-----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, OfNjDMHeHCB5GremRKgVlteMFLcnjAfHHCN3xNljLt5I6cPb6R5H7lRoBCb5FJV2 OzwQED6C8d1aFho62JcvNA== 0001047469-99-003357.txt : 19990205 0001047469-99-003357.hdr.sgml : 19990205 ACCESSION NUMBER: 0001047469-99-003357 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19990204 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEALTHEON CORP CENTRAL INDEX KEY: 0001009575 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 943236644 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-70553 FILM NUMBER: 99521330 BUSINESS ADDRESS: STREET 1: 4600 PATRICK HENY DRIVE CITY: SANTA CLARA STATE: CA ZIP: 95054 BUSINESS PHONE: 4088765000 MAIL ADDRESS: STREET 1: 4600 PATRICK HENY DRIVE CITY: SANTA CLARA STATE: CA ZIP: 95054 S-1/A 1 S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 4, 1999 REGISTRATION NO. 333-70553 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------- HEALTHEON CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 7374 94-3236644 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
4600 PATRICK HENRY DRIVE SANTA CLARA, CA 95054 (408) 876-5000 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ------------------------ W. MICHAEL LONG CHIEF EXECUTIVE OFFICER HEALTHEON CORPORATION 4600 PATRICK HENRY DRIVE SANTA CLARA, CA 95054 (408) 876-5000 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------ COPIES TO: LARRY W. SONSINI JACK DENNISON GORDON K. DAVIDSON STEVEN E. BOCHNER VICE PRESIDENT AND LAIRD H. SIMONS III MARK L. REINSTRA GENERAL COUNSEL JEFFREY R. VETTER Wilson Sonsini Goodrich & Rosati HEALTHEON CORPORATION CRAIG A. MENDEN Professional Corporation 4600 Patrick Henry Drive Fenwick & West LLP 650 Page Mill Road Santa Clara, CA 95054 Two Palo Alto Square Palo Alto, CA 94304-1050 (408) 876-5000 Palo Alto, CA 94306 (650) 493-9300 (650) 494-0600
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT. ------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / / - ------------ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / / - ------------ If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / / - ------------ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: / / ------------------------ CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF SECURITIES AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION TO BE REGISTERED BE REGISTERED(1) PER SHARE OFFERING PRICE(2) FEE(3) Common Stock, $.0001 par value............. 5,750,000 $7.00 $40,250,000 $11,190
(1) Includes 750,000 shares of common stock issuable upon exercise of the underwriters' over-allotment option. (2) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) of the Securities Act of 1933. (3) $9,730 of the Registration Fee was previously paid. 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. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS (SUBJECT TO COMPLETION) ISSUED FEBRUARY 4, 1999 5,000,000 SHARES [LOGO] COMMON STOCK ----------------- HEALTHEON CORPORATION IS OFFERING SHARES OF ITS COMMON STOCK. THIS IS OUR INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $6 AND $7 PER SHARE. ------------------- WE HAVE APPLIED TO LIST OUR COMMON STOCK ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "HLTH." ------------------- INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5. ----------------- PRICE $ A SHARE -----------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS COMPANY --------- ------------- ----------- PER SHARE............................................. $ $ $ TOTAL................................................. $ $ $
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. HEALTHEON HAS GRANTED THE UNDERWRITERS THE RIGHT TO PURCHASE UP TO AN ADDITIONAL 750,000 SHARES OF COMMON STOCK TO COVER OVER-ALLOTMENTS. MORGAN STANLEY & CO. INCORPORATED EXPECTS TO DELIVER THE SHARES TO PURCHASERS ON , 1999. ------------------- MORGAN STANLEY DEAN WITTER GOLDMAN, SACHS & CO. HAMBRECHT & QUIST VOLPE BROWN WHELAN & COMPANY , 1999 You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of the prospectus or of any sale of the common stock. In this prospectus, unless the context indicates otherwise, the "Company," "Healtheon," "we," "us" and "our" refer to Healtheon Corporation and its consolidated subsidiaries. TABLE OF CONTENTS
PAGE ----------- Prospectus Summary............................. 3 Risk Factors................................... 5 Use of Proceeds................................ 15 Dividend Policy................................ 15 Capitalization................................. 16 Dilution....................................... 17 Selected Consolidated Financial Data........... 18 Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 20 Business....................................... 31 Management..................................... 46 PAGE ----------- Certain Transactions........................... 59 Principal Stockholders......................... 64 Description of Capital Stock................... 66 Shares Eligible for Future Sale................ 69 Certain United States Tax Consequences to Non-U.S. Holders of Common Stock............. 71 Underwriters................................... 74 Legal Matters.................................. 77 Experts........................................ 77 Where You Can Find More Information............ 78 Index to Consolidated Financial Statements..... F-1
Until , 1999, all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. ------------------- For investors outside the United States: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus. ------------------- Healtheon, Healtheon's logo, Virtual Healthcare Network, VHN, Healtheon ProviderWorks and ProviderLink are some of our trademarks. SBCL SCAN is a trademark of SmithKline Beecham Clinical Laboratories, Inc. Each other trademark, trade name or service mark of any other company appearing in this prospectus is the property of its holder. 2 DESCRIPTION OF ARTWORK At the top of the page there is a colored band with the Healtheon name and logo on the left and the text "Pioneering the use of the Internet to simplify workflows, decrease costs, and improve the quality of patient care throughout the healthcare industry." On the middle left is the heading "Healtheon's Virtual Healthcare Networks" over a cloud labeled "Internet" with the Healtheon logo superimposed. The cloud has pictures of a telephone, a handheld computing device, a television with internet access, and a computer monitor. The cloud is connected to four photographs by lightning bolts. The upper left picture shows images from a laboratory and has the heading "Suppliers" with the subheadings "Laboratories, Pharmacies, Mail Order Drug and Pharmacy Benefit Managers." The upper right picture is of doctors and has the heading "Providers" with the subheadings "Physicians, Hospitals, Integrated Delivery Networks, Independent Practice Associations and Practice Management Companies." The lower left picture shows patients and has the heading "Consumers" with the subheadings "Employers", "Government Agencies, Individuals and Benefit Brokers." The lower right picture shows business people and has the heading "payers" with the subheadings "Government Agencies, Insurance Companies, Managed Care Companies, and Preferred Provider Organizations." On the middle right are two layers of plugs which connect the Healtheon logo identified as the "Healtheon Platform." This section has the heading "The Healtheon Platform" and is connected by a colored band to the cloud on the left. The upper level of plugs is identified as applications and has plugs for "Claims, Transcription, Authorizing, Workflow Engine, M.D. Search, Referrals, Reporting, Rules Engine, Registration, Eligibility, Person Index, Enrollment, Lab Orders and Prescriptions." There is a plug called "New Applications" over an arrow coming from three sources--"Healtheon Applications, 3rd Party Applications and Legacy Applications." The lower level of plugs is identified as "Data Objects." One plug, labeled "Data", is over an arrow coming from two sources--"Legacy Databases" and "Private Networks." The large Healtheon logo is surrounded by an inner band labeled "Security" and an outer band labeled "Flexibility," "Usability," "Scalability," "Availability," "Extensibility," "Manageability," "Performance" and "Fault Tolerance." The bottom of the page has a large arrow going from left to right with the heading "Enabling a New Model for Managing Healthcare Information and Transactions." To the left of the arrow is the term "Fragmented Legacy Software", and to the right is the term "Network Services Model." Inside the arrow is the following text: "HEALTHEON'S VIRTUAL HEALTHCARE NETWORKS connect providers, payers, consumers and suppliers over the public Internet or private intranets, and provide services and applications that enable the secure exchange of information, transactions and simplified workflows across the healthcare industry. At the center of these networks is THE HEALTHEON PLATFORM, an open framework for providing mission-critical applications and supporting complex healthcare transactions, while at the same time ensuring scalability, availability and security." PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION REGARDING OUR COMPANY AND THE COMMON STOCK BEING SOLD IN THIS OFFERING AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. Healtheon is pioneering the use of the Internet to simplify workflows, decrease costs and improve the quality of patient care throughout the healthcare industry. We designed and developed the Healtheon Platform, an Internet-based information and transaction platform that allows us to create Virtual Healthcare Networks, or "VHNs," that facilitate and streamline interactions among the myriad participants in the healthcare industry. The Healtheon VHN solution includes a suite of services delivered through applications operating on our Internet-based platform. Our solution enables the secure exchange of information among disparate healthcare information systems and supports a broad range of healthcare transactions, including enrollment, eligibility determination, referrals and authorizations, laboratory and diagnostic test ordering, clinical data retrieval and claims processing. We provide our own applications on the Healtheon Platform and also enable third-party applications to operate on the platform. In addition to VHNs, we provide comprehensive consulting, development, implementation and network management services to enable our customers to take full advantage of the capabilities of the Healtheon Platform. To date, our revenue has been derived primarily from non-Internet network services, development and consulting services and from management and operation of customers' information technology infrastructure. We have established strategic relationships with leading healthcare companies, including United HealthCare Group, SmithKline Beecham Clinical Laboratories, Inc., Brown & Toland Physician Services Organization and Beech Street Corporation. We believe that these relationships will enhance our application portfolio, provide us with important specialized industry expertise, increase our market penetration and generate revenue. An investment in our common stock involves risks and uncertainties, including the risks that the healthcare industry may be resistant to the adoption of new information technology due to concerns about government regulation, patient confidentiality and security. See "Risk Factors." The 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. We believe 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. A combination of advanced technologies, including digital encryption, digital certificates and audit trail tracking, ensures security. The platform is deployed on redundant, fault tolerant servers with associated software to create 24-hour availability. Our objective is to become the leading provider of Internet-based transaction and information services to the healthcare industry. Our strategy includes: - leveraging Internet technology to provide secure transactions and communications among a broad range of healthcare participants, regardless of their computing platforms; - expanding the functionality and transaction capability of our platform through the development, acquisition or enabling of Internet-based applications; - forming additional strategic relationships to increase our portfolio of applications and services, to increase the number of connected healthcare participants and to provide specialized industry expertise for our new applications; - targeting regional markets where we can gain critical mass, thereby expanding nationally region by region; and - employing our 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. We were incorporated in Delaware in December 1995 and commenced operations in January 1996. In May 1998, we acquired ActaMed, a leading provider of network services to the healthcare industry. In August 1998, we acquired Metis, LLC, a leading consulting, design and development firm focused on Internet and intranet-based solutions for medical centers and integrated delivery networks. Our executive offices are located at 4600 Patrick Henry Drive, Santa Clara, California 95054. Our telephone number is (408) 876-5000. Information contained on our website is not part of this prospectus. 3 THE OFFERING Common stock offered: U.S. offering................... 4,000,000 shares International offering.......... 1,000,000 shares Total......................... 5,000,000 shares Common stock to be outstanding after the offering.............. 59,422,868 shares(1) Use of proceeds................... For general corporate purposes, including working capital and capital expenditures. See "Use of Proceeds." Dividend policy................... We do not anticipate paying any cash dividends in the foreseeable future. Proposed Nasdaq National Market symbol.......................... "HLTH"
SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The consolidated financial data in this prospectus reflect our acquisition of ActaMed Corporation, or "ActaMed," on May 19, 1998, which was accounted for as a pooling of interests. This means that for accounting and financial reporting purposes, we treat the two companies as if they had always been combined. The consolidated statement of operations and statement of cash flows 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 how we accounted for the acquisition of ActaMed.
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, --------------------------------- ---------------------- 1995 1996 1997 1997 1998 --------- ---------- ---------- ---------- ---------- (UNAUDITED) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue...................................................... $ 2,175 $ 11,013 $ 13,390 $ 7,000 $ 33,231 Loss from operations......................................... (3,936) (16,541) (25,423) (19,073) (35,443) Net loss applicable to common stockholders................... $ (4,458) $ (18,606) $ (28,005) $ (21,273) $ (35,860) Basic and diluted net loss per common share(2)............... $ (.85) $ (2.83) $ (3.88) $ (3.03) $ (1.24) Weighted-average shares outstanding used in computing basic and diluted net loss per common share(2).................... 5,246 6,583 7,223 7,019 28,934 Pro forma basic and diluted net loss per common share (unaudited)(2).............................................. $ (.56) $ (.74) Shares used in computing pro forma basic and diluted net loss per common share (unaudited)(2)............................. 44,715 47,263
SEPTEMBER 30, 1998 ------------------------- ACTUAL AS ADJUSTED(3) --------- -------------- (UNAUDITED) BALANCE SHEET DATA: Cash, cash equivalents and short-term investments............................................ $ 5,392 $ 33,317 Working capital (deficit).................................................................... (6,055) 21,870 Total assets................................................................................. 50,271 78,196 Long-term obligations, net of current portion................................................ 1,714 1,714 Stockholders' equity......................................................................... 30,226 58,151
- --------- (1) Based on the number of shares outstanding at September 30, 1998. Excludes the following: - 15,979,566 shares subject to options and warrants outstanding or reserved for issuance under our stock plans at September 30, 1998 and an additional 3,107,321 shares reserved for issuance under our 1996 Stock Plan as a result of the annual increase in January 1999; - 7,683,341 shares of Series A convertible preferred stock issued in November 1998; - a warrant to purchase 500,000 shares issued in December 1998; and - 1,833,333 shares issued in connection with an asset purchase agreement with SmithKline Beecham Clinical Laboratories, Inc., or "SmithKline Labs." (2) 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. (3) As adjusted to give effect to the sale of the shares at an assumed initial public offering price of $6.50 per share, after deducting estimated underwriting discounts and commissions and our estimated offering expenses. See "Use of Proceeds" and "Capitalization." 4 RISK FACTORS YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN INVESTMENT DECISION. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING OUR COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS OR FINANCIAL CONDITION. IF ANY OF THE FOLLOWING RISKS OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS COULD BE MATERIALLY HARMED. IN THAT CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT. THIS PROSPECTUS ALSO CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THE RISKS FACED BY US DESCRIBED BELOW AND ELSEWHERE IN THIS PROSPECTUS. OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE OUR OPERATING HISTORY IS LIMITED AND OUR BUSINESS MODEL IS UNPROVEN Because we have recently begun operations, it is difficult to evaluate our business and our prospects. Our revenue and income potential is unproven and our business model is still emerging. Our historical financial information is of limited value in projecting our future operating results because of our limited operating history as a combined organization and the emerging nature of our markets. We began operations in January 1996 and until recently had not earned significant revenue. We have lost money since we began operations and, as of September 30, 1998, we had an accumulated deficit of $85.2 million. In May 1998, we acquired ActaMed and in August 1998, we acquired Metis, LLC. We currently derive our revenue primarily from proprietary non-Internet network services offered by ActaMed, from development and consulting services and from managing and operating our customers' information technology infrastructures. We plan to invest heavily in acquisitions, infrastructure development, applications development and sales and marketing. As a result, we expect that we will continue to lose money through 1999 and we may never achieve or sustain profitability. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." THE HEALTHCARE INDUSTRY MAY NOT ACCEPT OUR SOLUTIONS To be successful, we must attract a significant number of customers throughout the healthcare industry. To date, the healthcare industry has been resistant to adopting new information technology solutions. Electronic information exchange and transaction processing by the healthcare industry is still developing. We believe that complexities in the nature of the healthcare transactions that must be processed have hindered the development and acceptance of information technology solutions by the industry. Conversion from traditional methods to electronic information exchange may not occur as rapidly as we expect it will. Even if the conversion does occur as rapidly as we expect, healthcare industry participants may use applications and services offered by others. We believe that we must gain significant market share with our applications and services before our competitors introduce alternative products, applications or services with features similar to our current or proposed offerings. Our business plan is based on our belief that the value and market appeal of our solution will grow as the number of participants and the scope of the transaction services available on our platform increase. We may not achieve the critical mass of users we believe is necessary to become successful. In addition, we expect to generate a significant portion of our revenue from subscription and transaction-based fees. Consequently, any significant shortfall in the number of users or transactions occurring over our platform would adversely affect our financial results. See "Business -- Industry Background." 5 WE RELY ON STRATEGIC RELATIONSHIPS To be successful, we must establish and maintain strategic relationships with leaders in a number of healthcare industry segments. This is critical to our success because we believe that these relationships will enable us to: - extend the reach of our applications and services to the various participants in the healthcare industry; - obtain specialized healthcare expertise; - develop and deploy new applications; - further enhance the Healtheon brand; and - generate revenue. Entering into strategic relationships is complicated because some of our current and future partners may decide to compete with us. In addition, we may not be able to establish relationships with key participants in the healthcare industry if we have established relationships with competitors of these key participants. Consequently, it is important that we are perceived as independent of any particular customer or partner. Moreover, many potential partners may resist working with us until our applications and services have been successfully introduced and have achieved market acceptance. Once we have established strategic relationships, we will depend on our partners' ability to generate increased acceptance and use of our platform, applications and services. To date, we have established only a limited number of strategic relationships and these relationships are in the early stages of development. We have limited experience in establishing and maintaining strategic relationships with healthcare industry participants. If we lose any of these strategic relationships or fail to establish additional relationships, or if our strategic partners fail to actively pursue additional business relationships and partnerships, we would not be able to execute our business plans and our business would suffer significantly. We may not experience increased use of our platform, applications and services even if we establish and maintain these strategic relationships. For additional information regarding our strategic relationships, see "Business -- Strategy" and "-- Strategic Relationships." WE NEED TO EXPAND OUR SUITE OF APPLICATIONS Our business will suffer if we do not expand the breadth of our applications quickly. We currently offer a limited number of applications on our platform and our future success depends on quickly introducing new applications in several healthcare segments. We do not have the internal resources and specialized healthcare expertise to develop all these applications independently. Consequently, we must rely on a combination of internal development, strategic relationships, licensing and acquisitions to develop these applications. Each of our applications, regardless of how it was developed, must be integrated and customized to operate with existing customer legacy computer systems and our platform. Developing, integrating and customizing these applications will be expensive and time consuming. Even if we are successful, these applications may never achieve market acceptance, which could also cause our business to suffer. WE FACE RISKS WITH OUR ACQUISITION STRATEGY We expect to continue to acquire technologies and other healthcare technology companies to increase the number and variety of applications on our platform and to increase our customer base. For example, in May 1998 we acquired ActaMed, and in August 1998 we acquired substantially all the assets of Metis, LLC. To be successful, we will need to identify applications, technologies and businesses that are complementary to ours, integrate disparate technologies and corporate cultures and manage a geographically dispersed 6 company. Acquisitions could divert our attention from other business concerns and expose us to unforeseen liabilities or risks associated with entering new markets. Finally, we may lose key employees while integrating these new companies. Integrating newly acquired organizations and technologies into our company could be expensive, time consuming and may strain our resources. In addition, we may lose our current customers if any acquired companies have relationships with competitors of our customers. Consequently, we may not be successful in integrating any acquired businesses or technologies and may not achieve anticipated revenue and cost benefits. The healthcare industry is consolidating and we expect that we will face intensified competition for acquisitions, especially from larger, better-funded organizations. If we fail to execute our acquisition strategy successfully for any reason, our business will suffer significantly. We intend to pay for some of our acquisitions by issuing additional common stock and this could dilute our stockholders. We may also use cash to buy companies or technologies in the future. If we do use cash, we may need to incur debt to pay for these acquisitions. Acquisition financing may not be available on favorable terms or at all. In addition, we may be required to amortize significant amounts of goodwill and other intangible assets in connection with future acquisitions, which would materially harm our results of operations. WE MUST MANAGE OUR GROWTH We have rapidly and significantly expanded our operations and expect to continue to do so. This growth has placed, and is expected to continue to place, a significant strain on our managerial, operational, financial and other resources. As of September 30, 1998, we have grown to 613 employees and independent contractors, from 176 employees and independent contractors on December 31, 1997. A large portion of this increase resulted from our acquisitions of ActaMed in May 1998 and Metis, LLC in August 1998, which increased our payroll by 230 employees. We expect to hire a significant number of new employees to support our business. Our current information systems, procedures and controls may not continue to support our operations and may hinder our ability to exploit the market for healthcare applications and services. We are in the process of evaluating our accounting and management information systems and anticipate that we may implement new systems within the next twelve months. We could experience interruptions to our business while we transition to new systems. WE DEPEND ON THE ADOPTION OF INTERNET SOLUTIONS Our business model depends on the adoption of Internet solutions by commercial users. Our business could suffer dramatically if Internet solutions are not accepted or not perceived to be effective. The Internet may not prove to be a viable commercial marketplace for a number of reasons, including: - inadequate development of the necessary infrastructure for communication speed, access and server reliability; - security and confidentiality concerns; - lack of development of complementary products, such as high-speed modems and high-speed communication lines; - implementation of competing technologies; - delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity; and - governmental regulation. 7 We expect Internet use to grow in number of users and volume of traffic. The Internet infrastructure may be unable to support the demands placed on it by this continued growth. Growth in the demand for our applications and services depends on the adoption of Internet solutions by healthcare participants, which requires the acceptance of a new way of conducting business and exchanging information. The healthcare industry, in particular, relies on legacy systems that may be unable to benefit from our Internet-based platform. To maximize the benefits of our platform, healthcare participants must be willing to allow sensitive information to be stored in our databases. We can process transactions for healthcare participants that maintain information on their own proprietary databases. However, the benefits of our connectivity and sophisticated information management solution are limited under these circumstances. Customers using legacy and client-server systems may refuse to adopt new systems when they have made extensive investment in hardware, software and training for older systems. WE RELY ON THE CONTINUED PERFORMANCE AND SECURITY OF OUR SYSTEMS Our customer satisfaction and our business could be harmed if we or our customers experience any system delays, failures or loss of data. We currently process substantially all our customer transactions and data at our facilities in Santa Clara, California and Atlanta, Georgia. Although we have safeguards for emergencies, we do not have backup facilities to process information if either of these facilities is not functioning. The occurrence of a major catastrophic event or other system failure at either the Santa Clara or the Atlanta facility could interrupt data processing or result in the loss of stored data. In addition, we depend on the efficient operation of Internet connections from customers to our systems. These connections, in turn, depend on the efficient operation of Web browsers, Internet service providers and Internet backbone service providers, all of which have had periodic operational problems or experienced outages. A material security breach could damage our reputation or result in liability to us. We retain confidential customer and patient information in our processing centers. Therefore, it is critical that our facilities and infrastructure remain secure and that our facilities and infrastructure are perceived by the marketplace to be secure. Despite the implementation of security measures, our infrastructure may be vulnerable to physical break-ins, computer viruses, programming errors, attacks by third parties or similar disruptive problems. OUR BUSINESS IS AFFECTED BY RAPIDLY CHANGING TECHNOLOGY Healthcare information exchange and transaction processing is a relatively new and evolving market. The pace of change in our markets is rapid and there are frequent new product introductions and evolving industry standards. We may be unsuccessful in responding to technological developments and changing customer needs. In addition, our applications and services offerings may become obsolete due to the adoption of new technologies or standards. See "Business -- Development and Engineering." OUR PLATFORM INFRASTRUCTURE AND ITS SCALABILITY ARE NOT PROVEN So far, we have processed a limited number and variety of transactions over our platform. Similarly, a limited number of healthcare participants use our platform. Our systems may not accommodate increased use while maintaining acceptable overall performance. We must continue to expand and adapt our network infrastructure to accommodate additional users, increased transaction volumes and changing customer requirements. This expansion and adaptation will be expensive and will divert our attention from other activities. Many of our service agreements contain performance standards. If we fail to meet these standards, our customers could terminate their agreements with us. The loss of any of our service agreements would directly and significantly impact our business. We may be unable to expand or adapt our network infrastructure to meet additional demand or our customers' changing needs on a timely basis and at a commercially reasonable cost, or at all. 8 OUR REVENUES ARE CONCENTRATED IN A FEW CUSTOMERS We expect that we will generate a significant portion of our revenue from a small number of customers for the next few years. If we do not generate as much revenue from these customers as we expect, or if we lose any of these customers, our revenue will be significantly reduced which would harm our business. For example, we receive a substantial majority of our revenue from four customers. United HealthCare Group, SmithKline Beecham Clinical Laboratories, Inc., Brown & Toland Physician Services Organization and Beech Street Corporation each accounted for over 10% and together accounted for approximately 90% of our total revenue for the nine months ended September 30, 1998. In addition, United HealthCare and Brown & Toland each accounted for over 10% and together accounted for approximately 70% of our total revenue for the year ended December 31, 1997. Customers who also own shares of our stock, including United HealthCare and SmithKline Labs, accounted for 55% of our total revenue in the year ended December 31, 1997 and 43% of our total revenue for the nine months ended September 30, 1998. United HealthCare will own approximately 13.3% of our stock after this offering. Similarly, SmithKline Labs will own approximately 9.1% of our stock after this offering. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Strategic Relationships." WE FACE SIGNIFICANT COMPETITION The market for healthcare information services is intensely competitive, rapidly evolving and subject to rapid technological change. Many of our competitors have greater financial, technical, product development, marketing and other resources than we have. These organizations may be better known and have more customers than us. We may be unable to compete successfully against these organizations. Many of our competitors have announced or introduced Internet strategies that will compete with our applications and services. We have many competitors, including: - healthcare information software vendors, including HBO & Company and Shared Medical Systems Corporation; - healthcare electronic data interchange companies, including ENVOY Corporation and National Data Corporation; - large information technology consulting service providers, including Andersen Consulting, International Business Machines Corporation and Electronic Data Systems Corporation; and - small regional organizations. In addition, we expect that major software information systems companies and others specializing in the healthcare industry will offer competitive applications or services. Some of our large customers may also compete with us. See "Business -- Competition." CHANGES IN THE HEALTHCARE INDUSTRY COULD AFFECT OUR BUSINESS The healthcare industry is highly regulated and is subject to changing political, economic and regulatory influences. These factors affect the purchasing practices and operation of healthcare organizations. Changes in current healthcare financing and reimbursement systems could cause us to make unplanned enhancements of applications or services, or result in delays or cancellations of orders or in the revocation of endorsement of our applications and services by healthcare participants. Federal and state legislatures have periodically considered programs to reform or amend the U.S. healthcare system at both the federal and state level. These programs may contain proposals to increase governmental involvement in healthcare, lower reimbursement rates or otherwise change the environment in which healthcare industry participants operate. Healthcare industry participants may respond by reducing their investments or postponing investment decisions, including investments in our applications and services. We do not know what effect any proposals would have on our business. 9 Many healthcare providers are consolidating to create integrated healthcare delivery systems with greater market power. These providers may try to use their market power to negotiate price reductions for our applications and services. If we were forced to reduce our prices, our operating results would suffer. As the healthcare industry consolidates, competition for customers will become more intense and the importance of acquiring each customer will become greater. GOVERNMENT REGULATION COULD ADVERSELY AFFECT OUR BUSINESS Our business is subject to government regulation. Existing as well as new laws and regulations could adversely affect our business. Laws and regulations may be adopted with respect to the Internet or other on-line services covering issues such as: - user privacy; - pricing; - content; - copyrights; - distribution; and - characteristics and quality of products and services. Moreover, the applicability to the Internet of existing laws in various jurisdictions governing issues such as property ownership, sales and other taxes, libel and personal privacy is uncertain and may take years to resolve. Demand for our applications and services may be affected by additional regulation of the Internet. For example, until recently current Health Care Financing Administration guidelines prohibited transmission of Medicare eligibility information over the Internet. We are subject to extensive regulation relating to the confidentiality and release of patient records. Additional legislation governing the distribution of medical records has been proposed at both the state and federal level. It may be expensive to implement security or other measures designed to comply with any new legislation. Moreover, we may be restricted or prevented from delivering patient records electronically. Legislation currently being considered at the federal level could affect our business. For example, the Health Insurance Portability and Accountability Act of 1996 mandates the use of standard transactions, standard identifiers, security and other provisions by the year 2000. We are designing our platform and applications to comply with these proposed regulations; however, until these regulations become final, they could change, which could cause us to use additional resources and lead to delays in order to revise our platform and applications. In addition, our success depends on other healthcare participants complying with these regulations. Some computer applications and software are considered medical devices and are subject to regulation by the United States Food and Drug Administration, or the "FDA." We do not believe that our current applications or services are subject to FDA regulation. We may expand our application and service offerings into areas that subject us to FDA regulation. We have no experience in complying with FDA regulations. We believe that complying with FDA regulations would be time consuming, burdensome and expensive and could delay our introduction of new applications or services. See "Business -- Governmental Regulations." OUR QUARTERLY OPERATING RESULTS MAY VARY Fluctuations in our quarterly results could affect the market price of our common stock in a manner unrelated to our long-term operating performance. We expect that our quarterly revenue and operating results may fluctuate as a result of a number of factors, including: - changes in our strategic relationships; - future acquisitions; - our entry into new healthcare markets; - new customers; 10 - new application and service offerings; - software defects, delays in development and other quality factors; - customer demand for our applications and services; - our ability to meet project milestones or customer expectations; - our mix of consulting and transaction fee revenue; - variability in demand for Internet-based healthcare solutions; - changes within the healthcare industry; and - seasonality of demand. We expect to increase activities and spending in substantially all of our operational areas. We base our expense levels in part upon our expectations concerning future revenue and these expense levels are relatively fixed in the short-term. If we have lower revenue, we may not be able to reduce our spending in the short-term in response. Any shortfall in revenue would have a direct impact on our results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." For these and other reasons, we may not meet the earnings estimates of securities analysts or investors and our stock price could suffer. WE MAY FACE PRODUCT-RELATED LIABILITIES While we and our customers test our applications, they may contain defects or result in system failures. In addition, our platform may experience problems in security, availability, scalability or other critical features. These defects or problems could result in the loss of or delay in generating revenue, loss of market share, failure to achieve market acceptance, diversion of development resources, injury to our reputation or increased insurance costs. Many of our strategic relationships and services agreements involve providing critical information technology services to our clients' businesses. Providing these services is complex because our clients have complex computing system environments. If we fail to meet our clients' expectations, our reputation could suffer and we could be liable for damages. In addition, patient care could suffer and we could be liable if our systems fail to deliver correct information in a timely manner. Our insurance may not protect us from this risk. Finally, we could become liable if confidential information is disclosed inappropriately. Our contracts limit our liability arising from our errors; however, these provisions may not be enforceable and may not protect us from liability. While we have general liability insurance that we believe is adequate, including coverage for errors and omissions, we may not be able to maintain this insurance on reasonable terms in the future. In addition, our insurance may not be sufficient to cover large claims and our insurer could disclaim coverage on claims. If we are liable for an uninsured or underinsured claim or if our premiums increase significantly, our financial condition could be materially harmed. WE DEPEND ON OUR PROPRIETARY TECHNOLOGY Our intellectual property is important to our business. We expect that we could be subject to intellectual property infringement claims as the number of our competitors grows and the functionality of our applications overlaps with competitive offerings. These claims, even if not meritorious, could be expensive and divert our attention from operating our company. If we become liable to third parties for infringing their intellectual property rights, we would be required to pay a substantial damage award and to develop noninfringing technology, obtain a license or cease selling the applications that contain the infringing intellectual property. We may be unable to develop noninfringing technology or obtain a license on commercially reasonable terms, or at all. In addition, we may not be able to protect against misappropriation of our intellectual property. Third parties may infringe upon our intellectual property rights, we may not detect this unauthorized use and we may be unable to enforce our rights. See "Business -- Intellectual Property." 11 THE SALES AND IMPLEMENTATION CYCLES FOR OUR SOLUTIONS CAN BE LENGTHY A key element of our strategy is to market our solutions directly to large healthcare organizations. We are unable to control many of the factors that will influence our customers' buying decisions. We expect that the sales and implementation process will be lengthy and will involve a significant technical evaluation and commitment of capital and other resources by our customers. The sale and implementation of our solutions are subject to delays due to our customers' internal budgets and procedures for approving large capital expenditures and deploying new technologies within their networks. We will need to expend substantial resources to integrate our applications with the existing legacy and client-server architectures of large healthcare organizations. We have limited experience in integrating our applications with large, complex architectures, and we may experience delays in the integration process. These delays would, in turn, delay our ability to generate revenue from these applications and could adversely affect our results of operations. WE FACE RISKS RELATED TO THE YEAR 2000 Issues with respect to the Year 2000 could affect the performance of our or our customers' computer systems. Two of our systems, SBCL SCAN, or "SCAN," and ProviderLink, are not Year 2000 compliant. Our revenue from these systems accounted for approximately 43% of our total revenue in the first nine months of 1998. We plan to release Year 2000 upgrades to these systems in early 1999. We estimate the cost of these Year 2000 upgrades to SCAN and ProviderLink to be less than $1.0 million. In addition, our SCAN product is installed on approximately 4,650 workstations located in physician offices. Many of these workstations are not Year 2000 compliant and we must upgrade or replace them. We could experience delays and cost overruns in developing these upgrades. In addition, it may be difficult to convince physicians to implement these upgrades. Our revenue from SCAN and ProviderLink could decrease if we experience delays in upgrading these applications and workstations. In addition, we may not identify all of our applications and systems that must be modified to be Year 2000 compliant and may need to spend additional amounts to repair or modify our applications and systems. In certain of our agreements, we warrant that our applications and services are Year 2000 compliant. If they are not compliant, our customers could terminate the agreements and we could be liable for damages. We also depend on other healthcare participants to be Year 2000 compliant. Many of these organizations are not Year 2000 compliant, and we do not know what affect this would have on our systems. We could be liable for the failure of our platform even if the failure was caused by someone else. Furthermore, the costs to our customers of becoming Year 2000 compliant may result in reduced funds being available to purchase and implement our applications and services. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000 Compliance." WE MAY NEED TO OBTAIN FUTURE CAPITAL We expect that the money generated from this offering, combined with our current cash resources and credit facilities, will be sufficient to meet our requirements for at least the next 12 months. However, we may need to raise additional financing 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. We may need to raise additional funds by selling debt or equity securities, by entering into strategic relationships or through other arrangements. We may be unable to raise any additional amounts on reasonable terms when they are needed. 12 OUR COMMON STOCK PRICE MAY BE VOLATILE You may not be able to resell your shares at or above the initial public offering price due to a number of factors, including: - actual or anticipated quarterly variations in our operating results; - changes in expectations of future financial performance or changes in estimates of securities analysts; - announcements of technological innovations; - announcements relating to strategic relationships; - customer relationship developments; and - conditions affecting the Internet or healthcare industries, in general. The trading price of our common stock may be volatile. The stock market in general, and the market for technology and Internet-related companies in particular, has experienced extreme volatility that often has been unrelated to the operating performance of particular companies. These broad market and industry fluctuations may adversely affect the trading price of our common stock, regardless of our actual operating performance. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted. If this were to happen to Healtheon, litigation would be expensive and would divert management's attention. The initial public offering price will be established by negotiation between the U.S. underwriters and Healtheon. You should read the "Underwriters" section for a more complete discussion of the factors determining the initial public offering price. WE DEPEND ON OUR KEY PERSONNEL Our success will depend significantly on our senior management team and other key employees. We need to attract, integrate, motivate and retain additional highly skilled technical people. In particular, we need to attract experienced professionals capable of developing, selling and installing complex healthcare information systems. We face intense competition for these people. Our executive management team, including W. Michael Long, our Chief Executive Officer, and Pavan Nigam, our Vice President, Engineering, is critical to our success. We do not maintain key person life insurance for anyone. WE HAVE CERTAIN ANTI-TAKEOVER DEFENSES Certain provisions of our certificate of incorporation and bylaws and the provisions of Delaware law could have the effect of delaying, deferring or preventing an acquisition of Healtheon. For example, our board of directors is divided into three classes to serve staggered three-year terms, our stockholders may not take actions by written consent and our stockholders are limited in their ability to make proposals at stockholder meetings. See "Description of Capital Stock" for a further discussion of these provisions. FUTURE SALES OF SHARES COULD AFFECT OUR STOCK PRICE The market price for our common stock could fall dramatically if our stockholders sell large amounts of our common stock in the public market following this offering. These sales, or the possibility that these sales may occur, could make it more difficult for us to sell equity or equity-related securities in the future. The number of shares of common stock available for sale in the public market is limited by restrictions under federal securities law and by certain "lock-up" agreements that our stockholders have entered into with the underwriters. The lock-up agreements restrict our stockholders from selling or otherwise disposing of any of their shares for a period of 180 days after the date of this prospectus without the prior written consent of Morgan Stanley & Co. Incorporated. Morgan Stanley & Co. Incorporated may, however, in its sole discretion and without notice, release all or any portion of the shares from the restrictions in the lock-up agreements. 13 After this offering, we will have outstanding 67,195,893 shares of common stock, based upon shares outstanding as of November 30, 1998 and assuming no exercise of the Underwriters' overallotment option and no exercise of outstanding options or warrants. These shares will become eligible for sale in the public market as follows:
NUMBER OF SHARES DATE ELIGIBLE FOR PUBLIC RESALE - ----------------------- --------------------------------------------------------------------- 5,658,184............. Date of this prospectus (includes the 5,000,000 shares sold in this offering) 52,254,368............. 180 days after the date of this prospectus 9,283,341............. At various times thereafter through November 6, 1999
Any shares that may be purchased in this offering by our "affiliates," as defined in Rule 144 of the Securities Act, will be subject to the volume and other selling limitations under Rule 144 of the Securities Act. All but 10,437,264 of the shares eligible for sale at the 180th day after the date of this prospectus or afterward will be subject initially to certain volume and other limitations under Rule 144 of the Securities Act. On or prior to the 180th day following the date of this prospectus, we intend to register for resale an additional 13,811,659 shares of common stock reserved for issuance under our employee stock plans based upon the number of shares reserved for issuance as of November 30, 1998. In addition, the holders of approximately 50,007,164 shares of our common stock have the right to require us to register their shares for sale to the public. If these holders cause a large number of shares to be registered and sold in the public market, our stock price could fall materially. See "Shares Eligible for Future Sale." OUR OFFICERS, DIRECTORS AND AFFILIATED ENTITIES WILL HAVE SIGNIFICANT CONTROL OF HEALTHEON After this offering, our directors and management will own or control approximately 68.1% of our common stock. If these people act together, they will be able to significantly influence the management and affairs of Healtheon and will have the ability to control all matters requiring stockholder approval. This concentration of ownership may have the effect of delaying, deferring or preventing an acquisition of Healtheon and may adversely affect the market price of our common stock. OUR CURRENT STOCKHOLDERS WILL BENEFIT FROM THIS OFFERING Based on the number of shares of common stock outstanding as of September 30, 1998, existing stockholders have paid an average of $2.06 per share for their common stock, which is considerably less than the amount to be paid by investors who purchase in this offering. New investors in this offering will experience an immediate dilution of $5.92 per share, also based on the number of outstanding shares as of September 30, 1998. This offering will also create a public market for the resale of shares held by existing investors, and substantially increase the market value of those shares. See "Dilution" and "Principal Stockholders." 14 USE OF PROCEEDS The net proceeds from the sale of the 5,000,000 shares of common stock in this offering are estimated to be approximately $27.9 million, at an assumed initial public offering price of $6.50 per share and after deducting estimated underwriting discounts and commissions and our estimated offering expenses. If the U.S. underwriters' over-allotment option is exercised in full, the net proceeds would be approximately $32.5 million. The principal purposes of this offering are to obtain additional capital, to create a public market for Healtheon's common stock, to enhance the ability of Healtheon to acquire other businesses, products or technologies, and to facilitate future access by Healtheon to public equity markets. Healtheon currently expects to use the net proceeds of this offering for general corporate purposes, including working capital and capital expenditures. Healtheon may also use a portion of the net proceeds of this offering to acquire or invest in complementary businesses or technologies, although Healtheon has no present commitments or agreements with respect to any acquisition or investment. However, Healtheon from time to time enters into nondisclosure agreements with third parties for the purpose of evaluating strategic transactions involving complementary businesses or technologies. Healtheon intends to invest the proceeds of this offering in short-term, interest-bearing, investment grade securities pending use of the proceeds. DIVIDEND POLICY Healtheon 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. Healtheon intends to retain any earnings for use in the operation of its business and to fund future growth. In addition, the terms of Healtheon's credit agreement prohibit the payment of cash dividends on its capital stock. 15 CAPITALIZATION The following table sets forth the total capitalization of Healtheon as of September 30, 1998 on an actual basis and on an as adjusted basis to reflect the receipt by Healtheon of the estimated net proceeds from the sale of the 5,000,000 shares of common stock in this offering at an assumed initial public offering price of $6.50 per share after deducting estimated underwriting discounts and commissions and our estimated offering expenses.
SEPTEMBER 30, 1998 ---------------------- ACTUAL AS ADJUSTED --------- ----------- (UNAUDITED) (IN THOUSANDS) Capital lease obligations, net of current portion.............................................. $ 1,714 $ 1,714 --------- ----------- 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, 54,422,868 shares issued and outstanding, actual; 150,000,000 shares authorized, 59,422,868 shares issued and outstanding, as adjusted.................................................................... 5 6 Additional paid-in capital..................................................................... 119,645 147,569 Deferred stock compensation.................................................................... (4,184) (4,184) Accumulated deficit............................................................................ (85,240) (85,240) --------- ----------- Total stockholders' equity................................................................. 30,226 58,151 --------- ----------- Total capitalization..................................................................... $ 31,940 $ 59,865 --------- ----------- --------- -----------
The share numbers above exclude: - 11,186,473 shares of common stock issuable upon the exercise of options outstanding at September 30, 1998, with a weighted average exercise price of $2.33 per share; - 2,715,853 shares reserved for issuance under our 1996 Stock Plan and our 1998 Purchase Plan at September 30, 1998 and an additional 3,107,321 shares reserved for issuance under our 1996 Stock Plan as a result of the annual increase in January 1999; - 2,077,240 shares of common stock issuable upon the exercise of warrants outstanding at September 30, 1998, with a weighted average exercise price of $2.81 per share; - 500,000 shares of common stock subject to a warrant with an exercise price of $10.40 per share issued to a customer in December 1998; - 7,683,341 shares of Series A convertible preferred stock issued in November 1998 for $46.1 million in cash proceeds; - options to purchase common stock granted and shares of common stock issued under restricted stock purchase agreements equal to a total of 1,518,257 shares from October to December 1998 with a weighted-average exercise or purchase price of $3.55 per share; and - 1,833,333 shares of common stock issued in connection with a December 1998 Asset Purchase Agreement with SmithKline Beecham Clinical Laboratories, Inc. On October 20, 1998, Healtheon offered to reprice options granted from July 1998 through October 1998. Under this repricing, option holders could surrender their original option in exchange for a new option with a new vesting start date and an exercise price of $3.55 per share. Options for a total of 2,057,950 shares were canceled and reissued. On December 14, 1998, 455,000 shares of common stock issued in July 1998 pursuant to restricted stock purchase agreements were repurchased. See "Management--Employee Benefit Plans," "Description of Capital Stock" and Notes 10, 11 and 14 of Notes to Consolidated Financial Statements. 16 DILUTION The net tangible book value of Healtheon as of September 30, 1998 was approximately $6.5 million, or $0.12 per share. Net tangible book value per share is determined by dividing our total net tangible book value, which is 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 this offering and the net tangible book value per share of common stock immediately after completion of this offering. After giving effect to the sale of 5,000,000 shares of common stock offered by Healtheon, at an assumed initial public offering price of $6.50 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by Healtheon, and the application of the estimated net proceeds, our net tangible book value at September 30, 1998 would have been $34.4 million, or $0.58 per share. This represents an immediate increase in pro forma net tangible book value to existing stockholders of $0.46 per share and an immediate dilution to new investors of $5.92 per share. The following table illustrates the per share dilution:
Assumed initial public offering price per share.................................. $ 6.50 Net tangible book value per share as of September 30, 1998..................... .12 Increase per share attributable to new investors............................... .46 ----- Net tangible book value per share after this offering............................ $ .58 ----- Dilution per share to new public investors....................................... $ 5.92 ----- -----
The following table sets forth, on a pro forma basis, as of September 30, 1998, the difference between the number of shares of common stock purchased from Healtheon, the total consideration paid and the average price per share paid by existing stockholders and by the new investors. Amounts in the table are calculated at an assumed initial public offering price of $6.50 per share and before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by Healtheon:
SHARES PURCHASED TOTAL CONSIDERATION ------------------------- --------------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ------------ ----------- -------------- ----------- --------------- Existing stockholders............... 54,422,868 91.6% $ 112,287,000 77.6% $ 2.06 New public investors................ 5,000,000 8.4 32,500,000 22.4 6.50 ------------ ----- -------------- ----- Total........................... 59,422,868 100.0% $ 144,787,000 100.0% 2.44 ------------ ----- -------------- ----- ------------ ----- -------------- -----
As of September 30, 1998, there were options outstanding to purchase a total of 11,186,473 shares of common stock, with a weighted average exercise price of $2.33 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. From October through December 1998, Healtheon granted options to purchase common stock and issued shares of common stock under restricted stock purchase agreements equal to a total of 1,518,257 shares, with a weighted average exercise or purchase price of $3.55 per share. To the extent that any of the outstanding options or warrants are exercised, there will be further dilution to new public investors. If all outstanding options and warrants, through December 31, 1998, were exercised, the dilution per share to new public investors would be $5.47. In November 1998, Healtheon issued 7,683,341 shares of Series A convertible preferred stock for $46.1 million in cash proceeds at a purchase price of $6.00 per share. In December 1998, Healtheon issued to a customer a warrant to purchase 500,000 shares of common stock with an exercise price of $10.40 per share. In January 1999, Healtheon issued 1,833,333 shares of common stock to SmithKline Labs in connection with a December 1998 asset purchase agreement. On October 20, 1998, Healtheon offered to reprice options granted from July 1998 through October 1998. Under this repricing, option holders could surrender their original option in exchange for a new option with a new vesting start date and an exercise price of $3.55 per share. Options for a total of 2,057,950 shares were canceled and reissued. On December 14, 1998, 455,000 shares of common stock issued in July 1998 pursuant to restricted stock purchase agreements were repurchased. 17 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. In May 1998, Healtheon acquired ActaMed in a transaction accounted for as a pooling of interests. All financial information has been restated to reflect the combined operations of Healtheon and ActaMed. The consolidated statements of operations data for the three-year period ended December 31, 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 consolidated statements of operations and balance sheet data as of and for the years ended December 31, 1993, 1994 and 1995 are derived solely from the ActaMed statements of operations and balance sheets for such periods because Healtheon did not commence operations until January 1996. See Notes 1 and 2 of Notes to Consolidated Financial Statements for a discussion of the accounting for the acquisition of ActaMed. The statements of operations data for the nine-month period ended September 30, 1997 and 1998 and the balance sheet data as of September 30, 1998 are derived from unaudited financial statements included elsewhere in this prospectus and, in the opinion of Healtheon's management, include all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of operations for this period. Historical operating results are not necessarily indicative of results in the future, and the results for interim periods are not necessarily indicative of the results that may be expected for the entire year.
