-----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, D2MYViocwcXvUlMyOMPOv8EcXJCL8056H/NLSmNyUWk1F7OCOXkevM16ICXF58mH OsBwEfMT4bFQmotb/G5QPA== 0001047469-98-028990.txt : 19980803 0001047469-98-028990.hdr.sgml : 19980803 ACCESSION NUMBER: 0001047469-98-028990 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 25 FILED AS OF DATE: 19980731 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEALTHEON CORP CENTRAL INDEX KEY: 0001009575 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 943236644 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-60427 FILM NUMBER: 98675749 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 1 S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 31, 1998 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- 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 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 4600 Patrick Henry Drive MICHAEL J. MCADAM Professional Corporation Santa Clara, CA 95054 Fenwick & West LLP 650 Page Mill Road (408) 876-5000 Two Palo Alto Square Palo Alto, CA 94304-1050 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: / / --------------------- CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM TITLE OF EACH CLASS OF SECURITIES AGGREGATE OFFERING AMOUNT OF TO BE REGISTERED PRICE(1) REGISTRATION FEE Common Stock, $0.0001 par value....................................... $75,000,000 $22,125
(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o). A portion of the proposed maximum aggregate offering price represents shares that are to be offered outside of the United States but that may be resold from time to time in the United States. Such shares are not being registered for the purpose of sales outside the United States. --------------------- 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 two forms of prospectus: (1) one to be used in connection with an offering in the United States and Canada (the "U.S. Prospectus") and (2) the other to be used in connection with a concurrent offering outside of the United States and Canada (the "International Prospectus" and, together with the U.S. Prospectus, the "Prospectuses"). The U.S. Prospectus and the International Prospectus are identical in all respects except for the front cover page. The front cover page of the International Prospectus is included herein after the final page of the U.S. Prospectus and is labeled "Alternate Page for International Prospectus." Final forms of each of the Prospectuses will be filed with the Commission pursuant to Rule 424(b) promulgated under the Securities Act of 1933, as amended. 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 JULY 31, 1998 SHARES [LOGO] COMMON STOCK ----------------- OF THE SHARES OF COMMON STOCK OFFERED HEREBY, SHARES ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS AND SHARES ARE BEING OFFERED INITIALLY OUTSIDE OF THE UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS. SEE "UNDERWRITERS." ALL OF THE SHARES OF COMMON STOCK BEING OFFERED HEREBY ARE BEING SOLD BY THE COMPANY. 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 $ AND $ PER SHARE. SEE "UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS TO BE CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE. APPLICATION HAS BEEN MADE TO LIST THE COMMON STOCK FOR QUOTATION ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "HEON." --------------------------- THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 5 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 $ . (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 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 The Company....................... 4 Risk Factors...................... 5 Use of Proceeds................... 17 Dividend Policy................... 17 Capitalization.................... 18 Dilution.......................... 19 Selected Consolidated Financial Data............................ 20 Management's Discussion and Analysis of Financial Condition and Results of Operations....... 21 Business.......................... 30 PAGE ---- Management........................ 44 Certain Transactions.............. 55 Principal Stockholders............ 59 Description of Capital Stock...... 61 Shares Eligible for Future Sale... 64 Certain United States Tax Consequences to Non-U.S. Holders of Common Stock................. 66 Underwriters...................... 68 Legal Matters..................... 71 Experts........................... 71 Additional Information............ 73 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. ------------------- 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 INCENTIVE 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 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." PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION 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, 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 and increase its market penetration. THE OFFERING Common Stock offered: U.S. offering............................................... shares International offering...................................... shares Total..................................................... shares Common Stock to be outstanding after the offering(1).......... 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........................ "HEON"
SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ------------------------------- -------------------- 1995 1996 1997 1997 1998 --------- --------- --------- --------- --------- (UNAUDITED) CONSOLIDATED STATEMENT OF OPERATIONS DATA(2): Revenue................................................................... $ 2,175 $ 11,013 $ 13,390 $ 4,286 $ 20,653 Loss from operations...................................................... (3,936) (20,452) (23,684) (11,827) (20,943) Net loss.................................................................. $ (4,458) $ (22,517) $ (26,266) $ (13,307) $ (21,447) Basic and diluted net loss per common share............................... $ (3.42) $ (3.64) $ (1.85) $ (1.22) Weighted-average shares outstanding used in computing basic and diluted net loss per common share(3)............................................ 6,583 7,223 7,193 17,632 Pro forma basic and diluted net loss per common share (unaudited)(4)...... $ (.59) $ (.46) Shares used in computing pro forma basic and diluted net loss per common share (unaudited)(3).................................................... 44,715 46,631
AS OF JUNE 30, 1998 -------------------------- ACTUAL AS ADJUSTED(5) --------- --------------- (UNAUDITED) BALANCE SHEET DATA(2): Cash, cash equivalents and short-term investments.............................................. $ 12,801 $ Working capital................................................................................ 2,560 Total assets................................................................................... 48,122 Long-term obligations, net of current portion.................................................. 1,459 Stockholders' equity........................................................................... 30,427
- ------------ (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) 5,022,523 shares reserved for issuance under the 1996 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 (iv) 1,600,000 shares of Common Stock issuable in connection with the proposed acquisition of Metis LLC. In July 1998, the Company granted options to purchase 2,390,200 shares of Common Stock. See "Management -- Employee Benefit Plans," "Description of Capital Stock" and Notes 10, 11 and 14 of Notes to Consolidated Financial Statements. (2) The consolidated financial data reflects the business combination of Healtheon and 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) Pro forma adjustments reflect the conversion of Healtheon's Convertible Preferred Stock and ActaMed's Convertible Redeemable Preferred Stock into an aggregate of 39,272,329 shares of Common Stock. (5) As adjusted to give effect to the sale of the shares of Common Stock offered hereby at an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company and the application of the net proceeds therefrom. See "Use of Proceeds" and "Capitalization." 3 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") 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, 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 and increase its market penetration. 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. 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 incryption, digital certificate and audit trail tracking, ensures security. The platform is deployed on redundant, fault tolerant servers and 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 across 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 Corporation, a leading provider of network services to the healthcare industry. 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. 4 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 had not recognized substantial revenue and until late 1997 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 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 $73.0 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 if significant revenue and profitability are achieved, that 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 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 slower 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." 5 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, who 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 party to the strategic relationship and on the ability of the other party 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 independently develop all such applications 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 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 June 1998 the Company signed a definitive agreement to acquire 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 6 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 for 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. 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, which 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 Internet activity or governmental regulation. The Internet has experienced, and is expected to continue to 7 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 which 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 who maintain information on proprietary systems, the benefits of connectivity and sophisticated information management which 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 technologies to solve business problems. If these issues are not addressed successfully, the Internet may not prove 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. While 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 such 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. RAPID TECHNOLOGICAL CHANGE; NEW APPLICATION AND SERVICES INTRODUCTIONS. The emerging market for healthcare information exchange and transaction processing is characterized by rapid technological 8 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 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 "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. 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 of which accounted for over 10% and collectively accounted for over 90% of the Company's 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 over 60% of the Company's revenue for the year ended December 31, 1997. 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 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." 9 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 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 10 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 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 11 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, research and development, 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 are 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. 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 Company maintains general liability insurance coverage, 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 12 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 segment grows and the functionality of applications overlaps. There can be no assurance 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 noninfringing 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 with 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 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. Although the Company believes that its internally developed applications and systems are 13 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 revenue during the six months ended June 30, 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. 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. 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 available to purchase and implement the Company's applications and services. FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING. The Company currently anticipates that the net proceeds from this offering, together with its available cash resources and credit facilities, will be sufficient to meet its presently anticipated working capital, capital expenditure and business expansion requirements for at least the next 12 months. However, 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 this 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 the offering. The initial public offering price, which will be established by negotiation between the Company and the U.S. Underwriters based upon a number of factors, may not be indicative of prices that will prevail in the public market. See "Underwriters" 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 14 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 Michael Long, CEO, and Pavan Nigam, 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 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 has also entered 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 this offering could adversely affect the market price of the Company's Common 15 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 shares of Common Stock offered hereby (assuming no exercise of the U.S. Underwriters' over-allotment option), there will be shares of Common Stock outstanding as of the date of this Prospectus. On the date of this Prospectus, 667,404 shares other than the shares offered hereby will be eligible for immediate sale. Upon the expiration of lock-up agreements, an additional 48,604,105 shares will become eligible for sale in the public market on , subject in the case of all but 11,010,300 shares to the volume limitations and other conditions of Rule 144 adopted under the Securities Act ("Rule 144"). 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 43,159,170 shares of Common Stock reserved for issuance under the Company's Stock Plan. The holders of approximately 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. CONTROL BY OFFICERS, DIRECTORS AND AFFILIATED ENTITIES. Upon the completion of this offering, the present executive officers and directors of the Company and their affiliates will, in the aggregate, own approximately % of the Company's outstanding Common Stock ( % if the U.S. Underwriters' over-allotment option is exercised in full). As a result, 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 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered by the Company hereby are estimated to be approximately $ million (approximately $ million if the U.S. Underwriters' over-allotment option is exercised in full), at an assumed initial public offering price of $ 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 $3.5 million of the net proceeds of this offering 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 plans, commitments or agreements with respect to any such acquisition or investment and is not currently engaged in any negotiations with respect to any such transaction. 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. 17 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 shares of Common Stock offered hereby (at an assumed initial public offering price of $ 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, shares issued and outstanding, as adjusted(1).......................................................... 5 Additional paid-in capital............................................................. 106,832 Deferred stock compensation............................................................ (3,411) (3,411) Accumulated deficit.................................................................... (72,999) (72,999) ---------- ----------- Total stockholders' equity........................................................... 30,427 ---------- ----------- Total capitalization............................................................... $ 31,886 $ ---------- ----------- ---------- -----------
- --------- (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) 5,022,523 shares reserved for issuance under the 1996 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 (iv) 1,600,000 shares of Common Stock issuable to equity holders and employees in connection with the proposed acquisition of Metis LLC. In July 1998, the Company granted options to purchase 2,390,200 shares of Common Stock. See "Management -- Employee Benefit Plans," "Description of Capital Stock" and Notes 10, 11 and 14 of Notes to Consolidated Financial Statements. 18 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 offering. After giving effect to the sale of shares of Common Stock offered by the Company hereby (at an assumed initial public offering price of $ 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 $ , or $ per share. This represents an immediate increase in pro forma net tangible book value to existing stockholders of $ per share and an immediate dilution to new investors of $ per share. The following table illustrates the per share dilution: Assumed initial public offering price per share................... $ Net tangible book value per share as of June 30, 1998........... $ .26 Increase per share attributable to new investors................ ------ Net tangible book value per share after this offering............. ------ Dilution per share to new public investors........................ $ ------ ------
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 and by the new investors (at an assumed initial public offering price of $ 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 % $ 101,722,000 % $ 1.97 New public investors.......... ------------ ----- -------------- ----- Total....................... 100.0% $ 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. To the extent that any of these options or warrants are exercised, there will be further dilution to new public investors. In July 1998, the Company granted options to purchase 2,390,200 shares of Common Stock. See "Capitalization," "Management -- Employee Benefit Plans," "Description of Capital Stock" and Notes 10, 11 and 14 of Notes to Consolidated Financial Statements. 19 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 consolidated balance sheet data at December 31, 1996 and 1997 are derived from, and are qualified by reference to, the audited Consolidated Financial Statements included elsewhere in this Prospectus. The consolidated statements of operations data for the two year period ended December 31, 1994 and the consolidated balance sheet data at December 31, 1993, 1994 and 1995 are derived from, and are qualified by reference to, audited Consolidated Financial Statements that are not included in this Prospectus. The statements of operations data for the six month periods ended June 30, 1997 and 1998 and the balance sheet data as of June 30, 1998 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 financial position and the results of operations for these periods. Historical operating results are not necessarily indicative of results in the future, and the results for interim periods are not necessarily indicative of the results that may be expected for the entire year.
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ----------------------------------------------------- --------- 1993 1994 1995 1996 1997 1997 --------- --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENTS OF OPERATIONS DATA(1): Revenue.................................................... $ -- $ 190 $ 2,175 $ 11,013 $ 13,390 $ 4,286 Cost of revenue............................................ -- 507 1,916 5,423 8,808 2,857 Development and engineering expense........................ 1,002 1,863 2,446 8,596 12,986 6,409 Sales, general and administrative expense.................. 769 938 1,749 9,042 11,031 4,723 Amortization of intangible assets.......................... -- -- -- 3,189 4,249 2,124 Write-off of acquired in-process research and development costs.................................................... -- -- -- 5,215 -- -- --------- --------- --------- --------- --------- --------- Loss from operations....................................... (1,771) (3,118) (3,936) (20,452) (23,684) (11,827) Interest income............................................ 5 172 208 539 611 254 Interest expense........................................... (117) (57) (6) (56) (323) (128) Dividends on ActaMed's convertible redeemable preferred stock.................................................... -- (423) (724) (2,548) (2,870) (1,606) --------- --------- --------- --------- --------- --------- Net loss................................................... $ (1,883) $ (3,425) $ (4,458) $ (22,517) $ (26,266) $ (13,307) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Basic and diluted net loss per common share................ $ (3.42) $ (3.64) $ (1.85) Weighted-average shares outstanding used in computing basic and diluted net loss per common share(2)................. 6,583 7,223 7,193 Pro forma basic and diluted net loss per common share (unaudited).............................................. $ (.59) Shares used in computing pro forma basic and diluted net loss per common share (unaudited)(2)..................... 44,715 1998 ----------- CONSOLIDATED STATEMENTS OF OPERATIONS DATA(1): Revenue.................................................... $ 20,653 Cost of revenue............................................ 17,217 Development and engineering expense........................ 8,332 Sales, general and administrative expense.................. 12,123 Amortization of intangible assets.......................... 3,924 Write-off of acquired in-process research and development costs.................................................... -- ----------- Loss from operations....................................... (20,943) Interest income............................................ 637 Interest expense........................................... (251) Dividends on ActaMed's convertible redeemable preferred stock.................................................... (890) ----------- Net loss................................................... $ (21,447) ----------- ----------- Basic and diluted net loss per common share................ $ (1.22) Weighted-average shares outstanding used in computing basic and diluted net loss per common share(2)................. 17,632 Pro forma basic and diluted net loss per common share (unaudited).............................................. $ (.46) Shares used in computing pro forma basic and diluted net loss per common share (unaudited)(2)..................... 46,631
DECEMBER 31, ----------------------------------------------------- 1993 1994 1995 1996 1997 --------- --------- --------- --------- --------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA(1): Cash, cash equivalents and short-term investments.......... $ 74 $ 4,186 $ 9,386 $ 7,539 $ 21,804 Working capital (deficit).................................. (1,737) 4,226 7,244 2,505 14,790 Total assets............................................... 899 5,379 10,801 30,496 51,575 Long-term obligations, net of current portion.............. 159 63 -- 1,210 932 Convertible redeemable preferred stock..................... -- 7,919 16,029 39,578 50,948 Stockholders' equity (net capital deficiency).............. (1,335) (2,838) (7,697) (18,464) (12,102) JUNE 30, 1998 ----------- CONSOLIDATED BALANCE SHEET DATA(1): Cash, cash equivalents and short-term investments.......... $ 12,801 Working capital (deficit).................................. 2,560 Total assets............................................... 48,122 Long-term obligations, net of current portion.............. 1,459 Convertible redeemable preferred stock..................... -- Stockholders' equity (net capital deficiency).............. 30,427
- ------------ (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 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. (2) See Note 1 of Notes to Consolidated Financial Statements for an explanation of the determination of the weighted average shares used in computing basic and diluted net loss per common share. 20 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 had not recognized substantial revenue and until late 1997 was considered to be in the development stage. In May 1998, the Company 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 March 1996. In June 1998, the Company signed a definitive agreement to acquire Metis LLC, a leading consulting, design and development firm focused on Internet and intranet-based solutions for medical centers and integrated delivery networks. The Company earns revenue from providing access to its network-based services (including fixed fee and transaction-based services), performing development and consulting services and licensing software. Customers may purchase some or all of the Company's applications and services and the customer relationship may evolve from utilizing consulting and development services to utilizing transaction and subscription-based services. The Company earns network-based services revenue from fixed fee subscription arrangements, which 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 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. The Company recognizes license revenue in accordance with the American Institute of Certified Public Accountants' Statement of Position 97-2. The Company does not expect that it will earn a material amount of revenue from licensing 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 of which accounted for over ten percent, and together accounted for over 90% of the Company's revenue for the six months ended June 30, 1998. 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 21 customers, could have a material adverse effect on the Company's business, financial condition and results of operations. Cost of revenue consists 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. Given the Company's limited operating history, changes in revenue mix, limited history of Internet-based network services, recent investments in personnel, amortization of infrastructure investments, and evolving business model, the Company believes that analysis of historical cost of revenue as a percentage of revenue is not meaningful. The Company anticipates that its 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. 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 $73.0 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." 22 RESULTS OF OPERATIONS The following table sets forth certain data expressed as a percentage of revenue for the periods indicated.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------ --------------- 1995 1996 1997 1997 1998 ------ ------ ------ ------ ------ Revenue............................ 100.0% 100.0% 100.0% 100.0% 100.0% Operating costs and expenses: Cost of revenue.................. 88.1 49.2 65.8 66.6 83.4 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 19.0 Write-off of acquired in-process research and development costs.......................... -- 47.4 -- -- -- ------ ------ ------ ------ ------ Total operating costs and expenses......................... 281.0 285.7 276.9 375.9 201.4 ------ ------ ------ ------ ------ Loss from operations............... (181.0) (185.7) (176.9) (275.9) (101.4) 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....... (33.3) (23.1) (21.4) (37.5) (4.3) ------ ------ ------ ------ ------ Net loss........................... (205.0)% (204.4)% (196.1)% (310.5)% (103.8)% ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
SIX MONTHS ENDED JUNE 30, 1998 AND 1997 REVENUE. Revenue increased to $20.7 million in the first six months of 1998 from $4.3 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 and a new contract with SmithKline Labs in December 1997 to service its SCAN laboratory test order and results service. 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 employees and facilities are included as part of the total costs of the IT and development services billed to the customers by the Company. For the six months ended June 30, 1998, the Company recognized revenue for IT services of $7.3 million, which included costs of leased personnel and facilities of $6.1 million. In addition, the Company recognized revenue of approximately $2.5 million for development services in the same period. COST OF REVENUE. Cost of revenue increased to $17.2 million in the first six months of 1998 from $2.9 million in the same period in 1997. The increase in cost of revenue resulted from increased personnel and network operations costs necessary to support increased transactions, primarily from the Company's SCAN services. Cost of revenue also increased due to services provided to Beech Street and Brown & Toland. 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 in 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. 23 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 in 1997. The increase resulted primarily from the addition of sales personnel and executive management, and from the amortization of deferred compensation. The Company recorded deferred compensation of $2.4 million during the six months ended June 30, 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, $1.7 million for 2000, and $.6 million for 2001. AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets was $3.9 million in the six months ended June 30, 1998 and $2.1 million in the six months ended June 30, 1997. This amortization relates to the acquisition of EDI in March 1996 and certain intangible assets related to SCAN in December 1997. At June 30, 1998, a total of $16.9 million remained to be amortized, and the amortization charges are estimated to be for the six months ending December 31, 1998 and for the years ending 1999 and 2000, $5.2 million, $6.5 million and $5.2 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 planned acquisition of Metis LLC. INTEREST INCOME AND EXPENSE. Interest income has been derived primarily from cash investments which increased in the first half of 1998 compared to the first half of 1997. This increase was from the Company's $25.0 million Preferred Stock offering 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 $890,000 respectively, are shown as a charge against income in the consolidated statement of operations for the six months ended June 30, 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 the dividends and agreed to receive Healtheon Common Stock in exchange for their Preferred Stock. INCOME TAXES. At June 30, 1998, the Company had net operating loss carryforwards for federal income tax purposes of $50.0 million and federal tax credits of $1.0 million, both expiring from 2009 through 2013. Of these net operating losses, $20.0 million relates to a consolidated subsidiary. This loss carryforward is available only to affect 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. YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 REVENUE. Revenue increased to $13.4 million in 1997 from $11.0 million in 1996 and from $2.2 million in 1995. The significant increase in service revenue was due principally to revenue attributable to ProviderLink, which was acquired from United HealthCare in March 1996, and the contract with Brown & Toland in October 1997. This increase was partially offset by a decrease in software license revenue to $1.8 million in 1997 from $5.0 million in 1996, primarily due to a decline in license fees from IBM. For the year ended December 31, 1997, the Company recognized revenue for IT services of $2.1 million, which included costs of leased personnel and facilities of $1.9 million. 24 COST OF REVENUE. Cost of revenue was $8.8 million in 1997 compared to $5.4 million in 1996 and $1.9 million in 1995. The increase resulted from the significant growth in personnel and network operations costs necessary to meet increased demand for the Company's services. 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 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. WRITE-OFF OF ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT COSTS. The write-off of acquired in-process research and development costs of $5.2 million in 1996 relates to the acquisition of EDI in March 1996. Consistent with the Company's tests for internally developed software, the Company determined the amounts to be allocated to developed software and in-process research and development based on whether technological feasibility had been achieved and whether there was any alternative future use for the technology. At the date of the acquisition of EDI Services, Inc., the Company concluded that the in-process research and development had no alternative future use after taking into consideration the potential for usage of the software in different products, resale of the software and internal usage. 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. 25 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 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 --------- --------- --------- --------- --------- ---------- (IN THOUSANDS) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenue......................................... $ 1,922 $ 2,364 $ 2,714 $ 6,390 $ 9,754 $ 10,899 Operating costs and expenses: Cost of revenue............................... 1,411 1,447 1,567 4,383 7,513 9,704 Development and engineering................... 3,247 3,162 3,272 3,305 3,919 4,413 Sales, general and administrative............. 2,501 2,221 2,754 3,555 4,966 7,157 Amortization of intangible assets............. 1,062 1,062 1,063 1,062 1,949 1,975 --------- --------- --------- --------- --------- ---------- Total operating expenses.................... 8,221 7,892 8,656 12,305 18,347 23,249 --------- --------- --------- --------- --------- ---------- Loss from operations............................ (6,299) (5,528) (5,942) (5,915) (8,593) (12,350) --------- --------- --------- --------- --------- ---------- Interest income................................. 146 108 105 252 358 279 Interest expense................................ (50) (77) (49) (147) (116) (135) Dividends on ActaMed's convertible redeemable preferred stock............................... (783) (823) (776) (488) (890) -- --------- --------- --------- --------- --------- ---------- Net loss........................................ $ (6,986) $ (6,320) $ (6,662) $ (6,298) $ (9,241) $ (12,206) --------- --------- --------- --------- --------- ---------- --------- --------- --------- --------- --------- ---------- AS A PERCENTAGE OF REVENUE: Revenue......................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Operating costs and expenses: Cost of revenue............................... 73.4 61.2 57.7 68.6 77.0 89.0 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 18.1 --------- --------- --------- --------- --------- ---------- Total operating expenses.................... 427.7 333.8 319.0 192.5 188.1 213.3 --------- --------- --------- --------- --------- ---------- Loss from operations............................ (327.7) (233.8) (219.0) (92.5) (88.1) (113.3) --------- --------- --------- --------- --------- ---------- 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........................................ (363.4)% (267.4)% (245.5)% (98.5)% (94.7)% (111.9)% --------- --------- --------- --------- --------- ---------- --------- --------- --------- --------- --------- ----------
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 two quarters ended March 31, 1998 and June 30, 1998 primarily due to expenses related to the Beech Street and SmithKline Labs contracts. In addition, in the quarter ended June 30, 1998, cost of revenue increased due in part to an increase in amortization of internally developed 26 software. Development and engineering expense increased in the two 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 significantly in the past and are likely to vary substantially from quarter to quarter 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 revenues are 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 has 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, $9.9 million in 1996 and $16.4 million in 1997. The cash used during these periods was primarily attributable to net losses of $4.5 million, $22.5 million and $26.3 million in 1995, 1996, 1997, respectively, offset in part by depreciation and amortization, write off of acquired process research and development, net of acquisition costs and dividend 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 for the six months ended June 30, 1998 was $9.1 million, reflecting a net loss partially offset by depreciation and amortization expenses. Investments in property and equipment and internally developed software were $.5 million, $3.0 million, $3.1 million and $2.7 million for the years ended 1995, 1996 and 1997, and the six months ended June 30, 1998, respectively. Cash provided by financing activities was $7.0 million, $11.1 million and $34.6 million for the years ended December 31, 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. In addition, cash provided by financing activities for the six months ended June 30, 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 on December 31, 1997 consisted of obligations under operating leases and capital leases of $14.4 million and $2.2 million, respectively. See Note 6 of Notes to Consolidated Financial Statements. 27 The Company currently anticipates that the net proceeds from this offering, together with its available cash resources and credit facilities, will be sufficient to meet its presently anticipated working capital, capital expenditure and business expansion requirements for at least the next 12 months. However, 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. 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 revenue during the six months ended June 30, 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. 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. 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, 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 available to purchase and implement the Company's applications and services. 28 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 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. 29 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 that 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 role 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 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) is 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. 30 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, who 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 manually correct these errors. 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 is 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 accurately diagnose the patient's condition. Often, physicians will require patients to repeat tests for which data is 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 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 31 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 makes it possible 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, 32 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 across 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; 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. 33 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 who 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. 34 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 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 and 35 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. 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 to initially 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. 36 PROVIDERS. Healtheon targets 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, particularly providers who 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 who 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's 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, and increase its market penetration. Certain of these relationships are described below: UNITED HEALTHCARE CORPORATION. United HealthCare is the largest HMO in the United States. 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. 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 customers. Under the United HealthCare Agreement, the Company currently receives a monthly fee for 37 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. 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. United HealthCare is currently the Company's largest stockholder, and 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. The Company and SmithKline Labs entered into a Services Agreement (the "Services Agreement") under which the Company provides lab order and results services to the provider users of 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-based 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. SmithKline Labs is a stockholder of the Company, and 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. BROWN & TOLAND PHYSICIAN SERVICES ORGANIZATION. Brown & Toland Medical Group ("BTMG"), based in San Francisco, California, is a preeminent 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. 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 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. The Company and Beech Street have entered into an agreement under which the Company is developing PACER, which the Company intends to offer 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 38 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. 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 which reduce the need to query database servers for frequently used data. RAPID APPLICATION DEVELOPMENT AND INTEGRATION. The Healtheon Platform is designed to enable rapid application development and integration. The platform supports object-oriented programming which accelerates the design process through object reuse. The Company maintains a comprehensive set of object libraries, called core services, that allows developers to rapidly build complex applications. The platform is also designed for deploying applications developed by third parties with relative ease. The platform interfaces with legacy systems by accepting industry standard ANSI X.12 and HL7 electronic data interchange formats. HIGH AVAILABILITY. The Healtheon Platform architecture is designed to ensure high availability through the replication of applications and other software services, failure detection and automatic restart of failed services and applications. Running multiple copies of a service or application removes any single point of failure within the system and ensures that at least some copies of a service will be available while others may have failed. In addition, the server 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 39 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 by 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 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 successes 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 rapidly develop new applications and services. 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. 40 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 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 revenue. The Company believes that timely development of new and enhanced applications and technology are 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 research and development. 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 proprietary information. 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." 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 41 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 decrease 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, prospects, 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 and other online services 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. 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 42 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 general 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, 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 operations and that additional leased space can be obtained if needed. 43 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 W. Michael Long(3)................. 46 Chief Executive Officer and Director Michael K. Hoover.................. 43 President and Director Ron Alvarez........................ 49 Vice President, Consumer Group Kallen Chan........................ 43 Corporate Controller Jack Dennison...................... 41 Vice President and General Counsel Dennis Drislane.................... 49 Vice President, Customer and Network Services 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 Pavan Nigam........................ 39 Vice President, Engineering Charles Saunders, M.D.............. 43 Vice President, 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 Directors 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 July 1997. 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 44 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. Mr. Hoover holds a B.S. in engineering from the University of South Alabama. RON ALVAREZ has served as Vice President, Consumer Group 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. 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 1993, 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. Prior to joining the Company, Mr. Drislane was a division Vice President at Electronic Data Systems Corporation ("EDS"), where he worked in various management roles on projects in government, manufacturing, aerospace, defense, healthcare and communications. He held various positions during his time at EDS, including Vice President of Business Development in the Communications Industry Group and President of the Healthcare Division. Mr. Drislane received both a B.S. and an M.S. in business administration from California State University in Sacramento. NANCY HAM has served as Vice President, Laboratories and Pharmaceuticals Group at the Company since the Company acquired ActaMed in May 1998. Ms. Ham served as Senior Vice President at ActaMed from June 1996 to May 1998. She served as Chief Financial Officer and Secretary of ActaMed from 1993 to 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. Prior to joining ActaMed, he served as Vice President, Finance, Director of Finance and Controller of Melita International Corporation. Prior to that, he held various accounting positions at 45 Arthur Anderson & Company. Mr. Hardin holds a B.B.A. in accounting from the University of Georgia and an M.B.A. from Stanford University. 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 at 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. 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, 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. Prior to joining the Company, Mr. Westermann was Chief Financial Officer and Vice President of CSC Continuum, Inc., a unit of Computer Sciences Corporation. 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 @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, 46 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. 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. 47 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. 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. 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 the Company's fair market value on that date. The 1996 Plan provides that each outside director will receive 5,000 options 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 8.5% 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 17.0% 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 shall 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 48 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 shall, 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 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. 49 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 Chief Technology Officer................................... 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 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." 50 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 total 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. (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 up to 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 lapsing right of repurchase held by the Company. See "-- Employment Agreements." 51 AGGREGATE OPTION EXERCISES IN 1997 AND YEAR-END OPTION VALUES The following table sets forth information with respect to the Named Executive Officers concerning option exercises in 1997 and 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 Company's 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 of Directors, 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 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 two-year lapsing right of repurchase commencing on Mr. Long's employment start date. 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 of Directors adopted, and the Company's stockholders approved, the Company's 1996 Stock Plan (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 to increase the number of shares of Common Stock 52 issuable thereunder to 10,000,000 shares. In July 1998, the Board 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 (collectively, the "ActaMed Plans"): ActaMed Corp. 1992 Stock Option Plan, ActaMed Corp. 1993 Class B 53 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). 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. 54 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 $0.50 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 $1.8 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 (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 shares of any securities held by such entity except for his proportional interest therein. 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 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, Limited Partnership (500,000 shares for a purchase price of $1.0 million). 55 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. 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 $500,000 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 an 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 $38,000) and New Enterprise Associates VI, L.P. (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, L.P. (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 $500,000), Michael James Clark Trust (96,154 shares for a purchase price of $500,000) 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. In connection with the ActaMed Merger, each share of Preferred Stock of the Company converted into one share of Common Stock on May 19, 1998. 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 56 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 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 1997, 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 and 1997, the Company was paid $211,230, $186,880 and $77,555, 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 1996, 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 1,339,209 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. As of June 30, 1998 SmithKline Labs had paid the Company $4.8 million in service and transaction fees during 1998 under the Services Agreement. The Services Agreement is effective through December 2002, and provides for automatic successive two-year renewals, subject to each party's right to elect not to renew the agreement no later than 180 days (in the case of SmithKline Labs) or 360 days (in the case of 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 period, to request that the Company engage in certain exclusive 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. 57 In May 1998, the Company and SmithKline Labs entered into a letter agreement under which the Company and SmithKline 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 which 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 have been 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. 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. 58 PRINCIPAL STOCKHOLDERS The following table sets forth certain information with respect to the beneficial ownership of the Company's Common Stock as of June 30, 1998 and as adjusted to reflect the sale of the shares of Common Stock offered hereby 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 17.0% William W. McGuire, M.D. James H. Clark(4) ............................................... 8,485,598 16.4 Clark Ventures Monaco Partners, L.P. Kleiner Perkins Caufield & Byers(5) ............................. 7,253,498 13.8 L. John Doerr David Schnell P. E. Sadler(6) ................................................. 5,001,993 9.6 SFA Limited Partnership SmithKline Beecham(7) ........................................... 4,417,670 8.5 Tadataka Yamada New Enterprise Associates VI, L.P(8) ............................ 3,338,902 6.5 C. Richard Kramlich W. Michael Long(9)............................................... 1,677,083 4.3 Michael K. Hoover(10)............................................ 893,268 1.7 Pavan Nigam(11).................................................. 470,000 * * Denise Shea(12).................................................. 145,625 * * Kallen Chan(13).................................................. 57,500 * * All officers and directors as a group (18 persons)(14)........... 41,823,974 76.6 *
- --------- * Less than one percent (1) The number and percentage of shares beneficially owned are based on 51,704,947 shares of Common Stock outstanding as of June 30, 1998, and shares outstanding after the offering. Beneficial ownership is determined in accordance with the rules and regulations of the Commission. Shares of Common Stock subject to options that are currently exercisable or exercisable within 60 days of June 30, 1998 are deemed to be outstanding and beneficially owned by the person holding such options 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 Underwriters' over-allotment option 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. Dr. McGuire, Chairman and Chief Executive Officer of United HealthCare, is a director of the Company. United HealthCare's address is 9900 Bren Road East, 300 Opus Center, Minnetonka, MN 55343. 59 (4) Represents 4,612,600 shares held of record directly by Dr. Clark, 2,747,998 shares held of record by Clark Ventures and 1,125,000 shares held of record by Monaco Partners, LP, a Nevada limited partnership. Dr. Clark is a partner of both Clark Ventures and Monaco Partners. Dr. Clark disclaims beneficial ownership of shares in Monaco Partners and Clark Ventures except for his proportional interest therein. Dr. Clark is a director of the Company. Dr. Clark's address is c/o Healtheon Corporation, 4600 Patrick Henry Drive, Santa Clara, CA 95054. (5) Represents 5,125,863 shares held of record directly by Kleiner Perkins Caufield & Byers 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 Kleiner Perkins Caufield & Byers VII, and 52,936 shares subject to warrants held of record by KPCB Life Sciences Zaibatsu Fund II, all of which are exercisable within 60 days of June 30, 1998. KPCB Life Sciences Zaibatsu Fund II and KPCB VII are wholly controlled by KPCB Associates, a partnership. KPCB Java Fund is controlled by KPCB VII Associates. L. John Doerr, a general partner of KPCB VII Associates, KPCB VII, and KPCB Life Sciences Zaibatsu Fund II, is a director of the Company. Mr. Schnell, a general partner of KPCB, was formerly the Chief Executive Officer of the Company. Mr. Doerr and Mr. Schnell disclaim beneficial ownership of shares in such entities except for their proportional interests 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's address is c/ o Healtheon Corporation, 4600 Patrick Henry Drive, Santa Clara, CA 95054. (7) Dr. Yamada is President of SmithKline Beecham HealthCare Services and a director of SmithKline Beecham. He is a director of the Company. SmithKline Labs' address is 1201 South Collegeville Road, Collegeville, PA 19426. (8) Represents 3,306,923 shares held of record directly by New Enterprise Associates VI, L.P., 11,979 shares subject to warrants held of record by New Enterprise Associates VI, L.P. exercisable within 60 days of June 30, 1998, and 20,000 shares held of record by NEA Ventures, which is controlled by New Enterprise Associates VI, L.P. Mr. Kramlich is a partner of New Enterprise Associates VI, L.P. Mr. Kramlich disclaims beneficial ownership of shares held by such entities except for his proportional interest therein. New Enterprise Associates' 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 277,083 shares subject to options held of record by Mr. Long, in each case exercisable within 60 days of June 30, 1998. 343,750 shares underlying the warrant held by Mr. Long are subject to a right of repurchase held by the Company within 60 days of June 30, 1998. Mr. Long is the Chief Executive Officer and a director of the Company. (10) Represents 893,268 shares subject to options held of record by Mr. Hoover that are exercisable within 60 days of June 30, 1998. Mr. Hoover is the President and a director of the Company. (11) 168,750 shares are subject to a right of repurchase held by the Company within 60 days of June 30, 1998. Mr. Nigam is the Vice President, Engineering of the Company. (12) Includes 3,438 shares subject to options held of record by Ms. Shea that are exercisable within 60 days of June 30, 1998. Also includes 62,500 shares held by Ms. Shea that are subject to a right of repurchase held by the Company within 60 days of June 30, 1998. (13) Includes 2,500 shares subject to options held of record by Mr. Chan that are exercisable within 60 days of June 30, 1998. Also includes 20,833 shares held by Mr. Chan that are subject to a right of repurchase held by the Company within 60 days of June 30, 1998. Mr. Chan is the Controller of the Company. (14) Includes all shares described in above footnotes and an additional 1,312,817 shares held by other executive officers, of which 850,000 are currently outstanding and 462,817 are shares subject to options or warrants that are exercisable within 60 days of June 30, 1998. 60 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 June 30, 1998, there were 51,704,947 shares of Common Stock outstanding, par value $0.0001 per share. Upon consummation of this offering, 150,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock will be authorized, and 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 of Directors 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 which 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 of Directors 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. REGISTRATION RIGHTS The holders of approximately 43,159,170 shares of Common Stock (representing the purchasers of Common Stock at the founding of the Company in December 1995, the purchasers of Preferred Stock of the Company prior to its conversion in the acquisition of ActaMed Corporation, and 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 61 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 may 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 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. 62 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 has entered 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 has been appointed as transfer agent and registrar for the Company's Common Stock. LISTING Application has been made to have the Common Stock accepted for quotation on the Nasdaq National Market under the symbol "HEON." 63 SHARES ELIGIBLE FOR FUTURE SALE Prior to this 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 this offering, the Company will have shares of Common Stock outstanding. Of the shares outstanding after the offering, the shares of Common Stock ( shares if the U.S. Underwriters' over-allotment is exercised in full) sold in the 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 limitations of Rule 144 under the Securities Act. 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. The remaining 51,704,947 shares of Common Stock 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. Each of the Company's directors and officers and certain other stockholders of the Company has agreed that it will not, 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, it will not, directly or indirectly (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 (July 31), 667,404 of the Restricted Shares (in addition to the shares offered hereby) will be eligible for immediate sale. Upon the expiration of lock-up agreements, an additional 48,684,105 of the Restricted Shares will become eligible for sale in the public market on , subject in the case of all but 11,010,300 shares to the volume limitations and other conditions of Rule 144 adopted under the Securities Act ("Rule 144"). The holders of approximately 43,159,170 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. 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 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. 64 Immediately after the offering, there will be options to purchase approximately 8,997,995 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 all options granted under the 1996 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 -- 1996 Plan." 65 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. 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 66 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 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. 67 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 and 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..................................................................... ---------- International Underwriters: Morgan Stanley & Co. International Limited..................................... Goldman Sachs International.................................................... Hambrecht & Quist LLC.......................................................... Volpe Brown Whelan & Company, LLC.............................................. ---------- Subtotal..................................................................... ---------- Total.................................................................... ---------- ----------
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 68 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 69 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 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 shares of Common Stock to be issued by the Company and offered hereby for sale, at the initial public offering price, to directors, officers, employees, business associates and related persons of the Company. The number of shares of Common Stock available for sale to the general public will be reduced to the extent such individuals purchase such reserved shares. Any reserved shares which are not so purchased will be offered by the U.S. Underwriters to the general public on the same basis as the other shares offered hereby. Each of the Company and the directors, officers and certain other stockholders of the Company 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 (z) transactions by any person other than the 70 Company relating to shares of Common Stock or other securities acquired in open market transactions after the completion of the offering of the Shares. 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. 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 for the two years in the period ended December 31, 1997, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein which, as to the year ended December 31, 1996, is based in part on the report of Deloitte & Touche LLP, independent auditors. The consolidated financial statements referred to above are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The consolidated financial statements of ActaMed Corporation for the year ended December 31, 1995, included in this Prospectus and Registration Statement have been audited by Deloitte & Touche LLP, 71 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. 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 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. 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. 72 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 and schedules 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 and schedules 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 statements and other information with the Commission. Such periodic reports, proxy 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. 73 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-30 Statement of Divisional Net Loss and United's Net Investment......................... F-31 Statement of Divisional Cash Flows................................................... F-32 Notes to Financial Statements........................................................ F-33
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 as of December 31, 1996 and 1997, and the related consolidated statements of operations, convertible redeemable preferred stock and stockholders' equity (net capital deficiency), and cash flows for each of the two years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. In May 1998, the Company acquired ActaMed in a transaction that was accounted for as a pooling of interests. We did not audit the financial statements of ActaMed for the year ended December 31, 1996, which statements reflect total assets constituting approximately 79% of the related consolidated financial statement totals at December 31, 1996 and revenues and a net loss constituting approximately 89% and 57%, 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, is based solely on the report of the other auditors. 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 the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Palo Alto, California February 27, 1998, except for Notes 1 and 2, as to which the date is July 24, 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, shareholders' equity, and cash flows for each of the two years in the period ended December 31, 1996 (the consolidated financial statements for 1996 are not presented herein.) These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1996 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP Atlanta, Georgia June 20, 1997 F-3 HEALTHEON CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, ---------------------- JUNE 30, 1996 1997 1998 ---------- ---------- ----------- (UNAUDITED) 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....................................................... 12,644 16,596 16,895 Other assets................................................................. 2,641 2,892 2,471 ---------- ---------- ----------- $ 30,496 $ 51,575 $ 48,122 ---------- ---------- ----------- ---------- ---------- ----------- 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................................................. 2,670 5,649 106,832 Note receivable from officer............................................... -- (349) -- Deferred stock compensation................................................ -- (2,151) (3,411 ) Accumulated deficit........................................................ (32,742) (59,008) (72,999 ) ---------- ---------- ----------- Total stockholders' equity (net capital deficiency)........................ (18,464) (12,102) 30,427 ---------- ---------- ----------- $ 30,496 $ 51,575 $ 48,122 ---------- ---------- ----------- ---------- ---------- -----------
SEE ACCOMPANYING NOTES. F-4 CONSOLIDATED STATEMENTS OF OPERATIONS(1) (IN THOUSANDS, EXCEPT PER SHARE DATA)
HEALTHEON CORPORATION ACTAMED ---------------------------------------------- CORPORATION ------------ YEARS ENDED SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31, ---------------------- ---------------------- 1995 1996 1997 1997 1998 ------------ ---------- ---------- ---------- ---------- (UNAUDITED) Revenue.............................................. $ 2,175 $ 11,013 $ 13,390 $ 4,286 $ 20,653 Operating costs and expenses: Cost of revenue.................................... 1,916 5,423 8,808 2,857 17,217 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 3,924 Write-off of acquired in-process research and development costs................................ -- 5,215 -- -- -- ------------ ---------- ---------- ---------- ---------- Total operating costs and expenses................. 6,111 31,465 37,074 16,113 41,596 ------------ ---------- ---------- ---------- ---------- Loss from operations................................. (3,936) (20,452) (23,684) (11,827) (20,943) Interest income...................................... 208 539 611 254 637 Interest expense..................................... (6) (56) (323) (128) (251) Dividends on ActaMed's convertible redeemable preferred stock.................................... (724) (2,548) (2,870) (1,606) (890) ------------ ---------- ---------- ---------- ---------- Net loss............................................. $ (4,458) $ (22,517) $ (26,266) $ (13,307) $ (21,447) ------------ ---------- ---------- ---------- ---------- ------------ ---------- ---------- ---------- ---------- Basic and diluted net loss per common share.......... $ (3.42) $ (3.64) $ (1.85) $ (1.22) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Weighted-average shares outstanding used in computing basic and diluted net loss per common share........ 6,583 7,223 7,193 17,632 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Pro forma basic and diluted net loss per common share (unaudited)........................................ $ (.59) $ (.46) ---------- ---------- ---------- ---------- Shares used in computing pro forma basic and diluted net loss per common share (unaudited).............. 44,715 46,631 ---------- ---------- ---------- ---------- Revenue from related parties included above.......... $ -- $ 4,237 $ 7,309 $ 3,240 $ 9,370 ------------ ---------- ---------- ---------- ---------- ------------ ---------- ---------- ---------- ----------
- --------- (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. 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 EQUITY (NET PAID-IN FROM DEFERRED STOCK ACCUMULATED CAPITAL CAPITAL OFFICER COMPENSATION DEFICIT DEFICIENCY) ---------- ----------- -------------- ------------- ------------- BALANCES AT DECEMBER 31, 1994.................. $ 2,306 $ -- $ -- $ (5,767) $ (3,261) Net loss....................................... -- -- -- (4,458) (4,458) 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.............................. -- -- -- -- -- ---------- ----- ------- ------------- ------------- BALANCES AT DECEMBER 31, 1995.................. $ 2,306 $ -- $ -- $ (10,225) $ (7,698) ---------- ----- ------- ------------- ------------- ---------- ----- ------- ------------- -------------
HEALTHEON CORPORATION BALANCES AT DECEMBER 31, 1995 (REFLECTING THE CONVERSION RATIO OF .6272)........................ 7,682,671 $ 16,030 -- $ -- 5,846,288 $ 1 $ 2,526 $ -- Net loss........................... -- -- -- -- -- -- -- -- Issuance of common stock to founders and employees for cash............................. -- -- -- -- 2,806,134 -- 140 -- Issuance of Series A convertible preferred stock for cash (less issuance costs of $27)........... -- -- 10,285,000 5,115 -- -- -- -- Issuance of Series B convertible preferred stock for cash (less issuance costs of $8)............ -- -- 3,000,000 5,992 -- -- -- -- Issuance of Series B 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......................... -- -- -- -- -- -- 4 -- Dividends accrued on convertible redeemable preferred stock....... -- 2,548 -- -- -- -- -- -- ---------- --------- ---------- --------- --------- ----- --------- ----- BALANCES AT DECEMBER 31, 1996...... 14,170,947 39,578 13,285,000 11,607 8,652,422 1 2,670 --
BALANCES AT DECEMBER 31, 1995 OF .6272)........................ $ -- $ (10,225) $ (7,698) Net loss........................... -- (22,517) (22,517) Issuance of common stock to founders and employees for cash............................. -- -- 140 Issuance of Series A convertible preferred stock for cash (less issuance costs of $27)........... -- -- 5,115 Issuance of Series B convertible preferred stock for cash (less issuance costs of $8)............ -- -- 5,992 Issuance of Series B 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 Dividends accrued on convertible redeemable preferred stock....... -- -- -- ----------- ----------- ----------- BALANCES AT DECEMBER 31, 1996...... -- (32,742) (18,464) (REFLECTING THE CONVERSION RATIO
- ------------ (1) Because Healtheon did not commence operations until January 1996, the ActaMed statement of stockholders' equity 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 (CONT.).......... 14,170,947 39,578 13,285,000 11,607 8,652,422 1 Net loss....................................... -- -- -- -- -- -- Issuance of common stock pursuant to option and restricted stock exercises by employees...... -- -- -- -- 1,397,844 -- Repurchase of employee common stock............ -- -- -- -- (613,542) -- Issuance of Series A and Series B convertible preferred stock for services................. -- -- 45,000 55 -- -- Issuance of Series B convertible preferred stock for cash............................... -- -- 15,000 30 -- -- Issuance of Series B convertible preferred stock to officer for note receivable......... -- -- 250,000 500 -- -- Issuance of Series B convertible preferred stock warrants in connection with bridge financing.................................... -- -- -- 64 -- -- Issuance of Series C convertible preferred stock for cash and conversion of bridge note......................................... -- -- 2,600,000 6,500 -- -- Issuance of Series D convertible preferred stock for cash............................... -- -- 4,807,692 25,000 -- -- Issuance of Series D convertible redeemable preferred stock for asset purchase........... 2,317,913 8,500 -- -- -- -- Repayment of note receivable from officer...... -- -- -- -- -- -- Dividends accrued on convertible redeemable preferred stock.............................. -- 2,870 -- -- -- -- Deferred stock compensation.................... -- -- -- -- -- -- Amortization of deferred stock compensation.... -- -- -- -- -- -- -------------- ---------- -------------- ---------- ------------ ----- BALANCES AT DECEMBER 31, 1997.................. 16,488,860 50,948 21,002,692 43,756 9,436,724 1 Net loss (unaudited)........................... -- -- -- -- -- -- Issuance of common stock pursuant to option exercises by employees (unaudited)........... -- -- -- -- 1,659,685 -- Issuance of Series B convertible preferred stock pursuant to warrant exercises (unaudited).................................. -- -- 1,017,229 2,034 -- -- Issuance of Series D convertible redeemable preferred stock for asset purchase (unaudited).................................. 763,548 2,800 -- -- -- -- Dividends accrued on convertible redeemable preferred stock (unaudited).................. -- 890 -- -- -- -- Conversion of redeemable preferred and preferred stock to common stock (unaudited).................................. (17,252,408) (54,638) (22,019,921) (45,790) 39,272,329 4 Issuance of common stock for asset purchase (unaudited).................................. -- -- -- -- 1,336,209 -- Repayment of note receivable from officer (unaudited).................................. -- -- -- -- -- -- Deferred stock compensation (unaudited)........ -- -- -- -- -- -- Amortization of deferred stock compensation (unaudited).................................. -- -- -- -- -- -- -------------- ---------- -------------- ---------- ------------ ----- BALANCES, JUNE 30, 1998 (UNAUDITED)............ -- $ -- -- $ -- 51,704,947 $ 5 -------------- ---------- -------------- ---------- ------------ ----- -------------- ---------- -------------- ---------- ------------ ----- TOTAL NOTE STOCKHOLDERS' ADDITIONAL RECEIVABLE EQUITY (NET PAID-IN FROM DEFERRED STOCK ACCUMULATED CAPITAL CAPITAL OFFICER COMPENSATION DEFICIT DEFICIENCY) ---------- ----------- -------------- ------------- ------------- BALANCES AT DECEMBER 31, 1996 (CONT.).......... 2,670 -- -- (32,742) (18,464) Net loss....................................... -- -- -- (26,266) (26,266) 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.................. 5,649 (349) (2,151) (59,008) (12,102) Net loss (unaudited)........................... -- -- -- (21,447) (21,447) Issuance of common stock pursuant to option exercises by employees (unaudited)........... 913 -- -- -- 913 Issuance of Series B convertible preferred stock pursuant to warrant exercises (unaudited).................................. -- -- -- -- 2,034 Issuance of Series D convertible redeemable preferred stock for asset purchase (unaudited).................................. -- -- -- -- -- Dividends accrued on convertible redeemable preferred stock (unaudited).................. -- -- -- -- -- Conversion of redeemable preferred and preferred stock to common stock (unaudited).................................. 92,968 -- -- 7,456 54,638 Issuance of common stock for asset purchase (unaudited).................................. 4,900 -- -- -- 4,900 Repayment of note receivable from officer (unaudited).................................. -- 349 -- -- 349 Deferred stock compensation (unaudited)........ 2,402 -- (2,402) -- -- Amortization of deferred stock compensation (unaudited).................................. -- -- 1,142 -- 1,142 ---------- ----- ------- ------------- ------------- BALANCES, JUNE 30, 1998 (UNAUDITED)............ $ 106,832 $ -- $ (3,411) $ (72,999) $ 30,427 ---------- ----- ------- ------------- ------------- ---------- ----- ------- ------------- -------------
- ------------ (1) Because Healtheon did not commence operations until January 1996, the ActaMed statement of stockholders' equity 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)
HEALTHEON CORPORATION ACTAMED ------------------------------------------ CORPORATION ------------- YEARS ENDED DECEMBER SIX MONTHS ENDED YEAR ENDED 31, JUNE 30, DECEMBER 31, -------------------- -------------------- 1995 1996 1997 1997 1998 ------------- --------- --------- --------- --------- (UNAUDITED) Cash flows from operating activities: Net loss....................................................... $ (4,458) $ (22,517) $ (26,266) $ (13,307) $ (21,447) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization................................ 359 5,062 8,142 3,739 8,351 Warrants and preferred stock issued for services............. -- 500 119 56 -- Writeoff of acquired in-process research and development, net of acquisition costs....................................... -- 4,899 -- -- -- Dividends on ActaMed's convertible redeemable preferred stock...................................................... 724 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................. 515 800 346 572 2,905 Deferred revenue........................................... 1,603 3,078 (1,285) (205) 61 ------------- --------- --------- --------- --------- Net cash used in operating activities.......................... (1,321) (9,882) (16,353) (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) Internally developed software.................................. -- (1,001) (291) (165) -- ------------- --------- --------- --------- --------- Net cash from (used in) investing activities................... (464) (3,028) (9,275) (458) 910 ------------- --------- --------- --------- --------- Cash flows from financing activities: Proceeds from line of credit borrowings and bridge note........ -- 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..... 22 144 265 (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............................. 6,985 11,063 34,593 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 $ -- $ -- ------------- --------- --------- --------- --------- ------------- --------- --------- --------- --------- 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 statements 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 AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 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 companies where required for clarity of presentation. SNATURE 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 to 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. The Company has incurred operating losses to date and had an accumulated deficit of $72,999,000 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 as of June 30, 1998 and for the six months ended June 30, 1997 and 1998 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 periods. 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. 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. F-9 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ materially from these estimates. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS All highly liquid investments with an original maturity from date of purchase of three months or less are considered to be cash equivalents. 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, -------------------- 1996 1997 --------- --------- JUNE 30, ----------- 1998 ----------- (UNAUDITED) 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. Such amount is included in other assets in the accompanying consolidated balance sheets (see Note 6). 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 F-10 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) assets, generally three to seven years. Leasehold improvements and equipment acquired under capital lease obligations are amortized over the shorter of the lease term or the estimated useful lives of the related assets. INTANGIBLE ASSETS All intangible assets, which consist primarily of software licenses, 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. 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. Internally developed software costs are amortized based on the greater of the amount determined using the straight line method over the estimated economic useful 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 internally developed software costs included in cost of revenue were 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 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 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 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. REVENUE RECOGNITION The Company earns revenue from providing access to its network-based services (including fixed fee and transaction-based services), performing development and consulting services and licensing software. The Company earns network-based services revenue from fixed fee subscription arrangements, which is F-11 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 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 sheet. 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 the customers in migrating from their current IT operating environment to these new applications. The Company utilizes its own personnel, certain outside contractors, 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 employees 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 are amounts related to leased personnel and facilities of $1,909,000 and $6,088,000, respectively, which amounts are 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. Revenue from software licensing fees was $1,717,000, $4,981,000, $1,780,000, $390,000 and $390,000, respectively, for the years ended December 31, 1995, 1996 and 1997 and the six months ended June 30, 1997 and 1998. 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 ended December 31, 1995, 1996 and 1997, approximately $1,700,000, $3,400,000, $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 F-12 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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, the Company concluded that the license fee was not fixed and determinable 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 value of these obligations approximates 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 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. 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 healthcare transaction and information services delivered over the Internet, private intranets or other networks. Through June 30, 1998, the Company has had no export sales. F-13 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 SHARE Basic earnings (loss) per share and diluted earnings (loss) per 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 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 share has been computed using the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. Basic pro forma net loss per share, as presented in the statement 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 AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The following table presents the calculation of basic and diluted and pro forma net loss per share follows (in thousands, except per share data):
YEARS ENDED SIX MONTHS ENDED JUNE DECEMBER 31, 30, ---------------------- ---------------------- 1996 1997 1997 1998 ---------- ---------- ---------- ---------- (UNAUDITED) Net loss............................................................ $ (22,517) $ (26,266) $ (13,307) $ (21,447) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Basic and diluted: Weighted-average shares of common stock outstanding............... 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.................................................. 6,583 7,223 7,193 17,632 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Basic and diluted net loss per common share......................... $ (3.42) $ (3.64) $ (1.85) $ (1.22) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Pro forma: 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...................................................... 44,715 46,631 ---------- ---------- ---------- ---------- Pro forma basic and diluted net loss per common share (unaudited)... $ (.59) $ (.46) ---------- ---------- ---------- ----------
The Company has excluded all convertible redeemable preferred stock, convertible preferred stock, warrants and outstanding stock options from the calculation of basic and dilutive loss per common share because all such securities are anti-dilutive for all periods presented. See Notes 9, 10 and 11 for further information on these securities. 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. F-15 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 products, 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 are 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. 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 in-process research and development, software, the Services and License Agreement, and goodwill. Purchased in-process research and development costs of approximately $5,215,000 were written off by the Company at the time the acquisition was consummated. Consistent with the Company's tests for internally developed software, the Company determined the amounts to be allocated to developed software and in- process research and development based on whether technological feasibility had been achieved and whether there was any alternative future use for the technology. At the date of the acquisition of EDI, the Company concluded that the in-process research and development had no alternative future use after taking into consideration the potential for usage of the software in different products, resale of the software and internal usage, and accordingly charged such amounts to the Company's operations. F-16 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) 2. BUSINESS COMBINATIONS (CONTINUED) Intangible assets arising from the acquisition of EDI at March 31, 1996 is summarized as follows (in thousands):
Goodwill........................................................................... $ 8,012 Software........................................................................... 3,118 Other intangibles (primarily Service and License Agreement and trademarks)......... 4,612 --------- $ 15,742 --------- ---------
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) Net revenues.......................................................... $ 6,330 $ 12,031 ---------- ---------- ---------- ---------- Net loss applicable to common stockholders............................ $ (12,199) $ (21,736) ---------- ---------- ---------- ---------- Basic and diluted net loss per share.................................. $ (3.30) ---------- ----------
The pro forma net loss information excludes the $5,215,000 write-off of acquired in-process research and development as it represents a nonrecurring charge. 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 AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) 2. BUSINESS COMBINATIONS (CONTINUED) Separate results of the combined entities for the years ended December 31, 1995, 1996 and 1997 and the four months ended April 30, 1998 (period ending immediately prior to the acquisition) are as follows (in thousands, unaudited):
FOUR MONTHS YEARS ENDED DECEMBER 31, ENDED --------------------------------- APRIL 30, 1995 1996 1997 1998 --------- ---------- ---------- ------------ 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........................................................ (4,458) (13,974) (12,287) (5,601) --------- ---------- ---------- ------------ $ (4,458) $ (22,517) $ (26,266) $ (12,265) --------- ---------- ---------- ------------ --------- ---------- ---------- ------------
There were no significant intercompany transactions between the two companies or significant conforming accounting adjustments. 3. PURCHASE OF SCAN ASSETS Effective December 31, 1997, the Company entered into a series of agreements with SmithKline Beecham Clinical Laboratories, Inc. ("SmithKline Labs") to outsource the network connection between their customers and SmithKline Labs' laboratories. 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 SCAN software license totaled $14,774,000 and the value of the computer workstations totaled $3,426,000. In connection with this transaction, SmithKline Labs 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 Labs and its provider customers. F-18 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) 4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following (in thousands):
DECEMBER 31, -------------------- 1996 1997 --------- --------- JUNE 30, 1998 ----------- (UNAUDITED) 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, 1996 1997 1998 --------- --------- ----------- (UNAUDITED) Services agreements........................................ $ 2,855 $ 2,855 $ 2,855 Software technology rights................................. 3,118 12,449 17,892 Internally developed software.............................. 1,001 1,292 -- Goodwill................................................... 8,012 8,012 8,012 Other...................................................... 1,777 1,777 1,777 --------- --------- ----------- 16,763 26,385 30,536 Less accumulated amortization.............................. (4,119) (9,789) (13,641) --------- --------- ----------- $ 12,644 $ 16,596 $ 16,895 --------- --------- ----------- --------- --------- -----------
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 $3,750,000 had been utilized under the lease lines through December 31, F-19 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) 6. COMMITMENTS (CONTINUED) 1997 and June 30, 1998, respectively. The arrangements are secured by the property and equipment subject to the 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 December 31, 1997 were as follows (in thousands):
CAPITAL OPERATING LEASES LEASES ---------------- ------------- Year ending December 31, 1998...................................................... $ 2,444 $ 1,167 1999...................................................... 2,423 858 2000...................................................... 2,077 164 2001...................................................... 1,506 -- 2002...................................................... 963 -- Thereafter................................................ 4,978 -- ------- ------------- Total minimum lease payments................................ $ 14,391 2,189 ------- ------- Amount representing interest................................ (219) ------------- Present value of minimum lease payments under capital lease obligations............................................... 1,970 Less current portion........................................ (1,038) ------------- Non-current portion......................................... $ 932 ------------- -------------
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 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. F-20 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) 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 $ 9,743,000 5,519,912 $ 10,377,000 Series B............. 2,162,759 2,162,759 7,578,000 2,162,759 8,135,000 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 $ 39,578,000 16,488,860 $ 50,948,000 ------------ ------------ ------------- ------------ ------------- ------------ ------------ ------------- ------------ -------------
In March 1998, an additional 763,548 shares of Series D convertible redeemable preferred stock were issued in connection with the asset acquisition from SmithKline Labs (see Note 3). Dividends on each Series were cumulative whether or not declared and are shown as a charge against income in the accompanying financial statements. On May 19, 1998, in connection with the acquisition of ActaMed by Healtheon, the convertible redeemable preferred stockholders waived payment of all accrued and unpaid dividends. Preferred holders voted generally on an as-if converted basis. In addition a majority approval of the four Series was required to approve certain transactions. The Series A, B, C and D cumulative convertible redeemable preferred stockholders were entitled to receive, upon liquidation, an amount per share equal to the issuance price, plus all accrued but unpaid F-21 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) 9. CONVERTIBLE REDEEMABLE PREFERRED STOCK (CONTINUED) dividends. Common stockholders would then have received $5,000,000. Any remaining proceeds would then be 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. Series A, B, C and D convertible preferred stockholders were entitled to noncumulative dividends of $0.03375, $0.135, $0.16875 and $0.351, respectively, per share per annum. No dividends were declared through the date of conversion. The Series A, B, C and D convertible preferred stockholders were entitled to receive, upon liquidation, an amount per share equal to the issuance price, plus all declared but unpaid dividends. The Series A, B, C and D convertible preferred stockholders had voting rights equal to the common shares issuable upon conversion. F-22 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) 10. STOCKHOLDERS' EQUITY (CONTINUED) WARRANTS 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. In November 1996, the Company issued a warrant to an 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. The warrant may be exercised at any time within three years from the date of issuance. The Company has recorded a charge of $500,000 representing the fair value of the warrant issued and services received. 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 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 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 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 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. 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. F-23 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) 11. STOCK-BASED COMPENSATION STOCK OPTION PLANS Under the 1996 Stock Incentive Plan (the "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 and July 1998, the Board of Directors and the stockholders approved increases in the reserve of 1,000,000 shares and 5,000,000 shares, respectively, 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 Plan is ten years. At December 31, 1997 and June 30, 1998, 274,166 and 22,523 shares, respectively, remain available for future grant under the 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, 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 AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 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 (REFLECTING THE CONVERSION RATIO OF .6272) Options outstanding at December 31, 1995.......................................... 2,474,438 $ .88 Granted......................................................................... 3,004,384 .54 Exercised....................................................................... (300) .05 Canceled........................................................................ (233,907) .78 ----------- Options outstanding at December 31, 1996.......................................... 5,244,615 .68 Granted......................................................................... 5,394,008 .73 Exercised....................................................................... (547,844) .16 Canceled........................................................................ (890,528) .49 ----------- Options outstanding at December 31, 1997.......................................... 9,200,251 .72 Granted (unaudited)............................................................. 1,917,806 2.76 Exercised (unaudited)........................................................... (1,659,684) .59 Canceled (unaudited)............................................................ (460,378) .86 ----------- Options outstanding at June 30, 1998 (unaudited).................................. 8,997,995 $ 1.17 ----------- -----------
HEALTHEON CORPORATION ACTAMED ----------------------------------------- CORPORATION --------------- YEARS ENDED SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31, -------------------- ------------------- 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 AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) 11. STOCK-BASED COMPENSATION (CONTINUED) The following table summarizes information regarding options outstanding and exercisable at December 31, 1997.
WEIGHTED- AVERAGE WEIGHTED- REMAINING WEIGHTED- NUMBER AVERAGE CONTRACTUAL NUMBER AVERAGE EXERCISE PRICES OUTSTANDING EXERCISE PRICE LIFE (IN YEARS) EXERCISABLE EXERCISE PRICE - ------------------------------------------- ----------- --------------- --------------- ---------- --------------- $.03-$.08.................................. 2,490,007 $ .05 6.98 1,679,870 $ .04 $.20-$.25.................................. 3,693,879 .24 9.53 682,500 .20 $1.00-$1.45................................ 2,092,187 1.24 9.69 794,213 1.45 $3.24...................................... 924,178 3.24 7.94 76,644 3.24 ----------- ---------- 9,200,251 $ .72 8.63 3,233,227 $ .50 ----------- ---------- ----------- ----------
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. At June 30, 1998, the Company had a total of approximately $3,411,000 remaining to be amortized 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 AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 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 SIX MONTHS -------------- YEARS ENDED ENDED YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31, ---------------------- ----------- 1995 1996 1997 1998 -------------- ---------- ---------- ----------- Net loss (in thousands): As reported............................................... $ (4,458) $ (22,517) $ (26,266) $ (21,447) ------- ---------- ---------- ----------- ------- ---------- ---------- ----------- Pro forma................................................. $ (4,488) $ (22,606) $ (26,434) $ (22,260) ------- ---------- ---------- ----------- ------- ---------- ---------- ----------- Basic and diluted net loss per share: As reported............................................... $ (3.42) $ (3.64) $ (1.22) ---------- ---------- ----------- ---------- ---------- ----------- Pro forma................................................. $ (3.43) $ (3.66) $ (1.26) ---------- ---------- ----------- ---------- ---------- -----------
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, ---------------------- 1996 1997 ---------- ---------- JUNE 30, 1998 ----------- (UNAUDITED) Deferred tax assets: Net operating loss carryforwards........................................... $ 7,537 $ 14,263 $ 18,878 Intangible assets.......................................................... 3,067 4,564 5,944 Research and development tax credit........................................ 561 1,014 1,383 Reserves and accruals not currently deductible............................. 227 308 1,177 ---------- ---------- ----------- Total deferred tax assets.................................................... 11,392 20,149 27,382 Valuation allowance.......................................................... (11,032) (19,807) (27,337) ---------- ---------- ----------- 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...................................... $ -- $ -- $ -- ---------- ---------- ----------- ---------- ---------- -----------
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 F-27 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) 12. INCOME TAXES (CONTINUED) valuation allowance for deferred tax assets increased by $4,477,000, $8,775,000 and $7,530,000 during the years ended December 31, 1996 and 1997 and the six months ended June 30, 1998, respectively. At December 31, 1997, the Company had net operating loss carryforwards for federal income tax purposes of approximately $37,575,000, which expire in 2009 through 2012, and federal tax credits of approximately $800,000, which expire in 2009 through 2012. Approximately $16,675,000 of the net operating loss at December 31, 1997, related to a consolidated subsidiary. This loss carryforward is only available to offset future taxable income of that subsidiary. Because of the "change of ownership" provisions of the Internal Revenue Code, a portion of 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 former member of the Board of Directors of ActaMed. 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. PENDING ACQUISITION (UNAUDITED) On June 25, 1998, the Company entered into a definitive agreement to acquire 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. Under the terms of the agreement, the Company will exchange shares of its common stock F-28 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) 14. PENDING ACQUISITION (UNAUDITED) (CONTINUED) for the assets of Metis. The acquisition is subject to certain conditions of closing, including approvals of Metis stockholders and regulatory agencies. 15. SUBSEQUENT EVENTS (UNAUDITED) In July 1998, the Company granted to employees options to purchase 2,390,200 shares of the Company's common stock. The Company estimates that it will record deferred stock compensation with regard to these grants of approximately $6,000,000. 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 Incentive Stock Plan. F-29 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-30 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-31 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-32 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-33 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-34 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-35 [LOGO] 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 , 1998 SHARES [LOGO] COMMON STOCK ----------------- OF THE SHARES OF COMMON STOCK OFFERED HEREBY, SHARES ARE BEING OFFERED INITIALLY OUTSIDE OF THE UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS AND SHARES ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS. SEE "UNDERWRITERS." ALL OF THE SHARES OF COMMON STOCK BEING OFFERED HEREBY ARE BEING SOLD BY THE COMPANY. 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 $ AND $ PER SHARE. SEE "UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS TO BE CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE. APPLICATION HAS BEEN MADE TO LIST THE COMMON STOCK FOR QUOTATION ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "HEON." --------------------------- THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 5 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 $ . (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 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 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............................ $ 22,125 NASD filing fee................................................................ 8,000 Nasdaq National Market listing fee............................................. 50,000 Printing and engraving expenses................................................ * Legal fees and expenses........................................................ * Accounting fees and expenses................................................... * Blue Sky fees and expenses..................................................... * Transfer agent fees............................................................ * Miscellaneous.................................................................. * ------------- Total...................................................................... $ * ------------- -------------
- --------- * To be provided by amendment. 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. II-1 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES (a) Since its founding in December 1995, through July 31, 1998, the Registrant has issued and sold the following unregistered securities: (1) On January 26, 1996, the Registrant sold 10,305,000 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 to a vendor in consideration for services rendered. (4) On October 1, 1996, the Registrant sold 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 2,000,000 shares of Series B Preferred Stock with an exercise price of $2.00 per share to two entities, in consideration of services rendered and as an incentive 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 three entities 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 one entity at a purchase price of $2.00 per share, in consideration of services rendered. (9) On July 11, 1997, the Registrant sold 10,000 shares of Series A Preferred Stock to the same vendor referred to in (3) above in consideration of services rendered. (10) On July 11, 1997, the Registrant sold 250,000 shares of Series B Preferred Stock to an officer 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 which has subsequently been paid in full. (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 an officer 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 one investor at a purchase price of $2.00 per share, which was paid in cash. (13) From October 17 through 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 sold 1,017,229 shares of Series B Preferred Stock to one investor upon the exercise of warrants with an exercise price of $2.00 per share which was paid in cash. (15) On May 19, 1998, 22,019,921 shares of the Registrant's Preferred Stock of the Company were converted into Common Stock on a one-for-one basis, in connection with the ActaMed acquisition. II-2 (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 3,497,007 shares of Registrant's Common Stock. (17) On May 19, 1998, the Registrant issued 23,271,353 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 to purchase shares of ActaMed capital stock which are now exercisable for an aggregate of 282,533 shares of Healtheon Common Stock. (19) On June 26, 1998, the Registrant sold 1,336,209 shares of Common Stock to one entity in consideration for certain assets and licenses relating to SmithKline Labs. (20) Since January 1996, the Registrant has granted 11,611,084 options to purchase shares of Registrant's Common Stock to employees pursuant to the Company's 1996 Stock Plan. (21) From July 6, 1996 through July 17, 1998, the Company issued an aggregate of 4,739,920 shares of Common Stock for aggregate consideration, in the form of cash and promissory notes, of $1.1 million. (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 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. 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 April 18, 1996, by and among ActaMed Corporation, EDI Acquisition, Inc., UHC Green Acquisition, Inc. and United HealthCare Corporation. 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.
II-3 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. 10.17*+ Development Agreement, dated as of October 31, 1997, between ActaMed Corporation and SmithKline Beecham Clinical Laboratories, Inc. 10.18*+ Services, Development and License Agreement, dated as of December 15, 1997, between the Registrant and Beech Street Corporation. 10.19*+ Services, Development and License Agreement, dated as of September 30, 1997, between the Registrant and Brown & Toland Physician Services Organization. 10.20 Amended and Restated Securities Purchase Agreement, dated as of 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
II-4 10.29*+ Memorandum to SmithKline Beecham, dated as of May 14, 1998, from the Registrant. 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-7). 23.3 Consent of Deloitte & Touche LLP, independent auditors (see page II-8). 23.4 Consent of Deloitte & Touche LLP, independent auditors (see page II-9). 24.1 Power of Attorney (see page II-6). 27.1 Financial Data Schedule.
- --------- * To be supplied by amendment. + 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 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 of 1933 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 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 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 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 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 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-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Santa Clara, State of California, on this 31st day of July, 1998. HEALTHEON CORPORATION By: /s/ W. MICHAEL LONG ----------------------------------------- W. Michael Long CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints John L. Westermann III, Jack Dennison, and Kallen Chan, and any two of them, as attorneys-in-fact, with the power of substitution, for him in any and all capacities, to sign any amendment to this Registration Statement (including post-effective amendments and registration statements filed pursuant to Rule 462 and otherwise), and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting to said attorneys-in-fact, and any two of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact or any two of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ W. MICHAEL LONG Chief Executive Officer - ------------------------------ and Director (Principal July 31, 1998 W. Michael Long Executive Officer) /s/ JOHN L. WESTERMANN III Chief Financial Officer - ------------------------------ (Principal Financial and July 31, 1998 John L. Westermann III Accounting Officer) - ------------------------------ Chairman of the Board July 31, 1998 James Clark /s/ L. JOHN DOERR - ------------------------------ Director July 31, 1998 L. John Doerr /s/ MICHAEL HOOVER - ------------------------------ President and Director July 31, 1998 Michael Hoover /s/ C. RICHARD KRAMLICH - ------------------------------ Director July 31, 1998 C. Richard Kramlich /s/ WILLIAM MCGUIRE, M.D. - ------------------------------ Director July 31, 1998 William McGuire, M.D. /s/ P. E. SADLER - ------------------------------ Director July 31, 1998 P. E. Sadler /s/ TADATAKA YAMADA - ------------------------------ Director July 31, 1998 Tadataka Yamada
II-6 EXHIBIT 23.2 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated February 27, 1998 (except Notes 1 and 2 as to which the date is July 24, 1998) in 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 July 31, 1998 II-7 EXHIBIT 23.3 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of Healtheon Corporation on Form S-1 of our report dated June 20, 1997, 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 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 July 31, 1998 II-8 EXHIBIT 23.4 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement 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 July 31, 1998 II-9 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 April 18, 1996, by and among ActaMed Corporation, EDI Acquisition, Inc., UHC Green Acquisition, Inc. and United HealthCare Corporation. 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. 10.17*+ Development Agreement, dated as of October 31, 1997, between ActaMed Corporation and SmithKline Beecham Clinical Laboratories, Inc.
EXHIBIT SEQUENTIAL NUMBER DESCRIPTION PAGE NUMBER - --------- ------------------------------------------------------------------------------------------- ----------- 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*+ Memorandum to SmithKline Beecham, dated as of May 14, 1998, from the Registrant. 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-7). 23.3 Consent of Deloitte & Touche LLP, independent auditors (see page II-8). 23.4 Consent of Deloitte & Touche LLP, independent auditors (see page II-9). 24.1 Power of Attorney (see page II-6). 27.1 Financial Data Schedule.
