- ----------- ----------- --------- Total revenue............................... -- 190 2,175 11,013 13,390 4,286 20,653 Operating costs and expenses: Cost of revenue: Cost of services.......................... -- 507 1,573 1,648 4,011 598 10,770 Cost of services to related parties....... -- -- -- 4,919 6,536 3,129 7,317 Cost of software licenses................. -- -- 343 160 -- -- -- --------- --------- --------- ----------- ----------- ----------- --------- Total cost of revenue..................... -- 507 1,916 6,727 10,547 3,727 18,087 Development and engineering expense......... 1,002 1,863 2,446 8,596 12,986 6,409 8,332 Sales, general and administrative expense... 769 938 1,749 9,042 11,031 4,723 12,123 Amortization of intangible assets........... -- -- -- 3,189 4,249 2,124 3,938 --------- --------- --------- ----------- ----------- ----------- --------- Total operating costs and expenses.......... 1,771 3,308 6,111 27,554 38,813 16,983 42,480 --------- --------- --------- ----------- ----------- ----------- --------- Loss from operations.......................... (1,771) (3,118) (3,936) (16,541) (25,423) (12,697) (21,827) Interest income............................... 5 172 208 539 611 254 637 Interest expense.............................. (117) (57) (6) (56) (323) (128) (251) Dividends on ActaMed's convertible redeemable preferred stock............................. -- -- -- (2,548) (2,870) (1,606) (890) --------- --------- --------- ----------- ----------- ----------- --------- Net loss...................................... (1,883) (3,003) (3,734) (18,606) (28,005) (14,177) (22,331) Dividends on ActaMed's convertible redeemable preferred stock............................. -- (423) (724) -- -- -- -- --------- --------- --------- ----------- ----------- ----------- --------- Net loss applicable to common stockholders.... $ (1,883) $ (3,426) $ (4,458) $ (18,606) $ (28,005) $ (14,177) $ (22,331) --------- --------- --------- ----------- ----------- ----------- --------- --------- --------- --------- ----------- ----------- ----------- --------- Basic and diluted net loss per common share... $ (.85) $ (2.83) $ (3.88) $ (1.97) $ (1.27) Weighted-average shares outstanding used in computing basic and diluted net loss per common share(3)............................. 5,246 6,583 7,223 7,193 17,632 Pro forma basic and diluted net loss per common share (unaudited).................... $ (.56) $ (.46) Shares used in computing pro forma basic and diluted net loss per common share (unaudited)(3).............................. 44,715 46,631
21
DECEMBER 31, --------------------------------------------------------- JUNE 30, 1993 1994 1995 1996 1997 1998 --------- --------- --------- ----------- ----------- --------- (RESTATED) (RESTATED) (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA(1): Cash, cash equivalents and short-term investments........ $ 74 $ 4,186 $ 9,386 $ 7,539 $ 21,804 $ 12,801 Working capital (deficit)................................ (1,737) 4,226 7,244 2,505 14,790 2,560 Total assets............................................. 899 5,379 10,801 34,407 53,747 49,410 Long-term obligations, net of current portion............ 159 63 -- 1,210 932 1,459 Convertible redeemable preferred stock................... -- 7,919 16,029 39,578 50,948 -- Stockholders' equity (net capital deficiency)............ (1,335) (2,838) (7,697) (14,553) (9,930) 31,715
- ---------- (1) The consolidated financial data reflects the business combination of Healtheon and ActaMed, which was accounted for as a pooling of interests. All statements of operations prior to the acquisition on May 19, 1998 have been restated to reflect the combined results of Healtheon and ActaMed from inception. The consolidated statements of operations and balance sheet data as of and for the years ended December 31, 1993, 1994 and 1995 are derived solely from the ActaMed statements of operations and balance sheets for such periods because Healtheon did not commence operations until January 1996. See Notes 1 and 2 of Notes to Consolidated Financial Statements for a discussion of the accounting for the acquisition of ActaMed. In previously issued financial statements of ActaMed for the year ended December 31, 1996, $5.2 million of the intangible assets acquired in the acquisition of EDI was written off as in process research and development. This amount has been reallocated to software technology rights and the related amounts in the consolidated financial statements have been restated as described in Note 14 of the Notes to Consolidated Financial Statements. (2) Revenue from services to related parties consists of revenue from United HealthCare and Smith Kline Labs, customers that are also significant stockholders of the Company. (3) 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. 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS CONTEMPLATED BY THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE DISCUSSED BELOW AND ELSEWHERE IN THIS PROSPECTUS. OVERVIEW Healtheon is pioneering the use of the Internet to simplify workflows, decrease costs and improve the quality of patient care throughout the healthcare industry. Healtheon's VHN Solution enables the secure exchange of information among a wide array of disparate healthcare information systems and provides a framework for a broad range of healthcare transactions. Healtheon was incorporated in December 1995, commenced operations in January 1996 and until late 1997 had not recognized substantial revenue and was considered to be in the development stage. In May 1998, Healtheon acquired ActaMed, which was incorporated in 1992. The acquisition of ActaMed was accounted for as a pooling of interests. The financial information presented reflects the combined financial position and operations of Healtheon and ActaMed for all dates and periods presented. The Company's limited revenue to date has been derived primarily from proprietary non-Internet network services offered by ActaMed and from management and operation of customers' information technology ("IT") infrastructure. In March 1996, ActaMed acquired EDI Services, Inc. ("EDI"), a wholly owned subsidiary of United HealthCare, in a transaction accounted for as a purchase. Accordingly, the operations of EDI are included in the Company's consolidated statements of operations beginning in March 1996. In August 1998, the Company 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, the Company issued 1,600,000 shares of its Common Stock, of which 476,548 shares will be issued to certain employees pursuant to restricted stock purchase agreements subject to a lapsing right of repurchase, at the option of the Company, over the agreements' respective vesting periods. Two hundred thousand shares are held in escrow to secure certain indemnification obligations. The Asset Purchase was treated as a tax-free reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended. The Company earns revenue from services and services to related parties, which include providing access to its network-based services (including fixed fee and transaction-based services) and performing development and consulting services, and from licensing software. Revenue from services to related parties consists of services provided to United HealthCare under a Services and License Agreement between the Company and United HealthCare dated April 4, 1996 (the "United HealthCare Agreement") and services provided to SmithKline Labs under a Services Agreement between the Company and SmithKline Labs dated December 31, 1997 (the "Services Agreement"). Customers may purchase some or all of the Company's applications and services and the customer relationship may evolve from utilizing development and consulting services to utilizing transaction and subscription-based services. The Company earns network-based services revenue from fixed fee subscription arrangements, which revenue is recognized ratably over the term of the applicable agreement, or revenue from arrangements that are priced on a per-transaction or per-user basis, which revenue is recognized as the services are performed. Revenue from development projects is recognized on a percentage-of-completion basis or as such services are performed, depending on the terms of the contract. Revenue from consulting services is recognized as such services are performed. Cash received in excess of revenue recognized relating to such services has been recorded as deferred revenue. As of June 30, 1998, the Company had deferred revenue of approximately $3.5 million. 23 The United HealthCare Agreement has a five year term; however, the agreement provides that two years after the date of the agreement (April 4, 1998) the parties will agree on new prices that will be competitive with the marketplace. The Company and United HealthCare are negotiating such new prices, and the Company anticipates that the new prices will reduce the rates paid by United HealthCare. The Services Agreement with SmithKline Labs also has a five year term, but provides that the parties will negotiate new rates as of January 1, 2001 and each two year period thereafter. Pursuant to the Services Agreement, the renegotiated rates must be competitive with the marketplace and must be no higher than the lowest fees charged by the Company to similarly situated customers. The Company recognizes software license revenue in accordance with the American Institute of Certified Public Accountants' Statement of Position 97-2. ActaMed entered into a national marketing and licensing agreement with International Business Machines Corporation ("IBM") in 1995 that granted IBM a nonexclusive, nontransferable right to market ActaMed's software and services for a total of $6.3 million. For the years ended December 31, 1995, 1996 and 1997, approximately $1.7 million, $3.4 million and $1.2 million, respectively, of this amount was recognized as software license revenue upon delivery of the software. No software license revenue was recognized under this agreement for the six months ended June 30, 1997 or 1998. In December 1996, the Company entered into a new agreement (the "License") to license its newly granted patent to IBM. As part of the License, IBM agreed to pay ActaMed $4.8 million over a four-year period, $1.0 million in December 1996 and the remaining balance in 48 equal monthly installments commencing in January 1997. Additionally, in conjunction with the License, the Company issued IBM a five-year warrant to purchase 282,522 shares of the Company's common stock at a price of $7.97 per share. Because of the extended payment terms and the Company's contentious relationship with IBM, the Company concluded that the license fee was not assured of collection and, accordingly, is recognizing this revenue as the proceeds are collected. For the years ended December 31, 1996 and 1997 and the six months ended June 30, 1997 and 1998, the Company recognized revenue from the License of $1.0 million, $.8 million, $.4 million and $.4 million, respectively. At December 31, 1997, amounts due from IBM of $.7 million and $1.7 million were included in accounts receivable and other assets, respectively. At June 30, 1998, amounts due from IBM of $.8 million and $1.3 million were included in accounts receivable and other assets, respectively. Deferred revenue at December 31, 1996 and 1997 and June 30, 1998 included $3.1 million, $2.3 million and $2.0 million, respectively, related to the License. The Company does not expect that it will earn a material amount of revenue from sofware licenses in the foreseeable future. The Company has developed strategic relationships with healthcare industry leaders, including United HealthCare, SmithKline Labs, Brown & Toland and Beech Street. These four companies each accounted for over 10%, and together accounted for over 90%, of the Company's total revenue for the six months ended June 30, 1998 and United HealthCare and SmithKline Labs accounted for all of the Company's revenue from services to related parties. The Company expects that a small number of customers will continue to account for a substantial portion of the Company's revenue for the foreseeable future. The loss of one or more of the Company's significant customers, or a decline in volume of business generated by such customers, could have a material adverse effect on the Company's business, financial condition and results of operations. Cost of services and cost of services to related parties consist of costs related to services the Company provides to customers and costs associated with the operation and maintenance of Healtheon's networks. These costs include salaries and related expenses for consulting and development personnel, network operations personnel, customer support personnel, telecommunication costs, depreciation and maintenance of network equipment, a portion of facilities expenses and leased personnel and facilities costs. Cost of software licenses consists primarily of expenses realted to royalties and sublicensing fees. Given the Company's limited operating history, changes in revenue mix, limited history of Internet-based 24 network services, recent investments in personnel, amortization of infrastructure investments, and evolving business model, the Company believes that analysis of historical cost of revenue as a percentage of revenue is not meaningful. The Company anticipates that its total cost of revenue will increase in absolute dollars in the future. Development and engineering expense (which excludes development expenses that are included in cost of revenue) consists primarily of salaries and related expenses associated with the development of applications and services and includes compensation paid to engineering personnel, fees to outside contractors and consultants, a portion of facilities expenses, and the depreciation and amortization of capital equipment used in the development process. The Company 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, the Company intends to continue recruiting and hiring experienced engineering personnel and to continue making other investments in development and engineering. The Company 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 the operations of the Company. The Company 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. In previously issued financial statements of ActaMed for the year ended December 31, 1996, $5.2 million of the intangible assets acquired in the acquisition of EDI was written off as in process research and development. This amount has been reallocated to software technology rights and the related amounts in the consolidated financial statements have been restated as described in Note 14 of the Notes to Consolidated Financial Statements. The Company's business model is still in an emerging stage, and revenue and income potential from the Company's business is unproven. Moreover, the Company's limited operating history under its current business model makes an evaluation of the Company and its prospects difficult; investors should not use the Company's past results as a basis to predict future performance. The Company has incurred net losses since inception and, as of June 30, 1998, had an accumulated deficit of $71.7 million. The Company intends to continue investing heavily in acquisitions, infrastructure development, application development and sales and marketing. As a result, the Company expects to incur substantial operating losses at least through 1999. There can be no assurance that the Company will achieve significant revenue or profitability or, if significant revenue or profitability are achieved, that they can be sustained. See "Risk Factors -- Limited Operating History; Accumulated Deficit and Unproven Business Model." 25 RESULTS OF OPERATIONS The following table sets forth certain data expressed as a percentage of total revenue for the periods indicated.
Six Months Ended Year Ended December 31, June 30, -------------------------------- -------------------- 1995 1996 1997 1997 1998 ------- ---------- ---------- ---------- ------- (RESTATED) (RESTATED) (RESTATED) Revenue: Services......................... 21.1% 16.3% 32.1% 15.3% 52.7% Services to related parties(1)... -- 38.5 54.6 75.6 45.4 Software licenses................ 78.9 45.2 13.3 9.1 1.9 ------- ---------- ---------- ---------- ------- Total revenue.................... 100.0 100.0 100.0 100.0 100.0 Operating costs and expenses: Cost of revenue: Cost of services............... 72.3 15.0 30.0 14.0 52.1 Cost of services to related parties...................... -- 44.7 48.8 73.0 35.4 Cost of software licenses...... 15.8 1.5 -- -- -- ------- ---------- ---------- ---------- ------- Total cost of revenue.......... 88.1 61.2 78.8 87.0 87.5 Development and engineering...... 112.5 78.0 97.0 149.5 40.3 Sales, general and administrative................. 80.4 82.1 82.4 110.2 58.7 Amortization of intangible assets......................... -- 29.0 31.7 49.6 19.1 ------- ---------- ---------- ---------- ------- Total operating costs and expenses....................... 281.0 250.3 289.9 396.3 205.6 ------- ---------- ---------- ---------- ------- Loss from operations............... (181.0) (150.3) (189.9) (296.3) (105.6) Interest income.................... 9.6 4.9 4.6 5.9 3.1 Interest expense................... (0.3) (0.5) (2.4) (3.0) (1.2) Dividends on ActaMed's convertible redeemable preferred stock....... -- (23.1) (21.4) (37.5) (4.3) ------- ---------- ---------- ---------- ------- Net loss........................... (171.7) (169.0) (209.1) (330.9) (108.0) Dividends on ActaMed's convertible redeemable preferred stock....... (33.3) -- -- -- -- ------- ---------- ---------- ---------- ------- Net loss applicable to common stockholders..................... (205.0)% (169.0)% (209.1)% (330.9)% (108.0)% ------- ---------- ---------- ---------- ------- ------- ---------- ---------- ---------- -------
- --------- (1) Revenue from services to related parties consists of revenue from United HealthCare and SmithKline Labs, customers that are also significant stockholders of the Company. SIX MONTHS ENDED JUNE 30, 1998 AND 1997 REVENUE. Total revenue increased to $20.7 million in the first six months of 1998 from $4.3 million in the same period of 1997. Revenue from services increased to $10.9 million in the first six months of 1998 from $.7 million in the same period in 1997. The significant increase in revenue was due principally to new contracts with Brown & Toland and Beech Street for the management and operation of their IT infrastructure beginning in late 1997. To provide these services, the Company utilizes its own personnel, certain outside contractors and certain personnel and facilities of the customers that are leased to the Company. The cost of these leased customer personnel and facilities are included as part of the total costs of the IT and development services billed to the customers by the Company. In the first six months of 1998, the Company recognized revenue for IT services of $7.3 million, which included costs of leased personnel 26 and facilities of $6.1 million. In addition, the Company recognized revenue of approximately $2.5 million for development services in the same period. Revenue from services to related parties increased to $9.4 million in the first six months of 1998 from $3.2 million in the same period of 1997 primarily due to a new contract with SmithKline Labs in December 1997 to service its SCAN laboratory test order and results service. Revenue from software licenses was unchanged in the first six months of 1998 from the same period in 1997. The Company expects that revenue from software licenses will continue to decline in future periods as a percentage of total revenue. COST OF REVENUE. Total cost of revenue increased to $18.1 million in the first six months of 1998 from $3.7 million in the same period of 1997. Cost of services increased to $10.8 million in the first six months of 1998 from $.6 million in the same period in 1997. This increase includes $6.1 million related to costs of leased personnel and facilities utilized to provide IT services and $2.5 million related to development services. The remainder of the increase resulted from increased personnel to support the Brown & Toland and Beech Street contracts. The Company had no cost of software licenses revenue in the first six months of 1998 or in the comparable period of 1997. Cost of services to related parties increased to $7.3 million in the first six months of 1998 from $3.1 million in the same period of 1997. This increase resulted from higher personnel and network operations costs necessary to support increased transactions from the Company's SCAN services. DEVELOPMENT AND ENGINEERING. Development and engineering expense (which excludes development expenses that are included in cost of revenue) increased to $8.3 million in the first six months of 1998 from $6.4 million in the same period of 1997. The increase in development and engineering expenses was caused by a significant increase in the number of engineers engaged in the development of the Company's applications and services. SALES, GENERAL AND ADMINISTRATIVE. Sales, general and administrative expense increased to $12.1 million in the first six months of 1998 from $4.7 million in the same period of 1997. The increase resulted primarily from the addition of sales personnel and executive management (approximately $2.1 million in salaries and $3.4 million in related support costs), approximately $.8 million of costs related to the merger with ActaMed and from the amortization of deferred compensation. The Company recorded deferred compensation of $2.4 million during the first six months of 1998, and recorded $1.1 million of amortization of deferred compensation in this period. In July 1998, the Company recorded deferred compensation of approximately $6.0 million. Deferred compensation represents the difference between the purchase or exercise price of certain restricted stock and stock option grants and the deemed fair value of the Company's Common Stock at the time of such grants. The remaining deferred compensation will be amortized over the vesting period, generally four years, of the respective option or restricted stock grants. Amortization is estimated to total $3.1 million for the last six months of 1998, $4.0 million for 1999, $2.0 million for 2000, and $.6 million for 2001. AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets was $3.9 million in the first six months of 1998 and $2.1 million in the same period of 1997. This amortization relates to the acquisition of EDI in March 1996 from United HealthCare and certain intangible assets related to SCAN acquired from SmithKline Labs in December 1997. Although the Services and License Agreement entered into with United HealthCare in connection with the acquisition of EDI has a five year term, the Company 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, the Company 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 27 would be replaced within three years, and the uncertain profitability of the agreement after the price renegotiation. There can be no assurance that the Company's services to United HealthCare and SmithKline Labs will be profitable after the price renegotiations required by the agreements, particularly given the uncertainty of future rates and volumes under those agreements. At June 30, 1998, a total of $18.2 million remained to be amortized, and the amortization charges for the six months ending December 31, 1998 and for the years ending 1999 and 2000 are estimated to be $6.1 million, $7.0 million and $5.1 million, respectively, assuming no impairment of the remaining unamortized intangible asset balances. The Company anticipates that it will incur additional amortization of intangible assets in connection with its acquisition of Metis, LLC. See Notes 2, 3 and 15 of Notes to Consolidated Financial Statements. INTEREST INCOME AND EXPENSE. Interest income has been derived primarily from cash investments, and increased to $.6 million in the first six months of 1998 compared to $.3 million in the same period of 1997. The increase resulted from the Company's $25.0 million Preferred Stock financing in October 1997. Interest expense results from the Company's borrowings and from capitalized lease obligations for equipment purchases. DIVIDENDS ON ACTAMED'S CONVERTIBLE REDEEMABLE PREFERRED STOCK. As dividends on ActaMed's convertible redeemable preferred stock were cumulative whether declared or not, the Company accrued such dividends on a quarterly basis. Dividends of $1.6 million and $.9 million are shown as a charge against income in the consolidated statement of operations for the first six months of 1997 and 1998, respectively. None of the dividends were paid, and, in conjunction with approving the acquisition of ActaMed by the Company, the Preferred Stockholders waived their right to receive such dividends, which totaled $7.5 million at the time of the acquisition, and received an aggregate of 17,252,408 shares of Healtheon Common Stock in exchange for their ActaMed Preferred Stock. INCOME TAXES. At June 30, 1998, the Company had net operating loss carryforwards for federal income tax purposes of $49.8 million and federal tax credits of $1.0 million, both expiring from 2009 through 2013. Of these net operating losses, $19.5 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 the Company'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. YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 REVENUE. Total revenue increased to $13.4 million in 1997 from $11.0 million in 1996 and $2.2 million in 1995. Revenue from services increased to $4.3 million in 1997 from $1.8 million in 1996 and $.5 million in 1995. The increase is due primarily to the contract with Brown & Toland, which began in October 1997. In 1997, the Company recognized $2.1 million of revenue for IT services under this contract, which included costs of leased personnel and facilities of $1.9 million. Revenue from services to related parties increased to $7.3 million in 1997 from $4.2 million in 1996. There was no revenue from services to related parties in 1995. The Company's acquisition of ProviderLink in March 1996 from United HealthCare accounts for substantially all of the related party revenue in 1996 and the 1997 increase is substantially due to recording a full year of revenue in 1997 compared to nine months in 1996. Revenue from software licenses was $1.8 million, $5.0 million and $1.7 million in 1997, 1996 and 1995, respectively. Substantially all of this revenue was derived from licensing agreements with IBM. The full amount of revenue to be derived from one of these agreements had been recognized by the end of 1997. Revenue will continue to be recognized under a second agreement through December 2000. 28 COST OF REVENUE. Cost of services was $4.0 million, $1.6 million and $1.6 million in 1997, 1996 and 1995, respectively. The increase from 1996 to 1997 was primarily due to the $1.9 million cost related to the leased personnel and facilities under the Brown & Toland contract. Cost of services to related parties increased to $6.5 million in 1997 from $4.9 million in 1996. This increase was primarily due to recording a full year of costs related to ProviderLink in 1997 compared to only nine months in 1996. Cost of software licenses in 1996 and 1995 related principally to royalties and sublicense fees paid by the Company. DEVELOPMENT AND ENGINEERING. Development and engineering expense (which excludes development expenses that are included in cost of revenue) was $13.0 million in 1997 compared to $8.6 million in 1996 and $2.4 million in 1995. The increase in development and engineering expense was caused by a significant increase in the number of engineers engaged in the development of the Company's applications and services. SALES, GENERAL AND ADMINISTRATIVE. Sales, general and administrative expense was $11.0 million in 1997, compared to $9.0 million in 1996 and approximately $1.7 million in 1995. The increase resulted primarily from the addition of sales personnel and executive management (related salaries increased approximately $1.4 million in 1997 from 1996) and from the amortization of deferred compensation. The Company recorded deferred compensation of $2.7 million during 1997 and recorded $.6 million of amortization of deferred compensation in 1997. AMORTIZATION OF INTANGIBLE ASSETS. Amortization of acquisition-related costs including intangible assets was $4.2 million in 1997 and $3.2 million in 1996. This amortization relates to the acquisition of EDI in March 1996. INTEREST INCOME AND EXPENSE. Interest income was derived from cash investments following the Company's issuance of Preferred Stock and imputed interest on payments due from IBM beginning in early 1997. Interest expense increased in 1997 as a result of bridge financing and bank borrowings of the Company and from capitalized lease obligations for equipment purchases. 29 QUARTERLY FINANCIAL RESULTS The following table presents the Company's operating results for each of the six quarters in the period ended June 30, 1998, as well as such data expressed as a percentage of the Company's total revenue for the periods indicated. The information for each of these quarters is unaudited and has been prepared on the same basis as the audited consolidated financial statements appearing elsewhere in this Prospectus. In the opinion of management, all necessary adjustments (consisting only of normal recurring adjustments) have been included to present fairly the unaudited quarterly results. This data should be read in conjunction with the Consolidated Financial Statements and the Notes thereto appearing elsewhere in this Prospectus. These operating results are not indicative of the results of any future period.
THREE MONTHS ENDED ------------------------------------------------------------------------------- MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, 1997 1997 1997 1997 1998 1998 ------------ ------------ ------------ ------------ -------- -------- (RESTATED) (RESTATED) (RESTATED) (RESTATED) (IN THOUSANDS) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenue: Services................................... $ 239 $ 417 $ 560 $ 3,085 $ 4,903 $ 5,990 Services to related parties................ 1,488 1,752 1,959 2,110 4,656 4,714 Software licenses.......................... 195 195 195 1,195 195 195 ------------ ------------ ------------ ------------ -------- -------- Total revenue.............................. 1,922 2,364 2,714 6,390 9,754 10,899 Operating costs and expenses: Cost of revenue: Cost of services......................... 213 385 482 2,931 5,088 5,682 Cost of services to related parties...... 1,633 1,496 1,519 1,888 2,860 4,457 Cost of software licenses................ -- -- -- -- -- -- ------------ ------------ ------------ ------------ -------- -------- Total cost of revenue.................... 1,846 1,881 2,001 4,819 7,948 10,139 Development and engineering................ 3,247 3,162 3,272 3,305 3,919 4,413 Sales, general and administrative.......... 2,501 2,222 2,754 3,554 4,966 7,157 Amortization of intangible assets.......... 1,062 1,062 1,063 1,062 1,949 1,989 ------------ ------------ ------------ ------------ -------- -------- Total operating costs and expenses......... 8,656 8,327 9,090 12,740 18,782 23,698 ------------ ------------ ------------ ------------ -------- -------- Loss from operations......................... (6,734) (5,963) (6,376) (6,350) (9,028) (12,799) Interest income.............................. 146 108 105 252 358 279 Interest expense............................. (50) (78) (49) (146) (116) (135) Dividends on ActaMed's convertible redeemable preferred stock............................ (783) (823) (776) (488) (890) -- ------------ ------------ ------------ ------------ -------- -------- Net loss..................................... $ (7,421) $ (6,756) $ (7,096) $ (6,732) $(9,676) $(12,655) ------------ ------------ ------------ ------------ -------- -------- ------------ ------------ ------------ ------------ -------- -------- AS A PERCENTAGE OF REVENUE: Revenue: Services................................... 12.4% 17.6% 20.6% 48.3% 50.3% 55.0% Services to related parties................ 77.4 74.1 72.2 33.0 47.7 43.3 Software licenses.......................... 10.2 8.3 7.2 18.7 2.0 1.7 ------------ ------------ ------------ ------------ -------- -------- Total revenue.............................. 100.0 100.0 100.0 100.0 100.0 100.0 Operating costs and expenses: Cost of revenue: Cost of services......................... 11.1 16.3 17.8 45.9 52.2 52.1 Cost of services to related parties...... 85.0 63.3 56.0 29.5 29.3 40.9 Cost of software licenses................ -- -- -- -- -- -- ------------ ------------ ------------ ------------ -------- -------- Total cost of revenue.................... 96.1 79.6 73.8 75.4 81.5 93.0 Development and engineering................ 168.9 133.7 120.6 51.7 40.2 40.5 Sales, general and administrative.......... 130.1 94.0 101.5 55.6 50.9 65.7 Amortization of intangible assets.......... 55.3 44.9 39.2 16.6 20.0 18.2 ------------ ------------ ------------ ------------ -------- -------- Total operating costs and expenses......... 450.4 352.2 335.1 199.3 192.6 217.4 ------------ ------------ ------------ ------------ -------- -------- Loss from operations......................... (350.4) (252.2) (235.1) (99.3) (92.6) (117.4) Interest income.............................. 7.6 4.6 3.9 3.9 3.7 2.6 Interest expense............................. (2.6) (3.3) (1.8) (2.3) (1.2) (1.2) Dividends on ActaMed's convertible redeemable preferred stock............................ (40.7) (34.8) (28.6) (7.6) (9.1) -- ------------ ------------ ------------ ------------ -------- -------- Net loss..................................... (386.1)% (285.7)% (261.6)% (105.3)% (99.2)% (116.0)% ------------ ------------ ------------ ------------ -------- -------- ------------ ------------ ------------ ------------ -------- --------
30 Revenue has grown each quarter as demand for the Company's services has increased. Cost of revenue increased in the quarter ended December 31, 1997 due primarily to expenses related to the Brown & Toland contract, and in the quarters ended March 31, 1998 and June 30, 1998 due primarily to expenses related to the Beech Street and SmithKline Labs contracts. In addition, in the quarter ended June 30, 1998, total cost of revenue increased due in part to an increase in amortization of capitalized internally developed software. This increase was due to the fact that the Company 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. The Company determined that it expected no future cash flows to be generated by this software and, accordingly, wrote off the remaining unamortized balance of $.6 million. Development and engineering expense increased in the quarters ended March 31 and June 30, 1998 due to a significant increase in personnel engaged in the development of the Company's applications and services. Sales, general and administrative expenses increased in each of the quarters ended September 30, 1997 through June 30, 1998 due to increases in sales and executive personnel and due to amortization of deferred compensation. In addition, the Company recorded substantial professional fees related to the acquisition of ActaMed in the quarter ended June 30, 1998. The Company's quarterly revenue and operating results have varied in the past and are likely to vary substantially in the future. The Company intends to increase its marketing, sales, development and engineering, and administrative activities and to increase other operating expenses as required to integrate the operations, technologies and networks of recent and any future acquisitions and expand its healthcare network infrastructure and operations. It is anticipated that these expenses could significantly precede any revenue generated by such increased spending. If the Company does not experience significantly increased revenue from these efforts, the Company's business, financial condition and results of operations could be materially and adversely affected. In addition, the Company's expense levels are based in part on its expectations concerning future revenue and are relatively fixed in the short-term. Consequently, if the Company's revenue is below expectations in any period, the Company may not be able to adjust its spending levels in a timely manner. LIQUIDITY AND CAPITAL RESOURCES The Company has funded its operations since inception primarily through the private placement of equity securities, through which it had raised net proceeds of $59.6 million through June 30, 1998. The Company has also financed its operations through equipment lease financing and bank borrowings. As of June 30, 1998, the Company had outstanding equipment lease financing and bank borrowings of $6.5 million. As of June 30, 1998, the Company had approximately $12.8 million of cash, cash equivalents and short-term investments. Cash used in operating activities was $1.3 million in 1995, $9.6 million in 1996 and $16.4 million in 1997. The cash used during these periods was primarily attributable to net losses of $3.7 million, $18.6 million and $28.0 million in 1995, 1996, 1997, respectively, offset in part by depreciation and amortization, and dividends on ActaMed's Convertible Redeemable Preferred Stock. These losses were principally related to increased development and engineering expenses and sales, general and administrative expenses. Cash used in operations in the first six months of 1998 was $9.1 million, reflecting a net loss partially offset by depreciation and amortization expenses. Investments in property and equipment (excluding equipment acquired under capital leases) and internally developed software were $.5 million, $3.0 million, $3.1 million and $2.7 million in 1995, 1996 and 1997, and the first six months of 1998, respectively. In 1997, the Company used $5.3 million of cash to purchase short-term investments. During the first six months of 1998, the Company purchased an additional $3.5 million of short-term investments and realized $7.1 million in cash from maturities of its short-term investments. The Company had no purchases or maturities of short-term investments in 1995, 1996, or the six months ended June 30, 1997. 31 Cash provided by financing activities was $7.0 million, $11.1 million and $34.6 million in 1995, 1996 and 1997, respectively, resulting primarily from net proceeds from the sale of Preferred Stock and, to a lesser extent, from a bank line and bridge note financing in 1997. Cash provided by financing activities for the first six months of 1998 was $2.8 million, primarily from the net proceeds from the sale of Preferred and Common Stock, partially offset by payments on capital lease obligations. As of June 30, 1998, the Company did not have any material commitments for capital expenditures. The Company's principal commitments at June 30, 1998 consisted of obligations under operating leases and capital leases of $13.3 million and $3.4 million, respectively. See Note 6 of Notes to Consolidated Financial Statements. The Company currently anticipates that the net proceeds from the Underwritten Offering and the Related Sale, together with its available cash resources and credit facilities, will be sufficient to meet its presently anticipated working capital, capital expenditure and business expansion requirements for at least the next 12 months. However, the Company may need to raise additional funds prior to such time 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. The Company's future liquidity and capital requirements will depend upon numerous factors, including the success of the Company's existing and new application and service offerings and competing technological and market developments. The Company may be required to raise additional funds through public or private financing, strategic relationships or other arrangements. There can be no assurance that such additional funding, if needed, will be available on terms acceptable to the Company, 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 such "Year 2000" requirements. The Company'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 the Company to deliver services to its customers (including the Company's proprietary software systems as well as hardware and software supplied by third parties); communications networks, such as the Internet and private intranets, which the Company depends on to provide electronic transactions to its customers; the internal systems of the Company's customers and suppliers; the hardware and software systems used internally by the Company in the management of its business; and non-information technology systems and services used by the Company in its business, such as telephone systems and building systems. The Company has internally reviewed the proprietary software systems it uses to deliver services to its customers. Although the Company believes that its internally developed applications and systems are designed to be Year 2000 compliant, the Company utilizes third-party equipment and software that may not be Year 2000 compliant. Also, two systems acquired by ActaMed, specifically SCAN and ProviderLink, which together accounted for approximately 47% of the Company's total revenue in the first six months of 1998, will require modifications to become Year 2000 compliant. The Company plans to release Year 2000 upgrades to these systems in late 1998 or early 1999. The Company estimates the cost of these Year 2000 upgrades to be less than $1.0 million. In addition, the Company's SCAN product is installed on approximately 4,400 Company-owned workstations located in provider offices. Many of these workstations are not Year 2000 compliant and must be upgraded or replaced by the Company. The Company expects the costs of such upgrades or replacements to be less than $1.0 million. However, the Company could experience delays and cost overruns in the development of these upgrades, such upgrades could contain defects and the Company could experience difficulties in getting the Company's installed base of physicians to implement these upgrades in a timely manner. If the Company experiences these or other difficulties in developing and deploying its Year 2000 upgrades, revenues from SCAN and ProviderLink 32 could be significantly reduced, which could have a material adverse effect on the Company's business, financial condition and results of operations. Failure of such third-party or Healtheon equipment or software to operate properly with regard to the Year 2000 and thereafter could require the Company to incur unanticipated expenses to remedy any problems, which could have a material adverse effect on the Company's business, financial condition and results of operations. In certain of its agreements, the Company warrants that its applications and services are Year 2000 compliant. Failure of the Company'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 the Company's business, financial condition and results of operations. The Company does not believe that its expenditures to upgrade its internal systems and applications will have a material adverse effect on its business, financial condition and results of operations. Furthermore, the success of the Company'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 the Company's systems is difficult to determine. Customer difficulties due to Year 2000 issues could interfere with healthcare transactions or information, which might expose the Company to significant potential liability. If client failures result in the failure of Healtheon systems, the Company's business, financial condition and results of operations would be materially adversely affected. Furthermore, the purchasing patterns of these customers or potential customers may be affected by Year 2000 issues as companies expend significant resources to become Year 2000 compliant. The costs of becoming Year 2000 compliant for current or potential customers may result in reduced funds being available to purchase and implement the Company's applications and services. The Company, with the assistance of an independent consulting firm specializing in Year 2000 issues, is conducting a formal assessment of its Year 2000 exposure in order to determine what steps beyond those identified by the Company's internal review may be advisable. The Company expects to complete such assessment in the fourth quarter of 1998. The Company does not presently have a contingency plan for handling Year 2000 problems that are not detected and corrected prior to their occurrence. Any failure of the Company to address any unforeseen Year 2000 issue could adversely affect the Company's business, financial condition and results of operations. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Company is required to adopt SFAS No. 131 for the year ending December 31, 1998. SFAS No. 131 requires disclosure of certain information regarding operating segments, products and services, geographic areas of operation and major customers. Adoption of SFAS No. 131 is expected to have no material impact on the Company's business, financial condition or results of operations. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Company 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 the Company 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 the Company's business, financial condition or results of operations. 33 BUSINESS INDUSTRY BACKGROUND GROWTH OF INTERNET COMMERCE AND FUNCTIONALITY The Internet's open architecture, universal accessibility and growing acceptance make it an increasingly important environment for business-to-business and business-to-consumer interaction. Use of the Internet is rapidly expanding from simple information publishing, messaging, and data gathering to critical business transactions and confidential communications. For many industries, the Internet is connecting previously disconnected business processes and allowing companies to automate workflows, lower distribution costs and extend their market reach. The Company believes the healthcare industry, because of its size, fragmentation and extreme dependence on information exchange, is particularly well suited to benefit from greater use of the Internet. NEED FOR REDUCED HEALTHCARE COSTS AND IMPROVED QUALITY OF CARE According to the Health Insurance Association of America, healthcare is the largest single sector of the U.S. economy, consuming approximately $1 trillion annually, or 14% of the country's gross domestic product. The healthcare industry consists of a complex mix of participants, which includes physicians, medical practice groups, hospitals and other organizations that deliver medical care, referred to as "providers;" the government agencies, insurance companies, managed care organizations and other enterprises that pay the bills for healthcare, referred to as "payors;" clinical laboratories, pharmaceutical companies, and other groups that provide tests, drugs, x-rays and other services, referred to as "suppliers;" and, finally, individual patients who receive medical care, and the government agencies, employers and other organizations that represent groups of individuals, all referred to as "consumers." All healthcare participants rely heavily upon information to perform their roles in the industry. Individuals compare medical plans, choose physicians and submit claims for reimbursement. Employers select health plans, determine benefit levels, enroll employees and maintain employee eligibility data. Providers verify patient eligibility, collect patient histories, order diagnostic tests and x-rays, receive and interpret test results, render diagnoses, make referrals and submit claims to payors. Payors manage referrals, establish medical care protocols and reimbursement policies and process claims. Suppliers analyze and process patient samples or tests, provide results, fill prescriptions and submit claims for reimbursement. These and many other healthcare transactions are also highly dependent on information, and each participant is dependent on the others for parts of that information. In sum, the finance and delivery of healthcare requires that consistent, accurate information be shared confidentially across a large and fragmented industry. Inefficiencies within the healthcare system consume enormous amounts of time, resources and dollars. It is estimated that over $250 billion (or 25% of every healthcare dollar) are wasted through the delivery of unnecessary care, performance of redundant tests and procedures, and excessive administrative costs. The Company believes much of this inefficiency and waste is a direct result of poor information exchange among healthcare participants. Consumers do not have easy access to the detailed information they need to compare health plans, select physicians, or manage their own healthcare and benefits. Providers often lack timely access to relevant patient information, and this lack of information causes them to prescribe unnecessary tests or procedures and hinders their ability to diagnose and treat patients. Providers and suppliers often rely on manual processes to share data, and errors and information bottlenecks resulting from these manual processes cause delays in determining eligibility, approving referrals, reporting test results and paying claims. These inefficiencies contribute to the rising cost of healthcare. As a result, the government and other purchasers of healthcare have increasingly placed pressure on the healthcare industry to improve the cost-effectiveness of healthcare while maintaining the quality of care. 34 LIMITATIONS OF TRADITIONAL FUNCTIONAL APPROACH TO HEALTHCARE INFORMATION MANAGEMENT The unique characteristics of the healthcare industry have limited the scope of previous technology solutions. The sheer number of participants, the complexity of healthcare transactions, and pervasive concerns about confidentiality have precluded any comprehensive solution that would deliver connectivity and automated workflows across the entire industry. Healthcare organizations and their traditional technology vendors have focused on automating discrete business processes, such as billing and scheduling for physicians, or claims processing for hospitals and payors. As a result, the industry currently uses thousands of different mainframe and client/server systems that lack cross-platform compatibility. While these legacy systems serve the narrow functions for which they were designed, they have compounded the industry's connectivity problems. Information the industry needs to share is trapped in isolated, proprietary databases using non-standardized data formats. In this environment, many physician offices, particularly those with limited financial resources, have been reluctant to invest in information technology solutions. Current solutions may provide connectivity to a single payor or supplier, or to a limited subset of payors or suppliers, leaving the physician office with its old manual processes for the majority of its transactions. The following examples illustrate how poor information management and the lack of connectivity result in costly, inefficient healthcare services: ENROLLMENT AND ELIGIBILITY. The enrollment process typically begins with employees choosing a health plan and completing paper forms; the employer manually enters the employee information into its human resources information system and subsequently sends the data (often via a paper report) to the relevant health plan. The plan manually enters the information into its membership system and sends the information, again often in paper form, to other entities, such as provider groups, pharmacies, pharmacy benefit management companies and diagnostic laboratories, which in turn must manually enter this information into their own systems. By the time this process is complete, the information may be months old and contain data entry errors, and the disparate healthcare information systems of the various participants may contain conflicting information about the same member. The participants must then expend costly, time-consuming extra effort to correct these errors manually. In the interim, patients may be denied treatment or providers may go unpaid for their services. REFERRALS AND AUTHORIZATIONS. Managed care organizations may require physicians to obtain prior approval to refer patients to specialists or to render certain treatments. The approval process often requires physicians to mail, fax or telephone requests for authorization to the health plan. The plan manually enters the data into its own system, checks its guidelines regarding conditions of referral (which can involve multiple parties in different organizations), and replies via mail, fax or telephone with an approval or denial, a process that can take two days to a week or more. Next, the patient must schedule an appointment if the request is approved, or seek alternative care if the request is denied. This lengthy authorization process is costly, wastes valuable physician time and delays patient care. CLINICAL INFORMATION EXCHANGE. To diagnose and treat a patient properly, physicians need access to clinical information, such as medical history data, laboratory and x-ray results, and medication lists. However, this information typically resides in proprietary databases or is stored in paper form. Therefore, the physician must submit requests for information by phone or fax to various hospitals, laboratories, outpatient diagnostic centers or provider offices. Even when the data are stored at the physician's office, it can be time-consuming to locate in the physician's paper-based medical record system. As a result, significant delays can occur before the physician obtains the information required to diagnose the patient's condition accurately. Often, physicians will require patients to repeat tests for which data are missing, leading to unnecessary expense. More important, the lack of timely access to accurate clinical information in an urgent care situation may lead to inaccurate diagnoses resulting in delayed or inappropriate care. The problem is therefore not only costly, but also potentially harmful. The limitations and inefficiencies of traditional healthcare information management ultimately harm the individual consumer. Individual consumers have little control or influence over how healthcare services 35 are provided, in part because they lack easy access to information. It can be difficult for consumers to perform simple tasks, such as changing primary care providers, gaining access to their own medical records, or monitoring their own care and compliance at home, because the information they need for these simple tasks requires time-consuming phone calls or paper correspondence. Consumers, frustrated by burdensome bureaucracy and lack of empowerment, often fail to take ownership and control of their own treatment and recovery. The result is higher costs of care and growing dissatisfaction with the healthcare experience. HEALTHEON'S OPPORTUNITY Healtheon believes a significant opportunity exists to leverage the power of the Internet to provide secure, open, universally accessible network services that connect participants and automate workflows throughout the healthcare delivery process. The Company believes that such a solution has the potential to create significant improvements in the way that information is used by the healthcare system, enabling improved workflows, better decision-making and, ultimately, higher quality care at a lower cost. THE HEALTHEON VIRTUAL HEALTHCARE NETWORK Healtheon is pioneering the use of the Internet to simplify workflows, decrease costs and improve the quality of patient care throughout the healthcare industry. Healtheon has designed an Internet-based information and transaction platform that allows it to create Virtual Healthcare Networks that facilitate and streamline interactions among the myriad participants in the healthcare industry. The Healtheon VHN solution includes a suite of services delivered through applications operating on its Internet-based platform. Healtheon VHNs enable the secure exchange of information among disparate healthcare information systems and support a broad range of healthcare transactions, including enrollment, eligibility determination, referrals and authorizations, laboratory and diagnostic test ordering, clinical data retrieval and claims processing. Healtheon provides its own applications on the Healtheon Platform and also enables third-party applications to operate on its platform. The Healtheon Virtual Healthcare Network solution provides the following key benefits: ELIMINATION OF UNNECESSARY OR REDUNDANT EFFORTS. The Healtheon VHN solution is designed to reduce paper-based transactions, eliminate redundant data entry, shorten cycle times and decrease the communication inefficiencies created by isolated proprietary systems. Healtheon believes that by decreasing redundant tasks, errors, delays, and unnecessary tests and procedures, it can create efficiencies and reduce costs across the healthcare industry. EXTENDIBILITY ACROSS THE CONTINUUM OF HEALTHCARE. The Company 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. The Company expects the benefits of its solution to increase as it adds customers, enabling each user to exchange more data and complete more transactions with a greater number and broader range of other healthcare industry participants. SCALABILITY AND FLEXIBILITY. The Healtheon VHN solution is designed to support the Company'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, 36 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 payors of electronic transactions as well as the use of standard transactions, standard identifiers and security features by the year 2000. INCREASED ACCURACY AND TIMELINESS OF INFORMATION. The Healtheon VHN solution is designed to increase information flows among all healthcare participants, which ultimately results in more timely and appropriate treatments. For example, on-line access to accurate, up-to-date eligibility information facilitates patients' access to care on a more timely basis, reduces frustration and costs and increases the likelihood that providers will be compensated for their services in a timely manner. Similarly, using Healtheon's VHN solution, consumers will have greater access to their healthcare information, thereby enabling them to become more active participants in the provision of their own healthcare. Healtheon believes that these and other benefits provided by its solution will result in increased quality of care. STRATEGY Healtheon's objective is to become the leading provider of Internet-based transaction and information services to the healthcare industry. The Company's strategy includes the following key elements: LEVERAGE INTERNET TECHNOLOGY. Healtheon leverages Internet technology to create Virtual Healthcare Networks that provide secure transactions and communications among a broad range of healthcare participants, regardless of their legacy computing platforms. Unlike traditional proprietary solutions that focus on point-to-point communications and narrowly defined transactions, Internet technology allows the Company to integrate all categories of healthcare participants--payors, providers, suppliers and consumers--to eliminate redundant tasks and reduce costs. The Company believes that such connectivity will optimize and simplify the flow of mission-critical information. EXPAND FUNCTIONALITY AND TRANSACTION CAPABILITY. The Company seeks to identify key functions that are critical to particular industry participants and integrate applications supporting these functions into its VHN. The Company plans to accomplish this by building native, Internet-based applications encompassing the identified functionality, by acquiring businesses or technologies, and by enabling industry-leading, third-party applications on its platform. The Company has initially targeted those applications that are most critical to each business segment of the healthcare industry, offer the highest value to the participants, and are readily adaptable to a network computing paradigm. For example, the Company developed its Benefits Administration application suite to automate healthcare plan enrollment and is developing its RACER application suite to manage eligibility, referrals, authorizations and claims transactions between healthcare providers and payors. FORM STRATEGIC RELATIONSHIPS WITH LEADING HEALTHCARE PARTICIPANTS. The Company is aggressively pursuing strategic relationships with leaders in key healthcare industry segments to increase its portfolio of applications and services, increase the number of connected users and provide specialized industry expertise for new applications. In addition, the Company plans to acquire companies with strategic relationships with leading healthcare industry participants. The Company believes this strategy also provides accelerated market awareness and demand for Healtheon's services through the influence of these partners both directly, through their use and sales efforts, and indirectly, through their relationships with other potential customers. To date, Healtheon has established strategic relationships with the following organizations: United HealthCare, the largest health maintenance organization in the United States; SmithKline Labs, one of the largest independent clinical laboratory companies in the United States; 37 Brown & Toland, a leading medical group in the San Francisco Bay Area; and Beech Street, one of the largest preferred provider organizations in the United States. ESTABLISH A NATIONAL PRESENCE REGION BY REGION. The Company believes that the value of its applications and services will grow as the number of connected parties and the breadth of the transactions conducted on the Company's platform increase. However, healthcare remains highly regional, driven by business relationships and practices that are often unique to specific regions. Therefore, the Company's approach is to target regional markets where it can gain critical mass and to expand nationally region by region. The Company plans to enter into, and to acquire companies with, strategic relationships with national and regional healthcare participants that have significant market share in specific regions. In addition, the Company intends to leverage its existing relationships to penetrate new regions and markets. PURSUE USAGE-BASED BUSINESS MODEL. The Company offers network-based transaction and information services on a transaction or subscription fee basis. This pricing model reduces the initial investment required to obtain the benefits of high-end information technology systems, enabling physicians, small organizations and individuals to gain access to such systems for the first time. By enabling the shift from fixed information technology costs to variable costs, the Company believes that it will be able to achieve a critical mass of users and broad-based adoption of the Healtheon Virtual Healthcare Network solution. PROVIDE A COMPLETE SOLUTION. In addition to its network-based transaction and information services, the Company offers consulting, application development, systems integration and network management services to provide complete customer-specific solutions. By offering this range of services, the Company can provide customers with a complete migration path from the customers' legacy systems and processes to Healtheon's Internet-based model. HEALTHEON'S SERVICES Healtheon offers a suite of healthcare transaction and information services delivered over the Internet or over private intranets and other networks. These network-based services are provided by software applications operating on or interfacing with the Healtheon Platform, which is designed to provide connectivity across the healthcare industry and enable a broad array of secure, mission-critical healthcare transactions. In addition to its platform and Internet-based applications, Healtheon provides comprehensive consulting and implementation services to enable its customers to take full advantage of the capabilities of Healtheon's platform. 38 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.
BUSINESS CUSTOMERS/ FUNCTION USERS TRANSACTIONS SUPPORTED APPLICATIONS Membership Services Consumers - Enrollment Benefits Payors - Plan comparison/selection Administration - Provider search, selection, change - Benefits inquiry - Messaging Healthcare Administration Payors - Eligibility determination ProviderLink and Financial Management Providers - Referrals* RACER* - Authorization* PACER* - Claims submission and status - Remittance advice - Provider directories* - Provider files-management* - Reporting - Claims repricing* Clinical Information Providers - Patient identification and SCAN+ Services Suppliers encounter history GMPI+ - Patient registration ActaLab* - Lab orders and results - Text document/transcription distribution
* 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 the Company and are not yet Internet-enabled; the Company is currently redeveloping or replacing these applications to integrate them with the Healtheon Platform. MEMBERSHIP SERVICES. Healtheon provides membership services through its Benefits Administration application. The Benefits Administration application was developed internally and operates on the Healtheon Platform. The application provides Internet-based connectivity between healthcare payors and consumers and supports transactions such as selection of health plans and providers, enrollment for benefits and benefit inquiries. Benefits Administration users also receive Healtheon's Health Risk Appraisal service, which provides consumer education in wellness and health risks. Healtheon has deployed this application directly and through aggregators to 25 companies, covering approximately 30,000 members. HEALTHCARE ADMINISTRATION AND FINANCIAL MANAGEMENT. Healtheon supports or will support healthcare administration and financial management transactions through its ProviderLink, RACER and PACER applications. ProviderLink was licensed by the Company's ActaMed subsidiary from United HealthCare Corporation. The Company is currently developing a software interface between the Healtheon Platform 39 and ProviderLink to integrate ProviderLink with the Company's network-based services. ProviderLink is used by providers to support transactions and workflows with payors. ProviderLink supports transactions such as eligibility determinations, claims submission and status, and remittance advice. For example, physicians use ProviderLink to determine eligibility of patients to receive care and to submit health claims to payors. ProviderLink is currently deployed in over 4,000 active provider sites in more than 20 major markets, and processes over 2.5 million transactions per month. The Company is developing RACER, a new Internet-based provider application with support from Brown & Toland, one of the Company's strategic partners. RACER is designed to provide all of the functionality of ProviderLink and also support referrals, authorization, and provider directories reporting. Providers using the RACER service will be able to receive real-time patient eligibility verifications and referral authorizations over the Healtheon VHN. The Company is developing PACER, a new Internet-based payor application, with support from Beech Street, one of the Company's strategic partners. PACER is designed to support the creation and management of networks of providers. PACER is designed to enable the management of large, complex provider directories and files, manage provider relationships and contracts and perform certain claim adjudication functions, such as claim repricing. See "-- Strategic Relationships." CLINICAL INFORMATION SERVICES. The Company's SCAN product supports ordering and distribution of clinical tests and test results between SmithKline Labs and providers using SmithKline Labs' services. ActaMed acquired the SCAN application from SmithKline Labs. SCAN is deployed on approximately 4,400 installed workstations serving physicians throughout the United States. SCAN is not Internet-enabled; however, the Company is developing a new Internet-enabled application called ActaLab that will combine the functionality of SCAN and ProviderLink. See "-- Strategic Relationships." The Company's Global Master Person Index ("GMPI") enables the unique identification of a patient and reconciliation of multiple records for the same patient contained on diverse information systems. GMPI also supports access to patient data and registration information as well as clinical records. GMPI is an object-oriented application developed by ActaMed and is not yet Internet-enabled. Healtheon intends to adapt and implement GMPI functionality on the Healtheon Platform. OTHER SERVICES. Healtheon also provides professional services to its customers to enable them to define, develop and implement network-based information systems that leverage the capabilities of the Healtheon Platform. These services are typically sold on a fixed fee or time and materials basis. These services include consulting on information systems strategy related to the use of the Internet and secure networks, including design of information systems functional specifications, mapping and redesign of business processes and identification of enterprise transformation and training requirements to take advantage of increased connectivity. Healtheon also provides custom development of applications and enables the deployment of Healtheon services and integration with legacy information technology systems. In addition, Healtheon provides transitional network management services of its customers' networks. The Company 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. The Company currently offers a limited number of applications on its platform. CUSTOMERS AND MARKETS Healtheon's target customers include providers, payors, suppliers and consumers. Because the Company 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. 40 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, the Company 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. The Company's current customers in this category include Brown & Toland and the Greater Dayton Area Hospital Association. PAYORS. Healtheon's target payor customers include managed care organizations, indemnity insurers, third-party administrators and federal and state governmental agencies. Target managed care organization customers include mid-sized to large HMOs and PPOs. Healtheon's services for these customers include eligibility determination, member customer service functions, referral and authorization management, coordination of provider files and directories, and submission and tracking of claims and patient encounter reports. Target indemnity insurer and third-party administrator customers include mid-sized to large commercial entities, Medicare and other agencies of federal and state government. The Company's current customers in this category consist of United HealthCare, Beech Street, Sun Life of Canada, Blue Shield of California, CIGNA HealthCare and the Health Care Financing Administration. SUPPLIERS. Healtheon's target supplier customers include large national laboratory companies, pharmaceutical companies and pharmacy benefit managers. Healtheon's services for laboratory companies include ordering clinical tests and reporting test results. The Company's principal customer in this category is SmithKline Labs. CONSUMERS. Healtheon's target consumer customers include employers, health plans and health plan brokers. Healtheon's services for these consumer representatives include 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 services 25 employers covering approximately 30,000 members. STRATEGIC RELATIONSHIPS The Company has entered into several strategic relationships that it believes will enhance its application portfolio, provide important specialized industry expertise, increase its market penetration, and generate revenue. Certain of these relationships are described below: UNITED HEALTHCARE CORPORATION. United HealthCare is the largest HMO in the United States. United HealthCare is the Company's largest stockholder and will own approximately 13.7% of the Company's Common Stock after the Underwritten Offering and the Related Sale. In March 1996, the Company acquired United HealthCare's ProviderLink network which supports over 4,000 active provider sites in more than 20 major markets servicing over 2.5 million transactions per month. The Company earns transaction fee revenue by providing certain healthcare information services to United HealthCare, members of United HealthCare's provider network and ProviderLink subscribers. In April 1996, the Company and United HealthCare entered into a Services and License Agreement (the "United HealthCare Agreement") under which the Company, using ProviderLink, provides claims processing, referral, eligibility and enrollment services, to United HealthCare's managed care providers and 41 customers. Under the United HealthCare Agreement, the Company currently receives a monthly fee for each user site enrolled with United HealthCare and a fee per transaction. However, the United HealthCare Agreement does not guarantee any minimum level of transactions or payments to the Company. The United HealthCare Agreement has a five year term; however, the agreement provides that two years after the date of the agreement (April 4, 1998) the parties will agree on new prices that will be competitive with the marketplace. The Company and United HealthCare are negotiating such new prices, and the Company anticipates that the new prices will reduce the rates paid by United HealthCare. United HealthCare has also agreed during the term of the United HealthCare Agreement not to promote or contract for services providing the same functionality as that provided by the Company, although United HealthCare is permitted to continue to utilize services it was utilizing when it entered into the United HealthCare Agreement. In addition, through ActaMed, the Company has developed PLNet, an Internet-based version of ProviderLink, which the Company intends to integrate into the Healtheon Platform and offer to other major healthcare payors and providers. The Company is working with United HealthCare to expand the applications and content available to United HealthCare's provider network, to increase the size and geographic reach of its provider network, and to assimilate newly acquired health plans. William McGuire, M.D., the Chairman and CEO of United HealthCare, is a member of the Company's Board of Directors. The United HealthCare Agreement is effective through March 2001, subject to earlier termination in the event the Company fails to meet certain network performance standards or otherwise breaches its material obligations under the United HealthCare Agreement. SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. SmithKline Beecham Clinical Laboratories, Inc. ("SmithKline Labs"), a subsidiary of SmithKline Beecham, is one of the largest independent clinical laboratories in the United States. SmithKline is a stockholder of the Company and will own approximately 6.9% of the Company's Common Stock after the Underwritten Offering and the Related Sale. In December 1997, the Company and SmithKline Labs entered into a Services Agreement (the "Services Agreement") under which the Company provides lab orders and results to providers that use SCAN. SmithKline Labs has also agreed to promote the Company as its preferred vendor for laboratory electronic connectivity services. The Company acquired SCAN-related assets from SmithKline Labs, including approximately 4,200 installed workstations in physicians' offices, hospitals and other provider offices. The Company is currently developing ActaLab, an Internet-enabled version of the SCAN system, which the Company plans to integrate into the Healtheon Platform and to offer to physicians using SmithKline Labs' services or to physicians using other laboratories. Tadataka Yamada, M.D., President of SmithKline Beecham Healthcare Services, is a member of the Company's Board of Directors. The Services Agreement is effective through December 2002, with options for successive two-year renewals, subject to earlier termination in the event the Company fails to meet certain network performance standards or if the Company otherwise breaches its material obligations under the Services Agreement. The Services Agreement provides that the parties will negotiate new rates as of January 1, 2001 and each two years thereafter. Pursuant to the Services Agreement, the renegotiated rates must be competitive with the marketplace and must be no higher than the lowest fees charged by the Company to similarly situated customers. BROWN & TOLAND PHYSICIAN SERVICES ORGANIZATION. Brown & Toland Medical Group ("BTMG"), based in San Francisco, California, is a partnership of approximately 2,000 physicians representing a merger of physicians from California Pacific Medical Center, the University of California-San Francisco and Stanford University. Brown & Toland Physician Services Organization ("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, the Company and Brown & Toland entered into an agreement under which the Company is developing RACER, which the Company intends to market to Brown & Toland and other payors and providers. The Company also manages the information technology operations of Brown & Toland. Through its relationship with Brown & Toland, the Company believes it is gaining valuable industry-segment expertise from a leader in managed care and accelerating 42 its market presence in the San Francisco Bay Area. The Company'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, the Company and Beech Street have entered into an agreement under which the Company is developing PACER, which the Company intends to offer to Beech Street and to other payors and providers. The Company also manages the information technology operations of Beech Street. The relationship with Beech Street provides the Company with important industry-segment expertise and a strategic entry-point into the PPO market segment. The Company's agreement with Beech Street is effective through December 2002, although it may be terminated by either party upon 180 days' notice. See "Risk Factors -- Reliance on Strategic Relationships." THE HEALTHEON PLATFORM The Healtheon Platform is a CORBA-based distributed application framework, combined with software tools that ensure security, scalability, availability, reliability and manageability, on which transaction intensive applications can be delivered over the Internet or over other distributed environments. The Healtheon Platform is deployed on a server complex at the Healtheon data center in Santa Clara, California, which consists of SUN Solaris servers in a fault tolerant configuration and redundant or fault tolerant network components. The Healtheon Platform includes the following features: SECURITY. The Healtheon Platform is designed to ensure the privacy and integrity of data and communications by using a combination of security methodologies to provide multiple lines of defense. All Internet communications between Healtheon and its users employ the Secure Sockets Layer protocol. In addition, Healtheon utilizes server digital certificates and username/password schemes to authenticate users. Each user has a unique user ID and has one or more roles that define the types of functionality and data access available. All Healtheon's applications record logging information, creating an audit trail, and protect privacy by encrypting sensitive data. The Company 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. See "Risk Factors -- Unproven Platform Infrastructure and Scalability." 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. The Company 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. 43 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. The Company'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 the Company 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 the Company's services are linked to advanced storage systems that provide data protection through techniques such as replication. The Company also maintains on-site backup power systems. AUDITS. The Company'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 The Company believes that a high level of customer support is necessary to achieve wide acceptance of its solution. The Company provides a wide range of customer support services through a staff of customer service personnel, multiple call centers and an e-mail help desk. The Company 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. The Company also employs technical support personnel who work directly with its direct sales force, distributors and customers of its applications and services. The Company provides its customers with the ability to purchase maintenance for its applications and services, which includes technical support and upgrades. The Company also provides training programs for its customers. As of June 30, 1998, the Company had 164 employees in customer support functions, including network services, provider services and customer support services. SALES AND MARKETING Healtheon's sales and marketing efforts are organized according to its four main customer segments: providers, payors, suppliers and consumers. Healtheon's direct sales force targets significant potential customers in each market segment by region. In certain instances, the Company's direct sales force works with complementary brokers, value added resellers and systems integrators to deliver complete solutions for major customers. In addition, senior management plays an active role in the sales process by cultivating industry contacts. The Company 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. The Company 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. The Company's executive sales and marketing management is located in its Santa Clara, California headquarters and in its Atlanta, Georgia and Minneapolis, Minnesota facilities, while its account 44 representatives are deployed across the United States. As of June 30, 1998, the Company employed 44 sales executives, account managers, direct sales representatives and sales support personnel. DEVELOPMENT AND ENGINEERING The Company 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, the Company leverages the modular nature of its platform architecture to enable it to develop new applications and services rapidly. The Company has developed applications and services both independently and through acquisitions. The Company will continue to work closely with other companies in its applications development efforts. The Company has several significant projects currently in development. These include the continued enhancement of the platform architecture, development of new applications such as RACER, PACER and ActaLab, and integration of ActaMed's platform, network and associated services. As of June 30, 1998, the Company employed 144 people in the areas of applications design, research and development, quality assurance and technical support. In 1995, 1996, 1997 and the six months ended June 30, 1998, the Company's development and engineering expense (which excludes development expenses included in total cost of revenue) totaled $2.4 million, $8.6 million, $13.0 million and $8.3 million, respectively, representing 112%, 78%, 97% and 40%, respectively, of its total revenue. The Company believes that timely development of new and enhanced applications and technology is necessary to remain competitive in the marketplace. Accordingly, the Company 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 the Company 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 the Company's competitors and market acceptance. There can be no assurance that the Company will be successful in developing and marketing new applications and services that respond to competitive and technological developments and changing customer needs. The failure of the Company to develop and introduce new applications and services successfully on a timely basis and to achieve market acceptance for such applications and services could have a material adverse effect on the Company'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 the Company to adapt its applications and services. Moreover, there is a risk that a competitor's product might become the standard for healthcare information services. See "Risk Factors -- Rapid Technological Change; New Application and Services Introductions." INTELLECTUAL PROPERTY The Company 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. The Company believes that patent, trade secret and copyright protection are less significant to the Company's success than its ability to further develop applications. The Company has several trademarks in the United States and internationally. See "Risk Factors -- Dependence on Proprietary Technology; Potential Litigation." 45 COMPETITION The market for healthcare information services is intensely competitive, rapidly evolving and subject to rapid technological change. Many of the Company's actual and potential competitors have announced or introduced Internet strategies. The Company's competitors can be divided into several groups: healthcare information software vendors, including HBO & Company and Shared Medical Systems Corporation; healthcare electronic data interchange companies, including ENVOY Corporation and National Data Corporation; and large information technology consulting service providers, including Andersen Consulting, International Business Machines Corporation and Electronic Data Systems Corporation. Each of these companies can be expected to compete with the Company within certain segments of the healthcare information technology market. Furthermore, major software information systems companies and others, including those specializing in the healthcare industry that are not presently offering applications that compete with those offered by the Company, may enter the Company's markets. In some cases, large customers may have the ability to compete directly with the Company as well. The Company also competes with smaller regional competitors. Many of the Company's competitors and potential competitors have significantly greater financial, technical, product development, marketing and other resources and greater market recognition than the Company. Many of the Company's competitors also currently have, or may develop or acquire, substantial installed customer bases in the healthcare industry. As a result of these factors, the Company's competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion and sale of their applications or services than the Company. There can be no assurance that the Company will be able to compete successfully against current and future competitors or that competitive pressures faced by the Company will not materially adversely affect its business, financial condition and results of operations. GOVERNMENT REGULATION AND HEALTHCARE REFORM Laws and regulations may be adopted with respect to the Internet or other on-line services covering issues such as user privacy, pricing, content, copyrights, distribution and characteristics and quality of products and services. The adoption of any additional laws or regulations may impede the growth of the Internet or other on-line services, which could, in turn, decrease the demand for the Company's applications and services and increase the Company's cost of doing business, or otherwise have an adverse effect on the Company's business, financial condition and results of operations. For example, under current Health Care Financing Administration guidelines, Medicare eligibility information cannot be transmitted over the Internet. Moreover, the applicability to the Internet of existing laws in various jurisdictions governing issues such as property ownership, sales and other taxes, libel and personal privacy is uncertain and may take years to resolve. Any such new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to the Company's business, or the application of existing laws and regulations to the Internet and other online services could have a material adverse effect on the Company's business, financial condition and results of operations. The confidentiality of patient records and the circumstances under which such records may be released for inclusion in the Company's databases are subject to substantial regulation by state governments. These state laws and regulations govern both the disclosure and the use of confidential patient medical record information. Although compliance with these laws and regulations is at present principally the responsibility of the hospital, physician or other healthcare provider, regulations governing patient confidentiality rights are evolving rapidly. Additional legislation governing the dissemination of medical record information has been proposed at both the state and federal level. This legislation may require holders of such information to implement security measures that may require substantial expenditures by the Company. There can be no assurance that changes to state or federal laws will not materially restrict the ability of healthcare providers to submit information from patient records using the Company's applications. 46 Legislation currently being considered at the federal level could impact the manner in which the Company conducts its business. The Health Insurance Portability and Accountability Act of 1996 mandates the use of standard transactions, standard identifiers, security and other provisions by the year 2000. The Company is designing its Platform and applications to enable compliance with the proposed regulations; however, until such regulations become final, they could change, which could require the Company to expend additional resources to comply with the revised standards. In addition, the success of the Company's compliance efforts may be dependent on the success of healthcare participants in dealing with the standards. International regulations with respect to the Internet, privacy and transborder data flows are considerably more developed than regulations in the United States. The Company intends to develop applications and services to be used on a worldwide basis and, consequently, will be required to comply with international regulations regarding the Internet and electronic commerce, as well as with U.S. regulations. The Company has not evaluated the effect that these regulations would have on its business, and there can be no assurance that such regulations will not have an adverse effect on the Company's ability to compete internationally. The United States Food and Drug Administration is responsible for assuring the safety and effectiveness of medical devices under the Federal Food, Drug and Cosmetic Act. Computer applications and software are considered medical devices and subject to regulation by the FDA when they are indicated, labeled or intended to be used in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment or prevention of disease, or are intended to affect the structure or function of the body. The Company does not believe that any of its current applications or services are subject to FDA jurisdiction or regulation; however, the Company plans to expand its application and service offerings into areas that may subject it to FDA regulation. The Company has no experience in complying with FDA regulations. Healtheon's compliance with FDA regulations could prove to be time consuming, burdensome and expensive, which could have a material adverse effect on the Company's ability to introduce new applications or services in a timely manner. EMPLOYEES As of June 30, 1998, the Company had a total of 379 employees, of whom 101 engaged in customer and network services, 144 in development and engineering, 8 in consulting services, 63 in provider services, 44 in sales and marketing and 19 in corporate finance and administration. None of the Company's employees is represented by a labor union, and the Company has never experienced a work stoppage. The Company believes its relationship with its employees to be good. The Company'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 the Company's industry and geographical location in the San Francisco Bay Area is intense, particularly in software development and technical personnel. See "Risk Factors -- Dependence on Key Personnel." FACILITIES The Company'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. The Company 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; and 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. The Company believes that its facilities are adequate for its current operations and that additional leased space can be obtained if needed. 47 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information regarding the Company's current executive officers and directors:
NAME AGE POSITION - ----------------------------------- ----- ----------------------------------- James H. Clark(1)(2)............... 53 Chairman of the Board of Directors W. Michael Long(3)................. 46 Chief Executive Officer and Director Michael K. Hoover.................. 43 President and Director Ron Alvarez........................ 49 Vice President, Consumer Group Mark Bailey........................ 39 Vice President, Business Development Kallen Chan........................ 43 Corporate Controller Jack Dennison...................... 41 Vice President and General Counsel Dennis Drislane.................... 49 Vice President, Customer and Network Services Edward Fotsch, M.D................. 41 Vice President, Physician and Integrated Delivery Network Group Piers G.D. Fox..................... 53 Vice President, Europe Nancy Ham.......................... 37 Vice President, Laboratories and Pharmaceuticals J. Philip Hardin................... 35 Vice President, Managed Care Group John R. Hughes, Jr................. 45 Vice President, Provider Services Krishna Kolluri.................... 35 Vice President, Applications Pavan Nigam........................ 39 Vice President, Engineering Charles Saunders, M.D.............. 43 Vice President, Marketing and Consulting Services and Medical Director John L. Westermann III............. 53 Vice President, Chief Financial Officer, Secretary and Treasurer L. John Doerr(1)(2)................ 46 Director C. Richard Kramlich(1)(2).......... 63 Director William W. McGuire, M.D.(1)(2)..... 50 Director P. E. Sadler(1)(2)................. 63 Director Tadataka Yamada, M.D.(1)(2)........ 53 Director
- --------- (1) Member of the Audit Committee. (2) Member of the Compensation Committee. (3) Member of the Stock Option Committee. JAMES H. CLARK has served as Chairman of the Board of the Company since he co-founded it in December 1995. Dr. Clark co-founded Netscape Communications Corporation in April 1994 and has served as the Chairman of the Board of Directors of Netscape since its inception. He served as President and Chief Executive Officer of Netscape from its founding until December 1994. From 1981 until 1994, Dr. Clark served as Chairman of the board of directors of Silicon Graphics, Inc., a company which 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 the Company since joining the Company in July 1997. Prior to joining the Company, Mr. Long was President and Chief Executive Officer of CSC Continuum, Inc. ("CSC"), a unit of Computer Sciences Corporation from August 1996 to 48 July 1997. For more than five years prior to its acquisition by CSC, he was President and Chief Executive Officer of The Continuum Company, Inc., a provider of IT and consulting services to the financial industry. He holds a B.A. from the University of North Carolina. MICHAEL K. HOOVER has served as President and a director of the Company since the Company acquired ActaMed Corporation in May 1998. Mr. Hoover co-founded ActaMed in May 1992, and served as its President from its inception to May 1998, and as its President and Chief Executive Officer from December 1995 to May 1998. From 1989 to 1992, Mr. Hoover served as the Executive Director of Financial Services of the MicroBilt division of First Financial Management Corporation. Prior to that, he founded FormMaker Software Corporation, a producer of electronic forms automation systems, and served as its Chief Executive Officer from 1982 to 1988 and as its Executive Vice President during 1988. RON ALVAREZ has served as Vice President, Consumer Group of the Company since June 1998, and prior to that served as Vice President, Sales since joining the Company in July 1997. Prior to joining the Company, Mr. Alvarez spent ten years at Informix Software, Inc. as Vice President of North American Sales and as head of its Latin American operations. Prior to that time, he was District Sales Manager at Metaphor Computer Systems. Mr. Alvarez has also held sales positions at Storage Technology Corporation and Xerox Corporation. Mr. Alvarez holds a B.S. from California State University in Sacramento and an M.B.A. from the University of Missouri. MARK BAILEY has served as Vice President, Business Development of the Company since joining the Company in July 1998. Prior to joining the Company, Mr. Bailey served as general partner at Venrock Associates, the venture capital arm 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 Caufeld & Byers, a venture capital firm, from June 1985 to December 1989. Mr. Bailey holds an MBA from Harvard University and a BSE from Princeton University. KALLEN CHAN has served as Corporate Controller of the Company since April 1996. Prior to joining the Company, Mr. Chan was the Director of Audit and Group Controller for Worldwide Manufacturing at Cirrus Logic, Inc. since March 1995. From January 1993 to February 1995, Mr. Chan was Vice President of Finance and Chief Financial Officer of Comtech Labs Inc., a video imaging technology company. From 1986 to 1992, Mr. Chan served as Chief Financial Officer for various early stage companies, including Caeco Inc., Harmonic Lightwaves, Inc. and Oasic Technology, Inc. Prior to 1986, Mr. Chan spent nine years at Philips Semiconductor as a Division Controller. He holds a B.S. in commerce and an M.B.A. from the University of Santa Clara. JACK DENNISON has served as Vice President and General Counsel of the Company since joining the Company in July 1998. Mr. Dennison served as Deputy General Counsel of Computer Sciences Corporation from August 1996 to July 1998. Prior to that time, Mr. Dennison served as Vice President and General Counsel of The Continuum Company, Inc. Prior to joining Continuum in 1989, he was a partner with Ford, Dennison & Byrne in Austin, Texas. Mr. Dennison holds a B.A. and a J.D. from the University of Texas. DENNIS DRISLANE has served as Vice President, Customer and Network Services of the Company since joining the Company in July 1997. Mr. Drislane served as Vice President, Communications Industry Group, at Electronic Data Systems Corporation ("EDS") from June 1995 to July 1997. From October 1992 to June 1995, he was President of EDS' Healthcare Division. Prior to October 1992, he held various management positions for EDS. Mr. Drislane holds both a B.S. and an M.S. in business administration from California State University in Sacramento. EDWARD FOTSCH, M.D. has served as the Vice President, Physician and Integrated Delivery Network group of the Company since the Company acquired Metis, LLC in August 1998. Dr. Fotsch served as 49 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. PIERS G. D. FOX has served as Vice President, Europe of the Company since joining the Company in May 1998. From September 1997 to May 1998, Mr. Fox was a Principal of Fast Growth Practice, a business advisory consulting firm. From August 1996 to September 1997, Mr. Fox served as Executive Vice President of Computer Sciences Corporation's Integrated Business Services group. From April 1995 to July 1996, he served as Executive Vice President of Global Outsourcing Sales for The Continuum Company, Inc., a provider of information technology and consulting services to the financial industry. From September 1990 to April 1995, he served as Continuum's Senior Vice President, Europe, and from September 1984 to May 1990, as Continuum's Managing Director (Europe). Mr. Fox holds an MA from Cambridge University. NANCY HAM has served as Vice President, Laboratories and Pharmaceuticals Group of the Company since the Company acquired ActaMed in May 1998. Ms. Ham served as a Senior Vice President of ActaMed from June 1996 to May 1998. She served as Chief Financial Officer and Secretary of ActaMed from 1993 to May 1996. From 1992 to 1993, she was a Corporate Finance Director for the Capital Finance Group of Equifax, Inc. Prior to that, she was an Assistant Vice President at G.E. Capital Corporation. Ms. Ham holds a B.A. in economics from Duke University and a masters in international business studies from the University of South Carolina. J. PHILIP HARDIN has served as Vice President, Managed Care Group of the Company since the Company acquired ActaMed in May 1998. Mr. Hardin served as Vice President of Managed Care Operations of ActaMed from August 1997 until May 1998. He also served as Director of Payor Sponsorship for ActaMed from January 1997 to August 1997, and Project Executive from July 1995 to December 1996. From August 1993 to June 1995, Mr. Hardin attended Stanford University and received an MBA degree in June 1995. Prior to that, he served as Vice President, Finance, Director of Finance and Controller of Melita International Corporation and held various accounting positions at Arthur Andersen & Company. Mr. Hardin also holds a B.B.A. in accounting from the University of Georgia. JOHN R. HUGHES, JR. has served as Vice President, Provider Services of the Company since the Company acquired ActaMed in May 1998. Mr. Hughes served as Chief Operating Officer of ActaMed from March 1996 to May 1998. Prior to working at ActaMed, Mr. Hughes served as General Manager of the EDI Services Group of United HealthCare from August 1992 to March 1996. Mr. Hughes served as Vice President of North American Sales for Revelation Technologies, a computer software company, from 1990 to 1992. From 1980 to 1990, Mr. Hughes was Vice President, Sales Manager and Product Marketing Manager at Harris Corporation. Mr. Hughes holds a B.S. in business administration from the University of Kansas. KRISHNA KOLLURI has served as Vice President, Applications of the Company since July 1998, and prior to that, as Senior Director of Development Engineering of the Company since February 1996. Prior to joining the Company, 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 50 Operations Research from S.U.N.Y., Buffalo, and an M.S.C.S. from the University of California, Santa Cruz. PAVAN NIGAM co-founded the Company and has served as its Vice President, Engineering since February 1996. Prior to joining the Company, 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, Marketing and Consulting Services and Medical Director since joining the Company in September 1997. Prior to joining the Company, 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 the Company since joining the Company in July 1998. From August 1996 to July 1998, Mr. Westermann was Chief Financial Officer and Vice President of CSC Continuum, Inc., a unit of Computer Sciences Corporation. For more than five years prior to its acquisition by CSC, Mr. Westermann was Chief Financial Officer, Vice President, Secretary and Treasurer of The Continuum Company, Inc., a provider of IT and consulting services to the financial industry. Mr. Westermann holds a B.A. from Northwestern University and an M.B.A. from the University of Chicago Graduate School of Business. L. JOHN DOERR has served as a director of the Company since July 1997. He has been a general partner at Kleiner Perkins Caufield & Byers ("KPCB"), a venture capital firm, since 1980. Prior to joining KPCB, Mr. Doerr worked at Intel Corporation for five years. He is a director of At Home Corporation, Amazon.com, Inc., Netscape Communications Corporation, Intuit Inc., Platinum Software Corporation and Sun Microsystems, Inc. He holds a B.S.E.E. and an M.E.E. from Rice University and an M.B.A. from Harvard Business School. C. RICHARD KRAMLICH has served as a director of the Company 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., Chalone Wine Group, Inc. and SyQuest Technology, 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 the Company since the Company acquired ActaMed in May 1998. He has been the President of United HealthCare since 1989 and the Chief Executive Officer and Chairman of the Board of Directors of United HealthCare since 1991. Prior to this, Dr. McGuire was Executive Vice President and Chief Operating Officer of United HealthCare. Prior to this time, he served as President and Chief Operating Officer ("COO") of Peak Health Plan. Before becoming President and COO, he held a number of other positions within that organization. Dr. McGuire practiced medicine in Colorado, specializing in cardiopulmonary medicine. He holds a B.A. from the University of Texas and an M.D. from the University of Texas Medical Branch. P. E. SADLER has served as a director of the Company since the Company acquired ActaMed in May 1998. He was Chairman of the Board of ActaMed from the time that he helped co-found it in 1992 until it was acquired by the Company, and served as its Chief Executive Officer from 1992 until May 1996. 51 Prior to founding ActaMed, Mr. Sadler founded MicroBilt Corporation, a computer processing company, and served as its Chairman, Chief Executive Officer and President from 1981 until MicroBilt was acquired by First Financial Management Corporation ("FFMC") in 1989. Following the acquisition of MicroBilt, he served as President of the MicroBilt division of FFMC until 1991. Mr. Sadler also founded Agency Data Systems in 1972 and served as its President until the company was acquired in 1975. Mr. Sadler also served on the board of Knowledgeware, Inc. from 1990 to 1995 and currently serves on the Board of Directors of Central Parking, Inc., an operator of parking lots. Mr. Sadler holds a B.A. in business and economics from Vanderbilt University. TADATAKA YAMADA, M.D. has served as a director of the Company since the Company acquired ActaMed in May 1998. Dr. Yamada has been President and Executive Director of SmithKline Beecham HealthCare Services since February 1996 and has been a non-executive director of SmithKline Beecham's Board of Directors since February 1994. From June 1990 to February 1996, Dr. Yamada was Chairman of the Internal Medicine department and Physician-in-Chief of the University of Michigan Medical Center. Prior to that time, Dr. Yamada was a Professor and Chief of the Gastroenterology Division at the University of Michigan Medical School's Internal Medicine department. Prior to his work at the University of Michigan, Dr. Yamada was an associate professor of medicine at the UCLA School of Medicine. Dr. Yamada is also a director of Genevco, Inc. Dr. Yamada holds a B.A. in history from Stanford University and an M.D. from the New York University School of Medicine. The Company's Bylaws authorize no fewer than six and no more than eight directors. The size of the Board of Directors (the "Board") is currently set at eight. The Certificate of Incorporation and the Bylaws of the Company also provide for a staggered Board. Under this provision, the Board designates each director position as one of three categories. Each year the directors' positions in one of the categories are subject to election so that it would take up to three years to replace the entire Board (absent resignation or premature expiration of a director's term). Executive officers of the Company are appointed by the Board and serve at the discretion of the Board. There are no family relationships among any of the directors or executive officers of the Company. BOARD COMMITTEES The Board currently has three committees: an Audit Committee, a Stock Option Committee and a Compensation Committee. The Audit Committee is currently comprised of Dr. Clark, Mr. Doerr, Mr. Kramlich, Dr. McGuire, Mr. Sadler and Dr. Yamada. The Audit Committee reviews and, as it deems appropriate, recommends to the Board the internal accounting and financial controls for the Company and the accounting principles and auditing practices and procedures to be employed in preparation and review of the financial statements of the Company. 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 the Company. The Compensation Committee is currently comprised of Dr. Clark, Mr. Doerr, Mr. Kramlich, Dr. McGuire, Mr. Sadler and Dr. Yamada. The Compensation Committee reviews and, as it deems appropriate, recommends to the Board policies, practices and procedures relating to the compensation of the officers and other managerial employees and the establishment and administration of employee benefit plans. The Committee exercises all authority under the Company's employee equity incentive plans and advises and consults with the officers of the Company regarding managerial personnel policies. 52 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 of all reasonable out-of-pocket expenses incurred in connection with their attendance at Board and Board committee meetings. Upon completion of this offering, all Board members are eligible to receive stock options under the 1996 Plan, and outside directors receive stock options pursuant to automatic grants of stock options under the 1996 Plan. In July 1998, the Company granted to each of Drs. McGuire and Yamada an option to purchase 30,000 shares of its Common Stock under the 1996 Plan with an exercise price equal to $7.00 per share, the fair market value of the Company's Common Stock on that date as determined by the Board of Directors after taking into account the Company's financial results and prospects. The 1996 Plan provides that each outside director will receive an option to purchase 5,000 shares of Common Stock annually. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Dr. Yamada, a member of the Compensation Committee, is a director and executive officer of SmithKline Beecham, which, through its subsidiary SmithKline Labs, beneficially owns 8.1% of the Company's Common Stock, and has entered into the Services Agreement and certain other agreements with the Company. Dr. McGuire, a member of the Compensation Committee, is the Chairman and Chief Executive Officer of United HealthCare, which, with its subsidiaries and affiliates, beneficially owns approximately 16.2% of the Company's Common Stock, and has entered into the United HealthCare Agreement and certain other agreements with the Company. See "Certain Transactions." No interlocking relationship exists between the Board or Compensation Committee and the board of directors or compensation committee of any other company, nor has any such interlocking relationship existed in the past. LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS Section 102 of the Delaware General Corporation Law ("DGCL") authorizes a Delaware corporation to include a provision in its certificate of incorporation limiting or eliminating the personal liability of its directors to the corporation and its stockholders 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. Absent the limitations authorized by such provision, directors are accountable to corporations and their stockholders for monetary damages for conduct constituting gross negligence in the exercise of their duty of care. Although Section 102 of the DGCL does not change a director's duty of care, it enables corporations to limit available relief to equitable remedies such as injunction or rescission. The Company's Certificate of Incorporation and Bylaws include provisions that limit or eliminate the personal liability of its directors to the fullest extent permitted by Section 102 of the DGCL. Consequently, a director or officer will not be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except for (i) any breach of the director's duty of loyalty to the Company or its stockholders, (ii) acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) unlawful payments of dividends or unlawful stock repurchases, redemptions or other distributions and (iv) any transaction from which the director derived an improper personal benefit. The Company's Certificate of Incorporation provides that the Company will indemnify, to the fullest extent permitted by law any person made or threatened to be made a party to any action or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person or such person's testator or intestate is or was a director or officer of the Company or any predecessor or serves or served at any other enterprise as a director, officer or employee at the request of the Company. The Company's Bylaws provide that the Company will, to the maximum extent and in the manner permitted by the DGCL, indemnify each person who (i) is or was a director or officer of the Company or 53 any subsidiary of the Company, (ii) is or was serving at the request of the Company as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) was a director or officer of a corporation that was a predecessor corporation of the Company or any of its subsidiaries or of another enterprise at the request of such predecessor corporation or subsidiary, against expenses (including attorneys' fees), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding arising by reason of the fact that such person is or was an agent of the Company. The Company intends to enter into agreements to indemnify its directors and executive officers, in addition to indemnification provided for in the Company's Certificate of Incorporation and Bylaws. These agreements, among other things, indemnify the Company's directors and executive officers for certain expenses (including attorneys' fees), judgments, fines, penalties and settlement amounts incurred by any such person in any action or proceeding, including any action by or in the right of the Company, arising out of such person's services as a director, officer, employee, agent or fiduciary of the Company, any subsidiary of the Company or any other company or enterprise to which the person provides services at the request of the Company. In addition, the Company intends to obtain directors' and officers' insurance providing indemnification for certain of the Company's directors, officers and employees for certain liabilities. The Company believes that these indemnification provisions and agreements are necessary to attract and retain qualified directors and officers. The limited liability and indemnification provisions in the Company's Certificate of Incorporation and Bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duty (including breaches resulting from grossly negligent conduct) and may have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit the Company and it stockholders. Furthermore, a stockholder's investment in the Company may be adversely affected to the extent the Company pays the costs of settlement and damage awards against directors and officers of the Company pursuant to the indemnification provisions in the Company's Certificate of Incorporation and Bylaws. At present, there is no pending or threatened litigation or proceeding involving any director, officer or employee of the Company where indemnification is expected to be required or permitted, and the Company is not aware of any threatened litigation or proceeding that might result in a claim for such indemnification. 54 EXECUTIVE COMPENSATION The following table sets forth information concerning the compensation earned for services rendered to the Company in 1997 in all capacities by the Company's Chief Executive Officer, the Company's former Chief Executive Officer and the Company's four other most highly compensated executive officers who earned more than $100,000 in 1997 and were serving as executive officers at the end of 1997 (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ------------ AWARDS ANNUAL COMPENSATION ------------ SECURITIES ALL OTHER -------------------- UNDERLYING COMPENSATION NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#) ($)(1) - -------------------------------------------------- --------- -------- ------------ ------------ W. Michael Long(2) Chief Executive Officer......................... 234,849 -- 3,250,000(6) 2,766 Michael K. Hoover(3) President....................................... 175,000 75,000 -- 6,664 David Schnell(4) Former President and CEO........................ -- -- -- -- Pavan Nigam Vice President, Engineering..................... 200,004 50,000 125,000 5,571 Denise Shea(5) Former General Counsel.......................... 135,312 -- 55,000 2,268 Kallen Chan Controller...................................... 118,750 -- 20,000 4,073
- --------- (1) Represents life, medical and long-term disability insurance premiums paid by the Company. (2) Mr. Long joined the Company as Chief Executive Officer in July 1997, and was paid at a rate of $500,000 per year. (3) Mr. Hoover served as President and Chief Executive Officer of ActaMed Corporation until it was acquired by the Company in May 1998. (4) Mr. Schnell, a former general partner of Kleiner Perkins Caufield & Byers, served on an interim basis as President and Chief Executive Officer of the Company from February 1996 to July 1997. In exchange for Mr. Schnell's services and other services provided by KPCB, KPCB received a warrant to purchase 1,000,000 shares of Series B Preferred Stock of the Company which has been converted into a warrant to purchase 1,000,000 shares of Common Stock. (5) Ms. Shea became Assistant General Counsel of the Company on July 8, 1998. (6) Includes 750,000 shares of Common Stock subject to a warrant granted to Mr. Long upon the commencement of his employment with the Company. See "-- Employment Agreements." 55 OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1997 The following table sets forth certain information for the year ended December 31, 1997 with respect to grants of stock options to each of the Named Executive Officers:
POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE ------------------------------------------------ AT ASSUMED ANNUAL RATES NUMBER OF % OF TOTAL OF STOCK PRICE SECURITIES OPTIONS APPRECIATION UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(4) OPTIONS EMPLOYEES PRICE PER EXPIRATION ------------------------- NAME GRANTED(1) IN 1997(2) SHARE(3) DATE 5% 10% - ------------------------------------ ----------- ----------- --------- ----------- ----------- ------------ W. Michael Long..................... 2,500,000 45.3% $ 0.25 07/22/07 $ 393,059 $ 996,089 750,000(5) 13.6 2.00 7/10/00 943,342 2,390,614 Michael K. Hoover................... -- -- -- -- -- -- David Schnell....................... -- -- -- -- -- -- Pavan Nigam......................... 125,000 2.3 1.00 10/14/07 78,611 199,218 Denise Shea......................... 55,000 1.0 0.20 02/18/07 6,917 17,531 Kallen Chan......................... 20,000 0.4 0.20 02/18/07 2,515 6,375
- --------- (1) Options granted in 1997 were granted under the Company's 1996 Stock Plan. With respect to the options granted to Mr. Nigam, Ms. Shea and Mr. Chan, 25% of the shares vest on the first anniversary of the date of grant and 1/48 of the shares vest each month thereafter. With respect to the options granted to Mr. Long, 25% of the shares vested immediately upon grant and, beginning on the first anniversary of the date of grant, 1/48 of the shares vest each month thereafter. These options have a term of 10 years. See "-- Employee Benefit Plans" for a description of the material terms of these options. (2) The Company granted options or warrants to purchase 5,510,850 shares of Common Stock to employees during 1997. (3) Options were granted at an exercise price equal to the fair market value of the Company's Common Stock, as determined in good faith by the Board of Directors. The Board of Directors determined the fair market value based on the Company's financial results and prospects, the share price derived for arms-length transactions, and independent evaluations conducted by valuation experts. (4) Potential realizable values are net of exercise price before taxes, and are based on the assumption that the Common Stock of the Company appreciates at the annual rate shown (compounded annually) from the date of grant until the expiration of the ten-year term. These numbers are calculated based on Securities and Exchange Commission requirements and do not reflect the Company's projection or estimate of future stock price growth. (5) The Company issued Mr. Long a warrant to purchase 750,000 shares of the Company's Series B Preferred Stock upon the commencement of his employment with the Company. This warrant is currently exercisable for 750,000 shares of Common Stock. Shares issuable upon exercise of this warrant are subject to a two-year right of repurchase held by the Company that lapses ratably through July 1999. See "-- Employment Agreements." 56 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, 1997:
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS DECEMBER 31, 1997(1) AT DECEMBER 31, 1997(2) -------------------------- -------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---------------------------------------------------------- ----------- ------------- ----------- ------------- W. Michael Long........................................... 625,000 1,875,000 $ 468,750 $1,406,250 750,000(3) -- -- -- Michael K. Hoover......................................... 893,268 -- 561,119 -- David Schnell............................................. -- -- -- -- Pavan Nigam............................................... -- 125,000 -- -- Denise Shea............................................... -- 55,000 -- $44,000 Kallen Chan............................................... -- 20,000 -- $16,000
- --------- (1) Except in the case of Mr. Hoover, options shown were granted under the 1996 Stock Plan and are subject to vesting as described in footnote (1) to the option grant table above. Options held by Mr. Hoover were granted under the ActaMed 1992, 1993 Class B Common and 1994 Stock Option Plans, which were assumed by the Company upon the consummation of the acquisition of ActaMed. All of Mr. Hoover's shares are fully vested. (2) Based on an assumed value of $1.00 per share, the deemed fair market value as of December 31, 1997 as determined by the Board, and net of the option exercise price. (3) Represents shares issuable upon exercise of a warrant issued to Mr. Long upon commencement of his employment with the Company. See "-- Employment Agreements." EMPLOYMENT AGREEMENTS The Company's ActaMed subsidiary has an employment agreement with Michael K. Hoover, Healtheon's President. The agreement provides for a base salary of $85,000, and imposes a covenant not to compete upon Mr. Hoover for a period of one year following the termination of his employment. In July 1997, the Company and Mr. Long entered into an employment agreement pursuant to which Mr. Long became the President and Chief Executive Officer of the Company. The Company granted Mr. Long an option to purchase 2,500,000 shares of Common Stock, 25% of which vested immediately, and the remainder of which vests ratably each month during the second through the fourth year. In addition, Mr. Long purchased 250,000 shares for $500,000, $499,750 of which was represented by a promissory note to the Company, 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 the Company because he is no longer offered a position with similar responsibility due to a change of control of the Company, Mr. Long's option vests immediately as to 625,000 shares and the Company's repurchase right lapses. Additionally, if the Company 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 the Company's repurchase right will lapse. EMPLOYEE BENEFIT PLANS 1996 STOCK PLAN. In February 1996 the Board adopted, and the Company's stockholders approved, the 1996 Plan. The Company initially reserved for issuance 9,000,000 shares of Common Stock under the 1996 Plan. In March 1998, the Board and the stockholders each approved an amendment to the 1996 Plan 57 to increase the number of shares of Common Stock issuable thereunder to 10,000,000 shares. In July 1998, the Board approved and in October the stockholders approved an amendment to increase the number of shares of Common Stock issuable under the 1996 Plan to 15,000,000 shares plus annual increases equal to the lesser of (i) 5% of the outstanding shares or (ii) a lesser amount determined by the Board. Unless terminated sooner, the 1996 Plan will terminate automatically in February 2006. The 1996 Plan provides for the discretionary grant of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), to employees and for the grant of nonstatutory stock options and stock purchase rights ("SPRs") to employees, directors and consultants. The 1996 Plan also provides for annual grants of options to purchase 5,000 shares of Common Stock to each of the outside directors. The 1996 Plan may be administered by the Board or a committee thereof (as applicable, the "Administrator"). The Administrator has the power to determine the terms of the options or SPRs granted, including the exercise price of the options or SPRs, the number of shares subject to each option or SPR, the exercisability thereof, and the form of consideration payable upon such exercise. In addition, the Administrator has the authority to amend, suspend or terminate the 1996 Plan, provided that no such action may affect any share of Common Stock previously issued and sold or any option previously granted under the 1996 Plan. The exercise price of all incentive stock options granted under the 1996 Plan must be at least equal to the fair market value of the Common Stock on the date of grant. The exercise price of nonstatutory stock options and SPRs granted under the 1996 Plan is determined by the Administrator, but with respect to nonstatutory stock options intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code, the exercise price must be at least equal to the fair market value of the Common Stock on the date of grant. With respect to any participant who owns stock possessing more than 10% of the voting power of all classes of the Company'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 the term of such incentive stock option must not exceed five years. The term of all other options granted under the 1996 Plan may not exceed ten years. Options generally vest as to 25% at the end of the first year and monthly thereafter over a period of three years so that the entire option is vested after four years, based upon the optionee's continued employment or consulting relationship with the Company. In the case of SPRs, unless the Administrator determines otherwise, the restricted stock purchase agreement will grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's employment or consulting relationship with the Company for any reason (including death or disability). The purchase price for shares repurchased pursuant to a restricted stock purchase agreement must be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The repurchase option will lapse at a rate determined by the Administrator. Options and SPRs granted under the 1996 Plan are generally not transferable by the optionee, and each option and SPR is exercisable during the lifetime of the optionee only by such optionee. Options granted under the 1996 Plan must generally be exercised within 30 days after the end of optionee's status as an employee, director or consultant of the Company, or within one year after such optionee's termination by disability or death, respectively, but in no event later than the expiration of the option's term. The 1996 Plan provides that, in the event of a merger of the Company with or into another corporation, each outstanding option and SPR must be assumed or an equivalent option substituted by the successor corporation. If the outstanding options and SPRs are not assumed or substituted by the successor corporation, such outstanding options and SPRs will terminate. ACTAMED STOCK OPTION PLANS. In connection with its acquisition of ActaMed (the "Merger"), the Company assumed the outstanding options of ActaMed under the following ActaMed stock option plans 58 (collectively, the "ActaMed Plans"): ActaMed Corp. 1992 Stock Option Plan, ActaMed Corp. 1993 Class B Common Stock Option Plan, ActaMed Corp. 1994 Stock Option Plan, ActaMed Corp. 1995 Stock Option Plan, ActaMed Corp. 1996 Stock Option Plan, ActaMed Corp. 1997 Stock Option Plan and ActaMed Corp. 1996 Director Stock Option Plan. The following directors and executive officers of the Company held ActaMed options that were assumed by the Company: Michael Hoover (options to purchase 1,424,216 shares of ActaMed common stock), Nancy Ham (options to purchase 250,000 shares of ActaMed common stock), J. Philip Hardin (options to purchase 80,000 shares of ActaMed common stock), and John R. Hughes, Jr. (options to purchase 220,000 shares of ActaMed common stock). 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. The Company 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 adoption, and may be administered by the Board of Directors or a committee of the Board (as applicable, the "Administrator"). Options granted under the ActaMed Plans generally are not transferrable 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 the Company 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 the Company does not remain in existence, the Administrator may (i) to the extent such options have not previously been accelerated, declare that all ActaMed options shall vest in full and be exercisable for a period of thirty (30) days following written notice from the Administrator, after which all ActaMed options shall terminate, (ii) provide that all ActaMed options shall be assumed by the successor corporation, or (iii) a combination of (i) and (ii). 1998 EMPLOYEE STOCK PURCHASE PLAN. The Company's 1998 Employee Stock Purchase Plan (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 least of (i) 500,000 shares, (ii) .5% of the outstanding shares on such date or (iii) a lesser amount determined by the Board. The 1998 Purchase Plan, which is intended to qualify under Section 423 of the Code, contains consecutive, overlapping, twenty-four month offering periods. Each offering period includes four six-month purchase periods. The offering periods generally start on the first trading day on or after May 1 and November 1 of each year, except for the first such offering period which commences on the first trading day on or after the effective date of this offering and ends on the last trading day on or before April 30, 2000. Employees are eligible to participate if they are customarily employed by the Company or any participating subsidiary for at least 20 hours per week and more than five months in any calendar year. However, any employee who (i) 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 the Company, or (ii) whose rights to purchase stock under all employee stock purchase plans of the Company accrues at a rate which exceeds $25,000 worth of stock for each calendar year may not be granted an option to purchase stock under the 1998 Purchase Plan. The 1998 Purchase Plan permits each participant to purchase Common Stock through payroll deductions of up to 15% of the participant's "compensation." Compensation is defined as the participant's base straight time gross earnings and commissions but excludes payments for overtime, shift premium, incentive compensation, incentive payments, bonuses and other compensation. The maximum number of shares a participant may purchase during a single purchase period is 5,000 shares. 59 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 (i) at the beginning of the offering period or (ii) 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 the Company. Rights granted under the 1998 Purchase Plan are not transferable by a participant other than by will, the laws of descent and distribution, or as otherwise provided under the 1998 Purchase Plan. The 1998 Purchase Plan provides that, in the event of a merger of the Company with or into another corporation or a sale of substantially all of the Company'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 such action may adversely affect any outstanding options under the 1998 Purchase Plan. Notwithstanding anything to the contrary, 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. The Company participates in a tax-qualified employee savings and retirement plan (the "401(k) Plan") which covers all of the Company's full-time employees who have completed three months of service. Pursuant to 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 the Company 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, the Company has made no such matching contributions. The 401(k) Plan is intended to qualify under Section 401 of the Code, as amended, so that contributions by employees or by the Company to the 401(k) Plan, and income earned on plan contributions, are not taxable to employees until withdrawn from the 401(k) Plan, and income earned on plan contributions, are not taxable to employees until withdrawn from the 401(k) Plan, and so that contributions by the Company, if any, will be deductible by the Company 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. 60 CERTAIN TRANSACTIONS Since December 26, 1995, the Company's inception date, there has not been nor is there currently proposed any transaction or series of similar transactions to which the Company 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 the Company 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 (i) compensation agreements and other arrangements, which are described where required in "Management," and (ii) the transactions described below. ACTAMED CORPORATION ACQUISITION On May 19, 1998, the Company completed the acquisition of ActaMed by means of a merger of a wholly-owned subsidiary of the Company with and into ActaMed, with ActaMed surviving as a wholly owned subsidiary of the Company (the "Merger"). Pursuant to the Merger, 23,271,355 shares of the Company's Common Stock were issued in exchange for all of the issued and outstanding capital stock of ActaMed, and all options to purchase ActaMed Common Stock were assumed by the Company. The Merger was treated as a tax-free reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1996, as amended, and as a "pooling-of-interests" transaction for accounting and financial reporting purposes. All of the then outstanding shares of Preferred Stock of the Company were converted into shares of Common Stock of the Company upon the consummation of the Merger. The Company and certain stockholders of the Company who together hold a majority of the outstanding shares of Common Stock of the Company entered into a Voting Agreement in connection with the Merger (the "Voting Agreement"). Among other things, the Voting Agreement requires each of the signatories thereto to vote its shares in favor of the election of four directors nominated by those signatories who were ActaMed shareholders prior to the Merger and four directors nominated by those signatories who were Healtheon stockholders prior to the Merger. The Voting Agreement terminates upon the consummation of this offering. TRANSACTIONS WITH DIRECTORS, EXECUTIVE OFFICERS AND 5% STOCKHOLDERS On January 26, 1996, the Company sold 10,285,000 shares of its Series A Preferred Stock for $.50 per share. The purchasers of the Series A Preferred Stock included, among others, Dr. James H. Clark (3,500,000 shares for a purchase price of $1.75 million), Kleiner Perkins Caufield & Byers VII (2,999,500 shares for a purchase price of $1.5 million), KPCB VII Founders Fund (325,500 shares for a purchase price of $162,750), KPCB Life Sciences Zaibatsu Fund II (175,000 shares for a purchase price of $87,500) and New Enterprise Associates VI, Limited Partnership ("New Enterprise Associates VI") (2,000,000 shares for a purchase price of $1.0 million). KPCB VII Founders Fund, KPCB Life Sciences Zaibatsu Fund II and Kleiner Perkins Caufield & Byers VII, along with KPCB VII Associates and KPCB Java Fund, are affiliated entities. L. John Doerr, a director of the Company, is a general partner of KPCB VII Associates and the general partner of KPCB Life Sciences Zaibatsu Fund II. Mr. Doerr disclaims beneficial ownership of the securities held by such entities except for his proportional interest therein. C. Richard Kramlich, a director of the Company, is a general partner of New Enterprise Associates VI. Mr. Kramlich disclaims beneficial ownership of the securities held by such entity except for his proportional interest therein. On January 26, 1996, the Company sold 1,000,000 shares of its Common Stock for $.05 per share. The purchasers of the Common Stock included Dr. Clark (500,000 shares for a purchase price of $25,000), Kleiner Perkins Caufield & Byers VII (428,500 shares for a purchase price of $21,425), KPCB VII Founders Fund (46,500 shares for a purchase price of $2,325) and KPCB Life Sciences Zaibatsu Fund II (25,000 shares for a purchase price of $1,250). On October 1, 1996, the Company sold 3,000,000 shares of its Series B Preferred Stock for $2.00 per share. The purchasers of the Series B Preferred Stock included, among others, Dr. Clark (1,125,000 shares for a purchase price of $2.3 million), Kleiner Perkins Caufield & Byers VII (1,068,750 shares for a 61 purchase price of $2.1 million), KPCB Life Sciences Zaibatsu Fund II (56,250 shares for a purchase price of $112,500) and New Enterprise Associates VI (500,000 shares for a purchase price of $1.0 million). In related transactions, on November 1, 1996, the Company issued a warrant to purchase 1,000,000 shares of Series B Preferred Stock with an exercise price of $2.00 per share to each of Clark Ventures, as an incentive for Dr. Clark to continue to provide services to the Company, and KPCB VII Associates, in consideration for services provided to the Company by David Schnell, a former general partner of KPCB, in his capacity as President and CEO. The warrant issued to KPCB VII Associates was valued at $504,900. Clark Ventures subsequently exercised its warrant on May 1, 1998 for an aggregate purchase price of $2.0 million. Clark Ventures is controlled by Dr. Clark. On July 11, 1997 the Company issued 250,000 shares of Series B Preferred Stock for a purchase price of $.5 million and a warrant to purchase 750,000 shares of Series B Stock with an exercise price of $2.00 per share to W. Michael Long. See "-- Employment Agreements." In order to purchase the 250,000 shares of Preferred Stock, Dr. Long borrowed $499,750 from the Company pursuant to a one-year interest-free full recourse promissory note. The note was paid in full on June 30, 1998. Between April 15, 1997 and May 6, 1997, the Company borrowed an aggregate of $2.0 million at an annual interest rate of 6% pursuant to promissory notes (each of which included a right to receive certain Series B Preferred Stock warrants at the time of repayment or upon cancellation of such note) in a bridge financing transaction (the "Bridge Financing"). The lenders in the Bridge Financing included, among others, Dr. Clark (who lent $765,750), Kleiner Perkins Caufield & Byers VII (which lent an aggregate of $727,463), KPCB Life Sciences Zaibatsu Fund II (which lent an aggregate of $38,288) and New Enterprise Associates VI (which lent $312,500). On July 1, 1997 the promissory notes were cancelled in consideration for the issuance of Series C Preferred Stock (as described below), and the Series B Preferred Stock warrants were issued as follows: Dr. Clark received a warrant to purchase 17,229 shares, Kleiner Perkins Caufield & Byers VII received a warrant to purchase 27,891 shares, KPCB Life Sciences Zaibatsu Fund II received a warrant to purchase 1,468 and New Enterprise Associates VI received a warrant to purchase 11,979 shares. All of the Series B Warrants have an exercise price of $2.00 per share. Dr. Clark subsequently exercised his warrant on May 1, 1998 for an aggregate purchase price of $34,458. On July 1, 1997, the Company sold 2,400,000 shares of its Series C Preferred Stock for $2.50 per share. The purchasers of the Series C Preferred Stock included, among others, Dr. Clark (612,600 shares for a purchase price of $1.5 million, including cancellation of the $765,750 promissory note given in the Bridge Financing discussed above), Kleiner Perkins Caufield & Byers VII (290,985 shares for cancellation of the $727,463 in promissory notes given in the Bridge Financing discussed above), KPCB Java Fund (306,300 shares for a purchase price of $765,750), KPCB Life Sciences Zaibatsu Fund II (15,315 shares for cancellation of the $38,288 in promissory note given in the Bridge Financing discussed above) and New Enterprise Associates VI (250,000 shares for a purchase price of $625,000 including cancellation of the $312,500 promissory note given in the Bridge Financing discussed above). Between October 17, 1997 and December 19, 1997, the Company sold 4,807,692 shares of its Series D Preferred Stock for $5.20 per share. The purchasers of the Series D Preferred Stock included, among others, Clark Ventures (1,730,769 shares for a purchase price of $9.0 million), Kleiner Perkins Caufield & Byers VII (432,693 shares for a purchase price of $2.3 million), KPCB Java Fund (480,769 shares for a purchase price of $2.5 million), KPCB Life Sciences Zaibatsu Fund II (48,077 shares for a purchase price of $250,000), Kathy Clark (96,154 shares for a purchase price of $.5 million), Michael James Clark Trust (96,154 shares for a purchase price of $.5 million) and New Enterprise Associates VI, Limited Partnership (576,923 shares for a purchase price of $3.0 million). Kathy Clark and Michael James Clark are adult children of Dr. Clark. On May 19, 1998, in connection with the ActaMed Merger, each share of Preferred Stock of the Company converted into one share of Common Stock and each outstanding warrant to purchase shares of the Company's Preferred Stock converted into a warrant to purchase shares of the Company's Common Stock. 62 On November 21, 1996, ActaMed entered into an Amended and Restated Development Agreement with The SFA Limited Partnership ("SFA") under which ActaMed granted SFA a license to ActaMed's object broker technology that supports the GMPI functionality. SFA is controlled by P. E. Sadler, a director of the Company. SFA was given the right to use such technology outside the healthcare industry and must pay royalties on any revenues that would be derived from such use. This agreement expires in November 2001. To date, no royalties have become payable to the Company or ActaMed as a result of this agreement. In September 1997, ActaMed received a loan from NationsBank, N.A. in the aggregate principal amount of $2.1 million, all of which was personally guaranteed by P. E. Sadler, a director of the Company. As a result of ActaMed's pledging a note receivable from IBM to NationsBank, N.A. in November 1997, Mr. Sadler was released from the guarantee. In December 1997, ActaMed obtained a line of credit in the aggregate principal amount of $2.3 million from NationsBank, N.A. In exchange for a personal guarantee of this line of credit by Mr. Sadler, ActaMed granted to Mr. Sadler a security interest in all of its tangible assets other than the IBM note receivable. Upon the completion of the acquisition of ActaMed by the Company, Mr. Sadler's guarantee was released. This line of credit was repaid by the Company on July 31, 1998. From 1995 through June 1998, up to three companies affiliated with Mr. Sadler had agreements with ActaMed whereby ActaMed provided office space, phone facilities and computer network support. In 1995, 1996, 1997 and 1998 the Company was paid approximately $256,000, $215,000, $137,000 and $32,000, respectively, under such agreements. CERTAIN BUSINESS RELATIONSHIPS Prior to the acquisition of ActaMed by the Company, ActaMed entered into a series of agreements (the "SmithKline Agreements") with SmithKline Labs, which agreements were assumed by the Company in the ActaMed Merger. Pursuant to the SmithKline Agreements, ActaMed agreed to purchase certain intangible assets (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 (which shares were converted into 2,317,913 shares of the Company's Common Stock in connection with the ActaMed Merger). In March 1998, SmithKline Labs transferred the SmithKline Assets from the second region to ActaMed in exchange for 1,217,391 shares of ActaMed Preferred Stock (which shares were converted into 763,548 shares of the Company's Common Stock in connection with the ActaMed Merger). In June 1998, SmithKline Labs transferred SmithKline Assets from the remaining two regions to the Company in exchange for 1,336,209 shares of Common Stock. Also pursuant to one of the SmithKline Agreements (the "Services Agreement"), the Company will perform laboratory test order and results services to providers utilizing SmithKline Labs' laboratory services through SCAN. SmithKline Labs is obligated to pay the Company a minimum of approximately $10.0 million in 1998 for laboratory test orders and results transactions. SmithKline Labs may be required to pay the Company certain additional fees for transactions processed by the Company in the event the number of providers accessing SmithKline Labs' laboratory services through SCAN increases. SmithKline Labs paid the Company $4.8 million in service and transaction fees during the first six months of 1998 under the Services Agreement. The Services Agreement is effective through December 2002, and provides for automatic successive two-year renewals, subject to each party's right to elect not to renew the agreement no later than 180 days (in the case of SmithKline Labs) or 360 days (in the case of the Company) prior to the end of a term. In the event that the Company gives notice of non-renewal, SmithKline Labs will be entitled to continued to receive long-term order entry and results reporting services from the Company on a per transaction pricing basis or, in the alternative, may require the Company to develop a service for SmithKline that duplicates the services the Company 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 the Company engage in certain exclusive 63 development work for SmithKline Labs. SmithKline Labs has agreed to use reasonable efforts to use the Company 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 thereafter. Pursuant to the Services Agreement, the renegotiated rates must be competitive with the marketplace and must be no higher than the lowest fees charged by the Company to similarly situated customers. See Management's Discussion and Analysis -- Overview, and Note 3 of Notes to Consolidated Financial Statements. In May 1998, the Company and SmithKline Labs entered into a letter agreement under which the Company 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 the Company as its preferred vendor. The Company 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. In March 1996, ActaMed acquired EDI Services, a wholly owned subsidiary of United HealthCare, which had been formed by United HealthCare to deliver the ProviderLink service to United HealthCare's provider network. In exchange for EDI, ActaMed issued United HealthCare 10,344,828 shares of ActaMed Preferred Stock valued at $21.0 million (which were converted into 6,488,276 shares of the Company's Common Stock in connection with the Merger). In April 1996, ActaMed also entered into a Services and License Agreement with United HealthCare that granted United HealthCare a license to certain ActaMed technology and granted ActaMed the responsibilities of managing the ProviderLink service and of providing other information technology services to United HealthCare. United HealthCare pays the Company fees based on the number of ProviderLink sites in use and transactions processed. In 1996 and 1997, United HealthCare paid ActaMed approximately $4.8 million and $7.3 million, respectively, related to services, transaction and license fees. In the first six months of 1998, ActaMed (prior to the Merger) and the Company were paid an aggregate of $4.6 million. The Company is also obligated to provide certain support and maintenance services to United HealthCare. The Services and License Agreement is effective through March 2001 subject to earlier termination in the event the Company fails to meet certain network performance standards or otherwise breaches its material obligations under the United HealthCare Agreement. The Service and License Agreement provides that two years after the date of the agreement the parties will agree on new prices that will be competitive with the marketplace. The Company and United HealthCare are negotiating such new prices, and the Company anticipates that the new prices will reduce the rates paid by United HealthCare. See Management's Discussion and Analysis -- Overview, and Note 2 of Notes to Consolidated Financial Statements. United HealthCare is a principal stockholder of the Company and Dr. William McGuire, Chief Executive Officer and Chairman of United HealthCare, is a director of the Company. 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. ("HLM"), which bore interest at a rate of 10% per annum. United HealthCare was a limited partner of HLM and a director of United HealthCare, was a partner of HLM. HLM was also a stockholder of ActaMed. Both UHC and HLM are stockholders of the Company. This note was repaid at the time of the Merger. RELATED SALE Concurrent with the Underwritten Offering, the Company expects that it will issue and sell shares of its Common Stock to an entity controlled by James H. Clark, the Company's Chairman of the Board of Directors, which has indicated an interest in purchasing shares of Common Stock. It is anticipated that this entity will purchase 2,451,786 shares at a purchase price per share equal to the initial public offering price, for an aggregate purchase price of approximately $17.2 million based on an assumed initial public offering price of $7.00 per share. 64 PRINCIPAL STOCKHOLDERS The following table sets forth certain information with respect to the beneficial ownership of the Company's Common Stock as of August 31, 1998 and as adjusted to reflect the sale of the shares of Common Stock offered in the Underwritten Offering and the Related Sale by: (i) each person who is known by the Company to beneficially own more than 5% of the Company's Common Stock, (ii) each director of the Company, (iii) each of the Named Executive Officers and (iv) all directors and executive officers of the Company as a group.