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ----------------------------------------------------- -------------------- 1993 1994 1995 1996 1997 1997 1998 --------- --------- --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenue: Services.................................... $ -- $ 190 $ 458 $ 1,795 $ 4,301 $ 1,216 $ 18,326 Services to related parties(1).............. -- -- -- 4,237 7,309 5,199 14,320 Software licenses........................... -- -- 1,717 4,981 1,780 585 585 --------- --------- --------- --------- --------- --------- --------- Total revenue............................... -- 190 2,175 11,013 13,390 7,000 33,231 Operating costs and expenses: Cost of revenue: Cost of services.......................... -- 507 1,573 1,648 4,011 1,080 18,688 Cost of services to related parties....... -- -- -- 4,919 6,536 4,648 13,206 Cost of software licenses................. -- -- 343 160 -- -- -- --------- --------- --------- --------- --------- --------- --------- Total cost of revenue....................... -- 507 1,916 6,727 10,547 5,728 31,894 Development and engineering expense......... 1,002 1,863 2,446 8,596 12,986 9,681 13,036 Sales, general and administrative expense... 769 938 1,749 9,042 11,031 7,477 17,041 Amortization of intangible assets........... -- -- -- 3,189 4,249 3,187 6,703 --------- --------- --------- --------- --------- --------- --------- Total operating costs and expenses.......... 1,771 3,308 6,111 27,554 38,813 26,073 68,674 --------- --------- --------- --------- --------- --------- --------- Loss from operations.......................... (1,771) (3,118) (3,936) (16,541) (25,423) (19,073) (35,443) Interest income............................... 5 172 208 539 611 359 834 Interest expense.............................. (117) (57) (6) (56) (323) (177) (361) Dividends on ActaMed's convertible redeemable preferred stock............................. -- -- -- (2,548) (2,870) (2,382) (890) --------- --------- --------- --------- --------- --------- --------- Net loss...................................... (1,883) (3,003) (3,734) (18,606) (28,005) (21,273) (35,860) Dividends on ActaMed's convertible redeemable preferred stock............................. -- (423) (724) -- -- -- -- --------- --------- --------- --------- --------- --------- --------- Net loss applicable to common stockholders.... $ (1,883) $ (3,426) $ (4,458) $ (18,606) $ (28,005) $ (21,273) $ (35,860) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Basic and diluted net loss per common share... $ (.85) $ (2.83) $ (3.88) $ (3.03) $ (1.24) Weighted-average shares outstanding used in computing basic and diluted net loss per common share(2)............................. 5,246 6,583 7,223 7,019 28,934 Pro forma basic and diluted net loss per common share (unaudited).................... $ (.56) $ (.74) Shares used in computing pro forma basic and diluted net loss per common share (unaudited)(2)............................. 44,715 47,263
18
DECEMBER 31, -------------------------------------------- 1993 1994 1995 1996 1997 ------- ------- ------- -------- ------- SEPTEMBER 30, 1998 ------------- (IN THOUSANDS) (UNAUDITED) CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments..................... $ 74 $ 4,186 $ 9,386 $ 7,539 $21,804 $ 5,392 Working capital (deficit)............................................. (1,737) 4,226 7,244 2,505 14,790 (6,055) Total assets.......................................................... 899 5,379 10,801 34,407 53,747 50,271 Long-term obligations, net of current portion......................... 159 63 -- 1,210 932 1,714 Convertible redeemable preferred stock................................ -- 7,919 16,029 39,578 50,948 -- Stockholders' equity (net capital deficiency)......................... (1,335) (2,838) (7,697) (14,553) (9,930) 30,226
- ------------ (1) Revenue from services to related parties consists of revenue from United HealthCare and SmithKline Labs, customers that are also significant stockholders of Healtheon. (2) See Note 1 of Notes to Consolidated Financial Statements for an explanation of the determination of the shares used in computing basic and diluted net loss per common share. 19 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. HEALTHEON'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS CONTEMPLATED BY THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE DISCUSSED BELOW AND ELSEWHERE IN THIS PROSPECTUS. OVERVIEW Healtheon is pioneering the use of the Internet to simplify workflows, decrease costs and improve the quality of patient care throughout the healthcare industry. Healtheon's VHN Solution enables the secure exchange of information among a wide array of disparate healthcare information systems and provides a framework for a broad range of healthcare transactions. Healtheon was incorporated in December 1995, commenced operations in January 1996 and until late 1997 had not recognized substantial revenue and was considered to be in the development stage. In May 1998, Healtheon acquired ActaMed, which was incorporated in 1992. The acquisition of ActaMed was accounted for as a pooling of interests. The financial information presented reflects the combined financial position and operations of Healtheon and ActaMed for all dates and periods presented. Healtheon'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, or "IT," infrastructure. In March 1996, ActaMed acquired EDI Services, Inc., or "EDI," a wholly-owned subsidiary of United HealthCare, in a transaction accounted for as a purchase. Accordingly, the operations of EDI are included in Healtheon's consolidated statements of operations beginning in March 1996. In August 1998, Healtheon acquired substantially all of the assets of Metis, LLC, a leading consulting, design and development firm focused on Internet and intranet-based solutions for medical centers and integrated delivery networks. In connection with this acquisition, Healtheon issued 1,600,000 shares of its common stock, of which 476,548 shares will be issued to certain employees under restricted stock purchase agreements subject to a lapsing right of repurchase, at Healtheon's option, over the agreements' respective vesting periods. Of these shares, 200,000 shares are held in escrow to secure certain indemnification obligations. The Metis acquisition was treated as a tax-free reorganization and accounted for as a purchase. Healtheon earns revenue from services and services to related parties, which include providing access to its network-based services, including fixed fee and transaction-based services, and performing development and consulting services, and from licensing software. Revenue from services to related parties consists of services provided to United HealthCare under a Services and License Agreement between ActaMed and United HealthCare dated April 4, 1996, or the "United HealthCare Agreement," and services provided to SmithKline Labs under a Services Agreement between ActaMed and SmithKline Labs dated December 31, 1997, or the "Services Agreement." Customers may purchase some or all of the Healtheon's applications and services and the customer relationship may evolve from utilizing development and consulting services to utilizing transaction and subscription-based services. Healtheon earns network-based services revenue from fixed fee subscription arrangements, which revenue is recognized ratably over the term of the applicable agreement, or revenue from arrangements that are priced on a per-transaction or per-user basis, which revenue is recognized as the services are performed. Revenue from development projects is recognized on a percentage-of-completion basis or as services are performed, depending on the terms of the contract. Revenue from consulting services is recognized as the services are performed. Cash received in excess of revenue recognized relating to these services has been recorded as deferred revenue. As of September 30, 1998, Healtheon had deferred revenue of approximately $4.4 million. The United HealthCare Agreement has a five year term; however, the agreement provides that two years after the date of the agreement, April 4, 1998, the parties will agree on new prices that they agree are 20 competitive with the marketplace. Healtheon and United HealthCare are negotiating such new prices, and Healtheon anticipates that the new prices will reduce the rates paid by United HealthCare. The Services Agreement with SmithKline Labs also has a five year term, but provides that the parties will negotiate new rates as of January 1, 2001 and each two year period after that date. Under the Services Agreement, the renegotiated rates must be competitive with the marketplace and must be no higher than the lowest fees charged by Healtheon to similarly situated customers. In January 1999, Healtheon purchased certain assets used by SmithKline Labs to provide laboratory results delivery services in exchange for $2.0 million in cash and 1,833,333 shares of Healtheon's common stock. Healtheon and SmithKline Labs entered into a related services agreement under which Healtheon will provide certain electronic laboratory results delivery services to approximately 20,000 provider sites, in addition to the sites currently served through the SCAN service. The services agreement has a five year term. Healtheon recognizes software license revenue in accordance with the American Institute of Certified Public Accountants' Statement of Position 97-2. ActaMed entered into a national marketing and licensing agreement with International Business Machines Corporation, "IBM," in 1995 that granted IBM a nonexclusive, nontransferable right to market ActaMed's software and services for a total of $6.3 million. For the years ended December 31, 1995, 1996 and 1997, approximately $1.7 million, $3.4 million and $1.2 million 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 nine months ended September 30, 1997 or 1998. In December 1996, ActaMed entered into a new agreement, or the "License," to license its newly granted patent to IBM. As part of the License, IBM agreed to pay ActaMed $4.8 million over a four-year period, $1.0 million in December 1996 and the remaining balance in 48 equal monthly installments commencing in January 1997. Additionally, in conjunction with the License, IBM received a five-year warrant to purchase 282,522 shares of Healtheon's common stock at a price of $7.97 per share. Because of the extended payment terms and ActaMed's contentious relationship with IBM, ActaMed concluded that the license fee was not assured of collection and, accordingly, is recognizing this revenue as the proceeds are collected. For the years ended December 31, 1996 and 1997 and the nine months ended September 30, 1997 and 1998, Healtheon recognized revenue from the License of $1.0 million, $.8 million, $.6 million and $.6 million. At December 31, 1997, amounts due from IBM of $.7 million and $1.7 million were included in accounts receivable and other assets. At September 30, 1998, amounts due from IBM of $.8 million and $1.1 million were included in accounts receivable and other assets. Deferred revenue at December 31, 1996 and 1997 and September 30, 1998 included $3.1 million, $2.3 million and $1.8 million related to the License. Healtheon does not expect that it will earn a material amount of revenue from software licenses in the foreseeable future. Healtheon has developed strategic relationships with healthcare industry leaders, including United HealthCare, SmithKline Labs, Brown & Toland and Beech Street. These four companies each accounted for over 10%, and together accounted for approximately 90%, of Healtheon's total revenue for the nine months ended September 30, 1998 and United HealthCare and SmithKline Labs accounted for all of Healtheon's revenue from services to related parties. Healtheon expects that a small number of customers will continue to account for a substantial portion of Healtheon's revenue for the foreseeable future. The loss of one or more of Healtheon's significant customers, or a decline in volume of business generated by such customers, could have a material adverse effect on Healtheon's business, financial condition and results of operations. Cost of services and cost of services to related parties consist of costs related to services Healtheon 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, amortization of certain intangible assets, a portion of facilities expenses and leased personnel and facilities costs. Cost of software licenses consists primarily of expenses related to royalties and 21 sublicensing fees. Given Healtheon's limited operating history, changes in revenue mix, limited history of Internet-based network services, recent investments in personnel, amortization of infrastructure investments and evolving business model, Healtheon believes that analysis of historical cost of revenue as a percentage of revenue is not meaningful. Healtheon anticipates that its total cost of revenue will increase in absolute dollars in the future. Development and engineering expense, which excludes development expenses that are included in cost of revenue, consists primarily of salaries and related expenses associated with the development of applications and services and includes compensation paid to engineering personnel, fees to outside contractors and consultants, a portion of facilities expenses and the depreciation and amortization of capital equipment used in the development process. Healtheon believes its success is partially dependent upon its ability to introduce new applications in several healthcare markets in a relatively short period of time. Accordingly, Healtheon intends to continue recruiting and hiring experienced engineering personnel and to continue making other investments in development and engineering. Healtheon expects that development and engineering expenses will continue to increase in absolute dollars. Currently, all development and engineering costs are expensed as incurred. Sales, general and administrative expense consists primarily of salaries and related expenses for sales, account management, marketing, administrative, finance, legal, human resources and executive personnel, commissions, costs and expenses for marketing programs and trade shows, fees for professional services and costs of accounting and internal control systems to support Healtheon's operations. Healtheon anticipates that sales, general and administrative expense will continue to increase in absolute dollars as it adds sales, marketing and administrative personnel, increases its marketing and promotional activities and incurs costs related to being a public company, such as directors' and officers' liability insurance premiums and professional fees. Healtheon's business model is still in an emerging stage, and revenue and income potential from Healtheon's business is unproven. Moreover, Healtheon's limited operating history under its current business model makes an evaluation of Healtheon and its prospects difficult; investors should not use Healtheon's past results as a basis to predict future performance. Healtheon has incurred net losses since inception and, as of September 30, 1998, had an accumulated deficit of $85.2 million. Healtheon intends to continue investing heavily in acquisitions, infrastructure development, application development and sales and marketing. As a result, Healtheon expects to incur substantial operating losses at least through 1999. There can be no assurance that Healtheon will achieve significant revenue or profitability or, if significant revenue or profitability are achieved, that they can be sustained. 22 RESULTS OF OPERATIONS The following table sets forth certain data expressed as a percentage of total revenue for the periods indicated.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------ ------------------- 1995 1996 1997 1997 1998 -------- -------- -------- -------- -------- (UNAUDITED) Revenue: Services................................................................... 21.1% 16.3% 32.1% 17.4% 55.1% Services to related parties(1)............................................. -- 38.5 54.6 74.3 43.1 Software licenses.......................................................... 78.9 45.2 13.3 8.3 1.8 -------- -------- -------- -------- -------- Total revenue.............................................................. 100.0 100.0 100.0 100.0 100.0 Operating costs and expenses: Cost of revenue: Cost of services......................................................... 72.3 15.0 30.0 15.4 56.2 Cost of services to related parties...................................... -- 44.7 48.8 66.4 39.8 Cost of software licenses................................................ 15.8 1.5 -- -- -- -------- -------- -------- -------- -------- Total cost of revenue.................................................... 88.1 61.2 78.8 81.8 96.0 Development and engineering................................................ 112.5 78.0 97.0 138.4 39.2 Sales, general and administrative.......................................... 80.4 82.1 82.4 106.8 51.3 Amortization of intangible assets.......................................... -- 29.0 31.7 45.5 20.2 -------- -------- -------- -------- -------- Total operating costs and expenses......................................... 281.0 250.3 289.9 372.5 206.7 -------- -------- -------- -------- -------- Loss from operations......................................................... (181.0) (150.3) (189.9) (272.5) (106.7) Interest income.............................................................. 9.6 4.9 4.6 5.1 2.5 Interest expense............................................................. (0.3) (0.5) (2.4) (2.5) (1.1) Dividends on ActaMed's convertible redeemable preferred stock................ -- (23.1) (21.4) (34.0) (2.7) -------- -------- -------- -------- -------- Net loss..................................................................... (171.7) (169.0) (209.1) (303.9) (108.0) Dividends on ActaMed's convertible redeemable preferred stock................ (33.3) -- -- -- -- -------- -------- -------- -------- -------- Net loss applicable to common stockholders................................... (205.0)% (169.0)% (209.1)% (303.9)% (108.0)% -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
- --------- (1) Revenue from services to related parties consists of revenue from United HealthCare and SmithKline Labs, customers that are also significant stockholders of Healtheon. NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 REVENUE. Total revenue increased to $33.2 million in the first nine months of 1998 from $7.0 million in the same period of 1997. Revenue from services increased to $18.3 million in the first nine months of 1998 from $1.2 million in the same period in 1997. The significant increase in revenue was due principally to new contracts with Brown & Toland and Beech Street for the management and operation of their IT infrastructure beginning in late 1997. To provide these services, Healtheon utilizes its own personnel, certain outside contractors and certain personnel and facilities of the customers that are leased to Healtheon. The cost of these leased customer personnel and facilities are included as part of the total costs of the IT and development services that Healtheon billed to the customers. In the first nine months of 1998, Healtheon recognized revenue for IT services of $10.9 million, which included Healtheon's costs of leased personnel and facilities of $8.8 million. In addition, Healtheon recognized revenue of approximately $4.8 million for development services in the same period. 23 Revenue from services to related parties increased to $14.3 million in the first nine months of 1998 from $5.2 million in the same period of 1997 primarily due to a new contract with SmithKline Labs in December 1997 to service its SCAN laboratory test order and results service. Revenue from software licenses was unchanged in the first nine months of 1998 from the same period in 1997. Healtheon expects that revenue from software licenses will continue to decline in future periods as a percentage of total revenue. COST OF REVENUE. Total cost of revenue increased to $31.9 million in the first nine months of 1998 from $5.7 million in the same period of 1997. Cost of services increased to $18.7 million in the first nine months of 1998 from $1.1 million in the same period in 1997. This increase includes $8.8 million related to costs of leased personnel and facilities utilized to provide IT services and $4.8 million related to development services to support the Brown & Toland and Beech Street contracts. The remaining increase resulted from increased personnel and expansion of our network infrastructure to support current customers and future business activities. Healtheon believes its margin on services revenue will continue to be negative until its revenue from other than IT and development services increases. Healtheon had no cost of software licenses revenue in the first nine months of 1998 or in the comparable period of 1997. Cost of services to related parties increased to $13.2 million in the first nine months of 1998 from $4.6 million in the same period of 1997. This increase resulted from higher personnel and network operations costs necessary to support increased transactions from Healtheon's SCAN services. DEVELOPMENT AND ENGINEERING. Development and engineering expense, which excludes development expenses that are included in cost of revenue, increased to $13.0 million in the first nine months of 1998 from $9.7 million in the same period of 1997. The increase in development and engineering expenses was caused by a significant increase in the number of engineers engaged in the development of Healtheon's applications and services. SALES, GENERAL AND ADMINISTRATIVE. Sales, general and administrative expense increased to $17.0 million in the first nine months of 1998 from $7.5 million in the same period of 1997. The increase resulted primarily from approximately $6.7 million in salaries and related support costs for added sales personnel and executive management, approximately $.8 million of costs related to the merger with ActaMed and from the amortization of deferred compensation. Healtheon recorded deferred compensation of $4.1 million during the first nine months of 1998, and recorded $2.1 million of amortization of deferred compensation in this period. 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 Healtheon's common stock at the time of those grants. The deferred compensation balance of $4.2 million at September 30, 1998 will be amortized over the vesting period, generally four years, of the option or restricted stock grants. Amortization is estimated to total $0.8 million for the last three months of 1998, $2.1 million for 1999, $.9 million for 2000, and $0.3 million for 2001. From October through December 1998, Healtheon repriced certain stock options and restricted stock purchases and granted additional stock options. Healtheon estimates that it will record approximately $4.1 million of additional deferred compensation as a result of the repricing and additional grants. AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets was $6.7 million in the first nine months of 1998 and $3.2 million in the same period of 1997. This amortization relates to the acquisition of EDI in March 1996 from United HealthCare and certain intangible assets related to SCAN acquired from SmithKline Labs in December 1997 and acquisition of Metis, LLC in August 1998. Although the Services and License Agreement entered into with United HealthCare in connection with the acquisition of EDI has a five year term, Healtheon determined that a three year amortization period was appropriate for the EDI-related assets due to the price renegotiation required by such agreement, the probability that the purchased technology and software would be replaced within three years and the uncertain profitability of the agreement after the price renegotiation. Similarly, although the Services Agreement entered into with SmithKline Labs in connection with the acquisition of the SCAN-related assets has a five year term, 24 Healtheon determined that a three year amortization period was appropriate for the SCAN related assets due to the price renegotiation required by such agreement, the probability that the purchased technology and software would be replaced within three years and the uncertain profitability of the agreement after the price renegotiation. There can be no assurance that Healtheon's services to United HealthCare and SmithKline Labs will be profitable after the price renegotiations required by the agreements, particularly given the uncertainty of future rates and volumes under those agreements. Healtheon determined that the acquisition of Metis, LLC included the value of an assembled workforce, which will be amortized over two years. The other intangible assets related to the acquisition of Metis, LLC were determined to have a three-year life. At September 30, 1998, a total of $23.7 million remained to be amortized, and the amortization charges for the three months ending December 31, 1998 and for the years ending 1999 and 2000 are estimated to be $3.9 million, $10.1 million and $8.2 million, respectively, assuming no impairment of the remaining unamortized intangible asset balances. See Notes 2 and 3 of Notes to Consolidated Financial Statements. INTEREST INCOME AND EXPENSE. Interest income has been derived primarily from cash investments, and increased to $.8 million in the first nine months of 1998 compared to $.4 million in the same period of 1997. The increase resulted from Healtheon's $25.0 million preferred stock financing in October 1997. Interest expense results from Healtheon'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, ActaMed accrued such dividends on a quarterly basis. Dividends of $2.4 million and $.9 million are shown as a charge against income in the consolidated statement of operations for the first nine months of 1997 and 1998, respectively. None of the dividends were paid, and, in conjunction with approving the acquisition of ActaMed by Healtheon, the preferred stockholders waived their right to receive such dividends, which totaled $7.5 million at the time of the acquisition, and received an aggregate of 17,252,408 shares of Healtheon common stock in exchange for their ActaMed preferred stock. YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 REVENUE. Total revenue increased to $13.4 million in 1997 from $11.0 million in 1996 and $2.2 million in 1995. Revenue from services increased to $4.3 million in 1997 from $1.8 million in 1996 and $.5 million in 1995. The increase is due primarily to the contract with Brown & Toland, which began in October 1997. In 1997, Healtheon recognized $2.1 million of revenue for IT services under this contract, which included costs of leased personnel and facilities of $1.9 million. Revenue from services to related parties increased to $7.3 million in 1997 from $4.2 million in 1996. There was no revenue from services to related parties in 1995. Healtheon's acquisition of ProviderLink in March 1996 from United HealthCare accounts for substantially all of the related party revenue in 1996 and the 1997 increase is substantially due to recording a full year of revenue in 1997 compared to nine months in 1996. Revenue from software licenses was $1.8 million, $5.0 million and $1.7 million in 1997, 1996 and 1995. Substantially all of this revenue was derived from licensing agreements with IBM. The full amount of revenue to be derived from one of these agreements had been recognized by the end of 1997. Revenue will continue to be recognized under a second agreement through December 2000. COST OF REVENUE. Cost of services was $4.0 million, $1.6 million and $1.6 million in 1997, 1996 and 1995. The increase from 1996 to 1997 was primarily due to the $1.9 million cost related to the leased personnel and facilities under the Brown & Toland contract. Cost of services to related parties increased to $6.5 million in 25 1997 from $4.9 million in 1996. This increase was primarily due to recording a full year of costs related to ProviderLink in 1997 compared to only nine months in 1996. Cost of software licenses in 1996 and 1995 related principally to royalties and sublicense fees paid by Healtheon. 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 Healtheon'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 $1.7 million in 1995. The increase resulted primarily from the addition of sales personnel and executive management, which caused related salaries to increase by approximately $1.4 million in 1997 from 1996, and from the amortization of deferred compensation. Healtheon recorded deferred compensation of $2.7 million during 1997 and recorded $.6 million of amortization of deferred compensation in 1997. AMORTIZATION OF INTANGIBLE ASSETS. Amortization of acquisition-related costs including intangible assets was $4.2 million in 1997 and $3.2 million in 1996. This amortization relates to the acquisition of EDI in March 1996. INTEREST INCOME AND EXPENSE. Interest income was derived from cash investments following Healtheon'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 Healtheon and from capitalized lease obligations for equipment purchases. INCOME TAXES. At December 31, 1997, Healtheon had net operating loss carryforwards for federal income tax purposes of $37.6 million and federal tax credits of $.8 million, both expiring from 2009 through 2012. Of these net operating losses, $16.7 million relates to a consolidated subsidiary. This loss carryforward is available only to offset future taxable income of that subsidiary. Because of the "change of ownership" provisions of the Internal Revenue Code, a portion of Healtheon's net operating loss carryforwards and tax credit carryforwards may be subject to an annual limitation regarding their utilization against taxable income in future periods. Thus, a portion of these carryforwards may expire before becoming available to reduce future income tax liabilities. QUARTERLY FINANCIAL RESULTS The following table presents Healtheon's operating results for each of the seven quarters in the period ended September 30, 1998, as well as such data expressed as a percentage of Healtheon's total revenue for the periods indicated. The information for each of these quarters is unaudited and has been prepared on the same basis as the audited consolidated financial statements appearing elsewhere in this prospectus. In the opinion of management, all necessary adjustments, consisting only of normal recurring adjustments, have been included to present fairly the unaudited quarterly results. This data should be read in conjunction with the Consolidated Financial Statements and the Notes thereto appearing elsewhere in this prospectus. These operating results are not indicative of the results of any future period. 26
THREE MONTHS ENDED ----------------------------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, 1997 1997 1997 1997 1998 1998 1998 ----------- ----------- ----------- ----------- ----------- ----------- ----------- (UNAUDITED, IN THOUSANDS EXCEPT PERCENTAGES) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenue: Services................ $ 239 $ 417 $ 560 $ 3,085 $ 4,903 $ 5,990 $ 7,433 Services to related parties................ 1,488 1,752 1,959 2,110 4,656 4,714 4,950 Software licenses....... 195 195 195 1,195 195 195 195 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total revenue....... 1,922 2,364 2,714 6,390 9,754 10,899 12,578 Operating costs and expenses: Cost of revenue: Cost of services...... 213 385 482 2,931 5,088 5,682 7,918 Cost of services to related parties...... 1,633 1,496 1,519 1,888 2,860 4,457 5,889 Cost of software licenses............. -- -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total cost of revenue............ 1,846 1,881 2,001 4,819 7,948 10,139 13,807 Development and engineering............ 3,247 3,162 3,272 3,305 3,919 4,413 4,704 Sales, general and administrative......... 2,501 2,222 2,754 3,554 4,966 7,157 4,918 Amortization of intangible assets...... 1,062 1,062 1,063 1,062 1,949 1,989 2,765 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total operating costs and expenses........... 8,656 8,327 9,090 12,740 18,782 23,698 26,194 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Loss from operations...... (6,734) (5,963) (6,376) (6,350) (9,028) (12,799) (13,616) Interest income........... 146 108 105 252 358 279 197 Interest expense.......... (50) (78) (49) (146) (116) (135) (110) Dividends on ActaMed's convertible redeemable preferred stock......... (783) (823) (776) (488) (890) -- -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net loss.................. $(7,421) $(6,756) $(7,096) $(6,732) $(9,676) $(12,655) $(13,529) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- AS A PERCENTAGE OF REVENUE: Revenue: Services................ 12.4% 17.6% 20.6% 48.3% 50.3% 55.0% 59.1% Services to related parties................ 77.4 74.1 72.2 33.0 47.7 43.3 39.4 Software licenses....... 10.2 8.3 7.2 18.7 2.0 1.7 1.5 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total revenue....... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Operating costs and expenses: Cost of revenue: Cost of services...... 11.1 16.3 17.8 45.9 52.2 52.1 63.0 Cost of services to related parties...... 85.0 63.3 56.0 29.5 29.3 40.9 46.8 Cost of software licenses............. -- -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total cost of revenue............ 96.1 79.6 73.8 75.4 81.5 93.0 109.8 Development and engineering............ 168.9 133.7 120.6 51.7 40.2 40.5 37.4 Sales, general and administrative......... 130.1 94.0 101.5 55.6 50.9 65.7 39.1 Amortization of intangible assets...... 55.3 44.9 39.2 16.6 20.0 18.2 22.0 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total operating costs and expenses........... 450.4 352.2 335.1 199.3 192.6 217.4 208.3 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Loss from operations...... (350.4) (252.2) (235.1) (99.3) (92.6) (117.4) (108.3) Interest income........... 7.6 4.6 3.9 3.9 3.7 2.6 1.6 Interest expense.......... (2.6) (3.3) (1.8) (2.3) (1.2) (1.2) (0.9) Dividends on ActaMed's convertible redeemable preferred stock......... (40.7) (34.8) (28.6) (7.6) (9.1) -- -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net loss.................. (386.1)% (285.7)% (261.6)% (105.3)% (99.2)% (116.0)% (107.6)% ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Revenue has grown each quarter as demand for Healtheon's services has increased. Cost of revenue increased in the quarter ended December 31, 1997 due primarily to expenses related to the Brown & Toland contract, and in the quarters ended March 31, June 30 and September 30, 1998 due primarily to expenses related to the Beech Street and SmithKline Labs contracts. In addition, in the quarter ended June 30, 1998, 27 total cost of revenue increased due in part to an increase in amortization of capitalized internally developed software. This increase was due to the fact that Healtheon evaluated the carrying value of the capitalized internally developed software in light of the changes in operations resulting from the acquisition of ActaMed by Healtheon. Healtheon determined that it expected no future cash flows to be generated by this software and, accordingly, wrote off the remaining unamortized balance of $.6 million. Development and engineering expense increased in the quarters ended March 31, June 30 and September 30, 1998 due to a significant increase in personnel engaged in the development of Healtheon's applications and services. Sales, general and administrative expenses increased in each of the quarters ended September 30, 1997 through September 30, 1998 due to increases in sales and executive personnel and due to amortization of deferred compensation. In addition, Healtheon recorded substantial professional fees related to the acquisition of ActaMed in the quarter ended June 30, 1998. Healtheon's quarterly revenue and operating results have varied in the past and are likely to vary substantially in the future. Healtheon 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 the increased spending. If Healtheon does not experience significantly increased revenue from these efforts, Healtheon's business, financial condition and results of operations could be materially and adversely affected. In addition, Healtheon's expense levels are based in part on its expectations concerning future revenue and are relatively fixed in the short-term. Consequently, if Healtheon's revenue is below expectations in any period, Healtheon may not be able to adjust its spending levels in a timely manner. LIQUIDITY AND CAPITAL RESOURCES Healtheon has funded its operations since inception primarily through the private placement of equity securities, through which it had raised net proceeds of $59.6 million through September 30, 1998. Healtheon has also financed its operations through equipment lease financing and bank borrowings. As of September 30, 1998, Healtheon had outstanding equipment lease financing and bank borrowings of $4.8 million. As of September 30, 1998, Healtheon had approximately $5.4 million of cash, cash equivalents and short-term investments. Cash used in operating activities was $1.3 million in 1995, $9.6 million in 1996 and $16.4 million in 1997. The cash used during these periods was primarily attributable to net losses of $3.7 million in 1995, $18.6 million in 1996 and $28.0 million in 1997 offset in part by depreciation and amortization and dividends on ActaMed's convertible redeemable preferred stock. These losses were principally related to increased development and engineering expenses and sales, general and administrative expenses. Cash used in operations in the first nine months of 1998 was $13.9 million, reflecting a net loss partially offset by depreciation and amortization expenses and increases in liabilities. Investments in property and equipment, excluding equipment acquired under capital leases, and internally developed software were $.5 million, $3.0 million, $3.1 million and $5.1 million in 1995, 1996 and 1997, and the first nine months of 1998. In 1997, Healtheon used $5.3 million of cash to purchase short-term investments. During the first nine months of 1998, Healtheon purchased an additional $4.3 million of short-term investments and realized $8.8 million in cash from maturities of its short-term investments. Healtheon had no purchases or maturities of short-term investments in 1995, 1996, or the nine months ended September 30, 1997. Cash provided by financing activities was $7.0 million, $11.1 million and $34.6 million in 1995, 1996 and 1997 resulting primarily from net proceeds from the sale of preferred stock and, to a lesser extent, from a bank line and bridge note financing in 1997. Cash provided by financing activities for the first nine months of 28 1998 was $3.2 million, primarily from the net proceeds from the sale of preferred and common stock, partially offset by payments on line of credit borrowings and capital lease obligations. In November 1998, Healtheon received proceeds of $46.1 million from the sale of its Series A preferred stock. As of September 30, 1998, Healtheon did not have any material commitments for capital expenditures. Healtheon's principal commitments at December 31, 1997 consisted of obligations of $14.4 million under operating leases and $2.2 million under capital leases. See Note 6 of Notes to Consolidated Financial Statements. Healtheon currently anticipates that the net proceeds from the 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, Healtheon may need to raise additional funds within the next 12 months to support expansion, develop new or enhanced applications and services, respond to competitive pressures, acquire complementary businesses or technologies or take advantage of unanticipated opportunities. Healtheon's future liquidity and capital requirements will depend upon numerous factors, including the success of Healtheon's existing and new application and service offerings and competing technological and market developments. Healtheon may be required to raise additional funds through public or private financing, strategic relationships or other arrangements. There can be no assurance that additional funding, if needed, will be available on terms acceptable to Healtheon, or at all. YEAR 2000 COMPLIANCE Many currently installed computer systems and software products are unable to distinguish between twentieth century dates and twenty-first century dates. As a result, many companies' software and computer systems may need to be upgraded or replaced to comply with these "Year 2000" requirements. Healtheon's business is dependent on the operation of numerous systems that could potentially be impacted by Year 2000 related problems. Those systems include, among others: hardware and software systems used by Healtheon to deliver services to its customers, including Healtheon's proprietary software systems as well as hardware and software supplied by third parties; communications networks, such as the Internet and private intranets, which Healtheon depends on to provide electronic transactions to its customers; the internal systems of Healtheon's customers and suppliers; the hardware and software systems used internally by Healtheon in the management of its business; and non-information technology systems and services used by Healtheon in its business, such as telephone systems and building systems. Healtheon has internally reviewed the proprietary software systems it uses to deliver services to its customers. Although Healtheon believes that its internally developed applications and systems are designed to be Year 2000 compliant, Healtheon utilizes third-party equipment and software that may not be Year 2000 compliant. Also, two systems acquired by ActaMed, specifically SCAN and ProviderLink, which together accounted for approximately 43% of Healtheon's total revenue in the first nine months of 1998, will require modifications to become Year 2000 compliant. Healtheon plans to release Year 2000 upgrades to these systems in early 1999. Healtheon estimates the cost of these Year 2000 upgrades to be less than $1.0 million. In addition, Healtheon's SCAN product is installed on approximately 4,650 Healtheon-owned workstations located in provider offices. Many of these workstations are not Year 2000 compliant and must be upgraded or replaced by Healtheon. Healtheon expects the costs of such upgrades or replacements to be less than $1.0 million. However, Healtheon could experience delays and cost overruns in the development of these upgrades, the upgrades could contain defects and Healtheon could experience difficulties in getting Healtheon's installed base of physicians to implement these upgrades in a timely manner. If Healtheon experiences these or other difficulties in developing and deploying its Year 2000 upgrades, revenues from SCAN and ProviderLink could be significantly reduced, which could have a material adverse effect on Healtheon's business, financial condition and results of operations. Failure of third-party or Healtheon equipment or software to operate properly with regard to the Year 2000 and thereafter could require Healtheon to incur unanticipated expenses to remedy any problems, which could have a material adverse 29 effect on Healtheon's business, financial condition and results of operations. In certain of its agreements, Healtheon warrants that its applications and services are Year 2000 compliant. Failure of Healtheon's applications and services to be Year 2000 compliant could result in the termination of these agreements or in liability for damages, either of which could have a material adverse effect on Healtheon's business, financial condition and results of operations. Healtheon does not believe that 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 Healtheon's efforts may depend on the success of other healthcare participants in dealing with their Year 2000 issues. Many of these organizations are not Year 2000 compliant, and the impact of widespread customer failure on Healtheon's systems is difficult to determine. Customer difficulties due to Year 2000 issues could interfere with healthcare transactions or information, which might expose Healtheon to significant potential liability. If client failures result in the failure of Healtheon systems, Healtheon's business, financial condition and results of operations would be materially adversely affected. Furthermore, the purchasing patterns of these customers or potential customers may be affected by Year 2000 issues as companies expend significant resources to become Year 2000 compliant. The costs of becoming Year 2000 compliant for current or potential customers may result in reduced funds being available to purchase and implement Healtheon's applications and services. Healtheon, with the assistance of an independent consulting firm specializing in Year 2000 issues, is conducting a formal assessment of its Year 2000 exposure in order to determine what steps beyond those identified by Healtheon's internal review may be advisable. Healtheon expects to complete this assessment in the first quarter of 1999. Healtheon does not presently have a contingency plan for handling Year 2000 problems that are not detected and corrected prior to their occurrence. Any failure of Healtheon to address any unforeseen Year 2000 issue could adversely affect Healtheon's business, financial condition and results of operations. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board, or "FASB," issued Statement of Financial Accounting Standards, or "SFAS," No. 131, "Disclosures about Segments of an Enterprise and Related Information." Healtheon 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 Healtheon's financial condition or results of operations. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Healtheon is required to adopt SFAS No. 133 for the year ending December 31, 2000. SFAS No. 133 establishes methods of accounting for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. Because Healtheon currently holds no derivative financial instruments and does not currently engage in hedging activities, adoption of SFAS No. 133 is expected to have no material impact on Healtheon's financial condition or results of operations. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position, or "SOP," 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires that entities capitalize certain costs related to internal-use software once certain criteria have been met. Healtheon is required to implement SOP 98-1 for the year ending December 31, 1999. Adoption of SOP 98-1 is expected to have no material impact on Healtheon's financial condition or results of operations. 30 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. Healtheon 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: - "Providers" -- physicians, medical practice groups, hospitals and other organizations that deliver medical care; - "Payers" -- the government agencies, insurance companies, managed care organizations and other enterprises that pay the bills for healthcare; - "Suppliers" -- clinical laboratories, pharmaceutical companies, and other groups that provide tests, drugs, x-rays and other services; and - "Consumers" -- individual patients who receive medical care, and the government agencies, employers and other organizations that represent groups of individuals. All healthcare participants rely heavily upon information to perform their roles in the industry. Individuals compare medical plans, choose physicians and submit claims for reimbursement. Employers select health plans, determine benefit levels, enroll employees and maintain employee eligibility data. Providers verify patient eligibility, collect patient histories, order diagnostic tests and x-rays, receive and interpret test results, render diagnoses, make referrals and submit claims to payers. Payers manage referrals, establish medical care protocols and reimbursement policies and process claims. Suppliers analyze and process patient samples or tests, provide results, fill prescriptions and submit claims for reimbursement. These and many other healthcare transactions are also highly dependent on information, and each participant is dependent on the others for parts of that information. In sum, the finance and delivery of healthcare requires that consistent, accurate information be shared confidentially across a large and fragmented industry. Inefficiencies within the healthcare system consume enormous amounts of time, resources and dollars. It is estimated that over $250 billion, or 25% of every healthcare dollar, are wasted through the delivery of unnecessary care, performance of redundant tests and procedures, and excessive administrative costs. Healtheon 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 31 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. 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 payers. 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 payer or supplier, or to a limited subset of payers or suppliers, leaving the physician office with its old manual processes for the majority of its transactions. The following examples illustrate how poor information management and the lack of connectivity result in costly, inefficient healthcare services: ENROLLMENT AND ELIGIBILITY. The enrollment process typically begins with employees choosing a health plan and completing paper forms; the employer manually enters the employee information into its human resources information system and subsequently sends the data, often via a paper report, to the relevant health plan. The plan manually enters the information into its membership system and sends the information, again often in paper form, to other entities, such as provider groups, pharmacies, pharmacy benefit management companies and diagnostic laboratories, which in turn must manually enter this information into their own systems. By the time this process is complete, the information may be months old and contain data entry errors, and the disparate healthcare information systems of the various participants may contain conflicting information about the same member. The participants must then expend costly, time-consuming extra effort to correct these errors manually. In the interim, patients may be denied treatment or providers may go unpaid for their services. REFERRALS AND AUTHORIZATIONS. Managed care organizations may require physicians to obtain prior approval to refer patients to specialists or to render certain treatments. The approval process often requires physicians to mail, fax or telephone requests for authorization to the health plan. The plan manually enters the data into its own system, checks its guidelines regarding conditions of referral, and replies via mail, fax or telephone with an approval or denial, a process that can take two days to a week or more. Next, the patient must schedule an appointment if the request is approved, or seek alternative care if the request is denied. This lengthy authorization process is costly, wastes valuable physician time and delays patient care. CLINICAL INFORMATION EXCHANGE. To diagnose and treat a patient properly, physicians need access to clinical information, such as medical history data, laboratory and x-ray results, and medication lists. However, this information typically resides in proprietary databases or is stored in paper form. Therefore, the physician must submit requests for information by phone or fax to various hospitals, laboratories, outpatient diagnostic centers or provider offices. Even when the data are stored at the physician's office, it can be time-consuming to locate in the physician's paper-based medical record system. As a result, significant delays can occur before the physician obtains the information required to diagnose the patient's condition accurately. Often, physicians will require patients to repeat tests for which data are missing, 32 leading to unnecessary expense. More important, the lack of timely access to accurate clinical information in an urgent care situation may lead to inaccurate diagnoses resulting in delayed or inappropriate care. The problem is therefore not only costly, but also potentially harmful. The limitations and inefficiencies of traditional healthcare information management ultimately harm the individual consumer. Individual consumers have little control or influence over how healthcare services 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. Healtheon believes that such a solution has the potential to create significant improvements in the way that information is used by the healthcare system, enabling improved workflows, better decision-making and, ultimately, higher quality care at a lower cost. THE HEALTHEON VIRTUAL HEALTHCARE NETWORK Healtheon is pioneering the use of the Internet to simplify workflows, decrease costs and improve the quality of patient care throughout the healthcare industry. Healtheon has designed an Internet-based information and transaction platform that allows it to create Virtual Healthcare Networks that facilitate and streamline interactions among the myriad participants in the healthcare industry. The Healtheon VHN solution includes a suite of services delivered through applications operating on its Internet-based platform. Healtheon VHNs enable the secure exchange of information among disparate healthcare information systems and support a broad range of healthcare transactions, including enrollment, eligibility determination, referrals and authorizations, laboratory and diagnostic test ordering, clinical data retrieval and claims processing. Healtheon provides its own applications on the Healtheon Platform and also enables third-party applications to operate on its platform. The Healtheon Virtual Healthcare Network solution provides the following key benefits: ELIMINATION OF UNNECESSARY OR REDUNDANT EFFORTS. The Healtheon VHN solution is designed to reduce paper-based transactions, eliminate redundant data entry, shorten cycle times and decrease the communication inefficiencies created by isolated proprietary systems. Healtheon believes that by decreasing redundant tasks, errors, delays, and unnecessary tests and procedures, it can create efficiencies and reduce costs across the healthcare industry. EXTENDIBILITY ACROSS THE CONTINUUM OF HEALTHCARE. Healtheon leverages the Internet to provide an open, low-cost information and transaction platform capable of extending across a wide range of healthcare market segments. The Healtheon VHN solution is designed to interconnect a broad range of practice management, managed care, human resources and laboratory information systems. Healtheon expects the benefits of its solution to increase as it adds customers, enabling each user to exchange more data and complete more transactions with a greater number and broader range of other healthcare industry participants. SCALABILITY AND FLEXIBILITY. The Healtheon VHN solution is designed to support Healtheon's customers as their businesses grow and evolve. The Healtheon Platform is designed to scale to accommodate high 33 volumes of transactions and large numbers of simultaneous users. In addition, Healtheon's object-oriented platform provides flexibility so that customers can add or modify applications and transaction capabilities to react to changes in the healthcare marketplace. HIGH DEGREE OF SECURITY. To enable the use of the Internet for transmission of highly sensitive and confidential data, Healtheon utilizes advanced technology designed to ensure a high degree of security. This technology includes strict authentication requirements, sophisticated data encryption techniques, system-wide network security monitoring and tightly controlled physical security systems. These safeguards are designed to provide a secure environment for the exchange of confidential patient and customer data. The Healtheon Platform is designed to enable compliance with proposed government standards under the Health Insurance Portability and Accountability Act of 1996, which mandate the acceptance by payers of electronic transactions as well as the use of standard transactions, standard identifiers and security features by the year 2000. INCREASED ACCURACY AND TIMELINESS OF INFORMATION. The Healtheon VHN solution is designed to increase information flows among all healthcare participants, which ultimately results in more timely and appropriate treatments. For example, on-line access to accurate, up-to-date eligibility information facilitates patients' access to care on a more timely basis, reduces frustration and costs and increases the likelihood that providers will be compensated for their services in a timely manner. Similarly, using Healtheon's VHN solution, consumers will have greater access to their healthcare information, thereby enabling them to become more active participants in the provision of their own healthcare. Healtheon 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. Healtheon's strategy includes the following key elements: LEVERAGE INTERNET TECHNOLOGY. Healtheon leverages Internet technology to create Virtual Healthcare Networks that provide secure transactions and communications among a broad range of healthcare participants, regardless of their legacy computing platforms. Unlike traditional proprietary solutions that focus on point-to-point communications and narrowly defined transactions, Internet technology allows Healtheon to integrate all categories of healthcare participants--payers, providers, suppliers and consumers--to eliminate redundant tasks and reduce costs. Healtheon believes that such connectivity will optimize and simplify the flow of mission-critical information. EXPAND FUNCTIONALITY AND TRANSACTION CAPABILITY. Healtheon seeks to identify key functions that are critical to particular industry participants and integrate applications supporting these functions into its VHN. Healtheon 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. Healtheon 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, Healtheon developed its Benefits Administration application suite to automate healthcare plan enrollment and is developing its Healtheon Practice application suite, which is in use at beta sites, to manage eligibility, referrals, authorizations and claims transactions between healthcare providers and payers. FORM STRATEGIC RELATIONSHIPS WITH LEADING HEALTHCARE PARTICIPANTS. Healtheon 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, Healtheon plans to acquire companies with strategic relationships with leading healthcare industry participants. Healtheon believes this strategy also provides accelerated market 34 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 leading healthcare organizations, including: United HealthCare, one of the largest health maintenance organizations 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. ESTABLISH A NATIONAL PRESENCE REGION BY REGION. Healtheon 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 Healtheon's platform increase. However, healthcare remains highly regional, driven by business relationships and practices that are often unique to specific regions. Therefore, Healtheon's approach is to target regional markets where it can gain critical mass and to expand nationally region by region. Healtheon plans to enter into, and to acquire companies with, strategic relationships with national and regional healthcare participants that have significant market share in specific regions. In addition, Healtheon intends to leverage its existing relationships to penetrate new regions and markets. PURSUE USAGE-BASED BUSINESS MODEL. Healtheon 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 these systems for the first time. By enabling the shift from fixed information technology costs to variable costs, Healtheon 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, Healtheon offers consulting, application development, systems integration and network management services to provide complete customer-specific solutions. By offering this range of services, Healtheon 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. 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. 35
BUSINESS CUSTOMERS/ FUNCTION USERS TRANSACTIONS SUPPORTED HEALTHEON SERVICE Membership Services Consumers - Enrollment Benefits Payers - Plan comparison/selection Administration - Provider search, selection, change - Benefits inquiry - Messaging Healthcare Administration Payers - Eligibility determination Healtheon Practice and Financial Management Providers - Referrals Healtheon - Authorization ProviderWorks* - Claims submission and status ProviderLink - Remittance advice - Provider directories* - Provider files-management* - Reporting - Claims repricing* Clinical Information Providers - Patient identification and Healtheon Dx* Services Suppliers encounter history SCAN+ - Patient registration GMPI+ - Lab orders and results - Text document/transcription distribution Online Consumer Consumers - Access to licensed dictionaries Healtheon Information and encyclopedias, medical news and Consumer other reference sources Portal - Customized wellness assessments - Food label and nutritional library - Secure communications and transactions with providers and health plans*
- --------- *Under development +Not Internet-enabled The primary applications and services currently available or under development are described in greater detail below. Certain of these applications were acquired by Healtheon and are not yet Internet-enabled; Healtheon is currently redeveloping or replacing these applications to integrate them with the Healtheon Platform. MEMBERSHIP SERVICES. Healtheon provides membership services through its Benefits Administration service. The Benefits Administration service utilizes internally developed applications operating on the Healtheon Platform. The service provides Internet-based connectivity between healthcare payers and consumers and supports transactions such as selection of health plans and providers, enrollment for benefits and benefit inquiries. Benefits Administration users also receive Healtheon's Health Risk Appraisal service, which provides consumer education in wellness and health risks. Healtheon has deployed its Benefits Administration service directly and through aggregators to 45 companies, covering approximately 190,000 members. 36 HEALTHCARE ADMINISTRATION AND FINANCIAL MANAGEMENT. Healtheon supports or will support healthcare administration and financial management transactions through its ProviderLink, Healtheon Practice and Healtheon ProviderWorks services. ProviderLink was licensed by Healtheon's ActaMed subsidiary from United HealthCare Corporation. Healtheon is currently developing a software interface between the Healtheon Platform and ProviderLink to integrate ProviderLink with Healtheon's network-based services. ProviderLink is used by providers to support transactions and workflows with payers. ProviderLink supports transactions such as eligibility determinations, claims submission and status, and remittance advice. For example, physicians use ProviderLink to determine eligibility of patients to receive care and to submit health claims to payers. ProviderLink is currently deployed in over 4,300 active provider sites in more than 20 major markets, and processes over 3.2 million transactions per month. Healtheon has developed Healtheon Practice, a new Internet-based provider service with support from Brown & Toland, one of Healtheon's strategic partners. Healtheon Practice, which is in use at beta sites, is designed to provide all of the functionality of ProviderLink and also support referrals, authorization, and provider directories reporting. Providers using the Healtheon Practice service will be able to receive real-time patient eligibility verifications and referral authorizations over the Healtheon VHN. Healtheon is developing Healtheon ProviderWorks, a new Internet-based payer service, with support from Beech Street, one of Healtheon's strategic partners. Healtheon ProviderWorks is designed to support the creation and management of networks of providers. The service is designed to manage large, complex provider directories and files, manage provider relationships and contracts and perform certain claim processing functions, such as claim repricing. See "-- Strategic Relationships." CLINICAL INFORMATION SERVICES. Healtheon's SCAN product supports ordering and distribution of clinical tests and test results between SmithKline Labs and providers using SmithKline Labs' services. ActaMed acquired the SCAN application from SmithKline Labs. SCAN is deployed on approximately 4,650 installed workstations serving physicians throughout the United States. SCAN is not Internet-enabled; however, Healtheon is developing a new Internet-enabled application called Healtheon Dx, currently in beta testing, that will combine the functionality of SCAN and ProviderLink. See "-- Strategic Relationships." Healtheon's Global Master Person Index, or "GMPI," enables the unique identification of a patient and reconciliation of multiple records for the same patient contained on diverse information systems. GMPI also supports access to patient data and registration information as well as clinical records. GMPI is an object-oriented application developed by ActaMed and is not yet Internet-enabled. Healtheon intends to adapt and implement GMPI functionality on the Healtheon Platform. ONLINE CONSUMER INFORMATION. Healtheon's recently introduced Consumer Portal provides individual consumers with an authoritative source for healthcare information and is intended to extend Healtheon's transaction services directly to individual consumers. The Consumer Portal provides access to medical dictionaries and encyclopedias, medical news, a food label and nutritional library and customized wellness assessments. These sources include: Miller-Keane Encyclopedia & Dictionary of Medicine, Nursing & Allied Health; Dorland's Illustrated Medical Dictionary; Citizen 1's CitiLine index of authoritative medical information; A.D.A.M.'s Hypertext Medical Encyclopedia; and Links to medical headlines via the New York Times Syndicate. Healtheon's business partners can integrate the Consumer Portal into their own sites to provide their consumers with a single point of entry into the healthcare community. Healtheon expects to expand its Consumer Portal to support secure communications and transactions between consumers and their providers and health plans. OTHER SERVICES. Healtheon also provides professional services to its customers to enable them to define, develop and implement network-based information systems that leverage the capabilities of the Healtheon Platform. These services are typically sold on a fixed fee or time and materials basis. These services include consulting on information systems strategy related to the use of the Internet and secure networks, including design of information systems functional specifications, mapping and redesign of 37 business processes and identification of enterprise transformation and training requirements to take advantage of increased connectivity. Healtheon also provides custom development of applications and enables the deployment of Healtheon services and integration with legacy information technology systems. In addition, Healtheon provides transitional network management services of its customers' networks. Healtheon believes that its success is partially dependent upon its ability to introduce new applications in several healthcare markets in a relatively short period of time. Healtheon currently offers a limited number of applications on its platform. CUSTOMERS AND MARKETS Healtheon's target customers include providers, payers, suppliers and consumers. Because Healtheon believes that the value and benefit of Healtheon's services are directly related to both the number of participants using Healtheon VHNs and the breadth of functionality supported, it intends initially to focus on selected regions where it can quickly gain significant market acceptance. Healtheon is presently targeting a number of regional markets across the United States. PROVIDERS. Healtheon's target provider customers include aggregators of individual physicians such as large medical groups, independent practice associations, physician practice management companies and other large, organized physician entities. In particular, Healtheon seeks to form strategic relationships with providers with a high degree of involvement in managed care, especially providers that are involved in activities such as capitation, which require them to bear some level of insurance risk for each enrolled patient. Healtheon's services for these providers include benefit eligibility determinations, referrals and authorizations, claims processing, ordering of clinical tests and delivery of results and maintenance of patient histories. Healtheon also targets as potential customers large integrated delivery networks that combine multiple healthcare facilities, such as hospitals, outpatient facilities, labs and diagnostic centers, and affiliate with physicians and physician groups to coordinate care, contract for managed care lives and manage healthcare resource utilization. Healtheon offers these customers the following services: patient identification, patient registration, ordering of clinical tests and delivery of results and distribution of text documents across the network. Healtheon's current customers in this category include Brown & Toland, Baylor Health Care System, Hill Physician Group, Promina Health System and the Greater Dayton Area Hospital Association. PAYERS. Healtheon's target payer customers include managed care organizations, indemnity insurers, third-party administrators and federal and state governmental agencies. Healtheon targets managed care organization customers, such as mid-sized to large HMOs and PPOs. Healtheon's services for these customers include eligibility determination, member customer service functions, referral and authorization management, coordination of provider files and directories, and submission and tracking of claims and patient encounter reports. Healtheon targets indemnity insurer and third-party administrator customers, such as mid-sized to large commercial entities, Medicare and other agencies of federal and state government. Healtheon's current customers in this category 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. Healtheon's customers in this category include SmithKline Labs and Schering Corporation. CONSUMERS. Healtheon's target consumer customers include employers, health plans and health plan brokers. Healtheon's services in this area include a consumer web portal, health plan enrollment, benefits administration and membership coordination. Healtheon's target employer group includes mid-sized and large employers and, particularly, self-funded employers that have complex benefits management needs. 38 Healtheon's target health plan broker customers include mid-sized to large brokers that aggregate small and medium employers and administer healthcare benefits on their behalf. Healtheon services 45 employers covering approximately 190,000 members. STRATEGIC RELATIONSHIPS Healtheon has entered into several strategic relationships that it believes will enhance its application portfolio, provide important specialized industry expertise, increase its market penetration, and generate revenue. Certain of these relationships are described below: UNITED HEALTHCARE GROUP. United HealthCare is one of the largest HMOs in the United States. United HealthCare is Healtheon's second largest stockholder and will own approximately 13.3% of Healtheon's common stock after the offering. In March 1996, Healtheon acquired United HealthCare's ProviderLink network which supports over 4,300 active provider sites in more than 20 major markets servicing over 3.2 million transactions per month. Healtheon earns transaction fee revenue by providing certain healthcare information services to United HealthCare, members of United HealthCare's provider network and ProviderLink subscribers. In April 1996, Healtheon and United HealthCare entered into a Services and License Agreement, the "United HealthCare Agreement", under which Healtheon, using ProviderLink, provides claims processing, referral, eligibility and enrollment services, to United HealthCare's managed care providers and customers. Under the United HealthCare Agreement, Healtheon currently receives a monthly fee for each user site enrolled with United HealthCare and a fee per transaction. However, the United HealthCare Agreement does not guarantee any minimum level of transactions or payments to Healtheon. The United HealthCare Agreement has a five year term; however, the agreement provides that two years after the date of the agreement, the parties will agree on new prices that will be competitive with the marketplace. Healtheon and United HealthCare are negotiating such new prices, and Healtheon anticipates that the new prices will reduce the rates paid by United HealthCare. United HealthCare has also agreed during the term of the United HealthCare Agreement not to promote or contract for services providing the same functionality as that provided by Healtheon, 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, Healtheon has developed PLNet, an Internet-based version of ProviderLink, which Healtheon intends to integrate into the Healtheon Platform and offer to other major healthcare payers and providers. Healtheon is working with United HealthCare to expand the applications and content available to United HealthCare's provider network, to increase the size and geographic reach of its provider network, and to assimilate newly acquired health plans. William McGuire, M.D., the Chairman and CEO of United HealthCare, is a member of Healtheon's Board of Directors. The United HealthCare Agreement is effective through March 2001, subject to earlier termination in the event Healtheon fails to meet certain network performance standards or otherwise breaches its material obligations under the United HealthCare Agreement. SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. SmithKline Beecham Clinical Laboratories, Inc., or "SmithKline Labs," a subsidiary of SmithKline Beecham, is one of the largest independent clinical laboratories in the United States. SmithKline is a stockholder of Healtheon and will own approximately 9.1% of Healtheon's common stock after the offering. In December 1997, Healtheon and SmithKline Labs entered into a Services Agreement, or the "Services Agreement" under which Healtheon provides lab orders and results to providers that use SCAN. SmithKline Labs has also agreed to promote Healtheon as its preferred vendor for laboratory electronic connectivity services. 39 Healtheon acquired SCAN-related assets from SmithKline Labs, including approximately 4,200 installed workstations in physicians' offices, hospitals and other provider offices. Healtheon is currently developing Healtheon Dx, an Internet-enabled version of the SCAN system, which Healtheon plans to integrate into the Healtheon Platform and to offer to physicians using SmithKline Labs' services or to physicians using other laboratories. Tadataka Yamada, M.D., President of SmithKline Beecham Healthcare Services, is a member of Healtheon's Board of Directors. The Services Agreement is effective through December 2002, with options for successive two-year renewals, subject to earlier termination in the event Healtheon fails to meet certain network performance standards or if Healtheon otherwise breaches its material obligations under the Services Agreement. The Services Agreement provides that the parties will negotiate new rates as of January 1, 2001 and each two years thereafter. Pursuant to the Services Agreement, the renegotiated rates must be competitive with the marketplace and must be no higher than the lowest fees charged by Healtheon to similarly situated customers. In January 1999, Healtheon purchased certain assets used by SmithKline Labs to provide laboratory results delivery services in exchange for $2.0 million in cash and approximately 1.8 million shares of Healtheon's common stock. Healtheon and SmithKline Labs entered into a related services agreement under which Healtheon will provide certain electronic laboratory results delivery services to approximately 20,000 provider sites, in addition to the sites currently served through the SCAN service. The services agreement has a five year term. BROWN & TOLAND PHYSICIAN SERVICES ORGANIZATION. Brown & Toland Medical Group, or "BTMG," based in San Francisco, California, is a partnership of approximately 2,000 physicians representing a merger of physicians from California Pacific Medical Center, the University of California-San Francisco and Stanford University. Brown & Toland Physician Services Organization, or "Brown & Toland", a wholly owned subsidiary of BTMG, is the management company that administers the managed care risk business on behalf of BTMG and other physician organizations. In December 1997, Healtheon and Brown & Toland entered into an agreement under which Healtheon is developing Healtheon Practice, which Healtheon intends to market to Brown & Toland and other payers and providers. Healtheon also manages the information technology operations of Brown & Toland. Through its relationship with Brown & Toland, Healtheon believes it is gaining valuable industry-segment expertise from a leader in managed care and accelerating its market presence in the San Francisco Bay Area. Healtheon's agreement with Brown & Toland is effective through September 2000, although it may be terminated by either party upon 120 days' notice. BEECH STREET CORPORATION. Beech Street is one of the largest PPOs in the United States. Beech Street's PPO network consists of approximately 4,300 hospitals and 320,000 physician locations serving 15 million individuals in 49 states, and its clients consist of major self-insured employers, insurance companies and third-party administrators. In December 1997, Healtheon and Beech Street have entered into an agreement under which Healtheon is developing Healtheon ProviderWorks, which Healtheon intends to offer to Beech Street and to other payers and providers. Healtheon also manages the information technology operations of Beech Street. The relationship with Beech Street provides Healtheon with important industry-segment expertise and a strategic entry-point into the PPO market segment. Healtheon's agreement with Beech Street is effective through December 2002, although it may be terminated by either party upon 180 days' notice. THE HEALTHEON PLATFORM The Healtheon Platform is a 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. 40 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. Healtheon also uses a multi-layered firewall complex to secure the Healtheon network infrastructure. In addition, network vulnerability scanners are used on a regular basis to actively monitor security status. Healtheon's physical security systems at its Santa Clara facility consist of comprehensive physical controls and multi-layered internal network and information system safeguards. The physical controls include using fingerprint authentication, dual-level access points, and multiple alarm systems. SCALABILITY. The Healtheon Platform utilizes CORBA-based middleware, which enables a highly scalable distributed applications infrastructure. The platform enables an application to run simultaneously on multiple host systems, allowing for large numbers of simultaneous users while at the same time optimizing network performance and resource utilization. In addition, the Healtheon Platform has been designed to transparently deploy new services and hardware while existing applications remain operational. Finally, the Healtheon Platform reduces communications bottlenecks resulting from limited numbers of connections to database servers through intelligent management of database connections and object caches that reduce the need to query database servers for frequently used data. RAPID APPLICATION DEVELOPMENT AND INTEGRATION. The Healtheon Platform is designed to enable rapid application development and integration. The platform supports object-oriented programming, which accelerates the design process through object reuse. Healtheon maintains a comprehensive set of object libraries, called core services, that allows developers to build complex applications rapidly. The platform is also designed for deploying applications developed by third parties with relative ease. The platform interfaces with legacy systems by accepting industry standard ANSI X.12 and HL7 electronic data interchange formats. HIGH AVAILABILITY. The Healtheon Platform architecture is designed to ensure high availability through the replication of applications and other software services, failure detection and automatic restart of failed services and applications. Running multiple copies of a service or application removes any single point of failure within the system and ensures that at least some copies of a service will be available while others may have failed. In addition, the servers that host Healtheon applications are duplicated to provide redundancy. Healtheon uses duplicate fiber optic cable connections to Sprint and WorldCom to ensure highly-available access to the Internet. Healtheon's platform uses a mix of fault-tolerant hardware, redundant equipment and back-up power systems. MANAGEABILITY. The Healtheon management framework provides a single image view of all Healtheon services, thus simplifying administration in a distributed environment. Healtheon services can be managed from a Web-based management station. The Healtheon management and administration framework monitors service performance and generates event notifications of system abnormalities. DISASTER RECOVERY PLANS. Although Healtheon believes its operations facilities are highly resistant to systems failure and sabotage, it has developed, and is in the process of implementing, a disaster recovery and contingency operations plan. In addition, all of Healtheon's services are linked to advanced storage systems that provide data protection through techniques such as replication. Healtheon also maintains on-site backup power systems. 41 AUDITS. Healtheon's information technology department periodically performs, and retains accredited third parties to perform, audits of its operational procedures under both internally-developed audit procedures and externally-recognized standards. CUSTOMER SUPPORT Healtheon believes that a high level of customer support is necessary to achieve wide acceptance of its solution. Healtheon provides a wide range of customer support services through a staff of customer service personnel, multiple call centers and an e-mail help desk. Healtheon also offers Web-based support services that are available 24 hours a day, seven days a week and are frequently updated to improve existing information and to support new services. Healtheon also employs technical support personnel who work directly with its direct sales force, distributors and customers of its applications and services. Healtheon provides its customers with the ability to purchase maintenance for its applications and services, which includes technical support and upgrades. Healtheon also provides training programs for its customers. As of September 30, 1998, Healtheon had 251 employees and independent contractors in customer support functions, including network services, provider services and customer support services. SALES AND MARKETING Healtheon's sales and marketing efforts are organized according to its four main customer segments: providers, payers, suppliers and consumers. Healtheon's direct sales force targets significant potential customers in each market segment by region. In certain instances, Healtheon's direct sales force works with complementary brokers, value added resellers and systems integrators to deliver complete solutions for major customers. In addition, senior management plays an active role in the sales process by cultivating industry contacts. Healtheon markets its applications and services through direct sales contacts, strategic relationships, the sales and marketing organizations of its strategic partners, participation in trade shows, articles in industry publications and by leveraging its existing client base. Healtheon attends a number of major trade shows each year and has begun to sponsor executive conferences, which feature industry experts who address the information systems needs of large healthcare organizations. Healtheon supports its sales force with technical personnel who perform demonstrations of Healtheon's applications and assist clients in determining the proper hardware and software configurations. Healtheon's executive sales and marketing management is located in its Santa Clara, California headquarters and in its Atlanta, Georgia, Minneapolis, Minnesota and San Francisco, California facilities, while its account representatives are deployed across the United States. As of September 30, 1998, Healtheon employed 67 sales executives, account managers, direct sales representatives and sales support personnel. DEVELOPMENT AND ENGINEERING Healtheon believes that its future success will depend in large part on its ability to continue to maintain and enhance its platform, applications and services. To this end, Healtheon leverages the modular nature of its platform architecture to enable it to develop new applications and services rapidly. Healtheon has developed applications and services both independently and through acquisitions. Healtheon will continue to work closely with other companies in its applications development efforts. Healtheon has several significant projects currently in development. These include the continued enhancement of the platform architecture, development of new services such as Healtheon Practice, Healtheon ProviderWorks and Healtheon Dx, and integration of ActaMed's platform, network and associated services. As of September 30, 1998, Healtheon employed 201 people in the areas of applications design, research and development, quality assurance and technical support. In 1995, 1996, 1997 and the nine months ended September 30, 1998, Healtheon's development and engineering expense, which excludes development expenses included in total cost of revenue, totaled $2.4 million, $8.6 million, $13.0 million and $13.0 million, representing 112%, 78%, 97% and 39% of its total 42 revenue. Healtheon believes that timely development of new and enhanced applications and technology is necessary to remain competitive in the marketplace. Accordingly, Healtheon intends to continue recruiting and hiring experienced development personnel and to make other investments in development and engineering. The emerging market for healthcare information exchange and transaction processing is characterized by rapid technological developments, frequent new application introductions and evolving industry standards. The emerging nature of this market and its rapid evolution will require that Healtheon continually improve the performance, features and reliability of its applications and services, particularly in response to competing offerings, and that it introduce new applications and services or enhancements to existing applications and services as quickly as possible and prior to its competitors. The success of new application and service introductions is dependent on several factors, including proper definition of new applications or services, timely completion and introduction of new applications and services, differentiation of new applications and services from those of Healtheon's competitors and market acceptance. There can be no assurance that Healtheon will be successful in developing and marketing new applications and services that respond to competitive and technological developments and changing customer needs. The failure of Healtheon to develop and introduce new applications and services successfully on a timely basis and to achieve market acceptance for its applications and services could have a material adverse effect on Healtheon's business, financial condition and results of operations. In addition, the widespread adoption of new Internet, networking or telecommunication technologies or standards or other technological changes could render its applications and services obsolete or require substantial expenditures by Healtheon to adapt its applications and services. Moreover, there is a risk that a competitor's product might become the standard for healthcare information services. INTELLECTUAL PROPERTY Healtheon relies upon a combination of trade secret, copyright and trademark laws, license agreements, confidentiality procedures, employee nondisclosure agreements and technical measures to maintain the secrecy of its intellectual property. Healtheon believes that patent, trade secret and copyright protection are less significant to Healtheon's success than its ability to further develop applications. Healtheon has several trademarks in the United States and internationally. COMPETITION The market for healthcare information services is intensely competitive, rapidly evolving and subject to rapid technological change. Many of Healtheon's actual and potential competitors have announced or introduced Internet strategies. Healtheon's competitors can be divided into several groups: healthcare information software vendors, including HBO & Company, which was recently acquired by McKesson Corporation, one of the country's largest drug wholesalers, and Shared Medical Systems Corporation; healthcare electronic data interchange companies, including ENVOY Corporation, which has agreed to be acquired by Quintiles Transnational Corp., and National Data Corporation; and large information technology consulting service providers, including Andersen Consulting, International Business Machines Corporation and Electronic Data Systems Corporation. Each of these companies can be expected to compete with Healtheon within certain segments of the healthcare information technology market. Furthermore, major software information systems companies and others, including those specializing in the healthcare industry that are not presently offering applications that compete with those offered by Healtheon, may enter Healtheon's markets. In some cases, large customers may have the ability to compete directly with Healtheon as well. Healtheon also competes with smaller regional competitors. Many of Healtheon's competitors and potential competitors have significantly greater financial, technical, product development, marketing and other resources and greater market recognition than Healtheon. Many of Healtheon's competitors also currently have, or may develop or acquire, substantial installed customer bases in the healthcare industry. As a result of these factors, Healtheon's competitors may be able to respond more 43 quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion and sale of their applications or services than Healtheon. There can be no assurance that Healtheon will be able to compete successfully against current and future competitors or that competitive pressures faced by Healtheon will not materially adversely affect its business, financial condition and results of operations. GOVERNMENT REGULATION AND HEALTHCARE REFORM Laws and regulations may be adopted with respect to the Internet or other on-line services covering issues such as user privacy, pricing, content, copyrights, distribution and characteristics and quality of products and services. The adoption of any additional laws or regulations may impede the growth of the Internet or other on-line services, which could, in turn, decrease the demand for Healtheon's applications and services and increase Healtheon's cost of doing business, or otherwise have an adverse effect on Healtheon's business, financial condition and results of operations. Moreover, the applicability to the Internet of existing laws in various jurisdictions governing issues such as property ownership, sales and other taxes, libel and personal privacy is uncertain and may take years to resolve. Any such new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to Healtheon's business, or the application of existing laws and regulations to the Internet and other online services could have a material adverse effect on Healtheon's business, financial condition and results of operations. The confidentiality of patient records and the circumstances under which records may be released for inclusion in Healtheon'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 this information to implement security measures that may require substantial expenditures by Healtheon. 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 Healtheon's applications. Legislation currently being considered at the federal level could impact the manner in which Healtheon 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. Healtheon is designing its Platform and applications to enable compliance with the proposed regulations; however, until the proposed regulations become final, they could change, which could require Healtheon to expend additional resources to comply with the revised standards. In addition, the success of Healtheon'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. Healtheon 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. Healtheon 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 Healtheon'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. Healtheon 44 does not believe that any of its current applications or services are subject to FDA jurisdiction or regulation; however, Healtheon plans to expand its application and service offerings into areas that may subject it to FDA regulation. Healtheon 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 Healtheon's ability to introduce new applications or services in a timely manner. EMPLOYEES As of September 30, 1998, Healtheon had a total of 613 employees and independent contractors, of whom there were 184 in customer and network services, 244 in development and engineering, 14 in consulting services, 67 in provider services, 67 in sales and marketing and 37 in corporate finance and administration. None of Healtheon's employees is represented by a labor union, and Healtheon has never experienced a work stoppage. Healtheon believes its relationship with its employees to be good. Healtheon's ability to achieve its financial and operational objectives depends in large part upon its continuing ability to attract, integrate, retain and motivate highly qualified sales, technical and managerial personnel, and upon the continued service of its senior management and key sales and technical personnel, most of whom are not bound by an employment agreement. Competition for such qualified personnel in Healtheon's industry and geographical location in the San Francisco Bay Area is intense, particularly in software development and technical personnel. FACILITIES Healtheon's principal executive and corporate offices and development and network operations are located in Santa Clara, California, in approximately 50,000 square feet of leased office space under a lease that expires in March 2008. Healtheon also maintains sales, development and network operations in Atlanta, Georgia, in approximately 41,000 square feet of leased office space under a lease that expires in July 2001; sales, engineering and support operations in Minneapolis, Minnesota, in approximately 16,500 square feet of leased office space under a lease that expires in December 1999; and sales, engineering and support operations in San Francisco, California, in approximately 6,000 square feet and 5,000 square feet of leased office space under two leases that expire in November 2000 and September 2001. Healtheon believes that its facilities are adequate for its current operations and that additional leased space can be obtained if needed. 45 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information regarding Healtheon's current executive officers and directors:
NAME AGE POSITION - -------------------------------------------- ----------- -------------------------------------------------------------- James H. Clark(1)(2)........................ 53 Chairman of the Board of Directors W. Michael Long(3).......................... 46 Chief Executive Officer and Director Michael K. Hoover........................... 43 President and Director Mark Bailey................................. 39 Vice President, Business Development Kallen Chan................................. 44 Corporate Controller Jack Dennison............................... 42 Vice President and General Counsel Dennis Drislane............................. 49 Vice President, Customer and Network Services Edward Fotsch, M.D.......................... 42 Vice President, Physician and Integrated Delivery Network Group Nancy Ham................................... 37 Vice President, Laboratories and Pharmaceuticals J. Philip Hardin............................ 35 Vice President, Managed Care Group John R. Hughes, Jr.......................... 46 Vice President, Provider Services Krishna Kolluri............................. 36 Vice President, Applications Matthew Moore............................... 34 Vice President, Consumer Internet Services Pavan Nigam................................. 39 Vice President, Engineering Charles Saunders, M.D....................... 44 Vice President, Marketing and Consulting Services and Medical Director John L. Westermann III...................... 53 Vice President, Chief Financial Officer, Secretary and Treasurer L. John Doerr(1)(2)......................... 46 Director Thomas A. Jermoluk.......................... 42 Director C. Richard Kramlich(1)(2)................... 63 Director William W. McGuire, M.D.(1)(2).............. 50 Director P. E. Sadler(1)............................. 64 Director Laura D'Andrea Tyson........................ 50 Director Tadataka Yamada, M.D.(1).................... 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 Healtheon 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 that he founded in 1981. Prior to founding Silicon Graphics, Dr. Clark was an Associate Professor at Stanford University. He holds a B.S. and an M.S. from the University of New Orleans and a Ph.D. from the University of Utah. W. MICHAEL LONG has served as Chief Executive Officer and a director of Healtheon since joining Healtheon in July 1997. Prior to joining Healtheon, Mr. Long was President and Chief Executive Officer of 46 CSC Continuum, Inc., a unit of Computer Sciences Corporation, from August 1996 to July 1997. For more than five years prior to its acquisition by CSC, he was President and Chief Executive Officer of The Continuum Company, Inc., a provider of IT and consulting services to the financial industry. He holds a B.A. from the University of North Carolina. MICHAEL K. HOOVER has served as President and a director of Healtheon since Healtheon acquired ActaMed Corporation in May 1998. Mr. Hoover co-founded ActaMed in May 1992, and served as its President from its inception to May 1998, and as its President and Chief Executive Officer from December 1995 to May 1998. From 1989 to 1992, Mr. Hoover served as the Executive Director of Financial Services of the MicroBilt division of First Financial Management Corporation. Prior to that, he founded FormMaker Software Corporation, a producer of electronic forms automation systems, and served as its Chief Executive Officer from 1982 to 1988 and as its Executive Vice President during 1988. MARK BAILEY has served as Vice President, Business Development of Healtheon since joining Healtheon in July 1998. Prior to joining Healtheon, Mr. Bailey served as general partner at Venrock Associates, the venture capital organization for the Rockefeller family, from October 1997 to April 1998. Prior to that he was Senior Vice President Business Development at Symantec Corporation, a provider of productivity and utilities software, where he directed mergers and acquisitions efforts from December 1989 to October 1997. Before joining Symantec, he was an associate with Kleiner Perkins Caufield & Byers, a venture capital firm, from June 1985 to December 1989. Mr. Bailey holds an MBA from Harvard University and a BSE from Princeton University. KALLEN CHAN has served as Corporate Controller of Healtheon since April 1996. Prior to joining Healtheon, Mr. Chan was the Director of Audit and Group Controller for Worldwide Manufacturing at Cirrus Logic, Inc. since March 1995. From January 1993 to February 1995, Mr. Chan was Vice President of Finance and Chief Financial Officer of Comtech Labs Inc., a video imaging technology company. From 1986 to 1992, Mr. Chan served as Chief Financial Officer for various early stage companies, including Caeco Inc., Harmonic Lightwaves, Inc. and Oasic Technology, Inc. Prior to 1986, Mr. Chan spent nine years at Philips Semiconductor as a Division Controller. He holds a B.S. in commerce and an M.B.A. from the University of Santa Clara. JACK DENNISON has served as Vice President and General Counsel of Healtheon since joining Healtheon in July 1998. Mr. Dennison served as Deputy General Counsel of Computer Sciences Corporation from August 1996 to July 1998. Prior to that time, Mr. Dennison served as Vice President and General Counsel of The Continuum Company, Inc. Prior to joining Continuum in 1989, he was a partner with Ford, Dennison & Byrne in Austin, Texas. Mr. Dennison holds a B.A. and a J.D. from the University of Texas. DENNIS DRISLANE has served as Vice President, Customer and Network Services of Healtheon since joining Healtheon in July 1997. Mr. Drislane served as Vice President, Communications Industry Group, at Electronic Data Systems Corporation, "EDS," from June 1995 to July 1997. From October 1992 to June 1995, he was President of EDS' Healthcare Division. Prior to October 1992, he held various management positions for EDS. Mr. Drislane holds both a B.S. and an M.S. in business administration from California State University in Sacramento. EDWARD FOTSCH, M.D. has served as the Vice President, Physician and Integrated Delivery Network group of Healtheon since Healtheon acquired Metis, LLC in August 1998. Dr. Fotsch served as President and Chief Executive Officer of Metis, LLC from March 1997 to August 1998. Prior to working at Metis, LLC, Dr. Fotsch served as Vice President of Healthcare for NetSource Communications Inc., an Internet development and consulting organization, from November 1994 to March 1997. Prior to working at NetSource, Dr. Fotsch was President of Med-Tech Consulting, a healthcare consulting firm from October 1992 through November 1994. Dr. Fotsch practiced medicine as Chief of the Department of Emergency Medicine at Doctors Hospital in Northern California for ten years prior to 1994. He holds a Doctorate in Medicine from the Medical College of Wisconsin and a B.S. from Marquette University. 47 NANCY HAM has served as Vice President, Laboratories and Pharmaceuticals Group of Healtheon since Healtheon acquired ActaMed in May 1998. Ms. Ham served as a Senior Vice President of ActaMed from June 1996 to May 1998. She served as Chief Financial Officer and Secretary of ActaMed from 1993 to May 1996. From 1992 to 1993, she was a Corporate Finance Director for the Capital Finance Group of Equifax, Inc. Prior to that, she was an Assistant Vice President at G.E. Capital Corporation. Ms. Ham holds a B.A. in economics from Duke University and a masters in international business studies from the University of South Carolina. J. PHILIP HARDIN has served as Vice President, Managed Care Group of Healtheon since Healtheon 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 payer Sponsorship for ActaMed from January 1997 to August 1997, and Project Executive from July 1995 to December 1996. From August 1993 to June 1995, Mr. Hardin attended Stanford University and received an MBA degree in June 1995. Prior to that, he served as Vice President, Finance, Director of Finance and Controller of Melita International Corporation and held various accounting positions at Arthur Andersen & Company. Mr. Hardin also holds a B.B.A. in accounting from the University of Georgia. JOHN R. HUGHES, JR. has served as Vice President, Provider Services of Healtheon since Healtheon acquired ActaMed in May 1998. Mr. Hughes served as Chief Operating Officer of ActaMed from March 1996 to May 1998. Prior to working at ActaMed, Mr. Hughes served as General Manager of the EDI Services Group of United HealthCare from August 1992 to March 1996. Mr. Hughes served as Vice President of North American Sales for Revelation Technologies, a computer software company, from 1990 to 1992. From 1980 to 1990, Mr. Hughes was Vice President, Sales Manager and Product Marketing Manager at Harris Corporation. Mr. Hughes holds a B.S. in business administration from the University of Kansas. KRISHNA KOLLURI has served as Vice President, Applications of Healtheon since July 1998, and prior to that, as Senior Director of Development Engineering of Healtheon since February 1996. Prior to joining Healtheon, Mr. Kolluri spent six years at Silicon Graphics, Inc. From August 1993 to February 1996, Mr. Kolluri served as Senior Engineering Manager of Applications and Development Environments in the Interactive Media Group of Silicon Graphics, Inc. From May 1992 to August 1993, he served as Senior Engineering Manager of Programming Environments in Silicon Graphics' CASE group where he was involved in the development and deployment of interactive TV projects in Orlando, Florida and Urayasu, Japan. From March 1990 to May 1992, he was a Member of Silicon Graphic's technical staff. Mr. Kolluri holds a B.S.M.E. from the Indian Institute of Technology, Madras, India, an M.S. in Operations Research from S.U.N.Y., Buffalo, and an M.S.C.S. from the University of California, Santa Cruz. MATTHEW MOORE has served as Vice President, Consumer Internet Services since joining Healtheon in September 1998. Prior to joining Healtheon, Mr. Moore spent four years at Netscape Communications, where he co-founded the firm's European operations and served as Director of Strategic Sales from August 1994 until December 1997. Commencing January 1998, he moved to Netscape's U.S. operations to head up vertical markets internationally. From 1989 to 1994, he was a partner at Keystone Strategies, a technology consultancy firm based in Geneva, Switzerland. Mr. Moore holds a B.A. from University of California, Los Angeles, and an M.B.A from Hautes Etudes Commerciales, University of Geneva, Switzerland. PAVAN NIGAM co-founded Healtheon and has served as its Vice President, Engineering since February 1996. Prior to joining Healtheon, Mr. Nigam worked at Silicon Graphics from August 1989 to January 1996, where he was the division manager for Silicon Graphic's Interactive Media Group and was responsible for deploying Time Warner, Inc.'s Interactive TV project in Orlando, Florida. From 1989 to 1993, he was director of Silicon Graphics' Casevision products. Prior to 1989, Mr. Nigam was employed by Atherton Technologies and Intel Corporation. Mr. Nigam holds a B.S.E.E. from the Indian Institute of Technology and an M.S.C.S. from the University of Wisconsin-Madison. 48 CHARLES SAUNDERS, M.D. has served as Vice President, Marketing and Consulting Services and Medical Director since joining Healtheon in September 1997. Prior to joining Healtheon, Dr. Saunders was a principal in the consulting firm of A.T. Kearney, Inc./Electronic Data Systems Corporation from September 1994 to August 1997. Prior to that time, Dr. Saunders was Executive Director of managed care programs at San Francisco General Hospital, and served as Medical Director of the San Francisco Department of Public Health, Paramedic Division, from 1988 to 1994. He has conducted healthcare systems research for and has served on the faculties of the University of California at San Francisco, Vanderbilt University and the University of Colorado. Dr. Saunders holds a B.S. in biology from the University of Southern California and an M.D. from Johns Hopkins University. JOHN L. WESTERMANN III has served as Vice President, Chief Financial Officer, Secretary and Treasurer of Healtheon since joining Healtheon in July 1998. From August 1996 to July 1998, Mr. Westermann was Chief Financial Officer and Vice President of CSC Continuum, Inc., a unit of Computer Sciences Corporation. For more than five years prior to its acquisition by CSC, Mr. Westermann was Chief Financial Officer, Vice President, Secretary and Treasurer of The Continuum Company, Inc., a provider of IT and consulting services to the financial industry. Mr. Westermann holds a B.A. from Northwestern University and an M.B.A. from the University of Chicago Graduate School of Business. L. JOHN DOERR has served as a director of Healtheon since July 1997. He has been a general partner at Kleiner Perkins Caufield & Byers, or "KPCB," a venture capital firm, since 1980. Prior to joining KPCB, Mr. Doerr worked at Intel Corporation for five years. He is a director of At Home Corporation, Amazon.com, Inc., Netscape Communications Corporation, Intuit Inc., Platinum Software Corporation and Sun Microsystems, Inc. He holds a B.S.E.E. and an M.E.E. from Rice University and an M.B.A. from Harvard Business School. THOMAS A. JERMOLUK has served as a director of Healtheon since February 1999. Mr. Jermoluk has been Chairman of the Board, President and Chief Executive Officer of @Home Corporation since he joined @Home in July 1996. From 1994 to July 1996, he was President and, from 1992 to July 1996, he was Chief Operating Officer of Silicon Graphics, Inc., a visual computing company. From 1991 to 1994, Mr. Jermoluk was Executive Vice President of Silicon Graphics, and, from 1988 to 1991, he was Vice President and General Manager of Silicon Graphics' Advanced System Division. From October 1993 to August 1996, he was a member of the board of directors of Silicon Graphics. Prior to joining Silicon Graphics in 1986, Mr. Jermoluk managed a variety of hardware and software development projects at Hewlett-Packard Company and Bell Laboratories. He currently serves on the board of directors of @Home Corporation and Forte Software, Inc. Mr. Jermoluk holds B.S. and M.S. degrees in Computer Science from Virginia Tech. C. RICHARD KRAMLICH has served as a director of Healtheon since July 1996. Mr. Kramlich is the co-founder and has been a General Partner of New Enterprise Associates, a venture capital firm, since 1978. He is a director of Ascend Communications, Inc., Com 21, Inc., Lumisys, Inc., Silicon Graphics, Inc., and Chalone Wine Group, Inc. Mr. Kramlich holds a B.A. from Northwestern University and an M.B.A. from Harvard Business School. WILLIAM W. MCGUIRE, M.D. has served as a director of Healtheon since Healtheon acquired ActaMed in May 1998. He has been the President of United HealthCare since 1989 and the Chief Executive Officer and Chairman of the Board of Directors of United HealthCare since 1991. Prior to this, Dr. McGuire was Executive Vice President and Chief Operating Officer of United HealthCare. Prior to this time, he served as President and Chief Operating Officer of Peak Health Plan. Before becoming President and Chief Operating Officer, he held a number of other positions within that organization. Dr. McGuire practiced medicine in Colorado, specializing in cardiopulmonary medicine. He holds a B.A. from the University of Texas and an M.D. from the University of Texas Medical Branch. P. E. SADLER has served as a director of the Company since Healtheon acquired ActaMed in May 1998. He was Chairman of the Board of ActaMed from the time that he helped co-found it in 1992 until it was acquired by Healtheon, and served as its Chief Executive Officer from 1992 until May 1996. Prior to 49 founding ActaMed, Mr. Sadler founded MicroBilt Corporation, a computer processing company, and served as its Chairman, Chief Executive Officer and President from 1981 until MicroBilt was acquired by First Financial Management Corporation, or "FFMC," in 1989. Following the acquisition of MicroBilt, he served as President of the MicroBilt division of FFMC until 1991. Mr. Sadler also 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. LAURA D'ANDREA TYSON has served as a director of Healtheon since February 1999. Dr. Tyson has been the Dean of the Haas School of Business Administration at the University of California at Berkeley since 1996. Dr. Tyson served as National Economic Advisor to the President of the United States from March 1995 to December 1996 and as Chair of the White House Council of Economic Advisers from 1993 to 1995. She also served as a member of the President's National Security Council and Domestic Policy Council. Dr. Tyson was Director of the Institute of International Studies from 1990 to 1992, and Research Director of The Berkeley Roundtable on the International Economy from 1986 to 1992, at the University of California, Berkeley, where she was also a professor of economics and business administration. TADATAKA YAMADA, M.D. has served as a director of Healtheon since Healtheon 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. Healtheon's Bylaws authorize between six and eleven directors. The size of the Board of Directors is currently set at ten. The Certificate of Incorporation and the Bylaws of Healtheon also provide for a staggered Board. Under a staggered Board, each director is designated to one of three categories. Each year the directors' positions in one of the three 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 Healtheon 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 Healtheon. 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 recommends to the Board the internal accounting and financial controls for Healtheon and the accounting principles and auditing practices and procedures to be used for the financial statements of Healtheon. The Audit Committee makes recommendations to the Board concerning the engagement of independent public accountants and the scope of the audit to be undertaken by such accountants. The Stock Option Committee is currently comprised of Mr. Long and is charged with overseeing the stock option plans as they relate to employees other than officers and directors of Healtheon. The Compensation Committee is currently comprised of Dr. Clark, Mr. Doerr, Mr. Kramlich, and Dr. McGuire. The Compensation Committee reviews and recommends to the Board policies, practices and 50 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 Healtheon's employee equity incentive plans and advises and consults with the officers of Healtheon regarding managerial personnel policies. DIRECTOR COMPENSATION Directors do not receive any cash fees for their service on the Board or any Board committee, but they are entitled to reimbursement for all reasonable out-of-pocket expenses incurred in connection with their attendance at Board and Board committee meetings. Upon completion of this offering, all Board members will be eligible to receive stock options under the 1996 Plan, and outside directors will receive stock options pursuant to automatic grants of stock options under the 1996 Plan. In July 1998, Healtheon granted to each of Drs. McGuire and Yamada an option to purchase 30,000 shares of its common stock under the 1996 Plan with an exercise price equal to $7.00 per share. In October 1998, Drs. McGuire and Yamada each agreed to exchange his option for a new option with an exercise price of $3.55 per share, reflecting the fair market value of Healtheon's common stock on that date as determined by the Board of Directors after taking into account Healtheon's financial results and prospects. In connection with this repricing, the vesting of the options for Drs. McGuire and Yamada was restarted. Therefore, 25% of their shares will vest in October 1999, and the remainder will vest ratably over the subsequent three years. In January 1999, Healtheon granted to each of Mr. Jermoluk and Dr. Tyson an option to purchase 30,000 shares of its common stock under the 1996 Plan with an exercise price equal to $5.85 per share. The 1996 Plan provides that each outside director will receive an option to purchase 5,000 shares of common stock annually. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Dr. Yamada, a member of the Compensation Committee, is a director and executive officer of SmithKline Beecham, which, through its subsidiary SmithKline Labs, beneficially owns 9.8% of Healtheon's common stock prior to this offering, and has entered into the Services Agreement and certain other agreements with Healtheon. Dr. McGuire, a member of the Compensation Committee, is the Chairman and Chief Executive Officer of United HealthCare, which, with its affiliates, beneficially owns approximately 14.4% of Healtheon's common stock prior to this offering, and has entered into the United HealthCare Agreement and certain other agreements with Healtheon. 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 interlocking relationship existed in the past. LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS Healtheon's Certificate of Incorporation and Bylaws limit or eliminate the personal liability of its directors for monetary damages for breach of the directors' fiduciary duty of care. The duty of care generally requires that, when acting on behalf of the corporation, directors exercise an informed business judgment based on all material information reasonably available to them. Consequently, a director or officer will not be personally liable to Healtheon or its stockholders for monetary damages for breach of fiduciary duty as a director, except for - any breach of the director's duty of loyalty to Healtheon or its stockholders; - acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; - unlawful payments of dividends or unlawful stock repurchases, redemptions or other distributions; and - any transaction from which the director derived an improper personal benefit. These provisions are permitted under Delaware law. 51 Healtheon's Certificate of Incorporation also provides that Healtheon will indemnify, to the fullest extent permitted by law, any person made or threatened to be made a party to any action or proceeding by reason of the fact that he or she is or was a director or officer of Healtheon or serves or served at any other enterprise as a director, officer or employee at Healtheon's request. Healtheon's Bylaws provide that Healtheon will, to the maximum extent and in the manner permitted by Delaware law, indemnify each of the following persons against expenses, including attorneys' fees, judgments, fines, settlements, and other amounts incurred in connection with any proceeding arising by reason of the fact that he or she is or was an agent of Healtheon: - a current or past director or officer of Healtheon or any subsidiary of Healtheon; - a current or past director or officer of another enterprise who served at the request of Healtheon; or - a current or past director or officer of a corporation that was a predecessor corporation of Healtheon or any of its subsidiaries or of another enterprise at the request of a predecessor corporation or subsidiary. Healtheon intends to enter into Indemnification Agreements with each of its directors and executive officers to give them additional contractual assurances regarding the scope of the indemnification described above and to provide additional procedural protections. These agreements, among other things, indemnify Healtheon's directors and executive officers for certain expenses, including attorneys' fees, judgments, fines, penalties and settlement amounts incurred by them in any action or proceeding arising out of their services to Healtheon, its subsidiaries or any other enterprise to which they provide services at Healtheon's request. In addition, Healtheon intends to obtain directors' and officers' insurance providing indemnification for Healtheon's directors, officers and certain employees for certain liabilities. Healtheon believes that these indemnification provisions and agreements are necessary to attract and retain qualified directors and officers. The limited liability and indemnification provisions in Healtheon's Certificate of Incorporation and Bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duty and may reduce the likelihood of derivative litigation against directors and officers, even though a derivative action, if successful, might otherwise benefit Healtheon and it stockholders. Furthermore, a stockholder's investment in Healtheon may be adversely affected to the extent Healtheon pays the costs of settlement and damage awards against directors and officers of Healtheon under these indemnification provisions. At present, there is no pending or threatened litigation or proceeding involving any director, officer or employee of Healtheon where indemnification is expected to be required or permitted, and Healtheon is not aware of any threatened litigation or proceeding that might result in a claim for indemnification. 52 EXECUTIVE COMPENSATION The following table sets forth information concerning the compensation earned for services rendered to Healtheon in 1998 by (1) Healtheon's Chief Executive Officer and (2) Healtheon's four other most highly compensated executive officers who earned more than $100,000 in 1998 and were serving as executive officers at the end of 1998 (collectively, the "Named Executive Officers"). Under the rules of the Securities and Exchange Commission, this table does not include certain perquisites and other benefits received by the Named Executive Officers which do not exceed the lesser of $50,000 or 10% of any such officer's salary and bonus disclosed in this table. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ------------------- ANNUAL COMPENSATION SECURITIES ----------------------- UNDERLYING NAME AND PRINCIPAL POSITION SALARY($) BONUS($)(1) OPTIONS(#) - ------------------------------------------------------------------- ---------- ----------- ------------------- W. Michael Long Chief Executive Officer.......................................... $ 458,337 $ -- -- Michael K. Hoover(2) President........................................................ 154,487 60,000 80,000 Dennis Drislane Vice President, Customer and Network Services.................... 163,500 73,500 -- Pavan Nigam Vice President, Engineering...................................... 225,000 -- 325,000 Charles Saunders Vice President, Marketing and Consulting Services and Medical Director......................................................... 151,250 45,000 200,000(3)
- --------- (1) Some employee year-end bonus amounts for 1998 have not been determined yet by the Board of Directors. (2) Mr. Hoover joined Healtheon in May 1998. (3) Includes 100,000 shares underlying an option granted in 1998 that was cancelled under a stock option repricing exchange program in October 1998. 53 OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1998 The following table sets forth certain information for the year ended December 31, 1998 with respect to grants of stock options to each of the Named Executive Officers. All options granted by Healtheon in 1998 were granted under its 1996 Stock Plan. These options have a term of 10 years. See "--Employee Benefit Plans" for a description of the material terms of these options. Healtheon granted options to purchase common stock and issued shares of common stock pursuant to restricted stock purchase agreements equal to a total of 8,652,807 shares during 1998. This amount includes 2,057,950 shares underlying options granted and 568,732 shares issued pursuant to restricted stock purchase agreements in connection with a repricing program in October 1998 and on December 14, 1998. Options were granted at an exercise price equal to the fair market value of Healtheon's common stock, as determined in good faith by the Board of Directors. The Board of Directors determined the fair market value based on Healtheon's financial results and prospects, the share price derived for arms-length transactions, and evaluations conducted by valuation experts. Potential realizable values are net of exercise price before taxes, and are based on the assumption that the common stock of Healtheon appreciates at the annual rate shown, compounded annually, from the date of grant until the expiration of the ten-year term. These numbers are calculated based on Securities and Exchange Commission requirements and do not reflect Healtheon's projection or estimate of future stock price growth.