- --------- * To be supplied by amendment. + Confidential treatment requested as to portions of this exhibit. EX-2 2 EX-2.0 AGREEMENT AND PLAN OF REORGANIZATION BY AND AMONG HEALTHEON CORPORATION, MEDNET ACQUISITION CORP. AND ACTAMED CORPORATION DATED AS OF FEBRUARY 24, 1998 TABLE OF CONTENTS
PAGE ---- ARTICLE I THE MERGER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 The Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Effective Time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.3 Effect of the Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.4 Articles of Incorporation; Bylaws . . . . . . . . . . . . . . . . . . . . . . . 2 1.5 Directors and Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.6 Maximum Shares to Be Issued; Effect on Capital Stock. . . . . . . . . . . . . . 3 1.7 Dissenting Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.8 Surrender of Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.9 No Further Ownership Rights in Company Common Stock . . . . . . . . . . . . . . 7 1.10 Lost, Stolen or Destroyed Certificates. . . . . . . . . . . . . . . . . . . . . 7 1.11 Tax and Accounting Consequences . . . . . . . . . . . . . . . . . . . . . . . . 7 1.12 Taking of Necessary Action; Further Action. . . . . . . . . . . . . . . . . . . 7 ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY. . . . . . . . . . . . . . . . 8 2.1 Organization of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.2 Company Capital Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.3 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.4 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.5 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 2.6 No Undisclosed Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . .10 2.7 No Changes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 2.8 Tax and Other Returns and Reports . . . . . . . . . . . . . . . . . . . . . . .12 2.9 Restrictions on Business Activities . . . . . . . . . . . . . . . . . . . . . .14 2.10 Title to Properties; Absence of Liens and Encumbrances. . . . . . . . . . . . .14 2.11 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 2.12 Agreements, Contracts and Commitments . . . . . . . . . . . . . . . . . . . . .16 2.13 Interested Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . .18 2.14 Compliance with Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 2.15 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 2.16 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 2.17 Minute Books. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 2.18 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 2.19 Brokers' and Finders' Fees; Third Party Expenses. . . . . . . . . . . . . . . .19 2.20 Employee Matters and Benefit Plans. . . . . . . . . . . . . . . . . . . . . . .20 2.21 Accounting and Regulatory Matters . . . . . . . . . . . . . . . . . . . . . . .23 2.22 Representations Complete. . . . . . . . . . . . . . . . . . . . . . . . . . . .24 ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB . . . . . . . . . .24 3.1 Organization of Parent and Merger Sub . . . . . . . . . . . . . . . . . . . . .24 3.2 Parent and Merger Sub Capital Structure . . . . . . . . . . . . . . . . . . . .24 i 3.3 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 3.4 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 3.5 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 3.6 No Undisclosed Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . .27 3.7 No Changes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27 3.8 Tax and Other Returns and Reports . . . . . . . . . . . . . . . . . . . . . . .29 3.9 Restrictions on Business Activities . . . . . . . . . . . . . . . . . . . . . .30 3.10 Title to Properties; Absence of Liens and Encumbrances. . . . . . . . . . . . .30 3.11 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31 3.12 Agreements, Contracts and Commitments . . . . . . . . . . . . . . . . . . . . .32 3.13 Interested Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . .33 3.14 Compliance with Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 3.15 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 3.16 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 3.17 Minute Books. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 3.18 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 3.19 Brokers' and Finders' Fees; Third Party Expenses. . . . . . . . . . . . . . . .35 3.20 Employee Matters and Benefit Plans. . . . . . . . . . . . . . . . . . . . . . .35 3.21 Accounting and Regulatory Matters . . . . . . . . . . . . . . . . . . . . . . .39 3.22 Representations Complete. . . . . . . . . . . . . . . . . . . . . . . . . . . .39 ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME. . . . . . . . . . . . . . . . . . . . .39 4.1 Conduct of Business of the Company. . . . . . . . . . . . . . . . . . . . . . .39 4.2 No Company Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . .44 4.3 No Parent or Merger Sub Solicitation. . . . . . . . . . . . . . . . . . . . . .45 ARTICLE V ADDITIONAL AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . .46 5.1 California Permit; Company Shareholder and Parent Stockholder Approvals . . . .46 5.2 Access to Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47 5.3 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47 5.4 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47 5.5 Public Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47 5.6 Consents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47 5.7 FIRPTA Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48 5.8 Reasonable Efforts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48 5.9 Notification of Certain Matters . . . . . . . . . . . . . . . . . . . . . . . .48 5.10 Certain Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48 5.11 Accounting and Tax Treatment. . . . . . . . . . . . . . . . . . . . . . . . . .48 5.12 Additional Documents and Further Assurances . . . . . . . . . . . . . . . . . .49 5.13 Company's Auditors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49 5.14 Parent's Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49 5.15 Agreement of Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . .49 5.16 Amendment of Parent Bylaws. . . . . . . . . . . . . . . . . . . . . . . . . . .49 5.17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49 ii ARTICLE VI CONDITIONS TO THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . .50 6.1 Conditions to Obligations of Each Party to Effect the Merger. . . . . . . . . .50 6.2 Additional Conditions to Obligations of the Company . . . . . . . . . . . . . .52 6.3 Additional Conditions to the Obligations of Parent and Merger Sub . . . . . . .54 ARTICLE VII NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . .55 7.1 Non-Survival of Representations and Warranties. . . . . . . . . . . . . . . . .55 ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER. . . . . . . . . . . . . . . . . . . . .55 8.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55 8.2 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56 8.3 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56 8.4 Extension; Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56 ARTICLE IX GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57 9.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57 9.2 Interpretation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58 9.3 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58 9.4 Entire Agreement; Assignment. . . . . . . . . . . . . . . . . . . . . . . . . .58 9.5 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58 9.6 Other Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59 9.7 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59 9.8 Rules of Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59 9.9 Specific Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59
iii INDEX OF EXHIBITS
EXHIBIT DESCRIPTION - ------- ----------- EXHIBIT A Company Schedules EXHIBIT B Parent and Merger Sub Schedules EXHIBIT C Form of Parent Affiliate Agreement EXHIBIT D Form of Voting Agreement EXHIBIT E Form of Company Affiliate Agreement EXHIBIT F Merger Agreement Schedules
iv INDEX OF SCHEDULES
SCHEDULE DESCRIPTION - -------- ----------- 4.1(a) Exceptions to Company Conduct 4.1(b) Exceptions to Parent Conduct 6.3(j) Company Required Consents
v AGREEMENT AND PLAN OF REORGANIZATION This AGREEMENT AND PLAN OF REORGANIZATION (this "AGREEMENT") is made and entered into as of February 24, 1998 among Healtheon Corporation, a Delaware corporation ("PARENT"), MedNet Acquisition Corp., a Georgia corporation and a wholly-owned subsidiary of Parent ("MERGER SUB"), and ActaMed Corporation, a Georgia corporation (the "COMPANY"). RECITALS A. The Boards of Directors of each of the Company, Parent and Merger Sub believe it is in the best interests of each Company and their respective shareholders that Parent acquire the Company through the statutory merger of Merger Sub with and into the Company (the "MERGER") and, in furtherance thereof, have approved the Merger. B. Pursuant to the Merger, among other things, and subject to the terms and conditions of this Agreement, all of the issued and outstanding shares of capital stock of the Company ("COMPANY CAPITAL STOCK") and all outstanding options, warrants or other rights to acquire or receive shares of Company Capital Stock shall be converted into the right to receive shares of voting Common Stock of Parent ("PARENT COMMON STOCK"). C. It is the intention of the parties to this Agreement that the Merger for federal income tax purposes shall qualify as a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "CODE"), and for accounting purposes shall qualify for treatment as a pooling of interests. D. The Company, Parent and Merger Sub desire to make certain representations and warranties and other agreements in connection with the Merger. NOW, THEREFORE, in consideration of the covenants, promises and representations set forth herein, and for other good and valuable consideration, intending to be legally bound hereby the parties agree as follows: ARTICLE I THE MERGER 1.1 THE MERGER. At the Effective Time (as defined in Section 1.2) and subject to and upon the terms and conditions of this Agreement and the applicable provisions of the Delaware General Corporation Law ("DELAWARE LAW") and Georgia Business Corporation Code ("GEORGIA LAW"), Merger Sub shall be merged with and into the Company, the separate corporate existence of Merger Sub shall cease, and the Company shall continue as the surviving corporation and as a wholly-owned subsidiary of Parent. The Company as the surviving corporation after the Merger is hereinafter sometimes referred to as the "SURVIVING CORPORATION." The Merger shall be consummated pursuant to the terms of this Agreement, which has been approved and adopted by the respective Boards of Directors of the Company, Merger Sub and Parent, and by Parent, as the sole shareholder of Merger Sub. 1.2 EFFECTIVE TIME. Unless this Agreement is earlier terminated pursuant to Section 8.1, the closing of the Merger (the "CLOSING") will take place as promptly as practicable, but no later than five (5) business days, following satisfaction or waiver of the conditions set forth in Article VI, at the offices of Wilson Sonsini Goodrich & Rosati ("WSGR"), 650 Page Mill Road, Palo Alto, California, unless another place or time is agreed to by Parent and the Company. The date upon which the Closing actually occurs is herein referred to as the "CLOSING DATE." On the Closing Date, the parties hereto shall cause the Merger to be consummated by filing the Articles of Merger (or like instrument) with the Secretary of State of the State of Georgia (the "CERTIFICATE OF MERGER"), in accordance with the relevant provisions of applicable law (the time of acceptance by the Secretary of State of Georgia of such filing being referred to herein as the "EFFECTIVE TIME"). The parties currently intend that the Closing Date will occur on or prior to May 15, 1998. 1.3 EFFECT OF THE MERGER. At the Effective Time, the effect of the Merger shall be as provided in the applicable provisions of Georgia Law. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the property, rights, privileges, powers and franchises of the Company and Merger Sub shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and Merger Sub shall become the debts, liabilities and duties of the Surviving Corporation. 1.4 ARTICLES OF INCORPORATION; BYLAWS. (a) Unless otherwise determined by Parent prior to the Effective Time, at the Effective Time, the Articles of Incorporation of Merger Sub shall be the Articles of Incorporation of the Surviving Corporation until thereafter amended as provided by law and such Articles of Incorporation; provided, however, that Article I of the Articles of Incorporation of the Surviving Corporation shall be amended to read as follows: "The name of the corporation is ActaMed Corporation." (b) Unless otherwise determined by Parent, the Bylaws of the Merger Sub, as in effect immediately prior to the Effective Time, shall be the Bylaws of the Surviving Corporation until thereafter amended. 1.5 DIRECTORS AND OFFICERS. As promptly as practicable following the Effective Time, unless otherwise unanimously agreed to by Parent's Board of Directors, the board of directors of Merger Sub shall be comprised of an equal number of representatives from each of the Company and of Parent, each to hold office in accordance with the Articles of Incorporation and Bylaws of the Surviving Corporation. The officers of Merger Sub immediately prior to the Effective Time shall be the initial officers of the Surviving Corporation, each to hold office in accordance with the Bylaws of the Surviving Corporation. 2 1.6 MAXIMUM SHARES TO BE ISSUED; EFFECT ON CAPITAL STOCK. The maximum number of shares of Parent Common Stock to be issued (including Parent Common Stock to be reserved for issuance upon exercise of any of the Company's stock options or other securities convertible into, exchangeable for or exercisable for Company Capital Stock to be assumed by Parent) in exchange for the acquisition by Parent of all outstanding Company Capital Stock and all unexpired and unexercised options, warrants or other rights to acquire Company Capital Stock shall be the Aggregate Share Number (as defined in Section 1.6(g)(iii)). No adjustment shall be made in the number of shares of Parent Common Stock issued in the Merger as a result of any cash proceeds received by the Company from the date hereof to the Effective Time pursuant to the exercise of options, warrants or other rights to acquire Company Capital Stock. Subject to the terms and conditions of this Agreement, as of the Effective Time, by virtue of the Merger and without any action on the part of Merger Sub, the Company or the holder of any shares of the Company Capital Stock, the following shall occur: (a) CONVERSION OF COMPANY COMMON STOCK. Each share of Company Capital Stock (including any shares of Common Stock of the Company ("COMPANY COMMON STOCK") issued upon conversion of Preferred Stock of the Company ("COMPANY PREFERRED STOCK") and upon exercise, conversion or exchange of all other outstanding securities immediately prior to the Closing) issued and outstanding immediately prior to the Effective Time (other than any shares of Company Capital Stock to be canceled pursuant to Section 1.6(b) and any Dissenting Shares (as defined and to the extent provided in Section 1.7(a)) will be canceled and extinguished and be converted automatically into the right to receive that number of shares of Parent Common Stock equal to the Exchange Ratio (as defined in Section 1.6(g)(iv) below), upon surrender of the certificate representing such share of Company Common Stock in the manner provided in Section 1.8. (b) CANCELLATION OF PARENT-OWNED AND COMPANY-OWNED STOCK. Each share of Company Capital Stock owned by Merger Sub, Parent, the Company or any direct or indirect wholly-owned subsidiary of Parent or the Company immediately prior to the Effective Time shall be canceled and extinguished without any conversion thereof. (c) STOCK OPTIONS. At the Effective Time, all options to purchase Company Common Stock then outstanding under the Company's Option Plans or otherwise shall be assumed by Parent in accordance with provisions described below. "Option Plans" means collectively the Company's 1997 Stock Option Plan, 1996 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. (i) At the Effective Time, each outstanding option and warrant to purchase shares of Company Common Stock (each a "COMPANY OPTION") under the Option Plans or otherwise, whether vested or unvested, shall be, in connection with the Merger, assumed by Parent. Each Company Option so assumed by Parent under this Agreement shall continue to have, and be subject to, the same terms and conditions set forth in the Option Plans and/or as provided in the 3 respective option agreements governing such Company Option immediately prior to the Effective Time, except that (A) such Company Option shall be exercisable for that number of whole shares of Parent Common Stock equal to the product of the number of shares of Company Common Stock that were issuable upon exercise of such Company Option immediately prior to the Effective Time multiplied by the Exchange Ratio, rounded down (in the case of Company Options granted under the Option Plan) to the nearest whole number of shares of Parent Common Stock, (B) the per share exercise price for the shares of Parent Common Stock issuable upon exercise of such assumed Company Option shall be equal to the quotient determined by dividing the exercise price per share of Company Common Stock at which such Company Option was exercisable immediately prior to the Effective Time by the Exchange Ratio, rounded up to the nearest whole cent, and (C) Parent and its Board of Directors shall be substituted for the Company and the Committee of the Company's Board of Directors (including, if applicable, the entire Board of Directors of the Company) administering such Company Stock Plan. (ii) Promptly following the Effective Time, Parent will issue to each holder of an outstanding Company Option a document evidencing the foregoing assumption of such Company Option by Parent. At or prior to the Effective Time, Parent shall take all corporate action necessary to reserve for issuance sufficient shares of Parent Common Stock for delivery upon exercise of Company Options assumed by it in accordance with this Section 1.6. (d) CAPITAL STOCK OF MERGER SUB. Each share of Common Stock of Merger Sub issued and outstanding immediately prior to the Effective Time shall be converted into and exchanged for one validly issued, fully paid and nonassessable share of Common Stock of the Surviving Corporation. Each stock certificate of Merger Sub evidencing ownership of any such shares shall continue to evidence ownership of such shares of capital stock of the Surviving Corporation. (e) ADJUSTMENTS TO EXCHANGE RATIO. The Exchange Ratio shall be equitably adjusted to reflect fully the effect of any stock split, reverse split, stock dividend (including any dividend or distribution of securities convertible into Parent Common Stock or Company Capital Stock), reorganization, recapitalization or other like change with respect to Parent Common Stock or Company Capital Stock occurring after the date hereof and prior to the Effective Time. Any such change for which a record date is established shall be deemed for the purposes of this Section 1.6(e) to have occurred on the record date. (f) FRACTIONAL SHARES. No fraction of a share of Parent Common Stock will be issued. (g) DEFINITIONS. (i) COMPANY FULLY DILUTED CAPITALIZATION NUMBER. The "Company Fully-Diluted Capitalization Number" shall mean all of the issued and outstanding shares of the Company Common Stock as of the Effective Time calculated on a fully-diluted basis as if all outstanding convertible securities had been fully converted and all outstanding warrants, options and other rights 4 for the purchase of shares of Company Common Stock or convertible securities had been fully exercised immediately prior to such issuance (and the resulting securities fully converted into Company Common Stock, if so convertible) as of such date. (ii) PARENT FULLY-DILUTED CAPITALIZATION NUMBER. The "Parent Fully-Diluted Capitalization Number" shall mean all of the issued and outstanding shares of Parent Common Stock as of the Effective Time calculated on a fully-diluted basis as if all outstanding convertible securities had been fully converted and all outstanding warrants, options and other rights for the purchase of shares of Parent Common Stock or convertible securities had been fully exercised immediately prior to such issuance (and the resulting securities fully converted into Parent Common Stock, if so convertible) as of such date. (iii) AGGREGATE SHARE NUMBER. The "Aggregate Share Number" shall mean the number of shares of Parent Common Stock equal to (a) the Parent Fully Diluted Capitalization Number multiplied by (b) 44.68 divided by (c) 55.32. (iv) EXCHANGE RATIO. The "Exchange Ratio" shall mean the quotient obtained by dividing (x) the Aggregate Share Number by (y) the Company Fully Diluted Capitalization Number. 1.7 DISSENTING SHARES. (a) Notwithstanding any provision of this Agreement to the contrary, any shares of Company Capital Stock held by a holder who has demanded and perfected dissenters' rights for such shares in accordance with Georgia Law and who, as of the Effective Time, has not effectively withdrawn or lost such dissenters' rights ("DISSENTING SHARES") shall not be converted into or represent a right to receive Parent Common Stock pursuant to Section 1.6, but the holder thereof shall only be entitled to receive payment in cash for the fair value of such holder's shares as determined pursuant to the applicable provisions of Georgia Law; provided, that no such payment shall be made to any dissenting shareholder unless and until such dissenting shareholder has complied with the applicable provisions of Georgia Law and surrendered to the Company the certificate or certificates representing the Dissenting Shares. (b) Notwithstanding the provisions of subsection (a), if any holder of shares of Company Capital Stock who demands appraisal of such shares under Georgia Law shall effectively withdraw or lose (through failure to perfect or otherwise) the right to appraisal, then, as of the later of the Effective Time and the occurrence of such event, such holder's shares shall automatically be converted into and represent only the right to receive Parent Common Stock as provided in Section 1.6, without interest thereon, upon surrender of the certificate representing such shares. (c) The Company shall give Parent (i) prompt notice of any written notice by any shareholder of intent to demand payment for such shareholder's shares of Company Capital Stock, 5 withdrawals of such demands, and any other instruments served pursuant to Georgia Law and received by the Company and (ii) the opportunity to participate in all negotiations and proceedings with respect to demands for dissenters' rights under Georgia Law. The Company shall not, except with the prior written consent of Parent, voluntarily make any payment with respect to any demands for dissenters' rights or offer to settle or settle any such demands. 1.8 SURRENDER OF CERTIFICATES. (a) EXCHANGE AGENT. WSGR shall serve as the exchange agent (the "EXCHANGE AGENT") in the Merger. (b) PARENT TO PROVIDE COMMON STOCK. Immediately prior to the Effective Time, Parent shall make available to the Exchange Agent for exchange in accordance with this Article I, certificates representing the aggregate number of shares of Parent Common Stock issuable pursuant to Section 1.6 in exchange for outstanding shares of Company Capital Stock. (c) EXCHANGE PROCEDURES. Promptly after the Effective Time, the Surviving Corporation shall cause to be mailed to each holder of record of a certificate or certificates (the "CERTIFICATES") which immediately prior to the Effective Time represented outstanding shares of Company Capital Stock and which shares were converted into the right to receive shares of Parent Common Stock pursuant to Section 1.6, (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent and shall be in such form and have such other provisions as Parent may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for certificates representing shares of Parent Common Stock. Upon surrender of a Certificate for cancellation to the Exchange Agent or to such other agent or agents as may be appointed by Parent, together with such letter of transmittal, duly completed and validly executed in accordance with the instructions thereto, the holder of such Certificate shall be entitled to receive in exchange therefor a certificate representing the number of whole shares of Parent Common Stock, to which such holder is entitled pursuant to Section 1.6, and the Certificate so surrendered shall forthwith be canceled and the holder thereof shall no longer have any rights with respect to such Certificate. Until so surrendered, each outstanding Certificate that, prior to the Effective Time, represented shares of Company Capital Stock will be deemed from and after the Effective Time, for all corporate purposes, other than the payment of dividends, to evidence the ownership of the number of full shares of Parent Common Stock into which such shares of Company Capital Stock shall have been so converted. (d) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No dividends or other distributions with respect to Parent Common Stock declared or made after the Effective Time and with a record date after the Effective Time will be paid to the holder of any unsurrendered Certificate with respect to the shares of Parent Common Stock represented thereby until the holder of record of such Certificate shall surrender such Certificate. Subject to applicable law, following surrender of any such Certificate, there shall be paid to the record holder of the certificates representing whole 6 shares of Parent Common Stock issued in exchange therefor, without interest, at the time of such surrender, the amount of dividends or other distributions with a record date after the Effective Time theretofore payable with respect to such whole shares of Parent Common Stock. (e) TRANSFERS OF OWNERSHIP. If any certificate for shares of Parent Common Stock is to be issued in a name other than that in which the Certificate surrendered in exchange therefor is registered, it will be a condition of the issuance thereof that the Certificate so surrendered will be properly endorsed and otherwise in proper form for transfer and that the person requesting such exchange will have paid to Parent or any agent designated by it any transfer or other taxes required by reason of the issuance of a certificate for shares of Parent Common Stock in any name other than that of the registered holder of the Certificate surrendered, or established to the satisfaction of Parent or any agent designated by it that such tax has been paid or is not payable. (f) NO LIABILITY. Notwithstanding anything to the contrary in this Section 1.8, none of the Exchange Agent, the Surviving Corporation or any party hereto shall be liable to a holder of shares of Parent Common Stock or Company Capital Stock for any amount properly paid to a public official pursuant to any applicable abandoned property, escheat or similar law. 1.9 NO FURTHER OWNERSHIP RIGHTS IN COMPANY COMMON STOCK. All shares of Parent Common Stock issued upon the surrender for exchange of shares of Company Capital Stock in accordance with the terms hereof (including any cash paid in respect thereof) shall be deemed to have been issued in full satisfaction of all rights pertaining to such shares of Company Capital Stock, and there shall be no further registration of transfers on the records of the Surviving Corporation of shares of Company Capital Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Article I. 1.10 LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any Certificates evidencing shares of Company Capital Stock shall have been lost, stolen or destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or destroyed Certificates, upon the making of an affidavit of that fact by the holder thereof, such shares of Parent Common Stock as may be required pursuant to Section 1.6; provided, however, that Parent may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed Certificates to deliver a bond in such sum as it may reasonably direct as indemnity against any claim that may be made against Parent or the Exchange Agent with respect to the Certificates alleged to have been lost, stolen or destroyed. 1.11 TAX AND ACCOUNTING CONSEQUENCES. It is intended by the parties hereto that the Merger shall (i) constitute a reorganization within the meaning of Section 368 of the Code and (ii) qualify for accounting treatment as a pooling of interests. 1.12 TAKING OF NECESSARY ACTION; FURTHER ACTION. If, at any time after the Effective Time, any such further action is necessary or desirable to carry out the purposes of this Agreement and to 7 vest the Surviving Corporation with full right, title and possession to all assets, property, rights, privileges, powers and franchises of the Company and Merger Sub, the officers and directors of the Company and Merger Sub are fully authorized in the name of their respective corporations or otherwise to take, and will take, all such lawful and necessary action. ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to Parent and Merger Sub, subject to such exceptions as are specifically disclosed in the disclosure schedules (referencing the appropriate section number or subsection, as the case may be) supplied by the Company to Parent attached hereto as EXHIBIT A (the "COMPANY SCHEDULES") and dated as of the date hereof, as follows: 2.1 ORGANIZATION OF THE COMPANY. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Georgia. The Company has the corporate power to own its properties and to carry on its business as now being conducted. The Company is duly qualified to do business and in good standing as a foreign corporation in each jurisdiction in which the failure to be so qualified would have a material adverse effect on the business, assets (including intangible assets), financial condition or results of operations of the Company (hereinafter referred to as a "COMPANY MATERIAL ADVERSE EFFECT"). The Company has delivered a true and correct copy of its Articles of Incorporation and Bylaws, each as amended to date, to Parent. 2.2 COMPANY CAPITAL STRUCTURE. (a) The authorized capital stock of the Company consists of 50,000,000 shares of authorized Common Stock, of which 9,384,200 shares are issued and outstanding; 8,800,880 shares of authorized Series A Preferred Stock, all of which are issued and outstanding; 3,448,276 shares of authorized Series B Preferred Stock, all of which are issued and outstanding; 10,344,828 shares of authorized Series C Preferred Stock, all of which are issued and outstanding; and 7,043,478 shares of authorized Series D Preferred Stock, of which 3,695,652 are issued and outstanding and the balance of which may be issued pursuant to the Asset Purchase Agreement between the Company and SmithKline Beecham Clinical Laboratories, Inc. ("SBCL") dated as of December 31, 1997 (the "SBCL ASSETS PURCHASE AGREEMENT"). The Company Capital Stock is held of record by the persons, with the addresses of record and in the amounts set forth on Schedule 2.2(a). All outstanding shares of Company Capital Stock are duly authorized, validly issued, fully paid and non-assessable and not subject to preemptive rights created by statute, the Articles of Incorporation or Bylaws of the Company or any agreement to which the Company is a party or by which it is bound. (b) The Company has reserved 6,061,238 shares of Common Stock for issuance to directors, employees and consultants pursuant to the Option Plans, of which 5,173,615 shares are 8 subject to outstanding, unexercised options and 887,623 shares remain available for future grant. The Company has reserved 30,087,912 shares of Common Stock for issuance upon the conversion, exercise or exchange of any outstanding securities and 450,450 shares subject to a warrant issued to IBM (each referred to herein as a "COMPANY CONVERTIBLE SECURITY"). All of the Company Convertible Securities and Company Options have been duly authorized and validly issued, as applicable, in accordance with the applicable terms of the Option Plans and Blue Sky laws. Schedule 2.2(b) sets forth for each outstanding Company Option or Company Convertible Security the name of the holder of such option or Company Convertible Security, the domicile address of such holder, the number of shares of Common Stock subject to such option or Company Convertible Security, the exercise price of such option or Company Convertible Security and the vesting schedule for such option or Company Convertible Security, including the extent vested to date and whether the exercisability of such option or Company Convertible Security will be accelerated and become exercisable by reason of the transactions contemplated by this Agreement. Except for the Company Options and Company Convertible Securities described in Schedule 2.2(b), there are no options, warrants, calls, rights, commitments or agreements of any character, written or oral, to which the Company is a party or by which it is bound obligating the Company to issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any shares of the capital stock of the Company or obligating the Company to grant, extend, accelerate the vesting of, change the price of, otherwise amend or enter into any such option, warrant, call, right, commitment or agreement. The holders of Company Options and Company Convertible Securities have been or will be given, or shall have properly waived, any required notice prior to the Merger, and all such rights will be terminated at or prior to the Effective Time. As a result of the Merger, Parent will be the record and sole beneficial owner of all capital stock of the Company and rights to acquire or receive such capital stock. 2.3 SUBSIDIARIES. The Company does not have and has never had any subsidiaries and does not otherwise own and has never otherwise owned any shares of capital stock or any interest in, or control, directly or indirectly, any other corporation, partnership, limited liability company, association, joint venture or other business entity. 2.4 AUTHORITY. Subject only to the requisite approval of the Merger and this Agreement by the Company's shareholders, the Company has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The vote required of the Company's shareholders to duly approve the Merger and this Agreement is set forth on Schedule 2.4. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Company, subject only to the approval of the Merger by the Company's shareholders. The Company's Board of Directors has unanimously approved the Merger and this Agreement. This Agreement has been duly executed and delivered by the Company and constitutes the valid and binding obligation of the Company, enforceable in accordance with its terms (except in all cases as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, receivership, conservatorship, moratorium, or similar Laws affecting the enforcement of creditors' rights generally and except that the availability of the equitable remedy of specific performance or 9 injunctive relief is subject to the discretion of the court before which any proceeding may be brought). Except as set forth on Schedule 2.4, subject only to the approval of the Merger and this Agreement by the Company's shareholders, the execution and delivery of this Agreement by the Company does not, and, as of the Effective Time, the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any benefit under (any such event, a "COMPANY CONFLICT") (i) any provision of the Articles of Incorporation or Bylaws of the Company or (ii) any mortgage, indenture, lease, contract or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to the Company or its properties or assets. No consent, waiver, approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other federal, state, county, local or foreign governmental authority, instrumentality, agency or commission ("GOVERNMENTAL ENTITY") or any third party (so as not to trigger any Company Conflict) is required by or with respect to the Company in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, except for (i) the filing of the Agreement of Merger with the Georgia Secretary of State, (ii) such consents, waivers, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable federal and state securities laws (iii) such notices or filings with the Internal Revenue Service or the Pension Benefit Guaranty Corporation with respect to any employee benefit plans or under the HSR Act, and (iv) such other consents, waivers, authorizations, filings, approvals and registrations which are set forth on Schedule 2.4. 2.5 FINANCIAL STATEMENTS. Schedule 2.5 sets forth the Company's unaudited balance sheet as of December 31, 1997, and the related unaudited statement of operations for the twelve month period ended December 31, 1997 (the "COMPANY UNAUDITED FINANCIALS"), and the audited balance sheet as of December 31, 1996, and the related audited statement of operations for the twelve-month period ended December 31, 1996 (the "COMPANY AUDITED FINANCIALS") (collectively, such financial statements are sometimes referred to herein as "COMPANY FINANCIAL STATEMENTS"). The Company Unaudited Financials and the Company Audited Financials have been prepared in accordance with GAAP applied on a basis consistent throughout the periods indicated and consistent with each other (except that the Company Unaudited Financials do not contain all the notes that may be required by GAAP, and may require subsequent reclassification for proper recording of the accounting treatment of the acquisition of the SBCL SCAN business. As of the date hereof, the final accounting treatment of that transaction has not been determined). The Company Unaudited Financials and Company Audited Financials present fairly the financial condition, operating results and, in the case of Company Audited Financials only, the cash flows of the Company as of the dates and during the periods indicated therein, subject in the case of the Company Unaudited Financials, to normal year-end adjustments, which will not be material in amount or significance except for the effects of reclassification that may be required by the final accounting treatment of the SBCL SCAN acquisition. The Company's unaudited balance sheet dated as of December 31, 1997, shall be referred to as the "COMPANY CURRENT BALANCE SHEET". 10 2.6 NO UNDISCLOSED LIABILITIES. Except as set forth in Schedule 2.6, the Company does not have any liability, indebtedness, obligation, expense, claim, deficiency, guaranty or endorsement of any type, whether accrued, absolute, contingent, matured, unmatured or other (whether or not required to be reflected in financial statements in accordance with generally accepted accounting principles), which individually or in the aggregate, (i) has not been reflected in the Company Current Balance Sheet, or (ii) has not arisen in the ordinary course of the Company's business since the date of the Company Current Balance Sheet, consistent with past practices. 2.7 NO CHANGES. Except as set forth in Schedule 2.7, since the date of the Company Current Balance Sheet, there has not been, occurred or arisen any: (a) transaction by the Company except in the ordinary course of business as conducted as of the date of the Company Current Balance Sheet and consistent with past practices; (b) amendments or changes to the Articles of Incorporation or Bylaws of the Company; (c) capital expenditure or commitment by the Company, either individually or in the aggregate, exceeding $25,000; (d) destruction of, damage to or loss of any material assets, business or customer of the Company (whether or not covered by insurance); (e) labor trouble or claim of wrongful discharge or other unlawful labor practice or action; (f) change in accounting methods or practices (including any change in depreciation or amortization policies or rates) by the Company; (g) revaluation by the Company of any of its assets (other than as may be required by the final accounting of the SBCL SCAN business); (h) declaration, setting aside or payment of a dividend or other distribution with respect to the capital stock of the Company, or any direct or indirect redemption, purchase or other acquisition by the Company of any of its capital stock; (i) increase in the salary or other compensation payable or to become payable to any of its officers, directors, employees or advisors, or the declaration, payment or commitment or obligation of any kind for the payment of a bonus or other additional salary or compensation to any such person except as otherwise contemplated by this Agreement or in the ordinary course of business and consistent with past practices and Schedule 2.7(i) lists all salary increases in excess of 10% and any bonus or other compensation arrangement exceeding $10,000; 11 (j) sale, lease, license or other disposition of any of the assets or properties of the Company, except in the ordinary course of business and consistent with past practices; (k) material amendment or termination of any material contract, agreement or license to which the Company is a party or by which it is bound; (l) loan by the Company to any person or entity, incurring by the Company of any indebtedness, guaranteeing by the Company of any indebtedness, issuance or sale of any debt securities of the Company or guaranteeing of any debt securities of others, except for advances to employees for travel and business expenses in the ordinary course of business, consistent with past practices; (m) waiver or release of any right or claim of the Company, including any write-off or other compromise of any account receivable of the Company; (n) commencement or notice or threat of commencement of any lawsuit or proceeding against or investigation of the Company or its affairs; (o) notice of any claim of ownership by a third party of the Company's Intellectual Property (as defined in Section 2.11 below) or of infringement by the Company of any third party's Intellectual Property rights; (p) issuance or sale by the Company of any of its shares of capital stock, or securities exchangeable, convertible or exercisable therefor, or of any other of its securities; (q) change in pricing or royalties set or charged by the Company to its customers or licensees or in pricing or royalties set or charged by persons who have licensed Intellectual Property to the Company; (r) event or condition of any character that has or could be reasonably expected to have a Company Material Adverse Effect on the Company; or (s) negotiation or agreement by the Company or any officer or employees thereof to do any of the things described in the preceding clauses (a) through (r) (other than negotiations with Parent and its representatives regarding the transactions contemplated by this Agreement). 2.8 TAX AND OTHER RETURNS AND REPORTS. (a) DEFINITIONS. (i) "TAX" or, collectively, "TAXES", means any and all federal, state, local and foreign taxes, assessments and other governmental charges, duties, impositions and liabilities, including taxes based upon or measured by gross receipts, income, profits, sales, use and occupation, 12 and value added, ad valorem, transfer, franchise, withholding, payroll, recapture, employment, excise and property taxes, together with all interest, penalties and additions imposed with respect to such amounts and any obligations under any agreements or arrangements with any other person with respect to such amounts and including any liability for taxes of a predecessor entity. (ii) "KNOWLEDGE" as used herein shall mean the personal knowledge (including references to such person being aware of a particular matter), after reasonable inquiry, of, (a) in the case of the Company, P.E. Sadler, Michael K. Hoover, Lew Belote, Nancy J. Ham, J. Philip Hardin, J.R. Hughes and (to the extent not already identified in the foregoing list) all directors of the Company on the date of this Agreement, and (b) in the case of Parent, Jim Clark, W. Michael Long, Kallen Chan, Pavan Nigam, Dennis Drislane, Chuck Saunders, Denise M. Shea, Ron Alvarez and (to the extent not already identified in the foregoing list) all directors of Parent on the date of this Agreement. (b) TAX RETURNS AND AUDITS. Except as set forth in Schedule 2.8: (i) The Company as of the Effective Time will have prepared and filed all required federal, state, local and foreign returns, estimates, information statements and reports ("RETURNS") due on or before the Effective Time relating to any and all Taxes concerning or attributable to the Company or its operations and such Returns are or will be prior to filing true and correct in all material respects and have been completed in accordance with applicable law. (ii) The Company as of the Effective Time: (A) will have paid (if due on or before the Effective Time) or accrued on the Company Current Balance Sheet all Taxes it is required to pay, or which are attributable to the period ending December 31, 1997 and (B) will have withheld with respect to its employees all federal and state income taxes, FICA, FUTA and other Taxes required to be withheld. (iii) The Company has not been delinquent in the payment of any Tax nor is there any Tax deficiency outstanding, assessed, or to its Knowledge proposed against the Company, nor has the Company executed any waiver of any statute of limitations on or extending the period for the assessment or collection of any Tax. (iv) No audit or other examination of any Return of the Company is currently in progress, nor has the Company been notified of any request for such an audit or other examination. (v) The Company does not have any liabilities for unpaid federal, state, local and foreign Taxes which have not been accrued or reserved for in accordance with GAAP on the Company Current Balance Sheet, whether asserted or unasserted, contingent or otherwise, and the Company has no Knowledge of any basis for the assertion of any such liability attributable to the Company, its assets or operations. 13 (vi) The Company has provided to Parent or has made available to representatives of Parent for inspection copies of all federal and state income and all state sales and use Tax Returns for all periods since the date of Company's incorporation. (vii) There are (and as of immediately following the Effective Date there will be) no liens, pledges, charges, claims, security interests or other encumbrances of any sort on the assets ("LIENS") of the Company relating to or attributable to Taxes. (viii) The Company has no Knowledge of any basis for the assertion of any claim relating or attributable to Taxes which, if adversely determined, would result in any Lien on the Company. (ix) None of the Company's assets are treated as "tax-exempt use property" within the meaning of Section 168(h) of the Code. (x) As of the Effective Time, there will not be any contract, agreement, plan or arrangement, including but not limited to the provisions of this Agreement, covering any employee or former employee of the Company that, individually or collectively, could give rise to the payment of any amount that would not be deductible pursuant to Section 280G or 162 of the Code. (xi) The Company has not filed any consent agreement under Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as defined in Section 341(f)(4) of the Code) owned by the Company. (xii) The Company is not a party to a tax sharing or allocation agreement nor does the Company owe any amount under any such agreement. (xiii) The Company is not, and has not been at any time, a "United States real property holding corporation" within the meaning of Section 897(c)(2) of the Code. (xiv) Since December 31, 1997 no taxes have been incurred except in the ordinary course of business. 2.9 RESTRICTIONS ON BUSINESS ACTIVITIES. There is no agreement (noncompete or otherwise), commitment, judgment, injunction, order or decree to which the Company is a party or otherwise binding upon the Company which has or reasonably could be expected to have the effect of prohibiting or impairing any business practice of the Company, any acquisition of property (tangible or intangible) by the Company or the conduct of business by the Company. Without limiting the foregoing, the Company has not entered into any agreement under which the Company is restricted from developing, selling, licensing, marketing, promoting or otherwise distributing any products, services or technology to any class of customers, or entering into any strategic alliances, in any geographic area, during any period of time or in any segment of the market. 14 2.10 TITLE TO PROPERTIES; ABSENCE OF LIENS AND ENCUMBRANCES. (a) The Company owns no real property, nor has it ever owned any real property. Schedule 2.10(a) sets forth a list of all real property currently leased by the Company, the name of the lessor, the date of the lease and each amendment thereto and the aggregate annual rental and/or other fees payable under any such lease and any security interest in the Company's assets created by such lease. All such leases are in full force and effect, are valid and effective in accordance with their respective terms, and there is not, under any of such leases, any existing default or event of default (or event which with notice or lapse of time, or both, would constitute a default). (b) The Company has good and valid title to, or, in the case of leased properties and assets, valid leasehold interests in, all of its tangible properties and assets, real, personal and mixed, used or held for use in its business, free and clear of any Liens, except as reflected in the Company Financial Statements or in Schedule 2.10(b) and except for liens for taxes not yet due and payable and such imperfections of title and encumbrances, if any, which are not material in character, amount or extent, and which do not materially detract from the value, or materially interfere with the present use, of the property subject thereto or affected thereby. 2.11 INTELLECTUAL PROPERTY. (a) The Company owns, or is licensed or otherwise possesses legally enforceable rights to use, all patents, trademarks, trade names, service marks, copyrights, and any applications therefor, maskworks, net lists, schematics, technology, know-how, computer software programs or applications (in both source code and object code form), and tangible or intangible proprietary information or material that are used in the business of the Company as currently conducted or as proposed to be conducted by the Company (the "COMPANY INTELLECTUAL PROPERTY RIGHT(S)"). Schedule 2.11(a) sets forth a complete list of all patents, registered and material unregistered trademarks, registered copyrights, trade names and service marks, and any applications therefor, included in the Company Intellectual Property Rights, and specifies, where applicable, the jurisdictions in which each such Company Intellectual Property Right has been issued or registered or in which an application for such issuance and registration has been filed, including the respective registration or application numbers and the names of all registered owners. (b) Schedule 2.11(b) sets forth a complete list of all licenses, sublicenses and other agreements to which the Company is a party and pursuant to which the Company or any other person is authorized to use any Company Intellectual Property Right (excluding object code end-user licenses granted to end-users in the ordinary course of business that permit use of software products without a right to modify, distribute or sublicense the same ("END-USER LICENSES")) or trade secret of the Company, and includes the identity of all parties thereto, a description of the nature and subject matter thereof, the applicable royalty or other fees and the term thereof. The execution and delivery of this Agreement by the Company, and the consummation of the transactions contemplated hereby, will neither cause the Company to be in violation or default under any such license, sublicense or agreement, nor entitle any other party to any such license, sublicense or agreement to terminate or 15 modify such license, sublicense or agreement. Except as set forth in Schedules 2.11(a) or 2.11(b), the Company is the sole and exclusive owner or licensee of, with all right, title and interest in and to (free and clear of any liens or encumbrances), the Company Intellectual Property Rights, and has sole and exclusive rights (and is not contractually obligated to pay any compensation to any third party in respect thereof) to the use thereof or the material covered thereby in connection with the services or products in respect of which the Company Intellectual Property Rights are being used. (c) No claims with respect to the Company Intellectual Property Rights have been asserted or are, to the Company's Knowledge, threatened by any person, nor are there any valid grounds for any claims (i) to the effect that the manufacture, sale, licensing or use of any of the products of the Company infringes on any copyright, patent, trade mark, service mark, trade secret or other proprietary right, (ii) against the use by the Company of any trademarks, service marks, trade names, trade secrets, copyrights, maskworks, patents, technology, know-how or computer software programs and applications used in the Company's business as currently conducted or as proposed to be conducted by the Company, or (iii) challenging the ownership by the Company, validity or effectiveness of any of the Company Intellectual Property Rights. All registered trademarks, service marks and copyrights held by the Company are valid and subsisting. The Company has not infringed, and the business of the Company as currently conducted or as proposed to be conducted does not infringe, any copyright, patent, trademark, service mark, trade secret or other proprietary right of any third party. There is no material unauthorized use, infringement or misappropriation of any of the Company Intellectual Property Rights by any third party, including any employee or former employee of the Company. No Company Intellectual Property Right or product of the Company or any of its subsidiaries is subject to any outstanding decree, order, judgment, or stipulation restricting in any manner the licensing thereof by the Company. Each employee, consultant or contractor of the Company has executed a proprietary information and confidentiality agreement substantially in the Company's standard forms. Except for software licensed to the Company, all software included in the Company Intellectual Property Rights (i) is original with the Company and has been either created by employees of the Company on a work-for-hire basis or by consultants or contractors who have created such software themselves and have assigned all rights they may have had in such software to the Company, or (ii) was acquired by the Company and the seller of such software made representations substantially similar to those contained in (i) in connection with the acquisition of such software. 2.12 AGREEMENTS, CONTRACTS AND COMMITMENTS. Except as set forth on Schedule 2.12(a), the Company does not have, is not a party to nor is it bound by: (i) any collective bargaining agreements, (ii) any agreements or arrangements that contain any severance pay or post-employment liabilities or obligations, (iii) any bonus, deferred compensation, pension, profit sharing or retirement plans, or any other employee benefit plans or arrangements, 16 (iv) any employment or consulting agreement, contract or commitment with an employee or individual consultant or salesperson or any consulting or sales agreement, contract or commitment under which any firm or other organization provides services to the Company, (v) any agreement or plan, including, without limitation, any stock option plan, stock appreciation rights plan or stock purchase plan, any of the benefits of which will be increased, or the vesting of benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement, (vi) any fidelity or surety bond or completion bond, (vii) any lease of personal property having a value individually in excess of $25,000, (viii) any agreement of indemnification or guaranty, (ix) any agreement, contract or commitment containing any covenant limiting the freedom of the Company to engage in any line of business or to compete with any person, (x) any agreement, contract or commitment relating to capital expenditures and involving future payments in excess of $25,000, (xi) any agreement, contract or commitment relating to the disposition or acquisition of assets or any interest in any business enterprise outside the ordinary course of the Company's business, (xii) any mortgages, indentures, loans or credit agreements, security agreements or other agreements or instruments relating to the borrowing of money or extension of credit, including guaranties referred to in clause (viii) hereof, (xiii) any purchase order or contract for the purchase of raw materials involving $25,000 or more, (xiv) any construction contracts, (xv) any distribution, joint marketing or development agreement, 17 (xvi) any agreement pursuant to which the Company has granted or may be required to grant in the future, to any party, a source-code license or option or other right to use or acquire source-code, or (xvii) any other agreement, contract or commitment that involves $25,000 or more or is not cancelable without penalty within thirty (30) days. Except for such alleged breaches, violations and defaults, and events that would constitute a breach, violation or default with the lapse of time, giving of notice, or both, as are noted in Schedule 2.12(b), the Company has not breached, violated or defaulted under, or received notice that it has breached, violated or defaulted under, any of the terms or conditions of any agreement, contract or commitment required to be set forth on Schedule 2.12(a) or Schedule 2.11(b) (any such agreement, contract or commitment, a "COMPANY CONTRACT"). Each Company Contract is in full force and effect and, except as otherwise disclosed in Schedule 2.12(b), is not subject to any default thereunder of which the Company has Knowledge by any party obligated to the Company pursuant thereto. 2.13 INTERESTED PARTY TRANSACTIONS. Except as set forth on Schedule 2.13, (i) no officer, director or, to the Knowledge of the Company (without any duty to investigate), any shareholder of the Company has, directly or indirectly, an economic interest in any entity which furnished or sold, or furnishes or sells, services or products that the Company furnishes or sells, or proposes to furnish or sell, (ii) no officer or director, or to the Knowledge of the Company (without any duty to investigate), any shareholder of the Company has, directly or indirectly, an economic interest in any entity that purchases from or sells or furnishes to, the Company, any goods or services or (iii) no officer, director or shareholder of the Company has, directly or indirectly, a beneficial interest in any contract or agreement set forth in Schedule 2.12(a) or Schedule 2.11(b); provided, that ownership of no more than one percent (1%) of the outstanding voting stock of a publicly traded corporation shall not be deemed an "economic interest in any entity" for purposes of this Section 2.13. For the purposes of this subsection, "officer" and "director" shall include any parent, child, sibling or spouse of any of such persons, or any trust, partnership or corporation in which such officer or director has a controlling interest. 2.14 COMPLIANCE WITH LAWS. The Company has complied in all material respects with, is not in material violation of, and has not received any notices of violation with respect to, any foreign, federal, state or local statute, law or regulation. 2.15 LITIGATION. Except as set forth in Schedule 2.15, there is no action, suit or proceeding of any nature pending or to the Company's Knowledge threatened against the Company, its properties or any of its officers or directors in their respective capacities as such. Except as set forth in schedule 2.15, to the Company's Knowledge, there is no investigation pending or threatened against the Company, its properties or any of its officers or directors (in their respective capacities as such) by or before any governmental entity. Schedule 2.15 sets forth, with respect to any pending or threatened action, suit, proceeding or investigation, the forum, the parties thereto, the subject matter thereof and the amount of damages claimed or other remedy requested. No Governmental Entity has at any time challenged or questioned the legal right of the Company to manufacture, offer or sell any of its products in the present manner or style thereof. 2.16 INSURANCE. Set forth on Schedule 2.16 is a list of all of the Company's insurance policies and fidelity bonds. With respect to the insurance policies and fidelity bonds covering the assets, business, equipment, properties, operations, employees, officers and directors of the Company, there is no claim by the Company pending under any of such policies or bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies or bonds. All premiums due and payable under all such policies and bonds have been paid or will be paid when due and the Company is otherwise in material compliance with the terms of such policies and bonds (or other policies and bonds providing substantially similar insurance coverage). The Company has no Knowledge of any threatened termination of, or material premium increase with respect to, any of such policies. 2.17 MINUTE BOOKS. The minute books of the Company made available to counsel for Parent are the only minute books of the Company and contain a reasonably accurate summary of all meetings of directors (or committees thereof) and shareholders or actions by written consent since the time of incorporation of the Company. 2.18 ENVIRONMENTAL MATTERS. (a) HAZARDOUS MATERIAL. The Company has not operated any underground storage tanks, and has no Knowledge of the existence, at any time, of any underground storage tank (or related piping or pumps), at any property that the Company has at any time owned, operated, occupied or leased. The Company has not released any amount of any substance that has been designated by any Governmental Entity or by applicable federal, state or local law to be radioactive, toxic, hazardous or otherwise a danger to health or the environment, including, without limitation, PCBs, asbestos, oil and petroleum products, urea-formaldehyde and all substances listed as a "hazardous substance," "hazardous waste," "hazardous material" or "toxic substance" or words of similar import, under any law, including but not limited to, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended; the Resource Conservation and Recovery Act of 1976, as amended; the Federal Water Pollution Control Act, as amended; the Clean Air Act, as amended, and the regulations promulgated pursuant to said laws, (a "HAZARDOUS MATERIAL"). No Hazardous Materials are present as a result of the actions or omissions of the Company, or, to the Company's Knowledge, as a result of any actions of any third party or otherwise, in, on or under any property, including the land and the improvements, ground water and surface water thereof, that the Company has at any time owned, operated, occupied or leased. (b) HAZARDOUS MATERIALS ACTIVITIES. The Company has not transported, stored, used, manufactured, disposed of, released or exposed its employees or others to Hazardous Materials in violation of any law in effect on or before the Effective Time, nor has the Company disposed of, transported, sold, or manufactured any product containing a Hazardous Material (any or all of the foregoing being collectively referred to as "HAZARDOUS MATERIALS ACTIVITIES") in violation of any rule, 19 regulation, treaty or statute promulgated by any Governmental Entity in effect prior to or as of the date hereof to prohibit, regulate or control Hazardous Materials or any Hazardous Material Activity. (c) PERMITS. The Company currently holds all environmental approvals, permits, licenses, clearances and consents (the "ENVIRONMENTAL PERMITS") necessary for the conduct of the Company's Hazardous Material Activities and other businesses of the Company as such activities and businesses are currently being conducted. (d) ENVIRONMENTAL LIABILITIES. No action, proceeding, revocation proceeding, amendment, procedure, writ, injunction or claim is pending, or to the Company's Knowledge, threatened concerning any Environmental Permit, Hazardous Material or any Hazardous Materials Activity of the Company. The Company is not aware of any fact or circumstance which could involve the Company in any environmental litigation or impose upon the Company any environmental liability. 2.19 BROKERS' AND FINDERS' FEES; THIRD PARTY EXPENSES. Except as set forth on Schedule 2.19, the Company has not incurred, nor will it incur, directly or indirectly, any liability for brokerage or finders' fees, investment banking fees, consulting fees or agents' commissions or any similar charges in connection with this Agreement or any transaction contemplated hereby. Schedule 2.19 sets forth the principal terms and conditions of any agreement, written or oral, with respect to such fees. Schedule 2.19 also sets forth the Company's current reasonable estimate of all Company Third Party Expenses (as defined in Section 5.4) expected to be incurred by the Company in connection with the negotiation and effectuation of the terms and conditions of this Agreement and the transactions contemplated hereby. 2.20 EMPLOYEE MATTERS AND BENEFIT PLANS. (a) DEFINITIONS. For purposes of this Section 2.20 and Section 3.20 of this Agreement, the following terms shall have the meanings set forth below: (i) "COMPANY AFFILIATE" shall mean any other person or entity under common control with the Company within the meaning of Section 414(b) or (c) and the regulations thereunder. In addition, for any Company Employee Plan subject to Section 412(n), the term Company Affiliate shall mean any other person or entity under common control with the Company within the meaning of Section 414(b), (c), (m) or (o) of the Code; (ii) "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended; (iii) "COMPANY EMPLOYEE PLAN" shall refer to any plan, program, policy, practice, contract, agreement or other arrangement providing for compensation, severance, termination pay, performance awards, stock or stock-related awards, fringe benefits or other employee benefits or remuneration of any kind, whether formal or informal, funded or unfunded and 20 whether or not legally binding, including without limitation, each "employee benefit plan", within the meaning of Section 3(3) of ERISA which is or has been maintained, contributed to, or required to be contributed to, by the Company or any Company Affiliate for the benefit of any "Company Employee" (as defined below), and any Company Employee Plan which has been maintained, contributed to, or required to have been contributed to by the Company or any Company Affiliate pursuant to which the Company or any Company Affiliate has or may have any material liability contingent or otherwise; (iv) "COMPANY EMPLOYEE" shall mean any current, former, or retired employee, officer, or director of the Company or any Company Affiliate; (v) "COMPANY EMPLOYEE AGREEMENT" shall refer to each written management, employment, severance, consulting, relocation, repatriation, expatriation, visas, work permit or similar agreement or contract between the Company or any Company Affiliate and any Employee or consultant. Except as set forth on Schedule 2.20(a)(v), the Company represents and warrants that there are no oral agreements between the Company or any Affiliate and any Employee or consultant pertaining to management, employment, severance, consulting, relocation, repatriation, expatriation, visas, work permit or similar matters or arrangements; (vi) "IRS" shall mean the Internal Revenue Service; (vii) "MULTIEMPLOYER PLAN" shall mean any "Pension Plan" (as defined below) which is a "multiemployer plan", as defined in Section 3(37) of ERISA; and (viii) "COMPANY PENSION PLAN" shall refer to each Company Employee Plan which is an "employee pension benefit plan", within the meaning of Section 3(2) of ERISA. (ix) "COMPANY DEFINED BENEFIT PLAN" shall mean any Pension Plan that is a "defined benefit plan," as defined in ERISA Section 3(35). (b) SCHEDULE. Schedule 2.20(b) contains an accurate and complete list of each Company Employee Plan and each Company Employee Agreement. The Company does not have any plan or commitment, whether legally binding or not, to establish any new Company Employee Plan or Company Employee Agreement, to modify any Company Employee Plan or Company Employee Agreement (except to the extent required by law or to conform any such Company Employee Plan or Company Employee Agreement to the requirements of any applicable law, in each case as previously disclosed to Parent in writing, or as required by this Agreement), or to enter into any Company Employee Plan or Company Employee Agreement, nor does it have any intention or commitment to do any of the foregoing. (c) DOCUMENTS. The Company has provided to Parent (i) correct and complete copies of all nonprivileged documents embodying or materially affecting the interpretation or application of each Company Employee Plan and each Company Employee Agreement including all amendments thereto, and, to the Knowledge of the Company, there are no privileged documents 21 pertaining to such matters; (ii) the most recent annual actuarial valuations, if any, prepared for each Company Defined Benefit Plan; (iii) the three most recent annual reports (Series 5500 and all schedules thereto), if any, required under ERISA or the Code in connection with each Company Employee Plan or related trust; (iv) if the Company Employee Plan is funded, the most recent annual and periodic accounting of Company Employee Plan assets; (v) the most recent summary plan description together with the most recent summary of material modifications, if any, required under ERISA with respect to each Company Employee Plan which has a material adverse effect on such Company Employee Plan; (vi) the most recent IRS determination, opinion, notification or advisory letters as applicable, and rulings relating to Company Employee Plans and copies of all applications and correspondence to or from the IRS or the Department of Labor ("DOL") with respect to any Company Employee Plan; (vii) all communications material to any Company Employee or Company Employees relating to any Company Employee Plan and any proposed Company Employee Plans, in each case, relating to any amendments, terminations, establishments, increases or decreases in benefits, acceleration of payments or vesting schedules or other events which would result in any material liability to the Company; and (viii) all registration statements and prospectuses prepared in connection with each Company Employee Plan not otherwise publicly available on the SEC website. (d) EMPLOYEE PLAN COMPLIANCE. Except as set forth on Schedule 2.20(d), (i) the Company has performed in all material respects all obligations required to be performed by it under each Company Employee Plan, and each Company Employee Plan has been established and maintained in all material respects in accordance with its terms and in compliance with all applicable laws, statutes, orders, rules and regulations, including but not limited to ERISA or the Code; (ii) no "prohibited transaction", within the meaning of Section 4975 of the Code or Section 406 of ERISA, has occurred with respect to any Company Employee Plan for which an exemption is not applicable; (iii) there are no actions, suits or claims pending, or, to the Knowledge of the Company, threatened or anticipated (other than routine claims for benefits) against any Company Employee Plan or against the assets of any Company Employee Plan; and (iv) each Company Employee Plan can be amended, terminated or otherwise discontinued after the Effective Time in accordance with its terms, without material liability to the Company, Parent or any of its Affiliates (other than ordinary administration expenses typically incurred in a termination event); (v) there are no inquiries or proceedings pending or, to the Knowledge of the Company or any Affiliates, threatened by the IRS or DOL with respect to any Company Employee Plan; and (vi) neither the Company nor any Company Affiliate is subject to any material penalty or tax with respect to any Company Employee Plan under Section 502(i) of ERISA or Section 4975 through 4980 of the Code. (e) PENSION PLANS. Except as set forth on Schedule 2.20(e), the Company does not now, nor has it ever, maintained, established, sponsored, participated in, or contributed to, any Pension Plan which is subject to Part 3 of Subtitle B of Title I of ERISA, Title IV of ERISA or Section 412 of the Code. (f) MULTIEMPLOYER PLANS. At no time has the Company contributed to or been requested to contribute to any Multiemployer Plan. 22 (g) NO POST-EMPLOYMENT OBLIGATIONS. Except as set forth in Schedule 2.20(g), no Company Employee Plan provides, or has any liability to provide, life insurance, medical or other employee welfare benefits to any Company Employee upon his or her retirement or termination of employment for any reason, except as may be required by statute, and the Company has never represented, promised or contracted (whether in oral or written form) to any Company Employee (either individually or to Company Employees as a group) that such Company Employee(s) would be provided with life insurance, medical or other employee welfare benefits upon their retirement or termination of employment, except to the extent required by statute. The term "other employee welfare benefits" means those benefits traditionally provided under an "employee benefit welfare plan" as defined in ERISA Section 3(1). (h) COBRA. Neither the Company nor any Company Affiliate has, prior to the Effective Time and in any material respect, violated any of the health care continuation requirements of COBRA, the requirements of the FMLA or any similar provisions of state law applicable to its Company Employees. (i) EFFECT OF TRANSACTION. (i) Except as set forth on Schedule 2.20(i)(i), the execution of this Agreement and the consummation of the transactions contemplated hereby will not (either alone or upon the occurrence of any additional or subsequent events) constitute an event under any Company Employee Plan, Company Employee Agreement, trust or loan that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any Company Employee. (ii) Except as set forth on Schedule 2.20(i)(ii), no payment or benefit which will or may be made by the Company or Parent or any of their respective affiliates with respect to any Employee will be characterized as an "excess parachute payment" within the meaning of Section 280G(b)(1) of the Code. (j) EMPLOYMENT MATTERS. The Company (i) is in compliance in all material respects with all applicable foreign, federal, state and local laws, rules and regulations respecting employment, employment practices, terms and conditions of employment and wages and hours, in each case, with respect to Company Employees; (ii) has withheld all amounts required by law or by agreement to be withheld from the wages, salaries and other payments to Company Employees; (iii) is not liable for any arrears of wages, other than arrears normally included in its payroll schedule and system, or any taxes or any penalty for failure to comply with any of the foregoing; and (iv) is not liable for any payment to any trust or other fund or to any governmental or administrative authority, with respect to unemployment compensation benefits, social security or other benefits or obligations for Company Employees (other than routine payments to be made in the normal course of business and consistent with past practice). 23 (k) LABOR. To the Knowledge of the Company, no work stoppage or labor strike against the Company is pending or threatened. Except as set forth in Schedule 2.20(k), the Company is not involved in or, to the Knowledge of the Company, threatened with, any labor dispute, grievance, or litigation relating to labor, safety or discrimination matters involving any Company Employee, including, without limitation, charges of unfair labor practices or discrimination complaints, which, if adversely determined, would, individually or in the aggregate, result in a material liability to the Company. To the Knowledge of the Company, neither the Company nor any of its subsidiaries has engaged in any unfair labor practices within the meaning of the National Labor Relations Act which would, individually or in the aggregate, directly or indirectly result in a liability to the Company. Except as set forth in Schedule 2.20(k), the Company is not presently, nor has it been in the past, a party to, or bound by, any collective bargaining agreement or union contract with respect to Company Employees and no collective bargaining agreement is being negotiated by the Company. 2.21 ACCOUNTING AND REGULATORY MATTERS. The Company has no Knowledge of any action taken or agreed to be taken by the Company or any affiliate of the Company or has any Knowledge of any fact or circumstance that is reasonably likely to (a) prevent the Merger from qualifying for pooling-of-interests accounting treatment, or (b) materially impede or delay receipt of any consents of regulatory authorities referred to in Section 6.1(c), Section 6.1(e) and Section 6.1(h) or result in the imposition of a condition or restriction of the type referred to in the last sentence of such Section. An "AFFILIATE" of a Person shall mean: (i) any other Person directly, or indirectly through one or more intermediaries, controlling, controlled by or under common control with such Person; (ii) any officer, director, partner, employer, or direct or indirect beneficial owner of any 5% or greater equity or voting interest of such Person; or (iii) any other Persons for which a Person described in clause (ii) acts in any such capacity. 2.22 REPRESENTATIONS COMPLETE. None of the representations or warranties made by the Company (as modified by the Company Schedules), nor any statement made in any schedule or certificate furnished by the Company pursuant to this Agreement, or furnished in or in connection with documents mailed or delivered to the shareholders of the Company in connection with soliciting their consent to this Agreement and the Merger, contains or will contain at the Effective Time, any untrue statement of a material fact, or omits or will omit at the Effective Time to state any material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which made, not misleading. ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB Parent and Merger Sub hereby represent and warrant to the Company, subject to such exceptions as are specifically disclosed in the disclosure schedule (referencing the appropriate section number or subsection, as the case may be) supplied by the Parent and Merger Sub to the 24 Company attached hereto as EXHIBIT B (the "PARENT AND MERGER SUB SCHEDULES") and dated as of the date hereof, as follows: 3.1 ORGANIZATION OF PARENT AND MERGER SUB. Parent is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Merger Sub is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Parent has the corporate power to own its properties and to carry on their business as now being conducted. Parent is duly qualified to do business and in good standing as a foreign corporation in each jurisdiction in which the failure to be so qualified would have a material adverse effect on the business, assets (including intangible assets), financial condition or results of operations of Parent (hereinafter referred to as a "PARENT MATERIAL ADVERSE EFFECT"). Parent has delivered a true and correct copy of its Certificate of Incorporation and Bylaws, each as amended to date, to the Company. Merger Sub has delivered a true and correct copy of its Certificate of Incorporation and Bylaws, each as amended to date, to the Company. 3.2 PARENT AND MERGER SUB CAPITAL STRUCTURE. (a) The authorized capital stock of Parent consists of 37,000,000 shares of authorized Common Stock, of which 3,571,480 shares are issued and outstanding, 10,305,000 shares of authorized Series A Preferred Stock, of which 10,305,000 shares are issued and outstanding, 10,305,000 shares of authorized Series A-1 Preferred Stock, none of which is issued and outstanding, 6,105,000 shares of authorized Series B Preferred Stock, of which 3,290,000 shares are issued and outstanding, 6,105,000 shares of authorized Series B-1 Preferred Stock, none of which is issued and outstanding, 2,600,000 shares of authorized Series C Preferred Stock, of which 2,600,000 shares are issued and outstanding, 2,600,000 shares of authorized Series C-1 Preferred Stock, none of which is issued and outstanding, 5,000,000 shares of authorized Series D Preferred Stock, of which 4,807,692 shares are issued and outstanding, 5,000,000 shares of authorized Series D-1 Preferred Stock, none of which is issued and outstanding. The shares of the capital stock of Parent are held of record by the persons, with the addresses of record and in the amounts set forth on Schedule 3.2(a). All outstanding shares of Parent Capital Stock are duly authorized, validly issued, fully paid and non-assessable and not subject to preemptive rights created by statute, the Certificate of Incorporation or Bylaws of Parent or any agreement to which Parent is a party or by which it is bound. (b) The authorized capital stock of Merger Sub consists of 100 shares of authorized Common Stock, all of which are issued and outstanding and held of record by Parent. All outstanding shares of the capital stock of Merger Sub are duly authorized, validly issued, fully paid and non-assessable and not subject to preemptive rights created by statute, the Certificate of Incorporation or Bylaws of Merger Sub or any agreement to which the Merger Sub is a party or by which it is bound. (c) Parent has reserved (i) 9,000,000 shares of Common Stock for issuance to directors, employees and consultants pursuant to Parent's 1996 Stock Plan ("PARENT STOCK PLAN"), of which 6,441,520 shares are subject to outstanding, unexercised options ("PARENT OPTIONS") and 25 2,558,480 shares remain available for future grant, (ii) 500,000 shares of Common Stock for issuance pursuant to an outstanding warrant ("COMMON WARRANT") and (iii) 2,811,947 shares of Series B Preferred Stock for issuance pursuant to outstanding warrants ("PREFERRED WARRANTS"). The Parent Options, the Common Warrant and the Preferred Warrants are collectively referred to herein as "PARENT CONVERTIBLE SECURITIES." Schedule 3.2(b) sets forth for each outstanding Parent Convertible Security, the name of the holder of such Parent Convertible Security, the domicile address of such holder, the number of shares of Common Stock subject to such Parent Convertible Security, the exercise price of such Parent Convertible Security and the vesting schedule for such Parent Convertible Security, including the extent vested to date and whether the exercisability of such Parent Convertible Security will be accelerated and become exercisable by reason of the transactions contemplated by this Agreement. Except for the Parent Convertible Securities described in Schedule 3.2(b), there are no options, warrants, calls, rights, commitments or agreements of any character, written or oral, to which Parent is a party or by which it is bound obligating Parent to issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any shares of the capital stock of Parent or obligating Parent to grant, extend, accelerate the vesting of, change the price of, otherwise amend or enter into any such option, warrant, call, right, commitment or agreement. 3.3 SUBSIDIARIES. Other than Merger Sub, Parent does not have any subsidiaries and does not otherwise own and has never otherwise owned any shares of capital stock or any interest in, or control, directly or indirectly, any other corporation, partnership, limited liability company, association, joint venture or other business entity. 3.4 AUTHORITY. Subject only to the requisite approval of the Merger and this Agreement by Parent's stockholders and Merger Sub's shareholder, each of Parent and Merger Sub has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. A majority vote is required of the holders of Parent's Common Stock and the holders of Parent's Preferred Stock, each voting as a separate class, to duly approve the Merger and this Agreement. A majority vote is required of the holders of Merger Sub's Common Stock to duly approve the Merger and this Agreement. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Company and Merger Sub, subject only to the approval of the Merger by Parent's stockholders and Merger Sub's shareholder. Each of Parent's Board of Directors and Merger Sub's Board of Directors have unanimously approved the Merger and this Agreement. This Agreement has been duly executed and delivered by Parent and Merger Sub and constitutes the valid and binding obligation of Parent and Merger Sub, enforceable in accordance with its terms (except in all cases as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, receivership, conservatorship, moratorium, or similar Laws affecting the enforcement of creditors' rights generally and except that the availability of the equitable remedy of specific performance or injunctive relief is subject to the discretion of the court before which any proceeding may be brought). Except as set forth on Schedule 3.4, subject only to the approval of the Merger and this Agreement by Parent's stockholders and Merger Sub's shareholders, the execution and delivery of this Agreement by Parent and Merger Sub does not, and, as of the Effective Time, 26 the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any benefit under (any such event, a "PARENT CONFLICT") (i) any provision of the Certificate of Incorporation or Bylaws of Parent, (ii) any provision of the Articles of Incorporation or Bylaws of Merger Sub, or (iii) any mortgage, indenture, lease, contract or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Parent or its properties or assets. No consent, waiver, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity or any third party (so as not to trigger any Parent Conflict) is required by or with respect to Parent or Merger Sub in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, except for (i) the filing of the Articles of Merger with the Georgia Secretary of State, (ii) such consents, waivers, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable federal and state securities laws, (iii) such notices or filings with the Internal Revenue Service or the Pension Benefit Guaranty Corporation with respect to any employee benefit plans or under the HSR Act and (iv) such other consents, waivers, authorizations, filings, approvals and registrations which are set forth on Schedule 3.4. Parent, as the sole shareholder of Merger Sub, has voted prior to the Effective Time the shares of Merger Sub's Common Stock in favor of approval of this Agreement, as and to the extent required by applicable law. 3.5 FINANCIAL STATEMENTS. Schedule 3.5 sets forth the Parent's unaudited balance sheet as of December 31, 1997, and the related unaudited statement of income and cash flow for the twelve month period ended December 31, 1997 (the "PARENT UNAUDITED FINANCIALS"), and the audited balance sheet as of December 31, 1996, and the related audited statement of income and cash flow for the twelve-month period ended December 31, 1996 (the "PARENT AUDITED FINANCIALS") (collectively, such financial statements are sometimes referred to herein as "PARENT FINANCIAL STATEMENTS"). The Parent Unaudited Financials and the Parent Audited Financials have been prepared in accordance with GAAP applied on a basis consistent throughout the periods indicated and consistent with each other (except that the Parent Unaudited Financials do not contain all the notes that may be required by GAAP). The Parent Unaudited Financials and Parent Audited Financials present fairly the financial condition, operating results and cash flows of the Parent as of the dates and during the periods indicated therein, subject in the case of the Parent Unaudited Financials, to normal year-end adjustments, which will not be material in amount or significance. Parent's unaudited balance sheet dated as of December 31, 1997, shall be referred to as the "PARENT CURRENT BALANCE SHEET". 3.6 NO UNDISCLOSED LIABILITIES. Except as set forth in Schedule 3.6, Parent does not have any liability, indebtedness, obligation, expense, claim, deficiency, guaranty or endorsement of any type, whether accrued, absolute, contingent, matured, unmatured or other (whether or not required to be reflected in financial statements in accordance with generally accepted accounting principles), which individually or in the aggregate, (i) has not been reflected in the Parent Current Balance Sheet, or (ii) has not arisen in the ordinary course of Parent's business since the date of the Parent Current Balance Sheet, consistent with past practices. 27 3.7 NO CHANGES. Except as set forth in Schedule 3.7, since the date of the Parent Current Balance Sheet, there has not been, occurred or arisen any: (a) transaction by Parent except in the ordinary course of business as conducted as of the date of the Parent Current Balance Sheet and consistent with past practices; (b) amendments or changes to the Certificate of Incorporation or Bylaws of Parent; (c) capital expenditure or commitment by Parent, either individually or in the aggregate, exceeding $25,000; (d) destruction of, damage to or loss of any material assets, business or customer of Parent (whether or not covered by insurance); (e) labor trouble or claim of wrongful discharge or other unlawful labor practice or action; (f) change in accounting methods or practices (including any change in depreciation or amortization policies or rates) by Parent; (g) revaluation by Parent of any of its assets; (h) declaration, setting aside or payment of a dividend or other distribution with respect to the capital stock of Parent, or any direct or indirect redemption, purchase or other acquisition by Parent of any of its capital stock; (i) increase in the salary or other compensation payable or to become payable to any of Parent's officers, directors, employees or advisors, or the declaration, payment or commitment or obligation of any kind for the payment of a bonus or other additional salary or compensation to any such person except as otherwise contemplated by this Agreement or in the ordinary course of business and consistent with past practices and Schedule 3.7(i) lists all salary increases in excess of 10% and any bonus or other compensation arrangement exceeding $10,000; (j) sale, lease, license or other disposition of any of the assets or properties of Parent, except in the ordinary course of business as conducted on that date and consistent with past practices; (k) material amendment or termination of any material contract, agreement or license to which Parent is a party or by which it is bound; (l) loan by Parent to any person or entity, incurring by Parent of any indebtedness, guaranteeing by Parent of any indebtedness, issuance or sale of any debt securities of 28 Parent or guaranteeing of any debt securities of others, except for advances to employees for travel and business expenses in the ordinary course of business, consistent with past practices; (m) waiver or release of any right or claim of Parent, including any write-off or other compromise of any account receivable of Parent; (n) commencement or notice or threat of commencement of any lawsuit or proceeding against or investigation of Parent or its affairs; (o) notice of any claim of ownership by a third party of Parent's Intellectual Property (as defined in Section 3.11 below) or of infringement by Parent's of any third party's Intellectual Property rights; (p) issuance or sale by Parent of any of its shares of capital stock, or securities exchangeable, convertible or exercisable therefor, or of any other of its securities; (q) change in pricing or royalties set or charged by Parent to its customers or licensees or in pricing or royalties set or charged by persons who have licensed Intellectual Property to Parent; (r) event or condition of any character that has or could be reasonably expected to have a Parent Material Adverse Effect on Parent; or (s) negotiation or agreement by Parent or any officer or employees thereof to do any of the things described in the preceding clauses (a) through (r) (other than negotiations with the Company and its representatives regarding the transactions contemplated by this Agreement). 3.8 TAX AND OTHER RETURNS AND REPORTS. (a) TAX RETURNS AND AUDITS. Except as set forth in Schedule 3.8: (i) Parent as of the Effective Time will have prepared and filed all required Returns relating to any and all Taxes concerning or attributable to Parent or its operations and such Returns are true and correct in all material respects and have been completed in accordance with applicable law. (ii) Parent as of the Effective Time: (A) will have paid or accrued on the Parent Unaudited Financials all Taxes it is required to pay or which are attributable to the period ending December 31, 1997 and (B) will have withheld with respect to its employees all federal and state income taxes, FICA, FUTA and other Taxes required to be withheld. (iii) Parent has not been delinquent in the payment of any Tax nor is there any Tax deficiency outstanding, assessed, or to its Knowledge proposed against Parent, nor has 29 Parent executed any waiver of any statute of limitations on or extending the period for the assessment or collection of any Tax. (iv) No audit or other examination of any Return of Parent is currently in progress, nor has Parent been notified of any request for such an audit or other examination. (v) Parent does not have any liabilities for unpaid federal, state, local and foreign Taxes which have not been accrued or reserved against in accordance with GAAP on the Parent Current Balance Sheet, whether asserted or unasserted, contingent or otherwise, and Parent has no Knowledge of any basis for the assertion of any such liability attributable to the Company, its assets or operations. (vi) Parent has provided to the Company copies of all federal and state income and all state sales and use Tax Returns for all periods since the date of Parent's incorporation. (vii) There are (and as of immediately following the Effective Date there will be) no Liens on the assets of Parent relating to or attributable to Taxes. (viii) Parent has no Knowledge of any basis for the assertion of any claim relating or attributable to Taxes which, if adversely determined, would result in any Lien on the assets of Parent. (ix) None of Parent's assets are treated as "tax-exempt use property" within the meaning of Section 168(h) of the Code. (x) As of the Effective Time, there will not be any contract, agreement, plan or arrangement, including but not limited to the provisions of this Agreement, covering any employee or former employee of Parent that, individually or collectively, could give rise to the payment of any amount that would not be deductible pursuant to Section 280G or 162 of the Code. (xi) Parent has not filed any consent agreement under Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as defined in Section 341(f)(4) of the Code) owned by Parent. (xii) Parent is not a party to a tax sharing or allocation agreement nor does Parent owe any amount under any such agreement. (xiii) Parent is not, and has not been at any time, a "United States real property holding corporation" within the meaning of Section 897(c)(2) of the Code. (xiv) Since December 31, 1997 no Taxes have been incurred except in the ordinary course of business. 30 Parent's tax basis in its assets for purposes of determining its future amortization, depreciation and other federal income tax deductions is accurately reflected on the Parent's tax books and records. 3.9 RESTRICTIONS ON BUSINESS ACTIVITIES. There is no agreement (noncompete or otherwise), commitment, judgment, injunction, order or decree to which Parent is a party or otherwise binding upon Parent which has or reasonably could be expected to have the effect of prohibiting or impairing any business practice of Parent, any acquisition of property (tangible or intangible) by Parent or the conduct of business by Parent. Without limiting the foregoing, Parent has not entered into any agreement under which Parent is restricted from developing, selling, licensing, marketing, promoting or otherwise distributing any products, services or technology to any class of customers, or entering into any strategic alliances, in any geographic area, during any period of time or in any segment of the market. 3.10 TITLE TO PROPERTIES; ABSENCE OF LIENS AND ENCUMBRANCES. (a) Parent owns no real property, nor has it ever owned any real property. Schedule 3.10(a) sets forth a list of all real property currently leased by Parent, the name of the lessor, the date of the lease and each amendment thereto and the aggregate annual rental and/or other fees payable under any such lease and any security interest in Parent's assets created by such lease. All such leases are in full force and effect, are valid and effective in accordance with their respective terms, and there is not, under any of such leases, any existing default or event of default (or event which with notice or lapse of time, or both, would constitute a default). (b) Parent has good and valid title to, or, in the case of leased properties and assets, valid leasehold interests in, all of its tangible properties and assets, real, personal and mixed, used or held for use in its business, free and clear of any Liens, except as reflected in the Parent Financial Statements or in Schedule 3.10(b) and except for liens for taxes not yet due and payable and such imperfections of title and encumbrances, if any, which are not material in character, amount or extent, and which do not materially detract from the value, or materially interfere with the present use, of the property subject thereto or affected thereby. 3.11 INTELLECTUAL PROPERTY. (a) Parent owns, or is licensed or otherwise possesses legally enforceable rights to use, all patents, trademarks, trade names, service marks, copyrights, and any applications therefor, maskworks, net lists, schematics, technology, know-how, computer software programs or applications (in both source code and object code form), and tangible or intangible proprietary information or material that are used in the business of Parent as currently conducted or as proposed to be conducted by Parent (the "PARENT INTELLECTUAL PROPERTY RIGHT(S)"). Schedule 3.11(a) sets forth a complete list of all patents, registered and material unregistered trademarks, registered copyrights, trade names and service marks, and any applications therefor, included in the Parent Intellectual Property Rights, and specifies, where applicable, the jurisdictions in which each such Parent Intellectual Property Right has been issued or registered or in which an application for such issuance 31 and registration has been filed, including the respective registration or application numbers and the names of all registered owners. (b) Schedule 3.11(b) sets forth a complete list of all licenses, sublicenses and other agreements to which Parent is a party and pursuant to which Parent or any other person is authorized to use any Parent Intellectual Property Right (excluding End-User Licenses) or trade secret of Parent, and includes the identity of all parties thereto, a description of the nature and subject matter thereof, the applicable royalty or other fees and the term thereof. The execution and delivery of this Agreement by Parent, and the consummation of the transactions contemplated hereby, will neither cause Parent to be in violation or default under any such license, sublicense or agreement, nor entitle any other party to any such license, sublicense or agreement to terminate or modify such license, sublicense or agreement. Except as set forth in Schedules 3.11(a) or 3.11(b), Parent is the sole and exclusive owner or licensee of, with all right, title and interest in and to (free and clear of any liens or encumbrances), the Parent Intellectual Property Rights, and has sole and exclusive rights (and is not contractually obligated to pay any compensation to any third party in respect thereof) to the use thereof or the material covered thereby in connection with the services or products in respect of which the Parent Intellectual Property Rights are being used. (c) No claims with respect to the Parent Intellectual Property Rights have been asserted or are, to Parent's Knowledge, threatened by any person, nor are there any valid grounds for any claims, (i) to the effect that the manufacture, sale, licensing or use of any of the products of Parent infringes on any copyright, patent, trade mark, service mark, trade secret or other proprietary right, (ii) against the use by Parent of any trademarks, service marks, trade names, trade secrets, copyrights, maskworks, patents, technology, know-how or computer software programs and applications used in Parent's business as currently conducted or as proposed to be conducted by Parent, or (iii) challenging the ownership by Parent, validity or effectiveness of any of the Parent Intellectual Property Rights. All registered trademarks, service marks and copyrights held by Parent are valid and subsisting. Parent has not infringed, and the business of Parent as currently conducted or as proposed to be conducted does not infringe, any copyright, patent, trademark, service mark, trade secret or other proprietary right of any third party. There is no material unauthorized use, infringement or misappropriation of any of the Parent Intellectual Property Rights by any third party, including any employee or former employee of Parent. No Parent Intellectual Property Right or product of Parent or any of its subsidiaries is subject to any outstanding decree, order, judgment, or stipulation restricting in any manner the licensing thereof by Parent. Each employee, consultant or contractor of Parent has executed a proprietary information and confidentiality agreement substantially in the Parent's standard forms. All software included in the Parent Intellectual Property Rights is original with Parent and has been either created by employees of Parent on a work-for-hire basis or by consultants or contractors who have created such software themselves and have assigned all rights they may have had in such software to Parent. 3.12 AGREEMENTS, CONTRACTS AND COMMITMENTS. Except as set forth on Schedule 3.12(a), Parent does not have, is not a party to nor is it bound by: 32 (i) any collective bargaining agreements, (ii) any agreements or arrangements that contain any severance pay or post-employment liabilities or obligations, (iii) any bonus, deferred compensation, pension, profit sharing or retirement plans, or any other employee benefit plans or arrangements, (iv) any employment or consulting agreement, contract or commitment with an employee or individual consultant or salesperson or any consulting or sales agreement, contract or commitment under which any firm or other organization provides services to Parent, (v) any agreement or plan, including, without limitation, any stock option plan, stock appreciation rights plan or stock purchase plan, any of the benefits of which will be increased, or the vesting of benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement, (vi) any fidelity or surety bond or completion bond, (vii) any lease of personal property having a value individually in excess of $25,000, (viii) any agreement of indemnification or guaranty, (ix) any agreement, contract or commitment containing any covenant limiting the freedom of Parent to engage in any line of business or to compete with any person, (x) any agreement, contract or commitment relating to capital expenditures and involving future payments in excess of $25,000, (xi) any agreement, contract or commitment relating to the disposition or acquisition of assets or any interest in any business enterprise outside the ordinary course of the Parent's business, (xii) any mortgages, indentures, loans or credit agreements, security agreements or other agreements or instruments relating to the borrowing of money or extension of credit, including guaranties referred to in clause (viii) hereof, (xiii) any purchase order or contract for the purchase of raw materials involving $25,000 or more, (xiv) any construction contracts, 33 (xv) any distribution, joint marketing or development agreement, (xvi) any agreement pursuant to which Parent has granted or may grant in the future, to any party, a source-code license or option or other right to use or acquire source-code, or (xvii) any other agreement, contract or commitment that involves $25,000 or more or is not cancelable without penalty within thirty (30) days. Except for such alleged breaches, violations and defaults, and events that would constitute a breach, violation or default with the lapse of time, giving of notice, or both, as are all noted in Schedule 3.12(b), Parent has not breached, violated or defaulted under, or received notice that it has breached, violated or defaulted under, any of the terms or conditions of any agreement, contract or commitment required to be set forth on Schedule 3.12(a) or Schedule 3.11(b) (any such agreement, contract or commitment, a "PARENT CONTRACT"). Each Parent Contract is in full force and effect and, except as otherwise disclosed in Schedule 3.12(b), is not subject to any default thereunder of which Parent has Knowledge by any party obligated to Parent pursuant thereto. 3.13 INTERESTED PARTY TRANSACTIONS. Except as set forth on Schedule 3.13, (i) no officer, director or, to the Knowledge of Parent (without any duty to investigate), any shareholder of Parent has, directly or indirectly, an economic interest in any entity which furnished or sold, or furnishes or sells, services or products that Parent furnishes or sells, or proposes to furnish or sell, (ii) no officer, director or, to the Knowledge of Parent (without any duty to investigate), any stockholder of Parent has, directly or indirectly, an economic interest in any entity that purchases from or sells or furnishes to, Parent, any goods or services or (iii) no officer, director or shareholder of Parent has, directly or indirectly, a beneficial interest in any contract or agreement set forth in Schedule 3.12(a) or Schedule 3.11(b); provided, that ownership of no more than one percent (1%) of the outstanding voting stock of a publicly traded corporation shall not be deemed an "economic interest in any entity" for purposes of this Section 3.13. For the purposes of this subsection, "officer" and "director" shall include any parent, child, sibling or spouse of any of such persons, or any trust, partnership or corporation in which such officer or director has a controlling interest. 3.14 COMPLIANCE WITH LAWS. Parent has complied in all material respects with, is not in material violation of, and has not received any notices of violation with respect to, any foreign, federal, state or local statute, law or regulation. 3.15 LITIGATION. Except as set forth in Schedule 3.15, there is no action, suit or proceeding of any nature pending or to Parent's Knowledge threatened against Parent, its properties or any of its officers or directors, in their respective capacities as such. Except as set forth in Schedule 3.15, to the Parent's Knowledge, there is no investigation pending or threatened against Parent, its properties or any of its officers or directors (in their respective capacities as such) by or before any governmental entity. Schedule 3.15 sets forth, with respect to any pending or threatened action, suit, 34 proceeding or investigation, the forum, the parties thereto, the subject matter thereof and the amount of damages claimed or other remedy requested. No Governmental Entity has at any time challenged or questioned the legal right of Parent to manufacture, offer or sell any of its products in the present manner or style thereof. 3.16 INSURANCE. Set forth on Schedule 3.16 is a list of all of Parent's insurance policies and fidelity bonds. With respect to the insurance policies and fidelity bonds covering the assets, business, equipment, properties, operations, employees, officers and directors of Parent, there is no claim by Parent pending under any of such policies or bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies or bonds. All premiums due and payable under all such policies and bonds have been paid and Parent is otherwise in material compliance with the terms of such policies and bonds (or other policies and bonds providing substantially similar insurance coverage). Parent has no Knowledge of any threatened termination of, or material premium increase with respect to, any of such policies. 3.17 MINUTE BOOKS. The minute books of Parent made available to counsel for the Company are the only minute books of Parent and contain a reasonably accurate summary of all meetings of directors (or committees thereof) and stockholders or actions by written consent since the time of incorporation of Parent. 3.18 ENVIRONMENTAL MATTERS. (a) HAZARDOUS MATERIAL. Parent has not operated any underground storage tanks, and has no Knowledge of the existence, at any time, of any underground storage tank (or related piping or pumps), at any property that Parent has at any time owned, operated, occupied or leased. Parent has not released any amount of any substance that has been designated by any Governmental Entity or by applicable federal, state or local law to be a Hazardous Material. No Hazardous Materials are present as a result of the actions or omissions of Parent, or, to Parent's Knowledge, as a result of any actions of any third party or otherwise, in, on or under any property, including the land and the improvements, ground water and surface water thereof, that Parent has at any time owned, operated, occupied or leased. (b) HAZARDOUS MATERIALS ACTIVITIES. Parent has not engaged in any Hazardous Materials Activities in violation of any rule, regulation, treaty or statute promulgated by any Governmental Entity in effect prior to or as of the date hereof to prohibit, regulate or control Hazardous Materials or any Hazardous Material Activity. (c) PERMITS. The Company currently holds all Environmental Permits necessary for the conduct of Parent's Hazardous Material Activities and other businesses of Parent as such activities and businesses are currently being conducted. (d) ENVIRONMENTAL LIABILITIES. No action, proceeding, revocation proceeding, amendment, procedure, writ, injunction or claim is pending, or to Parent's Knowledge, threatened 35 concerning any Environmental Permit, Hazardous Material or any Hazardous Materials Activity of Parent. Parent is not aware of any fact or circumstance which could involve Parent in any environmental litigation or impose upon Parent any environmental liability. 3.19 BROKERS' AND FINDERS' FEES; THIRD PARTY EXPENSES. Except as set forth on Schedule 3.19, Parent has not incurred, nor will it incur, directly or indirectly, any liability for brokerage or finders' fees, investment banking fees, consulting fees or agents' commissions or any similar charges in connection with this Agreement or any transaction contemplated hereby. Schedule 3.19 sets forth the principal terms and conditions of any agreement, written or oral, with respect to such fees. Schedule 3.19 also sets forth Parent's current reasonable estimate of all Third Party Expenses (as defined in Section 5.4) expected to be incurred by Parent in connection with the negotiation and effectuation of the terms and conditions of this Agreement and the transactions contemplated hereby. 3.20 EMPLOYEE MATTERS AND BENEFIT PLANS. (a) DEFINITIONS. For purposes of this Agreement, the following terms shall have the meanings set forth below: (i) "PARENT AFFILIATE" shall mean any other person or entity under common control with Parent within the meaning of Section 414(b) or (c) and the regulations thereunder. In addition, for any Parent Employee Plan subject to Section 412(n), the term Parent Affiliate shall mean any other person or entity under common control with Parent within the meaning of Section 414(b), (c), (m) or (o) of the Code; (ii) "PARENT EMPLOYEE PLAN" shall refer to any plan, program, policy, practice, contract, agreement or other arrangement providing for compensation, severance, termination pay, performance awards, stock or stock-related awards, fringe benefits or other employee benefits or remuneration of any kind, whether formal or informal, funded or unfunded and whether or not legally binding, including without limitation, each "employee benefit plan", within the meaning of Section 3(3) of ERISA which is or has been maintained, contributed to, or required to be contributed to, by the Company or any Parent Affiliate for the benefit of any "Parent Employee" (as defined below), and any Parent Employee Plan which has been maintained, contributed to, or required to have been contributed to by Parent or any Parent Affiliate pursuant to which Parent or any Parent Affiliate has or may have any material liability contingent or otherwise; (iii) "PARENT EMPLOYEE" shall mean any current, former, or retired employee, officer, or director of Parent or any Parent Affiliate; (iv) "PARENT EMPLOYEE AGREEMENT" shall refer to each management, employment, severance, consulting, relocation, repatriation, expatriation, visas, work permit or similar agreement or contract between Parent or any Parent Affiliate and any Parent Employee or consultant; 36 (v) "PARENT PENSION PLAN" shall refer to each Parent Employee Plan which is an "employee pension benefit plan", within the meaning of Section 3(2) of ERISA. (vi) "PARENT DEFINED BENEFIT PLAN" shall mean any Pension Plan that is a "defined benefit plan," as defined in ERISA Section 3(35). (b) SCHEDULE. Schedule 3.20(b) contains an accurate and complete list of each Parent Employee Plan and each Parent Employee Agreement together with a schedule of all liabilities, whether or not accrued, under each such Parent Employee Plan or Parent Employee Agreement only to the extent not reflected on the Parent Current Balance Sheet. Parent does not have any plan or commitment, whether legally binding or not, to establish any new Parent Employee Plan or Parent Employee Agreement, to modify any Parent Employee Plan or Parent Employee Agreement (except to the extent required by law or to conform any such Parent Employee Plan or Parent Employee Agreement to the requirements of any applicable law, in each case as previously disclosed to Parent in writing, or as required by this Agreement), or to enter into any Parent Employee Plan or Parent Employee Agreement, nor does it have any intention or commitment to do any of the foregoing. (c) DOCUMENTS. Parent has provided to Company (i) correct and complete copies of all nonprivileged documents embodying or materially affecting the interpretation or application of each Parent Employee Plan and each Parent Employee Agreement including all amendments thereto, and, to the Knowledge of the Company, there are no privileged documents pertaining to such matters; (ii) the most recent annual actuarial valuations, if any, prepared for each Parent Defined Benefit Plan; (iii) the three most recent annual reports (Series 5500 and all schedules thereto), if any, required under ERISA or the Code in connection with each Parent Employee Plan or related trust; (iv) if the Parent Employee Plan is funded, the most recent annual and periodic accounting of Parent Employee Plan assets; (v) the most recent summary plan description together with the most recent summary of material modifications, if any, required under ERISA with respect to each Parent Employee Plan which has a material adverse effect on such Parent Employee Plan; (vi) the most recent IRS determination, opinion, notification or advisory letters as applicable, and rulings relating to Parent Employee Plans and copies of all applications and correspondence to or from the IRS or the DOL with respect to any Parent Employee Plan; (vii) all communications material to any Parent Employee or Parent Employees relating to any Parent Employee Plan and any proposed Parent Employee Plans, in each case, relating to any amendments, terminations, establishments, increases or decreases in benefits, acceleration of payments or vesting schedules or other events which would result in any material liability to Parent; and (viii) all registration statements and prospectuses prepared in connection with each Parent Employee Plan not otherwise publicly available on the SEC website. (d) EMPLOYEE PLAN COMPLIANCE. Except as set forth on Schedule 3.20(d), (i) Parent has performed in all material respects all obligations required to be performed by it under each Parent Employee Plan, and each Parent Employee Plan has been established and maintained in 37 all material respects in accordance with its terms and in compliance with all applicable laws, statutes, orders, rules and regulations, including but not limited to ERISA or the Code; (ii) no "prohibited transaction", within the meaning of Section 4975 of the Code or Section 406 of ERISA, has occurred with respect to any Parent Employee Plan for which an exemption is not applicable; (iii) there are no actions, suits or claims pending, or, to the Knowledge of Parent, threatened or anticipated (other than routine claims for benefits) against any Parent Employee Plan or against the assets of any Parent Employee Plan; and (iv) each Parent Employee Plan can be amended, terminated or otherwise discontinued after the Effective Time in accordance with its terms, without material liability to the Company, Parent or any Parent Affiliates (other than ordinary administration expenses typically incurred in a termination event); (v) there are no inquiries or proceedings pending or, to the Knowledge of Parent or any Affiliates, threatened by the IRS or DOL with respect to any Parent Employee Plan; and (vi) neither Parent nor any Parent Affiliate is subject to any material penalty or tax with respect to any Parent Employee Plan under Section 502(i) of ERISA or Section 4975 through 4980 of the Code. (e) PENSION PLANS. Parent does not now, nor has it ever, maintained, established, sponsored, participated in, or contributed to, any Pension Plan which is subject to Part 3 of Subtitle B of Title I of ERISA, Title IV of ERISA or Section 412 of the Code. (f) MULTIEMPLOYER PLANS. At no time has Parent contributed to or been requested to contribute to any Multiemployer Plan. (g) NO POST-EMPLOYMENT OBLIGATIONS. Except as set forth in Schedule 3.20(g), no Parent Employee Plan provides, or has any liability to provide, life insurance, medical or other employee welfare benefits to any Parent Employee upon his or her retirement or termination of employment for any reason, except as may be required by statute, and Parent has never represented, promised or contracted (whether in oral or written form) to any Parent Employee (either individually or to Employees as a group) that such Parent Employee(s) would be provided with life insurance, medical or other employee welfare benefits upon their retirement or termination of employment, except to the extent required by statute. The term "other employee welfare benefits" means those benefits traditionally provided under an "employee benefit welfare plan" as defined in ERISA Section 3(1). (h) COBRA. Neither Parent nor any Parent Affiliate has, prior to the Effective Time and in any material respect, violated any of the health care continuation requirements of COBRA, the requirements of the FMLA or any similar provisions of state law applicable to its Parent Employees. (i) EFFECT OF TRANSACTION. (i) Except as set forth on Schedule 3.20(i)(i), the execution of this Agreement and the consummation of the transactions contemplated hereby will not (either alone or upon the occurrence of any additional or subsequent events) constitute an event under any Parent 38 Employee Plan, Parent Employee Agreement, trust or loan that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any Parent Employee. (ii) Except as set forth on Schedule 3.20(i)(ii), no payment or benefit which will or may be made by Parent or Company or any of their respective affiliates with respect to any Employee will be characterized as an "excess parachute payment" within the meaning of Section 280G(b)(1) of the Code. (j) EMPLOYMENT MATTERS. Parent (i) is in compliance in all material respects with all applicable foreign, federal, state and local laws, rules and regulations respecting employment, employment practices, terms and conditions of employment and wages and hours, in each case, with respect to Parent Employees; (ii) has withheld all amounts required by law or by agreement to be withheld from the wages, salaries and other payments to Parent Employees; (iii) is not liable for any arrears of wages, other than arrears normally included in its payroll schedule and system, or any taxes or any penalty for failure to comply with any of the foregoing; and (iv) is not liable for any payment to any trust or other fund or to any governmental or administrative authority, with respect to unemployment compensation benefits, social security or other benefits or obligations for Parent Employees (other than routine payments to be made in the normal course of business and consistent with past practice). (k) LABOR. To the Knowledge of Parent, no work stoppage or labor strike against Parent is pending or threatened. Except as set forth in Schedule 3.20(k), Parent is not involved in or, to the Knowledge of Parent, threatened with, any labor dispute, grievance, or litigation relating to labor, safety or discrimination matters involving any Parent Employee, including, without limitation, charges of unfair labor practices or discrimination complaints, which, if adversely determined, would, individually or in the aggregate, result in liability to Parent. To the Knowledge of Parent, neither Parent nor any of its subsidiaries has engaged in any unfair labor practices within the meaning of the National Labor Relations Act which would, individually or in the aggregate, directly or indirectly result in a material liability to Parent. Except as set forth in Schedule 3.20(k), Parent is not presently, nor has it been in the past, a party to, or bound by, any collective bargaining agreement or union contract with respect to Parent Employees and no collective bargaining agreement is being negotiated by Parent. 3.21 ACCOUNTING AND REGULATORY MATTERS. Parent has no Knowledge of any action taken by Parent or any Affiliate of Parent or agreed to be taken nor has any Knowledge of any fact or circumstance that is reasonably likely to (a) prevent the Merger from qualifying for pooling-of-interests accounting treatment, or (b) materially impede or delay receipt of any consents of regulatory authorities referred to in Section 6.1(c), Section 6.1(e) and Section 6.1(h) or result in the imposition of a condition or restriction of the type referred to in the last sentence of such Section. 3.22 REPRESENTATIONS COMPLETE. None of the representations or warranties made by Parent or Merger Sub (as modified by the Parent and Merger Sub Schedules), nor any statement made in 39 any schedule or certificate furnished by Parent or Merger Sub pursuant to this Agreement, or furnished in or in connection with documents mailed or delivered to the stockholders of Parent or Merger Sub in connection with soliciting their consent to this Agreement and the Merger, contains or will contain at the Effective Time, any untrue statement of a material fact, or omits or will omit at the Effective Time to state any material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which made, not misleading. ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME 4.1 CONDUCT OF BUSINESS OF THE COMPANY AND PARENT. (a) COMPANY CONDUCT. During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement and the Effective Time, the Company agrees (except to the extent that Parent shall otherwise consent in writing or as expressly contemplated herein) to carry on its business in the usual, regular and ordinary course in substantially the same manner as heretofore conducted, to pay its debts and Taxes when due, to pay or perform other obligations when due, and, to the extent consistent with such business, to use all reasonable efforts consistent with past practice and policies to preserve intact its present business organization, keep available the services of its present officers and key employees and preserve their relationships with customers, suppliers, distributors, licensors, licensees, and others having business dealings with it, all with the goal of preserving unimpaired its goodwill and ongoing businesses at the Effective Time. The Company shall promptly notify Parent of any material event or occurrence or emergency not in the ordinary course of its business, and any material event involving or adversely affecting the Company or its business. Except as expressly contemplated by this Agreement and except as set forth on Schedule 4.1(a), the Company shall not, without the prior written consent of Parent: (i) Except as set forth in the following subparagraph, enter into any commitment, activity or transaction not in the ordinary course of business; (ii) Except for ProviderLink Valve-Added Reseller Agreements, transfer to any person or entity any rights to any Company Intellectual Property Rights (other than pursuant to End-User Licenses in the ordinary course of business); (iii) Enter into or amend any agreements pursuant to which any other party is granted manufacturing, marketing, distribution or similar rights of any type or scope with respect to any products of the Company; 40 (iv) Amend or otherwise modify (or agree to do so), except in the ordinary course of business, or violate the terms of, any of the agreements set forth or described in the Company Schedules; (v) Commence any litigation; (vi) Declare, set aside or pay any dividends on or make any other distributions (whether in cash, stock or property) in respect of any of its capital stock, or split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of capital stock of the Company, or repurchase, redeem or otherwise acquire, directly or indirectly, any shares of its capital stock (or options, warrants or other rights exercisable therefor); (vii) Except as may be required by the SBCL Assets Purchase Agreement, for the issuance of shares of Company Capital Stock upon exercise or conversion of presently outstanding Company Options or Company Convertible Securities and except pursuant to agreements previously entered into and agreements that the Company will enter into in connection with the employment of non-officer employees, issue, grant, deliver or sell or authorize or propose the issuance, grant, delivery or sale of, or purchase or propose the purchase of, any shares of its capital stock or securities convertible into, or subscriptions, rights, warrants or options to acquire, or other agreements or commitments of any character obligating it to issue any such shares or other convertible securities; (viii) Cause or permit any amendments to its Articles of Incorporation or Bylaws; (ix) Except as may be required by the SBCL Assets Purchase Agreement, acquire or agree to acquire by merging or consolidating with, or by purchasing any assets or equity securities of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets which are material, individually or in the aggregate, to the business of the Company; (x) Sell, lease, license or otherwise dispose of any of its properties or assets, except in the ordinary course of business and consistent with past practice; (xi) Incur any indebtedness for borrowed money or guarantee any such indebtedness or issue or sell any debt securities of the Company or guarantee any debt securities of others; (xii) Grant any severance or termination pay to any director, officer, employee or consultant, except payments (a) required by law or, (b) with respect to non-officer employees and consultants (i) made pursuant to written agreements outstanding on the date hereof 41 (which such agreements are disclosed on Schedule 4.1(a)(xii)), or (ii) pursuant to Company policy in effect on the date hereof; (xiii) Adopt or amend any employee benefit plan, program, policy or arrangement, or enter into any employment contract, extend any employment offer, pay or agree to pay any special bonus or special remuneration to any director, employee or consultant, or increase the salaries or wage rates of its employees other than in the ordinary course of business and consistent with past practice; (xiv) Except as required by the acquisition of assets pursuant to the SBCL Assets Purchase Agreement, revalue any of its assets, including without limitation writing down the value of inventory or writing off notes or accounts receivable other than in the ordinary course of business and consistent with past practice; (xv) Take any action, including the acceleration of vesting of any options, warrants, restricted stock or other rights to acquire shares of the capital stock of the Company which would be reasonably likely to interfere with Parent's ability to account for the Merger as a pooling of interests or any other action that could jeopardize the tax-free reorganization hereunder; (xvi) Pay, discharge or satisfy, in an amount in excess of $15,000, in any one case, or $50,000, in the aggregate, any claim, liability or obligation (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction in the ordinary course of business of liabilities reflected or reserved against in the Company Financial Statements or incurred in the ordinary course of business since December 31, 1997; (xvii) Make or change any material election in respect of Taxes, adopt or change any accounting method in respect of Taxes, enter into any closing agreement, settle any claim or assessment in respect of Taxes, or consent to any extension or waiver of the limitation period applicable to any claim or assessment in respect of Taxes; (xviii) Enter into any strategic alliance, joint development or joint marketing arrangement or agreement; (xix) Fail to pay or otherwise satisfy its monetary obligations as they become due, except such as are being contested in good faith; (xx) Waive or commit to waive any rights with a value in excess of $10,000, in any one case, or $25,000, in the aggregate; (xxi) Cancel, materially amend or renew any insurance policy other than in the ordinary course of business; 42 (xxii) Alter, or enter into any commitment to alter, its interest in any corporation, association, joint venture, partnership or business entity in which the Company directly or indirectly holds any interest on the date hereof; or (xxiii) Take, or agree in writing or otherwise to take, any of the actions described in Sections 4.1(i) through (xxii) above, or any other action that would prevent the Company from performing or cause the Company not to perform its covenants hereunder. (b) PARENT CONDUCT. During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement and the Effective Time, Parent agrees (except to the extent that Company shall otherwise consent in writing or as expressly contemplated herein) to carry on its business in the usual, regular and ordinary course in substantially the same manner as heretofore conducted, to pay its debts and Taxes when due, to pay or perform other obligations when due, and, to the extent consistent with such business, to use all reasonable efforts consistent with past practice and policies to preserve intact its present business organization, keep available the services of its present officers and key employees and preserve their relationships with customers, suppliers, distributors, licensors, licensees, and others having business dealings with it, all with the goal of preserving unimpaired its goodwill and ongoing businesses at the Effective Time. Parent shall promptly notify the Company of any material event or occurrence or emergency not in the ordinary course of its business, and any material event involving or adversely affecting Parent or its business. Except as expressly contemplated by this Agreement and except as set forth on Schedule 4.1(b), Parent shall not, without the prior written consent of the Company: (i) Enter into any commitment, activity or transaction not in the ordinary course of business. (ii) Transfer to any person or entity any rights to any Parent Intellectual Property Rights (other than pursuant to End-User Licenses in the ordinary course of business); (iii) Enter into or amend any agreements pursuant to which any other party is granted manufacturing, marketing, distribution or similar rights of any type or scope with respect to any products of Parent; (iv) Amend or otherwise modify (or agree to do so), except in the ordinary course of business, or violate the terms of, any of the agreements set forth or described in the Parent and Merger Sub Schedules; (v) Commence any litigation; (vi) Declare, set aside or pay any dividends on or make any other distributions (whether in cash, stock or property) in respect of any of its capital stock, or split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of capital stock of Parent, or repurchase, redeem 43 or otherwise acquire, directly or indirectly, any shares of its capital stock (or options, warrants or other rights exercisable therefor); (vii) Except for the issuance of shares of Parent capital stock upon exercise or conversion of presently outstanding Parent Convertible Securities and except pursuant to agreements previously entered into and agreements that Parent will enter into in connection with the employment of non-officer employees, issue, grant, deliver or sell or authorize or propose the issuance, grant, delivery or sale of, or purchase or propose the purchase of, any shares of its capital stock or securities convertible into, or subscriptions, rights, warrants or options to acquire, or other agreements or commitments of any character obligating it to issue any such shares or other convertible securities; (viii) Cause or permit any amendments to its Certificate of Incorporation or Bylaws; (ix) Acquire or agree to acquire by merging or consolidating with, or by purchasing any assets or equity securities of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets which are material, individually or in the aggregate, to the business of Parent; (x) Sell, lease, license or otherwise dispose of any of its properties or assets, except in the ordinary course of business and consistent with past practice; (xi) Incur any indebtedness for borrowed money or guarantee any such indebtedness or issue or sell any debt securities of Parent or guarantee any debt securities of others; (xii) Grant any severance or termination pay to any director, officer, employee or consultant, except payments (a) required by law or, (b) with respect to non-officer employees and consultants (i) made pursuant to written agreements outstanding on the date hereof (which such agreements are disclosed on Schedule 4.1(b)(xii)), or (ii) pursuant to Parent policy in effect on the date hereof; (xiii) Adopt or amend any employee benefit plan, program, policy or arrangement, or enter into any employment contract, extend any employment offer, pay or agree to pay any special bonus or special remuneration to any director, employee or consultant, or increase the salaries or wage rates of its employees other than in the ordinary course of business and consistent with past practice; (xiv) Revalue any of its assets, including without limitation writing down the value of inventory or writing off notes or accounts receivable other than in the ordinary course of business and consistent with past practice; 44 (xv) Take any action, including the acceleration of vesting of any options, warrants, restricted stock or other rights to acquire shares of the capital stock of Parent which would be reasonably likely to interfere with Parent's ability to account for the Merger as a pooling of interests or any other action that could jeopardize the tax-free reorganization hereunder; (xvi) Pay, discharge or satisfy, in an amount in excess of $15,000, in any one case, or $50,000, in the aggregate, any claim, liability or obligation (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction in the ordinary course of business of liabilities reflected or reserved against in the Parent Financial Statements or incurred in the ordinary course of business since December 31, 1997; (xvii) Make or change any material election in respect of Taxes, adopt or change any accounting method in respect of Taxes, enter into any closing agreement, settle any claim or assessment in respect of Taxes, or consent to any extension or waiver of the limitation period applicable to any claim or assessment in respect of Taxes; (xviii) Enter into any strategic alliance, joint development or joint marketing arrangement or agreement; (xix) Fail to pay or otherwise satisfy its monetary obligations as they become due, except such as are being contested in good faith; (xx) Waive or commit to waive any rights with a value in excess of $10,000, in any one case, or $25,000, in the aggregate; (xxi) Cancel, materially amend or renew any insurance policy other than in the ordinary course of business; (xxii) Alter, or enter into any commitment to alter, its interest in any corporation, association, joint venture, partnership or business entity in which Parent directly or indirectly holds any interest on the date hereof; or (xxiii) Take, or agree in writing or otherwise to take, any of the actions described in Sections 4.1(i) through (xxii) above, or any other action that would prevent Parent from performing or cause Parent not to perform its covenants hereunder. 