NUMBER OF PERCENTAGE OF SHARES SHARES BENEFICIALLY OWNED(1) BENEFICIALLY ---------------------------------- NAME OF BENEFICIAL OWNER OWNED BEFORE OFFERING AFTER OFFERING(2) - ----------------------------------------------------------------------------- ------------ --------------- ----------------- United HealthCare Corporation(3) ............................................ 8,770,020 16.2% 13.7% William W. McGuire, M.D.(3) ............................................... 8,770,020 16.2 13.7 James H. Clark(4) ........................................................... 8,485,598 15.6 17.1(4) Clark Ventures(4) ......................................................... 8,485,598 15.6 17.1(4) Monaco Partners, LP(4)..................................................... 8,485,598 15.6 17.1(4) Kleiner Perkins Caufield & Byers(5) ......................................... 7,253,498 13.1 11.1 L. John Doerr(5) .......................................................... 7,253,498 13.1 11.1 P. E. Sadler(6) ............................................................. 5,001,993 9.2 7.8 SmithKline Beecham Clinical Laboratories, Inc.(7) ........................... 4,417,670 8.1 6.9 Tadataka Yamada(7) ........................................................ 4,417,670 8.1 6.9 New Enterprise Associates VI, L.P.(8) ....................................... 3,338,902 6.2 5.2 C. Richard Kramlich(8) .................................................... 3,338,902 6.2 5.2 W. Michael Long(9)........................................................... 1,781,250 3.2 2.7 Integral Capital Partners, L.P. ............................................. 1,088,462 2.0 1.7 Michael K. Hoover(10)........................................................ 888,268 1.6 1.4 Pavan Nigam(11).............................................................. 501,250 * * David Schnell ............................................................... 495,000 * * Denise Shea(12).............................................................. 147,917 * * Kallen Chan(13).............................................................. 58,333 * * All officers and directors as a group (23 persons)(14)....................... 43,007,879 74.6 68.1
- ---------- * Less than one percent (1) The number and percentage of shares beneficially owned are based on 54,317,201 shares of Common Stock outstanding as of August 31, 1998, and 64,056,487 shares outstanding after the Underwritten Offering and the Related Sale. Beneficial ownership is determined in accordance with 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 August 31, 1998 are deemed to be outstanding and beneficially owned by the person holding such options or warrants for the purpose of computing the number of shares beneficially owned and the percentage ownership of such person, but 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, such persons have sole voting and investment power with respect to all shares of the Company's Common Stock shown as beneficially owned by them. (2) Assumes the U.S. Underwriters' over-allotment option to purchase 978,750 shares of Common Stock is not exercised. (3) Represents 6,488,276 shares held of record by United HealthCare, 502,069 shares held of record by United HealthCare Services, Inc., a subsidiary thereof, 509,595 shares held of record by HLM Partners VII, L.P., of which United HealthCare is a limited partner and 1,270,080 shares held of record by Validus, L.P., of which United HealthCare is the sole limited partner. United HealthCare disclaims beneficial ownership of shares held by both limited partnerships except for its proportionate interest therein. Dr. McGuire, a director of the Company, is the President, Chief Executive Officer and Chairman of United HealthCare. Dr. McGuire disclaims beneficial ownership of all shares held by United HealthCare. United HealthCare's address is 9900 Bren Road East, 300 Opus Center, Minnetonka, MN 55343. 65 (4) Represents 4,000,000 shares held of record by Dr. Clark as trustee of the James H. Clark and Nancy Rutter Clark Revocable Trust, 1,017,229 shares held of record by Clark Ventures, 268,000 shares held of record by JHC Investments, LLC and 3,200,369 shares held of record by Monaco Partners, LP. As part of the Related Sale, Monaco Partners, LP has indicated an interest in purchasing 2,451,786 shares of the Company's Common Stock which shares are included in the percentage held by Dr. Clark, Clark Ventures and Monaco Partners, LP after the offering. Dr. Clark wholly controls Clark Ventures, JHC Investments, LLC and Monaco Partners, LP. Dr. Clark is a director of the Company. The address for Dr. Clark is c/o Healtheon Corporation, 4600 Patrick Henry Drive, Santa Clara, CA 95054. The address for Clark Ventures and Monaco Partners, LP is 777 East Williams Street, Suite 201, Carson City, NV 89701. (5) Represents 5,125,863 shares held of record directly by Kleiner Perkins Caufield & Byers VII L.P. ("KPCB VII"), 787,069 shares held of record by KPCB Java Fund, and 311,207 shares held of record by KPCB Life Sciences Zaibatsu Fund II. Also represents 976,423 shares subject to warrants held of record by KPCB VII, and 52,936 shares subject to warrants held of record by KPCB Life Sciences Zaibatsu Fund II L.P., all of which are exercisable within 60 days of August 31, 1998. KPCB Life Sciences Zaibatsu Fund II and KPCB VII are wholly controlled by KPCB VII Associates, L.P. KPCB Java Fund is controlled by KPCB VIII Associates. L. John Doerr, a general partner of KPCB VIII Associates and KPCB VII Associates, L.P., is a director of the Company. Mr. Doerr disclaims beneficial ownership of shares in such entities except to the extent of his pecuniary interest therein. Kleiner Perkins Caufield & Byers' address is 2750 Sand Hill Road, Menlo Park, CA 94025. (6) Represents 2,975,140 shares held of record by P. E. Sadler and 2,026,853 shares held of record by SFA Limited Partnership, of which P. E. Sadler is a general partner. Mr. Sadler is a director of the Company. Mr. Sadler's address is c/o Healtheon Corporation, 4600 Patrick Henry Drive, Santa Clara, CA 95054. (7) Dr. Yamada, a director of the Company, is President and Executive Director of SmithKline Beecham HealthCare Services and a director of SmithKline Beecham. SmithKline Labs' address is 1201 South Collegeville Road, Collegeville, PA 19426. Dr. Yamada disclaims beneficial ownership of all shares held by SmithKline Labs. (8) Represents 3,306,923 shares held of record directly by New Enterprise Associates VI, L.P. ("New Enterprise Associates VI"), 11,979 shares subject to warrants held of record by New Enterprise Associates VI exercisable within 60 days of August 31, 1998, and 20,000 shares held of record by NEA Ventures 1996, L.P., which is controlled by New Enterprise Associates VI. Mr. Kramlich is a partner of New Enterprise Associates VI. Mr. Kramlich disclaims beneficial ownership of shares held by such entities except for his proportional interest therein. New Enterprise Associates VI's address is 1119 St. Paul Street, Baltimore, MD 21202. (9) Includes 650,000 shares held of record by Mr. Long. Also includes 750,000 shares subject to a warrant held of record by Mr. Long and 381,250 shares subject to options held of record by Mr. Long, in each case exercisable within 60 days of August 31, 1998. 315,000 shares underlying the warrant held by Mr. Long will remain subject to a right of repurchase by the Company 60 days after August 31, 1998. Mr. Long is the Chief Executive Officer and a director of the Company. (10) Represents 92,500 shares held of record directly by Mr. Hoover, 2,500 shares held by Nicholas D. Hoover for which Mr. Hoover is custodian, and 793,268 shares subject to options held of record by Mr. Hoover that are exercisable within 60 days of August 31, 1998. Mr. Hoover is the President and a director of the Company. (11) Includes 31,250 shares subject to options held of record by Mr. Nigam that are exercisable within 60 days of August 31, 1998. Also includes 187,500 shares that will remain subject to a right of repurchase by the Company 60 days after August 31, 1998. Mr. Nigam is the Vice President, Engineering of the Company. (12) Includes 2,292 shares subject to options held of record by Ms. Shea that are exercisable within 60 days of August 31, 1998. Also includes 57,291 shares that will remain subject to a right of repurchase by the Company 60 days after August 31, 1998. (13) Includes 833 shares subject to options held of record by Mr. Chan that are exercisable within 60 days of August 31, 1998. Also includes 16,750 shares held by Mr. Chan that will remain subject to a right of repurchase held by the Company 60 days after August 31, 1998. Mr. Chan is the Controller of the Company. (14) Includes all shares described in the above footnotes and includes an additional 2,363,180 shares held by other executive officers, of which 2,038,428 shares were outstanding as of August 31, 1998 and 324,752 shares are subject to options or warrants that are exercisable within 60 days of August 31, 1998. 66 DESCRIPTION OF CAPITAL STOCK The following summary of certain provisions of the Company's capital stock describes all material provisions of the Company's Certificate of Incorporation and Bylaws. This summary, however, does not purport to be complete and is subject to, and qualified in its entirety by, the Certificate of Incorporation and Bylaws, copies of which have been filed as exhibits to the Registration Statement of which this Prospectus is a part and by the provisions of applicable law. As of August 31, 1998, there were 54,317,201 shares of Common Stock outstanding, par value $0.0001 per share. In addition, approximately 15,000,000 shares of Common Stock issuable upon exercise of outstanding stock options or have been reserved for future grants under the 1996 Stock Plan and the 1998 Purchase Plan. Upon consummation of the Underwritten Offering and the Related Sale, 150,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock will be authorized, and 64,056,487 shares of Common Stock and no shares of Preferred Stock will be issued and outstanding. COMMON STOCK The issued and outstanding shares of Common Stock are, and the shares of Common Stock being offered by the Company will be upon payment therefor, validly issued, fully paid and nonassessable. The holders of outstanding shares of Common Stock are entitled to receive dividends out of assets legally available therefor at such time and in such amounts as the Board may from time to time determine. See "Dividend Policy." The shares of Common Stock are not convertible and the holders thereof have no preemptive or subscription rights to purchase any securities of the Company. Upon liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to receive pro rata the assets of the Company that are legally available for distribution, after payment of all debts and other liabilities. Each outstanding share of Common Stock is entitled to one vote on all matters submitted to a vote of the stockholders, including election of directors. There is no cumulative voting in the election of directors. PREFERRED STOCK The Company's Certificate of Incorporation provides that the Preferred Stock may be issued by the Company in one or more series and that the Board has the authority, without further action by the stockholders, to fix the rights, preferences and privileges thereof, including dividend rights, conversion rights, voting rights, rights and terms of redemption, liquidation preferences and sinking fund terms, any or all of which may be greater than the rights of the Common Stock. The issuance of Preferred Stock could adversely affect the voting power of holders of Common Stock and the likelihood that such holders would receive dividend payments and payments upon liquidation. Such issuance could have the effect of decreasing the market price of the Common Stock. The issuance of Preferred Stock may also have the effect of delaying, deterring or preventing a change in control of the Company. The Company has no present plans to issue any shares of Preferred Stock. WARRANTS The Company has outstanding warrants for the purchase of 2,077,240 shares of Common Stock. Of these, warrants to purchase 1,794,718 shares of Common Stock have an exercise price of $2.00 and warrants to purchase 282,522 shares of Common Stock have an exercise price of $7.97. These warrants expire either three years or five years after the date of issuance. In addition, as part of a service agreement with a customer, the Company will issue to the customer a warrant to purchase 500,000 shares of Common Stock with an exercise price of $10.40 per share. REGISTRATION RIGHTS The holders of approximately 43,218,397 shares of Common Stock (representing shares held by the purchasers of Common Stock at the founding of the Company in December 1995, the purchasers of 67 Preferred Stock of the Company prior to its conversion in connection with the acquisition of ActaMed, and shares held by certain former shareholders of ActaMed who received shares of the Company's Common Stock pursuant to the Company's acquisition of ActaMed and who had registration rights with respect to their shares of ActaMed capital stock) or their permitted transferees are entitled to certain rights with respect to registration of such shares (the "Registrable Securities") under the Securities Act pursuant to an Amended and Restated Investors' Rights Agreement. At any time after 12 months following the effective date of this offering, the holders of at least 40% of the Registrable Securities then outstanding may require the Company to file a registration statement covering Registrable Securities with an aggregate gross offering price of at least $10.0 million. In addition, two years after this offering, holders of registrable securities may require, on up to four separate occasions, that the Company register their shares for public resale on Form S-3 or any successor form, provided the Company is eligible to use Form S-3 or any such successor form and provided further that the value of the securities to be registered is at least $1.0 million. Furthermore, in the event the Company elects to register any of its shares of Common Stock or other securities for purposes of effecting any public offering, the holders of registrable securities are entitled to include their Registrable Securities in the registration, subject however to the right of the Company to reduce the number of shares proposed to be registered in view of market conditions. All expenses in connection with any registration (other than underwriting discounts and commissions) will be borne by the Company. Registration rights, other than the right to require the Company to register shares on Form S-3 or any successor form, will terminate at such time as the Company's shares are publicly traded and the holder is entitled to sell all of its shares in any three-month period under Rule 144 of the Securities Act. If such holders, by exercising their registration rights, cause a large number of securities to be registered and sold in the public market, such sales could have an adverse effect on the market price for the Company's Common Stock. If the Company were to initiate a registration and include Registrable Securities pursuant to the exercise of registration rights, the sale of such Registrable Securities could have an adverse effect on the Company's ability to raise capital. CERTAIN ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS AND OF DELAWARE LAW GENERAL. Certain provisions of the DGCL and the Company's Certificate of Incorporation and Bylaws could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, control of the Company. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of the Company's Common Stock. These provisions of Delaware law and the Certificate of Incorporation and Bylaws may also have the effect of discouraging or preventing certain types of transactions involving an actual or threatened change of control of the Company (including unsolicited takeover attempts), even though such a transaction may offer the Company's stockholders the opportunity to sell their stock at a price above the prevailing market price. DELAWARE TAKEOVER STATUTE. Following consummation of this offering, the Company will be subject to the "business combination" provisions of Section 203 of the DGCL. In general, such provisions prohibit a publicly held Delaware corporation from engaging in various "business combination" transactions with any interested stockholder for a period of three years after the date of the transaction in which the person became an interested stockholder, unless (i) the transaction is approved by the board of directors prior to the date the interested stockholder obtained such status; (ii) upon consummation of the transaction that resulted in the stockholder's becoming an interested stockholder, the stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned by (a) persons who are directors and also officers and (b) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or (iii) on or subsequent to such date the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. A "business 68 combination" is defined to include mergers, asset sales and other transactions resulting in financial benefit to a stockholder. In general, an "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years, did own) 15% or more of a corporation's voting stock. The statute could prohibit or delay mergers or other takeover or change in control attempts with respect to the Company and, accordingly, may discourage attempts to acquire the Company. CERTIFICATE OF INCORPORATION AND BYLAWS. The Company's Certificate of Incorporation provides that any action required or permitted to be taken by the stockholders of the Company must be effected at a duly called annual or special meeting of the stockholders and may not be taken by a consent in writing by stockholders. The Company's Bylaws provide that special meetings of the stockholders of the Company may be called by the Board or by the President of the Company, or by one or more stockholders holding at least 10% of the voting power of the Company's outstanding capital stock, or any such person or persons as may be authorized by the Certificate of Incorporation or the Bylaws (which currently only give this authority to the Board). The Company's Bylaws also require advance written notice by a stockholder of a proposal or director nomination that such stockholder desires to present at an annual or special meeting of stockholders. No business other than that stated in the notice may be transacted at any special meeting. These provisions will have the effect of delaying consideration of a stockholder proposal until the next annual meeting unless a special meeting is called by the Board. The Company's Bylaws provide that the authorized number of directors may be changed by an amendment to the Bylaws adopted by the Board or by the stockholders. Vacancies on the Board may be filled either by holders of a majority of the Company's voting stock or a majority of directors in office, although less than a quorum. The Certificate of Incorporation and the Bylaws of the Company also provide for a classified Board. Under this provision, the Board designates each director position as one of three categories. Each year the directors' positions in one of the categories are subject to election so that it would take three years to replace the entire board (absent resignation or premature expiration of a director's term), which may have the effect of deterring a hostile takeover or delaying or preventing changes in control or management of the Company. LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS The Company's Certificate of Incorporation limits the liability of directors to the fullest extent permitted by the DGCL. In addition, the Certificate of Incorporation and Bylaws provide that the Company will indemnify directors and officers of the Company to the fullest extent permitted by Delaware law. The Company intends to enter into separate indemnification agreements with its directors and executive officers that provide such persons indemnification protection in the event the Certificate of Incorporation is subsequently amended. See "Risk Factors -- Certain Anti-Takeover Provisions." TRANSFER AGENT AND REGISTRAR American Stock Transfer Trust Company has been appointed as transfer agent and registrar for the Company's Common Stock. LISTING The shares of Common Stock have been approved for quotation on the Nasdaq National Market under the symbol "HLTH" subject to official notice of issuance. 69 SHARES ELIGIBLE FOR FUTURE SALE Prior to the Underwritten Offering, there has been no public market for the Common Stock of the Company. The Company cannot predict the effect, if any, that sales of shares of Common Stock or the availability of shares for sale will have on the market price of the Common Stock prevailing from time to time. Nevertheless, sales of a significant number of shares of Common Stock in the public market, or the perception that such sales may occur, could adversely affect the prevailing market price of the Common Stock. Upon consummation of the Underwritten Offering and the Related Sale, the Company will have 64,056,487 shares of Common Stock outstanding, based on the number of shares of Common Stock outstanding as of August 31, 1998, assuming (i) the issuance by the Company of shares of Common Stock offered in the Underwritten Offering, (ii) no exercise of options or warrants after August 31, 1998 and (iii) no exercise of the U.S. Underwriters' over-allotment option. Of the shares outstanding after the offerings, 6,199,000 of the shares of Common Stock sold in the Underwritten Offering will be freely tradeable without restriction under the Securities Act, except for any such shares that may be acquired by an "affiliate" of the Company (an "affiliate"), which shares will be subject to the volume and other limitations of Rule 144 promulgated under the Securities Act ("Rule 144"). As defined in Rule 144, an "affiliate" of an issuer is a person who, directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, such issuer. Upon expiration of the lock-up agreements described below, (A) 1,088,500 of the shares sold in the Underwritten Offering will be freely tradeable and (B) the 2,451,786 shares to be sold in the Related Sale will be freely tradeable subject to the volume and other limitations of Rule 144. Of the remaining 54,317,201 shares of Common Stock, (i) 47,534,750 shares will be restricted securities (as that phrase is defined in Rule 144) (the "Restricted Shares") and may not be resold in the absence of registration under the Securities Act or pursuant to an exemption from such registration, including the exemption provided by Rule 144 under the Securities Act and (ii) 6,782,451 shares may be resold pursuant to an exemption from registration under Section 3(a)(10) of the Securities Act (the "3(a)(10) Shares"), subject to the lock-up agreements discussed below. Each of the Company's directors and officers and certain other stockholders of the Company has agreed that, subject to certain exceptions, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, during the period ending 180 days after the date of this Prospectus, he will not (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. On the date of this Prospectus, 689,609 of the 3(a)(10) Shares (in addition to 6,199,000 of the shares offered in the Underwritten Offering) will be eligible for immediate sale. Upon the expiration of lock-up agreements 180 days after the date of the Prospectus, an additional 6,092,842 of the 3(a)(10) Shares and 43,581,312 of the Restricted Shares (in addition to 1,088,500 of the shares to be sold in the Underwritten Offering and the 2,451,786 shares to be sold in the Related Sale) will become eligible for sale in the public market. Of these shares eligible for sale in the public market upon expiration of the lock-up agreements, all but 9,748,940 shares will be subject to the volume limitations and other conditions of Rule 144. The holders of approximately 43,218,397 shares of Common Stock are also entitled to certain rights with respect to registration of such shares of Common Stock for offer or sale to the public. If such holders, by exercising their registration rights, cause a large number of shares to be registered and sold in the public market, such sales could have a material adverse effect on the market price for the Company's Common Stock. 70 Under Rule 144 as currently in effect, beginning 90 days after the date of this Prospectus, a person (or persons whose shares are aggregated) who has beneficially owned restricted securities for at least one year would be entitled to sell a number of shares of Common Stock within any three-month period equal to the greater of 1% of the then outstanding shares of the Common Stock (approximately 640,565 shares immediately after the offering) or the average weekly reported volume of trading of the Common Stock on the Nasdaq National Market during the four calendar weeks preceding such sale, provided that certain manner of sale and notice requirements and requirements as to the availability of current public information concerning the Company are satisfied. Under Rule 144(k), a person who is not deemed to have been an affiliate of the Company at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years (including the holding period of any prior owner except an affiliate), is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144; therefore, unless otherwise restricted, "144(k) shares" may be sold immediately upon the completion of this offering. Immediately after this offering, there will be options to purchase approximately 10,670,074 shares of Common Stock outstanding. Subject to the provisions of the lock-up agreements described above, holders of these options may rely on the resale provisions of Rule 701 under the Securities Act, which permits nonaffiliates to sell their shares without having to comply with the current public information, holding period, volume limitation or notice provisions of Rule 144 and permits affiliates to sell their shares without having to comply with the holding period provision of Rule 144, in each case beginning 90 days after the consummation of this offering. In addition, shortly after this offering, the Company intends to file a registration statement on Form S-8 covering the 13,994,510 shares of Common Stock reserved for issuance under the 1996 Plan and the 1998 Purchase Plan. Shares of Common Stock registered under such registration statement will, subject to Rule 144 volume limitations applicable to affiliates, be available for sale in the open market, unless such shares are subject to vesting restriction with the Company or the lock-up agreements described below. See "Management -- Employee Benefit Plans." 71 CERTAIN UNITED STATES TAX CONSEQUENCES TO NON-U.S. HOLDERS OF COMMON STOCK The following is a general discussion of certain United States federal income and estate tax consequences relevant to holders of Common Stock that are non-U.S. Holders. A non-U.S. Holder is a holder of Common Stock that is not, for United States federal income tax purposes, any of the following: (i) a citizen or resident of the United States, (ii) a corporation, partnership or other entity created or organized in or under the laws of the United States or any state thereof, (iii) an estate, the income of which is subject to U.S. federal income taxation regardless of its source, or (iv) a trust that meets the following two tests: (A) a U.S. court is able to exercise primary supervision over the administration of the trust, and (B) one or more U.S. persons have the authority to control all substantial decisions of the trust. This discussion does not consider the specific facts and circumstances that may be relevant to particular non-U.S. Holders in light of their personal circumstances and does not address the treatment of such holders under the laws of any state, local or foreign taxing jurisdiction. Further, the discussion is based on provisions of the United States Internal Revenue Code of 1986, as amended (the "Code"), Treasury regulations thereunder, and administrative and judicial interpretations thereof, all as in effect on the date hereof and all of which are subject to change or different interpretation on a possibly retroactive basis. THIS DISCUSSION IS LIMITED TO NON-U.S. HOLDERS WHO HOLD THE COMMON STOCK AS A CAPITAL ASSET. EACH PROSPECTIVE HOLDER IS URGED TO CONSULT ITS TAX ADVISOR WITH RESPECT TO THE UNITED STATES FEDERAL TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF COMMON STOCK, AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION. DIVIDENDS Dividends paid to a non-U.S. Holder of Common Stock will be subject to United States federal withholding tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty, unless the dividends are effectively connected with the conduct of a trade or business within the United States (and are attributable to a United States permanent establishment of such holder, if an applicable income tax treaty so requires as a condition for the non-U.S. holder to be subject to United States income tax on a net income basis in respect of such dividends). Such "effectively connected" dividends are subject to tax at rates applicable to United States citizens, resident aliens and domestic United States corporations, and are not generally subject to withholding. Any such effectively connected dividends received by a corporate non-U.S. Holder may also, under certain circumstances, be subject to an additional "branch profits tax" at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. Under currently effective United States Treasury regulations, dividends paid prior to January 1, 2000 to an address in a foreign country are presumed to be paid to a resident of that country (unless the payor has knowledge to the contrary) for purposes of the withholding discussed above and, under the current interpretation of United States Treasury regulations, for purposes of determining the applicability of a tax treaty rate. Under recently finalized United States Treasury regulations that will generally be effective for distributions after December 31, 1999 (the "Final Withholding Regulations"), however, a non-U.S. Holder of Common Stock who wishes to claim the benefit of an applicable treaty rate would be required to satisfy applicable certification requirements. In addition, under the Final Withholding Regulations, in the case of Common Stock held by a foreign partnership, (i) the certification requirement would generally be applied to the partners of the partnership and (ii) the partnership would be required to provide certain information, including a United States taxpayer identification number. The Final Withholding Regulations provide look-through rules for tiered partnerships. A non-U.S. Holder of Common Stock that is eligible for a reduced rate of United States withholding tax pursuant to a tax treaty may obtain a refund of any excess amounts currently withheld by filing an appropriate claim for refund with the United States Internal Revenue Service. 72 GAIN ON DISPOSITION OF COMMON STOCK A non-U.S. holder generally will not be subject to United States federal income tax in respect of gain recognized on a disposition of Common Stock unless: (i) the gain is effectively connected with a trade or business conducted by the non-U.S. Holder in the United States (and is attributable to a permanent establishment maintained in the United States by such non-U.S. Holder if an applicable income tax treaty so requires as a condition for such non-U.S. Holder to be subject to United States taxation on a net income basis in respect of gain from the sale or other disposition of the Common Stock); (ii) in the case of a non-U.S. Holder who is an individual and holds the Common Stock as a capital asset, such holder is present in the United States for 183 or more days in the taxable year of the sale and certain other conditions exist; (iii) the Company is or has been a "United States real property holding corporation" for federal income tax purposes and, in the event that the Common Stock is considered "regularly traded on an established securities market," the non-U.S. Holder held, directly or indirectly at any time during the five-year period ending on the date of disposition, more than 5% of the Common Stock (and is not eligible for any treaty exemption); or (iv) the non-U.S. Holder is subject to tax pursuant to certain provisions of the Code applicable to U.S. expatriates. Effectively connected gains realized by a corporate non-U.S. Holder may also, under certain circumstances, be subject to an additional "branch profits tax" at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. The Company believes it is not currently, and does not anticipate becoming, a "United States real property holding corporation" for federal income tax purposes. FEDERAL ESTATE TAXES Common Stock held by a non-U.S. Holder at the time of death will be included in such holder's gross estate for United States federal estate tax purposes, unless an applicable estate tax treaty provides otherwise. INFORMATION REPORTING AND BACKUP WITHHOLDING Under current law, United States information reporting requirements (other than reporting of dividend payments for purposes of the withholding tax noted above) and backup withholding tax generally will not apply to dividends paid to non-U.S. Holders that are either subject to the 30% withholding discussed above or that are not so subject because an applicable tax treaty reduces such withholding. Otherwise, backup withholding of United States federal income tax at a rate of 31% may apply to dividends paid with respect to Common Stock to holders that are not "exempt recipients" and that fail to provide certain information (including the holder's United States taxpayer identification number). Generally, unless the payor of dividends has actual knowledge that the payee is a United States person, the payor may treat dividend payments to a payee with a foreign address as exempt from information reporting and backup withholding. However, under the Final Withholding Regulations, dividend payments generally will be subject to information reporting and backup withholding unless applicable certification requirements are satisfied. See the discussion above with respect to the rules applicable to foreign partnerships under the Final Withholding Regulations. In general, United States information reporting and backup withholding requirements also will not apply to a payment made outside the United States of the proceeds of a sale of Common Stock through an office outside the United States of a non-United States broker. However, United States information reporting (but not backup withholding) requirements will apply to a payment made outside the United States of the proceeds of a sale of Common Stock through an office outside the United States of a broker that is a United States person, that derives 50% or more of its gross income for certain periods from the conduct of a trade or business in the United States, that is a "controlled foreign corporation" as to the United States, or, in the case of payments made after December 31, 1999, a foreign partnership with certain connections to the United States, unless the broker has documentary evidence in its records that 73 the holder or beneficial owner is a non-United States person or the holder or beneficial owner otherwise establishes an exemption. Payment of the proceeds of the sale of Common Stock to or through a United States office of a broker is currently subject to both United States backup withholding and information reporting unless the holder certifies its non-United States status under penalties of perjury or otherwise establishes an exemption. A non-U.S. Holder generally may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the United States Internal Revenue Service. 74 UNDERWRITERS Under the terms and subject to the conditions contained in an Underwriting Agreement dated the date hereof (the "Underwriting Agreement"), the U.S. Underwriters named below, for whom Morgan Stanley & Co. Incorporated, Goldman, Sachs & Co., Hambrecht & Quist LLC and Volpe Brown Whelan & Company, LLC are acting as U.S. Representatives, and the International Underwriters named below for whom Morgan Stanley & Co. International Limited, Goldman Sachs International, Hambrecht & Quist LLC & Volpe Brown Whelan & Company, LLC are acting as International Representatives, have severally agreed to purchase, and the Company has agreed to sell to them, severally, the respective number of shares of Common Stock set forth opposite the names of such Underwriters below:
NUMBER OF NAME SHARES - --------------------------------------------------------------------------------- ---------- U.S. Underwriters: Morgan Stanley & Co. Incorporated.............................................. Goldman, Sachs & Co............................................................ Hambrecht & Quist LLC.......................................................... Volpe Brown Whelan & Company, LLC.............................................. ---------- Subtotal..................................................................... 5,830,000 ---------- International Underwriters: Morgan Stanley & Co. International Limited..................................... Goldman Sachs International.................................................... Hambrecht & Quist LLC.......................................................... Volpe Brown Whelan & Company, LLC.............................................. ---------- Subtotal..................................................................... 1,457,500 ---------- Total.................................................................... 7,287,500 ---------- ----------
The U.S. Underwriters and the International Underwriters, and the U.S. Representatives and the International Representatives, are collectively referred to as the "Underwriters" and the "Representatives," respectively. The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the shares of Common Stock offered hereby are subject to the approval of certain legal matters by their counsel and to certain other conditions. The Underwriters are obligated to take and pay for all of the shares of Common Stock offered hereby (other than those covered by the U.S. Underwriters' over-allotment option described below) if any such shares are taken. Pursuant to the Agreement between U.S. and International Underwriters, each U.S. Underwriter has represented and agreed that, with certain exceptions: (i) it is not purchasing any Shares (as defined herein) for the account of anyone other than a United States or Canadian Person (as defined herein) and (ii) it has not offered or sold, and will not offer or sell, directly or indirectly, any Shares or distribute any prospectus relating to the Shares outside the United States or Canada or to anyone other than a United States or Canadian Person. Pursuant to the Agreement between U.S. and International Underwriters, each International Underwriter has represented and agreed that, with certain exceptions: (i) it is not purchasing any Shares for the account of any United States or Canadian Person and (ii) it has not offered or sold, and 75 will not offer or sell, directly or indirectly, any Shares or distribute any prospectus relating to the Shares in the United States or Canada or to any United States or Canadian Person. With respect to any Underwriter that is a U.S. Underwriter and an International Underwriter, the foregoing representations and agreements (i) made by it in its capacity as a U.S. Underwriter apply only to it in its capacity as a U.S. Underwriter and (ii) made by it in its capacity as an International Underwriter apply only to it in its capacity as an International Underwriter. The foregoing limitations do not apply to stabilization transactions or to certain other transactions specified in the Agreement between U.S. and International Underwriters. As used herein, "United States or Canadian Person" means any national or resident of the United States or Canada, or any corporation, pension, profit-sharing or other trust or other entity organized under the laws of the United States or Canada or of any political subdivision thereof (other than a branch located outside the United States and Canada of any United States or Canadian Person), and includes any United States or Canadian branch of a person who is otherwise not a United States or Canadian Person. All shares of Common Stock to be purchased by the Underwriters under the Underwriting Agreement are referred to herein as the "Shares." Pursuant to the Agreement between U.S. and International Underwriters, sales may be made between the U.S. Underwriters and International Underwriters of any number of Shares as may be mutually agreed. The per share price of any Shares sold shall be the public offering price set forth on the cover page hereof, in United States dollars, less an amount not greater than the per share amount of the concession to dealers set forth below. Pursuant to the Agreement between U.S. and International Underwriters, each U.S. Underwriter has represented that it has not offered or sold, and has agreed not to offer or sell, any Shares, directly or indirectly, in any province or territory of Canada or to, or for the benefit of, any resident of any province or territory of Canada in contravention of the securities laws thereof and has represented that any offer or sale of Shares in Canada will be made only pursuant to an exemption from the requirement to file a prospectus in the province or territory of Canada in which such offer or sale is made. Each U.S. Underwriter has further agreed to send to any dealer who purchases from it any of the Shares a notice stating in substance that, by purchasing such Shares, such dealer represents and agrees that it has not offered or sold, and will not offer or sell, directly or indirectly, any of such Shares in any province or territory of Canada or to, or for the benefit of, any resident of any province or territory of Canada in contravention of the securities laws thereof and that any offer or sale of Shares in Canada will be made only pursuant to an exemption from the requirement to file a prospectus in the province or territory of Canada in which such offer or sale is made, and that such dealer will deliver to any other dealer to whom it sells any of such Shares a notice containing substantially the same statement as is contained in this sentence. Pursuant to the Agreement between U.S. and International Underwriters, each International Underwriter has represented and agreed that (i) it has not offered or sold and, prior to the date six months after the closing date for the sale of the Shares to the International Underwriters, will not offer or sell any Shares to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995; (ii) it has complied and will comply with all applicable provisions of the Financial Services Act 1986 with respect to anything done by it in relation to the Shares in, from or otherwise involving the United Kingdom; and (iii) it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the offering of the Shares to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or is a person to whom such document may otherwise lawfully be issued or passed on. Pursuant to the Agreement between U.S. and International Underwriters, each International Underwriter has further represented that it has not offered or sold, and has agreed not to offer or sell, directly or indirectly, in Japan or to or for the account of any resident thereof, any of the Shares acquired 76 in connection with the distribution contemplated hereby, except for offers or sales to Japanese International Underwriters or dealers and except pursuant to any exemption from the registration requirements of the Securities and Exchange Law and otherwise in compliance with applicable provisions of Japanese law. Each International Underwriter has further agreed to send to any dealer who purchases from it any of the Shares a notice stating in substance that, by purchasing such Shares, such dealer represents and agrees that it has not offered or sold, and will not offer or sell, any of such Shares, directly or indirectly, in Japan or to or for the account of any resident thereof except for offers or sales to Japanese International Underwriters or dealers and except pursuant to an exemption from the registration requirements of the Securities and Exchange Law and otherwise in compliance with applicable provisions of Japanese law, and that such dealer will send to any other dealer to whom it sells any of such Shares a notice containing substantially the same statement as is contained in this sentence. The Underwriters initially propose to offer part of the shares of Common Stock directly to the public at the public offering price set forth on the cover page hereof and part to certain dealers at a price that represents a concession not in excess of $ a share under the public offering price. Any Underwriter may allow, and such dealers may reallow, a concession not in excess of $ a share to other Underwriters or to certain other dealers. After the initial offering of the shares of Common Stock, the offering price and other selling terms may from time to time be varied by the Representatives. The Company has granted to the U.S. Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to an aggregate of 978,750 additional shares of Common Stock at the public offering price set forth on the cover page hereof, less underwriting discounts and commissions. The U.S. Underwriters may exercise such option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of Common Stock offered hereby. To the extent such option is exercised, each U.S. Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares of Common Stock as the number set forth next to such U.S. Underwriter's name in the preceding table bears to the total number of shares of Common Stock set forth next to the names of all U.S. Underwriters in the preceding table. The Underwriters have informed the Company that they do not intend sales to discretionary accounts to exceed five percent of the total number of shares of Common Stock offered by them. At the request of the Company, the U.S. Underwriters have reserved up to 1,088,500 shares of Common Stock (the "Reserved Shares") from the Underwritten Offering to be offered at the public offering price to certain persons designated by the Company. The Reserved Shares include certain shares that the Company had designated to be offered to an entity controlled by James H. Clark and to certain other investors as part of the non-underwritten public offering described below under "Related Sale" but were transferred into the Reserved Shares portion of the Underwritten Offering at the request of the Company. Any Reserved Shares not purchased by the persons designated by the Company will be offered by the U.S. Underwriters to the general public. Each of the Company and the directors, officers and certain other stockholders of the Company, including stockholders purchasing the Reserved Shares has agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not, during the period ending 180 days after the date of this Prospectus, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The restrictions described in this paragraph do not apply to (x) the sale of Shares to the Underwriters, (y) the issuance by the Company of shares of Common Stock upon the exercise of an option or a warrant or the conversion of a security outstanding on the date of this Prospectus of which the Underwriters have been advised in writing, or 77 (z) transactions by any person other than the Company relating to shares of Common Stock or other securities acquired in open market transactions after the completion of the offering of the Shares, provided that purchasers in transactions described in clause (y) enter into similar "lock-up" agreements. In order to facilitate the offering of the Common Stock, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock. Specifically, the Underwriters may over-allot in connection with the offering, creating a short position in the Common Stock for their own account. In addition, to cover over-allotments or to stabilize the price of the Common Stock, the Underwriters may bid for, and purchase, shares of Common Stock in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an Underwriter or a dealer for distributing the Common Stock in the offering, if the syndicate repurchases previously distributed Common Stock in transactions to cover syndicate short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the Common Stock above independent market levels. The Underwriters are not required to engage in these activities, and may end any of these activities at any time. The Company and the Underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. Certain of the Underwriters from time to time perform various investment banking services for the Company, for which such Underwriters receive compensation. PRICING OF THE OFFERING Prior to this offering, there has been no public market for the Common Stock. The initial public offering price will be determined by negotiations between the Company and the U.S. Representatives. Among the factors to be considered in determining the initial public offering price will be the future prospects of the Company and its industry in general, sales, earnings and certain other financial and operating information of the Company in recent periods, and the price-earnings ratios, price-sales ratios, market prices of securities and certain financial and operating information of companies engaged in activities similar to those of the Company. The estimated initial public offering price range set forth on the cover page of this Preliminary Prospectus is subject to change as a result of market conditions and other factors. RELATED SALE Concurrently with the Underwritten Offering, the Company expects that it will sell 2,451,786 shares of Common Stock directly to an entity controlled by James H. Clark, the Company's Chairman of the Board of Directors, which has indicated an interest in purchasing shares of Common Stock, in a non-underwritten public offering and at a purchase price equal to the price per share of the shares offered to the public in the Underwritten Offering. LEGAL MATTERS The validity of the issuance of the shares of Common Stock offered hereby will be passed upon for the Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Certain legal matters in connection with this offering will be passed upon for the Underwriters by Fenwick & West LLP, Palo Alto, California. EXPERTS Healtheon was incorporated in December 1995 and did not commence operations until January 1996. Thus, the financial statements of ActaMed for the year ended December 31, 1995 also represent the financial statements of Healtheon on a pooled basis for that period. The consolidated financial statements of Healtheon Corporation at December 31, 1996 and 1997 and June 30, 1998, and for the two years in the period ended December 31, 1997 and for the six month period ended June 30, 1998, appearing in this Prospectus and Registration Statement have been audited by 78 Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein which, as to the year ended December 31, 1996, is based in part on the report of Deloitte & Touche LLP, independent auditors. The consolidated financial statements referred to above are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The consolidated financial statements of ActaMed Corporation for the year ended December 31, 1995, included in this Prospectus and Registration Statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein. The consolidated financial statements of ActaMed Corporation as of December 31, 1996 and for the year then ended, (not separately presented in this Prospectus and Registration Statement) have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, (which expresses an unqualified opinion and includes an explanatory paragraph relating to the restatement of ActaMed Corporation 1996 financial statements as described in Note 14). Such financial statements are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The statements of divisional net loss and United HealthCare Corporation's net investment and of divisional cash flows of EDI Services Group (a division of United HealthCare Corporation) included in this Prospectus and Registration Statement have been audited by Deloitte and Touche LLP, independent auditors, as stated in their report appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 under the Securities Act, and the rules and regulations promulgated thereunder, with respect to the Common Stock offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits thereto. Statements contained in this Prospectus as to the contents of any contract or other document that is filed as an exhibit to the Registration Statement are not necessarily complete and each such statement is qualified in all respects by reference to the full text of such contract or document. For further information with respect to the Company and the Common Stock, reference is hereby made to the Registration Statement and the exhibits thereto, which may be inspected and copied at the principal office of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission located at Seven World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and copies of all or any part thereof may be obtained at prescribed rates from the Commission's Public Reference Section at such addresses. Also, the Commission maintains a World Wide Web site on the Internet at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. Upon completion of this offering, the Company will become subject to the information and periodic reporting requirements of the Exchange Act and, in accordance therewith, will file periodic reports, proxy and information statements and other information with the Commission. Such periodic reports, proxy and information statements and other information will be available for inspection and copying at the regional offices, public reference facilities and Web site of the Commission referred to above. 79 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS OF HEALTHEON CORPORATION: Report of Ernst & Young LLP, Independent Auditors.................................... F-2 Report of Deloitte & Touche LLP, Independent Auditors................................ F-3 Consolidated Balance Sheets.......................................................... F-4 Consolidated Statements of Operations................................................ F-5 Consolidated Statement of Convertible Redeemable Preferred Stock and Stockholders' Equity (Net Capital Deficiency).................................................... F-6 Consolidated Statements of Cash Flows................................................ F-8 Notes to Consolidated Financial Statements........................................... F-9 FINANCIAL STATEMENTS OF EDI SERVICES, INC.: Report of Deloitte and Touche LLP, Independent Auditors.............................. F-31 Statement of Divisional Net Loss and United's Net Investment......................... F-32 Statement of Divisional Cash Flows................................................... F-33 Notes to Financial Statements........................................................ F-34
F-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Healtheon Corporation We have audited the accompanying consolidated balance sheets of Healtheon Corporation as of December 31, 1996 and 1997, and June 30, 1998, and the related consolidated statements of operations, convertible redeemable preferred stock and stockholders' equity (net capital deficiency), and cash flows for each of the two years in the period ended December 31, 1997, and for the six months ended June 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. In May 1998, the Company acquired ActaMed Corporation in a transaction that was accounted for as a pooling of interests. We did not audit the financial statements of ActaMed Corporation for the year ended December 31, 1996, which statements reflect total assets constituting approximately 82% of the related consolidated financial statement totals at December 31, 1996 and revenues and a net loss constituting approximately 89% and 54%, respectively, of the related consolidated financial statement totals for the year ended December 31, 1996. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for ActaMed Corporation, is based solely on the report of the other auditors. As discussed in Note 14, the 1996 consolidated financial statements of ActaMed Corporation have been restated. 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 and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Healtheon Corporation at December 31, 1996 and 1997, and June 30, 1998, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 1997, and for the six months ended June 30, 1998, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Palo Alto, California July 24, 1998, except for Note 14, as to which the date is September 26, 1998 F-2 INDEPENDENT AUDITORS' REPORT Board of Directors of ActaMed Corporation We have audited the consolidated balance sheet of ActaMed Corporation and subsidiary (the "Company") as of December 31, 1996 and the related consolidated statements of operations, convertible redeemable preferred stock and stockholders' equity (net capital deficiency), and cash flows for each of the two years in the period ended December 31, 1996 (the consolidated financial statements for 1996 are not separately presented herein.) These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1996 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. As discussed in Note 14, the 1996 consolidated financial statements of ActaMed Corporation and subsidiary (not separately presented herein) have been restated. /s/ DELOITTE & TOUCHE LLP Atlanta, Georgia June 20, 1997 (September 26, 1998 as to Note 14 and Note 1 -- Net Loss Per Common Share, paragraph 2) F-3 HEALTHEON CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, ------------------ JUNE 30, 1996 1997 1998 -------- -------- ----------- (RESTATED -- SEE NOTE 14) ASSETS Current assets: Cash and cash equivalents............................................................... $ 7,539 $ 16,504 $ 11,075 Short-term investments.................................................................. -- 5,300 1,726 Accounts receivable, net of allowance for doubtful accounts of $41, $71 and $135 in 1996, 1997 and 1998, respectively..................................................... 959 2,723 3,726 Due from related parties................................................................ 1,742 1,533 1,916 Other current assets.................................................................... 437 527 353 -------- -------- ----------- Total current assets.................................................................... 10,677 26,587 18,796 Property and equipment, net............................................................... 4,534 5,500 9,960 Intangible assets, net.................................................................... 16,555 18,768 18,183 Other assets.............................................................................. 2,641 2,892 2,471 -------- -------- ----------- $ 34,407 $ 53,747 $ 49,410 -------- -------- ----------- -------- -------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) Current liabilities: Borrowings under line of credit......................................................... $ 30 $ 3,425 $ 3,473 Accounts payable........................................................................ 1,359 2,225 3,133 Accrued compensation.................................................................... 242 448 1,853 Other accrued liabilities............................................................... 1,097 1,265 2,765 Current portion of capital lease obligations............................................ 763 1,038 1,555 Deferred revenue........................................................................ 4,681 3,396 3,457 -------- -------- ----------- Total current liabilities............................................................... 8,172 11,797 16,236 Capital lease obligations, net of current portion......................................... 1,210 932 1,459 Commitments Convertible redeemable preferred stock, $.016 par value, issuable in series: 16,488,860 shares authorized in 1996 and 1997, none in 1998; 14,170,947, 16,488,860 and no shares issued and outstanding in 1996, 1997 and 1998, respectively; at amounts paid in......... 39,578 50,948 -- Stockholders' equity (net capital deficiency): Convertible preferred stock, $.0001 par value, issuable in series: 48,020,000 shares authorized in 1996 and 1997, none in 1998; 13,285,000, 21,002,692 and no shares issued and outstanding in 1996, 1997 and 1998, respectively; at amounts paid in.............. 11,607 43,756 -- Common stock, $.0001 par value, 75,000,000 shares authorized; 8,652,422, 9,436,724 and 51,704,947 shares issued and outstanding in 1996, 1997 and 1998, respectively......... 1 1 5 Additional paid-in capital.............................................................. 1,523 4,502 106,832 Note receivable from officer............................................................ -- (349) -- Deferred stock compensation............................................................. -- (2,151) (3,411) Accumulated deficit..................................................................... (27,684) (55,689) (71,711) -------- -------- ----------- Total stockholders' equity (net capital deficiency)..................................... (14,553) (9,930) 31,715 -------- -------- ----------- $ 34,407 $ 53,747 $ 49,410 -------- -------- ----------- -------- -------- -----------
SEE ACCOMPANYING NOTES. F-4 CONSOLIDATED STATEMENTS OF OPERATIONS(1) (IN THOUSANDS, EXCEPT PER SHARE DATA)
ACTAMED CORPORATION HEALTHEON CORPORATION ------------ --------------------------------------------------------- YEARS ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, --------------------------- --------------------------- YEAR ENDED DECEMBER 31, 1995 1996 1997 1997 1998 ------------ ---------- ---------- ------------ -------- (UNAUDITED) (RESTATED -- SEE NOTE 14) Revenue: Services........................................ $ 458 $ 1,795 $ 4,301 $ 656 $ 10,893 Services to related parties(2).................. -- 4,237 7,309 3,240 9,370 Software licenses............................... 1,717 4,981 1,780 390 390 ------------ ---------- ---------- ------------ -------- Total revenue................................... 2,175 11,013 13,390 4,286 20,653 Operating costs and expenses: Cost of revenue: Cost of services.............................. 1,573 1,648 4,011 598 10,770 Cost of services to related parties........... -- 4,919 6,536 3,129 7,317 Cost of software licenses..................... 343 160 -- -- -- ------------ ---------- ---------- ------------ -------- Total cost of revenue......................... 1,916 6,727 10,547 3,727 18,087 Development and engineering..................... 2,446 8,596 12,986 6,409 8,332 Sales, general and administrative............... 1,749 9,042 11,031 4,723 12,123 Amortization of intangible assets............... -- 3,189 4,249 2,124 3,938 ------------ ---------- ---------- ------------ -------- Total operating costs and expenses.............. 6,111 27,554 38,813 16,983 42,480 ------------ ---------- ---------- ------------ -------- Loss from operations.............................. (3,936) (16,541) (25,423) (12,697) (21,827) Interest income................................... 208 539 611 254 637 Interest expense.................................. (6) (56) (323) (128) (251) Dividends on ActaMed's convertible redeemable preferred stock................................. -- (2,548) (2,870) (1,606) (890) ------------ ---------- ---------- ------------ -------- Net loss.......................................... (3,734) (18,606) (28,005) (14,177) (22,331) Dividends on ActaMed's convertible redeemable preferred stock................................. (724) -- -- -- -- ------------ ---------- ---------- ------------ -------- Net loss applicable to common stockholders........ $(4,458) $ (18,606) $ (28,005) $(14,177) $(22,331) ------------ ---------- ---------- ------------ -------- ------------ ---------- ---------- ------------ -------- Basic and diluted net loss per common share....... $ (.85) $ (2.83) $ (3.88) $ (1.97) $ (1.27) ------------ ---------- ---------- ------------ -------- ------------ ---------- ---------- ------------ -------- Weighted-average shares outstanding used in computing basic and diluted net loss per common share........................................... 5,246 6,583 7,223 7,193 17,632 ------------ ---------- ---------- ------------ -------- ------------ ---------- ---------- ------------ -------- Pro forma basic and diluted net loss per common share (unaudited)............................... $ (.56) $ (.46) ---------- -------- ---------- -------- Shares used in computing pro forma basic and diluted net loss per common share (unaudited)... 44,715 46,631 ---------- -------- ---------- --------
- --------- (1) Because Healtheon did not commence operations until January 1996, the ActaMed statement of operations presented for the year ended December 31, 1995 represents the statement of operations of Healtheon for that period on a pooled basis. (2) Revenue from services to related parties consists of revenue from United HealthCare and SmithKline Labs, customers that are also significant stockholders of the Company. SEE ACCOMPANYING NOTES. F-5 CONSOLIDATED STATEMENT OF CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)(1) (IN THOUSANDS, EXCEPT SHARE DATA) ACTAMED CORPORATION
CONVERTIBLE REDEEMABLE CONVERTIBLE PREFERRED STOCK PREFERRED STOCK COMMON STOCK --------------------- --------------------- ------------------ SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ----------- -------- ----------- -------- ---------- ------ BALANCES AT DECEMBER 31, 1994........... 8,800,880 $ 8,343 -- $ -- 8,250,000 $200 Net loss................................ -- -- -- -- -- -- Issuance of common stock pursuant to option exercises by employees......... -- -- -- -- 1,071,250 21 Issuance of Series B convertible redeemable preferred stock for cash (less issuance costs of $36).......... 3,448,276 6,963 -- -- -- -- Dividends accrued on convertible redeemable preferred stock............ -- 724 -- -- -- -- ----------- -------- ----------- -------- ---------- ------ BALANCES AT DECEMBER 31, 1995........... 12,249,156 $ 16,030 -- $ -- 9,321,250 $221 ----------- -------- ----------- -------- ---------- ------ ----------- -------- ----------- -------- ---------- ------ TOTAL NOTE STOCKHOLDERS' ADDITIONAL RECEIVABLE DEFERRED EQUITY (NET PAID-IN FROM STOCK ACCUMULATED CAPITAL CAPITAL OFFICER COMPENSATION DEFICIT DEFICIENCY) ---------- ---------- ------------ ----------- ------------- BALANCES AT DECEMBER 31, 1994........... $ 1,883 $ -- $ -- $ (5,344) $ (3,261) Net loss................................ -- -- -- (3,734) (3,734) Issuance of common stock pursuant to option exercises by employees......... -- -- -- -- 21 Issuance of Series B convertible redeemable preferred stock for cash (less issuance costs of $36).......... -- -- -- -- -- Dividends accrued on convertible redeemable preferred stock............ (724) -- -- -- (724) ---------- ----- ------------ ----------- ------------- BALANCES AT DECEMBER 31, 1995........... $ 1,159 $ -- $ -- $ (9,078) $ (7,698) ---------- ----- ------------ ----------- ------------- ---------- ----- ------------ ----------- -------------
HEALTHEON CORPORATION
BALANCES AT DECEMBER 31, 1995 (REFLECTING THE EXCHANGE RATIO OF .6272)................................ 7,682,671 $ 16,030 -- $ -- 5,846,288 $ 1 Net loss (Restated)..................... -- -- -- -- -- -- Issuance of common stock to founders and employees for cash.................... -- -- -- -- 2,806,134 -- Issuance of Series A convertible preferred stock for cash (less issuance costs of $27)................ -- -- 10,285,000 5,115 -- -- Issuance of Series B convertible preferred stock for cash (less issuance costs of $8)................. -- -- 3,000,000 5,992 -- -- Issuance of Series B convertible preferred stock warrant to investor for services.......................... -- -- -- 500 -- -- Issuance of Series C convertible redeemable preferred stock for acquisition........................... 6,488,276 21,000 -- -- -- -- Issuance of common stock warrants....... -- -- -- -- -- -- Dividends accrued on convertible redeemable preferred stock............ -- 2,548 -- -- -- -- ----------- -------- ----------- -------- ---------- ------ BALANCES AT DECEMBER 31, 1996 (RESTATED)............................ 14,170,947 39,578 13,285,000 11,607 8,652,422 1 BALANCES AT DECEMBER 31, 1995 (REFLECTING THE EXCHANGE RATIO OF .6272)................................ $ 1,379 $ -- $ -- $ (9,078) $ (7,698) Net loss (Restated)..................... -- -- -- (18,606) (18,606) Issuance of common stock to founders and employees for cash.................... 140 -- -- -- 140 Issuance of Series A convertible preferred stock for cash (less issuance costs of $27)................ -- -- -- -- 5,115 Issuance of Series B convertible preferred stock for cash (less issuance costs of $8)................. -- -- -- -- 5,992 Issuance of Series B convertible preferred stock warrant to investor for services.......................... -- -- -- -- 500 Issuance of Series C convertible redeemable preferred stock for acquisition........................... -- -- -- -- -- Issuance of common stock warrants....... 4 -- -- -- 4 Dividends accrued on convertible redeemable preferred stock............ -- -- -- -- -- ---------- ----- ------------ ----------- ------------- BALANCES AT DECEMBER 31, 1996 (RESTATED)............................ 1,523 -- -- (27,684) (14,553)
- ------------ (1) Because Healtheon did not commence operations until January 1996, the ActaMed statement of convertible redeemable preferred stock and stockholders' equity (net capital deficiency) presented for the year ended December 31, 1995 represents the statement of stockholders' equity of Healtheon for that period on a pooled basis. SEE ACCOMPANYING NOTES. F-6 CONSOLIDATED STATEMENT OF CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)(1) (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA) HEALTHEON CORPORATION
CONVERTIBLE REDEEMABLE CONVERTIBLE PREFERRED STOCK PREFERRED STOCK COMMON STOCK --------------------- --------------------- ------------------ SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ----------- -------- ----------- -------- ---------- ------ BALANCES AT DECEMBER 31, 1996 (RESTATED)............................ 14,170,947 $ 39,578 13,285,000 $ 11,607 8,652,422 $ 1 Net loss (Restated)..................... -- -- -- -- -- -- Issuance of common stock pursuant to option and restricted stock exercises by employees.......................... -- -- -- -- 1,397,844 -- Repurchase of employee common stock..... -- -- -- -- (613,542) -- Issuance of Series A and Series B convertible preferred stock for services.............................. -- -- 45,000 55 -- -- Issuance of Series B convertible preferred stock for cash.............. -- -- 15,000 30 -- -- Issuance of Series B convertible preferred stock to officer for note receivable............................ -- -- 250,000 500 -- -- Issuance of Series B convertible preferred stock warrants in connection with bridge financing................. -- -- -- 64 -- -- Issuance of Series C convertible preferred stock for cash and conversion of bridge note............. -- -- 2,600,000 6,500 -- -- Issuance of Series D convertible preferred stock for cash.............. -- -- 4,807,692 25,000 -- -- Issuance of Series D convertible redeemable preferred stock for asset purchase.............................. 2,317,913 8,500 -- -- -- -- Repayment of note receivable from officer............................... -- -- -- -- -- -- Dividends accrued on convertible redeemable preferred stock............ -- 2,870 -- -- -- -- Deferred stock compensation............. -- -- -- -- -- -- Amortization of deferred stock compensation.......................... -- -- -- -- -- -- ----------- -------- ----------- -------- ---------- ------ BALANCES AT DECEMBER 31, 1997 (RESTATED)............................ 16,488,860 50,948 21,002,692 43,756 9,436,724 1 Net loss................................ -- -- -- -- -- -- Issuance of common stock pursuant to option exercises by employees......... -- -- -- -- 1,659,685 -- Issuance of Series B convertible preferred stock pursuant to warrant exercises............................. -- -- 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 Issuance of common stock for asset purchase.............................. -- -- -- -- 1,336,209 -- Repayment of note receivable from officer............................... -- -- -- -- -- -- Deferred stock compensation............. -- -- -- -- -- -- Amortization of deferred stock compensation.......................... -- -- -- -- -- -- ----------- -------- ----------- -------- ---------- ------ BALANCES, JUNE 30, 1998................. -- $ -- -- $ -- 51,704,947 $ 5 ----------- -------- ----------- -------- ---------- ------ ----------- -------- ----------- -------- ---------- ------ TOTAL NOTE STOCKHOLDERS' ADDITIONAL RECEIVABLE DEFERRED EQUITY (NET PAID-IN FROM STOCK ACCUMULATED CAPITAL CAPITAL OFFICER COMPENSATION DEFICIT DEFICIENCY) ---------- ---------- ------------ ----------- ------------- BALANCES AT DECEMBER 31, 1996 (RESTATED)............................ $ 1,523 -- -- $(27,684) $(14,553) Net loss (Restated)..................... -- -- -- (28,005) (28,005) Issuance of common stock pursuant to option and restricted stock exercises by employees.......................... 297 -- -- -- 297 Repurchase of employee common stock..... (31) -- -- -- (31) Issuance of Series A and Series B convertible preferred stock for services.............................. -- -- -- -- 55 Issuance of Series B convertible preferred stock for cash.............. -- -- -- -- 30 Issuance of Series B convertible preferred stock to officer for note receivable............................ -- (500) -- -- -- Issuance of Series B convertible preferred stock warrants in connection with bridge financing................. -- -- -- -- 64 Issuance of Series C convertible preferred stock for cash and conversion of bridge note............. -- -- -- -- 6,500 Issuance of Series D convertible preferred stock for cash.............. -- -- -- -- 25,000 Issuance of Series D convertible redeemable preferred stock for asset purchase.............................. -- -- -- -- -- Repayment of note receivable from officer............................... -- 151 -- -- 151 Dividends accrued on convertible redeemable preferred stock............ -- -- -- -- -- Deferred stock compensation............. 2,713 -- (2,713) -- -- Amortization of deferred stock compensation.......................... -- -- 562 -- 562 ---------- ---------- ------------ ----------- ------------- BALANCES AT DECEMBER 31, 1997 (RESTATED)............................ 4,502 (349) (2,151) (55,689) (9,930) Net loss................................ -- -- -- (22,331) (22,331) Issuance of common stock pursuant to option exercises by employees......... 913 -- -- -- 913 Issuance of Series B convertible preferred stock pursuant to warrant exercises............................. -- -- -- -- 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....... 94,115 -- -- 6,309 54,638 Issuance of common stock for asset purchase.............................. 4,900 -- -- -- 4,900 Repayment of note receivable from officer............................... -- 349 -- -- 349 Deferred stock compensation............. 2,402 -- (2,402) -- -- Amortization of deferred stock compensation.......................... -- -- 1,142 -- 1,142 ---------- ---------- ------------ ----------- ------------- BALANCES, JUNE 30, 1998................. $106,832 $ -- $(3,411) $(71,711) $ 31,715 ---------- ---------- ------------ ----------- ------------- ---------- ---------- ------------ ----------- -------------
- ------------- (1) Because Healtheon did not commence operations until January 1996, the ActaMed statement of convertible redeemable preferred stock and stockholders' equity (net capital deficiency) presented for the year ended December 31, 1995 represents the statement of stockholders' equity of Healtheon for that period on a pooled basis. SEE ACCOMPANYING NOTES. F-7 CONSOLIDATED STATEMENTS OF CASH FLOWS(1) (IN THOUSANDS)
ACTAMED CORPORATION HEALTHEON CORPORATION ------------ -------------------------------------------------------- YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, --------------------------- -------------------------- YEAR ENDED DECEMBER 31, 1995 1996 1997 1997 1998 ------------ ---------- ---------- ----------- -------- (UNAUDITED) (RESTATED -- SEE NOTE 14) Cash flows from operating activities: Net loss................................................ $(3,734) $(18,606) $(28,005) $(14,177) $(22,331) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization......................... 359 6,366 9,319 4,609 8,093 Amortization of deferred stock compensation........... -- -- 562 -- 1,142 Warrants and preferred stock issued for services...... -- 500 119 55 -- Dividends on ActaMed's convertible redeemable preferred stock..................................... -- 2,548 2,870 1,606 890 Changes in operating assets and liabilities: Accounts receivable................................. (36) (5,066) (806) 132 (988) Other assets........................................ (77) (325) (224) (242) 197 Accounts payable.................................... 49 1,139 751 (263) 908 Accrued compensation and other liabilities.......... 516 800 345 573 2,905 Deferred revenue.................................... 1,603 3,078 (1,285) (205) 61 ------------ ---------- ---------- ----------- -------- Net cash used in operating activities................... (1,320) (9,566) (16,354) (7,912) (9,123) ------------ ---------- ---------- ----------- -------- Cash flows from investing activities: Purchase of short-term investments...................... -- -- (5,300) -- (3,483) Maturities of short-term investments.................... -- -- -- -- 7,057 Increase in restricted cash............................. -- -- (867) -- -- Purchases of property and equipment..................... (464) (2,027) (2,817) (293) (2,664) Acquisition costs related to business combination....... -- (316) -- -- -- Capitalized internally developed software costs......... -- (1,001) (291) (165) -- ------------ ---------- ---------- ----------- -------- Net cash from (used in) investing activities............ (464) (3,344) (9,275) (458) 910 ------------ ---------- ---------- ----------- -------- Cash flows from financing activities: Proceeds from line of credit borrowings and bridge notes................................................. -- 30 5,395 2,765 48 Proceeds from line of credit borrowings from related party................................................. -- -- -- -- 1,000 Payments of line of credit borrowings from related party................................................. -- -- -- -- (1,000) Proceeds from issuance of preferred stock............... 6,963 11,107 29,530 96 2,034 Proceeds from issuance of common stock, net of repurchases........................................... 21 144 266 (10) 913 Payments on note receivable from officer................ -- -- 151 -- 349 Principal payments of capital lease obligations......... -- (218) (748) (363) (560) ------------ ---------- ---------- ----------- -------- Net cash from financing activities...................... 6,984 11,063 34,594 2,488 2,784 ------------ ---------- ---------- ----------- -------- Net increase (decrease) in cash and cash equivalents.... 5,200 (1,847) 8,965 (5,882) (5,429) Cash and cash equivalents at beginning of period........ 4,186 9,386 7,539 7,539 16,504 ------------ ---------- ---------- ----------- -------- Cash and cash equivalents at end of period.............. $ 9,386 $ 7,539 $ 16,504 $ 1,657 $ 11,075 ------------ ---------- ---------- ----------- -------- ------------ ---------- ---------- ----------- -------- Supplemental disclosure of cash flow information: Interest paid........................................... $ 5 $ 56 $ 252 $ 128 $ 269 ------------ ---------- ---------- ----------- -------- ------------ ---------- ---------- ----------- -------- Supplemental schedule of noncash investing and financing activities: Equipment acquired under capital lease obligations...... $ -- $ 2,083 $ 774 $ 356 $ 1,604 ------------ ---------- ---------- ----------- -------- ------------ ---------- ---------- ----------- -------- Issuance of note receivable from officer for preferred stock................................................. $ -- $ -- $ 500 $ -- $ -- ------------ ---------- ---------- ----------- -------- ------------ ---------- ---------- ----------- -------- Conversion of bridge notes to preferred stock........... $ -- $ -- $ 2,000 $ -- $ -- ------------ ---------- ---------- ----------- -------- ------------ ---------- ---------- ----------- -------- Dividends on ActaMed's convertible redeemable preferred stock................................................. $ 724 $ -- $ -- $ -- $ -- ------------ ---------- ---------- ----------- -------- ------------ ---------- ---------- ----------- -------- Issuance of convertible redeemable preferred stock for business combination.................................. $ -- $ 21,000 $ -- $ -- $ -- ------------ ---------- ---------- ----------- -------- ------------ ---------- ---------- ----------- -------- Issuance of convertible redeemable preferred stock for assets purchased...................................... $ -- $ -- $ 8,500 $ -- $ 2,800 ------------ ---------- ---------- ----------- -------- ------------ ---------- ---------- ----------- -------- Issuance of common stock for assets purchased........... $ -- $ -- $ -- $ -- $ 4,900 ------------ ---------- ---------- ----------- -------- ------------ ---------- ---------- ----------- -------- Deferred stock compensation related to options granted............................................... $ -- $ -- $ 2,713 $ -- $ 2,402 ------------ ---------- ---------- ----------- -------- ------------ ---------- ---------- ----------- -------- Conversion of convertible redeemable preferred and convertible preferred stock to common stock........... $ -- $ -- $ -- $ -- $ 92,972 ------------ ---------- ---------- ----------- -------- ------------ ---------- ---------- ----------- --------
- ------------- (1) Because Healtheon did not commence operations until January 1996, the statement of cash flows presented for the year ended December 31, 1995 represents the statement of cash flows of Healtheon for that period on a pooled basis. SEE ACCOMPANYING NOTES. F-8 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION In May 1998, Healtheon Corporation ("Healtheon") acquired ActaMed Corporation ("ActaMed") in a merger transaction accounted for as a pooling of interests (see Note 2). ActaMed was incorporated in 1992. Healtheon was incorporated on December 26, 1995 and was considered to be in the development stage through late 1997. All financial information has been restated to reflect the combined operations of Healtheon and ActaMed. All 1995 financial statement information represents that of ActaMed. Because Healtheon did not commence operations until January 1996, the financial statements of ActaMed for the year ended December 31, 1995 also represent the financial statements of Healtheon on a pooled basis for that period. As used herein, the "Company" refers to the combined companies and "Healtheon" or "ActaMed" is used to refer to the individual pre-merger company where required for clarity of presentation. NATURE OF OPERATIONS The Company is pioneering the use of the Internet to simplify workflows, decrease costs and improve the quality of patient care throughout the healthcare industry. The Company has designed and developed an Internet-based information and transaction platform (the "Healtheon Platform") that allows it to create Virtual Healthcare Networks ("VHNs") that facilitate and streamline interactions among the myriad participants in the healthcare industry. The Company's VHN solution includes a suite of services delivered through applications operating on its Internet-based platform. The Company'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 authorization, laboratory and diagnostic test ordering, clinical data retrieval and claims processing. Healtheon provides its own applications on the Healtheon Platform and also enables third-party applications to operate on the platform. In addition to VHNs, Healtheon provides consulting, implementation and network management services to enable its customers to take advantage of the capabilities of the Healtheon Platform. The Company has incurred operating losses to date and had an accumulated deficit of $71,711,000 at June 30, 1998. Company activities have been primarily financed through private placements of equity securities. The Company had cash, cash equivalents and short-term investments totaling approximately $12,801,000 at June 30, 1998. As noted above and as further discussed in Note 2, Healtheon merged with ActaMed in May 1998. This merger may significantly affect the Company's operating cash needs. The Company may need to raise additional capital through the issuance of debt or equity securities. There can be no assurance that the Company will be able to raise additional financing, or that such financing will be available on terms satisfactory to the Company, if at all. INTERIM FINANCIAL INFORMATION The financial information for the six months ended June 30, 1997 is unaudited but includes all adjustments, consisting only of normal recurring adjustments, that the Company considers necessary for a fair presentation of the Company's operating results and cash flows for such period. Results for the six months ended June 30, 1998 are not necessarily indicative of results to be expected for the full fiscal year of 1998 or for any future period. F-9 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany 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. 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. The Company'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 the Company's short-term investments mature within six months. The fair value of the Company's cash equivalents and short-term investments is as follows (in thousands):
DECEMBER 31, JUNE 30, -------------------- ----------- 1996 1997 1998 --------- --------- ----------- Cash equivalents: Corporate and other nongovernment debt securities......... $ -- $ 12,704 $ 10,380 Money market funds........................................ 5,603 3,429 864 --------- --------- ----------- 5,603 16,133 11,244 Short-term investments: Corporate and other nongovernment debt securities......... -- 5,300 -- U.S. government securities................................ -- -- 1,726 --------- --------- ----------- $ 5,603 $ 21,433 $ 12,970 --------- --------- ----------- --------- --------- -----------
Net unrealized gains (losses) were immaterial at December 31, 1996 and 1997 and June 30, 1998. Management determines the appropriate classification of debt and equity securities at the time of purchase and reevaluates such designation as of each balance sheet date. Marketable debt and equity securities are classified as available-for-sale, and are carried at their fair value, with the unrealized gains and losses, when material, reported net-of-tax in a separate component of stockholders' equity. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in interest income. The cost of securities sold is based on specific identification. Interest and dividends on securities classified as available-for-sale are included in investment income. Additionally, at December 31, 1997 and June 30, 1998, the Company had restricted cash of $867,000, related to a letter of credit invested in a certificate of deposit at a financial institution as a security deposit for its office facilities (see Note 6). Such amount is included in other assets in the accompanying consolidated balance sheets. F-10 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment are stated at cost, net of accumulated amortization and depreciation. Depreciation is computed using the straight-line method over the estimated useful life of the related asset, generally three to seven years. Leasehold improvements and equipment acquired under capital leases are amortized over the shorter of the lease term or the estimated useful life of the related asset. INTANGIBLE ASSETS All intangible assets, which consist primarily of software technology rights, intangibles related to services agreements and goodwill, are amortized on a straight-line basis over three years. SOFTWARE DEVELOPMENT COSTS Software development costs are incurred in the development or enhancement of software utilized in providing the Company's business management systems and services. Software development costs incurred after the establishment of technological feasibilty for each product or process are capitalized and capitalization ceases when the product or process is available for general release to customers or is put into service. Capitalized internally developed software costs were approximately $1,001,000, $291,000 and $165,000 for the years ended December 31, 1996 and 1997 and the six months ended June 30, 1997, respectively. There were no internally developed software costs capitalized for the year ended December 31, 1995 or for the six months ended June 30, 1998. Capitalized internally developed software costs are amortized based on the greater of the amount determined using the straight line method over the estimated useful economic life of the software or the ratio of remaining unamortized costs to current and expected future revenue from the software. Amortization expense related to the Company's capitalized internally developed software costs included in cost of revenue was approximately $134,000, $376,000, $173,000 and $782,000 for the years ended December 31, 1996 and 1997 and the six months ended June 30, 1997 and 1998, respectively. There was no amortization expense related to ActaMed's capitalized internally developed software costs for the year ended December 31, 1995. LONG-LIVED ASSETS The Company 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, the Company assesses 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, the Company 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. The Company determined that it 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. Such amount is included in the $782,000 amortization expense for the six months ended June 30, 1998 noted above. No impairment losses were recorded for the years ended December 31, 1995, 1996 and 1997 or for the six months ended June 30, 1997. F-11 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION The Company earns revenue from services and services to related parties, both of which include providing access to its network-based services and performing development and consulting services, and from licensing software. The Company earns network-based services revenue from fixed fee subscription arrangements, which is recognized ratably over the term of the applicable agreement, and from arrangements that are priced on a per-transaction or per-user basis, which is recognized as the services are performed. Revenue from development projects is recognized on a percentage-of-completion basis or as such services are performed, depending on the terms of the contract. Revenue from consulting services is recognized as such services are performed. Cash received in excess of revenue recognized relating to such services has been recorded as deferred revenue in the accompanying consolidated balance sheets. Revenue from services to related parties consists of services revenue attributable to United HealthCare and SmithKline Labs. To date, the Company has derived no significant revenue from brokers, value-added resellers or systems integrators. During the year ended December 31, 1997, the Company entered into agreements with two customers to manage and operate their current and expanding information technology ("IT") operations, to develop a suite of specific Internet-based commercial software applications and to assist these customers in migrating from their current IT operating environment to these new applications. The Company utilizes its own personnel, certain outside contractors and certain personnel and facilities of the customers that are leased under contract terms to the Company 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 billed to the customers by the Company. For the year ended December 31, 1997 and the six months ended June 30, 1998, the Company recognized revenue of approximately $2,100,000 and $7,304,000, respectively, for the IT services and approximately $200,000 and $2,497,000, respectively, for the development services. Included in the revenue recognized for IT services for the year ended December 31, 1997 and the six months ended June 30, 1998 were amounts related to leased personnel and facilities of $1,909,000 and $6,088,000, respectively, which amounts were also included in cost of revenue for the respective periods. The Company recognizes revenue from license fees when a noncancelable 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. The Company's products do not require significant customization. In October 1997, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition." SOP 97-2 is effective January 1, 1998 and generally requires revenue earned on software arrangements involving multiple elements such as software products, upgrades, enhancements, postcontract 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 the Company's accounting for revenue as a result of the adoption of SOP 97-2. ActaMed entered into a national marketing and licensing agreement (the "Agreement") with International Business Machines Corporation ("IBM") in 1995 that granted IBM a nonexclusive, nontransferable right to market ActaMed's software and services for a total of $6,300,000. For the years F-12 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ended December 31, 1995, 1996 and 1997, approximately $1,700,000, $3,400,000 and $1,200,000, respectively, of this amount was recognized as software license revenue upon delivery of the software. No software license revenue was recognized under this agreement for the six months ended June 30, 1997 or 1998. In December 1996, the Company entered into a new agreement (the "License") to license its newly granted patent to IBM. As part of the License, IBM agreed to pay ActaMed $4,800,000 over a four-year period. Additionally, in conjunction with the License, the Company issued IBM a five-year warrant to purchase 282,522 shares of the Company's common stock at a price of $7.97 per share. Because of the extended payment terms and the Company's contentious relationship with IBM, the Company concluded that the license fee was not assured of collection and, accordingly, is recognizing this revenue as the proceeds are collected. For the years ended December 31, 1996 and 1997 and the six months ended June 30, 1997 and 1998, the Company recognized revenue from the License of $995,000, $780,000, $390,000 and $390,000, respectively. At December 31, 1997, amounts due from IBM of $738,000 and $1,715,000 were included in accounts receivable and other assets, respectively. At June 30, 1998, amounts due from IBM of $776,000 and $1,318,000 were included in accounts receivable and other assets, respectively. Deferred revenue at December 31, 1996 and 1997 and June 30, 1998 included $3,121,000, $2,341,000 and $1,951,000, respectively, 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 the Company for debt instruments with similar terms, degrees of risk and remaining maturities. The carrying values of these obligations approximate their respective fair values. CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS The Company currently derives a substantial portion of its consolidated revenue from a few large customers, two of which are related parties. Two customers represented 35% and 17% of the total balance of trade accounts receivable and amounts due from related parties at December 31, 1997, and three customers represented 31%, 19% and 15% of the total balance of trade accounts receivable and amounts due from related parties at June 30, 1998. The Company believes that the concentration of credit risk in its trade receivables, with respect to its limited customer base, is substantially mitigated by the Company's credit evaluation process. The Company does not require collateral. To date, the Company's bad debt write-offs have not been significant. During the years ended December 31, 1996 and 1997 and the six months ended June 30, 1998, respectively, the Company added approximately $41,000, $35,000 and $66,000 to its bad debt reserves. Total write-offs of uncollectible amounts were zero, $5,000 and $2,000 in these periods, respectively. F-13 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) For the year ended December 31, 1995, one customer accounted for 85% of consolidated revenue. For the year ended December 31, 1996, two customers accounted for 46% and 38% of consolidated revenue. For the year ended December 31, 1997, two customers accounted for 55% and 15% of consolidated revenue. For the six months ended June 30, 1998, four customers accounted for 28%, 23%, 22% and 20% of consolidated revenue. The Company operates solely within one business segment, the development and marketing of healthcare transaction and information services delivered over the Internet, private intranets or other networks. Through June 30, 1998, the Company had no export sales. ACCOUNTING FOR STOCK-BASED COMPENSATION The Company 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," the Company accounts for stock option grants to employees and directors in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). 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. Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin No. 98, common stock and convertible preferred stock issued or granted for nominal consideration prior to the anticipated effective date of the Company's initial public offering must be included in the calculation of basic and diluted net loss per common share as if they had been outstanding for all periods presented. To date, the Company has not had any issuances or grants for nominal consideration. In accordance with SFAS No. 128, basic net loss per common share has been computed using the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. For the year ended December 31, 1995, the weighted-average number of shares of ActaMed reflects the effect of the exchange ratio of 0.6272. Basic pro forma net loss per common share, as presented in the statements of operations, has been computed as described above and also gives effect, under Securities and Exchange Commission guidance, to the conversion of the convertible and convertible redeemable preferred stock (using the if-converted method) from the original date of issuance. On May 19, 1998, in connection with Healtheon's acquisition of ActaMed, all outstanding shares of Healtheon's convertible preferred stock and ActaMed's convertible redeemable preferred stock were converted into an aggregate of 39,272,329 shares of common stock. There were no shares of convertible or convertible redeemable preferred stock outstanding at June 30, 1998. F-14 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The following table presents the calculation of basic and diluted and pro forma basic and diluted net loss per common share follows (in thousands, except per share data):
YEARS ENDED SIX MONTHS DECEMBER 31, ENDED JUNE 30, ------------------------------- ---------------------- 1995 1996 1997 1997 1998 --------- --------- --------- ----------- --------- (UNAUDITED) (RESTATED -- SEE NOTE 14) Net loss applicable to common stockholders... $ (4,458) $ (18,606) $ (28,005) $ (14,177) $ (22,331) --------- --------- --------- ----------- --------- --------- --------- --------- ----------- --------- Basic and diluted: Weighted-average shares of common stock outstanding.............................. 5,246 7,398 8,621 8,469 18,999 Less: Weighted-average shares subject to repurchase............................... -- (815) (1,398) (1,276) (1,367) --------- --------- --------- ----------- --------- Weighted-average shares used in computing basic and diluted net loss per common share...................................... 5,246 6,583 7,223 7,193 17,632 --------- --------- --------- ----------- --------- --------- --------- --------- ----------- --------- Basic and diluted net loss per common share...................................... $ (.85) $ (2.83) $ (3.88) $ (1.97) $ (1.27) --------- --------- --------- ----------- --------- --------- --------- --------- ----------- --------- Pro forma: Net loss applicable to common stockholders... $ (28,005) $ (22,331) Add: Dividends on ActaMed convertible redeemable preferred stock................. 2,870 890 --------- --------- Pro forma net loss........................... $ (25,135) $ (21,441) --------- --------- --------- --------- Shares used above............................ 7,223 17,632 Pro forma adjustment to reflect weighted effect of assumed conversion of convertible preferred stock............................ 37,492 28,999 --------- --------- Shares used in computing pro forma basic and diluted net loss per common share (unaudited)................................ 44,715 46,631 --------- --------- --------- --------- Pro forma basic and diluted net loss per common share (unaudited)................... $ (.56) $ (.46) --------- --------- --------- ---------
The Company has excluded all convertible redeemable preferred stock, convertible preferred stock, warrants, outstanding stock options and shares subject to repurchase by the Company from the calculation of diluted loss per common share because all such securities are anti-dilutive for all periods presented. The total numbers of shares excluded from the calculations of diluted loss per share were 10,157,109, 36,643,084, 51,216,689, 36,450,074 and 12,379,402 for the years ended December 31, 1995, 1996 and 1997 and the six months ended June 30, 1997 and 1998, respectively. See Notes 9, 10 and 11 for further information on these securities. In addition, subsequent to June 30, 1998, the Company granted to employees options to purchase common stock and issued shares of common stock pursuant to restricted stock agreements equal to a total F-15 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) of 3,433,500 shares and issued 1,600,000 shares of common stock in August 1998 in connection with the acquisition of Metis, LLC of which 476,548 shares will be issued to employees pursuant to restricted stock purchase agreements subject to a lapsing right of repurchase at the option of the Company, over the agreements' respective vesting periods. See Notes 15 and 16. COMPREHENSIVE LOSS The Company has no material components of other comprehensive loss. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Company is required to adopt SFAS No. 131 for the year ending December 31, 1998. SFAS No. 131 requires disclosure of certain information regarding operating segments, products and services, geographic areas of operation and major customers. Adoption of SFAS No. 131 is expected to have no material impact on the Company's financial position, results of operations or cash flows. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Company 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 the Company 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 the Company's financial position, results of operations or cash flows. 2. BUSINESS COMBINATIONS ACQUISITION OF EDI SERVICES, INC. Effective March 31, 1996, ActaMed acquired EDI Services Inc. ("EDI"), a wholly-owned subsidiary of United HealthCare Corporation ("United HealthCare"), in a transaction pursuant to which EDI became a wholly-owned subsidiary of ActaMed. ActaMed issued 6,488,276 shares of Series C convertible redeemable preferred stock with a fair value of $21,000,000 and incurred acquisition-related costs of approximately $316,000 in connection with the acquisition. EDI is a provider of electronic data interchange services to health care providers and has marketed its health care network product, ProviderLink, to providers of United HealthCare's local health plans since 1992. In connection with the acquisition, United HealthCare and ActaMed entered into a five-year Services and License Agreement pursuant to which the Company earns transaction fee revenue by providing certain health care information services to United HealthCare and its provider network and ProviderLink subscribers. The acquisition was accounted for as a purchase. Accordingly, the operations of EDI were included in the Company's consolidated statements of operations only after March 31, 1996. Assets and liabilities acquired in connection with this acquisition were recorded at their estimated fair market values. F-16 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED) 2. BUSINESS COMBINATIONS (CONTINUED) Approximately $359,000 of the purchase price was allocated to certain equipment and the remaining approximately $20,957,000 of the purchase price was allocated to intangible assets, consisting principally of software technology rights, the Services and License Agreement, trademarks and goodwill. In previously issued financial statements of ActaMed for the year ended December 31, 1996, $5,215,000 of the intangible asset amount was written off as in process research and development costs. This amount has been reallocated to software technology rights and the related amounts in the consolidated financial statements have been restated as described in Note 14. Intangible assets arising from the acquisition of EDI at March 31, 1996 are summarized as follows (in thousands):
RESTATED -- AMORTIZATION PERIOD SEE NOTE 14 ------------------- ----------- 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 each respective year (in thousands, except per share data):
DECEMBER 31, ------------------------ 1995 1996 ----------- ----------- (UNAUDITED, RESTATED -- SEE NOTE 14) (UNAUDITED) Net revenue.......................................... $ 6,330 $ 12,031 ----------- ----------- ----------- ----------- Net loss applicable to common stockholders........... $ (11,475) $ (20,492) ----------- ----------- ----------- ----------- Basic and diluted net loss per common share.......... $ (2.19) $ (3.11) ----------- ----------- ----------- -----------
ACQUISITION OF ACTAMED CORPORATION On May 19, 1998, the Company 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 the Company and ActaMed for all dates and periods presented. The Company 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. The Company also assumed all outstanding stock options and warrants to acquire 3,383,011 shares of ActaMed capital stock, after giving effect to the exchange ratio. F-17 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED) 2. BUSINESS COMBINATIONS (CONTINUED) Separate results of the combined entities for the years ended December 31, 1995, 1996 and 1997 and the four months ended April 30, 1998 (period ended immediately prior to the acquisition) were as follows (in thousands, unaudited):
FOUR MONTHS YEARS ENDED DECEMBER 31, ENDED --------------------------------- APRIL 30, 1995 1996 1997 1998 --------- ---------- ---------- ------------ (RESTATED -- SEE NOTE 14) Revenue: Healtheon...................................................... $ -- $ 1,200 $ 3,199 $ 6,405 ActaMed........................................................ 2,175 9,813 10,191 6,690 --------- ---------- ---------- ------------ $ 2,175 $ 11,013 $ 13,390 $ 13,095 --------- ---------- ---------- ------------ --------- ---------- ---------- ------------ Net loss: Healtheon...................................................... $ -- $ (8,543) $ (13,979) $ (6,664) ActaMed........................................................ (3,734) (10,063) (14,026) (6,186) --------- ---------- ---------- ------------ $ (3,734) $ (18,606) $ (28,005) $ (12,850) --------- ---------- ---------- ------------ --------- ---------- ---------- ------------
There were no significant intercompany transactions between the two companies or significant conforming accounting adjustments. 3. SERVICES AGREEMENT WITH SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. Effective December 31, 1997, the Company entered into a series of agreements with SmithKline Beecham Clinical Laboratories, Inc. ("SmithKline") to outsource the network connection between their customers and SmithKline laboratories. In connection with this transaction, SmithKline and the Company entered into a five-year Services Agreement pursuant to which the Company will earn transaction fee revenue by providing certain health care information services to SmithKline and its provider customers. As part of that transaction, the Company acquired a license to SBCL SCAN software and computer workstations that reside in various medical providers' offices. At December 31, 1997, the SCAN license and the assets from one region of the country were transferred to the Company 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 the Company and the Company paid the remaining purchase price of $7,700,000 through the issuance of 763,548 shares of the Company's Series D convertible redeemable preferred stock in March and 1,336,209 shares of the Company's common stock in June. The value of the services agreement and the SCAN software license totaled $14,774,000, and the value of the computer workstations totaled $3,426,000. SmithKline determined there was substantial benefit to their existing customers and potential marketing advantages in attracting new customers, if the SCAN software was upgraded to a new technology platform. Accordingly, in 1998 SmithKline entered into a development agreement with the Company to upgrade the technology. Payments to the Company are based upon achieving certain milestones in the development effort. At June 30, 1998 the Company had not achieved any milestones and F-18 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED) 3. SERVICES AGREEMENT WITH SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. (CONTINUED) had not received any payments from SmithKline. Accordingly, no development revenue had been recognized by the Company under this development agreement. 4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following (in thousands):
DECEMBER 31, -------------------- JUNE 30, 1996 1997 1998 --------- --------- ----------- Computer equipment........................................... $ 3,677 $ 6,238 $ 10,584 Office equipment, furniture and fixtures..................... 1,185 1,237 2,330 Purchased software for internal use.......................... 1,001 1,240 1,393 Leasehold improvements....................................... 303 328 1,255 --------- --------- ----------- 6,166 9,043 15,562 Less accumulated depreciation and amortization............... (1,632) (3,543) (5,602) --------- --------- ----------- Property and equipment, net.................................. $ 4,534 $ 5,500 $ 9,960 --------- --------- ----------- --------- --------- -----------
Included in property and equipment at December 31, 1996 and 1997 and June 30, 1998 were assets acquired under capital lease obligations with a cost of approximately $2,302,000, $3,075,000 and $4,603,000, respectively. Accumulated depreciation related to the assets acquired under capital leases totaled $319,000, $1,174,000 and $1,613,000 at December 31, 1996 and 1997 and June 30, 1998, respectively. 5. INTANGIBLE ASSETS Intangible assets consist of the following (in thousands):
DECEMBER 31, ------------------------ JUNE 30, AMORTIZATION PERIOD 1996 1997 1998 ------------------- ----------- ----------- --------- (RESTATED -- SEE NOTE 14) Services agreements.................... 3 years $ 2,855 $ 2,855 $ 2,855 Software technology rights............. 3 years 8,333 17,664 23,107 Internally developed software.......... 3 years 1,001 1,292 -- Trademarks............................. 3 years 216 216 216 Goodwill............................... 3 years 8,012 8,012 8,012 Other.................................. 3 years 1,541 1,541 1,541 ----------- ----------- --------- 21,958 31,580 35,731 Less accumulated amortization.......... (5,403) (12,812) (17,548) ----------- ----------- --------- $ 16,555 $ 18,768 $ 18,183 ----------- ----------- --------- ----------- ----------- ---------
F-19 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED) 6. COMMITMENTS The Company has entered into several lease lines of credit. Lease lines totaling $3,500,000 and $2,000,000 were entered into during the years ended December 31, 1996 and 1997, respectively. Approximately $2,900,000 and $4,461,000 had been utilized under these lease lines through December 31, 1997 and June 30, 1998, respectively. At June 30, 1998, approximately $1,750,000 was available for future utilization under these lease lines. This amount included approximately $711,000 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." The Company leases its headquarters and other office facilities under operating lease agreements that expire at various dates through 2008. Total rent expense for all operating leases was approximately $391,000, $953,000, $1,646,000, $756,000 and $1,052,000 for the years ended December 31, 1995, 1996 and 1997 and the six months ended June 30, 1997 and 1998, respectively, net of sublease income from a related party of approximately $30,000, $68,000, $27,000, $27,000 and $32,000, respectively. Future minimum lease commitments under noncancelable lease agreements at June 30, 1998 were as follows (in thousands):
CAPITAL OPERATING LEASES LEASES ---------------- ------------- Year ending December 31, 1998...................................................... $ 1,226 $ 885 1999...................................................... 2,188 1,457 2000...................................................... 2,175 811 2001...................................................... 1,461 230 2002...................................................... 963 -- Thereafter................................................ 5,263 -- ------- ------------- Total minimum lease payments................................ $ 13,276 3,383 ------- ------- Amount representing interest................................ (369) ------------- Present value of minimum lease payments under capital lease obligations............................................... 3,014 Less current portion........................................ (1,555) ------------- Non-current portion......................................... $ 1,459 ------------- -------------
7. BRIDGE LOANS AND NOTE RECEIVABLE FROM OFFICER In 1997, the Company borrowed $2,000,000 from certain stockholders in the form of 6% convertible promissory notes (the "Notes") in contemplation of the Series C convertible preferred stock offering. The 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 the Company's Series B convertible preferred stock issued to an officer, the Company received a one-year, full-recourse, noninterest-bearing promissory note F-20 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED) 7. BRIDGE LOANS AND NOTE RECEIVABLE FROM OFFICER (CONTINUED) for $500,000. At December 31, 1997, $349,000 remained outstanding under the note. At June 30, 1998, the note had been paid in full. In February 1998, the Company entered into a $2,000,000 line of credit agreement with a stockholder. The Company borrowed $1,000,000 under the agreement, which was repaid with interest at 10% per annum in May 1998. 8. LINES OF CREDIT In September 1997, the Company entered into a line of credit agreement with a bank that allows the Company to borrow up to $2,101,000. Amounts borrowed under this agreement bear interest at the bank's prime rate (8.5% at December 31, 1997 and June 30, 1998). Interest is payable monthly with payments commencing on September 30, 1997. The line of credit availability declines over the term to $1,821,000, $1,215,000 and $547,000 at December 31, 1997, 1998 and 1999, respectively, and expires on September 5, 2000. The amount outstanding is collateralized by certain assets. At December 31, 1997 and June 30, 1998, $1,425,000 was outstanding under the agreement. In December 1997, the Company entered into a loan agreement with a bank that allows the Company to borrow up to $2,250,000. Amounts borrowed under this loan agreement bear interest at the bank's prime rate (8.5% at December 31, 1997). The loan was personally guaranteed by one of the Company's stockholders 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% (10% at June 30, 1998). Interest is payable monthly with payments commencing on January 31, 1998. The principal balance of the loan is due on December 31, 1998. At December 31, 1997 and June 30, 1998, $2,000,000 was outstanding under the loan agreement. 9. CONVERTIBLE REDEEMABLE PREFERRED STOCK A summary of ActaMed's 8% cumulative convertible redeemable preferred stock is as follows.
DECEMBER 31, -------------------------------------------------------- 1996 1997 --------------------------- --------------------------- ISSUED ISSUED SHARES AND LIQUIDATION AND LIQUIDATION AUTHORIZED OUTSTANDING PREFERENCE OUTSTANDING PREFERENCE ------------ ------------ ------------- ------------ ------------- Series A............. 5,519,912 5,519,912 $ 9,825,000 5,519,912 $ 10,458,000 Series B............. 2,162,759 2,162,759 7,614,000 2,162,759 8,171,000 Series C............. 6,488,276 6,488,276 22,257,000 6,488,276 23,936,000 Series D............. 2,317,913 -- -- 2,317,913 8,500,000 ------------ ------------ ------------- ------------ ------------- 16,488,860 14,170,947 $ 39,696,000 16,488,860 $ 51,065,000 ------------ ------------ ------------- ------------ ------------- ------------ ------------ ------------- ------------ -------------
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). F-21 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED) 9. CONVERTIBLE REDEEMABLE PREFERRED STOCK (CONTINUED) Dividends on each Series were cumulative whether or not declared and are shown as a charge against income in the accompanying financial statements. On May 19, 1998, in connection with the acquisition of ActaMed by Healtheon, the convertible redeemable preferred stockholders waived payment of all accrued and unpaid dividends. Preferred holders voted generally on an as-if converted basis. In addition, a majority approval of the four Series was required to approve certain transactions. The Series A, B, C and D cumulative convertible redeemable preferred stockholders were entitled to receive, upon liquidation, an amount per share equal to the issuance price, plus all accrued but unpaid dividends. Common stockholders would then have received $5,000,000. Any remaining proceeds would then have been distributed pro rata to the stockholders, subject only to the Series A holders' right to receive sufficient funds to provide a 20% return on their original investment. Each Series was redeemable at up to one-third of the originally issued shares per year commencing in years six, seven and eight after the issue date at a redemption price equal to the issue price plus all accrued but unpaid dividends. On May 19, 1998, all outstanding shares of convertible redeemable preferred stock were converted into 17,252,408 shares of common stock in connection with the acquisition of ActaMed by the Company. 10. STOCKHOLDERS' EQUITY CONVERTIBLE PREFERRED STOCK The Company 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, -------------------------------------------------------- 1996 1997 --------------------------- --------------------------- ISSUED ISSUED SHARES AND LIQUIDATION AND LIQUIDATION DESIGNATED OUTSTANDING PREFERENCE OUTSTANDING PREFERENCE ------------ ------------ ------------- ------------ ------------- Series A............. 10,305,000 10,285,000 $ 5,143,000 10,305,000 $ 5,153,000 Series B............. 6,105,000 3,000,000 6,000,000 3,290,000 6,580,000 Series C............. 2,600,000 -- -- 2,600,000 6,500,000 Series D............. 5,000,000 -- -- 4,807,692 25,000,000 ------------ ------------ ------------- ------------ ------------- 24,010,000 13,285,000 $ 11,143,000 21,002,692 $ 43,233,000 ------------ ------------ ------------- ------------ ------------- ------------ ------------ ------------- ------------ -------------
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 the Company'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 the Company's common stock. At June 30, 1998, the Company had no preferred stock authorized. F-22 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED) 10. STOCKHOLDERS' EQUITY (CONTINUED) 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. WARRANTS In November 1996, the Company 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 behalf of the Company. A then partner of the venture capital firm assumed the role of President and Chief Executive Officer for the Company from the Company's inception through June 1997. The warrant was immediately exercisable and expires three years from the date of issuance. The Company recorded a charge of $500,000 representing the fair value of the warrant issued and services received based on a valuation obtained by the Company 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 June 30, 1998. In November 1996, the Company granted a warrant to a director of the Company 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, the Company issued a warrant to a customer to purchase 282,522 shares of the Company's common stock at a price of $7.97 per share. The warrant expires in December 2001. This warrant was outstanding at June 30, 1998. In July 1997, the Company issued a warrant to an officer of the Company, 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 the Company, at the Company's 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 June 30, 1998. In July 1997, the Company 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 June 30, 1998, were converted to warrants to purchase 44,718 shares of common stock. F-23 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED) 10. STOCKHOLDERS' EQUITY (CONTINUED) At December 31, 1997 the Company had reserved 2,811,947 and 282,522 shares of its Series B preferred stock and common stock, respectively, for issuance upon exercise of outstanding warrants. In conjunction with the acquisition of ActaMed in May 1998, all outstanding warrants to purchase Series B preferred stock were converted into warrants to purchase common stock. At June 30, 1998, the Company had reserved 2,077,240 shares of its common stock for issuance upon exercise of the outstanding warrants for common stock. In addition, as part of a service agreement with a customer, the Company will issue to the customer a warrant to purchase 500,000 shares of the Company's Common Stock with an exercise price of $10.40 per share. The terms and conditions of the warrant are currently being negotiated. 11. STOCK-BASED COMPENSATION STOCK OPTION PLANS Under the 1996 Stock Plan (the "1996 Plan"), which was adopted in February 1996, the Board of Directors may grant options to purchase common stock or issue common stock subject to a restricted stock purchase agreement to eligible participants. At December 31, 1997, a total of 9,000,000 shares had been reserved under the Plan. In March 1998, the Board of Directors and the stockholders approved an increase in the reserve of 1,000,000 shares; in July 1998, the Board of Directors approved and in October 1998, the stockholders also approved an additional increase in the reserve of 5,000,000 shares to a total of 15,000,000 shares reserved. Options granted may be either incentive stock options or nonstatutory stock options and are exercisable within the times or upon the events determined by the Board of Directors as specified in each option agreement. Options vest over a period of time as determined by the Board of Directors, generally four years. The term of the 1996 Plan is ten years. At December 31, 1997 and June 30, 1998, 274,166 and 22,523 shares, respectively, remained available for future grant under the 1996 Plan. In connection with the acquisition of ActaMed, the Company 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 the Company's common stock for issuance upon exercise of the assumed options. No further options can be granted under these plans. At the time of the acquisition, options for 2,717,269 shares were fully vested. The remainder of the shares vest based upon annual cliffs over a five-year period from the date of grant. During the years ended December 31, 1996 and 1997, the Company issued approximately 1,806,000 and 850,000 shares, respectively, of common stock subject to restricted stock purchase agreements to employees for cash. No such shares were issued during the six months ended June 30, 1998. The common stock is subject to repurchase at the original exercise price until vested, at the option of the Company, and approximately 614,000 shares were repurchased from terminated employees during the year ended December 31, 1997. The shares vest over a period of time as determined by the Board of Directors for each individual purchase agreement, generally four years. At December 31, 1996 and 1997 and June 30, 1998, approximately 1,660,000, 1,430,000 and 1,304,000 shares, respectively, were subject to repurchase. F-24 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED) 11. STOCK-BASED COMPENSATION (CONTINUED) The following table summarizes stock option activity:
WEIGHTED-AVERAGE NUMBER OF EXERCISE PRICE SHARES PER SHARE ----------- ----------------- ACTAMED CORPORATION Outstanding at January 1, 1995.................................................... 4,223,214 $ .34 Granted......................................................................... 856,000 .91 Exercised....................................................................... (1,071,250) .02 Canceled........................................................................ (62,750) .83 ----------- Options outstanding at December 31, 1995.......................................... 3,945,214 $ .55 ----------- ----------- HEALTHEON CORPORATION Options outstanding at December 31, 1995 (reflecting the exchange ratio of .6272).......................................................................... 2,474,438 $ .88 Granted......................................................................... 3,004,384 .54 Exercised....................................................................... (300) .05 Canceled........................................................................ (233,907) .78 ----------- Options outstanding at December 31, 1996.......................................... 5,244,615 .68 Granted......................................................................... 5,394,008 .73 Exercised....................................................................... (547,844) .16 Canceled........................................................................ (890,528) .49 ----------- Options outstanding at December 31, 1997.......................................... 9,200,251 .72 Granted......................................................................... 1,917,806 2.76 Exercised....................................................................... (1,659,684) .59 Canceled........................................................................ (460,378) .86 ----------- Options outstanding at June 30, 1998.............................................. 8,997,995 $ 1.17 ----------- -----------
HEALTHEON CORPORATION ACTAMED ----------------------------------------- CORPORATION --------------- YEARS ENDED YEAR ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31, -------------------- JUNE 30, 1995 1996 1997 1998 --------------- --------- --------- ------------------- Weighted-average fair value of options granted................ $ .28 $ .15 $ .18 $ .50 ----- --------- --------- ----- ----- --------- --------- -----
F-25 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED) 11. STOCK-BASED COMPENSATION (CONTINUED) The following table summarizes information regarding options outstanding and exercisable at June 30, 1998.
WEIGHTED- AVERAGE WEIGHTED- REMAINING WEIGHTED- NUMBER AVERAGE CONTRACTUAL NUMBER AVERAGE EXERCISE PRICES OUTSTANDING EXERCISE PRICE LIFE (IN YEARS) EXERCISABLE EXERCISE PRICE - ------------------------------------------- ----------- --------------- --------------- ---------- --------------- $.03-$.08.................................. 1,682,076 $ .05 6.01 941,969 $ .04 $.20-$.25.................................. 3,052,982 .24 9.04 392,025 .24 $1.00-$1.50................................ 1,881,377 1.26 8.14 715,877 1.45 $2.00-$2.75................................ 725,350 2.38 9.77 -- -- $3.24-$3.67................................ 1,656,210 3.42 9.24 698,913 3.24 ----------- ---------- 8,997,995 $ 1.17 8.39 2,748,784 $ 1.25 ----------- ---------- ----------- ----------
The Company recorded deferred stock compensation of approximately $2,713,000 and $2,402,000 during the year ended December 31, 1997 and the six months ended June 30, 1998, respectively. These amounts represented the difference between the exercise price and the deemed fair value of the Company's common stock on the date such stock options were granted. The Company recorded amortization of deferred stock compensation of approximately $562,000 and $1,142,000, respectively, during these periods based on a graded vesting method. At June 30, 1998, the Company had a total of approximately $3,411,000 remaining to be amortized on a graded vesting method over the corresponding vesting period of each respective option, generally four years. PRO FORMA INFORMATION The Company has elected to follow APB No. 25 and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123 requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB No. 25, no compensation expense is recognized when the exercise price of stock options granted to the Company's 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 its employee stock options granted subsequent to December 31, 1994 were accounted for under the fair value method of SFAS No. 123. The fair value for these options was estimated at the date of grant using the minimum value method with the following weighted-average assumptions for the years ended December 31, 1995, 1996 and 1997 and the six months ended June 30, 1998: risk-free interest rate of F-26 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED) 11. STOCK-BASED COMPENSATION (CONTINUED) approximately 6.2%, 6.0%, 6.0% and 5.5%, respectively; a weighted-average expected life of the option of 5.0 years, 4.3 years, 4.2 years and 3.6 years, respectively, and a dividend yield of zero for all periods.