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 OPTIONS EMPLOYEES PRICE PER EXPIRATION ------------------------- NAME GRANTED IN 1998 SHARE DATE 5% 10% - ----------------------------------------------------- ---------- ---------- --------- ---------- ---------- ------------ W. Michael Long...................................... -- --% $ -- -- $ -- $ -- Michael K. Hoover.................................... 80,000 0.9 3.55 6/2/08 178,606 452,623 Dennis Drislane...................................... -- -- -- -- -- -- Pavan Nigam.......................................... 325,000 3.8 4.50 7/8/08 919,758 2,330,848 Charles Saunders..................................... 100,000(1) 1.2 4.50 --(1) 283,003(1) 717,184(1) 100,000 1.2 3.55 10/21/08 223,258 565,779
- --------- (1) Represents an option to purchase 100,000 shares of common stock granted to Dr. Saunders in 1998 that was cancelled pursuant to a stock option repricing exchange program in October 1998. 54 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND 1998 YEAR-END OPTION VALUES The following table sets forth information with respect to the Named Executive Officers concerning exercisable and unexercisable options held as of December 31, 1998. The value of in-the-money options is based on an assumed offering price of $6.50 per share and net of the option exercise price.
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN- OPTIONS AT THE-MONEY OPTIONS AT DECEMBER 31, 1998(1) DECEMBER 31, 1998 SHARES ACQUIRED ON VALUE REALIZED -------------------------- --------------------------- NAME EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ----------------------- ------------------ ---------------- ----------- ------------- ------------ ------------- W. Michael Long........ 400,000 $ 1,320,000(1) 537,500 1,562,500 $ 3,359,375 $ 9,765,625 750,000(2) -- 3,375,000 -- Michael K. Hoover...... 100,000 446,800(3) 793,268 80,000 4,686,486 236,000 Dennis Drislane........ -- -- -- -- -- -- Pavan Nigam............ -- -- 364,062 85,937 864,847 472,654 Charles Saunders....... -- -- 228,571 171,429 1,098,569 1,071,431
- --------- (1) Based on a value of $3.55 per share, the fair market value of the common stock at June 2, 1998 as determined by the Board of Directors, minus the exercise price. (2) Represents shares issuable upon exercise of a warrant issued to Mr. Long upon commencement of his employment with Healtheon. See "--Employment Agreements." (3) Based on value of $4.50 per share, the fair market value of the common stock at July 8, 1998 as determined by the Board of Directors, minus the exercise price. Except in the case of Mr. Hoover, options shown above were granted under the 1996 Stock Plan and vest at a rate of 25% of the shares on the first anniversary of the date of grant and 1/48 of the shares each month thereafter. An option to purchase 80,000 shares of common stock held by Mr. Hoover was granted under the 1996 Stock Plan and vests as is described above. Mr. Hoover also holds options to purchase 793,268 shares granted under the ActaMed 1992, 1993 Class B Common and 1994 Stock Option Plans. These options were assumed by Healtheon upon the consummation of the acquisition of ActaMed. EMPLOYMENT AGREEMENTS Healtheon's ActaMed subsidiary has an employment agreement with Michael K. Hoover, Healtheon's President. The agreement provides for a base salary of $85,000, and imposes a covenant not to compete upon Mr. Hoover for a period of one year following the termination of his employment. In July 1997, Healtheon and Mr. Long entered into an employment agreement pursuant to which Mr. Long became the President and Chief Executive Officer of Healtheon. Healtheon granted Mr. Long an option to purchase 2,500,000 shares of common stock, 25% of which vested immediately, and the remainder of which vests ratably each month during the second through the fourth year of his employment. In addition, Mr. Long purchased 250,000 shares for $500,000, $499,750 of which was represented by a promissory note to Healtheon, and was issued a warrant to purchase an additional 750,000 shares at an exercise price of $2.00 per share. The shares issuable upon exercise of this warrant are subject to a right of repurchase commencing on Mr. Long's employment start date and lapsing as to 31,250 shares each month. The employment agreement provides that should Mr. Long leave Healtheon because he is no longer offered a position with similar responsibility due to a change of control of Healtheon, Mr. Long's option vests immediately as to 625,000 shares and Healtheon's repurchase right lapses. Additionally, if Healtheon terminates Mr. Long's employment without cause, he will receive six months' salary in installments, his option will vest immediately as to 625,000 shares and Healtheon's repurchase right will lapse. 55 EMPLOYEE BENEFIT PLANS 1996 STOCK PLAN. In February 1996 the Board adopted, and Healtheon's stockholders approved, the 1996 Plan. Healtheon initially reserved for issuance 9,000,000 shares of common stock under the 1996 Plan. In March 1998, the Board and the stockholders each approved an amendment to the 1996 Plan to increase the number of shares of common stock reserved under the plan to 10,000,000 shares. In July 1998, the Board approved, and in October 1998 the stockholders approved, an amendment to increase the number of shares of common stock issuable under the 1996 Plan to 15,000,000 shares plus annual increases equal to the lesser of (1) 5% of the outstanding shares or (2) a lesser amount determined by the Board. In January 1999, an additional 3,107,321 shares were reserved for issuance under the 1996 Plan under the annual increase provision. Unless terminated sooner, the 1996 Plan will terminate automatically in February 2006. The 1996 Plan provides for the discretionary grant of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code of 1986, the "Code," to employees and for the grant of nonstatutory stock options and stock purchase rights, "SPRs," to employees, directors and consultants. The 1996 Plan also provides for annual grants of options to purchase 5,000 shares of common stock to each of the outside directors. The 1996 Plan may be administered by the Board or a committee of the Board (as applicable, the "Administrator"). The Administrator has the power to determine the terms of the options or SPRs granted, including the exercise price of the options or SPRs, the number of shares subject to each option or SPR, the exercisability thereof, and the form of consideration payable upon such exercise. In addition, the Administrator has the authority to amend, suspend or terminate the 1996 Plan, provided that no share of common stock previously issued and sold or any option previously granted under the 1996 Plan is affected. The exercise price of all incentive stock options granted under the 1996 Plan must be at least equal to the fair market value of the common stock on the date of grant. The exercise price of nonstatutory stock options and SPRs granted under the 1996 Plan is determined by the Administrator, but with respect to nonstatutory stock options intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Code, the exercise price must be at least equal to the fair market value of the common stock on the date of grant. With respect to any participant who owns stock possessing more than 10% of the voting power of all classes of Healtheon's outstanding capital stock, the exercise price of any incentive stock option granted must be at least equal 110% of the fair market value on the grant date and its term must not exceed five years. The term of all other options granted under the 1996 Plan may not exceed ten years. Options generally vest as to 25% at the end of the first year and monthly thereafter over a period of three years so that the entire option is vested after four years, based upon the optionee's continued employment or consulting relationship with Healtheon. In the case of SPRs, unless the Administrator determines otherwise, the restricted stock purchase agreement will grant Healtheon a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser's employment or consulting relationship with Healtheon for any reason, including death or disability. The purchase price for shares repurchased pursuant to a restricted stock purchase agreement must be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to Healtheon. The repurchase option will lapse at a rate determined by the Administrator. Options and SPRs granted under the 1996 Plan are generally not transferable by the optionee, and each option and SPR is exercisable during the lifetime of the optionee only by the optionee. Options granted under the 1996 Plan must generally be exercised within 30 days after the end of optionee's status as an employee, director or consultant of Healtheon, or within one year after such optionee's termination by disability or death, respectively, but in no event later than the expiration of the option's term. The 1996 Plan provides that, in the event of a merger of Healtheon with or into another corporation, each outstanding option and SPR must be assumed or an equivalent option substituted by the successor 56 corporation. If the outstanding options and SPRs are not assumed or substituted by the successor corporation, the outstanding options and SPRs will terminate. ACTAMED STOCK OPTION PLANS. In connection with its acquisition of ActaMed in a merger, Healtheon assumed the outstanding options of ActaMed under the following ActaMed stock option plans (collectively, the "ActaMed Plans"): ActaMed Corp. 1992 Stock Option Plan, ActaMed Corp. 1993 Class B common stock Option Plan, ActaMed Corp. 1994 Stock Option Plan, ActaMed Corp. 1995 Stock Option Plan, ActaMed Corp. 1996 Stock Option Plan, ActaMed Corp. 1997 Stock Option Plan and ActaMed Corp. 1996 Director Stock Option Plan. The following options held by directors and executive officers of Healtheon were assumed by Healtheon: options to purchase 1,424,216 shares of ActaMed common stock held by Michael Hoover, options to purchase 250,000 shares of ActaMed common stock held by Nancy Ham, options to purchase 80,000 shares of ActaMed common stock held by J. Philip Hardin, and options to purchase 220,000 shares of ActaMed common stock held by John R. Hughes, Jr. As a result of the merger, each option to purchase shares of ActaMed common stock now represents an option to purchase a number of shares of Healtheon common stock equal to .6272 times the number of shares of ActaMed common stock originally subject to the option at the per share exercise price equal to the original per share exercise price divided by .6272. Healtheon will make no further grants under the ActaMed Plans. However, each assumed ActaMed option continues to have and remains subject to substantially the terms and conditions of the applicable ActaMed Plan under which such option was originally granted as in effect immediately prior to the merger. Generally, options granted under the ActaMed Plans will automatically terminate ten years following their issuance. Options granted under the ActaMed Plans generally are not transferable by the optionee, and must generally be exercised within 30 days after the end of the optionee's status as an employee or consultant of Healtheon or within 90 days after such optionee's termination by disability or death, respectively, but in no event later than the expiration of the option's term. Generally, in the event of any merger, sale of stock, consolidation, liquidation, recapitalization, reclassification, stock split up, combination of shares, share exchange, stock dividend, or transaction having a similar effect, where Healtheon does not remain in existence, the Administrator may (1) declare that all ActaMed options shall vest in full and be exercisable for a period of thirty (30) days following written notice from the Administrator, after which all ActaMed options shall terminate, (2) provide that all ActaMed options shall be assumed by the successor corporation, or (3) provide for a combination of (1) and (2). 1998 EMPLOYEE STOCK PURCHASE PLAN. Healtheon's 1998 Employee Stock Purchase Plan, or the "1998 Purchase Plan," was adopted by the Board in September 1998, and approved by the stockholders in October 1998. A total of 1,000,000 shares of common stock has been reserved for issuance under the 1998 Purchase Plan, plus annual increases equal to the lesser of (1) 500,000 shares, (2) .5% of the outstanding shares on such date or (3) a lesser amount determined by the Board. The 1998 Purchase Plan contains consecutive, overlapping, twenty-four month offering periods. Each offering period includes four six-month purchase periods. The offering periods generally start on the first trading day on or after May 1 and November 1 of each year, except for the first such offering period which commences on the first trading day on or after the effective date of this offering and ends on the last trading day on or before October 31, 2000. Employees are eligible to participate if they are employed by Healtheon or any participating subsidiary for at least 20 hours per week and more than five months in any calendar year. However, an employee may not be granted an option to purchase stock under the 1998 Purchase Plan if the employee (1) immediately after grant would own stock possessing 5% or more of the total combined voting power or value of all classes of the capital stock of Healtheon, or (2) holds rights to purchase stock under any employee stock purchase plans of Healtheon that together accrue at a rate which exceeds $25,000 worth of stock for each calendar year. The 1998 Purchase Plan permits each participant to purchase common stock through payroll deductions of up to 15% of the participant's "compensation." Compensation is defined as 57 the participant's base straight time gross earnings and commissions but excludes payments for overtime, shift premium, incentive compensation, incentive payments, bonuses and other compensation. The maximum number of shares a participant may purchase during a single purchase period is 5,000 shares. Amounts deducted and accumulated by the participant are used to purchase shares of common stock at the end of each purchase period. The price of stock purchased under the 1998 Purchase Plan is 85% of the lower of the fair market value of the common stock (1) at the beginning of the offering period or (2) at the end of the purchase period. In the event the fair market value at the end of a purchase period is less than the fair market value at the beginning of the offering period, the participants will be withdrawn from the current offering period following exercise and automatically re-enrolled in a new offering period. The new offering period will use the lower fair market value as of the first date of the new offering period to determine the purchase price for future purchase periods. Participants may end their participation at any time during an offering period, and they will be paid their payroll deductions to date. Participation ends automatically upon termination of employment with Healtheon. Rights granted under the 1998 Purchase Plan are not transferable by a participant other than by will or the laws of descent and distribution. The 1998 Purchase Plan provides that, in the event of a merger of Healtheon with or into another corporation or a sale of substantially all of Healtheon's assets, each outstanding option may be assumed or substituted for by the successor corporation. If the successor corporation refuses to assume or substitute for the outstanding options, the offering period then in progress will be shortened and a new exercise date will be set. The 1998 Purchase Plan will terminate in 2008. The Board has the authority to amend or terminate the 1998 Purchase Plan, except that no amendment or termination may adversely affect any outstanding options under the 1998 Purchase Plan. The Board may alter the purchase price for any offering period or shorten an offering period at any time without consent of the stockholders or of any participants. 401(K) PLAN. Healtheon participates in a tax-qualified employee savings and retirement plan, or the "401(k) Plan," which covers all of Healtheon's full-time employees who have completed three months of service. Under the 401(k) Plan, eligible employees may defer up to 20% of their pre-tax earnings, subject to the Internal Revenue Service's annual contribution limit. The 401(k) Plan permits additional discretionary matching contributions by Healtheon on behalf of all participants in the 401(k) Plan in such a percentage amount as may be determined annually by the Board. To date, Healtheon has made no matching contributions. The 401(k) Plan is intended to qualify under Section 401 of the Code, as amended, so that contributions by employees or by Healtheon to the 401(k) Plan, and income earned on plan contributions, are not taxable to employees until withdrawn from the 401(k) Plan, and income earned on plan contributions, are not taxable to employees until withdrawn from the 401(k) Plan, and so that contributions by Healtheon, if any, will be deductible by Healtheon when made. The trustee under the 401(k) Plan, at the direction of each participant, invests the assets of the 401(k) Plan in any of a number of investment options. 58 CERTAIN TRANSACTIONS Since December 26, 1995, Healtheon's inception date, there has not been nor is there currently proposed any transaction or series of similar transactions to which Healtheon or any of its subsidiaries was or is to be a party in which the amount involved exceeds $60,000 and in which any director, executive officer, holder of more than 5% of the common stock of Healtheon or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest other than (1) compensation agreements and other arrangements, which are described where required in "Management," and (2) the transactions described below. ACTAMED CORPORATION ACQUISITION On May 19, 1998, Healtheon acquired ActaMed in a merger. Pursuant to the merger, Healtheon issued 23,271,355 shares of its common stock in exchange for all of the issued and outstanding capital stock of ActaMed, and assumed all options to purchase ActaMed common stock. The merger was treated as a tax-free reorganization and as a "pooling-of-interests" transaction for accounting and financial reporting purposes. All of the then outstanding shares of preferred stock of Healtheon were converted into shares of common stock of Healtheon upon the consummation of the merger. Healtheon and certain stockholders of Healtheon who together hold a majority of the outstanding shares of common stock of Healtheon entered into a Voting Agreement in connection with the merger, or 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 1996 SERIES A PREFERRED STOCK. On January 26, 1996, Healtheon sold 10,285,000 shares of its Series A preferred stock for $.50 per share. The purchasers of the Series A preferred stock included, among others: - Dr. James H. Clark--3,500,000 shares; - Kleiner Perkins Caufield & Byers VII--2,999,500 shares; - KPCB VII Founders Fund--325,500 shares; - KPCB Life Sciences Zaibatsu Fund II--175,000 shares; and - New Enterprise Associates VI, Limited Partnership, or "New Enterprise Associates VI"--2,000,000 shares. 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 Healtheon, 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 in the entity. C. Richard Kramlich, a director of Healtheon, is a general partner of New Enterprise Associates VI. Mr. Kramlich disclaims beneficial ownership of the securities held by that entity except for his proportional interest in the entity. COMMON STOCK. On January 26, 1996, Healtheon sold 1,000,000 shares of its common stock for $.05 per share. The purchasers of the common stock included: - Dr. Clark--500,000 shares; - Kleiner Perkins Caufield & Byers VII--428,500 shares; - KPCB VII Founders Fund--46,500 shares; and - KPCB Life Sciences Zaibatsu Fund II--25,000 shares. 59 SERIES B PREFERRED STOCK AND WARRANTS. On October 1, 1996, Healtheon 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; - Kleiner Perkins Caufield & Byers VII--1,068,750 shares; - KPCB Life Sciences Zaibatsu Fund II--56,250 shares; and - New Enterprise Associates VI--500,000 shares. In related transactions, on November 1, 1996, Healtheon issued a warrant to purchase 1,000,000 shares of Series B preferred stock with an exercise price of $2.00 per share to Clark Ventures, as an incentive for Dr. Clark to continue to provide services to Healtheon. 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. Also on November 1, 1996, Healtheon issued a warrant to purchase 1,000,000 shares of Series B preferred stock at an exercise price of $2.00 per share to KPCB VII Associates, in consideration for services provided to Healtheon by David Schnell, a former general partner of KPCB, in his capacity as President and CEO. The warrant issued to KPCB VII Associates was valued at $504,900. On July 11, 1997 Healtheon issued 250,000 shares of Series B preferred stock for a purchase price of $.5 million and a warrant to purchase 750,000 shares of Series B Stock with an exercise price of $2.00 per share to W. Michael Long. See "--Employment Agreements." In order to purchase the 250,000 shares of preferred stock, Mr. Long borrowed $499,750 from Healtheon pursuant to a one-year interest-free full recourse promissory note. The note was paid in full on June 30, 1998. BRIDGE FINANCING. Between April 15, 1997 and May 6, 1997, Healtheon 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 the note in a bridge financing transaction, or the "Bridge Financing." The lenders in the Bridge Financing included, among others: - Dr. Clark--$765,750; - Kleiner Perkins Caufield & Byers VII--$727,463; - KPCB Life Sciences Zaibatsu Fund II--$38,288; and - New Enterprise Associates VI--$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. SERIES C PREFERRED STOCK. On July 1, 1997, Healtheon 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; 60 - KPCB Life Sciences Zaibatsu Fund II--15,315 shares for cancellation of the $38,288 in promissory note given in the Bridge Financing discussed above; and - New Enterprise Associates VI--250,000 shares for a purchase price of $625,000 including cancellation of the $312,500 promissory note given in the Bridge Financing discussed above. SERIES D PREFERRED STOCK. Between October 17, 1997 and December 19, 1997, Healtheon 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; - Kleiner Perkins Caufield & Byers VII--432,693 shares; - KPCB Java Fund--480,769 shares; - KPCB Life Sciences Zaibatsu Fund II--48,077 shares; - Kathy Clark--96,154 shares; - Michael James Clark Trust--96,154 shares; and - New Enterprise Associates VI, Limited Partnership--576,923 shares. Kathy Clark and Michael James Clark are adult children of Dr. Clark. On May 19, 1998, pursuant to the ActaMed merger, each outstanding share of preferred stock of Healtheon converted into one share of common stock and each outstanding warrant to purchase shares of Healtheon's preferred stock converted into a warrant to purchase shares of Healtheon's common stock. 1998 SERIES A PREFERRED STOCK. On November 3, 1998 and November 6, 1998 Healtheon sold an aggregate of 7,683,341 shares of its Series A preferred stock for $6.00 per share. Among the purchasers were the following 5% stockholders and entities affiliated with directors of Healtheon, who purchased the number of shares indicated: - Atherton Properties Partnership, LP, an entity controlled by Dr. Clark and affiliated with Kathy Clark and Michael Clark--166,667 shares; - Kathy Clark--166,667 shares; - Michael James Clark Trust--166,667 shares; - HLM Partners VII, LP, of which United HealthCare Corporation is a limited partner--166,667 shares; - KPCB Java Fund--416,667 shares; - Kleiner Perkins Caufield & Byers--375,000 shares; - KPCB Life Sciences Zaibatsu Fund II--41,667 shares; - Monaco Partners, LP--2,850,000 shares; and - New Enterprise Associates VI, LP--416,667 shares. On November 21, 1996, ActaMed entered into an Amended and Restated Development Agreement with The SFA Limited Partnership, or "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 Healtheon. SFA was given the right to use ActaMed's object broker technology outside the healthcare industry and must pay royalties on any revenues that would be derived from its use. This agreement expires in November 2001. To date, no royalties have become payable to Healtheon 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 Healtheon. As a result of ActaMed's pledging a note receivable from IBM to NationsBank, N.A. in November 1997, Mr. Sadler was released from the guarantee. In December 1997, ActaMed obtained a line of credit in the aggregate principal amount of $2.3 million from NationsBank, N.A. In exchange for a personal guarantee of this line of credit by Mr. Sadler, ActaMed granted to Mr. Sadler a security interest in all of its tangible assets other than the IBM note receivable. Upon the completion of the acquisition of ActaMed by 61 Healtheon, Mr. Sadler's guarantee was released. This line of credit was repaid by Healtheon on July 31, 1998. From 1995 through June 1998, up to three companies affiliated with Mr. Sadler had agreements with ActaMed whereby ActaMed provided office space, phone facilities and computer network support. ActaMed was paid approximately $256,000 in 1995, $215,000 in 1996, $137,000 in 1997 and $32,000 in 1998 under those agreements. CERTAIN BUSINESS RELATIONSHIPS SMITHKLINE LABS 1997-1998 ASSET PURCHASE AGREEMENTS. Prior to the acquisition of ActaMed by Healtheon, ActaMed entered into a series of agreements, the "SmithKline Agreements," with SmithKline Labs, which agreements were assumed by Healtheon in the ActaMed merger. Under the SmithKline Agreements, ActaMed agreed to purchase certain assets, or the "SmithKline Assets," located in four geographic regions, received a technology license relating to the SmithKline Assets and agreed to provide certain continuing development and network services to SmithKline Labs. In December 1997, SmithKline Labs transferred a portion of the SmithKline Assets from the first region to ActaMed in exchange for $2.0 million in cash and 3,695,652 shares of ActaMed preferred stock. The shares of ActaMed preferred stock issued to SmithKline were converted into 2,317,913 shares of Healtheon's common stock in connection with the ActaMed merger. In March 1998, SmithKline Labs transferred the SmithKline Assets from the second region to ActaMed in exchange for 1,217,391 shares of ActaMed preferred stock. Those shares were converted into 763,548 shares of Healtheon's common stock in connection with the ActaMed merger. In June 1998, SmithKline Labs transferred SmithKline Assets from the remaining two regions to Healtheon in exchange for 1,336,209 shares of common stock. SERVICES AGREEMENT. Also pursuant to one of the SmithKline Agreements, the "Services Agreement," Healtheon will perform laboratory test order and results services to providers utilizing SmithKline Labs' laboratory services through SCAN. SmithKline Labs is obligated to pay Healtheon a minimum of approximately $10.0 million in 1998 for laboratory test orders and results transactions. SmithKline Labs may be required to pay Healtheon certain additional fees for transactions processed by Healtheon in the event the number of providers accessing SmithKline Labs' laboratory services through SCAN increases. SmithKline Labs paid Healtheon $7.1 million in service and transaction fees during the first nine months of 1998 under the Services Agreement. The Services Agreement is effective through December 2002, and provides for automatic successive two-year renewals, subject to each party's right to elect not to renew the agreement no later than 180 days, in the case of SmithKline Labs, or 360 days, in the case of Healtheon, prior to the end of a term. In the event that Healtheon gives notice of non-renewal, SmithKline Labs will be entitled to continued to receive long-term order entry and results reporting services from Healtheon on a per transaction pricing basis or, in the alternative, may require Healtheon to develop a service for SmithKline that duplicates the services Healtheon had been providing under the Services Agreement. Also under the Services Agreement, SmithKline Labs is entitled, no more than once in any three consecutive month periods, to request that Healtheon engage in certain exclusive development work for SmithKline Labs. SmithKline Labs has agreed to use reasonable efforts to use Healtheon as its "preferred provider" of electronic eligibility verification and claims processing services. The Services Agreement provides that the parties will negotiate new rates as of January 1, 2001 and each two years after that date. The Services Agreement states that the renegotiated rates must be competitive with the marketplace and must be no higher than the lowest fees charged by Healtheon to similarly situated customers. See "Management's Discussion and Analysis--Overview" and Note 3 of Notes to Consolidated Financial Statements. NONCOMPETE LETTER. In May 1998, Healtheon and SmithKline Labs entered into a letter agreement under which Healtheon is obligated not to compete with SmithKline Labs in the business of disease 62 management, and has agreed to exclusively promote SmithKline Labs' disease management products and services so long as SmithKline continues to promote Healtheon as its preferred vendor. Healtheon also agreed that, in the event it performs development work related to a disease management program for one of its customers or itself, it will pay 50% of the profits from that development work to SmithKline Labs. 1999 ASSET PURCHASE AGREEMENT. In January 1999, Healtheon purchased certain assets used by SmithKline Labs to provide laboratory results delivery services in exchange for $2.0 million in cash and approximately 1.8 million shares of Healtheon's common stock. Healtheon and SmithKline Labs entered into a related services agreement under which Healtheon will provide certain electronic laboratory results delivery services to approximately 20,000 provider sites, in addition to the sites currently served through the SCAN service. The services agreement has a five year term with anticipated revenues of $17.0 to $18.0 million in the first year. Healtheon does not expect this arrangement to significantly contribute to earnings in the near term. Profitability will depend on Healtheon's ability to use these assets to provide results delivery services for non-SmithKline labs and to transition these provider sites to Healtheon's Internet-based services. UNITED HEALTHCARE EDI SERVICES ACQUISITION. 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 Healtheon's common stock in connection with the merger. SERVICES AGREEMENT. In April 1996, ActaMed also entered into a Services and License Agreement with United HealthCare that granted United HealthCare a license to certain ActaMed technology and granted ActaMed the responsibilities of managing the ProviderLink service and of providing other information technology services to United HealthCare. United HealthCare pays Healtheon 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 nine months of 1998, ActaMed, prior to the merger, and Healtheon were paid an aggregate of $7.7 million. Healtheon 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 Healtheon fails to meet certain network performance standards or otherwise breaches its material obligations under the United HealthCare Agreement. The Service and License Agreement provides that two years after the date of the agreement the parties will agree on new prices that will be competitive with the marketplace. Healtheon and United HealthCare are negotiating these new prices, and Healtheon anticipates that the new prices will reduce the rates paid by United HealthCare. See "Management's Discussion and Analysis--Overview" and Note 2 of Notes to Consolidated Financial Statements. United HealthCare is a principal stockholder of Healtheon and Dr. William McGuire, Chief Executive Officer and Chairman of United HealthCare, is a director of Healtheon. HLM NOTE. In February 1998, ActaMed issued a one-year promissory note in the aggregate principal amount of $2.0 million to HLM Partners VII, L.P., or "HLM," which bore interest at a rate of 10% per annum. 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 Healtheon. This note was repaid at the time of the merger. 63 PRINCIPAL STOCKHOLDERS The following table sets forth certain information with respect to the beneficial ownership of Healtheon's common stock as of November 30, 1998 and as adjusted to reflect the sale of the shares of common stock in this offering by: (1) each person who is known by Healtheon to beneficially own more than 5% of Healtheon's common stock, (2) each director of Healtheon, (3) each of the Named Executive Officers and (4) all directors and executive officers of Healtheon as a group.
PERCENTAGE OF SHARES BENEFICIALLY OWNED(1) NUMBER OF SHARES -------------------------- BENEFICIALLY BEFORE AFTER NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING(2) - ------------------------------------------------------------------------ ----------------- ----------- ------------- Entities associated with James H. Clark(3).............................. 11,502,265 18.5% 17.1% Entities associated with United HealthCare Corporation(4)............... 8,936,687 14.4 13.3 William W. McGuire, M.D.(4)........................................... 8,936,687 14.4 13.3 Entities associated with Kleiner Perkins Caufield & Byers(5)............ 8,086,832 12.8 11.9 L. John Doerr(5)...................................................... 8,086,832 12.8 11.9 SmithKline Beecham Clinical Laboratories, Inc.(6)....................... 6,251,003(6) 9.8 9.1 Tadataka Yamada(6).................................................... 6,251,003(6) 9.8 9.1 P. E. Sadler(7)......................................................... 5,001,993 8.0 7.4 Entities associated with New Enterprise Associates, L.P.(8)............. 3,755,569 6.0 5.6 C. Richard Kramlich(8)................................................ 3,755,569 6.0 5.6 W. Michael Long(9)...................................................... 1,937,500 3.1 2.8 Integral Capital Partners, L.P.......................................... 1,255,129 2.0 1.9 Michael K. Hoover(10)................................................... 888,268 1.4 1.3 Dennis Drislane(11)..................................................... 550,000 * * Pavan Nigam(12)......................................................... 509,062 * * Thomas A. Jermoluk...................................................... 333,334 * * Charles Saunders(13).................................................... 115,178 * * Laura D'Andrea Tyson.................................................... -- -- -- All officers and directors as a group (23 persons)(14).................. 49,469,829 73.1 68.1
- ---------- * Less than one percent (1) The number and percentage of shares beneficially owned are based on 62,195,893 shares of common stock outstanding as of November 30, 1998, assuming conversion of all outstanding shares of preferred stock into common stock, and 67,195,893 shares of common stock outstanding after this offering. Beneficial ownership is determined under the rules and regulations of the Securities and Exchange Commission. Shares of common stock subject to options or warrants that are currently exercisable or exercisable within 60 days of November 30, 1998 are deemed to be outstanding and beneficially owned by the person holding the options or warrants for the purpose of computing the number of shares beneficially owned and the percentage ownership of that person, these shares are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. Except as indicated in the footnotes to this table, and subject to applicable community property laws, these persons have sole voting and investment power with respect to all shares of Healtheon's common stock shown as beneficially owned by them. (2) The table assumes the U.S. Underwriters' over-allotment option to purchase 750,000 shares of common stock is not exercised. (3) Represents 166,667 shares held of record by Atherton Properties Partnership, LP, 4,000,000 shares held of record by Dr. Clark as trustee of the James H. Clark and Nancy Rutter Clark Revocable Trust, 1,017,229 shares held of record by Clark Ventures, 268,000 shares held of record by JHC Investments, LLC and 6,050,369 shares held of record by Monaco Partners, LP. Dr. Clark wholly controls Atherton Properties Partnership, LP, Clark Ventures, JHC Investments, LLC and Monaco Partners, LP. Dr. Clark is a director of Healtheon. The address for Dr. Clark is c/o Healtheon Corporation, 4600 Patrick Henry Drive, Santa Clara, CA 95054. The address for Clark Ventures and Monaco Partners, LP is 777 East Williams Street, Suite 201, Carson City, NV 89701. 64 (4) 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, 676,262 shares held of record by HLM Partners VII, L.P., of which United HealthCare is a limited partner and 1,270,080 shares held of record by Validus, L.P., of which United HealthCare is the sole limited partner. United HealthCare disclaims beneficial ownership of shares held by both limited partnerships except to the extent of its pecuniary interests in the entities. Dr. McGuire, a director of Healtheon, is the President, Chief Executive Officer and Chairman of United HealthCare. Dr. McGuire disclaims beneficial ownership of all shares held by United HealthCare. United HealthCare's address is 9900 Bren Road East, 300 Opus Center, Minnetonka, MN 55343. (5) Represents 5,500,863 shares held of record directly by Kleiner Perkins Caufield & Byers VII L.P. ("KPCB VII"), 1,203,736 shares held of record by KPCB Java Fund, and 352,874 shares held of record by KPCB Life Sciences Zaibatsu Fund II. Also represents 976,423 shares subject to warrants held of record by KPCB VII, and 52,936 shares subject to warrants held of record by KPCB Life Sciences Zaibatsu Fund II L.P., all of which are exercisable within 60 days of November 30, 1998. KPCB Life Sciences Zaibatsu Fund II and KPCB VII are wholly controlled by KPCB VII Associates, L.P. KPCB Java Fund is controlled by KPCB VIII Associates. L. John Doerr, a general partner of KPCB VIII Associates and KPCB VII Associates, L.P., is a director of Healtheon. Mr. Doerr disclaims beneficial ownership of shares held by these entities except to the extent of his pecuniary interest in the entities. Kleiner Perkins Caufield & Byers' address is 2750 Sand Hill Road, Menlo Park, CA 94025. (6) Includes in the number of shares beneficially owned by SmithKline Labs and in the total number of outstanding shares of common stock 1,833,333 shares of common stock issued under a December 1998 Asset Purchase Agreement with SmithKline Labs. Dr. Yamada, a director of Healtheon, is President and Executive Director of SmithKline Beecham HealthCare Services and a director of SmithKline Beecham. SmithKline Labs' address is 1201 South Collegeville Road, Collegeville, PA 19426. Dr. Yamada disclaims beneficial ownership of all shares held by SmithKline Labs. (7) Represents 2,975,140 shares held of record by P. E. Sadler and 2,026,853 shares held of record by SFA Limited Partnership, of which P. E. Sadler is a general partner. Mr. Sadler is a director of Healtheon. Mr. Sadler's address is c/o Healtheon Corporation, 4600 Patrick Henry Drive, Santa Clara, CA 95054. (8) Represents 3,723,590 shares held of record directly by New Enterprise Associates VI, L.P., or "New Enterprise Associates VI," 11,979 shares subject to warrants held of record by New Enterprise Associates VI exercisable within 60 days of November 30, 1998, and 20,000 shares held of record by NEA Ventures 1996, L.P., which is controlled by New Enterprise Associates VI. Mr. Kramlich is a partner of New Enterprise Associates VI. Mr. Kramlich disclaims beneficial ownership of shares held by these entities except for his proportional interests in the entities. New Enterprise Associates VI's address is 1119 St. Paul Street, Baltimore, MD 21202. (9) Includes 750,000 shares subject to a warrant held of record by Mr. Long and 537,500 shares subject to options held of record by Mr. Long, in each case exercisable within 60 days of November 30, 1998. 187,500 shares underlying the warrant held by Mr. Long will remain subject to a right of repurchase by Healtheon 60 days after November 30, 1998. Mr. Long is the Chief Executive Officer and a director of Healtheon. (10) Represents 92,500 shares held of record directly by Mr. Hoover, 2,500 shares held by Nicholas D. Hoover for which Mr. Hoover is custodian, and 793,268 shares subject to options held of record by Mr. Hoover that are exercisable within 60 days of November 30, 1998. Mr. Hoover is the President and a director of Healtheon. (11) Includes 343,750 shares held by Mr. Drislane that will remain subject to a right of repurchase by Healtheon 60 days after November 30, 1998. (12) Includes 39,062 shares subject to options held of record by Mr. Nigam that are exercisable within 60 days of November 30, 1998. Also includes 121,875 shares that will remain subject to a right of repurchase by Healtheon 60 days after November 30, 1998. Mr. Nigam is the Vice President, Engineering of Healtheon. (13) Represents 115,178 shares subject to options held of record by Mr. Saunders that are exercisable within 60 days of November 30, 1998. Mr. Saunders is the Vice President, Marketing and Consulting Services and Medical Director of Healtheon. (14) Includes all shares described in the above footnotes and includes an additional 1,422,971 shares held by other executive officers, of which 1,085,928 shares were outstanding as of November 30, 1998 and 337,043 shares are subject to options or warrants that are exercisable within 60 days of November 30, 1998. 65 DESCRIPTION OF CAPITAL STOCK The following summary of certain provisions of Healtheon's capital stock describes all material provisions of Healtheon'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 November 30, 1998, there were 62,183,393 shares of common stock outstanding, par value $0.0001 per share, assuming the conversion of all outstanding shares of preferred stock into shares of common stock. Upon consummation of this offering, 150,000,000 shares of common stock and 5,000,000 shares of preferred stock will be authorized. COMMON STOCK The issued and outstanding shares of common stock are, and the shares of common stock offered by this prospectus will be validly issued, fully paid and nonassessable upon payment for the shares. The holders of outstanding shares of common stock are entitled to receive dividends out of assets legally available therefor at a time and in amounts as the Board may from time to time determine. See "Dividend Policy." The shares of common stock are not convertible and the holders thereof have no preemptive or subscription rights to purchase any securities of Healtheon. Upon liquidation, dissolution or winding up of Healtheon, the holders of common stock are entitled to receive pro rata the assets of Healtheon that are legally available for distribution, after payment of all debts and other liabilities. Each outstanding share of common stock is entitled to one vote on all matters submitted to a vote of the stockholders, including election of directors. There is no cumulative voting in the election of directors. PREFERRED STOCK Upon the closing of this offering, each outstanding share of Series A preferred stock will be converted into one share of common stock. See Note 14 of Notes to Consolidated Financial Statements for a description of the Series A preferred stock issued in November 1998. Upon the closing of this offering, Healtheon's Certificate of Incorporation will provide that preferred stock may be issued by Healtheon in one or more series and that the Board has the authority, without further action by the stockholders, to fix the rights, preferences and privileges thereof, including dividend rights, conversion rights, voting rights, rights and terms of redemption, liquidation preferences and sinking fund terms, any or all of which may be greater than the rights of the common stock. The issuance of preferred stock could adversely affect the voting power of holders of common stock and the likelihood that such holders would receive dividend payments and payments upon liquidation. The issuance of preferred stock 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 Healtheon. Healtheon has no present plans to issue any shares of preferred stock. WARRANTS As of November 30, 1998, Healtheon 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 expire with respect to 1,000,000 shares on November 1, 1999, with respect to 750,000 shares on July 10, 2000, and with respect to 44,718 shares on June 30, 2002. Warrants to purchase 282,522 shares of common stock have an exercise price of $7.97, which expire December 2001. In addition, in December 1998, as part of a service agreement with a customer, Healtheon issued to the customer a warrant to purchase 500,000 shares of common stock with an exercise price of $10.40 per share, which expires on March 15, 2003. 66 REGISTRATION RIGHTS The holders of approximately 50,007,164 shares of common stock or their permitted transferees are entitled to certain rights with respect to registration of their shares, or the "Registrable Securities," under the Securities Act. These shares are held by (1) purchasers of common stock at the founding of Healtheon in December 1995, (2) purchasers of preferred stock of Healtheon prior to its conversion into common stock in connection with the acquisition of ActaMed, (3) certain former shareholders of ActaMed who received shares of Healtheon's common stock pursuant to Healtheon's acquisition of ActaMed and who had registration rights with respect to their shares of ActaMed capital stock and (4) purchasers of the Series A preferred stock sold in November 1998. 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 Healtheon 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 Healtheon register their shares for public resale on Form S-3 or any successor form, provided Healtheon is eligible to use Form S-3 or any such successor form. The value of the securities to be so registered must be at least $1.0 million. Furthermore, in the event Healtheon 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 Healtheon 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 Healtheon. Registration rights, other than the right to require Healtheon to register shares on Form S-3 or any successor form, will terminate at such time as Healtheon'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 Healtheon's stockholders with registration rights cause a large number of securities to be registered and sold in the public market, those sales could have an adverse effect on the market price for Healtheon's common stock. If Healtheon were to initiate a registration and include Registrable Securities because of the exercise of registration rights, the inclusion of Registrable Securities could have an adverse effect on Healtheon's ability to raise capital. CERTAIN ANTI-TAKEOVER EFFECTS OF PROVISIONS OF HEALTHEON'S CERTIFICATE OF INCORPORATION AND BYLAWS AND OF DELAWARE LAW GENERAL. Certain provisions of Delaware law and Healtheon'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 Healtheon. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of Healtheon'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 Healtheon, including unsolicited takeover attempts, even though such a transaction may offer Healtheon's stockholders the opportunity to sell their stock at a price above the prevailing market price. DELAWARE TAKEOVER STATUTE. Following consummation of this offering, Healtheon will be subject to the "business combination" provisions of Section 203 of the Delaware General Corporation Law. In general, those 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: - the transaction is approved by the board of directors prior to the date the interested stockholder obtained interested stockholder status; - 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 67 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 - on or subsequent to the 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 Healtheon and, accordingly, may discourage attempts to acquire Healtheon. CERTIFICATE OF INCORPORATION AND BYLAWS. Healtheon's Certificate of Incorporation provides that any action to be taken by the stockholders of Healtheon must be effected at an annual or special stockholder meeting and may not be taken by written consent. Healtheon's Bylaws provide that special meetings of the stockholders of Healtheon may be called by the Board or by the President of Healtheon, or by one or more stockholders holding at least 10% of the voting power of Healtheon's outstanding capital stock, or any persons as may be authorized by the Certificate of Incorporation or the Bylaws (which currently only give this authority to the Board). Healtheon'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 stockholders meeting. No business other than that stated in the notice may be transacted at any special meeting. These provisions will delay consideration of a stockholder proposal until the next annual meeting unless a special meeting is called by the Board. Healtheon'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 Healtheon's voting stock or a majority of directors in office, although less than a quorum. The Certificate of Incorporation and the Bylaws of Healtheon also provide for a staggered Board. Under a staggered Board, each director is designated to one of three categories. Each year the directors' positions in one of the three 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 Healtheon. LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS Healtheon's Certificate of Incorporation limits the liability of directors to the fullest extent permitted by the Delaware law. In addition, the Certificate of Incorporation and Bylaws provide that Healtheon will indemnify directors and officers of Healtheon to the fullest extent permitted by Delaware law. Healtheon intends to enter into separate indemnification agreements with its directors and executive officers that provide these persons indemnification protection in the event the Certificate of Incorporation is subsequently amended. TRANSFER AGENT AND REGISTRAR American Stock Transfer Trust Company has been appointed as transfer agent and registrar for Healtheon's common stock. LISTING Application has been made to have the common stock accepted for quotation on the Nasdaq National Market under the symbol "HLTH." 68 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for the common stock of Healtheon. Future sales of substantial amounts of common stock in the public market, or the perception that such sales may occur, could adversely affect prevailing market prices. Upon consummation of the offering, Healtheon will have an aggregate of 67,195,893 shares of common stock outstanding, based on the number of shares of common stock outstanding as of November 30, 1998, assuming no exercise of the U.S. underwriters' over-allotment option and no exercise of outstanding options or warrants. Of these shares, 5,658,184 shares, including the 5,000,000 shares sold in this offering, will be freely tradable without restriction under the Securities Act, except for any such shares that may be purchased by "affiliates" of Healtheon, which shares will be subject to the volume and other limitations of Rule 144 of the Securities Act, or "Rule 144" described below. As defined in Rule 144, an "affiliate" of an issuer is a person who, directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, such issuer. Upon the expiration of certain contractual "lock-up" restrictions described below, 52,254,368 shares will be eligible for sale 180 days after the date of this prospectus, with 41,817,104 of such shares subject to the volume and other limitations of Rule 144. The remaining 9,283,341 shares will become eligible for sale at various times after that date, including 7,683,341 shares that will become eligible for resale between November 3 and November 6, 1999; all of these remaining shares will be subject to the volume and other limitations of Rule 144. Each of Healtheon's directors and officers and certain other stockholders of Healtheon have agreed with Morgan Stanley & Co. Incorporated, for a period of 180 days after the date of this prospectus, not to (1) 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 (2) 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 above is to be settled by delivery of common stock or such other securities, in cash or otherwise. Morgan Stanley & Co. Incorporated may choose to release a certain number of these shares from such restrictions prior to the expiration of the 180-day period "lock-up" period, although it has no current intention of doing so. Under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned restricted shares of common stock for at least one year, including the holding period of any prior owner except an affiliate, would be entitled to sell a number of such shares within any three-month period equal to the greater of (1) 1% of the then outstanding shares of the common stock or (2) the average weekly reported volume of trading of the common stock on the Nasdaq National Market during the four calendar weeks preceding such sale. Immediately after the offering, 1% of Healtheon's outstanding shares of common stock would equal approximately 671,959 shares. Rule 144 also imposes on such restricted shares certain manner of sale and notice requirements and requirements as to the availability of current public information concerning Healtheon. Under Rule 144(k), a person who is not deemed to have been an affiliate 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 regard to the volume or other limitations of Rule 144 just described. The holders of approximately 50,007,164 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 Healtheon's common stock. Immediately after this offering, there will be options to purchase approximately 11,827,385 shares of common stock outstanding, based on the number of options outstanding as of November 30, 1998. Subject 69 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 non-Affiliates to sell their shares without having to comply with the volume, holding period or other limitations of Rule 144 and permits Affiliates to sell their shares without having to comply with the holding period limitation of Rule 144, in each case beginning 90 days after the consummation of this offering. In addition, shortly after this offering, Healtheon intends to file a registration statement on Form S-8 covering the 13,811,659 shares of common stock reserved for issuance under the 1996 Plan and the 1998 Purchase Plan based upon the number of options outstanding as of November 30, 1998. Shares of common stock registered under any registration statement will, subject to Rule 144 volume limitations applicable to Affiliates, be available for sale in the open market, unless the shares are subject to vesting restrictions with Healtheon or the lock-up agreements described above. 70 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: - a citizen or resident of the United States; - a corporation, partnership or other entity created or organized in or under the laws of the United States or any state thereof; - an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or - 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. Withholding may not apply if the dividends are effectively connected with the conduct of a trade or business within the United States and, if an applicable income tax treaty 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, are attributable to a United States permanent establishment of such holder. 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 payer 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, (1) the certification requirement would generally be applied to the partners of the partnership and (2) 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. 71 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 one of the following conditions is satisfied: - the gain is effectively connected with a trade or business conducted by the non-U.S. Holder in the United States and, if an applicable income tax treaty 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, is attributable to a permanent establishment maintained in the United States by such non-U.S. Holder; - 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; - Healtheon 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 - 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. Healtheon 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 payer of dividends has actual knowledge that the payee is a United States person, the payer 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. 72 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. 73 UNDERWRITERS Under the terms and subject to the conditions contained in an underwriting agreement dated the date hereof, or the "underwriting agreement," the U.S. underwriters named below, for whom Morgan Stanley & Co. Incorporated, Goldman, Sachs & Co., Hambrecht & Quist LLC and Volpe Brown Whelan & Company, LLC are acting as U.S. representatives, and the international underwriters named below for whom Morgan Stanley & Co. International Limited, Goldman Sachs International, Hambrecht & Quist LLC & Volpe Brown Whelan & Company, LLC are acting as international representatives, have severally agreed to purchase, and Healtheon 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......................................................................................... 4,000,000 ---------- International Underwriters: Morgan Stanley & Co. International Limited......................................................... Goldman Sachs International........................................................................ Hambrecht & Quist LLC.............................................................................. Volpe Brown Whelan & Company, LLC.................................................................. ---------- Subtotal......................................................................................... 1,000,000 ---------- Total.......................................................................................... 5,000,000 ---------- ----------
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 by this prospectus if any shares are taken. However, the underwriters are not required to take the shares covered by the U.S. underwriters' over-allotment option described below. Pursuant to the agreement between U.S. and international underwriters, each U.S. underwriter has represented and agreed that, with certain exceptions: (1) it is not purchasing any shares for the account of anyone other than a United States or Canadian Person (as defined) and (2) 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: (1) it is not purchasing any shares for the account 74 of any United States or Canadian Person and (2) 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 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 (1) made by it in its capacity as a U.S. underwriter apply only to it in its capacity as a U.S. underwriter and (2) 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. 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 (1) 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; (2) 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 (3) 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 in connection with the distribution contemplated in this offering, except for offers or sales to Japanese 75 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. Healtheon 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 750,000 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 Healtheon 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. Healtheon has requested that the U.S. underwriters reserve up to 650,000 shares of common stock to be offered at the public offering price to certain persons designated by Healtheon, including James H. Clark and Thomas A. Jermoluk, directors of Healtheon. Each of Healtheon and the directors, officers and certain other stockholders of Healtheon 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, (1) 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 (2) 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 (1) or (2) 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 Healtheon 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 Healtheon relating to shares of common stock or other securities acquired in open market transactions after the completion of the offering of the shares, provided that purchasers in transactions described in clause (y) enter into similar "lock-up" agreements. In order to facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may over-allot in connection with the offering, creating a short position in the common stock for their own 76 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. Healtheon 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 Healtheon, for which such underwriters receive customary 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 Healtheon and the U.S. representatives. Among the factors to be considered in determining the initial public offering price will be the future prospects of Healtheon and its industry in general, sales, earnings and certain other financial and operating information of Healtheon 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 Healtheon. 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 Healtheon 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, independent auditors, as stated in their report appearing herein. The consolidated financial statements of ActaMed Corporation as of December 31, 1996 and for the year then ended, which are not separately presented in this Prospectus and Registration Statement, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein. Such financial statements are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. 77 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. WHERE YOU CAN FIND MORE INFORMATION Healtheon has filed with the Securities and Exchange Commission, or the "Commission," a registration statement on Form S-1 under the Securities Act, and the rules and regulations promulgated thereunder, with respect to the common stock offered hereby. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement and the exhibits thereto. Statements contained in this prospectus as to the contents of any contract or other document that is filed as an exhibit to the registration statement are not necessarily complete and each such statement is qualified in all respects by reference to the full text of such contract or document. For further information with respect to Healtheon and the common stock, reference is hereby made to the registration statement and the exhibits thereto, which may be inspected and copied at the principal office of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission located at Seven World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and copies of all or any part thereof may be obtained at prescribed rates from the Commission's Public Reference Section at such addresses. Also, the Commission maintains a World Wide Web site on the Internet at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. Upon completion of this offering, Healtheon will become subject to the information and periodic reporting requirements of the Exchange Act and, in accordance therewith, will file periodic reports, proxy and information statements and other information with the Commission. Such periodic reports, proxy and information statements and other information will be available for inspection and copying at the regional offices, public reference facilities and Web site of the Commission referred to above. 78 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-9 Notes to Consolidated Financial Statements................................ F-11 FINANCIAL STATEMENTS OF EDI SERVICES, INC.: Report of Deloitte and Touche LLP, Independent Auditors................... F-34 Statement of Divisional Net Loss and United's Net Investment.............. F-35 Statement of Divisional Cash Flows........................................ F-36 Notes to Financial Statements............................................. F-37
F-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Healtheon Corporation We have audited the accompanying consolidated balance sheets of Healtheon Corporation as of December 31, 1996 and 1997, and 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 Corporation in a transaction that was accounted for as a pooling of interests. We did not audit the financial statements of ActaMed Corporation for the year ended December 31, 1996, which statements reflect total assets constituting approximately 82% of the related consolidated financial statement totals at December 31, 1996 and revenues and a net loss constituting approximately 89% and 54%, respectively, of the related consolidated financial statement totals for the year ended December 31, 1996. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for ActaMed Corporation, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted accounting standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Healtheon Corporation at December 31, 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 September 26, 1998 F-2 INDEPENDENT AUDITORS' REPORT Board of Directors of ActaMed Corporation We have audited the consolidated balance sheet of ActaMed Corporation and subsidiary (the "Company") as of December 31, 1996 and the related consolidated statements of operations, convertible redeemable preferred stock and stockholders' equity (net capital deficiency), and cash flows for each of the two years in the period ended December 31, 1996 (the consolidated financial statements for 1996 are not separately presented herein). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1996 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP Atlanta, Georgia June 20, 1997 (September 26, 1998 as to Note 1--Net Loss per Common Share, paragraph 2 and Note 2--Acquisition of EDI Services, Inc., paragraph 4) F-3 HEALTHEON CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, ---------------------- 1996 1997 ---------- ---------- SEPTEMBER 30, 1998 ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................................ $ 7,539 $ 16,504 $ 4,526 Short-term investments................................................... -- 5,300 866 Accounts receivable, net of allowance for doubtful accounts of $41, $71 and $130 in 1996, 1997 and 1998, respectively........................... 959 2,723 5,104 Due from related parties................................................. 1,742 1,533 1,159 Other current assets..................................................... 437 527 621 ---------- ---------- ------------- Total current assets..................................................... 10,677 26,587 12,276 Property and equipment, net................................................ 4,534 5,500 11,276 Intangible assets, net..................................................... 16,555 18,768 23,742 Other assets............................................................... 2,641 2,892 2,977 ---------- ---------- ------------- $ 34,407 $ 53,747 $ 50,271 ---------- ---------- ------------- ---------- ---------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) Current liabilities: Borrowings under line of credit.......................................... $ 30 $ 3,425 $ 1,415 Accounts payable......................................................... 1,359 2,225 4,472 Accrued compensation..................................................... 242 448 2,465 Other accrued liabilities................................................ 1,097 1,265 3,871 Current portion of capital lease obligations............................. 763 1,038 1,716 Deferred revenue......................................................... 4,681 3,396 4,392 ---------- ---------- ------------- Total current liabilities................................................ 8,172 11,797 18,331 Capital lease obligations, net of current portion.......................... 1,210 932 1,714 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 54,422,868 shares issued and outstanding in 1996, 1997 and 1998, respectively...................................................... 1 1 5 Additional paid-in capital............................................... 1,523 4,502 119,645 Note receivable from officer............................................. -- (349) -- Deferred stock compensation.............................................. -- (2,151) (4,184) Accumulated deficit...................................................... (27,684) (55,689) (85,240) ---------- ---------- ------------- Total stockholders' equity (net capital deficiency)...................... (14,553) (9,930) 30,226 ---------- ---------- ------------- $ 34,407 $ 53,747 $ 50,271 ---------- ---------- ------------- ---------- ---------- -------------
SEE ACCOMPANYING NOTES. F-4 CONSOLIDATED STATEMENTS OF OPERATIONS(1) (IN THOUSANDS, EXCEPT PER SHARE DATA)