4.2 NO COMPANY SOLICITATION. Until the earlier of the Effective Time and the date of termination of this Agreement pursuant to the provisions of Section 8.1 hereof, the Company will not (nor will the Company permit any of the Company's officers, directors, shareholders, agents, representatives or Affiliates to) directly or indirectly, take any of the following actions with any party other than Parent and its designees: (a) solicit, initiate, entertain, or encourage any proposals or offers from, or conduct discussions with or engage in negotiations with, any person relating to any possible acquisition of the Company or any of its subsidiaries (whether by way of merger, purchase 45 of capital stock, purchase of assets or otherwise), any material portion of its or their capital stock or assets or any equity interest in the Company or any of its subsidiaries, (b) provide information with respect to it to any person, other than Parent, relating to, or otherwise cooperate with, facilitate or encourage any effort or attempt by any such person with regard to, any possible acquisition of the Company (whether by way of merger, purchase of capital stock, purchase of assets or otherwise), any material portion of its or their capital stock or assets or any equity interest in the Company or any of its subsidiaries, (c) enter into an agreement with any person, other than Parent, providing for the acquisition of the Company (whether by way of merger, purchase of capital stock, purchase of assets or otherwise), any material portion of its or their capital stock or assets or any equity interest in the Company or any of its subsidiaries, or (d) make or authorize any statement, recommendation or solicitation in support of any possible acquisition of the Company or any of its subsidiaries (whether by way of merger, purchase of capital stock, purchase of assets or otherwise), any material portion of its or their capital stock or assets or any equity interest in the Company or any of its subsidiaries by any person, other than by Parent. The Company shall immediately cease and cause to be terminated any such contacts or negotiations with third parties relating to any such transaction or proposed transaction. In addition to the foregoing, if the Company receives prior to the Effective Time or the termination of this Agreement any offer or proposal relating to any of the above, the Company shall immediately notify Parent thereof, including information as to the identity of the offeror or the party making any such offer or proposal and the specific terms of such offer or proposal, as the case may be, and such other information related thereto as Parent may reasonably request. Except as contemplated by this Agreement, disclosure by the Company of the terms hereof (other than the prohibition of this section) shall be deemed to be a violation of this Section 4.2. 4.3 NO PARENT OR MERGER SUB SOLICITATION. Until the earlier of the Effective Time and the date of termination of this Agreement pursuant to the provisions of Section 8.1 hereof, Parent and Merger Sub will not (nor will Parent or Merger Sub permit any of their officers, directors, stockholders, agents, representatives or Affiliates to) directly or indirectly, take any of the following actions with any party other than the Company and its designees: (a) solicit, initiate, entertain, or encourage any proposals or offers from, or conduct discussions with or engage in negotiations with, any person relating to any possible acquisition of Parent or any of its subsidiaries (whether by way of merger, purchase of capital stock, purchase of assets or otherwise), any material portion of its or their capital stock or assets or any equity interest in Parent or any of its subsidiaries, (b) provide information with respect to it to any person, other than the Company, relating to, or otherwise cooperate with, facilitate or encourage any effort or attempt by any such person with regard to, any possible acquisition of Parent (whether by way of merger, purchase of capital stock, purchase of assets or otherwise), any material portion of its or their capital stock or assets or any equity interest in Parent or any of its subsidiaries, (c) enter into an agreement with any person providing for the acquisition of Parent (whether by way of merger, purchase of capital stock, purchase of assets or otherwise), any material portion of its or their capital stock or assets or any equity interest in Parent or any of its subsidiaries, or (d) make or authorize any statement, recommendation or solicitation in support of any possible acquisition of Parent or any of its subsidiaries (whether by way of merger, purchase of capital stock, purchase of assets or otherwise), any material portion of its or their capital stock or assets or any equity interest in Parent or any of its subsidiaries by any person. Parent shall 46 immediately cease and cause to be terminated any such contacts or negotiations with third parties relating to any such transaction or proposed transaction. In addition to the foregoing, if Parent receives prior to the Effective Time or the termination of this Agreement any offer or proposal relating to any of the above, Parent shall immediately notify the Company thereof, including information as to the identity of the offeror or the party making any such offer or proposal and the specific terms of such offer or proposal, as the case may be, and such other information related thereto as the Company may reasonably request. Except as contemplated by this Agreement, disclosure by Parent of the terms hereof (other than the prohibition of this section) shall be deemed to be a violation of this Section 4.3. ARTICLE V ADDITIONAL AGREEMENTS 5.1 CALIFORNIA PERMIT; COMPANY SHAREHOLDER AND PARENT STOCKHOLDER APPROVALS. (a) As soon as reasonably practical following the execution of this Agreement, Parent and the Company will prepare the necessary documentation to obtain a permit (a "CALIFORNIA PERMIT") from the Commissioner of Corporations of the State of California (after a hearing before such Department) pursuant to Section 25121 of the California Corporate Securities Law of 1968, so that the issuance of Parent Common Stock in the Merger shall be exempt from registration under Section 3(a)(10) of the Securities Act of 1933, as amended (the "SECURITIES ACT"). The Company and Parent will respond to any comments from the California Department of Corporations and use their commercially reasonable efforts to have the California Permit granted as soon as practical after such filing. As promptly as practical after the date of this Agreement, Parent and the Company shall prepare and make such filings as are required under applicable Blue Sky laws relating to the transactions contemplated by this Agreement. (b) As promptly as practicable after the receipt of a California Permit, the Company shall submit this Agreement and the transactions contemplated hereby, including without limitation the Merger, to the Company's shareholders for approval as provided by Georgia Law and the Company's Articles of Incorporation and Bylaws. The materials submitted to the Company's shareholders shall be subject to review and approval by Parent and include information regarding Parent and the Company, the terms of the Merger and this Agreement and the unanimous recommendation of the Board of Directors of the Company in favor of the Merger, this Agreement and the transactions contemplated hereby. (c) As promptly as practicable after receipt of a California Permit, Parent shall submit this Agreement and the transactions contemplated hereby, including without limitation the Merger, to Parent's stockholders for approval and adoption as provided by Delaware law, California law and Parent's Certificate of Incorporation and Bylaws. The materials submitted to Parent's 47 stockholders shall include the unanimous recommendation of the Board of Directors of Parent in favor of the Merger, this Agreement and the transactions contemplated hereby. 5.2 ACCESS TO INFORMATION. Each party shall afford the others and its accountants, counsel and other representatives, reasonable access during normal business hours during the period prior to the Effective Time to (a) all of its properties, books, contracts, commitments and records, and (b) all other information concerning the business, properties and personnel (subject to restrictions imposed by applicable law) of it as the others may reasonably request, subject, in the case of Parent, to reasonable limits on access to its technical and other nonpublic information. No information or knowledge obtained in any investigation pursuant to this Section 5.2 shall affect or be deemed to modify any representation or warranty contained herein. 5.3 CONFIDENTIALITY. Each of the parties hereto hereby agrees to keep the terms of this Agreement (except to the extent contemplated hereby) and such information or knowledge obtained in any investigation pursuant to Section 5.2, or pursuant to the negotiation and execution of this Agreement or the effectuation of the transactions contemplated hereby, confidential; provided, however, that the foregoing shall not apply to information or knowledge which (a) a party can demonstrate was already lawfully in its possession prior to the disclosure thereof by the other party, (b) is generally known to the public and did not become so known through any violation of law, (c) became known to the public through no fault of such party, (d) is later lawfully acquired by such party without confidentiality restrictions from other sources, (e) is required to be disclosed by order of court or government agency with subpoena powers (provided that such party shall have provided the other party with prior notice of such order or subpoena and an opportunity to object or take other available action) or (f) which is disclosed in the course of any litigation between any of the parties hereto. 5.4 EXPENSES. Whether or not the Merger is consummated, all fees and expenses incurred in connection with the Merger including, without limitation, all legal, accounting, financial advisory, consulting and all other fees and expenses of third parties ("THIRD PARTY EXPENSES") incurred by a party in connection with the negotiation and effectuation of the terms and conditions of this Agreement and the transactions contemplated hereby, shall be the obligation of the respective party incurring such fees and expenses. 5.5 PUBLIC DISCLOSURE. Unless otherwise required by law (including, without limitation, federal and state securities laws) prior to the Effective Time, no disclosure (whether or not in response to an inquiry) of the subject matter of this Agreement shall be made by any party hereto unless approved by Parent and the Company prior to release, provided that such approval shall not be unreasonably withheld. 5.6 CONSENTS. Parent and the Company shall use commercially reasonable efforts to obtain the consents, waivers and approvals under any of the Parent Contracts and Company Contracts as may be required in connection with the Merger (all of such consents, waivers and 48 approvals are set forth in the Company Schedules and Parent and Merger Sub Schedules) so as to preserve all rights of and benefits to the Parent and Company thereunder. 5.7 FIRPTA COMPLIANCE. On or prior to the Closing Date, the Company shall deliver to Parent a properly executed statement in a form reasonably acceptable to Parent for purposes of satisfying Parent's obligations under Treasury Regulation Section 1.1445-2(c)(3). 5.8 REASONABLE EFFORTS. Subject to the terms and conditions provided in this Agreement, each of the parties hereto shall use its reasonable efforts to ensure that its representations and warranties remain true and correct in all material respects, and to take promptly, or cause to be taken, all actions, and to do promptly, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated hereby, to obtain all necessary waivers, consents and approvals, to effect all necessary registrations and filings, and to remove any injunctions or other impediments or delays, legal or otherwise, in order to consummate and make effective the transactions contemplated by this Agreement for the purpose of securing to the parties hereto the benefits contemplated by this Agreement; provided that Parent shall not be required to agree to any divestiture by Parent or the Company or any of Parent's subsidiaries or affiliates of shares of capital stock or of any business, assets or property of Parent or its subsidiaries or affiliates or the Company or its affiliates, or the imposition of any material limitation on the ability of any of them to conduct their businesses or to own or exercise control of such assets, properties and stock. 5.9 NOTIFICATION OF CERTAIN MATTERS. The Company shall give prompt notice to Parent, and Parent shall give prompt notice to the Company, of (i) the occurrence or non-occurrence of any event, the occurrence or non-occurrence of which is likely to cause any representation or warranty of the Company, Parent or Merger Sub, respectively, contained in this Agreement to be untrue or inaccurate at or prior to the Effective Time and (ii) any failure of the Company or Parent, as the case may be, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder; provided, however, that the delivery of any notice pursuant to this Section 5.9 shall not limit or otherwise affect any remedies available to the party receiving such notice. 5.10 CERTAIN BENEFIT PLANS. Subject to compliance with pooling-of-interest accounting treatment of the Merger, Parent shall take such reasonable actions as are necessary to allow eligible employees of the Company to participate in the benefit programs of Parent, or alternative benefits programs substantially comparable to those applicable to employees of Parent on similar terms, as soon as practicable after the Effective Time. For purposes of participation, vesting and benefit accrual under Parent's employee benefit plans, the service of the employees of the Company prior to the Effective Time shall be treated as service with Parent. Parent shall cause the Surviving Corporation to honor in accordance with their terms all employment, severance, consulting and other compensation Contracts disclosed in the Company Schedules between the Company and any current or former director, officer or employee thereof, and all provisions for vested benefits or other vested amounts earned or accrued through the Effective Time under the Company Benefit Plans. 49 5.11 ACCOUNTING AND TAX TREATMENT. Each of the Parties undertakes and agrees to use its reasonable efforts to cause the Merger, and to take no action which would cause the Merger not, to qualify for treatment as a pooling of interests for accounting purposes and each of the Parties agrees to take no action which would cause the Merger not to qualify as a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code for federal income tax purposes. 5.12 ADDITIONAL DOCUMENTS AND FURTHER ASSURANCES. Each party hereto, at the request of the other party hereto, shall execute and deliver such other instruments and do and perform such other acts and things as may be necessary or desirable for effecting completely the consummation of this Agreement and the transactions contemplated hereby. 5.13 COMPANY'S AUDITORS. The Company will use its commercially reasonable efforts to cause its management and its independent auditors to facilitate on a timely basis (i) the review of any Company audit or review work papers for up to the past three years, including the examination of selected interim financial statements and data and (ii) the delivery of such representations from the Company's independent accountants as may be reasonably requested by Parent or its accountants in order for Parent's accountants to render the opinion called for by Section 6.1(l) hereof. 5.14 PARENT'S AUDITORS. Parent will use its commercially reasonable efforts to cause its management and its independent auditors to facilitate on a timely basis (i) the review of any Parent audit or review work papers for up to the past three years, including the examination of selected interim financial statements and data and (ii) the delivery of such representations from Parent's independent accountants as may be reasonably requested by the Company or its accountants in order for Company's accountants to render the opinion called for by Section 6.1(l) hereof. 5.15 AGREEMENT OF AFFILIATES. Each Party has disclosed in Schedule 5.15 of its Schedules all Persons whom it reasonably believes is an Affiliate. If the Merger is accounted for using the pooling-of-interests method of accounting, shares of Parent Common Stock held by such Persons shall not be transferable until such time as financial results covering at least 30 days of combined operations of Parent and the Company have been published within the meaning of Section 201.01 of the SEC's Codification of Financial Reporting Policies, regardless of whether each such Affiliate has provided the Voting Agreement (and Parent shall be entitled to place restrictive legends upon certificates for shares of Parent Common Stock issued to Affiliates of the Company pursuant to this Agreement to enforce the provisions of this Section 5.14). 5.16 AMENDMENT OF PARENT BYLAWS. Parent shall take all necessary corporate actions, including without limitation soliciting stockholder approval (including the unanimous recommendation of Parent's Board of Directors in favor thereof), to increase the authorized number of directors to eight. 5.17 INDEMNIFICATION. 50 (a) For a period of three years after the Effective Time, Parent shall, and shall cause the Surviving Corporation to, indemnify, defend and hold harmless the present and former directors, officers, employees and agents of the Company (each, an "INDEMNIFIED PARTY") against all liabilities arising out of actions or omissions arising out of the Indemnified Party's service or services as directors, officers, employees or agents of the Company, ShareNet, EDI Services, Inc. or as a trustee of the Company's 401(K) plans(s) occurring at or prior to the Effective Time (including the transactions contemplated by this Agreement) to the fullest extent permitted under Delaware law (or, in the event Georgia law is more restrictive with respect to indemnification, then under Georgia law) and by the Company's Articles of Incorporation and Bylaws as in effect on the date hereof, including provisions relating to advances of expenses incurred in the defense of any litigation and whether or not Parent is insured against any such matter. Without limiting the foregoing, in any case in which approval by the Surviving Corporation is required to effectuate any indemnification, the Surviving Corporation shall direct, at the election of the Indemnified Party, that the determination of any such approval shall be made by independent counsel mutually and reasonably agreed upon between Parent and the Indemnified Party. (b) This Section 5.17 shall survive the Effective Time and is intended to benefit the Company, the Surviving Corporation and each of the Indemnified Parties and his or her heirs and representatives (each of whom shall be entitled to enforce this Section 5.17 against Parent or the Surviving Corporation, as the case may be) and shall be binding upon all successors and assigns (whether by operation of law or by contract) of Parent and the Surviving Corporation. ARTICLE VI CONDITIONS TO THE MERGER 6.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY TO EFFECT THE MERGER. The respective obligations of each party to this Agreement to effect the Merger shall be subject to the satisfaction at or prior to the Closing of the following conditions: (a) COMPANY SHAREHOLDER APPROVAL. This Agreement and the Merger shall have been approved by the shareholders of the Company by the requisite vote under applicable law and the Company's Articles of Incorporation and Bylaws. (b) PARENT STOCKHOLDER APPROVAL. This Agreement and the Merger (including any amendments to Parent's Certificate of Incorporation reasonably necessary to consummate the transactions contemplated by this Agreement) shall have been approved and adopted by the stockholders of Parent by the requisite vote under applicable law and Parent's Certificate of Incorporation and Bylaws. (c) CALIFORNIA PERMIT. The Commissioner of Corporations for the State of California shall have approved the terms and conditions of the transactions contemplated by this 51 Agreement, and the fairness of such terms and conditions pursuant to Section 25142 of the California Corporations Code ("CALIFORNIA CODE") following a hearing for such purpose, and shall have issued a Permit under Section 25121 of the California Code. (d) NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal or regulatory restraint or prohibition preventing the consummation of the Merger shall be in effect. (e) HSR ACT CLEARANCE. All approvals shall have been received and the expiration or early termination under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (the "HSR ACT"), and other applicable antitrust laws ("HSR CLEARANCE"); provided that, neither party may rely on the condition set forth in this Section 6.1(e) if the failure to obtain HSR Clearance for the Merger is a result of such party's failure to take commercially reasonable efforts to obtain HSR Clearance. (f) TAX OPINIONS. Parent shall have received a written opinion from its counsel, Wilson Sonsini Goodrich & Rosati, Professional Corporation, and the Company shall have received a written opinion from its counsel, Alston & Bird LLP (substantially identical to the opinion received by Parent), to the effect that the Merger will constitute a reorganization within the meaning of Section 368(a) of the Code; provided, however, that if Company counsel does not render such opinion, this condition shall nonetheless be deemed to be satisfied if Parent's counsel renders its opinion to the Company as well as to Parent. The parties to this Agreement agree to make reasonable representations (and to cause their Affiliates to make reasonable representations) as requested by counsel for the purpose of rendering the opinions discussed herein. (g) INVESTORS' RIGHTS AGREEMENT. The Investors' Rights Agreement, dated as of October 14, 1997, as amended (the "INVESTORS' RIGHTS AGREEMENT"), by and between Parent and certain holders of Parent's securities shall have been amended and executed by Parent, the shareholders of the Company who possess registration rights pursuant to written agreements existing on the date hereof with respect to certain securities of the Company, and a sufficient number of the existing holders of registration rights with respect to Parent's securities in order to permit the granting of such rights under the Investors' Rights Agreement. (h) OTHER GOVERNMENTAL APPROVALS. All approvals from government authorities, including without limitation any requisite Blue Sky approvals, which are appropriate or necessary for the consummation of the Merger, shall have been obtained. (i) LITIGATION. There shall be no BONA FIDE action, suit, claim or proceeding of any nature pending, or overtly threatened, against Parent or the Company, their respective properties or any of their officers or directors, arising out of, or in any way connected with, the Merger or other transactions contemplated by the terms of this Agreement. 52 (j) CONSENTS AND APPROVALS. Each Party shall have obtained any and all consents required for consummation of the Merger or for the preventing of any Default under any Contract or Permit of such Party which, if not obtained or made, is reasonably likely to have, individually or in the aggregate, a Company Material Adverse Effect or a Parent Material Adverse Effect, as applicable. No consent so obtained which is necessary to consummate the transactions contemplated hereby shall be conditioned or restricted in a manner which in the reasonable judgment of the Board of Directors of either party would so materially adversely impact the economic or business benefits of the transactions contemplated by this Agreement that, had such condition or requirement been known, such party would not, in its reasonable judgment, have entered into this Agreement. (k) AGREEMENT WITH SBCL. Sections 1.5 through 1.8 of the SBCL Assets Purchase Agreement shall be amended to provide for payment of the Purchase Price (as that term is defined therein) with Parent Common Stock for any payment due on any Transfer Date (as that term is defined therein) which occurs following the Effective Time, and the parties shall obtain such other amendments and waivers to such agreement as may be reasonably necessary to accomplish the objectives of the Merger. (l) POOLING LETTERS. Each of Parent and Company shall have received letters, dated as of the Effective Time, from Ernst & Young LLP regarding such firm's concurrence with Parent's managements' and Company's managements' conclusions as to the appropriateness of pooling-of-interests accounting for the Merger under Accounting Principles Board Opinion No. 16 if the Merger is consummated in accordance with this Agreement. (m) VOTING AGREEMENTS. Each of the persons and entities listed on Exhibit A and Exhibit B to the Voting Agreement set forth in EXHIBIT D hereto, shall have executed and delivered such Voting Agreements in substantially the form set forth in EXHIBIT D. (n) AFFILIATE AGREEMENTS. Each of the persons and entities listed as Affiliates of Parent on Schedule 5.14 shall have executed and delivered Affiliate Agreements in substantially the form of EXHIBIT C, and each of the persons and entities listed as Affiliates of the Company on Schedule 5.14 shall have executed and delivered Affiliate Agreements in substantially the form of EXHIBIT E, and all such Affiliate Agreements shall be in full force and effect. 6.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligations of the Company to consummate the Merger and the transactions contemplated by this Agreement shall be subject to the satisfaction at or prior to the Closing of each of the following conditions, any of which may be waived, in writing, exclusively by the Company: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of Parent and Merger Sub contained in this Agreement shall be true and correct in all material respects on and as of the Closing Date, except for changes contemplated by this Agreement and except for those representations and warranties which address matters only as of a particular date (which shall remain true and correct as of such date), with the same force and effect as if made on and as of the Closing 53 Date, except for those representations and warranties that are qualified by references to "material" or "Material Adverse Effect" which all shall be true and correct in all respects, and except, in all such cases, for such breaches, inaccuracies or omissions of such representations and warranties which have neither had nor reasonably would be expected to have a Material Adverse Effect on Parent; and the Company shall have received a certificate to such effect signed on behalf of Parent by a duly authorized officer of Parent. (b) AGREEMENTS AND COVENANTS. Parent and Merger Sub shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by them on or prior to the Effective Time, and the Company shall have received a certificate to such effect signed by a duly authorized officer of Parent. (c) EXCHANGE AGENT CERTIFICATION. The Exchange Agent shall have delivered to the Company a certificate, dated as of the Effective Time, to the effect that the Exchange Agent has received from Parent appropriate instructions and authorization for the Exchange Agent to issue a sufficient number of shares of Parent Common Stock in exchange for outstanding shares of Company Common Stock and that Parent has deposited with the Exchange Agent sufficient funds to pay a reasonable estimate of the cash payments necessary to make all fractional share payments as required by Section 1.6(f). (d) LEGAL OPINION. The Company shall have received a legal opinion from Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel to Parent, in form and substance reasonably acceptable to counsel of Company. (e) MATERIAL ADVERSE CHANGE. There shall not have occurred any material adverse change in the business, assets (including intangible assets), liabilities, financial condition or results of operations of Parent since the date of the Parent Current Balance Sheet. (f) CONVERSION OF PREFERRED STOCK. All shares of Parent Preferred Stock, other than shares of Parent Series D Preferred Stock, shall have converted into Parent Common Stock in accordance with the Parent's Certificate of Incorporation; provided, however, if the Company so requests, shares of Parent Series D Preferred Stock shall have also converted to Parent Common Stock. (g) BOARD OF DIRECTORS. Parent shall have amended its Bylaws so as to increase the number of Directors on its Board of Directors from four to eight. Parent shall have taken all corporate actions to ensure that immediately upon the Closing, the Board of Directors of Parent consists of Jim Clark, John Doerr, Richard Kramlich, W. Michael Long, P. E. Sadler, Michael K. Hoover, Tadakata Yamada and one other person to be designated by the Company prior to the Closing Date. (h) INDEMNIFICATION. The Articles of Incorporation of Merger Sub shall contain officer and director indemnification provisions that are substantially similar to the officer and 54 director indemnification provisions contained in the Company's Articles of Incorporation in the form delivered to Parent on the date of this Agreement. (i) DUE DILIGENCE INVESTIGATION. Company shall have completed its due diligence investigation of Parent to Company's reasonable satisfaction, provided that no information or knowledge obtained in such investigation shall affect or be deemed to modify any representation or warranty of Parent contained herein. In this regard, Company's due diligence investigation shall be conclusively deemed to have been completed to Company's reasonable satisfaction in the event that the preliminary Parent Schedules attached hereto are not subsequently modified, or otherwise do not require subsequent modification in order to make Parent's representations and warranties true and correct in all material respects on and as of the Closing Date. (j) PARENT 1997 FINANCIAL STATEMENTS. Parent shall have completed and delivered to the Company a copy of its audited financial statements for the year ended December 31, 1997. 6.3 ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF PARENT AND MERGER SUB. The obligations of Parent and Merger Sub to consummate the Merger and the transactions contemplated by this Agreement shall be subject to the satisfaction at or prior to the Closing of each of the following conditions, any of which may be waived, in writing, exclusively by Parent: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects on and as of the Closing Date, except for changes contemplated by this Agreement and except for those representations and warranties which address matters only as of a particular date (which shall remain true and correct as of such date), with the same force and effect as if made on and as of the Closing Date, except for those representations and warranties that are qualified by references to "material" or "Material Adverse Effect" which all shall be true and correct in all respects, and except, in all such cases, for such breaches, inaccuracies or omissions of such representations and warranties which have neither had nor reasonably would be expected to have a Material Adverse Effect on the Company or Parent; and Parent and Merger Sub shall have received a certificate to such effect signed on behalf of the Company by the chief executive officer and chief financial officer of the Company. (b) AGREEMENTS AND COVENANTS. The Company shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Effective Time, and Parent and Merger Sub shall have received a certificate to such effect signed by a duly authorized officer of the Company. (c) LEGAL OPINION. Parent shall have received a legal opinion from Alston & Bird LLP, legal counsel to the Company, in form and substance reasonably acceptable to counsel of Parent. 55 (d) MATERIAL ADVERSE CHANGE. There shall not have occurred any material adverse change in the business, assets (including intangible assets) financial condition or results of operations of the Company since the date of the Company Current Balance Sheet. (e) NO ELECTION TO TREAT AS LIQUIDATION. Prior to the Closing Date, there shall have been no election made by the holders of a majority of the Company's Preferred Stock, in accordance with Section 3.2 of the Company's Articles of Incorporation, to treat the Merger as a liquidation, dissolution or winding up of the Company in accordance with such Articles of Incorporation. (f) NO DISSENTERS. Holders of more than five (5%) of the outstanding shares of Company Capital Stock shall not have exercised, nor shall they have any continued right to exercise, dissenters' rights under applicable law with respect to their shares by virtue of the Merger. (g) THIRD-PARTY CONSENTS. Parent shall have been furnished with evidence satisfactory to it that the Company has obtained the consents, approvals and waivers set forth in Schedule 6.3(j). (h) DUE DILIGENCE INVESTIGATION. Parent shall have completed its due diligence investigation of the Company to Parent's reasonable satisfaction, provided that no information or knowledge obtained in such investigation shall affect or be deemed to modify any representation or warranty of the Company contained herein. In this regard, Parent's due diligence investigation shall be conclusively deemed to have been completed to Parent's reasonable satisfaction in the event that the preliminary Company Schedules attached hereto are not subsequently modified, or otherwise do not require subsequent modification, in order to make the Company's representations and warranties true and correct in all material respects on and as of the Closing Date. (i) COMPANY 1997 FINANCIAL STATEMENTS. The Company shall have completed and delivered to Parent a copy of its audited financial statements for the year ended December 31, 1997. ARTICLE VII NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES 7.1 NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of the representations and warranties of the Company, Parent and Merger Sub contained in this Agreement or in any instrument delivered pursuant to this Agreement (each as modified by the corresponding schedules thereto) shall terminate at the Effective Time. ARTICLE VIII 56 TERMINATION, AMENDMENT AND WAIVER 8.1 TERMINATION. Except as provided in Section 8.2 below, this Agreement may be terminated and the Merger abandoned at any time prior to the Effective Time: (a) by mutual consent of the Company and Parent; (b) by Parent or the Company if: (i) the Effective Time has not occurred before 5:00 p.m. (Pacific time) on May 15, 1998 (provided that (A) the right to terminate this Agreement under this clause 8.1(b)(i) shall not be available to any party whose failure to use its commercially reasonable efforts to fulfill any obligation hereunder has been the cause of, or resulted in, the failure of the Effective Time to occur on or before such date, and (B) such date shall be automatically extended where the failure to Close is a result of not obtaining HSR Clearance and the parties are continuing to pursue such clearance); (ii) there shall be a final nonappealable order of a federal or state court in effect preventing consummation of the Merger; or (iii) there shall be any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Merger by any governmental entity that would make consummation of the Merger illegal; (c) by Parent if there shall be any action taken, or any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Merger, by any Governmental Entity, which would: (i) prohibit Parent's or the Company's ownership or operation of all or any portion of the business of the Company or (ii) compel Parent or the Company to dispose of or hold separate all or a portion of the business or assets of the Company or Parent as a result of the Merger; (d) by Parent if it is not in material breach of its obligations under this Agreement and there has been a breach of any representation, warranty, covenant or agreement contained in this Agreement on the part of the Company and (i) such breach has not been cured within thirty (30) days after written notice to the Company (provided that, no cure period shall be required for a breach which by its nature cannot be cured), and (ii) as a result of such breach the conditions set forth in Section 6.3(a) or 6.3(b), as the case may be, would not then be satisfied; or (e) by the Company if it is not in material breach of its obligations under this Agreement and there has been a breach of any representation, warranty, covenant or agreement contained in this Agreement on the part of Parent or Merger Sub and (i) such breach has not been cured within thirty (30) days after written notice to Parent (provided that, no cure period shall be required for a breach which by its nature cannot be cured), and (ii) as a result of such breach the conditions set forth in Section 6.2(a) or 6.2(b), as the case may be, would not then be satisfied. Where action is taken to terminate this Agreement pursuant to this Section 8.1, it shall be sufficient for such action to be authorized by the Board of Directors (as applicable) of the party taking such action. 57 8.2 EFFECT OF TERMINATION. In the event of termination of this Agreement as provided in Section 8.1, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of Parent, Merger Sub or the Company, or their respective officers, directors or shareholders, provided that each party shall remain liable for any breaches of this Agreement prior to its termination; and provided further that, the provisions of Sections 5.3 and 5.4 and Article VIII of this Agreement shall remain in full force and effect and survive any termination of this Agreement. 8.3 AMENDMENT. Except as is otherwise required by applicable law after the shareholders of the Company and the Stockholders of Parent approve this Agreement, this Agreement may be amended by the parties hereto at any time by execution of an instrument in writing signed on behalf of each of the parties hereto. 8.4 EXTENSION; WAIVER. At any time prior to the Effective Time, Parent and Merger Sub, on the one hand, and the Company, on the other, may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations of the other party hereto, (ii) waive any inaccuracies in the representations and warranties made to such party contained herein or in any document delivered pursuant hereto, and (iii) waive compliance with any of the agreements or conditions for the benefit of such party contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. ARTICLE IX GENERAL PROVISIONS 9.1 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by commercial delivery service, or mailed by registered or certified mail (return receipt requested) or sent via facsimile (with acknowledgment of complete transmission) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (i) if to Parent or Merger Sub, to: Healtheon Corporation 87 Encina Palo Alto, CA 94301 Attention: W. Michael Long Telephone No.: (650) 614-0200 Facsimile No.: (650) 614-3300 58 with a copy to: Wilson Sonsini Goodrich & Rosati, P.C. 650 Page Mill Road Palo Alto, California 94304 Attention: Steven E. Bochner, Esq. Jeffrey A. Herbst, Esq. Telephone No.: (415) 493-9300 Facsimile No.: (415) 493-6811 (ii) if to the Company, to: ActaMed Corporation 7000 Central Parkway, Suite 600 Atlanta, Georgia 30328 Attention: Michael K. Hoover Telephone No.: (770) 352-1600 Facsimile No.: (770) 352-1601 with a copy to: Alston & Bird 1201 W. Peachtree Street Atlanta, Georgia 30309 Attention: George M. Maxwell, Jr. Telephone No.: (404) 881-7570 Facsimile No.: (404) 881-7777 9.2 INTERPRETATION. The words "include," "includes" and "including" when used herein shall be deemed in each case to be followed by the words "without limitation." The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 9.3 COUNTERPARTS. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party, it being understood that all parties need not sign the same counterpart. 9.4 ENTIRE AGREEMENT; ASSIGNMENT. This Agreement, the Schedules and Exhibits hereto, and the documents and instruments and other agreements among the parties hereto referenced herein: (a) constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof; (b) are not intended to confer upon any other person any rights 59 or remedies hereunder (except with respect to Section 5.17); and (c) shall not be assigned by operation of law or otherwise except as otherwise specifically provided, except that Parent and Merger Sub may assign their respective rights and delegate their respective obligations hereunder to their respective Affiliates. 9.5 SEVERABILITY. In the event that any provision of this Agreement or the application thereof, becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement will continue in full force and effect and the application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. The parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of such void or unenforceable provision. 9.6 OTHER REMEDIES. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such party, and the exercise by a party of any one remedy will not preclude the exercise of any other remedy. 9.7 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. 9.8 RULES OF CONSTRUCTION. The parties hereto agree that they have been represented by counsel during the negotiation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document. 9.9 SPECIFIC PERFORMANCE. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court of the United States or any state having jurisdiction, this being in addition to any other remedy to which they are entitled at law or in equity. 60 IN WITNESS WHEREOF, Parent, Merger Sub, and the Company have caused this Agreement to be signed by their duly authorized respective officers and representatives, all as of the date first written above. ACTAMED CORPORATION HEALTHEON CORPORATION By /s/ Michael Hoover By /s/ W. Michael Long --------------------------- ----------------------------- Name: Michael Hoover Name: W. Michael Long Title: President and Chief Title: President and Chief Executive Officer Executive Officer MEDNET ACQUISITION CORP. By /s/ W. Michael Long ----------------------------- Name: W. Michael Long Title: President ***REORGANIZATION AGREEMENT** EX-3.1 3 EX-3.1 EXHIBIT 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF HEALTHEON CORPORATION (PURSUANT TO SECTIONS 242 AND 245 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE) Healtheon Corporation, a corporation organized and existing under the General Corporation Law of the State of Delaware (the "General Corporation Law") DOES HEREBY CERTIFY: FIRST: That this corporation was originally incorporated on December 26, 1995 under the name Healthscape Corporation, pursuant to the General Corporation Law. The corporation changed its name to "Healtheon Corporation" on June 17, 1996. SECOND: The Restated Certificate of Incorporation of Healtheon Corporation, in the form set forth below, has been duly adopted in accordance with the provisions of Sections 228, 242, and 245 of the General Corporation Law by the directors and the stockholders of the corporation. THIRD: The Restated Certificate of Incorporation, as so adopted, reads in full as set forth below: ARTICLE I The name of this corporation is Healtheon Corporation. ARTICLE II The address of the registered office of this corporation in the State of Delaware is 15 East North Street, Dover, County of Kent, Delaware 19901. The name of its registered agent at such address is Incorporating Services, Ltd. ARTICLE III The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE IV This corporation is authorized to issue one class of stock to be designated "Common Stock." The total number of shares that this corporation is authorized to issue is 75,000,000 with a par value of $0.0001 per share. ARTICLE V To the fullest extent permitted by the General Corporation Law as the same exists or as may hereafter be amended, a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach fiduciary duty as a director. The corporation shall indemnify to the fullest extent permitted by law any person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he, his testator or intestate is or was a director or officer of the corporation or any predecessor or the corporation or serves or served at any other enterprise as a director, officer or employee at the request of the corporation or any predecessor to the corporation. Neither any amendment nor repeal of this Article V, nor the adoption of any provision of this Restated Certificate of Incorporation inconsistent with this Article V, shall eliminate or reduce the effect of this Article V, in respect of any matter occurring, or any cause of action, suit, claim or proceeding that, but for this Article V, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. ARTICLE VI This corporation reserves the right to amend, alter, change or repeal any provision contained in this Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute or this Restated Certificate of Incorporation, and all rights conferred upon stockholders herein are granted subject to this reservation. ARTICLE VII In furtherance and not in limitation of powers conferred by statute, the Board of Directors is expressly authorized to make, alter, amend or repeal the Bylaws of the corporation. ARTICLE VIII The number of directors which constitute the whole Board of Directors of the corporation shall be as specified in the Bylaws of the corporation. ARTICLE IX Elections of directors need not be by written ballot unless the Bylaws of this corporation shall so provide. ARTICLE X Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of this corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of this corporation. ARTICLE XI This corporation is to have perpetual existence. *** FOURTH: That said amendments were duly adopted in accordance with the provisions of Sections 242 and 245 of the General Corporation Law. I hereby further declare and certify under penalty of perjury under the laws of the State of Delaware that the facts set forth in the foregoing certificate are true and correct of my own knowledge and that this certificate is my act and deed. IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been signed by the President of this corporation this 19th day of May 1998. Healtheon Corporation By: /s/ W. Michael Long --------------------------- W. Michael Long President Attest: By: /s/ Denise M. Shea ----------------------------- Denise M. Shea Secretary EX-3.2 4 EX-3.2 EXHIBIT 3.2 HEALTHEON CORPORATION a Delaware corporation AMENDED AND RESTATED CERTIFICATE OF INCORPORATION (PURSUANT TO SECTIONS 242 AND 245 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE) Healtheon Corporation, a corporation organized and existing under the General Corporation Law of the State of Delaware (the "General Corporation Law") DOES HEREBY CERTIFY: FIRST: That this corporation was originally incorporated on December 26, 1995 under the name Healthscape Corporation, pursuant to the General Corporation Law. The corporation changed its name to "Healtheon Corporation" on June 17, 1996. SECOND: The Restated Certificate of Incorporation of Healtheon Corporation, in the form set forth below, has been duly adopted in accordance with the provisions of Sections 228, 242, and 245 of the General Corporation Law by the directors and the stockholders of the corporation. THIRD: The Restated Certificate of Incorporation, as so adopted, reads in full as set forth below: ARTICLE I The name of this corporation is Healtheon Corporation. ARTICLE II The address of the registered office of this corporation in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle, State of Delaware. The name of the registered agent of the corporation at such location is The Corporation Trust Company. ARTICLE III The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE IV This corporation is authorized to issue one class of stock to be designated "Common Stock" and another class of stock to be designated "Preferred Stock," the rights, preferences and privileges of which may from time to time be determined by the Board of Directors. The total number of shares of Common Stock that this corporation is authorized to issue is 150,000,000 with a par value of $0.0001 per share. The total number of shares of Preferred Stock that this corporation is authorized to issue is 5,000,000 with a par value of $0.0001 per share. ARTICLE V To the fullest extent permitted by the General Corporation Law as the same exists or as may hereafter be amended, a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. The corporation shall indemnify to the fullest extent permitted by law any person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he, his testator or intestate is or was a director or officer of the corporation or any predecessor or the corporation or serves or served at any other enterprise as a director, officer or employee at the request of the corporation or any predecessor to the corporation. Neither any amendment nor repeal of this Article V, nor the adoption of any provision of this Restated Certificate of Incorporation inconsistent with this Article V, shall eliminate or reduce the effect of this Article V, in respect of any matter occurring, or any cause of action, suit, claim or proceeding that, but for this Article V, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. ARTICLE VI This corporation reserves the right to amend, alter, change or repeal any provision contained in this Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute or this Restated Certificate of Incorporation, and all rights conferred upon stockholders herein are granted subject to this reservation. ARTICLE VII In furtherance and not in limitation of powers conferred by statute, the Board of Directors is expressly authorized to make, alter, amend or repeal the Bylaws of the corporation. ARTICLE VIII Section 1. At any time following the closing of the first sale of Common Stock of the Corporation pursuant to a registration statement declared effective by the Securities and Exchange Corporation under the Securities Act of 1933, as amended, stockholders of the Corporation may not take any action by written consent in lieu of a meeting and any action contemplated by stockholders after such time must be taken at a duly called annual or special meeting of stockholders. Section 2. The number of directors which constitute the whole Board of Directors of the Corporation shall be fixed exclusively by one or more resolution adopted from time to time by the Board of Directors. The Board of Directors shall be divided into three classes designated as Class I, Class II, and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. At the first annual meeting of stockholders following the date hereof, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the date hereof, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At the third annual meeting of stockholders following the date hereof, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. Section 3. Advance notice of new business and stockholder nominations for the election of directors shall be given in the manner and to the extent provided in the Bylaws of the Corporation. ARTICLE IX Elections of directors need not be by written ballot unless the Bylaws of this corporation shall so provide. ARTICLE X Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of this corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of this corporation. ARTICLE XI This corporation is to have perpetual existence. *** FOURTH: That said amendments were duly adopted in accordance with the provisions of Sections 242 and 245 of the General Corporation Law. I hereby further declare and certify under penalty of perjury under the laws of the State of Delaware that the facts set forth in the foregoing certificate are true and correct of my own knowledge and that this certificate is my act and deed. IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been signed by the President of this corporation this ___ day of _______ 1998. Healtheon Corporation By: /s/ W. Michael Long --------------------------------- W. Michael Long Chief Executive Officer Attest: By: /s/ John L. Westermann III -------------------------------- John L. Westermann III Secretary EX-3.3 5 EX-3.3 EXHIBIT 3.3 BYLAWS OF HEALTHSCAPE CORPORATION TABLE OF CONTENTS
PAGE ARTICLE I - CORPORATE OFFICES. . . . . . . . . . . . . . . . . . . . . . . . . . . .1 1.1 REGISTERED OFFICE. . . . . . . . . . . . . . . . . . . . . . . . . . . .1 1.2 OTHER OFFICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 ARTICLE II - MEETINGS OF STOCKHOLDERS. . . . . . . . . . . . . . . . . . . . . . . .1 2.1 PLACE OF MEETINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . .1 2.2 ANNUAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 2.3 SPECIAL MEETING. . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 2.4 NOTICE OF STOCKHOLDERS' MEETINGS . . . . . . . . . . . . . . . . . . . .2 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE . . . . . . . . . . . . . .2 2.6 QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 2.7 ADJOURNED MEETING; NOTICE. . . . . . . . . . . . . . . . . . . . . . . .2 2.8 VOTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 2.9 WAIVER OF NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS. . . . . . .4 2.12 PROXIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE. . . . . . . . . . . . . . . . . .5 ARTICLE III - DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 3.1 POWERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 3.2 NUMBER OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . . .5 3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 3.4 RESIGNATION AND VACANCIES. . . . . . . . . . . . . . . . . . . . . . . .6 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE . . . . . . . . . . . . . . . .7 3.6 FIRST MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 3.7 REGULAR MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 3.8 SPECIAL MEETINGS; NOTICE . . . . . . . . . . . . . . . . . . . . . . . .8 3.9 QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 3.10 WAIVER OF NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 3.11 ADJOURNED MEETING; NOTICE. . . . . . . . . . . . . . . . . . . . . . . .8 3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING. . . . . . . . . . . .9 3.13 FEES AND COMPENSATION OF DIRECTORS . . . . . . . . . . . . . . . . . . .9 3.14 APPROVAL OF LOANS TO OFFICERS. . . . . . . . . . . . . . . . . . . . . .9 3.15 REMOVAL OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . .9 ARTICLE IV - COMMITTEES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.1 COMMITTEES OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . 10 4.2 COMMITTEE MINUTES. . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.3 MEETINGS AND ACTION OF COMMITTEES. . . . . . . . . . . . . . . . . . . 11 ARTICLE V - OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.1 OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.2 ELECTION OF OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.3 SUBORDINATE OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.4 REMOVAL AND RESIGNATION OF OFFICERS. . . . . . . . . . . . . . . . . . 12 5.5 VACANCIES IN OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . 12 5.6 CHAIRMAN OF THE BOARD. . . . . . . . . . . . . . . . . . . . . . . . . 12 5.7 PRESIDENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 5.8 VICE PRESIDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 5.9 SECRETARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 5.10 TREASURER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 5.11 ASSISTANT SECRETARY. . . . . . . . . . . . . . . . . . . . . . . . . . 14 5.12 ASSISTANT TREASURER. . . . . . . . . . . . . . . . . . . . . . . . . . 14 5.13 AUTHORITY AND DUTIES OF OFFICERS . . . . . . . . . . . . . . . . . . . 14 ARTICLE VI - INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS. . . . . . . . . . . . . . . 15 6.2 INDEMNIFICATION OF OTHERS. . . . . . . . . . . . . . . . . . . . . . . 15 6.3 INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 ARTICLE VII - RECORDS AND REPORTS. . . . . . . . . . . . . . . . . . . . . . . . . 16 7.1 MAINTENANCE AND INSPECTION OF RECORDS. . . . . . . . . . . . . . . . . 16 7.2 INSPECTION BY DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . 17 7.3 ANNUAL STATEMENT TO STOCKHOLDERS . . . . . . . . . . . . . . . . . . . 17 7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS . . . . . . . . . . . . 17 ARTICLE VIII - GENERAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . 17 8.1 CHECKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS . . . . . . . . . . . 18 8.3 STOCK CERTIFICATES; PARTLY PAID SHARES . . . . . . . . . . . . . . . . 18 8.4 SPECIAL DESIGNATION ON CERTIFICATES. . . . . . . . . . . . . . . . . . 18 8.5 LOST CERTIFICATES. . . . . . . . . . . . . . . . . . . . . . . . . . . 19 8.6 CONSTRUCTION; DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . 19 8.7 DIVIDENDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 8.8 FISCAL YEAR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 8.9 SEAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 8.10 TRANSFER OF STOCK. . . . . . . . . . . . . . . . . . . . . . . . . . . 20 8.11 STOCK TRANSFER AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . . 20 8.12 REGISTERED STOCKHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . 20 ARTICLE IX - AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 ARTICLE X - DISSOLUTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 ARTICLE XI - CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES. . . . . . . . . . . . . . 22 11.2 DUTIES OF CUSTODIAN. . . . . . . . . . . . . . . . . . . . . . . . . . 22
BYLAWS OF HEALTHSCAPE CORPORATION ARTICLE I CORPORATE OFFICES 1.1 REGISTERED OFFICE The registered office of the corporation shall be in the City of Dover, County of Kent, State of Delaware. The name of the registered agent of the corporation at such location is Incorporating Services, Ltd. 1.2 OTHER OFFICES The board of directors may at any time establish other offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF STOCKHOLDERS 2.1 PLACE OF MEETINGS Meetings of stockholders shall be held at any place, within or outside the State of Delaware, designated by the board of directors. In the absence of any such designation, stockholders' meetings shall be held at the registered office of the corporation. 2.2 ANNUAL MEETING The annual meeting of stockholders shall be held each year on a date and at a time designated by the board of directors. In the absence of such designation, the annual meeting of stockholders shall be held on the third Tuesday of April in each year at 10:00 a.m. However, if such day falls on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding full business day. At the meeting, directors shall be elected and any other proper business may be transacted. 2.3 SPECIAL MEETING A special meeting of the stockholders may be called, at any time for any purpose or purposes, by the board of directors or by such person or persons as may be authorized by the certificate of incorporation or the bylaws. 2.4 NOTICE OF STOCKHOLDERS' MEETINGS All notices of meetings with stockholders shall be in writing and shall be sent or otherwise given in accordance with Section 2.5 of these bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting. The notice shall specify the place, date, and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE Written notice of any meeting of stockholders, if mailed, is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. An affidavit of the secretary or an assistant secretary or of the transfer agent of the corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. 2.6 QUORUM The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum is not present or represented at any meeting of the stockholders, then the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed. 2.7 ADJOURNED MEETING; NOTICE When a meeting is adjourned to another time or place, unless these bylaws otherwise require, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 2.8 VOTING The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.11 of these bylaws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners of stock and to voting trusts and other voting agreements). Except as provided in the last paragraph of this Section 2.8, or as may be otherwise provided in the certificate of incorporation, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder. 2.9 WAIVER OF NOTICE Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such -2- meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice unless so required by the certificate of incorporation or these bylaws. 2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING Unless otherwise provided in the certificate of incorporation, any action required by this chapter to be taken at any annual or special meeting of stockholders of a corporation, or any action that may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice, and without a vote if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. If the action which is consented to is such as would have required the filing of a certificate under any section of the General Corporation Law of Delaware if such action had been voted on by stockholders at a meeting thereof, then the certificate filed under such section shall state, in lieu of any statement required by such section concerning any vote of stockholders, that written notice and written consent have been given as provided in Section 228 of the General Corporation Law of Delaware. 2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. If the board of directors does not so fix a record date: (i) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (ii) The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the board of directors is necessary, shall be the day on which the first written consent is expressed. (iii) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. -3- 2.12 PROXIES Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by a written proxy, signed by the stockholder and filed with the secretary of the corporation, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the stockholder or the stockholder's attorney-in-fact. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(c) of the General Corporation Law of Delaware. 2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE The officer who has charge of the stock ledger of a corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. ARTICLE III DIRECTORS 3.1 POWERS Subject to the provisions of the General Corporation Law of Delaware and any limitations in the certificate of incorporation or these bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. 3.2 NUMBER OF DIRECTORS The number of directors of the corporation shall be not less than three (3) nor more than five (5). The exact number of directors shall be four (4). This number may be changed, within the limits specified above, by a duly adopted amendment to the certificate of incorporation or by an amendment to this bylaw duly adopted by the vote or written consent of the holders of a majority of the stock issued and outstanding and entitled to vote or by resolution of a majority of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. 3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS -4- Except as provided in Section 3.4 of these bylaws, directors shall be elected at each annual meeting of stockholders to hold office until the next annual meeting. Directors need not be stockholders unless so required by the certificate of incorporation or these bylaws, wherein other qualifications for directors may be prescribed. Each director, including a director elected to fill a vacancy, shall hold office until his successor is elected and qualified or until his earlier resignation or removal. Elections of directors need not be by written ballot. 3.4 RESIGNATION AND VACANCIES Any director may resign at any time upon written notice to the corporation. When one or more directors so resigns and the resignation is effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in this section in the filling of other vacancies. Unless otherwise provided in the certificate of incorporation or these bylaws: (i) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. (ii) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the certificate of incorporation or these bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware. If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten (10) percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the General Corporation Law of Delaware as far as applicable. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE The board of directors of the corporation may hold meetings, both regular and special, either within or outside the State of Delaware. -5- Unless otherwise restricted by the certificate of incorporation or these bylaws, members of the board of directors, or any committee designated by the board of directors, may participate in a meeting of the board of directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 3.6 FIRST MEETINGS The first meeting of each newly elected board of directors shall be held at such time and place as shall be fixed by the vote of the stockholders at the annual meeting and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the stockholders to fix the time or place of such first meeting of the newly elected board of directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the board of directors, or as shall be specified in a written waiver signed by all of the directors. 3.7 REGULAR MEETINGS Regular meetings of the board of directors may be held without notice at such time and at such place as shall from time to time be determined by the board. 3.8 SPECIAL MEETINGS; NOTICE Special meetings of the board of directors may be called by the president on three (3) days' notice to each director, either personally or by mail, telegram, telex, or telephone; special meetings shall be called by the president or secretary in like manner and on like notice on the written request of two (2) directors unless the board consists of only one (1) director, in which case special meetings shall be called by the president or secretary in like manner and on like notice on the written request of the sole director. 3.9 QUORUM At all meetings of the board of directors, a majority of the authorized number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum is not present at any meeting of the board of directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. 3.10 WAIVER OF NOTICE Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors, or members of a committee of directors, need be specified in any written waiver of notice unless so required by the certificate of incorporation or these bylaws. -6- 3.11 ADJOURNED MEETING; NOTICE If a quorum is not present at any meeting of the board of directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. 3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the board of directors, or of any committee thereof, may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the board or committee. 3.13 FEES AND COMPENSATION OF DIRECTORS Unless otherwise restricted by the certificate of incorporation or these bylaws, the board of directors shall have the authority to fix the compensation of directors. 3.14 APPROVAL OF LOANS TO OFFICERS The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the board of directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in this section contained shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. 3.15 REMOVAL OF DIRECTORS Unless otherwise restricted by statute, by the certificate of incorporation or by these bylaws, any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director's term of office. ARTICLE IV COMMITTEES 4.1 COMMITTEES OF DIRECTORS The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, with each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously -7- appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors or in the bylaws of the corporation, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority to (i) amend the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation), (ii) adopt an agreement of merger or consolidation under Sections 251 or 252 of the General Corporation Law of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, (iv) recommend to the stockholders a dissolution of the corporation or a revocation of a dissolution, or (v) amend the bylaws of the corporation; and, unless the board resolution establishing the committee, the bylaws or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. 4.2 COMMITTEE MINUTES Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. 4.3 MEETINGS AND ACTION OF COMMITTEES Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these bylaws, Section 3.5 (place of meetings and meetings by telephone), Section 3.7 (regular meetings), Section 3.8 (special meetings and notice), Section 3.9 (quorum), Section 3.10 (waiver of notice), Section 3.11 (adjournment and notice of adjournment), and Section 3.12 (action without a meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may also be called by resolution of the board of directors and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. ARTICLE V OFFICERS 5.1 OFFICERS The officers of the corporation shall be a president, one or more vice presidents, a secretary, and a treasurer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more assistant vice presidents, assistant secretaries, assistant treasurers, and any such other officers as may be appointed in accordance with the provisions of Section 5.3 of these bylaws. Any number of offices may be held by the same person. -8- 5.2 ELECTION OF OFFICERS The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Sections 5.3 or 5.5 of these bylaws, shall be chosen by the board of directors, subject to the rights, if any, of an officer under any contract of employment. 5.3 SUBORDINATE OFFICERS The board of directors may appoint, or empower the president to appoint, such other officers and agents as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws or as the board of directors may from time to time determine. 5.4 REMOVAL AND RESIGNATION OF OFFICERS Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the board of directors at any regular or special meeting of the board or, except in the case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 VACANCIES IN OFFICES Any vacancy occurring in any office of the corporation shall be filled by the board of directors. 5.6 CHAIRMAN OF THE BOARD The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise and perform such other powers and duties as may from time to time be assigned to him by the board of directors or as may be prescribed by these bylaws. If there is no president, then the chairman of the board shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.7 of these bylaws. 5.7 PRESIDENT Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the president shall be the chief executive officer of the corporation and shall, subject to the control of the board of directors, have general supervision, direction, and control of the business and the officers of the corporation. He shall preside at all meetings of the shareholders and, in the absence or nonexistence of a chairman of the board, at all meetings of the board of directors. He shall have the general powers and duties of management usually vested in the office of president of a corporation and shall have such other powers and duties as may be prescribed by the board of directors or these bylaws. -9- 5.8 VICE PRESIDENT In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors, these bylaws, the president or the chairman of the board. 5.9 SECRETARY The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and shareholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at shareholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the board of directors required to be given by law or by these bylaws. He shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these bylaws. 5.10 TREASURER The treasurer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The treasurer shall deposit all money and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all of his transactions as treasurer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. 5.11 ASSISTANT SECRETARY The assistant secretary, or, if there is more than one, the assistant secretaries in the order determined by the stockholders or board of directors (or if there be no such determination, then in the order of their election) shall, in the absence of the secretary or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the board of directors or the stockholders may from time to time prescribe. -10- 5.12 ASSISTANT TREASURER The assistant treasurer, or, if there is more than one, the assistant treasurers, in the order determined by the stockholders or board of directors (or if there be no such determination, then in the order of their election), shall, in the absence of the treasurer or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the board of directors or the stockholders may from time to time prescribe. 5.13 AUTHORITY AND DUTIES OF OFFICERS In addition to the foregoing authority and duties, all officers of the corporation shall respectively have such authority and perform such duties in the management of the business of the corporation as may be designated from time to time by the board of directors or the stockholders. ARTICLE VI INDEMNITY 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS The corporation shall, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, indemnify each of its directors and officers against expenses (including attorneys' fees), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.1, a "director" or "officer" of the corporation includes any person (i) who is or was a director or officer of the corporation, (ii) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.2 INDEMNIFICATION OF OTHERS The corporation shall have the power, to the extent and in the manner permitted by the General Corporation Law of Delaware, to indemnify each of its employees and agents (other than directors and officers) against expenses (including attorneys' fees), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.2, an "employee" or "agent" of the corporation (other than a director or officer) includes any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.3 INSURANCE The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any -11- such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of the General Corporation Law of Delaware. ARTICLE VII RECORDS AND REPORTS 7.1 MAINTENANCE AND INSPECTION OF RECORDS The corporation shall, either at its principal executive office or at such place or places as designated by the board of directors, keep a record of its shareholders listing their names and addresses and the number and class of shares held by each shareholder, a copy of these bylaws as amended to date, accounting books, and other records. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. The officer who has charge of the stock ledger of a corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. 7.2 INSPECTION BY DIRECTORS Any director shall have the right to examine the corporation's stock ledger, a list of its stockholders, and its other books and records for a purpose reasonably related to his position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper. 7.3 ANNUAL STATEMENT TO STOCKHOLDERS -12- The board of directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. 7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS The chairman of the board, the president, any vice president, the treasurer, the secretary or assistant secretary of this corporation, or any other person authorized by the board of directors or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. ARTICLE VIII GENERAL MATTERS 8.1 CHECKS From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.3 STOCK CERTIFICATES; PARTLY PAID SHARES The shares of a corporation shall be represented by certificates, provided that the board of directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the board of directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by the chairman or vice-chairman of the board of directors, or the president or vice-president, and by the treasurer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. -13- The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 8.4 SPECIAL DESIGNATION ON CERTIFICATES If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 8.5 LOST CERTIFICATES Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and cancelled at the same time. The corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares. 8.6 CONSTRUCTION; DEFINITIONS Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Delaware General Corporation Law shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. 8.7 DIVIDENDS The directors of the corporation, subject to any restrictions contained in the certificate of incorporation, may declare and pay dividends upon the shares of its capital stock pursuant to the General Corporation Law of Delaware. Dividends may be paid in cash, in property, or in shares of the corporation's capital stock. The directors of the corporation may set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the corporation, and meeting contingencies. -14- 8.8 FISCAL YEAR The fiscal year of the corporation shall be fixed by resolution of the board of directors and may be changed by the board of directors. 8.9 SEAL The seal of the corporation shall be such as from time to time may be approved by the board of directors. 8.10 TRANSFER OF STOCK Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in its books. 8.11 STOCK TRANSFER AGREEMENTS The corporation shall have power to enter into and perform any agreement with any number of shareholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware. 8.12 REGISTERED STOCKHOLDERS The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments the person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE IX AMENDMENTS The original or other bylaws of the corporation may be adopted, amended or repealed by the stockholders entitled to vote; provided, however, that the corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors. The fact that such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal bylaws. ARTICLE X -15- DISSOLUTION If it should be deemed advisable in the judgment of the board of directors of the corporation that the corporation should be dissolved, the board, after the adoption of a resolution to that effect by a majority of the whole board at any meeting called for that purpose, shall cause notice to be mailed to each stockholder entitled to vote thereon of the adoption of the resolution and of a meeting of stockholders to take action upon the resolution. At the meeting a vote shall be taken for and against the proposed dissolution. If a majority of the outstanding stock of the corporation entitled to vote thereon votes for the proposed dissolution, then a certificate stating that the dissolution has been authorized in accordance with the provisions of Section 275 of the General Corporation Law of Delaware and setting forth the names and residences of the directors and officers shall be executed, acknowledged, and filed and shall become effective in accordance with Section 103 of the General Corporation Law of Delaware. Upon such certificate's becoming effective in accordance with Section 103 of the General Corporation Law of Delaware, the corporation shall be dissolved. Whenever all the stockholders entitled to vote on a dissolution consent in writing, either in person or by duly authorized attorney, to a dissolution, no meeting of directors or stockholders shall be necessary. The consent shall be filed and shall become effective in accordance with Section 103 of the General Corporation Law of Delaware. Upon such consent's becoming effective in accordance with Section 103 of the General Corporation Law of Delaware, the corporation shall be dissolved. If the consent is signed by an attorney, then the original power of attorney or a photocopy thereof shall be attached to and filed with the consent. The consent filed with the Secretary of State shall have attached to it the affidavit of the secretary or some other officer of the corporation stating that the consent has been signed by or on behalf of all the stockholders entitled to vote on a dissolution; in addition, there shall be attached to the consent a certification by the secretary or some other officer of the corporation setting forth the names and residences of the directors and officers of the corporation. ARTICLE XI CUSTODIAN 11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES The Court of Chancery, upon application of any stockholder, may appoint one or more persons to be custodians and, if the corporation is insolvent, to be receivers, of and for the corporation when: (i) at any meeting held for the election of directors the stockholders are so divided that they have failed to elect successors to directors whose terms have expired or would have expired upon qualification of their successors; or (ii) the business of the corporation is suffering or is threatened with irreparable injury because the directors are so divided respecting the management of the affairs of the corporation that the required vote for action by the board of directors cannot be obtained and the stockholders are unable to terminate this division; or (iii) the corporation has abandoned its business and has failed within a reasonable time to take steps to dissolve, liquidate or distribute its assets. -16- 11.2 DUTIES OF CUSTODIAN The custodian shall have all the powers and title of a receiver appointed under Section 291 of the General Corporation Law of Delaware, but the authority of the custodian shall be to continue the business of the corporation and not to liquidate its affairs and distribute its assets, except when the Court of Chancery otherwise orders and except in cases arising under Sections 226(a)(3) or 352(a)(2) of the General Corporation Law of Delaware. CERTIFICATE OF ADOPTION OF BYLAWS OF HEALTHSCAPE CORPORATION ADOPTION BY INCORPORATOR The undersigned person appointed in the Certificate of Incorporation to act as the Incorporator of HealthScape Corporation hereby adopts the foregoing bylaws, comprising twenty-two (22) pages, as the Bylaws of the corporation. Executed this 1st day of January 1996. /s/ Ivan J. Brockman ------------------------------ Ivan J. Brockman, Incorporator CERTIFICATE BY SECRETARY OF ADOPTION BY INCORPORATOR The undersigned hereby certifies that he is the duly elected, qualified, and acting Secretary of HealthScape Corporation and that the foregoing Bylaws, comprising twenty-two (22) pages, were adopted as the Bylaws of the corporation on January 1, 1996, by the person appointed in the Certificate of Incorporation to act as the Incorporator of the corporation. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed the corporate seal this 1st day of January 1996. /s/ Michael Curry ------------------------------ Michael Curry, Secretary CERTIFICATE OF AMENDMENT OF BYLAWS OF HEALTHEON CORPORATION Section 2.3 of the Bylaws of this corporation was amended, effective April 22, 1996, by the Board of Directors and a majority of the stockholders to provide in its entirety as follows: "ARTICLE II MEETING OF STOCKHOLDERS 2.3 SPECIAL MEETING A special meeting of the stockholders may be called at any time by the board of directors, or by the chairman of the board, or by the president, or by one or more stockholders holding shares in the aggregate entitled to cast not less than ten percent (10%) of the votes at the meeting. If a special meeting is called by any person or persons other than the board of directors or the president or the chairman of the board, then the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president, any vice president or the secretary of the corporation. The officer receiving the request shall cause notice to be promptly given to the stockholders entitled to vote, in accordance with the provisions of Section 2.4 and 2.5 of these bylaws, that a meeting will be held at the time requested by the person or persons calling the meeting, so long as that time is not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, then the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing or affecting the time when a meeting of stockholders called by action of the board of directors may be held." Dated: April 22, 1996 /s/ Michael S. Curry ------------------------------ Michael S. Curry, Secretary CERTIFICATE OF AMENDMENT OF BYLAWS OF HEALTHEON CORPORATION Section 3.2 of the Bylaws of this corporation was amended, effective May 19, 1998, by the Board of Directors and a majority of the stockholders to provide in its entirety as follows: "ARTICLE III DIRECTORS 3.2 NUMBER OF DIRECTORS The number of directors of the corporation shall be not less than six (6) nor more than eight (8). The exact number of directors shall be eight (8). This number may be changed, within the limits specified above, by a duly adopted amendment to the certificate of incorporation or by an amendment to this bylaw duly adopted by the vote or written consent of the holders of a majority of the stock issued and outstanding and entitled to vote or by resolution of a majority of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires." Dated: May 19, 1998 /s/ Kallen Chan -------------------------------- Kallen Chan, Assistant Secretary EX-3.4 6 EX-3.4 EXHIBIT 3.4 AMENDED AND RESTATED BYLAWS OF HEALTHEON CORPORATION TABLE OF CONTENTS
Page ----- ARTICLE I CORPORATE OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-1- 1.1 REGISTERED OFFICE . . . . . . . . . . . . . . . . . . . . . . . . . . .-1- 1.2 OTHER OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-1- ARTICLE II MEETINGS OF STOCKHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . .-1- 2.1 PLACE OF MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . .-1- 2.2 ANNUAL MEETING. . . . . . . . . . . . . . . . . . . . . . . . . . . . .-1- 2.3 SPECIAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . .-1- 2.4 NOTICE OF STOCKHOLDERS' MEETINGS. . . . . . . . . . . . . . . . . . . .-2- 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. . . . . . . . . . . . . .-2- 2.6 QUORUM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-2- 2.7 ADJOURNED MEETING; NOTICE . . . . . . . . . . . . . . . . . . . . . . .-2- 2.8 VOTING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-2- 2.9 WAIVER OF NOTICE. . . . . . . . . . . . . . . . . . . . . . . . . . . .-3- 2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING . . . . . . . .-3- 2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS . . . . . .-3- 2.12 PROXIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-4- 2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE . . . . . . . . . . . . . . . . .-4- ARTICLE III DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-5- 3.1 POWERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-5- 3.2 NUMBER OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . .-5- 3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS . . . . . . . .-5- 3.4 RESIGNATION AND VACANCIES . . . . . . . . . . . . . . . . . . . . . . .-6- 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE. . . . . . . . . . . . . . . .-6- 3.6 FIRST MEETINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .-6- 3.7 REGULAR MEETINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . .-6- 3.8 SPECIAL MEETINGS; NOTICE. . . . . . . . . . . . . . . . . . . . . . . .-6- 3.9 QUORUM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-6- 3.10 WAIVER OF NOTICE. . . . . . . . . . . . . . . . . . . . . . . . . . . .-7- 3.11 ADJOURNED MEETING; NOTICE . . . . . . . . . . . . . . . . . . . . . . .-7- 3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING . . . . . . . . . . .-7- 3.13 FEES AND COMPENSATION OF DIRECTORS. . . . . . . . . . . . . . . . . . .-7- 3.14 APPROVAL OF LOANS TO OFFICERS . . . . . . . . . . . . . . . . . . . . .-7- 3.15 REMOVAL OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . .-8- ARTICLE IV COMMITTEES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-8-
-i- TABLE OF CONTENTS (continued)
Page ----- 4.1 COMMITTEES OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . .-8- 4.2 COMMITTEE MINUTES . . . . . . . . . . . . . . . . . . . . . . . . . . .-8- 4.3 MEETINGS AND ACTION OF COMMITTEES . . . . . . . . . . . . . . . . . . .-9- 4.4 ADVISORY COMMITTEES . . . . . . . . . . . . . . . . . . . . . . . . . .-9- ARTICLE V OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-9- 5.1 OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .-9- 5.2 ELECTION OF OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . .-9- 5.3 SUBORDINATE OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . .-9- 5.4 REMOVAL AND RESIGNATION OF OFFICERS . . . . . . . . . . . . . . . . . -10- 5.5 VACANCIES IN OFFICES. . . . . . . . . . . . . . . . . . . . . . . . . -10- 5.6 CHAIRMAN OF THE BOARD . . . . . . . . . . . . . . . . . . . . . . . . -10- 5.7 CHIEF EXECUTIVE OFFICER . . . . . . . . . . . . . . . . . . . . . . . -10- 5.8 PRESIDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -10- 5.9 VICE PRESIDENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . -11- 5.10 SECRETARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -11- 5.11 CHIEF FINANCIAL OFFICER . . . . . . . . . . . . . . . . . . . . . . . -11- 5.13 ASSISTANT SECRETARY . . . . . . . . . . . . . . . . . . . . . . . . . -12- 5.14 ASSISTANT TREASURER . . . . . . . . . . . . . . . . . . . . . . . . . -12- 5.15 AUTHORITY AND DUTIES OF OFFICERS. . . . . . . . . . . . . . . . . . . -12- ARTICLE VI INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -12- 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS . . . . . . . . . . . . . . -12- 6.2 INDEMNIFICATION OF OTHERS . . . . . . . . . . . . . . . . . . . . . . -12- 6.3 INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -13- ARTICLE VII RECORDS AND REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . -13- 7.1 MAINTENANCE AND INSPECTION OF RECORDS . . . . . . . . . . . . . . . . -13- 7.2 INSPECTION BY DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . -14- 7.3 ANNUAL STATEMENT TO STOCKHOLDERS. . . . . . . . . . . . . . . . . . . -14- 7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS. . . . . . . . . . . . -14- ARTICLE VIII GENERAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -14- 8.1 CHECKS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -14- 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS. . . . . . . . . . . -14- 8.3 STOCK CERTIFICATES; PARTLY PAID SHARES. . . . . . . . . . . . . . . . -15- 8.4 SPECIAL DESIGNATION ON CERTIFICATES . . . . . . . . . . . . . . . . . -15-
-ii- TABLE OF CONTENTS (continued)
Page ----- 8.5 LOST CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . . -15- 8.6 CONSTRUCTION; DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . -16- 8.7 DIVIDENDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -16- 8.8 FISCAL YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -16- 8.9 SEAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -16- 8.10 TRANSFER OF STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . -16- 8.11 STOCK TRANSFER AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . -16- 8.12 REGISTERED STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . -16- ARTICLE IX AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -17- ARTICLE X DISSOLUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -17- ARTICLE XI CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -17- 11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES . . . . . . . . . . . . . -17- 11.2 DUTIES OF CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . . -18-
-iii- AMENDED AND RESTATED BYLAWS OF HEALTHEON CORPORATION ARTICLE I CORPORATE OFFICES 1.1 REGISTERED OFFICE The registered office of the corporation shall be at Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle, State of Delaware. The name of the registered agent of the corporation at such location is The Corporation Trust Company. 1.2 OTHER OFFICES The board of directors may at any time establish other offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF STOCKHOLDERS 2.1 PLACE OF MEETINGS Meetings of stockholders shall be held at any place, within or outside the State of Delaware, designated by the board of directors. In the absence of any such designation, stockholders' meetings shall be held at the principal office of the corporation. 2.2 ANNUAL MEETING The annual meeting of stockholders shall be held each year on a date and at a time designated by the board of directors. 2.3 SPECIAL MEETING A special meeting of the stockholders may be called, at any time by the board of directors, or by the president, or by one or more stockholders holding shares in the aggregate entitled to cast not less than ten percent (10%) of the votes at that meeting. If a special meeting is called by any person or persons other than the board of directors or the president or the chairman of the board, then the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president, any vice president or the secretary of the corporation. The officer receiving the request shall cause notice to be promptly given to the stockholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5 of these bylaws, that a meeting will be held at the time requested by the person or persons calling the meeting, so long as that time is not less than thirty-five nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, then the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing or affecting the time when a meeting of stockholders called by action of the board of directors may be held. 2.4 NOTICE OF STOCKHOLDERS' MEETINGS All notices of meetings with stockholders shall be in writing and shall be sent or otherwise given in accordance with Section 2.5 of these bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting. The notice shall specify the place, date, and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE Written notice of any meeting of stockholders, if mailed, is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. An affidavit of the secretary or an assistant secretary or of the transfer agent of the corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. 2.6 QUORUM The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum is not present or represented at any meeting of the stockholders, then the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed. 2.7 ADJOURNED MEETING; NOTICE When a meeting is adjourned to another time or place, unless these bylaws otherwise require, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 2.8 VOTING The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.11 of these bylaws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners of stock and to voting trusts and other voting agreements). Except as provided in the last paragraph of this Section 2.8, or as may be otherwise provided in the certificate of incorporation, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder. 2.9 WAIVER OF NOTICE Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice unless so required by the certificate of incorporation or these bylaws. 2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING Section 2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING of the Bylaws of this corporation was removed, in its entirety, effective as of the initial public offering of the corporation, by the Board of Directors. 2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. If the board of directors does not so fix a record date: (i) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (ii) The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the board of directors is necessary, shall be the day on which the first written consent is expressed. (iii) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. 2.12 PROXIES Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by a written proxy, signed by the stockholder and filed with the secretary of the corporation, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the stockholder or the stockholder's attorney-in-fact. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(c) of the General Corporation Law of Delaware. 2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE The officer who has charge of the stock ledger of a corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. 2.14 NOMINATIONS AND PROPOSALS Nominations of persons for election to the board of directors of the corporation and the proposal of business to be considered by the stockholders may be made at any meeting of stockholders only (a) pursuant to the corporation's notice of meeting, (b) by or at the direction of the board of directors or (c) by any stockholder of the corporation who was a stockholder of record at the time of giving of notice provided for in these bylaws, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 2.14. For nominations or other business to be properly brought before a stockholders meeting by a stockholder pursuant to clause (c) of the preceding sentence, the stockholder must have given timely notice thereof in writing to the secretary of the corporation and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder's notice shall be delivered to the secretary at the principal executive offices of the corporation not later than the close of business on the 60th day nor earlier than the close of business on the 90th day prior to the meeting; provided, however, that in the event that less than 65 days notice of the meeting is given to stockholders, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the seventh (7th) day following the day on which the notice of meeting was mailed. In no event shall the public announcement of an adjournment of a stockholders meeting commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (or any successor thereto) and Rule 14a-11 thereunder (or any successor thereto) (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the corporation's books, and of such beneficial owner, and (ii) the class and number of shares of the corporation which are owned beneficially and of record by such stockholder and such beneficial owner. Notwithstanding any provision herein to the contrary, no business shall be conducted at a stockholders meeting except in accordance with the procedures set forth in this Section 2.14. ARTICLE III DIRECTORS 3.1 POWERS Subject to the provisions of the General Corporation Law of Delaware and any limitations in the certificate of incorporation or these bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. 3.2 NUMBER OF DIRECTORS The number of directors of the corporation shall be not less than six (6) nor more than eight (8). The exact number of directors shall be eight (8). This number may be changed, within the limits specified above, by a duly adopted amendment to the certificate of incorporation or by an amendment to this bylaw duly adopted by the vote or written consent of the holders of a majority of the stock issued and outstanding and entitled to vote or by resolution of a majority of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. 3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS The Board of Directors shall be divided into three classes designated as Class I, Class II and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. At the first annual meeting of stockholders following the date hereof, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the date hereof, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At the third annual meeting of stockholders following the date hereof, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. Notwithstanding the foregoing provisions of this Section 3.3, each director shall serve until his or her successor is duly elected and qualified or until his or her death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. 3.4 RESIGNATION AND VACANCIES Any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal, or other causes shall, unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by stockholders, except as otherwise provided by law, be filled only by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors and not by the stockholders. Newly created directorships resulting from any increase in the number of directors shall, unless the Board of Directors determines by resolution that any such newly created directorship shall be filled by the stockholders, be filled only by the affirmative vote of the directors then in office, even though less than a quorum of the Board of Directors and not by the stockholders. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been elected and qualified. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE The board of directors of the corporation may hold meetings, both regular and special, either within or outside the State of Delaware. Unless otherwise restricted by the certificate of incorporation or these bylaws, members of the board of directors, or any committee designated by the board of directors, may participate in a meeting of the board of directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 3.6 FIRST MEETINGS The first meeting of each newly elected board of directors shall be held at such time and place as shall be determined by the directors. 3.7 REGULAR MEETINGS Regular meetings of the board of directors may be held without notice at such time and at such place as shall from time to time be determined by the board. 3.8 SPECIAL MEETINGS; NOTICE Special meetings of the board of directors may be called by the chief executive officer on three (3) days' notice to each director, either personally or by mail, telegram, telex, or telephone; special meetings shall be called by the president or secretary in like manner and on like notice on the written request of two (2) directors unless the board consists of only one (1) director, in which case special meetings shall be called by the president or secretary in like manner and on like notice on the written request of the sole director. 3.9 QUORUM At all meetings of the board of directors, a majority of the authorized number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum is not present at any meeting of the board of directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. 3.10 WAIVER OF NOTICE Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors, or members of a committee of directors, need be specified in any written waiver of notice unless so required by the certificate of incorporation or these bylaws. 3.11 ADJOURNED MEETING; NOTICE If a quorum is not present at any meeting of the board of directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. 3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the board of directors, or of any committee thereof, may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the board or committee. 3.13 FEES AND COMPENSATION OF DIRECTORS Unless otherwise restricted by the certificate of incorporation or these bylaws, the board of directors shall have the authority to fix the compensation of directors. 3.14 APPROVAL OF LOANS TO OFFICERS The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the board of directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in this section contained shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. 3.15 REMOVAL OF DIRECTORS Unless otherwise restricted by statute, by the certificate of incorporation or by these bylaws, any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director's term of office. ARTICLE IV COMMITTEES 4.1 COMMITTEES OF DIRECTORS The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, with each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors or in the bylaws of the corporation, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority to (i) amend the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation), (ii) adopt an agreement of merger or consolidation under Sections 251 or 252 of the General Corporation Law of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, (iv) recommend to the stockholders a dissolution of the corporation or a revocation of a dissolution, or (v) amend the bylaws of the corporation; and, unless the board resolution establishing the committee, the bylaws or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. 4.2 COMMITTEE MINUTES Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. 4.3 MEETINGS AND ACTION OF COMMITTEES Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these bylaws, Section 3.5 (place of meetings and meetings by telephone), Section 3.7 (regular meetings), Section 3.8 (special meetings and notice), Section 3.9 (quorum), Section 3.10 (waiver of notice), Section 3.11 (adjournment and notice of adjournment), and Section 3.12 (action without a meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may also be called by resolution of the board of directors and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. 4.4 ADVISORY COMMITTEES The board of directors may, by resolution passed by a majority of the whole board, designate one or more advisory committees, with each committee to consist of one or more of the directors of the corporation or any other such persons as the board may appoint. The board may designate one or more persons as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Members who are not board members shall not have the responsibilities or obligations of board members nor be deemed directors of the corporation for any other purpose. ARTICLE V OFFICERS 5.1 OFFICERS The officers of the corporation shall be a chief executive officer ("CEO"), a president, one or more vice presidents, a secretary, a chief financial officer ("CFO") and a treasurer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more assistant vice presidents, assistant secretaries, assistant treasurers, and any such other officers as may be appointed in accordance with the provisions of Section 5.3 of these bylaws. Any number of offices may be held by the same person. 5.2 ELECTION OF OFFICERS The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Sections 5.3 or 5.5 of these bylaws, shall be chosen by the board of directors, subject to the rights, if any, of an officer under any contract of employment. 5.3 SUBORDINATE OFFICERS The board of directors may appoint, or empower the CEO to appoint, such other officers and agents as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws or as the board of directors may from time to time determine. 5.4 REMOVAL AND RESIGNATION OF OFFICERS Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the board of directors at any regular or special meeting of the board or by any officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 VACANCIES IN OFFICES Any vacancy occurring in any office of the corporation shall be filled by the board of directors. 5.6 CHAIRMAN OF THE BOARD The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise and perform such other powers and duties as may from time to time be assigned to him by the board of directors or as may be prescribed by these bylaws. If there is no CEO, then the chairman of the board shall also be the CEO of the corporation and shall have the powers and duties prescribed in Section 5.7 of these bylaws. 5.7 CHIEF EXECUTIVE OFFICER Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the CEO of the corporation shall, subject to the control of the board of directors, have general supervision, direction, and control of the business and the officers of the corporation. He shall preside at all meetings of the stockholders and, in the absence or nonexistence of a chairman of the board, at all meetings of the board of directors. He shall have the general powers and duties of management usually vested in the CEO of a corporation, and shall have such other powers and duties as may be prescribed by the board of directors or these bylaws. 5.8 PRESIDENT The president may assume and perform the duties of the chief executive officer in the absence or disability of the chief executive officer or whenever the office of the chief executive officer is vacant. The president of the corporation shall exercise and perform such powers and duties as may from time to time be assigned to him by the board of directors, the CEO or as may be prescribed by these bylaws. The president shall have authority to execute in the name of the corporation bonds, contracts, deeds, leases and other written instruments to be executed by the corporation. In the absence or nonexistence of the chairman of the board and chief executive officer, he shall preside at all meetings of the stockholders and, in the absence or nonexistence of a chairman of the board and the chief executive officer, at all meetings of the board of directors and shall perform such other duties as the board of directors may from time to time determine. 5.9 VICE PRESIDENT In the absence or disability of the CEO and the president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors, these bylaws, the president or the chairman of the board. 5.10 SECRETARY The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and shareholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at shareholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the board of directors required to be given by law or by these bylaws. He shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these bylaws. 5.11 CHIEF FINANCIAL OFFICER The CFO shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The CFO shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. 5.12 TREASURER The treasurer shall deposit all money and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all of his transactions as treasurer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. 5.13 ASSISTANT SECRETARY The assistant secretary, or, if there is more than one, the assistant secretaries in the order determined by the stockholders or board of directors (or if there be no such determination, then in the order of their election) shall, in the absence of the secretary or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the board of directors or the stockholders may from time to time prescribe. 5.14 ASSISTANT TREASURER The assistant treasurer, or, if there is more than one, the assistant treasurers, in the order determined by the stockholders or board of directors (or if there be no such determination, then in the order of their election), shall, in the absence of the treasurer or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the board of directors or the stockholders may from time to time prescribe. 5.15 AUTHORITY AND DUTIES OF OFFICERS In addition to the foregoing authority and duties, all officers of the corporation shall respectively have such authority and perform such duties in the management of the business of the corporation as may be designated from time to time by the board of directors or the stockholders. ARTICLE VI INDEMNITY 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS The corporation shall, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, indemnify each of its directors and officers against expenses (including attorneys' fees), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.1, a "director" or "officer" of the corporation includes any person (i) who is or was a director or officer of the corporation or any subsidiary of the corporation, (ii) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the corporation or any of its subsidiaries or of another enterprise at the request of such predecessor corporation or subsidiary. 6.2 INDEMNIFICATION OF OTHERS The corporation shall have the power, to the extent and in the manner permitted by the General Corporation Law of Delaware, to indemnify each of its employees and agents (other than directors and officers) against expenses (including attorneys' fees), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.2, an "employee" or "agent" of the corporation (other than a director or officer) includes any person (i) who is or was an employee or agent of the corporation or any subsidiary of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or any of its subsidiaries or of another enterprise at the request of such predecessor corporation or subsidiary. 6.3 INSURANCE The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation or its subsidiaries as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of the General Corporation Law of Delaware. ARTICLE VII RECORDS AND REPORTS 7.1 MAINTENANCE AND INSPECTION OF RECORDS The corporation shall, either at its principal executive office or at such place or places as designated by the board of directors, keep a record of its shareholders listing their names and addresses and the number and class of shares held by each shareholder, a copy of these bylaws as amended to date, accounting books, and other records. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. The officer who has charge of the stock ledger of a corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. 7.2 INSPECTION BY DIRECTORS Any director shall have the right to examine the corporation's stock ledger, a list of its stockholders, and its other books and records for a purpose reasonably related to his position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper. 7.3 ANNUAL STATEMENT TO STOCKHOLDERS The board of directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. 7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS The chairman of the board, the CEO, the CFO or any other person authorized by the board of directors or the CEO, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. ARTICLE VII GENERAL MATTERS 8.1 CHECKS From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.3 STOCK CERTIFICATES; PARTLY PAID SHARES The shares of a corporation shall be represented by certificates, provided that the board of directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the board of directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by the chairman or vice-chairman of the board of directors, or the president or vice-president, and by the treasurer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 8.4 SPECIAL DESIGNATION ON CERTIFICATES If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 8.5 LOST CERTIFICATES Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and cancelled at the same time. The corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares. 8.6 CONSTRUCTION; DEFINITIONS Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Delaware General Corporation Law shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. 8.7 DIVIDENDS The directors of the corporation, subject to any restrictions contained in the certificate of incorporation, may declare and pay dividends upon the shares of its capital stock pursuant to the General Corporation Law of Delaware. Dividends may be paid in cash, in property, or in shares of the corporation's capital stock. The directors of the corporation may set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the corporation, and meeting contingencies. 8.8 FISCAL YEAR The fiscal year of the corporation shall be fixed by resolution of the board of directors and may be changed by the board of directors. 8.9 SEAL The seal of the corporation shall be such as from time to time may be approved by the board of directors. 8.10 TRANSFER OF STOCK Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in its books. 8.11 STOCK TRANSFER AGREEMENTS The corporation shall have power to enter into and perform any agreement with any number of shareholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware. 8.12 REGISTERED STOCKHOLDERS The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments the person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE IX AMENDMENTS The original or other bylaws of the corporation may be adopted, amended or repealed by the stockholders or the board of directors. ARTICLE X DISSOLUTION If it should be deemed advisable in the judgment of the board of directors of the corporation that the corporation should be dissolved, the board, after the adoption of a resolution to that effect by a majority of the whole board at any meeting called for that purpose, shall cause notice to be mailed to each stockholder entitled to vote thereon of the adoption of the resolution and of a meeting of stockholders to take action upon the resolution. At the meeting a vote shall be taken for and against the proposed dissolution. If a majority of the outstanding stock of the corporation entitled to vote thereon votes for the proposed dissolution, then a certificate stating that the dissolution has been authorized in accordance with the provisions of Section 275 of the General Corporation Law of Delaware and setting forth the names and residences of the directors and officers shall be executed, acknowledged, and filed and shall become effective in accordance with Section 103 of the General Corporation Law of Delaware. Upon such certificate's becoming effective in accordance with Section 103 of the General Corporation Law of Delaware, the corporation shall be dissolved. Whenever all the stockholders entitled to vote on a dissolution consent in writing, either in person or by duly authorized attorney, to a dissolution, no meeting of directors or stockholders shall be necessary. The consent shall be filed and shall become effective in accordance with Section 103 of the General Corporation Law of Delaware. Upon such consent's becoming effective in accordance with Section 103 of the General Corporation Law of Delaware, the corporation shall be dissolved. If the consent is signed by an attorney, then the original power of attorney or a photocopy thereof shall be attached to and filed with the consent. The consent filed with the Secretary of State shall have attached to it the affidavit of the secretary or some other officer of the corporation stating that the consent has been signed by or on behalf of all the stockholders entitled to vote on a dissolution; in addition, there shall be attached to the consent a certification by the secretary or some other officer of the corporation setting forth the names and residences of the directors and officers of the corporation. ARTICLE XI CUSTODIAN 11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES The Court of Chancery, upon application of any stockholder, may appoint one or more persons to be custodians and, if the corporation is insolvent, to be receivers, of and for the corporation when: (i) at any meeting held for the election of directors the stockholders are so divided that they have failed to elect successors to directors whose terms have expired or would have expired upon qualification of their successors; or (ii) the business of the corporation is suffering or is threatened with irreparable injury because the directors are so divided respecting the management of the affairs of the corporation that the required vote for action by the board of directors cannot be obtained and the stockholders are unable to terminate this division; or (iii) the corporation has abandoned its business and has failed within a reasonable time to take steps to dissolve, liquidate or distribute its assets. 11.2 DUTIES OF CUSTODIAN The custodian shall have all the powers and title of a receiver appointed under Section 291 of the General Corporation Law of Delaware, but the authority of the custodian shall be to continue the business of the corporation and not to liquidate its affairs and distribute its assets, except when the Court of Chancery otherwise orders and except in cases arising under Sections 226(a)(3) or 352(a)(2) of the General Corporation Law of Delaware. EX-10.3 7 EX-10.3 ACTAMED CORPORATION 1997 STOCK OPTION PLAN ARTICLE I GENERAL 1.1 PURPOSE OF THE PLAN. The purpose of the ActaMed Corporation 1997 Stock Option Plan (the "Plan") is to assist ActaMed Corporation (the "Company") in securing and retaining Key Employees and Consultants of outstanding ability by making it possible to offer them an increased incentive to advise, join or continue in the service of the Company and to increase their efforts for its welfare through participation or increased participation in the ownership and growth of the Company. 1.2 DEFINITIONS. (a) "BOARD OF DIRECTORS" or "BOARD" means the Board of Directors of the Company. (b) "CODE" means the Internal Revenue Code of 1986, as amended. (c) "COMMITTEE" means the committee referred to in Section 1.3. (d) "COMMON STOCK" means the common stock of the Company. (e) "CONSULTANT" means any person not employed by the Company rendering consulting or advisory services to the Company who is expected or determined by the Committee to contribute significantly to the management, growth or direction of some part or all of the business of the Company or its subsidiaries. The power to determine who is and who is not a Consultant for purposes of this Plan is reserved solely for the Committee. (f) "FAIR MARKET VALUE" means the closing price of the shares on a national securities exchange on which the Common Stock is primarily traded on the day on which such value is to be determined or, if no shares were traded on such day, on the next preceding day on which shares were traded, as reported by National Quotation Bureau, Inc. or other national quotation service. If the shares of Common Stock are traded in the over-the-counter market, "fair market value" means the closing "asked" price of the shares in the over-the-counter market on the day on which such value is to be determined or, if such "asked" price is not available, the last sales price on such day or, if no shares were traded on such day, on the next preceding day on which the shares were traded, as reported by the National Association of Securities Dealers Automatic Quotation System (NASDAQ) or other national quotation service. Nevertheless, if the Board of Directors determines that the fair market value of the Common Stock cannot be accurately determined pursuant to the methodologies described above or if shares of Common Stock are not traded on an exchange or in the over-the-counter market, Fair Market Value shall be the value determined by the Board of Directors or Committee administering the Plan, taking into consideration those factors affecting or reflecting value which they deem appropriate. (g) "INCENTIVE STOCK OPTION" means an option to purchase shares of Common Stock which is intended to qualify as an incentive stock option as defined in Section 422 of the Code and which may be granted solely to a Key Employee. (h) "KEY EMPLOYEE" means any person, including officers and directors in the regular employment of the Company or its subsidiaries, who is designated a Key Employee by the Committee and is or is expected to be primarily responsible for or to contribute significantly to the management, growth, or supervision of some part or all of the business of the Company or its subsidiaries. The power to determine who is and who is not a Key Employee is reserved solely for the Committee. (i) "NONQUALIFIED STOCK OPTION" means an option to purchase shares of Common Stock which is not intended to qualify as an incentive stock option as defined in Section 422 of the Code and which may be granted to Key Employees and Consultants. (j) "OPTION" means an Incentive Stock Option or a Nonqualified Stock Option. (k) "OPTIONEE" means a Key Employee or Consultant to whom an Option is granted under the Plan. (l) "PARENT" means any corporation which qualifies as a parent of a corporation under the definition of "parent corporation" contained in Section 424(e) of the Code. (m) "SUBSIDIARY" means any corporation which qualifies as a subsidiary of a corporation under the definition of "subsidiary corporation contained in Section 424(f) of the Code. (n) "TERM" means the period during which a particular Option may be exercised as determined by the Committee and as provided in the option agreement. 1.3 ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Compensation Committee (the "Committee") appointed by the Board of Directors consisting of at least three members from the Board of Directors. In the absence of an appointment of a Committee, the Board shall serve as the Committee. Subject to the control of the Board, and without limiting the control over decisions described in Section 1.7, the Committee shall have the power to interpret and apply the Plan and to make regulations for carrying out its purpose. More particularly, the Committee shall determine which Key Employees and Consultants shall be granted Options and the terms of such Options. When granting Options, the Committee shall designate the Option as either an Incentive Stock -2- Option or a Nonqualified Stock Option. Determinations by the Committee under the Plan (including, without limitation, determinations of the person to receive Options, the form, amount and timing of such Options, and the terms and provisions of such Options and the agreements evidencing same) need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, Options under the Plan, whether or not such persons are similarly situated. In serving on the Committee, members thereof shall be considered to be acting in their capacity as members of the Board of Directors and shall be entitled to all rights of indemnification provided by the Bylaws of the Company or otherwise to members of the Board of Directors. 1.4 SHARES SUBJECT TO THE PLAN. The total number of shares that may be purchased pursuant to Options under the Plan shall not exceed 500,000 shares of Common Stock. Shares subject to the Options which terminate or expire prior to exercise shall be available for future Options under the Plan without being charged against the limitation of 500,000 shares set forth above. Shares issued pursuant to the Plan may be either unissued shares of Common Stock or reacquired shares of Common Stock held in treasury. 1.5 TERMS AND CONDITIONS OF OPTIONS. All Options shall be evidenced by option agreements in such form as the Committee shall approve from time to time subject to the provisions of Article II and Article III, as appropriate, and the following provisions: (a) EXERCISE PRICE. Except as provided in Section 3.1, the exercise price of the Option shall not be less than the Fair Market Value (as determined by the Committee) of the Common Stock at the time the Option is granted. In making such determination, if the Board of Directors believes that the Company will engage in an initial public offering within 90 days of the date an Option is granted, the Board of Directors may designate the Fair Market Value as the initial offering price in such public offering after finding that such initial offering price will reflect an amount no less than the fair market value of the Common Stock on the date of Option grant. If the anticipated public offering does not occur within such 90 day period, the Board of Directors shall determine the Fair Market Value as of the date of the grant in the manner set forth in Section 1.2 hereof. (b) EXERCISE. The Committee shall determine whether the Option shall be exercisable in full at any time during the Term or in cumulative or noncumulative installments during the Term. (c) TERMINATION OF EMPLOYMENT. An Optionee's Option shall expire on the expiration of the Term specified in Section 2.1 or 3.1, as the case may be, or upon the occurrence of such events as are specified in the option agreement. If the option agreement permits exercise of the Option after termination of employment, the Optionee may exercise the Option only with respect to the shares which could have been purchased by the Optionee at the date of termination of employment. However, the Committee may, but is not required to, waive any requirements made -3- pursuant to Section 1.5(b) so that some or all of the shares subject to the Option may be exercised within the time limitation described in this subsection. An Optionee's employment shall be deemed to terminate on the last date for which he receives a regular wage or salary payment. Whether military, government or other service or other leave of absence shall constitute a termination of employment shall be determined in each case by the Committee at its discretion, and any determination by the Committee shall be final and conclusive. A termination of employment shall not occur where the Optionee transfers from the Company to one of its Subsidiaries or transfers from a Subsidiary to the Company or transfers between Subsidiaries. (d) DEATH OR DISABILITY. Upon termination of an Optionee's employment by reason of death or disability (as determined by the Committee consistent with the definition of Section 422(c)(6) of the Code), the Option shall expire on the earlier of the expiration of (i) the date specified in the option agreement which in no event shall be later than 12 months after the date of such termination, or (ii) the Term specified in Section 2.1 or 3.1, as the case may be. The Optionee or his successor in interest, as the case may be, may exercise the Option only as to the shares that could have been purchased by the Optionee at the date of his termination of employment. However, the Committee may, but is not required to, waive any requirements made pursuant to Section 1.5(b) so that some or all of the shares subject to the Option may be exercised within the time limitation described in this subsection. (e) PAYMENT. Payment for shares as to which an Option is exercised shall be made in such manner and at such time or times as shall be provided in the option agreement, including cash, Common Stock of the Company which was previously acquired by the Optionee, or any combination thereof. The Fair Market Value of the surrendered Common Stock as of the date of exercise shall be determined in valuing Common Stock used in payment for Options. (f) NONTRANSFERABILITY. No Option granted under the Plan shall be transferable other than by will or by the laws of descent and distribution. During the lifetime of the Optionee, an Option shall be exercisable only by the Optionee. (g) CHANGE IN CONTROL. In the discretion of the Committee, an option agreement may contain provisions providing that in the event of a "change in control" of the Company, such Option shall become immediately exercisable in full notwithstanding any provisions in the option agreement to the contrary. For the purposes of this paragraph (g), a "change in control" of the Company shall be deemed to occur if (i) the Company is a party to a merger, share exchange or other business combination pursuant to which the Company does not survive or survives only as a subsidiary of another corporation; or (ii) all or substantially all of the assets of the Company are sold or otherwise disposed of. (h) ADDITIONAL PROVISIONS. Each option agreement may contain such other terms and conditions not inconsistent with the provisions of the Plan as the Committee may deem appropriate from time to time, including cash awards for such purposes as the Committee may determine, including but not limited to cash awards for the payment of any income or excise tax -4- directly or indirectly attributable to the exercise or acceleration of exercise of an Option (including, without limitation, any tax under Code Section 280G). 