HEALTHEON CORPORATION ACTAMED --------------------------------------- CORPORATION -------------- YEARS ENDED YEAR ENDED DECEMBER 31, SIX MONTHS DECEMBER 31, -------------------------- ENDED JUNE 1995 1996 1997 30, 1998 -------------- ------------ ------------ ----------- (RESTATED -- SEE NOTE 14) Net loss applicable to common stockholders (in thousands): As reported........................................... $ (4,458) $ (18,606) $ (28,005) $ (22,331) ------- ------------ ------------ ----------- ------- ------------ ------------ ----------- Pro forma............................................. $ (4,488) $ (18,695) $ (28,173) $ (23,144) ------- ------------ ------------ ----------- ------- ------------ ------------ ----------- Basic and diluted net loss per common share: As reported........................................... $ (.85) $ (2.83) $ (3.88) $ (1.27) ------- ------------ ------------ ----------- ------- ------------ ------------ ----------- Pro forma............................................. $ (.86) $ (2.84) $ (3.90) $ (1.31) ------- ------------ ------------ ----------- ------- ------------ ------------ -----------
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 purposes. Significant components of the Company's deferred tax assets (liabilities) were as follows (in thousands):
DECEMBER 31, -------------------------- JUNE 30, 1996 1997 1998 ------------ ------------ ----------- (RESTATED -- SEE NOTE 14) Deferred tax assets: Net operating loss carryforwards....................................... $ 7,537 $ 14,263 $ 18,878 Intangible assets...................................................... 1,580 3,688 5,448 Research and development tax credit.................................... 561 1,014 1,383 Reserves and accruals not currently deductible......................... 227 308 1,177 ------------ ------------ ----------- Total deferred tax assets................................................ 9,905 19,273 26,886 Valuation allowance...................................................... (9,545) (18,931) (26,841) ------------ ------------ ----------- Net deferred tax assets.................................................. 360 342 45 ------------ ------------ ----------- Deferred tax liabilities: Depreciation........................................................... (31) (45) (45) Capitalized software development costs................................. (329) (297) -- ------------ ------------ ----------- Total deferred tax liabilities........................................... (360) (342) (45) ------------ ------------ ----------- Net deferred tax assets and liabilities.................................. $ -- $ -- $ -- ------------ ------------ ----------- ------------ ------------ -----------
F-27 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED) 12. INCOME TAXES (CONTINUED) 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 the Company's lack of earnings history. The valuation allowance for deferred tax assets increased by $6,580,000, $9,386,000 and $7,910,000 during the years ended December 31, 1996 and 1997 and the six months ended June 30, 1998, respectively. At June 30, 1998, the Company had net operating loss carryforwards for federal income tax purposes of approximately $49,800,000, which expire in 2009 through 2013, and federal tax credits of approximately $1,000,000, which expire in 2009 through 2013. Approximately $19,545,000 of the net operating loss at June 30, 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 the Company'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. A portion of these carryforwards may expire before becoming available to reduce future income tax liabilities. 13. RELATED PARTY TRANSACTIONS The Company has two customers that are significant stockholders of the Company. The Company entered into a Development Agreement with a partnership controlled by the former Chairman of the Board of Directors of ActaMed. Pursuant to this agreement, the Company granted the partnership exclusive licenses to use ActaMed's technology for industries other than the health care industry. Under the agreement, the Company will receive a commercial royalty on the partnership's gross receipts. If the Company desires 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 the Company. The agreement expires December 3, 1998 and to date no fees have been paid to the Company thereunder. The Company shares office space and provides 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 $45,000, $28,000, $59,000, $27,000 and $32,000 for the years ended December 31, 1995, 1996, and 1997 and the six months ended June 30, 1997 and 1998, respectively. Approximately $211,000, $187,000, $78,000 and $27,000 was reimbursed during the years ended December 31, 1995, 1996 and 1997 and the six months ended June 30, 1997, respectively, for the use of the network maintained by the Company. No income for the use of the network by the related party was recognized for the six months ended June 30, 1998. All such amounts are included as an offset to general and administrative expenses in the accompanying consolidated statements of operations. Amounts due from the related party of $33,000 and $72,000 at December 31, 1996 and 1997, respectively, were included in other current assets in the accompanying consolidated balance sheets. There were no amounts due from the related party at June 30, 1998. 14. RESTATEMENT OF FINANCIAL STATEMENTS Subsequent to the issuance of the financial statements for 1996 and 1997, the Company changed the allocation of the purchase price associated with the acquisition of the EDI technology to decrease the F-28 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED) 14. RESTATEMENT OF FINANCIAL STATEMENTS (CONTINUED) amount previously expensed as in process research and development costs and increase the amount capitalized as software technology rights. The effect of this reallocation on previously reported consolidated financial statements as of December 31, 1996 and 1997 and June 30, 1997 and for the two years ended 1997 and the six months ended June 30, 1997 follows:
SIX MONTHS ENDED JUNE YEARS ENDED DECEMBER 31, 30, -------------------------------------------------- ------------------------ 1997 1996 1997 (UNAUDITED) ------------------------ ------------------------ ------------------------ AS REPORTED RESTATED AS REPORTED RESTATED AS REPORTED RESTATED ----------- ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Cost of services............................. $ 1,487 $ 1,648 $ 3,792 $ 4,011 $ 518 $ 598 Cost of services to related parties.......... $ 3,776 $ 4,919 $ 5,016 $ 6,536 $ 2,339 $ 3,129 Writeoff of acquired in process research and development costs.......................... $ 5,215 $ -- $ -- $ -- $ -- $ -- Net loss applicable to common stockholders... $ (22,517) $ (18,606) $ (26,266) $ (28,005) $ (13,307) $ (14,177) Basic and diluted net loss per common share............................... $ (3.42) $ (2.83) $ (3.64) $ (3.88) $ (1.85) $ (1.97)
DECEMBER 31, -------------------------------------------------- 1996 1997 ------------------------ ------------------------ AS REPORTED RESTATED AS REPORTED RESTATED ----------- ----------- ----------- ----------- Intangible assets....................................................... $ 12,644 $ 16,555 $ 16,596 $ 18,768 Accumulated deficit..................................................... $ (31,595) $ (27,684) $ (57,861) $ (55,689)
15. ACQUISITION OF METIS, LLC (UNAUDITED) On August 25, 1998, the Company acquired Metis, LLC ("Metis"), 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 will be accounted for using the purchase method of accounting and, accordingly, the purchase price will be allocated to the tangible and intangible assets acquired and the liabilities assumed on the basis of their respective fair values on the acquisition date. The Company issued 1,600,000 shares of its common stock with a fair market value of $12.8 million. Of these shares, 476,548 shares will be issued to employees pursuant to restricted stock purchase agreements subject to a lapsing right of repurchase, at the option of the Company, over the respective vesting periods. In addition, the Company made a cash payment of approximately $.6 million, assumed liabilities of approximately $.3 million and incurred other estimated acquisition related expenses, consisting primarily of legal and other professional fees, of approximately $.1 million. The total purchase price is estimated to be approximately $13.8 million. The Company is currently determining the fair values of the assets acquired and the liabilities assumed, including the fair values of any identifiable intangible assets acquired. F-29 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED) 16. SUBSEQUENT EVENTS (UNAUDITED) In July and September 1998, the Company granted to employees options to purchase common stock and issued shares of common stock pursuant to restricted stock agreements equal to a total of 3,433,500 shares of the Company's common stock at exercise prices ranging from $4.50 to $8.00 per share. The Company estimates that it will record deferred stock compensation of approximately $6,000,000 with regard to these grants. In July 1998, the Board of Directors approved a resolution authorizing the Company to issue up to 5,000,000 shares of preferred stock. To date, no preferred shares have been issued. Also, in July 1998, the Board of Directors approved a 5,000,000 increase in the common shares reserved for issuance under the Company's 1996 Stock Plan. In September 1998, the Board of Directors approved and in October 1998, the stockholders also approved the adoption of the Company's 1998 Employee Stock Purchase Plan (the "1998 Purchase Plan"). 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 on such date or a lesser amount determined by the Board of Directors. F-30 INDEPENDENT AUDITORS' REPORT Board of Directors of United HealthCare Corporation: We have audited the accompanying statements of divisional net loss and United HealthCare Corporation's ("United's") net investment and of divisional cash flows for the year ended December 31, 1995 of EDI Services Group ("EDI") (a Division of United.) These statements of divisional net loss and United's net investment and of divisional cash flows are the responsibility of United's management. Our responsibility is to express an opinion on these statements of divisional net loss and United's net investment and of divisional cash flows based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statements of divisional net loss and United's net investment and of divisional cash flows are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statements of divisional net loss and United's net investment and of divisional cash flows. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall statements of divisional net loss and United's net investment and of divisional cash flows presentation. We believe that our audit provides a reasonable basis for our opinion. The accompanying statements of divisional net loss and United's net investment and of divisional cash flows reflect a component of a business enterprise that was derived from a consolidated group of companies rather than a complete legal entity. See Note 1 to the statements of divisional net loss and United's net investment and of divisional cash flows for a description of the basis of presentation. In our opinion, the statements of divisional net loss and United's net investment and of divisional cash flows present fairly, in all material respects, the results of its divisional net loss and United's net investment and of divisional cash flows for the year ended December 31, 1995, in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Minneapolis, Minnesota April 4, 1996 F-31 EDI SERVICES GROUP (A DIVISION OF UNITED HEALTHCARE CORPORATION) STATEMENT OF DIVISIONAL NET LOSS AND UNITED'S NET INVESTMENT YEAR ENDED DECEMBER 31, 1995 Revenue: Related-party processing revenue.................................. $2,900,448 Related-party site revenue........................................ 1,155,300 Other processing revenue.......................................... 100,013 ---------- Total revenue................................................... 4,155,761 Operating costs and expenses: Cost of revenues.................................................. 1,646,039 Sales and marketing............................................... 302,145 Research and development.......................................... 1,604,897 General and administrative........................................ 642,980 ---------- Total operating costs and expenses.............................. 4,196,061 ---------- Loss before income taxes............................................ (40,300) Income taxes........................................................ 48,177 ---------- Net loss........................................................ (88,477) United's net investment -- Beginning of period...................... 124,393 Net cash flows to EDI division...................................... 417,213 ---------- United's net investment -- end of period............................ $ 453,129 ---------- ----------
See notes to financial statements. F-32 EDI SERVICES GROUP (A DIVISION OF UNITED HEALTHCARE CORPORATION) STATEMENT OF DIVISIONAL CASH FLOWS YEAR ENDED DECEMBER 31, 1995 Operating activities: Net loss....................................................................... $ (88,477) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization................................................ 285,613 Increase in deferred income taxes............................................ 48,177 Changes in assets and liabilities: Accounts receivable........................................................ (13,347) Accounts payable........................................................... (58,612) Accrued expenses........................................................... (46,083) --------- Net cash provided by operating activities................................ 127,271 Investing activities: Purchase of property........................................................... (190,375) Software development costs..................................................... (354,109) --------- Net cash used in investing activities.................................... (544,484) --------- Net cash flows of division which were provided by United......................... $(417,213) --------- ---------
See notes to financial statements. F-33 EDI SERVICES GROUP (A DIVISION OF UNITED HEALTHCARE CORPORATION) NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS -- EDI Services Group ("EDI") is an operating division of United HealthCare Corporation ("United"). EDI was established to develop and market software to control a network that facilitates the exchange of health care information among managed care organizations, insurance carriers, hospitals, physicians, and other health care industry participants. On December 15, 1995, United transferred EDI and its ProviderLink operations to a holding company, UHC Green Acquisition Inc. ("UHC Green") (a wholly owned subsidiary of United). BASIS OF PRESENTATION -- The accompanying statements of divisional net loss and United's net investment and divisional cash flows have been prepared from the books and records maintained by EDI and United. The statement of divisional net loss may not necessarily be indicative of the results of operations that would have been obtained if EDI had been operated as an independent entity. The statement of divisional net loss includes allocation of certain expenses that are material in amount. Such expenses are allocations for corporate services and overhead. Intercompany revenue results from network services provided to health plans owned or managed by United. The accompanying financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and liabilities in the normal course of business. As shown in the financial statements, during the year ended December 31, 1995, EDI incurred a net loss of approximately $88,000 and a cash flow deficit of approximately $417,000. As discussed in Note 5, EDI was acquired by ActaMed Corporation ("ActaMed") effective March 31, 1996. EDI's continued existence is dependent on funding of its cash flow deficit by ActaMed and on its relationship and service agreement with United. The service agreement states that the combined entities will be the primary provider of electronic data interchange services for United for a period of five years. The nature of EDI's operations exposes EDI to certain business risks. Such business risks include EDI's concentration of sales transactions with United, which accounted for 98% of EDI's 1995 revenues (see Note 4). The market for health care information services is highly competitive and subject to rapid technological change, evolving industry standards, and regulatory developments and influences that may affect both the operations of EDI and its customers. In addition, significant demands may be placed on EDI's management as a result of EDI's merger with ActaMed (see Note 5). Other significant business risks faced by EDI include a dependence on key employees and the risk of liability associated with unforeseen software product errors. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. SIGNIFICANT ACCOUNTING POLICIES INCOME TAXES -- United provides for income taxes under the provisions of SFAS No. 109, "Accounting for Income Taxes," which requires deferred income tax balances to be computed annually for differences between financial statement and tax bases of assets and liabilities based on enacted tax rates. An income tax provision has been allocated to EDI as if EDI filed on a separate return basis; however, under the F-34 EDI SERVICES GROUP (A DIVISION OF UNITED HEALTHCARE CORPORATION) NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1995 (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) income tax allocation agreement policy with United, no benefit is allocated for losses incurred which are utilized in the consolidated income tax return (see Note 2). UNITED'S NET INVESTMENT -- United's net investment, as shown in the accompanying statement of divisional net loss and United's net investment, represents losses incurred by EDI since inception and the intercompany account with United that consists of transactions with United and the net cash flows of EDI, which have been funded by United. REVENUE RECOGNITION -- EDI earns revenue from providing access to its network services, including fixed fee and transaction-based services. EDI recognizes revenue from network services over the period the services are provided. 2. INCOME TAXES Components of income tax expense for the year ended December 31, 1995 were:
Deferred: State.................................................................. $11,666 Federal................................................................ 36,511 ------- $48,177 ------- -------
Differences between the provision for income taxes at the federal statutory rate and the recorded provision for the year ended December 31, 1995 are summarized as follows: Benefit at statutory rate............................................... $ (13,610) State income taxes...................................................... (2,590) Net operating loss carryforward for which no benefit could be recognized under United's tax allocation policy.................................. 60,368 Other................................................................... 4,009 ----------- $ 48,177 ----------- -----------
As of December 31, 1995, EDI had no federal and state tax loss carryforwards. Under a tax sharing agreement, tax loss carryforwards are not available to EDI because United has already realized these tax benefits in its prior years, consolidated federal and state returns. 3. EMPLOYEE STOCK OWNERSHIP PLAN EDI employees participate in United's unleveraged Employee Stock Ownership Plan ("ESOP") maintained for the benefit of all eligible employees. United contributions are made at the discretion of the Board of Directors. Contributions totaling $3,700 for the year ended December 31, 1995, have been made to the ESOP for EDI employees. F-35 EDI SERVICES GROUP (A DIVISION OF UNITED HEALTHCARE CORPORATION) NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1995 (CONTINUED) 4. RELATED PARTIES Revenue from processing transactions and site licensing for United and its affiliates comprises approximately 98% of total revenue for the year ended December 31, 1995, and was approximately $4,056,000 for the year then ended. EDI utilizes various common corporate systems and support maintained by United. The related costs are charged to EDI based on specific allocation methods, if applicable, and are based on employee headcount. These functions include human resources, accounting, legal, other processing and administrative services, and building rent. The total amounts allocated to EDI were approximately $438,000 for the year ended December 31, 1995. United's management believes that these allocations are reasonable; however, these allocations would not necessarily represent the amounts that would have been incurred on a separate company basis. 5. SUBSEQUENT EVENTS On March 1, 1996, United and UHC Green (renamed "EDI Services, Inc.") entered into an agreement with ActaMed and EDI Acquisition, Inc. (a subcorporation of ActaMed). This agreement allows for the acquisition of EDI Services, Inc. by ActaMed pursuant to the merger of EDI Acquisition, Inc. with and into EDI Services, Inc. effective March 31, 1996. The outstanding shares of capital stock of EDI Services, Inc. were converted into 10,344,828 shares of ActaMed's Series C Convertible Redeemable Preferred Stock. F-36 [LOGO] [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH JURISDICTION. [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] PROSPECTUS (SUBJECT TO COMPLETION) ISSUED OCTOBER 16, 1998 7,287,500 SHARES [LOGO] COMMON STOCK ----------------- OF THE 7,287,500 SHARES OF COMMON STOCK OFFERED HEREBY, 1,457,500 SHARES ARE BEING OFFERED INITIALLY OUTSIDE OF THE UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS AND 5,830,000 SHARES ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS. ALL OF THE SHARES OF COMMON STOCK BEING OFFERED HEREBY ARE BEING SOLD BY THE COMPANY. THE COMPANY HAS REQUESTED THAT THE U.S. UNDERWRITERS RESERVE UP TO 1,088,500 SHARES OF COMMON STOCK FROM THE UNDERWRITTEN OFFERING TO BE OFFERED AT THE PUBLIC OFFERING PRICE TO CERTAIN PERSONS DESIGNATED BY THE COMPANY. SEE "UNDERWRITERS." IN ADDITION, AN ENTITY CONTROLLED BY JAMES H. CLARK, THE COMPANY'S CHAIRMAN OF THE BOARD OF DIRECTORS, HAS INDICATED THAT IT WILL PURCHASE DIRECTLY FROM THE COMPANY AN AGGREGATE OF 2,451,786 SHARES AT THE INITIAL PUBLIC OFFERING PRICE CONCURRENTLY WITH THE CLOSING OF THIS OFFERING. PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $6.00 AND $8.00 PER SHARE. SEE "UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS TO BE CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE. THE SHARES OF COMMON STOCK HAVE BEEN APPROVED FOR QUOTATION ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "HLTH" SUBJECT TO OFFICIAL NOTICE OF ISSUANCE. ------------------------ THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 4 HEREOF. ----------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. --------------------- PRICE $ A SHARE -------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS(1) COMPANY(2) --------------------- ----------------------- ----------------------- PER SHARE.................................... $ $ $ TOTAL (3).................................... $ $ $
- ------------- (1) THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SEE "UNDERWRITERS." (2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $1,700,000. (3) THE COMPANY HAS GRANTED THE U.S. UNDERWRITERS AN OPTION, EXERCISABLE WITHIN 30 DAYS OF THE DATE HEREOF, TO PURCHASE UP TO AN AGGREGATE OF 978,750 ADDITIONAL SHARES AT THE PRICE TO PUBLIC, LESS UNDERWRITING DISCOUNTS AND COMMISSIONS FOR THE PURPOSE OF COVERING OVER-ALLOTMENTS, IF ANY. IF THE U.S. UNDERWRITERS EXERCISE SUCH OPTION IN FULL, THE TOTAL PRICE TO PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS AND PROCEEDS TO COMPANY WILL BE $ , $ AND $ , RESPECTIVELY. SEE "UNDERWRITERS." --------------------------- THE SHARES ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND IF ACCEPTED BY THE UNDERWRITERS NAMED HEREIN AND SUBJECT TO APPROVAL OF CERTAIN LEGAL MATTERS BY FENWICK & WEST LLP, COUNSEL FOR THE UNDERWRITERS. IT IS EXPECTED THAT DELIVERY OF THE SHARES WILL BE MADE ON OR ABOUT , 1998 AT THE OFFICE OF MORGAN STANLEY & CO. INCORPORATED, NEW YORK, N.Y., AGAINST PAYMENT THEREFOR IN IMMEDIATELY AVAILABLE FUNDS. ------------------- MORGAN STANLEY DEAN WITTER GOLDMAN SACHS INTERNATIONAL HAMBRECHT & QUIST VOLPE BROWN WHELAN & COMPANY , 1998 [ALTERNATE PAGE FOR NON-UNDERWRITTEN PROSPECTUS] INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH JURISDICTION. [ALTERNATE PAGE FOR NON-UNDERWRITTEN PROSPECTUS] PROSPECTUS (SUBJECT TO COMPLETION) ISSUED OCTOBER 16, 1998 2,451,786 SHARES [LOGO] COMMON STOCK ----------------- THIS PROSPECTUS RELATES TO 2,451,786 SHARES OF COMMON STOCK TO BE OFFERED AT A PRICE OF $ PER SHARE TO MONACO PARTNERS, LP (THE "RELATED SALE"). SEE "PLAN OF DISTRIBUTION." THE PRICE PER SHARE OF THE SHARES OFFERED HEREBY WILL BE THE SAME AS THE PRICE PER SHARE OF THE SHARES OFFERED IN A RELATED UNDERWRITTEN PUBLIC OFFERING OF 7,287,500 SHARES. THE SHARES OF COMMON STOCK HAVE BEEN APPROVED FOR QUOTATION ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "HLTH" SUBJECT TO OFFICIAL NOTICE OF ISSUANCE. ------------------- THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 4 HEREOF. ----------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. , 1998 [ALTERNATE PAGE FOR NON-UNDERWRITTEN PROSPECTUS] NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------------- UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary................ 3 Risk Factors...................... 4 The Company....................... 17 Use of Proceeds................... 18 Dividend Policy................... 18 Capitalization.................... 19 Dilution.......................... 20 Selected Consolidated Financial Data............................ 21 Management's Discussion and Analysis of Financial Condition and Results of Operations....... 23 Business.......................... 34 PAGE ---- Management........................ 48 Certain Transactions.............. 61 Principal Stockholders............ 65 Description of Capital Stock...... 68 Shares Eligible for Future Sale... 71 Certain United States Tax Consequences to Non-U.S. Holders of Common Stock................. 73 Plan of Distribution.............. 75 Legal Matters..................... 75 Experts........................... 75 Additional Information............ 76 Index to Consolidated Financial Statements...................... F-1
------------------- The Company intends to furnish its stockholders with annual reports containing consolidated financial statements audited by an independent public accounting firm and quarterly reports containing unaudited consolidated financial data for the first three quarters of each year. ------------------- The Company's executive offices are located at 4600 Patrick Henry Drive, Santa Clara, California 95054. Its telephone number at this location is 408-876-5000. ------------------- Healtheon, Healtheon's logo, Virtual Healthcare Network, VHN and ProviderLink are trademarks of the Company. SBCL SCAN is a trademark of SmithKline Beecham Clinical Laboratories, Inc., and each other trademark, trade name or service mark of any other company appearing in this Prospectus is the property of its holder. ------------------- UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS (i) ASSUMES NO EXERCISE OF THE U.S. UNDERWRITERS' OVER-ALLOTMENT OPTION, (ii) GIVES EFFECT TO THE FILING, PRIOR TO THE CLOSING OF THIS OFFERING, OF A CERTIFICATE OF INCORPORATION AUTHORIZING 150,000,000 SHARES OF COMMON STOCK AND 5,000,000 SHARES OF UNDESIGNATED PREFERRED STOCK AND (iii) GIVES EFFECT TO A 5,000,000 SHARE INCREASE IN THE NUMBER OF SHARES RESERVED UNDER THE COMPANY'S 1996 STOCK PLAN (THE "1996 PLAN"). IN THIS PROSPECTUS, UNLESS THE CONTEXT OTHERWISE INDICATES, REFERENCES TO "HEALTHEON" OR THE "COMPANY" ARE TO HEALTHEON CORPORATION, A DELAWARE CORPORATION, AND ITS CONSOLIDATED SUBSIDIARIES. ------------------- CERTAIN PERSONS PARTICIPATING IN THE UNDERWRITTEN OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR, AND PURCHASE, SHARES OF COMMON STOCK IN THE OPEN MARKET. [ALTERNATE PAGE FOR NON-UNDERWRITTEN PROSPECTUS] PLAN OF DISTRIBUTION This Prospectus relates to 2,451,786 shares of Common Stock to be offered to Monaco Partners, LP. Prior to this offering, there has been no public market for the Common Stock. The initial public offering price will be determined by negotiations between the Company and Morgan Stanley & Co. Incorporated, Goldman, Sachs & Co., Hambrecht & Quist LLC and Volpe Brown Whelan & Company, LLC. Among the factors to be considered in determining the initial public offering price will be the future prospects of the Company and its industry in general, sales, earnings and certain other financial and operating information of the Company in recent periods, and the price-earnings ratios, price-sales ratios, market prices of securities and certain financial and operating information of companies engaged in activities similar to those of the Company. The estimated initial public offering price range set forth on the cover page of this Preliminary Prospectus is subject to change as a result of market conditions and other factors. LEGAL MATTERS The validity of the issuance of the shares of Common Stock offered hereby will be passed upon for the Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Certain legal matters in connection with this offering will be passed upon for the Underwriters by Fenwick & West LLP, Palo Alto, California. EXPERTS Healtheon was incorporated in December 1995 and did not commence operations until January 1996. Thus, the financial statements of ActaMed for the year ended December 31, 1995 also represent the financial statements of Healtheon on a pooled basis for that period. The consolidated financial statements of Healtheon Corporation at December 31, 1996 and 1997 and June 30, 1998, and for the two years in the period ended December 31, 1997 and for the six month period ended June 30, 1998, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein which, as to the year ended December 31, 1996, is based in part on the report of Deloitte & Touche LLP, independent auditors. The consolidated financial statements referred to above are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The consolidated financial statements of ActaMed Corporation for the year ended December 31, 1995, included in this Prospectus and Registration Statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein. The consolidated financial statements of ActaMed Corporation as of December 31, 1996 and for the year then ended, (not separately presented in this Prospectus and Registration Statement) have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, (which expresses an unqualified opinion and includes an explanatory paragraph relating to the restatement of ActaMed Corporation 1996 financial statements as described in Note 14). Such financial statements are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The statements of divisional net loss and United HealthCare Corporation's net investment and of divisional cash flows of EDI Services Group (a division of United HealthCare Corporation) included in this Prospectus and Registration Statement have been audited by Deloitte and Touche LLP, independent auditors, as stated in their report appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. 75 [ALTERNATE PAGE FOR NON-UNDERWRITTEN PROSPECTUS] ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 under the Securities Act, and the rules and regulations promulgated thereunder, with respect to the Common Stock offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits thereto. Statements contained in this Prospectus as to the contents of any contract or other document that is filed as an exhibit to the Registration Statement are not necessarily complete and each such statement is qualified in all respects by reference to the full text of such contract or document. For further information with respect to the Company and the Common Stock, reference is hereby made to the Registration Statement and the exhibits thereto, which may be inspected and copied at the principal office of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission located at Seven World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and copies of all or any part thereof may be obtained at prescribed rates from the Commission's Public Reference Section at such addresses. Also, the Commission maintains a World Wide Web site on the Internet at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. Upon completion of the offering, the Company will become subject to the information and periodic reporting requirements of the Exchange Act and, in accordance therewith, will file periodic reports, proxy and information statements and other information with the Commission. Such periodic reports, proxy and information statements and other information will be available for inspection and copying at the regional offices, public reference facilities and Web site of the Commission referred to above. 76 [ALTERNATE PAGE FOR NON-UNDERWRITTEN PROSPECTUS] (This page intentionally left blank.) 77 [ALTERNATE PAGE FOR NON-UNDERWRITTEN PROSPECTUS] (This page intentionally left blank.) 78 [ALTERNATE PAGE FOR NON-UNDERWRITTEN PROSPECTUS] (This page intentionally left blank.) 79 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Registrant in connection with the sale of Common Stock being registered. All amounts are estimates except the Securities and Exchange Commission registration fee, the NASD filing fee and the Nasdaq National Market listing fee.
AMOUNT TO BE PAID ------------- Securities and Exchange Commission registration fee............................ $ 25,325 NASD filing fee................................................................ 9,100 Nasdaq National Market listing fee............................................. 95,000 Printing and engraving expenses................................................ 400,000 Professional fees and expenses................................................. 1,150,000 Blue Sky fees and expenses..................................................... 5,000 Transfer agent fees............................................................ 5,000 Miscellaneous.................................................................. 10,575 ------------- Total...................................................................... $ 1,700,000 ------------- -------------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law permits a corporation to include in its charter documents, and in agreements between the corporation and its directors and officers, provisions expanding the scope of indemnification beyond that specifically provided by the current law. Article V of the Registrant's Restated Certificate of Incorporation provides for the indemnification of directors to the fullest extent permissible under Delaware law. Article VI of the Registrant's Bylaws provides for the indemnification of officers and directors (and allows the Registrant to indemnify other employees and third parties) acting on behalf of the Registrant if such person acted in good faith and in a manner reasonably believed to be in and not opposed to the best interest of the Registrant, and, with respect to any criminal action or proceeding, the indemnified party had no reason to believe his or her conduct was unlawful. The Registrant intends to enter into indemnification agreements with its directors and executive officers, in addition to indemnification provided for in the Registrant's Bylaws, and intends to enter into indemnification agreements with any new directors and executive officers in the future. The Registrant intends to obtain directors' and officers' insurance providing indemnification for certain of the Registrant's directors, officers and employees for certain liabilities. Reference is also made to Section 7 of the Underwriting Agreement to be filed as Exhibit 1.1 to the Registration Statement for information concerning the Underwriters' obligation to indemnify the Registrant and its officers and directors in certain circumstances. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES (a) From its founding in December 1995, through August 31, 1998, the Registrant has issued and sold the following unregistered securities: II-1 (1) Between January 26 and August 15, 1996, the Registrant sold an aggregate of 10,285,000 shares of Series A Preferred Stock to 22 investors at a purchase price of $.50 per share, which was paid in cash. (2) On January 26, 1996, the Registrant sold 1,000,000 shares of Common Stock to four investors at a purchase price of $.05 per share, which was paid in cash. (3) On July 8, 1996, the Registrant sold 10,000 shares of Series A Preferred Stock valued at $5,000 to a consulting firm for services rendered. (4) Between October 1 and November 27, 1996, the Registrant sold an aggregate of 3,000,000 shares of Series B Preferred Stock to five investors at a purchase price of $2.00 per share, which was paid in cash. (5) On November 1, 1996, the Registrant issued warrants to purchase (i) 1,000,000 shares of Series B Preferred Stock with an exercise price of $2.00 per share to KPCB VII Associates, L.P., in consideration of services rendered by David Schnell as President and Chief Executive Officer with a value of $504,900 and (ii) 1,000,000 shares of Series B Preferred Stock with an exercise price of $2.00 per share to Clark Ventures as an incentive for James H. Clark to continue to provide services. (6) On July 1, 1997, the Registrant issued warrants to purchase a total of 61,947 shares of Series B Preferred Stock with an exercise price of $2.00 per share to five investors pursuant to a bridge loan financing. (7) Between July 1 and July 27, 1997, the Registrant sold an aggregate of 2,600,000 shares of Series C Preferred Stock to nine investors at a purchase price of $2.50 per share, in consideration of cash and cancellation of indebtedness incurred in connection with a bridge loan financing. (8) Between July 7 and July 16, 1997, the Registrant sold 25,000 shares of Series B Preferred Stock to the same consulting firm referred to in (3) above at a purchase price of $2.00 per share for services rendered. (9) On July 11, 1997, the Registrant sold 10,000 shares of Series A Preferred Stock valued at $5,000 to the same consulting firm referred to in (3) above for services rendered. (10) On July 11, 1997, the Registrant sold 250,000 shares of Series B Preferred Stock to W. Michael Long at a purchase price of $2.00 per share, paid with an amount of cash equal to the par value of the purchased shares and with a promissory note that has subsequently been paid in full for the remainder. (11) On July 11, 1997, the Registrant issued a warrant to purchase 750,000 shares of Series B Preferred Stock with an exercise price of $2.00 per share to W. Michael Long as an incentive to continue to provide services. (12) On July 22, 1997, the Registrant sold 15,000 shares of Series B Preferred Stock to Hugh Reinhuff, a former Director, at a purchase price of $2.00 per share, which was paid in cash. (13) Between October 17 and December 19, 1997, the Registrant sold an aggregate of 4,807,692 shares of Series D Preferred Stock to 13 investors at a purchase price of $5.20 per share, which was paid in cash. (14) On May 1, 1998, the Registrant issued 1,000,000 shares of Series B Preferred Stock to Clark Ventures and 17,229 shares of Series B Preferred Stock to James H. Clark upon the exercise of warrants with exercise prices of $2.00 per share which were paid in cash. (15) On May 19, 1998, in connection with the acquisition of ActaMed Corporation, 22,019,921 shares of the Registrant's Preferred Stock were converted into Common Stock on a one-for-one basis II-2 and warrants to purchase 1,794,718 shares of the Registrant's Preferred Stock were exchanged for warrants to purchase an equal number of shares of Common Stock. (16) On May 19, 1998, in connection with the ActaMed acquisition, the Registrant assumed options to purchase ActaMed Common Stock which were held by former ActaMed employees which are now exercisable for an aggregate of 3,100,489 shares of Registrant's Common Stock. (17) On May 19, 1998, the Registrant issued 23,271,355 shares of its Common Stock to former shareholders of ActaMed in connection with the acquisition of ActaMed Corporation ("ActaMed") in exchange for all of the issued and outstanding shares of capital stock of ActaMed. (18) On May 19, 1998, in connection with the acquisition of ActaMed, the Registrant assumed a warrant held by IBM to purchase shares of ActaMed capital stock which is now exercisable for an aggregate of 282,522 shares of Healtheon Common Stock with an exercise price of $7.97 per share. (19) On June 26, 1998, the Registrant sold 1,336,209 shares of Common Stock valued at $3.67 to SmithKline Labs in consideration for certain assets and licenses relating to SmithKline Labs. (20) Since January 1996, the Registrant has granted options to purchase 14,387,534 shares of Registrant's Common Stock to employees pursuant to the Company's 1996 Stock Plan. (21) From July 6, 1996 through August 31, 1998, the Company issued an aggregate of 5,190,302 shares of Common Stock as the result of exercises of options or stock purchase rights for aggregate consideration, in the form of cash and promissory notes, of approximately $3.9 million. (22) On August 25, 1998, the Registrant issued 1,600,000 shares of Common Stock valued at $12.8 million to Metis, LLC in connection with acquisition of certain assets of Metis, LLC of which 476,548 shares will be issued to employees pursuant to restricted stock purchase agreements subject to a lapsing right of repurchase, at the option of the Company, over the agreements' respective vesting periods. (b) There were no underwriters, brokers or finders employed in connection with any of the transactions set forth above. (c) The transactions referred to in numbers 16-18 and 22 were exempt from registration pursuant to the provisions of Section 3(a)(10) of the Securities Act. The sales of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, or, with respect to issuances to employees, Rule 701 promulgated under Section 3(b) of the Securities Act as transactions by an issuer not involving a public offering or transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under such Rule 701. The recipients of securities in each such transaction represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the instruments representing such securities issued in such transactions. All recipients had adequate access, through their relationships with the Company, to information about the Registrant. II-3 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS 1.1 Form of Underwriting Agreement. 2.0** Agreement and Plan of Reorganization, dated as of February 24, 1998, by and among the Registrant, MedNet Acquisition Corp. and ActaMed Corporation. 2.1** Agreement and Plan of Merger, dated as of March 1, 1996, by and among ActaMed Corporation, EDI Acquisition, Inc., UHC Green Acquisition, Inc. and United HealthCare Corporation. 2.2** Asset Purchase Agreement, dated June 25, 1998, among the Registrant, Metis Acquisition Corp. and Metis, LLC. 3.1** Amended and Restated Certificate of Incorporation of the Registrant, as currently in effect. 3.2** Form of Amended and Restated Certificate of Incorporation, to be filed prior to the closing of the offering made under this Registration Statement. 3.3** Bylaws of the Registrant, as currently in effect. 3.4** Form of Bylaws of the Registrant, to be adopted prior to the closing of the offering made under this Registration Statement. 4.1 Specimen Common Stock certificate. 5.1 Form of Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation, regarding the legality of the securities being issued. 10.1** Form of Indemnification Agreement entered into by the Registrant with each of its directors and executive officers. 10.2** 1996 Stock Plan and form of Stock Option Agreement thereunder. 10.3** ActaMed Corp. 1997 Stock Option Plan 10.4** ActaMed Corp. 1996 Stock Option Plan 10.5** ActaMed Corp. 1995 Stock Option Plan 10.6** ActaMed Corp. 1994 Stock Option Plan. 10.7** ActaMed Corp. 1993 Class B Common Stock Option Plan. 10.8** ActaMed Corp. 1992 Stock Option Plan. 10.9** ActaMed Corp. 1996 Director Stock Option Plan, as amended. 10.10** Amended and Restated Investors' Rights Agreement dated as of May 19, 1998 among the Registrant and certain of the Registrant's securityholders. 10.11** Lease Agreement, dated December 2, 1997, between Larvan Properties and Registrant. 10.12** Lease Agreement, dated November 6, 1995, as amended, between ActaMed Corporation and ZML-Central Park, L.L.C. 10.13+ Services and License Agreement, dated as of April 4, 1996, between ActaMed Corporation and United HealthCare Corporation. 10.14+ Services Agreement, dated as of December 31, 1997, as amended, between ActaMed Corporation and SmithKline Beecham Clinical Laboratories, Inc. 10.15+ Assets Purchase Agreement, dated as of December 31, 1997, as amended, between ActaMed Corporation and SmithKline Beecham Clinical Laboratories, Inc. 10.16+ License Agreement, dated as of December 31, 1997, between ActaMed Corporation and SmithKline Beecham Clinical Laboratories, Inc.
II-4 10.17+ Development Agreement, dated as of October 31, 1997, as amended, between ActaMed Corporation and SmithKline Beecham Clinical Laboratories, Inc. 10.18+ Services, Development and License Agreement, dated as of December 15, 1997, between the Registrant and Beech Street Corporation. 10.19+ Services, Development and License Agreement, dated as of September 30, 1997, between the Registrant and Brown & Toland Physician Services Organization. 10.20** Amended and Restated Securities Purchase Agreement, dated as of January 26, 1996, between the Registrant and investors. 10.21** Amended and Restated Series B Preferred Stock Purchase Agreement dated October 31, 1996, between Registrant and investors. 10.22** Form of Series B Preferred Stock Purchase Warrant between the Registrant and certain of the Registrant's investors. 10.23** Series C Preferred Stock Purchase Agreement dated July 25, 1997, between the Registrant and investors. 10.24** Series D Preferred Stock Purchase Agreement dated October 13, 1997, between the Registrant and investors. 10.25** Full Recourse Promissory Note dated as of July 11, 1997, between the Registrant and W. Michael Long. 10.26** Form of Promissory Note for Bridge Financing 10.27** W. Michael Long Employment Agreement 10.28** Michael Hoover Employment Agreement 10.29** 1998 Employee Stock Purchase Plan 21.1** Subsidiaries of the Registrant. 23.1 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (included in Exhibit 5.1). 23.2 Consent of Ernst & Young LLP, independent auditors (see page II-8). 23.3 Consent of Deloitte & Touche LLP, independent auditors (see page II-9). 23.4 Consent of Deloitte & Touche LLP, independent auditors (see page II-10). 24.1** Power of Attorney. 27.1** Financial Data Schedule.
- --------- ** Previously filed. + Confidential treatment requested as to portions of this exhibit. (b) FINANCIAL STATEMENT SCHEDULES All schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the consolidated financial statements or notes thereto. ITEM 17. UNDERTAKINGS (a) The undersigned hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 14 of this Registration Statement or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the II-5 Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (c) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Santa Clara, State of California, on this 14th day of October, 1998. HEALTHEON CORPORATION By: /s/ JOHN L. WESTERMANN III ----------------------------------------- John L. Westermann III CHIEF FINANCIAL OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ W. MICHAEL LONG* Chief Executive Officer - ------------------------------ and Director (Principal October 14, 1998 W. Michael Long Executive Officer) /s/ JOHN L. WESTERMANN III Chief Financial Officer - ------------------------------ (Principal Financial and October 14, 1998 John L. Westermann III Accounting Officer) - ------------------------------ Chairman of the Board October 14, 1998 James H. Clark /s/ L. JOHN DOERR* - ------------------------------ Director October 14, 1998 L. John Doerr /s/ MICHAEL HOOVER* - ------------------------------ President and Director October 14, 1998 Michael Hoover /s/ C. RICHARD KRAMLICH* - ------------------------------ Director October 14, 1998 C. Richard Kramlich /s/ WILLIAM W. MCGUIRE, M.D.* - ------------------------------ Director October 14, 1998 William W. McGuire, M.D. /s/ P. E. SADLER* - ------------------------------ Director October 14, 1998 P. E. Sadler /s/ TADATAKA YAMADA* - ------------------------------ Director October 14, 1998 Tadataka Yamada
*By: /s/ JOHN L. WESTERMANN III /s/ JACK DENNISON ------------------------------------ -------------------------------------- John L. Westermann III Jack Dennison ATTORNEY-IN-FACT ATTORNEY-IN-FACT
II-7 EXHIBIT 23.2 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated July 24, 1998 (except Note 14 as to which the date is September 26, 1998) in Amendment No. 4 to the Registration Statement on Form S-1 and related Prospectus of Healtheon Corporation for the registration of shares of its Common Stock. /s/ Ernst & Young LLP Palo Alto, California October 13, 1998 II-8 EXHIBIT 23.3 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 4 to Registration Statement No. 333-60427 of Healtheon Corporation on Form S-1 of our report dated June 20, 1997, (September 26, 1998 as to Note 14 and Note 2 -- Net Loss Per Common Share, paragraph 2) (which expresses an unqualified opinion and includes an explanatory paragraph relating to the restatement of ActaMed Corporation's 1996 financial statements as described in Note 14), relating to the consolidated financial statements of ActaMed Corporation as of December 31, 1996 and for the two years then ended (the consolidated financial statements for 1996 are not separately presented herein) appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. /s/ DELOITTE & TOUCHE LLP Atlanta, Georgia October 16, 1998 II-9 EXHIBIT 23.4 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 4 to Registration Statement No. 333-60427 of Healtheon Corporation on Form S-1 of our report dated April 4, 1996, relating to the statements of divisional net loss and United's net investment and of divisional cash flows for the year ended December 31, 1995 of EDI Services Group (a Division of United HealthCare Corporation) appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. /s/ DELOITTE & TOUCHE LLP Minneapolis, Minnesota October 16, 1998 II-10 EXHIBIT INDEX
EXHIBIT SEQUENTIAL NUMBER DESCRIPTION PAGE NUMBER - ---------- ------------------------------------------------------------------------------------------ ----------- 1.1 Form of Underwriting Agreement. 2.0** Agreement and Plan of Reorganization, dated as of February 24, 1998, by and among the Registrant, MedNet Acquisition Corp. and ActaMed Corporation. 2.1** Agreement and Plan of Merger, dated as of March 1, 1996, by and among ActaMed Corporation, EDI Acquisition, Inc., UHC Green Acquisition, Inc. and United HealthCare Corporation. 2.2** Asset Purchase Agreement, dated June 25, 1998, among the Registrant, Metis Acquisition Corp. and Metis, LLC. 3.1** Amended and Restated Certificate of Incorporation of the Registrant, as currently in effect. 3.2** Form of Amended and Restated Certificate of Incorporation, to be filed prior to the closing of the offering made under this Registration Statement. 3.3** Bylaws of the Registrant, as currently in effect. 3.4** Form of Bylaws of the Registrant, to be adopted prior to the closing of the offering made under this Registration Statement. 4.1 Specimen Common Stock certificate. 5.1 Form of Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation, regarding the legality of the securities being issued. 10.1** Form of Indemnification Agreement entered into by the Registrant with each of its directors and executive officers. 10.2** 1996 Stock Plan and form of Stock Option Agreement thereunder. 10.3** ActaMed Corp. 1997 Stock Option Plan 10.4** ActaMed Corp. 1996 Stock Option Plan 10.5** ActaMed Corp. 1995 Stock Option Plan 10.6** ActaMed Corp. 1994 Stock Option Plan. 10.7** ActaMed Corp. 1993 Class B Common Stock Option Plan. 10.8** ActaMed Corp. 1992 Stock Option Plan. 10.9** ActaMed Corp. 1996 Director Stock Option Plan, as amended. 10.10** Amended and Restated Investors' Rights Agreement dated as of May 19, 1998 among the Registrant and certain of the Registrant's securityholders. 10.11** Lease Agreement, dated December 2, 1997, between Larvan Properties and Registrant. 10.12** Lease Agreement, dated November 6, 1995, as amended, between ActaMed Corporation and ZML-Central Park, L.L.C. 10.13+ Services and License Agreement, dated as of April 4, 1996, between ActaMed Corporation and United HealthCare Corporation. 10.14+ Services Agreement, dated as of December 31, 1997, as amended, between ActaMed Corporation and SmithKline Beecham Clinical Laboratories, Inc. 10.15+ Assets Purchase Agreement, dated as of December 31, 1997, as amended, between ActaMed Corporation and SmithKline Beecham Clinical Laboratories, Inc. 10.16+ License Agreement, dated as of December 31, 1997, between ActaMed Corporation and SmithKline Beecham Clinical Laboratories, Inc.
EXHIBIT SEQUENTIAL NUMBER DESCRIPTION PAGE NUMBER - ---------- ------------------------------------------------------------------------------------------ ----------- 10.17+ Development Agreement, dated as of October 31, 1997, as amended, between ActaMed Corporation and SmithKline Beecham Clinical Laboratories, Inc. 10.18+ Services, Development and License Agreement, dated as of December 15, 1997, between the Registrant and Beech Street Corporation. 10.19+ Services, Development and License Agreement, dated as of September 30, 1997, between the Registrant and Brown & Toland Physician Services Organization. 10.20** Amended and Restated Securities Purchase Agreement, dated as of January 26, 1996, between the Registrant and investors. 10.21** Amended and Restated Series B Preferred Stock Purchase Agreement dated October 31, 1996, between Registrant and investors. 10.22** Form of Series B Preferred Stock Purchase Warrant between the Registrant and certain of the Registrant's investors. 10.23** Series C Preferred Stock Purchase Agreement dated July 25, 1997, between the Registrant and investors. 10.24** Series D Preferred Stock Purchase Agreement dated October 13, 1997, between the Registrant and investors. 10.25** Full Recourse Promissory Note dated as of July 11, 1997, between the Registrant and W. Michael Long. 10.26** Form of Promissory Note for Bridge Financing 10.27** W. Michael Long Employment Agreement 10.28** Michael Hoover Employment Agreement 10.29** 1998 Employee Stock Purchase Plan 21.1** Subsidiaries of the Registrant. 23.1 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (included in Exhibit 5.1). 23.2 Consent of Ernst & Young LLP, independent auditors (see page II-8). 23.3 Consent of Deloitte & Touche LLP, independent auditors (see page II-9). 23.4 Consent of Deloitte & Touche LLP, independent auditors (see page II-10). 24.1** Power of Attorney. 27.1** Financial Data Schedule.
- --------- ** Previously filed. + Confidential treatment requested as to portions of this exhibit. EX-1.1 2 EXHIBIT 1.1 Exhibit 1.1 _______________ SHARES HEALTHEON CORPORATION COMMON STOCK ($.0001 PAR VALUE PER SHARE) UNDERWRITING AGREEMENT __________, 1998 _____________, 1998 Morgan Stanley & Co. Incorporated Goldman, Sachs & Co. Hambrecht & Quist LLC Volpe Brown Whelan & Company, LLC c/o Morgan Stanley & Co. Incorporated 1585 Broadway New York, New York 10036 Morgan Stanley & Co. International Limited Goldman Sachs International Hambrecht & Quist LLC Volpe Brown Whelan & Company, LLC c/o Morgan Stanley & Co. International Limited 25 Cabot Square Canary Wharf London E14 4QA England Dear Sirs and Mesdames: Healtheon Corporation, a Delaware corporation (the "COMPANY"), proposes to issue and sell to the several Underwriters (as defined below) _________ shares of its Common Stock, $.0001 par value per share (the "FIRM SHARES"). It is understood that, subject to the conditions hereinafter stated, ____________ Firm Shares (the "U.S. FIRM SHARES") will be sold to the several U.S. Underwriters named in Schedule I hereto (the "U.S. UNDERWRITERS") in connection with the offering and sale of such U.S. Firm Shares in the United States and Canada to United States and Canadian Persons (as such terms are defined in the Agreement Between U.S. and International Underwriters of even date herewith), and __________ Firm Shares (the "INTERNATIONAL SHARES") will be sold to the several International Underwriters named in Schedule II hereto (the "INTERNATIONAL UNDERWRITERS") in connection with the offering and sale of such International Shares outside the United States and Canada to persons other than United States and Canadian Persons. Morgan Stanley & Co. Incorporated and Goldman, Sachs & Co., Hambrecht & Quist LLC and Volpe Brown Whelan & Company, LLC shall act as representatives (the "U.S. REPRESENTATIVES") of the several U.S. Underwriters, and Morgan Stanley & Co. International Limited and Goldman Sachs International, Hambrecht & Quist LLC and Volpe Brown Whelan & Company, LLC shall act as representatives (the "INTERNATIONAL REPRESENTATIVES") of the several International Underwriters. The U.S. Underwriters and the International Underwriters are hereinafter collectively referred to as the Underwriters. The Company also proposes to issue and sell to the several U.S. Underwriters not more than an additional __________ shares of its Common Stock, $.0001 par value per share (the "ADDITIONAL SHARES") if and to the extent that the U.S. Representatives shall have determined to exercise, on behalf of the U.S. Underwriters, the right to purchase such shares of common stock granted to the U.S. Underwriters in Section 2 hereof. The Firm Shares and the Additional Shares are hereinafter collectively referred to as the "SHARES". The shares of Common Stock, $.0001 par value per share of the Company to be outstanding after giving effect to the sales contemplated hereby are hereinafter referred to as the "COMMON STOCK". The Company has filed with the Securities and Exchange Commission (the "COMMISSION") a registration statement relating to the Shares. The registration statement contains two prospectuses to be used in connection with the offering and sale of the Shares: the U.S. prospectus, to be used in connection with the offering and sale of Shares in the United States and Canada to United States and Canadian Persons, and the international prospectus, to be used in connection with the offering and sale of Shares outside the United States and Canada to persons other than United States and Canadian Persons. The international prospectus is identical to the U.S. prospectus except for the outside front cover page. The registration statement as amended at the time it becomes effective, including the information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Securities Act of 1933, as amended (the "SECURITIES ACT"), is hereinafter referred to as the "REGISTRATION STATEMENT"; the U.S. prospectus and the international prospectus in the respective forms first used to confirm sales of Shares are hereinafter collectively referred to as the "PROSPECTUS." If the Company has filed an abbreviated registration statement to register additional shares of Common Stock pursuant to Rule 462(b) under the Securities Act (the "RULE 462 REGISTRATION STATEMENT"), then any reference herein to the term "Registration Statement" shall be deemed to include such Rule 462 Registration Statement. As part of the offering contemplated by this Agreement, Morgan Stanley & Co. Incorporated ("MORGAN STANLEY") has agreed to reserve out of the Shares set forth opposite its name on Schedule I to this Agreement, up to __________ shares, for sale to certain parties designated by the Company (collectively, "PARTICIPANTS") (the "DIRECTED SHARE PROGRAM"). The Shares to be sold by Morgan Stanley pursuant to the Directed Share Program (the "DIRECTED SHARES") will be sold by Morgan Stanley pursuant to this Agreement at the public offering price. Any Directed Shares not orally confirmed for purchase by any Participants by the end of the first business day after the date on which this Agreement is executed will be offered to the public by Morgan Stanley as set forth in the Prospectus. 1. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants to and agrees with each of the Underwriters that: (a) The Registration Statement has become effective; no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for such purpose are pending before or threatened by the Commission. 2 (b) (i) The Registration Statement, when it became effective, did not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) the Registration Statement and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder and (iii) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph do not apply to statements or omissions in the Registration Statement or the Prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein. (c) The Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its property and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its Subsidiaries (as defined below), taken as a whole. (d) Other than Actamed Corporation, a Georgia corporation ("ACTAMED"), UHC Green Acquisition Corp., a Nevada corporation ("UHC") and [Metis Acquisition Subsidiary] ("METIS") (each of Actamed, UHC and Metis are referred to herein as a "SUBSIDIARY" and collectively as the "SUBSIDIARIES"), the Company has no subsidiaries. Each Subsidiary of the Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its property and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its Subsidiaries, taken as a whole. All of the issued shares of capital stock of each Subsidiary of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and are owned directly by the Company, free and clear of all liens, encumbrances, equities or claims. The Company does not own, directly or indirectly, an interest in any other corporation, partnership, business, trust or other entity. (e) The Company and each of its Subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property 3 owned by them which is material to the business of the Company and the Subsidiaries, taken as a whole, in each case free and clear of all liens, encumbrances and defects except such as are described in the Prospectus or such as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company and its Subsidiaries, taken as a whole; and any real property and buildings held under lease by the Company and each of its Subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material to the Company and its Subsidiaries, taken as a whole, and do not interfere with the use made and proposed to be made of such property and buildings of the Company and each of its Subsidiaries, in each case except as described in the Prospectus, or which intervention is not material to the Company and its Subsidiaries, taken as a whole. (f) This Agreement has been duly authorized, executed and delivered by the Company. (g) The authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus. (h) The shares of Common Stock outstanding prior to the issuance of the Shares have been duly authorized and are validly issued, fully paid and non-assessable. Except as set forth in the Prospectus, neither the Company nor any of its Subsidiaries has outstanding any options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations. All outstanding shares of capital stock and options and other rights to acquire capital stock have been issued in compliance with the registration and qualification provisions of all applicable federal and state securities laws and were not issued in violation of any preemptive rights, rights of first refusal or other similar rights. (i) The Shares have been duly authorized and, when issued and delivered in accordance with the terms of this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights. (j) The execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement will not contravene any provision of applicable law or the certificate of incorporation or by-laws of the Company or any of its Subsidiaries or any agreement or other instrument binding upon the Company or any of its Subsidiaries that is material to the Company and its Subsidiaries, taken as a whole, or any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Company or any Subsidiary, and no consent, approval, authorization 4 or order of, or qualification with, any governmental body or agency is required for the performance by the Company of its obligations under this Agreement, except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Shares. (k) There has not occurred any material adverse change, or any development involving a prospective material adverse change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its Subsidiaries, taken as a whole, from that set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement). (l) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, (i) the Company and its Subsidiaries have not incurred any material liability or obligation, direct or contingent, nor entered into any material transaction not in the ordinary course of business; (ii) the Company has not purchased any of its outstanding capital stock, nor declared, paid or otherwise made any dividend or distribution of any kind on its capital stock; and (iii) there has not been any material change in the capital stock, short-term debt or long-term debt of the Company and its Subsidiaries, except in each case as described in the Prospectus. (m) There are no legal or governmental proceedings pending or threatened to which the Company or any of its Subsidiaries is a party or to which any of the properties of the Company or any of its Subsidiaries is subject that are required to be described in the Registration Statement or the Prospectus and are not so described or any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required. (n) Each of the Company and each of its Subsidiaries has all necessary consents, authorizations, approvals, orders, certificates and permits of and from, and has made all declarations and filings with, all federal, state, local, foreign and other governmental or regulatory authorities, all self-regulatory organizations and all courts and other tribunals, to own, lease, license and use its properties and assets and to conduct its business in the manner described in the Prospectus, except to the extent that the failure to obtain or file would not have a material adverse effect on the Company and its Subsidiaries taken as a whole. Neither the Company nor any of its Subsidiaries has received any notice of proceedings related to the revocation or modification of any such consent, authorization, approval, order, certificate or permit which, singly or in the aggregate, if the subject of any unfavorable decision, ruling or finding, would result in a material adverse change in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its Subsidiaries, taken as a whole, except as described in the Prospectus. 5 (o) Each preliminary prospectus filed as part of the registration statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Securities Act, complied when so filed in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder. (p) The Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. (q) The Company and each of its Subsidiaries (i) are in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, singly or in the aggregate, have a material adverse effect on the Company and its Subsidiaries, taken as a whole. (r) There are no costs or liabilities associated with Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties) which would, singly or in the aggregate, have a material adverse effect on the Company and its Subsidiaries, taken as a whole. (s) Except as described in the Prospectus, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company or to require the Company to include such securities with the Shares registered pursuant to the Registration Statement. (t) The Company and each of its Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which they are engaged; neither the Company nor any of its Subsidiaries has been refused any insurance coverage sought or applied for; and neither the Company nor its Subsidiaries has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the 6 condition, financial or otherwise, or the earnings, business or operations of the Company and its Subsidiaries, taken as a whole. (u) The financial statements, including the notes thereto, included in the Registration Statement and the Prospectus fairly present, in all material respects, the financial position of the Company as of the dates indicated and the results of its operations for the periods specified; said financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis. (v) Neither the Company nor, to the Company's knowledge, any other party is in violation or breach of, or in default with respect to, complying with any material provision of any contract, agreement, instrument, lease, license, arrangement or understanding which is material to the Company and its Subsidiaries taken as a whole, and each such contract, agreement, instrument, lease, license, arrangement and understanding is in full force and is the legal, valid and binding obligation of the Company or its Subsidiary and, to the Company's knowledge, the other parties thereto and is enforceable against the Company or its Subsidiary and, to the Company's knowledge, against the other parties thereto in accordance with its terms. (w) The Company has complied with all provisions of Section 517.075, Florida Statutes relating to doing business with the Government of Cuba or with any person or affiliate located in Cuba. (x) Except as disclosed in the Prospectus, (i) the Company and each of its Subsidiaries owns or possesses all material patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names, technology and know-how currently employed by them to conduct their respective businesses in the manner described in the Prospectus, (ii) neither the Company nor any of its Subsidiaries has received any notice of infringement of or conflict with (and neither the Company nor any of its Subsidiaries knows of any infringement or conflict with) asserted rights of others with respect to any of the foregoing which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a material adverse effect upon the Company and its Subsidiaries, taken as a whole, and (iii) the discoveries, inventions, products or processes of the Company and each of its Subsidiaries referred to in the Prospectus do not, to the knowledge of the Company or any of its Subsidiaries, infringe or conflict with any right or patent of any third party, or any discovery, invention, product or process that would have a material adverse effect on the Company and its Subsidiaries, taken as a whole. (y) The Company and its Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations; 7 (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (z) No material labor dispute with the employees of the Company or any of its Subsidiaries exists or, to the knowledge of the Company, is imminent; and the Company is not aware of any existing, threatened or imminent labor disturbance by the employees of any of its principal suppliers, manufacturers or contractors that could have a material adverse effect on the Company and its Subsidiaries, taken as a whole. (aa) All outstanding shares of Common Stock, and all securities convertible into or exercisable or exchangeable for Common Stock, are subject to valid,, binding and enforceable agreements with Morgan Stanley (collectively, the "LOCK-UP AGREEMENTS") that restrict the holders thereof from selling, making any short sale or, granting any option for the purchase of, or otherwise transferring or disposing of, any of such shares of Common Stock, or any such securities convertible into or exercisable or exchangeable for Common Stock, for a period of 180 days after the date of the Prospectus without the prior written consent of Morgan Stanley. (bb) As of the date the Registration Statement became effective, the Common Stock was authorized for listing on the Nasdaq National Market upon official notice of issuance. (cc) The Company represents and warrants to Morgan Stanley that (i) the Registration Statement, the Prospectus and any preliminary prospectus comply, and any further amendments or supplements thereto will comply, with any applicable laws or regulations of foreign jurisdictions in which the Prospectus or any preliminary prospectus, as amended or supplemented, if applicable, are distributed in connection with the Directed Share Program, and that, (ii) no authorization, approval, consent, license, order, registration or qualification of or with any government, governmental instrumentality or court, other than such as have been obtained, is necessary under the securities laws and regulations of foreign jurisdictions in which the Directed Shares are offered outside the United States. (dd) The Company has not offered, or caused the Underwriters to offer, Shares to any person pursuant to the Directed Share Program with the specific intent to unlawfully influence (i) a customer or supplier of the Company to alter the customer's or supplier's level or type of business with the Company, or (ii) a trade journalist or publication to write or publish favorable information about the Company or its applications or services. 8 2. AGREEMENTS TO SELL AND PURCHASE. The Company hereby agrees to sell to the several Underwriters, and each Underwriter, upon the basis of the representations and warranties herein contained, but subject to the conditions hereinafter stated, agrees, severally and not jointly, to purchase from the Company the respective numbers of Firm Shares set forth in Schedules I and II hereto opposite its names at U.S.$_____ a share ("PURCHASE PRICE"). On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company agrees to sell to the U.S. Underwriters the Additional Shares, and the U.S. Underwriters shall have a one-time right to purchase, severally and not jointly, up to __________ Additional Shares at the Purchase Price. If the U.S. Representatives, on behalf of the U.S. Underwriters, elect to exercise such option, the U.S. Representatives shall so notify the Company in writing not later than 30 days after the date of this Agreement, which notice shall specify the number of Additional Shares to be purchased by the U.S. Underwriters and the date on which such shares are to be purchased. Such date may be the same as the Closing Date (as defined below) but not earlier than the Closing Date nor later than ten business days after the date of such notice. Additional Shares may be purchased as provided in Section 4 hereof solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. If any Additional Shares are to be purchased, each U.S. Underwriter agrees, severally and not jointly, to purchase the number of Additional Shares (subject to such adjustments to eliminate fractional shares as the U.S. Representatives may determine) that bears the same proportion to the total number of Additional Shares to be purchased as the number of U.S. Firm Shares set forth in Schedule I hereto opposite the name of such U.S. Underwriter bears to the total number of U.S. Firm Shares. The Company hereby agrees that, without the prior written consent of Morgan Stanley on behalf of the Underwriters, it will not, during the period ending 180 days after the date of the Prospectus, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (A) the Shares to be sold hereunder or (B) the issuance by the Company of shares of Common Stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof of which the Underwriters have been advised in writing or described as outstanding or reserved for issuance under the option plans described in the Prospectus, or any other issuances of Common Stock or options to acquire Common Stock hereafter under the option or equity incentive plans described in the Prospectus; provided that with respect to securities issued pursuant to the exceptions set forth in clause (B), the holders of such securities shall enter into Lock-Up Agreements on the terms specified in Section 1(aa). 9 3. TERMS OF PUBLIC OFFERING. The Company is advised by you that the Underwriters propose to make a public offering of their respective portions of the Shares as soon after the Registration Statement and this Agreement have become effective as in your judgment is advisable. The Company is further advised by you that the Shares are to be offered to the public initially at U.S.$_____ a share (the "PUBLIC OFFERING PRICE") and to certain dealers selected by you at a price that represents a concession not in excess of U.S.$____ a share under the Public Offering Price, and that any Underwriter may allow, and such dealers may reallow, a concession, not in excess of U.S.$____ a share, to any Underwriter or to certain other dealers. 4. PAYMENT AND DELIVERY. Payment for the Firm Shares shall be made to the Company in Federal or other funds immediately available in New York City against delivery of such Firm Shares for the respective accounts of the several Underwriters at 10:00 a.m., New York City time, on ____________, 1998, or at such other time on the same or such other date, not later than _________, 1998, as shall be designated in writing by you. The time and date of such payment are hereinafter referred to as the "CLOSING DATE." Payment for any Additional Shares shall be made to the Company in Federal or other funds immediately available in New York City against delivery of such Additional Shares for the respective accounts of the several Underwriters at 10:00 a.m., New York City time, on the date specified in the notice described in Section 2 or at such other time on the same or on such other date, in any event not later than _______, 1998, as shall be designated in writing by the U.S. Representatives. The time and date of such payment are hereinafter referred to as the "OPTION CLOSING DATE." Certificates for the Firm Shares and Additional Shares shall be in definitive form and registered in such names and in such denominations as you shall request in writing not later than one full business day prior to the Closing Date or the Option Closing Date, as the case may be. The certificates evidencing the Firm Shares and Additional Shares shall be delivered to you on the Closing Date or the Option Closing Date, as the case may be, for the respective accounts of the several Underwriters, with any transfer taxes payable in connection with the transfer of the Shares to the Underwriters duly paid, against payment of the Purchase Price therefor. 5. CONDITIONS TO THE UNDERWRITERS' OBLIGATIONS. The obligations of the Company to sell the Shares to the Underwriters and the several obligations of the Underwriters to purchase and pay for the Shares on the Closing Date are subject to the condition that the Registration Statement shall have become effective not later than [_______] (New York City time) on the date hereof. The several obligations of the Underwriters are subject to the following further conditions: (a) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date: 10 (i) there shall not have occurred any downgrading, nor shall any notice have been given of any intended or potential downgrading or of any review for a possible change that does not indicate the direction of the possible change, in the rating accorded any of the Company's securities by any "nationally recognized statistical rating organization," as such term is defined for purposes of Rule 436(g)(2) under the Securities Act; and (ii) there shall not have occurred any change, or any development involving a prospective change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its Subsidiaries, taken as a whole, from that set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement) that, in your judgment, is material and adverse and that makes it, in your judgment, impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus. (b) The Underwriters shall have received on the Closing Date a certificate, dated the Closing Date and signed by an executive officer of the Company, to the effect set forth in Section 5(a) above and to the effect that the representations and warranties of the Company contained in this Agreement are true and correct as of the Closing Date and that the Company has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied hereunder on or before the Closing Date. The officer signing and delivering such certificate may rely upon the best of his or her knowledge as to proceedings threatened. (c) The Underwriters shall have received on the Closing Date an opinion of Wilson Sonsini Goodrich & Rosati, counsel for the Company, dated the Closing Date, to the effect that: (i) the Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its property and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its Subsidiaries, taken as a whole; (ii) each Subsidiary of the Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the 11 jurisdiction of its incorporation, has the corporate power and authority to own its property and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its Subsidiaries, taken as a whole; (iii) the authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus; (iv) the shares of Common Stock outstanding prior to the issuance of the Shares have been duly authorized and are validly issued, fully paid and non-assessable; (v) all of the issued shares of capital stock of each subsidiary of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and are owned directly by the Company, free and clear of all liens, encumbrances, equities or claims; (vi) the Shares have been duly authorized and, when issued and delivered in accordance with the terms of this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive right or rights of first refusal or similar rights. (vii) this Agreement has been duly authorized, executed and delivered by the Company; (viii) the execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement will not contravene any provision of applicable law or the certificate of incorporation or by-laws of the Company or, to such counsel's knowledge, any agreement or other instrument binding upon the Company or any of its Subsidiaries that is material to the Company and its Subsidiaries, taken as a whole, or, to such counsel's knowledge, any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Company or any Subsidiary, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by the Company of its obligations under this Agreement, except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Shares by the U.S. Underwriters; 12 (ix) the statements (A) in the Prospectus under the captions "Risk Factors--Dependence on Strategic Relationships," "Risk Factors--Government Regulation," "Risk Factors--Shares Eligible For Future Sale," "Business--Strategic Relationships," "Business--Government Regulation," "Certain Transactions," "Description of Capital Stock," "Shares Eligible for Future Sale" and "Underwriters" and (B) in the Registration Statement in Items 14 and 15, in each case insofar as such statements constitute summaries of the legal matters, documents or proceedings referred to therein, fairly present the information called for with respect to such legal matters, documents and proceedings and fairly summarize the matters referred to therein; (x) after due inquiry, such counsel does not know of any legal or governmental proceedings pending or threatened to which the Company or any of its Subsidiaries is a party or to which any of the properties of the Company or any of its Subsidiaries is subject that are required to be described in the Registration Statement or the Prospectus and are not so described or of any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required; (xi) the Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" as such term is defined in the Investment Company Act of 1940, as amended; (xii) to such counsel's knowledge: (1) the Registration Statement has become effective under the Securities Act; (2) no stop order proceedings with respect to the Registration Statement have been instituted or are pending or threatened under the Securities Act and nothing has come to such counsel's attention to lead it to believe that such proceedings are contemplated; and (3) any required filing of the Prospectus and any supplement thereto pursuant to Rule 424(b) under the Securities Act has been made in the manner and within the time period required by such Rule 424(b); (xiii) except as described in the Prospectus, no shares of Common Stock are required to be registered under the Registration Statement and no person or entity has any right to cause any shares of Common Stock to be registered under the Registration Statement, pursuant to the Company's certificate of incorporation or bylaws or, to such counsel's knowledge, any agreement or other right, which rights have not been validly waived; 13 (xiv) based on a letter from the Nasdaq Stock Market, the shares to be sold under this Agreement to the Underwriters are duly authorized for quotation on the Nasdaq National Market; and (xv) such counsel (A) is of the opinion that the Registration Statement and Prospectus (except for financial statements and schedules and other financial data included therein as to which such counsel need not express any opinion) comply as to form in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder, (B) has no reason to believe that (except for financial statements and schedules and other financial data as to which such counsel need not express any belief) the Registration Statement and the prospectus included therein at the time the Registration Statement became effective contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (C) has no reason to believe that (except for financial statements and schedules and other financial data as to which such counsel need not express any belief) the Prospectus, as of its date or the Closing Date, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (d) The Underwriters shall have received on the Closing Date an opinion of Fenwick & West LLP, counsel for the Underwriters, dated the Closing Date, covering the matters referred to in Sections 5(c)(vi), 5(c)(vii), 5(c)(ix) (but only as to the statements in the Prospectus under "Description of Capital Stock" and "Underwriters") and 5(c)(xv) above. With respect to Section 5(c)(xv) above, Wilson Sonsini Goodrich & Rosati and Fenwick & West LLP may state that their opinion and belief are based upon their participation in the preparation of the Registration Statement and Prospectus and any amendments or supplements thereto and review and discussion of the contents thereof, but are without independent check or verification, except as specified. The opinion of Wilson, Sonsini, Goodrich & Rosati described in Section 5(c) above shall be rendered to the Underwriters at the request of the Company and shall so state therein. (e) The Underwriters shall have received, on each of the date hereof and the Closing Date, a letter dated the date hereof or the Closing Date, as the case may be, in form and substance satisfactory to the Underwriters, from Ernst & Young LLP and with respect to the Financial Statements and certain financial information with respect to Actamed, Deloitte & Touche LLP, independent public accountants, containing statements and information of the type ordinarily included in accountants' "comfort letters" to 14 underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus; PROVIDED that the letter delivered on the Closing Date shall use a "cut-off date" not earlier than the date hereof. (f) The "lock-up" agreements, each substantially in the form of Exhibit A hereto, between you and certain stockholders, officers and directors of the Company relating to sales and certain other dispositions of shares of Common Stock or certain other securities, delivered to you on or before the date hereof, shall be in full force and effect on the Closing Date. (g) The Shares shall have received approval for listing, upon official notice of issuance, on the Nasdaq National Market. All the agreements, opinions, certificates and letters mentioned above or elsewhere in this Agreement shall be deemed in compliance with the provisions hereof only if Fenwick & West LLP, counsel for the Underwriters, shall be reasonably satisfied that they comply in form and scope. The several obligations of the U.S. Underwriters to purchase Additional Shares hereunder are subject to the delivery to the U.S. Representatives on the Option Closing Date of such documents as they may reasonably request with respect to the good standing of the Company, the due authorization and issuance of the Additional Shares and other matters related to the issuance of the Additional Shares. 6. COVENANTS OF THE COMPANY. In further consideration of the agreements of the Underwriters herein contained, the Company covenants with each Underwriter as follows: (a) To furnish to you, without charge, nine (9) signed copies of the Registration Statement (including exhibits thereto) and for delivery to each other Underwriter a conformed copy of the Registration Statement (without exhibits thereto) and to furnish to you in New York City, without charge, prior to 10:00 a.m. New York City time on the business day next succeeding the date of this Agreement and during the period mentioned in Section 6(c) below, as many copies of the Prospectus and any supplements and amendments thereto or to the Registration Statement as you may reasonably request. (b) Before amending or supplementing the Registration Statement or the Prospectus, to furnish to you a copy of each such proposed amendment or supplement and not to file any such proposed amendment or supplement to which you reasonably object, and to file with the Commission within the applicable period specified in Rule 424(b) under the Securities Act any prospectus required to be filed pursuant to such Rule. (c) If, during such period after the first date of the public offering of the Shares as in the opinion of counsel for the Underwriters the Prospectus is required by law 15 to be delivered in connection with sales by an Underwriter or dealer, any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, or if, in the opinion of counsel for the Underwriters, it is necessary to amend or supplement the Prospectus to comply with applicable law, forthwith to prepare, file with the Commission and furnish, at its own expense, to the Underwriters and to the dealers (whose names and addresses you will furnish to the Company) to which Shares may have been sold by you on behalf of the Underwriters and to any other dealers upon request, [as many copies as you may from, time to time reasonably request of] either amendments or supplements to the Prospectus so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances when the Prospectus is delivered to a purchaser, be misleading or so that the Prospectus, as amended or supplemented, will comply with law. (d) To endeavor to qualify the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions as you shall reasonably request. (e) To make generally available to the Company's security holders and to you as soon as practicable an earning statement covering the twelve-month period ending ________, 199_ that satisfies the provisions of Section 11(a) of the Securities Act and the rules and regulations of the Commission thereunder. (f) During a period of three years from the effective date of the Registration Statement, the Company will furnish to you copies of (i) all reports to its stockholders and (ii) all reports, financial statements and proxy or information statements filed by the Company with the Commission or any national securities exchange. (g) The Company will apply the proceeds from the sale of the Shares as set forth under "Use of Proceeds" in the Prospectus. (h) The Company will use its best efforts to obtain and maintain in effect the quotation of the Shares on the Nasdaq National Market and to maintain such inclusion for a period of three years after the date hereof or until such earlier date as the Shares shall be listed for regular trading privileges on another national securities exchange approved by you. (i) The Company will comply with all registration, filing and reporting requirements of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), which may from time to time be applicable to the Company. (j) The Company will comply with all provisions of all undertakings contained in the Registration Statement. 16 (k) Prior to the Closing Date, the Company will not, directly or indirectly, issue any press release or other communication and will not hold any press conference with respect to the Company, or its financial condition, results of operations, business, properties, assets, or prospects or this offering, without your prior written consent. (l) Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, to pay or cause to be paid all expenses incident to the performance of its obligations under this Agreement, including: (i) the fees, disbursements and expenses of the Company's counsel and the Company's accountants in connection with the registration and delivery of the Shares under the Securities Act and all other fees or expenses in connection with the preparation and filing of the Registration Statement, any preliminary prospectus, the Prospectus and amendments and supplements to any of the foregoing, including all printing costs associated therewith, and the mailing and delivering of copies thereof to the Underwriters and dealers, in the quantities hereinabove specified, (ii) all costs and expenses related to the transfer and delivery of the Shares to the Underwriters, including any transfer or other taxes payable thereon, (iii) the cost of printing or producing any Blue Sky or Legal Investment memorandum in connection with the offer and sale of the Shares under state securities laws and all expenses in connection with the qualification of the Shares for offer and sale under state securities laws as provided in Section 6(d) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection with such qualification and in connection with the Blue Sky or Legal Investment memorandum, (iv) all filing fees and the reasonable fees and disbursements of counsel to the Underwriters incurred in connection with the review and qualification of the offering of the Shares by the National Association of Securities Dealers, Inc., (v) all fees and expenses in connection with the preparation and filing of the registration statement on Form 8-A relating to the Common Stock and all costs and expenses incident to listing the Shares on the Nasdaq National Market, (vi) the cost of printing certificates representing the Shares, (vii) the costs and charges of any transfer agent, registrar or depositary, (viii) the costs and expenses of the Company relating to investor presentations on any "road show" undertaken in connection with the marketing of the offering of the Shares, including, without limitation, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations with the prior approval of the Company, travel and lodging expenses of the representatives and officers of the Company and any such consultants, and the cost of any aircraft chartered or limousines hired in connection with the road show, (ix) all expenses in connection with any offer and sale of the Shares outside of the United States, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection with offers and sales outside of the United States, (x) all fees and disbursements of counsel incurred by the Underwriters in connection with the Directed Share Program and stamp duties, similar taxes or duties or other taxes, if any, incurred by the Underwriters in connection with the 17 Directed Share Program, and (xi) all other costs and expenses incident to the performance of the obligations of the Company hereunder for which provision is not otherwise made in this Section. It is understood, however, that except as provided in this Section, Section 7 entitled "Indemnity and Contribution", and the last paragraph of Section 9 below, the Underwriters will pay all of their costs and expenses, including fees and disbursements of their counsel, stock transfer taxes payable on resale of any of the Shares by them and any advertising expenses connected with any offers they may make. (m) That in connection with the Directed Share Program, the Company will ensure that the Directed Shares will be restricted to the extent required by the NASD or the NASD rules from sale, transfer, assignment, pledge or hypothecation for a period of three months following the date of the effectiveness of the Registration Statement. Morgan Stanley will notify the Company as to which Participants are required to be so restricted. The Company will direct the transfer agent to place stop transfer restrictions upon such securities for such period of time. (n) That the Company will comply with all applicable securities and other applicable laws, rules and regulations in each foreign jurisdiction in which the Directed Shares are offered in connection with the Directed Share Program. 7. INDEMNITY AND CONTRIBUTION. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein; provided, however that the foregoing indemnity with respect to any preliminary prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages or liabilities purchased Shares, or any person controlling such Underwriter, if a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the 18 sale of the Shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such losses, claims, damages or liabilities unless such failure is the result of noncompliance by the Company, with Sections 6(a) or 6(c) hereof. (b) The Company agrees to indemnify and hold harmless Morgan Stanley and each person, if any, who controls Morgan Stanley within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act ("MORGAN STANLEY ENTITIES"), from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) (i) caused by any untrue statement or alleged untrue statement of a material fact contained in the prospectus wrapper material prepared by or with the consent of the Company for distribution in foreign jurisdictions in connection with the Directed Share Program attached to the Prospectus or any preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement therein, when considered in conjunction with the Prospectus or any applicable preliminary prospectus, not misleading; (ii) caused by the failure of any Participant to pay for and accept delivery of the shares which, immediately following the effectiveness of the Registration Statement, were subject to a properly confirmed agreement to purchase; or (iii) related to, arising out of, or in connection with the Directed Share Program, provided that, the Company shall not be responsible under this subparagraph (iii) for any losses, claim, damages or liabilities (or expenses relating thereto) that are finally judicially determined to have resulted from the bad faith or gross negligence of Underwriter Entities. (c) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Company to such Underwriter, but only with reference to information relating to such Underwriter furnished to the Company in writing by such Underwriter through you expressly for use in the Registration Statement, any preliminary prospectus, the Prospectus or any amendments or supplements thereto. (d) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to Section 7(a), 7(b) or 7(c), such person (the "INDEMNIFIED PARTY") shall promptly notify the person against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the reasonable fees and disbursements of such counsel 19 related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in respect of the legal expenses of any indemnified party in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all such indemnified parties and that all such fees and expenses shall be reimbursed as they are incurred. Such firm shall be designated in writing by Morgan Stanley, in the case of parties indemnified pursuant to Section 7(a) or 7(b), and by the Company, in the case of parties indemnified pursuant to Section 7(c). The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by the second and third sentences of this paragraph, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. Notwithstanding anything contained herein to the contrary, if indemnity may be sought pursuant to Section 7(b) hereof in respect of such action or proceeding, then in addition to such separate firm for the indemnified parties, the indemnifying party shall be liable for the reasonable fees and expenses of not more than one separate firm (in addition to any local counsel) for Morgan Stanley for the defense of any losses, claims, damages and liabilities arising out of the Directed Share Program, and all persons, if any, who control Morgan Stanley within the meaning of either Section 15 of the Act or Section 20 of the Exchange Act. (e) To the extent the indemnification provided for in Section 7(a), 7(b) or 7(c) is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each indemnifying party under such 20 paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other hand from the offering of the Shares or (ii) if the allocation provided by clause 7(e)(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 7(e)(i) above but also the relative fault of the Company on the one hand and of the Underwriters on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other hand in connection with the offering of the Shares shall be deemed to be in the same respective proportions as the net proceeds from the offering of the Shares (before deducting expenses) received by the Company and the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover of the Prospectus, bear to the aggregate Public Offering Price of the Shares. The relative fault of the Company on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Underwriters' respective obligations to contribute pursuant to this Section 7 are several in proportion to the respective number of Shares they have purchased hereunder, and not joint. (f) The Company and the Underwriters agree that it would not be just or equitable if contribution pursuant to this Section 7 were determined by PRO RATA allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in Section 7(e). The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The remedies provided for in this Section 7 are not exclusive and 21 shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. (g) The indemnity and contribution provisions contained in this Section 7 and the representations, warranties and other statements of the Company contained in this Agreement shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter or by or on behalf of the Company, its officers or directors or any person controlling the Company and (iii) acceptance of and payment for any of the Shares. 8. TERMINATION. This Agreement shall be subject to termination by notice given by you to the Company, if (a) after the execution and delivery of this Agreement and prior to the Closing Date (i) trading generally shall have been suspended or materially limited on or by, as the case may be, any of the New York Stock Exchange, the American Stock Exchange, the National Association of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any securities of the Company shall have been suspended on any exchange or in any over-the-counter market, (iii) a general moratorium on commercial banking activities in New York shall have been declared by either Federal or New York State authorities or (iv) there shall have occurred any outbreak or escalation of hostilities or any change in financial markets or any calamity or crisis that, in your judgment, is material and adverse and (b) in the case of any of the events specified in clauses 8(a)(i) through 8(a)(iv), such event, singly or together with any other such event, makes it, in your judgment, impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus. 9. EFFECTIVENESS; DEFAULTING UNDERWRITERS. This Agreement shall become effective upon the execution and delivery hereof by the parties hereto. If, on the Closing Date or the Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Shares that it has or they have agreed to purchase hereunder on such date, and the aggregate number of Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of the Shares to be purchased on such date, the other Underwriters shall be obligated severally in the proportions that the number of Firm Shares set forth opposite their respective names in Schedule I or Schedule II bears to the aggregate number of Firm Shares set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as you may specify, to purchase the Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date; PROVIDED that in no event shall the number of Shares that any Underwriter has agreed to purchase pursuant to this Agreement be increased pursuant to this Section 9 by an amount in excess of one-ninth of such number of Shares without the written consent of such Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Firm 22 Shares and the aggregate number of Firm Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Firm Shares to be purchased, and arrangements satisfactory to you and the Company for the purchase of such Firm Shares are not made within 36 hours after such default, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter or the Company. In any such case either you or the Company shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and in the Prospectus or in any other documents or arrangements may be effected. If, on the Option Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Additional Shares and the aggregate number of Additional Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Additional Shares to be purchased, the non-defaulting Underwriters shall have the option to (i) terminate their obligation hereunder to purchase Additional Shares or (ii) purchase not less than the number of Additional Shares that such non-defaulting Underwriters would have been obligated to purchase in the absence of such default. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. If this Agreement shall be terminated by the Underwriters, or any of them, because of any failure or refusal on the part of the Company to comply with the terms or to fulfill any of the conditions of this Agreement, or if for any reason the Company shall be unable to perform its obligations under this Agreement, the Company will reimburse the Underwriters or such Underwriters as have so terminated this Agreement with respect to themselves, severally, for all out-of-pocket expenses (including the fees and disbursements of their counsel) reasonably incurred by such Underwriters in connection with this Agreement or the offering contemplated hereunder. 10. COUNTERPARTS. This Agreement may be signed in two or more counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 11. APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York. 23 12. HEADINGS. The headings of the sections of this Agreement have been inserted for convenience of reference only and shall not be deemed a part of this Agreement. Very truly yours, HEALTHEON CORPORATION By:________________________________ Name: Title: Accepted as of the date hereof MORGAN STANLEY & CO. INCORPORATED GOLDMAN, SACHS & CO. HAMBRECHT & QUIST LLC VOLPE BROWN WHELAN & COMPANY, LLC Acting severally on behalf of themselves and the several U.S. Underwriters named in Schedule I hereto. By: Morgan Stanley & Co. Incorporated By:___________________________ Name: Title: MORGAN STANLEY & CO. INTERNATIONAL LIMITED GOLDMAN SACHS INTERNATIONAL HAMBRECHT & QUIST LLC VOLPE BROWN WHELAN & COMPANY, LLC Acting severally on behalf of themselves and the several International Underwriters named in Schedule II hereto. By: Morgan Stanley & Co. International Limited By: ____________________________ Name: Title: 24 SCHEDULE I U.S. UNDERWRITERS
Number of Firm Underwriter Shares To Be Purchased - ----------- ---------------------- Morgan Stanley & Co. Incorporated Goldman Sachs & Co. Hambrecht & Quist LLC Volpe Brown Whelan & Company, LLC ---------------------- Total U.S. Firm Shares: ---------------------- ----------------------
SCHEDULE II INTERNATIONAL UNDERWRITERS
Number of Firm Underwriter Shares To Be Purchased - ----------- ---------------------- Morgan Stanley & Co. International Limited Goldman Sachs International Hambrecht & Quist LLC Volpe Brown Whelan & Company, LLC ---------------------- Total International Firm Shares: ---------------------- ----------------------
EX-4.1 3 EXHIBIT 4.1 COMMON STOCK COMMON STOCK NUMBER SHARES HLT HEALTHEON SEE REVERSE FOR CERTAIN DEFINITIONS AND A STATEMENT AS TO THE RIGHTS, INCORPORATED UNDER THE LAWS OF PREFERENCES, PRIVILEGES AND THE STATE OF DELAWARE RESTRICTIONS ON SHARES CUSIP 422209 10 6 THIS CERTIFIES THAT IS THE RECORD HOLDER OF FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $0.0001 PAR VALUE, OF HEALTHEON CORPORATION transferable on the books of the Corporation in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar. WITNESS, the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: /s/ John L. Westermann III [HEALTHEON CORPORATE /s/ W. Michael Long SECRETARY SEAL] CHIEF EXECUTIVE OFFICER COUNTERSIGNED AND REGISTERED: AMERICAN STOCK TRANSFER & TRUST COMPANY TRANSFER AGENT AND REGISTRAR BY AUTHORIZED SIGNATURE A statement of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights as established, from time to time, by the Certificate of Incorporation of the Corporation and by any certificate of designation, and the number of shares constituting each class and series and the designations thereof, may be obtained by the holder hereof upon request and without charge from the Corporation at its principal office. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -- as tenants in common TEN ENT -- as tenants by the entireties JT TEN -- as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT -- _______________ Custodian _______________ (Cust) (Minor) under Uniform Gifts to Minors Act _____________________________________ (State) UNIF TRF MIN ACT -- _______________ Custodian (until age_____) (Cust) ___________________under Uniform Transfers ([ILLEGIBLE]) to Minors Act ___________________________ (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, ______________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - -------------------------------------- - -------------------------------------- ________________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) ________________________________________________________________________________ ________________________________________________________________________________ __________________________________________________________________________Shares of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ________________________________________________________________________Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated ___________________ __________________________________________________ NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. Signature(s) Guaranteed By _______________________________________________________ THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM) PURSUANT TO [THE REST OF THIS IS ILLEGIBLE]. EX-5.1 4 EXHIBIT 5.1 EXHIBIT 5.1 October 16, 1998 Healtheon Corporation 4600 Patrick Henry Drive Santa Clara, CA 95054 RE: Registration Statement on Form S-1 Ladies and Gentlemen: We have examined the Registration Statement on Form S-1 filed by you with the Securities and Exchange Commission on July 31, 1998 (Registration No. 333-60427), as amended (the "Registration Statement"), in connection with the registration under the Securities Act of 1933, as amended, of up to 10,718,036 shares of your Common Stock (the "Shares"), including an over-allotment option granted to the underwriters of the offering to purchase up to 978,750 shares. We understand that you are selling the Shares to the underwriters for resale to the public and directly to one investor as described in the Registration Statement. As your legal counsel, we have examined the proceedings taken, and are familiar with the proceedings proposed to be taken, by you in connection with the sale and issuance of the Shares. It is our opinion that, upon completion of the proceedings being taken or proposed to be taken by us, as your legal counsel, prior to the issuance of the Shares, the Shares will be legally issued, fully paid and non-assessable when sold in the manner described in the Registration Statement. We are members of the Bar of the State of California only and express no opinion as to any matter relating to the laws of any jurisdiction other than the laws of the State of California and the federal laws of the United States. Without limiting the foregoing, we express no opinion as to the securities laws of the State of Delaware. We consent to the use of this opinion as an exhibit to the Registration Statement and further consent to the use of our name wherever appearing in the Registration Statement, including the Prospectus constituting a part thereof, and any amendments thereto. Very truly yours, WILSON SONSINI GOODRICH & ROSATI Professional Corporation /s/ Wilson Sonsini Goodrich & Rosati, P.C. -------------------------------------- EX-10.13 5 EXHIBIT 10.13 EXHIBIT 10.13 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. Services and License Agreement Between ActaMed Corporation and United HealthCare Corporation This Services and License Agreement (the "Agreement") is made and entered into as of April 4, 1996 (the "Effective Date"), by and between ActaMed Corporation ("ActaMed") and United HealthCare Corporation ("UHC"), for itself and on behalf of each of the Managed Plans which has given its written consent (as hereinafter defined). RECITALS A. ActaMed is in the business of providing electronic data interchange products and services to the health care industry. B. UHC, for itself on and behalf of its Affiliates (including The MetraHealth Companies, Inc.), and other entities that UHC may hereafter acquire, and on behalf of the health maintenance organizations identified in Exhibit A hereto that are managed by UHC or an Affiliate thereof and which have given their consent to be bound by this Agreement (which plans which give their consent are referred to herein as the "Managed Plans"), desires to obtain from ActaMed certain software and materials and access to the Network, on the terms and conditions set forth below. NOW, THEREFORE, in consideration of the premises and the mutual promises contained herein, the parties agree as follows. 1. DEFINITIONS. 1.1 "Affiliate" means with respect to a party, an entity directly or indirectly controlling, controlled by or under common control with such party where control means the ownership or control, directly or indirectly, of more than fifty percent of all of the voting power of the shares (or other securities or rights) entitled to vote for the election of directors or other governing authority, as of the Effective Date or hereafter during the term of this Agreement; provided that such entity shall be considered an Affiliate only for the time during which such control exists. The Managed Plans shall be considered to be Affiliates of UHC. 1.2 "Cosmos" means the computer program owned by UHC which is commonly known as Cosmos, and which UHC operates for health care claims adjudication and other business functions. 1 1.3 "Enhancements" means changes or additions to application software and documentation that improve existing Functions, add new Functions, or improve performance through changes in the system design or coding. 1.4 "Functions" means the tasks employed by users to exchange information within the Network. 1.5 "Licensed Materials" shall mean the Network Software, the ORBIT software (i.e., the ProviderLink billing and registration system), and the documentation, training materials, and other materials related to the Network Software or the Network which are listed on Exhibit B attached to this Agreement. All updates and new versions of such materials are also included in the definition of "Licensed Materials". 1.6 "Network" means the electronic data interchange ("EDI") system and network operated by ActaMed, which includes the Network Software, including any future versions of the EDI network or products substituting for it which include the basic functionality of the Network Software and network as of the Effective Date, regardless of the name under which it is marketed. The term "Network" specifically excludes any telecommunications network. 1.7 "Network Software" means the personal computer version of the ProviderLink and ActaLink presentation and network software programs, and all updates to them, which are licensed to users and which allow access to the Network for the transmission and reception of information. 1.8 "Provider" means a provider of health care services, which is not UHC, an Affiliate of UHC, or operated by UHC. 1.9 "UHC" means United HealthCare Corporation and its Affiliates. 2. LICENSE AND NETWORK ACCESS. 2.1 ActaMed grants UHC the nonexclusive, nontransferable right to use the Licensed Materials, to reproduce and modify those of the Licensed Materials so designated on Exhibit B, and to access and utilize the services of the Network, for UHC's internal use, on the terms set forth in this Agreement. UHC's internal use shall include use by and/or on behalf of (a) UHC or any UHC Affiliate; and (b) third parties that are purchasers of UHC's products and/or services, including management services, as well as UHC's health care service providers (including, without limitation, NYH Health Plan Services, Inc. ("NYHHPS") and its subsidiaries and/or affiliates pursuant to the First Restated Administrative Services Agreement between UHC and NYHHPS, dated September 1, 1994, as amended from time to time). UHC's access to use the Network will be on the same operational basis which ActaMed offers the Network to its other customers of the Network, except as otherwise provided in this Agreement. 2 2.2 UHC shall submit all permitted modifications it makes to the Licensed Materials for ActaMed's approval, prior to distributing the modifications. If ActaMed does not respond to UHC within fourteen days after UHC submits modifications to ActaMed for approval, the modifications shall be deemed approved. On the copies of the Licensed Materials UHC makes, UHC shall reproduce all notices or legends appearing on the original copy, including the copyright notice. All copies of the Licensed Materials made by UHC can be used only as permitted under this Agreement. At any time within ten days after ActaMed's written request, UHC shall inform ActaMed of the number and location of all copies of the Licensed Materials UHC has made. 2.3 UHC shall have the right to install the Network Software at any UHC location and at any locations of Providers working with UHC, and to connect such locations to the Network. ActaMed will install the Network Software at UHC or Provider sites and connect them to the Network, when mutually agreed by the parties. UHC and ActaMed will do agreed upon installations in a timely manner. UHC and ActaMed must continue to use the installation procedures developed by UHC or other mutually agreeable installation procedures (except as provided in any agreements directly between ActaMed and a UHC health plan, such as UHC Georgia) for such sites. UHC shall not be obligated under paragraph 12.1 to pay a monthly site fee or transaction fees for any Provider connected to the Network by ActaMed, unless UHC has agreed to be responsible for such Provider and fees. 2.4 Any development work on the Licensed Materials or the Network which was in progress on the date of this Agreement, will be provided to UHC upon completion and included within the definition of "Licensed Materials", at no charge to UHC, if it is set forth on Exhibit C attached to this Agreement. 2.5 UHC shall not act as a clearinghouse for health care claims going to payors other than UHC, other than as required by a UHC client, such as UBS misdirected Railroad Retirement claims and Medicare cross-over claims. 2.6 If UHC desires to and ActaMed agrees that UHC may use and implement the Licensed Materials or the Network technology outside North America, UHC and ActaMed shall mutually agree upon the terms and conditions of such use and implementation. 2.7 Except as otherwise provided in this Agreement, ActaMed provides the Licensed Materials to UHC on an "AS IS, WHERE IS" basis. ACTAMED EXPRESSLY DISCLAIMS ANY WARRANTIES, EXPRESS OR IMPLIED, RELATING TO THE LICENSED MATERIALS, INCLUDING, BUT NOT LIMITED TO, THE WARRANTIES OF TITLE, NONINFRINGEMENT, MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE OR USE. 2.8 Except as otherwise provided in this Agreement, UHC shall not (a) copy, reproduce, modify, or excerpt any of the Licensed Materials for any purpose; (b) distribute, 3 rent, sublicense, share, transfer or lease the Licensed Materials or access to the Network, to any person or entity which is not a party to this Agreement; or (c) attempt to reverse engineer or otherwise obtain copies of the source code for the Licensed Materials. 2.9 UHC acknowledges that the Licensed Materials may contain embedded runtime modules of products licensed to ActaMed by Sybase, Inc. ("Sybase") and, accordingly, that Sybase as an interested third party beneficiary of this Agreement, may enforce this Agreement directly against UHC and shall have no liability to UHC. In addition, UHC agrees that Sybase shall have the right to direct a recognized independent accounting firm to conduct, during normal business hours, an audit of appropriate records of UHC to verify (a) the number of copies of the Licensed Materials in use by UHC, and the computer systems on which such copies are installed, the number of processors in such computer systems, and the number of users using such copies; and (b) UHC's compliance with this Agreement. Representatives of the auditing firm shall protect the confidentiality of UHC's confidential information and abide by UHC's reasonable security regulations while on UHC's premises. 2.10 ActaMed agrees that ActaMed does not own and cannot use, distribute or publish any data transmitted over the Network either to or from UHC, except to the extent such data originates with ActaMed. Notwithstanding the above, ActaMed shall have the right to collect and distribute data transmitted over the Network back to the originator of such data. 3. MARKETING AND IMPLEMENTATION OF NETWORK PRODUCTS. 3.1 UHC will identify the business needs, goals and objectives of UHC for ActaMed, and will establish targets for the number and volume of Providers submitting electronic transactions. These numbers will be estimates, and not guarantees, for any amount of business for ActaMed. UHC will provide this information to ActaMed no less often than quarterly, and shall respond to additional requests for information within thirty days of ActaMed's request. The parties shall mutually agree upon any other information or data which UHC may give to ActaMed under this Agreement. 3.2 ActaMed will appoint at least one representative dedicated to the UHC account, who will have decision making capabilities for ActaMed. This person will attend planning meetings with UHC, keep UHC updated on national trends in EDI, and consult with UHC regarding ActaMed's software and network strategy. ActaMed will provide a representative to WEDI and ANSI to represent UHC, upon UHC's request. UHC shall also designate a representative to work with ActaMed and to coordinate UHC's activities with ActaMed, who will have decision making capabilities for UHC. This person will attend planning meetings with ActaMed, keep ActaMed updated on technical developments with respect to Cosmos, and coordinate UHC's activities with ActaMed. J.R. Hughes will be the initial representative for ActaMed and Joy Bahnemann will be the initial representative for UHC. Each party will consult with the other before changing its designated representative. 4 3.3 Exhibit D to this Agreement specifies the reports UHC will deliver to ActaMed and ActaMed will deliver to UHC daily, weekly, monthly, quarterly and annually. The parties shall also provide ad hoc reports to each other at no cost to the requesting party. 3.4 ActaMed will submit to UHC for its input and comments a comprehensive disaster recovery plan and documentation within 90 days after the date of this Agreement. The plan shall include testing of the plan no less often than annually and agreed upon time constraints within which full recovery will be expected. ActaMed will accept comments from UHC and make reasonable commercial efforts within the context of the Network to incorporate such comments. ActaMed will use its best efforts to establish a hot site under its disaster recovery plan which is not at a UHC data center within one year after the date of this Agreement. ActaMed will submit amended disaster recovery plans to UHC, for its information and input, any time that ActaMed makes substantial changes to its plan. ActaMed will participate in UHC's annual test of the UHC disaster recovery plan, with up to forty hours of ActaMed personnel time at no cost to UHC. For any additional time beyond the forty hours which UHC requests from ActaMed for this purpose, UHC will pay ActaMed an agreed upon price. 3.5 ActaMed will establish a user group, to consult on priorities and provide direction to ActaMed on system initiatives, which will include representation from UHC, Providers and payors. ActaMed will solicit user suggestions, input and feedback regarding the Network. ActaMed will provide to UHC copies of customer satisfaction surveys and other similar information regarding use of the Network at sites for which UHC is paying the monthly site fee or any transaction fees. 3.6 UHC will make its sales and Provider relations personnel available to work with ActaMed to develop new sites for use of the Network by Providers working with UHC, to the same extent that such personnel work with UHC's EDI Services to develop new sites as of the Effective Date. Pursuant to paragraph 12.2, UHC shall have the option of performing installations and implementations of the Network software itself, rather than contracting for them through ActaMed. In such circumstances where UHC has decided not to out-source such functions to ActaMed, UHC will continue to use health plan ProviderLink representatives to install and implement the Network for new and existing UHC-sponsored sites. UHC will also continue to use health plan ProviderLink representatives to train and provide technical support to the extent required under Exhibit F and section 8. 3.7 UHC shall sponsor a reasonable number of reference inquiries and visits (not to exceed two visits in any calendar month) by customers and potential customers of the Network, pursuant to ActaMed's Showcase Program, on mutually agreeable terms. UHC shall retain the right to reasonably refuse a site visit to any competitor or potential competitor of UHC, and ActaMed shall inform all customers and potential customers allowed on UHC's premises under this paragraph 3.7 that they are required to abide by 5 UHC's security procedures and policies. 4. ACTAMED'S OBLIGATIONS REGARDING, NETWORK PRODUCT LINE. 4.1 ActaMed will, during the term of this Agreement, continue maintaining the Licensed Materials and the Network, or other ActaMed products which provide, at a minimum, substantially the same functionality as provided by the Licensed Materials and the Network, on the Effective Date. 4.2 ActaMed will update the licensed Materials and the Network with changes mandated by state or federal law and other changes required in the reasonable opinion of the parties to meet market expectations for EDI, including the ANSI X12N standard. The parties will mutually agree upon any additional standards which ActaMed will need to maintain. If the changes mandated by this paragraph apply to substantially all of ActaMed's customers, then ActaMed will make such changes as part of a release of the Network or the Licensed Materials pursuant to paragraph 8.1 or paragraph 8.2. 4.3 Subject to section 9, both parties will continue to work with practice management system vendors to develop interfaces between practice management programs and the Network, in order to be able to market the Network to Providers. UHC will assist ActaMed in its attempts to establish relationships with and work with practice management system vendors. 4.4 ActaMed will work with and cooperate with Allina and UHC to formulate a plan allowing Allina to use the Network to operate its LaborLink product, at UHC's request. 4.5 ActaMed will be responsible for notifying all Providers, practice management vendors and other entities which are signatories to Network agreements to be assigned by UHC to EDI Services, Inc. that the assignee will be merged with and into ActaMed. UHC shall have the right to review and approve the notice prior to ActaMed sending it to any Providers or other signatories. 4.6 ActaMed shall place a copy of the source code, object code and technical documentation for all software used in the operation of the Network in escrow, including the Network Software, for the benefit of UHC, pursuant to the escrow agreement attached to this Agreement as Exhibit E (the "Escrow Agreement"). ActaMed shall cause UHC to be listed as a "Licensee" under the Escrow Agreement and shall cause the Licensed Materials and all operational computer software and documentation ActaMed uses to operate the Network to be listed as a "System" under the Escrow Agreement, as soon as practical after the Effective Date. In the event ActaMed ceases operating the Network for any reason defined in such Escrow Agreement during the duration of this Agreement, ActaMed shall deliver to UHC, for UHC's nonexclusive use, one then-current copy of all operational computer software and documentation ActaMed uses to operate the Network. 6 5. UIHC'S OBLIGATIONS REGARDING THE NETWORK. 5.1 UHC shall generate or receive transaction data in the standard format and the protocol set forth in such format which is in use as of the Effective Date, or as otherwise mutually agreed upon by the parties. In the event that ActaMed changes such format, UHC shall provide ActaMed with standard output and test messages for ActaMed's use. 5.2 UIHC shall provide, at its own expense, all necessary hardware, including terminal equipment, compatible with and suitable for its communications with the Network. UIHC shall prepare the proper operating environment as described in Exhibit J attached to this Agreement. ActaMed shall verify UHC's operating environment with the testing procedure established by ActaMed and agreed to by UHC. 6. ACCESS TO COSMOS AND OTHER PROPRIETARY UHC SOFTWARE. 6.1 ActaMed will not have access to Cosmos or any other UHC proprietary systems, and will have no right to modify the computer code in Cosmos, except as mutually agreed by the parties in writing. ActaMed will not receive any part of the Cosmos code, except as mutually agreed by the parties in writing. The Network will deliver claims and information to Cosmos, and UHC is solely responsible for the operation of Cosmos. 6.2 UHC produces new releases of Cosmos four to five times each year, and new releases of other UHC host computer systems (including host computer systems operated by third party out-sources on behalf of UHC), from time to time. UHC will give ActaMed notice of such changes and information regarding them, and, if the changes require any modifications to the Network or the Licensed Materials, the parties will mutually agree on the scope of the project, the deliverables, deadlines, any fees ActaMed will charge UHC, a test plan and an acceptance test plan. 6.3 If, at any point, UHC agrees that ActaMed needs access to any other proprietary UHC software or systems, the parties shall negotiate a limited license allowing ActaMed such access to be used only for UHC's benefit. 6.4 ActaMed agrees that UHC shall be the sole and exclusive owner of any and all changes ActaMed makes to the code in Cosmos or any other computer system proprietary to UHC. ActaMed agrees to assign and hereby assigns and transfers to UHC any and all rights which ActaMed may have in such code, including any copyright, patent, trademark, trade secret and other intellectual property rights. ActaMed will cooperate with UHC and will execute any documentation reasonably required by UHC to assert or protect its property rights in such code. 7. DEVELOPMENT OF NEW FUNCTIONALITY. 7.1 When ActaMed develops new functionality for the Network that ActaMed 7 offers generally to its customers, which is not included in a maintenance release that ActaMed offers generally to its customers pursuant to paragraph 8.1, [*] 7.2 When UHC specifically requests development work from ActaMed, for UHC's own use, the parties will negotiate a price at the time such work is requested. If ActaMed will be permitted to use this custom work for other customers, the price UHC pays ActaMed for such work [*] that [*] and [*] 7.3 When ActaMed performs development work on the Network at the request of another customer, [*] to [*] at [*] for the [*] as long as ActaMed has the legal right to [*] and such [*] is [*]. 7.4 If, at any time, UHC chooses to contract with ActaMed for a dedicated services team from ActaMed to handle development of new functionality and other changes to the Network, the Licensed Materials, or UHC's proprietary systems which are not covered under maintenance, ActaMed will provide the dedicated team on mutually agreeable terms and conditions. 8. ACTAMED'S MAINTENANCE AND SUPPORT OBLIGATIONS. 8.1 ActaMed's maintenance releases for the Network and the Licensed Materials shall be denoted by a three digit number where the first number is the version number, the second number is the level number, and the third number (if it is greater than 1) is the build number. For example, release 2.1.2 is a maintenance release for the version 2.1.1 software. ActaMed will provide new maintenance releases at no charge to all its Network maintenance customers, including, without limitation, UHC. 8.2 The price UHC will pay ActaMed under paragraph 12.1 for ActaMed's maintenance services under this Agreement does not include Enhancements to the Network Software, such as new Functions, significant redesigns or improvements of current Functions, or significant advances in system performance. Enhancements are contained in Actamed's new versions which are denoted by a three digit number, the first digit of which is the version number, the second digit of which is a level number, and the third digit of which is 1. For example, version 2.1.1 is followed by new version numbers 2.2.1, 2.3.1, 2.4.1, 3.0.1, etc. ActaMed will make new versions of the Network Software available to UHC upon payment in accordance with paragraph 7.1. 8.3 ActaMed will provide free Network maintenance and support services to UHC at a minimum level which will meet or exceed the free Network maintenance and support [*] 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. 8 ActaMed provides to its other customers for the Network. ActaMed will also provide the support and maintenance services to UHC which are specified on Exhibit F attached to this Agreement. ActaMed will notify UHC of any technical errors in the Network Software reported to the ActaMed help desk, and will use reasonable efforts to provide customers with corrections of such technical errors in a timely manner. ActaMed will provide all support and maintenance services directly to UHC and the Providers who subscribe to the Network, as required. UHC shall have no obligation to provide any support, training or maintenance services to Providers, other than as specified on Exhibit F attached to this Agreement. In order to allow UHC to implement a new release of the Network or the Licensed Materials on an orderly schedule, ActaMed shall maintain the current release and one prior release of the Network and the Licensed Materials, at all times. The maintenance services specified in this Agreement shall be provided at no cost to UHC beyond the fees set forth below in section 12. 8.4 UHC inquiries and appeals will be handled by ActaMed within time frames specified on Exhibit F or as mutually agreed to, and with the utmost customer focus in mind. 8.5 ActaMed will maintain the security standards for the Network which are set forth on Exhibit G attached to this Agreement. 9. EXCLUSIVITY. 9.1 UHC agrees to use the services of the Network under this Agreement. UHC agrees that it will accept and attempt to process all transactions listed on Exhibit H and intended for UHC which the Network delivers to UHC. UHC will pay ActaMed for all such transactions pursuant to paragraph 12.1 of this Agreement. 9.2 For [*] term of this Agreement (except as otherwise permitted under this Agreement), UHC will not promote, develop, sell or distribute any product [*] except as permitted under this Agreement. UHC also agrees that it will not develop an interface for any third party, or provide any third party with access to Cosmos or any other host computer under the control of UHC for the purpose of developing an interface for any network that competes with the Network, except to the extent UHC is allowed to work with other vendors under this section 9 or UHC is allowed to continue existing projects under paragraph 9.6. 9.3 For [*] term of this Agreement, UHC will not promote or contract for services providing essentially the same functionality as the Network from third party providers of [*] PROVIDED, HOWEVER, that UHC shall not be required to terminate any existing contracts with vendors of services similar to the Network (including, specifically, the contracts entered into by The MetraHealth Companies, Inc.), which are listed on Exhibit K attached to this Agreement. Prior to automatic or optional renewal of any such contracts, however, UHC shall give ActaMed 15 business days in which to bid on such contracts, [*] 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 pursuant to paragraph 9.7 of this Agreement. UHC shall cease actively promoting any products similar to the Network from vendors other than ActaMed in markets where ActaMed's services are available; provided, however, that UHC may promote products similar to the Network in markets where ActaMed has waived its rights under this section 9. Nothing in this paragraph shall limit UHC's ability to meet its contractual obligations in such existing contracts, such as a contractual obligation to perform specified promotional activities. 