HEALTHEON CORPORATION ACTAMED ---------------------------------------------- CORPORATION ------------ YEARS ENDED NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, DECEMBER 31, ---------------------- ---------------------- 1995 1996 1997 1997 1998 ------------ ---------- ---------- ---------- ---------- (UNAUDITED) Revenue: Services............................................ $ 458 $ 1,795 $ 4,301 $ 1,216 $ 18,326 Services to related parties(2)...................... -- 4,237 7,309 5,199 14,320 Software licenses................................... 1,717 4,981 1,780 585 585 ------------ ---------- ---------- ---------- ---------- Total revenue....................................... 2,175 11,013 13,390 7,000 33,231 Operating costs and expenses: Cost of revenue: Cost of services.................................. 1,573 1,648 4,011 1,080 18,688 Cost of services to related parties............... -- 4,919 6,536 4,648 13,206 Cost of software licenses......................... 343 160 -- -- -- ------------ ---------- ---------- ---------- ---------- Total cost of revenue............................. 1,916 6,727 10,547 5,728 31,894 Development and engineering......................... 2,446 8,596 12,986 9,681 13,036 Sales, general and administrative................... 1,749 9,042 11,031 7,477 17,041 Amortization of intangible assets................... -- 3,189 4,249 3,187 6,703 ------------ ---------- ---------- ---------- ---------- Total operating costs and expenses.................. 6,111 27,554 38,813 26,073 68,674 ------------ ---------- ---------- ---------- ---------- Loss from operations.................................. (3,936) (16,541) (25,423) (19,073) (35,443) Interest income....................................... 208 539 611 359 834 Interest expense...................................... (6) (56) (323) (177) (361) Dividends on ActaMed's convertible redeemable preferred stock..................................... -- (2,548) (2,870) (2,382) (890) ------------ ---------- ---------- ---------- ---------- Net loss.............................................. (3,734) (18,606) (28,005) (21,273) (35,860) Dividends on ActaMed's convertible redeemable preferred stock..................................... (724) -- -- -- -- ------------ ---------- ---------- ---------- ---------- Net loss applicable to common stockholders............ $ (4,458) $ (18,606) $ (28,005) $ (21,273) $ (35,860) ------------ ---------- ---------- ---------- ---------- ------------ ---------- ---------- ---------- ---------- Basic and diluted net loss per common share........... $ (.85) $ (2.83) $ (3.88) $ (3.03) $ (1.24) ------------ ---------- ---------- ---------- ---------- ------------ ---------- ---------- ---------- ---------- Weighted-average shares outstanding used in computing basic and diluted net loss per common share......... 5,246 6,583 7,223 7,019 28,934 ------------ ---------- ---------- ---------- ---------- ------------ ---------- ---------- ---------- ---------- Pro forma basic and diluted net loss per common share (unaudited)......................................... $ (.56) $ (.74) ---------- ---------- ---------- ---------- Shares used in computing pro forma basic and diluted net loss per common share (unaudited)............... 44,715 47,263 ---------- ---------- ---------- ----------
- --------- (1) Because Healtheon did not commence operations until January 1996, the ActaMed statement of operations presented for the year ended December 31, 1995 represents the statement of operations of Healtheon for that period on a pooled basis. (2) Revenue from services to related parties consists of revenue from United HealthCare and SmithKline Labs, customers that are also significant stockholders of the Company. SEE ACCOMPANYING NOTES. F-5 CONSOLIDATED STATEMENT OF CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)(1) (IN THOUSANDS, EXCEPT SHARE DATA) ACTAMED CORPORATION
CONVERTIBLE REDEEMABLE PREFERRED CONVERTIBLE PREFERRED STOCK 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 ----------- -------- ----------- -------- ---------- ------- ----------- -------- ----------- -------- ---------- ------- HEALTHEON CORPORATION BALANCES AT DECEMBER 31, 1995 (REFLECTING THE EXCHANGE RATIO OF .6272)........................... 7,682,671 $ 16,030 -- $ -- 5,846,288 $ 1 Net loss........................... -- -- -- -- -- -- Issuance of common stock to founders and employees for cash............................. -- -- -- -- 2,806,134 -- Issuance of Series A convertible preferred stock for cash (less issuance costs of $27)........... -- -- 10,285,000 5,115 -- -- Issuance of Series B convertible preferred stock for cash (less issuance costs of $8)............ -- -- 3,000,000 5,992 -- -- Issuance of Series B convertible preferred stock warrant to investor for services............ -- -- -- 500 -- -- Issuance of Series C convertible redeemable preferred stock for acquisition...................... 6,488,276 21,000 -- -- -- -- Issuance of common stock warrants......................... -- -- -- -- -- -- Dividends accrued on convertible redeemable preferred stock....... -- 2,548 -- -- -- -- ----------- -------- ----------- -------- ---------- ------- BALANCES AT DECEMBER 31, 1996...... 14,170,947 39,578 13,285,000 11,607 8,652,422 1 TOTAL NOTE STOCKHOLDERS' ADDITIONAL RECEIVABLE DEFERRED EQUITY (NET PAID-IN FROM STOCK ACCUMULATED CAPITAL CAPITAL OFFICER COMPENSATION DEFICIT DEFICIENCY) ---------- ---------- ------------ ----------- ------------- BALANCES AT DECEMBER 31, 1994...... $ 1,883 $ -- $ -- $ (5,344) $ (3,261) Net loss........................... -- -- -- (3,734) (3,734) Issuance of common stock pursuant to option exercises by employees........................ -- -- -- -- 21 Issuance of Series B convertible redeemable preferred stock for cash (less issuance costs of $36)............................. -- -- -- -- -- Dividends accrued on convertible redeemable preferred stock....... (724) -- -- -- (724) ---------- ---------- ------------ ----------- ------------- BALANCES AT DECEMBER 31, 1995...... $ 1,159 $ -- $ -- $ (9,078) $ (7,698) ---------- ---------- ------------ ----------- ------------- ---------- ---------- ------------ ----------- ------------- BALANCES AT DECEMBER 31, 1995 (REFLECTING THE EXCHANGE RATIO OF .6272)........................... $ 1,379 $ -- $ -- $ (9,078) $ (7,698) Net loss........................... -- -- -- (18,606) (18,606) Issuance of common stock to founders and employees for cash............................. 140 -- -- -- 140 Issuance of Series A convertible preferred stock for cash (less issuance costs of $27)........... -- -- -- -- 5,115 Issuance of Series B convertible preferred stock for cash (less issuance costs of $8)............ -- -- -- -- 5,992 Issuance of Series B convertible preferred stock warrant to investor for services............ -- -- -- -- 500 Issuance of Series C convertible redeemable preferred stock for acquisition...................... -- -- -- -- -- Issuance of common stock warrants......................... 4 -- -- -- 4 Dividends accrued on convertible redeemable preferred stock....... -- -- -- -- -- ---------- ---------- ------------ ----------- ------------- BALANCES AT DECEMBER 31, 1996...... 1,523 -- -- (27,684) (14,553)
- ------------- (1) Because Healtheon did not commence operations until January 1996, the ActaMed statement of convertible redeemable preferred stock and stockholders' equity (net capital deficiency) presented for the year ended December 31, 1995 represents the statement of stockholders' equity of Healtheon for that period on a pooled basis. SEE ACCOMPANYING NOTES. F-6 CONSOLIDATED STATEMENT OF CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)(1) (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA) HEALTHEON CORPORATION
CONVERTIBLE REDEEMABLE PREFERRED CONVERTIBLE PREFERRED STOCK STOCK COMMON STOCK --------------------- --------------------- ------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ----------- -------- ----------- -------- ---------- ------- BALANCES AT DECEMBER 31, 1996...... 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 TOTAL NOTE STOCKHOLDERS' ADDITIONAL RECEIVABLE DEFERRED EQUITY (NET PAID-IN FROM STOCK ACCUMULATED CAPITAL CAPITAL OFFICER COMPENSATION DEFICIT DEFICIENCY) ---------- ---------- ------------ ----------- ------------- BALANCES AT DECEMBER 31, 1996...... $ 1,523 $ -- $ -- $(27,684) $(14,553) Net loss........................... -- -- -- (28,005) (28,005) Issuance of common stock pursuant to option and restricted stock exercises by employees........... 297 -- -- -- 297 Repurchase of employee common stock............................ (31) -- -- -- (31) Issuance of Series A and Series B convertible preferred stock for services......................... -- -- -- -- 55 Issuance of Series B convertible preferred stock for cash......... -- -- -- -- 30 Issuance of Series B convertible preferred stock to officer for note receivable.................. -- (500) -- -- -- Issuance of Series B convertible preferred stock warrants in connection with bridge financing........................ -- -- -- -- 64 Issuance of Series C convertible preferred stock for cash and conversion of bridge note........ -- -- -- -- 6,500 Issuance of Series D convertible preferred stock for cash......... -- -- -- -- 25,000 Issuance of Series D convertible redeemable preferred stock for asset purchase................... -- -- -- -- -- Repayment of note receivable from officer.......................... -- 151 -- -- 151 Dividends accrued on convertible redeemable preferred stock....... -- -- -- -- -- Deferred stock compensation........ 2,713 -- (2,713) -- -- Amortization of deferred stock compensation..................... -- -- 562 -- 562 ---------- ---------- ------------ ----------- ------------- BALANCES AT DECEMBER 31, 1997...... 4,502 (349) (2,151) (55,689) (9,930)
- ------------- (1) Because Healtheon did not commence operations until January 1996, the ActaMed statement of convertible redeemable preferred stock and stockholders' equity (net capital deficiency) presented for the year ended December 31, 1995 represents the statement of stockholders' equity of Healtheon for that period on a pooled basis. SEE ACCOMPANYING NOTES. F-7 CONSOLIDATED STATEMENT OF CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)(1) (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA) HEALTHEON CORPORATION
CONVERTIBLE REDEEMABLE PREFERRED CONVERTIBLE PREFERRED STOCK STOCK COMMON STOCK --------------------- --------------------- ------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ----------- -------- ----------- -------- ---------- ------- 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)...................... -- -- -- -- 2,247,606 -- 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)............. -- -- -- -- 2,936,209 -- Repayment of note receivable from officer (unaudited).............. -- -- -- -- -- -- Deferred stock compensation (unaudited)...................... -- -- -- -- -- -- Amortization of deferred stock compensation (unaudited)......... -- -- -- -- -- -- Issuance of common stock pursuant to restricted stock purchase by employees (unaudited)............ -- -- -- -- 530,000 -- ----------- -------- ----------- -------- ---------- ------- BALANCES, SEPTEMBER 30, 1998 (UNAUDITED)...................... -- $ -- -- $ -- 54,422,868 $ 5 ----------- -------- ----------- -------- ---------- ------- ----------- -------- ----------- -------- ---------- ------- TOTAL NOTE STOCKHOLDERS' ADDITIONAL RECEIVABLE DEFERRED EQUITY (NET PAID-IN FROM STOCK ACCUMULATED CAPITAL CAPITAL OFFICER COMPENSATION DEFICIT DEFICIENCY) ---------- ---------- ------------ ----------- ------------- BALANCES AT DECEMBER 31, 1997...... $ 4,502 $(349) $(2,151) $(55,689) $ (9,930) Net loss (unaudited)............... -- -- -- (35,860) (35,860) Issuance of common stock pursuant to option exercises by employees (unaudited)...................... 1,260 -- -- -- 1,260 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)................ 94,115 -- -- 6,309 54,638 Issuance of common stock for asset purchase (unaudited)............. 13,220 -- -- -- 13,220 Repayment of note receivable from officer (unaudited).............. -- 349 -- -- 349 Deferred stock compensation (unaudited)...................... 4,083 -- (4,083) -- -- Amortization of deferred stock compensation (unaudited)......... -- -- 2,050 -- 2,050 Issuance of common stock pursuant to restricted stock purchase by employees (unaudited)............ 2,465 -- -- -- 2,465 ---------- ---------- ------------ ----------- ------------- BALANCES, SEPTEMBER 30, 1998 (UNAUDITED)...................... $ 119,645 $ -- $(4,184) $(85,240) $ 30,226 ---------- ---------- ------------ ----------- ------------- ---------- ---------- ------------ ----------- -------------
- ------------- (1) Because Healtheon did not commence operations until January 1996, the ActaMed statement of convertible redeemable preferred stock and stockholders' equity (net capital deficiency) presented for the year ended December 31, 1995 represents the statement of stockholders' equity of Healtheon for that period on a pooled basis. SEE ACCOMPANYING NOTES. F-8 CONSOLIDATED STATEMENTS OF CASH FLOWS(1) (IN THOUSANDS)
HEALTHEON CORPORATION ACTAMED ------------------------------------------ CORPORATION NINE MONTHS ENDED ------------- YEARS ENDED DECEMBER YEAR ENDED 31, SEPTEMBER 30, DECEMBER 31, -------------------- -------------------- 1995(1) 1996 1997 1997 1998 ------------- --------- --------- --------- --------- (UNAUDITED) Cash flows from operating activities: Net loss................................................... $ (3,734) $ (18,606) $ (28,005) $ (21,273) $ (35,860) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............................ 359 6,366 9,319 6,937 13,488 Amortization of deferred stock compensation.............. -- -- 562 309 2,050 Warrants and preferred stock issued for services......... -- 500 119 55 -- Dividends on ActaMed's convertible redeemable preferred stock................................................... -- 2,548 2,870 2,382 890 Changes in operating assets and liabilities: Accounts receivable.................................... (36) (5,066) (806) 651 (1,819) Other assets........................................... (77) (325) (224) 122 (162) Accounts payable....................................... 49 1,139 751 (263) 2,580 Accrued compensation and other liabilities............. 516 800 345 681 3,964 Deferred revenue....................................... 1,603 3,078 (1,285) (285) 996 ------------- --------- --------- --------- --------- Net cash used in operating activities...................... (1,320) (9,566) (16,354) (10,684) (13,873) ------------- --------- --------- --------- --------- Cash flows from investing activities: Purchase of short-term investments......................... -- -- (5,300) -- (4,341) Maturities of short-term investments....................... -- -- -- -- 8,775 Increase in restricted cash................................ -- -- (867) -- -- Purchases of property and equipment........................ (464) (2,027) (2,817) (449) (5,071) Cash paid in business combination.......................... -- -- -- -- (652) Acquisition costs related to business combination.......... -- (316) -- -- -- Capitalized internally developed software costs............ -- (1,001) (291) (291) -- ------------- --------- --------- --------- --------- Net cash used in investing activities...................... (464) (3,344) (9,275) (740) (1,289) ------------- --------- --------- --------- --------- Cash flows from financing activities: Proceeds from line of credit borrowings and bridge notes... -- 30 5,395 2,000 -- Payment of line of credit borrowings....................... -- -- -- -- (2,010) 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 4,470 2,034 Proceeds from issuance of common stock, net of repurchases.............................................. 21 144 266 18 3,725 Payments on note receivable from officer................... -- -- 151 -- 349 Principal payments of capital lease obligations............ -- (218) (748) (573) (914) ------------- --------- --------- --------- --------- Net cash from financing activities......................... 6,984 11,063 34,594 5,915 3,184 ------------- --------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents....... 5,200 (1,847) 8,965 (5,509) (11,978) 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 $ 2,030 $ 4,526 ------------- --------- --------- --------- --------- ------------- --------- --------- --------- ---------
- ------------ (1) Because Healtheon did not commence operations until January 1996, the statement of cash flows presented for the year ended December 31, 1995 represents the statement of cash flows of Healtheon for that period on a pooled basis. F-9 CONSOLIDATED STATEMENTS OF CASH FLOWS(1) (CONTINUED) (IN THOUSANDS)
HEALTHEON CORPORATION ACTAMED ------------------------------------------ CORPORATION NINE MONTHS ENDED ------------- YEARS ENDED DECEMBER YEAR ENDED 31, SEPTEMBER 30, DECEMBER 31, -------------------- -------------------- 1995(1) 1996 1997 1997 1998 ------------- --------- --------- --------- --------- (UNAUDITED) Supplemental disclosure of cash flow information: Interest paid.............................................. $ 5 $ 56 $ 252 $ 154 $ 379 ------------- --------- --------- --------- --------- ------------- --------- --------- --------- --------- Supplemental schedule of noncash investing and financing activities: Equipment acquired under capital lease obligations......... $ -- $ 2,083 $ 774 $ 472 $ 2,278 ------------- --------- --------- --------- --------- ------------- --------- --------- --------- --------- Issuance of note receivable from officer for preferred stock.................................................... $ -- $ -- $ 500 $ -- $ -- ------------- --------- --------- --------- --------- ------------- --------- --------- --------- --------- Conversion of bridge notes to preferred stock.............. $ -- $ -- $ 2,000 $ 2,000 $ -- ------------- --------- --------- --------- --------- ------------- --------- --------- --------- --------- Dividends on ActaMed's convertible redeemable preferred stock.................................................... $ 724 $ -- $ -- $ -- $ -- ------------- --------- --------- --------- --------- ------------- --------- --------- --------- --------- Issuance of convertible redeemable preferred stock for business combination..................................... $ -- $ 21,000 $ -- $ -- $ -- ------------- --------- --------- --------- --------- ------------- --------- --------- --------- --------- Issuance of convertible redeemable preferred stock for asset purchase........................................... $ -- $ -- $ 8,500 $ -- $ 2,800 ------------- --------- --------- --------- --------- ------------- --------- --------- --------- --------- Issuance of common stock for asset purchase................ $ -- $ -- $ -- $ -- $ 4,900 ------------- --------- --------- --------- --------- ------------- --------- --------- --------- --------- Issuance of common stock for business combination.......... $ -- $ -- $ -- $ -- $ 8,320 ------------- --------- --------- --------- --------- ------------- --------- --------- --------- --------- Deferred stock compensation related to options granted..... $ -- $ -- $ 2,713 $ 1,101 $ 4,083 ------------- --------- --------- --------- --------- ------------- --------- --------- --------- --------- Conversion of convertible redeemable preferred and convertible preferred stock to common stock.............. $ -- $ -- $ -- $ -- $ 94,119 ------------- --------- --------- --------- --------- ------------- --------- --------- --------- ---------
- ------------ (1) Because Healtheon did not commence operations until January 1996, the statement of cash flows presented for the year ended December 31, 1995 represents the statement of cash flows of Healtheon for that period on a pooled basis. SEE ACCOMPANYING NOTES F-10 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION In May 1998, Healtheon Corporation acquired ActaMed Corporation in a merger transaction accounted for as a pooling of interests (see Note 2). ActaMed was incorporated in 1992. 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. NATURE OF OPERATIONS Healtheon is pioneering the use of the Internet to simplify workflows, decrease costs and improve the quality of patient care throughout the healthcare industry. We have designed and developed an Internet-based information and transaction platform, which we call the Healtheon Platform, that allows us to create Virtual Healthcare Networks, or VHNs, that facilitate and streamline interactions among the myriad participants in the healthcare industry. Our VHN solution includes a suite of services delivered through applications operating on our Internet-based platform. Our solution enables the secure exchange of information among disparate healthcare information systems and supports a broad range of healthcare transactions, including enrollment, eligibility determination, referrals and authorization, laboratory and diagnostic test ordering, clinical data retrieval and claims processing. We provide our own applications on the Healtheon Platform and also enable third-party applications to operate on the platform. In addition to VHNs, Healtheon provides consulting, implementation and network management services to enable our customers to take advantage of the capabilities of the Healtheon Platform. Healtheon has incurred operating losses to date and had an accumulated deficit of $85,240,000 at September 30, 1998. Our activities have been primarily financed through private placements of equity securities. We had cash, cash equivalents and short-term investments totaling $5,392,000 at September 30, 1998. As noted above and as further discussed in Note 2, Healtheon merged with ActaMed in May 1998. This merger may significantly affect our operating cash needs. We may need to raise additional capital through the issuance of debt or equity securities. There can be no assurance that we will be able to raise additional financing, or that such financing will be available on terms satisfactory to us, if at all. INTERIM FINANCIAL INFORMATION The financial information as of September 30, 1998 and for the nine months ended September 30, 1997 and 1998 is unaudited but includes all adjustments, consisting only of normal recurring adjustments, that Healtheon's management considers necessary for a fair presentation of Healtheon's operating results and cash flows for such period. Results for the nine months ended September 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 Healtheon and its wholly owned subsidiaries. All significant inter-company balances and transactions have been eliminated. F-11 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 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. Healtheon's cash, cash equivalents and short-term investments are invested in various investment-grade commercial paper, money market accounts and certificates of deposit. All of our short-term investments mature within nine months. The fair value of our cash equivalents and short-term investments is as follows (in thousands):
DECEMBER 31, -------------------- SEPTEMBER 30, 1996 1997 1998 --------- --------- ------------- (UNAUDITED) Cash equivalents: Corporate and other non-government debt securities...... $ -- $ 12,704 $ 2,808 Money market funds...................................... 5,603 3,429 1,372 --------- --------- ------ 5,603 16,133 4,180 Short-term investments: Corporate and other non-government debt securities...... -- 5,300 866 --------- --------- ------ $ 5,603 $ 21,433 $ 5,046 --------- --------- ------ --------- --------- ------
Net unrealized gains (losses) were immaterial at December 31, 1996 and 1997 and September 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 interest income. Additionally, at December 31, 1997 and September 30, 1998, we had restricted cash of $867,000, related to a letter of credit invested in a certificate of deposit at a financial institution as a security deposit for its office facilities (see Note 6). This amount is included in other assets in the accompanying consolidated balance sheets. F-12 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment are stated at cost, net of accumulated amortization and depreciation. Depreciation is computed using the straight-line method over the estimated useful life of the related asset, generally three to seven years. Leasehold improvements and equipment acquired under capital leases are amortized over the shorter of the lease term or the estimated useful life of the related asset. INTANGIBLE ASSETS Intangible assets related to software technology rights, services agreements and goodwill are amortized on a straight-line basis over three years. Intangible assets related to assembled workforce are amortized on a straight-line basis over two years. SOFTWARE DEVELOPMENT COSTS Software development costs are incurred in the development or enhancement of software utilized in providing Healtheon's business management systems and services. Software development costs incurred after the establishment of technological feasibility for each product or process are capitalized and capitalization ceases when the product or process is available for general release to customers or is put into service. Capitalized internally developed software costs were approximately $1,001,000, $291,000 and $288,000 for the years ended December 31, 1996 and 1997 and the nine months ended September 30, 1997. There were no internally developed software costs capitalized for the year ended December 31, 1995 or for the nine months ended September 30, 1998. Capitalized internally developed software costs are amortized based on the greater of the amount determined using the straight line method over the estimated useful economic life of the software or the ratio of remaining unamortized costs to current and expected future revenue from the software. Amortization expense related to our capitalized internally developed software costs included in cost of revenue was approximately $134,000 and $376,000 for the years ended December 31, 1996 and 1997. Amortization expense was approximately $268,000 and $782,000 for the nine months ended September 30, 1997 and 1998. There was no amortization expense related to ActaMed's capitalized internally developed software costs for the year ended December 31, 1995. LONG-LIVED ASSETS Healtheon continually monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets, including intangible assets, may not be recoverable. When such events or changes in circumstances are present, we assess the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. In June 1998, we evaluated the carrying value of the capitalized internally developed software in light of the changes in operations resulting from the acquisition of ActaMed by Healtheon. We determined that we expected no future cash flows to be generated by this software and, accordingly, wrote off the remaining unamortized balance of $603,000 related to capitalized internally developed software. This amount is included in the $782,000 amortization expense for the nine months ended September 30, 1998 noted above. No impairment losses were recorded for the years ended December 31, 1995, 1996 and 1997 or for the nine months ended September 30, 1997. F-13 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION Healtheon earns revenue from services and services to related parties, both of which include providing access to our network-based services and performing development and consulting services, and from licensing software. We earn network-based services revenue from fixed fee subscription arrangements, which is recognized ratably over the term of the applicable agreement, and from arrangements that are priced on a per-transaction or per-user basis, which is recognized as the services are performed. Revenue from development projects is recognized on a percentage-of-completion basis or as such services are performed, depending on the terms of the contract. Revenue from consulting services is recognized as such services are performed. Cash received in excess of revenue recognized relating to such services has been recorded as deferred revenue in the accompanying consolidated balance sheets. Revenue from services to related parties consists of services revenue attributable to United HealthCare and SmithKline Labs. To date, we have derived no significant revenue from brokers, value-added resellers or systems integrators. During the year ended December 31, 1997, we entered into agreements with two customers to manage and operate their current and expanding information technology, or IT, operations, to develop a suite of specific Internet-based commercial software applications and to assist these customers in migrating from their current IT operating environment to these new applications. We utilize our own personnel, certain outside contractors and certain personnel and facilities of the customers that are leased under contract terms to us for these services. The cost of these leased customer personnel and facilities is included as part of the total costs of the IT and development services that we billed to the customers. For the year ended December 31, 1997 and the nine months ended September 30, 1998, we recognized revenue of approximately $2,100,000 and $10,915,000 for the IT services and approximately $200,000 and $4,772,000 for the development services. Revenue recognized for IT services for the year ended December 31, 1997 and the nine months ended September 30, 1998 included amounts related to leased personnel and facilities, in total, of $1,909,000 and $8,806,000. These amounts were also included in cost of revenue for the respective periods. We recognize revenue from license fees when a noncancellable license agreement has been signed with a customer, the software product covered by the license agreement has been delivered, there are no uncertainties surrounding product acceptance, there are no significant future performance obligations, the license fees are fixed and determinable and collection of the license fees is considered probable. Our products do not require significant customization. In October 1997, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 97-2, "Software Revenue Recognition." SOP 97-2 was effective January 1, 1998 and generally requires revenue earned on software arrangements involving multiple elements such as software products, upgrades, enhancements, post-contract customer support, installation and training to be allocated to each element based on the relative fair values of the elements. There was no material change to our accounting for revenue as a result of the adoption of SOP 97-2. ActaMed entered into a national marketing and licensing agreement, or the Agreement, with International Business Machines Corporation in 1995 that granted IBM a nonexclusive, nontransferable right to market ActaMed's software and services for a total of $6,300,000. For the years ended December 31, 1995, 1996 and 1997, approximately $1,700,000, $3,400,000 and $1,200,000 of this amount F-14 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) was recognized as software license revenue upon delivery of the software. No software license revenue was recognized under this agreement for the nine months ended September 30, 1997 or 1998. In December 1996, we entered into a new agreement, or the License, to license our newly granted patent to IBM. As part of the License, IBM agreed to pay ActaMed $4,800,000 over a four-year period. Additionally, in conjunction with the License, we issued IBM a five-year warrant to purchase 282,522 shares of our common stock at a price of $7.97 per share. Because of the extended payment terms and our contentious relationship with IBM, we concluded that the license fee was not assured of collection and, accordingly, we are recognizing this revenue as the proceeds are collected. For the years ended December 31, 1996 and 1997, we recognized revenue from the License of $995,000 and $780,000. For the nine months ended September 30, 1997 and 1998, we recognized revenue from the License of $585,000 and $585,000. At December 31, 1997, amounts due from IBM of $738,000 and $1,715,000 were included in accounts receivable and other assets. At September 30, 1998, amounts due from IBM of $795,000 and $1,112,000 were included in accounts receivable and other assets. Deferred revenue at December 31, 1996 and 1997 and September 30, 1998 included $3,121,000, $2,341,000 and $1,756,000 related to the License. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value for marketable debt securities is based on quoted market prices. The carrying value of these securities approximates their fair value. The fair value of notes is estimated by discounting the future cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The carrying value of the note receivable from an officer approximated its fair value. The fair value of short-term and long-term capital lease obligations is estimated based on current interest rates available to Healtheon for debt instruments with similar terms, degrees of risk and remaining maturities. The carrying values of these obligations approximate their respective fair values. CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS Healtheon currently derives a substantial portion of its consolidated revenue from a few large customers, two of which are related parties. Two customers represented 35% and 17% of the total balance of trade accounts receivable and amounts due from related parties at December 31, 1997, and three customers represented 20%, 18% and 15% of the total balance of trade accounts receivable and amounts due from related parties at September 30, 1998. We believe that the concentration of credit risk in our trade receivables, with respect to our limited customer base, is substantially mitigated by our credit evaluation process. We do not require collateral. To date, our bad debt write-offs have not been significant. During the years ended December 31, 1996 and 1997 and the nine months ended September 30, 1998 we added approximately $41,000, $35,000 and $66,000 to our bad debt reserves. Total write-offs of uncollectible amounts were zero, $5,000 and $7,000 in these periods. 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 F-15 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) revenue. For the nine months ended September 30, 1998, four customers accounted for 27%, 22%, 21% and 20% of consolidated revenue. We operate solely within one business segment, the development and marketing of healthcare transaction and information services delivered over the Internet, private intranets or other networks. Through September 30, 1998, we had no export sales. ACCOUNTING FOR STOCK-BASED COMPENSATION Healtheon grants stock options for a fixed number of shares to employees with an exercise price equal to the fair market value of the shares at the date of grant. As permitted under Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," we account for stock option grants to employees and directors in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees." NET LOSS PER COMMON SHARE Basic net loss per common share and diluted net loss per common share are presented in conformity with SFAS No. 128, "Earnings Per Share," for all periods presented. In accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 98, common stock and convertible preferred stock issued or granted for nominal consideration prior to the anticipated effective date of our initial public offering must be included in the calculation of basic and diluted net loss per common share as if they had been outstanding for all periods presented. To date, we have not had any issuances or grants for nominal consideration. In accordance with SFAS No. 128, basic net loss per common share has been computed using the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. For the year ended December 31, 1995, the weighted-average number of shares of ActaMed reflects the effect of the exchange ratio of 0.6272. Basic pro forma net loss per common share, as presented in the statements of operations, has been computed as described above and also gives effect, under Securities and Exchange Commission guidance, to the conversion of the convertible and convertible redeemable preferred stock (using the if-converted method) from the original date of issuance. On May 19, 1998, in connection with Healtheon's acquisition of ActaMed, all outstanding shares of Healtheon's convertible preferred stock and ActaMed's convertible redeemable preferred stock were converted into an aggregate of 39,272,329 shares of common stock. There were no shares of convertible or convertible redeemable preferred stock outstanding at September 30, 1998. F-16 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 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 basic and diluted net loss per common share follows (in thousands, except per share data):
YEARS ENDED NINE MONTHS DECEMBER 31, ENDED SEPTEMBER 30, --------------------------------- ---------------------- 1995 1996 1997 1997 1998 --------- ---------- ---------- ---------- ---------- (UNAUDITED) Net loss applicable to common stockholders............. $ (4,458) $ (18,606) $ (28,005) $ (21,273) $ (35,860) --------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- ---------- Basic and diluted: Weighted-average shares of common stock outstanding........................................ 5,246 7,398 8,621 8,396 30,389 Less: Weighted-average shares subject to repurchase......................................... -- (815) (1,398) (1,377) (1,455) --------- ---------- ---------- ---------- ---------- Weighted-average shares used in computing basic and diluted net loss per common share.................... 5,246 6,583 7,223 7,019 28,934 --------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- ---------- Basic and diluted net loss per common share............ $ (.85) $ (2.83) $ (3.88) $ (3.03) $ (1.24) --------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- ---------- Pro forma: Net loss applicable to common stockholders............. $ (28,005) $ (35,860) Add: Dividends on ActaMed convertible redeemable preferred stock...................................... 2,870 890 ---------- ---------- Pro forma net loss..................................... $ (25,135) $ (34,970) ---------- ---------- ---------- ---------- Shares used above...................................... 7,223 28,934 Pro forma adjustment to reflect weighted effect of assumed conversion of convertible preferred stock.... 37,492 18,329 ---------- ---------- Shares used in computing pro forma basic and diluted net loss per common share (unaudited)................ 44,715 47,263 ---------- ---------- ---------- ---------- Pro forma basic and diluted net loss per common share (unaudited).......................................... $ (.56) $ (.74) ---------- ---------- ---------- ----------
We have excluded all convertible redeemable preferred stock, convertible preferred stock, warrants, outstanding stock options and shares subject to repurchase by Healtheon from the calculation of diluted loss per common share because all such securities are anti-dilutive for all periods presented. For the years ended December 31, 1995, 1996 and 1997, the total number of shares excluded from the calculation of diluted loss per share were 10,157,109, 36,643,084 and 51,216,689. For the nine months ended September 30, 1997 and 1998 the total number of shares excluded from the calculation of diluted loss per share were 46,893,485 and 12,687,723. See Notes 9, 10 and 11 for further information on these securities. F-17 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) COMPREHENSIVE LOSS Healtheon has no material components of other comprehensive loss and accordingly the comprehensive loss is the same as net loss for all periods presented. 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." Healtheon 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 our financial condition or results of operations. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." We are required to adopt SFAS No. 133 for the year ending December 31, 2000. SFAS No. 133 establishes methods of accounting for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. Because we currently hold no derivative financial instruments and does not currently engage in hedging activities, adoption of SFAS No. 133 is expected to have no material impact on our financial condition or results of operations. In March 1998, the American Institute of Certified Public Accountants issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires that entities capitalize certain costs related to internal use software once certain criteria have been met. We are required to implement SOP 98-1 for the year ending December 31, 1999. Adoption of SOP 98-1 is expected to have no material impact on our financial condition or results of operations. 2. BUSINESS COMBINATIONS ACQUISITION OF EDI SERVICES, INC. Effective March 31, 1996, ActaMed acquired EDI Services Inc. or EDI, a wholly-owned subsidiary of United HealthCare Corporation, in a transaction through which EDI became a wholly-owned subsidiary of ActaMed. ActaMed issued 6,488,276 shares of Series C convertible redeemable preferred stock with a fair value of $21,000,000 and incurred acquisition-related costs of approximately $316,000 in connection with the acquisition. EDI is a provider of electronic data interchange services to health care providers and has marketed its health care network product, ProviderLink, to providers of 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 under which we earn transaction fee revenue by providing certain health care information services to United HealthCare and its provider network and ProviderLink subscribers. The acquisition was accounted for as a purchase. Accordingly, the operations of EDI were included in our 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 F-18 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) 2. BUSINESS COMBINATIONS (CONTINUED) $20,957,000 of the purchase price was allocated to intangible assets, consisting principally of software technology rights, the Services and License Agreement, trademarks and goodwill. Subsequent to the issuance of the financial statements for 1996 and 1997, ActaMed changed the allocation of the purchase price associated with the acquisition of the EDI technology to decrease the amount previously expensed as in process research and development costs and increase the amount capitalized as software technology rights. The financial statements for ActaMed for the year ended December 31, 1996, have been reissued to reflect this restatement. Intangible assets arising from the acquisition of EDI at March 31, 1996 are summarized as follows (in thousands):
AMORTIZATION PERIOD --------------- Goodwill.......................................................... 3 years $ 8,012 Software technology rights........................................ 3 years 8,333 Service and License Agreement..................................... 3 years 2,855 Trademarks........................................................ 3 years 216 Other intangibles................................................. 3 years 1,541 --------- $ 20,957 --------- ---------
The following pro forma information gives effect to the acquisition of EDI as if such transaction had occurred as of the beginning of each respective year (in thousands, except per share data):
DECEMBER 31, ---------------------- 1995 1996 ---------- ---------- (UNAUDITED) Net revenue........................................................... $ 6,330 $ 12,031 ---------- ---------- ---------- ---------- Net loss applicable to common stockholders............................ $ (11,475) $ (20,492) ---------- ---------- ---------- ---------- Basic and diluted net loss per common share........................... $ (2.19) $ (3.11) ---------- ---------- ---------- ----------
ACQUISITION OF ACTAMED CORPORATION On May 19, 1998, Healtheon completed its acquisition of ActaMed, a Georgia corporation that develops and markets an integrated health care network, in a transaction that has been accounted for as a pooling of interests. Accordingly, the financial information presented reflects the combined financial position and operations of Healtheon and ActaMed for all dates and periods presented. Healtheon issued 23,271,355 shares of its common stock in exchange for all of the outstanding shares of common and convertible redeemable preferred stock of ActaMed. Healtheon also assumed all outstanding stock options and warrants to acquire 3,383,011 shares of ActaMed capital stock, after giving effect to the exchange ratio. F-19 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 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 ended immediately prior to the acquisition) were as follows (in thousands, unaudited):
FOUR MONTHS YEARS ENDED DECEMBER 31, ENDED --------------------------------- APRIL 30, 1995 1996 1997 1998 --------- ---------- ---------- ------------ Revenue: Healtheon...................................................... $ -- $ 1,200 $ 3,199 $ 6,405 ActaMed........................................................ 2,175 9,813 10,191 6,690 --------- ---------- ---------- ------------ $ 2,175 $ 11,013 $ 13,390 $ 13,095 --------- ---------- ---------- ------------ --------- ---------- ---------- ------------ Net loss: Healtheon...................................................... $ -- $ (8,543) $ (13,979) $ (6,664) ActaMed........................................................ (3,734) (10,063) (14,026) (6,186) --------- ---------- ---------- ------------ $ (3,734) $ (18,606) $ (28,005) $ (12,850) --------- ---------- ---------- ------------ --------- ---------- ---------- ------------
There were no significant intercompany transactions between the two companies or significant conforming accounting adjustments. ACQUISITION OF METIS, LLC On August 25, 1998, Healtheon acquired Metis, LLC, a provider of Internet/intranet strategic consulting, design and development of Internet-based applications and content for the healthcare industry enabling clinical integration and managed care process improvement. The acquisition has been accounted for using the purchase method of accounting and, accordingly, the purchase price has been allocated to the tangible and intangible assets acquired and the liabilities assumed on the basis of their respective fair values on the acquisition date. Metis' results of operations have been included in the consolidated financial statements from its date of acquisition. Healtheon issued 1,600,000 shares of its common stock with a fair market value of $8,320,000. Of these shares, 476,548 shares will be issued to employees under restricted stock purchase agreements subject to a lapsing right of repurchase, at Healtheon's option, over the respective vesting periods. In addition, we made a cash payment of $652,000, assumed liabilities of approximately $300,000 and incurred other acquisition related expenses, consisting primarily of legal and other professional fees, of approximately $100,000. The total purchase price was approximately $9,400,000. Approximately $300,000 of the purchase price was allocated to accounts receivable and certain assets; approximately $1,400,000 of the purchase price was allocated to the assembled workforce of Metis and will be amortized over two years; and the remaining $7,700,000 of the purchase price was allocated to goodwill and will be amortized over three years. F-20 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) 3. SERVICES AGREEMENT WITH SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. Effective December 31, 1997, Healtheon entered into a series of agreements with SmithKline Beecham Clinical Laboratories, Inc., or SmithKline, to outsource the network connection between their customers and SmithKline laboratories. In connection with this transaction, SmithKline and Healtheon entered into a five-year Services Agreement under which we will earn transaction fee revenue by providing certain health care information services to SmithKline and its provider customers. As part of that transaction, we 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 Healtheon for $2,000,000 in cash and 2,317,913 shares of Series D convertible redeemable preferred stock valued at $8,500,000. In March and June 1998, the assets for the remaining regions of the country were transferred to Healtheon and we paid the remaining purchase price of $7,700,000 through the issuance of 763,548 shares of our Series D convertible redeemable preferred stock in March and 1,336,209 shares of our common stock in June. The value of the services agreement and the SCAN software license totaled $14,774,000, and the value of the computer workstations totaled $3,426,000. SmithKline determined there was substantial benefit to their existing customers and potential marketing advantages in attracting new customers, if the SCAN software was upgraded to a new technology platform. Accordingly, in 1998 SmithKline entered into a development agreement with Healtheon to upgrade the technology. Payments to Healtheon are based upon achieving certain milestones in the development effort. At September 30, 1998 we had not achieved any milestones. Accordingly, no development revenue had been recognized under this development agreement. 4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following (in thousands):
DECEMBER 31, -------------------- 1996 1997 --------- --------- SEPTEMBER 30, 1998 ------------- (UNAUDITED) Computer equipment......................................... $ 3,677 $ 6,238 $ 12,458 Office equipment, furniture and fixtures................... 1,185 1,237 2,885 Purchased software for internal use........................ 1,001 1,240 1,852 Leasehold improvements..................................... 303 328 1,604 --------- --------- ------------- 6,166 9,043 18,799 Less accumulated depreciation and amortization............. (1,632) (3,543) (7,523) --------- --------- ------------- Property and equipment, net................................ $ 4,534 $ 5,500 $ 11,276 --------- --------- ------------- --------- --------- -------------
Included in property and equipment at December 31, 1996 and 1997 and September 30, 1998 were assets acquired under capital lease obligations with a cost of approximately $2,302,000, $3,076,000 and $5,354,000. Accumulated depreciation related to the assets acquired under capital leases totaled $319,000, $1,174,000 and $2,176,000 at December 31, 1996 and 1997 and September 30, 1998. F-21 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) 5. INTANGIBLE ASSETS Intangible assets consist of the following (in thousands):
DECEMBER 31, AMORTIZATION ---------------------- PERIOD 1996 1997 ------------ ---------- ---------- SEPTEMBER 30, 1998 ------------- (UNAUDITED) Services agreements...................... 3 years $ 2,855 $ 2,855 $ 2,855 Software technology rights............... 3 years 8,333 17,664 23,107 Internally developed software............ 3 years 1,001 1,292 -- Trademarks............................... 3 years 216 216 216 Goodwill................................. 3 years 8,012 8,012 15,668 Other.................................... 2-3 years 1,541 1,541 2,924 ---------- ---------- ------------- 21,958 31,580 44,770 Less accumulated amortization............ (5,403) (12,812) (21,028) ---------- ---------- ------------- $ 16,555 $ 18,768 $ 23,742 ---------- ---------- ------------- ---------- ---------- -------------
6. COMMITMENTS Healtheon 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. Approximately $2,900,000 and $5,135,000 had been utilized under these lease lines through December 31, 1997 and September 30, 1998. At September 30, 1998, approximately $1,266,000 was available for future utilization under these lease lines. This amount included approximately $901,000 that was repaid under the terms of a revolving lease line and is thus again available for future utilization. The arrangements are secured by the property and equipment subject to the leases. The term of the leases is generally three years and the interest rates implicit in the leases range from 16.9% to 20.2% per annum. Information on payments due under these lease lines is included in the table below under "Capital Leases." We lease our headquarters and other office facilities under operating lease agreements that expire at various dates through 2008. Total rent expense for all operating leases was approximately $391,000, $953,000, $1,646,000, $1,165,000 and $1,616,000 for the years ended December 31, 1995, 1996 and 1997 and the nine months ended September 30, 1997 and 1998. These amounts are net of sublease income from a related party of approximately $30,000, $68,000, $58,000, $42,000 and $43,000. Future minimum lease F-22 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) 6. COMMITMENTS (CONTINUED) commitments under noncancellable lease agreements at December 31, 1997 were as follows (in thousands):
OPERATING LEASES CAPITAL 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, Healtheon borrowed $2,000,000 from certain stockholders in the form of 6% convertible promissory notes in contemplation of the Series C convertible preferred stock offering. These notes were converted into 800,000 shares of Series C convertible preferred stock upon the closing of that offering. Warrants to purchase 61,947 shares of Series B convertible preferred stock were issued in connection with the Notes (see Note 10). In July 1997, in consideration of 250,000 shares of Series B convertible preferred stock issued to an officer, we received a one-year, full-recourse, noninterest-bearing promissory note for $500,000. At December 31, 1997, $349,000 remained outstanding under the note. At September 30, 1998, the note had been paid in full. In February 1998, we entered into a $2,000,000 line of credit agreement with a stockholder. We borrowed $1,000,000 under the agreement, which was repaid with interest at 10% per annum in May 1998. 8. LINES OF CREDIT In September 1997, Healtheon entered into a line of credit agreement with a bank that allows us to borrow up to $2,101,000. Amounts borrowed under this agreement bear interest at the bank's prime rate (8.5% at December 31, 1997 and September 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, and expires on September 5, 2000. The amount outstanding is collateralized by certain assets. At December 31, 1997 and September 30, 1998, $1,415,000 was outstanding under the agreement. F-23 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) 8. LINES OF CREDIT (CONTINUED) In December 1997, we entered into a loan agreement with a bank that allowed us to borrow up to $2,250,000. Amounts borrowed under this loan agreement bear interest at the bank's prime rate (8.5% at December 31, 1997 and September 30, 1998). The loan was personally guaranteed by a stockholder until the acquisition of ActaMed in May 1998. In May 1998, concurrent with the removal of the stockholder guarantee, the interest rate was increased to the bank's prime rate plus 1.5%. Interest is payable monthly with payments commencing on January 31, 1998. At December 31, 1997, $2,000,000 was outstanding under the loan agreement. The principal balance of the loan was repaid in full in August 1998. 9. CONVERTIBLE REDEEMABLE PREFERRED STOCK A summary of ActaMed's 8% cumulative convertible redeemable preferred stock is as follows.
DECEMBER 31, -------------------------------------------------------- 1996 1997 --------------------------- --------------------------- ISSUED ISSUED SHARES AND LIQUIDATION AND LIQUIDATION AUTHORIZED OUTSTANDING PREFERENCE OUTSTANDING PREFERENCE ------------ ------------ ------------- ------------ ------------- Series A............. 5,519,912 5,519,912 $ 9,825,000 5,519,912 $ 10,458,000 Series B............. 2,162,759 2,162,759 7,614,000 2,162,759 8,171,000 Series C............. 6,488,276 6,488,276 22,257,000 6,488,276 23,936,000 Series D............. 2,317,913 -- -- 2,317,913 8,500,000 ------------ ------------ ------------- ------------ ------------- 16,488,860 14,170,947 $ 39,696,000 16,488,860 $ 51,065,000 ------------ ------------ ------------- ------------ ------------- ------------ ------------ ------------- ------------ -------------
In March 1998, an additional 763,548 shares of Series D convertible redeemable preferred stock were issued in connection with the asset acquisition from SmithKline Labs (see Note 3). Dividends on each Series were cumulative whether or not declared and are shown as a charge against income in the accompanying financial statements. On May 19, 1998, in connection with the acquisition of ActaMed by Healtheon, the convertible redeemable preferred stockholders waived payment of all accrued and unpaid dividends. Preferred holders voted generally on an as-if converted basis. In addition, a majority approval of the four Series was required to approve certain transactions. The Series A, B, C and D cumulative convertible redeemable preferred stockholders were entitled to receive, upon liquidation, an amount per share equal to the issuance price, plus all accrued but unpaid dividends. Common stockholders would then have received $5,000,000. Any remaining proceeds would then have been distributed pro rata to the stockholders, subject only to the Series A holders' right to receive sufficient funds to provide a 20% return on their original investment. Each Series was redeemable at up to one-third of the originally issued shares per year commencing in years six, seven and eight after the issue date at a redemption price equal to the issue price plus all accrued but unpaid dividends. On May 19, 1998, all outstanding shares of convertible redeemable preferred stock were converted into 17,252,408 shares of common stock in connection with the acquisition of ActaMed by Healtheon. F-24 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) 10. STOCKHOLDERS' EQUITY CONVERTIBLE PREFERRED STOCK Healtheon was authorized to issue 48,020,000 shares of convertible preferred stock, designated in series. A summary of convertible preferred stock was as follows:
DECEMBER 31, -------------------------------------------------------- 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 Healtheon's acquisition of ActaMed. Concurrently with the conversion, all outstanding warrants to purchase Series B preferred stock were converted into warrants to purchase the same number of shares of common stock. Series A, B, C and D convertible preferred stockholders were entitled to noncumulative dividends of $0.03375, $0.135, $0.16875 and $0.351, respectively, per share per annum. No dividends were declared through the date of conversion. The Series A, B, C and D convertible preferred stockholders were entitled to receive, upon liquidation, an amount per share equal to the issuance price, plus all declared but unpaid dividends. The Series A, B, C and D convertible preferred stockholders had voting rights equal to the common shares issuable upon conversion. PREFERRED STOCK In July 1998, the Board of Directors approved a resolution authorizing Healtheon to issue up to 5,000,000 shares of preferred stock, to be effective upon the effective date of our initial public offering. WARRANTS In November 1996, Healtheon issued a warrant to a venture capital investor to purchase 1,000,000 shares of Series B convertible preferred stock at an exercise price of $2.00 per share for services rendered by the investor on Healtheon's behalf. A then partner of the venture capital firm assumed the role of President and Chief Executive Officer for Healtheon from our inception through June 1997. The warrant was immediately exercisable and expires three years from the date of issuance. We recorded a charge of $500,000 representing the fair value of the warrant issued and services received based on a valuation obtained from an independent appraiser utilizing a modified Black-Scholes option pricing model. This F-25 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) 10. STOCKHOLDERS' EQUITY (CONTINUED) warrant was outstanding at December 31, 1997 and in May 1998 was converted to a warrant to purchase common stock. It remained outstanding at September 30, 1998. In November 1996, we granted a warrant to one of our directors to purchase 1,000,000 shares of Series B convertible preferred stock at an exercise price of $2.00 per share, the fair value of Series B convertible preferred stock at the date of issuance. The warrant vests over a period of 18 months from the date of issuance. The term of the warrant is three years. This warrant was outstanding at December 31, 1997 and was exercised in full in May 1998. In December 1996, we issued a warrant to a customer to purchase 282,522 shares of common stock at a price of $7.97 per share. The warrant expires in December 2001. This warrant was outstanding at September 30, 1998. In July 1997, we issued a warrant to an officer, in connection with his employment, to purchase 750,000 shares of Series B convertible preferred stock at an exercise price of $2.00 per share, the fair value of Series B convertible preferred stock at the date of issuance. The warrant expires three years from issuance, and shares purchased under the warrant are subject to repurchase by Healtheon, at our option, upon termination of employment. Shares under the warrant vest ratably over a period of two years from the date of grant. This warrant was outstanding at December 31, 1997 and in May 1998 was converted to a warrant to purchase common stock. It remained outstanding at September 30, 1998. In July 1997, we issued warrants to purchase a total of 61,947 shares of Series B convertible preferred stock to certain investors in connection with a bridge financing. The warrants expire four years from issuance and are exercisable at $2.00 per share. The value of these warrants, approximately $64,000, was expensed as a cost of financing. All of these warrants were outstanding at December 31, 1997. In May 1998, warrants to purchase 17,229 shares of Series B convertible preferred stock were exercised and the remainder of the warrants, which were outstanding at September 30, 1998, were converted to warrants to purchase 44,718 shares of common stock. At December 31, 1997 we had reserved 2,811,947 shares of our Series B preferred stock and 282,522 shares of our common stock 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 September 30, 1998, we had reserved 2,077,240 shares of our common stock for issuance upon exercise of the outstanding warrants for common stock. F-26 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) 10. STOCKHOLDERS' EQUITY (CONTINUED) In December 1998, as part of a service agreement with a customer, we issued to the customer a warrant to purchase 500,000 shares of common stock with an exercise price of $10.40 per share. (See Note 14). 11. STOCK-BASED COMPENSATION STOCK OPTION PLANS Under the 1996 Stock Plan, or the 1996 Plan, which was adopted in February 1996, the Board of Directors may grant options to purchase common stock or issue common stock subject to a restricted stock purchase agreement to eligible participants. At December 31, 1997, a total of 9,000,000 shares had been reserved under the 1996 Plan. In March 1998, the Board of Directors and the stockholders approved an increase in the reserve of 1,000,000 shares. In July 1998, the Board of Directors approved, subject to stockholder approval, an additional increase in the reserve of 5,000,000 shares to a total of 15,000,000 shares reserved, plus annual increases equal to the lesser of 5% of the outstanding common shares or a lesser amount determined by the Board of Directors. Options granted may be either incentive stock options or nonstatutory stock options and are exercisable within the times or upon the events determined by the Board of Directors as specified in each option agreement. Options vest over a period of time as determined by the Board of Directors, generally four years. The term of the 1996 Plan is ten years. At December 31, 1997 and September 30, 1998, 274,166 and 1,715,853 shares remained available for future grant under the 1996 Plan. In connection with the acquisition of ActaMed, Healtheon assumed all the outstanding options issued under the ActaMed stock option plans, after the application of the exchange ratio, and reserved 3,100,489 shares of common stock for issuance upon exercise of the assumed options. No further options can be granted under these plans. At the time of the acquisition, options for 2,717,269 shares were fully vested. The remainder of the shares vest based upon annual cliffs over a five-year period from the date of grant. During the years ended December 31, 1996 and 1997 and the nine-month period ended September 30, 1998, we issued approximately 1,806,000, 850,000 and 530,000 shares of common stock subject to restricted stock purchase agreements to employees for cash. The common stock is subject to repurchase at the original exercise price until vested, at our option, 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 September 30, 1998, approximately 1,660,000, 1,430,000 and 1,501,000 shares, respectively, were subject to repurchase. F-27 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) 11. STOCK-BASED COMPENSATION (CONTINUED) The following table summarizes stock option activity:
WEIGHTED-AVERAGE NUMBER OF EXERCISE PRICE PER SHARES SHARE ----------------- ------------------- ACTAMED CORPORATION Outstanding at January 1, 1995.............................................. 4,223,214 $ .34 Granted................................................................... 856,000 .91 Exercised................................................................. (1,071,250) .02 Canceled.................................................................. (62,750) .83 ----------------- Options outstanding at December 31, 1995.................................... 3,945,214 $ .55 ----------------- ----------------- HEALTHEON CORPORATION Options outstanding at December 31, 1995 (reflecting the exchange ratio of .6272).................................................................... 2,474,438 $ .88 Granted................................................................... 3,004,384 .54 Exercised................................................................. (300) .05 Canceled.................................................................. (233,907) .78 ----------------- Options outstanding at December 31, 1996.................................... 5,244,615 .68 Granted................................................................... 5,394,008 .73 Exercised................................................................. (547,844) .16 Canceled.................................................................. (890,528) .49 ----------------- Options outstanding at December 31, 1997.................................... 9,200,251 .72 Granted (unaudited)....................................................... 4,756,006 4.47 Exercised (unaudited)..................................................... (2,247,606) .59 Canceled (unaudited)...................................................... (522,178) 1.01 ----------------- Options outstanding at September 30, 1998 (unaudited)....................... 11,186,473 $ 2.33 ----------------- -----------------
ACTAMED CORPORATION HEALTHEON CORPORATION --------------- --------------------------------------- NINE MONTHS YEAR ENDED YEARS ENDED ENDED DECEMBER 31, DECEMBER 31, SEPTEMBER 30, --------------- -------------------- ----------------- 1995 1996 1997 1998 --------------- --------- --------- ----------------- (UNAUDITED) Weighted-average fair value of options granted...................... $ .28 $ .15 $ .18 $ .75 --- --- --- --- --- --- --- ---
F-28 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 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 REMAINING WEIGHTED- WEIGHTED- CONTRACTUAL AVERAGE AVERAGE LIFE NUMBER EXERCISE EXERCISE PRICES NUMBER OUTSTANDING EXERCISE PRICE (IN YEARS) EXERCISABLE 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 ---------- ---------- ---------- ----------
We recorded deferred stock compensation of approximately $2,713,000 and $4,083,000 during the year ended December 31, 1997 and the nine months ended September 30, 1998, respectively. These amounts represented the difference between the exercise price and the deemed fair value of our common stock on the date such stock options were granted. We recorded amortization of deferred stock compensation of approximately $562,000 and $2,050,000 during these periods based on a graded vesting method. At September 30, 1998, we had a total of approximately $4,184,000 remaining to be amortized on a graded vesting method over the corresponding vesting period of each respective option, generally four years. PRO FORMA INFORMATION We have elected to follow APB No. 25 and related interpretations in accounting for 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 our employees equals the market price of the underlying stock on the date of grant. Pro forma information regarding net loss is required by SFAS No. 123 and has been determined as if employee stock options granted subsequent to December 31, 1994 were accounted for under the fair value method of SFAS No. 123. The fair value for these options was estimated at the date of grant using the minimum value method with the following weighted-average assumptions for the years ended December 31, 1995, 1996 and 1997 and the nine months ended September 30, 1998: risk-free interest rate F-29 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) 11. STOCK-BASED COMPENSATION (CONTINUED) of approximately 6.2%, 6.0%, 6.0% and 5.4%; a weighted-average expected life of the option of 5.0 years, 4.3 years, 4.2 years and 3.5 years; and a dividend yield of zero for all periods.