1.6 STOCK ADJUSTMENTS; MERGERS. (a) GENERALLY. Notwithstanding Section 1.4, in the event the outstanding shares of Common Stock are increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of any other corporation by reason of any merger, sale of stock, consolidation, liquidation, recapitalization, reclassification, stock split up, combination of shares, share exchange, stock dividend, or transaction having similar effect, the total number of shares of Common Stock set forth in Section 1.4 shall be proportionately and appropriately adjusted by the Committee. (b) OPTIONS. Following a transaction described in subsection (a) above, if the Company continues in existence, the number and kind of shares that are subject to any Option and the option price per share shall be proportionately and appropriately adjusted without any change in the aggregate price to be paid therefor upon exercise of the Option. If the Company will not remain in existence or substantially all of its Common Stock will be purchased by a single purchaser or group of purchasers acting together, then the Committee may (i) declare that all Options shall terminate 30 days after the Committee gives written notice to all Optionees of their immediate right to exercise all Options then outstanding (without regard to limitations on exercise otherwise contained in the Options), or (ii) notify all Optionees that all Options granted under the Plan shall apply with appropriate adjustments as determined by the Committee to the securities of the successor corporation to which holders of the numbers of shares subject to such Options would have been entitled, or (iii) take action that is some combination of aspects of (i) and (ii). Except as provided in the last sentence of this paragraph (b), the determination by the Committee as to the terms of any of the foregoing adjustments shall be conclusive and binding. Any fractional shares resulting from any of the foregoing adjustments under this paragraph shall be disregarded and eliminated. Notwithstanding anything else contained in this Section 1.6(b), if an option agreement permits the immediate exercise in full of an Option upon a change in control as provided in Section 1.5(g) above, the provisions of such option agreement may not be revised by the Committee pursuant to this Section 1.6(b) without the consent of the Optionee. 1.7 NOTIFICATION OF EXERCISE. Options shall be exercised by written notice directed to the Secretary of the Company at the principal executive offices of the Company. Such written notice shall be accompanied by any payment required pursuant to Section 1.5(e) and shall be effective upon receipt by the Secretary of the Company received during normal business hours or if not so received, such exercise shall be effective on the next regular business day of the Company. Exercise by an Optionee's heir or the representative of his estate shall be accompanied by evidence of his authority to so act in form reasonably satisfactory to the Company. -5- ARTICLE II INCENTIVE STOCK OPTIONS 2.1 TERMS OF INCENTIVE STOCK OPTIONS. Each Incentive Stock Option granted under the Plan to a Key Employee shall be exercisable only during a Term fixed by the Committee; provided, however, that the Term shall end no later than 10 years after the date the Incentive Stock Option is granted. 2.2 LIMITATION ON OPTIONS. The aggregate Fair Market Value of Common Stock (determined at the time the Incentive Stock Option is granted) subject to Incentive Stock Options granted to a Key Employee under all plans of the Key Employee's employer corporation and its Parent or Subsidiary corporations and that become exercisable for the first time by such Key Employee during any calendar year may not exceed $100,000. 2.3 SPECIAL RULE FOR TEN PERCENT SHAREHOLDER. If at the time an Incentive Stock Option is granted, an employee owns stock possessing more than 10% of the total combined voting power of all classes of stock of his employer corporation or of its Parent or any of its Subsidiaries, as determined using the attribution rules of Section 424(d) of the Code, then the terms of the Incentive Stock Option shall specify that the option price shall be at least 110% of the Fair Market Value of the stock subject to the Incentive Stock Option, and such Incentive Stock Option shall not be exercisable after the expiration of five years from the date such Incentive Stock Option is granted. 2.4 INTERPRETATION. In interpreting this Article II of the Plan and the provisions of individual option agreements, the Committee shall be governed by the principles and requirements of Sections 421, 422 and 424 of the Code, and applicable Treasury Regulations. ARTICLE III NONQUALIFIED STOCK OPTIONS 3.1 TERMS AND CONDITIONS OF OPTIONS. In addition to the requirements of Section 1.5, each Nonqualified Stock Option granted under the Plan to a Key Employee or Consultant shall be subject to the following provisions: -6- (a) TERM. Each Nonqualified Stock Option granted under the plan shall be exercisable only during a term fixed by the Committee. (b) EXERCISE PRICE. The Company may elect to grant Nonqualified Stock Options at a price less than the Fair Market Value of the Common Stock at the time the Option is granted. 3.2 SECTION 83(b) ELECTION. The Company recognizes that certain persons who receive Nonqualified Stock Options may be subject to restrictions regarding their right to trade Common Stock under applicable securities laws. Such restrictions may cause Optionees exercising such Options not to be taxable under the provisions of Section 83(c) of the Code. Accordingly, Optionees exercising such Nonqualified Stock Options may consider making an election to be taxed upon exercise of the Option under Section 83(b) of the Code and to effect such election will file such election with the Internal Revenue Service within thirty (30) days of exercise of the Option and otherwise in accordance with applicable Treasury Regulations. ARTICLE IV ADDITIONAL PROVISIONS 4.1 STOCKHOLDER APPROVAL. The Plan shall be submitted for the approval of the stockholders of the Company as soon as reasonably practicable following the adoption of the Plan by the Board of Directors or the Compensation Committee and in all events within one year of its approval by such Board or Committee. If the stockholders of the Company do not approve the Plan as provided in this Section 4.1, the Plan shall terminate. 4.2 COMPLIANCE WITH OTHER LAWS AND REGULATIONS. The Plan, the grant and exercise of Options hereunder, and the obligation of the Company to sell and deliver shares under such Options, shall be subject to all applicable Federal and state laws, rules, and regulations and to such approvals by any government or regulatory agency as may be required. The Company shall not be required to issue or deliver any certificates for shares of Common Stock prior to (a) the listing of such shares on any stock exchange on which the Common Stock may then be listed and (b) the completion of any registration or qualification (or determination of the availability of an exemption therefrom) of such shares under any Federal or state law, or any ruling or regulation of any government body which the Company shall, in its sole discretion, determine to be necessary or advisable. -7- 4.3 AMENDMENTS. The Board of Directors may discontinue the Plan at any time, and may amend it from time to time. However, except as permitted under Section 1.6, no amendment, without approval by stockholders, may (a) increase the total number of shares which may be issued under the Plan or to any individual under the Plan, (b) extend the date on which the Plan will terminate, (c) reduce the Option price for shares which may be purchased pursuant to Options under Articles II or III of the Plan, (d) extend the period during which Options may be granted, (e) change the class of eligible persons to whom Options may be granted under the Plan, or (f) change the provisions of the Plan in such a manner so as to increase materially the benefits accruing under the Plan. Other than as expressly permitted under the Plan, no outstanding Option may be revoked or altered in a manner unfavorable to the Optionee without the consent of the Optionee. 4.4 NO RIGHTS AS SHAREHOLDER. No Optionee shall have any rights as a shareholder with respect to any share subject to his Option prior to the date of issuance to him of a certificate or certificates for such shares. 4.5 WITHHOLDING. Whenever the Company proposes or is required to issue or transfer shares of Common Stock under the Plan, the Company shall have the right to require the Optionee to remit to the Company an amount sufficient to satisfy any Federal, state or local withholding tax liability in such form as the Company may determine or accept in its sole discretion, including payment by surrender or retention of shares of Common Stock prior to the delivery of any certificate or certificates for such shares. Whenever under the Plan payments are to be made in cash, such payments shall be made net of an amount sufficient to satisfy any Federal, state, or local withholding tax liability. 4.6 CONTINUED EMPLOYMENT NOT PRESUMED. This Plan and any document describing this Plan and the grant of any Option hereunder shall not give any Optionee or other employee or Director a right to continued employment by the Company or its Subsidiaries or affect the right of the Company or its Subsidiaries to terminate the employment of any such person with or without cause. 4.7 EFFECTIVE DATE; DURATION. The Plan shall become effective as of February 9, 1997, subject to stockholder approval pursuant to Section 4.1, and shall expire at midnight (eastern standard time) on February 9, 2006. No Options may be granted under the Plan after February 9, 2006, but Options granted on or before that date may be exercised according to the terms of the related agreements and shall continue to be governed by and interpreted consistent with the terms hereof. * * * -8- The foregoing Plan was approved and adopted by the Board of Directors of the Company on December 31, 1997. -9- EX-10.4 8 EXHIBIT 10.4 ACTAMED CORPORATION 1996 STOCK OPTION PLAN ARTICLE I GENERAL 1.1 PURPOSE OF THE PLAN. The purpose of the ActaMed Corporation 1996 Stock Option Plan (the "Plan") is to assist ActaMed Corporation (the "Company") in securing and retaining Key Employees and Consultants of outstanding ability by making it possible to offer then an increased incentive to advise, join or continue in the service of the Company and to increase their efforts for its welfare through participation or increased participation in the ownership and growth of the Company. 1.2 DEFINITIONS. (a) "BOARD OF DIRECTORS" or "BOARD" means the Board of Directors of the Company. (b) "CODE" means the Internal Revenue Code of 1986, as amended. (c) "COMMITTEE" means the committee referred to in Section 1.3. (d) "COMMON STOCK" means the common stock of the Company. (e) "CONSULTANT" means any person not employed by the Company rendering consulting or advisory services to the Company who is expected or determined by the Committee to contribute significantly to the management, growth or direction of some part or all of the business of the Company or its subsidiaries. The power to determine who is and who is not a Consultant for purposes of this Plan is reserved solely for the Committee. (f) "FAIR MARKET VALUE" means the closing price of the shares on a national securities exchange on which the Common Stock is primarily traded on the day on which such value is to be determined or, if no shares were traded on such day, on the next preceding day on which shares were traded, as reported by National Quotation Bureau, Inc. or other national quotation service. If the shares of Common Stock are traded in the over-the-counter market, "fair market value" means the closing "asked" price of the shares in the over-the-counter market on the day on which such value is to be determined or, if such "asked" price is not available, the last sales price on such day or, if no shares were traded on such day, on the next preceding day on which the shares were traded, as reported by the National Association of Securities Dealers Automatic Quotation System (NASDAQ) or other national quotation service. Nevertheless, if the Board of Directors determines that the fair market value of the Common Stock cannot be accurately determined pursuant to the methodologies described above or if shares of Common Stock are not traded on an exchange or in the over-the-counter market, Fair Market Value shall be the value determined by the Board of Directors or Committee administering the Plan, taking into consideration those factors affecting or reflecting value which they deem appropriate. (g) "INCENTIVE STOCK OPTION" means an option to purchase shares of Common Stock which is intended to qualify as an incentive stock option as defined in Section 422 of the Code and which may be granted solely to a Key Employee. (h) "KEY EMPLOYEE" means any person, including officers and directors in the regular employment of the Company or its subsidiaries, who is designated a Key Employee by the Committee and is or is expected to be primarily responsible for or to contribute significantly to the management, growth, or supervision of some part or all of the business of the Company or its subsidiaries. The power to determine who is and who is not a Key Employee is reserved solely for the Committee. (i) "NONQUALIFIED STOCK OPTION" means an option to purchase shares of Common Stock which is not intended to qualify as an incentive stock option as defined in Section 422 of the Code and which may be granted to Key Employees and Consultants. (j) "OPTION" means an Incentive Stock Option or a Nonqualified Stock Option. (k) "OPTIONEE" means a Key Employee or Consultant to whom an Option is granted under the Plan. (l) "PARENT" means any corporation which qualifies as a parent of a corporation under the definition of "parent corporation" contained in Section 424(e) of the Code. (m) "SUBSIDIARY" means any corporation which qualifies as a subsidiary of a corporation under the definition of "subsidiary corporation" contained in Section 424(f) of the Code. (n) "TERM" means the period during which a particular Option may be exercised as determined by the Committee and as provided in the option agreement. 1.3 ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Compensation Committee (the "Committee") appointed by the Board of Directors consisting of at least three members from the Board of Directors. In the absence of an appointment of a Committee, the Board shall serve as the Committee. Subject to the control of the Board, and without limiting the control over decisions described in Section 1.7, the Committee shall have the power to interpret and apply the Plan and to make regulations for carrying out its purpose. More particularly, the Committee shall determine which Key Employees and Consultants shall be granted Options and the terms of such Options. When granting Options, the Committee shall designate the Option as either an Incentive Stock -2- Option or a Nonqualified Stock Option. Determinations by the Committee under the Plan (including, without limitation, determinations of the person to receive Options, the form, amount and timing of such Options, and the terms and provisions of such Options and the agreements evidencing same) need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, Options under the Plan, whether or not such persons are similarly situated. In serving on the Committee, members thereof shall be considered to be acting in their capacity as members of the Board of Directors and shall be entitled to all rights of indemnification provided by the Bylaws of the Company or otherwise to members of the Board of Directors. 1.4 SHARES SUBJECT TO THE PLAN. The total number of shares that may be purchased pursuant to Options under the Plan shall not exceed 500,000 shares of Common Stock. Shares subject to the Options which terminate or expire prior to exercise shall be available for future Options under the Plan without being charged against the limitation of 500,000 shares set forth above. Shares issued pursuant to the Plan may be either unissued shares of Common Stock or reacquired shares of Common Stock held in treasury. 1.5 TERMS AND CONDITIONS OF OPTIONS. All Options shall be evidenced by option agreements in such form as the Committee shall approve from time to time subject to the provisions of Article II and Article III, as appropriate, and the following provisions: (a) EXERCISE PRICE. Except as provided in Section 3.1, the exercise price of the Option shall not be less than the Fair Market Value (as determined by the Committee) of the Common Stock at the time the Option is granted. In making such determination, if the Board of Directors believes that the Company will engage in an initial public offering within 90 days of the date an Option is granted, the Board of Directors may designate the Fair Market Value as the initial offering price in such public offering after finding that such initial offering price will reflect an amount no less than the fair market value of the Common Stock on the date of Option grant. If the anticipated public offering does not occur within such 90 day period, the Board of Directors shall determine the Fair Market Value as of the date of the grant in the manner set forth in Section 1.2 hereof. (b) EXERCISE. The Committee shall determine whether the Option shall be exercisable in full at any time during the Term or in cumulative or noncumulative installments during the Term. (c) TERMINATION OF EMPLOYMENT. An Optionee's Option shall expire on the expiration of the Term specified in Section 2.1 or 3.1, as the case may be, or upon the occurrence of such events as are specified in the option agreement. If the option agreement permits exercise of the Option after termination of employment, the Optionee may exercise the Option only with respect to the Shares which could have been purchased by the Optionee at the date of termination of employment. However, the Committee may, but is not required to, waive any requirements made -3- pursuant to Section 1.5(b) so that some or all of the shares subject to the Option may be exercised within the time limitation described in this subsection. An Optionee's employment shall be deemed to terminate on the last date for which he receives a regular wage or salary payment. Whether military, government or other service or other leave of absence shall constitute a termination of employment shall be determined in each case by the Committee at its discretion, and any determination by the Committee shall be final and conclusive. A termination of employment shall not occur where the Optionee transfers from the Company to one of its Subsidiaries or transfers from a Subsidiary to the Company or transfers between Subsidiaries. (d) DEATH OR DISABILITY. Upon termination of an Optionee's employment by reason of death or disability (as determined by the Committee consistent with the definition of Section 422(c)(6) of the Code), the Option shall expire on the earlier of the expiration of (i) the date specified in the option agreement which in no event shall be later than 12 months after the date of such termination, or (ii) the Term specified in Section 2.1 or 3.1, as the case may be. The Optionee or his successor in interest, as the case may be, may exercise the Option only as to the shares that could have been purchased by the Optionee at the date of his termination of employment. However, the Committee may, but is not required to, waive any requirements made pursuant to Section 1.5(b) so that some or all of the shares subject to the Option may be exercised within the time limitation described in this subsection. (e) PAYMENT. Payment for shares as to which an Option is exercised shall be made in such manner and at such time or times as shall be provided in the option agreement, including cash, Common Stock of the Company which was previously acquired by the Optionee, or any combination thereof. The Fair Market Value of the surrendered Common Stock as of the date of exercise shall be determined in valuing Common Stock used in payment for Options. (f) NONTRANSFERABILITY. No Option granted under the Plan shall be transferable other than by will or by the laws of descent and distribution. During the lifetime of the Optionee, an Option shall be exercisable only by the Optionee. (g) CHANGE IN CONTROL. In the discretion of the Committee, an option agreement may contain provisions providing that in the event of a "change in control" of the Company, such Option shall become immediately exercisable in full notwithstanding any provisions in the option agreement to the contrary. For the purposes of this paragraph (g), a "change in control" of the Company shall be deemed to occur if (i) the Company is a party to a merger, share exchange or other business combination pursuant to which the Company does not survive or survives only as a subsidiary of another corporation; or (ii) all or substantially all of the assets of the Company are sold or otherwise disposed of. (h) ADDITIONAL PROVISIONS. Each option agreement may contain such other terms and conditions not inconsistent with the provisions of the Plan as the Committee may deem appropriate from time to time, including cash awards for such purposes as the Committee may determine, including but not limited to cash awards for the payment of any income or excise tax -4- directly or indirectly attributable to the exercise or acceleration of exercise of an Option (including, without limitation, any tax under Code Section 280G). 1.6 STOCK ADJUSTMENTS; MERGERS. (a) GENERAL. Notwithstanding Section 1.4, in the event the outstanding shares of Common Stock are increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of any other corporation by reason of any merger, sale of stock, consolidation, liquidation, recapitalization, reclassification, stock split up, combination of shares, share exchange, stock dividend, or transaction having similar effect, the total number of shares of Common Stock set forth in Section 1.4 shall be proportionately and appropriately adjusted by the Committee. (b) OPTIONS. Following a transaction described in subsection (a) above, if the Company continues in existence, the number and kind of shares that are subject to any Option and the option price per share shall be proportionately and appropriately adjusted without any change in the aggregate price to be paid therefor upon exercise of the Option. If the Company will not remain in existence or substantially all of its Common Stock will be purchased by a single purchaser or group of purchasers acting together, then the Committee may (i) declare that all Options shall terminate 30 days after the Committee gives written notice to all Optionees of their immediate right to exercise all Options then outstanding (without regard to limitations on exercise otherwise contained in the Options), or (ii) notify all Optionees that all Options granted under the Plan shall apply with appropriate adjustments as determined by the Committee to the securities of the successor corporation to which holders of the numbers of shares subject to such Options would have been entitled, or (iii) take action that is some combination of aspects of (i) and (ii). Except as provided in the last sentence of this paragraph (b), the determination by the Committee as to the terms of any of the foregoing adjustments shall be conclusive and binding. Any fractional shares resulting from any of the foregoing adjustments under this paragraph shall be disregarded and eliminated. Notwithstanding anything else contained in this Section 1.6(b), if an option agreement permits the immediate exercise in full of an Option upon a change in control as provided in Section 1.5(g) above, the provisions of such option agreement may not be revised by the Committee pursuant to this Section 1.6(b) without the consent of the Optionee. 1.7 NOTIFICATION OF EXERCISE. Options shall be exercised by written notice directed to the Secretary of the Company at the principal executive offices of the Company. Such written notice shall be accompanied by any payment required pursuant to Section 1.5(e) and shall be effective upon receipt by the Secretary of the Company received during normal business hours or if not so received, such exercise shall be effective on the next regular business day of the Company. Exercise by an Optionee's heir or the representative of his estate shall be accompanied by evidence of his authority to so act in form reasonably satisfactory to the Company. -5- ARTICLE II INCENTIVE STOCK OPTIONS 2.1 TERMS OF INCENTIVE STOCK OPTIONS. Each Incentive Stock Option granted under the Plan to a Key Employee shall be exercisable only during a Term fixed by the Committee; provided, however, that the Term shall end no later than 10 years after the date the Incentive Stock Option is granted. 2.2 LIMITATION ON OPTIONS. The aggregate Fair Market Value of Common Stock (determined at the time the Incentive Stock Option is granted) subject to Incentive Stock Options granted to a Key Employee under all plans of the Key Employee's employer corporation and its Parent or Subsidiary corporations and that become exercisable for the first time by such Key Employee during any calendar year may not exceed $100,000. 2.3 SPECIAL RULE FOR TEN PERCENT SHAREHOLDER. If at the time an Incentive Stock Option is granted, an employee owns stock possessing more than 10% of the total combined voting power of all classes of stock of his employer corporation or of its Parent or any of its Subsidiaries, as determined using the attribution rules of Section 424(d) of the Code, then the terms of the Incentive Stock Option shall specify that the option price shall be at least 110% of the Fair Market Value of the stock subject to the Incentive Stock Option, and such Incentive Stock Option shall not be exercisable after the expiration of five years from the date such Incentive Stock Option is granted. 2.4 INTERPRETATION. In interpreting this Article II of the Plan and the provisions of individual option agreements, the Committee shall be governed by the principles and requirements of Sections 421, 422 and 424 of the Code, and applicable Treasury Regulations. ARTICLE III NONQUALIFIED STOCK OPTIONS 3.1 TERMS AND CONDITIONS OF OPTIONS. In addition to the requirements of Section 1.5, each Nonqualified Stock Option granted under the Plan to a Key Employee or Consultant shall be subject to the following provisions: -6- (a) TERM. Each Nonqualified Stock Option granted under the plan shall be exercisable only during a term fixed by the Committee. (b) EXERCISE PRICE. The Company may elect to grant Nonqualified Stock Options at a price less than the Fair Market Value of the Common Stock at the time the Option is granted. 3.2 SECTION 83(b) ELECTION. The Company recognizes that certain persons who receive Nonqualified Stock Options may be subject to restrictions regarding their right to trade Common Stock under applicable securities laws. Such restrictions may cause Optionees exercising such Options not to be taxable under the provisions of Section 83(c) of the Code. Accordingly, Optionees exercising such Nonqualified Stock Options may consider making an election to be taxed upon exercise of the Option under Section 83(b) of the Code and to effect such election will file such election with the Internal Revenue Service within thirty (30) days of exercise of the Option and otherwise in accordance with applicable Treasury Regulations. ARTICLE IV ADDITIONAL PROVISIONS 4.1 STOCKHOLDER APPROVAL. The Plan shall be submitted for the approval of the stockholders of the Company as soon as reasonably practicable following the adoption of the Plan by the Board of Directors or the Compensation Committee and in all events within one year of its approval by such Board or Committee. If the stockholders of the Company do not approve the Plan as provided in this Section 4.1, the Plan shall terminate. 4.2 COMPLIANCE WITH OTHER LAWS AND REGULATIONS. The Plan, the grant and exercise of Options hereunder, and the obligation of the Company to sell and deliver shares under such Options, shall be subject to all applicable Federal and state laws, rules, and regulations and to such approvals by any government or regulatory agency as may be required. The Company shall not be required to issue or deliver any certificates for shares of Common Stock prior to (a) the listing of such shares on any stock exchange on which the Common Stock may then be listed and (b) the completion of any registration or qualification (or determination of the availability of an exemption therefrom) of such shares under any Federal or state law, or any ruling or regulation of any government body which the Company shall, in its sole discretion, determine to be necessary or advisable. -7- 4.3 AMENDMENTS. The Board of Directors may discontinue the Plan at any time, and may amend it from time to time. However, except as permitted under Section 1.6, no amendment, without approval by stockholders, may (a) increase the total number of shares which may be issued under the Plan or to any individual under the Plan, (b) extend the date on which the Plan will terminate, (c) reduce the Option price for shares which may be purchased pursuant to Options under Articles II or III of the Plan, (d) extend the period during which Options may be granted, (e) change the class of eligible persons to whom Options may be granted under the Plan, or (f) change the provisions of the Plan in such a manner so as to increase materially the benefits accruing under the Plan. Other than as expressly permitted under the Plan, no outstanding Option may be revoked or altered in a manner unfavorable to the Optionee without the consent of the Optionee. 4.4 NO RIGHTS AS SHAREHOLDER. No Optionee shall have any rights as a shareholder with respect to any share subject to his Option prior to the date of issuance to him of a certificate or certificates for such shares. 4.5 WITHHOLDING. Whenever the Company proposes or is required to issue or transfer shares of Common Stock under the Plan, the Company shall have the right to require the Optionee to remit to the Company an amount sufficient to satisfy any Federal, state or local withholding tax liability in such form as the Company may determine or accept in its sole discretion, including payment by surrender or retention of shares of Common Stock prior to the delivery of any certificate or certificates for such shares. Whenever under the Plan payments are to be made in cash, such payments shall be made net of an amount sufficient to satisfy any Federal, state, or local withholding tax liability. 4.6 CONTINUED EMPLOYMENT NOT PRESUMED. This Plan and any document describing this Plan and the grant of any Option hereunder shall not give any Optionee or other employee or Director a right to continued employment by the Company or its Subsidiaries or affect the right of the Company or its Subsidiaries to terminate the employment of any such person with or without cause. 4.7 EFFECTIVE DATE; DURATION. The Plan shall become effective as of February 9, 1996, subject to stockholder approval pursuant to Section 4.1, and shall expire at midnight (eastern standard time) on February 9, 2006. No Options may be granted under the Plan after February 9, 2006, but Options granted on or before that date may be exercised according to the terms of the related agreements and shall continue to be governed by and interpreted consistent with the terms hereof. * * * -8- The foregoing Plan was approved and adopted by the Board of Directors of the Company on February 9, 1996. -9- EX-10.5 9 EX-10.5 ACTAMED CORPORATION 1995 STOCK OPTION PLAN ARTICLE I GENERAL 1.1 PURPOSE OF THE PLAN. The purpose of the ActaMed Corporation 1995 Stock Option Plan (the "Plan") is to assist ActaMed Corporation (the "Company") in securing and retaining Key Employees and Consultants of outstanding ability by making it possible to offer them an increased incentive to advise, join or continue in the service of the Company and to increase their efforts for its welfare through participation or increased participation in the ownership and growth of the Company. 1.2 DEFINITIONS. (a) "BOARD OF DIRECTORS" or "BOARD" means the Board of Directors of the Company. (b) "CODE" means the Internal Revenue Code of 1986, as amended. (c) "COMMITTEE" means the committee referred to in Section 1.3. (d) "COMMON STOCK" means the common stock of the Company. (e) "CONSULTANT" means any person not employed by the Company rendering consulting or advisory services to the Company who is expected or determined by the Committee to contribute significantly to the management, growth or direction of some part or all of the business of the Company or its subsidiaries. The power to determine who is and who is not a Consultant for purposes of this Plan is reserved solely for the Committee. (f) "FAIR MARKET VALUE" means the closing price of the shares on a national securities exchange on which the Common Stock is primarily traded on the day on which such value is to be determined or, if no shares were traded on such day, on the next preceding day on which shares were traded, as reported by National Quotation Bureau, Inc. or other national quotation service. If the shares of Common Stock are traded in the over-the-counter market, "fair market value" means the closing "asked" price of the shares in the over-the-counter market on the day on which such value is to be determined or, if such "asked" price is not available, the last sales price on such day or, if no shares were traded on such day, on the next preceding day on which the shares were traded, as reported by the National Association of Securities Dealers Automatic Quotation System (NASDAQ) or other national quotation service. Nevertheless, if the Board of Directors determines that the fair market value of the Common Stock cannot be accurately determined pursuant to the methodologies described above or if shares of Common Stock are not traded on an exchange or in the over-the-counter market, Fair Market Value shall be the value determined by the Board of Directors or Committee administering the Plan, taking into consideration those factors affecting or reflecting value which they deem appropriate. (g) "INCENTIVE STOCK OPTION" means an option to purchase shares of Common Stock which is intended to qualify as an incentive stock option as defined in Section 422 of the Code and which may be granted solely to a Key Employee. (h) "KEY EMPLOYEE" means any person, including officers and directors in the regular employment of the Company or its subsidiaries, who is designated a Key Employee by the Committee and is or is expected to be primarily responsible for or to contribute significantly to the management, growth, or supervision of some part or all of the business of the Company or its subsidiaries. The power to determine who is and who is not a Key Employee is reserved solely for the Committee. (i) "NONQUALIFIED STOCK OPTION" means an option to purchase shares of Common Stock which is not intended to qualify as an incentive stock option as defined in Section 422 of the Code and which may be granted to Key Employees and Consultants. (j) "OPTION" means an Incentive Stock Option or a Nonqualified Stock Option. (k) "OPTIONEE" means a Key Employee or Consultant to whom an Option is granted under the Plan. (l) "PARENT" means any corporation which qualifies as a parent of a corporation under the definition of "parent corporation" contained in Section 424(e) of the Code. (m) "SUBSIDIARY" means any corporation which qualifies as a subsidiary of a corporation under the definition of "subsidiary corporation" contained in Section 424(f) of the Code. (n) "TERM" means the period during which a particular Option may be exercised as determined by the Committee and as provided in the option agreement. 1.3 ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Compensation Committee (the "Committee") appointed by the Board of Directors consisting of at least three members from the Board of Directors. In the absence of an appointment of a Committee, the Board shall serve as the Committee. Subject to the control of the Board, and without limiting the control over decisions described in Section 1.7, the Committee shall have the power to interpret and apply the Plan and to make regulations for carrying out its purpose. More particularly, the Committee shall determine which Key Employees and Consultants shall be granted Options and the terms of such Options. When granting Options, the Committee shall designate the Option as either an Incentive Stock -2- Option or a Nonqualified Stock Option. Determinations by the Committee under the Plan (including, without limitation, determinations of the person to receive Options, the form, amount and timing of such Options, and the terms and provisions of such Options and the agreements evidencing same) need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, Options under the Plan, whether or not such persons are similarly situated. In serving on the Committee, members thereof shall be considered to be acting in their capacity as members of the Board of Directors and shall be entitled to all rights of indemnification provided by the Bylaws of the Company or otherwise to members of the Board of Directors. 1.4 SHARES SUBJECT TO THE PLAN. The total number of shares that may be purchased pursuant to Options under the Plan shall not exceed 975,000 shares of Common Stock. Shares subject to the Options which terminate or expire prior to exercise shall be available for future Options under the Plan without being charged against the limitation of 975,000 shares set forth above. Shares issued pursuant to the Plan may be either unissued shares of Common Stock or reacquired shares of Common Stock held in treasury. 1.5 TERMS AND CONDITIONS OF OPTIONS. All Options shall be evidenced by option agreements in such form as the Committee shall approve from time to time subject to the provisions of Article II and Article III, as appropriate, and the following provisions: (a) EXERCISE PRICE. Except as provided in Section 3.1, the exercise price of the Option shall not be less than the Fair Market Value (as determined by the Committee) of the Common Stock at the time the Option is granted. In making such determination, if the Board of Directors believes that the Company will engage in an initial public offering within 90 days of the date an Option is granted, the Board of Directors may designate the Fair Market Value as the initial offering price in such public offering after finding that such initial offering price will reflect an amount no less than the fair market value of the Common Stock on the date of Option grant. If the anticipated public offering does not occur within such 90 day period, the Board of Directors shall determine the Fair Market Value as of the date of the grant in the manner set forth in Section 1.2 hereof. (b) EXERCISE. The Committee shall determine whether the Option shall be exercisable in full at any time during the Term or in cumulative or noncumulative installments during the Term. (c) TERMINATION OF EMPLOYMENT. An Optionee's Option shall expire on the expiration of the Term specified in Section 2.1 or 3.1, as the case may be, or upon the occurrence of such events as are specified in the option agreement. If the option agreement permits exercise of the Option after termination of employment, the Optionee may exercise the Option only with respect to the shares which could have been purchased by the Optionee at the date of termination of employment. However, the Committee may, but is not required to, waive any requirements made -3- pursuant to Section 1.5(b) so that some or all of the shares subject to the Option may be exercised within the time limitation described in this subsection. An Optionee's employment shall be deemed to terminate on the last date for which he receives a regular wage or salary payment. Whether military, government or other service or other leave of absence shall constitute a termination of employment shall be determined in each case by the Committee at its discretion, and any determination by the Committee shall be final and conclusive. A termination of employment shall not occur where the Optionee transfers from the Company to one of its Subsidiaries or transfers from a Subsidiary to the Company or transfers between Subsidiaries. (d) DEATH OR DISABILITY. Upon termination of an Optionee's employment by reason of death or disability (as determined by the Committee consistent with the definition of Section 422(c)(6) of the Code), the Option shall expire on the earlier of the expiration of (i) the date specified in the option agreement which in no event shall be later than 12 months after the date of such termination, or (ii) the Term specified in Section 2.1 or 3.1, as the case may be. The Optionee or his successor in interest, as the case may be, may exercise the Option only as to the shares that could have been purchased by the Optionee at the date of his termination of employment. However, the Committee may, but is not required to, waive any requirements made pursuant to Section 1.5(b) so that some or all of the shares subject to the Option may be exercised within the time limitation described in this subsection. (e) PAYMENT. Payment for shares as to which an Option is exercised shall be made in such manner and at such time or times as shall be provided in the option agreement, including cash, Common Stock of the Company which was previously acquired by the Optionee, or any combination thereof. The Fair Market Value of the surrendered Common Stock as of the date of exercise shall be determined in valuing Common Stock used in payment for Options. (f) NONTRANSFERABILITY. No Option granted under the Plan shall be transferable other than by will or by the laws of descent and distribution. During the lifetime of the Optionee, an Option shall be exercisable only by the Optionee. (g) CHANGE IN CONTROL. In the discretion of the Committee, an option agreement may contain provisions providing that in the event of a "change in control" of the Company, such Option shall become immediately exercisable in full notwithstanding any provisions in the option agreement to the contrary. For the purposes of this paragraph (g), a "change in control" of the Company shall be deemed to occur if (i) the Company is a party to a merger, share exchange or other business combination pursuant to which the Company does not survive or survives only as a subsidiary of another corporation; or (ii) all or substantially all of the assets of the Company are sold or otherwise disposed of. (h) ADDITIONAL PROVISIONS. Each option agreement may contain such other terms and conditions not inconsistent with the provisions of the Plan as the Committee may deem appropriate from time to time, including cash awards for such purposes as the Committee may determine, including but not limited to cash awards for the payment of any income or excise tax -4- directly or indirectly attributable to the exercise or acceleration of exercise of an Option (including, without limitation, any tax under Code Section 280G). 1.6 STOCK ADJUSTMENTS; MERGERS. (a) GENERAL. Notwithstanding Section 1.4, in the event the outstanding shares of Common Stock are increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of any other corporation by reason of any merger, sale of stock, consolidation, liquidation, recapitalization, reclassification, stock split up, combination of shares, share exchange, stock dividend, or transaction having similar effect, the total number of shares of Common Stock set forth in Section 1.4 shall be proportionately and appropriately adjusted by the Committee. (b) OPTIONS. Following a transaction described in subsection (a) above, if the Company continues in existence, the number and kind of shares that are subject to any Option and the option price per share shall be proportionately and appropriately adjusted without any change in the aggregate price to be paid therefor upon exercise of the Option. If the Company will not remain in existence or substantially all of its Common Stock will be purchased by a single purchaser or group of purchasers acting together, then the Committee may (i) declare that all Options shall terminate 30 days after the Committee gives written notice to all Optionees of their immediate right to exercise all Options then outstanding (without regard to limitations on exercise otherwise contained in the Options), or (ii) notify all Optionees that all Options granted under the Plan shall apply with appropriate adjustments as determined by the Committee to the securities of the successor corporation to which holders of the numbers of shares subject to such Options would have been entitled, or (iii) take action that is some combination of aspects of (i) and (ii). Except as provided in the last sentence of this paragraph (b), the determination by the Committee as to the terms of any of the foregoing adjustments shall be conclusive and binding. Any fractional shares resulting from any of the foregoing adjustments under this paragraph shall be disregarded and eliminated. Notwithstanding anything else contained in this Section 1.6(b), if an option agreement permits the immediate exercise in full of an Option upon a change in control as provided in Section 1.5(g) above, the provisions of such option agreement may not be revised by the Committee pursuant to this Section 1.6(b) without the consent of the Optionee. 1.7 NOTIFICATION OF EXERCISE. Options shall be exercised by written notice directed to the Secretary of the Company at the principal executive offices of the Company. Such written notice shall be accompanied by any payment required pursuant to Section 1.5(e) and shall be effective upon receipt by the Secretary of the Company received during normal business hours or if not so received, such exercise shall be effective on the next regular business day of the Company. Exercise by an Optionee's heir or the representative of his estate shall be accompanied by evidence of his authority to so act in form reasonably satisfactory to the Company. -5- ARTICLE II INCENTIVE STOCK OPTIONS 2.1 TERMS OF INCENTIVE STOCK OPTIONS. Each Incentive Stock Option granted under the Plan to a Key Employee shall be exercisable only during a Term fixed by the Committee; provided, however, that the Term shall end no later than 10 years after the date the Incentive Stock Option is granted. 2.2 LIMITATION ON OPTIONS The aggregate Fair Market Value of Common Stock (determined at the time the Incentive Stock Option is granted) subject to Incentive Stock Options granted to a Key Employee under all plans of the Key Employee's employer corporation and its Parent or Subsidiary corporations and that become exercisable for the first time by such Key Employee during any calendar year may not exceed $100,000. 2.3 SPECIAL RULE FOR TEN PERCENT SHAREHOLDER. If at the time an Incentive Stock Option is granted, an employee owns stock possessing more than 10% of the total combined voting power of all classes of stock of his employer corporation or of its Parent or any of its Subsidiaries, as determined using the attribution rules of Section 424(d) of the Code, then the terms of the Incentive Stock Option shall specify that the option price shall be at least 110% of the Fair Market Value of the stock subject to the Incentive Stock Option, and such Incentive Stock Option shall not be exercisable after the expiration of five years from the date such Incentive Stock Option is granted. 2.4 INTERPRETATION. In interpreting this Article II of the Plan and the provisions of individual option agreements, the Committee shall be governed by the principles and requirements of Sections 421, 422 and 424 of the Code, and applicable Treasury Regulations. ARTICLE III NONQUALIFIED STOCK OPTIONS 3.1 TERMS AND CONDITIONS OF OPTIONS. In addition to the requirements of Section 1.5, each Nonqualified Stock Option granted under the Plan to a Key Employee or Consultant shall be subject to the following provisions: -6- (a) TERM. Each Nonqualified Stock Option granted under the plan shall be exercisable only during a term fixed by the Committee. (b) EXERCISE PRICE. The Company may elect to grant Nonqualified Stock Options at a price less than the Fair Market Value of the Common Stock at the time the Option is granted. 3.2 SECTION 83(b) ELECTION. The Company recognizes that certain persons who receive Nonqualified Stock Options may be subject to restrictions regarding their right to trade Common Stock under applicable securities laws. Such restrictions may cause Optionees exercising such Options not to be taxable under the provisions of Section 83(c) of the Code. Accordingly, Optionees exercising such Nonqualified Stock Options may consider making an election to be taxed upon exercise of the Option under Section 83(b) of the Code and to effect such election will file such election with the Internal Revenue Service within thirty (30) days of exercise of the Option and otherwise in accordance with applicable Treasury Regulations. ARTICLE IV ADDITIONAL PROVISIONS 4.1 STOCKHOLDER APPROVAL. The Plan shall be submitted for the approval of the stockholders of the Company as soon as reasonably practicable following the adoption of the Plan by the Board of Directors or the Compensation Committee and in all events within one year of its approval by such Board or Committee. If the stockholders of the Company do not approve the Plan as provided in this Section 4.1, the Plan shall terminate. 4.2 COMPLIANCE WITH OTHER LAWS AND REGULATIONS. The Plan, the grant and exercise of Options hereunder, and the obligation of the Company to sell and deliver shares under such Options, shall be subject to all applicable Federal and state laws, rules, and regulations and to such approvals by any government or regulatory agency as may be required. The Company shall not be required to issue or deliver any certificates for shares of Common Stock prior to (a) the listing of such share on any stock exchange on which the Common Stock may then be listed and (b) the completion of any registration or qualification (or determination of the availability of an exemption therefrom) of such shares under any Federal or state law, or any ruling or regulation of any government body which the Company shall, in its sole discretion, determine to be necessary or advisable. -7- 4.3 AMENDMENTS. The Board of Directors may discontinue the Plan at any time, and may amend it from time to time. However, except as permitted under Section 1.6, no amendment, without approval by stockholders, may (a) increase the total number of shares which may be issued under the Plan or to any individual under the Plan, (b) extend the date on which the Plan will terminate, (c) reduce the Option price for shares which may be purchased pursuant to Options under Articles II or III of the Plan, (d) extend the period during which Options may be granted, (e) change the class of eligible persons to whom Options may be granted under the Plan, or (f) change the provisions of the Plan in such a manner so as to increase materially the benefits accruing under the Plan. Other than as expressly permitted under the Plan, no outstanding Option may be revoked or altered in a manner unfavorable to the Optionee without the consent of the Optionee. 4.4 NO RIGHTS AS SHAREHOLDER. No Optionee shall have any rights as a shareholder with respect to any share subject to his Option prior to the date of issuance to him of a certificate or certificates for such shares. 4.5 WITHHOLDING. Whenever the Company proposes or is required to issue or transfer shares of Common Stock under the Plan, the Company shall have the right to require the Optionee to remit to the Company an amount sufficient to satisfy any Federal, state or local withholding tax liability in such form as the Company may determine or accept in its sole discretion, including payment by surrender or retention of shares of Common Stock prior to the delivery of any certificate or certificates for such shares. Whenever under the Plan payments are to be made in cash, such payments shall be made net of an amount sufficient to satisfy any Federal, state, or local withholding tax liability. 4.6 CONTINUED EMPLOYMENT NOT PRESUMED. This Plan and any document describing this Plan and the grant of any Option hereunder shall not give any Optionee or other employee or Director a right to continued employment by the Company or its Subsidiaries or affect the right of the Company or its Subsidiaries to terminate the employment of any such person with or without cause. 4.7 EFFECTIVE DATE; DURATION. The Plan shall become effective as of November 29, 2005 subject to stockholder approval pursuant to Section 4.1, and shall expire at midnight (eastern standard time) on November 29, 2005. No Options may be granted under the Plan after November 29, 2005 but Options granted on or before that date may be exercised according to the terms of the related agreements and shall continue to be governed by and interpreted consistent with the terms hereof. * * * -8- The foregoing Plan was approved and adopted by the Board of Directors of the Company on Novemver 29, 1995. -9- EX-10.6 10 EX-10.6 ACTAMED CORPORATION 1994 STOCK OPTION PLAN ARTICLE I GENERAL 1.1 PURPOSE OF THE PLAN. The purpose of the ActaMed Corporation 1994 Stock Option Plan (the "Plan") is to assist ActaMed Corporation (the "Company") in securing and retaining Key Employees and Consultants of outstanding ability by making it possible to offer them an increased incentive to advise, join or continue in the service of the Company and to increase their efforts for its welfare through participation or increased participation in the ownership and growth of the Company. 1.2 DEFINITIONS. (a) "BOARD OF DIRECTORS" or "BOARD" means the Board of Directors of the Company. (b) "CODE" means the Internal Revenue Code of 1986, as amended. (c) "COMMITTEE" means the committee referred to in Section 1.3. (d) "COMMON STOCK" means the common stock of the Company. (e) "CONSULTANT" means any person not employed by the Company rendering consulting or advisory services to the Company who is expected or determined by the Committee to contribute significantly to the management, growth or direction of some part or all of the business of the Company or its subsidiaries. The power to determine who is and who is not a Consultant for purposes of this Plan is reserved solely for the Committee. (f) "FAIR MARKET VALUE" means the closing price of the shares on a national securities exchange on which the Common Stock is primarily traded on the day on which such value is to be determined or, if no shares were traded on such day, on the next preceding day on which shares were traded, as reported by National Quotation Bureau, Inc. or other national quotation service. If the shares of Common Stock are traded in the over-the-counter market, "fair market value" means the closing "asked" price of the shares in the over-the-counter market on the day on which such value is to be determined or, if such "asked" price is not available, the last sales price on such day or, if no shares were traded on such day, on the next preceding day on which the shares were traded, as reported by the National Association of Securities Dealers Automatic Quotation System (NASDAQ) or other national quotation service. Nevertheless, if the Board of Directors determines that the fair market value of the Common Stock cannot be accurately determined pursuant to the methodologies described above or if shares of Common Stock are not traded on an exchange or in the over-the-counter market, Fair Market Value shall be the value determined by the Board of Directors or Committee administering the Plan, taking into consideration those factors affecting or reflecting value which they deem appropriate. (g) "INCENTIVE STOCK OPTION" means an option to purchase shares of Common Stock which is intended to qualify as an incentive stock option as defined in Section 422 of the Code and which may be granted solely to a Key Employee. (h) "KEY EMPLOYEE" means any person, including officers and directors in the regular employment of the Company or its subsidiaries, who is designated a Key Employee by the Committee and is or is expected to be primarily responsible for or to contribute significantly to the management, growth, or supervision of some part or all of the business of the Company or its subsidiaries. The power to determine who is and who is not a Key Employee is reserved solely for the Committee. (i) "NONQUALIFIED STOCK OPTION" means an option to purchase shares of Common Stock which is not intended to qualify as an incentive stock option as defined in Section 422 of the Code and which may be granted to Key Employees and Consultants. (j) "OPTION" means an Incentive Stock Option or a Nonqualified Stock Option. (k) "OPTIONEE" means a Key Employee or Consultant to whom an Option is granted under the Plan. (l) "PARENT" means any corporation which qualifies as a parent of a corporation under the definition of "parent corporation" contained in Section 424(e) of the Code. (m) "SUBSIDIARY" means any corporation which qualifies as a subsidiary of a corporation under the definition of "subsidiary corporation" contained in Section 424(f) of the Code. (n) "TERM" means the period during which a particular Option may be exercised as determined by the Committee and as provided in the option agreement. 1.3 ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Compensation Committee (the "Committee") appointed by the Board of Directors consisting of at least three members from the Board of Directors. In the absence of an appointment of a Committee, the Board shall serve as the Committee. Subject to the control of the Board, and without limiting the control over decisions described in Section 1.7, the Committee shall have the power to interpret and apply the Plan and to make regulations for carrying out its purpose. More particularly, the Committee shall determine which Key Employees and Consultants shall be granted Options and the terms of such Options. When granting Options, the Committee shall designate the Option as either an Incentive Stock -2- Option or a Nonqualified Stock Option. Determinations by the Committee under the Plan (including, without limitation, determinations of the person to receive Options, the form, amount and timing of such Options, and the terms and provisions of such Options and the agreements evidencing same) need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, Options under the Plan, whether or not such persons are similarly situated. In serving on the Committee, members thereof shall be considered to be acting in their capacity as members of the Board of Directors and shall be entitled to all rights of indemnification provided by the Bylaws of the Company or otherwise to members of the Board of Directors. 1.4 SHARES SUBJECT TO THE PLAN. The total number of shares that may be purchased pursuant to Options under the Plan shall not exceed 2,370,438 shares of Common Stock. Shares subject to the Options which terminate or expire prior to exercise shall be available for future Options under the Plan without being charged against the limitation of 2,370,438 shares set forth above. Shares issued pursuant to the Plan may be either unissued shares of Common Stock or reacquired shares of Common Stock held in treasury. 1.5 TERMS AND CONDITIONS OF OPTIONS. All Options shall be evidenced by option agreements in such form as the Committee shall approve from time to time subject to the provisions of Article II and Article III, as appropriate, and the following provisions: (a) EXERCISE PRICE. Except as provided in Section 3.1, the exercise price of the Option shall not be less than the Fair Market Value (as determined by the Committee) of the Common Stock at the time the Option is granted. In making such determination, if the Board of Directors believes that the Company will engage in an initial public offering within 90 days of the date an Option is granted, the Board of Directors may designate the Fair Market Value as the initial offering price in such public offering after finding that such initial offering price will reflect an amount no less than the fair market value of the Common Stock on the date of Option grant. If the anticipated public offering does not occur within such 90 day period, the Board of Directors shall determine the Fair Market Value as of the date of the grant in the manner set forth in Section 1.2 hereof. (b) EXERCISE. The Committee shall determine whether the Option shall be exercisable in full at any time during the Term or in cumulative or noncumulative installments during the Term. (c) TERMINATION OF EMPLOYMENT. An Optionee's Option shall expire on the expiration of the Term specified in Section 2.1 or 3.1, as the case may be, or upon the occurrence of such events as are specified in the option agreement. If the option agreement permits exercise of the Option after termination of employment, the Optionee may exercise the Option only with respect to the Shares which could have been purchased by the Optionee at the date of termination of employment. However, the Committee may, but is not required to, waive any requirements made -3- pursuant to Section 1.5(b) so that some or all of the shares subject to the Option may be exercised within the time limitation described in this subsection. An Optionee's employment shall be deemed to terminate on the last date for which he receives a regular wage or salary payment. Whether military, government or other service or other leave of absence shall constitute a termination of employment shall be determined in each case by the Committee at its discretion, and any determination by the Committee shall be final and conclusive. A termination of employment shall not occur where the Optionee transfers from the Company to one of its Subsidiaries or transfers from a Subsidiary to the Company or transfers between Subsidiaries. (d) DEATH OR DISABILITY. Upon termination of an Optionee's employment by reason of death or disability (as determined by the Committee consistent with the definition of Section 422(c)(6) of the Code), the Option shall expire on the earlier of the expiration of (i) the date specified in the option agreement which in no event shall be later than 12 months after the date of such termination, or (ii) the Term specified in Section 2.1 or 3.1, as the case may be. The Optionee or his successor in interest, as the case may be, may exercise the Option only as to the shares that could have been purchased by the Optionee at the date of his termination of employment. However, the Committee may, but is not required to, waive any requirements made pursuant to Section 1.5(b) so that some or all of the shares subject to the Option may be exercised within the time limitation described in this subsection. (e) PAYMENT. Payment for shares as to which an Option is exercised shall be made in such manner and at such time or times as shall be provided in the option agreement, including cash, Common Stock of the Company which was previously acquired by the Optionee, or any combination thereof. The Fair Market Value of the surrendered Common Stock as of the date of exercise shall be determined in valuing Common Stock used in payment for Options. (f) NONTRANSFERABILITY. No Option granted under the Plan shall be transferable other than by will or by the laws of descent and distribution. During the lifetime of the Optionee, an Option shall be exercisable only by the Optionee. (g) CHANGE IN CONTROL. In the discretion of the Committee, an option agreement may contain provisions providing that in the event of a "change in control" of the Company, such Option shall become immediately exercisable in full notwithstanding any provisions in the option agreement to the contrary. For the purposes of this paragraph (g), a "change in control" of the Company shall be deemed to occur if (i) the Company is a party to a merger, share exchange or other business combination pursuant to which the Company does not survive or survives only as a subsidiary of another corporation; or (ii) all or substantially all of the assets of the Company are sold or otherwise disposed of. (h) ADDITIONAL PROVISIONS. Each option agreement may contain such other terms and conditions not inconsistent with the provisions of the Plan as the Committee may deem appropriate from time to time, including cash awards for such purposes as the Committee may determine, including but not limited to cash awards for the payment of any income or excise tax -4- directly or indirectly attributable to the exercise or acceleration of exercise of an Option (including, without limitation, any tax under Code Section 280G). 1.6 STOCK ADJUSTMENTS; MERGERS. (a) GENERAL. Notwithstanding Section 1.4, in the event the outstanding shares of Common Stock are increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of any other corporation by reason of any merger, sale of stock, consolidation, liquidation, recapitalization, reclassification, stock split up, combination of shares, share exchange, stock dividend, or transaction having similar effect, the total number of shares of Common Stock set forth in Section 1.4 shall be proportionately and appropriately adjusted by the Committee. (b) OPTIONS. Following a transaction described in subsection (a) above, if the Company continues in existence, the number and kind of shares that are subject to any Option and the option price per share shall be proportionately and appropriately adjusted without any change in the aggregate price to be paid therefor upon exercise of the Option. If the Company will not remain in existence or substantially all of its Common Stock will be purchased by a single purchaser or group of purchasers acting together, then the Committee may (i) declare that all Options shall terminate 30 days after the Committee gives written notice to all Optionees of their immediate right to exercise all Options then outstanding (without regard to limitations on exercise otherwise contained in the Options), or (ii) notify all Optionees that all Options granted under the Plan shall apply with appropriate adjustments as determined by the Committee to the securities of the successor corporation to which holders of the numbers of shares subject to such Options would have been entitled, or (iii) take action that is some combination of aspects of (i) and (ii). Except as provided in the last sentence of this paragraph (b), the determination by the Committee as to the terms of any of the foregoing adjustments shall be conclusive and binding. Any fractional shares resulting from any of the foregoing adjustments under this paragraph shall be disregarded and eliminated. Notwithstanding anything else contained in this Section 1.6(b), if an option agreement permits the immediate exercise in full of an Option upon a change in control as provided in Section 1.5(g) above, the provisions of such option agreement may not be revised by the Committee pursuant to this Section 1.6(b) without the consent of the Optionee. 1.7 NOTIFICATION OF EXERCISE. Options shall be exercised by written notice directed to the Secretary of the Company at the principal executive offices of the Company. Such written notice shall be accompanied by any payment required pursuant to Section 1.5(e) and shall be effective upon receipt by the Secretary of the Company received during normal business hours or if not so received, such exercise shall be effective on the next regular business day of the Company. Exercise by an Optionee's heir or the representative of his estate shall be accompanied by evidence of his authority to so act in form reasonably satisfactory to the Company. -5- ARTICLE II INCENTIVE STOCK OPTIONS 2.1 TERMS OF INCENTIVE STOCK OPTIONS. Each Incentive Stock Option granted under the Plan to a Key Employee shall be exercisable only during a Term fixed by the Committee; provided, however, that the Term shall end no later than 10 years after the date the Incentive Stock Option is granted. 2.2 LIMITATION ON OPTIONS. The aggregate Fair Market Value of Common Stock (determined at the time the Incentive Stock Option is granted) subject to Incentive Stock Options granted to a Key Employee under all plans of the Key Employee's employer corporation and its Parent or Subsidiary corporations and that become exercisable for the first time by such Key Employee during any calendar year may not exceed $100,000. 2.3 SPECIAL RULE FOR TEN PERCENT SHAREHOLDER. If at the time an Incentive Stock Option is granted, an employee owns stock possessing more than 10% of the total combined voting power of all classes of stock of his employer corporation or of its Parent or any of its Subsidiaries, as determined using the attribution rules of Section 424(d) of the Code, then the terms of the Incentive Stock Option shall specify that the option price shall be at least 110% of the Fair Market Value of the stock subject to the Incentive Stock Option, and such Incentive Stock Option shall not be exercisable after the expiration of five years from the date such Incentive Stock Option is granted. 2.4 INTERPRETATION. In interpreting this Article II of the Plan and the provisions of individual option agreements, the Committee shall be governed by the principles and requirements of Sections 421, 422 and 424 of the Code, and applicable Treasury Regulations. ARTICLE III NONQUALIFIED STOCK OPTIONS 3.1 TERMS AND CONDITIONS OF OPTIONS. In addition to the requirements of Section 1.5, each Nonqualified Stock Option granted under the Plan to a Key Employee or Consultant shall be subject to the following provisions: -6- (a) TERM. Each Nonqualified Stock Option granted under the plan shall be exercisable only during a term fixed by the Committee. (b) EXERCISE PRICE. The Company may elect to grant Nonqualified Stock Options at a price less than the Fair Market Value of the Common Stock at the time the Option is granted. 3.2 SECTION 83(b) ELECTION. The Company recognizes that certain persons who receive Nonqualified Stock Options may be subject to restrictions regarding their right to trade Common Stock under applicable securities laws. Such restrictions may cause Optionees exercising such Options not to be taxable under the provisions of Section 83(c) of the Code. Accordingly, Optionees exercising such Nonqualified Stock Options may consider making an election to be taxed upon exercise of the Option under Section 83(b) of the Code and to effect such election will file such election with the Internal Revenue Service within thirty (30) days of exercise of the Option and otherwise in accordance with applicable Treasury Regulations. ARTICLE IV ADDITIONAL PROVISIONS 4.1 STOCKHOLDER APPROVAL. The Plan shall be submitted for the approval of the stockholders of the Company as soon as reasonably practicable following the adoption of the Plan by the Board of Directors or the Compensation Committee and in all events within one year of its approval by such Board or Committee. If the stockholders of the Company do not approve the Plan as provided in this Section 4.1, the Plan shall terminate. 4.2 COMPLIANCE WITH OTHER LAWS AND REGULATIONS. The Plan, the grant and exercise of Options hereunder, and the obligation of the Company to sell and deliver shares under such Options, shall be subject to all applicable Federal and state laws, rules, and regulations and to such approvals by any government or regulatory agency as may be required. The Company shall not be required to issue or deliver any certificates for shares of Common Stock prior to (a) the listing of such shares on any stock exchange on which the Common Stock may then be listed and (b) the completion of any registration or qualification (or determination of the availability of an exemption therefrom) of such shares under any Federal or state law, or any ruling or regulation of any government body which the Company shall, in its sole discretion, determine to be necessary or advisable. -7- 4.3 AMENDMENTS. The Board of Directors may discontinue the Plan at any time, and may amend it from time to time. However, except as permitted under Section 1.6, no amendment, without approval by stockholders, may (a) increase the total number of shares which may be issued under the Plan or to any individual under the Plan, (b) extend the date on which the Plan will terminate, (c) reduce the Option price for shares which may be purchased pursuant to Options under Articles II or III of the Plan, (d) extend the period during which Options may be granted, (e) change the class of eligible persons to whom Options may be granted under the Plan, or (f) change the provisions of the Plan in such a manner so as to increase materially the benefits accruing under the Plan. Other than as expressly permitted under the Plan, no outstanding Option may be revoked or altered in a manner unfavorable to the Optionee without the consent of the Optionee. 4.4 NO RIGHTS AS SHAREHOLDER. No Optionee shall have any rights as a shareholder with respect to any share subject to his Option prior to the date of issuance to him of a certificate or certificates for such shares. 4.5 WITHHOLDING. Whenever the Company proposes or is required to issue or transfer shares of Common Stock under the Plan, the Company shall have the right to require the Optionee to remit to the Company an amount sufficient to satisfy any Federal, state or local withholding tax liability in such form as the Company may determine or accept in its sole discretion, including payment by surrender or retention of shares of Common Stock prior to the delivery of any certificate or certificates for such shares. Whenever under the Plan payments are to be made in cash, such payments shall be made net of an amount sufficient to satisfy any Federal, state, or local withholding tax liability. 4.6 CONTINUED EMPLOYMENT NOT PRESUMED. This Plan and any document describing this Plan and the grant of any Option hereunder shall not give any Optionee or other employee or Director a right to continued employment by the Company or its Subsidiaries or affect the right of the Company or its Subsidiaries to terminate the employment of any such person with or without cause. 4.7 EFFECTIVE DATE; DURATION. The Plan shall become effective as of February 9, 1996, subject to stockholder approval pursuant to Section 4.1, and shall expire at midnight (eastern standard time) on February 9, 2006. No Options may be granted under the Plan after February 9, 2006, but Options granted on or before that date may be exercised according to the terms of the related agreements and shall continue to be governed by and interpreted consistent with the terms hereof. * * * -8- The foregoing Plan was approved and adopted by the Board of Directors of the Company on May 3, 1994. -9- EX-10.7 11 EX-10.7 ACTAMED CORP. 1993 CLASS B COMMON STOCK OPTION PLAN The 1993 Class B Common Stock Option Plan (the "Plan") is hereby adopted as follows: 1. PURPOSE OF PLAN. The purpose of the Plan is to provide corporate officers and key employees of Actamed Corp. ("Actamed"), and its Subsidiaries (collectively the "Company"), as the Administrator hereinafter referred to shall designate, with a strong incentive for individual creativity and contribution to insure the future growth of the Company. The Plan is designed to reward those whose ability and diligence permit such persons to make important contributions to the success of the Company by enabling such persons to acquire shares of Actamed Common Stock in the manner contemplated by the Plan. Actamed believes that the Plan will also aid the Company in attracting and retaining outstanding key employees and in stimulating the efforts of such employees to work for the success of the Company. This Plan covers the grant of options [including nonstatutory stock options and options intended to qualify as incentive stock options under Section 422 of the Code ("Incentive Options")] to acquire shares which may or may not be subject to restrictions ("Option Stock"). 2. DEFINITIONS. For purposes of this Plan, the following terms where appearing with initial capitalization shall be applicable: (a) "ADMINISTRATOR" means either the Board of Directors or the Committee, whichever is so designated by the Board of Directors to administer the Plan. (b) "BOARD OF DIRECTORS" means the Board of Directors of Actamed. (c) "CODE" means the Internal Revenue Code of 1986, as amended from time to time. (d) "COMMITTEE" means a committee appointed by the Board of Directors and which shall consist of not less than two persons, all of whom shall be "disinterested persons" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended from time to time, or any law, rule, regulation or other provisions that may hereafter replace such Rule. If the Plan is administered by a Committee, the members of the Committee shall serve at the pleasure of the Board of Directors. Sixty percent (60%) of the Committee members shall constitute a quorum, and the action of a majority of the members of the Committee present at any meeting at which a quorum is present, or acts unanimously adopted in writing without holding a meeting, shall be the acts of the Committee. The Committee shall report all actions taken by it to the Board of Directors. (e) "COMMON STOCK" means Actamed's Class B Common Stock. (f) "SUBSIDIARY" means any corporation (other than Actamed) in an unbroken chain of corporations beginning with Actamed if, at the time of the sale or award of any shares or the grant of any option under the Plan, each of the corporations other than the last in the unbroken chain owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one or the other corporations in such chain. 3. ADMINISTRATION OF PLAN. This Plan shall be administered, construed and interpreted by the Administrator. The Administrator shall have full and final authority, in its discretion, (a) to determine those corporate officers and key employees who shall be eligible to participate in the Plan and the number of shares to be covered by any options granted and the time or times at which such options shall be granted to each participant or exercised by each optionee (it being understood that more than one option may relate to the same participant), (b) to determine the terms and provisions of any Stock Option Agreement (the terms of which need not be identical) and the restrictions, if any, to be placed upon the shares of Common Stock issued under the Plan, (c) to accelerate the date on which any option granted under the Plan becomes exercisable and to waive (including in the event of a change-in-control of Actamed) any restriction, term or provision imposed by any Stock Option Agreement, (d) to employ such legal counsel, consultants and agents as it may deem desirable for the administration of the Plan and rely upon any opinions received from any such counsel or consultant and any computation received from any such consultant or agent, and (e) to make all other determinations and take all other actions deemed necessary and advisable for the proper administration of the Plan. The Administrator may adopt, alter and repeal such rules and regulations for the administration of the Plan as it from time to time deems advisable. The Administrator may act by a meeting in person or by telephone or by written determinations signed by all of the members of the Administrator. All actions, interpretations and determinations with respect to the administration of the Plan taken by the Administrator shall be conclusively binding for all purposes and upon all persons. Whether an authorized leave of absence, or absence in military or government service, shall constitute termination of employment shall be determined by the Administrator. 4. ELIGIBLE PARTICIPANTS. Employees, including but not limited to officers and directors who are employees, of the Company as determined by the Administrator shall be eligible for participation under the Plan. However, with respect to Incentive Options, persons eligible to receive Incentive Options shall be limited to key employees (including officers and directors who are employees) of Actamed and its Subsidiaries. -2- 5. SHARES SUBJECT TO PLAN. An aggregate of 1,250,000 shares of Common Stock shall be subject to this Plan either from authorized but unissued shares or from issued shares reacquired by Actamed, including shares purchased in the open market, and such number of shares subject to the Plan shall be appropriately adjusted, in the discretion of the Administrator in the event of any one or more stock dividends, stock splits or any other forms of recapitalization, or spin-off, spin-out or other distribution of assets to shareholders of Actamed. The Administrator in its sole discretion may provide in any Stock Option Agreement or otherwise for adjustments to be made with respect to options granted hereunder. If prior to the termination of the Plan, shares issued pursuant hereto shall have been repurchased by or redelivered to Actamed in connection with the restrictions imposed on such shares pursuant to this Plan or any Stock Option Agreement under the Plan, such repurchase or redelivered shares shall again become available for option under the Plan. To the extent any options granted hereunder terminate, are canceled or expire unexercised in whole or in part, the shares with respect to which such options were not exercised shall again become available for option under the Plan. Any shares that are reacquired or become available due to termination, cancellation or expiration of options may be used to replace options that are canceled by the Administrator (with the consent of the optionee) due to the fact that the option exercise price is higher than the then current market value of the Common Stock. 6. PRICE. The Administrator in its absolute discretion shall determine the price at which any options granted to purchase shares of Option Stock hereunder shall become exercisable (which price may be less than the fair market value of a share of Common Stock), provided that such sale or exercise price with respect to Incentive Options is not less than the fair market value of a share of Common Stock at the time such option is granted, except as otherwise provided in Section 8(b)(vii). For the purposes hereof, fair market value shall be determined by the Administrator and the Administrator may make such determination: (a) in case the Common Stock is publicly traded but shall not then be listed and traded upon a recognized national market system, upon the basis of the mean between the bid and asked quotations for such stock on the date of grant of such option as reported by the National Association of Securities Dealers Automated Quotation system (NASDAQ) or, in the event that there shall be no bid or asked quotations on the date of grant of such option, then upon the basis of the mean between the bid and asked quotations on the date nearest preceding such date of grant, and upon any other factors which the Administrator shall deem appropriate, or (b) in case the Common Stock is publicly traded and shall then be listed and traded upon a recognized securities exchange or shall be quoted on a recognized national market system, upon the basis of the mean between the highest and lowest selling prices at which shares of Common Stock were traded on such recognized securities exchange or national market system on such date of grant or, if the Common Stock was not traded on said date, upon the basis of the mean of such prices on the date nearest preceding such date of grant, and upon any other factors which the Administrator shall deem appropriate, or -3- (c) in case the Common Stock is not listed or traded as referred to in Sections 6(a) or 6(b) above, in good faith and taking into consideration factors which the Administrator determines are applicable in the determination of such fair market value. 7. PAYMENT. (a) Payment for shares purchased under this Plan shall be payable in cash, by check, by promissory note, or in addition to the above, in shares of Common Stock as provided in 7(d) below, or in any combination thereof, as shall be determined by the Administrator and provided in the applicable Stock Option Agreement. (b) If the payment is made in cash or by check, such payment shall be made at the time the shares are sold. (c) If the payment is made by promissory note, such note, containing terms and conditions satisfactory to the Administrator and Actamed, shall be delivered at the time the shares are sold and shall bear interest, if any, at such rate and shall be payable upon such terms as the Administrator shall determine. Certificates for the purchased shares shall be registered in the name of the participant and may be delivered to the purchaser or held by Actamed as security for payment of the promissory note as determined in the discretion of the Administrator. (d) In connection with any options granted pursuant to this Plan, the Administrator, in its discretion, may accept as payment for all or any portion of the option price of any Option Stock, shares of Common Stock previously acquired by the participant (including shares received upon the prior exercise of any options regardless of the amount of time such previously acquired shares have been held by the participant) having a fair market value equal to the required payment. The participant shall deliver to Actamed a certificate or certificates representing such shares duly endorsed to Actamed or accompanied by a separate stock power so endorsed. (e) In addition to the foregoing, the exercise price of an option also may be paid by delivery to Actamed of a written notice of election to exercise, subject to the approval of the Administrator and in accordance with the requirements of Regulation T as promulgated by the Federal Reserve Board. 8. OPTION STOCK. (a) All options granted pursuant to the Plan shall have such terms and conditions as the Administrator shall determine, including the period during which they may be exercised in whole or in part and the conditions under which they may be terminated or canceled and such other provisions as may be advisable to comply with the law or the rules of any such stock exchange, and each option shall have the following additional conditions: (i) The options shall not be transferable other than by will or the laws of descent and distribution and shall be exercisable during the participant's lifetime only by him and, -4- except as otherwise determined by the Administrator, shall only be exercisable prior to termination of employment with the Company. (ii) Actamed shall not issue any fractional shares upon the exercise of options granted under the Plan. (iii) No optionee will be deemed to be a holder of any shares of Common Stock or shall have any rights of a shareholder of Actamed with respect to the Common Stock until the issuance of certificates after the exercise thereof. No adjustment shall be made for any dividends or distributions or other rights for which the record date is prior to the date of such stock certificates so issued except as provided in 8(a)(iv) below. (iv) The number of shares subject to an option and the price per share shall be appropriately adjusted by the Administrator to reflect any stock splits, stock dividends or other form of recapitalization. (v) The Administrator shall have sole discretion to determine in the Stock Option Agreement whether shares of Option Stock (including any shares received thereon as a result of stock dividends, stock splits and any other forms of recapitalization) shall be free of any restrictions (other than those advisable to comply with the law) or shall be subject to any restrictions as may be determined by the Administrator, in its sole discretion. (vi) The granting of an option shall impose no obligation upon the participant to exercise such option. (b) All Incentive Options granted hereunder, in addition to the conditions required by Section 8(a) and the other Sections of the Plan applicable to Incentive Options, must meet the following additional conditions where applicable: (i) The Plan must be approved by the shareholders of Actamed within 12 months after its adoption by the Board of Directors. (ii) Any Incentive Option must be granted within 10 years from the date the Plan is adopted by the board of Directors. (iii) Any Incentive Option must be exercised only within 10 years of the date it is granted, except as otherwise provided in 8(b)(vii) below. (iv) A maximum of 1,250,000 shares of Common Stock may be issued under Incentive Options. (v) The aggregate fair market value (determined at the time the option is granted) of the stock with respect to which incentive stock options are exercisable for the first time -5- by such individual during any calendar year (under all plans of Actamed and its Subsidiaries) shall not exceed $100,000. (vi) Any Incentive Option granted hereunder shall be consistent with the provisions of Sections 421, 422 and 424 and related Sections of the Code and applicable Treasury Regulations. The Stock Option Agreements authorized under this Plan in connection with the grant of Incentive Options may contain other provisions, not inconsistent with the Plan and Section 422 of the Code, as the Administrator shall deem advisable. (vii) If the participant owns (subject to applicable ownership attribution rules of Section 424(d) of the Code and Treasury Regulations promulgated thereunder) stock possessing more than 10 percent of the total combined voting power of all classes of stock of Actamed or of stock of any parent or subsidiary of Actamed at the time the Incentive Option is granted, the option price shall be not less than 110 percent of the fair market value of the stock subject to the Incentive Option and the Incentive Option by its terms shall not be exercisable after the expiration of five years from the date the Incentive Option is granted. 9. WITHHOLDING OF TAXES. (a) Upon the grant or exercise of any option hereunder and should Actamed determine that the participant will be considered to have received income subject to withholding due to such event and the Company will be required to withhold amounts for federal and state income tax purposes, the distribution of any such shares to the participant may be deferred by Actamed until the participant makes satisfactory arrangements to provide Actamed with the funds to meet any such tax withholding obligation. If the participant fails to provide such funds to Actamed the time required to pay such withholding tax or should Actamed and the participant agree that such tax withholding obligation may be paid with shares to be distributed to the participant, Actamed may retain and sell a sufficient number of the participant's shares which are otherwise to be distributed to the participant as may be required to discharge, or reimburse Actamed for, the payment of such withholding obligation and any interest and penalty which may have accrued in connection therewith. Actamed shall have and retain a security interest in such shares of the participant for the purpose of securing the participant's obligation hereunder and the participant shall take such steps and execute such documents to perfect such security interest as Actamed shall reasonably request. (b) In the event a participant makes an election to be taxed under Section 83(b) of the Code and files such election with the Internal Revenue Service, the participant shall be required to notify the Company in writing within 10 days of making such election. 10. COMPLIANCE WITH SECURITIES LAW. (a) Actamed shall be under no obligation to effect the registration pursuant to any federal or state securities laws of any shares of Common Stock to be issued hereunder. Notwithstanding anything herein to the contrary, Actamed shall not be obligated to issue any shares pursuant to this Plan unless the shares to be distributed are at that time effectively registered or -6- exempt from registration, in the opinion of Actamed, under the applicable federal and state securities laws. (b) Unless the shares covered by the Plan have been registered under the applicable federal and state securities laws, or Actamed has determined that such registration is unnecessary, each person receiving shares under the Plan may be required by Actamed to give a representation in writing that he is acquiring such shares for his own account for investment and not with a view to, or for sale in connection with, the distribution of any part thereof. (c) The exercise of any option granted hereunder shall only be effective at such time as Actamed shall have determined that the issuance and delivery of shares of Common Stock pursuant to such exercise is in compliance with all applicable federal and states securities laws. Actamed may, in its sole discretion, defer the effectiveness of any exercise of an option granted hereunder in order to allow the issuance of shares of Common Stock pursuant thereto to be made pursuant to registration or an exemption from registration or other methods for compliance available under federal or state securities laws. Actamed shall inform the participant of its decision to defer the effectiveness of the exercise of an option granted hereunder. During the period that the effectiveness of the exercise of an option has been deferred, the participant may, by written notice, withdraw such exercise and obtain the refund of any amount paid or consideration tendered with respect thereto. 11. INDEMNIFICATION. In addition to any other rights of indemnification that they may have as directors of Actamed or as members of the Committee, the directors of Actamed and members of the Committee shall be indemnified by Actamed against the reasonable expenses, including attorneys' fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of action taken or failure to act under or in connection with the Plan, or any securities sold or issued hereunder, and against all amounts paid by them in settlement thereof (provided the settlement is approved by Actamed) or paid by them in satisfaction of a judgment in any action, suit or proceeding; provided that within 20 days after the institution of any action, suit or proceeding, the director or the Committee member shall in writing offer Actamed the opportunity, at its own expense to handle and defend the same. 12. EXPENSES OF PLAN. The expenses of administering the Plan shall be borne by Actamed. 13. NO EFFECT ON EMPLOYMENT. Nothing herein contained, including the grant of any option, shall affect the right of the Company to terminate any participant's employment at any time for any reason. -7- 14. EXEMPTION FROM PENSION COMPUTATION AND NON-EXCLUSIVITY OF THE PLAN. (a) By acceptance of options granted under this Plan, each participant shall be deemed to agree that it is special incentive compensation and that it will not be taken into account as "wages" or "salary" in retirement or deferred profit sharing plans, if any, of the Company. (b) In addition, each beneficiary of a deceased participant shall be deemed to agree that such grant will not affect the amount of any life insurance coverage available to such beneficiary under any life insurance plan, if any, covering employees of the Company. (c) Nothing contained in the Plan is intended to amend, modify or rescind any previously approved compensation plans or programs entered into by the Company. This Plan shall be construed to be an addition to any and all such other plans or programs. Neither the adoption of the Plan by Actamed nor the submission of the Plan to the shareholders of Actamed for approval shall be construed as creating any limitations on the power of authority of Actamed to adopt such additional or other compensation arrangements as Actamed may deem desirable. 15. LEGEND. In order to enforce the restrictions imposed upon shares sold or awarded hereunder the Administrator may cause a legend or legends to be placed on any certificates representing shares sold or awarded pursuant to this Plan, which legend or legends shall make appropriate reference to the restrictions imposed hereunder. 16. AMENDMENTS. This Plan may be amended at any time by the Board of Directors consistent with applicable laws and regulations, provided that without the approval of the shareholders of Actamed, no such amendment shall become effective if it would (a) extend the termination date of the Plan set forth in Section 17, (b) materially increase the number of shares of Common Stock which may be sold under the Plan, except as provided in Section 5, or (c) materially modify the requirements as to eligibility for participation in the Plan. Any amendment to the Plan shall not, without the written consent of the participant, affect such participant's rights under any Stock Option Agreement entered into prior to such amendment. 17. TERMINATION. This Plan shall terminate and no further shares shall be sold or issued hereunder after September 1, 2002, or such earlier date as may be determined by the Board of Directors. The termination of this Plan, however, shall not affect any restrictions previously imposed on shares of Option Stock issued pursuant to this Plan, or alter the rights of participants with respect to options granted or shares of Option Stock issued pursuant to this Plan. 18. RIGHTS OF PARTICIPANTS AS SHAREHOLDERS. Each participant acquiring shares of Option Stock hereunder shall, upon the issuance of certificates with respect to such shares, be the registered owner of such shares and, except as otherwise provided herein, in any related Stock Option Agreement or in the Articles of Incorporation of Actamed, shall be entitled to full dividend and distribution rights like any other holder of Actamed Common Stock as long as such participant remains the registered owner thereof. -8- 19. GOVERNING LAW. This Plan shall be governed and construed in accordance with the laws of Georgia in all respects. 20. CONSTRUCTION. The masculine gender, where appearing in the Plan, shall be deemed to include the feminine and neuter genders, unless the context clearly indicates to the contrary; the singular includes the plural, and the plural shall include the singular. 21. VALIDITY AND LEGALITY. If any provision of this Plan for any reason is declared invalid, illegal or unenforceable, in whole or in part, such declaration shall not affect the validity, legality or enforceability of any remaining provision or portion thereof, which remaining provisions or portion thereof shall remain in force and effect as if this Plan had been adopted with the invalid, illegal or, unenforceable provision or portion thereof eliminated. 22. EFFECTIVE DATE. This Plan shall become effective upon its adoption by the Board of Directors and approval by the shareholders of Actamed and the filing of the Articles of Amendment to the Articles of Incorporation authorizing the Common Stock. -9- I. EXHIBIT A AMENDMENT TO THE 1993 CLASS B COMMON STOCK OPTION PLAN The Plan is hereby amended as follows: 1. Paragraph 5 is hereby amended by deleting the number "1,250,000" from the first line of said paragraph and replacing it with the number "1,500,000." 2. Paragraph 8(b)(iv) is hereby deleted in its entirety and replaced with the following: "A maximum of 1,500,000 shares of Common Stock may be issued under Incentive Options." 3. All other provisions of the Plan shall remain in full force and effect. -10- EX-10.8 12 EX-10.8 ACTAMED CORP. 1992 STOCK OPTION PLAN The 1992 Stock Option Plan (the "Plan") is hereby adopted as follows: 1. PURPOSE OF PLAN. The purpose of the Plan is to provide corporate officers and key employees of Actamed Corp. ("Actamed"), and its Subsidiaries (collectively the "Company"), as the Administrator hereinafter referred to shall designate, with a strong incentive for individual creativity and contribution to insure the future growth of the Company. The Plan is designed to reward those whose ability and diligence permit such persons to make important contributions to the success of the Company by enabling such persons to acquire shares of Actamed Common Stock in the manner contemplated by the Plan. Actamed believes that the Plan will also aid the Company in attracting and retaining outstanding key employees and in stimulating the efforts of such employees to work for the success of the Company. This Plan covers the grant of options [including nonstatutory stock options and options intended to qualify as incentive stock options under Section 422 of the Code ("Incentive Options")] to acquire shares which may or may not be subject to restrictions ("Option Stock"). 2. DEFINITIONS. For purposes of this Plan, the following terms where appearing with initial capitalization shall be applicable: (a) "ADMINISTRATOR" means either the Board of Directors or the Committee, whichever is so designated by the Board of Directors to administer the Plan. (b) "BOARD OF DIRECTORS" means the Board of Directors of Actamed. (c) "CODE" means the Internal Revenue Code of 1986, as amended from time to time. (d) "COMMITTEE" means a committee appointed by the Board of Directors and which shall consist of not less than two persons, all of whom shall be "disinterested persons" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended from time to time, or any law, rule, regulation or other provisions that may hereafter replace such Rule. If the Plan is administered by a Committee, the members of the Committee shall serve at the pleasure of the Board of Directors. Sixty percent (60%) of the Committee members shall constitute a quorum, and the action of a majority of the members of the Committee present at any meeting at which a quorum is present, or acts unanimously adopted in writing without holding a meeting, shall be the acts of the Committee. The Committee shall report all actions taken by it to the Board of Directors. (e) "COMMON STOCK" means Actamed's Common Stock. (f) "SUBSIDIARY" means any corporation (other than Actamed) in an unbroken chain of corporations beginning with Actamed if, at the time of the sale or award of any shares or the grant of any option under the Plan, each of the corporations other than the last in the unbroken chain owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one or the other corporations in such chain. 3. ADMINISTRATION OF PLAN. This Plan shall be administered, construed and interpreted by the Administrator. The Administrator shall have full and final authority, in its discretion, (a) to determine those corporate officers and key employees who shall be eligible to participate in the Plan and the number of shares to be covered by any options granted and the time or times at which such options shall be granted to each participant or exercised by each optionee (it being understood that more than one option may relate to the same participant), (b) to determine the terms and provisions of any Stock Option Agreement (the terms of which need not be identical) and the restrictions, if any, to be placed upon the shares of Common Stock issued under the Plan, (c) to accelerate the date on which any option granted under the Plan becomes exercisable and to waive (including in the event of a change-in-control of Actamed) any restriction, term or provision imposed by any Stock Option Agreement. (d) to employ such legal counsel, consultants and agents as it may deem desirable for the administration of the Plan and rely upon any opinions received from any such counsel or consultant and any computation received from any such consultant or agent, and (e) to make all other determinations and take all other actions deemed necessary and advisable for the proper administration of the Plan. The Administrator may adopt, alter and repeal such rules and regulations for the administration of the Plan as it from time to time deems advisable. The Administrator may act by a meeting in person or by telephone or by written determinations signed by all of the members of the Administrator. All actions, interpretations and determinations with respect to the administration of the Plan taken by the Administrator shall be conclusively binding for all purposes and upon all persons. Whether an authorized leave of absence, or absence in military or government service, shall constitute termination of employment shall be determined by the Administrator. 4. ELIGIBLE PARTICIPANTS. Employees, including but not limited to officers and directors who are employees, of the Company as determined by the Administrator shall be eligible for participation under the Plan. However, with respect to Incentive Options, persons eligible to receive Incentive Options shall be limited to key employees (including officers and directors who are employees) of Actamed and its Subsidiaries. 5. SHARES SUBJECT TO PLAN. An aggregate of 25,000 shares of Common Stock shall be subject to this Plan either from authorized but unissued shares or from issued shares reacquired by Actamed, including shares purchased in the open market, and such number of shares subject to the Plan shall be appropriately adjusted, in the discretion of the Administrator in the event of any one or more stock dividends, stock splits or any other forms of recapitalization, or spin-off, spin-out or other distribution of assets to shareholders of Actamed. The Administrator in its sole discretion may provide in any Stock Option Agreement or otherwise for adjustments to be made with respect to options granted hereunder. If prior to the termination of the Plan, shares issued pursuant hereto shall have been repurchased by or redelivered to Actamed in connection with the restrictions imposed on such shares pursuant to this Plan or any Stock Option Agreement under the Plan, such repurchase or redelivered shares shall again become available for option under the Plan. To the extent any options granted hereunder terminate, are canceled or expire unexercised in whole or in part, the shares with respect to which such options were not exercised shall again become available for option under the Plan. Any shares that are reacquired or become available due to termination, cancellation or expiration of options may be used to replace options that are canceled by the Administrator (with the consent of the optionee) due to the fact that the option exercise price is higher than the then current market value of the Common Stock. 6. PRICE. The Administrator in its absolute discretion shall determine the price at which any options granted to purchase shares of Option Stock hereunder shall become exercisable (which price may be less than the fair market value of a share of Common Stock), provided that such sale or exercise price with respect to Incentive Options is not less than the fair market value of a share of Common Stock at the time such option is granted, except as otherwise provided in Section 8(b)(vii). For the purposes hereof, fair market value shall be determined by the Administrator and the Administrator may make such determination: (a) in case the Common Stock is publicly traded but shall not then be listed and traded upon a recognized national market system, upon the basis of the mean between the bid and asked quotations for such stock on the date of grant of such option as reported by the National Association of Securities Dealers Automated Quotation system (NASDAQ) or, in the event that there shall be no bid or asked quotations on the date of grant of such option, then upon the basis of the mean between the bid and asked quotations on the date nearest preceding such date of grant, and upon any other factors which the Administrator shall deem appropriate, or b) in case the Common Stock is publicly traded and shall then be listed and traded upon a recognized securities exchange or shall be quoted on a recognized national market system, upon the basis of the mean between the highest and lowest selling prices at which shares of Common Stock were traded on such recognized securities exchange or national market system on such date of grant or, if the Common Stock was not traded on said date, upon the basis of the mean of such prices on the date nearest preceding such date of grant, and upon any other factors which the Administrator shall deem appropriate, or (c) in case the Common Stock is not listed or traded as referred to in Sections 6(a) or 6(b) above, in good faith and taking into consideration factors which the Administrator determines are applicable in the determination of such fair market value. 7. PAYMENT. (a) Payment for shares purchased under this Plan shall be payable in cash, by check, by promissory note, or in addition to the above, in shares of Common Stock as provided in 7(d) below, or in any combination thereof, as shall be determined by the Administrator and provided in the applicable Stock Option Agreement. (b) If the payment is made in cash or by check, such payment shall be made at the time the shares are sold. (c) If the payment is made by promissory note, such note, containing terms and conditions satisfactory to the Administrator and Actamed, shall be delivered at the time the shares are sold and shall bear interest, if any, at such rate and shall be payable upon such terms as the Administrator shall determine. Certificates for the purchased shares shall be registered in the name of the participant and may be delivered to the purchaser or held by Actamed as security for payment of the promissory note as determined in the discretion of the Administrator. (d) In connection with any options granted pursuant to this Plan, the Administrator, in its discretion, may accept as payment for all or any portion of the option price of any Option Stock, shares of Common Stock previously acquired by the participant (including shares received upon the prior exercise of any options regardless of the amount of time such previously acquired shares have been held by the participant) having a fair market value equal to the required payment. The participant shall deliver to Actamed a certificate or certificates representing such shares duly endorsed to Actamed or accompanied by a separate stock power so endorsed. (e) In addition to the foregoing, the exercise price of an option also may be paid by delivery to Actamed of a written notice of election to exercise, subject to the approval of the Administrator and in accordance with the requirements of Regulation T as promulgated by the Federal Reserve Board. 8. OPTION STOCK. (a) All options granted pursuant to the Plan shall have such terms and conditions as the Administrator shall determine, including the period during which they may be exercised in whole or in part and the conditions under which they may be terminated or canceled and such other provisions as may be advisable to comply with the law or the rules of any such stock exchange, and each option shall have the following additional conditions: (i) The options shall not be transferable other than by will or the laws of descent and distribution and shall be exercisable during the participant's lifetime only by him and, except as otherwise determined by the Administrator, shall only be exercisable prior to termination of employment with the Company. (ii) Actamed shall not issue any fractional shares upon the exercise of options granted under the Plan. (iii) No optionee will be deemed to be a holder of any shares of Common Stock or shall have any rights of a shareholder of Actamed until the issuance of certificates after the exercise thereof. No adjustment shall be made for any dividends or distributions or other rights for which the record date is prior to the date of such stock certificates so issued except as provided in 8(a)(iv) below. (iv) The number of shares subject to an option and the price per share shall be appropriately adjusted by the Administrator to reflect any stock splits, stock dividends or other form of recapitalization. (v) The Administrator shall have sole discretion to determine in the Stock Option Agreement whether shares of Option Stock (including any shares received thereon as a result of stock dividends, stock splits and any other forms of recapitalization) shall be free of any restrictions (other than those advisable to comply with the law) or shall be subject to any restrictions as may be determined by the Administrator, in its sole discretion. (vi) The granting of an option shall impose no obligation upon the participant to exercise such option. (b) All Incentive Options granted hereunder, in addition to the conditions required by Section 8(a) and the other Sections of the Plan applicable to Incentive Options, must meet the following additional conditions where applicable: (i) The Plan must be approved by the shareholders of Actamed within 12 months after its adoption by the Board of Directors. (ii) Any Incentive Option must be granted within 10 years from the date the Plan is adopted by the board of Directors. (iii) Any Incentive Option must be exercised only within 10 years of the date it is granted, except as otherwise provided in 8(b)(vii) below. (iv) A maximum of 25,000 shares of Common Stock may be issued under Incentive Options. (v) The aggregate fair market value (determined at the time the option is granted) of the stock with respect to which incentive stock options are exercisable for the first time by such individual during any calendar year (under all plans of Actamed and its Subsidiaries) shall not exceed $100,000. (vi) Any Incentive Option granted hereunder shall be consistent with the provisions of Sections 421, 422 and 424 and related Sections of the Code and applicable Treasury Regulations. The Stock Option Agreements authorized under this Plan in connection with the grant of Incentive Options may contain other provisions, not inconsistent with the Plan and Section 422 of the Code, as the Administrator shall deem advisable. (vii) If the participant owns (subject to applicable ownership attribution rules of Section 424(d) of the Code and Treasury Regulations promulgated thereunder) stock possessing more than 10 percent of the total combined voting power of all classes of stock of Actamed or of stock of any parent or subsidiary of Actamed at the time the Incentive Option is granted, the option price shall be not less than 110 percent of the fair market value of the stock subject to the Incentive Option and the Incentive Option by its terms shall not be exercisable after the expiration of five years from the date the Incentive Option is granted. 9. WITHHOLDING OF TAXES. (a) Upon the grant or exercise of any option hereunder and should Actamed determine that the participant will be considered to have received income subject to withholding due to such event and the Company will be required to withhold amounts for federal and state income tax purposes, the distribution of any such shares to the participant may be deferred by Actamed until the participant makes satisfactory arrangements to provide Actamed with the funds to meet any such tax withholding obligation. If the participant fails to provide such funds to Actamed the time required to pay such withholding tax or should Actamed and the participant agree that such tax withholding obligation may be paid with shares to be distributed to the participant, Actamed may retain and sell a sufficient number of the participant's shares which are otherwise to be distributed to the participant as may be required to discharge, or reimburse Actamed for, the payment of such withholding obligation and any interest and penalty which may have accrued in connection therewith. Actamed shall have and retain a security interest in such shares of the participant for the purpose of securing the participant's obligation hereunder and the participant shall take such steps and execute such documents to perfect such security interest as Actamed shall reasonably request. (b) In the event a participant makes an election to be taxed under Section 83(b) of the Code and files such election with the Internal Revenue Service, the participant shall be required to notify the Company in writing within 10 days of making such election. 10. COMPLIANCE WITH SECURITIES LAW. (a) Actamed shall be under no obligation to effect the registration pursuant to any federal or state securities laws of any shares of Common Stock to be issued hereunder. Notwithstanding anything herein to the contrary, Actamed shall not be obligated to issue any shares pursuant to this Plan unless the shares to be distributed are at that time effectively registered or exempt from registration, in the opinion of Actamed, under the applicable federal and state securities laws. (b) Unless the shares covered by the Plan have been registered under the applicable federal and state securities laws, or Actamed has determined that such registration is unnecessary, each person receiving shares under the Plan may be required by Actamed to give a representation in writing that he is acquiring such shares for his own account for investment and not with a view to, or for sale in connection with, the distribution of any part thereof. (c) The exercise of any option granted hereunder shall only be effective at such time as Actamed shall have determined that the issuance and delivery of shares of Common Stock pursuant to such exercise is in compliance with all applicable federal and states securities laws. Actamed may, in its sole discretion, defer the effectiveness of any exercise of an option granted hereunder in order to allow the issuance of shares of Common Stock pursuant thereto to be made pursuant to registration or an exemption from registration or other methods for compliance available under federal or state securities laws. Actamed shall inform the participant of its decision to defer the effectiveness of the exercise of an option granted hereunder. During the period that the effectiveness of the exercise of an option has been deferred, the participant may, by written notice, withdraw such exercise and obtain the refund of any amount paid or consideration tendered with respect thereto. 11. INDEMNIFICATION. In addition to any other rights of indemnification that they may have as directors of Actamed or as members of the Committee, the directors of Actamed and members of the Committee shall be indemnified by Actamed against the reasonable expenses, including attorneys' fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of action taken or failure to act under or in connection with the Plan, or any securities sold or issued hereunder, and against all amounts paid by them in settlement thereof (provided the settlement is approved by Actamed) or paid by them in satisfaction of a judgment in any action, suit or proceeding; provided that within 20 days after the institution of any action, suit or proceeding, the director or the Committee member shall in writing offer Actamed the opportunity, at its own expense, to handle and defend the same. 12. EXPENSES OF PLAN. The expenses of administering the Plan shall be borne by Actamed. 13. NO EFFECT ON EMPLOYMENT. Nothing herein contained, including the grant of any option, shall affect the right of the Company to terminate any participant's employment at any time for any reason. 14. EXEMPTION FROM PENSION COMPUTATION AND NON-EXCLUSIVITY OF THE PLAN. (a) By acceptance of options granted under this Plan, each participant shall be deemed to agree that it is special incentive compensation and that it will not be taken into account as "wages" or "salary" in retirement or deferred profit sharing plans, if any, of the Company. (b) In addition, each beneficiary of a deceased participant shall be deemed to agree that such grant will not affect the amount of any life insurance coverage available to such beneficiary under any life insurance plan, if any, covering employees of the Company. (c) Nothing contained in the Plan is intended to amend, modify or rescind any previously approved compensation plans or programs entered into by the Company. This Plan shall be construed to be an addition to any and all such other plans or programs. Neither the adoption of the Plan by Actamed not the submission of the Plan to the shareholders of Actamed for approval shall be construed as creating any limitations on the power of authority of Actamed to adopt such additional or other compensation arrangements as Actamed may deem desirable. 15. LEGEND. In order to enforce the restrictions imposed upon shares sold or awarded hereunder the Administrator may cause a legend or legends to be placed on any certificates representing shares sold or awarded pursuant to this Plan, which legend or legends shall make appropriate reference to the restrictions imposed hereunder. 16. AMENDMENTS. This Plan may be amended at any time by the Board of Directors consistent with applicable laws and regulations, provided that without the approval of the shareholders of Actamed, no such amendment shall become effective if it would (a) extend the termination date of the Plan set forth in Section 17, (b) materially increase the number of shares of Common Stock which may be sold under the Plan, except as provided in Section 5, or (c) materially modify the requirements as to eligibility for participation in the Plan. Any amendment to the Plan shall not, without the written consent of the participant, affect such participant's rights under any Stock Option Agreement entered into prior to such amendment. 17. TERMINATION. This Plan shall terminate and no further shares shall be sold or issued hereunder after September 1, 2002, or such earlier date as may be determined by the Board of Directors. The termination of this Plan, however, shall not affect any restrictions previously imposed on shares of Option Stock issued pursuant to this Plan, or alter the rights of participants with respect to options granted or shares of Option Stock issued pursuant to this Plan. 18. RIGHTS OF PARTICIPANTS AS SHAREHOLDERS. Each participant acquiring shares of Option Stock hereunder shall, upon the issuance of certificates with respect to such shares, be the registered owner of such shares and, except as otherwise provided herein or in any related Stock Option Agreement, shall be entitled to full voting, dividend and distribution rights like any other holder of Actamed Common Stock as long as such participant remains the registered owner thereof. 19. GOVERNING LAW. This Plan shall be governed and construed in accordance with the laws of Georgia in all respects. 20. CONSTRUCTION. The masculine gender, where appearing in the Plan, shall be deemed to include the feminine and neuter genders, unless the context clearly indicates to the contrary; the singular includes the plural, and the plural shall include the singular. 21. VALIDITY AND LEGALITY. If any provision of this Plan for any reason is declared invalid, illegal or unenforceable, in whole or in part, such declaration shall not affect the validity, legality or enforceability of any remaining provision or portion thereof, which remaining provisions or portion thereof shall remain in force and effect as if this Plan had been adopted with the invalid, illegal or unenforceable provision or portion thereof eliminated. 22. EFFECTIVE DATE. This Plan shall become effective upon its adoption by the Board of Directors and approval by the shareholders of Actamed. AMENDMENT TO ACTAMED CORP. 1992 STOCK OPTION PLAN Pursuant to paragraph 16 of the 1992 Stock Option Plan, (the "Plan"), the Plan is hereby amended as follows: 1. Paragraph 2(e) is deleted in its entirety and replaced with the following: '"COMMON STOCK" means Actamed's Class A Common Stock."' 2. Paragraph 5 is hereby amended by deleting the number "25,000" from the first line of said paragraph and replacing it with the number "1,250,000". 3. Paragraph 8(b)(iv) is hereby deleted in it entirety and replaced with the following: "A maximum of 1,250,000 shares of Common Stock may be issued under Incentive Options." 4. All other provisions of the Plan shall remain in full force and effect. EX-10.9 13 EX-10.9 ACTAMED CORPORATION 1996 DIRECTOR STOCK OPTION PLAN (AMENDED AND RESTATED DECEMBER __, 1997) ARTICLE I GENERAL 1.1 PURPOSE OF THE PLAN. The purpose of the ActaMed Corporation 1996 Director Stock Option Plan (the "Plan") is to assist ActaMed Corporation (the "Company") in securing and retaining non-employee directors of outstanding ability by making it possible to offer them an increased incentive to advise, join or continue in the service of the Company and to increase their efforts for its welfare through participation or increased participation in the ownership and growth of the Company by granting non-employee directors, and Non-Employee Director's Designees (as defined below), Options under this Plan. 1.2 DEFINITIONS. (a) "BOARD OF DIRECTORS" or "BOARD" means the Board of Directors of the Company. (b) "CODE" means the Internal Revenue Code of 1986, as amended. (c) "COMMITTEE" means the committee referred to in Section 1.3. (d) "COMMON STOCK" means the common stock of the Company. (e) "FAIR MARKET VALUE" means the closing price of the shares on a national securities exchange on which the Common Stock is primarily traded on the day on which such value is to be determined or, if no shares were traded on such day, on the next preceding day on which shares were traded, as reported by National Quotation Bureau, Inc. or other national quotation service. If the shares of Common Stock are traded in the over-the-counter market, "fair market value" means the closing "asked" price of the shares in the over-the-counter market on the day on which such value is to be determined or, if such "asked" price is not available, the last sales price on such day or, if no shares were traded on such day, on the next preceding day on which the shares were traded, as reported by the National Association of Securities Dealers Automatic Quotation System (NASDAQ) or other national quotation service. Nevertheless, if the Board of Directors determines that the fair market value of the Common Stock cannot be accurately determined pursuant to the methodologies described above or if shares of Common Stock are not traded on an exchange or in the over-the-counter market, Fair Market Value shall be the value determined by the Board of Directors or Committee administering the Plan, taking into consideration those factors affecting or reflecting value which they deem appropriate. (f) "NON-EMPLOYEE DIRECTOR'S DESIGNEE" means the corporation, partnership, proprietorship or other entity (including an investment fund) by whom the non-employee director is employed or with whom the non-employee director is affiliated as an officer, partner, director, manager, principal, or associate, at the time the non-employee director is a director of the Corporation and is determined by the Committee to receive options under the Plan. (g) "NONQUALIFIED STOCK OPTION" means an option to purchase shares of Common Stock which is not intended to qualify as an incentive stock option as defined in Section 422 of the Code and which may be granted to non-employee directors and a Non-Employee Director's Designees. (h) "OPTION" means a Nonqualified Stock Option. (i) "OPTIONEE" means a non-employee director or a Non-Employee Director's Designee to whom an Option is granted under the Plan. (j) "PARENT" means any corporation which qualifies as a parent of a corporation under the definition of "parent corporation" contained in Section 424(e) of the Code. (k) "SUBSIDIARY" means any corporation which qualifies as a subsidiary of a corporation under the definition of "subsidiary corporation contained in Section 424(f) of the Code. (l) "TERM" means the period during which a particular Option may be exercised as determined by the Committee and as provided in the option agreement. 1.3 ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Compensation Committee (the "Committee") appointed by the Board of Directors consisting of at least three members from the Board of Directors. In the absence of such an express appointment of a Committee, the Board shall serve as the Committee. Subject to the control of the Board, and without limiting the control over decisions described in Section 1.7, the Committee shall have the power to interpret and apply the Plan and to make regulations for carrying out its purpose. More particularly, the Committee shall determine which non-employee directors shall be granted Options and the terms of such Options. All Options granted under the Plan shall be Nonqualified Stock Options. Determinations by the Committee under the Plan (including, without limitation, determinations of the person to receive Options, the form, amount and timing of such Options, and the terms and provisions of such Options and the agreements evidencing same) need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, Options under the Plan, whether or not such persons are similarly situated. In serving on the Committee, members thereof shall be considered to be acting in their capacity as members of the Board of Directors and shall be entitled to all rights of -2- indemnification provided by the Bylaws of the Company or otherwise to members of the Board of Directors. At the time that the Committee determines that a non-employee director shall be granted Options under the Plan, the non-employee director may promptly notify the Committee of the Non-Employee Director's Designee who shall be granted all or a portion of the Options in place of the non-employee director. The Committee shall retain at all times, before the Options are granted, the discretion as to whether or not to grant the Options to the Non-Employee Director's Designee. 1.4 SHARES SUBJECT TO THE PLAN. The total number of shares that may be purchased pursuant to Options under the Plan shall not exceed 100,000 shares of Common Stock. Shares subject to the Options which terminate or expire prior to exercise shall be available for future Options under the Plan without being charged against the limitation of 100,000 shares set forth above. Shares issued pursuant to the Plan may be either unissued shares of Common Stock or reacquired shares of Common Stock held in treasury. 