9.4 UHC agrees that, for [*] term of this Agreement, UHC will not and will not permit any of its subsidiaries to, directly or indirectly, (a) engage in or (b) have any ownership or equity interest exceeding five percent in any business, firm, corporation, joint venture, or other entity engaged in any business which competes with ActaMed's Network product (a "Competitive Business"). However, nothing contained herein shall prohibit UHC from acquiring any business, the principal line of business of which is not a Competitive Business and less than fifty percent of the revenues of which are derived from a Competitive Business. In such case, UHC shall use its reasonable efforts to cause the competitive portion of such business to be sold or disposed of as soon as reasonably possible, and, pending such sale, shall not use such business in such manner as would violate the provisions of this section 9 or seek to expand such business in a manner that would substantially adversely affect ActaMed's rights hereunder. Not later than one month following such acquisition, UHC shall give to ActaMed a notice of the acquisition of such Competitive Business and set forth the net purchase price (collectively, a "Sale Proposal") at which UHC would be prepared to sell such Competitive Business to ActaMed. ActaMed she have the right to purchase such Competitive Business for such terms or on such other basis as UHC and ActaMed may actually agree. In the event that, within 60 days after ActaMed's receipt of a Sale Proposal, UHC and ActaMed shall not have reached agreement that ActaMed will acquire such Competitive Business, each of UHC and ActaMed shall appoint an appraiser, which two appraisers shall select a mutually acceptable third appraiser. As promptly as practicable such three appraisers shall determine the fair value of the Competitive Business and shall notify UHC and ActaMed of their determination. ActaMed shall have sixty days after such notification in which to determine whether to acquire the CompetitiveBusiness at the value so determined. If ActaMed does not elect to acquire the Competitive Business at the appraised value, UHC shall be free to sell such Competitive Business to another entity; PROVIDED, HOWEVER, that UHC shall not sell such Competitive Business to another entity within six months after the appraisers' determination on terms and conditions which are substantially more favorable to such other entity than the terms and conditions last offered to ActaMed. 9.5 The restrictions set forth in this section 9 shall apply only to activities within North America. 9.6 Nothing in this section 9 shall be construed to prohibit UHC from engaging in activities relating to or contracting with third parties relating to the following, as long as each of the following is not intended primarily as a connection from a Provider's desk to a [*] 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. 10 network for communication of data: (a) promoting, developing, using, selling, and distributing its EmployerLink and LaborLink products and future versions of them, and any other initiatives for employers and brokers, and shall retain the right to contract with third parties to perform any work relating to these products. UHC agrees, however, that EmployerLink, LaborLink and such other initiatives shall not be intended for use primarily as connections to Providers' desk tops; (b) using and developing Internet connections; (c) electronic medical records and clinical data; (d) electronic mail (other than e-mail to and from a Provider's desk top); (e) financial or banking electronic data interchange, telecommunications networks, or EDI used by the UHC purchasing department or other internal departments which are not connecting to a Provider's desk top; (f) EDI between clinics and other facilities owned and/or operated by UHC; (g) claims repricing; or (h) UHC's "Total Recall" project, AdjudiPro product, or Q-Star product, and all future versions of them. 9.7 In the event that this section 9 requires UHC to offer any business opportunities or new development work to ActaMed, ActaMed shall notify UHC of ActaMed's prices and terms for such business or work. If ActaMed declines such business or work, or if ActaMed cannot provide the requested business or work to UHC [*] [*] UHC shall have the right to contract with a third party for such business or work or to do such business or work itself, and the provisions of this section 9 shall not apply to such business or work. To [*] ActaMed's [*] is [*] the parties [*] among other things, the [*] by [*] from [*] the [*] and the [*] offered by [*] and whether [*]. If the parties cannot agree upon [*] the parties shall resolve the dispute pursuant to section 15. In the event that any customer and/or supplier, including an integrated delivery system, of UHC or a UHC Affiliate requires, as a condition of doing business with the customer or supplier, that a different EDI system be-used in regard to that customer or supplier, UHC shall use all reasonable efforts to encourage the customer or supplier to utilize ActaMed's EDI system. In the event the customers or [*] 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 supplier [*], UHC or the UHC Affiliate [*] with [*]. 9.8 For the initial five year term of this Agreement, ActaMed agrees that it will not sell or distribute the Network in the Republic of South Africa, except with UHC's prior, written approval. 9.9 This section 9 shall not preclude UHC from providing factual information on other EDI vendors to Providers, as long as this section 9 permits UHC to work with such vendors and provided UHC does not promote such vendors. 10. PERFORMANCE STANDARDS. 10.1 Exhibit I to this Agreement specifies the performance standards and measurements ActaMed must achieve and the applicable time periods for measuring compliance with the performance standards (the "Performance Standards"). The parties shall measure, at a minimum, performance of ActaMed's help desk and customer support and the Network. The goal of these Performance Standards is to ensure that the performance of the Network during the term of this Agreement meets or exceeds the performance of the ProviderLink Network immediately prior to the Effective Date. In addition, ActaMed shall develop and deliver to UHC, from time to time, ActaMed's plans to increase performance of the Network beyond the minimum levels specified in Exhibit I. 10.2 The Performance Standards on Exhibit I apply only to transactions sent from or to Cosmos. At any time that UHC uses a different host computer to connect to the Network, the parties shall mutually agree upon performance standards for the Network and its connection to the different host computer, which shall become an amendment to this Agreement. 10.3 Any time that UHC's host computers are down and/or the down time on UHC computers will not be counted as down time for the Network. 10.4 In the event that ActaMed fails to meet any Performance Standard on Exhibit I in any month, ActaMed shall begin to diagnose the cause of the failure to meet the Performance Standard promptly after being notified of or discovering the failure to perform. Thereafter, ActaMed shall work continuously and diligently to correct such failure to perform until it is corrected. The failures to meet the Performance Standards which occur while ActaMed is working to remedy the problem shall continue to be counted for the purposes of paragraph 10.5. 10.5 In the event that ActaMed fails to meet any Performance Standard on Exhibit I for [*] in any [*] period, ActaMed shall be deemed to be in material breach of this Agreement, which allows UHC to terminate this Agreement under paragraph 14.2 of this Agreement. In this event, UHC shall also have the right, at its option, to [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 12 terminate section 9 of this Agreement and retain the rest of the Agreement in full force and effect, by giving the notice and opportunity to cure specified in paragraph 14.2 of this Agreement. 11. REPRESENTATIONS AND WARRANTIES. 11.1 The parties agree that ActaMed owns the Network and ActaMed represents that it has the right to license the Licensed Materials and grant access to the Network to UHC. All rights in patents, copyrights, trademarks and trade secrets encompassed in the Licensed Materials will remain in ActaMed or its licensors, as applicable. No title to or ownership of the Licensed Materials is transferred to UHC. UHC agrees that it does not obtain any rights in the Licensed Materials except the limited right to use the Licensed Materials as provided herein. 11.2 ActaMed agrees to defend UHC against and, to the extent of amounts paid to third parties in infringement damage awards and approved settlement awards, hold it harmless from all claims, damages and liabilities resulting from a claim that the Network or the Licensed Materials (other than the version of the Licensed Materials which ActaMed acquired from UHC) infringes a United States patent or United States copyright, provided that UHC gives ActaMed prompt, written notice of any such claim, sole control of the defense and settlement of such claim, and all reasonable assistance to defend such claim. UHC may appear in such action with counsel of its choice, at its own expense. ActaMed shall have no obligations under this paragraph if such claims, damages and liabilities result from UHC's breach of any term of this Agreement, UHC's unauthorized use of or modifications to the Licensed Materials or the Network, or the combination of the Licensed Materials with other materials not provided by ActaMed. 11.3 If UHC's right to use the Licensed Materials or the Network is enjoined or limited in any way, or if ActaMed believes that the Licensed Materials or the Network is likely to become subject to such action, then ActaMed, at its option and expense, may either: (a) procure for UHC the right to continue to use the Licensed Materials and the Network free from such limitations; (b) modify the Licensed Materials and the Network to be free from such limitations, but equivalent in all material functional and performance respects to the Licensed Materials and Network prior to such modification; (c) replace the Licensed Materials and the Network with materials that are free of claims, but equivalent in all material functional and performance respects to the Licensed Materials and the Network; or (d) if none of the above are reasonably possible or likely to be effective, 13 terminate this Agreement and the licenses granted herein. 11.4 Except as set forth in this Agreement, ACTAMED EXPRESSLY DISCLAIMS ANY WARRANTIES, EXPRESS OR IMPLIED, RELATING TO THE NETWORK OR SERVICES TO BE PERFORMED BY ACTAMED HEREUNDER, INCLUDING, BUT NOT LIMITED TO, THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE OR USE. 12. PRICES, PATENTS AND AUDITS. 12.1 For [*] after the date of this Agreement, UHC will pay ActaMed (a) [*] per user site identification number established by ActaMed at UHC; (b) [*] per user site identification number established by ActaMed for which UHC has agreed to be responsible; (c) [*] per transaction listed on Exhibit H attached to this Agreement, [*] and (d) [*] transaction listed on Exhibit H [*]. UHC shall not pay for any transactions a Provider sends to a different payor. ActaMed shall not charge UHC for any unclean transactions which are not able to access UHC's host computer. These payments cover all license fees, subscription fees, and access fees for usage of the Licensed Materials and the Network and all fees for the maintenance services set forth in section 8. 12.2 The fees set forth in paragraph 12.1 do not cover charges for any services UHC requests and obtains from ActaMed beyond the services specified in paragraph 12.1, including, without limitation, file transfer of data, installation, implementation or Enhancements of the Network, a particular sales effort from ActaMed which ActaMed would not otherwise be providing, or a telecommunications connection between the Network and UHC's host computers. For all services UHC requests from ActaMed for which this Agreement does not set forth a price (including, without limitation, UHC's request for a particular sales effort from ActaMed which ActaMed would not otherwise be providing), UHC shall pay ActaMed an agreed upon price. ActaMed shall not charge UHC anything for installation and implementation of the Network at sites where UHC chooses to do the installation and implementation itself. UHC shall pay all taxes levied in connection with this Agreement, except for any taxes based on ActaMed's net income. 12.3 After [*] after the date of this Agreement, the parties shall agree upon prices to supersede the prices in paragraph 12.1 of this Agreement, which new prices shall [*] [*]. To [*] is [*] the parties shall [*] among other things, the [*]. If the parties cannot agree upon [*] the parties shall resolve the dispute pursuant to section 15. 12.4 When ActaMed offers transactions other than those set forth on Exhibit H, [*] 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. 14 UHC will decide, in its sole discretion, whether it will agree to receive and/or send such transactions. Upon deciding to receive and/or send any such new transaction, UHC shall pay ActaMed a mutually agreeable price for its own such transactions and for such transactions from any other user site identification number where UHC (in its sole discretion) decides to be responsible for the fees. 12.5 ActaMed will bill UHC monthly for the site and transaction fees for UHC and any Providers where UHC has asked ActaMed to bill UHC directly, in a mutually agreeable format. When ActaMed bills UHC for a Provider's site and transaction fees, ActaMed shall not bill the Provider directly for the same charges. Invoices will include any additional fees for other services purchased by UHC. UHC agrees to pay all undisputed fees and expenses invoiced by ActaMed within thirty days after receipt of each invoice, and to pay a late payment charge equal to the lesser of [*] per month or the maximum rate allowed by law on all amounts outstanding after thirty days. 12.6 ActaMed shall maintain accurate and complete books and records regarding the transactions to and from UHC and the amounts ActaMed is charging UHC under this Agreement, with a system of audit trails, records and controls sufficient to satisfy the requirements imposed on ActaMed by its external auditors and governmental regulators. UHC shall have the right, not more often than once in each calendar year, to have employees or mutually agreeable external auditors audit the books and records of ActaMed relating to UHC transactions and charges for which UHC is responsible, to determine the proper amounts which should have been billed to UHC, which were billed to UHC, and which UHC has paid under this Agreement, and ActaMed's procedures for handling transactions to and from UHC. UHC shall give ActaMed two weeks prior notice of any such audit, and shall abide by reasonable ActaMed security and confidentiality procedures during the audit. UHC shall bear the cost of such audit, provided that in the event the audit determines that ActaMed has overcharged UHC by more than five percent of the amount properly due ActaMed in any month beginning on or after July 1, 1996, ActaMed shall pay all costs of such audit. 12.7 ActaMed will, at its expense, provide UHC annually with a report produced in accordance with standards established by the American Institute of Certified Public Accounts' Statement on Auditing Standards Number 70: Reports on the Processing of Transactions by Service Organizations. ActaMed shall submit the first such report to UHC by the end of third quarter 1997. 13. CONFIDENTIALITY AND SECURITY. 13.1 "Proprietary Information" means information that is (a) confidential to the business of a party, including, without limitation, computer software source code, technical documentation and information regarding proprietary computer systems, marketing and product development plans, financial and personnel information, and other business information not generally known to the public; and (b) is designated and identified as such [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 15 by a party, or which the other party should have reasonably known was confidential. Proprietary Information belonging to ActaMed includes, without limitation, the Licensed Materials and the source code for its proprietary software used in connection with the Network. Proprietary Information belonging to UHC includes, without limitation, information relating to Cosmos or other UHC computer systems, and information regarding UHC's members, Providers or health plans. "Proprietary Information" does not include information which a party had in its possession prior to receiving it from the other party, or which a party properly receives from a third party, or which is or becomes available to the public, or which a party independently develops without reference to information received from the other party under this Agreement. 13.2 Proprietary Information and all physical embodiments thereof received by either party (the "Receiving Party") from the other party (the "Disclosing Party") during the term of this Agreement are confidential to and are and will remain the sole and exclusive property of the Disclosing Party. At all times, both during the term of this Agreement and after its termination, the Receiving Party shall hold all Proprietary Information of the Disclosing Party in confidence, and will not use, copy or disclose such Proprietary Information or any physical embodiment thereof (except as permitted by this Agreement), or cause any of the Proprietary Information to lose its character as confidential information. 13.3 The Disclosing Party's Proprietary Information shall be maintained under secure conditions by the Receiving Party, using reasonable security measures which shall be not less than the same security measures used by the Receiving Party for the protection of its own Proprietary Information of a similar kind, and any specific security measures required by this Agreement. The Receiving Party shall not remove, obscure or deface any proprietary legend relating to the Disclosing Party's rights, on or from any tangible embodiment of any Licensed Materials without the Disclosing Party's prior written consent. Within thirty days after the termination of this Agreement, the Receiving Party shall deliver to the Disclosing Party all Proprietary Information belonging to the Disclosing Party, and all physical embodiments thereof, then in the custody, control or possession of the Receiving Party. 13.4 If the Receiving Party is ordered by a court, administrative agency or other governmental body of competent jurisdiction to disclose Proprietary Information, or if it is served with or otherwise becomes aware of a motion or similar request that such an order be issued, then the Receiving Party will not be liable to the Disclosing Party for disclosure of Proprietary Information required by such order if the Receiving Party complies with the following requirements: (a) If an already-issued order calls for immediate disclosure, then the Receiving Party shall immediately move for or otherwise request a stay of such order to permit the Disclosing Party to respond as set forth in this paragraph 13.4; and (b) The Receiving Party shall immediately notify the Disclosing Party of the 16 motion or order by the most expeditious possible means; and (c) The Receiving Party shall join or agree to (or at a minimum shall not oppose) a motion or similar request by the Disclosing Party for an order protecting the confidentiality of the Proprietary Information including joining or agreeing to (or not opposing) a motion for leave to intervene by the Disclosing Party. 13.5 The Receiving Party shall immediately report to the Disclosing Party any attempt by any person of which the Receiving Party has knowledge (a) to use or disclose any portion of the Proprietary Information without authorization from the Disclosing Party; or (b) to copy, reverse assemble, reverse compile or otherwise reverse engineer any part of the Proprietary Information (except as permitted herein). 13.6 Each party agrees not to disclose or utilize individual health care claim information in any way that would violate any physician-patient confidence or any state or federal regulations. 13.7 The obligations of this section 13 shall survive termination or expiration of this Agreement as to any Proprietary Information which falls under the definition of "trade secret" under the Uniform Trade Secret Act, as adopted in the State of Georgia and as amended from time to time. For all other information which falls under the definition of Proprietary Information used in this Agreement, the obligations of this section 13 shall terminate five years after termination or expiration of this Agreement. 14. TERM AND TERMINATION. 14.1 This Agreement commences as of the date set forth above and continues for five years thereafter, unless earlier terminated as provided herein. The parties shall mutually agree upon any renewal of this Agreement, but the provisions of section 9 shall not be part of any renewal. Upon termination or expiration of this Agreement, UHC's rights to use the Licensed Materials and the Network shall cease. 14.2 If one party breaches any material provision of this Agreement, the nonbreaching party may terminate this Agreement by giving 60 days written notice of termination to the breaching party. If the breach is capable of being cured and the other party acts diligently and continuously to cure such breach within the 60 days, the termination shall not become effective. In the event ActaMed attempts to terminate this Agreement pursuant to this paragraph 14.2 due to UHC's failure to pay any undisputed amounts due, the sixty day notice and cure period set forth above shall be reduced to fifteen working days. 14.3 If UHC or an affiliate thereof shall, at any time, cease to manage or administer any Managed Plan, then, as of the date of such cessation, this Agreement shall terminate as to such Managed Plan. UHC shall inform ActaMed that an entity has ceased or will cease to be a Managed Plan promptly after such information is known to UHC. 17 14.4 Upon termination or expiration of this Agreement, the parties shall cooperate in the orderly and reasonable removal of UHC from the Network. The parties shall jointly develop a transition plan, which will allow UHC to use the Network services for a mutually agreeable time after termination or expiration, which shall be not less than three months. The transition plan will provide for a reasonable level of support to transition UHC off the Network. Each party will bear its own costs in developing the transition plan. During such additional time, UHC shall continue to pay ActaMed all fees due under section 12 of this Agreement. In the event that ActaMed has terminated this Agreement pursuant to paragraph 14.2 due to UHC's failure to pay amounts due to ActaMed, ActaMed will not be required to perform services for UHC or to allow UHC access to the Network during the transition period unless UHC pays ActaMed in advance for such services and Network access. UHC shall not be obligated to pay any site or transaction fees that accrue after the effective date of termination with respect to Providers that remain connected to the Network. 15. DISPUTE RESOLUTION. 15.1 In the event a dispute between ActaMed and UHC arises out of or is related to this Agreement, either party may request in writing that the representatives of the parties designated pursuant to paragraph 3.2 of this Agreement meet and negotiate in good faith to attempt to resolve the dispute without a formal proceeding. During the course of such negotiations, all reasonable requests made by one party to the other for information, including copies of relevant documents, will be honored. The specific format for such discussions will be left to the discretion of the designated representatives. 15.2 If the designated representatives conclude in good faith that amicable resolution through continued negotiation in this forum does not appear likely, then the matter will be escalated to a joint panel of ActaMed and UHC senior executives, by formal written notification by either party to the other. This panel will meet as required to attempt to resolve the dispute. The number and nature of the senior executives will depend on the issues in dispute, but will include those senior executives with authority to resolve all matters in dispute. At either party's election, this panel will be facilitated by an external facilitator designated by both parties. 15.3 Formal proceedings for the resolution of a dispute may not be commenced until the earlier of (a) the panel referred to in paragraph 15.2 concluding in good faith that amicable resolution through continued negotiation of the matter does not appear likely; or (b) 30 days after the first notice of the dispute was sent under paragraph 15.1 or paragraph 15.2. However, nothing in this section 15 shall preclude either party from seeking temporary or preliminary injunctive relief where a party determines in good faith that such relief is necessary to limit its damage or injury under this Agreement. 15.4 In the event the dispute is not resolved as outlined in paragraphs 15.1 and 15.2, and if either party wishes to pursue the dispute, either party may submit it to binding 18 arbitration in accordance with the rules of the American Arbitration Association. In no event may arbitration be initiated more than one year following the sending of written notice of the dispute. The parties shall request a list from the American Arbitration Association of five possible arbitrators who shall each have had at least five years experience in some aspect of computer networking matters or health care. Each of the parties will select one of these arbitrators and the parties or their selected arbitrators shall jointly select the third arbitrator from the proposed list. Any arbitration proceeding under this Agreement shall be conducted in Hennepin County, Minnesota, Atlanta, Georgia, or in a mutually agreeable location. The arbitrators shall have no authority to award any punitive or exemplary damages, or to vary or ignore the terms of this Agreement, and shall be bound by controlling law. 16. LIMITATION ON DAMAGES AND ALLOCATION OF RISK. 16.1 Except to the extent of ActaMed's obligation to indemnify UHC as provided in [*] IN NO EVENT SHALL EITHER PARTY'S LIABILITY TO THE OTHER PARTY (INCLUDING LIABILITY TO ANY PERSON WHOSE CLAIM OR CLAIMS ARE BASED ON OR DERIVED FROM A RIGHT OR RIGHTS CLAIMED BY THE OTHER PARTY) WITH RESPECT TO ANY AND ALL CLAIMS ARISING FROM OR RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT IN CONTRACT, TORT OR OTHERWISE, EXCEED [*]. 16.2 NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY (NOR TO ANY PERSON CLAIMING RIGHTS DERIVED FROM THE OTHER PARTY'S RIGHTS) FOR INCIDENTAL, CONSEQUENTIAL, SPECIAL, PUNITIVE OR EXEMPLARY DAMAGES OF ANY KING (INCLUDING, BUT NOT LIMITED TO, LOST PROFITS, LOSS OF BUSINESS OR OTHER ECONOMIC DAMAGE) AS A RESULT OF BREACH OF THIS AGREEMENT. 16.3 Notwithstanding anything to the contrary set forth in this Agreement, ActaMed shall not be responsible for any breach of this Agreement or loss to UHC to the extent such breach or loss is caused by materials that ActaMed purchased from UHC or services provided by UHC. 17. GENERAL. 17.1 This Agreement, including the Exhibits to it, constitutes the entire understanding between the parties and supersedes all proposals, communications and agreements between the parties relating to its subject matter. However, this Agreement does not supersede the UHC Outsourcing Agreement between ActaMed and UHC, dated December 4, 1995, as amended from time to time. No amendment, change, or waiver of any provision of this Agreement will be binding unless in writing and signed by both parties. [*] 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. 19 17.2 This Agreement will be governed by and construed in accordance with the laws of the State of Georgia applicable to contracts made and performed therein. 17.3 Neither party may assign this Agreement without the prior, written consent of the other party, which shall not be unreasonably withheld. Any attempted assignment without such consent shall be void. Any assignment with consent does not release the assigning party from any of its obligations under this Agreement unless the consent so states. Notwithstanding the above, however, ActaMed may assign this Agreement without UHC's consent to the purchaser of all or substantially all the business or assets of ActaMed related to the Licensed Materials and the Network, as long as the purchaser is not a company which competes with UHC in any of the businesses UHC owns or operates at the time of the assignment. If the parties cannot agree upon whether a company competes with UHC in any of the businesses UHC owns or operates at the time of the assignment, the parties shall resolve the dispute pursuant to section 15. 17.4 Any notices relating to this Agreement shall be in writing and will be sent by certified United States mail, postage prepaid, return receipt requested, or by facsimile transmission or overnight courier service, addressed to the party at the address set forth below, or at such different address as a party has advised to the other party in writing and shall be deemed given and received when actually received: United HealthCare Corporation ActaMed Corporation 9900 Bren Road East 7000 Central Parkway Minneapolis, MN 55440 Suite 600 Attn: Chief Information Officer Atlanta, Georgia 30328 Attn: President 17.5 In the event one or more of the provisions of this Agreement are found to be invalid, illegal or unenforceable by a court with jurisdiction, the remaining provisions shall continue in full force and effect. 17.6 The obligations of the parties under this Agreement (other than the obligation to make payments) shall be suspended to the extent a party is hindered or prevented from complying therewith because of labor disturbances (including strikes or lockouts), war, acts of God, fires, storms, accidents, governmental regulations, failure of telecommunications vendors or suppliers, or any other cause whatsoever beyond a party's control. For so long as such circumstances prevail, the party whose performance is delayed or hindered shall continue to use all commercially reasonable efforts to recommence performance without delay and shall declare a disaster under its disaster recovery plan. 17.7 Each party shall have the right to include the other party's name on its customer or vendor list and to disclose the nature of the services and products provided under this Agreement, so long as such services and products are accurately represented; provided, however, that neither party has the right to use the other's name, trademarks or 20 trade names for other advertising, sales promotion, or publicity purposes without the other's prior written consent. 17.8 During the term of this Agreement, neither party will solicit or attempt to hire any individual who is then currently an employee of the other party or who has been an employee of the other party within the six months prior to the solicitation or hiring, without the other party's prior, written consent. This paragraph 17.8 shall only apply to individuals who, in the case of ActaMed, have performed services for UHC under this Agreement or worked in connection with the Network or the Licensed Materials, or who, in the case of UHC, have worked with ActaMed or received services from ActaMed, on behalf of UHC. THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION THAT MAY BE ENFORCED BY THE PARTIES. This Agreement may be executed in one or more counterparts each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth above. UNITED HEALTHCARE CORPORATION ACTAMED CORPORATION By: /s/ Travers H. Wills By: /s/ Michael K. Hoover ------------------------------- ------------------------------- Its: Chief Operating Officer Its: President ------------------------------ ------------------------------ Date: Date: April 4, 1996 ----------------------------- ----------------------------- 21 EXHIBIT LIST Exhibit A: Managed Plans Exhibit B: Licensed Materials Exhibit C: Development Work in Progress Exhibit D: Reports Exhibit E: Escrow Agreement Exhibit F: Network Maintenance and Support Services Exhibit G: Security Exhibit H: Transactions Exhibit 1: Performance Standards and Methods of Measurement Exhibit J: UHC Operating Environment Exhibit K: MetraHealth EDI Contracts 22 EXHIBIT A MANAGED PLANS Community Health Network of Louisiana, Inc. (purchase pending) PHP, Inc. (Michigan) PHP of Mid Michigan PHP of South Michigan PHP of Southwest Michigan PHP of West Michigan PHP of South Carolina PHP of North Carolina, Inc. (purchase pending) Physicians Plus Insurance Corporation Allina EXHIBIT B LICENSED MATERIALS
Right to Right to Reproduce Modify --------- ------ *User Manual, versions 2.1 and 2.2.5 No No Portal Specifications No No Communications Interface Document HCFA Claim Validations HCFA National Standard Format Claims ANSI X12 837 Claims Format Implementation Guide for Claims ANSI Xl 2 835 Electronic Remittance Advice UB92 Hospital Claim Format DOS Command Line Routines UNIX Command Line Routines Training Materials Version 2.2.5 Demo Disks and CSI Demo Disks Yes Yes PL Training Manual Yes Yes Network: EDI TCP/IP Interface Specification No No Promotional Material ProviderLink Brochure Yes Yes ProviderLink Send Back Card Yes Yes
*ActaMed will, upon request from UHC, identify UHC as the sponsor and promoter of these materials. EXHIBIT C DEVELOPMENT WORK IN PROGRESS Projects which are completed or will be completed by ActaMed as part of the sale: 1. COSMOS Distributed 'A' 2. Ohio health plan merger 3. Separation of the EmployerLink-ProviderLink network. At that time, a comprehensive list of hardware and software products required will be provided to ActaMed. 4. ORBIT 5. MHS "Mail Rules" EMPLOYERLINK SPLIT FROM PROVIDERLINK NETWORK PRODUCTION ENVIRONMENT
ACQUIRE ALTERNATE HARDWARE: [*] 20 hours, UHC [*] 4 hours, UHC [*] 2 hours, UHC [*] 20 hours, UHC [*] 10 hours, PL ACQUIRE ALTERNATE SOFTWARE: [*] 10 hours, UHC [*] 6 hours, UHC [*] 2 hour, UHC INSTALL VENDOR HARDWARE/SOFTWARE: [*] 40 hours, UHC [*] 40 hours, UHC [*] 10 hours, UHC [*] 10 hours, PL SPLIT PRODUCTION EMPLOYERLINK NETWORK SOFTWARE FROM PROVIDERLINK: [*] 30 UHC, 15 PL [*] 30 UHC, 8 PL [*] 30 UHC, 8 PL [*] 50 UHC [*] 40 UHC, 20 PL [*] 15 hours, PL
[*] 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 REPORTS REPORTS ACTAMED WILL PROVIDE TO UHC The following reports will be provided to UHC from ActaMed on a routine schedule as indicated. - - Orbit reports Three [*] core operating reports, for each market, will be sent to each health plan lead ProviderLink/EDI representative and a central UHC corporate resource. (Available electronically or on paper as requested.) UNI Access Status Report [*] Monthly Detail Transaction report by source UNI [*] Monthly Detail Transaction report by Destination Market [*] - - Intercompany billing detail reports for use in determining allocation of transaction expensed to the proper health plan or business unit. Summary of fees by health plan detailed by plan and DIV [*] Intercompany Billing Details-site fees, mail and Era transactions [*] Intercompany Billing Details-transaction charges [*]
- - Help Desk Reports The following problem notification procedures will be performed by the ActaMed Help Desk staff by call priority level. Severity levels are defined in Exhibit 1. Reporting on these activities will be provided to UHC upon request. Severity 1 - High priority calls will be reported to a health plan on a [*] basis. A report listing each call and its status will be electronically mailed or faxed the following morning. For a specific high priority call, if closure is not expected within [*], a call will be placed to the UHC health plan ProviderLink representative. If the call is closed within [*], notification to UHC health plan ProviderLink representative via the next morning's E-mail report is acceptable. If an UHC health plan ProviderLink representative cannot be accessed "live", a voice mail will be left. [*] contact with the customer is required until closure. Severity 2 - Normal priority calls will also be reported on a [*] report listing each call and its status. No telephone calls will be placed to the plan for these calls except on and as needed basis. Regular customer contact is required until closure. [*] 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. Severity 3 - Low-priority calls will also be reported in a [*] report to UHC health plan ProviderLink representative containing all calls and status. Customer contact is required as needed or when a course of action has been determined. - - In the event that the ActaMed Help Desk computerized on-line problem management tool is down, call information will be recorded manually and entered into the system as soon as it becomes available. - - Required problem resolution timeframes are outlined in Exhibit D. - - ActaMed should prepare a quarterly Executive Summary report for UHC management detailing the customer issues raised during this time frame and the resolution of these problems. - - Network Availability Reports Modem connectivity-actual performance to standard Monthly Network Transaction Success rate by plan, and in the aggregate Monthly Host and Modem availability Monthly - - Itemization and accounting for the hours worked by the UHC Dedicated Team, and a project status report on each item worked. Reports UHC will provide to ActaMed These reports will include data from health plans centralized on COSMOS, those plans with decentralized UHC host systems including, but not limited to, Complete, PrimeCare, Ramsay, UHC Illinois, etc., and all ex-MetraHealth systems including the previous Travelers and Met Life systems. UHC will provide a resource to coordinate the assembly of this data and will serve as the contact for all questions regarding these reports. - - Membership data by health plan or market provided on paper or Monthly electronically where available. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. - - Claims receipts or processed claims, for all commercial UHC Monthly health plans or markets, offices or systems, including the total volume of claims received electronically by month and year-to-date, if available, actual penetration percentages by plans, market, offices or systems, and desired percentage of electronic claim receipts. - - Decision Support System (DSS) Data will be extracted from UHC Monthly health plans and markets to support the market analysis done by ActaMed and for the prioritization of target providers and potential prospects. (A sample report is provided on Attachment 1) - - Physician and Hospital claims volume data for each health Quarterly plan/market by Provider Number and/or submitting Entity Tax ID including: * total claims volumes received by each provider/tax ID * volume received electronically (EDI) by each provider/tax ID * volume received on tape/other by each provider/tax ID, Monthly if applicable and available This information will be provided electronically, as available. - - Other data to be determined in the future to support the analysis of new transactions as mutually agreed by both parties. - - Strategic information from UHC related to EDI growth goals Quarterly and objectives by health plan/market will be provided to ActaMed as needed. This will include pertinent project plans and other material/documentation that will assist ActaMed to enhance and increase electronic transactions for UHC. EXHIBIT E MASTER ESCROW AGREEMENT BETWEEN PRODUCER AND FORT KNOX This escrow agreement is intended for use by a Producer (Developer) and Fort Knox Escrow Services, Inc. The Producer may escrow multiple products under this agreement. In addition, multiple Licensees (End Users) may be registered as beneficiaries of this agreement. Although each Licensee does not sign the agreement, Fort Knox does notify them of the service. Master Escrow Agreement This Master Escrow Agreement ("Agreement") is made as of this 20th day of February, 1995, by and between ActaMed Corp. ("Producer") and Fort Knox Escrow Services, Inc. ("Fort Knox"). PRELIMINARY STATEMENT. Producer intends to deliver to Fort Knox a sealed package containing magnetic tapes, disks, disk packs, or other forms of media, in machine readable form, and the written documentation prepared in connection therewith, and any subsequent updates or changes thereto (the "Deposit Materials") for the computer software products (the "System(s)"), all as identified from time to time on Exhibit B hereto. Producer desires Fort Knox to hold the Deposit Materials, and, upon certain events, deliver the Deposit Materials (or a copy thereof) to those persons or entities listed from time to time on Exhibit C hereto as a licensee of Producer ("Licensee"), in accordance with the terms hereof. Now, therefore, in consideration of the foregoing, of the mutual promises hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. DELIVERY BY PRODUCER. Producer shall be solely responsible for delivering to Fort Knox the Deposit Materials as soon as practicable. Fort Knox shall hold the Deposit Materials in accordance with the terms hereof. Except as provided in Section 10 below, Fort Knox shall have no obligation to verify the completeness or accuracy of the Deposit Materials. 2. DUPLICATION; UPDATES. (a) Fort Knox may duplicate the Deposit Materials by any means in order to comply with the terms and provisions of this Agreement, provided that the Licensee to whom a copy of the Deposit Materials is to be delivered pursuant to the terms hereof shall bear the expense of duplication. (b) Producer shall deposit with Fort Knox any modifications, updates, new releases or documentation related to the Deposit Materials by delivering to Fort Knox an updated version of the Deposit Materials ("Additional Deposit") as soon as practicable after the modifications, updates, new releases and documentation have become generally available to Producer's Licensees, but in any event within thirty (30) days following the first delivery to any Licensee. When Producer delivers an Additional Deposit to Fort Knox, Fort Knox shall return to Producer the previous Deposit Materials it held in custody, except for the Deposit Materials that were the subject of the most recent previous deposit. Except as provided in Section 10 below, Fort Knox shall have no obligation to verify the accuracy or completeness of any Additional Deposit or to verify that any Additional Deposit is in fact a copy of the Deposit Materials or any modification, update, or new release thereof. 3. NOTIFICATION OF DEPOSITS. Simultaneous with the delivery to Fort Knox of the Deposit Materials or any Additional Deposit, as the case may be, Producer shall deliver to Fort Knox and to each Licensee a written statement specifically identifying all items deposited and stating that the Deposit Materials or any Additional Deposit, as the case may be, so deposited have been inspected by Producer and are complete and accurate. Within five (5) days of receipt by Fort Knox of the Deposit Materials or any 1 Additional Deposit, Fort Knox will send notification of such receipt via certified or registered mail to the Licensee(s). 4. DELIVERY BY FORT KNOX 4.1 DELIVERY BY FORT KNOX TO LICENSEES. Fort Knox shall deliver the Deposit Materials, or a copy thereof, to a Licensee only in the event that: (a) Producer notifies Fort Knox to effect such delivery to a Licensee or Licensees at a specific address or addresses, the notification being accompanied by a check payable to Fort Knox in the amount of one hundred dollars ($100.00); or (b) Fort Knox receives from any Licensee: (i) written notification that Producer has failed in a material respect to support the applicable Systems as required by a valid and existing license agreement ("License Agreement") between Licensee and Producer or that Producer has generally ceased its business of supporting the applicable systems ("Producer Default"); (ii) evidence satisfactory to Fort Knox that Licensee has notified Producer, at least ten (10) days prior to the notice to Fort Knox, of such Producer Default in writing; (iii) a written demand that the Deposit Materials be released and delivered to Licensee; (iv) a written undertaking from the Licensee that the Deposit Materials being supplied to the Licensee will be used only as permitted under the terms of the License Agreement; (v) specific instructions from the Licensee for this delivery; and (vi) a cashier's check payable to Fort Knox in the amount of five hundred dollars ($500.00). (c) If the provisions of paragraph 4.1(a) are satisfied, Fort Knox shall, within five (5) business days after receipt of the notification and check specified in paragraph 4.1(a), deliver the Deposit Materials in accordance with the applicable instructions. (d) If the provisions of paragraph 4.1(b) are met, Fort Knox shall, within five (5) business days after receipt of all the documents specified in paragraph 4.1(b), send by certified mail to Producer a photostat copy of all such documents. Producer shall have thirty (30) days from the date on which Producer receives such documents ("Objection Period") to notify Fort Knox of its objection ("Objection Notice") to the release of the Deposit Materials to a Licensee and to request that the issue of Licensee's entitlement to a copy of the Deposit Materials be submitted to arbitration in accordance with the following provisions: 2 (i) If Producer shall send an Objection Notice to Fort Knox during the Objection Period, the matter shall be submitted to, and settled by arbitration by, a panel of three (3) arbitrators chosen by the Atlanta Regional Office of the American Arbitration Association in accordance with the rules of the American Arbitration Association. The arbitrators shall apply Georgia law. At least one (1) arbitrator shall be reasonably familiar with the computer software industry. The decision of the arbitrators shall be binding and conclusive on all parties involved, and judgment upon their decision may be entered in a court of competent jurisdiction. All costs of the arbitration incurred by Fort Knox, including reasonable attorneys' fees and costs, shall be paid by the non-prevailing party. (ii) Producer may, at any time prior to the commencement of arbitration proceedings, notify Fort Knox that Producer has withdrawn the Objection Notice. Upon receipt of any such notice from Producer, Fort Knox shall reasonably promptly deliver the Deposit Materials to the Licensee in accordance with the instructions specified in paragraph 4.1(b)(v). (e) If, at the end of the Objection Period, Fort Knox has not received an Objection Notice from Producer, then Fort Knox shall reasonably promptly deliver the Deposit Materials to the Licensee in accordance with the instructions specified in paragraph 4.1(b)(v). 4.2 DELIVERY BY FORT KNOX TO PRODUCER. Fort Knox shall release and deliver the Deposit Materials to Producer upon termination of this Agreement in accordance with paragraph 7(a) hereof. 5. INDEMNITY. Producer and any party claiming beneficiary status under this Agreement shall indemnify and hold harmless Fort Knox and each of its directors, officers, agents, employees and stockholders ("Fort Knox Indemnities") absolutely and forever, from and against any and all claims, actions, damages, suits, liabilities, obligations, costs, fees, charges, and any other expenses whatsoever, including reasonable attorneys' fees and costs, that may be asserted against Fort Knox Indemnitee in connection with this Agreement or the performance of Fort Knox or any Fort Knox Indemnitee hereunder, except as a result of the negligent act or omission on the part of Fort Knox or any Fort Knox Indemnitee. 6. DISPUTES AND INTERPLEADER. (a) In the event of any dispute between any of Fort Knox, Producer and/or any Licensee relating to delivery of the Deposit Materials by Fort Knox or to any other matter arising out of this Agreement, Fort Knox may submit the matter to any court of competent jurisdiction in an interpleader or similar action. Any and all costs incurred by Fort Knox in connection therewith, including reasonable attorneys' fees and costs, shall be borne by the party seeking the copy of the Deposit Materials. (b) Fort Knox shall perform any acts ordered by any court of competent jurisdiction, without any liability or obligation to any party hereunder by reason of such act. 3 7. TERM AND RENEWAL. (a) The initial term of this Agreement shall be two (2) years, commencing on the date hereof (the "Initial Term"). This Agreement shall be automatically extended for an additional term of one year ("Additional Term") at the end of the Initial Term and at the end of each Additional Term hereunder unless, on or before ninety (90) days prior to the end of the Initial Term or an Additional Term, as the case may be, either party notifies the other party that it wishes to terminate the Agreement at the end of such term. (b) In the event of termination of this Agreement, Producer shall pay all fees due Fort Knox and Fort Knox shall promptly notify all Licensees that this Agreement has been terminated and that Fort Knox shall promptly return to Producer all copies of the Deposit Materials then in its possession. 8. FEES. Producer shall pay to Fort Knox fees in accordance with Exhibit A as compensation for Fort Knox's services under this Agreement. (a) PAYMENT. Fort Knox shall issue an invoice to Producer following execution of this Agreement ("Initial Invoice"), on the commencement of any Additional Term hereunder, and in connection with the performance of any additional services hereunder. Payment is due upon receipt of invoice. All fees and charges are exclusive of, and Producer is responsible for the payment of, all sales, use and like taxes. Fort Knox shall have no obligations under this Agreement until the Initial Invoice has been paid in full by Producer. (b) NONPAYMENT. In the event of non-payment of any fees or charges invoiced by Fort Knox, Fort Knox shall give notice of non-payment of any fee due and payable hereunder to the Producer and, in such an event, the Producer shall have the right to pay the unpaid fee within thirty (30) days after receipt of notice from Fort Knox. If Producer fails to pay in full all fees due during such thirty (30) day period, Fort Knox shall give notice of non-payment of any fee due and payable hereunder to the Licensee(s) and, in such event, the Licensee(s) shall have the right to pay the unpaid fee within ten (10) days of receipt of such notice from Fort Knox. Upon payment of the unpaid fee by either the Producer or the Licensee(s), as the case may be, this Agreement shall continue in full force and effect until the end of the applicable term. Failure to pay the unpaid fee under this paragraph 8(b) by both Producer and the Licensee(s) shall result in termination of this Agreement. 9. OWNERSHIP OF DEPOSIT MATERIALS. Fort Knox and Producer recognize and acknowledge that ownership of the Deposit Materials shall remain with Producer at all times. 10. BANKRUPTCY. Producer and Licensee acknowledge that this Agreement is an "agreement supplementary to" the License Agreement as provided in Section 365(n) of Title 11, United States Code (the "Bankruptcy Code"). Producer acknowledges that if Producer as a debtor in possession or a trustee in Bankruptcy in a case under the Bankruptcy Code rejects the License Agreement or this Agreement, Licensee may elect to retain its rights under the License Agreement and this Agreement as provided in Section 365(n) of the Bankruptcy Code. Upon written request of Licensee to Producer or the Bankruptcy Trustee, Producer or such Bankruptcy Trustee shall not interfere with the rights of Licensee as provided in the License Agreement and this Agreement, including the right to obtain the Deposit Material from Fort Knox in accordance with Section 3. 4 11. MISCELLANEOUS. (a) REMEDIES. Except for actual fraud, gross negligence or intentional misconduct, Fort Knox shall not be liable to Producer for any act, or failure to act, by Fort Knox in connection with this Agreement. Fort Knox will not be liable for special, indirect, incidental or consequential damages hereunder. Licensees are intended to be third party beneficiaries as to the express rights and subject to the obligations set forth herein. (b) NATURAL DEGENERATION; UPDATED VERSION. In addition, the parties acknowledge that as a result of the passage of time alone, the Deposit Materials are susceptible to loss of quality ("Natural Degeneration"). It is further acknowledged that Fort Knox shall have no liability or responsibility to any person or entity for any Natural Degeneration. For the purpose of reducing the risk of Natural Degeneration, Producer shall deliver to Fort Knox a new copy of the Deposit Materials at least once every three years. (c) PERMITTED RELIANCE AND ABSTENTION. Fort Knox may rely and shall be fully protected in acting or refraining from acting upon any notice or other document believed by Fort Knox in good faith to be genuine and to have been signed or presented by the proper person or entity. Fort Knox shall have no duties or responsibilities except those expressly set forth herein. (d) INDEPENDENT CONTRACTOR. Fort Knox is an independent contractor, and is not an employee or agent of either the Producer or any Licensee. The foregoing notwithstanding, nothing in this Agreement shall limit any remedies to which Producer may be entitled, whether at law or in equity, in connection with any claim relating to the misappropriation of confidential information or trade secrets (including the Deposit Materials) or the violation of any copyright or other intellectual property right of Producer. Licensee is a party to this Agreement. (e) AMENDMENTS. This Agreement shall not be modified or amended except by another agreement in writing executed by the parties hereto, except that Producer may modify this Agreement at any time without the consent of Fort Knox to designate additional "Systems" on Exhibit B hereto and additional Licensees on Exhibit C hereto, as appropriate. (f) ENTIRE AGREEMENT. This Agreement, including all exhibits hereto, supersedes all prior discussions, understandings and agreements between the parties with respect to the matters contained herein, and constitutes the entire agreement between the parties with respect to the matters contemplated herein. All exhibits attached hereto are by this reference made a part of this Agreement and are incorporated herein. (g) COUNTERPARTS; GOVERNING LAW. This Agreement may be executed in two (2) counterparts, each of which when so executed shall be deemed to be an original and both of which when taken together shall constitute one and the same Agreement. This Agreement shall be construed and enforced in accordance with the laws of the State of Georgia. (h) CONFIDENTIALITY. Fort Knox will hold and release the Deposit Materials only in accordance with the terms and conditions hereof, and will maintain the confidentiality of the Deposit Materials. 5 (i) NOTICES. All notices, requests, demands or other communications required or permitted to be given or made under this Agreement shall be in writing and shall be delivered by hand or by commercial overnight delivery service which provides for evidence of receipt, or mailed by certified mail, return receipt requested, postage prepaid, and addressed as follows: (i) If to Producer: to the address listed on the signature page hereof (ii) If to Fort Knox: Fort Knox Escrow Services, Inc. 3539-A Church Street Clarkston, Georgia 30021-1717 Attn: Contracts Administrator Copy: Michael A. Payne Vice President If delivered personally or by commercial overnight delivery service, the date on which the notice, request, instruction or document is delivered shall be the date on which delivery is deemed to be made, and if delivered by mail, the date on which such notice, request, instruction or document is received shall be the date on which delivery is deemed to be made. Any party may change its address for the purpose of this Agreement by notice in writing to the other parties as provided herein. (j) SURVIVAL. Paragraphs 5, 6, 8, 9 and 10 shall survive any termination of this Agreement. (k) NO WAIVER. No failure on the part of any party hereto to exercise, and no delay in exercising any right, power or single or partial exercise of any right, power or remedy by any party will preclude any other or further exercise thereof or the exercise of any other right, power or remedy. No express waiver or assent by any party hereto to any breach of or default in any term or condition of this Agreement shall constitute a waiver of or an assent to any succeeding breach of or default in the same or any other term or condition hereof. 6 IN WITNESS WHEREOF each of the parties has caused its duly authorized officer to execute this Agreement as of the date and year first above written. Fort Knox Escrow Services, Inc. By: /s/ Michael A. Payne --------------------------------------------- Title: V.P. ------------------------------------------ Producer By: /s/ Nancy J. Ham ------------------------------------------------------ Print Name: Nancy J. Ham ------------------------------------------------------ Title: CFO ------------------------------------------------------ Address: 7000 Central Parkway, Suite 620 ------------------------------------------------------ Atlanta, GA 30328 ------------------------------------------------------ ------------------------------------------------------ Phone: (404) 551-1600 ------------------------------------------------------ Fax: (404) 551-1601 ------------------------------------------------------ Attention: Nancy Ham ------------------------------------------------------ 7 EXHIBIT A Fees to be paid by Producer shall be as follows: Initialization fee (one time only) $750 (payable for initial term only) Annual maintenance/storage fee - includes one Deposit Material update $800/Product - includes two cubic feet of storage space Annual Licensee registration fee FULL SERVICE $ 150/Licensee (foreign licensee $250) Additional Updates $ 100/Product (above one per year) Additional Storage Space $ 150/Cubic foot Payable by Licensee or Producer: Due Upon Licensee's or Producer's Request for Release of Deposit Materials $ 500
Fees due in full, in US dollars, upon receipt of signed contract or deposit material, whichever comes first. Thereafter, fees shall be subject to their current pricing, provided that such prices shall not increase by more than 10% per year. 8 EXHIBIT B B1. Product Name:____________________________________________________________ Version #:_______________________________________________________________ Prepared/Confirmed by:________________________________________________________ Title:___________________________________ Date:__________________________ Signature:____________________________________________________________________ Type of deposit: ____ Initial Deposit ____ Update Deposit to replace current deposits ____ Other (please describe)_____________________________________________ ITEMS DEPOSITED: Quantity Media Type Description of Material A) ________ ____________ _______________________________________________ B) ________ ____________ _______________________________________________ C) ________ ____________ _______________________________________________ B2. Product Name:____________________________________________________________ Version #:_______________________________________________________________ Prepared/Confirmed by:________________________________________________________ Title:___________________________________ Date:__________________________ Signature:____________________________________________________________________ Type of deposit: ____ Initial Deposit ____ Update Deposit to replace current deposits ____ Other (please describe)_____________________________________________ ITEMS DEPOSITED: Quantity Media Type Description of Material A) ________ ____________ _______________________________________________ B) ________ ____________ _______________________________________________ C) ________ ____________ _______________________________________________ 9 EXHIBIT C Licensees Please list a primary contact person, company names, and address, as well as telephone and facsimile numbers. COMPANY NAME & ADDRESS A.____________________________ Contact Name:____________________ ______________________________ Telephone:_______________________ ______________________________ Facsimile:_______________________ ______________________________ Date:____________________________ Product Name and Version #_____________________________________ B.____________________________ Contact Name:____________________ ______________________________ Telephone:_______________________ ______________________________ Facsimile:_______________________ ______________________________ Date:____________________________ Product Name and Version #______________________________________ C.____________________________ Contact Name:____________________ ______________________________ Telephone:_______________________ ______________________________ Facsimile:_______________________ ______________________________ Date:____________________________ Product Name and Version #______________________________________ (PLEASE COPY PAGE AS NECESSARY) 10 FIRST AMENDMENT TO MASTER ESCROW AGREEMENT This First Amendment to Master Escrow Agreement (the "Agreement") is made to that certain Master Escrow Agreement dated February 1995 (the "master Escrow Agreement"), between Fort Knox Escrow Services, Inc. ("Fort Knox"), and ActaMed Corp. (the "Producer"), to provide certain amended or revised terms to the Master Escrow Agreement. The Master Escrow Agreement and this Amendment together constitute the "Agreement" referred to in the Master Escrow Agreement. All capitalized terms used in this Amendment and not defined herein have the meaning provided for in the Master Escrow Agreement. In the event of any conflict between the terms of this Amendment and the terms of the Master Escrow Agreement, the terms of this Amendment shall govern and control. In consideration of the sum of Ten Dollars ($10.00) in hand resolved, and other good and valuable considerations, the receipt and adequacy of which is hereby acknowledged, the parties hereby do agree as follows: Section 4.1(b)(i) of the Master Escrow Agreement is deleted in its entirety and the following is substituted thereafter: (I) written notification that Producer has failed in material respects to support the applicable Systems as required by a valid and existing License Agreement ("License Agreement") between Licensee and Producer, or that the terms of any other agreement to which Producer and Licensee are a party provides that Licensee is entitled to receive the Deposit Materials, or that Producer has ceased the business of supporting the applicable Systems ("Producer Default"); IN WITNESS WHEREOF, each of the parties has caused this Amendment to be executed in duplicate originals by its duly authorized representative. Fort Knox Escrow Services, Inc. ActaMed Corporation By: /s/ Jane L. Elliott By: /s/ Nancy J. Ham -------------------------- ------------------------------- Name: Jane L. Elliott Name: Nancy J. Ham ------------------------ ----------------------------- Title: Senior Account Manager Title: CFO ----------------------- ---------------------------- Date: 9/27/95 Date: 9/27/95 ------------------------ ----------------------------- EXHIBIT F MAINTENANCE AND SUPPORT SERVICES ActaMed will provide United HealthCare Corporation with the following hardware, network and application (product) maintenance services which will be performed by ActaMed staff not dedicated to UHC enhancements. The cost of these maintenance services are provided as a part of the transaction and site fees, and include: - - Correction of identified system bugs in the network hardware or application; - - Changes and modifications to the ActaMed hardware, application and network required to manage scalability and capacity issues associated with increased transaction volumes; - - Changes required to maintain service level commitments as identified in Exhibit I; - - Help Desk services as defined in Exhibit I, including appropriate staffing, call response time, escalation procedures, reporting, availability, severity levels, problem log tracking and problem resolution, etc; - - Maintaining the ORBIT system and accurately performing the provider registration process on ORBIT to include the assignment of Site and Tax ID's; - - User Security set up and processing; - - Marketing Group Product Support for maintenance of a COMPUTERIZED DEFECT CONTROL SYSTEM problem log to include ongoing discussions between the Help Desk personnel and the ActaMed development staff to communicate customer needs and reactions to daily activity; - - Plan Rep Training for all current and future owned or managed plans as well as UHC corporate staff; - - Plan Rep and Corporate training will be conducted at ActaMed locations unless alternate locations are mutually agreed upon by both parties. - - Maintenance, monitoring and reporting of network and communication systems regarding stability and performance as specified in Exhibit D; F 1 - - Multi-Payor and Vendor technical and administrative support to insure collection and transmission of maximum volumes of electronic claims to UHC; Infrastructure will be upgraded by ActaMed as needed to accommodate provider transactions to UHC; - - Maintenance of appropriate connectivity to UHC host systems to maintain security provisions and data integrity of UHC transactions; - - Administer and maintain license agreement procedures with providers assuring appropriate signatures and approvals from UHC providers; - - Provide routine, updated application and network documentation for UHC sites and corporate; - - Maintain the network and application to assure data integrity of transactions; - - Maintenance releases shall be defined to include any emergency releases issued by ActaMed; - - Technology upgrades to the ActaMed hardware, network, and/or application (to include such things as fault tolerance products and services) will be included as part of ongoing maintenance; - - Provide ongoing support of and communication with the health plan representatives on electronic commerce issues, targets and strategies; - - Provide monthly billing detail by health plan, and in the aggregate, for all transaction activity. - - The following list of projects are "maintenance" and are part of the general support activities provided by ActaMed: 1. TCP/IP socket interface to ESN 2. Claim Batch Processing (CPB) - Report Generation Redesign 3. TALX Voice Response system support 4. Identification of health plans by payer ID 5. Menu navigation and file transfer 6. Accept physician claims using HCFA NSF 2.0 format F 2 EXHIBIT G ACTAMED PROVIDERLINK SECURITY FUNCTION OBJECTIVE To provide adequate data security given the confidential nature of the data and the types of transactions performed on the ActaMed ProviderLink network. Security related to ActaMeds ProviderLink is made up of multiple components: [*]. This document will concentrate on workstation and network security. FUNCTION FEATURES DATA OWNERSHIP The ActaMed ProviderLink network is a system that enables communication between a health care provider's place of business and payer host systems. While the ActaMed ProviderLink network enables the flow of data between these entities, it "owns" none of the data. [*] ActaMed ProviderLink [*]. [*] by the ActaMed ProviderLink network [*]. A [*] when installing the ActaMed ProviderLink application software. In [*] ProviderLink, this consisted of [*]. With [*] the ActaMed ProviderLink application, [*]. The [*] then [*] ActaMed ProviderLink application [*]. A [*] is used [*] to [*]. When the ActaMed ProviderLink application software [*]. It is the responsibility of [*] and the [*]. This allows [*] who [*] of ActaMeds ProviderLink. The [*] is [*] with all [*] the ActaMed's ProviderLink network, but only [*] is [*]. [*] The ActaMed ProviderLink [*] to manage security. ActaMed [*] will [*]. When [*] the [*] can perform and [*] that [*] 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 1 the [*] are granted. The [*] also [*] with some of the [*] ActaMed's ProviderLink. The ActaMed ProviderLink [*] makes a [*] with [*] the ActaMed ProviderLink network. The [*] will return [*] requested transaction [*]. In addition, the [*] that make up the ActaMed ProviderLink [*] use a [*] to control access. Each [*] call will [*] as part of [*]. In this manner, we [*] to a [*] in effect, if you know the [*] of the ActaMed ProviderLink [*] you still cannot [*]. [*] In general, [*] is [*] to the [*]. As necessary, the ActaMed ProviderLink [*] will provide [*] to satisfy the [*]. In the case of [*] ActaMed ProviderLink [*]. Also associated with each [*] are [*]. When transactions are performed to [*] the [*] then the [*]. For [*] transactions (referrals, claim status, etc.), the [*]. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. G 2 ACTALINK SECURITY FUNCTION OBJECTIVE To provide adequate data security given the confidential nature of the data and the types of transactions performed on the ActaLink network. FUNCTION FEATURES [*] ActaLink is a distributed database system which operates as if it were centralized. It implements an [*] in a [*]. It supports operations that make it [*]. The user need not be concerned with [*]. [*] a given user is provided with a [*] the information in the system is [*]. [*] all of the details for [*]. The [*] is a set of [*]. The [*] of the detailed information [*]. The [*] of the database system makes [*] and intuitive, a [*]. [*] [*] have [*]. The [*] for [*] at a [*]. Once a [*] the network [*] who must [*] with a [*] for that purpose. From that time onward, until the end of the [*] the [*] must be used by the individual [*]. All [*] and [*] is managed [*]. [*] All ActaLink [*] wherever [*] become the [*]. This [*] which network users are [*] ActaLink [*]. ActaMed provides [*] and [*] that are used only for the [*]. The [*] uses this [*] to access ActaLink through [*]. [*] 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 3 The [*] does not have ActaLink [*] so the local [*] must use a different account for personal ActaLink network access. This reduces the probability that [*] could walk up to [*] and grant [*] without [*]. A given ActaLink [*] may be [*] a variety of [*] but only if [*] have [*]. Accordingly, a physician can [*] at [*] as [*] assuming that [*]. This [*] can be granted with [*]. [*] When a [*] the [*] is [*] and the [*] is returned to [*]. The [*] determines which [*] to be [*] to the user [*] and uses [*] to prevent [*] from [*]. The [*] only presents the user with [*]. [*] The ActaLink [*] is composed of [*] may [*] information in ActaLink [*]. All access to [*] in the ActaLink system [*] are [*]. The only method of [*] is through the ActaLink [*]. A [*] to the [*] governed by [*]. [*] The [*] of using particular [*] to each [*]. This permits the [*] to allow [*] and [*] allowing some [*]. [*] correspond to [*] each of which [*]. As stated in the [*] this [*] is accomplished by [*] to the user. [*] 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 4 EXHIBIT H TRANSACTION DEFINITIONS [*] and [*] allow a user to [*] and [*] to the [*]. [*] which allows a user to [*]. [*] which allows a user to [*] about the [*] and their [*]. A user can also [*] if available. [*] which allows a user to [*] for [*]. [*] which allows a user to [*]. [*] which allows a user to [*]. [*] allow [*]. [*] which allows a user to [*]. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. H EXHIBIT I PERFORMANCE STANDARDS AND METHODS OF MEASUREMENT NETWORK AVAILABILITY The network will be available 24 hours a day, 7 days a week with the exception of scheduled downtime. - - During this time, ActaMed will achieve the following performance standards: * [*] of the time or better, hardware and modems will be operational and available for receiving/accepting calls. Hardware specifically includes the ActaMed UNIX machines and the modems attached to the hardware. Measurement will be weekly with reporting monthly. * [*] or better successful modem connectivity, until 30 days after the network is moved and is under the complete control of ActaMed, at which time [*] or better successful modem connection performance will be required. Of the calls attempted, ActaMed's bank of modems will negotiate a successful connection and offer service [*] of the time. This measurement will be based on statistics generated by the HDMS modem rack network controller and will be measured weekly with reporting monthly. * [*] or better of transactions will be successful. Of the transactions submitted to ActaMed, [*] of these will be successfully serviced. Measurement will be weekly with reporting monthly. The definition for transaction success will be those transactions that do not result in a system generated, non-user created error. They may be categorized into the following: - - transactions that return valid data - - transactions that return a meaningful message, but not an error (i.e. "Name not found" when performing an eligibility inquiry by name.) - - transactions returning an error based on the information received (i.e. "Unknown Request Format" which indicates an incorrectly formatted transaction.) [*] 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. I 1 Transaction failures are defined as those transactions that fail due to a system component failure (i.e. "Internal DCE Error" which identifies that a service necessary to complete the transaction was not available). Transaction failures will be recorded and measured according to the standards described above. AVAILABILITY MEASUREMENT Availability is measured as the number of ACTUAL hours available as a percentage of total AVAILABLE hours. Planned systems downtime is NOT included in the total availability time. The following definitions are used for calculating the availability measurement: - - DEFINED HOURS are the total days in the month multiplied by 24 hours. - - PLANNED HOURS are the planned and published hours that any system is down for maintenance or other planned outages. - - AVAILABLE HOURS are the Defined Hours minus the Planned Hours. - - UNPLANNED HOURS are the unplanned hours of downtime experienced during the month. - - ACTUAL HOURS are the Available Hours minus the Unplanned Hours. - - AVAILABILITY PERCENTAGE is determined by dividing the Actual Hours by Available Hours and multiplying the result by 100. - - CONNECTIVITY PERCENTAGE is determined by dividing the Total Successful Calls to the system by the Total Attempted Calls and multiplying the result by 100. UHC will consider these performance standards achieved if the network availability described above is achieved [*] of the time, or better. UHC will consider less than [*] performance achievement within [*] of any consecutive [*] period to be a material breach of this Service Level Agreement. Reporting as identified in Exhibit D will be the source documents from which these standards will be measured. Compliance to these standards will be determined by UHC upon reviewing the reports provided to the UHC/ActaMed liaison. [*] 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. I 2 In the event that ActaMed cannot perform according to the standards because of emergent situations. UHC will be notified following the emergency procedures outlined in this document. Reports on performance are due to UHC by no later than the 10th working day following the end of the month. LABORLINK SYSTEM ActaMed will continue to support the batch processing of Allinas LaborLink system, at the level of performance required for the ActaMed ProviderLink network. ActaMed will deliver files to the Third Party Administrator's (TPA) mailboxes as soon as UHC uploads the files to the network, usually available by 8:00 a.m. every Monday, which allows reports to be released to TPA's by noon on Monday, fifty-two weeks a year. DATA INTEGRITY ActaMed will uphold the highest standard of integrity with regard to the transmission and processing of transactions, reporting performance and service. Information received from ActaMed will be correct, and without errors, [*] of the time, measured monthly, unless otherwise stated in the SLA. All updates from COSMOS or other UHC host systems will be promptly and correctly applied [*] of the time. ACTAMED PROVIDERLINK HELP DESK Users, UHC health plans and business units agree to call the ActaMed ProviderLink Help Desk at 612-945-8500 or 1-800-446-8279 for all problem resolution when concerns cannot be resolved by the Health Plan, or a Health Plan representative is not available. The ActaMed ProviderLink Help Desk will be open from 7:00 a.m. - 5:00 p.m. CST, Monday through Friday. Voice mail is available for after hour calls. Messages left on voice mail after business hours will be retrieved the following business day. [*] 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. I 3 CALL DOCUMENTATION Utilizing the ActaMed ProviderLink Help Desk computerized problem management tool, the following information will be recorded on each call to the help desk: Site ID (PC ID) Site Name Caller Name Phone Number Health Plan Priority Level Date of Call Time of Call Problem Code Call Recipient Problem Definition Call Status Resolution Information The ActaMed ProviderLink Help Desk will attempt to accommodate any requests for additional information as long as the collection of the information does not add significant time and effort in logging the call. The ActaMed ProviderLink Help Desk statistics will be reported to UHC on a routine basis but will not be integrated into any individual health plan's call tracking statistics. DEFINITION OF THE PRIORITY LEVEL CLASSIFICATIONS All calls will be assigned to one of three priority levels. The following definitions will be used by the ActaMed ProviderLink Help Desk Representatives to assign priority to calls: SEVERITY 1 - A critical system or component is down or experiencing degraded service causing UHC's or a customer's business functions to be halted SEVERITY 2 - A single user is down, a component is experiencing degraded service, or scheduled deliverables are unavailable. This does not have a critical impact on the business, but may restrict function to some users and may impact normal business operations. SEVERITY 3 - A user's system is still operating but is experiencing difficulties or a specially requested deliverable is unavailable. The definition of each priority level and the classification of call types into priority levels will be determined through negotiation between ActaMed and UHC. The definitions may be reassessed and are subject to change. The ActaMed ProviderLink Help Desk's method of classifying calls into priority levels will be reviewed periodically with UHC. UHC will be responsible for defining additional situations and communicating to ActaMed any requests on how to classify particular call situations. 14 In the event that the ActaMed ProviderLink Help Desk computerized on-line problem management tool is down, call information will be recorded manually and entered into the system when it becomes available. MEASUREMENT Objectives have been set for both the maximum time required for communicating the current status and action plan to the user and to UHC for each priority level and for the percentage of call volumes that will meet these objectives. Measurement will begin when the problem is received by the ActaMed ProviderLink Help Desk and recorded into the computerized on-line problem management tool. Measurement will end when the call is closed, (i.e. the current status and action plan is communicated to the user and the appropriate UHC health plan has acknowledged the problem) by the ActaMed ProviderLink Help Desk representative. It is the responsibility of the UHC health plan personnel to notify ActaMed ProviderLink Help Desk when an open call has been resolved by a health plan resource, but not communicated to ActaMed by the user. The percent of calls closed within the time frame objectives will be measured by calculating, by priority level, the volume of calls closed within the time frame objectives as a percentage of total calls opened. SALES, INSTALLATION AND TRAINING When selling ProviderLink, UHC will ensure that the users conform to the technical standards that have been established in the current version of Schedule B of the ProviderLink License Agreement. UHC will continue to follow ProviderLink approved installation procedures and will provide an adequate level of user understanding of ProviderLink through appropriate training. The ProviderLink health plan representatives will be trained by ActaMed as described in Exhibit F. UHC recognizes that the quality of ActaMed's ProviderLink Help Desk support is partially dependent on UHC's sales and installation to sites with approved technical requirements and thorough training of users. CAPACITY PLANNING UHC is responsible for providing the ActaMed's ProviderLink Help Desk with as much information as possible to assist ActaMed in planning for the appropriate levels of staffing to meet the service level objectives. Forecasts of site sales, 15 installation scheduling and specific events that will impact ActaMed's ProviderLink volume of calls will be communicated to the best of UHC's ability. Major support requirements will be communicated with a 90 day lead time, whenever possible. TECHNICAL MAINTENANCE/ENHANCEMENT SCHEDULING OBJECTIVES PDR (PROVIDERLINK DEVELOPMENT REQUEST) PROCESS ActaMed will have an established process for documenting all ProviderLink user requests for correction of problems or the development of new functionality. All requests are recorded into a computerized defect control system software product including a detailed description of the requirements. All regular open requests are reviewed by the ActaMed ProviderLink development team on a routine basis, however, UHC will be responsible for establishing the development priorities. ActaMed assumes the responsibility to make the development and maintenance modifications based on UHC priorities. DURING THE TRANSITION, ACTAMED PROVIDERLINK PRODUCT MARKETING WILL AID AND CONTRIBUTE TO THE PRIORITIZATION OF UHC REQUESTS IF NEEDED. FOLLOWING THE TRANSITION PERIOD, ACTAMED WILL CONSIDER THIS ASSISTANCE A LONG TERM BILLABLE SERVICE. NETWORK MAINTENANCE RELEASES Regular ProviderLink network maintenance enhancements and fixes will be completed and certified on a regular basis. They will be released into production on Thursday evenings, AS AVAILABLE. Major software and hardware releases will be scheduled to go into production on weekends. ActaMed will communicate these changes to UHC on a regular, weekly basis. EMERGENCY MAINTENANCE RELEASES Emergency maintenance is defined as the correction of a technical bug or omission in the existing functionality of ActaMed's ProviderLink presentation software or network. The technical problem renders the ProviderLink feature or user inoperable. ActaMed will be responsible for ongoing monitoring and quality control of the network and application. UHC will expect ActaMed to have a well defined problem identification procedure to document and fix inoperable functionality before recognized by UHC or its users. However, when this has not been 16 accomplished, UHC will in cooperation with an ActaMed staff resource, complete a PDR with as much information as is available, designate it as emergency, and submit it to the ActaMed ProviderLink Product Marketing staff. The UHC/ActaMed liaison is responsible for supporting ActaMed with the initial research and documentation of the problem via the PDR. The service level performance objective for emergency correction will be within ten business days. Tracking of the fix will begin at the time of ActaMed's receipt of the PDR. Emergency changes will be released on any given day. These releases are not subject to the Thursday release schedule. The correction of the emergency technical problem will be in the control of the ActaMed development team. ActaMed is not responsible for correcting problems located outside of the ActaMed ProviderLink presentation software or network, i.e. a specific user's configuration, hardware problems, or technical problems located within another vendor's software. APPLICATION MAINTENANCE RELEASES Application Maintenance releases will include maintenance and fixes of presentation software bugs identified and documented in the PDR process. A software bug is defined as existing functionality that fails to perform as designed. Where applicable, it will be the responsibility of UHC to assist ActaMed/ProviderLink development in thoroughly researching user needs and determining the implication of product changes on all stakeholders within United HealthCare and ProviderLink end users. The registration, installation and training of ProviderLink users on the features of any maintenance release is the primary responsibility of UHC. ENHANCEMENT RELEASES All enhancements to the ActaMed ProviderLink software or network will be provided to UHC health plans or affiliates as outlined in the Service Level Agreement. Enhancements are defined as the addition of functionality that does not currently exist in the ProviderLink system, or is currently not supported. In addition, these releases may include maintenance and fixes of presentation or other software bugs not included in the routine application maintenance releases. An enhancement release may also include modifications to any or all of the current ProviderLink features of Claim Submissions, Eligibility, Referrals, Referral Status, Claims Status, ProviderLink E-mail/Fax, and Provider Directory. 17 Enhancements specific to UHC, and those created exclusively for UHC by the ActaMed/UHC dedicated team, will be released according to the agreed upon schedule. Information specific to the dedicated team and enhancements paid for by UHC, will be outlined in the Dedicated Team Agreement. It is the responsibility of UHC to assist ActaMed/ProviderLink development in thoroughly researching user needs and determining the implication of product enhancements on all stakeholders within United HealthCare and ProviderLink end users. The registration, installation and training of ProviderLink users on the features of any new release is the primary responsibility of UHC. All requests for the development of enhancements in functionality will be communicated to ActaMed through the PDR process. COMMUNICATION OF TECHNICAL REQUIREMENTS The ActaMed ProviderLink development team will formally communicate to UHC's health plan ProviderLink Managers, 90 days prior to release date, any anticipated changes in standard hardware requirements, as defined in the current version of schedule B of the ProviderLink License Agreement, that would impact UHC's users of new ProviderLink software releases. PLANNING FOR THE YEAR 2000 ActaMed will plan for, and successfully implement, changes to all applications and network tools and services to accommodate the transition to the year 2000. ActaMed will perform this task on internal software as part of the maintenance agreement with UHC and will be done at no extra cost. If UHC data formats change as a result of adding support for the year 2000, UHC will prioritize this exclusive change for ActaMed and submit the change request for completion by the UHC dedicated team. 18 ALLINA SERVICE LEVEL AGREEMENT (SLA) ActaMed will perform to the level of service described in the 1996 agreement negotiated with Allina by the UHC EDI Services Department through the duration of the 1996 calendar year. 19 EXHIBIT J UHC Operating Environment (a) [*] will provide [*] between ActaMed and [*]. (b) [*] will provide [*] between [*]. (c) [*] will provide [*]. UHC will provide [*] the communications between ActaMed and [*]. (d) [*] may [*] as appropriate [*]. ATTACHED DIAGRAMS: In the first diagram, labeled Attachment 1, the division of responsibility is identified by the vertical line. This division of responsibility is depicted in more detail by the second diagram, labeled 'ProviderLink Architecture'. In the second diagram, the cloud which represents [*] at the bottom of the page [*] are the responsibility of [*]. The [*] to connect the [*]. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 20 EXHIBIT K EMC CONTRACTS
- ------------------------------------------------------------------------------------------------------------------------------------ VENDOR CONTRACT RENEWAL PRODUCTION FEES PER CLAIM CHARGE TO PROVIDER DATE DATE DATE - ------------------------------------------------------------------------------------------------------------------------------------ [*]
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. EX-10.14 6 EXHIBIT 10.14 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. SERVICES AGREEMENT This SERVICES AGREEMENT (the "Services Agreement" or "Agreement") is made and entered into as of December 31, 1997 by and between ACTAMED CORPORATION, a Georgia Corporation ("ActaMed") and SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC., a Delaware Corporation ("SBCL"). BACKGROUND ActaMed is in the business of providing electronic data interchange products and services to the health care industry, including its ProviderLink software, and desires to develop business involving automated laboratory order entry and results reporting services. SBCL provides laboratory testing services to certain Providers who use SBCL Software (as defined in the License Agreement) for electronic clinical laboratory test order entry and/or test result reporting between an SBCL Lab and such Provider. In addition, SBCL uses the SBCL Software to allow [*] to send laboratory test orders entered electronically to an SBCL Lab and/or to have the test results reported electronically back to the PSC or the Provider ordering the test. The parties previously entered into the Development Agreement pursuant to which ActaMed and SBCL are jointly developing the ActaLab Software. Simultaneously with the execution of this Agreement, ActaMed and SBCL are entering into the Purchase Agreement pursuant to which ActaMed is purchasing and SBCL is selling certain assets associated with SBCL's provision of Lab EDI Services, as more fully set forth therein. Also concurrently with the execution and delivery of this Agreement, SBCL and ActaMed are entering into the License Agreement whereby SBCL, among other things, grants ActaMed a license to the SBCL Software. This Agreement sets forth the parties' agreements relating to their rights and obligations following the date hereof relating to provision of Lab EDI Services to Automated Providers. Pursuant to the Purchase Agreement, the Parties contemplate that there will be a staged transfer to ActaMed of SCAN Assets. The transfer of Region One SCAN Assets is to occur on the Region One Transfer Date. The transfer of the other Regions will occur sequentially when the Transfer Benchmarks (as defined in the Purchase Agreement) have been met. NOW THEREFORE, in consideration of the premises and the mutual promises contained herein, the parties, intending to be legally bound, agree as follows: [*] 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. I. DEFINITIONS. Capitalized terms used in this Agreement and not otherwise defined herein are defined in EXHIBIT A attached hereto. II. NETWORK READINESS SERVICES. A. GATEWAY REPLICATION. SBCL shall be responsible [*] to provide such reasonable and appropriate software development, installation and support services as are necessary to establish connectivity with an ActaMed gateway (the "ACTAMED GATEWAY") that works substantially as the SBCL gateway works as of the date hereof. In connection with such services from SBCL: 1. ActaMed shall [*] order, acquire, install and configure the necessary hardware and data communications lines required to install and operate the appropriate gateway systems, including without limitation a [*] modems, 800 phone service, [*] and data communications lines for connection to SBCL systems. SBCL will provide specifications and guidance to assist ActaMed in this effort. 2. SBCL will install the gateway software on ActaMed's computer and modify the gateway software as necessary to cause it to communicate with the SBCL systems. At SBCL's determination, this may include new enhancements or additional software as needed to allow the ActaMed Gateway to transmit Transmittal Information for Automated Providers using the SCAN Network. 3. At such time as the ActaMed Gateway has been adequately (in SBCL's determination) tested, including for compliance with applicable SBCL internal standards and using SBCL sample clinical laboratory test orders and/or test result report data, in which testing ActaMed and SBCL shall cooperate, SBCL shall so notify ActaMed. For a period of up to thirty (30) days after the date of such notice, ActaMed shall be entitled to perform such quality assurance testing as it shall reasonably deem appropriate. SBCL shall provide reasonable assistance to ActaMed in this process. If the system is not performing substantially the same as SBCL's gateway and as necessary to enable ActaMed to meet the Key Performance Standards and to provide the Lab EDI Services using the ActaMed Gateway, ActaMed shall provide timely notice to SBCL of such deficiency or performance problem within such thirty (30) day period. SBCL shall supply the appropriate personnel to investigate and correct any such reported deficiencies or performance problems. The acceptance period shall be extended to two (2) weeks beyond the time of such correction. When corrected to the reasonable satisfaction of ActaMed and SBCL, or if SBCL is notified of no further deficiencies or performance problems within such period, the ActaMed Gateway shall be deemed ready and accepted by ActaMed. 4. SBCL will provide reasonable training of ActaMed personnel and any available documentation to allow ActaMed to operate and support its gateway independently; [*] 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- provided that SBCL will not provide [*] or other base-line training that may be required by ActaMed. 5. The foregoing procedures of this Section II.A shall be completed within one hundred twenty (120) days after the date hereof. 6. After acceptance of the ActaMed Gateway and until [*] SBCL shall, at ActaMed's written request, provide such maintenance and related support to the ActaMed Gateway as may be necessary to continue its effective operation at substantially the same performance levels as SBCL experienced on its gateway immediately prior to the date hereof. SBCL shall charge ActaMed for such services at the then industry standard rates for similar services. After [*] (i) SBCL makes no representation or warranty as to the performance of the ActaMed Gateway software systems so established by SBCL hereunder; and (ii) ActaMed may request SBCL to provide such support and, if SBCL elects to provide such support, SBCL may charge ActaMed for such services at the then industry standard rates for similar services. B. MIGRATION PERIOD. After the Transfer Date of a Region, SBCL and ActaMed shall have the following obligations with respect to SBCL Sites transferred to ActaMed in that Region: 1. ACTAMED TO MIGRATE SITES. ActaMed will use its good faith efforts to migrate the SBCL Sites so transferred from communicating with the SBCL gateway to communicating with the ActaMed Gateway as soon as practicable, and shall similarly use its best efforts, and take all steps reasonably necessary, to assign financial responsibility or otherwise change the billing of dedicated phone lines installed in Automated Providers' offices for Lab EDI Services from SBCL over to ActaMed. SBCL will support ActaMed in ActaMed's efforts to transfer the local phone lines to ActaMed's account and, subject to ActaMed's obligation under Section II.B.7.(g) hereof, pay any charges, assessments, fees or other amounts incurred by SBCL for such transfer. 2. EDI AGREEMENT AMENDMENTS. ActaMed shall obtain signed amendments to any existing CIS Agreement between a Provider and SBCL or a new CIS Agreement between the Provider and ActaMed containing the provisions set forth in EXHIBIT II.B.2(a). SBCL shall obtain a signed agreement from such Provider for Lab EDI Services by ActaMed in the form of EXHIBIT II.B.2(b). 3. ASSISTANCE FROM SBCL. SBCL will make available to ActaMed such resources as SBCL determines is reasonable and appropriate for the transfer of each Region, at no cost to ActaMed. After the earlier of (i) [*] after the Transfer Date for a particular Region or (ii) the full migration of SBCL Sites in such Region from communication with the SBCL gateway to communication with the ActaMed Gateway, SBCL will continue to use its good faith efforts to make such resources available to ActaMed and may charge ActaMed therefor at then industry standard rates for similar services. 4. SUPPORT SERVICES. From time to time prior to the [*] [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -3- a. ActaMed may request that SBCL's [*] provide services to ActaMed in [*] to assist ActaMed in the delivery of items relating to ActaMed's delivery of Lab EDI Services to Automated Providers (provided ActaMed delivers the item to [*] for such delivery to the Automated Provider), such services to be provided consistently with the manner and extent to which SBCL has used such [*] during the twelve (12) month period prior to the Transfer Date of the Region in [*] is located. SBCL shall direct its [*] to provide such services provided that SBCL shall not be responsible for any Losses incurred as a result of providing such services. Nothing in this Section III.B.4 shall require SBCL, ActaMed or [*] to provide any service if to do so would cause any party, including [*] to violate any Regulation. b. SBCL may request that ActaMed's employees provide services to SBCL in the course of their normal duties to assist SBCL in the delivery of items (E.G., [*]) to Automated Providers (provided SBCL delivers the item to the employee for such delivery to the Automated Provider), such services to be provided consistently with the manner and extent to which SBCL has used employees for such purposes during the twelve (12) month period prior to the Transfer Date of the Region in which such employee works. ActaMed shall direct its employees to provide such services provided that ActaMed shall not be responsible for any Losses incurred as a result of providing such services. Nothing in this Section III.B.4 shall require ActaMed, SBCL or such employee to provide any service if to do so would cause any party, including the respective employee, to violate any Regulation. 5. USE OF SBCL FACILITIES BY TRANSFERRED EMPLOYEES. ActaMed will employ the Transferred Employees in accordance with the provisions of Article VI of the Asset Purchase Agreement. From the Transfer Date of a Region until [*] after the Transfer Date of that Region, such Transferred Employees may continue to use such office space, office equipment, office telephones, office supplies, and have access to such office services as such Transferred Employees had immediately prior to the applicable Transfer Date (collectively, "OFFICE SPACE"), [*] whether or not such Transferred Employees are responsible for ActaMed Sites. No employees of ActaMed other than the Transferred Employees currently assigned to such Office Space shall be allowed to use such Office Space, and ActaMed may not place signage inside or outside of such Office Space or use such Office Space for any operations other than the transition contemplated by this Section II and the provision by ActaMed of Lab EDI Services. 6. SCAN NETWORK MAINTENANCE. SBCL shall continue to have and support Lab EDI Services between each SBCL Site and SBCL's gateway until migration of such SBCL Site to the ActaMed Gateway is completed. SBCL will continue to operate and maintain its gateway systems for such purposes. [*] 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- 7. ACTAMED PAYMENTS TO SBCL. In consideration of services provided under this Agreement, ActaMed will pay SBCL the following amounts (in addition to any other amounts which may be charged to ActaMed by SBCL as expressly set forth in this Agreement): a. A fee in the amount of [*] per month for each month after the Region One Transfer Date (prorated for any portion thereof); provided that no payment shall be made under this clause a. either (i) if a payment is made under clause b. below, after the third month after the Region One Transfer Date, or (ii) if a payment is not made under clause b. below, after the Region Two Transfer Date. b. A fee in the amount of [*] for each month prior to the Region Two Transfer Date (prorated for portion thereof) commencing with the fourth month after the Region One Transfer Date, provided, however, that payment under this Section II.B.7.b shall not be made unless the delay in the Region Two Transfer Date beyond the date three (3) months after the Region One Transfer Date is due to ActaMed's failure to meet the Transfer Benchmarks (with any dispute with respect thereto to be resolved in accordance with Section XV hereof). c. A fee in the amount of [*] per month for each month after the Region Two Transfer Date (prorated for any portion thereof), provided that no payment shall be made under this clause c. after the Region Three Transfer Date; d. A fee in the amount of [*] per month after the Region Three Transfer Date (prorated for any portion thereof), provided that no payment shall be made under this clause d. after the Region Four Transfer Date; e. Until the date which is twelve (12) months after the Transfer Date of a Region, reimbursement for any local and long distance telecommunication services (including 800 and 888 service other than 800 and 888 numbers used to [*]) billed to SBCL in respect of SBCL Sites in that Region; f. From and after the date which is twelve (12) months from the Transfer Date of a Region, an amount equal to [*] of the amount of any local and long distance telecommunication services (including 800 and 888 service other than 800 and 888 numbers used to [*]) billed to SBCL in respect of SBCL Sites in that Region; and g. Reimbursement for [*] of any charges, assessments, fees or other amounts incurred by SBCL for the transfer of any dedicated phone lines installed in Automated Providers' offices for Lab EDI Services into the ActaMed name, including without limitation any transfer fees or new installation fees. C. PAYMENT TERMS FOR ACTAMED PAYMENTS TO SBCL. SBCL shall invoice ActaMed monthly for the services rendered by it and chargeable to, or to be reimbursed by, ActaMed pursuant to this Section II. All amounts shown due on such invoice shall be paid within [*] after the date of the invoice. Late payments shall be subject to a late fee equal to [*] per [*] 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. -5- month on the overdue amount. In the event ActaMed disputes any amount shown due on such invoice, ActaMed shall pay timely any undisputed amounts and send a Dispute Notice to SBCL with respect to any disputed amounts. For a period of thirty (30) days after the date of the Dispute Notice, ActaMed shall have Audit Rights with respect to the portions of SBCL's books and records that relate to the subject of the dispute. In the event the parties are unable to resolve the disputed matter, the matter shall be resolved in accordance with Section XV hereof and application of any late fee to such disputed amount shall be tolled until conclusion of such proceedings and then applied only to the amount so determined to be due. III. SERVICES AFTER TRANSFER. A. PLANNING AND OVERSIGHT COMMITTEE. On or promptly after the Region One Transfer Date, SBCL and ActaMed will establish an Oversight Committee having the obligations set forth in this Section III (the "OVERSIGHT COMMITTEE"). The parties may thereafter, in their respective sole discretion, change the complement of the Oversight Committee, including without limitation to decrease or increase the number of members on the Oversight Committee, so long as the Oversight Committee shall continuously have equal numbers of persons representing ActaMed and SBCL, provided that SBCL may appoint a majority of the Oversight Committee members if ActaMed consents thereto. The Oversight Committee shall continue in effect through the term of the Agreement (including any applicable renewal period). Each member of the Oversight Committee will have responsibility to, among other things, 1. review the performance of ActaMed hereunder, as measured by the Performance Standards, 2. review the compliance of ActaMed with Regulations and report to ActaMed and SBCL with respect to compliance matters, 3. discuss trends in the health care information services industry and service type and quality offered by competitors of ActaMed, 4. exchange information regarding strategic needs and directions of the respective ActaMed and SBCL businesses that are relevant to the relationships contemplated by this Agreement, 5. exchange information about technological developments for electronic connectivity in the health care information services industry, 6. provide feedback to ActaMed and SBCL regarding the implementation and effect of ActaMed's preferred provider status pursuant to Section VII of this Agreement, 7. notify SBCL, ActaMed and other members of the Oversight Committee at any time such member has any knowledge that ActaMed has not performed in accordance with the Performance Standards, and make recommendations to ActaMed and SBCL as to remedying -6- performance that does not comply with this Agreement, including without limitation the Performance Standards, and 8. examine and, collectively with the other members, report to ActaMed and SBCL from time to time on ways in which Agreed Services can be improved. B. AGREED SERVICES. ActaMed will provide the following services to SBCL and Automated Providers at ActaMed Sites in accordance with the Performance Standards and will take all reasonable and appropriate action to preserve the Network and the goodwill of the Automated Providers utilizing such services: 1. NETWORK SUPPORT. ActaMed shall maintain and support the Network for Lab EDI Services between Automated Providers and an SBCL Lab and shall ensure that the Network meets or exceeds all Network Standards. 2. INSTALLATION AND TRAINING. ActaMed will provide installation, set up and training services at all ActaMed Sites as reasonably necessary to enable such ActaMed Sites to utilize the Network accurately and efficiently. In this connection, ActaMed will (i) install software, and if necessary and appropriate and consistent with contractual relationships between SBCL and ActaMed, hardware, (ii) confirm set up thereof, (iii) confirm the ability after set up to successfully transmit and receive modem communications with the applicable SBCL Lab and that requisitions and results functionality is accurate, and (iv) provide competent and timely training to the Automated Provider's personnel regarding Lab EDI Services. Such installation, set up and training services shall be provided to, and connectivity to the Network established for, any Provider or PSC designated by SBCL. If ActaMed identifies a Provider which is a potential new customer for Lab EDI Services, it shall so notify SBCL and SBCL shall determine if such installation, set up and training services shall be provided to such Provider. SBCL and ActaMed shall [*] to establish [*] to provide guidance on [*] of ActaMed suggested Automated Providers. Prior to any installation, set up and training services being rendered hereunder, SBCL and ActaMed shall have each entered into an agreement for such Lab EDI Services with such new customer which agreement shall contain the provisions set forth on EXHIBIT II.B.2(b). 3. SPECIAL SERVICES AT PIF SITES. At up to [*] (the "PIF NUMBER") sites selected by SBCL prior to the [*] [*] where installation training and set up services are required (the "PIF SITES"), SBCL shall be entitled, by written request to ActaMed and payment of the [*] set forth in Section IV.B.2, to require that installation, set up and training services be provided on a top priority accelerated basis. 4. INITIAL ROLL OUT OF ACTALAB SOFTWARE. After market launch of the ActaLab Software (which shall be only after the ActaLab Software functions, features and performance have been accepted by SBCL in accordance with the Development Agreement and the requirement in this Agreement that it comply with Regulations), ActaMed will begin to replace the SCAN Software at ActaMed Sites with the ActaLab Software in accordance with a roll out plan developed by ActaMed [*] 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- which shall be designed to deploy the ActaLab Software as quickly as practicable with minimal disruption to Automated Providers. ActaMed shall submit the roll out plan to SBCL sufficiently in advance to allow SBCL reasonable opportunity to review and comment on the roll out plan prior to implementation, and shall use its good faith efforts to incorporate SBCL's comments thereon. Such roll out, however, shall not be made to any Provider which has not executed an agreement containing the provisions set forth in EXHIBIT II.B.2(a) or (b). 5. CUSTOMER SUPPORT. ActaMed will provide all reasonably necessary and appropriate end user support for issues relating to connectivity to the Network utilizing any Network Software in use at such time, including without limitation, help desk assistance to Automated Providers, hardware support to applicable Automated Providers, user training and bug fixes to the Network. All customer support services shall be performed in a competent and professional manner meeting or exceeding generally accepted industry standards for confidential EDI and will be rendered by qualified personnel who will perform the tasks assigned consistently with good professional practice and the state of the art involved. SBCL shall have the right to request the removal from Automated Providers accounts of any ActaMed personnel used by ActaMed to perform customer support services, provided such objection would not constitute unlawful discrimination, if SBCL becomes aware that such person is causing customer dissatisfaction. If an objection is raised by SBCL, ActaMed agrees to confer with SBCL and endeavor to furnish a replacement as quickly as is practicable. 6. MONITORING. ActaMed shall continuously monitor its performance against the Performance Standards and shall notify SBCL at any time when it fails to meet the Performance Standards. SBCL shall similarly notify ActaMed of any such failure, provided that the failure to notify shall not constitute a waiver of SBCL's rights hereunder. In the event that ActaMed fails to meet any Performance Standard at any time, ActaMed shall promptly diagnose the cause of the failure and shall work continuously and diligently to correct such failure to perform until it is corrected. Any failure to meet the Performance Standards which occurs while ActaMed is working to remedy the problem shall continue to be counted for the purposes of Section XII.B.1, Section VII.B.4 and IV.F. 7. REPORTS. ActaMed and SBCL will, at their own expense, provide the other with the reports specified on EXHIBIT III.B.7 hereto at the times specified thereon. C. PERFORMANCE STANDARDS. "Performance Standards" shall mean the Network Standards and the Customer Support Standards. EXHIBIT III.C-1 to this Agreement specifies the performance standards for the Network which must be maintained and the applicable time periods for measuring compliance with such standards (the "NETWORK STANDARDS"). EXHIBIT III.C-2 to this Agreement specifies the customer support standards ActaMed must achieve and maintain and the applicable time periods for measuring compliance with such standards (the "CUSTOMER SUPPORT STANDARDS"). In no event shall the Performance Standards be less than the comparable Network maintenance and support standards and services ActaMed utilizes for or provides to its other customers receiving services comparable to Lab EDI Services. ActaMed shall have sixty (60) days following the date -8- hereof to validate the metric performance level set forth in the Performance Standards as representative of SBCL's provision of services which are now Agreed Services. ActaMed shall perform the validation (with cooperation from and access to relevant records and data of SBCL) within such sixty (60) day period, and based upon the period of [*]. In the event that ActaMed's validation process yields a metric different from that set forth in the Performance Standards, a new metric for this Agreement shall be mutually agreed by SBCL and ActaMed, with any disputes with respect thereto resolved in accordance with Section XV hereof. D. SBCL OBLIGATIONS. SBCL shall have no obligation to provide any support, training or maintenance services to Automated Providers, other than as expressly set forth herein. E. Records and Audits. 1. ActaMed shall maintain accurate and complete records regarding the transmissions to and from Automated Providers and SBCL in accordance with accepted information storage practices in the clinical laboratories industry and in compliance with applicable Regulations, but in no event for less than [*] or such longer period as may be required by Regulations or the Integrity Agreement. 2. The records maintained pursuant to Section III.E.1 above shall include without limitation records of the amounts ActaMed charges SBCL under this Agreement, with a system of audit trails, records and controls sufficient to allow SBCL to audit such transactions and charges under this Agreement and to assure satisfaction of any requirements imposed on SBCL by their external auditors or on ActaMed or SBCL by government officials enforcing applicable Regulations. 3. In addition to the grant of Audit Rights pursuant to Sections IV.B, IV.C.3 and VI.B of this Agreement, SBCL shall have the right, exercisable not more often than twice in each calendar year for the first three years after the date hereof, and once in each calendar year thereafter, to have any of its agents or employees, who or which are reasonably acceptable to ActaMed, audit, in accordance with the Audit Rights, the books and records of ActaMed relating to such SBCL transactions to examine or determine the proper amounts which should have been billed to SBCL, the amounts which were billed to SBCL, and the amounts which SBCL has paid under this Agreement. 4. In any exercise of Audit Rights hereunder, including without limitation pursuant to Section III.E.3, SBCL shall give ActaMed two week's prior notice of any such audit, and shall abide by reasonable ActaMed security and confidentiality procedures during the audit. SBCL and ActaMed shall each bear their own costs associated with such audit, provided that in the event the audit determines that ActaMed has overcharged SBCL by more than ten percent (10%) of the amount properly due ActaMed in any month, ActaMed shall pay all costs of such audit. If the audit reveals an overpayment by SBCL to ActaMed, ActaMed shall promptly refund such overpayment to [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -9- SBCL. If the audit reveals an underpayment by SBCL, SBCL shall promptly pay to ActaMed the amount of such underpayment. IV. PAYMENTS TO ACTAMED BY SBCL. A. FEES FOR FIXED FEE SITES. SBCL will pay ActaMed for the Agreed Services rendered to Fixed Fee Sites as follows: 1. Fixed Fee payments shall be due [*] on the first (1st) business day of [*] beginning on January 2, 1998 and shall be in an amount equal to a. from January 2, 1998 until the day before the first business day of [*], [*] per month; b. from the first business day of [*] until [*]. B. TRANSACTION FEE FOR SITES OTHER THAN FIXED FEE SITES. From the Region One Transfer Date and continuing until the day before the [*] SBCL will pay to ActaMed, for Agreed Services in respect of sites which are not Fixed Fee Sites only, within thirty (30) days after receipt of an invoice from ActaMed detailing the charges then due, a fee equal to the sum of [*] SBCL in accordance with the Performance Standards during the period covered by the invoice (the "TRANSACTION FEE"). C. [*]. Provided the conditions set forth in Section IV.D are satisfied, SBCL shall pay the following amounts to ActaMed as hereinafter in this Section IV.C provided: 1. An amount (the "FIRST VARIABLE FEE") equal to (i) [*] minus the aggregate of the amount billed to SBCL pursuant to Section IV.B.1 above (the "TRANSACTION FEE AMOUNT") prior to the [*]; (ii) [*] minus the sum of (A) the Transaction Fee Amount for the period from the date hereof to the [*] and (B) the amount paid pursuant to clause (i) above; and (iii) [*] minus the sum of (A) the Transaction Fee Amount for the period from the date hereof to the [*] and (B) the amount paid pursuant to clauses (i) and (ii) above. 2. An amount (the "SECOND VARIABLE FEE" and together with the First Variable Fee, the "VARIABLE FEES") equal to (i) [*] minus the aggregate of the amount paid plus amounts owed (whether or not billed) pursuant to Section IV.M.1 below (the "PIF AMOUNT") prior to the [*]; (ii) [*] minus the sum of (A) the PIF Amount for the period from the date hereof to the [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -10- [*] and (B) the amount paid pursuant to clause (i) above; and (iii) [*] minus the sum of (A) the PIF Amount for the period from the date hereof to the [*] and (B) the amount paid pursuant to clauses (i) and (ii) above; PROVIDED THAT if the PIF Amount with respect to an annual period (other than the last such annual period) is at least [*] of the aforementioned dollar amount for that annual period, no payment shall be due under this Section IV.B.2 for such annual period. 3. Subject to Section IV.D, the Variable Fees shall be paid annually within thirty (30) days after invoice therefor from ActaMed, which shall be (i) submitted to SBCL within [*] (ii) detail the calculation thereof, and (iii) reflect the Variable Fees payable in respect of the most recently completed annual period only. SBCL shall have Audit Rights with respect to any disputed amount of the Variable Fees. D. CONDITIONS TO [*]. ActaMed and SBCL have agreed that the foregoing [*] with respect to the provision of Lab EDI Services after the date hereof shall apply (i) [*] and (ii) to the extent set forth in this Section IV.D: 1. With respect to [*] (i) such fees shall cease to be payable if (i) ActaMed shall fail to satisfy any of the Key Performance Standards, or (ii) such fees [*] for the applicable year shall not be payable (but shall be treated as paid for purposes of calculation of any amount payable in the following year) if any of the following shall occur: a. As of [*] shall [*] of [*] at [*] it has [*] as of [*]; b. As of [*] shall [*] of [*] at [*] it has [*] as of [*]; c. As of [*] shall [*] of [*] at [*] it has [*] as of [*]; 2. With respect to the [*] such fees shall be payable [*] in accordance with the Performance Standards [*] pursuant to Section [*]. E. LATE FEE. A late fee of [*] per month on the unpaid balance of any payments owing pursuant to this Section IV after expiration of the thirty (30) day period for payment thereof shall be due from SBCL. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -11- F. [*] OF PAYMENTS. After the [*] Anniversary, with respect to any month after ActaMed has [*] with the [*] for [*] SBCL may, at its option, [*] or other [*] to [*] for such month [*] established with [*] to be [*] the date as of which [*] with the [*]. G. DEFINITION OF FIXED FEE SITES. "Fixed Fee Sites" shall mean the [*] PROVIDED HOWEVER THAT: 1. if the number of SBCL Sites transferred to ActaMed on any Transfer Date, when added to the number of ActaMed Sites on the date of such Transfer, totals more than [*] any sites in excess of [*] (such excess to be identified as described in the next sentence) shall not be Fixed Fee Sites. The sites to be excluded from Fixed Fee Sites will be (i) from the Region transferred on such Transfer Date, and (ii) selected, in order, from a list of such sites that is sorted on the basis of the date of the first successful Requisition from each site, beginning with the site which had the most recent first successful Requisition, and continuing to the sites with the next most recent first successful Requisition; and 2. if, on the last day of [*] the number of sites that are Fixed Fee Sites [*] a number of sites, not to exceed [*] sites in any year, that are not Fixed Fee Sites [*] PROVIDED THAT the aggregate number of Fixed Fee Sites [*]. The [*] will be [*] in order, from a list of [*] that is sorted on the basis of the date of the first successful Requisition from a site, beginning with the site on such list which had the least recent first successful Requisition, and continuing to the sites with next least recent first successful Requisition; [*]. H. RENEGOTIATION OF PRICES. For a period of at least [*] prior to [*] the parties will negotiate new Transaction Fees which shall apply for the [*] period beginning on [*]. The parties will thereafter similarly negotiate new Transaction Fees for each two (2) year period thereafter for each renewal period in the term of this Agreement. [*] [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -12- [*]. I. EFFECT OF [*] CHANGES. If either of the following occurs, then the parties agree to negotiate in good faith to restructure the Transaction Fees payable or other provisions hereunder in a manner that will be fair to both parties while at the same time preserving the economic expectations of the parties under this Agreement to the greatest extent possible and in a manner consistent with the [*]. Any dispute as to the amendments to this Agreement to be made in the event of a [*] shall be settled in accordance with the procedures set forth in Article XV hereof. 1. Any [*] is [*] or determined to [*] including without limitation any significant reduction in SBCL's [*] or significant increase in the [*] as compared to SBCL's [*] and [*] as of the date of this Agreement as set forth on EXHIBIT IV.I hereto (which shall be delivered within thirty (30) days after the date hereof); or 2. if the Automated Providers' [*] such that the effective [*] for such period [*] with no corresponding [*]. J. PHONE LINE TRANSFER COSTS. SBCL shall reimburse ActaMed for [*] of any charges, assessments, fees or other amounts incurred by ActaMed for the transfer of any dedicated phone lines installed in Automated Providers' offices for Lab EDI Services into the ActaMed name, including without limitation any transfer fees or new installation fees. K. ActaMed Obligations Regarding Hardware. 1. ActaMed shall reimburse SBCL for the cost of hardware purchased by SBCL and located at SBCL Sites other than Fixed Fee Sites in a Region to be transferred to ActaMed on a Transfer Date. 2. Subject to the limitations of Section III.L.2(b) hereof, ActaMed and SBCL understand and agree that, [*] are to [*] for providing [*] to Providers, there will be situations where [*] is [*] for ActaMed to provide Lab EDI Services to certain Providers. ActaMed desires that the number of such new sites be capped. SBCL and ActaMed have therefore agreed that: [*] 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. -13- a. ActaMed shall provide [*], PC Systems for up to [*]. ActaMed may provide hardware for such [*] by either moving existing PC Systems from a canceled Fixed Fee Site or by providing new PC Systems, as it determines in its sole discretion. b. In addition, ActaMed shall provide, prior to the [*] Anniversary, [*] PC Systems for New Sites or [*] in excess of the [*]. Notwithstanding the above, this obligation shall be (a) limited to [*] PC Systems prior to the [*] and (b) reduced by each PC System the cost of which is reimbursed to SBCL subject to Section IV.K.1 above. c. Any PC Systems in excess of those required to be provided by ActaMed under (i) and (ii) above may be provided by SBCL to the Automated Provider, subject only to the Automated Provider entering into a contract with, and satisfactory to, SBCL for the use of such PC System. L. SPECIAL FEE FOR USE OF SCAN DEVELOPMENTS. SBCL will pay ActaMed a fee equal to [*], or [*] received by SBCL for [*] that use SCAN Developments for Lab EDI Services over the SCAN Network and which [*]. M. SPECIAL FEES FOR NEW SITES. From the Region One Transfer Date and continuing until the day before the [*], SBCL will pay to ActaMed, within thirty (30) days after receipt of an invoice from ActaMed detailing the charges then due, the following amounts: 1. a one time fee of [*] for [*] services at each PIF Site [*] or "PIF"); and 2. up to the first [*] of any out-of-pocket cost required to be incurred by ActaMed to provide the bar code label printer to be used for orders to SBCL Labs at any New Site or any [*] during the period covered by the invoice. ActaMed shall charge the Automated Provider [*] using the bar code label printer for anything other than Lab EDI Services for the fair market value of any such use. If an Automated Provider ceases to use Lab EDI Services, SBCL may direct where the printer previously installed at such Automated Provider will be next installed or ActaMed shall purchase, at its cost and without reimbursement under this Section IV.M.2, a bar code label printer for installation at another Automated Provider's location to be determined by SBCL. N. DISPUTED INVOICES. In the event SBCL disputes any amount shown due on such invoice, SBCL shall send a Dispute Notice to ActaMed. In such event, SBCL shall timely pay any undisputed amount to ActaMed and shall have Audit Rights with respect to the portions of ActaMed's books and records that relate to the subject of the dispute. In the event the parties are unable to resolve the disputed matter, the matter shall be resolved in accordance with Section XV [*] 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. -14- hereof and application of any late fee to such disputed amount shall be tolled until conclusion of such proceedings and then applied only to the amount so determined to be due. V. CHANGES AND DEVELOPMENT OF NEW FUNCTIONALITY. A. MAINTENANCE. ActaMed shall provide such maintenance upgrades and updates to the Network as set forth on EXHIBIT V.A and shall maintain and enhance the Network so as to improve from time to time the speed, accuracy, security and other features and functions available for Lab EDI Services. ActaMed shall make available to Automated Providers all such modified, upgraded, enhanced or improved services or software at no additional charge except as permitted by this Agreement or applicable agreement with Automated Providers. B. YEAR 2000 COMPLIANCE. ActaMed shall provide, without charge to SBCL or to Automated Providers (unless the Automated Providers own the PC Systems needing Year 2000 compliance), such maintenance and hardware upgrades and updates to the Network (other than the SBCL gateway), or other software relating (or which will relate) to Lab EDI Services as is necessary for all such software and related hardware to include acceptable design and performance specifications so that any or all such software will not abruptly end or provide invalid or incorrect results due to issues related to Year 2000 compliance and will otherwise be in compliance with the warranties set forth in EXHIBIT V.B hereto. Year 2000 compliance requires that the design and performance specifications of the hardware, software and/or other items include, without limitation: date data century recognition, calculations that accommodate same century and multi-century formulas and date values, and date data interface values that reflect the century change at the year 2000. SBCL shall provide specifications for Year 2000 compliance for SBCL systems in sufficient time to allow ActaMed and SBCL to mutually agree on and ActaMed to complete such modifications as are necessary to enable ActaMed to meet the requirements of this Section V.B. SBCL will also provide reasonable cooperation and assistance to ensure ActaMed's understanding of the requirements of this Section V.B. Prior to any sale of PC Systems to any Automated Provider or potential Automated Provider, ActaMed shall disclose to such Automated Provider any Year 2000 compliance problems of such PC System which are then known to ActaMed after reasonable inquiry. A condition of any such sale shall be appropriate arrangements for making the PC System to be sold Year 2000 compliant. In this regard, the sales price shall reflect the fair market value of the services required to make the PC System Year 2000 compliant. C. REQUIRED CHANGES. ActaMed shall be required to develop and implement, at its expense except to the extent hereinafter provided, as promptly as practicable and in no event later than thirty (30) days prior to the effective date of the applicable Regulatory Change, any Changes which (i) ActaMed determines are required for the Network Software to remain in compliance with all applicable Regulations, or (ii) SBCL requests in writing to ActaMed for compliance with Regulations of the Network Software. 1. If SBCL reasonably determines that ActaMed cannot provide such required work by thirty (30) days prior to a deadline imposed by governmental authority, SBCL shall have the [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -15- right to contract with a third party for such work or to do such work itself. In such event, SBCL shall be reimbursed therefor by ActaMed, except as provided in Section V.C.3 below. 2. Upon reasonable advance written notice to ActaMed, SBCL may request, and if it so requests ActaMed shall use its good faith efforts to accommodate, prioritization of such Changes over any other software development work performed by or on behalf of ActaMed. 3. In any event, upon reasonable advance notice to ActaMed, SBCL shall be entitled to change the prioritization of required Changes from time to time and to resolve conflicts between Changes demanding equal prioritization to the extent necessary to deliver any such Change not less than thirty (30) days prior to any government imposed deadlines or as promptly as practicable. 4. If ActaMed disputes that Changes requested by SBCL pursuant to clause (ii) of Section V.C are required by Regulations, either ActaMed or SBCL shall be entitled to cause the dispute to be resolved in accordance with the procedures set forth in Section XV.B.1.a and XV.B.1.b thereof. If such process is used and results in substantial agreement with either (i) ActaMed, then [*] (including the cost of FTEs) in implementing such Changes, or (ii) SBCL, [*]. If such process is not used or does not result in an agreement as to whether or not such Change is required by Regulations, ActaMed and SBCL shall mutually agree on an outside counsel familiar with issues of the nature involved in the dispute and the opinion of such counsel shall be binding on the parties hereto. D. ACTAMED DEVELOPED NEW FUNCTIONALITY. When ActaMed develops new functionality for the Network that ActaMed offers generally to its customers, which is not included in a maintenance release that ActaMed offers generally to its customers pursuant to Section V.A. above, ActaMed will offer such new functionality to Automated Providers on the same basis [*] subject to SBCL's right to accept or reject such new functionality. E. Development Work Requested by SBCL. 1. SBCL at any time may request that ActaMed perform additional development work and, subject to the terms of this Section V.E, shall pay ActaMed for such work at no higher than the then industry standard rates for similar services. a. If SBCL requests in writing that ActaMed provide additional development work for use exclusively by SBCL and, regardless of whether ActaMed or a third party actually performs such development work, ActaMed shall either (i) [*] in which case such work shall be a "Perpetual Exclusive Development", or (ii) acting in good faith, [*] in which case such work shall be a "Temporary Exclusive Development". With respect to Perpetual Exclusive Developments, ActaMed will not use or license [*] 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. -16- the use of the Perpetual Exclusive Developments (without regard to whether they constitute SCAN Developments or ActaLab Software) other than in support of Lab EDI Services. With respect to Temporary Exclusive Developments, ActaMed will not use or license the use of Temporary Exclusive Developments (without regard to whether they constitute SCAN Developments or ActaLab Software) other than in support of Lab EDI Services for a period of [*] from the date on which ActaMed first makes available to SBCL such Temporary Exclusive Development for use on a commercial basis in support of SBCL's laboratory testing services. After expiration of such [*] period, subject to resolution of any dispute relating to ActaMed's initial designation of such development work as a Temporary Exclusive Development pursuant to Section V.E.1.b, such Temporary Exclusive Development shall no longer be an Exclusive Development. For purposes of this Section V.E, Perpetual Exclusive Developments and Temporary Exclusive Developments shall include any Changes made pursuant to Section V.C and paid for by SBCL by reason of Section V.C.4, to be designated as Perpetual Exclusive Developments or Temporary Exclusive Developments in accordance with the procedures set forth in this Section V.E.1.a. All such developments are herein referred to collectively as "Exclusive Developments." b. Within twenty (20) days after receiving SBCL's request pursuant to Section V.E.1.a, ActaMed shall notify SBCL of ActaMed's prices and terms for performing such development work, and whether such work will constitute a Perpetual Exclusive Development or a Temporary Exclusive Development. If SBCL provides notice ("Acceptance Notice") accepting ActaMed's price and performance terms, ActaMed shall perform such work at the accepted price and on the accepted performance terms. If SBCL provides notice that it disputes ActaMed's determination that the development work should constitute a Temporary Exclusive Development, the parties shall resolve the dispute in accordance with Section XV. If either (i) ActaMed declines any work requested pursuant to this Section V.E.1, or (ii) SBCL provides notice that it does not accept ActaMed's price and performance terms, then SBCL may engage a third party to perform such work. c. Any contract between ActaMed and SBCL (or a third party developer and SBCL) for development of Exclusive Developments shall allocate ownership of and other rights with respect to the Exclusive Developments as between ActaMed and SBCL, in the manner contemplated by the License Agreement and Development Agreement, including, without limitation, Sections 2.1.4 and 2.3.2 of the License Agreement. 2. If, at any time, SBCL chooses to contract with ActaMed for a dedicated services team from ActaMed to handle development of Changes to the Network, the Licensed Materials, or SBCL's proprietary systems which are not required to be performed by ActaMed pursuant to Section V.C and which are not requested pursuant to Section V.E, ActaMed may elect whether to provide the dedicated team and, if it so elects, shall do so only on terms and conditions agreed to in advance by SBCL. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -17- F. Development Work Requested or Used by Another ActaMed Customer. 1. When ActaMed performs development work on the Network at the request of another ActaMed customer, SBCL shall have the right to obtain [*] but only for so long as ActaMed has the legal right to [*] to SBCL and [*] is not proprietary to the contracting party. 2. When ActaMed performs development work on the Network at the request of SBCL and such work is usable in connectivity with Other Labs (and is not an Exclusive Development), [*]. G. ACCESS AND COOPERATION. Whenever SBCL shall use a third party developer, ActaMed shall allow such third party such access to the Network as shall be reasonably necessary to complete such work and shall cooperate with such third party, PROVIDED THAT such access and cooperation shall be subject to such third party (i) executing reasonable and appropriate security and confidentiality agreements with ActaMed, (ii) abiding by ActaMed's internal policies applicable to all third party developers, and (iii) agreeing to [*] in providing such access and cooperation. H. EMPLOYEE WAIVERS. ActaMed shall ensure that all employees or agents who perform customer support services or have access to any Network Software (whether in preliminary or final form) have signed non-disclosure and assignment agreements that, at minimum, contain provisions (i) prohibiting the disclosure of Confidential Information to the same extent as is set forth in Section X hereof, and (ii) effecting the complete transfer and assignment (without further consideration) by such employee or agent to SBCL or ActaMed, as appropriate, of all right, title and interest to all software and documentation and any proprietary rights thereto to the extent required pursuant to the License Agreement. I. STATEMENT OF WORK AND ACCEPTANCE FOR NEW WORK. In the event any Change projected to cost in excess of [*] is to be made by ActaMed pursuant to this Section V, ActaMed shall deliver a Statement of Work therefor within thirty (30) days after the Change becomes known to it and shall, subject to the other provisions of this Section V, dedicate sufficient resources to the development and implementation of such Change as shall be necessary to gain acceptance of and deploy the Change in accordance with such Statement of Work. VI. COMPLIANCE MATTERS. ActaMed is a computer technology company which provides electronic connectivity services, and is not a health care provider. ActaMed acknowledges that, for a laboratory services provider such as SBCL, the ability to assure that it complies with applicable laws, rules or regulations ("Applicable Laws"), including, but not limited to, the federal Physician Self-Referral Law, 42 [*] 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. -18- U.S.C. 1395nn, and the regulations promulgated thereunder (together, the "Stark Law"), similar state physician self-referral laws and regulations (together with the Stark Law, the "Self-Referral Laws"), the federal Medicare/Medicaid Antikickback Law and regulations promulgated thereunder (the "Federal Antikickback Law"), and similar state antikickback laws and regulations (together with the Federal Antikickback Law, the "Antikickback Laws"), is of critical importance. SBCL and ActaMed intend that the outsourcing of the Lab EDI Services to ActaMed and the subsequent provision of the Agreed Services by ActaMed to SBCL be done in a manner that allows SBCL to maintain its compliance with Applicable Laws. Accordingly, SBCL and ActaMed have agreed to the provisions set forth in this Section VI, although SBCL and ActaMed understand and agree that the provisions of this Section VI and of the separate SOPs (as defined below) that may be agreed to from time to time by SBCL and ActaMed may not be necessary or may be more restrictive than necessary to assure SBCL's continued compliance with Applicable Laws. A. Representation, Warranty and Covenant. ActaMed represents, warrants, and covenants to SBCL as follows: 1. ActaMed will not directly or indirectly provide any remuneration, as defined in the applicable Self-Referral Laws or Antikickback Laws, to any Provider to whom any of such Self-Referral Laws or Antikickback Laws applies on behalf of SBCL, except for direct or indirect remuneration permitted by such law. 2. In furtherance and not in limitation of the foregoing, SBCL and ActaMed may, from time to time, agree upon certain principles, activities, agreements, standard operating procedures and/or actions (the "SOPs") that one or both parties, as applicable, will follow or undertake to help SBCL assure its compliance with Applicable Laws, and each party will follow any such SOPs applicable to it in the course of conducting its respective business. 3. With respect to [*] to which ActaMed is [*] in connection with the provision of Lab EDI Services, ActaMed will not [*] [*] unless and until SBCL has informed ActaMed in writing that it is willing to [*] and that ActaMed and SBCL have agreed upon [*]. 4. ActaMed will provide any reasonable assistance that SBCL may request from ActaMed, including the provision of information or other assistance, in order for SBCL to fulfill any obligation that SBCL, in its sole discretion, determines it has under the Integrity Agreement. Notwithstanding the foregoing, nothing in this provision is intended to or should be interpreted to mean that ActaMed is subject to any of the provisions of the Integrity Agreement. 5. In the event that SBCL becomes aware of an issue with respect to compliance with this Section VI, SBCL will promptly inform ActaMed of such issue and ActaMed will promptly address such issue and take action to remedy any such issue to the reasonable satisfaction of SBCL. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -19- 6. ActaMed will notify SBCL of any proposed changes in ActaMed's business practices with respect to EDI or the provision of LAB EDI Services that are likely to affect SBCL or Automated Providers (other than [*]) a reasonable period prior to the proposed implementation of such change or changes and will provide SBCL with a reasonable opportunity to review those proposed changes for compliance with this Section VI prior to implementation. If [*] any such [*] based on an [*] or the [*], [*] with [*] to [*] before [*]. B. AUDIT RIGHTS. SBCL shall have Audit Rights, exercisable [*] with respect to all of ActaMed's books, records and other materials that relate to any compliance issues covered by this Section VI in order for SBCL to determine ActaMed's fulfillment of its obligations hereunder or under any separately agreed upon SOPs. When ActaMed enters into agreements with Providers, it will use its best efforts to secure the right for ActaMed and, if such Provider is an SBCL client, for SBCL, to audit such Provider's books and records, and other materials and/or to inspect the Provider's premises to assure that any compliance requirements established with such Provider are being satisfied, and, upon request from SBCL, ActaMed will permit SBCL to exercise such rights. In any exercise of Audit Rights under this Section VI.B, SBCL shall give ActaMed two (2) weeks' prior written notice of any such audit, and shall abide by reasonable ActaMed security and confidentiality procedures during the audit. SBCL and ActaMed shall each bear their own expenses associated with such audit. C. DISPUTE RESOLUTION. Notwithstanding any other provision of this Agreement to the contrary, because of the critical nature of compliance to SBCL's business, disputes regarding compliance with this Section VI may not be susceptible to resolution following normal dispute resolution mechanisms. In the event that SBCL and ActaMed have a disagreement or dispute regarding compliance with this Section VI, ActaMed agrees to use its best efforts in working with SBCL to attempt to resolve that dispute as soon as possible. If the parties are not able promptly to resolve any such dispute, and the parties are not able to agree upon another mechanism, such as that provided for in Section V.C.4 hereof, to resolve the issue, SBCL shall have the right to exercise any and all remedies available to it under this Agreement, including the right to terminate the Agreement. VII. PREFERRED LAB EDI VENDOR. A. PREFERRED LAB EDI VENDOR RELATIONSHIP. Provided none of the events has occurred which is described in Section VII.B hereof, SBCL will, [*] afford ActaMed "preferred Lab EDI Vendor" status in the United States to the extent set forth in this Section VII. In this regard, SBCL will: 1. instruct its salespeople that when occasions arise where it is appropriate to do so, inform Providers interested in Lab EDI Services that ActaMed is its preferred vendor for all Lab EDI Services; [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -20- 2. indicate that ActaMed is SBCL's preferred vendor for Lab EDI Services in appropriate communications, whether internal or external, written or oral, as determined by SBCL that relate to the topic of Lab EDI Services and where a Lab EDI Services vendor is mentioned; 3. from the date when the ActaLab Software is approved by SBCL for use by Automated Providers, (i) cause the marketing materials for SCAN Software to be revised to feature the ActaLab Software; and (ii) train the SBCL salespeople at no direct expense to ActaMed regarding the general features and benefits of the ActaLab Software; 4. instruct its salespeople of the benefits to SBCL of ActaMed's preferred status so that whenever they undertake sales efforts or negotiations with a Provider whom SBCL believes to be a significant future customer for Lab EDI Services with an SBCL Lab, or with a significant Automated Provider serviced by ActaMed, insofar as it is known to the salesperson, for renewal or extension of lab testing services at an SBCL Lab, if appropriate, invite representatives from ActaMed to be included in such sales efforts and negotiations, so that ActaMed may promote the use of the ActaLab Software to such customer; 5. inform appropriate third parties, including but not limited to practice management system companies, electronic medical record vendors and other EDI clearinghouses interested in establishing Lab EDI Services (or services relating thereto) with SBCL, that, ActaMed is SBCL's preferred provider for Lab EDI Services, and suggest that, provided ActaMed has the capabilities sought by the third party, the third party pursue a contractual relationship with ActaMed regarding such Lab EDI Services. B. LIMITATIONS ON PREFERRED PROVIDER STATUS. The provisions of Section VII.A shall apply unless and until any of the following occurs: 1. ActaMed ceases to offer products and services which have features and functionality which are substantially comparable to other similar products and services of similar vendors for services in the nature of Lab EDI Services; SBCL provides written notice of same and, within thirty (30) days after such notice is given, ActaMed fails to demonstrate to SBCL's reasonable satisfaction that such determination is not accurate. 2. An Other Lab becomes a shareholder of ActaMed; provided that, after ActaMed has consummated a Qualified Public Offering (as defined in ActaMed's Fourth Amended and Restated Articles of Incorporation), this clause 2 shall apply only if the Other Lab becomes a shareholder of ActaMed by reason of either an issuance of equity to the Other Lab by ActaMed or waiver of restrictions in agreements between ActaMed and its stockholders which are comparable to the Standstill Agreement between ActaMed and SBCL dated the date hereof. 3. Any of the events described in clauses 2 through 5 of Section XII.B shall have occurred (without regard to grace periods otherwise applicable thereto and other than an event under clause 7 thereof which is based upon a failure of SBCL to pay amounts due from it hereunder). -21- 4. ActaMed fails to meet any of the Performance Standards in [*] or [*]. 5. Any of the events described in Article X of the Assets Purchase Agreement shall have occurred. 6. In the event that SBCL merges with or into, or acquires or is acquired by an entity, owning or operating a clinical laboratory, or sells substantially all of its assets to another entity in a transaction in which this Agreement is assigned to such entity, SBCL shall have the right to elect to have the preferred provider status removed with respect to such other entity, PROVIDED THAT the [*] set forth in Section IV.C and D hereof shall remain in effect after such transaction; and PROVIDED FURTHER THAT before exercising such right, SBCL shall have used its good faith efforts to preserve the original intention of the parties hereto. C. EXCLUSIONS. Notwithstanding anything to the contrary contained in this Agreement, including without limitation this Section VII, SBCL shall be entitled without restriction and in its sole discretion, to (i) utilize or change any EDI system for purposes of connectivity between an SBCL Lab and a Provider [*], or between SBCL Labs, utilizing Lab EDI Services that SBCL has already established or begun to establish connectivity capabilities as of the date hereof, including without limitation those set forth on EXHIBIT VII.C-1 which Exhibit shall be delivered by January 15, 1998 and shall represent SBCL's best efforts to identify all such capabilities which are significant to SBCL; (ii) terminate or not renew its current contracts or arrangements with third parties relating to Lab EDI Services; (iii) pursue future arrangements or relationships for Lab EDI for any exclusion described in EXHIBIT VII.C-2, and (iv) utilize or change any EDI system between SBCL Labs and other facilities owned, managed and/or operated by SBCL. D. EXCLUSIONS FOR [*]. Notwithstanding anything to the contrary contained in this Agreement, including without limitation this Section VII, SBCL shall be entitled without restriction and in its sole discretion, to change, continue to use or install [*]. At some time in the future, SBCL will consider a proposal from ActaMed for some or all of these [*] transactions and enter into reasonable negotiations, if appropriate. For a period of [*] from the date hereof, SBCL will not [*] Lab EDI Services without notifying ActaMed and affording ActaMed opportunity to propose to provide such services. E. FUTURE ACTAMED PARTICIPATION IN EXCLUDED ARRANGEMENTS. Notwithstanding Section VII.C above, SBCL will endeavor to include ActaMed in opportunities relating to the arrangements identified in Section VII.C(iii) to the extent feasible and appropriate as determined by SBCL for Lab EDI or physician connectivity. The nature and pricing of ActaMed's involvement will be negotiated on a case by case basis. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -22- F. ELIGIBILITY AND CLAIMS PROCESSING SERVICES. During the initial term of this Agreement, SBCL will use all reasonable business efforts, consistent with its competitive needs in the lab testing business, to utilize ActaMed as SBCL's preferred provider of electronic eligibility verification and claims processing services to provide connectivity with all third party payers with which SBCL desires connectivity and ActaMed is then connected, PROVIDED THAT this Section VII.F shall apply only if (i) SBCL desires to use an outside vendor for such services, and (ii) the prices proposed to be charged by ActaMed for such services are [*]. In furtherance of such "preferred" status, SBCL shall offer ActaMed as one of the potential providers of such services in any written response to a request for proposals for lab testing services. For each written SBCL proposal for the provision of such services, SBCL shall provide ActaMed with a copy of the sections thereof describing ActaMed's proposed services. SBCL shall provide ActaMed with such reasonable opportunity as circumstances permit to review and correct or comment on any such proposed language. Notwithstanding the foregoing, SBCL shall not be obligated to comply with the provisions of this Section VII.F in those cases in which (i) the payer designates (in the request for proposals or otherwise) a provider of such services other than ActaMed, or (ii) it would violate any Regulation, contractual provision or obligation by which SBCL is bound. G. FURTHER EXCLUSIONS FOR NON-LABORATORY EDI. Nothing contained herein shall prohibit SBCL from engaging in or contracting with third parties relating to non laboratory related EDI transactions including but not limited to the following, as long as each of the following is not intended primarily as a connection from an Automated Provider to a network for the purposes of Lab EDI Services (or services related thereto): [*]. VIII. COOPERATIVE RELATIONSHIP. A. COOPERATION. Upon SBCL request, ActaMed will work with SBCL's sales people to generate site connectivity and will use reasonable efforts to be available to perform the technical portions of sales presentations made by SBCL's sales people. B. USE OF OTHER PARTIES' NAME. Each party shall have the right to include the other party's name on its client or vendor list and to disclose the nature of the services and products provided under this Agreement, so long as such services and products are accurately represented; PROVIDED, HOWEVER, that neither party has the right to use the other's name, trademarks or trade names for other advertising, sales promotion, or publicity purposes without the other's prior written consent. [*] 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. -23- C. USER GROUP. ActaMed will establish a user group, to consult on priorities and provide direction to ActaMed on system initiatives, which will include representation from SBCL, Automated Providers and payers. At regular intervals not less frequently than annually ActaMed will solicit user suggestions, input and feedback regarding the Network. D. ACTAMED'S OBLIGATION TO PROMOTE SB FOR DISEASE MANAGEMENT. For so long as ActaMed is SBCL's preferred vendor pursuant to Section VII, ActaMed will undertake actions similar to those set forth in Section VII.A to promote SmithKline Beecham Corporation's Healthcare Services Division for the Disease Management Business. "DISEASE MANAGEMENT BUSINESS" shall be defined in a separate writing reasonably agreed upon by the parties within thirty (30) days after the date hereof. E. REFERENCE CHECKS. SBCL shall designate one or two individuals who shall respond to a reasonable number of reference inquiries and visits (not to exceed two visits in any calendar month) by customers and potential customers of ActaMed on mutually agreeable terms. SBCL shall retain the right to refuse a visit to any competitor or potential competitor of SBCL or to terminate the visit of any customer or potential customer who does not abide by SBCL's policies and procedures. ActaMed shall inform all customers and potential customers allowed on SBCL's premises pursuant to this Section that they are required to abide by SBCL's policies and procedures. IX. SBCL'S OBLIGATIONS REGARDING THE NETWORK. A. STANDARD FORMATS AND PROTOCOLS. SBCL shall receive and generate transaction data and any other Lab EDI in a standard format and protocol mutually agreed upon by the parties. B. HARDWARE AND OPERATING ENVIRONMENT. SBCL shall provide, at its own expense, all necessary hardware, including terminal equipment, compatible with and suitable for its communications with the Network at the SBCL Labs. ActaMed shall verify SBCL's operating environment with testing procedures implemented by ActaMed from time to time, with advance notice to and approval from SBCL, which approval shall not be unreasonably withheld or delayed. C. NEW RELEASES OF SBCL PROPRIETARY SOFTWARE. SBCL will make available to ActaMed all new releases and specifications for the SBCL gateway so as to enable ActaMed to maintain the ActaMed Gateway substantially the same as the SBCL gateway, including for Year 2000 compliance. In addition, SBCL will give ActaMed advance notice of test code changes, new releases of SBCL proprietary software and other SBCL host computer system changes (including host computer systems operated by third party outsourcers on behalf of SBCL), if such changes or releases will affect ActaMed's ability to transmit information over the Network. If any changes are required to the Network by reason of such actions by or on behalf of SBCL, the parties will mutually agree (consistent with Section V hereof) in advance on the scope of the project, the deliverables, deadlines, any fees ActaMed will charge SBCL, a test plan and an acceptance test plan. -24- X. CONFIDENTIALITY AND SECURITY. A. DATA CONFIDENTIALITY. Each party agrees that patient clinical records are Confidential Information and each party shall not disclose or utilize individual lab test information in any way that would violate any patient confidentiality obligation or any Regulations. Without limiting ActaMed's obligations regarding Confidential Information which may be otherwise provided for in this Agreement, ActaMed shall be responsible to ensure the confidentiality of test results and patient information transmitted over the Network, in accordance with all applicable Regulations governing such patient confidential information, including to prevent anyone other than the sender and addressee of Transmittal Information or their respective authorized employees from monitoring, using, gaining access to or learning the import or contents of any Transmittal Information. B. DISTRIBUTION AND USE OF DATA. All Transmittal Information entered onto the Network by SBCL or any Automated Provider from tests referred to SBCL, shall be owned by SBCL and not by ActaMed. ActaMed shall not aggregate, integrate, compile, regenerate, merge, manipulate or otherwise use the Transmittal Information for any purposes and shall not provide the Transmittal Information to any other person or entity, other than as specifically required or allowed under the terms of this Agreement to perform the Agreed Services, without the prior written consent of SBCL. ActaMed agrees that such information cannot be aggregated for any Provider or among different customers' or other health care providers or laboratory service providers for any purpose, without SBCL's prior written consent. 1. If ActaMed is served with a warrant, subpoena or any other order or request from a governmental body or any other entity or person for any records or files of information transmitted over the Network, ActaMed will as soon as practicable, and not in violation of law, deliver to SBCL a copy of such warrant, subpoena, order or request and will not, without SBCL's prior written consent, accede to the same unless and until required to do so under applicable law. 2. ActaMed acknowledges and agrees that in the event it has access to confidential data relating to an Automated Provider and/or the Automated Providers's patients, employees and medical staffs, ActaMed will hold such information in the strictest confidence and will not, without SBCL's prior written consent, disclose any such information, including without limitation in any regeneration, recompilation, or reorganization thereof, or through any statistical analyses or provision of other excerpts thereof. Without limiting the foregoing, ActaMed agrees that it shall limit the ActaMed employees who have access to any patient identifiable health information, including without limitation, laboratory test order or results information, if any, to only those "need to know" employees of ActaMed as is required to perform the Agreed Services to the level of the Performance Standards set forth herein. Such employees shall be identified to SBCL in advance of such access and shall have executed and delivered to ActaMed and to SBCL, an agreement requiring non-disclosure of confidential information, compliance with all ActaMed policies and procedures with respect to Confidential Information and security of the Network (which shall be consistent with the requirements in this Agreement), if applicable, procedures established by SBCL and shall include an acknowledgment of immediate termination for breach of such agreement. To the extent any -25- employee of ActaMed acquires such access to patient health information through any SBCL computer systems, or [*] ("SBCL ACCESS"), ActaMed shall cause such employees to abide by SBCL's [*] Security Access procedures, and shall deliver to SBCL such agreements reflecting same as may be required by SBCL and identified to ActaMed in writing from time to time. ActaMed shall be responsible for promptly notifying SBCL if any employee with SBCL Access is terminated or leaves the employment of ActaMed. 3. Subject to the requirements of Section X.A, ActaMed may, at [*] of [*] to such [*] for which the [*] from such [*] without the [*] SBCL. There shall be [*] such [*]. 4. Subject to Section X.A and without limiting the above restrictions in this Section X.B, ActaMed [*] without the [*]. A copy of [*] shall be provided to SBCL. ActaMed agrees that, if SBCL's consent is obtained, [*] to Automated Providers shall be made available only in accordance with all applicable patient confidentiality laws of the states [*] the patient and SBCL Labs and ActaMed are located, and only [*] or [*]. SBCL shall have Audit Rights with respect to any disputed amounts hereunder. C. TRADE SECRET NONDISCLOSURE COVENANT. Without limiting the foregoing, Trade Secrets and Confidential Information and all physical embodiments thereof received by either party (the "RECEIVING PARTY") from the other party (the "DISCLOSING PARTY") during the term of this Agreement, including those received pursuant to the exercise of Audit Rights as described in Section III.E hereof, are confidential to and are and will remain the sole and exclusive property of the Disclosing Party. In furtherance of the foregoing: 1. At all times, both during the term of this Agreement and after its termination, the Receiving Party shall hold all Trade Secrets of the Disclosing Party in confidence, and will not use, copy or disclose such Trade Secrets, or any physical embodiment thereof, or cause any of such Trade Secrets to lose their character as Trade Secrets. At all times during the term of this Agreement and for a period of [*] following the termination of this Agreement, (except where a longer period is required pursuant to this Agreement or Regulations) the Receiving Party shall hold the Confidential Information of the Disclosing Party in confidence, and will not use, copy or disclose such Confidential Information, or any physical embodiments thereof, or cause any of such Confidential Information to lose its character or cease to qualify as Confidential Information. [*] 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. -26- 2. Trade Secrets and Confidential Information shall be maintained under secure conditions by the Receiving Party, using reasonable security measures and in any event (1) not less than the same security measures used by the Receiving Party for the protection of its own Trade Secrets and Confidential Information of a similar kind, and (2) any specific security measures required by this Agreement. The Receiving Party shall not remove, obscure or deface any proprietary legend relating to the Disclosing Party's rights, on or from any tangible embodiment of any Licensed Materials without the Disclosing Party's prior written consent. Within thirty (30) days after termination of this Agreement, the Receiving Party shall deliver to the Disclosing Party all Trade Secrets and Confidential Information, and all physical embodiments thereof, then in the custody, control or possession of the Receiving Party. 3. If the Receiving Party is ordered by a court, administrative agency, or other governmental body of competent jurisdiction to disclose Trade Secrets or Confidential Information, or if it is served with or otherwise becomes aware of a motion or similar request that such an order be issued, then the Receiving Party will not be liable to the Disclosing Party for disclosure of Trade Secrets or Confidential Information required by such order if the Receiving Party complies with the following requirements: (i) if an already issued order calls for immediate disclosure, then the Receiving Party shall immediately move for or otherwise request a stay of such order to permit the Disclosing Party to take measures such as are described in clause (iii); (ii) the Receiving Party shall immediately notify the Disclosing Party of the motion or order by the most expeditious possible means; and (iii) the Receiving Party shall join or agree to (or at a minimum shall not oppose) a motion or similar request by the Disclosing Party for an order protecting the confidentiality of the Trade Secrets and Confidential Information, including joining or agreeing to (or non opposition to) a motion for leave to intervene by the Disclosing Party. 4. The Receiving Party shall immediately report to the Disclosing Party any attempt by any person of which the Receiving Party has knowledge (i) to use or disclose any portion of the Trade Secrets and Confidential Information without authorization from the Disclosing Party, or (ii) to copy, reverse assemble, reverse compile or otherwise reverse engineer any part of the Trade Secrets or Confidential Information (except as permitted herein). D. PERMITTED DISCLOSURES. Notwithstanding any provisions of this Agreement to the contrary, SBCL may disclose to the OIG as part of the disclosures SBCL makes under its Integrity Agreement the fact that SBCL and ActaMed have entered into the transactions contemplated by the parties and any information relating to such transaction or this Agreement which SBCL determines, in good faith upon advice of counsel, is required or, in light of SBCL's obligations under the Integrity Agreement, appropriate for SBCL to make, or SBCL proposes to make in response to a request for such information from the OIG, provided that ActaMed shall be given opportunity (which shall be reasonable in light of all facts and circumstances) to review and comment upon the information SBCL intends to include in any such submission. In the event that any such disclosure that SBCL intends to make includes any information that constitutes Confidential Information of ActaMed or Trade Secrets of ActaMed, SBCL will provide reasonable (in light of all facts and circumstances, including the time frame in which such disclosure is required to be made) assistance -27- to ActaMed to take reasonable steps to assure that such Confidential Information or Trade Secrets of ActaMed are maintained in confidence, including, but not limited to, (i) requesting that the OIG treat such information as trade secrets, confidential information or financial information within the meaning of the Freedom of Information Act, 5 U.S.C. Section 552(b)(4), (ii) requesting of the OIG that SBCL and ActaMed be given prior notice of any proposed release of such information to persons or entities outside of the OIG; (iii) requesting that the OIG otherwise assure the confidentiality of the information provided by ActaMed as if such information was confidential information of SBCL [*] and taking other reasonable steps that may be requested by ActaMed and to which SBCL may, in its sole discretion, agree to assure that the OIG honors its confidentiality obligations in that section; (iv) where such information is to be provided in response to a request by the OIG, take reasonable steps to narrow the request for information from the OIG in an appropriate manner in order to limit the amount of information, if any, that constitute Confidential Information or Trade Secrets of ActaMed covered by such request; and (v) make reasonable efforts to permit ActaMed with the concurrence of the OIG, to disclose such information directly to the OIG provided that in any such case, ActaMed shall give SBCL a timely opportunity to review, comment upon, and approve the information ActaMed intends to include in such submission. The additional safeguards described in subsections (i) through (v) above are designed to help assure the confidentiality of Confidential Information and Trade Secrets the disclosure of which would have a material adverse impact on ActaMed. These additional provisions are not intended to interfere with SBCL's ability to meet its disclosure obligations under the Integrity Agreement. Each party shall promptly notify the other in the event it receives an inquiry, investigation, or request for information from the OIG or other governmental agency into the matters relating to the proposed transaction. XI. RELATIONSHIP MANAGERS. ActaMed will designate a representative responsible for the SBCL account and who will have decision making authority for ActaMed (the "ACTAMED RELATIONSHIP MANAGER"). [*] will be the initial Relationship Manager for ActaMed. The ActaMed Relationship Manager will be a member of the Oversight Committee and shall attend planning meetings with SBCL, keep SBCL updated on national trends in EDI and Lab EDI, and consult with SBCL regarding ActaMed's software and Network strategy. SBCL will designate a representative responsible for SBCL's relationship with ActaMed who will have decision making authority for SBCL (the "SBCL RELATIONSHIP MANAGER"). [*] will be the initial Relationship Manager for SBCL. The SBCL Relationship Manager will be a member of the Oversight Committee and will coordinate SBCL's activities with ActaMed, attend planning meetings with ActaMed, and keep ActaMed updated on technical developments with respect to [*] and Lab EDI. Each party will consult with the other before changing its Relationship Manager. [*] 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. -28- XII. TERM AND TERMINATION. A. INITIAL TERM AND RENEWALS. This Agreement shall continue for five (5) years from the Region One Transfer Date, unless earlier terminated as provided herein. Unless written notice of termination is given by SBCL not less than one hundred eighty (180) days, or by ActaMed not less than three hundred sixty (360) days, prior to the end of the term (including any extension or renewal of the term pursuant to this Section XII.A), the term of this Agreement will be automatically extended for successive two (2) year periods. B. TERMINATION. A party may cause a termination of all rights and obligations of the parties hereunder, except as provided in this Section XII hereof, as follows: 1. In the event that ActaMed fails to meet any of the Key Performance Standards in any [*] during any period of [*] SBCL may terminate this Agreement immediately by giving written notice of termination to ActaMed. 2. SBCL may terminate this Agreement immediately following a breach by ActaMed of its covenants set forth in Section VI hereof by giving written notice of termination to ActaMed. 3. Either party may terminate this Agreement if the other party shall fail to pay any amount when due from it hereunder (disregarding for this purpose any unpaid amount in dispute which dispute is being pursued with diligence) within thirty (30) days after written notice of a failure to pay is provided by the terminating party to the nonpaying party. 4. If one party breaches any material provision of this Agreement, which breach is not described in Sections XII.B.1-3 above (and which is not a breach of Performance Standards other than the Key Performance Standards), the nonbreaching party may terminate this Agreement by giving [*] written notice of termination to the breaching party. If such breach is (in the reasonable estimation of the terminating party) capable of being cured during such period and the other party acts diligently and continuously to cure such breach, the termination shall be suspended during such time, PROVIDED THAT such breach is actually cured prior to the end of such period; AND PROVIDED FURTHER THAT during the period from and after the time an ActaMed breach is discovered, SBCL may, at its election, pay all Fixed Fees, Transaction Fees, Variable Fees, PIFs and other amounts otherwise due ActaMed hereunder into an escrow account established with a nationally recognized financial institution selected by SBCL, to be released to ActaMed upon the later of the date within such [*] period when the breach is cured or the date prior to exercise of the termination right provided in this Section XII.B.4 as of which ActaMed shall have been not in breach of this Agreement for at least thirty (30) days. If ActaMed proves, to SBCL's reasonable satisfaction, that such amounts are needed in order to cure the breach, SBCL will release amounts to enable ActaMed to cure the breach, in which case such released amounts will be used by ActaMed exclusively for purposes of curing such breach. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -29- 5. If one party becomes insolvent, files bankruptcy, or has an involuntary bankruptcy case filed against it which is not dismissed within ninety (90) days, the other party may terminate this Agreement immediately by giving written notice of termination to the breaching party. C. EFFECT OF EXPIRATION. All rights and obligations of the parties hereunder shall cease upon the expiration of this Agreement except that (i) the obligations of the parties pursuant to Section X (relating to confidentiality), and (ii) the exclusive use rights of SBCL pursuant to Section V (relating to development work) shall continue in full force and effect indefinitely. In addition, the obligations of the parties pursuant to Section IV (relating to compliance with Regulations) shall continue for so long as SBCL shall have Long Term Access or Short Term Access. D. EFFECT OF TERMINATION. All rights and obligations of the parties hereunder shall cease upon the effective date of the termination of this Agreement except that (i) the obligations of the parties pursuant to Section X (relating to confidentiality), (ii) the exclusive use rights of SBCL pursuant to Section V (relating to development work), and (iii) the obligations of ActaMed pursuant to Section XII.E hereof (relating to termination transition), shall continue in full force and effect indefinitely. In addition, the obligations of the parties pursuant to Section IV (relating to compliance with Regulations) shall continue for so long as SBCL shall have Long Term Access or Short Term Access. In the event that ActaMed has terminated this agreement for SBCL's failure to pay undisputed amounts due under this Agreement, ActaMed will not be required to perform services for SBCL or to allow SBCL access to or use of the Network during the termination transition period unless SBCL pays ActaMed in advance for such services and Network access. Upon termination of this Agreement, any amount in escrow pursuant to Section IV.F or Section XII.B.4 hereof shall be paid to the terminating party. E. Transition Upon Termination. 1. If this Agreement terminates as a result of a notice of non-renewal given by ActaMed pursuant to Section XII.A, ActaMed will provide [*] or, at SBCL's option, a. SBCL may have [*] so long as ActaMed provides [*] (but not less than [*]), or b. SBCL may require ActaMed [*] prior to the effective date of such termination, and SBCL may exercise the right to [*] as granted by the License Agreement. 2. If this Agreement terminates as a result of a notice of non-renewal given by SBCL pursuant to Section XII.A, ActaMed will provide [*] and SBCL will have [*]. 3. If SBCL terminates this Agreement pursuant to Section XII.B, [*] 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. -30- a. ActaMed will provide [*], b. SBCL may require ActaMed [*] within [*] after SBCL's notice of termination, c. SBCL may exercise the right to [*] as granted by the License Agreement, and d. until such time [*] by SBCL on a commercial basis, SBCL shall have Long Term Access. 4. [*] shall mean that [*] from [*] who have [*] or a version of [*]. For [*] SBCL will [*] on the date notice of termination is given. ActaMed will [*] and SBCL will [*] is rendered. If SBCL [*] (subject to [*] to those provided in Section [*] hereof), ActaMed will [*]. ActaMed will have [*] and SBCL will [*]. 5. [*] shall mean that ActaMed [*] the date of termination. For [*] SBCL will [*] the date of Termination. ActaMed will [*] the date the bill is rendered. If SBCL [*] (subject to [*] to those provided in Section [*] hereof), ActaMed will [*]. ActaMed will have [*] and SBCL will have [*]. 6. [*] shall mean [*] that will only provide [*] and allows [*], to provide [*] ActaLab Software at their sites. F. TRANSITION UPON TERMINATION. ActaMed's [*] shall mean (i) if the date of termination occurs [*] the transfer to SBCL of [*] requested by SBCL to [*] SBCL at such time [*] and (ii) providing SBCL, as promptly as practicable, with [*] used for [*] whether or not [*] to which ActaMed is in a position to [*] the effective date of the termination and to [*] to the transition. In furtherance of and in addition to the foregoing, upon termination or expiration of this Agreement, the parties shall effect, and shall cooperate with each other in effecting, [*] 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. -31- the orderly and reasonable removal of ActaMed as a provider of Lab EDI Services to Automated Providers in the manner that is least disruptive to Automated Providers and which allows connectivity between SBCL Labs and Automated Providers to continue uninterrupted with SBCL or a separate vendor. The parties shall jointly develop a removal plan which will provide a reasonable level of support consistent with Section III hereof to transition SBCL off the Network. Each party shall bear its own expenses in developing and implementing the removal plan. G. LICENSE AGREEMENT. To the extent any provisions of the License Agreement depend for their interpretation or application upon provisions of this Agreement, such provisions shall survive termination or expiration of this Agreement but solely for purposes of the License Agreement. XIII. NONSOLICITATION. A. BY SBCL. Until the occurrence of any of the events described in Sections XIII.B, SBCL will not, directly or indirectly, solicit any ActaMed Site to use a clinical laboratory test ordering or results reporting product other than one serviced or distributed by or otherwise affiliated with ActaMed. B. EXCEPTIONS TO SBCL NONSOLICITATION. The restrictions set forth in Section XIII.A shall not apply from and after the occurrence of the following: 1. Any of the events described in clauses 1 through 5 of Section XII.B shall have occurred (without regard to notice or grace periods otherwise applicable thereto and disregarding for this purpose any termination event arising by reason of nonpayment by SBCL of any amount not in dispute). 2. Any of the events described in Article X of the Assets Purchase Agreement shall have occurred. 3. Notice of nonrenewal of this Agreement is given by (i) ActaMed pursuant to Section XII.A in which case Section XIII.A shall not apply for the last [*] of the then remaining term hereof, or (ii) SBCL in which case Section XIII.A shall not apply for the last [*] of the then remaining term hereof. C. Noncompetition by ActaMed. 1. [*] ActaMed shall not, either individually or through any affiliate, employee, director, officer or consultant, directly or indirectly, (i) [*], or (ii) compete with SBCL in the Disease Management Business. The specific terms of such noncompetition shall be detailed in the separate writing referred to in Section VIII.D to be delivered within thirty (30) days after the date hereof. [*] 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. -32- 2. At any time prior to [*], ActaMed shall not [*] at the SBCL Sites transferred to ActaMed pursuant to the Purchase Agreement, including without limitation, to install or be instrumental in causing [*] to [*] located at such sites which enables the [*], or otherwise provide [*] which facilitate [*]. XIV. OBLIGATION TO INDEMNIFY. A. ACTAMED INDEMNITY. Subject to Section XIV.C hereunder, ActaMed agrees to indemnify and hold harmless each SBCL Indemnitee against and in respect of (i) all Losses, asserted against, imposed upon or incurred by any SBCL Indemnitee by reason of or resulting from any breach of any representation or warranty or covenant of ActaMed contained in this Agreement, as well as from any negligent act or omission of ActaMed; and (ii) any and all actions, suits, claims, proceedings, investigations, demands, assessments, audits, fines, judgments, costs and other expenses (including, without limitation, reasonable legal fees and expenses) incident to any Loss or to the enforcement of this Section XIV.A. B. SBCL INDEMNITY. Subject to Section XIV.C hereunder, SBCL agrees to indemnify and hold harmless each ActaMed Indemnitee against and in respect of (i) all Losses, asserted against, imposed upon or incurred by any ActaMed Indemnitee by reason of or resulting from any breach of any representation or warranty or covenant of SBCL contained in this Agreement, as well as from any negligent act or omission of SBCL; and (ii) any and all actions, suits, claims, proceedings, investigations, demands, assessments, audits, fines, judgments, costs and other expenses (including, without limitation, reasonable legal fees and expenses) incident to any Loss or to the enforcement of this Section XIV.B. C. ALLOCATION OF RISK. 1. ActaMed shall not be liable to SBCL (or to any person claiming to have been injured by SBCL) for any lab testing error, billing error, or other action or failure to act of SBCL, or any error or mistake not caused by ActaMed and made by SBCL in the reporting of lab testing results to ActaMed for delivery by the Network, and SBCL shall hold ActaMed harmless from all claims caused by such errors or mistakes to the extent made by SBCL. 2. SBCL shall not be liable to ActaMed (or to any person claiming to have been injured by ActaMed) for any error in Transmittal Information, billing error, or other action or failure to act of ActaMed, or any error or mistake not caused by SBCL and made by ActaMed in the transmission of test orders and results over the Network, and ActaMed shall hold SBCL harmless from all claims caused by such errors or mistakes to the extent made by ActaMed. 3. Neither party shall be liable to the other hereunder for consequential, special, punitive or exemplary damages of any kind (including, but not limited to, lost profits, loss of business or other similar damages) arising out of any action or proceeding except and only to the [*] 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. -33- extent that such damages arise from or relate to (i) the failure of a party to comply with Regulations as required by this Agreement, (ii) an action in tort initiated by a third party against either or both of the parties hereto, or (iii) breach of a party's confidentiality undertakings set forth herein. 4. Neither party shall be liable to the other hereunder in connection with any action or proceeding arising from or relating to a matter covered by this Section XIV, or for breach of this Agreement, for an amount in excess of the greater of (i) [*] or (ii) the [*] prior to the date on which such breach occurs; PROVIDED THAT this limitation shall not apply to any Losses or other damages arising out of or relating to any action described in clauses [*]. D. CLAIMS NOTICE. A Claim shall be made by any Indemnitee by delivery of a Claims Notice to any Indemnifying Party requesting indemnification and specifying the basis on which indemnification is sought and the amount of asserted Losses and, in the case of a Third Party Claim, containing (by attachment or otherwise) such other information as such Indemnitee shall have concerning such Third Party Claim. E. PROCEDURES INVOLVING NON THIRD PARTY CLAIMS. If the Claim involves a matter other than a Third Party Claim, the Indemnifying Party shall raise any objection to such Claim within a reasonable period of time by delivery of a written notice of such objection to such Indemnitee specifying in reasonable detail the basis for such objection. If an objection is timely interposed by the Indemnifying Party, the Indemnifying Party and the Indemnitee shall cooperate in the compromise of the Claim or resolve any disagreement in accordance with Section XV hereof. F. PROCEDURES INVOLVING THIRD PARTY CLAIMS. The obligations and liabilities of the parties hereunder with respect to a Third Party Claim shall be subject to the following terms and conditions: 1. The Indemnitee shall give the Indemnifying Party written notice of a Third Party Claim promptly after receipt by the Indemnitee of notice thereof, and the Indemnifying Party may undertake the defense, compromise and settlement thereof by representatives of its own choosing reasonably acceptable to the Indemnitee. The failure of the Indemnitee to notify the Indemnifying Party of such claim shall not relieve the Indemnifying Party of any liability that they may have with respect to such claim except to the extent the Indemnifying Party demonstrates that the defense of such claim is prejudiced by such failure. The assumption of the defense, compromise and settlement of any such Third Party Claim by the Indemnifying Party shall be an acknowledgment of the obligation of the Indemnifying Party to indemnify the Indemnitee with respect to such claim hereunder. If the Indemnitee desires to participate in, but not control, any such defense, compromise and settlement, it may do so at its sole cost and expense. If, however, the Indemnifying Party fails or refuses to undertake the defense of such Third Party Claim within ten (10) days after written notice of such claim has been given to the Indemnifying Party by the Indemnitee, the Indemnitee shall have the right to undertake the defense, compromise and settlement [*] 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. -34- of such claim with counsel of its own choosing. In the circumstances described in the preceding sentence, the Indemnitee shall, promptly upon its assumption of the defense of such claim, make a Claim as specified in Sections XIV.A and XIV.B which shall be deemed a Claim that is not a Third Party Claim for the purposes of the procedures set forth herein. 2. If, in the reasonable opinion of the Indemnitee, any Third Party Claim or the litigation or resolution thereof involves an issue or matter which could have a material adverse effect on the business, operations, assets, properties or prospects of the Indemnitee, the Indemnitee shall have the right to control the defense, compromise and settlement of such Third Party Claim undertaken by the Indemnifying Party, and the reasonable costs and expenses of the Indemnitee in connection therewith shall be included as part of the indemnification obligations of the Indemnifying Party hereunder. If the Indemnitee shall elect to exercise such right, the Indemnifying Party shall have the right to participate in, but not control, the defense, compromise and settlement of such Third Party Claim at its sole cost and expense. 3. No settlement of a Third Party Claim involving the asserted liability of the Indemnifying Party under this Article shall be made without the prior written consent by or on behalf of the Indemnifying Party, which consent shall not be unreasonably withheld or delayed. If the Indemnifying Party assumes the defense of such a Third Party Claim, (1) no compromise or settlement thereof may be effected by the Indemnifying Party without the Indemnitee's consent unless (a) there is no finding or admission of any violation of law or any violation of the rights of any person and no effect on any other claim that may be made against the Indemnitee (b) the sole relief provided is monetary damages that are paid in full by the Indemnifying Party and (c) the compromise or settlement includes, as an unconditional term thereof, the giving by the claimant or the plaintiff to the Indemnitee of a release, in form and substance satisfactory to the Indemnitee, from all liability in respect of such Third Party Claim, and (2) the Indemnitee shall have no liability with respect to any compromise or settlement thereof effected without its consent. G. NO RELEASE FOR FRAUD. Nothing contained in this Agreement shall relieve or limit the liability of a party or any officer or director of such party from any Liability arising out of or resulting from common law fraud or intentional misrepresentation in connection with the transactions contemplated by this Agreement or in connection with the delivery of this Agreement. Each ActaMed Indemnitee or SBCL Indemnitee, as the case may be, shall have a right to indemnification for any Loss incurred as the result of any common law fraud or intentional misrepresentation by SBCL or ActaMed, respectively, or any officer or director thereof. H. Payment. 1. If any party is required to make any payment under this Section XIV, such party shall promptly pay the Indemnified Party the amount so determined. If there is a dispute as to the amount or manner of determination of any indemnity obligation owed under this Section XIV, the Indemnifying Party shall nevertheless pay when due such portion, if any, of the obligation as shall not be subject to dispute. The difference, if any, between the amount of the obligation -35- ultimately determined as properly payable under this Section XIV and the portion, if any, theretofore paid shall bear interest as set forth in Section XIV.F.3. 2. Any items as to which an Indemnified Party is entitled to payment under this Article may be paid by setoff against amounts payable to the Indemnifying Party to the extent that such amounts are sufficient to pay such items. 3. If all or part of any indemnification obligation under this Agreement is not paid when due, then the Indemnifying Party shall pay the Indemnified Party interest on the unpaid principal amount of the obligation from the date the amount became due until payment in full, at the per annum rate of interest announced from time to time by NationsBank South, N.A., to be its "prime rate." XV. DISPUTE RESOLUTION; ARBITRATION. A. GENERAL. Except as otherwise provided in Section VI of this Agreement, disputes between ActaMed and SBCL relating to the interpretation or application of this provisions of this Agreement shall be resolved in accordance with this Section XV. B. INFORMAL DISPUTE RESOLUTION. Any dispute between the parties arising out of or with respect to this Agreement, either with respect to the interpretation of any provision of this Agreement or with respect to the performance by ActaMed or SBCL, shall be resolved as provided in this Article. 1. Prior to the initiation of formal dispute resolution procedures, the parties shall first attempt to resolve their dispute informally, as follows: a. The Representatives for each party shall meet for the purpose of endeavoring to resolve such dispute. They shall meet as often as the parties reasonably deem necessary in order to gather and furnish to the other all information with respect to the matter in issue which the parties believe to be appropriate and germane in connection with its resolution. The Representatives shall discuss the problem and negotiate in good faith in an effort to resolve the dispute without the necessity of any formal proceeding. During the course of negotiations, all reasonable requests made by one party to another for nonprivileged information, reasonably related to this Agreement, shall be honored in order that each of the parties may be fully advised of the other's position. b. If, within fifteen (15) days after a matter has been identified for resolution pursuant to this Section XV, either of the Representatives concludes in good faith that amicable resolution through continued negotiation in this forum does not appear likely, the matter will be escalated by formal written notification to the SBCL President and the ActaMed President. The parties will use their respective best efforts to cause the SBCL President and the ActaMed President to meet to attempt to resolve the dispute. -36- c. Formal proceedings for the resolution of a dispute may not be commenced until the earlier of: (i) the date on which the SBCL President and the ActaMed President conclude in good faith that amicable resolution through continued negotiation of the matter does not appear likely; or (ii) thirty (30) days after the dispute has been referred to the SBCL President and the ActaMed President. 2. The provisions of this Section XV shall not be construed to prevent a party from instituting, and a party is authorized to institute, formal proceedings earlier to avoid the expiration of any applicable limitations period. C. ARBITRATION. If the parties are unable to resolve any controversy arising under this Agreement as contemplated by Section XV.A and if such controversy is not subject to Section XIV or Section XV.D, then such controversy shall be submitted to mandatory and binding arbitration at the election of either Party (the "DISPUTING PARTY") pursuant to the following conditions: 1. The Disputing Party shall notify the AAA and the other Party in writing describing in reasonable detail the nature of the dispute (the "DISPUTE NOTICE"). The parties shall each select a neutral arbitrator in accordance with the rules of AAA and the two (2) arbitrators selected shall select a third neutral arbitrator. The three (3) arbitrators so selected are herein referred to as the "PANEL." 2. The Panel shall allow reasonable discovery as permitted by the Federal Rules of Civil Procedure, to the extent consistent with the purpose of the arbitration. The Panel shall have no power or authority to amend or disregard any provision of this Section XV. The arbitration hearing shall be commenced promptly and conducted expeditiously, with each of ActaMed and SBCL being allocated one-half of the time for the presentation of its case. Unless otherwise agreed to by the parties, an arbitration hearing shall be conducted on consecutive days. 3. Should any arbitrator refuse or be unable to proceed with arbitration proceedings as called for by this Section, such arbitrator shall be replaced by an arbitrator selected in accordance with the rules of the AAA and consistent with this Section XV. 4. The Panel rendering judgment upon disputes between parties as provided in this Section XV shall, after reaching judgment and award, prepare and distribute to the parties a writing describing the findings of fact and conclusions of law relevant to such judgment and award and containing an opinion setting forth the reasons for the giving or denial of any award. The award of the arbitrator shall be final and binding on the parties, and judgment thereon may be entered in a court of competent jurisdiction. 5. Arbitration hearings hereunder shall be held in Washington D.C. or other mutually agreeable location. 6. The Panel shall be instructed that time is of the essence in the arbitration proceeding. The Panel shall render its judgment or award within fifteen (15) days following the -37- conclusion of the hearing. Recognizing the express desire of the parties for an expeditious means of dispute resolution, the arbitrator shall limit or allow the parties to expand the scope of discovery as may be reasonable under the circumstances. D. LITIGATION. In the event of a breach of the confidentiality obligations set forth in this Agreement, or in the event a party makes a good faith determination that a breach of the terms of this Agreement by the other party is such that the damages to such party resulting from the breach will be so immediate, so large or severe, and so incapable of adequate redress after the fact that a temporary restraining order or other immediate injunctive relief is a necessary remedy, then such party may file a pleading with a court seeking immediate injunctive relief. If a party files a pleading with a court seeking immediate injunctive relief and this pleading is challenged by the other party and the injunctive relief sought is not awarded in substantial part (or in the event of a temporary restraining order is vacated upon challenge by the other party), the party filing the pleading seeking immediate injunctive relief shall pay all of the costs and attorneys' fees of the party successfully challenging the pleading. 1. ActaMed and SBCL each consent to venue in Philadelphia, Pennsylvania and to the nonexclusive jurisdiction of competent Pennsylvania state courts or federal courts located in Philadelphia for all litigation which may be brought, subject to the requirement for arbitration hereunder, with respect to the terms of, and the transactions and relationships contemplated by, this Agreement. XVI. MISCELLANEOUS. A. PUBLICITY. Each party hereto agrees that neither it, nor or any of its representatives, shall make any public announcement with respect to this Agreement or the transactions contemplated hereby without the prior consent of the other party hereto unless required by law or judicial process, in which case notification shall be given to the other party hereto prior to such disclosure and the content of such disclosure approved by such other party, which approval shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, ActaMed agrees that nothing in this Section XVI.A shall prohibit SBCL from disclosing any information SBCL is permitted to disclose under Section X.D. B. ENTIRE AGREEMENT. This Agreement, including the Exhibits to it, constitutes the entire understanding between the parties and supersedes all proposals, communications and agreements between the parties relating to its subject matter. No amendment, change, or waiver of any provision of this Agreement will be binding unless in writing and signed by both parties. C. GOVERNING LAW. This Agreement will be governed by and construed in accordance with the laws of the State of Georgia applicable to contracts made and performed therein. D. ASSIGNMENTS. Neither party may assign this Agreement without the prior, written consent of the other party, which shall not be unreasonably withheld; PROVIDED, HOWEVER, that SBCL may assign its rights and obligations hereunder without approval of ActaMed to any of its affiliates, -38- or an acquiror of substantially all of its assets; PROVIDED FURTHER that ActaMed may assign its rights and obligations under this Agreement without the approval of SBCL to any person that acquires all or substantially all of the business or assets of ActaMed related to the ActaLab Software and the Network, if such person (or any affiliate of such person) is not engaged in the business of providing laboratory testing services. Any attempted assignment without such consent shall be void. If the parties cannot agree upon whether a company competes with SBCL for lab testing, the parties shall resolve the dispute pursuant to Section XV. Any assignment with consent does not release the assigning party from any of its obligations under this Agreement unless the consent so states. E. NOTICES. Any notices relating to this Agreement shall be in writing and will be sent by certified United States mail, postage prepaid, return receipt requested, or by facsimile transmission or overnight courier service, addressed to the party at the address set forth below, or at such different address as a party has advised to the other party in writing and shall be deemed given and received when actually received: If to SBCL: SmithKline Beecham Clinical Laboratories, Inc. 1201 South Collegeville Road Collegeville, Pennsylvania 19426 Attention: John B. Okkerse, Jr., Ph.D., President Telephone: [*] Telecopy: [*] With a copy to: SmithKline Beecham Corporation One Franklin Plaza 16th and Race Streets Philadelphia, PA 19103 Attention: General Counsel-U.S. Telephone: [*] Telecopy: [*] If to ActaMed: ActaMed Corporation Suite 600 7000 Central Parkway Atlanta, Georgia 30328 Attention: Chief Financial Officer Telephone: (770)352-1600 Telecopy: (770)352-1815 [*] 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. -39- with a copy to: Alston & Bird One Atlantic Center 1201 West Peachtree Street Atlanta, Georgia 30309-3424 Attention: John C. Weitnauer, Esquire Telephone: (404) 881-7780 Telecopy Number: (404) 881-7777 F. SEVERABILITY. In the event one or more of the provisions of this Agreement are found to be invalid, illegal or unenforceable by a court with jurisdiction, the remaining provisions shall continue in full force and effect. G. FORCE MAJEURE. The obligations of the parties under this Agreement (other than the obligation to make payments) shall be suspended to the extent a party is hindered or prevented from complying therewith because of labor disturbances (including strikes or lockouts), war, acts of God, fires, storms, accidents, governmental regulations, failure of vendors or suppliers or any other cause whatsoever beyond a party's control. For so long as such circumstances prevail, the party whose performance is delayed or hindered shall continue to use all commercially reasonable efforts to recommence performance without delay. H. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION THAT MAY BE ENFORCED BY THE PARTIES. -40- IN WITNESS WHEREOF, the parties have executed this Services Agreement as of the date set forth above. ACTAMED CORPORATION By: /s/ --------------------------------------- Its: President -------------------------------------- SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. By: /s/ --------------------------------------- Its: President -------------------------------------- EXHIBITS Exhibit A -- Definitions- Exhibit II.B.2(a) -- Automated Provider Contract Amendment Provisions* Exhibit II.B.2(b) -- Automated Provider New Contract* Exhibit III.B.7 -- Reports- Exhibit III.C-1 -- Network Standards- Exhibit III.C-2 -- Customer Support Standards- Exhibit IV.G -- Average Revenue/Requisition & Monthly Average Number of Requisitions* Exhibit V.A. -- Required Maintenance Exhibit V.B. -- Year 2000 Warranties Exhibit VII.C-1 -- Current Connectivity Arrangements** Exhibit VII.C-2 -- Exclusions to Preferred Vendor Status
* TO BE DELIVERED BY JANUARY 31, 1998. ** TO BE DELIVERED BY JANUARY 15, 1998. EXHIBIT A DEFINITIONS "AAA" means the American Arbitration Association. "ActaLab Software" means the ActaLab Software as defined under the License Agreement. [*] has the meaning set forth in Section XII.E.6 of the Services Agreement. "ActaMed" means ActaMed Corporation, a Georgia corporation. "ActaMed Gateway shall have the meaning set forth in Section II.A.1. "ActaMed Indemnitee" means ActaMed and its directors, officers, employees, affiliates and permitted assigns. "ActaMed Network" means the EDI system and network for electronic Transmissions, which includes the Network Software and ActaMed's gateway and hardware and computer systems needed to operate that software. "ActaMed President" shall mean the President of ActaMed, presently Michael K. Hoover, or should ActaMed be restructured in any manner, the officer of ActaMed having top authority over ActaMed's operations. "ActaMed Relationship Manager" shall have the meaning set forth in Section XI. "ActaMed Site" means an Automated Provider utilizing the Network for Lab EDI Services located in a transferred Region that was an SBCL Site on the Transfer Date of the Region or is a New Site or [*]. "Agreed Services" means all services to be rendered by ActaMed under this Services Agreement, including without limitation Lab EDI Services. "Anniversary" shall mean the anniversary date of the Region One Transfer Date. "Audit Rights" means the right to, or to have representatives, (1) examine all books of account, records, reports and other papers except to the extent that such action would, in the reasonable opinion of counsel, constitute a waiver of the attorney/client privilege or violate obligations of confidentiality to third parties, [*] 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-1 (2) make copies and take extracts from any thereof, except for information which is subject to a written confidentiality agreement with a third party, (3) discuss the affairs, finances and accounts of the party being audited with such party's officers and independent certified public accountants (and by this provision such audited party hereby authorizes said accountants to discuss with the auditing party and its representatives, the finances and accounts of such entity) and (4) visit and inspect, at reasonable times and on reasonable notice during normal business hours, the properties of the other party; PROVIDED THAT, the foregoing audit rights are in addition to any rights of a party under the Georgia Business Corporation Code in the case of ActaMed, or the Delaware General Corporation Law in the case of SBCL, and shall in no way limit such rights; and PROVIDED FURTHER THAT, the expenses incurred in connection with any such inspection shall be for the account of the auditing party, except that all reasonable expenses incurred by the audited party, or any of its officers, employees, agents or independent certified public accountants, shall be expenses payable by the audited party and shall not be expenses of the auditing party. "Automated Provider" means a Provider [*] who or which, on or after the Transfer Date of the Region in which the Provider [*] is located, uses the Network to send clinical laboratory test orders to an SBCL Lab or to receive test result reports from an SBCL Lab. "Changes" means any improvements, changes or additions to application software and documentation that improve existing functions, add new functions, or improve performance through changes in the software or system design or coding. "Claim" means any claim for indemnification under Section XIV of the Services Agreement. "Claims Notice" means a written notice of an indemnification claim delivered pursuant to Section XIV of the Services Agreement. "Confidential Information" means information that is (1) confidential to the business of a party, including without limitation, data regarding the extent of the Agreed Services provided hereunder to, or Transaction Fees, Fixed Fees or PIFs paid hereunder by, SBCL, (2) is designated and identified as such by such party, and (3) is not a Trade Secret; provided, however, that Confidential Information does not include any information which is or becomes generally known to the public without any breach by the Receiving Party of its duties to the Disclosing Party. Assuming that the foregoing criteria are met, Confidential Information also includes information which has been disclosed to a Receiving Party by another person and which the Receiving Party is obligated to treat as confidential. [*] 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-2 "Customer Support Standards" has the meaning set forth in Section III.C of the Services Agreement. "Development Agreement" means the Development Agreement between SBCL and ActaMed dated October 31, 1997 for the initial development of the ActaLab Software. "Disclosing Party" has the meaning set forth in Section X.C of the Services Agreement. "Disease Management Business" shall have the meaning set forth in Section VIII.D. "Dispute Notice" means a written notice by one party hereto notifying the other of the existence of a dispute, which notice shall delineate the disputed items and the factual basis for the dispute. "Disputing Party" has the meaning given in Section XV.B of the Services Agreement. "EDI" means electronic data interchange. "Exclusive Developments" has the meaning set forth in Section V.E.1.a of the Services Agreement. "First Variable Fee" has the meaning set forth in Section IV.C.1 of the Services Agreement. "Fixed Fee" means the amounts payable by SBCL pursuant to Section IV.A of the Services Agreement. "Fixed Fee Sites" has the meaning set forth in Section IV.G of the Services Agreement. "FTE" means "full time equivalent," i.e., the equivalent number of work hours that would be worked by one person working on a full time basis, treating eight (8) hours worked per day as a full work day. "Indemnifying Party" means the Party obligated to provide indemnification pursuant to Section XIV of the Services Agreement. "Indemnitee" means an ActaMed Indemnitee or an SBCL Indemnitee. "Integrity Agreement" means SBCL's Corporate Integrity Agreement with the OIG. "Intellectual Property" means copyrights, trademarks, service marks, trade names, patents, applications therefor, technology rights and licenses, computer software (including, without limitation, any source or object codes therefor or documentation relating thereto), computer software licenses, trade secrets, franchises, know-how, inventions and intellectual property rights. A-3 "Key Performance Standards" shall mean the Performance Standards under the headings of [*] "Lab EDI Services " means electronic connectivity services enabling an Automated Provider to send Transmittal Information electronically to an SBCL Lab and/or to receive electronically Transmittal Information from an SBCL Lab utilizing the Network. "Liability" means any direct or indirect liability, indebtedness, obligation, expense, claim, deficiency, guaranty or endorsement of or by any person (other than endorsements of notes, bills and checks presented to banks for collection or deposit in the ordinary course of business) of any type, whether accrued, absolute, contingent, matured, unmatured or other. "License Agreement" means the License Agreement between SBCL and ActaMed dated the date of the Services Agreement and described in the Preamble to the Services Agreement. "Licensed Materials" means the software licensed pursuant to the License Agreement. [*] has the meaning set forth in Section XII.E.4 of the Services Agreement. "Losses" means any and all demands, claims, actions or causes of action, assessments, losses, diminution in value, damages (including special and consequential damages), liabilities, costs, and expenses, including without limitation, interest, penalties, cost of investigation and defense, and reasonable attorneys' and other professional fees and expenses. [*] has the meaning set forth in Section XII.F of the Services Agreement. "Network" means the SCAN Network and/or the ActaMed Network. "Network Software" means ActaMed's personal computer version of the ProviderLink and ActaLink presentation and network software programs, under whatever name marketed, and the SCAN Software and the ActaLab Software, and all Changes to them, which are licensed to Automated Providers and which allow access to the Network for the transmission of laboratory test order entries and reception of test result information, or other software program for use by ActaMed in the transmission of test order entries and reception of test result information which is licensed to Automated Providers. "Network Standards" shall have the meaning set forth in Section III.C of the Services Agreement. "New Business Plan" shall mean the ActaMed business plan delivered pursuant to Section 5.1.8 of the Purchase Agreement. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. A-4 "New Site" shall mean an ActaMed Site added to the Network on or after the Transfer Date of the Region in which the ActaMed Site is located and which is not a Fixed Fee Site. "Office Space" has the meaning set forth in Section II.B.5 of the Services Agreement. "OIG" means the Office of Inspector General, U.S. Department of Health and Human Services. "Other Lab" means a commercial laboratory other than an SBCL Lab. "Oversight Committee" has the meaning set forth in Section III.A of the Services Agreement. "Panel" has the meaning given it in Section XV.B of the Services Agreement. "PC System" means the personal computer, modem, bar code readers, bar code label printers, requisition and results printers and other hardware peripherals required for a Provider to become an Automated Provider. [*] means an SBCL [*] or other [*]. "Performance Standards" shall have the meaning set forth in Section III.C of the Services Agreement. "PIF Amount" has the meaning given it in Section IV.C.2 of the Services Agreement. "PIF Number" has the meaning given it in Section III.B.3 of the Services Agreement. "PIF Sites" has the meaning given it in Section III.B.3 of the Services Agreement. [*] or "PIF" has the meaning given it in Section IV.M.1 of the Services Agreement. "Provider" means a physician, clinic, hospital, or other provider of clinical health care services other than [*]. "Purchase Agreement" means the Asset Purchase Agreement between ActaMed and SBCL dated the date of the Services Agreement and described in the Preamble to the Services Agreement. "Receiving Party" has the meaning given it in Section X.C of the Services Agreement. "Region" means any one of Region One, Region Two, Region Three, or Region Four. [*] 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-5 "Region Four" means the Region described on Schedule 2.2(d) to the Purchase Agreement. "Region Four Transfer Date" has the meaning given in Section 2.3.4 of the Purchase Agreement. "Region One" means the Region described on Schedule 2.2(a) to the Purchase Agreement. "Region One Transfer Date" means the date on which Region One is transferred to ActaMed pursuant to the Purchase Agreement. "Region Three" means the Region described on Schedule 2.2(c) to the Assets Purchase Agreement. "Region Three Transfer Date" has the meaning given in Section 2.3.3 of the Purchase Agreement. "Region Two" means the Region described on Schedule 2.2(b) to the Purchase Agreement. "Region Two Transfer Date" has the meaning given in Section 2.3.2 of the Purchase Agreement. "Regulation" means any statute, law, ordinance, regulation, requirement, order or rule of any federal, state, local government or other governmental agency or body or of any other type of regulatory body, or any governmental or administrative interpretation of any thereof, including, without limitation, (i) those covering health, safety, environmental, energy, transportation, bribery, record keeping, zoning, antidiscrimination, antitrust, wage and hour, and price and wage control matters, (ii) requirements imposed by any governmental or regulatory body which must be satisfied to qualify for Medicare reimbursements, and (iii) any and all federal, state and local health care laws relating to or covering the methods and ways in which Lab EDI Services and other related or incidental services or benefits, if any, are provided to the Automated Providers, including, but not limited to, the Stark law (42 U.S.C. Section 1395nn) and the Clinical Laboratory Improvements Act of 1988, as amended. [*] has the meaning set forth in Section IV.G of the Services Agreement. [*] has the meaning set forth in Section IV.G.2 of the Services Agreement. "Representatives" means the ActaMed Relationship Manager and the SBCL Relationship Manager. [*] 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-6 "Requisition" shall mean an electronically transmitted clinical laboratory test order from an Automated Provider to SBCL which is entered utilizing SCAN Software, the ActaLab Software or other program for electronic lab order entry and results reporting and utilizing the Network, for one or more clinical laboratory tests for a single patient transmitted electronically at one time and the corresponding test results delivered electronically to an Automated Provider from SBCL at one or more times. The term "Requisition" shall include patient eligibility for third party payor benefits or reimbursement or claim status checking related to such order and available to ActaMed. "SBCL" means SmithKline Beecham Clinical Laboratories, Inc., a Delaware corporation. "SBCL Access" has the meaning set forth in Section X.B.2 of the Services Agreement. "SBCL Indemnitee" means SBCL and its directors, officers, employees, affiliates and permitted assigns. "SBCL Lab" means any location at which SBCL or its affiliates provide, or may in the future provide, clinical laboratory testing services, regardless of the computer systems or software, if any, used by such lab for lab order entry and results reporting. "SBCL President" shall mean the President of SBCL, presently John B. Okkerse, Jr., Ph.D., or should SBCL be restructured in any manner, the officer of SBCL having top authority over SBCL's operations. "SBCL Relationship Manager" has the meaning set forth in Section XI of the Services Agreement. "SBCL Site" means an Automated Provider utilizing the SCAN Network for Lab EDI Services on the Transfer Date of the Region in which such Automated Provider is located. "SCAN Assets" has the meaning set forth in the Purchase Agreement. "SCAN Developments" has the meaning set forth in the License Agreement. "SCAN Network" means the SCAN Software and SBCL's gateway and hardware and computer systems needed to operate the SCAN Software, excluding [*] which enables Providers or [*] to place laboratory test orders electronically to an SBCL Lab and/or to receive test result reports electronically from an SBCL Lab. "SCAN PSC" means a PSC which utilizes the Network to enter laboratory test orders electronically and/or to receive test result reports electronically. [*] 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-7 "SCAN Site" means either an SBCL Site or an ActaMed Site that has installed and is using SCAN Software for Lab EDI Services. "SCAN Software" means the SBCL SCAN-TM- software licensed to ActaMed pursuant to the License Agreement, and all Changes thereto after the date hereof. "Second Variable Fee" has the meaning set forth in Section IV.C.2 of the Services Agreement. [*] has the meaning set forth in Section XII.E.5 of the Services Agreement. "SOP" means a standard operating procedure. "Termination Transition" has the meaning given it in Section XII.D of the Services Agreement. "Third Party Claim" means any claim, suit or proceeding (including, without limitation, a binding arbitration or an audit by any taxing authority) that is instituted against an Indemnitee by a person or entity other than an Indemnitor and which, if prosecuted successful, would result in a Loss for which such Indemnitee is entitled to indemnification hereunder. "TopLab" means SBCL's proprietary laboratory systems which facilitate SBCL's internal automated laboratory test processing and reporting, including but not limited to SBCL's Total Order Processing Laboratory system. "Trade Secrets" means information related to the Disclosing Party (1) which derives economic value, actual or potential, from not being generally known to or readily ascertainable by other persons who can obtain economic value from its disclosure or use, and (2) which is the subject of efforts by the Disclosing Party that are reasonable under the circumstances to maintain its secrecy. Without limitation, for ActaMed, ProviderLink and the ActaLab Software are Trade Secrets, and for SBCL, the SBCL Software, SCAN Developments and TopLab are Trade Secrets. "Transaction Fee Amount" has the meaning set forth in Section IV.C.1 of the Services Agreement. "Transaction Fees" has the meaning set forth in Section IV.B of the Services Agreement. "Transfer Date" shall mean any one of, and "Transfer Dates" shall mean more than one of the Region One Transfer Date, the Region Two Transfer Date, the Region Three Transfer Date, and the Region Four Transfer Date. "Transferred Employees" shall have the meaning given such term in the Purchase Agreement. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. A-8 "Transmission" means the electronic transmittal over the Network of Transmittal Information in an approved document format. "Transmittal Information" means information which an Automated Provider gives ActaMed for communication to SBCL over the Network, or which SBCL gives ActaMed for communication to an Automated Provider over the Network, including all copies of same, and including without limitation, data relating to laboratory records, clinical data, encounter data, test information, test codes and provider identification numbers (other than UPINs) "Variable Fees" has the meaning given it in Section IV.C.2 of the Services Agreement. A-9 EXHIBIT II.B.2(a) LAB EDI SERVICE AGREEMENT AMENDMENT PROVISIONS III.B.2-1 EXHIBIT II.B.2(b) LAB EDI SERVICE AGREEMENT III.B.7-1 EXHIBIT III.B.7 REPORTS A. REPORTS ACTAMED WILL PROVIDE TO SBCL The following reports will be provided to SBCL by ActaMed on the indicated schedule. 1. BILLING REPORTS a. [*] SUMMARY REPORTS (POST-ACTAMED GATEWAY): (1) Fixed Fee Sites (a) Total Sites (b) Total Requisitions (c) Average Requisitions per Site (2) Transaction Fee Sites (a) Total Sites (b) Total Requisitions (c) Average Requisitions per Site (3) PIF Sites (a) Total Sites charged for the [*] that [*] (with appropriate supporting detail) (4) Label Printer Fees (a) Total Sites charged for the Label printer equipment fee (with appropriate supporting detail) b. [*] DETAILED FEES: (1) List of Fixed Fee sites by lab (2) List of Transaction Fee sites by lab III.B.7-1 [*] 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. (3) List of PIF Sites by lab (4) List of sites with bar code printer paid by SBCL by lab c. CUSTOM DEVELOPMENT: (1) Monthly itemization and accounting for the hours worked for any projects active under a Custom Development Fee, and a project status report on each item worked d. MONTHLY EXPENSE BILLINGS: (1) Personnel in non-transferred regions, with supporting detail 2. PERFORMANCE REPORTS a. All reports necessary to verify and measure the Performance Standards, including, but not limited to, the following: (i) [*] help desk REPORTS, as set forth in Exhibit III.C-2 - Customer Support Standards showing performance statistics against the Performance Standards and the number of calls received by type of problem (detail problem coded); (ii) [*] network reports, as set forth in Exhibit III.C-1 - Network Standards; (iii) Performance Metrics reports against the Performance Standards described in Exhibit III.C-1 & 2, including comparison of actuals to standard for current month and rolling prior 12 months. b. Transfer BENCHMARK reports, as set forth in Exhibit 2.3.1(a) of the Assets Purchase Agreement. c. Monthly Gateway reports (format to be mutually determined once the ActaMed GATEWAY is active, but intended to be generally similar to the SBCL November 1997 Gateway Report). d. As APPROPRIATE from time to time, in light of technological advances, market conditions or industry standards or other facts and circumstances, a report describing ActaMed's plans to increase the performance and capabilities of the Network and to improve Customer Service beyond the minimum levels specified in Exhibits III.C-1 and III.C-2. e. Monthly report of SBCL clients that have deinstalled (discontinued to use) Lab EDI Services. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. III.B.7-2 f. An ongoing data base (to be created, kept current and available for reporting) report of the current list of clients approved for installation including date received, Lab, Client ID, Client demographics and expected date of installation. 3. SAS 70 REPORT ActaMed will provide a report produced in accordance with standards established by the American Institute of Certified Public Accountants' Statement on Auditing Standards Number 70: Reports on the Processing of Transactions by Service Organizations. ActaMed shall submit the first such report to SBCL by the end of 1998. B. REPORTS SBCL WILL PROVIDE TO ACTAMED 1. BILLING REPORTS A. SBCL WILL MAKE AVAILABLE TO ACTAMED ACCESS TO DATA RELATING TO: (1) Fixed Fee Sites (2) Total Sites (list of Fixed Fee Sites by Lab active that month) (3) List of Transaction Fee sites by Lab B. FOLLOWING ACTAMED GATEWAY, MONTHLY EXPENSE BILLINGS (with appropriate SUPPORTING detail): (1) Gateway 1-800 charges to ActaMed (2) Non-transferred local line charges (3) Service Fees for ongoing support of ActaMed Gateway, if any (4) Service Fees for SBCL Gateway Services for Transferred Sites, if any 2. PERFORMANCE REPORTS a. Prior to the ActaMed Gateway, SBCL will continue to provide ActaMed with copies of its standard monthly Gateway report. b. Timely reports on changes in SBCL that affect ActaMed and its PERFORMANCE hereunder, as set forth in Section IX. III.B.7-3 3. STRATEGIC INFORMATION Quarterly information on major trends within SBCL as appropriate that are relevant to ActaMed and its performance hereunder, such as new customers, lost customers, trends in lab requisition and result volumes, compliance related issues, etc. III.B.7-4 EXHIBIT III.C-1 NETWORK SUPPORT STANDARDS ACTAMED NETWORK AVAILABILITY The ActaMed Network will be available 24 hours a day, 7 days a week with the exception of Planned Down Hours. "Planned Down Hours" means that time which is reasonably required for maintenance and problem resolution as reasonably required and notwithstanding any other provision herein shall only occur during the hours of [*] or on Federally recognized holidays. HARDWARE AND MODEM AVAILABILITY For each month, ActaMed shall maintain an "Availability Percentage" of at least [*]. Hardware systems and modems are operational and available for receiving/accepting calls as measured by an ActaMed systems management and monitoring tool [*]. Hardware specifically includes the ActaMed host machines required to process Lab EDI Services transactions, ActaMed provisioned modems and circuit termination equipment servicing Automated Providers using the ActaMed Network, and other third party provisioned dial-in access service and devices relevant to the Lab EDI Services. The "Availability Percentage" for Lab EDI Services shall be calculated on [*] and will be based on data gathered through an automated Systems Management and Reporting tool [*]. Similar automated measurement and reporting will be implemented as soon as is practical for SCAN Sites transferred to the ActaMed Gateway, but not later than 180 days following such transfer of the first SCAN Site to the ActaMed Gateway. The Availability Percentage is calculated as set forth below: - Defined Hours are the total days in the month multiplied by 24 hours. - Unplanned Hours are the hours experienced during the month in which the ActaMed Network is not operable or otherwise not properly transmitting valid Transmission as provided in the Agreement excluding Planned Down Hours. - Actual Hours are the Defined Hours minus the Unplanned Hours. - Availability Percentage is determined by dividing the Actual Hours by Defined Hours and multiplying the result by 100. [*] 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. III.C-1-1 SUCCESSFULLY DELIVERED CALLS For each month, ActaMed shall maintain a "Successfully Delivered Call Percentage" of at least [*]. The "Successfully Delivered Call Percentage" is the total of all Successfully Delivered Calls divided by the total of attempted calls from all sources and multiplying the result by 100. A Successfully Delivered Call shall mean a call made to ActaMed's premise equipment from any source for the purpose of processing Lab EDI Services. as to which ActaMed's equipment successfully offers service, to be measured by the call service provider's equipment facilities including: - calls delivered by an Interexchange Carrier ("IXC"), such as Sprint, AT&T, Worldcom, etc., using toll-free dial-in service to will be measured by the IXC carrier switch; - calls delivered by a third party dial-in access provider will be measured by the management capabilities of that provider's modem pool; and - calls delivered by a local service provider or by dedicated toll-free dial-in service will be measured by ActaMed's terminating premise equipment. MODEM CONNECTIVITY For each month, ActaMed shall maintain a "Modem Connectivity Percentage" of at least [*]. The "Modem Connectivity Percentage" is determined by dividing the total number of Successfully Connected Calls by the total of Successfully Delivered Calls and multiplying the result by 100. A Successfully Connected Call is a Successfully Delivered Call that establishes and maintains successful modem connection as determined by the statistics generated by the management and reporting functionality of the ActaMed terminating modem bank and/or third party dial-in access equipment. TRANSACTION PROCESSING ActaMed acknowledges and agrees that all Transactions meeting the requirements set forth next to one or both of the bullet points below ("Proposed Transaction") will be processed by the ActaMed Network. If Proposed Transactions are not being processed by the ActaMed Network, it will be treated as a Severity 1 problem. It is expected by the Parties that [*] of connected and Proposed Transactions will be successfully processed within ActaMed Network. [*] 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. III.C-1-2 - - Any order transactions that are entered according to the applicable specifications and edits of the Lab EDI software such as SCAN Software or ActaLab Software or any other ordering software module approved by ActaMed and SBCL that is connected to the ActaMed Network for the purposes of entering lab orders and upon completion of the order entry indicates to the operator that the order has been accepted for Transmission to SBCL; and - - Any result transactions transmitted by SBCL systems in accordance with applicable specifications and containing sufficient information to allow the ActaMed Network to determine the approved system to which the transaction is to be delivered. [*] [*] The Parties agree that this is not a currently automated measurement and is not included as a requirement of Section III.B.7, Reports. HISTORICAL DATA FOR RE-TRANSMISSION ActaMed will store all result transmission data on, and make it available in accordance with the Services Agreement via, the ActaMed Gateway for a minimum of [*]. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. III.C-1-3 EXHIBIT III.C-2 CUSTOMER SUPPORT STANDARDS ACTAMED HELP DESK The ActaMed Help Desk for all Lab EDI Services will be staffed Monday through Friday 8:00 AM to 8:00 PM EST excluding federally recognized holidays. Issues of any severity level can be reported during this time via any one of the following methods: - Telephone via ActaMed toll-free service (800 line); - FAX; - Internet e-mail to ActaMed help desk personnel; or - Internet e-mail directly into the ActaMed Help Desk call tracking system. In addition, - Internet web pages are being constructed to answer frequently asked questions; - By special arrangement, limited direct access to the ActaMed Help Desk call tracking system is possible; and - Using Internet e-mail and the assigned tracking number, the status of calls can be retrieved at any time. There shall be after hours support, which is typically limited to issues that are defined as Severity 1 or Severity 2 as further defined below. These are either issues that involve multiple users and major communications or systems failures, or problems involving an outage of a single Automated Provider (i.e. non-critical issues such as training questions, enhancement requests and usage questions are usually handled during normal help desk hours.) Service is initiated by calling the main Help Desk 800 number and leaving a detailed message. Voice mail left after hours or on holidays will result in a page to the appropriate on call analyst who will retrieve the message and return the call and immediately initiate investigatory and corrective actions as appropriate in accordance with Severity Levels. III.C-2-1 CALL TRACKING Beginning at such time as the ActaMed SCAN help desk begins to accept client calls from ActaMed Sites, which shall occur at a date mutually agreed upon by the parties, all calls made to the ActaMed SCAN Help Desk will be logged into ActaMed's "Support Magic" call tracking system, and will include at a minimum the following information: - Site ID (Machine ID) - Site Name - Caller Name - Phone Number - Local Lab - Date of Call - Time of Call - Problem Code / Description - Call Recipient / Analyst - Problem Definition - Call Status - Solution Code / Clear Description of final resolution - Severity Code - Date and time of final resolution ActaMed shall be responsible only for calls related to ActaMed Sites. Calls from all other SCAN sites will continue to be supported by SBCL and will continue to be tracked by SBCL processes as in force at that time. SEVERITY CODES Help Desk calls will be logged and appropriate escalations will be made based upon severity codes assigned to each call. It is the responsibility of the analyst handling the call to assign the severity level in accordance with the severity level definitions described below. The definition of each III.C-2-2 severity level and the classification of call types into severity levels will initially be as set forth below, with more specific definitions to be determined through negotiation between ActaMed and SBCL. The definitions may be reassessed and are subject to change by mutual consent of the Parties. The ActaMed Help Desk's method of classifying calls into priority levels will be reviewed periodically with the Oversight Committee. SBCL will be responsible for defining additional situations and communicating to ActaMed any requests on how to classify particular call situations. SEVERITY 1 DEFINITION: A critical system or component is down or experiencing degraded service causing SBCL or a customer's business functions to be halted. Severity I issues will typically involve major system outages that affect the service provided to many users. REQUIRED ACTION: Immediate notification to those persons identified in the Crisis Management document. [*] of Severity 1 issues should be resolved within [*] with [*] updates between ActaMed and SBCL. SEVERITY 2 DEFINITION: A single user is down; a component is experiencing degraded service; consumable supplies are unavailable and does not have a critical impact on the business, but may restrict function to some users and may impact normal business operations. REQUIRED ACTION: The help desk will asses the situation and verify that setup or configuration problems are not the cause. After the original assessment has been made, an ActaMed CIS representative will normally be dispatched to correct or replace the failing component. In remote areas where localized support is not available, a replacement component will be shipped for next day delivery, and arrangements will be made to provide assistance setting up or installing that component. Arrangements will also be made to remove or arrange for the removal of the failed component. [*] of Severity 2 calls should be resolved within [*] with updates to the affected user every [*] or less. SEVERITY 3 DEFINITION: A user's system is still operating but is experiencing difficulties or a specially requested deliverable is unavailable. REQUIRED ACTION: The Help Desk will make every attempt to resolve the issue over the phone or using the tools available to them. If those attempts are not successful, a ActaMed CIS representative might be called upon to resolve the issue on site, but these issues will typically have a lower priority than the Severity 2 issues listed above. [*] of Severity 3 calls will be resolved within [*] with updates to the affected user every [*] or less. [*] 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. III.C-2-3 NEW SITE INSTALLATION In accordance with the agreed upon procedures for installing New Sites (or [*] Sites) that SBCL requests or approves for Lab EDI Services, ActaMed will: - If required, phone line installation and new service will be ordered on behalf of the Provider or SBCL on average within [*] of receipt of new site notification and, - Provide installation and training, including any hardware required under Section IV.L of the Services Agreement, to properly prepare and set up the new client to use Lab EDI Services within [*] of receipt of new site notification and phone line availability; or - PIF Sites will be installed within [*] from the time the notification is received and phone service is available. except that, (i) delays caused by the practice management system vendor or the Provider, shall not be the responsibility of ActaMed; and (ii) SBCL and ActaMed will, when necessary, cooperate in the development of site installation schedules to reflect periods of high volumes of new installations and remote installations (usually requiring air travel). DE-INSTALLATIONS When required by the Assets Purchase Agreement or this Agreement, ActaMed will deinstall any Automated Provider within [*] of receipt of SBCL's deinstallation request. Re-deployment of the deinstalled PC System for Lab EDI Services will be in accordance with Section IV of the Services Agreement and in accordance with the performance metrics of a New Site. RETAINING ActaMed will provide ongoing training support in a manner and at such frequency as is reasonably required to maintain client satisfaction and ability to continue to use Lab EDI Services effectively to process laboratory transactions. SCAN CONSUMABLE SUPPLIES ActaMed will provide, [*] consumable supplies required by all ActaMed Sites for use of Lab EDI Services including printer paper, toner cartridges, backup tape cartridges and labels that meet SBCL label specifications. ActaMed will deliver or arrange for delivery of these as required for uninterrupted use of Lab EDI Services. Client requests for such supplies that prevent use of Lab EDI Services will be considered a Severity [*] problem. [*] 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. II.C-2-4 MEASUREMENTS AND REPORTING Measurement will begin when the problem is received by the ActaMed Help Desk at which time it will be recorded into the computerized on-line problem management tool. Measurement will end when the call is resolved satisfactorily and closed by the ActaMed Help Desk representative. In the case of calls that have been forwarded to an SBCL facility for questions or issues not covered by the ActaMed Help Desk, the ActaMed Analyst will, except in those cases where the problem determination or resolution is clearly the responsibility of SBCL because of the nature of the call, take ownership of that call and follow it through any other path it may take. So long as SBCL provides the information needed to resolve such a call, ActaMed will also be made to document that call and close it out with a detailed explanation of the final resolution. Where it is not possible for the ActaMed Analyst to remain "on the call", it is the responsibility of the SBCL personnel to notify the ActaMed Help Desk if the outcome is to be documented in the help desk system. Other measurements that will be made available on a monthly basis will come from the ACD system. The variety of reports available based upon the call tracking system and the ACD statistics will include:
REPORT TARGET SERVICE LEVEL ------ -------------------- Number of calls by category N/A, will vary Calls by region N/A, will vary Abandoned call rate * Average hold time [*]
* since there is no currently available SBCL baseline to be used to set reasonable standards, ActaMed will record these metrics from the beginning of its operations of the help desk. After the first four months of help desk operation, ActaMed and SBCL will evaluate performance and set mutually-agreeable metrics based on SBCL's actual performance and generally accepted performance standards for similar services. In no case shall such metrics result in standards lower than those generally found in the industry for similar services. The percent of calls closed within the time frame objectives will be measured by calculating, by priority level, the volume of calls closed within the time frame objectives as a percentage of total calls opened. The ActaMed Help Desk will use best efforts to accommodate any requests for additional information as long as the collection of the information does not add significant time and effort in logging the call. The ActaMed Help Desk statistics will be reported to SBCL on a monthly basis. The means of distribution is yet to be determined. [*] 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. III.C-2-5 SATISFACTION LEVELS For each year during the term of the Services Agreement, ActaMed will perform client satisfaction surveys assessing Automated Providers' satisfaction with ActaMed's Lab EDI Services. The format and content of the annual surveys shall be determined by ActaMed except that ActaMed will afford SBCL reasonable opportunity to review and comment thereon prior to its use. The annual survey will be conducted at annual intervals. III.C-2-6 EXHIBIT IV.I AVERAGE REVENUE/REQUISITION & MONTHLY AVERAGE NUMBER OF REQUISITIONS IV.I-1 EXHIBIT V.A MAINTENANCE ActaMed will provide SBCL with the following hardware, network and application (product) maintenance services which will be performed by ActaMed staff not dedicated to SBCL enhancements. The cost of these maintenance services are provided as a part of the annual Fixed Fee and Transaction Fees, and include the following: PRODUCT MAINTENANCE - - Maintenance of the Network through both emergency and routine bug fixes and scheduled maintenance releases; - - Such changes and modifications to the Network required to manage scalability and capacity issues associated with increased transaction volumes; - - Provision of routine, updated application documentation and training materials; - - Provision of periodic product updates to improve usability and to improve existing features and functionality. PERFORMANCE - - Maintenance, monitoring and reporting of hardware, network and communication systems regarding stability and performance as specified in Exhibit III.C-1 Network Standards; - - Changes required to maintain above service level commitments, including changes and modifications required to manage scalability and capacity issues associated with increased transaction volumes; - - Technology upgrades to the Network (to include such things as fault tolerance produces and services) will be included as part of ongoing maintenance; and - - Maintenance of appropriate connectivity to SBCL host systems to maintain security provisions and the data integrity of Transmissions. IV.I-2 EXHIBIT V.B YEAR 2000 WARRANTIES ActaMed warrants that the SCAN Software and ActaLab Software as compiled on any hardware and operating system platform designated in its documentation ("Platforms") will satisfy all of the following: (a) Such software will properly process date-related information from different centuries (19th through 21st). Results utilizing such software will be consistent and correct whether or not dates being processed span different centuries and will be given with the proper indication of century. (b) Data involving date information which will be generated from use of the software will be coded in a manner that captures, stores and displays date-related information so that the software will properly access and process the data regardless of the century involved. (c) The software will properly process date-related data which had been generated by previous versions of thereof regardless of the century involved. (d) The software interfaces with the operating system and other software, and with devices, will properly exchange and use date-related information regardless of the century involved, so long as such other software, systems and devices provide date-related information in a compatible format. (e) The software will check any date-related information provided by the user, and by any devices, systems or software with which the software interfaces, and will reject any date-related information which is not provided in a format which the software will properly process. When data is rejected, the software will generate an explanatory error message. (f) The software will not have a feature which will cause it to stop operating or to limit or alter its functions or performance because of a date or time extending beyond 11:59:59 p.m. on December 31, 1999. (g) The software will process information relating to years beginning with 2000 properly, including recognizing that the year 2000 and every fourth year thereafter is a leap year. (h) The software (including but not limited to, runtime systems) will function correctly if executing at the moment when the year changes from 1999 to 2000. The software setup and updates will not be affected by the century change. V.B-1 EXHIBIT VII.C-1 CURRENT CONNECTIVITY ARRANGEMENTS EXISTING VENDOR INTERFACE RELATIONSHIPS
ORDERS RESULTS ORDERS AND VENDOR NAME STATUS ONLY ONLY RESULTS BILLING DESCRIPTION ------------- -------------------- -------- --------- -------------- --------- ---------------------------------- [*] Production No No Yes No Computer Based Patient Record [*] Specs Sent No No Yes No Physician Practice [*] Dormant No No No No Unknown [*] Dormant No Yes No No Physician Practice [*] Dormant No Yes No No CLinic [*] Letter Sent No No Yes No Physician Practice [*] Production No No Yes No Vendor Lab [*] Production No Yes No No Medical Network [*] Specs Sent No Yes No No CLinic [*] Specs Sent No Yes No No Physician Practice [*] Production No Yes No No ESRD [*] Dormant No No Yes No Medical Network [*] Specs Sent No No Yes No Medical Network [*] Specs Sent No No No No Unknown [*] Letter Sent No No No No Unknown [*] Production No Yes No No Physician Practice [*] Specs Sent No No No No Unknown [*] Production No No No No Unknown [*] Dormant No Yes No No Unknown [*] Letter Sent No Yes No No Physician Practice [*] Dormant No Yes No No Unknown [*] Specs Sent No No No No Unknown [*] Dormant No Yes No No Unknown [*] Letter Sent No Yes No No CLinic [*] Specs Sent No No No No Unknown [*] Dormant No Yes No No ESRD [*] Specs Sent No Yes No No CLinic
[*] 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.C-1-1 EXISTING VENDOR INTERFACE RELATIONSHIPS
ORDERS RESULTS ORDERS AND VENDOR NAME STATUS ONLY ONLY RESULTS BILLING DESCRIPTION ------------- -------------------- -------- --------- -------------- --------- ---------------------------------- [*] Dormant No Yes No No Physician Practice [*] Dormant No Yes No No Physician Practice [*] Specs Sent No No No No Unknown [*] Specs Sent No Yes No No Unknown [*] Specs Sent No Yes No No Physician Practice [*] Specs Sent No No No No Unknown [*] Dormant No Yes No No Physician Practice [*] Specs Sent No Yes No No Physician Practice [*] Specs Sent No Yes No No Unknown [*] Production No No Yes No Physician Practice [*] Dormant No Yes No No Unknown [*] Dormant No Yes No No Unknown [*] Production No No Yes No Physician Practice [*] Dormant No Yes No No Physician Practice [*] Production No Yes No No Physician Practice [*] Beta No Yes No No Charting Program [*] Specs Sent No Yes No No Unknown [*] Section I Sent No No No No CLinic [*] Specs Sent No No Yes No Unknown [*] Specs Sent No Yes No No ESRD [*] Specs Sent No Yes No No Physician Practice [*] Dormant No Yes No No CLinic [*] Dormant No Yes No No CLinic [*] Dormant No Yes No No Nursing Home [*] Development No Yes No No Computer Based Patient Record [*] Specs Sent No No No No Unknown [*] Production No Yes No No ESRD
[*] 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.C-1-2 EXISTING VENDOR INTERFACE RELATIONSHIPS
ORDERS RESULTS ORDERS AND VENDOR NAME STATUS ONLY ONLY RESULTS BILLING DESCRIPTION ------------- -------------------- -------- --------- -------------- --------- ---------------------------------- [*] Specs Sent No Yes No No Physician Practice [*] Production No Yes No No CLinic [*] Dormant No No No No Unknown [*] Specs Sent No Yes No No Unknown [*] Specs Sent No No No No Unknown [*] Dormant No Yes No No Physician Practice [*] Specs Sent No Yes No No Physician Practice [*] Development No No Yes No Physician Practice [*] Production No Yes No No Unknown [*] Production No Yes No No Physician Practice [*] Specs Sent No No Yes No Unknown [*] Specs Sent No Yes No No Physician Practice [*] Production No Yes No No Unknown [*] Dormant No Yes No No Unknown [*] Dormant No Yes No No Physician Practice [*] Dormant No Yes No No CLinic [*] Specs Sent No No Yes No CLinic [*] Specs Sent No Yes No No Unknown [*] Dormant No Yes No No CLinic [*] Dormant No Yes No No Physician Practice [*] Production No Yes No No Physician Practice [*] Letter Sent No Yes No No Physician Practice [*] Production No Yes No No Physician Practice [*] Production No No Yes No Occupational Health [*] No No No No Unknown [*] Production No Yes No No Unknown [*] Dormant No Yes No No Vendor Lab
[*] 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.C-1-3 EXISTING VENDOR INTERFACE RELATIONSHIPS
ORDERS RESULTS ORDERS AND VENDOR NAME STATUS ONLY ONLY RESULTS BILLING DESCRIPTION ------------- -------------------- -------- --------- -------------- --------- ---------------------------------- [*] Production No Yes No No Medical Network [*] Production No Yes No No Medical Network [*] Dormant No No Yes No Medical Network [*] Dormant No No Yes No Medical Network [*] Development No No Yes No Medical Network [*] Specs Sent No No Yes No Physician Practice [*] Dormant No Yes No No CLinic [*] Specs Sent No Yes No No CLinic [*] Specs Sent No Yes No No CLinic [*] Letter Sent No No No No Unknown [*] Specs Sent No No No No Unknown [*] Specs Sent No No Yes Yes Physician Practice [*] Specs Sent No Yes No No Physician Practice [*] Production No Yes No No CLinic [*] Specs Sent No No Yes No Interface Engine [*] Dormant No Yes No No Unknown [*] Specs Sent No Yes No No Medical Network [*] Specs Sent No Yes No No Unknown [*] Specs Sent No No No No Physician Practice [*] Specs Sent No No Yes No Interface Engine [*] Specs Sent No No No No Unknown [*] Dormant No No No No Unknown [*] Specs Sent No Yes No No Physician Practice [*] Specs Sent No No No No Unknown [*] Specs Sent No Yes No No CLinic [*] Specs Sent Yes No No No Physician Practice [*] Dormant No Yes No No Unknown
[*] 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.C-1-4 EXISTING VENDOR INTERFACE RELATIONSHIPS
ORDERS RESULTS ORDERS AND VENDOR NAME STATUS ONLY ONLY RESULTS BILLING DESCRIPTION ------------- -------------------- -------- --------- -------------- --------- ---------------------------------- [*] Production No Yes No No Physician Practice [*] Dormant No Yes No No Physician Practice [*] Production No No Yes Yes Medical Network [*] Production No Yes No No ESRD [*] Specs Sent No Yes No No Unknown [*] Specs Sent No No No No Unknown [*] Development No Yes No No Unknown [*] Dormant No Yes No No ESRD [*] Specs Sent No Yes No No Physician Practice [*] Development No Yes No No Physician Practice [*] Specs Sent No No Yes No Physician Practice [*] Production No Yes No No Medical Network [*] Specs Sent No No No No Unknown [*] Specs Sent No Yes No No Clinical Trials [*] Letter Sent No No No No Unknown [*] Development No No Yes No Medical Network [*] Production No No Yes No Occupational Health [*] Development No Yes No No Physician Practice [*] Beta No Yes No No Physician Practice [*] Specs Sent No No Yes No Medical Network [*] Specs Sent No Yes No No CLinic [*] Specs Sent No Yes No No Physician Practice [*] Development Yes No No No Unknown [*] Dormant No Yes No No Physician Practice [*] Development No No Yes No Physician Practice [*] Letter Sent No Yes No No Physician Practice [*] Production No Yes No No Physician Practice
[*] 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.C-1-5 EXISTING VENDOR INTERFACE RELATIONSHIPS
ORDERS RESULTS ORDERS AND VENDOR NAME STATUS ONLY ONLY RESULTS BILLING DESCRIPTION ------------- -------------------- -------- --------- -------------- --------- ---------------------------------- [*] Specs Sent No No No No Physician Practice [*] Dormant No Yes No No Vendor Lab [*] Specs Sent No Yes No No CLinic [*] Specs Sent No Yes No No Physician Practice [*] Specs Sent No Yes No No Physician Practice [*] Specs Sent No Yes No No Medical Network [*] QA No No Yes Yes Physician Practice [*] Production No Yes No No Physician Practice [*] Specs Sent No No Yes No CLinic [*] Specs Sent No No Yes No Physician Practice [*] Specs Sent No Yes No No Unknown [*] Production No No Yes Yes Physician Practice [*] Letter Sent No No No No Unknown [*] Dormant No Yes No No Unknown [*] Dormant No Yes No No Unknown [*] Dormant No Yes No No Unknown [*] Specs Sent No No No No Unknown [*] Production No Yes No No Physician Practice [*] Production No No Yes No ESRD [*] Dormant No Yes No No Physician Practice [*] Specs Sent No Yes No No Physician Practice [*] Specs Sent No Yes No No Physician Practice [*] Beta No Yes No No Physician Practice [*] Specs Sent No Yes No No Unknown [*] Letter Sent No Yes No No Unknown [*] Development No No Yes No Unknown [*] Specs Sent No Yes No No Physician Practice
[*] 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.C-1-6 EXISTING VENDOR INTERFACE RELATIONSHIPS
ORDERS RESULTS ORDERS AND VENDOR NAME STATUS ONLY ONLY RESULTS BILLING DESCRIPTION ------------- -------------------- -------- --------- -------------- --------- ---------------------------------- [*] Specs Sent No Yes No No Physician Practice [*] Specs Sent No Yes No No Unknown [*] Dormant No No Yes No Vendor Lab [*] Letter Sent No No Yes No Physician Practice [*] Letter Sent No Yes No No Medical Network [*] Dormant No No No No Unknown [*] Specs Sent No No Yes No Vendor Lab [*] Specs Sent No No Yes No Computer Based Patient Record [*] Specs Sent No No No No Physician Practice [*] Development No Yes No No Physician Practice [*] No Yes No No Unknown [*] Specs Sent No No No No Unknown [*] Production No No Yes No Vendor Lab [*] No Yes No No ESRD [*] Specs Sent No Yes No No Pharmaceutical Services [*] Production No Yes No No Physician Practice [*] Production No No Yes No CLinic [*] Development No No No No Unknown [*] Production No Yes No No Unknown [*] Development No Yes No No ESRD [*] Dormant No Yes No No Physician Practice [*] Development No No Yes No Unknown [*] Dormant No No No No Medical Network [*] No No No No Unknown [*] Dormant No Yes No No CLinic [*] Specs Sent No Yes No No Pharmaceutical Services [*] Specs Sent No Yes No No Unknown
[*] 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.C-1-7 EXISTING VENDOR INTERFACE RELATIONSHIPS
ORDERS RESULTS ORDERS AND VENDOR NAME STATUS ONLY ONLY RESULTS BILLING DESCRIPTION ------------- -------------------- -------- --------- -------------- --------- ---------------------------------- [*] Specs Sent No Yes No No Physician Practice [*] Production No Yes No No Physician Practice [*] Dormant No Yes No No Physician Practice [*] Dormant No No Yes No Nursing Home [*] Specs Sent No Yes No No Unknown [*] Development No No Yes No Physician Practice [*] Specs Sent No No No No Unknown [*] Production No Yes No No Physician Practice [*] No No No No Unknown [*] Dormant No Yes No No Physician Practice [*] Specs Sent No No No No Unknown [*] Specs Sent No No No No Unknown [*] Section I Sent No No No No Unknown [*] Production No Yes No No Physician Practice [*] Specs Sent No Yes No No Physician Practice [*] Specs Sent No No Yes No Unknown [*] Specs Sent No No Yes No Unknown [*] Specs Sent No Yes No No Physician Practice [*] Production No Yes No No ESRD [*] Specs Sent No No No No Unknown [*] Production No Yes No No Physician Practice [*] Specs Sent No Yes No No CLinic [*] Dormant No Yes No No Unknown [*] Specs Sent No Yes No No CLinic [*] Letter Sent No Yes No No ESRD [*] Production No No Yes Yes Unknown [*] Dormant No Yes No No Unknown
[*] 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.C-1-8 EXISTING VENDOR INTERFACE RELATIONSHIPS
ORDERS RESULTS ORDERS AND VENDOR NAME STATUS ONLY ONLY RESULTS BILLING DESCRIPTION ------------- -------------------- -------- --------- -------------- --------- ---------------------------------- [*] Production No Yes No No Nursing Home [*] Dormant No Yes No No Physician Practice [*] Specs Sent No Yes No No Unknown [*] Beta No No Yes No Vendor Lab [*] Specs Sent No No No No Unknown [*] Development No Yes No No Physician Practice [*] Specs Sent No Yes No No CLinic [*] Dormant No No Yes No CLinic [*] Development No Yes No No Unknown [*] Dormant No No Yes No Unknown [*] Specs Sent No No No No Unknown [*] Dormant No Yes No No Physician Practice [*] Dormant No Yes No No Unknown [*] Specs Sent No No Yes No Physician Practice [*] No No No No Unknown [*] Letter Sent No Yes No No CLinic [*] Specs Sent No No No No Unknown [*] Dormant No No Yes No Unknown [*] Specs Sent No Yes No No CLinic [*] No No Yes No CLinic [*] Dormant No Yes No No CLinic [*] Dormant No Yes No No CLinic [*] Production No Yes No No ESRD [*] Specs Sent No No Yes No CLinic [*] Specs Sent No Yes No No Unknown [*] Production No Yes No No Unknown [*] Dormant No Yes No No CLinic
[*] 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.C-1-9 EXISTING VENDOR INTERFACE RELATIONSHIPS
ORDERS RESULTS ORDERS AND VENDOR NAME STATUS ONLY ONLY RESULTS BILLING DESCRIPTION ------------- -------------------- -------- --------- -------------- --------- ---------------------------------- [*] Specs Sent No No Yes No Unknown [*] Dormant No Yes No No Medical Network [*] Specs Sent No No No No Unknown [*] Specs Sent No No Yes No Physician Practice
[*] 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.C-1-10 AMENDMENT NO. 1 TO SERVICES AGREEMENT This AMENDMENT NO. 1 TO SERVICES AGREEMENT ("Amendment No. 1") is made and entered into this 15th day of May, 1998 by and between ACTAMED CORPORATION, a Georgia Corporation ("ActaMed") and SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC., a Delaware Corporation ("SBCL"). WHEREAS, ActaMed and SBCL entered into a Services Agreement on December 31, 1997 ("Services Agreement") and desire to amend same in connection with the merger a subsidiary of Healtheon Corporation with and into ActaMed, with the result that ActaMed will become a wholly-owned subsidiary of Healtheon. NOW THEREFORE, in consideration of the premises and the mutual promises contained herein, the parties, intending to be legally bound, agree as follows: 1 DEFINITIONS. Capitalized terms used in this Amendment No. 1 and not otherwise defined herein have the meanings set forth in the Services Agreement. 2 AMENDMENTS. 2.1 [*] REMOVED FROM [*]. Section IV.C is replaced in its entirety as follows: "1. An amount (the "FIRST VARIABLE FEE") equal to (i) [*] minus the aggregate of the amount billed to SBCL pursuant to Section IV.B. above, excluding amounts attributable to any Provider office with ProviderLink that is subsequently installed with the Scan Software or ActaLab Software (the "FIRST TRANSACTION FEE AMOUNT") prior to the [*] (ii) [*] minus the sum of (A) the First Transaction Fee Amount for the period from the date hereof to the [*] and (B) the amount paid pursuant to clause (i) above; and (iii) [*] minus the sum of (A) the First Transaction Fee Amount for the period from the date hereof to the [*] and (B) the amount paid pursuant to clauses (i) and (ii) above. 2. An amount (the "SECOND VARIABLE FEE") equal to (i) [*] minus the aggregate of the amount paid plus amounts owed (whether or not billed) pursuant to Section IV.M.1 below (the [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. "PIF AMOUNT") prior to the [*]; (ii) [*] minus the sum of (A) the PIF Amount for the period from the date hereof to the [*] and (B) the amount paid pursuant to clause (i) above; and (iii) [*] minus the sum of (A) the PIF Amount for the period from the date hereof to the [*] and (B) the amount paid pursuant to clauses (i) and (ii) above; PROVIDED THAT if the PIF Amount with respect to an annual period (other than the last such annual period) is at least [*] of the aforementioned dollar amount for that annual period, no payment shall be due under this Section IV.C.2 for such annual period. 3. An amount (the "THIRD VARIABLE FEE" and together with the First Variable Fee and Second Variable Fee, the "VARIABLE FEES") equal to (i) [*] minus the aggregate of the amount billed to SBCL attributable to any Provider office with ProviderLink that is subsequently installed with the Scan Software or ActaLab Software (the "THIRD TRANSACTION FEE AMOUNT") prior to the [*]; (ii) [*] minus the sum of (A) the Third Transaction Fee Amount for the period from the date hereof to the [*] and (B) the amount paid pursuant to clause (i) above; and (iii) [*] minus the sum of (A) the Third Transaction Fee Amount for the period from the date hereof to the [*] and (B) the amount paid pursuant to clauses (i) and (ii) above. 4. Subject to Section IV.D, the Variable Fees shall be paid annually within thirty (30) days after invoice therefor from ActaMed or Healtheon, which shall be (i) submitted to SBCL within [*] (ii) detail the calculation thereof, and (iii) reflect the Variable Fees payable in respect of the most recently completed annual period only. SBCL shall have Audit Rights with respect to any disputed amount of the Variable Fees." 2.2 CONDITIONS TO BUSINESS ASSURANCE PAYMENTS. Section IV.D.1 is hereby replaced in its entirety as follows: "1. With respect to all Variable Fees, (i) such fees shall cease to be payable if ActaMed shall fail to satisfy any of the Key Performance Standards, or (ii) such fees (excluding the portion of the First Variable Fee attributable to Transaction Fees generated from PIF Sites) for the applicable year shall not be payable (but shall be treated as paid for purposes of calculation of any amount payable in the following year) if any of the following shall occur: a. As of [*] ActaMed shall fail to have at least [*] ActaMed Sites; [*] 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- b. As of [*] ActaMed shall fail to have at least [*] ActaMed Sites; and c. As of [*] ActaMed shall fail to have at least [*] ActaMed Sites. 2.3 CONDITIONS TO BUSINESS ASSURANCE PAYMENTS. Section IV.D is hereby further amended by adding the following Subsection 3 at the end of such Section: "3. With respect to the Third Variable Fee, such fees also shall not be payable (but shall be treated as paid for purposes of calculating any amount payable in the following year) if any of the following shall occur: a. As of [*] ActaMed shall fail to have at least [*] ActaMed Sites; b. As of [*] ActaMed shall fail to have at least [*] ActaMed Sites; and c. As of [*] ActaMed shall fail to have at least [*] ActaMed Sites. 2.4 [*] COSTS. Section IV.J is amended to insert at the end thereof: "SBCL is not responsible for paying any [*] incurred by ActaMed or a Provider relating to the provision of Lab EDI Services, including without limitation, any [*], [*] and [*]." 2.5 REMOVAL OF [*] HARDWARE PURCHASES. Section IV.K.2.b is replaced in its entirety as follows: "b. In addition, ActaMed shall provide, prior to the [*] up to [*] PC Systems for New Sites or Replacement Fixed Fee Sites in excess of the [*] set forth in (a) above. Notwithstanding the above, this obligation shall be reduced by each PC System the cost of which is reimbursed to SBCL subject to Section IV.K.1 above." [*] 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- 2.6 EXCLUSIVE DEVELOPMENTS AMENDED. Section V.E is replaced in its entirety as follows: "E. DEVELOPMENT WORK REQUESTED BY SBCL. 1. SBCL may at any time request that ActaMed perform additional development work. Subject to the terms of this Section V.E, SBCL shall pay ActaMed for development services the work product from which constitutes an Exclusive Development at no higher than the then industry standard rates for similar services. a. SBCL shall be entitled to request in writing that ActaMed perform development services the resulting work from which shall be for the exclusive benefit of SBCL (an "EXCLUSIVE DEVELOPMENT"); provided that, except as provided in Section V.E.1.b, SBCL shall not be entitled to more than [*] Exclusive Development [*]. If ActaMed, before 9:00 AM (EST) of the [*] after the date on which such request is received by ActaMed, delivers to SBCL [*] then, notwithstanding that SBCL's request specified that the work would be an Exclusive Development, the work so requested by SBCL shall be a "COMMON DEVELOPMENT." Under no circumstances shall any SBCL requested development work that is required for purposes of complying with Applicable Laws, Regulations or any Regulatory Change constitute an Exclusive Development. Any SBCL requested work that is (i) classified as a Common Development in accordance with this Section V.E.1.a, or (ii) required to comply with Applicable Laws, Regulations or any Regulatory Change, shall not be counted for purposes of applying the limit on Exclusive Developments under this Section V.E.1.a. b. SBCL may request in writing that ActaMed provide additional development work at any time. Such work shall result in either a Common Development or Exclusive Development pursuant to price and terms agreed to by the parties in accordance with Section V.E.1.e below. Any work classified as an Exclusive Development in accordance with this Section V.E.1.b shall not be counted for purposes of applying the limit on Exclusive Developments under this Section V.E.1.a. c. ActaMed will not use or license the use of any Exclusive Development (without regard to whether it constitutes a SCAN Development or ActaLab Software) other than in support of Lab EDI Services. Subject to the ownership and license rights under the License Agreement, both [*] 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- ActaMed and SBCL shall be entitled to make any use of a Common Development. The terms of the foregoing two sentences shall survive termination of this Agreement for any reason. ActaMed may charge SBCL [*] the work product from which constitutes a Common Development. Any such charge shall be [*] and shall be separately stated on invoices sent to SBCL. d. For purposes of this Section V.E, Exclusive Developments shall include any Changes made pursuant to Section V.C and paid for by SBCL by reason of Section V.C.4, to be designated as Exclusive Developments in accordance with the procedures set forth in this Section V.E.1. e. Within [*] days after receiving SBCL's request pursuant to Sections V.E.1.a or V.E.1.b, ActaMed shall notify SBCL of ActaMed's prices and terms (including estimated completion date) for performing such development work, which prices and terms SBCL shall not unreasonably reject. Within twenty (20) days after receiving ActaMed's notice, SBCL shall accept or reject ActaMed's prices and terms for performing the development work. If SBCL provides notice accepting (i) in respect of requests under Section V.E.1.a, ActaMed's prices and terms, or (ii) in respect of requests under Section V.E.1.b (A) ActaMed's prices and terms, and (B) ActaMed's designation of the work as an Exclusive Development or Common Development, then ActaMed shall perform such work (or cause such work to be performed) on the accepted terms, and shall integrate the developed work into the ActaLab Software or SCAN Developments, as applicable, and offer it as an additional feature or function of Lab EDI Services, as soon as is reasonably practicable. If SBCL provides notice that it does not accept ActaMed's prices and terms, SBCL and ActaMed shall negotiate in good faith an alternative arrangement to the mutual satisfaction of the parties. If within [*] SBCL and ActaMed cannot reasonably agree upon such an alternative arrangement, then SBCL may engage a third party to perform the development services for such work, subject to Section V.E.1.f. Work performed by such a third party shall be (i) an Exclusive Development without regard to the frequency limitation of Section V.E.1.a, subject to Section V.E.1.f below, (ii) integrated by ActaMed into the ActaLab Software or SCAN Developments, as applicable, as soon as is reasonably practicable, and (iii) offered by ActaMed as an additional feature or function of Lab EDI Services, as soon as is reasonably practicable. SBCL and ActaMed shall cooperate in developing acceptance standards and processes (the "ACCEPTANCE PROCESS") pursuant to which work prepared by a third party, in accordance with industry standard practices, shall be (i) reviewed, tested and modified, as necessary, to conform with ActaMed's professional standards, [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -5- the Performance Standards and ActaMed's compliance obligations under Article VI, (ii) integrated into the ActaLab Software or SCAN Developments, as applicable, and (iii) offered by ActaMed as an additional feature or function of Lab EDI Services; provided, SBCL shall reimburse ActaMed (at no higher than the then industry standard rates for similar services) for any costs or expenses incurred by ActaMed in any such testing, integration and offering of an additional feature or function of Lab EDI Services under this Section V.E.1.e. f. Any contract between ActaMed and SBCL (or a third party developer and SBCL) for development of an Exclusive Development shall allocate ownership of and other rights with respect to the Exclusive Development, as between ActaMed and SBCL, in the manner contemplated by the License Agreement and Development Agreement, including, without limitation, Sections 2.1.4 and 2.3.2 of the License Agreement. 2. If, at any time, SBCL chooses to contract with ActaMed for a dedicated services team from ActaMed to handle development of Changes to the Network, the Licensed Materials, or SBCL's proprietary systems which are not required to be performed by ActaMed pursuant to Section V.C and which are not requested pursuant to Section V.E, ActaMed may elect whether to provide the dedicated team and, if it so elects, shall do so only on terms and conditions agreed to in advance by SBCL." 2.7 EXCLUSIVITY PERIOD. Section XIII.C.2 is hereby replaced in its entirety as follows: 2. At any time prior to [*] ActaMed shall not provide services to any Other Lab at the SBCL Sites transferred to ActaMed pursuant to the Purchase Agreement, including without limitation, to install or be instrumental in [*] located at such sites which [*] for services [*] or otherwise provide [*]. A full calendar month shall be added to the date set forth in the preceding sentence for each month after [*] in which ActaMed, determined as of the first day of each succeeding month, has failed to complete the development of a fully functional ActaLab Software (as described in the Development Agreement) and deploy a fully tested, accepted and operating version of such software at one or more ActaMed Sites. 3 MISCELLANEOUS. 3.1 ENTIRE AGREEMENT. This Amendment No. 1 constitutes the entire understanding between the parties with respect to amendment to the Services Agreement and supersedes all proposals, communications and agreements between the parties relating to such subject matter. [*] 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- No amendment, change, or waiver of any provision of this Amendment No. 1 will be binding unless in writing and signed by both parties. 3.2 GOVERNING LAW. This Amendment No. 1 will be governed by and construed in accordance with the laws of the State of Georgia applicable to contracts made and performed therein. 3.3 SERVICES AGREEMENT PROVISIONS. All provisions of the Services Agreement not modified by this Amendment No. 1 shall remain in full force and effect. Subsections D, E and F of Section XVI of the Services Agreement shall apply to this Amendment No. 1 as if fully set forth herein. 3.4 COUNTERPARTS. This Amendment No. 1 may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. [INTENTIONALLY LEFT BLANK] -7- IN WITNESS WHEREOF, the parties have executed this Amendment No. 1 to the Services Agreement as of the date set forth above. ACTAMED CORPORATION By: /s/ --------------------------------------- Its: President & CEO -------------------------------------- SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. By: /s/ --------------------------------------- Its: President -------------------------------------- -8- EX-10.15 7 EXHIBIT 10.15 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. ASSETS PURCHASE AGREEMENT between SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. and ACTAMED CORPORATION DATED DECEMBER 31, 1997 TABLE OF CONTENTS
PAGE ---- ARTICLE 1 PURCHASE AND SALE ........................................................2 Section 1.1 Agreement to Sell ..............................................2 Section 1.2 Other Software .................................................2 Section 1.3 Excluded Assets ................................................3 Section 1.4 Agreement to Purchase ..........................................3 Section 1.5 The Purchase Price .............................................3 Section 1.6 Series D Price .................................................4 Section 1.7 Purchase Price Adjustment ......................................5 Section 1.8 Number of Sites Adjustment .....................................5 ARTICLE 2 CLOSINGS .................................................................6 Section 2.1 Initial Closing ................................................6 Section 2.2 Staging of the Transactions ....................................6 Section 2.3 Regions to be Transferred ......................................7 Section 2.4 Procedures Applicable if Transfer Benchmarks Are Not Met .......8 Section 2.5 Deliveries by SBCL at Each of the Transfer Dates ...............9 Section 2.6 Deliveries by ActaMed at Each of the Transfer Dates ............9 Section 2.7 Prorations ....................................................10 Section 2.8 Non-Transferable Assets .......................................10 ARTICLE 3 REPRESENTATIONS AND WARRANTIES ..........................................11 Section 3.1 By SBCL .......................................................11 Section 3.2 By ActaMed ....................................................16 ARTICLE 4 TRANSITION MATTERS ......................................................26 Section 4.1 Prior to Region Transfer ......................................26 Section 4.2 Region Transition Matters .....................................26 Section 4.3 General Covenants .............................................27 Section 4.4 Confidentiality of Trade Secrets ..............................29 Section 4.5 Efforts to Satisfy Conditions .................................30 Section 4.6 Expenses ......................................................31 Section 4.7 Antitrust Notification ........................................31 ARTICLE 5 ACTAMED COVENANTS TO SBCL ...............................................31 Section 5.1 Additional Covenants Of ActaMed ...............................31 Section 5.2 Informational Covenants Of ActaMed ............................35 -i- ARTICLE 6 EMPLOYEE MATTERS ........................................................38 Section 6.1 Termination of Employment by SBCL and Offer of Employment by ActaMed ..............................38 Section 6.2 Transitional Employee Leasing Arrangement .....................38 Section 6.3 ActaMed Compensation and Benefits .............................39 Section 6.4 Past Service Credit ...........................................39 Section 6.5 Termination of Employment; Nonsolicitation; Termination of Agreement ................................................39 Section 6.6 Payment of Wage and Benefit Costs .............................39 Section 6.7 Taxes, Unemployment Insurance and Related Items ...............40 Section 6.8 Examination and Audit .........................................41 ARTICLE 7 CONDITIONS PRECEDENT TO OBLIGATIONS OF ACTAMED ..........................41 Section 7.1 Conditions Precedent To Obligations Of ActaMed ................41 Section 7.2 Conditions Precedent To The Obligations Of SBCL ...............42 ARTICLE 8 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS ...................43 Section 8.1 Survival Of Representations, Warranties and Covenants .........43 Section 8.2 Obligation to Indemnify .......................................44 ARTICLE 9 DISPUTE RESOLUTION ......................................................49 Section 9.1 Informal Dispute Resolution ...................................49 Section 9.2 Arbitration ...................................................50 Section 9.3 Litigation ....................................................51 ARTICLE 10 TERMINATION ............................................................51 Section 10.1 Termination ...................................................51 Section 10.2 Risk of Loss ..................................................52 ARTICLE 11 MISCELLANEOUS ..........................................................53 Section 11.1 General Provisions ............................................53