HEALTHEON CORPORATION ACTAMED ------------------------------------ CORPORATION ------------ YEARS ENDED NINE MONTHS YEAR ENDED DECEMBER 31, ENDED DECEMBER 31, ---------------------- SEPTEMBER 30 1995 1996 1997 1998 ------------ ---------- ---------- ------------ (UNAUDITED) Net loss applicable to common stockholders (in thousands): As reported................................................ $ (4,458) $ (18,606) $ (28,005) $ (35,860) ------------ ---------- ---------- ------------ ------------ ---------- ---------- ------------ Pro forma.................................................. $ (4,488) $ (18,695) $ (28,173) $ (36,892) ------------ ---------- ---------- ------------ ------------ ---------- ---------- ------------ Basic and diluted net loss per common share: As reported................................................ $ (.85) $ (2.83) $ (3.88) $ (1.24) ------------ ---------- ---------- ------------ ------------ ---------- ---------- ------------ Pro forma.................................................. $ (.86) $ (2.84) $ (3.90) $ (1.28) ------------ ---------- ---------- ------------ ------------ ---------- ---------- ------------
In September 1998, the Board of Directors approved and in October 1998, the stockholders also approved the adoption of Healtheon's 1998 Employee Stock Purchase Plan, or the 1998 Purchase Plan, to be effective on the effective date of our initial public offering. A total of 1,000,000 shares of common stock has been reserved for issuance under the 1998 Purchase Plan, plus annual increases equal to the lesser of 500,000 shares, 0.5% of the outstanding common shares or a lesser amount determined by the Board of Directors. 12. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax F-30 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) 12. INCOME TAXES (CONTINUED) purposes. Significant components of Healtheon's deferred tax assets (liabilities) were as follows (in thousands):
DECEMBER 31, -------------------- 1996 1997 --------- --------- Deferred tax assets: Net operating loss carryforwards....................................... $ 7,537 $ 14,263 Intangible assets...................................................... 1,580 3,688 Research and development tax credit.................................... 561 1,014 Reserves and accruals not currently deductible......................... 227 308 --------- --------- Total deferred tax assets................................................ 9,905 19,273 Valuation allowance...................................................... (9,545) (18,931) --------- --------- Net deferred tax assets.................................................. 360 342 --------- --------- Deferred tax liabilities Depreciation........................................................... (31) (45) Capitalized software development costs................................. (329) (297) --------- --------- Total deferred tax liabilities........................................... (360) (342) --------- --------- Net deferred tax assets and liabilities.................................. $ -- $ -- --------- --------- --------- ---------
A valuation allowance equal to 100% of the net deferred tax assets has been established because of the uncertainty of realization of the deferred tax assets due to our lack of earnings history. The valuation allowance for deferred tax assets increased by $6,580,000 and $9,386,000 during the years ended December 31, 1996 and 1997. At December 31, 1997, we 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 our net operating loss carryforwards and tax credit carryforwards may be subject to an annual limitation regarding their utilization against taxable income in future periods. A portion of these carryforwards may expire before becoming available to reduce future income tax liabilities. 13. RELATED PARTY TRANSACTIONS Healtheon has two customers that are significant stockholders of Healtheon. We entered into a Development Agreement with a partnership controlled by the former Chairman of the Board of Directors of ActaMed. Pursuant to this agreement, we granted the partnership exclusive licenses to use ActaMed's technology for industries other than the health care industry. Under the agreement, we will receive a commercial royalty on the partnership's gross receipts. If we desire in the F-31 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) 13. RELATED PARTY TRANSACTIONS (CONTINUED) future to expand to other industries, the partnership must either develop that industry in a defined time period or rights to that industry revert to Healtheon. The agreement expires December 3, 1998 and to date no fees have been paid to Healtheon under this agreement. We share office space and provide administrative support and network resources to a company controlled by a member of the Board of Directors. Amounts reimbursed for the shared facilities and administrative support totaled approximately $62,000, $58,000, $46,000, $36,000 and $51,000 for the years ended December 31, 1995, 1996, and 1997 and the nine months ended September 30, 1997 and 1998. Approximately $211,000, $187,000, $78,000 and $41,000 was reimbursed during the years ended December 31, 1995, 1996 and 1997 and the nine months ended September 30, 1997 for the use of the network maintained by Healtheon. No income for the use of the network by the related party was recognized for the nine months ended September 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 were included in other current assets in the accompanying consolidated balance sheets. There were no amounts due from the related party at September 30, 1998. 14. SUBSEQUENT EVENTS (UNAUDITED) From October through December 1998, Healtheon granted to employees options to purchase common stock and issued shares of common stock under restricted stock purchase agreements equal to a total of 1,518,257 shares of common stock at an exercise or purchase price of $3.55 per share. We estimate that we will record additional deferred stock compensation of approximately $1,400,000 with regard to these grants. On October 20, 1998, we offered our employees who were granted options between July 1998 through October 1998 the ability to cancel their original option grant in exchange for a new option agreement with a new vesting start date and option price of $3.55 per share. A total of 3,380,200 option shares with exercise prices of $4.50, $6.30, $7.00 and $8.00 were eligible to be repriced. A total of 2,057,950 option shares were cancelled and reissued. In addition, on December 14, 1998, 455,000 shares of common stock issued in July 1998 pursuant to restricted stock purchase agreements with purchase prices of $4.55 to $7.00 per share were rescinded. We estimate that we will record additional deferred stock compensation of approximately $2,700,000 as a result of this repricing. In December 1998, we issued to a customer a warrant to purchase 500,000 shares of common stock at an exercise price of $10.40 per share. In October 1998, the Board of Directors authorized 8,285,007 shares of convertible preferred stock and designated all of these shares as Series A. In November 1998, we issued 7,683,341 shares of Series A convertible preferred stock for $46,100,000 of cash proceeds. The Series A convertible preferred stockholders are entitled to non-cumulative dividends of $.405 per share per annum, and liquidation rights per share equal to the issuance price plus all declared but unpaid dividends. Each share of Series A preferred stock is convertible into one share of common stock. The Series A preferred stock has voting rights equal to the common stock issuable upon conversion. The Series A preferred stock will convert to common stock effective upon the effective date of our initial public offering. F-32 HEALTHEON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) 14. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED) Also in October 1998, the Board of Directors approved an increase in the number of shares of common stock authorized for issuance to 150,000,000 shares. In January 1998, Healtheon and SmithKline Labs entered into a services agreement under which Healtheon will provide certain electronic laboratory results delivery services to approximately 20,000 provider sites, in addition to the sites currently served through the SCAN service. In addition, in January 1999, the two companies completed an asset purchase agreement under which Healtheon purchased certain assets currently used by SmithKline Labs to provide these laboratory results delivery services in exchange for $2,000,000 in cash and 1,833,333 shares of Healtheon's common stock with a value of $11,000,000. F-33 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-34 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-35 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-36 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-37 EDI SERVICES GROUP (A DIVISION OF UNITED HEALTHCARE CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 1995 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-38 EDI SERVICES GROUP (A DIVISION OF UNITED HEALTHCARE CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 1995 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-39 [LOGO] THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS (SUBJECT TO COMPLETION) ISSUED FEBRUARY 4, 1999 5,000,000 SHARES [LOGO] COMMON STOCK ----------------- HEALTHEON CORPORATION IS OFFERING SHARES OF ITS COMMON STOCK. THIS IS OUR INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $6 AND $7 PER SHARE. ------------------- WE HAVE APPLIED TO LIST OUR COMMON STOCK ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "HLTH." ------------------- INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5. ----------------- PRICE $ A SHARE -----------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS COMPANY --------- ------------- ----------- PER SHARE............................................. $ $ $ TOTAL................................................. $ $ $
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. HEALTHEON HAS GRANTED THE UNDERWRITERS THE RIGHT TO PURCHASE UP TO AN ADDITIONAL 750,000 SHARES OF COMMON STOCK TO COVER OVER-ALLOTMENTS. MORGAN STANLEY & CO. INCORPORATED EXPECTS TO DELIVER THE SHARES TO PURCHASERS ON , 1999. ------------------- MORGAN STANLEY DEAN WITTER GOLDMAN, SACHS INTERNATIONAL HAMBRECHT & QUIST VOLPE BROWN WHELAN & COMPANY , 1999 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............................. $ 9,730 NASD filing fee................................................................. 4,000 Nasdaq National Market listing fee.............................................. 95,000 Printing and engraving expenses................................................. 500,000 Professional fees and expenses.................................................. 1,650,000 Blue Sky fees and expenses...................................................... 5,000 Transfer agent fees............................................................. 5,000 Miscellaneous................................................................... 31,270 ------------ Total......................................................................... $ 2,300,000
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law permits a corporation to include in its charter documents, and in agreements between the corporation and its directors and officers, provisions expanding the scope of indemnification beyond that specifically provided by the current law. Article V of the Registrant's Restated Certificate of Incorporation provides for the indemnification of directors to the fullest extent permissible under Delaware law. Article VI of the Registrant's Bylaws provides for the indemnification of officers and directors and allows the Registrant to indemnify other employees and third parties acting on behalf of the Registrant if such person acted in good faith and in a manner reasonably believed to be in and not opposed to the best interest of the Registrant, and, with respect to any criminal action or proceeding, the indemnified party had no reason to believe his or her conduct was unlawful. The Registrant intends to enter into indemnification agreements with its directors and executive officers, in addition to indemnification provided for in the Registrant's Bylaws, and intends to enter into indemnification agreements with any new directors and executive officers in the future. The Registrant intends to obtain directors' and officers' insurance providing indemnification for certain of the Registrant's directors, officers and employees for certain liabilities. Reference is also made to Section 7 of the Underwriting Agreement to be filed as Exhibit 1.1 to the Registration Statement for information concerning the Underwriters' obligation to indemnify the Registrant and its officers and directors in certain circumstances. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES (a) From its founding in December 1995, through December 31, 1998, the Registrant has issued and sold the following unregistered securities: (1) Between January 26 and August 15, 1996, the Registrant sold an aggregate of 10,285,000 shares of Series A preferred stock to 22 investors at a purchase price of $.50 per share, which was paid in cash. II-1 (2) On January 26, 1996, the Registrant sold 1,000,000 shares of common stock to four investors at a purchase price of $.05 per share, which was paid in cash. (3) On July 8, 1996, the Registrant sold 10,000 shares of Series A preferred stock valued at $5,000 to a consulting firm for services rendered. (4) Between October 1 and November 27, 1996, the Registrant sold an aggregate of 3,000,000 shares of Series B preferred stock to five investors at a purchase price of $2.00 per share, which was paid in cash. (5) On November 1, 1996, the Registrant issued warrants to purchase (i) 1,000,000 shares of Series B preferred stock with an exercise price of $2.00 per share to KPCB VII Associates, L.P., in consideration of services rendered by David Schnell as President and Chief Executive Officer with a value of $504,900 and (ii) 1,000,000 shares of Series B preferred stock with an exercise price of $2.00 per share to Clark Ventures as an incentive for James H. Clark to continue to provide services. (6) On July 1, 1997, the Registrant issued warrants to purchase a total of 61,947 shares of Series B preferred stock with an exercise price of $2.00 per share to five investors pursuant to a bridge loan financing. (7) Between July 1 and July 27, 1997, the Registrant sold an aggregate of 2,600,000 shares of Series C preferred stock to nine investors at a purchase price of $2.50 per share, in consideration of cash and cancellation of indebtedness incurred in connection with a bridge loan financing. (8) Between July 7 and July 16, 1997, the Registrant sold 25,000 shares of Series B preferred stock to the same consulting firm referred to in (3) above at a purchase price of $2.00 per share for services rendered. (9) On July 11, 1997, the Registrant sold 10,000 shares of Series A preferred stock valued at $5,000 to the same consulting firm referred to in (3) above for services rendered. (10) On July 11, 1997, the Registrant sold 250,000 shares of Series B preferred stock to W. Michael Long at a purchase price of $2.00 per share, paid with an amount of cash equal to the par value of the purchased shares and with a promissory note that has subsequently been paid in full for the remainder. (11) On July 11, 1997, the Registrant issued a warrant to purchase 750,000 shares of Series B preferred stock with an exercise price of $2.00 per share to W. Michael Long as an incentive to continue to provide services. (12) On July 22, 1997, the Registrant sold 15,000 shares of Series B preferred stock to Hugh Reinhuff, a former Director, at a purchase price of $2.00 per share, which was paid in cash. (13) Between October 17 and December 19, 1997, the Registrant sold an aggregate of 4,807,692 shares of Series D preferred stock to 13 investors at a purchase price of $5.20 per share, which was paid in cash. (14) On May 1, 1998, the Registrant issued 1,000,000 shares of Series B preferred stock to Clark Ventures and 17,229 shares of Series B preferred stock to James H. Clark upon the exercise of warrants with exercise prices of $2.00 per share which were paid in cash. (15) On May 19, 1998, in connection with the acquisition of ActaMed Corporation, 22,019,921 shares of the Registrant's preferred stock were converted into common stock on a one-for-one basis and warrants to purchase 1,794,718 shares of the Registrant's preferred stock were exchanged for warrants to purchase an equal number of shares of common stock. 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 3,100,489 shares of Registrant's common stock. (17) On May 19, 1998, the Registrant issued 23,271,355 shares of its common stock to former shareholders of ActaMed in connection with the acquisition of ActaMed Corporation ("ActaMed") in exchange for all of the issued and outstanding shares of capital stock of ActaMed. (18) On May 19, 1998, in connection with the acquisition of ActaMed, the Registrant assumed a warrant held by IBM to purchase shares of ActaMed capital stock which is now exercisable for an aggregate of 282,522 shares of Healtheon common stock with an exercise price of $7.97 per share. (19) On June 26, 1998, the Registrant sold 1,336,209 shares of common stock valued at $3.67 to SmithKline Labs in consideration for certain assets and licenses relating to SmithKline Labs. (20) Since January 1996, the Registrant has granted options to purchase 15,985,609 shares of Registrant's common stock to employees pursuant to the Company's 1996 Stock Plan. (21) From July 6, 1996 through December 31, 1998, the Company issued an aggregate of 6,108,770 shares of common stock as the result of exercises of options or stock purchase rights for aggregate consideration, in the form of cash and a promissory note, of approximately $4.1 million. (22) On August 25, 1998, the Registrant issued 1,600,000 shares of common stock valued at $12.8 million to Metis, LLC in connection with acquisition of certain assets of Metis, LLC of which 476,548 shares will be issued to employees pursuant to restricted stock purchase agreements subject to a lapsing right of repurchase, at the option of the Company, over the agreements' respective vesting periods. (23) On December 15, 1998 the Registrant issued to Beech Street Corporation a warrant to Purchase 500,000 shares of the Registrant's common stock at an exercise price of $10.40 per share as part of a service agreement. (24) On November 3 and November 6, 1998, the Registrant sold an aggregate of 7,683,341 shares of Series A preferred stock to 21 investors at a purchase price of $6.00 per share, which was paid in cash. (25) On January 18, 1999, the Registrant sold an aggregate of 1,833,333 shares of its common stock to SmithKline Labs pursuant to an Asset Purchase Agreement. (b) There were no underwriters, brokers or finders employed in connection with any of the transactions set forth above. (c) The transactions referred to in numbers 16-18 and 22 were exempt from registration pursuant to the provisions of Section 3(a)(10) of the Securities Act. The sales of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, or, with respect to issuances to employees, Rule 701 promulgated under Section 3(b) of the Securities Act as transactions by an issuer not involving a public offering or transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under such Rule 701. The recipients of securities in each such transaction represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the instruments representing such securities issued in such transactions. All recipients had adequate access, through their relationships with the Company, to information about the Registrant. II-3 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS 1.1 Form of Underwriting Agreement. 2.0* Agreement and Plan of Reorganization, dated as of February 24, 1998, by and among the Registrant, MedNet Acquisition Corp. and ActaMed Corporation. 2.1* Agreement and Plan of Merger, dated as of March 1, 1996, by and among ActaMed Corporation, EDI Acquisition, Inc., UHC Green Acquisition, Inc. and United HealthCare Corporation, including amendment. 2.2* Asset Purchase Agreement, dated June 25, 1998, among the Registrant, Metis Acquisition Corp. and Metis, LLC. 3.1* Amended and Restated Certificate of Incorporation of the Registrant, as currently in effect. 3.2* Form of Amended and Restated Certificate of Incorporation, to be filed prior to the closing of the offering made under this Registration Statement. 3.3* Bylaws of the Registrant, as currently in effect. 3.4* Form of Bylaws of the Registrant, to be adopted prior to the closing of the offering made under this Registration Statement. 4.1* Specimen Common Stock certificate. 5.1* Form of Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation, regarding the legality of the securities being issued. 10.1* Form of Indemnification Agreement to be 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 security holders. 10.11* Lease Agreement, dated December 2, 1997, between Larvan Properties and Registrant, including addenda. 10.12* Lease Agreement, dated November 6, 1995, as amended, between ActaMed Corporation and ZML-Central Park, L.L.C., including addenda. 10.13+* Services and License Agreement, dated 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.
II-4 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, as amended, between ActaMed Corporation and SmithKline Beecham Clinical Laboratories, Inc. 10.18+* Services, Development and License Agreement, dated as of December 15, 1997, between the Registrant and Beech Street Corporation. 10.19+* Services, Development and License Agreement, dated as of September 30, 1997, between the Registrant and Brown & Toland Physician Services Organization. 10.20* Amended and Restated Securities Purchase Agreement, dated as of August 15, 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, as amended 10.29* 1998 Employee Stock Purchase Plan 10.30* Series A Preferred Stock Purchase Agreement, dated as of October 31, 1998, between the Registrant and investors. 10.31+ Asset Purchase Agreement, dated December 31, 1998, between the Registrant and SmithKline Beecham Clinical Laboratories, Inc. 10.32+ Services Agreement, dated January 19, 1999, between the Registrant and SmithKline Beecham Clinical Laboratories, Inc. 21.1* Subsidiaries of the Registrant. 23.1 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (included in Exhibit 5.1). 23.2 Consent of Ernst & Young LLP, independent auditors (see page II-8). 23.3 Consent of Deloitte & Touche LLP, independent auditors (see page II-9). 23.4 Consent of Deloitte & Touche LLP, independent auditors (see page II-10). 24.1* Power of Attorney. 27.1 Financial Data Schedule.
- --------- * Previously filed with the Commission. + Confidential treatment requested as to portions of this exhibit. II-5 (b) FINANCIAL STATEMENT SCHEDULES All schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the consolidated financial statements or notes thereto. ITEM 17. UNDERTAKINGS (a) The undersigned hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 14 of this Registration Statement or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (c) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Santa Clara, State of California, on this 3rd day of February, 1999. HEALTHEON CORPORATION BY: /S/ JOHN L. WESTERMANN III ----------------------------------------- John L. Westermann III CHIEF FINANCIAL OFFICER Pursuant to the requirements of the Securities Act of 1933, this 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 February 3, 1999 W. Michael Long Executive Officer) /s/ JOHN L. WESTERMANN III Chief Financial Officer - ------------------------------ (Principal Financial and February 3, 1999 John L. Westermann III Accounting Officer) /s/ JAMES H. CLARK* Chairman of the Board - ------------------------------ February 3, 1999 James H. Clark /s/ L. JOHN DOERR* Director - ------------------------------ February 3, 1999 L. John Doerr /s/ MICHAEL HOOVER* President and Director - ------------------------------ February 3, 1999 Michael K. Hoover Director - ------------------------------ Thomas A. Jermoluk /s/ C. RICHARD KRAMLICH* Director - ------------------------------ February 3, 1999 C. Richard Kramlich /s/ WILLIAM W. MCGUIRE, Director M.D.* - ------------------------------ February 3, 1999 William W. McGuire, M.D. /s/ P. E. SADLER* Director - ------------------------------ February 3, 1999 P. E. Sadler Director - ------------------------------ Laura D'Andrea Tyson /s/ TADATAKA YAMADA* Director - ------------------------------ February 3, 1999 Tadataka Yamada, M.D. *By: /s/ JOHN L. WESTERMANN III /s/ JACK DENNISON ----------------------------------------- ----------------------------------------- John L. Westermann III Jack Dennison ATTORNEY-IN-FACT ATTORNEY-IN-FACT
II-7 EXHIBIT 23.2 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated February 27, 1998 (except Notes 1 and 2 as to which the date is September 26, 1998) in Amendment No. 1 to 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 February 3, 1999 II-8 EXHIBIT 23.3 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 1 to Registration Statement No. 333-70553 of Healtheon Corporation on Form S-1 of our report dated June 20, 1997 (September 26, 1998 as to Note 1-- Net Loss per Common Share, paragraph 2 and Note 2-- Acquisition of EDI Services, Inc., paragraph 4), relating to the consolidated financial statements of ActaMed Corporation as of December 31, 1996 and for the two years then ended (the consolidated financial statements for 1996 are not separately presented herein) appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. /s/ DELOITTE & TOUCHE LLP Atlanta, Georgia February 3, 1999 II-9 EXHIBIT 23.4 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 1 to Registration Statement No. 333-70553 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 February 3, 1999 II-10 EXHIBIT INDEX
EXHIBIT SEQUENTIAL PAGE NUMBER DESCRIPTION NUMBER - --------- -------------------------------------------------------------------------------------- --------------- 1.1 Form of Underwriting Agreement. 2.0* Agreement and Plan of Reorganization, dated as of February 24, 1998, by and among the Registrant, MedNet Acquisition Corp. and ActaMed Corporation. 2.1* Agreement and Plan of Merger, dated as of March 1, 1996, by and among ActaMed Corporation, EDI Acquisition, Inc., UHC Green Acquisition, Inc. and United HealthCare Corporation, including amendment. 2.2* Asset Purchase Agreement, dated June 25, 1998, among the Registrant, Metis Acquisition Corp. and Metis, LLC. 3.1* Amended and Restated Certificate of Incorporation of the Registrant, as currently in effect. 3.2* Form of Amended and Restated Certificate of Incorporation, to be filed prior to the closing of the offering made under this Registration Statement. 3.3* Bylaws of the Registrant, as currently in effect. 3.4* Form of Bylaws of the Registrant, to be adopted prior to the closing of the offering made under this Registration Statement. 4.1* Specimen Common Stock certificate. 5.1* Form of Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation, regarding the legality of the securities being issued. 10.1* Form of Indemnification Agreement to be 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, including addenda. 10.12* Lease Agreement, dated November 6, 1995, as amended, between ActaMed Corporation and ZML-Central Park, L.L.C., including addenda. 10.13+* Services and License Agreement, dated 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.
EXHIBIT SEQUENTIAL PAGE NUMBER DESCRIPTION NUMBER - --------- -------------------------------------------------------------------------------------- --------------- 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, as amended, between ActaMed Corporation and SmithKline Beecham Clinical Laboratories, Inc. 10.18+* Services, Development and License Agreement, dated as of December 15, 1997, between the Registrant and Beech Street Corporation. 10.19+* Services, Development and License Agreement, dated as of September 30, 1997, between the Registrant and Brown & Toland Physician Services Organization. 10.20* Amended and Restated Securities Purchase Agreement, dated as of August 15, 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, as amended 10.29* 1998 Employee Stock Purchase Plan 10.30* Series A Preferred Stock Purchase Agreement, dated as of October 31, 1998, between the Registrant and investors. 10.31+ Asset Purchase Agreement, dated December 31, 1998, between the Registrant and SmithKline Beecham Clinical Laboratories, Inc. 10.32+ Services Agreement, dated January 19, 1999, between the Registrant and SmithKline Beecham Clinical Laboratories, Inc. 21.1* Subsidiaries of the Registrant. 23.1 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (included in Exhibit 5.1). 23.2 Consent of Ernst & Young LLP, independent auditors (see page II-8). 23.3 Consent of Deloitte & Touche LLP, independent auditors (see page II-9). 23.4 Consent of Deloitte & Touche LLP, independent auditors (see page II-10). 24.1* Power of Attorney. 27.1 Financial Data Schedule.
- --------- * Previously filed with the Commission. + Confidential treatment requested as to portions of this exhibit. EX-1.1 2 EXHIBIT 1.1 [ ] SHARES ------------ HEALTHEON CORPORATION COMMON STOCK ($.0001 PAR VALUE PER SHARE) UNDERWRITING AGREEMENT , 1999 - --------- -- , 1999 --------- -- Morgan Stanley & Co. Incorporated Goldman, Sachs & Co. Hambrecht & Quist LLC Volpe Brown Whelan & Company, LLC c/o Morgan Stanley & Co. Incorporated 1585 Broadway New York, New York 10036 Morgan Stanley & Co. International Limited Goldman Sachs International Hambrecht & Quist LLC Volpe Brown Whelan & Company, LLC c/o Morgan Stanley & Co. International Limited 25 Cabot Square Canary Wharf London E14 4QA England Dear Sirs and Mesdames: Healtheon Corporation, a Delaware corporation (the "COMPANY"), proposes to issue and sell to the several Underwriters (as defined below) _____ shares of its Common Stock, $.0001 par value per share (the "FIRM SHARES"). It is understood that, subject to the conditions hereinafter stated, ____________ Firm Shares (the "U.S. FIRM SHARES") will be sold to the several U.S. Underwriters named in Schedule I hereto (the "U.S. UNDERWRITERS") in connection with the offering and sale of such U.S. Firm Shares in the United States and Canada to United States and Canadian Persons (as such terms are defined in the Agreement Between U.S. and International Underwriters of even date herewith), and __________ Firm Shares (the "INTERNATIONAL SHARES") will be sold to the several International Underwriters named in Schedule II hereto (the "INTERNATIONAL UNDERWRITERS") in connection with the offering and sale of such International Shares outside the United States and Canada to persons other than United States and Canadian Persons. Morgan Stanley & Co. Incorporated and Goldman, Sachs & Co., Hambrecht & Quist LLC and Volpe Brown Whelan & Company, LLC shall act as representatives (the "U.S. REPRESENTATIVES") of the several U.S. Underwriters, and Morgan Stanley & Co. International Limited and Goldman Sachs International, Hambrecht & Quist LLC and Volpe Brown Whelan & Company, LLC shall act as representatives (the "INTERNATIONAL REPRESENTATIVES") of the several International Underwriters. The U.S. Underwriters and the International Underwriters are hereinafter collectively referred to as the Underwriters. The Company also proposes to issue and sell to the several U.S. Underwriters not more than an additional ________ shares of its Common Stock, $.0001 par value per share (the "ADDITIONAL SHARES") if and to the extent that the U.S. Representatives shall have determined to exercise, on behalf of the U.S. Underwriters, the right to purchase such shares of common stock granted to the U.S. Underwriters in Section 2 hereof. The Firm Shares and the Additional Shares are hereinafter collectively referred to as the "SHARES". The shares of Common Stock, $.0001 par value per share of the Company to be outstanding after giving effect to the sales contemplated hereby are hereinafter referred to as the "COMMON STOCK". The Company has filed with the Securities and Exchange Commission (the "COMMISSION") a registration statement relating to the Shares. The registration statement contains two prospectuses to be used in connection with the offering and sale of the Shares: the U.S. prospectus, to be used in connection with the offering and sale of Shares in the United States and Canada to United States and Canadian Persons, and the international prospectus, to be used in connection with the offering and sale of Shares outside the United States and Canada to persons other than United States and Canadian Persons. The international prospectus is identical to the U.S. prospectus except for the outside front cover page. The registration statement as amended at the time it becomes effective, including the information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Securities Act of 1933, as amended (the "SECURITIES ACT"), is hereinafter referred to as the "REGISTRATION STATEMENT"; the U.S. prospectus and the international prospectus in the respective forms first used to confirm sales of Shares are hereinafter collectively referred to as the "PROSPECTUS." If the Company has filed an abbreviated registration statement to register additional shares of Common Stock pursuant to Rule 462(b) under the Securities Act (the "RULE 462 REGISTRATION STATEMENT"), then any reference herein to the term "Registration Statement" shall be deemed to include such Rule 462 Registration Statement. As part of the offering contemplated by this Agreement, Morgan Stanley & Co. Incorporated ("MORGAN STANLEY") has agreed to reserve out of the Shares set forth opposite its name on Schedule I to this Agreement, up to _________ shares, for sale to certain parties designated by the Company (collectively, "PARTICIPANTS") (the "DIRECTED SHARE PROGRAM"). The Shares to be sold by Morgan Stanley pursuant to the Directed Share Program (the "DIRECTED SHARES") will be sold by Morgan Stanley pursuant to this Agreement at the public offering price. Any Directed Shares not orally confirmed for purchase by any Participants by the end of the first business day after the date on which this Agreement is executed will be offered to the public by Morgan Stanley as set forth in the Prospectus. 1. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants to and agrees with each of the Underwriters that: 2 (a) The Registration Statement has become effective; no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for such purpose are pending before or threatened by the Commission. (b) (i) The Registration Statement, when it became effective, did not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) the Registration Statement and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder and (iii) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph do not apply to statements or omissions in the Registration Statement or the Prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein. (c) The Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its property and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its Subsidiaries (as defined below), taken as a whole. (d) Other than Actamed Corporation, a Georgia corporation ("ACTAMED"), UHC Green Acquisition Corp., a Nevada corporation ("UHC") and [Metis Acquisition Subsidiary] ("METIS") (each of Actamed, UHC and Metis are referred to herein as a "SUBSIDIARY" and collectively as the "SUBSIDIARIES"), the Company has no subsidiaries. Each Subsidiary of the Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its property and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its Subsidiaries, taken as a whole. All of the issued shares of capital stock of each Subsidiary of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and are owned directly by the Company, free and clear of all liens, encumbrances, equities or claims. The Company does not own, directly or indirectly, an interest in any other corporation, partnership, business, trust or other entity. 3 (e) The Company and each of its Subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them which is material to the business of the Company and the Subsidiaries, taken as a whole, in each case free and clear of all liens, encumbrances and defects except such as are described in the Prospectus or such as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company and its Subsidiaries, taken as a whole; and any real property and buildings held under lease by the Company and each of its Subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material to the Company and its Subsidiaries, taken as a whole, and do not interfere with the use made and proposed to be made of such property and buildings of the Company and each of its Subsidiaries, in each case except as described in the Prospectus, or which intervention is not material to the Company and its Subsidiaries, taken as a whole. (f) This Agreement has been duly authorized, executed and delivered by the Company. (g) The authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus. (h) The shares of Common Stock outstanding prior to the issuance of the Shares have been duly authorized and are validly issued, fully paid and non-assessable. Except as set forth in the Prospectus, neither the Company nor any of its Subsidiaries has outstanding any options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations. All outstanding shares of capital stock and options and other rights to acquire capital stock have been issued in compliance with the registration and qualification provisions of all applicable federal and state securities laws and were not issued in violation of any preemptive rights, rights of first refusal or other similar rights. (i) The Shares have been duly authorized and, when issued and delivered in accordance with the terms of this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights. (j) The execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement, and the sale by the Company of the Shares as contemplated hereby, will not contravene any provision of applicable law or the certificate of incorporation or by-laws of the Company or any of its Subsidiaries or any agreement or other instrument binding upon the Company or any of its Subsidiaries that is material to the Company and its Subsidiaries, taken as a whole, or any judgment, 4 order or decree of any governmental body, agency or court having jurisdiction over the Company or any Subsidiary, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by the Company of its obligations under this Agreement, except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Shares. (k) There has not occurred any material adverse change, or any development involving a prospective material adverse change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its Subsidiaries, taken as a whole, from that set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement). (l) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, (i) the Company and its Subsidiaries have not incurred any material liability or obligation, direct or contingent, nor entered into any material transaction not in the ordinary course of business; (ii) the Company has not purchased any of its outstanding capital stock, nor declared, paid or otherwise made any dividend or distribution of any kind on its capital stock; and (iii) there has not been any material change in the capital stock, short-term debt or long-term debt of the Company and its Subsidiaries, except in each case as described in the Prospectus. (m) There are no legal or governmental proceedings pending or threatened to which the Company or any of its Subsidiaries is a party or to which any of the properties of the Company or any of its Subsidiaries is subject that are required to be described in the Registration Statement or the Prospectus and are not so described or any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required. (n) Each of the Company and each of its Subsidiaries has all necessary consents, authorizations, approvals, orders, certificates and permits of and from, and has made all declarations and filings with, all federal, state, local, foreign and other governmental or regulatory authorities, all self-regulatory organizations and all courts and other tribunals, to own, lease, license and use its properties and assets and to conduct its business in the manner described in the Prospectus, except to the extent that the failure to obtain or file would not have a material adverse effect on the Company and its Subsidiaries taken as a whole. Neither the Company nor any of its Subsidiaries has received any notice of proceedings related to the revocation or modification of any such consent, authorization, approval, order, certificate or permit which, singly or in the aggregate, if the subject of any unfavorable decision, ruling or finding, would result in a material adverse change in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its Subsidiaries, taken as a whole, except as described in the Prospectus. 5 (o) Each preliminary prospectus filed as part of the registration statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Securities Act, complied when so filed in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder. (p) The Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. (q) The Company and each of its Subsidiaries (i) are in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, singly or in the aggregate, have a material adverse effect on the Company and its Subsidiaries, taken as a whole. (r) There are no costs or liabilities associated with Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties) which would, singly or in the aggregate, have a material adverse effect on the Company and its Subsidiaries, taken as a whole. (s) Except as described in the Prospectus, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company or to require the Company to include such securities with the Shares registered pursuant to the Registration Statement. (t) The Company and each of its Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which they are engaged; neither the Company nor any of its Subsidiaries has been refused any insurance coverage sought or applied for; and neither the Company nor its Subsidiaries has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the 6 condition, financial or otherwise, or the earnings, business or operations of the Company and its Subsidiaries, taken as a whole. (u) The financial statements, including the notes thereto, included in the Registration Statement and the Prospectus fairly present, in all material respects, the financial position of the Company as of the dates indicated and the results of its operations for the periods specified; said financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis. (v) Neither the Company nor, to the Company's knowledge, any other party is in violation or breach of, or in default with respect to, complying with any material provision of any contract, agreement, instrument, lease, license, arrangement or understanding which is material to the Company and its Subsidiaries taken as a whole, and each such contract, agreement, instrument, lease, license, arrangement and understanding is in full force and is the legal, valid and binding obligation of the Company or its Subsidiary and, to the Company's knowledge, the other parties thereto and is enforceable against the Company or its Subsidiary and, to the Company's knowledge, against the other parties thereto in accordance with its terms. (w) The Company has complied with all provisions of Section 517.075, Florida Statutes relating to doing business with the Government of Cuba or with any person or affiliate located in Cuba. (x) Except as disclosed in the Prospectus, (i) the Company and each of its Subsidiaries owns or possesses all material patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names, technology and know-how currently employed by them to conduct their respective businesses in the manner described in the Prospectus, (ii) neither the Company nor any of its Subsidiaries has received any notice of infringement of or conflict with (and neither the Company nor any of its Subsidiaries knows of any infringement or conflict with) asserted rights of others with respect to any of the foregoing which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a material adverse effect upon the Company and its Subsidiaries, taken as a whole, and (iii) the discoveries, inventions, products or processes of the Company and each of its Subsidiaries referred to in the Prospectus do not, to the knowledge of the Company or any of its Subsidiaries, infringe or conflict with any right or patent of any third party, or any discovery, invention, product or process that would have a material adverse effect on the Company and its Subsidiaries, taken as a whole. (y) The Company and its Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in 7 conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (z) No material labor dispute with the employees of the Company or any of its Subsidiaries exists or, to the knowledge of the Company, is imminent; and the Company is not aware of any existing, threatened or imminent labor disturbance by the employees of any of its principal suppliers, manufacturers or contractors that could have a material adverse effect on the Company and its Subsidiaries, taken as a whole. (aa) Substantially all of the outstanding shares of Common Stock, and all securities convertible into or exercisable or exchangeable for Common Stock, are subject to valid, binding and enforceable agreements (collectively, the "LOCK-UP AGREEMENTS") that restrict the holders thereof from selling, making any short sale or, granting any option for the purchase of, or otherwise transferring or disposing of, any of such shares of Common Stock, or any such securities convertible into or exercisable or exchangeable for Common Stock, for a period of 180 days after the date of the Prospectus without the prior written consent of the Company or Morgan Stanley. The Company represents and warrants to Morgan Stanley that it will not consent to any such sale, short sale, granting of option or other transfer or disposition without the prior written consent of Morgan Stanley. (bb) As of the date the Registration Statement became effective, the Common Stock was authorized for listing on the Nasdaq National Market upon official notice of issuance. (cc) The Company represents and warrants to Morgan Stanley that (i) the Registration Statement, the Prospectus and any preliminary prospectus comply, and any further amendments or supplements thereto will comply, with any applicable laws or regulations of foreign jurisdictions in which the Prospectus or any preliminary prospectus, as amended or supplemented, if applicable, are distributed in connection with the Directed Share Program, and that, (ii) no authorization, approval, consent, license, order, registration or qualification of or with any government, governmental instrumentality or court, other than such as have been obtained, is necessary under the securities laws and regulations of foreign jurisdictions in which the Directed Shares are offered outside the United States. (dd) The Company has not offered, or caused the Underwriters to offer, Shares to any person pursuant to the Directed Share Program with the specific intent to unlawfully influence (i) a customer, supplier or other business partner of the Company to alter such person's or entity's level or type of business with the Company, (ii) a trade journalist or publication to write or publish favorable information about the Company or 8 its applications or services, or (iii) a potential customer's, supplier's, business partner's or other individual's or entity's decision to enter into a business or commercial relationship of any type with the Company. 2. AGREEMENTS TO SELL AND PURCHASE. The Company hereby agrees to sell to the several Underwriters, and each Underwriter, upon the basis of the representations and warranties herein contained, but subject to the conditions hereinafter stated, agrees, severally and not jointly, to purchase from the Company the respective numbers of Firm Shares set forth in Schedules I and II hereto opposite its names at U.S.$_____ a share ("PURCHASE PRICE"). On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company agrees to sell to the U.S. Underwriters the Additional Shares, and the U.S. Underwriters shall have a one-time right to purchase, severally and not jointly, up to ______ Additional Shares at the Purchase Price. If the U.S. Representatives, on behalf of the U.S. Underwriters, elect to exercise such option, the U.S. Representatives shall so notify the Company in writing not later than 30 days after the date of this Agreement, which notice shall specify the number of Additional Shares to be purchased by the U.S. Underwriters and the date on which such shares are to be purchased. Such date may be the same as the Closing Date (as defined below) but not earlier than the Closing Date nor later than ten business days after the date of such notice. Additional Shares may be purchased as provided in Section 4 hereof solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. If any Additional Shares are to be purchased, each U.S. Underwriter agrees, severally and not jointly, to purchase the number of Additional Shares (subject to such adjustments to eliminate fractional shares as the U.S. Representatives may determine) that bears the same proportion to the total number of Additional Shares to be purchased as the number of U.S. Firm Shares set forth in Schedule I hereto opposite the name of such U.S. Underwriter bears to the total number of U.S. Firm Shares. The Company hereby agrees that, without the prior written consent of Morgan Stanley on behalf of the Underwriters, it will not, during the period ending 180 days after the date of the Prospectus, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (A) the Shares to be sold hereunder or (B) the issuance by the Company of shares of Common Stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof of which the Underwriters have been advised in writing or described as outstanding or reserved for issuance under the option plans described in the Prospectus, or any other issuances of Common Stock or options to acquire Common Stock hereafter under the option or equity incentive plans described in the Prospectus, provided that with respect to securities issued pursuant to the 9 exceptions set forth in clause (B), the holders of such securities shall enter into Lock-Up Agreements on the terms specified in Section 1(aa). 3. TERMS OF PUBLIC OFFERING. The Company is advised by you that the Underwriters propose to make a public offering of their respective portions of the Shares as soon after the Registration Statement and this Agreement have become effective as in your judgment is advisable. The Company is further advised by you that the Shares are to be offered to the public initially at U.S.$_____ a share (the "PUBLIC OFFERING PRICE") and to certain dealers selected by you at a price that represents a concession not in excess of U.S.$____ a share under the Public Offering Price, and that any Underwriter may allow, and such dealers may reallow, a concession, not in excess of U.S.$____ a share, to any Underwriter or to certain other dealers. 4. PAYMENT AND DELIVERY. Payment for the Firm Shares shall be made to the Company in Federal or other funds immediately available in New York City against delivery of such Firm Shares for the respective accounts of the several Underwriters at 10:00 a.m., New York City time, on ______ __, 1999, or at such other time on the same or such other date, not later than ______ __, 1999, as shall be designated in writing by you. The time and date of such payment are hereinafter referred to as the "CLOSING DATE." Payment for any Additional Shares shall be made to the Company in Federal or other funds immediately available in New York City against delivery of such Additional Shares for the respective accounts of the several Underwriters at 10:00 a.m., New York City time, on the date specified in the notice described in Section 2 or at such other time on the same or on such other date, in any event not later than _______, 1999, as shall be designated in writing by the U.S. Representatives. The time and date of such payment are hereinafter referred to as the "OPTION CLOSING DATE." Certificates for the Firm Shares and Additional Shares shall be in definitive form and registered in such names and in such denominations as you shall request in writing not later than one full business day prior to the Closing Date or the Option Closing Date, as the case may be. The certificates evidencing the Firm Shares and Additional Shares shall be delivered to you on the Closing Date or the Option Closing Date, as the case may be, for the respective accounts of the several Underwriters, with any transfer taxes payable in connection with the transfer of the Shares to the Underwriters duly paid, against payment of the Purchase Price therefor. 5. CONDITIONS TO THE UNDERWRITERS' OBLIGATIONS. The obligations of the Company to sell the Shares to the Underwriters and the several obligations of the Underwriters to purchase and pay for the Shares on the Closing Date are subject to the condition that the Registration Statement shall have become effective not later than [_______] (New York City time) on the date hereof. The several obligations of the Underwriters are subject to the following further conditions: 10 (a) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date: (i) there shall not have occurred any downgrading, nor shall any notice have been given of any intended or potential downgrading or of any review for a possible change that does not indicate the direction of the possible change, in the rating accorded any of the Company's securities by any "nationally recognized statistical rating organization," as such term is defined for purposes of Rule 436(g)(2) under the Securities Act; and (ii) there shall not have occurred any change, or any development involving a prospective change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its Subsidiaries, taken as a whole, from that set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement) that, in your judgment, is material and adverse and that makes it, in your judgment, impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus. (b) The Underwriters shall have received on the Closing Date a certificate, dated the Closing Date and signed by an executive officer of the Company, to the effect set forth in Section 5(a) above and to the effect that the representations and warranties of the Company contained in this Agreement are true and correct as of the Closing Date and that the Company has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied hereunder on or before the Closing Date. The officer signing and delivering such certificate may rely upon the best of his or her knowledge as to proceedings threatened. (c) The Underwriters shall have received on the Closing Date an opinion of Wilson Sonsini Goodrich & Rosati, counsel for the Company, dated the Closing Date, to the effect that: (i) the Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its property and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its Subsidiaries, taken as a whole; 11 (ii) each Subsidiary of the Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its property and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its Subsidiaries, taken as a whole; (iii) the authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus; (iv) the shares of Common Stock outstanding prior to the issuance of the Shares have been duly authorized and are validly issued, fully paid and non-assessable; (v) all of the issued shares of capital stock of each subsidiary of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and are owned directly by the Company, free and clear of all liens, encumbrances, equities or claims; (vi) the Shares have been duly authorized and, when issued and delivered in accordance with the terms of this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive right or rights of first refusal or similar rights. (vii) this Agreement has been duly authorized, executed and delivered by the Company; (viii) the execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement will not contravene any provision of applicable law or the certificate of incorporation or by-laws of the Company or, to such counsel's knowledge, any agreement or other instrument binding upon the Company or any of its Subsidiaries that is material to the Company and its Subsidiaries, taken as a whole, or, to such counsel's knowledge, any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Company or any Subsidiary, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by the Company of its obligations under this Agreement, except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Shares by the U.S. Underwriters; 12 (ix) the statements (A) in the Prospectus under the captions "Risk Factors--We Rely on Strategic Relationships," "Risk Factors--Future Sales of Shares Could Affect Our Stock Price," "Business--Strategic Relationships, "Certain Transactions," "Description of Capital Stock," "Shares Eligible for Future Sale" and, insofar as such statements relate to the terms of this Agreement, "Underwriters" and (B) in the Registration Statement in Items 14 and 15, in each case insofar as such statements constitute summaries of the legal matters, documents or proceedings referred to therein, fairly present the information called for with respect to such legal matters, documents and proceedings and fairly summarize the matters referred to therein; (x) after due inquiry, such counsel does not know of any legal or governmental proceedings pending or threatened to which the Company or any of its Subsidiaries is a party or to which any of the properties of the Company or any of its Subsidiaries is subject that are required to be described in the Registration Statement or the Prospectus and are not so described or of any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required; (xi) the Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" as such term is defined in the Investment Company Act of 1940, as amended; (xii) to such counsel's knowledge: (1) the Registration Statement has become effective under the Securities Act; (2) no stop order proceedings with respect to the Registration Statement have been instituted or are pending or threatened under the Securities Act and nothing has come to such counsel's attention to lead it to believe that such proceedings are contemplated; and (3) any required filing of the Prospectus and any supplement thereto pursuant to Rule 424(b) under the Securities Act has been made in the manner and within the time period required by such Rule 424(b); (xiii) except as described in the Prospectus, no shares of Common Stock are required to be registered under the Registration Statement and no person or entity has any right to cause any shares of Common Stock to be registered under the Registration Statement, pursuant to the Company's certificate of incorporation or bylaws or, to such counsel's knowledge, any agreement or other right, which rights have not been validly waived; (xiv) based on a letter from the Nasdaq Stock Market, the shares to be sold under this Agreement to the Underwriters are duly authorized for quotation on the Nasdaq National Market; and 13 (xv) such counsel (A) is of the opinion that the Registration Statement and Prospectus (except for financial statements and schedules and other financial data included therein as to which such counsel need not express any opinion) comply as to form in all material respects with the Securities Act and the applicable rules and regulations of the Commission hereunder, (B) has no reason to believe that (except for financial statements and schedules and other financial data as to which such counsel need not express any belief) the Registration Statement and the prospectus included therein at the time the Registration Statement became effective contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (C) has no reason to believe that (except for financial statements and schedules and other financial data as to which such counsel need not express any belief) the Prospectus, as of its date or the Closing Date, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (d) The Underwriters shall have received on the Closing Date an opinion of Fenwick & West LLP, counsel for the Underwriters, dated the Closing Date, covering the matters referred to in Sections 5(c)(vi), 5(c)(vii), 5(c)(ix) (but only as to the statements in the Prospectus under "Description of Capital Stock" and "Underwriters") and 5(c)(xv) above. With respect to Section 5(c)(xv) above, Wilson Sonsini Goodrich & Rosati, Professional Corporation and Fenwick & West LLP may state that their opinion and belief are based upon their participation in the preparation of the Registration Statement and Prospectus and any amendments or supplements thereto and review and discussion of the contents thereof, but are without independent check or verification, except as specified. The opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation described in Section 5(c) above shall be rendered to the Underwriters at the request of the Company and shall so state therein. (e) The Underwriters shall have received, on each of the date hereof and the Closing Date, a letter dated the date hereof or the Closing Date, as the case may be, in form and substance satisfactory to the Underwriters, from Ernst & Young LLP and with respect to the Financial Statements and certain financial information with respect to Actamed, Deloitte & Touche LLP, independent public accountants, containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus; PROVIDED that the letter delivered on the Closing Date shall use a "cut-off date" not earlier than the date hereof. 14 (f) The "lock-up" agreements, each substantially in the form of Exhibit A hereto, between you and certain stockholders, officers and directors of the Company relating to sales and certain other dispositions of shares of Common Stock or certain other securities, delivered to you on or before the date hereof, shall be in full force and effect on the Closing Date. (g) The Shares shall have received approval for listing, upon official notice of issuance, on the Nasdaq National Market. All the agreements, opinions, certificates and letters mentioned above or elsewhere in this Agreement shall be deemed in compliance with the provisions hereof only if Fenwick & West LLP, counsel for the Underwriters, shall be reasonably satisfied that they comply in form and scope. The several obligations of the U.S. Underwriters to purchase Additional Shares hereunder are subject to the delivery to the U.S. Representatives on the Option Closing Date of such documents as they may reasonably request with respect to the good standing of the Company, the due authorization and issuance of the Additional Shares and other matters related to the issuance of the Additional Shares. 6. COVENANTS OF THE COMPANY. In further consideration of the agreements of the Underwriters herein contained, the Company covenants with each Underwriter as follows: (a) To furnish to you, without charge, nine (9) signed copies of the Registration Statement (including exhibits thereto) and for delivery to each other Underwriter a conformed copy of the Registration Statement (without exhibits thereto) and to furnish to you in New York City, without charge, prior to 10:00 a.m. New York City time on the business day next succeeding the date of this Agreement and during the period mentioned in Section 6(c) below, as many copies of the Prospectus and any supplements and amendments thereto or to the Registration Statement as you may reasonably request. (b) Before amending or supplementing the Registration Statement or the Prospectus, to furnish to you a copy of each such proposed amendment or supplement and not to file any such proposed amendment or supplement to which you reasonably object, and to file with the Commission within the applicable period specified in Rule 424(b) under the Securities Act any prospectus required to be filed pursuant to such Rule. (c) If, during such period after the first date of the public offering of the Shares as in the opinion of counsel for the Underwriters the Prospectus is required by law to be delivered in connection with sales by an Underwriter or dealer, any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, or if, in the opinion of counsel 15 for the Underwriters, it is necessary to amend or supplement the Prospectus to comply with applicable law, forthwith to prepare, file with the Commission and furnish, at its own expense, to the Underwriters and to the dealers (whose names and addresses you will furnish to the Company) to which Shares may have been sold by you on behalf of the Underwriters and to any other dealers upon request, as many copies as you may from, time to time reasonably request of either amendments or supplements to the Prospectus so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances when the Prospectus is delivered to a purchaser, be misleading or so that the Prospectus, as amended or supplemented, will comply with law. (d) To endeavor to qualify the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions as you shall reasonably request. (e) To make generally available to the Company's security holders and to you as soon as practicable an earning statement covering the twelve-month period ending [March 31, 2000] that satisfies the provisions of Section 11(a) of the Securities Act and the rules and regulations of the Commission thereunder. (f) During a period of three years from the effective date of the Registration Statement, the Company will furnish to you copies of (i) all reports to its stockholders and (ii) all reports, financial statements and proxy or information statements filed by the Company with the Commission or any national securities exchange. (g) The Company will apply the proceeds from the sale of the Shares as set forth under "Use of Proceeds" in the Prospectus. (h) The Company will use its best efforts to obtain and maintain in effect the quotation of the Shares on the Nasdaq National Market and to maintain such inclusion for a period of three years after the date hereof or until such earlier date as the Shares shall be listed for regular trading privileges on another national securities exchange approved by you. (i) The Company will comply with all registration, filing and reporting requirements of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), which may from time to time be applicable to the Company. (j) The Company will comply with all provisions of all undertakings contained in the Registration Statement. (k) Prior to the Closing Date, the Company will not, directly or indirectly, issue any press release or other communication and will not hold any press conference with respect to the Company, or its financial condition, results of operations, business, properties, assets, or prospects or this offering, without your prior written consent. 16 (l) Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, to pay or cause to be paid all expenses incident to the performance of its obligations under this Agreement, including but not limited to: (i) the fees, disbursements and expenses of the Company's counsel and the Company's accountants in connection with the registration and delivery of the Shares under the Securities Act and all other fees or expenses in connection with the preparation and filing of the Registration Statement, any preliminary prospectus, the Prospectus and amendments and supplements to any of the foregoing, including all printing costs associated therewith, and the mailing and delivering of copies thereof to the Underwriters and dealers, in the quantities hereinabove specified, (ii) all costs and expenses related to the transfer and delivery of the Shares to the Underwriters, including any transfer or other taxes payable thereon, (iii) the cost of printing or producing any Blue Sky or Legal Investment memorandum in connection with the offer and sale of the Shares under state securities laws and all expenses in connection with the qualification of the Shares for offer and sale under state securities laws as provided in Section 6(d) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection with such qualification and in connection with the Blue Sky or Legal Investment memorandum, (iv) all filing fees and the reasonable fees and disbursements of counsel to the Underwriters incurred in connection with the review and qualification of the offering of the Shares by the National Association of Securities Dealers, Inc., not to exceed $15,000, (v) all fees and expenses in connection with the preparation and filing of the registration statement on Form 8-A relating to the Common Stock and all costs and expenses incident to listing the Shares on the Nasdaq National Market, (vi) the cost of printing certificates representing the Shares, (vii) the costs and charges of any transfer agent, registrar or depositary, (viii) the costs and expenses of the Company relating to investor presentations on any "road show" undertaken in connection with the marketing of the offering of the Shares, including, without limitation, expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations with the prior approval of the Company, travel and lodging expenses of the representatives and officers of the Company and any such consultants, and the pro rata cost of the seats used by Representative's (as compared to seats used by the Representatives and officers of the Company and any such consultants) cost of any aircraft chartered or limousines hired in connection with the road show, (ix) all expenses in connection with any offer and sale of the Shares outside of the United States, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection with offers and sales outside of the United States, and (x) all fees and disbursements of counsel incurred by the Underwriters in connection with the Directed Share Program and stamp duties, similar taxes or duties or other taxes, if any, incurred by the Underwriters in connection with the Directed Share Program. It is understood, however, that except as provided in this Section, Section 7 entitled "Indemnity and Contribution", and the last paragraph of Section 9 below, the Underwriters will pay all of their costs and expenses, including fees and disbursements of 17 their counsel, stock transfer taxes payable on resale of any of the Shares by them and any advertising expenses connected with any offers they may make. (m) That in connection with the Directed Share Program, the Company will ensure that the Directed Shares will be restricted to the extent required by the NASD or the NASD rules from sale, transfer, assignment, pledge or hypothecation for a period of three months following the date of the effectiveness of the Registration Statement. Morgan Stanley will notify the Company as to which Participants are required to be so restricted. The Company will direct the transfer agent to place stop transfer restrictions upon such securities for such period of time. (n) That the Company will comply with all applicable securities and other applicable laws, rules and regulations in each foreign jurisdiction in which the Directed Shares are offered in connection with the Directed Share Program. 7. INDEMNITY AND CONTRIBUTION. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein; provided, however that the foregoing indemnity with respect to any preliminary prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages or liabilities purchased Shares, or any person controlling such Underwriter, if a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such losses, claims, damages or liabilities unless such failure is the result of noncompliance by the Company, with Sections 6(a) or 6(c) hereof. 18 (b) The Company agrees to indemnify and hold harmless Morgan Stanley and each person, if any, who controls Morgan Stanley within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act ("MORGAN STANLEY ENTITIES"), from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) (i) caused by any untrue statement or alleged untrue statement of a material fact contained in the prospectus wrapper material prepared by or with the consent of the Company for distribution in foreign jurisdictions in connection with the Directed Share Program attached to the Prospectus or any preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement therein, when considered in conjunction with the Prospectus or any applicable preliminary prospectus, not misleading; (ii) caused by the failure of any Participant to pay for and accept delivery of the shares which, immediately following the effectiveness of the Registration Statement, were subject to a properly confirmed agreement to purchase but only to the extent that Morgan Stanley is unable to sell these; or (iii) related to, arising out of, or in connection with the Directed Share Program, provided that, the Company shall not be responsible under this subparagraph (iii) for any losses, claim, damages or liabilities (or expenses relating thereto) that are finally judicially determined to have resulted from the bad faith or gross negligence of Morgan Stanley Entities. (c) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Company to such Underwriter, but only with reference to information relating to such Underwriter furnished to the Company in writing by such Underwriter through you expressly for use in the Registration Statement, any preliminary prospectus, the Prospectus or any amendments or supplements thereto. (d) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to Section 7(a), 7(b) or 7(c), such person (the "INDEMNIFIED PARTY") shall promptly notify the person against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the reasonable fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel 19 would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in respect of the legal expenses of any indemnified party in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the fees and expenses of more than one separate firm (in addition to any local counsel) for all such indemnified parties and that all such fees and expenses shall be reimbursed as they are incurred. Such firm shall be designated in writing by Morgan Stanley, in the case of parties indemnified pursuant to Section 7(a) or 7(b), and by the Company, in the case of parties indemnified pursuant to Section 7(c). The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse th indemnified party for fees and expenses of counsel as contemplated by the second and third sentences of this paragraph, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. Notwithstanding anything contained herein to the contrary, if indemnity may be sought pursuant to Section 7(b) hereof in respect of such action or proceeding, then in addition to such separate firm for the indemnified parties, the indemnifying party shall be liable for the reasonable fees and expenses of not more than one separate firm (in addition to any local counsel) for Morgan Stanley for the defense of any losses, claims, damages and liabilities arising out of the Directed Share Program, and all persons, if any, who control Morgan Stanley within the meaning of either Section 15 of the Act or Section 20 of the Exchange Act. (e) To the extent the indemnification provided for in Section 7(a), 7(b) or 7(c) is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each indemnifying party under such paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other hand from the offering of the Shares or (ii) if the allocation provided by clause 7(e)(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 7(e)(i) above but also the relative fault 20 of the Company on the one hand and of the Underwriters on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other hand in connection with the offering of the Shares shall be deemed to be in the same respective proportions as the net proceeds from the offering of the Shares (before deducting expenses) received by the Company and the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover of the Prospectus, bear to the aggregate Public Offering Price of the Shares. The relative fault of the Company on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Underwriters' respective obligations to contribute pursuant to this Section 7 are several in proportion to the respective number of Shares they have purchased hereunder, and not joint. (f) The Company and the Underwriters agree that it would not be just or equitable if contribution pursuant to this Section 7 were determined by PRO RATA allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in Section 7(e). The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The remedies provided for in this Section 7 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. (g) The indemnity and contribution provisions contained in this Section 7 and the representations, warranties and other statements of the Company contained in this Agreement shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter or by or on behalf of the 21 Company, its officers or directors or any person controlling the Company and (iii) acceptance of and payment for any of the Shares. 8. TERMINATION. This Agreement shall be subject to termination by notice given by you to the Company, if (a) after the execution and delivery of this Agreement and prior to the Closing Date (i) trading generally shall have been suspended or materially limited on or by, as the case may be, any of the New York Stock Exchange, the American Stock Exchange, the National Association of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any securities of the Company shall have been suspended on any exchange or in any over-the-counter market, (iii) a general moratorium on commercial banking activities in New York shall have been declared by either Federal or New York State authorities or (iv) there shall have occurred any outbreak or escalation of hostilities or any change in financial markets or any calamity or crisis that, in your judgment, is material and adverse and (b) in the case of any of the events specified in clauses 8(a)(i) through 8(a)(iv), such event, singly or together with any other such event, makes it, in your judgment, impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus. 9. EFFECTIVENESS; DEFAULTING UNDERWRITERS. This Agreement shall become effective upon the execution and delivery hereof by the parties hereto. If, on the Closing Date or the Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Shares that it has or they have agreed to purchase hereunder on such date, and the aggregate number of Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of the Shares to be purchased on such date, the other Underwriters shall be obligated severally in the proportions that the number of Firm Shares set forth opposite their respective names in Schedule I or Schedule II bears to the aggregate number of Firm Shares set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as you may specify, to purchase the Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date; PROVIDED that in no event shall the number of Shares that any Underwriter has agreed to purchase pursuant to this Agreement be increased pursuant to this Section 9 by an amount in excess of one-ninth of such number of Shares without the written consent of such Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Firm Shares and the aggregate number of Firm Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Firm Shares to be purchased, and arrangements satisfactory to you and the Company for the purchase of such Firm Shares are not made within 36 hours after such default, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter or the Company. In any such case either you or the Company shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and in the Prospectus or in any other documents or arrangements may be effected. If, on the Option Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Additional Shares and the aggregate number of Additional Shares with respect to which 22 such default occurs is more than one-tenth of the aggregate number of Additional Shares to be purchased, the non-defaulting Underwriters shall have the option to (i) terminate their obligation hereunder to purchase Additional Shares or (ii) purchase not less than the number of Additional Shares that such non-defaulting Underwriters would have been obligated to purchase in the absence of such default. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. If this Agreement shall be terminated by the Underwriters, or any of them, because of any failure or refusal on the part of the Company to comply with the terms or to fulfill any of the conditions of this Agreement, or if for any reason the Company shall be unable to perform its obligations under this Agreement, the Company will reimburse the Underwriters or such Underwriters as have so terminated this Agreement with respect to themselves, severally, for all out-of-pocket expenses (including the fees and disbursements of their counsel) reasonably incurred by such Underwriters in connection with this Agreement or the offering contemplated hereunder. 10. COUNTERPARTS. This Agreement may be signed in two or more counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 11. APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York. 23 12. HEADINGS. The headings of the sections of this Agreement have been inserted for convenience of reference only and shall not be deemed a part of this Agreement. Very truly yours, HEALTHEON CORPORATION By: ------------------------------------- Name: Title: Accepted as of the date hereof MORGAN STANLEY & CO. INCORPORATED GOLDMAN, SACHS & CO. HAMBRECHT & QUIST LLC VOLPE BROWN WHELAN & COMPANY, LLC Acting severally on behalf of themselves and the several U.S. Underwriters named in Schedule I hereto. By: Morgan Stanley & Co. Incorporated By: ------------------------------------- Name: Title: MORGAN STANLEY & CO. INTERNATIONAL LIMITED GOLDMAN SACHS INTERNATIONAL HAMBRECHT & QUIST LLC VOLPE BROWN WHELAN & COMPANY, LLC Acting severally on behalf of themselves and the several International Underwriters named in Schedule II hereto. By: Morgan Stanley & Co. International Limited By: ------------------------------------- Name: Title: 24 SCHEDULE I U.S. UNDERWRITERS