1.5 TERMS AND CONDITIONS OF OPTIONS. All Options shall be evidenced by option agreements in such form as the Committee shall approve from time to time subject to the provisions of Article II and the following provisions: (a) EXERCISE PRICE. The exercise price of an Option shall be determined by the Committee; provided, however, such exercise price shall not be less than the Fair Market Value (as determined by the Board of Directors) of the Common Stock at the time the Option is granted without the unanimous approval of all members of the Board of Directors. (b) EXERCISE. The Committee shall determine whether the Option shall be exercisable in full at any time during the Term or in cumulative or noncumulative installments during the Term. (c) TERMINATION OF DIRECTORSHIP. An Optionee's Option shall expire on the expiration of the Term specified in Section 2.1 or upon the occurrence of such events as are specified in the option agreement. If the option agreement permits exercise of the Option after termination of directorship (or after the termination of the directorship of the non-employee director on whose behalf the Non-Employee Director's Designee has been granted the Option), the Optionee may exercise the Option only with respect to the shares which could have been purchased by the Optionee at the date of termination of such directorship. However, the Committee may, but is not required to, waive any requirements made pursuant to Section 1.5(b) so that some or all of the shares subject to the Option may be exercised within the time limitation described in this subsection. An Optionee's directorship (or the directorship of the non-employee director on whose behalf the Non-Employee Director's Designee has been granted the Option) shall be deemed to terminate on the effective date of his or her resignation or removal or, in the alternative, on the date determined by the Committee to constitute the date of the termination of directorship of the Optionee (or the non-employee director on whose behalf the Non-Employee Director's Designee has been granted the Option). Whether military, government or other service or other leave of absence shall constitute a termination of -3- directorship shall be determined in each case by the Committee at its discretion, and any determination by the Committee shall be final and conclusive. (d) DEATH OR DISABILITY. Upon termination of the directorship of the Optionee (or the non-employee director on whose behalf the Non-Employee Director's Designee has been granted the Option) by reason of death or disability (as determined by the Committee consistent with the definition of Section 422(c)(6) of the Code), the Option shall expire on the earlier of the expiration of (i) the date specified in the option agreement which in no event shall be later than 12 months after the date of such termination, or (ii) the Term specified in Section 2.1. The Optionee or his successor in interest, as the case may be, may exercise the Option only as to the shares that could have been purchased by the Optionee at the date of the termination of directorship of the Optionee (or the non-employee director on whose behalf the Non-Employee Director's Designee has been granted the Option). However, the Committee may, but is not required to, waive any requirements made pursuant to Section 1.5(b) so that some or all of the shares subject to the Option may be exercised within the time limitation described in this subsection. (e) PAYMENT. Payment for shares as to which an Option is exercised shall be made in such manner and at such time or times as shall be provided in the option agreement, including cash, Common Stock of the Company which was previously acquired by the Optionee, or any combination thereof. The Fair Market Value of the surrendered Common Stock as of the date of exercise shall be determined in valuing Common Stock used in payment for Options. (f) NONTRANSFERABILITY. No Option granted under the Plan shall be transferable other than by will or by the laws of descent and distribution; provided, however, a non-employee director may designate that his or her Options be granted to the Non-Employee Director's Designee subject to the approval by the Committee. During the lifetime of the Optionee (or the lifetime of the non-employee director on whose behalf the Non-Employee Director's Designee has been granted the Option), an Option shall be exercisable only by the Optionee. (g) CHANGE IN CONTROL. In the discretion of the Committee, an option agreement may contain provisions providing that in the event of a "change in control" of the Company, such Option shall become immediately exercisable in full notwithstanding any provisions in the option agreement to the contrary. For the purposes of this paragraph (g), a "change in control" of the Company shall be deemed to occur if (i) the Company is a party to a merger, share exchange or other business combination pursuant to which the Company does not survive or survives only as a subsidiary of another corporation; or (ii) all or substantially all of the assets of the Company are sold or otherwise disposed of. (h) ADDITIONAL PROVISIONS. Each option agreement may contain such other terms and conditions not inconsistent with the provisions of the Plan as the Committee may deem appropriate from time to time, including cash awards for such purposes as the Committee may determine, including but not limited to cash awards for the payment of any income or excise tax directly or indirectly attributable to the exercise or acceleration of exercise of an Option (including, without limitation, any tax under Code Section 280G). -4- 1.6 STOCK ADJUSTMENTS; MERGERS. (a) GENERAL. Notwithstanding Section 1.4, in the event the outstanding shares of Common Stock are increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of any other corporation by reason of any merger, sale of stock, consolidation, liquidation, recapitalization, reclassification, stock split up, combination of shares, share exchange, stock dividend, or transaction having similar effect, the total number of shares of Common Stock set forth in Section 1.4 shall be proportionately and appropriately adjusted by the Committee. (b) OPTIONS. Following a transaction described in subsection (a) above, if the Company continues in existence, the number and kind of shares that are subject to any Option and the option price per share shall be proportionately and appropriately adjusted without any change in the aggregate price to be paid therefor upon exercise of the Option. If the Company will not remain in existence or substantially all of its Common Stock will be purchased by a single purchaser or group of purchasers acting together, then the Committee may (i) declare that all Options shall terminate 30 days after the Committee gives written notice to all Optionees of their immediate right to exercise all Options then outstanding (without regard to limitations on exercise otherwise contained in the Options), or (ii) notify all Optionees that all Options granted under the Plan shall apply with appropriate adjustments as determined by the Committee to the securities of the successor corporation to which holders of the numbers of shares subject to such Options would have been entitled, or (iii) take action that is some combination of aspects of (i) and (ii). Except as provided in the last sentence of this paragraph (b), the determination by the Committee as to the terms of any of the foregoing adjustments shall be conclusive and binding. Any fractional shares resulting from any of the foregoing adjustments under this paragraph shall be disregarded and eliminated. Notwithstanding anything else contained in this Section 1.6(b), if an option agreement permits the immediate exercise in full of an Option upon a change in control as provided in Section 1.5(g) above, the provisions of such option agreement may not be revised by the Committee pursuant to this Section 1.6(b) without the consent of the Optionee. 1.7 NOTIFICATION OF EXERCISE. Options shall be exercised by written notice directed to the Secretary of the Company at the principal executive offices of the Company. Such written notice shall be accompanied by any payment required pursuant to Section 1.5(e) and shall be effective upon receipt by the Secretary of the Company received during normal business hours or if not so received, such exercise shall be effective on the next regular business day of the Company. Exercise by an Optionee which is a corporation, partnership or other entity, or by an Optionee's heir or the representative of his estate shall be accompanied by evidence of its or his authority to so act in form reasonably satisfactory to the Company. -5- ARTICLE II NONQUALIFIED STOCK OPTIONS 2.1 TERMS AND CONDITIONS OF OPTIONS. In addition to the requirements of Section 1.5, each Option granted under the Plan to a non-employee director or a Non-Employee Director's Designee shall be a Nonqualified Stock Option and subject to the following provisions: (a) TERM. Each Nonqualified Stock Option granted under the plan shall be exercisable only during a term fixed by the Committee. (b) EXERCISE PRICE. Subject to the terms of Section 1.5(a), the Company may elect to grant Nonqualified Stock Options at a price less than the Fair Market Value of the Common Stock at the time the Option is granted. 2.2 SECTION 83(b) ELECTION. The Company recognizes that certain persons who receive Nonqualified Stock Options may be subject to restrictions regarding their right to trade Common Stock under Applicable securities laws. Such may cause Optionee's exercising such Options not to be taxable under the provisions of Section 83(c) of the Code. Accordingly, Optionees exercising such Nonqualified Stock Options may consider making an election to be taxed upon exercise of the Option under Section 83(b) of the Code and to effect such election will file such election with the Internal Revenue Service within (30) days of exercise of the Option and otherwise in accordance with applicable Treasury Regulations. ARTICLE III ADDITIONAL PROVISIONS 3.1 SHAREHOLDER APPROVAL. The Plan shall be submitted for the approval of the shareholders of the Company as soon as reasonably practicable following the adoption of the Plan by the Board of Directors or the Committee and in all events within one year of its approval by such Board or Committee. If the shareholders of the Company do not approve the Plan as provided in this Section 3.1, the Plan shall terminate. 3.2 COMPLIANCE WITH OTHER LAWS AND REGULATIONS. The Plan, the grant and exercise of Options hereunder, and the obligation of the Company to sell and deliver shares under such Options, shall be subject to all applicable Federal and state laws, rules, and regulations and to such approvals by any government or regulatory agency as may be required. The Company shall not be required to issue or deliver any certificates for shares of -6- Common Stock prior to (a) the listing of such share on any stock exchange on which the Common Stock may then be listed and (b) the completion of any registration or qualification (or determination of the availability of an exemption therefrom) of such shares under any Federal or state law, or any ruling or regulation of any government body which the Company shall, in its sole discretion, determine to be necessary or advisable. 3.3 AMENDMENTS. The Board of Directors may discontinue the Plan at any time, and may amend it from time to time. However, except as permitted under Section 1.6, no amendment, without approval by stockholders, may (a) increase the total number of shares which may be issued under the Plan or to any individual under the Plan, (b) extend the date on which the Plan will terminate, (c) reduce the Option price for shares which may be purchased pursuant to Options under Articles II of the Plan, (d) extend the period during which Options may be granted, (e) change the class of eligible persons to whom Options may be granted under the Plan, or (f) change the provisions of the Plan in such a manner so as to increase materially the benefits accruing under the Plan. Other than as expressly permitted under the Plan, no outstanding Option may be revoked or altered in a manner unfavorable to the Optionee without the consent of the Optionee. 3.4 NO RIGHTS AS SHAREHOLDER. No Optionee shall have any rights as a shareholder with respect to any share subject to his or her Option prior to the date of issuance to him or her of a certificate or certificates for such shares. 3.5 WITHHOLDING. Whenever the Company proposes or is required to issue or transfer shares of Common Stock under the Plan the Company shall have the right to require the Optionee to remit to the Company an amount sufficient to satisfy any Federal, state or local withholding tax liability in such form as the Company may determine or accept in its sole discretion, including payment by surrender or retention of shares of Common Stock prior to the delivery of any certificate or certificates for such shares. Whenever under the Plan payments are to be made in cash, such payments shall be made net of an amount sufficient to satisfy any Federal, state, or local withholding tax liability. 3.6 CONTINUED SERVICE AS A DIRECTOR NOT PRESUMED. This Plan and any document describing this Plan and the grant of any Option hereunder shall not give any Optionee a right to continued service as a director of the Company or its Subsidiaries. 3.7 EFFECTIVE DATE; DURATION. The Plan shall become effective as of February 9, 1996, subject to shareholder approval pursuant to Section 3.1, and shall expire at midnight on February 9, 2006. No Options may be granted under the Plan after February 9, 2006, but Options granted on or before that date may be -7- exercised according to the terms of the related agreements and shall continue to be governed by and interpreted consistent with the terms hereof. The foregoing Plan was approved and adopted by the Board of Directors and the Shareholders of the Company on February 9, 1996 and the Plan was amended and restated by the Board of Directors of the Company on December __, 1997. -8- EX-10.10 14 EX-10.10 AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT This Amended and Restated Investors' Rights Agreement (the "Agreement") is entered into as of May 19, 1998, by and between Healtheon Corporation, a Delaware corporation (the "Company") and the persons and entities listed on Schedules A and B hereto. WHEREAS, the Company and certain of the persons and entities listed on Schedules A and B hereto entered into certain Securities Purchase Agreements during the period from January 26, 1996 through December __, 1997 (the "Securities Purchase Agreements") pursuant to which the Company sold and issued to such persons and entities (the "Healtheon Investors") shares of its Common Stock and Series A, Series B, Series C and Series D Preferred Stock and issued certain warrants with respect thereto; and WHEREAS, in order to induce the Healtheon Investors to invest funds in the Company pursuant to the Securities Purchase Agreements, the Company and the Healtheon Investors entered into certain Investors' Rights Agreements pursuant to which the Company granted certain rights to the Healtheon Investors; and WHEREAS, the Company entered into an Agreement and Plan of Reorganization (the "Merger Agreement") with ActaMed Corporation ("ActaMed") dated February 24, 1998, in connection with the acquisition of ActaMed by the Company (the "Merger"), pursuant to which the Company will issue and exchange 0.6272 shares of Company Common Stock for each share of ActaMed Capital Stock outstanding at the time the Merger is consummated; and WHEREAS, as a condition to closing of the Merger, the Healtheon Investors have agreed to convert all of their shares of Original Preferred Stock and warrants to acquire Original Preferred Stock into Common Stock and warrants to acquire Common Stock; and WHEREAS, certain shareholders of ActaMed Capital Stock listed on Schedules A and B hereto possess certain registration and other rights with respect to their shares of ActaMed Capital Stock, and desire to maintain certain rights following the Merger with respect to their shares of Company Common Stock (the "ActaMed Holders"); and WHEREAS, pursuant to the Merger Agreement, in order to induce the ActaMed Holders to approve the Merger, the Company and the ActaMed Holders have entered into this Agreement. NOW, THEREFORE, in consideration of the premises, covenants, and conditions set forth herein, the parties agree as follows: 1. REGISTRATION RIGHTS. The parties covenant and agree as follows: 1.1 DEFINITIONS. For purposes of this Agreement: (a) The term "register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act of 1933, as amended (the "Act"), and the declaration or ordering of effectiveness of such registration statement or document. 1 (b) The term "Registrable Securities" means (i) the Company's Common Stock issued pursuant to the Securities Purchase Agreements, (ii) the Company's Common Stock issued upon conversion of the Original Preferred Stock and issued upon the exercise of the warrants issued in substitution for the Series B Preferred Stock Warrants (together, the "Conversion Stock"), (iii) the Company's Common Stock issued to the ActaMed Holders pursuant to the Merger Agreement (the "Merger Stock"), and (iv) any Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, such Common Stock, Conversion Stock and Merger Stock described in (i), (ii) and (iii), excluding in all cases, however, (A) any Registrable Securities sold by a person in a transaction in which such person's rights under this Section 1 are not assigned or (B) shares of any Registrable Securities that have been sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction. (c) The number of shares of "Registrable Securities then outstanding" shall be equal to the sum of (i) the number of shares of Common Stock outstanding that are Registrable Securities and (ii) the number of shares of Common Stock issuable pursuant to then exercisable or convertible securities that are exercisable or convertible into Registrable Securities. (d) The term "Holder" means any person owning or having the right to acquire Registrable Securities or any transferee or assignee thereof in accordance with Section 1.14 hereof. (e) The term "Form S-3" means such form under the Act as in effect on the date hereof or any registration form under the Act subsequently adopted by the Securities and Exchange Commission ("SEC") that permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. (f) The term "Initial Public Offering" means the first sale of Common Stock of the Company to the public effected pursuant to a registration statement (other than a registration statement relating either to the sale of securities to employees of the Company pursuant to a stock plan, stock purchase or similar plan or a SEC Rule 145 transaction) filed with, and declared effective by, the SEC under the Act on Form S-1 (or any subsequently adopted similar form). (g) The term "Original Preferred Stock" shall mean the Series A Preferred Stock and the Series A-1 Preferred Stock (including Series A-2, Series A-3, etc.); the Series B Preferred Stock and the Series B-1 Preferred Stock (including Series B-2, Series B-3, etc.); the Series C Preferred Stock and the Series C-1 Preferred Stock (including Series C-2, Series C-3, etc.), and the Series D Preferred Stock and the Series D-1 Preferred Stock (including Series D-2, Series D-3, etc.) of the Company issued and sold to pursuant to the Securities Purchase Agreements or upon the exercise of the Series B Preferred Stock Warrants. (h) The term "Principal Holder" shall mean each Holder which, together with its affiliated entities, holds at least two hundred and fifty thousand (250,000) shares of Registrable Securities. 1.2 REQUEST FOR REGISTRATION. (a) If the Company shall receive at any time after the earlier of (i) January 26, 2001, or (ii) twelve (12) months after consummation of the Company's Initial Public Offering, a written request from the Holders of forty percent (40%) of the Registrable Securities then outstanding that the Company file a registration statement under the Act covering the registration of Registrable Securities with an aggregate gross offering price of at least ten million dollars ($10,000,000), then the Company shall, within ten (10) days of the receipt thereof, give written notice of such request to all Holders and shall, subject to the limitations of subsection 1.2(b), effect as soon as practicable, and in any event shall use its best efforts to effect within one hundred twenty (120) days of the receipt of such request, the registration under the Act of all Registrable Securities that the Holders request 2 to be registered within twenty (20) days of the mailing of such notice by the Company. (b) If the Holders initiating the registration request hereunder ("Initiating Holders") intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this Section 1.2 and the Company shall include such information in the written notice referred to in subsection 1.2(a). The underwriter or underwriters will be selected by the Company and shall be reasonably acceptable to a majority in interest of the Initiating Holders. In such event, the right of any Holder to include his Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder) to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company as provided in subsection 1.4(e)) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting. Notwithstanding any other provision of this Section 1.2, if the managing underwriter advises the Initiating Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Company shall so advise all Holders of Registrable Securities requesting to be included in the underwriting, and the number of shares of Registrable Securities that may be included in the underwriting shall be allocated among all Holders requesting to be included in the underwriting, in proportion (as nearly as practicable) to the amount of Registrable Securities of the Company owned by each Holder at the time of filing the registration statement; provided, however, that the number of shares of Registrable Securities to be included in such underwriting shall not be reduced unless all other securities, including, without limitation, any shares offered by the Company, are first entirely excluded from the underwriting. No Registrable Securities excluded from the underwriting by reason of the managing underwriters' marketing limitation shall be included in such registration. To facilitate the allocation of Shares in accordance with the above provisions, the Company or the underwriters may round the number of shares allocated to any Holder to the nearest one hundred (100) Shares. (c) The Company is obligated to effect only one (1) registration pursuant to this Section 1.2 (counting for this purpose only registrations that have been declared or ordered effective and pursuant to which Registrable Securities have been sold). (d) Notwithstanding the foregoing, if the Company shall furnish to Holders requesting a registration statement pursuant to this Section 1.2, a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such registration statement to be filed and that it is therefore essential to defer the filing of such registration statement, the Company shall have the right to defer such filing for a period of not more than one hundred twenty (120) days after receipt of the request of the Initiating Holders; provided, however, that the Company may defer its obligations for this reason only once in any twelve (12) month period. (e) Notwithstanding anything to the contrary in this Section 1.2, the Company shall not be obligated to take an action to effect such registration pursuant to this Section 1.2 for a period of six (6) months following the effective date of a registration statement previously filed by the Company (other than a registration of securities in a SEC Rule 145 transaction or with respect to an employee benefit plan). (f) If any registration statement prepared pursuant to this Section 1.2 is not filed or does not become effective or fails to close as a result of the decision of the Initiating Holders or any underwriter designated by them, the obligation of the Company to prepare and file a registration statement at the request of such Initiating Holders shall nevertheless have been satisfied unless such Initiating Holders shall reimburse the Company for its registration expenses set forth in Section 1.6 herein incurred in connection with the preparation and filing of such registration statement. If the registration statement otherwise fails to become effective or fails to close, the registration rights of the Holders provided in Section 1.2 shall remain fully available as if the registration had not been requested by the Initiating Holders. 3 1.3 COMPANY REGISTRATION. If (but without any obligation to do so) (i) the Company proposes to register any of its Common Stock or other securities under the Act in connection with a public offering of such securities solely for cash (including a registration effected by the Company for stockholders other than the Holders, but not including a registration relating solely to the Company's employee benefit plans, or a registration on any form that does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities), and (ii) the Company has consummated its Initial Public Offering, the Company shall, at such time, promptly give each Holder written notice of such registration. Upon the written request of each Holder given within twenty (20) days after mailing of such notice by the Company, the Company shall, subject to the provisions of Section 1.8, cause to be registered under the Act all of the Registrable Securities that each such Holder has requested to be registered. 1.4 OBLIGATIONS OF THE COMPANY. Whenever required pursuant to this Section 1 to effect the registration of any Registrable Securities, the Company shall perform the following obligations as expeditiously as reasonably possible: (a) The Company shall prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, to keep such registration statement effective for up to one hundred twenty (120) days. (b) The Company shall prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (c) If requested by a selling Holder which holds at least five percent (5%) of the Registrable Securities then outstanding, the Company shall provide the underwriters (which term, for purposes of this Agreement, shall include a person deemed to be an underwriter within the meaning of Section 2(11) of the Securities Act), if any, of the shares being sold and counsel for such underwriters and not more than one counsel for all of such selling Holders (which counsel shall be subject to approval by the Company, such approval not to be unreasonably withheld) the opportunity to participate in the preparation of the registration statement, each prospectus included therein or filed with the Commission, and each amendment or supplement thereto; and make available for inspection by such underwriters and the applicable counsel such financial and other information, books and records of the Company and cause the officers, directors and employees of the Company and counsel and independent certified public accountants of the Company to respond to such inquiries as shall be reasonably necessary, in the opinion of respective counsel to such selling Holders and such underwriters, to conduct a reasonable investigation within the meaning of the Securities Act. (d) The Company shall promptly notify (in writing, if so requested) the selling Holders and the underwriters, if any, (i) when the registration statement, the prospectus or any prospectus supplement or post-effective amendment has been filed, and with respect to the registration statement or any post-effective amendment, when the same has become effective, (ii) request by the Commission for amendments or supplements to the registration statement or the prospectus, (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the registration statement or the initiation of any proceedings for that purpose, (iv) of the receipt of the Company of any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose. (e) The Company shall, if requested by the managing underwriter or underwriters or by selling Holders, promptly incorporate in a prospectus, prospectus supplement or post-effective amendment such 4 information or such managing underwriter or underwriters as such selling Holders specify should be included therein relating to the sale of the Registrable Securities, including, without limitation, information with respect to the number or amount of Registrable Securities being sold to such underwriters, the purchase price being paid therefor by such underwriters and with respect to any other terms of the underwritten (or best efforts underwritten) offering of the Registrable Securities to be sold in such offering; and make all required filings of such prospectus, prospectus supplement or post-effective amendment promptly after notification of the matters to be incorporated in such prospectus, prospectus supplement or post-effective amendment, provided that the Company and its counsel are reasonably satisfied that such additional information does not constitute an 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 in light of the circumstances then existing. (f) The Company shall furnish to the Holders such numbers of copies of the prospectus, including a prospectus subject to completion, in conformity with the requirements of the Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (g) The Company shall use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (h) The Company shall prepare and file with the applicable exchange or securities market an appropriate listing application with respect to the Registered Securities. (i) In the event of any underwritten public offering, the Company shall enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (j) The Company shall notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (k) Notwithstanding the foregoing, the Company shall have no obligation with respect to any registration requested pursuant to Sections 1.2 or 1.13 if the number of shares or the anticipated aggregate offering price of the Registrable Securities to be included in the registration does not equal or exceed the number of shares or the anticipated aggregate offering price required to trigger the Company's obligation to initiate such registration as specified in subsection 1.2(a) or subsection 1.13(b)(ii), as applicable. 1.5 OBLIGATIONS OF THE HOLDERS. (a) It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 1 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of such Holder's Registrable Securities. (b) In the event of any underwritten public offering, each Holder participating in such 5 underwriting shall enter into and perform its obligations under an underwriting agreement in customary form with the managing underwriter of such offering. 1.6 EXPENSES OF DEMAND REGISTRATION. All expenses other than underwriting discounts and commissions incurred in connection with registrations, filings or qualifications pursuant to Section 1.2, including (without limitation) all registration, filing and qualification fees, printers' and accounting fees, fees and disbursements of counsel for the Company and the reasonable fees and disbursements of one counsel for the selling Holders not to exceed twenty five thousand dollars ($25,000), shall be borne by the Company. Notwithstanding the foregoing, the Company shall not be required to pay for expenses of any registration proceeding begun under Section 1.2, the request for which has been subsequently withdrawn by the Holders of a majority of the Registrable Securities or is not completed due to failure to meet the gross offering price requirement set forth in such section unless Holders representing a majority of Registrable Securities agree to forfeit their right to a registration under Section 1.2, provided however, that if at the time of such withdrawal by the Holders of a majority of the Registrable Securities, the Holders have learned of a material adverse change in the operating results, financial condition or business of the Company from that known to the Holders at the time of the request and have withdrawn the request with promptness following disclosure by the Company of such material adverse change. 1.7 EXPENSES OF COMPANY REGISTRATION. The Company shall bear and pay all expenses incurred in connection with any registration, filing or qualification of Registrable Securities with respect to the registrations pursuant to Section 1.3 for each Holder (which right may be assigned as provided in Section 1.14), including (without limitation) all registration, filing, and qualification fees, fees and disbursements of Company counsel, printers' and accounting fees relating or apportionable thereto and the reasonable fees and disbursements of one counsel for the selling Holders not to exceed twenty five thousand dollars ($25,000), but excluding underwriting discounts and commissions relating to Registrable Securities. 1.8 UNDERWRITING REQUIREMENTS. (a) In connection with any offering involving an underwriting of shares of the Company's Common Stock, the Company shall not be required under Section 1.3 to include any of the Holders' securities in such underwriting unless they accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (or by other persons entitled to select the underwriters), and then only in such quantity as the managing underwriter determines in its sole discretion will not, due to marketing factors, jeopardize the success of the offering by the Company. (b) If the total amount of securities, including Registrable Securities, requested by stockholders to be included in such offering (excluding an offering effected pursuant to Section 1.2) exceeds the amount of securities sold other than by the Company that the underwriters determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, which the underwriters determine in their sole discretion will not jeopardize the success of the offering (the securities so included to be apportioned pro rata among the Holders requesting inclusion in such registration according to the total amount of securities entitled to be included therein owned by each such Holder on a pro rata basis); provided, however, that any such limitation or "cut-back" shall be first applied to all shares proposed to be sold in such offering, other than for the account of the Company, which are not Registrable Securities. In no event shall any securities of the Company be excluded from such registration prior to the cut back of all shares proposed to be sold in such offering by the stockholders of the Company. 1.9 WITHDRAWAL RIGHTS AND REALLOCATION. If any Holder disapproves of the terms of any such underwriting, such Holder may elect to withdraw therefrom by written notice to the Company and the underwriters. If such Holder's shares are withdrawn from registration, or if the number of shares of Registrable 6 Securities was previously reduced due to marketing factors, the Company shall offer to all Holders retaining the right to include securities in the registration the right to include additional Registrable Securities in the registration, with such shares being allocated on a pro rata basis among the Holders of Registrable Securities. 1.10 DELAY OF REGISTRATION. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 1. 1.11 INDEMNIFICATION. In the event any Registrable Securities are included in a registration statement under this Section 1: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the officers, directors and general partners of each Holder, any underwriter (as defined in the Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Act or the 1934 Act, against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Act, the 1934 Act or other federal or state law, including any of the foregoing incurred in settlement of any litigation, commenced or threatened, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (each of which is referred to herein as a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any prospectus subject to completion or final prospectus contained therein or any amendments or supplements thereto; (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading; or (iii) any violation or alleged violation by the Company of the Act, the 1934 Act, any state securities law or any rule or regulation promulgated under the Act, the 1934 Act or any state securities laws. In addition, the Company will promptly reimburse each such Holder, officer, director or general partner, underwriter or controlling person for any legal or other expenses reasonably incurred by them, on an as-incurred basis, in connection with investigating or defending any such loss, claim, damage, liability, or action. Notwithstanding the foregoing, the indemnity provisions contained in this Section 1.11(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the written consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation that results from reliance upon written information furnished expressly for use in connection with such registration by any such Holder, officer, director, general partner, underwriter or controlling person. (b) To the extent permitted by law, each selling Holder shall indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the registration statement, each person, if any, who controls the Company within the meaning of the Act, any underwriter and any Holder selling securities in such registration statement or any of its directors, officers or general partners or each person, if any, who controls such Holder, against any losses, claims, damages, or liabilities (joint or several) to which the Company (or any director, officer, controlling person), or underwriter (or controlling person), or Holder (or director, officer, general partner or controlling person thereof) may become subject, under the Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or action in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation results from reliance upon written information furnished by such Holder expressly for use in connection with such 7 registration. Each such Holder will promptly reimburse any legal or other expenses reasonably incurred, on an as-incurred basis, by the Company (or any director, officer, controlling person), underwriter (or controlling person), Holder (or any director, officer, general partner, or controlling person thereof) in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this Section 1.11(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the written consent of the Holder, which consent shall not be unreasonably withheld. Notwithstanding the foregoing, the liability of each Holder under this Section 1.11(b) shall be limited to an amount equal to the aggregate proceeds of the shares sold by such Holder in the offering pursuant to which the Violation is claimed to have occurred, unless such liability arises out of or is based on willful misconduct of such Holder. (c) Within a reasonable time after receipt by an indemnified party of notice of the commencement of any action (including any governmental action) under this Section 1.11, such indemnified party shall, if a claim in respect thereof is to be made against any indemnifying party under this Section 1.11, deliver to the indemnifying party a written notice of the commencement thereof. Such indemnifying party shall have the right to participate in and subject to the consent of the indemnified party, which consent shall not be unreasonably withheld, the indemnifying party shall have the right to enter into settlement of such action, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense of such action with counsel approved by the indemnified party (whose approval shall not be unreasonably withheld); provided, however, that the indemnified party shall cooperate with the indemnifying party, and that if representation of an indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding, such indemnified party shall have the right to retain its own counsel, with the reasonable fees and reasonable expenses to be paid by the indemnifying party. The failure of an indemnified party to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if such failure is prejudicial to the indemnifying party, shall relieve such indemnifying party of any liability to the indemnified party under this Section 1.11 to the extent such party is prejudiced. However, the omission of the indemnified party to deliver such written notice to the indemnifying party will not relieve such indemnifying party of any liability that it may have to any indemnified party otherwise than under this Section 1.11. (d) If the indemnification provided for in this Section 1.11 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, claim, damage, liability, or action referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage, liability or action in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, claim, damage, liability or action as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the violation of law or the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to acts of or information supplied by the indemnifying party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 1.11(d) were determined by pro rata allocation (even if the selling Holders or any underwriters or all of them were treated as one entity for such purpose) or by any other method of allocation which does not take 8 account of the equitable considerations referred to in the immediately preceding paragraph. In no event shall the contribution obligations of each selling Holder exceed the amount of proceeds received by such selling Holder from the date of his, her or its Registrable Securities covered by the registration statement. 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. (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. (f) The obligations of the Company and of the Holders under this Section 1.11 shall survive the conversion, if any, of the Series A Preferred and the completion of any offering of Registrable Securities in a registration statement under this Section 1 or otherwise. 1.12 REPORTS UNDER THE 1934 ACT. With a view to making available to the Holders the benefits of Rule 144 promulgated under the Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration, the Company agrees: (a) to make and keep public information available, as those terms are defined under SEC Rule 144, at all times after ninety (90) days after the effective date of the first registration statement filed by the Company for the offering of its securities to the general public; (b) use its best efforts to file with the SEC all reports and other documents required of the Company under the Act and the 1934 Act (at any time after it has become subject to such reporting requirements) in a timely manner; and (c) to furnish to any Holder, so long as such Holder owns Registrable Securities, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144 (at any time after ninety (90) days after the effective date of the first registration statement filed by the Company), the Act and the 1934 Act (at any time after it has become subject to such reporting requirements), (ii) a copy of the Company's most recent annual or quarterly report and (iii) such other information as may be reasonably requested by such Holder in order to avail itself of any rule or regulation of the SEC that permits the selling of any such securities without registration. 1.13 FORM S-3 REGISTRATION. At any time following the second anniversary of the Company's Initial Public Offering, in case the Company shall receive from any Holder or Holders holding a written request that the Company effect a registration on Form S-3 or any successor form and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company shall comply with the following obligations: (a) The Company shall promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders. In the event the registration is proposed to be part of a firm commitment underwritten public offering, the substantive provisions of paragraph (b) of Section 1.2 hereof shall be applicable to each such registration initiated under this Section 1.13. (b) As soon as practicable, the Company shall effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder's or Holders' Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within fifteen (15) days after receipt of such written notice from the Company. Notwithstanding the foregoing, the Company shall not be obligated to effect any such registration, qualification 9 or compliance, pursuant to this Section 1.13 if: (i) the Company has previously effected three (3) registrations pursuant to this Section 1.13, (ii) Form S-3 is not available for such offering by the Holders; (iii) the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public of less than one million dollars ($1,000,000); (iv) the Company furnishes to the Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such Form S-3 registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than one hundred twenty (120) days after receipt of the request of the Holder or Holders under this Section 1.13, notwithstanding the foregoing, the Company shall not have the right to exercise this right more than twice in any twelve (12) month period; (v) the Company has, within the twelve (12) month period preceding the date of such request, already effected a registration on Form S-3 for the Holders pursuant to this Section 1.13; (vi) the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance in a particular jurisdiction; or (vii) a registration statement respecting securities of the Company has been declared effective within one hundred eighty (180) days of such request. (c) Subject to the foregoing, the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders. All expenses incurred in connection with the registrations requested pursuant to this Section 1.13, including (without limitation) all registration, filing, qualification, printers' and accounting fees, fees and disbursements of counsel for the selling Holder or Holders and any underwriters' discounts or commissions associated with Registrable Securities, shall be borne by the selling Holder or Holders. Registrations effected pursuant to this Section 1.13 shall not be counted as demands for registration effected pursuant to Section 1.2. 1.14 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company to register Registrable Securities granted under this Section 1 may be assigned by a Holder to a transferee or assignee who acquires two hundred fifty thousand (250,000) shares (as adjusted for stock splits, combinations, dividends and the like) of the Registrable Securities held by such Holder, provided the Company is, within a reasonable time prior to such transfer, furnished with written notice of the name and address of such proposed transferee or assignee and the securities with respect to which such registration rights are being assigned; provided further that such assignment shall be effective only if the transferee enters into a written agreement providing that such transferee shall be bound by the provisions of Section 1 of this Agreement. Notwithstanding the foregoing or any other provision contained herein to the contrary, the right to cause the Company to register Registrable Securities may be assigned by a Holder to any constituent partner of a partnership Holder and any affiliate, subsidiary or parent of a corporate Holder provided that such transferee agrees in writing to be bound by the terms and conditions of this Agreement. 1.15 "MARKET STAND-OFF" AGREEMENT. Each Holder hereby agrees that it shall not, to the extent specified by the Company and an underwriter of Common Stock (or other securities) of the Company, sell, offer to sell, contract to sell (including without limitation any short sale), grant any option to purchase or otherwise transfer or dispose of (other than to donees who agree to be similarly bound) any securities of the Company (other than securities already registered) during a reasonable and customary period of time not to exceed one hundred and eighty (180) days, as agreed to by the Company and the underwriters, following the effective date of the Company's Initial Public Offering; provided, however, that all officers and directors of the Company enter into similar agreements. In order to enforce the foregoing covenant, the Company may impose stop transfer instructions with respect to the securities of each Holder (and the shares or securities of every other person subject to the foregoing restriction) until the end of such one hundred and eighty (180) day period. 10 1.16 TERMINATION OF THE COMPANY'S OBLIGATIONS. The rights to cause the Company to register securities granted to Holders pursuant to Sections 1.2 and 1.3 shall terminate as to any Holder at such time as the Holder has the ability to sell all of the Registrable Securities owned by such stockholder under SEC Rule 144 within a three (3) month period. 1.17 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and after the date of this Agreement, the Company shall not, without the prior written consent of the Holders of a majority of Registrable Securities then outstanding, enter into any agreement with any holder or prospective holder of any securities of the Company which would grant rights to have securities other than Registrable Securities registered under the Act that are PARI PASSU or senior to the registration rights granted herein. 2. COVENANTS. 2.1 DELIVERY OF FINANCIAL STATEMENTS. The Company shall, as soon as practicable, but in any event within ninety (90) days after the end of each fiscal year of the Company, furnish to each Principal Holder a consolidated profit and loss statement for such fiscal year, a consolidated balance sheet of the Company and a consolidated statement of stockholders' equity as of the end of such year, and a consolidated statement of cash flows for such year, such year-end financial reports to be prepared in accordance with generally accepted accounting principles and audited and certified by independent public accountants of nationally recognized standing selected by the Company. In the event that the Company is involved in a material corporate transaction which is likely to have an effect on the Company's financial reports, the Company shall have an additional thirty (30) days in order to fulfill its obligations hereunder. 2.2 DELIVERY OF QUARTERLY FINANCIAL STATEMENTS. The Company shall, as soon as practicable, but in no event within forty-five (45) days after the end of each fiscal quarter of the Company (except for the fiscal quarter ending December 31 of each year) furnish to each Principal Holder a consolidated profit and loss statement for such quarter and year-to-date, a consolidated balance sheet of the Company and a consolidated statement of cash flows for such quarter and year-to-date prepared in accordance with generally accepted accounting principles consistently applied. In the event that the Company is involved in a material corporate transaction which is likely to have an effect on the Company's financial reports, the Company shall have an additional thirty (30) days in order to fulfill its obligations hereunder. 2.3 DELIVERY OF MONTHLY FINANCIAL STATEMENTS. The Company shall furnish each Principal Holder upon request (commencing with the month ending July 31, 1998), within thirty (30) days of the end of each month, an unaudited consolidated profit and loss statement, consolidated statement of cash flows and consolidated balance sheet for and as of the end of such month, and comparison to year-end results (if any). In the event that the Company is involved in a material corporate transaction which is likely to have an effect on the Company's financial reports, the Company shall have an additional thirty (30) days in order to fulfill its obligations hereunder. 2.4 LIMITATION ON INFORMATION RIGHTS. The rights to receive financial information set forth in Sections 2.1, 2.2 and 2.3 above may be assigned by each Principal Holder to a subsequent transferee or assignee of at least two hundred fifty thousand (250,000) shares (as adjusted for stock splits, combinations, dividends and the like) of such Principal Holder's Registrable Securities, provided that the transferee or assignee of such rights is not deemed by the Board of Directors, in its reasonable judgment, to be a current or potential competitor of the Company. Notwithstanding the foregoing or any other provision contained herein to the contrary, the information rights contained in Section 2.1, 2.2 and 2.3 above may be assigned by a Holder to any constituent partner of a partnership Holder or any affiliate, subsidiary or parent of a corporate Holder provided that such transferee agrees in writing to be bound by the terms and conditions of this Agreement. 11 2.5 RIGHT OF FIRST REFUSAL. The Company hereby grants to each Principal Holder, the right of first refusal to purchase a pro rata share of New Securities (as defined in this Section 2.5) which the Company may, from time to time, propose to sell and issue after the date hereof. A Principal Holder's pro rata share, for purposes of this right of first refusal, is the ratio of (i) the number of shares of Registrable Securities held by such Principal Holder; and (ii) the total number of shares of Registrable Securities then outstanding. This right of first refusal shall be subject to the following provisions: (a) "New Securities" shall mean any capital stock (including Common Stock and/or preferred stock) of the Company whether now authorized or not, and rights, options or warrants to purchase such capital stock, and securities of any type whatsoever that are, or may become, convertible into capital stock; provided that the term "New Securities" does not include (i) securities issued upon conversion of the any preferred stock; (ii) securities issued pursuant to the acquisition of another business entity or business segment of any such entity by the Company by merger, purchase of substantially all the assets or other reorganization whereby the Company will own not less than fifty-one percent (51%) of the voting power of such business entity or business segment of any such entity; (iii) any borrowing, direct or indirect, from financial institutions or other persons by the Company, whether or not presently authorized, including any type of loan or payment evidenced by any type of debt instrument, provided that such borrowing does not have any equity features including warrants, options or other rights to purchase capital stock and are not convertible into capital stock of the Company; (iv) securities issued to employees, consultants, officers or directors of the Company pursuant to any stock option, stock purchase or stock bonus plan, agreement or arrangement approved by the Board of Directors; (v) securities issued in connection with obtaining lease financing, whether issued to a lessor, guarantor or other person and is for purposes other than equity financing of the Company; (vi) securities issued in connection with one or more strategic development, licensing or technology transactions, up to an aggregate of three million (3,000,000) shares of Company capital stock or rights to purchase Company capital stock pursuant to all transactions pursuant to this subsection (vi); (vii) up to one million three hundred thirty-six thousand four hundred twenty-two (1,336,422) shares of Company common stock to be issued to SmithKline Beechham Clinical Laboratories, Inc.(SBLC), issued pursuant to the First Amendment to the Asset Purchase Agreement dated December 31, 1997 between SBLC and ActaMed; (viii) securities issued in a firm commitment underwritten public offering pursuant to a registration under the Act; (ix) securities issued in connection with any stock split, stock dividend or recapitalization of the Company so long as such issuance results in adjustments to the conversion rate under the Restated Certificate of Incorporation of the Company with respect to any preferred stock; and (x) any right, option or warrant to acquire any security convertible into the securities excluded from the definition of New Securities pursuant to subsections (i) through (ix) above. (b) In the event the Company proposes to undertake an issuance of New Securities, it shall give each Principal Holder written notice of its intention, describing the type of New Securities, and their price and the general terms upon which the Company proposes to issue the same. Each Principal Holder shall have fifteen (15) days after any such notice is effective to agree to purchase up to such Principal Holder's pro rata share, as the case may be, of such New Securities for the price and upon the terms specified in the notice by giving written notice to the Company and stating therein the quantity of New Securities to be purchased. (c) In the event the Principal Holders fail to exercise the right of first refusal, in full or in part, within said fifteen (15)-day period, the Company shall have sixty (60) days thereafter to sell or enter into an agreement (pursuant to which the sale of New Securities covered thereby shall be closed, if at all, within sixty (60) days from the date of said agreement) to sell the New Securities respecting which the Principal Holders' right of first refusal option set forth in this Section 2.4 was not exercised, at a price and upon terms no more favorable to the purchasers thereof than specified in the Company's notice to Principal Holders pursuant to Section 2.5(b). In the event the Company has not sold within said 60-day period or entered into an agreement to sell the New Securities within said 60-day period (or sold and issued New Securities in accordance with the foregoing within sixty (60) days from the date of said agreement), the Company shall not thereafter issue or sell any New Securities, without first again offering such securities to the Principal Holders in the manner provided in 12 Section 2.5(b) above. (d) The right of first refusal set forth in this Section 2.5 may be assigned by a Principal Holder to a transferee or assignee who acquires two hundred and fifty thousand (250,000) shares (as adjusted for stock splits, combinations, dividends and the like) of such Principal Holder's Conversion Stock or such Principal Holder's Merger Stock, as the case may be, provided, the Company is, within a reasonable time prior to such transfer, furnished with written notice of the name and address of such proposed transferee or assignee and the securities with respect to which such rights of first refusal are being assigned; provided further that such assignment shall be effective only if the transferee enters into a written agreement providing that such transferee shall be bound by the provisions of Section 2.5 of this Agreement. Notwithstanding the foregoing or any other provision contained herein to the contrary, the right of first refusal may be assigned by a Principal Holder to any constituent partner of a partnership Principal Holder and any affiliate, subsidiary or parent of a corporate Principal Holder provided that such transferee agrees in writing to be bound by the terms and conditions of this Agreement. 2.6 TERMINATION OF COVENANTS. Unless terminated earlier, the covenants set forth in these Sections 2.1, 2.2, 2.3 and 2.5 shall terminate and be of no further force or effect upon the consummation of the Company's Initial Public Offering. 3. MISCELLANEOUS. 3.1 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among California residents, made and to be performed entirely within the State of California. 3.2 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto (including transferees of any shares of Registrable Securities sold under their respective stock purchase agreements). 3.3 ENTIRE AGREEMENT. This Agreement constitutes the full and entire understanding and agreement among the parties with regard to the subject matter hereof, and no party shall be liable or bound to any other party in any manner by any representations, warranties, covenants, or agreements except as specifically set forth herein. Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto and their respective successors and assigns, any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided herein. 3.4 SEVERABILITY. Any invalidity, illegality, or limitation of the enforceability with respect to any Holder of any one or more of the provisions of this Agreement, or any part thereof, whether arising by reason of the law of any such Holder's domicile or otherwise, shall in no way affect or impair the validity, legality, or enforceability of this Agreement with respect to any other Holder. In case any provision of this Agreement shall be invalid, illegal, or unenforceable, it shall, to the extent practicable, be modified so as to make it valid, legal and enforceable and to retain as nearly as practicable the intent of the parties, and the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 3.5 AMENDMENT AND WAIVER. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company and the Holders of a majority of the Registrable Securities then outstanding, provided that the effect of such amendment or waiver is to treat all Holders equally. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each Holder of Registrable Securities at the time outstanding (including securities exercisable for or convertible into Registrable 13 Securities), each future holder of all such securities, and the Company. 3.6 DELAYS OR OMISSIONS. No delay or omission to exercise any right, power, or remedy accruing to any Holder or any permitted transferee upon any breach, default or noncompliance of the Company under this Agreement shall impair any such right, power, or remedy, nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any acquiescence therein, or of any similar breach, default or noncompliance thereafter occurring. It is further agreed that any waiver, permit, consent, or approval of any kind or character on the Holders' part of any breach, default or noncompliance of this Agreement or any waiver on the Holders' part of any provisions or conditions of this Agreement must be in writing and shall be effective only to the extent specifically set forth in such writing, and that all remedies, either under this Agreement, by law, or otherwise afforded to each Holder, shall be cumulative and not alternative. 3.7 NOTICES, ETC. Unless otherwise provided, any notice required or permitted under this Agreement shall be given to the party to be so notified in writing and shall be deemed effective upon personal delivery, upon delivery by confirmed facsimile or electronic transmission (with duplicate original sent by United States mail), or three business days after deposit with the United States Post Office, by registered or certified mail, postage prepaid and addressed to the party to be notified at the address indicated for such party on Schedule A hereto (or, if to the Company, at the address of its principal executive offices), or at such other address as such party may designate by ten (10) days' advance written notice to the other parties. 3.8 TITLES AND SUBTITLES. The titles of the paragraphs and subparagraphs of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 3.9 EXPENSES. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, expenses and necessary disbursements in addition to any other relief to which such party may be entitled. 3.10 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. 3.11 AGGREGATION OF STOCK. All shares of Registrable Securities held or acquired by affiliated entities or persons shall be aggregated together for the purposes of determining the availability of any right under this Agreement. 3.12 SPECIFIC PERFORMANCE. The parties hereto agree that limitations on the purchase and sale of the Registrable Securities of the Company exist and that, for that reasons, among others, the Holders of the Registrable Securities may be irreparably damaged in the event of a breach or prospective breach of the terms and provisions of this Agreement and, therefore, the parties hereto consent to the application of equitable remedies, including, without limitation, specific performance, to enforce the terms and provisions of this Agreement. The rights granted in this Section 3.12 shall be cumulative and not exclusive, and shall be in addition to any and all other rights which the parties hereto may have hereunder, at law or in equity. IN WITNESS WHEREOF, the parties have executed this Amended and Restated Investors' Rights Agreement as of the date first above written. HEALTHEON CORPORATION 14 By: /s/ Michael Long ------------------------------------- Michael Long President and Chief Executive Officer Address: 4600 Patrick Henry Drive Santa Clara, CA 95054 HEALTHEON CORPORATION SIGNATURE PAGE TO AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT The undersigned amends the Amended and Restated Investors' Rights Agreement dated October 13, 1997 and hereby executes and delivers this Amended and Restated Investors' Rights Agreement dated May ___, 1998 (the "Agreement") to which this Signature Page is attached, effective as of the date of the Agreement, which Agreement and Signature Page, together with all counterparts of said Agreement and Signature Pages of the other parties named in said Agreement, shall constitute one and the same document in accordance with the terms of said Agreement. _____________________________________________________ Name of Stockholder By:__________________________________________________ Print Name:__________________________________________ Title:_______________________________________________ 16 EX-10.11 15 EX-10.11 LEASE DATED: DECEMBER 2, 1997 BY AND BETWEEN LARVAN PROPERTIES, A CALIFORNIA GENERAL PARTNERSHIP AS LANDLORD AND HEALTHEON CORPORATION, A DELAWARE CORPORATION AS TENANT AFFECTING PREMISES COMMONLY KNOWN AS 4600 PATRICK HENRY DRIVE SANTA CLARA, CALIFORNIA [1/15/97 TRIPLE NET INDUSTRIAL/COMMERCIAL LEASE] TABLE OF CONTENTS
ARTICLE 1 - DEFINITIONS PAGE: - ----------------------- ----- 1.1 General 1 1.2 Additional Rent 1 1.3 Address for Notices 1 1.4 Agents 1 1.5 Agreed Interest Rate 1 1.6 Base Monthly Rate 1 1.7 Building 1 1.8 Commencement Date 1 1.9 Common Area 1 1.10 Common Operating Expense 1 1.11 Consumer Price Index 1 1.12 Effective Date 1 1.13 Event of Tenant's Default 1 1.14 Hazardous Materials 1 1.15 Insured and Uninsured Peril 1 1.16 Law 1 1.17 Lease 1 1.18 Lease Term 1 1.19 Lender 1 1.20 Permitted Use 2 1.21 Premises 2 1.22 Project 2 1.23 Private Restrictions 2 1.24 Real Property Taxes 2 1.25 Scheduled Commencement Date 2 1.26 Security Instrument 2 1.27 Summary 2 1.28 Tenant's Alterations 2 1.29 Tenant's Share 2 1.30 Trade Fixtures 2 ARTICLE 2 - DEMISE, CONSTRUCTION, AND ACCEPTANCE 2 - ------------------------------------------------ 2.1 Demise of Premises 2 2.2 Commencement Date 2 2.3 Construction of Improvements 2 2.4 Delivery and Acceptance of Possession 2 2.5 Early Occupancy 3 ARTICLE 3 - RENT 3 - ---------------- 3.1 Base Monthly Rent 3 3.2 Additional Rent 3 3.3 Payment of Rent 3 3.4 Late Charge and Interest on Rent in Default 3 3.5 Security Deposit 3 ARTICLE 4 - USE OF PREMISES 3 - --------------------------- 4.1 Limitation on Use 3 4.2 Compliance with Regulations 4 4.3 Outside Areas 4 4.4 Signs 4 4.5 Parking 4 4.6 Rules and Regulations 4
ii TABLE OF CONTENTS (CONTINUED)
PAGE: ----- ARTICLE 5 - TRADE FIXTURES AND ALTERATIONS 4 5.1 Trade Fixtures 4 5.2 Tenant's Alterations 4 5.3 Alterations Required by Law 5 5.4 Amortization of Certain Capital Improvements 5 5.5 Mechanic's Liens 5 5.6 Taxes on Tenant's Property 5 ARTICLE 6 - REPAIR AND MAINTENANCE 6 6.1 Tenant's Obligation to Maintain 6 6.2 Landlord's Obligation to Maintain 6 6.3 Control of Common Area 6 ARTICLE 7 - WASTE DISPOSAL AND UTILITIES 7 7.1 Waste Disposal 7 7.2 Hazardous Materials 7 7.3 Utilities 8 7.4 Compliance with Governmental Regulations 8 ARTICLE 8 - COMMON OPERATING EXPENSES 8 8.1 Tenant's Obligation to Reimburse 8 8.2 Common Operating Expenses Defined 8 8.3 Real Property Taxes Defined 9 ARTICLE 9 - INSURANCE 9 9.1 Tenant's Insurance 9 9.2 Landlord's Insurance 10 9.3 Tenant's Obligation to Reimburse 10 9.4 Release and Waiver of Subrogation 10 ARTICLE 10 - LIMITATION ON LANDLORD'S LIABILITY AND INDEMNITY 10 10.1 Limitation on Landlord's Liability 10 10.2 Limitation on Tenant's Recourse 11 10.3 Indemnification of Landlord 11 ARTICLE 11 - DAMAGE TO PREMISES 11 11.1 Landlord's Duty to Restore 11 11.2 Landlord's Right to Terminate 11 11.3 Tenant's Right to Terminate 12 11.4 Abatement of Rent 12 ARTICLE 12 - CONDEMNATION 12 12.1 Landlord's Termination Right 12 12.2 Tenant's Termination Right 12 12.3 Restoration and Abatement of Rent 12 12.4 Temporary Taking 12 12.5 Division of Condemnation Award 12 iii TABLE OF CONTENTS (CONTINUED) PAGE: ----- ARTICLE 13 - DEFAULT AND REMEDIES 13 13.1 Events of Tenant's Default 13 13.2 Landlord's Remedies 13 13.3 Waiver 14 13.4 Limitation on Exercise of Rights 14 13.5 Waiver by Tenant of Certain Remedies 14 ARTICLE 14 - ASSIGNMENT AND SUBLETTING 14 14.1 Transfer by Tenant 14 14.2 Transfer by Landlord 16 ARTICLE 15 - GENERAL PROVISIONS 16 15.1 Landlord's Right to Enter 16 15.2 Surrender of the Premises 17 15.3 Holding Over 17 15.4 Subordination 17 15.5 Mortgagee Protection and Attornment 17 15.6 Estoppel Certificates and Financial Statements 17 15.7 Reasonable Consent 18 15.8 Notices 18 15.9 Attorney's Fees 18 15.10 Corporate Authority 18 15.11 Miscellaneous 18 15.12 Termination by Exercise of Right 18 15.13 Brokerage Commissions 19 15.14 Force Majeure 19 15.15 Entire Agreement 19
EXHIBITS Exhibit A - Site plan of the Project containing a description of the Premises Exhibit B - Space Plan Exhibit C - Intentionally Omitted Exhibit D - Acceptance Agreement Exhibit E - Intentionally Omitted Exhibit F - Intentionally Omitted Exhibit G - Form of Subordination Agreement Exhibit H - Asbestos Disclosure
iv SUMMARY OF BASIC LEASE TERMS SECTION TERMS (LEASE REFERENCE) A. LEASE REFERENCE DATE: December 3, 1997 (Introduction) B. LANDLORD: LARVAN PROPERTIES, A CALIFORNIA GENERAL (Introduction) PARTNERSHIP C. TENANT: HEALTHEON CORPORATION, A DELAWARE CORPORATION (Introduction) D. PREMISES: That area consisting of 49,837 square feet (Section 1.21) of gross leasable area the address of which is 4600 PATRICK HENRY DRIVE, SANTA CLARA, CALIFORNIA, comprising the Building shown on EXHIBIT A. E. PROJECT: The land and improvements shown on EXHIBIT (Section 1.22) A consisting of 1 building the aggregate gross leasable area of which is 49,837 square feet. F. BUILDING: The building in which the Premises are (Section 1.7) located known as 4600 Patrick Henry Drive, Santa Clara, California containing 49,837 square feet of gross leasable area. G. TENANT'S SHARE: 100% (Section 1.29) H. TENANT'S ALLOCATED PARKING STALLS: TENANT SHALL HAVE (Section 4.5) THE RIGHT TO ALL PARKING SPACES I. SCHEDULED COMMENCEMENT DATE: FEBRUARY 1, 1998, (Section 1.26) OR THE DATE ON WHICH TENANT OCCUPIES THE PREMISES FOR BUSINESS, WHICHEVER IS EARLIER. J. LEASE TERM: 120 calendar months (plus the partial (Section 1.18) month following the Commencement Date of such date is not the first day of a month). K. BASE MONTHLY RENT: (Section 3.1) INCLUSIVE PERIOD BASE MONTHLY RENT 2/1/98 THROUGH 12/31/98 $72,263.69 PER MONTH NNN 1/1/99 THROUGH 12/31/99 $74,257.17 PER MONTH NNN 1/1/2000 THROUGH 12/31/2000 $76,250.65 PER MONTH NNN 1/1/2001 THROUGH 12/31/2001 $78,244.13 PER MONTH NNN 1/1/2002 THROUGH 12/31/2002 $80,237.61 PER MONTH NNN 1/1/2003 THROUGH 12/31/2003 $82,231.09 PER MONTH NNN 1/1/2004 THROUGH 12/31/2004 $84,224.57 PER MONTH NNN 1/1/2005 THROUGH 12/31/2005 $86,218.05 PER MONTH NNN 1/1/2006 THROUGH 12/31/2006 $88,211.53 PER MONTH NNN 1/1/2007 THROUGH 12/31/2008 $90,205.01 PER MONTH NNN L. PREPAID RENT: $72,263.69 (Section 3.3) M. SECURITY DEPOSIT: $72,263.69 (THE "PERMANENT SECURITY (Section 3.5) DEPOSIT") PLUS A LETTER OF CREDIT AS SET FORTH IN THE FIRST ADDENDUM TO LEASE, PARAGRAPH 1. N. PERMITTED USE: RESEARCH AND DEVELOPMENT, SALES, (Section 4.1) ADMINISTRATION, GENERAL OFFICE AND STORAGE, AND OTHER DIRECTLY RELATED USES AS WELL AS OTHER LEGAL USES IF APPROVED IN WRITING BY LANDLORD, APPROVAL NOT TO BE UNREASONABLY WITHHELD. O. PERMITTED TENANT'S ALTERATIONS LIMIT: $10,000 (Section 5.2) P. TENANT'S LIABILITY INSURANCE MINIMUM: $5,000,000 (Section 9.1) Q. LANDLORD'S ADDRESS: LARVAN PROPERTIES (Section 1.3) ATTN: DONN BYRNE 1960 THE ALAMEDA SAN JOSE, CALIFORNIA 95128 R. TENANT'S ADDRESS: HEALTHEON CORPORATION (Section 1.3) ATTENTION: KALLEN CHEN 4600 PATRICK HENRY DRIVE SANTA CLARA, CALIFORNIA 95054 S. RETAINED REAL ESTATE BROKERS: Cornish and Carey (Section 15.13) Commercial (representing only Tenant and not representing Landlord) shall receive 50% of the commission, and Cooper-Brady and Colliers Parrish International (representing only the Landlord and not representing Tenant) shall receive 50% of the commission. T. LEASE: This Lease includes the summary of the Basic (Section 1.17) Lease Terms, the Lease, and the following exhibits and addenda: First Addendum to Lease, EXHIBIT A (site plan of the Project), EXHIBIT B (Space Plan), EXHIBIT C (intentionally omitted), EXHIBIT D (acceptance agreement), EXHIBIT E (intentionally omitted), EXHIBIT F (intentionally omitted), EXHIBIT G (form of subordination agreement), EXHIBIT H (asbestos disclosure). The foregoing Summary of Basic Lease Terms ("Summary") is incorporated into and made a part of this Lease. Each initially capitalized word used in this Lease or any Addendum or Amendment shall have the meaning ascribed to such words in this Summary, unless the context clearly indicates another meaning. In the event of any conflict between the Summary and the Lease, the provision of this Summary shall control. LANDLORD: TENANT: LARVAN PROPERTIES, HEALTHEON CORPORATION, A DELAWARE A CALIFORNIA GENERAL PARTNERSHIP CORPORATION By: VANDERSON CONSTRUCTION, INC. a By: /s/ Kallen Chan California corporation, its --------------------------------- General Partner KALLEN CHEN, Controller --------------------------------- By: /s/ George F. Van Sickle [Typed or printed name and title] ---------------------------------- Dated: 12/5/97 ------------------------------ George F. Van Sickle-President ---------------------------------- [Typed or printed name and title] By: Larscom Incorporated, a Delaware corporation its General Partner By: /s/ Bruce Horn ---------------------------------- Bruce Horn VP Finance ---------------------------------- [Typed or printed name and title] By: /s/ Donn Byrne ---------------------------------- Donn Byrne, General Partner Dated: 12/8/97 ------------------------------- 2 LEASE - ------------------------------------------------------------------------------- This Lease is dated as of the lease reference date specified in SECTION A of the Summary and is made by and between the party identified as Landlord in SECTION B of the Summary and the party identified as Tenant in SECTION C of the Summary. ARTICLE 1 DEFINITIONS 1.1 GENERAL: Any initially capitalized term that is given a special meaning by this Article 1, the Summary, or by any other provision of this Lease (including the exhibits attached hereto) shall have such meaning when used in this Lease or any addendum or amendment hereto unless otherwise clearly indicated by the context. 1.2 ADDITIONAL RENT: The term "Additional Rent" is defined in PARA 3.2. 1.3 ADDRESS FOR NOTICES: THe term "Address for Notices" shall mean the addresses set forth in the SECTIONS Q AND R of the Summary; provided, however, that after the Commencement Date, Tenant's Address for Notices shall be the address of the Premises. 1.4 AGENTS: The term "Agents" shall mean the following: (i) with respect to Landlord or Tenant, the agents, employees, contractors, and invitees of such party; and (ii) in addition with respect to Tenant, Tenant's subtenants and their respective agents, employees, contractors, and invitees. 1.5 AGREED INTEREST RATE: The term "Agreed Interest Rate" shall mean that interest rate determined as of the time it is to be applied that is equal to the lesser of (i) 3% in excess of the discount rate established by the Federal Reserve Bank of San Francisco as it may be adjusted from time to time, or (ii) the maximum interest rate permitted by Law. 1.6 BASE MONTHLY RENT: The term "Base Monthly Rent" shall mean the fixed monthly rent payable by Tenant pursuant to PARA 3.1 which is specified in SECTION K of the Summary. 1.7 BUILDING: The term "Building" shall mean the building in which the Premises are located which Building is identified in SECTION F of the Summary, the gross leasable area of which is referred to herein as the "Building Gross Leasable Area." 1.8 COMMENCEMENT DATE: The term "Commencement Date" is the date the Lease Term commences, which term is defined in PARA 2.2. 1.9 COMMON AREA: The term "Common Area" means the area of the Project outside the walls of the Building. 1.10 COMMON OPERATING EXPENSES: The term "Common Operating Expenses" is defined in PARA 8.2. 1.11 INTENTIONALLY OMITTED. 1.12 EFFECTIVE DATE: The term "Effective Date" shall mean the date the last signatory to this Lease whose execution is required to make it binding on the parties hereto shall have executed this Lease. 1.13 EVENT OF TENANT'S DEFAULT: The term "Event of Tenant's Default" is defined in PARA 13.1. 1.14 HAZARDOUS MATERIALS: The term "Hazardous Materials" and "Hazardous Materials Laws" are defined in PARA 7.2E. 1.15 INSURED AND UNINSURED PERIL: The terms "Insured Peril" and "Uninsured Peril" are defined in PARA 11.2E. 1.16 LAW: The term "Law" shall mean any judicial decision, statutes, constitution, ordinance, resolution, regulation, rule, administrative order, or other requirement of any municipal, county, state, federal or other government agency or authority having jurisdiction over the parties to this Lease or the Premises, or both, in effect either at the Effective Date or any time during the Lease Term. 1.17 LEASE: The term "Lease" shall mean the Summary, this Lease which is attached to the Summary and all elements of this Lease identified in SECTION I of the Summary, all of which are attached hereto and incorporated herein by this reference. 1.18 LEASE TERM: The term "Lease Term" shall mean the term of this Lease which shall commence on the Commencement Date and continue for the period specified in SECTION J of the Summary. 1.19 LENDER: The term "Lender" shall mean any beneficiary, mortgagee, secured party, lessor, or other holder of any Security Instrument. 1.20 PERMITTED USE: The term "Permitted Use" shall mean the use specified in SECTION N of the Summary. 1.21 PREMISES: The term "Premises" shall mean that building area described in SECTION D of the Summary that is within the Building. 1.22 PROJECT" The term "Project" shall mean that real property and the improvements thereon which are specified in SECTION E of the Summary the aggregate gross leasable area of which is referred to herein as the "Project Gross Leasable Area." 1.23 PRIVATE RESTRICTIONS: The term "Private Restrictions" shall mean all recorded covenants, conditions and restrictions, private agreements, reciprocal easement agreements, and any other recorded instruments affecting the use of the Premises which (i) exists as of the Effective Date, or (ii) are recorded after the Effective Date and are approved by Tenant. 1.24 REAL PROPERTY TAXES: The term "Real Property Taxes" is defined in PARA 8.3. 1.25 SCHEDULED COMMENCEMENT DATE: The term "Scheduled Commencement Date" shall mean the date specified in SECTION I of the Summary. 1.26 SECURITY INSTRUMENT: The term "Security Instrument" shall mean any underlying lease, mortgage or deed of trust which now or hereafter affects the Project, and any renewal, modification, consolidation, replacement or extension thereof. 1.27 SUMMARY: The term "Summary" shall mean the Summary of Basic Lease Terms executed by Landlord and Tenant that is part of this Lease. 1.28 TENANT'S ALTERATIONS: The term "Tenant's Alterations" shall mean all improvements, additions, alterations, and fixtures installed in the Premises by Tenant at its expense which are not Trade Fixtures. 1.29 TENANT'S SHARE: The term "Tenant's Share" shall mean the percentage obtained by dividing Tenant's Gross Leasable Area by the Building Gross Leasable Area, which as of the Effective Date is the percentage identified in SECTION G of the Summary. 1.30 TRADE FIXTURES: The term "Trade Fixtures" shall mean (i) Tenant's inventory, furniture, signs, and business equipment, and (ii) anything affixed to the Premises by Tenant at its expense for purposes of trade, manufacture, ornament or domestic use (except replacement of similar work or material originally installed by Landlord) which can be removed without material injury to the Premises unless such thing has, by the manner in which it is affixed, become an intregal part of the Premises. ARTICLE 2 DEMISE, CONSTRUCTION, AND ACCEPTANCE 2.1 DEMISE OF PREMISES: Landlord hereby leases to Tenant, and Tenant leases from Landlord, for the Lease Term upon the terms and conditions of this Lease, the Premises for Tenant's own use in the conduct of Tenant's business together with the right to use all of the Parking Stalls within the Project (subject to the limitations set forth in PARA 4.5. Landlord reserves the use of the exterior walls, the roof and the area beneath and above the Premises, together with the right to install, maintain, use, and replace ducts, wires, conduits and pipes leading through the Premises in locations which will not materially interfere with Tenant's use of the Premises. 2.2 COMMENCEMENT DATE: On the Scheduled Commencement Date, the Lease Term shall commence, and such date shall be referred to herein as the "Commencement Date." 2.3 INTENTIONALLY OMITTED. 2.4 DELIVERY AND ACCEPTANCE OF POSSESSION: If this Lease provides that Landlord must deliver possession of the Premises to Tenant on a certain date, then if Landlord is unable to deliver possession of the Premises to Tenant on or before such date for any reason whatsoever, this Lease shall not be voidable for a period of 60 days thereafter, and Landlord shall not be liable to Tenant for any loss or damage resulting therefrom. If Landlord has not delivered possession within such 60 day period, Tenant may terminate this Lease without further liability to Landlord by giving Landlord ten (10) days written notice to deliver possession or have the Lease terminated. If Landlord does not deliver possession within such ten (10) day period, then the Lease shall be terminated, and Landlord shall forthwith return to Tenant any Rent or Security Deposit which Tenant has paid or provided to Landlord. Tenant shall accept possession and enter into good faith occupancy of the entire Premises on the Commencement Date. Tenant acknowledges that it has had an opportunity to conduct, and has conducted, such inspections of the Premises as it deems necessary to evaluate its condition. Except as otherwise specifically provided herein, Tenant agrees to accept possession of the Premises in its then existing condition, "as-is", including all patent and latent defects. Tenant's taking possession of any part of the Premises shall be deemed to be an acceptance by Tenant of the improvements. At the time Landlord delivers possession of the Premises to Tenant, Landlord and Tenant shall together execute an Acceptance Agreement in the form attached as EXHIBIT D, appropriately completed. Landlord shall have no obligation to deliver possession, nor shall Tenant be entitled to take occupancy, of the Premises until such Acceptance Agreement has been executed, but Tenant's obligation to pay Base Monthly Rent and Additional Rent shall not be excused or delayed because of Tenant's failure to execute such Acceptance Agreement. 2.5 EARLY OCCUPANCY: From the Effective Date to the Commencement Date, Tenant shall have the right to enter and use the Premises for the purpose of deliveries, interior renovation and installation of improvements, equipment, and furniture, phone installation, and general setup (the "Early Occupancy Period"). Occupancy during the Early Occupancy Period shall be subject to all of the terms, covenants and conditions of the Lease (including but not limited to provisions for insurance and indemnity; provided; however, that the rent payable during the Early Occupancy Period shall be waived. During the Early Occupancy Period, Tenant shall pay for all utility services for the Premises, including but not limited to gas, electric, water, cleaning and janitorial, and trash disposal, and shall have such services billed directly to Tenant for payment. During the Early Occupancy Period, Tenant shall at all times make the Project and the Premises available for Landlord's Agents to conduct needed repair and construction work to carry out Landlord's responsibilities under the Lease and the First Addendum to Lease, including but not limited to Landlord's obligation to remove asbestos containing materials under Paragraph 5 of the First Addendum to Lease, and otherwise to improve the Building as needed. Neither time required for such matters nor any delays in Landlord's completion of the improvements to building systems which are contemplated hereby shall affect, delay, or extend the Commencement Date. Tenant shall not be entitled to begin early occupancy until the Letter of Credit required by Paragraph 1 of the First Addendum to Lease is posted as required therein. ARTICLE 3 RENT 3.1 BASE MONTHLY RENT: Commencing on the Commencement Date and continuing throughout the Lease Term. Tenant shall pay to Landlord the Base Monthly Rent set forth in SECTION K of the Summary. 3.2 ADDITIONAL RENT: Commencing on the Commencement Date and continuing throughout the 2 Lease Term, Tenant shall pay the following as additional rent (the "Additional Rent"): (i) any late charges or interest due Landlord pursuant to PARA 3.4; (ii) Tenant's Share of Common Operating Expenses as provided in PARA 8.1; (iii) Landlord's share of any Subrent received by Tenant upon certain assignments and sublettings as required by PARA 14.1 and any costs and attorney's fees required by said Paragraph; (iv) any legal fees and costs due Landlord pursuant to PARA 15.9; and (v) any other charges due Landlord pursuant to this Lease. 3.3 PAYMENT OF RENT: On or before the Commencement Date, Tenant shall pay to Landlord the amount set forth in SECTION L of the Summary as prepayment of rent for credit against the first installment(s) of Base Monthly Rent. All rent required to be paid in monthly installments shall be paid in advance on the first day of each calendar month during the Lease Term. If Section K of the Summary provides that the Base Monthly Rent is to be increased during the Lease Term and if the date of such increase does not fall on the first day of a calendar month, such increase shall become effective on the first day of the next calendar month. All rent shall be paid in lawful money of the United States, without any abatement, deduction or offset whatsoever (except as specifically provided in PARA 11.4 and PARA 12.3), and without any prior demand therefor. Rent shall be paid to Landlord at its address set forth in Section P of the Summary, or at such other place as Landlord may designate from time to time. Tenant's obligation to pay Base Monthly Rent and Tenant's Share of Common Operating Expenses shall be prorated at the commencement and expiration of the Lease Term. 3.4 LATE CHARGE AND INTEREST ON RENT IN DEFAULT. If any Base Monthly Rent or Additional Rent is not received by Landlord from Tenant within five (5) calendar days after the date on which Landlord gives Tenant written notice that it is due and unpaid, then Tenant shall immediately pay to Landlord a late charge equal to Six Percent (6%) of such delinquent rent as liquidated damages for Tenant's failure to make timely payment (and not in lieu of interest due thereon). If Landlord gives such a notice on two occasions within any twenty four (24) month period, then the said late charge shall be payable thereafter and for the remainder of this Lease without notice, in the event that such Rent is not received by Landlord from Tenant within five (5) calendar days after the date on which it is due. In no event shall this provision for a late charge be deemed to grant to Tenant a grace period or extension of time within which to pay any rent or prevent Landlord from exercising any right or remedy available to Landlord upon Tenant's failure to pay any rent due under this Lease in a timely fashion, including any right to terminate this Lease pursuant to PARA 13.2B. If any rent remains delinquent for a period in excess of 30 days then, in addition to such late charge, Tenant shall pay to Landlord interest on such rent at the Agreed Interest Rate from the date on which such amount became due until fully paid. 3.5 SECURITY DEPOSIT: On the Effective Date, Tenant shall deposit with Landlord the amount set forth in SECTION M of the Summary as security for the performance by Tenant of its obligation under this Lease, and not as prepayment of rent, as well as any further Security Deposit required pursuant to the First Addendum to Lease (collectively the "Security Deposit"); subject to the provisions of Paragraph 1 of the First Addendum to Lease in regard to delayed provision of the further Security Deposit required by the First Addendum to Lease. Landlord may from time to time apply such portion of the Security Deposit as is reasonably necessary for the following purposes:(i) to remedy any default by Tenant in the payment of rent; (ii) to repair damage to the Premises caused by Tenant (provided, that any such application occurring prior to the expiration or earlier termination of this Lease shall be done only to remedy an Event of Tenant's default); (iii) to clean, repair, and restore the Premises upon termination of the Lease to the condition required hereby; and (iv) to remedy any other default of Tenant to the extent permitted by Law and, in this regard, Tenant hereby waives any restriction on the uses to which the Security Deposit may be put contained in California Civil Code Section 1950.7. In the event the Security Deposit or any portion thereof is so used, Tenant agrees to pay to Landlord promptly upon demand an amount in cash sufficient to restore the Security Deposit to the full original amount. Landlord shall not be deemed a trustee of the Security Deposit, may use the Security Deposit in business, and shall not be required to segregate it from its general accounts. Tenant shall not be entitled to any interest on the Security Deposit. If Landlord transfers the Premises during the Lease Term, Landlord may pay the Security Deposit to any transferee of Landlord's interest in conformity with the provisions of California Civil Code Section 1950.7 and/or any successor statute, in which event the transferring Landlord will be released from all liability for the return of the Security Deposit. Upon expiration or sooner termination of the Lease, Landlord shall return to Tenant the balance of the Security Deposit held by Landlord on such date of expiration or termination, less any amounts used by Landlord in accordance with this Lease, within a commercially reasonable time (and Tenant waives the specific time requirements in regard to return of the Security Deposit which are contained in Civil Code Section 1950.7). As used in this Paragraph, a "commercially reasonable time" for return of the Security Deposit shall mean within thirty (30) days after Landlord recovers possession of the Premises, except that if Landlord in good faith claims or is investigating a claim to all or any portion of the Security Deposit by reason of the application thereof to defaults other than non-payment of Base Monthly Rent or Common Operating Expenses, then Landlord shall return any remaining portion of the Security Deposit within forty five (45) days after Landlord recovers possession of the Premises. ARTICLE 4 USE OF PREMISES 4.1 LIMITATION ON USE: Tenant shall use the Premises solely for the Permitted Use specified in SECTION N of the Summary. Tenant shall not do anything in or about the Premises which will (i) cause structural injury to the Building, or (ii) cause damage to any part of the Building except to the extent reasonably necessary for the installation of Tenant's Trade Fixtures and Tenant's Alterations, and then only in a manner which has been first approved by Landlord in writing. Tenant shall not operate any equipment within the 3 Premises which will (i) materially damage the Building or the Common Area, (ii) overload existing electrical systems or other mechanical equipment servicing the Building, (iii) impair the efficient operation of the sprinkler system or the heating, ventilating or air conditioning ("HVAC") equipment within or servicing the Building, or (iv) damage, overload or corrode the sanitary sewer system. Tenant shall not attach, hang or suspend anything from the ceiling, roof, walls or columns of the Building or set any load on the floor in excess of the load limits for which such items are designed nor operate hard wheel forklifts within the Premises. Any dust, fumes, or waste products generated by Tenant's use of the Premises shall be contained and disposed so that they do not (i) create an unreasonable fire or health hazard, (ii) damage the Premises, or (iii) result in the violation of any Law. Except as approved by Landlord, Tenant shall not change the exterior of the Building or install any equipment or antennas on or make any penetrations of the exterior or roof of the Building. Tenant shall not commit any waste in or about the Premises, and Tenant shall keep the Premises in a neat, clean, attractive and orderly condition, free of any nuisances. If Landlord designates a standard window covering for use throughout the Building, Tenant shall use this standard window covering to cover all windows in the Premises. Tenant shall not conduct on any portion of the Premises or the Project any sale of any kind, including any public or private auction, fire sale, going-out-of-business sale, distress sale or other liquidation sale. 4.2 COMPLIANCE WITH REGULATIONS: Tenant shall not use the Premises in any manner which violates any Laws or Private Restrictions which affect the Premises. Tenant shall abide by and promptly observe and comply with all Laws and Private Restrictions. Tenant shall not use the Premises in any manner which will cause a cancellation of any insurance policy covering Tenant's Alterations or any improvements installed by Landlord at its expense or which poses an unreasonable risk of damage or injury to the Premises. Tenant shall not sell, or permit to be kept, used, or sold in or about the Premises any article which may be prohibited by the standard form of fire insurance policy. Tenant shall comply with all reasonable requirements of any insurance company, insurance underwriter, or Board of Fire Underwriters which are necessary to maintain the insurance coverage carried by either Landlord or Tenant pursuant to this Lease. 4.3 OUTSIDE AREAS: No materials, supplies, tanks or containers, equipment, finished products or semi-finished products, raw materials, inoperable vehicles or articles of any nature shall be stored upon or permitted to remain outside of the Premises except in fully fenced and screened areas outside the Building which have been designed for such purpose and have been approved in writing by Landlord for such use by Tenant. 4.4 SIGNS: Tenant shall not place on any portion of the Premises any sign, placard, lettering in or on windows, banner, displays or other advertising or communicative material which is visible from the exterior of the Building without the prior written approval of Landlord. All such approved signs shall strictly conform to all Laws and shall be installed at the expense of Tenant. Tenant shall maintain such signs in good condition and repair. 4.5 PARKING: Tenant is allocated and shall have the exclusive right to use all of the parking stalls contained within the Project for its use and the use of Tenant's Agents. Tenant shall not at any time park its vehicles or the vehicles of others in any portion of the Project not designated by Landlord as a parking area. All trucks and delivery vehicles shall be (i) parked at the rear of the Building, (ii) loaded and unloaded in a manner which does not interfere with the businesses of other occupants of the Project, and (iii) permitted to remain on the Project only so long as is reasonably necessary to complete loading and unloading, and in no cases overnight. In the event Landlord elects or is required by any Law to limit or control parking in the Project or automobile commuting by Tenant's employees, by whatever method, Tenant agrees to participate in such program under such reasonable rules and regulations as are from time to time established by Landlord, and in whatever what is required for Landlord to comply with its legal obligations. ARTICLE 5 TRADE FIXTURES AND ALTERATIONS 5.1 TRADE FIXTURES: Throughout the Lease Term, Tenant may provide and install, and shall maintain in good condition, any Trade Fixtures required in the conduct of its business in the Premises. All Trade Fixtures shall remain Tenant's property. 5.2 TENANT'S ALTERATIONS: Construction by Tenant of Tenant's Alterations shall be governed by the following: A. Tenant shall not construct any Tenant's Alterations or otherwise alter the Premises without Landlord's prior written approval, to make Tenant's Alterations (i) which do not affect the structural or exterior parts or water tight character of the Building, and (ii) the reasonable estimated cost of which, plus the original cost of any part of the Premises removed or materially altered in connection with such Tenant's Alterations, together do not exceed the Permitted Tenant Alterations Limit specified in SECTION O of the Summary per work of improvement. In the event that Tenant makes Tenant's Alterations which do not require Landlord's approval pursuant to the preceding sentence, Tenant shall supply Landlord with notice of the work which has been done, and "as-built" drawings which show the work that has been done. In the event Landlord's approval for any Tenant's Alterations is required, Tenant shall not construct the Tenant's Alterations until Landlord has approved in writing the plans and specifications therefor, and such Tenant's Alterations shall be constructed substantially in compliance with such approved plans and specifications by a licensed contractor first approved by Landlord. All Tenant's Alterations constructed by Tenant shall be constructed by a licensed contractor in accordance with all Laws using new materials of good quality. B. Tenant shall not commence 4 construction of any Tenant's Alterations until (i) all required governmental approvals and permits have been obtained, (ii) all requirements regarding insurance imposed by this Lease have been satisfied, (iii) Tenant has given Landlord at least five days' prior written notice of its intention to commence such construction, and (iv) if reasonably requested by Landlord, Tenant has obtained contingent liability and broad form builders' risk insurance in an amount reasonably satisfactory to Landlord if there are any perils relating to the proposed construction not covered by insurance carried pursuant to Article 9. C. All Tenant's Alterations shall remain the property of Tenant during the Lease Term and may be altered or removed from the Premises, during the Lease Term provided that, in so doing, Tenant complies with all provisions of this Article 5 in doing so, and provided further that Tenant repairs any damage to the Premises or the Project caused by such alteration or removal, restoring the Premises and the Project to their condition prior to the installation of the removed Tenant's Alterations. At the expiration or sooner termination of the Lease Term, all Tenant's Alterations shall be surrendered to Landlord as part of the realty and shall then become Landlord's property, and Landlord shall have no obligation to reimburse Tenant for all or any portion of the value or cost thereof, provided, however, that if Landlord requires Tenant to remove any Tenant's Alterations, Tenant shall so remove such Tenant's Alterations prior to the expiration or sooner termination of the Lease Term. Notwithstanding the foregoing, Tenant shall not be obligated to remove any Tenant's Alterations with respect to which the following is true: (i) Tenant was required, or elected, to obtain the approval of Landlord to the installation of the Tenant's Alterations in question; (ii) at the time Tenant requested Landlord's approval, Tenant requested of Landlord in writing that Landlord inform Tenant of whether or not Landlord would require Tenant to remove such Tenant's Alterations at the expiration of the Lease Term; and (iii) at the time Landlord granted its approval, it did not inform Tenant that it would require Tenant to remove such Tenant's Alterations at the expiration of the Lease Term. 5.3 ALTERATIONS REQUIRED BY LAW: Tenant shall make any alteration, addition or change of any sort to the Premises that is required by any Law because of (i) Tenant's particular use or change of use of the Premises; (ii) Tenant's application for any permit or governmental approval; or (iii) Tenant's construction or installation of any Tenant's Alterations or Trade Fixtures. Any other alteration, addition, or change required by Law which is not the responsibility of Tenant pursuant to the foregoing shall be made by Landlord (subject to Landlord's right to reimbursement from Tenant specified in this Lease). 5.4 AMORTIZATION OF CERTAIN CAPITAL IMPROVEMENTS: Tenant shall pay Additional Rent in the event Landlord reasonably elects or is required to make any of the following kinds of capital improvements to the Project and the cost thereof is not reimbursable as a Common Operating Expense: (i) capital improvements required to be constructed in order to comply with any Law (excluding any Hazardous Materials Law) not in effect or applicable to the Project as of the Effective Date; (ii) modification of existing or construction of additional capital improvements or building service equipment for the purpose of reducing the consumption of utility services or Common Operating Expenses of the Project; (iii) replacement of capital improvements or building service equipment existing as of the Effective Date when required because of normal wear and tear; and (iv) restoration of any part of the Project that has been damaged by any peril to the extent the cost thereof is not covered by insurance proceeds (which shall include, for the purposes of this Paragraph 5.4 only, the amount of any "deductible" (allowed hereby) on the applicable policy(ies) of insurance) actually recovered by Landlord up to a maximum amount per occurrence of 10% of the then replacement cost of the Project. The amount of Additional Rent Tenant is to pay with respect to each such capital improvement shall be determined as follows: A. All costs paid by Landlord to construct such improvements (including commercially reasonable financing costs) shall be amortized over the useful life of such improvement (as reasonably determined by Landlord in accordance with generally accepted accounting principles) with interest on the unamortized balance at the then prevailing market rate Landlord would pay if it borrowed funds to construct such improvements from an institutional lender, and Landlord shall inform Tenant of the monthly amortization payment required to so amortize such costs, and shall also provide Tenant with the information upon which such determination is made B. As Additional Rent, Tenant shall pay at the same time the Base Monthly Rent is due an amount equal to Tenant's Share of that portion of such monthly amortization payment fairly allocable to the Building (as reasonably determined by Landlord) for each month after such improvements are completed until the first to occur of (i) the expiration of the Lease Term (as it may be extended), or (ii) the end of the term over which such costs were amortized. 5.5 MECHANIC'S LIENS: Tenant shall keep the Project free from any liens and shall pay when due all bills arising out of any work performed, materials furnished, or obligations incurred by Tenant or Tenant's Agents relating to the Project. If any claim of lien is recorded (except those caused by Landlord or Landlord's Agents), Tenant shall bond against or discharge the same within 10 days after Tenant has notice that the same has been recorded against the Project. Should any lien be filed against the Project or any action be commenced affecting title to the Project, the party receiving notice of such lien or action shall immediately give the other party written notice thereof. 5.6 TAXES ON TENANT'S PROPERTY: Tenant shall pay before delinquency any and all taxes, assessments, license fees and public charges levied, assessed or imposed against Tenant or Tenant's estate in this Lease or the property of Tenant situated within the Premises which become due during the Lease Term. If any tax or other charge is assessed by any governmental agency because of the execution of this Lease, such tax shall be paid by Tenant. On demand by Landlord, Tenant shall furnish Landlord with satisfactory evidence of these payments. 5 ARTICLE 6 REPAIR AND MAINTENANCE 6.1 TENANT'S OBLIGATION TO MAINTAIN: Except as otherwise provided in PARA 6.2, PARA 11.1, and PARA 12.3, Tenant shall be responsible for the following during the Lease Term: A. Except as to those items which are Landlord's responsibility under Paragraph 6.2, Tenant shall clean and maintain in good order, condition, and repair when necessary the Premises and the Building and every part thereof, through regular inspections and servicing, including, but not limited to: (i) all plumbing and sewage facilities (including all sinks, toilets, faucets and drains), and all ducts, pipes, vents or other parts of the HVAC or plumbing system; (ii) all fixtures, interior and exterior walls, floors, carpets and ceilings; (iii) all windows, doors, entrances, plate glass, showcases and skylights (including cleaning both interior and exterior surfaces); (iv) all electrical facilities and all equipment (including all lighting fixtures, lamps, bulbs, tubes, fans, vents, exhaust equipment and systems); (vi) any automatic fire extinguisher equipment on the Project; (vii)the exterior surfaces (including painting) of the Building, (ix) utility facilities and other building service equipment; (x) the parking area, including cleaning, painting, restriping and resurfacing; (xi) the landscaping and other exterior facilities of the Project, including replacement or installation of lighting fixtures, directional or other signs and signals, irrigation systems, trees, shrubs, ground cover and other plant materials; and B. With respect to utility facilities servicing the Premises (including electrical wiring and conduits, gas lines, water pipes, and plumbing and sewage fixtures and pipes), Tenant shall be responsible for the maintenance and repair of all such facilities, including all such facilities that are within the walls or floor, or on the roof of the Premises, and any part of such facility that is within the Project. Tenant shall replace any damaged or broken glass in the Premises (including all interior and exterior doors and windows) with glass of the same kind, size and quality. Tenant shall repair any damage to the Premises or the Project (including exterior doors, walls, windows, parking areas, trash areas, and landscaping) caused by vandalism or any unauthorized entry, provided, that if and only to the extent that Tenant is not covered by insurance for the losses described in this sentence, Landlord will, at no cost or expense to itself, make a claim against any applicable policy of insurance carried by the Landlord and covering such damages from vandalism or unauthorized entry, and provide Tenant with the benefit of any recovery or payment received in that regard. Landlord shall have no duty to make any claim unless, in Landlord's reasonable judgment, the claim is meritorious. In the event that the claim is wholly or partially denied, Landlord shall not have further responsibility for prosecuting the claim, but on Tenant's written request, Landlord will assign the claim, without warranty, to Tenant, which may prosecute the claim (provided further, that Tenant shall at all times meet any of its own expenses of prosecuting any assigned claim against any insurance carrier, and hold Landlord harmless and indemnify Landlord against any damage to Landlord resulting from the making or prosecution of such a claim). C. Tenant shall (i) maintain and repair all HVAC equipment for the Building, and shall keep the same in good condition through regular inspection and servicing, and (ii) maintain continuously throughout the Lease Term a service contract for the maintenance of all such HVAC equipment with a licensed HVAC repair and maintenance contractor approved by Landlord, which contract provides for the periodic inspection and servicing of the HVAC equipment at least once every 60 days during the Lease Term. Notwithstanding the foregoing, Landlord may elect at any time to assume responsibility for the maintenance, repair and replacement of such HVAC equipment. Tenant shall furnish Landlord with copies of all such service contracts, which shall provide that they may not be canceled or changed without at least 30 days' prior written notice to Landlord. D. All repairs and replacements required of Tenant shall be promptly made with new materials of like kind and quality. If the work affects the structural parts of the Building or if the estimated cost of any item of repair or replacement is in excess of the Permitted Tenant's Alterations Limit, then Tenant shall first obtain Landlord's written approval of the scope of the work, plans therefor materials to be used and the contractor Notwithstanding anything to the contrary in Paragraph 6.1, Landlord shall perform and construct, and Tenant shall have no responsibility to perform or construct, any repair, maintenance or improvement to the Premises (i) necessitated by the acts or omissions of Landlord, or its Agents, (ii) required under Landlord's Corrective Responsibility (as defined herein), or (iii) for which Landlord has a right of reimbursement from others. Restoration of damage which is covered by Articles 11 or 12 shall be determined as set forth in such Articles. Whenever the proper repair and maintenance required of Tenant rises to the level of replacement of the roof, building systems, HVAC systems, or other matters which are otherwise Tenant's responsibility, Landlord shall have the responsibility to conduct such replacement, which shall be (i) treated as a "capital expenditure" if it is a capital expenditure under generally accepted accounting principles, in which case the costs thereof shall be amortized and paid by Tenant in accordance with the provisions of Paragraph 5.4; or (ii) treated as an item of Common Operating Expenses if it is not a capital expenditure under generally accepted accounting principles Determination of whether such an item is a capital expense or not under generally accepted accounting principles shall be conclusively made by Landlord's certified public accountant. To the extent that any of Tenant's repair and maintenance responsibilities involve matters which are wholly or partially covered under any warranty by a third party to Landlord, Landlord will, at no cost or expense to itself, make a claim against any applicable warranty available to Landlord and covering such damages and provide Tenant with the benefit of any recovery or payment received in that regard. Landlord shall have no duty to make any claim unless, in Landlord's reasonable judgment, the claim is meritorious. In the event that the claim is wholly or 6 partially denied, Landlord shall not have further responsibility for prosecuting the claim, but on Tenant's written request, Landlord will assign the claim, without warranty, to Tenant, which may prosecute the claim (provided further, that Tenant shall at all times meet any expenses of prosecuting any assigned claim against any warrantor, and hold Landlord harmless and indemnify Landlord against any damage to Landlord resulting from the making or prosecution of such a claim). 6.2 LANDLORD'S OBLIGATION TO MAINTAIN: Landlord shall repair and maintain in good order and replace when necessary (i) the structural parts of the Building, including, without limitation, the foundation, load-bearing walls, the structural members of the roof, and the floor slab, (ii) the plumbing lines, pipes, and conduits serving the Premises, including the fire protection loop, to the point of entry into the Building; and (iii) the roof membrane, so that the same are kept in good order and repair. Landlord shall further be responsible for the correction of defects in design and construction of the Project existing as of the Commencement Date (unless caused by the acts or omissions of Tenant or Tenant's Agents, and in the case of the roofing system and membrane and the HVAC system, only to the extent provided in the First Addendum to Lease) and corrections of violations of any Laws relating to the Premises which were in existence as of the Commencement Date (except as otherwise provided in this Lease, including, but not limited to, those provisions which assign responsibility for compliance with the Americans with Disabilities Act to Tenant as regards the interior of the Premises). The responsibility for correction of defects and legal violations set forth in the preceding sentence is referred to herein as "Landlord's Corrective Responsibility". Landlord shall not be responsible for repairs required by an accident, fire or other peril or for damage caused to any part of the Project by any act or omission of Tenant or Tenant's Agents except as otherwise required by Article 11. Landlord may engage contractors of its choice to perform the obligations required of it by this Article, and the necessity of any expenditure to perform such obligations shall be at the sole, but reasonable, discretion of Landlord. Landlord's expenses in complying with this Paragraph shall be reimbursed by Tenant according to the following provisions: (i) such expense shall be treated as a "capital expenditure" if it is a capital expenditure under generally accepted accounting principles, in which case the costs thereof shall be amortized and paid by Tenant in accordance with the provisions of Paragraph 5.4; or (ii) such expense shall be treated as an item of Common Operating Expenses if it is not a capital expenditure under generally accepted accounting principles. Determination of whether such an item is a capital expense or not under generally accepted accounting principles shall be conclusively made by Landlord's certified public accountant. Landlord shall be solely responsible for the expense of complying with Landlord's Corrective Responsibility, and shall not be entitled to any reimbursement from Tenant with respect to such matters. 6.3 CONTROL OF EXTERIOR AREA: Landlord shall have the right, without the same constituting an actual or constructive eviction and without entitling Tenant to any abatement of rent, to: (i) close any part of the exterior area of the Project to whatever extent required in the opinion of Landlord's counsel to prevent a dedication thereof or the accrual of any prescriptive rights therein so long as the same does not unreasonably and adversely affect Tenant's access to and use of the Premises and Tenant's parking rights; (ii) temporarily close all or part of the exterior area of the Project for any reason deemed sufficient by Landlord so long as the same does not unreasonably and adversely affect Tenant's access to and use of the Premises and Tenant's parking rights; (iii) make changes to the exterior area of the Project, including, without limitation, changes in the location of driveways, entrances, exits, parking spaces, parking areas, sidewalks or the direction of the flow of traffic in any reasonable way, so long as same does not unreasonably and adversely affect Tenant's use and enjoyment of the Premises; and/or (iv) remove unauthorized persons from the Project. Tenant shall keep the exterior area of the Project clear of all obstructions created or permitted by Tenant. If in the opinion of Landlord unauthorized persons are using any of the exterior area of the Project by reason of the presence of Tenant in the Building, Tenant, upon demand of Landlord, shall restrain such unauthorized use by appropriate proceedings. In exercising any such rights regarding the exterior area of the Project, (i) Landlord shall make a reasonable effort to minimize any disruption to Tenant's business, and (ii) Landlord shall not exercise its rights in a manner that would materially interfere with Tenant's use of the Premises without first obtaining Tenant's consent. Landlord shall have no obligation to provide guard services or other security measures for the benefit of the Project or the safety of Tenant, Tenant's Agents, or others. Tenant assumes all responsibility for the protection of Tenant and Tenant's Agents, and others on the Project, from acts of third parties; provided, however, that nothing contained herein shall prevent Landlord, at its sole option, from providing security measures for the Project. ARTICLE 7 WASTE DISPOSAL AND UTILITIES 7.1 WASTE DISPOSAL: Tenant shall store its waste either inside the Premises or within outside trash enclosures that are fully fenced and screened in compliance with all Private Restrictions, and designed for such purpose. All entrances to such outside trash enclosures shall be kept closed, and waste shall be stored in such manner as not to be visible from the exterior of such outside enclosures. Tenant shall cause all of its waste to be regularly removed from the Premises at Tenant's sole cost. Tenant shall keep all fire corridors and mechanical equipment rooms in the Premises free and clear of all obstructions at all times. 7.2 HAZARDOUS MATERIALS: Landlord and Tenant agree as follows with respect to the existence or use of Hazardous Materials on the Project: A. Any handling, transportation, storage, treatment, disposal or use of Hazardous Materials by Tenant and Tenant's Agents after the Effective Date in or about the Project shall strictly comply with all applicable Hazardous Materials Laws. Tenant shall indemnify, defend upon demand with counsel reasonably acceptable to Landlord, and hold harmless Landlord from and against any liabilities, 7 losses, claims, damages, lost profits, consequential damages, interest, penalties, fines, monetary sanctions, attorneys' fees, experts' fees, court costs, remediation costs, investigation costs, and other expenses to the extent the same arise in any manner whatsoever out of the use, storage, treatment, transportation, release or disposal of Hazardous Materials on or about the Project by Tenant or Tenant's Agents after the Effective Date. B. If the presence of Hazardous Materials on the Project caused or knowingly or actively negligently permitted by Tenant or Tenant's Agents after the Effective Date results in contamination or deterioration of water or soil resulting in a level of contamination greater than the levels established as acceptable by any governmental agency having jurisdiction over such contamination, then Tenant shall promptly take any and all action necessary to investigate and remediate such contamination if required by Law or as a condition to the issuance or continuing effectiveness of any governmental approval which relates to the use of the Project or any part thereof. Tenant shall further be solely responsible for, and shall defend, indemnify and hold Landlord and its agents harmless from and against, all claims, costs and liabilities, including attorneys' fees and costs, to the extent the same arise out of or in connection with any investigation and remediation required hereunder to return the Project to its condition existing prior to the appearance of such Hazardous Materials. C. Landlord and Tenant shall each give written notice to the other as soon as reasonably practicable of (i) any communication received from any governmental authority concerning Hazardous Materials which relates to the Project, and (ii) any contamination of the Project by Hazardous Materials which constitutes a violation of any Hazardous Materials Law. Tenant may use small quantities of household chemicals such as adhesives, lubricants, and cleaning fluids in order to conduct its business at the Premises and such other Hazardous Materials as are necessary for the operation of Tenant's business of which Landlord receives notice prior to such Hazardous Materials being brought onto the Premises and which Landlord consents in writing may be brought onto the Premises. At any time during the Lease Term, Tenant shall, within ten (10) business days after written request therefor received from Landlord, disclose in writing all Hazardous Materials that are being used by Tenant on the Project, the nature of such use, and the manner of storage and disposal. D. Landlord, at its sole cost and expense except as set forth below in this Subparagraph D, may cause testing wells to be installed on the Project, and may cause the ground water to be tested to detect the presence of Hazardous Material by the use of such tests as are then customarily used for such purposes. If Tenant so requests, Landlord shall supply Tenant with copies of such test results. The cost of such tests and of the installation, maintenance, repair and replacement of such wells shall be paid by Tenant if such tests disclose the existence of facts which give rise to liability of Tenant pursuant to its indemnity given in PARA 7.2A and/or PARA 7.2B. E. As used herein, the term "Hazardous Material," means any hazardous or toxic substance, material or waste which is or becomes regulated by any local governmental authority, the State of California or the United States Government. The term "Hazardous Material," includes, without limitation, petroleum products, asbestos, PCB's, and any material or substance which is (i) listed under Article 9 or defined as hazardous or extremely hazardous pursuant to Article 11 of Title 22 of the California Administrative Code, Division 4, Chapter 20, (ii) defined as a "hazardous waste" pursuant to Section 1004 of the Federal Resource Conservation and Recovery Act, 42 U.S.C. 6901 et seq. (42 U.S.C. 6903), or (iii) defined as a "hazardous substance" pursuant to Section 101 of the Comprehensive Environmental Response; Compensation and Liability Act, 42 U.S.C. 9601 et seq. (42 U.S.C. 9601). As used herein, the term "Hazardous Material Law" shall mean any statute, law, ordinance, or regulation of any governmental body or agency (including the U.S. Environmental Protection Agency, the California Regional Water Quality Control Board, and the California Department of Health Services) which regulates the use, storage, release or disposal of any Hazardous Material. F. LANDLORD'S INDEMNITY REGARDING HAZARDOUS MATERIALS: Landlord shall indemnify Tenant from its actual out of pocket cost of complying with any administrative order (a "Compliance Order") issued by any governmental agency pursuant to the Comprehensive Environmental Response Compensation and Liability Act, 42 U.S.C. 9601 et seq. or the Carpenter/Presley/Tanner Hazardous Substances Account Act, California Health and Safety Code Section 25300, et seq., which is issued against Tenant and with which Tenant is obligated to comply solely because of Tenant's status as an "owner" or "operator" of the Premises, if such Compliance Order results from the presence on the Premises of Hazardous Materials which is not caused, exacerbated, or contributed to by Tenant or Tenant's Agents, provided that one of the following conditions is met: 1. Tenant proves by clear and convincing evidence that the Compliance Order arises solely from a release of Hazardous Materials which took place before the first date on which Tenant occupied the Premises; or 2. Tenant proves by clear and convincing evidence (1) that such Compliance Order does not result from the presence on the Premises of Hazardous Materials which was caused, exacerbated, or contributed to by Tenant or Tenant's Agents, and (2) that such Compliance Order does not result from a release of Hazardous Materials which was caused, exacerbated, or contributed to by Tenant or Tenant's Agents. Landlord's obligation under this indemnity is limited to Tenant's actual, out of pocket costs incurred in complying with a Compliance Order and attorney's fees incurred in defending against a proposed Compliance Order, provided that one of the preceding conditions is met, so long as Landlord may select the attorney to defend Tenant and have sole authority to make all settlement and decisions in regard to the proceedings, including the decision whether to challenge administrative orders by appeal or court challenge. Landlord shall have no liability under this 8 Paragraph for any other claims, costs, damages, or losses incurred by Tenant, including without limitation personal injury, property damage, punitive damages, damage to business, lost profits, or other consequential damages incurred by Tenant or any third party. G. Except as otherwise disclosed to Tenant in writing prior to the Effective Date, to the best of Landlord's knowledge (i) no underground storage tanks are present on the Premises or Project; and (ii) no action or proceeding is pending or threatened regarding the Premises or Project concerning any Hazardous Material. H. The obligations of Landlord and Tenant under this PARA 7.2 shall survive the expiration or earlier termination of the Lease Term. The rights and obligations of Landlord and Tenant with respect to issues relating to Hazardous Materials are exclusively established by this PARA 7.2. In the event of any inconsistency between any other part of this Lease and this PARA 7.2, the terms of this PARA 7.2 shall control. 7.3 UTILITIES: Tenant shall promptly pay, as the same become due, all charges for water, gas, electricity, telephone, sewer service, janitorial and cleaning services, waste pick-up and any other utilities, materials or services furnished directly to or used by the Tenant on or about the Premises during the Lease Term, including, without limitation, (i) meter, use and/or connection fees, hook-up fees, or standby fee (excluding any connection fees or hook-up fees which relate to making the existing electrical, gas, and water service accessible to the Premises as of the Commencement Date), and (ii) penalties for discontinued to interrupted service. Landlord shall not have any duty to provide or pay for janitorial, cleaning, or maintenance of the Premises. 7.4 COMPLIANCE WITH GOVERNMENTAL REGULATIONS: Landlord and Tenant shall comply with all rules, regulations and requirements promulgated by national, state or local governmental agencies or utility suppliers concerning the use of utility services, including any rationing limitation or other control. Tenant shall not be entitled to terminate this Lease not to any abatement in rent by reason of such compliance. ARTICLE 8 COMMON OPERATING EXPENSES 8.1 TENANT'S OBLIGATION TO REIMBURSE: As Additional Rent, Tenant shall pay Tenant's Share (specified in SECTION G of the Summary) of all Common Operating Expenses. Tenant shall pay such share of the actual Common Operating Expenses incurred or paid by Landlord but not theretofore billed to Tenant within 30 days after receipt of a written bill therefor from Landlord, on such periodic basis as Landlord shall designate, but in no event more frequently than once a month. Alternatively, Landlord may from time to time require that Tenant pay Tenant's Share of Common Operating Expenses in advance in estimated monthly installments, in accordance with the following: (i) Landlord shall deliver to Tenant Landlord's reasonable estimate of the Common Operating expenses it anticipates will be paid on incurred for the Landlord's fiscal year in question; (ii) during such Landlord's fiscal year Tenant shall pay such share of the estimated Common Operating Expenses in advance in monthly installments as required by Landlord due with the installments of Base Monthly Rent; and (iii) within 90 days after the end of each Landlord's fiscal year, Landlord shall furnish to Tenant a statement in reasonable detail of the actual Common Operating Expenses paid or incurred by Landlord during the just ended Landlord's fiscal year and thereupon there shall be an adjustment between Landlord and Tenant, with payment to Landlord or credit by Landlord against the next installment of Base Monthly Rent (or payment to Tenant by Landlord if the Lease has terminated or expired and there are no other or further amounts due from Tenant to Landlord against which such amounts can be credited),as the case may require, within 10 days after delivery by Landlord to Tenant of said statement, so that Landlord shall receive the entire amount of Tenant's Share of all Common Operating Expenses for such Landlord's Fiscal year and no more. Tenant shall have the right at its expense, exercisable upon reasonable prior written notice to Landlord, to inspect the Landlord's office during normal books and records as they relate to Common Operating Expenses. Such inspection must be within 30 days of Tenant's receipt of Landlord's annual statement for the same (and is waived as to any year where such an inspection is not timely conducted), and shall be limited to verification of the charges contained in such statement. Tenant may not withhold payment of such bill pending completion of such inspection. 8.2 COMMON OPERATION EXPENSES DEFINED: The term "Common Operating Expenses" shall mean the following: A. Except as otherwise provided herein, all costs and expenses paid or incurred by Landlord in doing the following (including payments to independent contractors providing services related to the performance of the following): (i) performing all maintenance required of Landlord under this Lease and performing any other maintenance which is necessitated by Tenant's failure to maintain as obliged hereunder;(ii) maintenance of the liability, fire and property damage insurance covering the Project carried by Landlord pursuant to PARA 9.2 (including the prepayment of premiums for coverage of up to one year); (iii) complying with all applicable Laws; and (iv) providing security to the extent that Landlord may see fit in its sole discretion, to do so. B. The following costs, (i) Real Property Taxes as defined in PARA 8.3; (ii) the amount of any "deductible" paid by Landlord with respect to damage caused by any insured Peril (unless the damage causes termination of the Lease under the provisions of Article 11 hereof); (iii) the cost to repair damage caused by an Uninsured Peril up to a maximum amount in any 12 month period equal to 2% of the replacement cost of the buildings or other improvements damaged; and (iv) that portion of all compensation (including benefits and premiums for workers' compensation and other insurance) paid to or on behalf of employees of Landlord but only to the extent they are involved in the performance of the work described by PARA 8.2A that is fairly allocable to the Project (and not including compensation of executive personnel of Landlord). 9 C. Fees for management services rendered by either Landlord or a third party manager engaged by Landlord (which may be a party affiliated with Landlord), except that the total amount charged for management services and included in Tenant's Share of Common Operating Expenses shall not exceed the monthly rate of Two Percent (2%) of the Base Monthly Rent. D. All additional costs and expenses incurred by Landlord with respect to the operation, protection, maintenance, repair and replacement of the Project which are not specified in the preceding Subparagraphs of this Paragraph 8.2 and which are current expenses, not capital expenses, according to generally accepted accounting principles as determined conclusively by Landlord's independent certified public accountant; provided, however, that Common Operating Expenses shall not include any of the following: (i) payments on any loans or ground leases affecting the Project; (ii) depreciation of any buildings or any major systems of building service equipment within the Project; (iii) any cost incurred in complying with Hazardous Materials Laws, which subject is governed exclusively by PARA 7.2, (iv) costs (a) for which Landlord has a right of reimbursement from others, or (b) which Tenant reimburses Landlord directly or which Tenant pays directly to a third person, or (v) costs to comply with Landlord's Corrective Responsibility (as defined in Paragraph 6.2). 