-ii- CONFIDENTIAL TREATMENT REQUESTED ASSETS PURCHASE AGREEMENT This Assets Purchase Agreement (this "ASSETS PURCHASE AGREEMENT" or "AGREEMENT"), dated as of December 31, 1997, is an agreement by and between SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC., a corporation organized and existing under the laws of Delaware ("SBCL") and ACTAMED CORPORATION, a corporation organized and existing under the laws of Georgia ("ACTAMED"). Capitalized terms used in this Assets Purchase Agreement and not otherwise defined herein are defined in EXHIBIT A attached to this Assets Purchase Agreement. PREAMBLE ActaMed is in the business of providing electronic data interchange products and services to the health care industry, including its ProviderLink software, and desires to develop business involving automated laboratory order entry and results reporting services. SBCL provides laboratory testing services to certain Providers who use SBCL Software for electronic clinical laboratory test order entry and/or test result reporting between an SBCL Lab and such Provider. In addition, SBCL uses the SBCL Software to allow certain [*] to send laboratory test orders entered electronically to an SBCL Lab and/or to have the test results reported electronically back to [*] or the Provider ordering the test. The Parties previously entered into a Development Agreement dated October 31, 1997 pursuant to which ActaMed and SBCL are jointly developing the ActaLab Software. ActaMed desires to purchase and SBCL desires to sell certain assets associated with SBCL's provision of Lab EDI Services, as more fully set forth herein. Concurrently with the execution and delivery of this Purchase Agreement, SBCL and ActaMed are entering into (i) a License Agreement whereby, among other things, SBCL grants ActaMed an irrevocable non-exclusive license to the SBCL Software (as defined therein); and (ii) a Services Agreement whereby ActaMed agrees, among other things, to provide Lab EDI Services to Automated Providers and SBCL agrees to pay certain compensation to ActaMed in connection therewith. This Assets Purchase Agreement states the parties' agreements relating to the purchase and sale of the SCAN Assets and certain transition matters. The Parties contemplate that there will be a staged transfer to ActaMed of the SCAN Assets. The transfer of Region One SCAN Assets is to occur on the Region One Transfer Date. The transfer of the other Regions will occur sequentially when the Transfer Benchmarks for transfer of such Regions have been met. AGREEMENT In consideration of the recitals and of the respective covenants, representations, warranties and agreements herein contained, and intending to be legally bound hereby, the parties hereto hereby agree as follows: [*] 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. ARTICLE 1 PURCHASE AND SALE SECTION 1.1 AGREEMENT TO SELL. SBCL hereby agrees to sell, convey, assign, transfer and deliver to ActaMed, upon and subject to the terms and conditions of this Assets Purchase Agreement, all right, title and interest of SBCL in and to the following assets located in Region One, and, subject in addition to fulfillment of the conditions precedent set forth in Section 2.3, the following assets in Regions Two, Three, and Four, in every case free and clear of all Liens: 1.1.1 The personal computers, modems, bar code readers, bar code label printers, requisition and results printers and other peripherals (not including [*]) and spare parts owned by SBCL and provided by SBCL to Automated Providers for Lab EDI Services (or which comprised all or part of such items located at an SBCL Site before the Applicable Transfer Date, but not located at an SBCL Site on the Applicable Transfer Date), including all documentation supplied to Automated Providers for purposes of utilizing SBCL Software; 1.1.2 SBCL's contractual right to use the telephone lines that are installed at an SBCL Site and are used by SBCL in providing Lab EDI Services to the extent assignable and assumed by ActaMed; 1.1.3 The letter agreements, as amended, between SBCL and Automated Providers relating to Automated Providers' use of SBCL's Lab EDI Services; 1.1.4 The vendor contracts between SBCL and various vendors who provide products or services to Automated Providers in connection with SBCL's provision of Lab EDI Services to SBCL Sites to the extent assignable and assumed by ActaMed; 1.1.5 All personal computers, peripherals, spare parts and other fixed assets not located at an SBCL Site on the Applicable Transfer Date, but used solely by the Transferred Employees and exclusively in connection with SBCL's provision of software development, field or remote support for SBCL Sites; and 1.1.6 SBCL's rights to the ActaLab Software. SECTION 1.2 OTHER SOFTWARE. 1.2.1 In conjunction with the sale of each PC System and each personal computer described in Section 1.1.5 (an "Employee Computer") to ActaMed in accordance herewith, SBCL shall assign to ActaMed all of SBCL's rights in the copies of Third Party Software (excluding any office software used by the Employees, including without limitation, cc:mail) that, as of the Applicable Transfer Date, are (i) installed by, or in accordance with the [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -2- instructions of, SBCL and (ii) is resident on such PC System or Employee Computer, which rights shall be sufficient to permit ActaMed to: (a) continue using such copy of the Third Party Software on the applicable PC System or Employee Computer, (b) move such copy to a replacement computer so long as the copy is deleted from the PC System or Employee Computer on which it resides on the Applicable Transfer Date or subsequent transferee computer system, and (c) assign ActaMed's rights in such copy to a purchaser of the applicable components of the PC System (but not to a purchaser of any Employee Computer) on which it resides at the Applicable Transfer Date, or replacement computer with respect to any PC System; PROVIDED, that (A) ActaMed agrees to comply with any applicable terms and conditions imposed by the supplier of such Third Party Software, (B) except as expressly set forth herein, nothing in this Section 1.2 shall be construed as assigning to ActaMed, or granting to ActaMed, any rights under any agreements between SBCL and the vendors of such Third Party Software, and (C) nothing in this Agreement shall be construed as conveying to ActaMed or any other party any software installed on any PC System or Employee Computer other than by SBCL or pursuant to SBCL's instructions. 1.2.2 SBCL shall transfer to ActaMed, proportionately with the number of SBCL Sites transferred to ActaMed from time to time in accordance with this Agreement, all of SBCL's rights in, including the single-site licenses for, any copy of Microsoft Windows which was resident on a PC System when it was delivered to SBCL by the manufacturer or other supplier for installation at an SBCL Site, and subsequently removed by SBCL. SBCL shall deliver the licenses to ActaMed. SECTION 1.3 EXCLUDED ASSETS. The SCAN Assets shall not include computers, modems, bar code readers, bar code label printers, requisition and results printers and other peripherals and fixed assets acquired by SBCL for use in providing Lab EDI Services, but which have never been so used. SECTION 1.4 AGREEMENT TO PURCHASE. ActaMed hereby agrees to purchase the SCAN Assets from SBCL, upon and subject to the terms and conditions of this Assets Purchase Agreement and in reliance on the representations, warranties and covenants of SBCL contained herein, for the Purchase Price and the execution and delivery of the Assumption Agreement. ActaMed shall not assume or be responsible for any liabilities or obligations of SBCL other than the Liabilities assumed by virtue of the Assumption Agreement. SECTION 1.5 THE PURCHASE PRICE. Subject to any adjustment pursuant to Sections 1.7 or 1.8 hereof, the purchase price for the SCAN Assets and the rights granted to ActaMed -3- pursuant to the License Agreement shall be [*]. The Purchase Price shall be allocated among the SCAN Assets in the different Regions and the License granted pursuant to the License Agreement as set forth in Schedule 1.5 hereto (the "Purchase Price"). The Purchase Price shall be payable as follows: 1.5.1 on the Region One Transfer Date, in consideration for the grant of rights pursuant to the License Agreement, ActaMed will pay or issue to SBCL (A) [*] by wire transfer of immediately available funds to an account designated by SBCL prior to the Region One Transfer Date, and (B) [*] shares of ActaMed's Series D Preferred Stock; 1.5.2 on the Region One Transfer Date, in consideration of the transfer to ActaMed of the SCAN Assets located in Region One, ActaMed will issue to SBCL [*] shares of ActaMed's Series D Preferred Stock; 1.5.3 on the Region Two Transfer Date, in further consideration of the grant to ActaMed of rights under the License Agreement, and in consideration of the transfer to ActaMed of the SCAN Assets located in Region Two, ActaMed will issue to SBCL the number of shares of ActaMed's Series D Preferred Stock determined by dividing [*] plus [*] respectively, by the Series D Price on such date; 1.5.4 on the Region Three Transfer Date, in further consideration of the grant to ActaMed of rights under the License Agreement, and in consideration of the transfer to ActaMed of the SCAN Assets located in Region Three, ActaMed will issue to SBCL the number of shares of ActaMed's Series D Preferred Stock determined by dividing [*] plus [*] respectively, by the Series D Price on such date; and 1.5.5 on the Region Four Transfer Date, in further consideration of the grant to ActaMed of rights under the License Agreement, and in consideration of the transfer to ActaMed of the SCAN Assets located in Region Four, ActaMed will issue to SBCL the number of shares of ActaMed's Series D Preferred Stock determined by dividing [*] plus [*] respectively, by the Series D Price on such date. SECTION 1.6 SERIES D PRICE. For purposes hereof, the "Series D Price" shall mean: 1.6.1 prior to ActaMed's initial Public Offering: (a) [*] on the Region One Transfer Date and the Region Two Transfer Date, [*] on the Region Three Transfer Date, and [*] on the Region Four Transfer Date, subject to the provisions of subparagraphs (b) and (c) below; (b) if prior to any Transfer Date after the Region One Transfer Date, ActaMed issues Qualified Preferred Stock, the Series D Price on such Transfer Date shall be the Per Share Issue Price of such Qualified Preferred Stock, and the Series D Price shall [*] 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- thereafter remain constant for all subsequent Transfer Dates unless adjusted (i) in accordance with this provision, upon a subsequent issuance of Qualified Preferred Stock or (ii) in accordance with subparagraph (c) below; or (c) notwithstanding anything to the contrary in this Section 1.6.1, if, on any Applicable Transfer Date, ActaMed has achieved less than [*] of the revenues for the cumulative months or quarters (as may be applicable based on the detail required for the New Business Plan) prior to such Applicable Transfer Date as set forth in the New Business Plan, then the Series D Price shall revert to [*] and 1.6.2 after ActaMed's initial Public Offering, if a Transfer Date occurs at least thirty (30) trading days after the effective date of such Public Offering, the average for such 30 days of (i) the mean between the reported high and low sales prices for ActaMed Common Stock on each such trading day, or (ii) if no sales are reported on any such trading day, the mean between the bid and offered prices for ActaMed Common Stock on such trading day; or, if the Transfer Date occurs prior to the 30th day following such initial Public Offering (including the initial day of trading when computing the number of days), the initial offering price for ActaMed Common Stock in such initial Public Offering less the amount of any underwriters' discounts or commissions on a per share basis, as set forth in the effective registration statement. 1.6.3 For purposes of Section 1.6, "Qualified Preferred Stock" shall mean shares of ActaMed's preferred stock issued in an arm's length transaction to one or more purchasers who are not ActaMed stockholders as of the Region One Transfer Date for an aggregate purchase price of not less than $7,000,000; and the "Per Share Issue Price" of such Qualified Preferred Stock shall be the consideration per equivalent share of Common Stock received by ActaMed for the Qualified Preferred Stock, adjusted backwards to the Region One Transfer Date for any subdivision or combination of shares of ActaMed capital stock or similar change in ActaMed's capital structure (whether by stock split, stock dividend, merger, share exchange, consolidation or otherwise) since the Region One Transfer Date. SECTION 1.7 PURCHASE PRICE ADJUSTMENT. SBCL shall transfer all of the SCAN Assets located in Region Three on the Region Three Transfer Date. In the event that, by [*] SBCL has not provided [*] to ActaMed [*] described in [*] of the Services Agreement, [*] to [*] by [*]. In such case, if, subsequent to [*] SBCL provides [*] ActaMed shall [*] that SBCL [*] pursuant to this provision [*]. SECTION 1.8 NUMBER OF SITES ADJUSTMENT. On any Transfer Date other than the Region One Transfer Date, if the aggregate number of SBCL Sites located in the Regions which were previously transferred to ActaMed in accordance herewith, plus the aggregate number of SBCL Sites located in Regions then being or subsequently to be transferred to ActaMed, is less than [*] then the portion of the Purchase Price [*] 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. -5- otherwise payable on such Transfer Date shall be reduced to an amount equal to the portion of the Purchase Price otherwise then payable times a fraction the numerator of which shall be the number of SBCL Sites to be transferred on such Transfer Date, and the denominator of which shall be [*] MINUS the number of SBCL Sites transferred on previous Transfer Dates, and MINUS the number of SBCL Sites located in Regions subsequently to be transferred; PROVIDED that no such adjustment shall be made if such fraction is [*] or more. ARTICLE 2 CLOSINGS SECTION 2.1 INITIAL CLOSING. Conveyance of SCAN Assets in each of the Regions by SBCL to ActaMed shall take place as set forth in this Article Two. Concurrently with the execution and delivery of this Assets Purchase Agreement, SBCL and ActaMed have executed and delivered the License Agreement, the First Amendment to the Development Agreement, the Services Agreement, the Third Amendment to the Stockholders Agreement, the Third Amendment to the Registration Rights Agreement, the Standstill Agreement, and such other documents as the parties have reasonably requested, each of which shall be effective as of the Region One Transfer Date. In addition, effective on or before such date, ActaMed shall file in the office of the Secretary of State of Georgia its Fourth Amended Articles. SECTION 2.2 STAGING OF THE TRANSACTIONS. 2.2.1 The parties shall effect the transfer of the SCAN Assets in as orderly a manner as possible and with minimal disruption to Automated Providers. This Assets Purchase Agreement provides benchmarks that will be used by the parties to measure the degree to which the transfer is orderly and without disruption and provides steps the parties will take if the benchmarks are not met to improve the transition process. Provided the benchmarks are satisfied, the parties intend that all of the transfers be completed as quickly as possible and that targeted transfer dates may be accelerated in such circumstances. 2.2.2 At any time, upon not less than fifteen (15) days written notice by SBCL to ActaMed, except to the extent a shorter period is provided for in Section 2.2.3 hereof, SBCL shall in its sole discretion have the right to accelerate the Region Two Transfer Date, the Region Three Transfer Date or the Region Four Transfer Date to a date immediately after expiration of such notice period (the "ACCELERATED TRANSFER DATE"). In such case, the transactions contemplated by Sections 1.5.3, 1.5.4 and 1.5.5 above shall take place on such Accelerated Transfer Date, in the manner specified in Sections 2.5 and 2.6 below, subject to the other terms and conditions of this Assets Purchase Agreement. 2.2.3 In the event of any proposed issuance of Qualified Preferred Stock, ActaMed shall provide SBCL with notice of its intent to consummate such a transaction not less [*] 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- than forty-five (45) days prior to doing so, and shall provide SBCL notice of an affirmative obligation to issue Qualified Preferred Stock not less than fifteen (15) days prior to issuance. In such event, SBCL shall in its sole discretion have the right to notify ActaMed and cause one or more Accelerated Transfer Dates to occur thirty (30) days after the giving of such notice, and, if SBCL so designates, conditioned upon the occurrence of the proposed sale of Qualified Preferred Stock. The number of shares Series D Preferred Stock issued to SBCL on any such Accelerated Transfer Date(s) shall be calculated as if such Accelerated Transfer Date(s) occurred prior to the closing of the sale of such Qualified Preferred Stock. SECTION 2.3 REGIONS TO BE TRANSFERRED. 2.3.1 The SCAN Assets located in Region One will be transferred to ActaMed on the Region One Transfer Date. The parties will cooperate to identify and resolve any problems that arise after the transfer of such SCAN Assets to ActaMed. 2.3.2 Provided that the applicable Transfer Benchmarks have been met for Region One Sites, and subject to SBCL's rights under Section 2.2.2 hereof, the SCAN Assets located in Region Two will be transferred to ActaMed three (3) months after the Region One Transfer Date (the "REGION TWO TRANSFER DATE"). ActaMed shall notify SBCL's Relationship Manager that it is in compliance with the Transfer Benchmarks and wishes to close the transfer of the SCAN Assets located in Region Two fifteen (15) days prior to the scheduled Region Two Transfer Date. SBCL shall have seven (7) days to respond to ActaMed's notice, indicating that SBCL either (i) will close the transfer on the scheduled Region Two Transfer Date or (ii) that ActaMed's operations relative to the Region One Sites fail to meet the Transfer Benchmarks. If SBCL determines that ActaMed's operations relative to the Region One Sites fail to meet the Transfer Benchmarks to allow for the transfer of SCAN Assets located in Region Two, the provisions of Section 2.4 will apply. The parties will cooperate to identify and resolve any problems that arise after the transfer of the SCAN Assets located at Region Two Sites to ActaMed. 2.3.3 Provided that the applicable Transfer Benchmarks have been met for Region One Sites and Region Two Sites on and after the Region Two Transfer Date, and subject to SBCL's rights under Section 2.2.2 hereof, the SCAN Assets located in Region Three will be transferred to ActaMed three (3) months after the Region Two Transfer Date (the "REGION THREE TRANSFER DATE"). ActaMed shall notify SBCL's Relationship Manager that it is in compliance with the Transfer Benchmarks and wishes to close the transfer of the SCAN Assets located in Region Three fifteen (15) days prior to the scheduled Region Three Transfer Date. SBCL shall have seven (7) days to respond to ActaMed's notice, indicating that SBCL either (i) will close the transfer on the scheduled Region Three Transfer Date or (ii) that ActaMed's operations relative to the Region One Sites and Region Two Sites fail to meet the Transfer Benchmarks. If SBCL determines that ActaMed's operations relative to the Region One Sites and Region Two Sites fail to meet the Transfer Benchmarks to allow for the transfer of SCAN Assets located in Region Three, the provisions of Section 2.4 will apply. The parties will -7- cooperate to identify and resolve any problems that arise after the transfer of the SCAN Assets located at Region Three Sites to ActaMed. 2.3.4 Provided that the applicable Transfer Benchmarks have been met for Region One Sites, Region Two Sites and Region Three Sites on and after the Region Three Transfer Date, and subject to SBCL's rights under Section 2.2.2 hereof, the SCAN Assets located in Region Four will be transferred to ActaMed three (3) months after the Region Three Transfer Date (the "REGION FOUR TRANSFER DATE"). ActaMed shall notify SBCL's Relationship Manager that it is in compliance with the Transfer Benchmarks and wishes to close the transfer of the SCAN Assets located in Region Four fifteen (15) days prior to the scheduled Region Four Transfer Date. SBCL shall have seven (7) days to respond to ActaMed's notice, indicating that SBCL either (i) will close the transfer on the scheduled Region Four Transfer Date or (ii) that ActaMed's operations relative to the Region One Sites, Region Two Sites and Region Three Sites fail to meet the Transfer Benchmarks. If SBCL determines that ActaMed's operations relative to the Region One Sites, Region Two Sites and Region Three Sites fail to meet the Transfer Benchmarks to allow for the transfer of SCAN Assets located in Region Four, the provisions of Section 2.4 will apply. The parties will cooperate to identify and resolve any problems that arise after the transfer of the SCAN Assets located at Region Four Sites to ActaMed. SECTION 2.4 PROCEDURES APPLICABLE IF TRANSFER BENCHMARKS ARE NOT MET. If, prior to any scheduled Transfer Date after the Region One Transfer Date, SBCL determines that ActaMed has failed to meet the requisite Transfer Benchmarks, ActaMed shall, on or prior to five (5) business days following the scheduled Transfer Date, either (i) submit a written remediation plan to SBCL detailing the steps required to accomplish such Transfer Benchmarks and the means to achieving such steps, or (ii) notify SBCL, in writing, that ActaMed believes the failure to meet such Transfer Benchmarks is for reasons beyond the control of ActaMed, including without limitation, a failure by SBCL to perform in accordance with the terms and conditions of the Services Agreement. Within ten (10) business days following receipt of such a remediation plan or notice, SBCL shall make a determination, considering available resources and the contents of the plan or notice, as to whether the problem is remediable within a reasonable period of time. If SBCL determines that the problem is remediable as aforesaid, it shall set a date not less than thirty (30) nor more than ninety (90) days from the scheduled Transfer Date as a measurement date (the "Measurement Date") for satisfaction of the applicable Transfer Benchmarks. If SBCL determines that the applicable Transfer Benchmarks are met on or before the Measurement Date, then the original Transfer Date shall be reset for a date immediately following the date which is ten (10) days after such applicable Transfer Benchmarks were met, and on which date such applicable Transfer Benchmarks continue to be met. If ActaMed disagrees with SBCL's determination as to whether the problem is remediable, the dispute shall be resolved pursuant to the provisions of Article IX hereof. If a Transfer Date is extended or reset hereunder, all subsequent Transfer Dates will be rescheduled, subject to this Section 2.4, at three (3) month intervals after the extended or reset Transfer Date. -8- SECTION 2.5 DELIVERIES BY SBCL AT EACH OF THE TRANSFER DATES. At each of the Transfer Dates, SBCL shall execute and deliver to ActaMed the following documents to the extent relating to the SCAN Assets in the Region being transferred: 2.5.1 a Bill of Sale and Assignment (in the form attached as EXHIBIT 2.5.1) covering the SCAN Assets for the Region being transferred; 2.5.2 an SBCL Compliance Certificate (in the form attached as EXHIBIT 2.5.2) pursuant to which SBCL will make the representations and warranties as to itself and the SCAN Assets in the Region being transferred contained in Section 3.1 hereof (other than the representations and warranties contained in Sections 3.1.3, 3.1.4(a)-(e), 3.1.6(d) and 3.1.7(b), which shall be made only on the Region One Transfer Date), which certificate shall attach revised Disclosure Schedules to the extent necessary to make the representations and warranties made on such Transfer Date (with the exceptions noted above) true and correct in all material respects; PROVIDED that to the extent that any such representation and warranty is dependent upon information provided by Transferred Employee or other people employed by ActaMed, such representations and warranties shall be given only to the best of SBCL's knowledge; 2.5.3 an SBCL Secretary's Certificate (in the form attached as EXHIBIT 2.5.3); 2.5.4 any other consents or waivers obtained pursuant to Section 7.1.5 covering the Region transferred, including consents to the assignment and assumption of each of the Vendor Contracts applicable to the SCAN Assets in the Region that ActaMed is assuming; 2.5.5 all of the books and records, including but not limited to, books of account, leases, contracts, and customer lists, of SBCL relating exclusively to the SCAN Assets for the Region transferred; and 2.5.6 such other documents or certificates as may be reasonably requested by ActaMed. SECTION 2.6 DELIVERIES BY ACTAMED AT EACH OF THE TRANSFER DATES. At each of the Transfer Dates, ActaMed shall execute and deliver to SBCL the following documents to the extent relating to the Region being transferred: 2.6.1 the applicable number of shares of Series D Preferred Stock, as determined in accordance with Sections 1.5, 1.6 and 1.8 of this Assets Purchase Agreement; 2.6.2 an Assumption Agreement (in the form attached hereto as EXHIBIT 2.6.2) covering, for the Region transferred, (i) the Vendor Contracts for the Region transferred, (ii) the Phone Lines and (iii) the Provider Agreements for the Region transferred; -9- 2.6.3 an ActaMed Compliance Certificate (in the form attached hereto as EXHIBIT 2.6.3), pursuant to which ActaMed will make the representations and warranties contained in Section 3.2 hereof, which certificate shall attach revised Disclosure Schedules to the extent necessary to make the representations and warranties made on such Transfer Date true and correct in all material respects; 2.6.4 an ActaMed Secretary's Certificate (in the form attached hereto as EXHIBIT 2.6.4); and 2.6.5 such other documents or certificates as may be reasonably requested by SBCL. SECTION 2.7 PRORATIONS. All amounts previously paid or payable with respect to the items identified on Schedule 2.7, or for any other items reflecting actual costs incurred solely in connection with the provision of Lab EDI Services which are to be prorated on the basis of days, for or in respect of periods which straddle any Transfer Date shall be apportioned on a pro rata basis based on the respective number of days in the pre-Transfer Date and post-Transfer Date periods. SECTION 2.8 NON-TRANSFERABLE ASSETS. 2.8.1 To the extent that any SCAN Asset which would otherwise be transferred on an Applicable Transfer Date (a "TRANSFERRED ASSET") is not capable of being sold, assigned, transferred, conveyed or delivered without obtaining a Required Consent, or if such sale, assignment, transfer, conveyance or delivery or attempted sale, assignment, transfer, conveyance or delivery would constitute a violation of any Contract or License constituting or relating specifically to a Transferred Asset, or a violation of any Regulation, or would result in the imposition of any significant additional Liability or obligation on SBCL or ActaMed, or a substantial diminution in the value or use of such Transferred Asset, this Assets Purchase Agreement shall not constitute a sale, assignment, transfer, conveyance or delivery of such Transferred Asset or an attempted sale, assignment, transfer, conveyance or delivery thereof, nor shall it constitute an assumption of any Liability under any Contract or License constituting or relating specifically to such Transferred Asset. Any such Transferred Asset and any Contract or License which constitutes or relates exclusively to any such Transferred Asset or Assets shall be a "NON-TRANSFERABLE ASSET". SBCL shall use its best efforts, and ActaMed shall reasonably cooperate therein, to provide ActaMed with the benefit of any such Non-Transferable Asset. 2.8.2 Anything in this Assets Purchase Agreement to the contrary notwithstanding, SBCL shall not be obligated to sell, assign, transfer, convey or deliver, or cause to be sold, assigned, transferred, conveyed or delivered to ActaMed, and ActaMed shall not be obligated to purchase or assume, any Non-Transferable Asset without first having obtained all Required Consents or prevented the imposition of such Liability or obligation or diminution in value or use. Both before and after the Applicable Transfer Date, SBCL and ActaMed shall use their collective best efforts to obtain any Required Consents or to prevent the imposition of any -10- such Liability or obligation or any such diminution in value or use so as to transfer each such Non-Transferable Asset to ActaMed without adversely modifying, amending or burdening such Non-Transferable Asset. Any costs associated with such efforts shall be borne by SBCL. 2.8.3 To the extent that on a given Transfer Date, there is any Non-Transferable Asset, SBCL shall, from and after such Transfer Date, cooperate with ActaMed in any reasonable and lawful arrangement designed to provide the benefit of such Non-Transferable Asset to ActaMed, and ActaMed, so long as such benefit is so provided, shall satisfy or perform any Liability under or in connection with such Non-Transferable Asset which would be a Liability assumed by ActaMed if such Non-Transferable Asset were a Transferred Asset. Any costs associated with such efforts shall be borne by SBCL. 2.8.4 At any time after a given Transfer Date, if any Non-Transferable Asset becomes capable of being sold, assigned, transferred, conveyed or delivered to ActaMed without a violating any Contract, License or Regulation or resulting in the imposition of any significant additional Liability or obligation on SBCL or ActaMed or a substantial diminution in the value or use of such Asset, then, at such time, such Non-Transferable Asset shall be deemed to have been sold, assigned, transferred, conveyed and delivered to ActaMed effective as of the Applicable Transfer Date hereof pursuant to the execution and delivery of a Bill of Sale and Assignment and an Assumption Agreement with respect to the Transferred Assets on such Applicable Transfer Date; PROVIDED, HOWEVER, that if and to the extent that SBCL has theretofore provided ActaMed with comparable assets or compensation for such Asset, an equitable adjustment shall be made between SBCL and ActaMed to effectuate fully the intent of the foregoing provision. ARTICLE 3 REPRESENTATIONS AND WARRANTIES SECTION 3.1 BY SBCL. Except as set forth on a Disclosure Schedule hereto, SBCL hereby represents and warrants to ActaMed, and shall (except as contemplated by Section 2.5.2 hereof) represent and warrant to ActaMed on each Transfer Date as to itself and the SCAN Assets being transferred on such Transfer Date, as follows: 3.1.1 CAPACITY AND VALIDITY. SBCL has the full power and corporate authority necessary to enter into and perform its obligations under this Assets Purchase Agreement and the other documents to be executed and delivered by SBCL hereunder or in connection herewith (the "SBCL DOCUMENTS") and to consummate the transactions contemplated hereby and thereby. This Assets Purchase Agreement and all other SBCL Documents have been or will be duly executed and delivered by SBCL, and constitute or will constitute the legal, valid and binding obligations of SBCL, enforceable in accordance with their respective terms except as enforceability may be limited by applicable equitable principles, or by bankruptcy, insolvency, reorganization, moratorium or similar laws from time to time in effect -11- affecting the enforcement of creditors' rights generally. The execution, delivery and performance of this Assets Purchase Agreement or any other SBCL Document, and the consummation of the transactions contemplated hereby or thereby, will not violate any provisions of the articles of incorporation or bylaws of SBCL, or any Regulation or Court Order to which SBCL is subject. 3.1.2 ORGANIZATION, GOOD STANDING AND FOREIGN QUALIFICATION. SBCL is a corporation duly incorporated, validly existing and in good standing under the laws of Delaware, and has the corporate power and authority to carry on its business in such places as it has been and is now being conducted, and to own and lease the properties and assets which it now owns or leases, in each case in connection with its provision of Lab EDI Services. 3.1.3 PROJECTIONS. (a) The aggregate costs reflected by the line items [*] attached hereto as DISCLOSURE SCHEDULE 3.1.3 (the "PROJECTIONS") are accurate in all material respects and do not omit to state any material fact required to be stated therein to make such Projections not misleading; PROVIDED that such Projections are indicative only of general expenses (excluding one-time or transactional expenses, which include any expenses incurred with respect to this transaction) for [*] projected to be incurred in connection with SBCL's provision of Lab EDI Services to [*] SCAN Sites and assume that ActaMed will provide services to only such number of SCAN Sites and only in the same manner that SBCL did prior to transfer. (b) The Projections were prepared in accordance with the books and records of SBCL in all material respects, which books and records have been properly maintained and are complete and correct in all material respects. (c) SBCL has not received any advice or notification from its independent certified public accountants that SBCL has used any improper accounting practice that would have the effect of not reflecting or incorrectly reflecting in the Projections any expenses associated with SBCL's provision of Lab EDI Services. 3.1.4 ABSENCE OF CHANGES. Except as contemplated by this Assets Purchase Agreement, since December 1, 1997, SBCL's provision of Lab EDI Services has been carried on only in the ordinary course of SBCL's business, and there has not been any transaction or occurrence in which SBCL has: (a) suffered or experienced any event or condition materially increasing the expenses incurred by SBCL in the provision of Lab EDI Services; [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -12- (b) increased the rate of compensation payable or to become payable by it to any of the Transferred Employees or agreed to do so, except general hourly rate increases, normal merit increases and increases due to promotions; (c) failed to provide notice to ActaMed that it hired or committed to hire any Person who will perform services directly relating to SBCL's provision of Lab EDI Services, or terminated or received the resignation of any Transferred Employee; (d) through negotiation or otherwise, made any commitment or incurred any Liability, whether or not enforceable, to any labor organization affecting Transferred Employees; (e) directly or indirectly paid or entered into a Contract to pay any severance or termination pay to any Transferred Employee; (f) experienced problems with the SCAN Network or [*] (as defined in the Services Agreement) (such as network operations, quality assurance or software development problems) which have materially and adversely affected SBCL's provision of Lab EDI Services to SBCL Sites in Regions not yet transferred to ActaMed pursuant to this Assets Purchase Agreement. 3.1.5 REAL PROPERTY. SBCL neither owns nor leases (either as lessee or lessor) any real property related exclusively to its provision of Lab EDI Services. 3.1.6 PERSONAL PROPERTY. (a) SBCL owns and has good title to the SCAN Assets, free and clear of any and all Liens of any kind or nature. (b) DISCLOSURE SCHEDULE 3.1.6 contains (i) a sample configuration of a PC System which is representative of PC Systems provided to Automated Providers by SBCL for the provision of Lab EDI Services, and (ii) a list of the SCAN Assets in the Region being transferred, which list is true and complete in all material respects to the best of SBCL's knowledge. (c) SBCL does not lease any equipment, machinery or other items of tangible personal property for use exclusively in the provision of Lab EDI Services. SBCL does not lease any personal property as lessor in connection with its provision of Lab EDI Services. (d) As of the Region One Transfer Date, there are not less than [*] SBCL Sites located in all Regions. [*] 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. -13- 3.1.7 COMPLIANCE WITH LAWS. (a) To the best knowledge of SBCL, in its provision of Lab EDI Services, SBCL has complied in all material respects with all applicable Regulations relating to the provision of Lab EDI Services. (b) To the best knowledge of SBCL, the SCAN Software complies as of the Region One Transfer Date with all applicable Regulations relating to SBCL's provision of Lab EDI Services. (c) SBCL has obtained all consents or approvals required from, has made all necessary filings with, and has provided all required notices to, any governmental body or agency or any other third party in connection with the execution and delivery of this Assets Purchase Agreement or any of the SBCL Documents. 3.1.8 LITIGATION AND CLAIMS. There are no outstanding Court Orders or quasi-judicial or administrative decisions to which SBCL is subject relating to the SCAN Assets located at SBCL Sites and there is no Litigation pending or, to SBCL's knowledge, threatened relating to (i) the SCAN Assets located at SBCL Sites or (ii) SBCL's provision of Lab EDI Services. SBCL has not been advised by any attorney representing it that there are any "loss contingencies" (as defined in FASB 5), which would be required by FASB 5 to be disclosed or accrued in SBCL's financial statements by reason of the Lab EDI Services provided by SBCL. 3.1.9 CONTRACTS AND COMMITMENTS; WARRANTIES. (a) DISCLOSURE SCHEDULE 3.1.9 contains, to the best knowledge of SBCL, a list, which is true and correct in all material respects, of all Vendor Contracts and all Contracts to which SBCL is a party solely because it provides Lab EDI Services using the SCAN Network, except for Contracts (other than Vendor Contracts) that (i) are terminable on thirty (30) days or less notice by SBCL without any Liability, (ii) are described in any other Section of the Disclosure Schedule hereto, or (iii) do not require payments in excess of $5,000 in the aggregate following the date hereof (unless renewed which renewal is at the discretion of ActaMed). (b) Each of the Contracts listed in DISCLOSURE SCHEDULE 3.1.9, or described in this Section 3.1.9, is in full force and effect. No Default by SBCL under any of the terms or conditions set forth in any of the Contracts to which SBCL is a party or any document or instrument related thereto has occurred or been asserted by any party which could result in acceleration of any obligations under or termination of the Contract. The execution, delivery and performance of this Assets Purchase Agreement or any other SBCL Document, and the consummation of the transactions contemplated hereby or thereby, will not conflict with, result in a breach of, or constitute a Default under any Contract to which SBCL is a party or by which it is bound, affect the continuation, validity and effectiveness of any of such Contracts, or any terms thereof, or result in the creation of any Lien upon any of the SCAN Assets located at SBCL Sites, or result in the acceleration of the maturity of any payment date of any of SBCL's -14- obligations, or increase or adversely affect the obligations of SBCL thereunder. SBCL has provided, upon request, true, correct and complete copies of the Contracts referred to in DISCLOSURE SCHEDULE 3.1.9 to ActaMed for review. 3.1.10 CONDITION OF ASSETS. To the best of SBCL's knowledge, the PC Systems located at SBCL Sites in a Region to be transferred on an Applicable Transfer Date are in good operating condition so as to allow, in the aggregate, a level of connectivity with the SCAN Network which is consistent with SBCL's historically experienced level of connectivity. No representation or warranty is hereby given as to the condition or state of repair of any individual component of a PC System. 3.1.11 BROKERS AND FINDERS. No third party is entitled to receive any commission, fees or similar consideration in connection with the transactions contemplated by this Assets Purchase Agreement based on any arrangement or agreement made by or on behalf of SBCL. 3.1.12 INVESTMENT REPRESENTATIONS; LEGEND ON SHARES. (a) SBCL hereby acknowledges that (i) the shares of Series D Preferred Stock (or, if applicable, Conversion Shares) delivered pursuant to this Assets Purchase Agreement have not been registered under the Securities Act, and the resale of such shares is therefore subject to restrictions imposed by federal and state securities laws including without limitation that such shares cannot be sold or otherwise disposed of except in a transaction which is registered under the Securities Act or exempted from registration; (ii) ActaMed has advised SBCL, a reasonable time prior to the execution of this Assets Purchase Agreement, that the shares have not been registered under the Securities Act; and (iii) all certificates representing the shares delivered to SBCL shall be stamped or otherwise imprinted with a legend substantially in the following form (together with any other legend required by state law), and that stop transfer orders will be given to ActaMed's transfer agent: "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES ACTS AND MAY NOT BE TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS THEY HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND ANY APPLICABLE STATE SECURITIES ACTS OR EXEMPTIONS FROM SUCH REGISTRATIONS ARE AVAILABLE." (b) SBCL is an accredited investor (as such term is defined in Rule 506 of Regulation D promulgated by the SEC) and is acquiring the shares of Series D Preferred Stock (and, if applicable, Conversion Shares) for its own account for investment purposes only, and not with a view to the distribution, transfer, or assignment of the same in whole or in part. SBCL has been represented by counsel and advisers, each of whom has been -15- previously selected by SBCL, as SBCL has found necessary to consult concerning this Assets Purchase Agreement and the shares to be issued pursuant to this Assets Purchase Agreement. SBCL, either alone or with its representative(s), has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the prospective investment. SBCL and its counsel and other advisers have been provided with such information concerning ActaMed as they have deemed relevant with respect to SBCL's investment decision relating to the shares being delivered to it. SBCL has had a reasonable opportunity to ask questions and receive answers concerning the terms and conditions of the transactions contemplated by this Assets Purchase Agreement, to discuss ActaMed's business, management and financial affairs with the management of ActaMed, and to obtain any additional information which ActaMed possesses or can acquire without unreasonable effort or expense that is necessary to verify the accuracy of the information furnished. SBCL has received satisfactory responses from management of ActaMed to SBCL's inquiries. 3.1.13 THIRD PARTY SOFTWARE. SBCL has sufficient rights and licenses in Third Party Software to convey the rights contemplated by Section 1.2 hereof, free and clear of any liens, claims or encumbrances, in each case subject to the exclusions and limitations expressly set forth in Section 1.2 hereof. 3.1.14 SCHEDULES. All Sections of the Disclosure Schedule referenced in this Section 3.1 are true, correct and complete as of the date of this Assets Purchase Agreement, and will be true, correct and complete as of each Transfer Date. Matters disclosed in each such Section of the Disclosure Schedule shall be deemed disclosed for purposes of the matters to be disclosed in any Section of the Disclosure Schedule. SECTION 3.2 BY ACTAMED. Except as set forth on a Disclosure Schedule hereto, ActaMed hereby represents and warrants to SBCL, and will represent and warrant to SBCL on each Transfer Date, as follows: 3.2.1 ORGANIZATION, GOOD STANDING AND AUTHORITY. ActaMed is a duly organized and validly existing corporation in good standing under the laws of the State of Georgia and has full corporate power and authority to carry on its business, to own and operate its properties and assets, and to consummate the transactions contemplated by this Assets Purchase Agreement and the other documents to be executed and delivered by ActaMed hereunder (the "ACTAMED DOCUMENTS"). ActaMed is currently engaged in the ActaMed Business and is qualified to do business as a foreign corporation in each jurisdiction in which the failure to be so qualified would have a Material Adverse Effect. The Fourth Amended Articles have been duly filed and are currently in effect. ActaMed has delivered to SBCL true, correct and complete copies of the Fourth Amended Articles and the bylaws of ActaMed, including all amendments thereto, as presently in effect. ActaMed has all governmental licenses, authorizations, consents and approvals required to carry on the ActaMed Business as now conducted and as proposed to be conducted and to own, operate and lease its properties and -16- assets, except for those licenses, authorizations, consents and approvals the failure of which to have would not have a Material Adverse Effect. 3.2.2 AUTHORIZATION OF AGREEMENT, NO BREACH. The execution and delivery of this Assets Purchase Agreement have been duly authorized by all necessary corporate action on the part of ActaMed, and no further corporate action of any nature is required pursuant to the Articles or the bylaws of ActaMed. All Persons who have executed or will execute this Assets Purchase Agreement, or any other agreement or document called for by this Assets Purchase Agreement on behalf of ActaMed have been duly authorized to do so by all necessary corporate action. This Assets Purchase Agreement and the other ActaMed Documents have been duly executed and delivered by ActaMed and constitute legal, valid and binding obligations of ActaMed, enforceable against ActaMed in accordance with their respective terms, except as enforceability may be limited by applicable equitable principles, or by bankruptcy, insolvency, reorganization, moratorium or similar laws from time to time in effect affecting the enforcement of creditors' rights generally. The execution, delivery and performance of this Assets Purchase Agreement and the other ActaMed Documents and the consummation of the transactions contemplated hereby and thereby will not (1) violate or result in a breach of or Default or acceleration under the Articles or the bylaws of ActaMed or any material contract to which ActaMed is a party or is bound, (2) violate any Court Order, quasi-judicial or administrative decision or award of any court, arbitrator, mediator, tribunal, administrative agency or governmental body applicable to or binding upon ActaMed or upon the securities, property or business of ActaMed or (3) violate any Regulation relating to ActaMed, or to the securities, property, or business of ActaMed. 3.2.3 ACTAMED FINANCIAL STATEMENTS. (a) DISCLOSURE SCHEDULE 3.2.3 hereto contains a true and correct copy of (i) the balance sheets of ActaMed at December 31, 1995 and December 31, 1996 and the statements of operations, statements of stockholders equity and statements of cash flows of ActaMed for the years ended December 31, 1995 and December 31, 1996, which have been audited by Deloitte & Touche, LLP independent accountants (the "ACTAMED FINANCIAL STATEMENTS"), and (ii) the unaudited balance sheets of ActaMed at September 30, 1997 and the statements of operations, statements of stockholders equity and statements of cash flows of ActaMed for quarter ended September 30, 1997 (the "ACTAMED UNAUDITED STATEMENTS"). (b) The ActaMed Financial Statements have been prepared in accordance with GAAP applied on a consistent basis during the respective periods covered thereby. The ActaMed Financial Statements are correct and complete and present fairly in all material respects the financial position of ActaMed at the date of the balance sheets included therein and the results of operations and cash flows of ActaMed for the respective periods covered by the statements of operations and cash flows included therein. ActaMed has no material obligations or liabilities of any nature whatsoever (whether absolute, accrued, contingent or otherwise and whether due or not due) which would be required by GAAP to be -17- disclosed in the ActaMed Financial Statements and which, either individually or in the aggregate, would have a Material Adverse Effect and which are not disclosed by the ActaMed Financial Statements. (c) The ActaMed Unaudited Statements have been prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein (except as otherwise disclosed therein) and certified by the chief financial officer of ActaMed as presenting fairly the financial condition and results of operations of ActaMed and any of its Subsidiaries for the periods covered by the statements (subject to customary exceptions for interim unaudited financial statements). 3.2.4 CONSENTS. No consent, approval or authorization of, or qualification, designation, declaration or filing with, or notice to any governmental authority on the part of ActaMed is required in connection with (a) the valid execution and delivery of the ActaMed Documents and (b) the issuance of the shares of Series D Preferred Stock (and, if applicable, the Conversion Shares), except the filing of the Fourth Amended Articles in the office of the Secretary of State of the State of Georgia, which filing will be accomplished concurrently with the execution and delivery of this Assets Purchase Agreement. 3.2.5 CAPITALIZATION. (a) After giving effect to the authorization of the shares of Series D Preferred Stock, the capital stock of ActaMed, as authorized by its Articles consists of the authorized, issued and outstanding capital stock set forth on DISCLOSURE SCHEDULE 3.2.5. None of such issued shares is held in the treasury of ActaMed. ActaMed does not have outstanding any stock or securities convertible into or exchangeable for any shares of its capital stock and no Person has any right against ActaMed to subscribe for or to purchase, or any options for the purchase, or any agreements providing for the issuance, of any capital stock or any stock or securities convertible into capital stock of ActaMed. (b) All of the issued and outstanding shares of ActaMed capital stock have been validly issued and are fully paid and non-assessable. The shares of Series D Preferred Stock, when issued to SBCL pursuant to this Assets Purchase Agreement, will be validly issued, fully paid and nonassessable, will have the designations, preferences, limitations, and relative rights set forth in the Articles and will be free and clear of all liens, claims and encumbrances. Any and all of the Conversion Shares, when issued, will be validly issued, fully paid and nonassessable. 3.2.6 REGISTRATION RIGHTS. Except as set forth in the Registration Rights Agreement, ActaMed will not be under any obligation to register under the Securities Act any of its then outstanding securities or any of its securities which may thereafter be issued. 3.2.7 OFFERING. Subject to the accuracy of representations and warranties by SBCL in Section 3.1 hereof, the issuance of the shares of Series D Preferred Stock (and the -18- issuance of the Conversion Shares) on the Applicable Transfer Date constitutes a transaction exempt from the registration requirements of Section 5 of the Securities Act, and from the qualification requirements of any applicable state securities or "blue sky" laws. 3.2.8 CHANGES. Since the date of the latest ActaMed Unaudited Statements, there has not been (i) any adverse change in the assets, liabilities, financial condition or operations of the ActaMed Business from that reflected in the ActaMed Financial Statements, other than changes in the ordinary course of business, none of which individually or in the aggregate has had a Material Adverse Effect or (ii) any adverse change in the prospects of the ActaMed Business or any other event or condition (or events or conditions) of any character which, either individually or cumulatively, has had a Material Adverse Effect. 3.2.9 SUBSIDIARIES. Other than EDI Services Inc., ActaMed has no Subsidiaries. Except as set forth in this Assets Purchase Agreement, ActaMed does not own, or have the right to acquire, any securities or other equity or ownership interest in any corporation, association or other business entity or Person. 3.2.10 PENDING LITIGATION, ETC. There are no actions at law, suits in equity or other proceedings or, to the knowledge of ActaMed, investigations in any court, tribunal or by or before any other governmental or public authority or agency or any arbitrator or arbitration panel or any governmental or private third-party insurance agency, pending or, to the knowledge of ActaMed, threatened against or affecting ActaMed that either individually or in the aggregate, would have a Material Adverse Effect, or, would question the validity or enforceability of this Assets Purchase Agreement, the ActaMed Documents, or any of the transactions contemplated hereby and thereby. ActaMed is not in default with respect to any Court Order. 3.2.11 TITLE TO PROPERTIES. ActaMed has good and marketable title to its properties and assets and has good title to all its respective leasehold interests, in each case subject to no Lien, other than as set forth on DISCLOSURE SCHEDULE 3.2.11 hereto. DISCLOSURE SCHEDULE 3.2.11 accurately lists with respect to the personal property owned by ActaMed (i) each financing statement, deed, agreement or other instrument which has been filed, recorded or registered pursuant to any Regulation that names a business entity as debtor or lessee or as the grantor or the transferor of the interest created thereby, and (ii) as to each such financing statement, deed, agreement or other instrument, the names of the debtor, lessee, grantor or transferor and the secured party, lessor, grantee or transferee and the name of the jurisdiction in which such financing statement, deed, agreement or other instrument has been filed, recorded or registered. 3.2.12 INTELLECTUAL PROPERTY, ETC. ActaMed owns or possesses the rights to use, free from burdensome restrictions or conflicts with the rights of others, all Intellectual Property necessary for the conduct of the ActaMed Business as now conducted and as proposed to be conducted. All licenses constituting ActaMed's Intellectual Property are in full force and effect and constitute legal, valid and binding obligation of the respective parties thereto, and -19- there have not been and are not any Defaults thereunder by any party. There are no outstanding options, licenses, or material agreements of any kind relating to the foregoing, nor is ActaMed bound by or a party to any options, licenses or agreements of any kind with respect to such Intellectual Property. ActaMed has not received any communications alleging that it has violated or, by conducting its business as proposed, would violate any of the Intellectual Property rights of any other Person. To ActaMed's knowledge, none of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of their best efforts to promote the interests of ActaMed or that would conflict with the ActaMed Business as proposed to be conducted. Neither the execution nor delivery of this Assets Purchase Agreement, nor the carrying on of the ActaMed Business by the employees of ActaMed, nor the conduct of the ActaMed Business as proposed, will, to ActaMed's knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a Default under, any Contract under which any of such employees is now obligated. ActaMed does not believe it is or will be necessary to utilize any inventions of any of its employees (or people it currently intends to hire) made prior to their employment by ActaMed. 3.2.13 COMPLIANCE WITH OTHER INSTRUMENTS. ActaMed is not in violation of or in Default in any material respect under any term of its organizational documents, any term or provision of any mortgage, indenture, contract, agreement, instrument, judgment or decree, and is not in violation in any material respect of any applicable Regulation, and to ActaMed's knowledge, there is no state of facts which, with the passage of time or giving of notice or both, would constitute any such violation or Default that would in the aggregate have a Material Adverse Effect. The execution, delivery and performance of and compliance with the ActaMed Documents, the issuance of the shares of Series D Preferred Stock (and the Conversion Shares) and the consummation of any other transaction contemplated by the ActaMed Documents have not resulted and will not result in any such violation, or be in conflict with, or constitute a Default under any of the foregoing, or result in the creation of any Lien upon any of the properties or assets of ActaMed. 3.2.14 COMPLIANCE WITH LAW. ActaMed is in compliance with all Regulations to which it is subject, the violation of which, either individually or in the aggregate, would have a Material Adverse Effect. The execution, delivery or performance of this Assets Purchase Agreement or any of the other ActaMed Documents, and the consummation of the transactions contemplated by the ActaMed Documents, will not cause ActaMed to be in violation of any Regulation. 3.2.15 EMPLOYEES. To the knowledge of ActaMed, no employee of ActaMed is in violation of any term of any employment contract, patent disclosure agreement or any other Contract relating to the Intellectual Property of ActaMed or the relationship of any such employee with such entity or any other party. -20- 3.2.16 EMPLOYEE BENEFIT PLANS. (a) DISCLOSURE SCHEDULE 3.2.16 contains a current, correct and complete list of all the Employee Benefit Plans. (b) All Employee Benefit Plans conform (and at all times have conformed) in all material respects to, and are being administered and operated (and have at all times been administered and operated) in material compliance with, the requirements of ERISA, the Code and all other applicable Regulations. All returns, reports and disclosure statements required to be made under ERISA and the Code with respect to all such Employee Benefit Plans have been timely filed or delivered. There have not been any "prohibited transactions," as such term is defined in Section 4975 of the Code or Section 406 of ERISA, involving any of the Employee Benefit Plans, that could subject ActaMed to any material penalty or tax imposed under the Code or ERISA. (c) Any Employee Benefit Plan intended to be qualified under Section 401(a) of the Code and exempt from tax under Section 501(a) of the Code has been determined by the Internal Revenue Service to be so qualified or an application for such determination is pending. Any such determination that has been obtained remains in effect and has not been revoked, and with respect to any application that is pending, ActaMed has no reason to suspect that such application for determination will be denied. Nothing has occurred since the date of any such determination that is reasonably likely to affect adversely such qualification or exemption, or result in the imposition of excise taxes or income taxes or unrelated business income under the Code or ERISA with respect to any such Employee Benefit Plan. (d) ActaMed and the ERISA Affiliates do not sponsor or contribute to, and have not in the past sponsored or contributed to, and have no Liability with respect to, any defined benefit plan subject to Title IV of ERISA or any multi-employer plan (as defined in Section 3(37) of ERISA). Neither ActaMed nor any ERISA Affiliate has any current or contingent obligation to any multi-employer plan (as defined in Section 3(37) of ERISA). ActaMed does not have any Liability with respect to any employee benefit plan or arrangement other than with respect to the Employee Benefit Plans listed in DISCLOSURE SCHEDULE 3.2.16. (e) There are no pending or, to the knowledge of ActaMed, threatened claims by or on behalf of any such Employee Benefit Plans, or by or on behalf of any individual participants or beneficiaries of any such Employee Benefit Plans, alleging any violation of ERISA or any other Applicable Regulations, or claiming benefit payments (other than those made in the ordinary operation of such plans), nor is there, to the knowledge of ActaMed, any basis for such claim. Such Employee Benefit Plans are not the subject of any pending (or to the knowledge of ActaMed, any threatened) investigation or audit by the Internal Revenue Service, the U.S. Department of Labor or the Pension Benefit Guaranty Corporation or any similar regulatory agency, foreign or domestic. -21- (f) ActaMed has timely made all required payments and contributions under the Employee Benefit Plans including the payment of all insurance premiums. All such payments and contributions have been deducted fully by ActaMed for federal income tax purposes. Such deductions have not been challenged or disallowed by any governmental entity and ActaMed has no reason to believe that such deductions are not properly allowable. ActaMed has not incurred any Liability for any tax, excise tax, penalty or fee with respect to any Employee Benefit Plan, and, to the best of ActaMed's knowledge, no event has occurred and no circumstance exists or has existed that could give rise to any such Liability. (g) The execution of and performance of the transactions contemplated by this Assets Purchase Agreement will not (either alone or upon the occurrence of any additional or subsequent events) result in any payment, acceleration, vesting or increase in benefits with respect to any employee or former employee of ActaMed, including one that would be an "excess parachute payment" under Section 280G of the Code. (h) ActaMed does not maintain any plan or arrangement that provides post retirement medical benefits, post retirement death benefits or other post retirement welfare benefits, other than to the extent required by Part 6 of Title I of ERISA. (i) ActaMed does not maintain or contribute to, nor has it in the past maintained or contributed to, any "welfare benefit fund" (within the meaning of Section 419 of the Code). (j) Any Employee Benefit Plan that is a group health plan (within the meaning of Section 4980B(g)(2) of the Code) complies and has been administered in material respects in accordance with all of the applicable requirements of Section 4980B of the Code, Part 6 of Title I of ERISA, Title XXII of the Public Health Service Act, the Social Security Act and all other applicable Regulations. (k) Any Employee Benefit Plan that is a group health plan (within the meaning of Section 4980D(f)(1) of the Code) complies and has been administered in material respects in accordance with all of the applicable requirements of Subtitle K of the Code, Part 7 of Title I of ERISA, the Public Health Service Act and all other applicable Regulations, and (l) Neither ActaMed nor any ERISA Affiliate has contributed to a non-conforming group health plan (as that term is defined in Code section 5000(c)) or incurred any tax liability under Code section 5000(a). 3.2.17 COMPLIANCE WITH ENVIRONMENTAL LAWS. (a) ActaMed is in compliance with all applicable environmental Regulations applicable to the ActaMed Business with respect to all discharges into the ground and surface water, emissions into the ambient air and generation, accumulation, -22- storage, treatment, recycling, transportation, labeling or disposal of waste materials or process by-products, except violations which, either individually or in the aggregate, would not have a Material Adverse Effect. ActaMed is not liable for any material penalties, fines or forfeitures for failure to comply with any of the foregoing. All licenses, permits or registrations required for the ActaMed Business as presently conducted and proposed to be conducted, under any environmental Regulations have been or will, in a timely manner, be obtained or made, other than such licenses, permits or registrations as to which the failure to obtain or make, either individually or in the aggregate, will not have a Material Adverse Effect, and ActaMed is in compliance therewith in all material respects. (b) No release, emission or discharge into the environment of hazardous substances, as defined under the Comprehensive Environmental Response, Compensation, and Liability Act, as amended, or hazardous waste, as defined under the Resource Conservation and Recovery Act, or air pollutants as defined under the Clean Air Act, or pollutants, as defined under the Clean Water Act, by ActaMed has occurred or is presently occurring on or from any property owned or leased by ActaMed in excess of federal, state or local permitted releases or reportable quantities, or other concentrations, standards or limitations under the foregoing Regulations governing the protection of health and the environment or under any other Regulations (then or now applicable, as the case may be) other than such releases, emissions or discharges, either individually or in the aggregate, would not have a Material Adverse Effect. (c) To its knowledge, ActaMed has never (1) owned, occupied or operated a site or structure on or in which any hazardous substance was or is stored, transported or disposed of in violation of any environmental Regulations at such time as such site or structure was owned, occupied or operated by ActaMed or at any other time, or (2) transported or arranged for the transportation of any hazardous substance other than in full compliance with all applicable environmental Regulations governing the ActaMed Business or the storage, transportation or disposal of hazardous substances except for such violations as, either individually or in the aggregate, would not have a Material Adverse Effect. ActaMed has never caused or been held legally responsible for any release or threatened release of any hazardous substance, or received notification from any federal, state or other governmental authority of any such release or threatened release, or that ActaMed may be required to pay any costs or expenses incurred or to be incurred in connection with any efforts to mitigate the environmental impact of any release or threatened release, of any hazardous substance from any site or structure owned, occupied or operated by ActaMed, except such releases or threatened releases as, either individually or in the aggregate, would not have a Material Adverse Effect. 3.2.18 INSURANCE. The ActaMed Business has fire, casualty, liability, and business interruption insurance policies with recognized insurers, in such amounts and with such coverage as set forth on DISCLOSURE SCHEDULE 3.2.18. -23- 3.2.19 MATERIAL CONTRACTS AND AGREEMENTS. DISCLOSURE SCHEDULE 3.2.19 lists the parties to, and subject matter of, all material Contracts of the ActaMed Business, including without limitation, all employment or labor contracts, leases or compensation plans. Except as set forth on such Schedule, all Contracts set forth on such list are valid, binding, and in full force and effect, without any breach by ActaMed or, to ActaMed's knowledge, any other party thereto. 3.2.20 TAXES. All federal, state and other tax returns of ActaMed required by law to be filed have been duly filed and all federal, state and other Taxes, assessments, fees and other federal governmental charges upon ActaMed or any of the properties, incomes or assets of ActaMed that are due and payable have been paid. No extensions of the time for the assessment of deficiencies have been granted to ActaMed in connection with any federal tax, assessment, fee or other federal governmental charge. There are no Liens, on any properties or assets of the ActaMed Business imposed or arising as a result of the delinquent payment or the non-payment of any tax, assessment, fee or other governmental charge that, either individually or in the aggregate, would have a Material Adverse Effect. (a) ActaMed has not assumed and is not liable for any Tax liability of any other Person, including any predecessor corporation, as a result of any purchase of assets or other business acquisition transaction; (b) ActaMed has not indemnified or agreed to indemnify any other Person or otherwise agreed to pay on behalf of any other Person tax liability growing out of or which may be asserted on the basis of any tax treatment adopted with respect to all or any aspect of such a business acquisition transaction; (c) The charges, accruals and reserves, if any, on the books of ActaMed in respect of all Taxes for all fiscal periods to date are adequate in accordance with GAAP, and ActaMed knows of no additional unpaid assessments for such periods or other governmental charges payable by ActaMed in connection with the execution and delivery of this Assets Purchase Agreement, the ActaMed Documents or the issuance of the Shares of Series D Preferred Stock by ActaMed, other than stock transfer taxes, recording fees and filing fees in connection with state securities or "blue sky" filings. 3.2.21 INVESTMENT COMPANY. ActaMed is not an "investment company", or an "affiliated person" of an "investment company", or a company "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended, and ActaMed is not an "investment adviser" or an "affiliated person" of an "investment adviser" as such terms are defined in the Investment Advisers Act of 1940, as amended. -24- 3.2.22 LABOR RELATIONS. ActaMed is not engaged in any unfair labor practices. There is: (a) no unfair labor practice complaint pending or, to the best of ActaMed's knowledge, threatened against ActaMed before the National Labor Relations Board or any court or labor board, and no grievance or arbitration proceedings arising out of or under collective bargaining agreements is so pending or, to the best of ActaMed's knowledge, threatened, (b) no strike, lock-out, labor dispute, slowdown or work stoppage pending or, to the best of ActaMed's knowledge, threatened against ActaMed, and (c) no union representation or certification question existing or pending with respect to the employees of ActaMed, and, to the best knowledge of ActaMed, no union organization activity taking place, other than such actions or proceedings as, either individually or in the aggregate, would not have a Material Adverse Effect. 3.2.23 NO CONFLICT OF INTEREST. ActaMed is not indebted, directly or indirectly, to any Substantial Holder, or, to ActaMed's knowledge, to any Affiliate of a Substantial Holder, in any amount whatsoever. To the best knowledge of ActaMed, no Substantial Holders, or any of their Affiliates, are indebted to any firm or corporation with which ActaMed is affiliated or with which ActaMed has a business relationship, or any firm or corporation which competes with ActaMed. Except as contemplated by the ActaMed Documents, no Substantial Holder, or, to ActaMed's knowledge, any Affiliate of a Substantial Holder, is directly or indirectly interested in any contract with ActaMed or any of its Subsidiaries. 3.2.24 BROKERS OR FINDERS. No broker, agent, finder or consultant or other Person has been retained by or on behalf of ActaMed (other than legal or accounting advisors), or is or may be entitled to be paid based upon any agreements or understandings made by ActaMed in connection with the transactions contemplated hereby. 3.2.25 FULL DISCLOSURE. This Assets Purchase Agreement, the other ActaMed Documents, and any report or financial statement referred to in this Section 3.2 hereof and any certificate, report, statement or other writing furnished to SBCL by or on behalf of ActaMed in connection with the negotiation of this Assets Purchase Agreement and the other ActaMed Documents and the sale of the shares of Series D Preferred Stock, taken as a whole, do not contain any untrue statement of a material fact or omit to state a material fact with respect to which disclosure has been requested and which is necessary to make the statements contained herein or therein not misleading. -25- ARTICLE 4 TRANSITION MATTERS SECTION 4.1 PRIOR TO REGION TRANSFER. 4.1.1 SBCL CONTINUED OPERATION. Except (i) as contemplated by the Implementation Plan, (ii) with the prior written consent of ActaMed, or (iii) as necessary to effect the transactions contemplated by this Assets Purchase Agreement, SBCL shall, with respect to all SBCL Sites in each Region which has not been transferred, until the Applicable Transfer Date for the Region: (a) provide Lab EDI Services using the SCAN Network in substantially the same manner as presently being conducted; (b) use its best efforts to preserve its present relationships with Automated Providers and vendors; and (c) notify ActaMed of any development materially and adversely affecting its ability to provide Lab EDI Services, and of any governmental complaints, investigations or hearings (or written communications indicating that the same is contemplated) or administrative proceedings, involving its ability to provide Lab EDI Services, and permit its representatives prompt access to all materials prepared in connection therewith. 4.1.2 SCAN EXPENSE STATEMENTS. SBCL will cooperate with ActaMed and Ernst & Young, or another of the "Big 6" national accounting firms chosen by ActaMed and approved by SBCL ("CPA"), and provide CPA access to SBCL's business and accounting records relating to SBCL's provision of Lab EDI Services so that CPA may prepare audited financial statements, as of December 31, 1995, December 31, 1996, and December 31, 1997, with respect to SBCL's provision of such services, to the extent required for ActaMed to complete a registration of the ActaMed Common Stock with the Securities Exchange Commission. ActaMed will be responsible for, and pay, the expense of said audit, and ActaMed and SBCL shall use their collective best efforts to cause said audit to be completed on or prior to April 30, 1998. SECTION 4.2 REGION TRANSITION MATTERS. 4.2.1 IMPLEMENTATION PLAN. (a) As a further condition precedent to the occurrence of the Region One Transfer Date, the parties have prepared a detailed plan regarding the transition of SBCL Sites into ActaMed Sites (the "IMPLEMENTATION PLAN"), a copy of which is attached hereto as SCHEDULE 4.2.1. SBCL's nominees to the Implementation Committee shall review the Implementation Plan and shall notify ActaMed as to any proposed changes to the Implementation Plan on or prior to January 15, 1998. ActaMed shall implement all such -26- changes, except to the extent its designees to the Implementation Committee reasonably believe that any such change would materially impact ActaMed's ability to meet the Transfer Benchmarks or the Performance Standards (as defined in the Services Agreement), or would have a Material Adverse Effect on ActaMed. If SBCL's designees to the Implementation Committee disagree with ActaMed's assessment of a proposed change, the dispute shall be resolved in accordance with the provisions of Article IX hereof. The Implementation Plan shall continue in force, without any modification in respect of the disputed change, until resolution of the matter. (b) In the event of any conflict between the terms of the Implementation Plan, on the one hand, and this Assets Purchase Agreement, the Services Agreement, the License or the Development Agreement, on the other, the terms of the relevant Transaction Document shall govern and control over those of the Implementation Plan. 4.2.2 IMPLEMENTATION COMMITTEE. ActaMed and SBCL shall form an implementation committee, consisting of an equal number of representatives of ActaMed and SBCL (the "IMPLEMENTATION COMMITTEE"), authorized and directed to (i) apply the Implementation Plan to each Region prior to it being transferred to ActaMed, (ii) oversee, manage and implement the transition of SBCL Sites into ActaMed Sites in accordance with the Implementation Plan; (iii) revise and adapt the Implementation Plan to changing circumstances; and (iv) determine the steps to be taken by the parties in those instances where the Implementation Plan does not address an issue or problem presented. The Implementation Committee shall initially be comprised of the people named on SCHEDULE 4.2.2 hereto. From such list, ActaMed and SBCL shall each designate one person (each an "RELATIONSHIP MANAGER") who together will manage the Implementation Committee. 4.2.3 ASSISTANCE FROM SBCL. SBCL will provide resources to assist ActaMed in the transition of SBCL Sites to ActaMed Sites as more fully provided in the Services Agreement. SECTION 4.3 GENERAL COVENANTS. 4.3.1 ACCESS TO PROPERTIES. At all times prior to the last Transfer Date, the Transferred Employees, attorneys, accountants, agents and other authorized and designated representatives of ActaMed will be allowed upon reasonable advance notice and with minimal disruption to SBCL's business operations, reasonable access to the properties, books and records of SBCL relating to the SCAN Assets located at SBCL Sites, including without limitation, title documents, leases, customer lists, and other data that, in the reasonable opinion of both ActaMed and SBCL, are required for ActaMed to obtain such information as it may reasonably request about the Transferred Employees or such SCAN Assets. ActaMed shall also be allowed reasonable opportunity to consult with the officers, employees, accountants, counsel and agents of SBCL in connection with such investigation. -27- 4.3.2 OTHER OFFERS AND EXCLUSIVE DEALING. Unless and until notice of termination of this Assets Purchase Agreement prior to the last Transfer Date pursuant to Article X hereof, SBCL shall not, acting in any capacity, directly or indirectly, through any officer, director, employee, agent, affiliate or otherwise of SBCL, (a) solicit, initiate or encourage submission of proposals or offers from any Person, corporation or other entity for the primary or specific purpose of selling the SCAN Assets located at SBCL Sites, or relating to the provision of Lab EDI Services to Automated Providers, (b) participate in any discussions or negotiations regarding, or, except as required by a legal or judicial process, furnish to any other Person, corporation or other entity any information with respect to, or otherwise cooperate in any way with, or assist or participate in, facilitate or encourage, any effort or attempt by any other Person to purchase the SCAN Assets located at SBCL Sites or to obtain the right to provide Lab EDI Services to Automated Providers, or (c) approve or undertake any such transaction. Nothing in this Section 4.3.2 shall restrict what SBCL may otherwise do under the Services Agreement. 4.3.3 CONSENTS AND APPROVALS. SBCL will use its best efforts to obtain the waiver, consent and approval of all Persons whose waiver, consent or approval (a) is required in order to consummate the transactions contemplated by this Assets Purchase Agreement, or (b) is required by any Contract to be assumed by ActaMed, or by any Court Order or License to which SBCL is a party or subject on any Transfer Date in connection with the provision of Lab EDI Services, and which would prohibit, or require the waiver, consent or approval of such transactions, or under which such transactions would, without such waiver, consent or approval, constitute a Default under the provisions thereof, result in the acceleration of any obligation thereunder, or give rise to a right of any party thereto to terminate its obligations thereunder. All written waivers, consents and approvals obtained by SBCL relating to a Region shall be provided to ActaMed on the Transfer Date relating to such Region in form and content reasonably satisfactory to ActaMed. Without limiting the generality of the foregoing, SBCL shall cause the [*] to sell to ActaMed in accordance with the terms and conditions of this Agreement the SCAN Assets located in Region Two on or prior to December 31, 1998. To the extent that SBCL's rights under any Contract or other SCAN Asset to be assigned to ActaMed hereunder may not be assigned without the consent of another Person which has not been obtained, this Assets Purchase Agreement shall not constitute an agreement to assign the same if an attempted assignment would constitute a breach thereof or be unlawful. If notwithstanding the best efforts of SBCL described above any such consent shall not be obtained, or if any attempted assignment would be ineffective or would impair ActaMed's rights under the SCAN Asset in question so that ActaMed would not in effect acquire the benefit of all such rights, ActaMed to the maximum extent permitted by law, shall act after the Applicable Transfer Date as SBCL's agent in order to obtain for it the benefits thereunder and shall cooperate, to the maximum extent permitted by law, with SBCL in any other reasonable arrangement designed to provide such benefits to ActaMed. 4.3.4 PUBLIC ANNOUNCEMENTS. The parties hereto are in the process of jointly developing a plan (the "COMMUNICATION PLAN") for communicating the transactions [*] 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. -28- contemplated by this Assets Purchase Agreement and the Services Agreement to Automated Providers, Transferred Employees and the public, a draft of which attached as SCHEDULE 4.3.4 hereto. The parties agree to use their collective best efforts to complete the Communication Plan by January 6, 1998, and each party agrees to abide by such Communication Plan. Without limiting the foregoing, neither party shall send any communication to any Automated Providers or Transferred Employee describing, or otherwise in connection with, the transactions and relationships contemplated by this Agreement (and such other agreements) unless the form and content of such communication shall have been approved in advance by the other unless required by law or judicial process, in which case notification shall be given to the other party hereto prior to such disclosure. 4.3.5 STANDSTILL. At all times prior to the last Transfer Date, ActaMed shall not consummate, or enter into any agreement with respect to a Sale of Assets (as that term is defined in the Articles), without the prior written consent of SBCL. If, at any time prior to the last Transfer Date, (i) ActaMed consummates any Merger, Share Exchange or Consolidation (as such terms are defined in the Articles) (a "Combination"); (ii) the holders of ActaMed stock immediately prior to the Combination are not the holders of a majority of the voting stock of the surviving company of the Combination, (iii) Michael K. Hoover no longer has (or has diminished) responsibility for overseeing and, directly or indirectly, managing the transfer of the Regions under Section 2.3, and (iv) the Transfer Date of any remaining Region does not occur as scheduled under Section 2.3, then SBCL may withhold [*] of the Fixed Fee (as defined in the Services Agreement) due on or after such scheduled date or dates until such time as all Regions have been transferred. SECTION 4.4 CONFIDENTIALITY OF TRADE SECRETS. Each party hereto agrees not to use, copy or disclose the Trade Secrets of the other party, except as permitted by this Assets Purchase Agreement and the other Transaction Documents. Each party shall treat the other's Trade Secrets with at least that degree of care it uses with respect to its own such Trade Secrets. SBCL will give access to its Trade Secrets relating to its provision of Lab EDI Services to those ActaMed personnel who have a need for such access and to no other Person whatsoever. ActaMed will give access to its Trade Secrets relating to the provision of Lab EDI Services to those SBCL personnel who have a need for such access and to no other Person whatsoever. The requirements herein contained with respect to non-disclosure and non-use and protection of each party's Trade Secrets shall permanently survive termination of any other provisions of this Assets Purchase Agreement or the other Transaction Documents. If any party is ordered by a court, administrative agency, or other governmental body of competent jurisdiction to disclose Trade Secrets, or if it is served with or otherwise becomes aware of a motion or similar request that such an order be issued, then such party will not be liable to the other party for disclosure of Trade Secrets required by such order if the disclosing party complies with the following requirements: (1) if an already issued order calls for immediate disclosure, then the disclosing party shall immediately move for or otherwise request a stay of such order to permit the other [*] 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. -29- party to respond; (2) the disclosing party promptly notifies the other party of the motion or order; and (3) the disclosing party does not oppose a motion or similar request by the other party for an order protecting the Trade Secrets including joining or agreeing to (or non-opposition to) a motion for leave to intervene by such other party. Notwithstanding anything to the contrary contained in this Assets Purchase Agreement, SBCL may disclose to the Office of Inspector General of the Department of Health and Human Services (the "OIG") as part of the disclosure SBCL makes under its Integrity Agreement the fact that SBCL and ActaMed have entered into the transactions contemplated by the parties and any information relating to such transaction or this Assets Purchase Agreement which SBCL determines, in good faith upon advice of counsel, is required or, in light of SBCL's obligations under the Integrity Agreement, appropriate for SBCL to make, or SBCL proposes to make in response to a request for such information from the OIG, provided that ActaMed shall be given opportunity (which shall be reasonable in light of all facts and circumstances) to review and comment upon the information SBCL intends to include in any such submission. In the event that any such disclosure that SBCL intends to make includes any information that constitutes Trade Secrets of ActaMed, SBCL will provide reasonable (in light of all facts and circumstances, including the time frame in which such disclosure is required to be made) assistance to ActaMed to take reasonable steps to assure that such Trade Secrets of ActaMed are maintained in confidence, including, but not limited to, (i) requesting that the OIG treat such information as trade secrets within the meaning of the Freedom of Information Act, 5 U.S.C. Section 552(b)(4), (ii) requesting of the OIG that SBCL and ActaMed be given prior notice of an proposed release of such information to Persons or entities outside of the OIG; (iii) requesting that the OIG otherwise assure the confidentiality of the information provided by ActaMed as if such information was a Trade Secret of SBCL [*] and taking other reasonable steps that may be requested by ActaMed and to which SBCL may, in its sole discretion, agree to assure that the OIG honors its confidentiality obligations in that section; (iv) where such information is to be provided in response to a request by the OIG, take reasonable steps to narrow the request from the OIG in an appropriate manner in order to limit the amount of information, if any, that constitutes Trade Secrets of ActaMed covered by such request; and (v) make reasonable efforts to permit ActaMed, with the concurrence of the OIG, to disclose such information directly to the OIG, provided that in any such case, ActaMed shall give SBCL a timely opportunity to review, comment upon and approv the information ActaMed intends to include in such submission. The additional safeguards described in subsections (i) through (v) above are designed to help assure the confidentiality of the Trade Secrets, the disclosure of which would have a material adverse impact on ActaMed. These additional provisions are not intended to interfere with SBCL's ability to meet its disclosure obligations under the Integrity Agreement. Each party shall promptly notify the other in the event it receives an inquiry, investigation or request for information from the OIG or other governmental agency into the matters relating to the proposed transactions. The provisions of this Section 4.4 shall apply in addition to similar provisions in the Services Agreement. SECTION 4.5 EFFORTS TO SATISFY CONDITIONS. SBCL and ActaMed each agree to use their respective best efforts to cause the Transfer Dates to occur as currently scheduled. In [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -30- addition, SBCL agrees to use its best efforts to satisfy the conditions set forth in Section 7.1 hereof, and ActaMed agrees to use its best efforts to satisfy the conditions set forth in Section 7.2 hereof. In furtherance of the foregoing, each party will use its best efforts to take all commercially reasonable steps necessary or desirable and proceed diligently and in good faith to satisfy each condition to the obligations of the other party contained in this Assets Purchase Agreement and will not take or fail to take any commercially reasonable action that could reasonably be expected to result in the nonfulfillment of any such condition. Each of ActaMed and SBCL further agrees to use its best efforts to (i) satisfy any conditions to the transfer of a Region set forth in Section 2.3, and (ii) deliver any and all documents to be delivered upon the transfer of a Region, as set forth in Sections 2.5 and 2.6. SECTION 4.6 EXPENSES. Except as otherwise provided herein, each of the parties to this Assets Purchase Agreement shall bear its respective expenses incurred in connection with the preparation, execution and performance of this Assets Purchase Agreement and the transactions contemplated hereby, including, without limitation, all fees and expenses of agents, representatives, counsel and accountants. SECTION 4.7 ANTITRUST NOTIFICATION. The parties have filed 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 was requested in connection therewith pursuant to the HSR Act. The filing fee relating to such notification and report form will be borne equally. ARTICLE 5 ACTAMED COVENANTS TO SBCL SECTION 5.1 ADDITIONAL COVENANTS OF ACTAMED. ActaMed covenants and agrees that: 5.1.1 SECURITIES LAW FILINGS. From and after consummation of a Public Offering and for so long as a Permitted Owner holds any Conversion Shares, ActaMed will timely file the reports required to be filed by it under the Securities Act and the Exchange Act and the Regulations adopted by the SEC thereunder, to the extent required from time to time to enable the Permitted Owner to sell Conversion Shares without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 under the Securities Act, as such rule may be amended from time to time, or (b) any similar Regulation hereafter adopted by the SEC. Upon the request of the Permitted Owner, ActaMed will deliver to the Permitted Owner a written statement as to whether it has complied with such requirements. 5.1.2 TRANSACTIONS WITH SUBSTANTIAL HOLDERS. ActaMed shall not, directly or indirectly, knowingly enter into any material transaction or agreement with any of its Substantial Holders or any Affiliate or officer of ActaMed or a Substantial Holder, or a material -31- transaction or agreement in which a Substantial Holder or Affiliate or officer of ActaMed or a Substantial Holder has a direct or indirect interest, unless such transaction or agreement is on terms and conditions no less favorable to ActaMed or any of its Subsidiaries than could be obtained at the time in an arm's length transaction with a third Person that is not such a Substantial Holder or Affiliate or officer of ActaMed or a Substantial Holder, and such transaction or agreement has been reviewed and approved by a majority of those members of ActaMed's Board of Directors who have no such interest in the transaction. Except as provided in Section 11.1.4, this Section shall not be enforceable against ActaMed by (i) any Person other than a Permitted Owner or (ii) any Person not a party to this Assets Purchase Agreement. 5.1.3 BUSINESS AND FINANCIAL COVENANTS. ActaMed covenants that: (a) Except for shares issued (i) upon exercise of options granted in accordance with the Stock Option Plans, the Articles and the Stockholders Agreement, (ii) upon conversion of shares of Preferred Stock, (iii) in connection with a Public Offering, (iv) upon exercise of the Warrant, or (v) as permitted under the Articles and the Stockholders Agreement, ActaMed will not, and will not permit any of its Subsidiaries, to hereafter issue or sell any shares or any securities convertible into, or any warrants, rights, or options to purchase shares of, the capital stock of ActaMed or such Subsidiary to any Person other than ActaMed, and ActaMed will not pledge any of the capital stock of any Subsidiary to any Person. ActaMed will not, in any event, issue or sell any shares of Series D Preferred Stock to any Person other than SBCL or its Affiliates. (b) Except as expressly permitted by the Articles or the Stockholders Agreement, ActaMed shall not (except for the advancement of money for expenses in the ordinary course of business) make, or permit any of its Subsidiaries to make, any loans or advances to any Person or have outstanding any investment in any Person, whether by way of loan or advance to, or by the acquisition of the capital stock, assets or obligations of, or any other interest in, any Person. (c) Except as expressly permitted herein or by the Articles or the Stockholders Agreement, neither ActaMed nor any of its Subsidiaries shall declare or make (i) any payment or the incurrence of any Liability to make any payment in cash, property or other assets as a dividend or other distribution in respect of any shares of capital stock of ActaMed or any Subsidiary, excluding, however, any dividends payable to ActaMed by a Subsidiary or dividends which may be payable solely in ActaMed Common Stock or the common stock of any Subsidiary and (ii) except as otherwise permitted by the Transaction Documents or a stock option agreement under the Stock Option Plans, any payment or the incurrence of any Liability to make any payment in cash, property or other assets for the purposes of purchasing, retiring or redeeming any shares of any class of capital stock of ActaMed or any Subsidiary or any warrants, options or other rights to purchase any such shares. (d) Neither ActaMed nor any of its Subsidiaries will amend or change its articles of incorporation or bylaws, or violate or breach any of the provisions thereof. -32- (e) Without the consent of a majority of the Board of Directors: (i) Other than debt in an amount no greater than $2,000,000 incurred to fund the cash portion of the Purchase Price, ActaMed shall not create, incur or suffer to exist, or permit any Subsidiary to create, incur or suffer to exist, any debt other than: (a) debt existing on the date hereof and included in the ActaMed Financial Statements or incurred in the ordinary course of business between the date of the ActaMed Financial Statements and the date hereof, and any renewals or replacements of such debt not exceeding the principal amount of the debt being replaced or renewed; and (b) debt not in excess of $1,000,000 in the aggregate in any one calendar year. (ii) ActaMed shall not create or suffer to exist, or permit any Subsidiary to create or suffer to exist, any obligations for the payment of rent for any property under leases or agreements to lease, other than obligations for (a) the payment of rent which, in the aggregate, do not exceed $1,000,000 annually and (b) payments under leases set forth on DISCLOSURE SCHEDULE 3.2.19. (iii) ActaMed shall not acquire, or permit any Subsidiary to acquire, directly or indirectly, the assets of or equity interests in any other business or entity, whether by purchase, merger consolidation or otherwise in excess of $1,000,000. (iv) ActaMed shall not effect an initial Public Offering of any equity securities, other than equity securities issued in a merger, totaling less than $15,000,000 (before discounts and commissions) in gross proceeds to ActaMed, and at a per share price of less than 2.5 times the then existing conversion price of the Series A Preferred Stock. 5.1.4 CORPORATE EXISTENCE, BUSINESS, MAINTENANCE, INSURANCE. (a) ActaMed will at all times preserve and keep in full force and effect its corporate existence and rights and franchises deemed material to its business and those of its Subsidiaries, except any Subsidiary of ActaMed may be merged into ActaMed or another Subsidiary. (b) ActaMed shall engage solely in the business of developing healthcare information networks (with a principle focus on the provision of lab order entry and results reporting services) and businesses closely related thereto. ActaMed (and any Subsidiary) will not purchase or acquire any property other than property useful in and related to such business. (c) ActaMed will maintain or cause to be maintained in good repair, working order and condition all properties used or useful in the business of ActaMed and any Subsidiary and from time to time will make or cause to be made all appropriate repairs, -33- renewals and replacements thereof. ActaMed and any Subsidiary will at all times comply in all material respects with the provisions of all material leases to which it is a party or under which it occupies property so as to prevent any loss or forfeiture thereof or thereunder. (d) ActaMed will maintain or cause to be maintained, with financially sound and reputable insurers, appropriate insurance with respect to its properties and business and the properties and business of any Subsidiary against loss or damage. 5.1.5 REPURCHASE OF SHARES OF PREFERRED STOCK. Except as provided in Article Three, Section 5.1 of the Fourth Amended Articles, ActaMed shall not, and shall not permit any of its Subsidiaries or any Affiliate of ActaMed to, directly or indirectly, redeem or repurchase or make any offer to redeem or repurchase any shares of (i) Preferred Stock other than Series D Preferred Stock, unless ActaMed, such Subsidiary or such Affiliate has offered to repurchase shares of Preferred Stock PRO RATA, from all holders of outstanding shares of Preferred Stock, including without limitation the Series D Preferred Stock, upon the same terms, or (ii) Series D Preferred Stock unless ActaMed, such Subsidiary or such Affiliate has offered to repurchase shares of Series D Preferred Stock PRO RATA, from all holders of outstanding shares of Series D Preferred Stock upon the same terms. 5.1.6 COMPENSATION. All awards of compensation, including, but not limited to, salary, bonus and awards of stock options made to executive officers and/or directors of ActaMed shall be determined by ActaMed in accordance with the terms of the Stockholders' Agreement and the Articles. 5.1.7 SFA AMENDMENT. ActaMed shall deliver to SBCL, within five (5) business days of the Region One Transfer Date, a duly executed and delivered Amendment to that certain Amended and Restated Development Agreement, dated the 21st day of November, 1996, but effective as of the 3rd day of December, 1993, by and between ActaMed and The SFA Limited Partnership, which Amendment shall provide, on terms satisfactory to SBCL and its counsel, that the SBCL Software, the ActaLab Software and any Intellectual Property developed under the Development Agreement shall not constitute "ActaMed Technology," as defined in such Amended and Restated Development Agreement with The SFA Limited Partnership. 5.1.8 NEW BUSINESS PLAN. Within thirty days after the Region One Transfer Date, the Board of Directors of ActaMed will approve and adopt a new business plan (the "NEW BUSINESS PLAN") for ActaMed covering the years 1998 and 1999, which shall include projected financial data, including statements of operations, and operational data, including number of sites and transactions per site. The new business plan shall provide monthly data for 1998 and quarterly data for 1999. By June 30, 1999, the Board of Directors of ActaMed will approve and adopt an addendum to the plan, covering the same items of financial and operational data, for the year 2000, presented on a monthly basis. The nominal values set forth in the New Business Plan shall not deviate from analogous figures presented in ActaMed's existing business plan, a copy of which was forwarded to SBCL prior to December 1, 1997, by more than seven percent (7%). -34- Section 5.2 INFORMATIONAL COVENANTS OF ACTAMED. ActaMed covenants and agrees that it shall deliver the following information to any Permitted Owner for so long as (except as set forth in Section 5.2.6) such Permitted Owner shall hold [*] of the aggregate outstanding shares of Preferred Stock or Conversion Shares (considered as a single class) or until such time as ActaMed shall have consummated a Public Offering: 5.2.1 AUDITED ANNUAL FINANCIAL STATEMENTS. As soon as practicable and, in any case, within one hundred and twenty (120) days after the end of each fiscal year, financial statements of ActaMed, consisting of the balance sheet of ActaMed as of the end of such fiscal year and the statements of operations, statements of stockholders equity and statements of cash flows of ActaMed for such fiscal year, setting forth in each case, in comparative form, the figures for the preceding fiscal year, all in reasonable detail and fairly presented in accordance with GAAP applied on a consistent basis throughout the periods reflected therein, except as stated therein, and accompanied by an opinion thereon of Ernst & Young, or other independent certified public accountants selected by ActaMed of good and recognized national standing in the United States. 5.2.2 QUARTERLY UNAUDITED FINANCIAL STATEMENTS. As soon as practicable and, in any case, within forty-five (45) days after the end of each of the first three fiscal quarters in each fiscal year, unaudited financial statements of ActaMed setting forth the balance sheet of ActaMed at the end of each such fiscal quarter and the statements of operations and statements of cash flows of ActaMed for each such fiscal quarter and for the year to date, and setting forth in comparative form figures as of the corresponding date and for the corresponding periods of the preceding fiscal year, all in reasonable detail and certified by an accounting officer of ActaMed as complete and correct, as having been prepared in accordance with GAAP consistently applied (except as otherwise disclosed therein) and as presenting fairly, in all material respects, the financial position of ActaMed and any of its Subsidiaries and results of operations and cash flows thereof subject, in each case, to customary exceptions for interim unaudited financial statements. 5.2.3 MONTHLY UNAUDITED FINANCIAL STATEMENTS. As soon as available, but in any event within thirty (30) days after the end of each calendar month, copies of the unaudited balance sheet of ActaMed as at the end of such calendar month and the related unaudited statements of operations and cash flows for such calendar month and the portion of the calendar year through such calendar month, in each case setting forth in comparative form the figures for the corresponding periods of (a) the previous calendar year and (b) the budget for the current year, prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein (except as otherwise disclosed therein) and certified by the chief financial officer of ActaMed as presenting fairly the financial condition and results of operations of ActaMed and any of its Subsidiaries (subject to customary exceptions for interim unaudited financial statements). [*] 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. -35- 5.2.4 MANAGEMENT'S ANALYSIS. All the financial statements delivered pursuant to Sections 5.2.2 and Section 5.2.3 shall be accompanied by an informal narrative description of material business and financial trends and developments and significant transactions that have occurred in the appropriate period or periods covered thereby. 5.2.5 BUDGETS. As soon as practicable, but in any event within thirty (30) days prior to the commencement of a fiscal year, an annual operating budget for such fiscal year, approved by the Board of Directors, including monthly income and cash flow projections and projected balance sheets as of the end of each quarter within such fiscal year. Extensions of such due date shall not be unreasonably withheld. 5.2.6 INSPECTION. Upon reasonable notice, ActaMed shall, and shall cause any of its Subsidiaries to, permit any Permitted Owner (so long as it owns [*] or more of the outstanding capital stock of ActaMed) by its representatives, agents or attorneys: (a) to examine all books of account, records, reports and other papers of ActaMed or such Subsidiary except to the extent that such action would, in the reasonable opinion of counsel, constitute a waiver of the attorney/client privilege, (b) to make copies and take extracts from any thereof, except for information which is confidential or proprietary, (c) to discuss the affairs, finances and accounts of ActaMed or such Subsidiary with ActaMed's or such Subsidiary's officers and independent certified public accountants (and by this provision ActaMed hereby authorizes said accountants to discuss with the Permitted Owner and its representatives, agents or attorneys the finances and accounts of ActaMed or such Subsidiary), and (d) to visit and inspect, at reasonable times and on reasonable notice during normal business hours, the properties of ActaMed and such Subsidiary. Notwithstanding any provision herein to the contrary, the provisions of this Section 5.2.6 are in addition to any rights of a Permitted Owner under the Georgia Business Corporation Code and shall in no way limit such rights. The expenses of the Permitted Owner in connection with any such inspection shall be for the account of the Permitted Owner. Notwithstanding the foregoing sentence, it is understood and agreed by ActaMed that all reasonable expenses incurred by ActaMed or such Subsidiary, any officers, employees or agents thereof or the independent certified public accountants therefor, shall be expenses payable by ActaMed and shall not be expenses of the Permitted Owner making the inspection. Notwithstanding anything to the contrary, SBCL shall be permitted access to any information of, or related to, any customer of ActaMed that is a competitor of SBCL only to the [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -36- extent ActaMed is not subject to confidentiality undertakings with respect to such information; PROVIDED that such limitation shall not prevent SBCL or auditors retained by SBCL, or if ActaMed so requires for reasons of confidentiality only auditors retained by SBCL, from confirming the amount of royalties payable to it under the License Agreement or Services Agreement by reason of connectivity between Providers and commercial laboratories other than SBCL Labs. 5.2.7 OTHER INFORMATION. ActaMed shall deliver the following provided that in the reasonable opinion of counsel to ActaMed such disclosure will not constitute a waiver of the attorney/client privilege, the breach of any secrecy covenant or the release of information regarding competitors of the Permitted Owner: (a) promptly after the submission thereof to ActaMed, copies of any detailed reports (including the auditors' comment letter to management, if any such letter is prepared) submitted to ActaMed by its independent auditors in connection with each annual or interim audit of the accounts of ActaMed made by such accountants; (b) promptly, and in any event within ten (10) days after obtaining knowledge thereof, notice of the institution of any suit, action or proceeding (other than a proceeding of general application which is not directly against ActaMed or one or more of the Subsidiaries), the happening of any event or, to the best knowledge of ActaMed, the assertion or threat of any claim against ActaMed or any of the Subsidiaries which, either individually or in the aggregate, would have a Material Adverse Effect; (c) promptly upon, and in any event within thirty (30) days after obtaining knowledge thereof, notice of any breach of, Default under or failure to comply with any material term under this Article V or any material adverse change in ActaMed's relationship with its major customers, suppliers, employees or other entity with which ActaMed has a business relationship; (d) with reasonable promptness, a notice of any default by ActaMed or any of its Subsidiaries under any material agreement to which it is a party; (e) with reasonable promptness, copies of all written materials furnished to directors; (f) promptly (but in any event within ten (10) days) after the filing of any document or material with the SEC, a copy of such document or material; (g) promptly after the record date set by the Board of Directors to determine the stockholders entitled to vote at ActaMed's annual meeting of stockholders (but in any event ten (10) days prior to such meeting), a list of all stockholders of ActaMed and their respective holdings; and -37- (h) promptly upon request therefor, such other data, filings and information as the Permitted Owner may from time to time reasonably request. ARTICLE 6 EMPLOYEE MATTERS SECTION 6.1 TERMINATION OF EMPLOYMENT BY SBCL AND OFFER OF EMPLOYMENT BY ACTAMED. Effective as of the close of business on January 1, 1998 or such later date as mutually agreed by SBCL and ActaMed, but not later than January 29, 1998 (the "Termination Date"), SBCL will terminate the employment of the individuals listed on Schedule VI. As soon as practicable following the Region One Transfer Date, ActaMed will offer employment to each of the individuals listed on Schedule VI, which employment shall become effective as of the day following the Termination Date (the "Hire Date"). Each individual listed on Schedule VI who accepts ActaMed's offer of employment shall be referred to herein as a "Transferred Employee." In connection with the termination of employment of the individuals listed on Schedule VI, SBCL shall take such action with respect to compensation and benefits for such individuals as described in the SBCL undertakings section of Schedule VI. SECTION 6.2 TRANSITIONAL EMPLOYEE LEASING ARRANGEMENT. For each Transferred Employee, the "Transitional Employee Leasing Arrangement" shall extend for the period from the Hire Date until the earlier of: 6.2.1 the Transfer Date for the Region to which a Transferred Employee is assigned; or 6.2.2 five business days after the date SBCL provides written notice to ActaMed with respect to such Transferred Employee, if SBCL determines that it no longer wishes to have a Transferred Employee assigned to provide leased services to SBCL pursuant to this Agreement. During the Transitional Employee Leasing Arrangement period, ActaMed shall require, as a condition of the continued employment of each Transferred Employee, that each Transferred Employee report to SBCL, and continue to comply with SBCL's policies and procedures in the course of each such Transferred Employee's employment by ActaMed. Notwithstanding the foregoing, Transferred Employees shall be under ActaMed's supervision, direction and control, subject to the general oversight and guidance of SBCL. In performing services for SBCL pursuant to this Article VI, the Transferred Employees shall have the status of common law employees of ActaMed, and neither the Transferred Employees nor ActaMed shall act as or be employees or agents of SBCL. -38- SECTION 6.3 ACTAMED COMPENSATION AND BENEFITS. ActaMed shall, out of its own funds, provide each Transferred Employee with compensation and benefits as set forth on Schedule VI. SECTION 6.4 PAST SERVICE CREDIT. The service of each Transferred Employee with SBCL or any of its Affiliates shall be counted for purposes of determining eligibility to participate or to vest in benefits under any compensation or benefit plan, program or arrangement now or hereafter maintained by ActaMed to the same extent that such service was credited or otherwise counted under any Benefit Plan in which such Transferred Employee was eligible to participate with SBCL immediately prior to the Region One Transfer Date. SECTION 6.5 TERMINATION OF EMPLOYMENT; NONSOLICITATION; TERMINATION OF AGREEMENT. 6.5.1 ActaMed will not terminate without cause the employment of any Transferred Employee before the date determined under Section 6.2.1 or 6.2.2, without the advance written consent of SBCL. 6.5.2 ActaMed shall be responsible for assigning Transferred Employees to principal work locations, which shall be the same as the locations to which such Transferred Employees were assigned as of December 31, 1997. Except as may otherwise be agreed by SBCL and ActaMed in a writing signed by the parties, SBCL shall make the business facilities to which Transferred Employees are currently assigned available to ActaMed for the purpose of location assignments of Transferred Employees until not later than the [*] anniversary of the Transfer Date of the Region to which a Transferred Employee is assigned. 6.5.3 SBCL shall not solicit the employment of, hire or employ any Transferred Employee until after the earlier of (i) such Transferred Employee's termination of employment by ActaMed with cause, (ii) such Transferred Employee's voluntary resignation from ActaMed, [*] (iii) [*] or (iv) the termination of this Assets Purchase Agreement pursuant to Section 10.1, in which event ActaMed shall, at SBCL's request, use its best efforts to cooperate with SBCL in facilitating SBCL's solicitation to re-hire such Transferred Employees. SECTION 6.6 PAYMENT OF WAGE AND BENEFIT COSTS. 6.6.1 PERIOD FROM JANUARY 1, 1998 THROUGH THE HIRE DATE. For the period beginning January 1, 1998 and extending through the Hire Date, with respect to each individual identified on SCHEDULE VI as a Transferred Employee, ActaMed shall reimburse SBCL for such individuals' base salary, paid time off, the employer-paid portion of employment and unemployment insurance or taxes, the employer-paid portion of premiums payable with respect to all insured benefits, with respect to medical and dental benefits for individuals who participate in the self-insured medical and dental program sponsored by SBCL, the pro rated portion of the excess, if any, of a reasonable premium cost for such coverage, as determined by [*] 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. -39- SBCL, over the amount paid by such individual for such coverage, the present value of additional accruals under the SmithKline Beecham Pension Plan, as determined by the Plan's actuary and employer contributions payable under the SmithKline Beecham Retirement Savings Plan. SBCL will bill such employee costs to ActaMed by or before January 31, 1998, and ActaMed will remit payment to SBCL for such employee costs within 30 days of receipt of the bill for such costs. 6.6.2 DURING TRANSITION. Except as otherwise provided in SCHEDULE VI, SBCL will reimburse ActaMed for certain direct compensation and benefit costs incurred by ActaMed with respect to each Transferred Employee during the Transitional Employee Leasing Arrangement period (as hereinafter defined, the "Employee Costs"). For purposes of this Article VI, Employee Costs will include base salary, paid time off pursuant to the paid time off policy described in SCHEDULE VI, the employer-paid portion of employment and unemployment insurance or taxes, the employer-paid portion of premiums payable with respect to the insured benefits set forth on SCHEDULE VI, employer contributions made under any ActaMed qualified defined contribution plan, and with respect to short term disability benefits for individuals who participate in the self-insured short term disability plan sponsored by ActaMed, the pro rated portion of the excess, if any, of a reasonable premium cost for such coverage, as determined by ActaMed, over the amount paid by such individual for such coverage. In addition, for each Transferred Employee, for each of 1998 and 1999, Employee Costs will include an amount equal to [*] of [*] to such Transferred Employee [*], the [*] is the [*] during which such Transferred Employee was [*], and the [*]. ActaMed will bill such Employee Costs to SBCL monthly, and SBCL will remit payment to ActaMed for such Employee Costs within 30 days of receipt of the bill for such costs. 6.6.3 STAY BONUS AND BONUS. (a) Stay Bonus. SBCL will reimburse ActaMed for [*] of the stay bonus payments described in SCHEDULE VI and actually made by ActaMed within thirty (30) days following SBCL's receipt of the bill for such costs. (b) Bonus. ActaMed will pay, and SBCL will reimburse ActaMed for, bonus payments as described in the bonus provisions of SCHEDULE VI. SECTION 6.7 TAXES, UNEMPLOYMENT INSURANCE AND RELATED ITEMS. ActaMed agrees to accept and hereby accepts full and exclusive responsibility for the payment of any and all contributions or taxes, or both, for any unemployment insurance or taxes, medical and old age retirement benefits, pensions or annuities now or hereafter imposed under any law of the United States or any State, which are measured by the wages, salaries or other remuneration paid to persons employed by ActaMed on the work covered by this Article VI or in any way connected [*] 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. -40- therewith; and ActaMed shall reimburse SBCL for any of the contributions or taxes, or both, or any part thereof, if SBCL may be required by law to pay the same or any part thereof. SECTION 6.8 EXAMINATION AND AUDIT. For the Transitional Employee Leasing Arrangement period, and for three calendar years after final payment is made to ActaMed by SBCL pursuant to Section 6.6, ActaMed shall establish and maintain relevant books, records, payroll records, receipts, documents, papers and any other data or information which support and substantiate the charges made to and payments received from SBCL under Section 6.2. During such time, SBCL or its designated representative shall have access to and the right to examine any relevant books, records, documents, papers, receipts and any other data or information of ActaMed relating to ActaMed's obligations under this Article VI. ARTICLE 7 CONDITIONS PRECEDENT TO OBLIGATIONS OF ACTAMED SECTION 7.1 CONDITIONS PRECEDENT TO OBLIGATIONS OF ACTAMED. The obligations of ActaMed to consummate the transactions contemplated by this Assets Purchase Agreement shall be subject to the satisfaction, on or before the Applicable Transfer Date, of each and every one of the following conditions, all or any of which may be waived, in whole or in part, by ActaMed for purposes of consummating such transactions, but without prejudice to any other right or remedy which ActaMed may have hereunder as a result of any misrepresentation by, or breach of any agreement, covenant or warranty of SBCL contained in this Assets Purchase Agreement or any Schedule, certificate or instrument furnished or caused to be furnished by SBCL hereunder. 7.1.1 REPRESENTATIONS TRUE. The representations and warranties made by SBCL in this Assets Purchase Agreement, with any exceptions set forth in the Disclosure Schedules attached to the Compliance Certificate, shall be true and correct in all material respects on the Applicable Transfer Date, with the same force and effect as if such representations and warranties had been made on and as of such Applicable Transfer Date. The Disclosure Schedules shall not identify any item indicating that the business or financial condition of SBCL or SBCL's provision of or ability to provide Lab EDI Services to SBCL Sites has been materially and adversely impacted, or which would impair SBCL's ability to perform its obligations hereunder, including its ability to deliver the SCAN Assets to ActaMed. 7.1.2 COVENANTS. All of the terms, covenants and conditions in this Assets Purchase Agreement and the other SBCL Documents to be complied with or performed by SBCL on or prior to the Region One Transfer Date shall have been complied with and performed in all material respects. 7.1.3 NO INJUNCTION, ETC. No action, proceeding, investigation or Regulation shall have been instituted, threatened or proposed before any court, governmental -41- agency or legislative body to enjoin, restrain, prohibit, or obtain substantial damages in respect of, or which is related to, or arises out of, this Assets Purchase Agreement or the consummation of the transactions contemplated hereby, or which is related to or arises out of the provision of Lab EDI Services, if such action, proceeding, investigation or Regulation, in the reasonable judgment of ActaMed, would make it inadvisable to consummate the transactions contemplated on such Transfer Date. 7.1.4 APPROVAL OF LEGAL MATTERS. All actions, proceedings, instruments and documents deemed necessary or appropriate by ActaMed or their counsel to effectuate this Assets Purchase Agreement and the consummation of the transactions contemplated hereby, or incidental thereto, and all other related legal matters, shall have been approved by such counsel. 7.1.5 GOVERNMENTAL APPROVALS. All governmental and other consents and approvals, if any, necessary to permit the consummation of the transactions contemplated by this Assets Purchase Agreement on such Transfer Date shall have been received by ActaMed. SECTION 7.2 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SBCL. The obligations of SBCL to consummate the transactions contemplated by this Assets Purchase Agreement shall be subject to the satisfaction, on or before each Transfer Date, of each and every one of the following conditions, all or any of which may be waived, in whole or in part, by SBCL for purposes of consummating such transactions, but without prejudice to any other right or remedy which SBCL may have hereunder as a result of any misrepresentation by, or breach of any agreement, covenant or warranty of ActaMed contained in this Assets Purchase Agreement, or any certificate or instrument furnished by it hereunder. 7.2.1 REPRESENTATIONS TRUE. The representations and warranties made by ActaMed in this Assets Purchase Agreement, with any exceptions set forth in the Disclosure Schedules attached to the Compliance Certificate, shall be true and correct in all material respects on the Applicable Transfer Date, with the same force and effect as if such representations and warranties had been made on and as of such Applicable Transfer Date. The Disclosure Schedules shall not identify any item indicating that the business or financial condition of ActaMed has been materially and adversely impacted, or which would impair ActaMed's ability to perform its obligations hereunder. 7.2.2 COVENANTS. All of the terms, covenants and conditions in the ActaMed Documents to be complied with or performed by ActaMed on or prior to the Transfer Date shall have been complied with and performed in all material respects. 7.2.3 NO INJUNCTION, ETC. No action, proceeding, investigation or Regulation shall have been instituted, threatened or proposed before any court, governmental agency or legislative body to enjoin, restrain, prohibit, or obtain substantial damages in respect of, or which is related to, or arises out of, this Assets Purchase Agreement or the consummation of the transactions contemplated hereby, or which is related to or arises out of the business of ActaMed, if such action, proceeding, investigation or Regulation, in the reasonable judgment of -42- SBCL, would make it inadvisable to consummate the transactions contemplated on such Transfer Date. 7.2.4 APPROVAL OF LEGAL MATTERS. All actions, proceedings, instruments and documents deemed necessary or appropriate by SBCL or its counsel to effectuate this Assets Purchase Agreement and the consummation of the transactions contemplated hereby, or incidental hereto, and all other related legal matters, shall have been approved by such counsel. 7.2.5 GOVERNMENTAL APPROVALS. All governmental and other consents and approvals, if any, necessary to permit the consummation of the transactions contemplated by this Assets Purchase Agreement shall have been received by SBCL. ARTICLE 8 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS AND INDEMNIFICATION SECTION 8.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. 8.1.1 SURVIVAL OF SBCL REPRESENTATIONS, WARRANTIES AND COVENANTS. ActaMed and SBCL acknowledge and agree that, as contemplated by Section 4.3.1, prior to each of the Transfer Dates, ActaMed intends to perform such investigation of the SCAN Assets to be transferred on such Transfer Date and related Lab EDI Services provided by SBCL as ActaMed may deem appropriate; PROVIDED, HOWEVER, no investigation by ActaMed shall diminish or otherwise affect any of the representations, warranties, covenants or agreements made or to be performed by SBCL pursuant to this Assets Purchase Agreement or ActaMed's right to rely fully upon such representations, warranties, covenants and agreements. All such representations, warranties, covenants and agreements made or to be performed by SBCL pursuant to this Assets Purchase Agreement shall survive the execution and delivery hereof and each of the Transfer Dates hereunder indefinitely except to the extent limited by this Section 8.1.1. The representations and warranties shall terminate and expire, (a) with respect to any General Claim based on a breach thereof (other than one based on a breach of Section 3.1.3 hereof) with respect to which a Claims Notice has not been given, after [*] from the Transfer Date of the SCAN Assets as to which the representation and warranty was made, (b) with respect to any General Claim based upon a breach of Section 3.1.3 hereof, after the earlier of (i) [*] or (ii) [*] days after the Region Four Transfer Date, and (c) with respect to a Tax Claim, on the later of (i) the [*] after the date upon which the Liability to which any such Tax Claim may relate is barred by all applicable statutes of limitation and (ii) the [*] after the date upon which any claim for refund or credit related to such Tax Claim is barred by all applicable statutes of limitation. A Claims Notice for a General Claim based on a breach of covenant may be given at any time up to the [*] of the date on which the breach of such covenant occurred. With respect to any Ownership Claim, Undisclosed Liability Claim or any type of claim not specifically addressed [*] 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. -43- above, such representations, warranties, covenants and agreements shall survive without limit of time. 8.1.2 SURVIVAL OF ACTAMED REPRESENTATIONS, WARRANTIES AND COVENANTS. All the representations, warranties, covenants and agreements, made or to be performed by ActaMed pursuant to this Assets Purchase Agreement shall survive the execution and delivery hereof indefinitely except to the extent limited by this Section 8.1.2. No investigation by SBCL shall diminish or otherwise affect any of the representations, warranties, covenants or agreements made or to be performed by ActaMed pursuant to this Assets Purchase Agreement or SBCL's right to rely fully upon such representations, warranties, covenants and agreements. All such representations, warranties, covenants and agreements shall be considered to have been relied upon by SBCL and shall survive the delivery to SBCL of the shares of Series D Preferred Stock (and the Conversion Shares). The representations and warranties shall terminate and expire (a) with respect to a General Claim based on a breach thereof for which a Claims Notice has not been given, after [*] from the Transfer Date with respect to which such representation and warranty was made, (b) with respect to a Tax Claim, on the later of (i) the [*] after the date upon which the Liability to which any such Tax Claim may relate is barred by all applicable statutes of limitation and (ii) the [*] after the date upon which any claim for refund or credit related to such Tax Claim is barred by all applicable statutes of limitation and (c) with respect to the covenants of ActaMed set forth in Sections 5.1.3 and 5.1.6 hereof, upon the closing of a Public Offering. A Claims Notice for a General Claim based on a breach of covenant may be given at any time up to the [*] of the date on which the breach of such covenant occurred. With respect to any Ownership Claim, Undisclosed Liability Claim or any type of claim not specifically addressed above, such representations, warranties, covenants and agreements shall survive without limit of time. SECTION 8.2 OBLIGATION TO INDEMNIFY. 8.2.1 OBLIGATIONS OF SBCL TO INDEMNIFY. Subject to the limitations of Sections 8.1.1, 8.2.6 and 8.2.9, SBCL agrees to indemnify and hold harmless each ActaMed Indemnitee against and in respect of: (a) all Losses imposed upon or incurred by any ActaMed Indemnitee by reason of or resulting from: (i) a breach of any representation or warranty of SBCL contained in or made pursuant to this Assets Purchase Agreement other than the representation contained in Section 3.1.3(a); or (ii) any nonfulfillment of any covenant or agreement of SBCL contained in or made pursuant to this Assets Purchase Agreement; or (iii) any Liability of SBCL not assumed by ActaMed hereunder, including without limitation any Liability for any Taxes attributable to ownership of [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -44- SCAN Assets or SBCL's provision of Lab EDI Services in a Region prior to its Transfer Date in accordance herewith. (b) any and all actions, suits, claims, proceedings, investigations, demands, assessments, audits, fines, judgments, costs and other expenses (including, without limitation, reasonable legal fees and expenses) incident to any Loss in connection with Section 8.2.1(a) or to the enforcement of this Section 8.2.1; (c) all Losses imposed upon or incurred by any ActaMed Indemnitee by reason of or resulting from any Litigation pending or threatened, arising out of or relating to the provision of Lab EDI Services at an SBCL Site hereunder, regardless of whether it is disclosed in any Section of the Disclosure Schedule called for by Section 3.1 or Section 2.5.2 hereof; PROVIDED, HOWEVER that, to the extent that any such Loss arises out of the actions of a Transferred Employee, SBCL shall only be obligated to indemnify and hold harmless an ActaMed Indemnitee hereunder if such Transferred Employee was acting subject to SBCL's general oversight and guidance pursuant to Section 6.2 hereof. 8.2.2 OBLIGATION OF ACTAMED TO INDEMNIFY. Subject to the limitations of Section 8.1.2 and Section 8.2.6, ActaMed agrees to indemnify and hold harmless each SBCL Indemnitee against and in respect of: (a) all Losses imposed upon or incurred by any SBCL Indemnitee by reason of or resulting from: (i) a breach of any representation or warranty of ActaMed contained in or made pursuant to this Assets Purchase Agreement; or (ii) any nonfulfillment of any covenant or agreement of ActaMed contained in or made pursuant to this Assets Purchase Agreement; and (iii) any Liability of ActaMed (other than a Liability indemnified by SBCL pursuant to Section 8.2.1) attributable to ownership of SCAN Assets or ActaMed's provision of Lab EDI Services in a Region after its Transfer Date in accordance herewith; PROVIDED that if the Services Agreement provides for indemnification for any such Liability, then no such claim shall be brought hereunder. (b) any and all actions, suits, claims, proceedings, investigations, demands, assessments, audits, fines, judgments, costs and other expenses (including, without limitation, reasonable legal fees and expenses) incident to any Loss in connection with Section 8.2.2(a) or to the enforcement of this Section 8.2.2. (c) all Losses imposed upon or incurred by any SBCL Indemnitee by reason of or resulting from any Litigation pending or threatened, arising out of or relating to use of SCAN Assets at an ActaMed Site -45- after such site became an ActaMed Site hereunder, regardless of whether it is disclosed in the Disclosure Schedule by reason of Section 3.2 or Section 2.6.3 hereof. (d) all Losses imposed upon or incurred by SBCL by reason of SBCL premises being used by Transferred Employees on or after the Hire Date. 8.2.3 CLAIMS NOTICE. A Claim shall be made by any Indemnitee by delivery of a Claims Notice to the Indemnifying Party requesting indemnification and specifying the basis on which indemnification is sought and the amount of asserted Losses and, in the case of a Third Party Claim, containing (by attachment or otherwise) such other information as such Indemnitee shall have concerning such Third Party Claim. 8.2.4 PROCEDURES INVOLVING NON-THIRD PARTY CLAIMS. If the Claim involves a matter other than a Third Party Claim, the Indemnifying Party shall have forty-five (45) days to object to such Claim by delivery of a written notice of such objection to such Indemnitee specifying in reasonable detail the basis for such objection. If an objection is timely made by the Indemnifying Party, the Indemnifying Party and the Indemnitee shall cooperate in the compromise of the Claim with ultimate resolution of the validity of such Claim to be determined under Article IX. Failure to object in a timely manner shall constitute a final and binding acceptance of the Claim by the Indemnifying Party on behalf of all Indemnitors, and the Claim shall be paid in accordance with Section 8.2.8 hereof. 8.2.5 PROCEDURES INVOLVING THIRD PARTY CLAIMS. The obligations and liabilities of the parties hereunder with respect to a Third Party Claim shall be subject to the following terms and conditions: (a) The Indemnitee shall give the Indemnifying Party written notice of a Third Party Claim promptly after receipt by the Indemnitee of notice thereof, and the Indemnifying Party may undertake the defense, compromise and settlement thereof by representatives of its own choosing reasonably acceptable to the Indemnitee. The failure of the Indemnitee to notify the Indemnifying Party of such claim shall not relieve the Indemnifying Party of any liability that it may have with respect to such claim except to the extent the Indemnifying Party demonstrates that the defense of such claim is prejudiced by such failure. The assumption of the defense, compromise and settlement of any such Third Party Claim by the Indemnifying Party shall be an acknowledgment of the obligation of the Indemnifying Party to indemnify the Indemnitee with respect to such claim hereunder. If the Indemnitee desires to participate in, but not control, any such defense, compromise and settlement, it may do so at its sole cost and expense. If, however, the Indemnifying Party fails or refuses to undertake the defense of such Third Party Claim within ten (10) days after written notice of such claim has been given to the Indemnifying Party by the Indemnitee, the Indemnitee shall have the right to undertake the defense, compromise and settlement of such claim with counsel of its own choosing. In the circumstances described in the preceding sentence, the Indemnitee shall, promptly upon its assumption of the defense of such claim, make a Claim as specified in -46- Section 8.2.1(b) or 8.2.2(b) which shall be deemed a Claim that is not a Third Party Claim for the purposes of the procedures set forth herein. (b) If, in the reasonable opinion of the Indemnitee, any Third Party Claim or the litigation or resolution thereof involves an issue or matter which could have a material adverse effect on the business, operations, assets, properties or prospects of the Indemnitee (including, without limitation, the administration of the tax returns and responsibilities under the tax laws of the Indemnitee), the Indemnitee shall have the right to control the defense, compromise and settlement of such Third Party Claim undertaken by the Indemnifying Party, and the reasonable costs and expenses of the Indemnitee in connection therewith shall be included as part of the indemnification obligations of the Indemnifying Party hereunder. If the Indemnitee shall elect to exercise such right, the Indemnifying Party shall have the right to participate in, but not control, the defense, compromise and settlement of such Third Party Claim at its sole cost and expense. (c) No settlement of a Third Party Claim involving the asserted liability of the Indemnifying Party under this Article shall be made without the prior written consent by or on behalf of the Indemnifying Party, which consent shall not be unreasonably withheld or delayed. If the Indemnifying Party assumes the defense of such a Third Party Claim, (1) no compromise or settlement thereof may be effected by the Indemnifying Party without the Indemnitee's consent unless (a) there is no finding or admission of any violation of law or any violation of the rights of any Person and no effect on any other claim that may be made against the Indemnitee (b) the sole relief provided is monetary damages that are paid in full by the Indemnifying Party and (c) the compromise or settlement includes, as an unconditional term thereof, the giving by the claimant or the plaintiff to the Indemnitee of a release, in form and substance reasonably satisfactory to the Indemnitee, from all liability in respect of such Third Party Claim, and (2) the Indemnitee shall have no liability with respect to any compromise or settlement thereof effected without its consent. 8.2.6 LIMITATIONS ON INDEMNIFICATION. (a) No Party to this Assets Purchase Agreement shall be entitled to indemnification under this Assets Purchase Agreement to the extent that such Party's Losses are increased or extended by the willful misconduct, violation of law or bad faith of such Party. (b) No Indemnifying Party shall be required to indemnify an Indemnitee with respect to any Loss arising out of or with respect to a Claim unless the amount of such Loss, when aggregated with all other such Losses, shall (i) exceed [*], at which time Claims may be asserted to the extent that all Losses or Asserted Liabilities are in excess of such threshold amount; PROVIDED, however, that such threshold amount shall not apply to any (a) Loss which results from or arises out of an Ownership Claim, a Tax Claim or Undisclosed Liability Claim, (b) Loss which results from or arises out of fraud or intentional misrepresentation or an intentional breach of a representation, [*] 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. -47- warranty, covenant or agreement in this Assets Purchase Agreement; (c) Claim which is based upon Section 8.2.1(a)(iii) or 8.2.2(a)(iii) or (d) Loss which results from or arises out of any Litigation incident to any of the matters referred to in the foregoing clauses (a) and (b); and (ii) be less than [*], PROVIDED that such cap shall not apply to (a) a General Claim which is based upon a breach by SBCL of its representations and warranties set forth in Sections 3.1.7(a) or (b) hereof or a breach of its covenant set forth in Section 4.4 hereof, (b) a General Claim which is based upon a breach by ActaMed of its representation and warranty set forth in Section 3.2.14 or a breach of its covenant set forth in Section 4.4 hereof, or (c) a Claim which is based upon Section 8.2.1(a)(iii) or 8.2.2(a)(iii). Notwithstanding the foregoing, for any breach of Section 3.1.6(a)-(c), SBCL shall indemnify each ActaMed Indemnitee for any individual Loss in excess of [*] per item of tangible personal property and any aggregate Loss exceeding [*] for items of tangible personal property. 8.2.7 NO RELEASE FOR FRAUD. Nothing contained in this Assets Purchase Agreement shall relieve or limit the liability of any Party or any officer or director of such Party from any Liability arising out of or resulting from common law fraud or intentional misrepresentation in connection with the transactions contemplated by this Assets Purchase Agreement or in connection with the delivery of any of the Transaction Documents. Each Party shall have a right to indemnification for any Loss incurred as the result of any common law fraud or intentional misrepresentation by any other Party or any officer or director of such other Party without regard to the Threshold Amount, the maximum liability or any period of limitation. 8.2.8 PAYMENT. (a) If any Party is required to make any payment under this Article, such Party shall promptly pay the Indemnified Party the amount so determined. If there is a dispute as to the amount or manner of determination of any indemnity obligation owed under this Article, the Indemnifying Party shall nevertheless pay when due such portion, if any, of the obligation as shall not be subject to dispute. The difference, if any, between the amount of the obligation ultimately determined as properly payable under this Article and the portion, if any, theretofore paid shall bear interest as provided in Section 8.2.8(c). (b) Any items as to which an Indemnified Party is entitled to payment under this Article may be paid by set-off against amounts payable to the Indemnifying Party to the extent that such amounts are sufficient to pay such items. (c) If all or part of any indemnification obligation under this Assets Purchase Agreement is not paid when due, then the Indemnifying Party shall pay the Indemnified Party interest on the unpaid principal amount of the obligation from the date the amount became due until payment in full, at the per annum rate of interest announced from time to time by NationsBank South, N.A., to be its "prime rate." [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -48- 8.2.9 SPECIAL INDEMNITY AS TO PROJECTIONS. Notwithstanding Section 8.2.6(b), SBCL shall pay to ActaMed any amount by which (x) the aggregate general expenses incurred by ActaMed for goods and services reflected on SCHEDULE 3.1.3 under the Subtotals [*] in connection with ActaMed's provision of Lab EDI Services to the Fixed Fee Sites (as defined in the Services Agreement), taking into account that the Projections are based on [*] SCAN Sites, the number of SCAN Sites actually transferred to ActaMed and the staging of their transfer, excluding one-time or transactional expenses (which amount shall include any expenses incurred with respect to this transaction), and less any increased expenses incurred as a result of providing the Agreed Services (as defined in the Services Agreement) in a different manner than SBCL did prior to the transfer of such SCAN Sites exceeds (y) [*] of the Projections. 8.2.10 EXCLUSIVE REMEDY. Except for equitable remedies and any action for common law fraud, the remedies provided in this Article constitute the sole and exclusive remedies for recovery against the Indemnifying Party based upon this Assets Purchase Agreement. ARTICLE 9 DISPUTE RESOLUTION SECTION 9.1 INFORMAL DISPUTE RESOLUTION. Any dispute between the parties arising out of or with respect to this Assets Purchase Agreement, either with respect to the interpretation of any provision of this Assets Purchase Agreement or with respect to the performance by ActaMed or SBCL, shall be resolved as provided in this Article. 9.1.1 INFORMAL DISPUTE RESOLUTION. Prior to the initiation of formal dispute resolution procedures, the parties shall first attempt to resolve their dispute informally, as follows: (a) The Relationship Managers for each Party shall meet for the purpose of endeavoring to resolve such dispute. They shall meet as often as the parties reasonably deem necessary in order to gather and furnish to the other all information with respect to the matter in issue which the parties believe to be appropriate and germane in connection with its resolution. The Relationship Managers shall discuss the problem and negotiate in good faith in an effort to resolve the dispute without the necessity of any formal proceeding. During the course of negotiations, all reasonable requests made by one Party to another for nonprivileged information, reasonably related to this Assets Purchase Agreement, shall be honored in order that each of the parties may be fully advised of the other's position. (b) If, within fifteen (15) days after a matter has been identified for resolution pursuant to this Article, either of the Relationship Managers concludes in good faith that amicable resolution through continued negotiation in this forum does not appear likely, [*] 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. -49- the matter will be escalated by formal written notification to the SBCL President and the ActaMed President. The Parties will use their respective best efforts to cause the SBCL President and the ActaMed President to meet to attempt to resolve the dispute. (c) Formal proceedings for the resolution of a dispute may not be commenced until the earlier of: (i) the date on which the SBCL President and the ActaMed President conclude in good faith that amicable resolution through continued negotiation of the matter does not appear likely; or (ii) thirty (30) days after the dispute has been referred to the SBCL President and the ActaMed President. 9.1.2 FORMAL PROCEEDINGS PERMITTED. The provisions of this Section 9.1 shall not be construed to prevent a party from instituting, and a party being authorized to institute, formal proceedings earlier to avoid the expiration of any applicable limitations period or any period provided for in Section 8.1. SECTION 9.2 ARBITRATION. If the parties are unable to resolve any controversy arising under this Assets Purchase Agreement as contemplated by Section 9.1 and if such controversy is not subject to Article VIII or Section 9.3, then such controversy shall be submitted to mandatory and binding arbitration at the election of either party (the "Disputing Party") pursuant to the following conditions: 9.2.1 SELECTION AND REPLACEMENT OF ARBITRATORS. The Disputing Party shall notify the AAA and the other party in writing describing in reasonable detail the nature of the dispute (the "DISPUTE NOTICE"). Each of the parties shall select a neutral arbitrator in accordance with the rules of AAA, and the two arbitrators so selected shall select a third neutral arbitrator (the three arbitrators referred to in this Section being hereinafter referred to as the "PANEL"). 