Number of Firm Underwriter Shares To Be Purchased ----------- ---------------------- Morgan Stanley & Co. Incorporated Goldman, Sachs & Co. Hambrecht & Quist LLC Volpe Brown Whelan & Company, LLC -------------- Total U.S. Firm Shares: -------------- --------------
SCHEDULE II INTERNATIONAL UNDERWRITERS
Number of Firm Underwriter Shares To Be Purchased ----------- ---------------------- Morgan Stanley & Co. International Limited Goldman Sachs International Hambrecht & Quist LLC Volpe Brown Whelan & Company, LLC -------------- Total International Firm Shares: -------------- --------------
EX-10.31 3 ASSET PURCHASE AGREEMENT EXHIBIT 10.31 CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. ASSET PURCHASE AGREEMENT This Asset Purchase Agreement (this "ASSET PURCHASE AGREEMENT" or "AGREEMENT"), dated December 31, 1998, is an agreement by and between SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC., a corporation organized and existing under the laws of Delaware ("SELLER") and Healtheon Corporation, a corporation organized and existing under the laws of Delaware ("BUYER"). Capitalized terms used in this Asset Purchase Agreement and not otherwise defined herein are defined in EXHIBIT A hereto. PREAMBLE Buyer is in the business of providing and managing certain information services and desires to provide services to Seller relating to reporting of results of clinical laboratory tests to Providers. Seller provides laboratory testing services to certain Providers who receive clinical laboratory test result reports via teleprinters and related assets owned by Seller. Buyer desires to purchase and Seller desires to sell teleprinters and related assets as more fully set forth herein. Concurrently with the execution and delivery of this Agreement, Seller and Buyer are entering into a Services Agreement whereby Buyer agrees, among other things, to facilitate the provision of Teleprinter Services to Providers and Seller agrees to pay certain compensation to Buyer in connection therewith. This Agreement states the parties' agreements relating to the purchase and sale of the Purchased Assets and certain transition matters. AGREEMENT NOW THEREFORE, in consideration of the recitals and of the respective covenants, representations, warranties and agreements herein contained, and intending to be legally bound hereby, the parties hereto hereby agree as follows: ARTICLE I PURCHASE AND SALE SECTION 1.1. AGREEMENT TO SELL. At the Closing, Seller hereby agrees to sell, convey, assign, transfer and deliver to Buyer, upon and subject to the terms and conditions of this Agreement, all right, title and interest of Seller in and to the following assets, free and clear of all Liens: 1.1.1. All of the teleprinters owned by Seller and used for Teleprinter Services or intended by Seller to be used for Teleprinter Services located at Provider Sites, or in the case of inventory, spare or replacement teleprinters, at Provider Sites, Seller Labs or Seller's suppliers, or with Seller's sales and distribution representatives; 1.1.2. The printer stands and incidental supplies owned by Seller and used or intended by Seller for use in conjunction with the teleprinters described in Section 1.1.1; and 1.1.3. To the extent assignable and assumed by Buyer, the contracts between Seller and Key Communications, Inc. relating to the provision of products or services to Providers in connection with Seller's provision of Teleprinter Services to Provider Sites. SECTION 1.2. INVENTORY. Seller shall count and identify by way of performing a physical inventory as of the Closing Date, any Purchased Assets not located at a Provider Site, such inventory to be completed as soon as practicable but in all events [*] following the Closing. The portion of the Purchased Assets identified pursuant to the physical inventory shall be listed on a schedule which shall be delivered to Buyer within [*] after completion of the physical inventory. SECTION 1.3. AGREEMENT TO PURCHASE. Buyer hereby agrees to purchase the Purchased Assets from Seller, upon and subject to the terms and conditions of this Agreement and in reliance on the representations, warranties and covenants of Seller contained herein, for (i) the Purchase Price and (ii) the execution and delivery of the assumption agreement referenced in Section 5.2.4. SECTION 1.4. PURCHASE PRICE. The purchase price for the Purchased Assets shall be thirteen million dollars ($13,000,000), to be paid by (i) a wire transfer in the amount of two million dollars ($2,000,000) in United States federal funds to such account as Seller shall designate prior to the Closing, and (ii) the issuance to Seller of the Consideration Shares. SECTION 1.5. ASSUMPTION OF CONTRACTS. To the extent assignable, Seller will assign to Buyer on the Closing Date, and Buyer will assume, all of Seller's obligations under the Assumed Contracts. SECTION 1.6. CALCULATION OF CONSIDERATION SHARES. 1.6.1. If Buyer has not consummated an initial public offering of its common stock pursuant to the Securities Act as of the Closing, then the number of Consideration Shares shall be 1,833,333. 1.6.2. If Buyer has consummated an initial public offering of its common stock pursuant to the Securities Act as of the Closing, then the number of Consideration Shares shall be the result of eleven million dollars ($11,000,000) divided by [*] for the five (5) business days (or such lesser number of business days since the consummation of such initial public offering) immediately preceding the Closing Date. 1.6.3. The number of Consideration Shares shall be equitably adjusted for any subdivision or combination of shares of Buyer capital stock or similar change in Buyer's [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -2- capital structure (whether by stock split, stock dividend, merger, share exchange, consolidation or otherwise) occurring between the date hereof and the Closing Date. ARTICLE II CLOSING SECTION 2.1. TIME AND PLACE. Unless otherwise mutually agreed to in writing by both parties, the closing of the transactions (the "Closing") contemplated hereby shall be held at the offices of Pepper Hamilton LLP, at 3000 Two Logan Square, 18th and Arch Streets, Philadelphia, Pennsylvania, and shall be held promptly after the satisfaction or waiver of all of the conditions precedent set forth in Article V hereof, or at such time as the parties may otherwise mutually agree (the date of Closing, the "Closing Date"). ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.1. BY SELLER. Seller hereby represents and warrants to Buyer as follows: 3.1.1. ORGANIZATION AND STANDING. Seller is a corporation duly organized, validly existing, and in good standing under the laws of Delaware. Seller has full power and authority to provide Teleprinter Services. 3.1.2. POWER AND AUTHORITY. Seller has the requisite power and authority to execute, deliver and perform this Agreement and each of the Collateral Documents by Seller and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance of this Agreement and each of the Collateral Documents to which it is a party, and the consummation of the transactions contemplated hereby and thereby, have been duly authorized by all necessary action on the part of Seller and requires no further authorization or consent by Seller. This Agreement is and each of the Collateral Documents will be, once fully executed, valid and binding obligations, enforceable in accordance with their respective terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally or by general principles of equity. 3.1.3. VALIDITY OF CONTEMPLATED TRANSACTIONS. (a) NO VIOLATION. The execution, delivery and performance of this Agreement and each of the Collateral Documents to which it is a party, and the consummation of the transactions contemplated hereby and thereby, do not and will not (i) violate, breach or contravene any of the terms, conditions or provisions of the Certificate of -3- Incorporation or Bylaws of Seller, (ii) violate any Regulation or Court Order applicable to Seller or to any of the Purchased Assets, or (iii) violate, breach or contravene any of the terms, conditions or provisions of any mortgage, indenture, agreement, contract, commitment, lease or other instrument, document or understanding, oral or written, to which Seller is a Party. (b) REQUIRED FILINGS. Seller will not be required to make any filing or registration with, or obtain any Permit from, any Governmental Entity in order to execute, deliver and perform its obligations under this Agreement and each of the Collateral Documents to which it is a party. 3.1.4. REAL PROPERTY. Seller neither owns nor leases (either as lessee or lessor) any real property related exclusively to its provision of Teleprinter Services. 3.1.5. PERSONAL PROPERTY. (a) Except as provided in Section 3.1.5(c), Seller owns and has good title to the Purchased Assets, free and clear of any and all Liens of any kind or nature, except for Liens which will have been removed on or prior to the Closing Date. (b) Except as provided in Section 3.1.5(c), Seller does not lease from any Person any of the Purchased Assets, and Seller does not lease any personal property as lessor in connection with its provision of Teleprinter Services. (c) Certain of the Purchased Assets are subject to equipment financing leases. Seller expects that such leases will have been paid in full on or prior to the Closing Date or within a [*] period after Closing as contemplated by Section 5.1.6. Upon repayment of such leases, Buyer will have good title to such Purchased Assets, free and clear of any and all Liens of any kind or nature. 3.1.6. COMPLIANCE WITH LAWS. To Seller's knowledge, in its provision of Teleprinter Services and incidental services or benefits provided to Providers in connection with the provision of Teleprinter Services, Seller has complied in all material respects with all applicable Regulations. 3.1.7. LITIGATION. There is no Litigation pending or, to Seller's knowledge threatened, against or related to Seller, which seeks to prohibit or delay the execution, delivery or performance of this Agreement or the Collateral Documents or the consummation of the transactions contemplated hereby or thereby. 3.1.8. CONTRACTS AND COMMITMENTS; WARRANTIES. (a) All Assumed Contracts are in full force and effect. No material Default by Seller, or, to Seller's knowledge, any other party, under any of the terms or conditions set forth in any Assumed Contract to which it is bound has occurred or, to Seller's knowledge, been asserted. The execution, delivery and performance of this Agreement and the [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -4- Collateral Documents, and the consummation of the transactions contemplated hereby or thereby, will not conflict with, result in a breach of, or constitute a Default under any such Assumed Contract, affect the continuation, validity and effectiveness of any of such Contract, or any terms thereof, or result in the creation of any Lien upon any of the Purchased Assets, or result in the acceleration of the maturity of any payment date of any of Seller's obligations, or increase or adversely affect the obligations of Seller or Buyer (after assumption) thereunder. Seller has provided true, correct and complete copies of the Assumed Contracts to Buyer for review. 3.1.9. CONDITION OF ASSETS. The Purchased Assets are in good operating condition, and are able to provide Teleprinter Services to each of the Providers, subject to ordinary wear and tear and repairs needed which are consistent with past practice. Seller has maintained and repaired the Purchased Assets in the ordinary course of business consistent with past practice. Except as expressly provided herein or in the Services Agreement, Seller otherwise makes no representation, warranty, statement or promise to Buyer concerning the Purchased Assets, the quality, value, physical aspects or condition thereof, any dimensions or specifications of the Purchased Assets, the feasibility, desirability, convertibility of the Purchased Assets for or into any particular use, the current or projected income or expenses of the Purchased Assets or any other matter with respect to the Purchased Assets. In entering into this Agreement, Buyer has not relied upon any representation, statement or warranty of Seller except as expressly set forth in this Agreement or in the Services Agreement, and that, subject to the foregoing, Buyer acknowledges that it is purchasing the assets "as is" and "where is". Buyer does hereby waive and Seller does hereby disclaim all other warranties of any kind or type whatsoever with respect to the Purchased Assets, whether expressed or implied, including by way of description but not limitation, those of fitness for a particular purpose and use. 3.1.10. BROKERS AND FINDERS. No third party is entitled to receive any commission, fees or similar consideration in connection with the transactions contemplated by this Agreement based on any arrangement or agreement made by or on behalf of Seller for which Buyer could become obligated. 3.1.11. INVESTMENT REPRESENTATIONS; LEGEND ON SHARES. (a) Seller hereby acknowledges that (i) the Consideration Shares delivered pursuant to this Agreement have not been registered under the Securities Act, and the resale of such shares is therefore subject to restrictions imposed by federal and state securities laws including without limitation that such shares cannot be sold or otherwise disposed of except in a transaction which is registered under the Securities Act or exempted from registration; (ii) Buyer has advised Seller, a reasonable time prior to the execution of this Agreement, that the shares have not been registered under the Securities Act; and (iii) all certificates representing the shares delivered to Seller shall be stamped or otherwise imprinted with a legend substantially in the following form (together with any other legend required by state law), and that stop transfer orders will be given to Buyer's transfer agent: -5- "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES ACTS AND MAY NOT BE TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS THEY HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND ANY APPLICABLE STATE SECURITIES ACTS OR EXEMPTIONS FROM SUCH REGISTRATIONS ARE AVAILABLE." (b) Seller is an accredited investor (as such term is defined in Rule 506 of Regulation D promulgated by the SEC) and is acquiring the Consideration Shares for its own account for investment purposes only, and not with a view to the distribution, transfer, or assignment of the same in whole or in part. Seller has been represented by counsel and advisers, each of whom has been previously selected by Seller, as Seller has found necessary to consult concerning this Agreement and the shares to be issued pursuant to this Agreement. Seller, either alone or with its representative(s), has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the prospective investment. Seller and its counsel and other advisers have been provided with such information concerning Buyer as they have deemed relevant with respect to Seller's investment decision relating to the shares being delivered to it. Seller has had a reasonable opportunity to ask questions and receive answers concerning the terms and conditions of the transactions contemplated by this Agreement, to discuss Buyer's business, management and financial affairs with the management of Buyer, and to obtain any additional information which Buyer possesses or can acquire without unreasonable effort or expense that is necessary to verify the accuracy of the information furnished. Seller has received satisfactory responses from management of Buyer to Seller's inquiries. 3.1.12. NUMBER OF PROVIDER SITES. The Purchased Assets include [*] teleprinters that are being used at Provider Sites. 3.1.13. FULL DISCLOSURE. No representation or warranty by Seller contained in this Agreement contains any untrue statement of a material fact or omits a material fact necessary to make the statements made herein true and not misleading. SECTION 3.2. BY BUYER. Buyer hereby represents and warrants to Seller as follows: 3.2.1. ORGANIZATION AND STANDING. Buyer is a corporation duly organized, validly existing, and in good standing under the laws of Delaware. Buyer has full power and authority to carry on its business as it is now being conducted and to own and operate the properties and assets now owned and operated by it. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -6- 3.2.2. POWER AND AUTHORITY. Buyer has the requisite power and authority to execute, deliver, and, subject to obtaining the approval of Buyer's Board of Directors and the waivers required under the Investors' Rights Agreement (as set forth in Section 5.1.5), perform this Agreement and each of the Collateral Documents to be executed and delivered hereunder by Buyer and to consummate the transactions contemplated hereby and thereby. This Agreement is and each of the Collateral Documents will be, once fully executed, valid and binding obligations, enforceable in accordance with their respective terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally or by general principles of equity. 3.2.3. VALIDITY OF CONTEMPLATED TRANSACTIONS. (a) NO VIOLATION. The execution, delivery, and, subject to obtaining the approval of Buyer's Board of Directors and the waivers required under the Investors' Rights Agreement (as set forth in Section 5.1.5), performance of this Agreement and each of the Collateral Documents to which it is a party, and the consummation of the transactions contemplated hereby and thereby, do not and will not (i) violate, breach or contravene any of the terms, conditions or provisions of the Certificate of Incorporation or Bylaws of Buyer, (ii) violate any Regulation or Court Order applicable to Buyer, or (iii) violate, breach or contravene any of the terms, conditions or provisions of any mortgage, indenture, agreement, contract, commitment, lease or other instrument, document or understanding, oral or written, to which Buyer is a party. (b) NO DEFAULT. No Default by Buyer under any Contract has occurred or, to Buyer's knowledge, been asserted, which could reasonably be expected to have a Material Adverse Effect. The execution, delivery and performance of this Agreement and the Collateral Documents, and the consummation of the transactions contemplated hereby or thereby, will not conflict with, result in a breach of, or constitute a Default under any such Contract, affect the continuation, validity and effectiveness of any such Contract, or any terms thereof, or result in the acceleration of the maturity of any payment date of any of Buyer's obligations, or increase or adversely affect the obligations of Buyer thereunder, except such as could not reasonably be expected to cause a Material Adverse Effect; provided, however, that the execution, delivery and performance of this Agreement and the Collateral Documents, and the consummation of the transactions contemplated hereby or thereby, could conflict with, result in a breach of, or constitute a Default under the Investors' Rights Agreement if, and only if, the waivers referenced in Section 5.1.5 are not obtained prior to Closing. (c) REQUIRED FILINGS. Buyer will not be required to make any filing or registration with, or obtain any Permit from, any Governmental Entity in order to execute, deliver and perform its obligations under this Agreement and each of the Collateral Documents to which it is a party. 3.2.4. LITIGATION. There is no Litigation pending or, to Buyer's knowledge threatened, against or related to Buyer, which seeks to prohibit or delay the -7- execution, delivery or performance of this Agreement or the Collateral Documents or the consummation of the transactions contemplated hereby or thereby. There are no actions at law, suits in equity or other proceedings or, to the knowledge of Buyer, any investigations, in any court, tribunal or by or before any other governmental or public authority or agency or any arbitrator or arbitration panel or any governmental or private third-party insurance agency, pending or, to the knowledge of Buyer, threatened, against or affecting Buyer that either individually or in the aggregate, would have a Material Adverse Effect, or, would question the validity or enforceability of this Agreement, the Collateral Documents, or any of the transactions contemplated hereby and thereby. Buyer is not in default with respect to any Court Order. 3.2.5. BUYER FINANCIAL STATEMENTS; UNDISCLOSED LIABILITIES. (a) SCHEDULE 3.2.5 hereto contains a true and correct copy of (i) the balance sheets of Buyer at December 31, 1996, December 31, 1997 and June 30, 1998 and the statements of operations, statements of stockholders equity and statements of cash flows of Buyer for the years ended December 31, 1996 and December 31, 1997, and the six months ended June 30, 1998, which have been audited by Ernst & Young LLP, independent accountants (the "BUYER FINANCIAL STATEMENTS"), and (ii) the September 30, 1998 unaudited financial statements of Buyer delivered in accordance with the Investors' Rights Agreement (the "BUYER UNAUDITED STATEMENTS"). (b) The Buyer Financial Statements have been prepared in accordance with GAAP applied on a consistent basis during the respective periods covered thereby. The Buyer Financial Statements are correct and complete and present fairly in all material respects the financial position of Buyer at the date of the balance sheets included therein and the results of operations and cash flows of Buyer for the respective periods covered by the statements of operations and cash flows included therein. Buyer has no material obligations or liabilities of any nature whatsoever (whether absolute, accrued, contingent or otherwise and whether due or not due) which would be required by GAAP to be disclosed in the Buyer Unaudited Statements and which are not disclosed by the Buyer Unaudited Statements. Buyer has no material obligations or liabilities of any nature whatsoever (whether absolute, accrued, contingent or otherwise, known or unknown, and whether due or not due) which, either individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect and which are not disclosed by the Buyer Unaudited Statements. (c) The Buyer Unaudited Statements have been prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein (except as otherwise disclosed therein) and certified by the chief financial officer of Buyer as presenting fairly the financial condition and results of operations of Buyer and any of its Subsidiaries for the periods covered by the statements (subject to customary exceptions for interim unaudited financial statements). 3.2.6. CONSENTS. No consent, approval or authorization of, or qualification, designation, declaration or filing with, or notice to any governmental authority on -8- the part of Buyer is required in connection with (a) the valid execution and delivery of this Agreement and the Collateral Documents and (b) the issuance of the Consideration Shares. 3.2.7. CAPITALIZATION. (a) The authorized capital stock of Buyer consists of the authorized, issued and outstanding capital stock set forth in SCHEDULE 3.2.7. None of such issued shares is held in the treasury of Buyer. Except as set forth in SCHEDULE 3.2.7, Buyer does not have outstanding any stock or securities convertible into or exchangeable for any shares of its capital stock and no Person has any right against Buyer to subscribe for or to purchase, or any options for the purchase, or any agreements providing for the issuance, of any capital stock or any stock or securities convertible into capital stock of Buyer. (b) All of the issued and outstanding shares of Buyer capital stock have been validly issued and are fully paid and non-assessable. The Consideration Shares, when issued to Seller pursuant to this Agreement, will be validly issued, fully paid and nonassessable, will have the designations, preferences, limitations, and relative rights of common stock as set forth in Buyer's charter, a true and correct copy of which is attached hereto in SCHEDULE 3.2.7, and will be free and clear of all liens, claims and encumbrances. 3.2.8. REGISTRATION RIGHTS. Except as provided in the Investors' Rights Agreement or in a separate writing delivered to and acknowledged by Seller prior to or concurrently with Closing, and except for the registration rights to be provided to Seller as contemplated by this Agreement, Buyer is not under any obligation to register under the Securities Act any of its outstanding securities or any of its securities which may hereafter be issued. 3.2.9. OFFERING. Subject to the accuracy of the representations and warranties by Seller in Section 3.1.11 hereof, the issuance of the Consideration Shares at the Closing constitutes a transaction exempt from the registration requirements of Section 5 of the Securities Act, and from the qualification requirements of any applicable state securities or "blue sky" laws. 3.2.10. CHANGES. Since the date of the most recent Buyer Financial Statements and except as set forth in a separate writing delivered to and acknowledged by Seller prior to or concurrently with Closing, there has not been (i) any adverse change in the assets, liabilities or financial condition of Buyer from that reflected in the Buyer Financial Statements, other than any such changes disclosed in the Buyer Unaudited Statements, which, either individually or in the aggregate with other adverse changes, has had or could reasonably be expected to have a Material Adverse Effect or (ii) any adverse change in the prospects of Buyer or any other event or condition (or events or conditions) of any character which, either individually or cumulatively, has had or could reasonably be expected to have a Material Adverse Effect. -9- 3.2.11. SUBSIDIARIES. Except as set forth in SCHEDULE 3.2.11, Buyer has no Subsidiaries. Except as set forth in this Agreement, Buyer does not own, or have the right to acquire, any securities or other equity or ownership interest in or the assets of any corporation, association or other business entity or Person. 3.2.12. TITLE TO PROPERTIES. Buyer has good and marketable title to its properties and assets and has good title to all its respective leasehold interests. 3.2.13. INTELLECTUAL PROPERTY, ETC. Buyer owns or possesses the rights to use, free from burdensome restrictions or conflicts with the rights of others, all Intellectual Property necessary for the conduct of Buyer's business as now conducted and as proposed to be conducted. All licenses constituting Buyer's Intellectual Property are in full force and effect and constitute legal, valid and binding obligations of the respective parties thereto, and there have not been and are not any Defaults thereunder by any party that could reasonably be expected to have a Material Adverse Effect. Buyer has not received any communications alleging that it has violated or, by conducting its business as proposed, would violate any of the Intellectual Property rights of any other Person. To Buyer's knowledge, none of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that could reasonably be expected to interfere with the use of their best efforts to promote the interests of Buyer and cause a Material Adverse Effect, or that could reasonably be expected to conflict with Buyer's business and cause a Material Adverse Effect. Neither the execution nor delivery of this Agreement, nor the carrying on of Buyer's business by the employees of Buyer, nor the conduct of Buyer's business, will, to Buyer's knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a Default under, any Contract under which any of such employees is now obligated, which conflict or breach could reasonably be expected to have a Material Adverse Effect. Buyer does not believe it is or will be necessary to utilize any inventions of any of its employees made prior to their employment by Buyer. 3.2.14. COMPLIANCE WITH LAW AND ORGANIZATIONAL DOCUMENTS. Buyer is in compliance with all Regulations to which it is subject, the violation of which, either individually or in the aggregate, would have a Material Adverse Effect, and Buyer is not in violation or in Default under any term of its organizational documents. 3.2.15. EMPLOYEE BENEFIT PLANS. Except where an inaccuracy in this Section 3.2.15 could not reasonably be expected to have a Material Adverse Effect: (a) all Employee Benefit Plans conform (and at all times have conformed) in all respects to, and are being administered and operated (and have at all time been administered and operated) in compliance with their terms, the requirements of ERISA, the Code and all other applicable laws; (b) neither Buyer nor any Controlled Group Member sponsors or contributes to, and has not in the past sponsored or contributed to, and has no Liability with -10- respect to, any defined benefit plan subject to Title IV of ERISA or any multi-employer plan (as defined in Section 3(37) of ERISA). Neither Buyer nor any ERISA Affiliate has any current or contingent obligation to any multi-employer plan (as defined in Section 3(37) of ERISA). (c) neither Buyer nor any Controlled Group Member maintains any plan or arrangement that provides post retirement medical benefits, post retirement death benefits or other post retirement welfare benefits, other than to the extent required by Part 6 of Title I of ERISA. 3.2.16. COMPLIANCE WITH ENVIRONMENTAL LAWS. (a) Buyer is in compliance with all environmental Regulations applicable to Buyer with respect to all discharges into the ground and surface water, emissions into the ambient air and generation, accumulation, storage, treatment, recycling, transportation, labeling or disposal of waste materials or process by-products, except violations which, either individually or in the aggregate, would not have a Material Adverse Effect. Buyer is not liable for any penalties, fines or forfeitures for failure to comply with any of the foregoing. All licenses, permits or registrations required for the Buyer's business as presently conducted and proposed to be conducted, under any environmental Regulations have been or will, in a timely manner, be obtained or made, except where the lack thereof would not either individually or in the aggregate, have a Material Adverse Effect, and Buyer is in compliance therewith in all material respects. (b) Except such as would not, either individually or in the aggregate, cause a Material Adverse Effect, no release, emission or discharge into the environment of hazardous substances, as defined under the Comprehensive Environmental Response, Compensation, and Liability Act, as amended, or hazardous waste, as defined under the Resource Conservation and Recovery Act, or air pollutants as defined under the Clean Air Act, or pollutants, as defined under the Clean Water Act, by Buyer has occurred or is presently occurring on or from any property owned or leased by Buyer in excess of federal, state or local permitted releases or reportable quantities, or other concentrations, standards or limitations under the foregoing Regulations governing the protection of health and the environment or under any other Regulations (then or now applicable, as the case may be). (c) Except such as would not, either individually or in the aggregate, cause a Material Adverse Effect, Buyer has never (1) to its knowledge, owned, occupied or operated a site or structure on or in which any hazardous substance was or is stored, transported or disposed of in violation of any environmental Regulations at such time as such site or structure was owned, occupied or operated by Buyer or at any other time, or (2) stored, transported or disposed of or arranged for the storage, transportation or disposal of any hazardous substance other than in full compliance with all applicable environmental Regulations. Buyer has never caused or been held legally responsible for any release or threatened release of any hazardous substance, or received notification from any federal, state or other governmental authority of any such release or threatened release, or that Buyer may be required to pay any -11- costs or expenses incurred or to be incurred in connection with any efforts to mitigate the environmental impact of any release or threatened release, of any hazardous substance from any site or structure owned, occupied or operated by Buyer. 3.2.17. INSURANCE. Buyer has fire, casualty, liability, and business interruption insurance policies with recognized insurers, in such amounts and with such coverage as set forth in SCHEDULE 3.2.17. Except as set forth in a separate writing (applicable only to Buyer) delivered to and acknowledged by Seller prior to or concurrently with Closing, substantially similar liability insurance (taking into account, with respect to Buyer, the growth of Buyer's business and, therefore, insured risk, during such period) has been maintained by Buyer and ActaMed without interruption for each of the last two (2) years. 3.2.18. TAXES. All federal, state and other tax returns of Buyer required by law to be filed have been duly filed and all federal, state and other Taxes, assessments, fees and other federal governmental charges upon Buyer or any of the properties, incomes or assets of Buyer that are due and payable have been paid, except where an inaccuracy in the foregoing could not reasonably be expected to have a Material Adverse Effect. No extensions of the time for the assessment of deficiencies have been granted to Buyer in connection with any federal tax, assessment, fee or other federal governmental charge. There are no Liens on any properties or assets of the Buyer imposed or arising as a result of the delinquent payment or the non-payment of any tax, assessment, fee or other governmental charge. The charges, accruals and reserves, if any, on the books of Buyer in respect of all Taxes for all fiscal periods to date are adequate and in accordance with GAAP, and Buyer knows of no additional unpaid assessments for such periods or other governmental charges payable by Buyer in connection with the execution and delivery of this Agreement, the Collateral Documents or the issuance of the Consideration Shares by Buyer, other than stock transfer taxes, recording fees and filing fees in connection with state securities or "blue sky" filings, if any. 3.2.19. INVESTMENT COMPANY. Buyer is not an "investment company", or an "affiliated person" of an "investment company", or a company "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended, and Buyer is not an "investment adviser" or an "affiliated person" of an "investment adviser" as such terms are defined in the Investment Advisers Act of 1940, as amended. 3.2.20. LABOR RELATIONS. Buyer is not engaged in any unfair labor practices. There is: (a) no unfair labor practice complaint pending or, to the best of Buyer's knowledge, threatened against Buyer before the National Labor Relations Board or any court or labor board, and no grievance or arbitration proceedings arising out of or under collective bargaining agreements is so pending or, to the best of Buyer's knowledge, threatened, (b) no strike, lock-out, labor dispute, slowdown or work stoppage pending or, to the best of Buyer's knowledge, threatened against Buyer, and -12- (c) no union representation or certification question existing or pending with respect to the employees of Buyer, and, to the best knowledge of Buyer, no union organization activity taking place, other than such actions or proceedings as, either individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. 3.2.21. NO CONFLICT OF INTEREST. Buyer is not indebted, directly or indirectly, to any Substantial Holder, or, to Buyer's knowledge, to any Affiliate of a Substantial Holder, in any amount whatsoever. To the best knowledge of Buyer, none of the Substantial Holders, or any of their Affiliates, is indebted to any firm or corporation with which Buyer is affiliated or with which Buyer has a business relationship, or any firm or corporation which competes with Buyer. Except as set forth in Schedule 3.2.21, no Substantial Holder, or, to Buyer's knowledge, any Affiliate of a Substantial Holder, is directly or indirectly interested in any contract with Buyer or any of its Subsidiaries. 3.2.22. FUNDAMENTAL TRANSACTIONS. Except as disclosed in writing to Seller prior to or concurrently with Closing, Buyer is not engaged in any substantive negotiations that Buyer reasonably believes will lead to a change in control of Buyer or a change in ownership of a substantial portion of Buyer's assets. 3.2.23. BROKERS AND FINDERS. No third party is entitled to receive any commission, fees or similar consideration in connection with the transactions contemplated by this Agreement based on any arrangement or agreement made by or on behalf of Buyer for which Seller could become obligated. 3.2.24. FULL DISCLOSURE. No representation or warranty by Buyer contained in this Agreement contains any untrue statement of a material fact or omits a material fact necessary to make the statements made herein or therein true and not misleading. ARTICLE IV COVENANTS SECTION 4.1. COVENANTS OF SELLER. 4.1.1. OPERATION OF THE BUSINESS. Except with the prior written consent of Buyer or as necessary to effect the transactions contemplated by this Agreement, Seller shall, from and after the date hereof until the Closing, in connection with its provision of Teleprinter Services: (i) provide Teleprinter Services in substantially the same manner as presently being conducted; (ii) maintain and repair the Purchased Assets consistent with past practice; (iii) perform its obligations under the vendor contracts referenced in Section 1.1.3; and (iv) notify Buyer of any development that could materially and adversely affect Seller's ability to fulfill its obligations under this Agreement or its ability to continue to provide Teleprinter Services. -13- 4.1.2. ACCESS TO INFORMATION. At all times prior to the Closing, the attorneys, accountants, agents and other authorized and designated representatives of Buyer will be allowed upon reasonable advance notice and with minimal disruption to Seller's business operations, reasonable access to the properties, books and records of Seller relating to the Purchased Assets, including without limitation, title documents, leases, customer lists, and other data that, in the reasonable opinion of both Buyer and Seller, are required for Buyer to obtain such information as it may reasonably request about the Purchased Assets or to verify the Non-Telecom Baseline Amount and the Initial Baseline Telecom Amount (as defined in the terms and conditions set forth on EXHIBIT B hereto). Buyer shall also be allowed reasonable opportunity to consult with the officers, employees, accountants, counsel and agents of Seller in connection with such investigation. 4.1.3. OTHER OFFERS AND EXCLUSIVE DEALING. Prior to the Closing Date, Seller shall not, directly or indirectly, (a) solicit, initiate or encourage submission of proposals or offers from any Person, corporation or other entity for the purpose of selling the Purchased Assets, or relating to the provision of Teleprinter Services to Providers, (b) participate in any discussions or negotiations regarding, or, except as required by a legal or judicial process, furnish to any other Person, corporation or other entity any information with respect to, or otherwise cooperate in any way with, or assist or participate in, facilitate or encourage, any effort or attempt by any other Person to purchase the Purchased Assets or to obtain the right to provide Teleprinter Services to Providers, or (c) approve or undertake any such transaction; provided, however, that this covenant shall not limit in any way the ability of Seller or any of its Affiliates to be sold to (whether via sale of stock or substantially all assets), or merged or consolidated with, any other Person, or to take any actions deemed appropriate in connection therewith. 4.1.4. NOTICE OF CHANGE. Seller shall promptly notify Buyer of the existence or happening of any fact, event or occurrence prior to the Closing and of which Seller has knowledge which may materially alter the accuracy or completeness of any representation or warranty contained in Section 3.1 of this Agreement. 4.1.5. OTHER DELIVERIES. At or prior to Closing, Seller shall have delivered to Buyer any written disclosures referenced in this Agreement which have not been delivered as of the date hereof, which other disclosures shall be incorporated into this Agreement pursuant to Section 10.2 as if they were attached to this Agreement at the date hereof. 4.1.6. BEST EFFORTS. Subject to the other provisions of this Agreement, Seller shall use its best efforts to cause the conditions listed in Section 6.1 hereof to be satisfied expeditiously and on the Closing Date and to take all actions necessary in order to consummate the transactions contemplated hereby and by the Collateral Documents on the terms and conditions herein and therein. -14- SECTION 4.2. COVENANTS OF BUYER. Buyer covenants and agrees as follows: 4.2.1. PRIOR COVENANTS. Buyer hereby acknowledges its covenants made in Section 5.1.1 ("Transactions with Affiliates"), Section 5.1.2 ("Corporate Existence, Business, Maintenance, Insurance") and Section 5.2 ("Informational Covenants of Healtheon") of the Asset Purchase Agreement between ActaMed and Seller dated December 31, 1997, as amended by Amendment No. 1 to Asset Purchase Agreement dated May 18, 1998 among Seller, ActaMed and Buyer (the "Prior Covenants"). Buyer agrees that (i) to the extent the Prior Covenants apply for so long as Seller owns stock of Buyer, such Prior Covenants shall also apply for so long as an Affiliate of Seller owns stock of Buyer (or a designated percentage thereof, as applicable), and (ii) the Consideration Shares shall be taken into account in assessing Losses, if any, arising from a breach of any of the Prior Covenants. 4.2.2. NOTICE OF CHANGE. Buyer shall promptly notify Seller of the existence or happening of any fact, event or occurrence prior to the Closing and of which Buyer has knowledge which may materially alter the accuracy or completeness of any representation or warranty contained in Section 3.2 of this Agreement. 4.2.3. OTHER DELIVERIES. At or prior to Closing, Buyer shall have delivered to Seller completed schedules to, and any other written disclosures referenced in, this Agreement which have not been delivered as of the date hereof, which other schedules and disclosures shall be incorporated into this Agreement pursuant to Section 10.2 as if they were attached to this Agreement at the date hereof. 4.2.4. BEST EFFORTS. Subject to the other provisions of this Agreement, Buyer shall use its best efforts to cause the conditions listed in Section 5.2 hereof to be satisfied expeditiously and on the Closing Date and to take all actions necessary in order to consummate the transactions contemplated hereby and by the Collateral Documents on the terms and conditions herein and therein. 4.2.5. COVENANTS OF SELLER AND BUYER 4.2.6. CONFIDENTIALITY OF TRADE SECRETS. Each party hereto agrees not to use, copy or disclose the Trade Secrets of the other party, except as permitted by this Agreement and the Collateral Documents. Each party shall treat the other's Trade Secrets with at least that degree of care it uses with respect to its own such Trade Secrets. Seller will give access to its Trade Secrets relating to its provision of Teleprinter Services to those Buyer personnel who have a need for such access and to no other Person whatsoever. Buyer will give access to its Trade Secrets relating to its anticipated performance under the Services Agreement to those Seller personnel who have a need for such access and to no other Person whatsoever. If any party is ordered by a court, administrative agency, or other governmental body of competent jurisdiction to disclose Trade Secrets, or if it is served with or otherwise becomes aware of a motion or similar request that such an order be issued, then such party will not be liable to the other party -15- for disclosure of Trade Secrets required by such order if the disclosing party complies with the following requirements: (1) if an already issued order calls for immediate disclosure, then the disclosing party shall immediately move for or otherwise request a stay of such order to permit the other party to respond; (2) the disclosing party promptly notifies the other party of the motion or order; and (3) the disclosing party does not oppose a motion or similar request by the other party for an order protecting the Trade Secrets including joining or agreeing to (or non-opposition to) a motion for leave to intervene by such other party. Notwithstanding anything to the contrary contained in this Agreement, Seller may disclose to the OIG as part of the disclosure Seller makes under its Integrity Agreement the fact that Seller and Buyer have entered into the transactions contemplated by the parties and any information relating to such transaction or this Agreement which Seller determines, in good faith upon advice of counsel, is required or, in light of Seller's obligations under the Integrity Agreement, appropriate for Seller to make, or Seller proposes to make in response to a request for such information from the OIG, provided that Buyer shall be given opportunity (which shall be reasonable in light of all facts and circumstances) to review and comment upon the information Seller intends to include in any such submission. In the event that any such disclosure that Seller intends to make includes any information that constitutes Trade Secrets of Buyer, Seller will provide reasonable (in light of all facts and circumstances, including the time frame in which such disclosure is required to be made) assistance to Buyer to take reasonable steps to assure that such Trade Secrets of Buyer are maintained in confidence, including, but not limited to, (i) requesting that the OIG treat such information as trade secrets within the meaning of the Freedom of Information Act, 5 U.S.C. Section 552(b)(4), (ii) requesting of the OIG that Seller and Buyer be given prior notice of a proposed release of such information to Persons or entities outside of the OIG; (iii) requesting that the OIG otherwise assure the confidentiality of the information provided by Buyer as if such information was a Trade Secret of Seller as provided for in Section 46 of the Integrity Agreement and taking other reasonable steps that may be requested by Buyer and to which Seller may, in its sole discretion, agree to assure that the OIG honors its confidentiality obligations in that section; (iv) where such information is o be provided in response to a request by the OIG, take reasonable steps to narrow the request from the OIG in an appropriate manner in order to limit the amount of information, if any, that constitutes Trade Secrets of Buyer covered by such request; and (v) make reasonable efforts to permit Buyer, with the concurrence of the OIG, to disclose such information directly to the OIG, provided that in any such case, Buyer shall give Seller a timely opportunity to review, comment upon and approve the information Buyer intends to include in such submission. The additional safeguards described in subsections (i) through (v) above are designed to help assure the confidentiality of the Trade Secrets, the disclosure of which would have a material adverse impact on Buyer. These additional provisions are not intended to interfere with Seller's ability to meet its disclosure obligations under the Integrity Agreement. Each party shall promptly notify the other in the event it receives an inquiry, investigation or request for information from the OIG or other governmental agency into the matters relating to the proposed transactions. The provisions of this Section 4.3.1 shall apply in addition to similar provisions in the Services Agreement and shall permanently survive termination of any other provisions of this Agreement or the Collateral Documents. -16- 4.2.7. PUBLIC ANNOUNCEMENTS AND REGISTRATION STATEMENTS. The parties hereto shall jointly develop a mutually acceptable plan (the "COMMUNICATION PLAN") for communicating the transactions contemplated by this Agreement and the Services Agreement to Providers and the public. The parties agree to use their collective best efforts to complete the Communication Plan within [*] after Closing, and each party agrees to abide by such Communication Plan. Without limiting the foregoing, neither party shall send any communication to any Provider describing, or otherwise in connection with, the transactions and relationships contemplated by this Agreement and the Services Agreement, and neither party shall make any disclosure of the transactions contemplated hereby except pursuant to the Communication Plan, unless the form and content of such communication shall have been approved in advance by the other, or unless required by law or judicial process, in which case notification shall be given to the other party hereto sufficiently prior to such disclosure to allow the party receiving such notice to comment on, or take reasonable action to avoid or mitigate, such disclosure. Buyer shall not make any filings with any governmental authority, including registration statements pursuant to the Securities Act, without giving Seller the reasonable opportunity to review and comment on any disclosures pertaining to Seller. In any of the foregoing circumstances, the disclosing party shall use its commercially reasonable efforts to incorporate or otherwise accommodate all reasonable comments or requests of the other party with respect to such contemplated disclosure or filing. ARTICLE V CONDITIONS PRECEDENT TO CLOSING SECTION 5.1. CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER. The obligations of Buyer to consummate the transactions contemplated by this Agreement shall be subject to the satisfaction, on or before the Closing, of each and every one of the following conditions, all or any of which may be waived, in whole or in part, by Buyer for purposes of consummating such transactions, but without prejudice to any other right or remedy which Buyer may have hereunder as a result of any misrepresentation by, or breach of any agreement, covenant or warranty of Seller contained in this Agreement or any of the Collateral Documents. 5.1.1. REPRESENTATIONS AND WARRANTIES; COMPLIANCE WITH AGREEMENT. (i) Each of the representations and warranties of Seller set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing as though made on and as of the Closing (except for representations and warranties qualified by a materiality provision, which representations and warranties shall be true and correct as stated therein), and (ii) Seller shall have performed all covenants, agreements and obligations to be performed by it under this Agreement on or prior to the Closing. 5.1.2. NO INJUNCTION, ETC. No action, proceeding, investigation or Regulation shall have been instituted, threatened or proposed before any court, governmental agency or legislative body to enjoin, restrain, prohibit, or obtain substantial damages in respect [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -17- of, or which is related to, or arises out of, this Agreement or the consummation of the transactions contemplated hereby, or which is related to or arises out of the provision of Teleprinter Services, if such action, proceeding, investigation or Regulation, in the reasonable judgment of Buyer, would make it inadvisable to consummate the transactions contemplated hereby. 5.1.3. COMPLIANCE. Seller shall have delivered to Buyer a certificate (the "SELLER COMPLIANCE CERTIFICATE") to the effect that each of the conditions specified in Sections 5.1.1, 5.1.2 and 5.1.6 is satisfied in all respects, except that Seller shall be permitted to limit to its knowledge the certification with respect to Section 5.1.2, insofar as Section 5.1.2 pertains to threatened or proposed actions, proceedings, investigations or Regulations. 5.1.4. DELIVERIES. Seller shall have executed and delivered the following documents, instruments and agreements: (a) a bill of sale in form and substance reasonably satisfactory to Buyer; (b) an assignment and assumption agreement covering each of the Assumed Contracts in form and substance reasonably satisfactory to Buyer and Seller; (c) a compliance plan relating to compliance by Buyer and Seller with applicable Regulations, including, but not limited to, the federal Physician Self-Referral Law, 42 U.S.C. 1395nn, and the regulations promulgated thereunder, similar state physician self-referral laws and regulations, the federal Medicare/Medicaid Antikickback Law and regulations promulgated thereunder, and similar state antikickback laws and regulations, in form and substance reasonably satisfactory to Buyer and Seller (the "Compliance Plan"). (d) a Seller Secretary's Certificate certifying as to the corporate approvals of this Agreement, the Collateral Documents and the transactions contemplated hereby and thereby, in form and substance reasonably satisfactory to Buyer; (e) the Services Agreement; (f) an agreement between Buyer and Seller in form and substance reasonably satisfactory to Buyer containing lock-up provisions comparable to the lock-up provisions contained in the Investors' Rights Agreement; (g) a schedule identifying the Provider Sites, including their addresses, as of a date not greater than three (3) business days prior to the Closing Date, in form and substance reasonably satisfactory to Buyer, and Seller shall update such schedule to be updated not later than three (3) business days after the Closing Date to identify the Provider Sites, including their addresses, as of the Closing Date; -18- (h) such other documents and instruments as reasonably may be requested by Buyer in order to consummate the transactions contemplated by this Agreement and the Collateral Documents. 5.1.5. OTHER DELIVERIES. All disclosures required to be delivered to Buyer under Section 4.1.5 shall have been delivered to Buyer pursuant thereto in form and substance satisfactory to Buyer. 5.1.6. BOARD APPROVAL; WAIVER UNDER INVESTORS' RIGHTS AGREEMENT. Buyer's Board of Directors shall have approved this Agreement and the waivers required under the Investors' Rights Agreement in order for Buyer to issue the Consideration Shares and grant the registration rights to Seller contemplated by this Agreement, shall have been obtained in accordance with the terms of the Investors' Rights Agreement. 5.1.7. FINANCING LEASES. Seller shall have repaid the financing leases referenced in Section 3.1.5(b) or shall have made commitments for the payment thereof within thirty (30) days after Closing. SECTION 5.2. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER. The obligations of Seller to consummate the transactions contemplated by this Agreement shall be subject to the satisfaction, on or before the Closing (except where an earlier date is specified herein), of each and every one of the following conditions, all or any of which may be waived, in whole or in part, by Seller for purposes of consummating such transactions, but without prejudice to any other right or remedy which Seller may have hereunder as a result of any misrepresentation by, or breach of any agreement, covenant or warranty of Buyer contained in this Agreement or any of the Collateral Documents. 5.2.1. REPRESENTATIONS AND WARRANTIES; COMPLIANCE WITH AGREEMENT. (i) Each of the representations and warranties of Buyer set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing as though made on and as of the Closing (except for representations and warranties qualified by a materiality or Material Adverse Effect provision, which representations and warranties shall be true and correct as stated therein), (ii) the representations and warranties of Buyer set forth in this Agreement (taken as a whole and disregarding any materiality or Material Adverse Effect provisions) shall be true and correct in all material respects as of the date of this Agreement and as of the Closing as though made on and as of the Closing, except where the failure of the representations and warranties (taken as a whole and disregarding any materiality or Material Adverse Effect provisions) to be true and correct in all material respects would not cause a Material Adverse Effect, and (iii) Buyer shall have performed all covenants, agreements and obligations to be performed by it under this Agreement on or prior to the Closing. 5.2.2. NO INJUNCTION, ETC. No action, proceeding, investigation or Regulation shall have been instituted, threatened or proposed before any court, governmental agency or legislative body to enjoin, restrain, prohibit, or obtain substantial damages in respect -19- of, or which is related to, or arises out of, this Agreement or the consummation of the transactions contemplated hereby, or which is related to or arises out of the business of Buyer, if such action, proceeding, investigation or Regulation, in the reasonable judgment of Seller, would make it inadvisable to consummate the transactions contemplated hereby. 5.2.3. COMPLIANCE. Buyer shall have delivered to Seller a certificate (the "BUYER COMPLIANCE CERTIFICATE") to the effect that each of the conditions specified in Sections 5.2.1 and 5.2.2 is satisfied in all respects, except that Buyer shall be permitted to limit to its knowledge the certification with respect to Section 5.2.2, insofar as Section 5.2.2 pertains to threatened or proposed actions, proceedings, investigations or Regulations. 5.2.4. DELIVERIES. Buyer shall have executed and delivered the following documents, instruments and agreements: (a) a certificate in form reasonably satisfactory to Seller for the Consideration Shares; (b) an assignment and assumption agreement covering each of the Assumed Contracts in form and substance reasonably satisfactory to Buyer and Seller; (c) the Compliance Plan; (d) a Buyer Secretary's Certificate certifying as to Buyer's charter, bylaws, good standing, incumbent officers and the resolutions approving this Agreement, the Collateral Documents and the transactions contemplated hereby and thereby, in form and substance reasonably satisfactory to Seller; (e) the Services Agreement; (f) either a Registration Rights Agreement between Buyer and Seller containing registration rights for the Consideration Shares and lock-up provisions comparable to the registration rights and lock-up provisions contained in the Investors' Rights Agreement, or an amendment to the Investors' Rights Agreement in form and substance reasonably satisfactory to Seller, in either case, which grants Seller registration rights which are the same as if the term "Registrable Securities" as used in the Investors' Rights Agreement included the Consideration Shares; and (g) such other documents and instruments as reasonably may be requested by Seller in order to consummate the transactions contemplated by this Agreement and the Collateral Documents. 5.2.5. OTHER DELIVERIES. All schedules and disclosures required to be delivered to Seller under Section 4.2.3 shall have been delivered to Seller pursuant thereto in form and substance satisfactory to Seller. -20- ARTICLE VI POST-CLOSING OBLIGATIONS SECTION 6.1. EXPENSES. Except as otherwise provided herein, each of the parties to this Agreement shall bear its respective expenses incurred in connection with the preparation, execution and performance of this Agreement and the transactions contemplated hereby, including, without limitation, all fees and expenses of agents, representatives, counsel and accountants. SECTION 6.2. TRANSACTION TAXES. Buyer shall pay any documentary, stamp, sales, transfer, use, filing or other similar taxes payable as a result of the transactions contemplated hereby. SECTION 6.3. YEAR 2000 COVENANTS. 6.3.1. SELLER SYSTEMS. Seller hereby represents and warrants to Buyer that Seller's computerized laboratory computer systems known as TopLab will not fail due to: (i) any non-recognition of date data at the change of the century on January 1, 2000, or (ii) the failure of any calculations to accommodate same century and multi-century formulae and date values or date data interface values that reflect the century, in either case, where such failure causes Seller to be unable to accurately transmit reports to Providers via the teleprinters. Seller shall make any necessary modifications to TopLab to ensure accuracy of this warranty. 6.3.2. TELEPRINTERS. Seller has received assurances from its primary supplier regarding year 2000 compliance (as described in Section 6.3.1 above) of teleprinters included in the Purchased Assets. In the event any teleprinter(s) fail to receive or print accurate and complete test reports because of any problem related to the occurrence of dates prior to, during, or after the year 2000 and reasonably classified as a "year 2000" problem, for each such teleprinter with respect to which Buyer provides reasonable notice to Seller of such failure within thirty (30) days after Buyer knows that such failure was the result of a "year 2000" problem, acquiring knowledge of the initial manifestation of such failure, Seller will (i) [*] Buyer associated with [*] to the Provider Site in accordance with Seller's directions, (ii) not hold Buyer responsible for any Loss of Seller by reason of such failure of such teleprinter(s), and (iii) indemnify and hold harmless Buyer (in accordance with Section 7.2.1 hereof, except that the threshold amount provided for in Section 7.2.6(b) shall not apply) against any Third Party Claim to the extent such claim is alleged to have been caused by reason of such failure of such teleprinter. Buyer will use its commercially reasonable efforts, if Seller so requests, to remedy the year 2000 non-compliance of such teleprinter(s) at Seller's cost (as provided in clause (i) above), and Seller shall reimburse Buyer for any reasonable expenses in connection therewith. 6.3.3. REMEDIES. Buyer and Seller agree that the remedies provided for in this Section 6.3 shall be the exclusive remedy in the event any teleprinter or TopLab fails [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -21- because of year 2000 non-compliance. Nothing in this Section 6.3 shall affect any rights or obligations of Buyer or Seller under the Services Agreement. ARTICLE VII SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS AND INDEMNIFICATION SECTION 7.1. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. Notwithstanding anything herein to the contrary, all of the representations, warranties, covenants and agreements (including, without limitation, the corresponding indemnification obligations) contained in this Agreement shall survive the Closing and continue in full force and effect for one (1) year, except that the representation of Seller made in section 6.3.1 and the covenant in Section 6.3.2 shall survive for a period of [*], and except that any representations or warranties not true when made and made fraudulently or with the intent to defraud or mislead, shall continue in full force and effect thereafter (subject to any applicable statute of limitations and any extensions thereof); and, in all cases, thereafter as to any Losses relating thereto for which a Claims Notice has been given prior to the termination of such period of survival. Notwithstanding the foregoing, covenants contained herein which by their terms survive for a longer period shall continue to apply as provided in such specific terms. SECTION 7.2. OBLIGATION TO INDEMNIFY. 7.2.1. OBLIGATIONS OF SELLER TO INDEMNIFY. From and after the Closing, regardless of any investigation undertaken by Buyer, Seller shall indemnify and hold harmless Buyer Indemnitees against and in respect of all Losses asserted against, imposed upon or incurred by any Buyer Indemnitee by reason of or resulting from (i) any misrepresentation or breach of warranty made to Buyer by Seller in this Agreement; (ii) any failure by Seller to perform any of the covenants, agreements or obligations required to be performed by it in accordance with the terms and conditions of this Agreement; (iii) any and all operation by Seller of the Purchased Assets prior to Closing; and (iv) any and all Litigation arising out of any of the foregoing or the enforcement of this Section 7.2.1. 7.2.2. OBLIGATION OF BUYER TO INDEMNIFY. From and after the Closing, regardless of any investigation undertaken by Seller, Buyer shall indemnify and hold harmless Seller Indemnitees against and in respect of all Losses asserted against, imposed upon or incurred by any Seller Indemnitee by reason of or resulting from (i) any misrepresentation or breach of warranty made to Seller by Buyer in this Agreement; (ii) any failure by Buyer to perform any of the covenants, agreements or obligations required to be performed by it in accordance with the terms and conditions of this Agreement; (iii) any and all operation by Buyer of the Purchased Assets after Closing; and (iv) any and all Litigation arising out of any of the foregoing or the enforcement of this Section 7.2.2. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -22- 7.2.3. CLAIMS NOTICE. A Claim shall be made by any Indemnitee by delivery of a Claims Notice to the Indemnifying Party requesting indemnification and specifying the basis on which indemnification is sought and the amount of asserted Losses and, in the case of a Third Party Claim, attaching any written documentation received from the third party claimant with respect thereto. 7.2.4. PROCEDURES INVOLVING NON-THIRD PARTY CLAIMS. If the Claim involves a matter other than a Third Party Claim, the Indemnifying Party shall have forty-five (45) days to object to such Claim by delivery of a written notice of such objection to such Indemnitee specifying in reasonable detail the basis for such objection. If an objection is timely made by the Indemnifying Party, the Indemnifying Party and the Indemnitee shall cooperate in the compromise of the Claim with ultimate resolution of the validity of such Claim to be determined under Article VIII. If an objection is not timely made by the Indemnifying Party, such failure shall be deemed to be an objection, and the Indemnifying Party and the Indemnitee shall cooperate in the compromise of the Claim with ultimate resolution of the validity of such Claim to be determined under Article VIII. 7.2.5. PROCEDURES INVOLVING THIRD PARTY CLAIMS. Subject to the rights and obligations of the Parties in this Section 7.2.5, each of Indemnitee and Indemnifying Party shall cooperate with the other in the resolution of a Third Party Claim. The obligations and liabilities of the parties hereunder with respect to a Third Party Claim shall be subject to the following terms and conditions: (a) The Indemnitee shall give the Indemnifying Party written notice of a Third Party Claim promptly after receipt by the Indemnitee of notice thereof, and the Indemnifying Party may undertake the defense, compromise and settlement thereof by representatives of its own choosing reasonably acceptable to the Indemnitee. The failure of the Indemnitee to notify the Indemnifying Party of such claim shall not relieve the Indemnifying Party of any liability that it may have with respect to such claim except to the extent the Indemnifying Party demonstrates that the defense of such claim is prejudiced by such failure. The assumption of the defense, compromise and settlement of any such Third Party Claim by the Indemnifying Party shall be an acknowledgment of the obligation of the Indemnifying Party to indemnify the Indemnitee with respect to such claim hereunder to the extent an indemnity obligation arises pursuant to Section 7.2.1 or 7.2.2, as applicable. If the Indemnitee desires to participate in, but not control, any such defense, compromise and settlement, it may do so at its sole cost and expense. If, however, the Indemnifying Party fails or refuses to undertake the defense of such Third Party Claim within a reasonable period of time after written notice of such claim has been given to the Indemnifying Party by the Indemnitee (but in no event more than thirty (30) days after receipt of such notice), the Indemnitee shall have the right to undertake the defense, compromise and settlement of such claim with counsel of its own choosing. In the circumstances described in the preceding sentence, the Indemnitee shall, promptly upon its assumption of the defense of such claim, make a Claim as specified in Section 7.2.1(iv) or 7.2.2(iv) which shall be deemed a Claim that is not a Third Party Claim for the purposes of the procedures set forth herein. -23- (b) No settlement of a Third Party Claim involving the asserted liability of the Indemnifying Party under this Article shall be made without the prior written consent by or on behalf of the Indemnifying Party, which consent shall not be unreasonably withheld or delayed. If the Indemnifying Party assumes the defense of such a Third Party Claim, (1) no compromise or settlement thereof may be effected by the Indemnifying Party without the Indemnitee's consent unless (a) there is no finding or admission of any violation of law or any violation of the rights of any Person and no effect on any other claim that may be made against the Indemnitee (b) the sole relief provided is monetary damages that are paid in full by the Indemnifying Party and (c) the compromise or settlement includes, as an unconditional term thereof, the giving by the claimant or the plaintiff to the Indemnitee of a release, in form and substance reasonably satisfactory to the Indemnitee, from all liability in respect of such Third Party Claim, and (2) the Indemnitee shall have no liability with respect to any compromise or settlement thereof effected without its consent. 7.2.6. LIMITATIONS ON INDEMNIFICATION. (a) No party to this Agreement shall be entitled to indemnification under this Agreement to the extent that such party's Losses are increased or extended by the willful misconduct, violation of law or bad faith of such party. (b) No Indemnifying Party shall be required to indemnify an Indemnitee with respect to any Loss with respect to a Claim unless the amount of such Loss, when aggregated with all other such Losses suffered by that Indemnitee, shall [*], at which time Claims may be asserted to the extent that all Losses are in excess of such threshold amount; PROVIDED, however, that such threshold amount shall not apply to any Loss which results from or arises out of fraud or intentional misrepresentation or an intentional breach of a representation, warranty, covenant or agreement in this Agreement or the Collateral Documents. (c) The parties acknowledge there will be an indemnification section in the Services Agreement, and that an Indemnitee shall only be entitled to a single satisfaction of any Loss. SECTION 7.3. NO RELEASE FOR FRAUD. Nothing contained in this Agreement shall relieve or limit the liability of either party hereto or any officer or director of either party from any Liability arising out of or resulting from common law fraud or intentional misrepresentation in connection with the transactions contemplated by this Agreement or in connection with the delivery of any of the Collateral Documents. Each party shall have a right to indemnification for any Loss incurred as the result of any common law fraud or intentional misrepresentation by the other party or any officer or director of the other party without regard to the Threshold Amount or any period of limitation provided in this Agreement. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -24- 7.3.1. PAYMENT. (a) If any party is required to make any payment under this Article, such party shall promptly pay the Indemnified Party the amount so determined. If there is a dispute as to the amount or manner of determination of any indemnity obligation owed under this Article, the Indemnifying Party shall nevertheless pay when due such portion, if any, of the obligation as shall not be subject to dispute. The difference, if any, between the amount of the obligation ultimately determined as properly payable under this Article and the portion, if any, theretofore paid shall bear interest as provided in Section 7.2.8(b). (b) If all or part of any indemnification obligation under this Agreement is not paid when due, then the Indemnifying Party shall pay the Indemnified Party interest on the unpaid principal amount of the obligation from the date the amount became due until payment in full, at the per annum rate of interest published from time to time by The Wall Street Journal as the "Prime Rate." ARTICLE VIII DISPUTE RESOLUTION SECTION 8.1. INFORMAL DISPUTE RESOLUTION. Any dispute between the parties arising out of or with respect to this Agreement, either with respect to the interpretation of any provision of this Agreement or with respect to the performance by Buyer or Seller, shall be resolved as provided in this Article. 8.1.1. INFORMAL DISPUTE RESOLUTION. Prior to the initiation of formal dispute resolution procedures, the parties shall first attempt to resolve their dispute informally, as follows: (a) The Relationship Managers for each party shall meet for the purpose of endeavoring to resolve such dispute. They shall meet as often as the parties reasonably deem necessary in order to gather and furnish to the other all information with respect to the matter in issue which the parties believe to be appropriate and germane in connection with its resolution. The Relationship Managers shall discuss the problem and negotiate in good faith in an effort to resolve the dispute without the necessity of any formal proceeding. During the course of negotiations, all reasonable requests made by one party to another for non-privileged information, reasonably related to this Agreement, shall be honored in order that each of the parties may be fully advised of the other's position. (b) If, within [*] days after a matter has been identified for resolution pursuant to this Article, either of the Relationship Managers concludes in good faith that amicable resolution through continued negotiation in this forum does not appear likely, the matter will be escalated by formal written notification to the Seller and the Buyer. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -25- (c) Formal proceedings for the resolution of a dispute may not be commenced until the earlier of: (i) the date on which the Seller and Buyer conclude in good faith that amicable resolution through continued negotiation of the matter does not appear likely; or (ii) fifteen (15) days after the dispute has been referred to the Seller and the Buyer. 8.1.2. FORMAL PROCEEDINGS PERMITTED. The provisions of this Section 8.1 shall not be construed to prevent a party from instituting, and a party being authorized to institute, formal proceedings earlier to avoid the expiration of any applicable limitations period or any period provided for in Section 7.1. SECTION 8.2. ARBITRATION. If the parties are unable to resolve any controversy arising under this Agreement as contemplated by Section 8.1 and if such controversy is not subject to Article VII or Section 8.3, then such controversy shall be submitted to mandatory and binding arbitration at the election of either party (the "DISPUTING PARTY") pursuant to the following conditions: 8.2.1. SELECTION OF ARBITRATORS. The Disputing Party shall notify the AAA and the other party in writing describing in reasonable detail the nature of the dispute (the "DISPUTE NOTICE"). Each of the parties shall select a neutral arbitrator in accordance with the rules of AAA, and the two arbitrators so selected shall select a third neutral arbitrator (the three arbitrators referred to in this Section being hereinafter referred to as the "PANEL"). 