8.3 REAL PROPERTY TAXES DEFINED; The term "Real Property Taxes" shall mean all taxes, assessments, levies, and other charges of any kind or nature whatsoever, general and special, foreseen and unforseen (including all installments of principal and interest required to pay any existing or future general or special assessments for public improvements, services or benefits, and any increases resulting from reassessments resulting from a change in ownership, new construction, or any other cause and including any interest and/or penalties accruing thereon, except as set forth below), now or hereafter imposed by any governmental or quasi-governmental authority or special district having the direct of indirect power to tax or levy assessments, which are levied or assessed against, or with respect to the value, occupancy or use of all or any portion of the Project (as now constructed or as may at any time hereafter be constructed, altered, or otherwise changed) or Landlord's interest therein, the fixtures, equipment and other property of Landlord, real or personal, that are an integral part of and located on the Project, the gross receipts, income, or rentals from the Project, or the use of parking areas, public utilities, or energy within the Project, or Landlord's business of leasing the Project. If at any time during the Lease Term the method of taxation or assessment of the Project prevailing as of the Effective Date shall be altered so that in lieu of or in addition to any Real Property Tax described above there shall be levied, assessed or imposed (whether by reason of change in the method of taxation or assessment, creation of a new tax or charge, or any other cause) an alternate or additional tax or charge (i) on the value, use or occupancy of the Project of Landlord's interest therein, or (ii) on or measured by the gross receipts, income or rentals from the Project, on Landlord's business of leasing the Project, or computed in any manner with respect to the operation of the Project, then any such tax or charge, however designated, shall be included within the meaning of the term "Real Property Taxes" for purposes of this Lease. If any Real Property Tax is based upon property or rents unrelated to the Project, then only that part of such Real Property Tax that is fairly allocable to the Project shall be included within the meaning of the term "Real Property Taxes". Notwithstanding the foregoing, the term "Real Property Taxes" shall not include (i) estate, inheritance, transfer, gift or franchise taxes of Landlord (ii) the federal or state net income tax imposed on Landlord's income from all sources, or (iii) taxes, assessments or any other governmental levies, or any increases in the foregoing occasioned by or relating to (a) land and improvements not reserved for Tenant's exclusive or nonexclusive use, (b) assessments and other fees for improvement and services which do not benefit the Project, or (c) Hazardous Materials except to the extent caused by Tenant's storage, use or disposal of Hazardous Materials or (iv) interest or penalties caused by Landlord's late payment of non-payment of Real Property Taxes, provided, that on the occasion when such were due to be paid, Tenant had paid all of its Rent obligations to Landlord. Notwithstanding any provision to contrary contained herein, if Landlord elects to pay any tax, assessment or levy in total which Landlord could have elected to pay in installments without incurring any additional expense, but Landlord does not make such election, Tenant shall be required to pay only Tenant's Share of each installment payable with respect to the period of time covered by the Lease Term, as each such installment would have become due. Additionally, Tenant shall have the right, by appropriate proceedings, to protest or contest any assessment, reassessment or allocation of property taxes or any change therein. Landlord shall notify Tenant in writing of any change in property taxes within sufficient time to allow Tenant to review and, if it so desires, to contest or protest such change. In the contest or proceedings, Tenant may act in its own name and/or the name of the Landlord and Landlord will, at Tenant's request and expense cooperate with Tenant in any way Tenant may reasonably require in connection with such contest, provided that Landlord shall not be required to incur any expense (unless Tenant agrees to reimburse Landlord for such expense) or to incur any risks (unless Tenant agrees to indemnify against such risks). If Tenant does not pay the property taxes when due which are the subject of such protest or contest, Tenant shall post a bond in lieu thereof in an amount reasonably determined by Landlord but not less than one hundred twenty-five percent (125%) of the amount demanded by the taxing authorities, which bond shall be in a form satisfactory to Landlord, written by an approved surety, and which shall hold Landlord and the Project harmless from any damage arising out of the contest and ensure the payment of any judgment that may be rendered. With respect to any contest of property taxes or Laws, Tenant shall hold Landlord and the Premises harmless from any damage arising out of such protest or contest and shall pay any judgment that may be rendered for which Tenant would otherwise be liable under this Lease without such contest or protest. Any contest conducted by Tenant under this Paragraph shall be at Tenant's expense and if interest or late charges become payable as a result of such contest or protest, Tenant 10 shall pay the same. Tenant shall receive the net benefit (after Landlord's expenses of obtaining the refund are paid) of all refunds of property taxes received with respect to the Lease Term, to the extent that Tenant paid such property taxes. ARTICLE 9 INSURANCE 9.1 TENANT'S INSURANCE: Tenant shall maintain insurance complying with all of the following: A. Tenant shall procure, pay for and keep in full force and effect the following: (1) Commercial general liability insurance, including property damage, against liability for personal injury, bodily injury, death and damage to property occurring in or about, or resulting from an occurrence in or about, the Premises with combined single limit coverage of not less than the amount of Tenant's Liability Insurance Minimum specified in SECTION P of the Summary, which insurance shall contain a "contractual liability" endorsement insuring Tenant's performance of Tenant's obligation to indemnify Landlord contained in PARA 10.3 (provided, however, that Tenant may satisfy all but $1,000,000.00 of this commercial general liability insurance coverage requirement by an "umbrella policy" of excess liability coverage which meets all of the other requirements hereof, which covers at least the same losses and damages as a commercial general liability policy, and which is in a form approved by Landlord); (2) Fire and property damage insurance in so-called "all risk" form insuring Tenant's Trade Fixtures and Tenant's Alterations for the full actual replacement cost thereof; (3) Such other insurance that is either (i) reasonably required by any Lender, or (ii) reasonably required by Landlord and customarily carried by tenants of similar property in similar businesses. In the event that Tenant believes that a Lender's requirement is unreasonable, Tenant shall nevertheless obtain the required insurance, but Landlord shall be reasonable for the cost thereof if it is established that requirement was unreasonable. B. Where applicable and required by Landlord, each policy of insurance required to be carried by Tenant pursuant to this PARA 9.1: (i) shall name Landlord and such other parties in interest as Landlord reasonably designates as additional insured; (ii) shall be primary insurance which provides that the insurer shall be liable for the full amount of the loss up to and including the total amount of liability set forth in the declarations without the right of contribution from any other insurance coverage of Landlord; (iii) shall be in a form satisfactory to Landlord; (iv) shall be carried with companies reasonably acceptable to Landlord; (v) shall provide that such policy shall not be subject to cancellation, lapse, or reduction in coverage except after at least 30 days prior written notice to Landlord so long as such provision of 30 days notice is reasonably obtainable, but in any event not less than 10 days prior written notice; (vi) shall not have a "deductible" in excess of such amount as is reasonably approved by Landlord; (vii) shall contain a cross liability endorsement; and (viii) shall contain a "severability" clause. If Tenant has in full force and effect a blanket policy of liability insurance with the same coverage for the Premises as described above, as well as other coverage of other premises and properties of Tenant, or in which Tenant has some interest, such blanket insurance shall satisfy the requirements of this PARA 9.1. C. A copy of each certificate of the insurer, certifying that such policy has been issued, providing the coverage required by this PARA 9.1, and containing the provisions specified herein, shall be delivered to Landlord prior to the time Tenant or any of its Agents enters the Premises and upon renewal of such policies, but not less than 5 days prior to the expiration of the term of such coverage. Landlord may, at any time, and form time to time, inspect and/or copy any and all insurance policies required to be procured by Tenant pursuant to this PARA 9.1. If any Lender or insurance advisor reasonably determines at any time that the amount of coverage required for any policy of insurance Tenant is to obtain pursuant to this PARA 9.1 is not adequate, then Tenant shall increase such coverage for such insurance to such amount as such Lender or insurance advisor reasonably deems adequate, not to exceed the level of coverage for such insurance commonly carried by comparable businesses similarly situated. 9.2 LANDLORD'S INSURANCE: Landlord shall have the following obligations and options regarding insurance: A. Landlord shall maintain a policy or policies of fire and property damage insurance in so-called "all risk" form insuring Landlord (and such others as Landlord may designate) against loss of rents for a period of not less than 12 months and from physical damage to the Project with coverage of not less than the full replacement cost thereof. Landlord may so insure the Project separately, or may insure the Project with other property owned by Landlord which Landlord elects to insure together under the same policy or policies. Such fire and property damage insurance (i) may be endorsed to cover loss caused by such additional perils against which Landlord may elect to insure, including earthquake and/or flood, and to provide such additional coverage as Landlord reasonably requires, (provided, that the cost of earthquake and flood insurance coverage shall not exceed a commercially reasonable sum and (ii) shall contain reasonable "deductibles" which, in the case of earthquake and flood insurance, may be up to 10% of the replacement cost of the property insured or such higher amount as is then commercially reasonable. Landlord shall not be required to cause such insurance to cover any Trade Fixtures or Tenant's Alterations of Tenant. B. Landlord may maintain a policy or policies of commercial general liability insurance insuring Landlord (and such others as are designated by Landlord) against liability for personal injury, bodily injury, death and damage to property occurring or resulting from an occurrence in, on or about the Project, with combined single limit coverage in such amount as Landlord from time to time determines is reasonably necessary for its protection. 11 9.3 TENANT'S OBLIGATION TO REIMBURSE: If Landlord's insurance rates for the Building are increased at any time during the Lease Term as a result of the nature of Tenant's use of the Premises, Tenant shall reimburse Landlord for the full amount of such increase immediately upon receipt of a bill from Landlord therefor. 9.4 RELEASE AND WAIVER OF SUBROGATION: Notwithstanding anything to the contrary contained in this Lease, the parties hereto release each other, and their respective agents and employees, from any liability for injury to any person or damage to property that is caused by or results from any risk insured against under any valid and collectible insurance policy carried by either of the parties which contains a waiver of subrogation by the insurer and is in force at the time of such injury or damage; subject to the following limitations: (i) the foregoing provision shall not apply to the commercial general liability insurance described by subparagraphs PARA 9.1A and PARA 9.2B; (ii) such release shall apply to liability resulting from any risk insured against or covered by self-insurance maintained or provided by Tenant to satisfy the requirements of PARA 9.1 to the extent permitted by this Lease; and (iii) Tenant shall not be released from any such liability to the extent any damages resulting from such injury or damage are not covered by the recovery obtained by Landlord from such insurance, but only if the insurance in question permits such partial release in connection with obtaining a waiver of subrogation from the insurer. This release shall be in effect only so long as the applicable insurance policy contains a clause to the effect that this release shall not affect the right of the insured to recover under such policy. Each party shall use reasonable efforts to cause each insurance policy obtained by it to provide that the insurer waives all right of recovery by way of subrogation against the other party and its agents and employees in connection with any injury or damage covered by such policy. However, if any insurance policy cannot be obtained with such a waiver of subrogation, or if such waiver of subrogation is only available at additional cost and the party for whose benefit the waiver is to be obtained does not pay such additional cost, then the party obtaining such insurance shall notify the other party of that fact and thereupon shall be relieved of the obligation to obtain such waiver of subrogation rights from the insurer with respect to the particular insurance involved. Landlord and Tenant agree to consider, in good faith, the request of either of them addressed to the other in writing, to extend the provisions of this Paragraph 9.4 to a contractor or subcontractor engaged by or through the requesting party, upon the offer of such contractor or subcontractor to enter into a similar agreement acceptable to the party to whom the request is addressed, but neither Landlord nor Tenant shall be obligated to grant such a request, and the decision to grant or deny such request shall be in the sole but reasonable discretion of the party to whom the request is addressed, and shall not be subject to any standard of reasonableness, anything to the contrary contained in this Lease to the contrary notwithstanding. Neither party shall lose the benefit of the waivers contained in this Paragraph 9.4 solely on account of the fact that a loss is not covered by insurance, if such fact is due to the other party's failure to obtain such insurance in breach of the other party's obligations under this Lease. ARTICLE 10 LIMITATION ON LANDLORD'S LIABILITY AND INDEMNITY 10.1 LIMITATION ON LANDLORD'S LIABILITY: Landlord shall not be liable to Tenant, nor shall Tenant be entitled to terminate this Lease or to any abatement of rent (except as expressly provided otherwise herein), for any injury to Tenant or Tenant's Agents, damage to the property of Tenant or Tenant's Agents, or loss to Tenant's business resulting from any cause, including without limitation any: (i) failure, interruption or installation of any HVAC or other utility system or service; (ii) failure to furnish or delay in furnishing any utilities or services when such failure or delay is caused by fire or other peril, the elements, labor disturbances of any character, or any other accidents or other conditions beyond the reasonable control of Landlord; (iii) limitation, curtailment, rationing or restriction on the use of water or electricity, gas or any other form of energy or any services or utility servicing the Project; (iv) vandalism or forcible entry by unauthorized persons or the criminal act of any person; or (v) penetration of water into or onto any portion of the Premises or the Building through roof leaks or otherwise. Notwithstanding the foregoing but subject to PARA 9.4, Landlord shall be liable for any such injury, damage or loss which is proximately caused by Landlord's willful misconduct or gross or active negligence. 10.2 LIMITATION ON TENANT'S RECOURSE: If Landlord is a corporation, trust, partnership, joint venture, unincorporated association or other form of business entity: (i) the obligations of Landlord shall not constitute personal obligations of the officers, directors, trustees, partners, joint ventures, members owners, stockholders, or other principals or representatives of such business entity; and (ii) Tenant shall not have recourse to the assets of such officers, directors, trustees, partners, joint venturers, members, owners, stockholders, principals or representatives except to the extent of their interest in the Project. Tenant shall have recourse only to the interest of Landlord in the Project (or, if the Project is sold, the proceeds of sale) for the satisfaction of the obligations of Landlord and shall not have recourse to any other assets of Landlord for the satisfaction of such obligations. 10.3 INDEMNIFICATION OF LANDLORD: Tenant shall hold harmless, indemnify and defend Landlord, and its employees agents and contractors, with competent counsel reasonably satisfactory to Landlord (and Landlord agrees to accept counsel that any insurer requires be used), from all liability, penalties, losses, damages, costs, expenses, causes of action, claims and/or judgements arising by reason of any death, bodily injury, personal injury or property damage resulting from (i) any cause or causes whatsoever (other than the willful misconduct or gross or active negligence of Landlord) occurring on or resulting from an occurrence on the Project during the Lease Term, (ii) the negligence or willful misconduct of Tenant or its agents, employees and contractors, wherever the same may occur, or (iii) and Event of Tenant's Default. The provisions of this PARA 10.3 shall survive the expiration or 12 sooner termination of this Lease. 10.4 INDEMNIFICATION OF TENANT: Landlord shall hold harmless, indemnify and defend Tenant, and its employees and Agents from all liability, penalties, losses, damages, costs, expenses, causes of action, claims and/or judgments not covered by insurance (including reasonable attorney's fees) arising by reason of any death, bodily injury, personal injury or property damage resulting from the gross or active negligence or willful misconduct of Landlord or its Agents or employees and for which Tenant is not, pursuant to Paragraph 10.3, obligated to indemnify Landlord. The provisions of this Paragraph 10.4 shall survive the expiration or sooner termination of this Lease. ARTICLE 11 DAMAGE TO PREMISES 11.1 LANDLORD'S DUTY TO RESTORE: If the Premises are damaged by any peril after the Effective Date, Landlord shall restore the Premises unless the Lease is terminated by Landlord pursuant to PARA 11.2 or by Tenant pursuant to PARA 11.3. All insurance proceeds available from the fire and property damage insurance carried by Landlord pursuant to PARA 9.2 shall be paid to and become the property of Landlord. If this Lease is terminated pursuant to either PARA 11.2 or PARA 11.3, then all insurance proceeds available from insurance carried by Tenant which covers loss to property that is Landlord's property or would become Landlord's property on termination of this Lease shall be paid or assigned to and become the property of Landlord. If this Lease is not so terminated, then upon receipt of the insurance proceeds (if the loss is covered by insurance) and the issuance of all necessary governmental permits, Landlord shall commence and diligently prosecute to completion the restoration of the Premises, to the extent then allowed by Law, to substantially the same condition in which the Premises were immediately prior to such damage. Landlord's obligation to restore shall be limited to the Premises and interior improvements constructed by Landlord as they existed as of the Commencement Date, excluding any Tenant's Alterations, Trade Fixtures and/or personal property constructed or installed by Tenant in the Premises. Tenant shall forthwith replace or fully repair all Tenant's Alterations and Trade Fixtures installed by Tenant and existing at the time of such damage or destruction, and all insurance proceeds received by Tenant from the insurance carried by it pursuant to PARA 9.1A(2) shall be used for such purpose. Landlord agrees to consult with Tenant in good faith in regard to the replacement or repair of Tenant's Alterations or Trade Fixtures which have been damaged, and to approve or disapprove Tenant's proposals for Tenant's Alterations or Trade Fixtures not to be replaced or repaired using a standard of commercial reasonableness. 11.2 LANDLORD'S RIGHT TO TERMINATE: Landlord shall have the right to terminate this Lease in the event any of the following occurs, which right may be exercised only by delivery to Tenant of a written notice of election to terminate within 30 days after the date of such damage: A. Either the Project or the Building is damaged by an Insured Peril to such an extent that the estimated cost to restore exceeds 33% of the then actual replacement cost thereof; B. Either the Project or the Building is damaged by an Uninsured Peril to such an extent that the estimated cost to restore exceeds 5% of the then actual replacement cost thereof; provided, however, that Landlord may not terminate this Lease pursuant to this PARA 11.2B if one or more tenants of the Project agree in writing to pay the amount by which the cost to restore the damage exceeds such amount and subsequently deposit such amount with Landlord within 30 days after Landlord has notified Tenant of its election to terminate this Lease; C. The Premises are damaged by any peril within 12 months of the last day of the Lease Term to such an extent that the estimated cost to restore equals or exceeds an amount equal to six times the Base Monthly Rent then due; provided, however, that Landlord may not terminate this Lease pursuant to this PARA 11.2C if Tenant, at the time of such damage, has a then valid express written option to extend the Lease Term and Tenant exercises such option to extend the Lease Term within 15 days following the date of such damage; or D. Either the Project or the Building is damaged by any peril and, because of the Laws then in force, (i) cannot be restored at reasonable cost to substantially the same condition in which it was prior to such damage, or (ii) cannot be used for the same use being made thereof before such damage if restored as required by this Article. E. As used herein, the following terms shall have the following meanings: (i) the term "Insured Peril" shall mean a peril actually or required to be insured against for which the insurance proceeds actually received by Landlord are sufficient (except for any "deductible" amount specified by such insurance) to restore the Project under then existing building codes to the condition existing immediately prior to the damage; and (ii) the term "Uninsured Peril" shall mean any peril which is not an Insured Peril. Notwithstanding the foregoing, if the "deductible" for earthquake or flood insurance exceeds 2% of the replacement cost of the improvements insured, such peril shall be deemed an "Uninsured Peril". 11.3 TENANT'S RIGHT TO TERMINATE: If the Premises are damaged by any peril and Landlord does not elect to terminate this Lease or is not entitled to terminate this Lease pursuant to PARA 11.2, then as soon as reasonably practicable, Landlord shall furnish Tenant with the written opinion of Landlord's architect or construction consultant as to when the restoration work required of Landlord may be completed. Tenant shall have the right to terminate this Lease in the event any of the following occurs, which right may be exercised only by delivery to Landlord of a written notice of election to terminate within 10 days after Tenant receives from Landlord the estimate of the time needed to complete such restoration. A. The Premises are damaged by any peril and, in the reasonable opinion of Landlord's architect or construction consultant, the restoration of the Premises cannot be substantially completed within 13 180 days after the date of the report of Landlord's architect or construction consultant; or B. The Premises are damaged by any peril within 12 months of the last day of the Lease Term and, in the reasonable opinion of Landlord's architect or construction consultant, the restoration of the Premises cannot be substantially completed within 90 days after the date of such damage and such damage renders unusable more than 30% of the Premises. 11.4 ABATEMENT OF RENT: In the event of damage to the Premises which does not result in the termination of this Lease, the Base Monthly Rent and the Additional Rent shall be temporarily abated during the period of restoration in proportion to the degree to which Tenant's use of the Premises is impaired by such damage. Tenant shall not be entitled to any compensation or damages from Landlord for loss of Tenant's business or property or for any inconvenience or annoyance caused by such damage or restoration. Tenant hereby waives the provisions of California Civil Code Sections 1932(2) and 1933(4) and the provisions of any similar law hereinafter enacted. ARTICLE 12 CONDEMNATION 12.1 LANDLORD'S TERMINATION RIGHT: Landlord shall have the right to terminate this Lease if, as a result of a taking by means of the exercise of the power of eminent domain (including a voluntary sale or transfer by Landlord to a condemnor under threat of condemnation), (i) more than 10% of the Building Leasable Area is so taken, or (ii) more than 50% of the Common Area (which in this Article means the area of the Project outside the Premises) is so taken. Any such right to terminate by Landlord must be exercised within a reasonable period of time, to be effective as of the date possession is taken by the condemnor. 12.2 TENANT'S TERMINATION RIGHT: Tenant shall have the right to terminate this Lease if, as a result of any taking by means of the exercise of the power of eminent domain (including any voluntary sale or transfer by Landlord to any condemnor under threat of condemnation), (i) 10% or more of the Premises is so taken and that part of the Premises that remains is not or cannot be restored within a reasonable period of time and thereby made reasonably suitable for the continued operation of the Tenant's business, or (ii) there is a taking affecting the Common Area and, as a result of such taking, Landlord cannot provide parking spaces within reasonable walking distance of the Premises equal in number to at least 80% of the number of spaces allocated to Tenant by PARA 2.1, whether by rearrangement of the remaining parking areas in the Common Area (including construction of multi-deck parking structures or restriping for compact cars where permitted by Law) or by alternative parking facilities on other land. Tenant must exercise such right within a reasonable period of time, to be effective on the date that possession of that portion of the Premises or Common Area that is condemned is taken by the condemnor. 12.3 RESTORATION AND ABATEMENT OF RENT: If any part of the Premises or the Common Area is taken by condemnation and this Lease is not terminated, then Landlord shall restore the remaining portion of the Premises and Common Area and interior improvements constructed by Landlord as they existed as of the Commencement Date, excluding any Tenant's Alterations, Trade Fixtures and/or personal property constructed or installed by Tenant. Thereafter, except in the case of a temporary taking, as of the date possession is taken (i) the Base Monthly Rent shall be reduced in the same proportion that the floor area of that part of the Premises so taken (less any addition thereto by reason of any reconstruction) bears to the original floor area of the Premises and/or (ii) there shall be an equitable adjustment of Base Monthly Rent to reflect any taking of the Common Area, to the extent such taking results in material diminishment of the value and useability of Tenant's's Lease; and in either event, Tenant shall be entitled to the benefit of any actual reduction in Common Operating Expenses which Landlord obtains as a result thereof (not including any condemnation award). 12.4 TEMPORARY TAKING: If any portion of the Premises is temporarily taken for one hundred eighty (180) days or less, this Lease shall remain in effect. If any portion of the Premises is temporarily taken by condemnation for a period which exceeds one hundred eighty (180) days or which extends beyond the natural expiration of the Lease Term, and such taking materially and adversely affects Tenant's ability to use the Premises for the Permitted Use, then Tenant shall have the right to terminate this Lease, effective on the date possession is taken by the condemnor. 12.5 DIVISION OF CONDEMNATION AWARD: Any award made as a result of any condemnation of the Premises or the Common Area shall belong to and be paid to Landlord, and Tenant hereby assigns to Landlord all of its right, title and interest in any such award; provided, however, that Tenant shall be entitled to receive any condemnation award that is made directly to Tenant for the following so long as the award made to Landlord is not thereby reduced; (i) for the taking of personal property or Trade Fixtures belonging to Tenant, (ii) for the interruption of Tenant's business or its moving costs, (iii) for loss of Tenant's goodwill; or (iv) for any temporary taking where this Lease is not terminated as a result of such taking. The rights of Landlord and Tenant regarding any condemnation shall be determined as provided in this Article, and each party hereby waives the provisions of California Code of Civil Procedure Section 1265.130 and the provisions of any similar law hereinafter enacted allowing either party to petition the Superior Court to terminate this Lease in the event of a partial taking of the Premises. ARTICLE 13 DEFAULT AND REMEDIES 13.1 EVENTS OF TENANT'S DEFAULT: Tenant shall be in default of its obligations under this Lease if any of the following events occurs (an "Event of Tenant's Default"): A. Tenant shall have failed to pay Base Monthly Rent or Additional Rent when due, and such failure is not cured within five (5) days after delivery of written notice from Landlord specifying such failure to 14 pay, or B. Tenant shall have failed to perform any term, covenant, or condition of this Lease except those identified in Subparagraphs C through F of this Paragraph or requiring the payment of Base Monthly Rent or Additional Rent, and Tenant shall have failed to cure such breach within 30 days after written notice from Landlord specifying the nature of such breach where such breach could reasonably be cured within said 30 day period, or if such breach could not be reasonably cured within said 30 day period, Tenant shall have failed to commence such cure within said 30 day period and thereafter continue with due diligence to prosecute such cure to completion within such time period as is reasonably needed but not to exceed 120 days from the date of Landlord's notice; or C. Tenant shall have sublet the Premises or assigned its interest in the Lease in violation of the provisions contained in Article 14; or D. Tenant shall have abandoned the Premises; or E. The occurrence of the following: (i) the making by Tenant of any general arrangements or assignments for the benefit of creditors; (ii) Tenant becomes a "debtor" as defined in 11 USC Section 101 or any successor statute thereto (unless, in the case of a petition filed against Tenant, the same is dismissed within 60 days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within 30 days; or (iv) the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where such seizure is not discharged within 30 days; provided, however, in the event that any provision of this Section 13.1E is contrary to any applicable Law, such provision shall be of no force or effect; or F. Tenant shall have failed to deliver documents required of it pursuant to PARA 15.4 to PARA 15.6 within the time periods specified therein, and shall have further failed to deliver such documents within five (5) days after Landlord's further written notice declaring that Tenant must either perform its obligations under PARA 15.4 or PARA 15.6 or an Event of Tenant's Default will have occurred. 13.2 LANDLORD'S REMEDIES: If an Event of Tenant's Default occurs, Landlord shall have the following remedies, in addition to all other rights and remedies provided by any Law or otherwise provided in this Lease, to which Landlord may resort cumulatively or in the alternative: A. So long as Landlord does not terminate Tenant's right to possession of the Premises, Landlord may keep this Lease in effect and enforce by an action at law or in equity all of its rights and remedies under this Lease, including (i) the right to recover the rent and other sums as they become due by appropriate legal action, (ii) the right to make payments required of Tenant or perform Tenant's obligations and be reimbursed by Tenant for the cost thereof with interest at the Agreed Interest Rate from the date the sum is paid by Landlord until Landlord is reimbursed by Tenant, and (iii) the remedies of injunctive relief and specific performance to compel Tenant to perform its obligations under this Lease. Notwithstanding anything contained in this Lease, in the event of a breach of an obligation by Tenant which results in a condition which poses an imminent danger to safety of persons or damage to property, an unsightly condition visible from the exterior of the Building, or a threat to insurance coverage, then if Tenant does not cure such breach within five (5) days after delivery to it of written notice from Landlord identifying the breach, Landlord may cure the breach of Tenant and be reimbursed by Tenant for the cost thereof with interest at the Agreed Interest Rate from the date the sum is paid by Landlord until Landlord is reimbursed by Tenant. B. Landlord may enter the Premises and release them to third parties for Tenant's account for any period, whether shorter or longer than the remaining Lease Term (provided, that in no event shall Tenant remain liable for longer than the Lease Term). Tenant shall be liable immediately to Landlord for all costs Landlord incurs in releasing the Premises, including brokers' commissions, expenses of altering and preparing the Premises required by the releasing. Tenant shall pay to Landlord the rent and other sums due under this Lease on the date the rent is due, less the rent and other sums Landlord received from any releasing. No act by Landlord allowed by this subparagraph shall terminate this Lease unless Landlord notifies Tenant in writing that Landlord elects to terminate this Lease. Notwithstanding any releasing without termination, Landlord may later elect to terminate this Lease because of the default by Tenant. C. Landlord may terminate this Lease by giving Tenant written notice of termination, in which event this Lease shall terminate on the date set forth for termination in such notice. Any termination under this PARA 13.2C shall not relieve Tenant from its obligation to pay sums then due Landlord or from any claim against Tenant for damages or rent previously accrued or then accruing. In no event shall any one or more of the following actions by Landlord, in the absence of a written election by Landlord to terminate this Lease or Tenant's right to possession of the Premises, constitute a termination of this Lease: (i) appointment of a receiver or keeper in order to protect Landlord's interest hereunder; (ii) consent to any subletting of the Premises or assignment of this Lease by Tenant, whether pursuant to the provisions hereof or otherwise; or (iii) any other action by Landlord or Landlord's Agents intended to mitigate the adverse effects of any breach of this Lease by Tenant, including without limitation any action taken to maintain and preserve the Premises or any action taken to relet the Premises or any portions thereof to the extent such actions do not affect a termination of Tenant's right to possession of the Premises. D. In the event Tenant breaches this Lease and abandons the Premises, this Lease shall not terminate unless Landlord gives Tenant written notice of its election to so terminate this Lease. No act by or on behalf of Landlord intended to mitigate the adverse effect of such breach, including those described by PARA 13.C, shall constitute a termination of Tenant's right to 15 possession unless Landlord gives Tenant written notice of termination. Should Landlord not terminate this Lease by giving Tenant written notice, Landlord may enforce all its rights and remedies under this Lease, including the right to recover the rent as it become due under the Lease as provided in California Civil Code Section 1951.4. E. In the event Landlord terminates this Lease, Landlord shall be entitled, at Landlord's election to damages in an amount as set forth in California Civil Code Section 1951.2 as in effect on the Effective Date. For purposes of computing damages pursuant to California Civil Code Section 1951.2, (i) an interest rate equal to the Agreed Interest Rate shall be used where permitted, and (ii) the term "rent" includes Base Monthly Rent and Additional Rent. Such damages shall include: (1) The worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided, computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%); and (2) Any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform Tenant's obligations under this Lease, or which in the ordinary course of things would be likely to result therefrom, including the following: (i) expenses for cleaning, repairing or restoring the Premises; (ii) expenses for altering, remodeling or otherwise improving the Premises for the purpose of reletting, including installation of leasehold improvement (whether such installation be funded by a reduction of rent, direct payment or allowance to a new tenant, or otherwise); (iii) broker's fees applicable to the remaining term of the Lease, advertising costs and other expenses of reletting the Premises; (iv) costs of carrying the Premises, such as taxes, insurance premiums, utilities and security precautions; (v) expenses in retaking possession of the Premises, and (vi) attorneys' fees and court costs incurred by Landlord in retaking possession of the Premises and in releasing the Premises or otherwise incurred as a result of Tenant's default. F. Nothing in this PARA 13.2 shall limit Landlord's right to indemnification from Tenant as provided in PARA 7.2 and PARA 10.3. Any notice given by Landlord in order to satisfy the requirements of PARA 13.1A or PARA 13.1B above shall also satisfy the notice requirements of California Code of Civil Procedure Section 1161 regarding unlawful detainer proceedings, if Landlord gives such notice(s) in compliance with the legal provisions relating to notices in unlawful detainer proceedings. 13.3 WAIVER: One party's consent to or approval of any act by the other party requiring the first party's consent or approval shall not be deemed to waive or render unnecessary the first party's consent to or approval of any subsequent similar act by the other party. The receipt by Landlord of any rent or payment with or without knowledge of the breach of any other provision hereof shall not be deemed a waiver of any such breach unless such waiver is in writing and signed by Landlord. No delay or omission in the exercise of any right or remedy accruing to either party upon any breach by the other party under this Lease shall impair such right or remedy or be construed as a waiver of any such breach theretofore or thereafter occurring. The waiver by either party of any breach of any provision of this Lease shall not be deemed to be a waiver of any subsequent breach of the same or of any other provisions herein contained. 13.4 LIMITATION ON EXERCISE OF RIGHTS: At any time that an Event of Tenant's Default has occurred and remains uncured, (i) it shall not be unreasonable for Landlord to deny or withhold any consent or approval requested of it by Tenant which Landlord would otherwise be obligated to give, and (ii) Tenant may not exercise any option to extend, right to terminate this Lease, or other right granted to it by this Lease which would otherwise be available to it. 13.5 WAIVER BY TENANT OF CERTAIN REMEDIES: Tenant waives the provisions of Sections 1932(1), 1941 and 1942 of the California Civil Code and any similar or successor law regarding Tenant's right to terminate this Lease or to make repairs and deduct the expenses of such repairs from the rent due under this Lease. Tenant hereby waives any right of redemption or relief from forfeiture under the laws of the State of California, or under any other present or future law, including the provisions of Sections 1174 and 1179 of the California Code of Civil Procedure. ARTICLE 14 ASSIGNMENT AND SUBLETTING 14.1 TRANSFER BY TENANT: The following provisions shall apply to any assignment, subletting or other transfer by Tenant or any subtenant or assignee or other successor in interest of the original Tenant (collectively referred to in this PARA 14.1 as "Tenant") A. Tenant shall not do any of the following (collectively referred to herein as a "Transfer"), whether voluntarily, involuntarily or by operation of law, without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed: (i) sublet all or any part of the Premises or allow it to be sublet, occupied or used by any person or entity other than Tenant; (ii) assign its interest in this Lease; (iii) mortgage or encumber the Lease (or otherwise use the Lease as a security device) in any manner; or (iv) materially amend or modify an assignment, sublease or other transfer that has been previously approved by Landlord. Landlord's disapproval of a proposed Transfer shall be conclusively presumed reasonable if (i) the proposed subtenant or assignee requires a change in the Permitted Use or Landlord's consent to or approval of an "other legal use" under Paragraph N of the Summary; or (ii) if the proposed subtenant or assignee uses Hazardous Materials in its business (other than insignificant amounts used for ordinary office purposes and cleaning); or (iii) if the proposed assignee does not have at least as much net worth and creditworthiness, in Landlord's reasonable judgment, as the greater of Tenant's net worth and creditworthiness on the 16 Effective Date or the date on which the request to Transfer is made, whichever shall be greater, or in the ease of a sublease, if the proposed subtenant does not have net worth and creditworthiness, in Landlord's reasonable judgment, commensurate with the financial obligations of the proposed sublease. Tenant shall reimburse Landlord for all reasonable costs and attorneys' fees (which attorney's fees shall not exceed $1,500 in regard to any one application for Transfer) incurred by Landlord in connection with the evaluation, processing, and/or documentation of any requested Transfer, whether or not Landlord's consent is granted. Landlord's reasonable costs shall include the cost of any review or investigation performed by Landlord or consultant acting on Landlord's behalf of (i) Hazardous Materials (as defined in Section 7.2E of this Lease) used, stored, released, or disposed of by the potential Subtenant or Assignee, and/or (ii) violations of Hazardous Materials Law (as defined in Section 7.2E of this lease) by the Tenant or the proposed Subtenant or Assignee. Any Transfer so approved by Landlord shall not be effective until Tenant has delivered to Landlord an executed counterpart of the document evidencing the Transfer which (i) is in a form reasonably approved by Landlord, (ii) contains the same terms and conditions as stated in Tenant's notice given to Landlord pursuant to PARA 14.1B, and (iii) in the case of an assignment of the Lease, contains the agreement of the proposed transferee to assume all obligations of Tenant under this Lease arising after the effective date of such Transfer and to remain jointly and severally liable therefor with Tenant. Any attempted Transfer without Landlord's consent shall constitute an Event of Tenant's Default and shall be voidable at Landlord's option. Landlord's consent to any one Transfer shall not constitute a waiver of the provisions of this PARA 14.1 as to any subsequent Transfer or a consent to any subsequent Transfer. No Transfer, even with the consent of Landlord, shall relieve Tenant of its personal and primary obligation to pay the rent and to perform all of the other obligations to be performed by Tenant hereunder. The acceptance of rent by Landlord from any person shall not be deemed to be a waiver by Landlord of any provision of this Lease nor to be a consent to any Transfer. B. At least 15 days before a proposed Transfer is to become effective, Tenant shall give Landlord written notice of the proposed terms of such Transfer and request Landlord's approval, which notice shall include the following: (i) the name and legal composition of the proposed transferee; (ii) a current financial statement of the transferee, financial statements of the transferee covering the preceding three years if the same exist, and (if available) an audited financial statement of the transferee for a period ending not more than one year prior to the proposed effective date of the Transfer, all of which statements are prepared in accordance with generally accepted accounting principles; (iii) the nature of the proposed transferee's business to be carried on in the Premises; (iv) all consideration to be given on account of the Transfer; (v) a current financial statement of Tenant; and (vi) an accurately filled out response to a Hazardous Materials questionnaire. Tenant shall provide to Landlord such other information as may be reasonably requested by Landlord within seven days after Landlord's receipt of such notice from Tenant. Landlord shall respond in writing to Tenant's request for Landlord's consent to a Transfer within the later of (i) 10 days of receipt of such request together with the required accompanying documentation, or (ii) seven days after Landlord's receipt of all information which Landlord reasonably requests within seven days after it receives Tenant's first notice regarding the Transfer in question. If Landlord fails to respond in writing within said period, Landlord will be deemed to have withheld consent to such Transfer. Tenant shall immediately notify Landlord of any material modification to the proposed terms of such Transfer. C. In the event that Tenant seeks to make any Transfer, Landlord shall have the right, in the case of a proposed assignment or a proposed sublease of all or substantially all of the Premises, to terminate this Lease or, in the case of a sublease of less than all of the Premises for all or substantially all of the remainder of the Lease Term, terminate this Lease as to that part of the Premises proposed to be so sublet, either (i) on the condition that the proposed transferee immediately enter into a direct lease of the Premises with Landlord (or, in the case of a partial sublease of less than all of the Premises but for all or substantially all of the remaining balance of the Lease Term, a lease for the portion proposed to be so sublet) on the same terms and conditions contained in Tenant's notice, or (ii) so that Landlord is thereafter free to lease the Premises (or, in the case of a partial sublease of less than all of the Premises but for all or substantially all of the remaining balance of the Lease Term, the portion proposed to be so sublet) to whomever it pleases on whatever terms are acceptable to Landlord. In the event Landlord elects to so terminate or partially terminate this Lease, then (i) if such termination is conditioned upon the execution of a lease between Landlord and the proposed transferee, Tenant's obligations under this Lease shall not be terminated until such transferee executes a new lease with Landlord, enters into possession and commences the payment of rent, and (ii) if Landlord elects simply to terminate this Lease (or, in the case of a partial sublease of less than all of the Premises but for all or substantially all of the remaining balance of the Lease Term, terminate this Lease as to the portion to be so sublet), the Lease shall so terminate in its entirety (or as to the space to be so sublet) fifteen (15) days after Landlord has notified Tenant in writing of such election. Upon such termination, Tenant shall be released from any further obligation under this Lease if it is terminated in its entirety, or shall be released from any further obligation under the Lease with respect to the space proposed to be sublet in the case of a proposed partial sublease of less than all of the Premises but for all or substantially all of the remaining balance of the Lease Term. In the case of the partial termination of the Lease, the Base Monthly Rent and Tenant's Share shall be reduced to an amount which bears the same relationship to the original amount thereof as the area of that part of the Premises which remains subject to the Lease bears to the original area of the Premises. Landlord and Tenant shall execute a cancellation and release with respect to the Lease to effect such termination. D. If Landlord consents to a Transfer proposed by Tenant, Tenant may enter into such Transfer, and if Tenant does so, the following shall apply: (1) Tenant shall not be released 17 of its liability for the performance of all of its obligations under the Lease. (2) If Tenant assigns its interest in this Lease, then Tenant shall pay to Landlord 50% of all Subrent (as defined in PARA 14.1D(5)) received by Tenant over and above (i) the assignee's agreement to assume the obligations of Tenant under this Lease, and (ii) all Permitted Transfer Costs related to such assignment. In the case of assignment, the amount of Subrent owned to Landlord shall be paid to Landlord on the same basis, whether periodic or in lump sum, that such Subrent is paid to Tenant by the assignee. (3) If Tenant sublets any part of the Premises, then with respect to the space so subleased, Tenant shall pay to Landlord 50% of the positive difference, if any, between (i) all Subrent paid by the subtenant to Tenant, less (ii) the sum of all Base Monthly Rent and Additional Rent allocable to the space sublet and all Permitted Transfer Costs related to such sublease. Such amount shall be paid to Landlord on the same basis, whether periodic or in lump sum, that such Subrent is paid to Tenant by its subtenant. In calculating Landlord's share of any periodic payments, all Permitted Transfer Costs shall be first recovered by Tenant. (4) Tenant's obligations under this PARA 14.1D shall survive any Transfer, and Tenant's failure to perform its obligations hereunder shall be an Event of Tenant's Default without notice or opportunity to cure. At the time Tenant makes any payment to Landlord required by this PARA 14.1D, Tenant shall deliver an itemized statement of the method by which the amount to which Landlord is entitled was calculated, certified by Tenant as true and correct. Landlord shall have the right at reasonable intervals to inspect Tenant's books and records relating to the payments due hereunder. Upon request therefor, Tenant shall deliver to Landlord copies of all bills, invoices or other documents upon which its calculations are based. Landlord may condition its approval of any Transfer upon obtaining a certification from both Tenant and the proposed transferee of all Subrent and other amounts that are to be paid to Tenant in connection with such Transfer. (5) As used in this PARA 14.1D, the term "Subrent" shall mean any consideration of any kind received, or to be received, by Tenant as a result of the Transfer, if such sums are received by Tenant in return for Tenant's Transfer of this Lease or the right to occupy all or part of the Premises, or in lieu of rent payments, including payments from or on behalf of the transferee (in excess of the book value thereof) for Tenant's assets, fixtures, leasehold improvements, inventory, accounts, goodwill, equipment, furniture, and general intangibles. As used in this PARA 14.1D, the term "Permitted Transfer Costs" shall mean (i) all reasonable leasing commissions paid to third parties not affiliated with Tenant in order to obtain the Transfer in question, and (ii) all reasonable attorneys' fees incurred by Tenant with respect to the Transfer in question. E. If Tenant is a corporation, the following shall be deemed a voluntary assignment of Tenant's interest in this Lease: (i) any dissolution, merger, consolidation, or other reorganization of or affecting Tenant, whether or not Tenant is the surviving corporation except as provided in Paragraph 14.1F, and (ii) if the capital stock of Tenant is not publicly traded, the sale or transfer to one person to entity (or to any group of related persons or entities) of stock possessing more than 50% of the total combined voting power of all classes of Tenant's capital stock issued, outstanding and entitled to vote for the election of directors. If Tenant is a partnership, any withdrawal or substitution (whether voluntary, involuntary or by operation of law, and whether occurring at one time or over a period of time) of any partner owning 25% of more (cumulatively) of any interest in the capital or profits of the partnership, or the dissolution of the partnership, shall be deemed a voluntary assignment of Tenant's interest in this Lease. F. Notwithstanding anything contained in PARA 14.1, so long as Tenant otherwise complies with the provisions of PARA 14.1 Tenant may enter into a transfer (a "Permitted Transfer") without Landlord's prior written consent, and Landlord shall not be entitled to terminate the Lease pursuant to PARA 14.1C or to receive any part of any Subrent resulting therefrom that would otherwise be due it pursuant to PARA 14.1D, if Tenant is (i) subleasing all or part of the Premises or assigning its interest in this Lease to any corporation which controls, is controlled by, or is under common control with the original Tenant to this Lease by means of an ownership interest of more than 50%, or (ii) assigning this Lease to a successor corporation related to Tenant by a merger in which Tenant is not the surviving corporation, or by a consolidation or nonbankruptcy reorganization, or which purchases all or substantially all of the assets of Tenant, which assignee in each such case has at least as much net worth and creditworthiness, in Landlord's reasonable judgment, as the greater of Tenant's net worth and creditworthiness on the Effective Date or the date on which the merger, reorganization, or consolidation is to take place, whichever shall be greater; or (iii) any transaction relating to Tenant's stock which does not meet the requirements of Paragraph 14.1E(ii). In order to have a Transfer treated as a Permitted Transfer, Tenant must provide Landlord with (i) at least fifteen (15) days advance written notice of the proposed Transfer, including therewith sufficient documentation and information so that Landlord may reasonably determine that the Transfer is a Permitted Transfer; (ii) any further information reasonably requested by Landlord relating to the Transfer; and (iii) written notice and documentation that the Transfer has taken place, including documentation executed by the Transferee acknowledging that it has assumed Tenant's responsibilities under the Lease, within fifteen (15) days after the Transfer takes legal effect, and any Transfer made in violation of this requirement shall not be a Permitted Transfer. 14.2 TRANSFER BY LANDLORD: Landlord and its successors in interest shall have the right to transfer their interest in this Lease and the Project at any time and to any person or entity. In the event of any such transfer, the Landlord originally named herein (and, in the case of any subsequent transfer, the transferror) from the date of such transfer, shall be automatically relieved, without any further act by any person or entity, of all liability for the performance of the obligations of the Landlord hereunder which may accrue after the date of such transfer. After the date of any such transfer, the 18 term "Landlord" as used herein shall mean the transferee of such interest in the Premises. ARTICLE 15 GENERAL PROVISIONS 15.1 LANDLORD'S RIGHT TO ENTER: Landlord and its agents may enter the Premises at any reasonable time after giving at least 24 hours' prior notice to Tenant (and immediately in the case of emergency) for the purpose of: (i) inspecting the same; (ii) posting notices of non-responsibility; (iii) supplying any service to be provided by Landlord to Tenant; (iv) showing the Premises to prospective purchasers, mortgagees or tenants (but in regard to Tenants, only during the last 180 days of the Lease Term, or during periods when an uncured Event of Tenant's Default has occurred); (v) making necessary alterations, additions or repairs; (vi) performing Tenant's obligations when Tenant has failed to do so after written notice from Landlord; (vii) placing upon the Premises ordinary "for lease" signs (but only within the last 180 days of the Lease Term) or "for sale" signs; and (viii) responding to an emergency. Landlord shall have the right to use any and all means Landlord may deem necessary ad proper to enter the Premises in an emergency. Any entry into the Premises obtained by landlord in accordance with this PARA 15.1 shall not be a forcible or unlawful entry into, or a detainer of, the Premises, or an eviction, actual or constructive, of Tenant from the Premises. Any such entry by Landlord and Landlord's Agents shall comply with all reasonable security measures of Tenant and shall not impair Tenant's operations more than reasonably necessary. During any such entry, Landlord and Landlord's agents shall at all times be accompanied by Tenant, so long as Tenant remains in physical occupancy of the Premises. 15.2 SURRENDER OF THE PREMISES: Upon the expiration or sooner termination of this Lease, Tenant shall vacate and surrender the Premises to Landlord in the same condition as existed at the Commencement Date, except for (i) reasonable wear and tear, (ii) damage caused by any peril or condemnation, and (iii) contamination by Hazardous Materials for which Tenant is not responsible pursuant to PARA 7.2A or PARA 7.2B. In this regard, normal wear and tear shall be construed to mean wear and tear caused to the Premises by the natural aging process which occurs in spite of prudent application of the best reasonable standards for maintenance, repair and janitorial practices, and does not include items of neglected or deferred maintenance. In any event, Tenant shall cause the following to be done prior to the expiration or the sooner termination of this Lease: (i) all interior walls shall be painted or cleaned so that they appear freshly painted; (ii) all tiled floors shall be cleaned and waxed; (iii) all carpets shall be cleaned and shampooed; (iv) all broken, marred, stained or nonconforming acoustical ceiling tiles shall be replaced; (v) all windows shall be washed; (vi) the HVAC system should be serviced by a reputable and licensed service firm and left in good operating condition and repair as so certified by such firm; and (vii) the plumbing and electrical systems and lighting shall by placed in good order and repair (including replacement of any burned out, discolored or broken light bulbs, ballasts, or lenses). If Landlord so requests, Tenant shall, prior to the expiration or sooner termination of this Lease, (i) remove any Tenant's Alterations which Tenant is required to remove pursuant to PARA 5.2 and repair all damage caused by such removal, and (ii) return the Premises or any part thereof to its original configuration existing as of the time the Premises were delivered to Tenant (provided, however, that Landlord agrees that removal of Tenant's Alterations shown in Exhibit "B" is not required). If the Premises are not so surrendered at the termination of this Lease, Tenant shall be liable to Landlord for all costs incurred by landlord in returning the Premises to the required condition, plus interest on all costs incurred at the Agreed Interest Rate. Tenant shall indemnify Landlord against loss or liability resulting from delay by Tenant in so surrendering the Premises, including, without limitation, any claims made by any succeeding tenant or losses to Landlord due to lost opportunities to lease to succeeding tenants. 15.3 HOLDING OVER: This Lease shall terminate without further notice at the expiration of the Lease Term. Any holding over by Tenant after expiration of the Lease Term shall not constitute a renewal or extension of the Lease or give Tenant any rights in or to the Premises except as expressly provided in this Lease. Any holding over after such expiration with the written consent of Landlord shall be construed to be a tenancy from month to month on the same terms and conditions herein specified insofar as applicable except that Base Monthly Rent shall be increased to an amount equal to 125% of the Base Monthly Rent payable during the last full calendar month of the Lease Term. 15.4 SUBORDINATION: The following provisions shall govern the relationship of this Lease to any Security Instrument: A. The Lease is subject and subordinate to all Security Instruments existing as of the Effective Date. However, if any Lender so requires, the Lease shall become prior and superior to any such Security Instrument. Landlord will make its best efforts to obtain for Tenant, within forty five (45) days of the Effective Date, (i) a subordination and non-disturbance agreement in the form attached hereto as Exhibit G from Landlord's current lender, including the changes requested by Tenant in Exhibit G, and (ii) a subordination and non-disturbance agreement on the standard form of Landlord's proposed bridge loan lender (currently expected to be Wells Fargo Bank), with such commercially reasonable changes as Tenant shall request. B. At Landlord's election, this Lease shall become subject and subordinate to any Security Instrument created after the Effective Date. Notwithstanding such subordination, Tenant's right to quiet possession of the Premises shall not be disturbed so long as Tenant is not in default and performs all of its obligations under this Lease, unless this Lease is otherwise terminated pursuant to its terms. C. Tenant shall upon request execute any documentation or instrument reasonably required by any Lender to make this Lease either prior or subordinate to a Security Instrument, which may include such other matters as the Lender customarily and reasonably requires in connection with such agreements, including provisions that the Lender not be liable for (i) the return of any security deposit unless the Lender receives it 19 from Landlord, and (ii) any defaults on the part of Landlord occurring prior to the time the Lender takes possession of the Project in connection with the enforcement of its Security Instrument. Tenant's failure to execute any such document or instrument within 10 days after written demand therefor shall constitute an Event of Tenant's Default. 15.5 MORTGAGEE PROTECTION AND ATTORNMENT: In the event of any default on the part of the Landlord, Tenant will use reasonable efforts to give notice by certified mail to any Lender whose name has been provided to Tenant and shall offer such Lender a reasonable opportunity to cure the default, including time to obtain possession of the Premises by power of sale or judicial foreclosure or other appropriate legal proceedings, if such should prove necessary to effect a cure. Tenant shall attorn to any purchaser of the Premises at any foreclosure sale or private sale conducted pursuant to any Security Instrument encumbering the Premises, or to any grantee or transferee designated in any deed given in lieu of foreclosure. 15.6 ESTOPPEL CERTIFICATES AND FINANCIAL STATEMENTS: At all times during the Lease Term, each party agrees, following any request by the other party, promptly to execute and deliver to the requesting party within 15 days following delivery of such request an estoppel certificate: (i) certifying that this Lease is unmodified and in full force and effect or, if modified, stating the nature of such modification and certifying that this lease, as so modified, is in full force and effect, (ii) stating the date to which the rent and other charges are paid in advance, if any, (iii) acknowledging that there are not, to the certifying party's knowledge, any uncured defaults on the part of any party hereunder or, if there are uncured defaults, specifying the nature of such defaults, and (iv) certifying such other information about the Lease as may be reasonably required by the requesting party. A failure to deliver an estoppel certificate within 15 days after delivery of a request therefor shall be a conclusive admission that, as of the date of the request for such statement: (i) this Lease is unmodified except as may be represented by the requesting party in said request and is in full force and effect, (ii) there are no uncured defaults in the requesting party's performance, and (iii) no rent has been paid more than 30 days in advance. At any time during the Lease Term Tenant shall, upon 15 days' prior written notice from Landlord, provide Tenant's most recent financial statement and financial statements covering the 24 month period prior to the date of such most recent financial statement to any existing Lender or to any potential Lender or buyer of the Premises, provided, that any such statements are to be held by Landlord and any potential buyer or Lender in the strictest confidence, unless the same are already public knowledge or available to the public. Such statements shall be prepared in accordance with generally accepted accounting principles and, if such is the normal practice of Tenant, shall be audited by an independent certified public accountant. 15.7 REASONABLE CONSENT: Except as otherwise provided herein, whenever any party's approval or consent is required by this Lease before an action may be taken by the other party, such approval or consent shall not be unreasonably withheld or delayed. 15.8 NOTICES: Any notice required or desired to be given regarding this Lease shall be in writing and may be given by personal delivery, by facsimile telecopy, by courier service, or by mail. A notice shall be deemed to have been given (i) on the third business day after mailing if such notice was deposited in the United States mail, certified or registered, postage prepaid, addressed to the party to be served at its Address for Notices specified in SECTION Q or SECTION R of the Summary (as applicable), (ii) when delivered if given by personal delivery, and (iii) in all other cases when actually received at the party's Address for Notices. Either party may change its address by giving notice of the same in accordance with this PARA 15.8, provided, however, that any address to which notices may be sent must be a California address. 15.9 ATTORNEY'S FEES. In the event either Landlord or Tenant shall bring any action or legal proceeding for an alleged breach of any provision of this Lease, to recover rent, to terminate this Lease or otherwise to enforce, protect or establish any term or covenant of this Lease, the prevailing party shall be entitled to recover as a part of such action or proceeding, or in a separate action brought for that purpose, reasonable attorneys' fees, court costs, and experts' fees as may be fixed by the court. 15.10 CORPORATE AUTHORITY: If Tenant is a corporation (or partnership), each individual executing this Lease on behalf of Tenant represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of such corporation in accordance with the by-laws of such corporation (or partnership in accordance with the partnership agreement of such partnership) and that this Lease is binding upon such corporation (or partnership) in accordance with its terms. Each of the persons executing this Lease on behalf of a corporation does hereby covenant and warrant that the party for whom it is executing this Lease is a duly authorized and existing corporation, that it is qualified to do business in California, and that the corporation has full right and authority to enter into this Lease. 15.11 MISCELLANEOUS: Should any provision of this Lease prove to be invalid or illegal, such invalidity or illegality shall in no way affect, impair or invalidate any other provision hereof, and such remaining provisions shall remain in full force and effect. Time is of the essence with respect to the performance of every provision of this Lease in which time of performance is a factor. The captions used in this Lease are for convenience only and shall not be considered in the construction or interpretation of any provision hereof. Any executed copy of this Lease shall be deemed an original for all purposes. This Lease shall, subject to the provisions regarding assignment, apply to and bind the respective heirs, successors, executors, administrators and assigns of Landlord and Tenant. "Party" shall mean Landlord or Tenant, as the context implies. If Tenant consists of more than one person or entity, then all members of Tenant shall be jointly and severally liable hereunder. This Lease shall be construed and enforced in accordance with the laws of the State of California. The language in all parts of this Lease shall in all cases be construed as a whole according to its fair meaning, and not strictly for or against either Landlord or Tenant. When the context of 20 this Lease requires, the neuter gender includes the masculine, the feminine, a partnership or corporation or joint venture, and the singular includes the plural. The terms "shall", "will" and "agree" are mandatory. The term "many" is permissive. When a party is required to do something by this Lease, it shall do so at its sole cost and expense without right of reimbursement from the other party unless a provision of this Lease expressly requires reimbursement. Landlord and Tenant agree that (i) the gross leasable area of the Premises includes any atriums, depressed loading docks, covered entrances or egresses, and covered loading areas, (ii) each has had an opportunity to determine to its satisfaction the actual area of the Project and the Premises, (iii) all measurements of area contained in this Lease are conclusively agreed to be correct and binding upon the parties, even if a subsequent measurement of any one of these areas determines that it is more or less than the amount of area reflected in this Lease, and (iv) any such subsequent determination that the area is more or less than shown in this Lease shall not result in a change in any of the computations of rent, improvement allowances, or other matters described in this Lease where area is a factor. Where a party hereto is obligated not to perform any act, such party is also obligated to restrain any others within its control from performing said act, including the Agents of such party. Landlord shall not become or be deemed a partner or a joint venture with Tenant by reason of the provision of this Lease. 15.12 TERMINATION BY EXERCISE OF RIGHT: If this Lease is terminated pursuant to its terms by the proper exercise of a right to terminate specifically granted to Landlord or Tenant by this Lease, then this Lease shall terminate 30 days after the date the right to terminate is properly exercised (unless another date is specified in that part of the Lease creating the right, in which event the date so specified for termination shall prevail), the rent and all other charges due hereunder shall be proacted as of the date of termination, and neither Landlord nor Tenant shall have any further rights or obligations under this Lease except for those that have accrued prior to the date of termination or those obligations which this Lease specifically provides are to survive termination. This PARA-15.12 does not apply to a termination of this Lease by Landlord as a result of an Event of Tenant's Default. 15.13 BROKERAGE COMMISSIONS: Each party hereto (i) represents and warrants to the other that it has not had any dealings with any real estate brokers, leasing agents or salesmen, or incurred any obligations for the payment of real estate brokerage commissions or finder's fees which would be earned or due and payable by reason of the execution of this Lease, other than to the Retained Real Estate Brokers described in SECTION S of the Summary, and (ii) agrees to indemnify, defend, and hold harmless the other party from any claim for any such commission of fees which result from the actions of the indemnifying party. Landlord shall be responsible for the payment of any commission owed to the Retained Real Estate Brokers. 15.14 FORCE MAJEURE: Any prevention, delay or stoppage due to strikes, lock-outs, inclement weather, labor disputes, inability to obtain labor, materials, fuels or reasonable substitutes therefor, governmental restrictions, regulations, controls, action or inaction, civil commotion, fire or other acts of God, and other causes beyond the reasonable control of the party obligated to perform (except financial inability) shall excuse the performance, for a period equal to the period of any said prevention, delay or stoppage, of any obligation hereunder except the obligation of Tenant to pay rent or any other sums due hereunder. 15.15 ENTIRE AGREEMENT: This Lease constitutes the entire agreement between the parties and there are no binding agreements or representations between the parties except as expressed herein. Tenant acknowledges that neither Landlord nor Landlord's Agents has made any legally binding representation or warranty as to any matter except those expressly set forth herein, including any warranty as to (i) whether the Premises may be used for Tenant's intended use under existing Law, (ii) the suitability of the Premises or the Project for conduct of Tenant's business, or (iii) the condition of any improvements. There are no oral agreements between Landlord and Tenant affecting this Lease, and this Lease supersedes and cancels any and all previous negotiations, arrangements, brochures, agreements and understandings, if any, between Landlord and Tenant or displayed by Landlord to Tenant with respect to the subject matter of this Lease. This instrument shall not be legally binding until it is executed by both Landlord and Tenant. No subsequent change or addition to this Lease shall be binding unless in writing and signed by Landlord and Tenant. 21 15.16 EXECUTION IN COUNTERPART AND BY FAX: This Lease may be executed in counterpart, whereby different signatories execute this document on different signature pages, and when so executed and all signature ages are attached hereto, the resulting document shall be fully executed and shall be considered a signed document. The parties agree that faxed copies of actual signatures shall be as binding as if the party had received an executed original, provided, that each party will, following the tender of any faxed copy signature, promptly supply an original signature page. IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease with the intent to be legally bound thereby, to be effective as of the Effective Date. LANDLORD: TENANT: LARVAN PROPERTIES HEALTHEON CORPORATION, A DELAWARE A CALIFORNIA GENERAL PARTNERSHIP CORPORATION By: VANDERSON CONSTRUCTION, INC. By: /s/ Kallen Chan A California corporation, its ----------------------------- General Partner Kallen Chan, Controller By: /s/ George F. Van Sickle ------------------------------------ --------------------------- [Typed or printed name and title] George F. Van Sickle - PRESIDENT Dated: 12/5/97 --------------------------------- ---------------------------- [Typed or printed name and title] By: LARSCOM INCORPORATED a Delaware corporation its General Partner By: /s/ Bruce Horn ----------------------------- Bruce Horn V.P. Finance -------------------------------- [Typed or printed name and title] By: /s/ Donn Byrne ------------------------------- DONN BYRNE, General Partner Dated: 12/8/97 ------------------------- FIRST ADDENDUM TO LEASE This First Addendum to Lease is dated for reference purposes as of December 3, 1997, and is made a part of that Lease Agreement (the "Lease") dated December 3, 1997, by and between Larvan Properties, a California general partnership ("Landlord") and Healtheon Corporation, a Delaware corporation ("Tenant") affecting certain real property commonly known as 4600 Patrick Henry Drive, Santa Clara, California. Landlord and Tenant agree that the Lease is hereby amended and supplemented as follows: 1. SECURITY DEPOSIT: In addition to the cash portion of the Security Deposit set forth in the Summary of Basic Lease Terms, Paragraph K, and Paragraph 3.3 of the Lease, Tenant shall provide to Landlord the additional and further amount of $867,000.00 as a further Security Deposit, and said amount shall be deemed to be and treated in all respects as a part of the Security Deposit. A. This amount, or any portion thereof, can be provided, at Tenant's sole cost and option, by providing Landlord an irrevocable Letter of Credit which (i) is for an initial term of at least twelve (12) months; (ii) is drawn upon a local commercial bank reasonably acceptable to Landlord; (iii) is in the amount of $867,000.00; (iv) is in a form satisfactory to Landlord ; and (v) may be drawn on by Landlord solely upon submission of a written certification of Landlord that there exists an Event of Tenant's Default (as defined in Paragraph 13.1 or other applicable provisions of this Lease or as defined in this Addendum), that Tenant has not, as of the date of Landlord's draw request, cured such Event of Default, and that the amount drawn on the Letter of Credit is the net amount due Landlord after first applying any cash Security Deposit then being held by Landlord. Tenant and Landlord acknowledge that Landlord is in the process of obtaining a bridge loan secured by the Project, that Landlord's lender (the "Bridge Loan Lender") has required that Landlord assign this Lease to the Bridge Loan Lender as part of the security for the loan, that the Bridge Loan Lender is further requiring that the Letter of Credit be assigned to the Bridge Loan Lender in conjunction with the assignment of this Lease. Accordingly, Landlord and Tenant agree that they will work together reasonably to replace or restructure the Letter of Credit in order to meet Landlord's lender Page 1 of 10 requirements, and that Tenant will reasonably cooperate with Landlord in providing documentation and taking action requested by the Bridge Loan Lender in regard to such an assignment, at no cost to Tenant, including but not limited to any necessary issuance of the Letter of Credit in the name of the Bridge Loan Lender or jointly in the name of Landlord and the Bridge Loan Lender, provided always, that no such arrangement shall be required of Tenant without adequate protection of Tenant's rights under the Letter of Credit provisions hereof. B. Except as provided in Subparagraph H of this Paragraph, Tenant shall keep the Letter of Credit in effect during the entire Lease term plus a period of (30) days thereafter. C. Tenant shall renew the Letter of Credit for an additional period of at least twelve (12) months, and shall deliver the new or renewed original Letter of Credit, in the required amount and in keeping with all of the requirements hereof, to Landlord not later than 5:00 P.M. on the thirty-first (31st) day before each date on which the then existing Letter of Credit expires (such 31st day being referred to herein as the "Renewal Date"). D. Tenant's failure to renew the Letter of Credit by the Renewal Date shall be deemed an Event of Tenant's Default under this Lease, without Landlord being required to give any notice or opportunity to cure, except that Landlord shall give Tenant five (5) days written notice of such failure to renew, and no Event of Default shall be deemed to have occurred if, within such five (5) day period, Tenant renews the Letter of Credit as required hereunder. Upon such an Event of Tenant's Default, Landlord shall be immediately entitled to draw all of the funds available under the Letter of Credit, which sum when received shall remain a part of the Security Deposit until and unless applied by Landlord pursuant to the provisions of Paragraph 3.5 of the Lease. E. If Tenant shall allow the Letter of Credit to expire or to be revoked at any time when it is required to be maintained hereunder, this shall constitute an independent Event of Tenant's Default; provided, however, that before such shall be deemed an Event of Tenant's Default, Landlord shall give Tenant five (5) days written Page 2 of 10 notice to cure or have committed an Event of Tenant's Default, and Tenant fails within such five (5) day period to cure by causing the Letter of Credit to be reissued or renewed. Tenant's failure to replenish any cash Security Deposit which is applied by Landlord, within ten (10) days after notice that it has been applied, shall be an immediate Event of Tenant's Default (for purposes of this Paragraph only), without further notice or opportunity to cure, which shall entitle Landlord to resort to the Letter of Credit to replenish its cash Security Deposit. F. Any proceeds received by Landlord by drawing upon the Letter of Credit shall be applied in accordance with the provisions of Paragraph 3.5 of the Lease. G. If Landlord transfers the Premises during the Lease Term, and if a Letter of Credit is still posted as part of the Security Deposit, Tenant agrees, promptly on receipt of a written request from Landlord, to take such actions as are necessary to have the Letter of Credit redrawn in favor of the new owner of the Premises, at Tenant's sole cost and expense. H. Notwithstanding the foregoing, the Letter of Credit shall be wholly or partially (as the case may be) released by Landlord upon the achievement by Tenant of the following milestones: 1. Provided that Tenant is not in material default of any obligations under the Lease on any one year anniversary of the Commencement Date, has not been in material default more than one time during the preceding one (1) year period, and is not in material default as of the final date following such one year anniversary on which Landlord must execute any documents authorizing such reduction, and provided that as of such anniversary date, Tenant's financial condition is, in Landlord's judgment reasonably applied, equal to or better than its financial condition on the Execution Date, Tenant shall be allowed to reduce the Letter of Credit by the amount of $289,000.00, and Landlord shall execute such documents as are required by the issuing bank to effectuate such Page 3 of 10 reduction and such review procedures shall occur on each anniversary of the Commencement Date until the Letter of Credit is extinguished or the Lease has expired or been terminated according to its terms, except that no such reduction shall occur on an anniversary date which is within 6 months of the expiration date of the Lease. 2. Notwithstanding any of the foregoing, if Tenant provides Landlord with documentation establishing to Landlord's reasonable satisfaction that Tenant has successfully completed an initial public offering of Tenant's stock and requests extinguishment of the Letter of Credit, and further provided that Tenant has not been in material default more than one time during the one (1) year period preceding the date on which Tenant makes its request for extinguishment, and Tenant is not in material default of any obligations under the Lease as of the final date on which Landlord must execute any documents authorizing such extinguishment, Tenant shall be allowed to extinguish the Letter of Credit, and Landlord shall execute such documents as are required by the issuing bank to effectuate such extinguishment. In the event that, as of the date of the IPO, Tenant cannot satisfy the requirements hereof because it has been in material default on more than one occasion during the one (1) year preceding the date of the EPO, then Tenant may apply for and obtain such an extinguishment at a later time, provided that (i) Tenant has not been in material default on more than one occasion within the one (1) year immediately preceding the date of such extinguishment application and (ii) Tenant satisfies the other requirement hereof that it not be in material default as of the date on which Landlord must execute the extinguishment documents. For purposes of this Subparagraph H, Tenant shall be deemed to be in "material default" under the Lease if (a) Tenant has failed to make any payment required hereunder or under the Lease within five (5) calendar days of Landlord giving written notice that said payment is due and unpaid or Page 4 of 10 committed any financial Event of Tenant's Default; and/or (b) Tenant has committed a material non-financial Event of Tenant's Default hereunder. I. All additional costs and expenses incurred by Landlord in regard to the Letter of Credit, including but not limited to any reasonable attorney's fees incurred by Landlord in the administration of this Paragraph, shall be paid by Tenant to Landlord as Additional Rent within ten (10) days after Landlord provides its written invoice for such costs and expenses. J. If Tenant cannot post the Letter of Credit on or before the Effective Date, Tenant shall provide the Letter of Credit no later than seven (7) days thereafter. In the event that Tenant fails to do so (or to provide equivalent cash security) within such period, Landlord may, at its option, deem this failure to be an Event of Tenant's Default or declare the Lease to be terminated, provided, however, that before such shall be deemed an Event of Tenant's Default or before the Lease is terminated, Landlord must give Tenant five (5) days written notice to cure or, as the case may be, have the Lease terminate or have committed an Event of Tenant's Default. If Tenant falls within such five (5) day period to cure by causing the Letter of Credit to be posted, then Landlord shall have the right to exercise the remedy of which Tenant has been notified. Tenant shall not be entitled to early occupancy under Paragraph 2.5 of the Lease until the Letter of Credit is posted. 2. TENANT IMPROVEMENT ALLOWANCE: Landlord shall provide to Tenant a Tenant Improvement Allowance (defined below) for the purpose of improving the Premises, on the following terms and conditions: A. The term "Tenant Improvement Allowance" shall mean the maximum amount Landlord is required to spend toward the payment of costs for all Tenant's Alterations constructed in the Premises, which amount is $249,185.00 (i.e., $5.00 per square foot for Tenant's Gross Leasable Area within the Premises). B. Tenant shall obtain Landlord's written consent, which shall not unreasonably be withheld, for all proposed improvements, which shall be conducted according to the standards set forth in Paragraph 5.2 Page 5 of 10 of the Lease. Tenant shall construct the Tenant's Alterations as set forth in the Space Plan and description of Tenant's Alterations which is attached to the Lease as Exhibit B, or as otherwise approved in writing by Landlord. However, Tenant is not required to construct all or any of the specified Tenant's Alterations (and if Tenant does not do so, Landlord is not obligated to provide the portion of the Tenant Improvement Allowance relating to Tenant's Alterations which Tenant has elected not to construct). C. Upon completion of all work on the initial Tenant's Alterations outlined in Exhibit "B", Landlord shall inspect the improvements, and if satisfactorily constructed in accordance with Exhibit "B" and the approved plans and specifications, and as required by Paragraph 5.2 (or any modifications thereto approved in writing by Landlord), shall approve the improvements. On receipt of Landlord's approval, Tenant will submit invoices, lien releases, and other documentation reasonably required or requested by Landlord in regard to the improvements, and Landlord shall, within fifteen (15) days of receipt of all requested documentation, reimburse Tenant for all documented expenses of constructing the improvements up to the limit of the Tenant Improvement Allowance. Provided that Tenant can so arrange with its contractors, Landlord will make payments under the Tenant Improvement Allowance directly to the contractors, upon receipt of appropriate lien releases reasonably satisfactory to Landlord. Under such circumstances, Landlord will not require that expenses of the Tenant's Alterations be actually paid by Tenant to the contractor. In the event that the construction of Tenant's Alterations cannot reasonably be completed by the Commencement Date, Landlord will make a single progress payment of such part of the Tenant Improvement Allowance as shall be merited by the progress toward completion of the initial Tenant's Alterations as of the Commencement Date, on a reasonable basis to be determined by mutual agreement of Landlord and Tenant, to include such inspections and lien releases as Landlord shall reasonably request. 3. INTERIOR IMPROVEMENTS: Except as otherwise set forth herein or in the Lease, the Premises shall be delivered to Tenant in their then existing "as-is" condition. Tenant acknowledges that it has had the opportunity to inspect the Premises prior to execution of the Lease, and agrees that the Premises are to be Page 6 of 10 leased and accepted by Tenant in their condition existing as of the Effective Date of this Lease, "as is", without implied or expressed warranty or representation and with all patent and latent defects. Landlord shall not have any obligation to make any alterations or improvements to the Premises prior to the commencement of the Lease Term except as otherwise specified herein and in the Lease. Notwithstanding anything to the contrary contained herein or in the Lease, Landlord represents and warrants to Tenant that the plumbing and electrical systems of the Building and any other building systems other than the HVAC and roof systems, which are dealt with below in Paragraph 4, will be in good operating condition upon the Commencement Date. Tenant shall not make any claims under any warranties set forth herein unless the defect is brought to the Landlord's attention within one (1) year of the Commencement Date, in the case of defects discovered by Tenant, or discoverable by a reasonable Tenant's inspection (including the engagement of appropriate expert consultants with regard to matters not within Tenant's expertise); and within two (2) years for defects not so discovered or discoverable. 4. CONDITION OF PREMISES: Landlord shall provide the Premises with all existing electrical, plumbing, and building systems (other than the HVAC and roof systems, which are dealt with below) in good and workable condition. Landlord shall provide roof and HVAC systems as set forth below: A. Prior to the Commencement Date, at its sole cost and expense, Landlord will replace HVAC mechanical units and make other capital improvements to the HVAC system as necessary, but Landlord's expense thereof (measured by Landlord's out of pocket payments to third parties) shall not exceed $35,000.00. Should any capital improvements to the HVAC system be required after the Commencement Date, then Landlord will continue to pay for such improvements so long as the total expense (measured by Landlord's out of pocket payments to third parties) of all capital improvements to the HVAC system (both before and after the Commencement Date) does not exceed $35,000.00 in the aggregate. Any costs incurred by Landlord in making any replacements to the HVAC system (both before and after the Commencement Date) in excess of $35,000.00 in the aggregate will be considered a capital expenditure, which shall be paid for by Landlord and reimbursed to Landlord by Tenant on an amortized basis under the provisions set forth in Paragraph 5.4 of the Lease. Page 7 of 10 B. Landlord shall promptly consult with Tenant as to the best date for re-roofing the Building, and thereafter, as soon as reasonably possible within the time guidelines of this Subparagraph, shall apply, at Landlord's expense and on a schedule to be determined by Landlord (depending on the weather and availability of a highly qualified roofing company), not to be reimbursed as a Common Operating Expense, a new roof. Landlord and Tenant acknowledge that such roof win not be applied prior to the currently approaching rainy season, and that until the roof is replaced, there may be leaks. Provided that Landlord has used commercially reasonably efforts to replace the roof in accordance with this Paragraph, Landlord shall not be liable for any roof leaks that may occur prior to the roof's replacement, provided, however, that such waiver shall not apply unless Landlord has used commercially reasonable efforts to repair any leaks in a prompt and reasonable manner. 5. ASBESTOS CONTAINING MATERIALS. Tenant acknowledges that Landlord has provided notification of possible asbestos containing materials in the form attached hereto as Exhibit "H". Notwithstanding anything to the contrary in this Lease, Landlord, at its sole cost and expense, shall (i) be responsible keeping and maintaining the Premises in compliance with all Laws (including all health and safety rules and regulations) concerning the presence of asbestos-containing materials in commercial buildings and (ii) performing any and all asbestos abatement and removal work required in the Premises during the Lease term; provided, however, that if the removal, encapsulation, or other treatment of asbestos containing materials in the Building will be required as a result of improvements to be constructed by Tenant in the Premises, then such abatement work, shall be at Tenant's sole cost and expense, and without cost or liability on the part of Landlord. However, such matters may be paid for, at Tenant's election, from any Tenant Improvement Allowance granted by this Lease, to the extent that such Allowance is sufficient to cover such costs. Notwithstanding anything above, Landlord will, at its sole cost and expense, cause the asbestos containing materials shown in Exhibit "H" to be removed during the Early Occupancy Period, in compliance with all Laws relating to such removal, in a prompt and diligent manner, and coordinating its work in regard to asbestos with Tenant's contractor for maximum convenience and speed of work. 6. COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT. Landlord shall, at its sole cost and expense, keep and maintain the exterior areas of the Project in Page 8 of 10 compliance with the Americans With Disabilities Act of 1990 ("ADA") and the regulations in force thereunder. Landlord shall deliver the Project in such a state of compliance at Landlord's sole cost and expense as of the Commencement Date, notwithstanding whether some improvements of the exterior areas are required to be constructed solely as a result of any Tenant's Alterations being constructed by Tenant prior to the Commencement Date (or thereafter, if such construction is a continuation of construction begun prior to the Commencement Date and continuously pursued thereafter), but in the event that, thereafter, further work is required by changes in Law or good practices, Landlord shall continue to take responsibility for compliance, but any expenses thereof shall be Common Operating Expenses. Tenant shall design, keep, and maintain the interior portions of the Premises, including but not limited to the floor plan, design, and furnishing thereof, in compliance with the ADA, at Tenant's sole cost and expense. Each party shall indemnify, defend with counsel reasonably acceptable to the indemnified party, and hold harmless the other party against any claims, losses, liabilities, or damages which are incurred by the other party by reason of a breach of the duties assumed in this Paragraph. 7. BROKER DISCLOSURE: Tenant understands that agents and/or brokers associated with Cooper-Brady and Colliers Parrish International, to wit, Jon Brady and Donn Byrne, are partners in Landlord. 8. SUBORDINATION TO GROUND LEASE: Tenant acknowledges that Landlord leases a portion of the land within the Project from the City and County of San Francisco pursuant to a Lease dated July 26, 1977 (referred to herein as the "Ground Lease", a copy of which has been read and approved by Tenant) and that this Lease is subject and subordinate to the terms of the Ground Lease and to any extension, modifications or amendments thereof. The portion of the Project to which this Ground Lease is applicable is as defined in said Ground Lease. Landlord will at all times pay all amounts due and satisfy any obligations under the Ground Lease, including but not limited to payment of all rent thereunder and removal and/or restoration of parking surfaces or landscaping as required thereunder, and such costs shall not be reimbursed by Tenant as Common Operating Expenses or otherwise. In the event that Landlord loses possession of the portion of the Project to which the Ground Lease is applicable, then Tenant shall be entitled as its sole remedy to an equitable adjustment of its Base Monthly Rent (as well as any actual decrease in Common Operating Expenses), to the extent such taking results in material diminishment of the value and useability of Tenant's Lease. Page 9 of 10 9. EFFECT OF ADDENDUM: Each term used herein with initial capital letters shall have the meaning ascribed to such term in the Lease unless specifically otherwise defined herein. In the event of any inconsistency between this First Addendum to the Lease and the Lease, the terms of this First Addendum to the Lease shall prevail. LANDLORD: TENANT: Larvan Properties, a California general Healtheon Corporation, a Delaware partnership corporation By: VANDERSON CONSTRUCTION, INC. By: /s/ Kallen Chan a California corporation, its ------------------------------ General Partner Kallen Chan, Controller --------------------------------- [Print Name and Title] By: /s/ George F. Van Sickle --------------------------- Dated: 12/8/97 George F. Van Sickle - President --------------------------- ------------------------------ [Print Name and Title] By: LARSCOM INCORPORATED, a Delaware corporation its General Partner By: /s/ Bruce Horn ------------------------------ Bruce Horn V.P. Finance ------------------------------ [Print Name and Title] By: Donn Byrne, its General Partner /s/ Don H. Byrne ------------------------------ Dated: 12/8/97 --------------------------- Page 10 of 10 TENANT ESTOPPEL CERTIFICATE TENANT: Healtheon Corporation, a Delaware Corporation DATE OF LEASE: December 2, 1997 AMENDED: None PREMISES: 49,837 square feet located at 4600 Patrick Henry Drive, Santa Clara, California ESTOPPEL CERTIFICATE RE: Lease dated December 2, 1997 between Larvan Properties, a California general Partnership, as Landlord, and Healtheon Corporation, a Delaware corporation, as Tenant. The undersigned hereby certifies to MELP VII L.P., a California limited partnership ("Buyer") as follows: 1 . The undersigned is the "Tenant" under the above-referenced lease ("Lease"), a true and complete copy of which is attached hereto as Exhibit "A", covering the above-referenced Premises ("Premises") located in that certain building commonly known as 4600 Patrick Henry Drive, Santa Clara, California ("Property"). 2. The Lease is in full force and effect and constitutes the entire agreement between the Landlord under the Lease and Tenant with respect to the Premises, and the Lease has not been modified, changed, altered or amended in any respect except as set forth in Exhibit "A". 3. The term of the Lease commenced on February 1, 1997, and will expire on January 31, 2008. Tenant has accepted possession of the Premises and is the actual occupant in possession and has not sublet, assigned or hypothecated Tenant's leasehold interest. Landlord has no obligation to construct any tenant improvements in the Premises (except as provided with respect to roof in Paragraph 4 of the First Addendum) and the only allowances to be paid by Landlord in connection with any improvements to be made to the Premises are in the amount of $249,815 for tenant improvements and $35,000 for HVAC work pursuant to Paragraphs 2 and 4 of the First Addendum to the Lease. Tenant is not currently aware of any defects in the existing electrical, plumbing and other building systems serving the Premises; provided, however that (i) Tenant is aware of a split puralin in the roof structure of the Premises and the exterior loading dock is not level and may not comply with building code requirements, and (ii) Landlord is performing, at Landlord's sole cost and expense, certain seismic and other structural upgrades to the building. Except as otherwise provided herein, to Tenant's knowledge, the building systems serving the Premises were delivered by Landlord in good and workable condition as required by Paragraph 4 of the First Addendum to Lease. Nothing herein shall constitute of a waiver of any Landlord's obligations under the Lease with respect to maintenance and repair of the Premises. Tenant acknowledges that it is completing certain tenant improvements and that rent obligations under the Lease have commenced even though construction is not yet complete. 4. As of the date of this Estoppel Certificate, to Tenant's knowledge there exists no breach or default, nor any state of facts which, with notice, the passage of time, or both, would result in a breach or default on the part of either Tenant or Landlord. 5. Tenant is currently obligated to pay annual rental of $867,164.28 in monthly installments of $72,263.69 per month and monthly installments of annual rental have been paid through March 31, 1998. Tenant's pro rata share of real estate taxes and "Common Operating Expenses" as defined in the Lease for the Property is one hundred percent (100%). Tenant's pro rata share of real estate taxes and Common Operating Expenses for the Property are due from February 1, 1998 and thereafter. No other rent has been paid in advance and Tenant presently has no claim or defense against Landlord under the Lease and is asserting no offset or credits against either the rent or Landlord. Tenant has no claim against Landlord for any security or other deposits except $72,203.69 plus a letter of credit as set forth in the First Addendum to Lease in the amount of $867,000 which was paid or deposited with Landlord pursuant to the Lease. 6. Tenant has no option or preferential right to purchase all or any part of the Premises (or the real property of which the Premises are a part) nor any right or interest with respect to the Property other than as Tenant under the Lease. 7. Tenant has no option, right of first offer or right of first refusal to lease or occupy any other space within the Property, and Tenant has no right to renew or extend the terms of the Lease except as follows: NO EXCEPTIONS. 8. Tenant has made no agreement with Landlord or any agent, representative or employee of Landlord concerning free rent, partial rent, rebate or rental payments or any other type of rental or other concession except as expressly set forth in the Lease. 9. To Tenant's knowledge, there has not been filed by or against Tenant a petition in bankruptcy, voluntary or otherwise, any assignment for the benefit of creditors, any petition seeking reorganization or arrangement under the bankruptcy laws of the United States, or any state thereof, or any other action brought under said bankruptcy laws with respect to Tenant. This Estoppel Certificate is made to Buyer in connection with the prospective purchase by Buyer, or Buyer's assignee, of the Property. This Estoppel Certificate may be relied on by Buyer or Buyer's assignee and any other party who acquires an interest in the Premises in connection with such purchase or any person or entity which may finance such purchase. The statements made herein shall be binding upon us, our successors and assigns. Nothing contained herein shall constitute or be deemed to constitute an amendment or modification of any term or condition of the Lease or any right or remedy of Tenant thereunder all of which are expressly reserved. The officers or persons executing this letter have been duly empowered to do so on behalf of Tenant. -2- Dated this 11 day of March, 1998. "TENANT" HEALTHEON CORPORATION, a Delaware corporation By: /s/ Kallen Chan ------------------------------------- Print Name: Kallen Chan ----------------------------- Its: Corporate Controller ------------------------------------ -3- EX-10.12 16 EX-10.12 CENTRAL PARK LEASE AGREEMENT BY AND BETWEEN ZML-CENTRAL PARK, L.L.C., A DELAWARE LIMITED LIABILITY COMPANY ("LANDLORD") AND ACTAMED CORP., A GEORGIA CORPORATION ("TENANT") DATED NOVEMBER 6, 1995 FOR SUITE NUMBER 400 SUITE NUMBER 600 CONTAINING 41,292 SQUARE FEET OF RENTABLE FLOOR AREA AT BUILDING 7000 TERM: 60 MONTHS TABLE OF CONTENTS
PAGE ---- 1. Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Lease of Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3. Term. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 4. Possession. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 5. Rental Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 6. Base Rental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 7. Rental Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 8. Additional Rental . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 9. Operating Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 10. Tenant Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 11. Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 12. Late Charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 13. Use Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 14. Alterations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 15. Repairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 16. Landlord's Right of Entry . . . . . . . . . . . . . . . . . . . . . . . . 7 17. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 18. Waiver of Subrogation . . . . . . . . . . . . . . . . . . . . . . . . . . 7 19. Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 20. Waiver of Breach. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 21. Assignment and Subletting . . . . . . . . . . . . . . . . . . . . . . . . 8 22. Destruction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 24. Services by Landlord. . . . . . . . . . . . . . . . . . . . . . . . . . .10 25. Attorneys' Fees and Homestead . . . . . . . . . . . . . . . . . . . . . .10 26. Time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 27. Subordination and Attornment. . . . . . . . . . . . . . . . . . . . . . .10 28. Estoppel Certificates . . . . . . . . . . . . . . . . . . . . . . . . . .11 29. No Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 30. Cumulative Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 31. Holding Over. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 32. Surrender of Premises . . . . . . . . . . . . . . . . . . . . . . . . . .11 33. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 34. Damage or Theft of Personal Property. . . . . . . . . . . . . . . . . . .11 35. Eminent Domain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 36. Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 39. Force Majeure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 40. Landlord's Liability. . . . . . . . . . . . . . . . . . . . . . . . . . .13 41. Landlord's Covenant of Quiet Enjoyment. . . . . . . . . . . . . . . . . .13 42. Security Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 43. Hazardous Substances. . . . . . . . . . . . . . . . . . . . . . . . . . .13 44. Submission of Lease . . . . . . . . . . . . . . . . . . . . . . . . . . .14 45. Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 46. Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 47. Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 48. Broker. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 49. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 50. Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 51. Joint and Several Liability . . . . . . . . . . . . . . . . . . . . . . .14 52. Special Stipulations. . . . . . . . . . . . . . . . . . . . . . . . . . .14
RULES AND REGULATIONS EXHIBIT "A" - Legal Description EXHIBIT "B" - Floor Plan EXHIBIT "C" - Supplemental Notice EXHIBIT "D" - Landlord's Construction EXHIBIT "E" - Building Standard Services EXHIBIT "F" - Special Stipulations LEASE AGREEMENT THIS LEASE AGREEMENT ("Lease") is made and entered into this 6th day of November 1995, by and between Landlord and Tenant. W I T N E S S E T H: 1. CERTAIN DEFINITIONS. For purposes of this Lease, the following terms shall have the meanings hereinafter ascribed thereto: (a) LANDLORD: The Equitable Life Assurance Society of the United States (b) LANDLORD'S ADDRESS: LANDLORD'S ADDRESS FOR PAYMENTS: c/o Equity Office Holding, c/o Equity Office Properties, L.L.C. L.L.C. Suite 1040 Two North Riverside Plaza 7000 Central Parkway, N.E. 22nd Floor Atlanta, Georgia 30328 Chicago, Illinois 60606 Attention: General Counsel (c) TENANT: ActaMed Corp., a Georgia corporation (d) TENANT'S ADDRESS: Suite 400 7000 Central Parkway Atlanta, Georgia 30328 Attn: Chief Financial Officer (e) BUILDING ADDRESS: 7000 Central Parkway Atlanta, Georgia 30328 (f) SUITE NUMBERS: Suite 400: 25,331 rentable square feet Suite 600: 15,961 rentable square feet Total: 41,292 rentable square feet (g) RENTABLE FLOOR AREA OF DEMISED PREMISES: Total 41,292 square feet. (h) RENTABLE FLOOR AREA OF BUILDING: 410,490 square feet. (i) LEASE TERM: Suite 400 - 60 months Suite 600 - 55 months (j) BASE RENTAL RATE: $19.95 per square foot of Rentable Floor Area of Demised Premises per year. (k) RENTAL COMMENCEMENT DATE: Suite 400 - August 1, 1996 Suite 600 - January 1, 1997 See Special Stipulation No. 34. (l) TENANT IMPROVEMENT ALLOWANCE: $7.83 per square foot of rentable floor area in Demised Premises. See Special Stipulation No. 11. (m) SECURITY DEPOSITS: (i) $43,875.04 [Article 42(a)]. (ii) $ N/A [Article 42(b)]. (n) BROKER(S): CB Commercial Real Estate Group, Inc. 2. LEASE OF PREMISES. Landlord, in consideration of the covenants and agreements to be performed by Tenant, and upon the terms and conditions hereinafter stated, does hereby rent and lease unto Tenant, and Tenant does hereby rent and lease from Landlord, certain premises (the "Demised Premises") in the building (the "Building") located on that certain tract of land (the "Land") more particularly described on EXHIBIT "A" attached hereto and by this reference made a part hereof, which Demised Premises are outlined in red or cross-hatched on the floor plan attached hereto as EXHIBIT "B" and by this reference made a part hereof, with no easement for light, view or air included in the Demised Premises or being granted hereunder. The "Project" is comprised of the Building, the Land, the Building's parking facilities, any walkways, covered walkways, tunnels or other means of access to the Building and the Building's parking facilities, all common areas, including any lobbies or plazas, and any other improvements or landscaping on the Land. 3. TERM. The term of this Lease (the "Lease Term") shall commence on the date first hereinabove set forth (the "Term Commencement Due"), and, unless sooner terminated as provided in this Lease, shall end on the expiration of the period designated in Article 1(i) above, which period shall commence on the Rental Commencement Date, unless the Rental Commencement Date shall be other than the first day of a calendar month, in which event such period shall commence on the first day of the calendar month following the month in which the Rental Commencement Date occurs. Promptly after the Rental Commencement Date, Landlord or Landlord's agent shall send to Tenant a Supplemental Notice in the form of EXHIBIT "C" attached hereto and by this reference made a part hereof, specifying the Rental Commencement Date, the date of expiration of the Lease Term in accordance with Article 1(i) above and certain other matters as therein set forth. Notwithstanding anything herein to the contrary, if the Additional Space is not substantially complete within sixty (60) days after the scheduled Rental Commencement Date, Tenant shall have the option of terminating this Lease upon written notice to Landlord, provided that if any delay in Landlord's completion of the Demised Premises shall be caused by Tenant the deadline for substantial completion shall be adjusted accordingly. See Special Stipulation No. 34. 4. POSSESSION. The obligations of Landlord and Tenant with respect to the initial leasehold improvements to the Additional Space are set forth in EXHIBIT "D" attached hereto and by this reference made a part hereof. Taking of possession by Tenant of the Additional Space shall be deemed conclusively to establish that Landlord's construction obligations with respect to the Additional Space have been completed in accordance with the plans and specifications approved by Landlord and Tenant and that the Additional Space, to the extent of Landlord's construction obligations with respect thereto, are in good and satisfactory condition, except as to latent defects and any items Tenant notifies Landlord of in writing within ten (10) days of Tenant's taking possession of the Additional Space. Landlord shall repair any such defects and items within a reasonable period following receipt of notice from Tenant. 5. RENTAL PAYMENTS. (a) Commencing on the Rental Commencement Date, and continuing thereafter throughout the Lease Term, Tenant hereby agrees to pay all Rent due and payable under this Lease. As used in this Lease, the term "Rent" shall mean the Base Rental, Rental Adjustment, Tenant's Forecast Additional Rental, Tenant's Additional Rental, and any other amounts that Tenant assumes or agrees to pay under the provisions of this Lease that are owed to Landlord, including, without limitation, any and all other sums that may become due by reason of any default of Tenant or failure on Tenant's part to comply with the agreements, terms, covenants and conditions of this Lease to be performed by Tenant. Base Rental, together with Tenant's Forecast Additional Rental, shall be due and payable in twelve (12) equal installments on the first day of each calendar month, commencing on the Rental Commencement Date and continuing thereafter throughout the Lease Term and any extensions or renewals thereof. Tenant hereby agrees to pay such Rent to Landlord at Landlord's address as provided herein (or such other address as may be designated by Landlord from time to time) monthly in advance. Tenant shall pay all Rent and other sums of money as shall become due from and payable by Tenant to Landlord under this Lease at the times and in the manner provided in this Lease, without demand, set-off or counterclaim, except as specifically set forth in this Lease. (b) If the Rental Commencement Date is other than the first day of a calendar month or if this Lease terminates on a day other than the last day of a calendar month, then the installments of Base Rental and Tenant's Forecast Additional Rental for such month or months shall be prorated on a daily basis and the installment or installments so prorated shall be paid in advance. Also, if the Rental Commencement Date occurs on a day other than the first day of a calendar year, or if this Lease expires or is terminated on a day other than the last day of a calendar year, Tenant's Additional Rental shall be prorated for such commencement or termination year, as the case may be, by multiplying such Tenant's Additional Rental by a fraction, the numerator of which shall be the number of days of the Lease Term (from and after the Rental Commencement Date) during the commencement or expiration or termination year, as the case may be, and the denominator of which shall be 365, and the calculation described in Article 8 hereof shall be made as soon as possible after the expiration or termination of this Lease, Landlord and Tenant hereby agreeing that the provisions relating to said calculation shall survive the expiration or termination of this Lease, by not more than three (3) years. 6. BASE RENTAL. From and after the applicable Rental Commencement Date, Tenant shall pay to Landlord a base annual rental (herein called "Base Rental") equal to the Base Rental Rate set forth in Article 1(j) above multiplied by the Rentable Floor Area of the portion of the Demised Premises as set forth in Article 1(f) above. 2 7. RENTAL ADJUSTMENT. (a) Tenant shall pay to Landlord as additional rental a rental adjustment (the "Rental Adjustment") which shall be determined as of the first anniversary of the Rental Commencement Date and as of each January 1 thereafter during the Lease Term in the manner hereinafter provided (each such date being hereinafter in this Article 7 called an "Adjustment Date", and each period of time from any given Adjustment Date through the day before the next succeeding Adjustment Date being herein called an "Adjustment Period"). Each such Rental Adjustment shall be payable in monthly installments in advance on the first day of every such calendar month during the Adjustment Period for which such Rental Adjustment was determined. A prorated monthly installment, based on the number of days in the partial month, shall be paid for any fraction of a month if the Rental Commencement Date falls on any day other than the first day of a calendar month, or if the Lease Term is terminated or expires on any other day than the last day of a calendar month. Landlord shall use reasonable efforts to notify Tenant in writing of the monthly amount of the Rental Adjustment for each Adjustment Period at least ten (10) days prior to the date on which the first installment of such Rental Adjustment is due and payable, or as soon thereafter as is practicable. Failure by Landlord to notify Tenant of the monthly amount of such Rental Adjustment shall not prejudice Landlord's right to collect the full amount of such Rental Adjustment, nor shall Landlord be deemed to have forfeited or surrendered its rights to collect such Rental Adjustment which may have become due pursuant to this Article 7, and Tenant agrees to pay within thirty (30) days after notice all accrued but unpaid Rental Adjustment. (b) For each Adjustment Period, each monthly installment of the Rental Adjustment shall be an amount equal to one-twelfth (1/12th) of the product of: (i) the annual Base Rental set forth in Article 6 hereof, multiplied by (ii) .50, multiplied by (iii) the "percentage increase" (as hereinafter defined), if any, in the "index" (as hereinafter defined), as such percentage increase is determined with respect to the Adjustment Date beginning such Adjustment Period. (c) For purposes of Articles 7(a) and (b) above, the "percentage increase," if any, in the Index for each Adjustment Date shall mean and equal the quotient (expressed as a decimal) determined by dividing (i) the difference obtained by subtracting the Index for the calendar month in which the Rental Commencement Date falls from the Index for the calendar month of October immediately preceding the Adjustment Date in question [if the difference so obtained is negative, then this factor (i) shall be deemed to be zero], by (ii) the Index for the calendar month in which the Rental Commencement Date falls. (d) The term "Index" as used in Articles 7(b) and (c) above shall mean the Consumer Price Index for All Urban Consumers, U.S. City Average, All Items (1982-84 = 100), published by the Bureau of Labor Statistics of the United States Department of Labor. If the Bureau of Labor Statistics should discontinue the publication of the Index, or publish the same less frequently, or alter the same in some manner, then Landlord shall adopt a substitute Index or substitute procedure which reasonably reflects and monitors consumer prices. (e) Nothing contained in this Article 7 shall be construed at any time so to reduce the monthly installments of Base Rental payable hereunder below the amount set forth in Article 6 of this Lease. Notwithstanding anything contained in this Lease to the contrary, it is agreed that (i) the Rental Adjustment for any given Adjustment Period shall not be less than the Rental Adjustment for the immediately preceding Adjustment Period, and (ii) Tenant's payments pursuant to this Article 7 shall not be deemed payments of rent as that term is construed relative to governmental wage and price controls or analogous governmental actions affecting the amount of rent which Landlord may charge Tenant. See Special Stipulation No. 3 8. ADDITIONAL RENTAL. (a) For purposes of this Lease, "Tenant's Forecast Additional Rental" shall mean Landlord's reasonable estimate of Tenant's Additional Rental for each calendar year or portion thereof during the Lease Term. If at any time it appears to Landlord that Tenant's Additional Rental for the current calendar year then at hand will vary from Landlord's estimate, Landlord shall have the right to revise, by notice to Tenant, its estimate for such year, and subsequent payments by Tenant for such year shall be based upon such revised estimate of Tenant's Additional Rental. Failure to make a revision contemplated by the immediately preceding sentence shall not prejudice Landlord's right to collect the full amount of Tenant's Additional Rental. "Prior to the Rental Commencement Date, and thereafter prior to the beginning of each calendar year during the Lease Term, including any extensions or renewals thereof, Landlord shall present to Tenant a statement of Tenant's Forecast Additional Rental for such calendar year; provided, however, that if such statement is not given prior to the beginning of any calendar year as aforesaid, Tenant shall continue to pay during the next ensuing calendar year on the basis of the amount of Tenant's Forecast Additional Rental payable during the calendar year just ended until the month after such statement is delivered to Tenant." (b) For purposes of this Lease, "Tenant's Additional Rental" shall mean for each calendar year (or portion thereof) during the Lease Term the excess of (x) the Operating Expense Amount (defined below) multiplied by the number of square feet of Rentable Floor Area of the Demised Premises, over (y) the Operating Expense Stop (as hereinafter defined). As used herein, "Operating Expense Amount" shall mean an amount equal to the amount of Operating Expenses (as defined below) for such calendar year divided by the greater of (i) ninety-five percent (95%) of the number of square feet of Rentable Floor Area of the Building, or (ii) the total number of square feet of Rentable Floor Area occupied in the Building for such calendar year on an average annualized basis; provided, however, if the amount is calculated under (i) above, the Operating Expenses actually incurred with respect to such calendar year shall be adjusted to reflect the amount of Operating Expenses which would have been incurred if the Building were ninety-five percent (95%) occupied throughout such calendar year. As used herein, "Operating Expense Stop" shall be determined by calculating the Operating Expenses during the first twelve (12) months following the Rental Commencement Date for Suite 400. (c) Within one hundred fifty (150) days after the end of the calendar year in which the Rental Commencement Date occurs and of each calendar year thereafter during the Lease Term, or as soon thereafter as practicable, Landlord shall provide Tenant a statement showing the Operating 3 Expenses for said calendar year, as prepared by an authorized representative of Landlord, and a statement prepared by Landlord comparing Tenant's Forecast Additional Rental with Tenant's Additional Rental. In the event Tenant's Forecast Additional Rental exceeds Tenant's Additional Rental for said calendar year, Landlord shall credit such amount against the Forecast Additional Rental next due hereunder or, if the Lease Term has expired or is about to expire, promptly refund such excess to Tenant if Tenant is not in default under this Lease (in the instance of a default, such excess shall be held as additional security for Tenant's performance, may be applied by Landlord to cure any such default, and shall not be refunded until any such default is cured). In the event that the Tenant's Additional Rental exceeds Tenant's Forecast Additional Rental for said calendar year, Tenant shall pay Landlord, within thirty (30) days of receipt of the statement, an amount equal to such difference. The provisions of this Lease concerning the payment of Tenant's Additional Rental shall survive the expiration or earlier termination of this Lease. (d) Landlord's books and records pertaining to the calculation of Operating Expenses for any calendar year within the Lease Term may be audited by Tenant or its representatives at Landlord's office where Operating Expense records are kept, at Tenant's expense, at any time within ninety (90) days after Landlord's annual statement is delivered to Tenant for such calendar year; provided that Tenant shall give Landlord not less than thirty (30) days' prior written notice of any such audit. If Landlord's calculations of Tenant's Additional Rental for the audited calendar year was incorrect, then Tenant shall be entitled to a prompt refund of any overpayment or Tenant shall promptly pay to Landlord the amount of any underpayment, as the case may be. See Special Stipulation No. 21. 9. OPERATING EXPENSES. (a) For the purposes of this Lease, "Operating Expenses" shall mean all expenses, costs and disbursements (but not specific costs billed or billable to specific tenants of the Building) of every kind and nature, computed on an accrual basis and in conformity with generally accepted accounting principles consistently applied, relating to or incurred or paid in connection with the ownership, management, operation, repair and maintenance of the Project, including but not limited to, the following: (1) wages, salaries and other costs of all on-site and off-site employees engaged either full or part time in the operation, management, maintenance or access control of the Project, including taxes, insurance and benefits relating to such employees, allocated based upon the time such employees are engaged directly in providing such services; (2) the cost of all supplies, tools, equipment and materials used in the operation, management, maintenance and access control of the Project; (3) the cost of all utilities for the Project, including but not limited to the cost of electricity, gas, water, sewer services and power for heating, lighting, air conditioning and ventilating; (4) the cost of all maintenance and service agreements for the Project and the equipment therein, including, but not limited to, security service, garage operators, window cleaning, elevator maintenance, HVAC maintenance, janitorial service, landscaping maintenance and customary landscaping replacement; (5) the cost of inspections, repairs and general maintenance of the Project; (6) amortization (together with reasonable financing charges, whether or not actually incurred) of the cost of acquisition and/or installation of capital investment items (including security equipment), amortized over their respective useful lives, which are installed for the purpose of reducing operating expenses (providing that such amortization charge shall not exceed the cost reduction attributable to the capital investment item for the related period), promoting safety, complying with governmental requirements, or maintaining the first-class nature of the Project; (7) the cost of casualty, rental loss, liability and other insurance applicable to the Project and Landlord's personal property used in connection therewith; (8) the cost of trash and garbage removal, vermin extermination, and snow, ice and debris removal; (9) the cost of legal and accounting services incurred by Landlord in connection with the management, maintenance, operation and repair of the Project, excluding the owner's or Landlord's general accounting, such as partnership statements and tax returns, and excluding services described in Article 9(b)(14) below; (10) all taxes, assessments and governmental charges, whether or not directly paid by Landlord, whether federal, state, country or municipal and whether they be by taxing districts or authorities presently taxing the Project or by others subsequently created or otherwise, and any other taxes and assessments attributable to the Project or its operation (and the costs of monitoring and contesting any of the same), including business license taxes and fees (all of the foregoing are herein sometimes collectively referred to as "Taxes"), excluding, however, taxes and assessments imposed on the personal property of the tenants of the Project, federal and state taxes on income, death taxes, franchise taxes, and any taxes (other than business license taxes and fees) imposed or measured on or by the income of Landlord from the operation of the Project; provided, however, that if at any time during the Lease Term, the present method of taxation or assessment shall be so changed that the whole or any part of the taxes, assessments, levies, impositions or charges now levied, assessed or imposed on real estate and the improvements thereon shall be discontinued and as a substitute therefor, or in lieu of or in addition thereto, taxes, assessments, levies, impositions or charges shall be 4 levied, assessed and/or imposed wholly or partially as a capital levy or otherwise on the rents received from the Project or the rents reserved herein or any part thereof, then such substitute or additional taxes, assessments, levies, impositions or charges, to the extent so levied, assessed or imposed, shall be deemed to be included within the Operating Expenses to the extent that such substitute or additional tax would be payable if the Project were the only property of the Landlord subject to such tax; and it is agreed that Tenant will be responsible for ad valorem taxes on its personal property and on the value of the leasehold improvements in the Demised Premises to the extent that the same exceed building standard allowances, if said taxes are based upon an assessment which includes the cost of such leasehold improvements in excess of building standard allowances (and if the taxing authorities do not separately assess Tenant's leasehold improvements, Landlord may make an appropriate allocation of the ad valorem taxes allocated to the Project to give effect to this sentence) (for purposes of this subparagraph only, "building standard allowances" shall mean the improvements which exist in the Demised Premises as of the Term Commencement Date plus all additional improvements constructed using the Tenant Improvement Allowances); (11) the cost of operating the management office for the Project, including cost of office supplies, telephone expenses and non-capital investment equipment and amortization (together with reasonable financing charges) of the cost of capital investment equipment; and (12) management fees consistent with those charged for comparable buildings in the north central submarket of Atlanta, Georgia. Tenant acknowledges that the Project is part of a development, which will or may include other improvements and that the costs of management, operation and maintenance of the development shall, from time to time, be allocated among and shared by two or more of the improvements in the development (including the Project). The determination of such costs and their allocation shall be made by Landlord in its reasonable discretion. In addition, Landlord reserves the right to recompute and adjust the base year of any component of Operating Expenses at any time during the Lease Term as a result of any reallocation within the Project. Accordingly, the term "Operating Expenses" as used in this Lease shall, from time to time, include some costs, expenses and taxes enumerated above which were incurred with respect to other improvements in the development but which were allocated to and shared by the Project in accordance with the foregoing. Notwithstanding the foregoing, Tenant understands and agrees that its right to use other portions of the development of which the Project is a part are those available to the general public and that this Lease does not grant to Tenant additional rights of use. (b) For purposes of this Lease, and notwithstanding anything in any other provision of this Lease to the contrary, "Operating Expenses" shall not include the following: (1) the cost of any special work or service performed for any tenant (including Tenant) at such tenant's cost; (2) the cost of installing, operating and maintaining any specialty service, such as an observatory, broadcasting facility, luncheon club, restaurant, cafeteria, retail store, sundry shop, newsstand, or concession, but only to the extent such costs exceed those which would normally be expected to be incurred had such space been general office space; (3) the cost of correcting defects in construction; (4) compensation paid to officers and executives of Landlord (but it is understood that the on-site building manager and other on-site employees below the grade of building manager may carry a title such as vice president and the salaries and related benefits of these officers/employees of Landlord would be allowable Operating Expenses under Article 9[a][1] above); (5) the cost of any items for which Landlord is reimbursed by insurance, condemnation or otherwise, except for costs reimbursed pursuant to provisions similar to Articles 8 and 9 hereof; (6) the cost of any additions, changes, replacements and other items which are made in order to prepare for a new tenant's occupancy; (7) the cost of repairs incurred by reason of fire or other casualty; (8) insurance premiums to the extent Landlord may be directly reimbursed therefor, except for premiums reimbursed pursuant to provisions similar to Articles 8 and 9 hereof; (9) interest on debt or amortization payments on any mortgage or deed to secure debt (except to the extent specifically permitted by Article 9[a]) and rental under any ground lease or other underlying lease; (10) any real estate brokerage commissions or other costs incurred in procuring tenants or any fee in lieu of such commission; (11) any advertising expenses incurred in connection with the marketing of any rentable space; (12) rental payments for base building equipment such as HVAC equipment and elevators; (13) any expenses for repairs or maintenance which are covered by warranties and service contracts, to the extent such maintenance and repairs are made at no cost to Landlord; 5 (14) legal expenses arising out of the construction of the improvements on the Land or the enforcement of the provisions of any lease affecting the Land or Building, including without limitation this Lease; and (15) amortization or depreciation of the cost of acquisition of the Building, project and any improvements thereto (other than those described in section 9(a)(6). See Special Stipulation No. 22. 10. TENANT TAXES. Tenant shall pay promptly when due all taxes directly or indirectly imposed or assessed upon Tenant's gross sales, business operations, machinery, equipment, trade fixtures and other personal property or assets, whether such taxes are assessed against Tenant, Landlord or the Building. In the event that such taxes are imposed or assessed against Landlord or the Building, Landlord shall furnish Tenant with all applicable tax bills, public charges and other assessments or impositions and Tenant shall forthwith pay the same either directly to the taxing authority or, at Landlord's option, to Landlord. 11. PAYMENTS. All payments of Rent and other payments to be made to Landlord shall be made on a timely basis and shall be payable to Landlord or as Landlord may otherwise designate. All such payments shall be mailed or delivered to Landlord's Address designated in Article 1(b) above or at such other place as Landlord may designate from time to time in writing. If mailed, all payments shall be mailed in sufficient time and with adequate postage thereon to be received in Landlord's account by no later than the due date for such payment. 