9.2.2 CONDUCT OF ARBITRATION. The Panel shall allow reasonable discovery as permitted by the Federal Rules of Civil Procedure, to the extent consistent with the purpose of the arbitration. The panel shall have no power or authority to amend or disregard any provision of this Section. The arbitration hearing shall be commenced promptly and conducted expeditiously, with each of ActaMed and SBCL being allocated one-half of the time for the presentation of its case. Unless otherwise agreed to by the parties, an arbitration hearing shall be conducted on consecutive days. 9.2.3 REPLACEMENT OF ARBITRATOR. Should an arbitrator refuse or be unable to proceed with arbitration proceedings as called for by this Section, such arbitrator shall be replaced by an arbitrator selected in accordance with the rules of the AAA. 9.2.4 FINDINGS AND CONCLUSIONS. The Panel rendering judgment upon disputes between parties as provided in this Section shall, after reaching judgment and award, prepare and distribute to the parties a writing describing the findings of fact and conclusions of law relevant to such judgment and award and containing an opinion setting forth the reasons for -50- the giving or denial of any award. The award of the Panel shall be final and binding on the parties, and judgment thereon may be entered in a court of competent jurisdiction. 9.2.5 PLACE OF ARBITRATION HEARINGS. Arbitration hearings hereunder shall be held in Washington, D.C. 9.2.6 TIME OF THE ESSENCE. The Panel is instructed that time is of the essence in the arbitration proceeding. The Panel shall render its judgment or award within fifteen (15) days following the conclusion of the hearing. Recognizing the express desire of the parties for an expeditious means of dispute resolution, the Panel shall limit or allow the parties to expand the scope of discovery as may be reasonable under the circumstances. SECTION 9.3 LITIGATION. 9.3.1 IMMEDIATE INJUNCTIVE RELIEF. In the event of a breach of the confidentiality obligations set forth in this Assets Purchase Agreement, or in the event a party makes a good faith determination that a breach of the terms of this Assets Purchase Agreement by the other party is such that the damages to such party resulting from the breach will be so immediate, so large or severe, and so incapable of adequate redress after the fact that a temporary restraining order or other immediate injunctive relief is a necessary remedy, then such party may file a pleading with a court seeking immediate injunctive relief. If a party files a pleading with a court seeking immediate injunctive relief and this pleading is challenged by the other party and the injunctive relief sought is not awarded in substantial part (or in the event of a temporary restraining order is vacated upon challenge by the other party), the party filing the pleading seeking immediate injunctive relief shall pay all of the costs and attorneys' fees of the party successfully challenging the pleading. 9.3.2 JURISDICTION. ActaMed and SBCL each consent to venue in Philadelphia, Pennsylvania and to the nonexclusive jurisdiction of competent Pennsylvania state courts or federal courts located in Philadelphia for all litigation which may be brought, subject to the requirement for arbitration hereunder, with respect to the terms of, and the transactions and relationships contemplated by, this Assets Purchase Agreement. ARTICLE 10 TERMINATION SECTION 10.1 TERMINATION. 10.1.1 METHOD OF TERMINATION. This Assets Purchase Agreement and the transactions contemplated hereby may be terminated at any time prior to a Transfer Date: (a) by the mutual consent of SBCL and ActaMed; -51- (b) by SBCL by written notice of termination to ActaMed given after ActaMed shall have failed to meet the Transfer Benchmarks with respect to a Region by any applicable Measurement Date; (c) by ActaMed, if SBCL shall (1) fail to perform in any material respect its agreements contained herein required to be performed by it on or prior to such Transfer Date, or (2) materially breach any of its representations, warranties or covenants contained herein; (d) by SBCL, if ActaMed shall (1) fail to perform in any material respect its agreements contained herein required to be performed by it on or prior to such Transfer Date, or (2) materially breach any of its representations, warranties or covenants contained herein; (e) by either SBCL or ActaMed if there shall be any order, writ, injunction or decree of any court or governmental or regulatory agency binding on ActaMed or SBCL which prohibits or restrains ActaMed or SBCL from consummating the transactions contemplated by this Assets Purchase Agreement, provided that ActaMed and SBCL shall have used their best efforts to have any such order, writ, injunction or decree lifted and the same shall not have been lifted within thirty (30) days after entry; (f) by SBCL if SBCL terminates the Services Agreement; or (g) by ActaMed if ActaMed terminates the Services Agreement. 10.1.2 NOTICE OF TERMINATION. Notice of termination of this Assets Purchase Agreement, as provided for in this Article, shall be given by the party so terminating to the other party in accordance with Section 11.1.1 of this Assets Purchase Agreement. Any such termination shall be effective as of the date of such notice, unless otherwise provided in such notice. 10.1.3 EFFECT OF TERMINATION. If this Assets Purchase Agreement is terminated pursuant to Section 10.1 then, with respect to all transactions contemplated by this Assets Purchase Agreement as to which no Transfer Date has occurred (the "Future Transfers"), the obligations of the parties as to such Future Transfers shall become void and of no further force and effect, and each party shall pay the costs and expenses incurred by it in connection with this Assets Purchase Agreement as set forth herein and no party (nor any of its officers, directors, employees, agents, representatives or stockholders) shall be liable to any other party for any costs, expenses, damages (direct or indirect) or loss of anticipated profits for Future Transfers. SECTION 10.2 RISK OF LOSS. SBCL assumes all risk of destruction, loss or damage due to fire or other casualty to the SCAN Assets located at SBCL Sites. SBCL shall remit all insurance proceeds relating to SCAN Assets not transferred by reason of such destruction, loss or -52- damage to ActaMed. If ActaMed and SBCL are unable to agree upon the amount of such insurance proceeds applicable to the affected SCAN Assets, the dispute shall be resolved jointly by the independent accounting firms then employed by ActaMed and SBCL, and if said accounting firms do not agree, they shall appoint a nationally recognized accounting firm, whose determination of the dispute shall be final and binding. ARTICLE 11 MISCELLANEOUS SECTION 11.1 GENERAL PROVISIONS. 11.1.1 NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been given if (1) delivered by hand or if mailed by United States registered or certified mail, return receipt requested, first class postage prepaid, (2) sent by Federal Express or similar overnight courier service to the parties or their assignees, or (3) sent by telecopy to the number set forth below and promptly followed by a written copy sent by any other means specified herein, addressed as follows: If to SBCL: SmithKline Beecham Clinical Laboratories, Inc. 1201 South Collegeville Road Collegeville, PA 19426 Attention: John B. Okkerse, Jr., PhD, President Telephone: [*] Telecopy: [*] with a copy to: SmithKline Beecham Corporation One Franklin Plaza 16th and Race Streets Philadelphia, PA 19103 Attention: General Counsel-U.S. Telephone: [*] Telecopy: [*] [*] 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. -53- If to ActaMed: ActaMed Corporation Suite 600 7000 Central Parkway Atlanta, Georgia 30328 Attention: Chief Financial Officer Telephone: (770) 352-1600 Telecopy: (770) 352-1815 with a copy to: Alston & Bird One Atlantic Center 1201 West Peachtree Street Atlanta, Georgia 30309-3424 Attention: John C. Weitnauer, Esq. Telephone: (404) 881-7780 Telecopy Number: (404) 881-7777 (a) If delivered personally, the date on which a notice, request, instruction or document is delivered shall be the date on which such delivery is made and, if delivered by mail, telecopy, Federal Express or other overnight courier, the date on which such notice, request, instruction or document is first received shall be the date of delivery. (b) Any party hereto may change its address specified for notices herein by designating a new address by notice in accordance with this Section 11.1. (c) Failure of any party to send a copy of any notice to counsel for the other Party shall not affect in any way the validity of such notice to other party. 11.1.2 FURTHER ASSURANCES. Each party covenants that at any time, and from time to time, after any Transfer Date, it will execute such additional instruments and take such actions as may be reasonably requested by the other party to confirm or perfect or otherwise to carry out the intent and purposes of this Assets Purchase Agreement. 11.1.3 WAIVER. Any failure on the part of any party hereto to comply with any of its obligations, agreements or conditions hereunder may be waived by any other party to whom such compliance is owed. No waiver of any provision of this Assets Purchase Agreement shall be deemed, or shall constitute, a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. 11.1.4 ASSIGNMENT. This Assets Purchase Agreement shall not be assignable by any of the parties hereto without the written consent of the other party hereto, and -54- no rights under this Assets Purchase Agreement may be transferred without the consent of the non-transferring party, except that: (a) the rights of ActaMed under this Assets Purchase Agreement may be transferred to any Person that acquires all or substantially all of the business or assets of ActaMed related to the ActaLab Software and the Network (whether by purchase of assets, merger or other corporate reorganization), [*]; (b) the rights of SBCL under this Assets Purchase Agreement may be transferred before or after the last Transfer Date in connection with a transfer of shares of Series D Preferred Stock made in accordance with the provisions of the Stockholders' Agreement; and (c) all the rights of SBCL may be transferred to an Affiliate of SBCL or an acquiror of substantially all of its assets (whether by purchase of assets, merger or other corporate reorganization). Any attempted assignment without such consent shall be void. If the parties cannot agree upon whether a company competes with SBCL, the parties shall resolve the dispute pursuant to Article IX. Any assignment with consent does not release the assigning party from any of its obligations under this Assets Purchase Agreement unless the consent so states. Any transferee of SBCL permitted pursuant to clause (b) above shall execute and deliver to ActaMed an instrument satisfactory to it agreeing to be bound by the provisions hereof and of the Stockholders' Agreement and the Registration Rights Agreement. 11.1.5 BINDING EFFECT. Subject to the limitations on transfer set forth in Section 11.1.4, this Assets Purchase Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, executors, administrators, successors and assigns. 11.1.6 KNOWLEDGE. The use of the terms "to ActaMed's knowledge" or words of similar import shall refer to the facts known to [*] Michael K. Hoover and [*] after reasonable inquiry. The use of the terms "to SBCL's knowledge" or words of similar import shall refer to the facts known to [*] after reasonable inquiry. 11.1.7 HEADINGS. The section and other headings in this Assets Purchase Agreement are inserted solely as a matter of convenience and for reference, and are not a part of this Assets Purchase Agreement. 11.1.8 ENTIRE AGREEMENT. This Assets Purchase Agreement and the Exhibits, Schedules, certificates and other documents delivered pursuant hereto or incorporated [*] 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. -55- herein by reference, contain and constitute the entire agreement among the parties hereto and supersede and cancel any prior agreements, representations, warranties, or communications, whether oral or written, among the parties hereto relating to the transactions contemplated hereby or the subject matter herein. This Assets Purchase Agreement may be changed, waived, discharged or terminated only by an agreement in writing signed by (a) ActaMed and (b) SBCL or, after the last of the Transfer Dates, the holder(s) of a majority of the Shares of Series D Preferred Stock and any Conversion Shares considered as a single class. 11.1.9 GOVERNING LAW. Except for the matters referred to by Section 9.3, this Assets Purchase Agreement shall be governed by and construed in accordance with the laws of the State of Georgia. 11.1.10 COUNTERPARTS. This Assets Purchase Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 11.1.11 PRONOUNS. All pronouns used herein shall be deemed to refer to the masculine, feminine or neutral gender as the context requires. 11.1.12 TIME OF ESSENCE. Time is of the essence in this Assets Purchase Agreement. 11.1.13 SCHEDULES AND EXHIBITS. All Schedules and Exhibits attached to this Assets Purchase Agreement are by this reference made a part hereof. [SPACE INTENTIONALLY LEFT BLANK] -56- IN WITNESS WHEREOF, the parties hereto have executed this Assets Purchase Agreement under seal as of the day and year first above written. ActaMed Corporation /s/ ----------------------------------- By: Michael K. Hoover Its: President SmithKline Beecham Clinical Laboratories, Inc. /s/ ----------------------------------- By: John B. Okkerse Jr. Its: President -57- EXHIBIT A DEFINITIONS "AAA" means the American Arbitration Association. "ActaLab Software" means the ActaLab Software, as defined under the License Agreement. "ActaMed" means ActaMed Corporation, a Georgia corporation. "ActaMed Business" means the business of developing and selling information systems and related technology for the healthcare industry. "ActaMed Common Stock" means the $.01 par value common stock of ActaMed. "ActaMed Documents" has the meaning given in Section 3.2.1 of the Assets Purchase Agreement. "ActaMed Financial Statements" has the meaning given in Section 3.2.3(a) of the Assets Purchase Agreement. "ActaMed Indemnitee" means ActaMed and its directors, officers, employees, affiliates and permitted assigns. "ActaMed Network" means the EDI system and network operated by ActaMed for electronic laboratory test order entry and/or results reporting, which includes the Network Software and ActaMed's gateway and hardware and computer systems needed to operate that software. "ActaMed President" means the President of ActaMed, presently Michael Hoover, or should ActaMed be restructured in any manner, the officer of ActaMed having top authority over ActaMed's operations. "ActaMed Site" means a Provider [*] utilizing the Network for Lab EDI Services that was an SBCL Site on the Transfer Date of the Region in which such Provider [*] is located. "ActaMed Unaudited Statements" has the meaning given in Section 3.2.3(a) of the Assets Purchase Agreement. "Affiliate" means, with respect to any Person, any other Person controlling, controlled by or under common control with such Person. [*] 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-1 "Applicable Transfer Date" means, with respect to an SBCL Site, the Transfer Date of the Region in which the SBCL Site is located. "Articles" means the Fourth Amended and Restated Articles of Incorporation of ActaMed, as the same may be hereafter amended from time to time. "Assumption Agreement" the agreement attached as EXHIBIT 2.6.2 to the Assets Purchase Agreement. "Automated Provider" means a Provider [*] who or which, on the Transfer Date of the Region in which the Provider [*] is located, uses the SCAN Network to send clinical laboratory test orders to an SBCL Lab or to receive test result reports from an SBCL Lab. "Claim" means any claim for indemnification under Article VIII of the Assets Purchase Agreement, including but not limited to a General Claim, a Tax Claim or an Ownership Claim. "Claims Notice" means a written notice of an indemnification claim delivered pursuant to Section 8.2.3 of the Assets Purchase Agreement. "Code" means the Internal Revenue Code of 1986, as amended. "Communication Plan" shall have the meaning assigned in Section 4.3.4. "Contract" means any written contract, agreement, lease, plan, instrument or other document, commitment, arrangement, undertaking, practice or authorization that is or may be binding on any Person or its property under applicable law. "Conversion Shares" means the shares of ActaMed Common Stock issued or issuable upon the conversion of, unless specified otherwise, all of the Preferred Shares. "Court Order" means any judgment, decree, writ, injunction, order or ruling of any federal, state or local court or governmental or regulatory body or authority that is binding on any Person or its property under applicable law. "Default" means (a) a breach of or default under any Contract or License, (b) the occurrence of an event that with the passage of time or the giving of notice or both would constitute a breach of or default under any Contract or License or (c) the occurrence of an event that with or without the passage of time or the giving of notice or both would give rise to a right of termination, renegotiation or acceleration under any Contract or License. "Development Agreement" means the Development Agreement between SBCL and ActaMed dated October 31, 1997 for the initial development of the ActaLab Software. [*] 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-2 "Dispute Notice" has the meaning given in Section 9.2.1 of the Assets Purchase Agreement. "Disputing Party" has the meaning given in Section 9.2 of the Assets Purchase Agreement. "EDI" means electronic data interchange. "Employee Benefit Plan" means any pension, retirement profit-sharing, deferred compensation, bonus, incentive, performance, stock option, phantom stock, stock purchase, restricted stock, medical, hospitalization, vision, dental or other health, life, disability, severance, termination or other employee benefit plan, program, arrangement, agreement or policy, whether written or unwritten, to which ActaMed contributes or is obligated to contribute, is a party to or is otherwise bound, or with respect to which ActaMed may have any Liability. "Employee Computer" shall have the meaning assigned in Section 1.2.1 of this Assets Purchase Agreement. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" means (i) a member of any "controlled group," as defined in Section 414(b) of the Code, of which ActaMed is a member, (ii) a trade or business, whether or not incorporated, under common control (within the meaning of Section 414(c) of the Code) with ActaMed, or (iii) a member of any affiliated service groups (within the meaning of Section 414(m) of the Code) of which ActaMed is a member. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "FASB 5" means Statement of Financing Accounting Standards No. 5 issued by the Financial Accounting Standards Board in March 1975. "Fourth Amended Articles" means the Fourth Amended and Restated Articles of Incorporation of ActaMed. "GAAP" means generally accepted accounting principles. "General Claim" means any claim other than a Tax Claim, Ownership Claim or Undisclosed Liability Claim based upon, arising out of or otherwise in respect of any inaccuracy in any representation or warranty or any breach of any covenant or agreement made or to be performed by a Party pursuant to this Assets Purchase Agreement. "HSR Act" means 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 Regulations promulgated thereunder. A-3 "Implementation Committee" has the meaning given in Section 4.2.2 of the Assets Purchase Agreement. "Implementation Plan" has the meaning given in Section 4.2.1 of the Assets Purchase Agreement. "Indemnifying Party" means the Party obligated to provide indemnification pursuant to Sections 8.2.1 or 8.2.2 of the Assets Purchase Agreement. "Indemnitee" means a Party seeking indemnification under Sections 8.2.1 or 8.2.2 of the Assets Purchase Agreement. "Integrity Agreement" shall have the meaning given in the Services Agreement. "Intellectual Property" means copyrights, trademarks, service marks, trade names, patents, applications therefor, technology rights and licenses, computer software (including, without limitation, any source or object codes therefor or documentation relating thereto), computer software licenses, trade secrets, franchises, know-how, inventions and intellectual property rights. "Lab EDI Services" means electronic connectivity services enabling an Automated Provider to send Transmittal Information electronically to an SBCL Lab and/or to receive electronically Transmittal Information from an SBCL Lab utilizing the Network. "Liability" means any direct or indirect liability, indebtedness, obligation, expense, claim, deficiency, guaranty or endorsement of or by any Person (other than endorsements of notes, bills and checks presented to banks for collection or deposit in the ordinary course of business) of any type, whether accrued, absolute, contingent, matured, unmatured or other. "License Agreement" means the License Agreement between SBCL and ActaMed dated the date of the Assets Purchase Agreement and described in the preamble to the Assets Purchase Agreement. "License" means any license, franchise, notice, permit, easement, right, authorization or filing. "Lien" means any mortgage, lien, security interest, pledge, encumbrance, restriction on transferability, defect of title, charge or claim of any nature whatsoever on any property or property interest. "Litigation" means any lawsuit, action, claim, arbitration, administrative or other proceeding, criminal prosecution or governmental investigation or inquiry involving or affecting a Party or its business, assets or Contracts to which it is a party or by which it or its business, assets or Contracts may be bound or affected. A-4 "Losses" means any and all demands, claims, actions or causes of action, assessments, losses, diminution in value, damages (including special and consequential damages), liabilities, costs, and expenses, including without limitation, interest, penalties, cost of investigation and defense, and reasonable attorneys' and other professional fees and expenses. "Material Adverse Effect" means a material adverse effect on the business or financial condition of ActaMed or on the ability of ActaMed to conduct the ActaMed Business or the impairment of ActaMed's ability to perform its obligations under the ActaMed Documents. "Network" means the SCAN Network and/or the ActaMed Network. "Network Software" means ActaMed's personal computer version of the ProviderLink and ActaLink presentation and network software programs, under whatever name marketed, and the SBCL Software and the ActaLab Software, and all Changes to them, which are licensed to Automated Providers and which allow access to the Network for the transmission of laboratory test order entries and reception of test result information. "New Business Plan" means the New Business Plan for ActaMed prepared in accordance with Section 5.1.8 of this Assets Purchase Agreement. "OIG" shall have the meaning assigned in Section 4.4 of this Assets Purchase Agreement. "Ownership Claim" means any claim arising out of or otherwise in respect of any inaccuracy in the representations and warranties set forth in Sections 3.1.1, 3.1.2, 3.1.6 or 3.1.13, or 3.2.1, 3.2.2, 3.2.11, or 3.2.12 of the Assets Purchase Agreement. "Panel" has the meaning set forth in Section 9.2.1. "PC Systems" means the assets described in Section 1.1.1 of the Assets Purchase Agreement. "Performance Standards" has the meaning given such term in the Services Agreement. "Permitted Owner" means SBCL or a successor owner of SBCL's Series D Preferred Stock or Conversion Shares permitted under the Stockholders Agreement among ActaMed and its stockholders, as amended from time to time. "Person" means any individual, corporation, trust, estate, business trust, general or limited partnership, limited liability company, limited liability partnership, unincorporated association or other legal entity. "Phone Lines" means SBCL's contractual right to use certain phone lines, as more fully described in Section 1.1.2 of this Assets Purchase Agreement. A-5 "Preferred Stock" means the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock and the Series D Preferred Stock. [*] means an [*]. "Projections" shall have the meaning assigned in Section 3.1.3 of this Assets Purchase Agreement. "Provider" means a physician, clinic, hospital, patient service center (other than [*]) or other provider of clinical health care services. "Provider Agreements" means the contracts described in Section 1.1.3 of this Assets Purchase Agreement. "Public Offering" means a bona fide firm commitment underwritten offering of ActaMed Common Stock pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission pursuant to the Securities Act. "Region" means any one of Region One, Region Two, Region Three, or Region Four. "Region Four" means the Region described on SCHEDULE 2.2(d) "Region Four Sites" are the SCAN Sites located in Region Four. "Region Four Transfer Date" has the meaning given in Section 2.3.4 of the Assets Purchase Agreement. "Region One" means the Region described on SCHEDULE 2.2(a) "Region One Sites" are the SCAN Sites located in Region One. "Region One Transfer Date" means December 31, 1997. "Region Three" means the Region described on SCHEDULE 2.2(c). "Region Three Sites" are the SCAN Sites located in Region Three. "Region Three Transfer Date" has the meaning given in Section 2.3.3 of the Assets Purchase Agreement. "Region Two" means the Region described on SCHEDULE 2.2(b). "Region Two Sites" are the SCAN Sites located in Region Two. [*] 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-6 "Region Two Transfer Date" has the meaning given in Section 2.3.2 of the Assets Purchase Agreement. "Registration Rights Agreement" means the Registration Rights Agreement dated May 3, 1994, as amended as of the date hereof and as the same may be amended from time to time, by and among ActaMed and the stockholders of ActaMed signatory thereto. "Regulation" means any statute, law, ordinance, regulation, requirement, order or rule of any federal, state, or local government or other governmental agency or body or of any other type of regulatory body, or any governmental or administrative interpretation of any thereof, including, without limitation, (i) those covering health, safety, environmental, energy, transportation, bribery, record keeping, zoning, antidiscrimination, antitrust, wage and hour, and price and wage control matters, (ii) requirements imposed by any governmental or regulatory body which must be satisfied to qualify for Medicare reimbursements, and (iii) any and all federal, state and local health care laws relating to or covering the methods and ways in which Lab EDI Services and other related or incidental services or benefits, if any, are provided to the Automated Providers, including, but not limited to, 42 U.S.C. Section 1395nn and the Clinical Laboratory Improvements Act of 1988, as amended. "Relationship Manager" has the meaning given in Section 4.2.2 of the Assets Purchase Agreement. "Required Consents" means any and all licenses, waivers, consents or approvals from other parties to Contracts necessary to consummate the transactions contemplated hereby and by any Exhibit hereto. "SBCL" means SmithKline Beecham Clinical Laboratories, Inc., a Delaware corporation. "SBCL Documents" has the meaning given in Section 3.1.1 of the Assets Purchase Agreement. "SBCL Lab" means any location at which SBCL or its Affiliates provide, or may in the future provide, clinical laboratory testing services, regardless of the computer systems or software, if any, used by such lab for lab order entry and results reporting. "SBCL President" shall mean the President of SBCL, presently John B. Okkerse, Jr., Ph.D., or should SBCL be restructured in any manner, the officer of SBCL having top authority over SBCL's operations. "SBCL Site" means an Automated Provider utilizing the SCAN Network for Lab EDI Services on the Transfer Date of the Region in which such Automated Provider is located. "SBCL Software" means SBCL Software, as defined in the License Agreement. A-7 "SCAN Assets" means the assets described in subsections 1.1.1 through 1.1.6 of the Assets Purchase Agreement. "SCAN Network" means the SBCL Software and SBCL's hardware and computer systems needed to operate the SBCL Software which enables Automated Providers to place laboratory test orders electronically to an SBCL Lab and/or to receive test result reports electronically from an SBCL Lab. "SCAN Site" means either an SBCL Site or an ActaMed Site. "SCAN Software" means the SBCL SCAN-TM- software licensed to ActaMed pursuant to the License Agreement. "Schedule" means any of the lists or disclosure schedules referred to herein. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. "Series A Preferred Stock" means the Series A Convertible Preferred Stock of ActaMed. "Series B Preferred Stock" means the Series B Convertible Preferred Stock of ActaMed. "Series C Preferred Stock" means the Series C Convertible Preferred Stock of ActaMed. "Series D Preferred Stock" means the Series D Convertible Preferred Stock of ActaMed. "Services Agreement" means the Services Agreement, made and entered into as of the date hereof, between ActaMed and SBCL. "Standstill Agreement" means the Standstill Agreement, dated the date hereof between SBCL and ActaMed. "Stockholders Agreement" means the Stockholders Agreement, dated as of May 3, 1994, as amended as of the date hereof and as the same may be amended from time to time, between ActaMed and the stockholders of ActaMed who are signatories thereto. "Stock Option Plans" means ActaMed's 1997 Stock Option Plan, 1996 Directors Stock Option Plan, 1995 Stock Option Plan, 1994 Stock Option Plan, 1993 Stock Option Plan and 1992 Stock Option Plan. A-8 "Subsidiary" means a corporation, limited liability company, partnership, association, trust, joint venture or other entity in which ActaMed or SBCL, as the case may be, has, directly or indirectly, an equity, ownership or proprietary interest of greater than ten percent (10%). "Substantial Holder" means an officer or employee of ActaMed who is the beneficial owner of one percent (1%) or more of the outstanding voting power or the outstanding equity (on a fully diluted basis) of ActaMed. "Tax Claim" means any claim based upon, arising out of or otherwise in respect of any inaccuracy in any representation or warranty or breach of any covenant or agreement made or to be performed by a Party pursuant to this Assets Purchase Agreement related to any Taxes. "Taxes" means any federal, state, county, local and other taxes, including without limitation, income taxes, estimated taxes, excise taxes, sales taxes, use taxes, gross receipts taxes, franchise taxes, taxes on earnings and profits, employment and payroll related taxes, property taxes, real property transfer taxes, Federal Insurance Contributions Act taxes, taxes on value added and import duties, whether or not measured in whole or in part by net income, imposed by the United States or any political subdivision thereof or by any Jurisdiction other than the United States or any political subdivision thereof. "Third Party Claim" means any claim, suit or proceeding (including, without limitation, a binding arbitration or an audit by any taxing authority) that is instituted against an Indemnitee by a Person other than an Indemnitor and which, if prosecuted successful, would result in a Loss for which such Indemnitee is entitled to indemnification hereunder. "Third Party Software" means software that SBCL licensed from third parties for use in delivery of Lab EDI Services, including without limitation software known as pkZip and pkUnzip, ProCom, and Reach Out. "Trade Secrets" means information related to a Party (1) which derives economic value, actual or potential, from not being generally known to or readily ascertainable by other Persons who can obtain economic value from its disclosure or use, and (2) which is the subject of efforts by said Person that are reasonable under the circumstances to maintain its secrecy. Without limitation, for ActaMed, ProviderLink and the ActaLab Software are Trade Secrets, and for SBCL, the SBCL Software is a Trade Secret. "Transaction Documents" means the Assets Purchase Agreement, the Development Agreement, the License Agreement, the Services Agreement and all documents executed or delivered in connection with the foregoing. "Transfer Benchmarks" means the criteria set forth on EXHIBIT 2.3.1, timely achievement of which shall determine whether the SCAN Assets relating to SCAN Sites in the A-9 next Region to be transferred shall be transferred by SBCL to ActaMed pursuant to the Assets Purchase Agreement. "Transferred Employees" means the employees listed on SCHEDULE VI hereto. "Transfer Date" shall mean any one of and "Transfer Dates" shall mean more than one of the Region One Transfer Date, the Region Two Transfer Date, the Region Three Transfer Date, and the Region Four Transfer Date. "Transmittal Information" means information which an Automated Provider gives ActaMed for communication to SBCL over the Network, or which SBCL gives ActaMed for communication to an Automated Provider over the Network, including all copies of same, and including without limitation, data relating to laboratory records, clinical data, encounter data, test information, test codes and provider identification numbers (other than UPINs) "Undisclosed Liability Claim" means any claim arising out of or otherwise in respect of any inaccuracy in the representations and warranties set forth in Sections 3.2.3 or 3.2.8 of the Assets Purchase Agreement. "Vendor Contracts" means the Contracts described in Section 1.1.4 of the Assets Purchase Agreement. "Warrant" means the Warrant to purchase 450,450 shares of ActaMed Common Stock at an exercise price of $5.00 issued by ActaMed to International Business Machines Corporation in December 1996. A-10 Exhibit 2.3.1 TRANSFER BENCHMARKS CLIENT SATISFACTION MEASUREMENTS ActaMed will provide such level of satisfactory Agreed Services (as defined in the Services Agreement) measured as set forth below. The following "Transfer Benchmarks" will be used as the measurement for proceeding to the transfer of Region Two Sites, Region Three Sites and Region Four Sites. REQUISITION VOLUME The first Transfer Benchmark shall be sustaining the monthly average number of Requisitions on a per-Site basis. More specifically, ActaMed shall measure each month the volume of Requisitions for the ActaMed Sites in each Transferred Region. It shall then calculate the average monthly per-Site Requisition volume. This calculated average shall then be compared (i) to the mean of the average monthly per-Site Requisition volumes for the same Region for the twelve months immediately preceding the month for which the measurement was made and (ii) to the mean of the average monthly per-Site Requisition volumes for all non-Transferred Regions during the same time period. If ActaMed's average monthly per-Site Requisition volume for the measured period, as adjusted for seasonality, is within 90% of each of (i) and (ii), above, then ActaMed will have met this benchmark. For Region One, SBCL shall provide within thirty (30) days after the Region One Transfer Date the monthly Requisitions and Sites for January-December 1997. For all other Regions, the monthly Requisitions and Sites for the twelve months prior to the Applicable Transfer Date shall be provided on the Applicable Transfer Date. CUSTOMER SURVEYS The second Transfer Benchmark shall be sustaining levels of support and client acceptance satisfactory to SBCL, in its reasonable discretion, determined by comparing Transfer Surveys of the Automated Providers in each Transferred Region to a corresponding Initial Survey for such Automated Providers. The Initial Survey shall be a survey, in a format and with content approved by SBCL in advance, which shall be performed by ActaMed within thirty (30) days after each Transfer Date. Such survey shall solicity performance and service-related comments from the Automated Providers about SBCL's provision of Lab EDI Services for that Region. The initial survey shall be sent to ten percent (10%) of the Sites in each Region, selected at random by ActaMed. The Transfer Surveys for each Region shall be identical to the Initial Survey for such Region and shall be sent to the same Automated Providers, to the greatest extent possible, as the Initial Survey (and to replacement Automated Providers where not possible). The Transfer Surveys shall solicit performance and service-related comments from the Automated Providers about ActaMed's provision of Lab EDI Services for each Region. The Transfer Surveys shall be performed for each applicable Region within thirty (30) days prior to the each scheduled Transfer Date; provided, that a Transfer Survey for a given Region shall only solicit information pertaining to the period between the last Transfer Date and the next scheduled Transfer Date. CUSTOMER COMPLAINTS The third and final Transfer Benchmark will be the absence of a material number (materiality to be determined by SBCL in its reasonable discretion relative to the frequency and severity of complaints) of documented problems and Automated Providers ceasing to do business with SBCL Labs citing issues related to Lab EDI Services provided by ActaMed. SBCL will provide ActaMed with copies of any such documented problems within fifteen (15) days of their receipt. -2- Exhibit 2.5.1 BILL OF SALE AND ASSIGNMENT This is a Bill of Sale and Assignment from SmithKline Beecham Clinical Laboratories, Inc., a Delaware corporation ("SBCL"), to ActaMed Corporation, a Georgia corporation ("ActaMed"), pursuant to a certain Assets Purchase Agreement dated as of December ___, 1997 between SBCL and ActaMed (the "Assets Purchase Agreement"). Capitalized terms used and not defined herein shall have the meanings set forth in the Assets Purchase Agreement. 1. For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, SBCL hereby sells, assigns, transfers, conveys and delivers to ActaMed, its successors and assigns, to have and to hold forever: (a) all of its right, title and interest in and to the SCAN Assets located at SCAN Sites in Region ___, listed on Exhibit A attached hereto, free and clear of all mortgages, liens, pledges, security interests, charges, claims and other encumbrances of any nature whatsoever other than those disclosed in the Assets Purchase Agreement or any Schedule thereto; and (b) all of its rights in the single-copy licenses granting the right to use the Third Party Software (i) installed by, or in accordance with the instructions of, SBCL and (ii) resident on a PC System conveyed to ActaMed in accordance with the preceding subparagraph (a), which rights are in accordance with the provisions of Section 1.2.1 of the Assets Purchase Agreement; and (c) all of its rights in the single-site licenses for Microsoft Windows to the extent contemplated by Section 1.2.2 of the Assets Purchase Agreement. The assets described in the foregoing subparagraphs (a) -- (c) are hereinafter referred to as the "Transferred Assets." 2. From and after the Region ___ Transfer Date, upon request of ActaMed, SBCL shall duly execute, acknowledge and deliver all such further assignments, documents of transfer or conveyance, powers of attorney and assurances and do such further acts as may be reasonably required to convey to and vest in ActaMed and protect its rights, title and interest in enjoyment of all the Transferred Assets and as may be appropriate otherwise to carry out the transactions contemplated by the Assets Purchase Agreement and this Bill of Sale and Assignment. 3. In the event of a conflict between the terms and conditions of this Bill of Sale and Assignment and the terms and conditions of the Assets Purchase Agreement, the terms of the Assets Purchase Agreement shall govern, supersede and prevail. 4. Notwithstanding anything herein to the contrary, the terms and conditions of the Assets Purchase Agreement shall survive the execution and delivery of this Bill of Sale and Assignment. 5. This instrument shall be governed by and construed in accordance with the laws of the State of Georgia. 6. This instrument shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. IN WITNESS WHEREOF, and intending to be legally bound, the undersigned have duly executed and delivered this Bill of Sale and Assignment as of this ___ day of _______________, 199_. SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. By:_____________________________________ Title: Acknowledged and agreed: ACTAMED CORPORATION By: _____________________________ Title: -2- Exhibit 2.5.2 SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. COMPLIANCE CERTIFICATE The undersigned certifies that he is a __________________________ of SmithKline Beecham Clinical Laboratories, Inc., a Delaware corporation ("SBCL"), and that as such he is authorized to execute this certificate by and on behalf of the SBCL and, pursuant to Section 2.5.2 of the Assets Purchase Agreement, dated as of December __, 1997 (the "Asset Purchase Agreement"), between SBCL and ActaMed Corporation, a Georgia corporation ("ActaMed"), and further certifies that: a. The representations and warranties of SBCL, [other than the representations and warranties contained in Sections 3.1.3, 3.1.4(a) - (e), 3.1.6(d) and 3.1.7(b),] contained in the Assets Purchase Agreement, as supplemented by the Disclosure Schedule attached hereto, are true and correct in all material respects at and as of the date hereof as though such representation and warranties were made at and as of the date hereof. b. SBCL has duly performed and complied with each covenant and condition required by the Assets Purchase Agreement to be performed or complied with before or on the date hereof. IN WITNESS WHEREOF, I have hereunto set my hand as of this ___ day of ____________, 199_. By: ____________________________________ Name: Title: ** Bracketed text to be included on Region Two Transfer Date, Region Three Transfer Date, and Region Four Transfer Date only. Exhibit 2.5.3 SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. CERTIFICATE OF THE ASSISTANT SECRETARY The undersigned certifies that he is the Secretary of SmithKline Beecham Clinical Laboratories, Inc., a Delaware corporation (the "Company"), and that as such he is authorized to execute and deliver this certificate by and on behalf of the Company, and further certifies that: a. Attached hereto as Exhibit "A" is a true, correct and complete copy of the Company's Certificate of Incorporation, as certified by the Secretary of State of the State of Delaware; said Certificate of Incorporation is in full force and effect as of the date hereof; since the date of certification by the Secretary of State of the State of Delaware there have been no amendments, alterations or modifications of such Certificate of Incorporation; and no action has been taken by the Company in contemplation of any such amendment or the dissolution, merger or consolidation of the Company. b. Attached hereto as Exhibit "B" is a true, correct and complete copy of the Bylaws of the Company as in effect on the date hereof, and there have been no additional amendments authorized with respect thereto. c. Attached hereto as Exhibit "C" is a copy of the resolutions duly adopted by the Board of Directors of the Company on December 29, 1997, with respect to the Asset Purchase Agreement and the transactions contemplated hereby, and such resolutions have not been rescinded or amended in any respect and are in full force and effect on the date hereof. d. Each of the following persons now is, and at all times including and since ___________________, 199_, has been a duly elected officer or employee of the Company, holding the office or position in the Company set forth opposite his name below, and the signature of each such person appearing opposite his name below is his genuine signature: [Name and title] _______________________________________ [Name and title] _______________________________________ IN WITNESS WHEREOF, I have hereunto set my hand this ___ day of ____________, 199_. By: _________________________________ Assistant Secretary I, __________________________, ________________________ of SmithKline Beecham Clinical Laboratories, Inc., a Delaware corporation, do hereby certify that ____________________ is the duly elected Assistant Secretary of the Company, and that the signature appearing above is his genuine signature. IN WITNESS WHEREOF, I have herewith set my hand this ___ day of _____________, 199_. __________________________________________ [Title] -2- Exhibit 2.6.2 ASSUMPTION AGREEMENT This is an Assumption Agreement by ActaMed Corporation, a Georgia Corporation ("ActaMed"), in favor of SmithKline Beecham Clinical Laboratories, Inc., a Delaware corporation ("SBCL"), pursuant to and in accordance with Section 2.6.2 of the Assets Purchase Agreement, dated as of December ___, 199_ (the "Assets Purchase Agreement") between SBCL and ActaMed. Capitalized terms used and not defined herein shall have the meanings set forth in the Assets Purchase Agreement. 1. For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, ActaMed hereby assumes: (a) all of SBCL's contractual liabilities arising on or after the date hereof with respect to the Phone Lines installed at SCAN Sites in Region ___; (b) all of SBCL's duties and obligations arising on or after the date hereof under such Provider Agreements as relate to Automated Providers located in Region ___; and (c) all of SBCL's duties and obligations arising on or after the date hereof pursuant to the Vendor Contracts relating to the provision of products or services in connection with SBCL's provision of Lab EDI Services in Region ________. ActaMed undertakes to perform the liabilities set forth in the preceding subparagraphs (the "Liabilities") in accordance with their respective terms, effective as of the date hereof. 2. From and after the Region ___ Transfer Date, ActaMed will, from time to time, at the reasonable request of SBCL, duly execute, acknowledge and deliver all such additional instruments, notices, releases, certificates, powers of attorney, assurances and other documents and do all such further acts as SBCL may reasonably require in order to effectively assume the Liabilities and as may be appropriate otherwise to carry out the transactions contemplated by the Assets Purchase Agreement and this Assumption Agreement. 3. In the event of any conflict between the terms and conditions of this Assumption Agreement and the terms of the Assets Purchase Agreement, the terms of the Assets Purchase Agreement shall govern, supersede and prevail. 4. If the assumption by ActaMed of any Liability is invalid or unenforceable in any jurisdiction, it shall be ineffective to the extent of such invalidity or unenforceability without invalidating or rendering unenforceable the assumption by Purchaser of the remaining Liabilities. 5. Notwithstanding anything herein to the contrary, the terms and conditions of the Assets Purchase Agreement shall survive the execution and delivery of this Assumption of Liabilities. 6. This instrument shall be governed by and construed in accordance with the laws of the State of Georgia. 7. This instrument shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. IN WITNESS WHEREOF, the undersigned have caused this Assumption Agreement to be executed this ___ day of ________________, ______. ACTAMED CORPORATION By: _________________________________ Name: Title: Acknowledged and agreed: SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. By: ____________________________ Name: Title: -2- Exhibit 2.6.3 ACTAMED CORPORATION COMPLIANCE CERTIFICATE The undersigned certifies that he or she is a _______________________________ of ActaMed Corporation, a Georgia corporation ("ActaMed"), and that as such he or she is authorized to execute this certificate by and on behalf of ActaMed and, pursuant to Section 2.6.3 of the Assets Purchase Agreement, dated as of December ___, 1997 (the "Asset Purchase Agreement"), between SmithKline Beecham Clinical Laboratories, Inc. ("SBCL") and ActaMed, and further certifies that: a. The representations and warranties of ActaMed contained in the Assets Purchase Agreement, as supplemented by the Disclosure Schedule attached hereto are true and correct in all material respects at and as of the date hereof as though such representation and warranties were made at and as of the date hereof. b. ActaMed has duly performed and complied with each covenant and condition required by the Assets Purchase Agreement to be performed or complied with before or on the date hereof. IN WITNESS WHEREOF, I have hereunto set my hand as of this ___ day of ____________, 199_. By: ______________________________ Name: Title: Exhibit 2.6.4 ACTAMED CORPORATION CERTIFICATE OF THE SECRETARY The undersigned certifies that he is the Secretary of ActaMed Corporation, a Georgia corporation (the "Company"), and that as such he is authorized to execute and deliver this certificate by and on behalf of the Company, and further certifies that: a. Attached hereto as Exhibit "A" is a true, correct and complete copy of the Company's Articles of Incorporation, as certified by the Secretary of State of the State of Georgia; said Articles of Incorporation are in full force and effect as of the date hereof; since the date of certification by the Secretary of State of the State of Georgia there have been no amendments, alterations or modifications of such Articles of Incorporation; and no action has been taken by the Company in contemplation of any such amendment or the dissolution, merger or consolidation of the Company. b. Attached hereto as Exhibit "B" is a true, correct and complete copy of the Bylaws of the Company as in effect on the date hereof, and there have been no additional amendments authorized with respect thereto. c. Attached hereto as Exhibit "C" is a copy of the resolutions duly adopted by the Board of Directors of the Company on December __, 1997, with respect to the Assets Purchase Agreement and the transactions contemplated hereby, and such resolutions have not been rescinded or amended in any respect and are in full force and effect on the date hereof. d. Each of the following persons now is, and at all times including and since ___________________, 199_, has been a duly elected officer or employee of the Company, holding the office or position in the Company set forth opposite his or her name below, and the signature of each such person appearing opposite his or her name below is his or her genuine signature: [Name and title] _______________________________________ [Name and title] _______________________________________ IN WITNESS WHEREOF, I have hereunto set my hand this ___ day of ________________, 199_. By: ________________________________ Secretary I, _________________________, _________________________ of ActaMed Corporation, a Georgia corporation, do hereby certify that _________________ is the duly elected Secretary of the Company, and that the signature appearing above is his genuine signature. IN WITNESS WHEREOF, I have herewith set my hand this ___ day of _______________, 199_. _______________________________________ [Title] -2- ACTAMED CORPORATION CERTIFICATE OF THE SECRETARY The undersigned certifies that he is the Secretary of ActaMed Corporation, a Georgia corporation (the "Company"), and that as such he is authorized to execute and deliver this certificate by and on behalf of the Company, and further certifies that: a. Attached hereto as Exhibit "A" is a true, correct and complete copy of the Company's Articles of Incorporation, as certified by the Secretary of State of the State of Georgia; said Articles of Incorporation are in full force and effect as of the date hereof; since the date of certification by the Secretary of State of the State of Georgia there have been no amendments, alterations or modifications of such Articles of Incorporation; and no action has been taken by the Company in contemplation of any such amendment or the dissolution, merger or consolidation of the Company. b. Attached hereto as Exhibit "B" is a true, correct and complete copy of the Bylaws of the Company as in effect on the date hereof, and there have been no additional amendments authorized with respect thereto. c. Attached hereto as Exhibit "C" is a copy of the resolutions duly adopted by the Board of Directors of the Company on December 19, 1997, with respect to the Assets Purchase Agreement and the transactions contemplated hereby, and such resolutions have not been rescinded or amended in any respect and are in full force and effect on the date hereof. d. Each of the following persons now is, and at all times including and since January 1, 1997, has been a duly elected officer or employee of the Company, holding the office or position in the Company set forth opposite his or her name below, and the signature of each such person appearing opposite his or her name below is his or her genuine signature: Michael K. Hoover, President and CEO /s/ _________________________________________ Nancy J. Ham, Sr. Vice President /s/ _________________________________________ IN WITNESS WHEREOF, I have hereunto set my hand this 31st day of December, 1997. By: /s/ _________________________________________ Lewis R. Belote Secretary I, Nancy J. Ham, Senior Vice President of ActaMed Corporation, a Georgia corporation, do hereby certify that Lewis R. Belote is the duly elected Secretary of the Company, and that the signature appearing above is his genuine signature. IN WITNESS WHEREOF, I have herewith set my hand this 31st day of December, 1997. /s/ _________________________________________ Nancy J. Ham Senior Vice President -2- AMENDMENT NO. 1 TO ASSETS PURCHASE AGREEMENT This AMENDMENT NO. 1 TO ASSETS PURCHASE AGREEMENT ("Amendment No. 1") is made and entered into this 18th day of May, 1998 by and between HEALTHEON CORPORATION, a Delaware corporation ("Healtheon"), ACTAMED CORPORATION, a Georgia corporation ("ActaMed") and SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC., a Delaware corporation ("SBCL"). WHEREAS, ActaMed and SBCL entered into an Assets Purchase Agreement on December 31, 1997 ("Purchase Agreement"); and WHEREAS, ActaMed has entered into that certain "Agreement and Plan of Reorganization by and among Healtheon Corporation, MedNet Acquisition Corp. and ActaMed Corporation dated as of February 24, 1998, (the "Healtheon Merger Agreement"), and, in order to permit the closing of the Healtheon Merger Agreement, the parties wish to amend the Purchase Agreement as set forth below. NOW THEREFORE, in consideration of the premises and the mutual promises contained herein, the parties, intending to be legally bound, agree as follows: 1. DEFINITIONS. Capitalized terms used in this Amendment No.1 and not otherwise defined herein have the meanings set forth in the Purchase Agreement. 2. AMENDMENTS. 2.1 ACTAMED REFERENCES. Except as the context may require otherwise or this Amendment specifies otherwise, the term "ActaMed" shall be deemed to refer to Healtheon wherever it appears in the Purchase Agreement. 2.2 PURCHASE PRICE. Sections 1.5.4. and 1.5.5 are each amended by substituting the phrase "Common Stock of Healtheon" for the phrase "ActaMed's Series D Preferred" and by substituting the term "Healtheon Stock Price" for the term "Series D Price." 2.3 HEALTHEON STOCK PRICE. Section 1.6 is amended as follows: 2.3.1 The caption shall be changed to "HEALTHEON STOCK PRICE" and the term "Series D Price" in the lead-in clause shall be replaced with the term "Healtheon Stock Price". -1- 2.3.2 Section 1.6.1 (a) is amended by inserting the phrase "divided by the Exchange Ratio" after "[*]" and "[*]". 2.3.3 Section 1.6.1 (c) is amended by inserting the phrase "divided by the Exchange Ratio on the Region Three Transfer Date or the Region Four Transfer Date, as applicable" after "[*]". 2.3.4 Section 1.6.3 is replaced in its entirety as follows: "1.6.3 For purposes of Section 1.6, "Qualified Preferred Stock" shall mean shares of Healtheon's preferred stock issued in an arm's length transaction to one or more purchasers who are not ActaMed or Healtheon's stockholders as of the Merger Effective Date for an aggregate purchase price of not less than $7,000,000; and the "Per Share Issue Price" of such Qualified Preferred Stock shall be the consideration per equivalent share of Common Stock received by Healtheon for the Qualified Preferred Stock multiplied by the Exchange Ratio, adjusted backwards to the Merger Effective Date for any subdivision or combination of shares of Healtheon capital stock or similar change in Healtheon's capital structure (whether by stock split, stock dividend, merger, share exchange, consolidation or otherwise) since the Merger Effective Date." 2.4 DELIVERIES AT EACH OF THE TRANSFER DATES. Section 2.6 is replaced in its entirety as follows: "SECTION 2.6. DELIVERIES AT EACH OF THE TRANSFER DATES. At each of the Transfer Dates, the following documents shall be executed and delivered to SBCL to the extent relating to the region transferred: 2.6.1. by Healtheon, the applicable number of shares of Common Stock of Healtheon, as determined in accordance with Sections 1.5, 1.6 and 1.8 of this Assets Purchase Agreement; 2.6.2. by either Healtheon or ActaMed, an Assumption Agreement (in the form attached hereto as EXHIBIT 2.6.2) covering, for the Region transferred, (i) the Vendor Contracts for the Region transferred, (ii) the Phone Lines and (iii) the Provider Agreements for the Region transferred; 2.6.3 by Healtheon and ActaMed, a Compliance Certificate (in the form attached hereto as EXHIBIT 2.6.3), pursuant to which Healtheon and ActaMed will jointly and severally make the representations and warranties contained in Section 3.2 hereof, which certificate shall attach revised Disclosure Schedules to the [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -2- extent necessary to make the representations and warranties made on such Transfer Date true and correct in all material respects; 2.6.4 by Healtheon, a Secretary's Certificate (in the form attached hereto as EXHIBIT 2.6.4); and 2.6.5 by either Healtheon or ActaMed, such other documents or certificates as may be reasonably requested by SBCL." 2.5 REPRESENTATIONS AND WARRANTIES. 2.5.1 INVESTMENT REPRESENTATIONS OF SBCL. Section 3.1.12 is amended by deleting the parentheticals referencing the "Conversion Shares" in each of subsections (a) and (b), and by adding the words "or Common Stock of Healtheon" after the term "Series D Preferred Stock" in each of subsections (a) and (b). 2.5.2 BY ACTAMED AND HEALTHEON. The lead-in paragraph of Section 3.2 is replaced in its entirety as follows: "SECTION 3.2. BY ACTAMED AND HEALTHEON. Except as set forth on a Disclosure Schedule hereto, for representations to be made on any Transfer Date after the Merger Effective Date, ActaMed and Healtheon hereby jointly and severally represent and warrant to SBCL, and will jointly and severally represent and warrant to SBCL on each such Transfer Date, as follows:" Other than as specifically set forth in Sections 2.5.3 through 2.5.9 of this Amendment No. 1, each of the representations and warranties set forth in Sections 3.2.1 through 3.2.25 of the Purchase Agreement are amended as necessary to the effect that such representations and warranties shall be made on any Transfer Date after the Merger Effective Date by both ActaMed and Healtheon. 2.5.3 FINANCIAL STATEMENTS. Section 3.2.3 is amended as follows: 2.5.3.1 Subsection (a) is amended by adding the following text at the end of such subsection: "DISCLOSURE SCHEDULE 3.2.3 hereto also contains a true and correct copy of (i) the balance sheets of Healtheon at December 31, 1996 and December 31, 1997 and the statements of operations, statements of stockholders equity and statements of cash flows of Healtheon for the years ended December 31, 1996 and December 31, 1997, which have been audited by Ernst & Young, independent accountants (the "HEALTHEON FINANCIAL STATEMENTS"), and (ii) the -3- unaudited balance sheets of Healtheon at March 31, 1998 and the statements of operations, statements of stockholders equity and statements of cash flows of Healtheon for quarter ended March 31, 1998 (the "HEALTHEON UNAUDITED STATEMENTS")." 2.5.3.2 Subsection (b) is amended by adding the phrase "and the Healtheon Financial Statements" after the term "ActaMed Financial Statements" wherever such term appears in such subsection, by inserting the word "respective" prior to the phrase "financial position", by inserting the phrase "and Healtheon" after the term "ActaMed" wherever such term appears in such subsection, and by replacing the introduction to the final sentence, "ActaMed has" with the introduction "ActaMed and Healtheon have". 2.5.3.3 Subsection (c) is amended by adding the phrase "and the Healtheon Unaudited Statements after the term "ActaMed Unaudited Statements", by inserting the word "respective" prior to the term "chief financial officer", by inserting the phrase "and Healtheon" after the phase "chief financial officer of ActaMed" and by inserting the phrase "and Healtheon and its Subsidiaries" after the phrase "ActaMed and its Subsidiaries". 2.5.4 CONSENTS. Section 3.2.4 is amended by inserting the words "or Healtheon" after the word "ActaMed" in the third line thereof, by substituting the term "Common Stock of Healtheon" for the term "Series D Preferred Stock" in item (b), and by deleting the parenthetical in item (b) and the remainder of the Section following such parenthetical. 2.5.5 CAPITALIZATION. Section 3.2.5 is amended by substituting the term "Common Stock of Healtheon" for the term "Series D Preferred Stock" throughout the Section. Section 3.2.5 shall be further amended by deleting the phrase "will have the designations, preferences, limitations and relative rights set forth in the Articles" from subsection (b) and by deleting the final sentence of subsection (b). 2.5.6 REGISTRATION RIGHTS. Section 3.2.6 is amended by substituting the term "Investors' Rights Agreement" for "Registration Rights Agreement," and by adding the clause "except for such securities which may be granted registration rights pursuant to the terms of the Investors' Rights Agreement" at the end of such Section. 2.5.7 OFFERING. Section 3.2.7 is amended by substituting the term "Common Stock of Healtheon" for "Series D Preferred Stock" and by deleting the parenthetical. 2.5.8 CHANGES. Section 3.2.8 is amended by adding the subsection designation "(a)" at the beginning of such Section and by adding a new subsection (b) as follows: "Since the date of the latest Healtheon Unaudited Statements, there has not been (i) any adverse change in the assets, liabilities, financial condition or operations of Healtheon from that reflected in the Healtheon Financial Statements, other than changes in the ordinary course of business, none of which individually or in the -4- aggregate has had a Material Adverse Effect or (ii) any adverse change in the prospects of the business of Healtheon or any other event or condition (or events or conditions) of any character which, either individually or cumulatively, has had a Material Adverse Effect." 2.5.9 FULL DISCLOSURE. Section 3.2.25 is amended by inserting the words "and Common Stock of Healtheon" after the term "Series D Preferred Stock." 2.6 AUDIT. Section 4.1.2 is amended by replacing the term "ActaMed Common Stock" with "Common Stock of Healtheon" and by deleting the clause "on or prior to April 30, 1998" and replacing it with the clause "in an expedient fashion as required." 2.7 STANDSTILL. Section 4.3.5 is replaced in its entirety by the following: "4.3.5. STANDSTILL. At all times prior to the last Transfer Date, neither Healtheon nor ActaMed shall consummate, or enter into any agreement with respect to, any merger, share exchange or consolidation or sale of substantially all of its assets, nor shall Healtheon dispose of the capital stock of ActaMed, without the prior written consent of SBCL." 2.8 COVENANTS TO SBCL. Article V is replaced in its entirety by the following: "ARTICLE V COVENANTS TO SBCL SECTION 5.1 ADDITIONAL COVENANTS. ActaMed and Healtheon, as applicable, covenant and agree as follows: 5.1.1 TRANSACTIONS WITH AFFILIATES. For so long as either (i) SBCL is a stockholder of Healtheon or any successor to this agreement or (ii) the Services Agreement (or any successor agreement for Lab EDI Services), including all extensions and renewals thereof, remains in effect, Healtheon shall not, directly or indirectly, knowingly enter into any material transaction or agreement with any of its Affiliates, or a material transaction or agreement in which an Affiliate of Healtheon has a direct or indirect interest, unless such transaction or agreement is on terms and conditions no less favorable to Healtheon or any of its Subsidiaries than could be obtained at the time in an arm's length transaction with a third Person that is not such an Affiliate, or unless such transaction or agreement has been reviewed and approved by either a majority of those members of Healtheon's -5- Board of Directors who have no such interest in the transaction or a majority of the shareholders, voting in good faith. This Section is in furtherance and not in limitation of Healtheon's obligations under Section 144 of the Delaware Corporation Law. 5.1.2 CORPORATE EXISTENCE, BUSINESS, MAINTENANCE, INSURANCE. For so long as the Services Agreement (or any successor agreement for Lab EDI Services), including all extensions and renewals thereof, remains in effect: (a) Neither Healtheon nor ActaMed will enter into any agreement for the disposition of all or substantially all of the assets used in the provision of Lab EDI Services, including by way of a merger, consolidation, share exchange, or, in the case of Healtheon, sale of the capital stock of ActaMed, if such a sale will have a material impact on the provision of Lab EDI Services. (b) Healtheon, either independently or through ActaMed, shall continue to engage in the business of developing information networks (with a meaningful focus on the provision of lab order entry and results reporting services as one of Healtheon's core businesses) and businesses related thereto. (c) ActaMed and Healtheon will maintain or cause to be maintained in good repair, working order and condition all properties used in the business of Healtheon and any Subsidiary related to the provision of Lab EDI Services and from time to time will make or cause to be made all appropriate repairs, renewals and replacements thereof. Healtheon and any such Subsidiary will at all times comply in all material respects with the provisions of all material leases to which it is a party or under which it occupies property related to the provision of Lab EDI Services so as to prevent any loss or forfeiture thereof or thereunder. (d) Healtheon will maintain or cause to be maintained, with financially sound and reputable insurers, insurance in amounts approved by Healtheon's Board of Directors with respect to its properties and business and the properties and business of any Subsidiary against loss or damage. SECTION 5.2. INFORMATIONAL COVENANTS OF HEALTHEON. Healtheon covenants and agrees that it shall deliver the following information to SBCL so long as the Services Agreement remains in effect (including any extensions or renewal thereof) or until such time as Healtheon shall have consummated a Public Offering. -6- 5.2.1. MANAGEMENT'S ANALYSIS. All the financial statements delivered pursuant to the Investor Rights Agreement shall be accompanied by an informal narrative description of material business and financial trends and developments and significant transactions that have occurred in the appropriate period or periods covered thereby. 5.2.2. BUDGETS. As soon as practicable, but in any event within thirty (30) days prior to the commencement of a fiscal year, an annual operating budget for such fiscal year, approved by the Board of Directors, including monthly income and cash flow projections and projected balance sheets as of the end of each quarter within such fiscal year. Extensions of such due date shall not be unreasonably withheld. 5.2.3. INSPECTION. Except as provided in Section 5.2.5, below, upon reasonable notice, and no more frequently than two (2) times per year, Healtheon shall, and shall cause its Subsidiaries to, permit SBCL by its representatives, agents or attorneys: (a) to examine all books of account, records, reports and other papers of Healtheon or such Subsidiary, (b) to make copies and take extracts from any thereof, (c) to discuss the affairs, finances and accounts of Healtheon or such Subsidiary with Healtheon's or such Subsidiary's officers and independent certified public accountants (and by this provision Healtheon hereby authorizes said accountants to discuss with SBCL and its representatives, agents or attorneys the finances and accounts of Healtheon or such Subsidiary), and (d) to visit and inspect, at reasonable times and on reasonable notice during normal business hours, the properties of Healtheon and any Subsidiary. Notwithstanding any provision herein to the contrary, the provisions of this Section 5.2.3 are in addition to any rights which SBCL may have as a Healtheon stockholder under the Delaware Corporation Law and shall in no way limit such rights. The expenses of SBCL in connection with any such inspection shall be for the account of SBCL. Notwithstanding the foregoing -7- sentence, it is understood and agreed by Healtheon that all reasonable expenses incurred by Healtheon or such Subsidiary, any officers, employees or agents thereof or the independent certified public accountants therefor, shall be expenses payable by Healtheon and shall not be expenses of SBCL. 5.2.4 OTHER INFORMATION Except as provided in Section 5.2.5 below, for so long as SBCL continues to own at least [*] of the aggregate number of shares of Healtheon Common Stock now or hereafter acquired by it as a direct result of the Region transfers completed under this Agreement, Healtheon shall deliver courtesy copies of the following information, as requested by and furnished to the SBCL-nominated board member, or, if there is no such SBCL-nominated board member, as requested by the President of SBCL, to up to three employees of, or in-house counsel to, SBCL designated by SBCL in writing (and who initially shall be [*]): (a) promptly after the submission thereof to Healtheon, copies of any detailed reports (including the auditors' comment letter to management, if any such letter is prepared) submitted to Healtheon by its independent auditors in connection with each annual or interim audit of the accounts of Healtheon made by such accountants; (b) promptly, and in any event within ten (10) days after obtaining knowledge thereof, notice of the institution of any suit, action or proceeding (other than a proceeding of general application which is not directly against Healtheon or one or more of its Subsidiaries), the happening of any event or, to the best knowledge of Healtheon, the assertion or threat of any claim against Healtheon or any of its Subsidiaries which, either individually or in the aggregate, would have a Material Adverse Effect; (c) promptly upon, and in any event within thirty (30) days after, obtaining knowledge thereof, notice of any material breach of, Default under or failure to comply with any material term under this Article V of this Agreement or any change in Healtheon's relationship with its major customers, suppliers, employees or other entity with which Healtheon has a business relationship if such breach would have a Material Adverse Effect; [*] 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. -8- (d) with reasonable promptness, a notice of any material default by Healtheon or any of its Subsidiaries under any agreement to which it is a party if such breach would have a Material Adverse Effect; (e) with reasonable promptness, copies of all written materials furnished to directors; (f) promptly (but in any event within ten (10) days) after the filing of any document or material with the SEC, a copy of such document or material; (g) promptly after the record date set by the Board of Directors to determine the stockholders entitled to vote at Healtheon's annual meeting of stockholders (but in any event ten (10) days prior to such meeting), a list of all stockholders of Healtheon and their respective holdings; and (h) promptly upon request therefor, such other data, filings and information as the SBCL-nominated Healtheon Board representative may from time to time reasonably request, or, if there is no such SBCL-nominated board member, as the President of SBCL may from time to time reasonably request, in either case to the extent consistent with Section 220 of the Delaware Corporation Law. 5.2.5 EXCLUDED INFORMATION. Notwithstanding the provisions of Sections 5.2.3 and 5.2.4, SBCL shall not have the right to inspect, receive, review or otherwise have access to any information or documents which, in the reasonable opinion of Healtheon's counsel would constitute any of the following: (i) a waiver of the attorney-client privilege; (ii) the disclosure of any third-party confidential or proprietary information, disclosure of which is restricted by a written non-disclosure agreement or applicable law; or (iii) the disclosure of any confidential or proprietary information of Healtheon or any of its affiliated entities which relates to any areas of Healtheon's business, with which, in the reasonable opinion of the Board of Directors of Healtheon, SBCL or its affiliates compete (collectively, the "Excluded Information"). Notwithstanding Section 5.2.4 above, in the event of a Change of Control of Healtheon by an Acquirer that has a class of securities registered under the Exchange Act (a "Public Company"), SBCL shall no longer have the information rights set forth in this Section -9- 5.25. In the event of a Change in Control of Healtheon by an Acquirer (other than a Public Company) that is a direct competitor of SBCL, SBCL shall continue to have the information rights set forth in Section 5.2.4, but only insofar as the information to be obtained upon the exercise of such rights relates to Lab EDI Services provided, to be provided, or alleged by SBCL to have been required to be provided, by ActaMed or Healtheon. For purposes of this Section 5.2.5, a "Change of Control" shall mean the sale or other transfer in a single transaction or series of related transactions to a person or group of affiliated persons (the "Acquiror") of shares of Healtheon Common Stock representing more than 50% of the voting power of all Healtheon Common Stock then outstanding. Notwithstanding the foregoing limitations of this Section 5.2.5, independent auditors retained by SBCL shall have the right to review any Excluded Information which, in their reasonable opinion, is necessary to determine or confirm (i) the amount of royalties payable to SBCL under the License Agreement by reason of connectivity between Providers and commercial laboratories other than SBCL Labs or (ii) the revenues of ActaMed for purposes of Section 1.6 hereof. 5.2.6 CONFIDENTIALITY OBLIGATIONS. Subject to Section 4.4, all information disclosed to or obtained by SBCL pursuant to this Section 5.2 (including any Excluded Information which may be inadvertently disclosed to or obtained by SBCL hereunder) shall be deemed to be the confidential information of Healtheon and SBCL agrees that it shall treat such information with the same degree of care that it uses to protect its own confidential information of a similar nature and shall only disclose such information to those employees of SBCL who have a need to know such information in order to enforce SBCL's rights under this Agreement and the License Agreement. In the event that SBCL obtains any copies of any Excluded Information, SBCL shall promptly return all copies of such information to Healtheon upon request or promptly after the SBCL employees in possession of Excluded Information gain actual knowledge that it is Excluded Information." 2.9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Section 8.1.2 is amended by deleting the word "ActaMed" from the caption, by replacing the word "ActaMed" with the words "ActaMed or Healtheon" throughout the Section and by replacing the term "Series D Preferred Stock" with the term "Common Stock of Healtheon." -10- 2.10 INDEMNITY OF SBCL. Section 8.2.1 is amended by adding the clause "including, without limitation, Section 5.2.6 hereof" at the end of subsection (a)(ii). 2.11 INDEMNITY OF ACTAMED AND HEALTHEON. Section 8.2.2 is amended by (i) deleting the word "ActaMed" in the caption and replacing it with the words "ActaMed and Healtheon", (ii) by replacing the words "ActaMed agrees" in the lead-in paragraph with the words "ActaMed and Healtheon, jointly and severally agree," (iii) by replacing the word "ActaMed" in subsections (a)(i), (ii) and (iii) with the words "ActaMed or Healtheon", and (iv) by adding the clause "including, without limitation, representations and warranties made by ActaMed prior to the Merger Effective Date" at the end of subsection (a)(i). 2.12 SPECIAL INDEMNITY AS TO PROJECTIONS. Section 8.2.9 is amended by inserting the clause "as such Lab EDI Services are presently provided, without regard to any additional expenses incurred as a result of the acquisition of ActaMed by Healtheon" after the parenthetical "(as defined in the Services Agreement)". 2.13 NOTICES. Section 11.1.1 is amended by adding the following: "If to Healtheon: Healtheon Corp. 4600 Patrick Henry Drive Santa Clara, CA 95054 Attention: General Counsel Telephone: (408) 876-5000 Telecopy: (408) 876-5175" 2.14 ASSIGNMENT. Section 11.1.4(b) is amended by replacing the term "Series D Preferred Stock" with the term "Common Stock of Healtheon" and by replacing the term "Stockholders' Agreement" with the term "Affiliate Agreement prior to a Public Offering." 2.15 ENTIRE AGREEMENT. Section 11.1.8 is amended by deleting the text after the term "SBCL." 2.16 ADDED DEFINITIONS. The following definitions are added to Exhibit A to the Purchase Agreement. If such terms are defined in said Exhibit A, the existing definitions shall be deleted in their entirety and the following shall replace the existing definitions: "Affiliate Agreement" means the ActaMed Corporation Affiliate Agreement, dated as of May , 1998, between Healtheon and SBCL. "Common Stock of Healtheon" means the common stock, $.0001 par value, of Healtheon. -11- "Exchange Ratio" shall have the meaning given to such term in the Healtheon Merger Agreement. "Healtheon Merger Agreement" means the Agreement and Plan of Reorganization, dated February 24, 1998, by and among Healtheon Corporation, MedNet Acquisition Corp. and ActaMed Corporation. "Investors' Rights Agreement" means the Amended and Restated Investors' Rights Agreement, dated as of May __, 1998, between Healtheon and the persons and entities listed on Schedules A and B thereto. "Material Adverse Effect" means a material adverse effect on the business or financial condition of either Healtheon or ActaMed or on the ability of either Healtheon or ActaMed to conduct the ActaMed Business, including to provide Lab EDI Services, or the impairment of the ability of either Healtheon or ActaMed to perform its respective obligations under the ActaMed Documents. "Merger Effective Date" means the date on which the transactions contemplated by the Healtheon Merger Agreement become effective. "New Business Plan" means for the business plan of ActaMed presented to SBCL on April 29, 1998, approved by the ActaMed board of directors on May 5, 1998 and in the form approved by the Healtheon board of directors on May 14, 1998, covering (i) for the years 1998 and 1999, projected financial data, including statements of operations, and operational data, including number of sites and transactions per site and (ii) for the year 2000, number of sites. "Public Offering" means a bona fide firm commitment underwritten offering of the Common Stock of Healtheon or the ActaMed Common Stock, as the case may be, pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission pursuant to the Securities Act. 2.17 DELETED DEFINITIONS. The definitions for the following terms set forth in Exhibit A to the Purchase Agreement are deleted in their entirety: "Conversion Shares" "Permitted Owner" -12- "Preferred Stock" and "Series A Preferred Stock," "Series B Preferred Stock" and "Series C Preferred Stock" "Stock Option Plans" 3. MISCELLANEOUS. 3.1 ENTIRE AGREEMENT. This Amendment No.1 constitutes the entire understanding between the parties with respect to amendment of the Purchase Agreement and supersedes all proposals, communications and agreements between the parties relating to such subject matter. No amendment, change, or waiver of any provision of this Amendment No.1 will be binding unless in writing and signed by all parties. 3.2 GOVERNING LAW. This Amendment No.1 will be governed by and construed in accordance with the laws of the State of Georgia applicable to contracts made and performed therein. 3.3 PURCHASE AGREEMENT PROVISIONS. Except as otherwise provided, all provisions of the Purchase Agreement not modified by this Amendment No. 1 shall remain in full force and effect. 3.4 COUNTERPARTS. This Amendment No. 1 may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. [INTENTIONALLY LEFT BLANK] -13- IN WITNESS WHEREOF, the parties have executed this Amendment No. 1 to the Purchase Agreement as of the date set forth above. HEALTHEON CORPORATION By: /s/ W. Michael Long ------------------------------------- Its: CEO ------------------------------------ ACTAMED CORPORATION By: /s/ Michael K. Hoover ------------------------------------- Its: President & CEO ------------------------------------ SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. By: /s/ John B. Okkersee Jr. ------------------------------------- Its: President ------------------------------------ -14- EX-10.16 8 EXHIBIT 10.16 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. EXECUTION LICENSE AGREEMENT between SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. and ACTAMED CORPORATION December 31, 1997 TABLE OF CONTENTS
PAGE ---- ARTICLE 1 - DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 ActaLab Software . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Affiliate. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.3 Confidential Information . . . . . . . . . . . . . . . . . . . . 2 1.4 Derivative Work. . . . . . . . . . . . . . . . . . . . . . . . . 2 1.5 Documentation. . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.6 Exclusive Developments . . . . . . . . . . . . . . . . . . . . . 2 1.7 Health Care Field. . . . . . . . . . . . . . . . . . . . . . . . 2 1.8 Information Services . . . . . . . . . . . . . . . . . . . . . . 3 1.9 Object Code. . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.10 Other Lab. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.11 ProviderLink . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.12 [*]. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.13 Providers. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.14 Related Entity . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.15 SBCL Software. . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.16 SBCL Trademark . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.17 SCAN Agreements. . . . . . . . . . . . . . . . . . . . . . . . . 3 1.18 SCAN Developments. . . . . . . . . . . . . . . . . . . . . . . . 4 1.19 Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.20 Source Code. . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.21 Specifications . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.22 Territory. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.23 Third Party Software . . . . . . . . . . . . . . . . . . . . . . 4 1.24 Trigger Date . . . . . . . . . . . . . . . . . . . . . . . . . . 4 ARTICLE 2 - LICENSE GRANTS; RELATED PROVISIONS . . . . . . . . . . . . . . . 4 2.1 SCAN Development License . . . . . . . . . . . . . . . . . . . . 4 2.2 ActaLab Development License. . . . . . . . . . . . . . . . . . . 5 2.3 Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.4 Technology Transfer. . . . . . . . . . . . . . . . . . . . . . . 6 2.5 Royalties. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 ARTICLE 3 - SCAN DEVELOPMENTS OWNERSHIP; RELATED PROVISIONS. . . . . . . . . 6 3.1 Ownership. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.2 Limitations. . . . . . . . . . . . . . . . . . . . . . . . . . . 7 ARTICLE 4 - LICENSE BACK . . . . . . . . . . . . . . . . . . . . . . . . . . 8 4.1 License Grant. . . . . . . . . . . . . . . . . . . . . . . . . . 8 4.2 Term of License. . . . . . . . . . . . . . . . . . . . . . . . . 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. -i- 4.3 Sublicenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 8 4.4 Usage Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 4.5 ActaLab Software Escrow. . . . . . . . . . . . . . . . . . . . . 9 ARTICLE 5 - MARKINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 5.1 By ActaMed . . . . . . . . . . . . . . . . . . . . . . . . . . .10 5.2 By SBCL. . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 ARTICLE 6 - DEVELOPMENT AGREEMENT AMENDMENTS . . . . . . . . . . . . . . . .11 ARTICLE 7 - WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . .11 7.1 Warranty of Title and Noninfringement. . . . . . . . . . . . . .11 7.2 Authorization. . . . . . . . . . . . . . . . . . . . . . . . . .12 7.3 Disclaimers. . . . . . . . . . . . . . . . . . . . . . . . . . .12 ARTICLE 8 - INDEMNITY. . . . . . . . . . . . . . . . . . . . . . . . . . . .12 8.1 General. . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 8.2 Services . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 8.3 Infringement . . . . . . . . . . . . . . . . . . . . . . . . . .13 8.4 Claims Notice. . . . . . . . . . . . . . . . . . . . . . . . . .13 8.5 Procedures Involving Non-Third Party Claims. . . . . . . . . . .13 8.6 Procedures Involving Third Party Claims. . . . . . . . . . . . .14 8.7 No Release for Fraud . . . . . . . . . . . . . . . . . . . . . .15 8.8 Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 8.9 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 ARTICLE 9 - LIMITATION OF LIABILITY. . . . . . . . . . . . . . . . . . . . .16 ARTICLE 10 - CONFIDENTIALITY . . . . . . . . . . . . . . . . . . . . . . . .16 ARTICLE 11 - ASSIGNMENT. . . . . . . . . . . . . . . . . . . . . . . . . . .16 11.1 By SBCL. . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 11.2 By ActaMed . . . . . . . . . . . . . . . . . . . . . . . . . . .17 11.3 Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 ARTICLE 12 - DISPUTE RESOLUTION. . . . . . . . . . . . . . . . . . . . . . .17 12.1 Informal Dispute Resolution. . . . . . . . . . . . . . . . . . .17 12.2 Arbitration. . . . . . . . . . . . . . . . . . . . . . . . . . .18 12.3 Immediate Injunctive Relief. . . . . . . . . . . . . . . . . . .19 12.4 Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . .19 12.5 Continued Performance; Continuation of Licenses. . . . . . . . .19 ARTICLE 13 - MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . .20 13.1 Further Assurances . . . . . . . . . . . . . . . . . . . . . . .20 13.2 Integration. . . . . . . . . . . . . . . . . . . . . . . . . . .20 -ii- 13.3 Force Majeure. . . . . . . . . . . . . . . . . . . . . . . . . .20 13.4 No Agency. . . . . . . . . . . . . . . . . . . . . . . . . . . .20 13.5 No Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . .20 13.6 Severability . . . . . . . . . . . . . . . . . . . . . . . . . .21 13.7 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 13.8 Governing Law; Interpretation. . . . . . . . . . . . . . . . . .21
SCHEDULES Schedule A SBCL Software Schedule B Amendments to Development Agreement -iii- CONFIDENTIAL TREATMENT REQUESTED LICENSE AGREEMENT THIS LICENSE AGREEMENT ("License Agreement") dated December 31, 1997 (the "Effective Date") is by and between SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC., a Delaware corporation ("SBCL") and ACTAMED CORPORATION, a Georgia corporation ("ActaMed"). WHEREAS, SBCL and ActaMed have entered into an Assets Purchase Agreement dated of even date herewith (the "Purchase Agreement") pursuant to which ActaMed has agreed to purchase certain assets owned by SBCL and used to provide certain services to health care service providers; WHEREAS, the Purchase Agreement contemplates that the parties will enter into a license agreement substantially on the terms set forth herein, as well as a Services Agreement (the "Services Agreement") pursuant to which ActaMed shall provide certain services to SBCL and to health care service providers; WHEREAS, SBCL and ActaMed have previously entered into a Development Agreement dated October 31, 1997 (the "Development Agreement") pursuant to which ActaMed agreed to perform certain development services; and WHEREAS, the parties desire to amend the provisions of the Development Agreement pursuant to which SBCL authorized ActaMed to use SBCL software and related materials in the performance of work under the Development Agreement, and pursuant to which the parties allocated ownership of deliverables created under the Development Agreement and intellectual property rights therein; NOW THEREFORE, in consideration of the foregoing premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, SBCL and ActaMed agree as follows: ARTICLE 1 - DEFINITIONS 1.1 "ACTALAB SOFTWARE" means (i) any updated, upgraded, corrected, modified, or enhanced version of ProviderLink created by or for ActaMed, and any Derivative Works made from ProviderLink by or for ActaMed, and any other Software owned and employed by ActaMed in providing Information Services or related services in accordance with the terms of the Services Agreement, in each case embodying, incorporating or practicing the SBCL Software or any portion thereof, (ii) any compiler or other program reasonably required to create Object Code from the Source Code of the foregoing or use any of the foregoing in the provision of Information Services, and (iii) any Documentation relating to any of the foregoing created by or for ActaMed. Without limiting the foregoing, "ActaLab Software" shall include [*] (as the term is defined in the Services Agreement). 1.2 "AFFILIATE" of an entity means a company or other person controlling, controlled by or under common control with such entity. 1.3 "CONFIDENTIAL INFORMATION" means any and all proprietary information disclosed or made available by a party hereto to the other party pursuant to this License Agreement, whether in written, oral, magnetic, photographic, optical or other form and whether now existing or hereafter created, including, without limitation, all trade secrets, know-how, information systems, technology, data, computer programs, processes, methods, operational procedures, plans, strategies or results, and other information of a similar nature that is not generally disclosed by such party to the public. Without limiting the foregoing, ActaMed's Confidential Information shall include the Source Code and Documentation for the ProviderLink Software and ActaLab Software, and SBCL's Confidential Information shall include the Source Code and Documentation for the SBCL Software and the SCAN Developments. Confidential Information shall not include any information which (a) is proven by written evidence to have been in the receiving party's possession prior to disclosure by the other party; (b) is received from a third party having the right to disclose such information; (c) is or hereafter becomes public knowledge through no act or fault of the receiving party; or (d) is proven by written evidence to have been independently developed by the receiving party without access to the Confidential Information of the other party. 1.4 "DERIVATIVE WORK" means a work that is based upon one or more preexisting works, such as a revision, modification, translation, abridgment, condensation, expansion, or any other form in which such preexisting works may be recast, transformed, translated or adapted, and that, if prepared without authorization of the owner of the copyright in such preexisting work, would constitute a copyright infringement. 1.5 "DOCUMENTATION" means manuals (e.g., user, utility reference and language reference) and other written materials that relate to particular Software, including materials useful for the operation of the Software by a user (collectively, "USER DOCUMENTATION"), and information (e.g., data flows, data structures, control logic, flow diagrams, and principles of operation) useful for design, modification and maintenance of the Source Code by a programmer (collectively, "PROGRAMMER DOCUMENTATION"). 1.6 "EXCLUSIVE DEVELOPMENTS" shall have the meaning ascribed to it by Section V.E of the Services Agreement. 1.7 "HEALTH CARE FIELD" means the provision of electronic data interchange technology relating to patients, patient-related services or the practice of medicine, to Providers, Healthcare Payors and Healthcare Administrators. "Healthcare Payor," for the purposes of this definition, means any person or entity that pays for the provision of healthcare services, [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -2- including without limitation employers, insurance companies, regional healthcare alliances, and federal, state and local governmental agencies. "Healthcare Administrator" means those entities engaged in the administration of healthcare services, including without limitation managed care companies, utilization review companies and third party administrators. Notwithstanding the foregoing, "Health Care Field" shall exclude services relating to or provided to [*]. 1.8 "INFORMATION SERVICES" means the transmission of orders for laboratory tests and/or laboratory test results and reports. 1.9 "OBJECT CODE" means the form of Software resulting from the translation or processing of the Source Code by a computer into machine language or intermediate code in a form that is not convenient to human understanding but which is appropriate for execution or interpretation by a computer, together with related User Documentation. 1.10 "OTHER LAB" shall have the meaning ascribed to it by the Services Agreement. 1.11 "PROVIDERLINK" means the ActaMed proprietary Software known as ProviderLink as it exists on the Effective Date, together with any updates, upgrades, enhancements, modifications or Derivative Works made thereto or therefrom by or for ActaMed other than under the licenses granted by this License Agreement, and the Specifications and Documentation relating to and of the foregoing prepared by or for ActaMed. 1.12 [*]. 1.13 "PROVIDERS" means physicians, clinics, hospitals and other providers of clinical health care services other than [*]. 1.14 "RELATED ENTITY" means an entity that is engaged in the laboratory testing business and in which SBCL or an SBCL affiliate has a legal or beneficial ownership of ten percent (10%) or more. 1.15 "SBCL SOFTWARE" means the Software described in Schedule A hereto. "SBCL Software" shall in no event be construed to include [*] or Third Party Software. 1.16 "SBCL TRADEMARK" means SBCL's trade names, logos, trademarks, trade devices, product names and/or service marks. 1.17 "SCAN AGREEMENTS" means the Development Agreement, Purchase Agreement, Services Agreement and this License Agreement. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -3- 1.18 "SCAN DEVELOPMENTS" means (i) any updated, upgraded, corrected, modified, or enhanced version of the SBCL Software created by or for ActaMed under the rights granted by this License Agreement, and (ii) any Documentation relating to any of the foregoing created by or for ActaMed, provided, that SCAN Developments shall in no event be construed to include the ActaLab Software. 1.19 "SOFTWARE" means computer programming code consisting of Object Code and/or Source Code and/or associated procedural code, as applicable, including updates and revisions thereto. 1.20 "SOURCE CODE" means program instructions and codes written by humans with the intention that the instructions and codes be compiled and interpreted by a computer, including all existing commentary, explanations, control procedures, record layouts for all files and program listings-source codes, design documentation, user manuals, programmers' guides, system guides, current compilation instructions, and all other User Documentation and Programmer Documentation. 1.21 "SPECIFICATIONS" means a description of the design, operating procedures, performance, functions and other requirements for Software. 1.22 "TERRITORY" means the United States of America, including all territories and possessions thereof. 1.23 "THIRD PARTY SOFTWARE" means Software that SBCL prior to the Effective Date licensed from third parties for use in delivery of automated order entry and results reporting services, including without limitation Software known as [*] and [*]. 1.24 "TRIGGER DATE" shall have the meaning ascribed to it by Section 4.4.1 hereof. ARTICLE 2 - LICENSE GRANTS; RELATED PROVISIONS 2.1 SCAN DEVELOPMENT LICENSE. Subject to the terms and conditions of this License Agreement, SBCL hereby grants ActaMed a perpetual, irrevocable, nonexclusive, non-transferable (except as otherwise expressly set forth herein) right and license in the Health Care Field in the Territory to: 2.1.1 possess and use the SBCL Software to update, upgrade, enhance, modify and create Derivative Works from the SBCL Software and otherwise create SCAN Developments; and 2.1.2 possess and use, update, upgrade, enhance, modify and create Derivative Works from the SBCL Software, SCAN Developments and ActaLab Software; [*] 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- 2.1.3 possess and use the SBCL Software and SCAN Developments for the purposes of performing ActaMed's obligations under the SCAN Agreements; and 2.1.4 possess and use the SCAN Developments for the purpose of providing Information Services in support of the laboratory testing services offered by Other Labs only to the extent such SCAN Developments do not constitute Exclusive Developments under the Service Agreement. The foregoing license shall include the right to (i) sublicense the SBCL Software and/or SCAN Developments to one or more contractors performing the activities described in Sections 2.1.1 or 2.1.2 hereof for ActaMed's benefit and for ActaMed's account, and (ii) sublicense Providers, [*] and Other Labs to use the Object Code version of the SBCL Software and/or the SCAN Developments as ActaMed reasonably determines necessary or appropriate in connection with its provision of the services contemplated by Section 2.1.3, in each case provided that each sublicensee executes a written agreement (x) prohibiting such sublicensee from disclosing SBCL Confidential Information or using the same other than as contemplated by this Section 2.1, and (y) precluding the sublicensee or any of its employees or agents from gaining or holding any right or interest in the SBCL Software. 2.2 ACTALAB DEVELOPMENT LICENSE 2.2.1 GRANT. Subject to the terms and conditions of this License Agreement, SBCL hereby grants ActaMed a perpetual, irrevocable, nonexclusive, non-transferable (except as otherwise expressly set forth herein) right and license to possess and use the SBCL Software to update, upgrade, enhance, modify and create Derivative Works from ProviderLink and otherwise create ActaLab Software pursuant to the Development Agreement and otherwise. The license granted by this Section 2.2.1 shall survive the termination of this License Agreement. 2.2.2 OWNERSHIP. Ownership of Deliverables (as defined by the Development Agreement) relative to the ActaLab Software shall be governed by Section 5 of the Development Agreement, as amended. Ownership of all other ActaLab Software and all intellectual property rights therein (including but not limited to copyrights and all renewals and extensions thereof) shall vest in ActaMed, except that nothing in this Agreement shall be construed to transfer to ActaMed, or otherwise divest SBCL of SBCL's ownership of, the SBCL Software or SCAN Developments or the patents, copyrights, trade secrets and other intellectual property rights therein. ActaMed shall own the ActaLab Software Exclusive Developments. 2.3 CONDITIONS. 2.3.1 As a material inducement for SBCL's grant of the licenses contemplated by this Agreement and the amendments to the Development Agreement contemplated by [*] 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. -5- Article 6 of this Agreement, ActaMed hereby covenants and agrees that, except as SBCL may authorize in writing, ActaMed (and any sublicensee of ActaMed) shall use the ActaLab Software solely within the Territory and solely in the Health Care Field. 2.3.2 ActaMed further covenants and agrees that, except as SBCL may otherwise agree in writing, ActaMed shall not use or license the use of the ActaLab Software Exclusive Developments for the benefit of any party other than in support of SBCL's laboratory testing services. 2.4 TECHNOLOGY TRANSFER. SBCL, within thirty (30) days following the Effective Date, shall provide ActaMed with one copy of all currently existing SBCL Software not previously provided in connection with the Development Agreement or otherwise. Thereafter, during the term of the Services Agreement, SBCL shall promptly provide ActaMed with such updates, upgrades and enhancements to the SBCL Software as SBCL, in its sole discretion, may make or have made during the term of the Services Agreement. 2.5 ROYALTIES. 2.5.1 If ActaMed uses the SBCL Software, SCAN Developments or ActaLab Software in the provision of Information Services to [*] ActaMed shall agree to pay SBCL a royalty equal to [*] of Royalty Revenues for the Royalty Period applicable to such [*]. "Royalty Revenues," for these purposes, means the [*] ActaMed collects for such Information Services. The "Royalty Period," with respect to Software or services provided in support of a given [*] means the [*] period commencing on the date [*]. 2.5.2 The royalties accruing pursuant to this Section 2.4 shall be payable on a [*] basis, and shall be due within [*] days following the end of the [*] in which they accrue. Each such royalty payment shall be accompanied by a report showing, by each [*] the total Royalty Revenue collected during the applicable [*] and the royalty amount due in respect of such Royalty Revenue. ARTICLE 3 - SCAN DEVELOPMENTS OWNERSHIP; RELATED PROVISIONS 3.1 OWNERSHIP. 3.1.1 Subject to the provisions of Section 3.2 hereof, SBCL, as between ActaMed and SBCL, shall have sole and exclusive ownership in and title to the SBCL Software and SCAN Developments, including all intellectual property rights therein. Without limiting the foregoing, the SCAN Developments shall be "works made for hire" for [*] 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- the benefit of SBCL. To the extent that any of the SCAN Developments, by operation of law, may not be works made for hire, or to the extent ActaMed otherwise would retain any rights in the SCAN Developments, ActaMed, subject to the provisions of Section 3.2.2 hereof, hereby assigns to SBCL the ownership of any patent or copyright in the SCAN Developments and SBCL shall have the right to obtain and hold in its own name copyrights, patents, registrations and similar protections which may be available with respect to the SCAN Developments. 3.1.2 Nothing in this Agreement shall be construed to transfer to SBCL, or otherwise divest ActaMed of ActaMed's ownership of, ProviderLink, the ActaLab Software or the patents, copyrights, trade secrets and other intellectual property rights therein, provided, that, subject to the provisions of Section 3.2.1 hereof, ActaMed hereby grants SBCL a perpetual, nonexclusive, royalty-free license (with right of sublicense) under such intellectual property rights to use, possess, update, upgrade, enhance, modify, reproduce, market, distribute and sell the SCAN Developments. 3.1.3 ActaMed shall provide SBCL with the Source Code for the SCAN Developments on or before the first release of the same to a commercial customer or the use of the same in providing a commercial service (the "Release Date") and, thereafter, on or before the Release Date of any updates, upgrades, enhancements or modifications thereto and, in any event, [*] during the term of the Services Agreement (including any renewal terms thereof). 3.2 LIMITATIONS. 3.2.1 SBCL covenants and agrees that, prior to the expiration or termination of the Services Agreement, it shall not use, or sublicense any other party to use, the SCAN Developments except (i) in the Territory solely for the purpose of performing Information Services in support of the laboratory testing services offered [*] that has not been transferred to ActaMed pursuant to the Purchase Agreement, and (ii) outside of the Territory. In the event SBCL uses the SCAN Developments to provide Information Services in support of [*] within the Territory, SBCL shall pay ActaMed a usage fee to be negotiated by the parties, such usage fee to be determined in accordance with the provisions, and during the term, of the Services Agreement. 3.2.2 Except to the extent such SCAN Developments constitute Exclusive Developments, nothing in this Agreement shall be construed to (i) grant SBCL or any other party ownership of such portions of the SCAN Developments as are devoted solely to the process of checking patient eligibility for third party payor benefits or reimbursement, or claim status checking (collectively, "Eligibility Services"), or (ii) grant SBCL any right or license to use the SCAN Developments for the purposes of performing or providing Eligibility Services, except that SBCL shall not be required to delete or [*] 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- remove the Eligibility Code from the SCAN Developments prior to exercising the rights and licenses granted by this Article 3. ARTICLE 4 - LICENSE BACK 4.1 LICENSE GRANT. Subject to the provisions of this Article 4, ActaMed hereby grants SBCL an irrevocable, nonexclusive, non-transferable (except as expressly set forth herein) right and license in the Territory in the Health Care Field to: 4.1.1 possess and use the ActaLab Software to create [*] and update, upgrade, modify, enhance and create Derivative Works from [*] (such Derivative Works being referred to herein as the [*]) as SBCL reasonably determines necessary to perform Information Services in support of laboratory test services offered by SBCL and/or Related Entities, including without limitation to ensure compliance with laws and regulations applicable to the business of SBCL and Related Entities, PROVIDED, that SBCL covenants and agrees that it shall not exercise the licenses granted by this Section 4.1.1 prior to the earlier of [*] (the "Trigger Date"); and 4.1.2 possess and use [*] and [*] for internal business purposes of SBCL and Related Entities, including without limitation the provision of Information Services to Providers in support of their respective laboratory testing services, PROVIDED, that SBCL covenants and agrees that it shall not exercise the licenses granted by this Section 4.1.2 prior to the date on which the Services Agreement expires as a result of ActaMed's notice of nonrenewal or the date on which the Services Agreement terminates for ActaMed's breach, as applicable. 4.2 TERM OF LICENSE. The licenses granted by this Article 4 shall expire on the second anniversary of the date on which SBCL first uses ActaLabSB on a commercial basis in support of SBCLs laboratory testing services. 4.3 SUBLICENSES. The licenses granted by Section 4.1 shall include the right to (a) sublicense the ActaLab Software, and [*] to one or more contractors performing any of the foregoing for the benefit and account of SBCL or a Related Entity, and (b) sublicense Providers to use the Object Code version of [*] as reasonably may be required to provide the services contemplated by Section 4.1.2, in each case provided that each sublicensee executes a written agreement (x) prohibiting such sublicensee from disclosing ActaMed Confidential Information or using the same other than as contemplated [*] 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. -8- by this Article 4, and (y) precluding the sublicensee or any of its employees or agents from gaining or holding any right or interest in the ActaLab Software. 4.4 USAGE FEES. 4.4.1 SBCL, in addition to the other consideration contemplated by the SCAN Agreements, agrees to pay, as a royalty, a Usage Fee on each Royalty Transaction. For the purposes of this Section 4.4.1: (i) "Royalty Transaction" means a Requisition (as defined in the Services Agreement) entered [*] (pursuant to Sections XII.E.1.b or XII.E.3.c. of the Services Agreement) to or for a site other than one of the Permitted Number of sites. (ii) "Usage Fee" means the lesser of (i) [*] per Requisition and [*] of the Transaction Fee then prevailing under Article IV of the Services Agreement or (ii) [*] of an amount competitive with the market for Information Services, such amount [*] to be calculated in accordance with the principles established by Section IV of the Services Agreement. (iii) "Permitted Number" means [*] the number of sites [*] the largest number of sites with respect to which [*]. 4.4.2 The royalties accruing pursuant to this Section 4.4 shall be payable on a [*] and shall be due within [*] days following the end of the [*] in which they accrue. Each such royalty payment shall be accompanied by a report showing the manner in which the payment amount was calculated. 4.5 ACTALAB SOFTWARE ESCROW. 4.5.1 Promptly upon the execution of this License Agreement, ActaMed shall give written notice to Fort Knox Escrow Services, Inc. ("Fort Knox") instructing Fort Knox to add SBCL to the list of Licensees maintained pursuant to that certain Master Escrow Agreement dated February 20, 1995 (the "Escrow Agreement"). ActaMed shall deposit the Source Code for all ActaLab Software in accordance with the terms of the Escrow Agreement on or before the first release of the same to a commercial customer or the use of the same in providing a commercial service (the "Release Date") and, thereafter, on or before the Release Date of any updates, upgrades, [*] 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- enhancements or modifications thereto and, in any event, no less often than once [*] during the term of the Services Agreement (including any renewal terms thereof). 4.5.2 ActaMed, within thirty (30) days of the date of this Agreement shall enter into an amendment to the Escrow Agreement with Fort Knox, reasonably acceptable to SBCL in form and substance, to the effect that Fort Knox, at SBCL's request and expense, agrees to inspect the deposit materials supplied by ActaMed for the purpose of confirming their identity and completeness. 4.5.3 ActaMed, promptly upon SBCL's demand made at any time following the Trigger Date, shall notify Fort Knox in accordance with Section 4.1(a) of the Escrow Agreement to deliver the Source Code for the ActaLab Software to SBCL, which notice shall be accompanied by the fees specified in such Section 4.1(a). 4.5.4 ActaMed covenants and agrees to maintain the Escrow Agreement in full force and effect during the term of the Services Agreement, and acknowledges that its failure to do so will constitute a material breach of this License Agreement and the Services Agreement. 4.5.5 ActaLab hereby appoints SBCL as its attorney in fact for the limited purpose of providing to Fort Knox the notices contemplated by this Section 4.4.1 and 4.4.3. ARTICLE 5 - MARKINGS 5.1 BY ACTAMED. ActaMed shall reproduce SBCLs copyright notice on all SBCL Software and SCAN Developments in accordance with the practice prevailing in the software industry. Subject to the foregoing sentence: 5.1.1 ActaMed, on or before the date on which ActaMed switches any site from the SBCL gateway to the ActaMed gateway (as described in Section II.B of the Services Agreement), shall remove SBCL Trademarks from the sign-on screen for the ActaLab Software and SCAN Developments resident on the computer at such site, and from any other screens that might reasonably suggest that SBCL, rather than ActaMed, is the source of the Information Services provided using such Software; and 5.1.2 ActaMed, with the reasonable assistance of SBCL's Distribution Service Representatives in accordance with Section II.B.4 of the Services Agreement, shall remove SBCL Trademarks from any equipment owned or controlled by ActaMed and located at a given site within three (3) months of the Transfer Date for such site, but in any event prior to the date on which ActaMed transfers ownership of such equipment to any other party. [*] 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. -10- 5.2 BY SBCL. SBCL shall reproduce ActaMeds copyright notice on all copies of the ActaLab Software in accordance with the practice prevailing in the software industry. ARTICLE 6 - DEVELOPMENT AGREEMENT AMENDMENTS The parties hereby agree to amend the Development Agreement as set forth in Schedule B hereto. ARTICLE 7 - WARRANTIES 7.1 WARRANTY OF TITLE AND NONINFRINGEMENT. 7.1.1 ActaMed represents and warrants to SBCL that: (i) Unless ActaMed provides SBCL with advance written notice to the contrary in accordance with Section 5.2(b) of the Development Agreement, ActaMed is and will be the sole author of all works used by ActaMed in preparing the ActaLab Software and SCAN Developments; (ii) ActaMed shall require all officers, employees, contractors, representatives and agents who provide services with respect to the ActaLab Software, SBCL Software or SCAN Developments under the SCAN Agreements to assign to ActaMed all intellectual property rights created or arising therein; (iii) Subject to the provisions of Section 7.1.2 hereof, ActaMed has and will have full and sufficient right in the ActaLab Software to grant the licenses and rights contemplated by Article 4 of this License Agreement, free and clear of any liens, claims or encumbrances; (iv) Subject to the provisions of Section 7.1.2 hereof, the terms and conditions set forth in Article 3 hereof are sufficient to convey to SBCL all right, title and interest in and to the SCAN Developments, and following such conveyance neither ActaMed nor any third party shall retain any right, title or interest in the SCAN Developments other than the licenses expressly set forth herein; and (v) Subject to the provisions of Section 7.1.2 hereof, none of the ActaLab Software or SCAN Developments infringes any patents, copyrights, trademarks, or other intellectual property rights (including trade secrets), privacy or similar rights of any third party, nor has any claim of such infringement been threatened or asserted. -11- 7.1.2 SBCL represents and warrants to ActaMed that: (i) SBCL is the sole author of the SBCL Software; (ii) SBCL has required all officers, employees, contractors, representatives and agents who prior to the date of this Agreement provided services with respect to the Software to assign to SBCL all intellectual property rights created or arising therein; (iii) SBCL has and will have full and sufficient right in the SBCL Software to grant the licenses and rights contemplated by Article 2 of this License Agreement, free and clear of any liens, claims or encumbrances; and (iv) none of the SBCL Software provided to ActaMed by SBCL hereunder infringes any patents, copyrights, trademarks, or other intellectual property rights (including trade secrets), privacy or similar rights of any third party, nor has any claim of such infringement been threatened or asserted. 7.2 AUTHORIZATION. Each of ActaMed and SBCL represents and warrants that, as of the Effective Date of this License Agreement (i) it is duly authorized to enter into this License Agreement, and (ii) it is free of any obligation or restriction that would prevent it either from entering into or performing this License Agreement. 7.3 DISCLAIMERS. THE FOREGOING WARRANTY IS IN LIEU OF ANY OTHER WARRANTY, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WHICH ARE HEREBY SPECIFICALLY EXCLUDED AND DISCLAIMED. WITHOUT LIMITING THE FOREGOING, (i) NOTHING IN THIS LICENSE AGREEMENT SHALL BE CONSTRUED TO EXPAND OR EXTEND THE WARRANTIES ACTAMED GRANTS IN THE OTHER SCAN AGREEMENTS WITH RESPECT TO THE ACTALAB SOFTWARE OR SCAN DEVELOPMENTS, AND (ii) SUBJECT TO SUCH WARRANTIES AND REPRESENTATIONS AS ARE CONTAINED IN THE OTHER SCAN AGREEMENTS, ACTAMED ACKNOWLEDGES THAT SBCL IS LICENSING THE SBCL SOFTWARE TO ACTAMED ON AN AS IS BASIS, AND HEREBY DISCLAIMS ANY WARRANTIES WITH RESPECT TO THE OPERATION THEREOF. ARTICLE 8 - INDEMNITY 8.1 GENERAL. Each party hereto shall indemnify, defend and hold harmless the other party and its officers, employees, representatives and agents against any and all damages, losses, or expenses suffered or paid as a result of any claims, demands, suits, causes of action, -12- proceedings, awards, judgments, and liabilities (including reasonable attorneys fees) incurred in litigation, arbitration or otherwise, assessed, incurred, or sustained (each, a Claim) with respect to or arising out of the breach by the Indemnifying Party of any representation, warranty, covenant or agreement made herein. 8.2 SERVICES. ActaMed shall indemnify, defend and hold harmless SBCL and its officers, employees, representatives and agents against any Claim arising from or relating to ActaMeds provision of the ActaLab Software, SCAN Developments or any services, in each case in support of any Other Lab pursuant to this License Agreement. SBCL shall indemnify, defend and hold harmless ActaMed and its officers, employees, representatives and agents against any Claim arising from or relating to SBCLs provision of the SCAN Developments or any services outside the Territory or to [*] as contemplated by Section 3.2 hereof. 8.3 INFRINGEMENT. 8.3.1 ActaMed, subject to the provisions of Section 8.3.2 hereof, shall indemnify, defend and hold harmless SBCL and the Related Entities and their respective officers, employees, representatives and agents against any Claim alleging the ActaLab Software or any SCAN Development infringes or constitutes misappropriation of any U.S. or foreign patent or any other U.S. or foreign proprietary right of a third party. 8.3.2 SBCL shall indemnify, defend and hold harmless ActaMed and its Affiliates and their respective officers, employees, representatives and agents against any Claim alleging the SBCL Software infringes or constitutes misappropriation of any U.S. or foreign patent or any other U.S. or foreign proprietary right of a third party. 8.4 CLAIMS NOTICE. A Claim shall be made by any entity or individual eligible for indemnification pursuant to this Article 8 (an Indemnitee) by delivery of a Claims Notice to the party owing a duty of indemnification under this Article 8 (the Indemnifying Party) requesting indemnification and specifying the basis on which indemnification is sought and the amount of asserted Losses (as defined in the Services Agreement) and, in the case of a Third Party Claim (as defined in the Services Agreement), containing (by attachment or otherwise) such other information as such Indemnitee shall have concerning such Third Party Claim. 8.5 PROCEDURES INVOLVING NON-THIRD PARTY CLAIMS. If the Claim involves a matter other than a Third Party Claim, the Indemnifying Party shall raise any objection to such Claim within a reasonable period of time by delivery of a written notice of such objection to such Indemnitee specifying in reasonable detail the basis for such objection. If an objection is timely interposed by the Indemnifying Party, the Indemnifying Party and the Indemnitee shall cooperate in the compromise of the Claim or resolve any disagreement in accordance with Article 12 hereof. [*] 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. -13- 8.6 PROCEDURES INVOLVING THIRD PARTY CLAIMS. The obligations and liabilities of the parties hereunder with respect to a Third Party Claim shall be subject to the following terms and conditions: 8.6.1 The Indemnitee shall give the Indemnifying Party written notice of a Third Party Claim promptly after receipt by the Indemnitee of notice thereof, and the Indemnifying Party may undertake the defense, compromise and settlement thereof by representatives of its own choosing reasonably acceptable to the Indemnitee. The failure of the Indemnitee to notify the Indemnifying Party of such claim shall not relieve the Indemnifying Party of any liability that they may have with respect to such claim except to the extent the Indemnifying Party demonstrates that the defense of such claim is prejudiced by such failure. The assumption of the defense, compromise and settlement of any such Third Party Claim by the Indemnifying Party shall be an acknowledgment of the obligation of the Indemnifying Party to indemnify the Indemnitee with respect to such claim hereunder. If the Indemnitee desires to participate in, but not control, any such defense, compromise and settlement, it may do so at its sole cost and expense. If, however, the Indemnifying Party fails or refuses to undertake the defense of such Third Party Claim within ten (10) days after written notice of such claim has been given to the Indemnifying Party by the Indemnitee, the Indemnitee shall have the right to undertake the defense, compromise and settlement of such claim with counsel of its own choosing. In the circumstances described in the preceding sentence, the Indemnitee shall, promptly upon its assumption of the defense of such claim, make a Claim as specified in Section 8.3 which shall be deemed a Claim that is not a Third Party Claim for the purposes of the procedures set forth herein. 8.6.2 If, in the reasonable opinion of the Indemnitee, any Third Party Claim or the litigation or resolution thereof involves an issue or matter which could have a material adverse effect on the business, operations, assets, properties or prospects of the Indemnitee, the Indemnitee shall have the right to control the defense, compromise and settlement of such Third Party Claim undertaken by the Indemnifying Party, and the reasonable costs and expenses of the Indemnitee in connection therewith shall be included as part of the indemnification obligations of the Indemnifying Party hereunder. If the Indemnitee shall elect to exercise such right, the Indemnifying Party shall have the right to participate in, but not control, the defense, compromise and settlement of such Third Party Claim at its sole cost and expense. 8.6.3 No settlement of a Third Party Claim involving the asserted liability of the Indemnifying Party under this Article shall be made without the prior written consent by or on behalf of the Indemnifying Party, which consent shall not be unreasonably withheld or delayed. If the Indemnifying Party assumes the defense of such a Third Party Claim, (1) no compromise or settlement thereof may be effected by the Indemnifying Party without the Indemnitee's consent unless (a) there is no finding or -14- admission of any violation of law or any violation of the rights of any person and no effect on any other claim that may be made against the Indemnitee (b) the sole relief provided is monetary damages that are paid in full by the Indemnifying Party and (c) the compromise or settlement includes, as an unconditional term thereof, the giving by the claimant or the plaintiff to the Indemnitee of a release, in form and substance satisfactory to the Indemnitee, from all liability in respect of such Third Party Claim, and (2) the Indemnitee shall have no liability with respect to any compromise or settlement thereof effected without its consent. 8.7 NO RELEASE FOR FRAUD. Nothing contained in this Agreement shall relieve or limit the liability of a party or any officer or director of such party from any Liability arising out of or resulting from common law fraud or intentional misrepresentation in connection with the transactions contemplated by this Agreement or in connection with the delivery of this Agreement. Each ActaMed Indemnitee or SBCL Indemnitee, as the case may be, shall have a right to indemnification for any Loss incurred as the result of any common law fraud or intentional misrepresentation by SBCL or ActaMed, respectively, or any officer or director thereof. 8.8 PAYMENT. 8.8.1 If any party is required to make any payment under this Article 8, such party shall promptly pay the Indemnified Party the amount so determined. If there is a dispute as to the amount or manner of determination of any indemnity obligation owed under this Article 8, the Indemnifying Party shall nevertheless pay when due such portion, if any, of the obligation as shall not be subject to dispute. The difference, if any, between the amount of the obligation ultimately determined as properly payable under this Article 8 and the portion, if any, theretofore paid shall bear interest as set forth in Section 8.8.3 hereof. 8.8.2 Any items as to which an Indemnified Party is entitled to payment under this Article may be paid by set off against amounts payable to the Indemnifying Party to the extent that such amounts are sufficient to pay such items. 8.8.3 If all or part of any indemnification obligation under this Agreement is not paid when due, then the Indemnifying Party shall pay the Indemnified Party interest on the unpaid principal amount of the obligation from the date the amount became due until payment in full, at the per annum rate of interest announced from time to time by NationsBank South, N.A., to be its "prime rate." 8.9 SURVIVAL. The provisions of this Article 8 shall survive the termination of this License Agreement. -15- ARTICLE 9 - LIMITATION OF LIABILITY NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY IN TORT, CONTRACT OR OTHERWISE FOR ANY LOST PROFITS, SPECIAL, INDIRECT, INCIDENTAL, PUNITIVE OR CONSEQUENTIAL DAMAGES ARISING OUT OF, OR IN CONNECTION WITH THIS LICENSE AGREEMENT THAT THE OTHER PARTY, OR ANY THIRD PARTY, MAY INCUR, EXPERIENCE OR CLAIM, EVEN IF THE PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH CLAIM. ARTICLE 10 - CONFIDENTIALITY In the course of exercising this License Agreement each party will likely obtain Confidential Information of the other party. The parties agree to safeguard against the unauthorized use and disclosure of any Confidential Information and to use the same degree of care that each uses to protect its own information of a similar nature, but in no event less than a reasonable degree of care under the circumstances. Neither party to this License Agreement will disclose the other party's Confidential Information to any third person, except (i) with the prior written consent of the other party; (ii) to the extent necessary to comply with law or legal process, in which event the party making the disclosure will, subject to applicable law, notify the other party as promptly as practicable prior to making any disclosure and seek confidential treatment of the information; (iii) to the extent necessary, as a part of its normal reporting or review procedure to its parent company, or its auditors and attorneys on a confidential basis; or (iv) in connection with the enforcement of the party's rights hereunder or under any related agreements. The parties hereto agree to restrict disclosure of the Confidential Information solely to its employees or others under its control who have a need to know the same in furtherance of the purposes of this License Agreement and who have been directed and contractually or legally restricted from disclosing the Confidential Information at least to the degree required under this License Agreement. Each party shall be liable to the other for any breach of the covenants of confidentiality contained herein by its agents or employees. The provisions of this section shall survive the expiration or termination of this License Agreement. ARTICLE 11 - ASSIGNMENT 11.1 BY SBCL. SBCL may assign all of its rights and obligations under this License Agreement or any license granted hereunder to any Affiliate, or to any corporation or other entity pursuant to a merger, consolidation, or other reorganization. SBCL agrees to notify ActaMed of any such assignment, in writing, specifying the name and address of the other entity. -16- 11.2 BY ACTAMED. ActaMed may assign all of its rights and obligations under this License Agreement or any license granted hereunder to any Affiliate or to any other corporation or other entity pursuant to a merger, consolidation, or other reorganization. ActaMed agrees to notify SBCL at least thirty (30) days prior to the date of any such assignment, in writing, specifying the name and address of the assignee. Notwithstanding the foregoing: (i) Nothing in this License Agreement shall be construed to authorize ActaMed to assign this License Agreement to any assignee if such assignee or any Affiliate of the assignee is engaged in the business of performing laboratory services similar to those performed by SBCL as of the date of the assignment, and (ii) SBCL shall have the right to require ActaMed to void the assignment if the assignee or any Affiliate of the assignee enters the business of performing laboratory services similar to those performed by SBCL as of the date of this Agreement or the date of the assignment. 11.3 OTHER. Except as expressly set forth in this Article 11 and except as the other party may consent in writing, neither party may assign or transfer this License Agreement or any right or obligation hereunder to any third party, and any attempt to do so in contravention of this Article 11 shall be void and shall have no force or effect. ARTICLE 12 - DISPUTE RESOLUTION 12.1 INFORMAL DISPUTE RESOLUTION. Any dispute between the parties arising out of or with respect to this License Agreement, either with respect to the interpretation of any provision of this Agreement or with respect to the performance by ActaMed or SBCL, shall be resolved as provided in this Article. 12.1.1 Prior to the initiation of formal dispute resolution procedures, the parties shall first attempt to resolve their dispute informally, as follows: (i) The Representatives (as defined in the Services Agreement) for each party shall meet for the purpose of endeavoring to resolve such dispute. They shall meet as often as the parties reasonably deem necessary in order to gather and furnish to the other all information with respect to the matter in issue which the parties believe to be appropriate and germane in connection with its resolution. The Representatives shall discuss the problem and negotiate in good faith in an effort to resolve the dispute without the necessity of any formal proceeding. During the course of negotiations, all reasonable requests made by one party to another for nonprivileged information, reasonably -17- related to this Agreement, shall be honored in order that each of the parties may be fully advised of the other's position. (ii) If, within fifteen (15) days after a matter has been identified for resolution pursuant to this Article, either of the Representatives concludes in good faith that amicable resolution through continued negotiation in this forum does not appear likely, the matter will be escalated by formal written notification to the SBCL President and the ActaMed President (both as defined in the Services Agreement). The parties will use their respective best efforts to cause the SBCL President and the ActaMed President to meet to attempt to resolve the dispute. (iii) Formal proceedings for the resolution of a dispute may not be commenced until the earlier of: (i) the date on which the SBCL President and the ActaMed President conclude in good faith that amicable resolution through continued negotiation of the matter does not appear likely; or (ii) thirty (30) days after the dispute has been referred to the SBCL President and the ActaMed President. 12.1.2 The provisions of this Article 12 shall not be construed to prevent a party from instituting, and a party is authorized to institute, formal proceedings earlier to avoid the expiration of any applicable limitations period. 12.2 ARBITRATION. If the parties are unable to resolve any controversy arising under this Agreement as contemplated by Section 12.1 and if such controversy is not subject to Section 12.3 or Section 12.4, then such controversy shall be submitted to mandatory and binding arbitration at the election of either Party (the Disputing Party) pursuant to the following conditions: 12.2.1 The Disputing Party shall notify the AAA and the other Party in writing describing in reasonable detail the nature of the dispute (the "DISPUTE NOTICE"). The parties shall each select a neutral arbitrator in accordance with the rules of AAA and the two (2) arbitrators selected shall select a third neutral arbitrator. The three (3) arbitrators so selected are herein referred to as the "PANEL." 12.2.2 The Panel shall allow reasonable discovery as permitted by the Federal Rules of Civil Procedure, to the extent consistent with the purpose of the arbitration. The Panel shall have no power or authority to amend or disregard any provision of this Article 12. The arbitration hearing shall be commenced promptly and conducted expeditiously, with each of ActaMed and SBCL being allocated one-half of the time for the presentation of its case. Unless otherwise agreed to by the parties, an arbitration hearing shall be conducted on consecutive days. -18- 12.2.3 Should any arbitrator refuse or be unable to proceed with arbitration proceedings as called for by this Section, such arbitrator shall be replaced by an arbitrator selected in accordance with the rules of the AAA and consistent with this Article 12. 12.2.4 The Panel rendering judgment upon disputes between parties as provided in this Article 12 shall, after reaching judgment and award, prepare and distribute to the parties a writing describing the findings of fact and conclusions of law relevant to such judgment and award and containing an opinion setting forth the reasons for the giving or denial of any award. The award of the arbitrator shall be final and binding on the parties, and judgment thereon may be entered in a court of competent jurisdiction. 12.2.5 Arbitration hearings hereunder shall be held in Washington D.C. or another mutually agreeable location. 12.2.6 The Panel shall be instructed that time is of the essence in the arbitration proceeding. The Panel shall render its judgment or award within fifteen (15) days following the conclusion of the hearing. Recognizing the express desire of the parties for an expeditious means of dispute resolution, the arbitrator shall limit or allow the parties to expand the scope of discovery as may be reasonable under the circumstances. 12.3 IMMEDIATE INJUNCTIVE RELIEF. The nonbreaching party may file a pleading with a court seeking immediate injunctive relief in the event the other party commits a breach of the confidentiality obligations set forth in this Agreement, SBCL violates the limitations imposed by Section 3.2 hereof, ActaMed violates the limitations imposed by Section 2.2 or 2.3 hereof, or in the event a party makes a good faith determination that a breach of the terms of this Agreement by the other party is such that the damages to such party resulting from the breach will be so immediate, so large or severe, and so incapable of adequate redress after the fact that a temporary restraining order or other immediate injunctive relief is a necessary remedy. If a party files a pleading with a court seeking immediate injunctive relief and this pleading is challenged by the other party and the injunctive relief sought is not awarded in substantial part (or in the event of a temporary restraining order is vacated upon challenge by the other party), the party filing the pleading seeking immediate injunctive relief shall pay all of the costs and attorneys fees of the party successfully challenging the pleading. 12.4 JURISDICTION. ActaMed and SBCL each consent to venue in Philadelphia, Pennsylvania and to the nonexclusive jurisdiction of competent Pennsylvania state courts or federal courts located in Philadelphia for all litigation which may be brought, subject to the requirement for arbitration hereunder, with respect to the terms of, and the transactions and relationships contemplated by, this Agreement. 12.5 CONTINUED PERFORMANCE; CONTINUATION OF LICENSES. Each party agrees to continue performing its obligations under this Agreement while any dispute is being resolved unless -19- and until such obligations are terminated or expire in accordance with the provisions by the termination or expiration of this Agreement not in dispute. Nothing in this Agreement shall be construed as altering the perpetual and irrevocable nature of the licenses granted by this Agreement or as authorizing any arbitrator or court in any way to enjoin or otherwise interfere with the proper exercise of such licenses by either party hereto. ARTICLE 13 - MISCELLANEOUS 13.1 FURTHER ASSURANCES. From time to time SBCL and ActaMed and their respective officers, employees, contractors, representatives and agents, shall confirm the provisions of this Agreement by execution and delivery of such assignments, confirmations or other written instruments as may be reasonably requested by the other party in order to vest each party with the rights mentioned in this Agreement. ActaMed and SBCL shall obtain appropriate assignments, covenants and obligations from its officers, employees, representatives, agents and any contractors hired to carry out its obligations under the SCAN Agreements prior to their performance thereof to ensure SBCL or ActaMed, as the case may be, may own the rights specified in this Agreement. 13.2 INTEGRATION. This License Agreement (including all of the Schedules hereto) supersedes all prior agreements and understandings between the parties with respect to the subject matter of this License Agreement, and is intended by the parties as the complete and exclusive statement of their agreement, and supersedes all prior understandings and agreements, whether oral or written, between the parties with respect to the same subject matter. 13.3 FORCE MAJEURE. Each party shall be excused from delays in performing or from its failure to perform hereunder to the extent that such delays or failures result from causes beyond the reasonable control of such party; PROVIDED that, in order to be excused from delay or failure to perform, such party must act diligently to remedy the cause of such delay or failure. 13.4 NO AGENCY. Each party hereto, is acting solely as an independent contractor. In no way is either party to be construed as the agent or to be acting as the agent of the other party in any respect. Each party has the sole obligation to supervise, manage, contract, direct, procure, perform, or cause to be performed all work to be carried out by such party under any SCAN Agreement. 13.5 NO WAIVER. No delay or omission by either party to exercise any right arising upon any noncompliance with, or breach of, any covenant, condition or agreement to be performed by the other party shall impair any such right or be construed to be a waiver thereof. A waiver by either of the parties hereto of any noncompliance with, or breach of, any covenant, condition or agreement to be performed by the other party must be in writing and signed by both parties. No waiver of any right upon any one occurrence of noncompliance or breach -20- shall be construed to be a waiver of any succeeding noncompliance or breach. Unless stated otherwise, all remedies provided for in this License Agreement shall be cumulative and in addition to and not in lieu of any other remedies available to either party at law, in equity, or otherwise. 13.6 SEVERABILITY. If any term, covenant, condition or provision of this License Agreement or the application thereof to any circumstance shall be invalid or unenforceable to any extent, the remaining terms, covenants, conditions and provisions of this License Agreement shall not be affected thereby and each remaining term, covenant, condition and provision of this License Agreement shall be valid and enforceable to the fullest extent permitted by law. If any provision of this License Agreement is so broad as to be unenforceable, such provision shall be interpreted to be only as broad as is enforceable. 