8.2.2. CONDUCT OF ARBITRATION. The Panel shall allow reasonable discovery as permitted by the Federal Rules of Civil Procedure, to the extent consistent with the purpose of the arbitration. The panel shall have no power or authority to amend or disregard any provision of this Section 8.2. The arbitration hearing shall be commenced promptly and conducted expeditiously, with each of Buyer and Seller being allocated one-half of the time for the presentation of its case. Unless otherwise agreed to by the parties, an arbitration hearing shall be conducted on consecutive days. 8.2.3. REPLACEMENT OF ARBITRATOR. Should an arbitrator refuse or be unable to proceed with arbitration proceedings as called for by this Section 8.2, such arbitrator shall be replaced by an arbitrator selected in accordance with the rules of the AAA. 8.2.4. FINDINGS AND CONCLUSIONS. The Panel rendering judgment upon disputes between parties as provided in this Section shall, after reaching judgment and award, prepare and distribute to the parties a writing describing the findings of fact and conclusions of law relevant to such judgment and award and containing an opinion setting forth the reasons for the giving or denial of any award. The award of the Panel shall be final and binding on the parties, and judgment thereon may be entered in a court of competent jurisdiction. 8.2.5. PLACE OF ARBITRATION HEARINGS. Arbitration hearings hereunder shall be held in Washington, D.C. -26- 8.2.6. TIME OF THE ESSENCE. The Panel is instructed that time is of the essence in the arbitration proceeding. The Panel shall use its best efforts to render its judgment or award within [*] following the conclusion of the hearing or as soon as possible thereafter. Recognizing the express desire of the parties for an expeditious means of dispute resolution, the Panel shall limit or allow the parties to expand the scope of discovery as may be reasonable under the circumstances. SECTION 8.3. IMMEDIATE INJUNCTIVE RELIEF. In the event of a breach of the confidentiality obligations set forth in this Agreement, or in the event a party makes a good faith determination that a breach of the terms of this Agreement by the other party is such that the damages to such party resulting from the breach will be so immediate, so large or severe, and so incapable of adequate redress after the fact that a temporary restraining order or other immediate injunctive relief is a necessary remedy, then such party may file a pleading with a court seeking immediate injunctive relief. If a party files a pleading with a court seeking immediate injunctive relief and this pleading is challenged by the other party and the injunctive relief sought is not awarded in substantial part (or in the event of a temporary restraining order is vacated upon challenge by the other party), the party filing the pleading seeking immediate injunctive relief shall pay all of the costs and attorneys' fees of the party successfully challenging the pleading. ARTICLE IX TERMINATION SECTION 9.1. EVENTS OF TERMINATION. Anything herein or elsewhere to the contrary notwithstanding, this Agreement may be terminated by written notice of termination at any time prior to the Closing only as follows: 9.1.1. MUTUAL CONSENT. By mutual consent of Seller and Buyer; 9.1.2. BY SELLER OR BUYER. (a) By Seller if Buyer shall have (i) materially misstated any representation or been materially in breach of any warranty contained herein or (ii) been materially in breach of any covenant, undertaking or restriction contained herein, and such misstatement or breach has not been cured by the earlier of (A) 10 days after the giving of notice to such party of such misstatement or breach or (B) the Closing; (b) By Buyer if Seller shall have (i) materially misstated any representation or been materially in breach of any warranty contained herein or (ii) been materially in breach of any covenant, undertaking or restriction contained herein, and such misstatement or breach has not been cured by the earlier of (A) 10 days after the giving of notice to such party of such misstatement or breach or (B) the Closing; and Final Closing Date. By either party if the Closing has not occurred by January 15, 1999. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -27- SECTION 9.2. CONSEQUENCES OF TERMINATION. In the event of the termination hereof pursuant to the provisions of Section 9.1, this Agreement shall become void and have no effect, without any liability on the part of either of the parties or their officers and directors; provided, however, that (i) if this Agreement is terminated under the provisions of Section 9.1.2, the provisions of this Section 9.2 shall not relieve the misstating or breaching party of any liability therefor, and (ii) the obligations of the parties under Section 4.3.1 shall survive the termination of this Agreement. ARTICLE X MISCELLANEOUS SECTION 10.1. GENERAL PROVISIONS. 10.1.1. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been given if (1) delivered by hand or if mailed by United States registered or certified mail, return receipt requested, first class postage prepaid, (2) sent by Federal Express or similar overnight courier service to the parties or their assignees, or (3) sent by telecopy to the number set forth below and promptly followed by a written copy sent by any other means specified herein, addressed as follows: If to Seller: SmithKline Beecham Clinical Laboratories, Inc. 1201 South Collegeville Road Collegeville, PA 19426 Attention: President Telephone: 610.454.6116 Telecopy: 610.983.2185 with a copy to: SmithKline Beecham Corporation One Franklin Plaza 16th and Race Streets Philadelphia, PA 19103 Attention: General Counsel-U.S. Telephone: 215.751.5844 Telecopy: 215.751.5132 If to Buyer: Healtheon Corporation 4600 Patrick Henry Drive Santa Clara, CA 95054 Attention: W. Michael Long -28- Telephone: 650.614.0200 Telecopy: 650.614.3300 with a copy to: Alston & Bird One Atlantic Center 1201 W. Peachtree Street Atlanta, GA 30309 Attention: John C. Weitnauer Telephone: 404.881.7780 Telecopy: 404.881.7777 (a) If delivered personally, the date on which a notice, request, instruction or document is delivered shall be the date on which such delivery is made and, if delivered by mail, telecopy, Federal Express or other overnight courier, the date on which such notice, request, instruction or document is first received shall be the date of delivery. (b) Any party hereto may change its address specified for notices herein by designating a new address by notice in accordance with this Section 10.1.1. (c) Failure of any party to send a copy of any notice to counsel for the other Party shall not affect in any way the validity of such notice to other party. 10.1.2. ENTIRE AGREEMENT. This Agreement and the Collateral Documents constitute the entire understanding and agreement among the parties with respect to the subject matter contained herein and supersede any prior understandings and agreements (whether written or oral) among them respecting such subject matter, except that any other confidentiality provisions agreed to in writing between the parties shall survive and be merely supplemented by Section 4.3.1 of this Agreement (except to the extent such other written provisions may be in conflict with Section 4.3.1, in which cases such other written provisions shall be superseded to the extent necessary to resolve such conflict). The exhibits and schedules identified in this Agreement are incorporated herein by reference and made a part hereof. 10.1.3. HEADINGS. The headings in this Agreement (and the Table of Contents) are for convenience of reference only and shall not affect its interpretation. 10.1.4. ASSIGNMENT. This Agreement shall not be assignable by any of the parties hereto without the written consent of the other party hereto, and no rights under this Agreement may be transferred without the consent of the non-transferring party, except that (i) all the rights and obligations of Seller hereunder may be transferred, without the consent of (but with notice to) Buyer, to an Affiliate of Seller or an acquiror of substantially all of Seller's assets (whether by purchase of assets, merger or other corporate reorganization), and (ii) all rights and obligations of Buyer hereunder may be transferred, without the consent of (but with -29- notice to) Seller, to any assignee of Buyer's rights and obligations under the Services Agreement provided such assignment is made in accordance with the Services Agreement. Any attempted assignment without a required consent shall be void. Any assignment with a required consent does not release the assigning party from any of its obligations under this Agreement unless the consent so states. 10.1.5. BINDING EFFECT. Subject to the limitations on transfer set forth in Section 10.1.4, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, executors, administrators, successors and assigns. 10.1.6. KNOWLEDGE. As used herein, the words "TO THE KNOWLEDGE OF" or words of similar import mean, (i) with respect to Seller, the actual knowledge of the directors, managers and officers of Seller, and persons with similar such responsibilities, and that knowledge which would have been acquired by any such persons after making due and diligent inquiry of those employees of the Company who could reasonably be expected to have actual knowledge of the matters in question, or other due inquiry, and (ii) with respect to Buyer, the actual knowledge of the directors, managers and officers of Buyer and persons with similar such responsibilities, and that knowledge which would have been acquired by any such persons after making due and diligent inquiry of those employees of Buyer who could reasonably be expected to have actual knowledge of the matters in question, or other due inquiry. 10.1.7. SEVERABILITY. It is the desire and intent of the parties that all of the material provisions of this Agreement and the Services Agreement be enforced to the fullest extent permissible and no severability shall pertain thereto. In the event that any other provision of this Agreement is held illegal, invalid, prohibited or unenforceable for any reason, such illegality, invalidity, or unenforceability will not affect any other provision hereof, and this Agreement shall be deemed modified to the extent necessary to render enforceable the remaining provisions hereof. Notwithstanding the foregoing, if such provision could be more narrowly interpreted so as not to be illegal, invalid, prohibited or unenforceable, without invalidating any of the material remaining provisions of this Agreement or the Services Agreement, it shall be so narrowly interpreted. 10.1.8. WAIVER. The failure of either party to insist upon strict performance of any of the terms or conditions of this Agreement will not constitute a waiver of any of its rights hereunder. No waiver by any party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 10.1.9. GOVERNING LAW. This Agreement will be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, without giving effect to any choice of law or conflicting provision or rule (whether of the Commonwealth of Pennsylvania or any other jurisdiction) that would cause the laws of any jurisdiction other than the Commonwealth of Pennsylvania to be applied. In furtherance of the foregoing, the internal -30- law of the Commonwealth of Pennsylvania will control the interpretation and construction of this Agreement, even if under such jurisdiction's choice of law or conflict of law analysis, the substantive law of some other jurisdiction would ordinarily apply. Any legal action or proceeding with respect to this Agreement may be brought exclusively in the courts of the Commonwealth of Pennsylvania or of the United States that are located in Pennsylvania, and, by execution and delivery of this Agreement, each party hereto hereby irrevocably accepts for itself and in respect of its property and assets, generally and unconditionally the jurisdiction of the aforesaid courts. 10.1.10. RULE OF STRICT CONSTRUCTION. The language used in this Agreement has been chosen by the parties to express their mutual intent, and no rule of strict construction shall be applied against either party. 10.1.11. CONSTRUCTION. Unless the context of this Agreement otherwise requires, (i) words of any gender include each other gender; (ii) words using the singular or plural number also include the plural or singular number, respectively; (iii) the terms "hereof," "herein," "hereby" and derivative or similar words refer to this entire Agreement; and (iv) the terms "Article" or "Section" refer to the specified Article or Section of this Agreement. Whenever this Agreement refers to a number of days, such number shall refer to calendar days. 10.1.12. AMENDMENTS. This Agreement may be amended or supplemented only by a written instrument duly executed by each party. 10.1.13. TIME OF ESSENCE. Time is of the essence in this Agreement. 10.1.14. COUNTERPARTS. This Agreement may be executed in any number of counterparts and either party hereto may execute any such counterpart, each of which when executed and delivered shall be deemed to be an original and all of which counterparts taken together shall constitute but one and the same instrument. The execution of this Agreement by either party hereto will not become effective until counterparts hereof have been executed by the other party hereto. It shall not be necessary in making proof of this Agreement or any counterpart hereof to produce or account for any other counterpart. 10.1.15. FACSIMILE SIGNATURES. This Agreement may be executed by facsimile signature which shall be deemed to be an original for all purposes. (SIGNATURE PAGE FOLLOWS) -31- IN WITNESS WHEREOF, the parties hereto have executed this Asset Purchase Agreement on the day and year first above written. Healtheon Corporation ----------------------------------------------- By: Its: SmithKline Beecham Clinical Laboratories, Inc. ----------------------------------------------- By: Its: -32- EXHIBIT A DEFINITIONS "AAA" means the American Arbitration Association. "ActaMed" means ActaMed Corporation, a Delaware corporation and Subsidiary of Buyer. "Affiliate" means, with respect to any Person, any other Person controlling, controlled by or under common control with such Person. "Agreement" means the Asset Purchase Agreement of which this Exhibit forms a part. "Assumed Contracts" means the Contracts referenced in Section 1.1.3. "Buyer Indemnitee" means Buyer and its Affiliates, and its or their respective directors, officers, employees, and permitted assigns. "Claim" means any claim for indemnification under Article VII of the Agreement. "Claims Notice" means a written notice of an indemnification claim delivered pursuant to Section 7.2.3 of the Agreement. "Code" means the Internal Revenue Code of 1986, as amended. "Collateral Documents" means the documents, agreements and instruments to be executed and delivered in connection with the Agreement, including without limitation the Services Agreement and other agreements and documents to be executed at or prior to Closing as contemplated by Article V of the Agreement. "Consideration Shares" means the number of shares of Buyer's common stock determined pursuant to Section 1.6. "Contract" means any written contract, agreement, lease, plan, instrument or other document, commitment, arrangement, undertaking, practice or authorization that is binding on any Person or its property under applicable law. "Controlled Group Member" means any trade or business (whether or not incorporated) which is aggregated with Buyer pursuant to sections 414(b), (c), (m) or (o) of the Code. "Court Order" means any judgment, decree, writ, injunction, order or ruling of any federal, state or local court or governmental or regulatory body or authority that is binding on any Person or its property under applicable law. A-1 "Default" means (a) a breach of or default under any Contract or License, (b) the occurrence of an event that with the passage of time or the giving of notice or both would constitute a breach of or default under any Contract or License or (c) the occurrence of an event that with or without the passage of time or the giving of notice or both would give rise to a right of termination, renegotiation (but not where the right of renegotiation would arise in the ordinary course of business or by virtue of the terms of the Contract or License, in either case, independent of the transactions contemplated hereby) or acceleration under any Contract or License. "Employee Benefit Plan" means any pension, retirement profit-sharing, deferred compensation, bonus, incentive, performance, stock option, phantom stock, stock purchase, restricted stock, medical, hospitalization, vision, dental or other health, life, disability, severance, termination or other employee benefit plan, program, arrangement, agreement or policy, whether written or unwritten, to which Buyer contributes or is obligated to contribute, is a party to or is otherwise bound, or with respect to which Buyer may have any Liability. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" means (i) a member of any "controlled group," as defined in Section 414(b) of the Code, of which Buyer is a member, (ii) a trade or business, whether or not incorporated, under common control (within the meaning of Section 414(c) of the Code) with Buyer, or (iii) a member of any affiliated service groups (within the meaning of Section 414(m) of the Code) of which Buyer is a member. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Indemnifying Party" means the party obligated to provide indemnification pursuant to Sections 7.2.1 or 7.2.2 of the Agreement. "Indemnitee" means a party seeking indemnification under Sections 7.2.1 or 7.2.2 of the Agreement. "Integrity Agreement" means the Corporate Integrity Agreement between Seller and the OIG. "Intellectual Property" means copyrights, trademarks, service marks, trade names, patents or applications therefor, technology rights and licenses, computer software (including, without limitation, any source or object codes therefor or documentation relating thereto), computer software licenses, trade secrets, franchises, know-how, inventions and intellectual property rights. "Investors' Rights Agreement" means the Amended and Restated Investors' Rights Agreement between Healtheon Corporation, Seller and the other persons and entities listed on schedules A and B thereto, dated in May 1998. A-2 "Liability" means any direct or indirect liability, indebtedness, obligation, expense, guaranty or endorsement of or by any Person (other than endorsements of notes, bills and checks presented to banks for collection or deposit in the ordinary course of business) of any type, whether accrued, absolute, contingent, matured, unmatured, known or unknown. "License" means any license, franchise, permit, easement, right or authorization. "Lien" means any mortgage, lien, security interest, pledge, encumbrance, restriction on transferability, defect of title, charge or claim of any nature whatsoever on any property or property interest. "Litigation" means any lawsuit, action, claim, arbitration, administrative or other proceeding, criminal prosecution or governmental investigation or inquiry involving or affecting a Party or its business, assets or Contracts to which it is a party or by which it or its business, assets or Contracts may be bound or affected. "Losses" means any and all demands, claims, actions or causes of action, assessments, losses, diminution in value, damages (including special and consequential damages), Liabilities, costs, and expenses, including without limitation, interest, penalties, cost of investigation and defense, and reasonable attorneys' and other professional fees and expenses. "Material Adverse Effect" means a material adverse effect on the business, operations, assets, condition (financial or otherwise), operating results, prospects or liabilities of Buyer and its subsidiaries, taken as a whole, or on the ability of Buyer to perform its obligations under this Agreement and the Collateral Documents. "OIG" means the Office of Inspector General of the Department of Health and Human Services. "Person" means any individual, corporation, trust, estate, business trust, general or limited partnership, limited liability company, limited liability partnership, unincorporated association or other legal entity. "Prior Services Agreement" means the Services Agreement between Buyer and Seller dated December 31, 1997. "Provider" means a physician, clinic, hospital, patient service center or other provider of clinical health care services who or which uses any of the Purchased Assets to receive test result reports from a Seller Lab. "Provider Site" means the site of a Provider utilizing a teleprinter for Teleprinter Services. "Public Offering" means a bona fide firm commitment underwritten offering of the common stock of Buyer pursuant to a registration statement filed with and declared effective by the SEC pursuant to the Securities Act. A-3 "Purchase Price" means the total purchase price of the Purchased Assets. "Purchased Assets" means the assets described in subsections 1.1.1 through 1.1.3 of this Agreement. "Regulation" means any statute, law, ordinance, regulation, requirement, order or rule of any federal, state, or local government or other governmental agency or body or of any other type of regulatory body, or any governmental or administrative interpretation of any thereof, including, without limitation, (i) those covering health, safety, environmental, energy, transportation, bribery, record keeping, zoning, anti-discrimination, antitrust, wage and hour, and price and wage control matters, (ii) requirements imposed by any governmental or regulatory body which must be satisfied to qualify for Medicare reimbursements, and (iii) any and all federal, state and local health care laws relating to or covering the methods and ways in which Teleprinter Services, and incidental services or benefits provided to Providers in connection with the provision of Teleprinter Services, are provided to the Providers, including, but not limited to, 42 U.S.C. Section 1395nn and the Clinical Laboratory Improvement Amendments of 1988, as amended. "Relationship Manager" means, for each party, the person designated in writing (such writing to be delivered to the other party) by such party prior to Closing. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. "Seller Indemnitee" means Seller and its Affiliates, and its or their respective directors, officers, employees and permitted assigns. "Seller Lab" means any location at which Seller or its Affiliates provide, or may in the future provide, clinical laboratory testing services, regardless of the means used by such lab for lab order entry and results reporting. "Services Agreement" means (except as used in the definition of "Prior Services Agreement") the Services Agreement between Buyer and Seller in a form and substance to be agreed by Buyer and Seller, to be entered into on or prior to the Closing Date, containing substantially the same terms and conditions as those set forth on EXHIBIT B to the Agreement, and such other terms as Buyer and Seller may agree upon. "Subsidiary" means a corporation, limited liability company, partnership, association, trust, joint venture or other entity in which Buyer or Seller, as the case may be, has, directly or indirectly, an equity, ownership or proprietary interest of greater than ten percent (10%). "Substantial Holder" means an officer or employee of Buyer who is the beneficial owner of one percent (1%) or more of the outstanding voting power or the outstanding equity (on a fully diluted basis) of Buyer. A-4 "Teleprinter Services" means the transmission by Seller of clinical laboratory test results from a Seller Lab to a teleprinter at a Provider Site via a telephone line in the Provider Site which is automatically dialed by the applicable Seller Lab and the printing of such results by such teleprinter. "Third Party Claim" means any claim, suit or proceeding (including, without limitation, a binding arbitration or an audit by any taxing authority) that is instituted against an Indemnitee by a Person other than a party hereto and which, if prosecuted successfully, would result in a Loss for which such Indemnitee is entitled to indemnification hereunder. "Trade Secrets" means information related to a party (1) which derives economic value, actual or potential, from not being generally known to or readily ascertainable by other Persons who can obtain economic value from its disclosure or use, and (2) which is the subject of efforts by said party that are reasonable under the circumstances to maintain its secrecy. A-5 EXHIBIT B SUMMARY TERMS AND CONDITIONS SERVICES AGREEMENT BETWEEN SBCL AND HEALTHEON CORPORATION [*] [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. EX-10.32 4 SERVICE AGREEMENT CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. SERVICES AGREEMENT This SERVICES AGREEMENT (the "Services Agreement" or "Agreement") is made and entered into this 19th day of January, 1999 by and between HEALTHEON CORPORATION, a Delaware corporation ("Healtheon") and SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC., a Delaware Corporation ("SBCL"). BACKGROUND Healtheon is in the business of providing and managing certain information services and desires to provide services to SBCL relating to reporting of results of clinical laboratory tests to Providers via teleprinters. SBCL provides laboratory testing services to certain Providers who receive clinical laboratory test results via teleprinters and related assets previously owned by SBCL and purchased by Healtheon pursuant to an Asset Purchase Agreement dated December 31, 1998 (the "Asset Purchase Agreement"). This Agreement sets forth the parties' agreements relating to their rights and obligations following the date hereof relating to provision of Teleprinter Services to Connected Providers. There are two basic components of the fees for the services to be provided under this Agreement: one based on [*] and [*]. Because the per teleprinter [*] fee used in the first Year of this Agreement is based on [*] for teleprinters during the Baseline Period, after the end of Year One there will be [*]; and the [*] fee used in Years Two through Year Five are reset at the end of Year One. In addition, SBCL will be entitled to [*] and [*] pricing applied to the [*] as so calculated. NOW THEREFORE, in consideration of the premises and the mutual promises contained herein, the parties, intending to be legally bound, agree that capitalized terms used above and in this Agreement and not otherwise defined herein shall have the meanings set forth in EXHIBIT A attached hereto, and further agree as follows: 1. AGREED SERVICES. 1.1. General. Healtheon will provide the following services to SBCL at Sites in accordance with the Performance Standards and will take all reasonable and appropriate action to preserve the goodwill of the Connected Providers utilizing such services (the "Agreed Services"): 1.1.1. TELEPRINTER SERVICES. (a) HARDWARE AND EQUIPMENT. Healtheon shall provide Connected Providers with all necessary hardware and equipment to allow them to receive Teleprinter Services (the "Hardware") (including shipping and transportation thereof), including without limitation: (i) teleprinters (with at [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. least the same capabilities as those utilized by SBCL on the date hereof), (ii) teleprinter stands (as needed), and (iii) cabling, connectors and line splitting devices within the Site, as needed. (b) SUPPLIES. Healtheon shall provide Connected Providers with all supplies necessary to their receipt of Teleprinter Services, including without limitation: paper, forms, ribbons, and replacement parts; PROVIDED THAT SBCL and Healtheon will use commercially reasonable efforts to preserve [*] in terms of [*]. The parties will establish what [*] is for requisitions for [*] Teleprinters and [*] Teleprinters based on due diligence completed prior to the Effective Date. (c) REPAIR AND REPLACEMENT. Healtheon shall repair or replace any malfunctioning Hardware and maintain the Hardware in proper working condition; provided, however, that any replacement teleprinters (which may be new or used) have at least the same capabilities as the units which they replace. (d) INSTALLATION AND DE-INSTALLATION. Healtheon shall provide installation and de-installation of Hardware at Sites where such installation or de-installation is requested or approved by SBCL; provided, however, that (i) in place of de-installation, Healtheon may, in its discretion, discontinue SBCL service following SBCL's request for de-installation; and (ii) in place of installation, Healtheon may, in its discretion and subject to meeting the Performance Standards and other terms and conditions hereof, commence SBCL service utilizing a teleprinter already installed at the applicable Site. (e) TRAINING. Healtheon shall provide training and re-training services for all Connected Providers and their designated personnel as necessary to enable them to utilize the Teleprinter Services accurately and efficiently, or as reasonably requested by the Connected Provider. (f) CUSTOMER SUPPORT. Healtheon will provide all reasonably necessary and appropriate end user support for issues relating to the utilization of Teleprinter Services, including without limitation, [*] help desk support (except that SBCL shall [*]), as set forth in EXHIBIT 1.2 hereto. All customer support services shall be performed in a competent and professional manner meeting or exceeding generally accepted industry standards for Teleprinter Services and will be rendered by qualified personnel who will perform the tasks assigned consistently with good professional practice and the state of the art involved. SBCL shall have the right to request the removal from Connected Providers' accounts of any Healtheon personnel used by Healtheon to perform customer support services, provided such [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. objection would not constitute unlawful discrimination, if SBCL becomes aware that such person is causing customer dissatisfaction. If an objection is raised by SBCL, Healtheon agrees to confer with SBCL and endeavor to furnish a replacement as quickly as practicable. (g) REPORTS. Healtheon shall provide SBCL, at Healtheon's own expense, and SBCL shall provide Healtheon, at SBCL's own expense, with the reports specified on EXHIBIT 1.1.1(g) hereto as to be delivered by them and at the times specified thereon. (h) PROVIDER AGREEMENTS. From time to time and as requested by SBCL, Healtheon and SBCL shall use their respective commercially reasonable efforts to [*] Connected Providers or [*], containing provisions substantially the same as those set forth in EXHIBIT 1.1.1(h). Healtheon shall use its commercially reasonable efforts, with SBCL's cooperation, to [*] with all [*] Connected Providers, which agreements shall contain provisions substantially the same as those set forth in EXHIBIT 1.1.1(h). 1.1.2. TELECOMMUNICATIONS SERVICES. Healtheon shall: (i) arrange all installations of Phone Lines at Connected Providers designated by SBCL and notify SBCL when such Phone Lines become available for Teleprinter Services, (ii) not use the Phone Lines other than for printing of SBCL clinical test reports or as agreed pursuant to Section 1.1.3, unless and until [*] for the Phone Line [*] to Healtheon, (iii) at SBCL's direction, arrange termination of any Phone Line connected to a teleprinter to which SBCL is no longer providing Teleprinter Services and de-installation of such teleprinter, PROVIDED HOWEVER, that at [*] option, [*] may choose [*] such Phone Line so long as such Phone Line is or [*] pursuant to Section 4 of this Agreement, and may choose to [*] in place, and such teleprinter will not thereafter be considered an Active Teleprinter, and (iv) arrange for the maintenance of Phone Lines and provide help desk support. 1.1.3. CONTRACTUAL COMMITMENTS. Healtheon acknowledges and agrees that SBCL has contractual commitments with payers and other third parties which may require such parties [*]. Healtheon and SBCL shall work together on mutually agreeable terms, including without limitation reasonable and appropriate fees [*], to assist SBCL in meeting its contractual commitments under such contracts as they exist from time to time. 1.1.4. MONITORING OF PERFORMANCE STANDARDS. Healtheon shall continuously monitor its performance against the Performance Standards. Healtheon shall notify SBCL at any time when it fails to meet the Performance Standards. SBCL shall similarly notify Healtheon of any such failure, provided that the failure by SBCL to so notify shall not constitute a waiver of SBCL's [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. rights hereunder. In the event that Healtheon fails to meet any Performance Standard at any time, Healtheon shall promptly diagnose the cause of the failure and shall work continuously and diligently to correct such failure to perform until it is corrected. Any failure to meet the Performance Standards which occurs while Healtheon is working to remedy the problem shall continue to be counted for purposes of Section 14.2 hereof. 1.1.5. MONITORING OF MATTERS RELATING TO COMPLIANCE MATTERS. Healtheon shall diligently monitor whether there is any Shared Use of Phone Lines or Hardware which is inconsistent with the terms of this Agreement; PROVIDED THAT, such monitoring for Shared Use of Phone Lines [*] under Section 4 of this Agreement shall be required only to the extent information required for such monitoring is provided by SBCL. Healtheon shall notify SBCL when it becomes aware of any Shared Use which is inconsistent with the terms of this Agreement. SBCL shall similarly notify Healtheon of any such awareness of SBCL, provided that the failure by SBCL to so notify shall not constitute a waiver of Healtheon's obligations hereunder. 1.2. PERFORMANCE STANDARDS. EXHIBIT 1.2 to this Agreement specifies the Performance Standards for the services hereunder which Healtheon must achieve and maintain and the applicable time periods for measuring compliance with such standards. To the extent Exhibit 1.2 requires later agreement as to the metrics for designated Performance Standards, then if the parties fail to agree on such metrics for such Performance Standards by [*], notwithstanding anything in this Agreement to the contrary, either party may identify the dispute regarding the metrics for such Performance Standards for resolution pursuant to Section 16. 1.3. RECORDS AND AUDITS. 1.3.1 Healtheon shall maintain accurate and complete billing records regarding the provision of Agreed Services in compliance with applicable Regulations, but in no event for less than three (3) years or such longer period as may be required by Regulations or the Integrity Agreement; AND PROVIDED FURTHER THAT with respect to Transmissions which, after accepted Systems Changes, are run [*], such records shall include such information as would conform to accepted information storage practices in the clinical laboratory industry. 1.3.2 The records maintained pursuant to Section 1.3.1 above shall include without limitation records of the amounts Healtheon charges SBCL under this Agreement, with a system of audit trails, records and controls sufficient to allow SBCL to audit such transactions and charges under this Agreement and to assure satisfaction of any requirements imposed on SBCL by their external auditors or on Healtheon or SBCL by government officials enforcing applicable Regulations. 1.3.3 In addition to the grant of Audit Rights pursuant to Sections 4.11, 5.1.8, 5.11 and 8.4 of this Agreement, SBCL shall have the right, exercisable [*] to have any of [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. its agents or employees, who or which are reasonably acceptable to Healtheon, audit, in accordance with the Audit Rights, the books and records of Healtheon relating to Agreed Services to examine or determine compliance with this Agreement and the proper amounts which should have been billed to SBCL, the amounts which were billed to SBCL, and the amounts which SBCL has paid under this Agreement. 1.3.4 In any exercise of Audit Rights under this Agreement, including without limitation pursuant to Section 1.3.3, SBCL shall give Healtheon two week's prior notice of any such audit, and shall abide by reasonable Healtheon security and confidentiality procedures during the audit. SBCL and Healtheon shall each bear their own costs associated with such audit, provided that in the event the audit determines that Healtheon has [*] of the [*] Healtheon in any month, Healtheon shall pay all costs of such audit. If the audit reveals an overpayment by SBCL to Healtheon, Healtheon shall promptly refund such overpayment to SBCL. If the audit reveals an underpayment by SBCL, SBCL shall promptly pay to Healtheon the amount of such underpayment. In the exercise of any Audit Rights under this Agreement, SBCL shall use its commercially reasonable efforts to coordinate such exercise with the exercise of comparable rights under the Prior Services Agreement so as to reasonably minimize the inconvenience thereof to Healtheon. 1.4. SBCL [*]. If the net number of Active Teleprinters increases by more than [*], or by more than [*], SBCL will provide mutually agreeable [*] to Healtheon for the [*] number of Active Teleprinters in [*]. The terms of [*] shall be consistent with past practice between the parties under the Prior Services Agreement and shall result in [*] to SBCL within [*] is provided. 1.5. SBCL [*]. If requested by SBCL, Healtheon shall give [*] Hardware, supplies or telecommunications or other services [*]. 1.6. SUBCONTRACTED SERVICES. Healtheon will be permitted to engage subcontractors to provide Agreed Services under this Agreement; PROVIDED THAT: 1.6.1 Healtheon shall not be relieved of any liability to SBCL by reason of the subcontract; 1.6.2 Healtheon shall have sole responsibility for all payments due under such subcontract; 1.6.3 SBCL is notified, in advance of the effectiveness of any material contract with a third party subcontractor(s), of the identity of the third party subcontractor and the services to be provided by such subcontractor. SBCL will promptly notify Healtheon of any objection it may have to a particular subcontract or subcontractor and Healtheon will [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. use its commercially reasonable efforts to accommodate SBCL's concerns. The parties hereby acknowledge and agree that [*] is a permitted subcontractor. The parties agree that material contracts for purposes of this Section 1.6.3 include any subcontract for Agreed Services greater than [*]. 1.6.4 The [*], except that [*] may be engaged by Healtheon [*] to [*] Teleprinters or, at SBCL's option, to [*]. 1.6.5 Healtheon will have total responsibility for the subcontracted services. 2. TRANSITION SERVICES 2.1. TRANSITION COMMITTEE. Prior to the Effective Date, the parties shall appoint a Transition Committee which will plan for and assist in the transition of the provision of Teleprinter Services from SBCL to Healtheon. The Transition Committee will consist of persons meeting the criteria for each of the parties as set forth on EXHIBIT 2.1 hereto. The Transition Committee will serve [*] or such later date as the parties shall mutually agree. The Transition Committee shall have responsibility for the design and execution of an implementation plan setting forth the business plan for transition of Agreed Services from SBCL to Healtheon. The initial draft of the implementation plan is attached hereto as part of EXHIBIT 2.1. 2.2. TRANSITION SERVICES. From and after the date hereof and until [*], SBCL will provide necessary and appropriate services other than such services as have been transitioned to Healtheon in order that the Agreed Services are rendered to SBCL. Notwithstanding the foregoing, SBCL shall not be required to provide any services provided by [*] under Assumed Contracts (as defined in the Asset Purchase Agreement). In consideration of such services from the Effective Date, SBCL will invoice Healtheon not more frequently than monthly for all [*] Costs (other than [*]) incurred by SBCL in the provision of such services. Each such invoice shall be accompanied by reasonable documentation relating to charges on such invoice. In the event that SBCL is still required to provide any such services after [*] in order for all Agreed Services to be rendered, it shall invoice Healtheon for [*] of all such [*] Costs incurred after [*]; provided that the foregoing [*] in charges shall not apply to the extent such delays are due to the acts of, or one or more failures to act by, SBCL, and Healtheon provides reasonable documentation of such fact. All amounts shown on any such invoice shall be paid by Healtheon, without offset for any amounts which may then be owed by SBCL to Healtheon, within [*] after the date of the invoice. In the event that Healtheon disputes any amount shown due on any such invoice, Healtheon shall pay timely any undisputed amounts and send a Dispute Notice to SBCL with respect to any disputed amounts. Within a period of [*] after the date of the Dispute Notice, Healtheon shall have the right to initiate exercise of Audit Rights with respect to the portions of SBCL's books and records that relate to the subject of the dispute. In the event that the [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. parties are unable to resolve the disputed matter, the matter shall be resolved in accordance with Section 16 hereof. 2.3. EMPLOYEE TRANSFERS. Except as provided in this Section 2.3, throughout the term hereof (including any renewal period), Healtheon shall not, either individually or through any affiliate, employee, director, officer, partner, joint venturer or consultant, directly or indirectly, [*] with SBCL. Healtheon shall be permitted from and after the date hereof until [*], to [*] to the persons [*] on the list [*] on such terms and conditions as Healtheon may determine in its sole discretion; PROVIDED THAT, prior to [*] such person, Healtheon shall [*] to the SBCL Relationship Manager [*]. Up until [*], SBCL shall not [*] listed [*] to a [*] from that [*]. Notwithstanding the foregoing, in the event that Healtheon notifies SBCL [*], SBCL shall be entitled to [*] any such [*] which such [*] to hold. Healtheon shall institute a policy which requires that, in the event any [*] approaches Healtheon regarding [*] and Healtheon, after completion of [*] or its equivalent, determines that it wishes to [*], Healtheon [*] with [*], or cause any other Person to [*] on behalf of Healtheon, unless (i) such [*] has granted permission [*] regarding [*], and (ii) Healtheon has [*]. 3. [*] 3.1. AVAILABILITY OF [*]. From and after the Effective Date and until [*], Healtheon shall be entitled to [*] for delivery of teleprinters, spare parts and supplies to Connected Providers necessary for the provision of Teleprinter Services to such Connected Providers in a manner and to an extent [*] for such services; PROVIDED THAT: 3.1.1 Healtheon shall not [*] to make a delivery other than on such [*] as determined by SBCL from time to time; and 3.1.2 Healtheon shall not [*] to pick up teleprinters, spare parts or supplies at other than an SBCL owned or operated location (except to the extent SBCL [*] at other than SBCL owned or operated locations prior to February 1, 1999). Notwithstanding the foregoing, SBCL shall (i) not be required to [*] to make such deliveries to any Site that has only [*] Teleprinters; and (ii) make available to Healtheon [*] which as of the date of this Agreement is utilized by SBCL [*] utilized in connection with Agreed Services ("[*]"). [*] made available to Healtheon shall be available [*] to Healtheon for [*] by Healtheon, so long as it does not cause SBCL to incur any [*]. Nothing in the foregoing provisions relating to [*] shall require SBCL to [*], all of such decisions being in SBCL's sole discretion. In addition, if, in the ordinary course of business SBCL needs to [*] for its own business needs, SBCL may do so, and in such case SBCL will use commercially reasonable efforts to make [*] as a substitute therefore if SBCL has [*]. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 3.2. CHARGES FOR [*] 3.2.1 There shall be [*] for use of [*] for the period from the Effective Date until [*]. 3.2.2 Prior to commencement of the [*], Healtheon and SBCL shall determine the methods by which data will be gathered from [*] during [*] regarding the duration, purposes and [*] made [*] for or on behalf of Healtheon in connection with the provision of Agreed Services under this Agreement and for and on behalf of SBCL or any other person. [*], (i) Healtheon and SBCL shall cooperate in gathering such data in accordance with the guidelines so established [*], (ii) SBCL and Healtheon shall maintain documentation of [*] for Healtheon, and (iii) SBCL shall require [*] made for Healtheon and all [*]. 3.2.3 From [*] through and including [*], SBCL shall [*] Healtheon, not more frequently than monthly, an amount per month (the "[*]") equal to [*]. In this formula, (a) "A" is equal to the [*], as determined in good faith by SBCL and with reasonable documentation therefor available to Healtheon upon Healtheon's request; (b) "B" is equal to the [*] by all [*]; (c) "C" is equal to the [*] on behalf of Healtheon in connection with the provision of Agreed Services under this Agreement during [*] (d) "D" is equal to the aggregate number of [*] at all Healtheon [*] made in [*] and (e) "E" is equal to the aggregate maximum number of [*] (including the provision of Agreed Services) at [*] during [*]. The [*] shall be dependent upon (i) the guidelines established therefor by Healtheon and SBCL prior to commencement of the [*], and (ii) the duration and purposes [*], as well as any other relevant factors which the parties determine should be [*] prior to the [*]. The above calculations shall be done on a [*] so that they take into account the [*], availability and usage of [*]. The parties acknowledge that any [*] activities undertaken by any [*] pursuant to Section 6.5 shall not be taken into account for the purpose of the calculations required by this Section 3. 3.2.4 In the event that Healtheon's [*] shall change in a material manner so as to be materially inconsistent with Healtheon's [*] during the [*] (and the parties acknowledge that a termination [*] in one or more [*] is such a change), Healtheon shall notify SBCL of the change, with reasonable explanation as to the reasons therefor, and the parties shall negotiate in good faith an adjustment (and in the case of a [*]) to the [*] so as to take account of such change in usage. Nothing in this Section 3 shall restrict SBCL, in the ordinary course of its business, from making [*] (including, but not limited to [*], timing [*] provided SBCL gives Healtheon reasonable advance notice (generally not less than ten (10) days) of any such changes that could reasonably be expected to affect Healtheon's ability to meet Performance Standards. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 4. TELEPHONE LINES; TRANSFER, BILLING AND TELECOM FEES 4.1. PHONE LINES FOR NEW TELEPRINTERS. Subject to Section 4.2, except in the case of a [*] Teleprinter, Healtheon shall cause SBCL to be the party to whom any bill is sent from the telecommunications carrier for a Phone Line to a new teleprinter installed pursuant to Section 1.1.1(d) of this Agreement. 4.2. PHONE LINES BEFORE TRANSFER. Until transferred to Healtheon in accordance with this Agreement, SBCL shall remain the party to whom any bill from the applicable telecommunications carrier for a Phone Line is sent. SBCL shall have the sole obligation to pay all undisputed amounts owed to telecommunications carriers for which it is the billing party pursuant to Section 4.1 or 4.2. 4.3. TRANSFER AT HEALTHEON REQUEST. By written notice to SBCL, Healtheon may [*] request that bill paying responsibility for any Phone Line be transferred to Healtheon. After receiving such request for transfer of Phone Lines to Healtheon, SBCL shall use commercially reasonable efforts to assist in the transfer to Healtheon of Phone Lines so requested to be transferred; PROVIDED THAT [*] shall be responsible [*] associated with such transfer. If Healtheon receives its first bill for a Phone Line transferred pursuant to this Section 4.3 or Section 4.4 on the first day of the month, such Phone Line shall be deemed a "Transferred Phone Line" for such month and each month thereafter. If Healtheon receives its first bill for a Phone Line transferred pursuant to this Section 4.3 or Section 4.4 on any day from the second day of the month until the last day of the month, such Phone Line shall be deemed a "Transferred Phone Line" for the next month and each month thereafter. 4.4. TRANSFER AT SBCL REQUEST. From time to time (but not to exceed [*] times without Healtheon's express written consent), SBCL may provide Healtheon with notice that it wishes to transfer a small number of Phone Lines identified in the notice (not to exceed [*] without Healtheon's express written consent, which consent will not be unreasonably withheld) to Healtheon. After receiving the request from SBCL for transfer of such Phone Lines, Healtheon shall use commercially reasonable efforts to assist in the transfer to Healtheon of such Phone Lines; PROVIDED THAT [*] shall be responsible [*] associated with such transfer. 4.5. GENERAL CONDITION. The transfer of Phone Lines to Healtheon pursuant to Section 4.3 above shall be conditioned upon the maintenance of the same or higher level of telecommunications services. SBCL shall not be obligated to transfer Phone Lines to Healtheon following receipt of a request from Healtheon for such a transfer if service related problems have [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. occurred upon previous transfers of Phone Lines, unless Healtheon shall have demonstrated, through trial transfer or other reasonable means determined in SBCL's sole discretion, that future transfers of Phone Lines can occur with no deterioration in service. 4.6. YEAR ONE [*] TELECOM FEES. For [*] during Year One, SBCL shall pay Healtheon a fee equal to the [*] (other than, subject to Section 6.5[*]; PROVIDED HOWEVER, that for each Phone Line for which SBCL receives the bill pursuant to Section 4, SBCL shall pay the telecommunications carrier for such Phone Line directly on Healtheon's behalf and (i) net such amount from the amounts otherwise due hereunder, and (ii) bill Healtheon for any [*] included in such bills (other than such fees subject to Section 6.5 of this Agreement) AND PROVIDED FURTHER HOWEVER, that notwithstanding the foregoing, for each Transferred Phone Line, SBCL shall pay Healtheon [*] the [*] Telecom Fee. 4.6.1. CERTAIN DEFINITIONS FOR YEAR ONE TELECOM FEES. For Year One, (a) "[*] Telecom Fee" shall mean the Telecom Baseline divided by [*] Phone Lines used for Teleprinter Services [*] and paid for [*]; and (b) "Telecom Baseline" shall mean [*] Phone Lines (other than [*] which are to be included in the [*] used for Teleprinter Services in the [*]. 4.6.2. Time Period for Agreeing on Telecom Baseline. Healtheon and SBCL shall use their best efforts to exchange information needed to reach agreement as to the Telecom Baseline no later than [*]. If, by [*], the parties have not completed the exchange and review of information needed to reach agreement, or cannot reach agreement the parties shall [*] between their opposing views and the result (the "Temporary Telecom Baseline") shall be deemed to be the Telecom Baseline until [*]. In such a case, when the needed information has been exchanged and reviewed, or the parties agree as to the amount of the Telecom Baseline, the parties will [*] based on the Temporary Telecom Baseline as though the Telecom Baseline Amounts had been agreed to prior to the Effective Date. If the parties cannot agree to the Telecom Baseline by [*], either party shall have the right to require that the dispute will be resolved pursuant to Section 16 hereof. Upon the resolution of such dispute, the parties will adjust for any payments previously made based on the Temporary Telecom Baseline as though the Telecom Baseline determined through dispute resolution had been in effect from the Effective Date. 4.7. YEAR TWO [*] TELECOM FEES. For each month during Year Two, SBCL shall pay Healtheon a fee equal to the [*] (other than [*] included [*] for such Phone Lines); PROVIDED HOWEVER, that for each Phone Line for which SBCL receives the bill pursuant to Section 4, SBCL shall pay the telecommunications carrier for such Phone Line directly on Healtheon's behalf and (i) net [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. such amount from the amounts otherwise due hereunder, and (ii) bill Healtheon for any [*] included in such bills; AND PROVIDED FURTHER HOWEVER, that notwithstanding the foregoing, for each Transferred Phone Line, SBCL shall pay Healtheon [*] Telecom Fee. For Year Two, "[*] Telecom Fee" shall mean [*] (other than [*] used for Teleprinter Services for the twelve months ending [*], divided by the [*] during such twelve month period. 4.8. YEAR THREE [*] TELECOM FEES. For each [*] during Year Three, SBCL shall pay Healtheon a fee equal to the [*] (other than [*] included in [*] such Phone Lines); PROVIDED HOWEVER, that for each Phone Line for which SBCL receives the bill pursuant to Section 4, SBCL shall pay the telecommunications carrier for such Phone Line directly on Healtheon's behalf and (i) net such amount from the amounts otherwise due hereunder, and (ii) bill Healtheon for any [*] included in such bills; AND PROVIDED FURTHER HOWEVER, that notwithstanding the foregoing, for each Transferred Phone Line, SBCL shall pay Healtheon [*] Telecom Fee. For Year Three, "[*] Telecom Fee" shall mean [*] (other than [*]) used for Teleprinter Services for the twelve months ending [*], divided by [*] during such twelve month period. 4.9. YEAR FOUR [*] TELECOM FEES. For each [*] during Year Four, SBCL shall pay Healtheon a fee equal to the [*] (other than [*] included in [*] for such Phone Lines); PROVIDED HOWEVER, that for each Phone Line for which SBCL for such [*] pursuant to Section 4, SBCL shall pay the telecommunications carrier for such Phone Line directly on Healtheon's behalf and (i) net such amount from the amounts otherwise due hereunder, and (ii) bill Healtheon for any [*] included in such bills; AND PROVIDED FURTHER HOWEVER, that notwithstanding the foregoing, for each Transferred Phone Line, SBCL shall pay Healtheon [*] Telecom Fee. For Year Four, "[*] Telecom Fee" shall mean [*] (other than [*]) used for Teleprinter Services for the twelve months ending [*], divided by [*] during such twelve month period. 4.10. YEAR FIVE [*] TELECOM FEES. For each [*] during Year Five, SBCL shall pay Healtheon a fee equal to the [*] (other than [*] included in [*] for such Phone Lines); PROVIDED HOWEVER, that for each Phone Line for which SBCL receives the bill pursuant to Section 4, SBCL shall pay the telecommunications carrier for such Phone Line directly on Healtheon's behalf and (i) net such amount from the amounts otherwise due hereunder, and (ii) bill Healtheon for any [*] included in such bills; AND PROVIDED FURTHER HOWEVER, that notwithstanding the foregoing, for each Transferred Phone Line, SBCL shall pay Healtheon [*] Telecom Fee. For Year Five, "[*] Telecom Fee" shall mean [*] (other than [*]) used for Teleprinter Services for the twelve months ending [*], divided by the [*] during such twelve month period. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 4.11. DOCUMENTATION AND AUDIT RIGHTS. In connection with the periodic calculations of each Monthly Telecom Fee the parties will provide to each other reasonable documentation of [*] for Phone Lines (other than [*]) used for Teleprinter Services for the applicable period. If the parties cannot agree as to the applicable Monthly Telecom Fee, then the applicable Monthly Telecom Fee shall be the Monthly Telecom Fee as agreed to or as determined for the prior period until the correct Monthly Telecom Fee has been agreed to or is determined (including through Section 16). Each party shall have Audit Rights for each such calculation; and in the event any Monthly Telecom Fee was incorrectly calculated (or a prior Monthly Telecom Fee was used pending agreement or determination of the correct Monthly Telecom Fee for a period), the difference in the correct amount due shall be paid to the party entitled to it. 4.12. TELECOM FEES UPON RENEWAL. Telecom fees for any Year after Year Five will be set by negotiation of the parties in connection with any renewals of this Agreement. 4.13. TELECOM FEES INVOICES AND PAYMENTS. For the telecom fees for Transferred Phone Lines, Healtheon will invoice SBCL in the same fashion (e.g., in advance or in arrears) as SBCL was required to pay the carrier (e.g., in advance or in arrears) prior to the transfer of the phone line from SBCL to Healtheon. SBCL will pay any undisputed amounts on such invoices within (30) days after receipt of the invoice. 4.14. TELECOM RECORDKEEPING. Each of Healtheon and SBCL will use commercially reasonable efforts to organize its information relating to [*] so that each will be able to provide necessary information in a reasonably prompt manner to implement the requirements of this Section 4 relating to [*] Telecom Baseline Amounts and monthly invoices. 5. TELEPRINTER FEES. 5.1. DEFINITIONS USED IN CALCULATING FEES. 5.1.1 "Baseline Costs" shall mean (i) SBCL's [*] and (ii) SBCL's [*] in connection with activities and services that would fall within the definition of Agreed Services if performed by Healtheon after the Effective Date (such as Help Desk personnel ([*]); and (iii) SBCL's [*] teleprinters. 5.1.2 "Baseline Period" shall mean the [*] period beginning [*] and ending [*]. 5.1.3 "Standard [*] Teleprinter Fee" shall be equal to the [*] divided by the [*]. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 5.1.4 "Year One [*] Teleprinter Fee" shall mean the result of (i) the [*], divided by (ii) twelve (12). 5.1.5 "Baseline Denominator" shall mean the [*]. 5.1.6 "Teleprinter Baseline" shall mean the [*]. 5.1.7 "Year One Denominator" shall mean the [*] during Year One. 5.1.8 "Year One Teleprinter Cost" shall mean Healtheon's [*] (but not including such [*]) associated with the teleprinters subject to this Agreement [*] in connection with Agreed Services for Year One, [*]; provided that for the purposes of this calculation, Healtheon shall (i) [*] and (ii) exclude (A) [*], (B) [*], (C) increased [*] which are [*] and (D) [*] or which the parties [*] in the [*]. Healtheon shall provide reasonable documentation for the amount of such costs and to demonstrate that such costs relate to Teleprinter Services hereunder. Healtheon shall use its commercially reasonable efforts to keep the Year One Teleprinter Costs low during Year One. SBCL shall have Audit Rights with respect to this calculation, and any disputes relating thereto shall be resolved pursuant to Section 16 of this Agreement. 5.2. TIME PERIOD FOR AGREEING ON TELEPRINTER BASELINE. Healtheon and SBCL shall use their best efforts to exchange information needed to reach agreement as to the Teleprinter Baseline no later than [*]. If, by [*], the parties have not completed the exchange and review of information needed to reach agreement, or cannot reach agreement the parties shall [*] between their opposing views and the result (the "Temporary Teleprinter Baseline") shall be deemed to be the Teleprinter Baseline until [*]. In such a case, when the needed information has been exchanged and reviewed, or the parties agree as to the amount of the Teleprinter Baseline, the parties will [*] made based on the Temporary Teleprinter Baseline as though the Teleprinter Baseline had been agreed to prior to [*]. If the parties cannot agree to the Teleprinter Baseline [*] either party shall have the right to require that the dispute will be resolved pursuant to Section 16 hereof. Upon the resolution of such dispute, the parties will adjust for any payments previously made based on Temporary Teleprinter Baseline as though the Teleprinter Baseline determined through dispute resolution had been in effect from the Effective Date. 5.3. YEAR ONE [*] TELEPRINTER FEES. Subject to Section 5.13 and [*] provided for in Section 6 hereof, for each month during Year One, for each Active Teleprinter subject to this Agreement SBCL shall pay Healtheon a fee equal to [*] Year One [*] Teleprinter Fee. 5.4. YEAR ONE ADJUSTMENT PAYMENT. If the Year One Teleprinter Cost [*] the sum of, for all [*] of Year One, the [*] multiplied by the number of [*], then SBCL shall pay Healtheon an amount equal to [*] if the term "[*]" were used instead of [*]. If the Year One Teleprinter Cost is [*]of the [*] paid [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. by SBCL for Active Teleprinters, then Healtheon shall pay SBCL an amount equal to the [*] were used instead of [*] in [*] of this Agreement and (ii) the [*]. Any payment required to be made pursuant to this Section 5.4 shall be due within [*] after the date of receipt of the calculation of such difference, together with reasonable documentation of the supporting information. SBCL shall have Audit Rights with respect to this calculation, and any disputes shall be resolved pursuant to Section 16 of this Agreement. 5.5. YEAR TWO [*] FEES. Subject to Section 5.13 [*] provided for in Section 6 hereof, for each month during Year Two, for each Active Teleprinter subject to this Agreement, SBCL shall pay Healtheon a fee equal to [*] Standard [*] Teleprinter Fee. 5.6. YEAR THREE [*] FEES. Subject to Section 5.13 and [*] provided for in Section 6 hereof, for each month during Year Three, for each Active Teleprinter subject to this Agreement, SBCL shall pay Healtheon a fee equal to [*] Standard [*] Teleprinter Fee. 5.7. YEAR FOUR [*] FEES. Subject to Section 5.13 and [*] provided for in Section 6 hereof, for each month during Year Four, for each Active Teleprinter subject to this Agreement, SBCL shall pay Healtheon a fee equal to [*] Standard [*] Teleprinter Fee. 5.8. YEAR FIVE [*] FEES. Subject to Section 5.13 and [*] provided for in Section 6 hereof, for each month during Year Five, for each Active Teleprinter subject to this Agreement, SBCL shall pay Healtheon a fee equal to [*] Standard [*] Teleprinter Fee. 5.9. FEES UPON RENEWAL; OTHER FEES. Fees for any period after Year Five will be set by negotiation of the parties in connection with any renewals of this Agreement. In consideration of its receipt of the Agreed Services and Healtheon's other undertakings set forth in this Agreement, SBCL has agreed to pay Healtheon as provided in Section 4 and this Section 5, and provision of services under this Agreement will result in no other fees, including without limitation, any development, integration or customization fees chargeable to SBCL, except to the extent expressly set forth in this Agreement or in a writing delivered pursuant to this Agreement and executed by both parties hereto. 5.10. INVOICES AND PAYMENTS. For the fees due under Sections 5.3, 5.5 and 5.6 of this Agreement, Healtheon will invoice SBCL on the 15th of each month, and undisputed amounts will be due within (30) days after receipt of the invoice; and for the fees due under Sections 5.7 and 5.8, Healtheon will invoice SBCL on a basis to be negotiated prior to the end of Year Three. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 5.11. DISPUTED INVOICES. In the event SBCL disputes any amount shown due on any invoice from Healtheon, SBCL shall send a Dispute Notice to Healtheon. In such event, SBCL shall timely pay any undisputed amount to Healtheon and shall have Audit Rights with respect to the portions of Healtheon's books and records that relate to the subject of the dispute. In the event the parties are unable to resolve the disputed matter, the matter shall be resolved in accordance with Section 16 hereof. 5.12. INTENTIONALLY OMITTED 5.13. [*] 5.13.1. CERTAIN DEFINITIONS USED IN THIS SECTION 5.13. (a) "[*] Teleprinters" on the first day of any [*] shall mean [*] any [*] since the date hereof which [*] to either (i) the [*] (ii) any formerly [*] and which on the first day of the month are [*] of test results reporting. (b) "[*] Teleprinters" on the first day of any month shall mean [*] any [*] since the date hereof which [*] to either (i) the [*], or (ii) any formerly [*] and which on the first day of the month are [*] of test results reporting. (c) "[*] Teleprinters" on the first day of any month shall mean [*] the sum of [*] and [*] which were [*] and which on the first day of the month are [*] of test results reporting. (d) "[*] Teleprinters" shall mean teleprinters located at Sites that are [*]. (e) "[*] Teleprinters" shall mean teleprinters at Sites receiving Teleprinter Services for the printing of results of [*]. (f) "[*] Teleprinters" shall mean any teleprinter that is not a [*] Teleprinter. (g) "Beginning Number" shall mean the actual number of [*] Teleprinters or [*] teleprinters on the Effective Date as set forth on the final schedule to be delivered pursuant to 5.1.3(g) to the Asset Purchase Agreement listing such teleprinters. 5.13.2. YEAR ONE. If, on the first day of any month of Year One, the number of Active Teleprinters is less than the sum of [*] (which sum is referred to as the "[*]"), SBCL will pay Healtheon pursuant to Section 5.3 hereof as though the number of Active Teleprinters on the first day of such month was equal to the Year One [*]. 5.13.3. YEAR TWO. If, on the first day of any month of Year Two, the number of Active Teleprinters is less than the sum of [*] (which sum is referred to as the "[*]") SBCL will pay Healtheon pursuant to Section 5.5 as though the number of Active Teleprinters on the first day of such month was equal to the Year Two [*]. 5.13.4. YEAR THREE. If, on the first day of any month of Year Three, the number of Active Teleprinters is less than the sum of [*] (which sum is referred to as the "[*]"), SBCL will pay Healtheon pursuant to Section 5.6 as though the number of Active Teleprinters on the first day of such month was equal to the Year Three [*]. 5.13.5. YEAR FOUR. If, on the first day of any month of Year Four, the number of Active Teleprinters is less than the sum of (i) * (which sum is referred to as the "[*]"), SBCL will pay Healtheon pursuant to Section 5.7 as though the number of Active Teleprinters on the first day of [*] was equal to the Year Four [*]. 5.13.6. YEAR FIVE. If, on the first day of any month of Year Five, the number of Active Teleprinters is less than the sum of (i) [*] (which sum is referred to as the "[*]"). SBCL will pay Healtheon pursuant to Section 5.8 as though the number of Active Teleprinters on the first day of [*] was equal to the Year Five [*]. 5.13.7. AGGREGATE [*] AMOUNTS. The fees payable by SBCL for the last month of each Year pursuant to Sections 5.3, 5.5, 5.6, 5.7, or 5.8 of this Agreement and this Section 5.13, as applicable to that Year, shall be [*]) so that, for that Year, SBCL shall not have paid fees under such applicable Section and this Section 5.13 with respect to a number of teleprinters that is [*] of (i) that number of teleprinters which is equal to the [*], as applicable, for each of the [*], or (ii) the sum of the [*] for each month in such Year on which fees would be paid but for this Section 5.13. 5.13.8. EXAMPLES. Examples of the application of this Section 5.13 are attached hereto as EXHIBIT 5.13.8. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 6. OTHER PROVISIONS AFFECTING PRICING 6.1. STAT INSTALLS. SBCL may, on a rare and occasional basis, and for reasonable commercial purposes, request that a Provider receive an installation on a faster basis than the Performance Standards otherwise requires. Healtheon will accommodate SBCL's reasonable request for such "STAT" services requested in accordance with the foregoing sentence. Any incremental out-of-pocket costs (expenses in excess of those that would be incurred in providing Agreed Services to such Provider without regard to the request for STAT services) incurred by Healtheon by reason of SBCL's request shall be paid by SBCL to Healtheon within [*] after receipt of invoice therefor. 6.2. SCAN SITES. If a Provider is receiving services under the Prior Services Agreement for SCAN (as defined in the Prior Services Agreement) and also has one or more Active Teleprinters subject to this Agreement, SBCL shall [*] the Year One Monthly Teleprinter Fee for any Active Teleprinter at such Site for [*]. The Year One Monthly Teleprinter Fee (or the Standard Monthly Teleprinter Fee, as applicable) [*] Active Teleprinter at each such Site for [*] and for each month thereafter except to the extent that SBCL shall have provided a de-installation notice pursuant to Section 1.1.1(d). 6.3..[*] 6.3.1 From and after the effective date of a Reference Contract the appropriate portion of the Site Fees due under this Agreement shall be [*], to an amount equal to [*] furnishing clinical laboratory testing results on [*] teleprinters ("Reference Services") provided pursuant to such Reference Contract. "Reference Contract" shall mean any agreement between Healtheon and [*] pursuant to which Healtheon (i) provides services that include furnishing clinical laboratory testing results on a [*], or (ii) provides only the service of furnishing clinical laboratory testing results on [*] at [*] and services directly related thereto; or (iii) provides services that include furnishing clinical laboratory testing results on [*] and that [*] that such agreement shall be deemed a Reference Contract. 6.3.2 On or prior to the earlier of (i) [*] or (ii) the date on which [*] teleprinter network, the parties shall agree upon the adjustment to the applicable portion of the Site Fees to be paid by SBCL for the use of [*] Teleprinters (in the case of (ii), based on the price to be paid by an [*] Lab for the use of any Active Teleprinter (which will thereby become a [*] Teleprinter)). Notwithstanding the foregoing, if Healtheon (i) has [*] which seeks to use teleprinters which are the subject of this Agreement and (ii) has given SBCL [*], the parties shall endeavor to reach agreement regarding such adjustment within thirty (30) days after such notice, and if the parties have not reached agreement regarding such adjustment by a date thirty (30) days after such notice, either party may identify such dispute for resolution pursuant to Section 16; PROVIDED HOWEVER, if the dispute is not [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. resolved within [*] after the matter has been identified for resolution pursuant to Section 16, Healtheon may proceed to [*] and [*] which are the subject of this Agreement [*]; and the fees paid by SBCL for use of such [*] Teleprinters shall be set at the [*] until such time as the dispute has been finally resolved pursuant to Section 16 or by agreement, and thereupon any fees previously paid by SBCL for the use of such [*] Teleprinters shall [*] to reflect such resolution or agreement. 6.3.3 In determining whether amounts paid by [*] for Reference Services reflect [*] the applicable portion of the Site Fees, the parties shall mutually agree on appropriate means of [*] for Agreed Services and [*]. Any dispute occasioned by the inability of the parties to so agree shall be resolved in accordance with Section 16 hereof. (a) The parties acknowledge and agree that there are multiple methods which may be utilized to determine [*] pursuant to Section 6.3.1 Such methodologies may include but are not limited to: (i) comparison of [*] SBCL to Healtheon hereunder to the [*]; or (ii) comparison of [*]. If this methodology is used, it shall be determined by [*] charged by Healtheon on an invoice [*] on the invoice. (b) The parties will consider, in any such case [*], such as [*] and the amount, if any, paid by Healtheon to [*] which are used by [*]. If fees charged by Healtheon to [*] with other fees, then Healtheon and SBCL shall choose a commercially reasonable approach to [*]. 6.3.4 Healtheon's obligations to protect the [*] applicable to [*] shall be respected in applying this Section 6.3. 6.3.5 In [*] required by Section 6.3.1, the parties shall take into account the [*] applicable to the Agreed Services and [*]. In the event [*] are [*] than [*] for the Agreed Services and [*] (taking into account the matters set out in Section 6.3.3) [*] the [*] the Agreed Services, SBCL shall be entitled to [*] applicable to the Agreed Services with appropriate [*] hereunder, as mutually agreed by the parties at the time. In the event that [*] applicable to [*] are [*] the [*] for the Agreed Services and [*] (taking into account the matters set out in Section 6.3.3) [*] SBCL shall be entitled pursuant to Section 6.3.1 to [*] under this Agreement. 6.3.5 When SBCL gains the ability [*] to a [*] pursuant to the Asset Purchase Agreement and which was [*] pursuant to this Agreement, SBCL will pay to Healtheon a fee therefor which is [*] (taking into account the matters set out in Section 6.3.3) [*] by Healtheon [*] for the use of such teleprinter. 6.3.6 If Healtheon fails to implement this Section 6.3, [*] SBCL the [*] by Healtheon to SBCL and the [*] if this Section 6.3 had been implemented in accordance with its terms, plus interest at the Prime Rate. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 6.4. EFFECT OF REGULATORY CHANGES. If any Regulatory Change shall occur which materially changes the [*] or [*] to either SBCL or Healtheon, then the parties agree [*] the Site Fees payable or other provisions hereunder in a manner that will be fair to both parties while at the same time [*] of the parties under this Agreement to the greatest extent possible and in a manner consistent with the Regulatory Change. Any dispute as to the amendments to this Agreement to be made in the event of a Regulatory Change shall be settled in accordance with the procedures set forth in Section 16 hereof. 6.4.1 For purposes of this Section 6.4, a "Regulatory Change" shall have occurred if any Regulation is modified, implemented, threatened to be implemented (where the Regulation as threatened to be implemented is generally followed by those in the industry), or determined to prohibit, restrict or in any way materially change the [*] to either SBCL or Healtheon. 6.5. [*] INSTALLATIONS. (a) Notwithstanding anything to the contrary in this Agreement, in the event the number of Active Teleprinters as of the Effective Date is [*], then Healtheon shall [*] for each new installation after [*] up to a [*]. (b) In addition, SBCL shall be responsible for the cost of installing any Phone Line required for such Active Teleprinters for which SBCL is so billed by Healtheon. SBCL will pay undisputed invoices for such installations within [*] of the invoice. The invoice shall contain reasonable documentation of the Phone Line installation costs. (c) SBCL will arrange and be responsible for the actual installation of such teleprinters, and all labor costs, travel expenses and similar costs incurred by SBCL in connection with such installations. The parties expect that SBCL will use [*] to perform such installations. (d) If by the end of Year One SBCL has [*] of new teleprinters [*], SBCL will pay Healtheon an amount equal to the [*] (i) the number of [*] the sum of [*] and [*] such a teleprinter [*]. (e) If at or prior to the end of Year One, the parties determine that SBCL has [*] pursuant to Section [*], Healtheon will [*]. (e) If SBCL can demonstrate that the number of teleprinters in inventory (including new teleprinters received; new teleprinters ordered but not received, and teleprinters de-installed and available for re-installation) on the Effective Date was greater than [*] (as described above) [*] then SBCL will be entitled to [*] in Section [*]. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 7. CHANGES AND DEVELOPMENTS. 7.1. CHANGES. As used in this Section 7, "Change" means a change to (i) the computer systems which would affect the provision, or the steps in transmission, of Teleprinter Services ("Systems Changes"), including without limitation the [*] Transmissions being directed through [*], (ii) the technology used in providing Teleprinter Services, (iii) the operational processes through which Teleprinter Services are provided, or (iv) the telecommunications which are utilized in delivering test report data to Providers. No Change will be made by either Healtheon or SBCL that would affect the Agreed Services unless: 7.1.1 With respect to all Systems Changes, and all material Changes other than Systems Changes, the party seeking to implement the Change gives the other party both (i) sixty (60) days prior written notice of the Change and (ii) opportunity to review and approve the Change (which approval shall be required to be obtained before implementing such Change) and which approval shall not be given until after any appropriate steps with affected Providers are taken and reasonable acceptance testing, if applicable, is satisfactorily completed. In the event Healtheon desires to [*] SBCL send Transmissions over [*] Healtheon shall provide notice of same to SBCL and the parties shall agree on appropriate testing and approval steps as well as quality assurance. No such migration to the Healtheon network shall occur without SBCL's prior written consent. In the event of any such migration, the confidentiality of Transmissions and the performance standards for such network shall be consistent with the Network Standards (as defined in the Prior Services Agreement) and subject to SBCL's approval. 7.1.2 The Change will not result in any material additional costs to be incurred by either SBCL or Healtheon under this Agreement. 7.1.3. In the event of such Changes, Performance Standards will be reviewed, modified and/or expanded to take into account the Change. 7.2. YEAR 2000 COMPLIANCE. 7.2.1 For purposes of this Section 7.2, a "Year 2000 Problem" shall be deemed to exist if a teleprinter fails to receive or print accurate and complete test reports because of any problem related to the occurrence of dates prior to, during, or after the year 2000 and reasonably classified as a "year 2000" problem. 7.2.2 In the event any teleprinter conveyed to Healtheon under the Asset Purchase Agreement (each, an "APA Teleprinter") or any part conveyed to Healtheon under the Asset Purchase Agreement (each, an "APA Part") has a Year 2000 Problem, Healtheon will (i) restore results delivery capabilities to the affected Site and/or APA Teleprinter in accordance with SBCL's direction, and (ii) use its commercially reasonable efforts, if SBCL so requests, to remedy such Year 2000 Problem of such APA Teleprinter or APA Part and notwithstanding anything in this Agreement to the contrary (but subject [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. to Section 7.2.3 of this Agreement), [*] of Healtheon associated with restoring results delivery capabilities to the affected Site and/or APA Teleprinter in accordance with SBCL's directions or incurred by virtue of Healtheon's commercially reasonable efforts to remedy such Year 2000 Problem of such APA Teleprinter or APA Part in accordance with SBCL's request, (y) not hold Healtheon responsible for any Loss (as that term is defined in the Asset Purchase Agreement) of SBCL by reason of such failure of such APA Teleprinters, and (z) indemnify and hold harmless Healtheon against any Third Party Claim (as that term is defined in the Asset Purchase Agreement) to the extent such claim is alleged to have been caused by such failure of such APA Teleprinter, in accordance with Section 6.3.2 of the Asset Purchase Agreement. Healtheon shall not be in breach of this Agreement for failure to meet any Performance Standards to the extent that such failure is attributable to a Year 2000 Problem existing in the assets sold to Healtheon pursuant to the Asset Purchase Agreement or in SBCL systems. Notwithstanding any Year 2000 Problem of any APA Teleprinter, SBCL shall continue to be obligated to pay any and all Site Fees for such affected APA Teleprinter as though there were no Year 2000 Problem for such affected APA Teleprinter (and Healtheon shall be obligated to pay any and all amounts owed by it) under this Agreement without regard to provisions providing for liquidated damages or escrow of such amounts. 