12. LATE CHARGES. Any Rent or other amounts payable to Landlord under this Lease, if not paid by the fifth day of the month for which such Rent is due, or by the due date specified on any invoices from Landlord for any other amounts payable hereunder, shall incur a late charge of Fifty Dollars ($50.00) for Landlord's administrative expense in processing such delinquent payment and in addition thereto shall bear interest at the rate of fifteen percent (15%) per annum from and after the due date for such payment. Notwithstanding anything to the contrary contained in this Lease, in no event shall the rate of interest payable on any amount due under this Lease exceed the legal limits for such interest enforceable under applicable law. 13. USE RULES. The Demised Premises shall be used for executive, general administrative and office space purposes, including, without limitation, sales offices, training facilities for Tenant's customers and employees, ancillary kitchen facilities (including use of vending machines), and no other purposes and in accordance with all applicable laws, ordinances, rules and regulations of governmental authorities and the Rules and Regulations attached hereto and made a part hereof. Tenant covenants and agrees that it will, at its expense, comply with all laws, ordinances, orders, directions, requirements, rules and regulations of all governmental authorities (including Federal, State, county and municipal authorities), now in force or which may hereafter be in force ("Legal Requirements"), which shall impose any duty upon Landlord or Tenant with respect to the use, occupancy or alteration of the Demised Premises, and of all insurance bodies applicable to the Demised Premises or to the Tenant's use or occupancy thereof. Notwithstanding the foregoing, nothing in this Lease shall be construed to require Tenant to make any structural repairs, alterations or modifications to the Demised Premises, the Building (including the bathrooms and Common Areas) or the Project, in connection with any Legal Requirements. Tenant covenants and agrees to abide by the Rules and Regulations in all respects as now set forth and attached hereto or as hereafter promulgated by Landlord, provided that such rules do not materially and adversely affect Tenant's rights hereunder. Landlord shall have the right at all times during the Lease Term to publish and promulgate and thereafter enforce such rules and regulations or changes in the existing Rules and Regulations as it may reasonably deem necessary in its sole discretion to protect the tenantability, safety, operation, and welfare of the Demised Premises and the Project. See Special Stipulation No. 27. 14. ALTERATIONS. Except for any initial improvement of the Demised Premises pursuant to EXHIBIT "D", which shall be governed by the provisions of said EXHIBIT "D", Tenant shall not make, suffer or permit to be made any alterations, additions or improvements to or of the Demised Premises or any part thereof, or attach any fixtures or equipment thereto, without first obtaining Landlord's written consent. With respect to any alteration, addition or improvement which does not affect the structure of the Building, does not affect any of the Building's systems (e.g., mechanical, electrical or plumbing), does not diminish the capacity of such Building systems available to other portions of the Building, is not visible from the common areas or exterior of the Building, and is in full compliance with all laws, orders, ordinances, directions, requirements, rules and regulations of all governmental authorities. Landlord's consent shall not be unreasonably withheld (and Landlord's consent shall not be required if the cost of the aforesaid type of alteration is less than $15,000.00). Any such alterations, additions or improvements to the Demised Premises consented to by Landlord shall be made by Landlord or under Landlord's supervision for Tenant's account and Tenant shall reimburse Landlord for all costs thereof (including a reasonable charge for Landlord's overhead), as Rent, within ten (10) days after receipt of a statement. All such alterations, additions and improvements (except for Tenant's trade fixtures and computer and electronic equipment) shall become Landlord's property at the expiration or earlier termination of the Lease Term and shall remain on the Demised Premises without compensation to Tenant unless Landlord elects by notice to Tenant to have Tenant remove such alterations, additions and improvements, in which event, notwithstanding any contrary provisions respecting such alterations, additions and improvements contained in Article 32 hereof, Tenant shall promptly restore, at its sole cost and expense, the Demised Premises to its condition prior to the installation of such alterations, additions and improvements, normal wear and tear excepted. Tenant shall under no circumstances be required to remove any alterations, additions and improvements which are part of the initial improvement of the Demised Premises which do not require Landlord's consent, or which are made with Landlord's consent (unless the removal requirement is specified by Landlord at the time of initial approval). See Special Stipulation No. 39. 6 15. REPAIRS. (a) Landlord shall maintain in good order and repair, subject to normal wear and tear and subject to casualty and condemnation, the Building (excluding the Demised Premises, other than the structural portions thereof, and other portions of the Building leased to other tenants, other than the structural portions thereof), the Building parking facilities, the public areas and the landscaped areas. Notwithstanding the foregoing obligation, the cost of any repairs or maintenance to the foregoing necessitated by the intentional acts or negligence of Tenant or its agents, contractors, employees, invitees, licensees, tenants or assigns, shall be borne solely by Tenant and shall be deemed Rent hereunder and shall be reimbursed by Tenant to Landlord upon demand. Landlord shall not be required to make any repairs or improvements to the Demised Premises except structural repairs necessary for safety and tenantability. (b) Tenant covenants and agrees that it will take good care of the Demised Premises and all alterations, additions and improvements thereto and will keep and maintain the same in good condition and repair, except for normal wear and tear (Covered Repairs" (as defined in Special Stipulation No. 36), condemnation and casualty. To the fullest extent permitted by law, Tenant hereby waives all rights to make repairs at the expense of Landlord or in lieu thereof to vacate the Demised Premises as may be provided by any law, statute or ordinance now or hereafter in effect. Landlord has no obligation and has made no promise to alter, remodel, improve, repair, decorate or paint the Demised Premises or any part thereof, except as specifically and expressly herein set forth. 16. LANDLORD'S RIGHT OF ENTRY. Landlord shall retain duplicate keys to all doors of the Demised Premises and Landlord and its agents, employees and independent contractors shall have the right to enter the Demised Premises at reasonable hours to inspect and examine same, to make repairs, additions, alterations and improvements, to exhibit the Demised Premises to mortgagees, prospective mortgagees, purchasers or tenants, and to inspect the Demised Premises to ascertain that Tenant is complying with all of its covenants and obligations hereunder, all without being liable to Tenant in any manner whatsoever for any damages arising therefrom, unless caused by Landlord's negligence or willful misconduct; provided, however, that Landlord shall, except in case of emergency, afford Tenant such prior notification of any entry into the Demised Premises as shall be reasonably practicable under the circumstances. Landlord shall be allowed to take into and through the Demised Premises any and all materials (except hazardous substances as defined in Article 43) that may be required to make such repairs. During such time as such work is being carried on, in or about the Demised Premises, the Rent provided herein shall not abate, and Tenant waives any claim or cause of action against Landlord for damages by reason of interruption of Tenant's business or loss of profits therefrom because of the prosecution of any such work or any part thereof. See Special Stipulation No. 23. 17. INSURANCE. Tenant shall procure at its expense and maintain throughout the Lease Term a policy or policies of commercial property insurance, issued on an "all risks" basis insuring the full replacement cost with a reasonable deductible amount of its furniture, equipment, supplies and other property owned, leased, held or possessed by it and contained in the Demised Premises, together with the excess value of the improvements to the Demised Premises over the "building standard allowances" as defined in subparagraph 9(a)(10) (with a replacement cost endorsement sufficient to prevent Tenant from becoming a co-insurer), and workmen's compensation insurance as required by applicable law. Tenant shall also procure at its expense and maintain throughout the Lease Term a policy or policies of commercial general liability insurance, written on an occurrence basis and insuring Tenant, and naming as an additional insured, Landlord and any mortgagee identified by written notice to Tenant, against any and all liability for injury to or death of a person or persons and for damage to property occasioned by or arising out of any construction work being done on the Demised Premises by Tenant or its agent or contractors, or arising out of the use or occupancy of the Demised Premises, or in any way occasioned by or arising out of the activities of Tenant, its agents, contractors, employees, guests or licensees in the Demised Premises, or other portions of the Building or the Project, the limits of such policy or policies to be in combined single limits for both damage to property and personal injury and in amounts not less than Three Million Dollars ($3,000,000.00) for each occurrence. Such insurance shall, in addition, extend to any liability of Tenant arising out of the indemnities provided for in this Lease. Landlord shall keep and maintain in effect fire insurance with extended coverage in an amount equal to at least eighty percent (80%) of the insurable amount of the Building. Such insurance company (an "Eligible Company") shall be solvent, authorized to do business in Atlanta, Georgia, and be acceptable to prudent landlords of first class office buildings in the Atlanta, Georgia, area similar to the Building. Landlord shall keep and maintain comprehensive general liability insurance, including contractual liability coverage issued by an Eligible Company. The insurance policies evidencing the coverages described above shall contain such terms and conditions as similar policies obtained by landlords of similar first class office buildings in the Atlanta, Georgia, area. All insurance policies procured and maintained by Tenant pursuant to this Article 17 shall name Landlord and any mortgagee as additional insured, shall be carried with companies licensed to do business in the State of Georgia reasonably satisfactory to Landlord and shall be non-cancelable and not subject to material change except after twenty (20) days' written notice to Landlord. Duly executed certificates of insurance with respect to such policies, accompanied by proof of payment of the premium therefor, shall be delivered to Landlord prior to the Rental Commencement Date, and renewals of such policies shall be delivered to Landlord at least thirty (30) days prior to the expiration of each respective policy term. 18. WAIVER OF SUBROGATION. Landlord and Tenant shall each have included in all policies of commercial property insurance, commercial general liability insurance, and business interruption and other insurance respectively obtained by them pursuant to this Lease, a waiver by the insurer of all right of subrogation against the other in connection with any loss or damage thereby insured against. Any additional premium for such waiver shall be paid by the primary insured. To the full extent permitted by law, Landlord and Tenant each waives all right of recovery against the other for, and releases the other from liability for, loss or damage to the extent such loss or damage is covered by valid and collectible insurance in effect at the time of such loss or damage or, in the event of self-insurance or a failure to insure, would be covered by the insurance required to be maintained under this Lease by the party seeking recovery. 7 19. DEFAULT (a) The following events shall be deemed to be events of default by Tenant under this Lease: (i) Tenant shall fail to pay any installment of Rent or any other charge or assessment against Tenant pursuant to the terms hereof within five (5) days following written notice by Landlord to Tenant of its failure to pay such installments, provided that Landlord shall not be obligated to send to Tenant such written notice more often than twice in any calendar year during the term hereof; (ii) Tenant shall fail to comply with any term, provision, covenant or warranty made under this Lease by Tenant, other than the payment of the Rent or any other charge or assessment payable by Tenant, and shall not cure such failure within twenty (20) days after notice thereof to Tenant; (iii) Tenant or any guarantor of this Lease shall make a general assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts as they become due, or shall file a petition in bankruptcy, or shall be adjudicated as bankrupt or insolvent, or shall file a petition in any proceeding seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, or shall file an answer admitting or fail timely to contest the material allegations of a petition filed against it in any such proceeding; (iv) a proceeding is commenced against Tenant or any guarantor of this Lease seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, and such proceeding shall not have been dismissed within forty-five (45) days after the commencement thereof; (v) a receiver or trustee shall be appointed for the Demised Premises or for all or substantially all of the assets of Tenant or of any guarantor of this Lease (unless such receiver is removed within thirty (30) days after appointment thereof); and (vi) Tenant shall do or permit to be done anything which creates a lien upon the Demised Premises or the Project and such lien is not removed or discharged within fifteen (15) days after the filing thereof. Notwithstanding the foregoing, in the case of a non-monetary default which is subject to cure but which cannot by its very nature be cured within said twenty (20) day period, Tenant shall be granted an additional period of time, not to exceed twenty-five (25) days, in which to effect such cure, provided Tenant promptly commences to cure such default and diligently pursues said cure to completion. (b) Upon the occurrence of any of the aforesaid events of default, Landlord shall have the option to pursue any one or more of the following remedies without any notice or demand whatsoever: (i) terminate this Lease, in which event Tenant shall immediately surrender the Demised Premises to Landlord and if Tenant fails to do so, Landlord may without prejudice to any other remedy which it may have for possession or arrearages in Rent, enter upon and take possession of the Demised Premises and expel or remove Tenant and any other person who may be occupying said Demised Premises or any part thereof, in accordance with applicable law, without being liable for prosecution or any claim of damages therefor; Tenant hereby agreeing to pay to Landlord on demand the amount of all loss and damage which Landlord may suffer by reason of such termination, whether through inability to relet the Demised Premises on satisfactory terms or otherwise; (ii) terminate Tenant's right of possession (but not this Lease) and enter upon and take possession of the Demised Premises and expel or remove Tenant and any other person who may be occupying said Demised Premises or any part thereof, by entry (in accordance with applicable law), dispossessory suit or otherwise, without thereby releasing Tenant from any liability hereunder, without terminating this Lease, and without being liable for prosecution or any claim of damages therefor and, if Landlord so elects, make such alterations, redecorations and repairs as, in Landlord's judgment, may be necessary to relet the Demised Premises, and Landlord may, but shall be under no obligation to do so, relet the Demised Premises or any portion thereof in Landlord's or Tenant's name, but for the account of Tenant, for such term or terms (which may be for a term extending beyond the Lease Term) and at such rental or rentals and upon such other terms as Landlord may deem advisable, with or without advertisement, and by private negotiations, and receive the rent therefor, Tenant hereby agreeing to pay to Landlord the deficiency, if any, between all Rent reserved hereunder and the total rental applicable to the Lease Term hereof obtained by Landlord re-letting, and Tenant shall be liable for Landlord's expenses in redecorating and restoring the Demised Premises and all costs incident to such re-letting, including broker's commissions and lease assumptions, and in no event shall Tenant be entitled to any rentals received by Landlord in excess of the amounts due by Tenant hereunder; or (iii) enter upon the Demised Premises, in accordance with applicable law, without being liable for prosecution or any claim of damages therefor, and do whatever Tenant is obligated to do under the terms of this Lease; and Tenant agrees to reimburse Landlord on demand for any expenses including, without limitation, reasonable attorneys' fees which Landlord may incur in this effecting compliance with Tenant's obligations under this Lease and Tenant further agrees that Landlord shall not be liable for any damages resulting to Tenant from such action. If this Lease is terminated by Landlord as a result of the occurrence of an event of default, Landlord may declare due and payable immediately an amount determined as follows: (x) the entire amount of Rent and other charges and assessments which would have become due and payable during the remainder of the Lease Term (including, without limitation, increases in Rent pursuant to Article 7 hereof), discounted to present value by using a discount factor of eight percent (8%) per annum, plus (y) all of Landlord's costs and expenses (including, without limitation, Landlord's expenses in redecorating and restoring the Demised Premises and all costs relating to such reletting, including broker's commissions and lease assumptions) reasonably incurred in connection with or related to the reletting of the Demised Premises, minus (z) the market rental value of the Demised Premises for the remainder of the Lease Term, based on Landlord's reasonable determination of both future rental value and the probability of reletting the Demised Premises for all or part of the remaining Term, discounted to present value by using a discount factor of eight percent (8%) per annum. Such payment shall not constitute a penalty or forfeiture but shall constitute liquidated damages for Tenant's failure to comply with the terms and provisions of this Lease (Landlord and Tenant agreeing that Landlord's exact damages in such event are impossible to ascertain and that the amount set forth above is a reasonable estimate thereof). For purposes of determining what could be collected by Landlord by reletting under this subsection, Landlord is not required to relet when other comparable space in the Building is available. The term "remaining Lease Term" as used in this subsection shall mean the period which otherwise would have (but for the termination of this Lease) constituted the balance of the Lease Term from the date of the termination of this Lease. (c) Pursuit of any of the foregoing remedies shall not preclude pursuit of any other remedy herein provided or any other remedy provided by law or at equity, nor shall pursuit of any remedy herein provided constitute an election of remedies thereby excluding the later election of an alternate remedy, or a forfeiture or waiver of any Rent or other charges and assessments payable by Tenant and due to Landlord hereunder or of any damages accruing to Landlord by reason of violation of any of the terms, covenants, warranties and provisions herein contained. No reentry or taking possession 8 of the Demised Premises by Landlord or any other action taken by or on behalf of Landlord shall be construed to be an acceptance of a surrender of this Lease or an election by Landlord to terminate this Lease unless written notice of such intention is given to Tenant. Forbearance by Landlord to enforce one or more of the remedies herein provided upon an event of default shall not be deemed or construed to constitute a waiver of such default. In determining the amount of loss or damage which Landlord may suffer by reason of termination of this Lease or the deficiency arising by reason of any reletting of the Demised Premises by Landlord as above provided, allowance shall be made for the expense of repossession. Tenant agrees to pay to Landlord all costs and expenses incurred by Landlord in the enforcement of this Lease, including without limitation, the fees of Landlord's attorneys as provided in Article 25 hereof. 20. WAIVER OF BREACH. No waiver of any breach of the covenants, warranties, agreements, provisions, or conditions contained in this Lease shall be construed as a waiver of said covenant, warranty, provision, agreement or condition or of any subsequent breach thereof, and if any breach shall occur and afterwards be compromised, settled or adjusted, this Lease shall continue in full force and effect as if no breach had occurred. 21. ASSIGNMENT AND SUBLETTING. Tenant shall not, without the prior written consent of Landlord, assign this Lease or any interest herein or in the Demised Premises, or mortgage, pledge, encumber, hypothecate or otherwise transfer or sublet the Demised Premises or any part thereof or permit the use of the Demised Premises by any party other than Tenant. Consent to one or more such transfers or subleases shall not destroy or waive this provision, and all subsequent transfers and subleases shall likewise be made only upon obtaining the prior written consent of Landlord. Without limiting the foregoing prohibition, in no event shall Tenant assign this Lease or any interest herein, whether directly, indirectly or by operation of law, or sublet the Demised Premises or any part thereof or permit the use of the Demised Premises or any part thereof by any party if such proposed assignment, subletting or use would contravene any restrictive covenant (including any exclusive use) granted to any other tenant of the Building or would contravene the provisions of Article 13 of this Lease. Sublessees or transferees of the Demised Premises for the balance of the Lease Term shall become directly liable to Landlord for all obligations of Tenant hereunder, without relieving Tenant (or any guarantor of Tenant's obligations hereunder) of any liability therefor, and Tenant shall remain obligated for all liability to Landlord arising under this Lease during the entire remaining Lease Term including any extensions thereof, whether or not authorized herein. If Tenant is a partnership, a withdrawal or change, whether voluntary, involuntary or by operation of law, of partners owning a controlling interest in the Tenant shall be deemed a voluntary assignment of this Lease and subject to the foregoing provisions. If Tenant is a corporation, any dissolution, merger, consolidation or other reorganization of Tenant, or the sale or transfer of a controlling interest in the capital stock of Tenant, whether in a single transaction or in a series of transactions, shall be deemed a voluntary assignment of this Lease and subject to the foregoing provisions. Landlord may, as a prior condition to considering any request for consent to an assignment or sublease, require Tenant to obtain and submit current financial statements of any proposed subtenant or assignee and such other financial documentation relative to the proposed subtenant or assignee as Landlord may reasonably require. In the event Landlord consents to an assignment or sublease, Tenant shall pay to Landlord a fee to cover Landlord's accounting costs plus any legal fees actually incurred by Landlord as a result of the assignment or sublease (not to exceed $1,000.00). The consent of Landlord to any proposed assignment or sublease may be withheld by Landlord in its sole and absolute discretion. Any consideration, in excess of the Rent and other charges and sums due and payable by Tenant under this Lease, paid to Tenant by any assignee of this Lease for its assignment, or by any sublessee under or in connection with its sublease, or otherwise paid to Tenant by another party for use and occupancy of the Demised Premises or any portion thereof (after deducting Tenant's reasonable costs associated therewith, including brokerage fees, attorneys' fees and remodeling costs), shall be promptly remitted by Tenant to Landlord as additional rent hereunder and Tenant shall have no right or claim thereto as against Landlord. No assignment of this Lease consented to by Landlord shall be effective unless and until Landlord shall receive an original assignment and assumption agreement, in form and substance satisfactory to Landlord, signed by Tenant and Tenant's proposed assignee, whereby the assignee assumes due performance of this Lease to be done and performed for the balance of the then remaining Lease Term of this Lease. No subletting of the Demised Premises, or any part thereof, shall be effective unless and until there shall have been delivered to Landlord an agreement, in form and substance satisfactory to Landlord, signed by Tenant and the proposed sublessee, whereby the sublessee acknowledges the right of Landlord to continue or terminate any sublease, in Landlord's sole discretion, upon termination of this Lease, and such sublessee agrees to recognize and attorn to Landlord in the event that Landlord elects under such circumstances to continue such sublease. Upon Landlord's receipt of a request by Tenant to assign this Lease or any interest herein or in the Demised Premises or to transfer or sublet the Demised Premises or any part thereof or permit the use of the Demised Premises by any party other than Tenant, Landlord shall exercise in writing one of the following options: (a) to terminate this Lease as to the portion of the Demised Premises proposed to be assigned or sublet; (b) to consent to the proposed assignment or sublease, subject to the other terms and conditions set forth in this Article 21; or (c) to refuse to consent to the proposed assignment or sublease, which refusal shall be deemed to have been exercised unless Landlord gives Tenant written notice providing otherwise. Landlord agrees to respond to any such request within ten (10) days after receipt of such request, together with such information as may be reasonably necessary to enable Landlord to make an informed decision with respect to such request. See Special Stipulation No. 5. 22. DESTRUCTION. (a) If the Demised Premises are damaged by fire or other casualty, the same shall be repaired or rebuilt as speedily as practical under the circumstances as the expense of Landlord, unless this Lease is terminated as provided in this Article 22, and during the period required for restoration, a just and proportionate part of Base Rental shall be abated until the Demised Premises are repaired or rebuilt. (b) If the Demised Premises are (i) damaged to such an extent that repairs cannot be completed within one hundred eighty (180) days after the date of the casualty, or (ii) damaged or destroyed as a result of a risk which is not insured under the insurance policies required hereunder, or (iii) damaged or destroyed during the last eighteen (18) months of the Lease Term, or (iv) if the Building is damaged in whole or in part (whether or not the Demised Premises are damaged) to such an extent that the Building cannot, in Landlord's reasonable judgment, be operated economically as an integral unit, then and in any such event Landlord may at its option terminate this Lease by notice in writing to Tenant within sixty (60) days after the day of such occurrence. With respect to condition (iv) above, Landlord must terminate all other leases 9 in the Building in order to terminate this Lease. If the Demised Premises are damaged to such an extent that repairs cannot reasonably be anticipated to be to be or are not completed within one hundred eighty (180) days after the date of the casualty or if the Demised Premises are substantially damaged during the last eighteen (18) months of the Lease Term, then in either such event Tenant may elect to terminate this Lease by notice in writing to Landlord given within forty-five (45) days after the date of such occurrence (or within thirty (30) days of the conclusion of such one hundred eighty (180) day period if the repairs are not completed within such period). Unless Landlord or Tenant elects to terminate this Lease as hereinabove provided, this Lease will remain in full force and effect and Landlord shall repair such damage at its expense to the extent required under subparagraph (c) below as expeditiously as possible under the circumstances. (c) If Landlord should elect or be obligated pursuant to subparagraph (a) above to repair or rebuild because of any damage or destruction, Landlord's obligation shall be limited to the original Building and any other work or improvements which were originally performed or installed at Landlord's expense as described in EXHIBIT "D" hereto or with the proceeds of the Tenant Improvement Allowance. If Landlord's mortgagee or the lessor under a ground or underlying lease shall require that any insurance proceeds from a casualty loss be paid to it, Landlord may terminate this Lease unless Tenant, within fifteen (15) days after demand therefor, deposits with Landlord a sum of money sufficient to pay the difference between the cost of repair and the proceeds of the insurance available to Landlord for such purpose. (d) In no event shall Landlord be liable for any loss or damage sustained by Tenant by reason of casualties mentioned hereinabove or any other accidental casualty. (e) In the event of a minor casualty (i.e., one which can be fully repaired in less than thirty (30) days), Landlord shall not be entitled to terminate this Lease and shall restore the Demised Premises in accordance with the provisions of this Article 22. See Special Stipulation No. 37. 23. LANDLORD'S LIEN. [INTENTIONALLY DELETED.] 24. SERVICES BY LANDLORD. Landlord shall provide the Building Standard Services described on EXHIBIT "E" attached hereto and by this reference made a part hereof. 25. ATTORNEYS' FEES AND HOMESTEAD. [INTENTIONALLY DELETED.] See Special Stipulation No. 18. 26. TIME. Time is of the essence of this Lease and whenever a certain day is stated for payment or performance of any obligation of Tenant or Landlord, the same enters into and becomes a part of the consideration hereof. 27. SUBORDINATION AND ATTORNMENT. (a) Tenant agrees that this Lease and all rights of Tenant hereunder are and shall be subject and subordinate to any ground or underlying lease which may now or hereafter be in effect regarding the Project or any component thereof, to any mortgage now or hereafter encumbering the Demised Premises or the Project or any component thereof, to all advances made or hereafter to be made upon the security of such mortgage, to all amendments, modifications, renewals, consolidations, extensions and restatements of such mortgage, and to any replacements and substitutions for such mortgage. The terms of this provision shall be self-operative and no further instrument of subordination shall be required. Tenant, however, upon request of any party in interest, shall execute promptly such instrument or certificates as may be reasonably required to carry out the intent hereof, whether said requirement is that of Landlord or any other party in interest, including, without limitation, any mortgagee. (b) If any mortgagee or lessee under a ground or underlying lease elects to have this Lease superior to its mortgage or lease and signifies its election in the instrument creating its lien or lease or by separate recorded instrument, then this Lease shall be superior to such mortgage or lease, as the case may be. The term "mortgage", as used in this Lease, includes any deed to secure debt, deed of trust or security deed and any other instrument creating a lien in connection with any other method of financing or refinancing. The term "mortgagee", as used in this Lease, refers to the holder(s) of the indebtedness secured by a mortgage. (c) In the event any proceedings are brought for the foreclosure of, or in the event of exercise of the power of sale under, any mortgage covering the Demised Premises or the Project, or in the event the interests of Landlord under this Lease shall be transferred by reason of deed in lieu of foreclosure or other legal proceedings, or in the event of termination of any lease under which Landlord may hold title, Tenant shall, at the option of the transferee or purchaser at foreclosure or under power of sale, or the lessor of the Landlord upon such lease termination, as the case may be (sometimes hereinafter called "such person"), attorn to such person and shall recognize and be bound and obligated hereunder to such person as the Landlord under this Lease; provided, however, that no such person shall be (i) bound by any payment of Rent for more than one (1) month in advance, except prepayments in the nature of security for the performance by Tenant of its obligations under this Lease; (ii) bound by any amendment or modification of this Lease made without the express written consent of the mortgagee or lessor of the Landlord, as the case may be (provided that Tenant was notified in writing of such mortgagee or lessor of Landlord); (iii) obligated to cure any defaults under this Lease of any prior landlord (including Landlord); (iv) liable for any act or omission of any 10 prior landlord (including Landlord); (v) subject to any offsets or defenses which Tenant might have against any prior landlord (including Landlord); or (vi) bound by any warranty or representation of any prior landlord (including Landlord) relating to work performed by any prior landlord (including Landlord) under this Lease. Landlord's successor shall not be liable for the matters described in clauses (iii) through (vi) of the preceding sentence, provided Landlord shall remain liable to Tenant for the matters described therein. Tenant agrees to execute any attornment agreement reasonable in form and content and not in conflict herewith requested by Landlord, the mortgagee or such person. Tenant's obligation to attorn to such person shall survive the exercise of any such power of sale, foreclosure or other proceeding. Tenant agrees that the institution of any suit, action or other proceeding by any mortgagee to realize on Landlord's interest in the Demised Premises or the Building pursuant to the powers granted to a mortgagee under its mortgage, shall not, by operation of law or otherwise, result in the cancellation or termination of the obligations of Tenant hereunder. Landlord and Tenant agree that notwithstanding that this Lease is expressly subject and subordinate to any mortgages, any mortgagee, its successors and assigns, or other holder of a mortgage or of a note secured thereby, may sell the Demised Premises or the Building, in the manner provided in the mortgage and may, at the option of such mortgagee, its successors and assigns, or other holder of the mortgage or note secured thereby, make such sale of the Demised Premises or Building subject to this Lease. See Special Stipulation No. 6. 28. ESTOPPEL CERTIFICATES. Within twenty (20) days after written request therefor by Landlord, Tenant agrees to execute and deliver to Landlord in recordable form an estoppel certificate addressed to Landlord, any mortgagee or assignee of Landlord's interest in, or purchaser of, the Demised Premises or the Building or any part thereof, certifying (if such be the case) that this Lease is unmodified and is in full force and effect (and if there have been modifications, that the same is in full force and effect as modified and stating said modifications); that there are no defenses or offsets against the enforcement thereof to Tenant's knowledge or stating those claimed by Tenant; and stating the date to which Rent and other charges have been paid. Such certificate shall also include such other information concerning the Lease and Tenant's occupancy as may reasonably be required by such mortgagee, proposed mortgagee, assignee, purchaser or Landlord. Any such certificate may be relied upon by Landlord, any mortgagee, proposed mortgagee, assignee, purchaser and any other party to whom such certificate is addressed. Upon written request from Tenant, Landlord agrees to provide estoppel certificates to Tenant generally in the same manner as set forth herein above. 29. NO ESTATE. This Lease shall create the relationship of landlord and tenant only between Landlord and Tenant and no estate shall pass out of Landlord. Tenant shall have only an usufruct, not subject to levy and sale and not assignable in whole or in part by Tenant except as herein provided. 30. CUMULATIVE RIGHTS. All rights, powers and privileges conferred hereunder upon the parties hereto shall be cumulative to, but not restrictive of, or in lieu of those conferred by law. 31. HOLDING OVER. If Tenant remains in possession after expiration or termination of the Lease Term with or without Landlord's written consent, Tenant shall become a tenant-at-sufferance, and there shall be no renewal of this Lease by operation of law. During the period of any such holding over, all provisions of this Lease shall be and remain in effect except that the monthly rental shall be one hundred fifty percent (150%) of Rent (including any adjustments as provided herein) payable for the last full calendar month of the Lease Term including renewals or extensions. The inclusion of the preceding sentence in this Lease shall not be construed as Landlord's consent for Tenant to hold over. 32. SURRENDER OF PREMISES. Upon the expiration or other termination of this Lease, Tenant shall quit and surrender to Landlord the Demised Premises and every part thereof and all alterations, additions and improvements thereto, broom clean and in good condition and state of repair, reasonable wear and tear and damage caused by casualty or condemnation excepted. Tenant shall remove all personalty and equipment not attached to the Demised Premises which it has placed upon the Demised Premises, and Tenant shall restore the Demised Premises to the condition immediately preceding the time of placement thereof. If Tenant shall fail or refuse to remove all of Tenant's effects, personalty and equipment from the Demised Premises upon the expiration or termination of this Lease for any cause whatsoever or upon Tenant being dispossessed by process of law or otherwise, such effects, personalty and equipment shall be deemed upon three (3) business days prior written notice to Tenant to be abandoned and may be appropriated, sold, stored, destroyed or otherwise disposed of by Landlord without written notice to Tenant or any other party and without obligation to account for them. Tenant shall pay Landlord on demand any and all reasonable expenses incurred by Landlord in the removal of such property, including, without limitation, the cost of repairing any damage to the Building or Project caused by the removal of such property and storage charges (if Landlord elects to store such property). The covenants and conditions of this Article 32 shall survive any expiration or termination of this Lease. See Special Stipulation No. 39. 33. NOTICES. All notices required or permitted to be given hereunder shall be in writing and shall be deemed to have been fully given, whether actually received or not, when delivered in person, or one (1) days after being deposited with an overnight commercial courier, or three (3) days after being deposited, postage prepaid, in the United States Mail, certified, return receipt requested, and addressed to Landlord or Tenant at their respective address set forth hereinabove or at such other address as either party shall have theretofore given to the other by notice as herein provided. See Special Stipulation No. 33. 34. DAMAGE OR THEFT OF PERSONAL PROPERTY. All personal property brought into the Demised Premises by Tenant, or Tenant's employees, agents, or business visitors, shall be at the risk of Tenant only, and Landlord shall not be liable for theft thereof or any damage thereto occasioned by any act 11 of co-tenants, occupants, invitees or other users of the Building or any other person unless damage or theft is caused by Landlord's negligence or misconduct. Landlord shall not at any time be liable for damage to any personal property of Tenant, its employees, sublessees, or invitees in or upon the Demised Premises, which results from gas, smoke, water, rain, ice or snow which issues or leaks from or forms upon any part of the Building or from the pipes or plumbing work of the same, or from any other place whatsoever unless damage is caused by Landlord's negligence or misconduct. 35. EMINENT DOMAIN. (a) If all or part of the Project shall be taken for any public or quasi-public use by virtue of the exercise of the power of eminent domain or by private purchase in lieu thereof, this Lease shall terminate as to any part of the Demised Premises so taken as of the date of taking, and, in the case of a partial taking, either Landlord or Tenant shall have the right to terminate this Lease by written notice to the other within thirty (30) days after such date; provided, however, that a condition to the exercise by Tenant of such right to terminate shall be that the portion of the Project taken shall be of such extent and nature as to materially impair Tenant's use of the balance of the Demised Premises (i.e. insufficient parking, lack of access, non-availability of essential services). If title to so much of the Project is taken that a reasonable amount of reconstruction thereof will not in Landlord's sole discretion result in the Building being a practical improvement and reasonably suitable for use for the purpose for which it is designed, then this Lease shall terminate on the date that the condemning authority actually takes possession of the part so condemned or purchased; provided, however, that as a condition to terminating this Lease, Landlord must also terminate all other leases in the Building. If a temporary taking has a material, adverse effect on the Demised Premises and will extend beyond one hundred eighty (180) days, then Tenant shall have the right to terminate this Lease by timely notice to Landlord. If any part of the Demised Premises is taken and Tenant elects not to terminate the Lease, rent will be reduced in proportion to the area of the Demised Premises so taken. (b) If this Lease is terminated under the provisions of this Article 35, Rent shall be apportioned and adjusted as of the date of termination. Tenant shall have no claim against Landlord or against the condemning authority for the value of any leasehold estate or for the value of the unexpired Lease Term provided that the foregoing shall not preclude any claim that Tenant may have against the condemning authority for the unamortized cost of leasehold improvements, to the extent the same were installed at Tenant's expense (and not with the proceeds of the Tenant Improvement Allowance), or for loss of business, moving expenses or other consequential damages, in accordance with subparagraph (d) below. (c) If there is a partial taking of the Project and this Lease is not thereupon terminated under the provisions of this Article 35, then this Lease shall remain in full force and effect, and Landlord shall, within a reasonable time thereafter, repair or reconstruct the remaining portion of the Project or Building to the extent necessary to make the same a complete architectural unit; provided, that in complying with its obligations hereunder, Landlord shall not be required to expend more than the net proceeds of the condemnation award which are paid to Landlord. Upon any such partial taking, Landlord shall have the right to reduce the figure described in Article 8(b)(y) hereof by an amount equal to the product of (x) the amount of tax savings arising from such partial taking, as determined by Landlord in its reasonable discretion, divided by the number of square feet of Rentable Floor Area of the Building, multiplied by (y) the number of square feet of Rentable Floor Area of the Demised Premises. Landlord shall give Tenant notice of such adjustment and a statement setting forth a reasonably detailed explanation of how the adjustment was calculated. (d) All compensation awarded or paid to Landlord upon a total or partial taking of the Demised Premises or the Project shall belong to and be the property of Landlord without any participation by Tenant. Nothing herein shall be construed to preclude Tenant from prosecuting any claim directly against the condemning authority for loss of business, for damage to, and cost of removal of, trade fixtures, furniture and other personal property belonging to Tenant, and for the unamortized cost of leasehold improvements to the extent the same were installed at Tenant's expense (and not with the proceeds of the Tenant Improvement Allowance); provided, however, that no such claim shall diminish or adversely affect Landlord's award. (e) Notwithstanding anything to the contrary contained in this Article 35, if, during the Lease Term, the use or occupancy of any part of the Project or the Demised Premises shall be taken or appropriated temporarily for any public or quasi-public use under any governmental law, ordinance or regulation, or by right of eminent domain, this Lease shall be and remain unaffected by such taking or appropriation and Tenant shall continue to pay in full all Rent payable hereunder by Tenant during the Lease Term. In the event of any such temporary appropriation or taking, Tenant shall be entitled to receive that portion of any award which represents compensation for the loss of use or occupancy of the Demised Premises during the Lease Term, and Landlord shall be entitled to receive that portion of any award which represents the cost of restoration and compensation for the loss of use or occupancy of the Demised Premises after the end of the Lease Term. 36. PARTIES. The term "Landlord", as used in this Lease, shall include Landlord and its successors and assigns. It is hereby covenanted and agreed by Tenant that should Landlord's interest in the Demised Premises cease to exist for any reason during the Lease Term, then notwithstanding the happening of such event, this Lease nevertheless shall remain in full force and effect, and Tenant hereby agrees to attorn to the then owner of the Demised Premises. The term "Tenant" shall include Tenant and its heirs, legal representatives and successors, and shall also include Tenant's assignees, if this Lease shall be validly assigned for the balance of the Lease Term or any renewals or extensions thereof. In addition, Landlord and Tenant covenant and agree that Landlord's right to transfer or assign Landlord's interest in and to the Demised Premises, or any part or parts thereof, shall be unrestricted, and that in the event of any such transfer or assignment by Landlord which includes the Demised Premises, Landlord's obligations to Tenant hereunder shall cease and terminate, and Tenant shall look only and solely to Landlord's assignee or transferee for performance thereof, provided Landlord's successor assumes all of Landlord's liability hereunder. 37. [INTENTIONALLY DELETED.] 12 See Special Stipulation No. 17. 38. RELOCATION OF THE PREMISES. [INTENTIONALLY DELETED.] 39. FORCE MAJEURE. In the event of strike, lockout, labor trouble, civil commotion, Act of God, or any other cause beyond a party's control (collectively "force majeure") resulting in Landlord's inability to supply the services or perform the other obligations required of Landlord hereunder, this Lease shall not terminate and Tenant's obligation to pay Rent and all other charges and sums due and payable by Tenant shall not be affected or excused and Landlord shall not be considered to be in default under this Lease. If, as a result of force majeure, Tenant is delayed in performing any of its obligations under this Lease, other than Tenant's obligation to take possession of the Demised Premises on or before the Rental Commencement Date and to pay Rent and all other charges and sums payable by Tenant hereunder, Tenant's performance shall be excused for a period equal to such delay and Tenant shall not during such period be considered to be in default under this Lease with respect to the obligation, performance of which has thus been delayed. 40. LANDLORD'S LIABILITY. Landlord shall have no personal liability with respect to any of the provisions of this Lease. If Landlord is in default with respect to its obligations under this Lease, Tenant shall look solely to the interest of Landlord in and to the Building and the Land (including net rental income and net sales, insurance and condemnation proceeds) for satisfaction of Tenant's remedies, if any. It is expressly understood and agreed that Landlord's liability under the terms of this Lease shall in no event exceed the amount of its interest in and to said Land and Building. In no event shall any partner of Landlord nor any joint venturer in Landlord, nor any officer, director or shareholder of Landlord or any such partner or joint venturer of Landlord be personally liable with respect to any of the provisions of this Lease. 41. LANDLORD'S COVENANT OF QUIET ENJOYMENT. Provided Tenant performs the terms, conditions and covenants of this Lease, and subject to the terms and provisions hereof, Landlord covenants and agrees that Tenant shall have the quiet and peaceful possession of the Demised Premises, for the Lease Term, without hindrance, claim or molestation by Landlord or any other person lawfully claiming under Landlord. 42. SECURITY DEPOSITS. (a) As security for Tenant's obligations to take possession of the Demised Premises in accordance with the terms of this Lease and to comply with all of Tenant's covenants, warranties and agreements hereunder, Tenant shall deposit with Landlord the sum set forth in Article 1(m)(i) above on the date Tenant executes and delivers this Lease to Landlord as prepaid rent. Such amount shall be applied by Landlord, without interest, to the first monthly installment(s) of Base Rental as they become due hereunder. In the event Tenant fails to take possession of the Demised Premises as aforesaid, said sum shall be retained by Landlord for application in reduction, but not in satisfaction, of damages suffered by Landlord as a result of such breach by Tenant. (c) In the event of a sale or transfer of Landlord's interest in the Demised Premises or the Building or a lease by Landlord of the Building, Landlord shall have the right to transfer the within described security deposits to the purchaser or lessor, as the case may be, and Landlord shall be relieved of all liability to Tenant for the return of such security deposits. Tenant shall look solely to the new owner or lessor for the return of said security deposits. The security deposits shall not be mortgaged, assigned or encumbered by Tenant. In the event of a permitted assignment under this Lease by Tenant, the security deposits shall be held by Landlord as a deposit made by the permitted assignee and Landlord shall have no further liability with respect to the return of said security deposits to the original Tenant. (d) Neither Landlord nor its agents shall be required to keep the security deposits separate from their general accounts, it being agreed that the security deposits may be commingled with other funds of Landlord or of its agents. It is further agreed and acknowledged by Tenant that Landlord or its agents shall have the right to deposit the security deposits in an interest-bearing account, and all interest accrued on the security deposits shall belong to Landlord and will be retained by Landlord as its property. 43. HAZARDOUS SUBSTANCES. Tenant hereby covenants and agrees that Tenant shall not bring or cause to be brought any "Hazardous Substances" (as hereinafter defined) or knowingly permit to be generated, placed, held, stored, used, located or disposed of at the Project or any part thereof, except for Hazardous Substances as are commonly and legally used or stored as a consequence of using the Demised Premises for general office and administrative purposes, but only so long as the quantities thereof do not pose a threat to public health or to the environment or would necessitate a "response action", as that term is defined in CERCLA (as hereinafter defined), and so long as Tenant strictly complies or causes compliance with all 13 applicable governmental rules and regulations concerning the use or production of such Hazardous Substances, at the time such materials are placed in or on the Land, Building or the Demised Premises. For purposes of this Article 43, "Hazardous Substances" shall mean and include those elements or compounds which are contained in the list of Hazardous Substances adopted by the United States Environmental Protection Agency (EPA) or the list of toxic pollutants designated by Congress or the EPA which are defined as hazardous, toxic, pollutant, infectious or radioactive by any other federal, state or local statute, law, ordinance, code, rule, regulation, order or decree regulating, relating to or imposing liability (including, without limitation, strict liability) or standards of conduct concerning, any hazardous, toxic or dangerous waste, substance or material, as now or at any time hereinafter in effect (collectively "Environmental Laws"). Tenant hereby agrees to indemnify Landlord and hold Landlord harmless from and against any and all losses, liabilities, including strict liability, damages, injuries, expenses, including reasonable attorneys' fees, costs of settlement or judgment and claims of any and every kind whatsoever paid, incurred or suffered by, or asserted against, Landlord by any person, entity or governmental agency for, with respect to, or as a direct or indirect result of Tenant's breach of this paragraph 43 (including, without limitation, any losses, liabilities, including strict liability, damages, injuries, expenses, including reasonable attorneys' fees, costs of any settlement or judgment or claims asserted or arising under the Comprehensive Environmental Response, Compensation and Liability Act ["CERCLA"], any so-called federal, state or local "Superfund" or "Superlien" laws or any other Environmental Law); provided, however, that the foregoing indemnity is limited to matters arising solely from Tenant's violation of the covenant contained in this Article. The obligations of Tenant under this Article shall survive any expiration or termination of this Lease. See Special Stipulation No. 16. 44. SUBMISSION OF LEASE. The submission of this Lease for examination does not constitute an offer to lease and this Lease shall be effective only upon execution hereof by Landlord and Tenant. 45. SEVERABILITY. If any clause or provision of the Lease is illegal, invalid or unenforceable under present or future laws, the remainder of this Lease shall not be affected thereby, and in lieu of each clause or provision of this Lease which is illegal, invalid or unenforceable, there shall be added as a part of this Lease a clause or provision as nearly identical to the said clause or provision as may be legal, valid and enforceable. 46. ENTIRE AGREEMENT. This Lease contains the entire agreement of the parties and no representations, inducements, promises or agreements, oral or otherwise, between the parties not embodied herein shall be of any force or effect. No failure of Landlord to exercise any power given Landlord hereunder, or to insist upon strict compliance by Tenant with any obligation of Tenant hereunder, and no custom or practice of the parties at variance with the terms hereof, shall constitute a waiver of Landlord's right to demand exact compliance with the terms hereof. This Lease may not be altered, waived, amended or extended except by an instrument in writing signed by Landlord and Tenant. This Lease is not in recordable form, and Tenant agrees not to record or cause to be recorded this Lease or any short form or memorandum thereof. 47. HEADINGS. The use of headings herein is solely for the convenience of indexing the various paragraphs hereof and shall in no event be considered in construing or interpreting any provision of this Lease. 48. BROKER. Broker(s) [as defined in Article 1(n)] is(are) entitled to a leasing commission from Landlord by virtue of this Lease, which leasing commission shall be paid by Landlord to Broker(s) in accordance with the terms of a separate agreement between Landlord and Broker(s). Tenant represents and warrants to Landlord that [except with respect to any Broker(s) identified in Article 1(n) hereinabove, which has(have) acted as agent for Tenant (and not for Landlord) in this transaction] no broker, agent, commission salesperson, or other person has represented Tenant in the negotiations for and procurement of this Lease and that [except with respect to any Broker(s) identified in Article 1(n) hereinabove] no commissions, fees or compensation of any kind are due and payable in connection herewith to any broker, agent, commission salesperson or other person as a result of any act or agreement of Tenant. Tenant agrees to indemnify and hold Landlord harmless from all loss, liability, damage, claim, judgment, cost or expense (including reasonable attorneys' fees and court costs) suffered or incurred by Landlord as a result of a breach by Tenant of the representation and warranty contained in the immediately preceding sentence or as a result of Tenant's failure to pay commissions, fees or compensation due to any broker who represented Tenant, whether or not disclosed, or as a result of any claim for any fee, commission or similar compensation with respect to this Lease made by any broker, agent or finder [other than the Broker(s) identified in Article 1(n) hereinabove] claiming to have dealt with Tenant with respect to the Lease, whether or not such claim is meritorious. The parties hereto do hereby acknowledge and agree that COMPASS Management and Leasing, Inc., a subsidiary of Equitable Real Estate Investment Management, Inc., has acted as agent for Landlord in this transaction and shall be paid a commission by Landlord in connection with this transaction pursuant to the terms of a separate written commission agreement. COMPASS Management and Leasing, Inc. has not acted as agent for Tenant in this transaction. Landlord hereby warrants and represents to Tenant that Landlord has not dealt with any broker, agent or finder other than COMPASS Management and Leasing, Inc. and Broker as defined in subparagraph 1(n) in connection with this Lease, and, Landlord hereby agrees to indemnify and hold Tenant harmless from and against any and all loss, damage, liability, claim, judgment, cost or expense (including, but not limited to, reasonable attorneys' fees and court costs) that may be incurred or suffered by Tenant because of any claim for any fee, commission or similar compensation with respect to this Lease made by any broker, agent or finder claiming to have represented Landlord. 49. GOVERNING LAW. The laws of the State of Georgia shall govern the validity, performance and enforcement of this Lease. 50. AUTHORITY. If Tenant executes this Lease as a corporation, Tenant does hereby represent and warrant that Tenant is a duly incorporated or a duly qualified (if a foreign corporation) corporation and is fully authorized and qualified to do business in the State in which the Demised Premises are located, that the corporation has full right and authority to enter into this Lease, and that each person signing on behalf of the corporation is an officer of the corporation and is authorized to sign on behalf of the corporation. If Tenant signs as a partnership, joint venture or sole proprietorship or other 14 business entity (each being herein called "Entity"), each of the persons executing on behalf of Tenant does hereby covenant and warrant that Tenant is a duly authorized and existing Entity, that Tenant has full right and authority to enter into this Lease, that all persons executing this Lease on behalf of the Entity are authorized to do so on behalf of the Entity, and that such execution is fully binding upon the Entity and its partners, joint venturers or principal, as the case may be. Upon the request of Landlord, Tenant shall deliver to Landlord documentation satisfactory to Landlord evidencing Tenant's compliance with this Article, and Tenant agrees to promptly execute all necessary and reasonable applications or documents as reasonably requested by Landlord, required by the jurisdiction in which the Demised Premises is located, to permit the issuance of necessary permits and certificates for Tenant's use and occupancy of the Demised Premises. 51. JOINT AND SEVERAL LIABILITY. If Tenant comprises more than one person, corporation, partnership or other entity, the liability hereunder of all such persons, corporations, partnerships or other entities shall be joint and several. 52. SPECIAL STIPULATIONS. The special stipulations attached hereto as EXHIBIT "F" are hereby incorporated herein by this reference as though fully set forth (if none, so state). To the extent the special stipulations conflict with or are inconsistent with the foregoing provisions of this Lease or any exhibit to this Lease, the special stipulations shall control. IN WITNESS WHEREOF, the parties have hereunto set their hands and seals as of the day, month and year first above written. "LANDLORD": ZML-CENTRAL PARK, L.L.C., a Delaware Limited Liability Company BY: EQUITY OFFICE HOLDINGS, L.L.C., as agent Date executed by Landlord By: /s/ Arvid Povilaitis ------------------------------------------- 11/6/95 Arvid Povilaitis - ------------------- Title: Vice President ---------------------------------------- "TENANT": ACTAMED CORP., a Georgia corporation Date executed by Tenant By: /s/ Nancy J. Ham 10/2/95 ------------------------------------------- - ----------- Title: Chief Financial Officer ---------------------------------------- Attest: --------------------------------------- Title: --------------------------------------- [CORPORATE SEAL] Exhibits Attached Rules and Regulations Exhibit "A" - Legal Description of Building 7000 Exhibit "A-1" - Storage Space Exhibit "B" - Floor Plan Exhibit "C" - Supplemental Notice Exhibit "D" - Landlord's Construction Exhibit "E" - Building Standard Services Exhibit "F" - Special Stipulations Exhibit "G" - Janitorial Specifications 15 ADDENDUM This Addendum is entered into as of the 6th day of November, 1995 by and between ZML-Central Park, L.L.C., a Delaware Limited Liability Company ("Landlord") by its agent Equity Office Holdings, L.L.C., a Delaware Limited Liability Company, and Actamed Corp., a Georgia Corporation ("Tenant"). WITNESSETH: WHEREAS, simultaneously with the execution of this Addendum, Landlord and Tenant have entered into that certain lease of even date herewith (the "Lease") for approximately 41,292 square feet of Rentable Floor Area on the 4th and 6th floors of the building located at 7000 Central Parkway, Atlanta, Georgia and commonly known as Central Park (the "Building"), all as more particularly described in the Lease; and WHEREAS, Landlord and Tenant desire to modify certain terms and conditions of the Lease as set forth herein; NOW, THEREFORE, in consideration of the mutual covenants set forth herein and other good and valuable consideration, the sufficiency and receipt of which is acknowledge, Landlord and Tenant agree as follows: 1. TERM. Article 3 of the Lease is hereby amended by adding the following language at the end thereof: "Notwithstanding anything herein to the contrary, if Landlord determines that it will be unable to substantially complete the Additional Space by sixty (60) days after the scheduled Rental Commencement Date for the Additional Space (the "Outside Completion Date"), Landlord shall have the right to provide Tenant with written notice (the "Outside Extension Notice") of such inability, which Outside Extension Notice shall set forth the date on which Landlord reasonably believes that it will be able to substantially complete the Additional Space. Upon receipt of the Outside Extension Notice, Tenant shall have the right to terminate this Lease by providing written notice of termination to Landlord within five (5) business days after the date of the Outside Extension Notice. In the event that Tenant does not terminate this Lease within such five (5) business day period, the Outside Completion Date shall automatically be amended to be the date set forth in Landlord"s Outside Extension Notice." 2. RELOCATION OF PREMISES. Article 38 of the Lease is hereby amended by deleting the words "INTENTIONALLY DELETED" and adding the following in lieu thereof: "In the event that: (i) Tenant leases First Refusal Space (as defined in Exhibit F) on any floor of the Building other than the 4th and 6th floors; and (ii) such First Refusal Space, when combined with any other space already leased by Tenant on such floor, equals a total of less than 6,000 rentable square feet, then Landlord, at its expense, shall be entitled to cause Tenant to relocate from such First Refusal Space to space containing comparable improvements and approximately the same Rentable Area as the First Refusal Space (the "Relocation Space") SECOND AMENDMENT This Second Amendment (the "Amendment") is made and entered into as of the 22nd day of April 1996, by and between ZML-Central Park, L.L.C., a Delaware limited liability company "Landlord") by its agent, Equity Office Holdings, L.L.C., a Delaware limited liability company and ActaMed Corporation, a Georgia corporation ("Tenant"). WITNESSETH A. WHEREAS, Landlord and Tenant are parties to that certain Lease Agreement dated the 4th day of November, 1995 as amended by that certain Addendum dated the 6th day of November, 1995, for approximately 41,292 rentable square feet of space described as Suite No(s). 400 and 600 on the fourth (4th) and sixth (6th) floor(s) of the building commonly known as 7000 Central Park and the address of which is 7000 Central Parkway, Atlanta, Georgia (the "Building"); and B. WHEREAS, Tenant has requested that additional space consisting of 2,404 rentable square feet on the third (3rd) floor of the Building shown on Exhibit A hereto (the "Expansion Space") be added to the Premises and that the Lease be appropriately amended, and Landlord is willing to do the same on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree as follows: I. EXPANSION AND EFFECTIVE DATE. Effective as of the Expansion Effective Date (as hereinafter defined), the Premises is increased from 41,292 rentable square feet on the fourth (4th) and sixth (6th) floor(s) to 43,696 rentable square feet on the third (3rd), fourth (4th) and sixth (6th) floor(s) by the addition of the Expansion Space. The lease term for the Expansion Space shall commence on the Expansion Effective Date and end at 5:00 p.m. on the last day following thirty-six (36) calendar months following the Expansion Effective Date (the "Expansion Space Termination Date"). The Expansion Space is subject to all the terms and conditions of the Lease except as expressly modified herein and except that Tenant shall not be entitled to receive any allowances, abatement or other financial concession granted with respect to the Premises unless such concessions are expressly provided for herein with respect to the Expansion Space. A. The Expansion Effective Date shall be April 22, 1996 ("Expansion Effective Date"). II. MONTHLY BASE RENTAL. In addition to Tenants' obligation to pay Base Rental for the Premises, Tenant shall pay Landlord the sum of One Hundred Sixty-two Thousand Two Hundred Seventy and 00/100's Dollars ($165,539.40) as Base Rental for the Expansion Space in Thirty-six monthly installments as follows: A. Twelve equal installments of Four Thousand Five Hundred Seven and 50/100's Dollars ($4,507.50) each payable on or before the first day of each month during the period beginning April 22, 1996 and ending April 21, 1997. B. Twelve equal installments of Four Thousand Five Hundred Ninety-seven and 65/100's Dollars ($4,597.65) each payable on or before the first day of each month during the period beginning April 22, 1997 and ending April 21, 1998. C. Twelve equal installment of Four Thousand Six Hundred Eighty-nine and 80/100's Dollars ($4,689.80) each payable on or before the first day of each month during the period beginning April 22, 1998 and ending April 21, 1999. All such Base Rental shall be payable by Tenant in accordance with the terms of Article V of the Lease. III. TENANT'S PRO RATA SHARE. For the period commencing with the Expansion Effective Date and ending on the Expansion Space Termination Date unless terminated sooner as provided herein, Tenants Pro Rata Share for purposes of calculating Tenant's Additional Rental for the Expansion Space is Fifty-nine One Hundredths percent (.59%). IV. BASE YEAR, BASE AMOUNT, TAX BASE, AND EXPENSE BASE. For the period commencing with the Expansion Effective Date and ending on the Expansion Space Termination Date, the Base Year for the computation of Tenant's Pro Rata Share of Basic Costs applicable to the Expansion Space is 1996. V. IMPROVEMENTS TO EXPANSION SPACE. A. ACCEPTANCE OF EXPANSION SPACE. Tenant has inspected the Expansion Space and agrees to accept the same "as is" without any agreements, representations, understandings or obligations on the part of Landlord to perform any alterations, repairs or improvements, except as may be expressly provided otherwise in this Amendment. B. OCCUPANCY OF EXPANSION SPACE. Tenant shall have the right to take occupancy of the Expansion Space on April 22, 1996. Tenant may elect to perform improvements or have Landlord perform improvements to the Expansion Space thereafter. C. COST OF IMPROVEMENTS TO EXPANSION SPACE. Provided Tenant is not in default, Tenant shall be entitled to receive an improvement allowance (the "Expansion Improvement Allowance") in an amount not to exceed Nineteen Thousand Five Hundred Ninety-two and 60/100 Dollars ($19,592.60) to be applied toward the cost of performing initial construction, alteration or improvement of the Expansion Space, including but not limited to the cost of space planning, design and related architectural and engineering services and a five percent (5%) construction management fee if Tenant elects to have Landlord manage the construction of the Expansion Space. In the event the total cost of the initial improvements to the Expansion Space exceeds the Expansion Improvement Allowance, Tenant shall pay for such excess upon demand. Any unused Expansion Improvement Allowance may be used by Tenant for improvements in the original Premises within eight (8) months after the Expansion Effective Date or if not used within said eight (8) months, accrue to the sole benefit of Landlord. Landlord shall pay such Expansion Improvement Allowance directly to the contractors retained to perform the construction, design or related improvement work to the Expansion Space. D. RESPONSIBILITY FOR IMPROVEMENTS TO EXPANSION SPACE. (i) WORK PERFORMED BY OR ON BEHALF OF LANDLORD PURSUANT TO PLANS YET TO BE PREPARED. If Tenant elects to have Landlord manage the construction of the Expansion Space, Landlord shall enter into a direct contract for the initial improvements to the Expansion Space with a general contractor selected by Landlord. Tenant shall devote such time in consultation with Landlord or Landlord's architect as may be required to provide all information Landlord deems necessary in order to enable Landlord to complete, and obtain Tenant's written approval of, the plans for the initial improvements to the Expansion Space in a timely manner. All plans for the initial improvements to the Expansion Space shall be subject to Landlord's consent, which consent shall not be unreasonably withheld. If the cost of such improvements exceeds the Expansion Improvement Allowance, then prior to commencing any construction of improvements to the Expansion Space, Landlord shall submit to Tenant a written estimate setting forth the anticipated cost, including but not limited to the cost of space planning, design and related architectural and engineering services, labor and materials, contractor's fees, and permit fees. Within a reasonable time thereafter, Tenant shall either notify Landlord in writing of its approval of the cost estimate or specify its objections thereto and any desired changes to the proposed improvements. In the event Tenant notifies Landlord of such objections and desired changes, Tenant shall work with Landlord to reach a mutually acceptable alternative cost estimate. VI. RIGHT TO TERMINATE. Provided Tenant is not in default under the Lease, as amended, Tenant shall have a one-time right to terminate the Lease with respect to the Expansion Space only as defined by this Second Amendment effective as of October 21, 1997 (the "Early Termination Date") subject to the following terms and conditions: A. Tenant shall notify Landlord in writing of its desire to terminate the Lease with respect to the Expansion space no less than six (6) months prior to the Early Termination Date. B. Tenant shall pay to Landlord no later than October 1, 1997 a termination fee equal to Thirty-five Thousand three Hundred Ninety-eight and 90/100 Dollars ($35,398.90) which is the (i) unamortized Expansion Improvement Allowance (at 13%), (ii) the difference between a Base Rental Rate of $22.50 and $25.00 for twelve (12) months and the difference between a Base Rental Rate of $22.95 and $25.00 for six (6) months and (iii) three (3) months rent at $25.00 per rentable square foot. C. Tenant shall vacate the Expansion Space effective October 21, 1997 and leave same in broom clean condition. VII. MISCELLANEOUS. A. This Second Amendment sets forth the entire agreement between the parties with respect to the matters set forth herein. There have been no additional oral or written representations or agreements. B. Except as herein modified or amended, the provisions, conditions and terms of the Lease shall remain unchanged and in full force and effect. C. In the case of any inconsistency between the provisions of the Lease and this Second Amendment, the provisions of this Amendment shall govern and control. D. Submission of this Second Amendment by Landlord is not an offer to enter into this Second Amendment but rather is a solicitation for such an offer by Tenant. Landlord shall not be bound by this Second Amendment until Landlord has executed and delivered the same to Tenant. E. The capitalized terms used in this Second Amendment shall have the same definitions as set forth in the Lease to the extent that such capitalized terms are defined therein and not redefined in this Second Amendment. F. This Second Amendment shall be of no force and effect unless and until accepted by any guarantors of the Lease, who by signing below shall agree that their guarantee shall apply to the Lease as amended herein, unless such requirement is waived by Landlord in writing. G. Landlord and Tenant each warrant and represent to the other that CB Commercial Real Estate Services ("Broker") has represented Tenant in connection with the negotiations of the Second Amendment and that Equity Office Properties, L.L.C. ("Co-Broker"), collectively "Brokers", has represented Landlord, and it knows of no other real estate broker, agent or finder other than the Brokers who is entitled to any commission in connection with this Second Amendment. Landlord and Tenant each covenant and agree to defend, indemnify and hold the other harmless from and against any and all loss, liability, damage, claim, judgment, cost or expense (including, but not limited to, reasonable attorneys' fees and expenses and court costs) that may be incurred or suffered by the other because of any claim for any fee, commission or similar compensation with respect to the Second Amendment made by any broker, agent or finder claiming to have dealt with the indemnifying party whether or not such claim is meritorious. Landlord agrees to pay the commission due Brokers in connection with this Second Amendment pursuant to a separate written commission agreement. The parties hereby acknowledge CB Commercial Real Estate Services has represented Tenant and Equity Office Properties, L.L.C. has represented Landlord in this transaction. IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Second Amendment as of the day and year first above written. WITNESSES; ATTESTATION LANDLORD:ZML-Central Park, L.L.C., a Delaware limited liability company BY: EQUITY OFFICE HOLDINGS, L.L.C., a Delaware limited liability company as agent By: /s/ Arvid A. Povilaitis -------------------------------- /s/ Angel Rivera - ---------------------------- Name (print): Angel Rivera Name: /s/ Arvid A Povilaitis -------------- ------------------------------ /s/ illegible - ---------------------------- Title: VP -- ASSET MANAGEMENT ----------------------------- Name (print): illegible - ---------------------------- Date: ------------------------------ TENANT: ActaMed Corporation, a Georgia corporation /s/ Mary Lee Lockhart - ---------------------------- By: /s/ Nancy J. Ham -------------------------------- Name (print): Mary Lee Lockhart /s/ Katherine B. Grissom Its: CFO - ---------------------------- ------------------------------- Name (print): Katherine B. Grissom Date: 4/22/96 --------------------- ------------------------------ EXHIBIT A This Exhibit is attached to and made a part of the Third Amendment dated April 22nd, 1996, by and between ZML-Central Park, L.L.C., a Delaware limited liability company ("Landlord"), by its agent Equity Office Holdings, L.L.C., a Delaware limited liability company and ActaMed Corporation, a Georgia corporation ("Tenant") for space in the Building located at 7000 Central Parkway, Atlanta, Georgia. The Expansion Space shall consist of 2,404 rentable square feet located on the third (3rd) floor in the Building commonly known as 7000 Central Park in the approximate location outlined below. [MAP] THIRD AMENDMENT This Third Amendment (the "Amendment") is made and entered into as of the 9th day of February, 1998, by and between EOP-Central Park, L.L.C., a Delaware limited liability company ("Landlord"), and ActaMed Corporation, a Georgia corporation ("Tenant"). WITNESSETH A. WHEREAS, Landlord (f/k/a ZML-Central Park, L.L.C.) and Tenant are parties to that certain lease dated the 6th day of November, 1995, for space currently containing approximately 43,696 rentable square feet of space (the "Original Premises") described as Suite No(s). 370, 400, and 600 on the Third, Fourth, and Sixth floor(s) of the building commonly known as Central Park and the address of which is 7000 Central Parkway, Atlanta, GA 30328 (the "Building"), which lease has been previously amended or assigned by instrument(s) dated November 6, 1995 and April 22, 1996 (collectively, the "Lease"); and B. WHEREAS, Tenant desires to surrender a portion of the Premises to Landlord containing approximately 2,404 rentable square feet on the Third floor(s) of the Building as shown on EXHIBIT A hereto (the "Reduction Space") and that the Lease be appropriately amended, and Landlord is willing to accept such surrender on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree as follows: I. REDUCTION. Effective as of December 31, 1997 (the "Reduction Effective Date"), the Premises is decreased from 43,696 rentable square feet on the Third, Fourth and Sixth floor(s) to 41,292 rentable square feet on the Fourth and Sixth floor(s) by the elimination of the Reduction Space. As of the Reduction Effective Date, the Reduction Space shall be deemed surrendered by Tenant to Landlord, the Lease shall be deemed terminated with respect to the Reduction Space, and the "Premises", as defined in the Lease, shall be deemed to mean the Original Premises, less the Reduction Space. Tenant shall fully comply with all obligations under the Lease respecting the Reduction Space through the Reduction Effective Date, including those provisions relating to the condition of the Reduction Space and removal of Tenant's Property therefrom upon termination or expiration of the Lease. Landlord acknowledges that Tenant has surrendered the Reduction Space as of the Reduction Effective Date and Tenant will not be subject to any holdover provisions as defined in the Lease, as it relates to the Reduction Space. Landlord also acknowledges that the Reduction Space was returned to it in broom clean condition. II. MONTHLY BASE RENTAL. As of the Reduction Effective Date, the schedule of monthly installments of Base Rental contained in the Second Amendment is hereby deleted. III. TENANT'S PRO RATA SHARE. For the period commencing with the Reduction Effective Date, Tenant's Pro Rata Share as contained in the Second Amendment is hereby deleted. IV. REPRESENTATIONS. Each party represents to the other that it has full power and authority to execute this Amendment. Tenant represents that it has not made any assignment, sublease, transfer, conveyance of the Lease or any interest therein or in the Reduction Space other than those explicitly recited herein and further represents that there is not and will not hereafter be any claim, demand, obligation, liability, action or cause of action by any other party respecting, relating to or arising out of the Reduction Space, and Tenant agrees to indemnify and hold harmless Landlord and the Landlord Related Parties (as defined in the "Miscellaneous" Section below) from all liabilities, expenses, claims, demands, judgments, damages or costs arising from any of the same, including without limitation, attorneys' fees. Tenant acknowledges that Landlord will be relying on this Amendment in entering into leases for the Reduction Space with other parties. VII. MISCELLANEOUS. A. This Amendment sets forth the entire agreement between the parties with respect to the matters set forth herein. There have been no additional oral or written representations or agreements. Under no circumstances shall Tenant be entitled to any Rent abatement, improvement allowance, leasehold improvements, or other work to the Premises, or any similar economic incentives that may have been provided Tenant in connection with entering into the Lease, unless specifically set forth in this Amendment. This Amendment shall not be relied upon by any other party, individual, corporation, partnership or entity as a basis for reducing its lease obligations with Landlord. Tenant agrees that it shall not disclose any matters set forth in this Amendment or disseminate or distribute any information concerning the terms, details or conditions hereof to any person, firm or entity without obtaining the express written consent of Landlord. B. Except as herein modified or amended, the provisions, conditions and terms of the Lease shall remain unchanged and in full force and effect. C. In the case of any inconsistency between the provisions of the Lease and this Amendment, the provisions of this Amendment shall govern and control. D. Submission of this Amendment by Landlord is not an offer to enter into this Amendment but rather is a solicitation for such an offer by Tenant. Landlord shall not be bound by this Amendment until Landlord has executed and delivered the same to Tenant. E. The capitalized terms used in this Amendment shall have the same definitions as set forth in the Lease to the extent that such capitalized terms are defined therein and not redefined in this Amendment. F. Tenant hereby represents to Landlord that Tenant has dealt with no broker in connection with this Amendment. Tenant agrees to indemnify and hold Landlord, its members, principals, beneficiaries, partners, officers, directors, employees, mortgagee(s) and agents, and the respective principals and members of any such agents (collectively, the "Landlord Related Parties") harmless from all claims of any brokers claiming to have represented Tenant in connection with this Amendment. Landlord hereby represents to Tenant that Landlord has dealt with no broker in connection with this Amendment. Landlord agrees to indemnify and hold Tenant, its members, principals, beneficiaries, partners, officers, directors, employees, and agents, and the respective principals and members of any such agents (collectively, the "Tenant Related Parties") harmless from all claims of any brokers claiming to have represented Landlord in connection with this Amendment. 2 IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Amendment as of the day and year first above written. WITNESS/ATTEST: LANDLORD: EOP-CENTRAL PARK, L.L.C., A DELAWARE LIMITED LIABILITY COMPANY By: EOP Operating Limited Partnership, a Delaware limited partnership, its managing member By Equity Office Properties Trust, a Maryland real estate investment trust, its managing general partner By: - ----------------------------------- -------------------------------- Name (print): Name: ---------------------- ------------------------------ Title: - ----------------------------------- ----------------------------- Name (print): ---------------------- TENANT: ACTAMED CORPORATION, a Georgia corporation /s/ Katherine B. Grissom By: /s/ Lewis R. Belote - ----------------------------------- -------------------------------- Name: Lewis R. Belote, II -------------------------------- Pat N. Daer - ----------------------------------- Title: Senior VP & CFO ----------------------------- 3 EX-10.20 17 EX-10.20 HEALTHEON CORPORATION SECURITIES PURCHASE AGREEMENT INITIAL CLOSING: JANUARY 26, 1996 SUBSEQUENT CLOSING: August 15, 1996 TABLE OF CONTENTS
Page ---- SECTION 1 - Authorization and Sale of Stock. . . . . . . . . . . . 1 1.1 Authorization . . . . . . . . . . . . . . . . . . . . . 1 1.2 Sale of Stock . . . . . . . . . . . . . . . . . . . . . 1 SECTION 2 - Closing Date; Delivery . . . . . . . . . . . . . . . . 1 2.1 Closing Date. . . . . . . . . . . . . . . . . . . . . . 1 2.2 Subsequent Closing. . . . . . . . . . . . . . . . . . . 2 2.3 Delivery. . . . . . . . . . . . . . . . . . . . . . . . 2 SECTION 3 - Representations and Warranties of the Company. . . . . 2 3.1 Organization and Standing; Certificate and Bylaws . . . 2 3.2 Corporate Power . . . . . . . . . . . . . . . . . . . . 2 3.3 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . 3 3.4 Capitalization. . . . . . . . . . . . . . . . . . . . . 3 3.5 Authorization . . . . . . . . . . . . . . . . . . . . . 3 3.6 Title to Properties and Assets; Liens, etc. . . . . . . 3 3.7 Financial Statements. . . . . . . . . . . . . . . . . . 4 3.8 Activities Since Balance Sheet Date . . . . . . . . . . 4 3.9 Tax Returns and Payments. . . . . . . . . . . . . . . . 5 3.10 Patents, Trademarks, etc. . . . . . . . . . . . . . . . 5 3.11 Material Contracts and Commitments. . . . . . . . . . . 5 3.12 Compliance with Other Instruments, None Burdensome, etc. . . . . . . . . . . . . . . . . . . . 6 3.13 Litigation, etc.. . . . . . . . . . . . . . . . . . . . 6 3.14 Employees . . . . . . . . . . . . . . . . . . . . . . . 6 3.15 Registration Rights . . . . . . . . . . . . . . . . . . 6 3.16 Governmental Consent, etc.. . . . . . . . . . . . . . . 6 3.17 Brokers or Finders. . . . . . . . . . . . . . . . . . . 7 3.18 Disclosures . . . . . . . . . . . . . . . . . . . . . . 7 3.19 Permits . . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 4 - Representations and Warranties of the Investors. . . . 7 4.1 Authorization . . . . . . . . . . . . . . . . . . . . . 7 4.2 Purchase Entirely for Own Account . . . . . . . . . . . 7 4.3 Investment Experience . . . . . . . . . . . . . . . . . 8 4.4 Accredited Investor . . . . . . . . . . . . . . . . . . 8 4.5 No Public Market. . . . . . . . . . . . . . . . . . . . 8 4.6 Receipt of Information. . . . . . . . . . . . . . . . . 8 4.7 Restricted Securities . . . . . . . . . . . . . . . . . 8 4.8 Further Limitations on Disposition. . . . . . . . . . . 9
-i- TABLE OF CONTENTS (continued)
Page ---- 4.9 Legends . . . . . . . . . . . . . . . . . . . . . . . . 9 4.10 Government Consents . . . . . . . . . . . . . . . . . .10 SECTION 5 - Conditions to Closing of Investors . . . . . . . . . .10 5.1 Representations and Warranties Correct. . . . . . . . .10 5.2 Covenants . . . . . . . . . . . . . . . . . . . . . . .10 5.3 Opinion of Company's Counsel. . . . . . . . . . . . . .10 5.4 Compliance Certificate. . . . . . . . . . . . . . . . .10 5.5 Blue Sky. . . . . . . . . . . . . . . . . . . . . . . .10 5.6 Board of Directors. . . . . . . . . . . . . . . . . . .10 5.7 Restated Certificate. . . . . . . . . . . . . . . . . .11 5.8 No Material Adverse Change. . . . . . . . . . . . . . .11 5.9 Investors' Rights Agreement . . . . . . . . . . . . . .11 SECTION 6 - Conditions to Closing of Company . . . . . . . . . . .11 6.1 Representations . . . . . . . . . . . . . . . . . . . .11 6.2 Blue Sky. . . . . . . . . . . . . . . . . . . . . . . .11 6.3 Restated Certificate. . . . . . . . . . . . . . . . . .11 SECTION 7 - Miscellaneous. . . . . . . . . . . . . . . . . . . . .11 7.1 Governing Law . . . . . . . . . . . . . . . . . . . . .11 7.2 Survival. . . . . . . . . . . . . . . . . . . . . . . .11 7.3 Successors and Assigns. . . . . . . . . . . . . . . . .11 7.4 Entire Agreement; Amendment . . . . . . . . . . . . . .12 7.5 Notices, etc. . . . . . . . . . . . . . . . . . . . . .12 7.6 Delays or Omissions . . . . . . . . . . . . . . . . . .12 7.7 California Corporate Securities Law . . . . . . . . . .12 7.8 Expenses. . . . . . . . . . . . . . . . . . . . . . . .13 7.9 Counterparts. . . . . . . . . . . . . . . . . . . . . .13 7.10 Severability. . . . . . . . . . . . . . . . . . . . . .13 7.11 Gender. . . . . . . . . . . . . . . . . . . . . . . . .13
-ii- EXHIBITS A. Schedule of Investors B. Restated Certificate of Incorporation C. Exceptions to Representations and Warranties of the Company D. Amended and Restated Investors' Rights Agreement E. Form of Opinion of Wilson Sonsini Goodrich & Rosati HEALTHEON CORPORATION AMENDED AND RESTATED SECURITIES PURCHASE AGREEMENT This Amended and Restated Securities Purchase Agreement (the "Agreement") is made as of August 15, 1996, by and among Healtheon Corporation, a Delaware corporation (the "Company"), with its principal office at 87 Encina Avenue, Palo Alto, California 94301, and the persons and entities listed on the Schedule of Investors attached as Exhibit A hereto (the "Investors"). SECTION 1 AUTHORIZATION AND SALE OF STOCK 1.1 AUTHORIZATION. The Company has authorized the sale and issuance of up to 1,000,000 shares of its Common Stock ("Common Stock") and up to 10,285,000 shares of its Series A Preferred Stock ("Series A Preferred"), each having the rights, restrictions, privileges and preferences as set forth in the Company's Restated Certificate of Incorporation in the form attached to this Agreement as Exhibit B (the "Restated Certificate"). 1.2 SALE OF STOCK. Subject to the terms and conditions hereof, the Company will issue and sell to the Investors, and the Investors will buy from the Company, the number of shares (the "Shares") of Common Stock and Series A Preferred specified opposite each Investor's name on the Schedule of Investors, at a cash purchase price of $0.05 per share and $0.50 per share, respectively. The Company's agreements with each of the Investors are separate agreements, and the sales of the Shares to each of the Investors are separate sales. SECTION 2 CLOSING DATE; DELIVERY 2.1 CLOSING DATE. The initial closing of the purchase and sale of the Shares hereunder (the "Closing") shall be held at 3:00 p.m. on January 26, 1996 or on such later date or dates as the Company and the Investors may agree to (the date of such Closing being referred to as the "Closing Date"). The place of the Closing (including the place of delivery to the Investors by the Company of the certificates evidencing all shares of Common Stock and Series A Preferred being purchased and the place of payment to the Company by the Investors of the purchase price therefor) shall be at the offices of Wilson Sonsini Goodrich & Rosati, Professional Corporation, 650 Page Mill Road, Palo Alto, California 94304-1050, or such other place as the Investors and the Company may mutually agree. The date of any closing of the transactions contemplated by this Agreement is sometimes also referred to herein as the "Closing Date." 2.2 SUBSEQUENT CLOSING. The Company may, in its sole discretion, provide for deferred closings hereunder (the "Subsequent Closings"), to be held at the offices of Wilson, Sonsini, Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California, at such time and dates as the Company may determine (the date of such Subsequent Closing being referred to as the "Subsequent Closing Date"). The persons entitled to purchase shares of Series A Preferred pursuant to this Section 2.2 will be limited to those individuals and entities who, based on their reputations, experience and contacts within the Company's business, the Board of Directors unanimously believes can contribute to the success of the Company (the "Friends of the Company"). The Closing(s) for the Friends of the Company will take place as promptly as possible following the initial Closing hereunder. The number of shares of Series A Preferred which each such Friend of the Company shall be entitled to purchase, shall be determined within the sole discretion of the Company, but in no event shall the total number of shares of Series A Preferred sold pursuant to this Agreement be more than 10,285,000. Upon completion of each Subsequent Closing, if any, all additional purchasers of shares of Series A Preferred shall be considered "Investors" within the meaning of this Agreement. 2.3 DELIVERY. At the Closing and any Subsequent Closing, the Company will deliver to each Investor a certificate or certificates representing the number of Shares designated in column 2 of the Schedule of Investors to be purchased by each Investor, against payment of the purchase price therefor, by check or wire transfer payable to the Company, or by cancellation of outstanding indebtedness from the Company to such Investor, or by a combination thereof, in the amount specified in column 3 of the Schedule of Investors. SECTION 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY Except as set forth on Exhibit C attached hereto, the Company hereby represents and warrants to the Investors as follows: 3.1 ORGANIZATION AND STANDING; CERTIFICATE AND BYLAWS. The Company is a corporation duly organized and existing under, and by virtue of, the laws of the State of Delaware and is in good standing under such laws. The Company has requisite corporate power to own and operate its properties and assets, and to carry on its business as presently conducted and as proposed to be conducted. The Company is not qualified to do business as a foreign corporation in any jurisdiction and such qualification is not presently required. 3.2 CORPORATE POWER. The Company will have at the Closing Date all requisite corporate power to execute and deliver this Agreement and the Amended and Restated Investors' Rights Agreement attached hereto as Exhibit D (the "Investors' Rights Agreement"), to sell and issue the -2- Shares hereunder, to issue the underlying Series A-1 Preferred Stock (the "Series A-1 Preferred") and Common Stock (together, the "Conversion Stock") in accordance with the provisions of the Restated Certificate, and to carry out and perform its obligations under the terms of this Agreement and the Investors' Rights Agreement. 3.3 SUBSIDIARIES. The Company has no subsidiaries or affiliated companies and does not otherwise own or control, directly or indirectly, any other corporation, association or business entity. 3.4 CAPITALIZATION. The authorized capital stock of the Company consists of 23,000,000 shares of Common Stock, 1,000,300 shares of which are issued and outstanding prior to the Closing, and 11,000,000 shares of Series A Preferred, 10,000,000 shares of which are issued and outstanding prior to the Closing and 11,000,000 shares of Series A-1 Preferred, none of which has been or will be issued or outstanding prior to the Closing. The Company has reserved (i) 10,285,000 shares of Series A Preferred for issuance hereunder, (ii) sufficient shares of Common Stock for issuance upon conversion of the Series A Preferred and/or Series A-1 Preferred, (iii) 10,285,000 shares of Series A-1 Preferred for issuance upon conversion of the Series A Preferred, (iv) 1,000,000 shares of Common Stock for issuance hereunder and (v) 9,000,000 shares of Common Stock for issuance to employees iv) 9,000,000 shares of Common Stock for issuance to employees and consultants pursuant to the Company's 1996 Stock Plan (of which 3,389,800 shares have been granted prior to the date hereof). The Series A Preferred and the Series A-1 Preferred shall have the rights, preferences, privileges and restrictions set forth in the Restated Certificate. There are no other options, warrants, conversion privileges or other rights presently outstanding to purchase or otherwise acquire any authorized but unissued shares of capital stock or other securities of the Company. Assuming the accuracy of each Investor's representations in Section 4 below, upon issuance, the Shares will have been issued in compliance with all federal and state securities laws. 3.5 AUTHORIZATION. All corporate action on the part of the Company, its directors and shareholders necessary for the authorization, execution, delivery and performance of this Agreement and the Investors' Rights Agreement by the Company, the authorization, sale, issuance and delivery of the Shares and the Conversion Stock and the performance of the Company's obligations hereunder has been taken or will be taken prior to the Closing. This Agreement and the Investors' Rights Agreement, when executed and delivered by the Company, shall constitute the valid and binding obligations of the Company enforceable in accordance with their respective terms except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, and other equitable remedies, and (iii) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal and state securities laws. The Shares, when issued in compliance with the provisions of this Agreement, will be validly issued and will be fully paid and nonassessable; the Series A-1 Preferred issuable upon conversion of the Series A Preferred has been duly and validly reserved and, when issued in compliance with the provisions of this Agreement, will be validly issued and will be fully paid and nonassessable and the Common Stock issuable upon conversion of the Series A Preferred and/or the Series A-1 Preferred has been duly and validly reserved and, when issued in compliance with the provisions of this Agreement, will be validly issued and will be fully -3- paid and nonassessable, and free of any liens or encumbrances (assuming the Investors take the Shares with no notice thereof) other than any liens or encumbrances created by or imposed upon the holders; provided, however, that the Shares and the Conversion Stock may be subject to restrictions on transfer under state or federal securities laws and restrictions set forth herein. 3.6 TITLE TO PROPERTIES AND ASSETS; LIENS, ETC. The Company has good and valid title to its properties and assets, and has good title to all its leasehold interests, in each case subject to no mortgage, pledge, lien, lease, encumbrance or charge, other than (i) the lien of current taxes not yet due and payable, and (ii) possible minor liens and encumbrances which do not in any case materially detract from the value of the property subject thereto or materially impair the operations of the Company, and which have not arisen otherwise than in the ordinary course of business. 3.7 FINANCIAL STATEMENTS. The Company has delivered to each Investor its unaudited financial statements (balance sheet and income statement) at June 30, 1996 and for the period from inception through June 30, 1996 (the "Financial Statements"). The Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated and with each other, except that the Financial Statements may not contain all footnotes required by generally accepted principles and are subject to normal year end adjustments. The Financial Statements fairly present the financial condition and operating results of the Company as of the dates, and for the periods, indicated therein. Except as set forth in the Financial Statements, the Company has no material liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to June 30, 1996, which individually or in the aggregate are not material to the financial condition or operating results of the Company, and (ii) obligations not required under generally accepted accounting principles to be reflected in the Financial Statements. 3.8 ACTIVITIES SINCE BALANCE SHEET DATE. Since the Company's balance sheet dated June 30, 1996 there has not been: (a) any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the assets, properties, financial condition, operating results, or business of the Company; (b) any waiver by the Company of a valuable right or of a material debt owed to it; (c) any material change or amendment to a material contract or arrangement by which the Company or any of its assets or properties is bound or subject, except for changes or amendments which are expressly provided for or disclosed in this Agreement; (d) any loans or guarantees made by the Company to or for the benefit of its employees, officers or directors, or any members of their immediate families, other than travel advances or other advances made in the ordinary course of business; -4- (e) any declaration, setting aside of payment or other distribution in respect of any of the Company's capital stock, or any direct or indirect redemption, purchase or other acquisition of any such stock by the Company; (f) any incurrance of indebtedness for money borrowed individually in excess of $50,000 or in excess of $100,000 in the aggregate; (g) any material change in any compensation arrangement or agreement with any employee; (h) any sale, assignment or transfer of any patents, trademarks, copyrights, trade secrets or other intangible assets; (i) any resignation or termination of employment of any key officer of the Company; and (j) to the Company's knowledge, any other event or condition or any character which would be reasonably likely to materially and adversely affect the assets, properties, financial condition, operating results or business of the Company; 3.9 TAX RETURNS AND PAYMENTS. The Company has timely filed all tax returns and reports when and as required by law and has never been audited by any state or federal taxing authority. All tax returns and reports of the Company, if applicable, are true and correct in all material respects. 3.10 PATENTS, TRADEMARKS, ETC. The Company owns or has the right, or prior to the Closing will own or have the right, to use, free and clear of all liens, charges, claims and restrictions, all patents, trademarks, service marks, trade names, copyrights, licenses and rights necessary to its business as now conducted, and is not, to the best of its knowledge, infringing upon or otherwise acting adversely to the right or claimed right of any person under or with respect to any of the foregoing. There are no outstanding options, licenses, or agreements of any kind relating to the foregoing, nor is the Company bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information, proprietary rights and processes of any other person or entity. The Company has not received any written communications alleging that the Company has violated or, by conducting its business as proposed, would violate any patent, trademark, service mark, trade name, copyright or trade secret or other proprietary right of any other person or entity. The Company is not aware that any 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 such employee's best efforts to promote the interests of the Company or that would conflict with the Company's business as proposed to be conducted. Neither the execution nor delivery of this Agreement, nor the carrying on of the Company's business by the employees of the Company, nor the conduct of the Company's business as proposed, will, to the Company's knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument -5- under which any of such employees is now obligated. The Company 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 the Company. 3.11 MATERIAL CONTRACTS AND COMMITMENTS. Neither the Company, nor, to the best knowledge of the Company, any third party is in default under any material contract, agreement or instrument to which the Company is a party. 3.12 COMPLIANCE WITH OTHER INSTRUMENTS, NONE BURDENSOME, ETC. The Company is not in violation of any term of the Restated Certificate of Incorporation or Bylaws, or in any material respect of any term or provision of any material mortgage, indenture, contract, agreement or instrument to which it is a party or by which it is bound, and to the best of its knowledge, is not in violation of any order, statute, rule or regulation applicable to the Company, which violation reasonably would be expected to have a material adverse effect on the Company's business or financial condition. The execution, delivery and performance of and compliance with this Agreement, and the issuance of the Shares and the Conversion Stock, have not resulted and will not result in any violation of, or conflict with, or constitute a default under, or result in the creation of, any material mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company. 3.13 LITIGATION, ETC. There are no actions, suits, proceedings or investigations pending against the Company or its properties before any court or governmental agency (nor, to the best of the Company's knowledge, is there any written threat thereof), which, either in any case or in the aggregate, reasonably would be expected to result in any material adverse change in the business or financial condition of the Company or any of its properties or assets, or in any material impairment of the right or ability of the Company to carry on its business as now conducted, and none which questions the validity of this Agreement or the Investors' Rights Agreement or any action taken or to be taken in connection herewith. The Company is not a party to, or to the best of its knowledge named in any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit or proceeding by the Company currently pending or that the Company currently intends to initiate. 3.14 EMPLOYEES. To the best of the Company's knowledge, no employee of the Company is in violation of any term of any employment contract, patent disclosure agreement or any other contract or agreement relating to the relationship of any such employee with the Company or any other party because of the nature of the business conducted or to be conducted by the Company. The Company does not have any collective bargaining agreements covering any of its employees. 3.15 REGISTRATION RIGHTS. Except as set forth in the Investors' Rights Agreement, the Company is not currently under any obligation to register under the Securities Act of 1933, as amended (the "Act") any of its presently outstanding securities or any of its securities which may hereafter be issued. -6- 3.16 GOVERNMENTAL CONSENT, ETC. No consent, approval or authorization of, or designation, declaration or filing with, any federal, state or local governmental authority on the part of the Company is required in connection with the valid execution and delivery of this Agreement and the Investors' Rights Agreement, or the offer, sale or issuance of the Shares and the Conversion Stock, or the consummation of any other transaction contemplated hereby, except (a) filing of the Restated Certificate in the office of the Secretary of State of the State of Delaware, and (b) qualification (or taking such action as may be necessary to secure an exemption from qualification, if available) of the offer and sale of the Shares and the Conversion Stock under the California Corporate Securities Law and other applicable Blue Sky laws, which filing and qualification, if required, will be accomplished in a timely manner prior to or promptly upon completion of the Closing. 3.17 BROKERS OR FINDERS. The Company has not incurred, and will not incur, directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement or any transaction contemplated hereby. 3.18 DISCLOSURES. No representation, warranty or statement by the Company in this Agreement, or in any written statement or certificate furnished to the Investors pursuant to this Agreement, contains any untrue statement of a material fact or, when taken together, omits to state a material fact necessary to make the statements made herein, in light of the circumstances under which they were made, not misleading. However, as to any projections furnished to the Investors, such projections were prepared in good faith by the Company, but the Company makes no representation or warranty that it will be able to achieve such projections. The Company has fully provided each Investor with all the information that such Investor has requested for deciding whether to purchase the Shares. 3.19 PERMITS. The Company has all franchises, permits, licenses, and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could materially and adversely affect the business, properties or financial condition of the Company, and believes it can obtain without undue burden or expense, any similar authority for the conduct of its business as planned to be conducted. The Company is not in default in any material respect under any of such franchises, permits, licenses or other similar authority. SECTION 4 REPRESENTATIONS AND WARRANTIES OF THE INVESTORS Each Investor hereby represents and warrants to the Company with respect to its purchase of the Shares as follows: 4.1 AUTHORIZATION. Each of this Agreement and the Investors' Right Agreement, when executed and delivered by the Investor, will constitute the Investor's valid and legally binding obligation, enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement -7- of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, and (iii) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities laws. 4.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with the Investor in reliance upon the Investor's representation to the Company, which by the Investor's execution of this Agreement the Investor hereby confirms, that the Common Stock or Series A Preferred to be received by the Investor and the Common Stock and Series A-1 Preferred issuable upon conversion of the Series A Preferred (collectively, the "Securities") will be acquired for investment for the Investor's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that the Investor has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, the Investor further represents that the Investor does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities. The Investor represents that it has the full power and authority to enter into this Agreement. 4.3 INVESTMENT EXPERIENCE. The Investor is an investor in securities of companies in the development stage and acknowledges that it is able to fend for itself, can bear the economic risk of its investment, and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Common Stock or Series A Preferred. If other than an individual, the Investor also represents it has not been organized solely for the purpose of acquiring the Common Stock or Series A Preferred, or if the Investor has been organized solely for the purpose of acquiring the Common Stock or Series A Preferred, that all of the equity owners of the Investor are "accredited investors" as defined below. 4.4 ACCREDITED INVESTOR. The Investor is an "accredited investor" within the meaning of Securities and Exchange Commission ("SEC") Rule 501 of Regulation D, as presently in effect. 4.5 NO PUBLIC MARKET. Each Investor understands that no public market now exists for any of the securities issued by the Company and that it is unlikely that a public market will ever exist for the Shares. 4.6 RECEIPT OF INFORMATION. Each Investor has received and reviewed this Agreement and all Exhibits thereto; it, its attorney and its accountant have had access to, and an opportunity to review all documents and other materials requested of, the Company; it and they have been given an opportunity to ask any and all questions of, and receive answers from, the Company concerning the terms and conditions of the offering and to obtain all information it or they believe necessary or appropriate to evaluate the suitability of an investment in the Common Stock or Series A Preferred; and, in evaluating the suitability of an investment in the Common Stock or Series A Preferred, it and they have not relied upon any representations or other information (whether oral or written) other than as set forth in the documents and answers referred to above. -8- 4.7 RESTRICTED SECURITIES. The Investor understands that the Securities it is purchasing are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold without registration under the Act only in certain limited circumstances. In addition, the Investor represents that it is familiar with Rule 144 promulgated under the Act, as presently in effect, and understands the resale limitations imposed thereby and by the Act. 4.8 FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting the representations set forth above, the Investor further agrees not to make any disposition of all or any portion of the Securities unless: (a) There is then in effect a Registration Statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such Registration Statement; (b) The Investor shall have notified the Company of the proposed disposition and shall have furnished the Company with a statement of the circumstances surrounding the proposed disposition, and if requested by the Company, the Investor shall have furnished the Company with either (i) an unqualified written opinion of counsel who shall be reasonably satisfactory to the Company addressed to the Company and reasonably satisfactory in form and substance to the Company's counsel to the effect that the proposed transfer may be effected without registration under the Act or (ii) a "No Action" letter from the Securities and Exchange Commission to the effect that the transfer of such securities without registration will not result in a recommendation by the staff of the Securities and Exchange Commission that action be taken with respect thereto, whereupon the holder of such Securities shall be entitled to transfer such Securities in accordance with the terms of the notice delivered by the Holder to the Company; or (c) The Investor shall have sold, assigned, transferred, pledged or otherwise disposed of the Securities in a transaction involving the distribution without consideration of the Securities by the Investor to any of its partners or retired partners, or to the estate of any of its partners or retired partners, or in a transaction involving the transfer or distribution of the Securities by a corporation to any subsidiary, parent or affiliated corporation of such corporation; provided in each case that the Investor shall give written notice to the Company of such Investor's intention to effect such transfer, sale, assignment, pledge or other disposition. The Investor will cause any such proposed purchaser, assignee, transferee or pledgee of any Securities held by the Investor to agree to take and hold such Securities subject to the provisions and upon the conditions specified in this Agreement. 4.9 LEGENDS. It is understood that the certificates evidencing the Securities may bear one or all of the following legends: (a) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR -9- SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A OF SUCH ACT." (b) Any legend required by the laws of the State of Delaware or the State of California, including any legend required by the California Department of Corporations. 4.10 GOVERNMENT CONSENTS. Other than securities law filings required to be made by the Company, no consent, approval or authorization of or designation, declaration or filing with any state, federal or foreign governmental authority on the part of the Investor is required in connection with the valid execution and delivery of this Agreement and the Investors' Rights Agreement by the Investor and the consummation by the Investor of the transactions contemplated hereby and thereby. SECTION 5 CONDITIONS TO CLOSING OF INVESTORS The Investors' obligations to purchase the Shares at the Closing or at any Subsequent Closing are, at the option of each Investor, subject to the fulfillment on or prior to the Closing Date or at any Subsequent Closing Date of the following conditions: 5.1 REPRESENTATIONS AND WARRANTIES CORRECT. The representations and warranties made by the Company in Section 3 hereof shall be true and correct in all material respects when made, and shall be true and correct in all material respects on the Closing Date, or the Subsequent Closing Date, as the case may be, with the same force and effect as if they had been made on and as of said date. 5.2 COVENANTS. All covenants, agreements and conditions contained in this Agreement to be performed by the Company on or prior to the Closing Date or the Subsequent Closing Date, as the case may be, shall have been performed or complied with in all material respects. 5.3 OPINION OF COMPANY'S COUNSEL. The Investors shall have received from Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel to the Company, an opinion addressed to them, dated the Closing Date or the Subsequent Closing Date, as the case may be, in substantially the form attached hereto as Exhibit E. 5.4 COMPLIANCE CERTIFICATE. The Company shall have delivered to the Investors a certificate executed by the President of the Company, dated the Closing Date or the Subsequent Closing Date, as the case may be, and certifying to the fulfillment of the conditions specified in Sections 5.1, 5.2, and 5.8 of this Agreement, and that he has made, or caused to be made, such investigations as he deemed necessary in order to permit him to verify the accuracy of the information set forth in such certificate. -10- 5.5 BLUE SKY. The Company shall have obtained all necessary Blue Sky law permits and qualifications, or secured an exemption therefrom, required by any state for the offer and sale of the Shares and the Conversion Stock. 5.6 BOARD OF DIRECTORS. On or before the Closing, the Bylaws of the Company shall provide for a flexible number of directors from three to five and fixing the current number of directors at four. The Board of Directors shall at the Closing consist of Jim Clark, Brook Byers, Hugh Reinhoff and David Schnell. 5.7 RESTATED CERTIFICATE. The Restated Certificate shall have been filed with the Secretary of State of the State of Delaware. 5.8 NO MATERIAL ADVERSE CHANGE. There shall have been no material adverse change in the Company's business or financial condition. 5.9 INVESTORS' RIGHTS AGREEMENT. The Investors and the Company shall have entered into the Investors' Rights Agreement in substantially the form attached hereto as Exhibit D. SECTION 6 CONDITIONS TO CLOSING OF COMPANY The Company's obligation to sell and issue the Shares at the Closing or at any Subsequent Closing, is at the option of the Company, subject to the fulfillment of the following conditions: 6.1 REPRESENTATIONS. The representations made by the Investors in Section 4 hereof shall be true and correct when made, and shall be true and correct on the Closing Date or the Subsequent Closing Date, as the case may be. 6.2 BLUE SKY. The Company shall have obtained all necessary Blue Sky law permits and qualifications, or secured an exemption therefrom, required by any state for the offer and sale of the Shares and the Conversion Stock. 6.3 RESTATED CERTIFICATE. The Restated Certificate shall have been filed with the Secretary of State of the State of Delaware. SECTION 7 MISCELLANEOUS 7.1 GOVERNING LAW. This Agreement shall be governed in all respects by the laws of the State of California, without giving effect to the conflicts of laws principles thereof. -11- 7.2 SURVIVAL. The representations, warranties, covenants, and agreements made herein shall survive any investigation made by any Investor and the closing of the transactions contemplated hereby. 7.3 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto, provided, however, that the rights of a Investor to purchase Shares shall not be assignable without the written consent of the Company. 7.4 ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. Neither this Agreement nor any term hereof may be amended, waived, discharged, or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge, or termination is sought; provided, however, that holders of a majority of the shares of Common Stock issued or issuable upon conversion of the Shares and/or the Series A-1 Preferred and (whether or not converted) not resold to the public may waive or amend, on behalf of all Investors, any provisions hereof benefiting Investors in respect of the Shares. 7.5 NOTICES, ETC. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed effectively given upon delivery to the party to be notified in person or by courier service or five days after deposit with the United States mail, by registered or certified mail, postage prepaid, addressed (a) if to a Investor, at such Investor's address set forth in Exhibit A, or at such other address as such Investor shall have furnished to the Company in writing, or (b) if to any other holder of any Shares, at such address as such holder shall have furnished the Company in writing, or, until any such holder so furnishes an address to the Company, then to and at the address of the last holder of such Shares who has so furnished an address to the Company, or (c) if to the Company, one copy should be sent to its address set forth on the cover page of this Agreement and addressed to the attention of the Corporate Secretary, or at such other address as the Company shall have furnished to the Investors. 7.6 DELAYS OR OMISSIONS. No delay or omission to exercise any right, power or remedy accruing to any holder of any Shares, upon any breach or default of the Company under this Agreement, shall impair any such right, power or remedy of such holder nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any holder of any breach or default under this Agreement, or any waiver on the part of any holder of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any holder, shall be cumulative and not alternative. -12- 7.7 CALIFORNIA CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS AN EXEMPTION FROM SUCH QUALIFICATION IS AVAILABLE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, OR SUCH EXEMPTION BEING AVAILABLE. 7.8 EXPENSES. The Company and the Investors shall each bear their own expenses and legal fees with respect to this Agreement and the transactions contemplated hereby except that, assuming a successful completion of the offering the Company will pay at the initial Closing the reasonable legal fees and reasonable expenses upon receipt of a bill therefor, incurred by one counsel to the Investors. 7.9 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which may be executed by less than all of the Investors, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument. 7.10 SEVERABILITY. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. 7.11 GENDER. The use of the neuter gender herein shall be deemed to include the masculine and the feminine gender, if the context so requires. -13- The foregoing Amended and Restated Securities Purchase Agreement is hereby executed as of the date first above written. COMPANY: HEALTHEON CORPORATION By: /s/ David Schnell, M.D. -------------------------------------------- David Schnell, M.D., President Address: 87 Encina Avenue Palo Alto, CA 94301 -14- HEALTHEON CORPORATION SIGNATURE PAGE TO AMENDED AND RESTATED SECURITIES PURCHASE AGREEMENT The undersigned hereby executes and delivers the Amended and Restated Securities Purchase Agreement (the "Agreement") to which this Signature Page is attached effective as of the date of the Agreement, which Agreement and Signature Page, together with all counterparts of said Agreement and Signature Pages of the other parties named in said Agreement, shall constitute one and the same document in accordance with the terms of said Agreement. -------------------------------------------- Name of Stockholder By: ----------------------------------------- Print Name: --------------------------------- Title: -------------------------------------- EX-10.21 18 EX-10.21 HEALTHEON CORPORATION AMENDED AND RESTATED SERIES B PREFERRED STOCK PURCHASE AGREEMENT OCTOBER 31, 1996 TABLE OF CONTENTS
Page ---- SECTION 1 - Authorization and Sale of Stock.................................. 1 1.1 Authorization........................................................... 1 1.2 Sale of Stock........................................................... 1 SECTION 2 - Closing Date; Delivery........................................... 1 2.1 Closing Date............................................................ 1 2.2 Subsequent Closing...................................................... 1 2.3 Delivery................................................................ 2 SECTION 3 - Representations and Warranties of the Company.................... 2 3.1 Organization and Standing; Certificate and Bylaws....................... 2 3.2 Corporate Power......................................................... 2 3.3 Subsidiaries............................................................ 2 3.4 Capitalization.......................................................... 2 3.5 Authorization........................................................... 3 3.6 Title to Properties and Assets; Liens, etc.............................. 3 3.7 Financial Statements.................................................... 4 3.8 Activities Since Balance Sheet Date..................................... 4 3.9 Tax Returns and Payments................................................ 5 3.10 Patents, Trademarks, etc............................................... 5 3.11 Material Contracts and Commitments..................................... 5 3.12 Compliance with Other Instruments, None Burdensome, etc................ 5 3.13 Litigation, etc........................................................ 6 3.14 Employees.............................................................. 6 3.15 Registration Rights.................................................... 6 3.16 Governmental Consent, etc.............................................. 6 3.17 Brokers or Finders..................................................... 7 3.18 Disclosures............................................................ 7 3.19 Permits................................................................ 7 SECTION 4 - Representations and Warranties of the Investors.................. 7 4.1 Authorization........................................................... 7 4.2 Purchase Entirely for Own Account....................................... 7 4.3 Investment Experience................................................... 8 4.4 Accredited Investor..................................................... 8
-i- 4.5 No Public Market........................................................ 8 4.6 Receipt of Information.................................................. 8 4.7 Restricted Securities................................................... 8 4.8 Further Limitations on Disposition...................................... 8 4.9 Legends................................................................. 9 4.10 Government Consents.................................................... 9 4.11 Waiver of Right of First Refusal...................................... 10 SECTION 5 - Conditions to Closing of Investors.............................. 10 5.1 Representations and Warranties Correct................................. 10 5.2 Covenants.............................................................. 10 5.3 Opinion of Company's Counsel........................................... 10 5.4 Compliance Certificate................................................. 10 5.5 Blue Sky............................................................... 10 5.6 Board of Directors..................................................... 10 5.7 Restated Certificate................................................... 10 5.8 No Material Adverse Change............................................. 11 5.9 Investors' Rights Agreement............................................ 11 SECTION 6 - Conditions to Closing of Company................................ 11 6.1 Representations........................................................ 11 6.2 Blue Sky............................................................... 11 6.3 Restated Certificate................................................... 11 SECTION 7 - Miscellaneous................................................... 11 7.1 Governing Law.......................................................... 11 7.2 Survival............................................................... 11 7.3 Successors and Assigns................................................. 11 7.4 Entire Agreement; Amendment............................................ 11 7.5 Notices, etc........................................................... 12 7.6 Delays or Omissions.................................................... 12 7.7 California Corporate Securities Law.................................... 12 7.8 Expenses............................................................... 12 7.9 Counterparts........................................................... 13 7.10 Severability.......................................................... 13 7.11 Gender................................................................ 13