13.7 NOTICES. If one party is required or desires to give notice to the other, such notice shall be deemed given if mailed by U.S. mail, first class, postage prepaid, or via a nationally recognized overnight carrier, with all freight charges prepaid, and addressed as follows (or as subsequently noticed to the other party): If to SBCL: SmithKline Beecham Clinical Laboratories, Inc. 1201 S. Collegeville Road Collegeville, PA 19426 ATTN: [*] If to ActaMed: ActaMed Corporation 7000 Central Parkway Suite 600 Atlanta, GA 30328 ATTN: MIKE HOOVER 13.8 GOVERNING LAW; INTERPRETATION. This License Agreement shall be construed, interpreted and enforced under the laws of the Commonwealth of Pennsylvania, excluding its provisions regarding conflicts of law. The section and subsection headings used herein are for reference and convenience only, and shall not enter into the interpretation hereof. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -21- IN WITNESS WHEREOF, the parties have caused this License Agreement to be executed on the date set forth below. SMITHKLINE BEECHAM CLINICAL ACTAMED CORPORATION LABORATORIES, INC. BY: /s/ John B. Okkerse, Jr. BY: /s/ Michael K. Hoover --------------------------- ------------------------- NAME: John B. Okkerse, Jr. NAME: Michael K. Hoover --------------------------- ------------------------- TITLE: President TITLE: President --------------------------- ------------------------- DATE: 12-31-97 DATE: 12-31-97 --------------------------- ------------------------- SCHEDULE A SBCL SOFTWARE - - SBCL proprietary Software known as [*] (including without limitation the [*]) and [*]. - - Download programs and routines and other SBCL proprietary Software reasonably required to perform Information Services as SBCL is performing them as of the date of the License Agreement. - - Documentation owned by SBCL and related to any of the foregoing. - - Specifications owned and possessed by SBCL with respect to the foregoing. - - Such Specifications for the Software known as [*] and [*] as SBCL determines reasonably necessary for the SBCL Software, SCAN Developments and ActaLab Software [*] and [*]. - - Such updates, upgrades, corrections, modifications, and enhancements to any of the foregoing created during the term of the Services Agreement. - - All patents, patent applications, copyrights, trade secrets, know-how, information and other intellectual property rights that are currently owned or controlled by SBCL and that are embodied or practiced in the foregoing. [*] 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. SCHEDULE B AMENDMENTS TO DEVELOPMENT AGREEMENT SBCL and ActaMed hereby agree this day of December, 1997, to amend their Development Agreement October 31, 1997, as set forth herein as of the effective dates set forth herein. 1. Effective as of the date of the Development Agreement, Article I of the Development Agreement is hereby amended to include the following additional or revised definitions: "ActaLab Software" has the meaning ascribed to it by the License Agreement. "Deliverable" means all Software, Documentation and other materials developed by ActaMed under this Agreement and described in a Statement of Work. "License Agreement" means that certain License Agreement between SBCL and ActaMed dated December 22, 1997. "SBCL Software" has the meaning ascribed to it by the License Agreement. "SOW No. 1" shall mean the Statement of Work dated October 31, 1997. 2. The second "Whereas" clause is hereby deleted. 3. The fourth "Whereas" clause is hereby revised to delete the words "to SBCL." 4. Section 5.1(a) of the Development Agreement is hereby revised as of the date of the Development Agreement to read as follows: (a) The parties hereby acknowledge and agree that: (i) The Deliverables under SOW No. 1 do not [*] the SBCL Software, but instead [*] which will be used in conjunction with and/or will be integrated into ActaMed's ProviderLink software. All Deliverables (including but not limited to, the ActaLab Software) under SOW No. 1, and all intellectual property rights (including but not limited to copyrights and all renewals and extensions thereof) in such Deliverables, shall be [*]. Subject to the provisions of Section 5(a)(iv) hereof, SBCL hereby grants, transfers and assigns all of its right, title and interest in such Deliverables, including patents, copyrights, trade secrets and other intellectual property developed or acquired in the course of creating such Deliverables, to ActaMed and ActaMed shall have the right to obtain and hold in its own name copyrights, [*] 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. patents, registrations and similar protections which may be available with respect to such Deliverables. (ii) The parties contemplate that additional SOWs may be entered into from time to time for the purpose of enhancing, modifying or upgrading the ActaLab Software (an "ActaLab SOW"). All Deliverables under an ActaLab SOW and all intellectual property rights (including but not limited to copyrights and all renewals and extensions thereof) in such Deliverables, shall be [*]. Subject to the provisions of Section 5(a)(iv) hereof, SBCL hereby grants, transfers and assigns all of its right, title and interest in such Deliverables, including patents, copyrights, trade secrets and other intellectual property developed or acquired in the course of creating such Deliverables, to ActaMed and ActaMed shall have the right to obtain and hold in its own name copyrights, patents, registrations and similar protections which may be available with respect to such Deliverables. (iii) The parties contemplate that additional SOWs may be entered into from time to time for the purpose of enhancing, modifying or upgrading the SBCL Software (a "SCAN Development SOW"). Ownership of any Deliverables under a SCAN Development SOW, and ownership of any intellectual property rights therein (including but not limited to copyrights and all renewals and extensions thereof), shall be governed in all respects by Article 3 of the License Agreement. Subject to the provisions of Section 5(a)(iv) hereof, ActaMed hereby grants, transfers and assigns all of its right, title and interest in such Deliverables, including patents, copyrights, trade secrets and other intellectual property developed or acquired in the course of creating such Deliverables, to SBCL. (iv) Nothing in this Section 5(a) shall be construed to transfer to ActaMed, or otherwise divest SBCL of SBCL's ownership of, the SBCL Software and, subject to the licenses granted by the License Agreement, SBCL (as between SBCL and ActaMed) shall be the sole owner of the patents, copyrights, trade secrets and other intellectual property rights therein. Nothing in this Section 5(a) shall be construed to transfer to SBCL, or otherwise divest ActaMed of ActaMed's ownership of, any software or work of authorship owned by ActaMed as of the effective date of the Development Agreement and, subject to the licenses granted by the License Agreement, ActaMed (as between SBCL and ActaMed) shall be the sole owner of any patent, copyright, trade secret right or other intellectual property right therein. (v) Any Statement of Work, by mutual agreement of the parties, may include limitations and restrictions on ActaMed's use of the applicable Deliverables in support of laboratory testing services of commercial laboratories other than SBCL. 6. Sections 5.1(d) and (e) and Section 5.2(a) as of the date of this Amendment are hereby deleted from the Development Agreement. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 7. In the event of conflict between the Development Agreement and the License Agreement, the License Agreement shall control. 9. Except as expressly set forth herein, the Development Agreement shall continue in full force and effect as originally executed by the parties. 10. Nothing in this Agreement shall be construed to modify or change in any respect the ownership and use rights with respect to Exclusive Developments (as defined in the Services Agreement between SBCL and ActaMed dated the date hereof) pursuant to the License Agreement and Section V of said Services Agreement. In witness whereof, the parties have caused this Amendment to be signed this day of December, 1997. SMITHKLINE BEECHAM CLINICAL ACTAMED CORPORATION LABORATORIES, INC. BY: /s/ BY: /s/ ---------------------------- --------------------------- NAME: John B. Okkersee Jr. NAME: Michael K. Hoover -------------------------- ------------------------- TITLE: President TITLE: President ------------------------- ------------------------ DATE: DATE: -------------------------- ------------------------- EX-10.17 9 EXHIBIT 10.17 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. DEVELOPMENT AGREEMENT THIS AGREEMENT is made as of this 31 day of October, 1997, by and between SmithKline Beecham Clinical Laboratories, Inc., a Delaware corporation with offices located at 1201 S. Collegeville Road, Collegeville, PA 19426 ("SBCL"), and ActaMed Corporation, a Georgia corporation with offices located at 7000 Central Parkway, Suite 600, Atlanta, GA 30328 ("ACTAMED"). WHEREAS, ACTAMED has expertise in software development, installation and implementation, systems analysis and design, data processing and computer programming; WHEREAS, ACTAMED employs a staff of qualified technical personnel whose services ACTAMED is willing to provide to SBCL on a temporary or project basis; WHEREAS, SBCL desires to have ACTAMED provide certain services and personnel to SBCL for the project described in the attached Statement of Work; and WHEREAS, the parties desire to agree upon the terms and conditions under which ACTAMED may provide such services and personnel to SBCL. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants and agreements contained herein, the parties hereto agree as follows: ARTICLE I DEFINITIONS For purposes of this Agreement, the following terms shall have the following meanings and shall include the plural as well as the singular: "Affiliate" means any corporation or other entity which controls, is controlled by, or is under common control with SBCL, and any joint venture or partnership in which SBCL is a partner or joint venturer, or any other entity in which SBCL has an interest and to which it supplies or receives information processing services. A corporation or other entity shall be deemed to control another corporation or entity if it owns, directly or indirectly, more than fifty percent (50%) of the voting shares or other interest, or has the power to elect more than half the directors, of such other corporation or entity. "Confidential Information" means any and all proprietary information disclosed or made available by a party hereto to the other party in the course of performing hereunder, whether in written, oral, magnetic, photographic, optical or other form and whether now existing or hereafter created, including, without limitation, all trade secrets, know-how, information systems, technology, data, computer programs, processes, methods, operational procedures, plans, strategies or results, and other information of a similar nature that is not generally disclosed by such party to the public. Confidential Information shall not include any information which (a) is proven by written evidence to have been in a receiving party's possession prior to disclosure by the other party; (b) is received from a third party having the right to disclose such information; (c) is or hereafter becomes public knowledge through no act or fault of a receiving party; or (d) is proven by written evidence to have been independently developed by a receiving party without access to the Confidential Information of the other party. "Deliverables" means all Software, Documentation and other materials developed for or delivered to SBCL by ACTAMED under this Agreement and described in a Statement of Work. "Derivative Work" means a work that is based upon one or more preexisting works, such as a revision, modification, translation, abridgment, condensation, expansion, or any other form in which such preexisting works may be recast, transformed, translated or adapted, and that, if prepared without authorization of the owner of the copyright in such preexisting work, would constitute a copyright infringement. "Documentation" means manuals (e.g., user, utility reference and language reference) and other written materials that relate to particular Software, including materials useful for the operation of the Software by a user, and information (e.g., data flows, data structures, control logic, flow diagrams, and principles of operation) useful for design, modification and maintenance of the source code by a programmer. Documentation also shall include any Maintenance Modifications or Enhancements thereto created by ACTAMED from time to time, and such additional materials as may be described in a Statement of Work. "Enhancements" means changes or additions, other than Maintenance Modifications, to Software and related Documentation, including all new releases, that improve functions, add new functions, or significantly improve performance by changes in system design or coding. "Error" means any error, problem, or defect resulting from (a) an incorrect functioning of Software, or (b) an incorrect or incomplete statement of diagram in Documentation, if such an error, problem or defect renders the Software inoperable, causes the Software to fail to meet the Specifications thereof, causes the Documentation to be inaccurate or incomplete in any material respect, causes incorrect results or causes incorrect functions to occur when any such materials are used. "Maintenance Modifications" means any modifications or revisions, other than Enhancements, to Software or Documentation that correct Errors, support new releases of the operating systems with which the Software is designed to operate, support new input/output devices or provide other incidental updates and corrections. "Services" means the software development, design, analysis, data processing, computer programming, consulting, training and/or such other services and duties to be provided to SBCL under this Agreement and described in a Statement of Work. -2- "Software" means computer programming code, including updates and revisions thereto, which conform to the Specifications and includes both object code (i.e., machine-readable) and source code (i.e., human-readable), and associated procedural code, all as more fully described in a Statement of Work. Software also shall include any Maintenance Modifications and Enhancements thereto created by ACTAMED from time to time. "Specifications" means the description of the design, operating procedures, performance, functions and other requirements for the Software set forth in a Statement of Work. "Statement of Work" or "SOW" means a written instrument in substantially the form of Exhibit A attached hereto which is signed on behalf of both parties by their authorized representatives. ARTICLE II SERVICES 2.1 SERVICES. SBCL hereby retains ACTAMED to provide the Services and Deliverables, and ACTAMED hereby agrees to provide the Services and Deliverables, in the manner described in this Agreement and in Statements of Work issued from time to time hereunder. The Services and Deliverables shall conform to the Specifications set forth in the applicable SOW. 2.2 SCHEDULE; LOCATION. SBCL, at its own expense, shall furnish to ACTAMED access to appropriate computer personnel, as well as all relevant Documentation, Specifications and source code in its possession and necessary for ACTAMED to provide the Services and Deliverables. ACTAMED will provide the Services and deliver the Deliverables on or before the dates (the "Schedule") and at the location(s) set forth in a SOW. Delivery of any intermediate Deliverables, or status reports thereon, also shall be on the dates specified in the Schedule. No variation or modification shall be made to the Schedule without the prior written consent of SBCL and ACTAMED. 2.3 Personnel. (a) ACTAMED shall provide fully trained, competent and skilled personnel for performance of the Services. (b) Promptly upon execution of this Agreement, each party shall notify the other party of the name, business address and telephone number of its Contract Administrator. The Contract Administrators of each party shall be responsible for arranging all meetings, visits and consultations between the parties that are of a nontechnical nature. The Contract Administrator also shall be responsible for receiving all notices under this Agreement and for all administrative matters such as invoices, payments and amendments. (c) Each SOW shall state the name, business address and telephone number of the Project Managers for each party. The Project Managers of each party designated for a particular -3- SOW shall, with respect to such SOW, be responsible for technical and performance matters, and the delivery, receipt and acceptance of the Deliverables and technical information. 2.4 PROGRESS REPORTS AND MEETINGS. At either party's reasonable written request from time to time during the performance of this Agreement, but at least once each month, and at no additional cost, the Project Managers and any other personnel either party may designate shall meet to review the progress of the project described in a particular SOW. At each such meeting, ACTAMED shall provide SBCL with a written status report, which shall include but not be limited to, any problem that, in ACTAMED's reasonable judgment, might cause any increase in the budgeted costs for such project or adversely affect ACTAMED's ability to meet the Schedule or the Specifications. 2.5 Change Order Procedures. (a) REQUIREMENT OF CHANGE ORDERS. All changes, modifications and additions to the obligations of either party under this Agreement or any SOW requires a written change order (a "Change Order"). Either party may initiate a Change Order by submitting a written request for a Change Order to the other party along with an explanation of reasons as to why such a modification is desirable or necessary. (b) CHANGE ORDER CONTENTS. All Change Orders must contain: (i) a description of any additional work to be performed and/or changes to the performance required of either party, including the estimated number and skill level of personnel necessary to make such changes and/or additions and the availability of such personnel over the ensuing period; (ii) a statement of the impact of the work or changes on the Services, Deliverables, Schedule, costs or other requirements of this Agreement or a SOW; (iii) acceptance test procedures for such work, if applicable; and (iv) signatures of duly authorized individuals of each party. (c) ACCEPTANCE OF CHANGE ORDER. Within ten (10) days of the submission of a Change Order request from one party to the other, the receiving party shall notify the other party of its acceptance or rejection. SBCL may, in its sole discretion, reject any Change Order requested by ACTAMED. ACTAMED may not decline to accept any Change Order requested by SBCL that, together with any prior accepted Change Orders, do not substantially affect the nature of the Deliverables, their performance or functionality, and does not change the Schedule by more than two man day or dollar amounts by more than 2%. 2.6 CONTROLLING DOCUMENT. In the event any provision contained in this Agreement conflicts with any part of a SOW, the provision set forth in the SOW shall take precedence. -4- ARTICLE III COMPENSATION; PAYMENT AND EXPENSES 3.1 COMPENSATION. Amounts and method of payment for all Services and Deliverables to be provided under this Agreement shall be set forth in each SOW. 3.2 PAYMENT. Unless otherwise specified in the applicable SOW, (a) ACTAMED shall submit invoices to SBCL for payment for Services and Deliverables within thirty (30) calendar days after the close of each month during which Services were rendered and/or Deliverables were delivered to SBCL; and (b) all undisputed invoices shall be due and payable within [*] days of SBCL's receipt of such invoice and acceptance of the Services and/or Deliverables. All invoices shall specifically refer to the applicable SOW, indicate the period of performance and provide reasonable detail with respect to the Services and Deliverables to which they relate, including, if applicable, time and labor spent in providing the Services, cost of materials and travel and living expenses. Supporting documentation called for by SBCL's standard reimbursement policies shall accompany any such invoice. Payment in accordance with these terms shall represent full and complete compensation for all Services and Deliverables provided pursuant hereto, and for any inventions, improvements, copyrights, patent rights and other intellectual property rights assigned, as more fully set forth below. 3.3 RECORDS AND AUDITS. ACTAMED shall maintain complete and accurate accounting records in accordance with sound accounting practices to substantiate ACTAMED's charges and shall preserve such records for a period of at least [*] after completion of the pertinent work. SBCL shall have access to such records for purposes of audit, either through its own representatives or through an accounting firm selected and paid by SBCL. Any such review of ACTAMED's records shall be conducted at reasonable times during business hours, and no more than twice annually. 3.4 TAXES. ACTAMED assumes all responsibility and liability for the payment of any federal, state, or local income taxes due on money received from SBCL hereunder, and shall be responsible for all employment taxes and withholding with respect to its employees and contractors. 3.5 EXPENSES. Except as otherwise agreed by SBCL in writing, ACTAMED shall bear all of its own expenses arising from performance of its obligations under this Agreement and each SOW, including, without limitation, expenses for transportation, living facilities, work spaces, utilities, management, clerical and reproduction services, supplies, and the like. ARTICLE IV DELIVERY; ACCEPTANCE AND MAINTENANCE 4.1 DELIVERY. ACTAMED shall deliver all Deliverables for testing and acceptance in the manner set forth in the applicable SOW. [*] 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. -5- 4.2 TESTING. (a) Upon receipt of the Deliverables, SBCL shall test the Deliverables to determine whether they meet the Specifications and any other requirements set forth in the SOW. (b) Unless otherwise specified in the applicable SOW, such testing shall be conducted in accordance with the following testing procedures and criteria: (i) SBCL will notify ACTAMED, in writing, that it is accepting or rejecting the Deliverables within thirty (30) days after receipt. Any notice of rejection shall set forth the grounds for rejection. ACTAMED shall use its best efforts to remedy any failures of the Deliverables to meet the Specifications, and shall deliver corrected Deliverables to SBCL as soon as possible. (ii) Upon receipt of corrected Deliverables, SBCL shall have [*] within which to test them and inform ACTAMED of its acceptance or rejection. This procedure may be repeated any number of times; PROVIDED, HOWEVER, that if SBCL detects errors in the Deliverables or the Deliverables fail to meet the Specifications, SBCL may withhold payment under the applicable SOW until the errors in the Deliverables are corrected or the Deliverables meet the Specifications. (c) If SBCL detects errors in the Deliverables or the Deliverables fail to meet the Specifications after it has tested them twice, SBCL shall thereafter have, until it accepts the Deliverables, the right to terminate this Agreement or the applicable SOW upon written notice to ACTAMED. Upon such termination, ACTAMED shall retain all payments SBCL has made to it up to the date of termination, SBCL shall retain all Deliverables received by such date, and SBCL shall have no further obligations to pay any amounts to ACTAMED under this Agreement. 4.3 ACCEPTANCE. If SBCL does not detect any Errors or any failure of the Deliverables to meet the Specifications after a performance of the tests described in Section 4.2, SBCL shall accept the Deliverables by issuing a written confirmation of acceptance to ACTAMED, which shall be effective as of the date of successful completion of the tests. ARTICLE V OWNERSHIP AND CONFIDENTIALITY 5.1 OWNERSHIP OF WORK PRODUCT BY SBCL. (a) SBCL and ACTAMED agree that any Deliverables prepared under this Agreement, including modifications to software owned by ACTAMED, and ownership of all intellectual property rights, including but not limited to copyrights and all renewals and extensions thereof, in such works shall [*]. SBCL and ACTAMED agree to and hereby grant, transfer and assign such right, title and interest in the Deliverables, including patents, copyrights and trade secrets for purposes of, and to the extent necessary and [*] 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- consistent with this Section 5.1(a). From time to time SBCL and ACTAMED, and their respective officers, employees, contractors, representatives and agents, shall confirm the foregoing assignment by execution and delivery of such assignments, confirmations or other written instruments as may be reasonably requested by the other party in order to vest each party with the rights mentioned in this Section 5.1(a). ACTAMED shall obtain appropriate assignments, covenants and obligations from its officers, employees, representatives, agents and any contractors hired to carry out its obligations under this Agreement prior to their performance under any SOW to ensure SBCL and ACTAMED may own the rights specified in this Section 5.1(a). (b) ACTAMED agrees that it shall not, directly or indirectly, produce, develop or participate in the production or development of any work, materials documentation or software similar to any Deliverable or Specification, or utilize any techniques, methods or know-how relating to the aforementioned items, for the period beginning as of the date hereof and ending on the date on which the last phase any Deliverable was scheduled under an SOW to be delivered to SBCL for testing and acceptance, or the date the last phase any such Deliverable was actually delivered to SBCL for testing and acceptance, whichever is later; PROVIDED, HOWEVER, nothing contained in this Section 5.1(b) shall prohibit ACTAMED from purchasing any work, documentation or software similar in function or purpose to any of the Deliverables or Specifications that is produced or developed independently by a third party without access, reference or knowledge of the Deliverables, Specifications or any other SBCL Confidential Information. SBCL reserves the right to audit and inspect any work, materials, documentation or software developed or purchased by ACTAMED at any time that is similar to any Deliverable or Specification for purposes of ensuring compliance with the confidentiality provisions of this Agreement. (c) ACTAMED agrees that if, during [*] beginning with the date on which the last phase of any Deliverable was scheduled under SOW No. 1 to be delivered to SBCL for testing and acceptance, or the date the last phase of any such Deliverable was actually delivered to SBCL for testing and acceptance, whichever is later, ACTAMED, directly or indirectly, produces, develops or participates in the production or development of any laboratory test ordering and result reporting software, ACTAMED will not permit any software engineer, designer or similar person (whether an employee or independent contractor) that participated in the production or development of the Services or Deliverables or who otherwise had access to SBCL Confidential Information to participate, directly or indirectly, in such production or development. (d) Notwithstanding anything to the contrary in this Agreement, both SBCL and ACTAMED agree not to exercise or to authorize any other party to exercise any of SBCL's or ACTAMED's ownership rights or privileges with respect to any of the Deliverables, including without limitation, the right to use, license, sell, deliver, transfer or incorporate such Deliverables into any other product for any reason without the prior written consent of the other party. Neither party shall have any obligation to give their consent for purposes of this Section 5.1(d). (e) SBCL and ACTAMED agree not to reveal any Deliverable, in whole or in part, to anyone outside of ACTAMED or SBCL without the prior written consent of the other party, or to any officer, employee, contractor, representative or agent of ACTAMED or SBCL who is not [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -7- covered by the restrictions on confidentiality and use contained herein. ACTAMED further agrees not to use, sell, deliver, transfer or reveal any Specification, in whole or in part, to anyone outside of ACTAMED without SBCL's prior written consent, or to any officer, employee, contractor, representative or agent of ACTAMED who is not covered by the restrictions on confidentiality and use contained herein. 5.2 PREEXISTING WORKS. (a) In the event that any Deliverable or part thereof constitutes a Derivative Work of any preexisting works owned by either party, or in the event either party requires the other party's preexisting works in order to perform under this Agreement, each party hereby grants to the other party and its Affiliates a non-exclusive, worldwide, royalty-free right and license to use, execute, reproduce, display, perform and distribute internally such preexisting works for the sole and limited purpose of developing the Deliverables and performing the Services in accordance with this Agreement. All rights not granted herein are specifically reserved. For purposes of this Section 5.2, "preexisting works" shall include, but not be limited to, the Specifications (including the specifications for the [*] and [*] systems) and "SBCL SCAN" software, in the case of SBCL, and the "Provider Link" software, in the case of ACTAMED. (b) In the event that any Deliverable or part thereof constitutes a Derivative Work of preexisting works not owned by SBCL or ACTAMED, SBCL or ACTAMED, as the case may be, shall ensure that the other party and its Affiliates have a non-exclusive, worldwide, royalty-free right and license to use, execute, reproduce, display, perform and distribute internally such preexisting works for the sole and limited purpose of developing the Deliverables and performing the Services in accordance with this Agreement. SBCL and ACTAMED each agree to notify the other party in writing of any pre-existing work, or portion thereof, which either or them does not own prior to the incorporation of such pre-existing work in the Deliverables. Such notice shall identify: (i) the pre-existing work which is not owned, (ii) the owner of such pre-existing work, (iii) SBCL's or ACTAMED's, as the case may be, right to use such pre-existing work, (iv) the nature of SBCL's or ACTAMED's right to grant to the other party the license contemplated herein, and (v) it shall grant the other party the aforesaid rights and license. 5.3 OBLIGATION OF CONFIDENTIALITY. (a) SBCL and ACTAMED each acknowledge and agree that during the term of this Agreement, they shall have access to certain Confidential Information of the other party. SBCL and ACTAMED each agree to keep such Confidential Information in strict confidence and shall not disclose it to any person, firm, partnership or corporation other than to its officers, employees, contractors, representatives and agents who have a need to know such information in order to perform hereunder or under a SOW, nor use the same for any purpose other than performance hereunder or under a SOW. SBCL and ACTAMED, respectively, shall advise all officers, employees, contractors, representatives and agents with access to the other party's Confidential Information of the confidentiality obligations with respect thereto under this Agreement. Notwithstanding the foregoing, SBCL and ACTAMED shall be and remain liable and responsible [*] 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. -8- for the confidentiality obligations of their respective officers, employees, contractors, representatives and agents. In addition to the foregoing, SBCL and ACTAMED shall protect and safeguard the other party's Confidential Information by using the same degree of care, but no less than a reasonable degree of care to prevent the unauthorized use, dissemination or publication of such Confidential Information as they each use to protect their own confidential or proprietary information of a like nature. Upon request by the other party, SBCL and ACTAMED shall require any or all of its officers, employees, contractors, representatives and agents to sign a confidentiality agreement prepared by the other party and approved by SBCL or ACTAMED, as the case may be, which affirms such officers, employees, contractors, representatives or agents obligations in regards to the Confidential Information. (b) SBCL and ACTAMED each acknowledge and agree that the terms and conditions with respect to confidentiality are reasonable and necessary for the protection of each of the party's Confidential Information and to prevent damage or loss to the other party. SBCL and ACTAMED further agree that any breach or threatened breach of such provisions will cause the other party irreparable harm for which there is no adequate remedy at law. Therefore, SBCL and ACTAMED each agree that the nondisclosing party shall be entitled, in addition to any other remedies available, to injunctive or other equitable relief to require specific performance or to prevent a breach of the foregoing confidentiality provisions. (c) Upon the breach of any provision, early termination or completion of this Agreement or any SOW, SBCL and ACTAMED each agree to cease all use and make no further use of the Confidential Information disclosed to it by the other party and shall, upon the written request of the other party, promptly return all such Confidential Information, including any copies used or distributed to any of its officers, employees, contractors, representatives and agents, and retain no copies. (d) The confidentiality obligations of this Section 5.3 shall survive termination of this Agreement. ARTICLE VI REPRESENTATIONS AND WARRANTIES 6.1 WARRANTY OF TITLE AND NONINFRINGEMENT. (a) ACTAMED represents and warrants to SBCL that: (i) unless ACTAMED provides SBCL with advance written notice to the contrary in accordance with Section 5.2(b), ACTAMED is and will be the sole author of all works used by ACTAMED in preparing any and all Deliverables; (ii) ACTAMED shall require all officers, employees, contractors, representatives and agents who provide Services or Deliverables hereunder to assign to ACTAMED all intellectual property rights created or arising in the performance of the Services and Deliverables for purposes consistent with Article V; -9- (iii) ACTAMED has and will have full and sufficient right to assign or grant the rights granted pursuant to this Agreement, free and clear of any liens, claims or encumbrances; and (iv) none of the Deliverables infringe any patents, copyrights, trademarks, or other intellectual property rights (including trade secrets), privacy or similar rights of any third party, nor has any claim of such infringement been threatened or asserted. (b) SBCL represents and warrants to ACTAMED that: (i) SBCL has and will have full and sufficient right to assign or grant the rights granted pursuant to this Agreement, free and clear of any liens, claims or encumbrances; and (ii) none of the Specifications, software and any other materials provided to ActaMed by SBCL hereunder infringe any patents, copyrights, trademarks, or other intellectual property rights (including trade secrets), privacy or similar rights of any third party, nor has any claim of such infringement been threatened or asserted. 6.2 WARRANTIES OF CONFORMITY, PERFORMANCE AND COMPLIANCE. ACTAMED represents and warrants to SBCL that: (a) all Services and Deliverables shall be performed or provided in a workmanlike manner and with professional diligence and skill; (b) no portion of the Software contains any unauthorized code such as a virus, Trojan horse, worm or other software routine or hardware component designed to permit unauthorized access to disable, erase or otherwise harm the Software, hardware, or data automatically, with the passage of time or under the control of a person other than SBCL; and (c) the Software includes acceptable Specifications so that any or all such Software and any related hardware will not abruptly end or provide invalid or incorrect results during the operation of SBCL's business due to issues related to Year 2000 compliance. "Year 2000 compliance" requires that the Specifications of the Software and related hardware include, but not be limited to: date data century recognition, calculations that accommodate same century and multi-century formulas and date values, and date data interface values that reflect the century. The Software and related hardware shall be used by SBCL prior to, during and after the calendar year 2000. The Specifications of the Software and related hardware to ensure Year 2000 compliance shall be supplied by ACTAMED at no additional cost to SBCL. 6.3 AVOIDANCE OF INFRINGEMENT. In performing Services under this Agreement, ACTAMED agrees to avoid designing or developing any items that infringe any patents, copyrights or other intellectual property rights of any third party. If SBCL or ACTAMED becomes aware of any such possible infringement in the course of performing work under any SOW issued hereunder, SBCL or ACTAMED, as the case may be, shall immediately so notify the other party in writing. -10- 6.4 INDEMNIFICATION. (a) SBCL and ACTAMED, respectively, shall indemnify and hold the other party harmless from and against all loss, liability, costs, charges, claims or damages to any persons or property, arising out of this Agreement, a SOW or the provision of the Services or Deliverables where caused by its own fault or negligence, or the fault or negligence of its officers, employees, contractors, representatives or agents. SBCL and ACTAMED also shall indemnify and hold the other party harmless from and against all loss, liability, costs, charges, claims or damages which may arise as a consequence of or grow out of any injury, illness or death of its officers, employees, contractors, representatives or agents who are engaged in the performance of the Services under this Agreement or a SOW. (b) ACTAMED shall defend or settle, at its own expense, any and all suits, actions, proceedings or claims against SBCL charging that any part of the Services infringes any patent, trademark, trade secret, copyright or other intellectual property right of any person or entity. SBCL and ACTAMED shall defend or settle, each at its own expense, any and all suits, actions, proceedings or claims against the other party charging that the use, copying, modification, disclosure or distribution of any part of the Deliverables or Documentation provided by SBCL or ACTAMED, as the case may be, infringes any patent, trademark, trade secret, copyright or other intellectual property right of any person or entity not a party hereto. Each party will pay actual costs of the other party, including all legal fees and any damages awarded in any such suit or proceeding, and will indemnify and hold that other party harmless from all other liability incurred in connection with such action. (c) SBCL and ACTAMED each agree to (i) promptly notify the other party in writing of any claim for which it is seeking indemnification; (ii) at the other party's request and expense, give assistance reasonably required for the defense of any such claim; and (iii) give the other party control of the defense and/or settlement of such claim; PROVIDED, HOWEVER, that the other party may participate in such defense and/or settlement at its option and expense. (d) If any part of the Services or Deliverables is or is likely to become the subject of such a suit, action or claim, at no expense to the other party, SBCL or ACTAMED may: (i) obtain sufficient rights to allow the other party to use the Services or Deliverables as contemplated hereunder; or (ii) substitute non-infringing services or deliverables acceptable to the other party and substantially similar to the Services and Deliverables described in the SOW. Any such replacement services and deliverables shall be subject to all of the terms and conditions of this Agreement, including without limitation, the foregoing indemnification provisions. 6.5 SURVIVAL. The provisions of this Section shall survive the termination of this Agreement. -11- ARTICLE VII TERM AND TERMINATION 7.1 TERM. This Agreement shall commence on the date hereof and shall remain in force for a period of one (1) year unless sooner terminated as provided herein; PROVIDED, HOWEVER, this Agreement shall remain in effect with respect to any Statements of Work already issued hereunder at the time of such termination until such Statements of Work are themselves terminated and/or performance thereunder is completed. 7.2 TERMINATION OF SOWS. SBCL may terminate any or all SOWs outstanding, or any portion thereof, upon fifteen (15) business days' written notice in the event that SBCL reasonably determines that ActaMed has failed to meet any of the milestone dates for completing a phase of work, as set forth in the project plan for the applicable SOW; provided however, that SBCL acknowledges that ActaMed's timely performance may be dependent upon SBCL's timely performance, and therefore SBCL may not so terminate if ActaMed's failure to meet a milestone date is (i) the result of SBCL's failure to timely perform, or (ii) because the parties are still engaged in the testing and acceptance process for that milestone. Upon receipt of notice of such termination, ACTAMED shall inform SBCL of the extent to which performance has been completed through such date, and collect and deliver to SBCL whatever work product then exists in the manner prescribed by SBCL. Subject to Section 4.2(c), ACTAMED shall be paid for all work performed and accepted through the date of termination, provided that such payment shall not be greater than the payment that would have become due if the work had been completed. ACTAMED may not terminate any SOW once ACTAMED has entered into such SOW. 7.3 TERMINATION OF AGREEMENT. SBCL or ACTAMED may terminate this Agreement for cause, as provided below, upon [*] prior written notice. SBCL and ACTAMED may terminate this Agreement or any SOW at any time upon mutually written agreement. This Agreement shall continue to remain in effect with respect to any SOW already issued hereunder until such SOW is itself terminated and/or performance thereunder is completed. 7.4 TERMINATION IN THE EVENT OF BREACH. In the event of any material breach of this Agreement or a SOW by either party, the other party may terminate this Agreement or the applicable SOW without waiving any remedies or rights available to such other party at law or in equity. Such termination shall be in writing upon at least [*] prior written notice to the party in breach specifying the nature of the breach. The party in breach shall have the opportunity to cure such breach during such [*] period. If the breach has been cured by the end of such period, this Agreement and the applicable SOW will not terminate. 7.5 INSOLVENCY. Either party may immediately terminate this Agreement if the other party is declared insolvent or bankrupt; the property of the other party is assigned for the benefit of creditors, levied upon under execution, or seized by virtue of any writ of any court of law; a petition for declaration of bankruptcy or reorganization is filed against the other party in any court and not dismissed in ninety (90) days; or a trustee or receiver is appointed for the other party. In the event of any such insolvency or bankruptcy, all licenses granted hereunder shall be considered licenses to [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -12- intellectual property, and SBCL shall be entitled to retain the licenses granted herein, subject to ACTAMED's right to terminate this Agreement for reasons other than bankruptcy or insolvency as expressly provided in this Agreement. In the event that a court or other legal or administrative tribunal, directly or through an appointed master, trustee or receiver, assumes partial or complete control over the assets of a party to this Agreement based on the insolvency or bankruptcy of such party, the bankrupt or insolvent party shall promptly notify the court or other tribunal of the confidentiality obligations under this Agreement, and that Confidential Information received from the other party under this Agreement remains the property of the other party. In addition, the bankrupt or insolvent party shall, to the extent permitted by law, take all steps necessary or desirable to maintain the confidentiality of the other party's Confidential Information and to insure that the court, other tribunal or appointee maintains such information in confidence in accordance with the terms of this Agreement. 7.6 CONSEQUENCES OF TERMINATION. Upon termination of this Agreement, ACTAMED shall: (a) immediately cease work as provided in the notice of termination, and shall cease to represent itself as providing services to SBCL; and (b) deliver to SBCL (i) a report describing the current state of the Services and Deliverables to be provided by ACTAMED under this Agreement and any applicable SOWs at the date of termination; (ii) all SBCL Confidential Information in its possession; and (iii) all work product, Software, materials and Documentation related to the Services and Deliverables in whatever state of development they may exist on the date of termination. ARTICLE VIII MISCELLANEOUS 8.1 FORCE MAJEURE. Each party shall be excused from delays in performing or from its failure to perform hereunder to the extent that such delays or failures result from causes beyond the reasonable control of such party; PROVIDED that, in order to be excused from delay or failure to perform, such party must act diligently to remedy the cause of such delay or failure. 8.2 NO AGENCY. ACTAMED, in rendering performance under this Agreement and any SOW, is acting solely as an independent contractor. SBCL does not undertake by this Agreement or otherwise to perform any obligation of ACTAMED, whether by regulation or contract. In no way is ACTAMED to be construed as the agent or to be acting as the agent of SBCL in any respect. ACTAMED has the sole obligation to supervise, manage, contract, direct, procure, perform, or cause to be performed all work to be carried out by ACTAMED hereunder. 8.3 NO WAIVER. No delay or omission by either party to exercise any right arising upon any noncompliance with, or breach of, any covenant, condition or agreement to be performed by the other party shall impair any such right or be construed to be a waiver thereof. A waiver by either of the parties hereto of any noncompliance with, or breach of, any covenant, condition or agreement to be performed by the other party must be in writing and signed by both parties. No waiver of any -13- right upon any one occurrence of noncompliance or breach shall be construed to be a waiver of any succeeding noncompliance or breach. Unless stated otherwise, all remedies provided for in this Agreement shall be cumulative and in addition to and not in lieu of any other remedies available to either party at law, in equity, or otherwise. 8.4 SEVERABILITY. If any term, covenant, condition or provision of this Agreement or the application thereof to any circumstance shall be invalid or unenforceable to any extent, the remaining terms, covenants, conditions and provisions of this Agreement shall not be affected thereby and each remaining term, covenant, condition and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. If any provision of this Agreement is so broad as to be unenforceable, such provision shall be interpreted to be only as broad as is enforceable. 8.5 NOTICES. If one party is required or desires to give notice to the other, such notice shall be deemed given if mailed by U.S. mail, first class, postage prepaid, or via a nationally recognized overnight carrier, with all freight charges prepaid, and addressed as follows (or as subsequently noticed to the other party): If to SBCL: SmithKline Beecham Clinical Laboratories, Inc. 1201 S. Collegeville Road Collegeville, PA 19426 ATTN: [*] ---------------------------- If to ACTAMED: ActaMed Corporation 7000 Central Parkway Suite 600 Atlanta, GA 30328 ATTN: Mike Hoover ---------------------------- 8.6 ASSIGNMENT. SBCL may assign all of its rights and obligations under this Agreement, SOWs or any license granted hereunder to any Affiliate, or to any corporation or other entity pursuant to a merger, consolidation, or other reorganization. SBCL agrees to notify ACTAMED of any such assignment, in writing, specifying the name and address of the other entity. ACTAMED may not, without the prior written consent of SBCL, assign or transfer this Agreement or any right or obligation hereunder, and any attempt to do so in contravention of this Section 8.6 shall be void and of no force and effect. 8.7 GOVERNING LAW; INTERPRETATION. This Agreement and all SOWs shall be construed, interpreted and enforced under the laws of the Commonwealth of Pennsylvania, excluding its provisions regarding conflicts of law. The section and subsection headings used herein are for reference and convenience only, and shall not enter into the interpretation hereof. [*] 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. -14- 8.8 ENTIRE AGREEMENT. This Agreement, the SOWs issued from time to time hereunder and the schedules and exhibits attached hereto or thereto, constitute the entire agreement concerning the subject matter covered herein and supersede all prior oral or written agreements, understandings and promises relating thereto. This Agreement may not be modified or amended except by an instrument in writing declared to be an amendment hereto and executed by both parties. This Agreement may be executed in several counterparts, all of which taken together shall constitute one single agreement between the parties. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in the manner appropriate to each as of the day and year first above written. ACTAMED CORPORATION SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. By: /s/ By: /s/ ------------------------ -------------------------------- Mike Hoover Rich Davis President Vice President Information Resources Dated: 10/31/97 Dated: 10/30/97 --------------------- ----------------------------- -15- EXHIBIT A STATEMENT OF WORK This is a Statement of Work entered into on this 31st day of October, 1997, between SmithKline Beecham Clinical Laboratories, Inc., a Delaware corporation with offices located at 1201 S. Collegeville Road, Collegeville, PA 19426 ("SBCL"), and ActaMed Corporation, a Georgia corporation with offices located at 7000 Central Parkway, Suite 600, Atlanta, GA 30328 ("ACTAMED"), under the Development Agreement, dated as of October 31, 1997. 1. PROJECT MANAGERS: for SB: [*] 1201 So. Collegeville Rd. Collegeville, PA 19426 VOICE: [*] FAX: [*] E-MAIL: [*] for ACTAMED: [*] 7000 Central Parkway Suite 600 Atlanta, Georgia 30328 VOICE: [*] FAX: [*] E-MAIL: [*] 2. GENERAL DESCRIPTION OF PROJECT: ACTAMED will "port" the SBCL Scan system to its ActaLink architecture, substantially re-engineering the system by re-writing most if not all of the source code, thereby creating a new product, "ACTALAB," which incorporates all of the requirements and functionality [*] of SBCL SCAN as depicted by the actual SBCL SCAN system and its associated documentation. This re-engineering will also incorporate ActaLink architecture, functionality and components as appropriate to create a fully integrated product that benefits from the functionality of the ActaLink product. This will include functionality to perform an eligibility check at the time of order entry and to associate the resulting billing and eligibility information with each order for all payers available to ACTAMED. A complete description and overview of the project is provided as Attachment 1 to this Statement of Work, which includes: [*] 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. -16- - Description of Specifications - Description of Deliverables - Description and Location of Services - Project Schedule and Resources - Testing procedures and Acceptance Criteria 3. PAYMENT SCHEDULE For the Services and Deliverables to be provided hereunder, SBCL will pay ACTAMED the aggregate sum of [*] in accordance with the following schedule. The payment for each Deliverable shown below is due within [*] of receipt of the corresponding sign-off from SBCL, as set forth in more detail in Attachment 1, Section 5. The amount payable to ACTAMED by SBCL under this SOW is based on the estimates outlined in Attachment 2.
% OF TOTAL AMOUNT DELIVERABLE/MILESTONE ---------- ------ --------------------- [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]
ACTAMED CORPORATION SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. By: /s/ By: /s/ ------------------------ -------------------------------- Mike Hoover Rich Davis President Vice President Information Resources Dated: 10/31/97 Dated: 10/30/97 --------------------- ----------------------------- [*] 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- AMENDMENT TO DEVELOPMENT AGREEMENT SBCL and ActaMed hereby agree this 31st day of December, 1997, to amend their Development Agreement October 31, 1997, as set forth herein as of the effective dates set forth herein. 1. Effective as of the date of the Development Agreement, Article I of the Development Agreement is hereby amended to include the following additional or revised definitions: "ActaLab Software" has the meaning ascribed to it by the License Agreement. "Deliverable" means all Software, Documentation and other materials developed by ActaMed under this Agreement and described in a Statement of Work. "License Agreement" means that certain License Agreement between SBCL and ActaMed dated December 31, 1997. "SBCL Software" has the meaning ascribed to it by the License Agreement. "SOW No. 1" shall mean the Statement of Work dated October 31, 1997. 2. The second "Whereas" clause is hereby deleted. 3. The fourth "Whereas" clause is hereby revised to delete the words "to SBCL." 4. Section 5.1(a) of the Development Agreement is hereby revised as of the date of the Development Agreement to read as follows: (a) the parties hereby acknowledge and agree that: (i) The Deliverables under SOW No. 1 do not constitute modifications or enhancements to the SBCL Software, but instead constitute a new Windows- and JAVA-based product which will be used in conjunction with and/or will be integrated into ActaMed's ProviderLink software. All Deliverables (including but not limited to, the ActaLab Software) under SOW No. 1, and all intellectual property rights (including but not limited to copyrights and all renewals and extensions thereof) in such Deliverables, shall be owned solely and exclusively by ActaMed. Subject to the provisions of Section 5(a)(iv) hereof, SBCL hereby grants, transfers and assigns all of its right, title and interest in such Deliverables, including patents, copyrights, trade secrets and other intellectual property developed or acquired in the course of creating such Deliverables, to ActaMed and ActaMed shall have the right to obtain and hold in its own name copyrights, patents, registrations and similar protections which may be available with respect to such Deliverables. (ii) The parties contemplate that additional SOWs may be entered into from time to time for the purpose of enhancing, modifying or upgrading the ActaLab Software (an "ActaLab SOW"). All Deliverables under an ActaLab SOW and all intellectual property rights (including but not limited to copyrights and all renewals and extensions thereof) in such Deliverables, shall be owned solely and exclusively by ActaMed. Subject to the provisions of Section 5(a)(iv) hereof, SBCL hereby grants, transfers and assigns all of its right, title and interest in such Deliverables, including patents, copyrights, trade secrets and other intellectual property developed or acquired in the course of creating such Deliverables, to ActaMed and ActaMed shall have the right to obtain and hold in its own name copyrights, patents, registrations and similar protections which may be available with respect to such Deliverables. (iii) The parties contemplate that additional SOWs may be entered into from time to time for the purpose of enhancing, modifying or upgrading the SBCL Software (a "SCAN Development SOW"). Ownership of any Deliverables under a SCAN Development SOW, and ownership of any intellectual property rights therein (including but not limited to copyrights and all renewals and extensions thereof). shall be governed in all respects by Article 3 of the License Agreement. Subject to the provisions of Section 5(a)(iv) hereof, ActaMed hereby grants, transfers and assigns all of its right, title and interest in such Deliverables, including patents, copyrights, trade secrets and other intellectual property developed or acquired in the course of creating such Deliverables, to SBCL. (iv) Nothing in this Section 5(a) shall be construed to transfer to ActaMed, or otherwise divest SBCL of SBCL's ownership of, the SBCL Software and, subject to the licenses granted by the License Agreement, SBCL (as between SBCL and actaMed) shall be the sole owner of the patents, copyrights, trade secrets and other intellectual property rights therein. Nothing in this Section 5(a) shall be construed to transfer to SBCL, or otherwise divest ActaMed of ActaMed's ownership of, any software or work of authorship owned by ActaMed as of the effective date of the Development Agreement and, subject to the licenses granted by the License Agreement, ActaMed (as between SBCL and ActaMed) shall be the sole owner of any patent, copyright, trade secret right or other intellectual property right therein. (v) Any Statement of Work, by mutual agreement of the parties, may include limitations and restrictions on ActaMed's use of the applicable 2 Deliverables in support of laboratory testing services of commercial laboratories other than SBCL. 6. Sections 5.1(d) and (e) and Section 5.2(a) as of the date of this Amendment are hereby deleted from the Development Agreement. 7. In the event of conflict between the Development Agreement and the License Agreement, the License Agreement shall control. 9. Except as expressly set forth herein, the Development Agreement shall continue in full force and effect as originally executed by the parties. 10. Nothing in this Agreement shall be construed to modify or change in any respect the ownership and use rights with respect to Exclusive Developments (as defined in the Services Agreement between SBCL and ActaMed dated the date hereof) pursuant to the License Agreement and Section V of said Services Agreement. In witness whereof, the parties have caused this Amendment to be signed this 31st day of December, 1997. SMITHKLINE BEECHAM CLINICAL ACTAMED CORPORATION LABORATORIES, INC. BY: /s/ John B. Okkenele Jr. BY: /s/ Michael K. Hoover ---------------------------- --------------------------- NAME: John B. Okkenele Jr. NAME: Michael K. Hoover ------------------------- ------------------------ TITLE: President TITLE: President ------------------------ ----------------------- DATE: 12-31-97 DATE: 12-31-97 ------------------------ ----------------------- 3 SECOND AMENDMENT TO DEVELOPMENT AGREEMENT SmithKline Beecham Clinical Laboratories, Inc. ("SBCL") and Healtheon Corporation ("Healtheon") hereby agree this 14th day of October, 1998, to amend the Development Agreement dated October 31, 1997, as amended, by and between ActaMed Corporation and SBCL, which was assumed by Healtheon on May 18, 1998, as follows: 1. Section 7.1 of the Development Agreement is hereby replaced in its entirety by the following: "7.1 TERM. This Agreement shall commence on the date hereof and shall remain in effect until October 31, 1999 or such later date as mutually agreed upon by the parties for the purposes of completing the work required under Statements of Work adopted hereunder." SMITHKLINE BEECHAM CLINICAL HEALTHEON CORPORATION LABORATORIES, INC. By: /s/ Donald F. Parmen By: /s/ Jack Dennison --------------------------- --------------------------- Name: Donald F. Parmen Name: Jack Dennison --------------------------- --------------------------- Title: Assistant Secretary Title: Vice President --------------------------- --------------------------- Date: October 14, 1998 Date: October 14, 1998 --------------------------- --------------------------- EX-10.18 10 EXHIBIT 10.18 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. SERVICES, DEVELOPMENT AND LICENSE AGREEMENT This Agreement made this 15th day of December, 1997 (the "Effective Date"), is by and between Healtheon Corporation, a Delaware corporation with offices at 87 Encina Ave., Palo Alto, CA 94301 ("Healtheon") and Beech Street Corporation, a Georgia Corporation with offices at 173 Technology, Irvine, California 92618 ("BSC"). WHEREAS, the parties have agreed to form an alliance to address the information technology needs of BSC, develop new applications designed to address the information service needs of companies providing managed care and other administrative services and pursue other ventures which may be of mutual interest to the parties. The parties hereby agree as follows: 1. DEFINITIONS. 1.1 "ADDITIONAL APPLICATIONS" shall mean those applications which are developed by Healtheon, but excluding the Developed Applications and the Healtheon Platform Software, which are designed to run on the Healtheon Platform. 1.2 "BSH DIVISION" shall mean the division of Healtheon which shall be organized to perform the Services hereunder. 1.3 "BSC CLIENT" shall mean those clients of BSC including but not limited to, health care medical providers (E.G., physicians, hospitals, other care facilities, and ancillary providers), third party administrators, preferred provider organizations, health maintenance organizations, employers, unions, governmental entities, credit card companies, reinsurance companies, health benefit or workers' compensation software vendors, and medical management vendors, which use BSC Managed Care Services or as to which BSC has incorporated such entities' services into BSC Managed Care Services. 1.4 "BSC MANAGED CARE SERVICES" shall mean the following types of services provided by BSC to BSC Clients: personal health management (demand management), workers' compensation medical bill review, case management, pre-admission review, concurrent review, discharge planning, hospital bill audit, retrospective non-network bill review and fee negotiation, health care provider contracting and management, data reporting, computer operations, service bureau services, consulting and other support services and such other related new products/services that BSC shall develop subsequent to the execution of this Agreement. Notwithstanding the foregoing, Managed Care Services shall not include any service where the primary service provided by BSC is either (i) access to and/or use of the BSC On-Line Service to obtain repricing services or (ii) other repricing services offered by BSC to BSC Clients which use all or a portion of the repricing functionality of the Developed Applications The Management Committee shall determine whether services based upon other functionality of the Developed Applications shall be excluded from the definition of "BSC Managed Care Services" at the time that the relevant specifications for such Developed Applications are being developed. Notwithstanding the foregoing, workers' compensation medical bill review services shall be included as part of the BSC Managed Care Services regardless of whether such services are offered alone or in conjunction with other BSC Managed Care Services. 1.5 "BSC ON-LINE SERVICE" shall mean the on-line service provided by BSC to BSC Clients which incorporates all or a portion of the Developed Applications and any derivative works thereof. 1.6 "DEVELOPED APPLICATIONS" shall mean those applications and any improvements thereto which are developed by Healtheon hereunder and which are designed to run on the Healtheon Platform, as more fully described on Exhibit B. 1.7 "DEVELOPMENT WORK" shall mean the work to be performed hereunder by Healtheon to develop the Developed Applications. 1.8 "END USER" shall mean any employee, partner, agent or other representative of (i) BSC, or (ii) a BSC Client; who is authorized to access the BSC On-Line Service in conjunction with obtaining BSC Managed Care Services. 1.9 "HEALTHEON PLATFORM" shall mean the Healtheon Platform Software, as well as certain industry standard software applications, tools, and processes which provide the operating environment which enables the use of Healtheon developed applications as part of an on-line service which is accessible through the Internet by using industry standard web browsers. 1.10 "HEALTHEON PLATFORM SOFTWARE" shall mean the proprietary operating system and other software which has been developed by Healtheon (but excluding the Developed Applications and the Additional Applications) which is part of the operating system of the Healtheon Platform. 1.11 "SERVICES" shall mean those information technology services described on Exhibit A. 2. PERFORMANCE OF THE SERVICES AND THE DEVELOPMENT WORK 2.1 PERFORMANCE OF THE SERVICES. Healtheon, through personnel assigned to its BSH Division, shall perform the Services at certain sites controlled by BSC and/or Healtheon. The initial scope of the Services is set forth as Exhibit A. Exhibit A may be amended with the written consent of the parties. 2.2 PERFORMANCE OF THE DEVELOPMENT WORK. Healtheon shall design, develop, test, and complete the Developed Applications. The specifications for each Developed Application shall be developed jointly and mutually approved by the parties. In conjunction with the development of each set of specifications, the parties shall jointly develop a mutually agreeable detailed project plan, which shall be attached hereto as Exhibit B. Such project plan shall describe, in a degree of detail reasonably satisfactory to the parties, all tasks and responsibilities required for the successful and timely completion of the development and delivery of the applicable Developed Applications, including the projected costs. 3. PROJECT MANAGEMENT 3.1 PERSONNEL RESOURCES. Healtheon and BSC shall each commit the number of qualified and experienced personnel which are reasonably necessary to perform their respective obligations under this Agreement and as further outlined in the project plan(s). Healtheon shall have the sole right and obligation to hire, supervise, manage, contract, direct, procure, perform or cause to be performed all work to be performed by Healtheon and its personnel hereunder. Healtheon, at its option, may engage third parties to render services in connection with the performance of the Services and/or Development Work contemplated hereunder, which may include engaging the services of certain BSC employees to 2 provide certain information technology services. All Healtheon employees utilized to provide the Services shall have entered into Healtheon's standard form of employee nondisclosure agreement. 3.2 PROJECT MANAGEMENT. Each party shall designate a project manager (the "Project Managers") and appropriate technical resource persons to coordinate the development and implementation of the project plan(s). The Project Managers shall be responsible for resolving any matters arising under this Agreement and the Services and Development Work contemplated hereunder. In the event that the Project Managers are not able to resolve a dispute, such dispute shall be resolved by the Management Committee, as described in Section 3.3. 3.3 MANAGEMENT COMMITTEE. The parties shall each designate an equal number of management-level personnel to serve on the Management Committee. The Management Committee shall conduct status meetings on a monthly basis detailing the performance of the Services and Development Work during the prior four (4) week period and the work planned to be performed during the upcoming four (4) week period. The Management Committee shall be responsible for resolving any disputes which have not been resolved by the Project Managers. The Management Committee shall be responsible for determining whether services based upon the Developed Applications shall be included or excluded from the definition of "BSC Managed Care Services" for the purposes of this Agreement. If such services are not excluded, then the Management Committee shall be responsible for establishing the applicable financial arrangements, if any, pursuant to which such services may be offered by BSC. 3.4 CHANGES TO SERVICES, DEVELOPMENT WORK AND PROJECT PLAN. The scope of the Services, the Development Work and the project plans shall not be changed in any material respect without the prior written agreement of the parties, which agreement shall not be unreasonably withheld. 4. OWNERSHIP AND LICENSE RIGHTS. 4.1 OWNERSHIP. BSC acknowledges and agrees that all of the work product produced or developed by Healtheon in connection with Healtheon's performance of the Services and/or Development Work to be provided hereunder, including, but not limited to, all technology of any nature whatsoever, all notes, records, drawings, designs, inventions, improvements, developments, discoveries, trade secrets and any copyrightable material, including but not limited, to the Developed Applications, and all patentable inventions, conceived, made or discovered by Healtheon, solely or in collaboration with others, during the period of this Agreement and which relate in any manner to the Services and/or Development Work to be performed hereunder or which Healtheon may be directed to undertake or investigate in performing the Services and/or the Development Work, including any derivative works of any of the foregoing (collectively the "Work Product"), is the sole property of Healtheon, but excluding BSC's contracts and contracted rates with BSC's providers, which may be incorporated into the Work Product. Subject only to the license rights to be granted by Healtheon to BSC in Section 5.1, below, BSC acknowledges and agrees that Healtheon shall have all proprietary rights in and to the Work Product, including, without limitation, all copyrights, patents and trade secret rights, all moral rights, all contract and licensing rights, and all claims and causes of action of any kind with respect to any of the foregoing, whether now known or hereafter to become known, and that Healtheon shall have the sole and exclusive right to use, modify and exploit the Work Product in any manner that Healtheon may choose. 4.2 PROPRIETARY NOTICES. BSC shall not remove or alter any trademark, trade name, copyright, or other proprietary notices, legends, symbols, or labels appearing on or in materials pertaining to the Work Product. Each portion of the Healtheon documentation reproduced by BSC shall include the 3 intellectual property notice or notices appearing in or on the corresponding portion of such materials as delivered by Healtheon hereunder. 5. LICENSE AND SERVICE RIGHTS. 5.1 LICENSE RIGHTS. In consideration for the development fees paid to Healtheon pursuant to Section 7.1, Healtheon hereby grants to BSC a nonexclusive and nontransferable, fully-paid, perpetual right and license, exercisable at BSC's primary operations site, to: (i) install, use, copy, modify, create derivative works and maintain the Developed Applications, in object code and source code form, solely as (a) part of the BSC On-Line Services which are offered to BSC Clients in conjunction with the BSC Managed Care Services obtained by such BSC Clients and to enable world-wide remote access by End Users in conjunction with the BSC On-Line Service and (b) for BSC's internal use in providing BSC Managed Care Services to BSC Clients, and (ii) use the Work Product (excluding the Developed Applications and any derivative works thereof) delivered to BSC by Healtheon hereunder in conjunction with the operations of BSC's Managed Care Services. BSC shall not use, sublicense or otherwise distribute the Healtheon Platform Software or the Work Product, including the Developed Applications and any derivative works thereof, in any other manner except as expressly stated herein. The BSC's primary operations site is anticipated to be in Irvine, California. BSC may from time to time designate another site to be its primary operations site by providing Healtheon with thirty (30) days' prior written notice of such redesignation. Notwithstanding the foregoing, BSC shall make no more than two (2) copies of the source code relating to the Developed Applications (the "Source Code") and shall restrict access to such Source Code to only those employees who require such access to enable BSC to use the Source Code as in the manner contemplated herein and otherwise secure and protect such Source Code consistent with its own practices regarding its most highly confidential information. 5.2 OPTION TO LICENSE ADDITIONAL APPLICATIONS. Healtheon hereby agrees to grant to BSC a nonexclusive and nontransferable, right and license, to use the Additional Applications as may be licensed at the option of BSC, as part of the services to be offered to BSC Clients in conjunction with the BSC Managed Care Services, and to enable worldwide access to End Users in conjunction with the BSC On-Line Service. The fee for such license shall be [ * ] each such Additional Application as may be licensed by BSC, net of any third-party royalty obligations. Each such license agreement for Additional Applications shall be on commercially reasonable terms and conditions. BSC shall not use, sublicense or otherwise distribute the Additional Applications in any other manner except as expressly stated herein. 5.3 OPTION TO LICENSE HEALTHEON PLATFORM SOFTWARE. Subject to the payment of the license fee set forth below, Healtheon hereby grants to BSC a nonexclusive and nontransferable, right and license, exercisable at BSC's primary operational site, to use the Healtheon Platform Software as part of the Healtheon Platform to be deployed at BSC's primary operational site to run the Developed Applications and such Additional Applications which may be licensed from Healtheon, as part of the BSC On-Line service or other BSC Managed Care Service to be offered to BSC Clients in conjunction with the BSC Managed Care Services obtained by such BSC Client, and to enable world-wide access and use by End Users at remote locations in conjunction with the use of the BSC On-Line Service and to make a single back-up copy. The applicable one-time, up front fee for such license shall be [ * ] payable upon such commercially reasonable terms as the parties may agree to at the time of BSC's exercise of its rights hereunder. BSC shall not have the right to use, sublicense or otherwise distribute the Healtheon Platform Software in any other manner except as [ * ] 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 expressly stated herein. BSC shall be solely responsible for the costs associated with acquiring all third-party hardware and software and implementation services necessary to deploy the Healtheon Platform at BSC's site. In the event the BSC exercises its rights hereunder, Healtheon shall make available to BSC maintenance services on such commercially reasonable terms and conditions as may be agreed to by the parties. 5.4 OPTION TO USE HEALTHEON SERVICE. If, following the completion of the Developed Applications, BSC declines to use its licensed rights under Section 5.1, Healtheon hereby agrees to enter into a Healtheon Service Agreement with BSC containing Healtheon's standard terms and conditions whereby Healtheon shall provide BSC and BSC Clients with access to an on-line service which includes the Developed Applications. Healtheon shall offer such service to BSC and the BSC Clients at a rate [ * ] as may be mutually agreed to by the parties, based upon the actual margins of the on-line service. 6. THIRD-PARTY TECHNOLOGY AND LICENSE RIGHTS 6.1 THIRD-PARTY TECHNOLOGY AND LICENSE RIGHTS. In order to perform the Services contemplated hereunder (but excluding Services relating solely to the Developed Applications), BSC represents that Healtheon will need to have access only to the third-party technology and software listed on Exhibit C which is licensed and/or deployed by BSC (the "Third-Party Technology and Software"). BSC hereby agrees to use commercially reasonable efforts to obtain, at its own expense, all necessary consents, licenses and/or assignments which may be necessary in order for Healtheon to perform the such Services. Healtheon shall use commercially reasonable efforts to cooperate with BSC to assist BSC in obtaining any necessary consents, licenses and/or assignments to Third-Party Technology and Software. In the event that any Development Work requires access to or use of any other third-party technology or software, the Management Committee shall be responsible for obtaining any necessary rights. 6.2 BSC TECHNOLOGY AND LICENSE RIGHTS. During the term of this Agreement, BSC hereby grants to Healtheon a nonexclusive and nontransferable right and license to use, modify and copy all technology and software owned by BSC which is necessary for Healtheon to perform the Services and Development Work. 7. FEES AND PAYMENT; GAIN SHARING 7.1 FEES AND EXPENSES, PAYMENT. BSC shall pay Healtheon the Fees and Expenses, as set forth in Exhibit D for the Services and the Development Work to be performed hereunder (the "Fees"). Healtheon shall submit invoices to BSC on a bi-weekly basis for the Fees when due, corresponding to applicable payroll cycles. Invoices shall be due and payable within ten (10) days after receipt. 7.2 OTHER EXPENSES. Healtheon shall have sole responsibility for payment of compensation to its personnel and shall pay and report, for all personnel assigned to perform services hereunder, federal and state income tax withholding, social security taxes, and unemployment insurance applicable to such personnel. Healtheon shall bear sole responsibility for any health or disability insurance, retirement benefits, or other welfare or pension benefits (if any) to which its own personnel may be entitled. 7.3 REVENUE SHARING. In the event that BSC declines to use its licensed rights under Section 5.1 and Healtheon provides services in accordance with Section 5.4 for any current or future BSC Client [ * ] 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. 5 which (i) utilizes any of the Developed Applications and (ii) such BSC Client has entered into a written contract for one or more of BSC's Managed Care Services (a "Qualified BSC Client"), then BSC shall pay to Healtheon the Applicable Percentage (as defined below) of Net Revenues (as defined below with respect to repricing services) with respect to each such Qualified BSC Client. "Net Revenues" shall mean the revenues received by BSC from a Qualified BSC Client for BSC Managed Care Services less any fees paid by BSC to any third party which facilitates the sale or delivery of BSC's Managed Care Services, including but not limited to leased network fees, broker fees, commissions paid to outside third parties, fees payable to Healtheon pursuant to Section 5.4, subcontractor vendor fees and other such reasonable and customary fees as may apply from time to time. The "Applicable Percentage" with respect to BSC's repricing services shall be as follows: [ * ] The revenue sharing described above will be reviewed by the Management Committee periodically, and at least on an annual basis, to determine that the cost savings objectives are being achieved and to determine the appropriate applicable percentage for other BSC Managed Care Services which are performed through the Healtheon service as the applicable Developed Applications are deployed as part of the Healtheon service. Additionally if other significant cost savings are identified they will be reviewed by the Management Committee to determine appropriate sharing. 7.4 THIRD-PARTY HARDWARE AND SOFTWARE. In the event that it is reasonably necessary for Healtheon to purchase or license any third-party hardware and/or software in order to perform the Services and/or the Development Work, the Project Managers shall determine whether such third-party hardware and/or software should be purchased and/or licensed by BSC or Healtheon and how the costs and ownership shall be allocated between the parties. 7.5 TAXES. All Fees and payments are exclusive of all taxes, duties or levies, however designated or computed. BSC shall be responsible for and pay all taxes upon payments due under this Agreement including, but not limited to, sales, use, or value-added taxes, duties, withholding taxes and other assessments now or hereafter imposed on or in connection with this Agreement, exclusive of taxes based upon Healtheon's net income. 7.6 AUDIT RIGHTS. Each of the parties shall have the right, exercisable no more frequently than once per calendar quarter and exercisable upon thirty (30) days prior written notice, to audit the appropriate books and records of the other party during regular business hours to review the calculations of the amounts payable pursuant to Section 7. The costs of such audit shall be borne by the auditing party, unless the results of such audit reveal an underpayment (or overpayment) of more than ten percent (10%) for a twelve month period, in which case the reasonable expenses of the auditing party shall be reimbursed by the other party. The parties shall promptly pay (or refund) to the other, the amounts of any underpayments (or overpayments). 8. CONFIDENTIALITY 8.1 CONFIDENTIAL INFORMATION. The parties acknowledge that in the course of performing under this Agreement, each party may be exposed to or acquire information which is proprietary to or confidential to the other party, its suppliers or customers ("Confidential Information"). Any and all such Confidential Information of one party in any form obtained by the other party or its employees, agents, [ * ] 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 or representatives in the performance of this Agreement shall be deemed to be confidential and proprietary information of such party. The parties agree to hold such Confidential Information in strict confidence, to only permit use of such Confidential Information by its employees and agents having a need to know in connection with performance under this Agreement, and not to copy, reproduce, sell, assign, license, market, transfer, give or otherwise disclose the Confidential Information of the other party to third parties or to use such Confidential Information for any purposes whatsoever, except as expressly contemplated by this Agreement, without the express written permission of the other party and to advise each of their employees, agents, and representatives of their obligations to keep such information confidential. Work Product shall be deemed to be the Confidential Information of Healtheon. 8.2 EXCEPTIONS TO CONFIDENTIAL INFORMATION. Confidential Information shall not include information that (i) was, as of the time of its disclosure, or thereafter becomes part of the public domain through a source other than the receiving party; (ii) the receiving party can demonstrate was known to the receiving party as of the time of its disclosure; (iii) the receiving party can demonstrate was independently developed by the receiving party without use of the Confidential Information; or (iv) the receiving party can demonstrate was subsequently learned from a third party not under a confidentiality obligation to the providing party. In the event that a receiving party is required to disclose certain Confidential Information of a disclosing party pursuant to applicable law, court order or government authority, the receiving party shall provide reasonable notice to the disclosing party prior to such disclosure and shall cooperate with the disclosing party to obtain protection from such disclosure. 9. REPRESENTATIONS AND WARRANTIES 9.1 WARRANTIES FOR SERVICES AND THE DEVELOPMENT WORK. Healtheon hereby represents and warrants that (i) each person assigned to perform the Services and/or the Development Work shall have the proper skill, training and background so as to be able to perform the such Services and/or Development Work in a competent and professional manner and (ii) all Services and/or Development Work and any Work Product and other materials or documentation delivered under this Agreement shall have been completed in a thorough and professional manner. In the event of a breach of Healtheon's representations and warranties under this Section 9.1, Healtheon's sole obligation shall be to promptly correct any defects identified by BSC, provided that BSC provides Healtheon with written notice within thirty (30) days of becoming aware of the defective work. 9.2 THIRD-PARTY TECHNOLOGY. BSC hereby represents and warrants that it has obtained all necessary consents, licenses and/or assignments with respect to the Third-Party Technology and Software which is licensed and/or deployed by BSC and which are necessary in order for Healtheon to perform the Services and Development Work to be performed hereunder. 9.3 AUTHORITY. Healtheon and BSC each hereby represents and warrants to the other that it is duly organized and validly existing under the laws of the jurisdiction in which it is organized, in good standing therein, and has the power to enter into this Agreement and to perform its obligations hereunder and, furthermore, that the performance by it of its obligations under this Agreement has been duly authorized by all necessary corporate or other action and will not violate any provision of law or regulation or of any corporate charter or bylaws. 9.4 INFRINGEMENT. Healtheon and BSC each hereby represents and warrants to the other that any information or technology provided by it to the other party in order to define the specifications or to accomplish the development objectives of this Agreement does not infringe, violate, misappropriate, or 7 in any manner contravene or breach any U.S. patent or any trademark, copyright, trade secret right, license or other property, or proprietary right of any third party. 9.5 NO IMPLIED WARRANTIES. THE WARRANTIES STATED ABOVE IN THIS SECTION 9 ARE THE ONLY WARRANTIES MADE BY EITHER PARTY. THE PARTIES DO NOT MAKE AND HEREBY DISCLAIM ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. THE PARTIES ACKNOWLEDGES THAT COMPLEX COMPUTER SOFTWARE AND SERVICES, SUCH AS THE DEVELOPED APPLICATIONS AND THE SERVICES, ARE RARELY FREE OF DEFECTS OR ERRORS AND HEALTHEON DOES NOT WARRANT THE SAME. 10. LIMITATION OF LIABILITY EXCLUSION OF CERTAIN DAMAGES. [ * ] UNDER NO CIRCUMSTANCES AND UNDER NO LEGAL THEORY SHALL EITHER PARTY HAVE ANY LIABILITY FOR LOSS OF PROFITS, CONSEQUENTIAL, EXEMPLARY, INCIDENTAL OR PUNITIVE DAMAGES, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 10.2 LIMITATION OF LIABILITY. [ * ] IN NO EVENT SHALL EITHER PARTY'S AGGREGATE LIABILITY FOR ALL MATTERS ARISING OUT OF THE SUBJECT MATTER OF THIS AGREEMENT, WHETHER IN CONTRACT, TORT OR OTHERWISE [ * ]. The remedies provided herein are the parties' sole and exclusive remedies. 11. INDEMNIFICATION 11.1 INDEMNIFICATION. Healtheon agrees to hold harmless and defend BSC from and against any and all claims, demands, suits, actions, or proceedings, arising out of any actual or alleged infringement by Healtheon of any copyright or any U.S. patent, trademark, or trade secret right or other proprietary right, with respect to the Work Product and Healtheon Platform Software, as delivered by Healtheon hereunder and used by BSC in accordance with the terms of this Agreement. BSC agrees to hold harmless and defend Healtheon from and against any and all claims, demands, suits, actions, or proceedings, arising out of any actual or alleged infringement by Healtheon of any copyright or any U.S. patent, trademark, or trade secret right or other proprietary right which arises out of BSC's failure to obtain any necessary consents, licenses, or assignments with respect to any Third-Party Technology or Software which has been licensed and/or deployed by BSC and which is necessary in order for Healtheon to perform the Services (but excluding Services relating solely to the Developed Applications). 11.2 LIMITATIONS. Healtheon shall have no indemnity obligation for claims resulting from or alleged to result from (i) development work performed by Healtheon in compliance with BSC's specifications where Healtheon's method of compliance has been specifically compelled by the terms of BSC's specifications; or (ii) BSC's use of the Work Product in combination with any hardware or software not furnished by or authorized by Healtheon hereunder, if such combination is the cause of such claim and the Work Product is not material to the claim, or any modifications which have been made by BSC if such modification is the cause of the claim. In addition, Healtheon shall have no indemnity [ * ] 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. 8 obligation for claims of infringement resulting or alleged to result from BSC's failure within a reasonable time frame to implement any replacement or modification which conforms to the requirements of Section 11.4 herein. BSC shall have no indemnity obligations for claims resulting from or alleged to result from Healtheon's breach of any Third-Party Technology or Software rights where appropriate consents, licenses and/or assignments were obtained and provided to Healtheon and Healtheon failed to adhere to the terms of applicable consents, licenses and/or assignments. 11.3 PAYMENT AND COOPERATION. Subject to the limitations set forth in Section 11.2 above, the indemnifying party shall pay all losses, damages, damages, settlements, expenses, costs and reasonable attorney's fees, incurred by the indemnified party arising out of the matters set forth in Section 11.1 provided that such payment shall be contingent on: (i) cooperation by the indemnified party with the indemnifying party in the defense and or settlement thereof, at the indemnifying party's expense; and (ii) allowing the Indemnifying Party to control the defense and all related settlement negotiations. The indemnified party shall give the indemnifying party prompt written notice of any such claim to enable the indemnifying party to defend or mitigate the claim. 11.4 REMEDY. If, in the event of an infringement action pertaining to the Work Product, including the Developed Applications, and/or Healtheon Platform Software and BSC's use of the such Work Product and/or Healtheon Platform Software is disrupted, Healtheon shall, at its option, (i) provide BSC with access to software which is functionally equivalent to the infringing elements of the Work Product and/or Healtheon Platform Software as applicable, without additional charge; (ii) modify the infringing portions of the Work Product and/or Healtheon Platform Software, as applicable, to avoid the infringement; or (iii) obtain a license for BSC to continue use of such Work Product and/or Healtheon Platform Software, as applicable, for the term of the applicable license and pay, on an annual basis, if Healtheon elects not to acquire a perpetual license, the additional fee required for such license(s). 11.5 LIMITATIONS. SECTION 11 SETS FORTH THE PARTIES' SOLE OBLIGATION, AND THE SOLE RECOURSE AGAINST THE OTHER PARTY IN THE EVENT OF ANY CLAIM OF INFRINGEMENT OF THIRD PARTY INTELLECTUAL PROPERTY RIGHTS. 12. TERM AND TERMINATION 12.1. TERM. This Agreement shall continue for a fixed term of five (5) years from the date hereof (the "Term") unless terminated earlier under the provisions of this Section 12 or by the mutual agreement of the parties. Notwithstanding the foregoing, (i) the license granted in Section 5.1 shall have a perpetual term unless terminated earlier pursuant to Section 12.3 or 12.4, or by the mutual consent of the parties; and (ii) the license granted in Section 5.3, if exercised, shall continue for a term of [ * ] from the Effective Date and shall renew automatically for successive additional [ * ] terms unless terminated earlier pursuant to Section 12.3 or 12.4, or by the mutual consent of the parties. 12.2 TERMINATION FOR CONVENIENCE. Either party may terminate this Agreement upon one hundred-eighty (180) days prior written notice to the other for any reason. Promptly following the notice of termination the parties shall use good faith efforts to agree to a commercially reasonable transition plan which will enable the parties' to mitigate to on-going expenses during the notice period. 12.3 TERMINATION BY EITHER PARTY FOR DEFAULT. If either party defaults in the performance of any material provision of this Agreement, then the non-defaulting party may give written notice to the defaulting party that if the default is not cured within thirty (30) days of such notice the Agreement will be terminated. If the non-defaulting party gives such notice and the default is not cured during the thirty [ * ] 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 (30) day period, then the Agreement shall automatically terminate at the end of that thirty (30) day period. 12.4 INSOLVENCY. Either party may terminate this Agreement by written notice to the other, and may regard the defaulting party as in default of this Agreement, if the defaulting party becomes insolvent, makes a general assignment for the benefit of creditors, suffers or permits the appointment of a receiver for its business or assets, becomes subject to any proceeding under any bankruptcy or insolvency law whether domestic or foreign, or has wound up or liquidated, voluntarily or otherwise. 12.5 EFFECT OF TERMINATION. The provisions of Sections 7 (solely with respect to Fees and other payments which were due and payable as of the date of termination), 4, 8, 10, 11, and 13 (to the extent applicable) shall survive the termination of this Agreement for any reason. All other rights and obligations of the parties shall cease upon termination of this Agreement. In the event of a termination, neither party shall be entitled to any refund of the fees paid or cost incurred for the development performed hereunder. Provided that this Agreement is not terminated by Healtheon pursuant to either Section 12.3 or 12.4 or by BSC pursuant to Section 12.2, upon termination, Healtheon shall deliver to BSC a copy of each Developed Application which has been completed as of the date of termination, in source and object code form, and the related user documentation, and, in the event of the exercise of BSC's option pursuant to Section 5.3, Healtheon shall deliver to BSC a copy of Healtheon Platform Software in object code form. 12.6 RETURN OF MATERIALS. Within thirty (30) days after the termination of this Agreement, each party shall return to the other, all Confidential Information, and other material of any kind which is the property of the other party. 13. GENERAL 13.1 NO EXCLUSIVITY OR RESTRICTION ON OTHER ACTIVITY. Except as expressly set forth in this Agreement, nothing herein shall preclude either party from entering into agreements to obtain similar services or development work from third parties or from providing similar services or development work to third parties. 13.2 RELATIONSHIP OF PARTIES. The relationship of the parties shall be that of independent contractors. Neither party will represent that it has any authority to assume or create any obligation, express or implied, on behalf of the other party, or to represent the other party as agent, employee, or in any other capacity, except as specifically provided herein. 13.3 BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding on and inure to the benefit of the respective parties and their permitted successors and assigns. Neither party shall not transfer, assign, sublicense or subcontract any right or obligation hereunder, except as expressly provided herein. In the event of a change in control of BSC, BSC shall be permitted to assign this Agreement to the surviving or new corporation acquiring all or substantially all of the business and assets of BSC by merger, acquisition, consolidation or otherwise, with the prior written consent of Healtheon, which consent shall not be unreasonably withheld. BSC may assign its rights under this Agreement to an entity which is controlled by BSC with the prior written consent of Healtheon, which consent shall not be unreasonably withheld. It shall not be unreasonable for Healtheon to withhold its consent if any proposed assignment would materially increase Healtheon's obligations under this Agreement or materially increase the scope of BSC's rights (including but not limited to the grant of rights contained in Section 5) or if such proposed assignee is a competitor of Healtheon. 10 13.4 NO WAIVER. Either party's failure to exercise any right under this Agreement shall not constitute a waiver of any other terms or conditions of this Agreement with respect to any other or subsequent breach, nor a waiver by such party of its right at any time thereafter to require exact and strict compliance with the terms of this Agreement. 13.5 NOTICES. All notices or other communications which are required or permitted to be given hereunder shall be in writing and shall be sent to the address of the recipient set forth below or such other address as the recipient may designate by notice given in accordance with the provisions of this Section with copies to: In the case of Healtheon: In the case of BSC: Healtheon Corporation Beech Street Corporation 87 Encina Avenue 173 Technology Palo Alto, California 94301 Irvine, California 92618 Attn: President Attn: President and COO Copy to: General Counsel Copy to: Chief Financial Officer Any such notice shall be delivered by either (i) first class registered or certified airmail, postage prepaid, and shall be deemed to have been served forty-eight (48) hours after posting; or (ii) express courier service, service fee prepaid, and shall be effective upon delivery. 13.6 APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California. 13.7 SEVERABILITY. The invalidity of one or more phrases, sentences, clauses or articles contained in this Agreement shall not affect the remaining portions of this Agreement or any part thereof; and in the event that one or more phrases, sentences, clauses or articles shall be declared void or unenforceable this Agreement shall be amended to include only such portions of such phrases, sentences, clauses or articles that are not invalid, void or unenforceable. 13.8 ENTIRE AGREEMENT; AMENDMENTS. This Agreement, along with the Exhibits attached hereto, sets forth the entire agreement between the parties and supersedes any other prior proposals, agreements and representations between them related to its subject matter, whether written or oral, including but not limited to the Letter of Intent between the parties. No modifications or amendments to this Agreement shall be binding upon the parties unless made in writing and duly executed by authorized officials of both parties. 13.9 ATTORNEYS FEES. The prevailing party in any dispute shall be entitled to collect from the other party the prevailing party's reasonable attorneys' fees and costs in connection with the enforcement of this Agreement. 13.10 NON-SOLICITATION OF EMPLOYEES. Neither party shall solicit the services or employment of any employee or agent of the other party for a period beginning at the Effective Date and ending on the termination date of this Agreement, without the prior written consent of the other party. The soliciting party, who violates this Section 13.10, shall pay to the other party an amount equal to one (1) year's salary for any solicited employee of the other party, as liquidated damages and not as a penalty. The amount of annual salary shall be the annual salary in effect at the date the employee was solicited. For 11 purposes of this Section, the term "employee" means current or former employees of the other party who were employed by the other party at any time during the period beginning on the Effective Date and ending on the date on which the nonsolicitation period above terminates. Initiation by an individual of contact regarding employment or response by an individual to an advertisement or other generally available notice, shall not constitute solicitation. 13.11 BANKRUPTCY. The parties agree that the Agreement and any related agreements are contracts under which Healtheon is a licensor of rights to intellectual property within the scope of Section 101 of the United States Bankruptcy Code and that BSC shall have all the rights of a licensee set forth in Section 365(n) of the Bankruptcy Code. Upon the commencement of a bankruptcy petition involving either party, the other party shall be entitled to retain and may fully exercise all rights and licenses available under the Bankruptcy Code. 13.12 USE OF NAME. Neither party shall use the name of the other party, or refer to the other party, directly or indirectly, in any advertising, sales presentation, news release, information provided to any profession or trade publication, or any other promotional or informational material, for any purpose whatsoever, or in any manner indicate any endorsement or support of any product, without such party's prior written approval. 13.13 RESIDUAL INFORMATION. Without prejudice to either party's proprietary rights, neither party shall be liable for using general ideas, concepts and know-how that may be gained as a result of exposure to or contact with the other party or its materials. 13.14 ESCROW. Healtheon agrees that it will put the Healtheon Platform Software and the Developed Applications, as they are developed, in escrow with an independent escrow agent. The escrow agreement will be on terms and conditions which are mutually agreeable to parties. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first written above. Healtheon Corporation Beech Street Corporation By: /s/ By: /s/ -------------------------------- -------------------------------- Title: President & CEO Title: President & CEO ----------------------------- ----------------------------- Date: 12/15/97 Date: 12/15/97 -------------------------------- -------------------------------- 12 EXHIBIT A SERVICES Healtheon will operate and maintain BSC's information technology infrastructure and data processing functionality and related services, including the following types of services, as necessary and agreed to by the parties: - maintain hardware operations - maintain software infrastructure - maintain data network(s) - desktop computing - provide internal and external technical support - provide project planning and management - software installation - hardware installation - provide user technical support - provide user training - provide IT personnel management services - provide IT consulting services - provide custom software solution design and development services 13 EXHIBIT B DEVELOPMENT WORK OVERVIEW Healtheon shall provide an engineering team staffed with up to forty engineers by December 31, 1998 to perform the general development tasks set forth below ( the "Development Team"). The Development Team will begin staffing during January, 1998 and is anticipated to be fully staffed by December 31, 1998. Unless otherwise agreed to by the parties, the Development Team will remain fully staffed during calendar years 1999, 2000 and 2001 and will reduce its staffing during calendar year 2002, depending upon the resources need to fulfill the Development Work in accordance with the project plans which are developed by the parties pursuant to Section 2.2. In the event that the applicable project plans, as they are agreed to by the parties pursuant to Section 2.2, require additional personnel resources, the parties will revise the Development Team staffing commitments hereunder. The Development Team will develop the following types of internet-based solutions, but not limited to, with the objective of creating a Network Computing PPO/Managed Care capability: - - Claims Repricing - - Integrated Provider Management System - - Demand Management(Personal Health Management) - - Interfaces to internal and external systems (which are not "custom development") Phase 1 of the Development Work will consist of developing appropriate Project Plans and related design specifications and cost estimates to be approved by Management Committee. The work products of this phase will consist of: 1. An overall Project Plan; 2. Specific Project Plans and general specifications for Claims Repricing and Integrated Provider Management; and 3. General specifications for the Demand Management service and internet integration of the Demand Management service. Phase 1 is anticipated to take approximately sixty work days to complete with interim deliverables as tasks are completed and submitted to the Management Committee for approval. 14 EXHIBIT C THIRD-PARTY TECHNOLOGY AND SOFTWARE 15 EXHIBIT D FEES AND EXPENSES 1. FEES AND EXPENSE FOR SERVICES AND "CUSTOM DEVELOPMENT" WORK. [ * ] of the "costs" incurred by Healtheon which are associated with performing the Services and any "custom" development work performed on behalf of BSC. For the purposes of this Agreement, "Custom" development work shall mean any development work performed to meet BSC's own specifications which is not anticipated to be reusable for other Healtheon clients. 2. FEES AND EXPENSE FOR DEVELOPMENT WORK FOR THE DEVELOPED APPLICATIONS [ * ] of the "costs" incurred by Healtheon which are associated with developing the Developed Applications. 3. DEFINITION OF "COST." For the purposes of this Agreement "cost" shall be defined as follows: A. For employees/contractors assigned to perform the Services and/or Development Work on a full-time basis, "cost" will include direct expenses (such as salary, benefits, recruiting, consulting, travel, etc.), support expenses (rent, phone, computing, office expenses) and allocated expenses (such as management, administration, other overhead cost, etc.). The average hourly loaded cost per employee is currently approximately [ * ] per hour. B. For Healtheon's employees that are not assigned to perform the Services and/or Development Work on a full-time basis, they will charge their time performing or supporting the Services and/or Development Work based on a set rate, which is subject to change based on the cost structure of Healtheon. The initial rates are :- Level 1 [ * ] per hour Level 2 [ * ] per hour Level 3 [ * ] per hour C. For Healtheon's employees that are not generally assigned to perform the Services and/or Development Work on a regular basis, they will charge their time providing short term consulting services to this project based on a reduced standard consulting rate. The current rates, [ * ] are :- Level 1 [ * ] per hour Level 2 [ * ] per hour Level 3 [ * ] per hour Cost for additional capital equipment or computer processing needed to perform the Services or Development Work will be invoiced separately. [ * ] 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. 16 EX-10.19 11 10.19 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. SERVICES, DEVELOPMENT AND LICENSE AGREEMENT This Agreement made this 30th day of September, 1997 (the "Effective Date"), is by and between Healtheon Corporation, a Delaware corporation with offices at 87 Encina Ave., Palo Alto, CA 94301 ("Healtheon") and Brown & Toland Physician Services Organization, with offices at 1388 Sutter Street, Suite 400, San Francisco, CA 94109 ("B&T"). WHEREAS, the parties have agreed to form an alliance to address the information technology needs of B&T, develop new applications designed to address the needs of physician practice groups, and pursue other ventures which may be of mutual interest to the parties. The parties hereby agree as follows: 1. DEFINITIONS. 1.1 "ADDITIONAL APPLICATIONS" shall mean those applications which are developed by Healtheon, but excluding the Developed Applications, which are designed to run on the Healtheon Platform. 1.2 "BTH DIVISION" shall mean the division of Healtheon which shall be organized to perform the Services hereunder. 1.3 "B&T SERVICE" shall mean B&T's physician practice management services, including the practice management services listed on Exhibit A. 1.4 "DEVELOPED APPLICATIONS" shall mean those applications and any improvements thereto which are developed by Healtheon hereunder and which are designed to run on the Healtheon Platform. 1.5 "DEVELOPMENT WORK" shall mean the work to be performed hereunder by Healtheon to develop the Developed Applications. 1.6 "END USER" shall mean any employee, partner, agent or other representative of a Physician Group who is authorized to access and use the B&T Service. 1.7 "HEALTHEON PLATFORM" shall mean the Healtheon Platform Software, as well as certain industry standard software applications, tools, and processes which provides the operating environment which enables the use of Healtheon developed applications as part of an on-line service which is accessible through the Internet by using industry standard web browsers. 1.8 "HEALTHEON PLATFORM SOFTWARE" shall mean the proprietary operating system and other software which has been developed by Healtheon which is part of the operating system of the Healtheon Platform. 1.9 "PHYSICIAN GROUPS" shall mean those physician practice groups for which B&T provides the B&T Service. 1.10 "SERVICES" shall mean those information technology services described on Exhibit B. -1- 2. PERFORMANCE OF THE SERVICES AND THE DEVELOPMENT WORK 2.1 PERFORMANCE OF THE SERVICES. Healtheon, through personnel assigned to its BTH Division, shall perform the Services at certain sites controlled by B&T and/or Healtheon. The initial scope of the Services is set forth as Exhibit B. Exhibit B may be amended with the written consent of the parties. Healtheon shall perform the Services in accordance with the guidelines set forth in Exhibit B. 2.2 PERFORMANCE OF THE DEVELOPMENT WORK. Healtheon shall design, develop and complete the Developed Applications. The specifications for each Developed Application shall be developed jointly and mutually approved by the parties. In conjunction with the development of each set of specifications, the parties shall jointly develop a mutually agreeable detailed project plan. Such project plan shall describe, in a degree of detail reasonably satisfactory to the parties, all tasks and responsibilities required for the successful and timely completion of the development and delivery of the applicable Developed Applications. 3. PROJECT MANAGEMENT 3.1 PERSONNEL RESOURCES. Healtheon shall commit the number of qualified and experienced personnel which are necessary to perform its obligations under this Agreement and as further outlined in the project plan(s). Healtheon shall have the sole right and obligation to hire, supervise, manage, contract, direct, procure, perform or cause to be performed all work to be performed by Healtheon and its personnel hereunder. Healtheon may engage third parties to render services in connection with the performance of the Services and/or Development Work contemplated hereunder. 3.2 MANAGEMENT BOARD. The parties shall establish a project executive committee consisting of three (3) senior level employees from each party (the "Management Board"). The Management Board shall have overall project oversight responsibility and management, shall establish appropriate project leadership, and shall be responsible for resolving any matters arising under this Agreement and the Services and Development Work contemplated hereunder. 3.3 STATUS MEETINGS. The parties shall conduct status meetings on a monthly basis detailing the performance of the Services and Development Work during the period and the work planned to be performed during the upcoming four (4) week period. 3.4 CHANGES TO SERVICES, DEVELOPMENT WORK AND PROJECT PLAN. The scope of the Services, the Development Work and the project plans shall not be changed in any material respect without the mutual written agreement of the parties, which agreement shall not be unreasonably withheld. 4. OWNERSHIP AND LICENSE RIGHTS. 4.1 OWNERSHIP. B&T acknowledges and agrees that all of the work product produced or developed by Healtheon in connection with Healtheon's performance of the Services and/or Development Work to be provided hereunder, including, but not limited to, all technology of any nature whatsoever, all notes, records, drawings, designs, inventions, improvements, developments, discoveries, trade secrets and any copyrightable material, including but not limited, to the Developed Applications, and all patentable inventions, conceived, made or discovered by Healtheon, solely or in collaboration with others, during the period of this Agreement and which relate in any manner to the Services and/or Development Work to be performed hereunder or which Healtheon may be directed to undertake or investigate, or which Healtheon may become associated with in performing the Services and/or the -2- Development Work, including any derivative works of any of the foregoing (collectively the "Work Product"), is the sole property of Healtheon. Subject only to the license rights to be granted by Healtheon to B&T in Section 5.1, below, B&T acknowledges and agrees that Healtheon shall have all proprietary rights in and to the Work Product, including, without limitation, all copyrights, patents and trade secret rights, all moral rights, all contract and licensing rights, and all claims and causes of action of any kind with respect to any of the foregoing, whether now known or hereafter to become known, and that Healtheon shall have the sole and exclusive right to use, modify and exploit the Work Product in any manner that Healtheon may choose. 4.2 PROPRIETARY NOTICES. B&T shall not remove or alter any trademark, trade name, copyright, or other proprietary notices, legends, symbols, or labels appearing on or in materials pertaining to the Work Product. Each portion of the Healtheon documentation reproduced by B&T shall include the intellectual property notice or notices appearing in or on the corresponding portion of such materials as delivered by Healtheon hereunder. 5. LICENSE AND SERVICE RIGHTS. 5.1 LICENSE RIGHTS. Healtheon grants to B&T a nonexclusive and nontransferable, fully-paid, right and license, exercisable at B&T's operational site(s), to: (i) use the Developed Applications, in object code form, as part of B&T's physician practice management services which are offered to the Physician Groups; and (ii) use the Work Product (excluding the Developed Applications) delivered to B&T hereunder in conjunction with the operations of B&T's physician practice management services. B&T shall not use, sublicense or otherwise distribute the Work Product, including the Developed Applications, in any other manner except as expressly stated herein. Notwithstanding the foregoing, nothing herein shall be construed so as to limit or interfere with B&T's ability to use the Developed Applications as part of the B&T Service to be offered to Physician Groups, and to enable access and use by End Users in conjunction with the B&T Service. 5.2 OPTION TO LICENSE HEALTHEON PLATFORM SOFTWARE. Healtheon hereby agrees to grant to B&T a nonexclusive and nontransferable, right and license, exercisable at B&T's operational site(s), to use the Healtheon Platform Software as part of the Healtheon Platform to be deployed at B&T's primary operational site(s) to run the Developed Applications (and any Additional Applications which may be licensed from Healtheon), as part of the B&T Service to be offered to Physician Groups, and to enable access and use by End Users in conjunction with the B&T Service. The applicable one-time, up-front fees for such license(s) shall be [*] net of any third-party royalty obligations. B&T shall not have the right to use, sublicense or otherwise distribute the Healtheon Platform Software in any other manner except as expressly stated herein. Notwithstanding the foregoing, nothing herein shall be construed so as to limit or interfere with B&T's ability to use the Developed Applications (and any Additional Applications which may be licensed from Healtheon) as part of the B&T Service to be offered to Physician Groups, and to enable access and use by End Users in conjunction with the B&T Service. B&T shall be solely responsible for the costs associated with acquiring all third-party hardware and software and implementation services necessary to deploy the Healtheon Platform at B&T's sites. 5.3 OPTION TO LICENSE ADDITIONAL APPLICATIONS. Healtheon hereby agrees to grant to B&T a nonexclusive and nontransferable, right and license, exercisable at B&T's primary operational site(s), to use the Additional Applications as may be licensed at the option of B&T, as part of the B&T Service to be offered to Physician Groups, and to enable access to End Users in conjunction with the B&T Service. [*] 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- The one-time up-front fee(s) for such license(s) shall be [*] to each such Additional Application as may be licensed by B&T, net of any third-party royalty obligations. B&T shall not use, sublicense or otherwise distribute the Additional Applications in any other manner except as expressly stated herein. Notwithstanding the foregoing, nothing herein shall be construed so as to limit or interfere with B&T's ability to use the Additional Applications which may be licensed from Healtheon as part of the B&T Service to be offered to Physician Groups, and to enable access and use by End Users in conjunction with the B&T Service. 5.4 OPTION TO USE HEALTHEON SERVICE. If, following the completion of the Developed Applications, B&T does not elect to exercise its license rights under Section 5.1, Healtheon hereby agrees to enter into a Healtheon Service Agreement with B&T whereby Healtheon shall provide B&T and its Physician Groups with access to an on-line service which includes the Developed Applications. Healtheon shall offer such service to B&T and its Physician Groups at [*]. 6. THIRD-PARTY TECHNOLOGY AND LICENSE RIGHTS 6.1 THIRD-PARTY TECHNOLOGY AND LICENSE RIGHTS. In order to perform the Services and/or Development Work contemplated hereunder, Healtheon may need to have access to the third-party technology and software listed on Exhibit C (the "Third-Party Technology and Software") which is licensed and/or deployed by B&T. B&T hereby agrees to use its best efforts to obtain, at its own expense, all necessary consents, licenses and/or assignment which may be necessary in order for Healtheon to perform the Services and/or Development Work, as contemplated hereunder. In the event that B&T fails to obtain any such necessary consent, license or assignment, B&T shall promptly notify Healtheon in writing and the parties will work together to attempt to find a reasonable accommodation to allow Healtheon to proceed with the work contemplated hereunder without violating any third party rights. In the event that the parties cannot find a reasonable accommodation, neither party shall have any obligation to proceed with any work which would infringe any third-party proprietary rights. Healtheon shall use reasonable efforts to cooperate with B&T to assist B&T in obtain any necessary consents, licenses and/or assignments. 6.2 B&T TECHNOLOGY AND LICENSE RIGHTS. B&T hereby grants to Healtheon a right and license to use, modify and copy all technology and software owned by B&T which is necessary for Healtheon to perform its obligations hereunder. 7. FEES AND PAYMENT 7.1 FEES AND EXPENSES, PAYMENT. B&T shall pay Healtheon the Fees and Expenses, as set forth in Exhibit D for the Services and the Development Work to be performed hereunder (the "Fees"). Healtheon shall submit invoices to B&T on a monthly basis for the Fees when due. Invoices shall be due and payable within ten (10) days after receipt. The Fees may be changed with the written consent of the parties. 7.2 OTHER EXPENSES. Healtheon shall have sole responsibility for payment of compensation to its personnel and shall pay and report, for all personnel assigned to perform services hereunder, federal and state income tax withholding, social security taxes, and unemployment insurance applicable to such personnel. Healtheon shall bear sole responsibility for any health or disability insurance, retirement benefits, or other welfare or pension benefits (if any) to which its own personnel may be entitled. [*] 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- 7.3 THIRD-PARTY HARDWARE AND SOFTWARE. In the event that it is reasonably necessary for Healtheon to purchase or license any third-party hardware and/or software in order to perform the Services and/or the Development Work, the Management Board shall determine whether such third-party hardware and/or software should be purchased and/or licensed by B&T or Healtheon and how the cost shall be allocated between the parties. 7.4 TAXES. All Fees and payments are exclusive of all taxes, duties or levies, however designated or computed. B&T shall be responsible for and pay all taxes upon payments due under this Agreement including, but not limited to, sales, use, or value-added taxes, duties, withholding taxes and other assessments now or hereafter imposed on or in connection with this Agreement, exclusive of taxes based upon Healtheon's net income, except as noted in Section 7.2. 8. CONFIDENTIALITY 8.1 CONFIDENTIAL INFORMATION. The parties acknowledge that in the course of performing under this Agreement, each party may be exposed to or acquire information which is proprietary to or confidential to the other party, its suppliers or customers. Any and all such information of one party in any form obtained by the other party or its employees, agents, or representatives in the performance of this Agreement shall be deemed to be confidential and proprietary information of such party. The parties agree to hold such information in strict confidence, to only permit use of such information by its employees and agents having a need to know in connection with performance under this Agreement, and not to copy, reproduce, sell, assign, license, market, transfer, give or otherwise disclose the confidential information of the other party to third parties or to use such information for any purposes whatsoever, without the express written permission of the other party and to advise each of their employees, agents, and representatives of their obligations to keep such information confidential. All such confidential and proprietary information described herein in whatever form, including but not limited to the Work Product, is hereinafter collectively referred to as "Confidential Information." Work Product shall be deemed to be the Confidential Information of Healtheon. B&T hereby agrees that it will not disclose any Confidential Information of Healtheon to any person or entity who is not an employee of B&T, without Healtheon's prior written consent and subject to such third party entering into a confidentiality agreement with Healtheon in a form acceptable to Healtheon. 8.2 EXCEPTIONS TO CONFIDENTIAL INFORMATION. Notwithstanding the obligations set forth in Section 8.1 above, the confidentiality obligations of Healtheon and B&T shall not extend to information that (i) was, as of the time of its disclosure, or thereafter becomes part of the public domain through a source other than receiving party; (ii) the receiving party can demonstrate was known to the receiving party as of the time of its disclosure; (iii) the receiving party can demonstrate was independently developed by the receiving party without use of the Confidential Information; or (iv) the receiving party can demonstrate was subsequently learned from a third party not under a confidentiality obligation to the providing party. In the event that a receiving party is required to disclose certain Confidential Information of a disclosing party pursuant to court order or government authority, the receiving party shall provide reasonable notice to the disclosing party prior to such disclosure and shall cooperate with the disclosing party to obtain protection from such disclosure. 9. REPRESENTATIONS AND WARRANTIES 9.1 WARRANTIES FOR SERVICES AND THE DEVELOPMENT WORK. Healtheon hereby represents and warrants that (i) each person assigned to perform the Services and/or the Development Work shall have -5- the proper skill, training and background so as to be able to perform the such Services and/or Development Work in a competent and professional manner and (ii) all Services and/or Development Work and any work product and other materials or documentation delivered under this Agreement shall have been completed in a thorough and professional manner. In the event of a breach of Healtheon's representations and warranties under this Section 9.1, Healtheon's sole obligation shall be to promptly correct any defects identified by B&T, provided that B&T provides Healtheon with written notice within thirty (30) days of becoming aware of the defective work. 9.2 THIRD-PARTY TECHNOLOGY. B&T hereby represents and warrants that it will use its best effort to obtain all necessary consents, licenses and/or assignments with respect to the third-party technology software which is licensed and/or deployed by B&T and which are necessary in order for Healtheon to perform the Services and Development Work to be performed hereunder. In the event that B&T has failed to obtain any necessary consent, license or assignment, B&T shall have notified Healtheon in writing. 9.3 AUTHORITY. Healtheon and B&T each hereby represents and warrants to the other that it is duly organized and validly existing under the laws of the jurisdiction in which it is organized, in good standing therein, and has the power to enter into this Agreement and to perform its obligations hereunder and, furthermore, that the performance by it of its obligations under this Agreement has been duly authorized by all necessary corporate or other action and will not violate any provision of law or regulation or of any corporate charter or bylaws. 9.4 NO IMPLIED WARRANTIES. THE WARRANTIES STATED ABOVE IN THIS SECTION 9 ARE THE ONLY WARRANTIES MADE BY EITHER PARTY. HEALTHEON DOES NOT MAKE AND HEREBY DISCLAIMS ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. B&T ACKNOWLEDGES THAT COMPLEX COMPUTER SOFTWARE AND SERVICES, SUCH AS THE DEVELOPED APPLICATIONS AND THE SERVICES, ARE RARELY FREE OF DEFECTS OR ERRORS AND HEALTHEON DOES NOT WARRANT THE SAME. 10. LIMITATION OF LIABILITY 10.1 EXCLUSION OF CERTAIN DAMAGES. [*] UNDER NO CIRCUMSTANCES AND UNDER NO LEGAL THEORY SHALL EITHER PARTY HAVE ANY LIABILITY FOR LOSS OF PROFITS, CONSEQUENTIAL, EXEMPLARY, INCIDENTAL OR PUNITIVE DAMAGES, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 10.2 LIMITATION OF LIABILITY. [*] IN NO EVENT SHALL EITHER PARTY'S AGGREGATE LIABILITY FOR ANY MATTER ARISING OUT OF THE SUBJECT MATTER OF THIS AGREEMENT, WHETHER IN CONTRACT, TORT OR OTHERWISE, EXCEED THE AMOUNT OF THE FEES PAID FOR THE PARTICULAR SERVICES OR DEVELOPMENT WORK WHICH GAVE RISE TO SUCH CLAIM UNDER THIS AGREEMENT. The remedies provided herein are the parties' sole and exclusive remedies. [*] 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- 11. INDEMNIFICATION 11.1 INDEMNIFICATION. Healtheon agrees to hold harmless and defend B&T from and against any and all claims, actions, or proceedings, arising out of any actual or alleged infringement by Healtheon of any copyright or any U.S. patent, trademark, or trade secret right or other proprietary right, with respect to the Work Product, as delivered by Healtheon hereunder and used by B&T in accordance with the terms of this Agreement. B&T agrees to hold harmless and defend Healtheon from and against any and all claims, actions, or proceedings, arising out of any actual or alleged infringement by Healtheon of any copyright or any U.S. patent, trademark, or trade secret right or other proprietary right which arises out of B&T's failure to obtain any necessary consents, licenses, or assignments with respect to any third-party technology or software which has been licensed and/or deployed by B&T and which is necessary in order for Healtheon to perform its obligations hereunder ("B&T Third-Party Technology Rights"). 11.2 LIMITATIONS. Healtheon shall have no indemnity obligation for claims resulting from or alleged to result from (i) development work performed by Healtheon in compliance with B&T's specifications where Healtheon's method of compliance has been compelled by the terms of B&T's specifications; or (ii) B&T's use of the Work Product in combination with any hardware or software not furnished by or authorized by Healtheon hereunder, if such combination is the cause of such claim, or any modifications which have been made by B&T. In addition, Healtheon shall have no indemnity obligation for claims of infringement resulting or alleged to result from B&T's failure within a reasonable time frame to implement any replacement or modification which conforms to the requirements of Section 11.4 herein. B&T shall have no indemnity obligations for claims resulting from or alleged to result from Healtheon's breach of any B&T Third-Party Technology Rights where appropriate consents, licenses and/or assignments were obtained and Healtheon failed to adhere to the terms of applicable consents, licenses and/or assignments. 11.3 PAYMENT AND COOPERATION. Subject to the limitations set forth in Section 11.2 above, the Indemnifying Party shall pay all damages settlements, expenses, costs and reasonable attorney's fees, incurred by the Indemnified Party arising out of the matters set forth in Section 11.1 provided that such payment shall be contingent on: (i) prompt notice to the Indemnifying Party in writing of such claim to enable it to defend or mitigate the same; (ii) cooperation by the Indemnified Party with the Indemnifying Party in the defense and or settlement thereof, at the Indemnifying Party's expense; and (iii) allowing the Indemnifying Party to control the defense and all related settlement negotiations. 11.4 REMEDY. If, in the event of an infringement action pertaining to the Work Product and B&T's use of the Work Product is disrupted, Healtheon shall, at its option, (i) provide B&T with access to software which is functionally equivalent to the infringing elements of the Work Product, without additional charge; (ii) modify the infringing portions of the Work Product to avoid the infringement; or (iii) obtain a license for B&T to continue use of the Work Product for the term of this Agreement and pay for any additional fee required for such license, subject to B&T's approval, which shall not be unreasonably withheld. 11.5 LIMITATIONS. SECTION 11 SETS FORTH THE PARTIES' SOLE OBLIGATION, AND THE SOLE RECOURSE AGAINST THE OTHER PARTY IN THE EVENT OF ANY CLAIM OF INFRINGEMENT OF THIRD PARTY INTELLECTUAL PROPERTY RIGHTS. -7- 12. TERM AND TERMINATION 12.1. TERM. This Agreement shall continue for a fixed term of three (3) years from the date hereof unless terminated earlier under the provisions of this Section 12 or by the mutual written agreement of the parties. Notwithstanding the foregoing, the licenses granted in Section 5.1 shall continue for a term of [*] from the Effective Date and shall renew automatically for successive additional [*] terms unless terminated earlier pursuant to Section 12.3 or 12.4, or by the mutual written consent of the parties. 12.2 TERMINATION FOR CONVENIENCE. Either party may terminate this Agreement upon one hundred twenty days (120) prior written notice to the other for any reason. 12.3 TERMINATION BY EITHER PARTY FOR DEFAULT. If either party defaults in the performance of any material provision of this Agreement, then the non-defaulting party may give written notice to the defaulting party that if the default is not cured within thirty (30) days of such notice the Agreement will be terminated. If the non-defaulting party gives such notice and the default is not cured during the thirty (30) day period, then the Agreement shall automatically terminate at the end of that period. 12.4 INSOLVENCY. Either party may terminate this Agreement by written notice to the other, and may regard the defaulting party as in default of this Agreement, if the defaulting party becomes insolvent, makes a general assignment for the benefit of creditors, suffers or permits the appointment of a receiver for its business or assets, becomes subject to any proceeding under any bankruptcy or insolvency law whether domestic or foreign, or has wound up or liquidated, voluntarily or otherwise. 12.5 EFFECT OF TERMINATION. The provisions of Sections 7(with respect to Fees and other payments which were due and payable as of the date of termination), 4, 8, 10, 11, and 13 (to the extent applicable) shall survive the termination of this Agreement for any reason. All other rights and obligations of the parties shall cease upon termination of this Agreement. In the event of a termination, neither party shall be entitled to any refund of the fees paid or cost incurred for the development performed hereunder. Provided that this Agreement is not terminated pursuant to Section 12.4 pursuant to B&T's insolvency, upon termination, Healtheon shall deliver to B&T a copy of (i) each Developed Application which has been completed as of the date of termination, in object code form, and the related user documentation, and (ii) all portions of Developed Applications which were under development but not yet completed as of the date of termination, in object code form, and the related user documentation, if any. Materials delivered pursuant to Section 12.5(ii) shall be delivered on an "as-is" basis. 12.6 RETURN OF MATERIALS. Within thirty (30) days after the termination of this Agreement, each party shall return to the other, all Confidential Information, and other material of any kind which is the property of the other party. 13. GENERAL 13.1 NO EXCLUSIVITY OR RESTRICTION ON OTHER ACTIVITY. Except as expressly set forth in this Agreement, nothing herein shall preclude either party from entering into agreements to obtain similar services or development work from third parties or from providing similar services or development work to third parties. [*] 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. -8- 13.2 RELATIONSHIP OF PARTIES. The relationship of the parties shall be that of independent contractors. Neither party will represent that it has any authority to assume or create any obligation, express or implied, on behalf of the other party, or to represent the other party as agent, employee, or in any other capacity, except as specifically provided herein. 13.3 BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding on and inure to the benefit of the respective parties and their permitted successors and assigns. Neither party shall not transfer, assign, sublicense or subcontract any right or obligation hereunder, except as expressly provided herein. 13.4 NO WAIVER. Either party's failure to exercise any right under this Agreement shall not constitute a waiver of any other terms or conditions of this Agreement with respect to any other or subsequent breach, nor a waiver by such party of its right at any time thereafter to require exact and strict compliance with the terms of this Agreement. 13.5 NOTICES. All notices or other communications which are required or permitted to be given hereunder shall be in writing and shall be sent to the address of the recipient set forth below or such other address as the recipient may designate by notice given in accordance with the provisions of this Section with copies to: In the case of Healtheon: In the case of B&T: Healtheon Corporation Brown & Toland 87 Encina Avenue 1388 Sutter Street, Suite 400 Palo Alto, California 94302 San Francisco, CA 94109 Attn: President Attn: President Copy to: General Counsel Copy to: General Counsel Any such notice shall be delivered by either (i) first class registered or certified airmail, postage prepaid, and shall be deemed to have been served forty-eight (48) hours after posting; or (ii) express courier service, service fee prepaid, and shall be effective upon delivery. 13.6 APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California. 13.7 SEVERABILITY. The invalidity of one or more phrases, sentences, clauses or articles contained in this Agreement shall not affect the remaining portions of this Agreement or any part thereof; and in the event that one or more phrases, sentences, clauses or articles shall be declared void or unenforceable this Agreement shall be amended to include only such portions of such phrases, sentences, clauses or articles that are not invalid, void or unenforceable. 13.8 ENTIRE AGREEMENT; AMENDMENTS. This Agreement, along with the Exhibits attached hereto, sets forth the entire agreement between the parties and supersedes any other prior proposals, agreements and representations between them related to its subject matter, whether written or oral. No modifications or amendments to this Agreement shall be binding upon the parties unless made in writing and duly executed by authorized officials of both parties. -9- IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first written above. Healtheon Corporation Brown & Toland Physician Services Organization By: /s/ By: /s/ --------------------------------- ------------------------------- Title: President and CEO Title: President ------------------------------ ---------------------------- Date: Date: ------------------------------ ---------------------------- -10- EXHIBIT A B&T SERVICE "B & T Services" shall mean B & T's physician practice, physician group practice, and IPA management services which include, but not be limited to, the following services: - - Claims processing, adjudication, eligibility, and encounter data - - Risk pool management - - Utilization management - - Authorization and referral management - - Care management including inpatient and outpatient case management - - Inpatient physician program management - - Disease management and wellness programs - - Provider credentialling - - Health plan member marketing - - Provider relations - - Health plan and provider contracting - - Quality management - - Practice management including office management, billing and collections - - Financial services including accounting, audit, budget, financial reporting, and taxes - - Medical group and IPA administration - - Capitation management - - Health Plan Member services which are offered to "Physician Groups. -11- EXHIBIT B SERVICES - - Operate, maintain and enhance B&T applications - - Operate and maintain B&T hardware and software infrastructure, network and desktop environment - - Provide technical support to internal and external B&T users - - Provide support for B&T new site implementations - project planning and management - solution design - installation of hardware and software - user technical support and training -12- EXHIBIT C Third-Party Technology and Software -13- EXHIBIT D FEES AND EXPENSES 1. Fee and Expenses for Services B&T will pay [*] of all "cost" (as defined below) incurred by Healtheon in performing the Services. 2. Fee and Expenses for Development Work B&T will pay [*] of all "cost" (as defined below) incurred by Healtheon in performing the Development Work. DEFINITION OF COST Cost will include Healtheon's "fully loaded" cost (which include payroll, benefit, support services, corporate overhead and other appropriate expenses) for all full time employees assigned to the BTH Division, and all direct expenses (consultants, contractors, recruiting expenses and fees, outside services, travel, etc.). For Healtheon's employees that are not assigned full time to the Division, they will charged their time performing or supporting the Services based on a set rate, which is subject to change based on the cost structure of Healtheon. The initial rates are:- Level 1 [*] per hour Level 2 [*] per hour Level 3 [*] per hour For Healtheon's employees that are not involved in this project, they will charge their time providing short term consulting services to this project or B&T based on [*]. The current rates are :- Level 1 [*] per hour Level 2 [*] per hour Level 3 [*] per hour Cost for additional capital equipment or computer processing needed to perform the Services or Development Work will be paid by B&T. [*] 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. -14- -----END PRIVACY-ENHANCED MESSAGE-----