-ii- EXHIBITS A. Schedule of Investors B. Restated Certificate of Incorporation C. Form of Warrant D. Exceptions to Representations and Warranties of the Company E. Second Amended and Restated Investors' Rights Agreement F. Form of Opinion of Wilson Sonsini Goodrich & Rosati -iii- HEALTHEON CORPORATION AMENDED AND RESTATED SERIES B PREFERRED STOCK PURCHASE AGREEMENT This Amended and Restated Series B Preferred Stock Purchase Agreement (the "Agreement") is made as of October 31, 1996, by and among Healtheon Corporation, a Delaware corporation (the "Company"), with its principal office at 87 Encina Avenue, Palo Alto, California 94301, and the persons and entities listed on the Schedule of Investors attached as Exhibit A hereto (the "Investors"). This Agreement amends and restates, in its entirety, the Series B Preferred Stock Purchase Agreement dated as of October 1, 1996. SECTION I AUTHORIZATION AND SALE OF STOCK AND ISSUANCE OF THE WARRANTS 1.1 AUTHORIZATION. The Company has authorized the sale and issuance of up to an aggregate of five million (5,000,000) shares of its Series B Preferred Stock (the "Series B Preferred"), having the rights, restrictions, privileges and preferences as set forth in the Company's Restated Certificate of Incorporation in the form attached to this Agreement as Exhibit B (the "Restated Certificate'). 1.2 SALE OF STOCK AND ISSUANCE OF WARRANTS. Subject to the terms and conditions hereof, the Company will issue and sell to the Investors, and the Investors will buy from the Company, the number of shares (the "Shares") of Series B Preferred specified opposite each Investor's name on the Schedule of Investors, at a cash purchase price of two dollars ($2.00) per share and the Company will issue warrants, in the form attached hereto as Exhibit C, with respect to the number of shares of Series B Preferred specified opposite the applicable Investors' names on the Schedule of Investors (the "Warrants"). The Company's agreements with each of the Investors are separate agreements, and the sales of the Shares, and the issuance of the warrant, if applicable, to each of the Investors are separate sales and issuances. SECTION 2 CLOSING DATE, DELIVERY 2.1 CLOSING DATE. The initial closing of the purchase and sale of an aggregate of one million eight hundred seventy five thousand (1,875,000) of the Shares hereunder was held at 1:00 p.m. on October 1, 1996 (the "First Closing"). The subsequent closing and the issuance of the Warrants hereunder shall be held on October 31, 1996 or on such later date or dates as the Company and the affected Investors may agree to (the "Second Closing"). The date of each such Closing being referred to as a "Closing Date". The place of the Closing (including the place of delivery to the Investors by the Company of the certificates evidencing all shares Series B Preferred being purchased and the Warrants being issued and the place of payment to the Company by the Investors of the purchase price therefor) shall be at the offices of the Company located at 87 Encina Avenue, Palo Alto, California 94301, or such other place as the Investors and the Company may mutually agree. 2.2 SUBSEQUENT CLOSING. The Company may, in its sole discretion, provide for deferred closings hereunder (a "Subsequent Closing"), to be held at the offices of the Company, at such time and dates as the Company may determine (the date of any such Subsequent Closing being referred to as a "Subsequent Closing Date"). Any Subsequent Closing(s) will take place as promptly as possible following the initial Closing hereunder. The number of shares of Series B Preferred which any Subsequent Investor shall be entitled to purchase, shall be determined within the sole discretion of the Company, but in no event shall the total number of shares of Series B Preferred sold pursuant to this Agreement and/or subject to the Warrants or any other purchase rights be more than an aggregate of five million (5,000,000) shares. Upon completion of any Subsequent Closing, if any, all additional purchasers of shares of Series B Preferred shall be considered "Investors" within the meaning of this Agreement. 2.3 DELIVERY. At each Closing the Company will deliver to each Investor a certificate or certificates representing the applicable number of Shares, as designated in column 2 of the Schedule of Investors to be purchased by such Investor at such Closing, against payment of the purchase price therefor, by check or wire transfer payable to the Company, or by cancellation of outstanding indebtedness from the Company to such Investor, or by a combination thereof, in the amount specified in column 3 of the Schedule of Investors and at the Second Closing the Company shall issue the Warrants as set forth in the Schedule of Investors. SECTION 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY Except as set forth on Exhibit D attached hereto, the Company hereby represents and warrants to the Investors as follows: 3.1 ORGANIZATION AND STANDING: CERTIFICATE AND BYLAWS. The Company is a corporation duly organized and existing under, and by virtue of, the laws of the State of Delaware and is in good standing under such laws. The Company has requisite corporate power to own and operate its properties and assets, and to carry on its business as presently conducted and as proposed to be conducted. The Company is not qualified to do business as a foreign corporation in any jurisdiction and such qualification is not presently required. 3.2 CORPORATE POWER. The Company will have at the Closing Date all requisite corporate power to execute and deliver this Agreement and the Second Amended and Restated Investors' Rights Agreement attached hereto as Exhibit E (the "Investors' Rights Agreement"), to sell and issue the Shares hereunder, to issue the underlying Series B-1 Preferred Stock (the "Series B-1 2 Preferred") and Common Stock (together, the "Conversion Stock") in accordance with the provisions of the Restated Certificate, and to carry out and perform its obligations under the terms of this Agreement and the Investors' Rights Agreement. 3.3 SUBSIDIARIES. The Company has no subsidiaries or affiliated companies and does not otherwise own or control, directly or indirectly, any other corporation, association or business entity. 3.4 CAPITALIZATION. The authorized capital stock of the Company consists of 28,000,000 shares of Common Stock, 2,230,834 shares of which are issued and outstanding prior to the Closing, 10,305,000 shares of Series A Preferred, 10,285,000 shares of which are issued and outstanding prior to the Closing and 10,305,000 shares of Series A-1 Preferred, none of which has been or will be issued or outstanding prior to the Closing, and 5,000,000 shares of Series B Preferred 1,875,000 of which were issued in the First Closing and are outstanding as of the date hereof, and 5,000,000 shares of Series B-1 Preferred, none of which has been or will be issued or outstanding prior to the Closing. The Company has reserved (i) an aggregate of 5,000,000 shares of Series B Preferred for issuance hereunder and/or for issuance pursuant to the exercise of the Warrants which may be issued hereunder, (ii) sufficient shares of Common Stock for issuance upon conversion of the Series B Preferred and/or Series B-1 Preferred, (iii) 5,000,000 shares of Series B-1 Preferred for issuance upon conversion of the Series B Preferred, (iv) 10,285,000 shares of Series A-1 Preferred for issuance upon conversion of the Series A Preferred, (v) sufficient shares of Common Stock for issuance upon conversion of the Series A Preferred and/or Series A-1 Preferred and (vi) 9,000,000 shares of Common Stock for issuance to employees and consultants pursuant to the Company's 1996 Stock Plan (of which 4,268,934 shares have been issued and/or option granted with respect thereto, prior to the date hereof). The Series B Preferred and the Series B-1 Preferred shall have the rights, preferences, privileges and restrictions set forth in the Restated Certificate. There are no other options, warrants, conversion privileges or other rights presently outstanding to purchase or otherwise acquire any authorization but unissued shares of capital stock or other securities of the Company. Assuming the accuracy of each Investor's representations in Section 4 below, upon issuance, the Shares will have been issued in compliance with all federal and state securities laws. 3.5 AUTHORIZATION. All corporate action on the part of the Company, its directors and shareholders necessary for the authorization, execution, delivery and performance of this Agreement and the Investors' Rights Agreement by the Company, the authorization, sale, issuance and delivery of the Shares and the Conversion Stock and the performance of the Company's obligations hereunder has been taken or will be taken prior to the Closing. This Agreement and the Investors' Rights Agreement, when executed and delivered by the Company, shall constitute the valid and binding obligations of the Company enforceable in accordance with their respective terms except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, and other equitable remedies, and (iii) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal and state securities laws. The Shares, when issued in compliance with the provisions of this Agreement, will be validly issued and will be fully paid and nonassessable; the Series B-1 Preferred issuable upon conversion of the Series B Preferred has been 3 duly and validly reserved and, when issued in compliance with the provisions of this Agreement, will be validly issued and will be fully paid and nonassessable and the Common Stock issuable upon conversion of the Series B Preferred and/or the Series B-1 Preferred has been duly and validly reserved and, when issued in compliance with the provisions of this Agreement, will be validly issued and will be fully paid and nonassessable, and free of any liens or encumbrances (assuming the Investors take the Shares with no notice thereof) other than any liens or encumbrances created by or imposed upon the holders; provided, however, that the Shares and the Conversion Stock may be subject to restrictions on transfer under state or federal securities laws and restrictions set forth herein. 3.6 TITLE TO PROPERTIES AND ASSETS, LIENS, ETC. The Company has good and valid title to its properties and assets, and has good title to all its leasehold interests, in each case subject to no mortgage, pledge, lien, lease, encumbrance or charge, other than (i) the lien of current taxes not yet due and payable, and (ii) possible minor liens and encumbrances which do not in any case materially detract from the value of the property subject thereto or materially impair the operations of the Company, and which have not arisen otherwise than in the ordinary course of business. 3.7 FINANCIAL STATEMENTS. The Company has delivered to each Investor its unaudited financial statements (balance sheet and income statement) at July 31, 1996 and for the period from inception through July 31, 1996 (the "Financial Statement"). The Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated and with each other, except that the Financial Statements may not contain all footnotes required by generally accepted principles and are subject to normal year end adjustments. The Financial Statements fairly present the financial condition and operating results of the Company as of the dates, and for the periods, indicated therein. Except as set forth in the Financial Statements, the Company has no material liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to July 31, 1996, which individually or in the aggregate are not material to the financial condition or operating results of the Company, and (ii) obligations not required under generally accepted accounting principles to be reflected in the Financial Statements. 3.8 ACTIVITIES SINCE BALANCE SHEET DATE. Since the Company's balance sheet dated July 31, 1996 there has not been: (a) any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the assets, properties, financial condition, operating results, or business of the Company; (b) any waiver by the Company of a valuable right or of a material debt owed to it; (c) any material change or amendment to a material contract or arrangement by which the Company or any of its assets or properties is bound or subject, except for changes or amendments which are expressly provided for or disclosed in this Agreement; 4 (d) any loans or guarantees made by the Company to or for the benefit of its employees, officers or directors, or any members of their immediate families, other than travel advances or other advances made in the ordinary course of business; (e) any declaration, setting aside or payment or other distribution in respect of any of the Company's capital stock, or any direct or indirect redemption, purchase or other acquisition of any such stock by the Company; (f) any incurrence of indebtedness for money borrowed individually in excess of $50,000 or in excess of $100,000 in the aggregate; (g) any material change in any compensation arrangement or agreement with any employee; (h) any sale, assignment or transfer of any patents, trademarks, copyrights, trade secrets or other intangible assets; (i) any resignation or termination of employment of any key officer of the Company; and (j) to the Company's knowledge, any other event or condition or any character which would be reasonably likely to materially and adversely affect the assets, properties, financial condition, operating results or business of the Company; 3.9 TAX RETURNS AND PAYMENTS. The Company has timely filed all tax returns and reports when and as required by law and has never been audited by any state or federal taxing authority. All tax and reports of the Company, if applicable, are true and correct in all material respects. 3. 10 PATENTS, TRADEMARKS, ETC. The Company owns or has the right, or prior to the Closing will own or have the right, to use, free and clear of all liens, charges, claims and restrictions, all patents, trademarks, service marks, trade names, copyrights, licenses and rights necessary to its business as now conducted, and is not, to the best of its knowledge, infringing upon or otherwise acting adversely to the right or claimed right of any person under or with respect to any of the foregoing. There are no outstanding options, licenses, or agreements of any kind relating to the foregoing, nor is the Company bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information, proprietary rights and processes of any other person or entity. The Company has not received any written communications alleging that the Company has violated or, by conducting its business as proposed, would violate any patent, trademark, service mark, trade name, copyright or trade secret or other proprietary right of any other person or entity. The Company is not aware that any 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 such employee's best efforts to promote the interests of the Company or that would conflict with the Company's business as proposed to be conducted. Neither the execution nor delivery of this Agreement, nor the carrying 5 on of the Company's business by the employees of the Company, nor the conduct of the Company's business as proposed, will, to the Company's knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any of such employees is now obligated. The Company 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 the Company. 3.11 MATERIAL CONTRACTS AND COMMITMENTS. Neither the Company, nor, to the best knowledge of the Company, any third party is in default under any material contract, agreement or instrument to which the Company is a party. 3.12 COMPLIANCE WITH OTHER INSTRUMENTS, NONE BURDENSOME, ETC. The Company is not in violation of any term of the Restated Certificate of Incorporation or Bylaws, or in any material respect of any term or provision of any material mortgage, indenture, contact, agreement or instrument to which it is a party or by which it is bound, and to the best of its knowledge, is not in violation of any order, statute, rule or regulation applicable to the Company, which violation reasonably would be expected to have a material adverse effect on the Company's business or financial condition. The execution, delivery and performance of and compliance with this Agreement, and the issuance of the Shares and the Conversion Stock, have not resulted and will not result in any violation of, or conflict with, or constitute a default under, or result in the creation of, any material mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company. 3.13 LITIGATION, ETC. There are no actions, suits, proceedings or investigations pending against the Company or its properties before any court or governmental agency (nor, to the best of the Company's knowledge, is there any written threat thereof), which, either in any case or in the aggregate, reasonably would be expected to result in any material adverse change in the business or financial condition of the Company or any of its properties or assets, or in any material impairment of the right or ability of the Company to carry on its business as now conducted, and none which questions the validity of this Agreement or the Investors' Rights Agreement or any action taken or to be taken in connection herewith. The Company is not a party to, or to the best of its knowledge named in any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit or proceeding by the Company currently pending or that the Company currently intends to initiate. 3.14 EMPLOYEES. To the best of the Company's knowledge, no employee of the Company is in violation of any term of any employment contract, patent disclosure agreement or any other contract or agreement relating to the relationship of any such employee with the Company or any other party because of the nature of the business conducted or to be conducted by the Company. The Company does not have any collective bargaining agreements covering any of its employees. 3.15 REGISTRATION RIGHTS. Except as set forth in the Investors' Rights Agreement, the Company is not currently under any obligation to register under the Securities Act of 1933, as amended (the "Act) any of its presently outstanding securities or any of its securities which may hereafter be issued. 6 3.16 GOVERNMENTAL CONSENT ETC. No consent, approval or authorization of, or designation, declaration or filing with, any federal, state or local governmental authority on the part of the Company is required in connection with the valid execution and delivery of this Agreement and the Investors' Rights Agreement, or the offer, sale or issuance of the Shares and the Conversion Stock, or the consummation of any other transaction contemplated hereby, except (a) filing of the Restated Certificate in the office of the Secretary of State of the State of Delaware, and (b) qualification (or taking such action as may be necessary to secure an exemption from qualification, if available) of the offer and sale of the Shares and the Conversion Stock under the California Corporate Securities Law and other applicable Blue Sky laws, which filing and qualification, if required, will be accomplished in a timely manner prior to or promptly upon completion of the Closing. 3.17 BROKERS OR FINDERS. The Company has not incurred, and will not incur, directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement or any transaction contemplated hereby. 3.18 DISCLOSURES. No representation, warranty or statement by the Company in this Agreement, or in any written statement or certificate furnished to the Investors pursuant to this Agreement, contains any untrue statement of a material fact or, when taken together, omits to state a material fact necessary to make the statements made herein, in light of the circumstances under which they were made, not misleading. However, as to any projections furnished to the Investors, such projections were prepared in good faith by the Company, but the Company makes no representation or warranty that it will be able to achieve such projections. The Company has fully provided each Investor with all the information that such Investor has requested for deciding whether to purchase the Shares. 3.19 PERMITS. The Company has all franchises, permits, licenses, and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could materially and adversely affect the business, properties or financial condition of the Company, and believes it can obtain without undue burden or expense, any similar authority for the conduct of its business as planned to be conducted. The Company is not in default in any material respect under any of such franchises, permits, licenses or other similar authority. SECTION 4 REPRESENTATIONS AND WARRANTIES OF THE INVESTORS Each Investor hereby represents and warrants to the Company with respect to its purchase of the Shares as follows: 4.1 AUTHORIZATION. This Agreement and the Investors' Right Agreement, when executed and delivered by the Investor, will each constitute the Investor's valid and legally binding obligation, enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific 7 performance, injunctive relief, or other equitable remedies, and (iii) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities laws. 4.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with the Investor in reliance upon the Investor's representation to the Company, which by the Investor's execution of this Agreement the Investor hereby confirms, that the Common Stock or Series B Preferred to be received by the Investor and the Common Stock and Series B-1 Preferred issuable upon conversion of the Series B Preferred (collectively, the "Securities') will be acquired for investment for the Investor's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that the Investor has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, the Investor further represents that the Investor does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities. The Investor represents that it has the full power and authority to enter into this Agreement. 4.3 INVESTMENT EXPERIENCE. The Investor is an investor in securities of companies in the development stage and acknowledges that it is able to fend for itself, can bear the economic risk of its investment, and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Common Stock or Series B Preferred. If other than an individual, the Investor also represents it has not been organized solely for the purpose of acquiring the Common Stock or Series B Preferred or if the Investor has been organized solely for the purpose of acquiring the Common Stock or Series B Preferred that all of the equity owners of the Investor are "accredited investors" as defined below. 4.4 ACCREDITED INVESTOR. The Investor is an "accredited investor" within the meaning of Securities and Exchange Commission ("SEC") Rule 501 of Regulation D, as presently in effect. 4.5 NO PUBLIC MARKET. Each Investor understands that no public market now exists for any of the securities issued by the Company and that it is unlikely that a public market will ever exist for the Shares. 4.6 RECEIPT OF INFORMATION. Each Investor has received and reviewed this Agreement and all Exhibits thereto; it, its attorney and its accountant have had access to, and an opportunity to review all documents and other materials requested of, the Company; it and they have been given an opportunity to ask any and all questions of, and receive answers from, the Company concerning the terms and conditions of the offering and to obtain all information it or they believe necessary or appropriate to evaluate the suitability of an investment in the Common Stock or Series B Preferred; and, in evaluating the suitability of an investment in the Common Stock or Series B Preferred, it and they have not relied upon any representations or other information (whether oral or written) other than as set forth in the documents and answers referred to above. 4.7 RESTRICTED SECURITIES. The Investor understands that the Securities it is purchasing are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold without registration under the Act only in certain limited circumstances. In addition, the Investor represents that it is familiar with Rule 144 promulgated under the Act, as presently in effect, and understands the resale limitations imposed thereby and by the Act. 4.8 FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting the representations set forth above, the Investor further agrees not to make any disposition of all or any portion of the Securities unless: (a) There is then in effect a Registration Statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such Registration Statement; (b) The Investor shall have notified the Company of the proposed disposition and shall have furnished the Company with a statement of the circumstances surrounding the proposed disposition, and if requested by the Company, the Investor shall have furnished the Company with either (i) an unqualified written opinion of counsel who shall be reasonably satisfactory to the Company addressed to the Company and reasonably satisfactory in form and substance to the Company's counsel to the effect that the proposed transfer may be effected without registration under the Act or (ii) a "No Action" letter from the Securities and Exchange Commission to the effect that the transfer of such securities without registration will not result in a recommendation by the staff of the Securities and Exchange Commission that action be taken with respect thereto, whereupon the holder of such Securities shall be entitled to offer such Securities in accordance with the terms of the notice delivered by the Holder to the Company; or (c) The Investor shall have sold, assigned, transferred, pledged or otherwise disposed of the Securities in a transaction involving the distribution without consideration of the Securities by the Investor to any of its partners or retired partners, or to the estate of any of its partners or retired partners, or in a transaction involving the offer or distribution of the Securities by a corporation to any subsidiary, parent or affiliated corporation of such corporation; provided in each case that the Investor shall give written notice to the Company of such Investor's intention to effect such transfer, sale, assignment, pledge or other disposition. The Investor will cause any such proposed purchaser, assignee, transferee or pledgee of any Securities held by the Investor to agree to take and hold such Securities subject to the provisions and upon the conditions specified in this Agreement. 4.9 LEGENDS. It is understood that the certificates evidencing the Securities may bear one or all of the following legends: (a) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A OF SUCH ACT." 9 (b) Any legend required by the laws of the State of Delaware or the State of California, including any legend required by the California Department of Corporations. 4.10 GOVERNMENT CONSENTS. Other than securities law filings required to be made by the Company, no consent, approval or authorization of or designation, declaration or filing with any state, federal or foreign governmental authority on the part of the Investor is required in connection with the valid execution and delivery of this Agreement and the Investors' Rights Agreement by the Investor and the consummation by the Investor of the transactions contemplated hereby and thereby. 4.11 WAIVER OF RIGHT OF FIRST REFUSAL. Each Investor hereby waives all rights which it may have had under Section 2.5 of the Amended and Restated Investors' Rights Agreement, including notice rights, with respect to the sale of the Series B Preferred Stock and the issuance of the Warrants with respect thereto, hereunder. SECTION 5 CONDITIONS TO CLOSING OF INVESTORS The Investors' obligations to purchase the Shares at the Closing or at any Subsequent Closing are, at the option of each Investor, subject to the fulfillment on or prior to the Closing Date or at any Subsequent Closing Date of the following conditions: 5.1 REPRESENTATIONS AND WARRANTIES CORRECT. The representations and warranties made by the Company in Section 3 hereof shall be true and correct in all material respects when made, and shall be true and correct in all material respects on the Closing Date, or the Subsequent Closing Date, as the case may be, with the same force and effect as if they had been made on and as of said date. 5.2 COVENANTS. All covenants, agreements and conditions contained in this Agreement to be performed by the Company on or prior to the Closing Date or the Subsequent Closing Date, as the case may be, shall have been performed or compiled with in all material respects. 5.3 OPINION OF COMPANY'S COUNSEL. The Investors shall have received from Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel to the Company, an opinion addressed to them, dated the Closing Date or the Subsequent Closing Date, as the case may be, in substantially the form attached hereto as Exhibit F. 5.4 COMPLIANCE CERTIFICATE. The Company shall have delivered to the Investors a certificate executed by the President of the Company, dated the Closing Date or the Subsequent Closing Date, as the case may be, and certifying to the fulfillment of the conditions specified in Sections 5.1, 5.2, and 5.8 of this Agreement, and that he has made, or caused to be made, such investigations as he deemed necessary in order to permit him to verify the accuracy of the information set forth in such certificate. 10 5.5 BLUE SKY. The Company shall have obtained all necessary Blue Sky law permits and qualifications, or secured an exemption therefrom, required by any state for the offer and sale of the Shares and the Conversion Stock. 5.6 BOARD OF DIRECTORS. The Board of Directors shall at the Closing consist of Jim Clark, Brook Byers, Hugh Reinhoff, Jr., M.D. and David Schnell, M.D. 5.7 RESTATED CERTIFICATE. The Restated Certificate shall have been filed with the Secretary of State of the State of Delaware. 5.8 NO MATERIAL ADVERSE CHANGE. There shall have been no material adverse change in the Company's business or financial condition. 5.9 INVESTORS' RIGHTS AGREEMENT. The Investors and the Company shall have entered into the Investors' Rights Agreement in substantially the form attached hereto as Exhibit E. SECTION 6 CONDITIONS TO CLOSING OF COMPANY The Company's obligation to sell and issue the Shares at the Closing or at any Subsequent Closing, is at the option of the Company, subject to the fulfillment of the following conditions: 6.1 REPRESENTATIONS. The representations made by the Investors in Section 4 hereof shall be true and correct when made, and shall be true and correct on the Closing Date or the Subsequent Closing Date, as the case may be. 6.2 BLUE SKY. The Company shall have obtained all necessary Blue Sky law permits and qualifications, or secured an exemption therefrom, required by any state for the offer and sale of the Shares and the Conversion Stock. 6.3 RESTATED CERTIFICATE. The Restated Certificate shall have been filed with the Secretary of State of the State of Delaware. SECTION 7 MISCELLANEOUS 7.1 GOVERNING LAW. This Agreement shall be governed in all respects by the laws of the State of California, without giving effect to the conflicts of laws principles thereof. 7.2 SURVIVAL. The representations, warranties, covenants, and agreements made herein shall survive any investigation made by any Investor and the closing of the transactions contemplated hereby. 11 7.3 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto, provided, however, that the rights of a Investor to purchase Shares shall not be assignable without the written consent of the Company. 7.4 ENTIRE AGREEMENT, AMENDMENT. This Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. Neither this Agreement nor any term hereof may be amended, waived, discharged, or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge, or termination is sought; provided, however, that holders of a majority of the shares of Common Stock issued or issuable upon conversion of the Shares and/or the Series B-1 Preferred and (whether or not converted) not resold to the public may waive or amend, on behalf of all Investors, any provisions hereof benefiting Investors in respect of the Shares. 7.5 NOTICES, ETC. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed effectively given upon delivery to the party to be notified in person or by courier service or five days after deposit with the United States mail, by registered or certified mail, postage prepaid, addressed (a) if to a Investor, at such Investor's address set forth in Exhibit A, or at such other address as such Investor shall have furnished to the Company in writing, or (b) if to any other holder of any Shares, at such address as such holder shall have furnished the Company in writing, or, until any such holder so furnishes an address to the Company, then to and at the address of the last holder of such Shares who has so furnished an address to the Company, or (c) if to the Company, one copy should be sent to its address set forth on the cover page of this Agreement and addressed to the attention of the Corporate Secretary, or at such other address as the Company shall have furnished to the Investors. 7.6 DELAYS OR OMISSIONS. No delay or omission to exercise any right, power or remedy accruing to any holder of any Shares, upon any breach or default of the Company under this Agreement, shall impair any such right, power or remedy of such holder nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any holder of any breach or default under this Agreement, or any waiver on the part of any holder of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any holder, shall be cumulative and not alternative. 7.7 CALIFORNIA CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS AN EXEMPTION FROM SUCH QUALIFICATION IS AVAILABLE. THE RIGHTS 12 OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, OR SUCH EXEMPTION BEING AVAILABLE. 7.8 EXPENSES. The Company and the Investors shall each bear their own expenses and legal fees with respect to this Agreement and the transactions contemplated hereby except that, assuming a successful completion of the offering the Company will pay at the initial Closing the reasonable legal fees and reasonable expenses upon receipt of a bill therefor, incurred by one counsel to the Investors. 7.9 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which may be executed by less than all of the Investors, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument. 7.10 SEVERABILITY. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. 7.11 GENDER. The use of the neuter gender herein shall be deemed to include the masculine and the feminine gender, if the context so requires. The foregoing Amended and Restated Series B Preferred Stock Purchase Agreement is hereby executed as of the date first above written. COMPANY: HEALTHEON CORPORATION By: /s/ David Schnell, M.D. ------------------------------ David Schnell, M.D., President Address: 87 Encina Avenue Palo Alto, CA 94301 13 EX-10.22 19 EX-10.22 EXHIBIT 10.22 THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A OF SUCH ACT. HEALTHEON CORPORATION SERIES B PREFERRED STOCK PURCHASE WARRANT THIS CERTIFIES THAT, for value received ________ ("Holder"), is entitled to purchase up to ________ shares of Series B Preferred Stock (the "Shares") of HEALTHEON CORPORATION, a Delaware corporation (the "Company"), subject to the terms and conditions of this Warrant set forth herein, at an exercise price per share of two dollars ($2.00) (the "Warrant Price"), as adjusted from time-to-time pursuant to Section 3 below. 1. TERM. The purchase right represented by this Warrant is exercisable, in whole or in part, only during the period (the "Exercise Period") commencing on July 1, 1997 and expiring automatically on June 30, 2002. 2. METHOD OF EXERCISE AND PAYMENT. (a) METHOD OF EXERCISE. Subject to Section I hereof and compliance with all applicable federal and state securities laws, the purchase right represented by this Warrant only may be exercised, in whole or in part, by the Holder by (i) surrender of this Warrant and delivery of the Notice of Exercise (the form of which is attached hereto as Exhibit A), duly executed, at the principal office of the Company during the Exercise Period and (ii) payment to the Company during the Exercise Period of an amount equal to the product of the then applicable Warrant Price multiplied by the number of Shares then being purchased pursuant to one of the payment methods permitted under Section 2(b) (or as set forth below in Section 2(c)). (b) METHOD OF PAYMENT. Payment shall be made by: (1) check drawn on a United States bank and for United States funds made payable to the Company, (2) wire transfer of United States funds to the account of the Company, (3) cancellation of indebtedness of the Company, or (4) any combination of the foregoing at the option of the Holder. (c) NET ISSUE EXERCISE. In lieu of paying the aggregate Warrant Price for the Shares by one of the payment methods specified in Section 2(b) above, the Holder may elect to receive Shares equal to the value of this Wan-ant (or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company together with notice of such election, in which event the Company shall issue to the Holder a number of shares of the Company's Series B Preferred Stock computed using the following formula: Y (A - B) X = ---------- A Where X = the number of shares of Series B Preferred Stock to be issued to Holder. Y = the number of shares of Series B Preferred Stock purchasable under this Warrant. A = the fair market value of one share of the Company's Series B Preferred Stock (at the date of calculation). B = Warrant Price (as adjusted to the date of such calculations). For the purposes of the above calculation, the fair market value of the Series B Preferred Stock shall mean with respect to each share of Series B Preferred Stock: (i) the product of (x) the number of shares of Common Stock into which each share of Series B Preferred Stock is convertible at the time of exercise and (y) the average of the closing bid and asked prices of the Company's Common Stock quoted in the Over-The-Counter Market Summary or the closing price quoted on any exchange on which the Common Stock is listed, whichever is applicable, as published in the Western Edition of the WALL STREET JOURNAL for the ten trading days prior to the date of determination of fair market value; or (ii) if the Company's Common Stock is not traded Over-The-Counter or on an exchange, fair market value of each share of the Series B Preferred Stock shall be determined in good faith by the Company's Board of Directors. Receipt and acknowledgment of this Warrant by the Holder shall be deemed to be an acknowledgment and acceptance of any such fair market value determination by the Company's Board of Directors as the final and binding determination of such value for purposes of this Warrant. (d) DELIVERY OF CERTIFICATE. In the event of any exercise of the purchase right represented by this Warrant, certificates for the Shares so purchased shall be delivered to the Holder within thirty (30) days of delivery of the Notice of Exercise and, unless this Warrant has been fully exercised or has expired, a new warrant representing the portion of the Shares with respect to which this Warrant shall not then have been exercised shall also be issued to the Holder within such thirty (30) day period. (e) NO FRACTIONAL SHARES. No fractional Shares shall be issued in connection with any exercise hereunder, but in lieu of such fractional Shares the Company shall make a cash payment therefor upon the basis of the fair market value per Share as of the date of exercise (as determined above). 3. ADJUSTMENTS. The number and kind of securities issuable upon the exercise of this Warrant and the Warrant Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows: (a) REORGANIZATION, CONSOLIDATION OR MERGER. In the case of any reorganization, consolidation or merger of the Company (including, without limitation, any change of control transaction whereby immediately following such transaction or series of transactions 50% or more of the Company's outstanding capital stock is held by new stockholders) with or into another corporation, the Company, or such successor entity, as the case may be, shall execute a new warrant providing that the Holder shall have the right to exercise such new warrant and, upon such exercise. to receive, in lieu of each Share issuable upon exercise of this Warrant, the number and kind of shares of stock, other securities, money or property receivable upon such reorganization, consolidation or merger by a holder of the number of Shares then purchasable with this Warrant. Such new warrant shall contain provisions relating to the rights and obligations of the Holder and the Company after such reorganization, consolidation or merger that shall have, as nearly as possible after appropriate adjustment, the same effect as the provisions of this Warrant, including the provisions of this Warrant relating to the exercise price and number and type of shares of stock deliverable upon exercise. (b) SPLIT, SUBDIVISION OR COMBINATION OF SHARES. If the Company at any time while this Warrant remains outstanding and unexpired shall split, subdivide or combine its authorized stock that is of the 2 same class and/or series as the Shares, the Warrant Price shall be proportionately decreased in the case of a split or subdivision or proportionately increased in the case of a combination. Any adjustment under this subsection (b) shall become effective at the close of business on the date the split, subdivision or combination becomes effective. (c) STOCK DIVIDENDS. If the Company at any time while this Warrant remains outstanding and unexpired shall pay a stock dividend with respect to the shares of stock of the same class and/or series as the Shares, or make any other distribution with respect to such shares (except any distribution specifically provided for in Sections 3(a) or 3(b) above) of similar shares, the Warrant Price shall be adjusted, from and after the date of determination of the stockholders entitled to receive such dividend or distribution, to that price determined by multiplying the Warrant Price in effect immediately prior to such date of determination by a fraction (i) the numerator of which shall be the total number of the shares of stock of the same class and/or series as the Shares outstanding immediately prior to such dividend or distribution, and (ii) the denominator of which shall be the total number of such shares outstanding immediately after such dividend or distribution. Any adjustment under this subsection (c) shall become effective at the close of business on the date such stock dividend becomes effective. (d) RECLASSIFICATION, EXCHANGE OR SUBSTITUTION. If the Shares issuable upon exercise of this Warrant shall be changed into the same or a different number of shares of any other class or classes of stock, whether by reclassification, exchange, substitution or otherwise (other than a split, subdivision or combination of the Shares pursuant to Section 3(b)), the Holder shall, upon exercise of this Warrant, be entitled to purchase, in lieu of the shares which the Holder would have been entitled to purchase but for such change, the number and kind of shares of stock receivable upon such reclassification, exchange or substitution by a holder of shares of the shares of stock of the same class and/or series as the Shares. 4. NOTICE OF ADJUSTMENTS. Whenever the number or kind of Shares or the Warrant Price shall be adjusted pursuant to Section 3 hereof, the Company shall mail to the Holder, at least ten (10) days prior to the event requiring such adjustment, a notice setting forth, in reasonable detail, the event requiring the adjustment, and, within thirty (30) days after any such adjustment, the Company shall issue a certificate signed by its Chief Financial Officer setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated and the number or kind of shares or the Warrant Price or Warrant Prices after giving effect to such adjustment, and shall cause a copy of such certificate to be delivered to the Holder. 5. COMPANY'S REPRESENTATIONS. All Shares which may be issued upon the exercise of the purchase right represented by this Warrant shall, upon issuance in accordance with this Warrant, be duly authorized, validly issued, fully paid and nonassessable, and free of any liens and encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws. During the Exercise Period, the Company shall at all times have authorized, and reserved for the purpose of issuance upon exercise right represented by this Warrant, a sufficient number of shares of Series B Preferred Stock to provide for the exercise of the purchase right represented by this Warrant. 6. COMPLIANCE WITH SECURITIES ACT; TRANSFERABILITY AND NEGOTIABILITY OF WARRANT; DISPOSITION OF SHARES. (a) COMPLIANCE WITH SECURITIES ACT. The Holder, by acceptance hereof, agrees that this Warrant and the Shares to be issued upon the exercise hereof are being acquired solely for its own account and not as a nominee for any other party and not with a view toward the resale or distribution thereof and that it will not offer, sell or otherwise dispose of this Warrant or any Shares to be issued upon the exercise hereof except under circumstances which will not result in a violation of the Securities Act of 1933, as amended (the 3 "Securities Act"). Upon the exercise of this Warrant, the Holder shall confirm in writing, in a form reasonably satisfactory to the Company, that the Shares so issued are being acquired solely for its own account and not as a nominee for any other party and not with a view toward resale or distribution thereto. This Warrant and the Shares to be issued upon the exercise hereof (unless registered under the Act) shall be imprinted with a legend in substantially the following form: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO T14E COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A OF SUCH ACT. In addition, this Warrant and the Shares to be issued upon the exercise hereof shall bear any legends required by the securities laws of any applicable states. (b) TRANSFERABILITY AND NEGOTIABILITY OF WARRANT. This Warrant may not be transferred or assigned in whole or in part without compliance with all applicable federal and state securities laws by the transferor and the transferee (including, if the transfer is being made other than in a transaction registered under the Securities Act or exempt from registration under Rule 144 under the Securities Act, the delivery of investment representation letters and, if the transfer is being made other than in a transaction registered under the Securities Act, the delivery of legal opinions satisfactory to the Company, if requested by the Company) and unless the transfer is to a transferee or assignee who the Company does not reasonably consider to be an actual or potential competitor of the Company. Subject to the provisions of this Warrant with respect to compliance with the Securities Act, title to this Warrant may be transferred by endorsement and delivery in the same manner as a negotiable instrument transferable by endorsement and delivery. The Company shall act promptly to record transfers of this Warrant on its books, but the Company may treat the registered holder of this Warrant as the absolute owner of this Warrant for all purposes, notwithstanding any notice to the contrary. (c) DISPOSITION OF SHARES. With respect to any offer, sale, transfer or other disposition of any Shares acquired pursuant to the exercise of this Warrant prior to registration of such Shares, the Holder and each subsequent holder of this Warrant agrees to give written notice to the Company prior thereto, describing briefly the manner thereof, together with a written opinion of legal counsel for such holder, reasonably satisfactory to the Company and its legal counsel, if requested by the Company, to the effect that such offer, sale or other disposition may be effected without registration or qualification (under the Act or any other federal or state securities laws) of such Shares and indicating whether or not under the Act, certificates for such Shares to be sold or otherwise disposed of require any restrictive legend as to the applicable restrictions on transferability in order to insure compliance with the Securities Act. Promptly upon receiving such written notice and reasonably satisfactory opinion, if so requested, the Company, as promptly as practicable, shall notify such holder that such holder may sell or otherwise dispose of such Shares, all in accordance with the terms of the notice delivered to the Company. Each certificate representing the Shares thus transferred (except a transfer pursuant to Rule 144(k)) shall bear a restrictive legend as to the applicable restrictions on transferability in order to insure compliance with the Act, unless in the aforesaid opinion of legal counsel for the holder, such legend is not required in order to insure compliance with the Securities Act. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. 7. RIGHTS OF STOCKHOLDERS. The Holder shall not be entitled to vote or receive dividends or be deemed the holder of Shares or any other securities of the Company which may at any time be issuable on the exercise of this Warrant for any purpose, nor shall anything contained herein be construed to confer upon the 4 Holder, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance of stock, reclassification of stock, consolidation, merger, transfer of assets or otherwise) or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until this Warrant shall have been exercised and the shares issuable upon exercise hereof shall have become deliverable, as provided herein. 8. NOTICES. All notices and other communications from the Company to the Holder, or vice versa, shall be deemed delivered and effective when given personally or five (5) days after mailed by first-class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company or the Holder, as the case may be, in writing by the Company or such holder from time to time. 9. WAIVER. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. 10. GOVERNING LAW. This Warrant shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to its principles regarding conflicts of law. 11. EXPIRATION. The right to exercise this Warrant shall expire at 5:00 P.M., Pacific Standard Time, on June 30, 2002, if not terminated earlier pursuant to any other provision of this Warrant. Dated: __________, 1997 HEALTHEON CORPORATION By: /s/ David Schnell, M.D. ----------------------------------- David Schnell, M.D. President 5 EXHIBIT A NOTICE OF EXERCISE TO: HEALTHEON CORPORATION 1. The undersigned Holder of the attached original, executed Series B Preferred Stock Purchase Warrant (the "Warrant") hereby elects to exercise its purchase right under such Warrant with respect to _____________________ shares of Series B Preferred Stock of Healtheon Corporation (the "Company"). 2. The undersigned Holder elects to exercise the Warrant for such shares (the "Exercise Shares") in the following manner: [ ] by the enclosed check drawn on a United States bank and for United States funds made payable to the Company in the amount of $___________; [ ] by wire transfer of United States funds to the account of the Company in the amount of which $____________, transfer has been made before or simultaneously with the delivery of this Notice pursuant to the instructions of the Company; [ ] by cancellation of indebtedness of the Company in the amount of $______________; [ ] by net issue exercise pursuant to Section 2(c) of the Warrant; [ ] by the combination of the foregoing indicated above or on the attached sheet. 3. Please issue a stock certificate or certificates representing the appropriate number of shares in the name of the undersigned or in such other names as is specified below: Name: ----------------------------------------- Address: ----------------------------------------- Tax Ident. No.: ------------------------------------ HOLDER: By: ------------------------------- Date: ------------------------------- EX-10.23 20 EX-10.23 HEALTHEON CORPORATION SERIES C PREFERRED STOCK PURCHASE AGREEMENT JULY 25, 1997 TABLE OF CONTENTS
PAGE ---- SECTION I - Authorization and Sale of Stock 1.1 Authorization.............................................. 1 1.2 Sale of Stock.............................................. 1 SECTION 2 - Closing Date; Delivery....................................... 1 2.1 Closing Date............................................... 1 2.2 Subsequent Closing......................................... 1 2.3 Delivery................................................... 2 SECTION 3 - Representations and Warranties of the Company................ 2 3.1 Organization and Standing; Certificate and Bylaws........... 2 3.2 Corporate Power............................................. 2 3.3 Subsidiaries................................................ 2 3.4 Capitalization.............................................. 2 3.5 Authorization............................................... 3 3.6 Title to Properties and Assets; Liens, etc.................. 3 3.7 Financial Statements........................................ 3 3.8 Activities Since Balance Sheet Date......................... 4 3.9 Tax Returns and Payments.................................... 5 3.10 Patents, Trademarks, etc.................................... 5 3.11 Material Contracts and Commitments.......................... 5 3.12 Compliance with Other Instruments, None Burdensome, etc..... 5 3.13 Litigation, etc............................................. 5 3.14 Employees................................................... 6 3.15 Registration Rights......................................... 6 3.16 Governmental Consent, etc................................... 6 3.17 Brokers or Finders.......................................... 6 3.18 Disclosures................................................. 6 3.19 Permits..................................................... 6 3.20 Real Property Holding Company............................... 6 SECTION 4 - Representations and Warranties of the Investors............... 7 4.1 Authorization............................................... 7 4.2 Purchase Entirely for Own Account........................... 7 4.3 Investment Experience....................................... 7 4.4 Accredited Investor......................................... 7 4.5 No Public Market............................................ 7 4.6 Receipt of Information...................................... 7
-i- 4.7 Restricted Securities....................................... 8 4.8 Further Limitations on Disposition.......................... 8 4.9 Legends..................................................... 8 4.10 Government Consents......................................... 9
SECTION 5 - Conditions to Closing of Investors............................ 9 5.1 Representations and Warranties Correct...................... 9 5.2 Covenants................................................... 9 5.3 Opinion of Company's Counsel................................ 9 5.4 Compliance Certificate...................................... 9 5.5 Blue Sky.................................................... 9 5.6 Board of Directors.......................................... 9 5.7 Restated Certificate........................................ 9 5.8 No Material Adverse Change.................................. 10 5.9 Investors' Rights Agreement................................. 10 SECTION 6 - Conditions to Closing of Company.............................. 10 6.1 Representations............................................. 10 6.2 Blue Sky.................................................... 10 6.3 Restated Certificate........................................ 10 SECTION 7 - Miscellaneous................................................ 10 7.1 Governing Law............................................... 10 7.2 Survival.................................................... 10 7.3 Successors and Assigns...................................... 10 7.4 Entire Agreement; Amendment................................. 10 7.5 Notices, etc................................................ 11 7.6 Delays or Omissions......................................... 11 7.7 California Corporate Securities Law......................... 11 7.8 Expenses.................................................... 11 7.9 Counterparts................................................ 11 7.10 Severability................................................ 11 7.11 Gender...................................................... 11 7.12 Information Rights.......................................... 12
-ii- EXHIBITS A. Schedule of Investors B. Restated Certificate of Incorporation C. Exceptions to Representations and Warranties of the Company D. Fourth Amended and Restated Investors' Rights Agreement -iii- HEALTHEON CORPORATION SERIES C PREFERRED STOCK PURCHASE AGREEMENT This Series C Preferred Stock Purchase Agreement (the "Agreement') is made as of July 25, 1997, by and among Healtheon Corporation, a Delaware corporation (the "Company"), with its principal office at 87 Encina Avenue, Palo Alto, California 94301, and the persons and entities listed on the Schedule of Investors attached as Exhibit A hereto (the "Investors"). SECTION I AUTHORIZATION AND SALE OF STOCK 1.1 AUTHORIZATION. The Company has authorized the sale and issuance of up to two million six hundred thousand (2,600,000) shares of its Series C Preferred Stock (the "Series C Preferred"), having the rights, restrictions, privileges and preferences as set forth in the Company's Restated Certificate of Incorporation in the form attached to this Agreement as Exhibit B (the "Restated Certificate"). 1.2 SALE OF STOCK. Subject to the terms and conditions hereof, the Company will issue and sell to the Investors, and the Investors will buy from the Company, the number of shares (the "Shares") of Series C Preferred specified opposite each Investor's name on the Schedule of Investors, at a cash purchase price of two dollars and fifty cents ($2.50) per share. The Company's agreements with each of the Investors are separate agreements, and the sales of the Shares to each of the Investors are separate sales. SECTION 2 CLOSING DATE; DELIVERY 2.1 CLOSING DATE. The initial closing of the purchase and sale of two million four hundred thousand (2,400,000) shares of the Series C Preferred Stock was held at 11:00 a.m. on July 1, 1997 and the second closing with respect to two hundred thousand (200,000) shares of Series C Preferred is anticipated to be held on July 25, 1997 at 11:00 a.m. (the "Closing") or on such later date or dates as the Company and the applicable Investors may agree to (the date of such Closing being referred to as the "Closing Date"). The place of the Closing (including the place of delivery to the Investors by the Company of the certificates evidencing all shares Series C Preferred being purchased and the place of payment to the Company by the Investors of the purchase price therefor) shall be at the offices of the Company located at 87 Encina Avenue, Palo Alto, California 94301, or such other place as the Investors and the Company may mutually agree. 2.2 SUBSEQUENT CLOSING. The Company may, in its sole discretion, provide for deferred closings hereunder (a "Subsequent Closing"), to be held at the offices of the Company, at such time and dates as the Company may determine (the date of any such Subsequent Closing being referred to as a "Subsequent Closing Date"). Any Subsequent Closing(s) will take place as promptly as possible following the initial Closing hereunder. The number of shares of Series C Preferred which any Subsequent Investor shall be entitled to purchase, shall be determined within the sole discretion of the Company, but in no event shall the total number of shares of Series C Preferred sold pursuant to this Agreement be more than three million (3,000,000) shares. Upon completion of any Subsequent Closing, if any, all additional purchasers of shares of Series C Preferred shall be considered "Investors" within the meaning of this Agreement. 2.3 DELIVERY. At the Closing and any Subsequent Closing, the Company will deliver to each Investor a certificate or certificates representing the number of Shares designated in column 2 of the Schedule of Investors to be purchased by each Investor, against payment of the purchase price therefor, by check or wire transfer payable to the Company, or by cancellation of outstanding indebtedness from the Company to such Investor, or by a combination thereof, in the amount specified in column 3 of the Schedule of Investors. SECTION 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY Except as set forth on Exhibit C attached hereto, the Company hereby represents and warrants to the Investors as follows: 3.1 ORGANIZATION AND STANDING; CERTIFICATE AND BYLAWS. The Company is a corporation duly organized and existing under, and by virtue of, the laws of the State of Delaware and is in good standing under such laws. The Company has requisite corporate power to own and operate its properties and assets, and to carry on its business as presently conducted and as proposed to be conducted. The Company is not qualified to do business as a foreign corporation in any jurisdiction and such qualification is not presently required. 3.2 CORPORATE POWER. The Company will have at the Closing Date all requisite corporate power to execute and deliver this Agreement and the Fourth Amended and Restated Investors' Rights Agreement attached hereto as Exhibit D (the "Investors' Rights Agreement"), to sell and issue the Shares hereunder, to issue the underlying Series C-1 Preferred Stock (the "Series C-1 Preferred") and Common Stock (together, the "Conversion Stock") in accordance with the provisions of the Restated Certificate, and to carry out and perform its obligations under the terms of this Agreement and the Investors' Rights Agreement. 3.3 SUBSIDIARIES. The Company has no subsidiaries or affiliated companies and does not otherwise own or control, directly or indirectly, any other corporation, association or business entity. 3.4 CAPITALIZATION. The authorized capital stock of the Company consists of (a) 34,000,000 shares of Common Stock, 2,353,221 shares of which are issued and outstanding prior to the Closing; (b) 10,305,000 shares of Series A Preferred, 10,285,000 shares of which are issued and outstanding prior to the Closing and 10,305,000 shares of Series A-1 Preferred, none of which has been or will be issued or outstanding prior to the Closing (c) 8,000,000 shares of Series B Preferred, 3,000,000 of which are issued and are outstanding as of the date hereof, 2,000,000 of which are subject to outstanding warrants as of the date hereof and up to 1,015,000 of which are subject to outstanding purchase and/or warrant rights as of the date hereof and 8,000,000 shares of Series B-1 Preferred, none of which has been or will be issued or outstanding prior to the Closing; and (d) 3,000,000 shares of Series C Preferred, 2,400,000 of which will be issued and outstanding prior to the Closing and 3,000,000 shares of Series C-1 Preferred, none of which has been or will be issued or outstanding prior to the Closing. The Company has reserved (i) 200,000 shares of Series C Preferred for issuance hereunder, (ii) sufficient shares of Common Stock for issuance upon conversion of the Series C Preferred and/or Series C-1 Preferred, (iii) an aggregate of 2,600,000 shares of Series C-1 Preferred for issuance upon conversion of the Series C Preferred, (iv) two million (2,000,000) shares of Series B Preferred for issuance pursuant to outstanding warrants; (v) 72,000 shares of Series B Preferred which will be subject to issuance upon the exercise of warrants issued pursuant to the Company's 2 April 1997 Bridge Loan; (vi) one million (1,000,000) shares of Series B Preferred for issuance pursuant to an outstanding purchase right and/or warrant right which has been granted to the Company's Chief Executive Officer candidate; (vii) fifteen thousand (15,000) shares of Series B Preferred for issuance pursuant to an outstanding purchase right which has been granted to a member of the Company's Board of Directors; (viii) sufficient shares of Common Stock for issuance upon conversion of the Series B Preferred and/or Series B-1 Preferred, (ix) sufficient number of shares of Series B-1 Preferred for issuance upon conversion of the Series B Preferred, (x) 10,285,000 shares of Series A-1 Preferred for issuance upon conversion of the Series A Preferred, (xi) sufficient shares of Common Stock for issuance upon conversion of the Series A Preferred and/or Series A-1 Preferred, and (xii) 9,000,000 shares of Common Stock for issuance to employees and consultants pursuant to the Company's 1996 Stock Plan (of which 4,130,608 shares have been issued and/or option granted with respect thereto, prior to the date hereof). There are no other options, warrants, conversion privileges or other rights presently outstanding to purchase or otherwise acquire any authorized but unissued shares of capital stock or other securities of the Company. The Series C Preferred and the Series C-1 Preferred shall have the rights, preferences, privileges and restrictions set forth in the Restated Certificate. There are no other options, warrants, conversion privileges or other rights presently outstanding to purchase or otherwise acquire any authorized but unissued shares of capital stock or other securities of the Company. Assuming the accuracy of each Investor's representations in Section 4 below, upon issuance, the Shares will have been issued in compliance with all federal and state securities laws. 3.5 AUTHORIZATION. All corporate action on the part of the Company, its directors and shareholders necessary for the authorization, execution, delivery and performance of this Agreement and the Investors' Rights Agreement by the Company, the authorization, sale, issuance and delivery of the Shares and the Conversion Stock and the performance of the Company's obligations hereunder has been taken or will be taken prior to the Closing. This Agreement and the Investors' Rights Agreement, when executed and delivered by the Company, shall constitute the valid and binding obligations of the Company enforceable in accordance with their respective terms except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, and other equitable remedies, and (iii) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal and state securities laws. The Shares, when issued in compliance with the provisions of this Agreement, will be validly issued and will be fully paid and nonassessable; the Series C-1 Preferred issuable upon conversion of the Series C Preferred has been duly and validly reserved and, when issued in compliance with the provisions of this Agreement, will be validly issued and will be fully paid and nonassessable and the Common Stock issuable upon conversion of the Series C Preferred and/or the Series C-1 Preferred has been duly and validly reserved and, when issued in compliance with the provisions of this Agreement, will be validly issued and will be fully paid and nonassessable, and free of any liens or encumbrances (assuming the Investors take the Shares with no notice thereof) other than any liens or encumbrances created by or imposed upon the holders; provided, however, that the Shares and the Conversion Stock may be subject to restrictions on transfer under state or federal securities laws and restrictions set forth herein. 3.6 TITLE TO PROPERTIES AND ASSETS; LIENS ETC. The Company has good and valid title to its properties and assets, and has good title to all its leasehold interests, in each case subject to no mortgage, pledge, lien, lease, encumbrance or charge, other than (i) the lien of current taxes not yet due and payable, and (ii) possible minor liens and encumbrances which do not in any case materially detract from the value of the property subject thereto or materially impair the operations of the Company, and which have not arisen otherwise than in the ordinary course of business. 3 3.7 FINANCIAL STATEMENTS. The Company has delivered to each Investor its audited financial statements (balance sheet, income statement and statement of cashflow) for the period from inception through December 31, 1996 and its unaudited financial statements (balance sheet and income statement) for the period ended May 31, 1997 (the "Financial Statements"). The Financial Statements have been prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis, except that the Financial Statements may not contain all footnotes required by GAAP and the May 31, 1997 Financial Statement are subject to normal year end adjustments. The Financial Statements fairly present the financial condition and operating results of the Company as of the dates, and for the periods, indicated therein. Except as set forth in the Financial Statements, the Company has no material liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to May 31, 1997 which individually or in the aggregate are not material to the financial condition or operating results of the Company, and (ii) obligations not required under generally accepted accounting principles to be reflected in the Financial Statements. 3.8 ACTIVITIES SINCE BALANCE SHEET DATE. Since the Company's balance sheet dated May 3 1, 1997 there has not been: (a) any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the assets, properties, financial condition, operating results, or business of the Company; (b) any waiver by the Company of a valuable right or of a material debt owed to it; (c) any material change or amendment to a material contract or arrangement by which the Company or any of its assets or properties is bound or subject, except for changes or amendments which are expressly provided for or disclosed in this Agreement; (d) any loans or guarantees made by the Company to or for the benefit of its employees, officers or directors, or any members of their immediate families, other than travel advances or other advances made in the ordinary course of business; (e) any declaration, setting aside or payment or other distribution in respect of any of the Company's capital stock, or any direct or indirect redemption, purchase or other acquisition of any such stock by the Company; (f) any incurrance of indebtedness for money borrowed individually in excess of $50,000 or in excess of $100,000 in the aggregate; (g) any material change in any compensation arrangement or agreement with any employee; (h) any sale, assignment or transfer of any patents, trademarks, copyrights, trade secrets or other intangible assets; (i) any resignation or termination of employment of any key officer of the Company; and (j) to the Company's knowledge, any other event or condition or any character which would be reasonably likely to materially and adversely affect the assets, properties, financial condition, operating results or business of the Company; 4 3.9 TAX RETURNS AND PAYMENTS. The Company has timely filed all tax returns and reports when and as required by law and has never been audited by any state or federal taxing authority. All tax returns and reports of the Company, if applicable, are true and correct in all material respects. 3.10 PATENTS, TRADEMARKS, ETC. The Company owns or has the right, or prior to the Closing will own or have the right, to use, free and clear of all liens, charges, claims and restrictions, all patents, trademarks, service marks, trade names, copyrights, licenses and rights necessary to its business as now conducted, and is not, to the best of its knowledge, infringing upon or otherwise acting adversely to the right or claimed right of any person under or with respect to any of the foregoing. There are no outstanding options, licenses, or agreements of any kind relating to the foregoing, nor is the Company bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information, proprietary rights and processes of any other person or entity. The Company has not received any written communications alleging that the Company has violated or, by conducting its business as proposed, would violate any patent, trademark, service mark, trade name, copyright or trade secret or other proprietary right of any other person or entity. The Company is not aware that any 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 such employee's best efforts to promote the interests of the Company or that would conflict with the Company's business as proposed to be conducted. Neither the execution nor delivery of this Agreement, nor the carrying on of the Company's business by the employees of the Company, nor the conduct of the Company's business as proposed, will, to the Company's knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any of such employees is now obligated. The Company 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 the Company. 3.11 MATERIAL CONTRACTS AND COMMITMENTS. Neither the Company, nor, to the best knowledge of the Company, any third party is in default under any material contract, agreement or instrument to which the Company is a party. 3.12 COMPLIANCE WITH OTHER INSTRUMENTS, NONE BURDENSOME, ETC. The Company is not in violation of any term of the Restated Certificate of Incorporation or Bylaws, or in any material respect of any term or provision of any material mortgage, indenture, contract, agreement or instrument to which it is a party or by which it is bound, and to the best of its knowledge, is not in violation of any order, statute, rule or regulation applicable to the Company, which violation reasonably would be expected to have a material adverse effect on the Company's business or financial condition. The execution, delivery and performance of and compliance with this Agreement, and the issuance of the Shares and the Conversion Stock, have not resulted and will not result in any violation of, or conflict with, or constitute a default under, or result in the creation of, any material mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company. 3.13 LITIGATION, ETC. There are no actions, suits, proceedings or investigations pending against the Company or its properties before any court or governmental agency (nor, to the best of the Company's knowledge, is there any written threat thereof), which, either in any case or in the aggregate, reasonably would be expected to result in any material adverse change in the business or financial condition of the Company or any of its properties or assets, or in any material impairment of the right or ability of the Company to carry on its business as now conducted, and none which questions the validity of this Agreement or the Investors' Rights Agreement or any action taken or to be taken in connection herewith. The Company is not a party to, or to the best of its knowledge named in any order, writ, injunction, 5 judgment or decree of any court or government agency or instrumentality. There is no action, suit or proceeding by the Company currently pending or that the Company currently intends to initiate. 3.14 EMPLOYEES. To the best of the Company's knowledge, no employee of the Company is in violation of any term of any employment contract, patent disclosure agreement or any other contract or agreement relating to the relationship of any such employee with the Company or any other party because of the nature of the business conducted or to be conducted by the Company. The Company does not have any collective bargaining agreements covering any of its employees. 3.15 REGISTRATION RIGHTS. Except as set forth in the Investors' Rights Agreement, the Company is not currently under any obligation to register under the Securities Act of 1933, as amended (the "Act") any of its presently outstanding securities or any of its securities which may hereafter be issued. 3.16 GOVERNMENTAL CONSENT, ETC. No consent, approval or authorization of, or designation, declaration or filing with, any federal, state or local governmental authority on the part of the Company is required in connection with the valid execution and delivery of this Agreement and the Investors' Rights Agreement, or the offer, sale or issuance of the Shares and the Conversion Stock, or the consummation of any other transaction contemplated hereby, except (a) filing of the Restated Certificate in the office of the Secretary of State of the State of Delaware, and (b) qualification (or taking such action as may be necessary to secure an exemption from qualification, if available) of the offer and sale of the Shares and the Conversion Stock under the California Corporate Securities Law and other applicable Blue Sky laws, which filing and qualification, if required, will be accomplished in a timely manner prior to or promptly upon completion of the Closing. 3.17 BROKERS OR FINDERS. The Company has not incurred, and will not incur, directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement or any transaction contemplated hereby. 3.18 DISCLOSURES. No representation, warranty or statement by the Company in this Agreement, or in any written statement or certificate furnished to the Investors in connection with this Agreement, contains any untrue statement of a material fact or, when taken together, omits to state a material fact necessary to make the statements made herein, in light of the circumstances under which they were made, not misleading. However, as to any projections furnished to the Investors, such projections were prepared in good faith by the Company, but the Company makes no representation or warranty that it will be able to achieve such projections. The Company has fully provided each Investor with all the information that such Investor has requested for deciding whether to purchase the Shares. 3.19 PERMITS. The Company has all franchises, permits, licenses, and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could materially and adversely affect the business, properties or financial condition of the Company, and believes it can obtain without undue burden or expense, any similar authority for the conduct of its business as planned to be conducted. The Company is not in default in any material respect under any of such franchises, permits, licenses or other similar authority. 3.20 REAL PROPERTY HOLDING COMPANY. The Company is not a "real property holding company" as defined under Section 897 of the Internal Revenue Code. 6 SECTION 4 REPRESENTATIONS AND WARRANTIES OF THE INVESTORS Each Investor hereby represents and warrants to the Company with respect to its purchase of the Shares as follows: 4.1 AUTHORIZATION. This Agreement and the Investors' Right Agreement, when executed and delivered by the Investor, will each constitute the Investor's valid and legally binding obligation, enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, and (iii) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities laws. 4.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with the Investor in reliance upon the Investor's representation to the Company, which by the Investor's execution of this Agreement the Investor hereby confirms, that the Common Stock or Series C Preferred to be received by the Investor and the Common Stock and Series C-1 Preferred issuable upon conversion of the Series C Preferred (collectively, the "Securities") will be acquired for investment for the Investor's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that the Investor has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, the Investor further represents that the Investor does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities. The Investor represents that it has the full power and authority to enter into this Agreement. 4.3 INVESTMENT EXPERIENCE. The Investor is an investor in securities of companies in the development stage and acknowledges that it is able to fend for itself, can bear the economic risk of its investment, and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Series C Preferred. If other than an individual, the Investor also represents it has not been organized solely for the purpose of acquiring the Series C Preferred, or if the Investor has been organized solely for the purpose of acquiring the Series C Preferred, that all of the equity owners of the Investor are "accredited investors" as defined below. 4.4 ACCREDITED INVESTOR. The Investor is an "accredited investor" within the meaning of Securities and Exchange Commission ("SEC") Rule 501 of Regulation D, as presently in effect. 4.5 NO PUBLIC MARKET. Each Investor understands that no public market now exists for any of the securities issued by the Company and that it is unlikely that a public market will ever exist for the Shares. 4.6 RECEIPT OF INFORMATION. Each Investor has received and reviewed this Agreement and all Exhibits thereto; it, its attorney and its accountant have had access to, and an opportunity to review all documents and other materials provided by or requested of, the Company; it and they have been given an opportunity to ask any and all questions of, and receive answers from, the Company concerning the terms and conditions of the offering and to obtain all information it or they believe necessary or appropriate to evaluate the suitability of an investment in the Common Stock or Series C Preferred; and, in evaluating the suitability of an investment in the Common Stock or Series C Preferred, it and they have not relied upon any 7 representations or other information (whether oral or written) other than as set forth in the documents and answers referred to above. 4.7 RESTRICTED SECURITIES. The Investor understands that the Securities it is purchasing are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold without registration under the Act only in certain limited circumstances. In addition, the Investor represents that it is familiar with Rule 144 promulgated under the Act, as presently in effect, and understands the resale limitations imposed thereby and by the Act. 4.8 FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting the representations set forth above, the Investor further agrees not to make any disposition of all or any portion of the Securities unless: (a) There is then in effect a Registration Statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such Registration Statement; (b) The Investor shall have notified the Company of the proposed disposition and shall have furnished the Company with a statement of the circumstances surrounding the proposed disposition, and if requested by the Company, the Investor shall have furnished the Company with either (i) an unqualified written opinion of counsel who shall be reasonably satisfactory to the Company addressed to the Company and reasonably satisfactory in form and substance to the Company's counsel to the effect that the proposed transfer may be effected without registration under the Act or (ii) a "No Action" letter from the Securities and Exchange Commission to the effect that the transfer of such securities without registration will not result in a recommendation by the staff of the Securities and Exchange Commission that action be taken with respect thereto, whereupon the holder of such Securities shall be entitled to transfer such Securities in accordance with the terms of the notice delivered by the Holder to the Company; or (c) The Investor shall have sold, assigned, transferred, pledged or otherwise disposed of the Securities in a transaction involving the distribution without consideration of the Securities by the Investor to any of its partners or retired partners, or to the estate of any of its partners or retired partners, or in a transaction involving the transfer or distribution of the Securities by a corporation to any subsidiary, parent or affiliated corporation of such corporation; provided in each case that the Investor shall give written notice to the Company of such Investor's intention to effect such transfer, sale, assignment, pledge or other disposition. The Investor will cause any such proposed purchaser assignee, transferee or pledgee of any Securities held by the Investor to agree to take and hold such Securities subject to the provisions and upon the conditions specified in this Agreement. 4.9 LEGENDS. It is understood that the certificates evidencing the Securities may bear one or all of the following legends: (a) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A OF SUCH ACT." (b) Any legend required by the laws of the State of Delaware or the State of California, including any legend required by the California Department of Corporations. 8 4.10 GOVERNMENT CONSENTS. Other than securities law filings required to be made by the Company, no consent, approval or authorization of or designation, declaration or filing with any state, federal or foreign governmental authority on the part of the Investor is required in connection with the valid execution and delivery of this Agreement and the Investors' Rights Agreement by the Investor and the consummation by the Investor of the transactions contemplated hereby and thereby. SECTION 5 CONDITIONS TO CLOSING OF INVESTORS The Investors' obligations to purchase the Shares at the Closing or at any Subsequent Closing are, at the option of each Investor, subject to the fulfillment on or prior to the Closing Date or at any Subsequent Closing Date of the following conditions: 5.1 REPRESENTATIONS AND WARRANTIES CORRECT. The representations and warranties made by the Company in Section 3 hereof shall be true and correct in all material respects when made, and shall be true and correct in all material respects on the Closing Date, or the Subsequent Closing Date, as the case may be, with the same force and effect as if they had been made on and as of said date. 5.2 COVENANTS. All covenants, agreements and conditions contained in this Agreement to be performed by the Company on or prior to the Closing Date or the Subsequent Closing Date, as the case may be, shall have been performed or complied with in all material respects. 5.3 OPINION OF COMPANY'S COUNSEL. The Investors shall have received from counsel to the Company, an opinion addressed to them, dated the Closing Date or the Subsequent Closing Date, as the case may be, in a form reasonably acceptable to the Investors. 5.4 COMPLIANCE CERTIFICATE. The Company shall have delivered to the Investors a certificate executed by the President of the Company, dated the Closing Date or the Subsequent Closing Date, as the case may be, and certifying to the fulfillment of the conditions specified in Sections 5.1, 5.2, and 5.8 of this Agreement, and that he has made, or caused to be made, such investigations as he deemed necessary in order to permit him to verify the accuracy of the information set forth in such certificate. 5.5 BLUE SKY. The Company shall have obtained all necessary Blue Sky law permits and qualifications, or secured an exemption therefrom, required by any state for the offer and sale of the Shares and the Conversion Stock. 5.6 BOARD OF DIRECTORS. The Board of Directors shall at the Closing consist of Jim Clark, Brook Byers, Hugh Rienhoff, Jr., M.D. and John Doerr. 5.7 RESTATED CERTIFICATE. The Restated Certificate shall have been filed with the Secretary of State of the State of Delaware. 5.8 NO MATERIAL ADVERSE CHANGE. There shall have been no material adverse change in the Company's business or financial condition. 5.9 INVESTORS' RIGHTS AGREEMENT. The Investors and the Company shall have entered into the Investors' Rights Agreement in substantially the form attached hereto as Exhibit D. 9 SECTION 6 CONDITIONS TO CLOSING OF COMPANY The Company's obligation to sell and issue the Shares at the Closing or at any Subsequent Closing, is at the option of the Company, subject to the fulfillment of the following conditions: 6.1 REPRESENTATIONS. The representations made by the Investors in Section 4 hereof shall be true and correct when made, and shall be true and correct on the Closing Date or the Subsequent Closing Date, as the case may be. 6.2 BLUE SKY. The Company shall have obtained all necessary Blue Sky law permits and qualifications, or secured an exemption therefrom, required by any state for the offer and sale of the Shares and the Conversion Stock. 6.3 RESTATED CERTIFICATE. The Restated Certificate shall have been filed with the Secretary of State of the State of Delaware. SECTION 7 MISCELLANEOUS 7.1 GOVERNING LAW. This Agreement shall be governed in all respects by the laws of the State of California, without giving effect to the conflicts of laws principles thereof. 7.2 SURVIVAL. The representations, warranties, covenants, and agreements made herein shall survive any investigation made by any Investor and the closing of the transactions contemplated hereby. 7.3 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto, provided, however, that the rights of a Investor to purchase Shares shall not be assignable without the written consent of the Company. 7.4 ENTIRE AGREEEMNT; AMENDMENT. This Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. Neither this Agreement nor any term hereof may be amended, waived, discharged, or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge, or termination is sought; provided, however, that holders of a majority of the shares of Common Stock issued or issuable upon conversion of the Shares and/or the Series C-I Preferred and (whether or not converted) not resold to the public may waive or amend, on behalf of all Investors, any provisions hereof benefiting Investors in respect of the Shares. 7.5 NOTICES, ETC. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed effectively given upon delivery to the party to be notified in person or by courier service or five days after deposit with the United States mail, by registered or certified mail, postage prepaid, addressed (a) if to a Investor, at such Investor's address set forth in Exhibit A, or at such other address as such Investor shall have furnished to the Company in writing, or (b) if to any other holder of any Shares, at such address as such holder shall have furnished the Company in writing, or, until any such holder so furnishes an address to the Company, then to and at the address of the last holder of such Shares who has 10 so furnished an address to the Company, or (c) if to the Company, one copy should be sent to its address set forth on the cover page of this Agreement and addressed to the attention of the Corporate Secretary, or at such other address as the Company shall have furnished to the Investors. 7.6 DELAYS OR OMISSIONS. No delay or omission to exercise any right, power or remedy accruing to any holder of any Shares, upon any breach or default of the Company under this Agreement, shall impair at such right, power or remedy of such holder nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any holder of any breach or default under this Agreement, or any waiver on the part of any holder of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any holder, shall be cumulative and not alternative. 7.7 CALIFORNIA CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS AN EXEMPTION FROM SUCH QUALIFICATION IS AVAILABLE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, OR SUCH EXEMPTION BEING AVAILABLE. 7.8 EXPENSES. The Company and the Investors shall each bear their own expenses and legal fees with respect to this Agreement and the transactions contemplated hereby except that, assuming a successful completion of the offering the Company will pay at the initial Closing the reasonable legal fees and reasonable expenses upon receipt of a bill therefor, incurred by one counsel to the Investors. 7.9 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which may be executed by less than all of the Investors, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument. 7.10 SEVERABILITY. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that no such severablility shall be effective if it materially changes the economic benefit of this Agreement to any party. 7.11 GENDER. The use of the neuter gender herein shall be deemed to include the masculine and the feminine gender, if the context so requires. 7.12 INFORMATION RIGHTS. The Company hereby agrees to provide the Investors with the following information rights: a. The Company shall, as soon as practicable, but in any event within ninety (90) days after the end of each fiscal year of the Company, furnish to Investor a consolidated profit and loss statement for such fiscal year, a consolidated balance sheet of the Company and a consolidated statement of stockholders' equity as of the end of such year, and a consolidated statement of cash flows for such year, such year-end financial reports to be prepared in accordance with generally accepted accounting principles 11 and audited and certified by independent public accountants of nationally recognized standing selected by the Company. b. The Company shall furnish to Investor, as soon as practicable following the end of each quarter at such time as the Company furnishes to its other venture capital investors, a consolidated profit and loss statement for each quarter and year-to-date, a consolidated balance sheet of the Company and a consolidated statement of cash flows for such quarter and year-to-date prepared in accordance with generally accepted accounting principles consistently applied. c. The Company shall furnish Investor, provided Investor continues to hold all of the Shares purchased hereunder, upon request, within thirty (30) days of the end of each month, an unaudited consolidated profit and loss statement, consolidated statement of cash flows and consolidated balance sheet for and as of the end of such month, and comparison to year-end results (if any). d. The rights to receive financial information set forth herein above may be assigned by Investor to a subsequent transferee or assignee which holds in the aggregate at least two hundred fifty thousand (250,000) shares (as adjusted for stock splits, combinations, dividends and the like) of such Investor's Shares (or Common Stock issued upon conversion of such Preferred Stock), provided that the transferee or assignee of such rights is not deemed by the Board of Directors, in its reasonable judgment, to be a current or potential competitor of the Company. The foregoing Series C Preferred Stock Purchase Agreement is hereby executed as of the date first above written. HEALTHEON CORPORATE By: /s/ W. Michael Long ---------------------------- President 12 EX-10.24 21 EX-10.24 HEALTHEON CORPORATION SERIES D PREFERRED STOCK PURCHASE AGREEMENT This Series D Preferred Stock Purchase Agreement (the "Agreement") is made as of October 13, 1997, by and among Healtheon Corporation, a Delaware corporation (the "Company"), with its principal office at 87 Encina Avenue, Palo Alto, California 94301, and the persons and entities listed on the Schedule of Investors attached as Exhibit A hereto (the "Investors"). SECTION 1 AUTHORIZATION AND SALE OF STOCK 1.1 AUTHORIZATION. The Company has authorized the sale and issuance of up to four million eight hundred seven thousand six hundred ninety-three (4,807,693) shares of its Series D Preferred Stock (the "Series D Preferred"), having the rights, restrictions, privileges and preferences as set forth in the Company's Restated Certificate of Incorporation in the form attached to this Agreement as Exhibit B (the "Restated Certificate"). 1.2 SALE OF STOCK. Subject to the terms and conditions hereof, the Company will issue and sell to the Investors, and the Investors will buy from the Company, the number of shares (the "Shares") of Series D Preferred specified opposite each Investor's name on the Schedule of Investors, at a cash purchase price of five dollars and twenty cents ($5.20) per share. The Company's agreements with each of the Investors are separate agreements, and the sales of the Shares to each of the Investors are separate sales. SECTION 2 CLOSING DATE; DELIVERY 2.1 CLOSING DATE. The initial closing of the purchase and sale of the Shares hereunder (the "Closing") shall be held at 11:00 a.m. on October 13, 1997 or on such later date or dates as the Company and the Investors may agree to (the date of such Closing being referred to as the "Closing Date"). The place of the Closing (including the place of delivery to the Investors by the Company of the certificates evidencing all shares Series D Preferred being purchased and the place of payment to the Company by the Investors of the purchase price therefor) shall be at the offices of the Company located at 87 Encina Avenue, Palo Alto, California 94301, or such other place as the Investors and the Company may mutually agree. 2.2 SUBSEQUENT CLOSING. The Company may, in its sole discretion, provide for deferred closings hereunder (a "Subsequent Closing"), to be held at the offices of the Company, at such time and dates as the Company may determine (the date of any such Subsequent Closing being referred to as a "Subsequent Closing Date"). Any Subsequent Closing(s) will take place as promptly as possible following the initial Closing hereunder. The number of shares of Series D Preferred which any Subsequent Investor shall be entitled to purchase, shall be determined within the sole discretion of the Company, but in no event shall the total number of shares of Series D Preferred sold pursuant to this Agreement be more than three million (3,000,000) shares. Upon completion of any Subsequent Closing, if any, all additional purchasers of shares of Series D Preferred shall be considered "Investors" within the meaning of this Agreement. 1 2.3 DELIVERY. At the Closing and any Subsequent Closing, the Company will deliver to each Investor a certificate or certificates representing the number of Shares designated in column 2 of the Schedule of Investors to be purchased by each Investor, against payment of the purchase price therefor, by check or wire transfer payable to the Company, or by cancellation of outstanding indebtedness from the Company to such Investor, or by a combination thereof, in the amount specified in column 3 of the Schedule of Investors. SECTION 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY Except as set forth on Exhibit C attached hereto, the Company hereby represents and warrants to the Investors as follows: 3.1 ORGANIZATION AND STANDING; CERTIFICATE AND BYLAWS. The Company is a corporation duly organized and existing under, and by virtue of, the laws of the State of Delaware and is in good standing under such laws. The Company has requisite corporate power to own and operate its properties and assets, and to carry on its business as presently conducted and as proposed to be conducted. The Company is not qualified to do business as a foreign corporation in any jurisdiction and such qualification is not presently required. 3.2 CORPORATE POWER. The Company will have at the Closing Date all requisite corporate power to execute and deliver this Agreement and the Amended and Restated Investors' Rights Agreement dated October 13, 1997 attached hereto as Exhibit D (the "Investors' Rights Agreement"), to sell and issue the Shares hereunder, to issue the underlying Series D-1 Preferred Stock (the "Series D-1 Preferred") and Common Stock (together, the "Conversion Stock") in accordance with the provisions of the Restated Certificate, and to carry out and perform its obligations under the terms of this Agreement and the Investors' Rights Agreement. 3.3 SUBSIDIARIES. The Company has no subsidiaries or affiliated companies and does not otherwise own or control, directly or indirectly, any other corporation, association or business entity. 3.4 CAPITALIZATION. The authorized capital stock of the Company consists of (a) 37,00,000 shares of Common Stock, 2,167,804 shares of which are issued and outstanding prior to the Closing; (b) 10,305,000 shares of Series A Preferred, 10,305,000 shares of which are issued and outstanding prior to the Closing and 10,305,000 shares of Series A-1 Preferred, none of which has been or will be issued or outstanding prior to the Closing (c) 6,105,000 shares of Series B Preferred, 3,277,500 of which are issued and are outstanding as of the date hereof, 2,811,947 of which are subject to outstanding warrants as of the date hereof and 6,105,000 shares of Series B-1 Preferred, none of which has been or will be issued or outstanding prior to the Closing; (d) 2,600,000 shares of Series C Preferred, 2,600,000 of which are issued and outstanding prior to the Closing and 2,600,000 shares of Series C-1 Preferred, none of which has been or will be issued or outstanding prior to the Closing; (e) 5,000,000 shares of Series D Preferred, none of which will be issued and outstanding prior to the Closing and 5,000,000 shares of Series D-1 Preferred, none of which has been or will be issued or outstanding prior to the Closing. The Company has reserved (i) 4,807,693 shares of Series D Preferred for issuance hereunder, (ii) sufficient shares of Common Stock for issuance upon conversion of the Series D Preferred and/or Series D-1 Preferred, (iii) 4,807,693 shares of Series D-1 Preferred for issuance upon conversion of the Series D Preferred, (iv) sufficient shares of Common Stock for issuance upon conversion of the Series C Preferred and/or Series C-1 Preferred, (v) 2,600,000 shares of Series C-1 Preferred for issuance upon conversion of the Series C Preferred, (vi) two million eight hundred eleven thousand nine hundred forty seven (2,811,947) shares of Series B Preferred for issuance pursuant to outstanding warrants; (vii) sufficient 2 shares of Common Stock for issuance upon conversion of the Series B Preferred and/or Series B-1 Preferred, (viii) sufficient number of shares of Series B-1 Preferred for issuance upon conversion of the Series B Preferred, (ix) 10,305,000 shares of Series A-1 Preferred for issuance upon conversion of the Series A Preferred, (x) sufficient shares of Common Stock for issuance upon conversion of the Series A Preferred and/or Series A-1 Preferred, and (xi) 9,000,000 shares of Common Stock for issuance to employees and consultants pursuant to the Company's 1996 Stock Plan (of which 7,928,191 shares have been issued and/or options granted,with respect thereto, prior to the date hereof). There are no other options, warrants, conversion privileges or other rights presently outstanding to purchase or otherwise acquire any authorized but unissued shares of capital stock or other securities of the Company. The Series D Preferred and the Series D-1 Preferred shall have the rights, preferences, privileges and restrictions set forth in the Restated Certificate. There are no other options, warrants, conversion privileges or other rights presently outstanding to purchase or otherwise acquire any authorized but unissued shares of capital stock or other securities of the Company. Assuming the accuracy of each Investor's representations in Section 4 below, upon issuance, the Shares will have been issued in compliance with all federal and state securities laws. 3.5 AUTHORIZATION. All corporate action on the part of the Company, its directors and shareholders necessary for the authorization, execution, delivery and performance of this Agreement and the Investors' Rights Agreement by the Company, the authorization, sale, issuance and delivery of the Shares and the Conversion Stock and the performance of the Company's obligations hereunder has been taken or will be taken prior to the Closing. This Agreement and the Investors' Rights Agreement, when executed and delivered by the Company, shall constitute the valid and binding obligations of the Company enforceable in accordance with their respective terms except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, and other equitable remedies, and (iii) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal and state securities laws. The Shares, when issued in compliance with the provisions of this Agreement, will be validly issued and will be fully paid and nonassessable; the Series D-1 Preferred issuable upon conversion of the Series D Preferred has been duly and validly reserved and, when issued in compliance with the provisions of this Agreement, will be validly issued and will be fully paid and nonassessable and the Common Stock issuable upon conversion of the Series D Preferred and/or the Series D-1 Preferred has been duly and validly reserved and, when issued in compliance with the provisions of this Agreement, will be validly issued and will be fully paid and nonassessable, and free of any liens or encumbrances (assuming the Investors take the Shares with no notice thereof) other than any liens or encumbrances created by or imposed upon the holders; provided, however, that the Shares and the Conversion Stock may be subject to restrictions on transfer under state or federal securities laws and restrictions set forth herein. 3.6 TITLE TO PROPERTIES AND ASSETS, LIENS, ETC. The Company has good and valid title to its properties and assets, and has good title to all its leasehold interests, in each case subject to no mortgage, pledge, lien, lease, encumbrance or charge, other than (i) the lien of current taxes not yet due and payable, and (ii) possible minor liens and encumbrances which do not in any case materially detract from the value of the property subject thereto or materially impair the operations of the Company, and which have not arisen otherwise than in the ordinary course of business. 3.7 FINANCIAL STATEMENTS. The Company has delivered to each Investor its audited financial statements (balance sheet, income statement and statement of cashflow) for the period from inception through December 31, 1996 and its unaudited financial statements (balance sheet and income statement) for the period ended August 31, 1997 (the "Financial Statements"). The Financial Statements have been prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis, except that the August 31, 1997 Financial Statements do not contain all footnotes required by GAAP and are subject to 3 normal year end adjustments. The Financial Statements fairly present the financial condition and operating results of the Company as of the dates, and for the periods, indicated therein. Except as set forth in the Financial Statements, the Company has no material liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to August 31, 1997 which individually or in the aggregate are not material to the financial condition or operating results of the Company, and (ii) obligations not required under generally accepted accounting principles to be reflected in the Financial Statements. 3.8 ACTIVITIES SINCE BALANCE SHEET DATE. Since the Company's balance sheet dated August 3 1, 1997 there has not been: (a) any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the assets, properties, financial condition, operating results, or business of the Company; (b) any waiver by the Company of a valuable right or of a material debt owed to it; (c) any material change or amendment to a material contract or arrangement by which the Company or any of its assets or properties is bound or subject, except for changes or amendments which are expressly provided for or disclosed in this Agreement; (d) any loans or guarantees made by the Company to or for the benefit of its employees, officers or directors, or any members of their immediate families, other than travel advances or other advances made in the ordinary course of business; (e) any declaration, setting aside or payment or other distribution in respect of any of the Company's capital stock, or any direct or indirect redemption, purchase or other acquisition of any such stock by the Company; (f) any incurrance of indebtedness for money borrowed individually in excess of $50,000 or in excess of $100,000 in the aggregate; (g) any material change in any compensation arrangement or agreement with any employee; (h) any sale, assignment or transfer of any patents, trademarks, copyrights, trade secrets or other intangible assets; (i) any resignation or termination of employment of any key officer of the Company; and (j) to the Company's knowledge, any other event or condition or any character which would be reasonably likely to materially and adversely affect the assets, properties, financial condition, operating results or business of the Company; 3.9 TAX RETURNS AND PAYMENTS. The Company has timely filed all tax returns and reports when and as required by law and has never been audited by any state or federal taxing authority. All tax returns and reports of the Company, if applicable, are true and correct in all material respects. 3.10 PATENTS, TRADEMARKS, ETC. The Company owns or has the right, or prior to the Closing will own or havee the right, to use, free and clear of all liens, charges, claims and restrictions, all patents, 4 trademarks, service marks, trade names, copyrights, licenses and rights necessary to its business as now conducted, and is not, to the best of its knowledge, infringing upon or otherwise acting adversely to the right or claimed right of any person under or with respect to any of the foregoing. There are no outstanding options, licenses, or agreements of any kind relating to the foregoing, nor is the Company bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information, proprietary rights and processes of any other person or entity. The Company has not received any written communications alleging that the Company has violated or, by conducting its business as proposed, would violate any patent, trademark, service mark, trade name, copyright or trade secret or other proprietary right of any other person or entity. The Company is not aware that any 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 such employee's best efforts to promote the interests of the Company or that would conflict with the Company's business as proposed to be conducted. Neither the execution nor delivery of this Agreement, nor the carrying on of the Company's business by the employees of the Company, nor the conduct of the Company's business as proposed, will, to the Company's knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any of such employees is now obligated. The Company 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 the Company. 3.11 MATERIAL CONTRACTS AND COMMITMENTS. Neither the Company, nor, to the best knowledge of the Company, any third party is in default under any material contract, agreement or instrument to which the Company is a party. 3.12 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in violation of any term of the Restated Certificate of Incorporation or Bylaws, or in any material respect of any term or provision of any material mortgage, indenture, contract, agreement or instrument to which it is a party or by which it is bound, and to the best of its knowledge, is not in violation of any order, statute, rule or regulation applicable to the Company, which violation reasonably would be expected to have a material adverse effect on the Company's business or financial condition. The execution, delivery and performance of and compliance with this Agreement, and the issuance of the Shares and the Conversion Stock, have not resulted and will not result in any violation of, or conflict with, or constitute a default under, or result in the creation of, any material mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company. 3.13 LITIGATION, etc. There are no actions, suits, proceedings or investigations pending against the Company or its properties before any court or governmental agency (nor, to the best of the Company's knowledge, is there any written threat thereof), which, either in any case or in the aggregate, reasonably would be expected to result in any material adverse change in the business or financial condition of the Company or any of its properties or assets, or in any material impairment of the right or ability of the Company to carry on its business as now conducted, and none which questions the validity of this Agreement or the Investors' Rights Agreement or any action taken or to be taken in connection herewith. The Company is not a party to, or to the best of its knowledge named in any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit or proceeding by the Company currently pending or that the Company currently intends to initiate. 3.14 EMPLOYEES. To the best of the Company's knowledge, no employee of the Company is in violation of any term of any employment contract, patent disclosure agreement or any other contract or agreement relating to the relationship of any such employee with the Company or any other party because of the nature of the business conducted or to be conducted by the Company. The Company does not have any collective bargaining agreements covering any of its employees. 5 3.15 REGISTRATION RIGHTS. Except as set forth in the Investors' Rights Agreement, the Company is not currently under any obligation to register under the Securities Act of 1933, as amended (the "Act") any of its presently outstanding securities or any of its securities which may hereafter be issued. 3.16 GOVERNMENTAL CONSENT ETC. No consent, approval or authorization of, or designation, declaration or filing with, any federal, state or local governmental authority on the part of the Company is required in connection with the valid execution and delivery of this Agreement and the Investors' Rights Agreement, or the offer, sale or issuance of the Shares and the Conversion Stock, or the consummation of any other transaction contemplated hereby, except (a) filing of the Restated Certificate in the office of the Secretary of State of the State of Delaware, and (b) qualification (or taking such action as may be necessary to secure an exemption from qualification, if available) of the offer and sale of the Shares and the Conversion Stock under the California Corporate Securities Law and other applicable Blue Sky laws, which filing and qualification, if required, will be accomplished in a timely manner prior to or promptly upon completion of the Closing. 3.17 BROKERS OR FINDERS. The Company has not incurred, and will not incur, directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement or any transaction contemplated hereby. 3.18 DISCLOSURES. No representation, warranty or statement by the Company in this Agreement, or in any written statement or certificate furnished to the Investors in connection with this Agreement, contains any untrue statement of a material fact or, when taken together, omits to state a material fact necessary to make the statements made herein, in light of the circumstances under which they were made, not misleading. However, as to any projections furnished to the Investors, such projections were prepared in good faith by the Company, but the Company makes no representation or warranty that it will be able to achieve such projections. The Company has fully provided each Investor with all the information that such Investor has requested for deciding whether to purchase the Shares. 3.19 PERMITS. The Company has all franchises, permits, licenses, and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could materially and adversely affect the business, properties or financial condition of the Company, and believes it can obtain without undue burden or expense, any similar authority for the conduct of its business as planned to be conducted. The Company is not in default in any material respect under any of such franchises, permits, licenses or other similar authority. 3.20 REAL PROPERTY HOLDING COMPANY. The Company is not a "real property holding company" as defined under Section 897 of the Internal Revenue Code. SECTION 4 REPRESENTATIONS AND WARRANTIES OF THE INVESTORS Each Investor hereby represents and warrants to the Company with respect to its purchase of the Shares as follows: 4.1 AUTHORIZATION. This Agreement and the Investors' Right Agreement, when executed and delivered by the Investor, will each constitute the Investor's valid and legally binding obligation, enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, 6 moratorium, and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, and (iii) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities laws. 4.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with the Investor in reliance upon the Investor's representation to the Company, which by the Investor's execution of this Agreement the Investor hereby confirms, that the Common Stock or Series D Preferred to be received by the Investor and the Common Stock and Series D-1 Preferred issuable upon conversion of the Series D Preferred (collectively, the "Securities") will be acquired for investment for the Investor's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that the Investor has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, the Investor further represents that the Investor does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities. The Investor represents that it has the full power and authority to enter into this Agreement. 4.3 INVESTMENT EXPERIENCE. The Investor is an investor in securities of companies in the development stage and acknowledges that it is able to fend for itself, can bear the economic risk of its investment, and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Series D Preferred. If other than an individual, the Investor also represents it has not been organized solely for the purpose of acquiring the Series D Preferred, or if the Investor has been organized solely for the purpose of acquiring the Series D Preferred, that all of the equity owners of the Investor are "accredited investors" as defined below. 4.4 ACCREDITED INVESTOR. The Investor is an "accredited investor" within the meaning of Securities and Exchange Commission ("SEC") Rule 501 of Regulation D, as presently in effect. 4.5 NO PUBLIC MARKET. Each Investor understands that no public market now exists for any of the securities issued by the Company and that it is unlikely that a public market will ever exist for the Shares. 4.6 RECEIPT OF INFORMATION. Each Investor has received and reviewed this Agreement and all Exhibits thereto; it, its attorney and its accountant have had access to, and an opportunity to review all documents and other materials provided by or requested of, the Company; it and they have been given an opportunity to ask any and all questions of, and receive answers from, the Company concerning the terms and conditions of the offering and to obtain all information it or they believe necessary or appropriate to evaluate the suitability of an investment in the Common Stock or Series D Preferred; and, in evaluating the suitability of an investment in the Common Stock or Series D Preferred, it and they have not relied upon any representations or other information (whether oral or written) other than as set forth in the documents and answers referred to above. 4.7 RESTRICTED SECURITIES. The Investor understands that the Securities it is purchasing are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold without registration under the Act only in certain limited circumstances. In addition, the Investor represents that it is familiar with Rule 144 promulgated under the Act, as presently in effect, and understands the resale limitations imposed thereby and by the Act. 4.8 FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting the representations set forth above, the Investor further agrees not to make any disposition of all or any portion of the Securities unless: 7 (a) There is then in effect a Registration Statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such Registration Statement; (b) The Investor shall have notified the Company of the proposed disposition and shall have furnished the Company with a statement of the circumstances surrounding the proposed disposition, and if requested by the Company, the Investor shall have furnished the Company with either (i) an unqualified written opinion of counsel who shall be reasonably satisfactory to the Company addressed to the Company and reasonably satisfactory in form and substance to the Company's counsel to the effect that the proposed transfer may be effected without registration under the Act or (ii) a "No Action" letter from the Securities and Exchange Commission to the effect that the transfer of such securities without registration will not result in a recommendation by the staff of the Securities and Exchange Commission that action be taken with respect thereto, whereupon the holder of such Securities shall be entitled to transfer such Securities in accordance with the terms of the notice delivered by the Holder to the Company; or (c) The Investor shall have sold, assigned, transferred, pledged or otherwise disposed of the Securities in a transaction involving the distribution without consideration of the Securities by the Investor to any of its partners or retired partners, or to the estate of any of its partners or retired partners, or in a transaction involving the transfer or distribution of the Securities by a corporation to any subsidiary, parent or affiliated corporation of such corporation; provided in each case that the Investor shall give written notice to the Company of such Investor's intention to effect such transfer, sale, assignment, pledge or other disposition. The Investor will cause any such proposed purchaser, assignee, transferee or pledgee of any Securities held by the Investor to agree to take and hold such Securities subject to the provisions and upon the conditions specified in this Agreement. 4.9 LEGENDS. It is understood that the certificates evidencing the Securities may bear one or all of the following legends: (a) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A OF SUCH ACT." (b) Any legend required by the laws of the State of Delaware or the State of California, including any legend required by the California Department of Corporations. 4.10 GOVERNMENT CONSENTS. Other than securities law filings required to be made by the Company, no consent, approval or authorization of or designation, declaration or filing with any state, federal or foreign governmental authority on the part of the Investor is required in connection with the valid execution and delivery of this Agreement and the Investors' Rights Agreement by the Investor and the consummation by the Investor of the transactions contemplated hereby and thereby. 4.11 WAIVER OF RIGHT OF FIRST REFUSAL. Each Investor hereby waives all rights which it may have had under Section 2.5 of the Amended and Restated Investors' Rights Agreement, including notice rights, with respect to the sale of the Series D Preferred Stock hereunder. 8 SECTION 5 CONDITIONS TO CLOSING OF INVESTORS The Investors' obligations to purchase the Shares at the Closing or at any Subsequent Closing are, at the option of each Investor, subject to the fulfillment on or prior to the Closing Date or at any Subsequent Closing Date of the following conditions: 5.1 REPRESENTATIONS AND WARRANTIES CORRECT. The representations and warranties made by the Company in Section 3 hereof shall be true and correct in all material respects when made, and shall be true and correct in all material respects on the Closing Date, or the Subsequent Closing Date, as the case may be, with the same force and effect as if they had been made on and as of said date. 5.2 COVENANTS. All covenants, agreements and conditions contained in this Agreement to be performed by the Company on or prior to the Closing Date or the Subsequent Closing Date, as the case may be, shall have been performed or complied with in all material respects. 5.3 OPINION OF COMPANY'S COUNSEL. The Investors shall have received from counsel to the Company, an opinion addressed to them, dated the Closing Date or the Subsequent Closing Date, as the case may be, in a form reasonably acceptable to the Investors. 5.4 COMPLIANCE CERTIFICATE. The Company shall have delivered to the Investors a certificate executed by the President of the Company, dated the Closing Date or the Subsequent Closing Date, as the case may be, and certifying to the fulfillment of the conditions specified in Sections 5.1, 5.2, and 5.8 of this Agreement, and that he has made, or caused to be made, such investigations as he deemed necessary in order to permit him to verify the accuracy of the information set forth in such certificate. 5.5 BLUE SKY. The Company shall have obtained all necessary Blue Sky law permits and qualifications, or secured an exemption therefrom, required by any state for the offer and sale of the Shares and the Conversion Stock. 5.6 BOARD OF DIRECTORS. The Board of Directors shall at the Closing consist of Jim Clark, John Doerr, Richard Kramlich and W. Michael Long. 5.7 RESTATED CERTIFICATE. The Restated Certificate shall have been filed with the Secretary of State of the State of Delaware. 5.8 NO MATERIAL ADVERSE CHANGE. There shall have been no material adverse change in the Company's business or financial condition. 5.9 INVESTORS' RIGHTS AGREEMENT. The Investors and the Company shall have entered into the Investors' Rights Agreement in substantially the form attached hereto as Exhibit D. SECTION 6 CONDITIONS TO CLOSING OF COMPANY The Company's obligation to sell and issue the Shares at the Closing or at any Subsequent Closing, is at the option of the Company, subject to the fulfillment of the following conditions: 9 6.1 REPRESENTATIONS. The representations made by the Investors in Section 4 hereof shall be true and correct when made, and shall be true and correct on the Closing Date or the Subsequent Closing Date, as the case may be. 6.2 BLUE SKY. The Company shall have obtained all necessary Blue Sky law permits and qualifications, or secured an exemption therefrom, required by any state for the offer and sale of the Shares and the Conversion Stock. 6.3 RESTATED CERTIFICATE. The Restated Certificate shall have been filed with the Secretary of State of the State of Delaware. SECTION 7 MISCELLANEOUS 7.1 GOVERNING LAW. This Agreement shall be governed in all respects by the laws of the State of California, without giving effect to the conflicts of laws principles thereof. 7.2 SURVIVAL. The representations, warranties, covenants, and agreements made herein shall survive any investigation made by any Investor and the closing of the transactions contemplated hereby. 7.3 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto, provided, however, that the rights of a Investor to purchase Shares shall not be assignable without the written consent of the Company. 7.4 ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. Neither this Agreement nor any term hereof may be amended, waived, discharged, or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge, or termination is sought; provided, however, that holders of a majority of the shares of Common Stock issued or issuable upon conversion of the Shares and/or the Series D-1 Preferred and (whether or not converted) not resold to the public may waive or amend, on behalf of all Investors, any provisions hereof benefiting Investors in respect of the Shares. 7.5 NOTICES, ETC. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed effectively given upon delivery to the party to be notified in person or by courier service or five days after deposit with the United States mail, by registered or certified mail, postage prepaid, addressed (a) if to a Investor, at such Investor's address set forth in Exhibit A, or at such other address as such Investor shall have furnished to the Company in writing, or (b) if to any other holder of any Shares, at such address as such holder shall have furnished the Company in writing, or, until any such holder so furnishes an address to the Company, then to and at the address of the last holder of such Shares who has so furnished an address to the Company, or (c) if to the Company, one copy should be sent to its address set forth on the cover page of this Agreement and addressed to the attention of the Corporate Secretary, or at such other address as the Company shall have furnished to the Investors. 7.6 DELAYS OR OMISSIONS. No delay or omission to exercise any right, power or remedy accruing to any holder of any Shares, upon any breach or default of the Company under this Agreement, shall impair any such right, power or remedy of such holder nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any 10 waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any holder of any breach or default under this Agreement, or any waiver on the part of any holder of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any holder, shall be cumulative and not alternative. 7.7 CALIFORNIA CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS AN EXEMPTION FROM SUCH QUALIFICATION IS AVAILABLE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, OR SUCH EXEMPTION BEING AVAILABLE. 7.8 EXPENSES. The Company and the Investors shall each bear their own expenses and legal fees with respect to this Agreement and the transactions contemplated hereby. 7.9 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which may be executed by less than all of the Investors, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument. 7.10 SEVERABILITY. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. 7.11 GENDER. The use of the neuter gender herein shall be deemed to include the masculine and the feminine gender, if the context so requires. The foregoing Series D Preferred Stock Purchase Agreement is hereby executed as of the date first above written. COMPANY: HEALTHEON CORPORATION By: /s/ W. Michael Long ------------------------------------- W. Michael Long President and Chief Executive Officer Address: 87 Encina Avenue Palo Alto, CA 94301 11 EX-10.25 22 EX-10.25 FULL RECOURSE PROMISSORY NOTE $499,750 Dated as of July 11, 1997 FOR VALUE RECEIVED, W. Michael Long ("BORROWER"), hereby promises to pay to the order of Healtheon Corporation, a Delaware corporation (the "LENDER"), its successors and assigns in lawful money of the United States of America, the principal sum of Four Hundred Ninety-Nine Thousand Seven Hundred Fifty ($499,750), or such lesser amount as may be outstanding from time to time, no later than July 16, 1998. (the "MATURITY DATE"). 1. PAYMENT. Borrower hereby agrees to repay this Promissory Note in a series of (i) twenty-five (25) semi-monthly installments commencing upon July 15, 1997 and concluding on July 15, 1998; and (ii) four (4) additional quarterly payments commencing on October 15, 1997 and concluding on July 15, 1998. The semimonthly payments shall be equal to the amount of net compensation due to Borrower from Lander after giving effect to all applicable payroll deductions for taxes, benefits, etc. The quarterly payments shall each be in an amount which is equal to the difference between (i) one hundred twenty-four thousand nine hundred thirty seven dollars and fifty cents ($124,937.50) and (ii) The amount which has been repaid under this Promissory Note during the preceding quarter. Each payment, when made hereunder, shall be added to Exhibit A. The unpaid balance under this Promissory Note shall be due and payable upon the termnination of Borrower's employment with the Company for any reason. Borrower shall repay the remaining outstanding balance within five (5) days of the termination of Borrower's employment. Borrower may pay any portion or all of this Promissory Note at any time, without penalty. In the event that Borrower shall fail to pay when due (whether at maturity, by reason of acceleration or otherwise) any principal of or interest on this Note, such overdue amounts shall bear interest at a rate equal to eight percent (8%) per annum. If this Note (or any interest payment hereunder) becomes due and payable on a day other than a business day, the maturity thereof shall be extended to the next succeeding business day. 2. WAIVER. The Borrower hereby waives diligence, demand, presentment, protest and notice of any kind, and all rights of set-off, and assents to extensions of the time of payment, release, surrender or substitution of security, or forbearance or other indulgence, without notice. 3. GENERAL. This Note may not be changed, modified or terminated or- ally, but only by an agreement in writing signed by the party to be charged. This Note shall be binding upon the heirs, executors, administrators, successors and assigns of the Borrower and inure to the benefit of the Lender and its permitted successors, endorsees and assigns. If any term or provision of this Note shall be held invalid, illegal or unenforceable the validity, legality and enforceability of all other terms and provisions hereof shall in no way be affected thereby. 4. LAW. This Note shall be governed by and construed in accordance of the State of California. /s/ W. Michael Long ----------------------------- W. Michael Long Healtheon Corporation: /s/ Jim Clark - ------------------------------- Jim Clark, Chairman of the Board EXHIBIT A SCHEDULE OF PAYMENTS
Payment Outstanding Balance ------- ------------------- $499,750.00 1. July 15, 1997 2. July 31, 1997 3. August 15, 1997 4. August 31, 1997 5. September 15, 1997 6. September 30, 1997 7 October 15, 1997 OCTOBER 15,1997, QUARTERLY PMT $374,812.50 8 October 31, 1997 9. November 15, 1997 10. November 30, 1997 11. December 15, 1997 12. December 31, 1997 13. January 15, 1998 JANUARY 15,1998 QUARTERLY PMT $249,875.00 14. January 31, 1998 15. February 15, 1998 16. February 28, 1998 17. March 15, 1998 18. March 31, 1998 19. April 15, 1998 APRIL 15,1998, QUARTERLY PMT $124,937.50 20. April 30, 1998 21. May 15,1998 22. May 31, 1998 23. June 15, 1998 24. June 30, 1998 25. July 15, 1998 JULY 15,1998, QUARTERLY PMT $0
EX-10.26 23 EX-10.26 PROMISSORY NOTE Dated as of ___________, 1997 For Value Received, Healtheon Corporation, a Delaware corporation (the "Borrower"), hereby promises to pay to the order of _______________ (the "Payee"), the principal sum (the "Principal Amount") of ___________ dollars _______________, together with interest thereon at the rate set forth below, which shall be due and payable as hereinafter provided. This Promissory Note is one of a series of seven (7) Promissory Notes totaling two million dollars ($2,000,000.00) (the "Series"). 1. PAYMENT. This Promissory Note can be called by Payee at any time after thirty (30) days from the date of issuance upon ten (10) days notice to Borrower. Borrower may pay any portion or all of this Promissory Note at any time, without penalty. All payments will be applied first to interest due and then to principal. 2. INTEREST. Interest shall accrue on the unpaid Principal Amount of this Promissory Note from the date hereof until such Principal Amount is repaid in full, at an interest rate equal to six percent (6%) per annum. All computations of the interest rate hereunder shall be made on the basis of a year of three hundred sixty-five (365) days based on the actual number of days (including the first day but excluding the last day) any such Principal Amount is outstanding. 3. WARRANT. Simultaneously with the complete payment of this Promissory Note, if such payment occurs at least thirty (30) days from the date of issuance of this Promissory Note, Borrower shall issue to Payee a warrant exercisable for the number of shares of Borrowees Series B Preferred Stock equal to the number of full and pro rated partial months that any portion of this Promissory Note is outstanding, multiplied by five percent (5%) of the Principal Amount, divided by the lesser of: (i) two dollars ($2.00); or (ii) the price per share of the next equity financing following the issue date of this Promissory Note in which Borrower raises at least two million dollars ($2,000,000). Such warrant shall have an exercise price equal to two dollars ($2.00) per share, shall have a "net exercise" right, and shall be exercisable for five (5) years from the date of the issuance. 4. REPRESENTATIONS. This Promissory Note has been acquired for investment and not with a view to distribution and may not be resold without registration or pursuant to an exemption therefrom. 5. COLLECTION EXPENSES. Should the indebtedness evidenced by this Promissory Note or any part hereof be collected at law or in equity or in bankruptcy, receivership or other court proceedings, or this Promissory Note placed in the hands of attorneys for collection, the Borrower agrees to pay, in addition to principal and interest due and payable hereon, all costs of collection, including attorney's fees, incurred by the Payee in collecting or enforcing this Promissory Note. 6. WAIVER. Payee will not be deemed to waive any of its rights under this Promissory Note unless its waiver is in writing and signed by the Payee. No delay or omission by the Payee in exercising any of its rights will operate as a waiver of its rights. A waiver in writing on one occasion will not be construed as a consent to or a waiver of any of the Payee's right or remedy on any ftiture occasion. 7. GENERAL. This Promissory Note will be governed by and construed and enforced in accordance with the laws of the State of California. Whenever possible, each provision of this Promissory Note will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Promissory Note will be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Promissory Note. Dated as of _________, 1997. Healtheon Corporation By: /s/ David Schnell, M.D. ------------------------------- David Schnell, M.D. President -2- EX-21.1 24 EX-21.1 EXHIBIT 21.1 ActaMed Corporation Georgia EDI Services, Inc. Nevada Metis Acquisition Corp. Delaware EX-27.1 25 EX-27.1
5 1,000 YEAR 6-MOS DEC-31-1997 DEC-31-1998 JAN-01-1997 JAN-01-1998 DEC-31-1997 JUN-30-1998 16,504 11,075 5,300 1,726 2,794 3,861 (71) (135) 0 0 26,587 18,796 9,043 15,562 (3,543) (5,602) 51,575 48,122 11,797 16,236 0 0 50,948 0 43,756 0 1 5 (55,859) 30,422 51,575 48,122 0 0 13,390 20,653 0 0 8,808 17,217 28,236 24,315 30 64 323 251 (26,266) (21,447) 0 0 (26,266) (21,447) 0 0 0 0 0 0 (26,266) (21,447) (3.64) (1.22) (3.64) (1.22)
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