7.2.3 Any teleprinter subject to this Agreement which is not an APA Teleprinter (including software therein and upgrades to such software), any hardware repairs or upgrades made with parts other than APA Parts, and any software upgrades in one or more of the APA Teleprinters made on or after the Effective Date by or at the direction of Healtheon, will not have a Year 2000 Problem. In the event such a teleprinter, hardware repair or upgrade, or software upgrade does have a Year 2000 Problem, Healtheon will (i) restore results delivery capabilities to the affected Site where such teleprinter is located, where such hardware repair or upgrade is located, or where such software upgrade was made, and (ii) use its commercially reasonable efforts to remedy such Year 2000 Problem, at Healtheon's sole cost and expense. 7.3. REQUIRED CHANGES. Healtheon shall be required to develop and implement, at its expense except to the extent hereinafter provided, as promptly as practicable and in no event later than thirty (30) days prior to the effective date of any applicable change to Applicable Laws (including a change which is threatened to be implemented where such change as threatened to be implemented is generally followed by those in the industry (each, a "Threatened Change")), any Change which (i) Healtheon determines are required for teleprinters used in Teleprinter Services to remain in compliance with all Applicable Laws (or a Threatened Change), or (ii) SBCL requests in writing to Healtheon for compliance with Applicable Laws (or a Threatened Change) of such teleprinters. In the event that an SBCL requested Change pursuant to clause (ii) of the preceding sentence is ultimately and finally determined not to be required in order to comply with Applicable Laws (or a Threatened Change), then SBCL shall reimburse Healtheon for its out-of-pocket costs incurred in effecting such Change. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 7.4. DEVELOPMENT WORK REQUESTED OR USED [*] 7.4.1 When Healtheon performs development work that would benefit the provision of Teleprinter Services at [*], SBCL shall have the right to [*], and at a price that reflects that Healtheon will [*], but only for so long as Healtheon has the legal right to offer such work to SBCL and such work is not proprietary to the contracting party. 7.4.2 When Healtheon performs development work in connection with Teleprinter Services at the request of SBCL and such work is usable in connectivity [*] the [*] shall reflect that Healtheon [*]. 8. COMPLIANCE MATTERS. 8.1. GENERAL. Healtheon is a computer technology company which provides electronic connectivity services, and is not a health care provider. Healtheon acknowledges that, for a laboratory services provider such as SBCL, the ability to assure that it complies with applicable laws, rules or regulations ("Applicable Laws"), including, but not limited to, the federal Physician Self-Referral Law, 42 U.S.C. 1395nn, and the regulations promulgated thereunder (together, the "Stark Law"), similar state physician self-referral laws and regulations (together with the Stark Law, the "Self-Referral Laws"), the federal Medicare/Medicaid Antikickback Law and regulations promulgated thereunder (the "Federal Antikickback Law"), and similar state antikickback laws and regulations (together with the Federal Antikickback Law, the "Antikickback Laws"), is of critical importance. SBCL and Healtheon intend that the outsourcing of the Teleprinter Services to Healtheon and the subsequent provision of the Agreed Services by Healtheon to SBCL be done in a manner that allows SBCL to maintain its compliance with Applicable Laws. Accordingly, SBCL and Healtheon have agreed to the provisions set forth in this Section 8. 8.2. REPRESENTATION, WARRANTY AND COVENANT. Healtheon represents, warrants, and covenants to SBCL as follows: 8.2.1 Healtheon will not directly or indirectly provide any remuneration, as defined in the applicable Self-Referral Laws or Antikickback Laws, to any Connected Provider to whom any of such Self-Referral Laws or Antikickback Laws applies on behalf of SBCL, except for direct or indirect remuneration permitted by such law. 8.2.2 In furtherance and not in limitation of the foregoing, SBCL and Healtheon may, from time to time, agree upon certain principles, activities, agreements, standard operating procedures and/or actions (the "SOPs") that one or both parties, as applicable, will follow or undertake to help SBCL assure its compliance with Applicable Laws, and each party will follow any such SOPs applicable to it in the course of conducting its respective business. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 8.2.3 With respect to any Connected Provider located in the State of New York to which Healtheon or SBCL, as the case may be, is providing Phone Lines or a teleprinter or other equipment in connection with the provision of Teleprinter Services, Healtheon will not permit Shared Use of same unless either (i) SBCL has informed Healtheon in writing that it is willing to permit Healtheon to allow such Shared Use and that Healtheon and SBCL have agreed upon appropriate parameters for such Shared Use; or (ii) the only such Shared Use is the result of a teleprinter becoming a Generic Teleprinter in accordance with this Agreement and so long as a fair market value charge is paid by SBCL and such third party using such teleprinter for the use of such teleprinter. If and to the extent that Section VI.A.3 of the Prior Services Agreement shall cease to apply because SBCL shall have informed Healtheon that it is willing to permit Healtheon to allow the Shared Use contemplated by that Section of the Prior Services Agreement, then this Section 8.2.3 shall similarly no longer apply. 8.2.4 Healtheon will provide any reasonable assistance that SBCL may request from Healtheon, including the provision of information or other assistance, in order for SBCL to fulfill any obligation that SBCL, in its sole discretion, determines it has under the Integrity Agreement. Notwithstanding the foregoing, nothing in this provision is intended to or should be interpreted to mean that Healtheon is subject to any of the provisions of the Integrity Agreement. 8.2.5 In the event that SBCL becomes aware of an issue with respect to compliance with this Section 8, SBCL will promptly inform Healtheon of such issue and Healtheon will promptly address such issue and take action to remedy any such issue to the reasonable satisfaction of SBCL. 8.3. PHONE LINES. Healtheon's obligations under this Section 8 shall apply to all Phone Lines, whether or not Healtheon has billing responsibility therefor, consistent with the provisions of Section 1.1.5. 8.4. AUDIT RIGHTS. SBCL shall have Audit Rights, exercisable from time to time in SBCL's sole discretion, but not more than once per calendar year, with respect to all of Healtheon's books, records and other materials that relate to any compliance issues covered by this Section 8 in order for SBCL to determine Healtheon's fulfillment of its obligations hereunder or under any separately agreed upon SOPs. In any exercise of Audit Rights under this Section 8.4, SBCL shall give Healtheon two (2) weeks' prior written notice of any such audit, and shall abide by reasonable Healtheon security and confidentiality procedures during the audit. SBCL and Healtheon shall each bear their own expenses associated with such audit. 8.5. DISPUTE RESOLUTION. Notwithstanding any other provision of this Agreement to the contrary, because of the critical nature of compliance to SBCL's business, disputes regarding compliance with this Section 8 may not be susceptible to resolution following normal dispute resolution mechanisms. In the event that SBCL and Healtheon have a disagreement or dispute regarding compliance with this Section 8, Healtheon agrees to use its best efforts in working with SBCL to attempt to resolve that dispute as soon as possible. If the parties are not able promptly to resolve any such dispute, and the parties are not able to agree upon another mechanism, such as that provided for in Section 16 hereof, to resolve the issue, SBCL shall have the right to exercise any and all remedies available to it under this Agreement, including the right to terminate the Agreement. 9. COOPERATIVE RELATIONSHIP 9.1. COOPERATION. Upon SBCL request, Healtheon will work with SBCL's sales people to generate connectivity for Teleprinter Services. 9.2. USE OF OTHER PARTIES' NAME. Each party shall have the right to include the other party's name on its client or vendor list and to disclose the nature of the services and products provided under this Agreement, so long as such services and products are accurately represented; PROVIDED, HOWEVER, that neither party has the right to use the other's name, trademarks or trade names for other advertising, sales promotion, or publicity purposes without the other's prior written consent. 9.3. REFERENCE CHECKS. SBCL shall designate one or two individuals who shall respond to a reasonable number of reference inquiries and visits (not to exceed two visits in any calendar month) by customers and potential customers of Healtheon on mutually agreeable terms. SBCL shall retain the right [*] of SBCL or to [*] who does not abide by SBCL's policies and procedures. Healtheon shall inform all customers and potential customers allowed on SBCL's premises pursuant to this Section 9.3 that they are required to abide by SBCL's policies and procedures. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 10. EXCLUSIVITY; PREFERRED PROVIDER. 10.1. EXCLUSIVE PROVIDER. Section VII.D of the Prior Services Agreement related to the freedom of SBCL to undertake any results reporting services using teleprinters. This Agreement reflects SBCL's exercise of its right thereunder, and SBCL agrees that, so long as this Agreement (or any successor agreement hereto) remains in effect, this Agreement (or such successor agreement hereto) will be SBCL's sole exercise of such right (subject to the terms of this Agreement). Accordingly, SBCL hereby agrees that Healtheon shall be the exclusive provider to SBCL of Agreed Services until the earlier of (i) termination or expiration of this Agreement, and (ii) such time as more than [*] accordance with [*] hereof. Notwithstanding the foregoing, if Healtheon fails to meet any of the Performance Standards in any [*] or any [*] (a "Disqualifying Condition"), SBCL may [*] Healtheon's [*] of Agreed Services, provided however, if SBCL does not exercise its right to [*] status within [*] after the date the occurrence of a Disqualifying Condition is first reflected in a report delivered pursuant to Section 1.1.1(g) or a notice from SBCL pursuant to Section 1.1.4, SBCL may not thereafter exercise its [*] as a result of such Disqualifying Condition. Thereafter, Healtheon shall be [*] of Agreed Services to SBCL except as provided in Section 10.2. 10.2. LIMITATIONS ON PREFERRED PROVIDER STATUS. The provisions of Section 10.1 with respect to preferred provider status shall apply unless and until any of the following occurs: 10.2.1 Healtheon ceases to offer products and services which have features and functionality which are substantially comparable to other similar products and services of similar vendors for services in the nature of Teleprinter Services; SBCL provides written notice of same and, within thirty (30) days after such notice is given, Healtheon fails to demonstrate to SBCL's reasonable satisfaction that such determination is not accurate. 10.2.2 [*] for the [*] (including CRTs) to Healtheon made [*] and the amount of [*] is not [*] (which for purposes of this Section 10.2.2 shall be deemed to be [*] the number of [*] equal to [*] pursuant to the [*] (as adjusted for [*] (a "[*]"). The parties agree that, notwithstanding [*] a [*] will not permit SBCL to [*] as provided [*]. After Healtheon has [*], this Section 10.2.2 shall apply only if the [*] by reason of an [*] by Healtheon that is not a [*]. 10.2.3 Any of the events described in Sections 14.2.1 through 14.2.5 shall have occurred (without regard to grace periods otherwise applicable thereto and other than an event under Section 14.2.4 which is based upon a failure of SBCL to pay amounts due from it hereunder). 10.2.4 A Disqualifying Condition occurs (other than the Disqualifying Condition that [*] under Section 10.1) provided however, if SBCL does not exercise its right to terminate Healtheon's preferred provider status within [*] after the date the occurrence of such a Disqualifying Condition is first reflected in a report delivered pursuant to [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Section 1.1.1(g) or a notice from DBCL pursuant to Section 1.1.4, SBCL may not thereafter exercise its right to terminate Healtheon's preferred provider status as a result of such Disqualifying Condition. 10.3. EXCLUSIONS. Notwithstanding anything to the contrary contained in this Agreement, including without limitation this Section 10, SBCL shall be entitled, without restriction and in its sole discretion, to (i) use or change any result reporting system for purposes of connectivity between an SBCL Lab and a Provider, or between SBCL Labs, that does not involve the use of teleprinters; (ii) pursue future arrangements or relationships for Test Report delivery that does not involve the use of teleprinters; and (iii) use or change any system between SBCL Labs and other facilities owned, managed and/or operated by SBCL. Without limiting the foregoing, SBCL shall be entitled without restriction and in its sole discretion, to change, continue to use or install new (non-teleprinter) test results reporting interfaces and devices. SBCL will not [*] or enter into [*] with [*] for such [*] and [*] opportunity to [*] on the [*] may make such [*] (if [*] are asked to do so). 10.4. SBCL TRANSACTIONS. In the event that SBCL merges with or into, or acquires or is acquired by an entity, owning or operating a clinical laboratory, or sells substantially all of its assets to or merges or consolidates with (or undertakes a share exchange with) another entity in a transaction in which this Agreement is assigned to such entity, SBCL shall have the right to elect to have the preferred provider status removed with respect to such other entity, PROVIDED THAT the [*] set forth in [*] hereof shall continue in effect after the date of such transaction. In addition, in the event of such an SBCL transaction, this Agreement shall, at the option of the new entity, apply only to Sites existing on the date of consummation of such transaction. 11..[*] 11.1. [*] USE OF TELEPRINTERS. Healtheon shall not permit any teleprinter or Phone Line in respect of which SBCL pays for Agreed Services hereunder to be [*] to become a [*] Teleprinter unless [*] for such use. Until [*], Healtheon will target for [*] Teleprinters only those teleprinters [*] which, as of the date hereof, receive teleprinter result reporting services from [*]. 11.2. [*] SITES. Prior to the Effective Date, SBCL shall [*] (other than sites that have [*] Teleprinters, [*] , and other than, at SBCL's option, those Sites with a teleprinter from SBCL and a [*])) which (i) have the [*] from all such Sites and (ii) represent [*] of the [*] ordered from all such Sites [*]. A preliminary list of [*] is attached hereto as EXHIBIT 11.2. Such list is true and correct in all material respects. A final list of [*] shall be delivered to Healtheon on or before the Effective Date. SBCL may, on a rare and occasional basis, [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. and for reasonable commercial purposes [*] from such list, and substitute a [*] for such [*], which [*] shall be a [*]. 11.2.1 Teleprinters located at [*] shall not be [*] Teleprinters for the use [*] for at least [*] from the Effective Date, unless SBCL is [*] to the teleprinters [*] will have to the teleprinter at [*]. 11.2.2 Notwithstanding the foregoing, Healtheon may [*] or any other [*] which is a successor to and comparable[*], provided that access to such [*] or such other successor solution shall [*] as provided by Section 11.2.1. 11.3. TIMING OF [*] PRINTERS. [*] will not [*] to (i) an Active Teleprinter (thereby [*] teleprinter a [*] Teleprinter) or (ii) an Active Teleprinter that [*] Teleprinter, in either case located at a Site other than a [*], [*] unless [*] is a party to [*] and SBCL is [*] to the teleprinters that are subject to such Reference Contract, and in such case [*] of teleprinters to [*] Teleprinters for such [*], and conversion of such [*] teleprinters to [*] teleprinters for the purpose of SBCL's access, may be accomplished within a [*] provided that the [*] time for [*] under this Agreement is [*] for SBCL under such Reference Contract. 12. CONFIDENTIALITY AND SECURITY. 12.1. DATA CONFIDENTIALITY. Each party agrees that patient clinical records are Confidential Information and each party shall not disclose or utilize individual lab test information in any way that would violate any patient confidentiality obligation or any Regulations. Without limiting Healtheon's obligations regarding Confidential Information which may be otherwise provided for in this Agreement, Healtheon shall be responsible to ensure the confidentiality of test results and patient information transmitted in the provision of Teleprinter Services in accordance with all applicable Regulations governing such patient confidential information, including to prevent anyone other than the sender and addressee of Transmittal Information or their respective authorized employees from monitoring, using, gaining access to or learning the import or contents of any Transmittal Information. The foregoing notwithstanding, Healtheon shall not have any obligation regarding the confidentiality of a Test Report once it has been printed at a teleprinter. 12.2. DISTRIBUTION AND USE OF DATA. All Transmittal Information sent by SBCL shall be owned by SBCL and not by Healtheon. Healtheon shall not capture, aggregate, integrate, compile, regenerate, merge, manipulate or otherwise use the Transmittal Information for any purposes and shall not provide the Transmittal Information to any other person or entity, other than as specifically required or allowed under the terms of this Agreement to perform the Agreed Services, without the prior written consent of SBCL. Healtheon agrees that such information cannot be aggregated for any Provider or among different customers or other [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. health care providers or laboratory service providers for any purpose, without SBCL's prior written consent. 12.2.1 If Healtheon is served with a warrant, subpoena or any other order or request from a governmental body or any other entity or person for any records or files of Transmittal Information, Healtheon will as soon as practicable, and not in violation of law, deliver to SBCL a copy of such warrant, subpoena, order or request and will not, without SBCL's prior written consent, accede to the same unless and until required to do so under applicable law. 12.2.2 SBCL agrees that Healtheon shall have SBCL Access for [*] and otherwise to the extent reasonably necessary to perform Agreed Services hereunder and meet the Performance Standards. Healtheon acknowledges and agrees that in the event it has access to confidential data relating to a Connected Provider and/or the Connected Providers' patients, employees and medical staffs, Healtheon will hold such information in the strictest confidence and will not, without SBCL's (and, if required, the Connected Provider's) prior written consent, disclose any such information, including without limitation in any regeneration, recompilation, or reorganization thereof, or through any statistical analyses or provision of other excerpts thereof. Without limiting the foregoing, Healtheon agrees that it shall limit the Healtheon employees who have access to any patient identifiable health information, including without limitation, any information relating to a Test Report, if any, to only those "need to know" employees of Healtheon as is required to perform the Agreed Services to the level of the Performance Standards set forth herein. Such employees shall be identified to SBCL in advance of such access and shall have executed and delivered to Healtheon and to SBCL, an agreement requiring non-disclosure of confidential information, compliance with all Healtheon policies and procedures with respect to Confidential Information and security of the Network (which shall be consistent with the requirements in this Agreement), if applicable, established by SBCL and shall include an acknowledgment of immediate termination for breach of such agreement. To the extent any employee of Healtheon acquires such SBCL Access, Healtheon shall cause such employees to abide by SBCL's [*] procedures, and shall deliver to SBCL such agreements reflecting same as may be required by SBCL and identified to Healtheon in writing from time to time. Healtheon shall be responsible for promptly notifying SBCL if any employee with SBCL Access is terminated or leaves the employment of Healtheon. 12.3. TRADE SECRET NONDISCLOSURE COVENANT. Without limiting the foregoing, Trade Secrets and Confidential Information and all physical embodiments thereof received by either party (the "RECEIVING PARTY") from the other party (the "DISCLOSING PARTY") during the term of this Agreement, including those received pursuant to the exercise of Audit Rights as described in Section 1.3 hereof, are confidential to and are and will remain the sole and exclusive property of the Disclosing Party. In furtherance of the foregoing: 12.3.1 At all times, both during the term of this Agreement and after its termination, the Receiving Party shall hold all Trade Secrets of the Disclosing Party in [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. confidence, and will not use, copy or disclose such Trade Secrets, or any physical embodiment thereof, or cause any of such Trade Secrets to lose their character as Trade Secrets. At all times during the term of this Agreement and for a period of eighteen (18) months following the termination of this Agreement (except where a longer period is required pursuant to this Agreement or Regulations) the Receiving Party shall hold the Confidential Information of the Disclosing Party in confidence, and will not use, copy or disclose such Confidential Information, or any physical embodiments thereof, or cause any of such Confidential Information to lose its character or cease to qualify as Confidential Information. 12.3.2 Trade Secrets and Confidential Information shall be maintained under secure conditions by the Receiving Party, using reasonable security measures and in any event (i) not less than the same security measures used by the Receiving Party for the protection of its own Trade Secrets and Confidential Information of a similar kind, and (ii) any specific security measures required by this Agreement. The Receiving Party shall not remove, obscure or deface any proprietary legend relating to the Disclosing Party's rights, on or from any tangible embodiment of any Trade Secrets and Confidential Information without the Disclosing Party's prior written consent. Within thirty (30) days after termination of this Agreement, the Receiving Party shall deliver to the Disclosing Party all Trade Secrets and Confidential Information, and all physical embodiments thereof, then in the custody, control or possession of the Receiving Party. 12.3.3 If the Receiving Party is ordered by a court, administrative agency, or other governmental body of competent jurisdiction to disclose Trade Secrets or Confidential Information, or if it is served with or otherwise becomes aware of a motion or similar request that such an order be issued, then the Receiving Party will not be liable to the Disclosing Party for disclosure of Trade Secrets or Confidential Information required by such order if the Receiving Party complies with the following requirements: (i) if an already issued order calls for immediate disclosure, then the Receiving Party shall immediately move for or otherwise request a stay of such order to permit the Disclosing Party to take measures such as are described in clause (iii); (ii) the Receiving Party shall immediately notify the Disclosing Party of the motion or order by the most expeditious possible means; and (iii) the Receiving Party shall join or agree to (or at a minimum shall not oppose) a motion or similar request by the Disclosing Party for an order protecting the confidentiality of the Trade Secrets and Confidential Information, including joining or agreeing to (or non opposition to) a motion for leave to intervene by the Disclosing Party. 12.3.4 The Receiving Party shall immediately report to the Disclosing Party any attempt by any person of which the Receiving Party has knowledge (i) to use or disclose any portion of the Trade Secrets and Confidential Information without authorization from the Disclosing Party, or (ii) to copy, reverse assemble, reverse compile or otherwise reverse engineer any part of the Trade Secrets or Confidential Information (except as permitted herein). 12.4. PERMITTED DISCLOSURES. Notwithstanding any provisions of this Agreement to the contrary, SBCL may disclose to the OIG as part of the disclosures SBCL makes under its Integrity Agreement the fact that SBCL and Healtheon have entered into the transactions contemplated by the parties and any information relating to such transaction or this Agreement which SBCL determines, in good faith upon advice of counsel, is required or, in light of SBCL's obligations under the Integrity Agreement, appropriate for SBCL to make, or SBCL proposes to make in response to a request for such information from the OIG, provided that Healtheon shall be given opportunity (which shall be reasonable in light of all facts and circumstances) to review and comment upon the information SBCL intends to include in any such submission. In the event that any such disclosure that SBCL intends to make includes any information that constitutes Confidential Information of Healtheon or Trade Secrets of Healtheon, SBCL will provide reasonable (in light of all facts and circumstances, including the time frame in which such disclosure is required to be made) assistance to Healtheon to take reasonable steps to assure that such Confidential Information or Trade Secrets of Healtheon are maintained in confidence, including, but not limited to, (i) requesting that the OIG treat such information as trade secrets, confidential information or financial information within the meaning of the Freedom of Information Act, 5 U.S.C. Section 552(b)(4), (ii) requesting of the OIG that SBCL and Healtheon be given prior notice of any proposed release of such information to persons or entities outside of the OIG; (iii) requesting that the OIG otherwise assure the confidentiality of the information provided by Healtheon as if such information was confidential information of SBCL as provided for in Section 46 of the Integrity Agreement and taking other reasonable steps that may be requested by Healtheon and to which SBCL may, in its sole discretion, agree to assure that the OIG honors its confidentiality obligations in that section; (iv) where such information is to be provided in response to a request by the OIG, take reasonable steps to narrow the request for information from the OIG in an appropriate manner in order to limit the amount of information, if any, that constitutes Confidential Information or Trade Secrets of Healtheon covered by such request; and (v) make reasonable efforts to permit Healtheon with the concurrence of the OIG, to disclose such information directly to the OIG provided that in any such case, Healtheon shall give SBCL a timely opportunity to review, comment upon, and approve the information Healtheon intends to include in such submission. The additional safeguards described in subsections (i) through (v) above are designed to help assure the confidentiality of Confidential Information and Trade Secrets the disclosure of which would have a material adverse impact on Healtheon. These additional provisions are not intended to interfere with SBCL's ability to meet its disclosure obligations under the Integrity Agreement. Each party shall promptly notify the other in the event it receives an inquiry, investigation, or request for information from the OIG or other governmental agency into the matters relating to the proposed transaction. 12.5. EMPLOYEE WAIVERS. Healtheon shall ensure that all employees or agents who perform customer support services have signed non-disclosure agreements that, at minimum, contain provisions prohibiting the disclosure of Confidential Information to the same extent as is set forth in Section 12 hereof. 13. RELATIONSHIP MANAGERS AND COMMUNICATION PLAN. 13.1. RELATIONSHIP MANAGERS. Each party will designate a relationship manager ("RELATIONSHIP MANAGER") for matters pertaining to this Agreement and shall consult with the other before changing its Relationship Manager. The Relationship Manager for each party shall be the same as such party's relationship manager under the Prior Services Agreement. 13.1.1. HEALTHEON RELATIONSHIP MANAGER. Healtheon will designate a representative responsible for the SBCL account and who will have decision making authority for Healtheon (the "HEALTHEON RELATIONSHIP MANAGER"). The Healtheon Relationship Manager will be a member of the Transition Committee and shall attend planning meetings with SBCL, keep SBCL updated on feedback from the field with regard to use of teleprinters, potential for alternative means of results-only reporting, conversion of teleprinters to Healtheon Dx or other Healtheon solution. 13.1.2. SBCL RELATIONSHIP MANAGER. SBCL will designate a representative responsible for SBCL's relationship with Healtheon who will have decision making authority for SBCL (the "SBCL RELATIONSHIP MANAGER"). The SBCL Relationship Manager will be a member of the Transition Committee and will coordinate SBCL's activities with Healtheon, attend planning meetings with Healtheon, and keep Healtheon updated on trends with regard to use of teleprinters by SBCL. 13.2. COMMUNICATION PLAN. Within [*] after the date of this Agreement, Healtheon and SBCL shall prepare a mutually agreeable written plan for communicating [*] the fact of the transactions and arrangements contemplated by the Asset Purchase Agreement and this Agreement. Such plan shall contain a mutually agreeable [*] which will include a statement (consistent with the terms of Exhibit 1.1.1(h)) of the [*] with respect to Active Teleprinters which will act as an amendment to existing agreements or creation of a new agreement where no written agreement existed at the Closing Date. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 14. TERM AND TERMINATION. 14.1. INITIAL TERM. This Agreement shall take effect from February 1, 1999 and shall continue in effect until the last day of Year Five unless earlier terminated as provided herein or extended pursuant to Section 14.1.1 or 14.1.2. 14.1.1. INITIAL RENEWAL. SBCL may extend this Agreement for a sixth and seventh Year by giving Healtheon notice to that effect not less than one hundred eighty (180) days prior to the end of Year Five unless Healtheon has provided SBCL notice on or before the last day of Year Four that it is only willing to permit a renewal for one Year, in which case SBCL may extend this Agreement only for a sixth Year by giving Healtheon notice to that effect not less than one hundred eighty (180) days prior to the end of Year Five. 14.1.2. SUBSEQUENT RENEWALS. This Section 14.1.2 applies unless Healtheon gave the notice referred to in Section 14.1.1. SBCL may extend this Agreement for successive two Year periods by giving Healtheon notice to that effect not less than one hundred eighty (180) days prior to the end of the last year of a two Year renewal period unless Healtheon has provided SBCL notice on or before the last day of the first Year of such two Year period that it is not willing to permit another renewal, in which case SBCL may not extend this Agreement beyond such two Year period and it shall terminate on the last day of such period. 14.2. TERMINATION. A party may cause a termination of all rights and obligations of the parties hereunder, except as provided in this Section 14, as follows: 14.2.1 In the event that Healtheon fails to meet any of the Key Performance Standards in any [*] during any period of [*] (a "Key Default Condition"), SBCL may terminate this Agreement [*] by giving written notice of termination to Healtheon; provided however, if SBCL does not exercise its right to terminate within [*] after the date the occurrence of a Key Default Condition is first reflected in a report delivered pursuant to Section 1.1.1(g) or a notice from SBCL pursuant to Section 1.1.4, SBCL may not thereafter exercise its right to terminate as a result of such Key Default Condition. In addition, (a) SBCL will be entitled to liquidated damages equal to [*] of the Site Fees payable (without regard to the breach) to Healtheon pursuant to Section 5 hereof for the Sites for which such Key Performance Standards have not been met. Such liquidated damages shall be payable, in the absence of termination of this Agreement, by means of offset against amounts owing to Healtheon under this Agreement for immediately succeeding periods. In the event of termination [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. of this Agreement, the liquidated damages not paid by means of offset as provided above, shall be payable in cash to SBCL with interest at the Prime Rate from the date of termination to the date of payment; and (b) With respect to any month after Healtheon has not been in full compliance with the Key Performance Standards for [*], SBCL may, at its option, pay the fees applicable to the Sites in respect of which Healtheon is not in such compliance for such month into an escrow account established with a nationally recognized financial institution selected by SBCL, to be released (less the liquidated damages above) to Healtheon upon the date as of which Healtheon shall have been in full compliance with the Key Performance Standards for at least [*]. 14.2.2 SBCL may terminate this Agreement [*] following a breach by Healtheon of its covenants set forth in Section 8 hereof by giving written notice of termination to Healtheon. 14.2.3 Either party may terminate this Agreement if the other party shall fail to pay any amount when due from it hereunder (disregarding for this purpose any unpaid amount in dispute which dispute is being pursued with diligence) within [*] after written notice of a failure to pay is provided by the terminating party to the nonpaying party. 14.2.4 If one party breaches any material provision of this Agreement, which breach is not described in Section 14.2.1, 14.2.2 or 14.2.3 above (and which is not a breach of Performance Standards other than the Key Performance Standards), the nonbreaching party may terminate this Agreement by giving [*] written notice of termination to the breaching party. If such breach is (in the reasonable estimation of the terminating party) capable of being cured during such period and the other party acts diligently and continuously to cure such breach, the termination shall be suspended during such time, PROVIDED THAT: (a) such breach is actually cured prior to the end of such period; (b) during the period from and after the time a breach by Healtheon is discovered by SBCL, SBCL may, at its election, pay all fees due Healtheon hereunder into an escrow account established with a nationally recognized financial institution selected by SBCL, to be released to Healtheon upon the later of the date within such [*] period when the breach is cured or the date prior to exercise of the termination right provided in this Section 14.2.4 as of which Healtheon shall have been not in breach of this Agreement for at [*]; and (c) If Healtheon proves, to SBCL's reasonable satisfaction, that such amounts are needed in order to cure the breach, SBCL will release amounts to enable Healtheon to cure the breach, in which case such released amounts will be used by Healtheon exclusively for purposes of curing such breach. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. In addition, if such breach is [*] of an Active Teleprinter to a [*] Teleprinter in violation of this Agreement, SBCL shall be entitled to the liquidated damages provided in Section 14.2.1(a) with respect to such Site until the earlier of (i) such [*] Teleprinter is [*] Active Teleprinter status, or (ii) the date SBCL consents in writing to such conversion, regardless of the exercise of any right to terminate this Agreement arising by reason thereof under this Section 14.2.4. 14.2.5 If one party becomes insolvent, files bankruptcy, or has an involuntary bankruptcy case filed against it which is not dismissed within [*], the other party may terminate this Agreement immediately by giving written notice of termination to the breaching party. 14.3. INTENTIONALLY OMITTED. 14.4. EFFECT OF EXPIRATION OR TERMINATION. All rights and obligations of the parties hereunder shall cease upon the expiration or the effective date of the termination of this Agreement except that (i) the obligations of the parties pursuant to Section 12 (relating to confidentiality) and, Section 15 (relating to indemnity) and (ii) the obligations of Healtheon pursuant to Section 14.6 hereof (relating to termination transition) and, shall continue in full force and effect as set forth therein. In addition, if SBCL shall have Access pursuant to Section 14.6, the obligations of the parties pursuant to Section 8 (relating to compliance with Regulations) shall continue for so long as SBCL shall have Access. In addition, the parties shall be obligated to make payment of any sums due under this Agreement but not yet paid, and the parties shall be obligated to complete the resolution of any disputes pending under Section 16. In the event that Healtheon has terminated this agreement for SBCL's failure to pay undisputed amounts due under this Agreement, Healtheon will not be required to perform services for SBCL or to allow Access unless SBCL pays Healtheon in advance for such services and Access. Upon expiration or termination of this Agreement, (i) any amount in escrow pursuant to Section 14 hereof shall be paid to the party entitled thereto in accordance with Section 14 and (ii) all Phone Lines (other than those [*] Teleprinters) shall be transferred to SBCL at SBCL's cost, or, if this Agreement was terminated by SBCL for Healtheon's breach, at Healtheon's cost. 14.5. [*]. Upon termination of this Agreement by SBCL for breach hereof by Healtheon, (i) SBCL shall be entitled to [*] (and not [*]) of the teleprinters in respect of which Healtheon is then providing Agreed Services, other [*] Teleprinters at the [*] therefor equal to [*]; where "X" is equal to the [*] of this Agreement; "Y" is [*] in respect of which Healtheon is [*] other [*] Teleprinters; and "Z" is the [*] respect of which Healtheon is [*] including [*] Teleprinters; and (ii) all Phone Lines (other than those connected to [*] Teleprinters) shall be transferred to SBCL at [*] cost. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 14.6. TRANSITION UPON TERMINATION. This Section 14.6 shall apply if SBCL does not exercise the purchase option set forth in Section 14.5. If SBCL terminates this Agreement pursuant to Section 14.2, SBCL shall have Access. For this purpose, "Access" shall mean that, for a period of [*] days after the effective date of termination of this Agreement, Healtheon will continue to provide Agreed Services necessary to continue Teleprinter Services to Providers who are Connected Providers as of the effective date of termination. SBCL will be charged a Site Fee for such Agreed Services equal to the Site Fee in effect on the date notice of termination is given. Healtheon will bill SBCL monthly for such Site Fees, and SBCL will pay such Site Fees within thirty (30) days after the date the bill is rendered. If SBCL fails to pay such Site Fees when due (subject to grace periods comparable to those provided in Section 14 hereof), Healtheon will no longer be required to provide such services, at which point Healtheon will have no other obligations to provide Agreed Services to SBCL and SBCL will have no other obligations to Healtheon hereunder, except as provided in Section 14.4. 15. OBLIGATION TO INDEMNIFY. 15.1. HEALTHEON INDEMNITY. Subject to Section 15.3 hereunder, Healtheon agrees to indemnify and hold harmless each SBCL Indemnitee against and in respect of (i) all Losses, asserted against, imposed upon or incurred by any SBCL Indemnitee by reason of or resulting from any breach of any representation or warranty or covenant of Healtheon contained in this Agreement, as well as from any act or omission of Healtheon constituting negligence or willful misconduct; and (ii) any and all actions, suits, claims, proceedings, investigations, demands, assessments, audits, fines, judgments, costs and other expenses (including, without limitation, reasonable legal fees and expenses) incident to any Loss described in Section 15.1(i) or to the enforcement of this Section 15.1. 15.2. SBCL INDEMNITY. Subject to Section 15.3 hereunder, SBCL agrees to indemnify and hold harmless each Healtheon Indemnitee against and in respect of (i) all Losses, asserted against, imposed upon or incurred by any Healtheon Indemnitee by reason of or resulting from any breach of any representation or warranty or covenant of SBCL contained in this Agreement, as well as from any act or omission of SBCL constituting negligence or willful misconduct; and (ii) any and all actions, suits, claims, proceedings, investigations, demands, assessments, audits, fines, judgments, costs and other expenses (including, without limitation, reasonable legal fees and expenses) incident to any Loss described in Section 15.2(i) or to the enforcement of this Section 15.2. 15.3. ALLOCATION OF RISK. 15.3.1 Healtheon shall not be liable to SBCL (or to any person claiming to have been injured by SBCL) for any lab testing error, billing error, or other action or failure to [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. act of SBCL, or any error or mistake made by SBCL, and SBCL shall hold Healtheon harmless from all claims caused by such errors or mistakes to the extent made by SBCL. 15.3.2 SBCL shall not be liable to Healtheon (or to any person claiming to have been injured by Healtheon) for any error by a teleprinter (including a Transmission error not caused by SBCL and related to a teleprinter connected to a Phone Line that has been transferred to Healtheon pursuant to Section 4 hereof), billing error, or other action or failure to act of Healtheon, or any error or mistake made by Healtheon, and Healtheon shall hold SBCL harmless from all claims caused by such errors or mistakes to the extent made by Healtheon. 15.3.3 Neither party shall be liable to the other hereunder for consequential, special, punitive or exemplary damages of any kind (including, but not limited to, lost profits, loss of business or other similar damages) arising out of any action or proceeding except and only to the extent that such damages arise from or relate to (i) the failure of a party to comply with Regulations as required by this Agreement, (ii) an action in tort initiated by a third party against either or both of the parties hereto, or (iii) breach of a party's confidentiality undertakings set forth herein. 15.3.4 Neither party shall be liable to the other hereunder in connection with any action or proceeding arising from or relating to a matter covered by this Section 15, or for breach of this Agreement, for an amount in excess of [*] for claims arising in such Year; PROVIDED THAT this limitation shall not apply to any Losses or other damages arising out of or relating to any action described in [*]. For the avoidance of doubt, if two claims arose in Year One that were subject to the [*], the maximum liability for those two claims would be [*]. In no claims arose in Year Two and Year Three that were subject to [*] there would be no increase in the maximum liability for the two claims that arose in Year One. Similarly, if three claims subject to the [*] arose in Year Four, the maximum liability for those three claims would be [*] even though no claims arose in Years Two and Three. 15.4. HEALTHEON PARTIES. References to Healtheon in Sections 15.1 and 15.3 above shall include subcontractors, agents, employees and officers of Healtheon performing services for or on behalf of Healtheon in connection with Healtheon's obligations under this Agreement. 15.5. CLAIMS NOTICE. A Claim shall be made by any Indemnitee within [*] after such Indemnitee gains actual knowledge of the Claim, and shall be made by delivery of a Claims Notice to any Indemnifying Party requesting indemnification and specifying the basis on which indemnification is sought and the amount of asserted Losses and, in the case of a Third Party Claim, containing (by attachment or otherwise) such other information as such Indemnitee shall have concerning such Third Party Claim. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 15.6. PROCEDURES INVOLVING NON THIRD PARTY CLAIMS. If the Claim involves a matter other than a Third Party Claim, the Indemnifying Party shall raise any objection to such Claim within a reasonable period of time by delivery of a written notice of such objection to such Indemnitee specifying in reasonable detail the basis for such objection. If an objection is timely interposed by the Indemnifying Party, the Indemnifying Party and the Indemnitee shall cooperate in the compromise of the Claim or resolve any disagreement in accordance with Section 16 hereof. 15.7. PROCEDURES INVOLVING THIRD PARTY CLAIMS. The obligations and liabilities of the parties hereunder with respect to a Third Party Claim shall be subject to the following terms and conditions: 15.7.1 The Indemnitee shall give the Indemnifying Party written notice of a Third Party Claim promptly after receipt by the Indemnitee of notice thereof, and the Indemnifying Party may undertake the defense, compromise and settlement thereof by representatives of its own choosing reasonably acceptable to the Indemnitee. The failure of the Indemnitee to notify the Indemnifying Party of such claim shall not relieve the Indemnifying Party of any liability that it may have with respect to such claim except to the extent the Indemnifying Party demonstrates that the defense of such claim is prejudiced by such failure. The assumption of the defense, compromise and settlement of any such Third Party Claim by the Indemnifying Party shall be an acknowledgment of the obligation of the Indemnifying Party to indemnify the Indemnitee with respect to such claim hereunder. If the Indemnitee desires to participate in, but not control, any such defense, compromise and settlement, it may do so at its sole cost and expense. If, however, the Indemnifying Party fails or refuses to undertake the defense of such Third Party Claim within [*] after written notice of such claim has been given to the Indemnifying Party by the Indemnitee, the Indemnitee shall have the right to undertake the defense, compromise and settlement of such claim with counsel of its own choosing. In the circumstances described in the preceding sentence, the Indemnitee shall, promptly upon its assumption of the defense of such claim, make a Claim as specified in Sections 15.5 and 15.6 which shall be deemed a Claim that is not a Third Party Claim for the purposes of the procedures set forth herein. 15.7.2 If, in the reasonable opinion of the Indemnitee, any Third Party Claim or the litigation or resolution thereof involves an issue or matter which could have a material adverse effect on the business, operations, assets, properties or prospects of the Indemnitee, the Indemnitee shall have the right to control the defense, compromise and settlement of such Third Party Claim undertaken by the Indemnifying Party, and the reasonable costs and expenses of the Indemnitee in connection therewith shall be included as part of the indemnification obligations of the Indemnifying Party hereunder. If the Indemnitee shall elect to exercise such right, the Indemnifying Party shall have the right to participate in, but not control, the defense, compromise and settlement of such Third Party Claim at its sole cost and expense. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 15.7.3 No settlement of a Third Party Claim involving the asserted liability of the Indemnifying Party under this Section 15 shall be made without the prior written consent by or on behalf of the Indemnifying Party, which consent shall not be unreasonably withheld or delayed. If the Indemnifying Party assumes the defense of such a Third Party Claim, (1) no compromise or settlement thereof may be effected by the Indemnifying Party without the Indemnitee's consent unless (a) there is no finding or admission of any violation of law or any violation of the rights of any person and no effect on any other claim that may be made against the Indemnitee (b) the sole relief provided is monetary damages that are paid in full by the Indemnifying Party and (c) the compromise or settlement includes, as an unconditional term thereof, the giving by the claimant or the plaintiff to the Indemnitee of a release, in form and substance satisfactory to the Indemnitee, from all liability in respect of such Third Party Claim, and (2) the Indemnitee shall have no liability with respect to any compromise or settlement thereof effected without its consent. 15.8. NO RELEASE FOR FRAUD. Nothing contained in this Agreement shall relieve or limit the liability of a party or any officer or director of such party from any Liability arising out of or resulting from common law fraud or intentional misrepresentation in connection with the transactions contemplated by this Agreement or in connection with the delivery of this Agreement. Each Healtheon Indemnitee or SBCL Indemnitee, as the case may be, shall have a right to indemnification for any Loss incurred as the result of any common law fraud or intentional misrepresentation by SBCL or Healtheon, respectively, or any officer or director thereof. 15.9. PAYMENT. 15.9.1 If any party is required to make any payment under this Section 15, such party shall promptly pay the Indemnified Party the amount so determined. If there is a dispute as to the amount or manner of determination of any indemnity obligation owed under this Section 15, the Indemnifying Party shall nevertheless pay when due such portion, if any, of the obligation as shall not be subject to dispute. The difference, if any, between the amount of the obligation ultimately determined as properly payable under this Section 15 and the portion, if any, theretofore paid shall bear interest as set forth in Section 15.9.3. 15.9.2 Any items as to which an Indemnified Party is entitled to payment under this Section 15 may be paid by setoff against amounts payable to the Indemnifying Party to the extent that such amounts are sufficient to pay such items. 15.9.3 If all or part of any indemnification obligation under this Agreement is not paid when due, then the Indemnifying Party shall pay the Indemnified Party interest on the unpaid principal amount of the obligation from the date the amount became due until payment in full, at the Prime Rate. 15.10. INSURANCE. Healtheon agrees that during the term of this Agreement (including any extension or renewal of the term pursuant to Section 14) and for a period of three (3) years thereafter, Healtheon shall maintain insurance policies with recognized insurers, in such amounts and with such coverage at least as favorable as set forth in Schedule 3.2.17 to the Asset Purchase Agreement. 16. DISPUTE RESOLUTION; ARBITRATION. 16.1. GENERAL. Except as otherwise provided in Section 8.5 of this Agreement, disputes between Healtheon and SBCL relating to the interpretation or application of the provisions of this Agreement shall be resolved in accordance with this Section 16. 16.2. INFORMAL DISPUTE RESOLUTION. Any dispute between the parties arising out of or with respect to this Agreement, either with respect to the interpretation of any provision of this Agreement or with respect to the performance by Healtheon or SBCL, shall be resolved as provided in this Section 16. 16.2.1 Prior to the initiation of formal dispute resolution procedures, the parties shall first attempt to resolve their dispute informally, as follows: (a) The Relationship Managers shall meet for the purpose of endeavoring to resolve such dispute. They shall meet as often as the parties reasonably deem necessary in order to gather and furnish to the other all information with respect to the matter in issue which the parties believe to be appropriate and germane in connection with its resolution. The Relationship Managers shall discuss the problem and negotiate in good faith in an effort to resolve the dispute without the necessity of any formal proceeding. During the course of negotiations, all reasonable requests made by one party to another for nonprivileged information, reasonably related to this Agreement, shall be honored in order that each of the parties may be fully advised of the other's position. (b) If, within fifteen (15) days after a matter has been identified for resolution pursuant to this Section 16, either of the Relationship Managers concludes in good faith that amicable resolution through continued negotiation in this forum does not appear likely, the matter will be escalated by formal written notification to the SBCL President and the Healtheon President. The parties will use their respective best efforts to cause the SBCL President and the Healtheon President to meet to attempt to resolve the dispute. (c) Formal proceedings for the resolution of a dispute may not be commenced until the earlier of: (i) the date on which the SBCL President and the Healtheon President conclude in good faith that amicable resolution through continued negotiation of the matter does not appear likely; or (ii) thirty (30) days after the dispute has been referred to the SBCL President and the Healtheon President. 16.2.2 The provisions of this Section 16 shall not be construed to prevent a party from instituting, and a party is authorized to institute, formal proceedings earlier to avoid the expiration of any applicable limitations period. 16.3. ARBITRATION. If the parties are unable to resolve any controversy arising under this Agreement as contemplated by Section 16.2 and if such controversy is not subject to Section 8 or Section 16.4, then such controversy shall be submitted to mandatory and binding arbitration at the election of either Party (the "DISPUTING PARTY") pursuant to the following conditions: 16.3.1 The Disputing Party shall notify the AAA and the other Party in writing describing in reasonable detail the nature of the dispute (the "DISPUTE NOTICE"). The parties shall each select a neutral arbitrator in accordance with the rules of AAA and the two (2) arbitrators selected shall select a third neutral arbitrator. The three (3) arbitrators so selected are herein referred to as the "PANEL." 16.3.2 The Panel shall allow reasonable discovery as permitted by the Federal Rules of Civil Procedure, to the extent consistent with the purpose of the arbitration. The Panel shall have no power or authority to amend or disregard any provision of this Section 16. The arbitration hearing shall be commenced promptly and conducted expeditiously, with each of Healtheon and SBCL being allocated one-half of the time for the presentation of its case. Unless otherwise agreed to by the parties, an arbitration hearing shall be conducted on consecutive days. 16.3.3 Should any arbitrator refuse or be unable to proceed with arbitration proceedings as called for by this Section, such arbitrator shall be replaced by an arbitrator selected in accordance with the rules of the AAA and consistent with this Section 16. 16.3.4 The Panel rendering judgment upon disputes between parties as provided in this Section 16 shall, after reaching judgment and award, prepare and distribute to the parties a writing describing the findings of fact and conclusions of law relevant to such judgment and award and containing an opinion setting forth the reasons for the giving or denial of any award. The award of the arbitrator shall be final and binding on the parties, and judgment thereon may be entered in a court of competent jurisdiction. 16.3.5 Arbitration hearings hereunder shall be held in Philadelphia, Pennsylvania, Atlanta, Georgia or other mutually agreeable location. 16.3.6 The Panel shall be instructed that time is of the essence in the arbitration proceeding. The Panel shall render its judgment or award within fifteen (15) days following the conclusion of the hearing. Recognizing the express desire of the parties for an expeditious means of dispute resolution, the arbitrator shall limit or allow the parties to expand the scope of discovery as may be reasonable under the circumstances. 16.4. LITIGATION. In the event of a breach of the confidentiality obligations set forth in this Agreement, or in the event a party makes a good faith determination that a breach of the terms of this Agreement by the other party is such that the damages to such party resulting from the breach will be so immediate, so large or severe, and so incapable of adequate redress after the fact, that a temporary restraining order or other immediate injunctive relief is a necessary remedy, then such party may file a pleading with a court seeking immediate injunctive relief. If a party files a pleading with a court seeking immediate injunctive relief and this pleading is challenged by the other party and the injunctive relief sought is not awarded in substantial part (or in the event of a temporary restraining order is vacated upon challenge by the other party), the party filing the pleading seeking immediate injunctive relief shall pay all of the costs and attorneys' fees of the party successfully challenging the pleading. 16.5. CONSENT TO JURISDICTION. Healtheon and SBCL each consent to venue in Philadelphia, Pennsylvania and Atlanta, Georgia and to the nonexclusive jurisdiction of competent Pennsylvania and Georgia state courts or federal courts located in Philadelphia or Atlanta for all litigation which may be brought, subject to the requirement for arbitration hereunder, with respect to the terms of, and the transactions and relationships contemplated by, this Agreement. 17. MISCELLANEOUS. 17.1. PUBLICITY. Each party hereto agrees that neither it, nor or any of its representatives, shall make any public announcement with respect to this Agreement or the transactions contemplated hereby without the prior consent of the other party hereto unless required by law or judicial process, in which case notification shall be given to the other party hereto prior to such disclosure and the content of such disclosure approved by such other party, which approval shall not be unreasonably withheld or delayed. Any such public statement regarding the transactions contemplated by this Agreement or the Asset Purchase Agreement as to which advance notice is given to the other party shall have been approved by the respective parties' appropriate personnel (the SBCL President in the case of SBCL). Notwithstanding the foregoing, Healtheon agrees that nothing in this Section 17.1 shall prohibit SBCL from disclosing any information SBCL is permitted to disclose under Section 12.4. 17.2. ENTIRE AGREEMENT. This Agreement, including the Exhibits to it, constitutes the entire understanding between the parties and supersedes all proposals, communications and agreements between the parties relating to its subject matter. No amendment, change, or waiver of any provision of this Agreement will be binding unless in writing and signed by both parties. 17.3. GOVERNING LAW. This Agreement will be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania applicable to contracts made and performed therein. 17.4. ASSIGNMENTS. Neither party may assign this Agreement without the prior, written consent of the other party, which consent shall not be unreasonably withheld. Any merger, consolidation or share exchange involving a change of control of more than 50% of the voting securities of a party shall constitute an assignment for purposes of this Section 17.4. Notwithstanding the foregoing, (i) SBCL may assign its rights and obligations under this Agreement without the consent of Healtheon to any of its Affiliates, or to an acquiror of substantially all of its business (including by sale of assets, merger, consolidation or share exchange); and (ii) Healtheon may assign its rights and obligations under this Agreement without the consent of SBCL to an acquiror of substantially all of its business (including by sale of assets, merger, consolidation or share exchange) if, and only if, the acquiror (X) assumes all of Healtheon's obligations under this Agreement, (Y) provides assurances to SBCL, which SBCL agrees are reasonable in light of all facts and circumstances (such agreement not to be unreasonably withheld), that the acquiror will be able to satisfy all of such obligations and that SBCL will continue to receive Agreed Services on the same terms and conditions as provided herein; and [*]. Any attempted assignment (including by merger, share exchange or consolidation) without the requisite consent or assurances shall be void. If the parties cannot agree upon whether a [*], the parties shall resolve the dispute pursuant to Section 16. Any assignment with consent shall release the assigning party from any of its obligations under this Agreement unless the consent expressly states otherwise. 17.5. NOTICES. Any notices relating to this Agreement shall be in writing and will be sent by certified United States mail, postage prepaid, return receipt requested, or by facsimile transmission or overnight courier service, addressed to the party at the address set forth below, or at such different address as a party has advised to the other party in writing and shall be deemed given and received when actually received: If to SBCL: SmithKline Beecham Clinical Laboratories, Inc. 1201 South Collegeville Road Collegeville, Pennsylvania 19426 Attention: John B. Okkerse, Jr., Ph.D., President Telephone: (610) 454-6000 Telecopy: (610) 983-2010 [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. With a copy to: SmithKline Beecham Corporation One Franklin Plaza 16th and Race Streets Philadelphia, PA 19103 Attention: General Counsel-U.S. Telephone: (215) 751-5844 Telecopy: (215) 751-5132 If to Healtheon: Healtheon Corporation Suite 600 7000 Central Parkway Atlanta, Georgia 30328 Attention: Nancy Ham Telephone: 770.352.1626 Telecopy: 7700.352.1928 with a copy to: Alston & Bird, LLP One Atlantic Center 1201 W. Peachtree Street Atlanta, GA 30309 Attention: John C. Weitnauer Telephone: 404.881.7780 Telecopy: 404.881.7777 If delivered personally, the date on which a notice, request, instruction or document is delivered shall be the date on which such delivery is made and, if delivered by mail, telecopy, Federal Express or other overnight courier, the date on which such notice, request, instruction or document is first received shall be the date of delivery. Any party hereto may change its address specified for notices herein by designating a new address by notice in accordance with this Section 17.5. Failure of any party to send a copy of any notice to counsel for the other Party shall not affect in any way the validity of such notice to other party. 17.6. SEVERABILITY. It is the desire and intent of the parties that all of the material provisions of this Agreement and the Asset Purchase Agreement be enforced to the fullest extent permissible and no severability shall pertain thereto. In the event that any other provision of this Agreement is held illegal, invalid, prohibited or unenforceable for any reason, such illegality, invalidity, or unenforceability will not affect any other provision hereof, and this Agreement shall be deemed modified to the extent necessary to render enforceable the remaining provisions hereof. Notwithstanding the foregoing, if such provision could be more narrowly interpreted so as not to be illegal, invalid, prohibited or unenforceable, without invalidating any of the material remaining provisions of this Agreement or the Asset Purchase Agreement, it shall be so narrowly interpreted. 17.7. FORCE MAJEURE. The obligations of the parties under this Agreement (other than the obligation to make payments) shall be suspended to the extent a party is hindered or prevented from complying therewith because of labor disturbances (including strikes or lockouts), war, acts of God, fires, storms, accidents, governmental regulations, failure of vendors or suppliers or any other cause whatsoever beyond a party's control. For so long as such circumstances prevail, the party whose performance is delayed or hindered shall continue to use all commercially reasonable efforts to recommence performance without delay. 17.8. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION THAT MAY BE ENFORCED BY THE PARTIES. IN WITNESS WHEREOF, the parties have executed this Services Agreement as of the date set forth above. HEALTHEON CORPORATION /s/ W. Michael Long ----------------------------------------- By: Its: SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. /s/ John B. Okkerse, Jr. ----------------------------------------- By: Its: EXHIBITS - -------------------------------------------------------------------------------- Exhibit A Definitions - -------------------------------------------------------------------------------- Exhibit 1.1.1(g) Reports - -------------------------------------------------------------------------------- Exhibit 1.1.1(h) Connected Provider Contract Provisions - -------------------------------------------------------------------------------- Exhibit 1.2 Performance Standards - -------------------------------------------------------------------------------- Exhibit 2.1 Transition Committee; Initial draft of Implementation Plan - -------------------------------------------------------------------------------- Exhibit 2.3 [*] (initial draft attached, final to be delivered within five (5) business days). - -------------------------------------------------------------------------------- Exhibit 5.13.8 Examples of Application of [*] - -------------------------------------------------------------------------------- Exhibit 11.2 [*] - --------------------------------------------------------------------------------
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. EXHIBIT A[*] DEFINITIONS "AAA" means the American Arbitration Association. "Access" has the meaning set forth in Section 14.6 of the Agreement. "Active Teleprinter" shall mean, for any month, a teleprinter at a Site that is used in the provision of Teleprinter Services on the first day of a month. "Affiliate" means, with respect to any Person, any other Person controlling, controlled by or under common control with such Person. "Agreed Services" means the services identified in Section 1.1 of the Agreement. "Antikickback Laws" shall have the meaning given in Section 8.1. "APA Part" shall have the meaning given in Section 7.2.2. "APA Teleprinter" shall have the meaning given in Section 7.2.2. "Applicable Laws" shall have the meaning given in Section 8.1. "Audit Rights" means the right to, or to have representatives, (a) examine all books of account, records, reports and other papers except to the extent that such action would, in the reasonable opinion of counsel, constitute a waiver of the attorney/client privilege or violate obligations of confidentiality to third parties, (b) make copies and take extracts from any of the foregoing, except for information which is subject to a written confidentiality agreement with a third party, (c) discuss the affairs, finances and accounts of the party being audited with such party's officers and independent certified public accountants (and by this provision such audited party hereby authorizes said accountants to discuss with the auditing party and its representatives, the finances and accounts of such entity) and (d) visit and inspect, at reasonable times and on reasonable notice during normal business hours, the properties of the other party; PROVIDED THAT, the foregoing audit rights are in addition to any rights of a party under the Delaware General Corporation Law, as amended from time to time, and shall in no way limit such rights; and PROVIDED FURTHER THAT, the expenses incurred in connection with any such inspection shall be for the account of the auditing party, except that all reasonable [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. expenses incurred by the audited party, or any of its officers, employees, agents or independent certified public accountants, shall be expenses payable by the audited party and shall not be expenses of the auditing party. "Baseline Costs" has the meaning set forth in Section 5.1.1 of the Agreement. "Baseline Denominator" shall have the meaning given in Section 5.1.5. "Baseline Period" shall have the meaning set forth in Section 5.1.2 of the Agreement. "Beginning Number" shall have the meaning given in Section 5.13.1(g). "Change" shall have the meaning set forth in Section 7.1 of the Agreement. "Claim" means any claim for indemnification under Section 15 of the Agreement. "Claims Notice" means a written notice of an indemnification claim delivered pursuant to Section 15 of the Agreement. "Closing" means the closing of the transactions contemplated by the Asset Purchase Agreement. "Closing Date" means the date of the Closing. "Confidential Information" means information that is (1) confidential to the business of a party, including without limitation, data regarding the extent of the Agreed Services provided hereunder to, or fees paid hereunder by, SBCL, (2) is designated and identified as such by such party, and (3) is not a Trade Secret; provided, however, that Confidential Information does not include any information which is or becomes generally known to the public without any breach by the Receiving Party of its duties to the Disclosing Party. Assuming that the foregoing criteria are met, Confidential Information also includes information which has been disclosed to a Receiving Party by another person and which the Receiving Party is obligated to treat as confidential. "Connected Provider" means a Provider who or which, at a given time, is a recipient of Teleprinter Services or a Provider who or which has agreed with SBCL to become a recipient of Teleprinter Services. "Contract" means any written contract, agreement, lease, plan, instrument or other document, commitment, arrangement, undertaking, practice or authorization that is binding on any Person or its property under applicable law. "Disclosing Party" has the meaning set forth in Section 12.3 of the Agreement. "Dispute Notice" shall have the meaning given in Section 16.3.1. "Disputing Party" shall have the meaning given in Section 16.3. "[*]" means [*], as that group of [*] may be constituted from time to time. "[*]" has the meaning set forth in Section 3.2.3 of the Agreement. "[*]" means the period beginning March 1, 1999 and ending August 31, 1999. "[*]" has the meaning set forth in Section 11.2. "Effective Date" means February 1, 1999. "Federal Antikickback Law" shall have the meaning given at Section 8.1. "[*]" means a teleprinter for which Agreed Services are rendered and which is used for any other purpose, including printing test results of an [*]. "[*]" has the meaning set forth in Section 5.13.1(a) of the Agreement. "[*]" has the meaning set forth in Section 5.13.1(b) of the Agreement. "[*]" shall have the meaning given in Section 5.13.1(c) "Hardware" shall have the meaning set forth in Section 1.1.1(a). "Healtheon Indemnitee" means Healtheon and its Affiliates, and its or their respective directors, officers, employees, and permitted assigns. "Healtheon President" shall mean the President of Healtheon, presently Michael K. Hoover, or should Healtheon be restructured in any manner, the officer of Healtheon having top authority over Healtheon's operations. "Healtheon Relationship Manager" shall have the meaning given in Section 13.1.1. "Healtheon [*]" shall have the meaning given in Section 3.2.3(c). "[*]" has the meaning set forth in Section 5.13.1(d) of the Agreement. "Indemnifying Party" means the party obligated to provide indemnification pursuant to Section 15 of the Agreement. "Indemnitee" means a party seeking indemnification under Section 15 of the Agreement. "Integrity Agreement" means the Corporate Integrity Agreement between SBCL and the OIG. "[*]" means [*] [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. "Key Performance Standards" means action required by Healtheon under the Problem Resolution section of Exhibit 1.2. "Liability" means any direct or indirect liability, indebtedness, obligation, expense, guaranty or endorsement of or by any Person (other than endorsements of notes, bills and checks presented to banks for collection or deposit in the ordinary course of business) of any type, whether accrued, absolute, contingent, matured, unmatured, known or unknown. "Litigation" means any lawsuit, action, claim, arbitration, administrative or other proceeding, criminal prosecution or governmental investigation or inquiry involving or affecting a Party or its business, assets or Contracts to which it is a party or by which it or its business, assets or Contracts may be bound or affected. "Losses" means any and all demands, claims, actions or causes of action, assessments, losses, diminution in value, damages (including special and consequential damages), Liabilities, costs, and expenses, including without limitation, interest, penalties, cost of investigation and defense, and reasonable attorneys' and other professional fees and expenses. "[*] Telecom Fee" shall have the meaning given, and as made applicable therein, in Sections 4.6.1; 4.7; 4.8; 4.9 and 4.10. "[*]" has the meaning set forth in Section 5.13.1(e) of the Agreement. "OIG" means the Office of Inspector General of the Department of Health and Human Services. "[*]" means a [*] that provides[*] . "Other Teleprinters" has the meaning set forth in Section 5.13.1(f) of the Agreement. "Panel" shall have the meaning given by Section 16.3.1. "Performance Standards" mean the performance standards set forth on Exhibit 1.2 hereto. "Permitted Issuance" has the meaning given in Section 10.2.2. "Person" means any individual, corporation, trust, estate, business trust, general or limited partnership, limited liability company, limited liability partnership, unincorporated association or other legal entity. "Phone Line" means any telephone line at a Site used to receive Teleprinter Services at a teleprinter subject to this Agreement. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. "Prime Rate" means the per annum rate of interest published from time to time by THE WALL STREET JOURNAL (or successor publication if THE WALL STREET JOURNAL is not longer published) as the prime rate. If more than one such prime rate is set forth for a given day, the highest such rate designated by such publication (or successor publication) shall be the Prime Rate for purposes of the Agreement. "Prior Services Agreement" means the Services Agreement between ActaMed Corporation and SBCL dated December 31, 1997, as amended and assumed by Healtheon Corporation. "Provider" means a physician, clinic, hospital, patient service center or other provider of clinical health care services, or, as appropriate, employers receiving test results via teleprinters for drug screening tests and other corporate health services, if any. "Receiving Party" has the meaning given it in Section 12.3 of the Agreement. "Reference Contract" shall have the meaning given in Section 6.3.1. "Reference Services" shall have the meaning given in Section 6.3.1. "Regulation" means any statute, law, ordinance, regulation, requirement, order or rule of any federal, state, or local government or other governmental agency or body or of any other type of regulatory body, or any governmental or administrative interpretation of any of the foregoing, including, without limitation, (i) those covering health, safety, environmental, energy, transportation, bribery, record keeping, zoning, anti-discrimination, antitrust, wage and hour, and price and wage control matters, (ii) requirements imposed by any governmental or regulatory body which must be satisfied to qualify for Medicare reimbursements, and (iii) any and all federal, state and local health care laws relating to or covering the methods and ways in which Teleprinter Services, and incidental services or benefits provided to Connected Providers in connection with the provision of Teleprinter Services, are provided to the Connected Providers, including, but not limited to, 42 U.S.C. Section 1395nn and the Clinical Laboratory Improvement Amendments of 1988, as amended. "Regulatory Change" has the meaning set forth in Section 6.4.1 of the Agreement. "Relationship Manager" has the meaning set forth in Section 13.1.1 of the Agreement. "[*]" means (i) any employee of SBCL; (ii) any employee of [*]; (iii) any employee of a [*]; (iv) any employee of [*]; (v) any employee [*]. "SBCL Access" shall mean access to SBCL laboratory information computer systems. "SBCL Indemnitee" means SBCL and its Affiliates, and its or their respective directors, officers, employees and permitted assigns. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. "SBCL Lab" means any location at which SBCL or its Affiliates provide, or may in the future provide, clinical laboratory testing services, regardless of the means used by such lab for lab order entry and results reporting. "SBCL President" shall mean the President of SBCL, presently John B. Okkerse, Jr., Ph.D., or should SBCL be restructured in any manner, the officer of SBCL having top authority over SBCL's operations. "Self Referral Laws" shall have the meaning given in Section 8.1. "SBCL Relationship Manager" shall have the meaning given in Section 13.1.2. "Shared Use" shall mean the use of a Phone Line, teleprinter or other equipment by or for the benefit of a Connected Provider for any purpose other than (i) for Teleprinter Services or (ii) receipt of communications from Healtheon related to Teleprinter Services. "Site" shall mean a site where a teleprinter used for Teleprinter Services is located. "Site Fee" shall mean the total of (i) the [*] Telecom Fee and (ii) either the Year One [*] Teleprinter Fee or the Standard [*] Teleprinter Fee, as may be applicable for any [*]. "SOPs" shall have the meaning given in Section 8.2.2. "Stark Law" shall have the meaning given in Section 8.1. "Standard [*] Teleprinter Fee" shall have the meaning given in Section 5.1.3. "[*]" has the meaning given in Section 3.1.2. "Systems Changes" has the meaning set forth in Section 7.1 of the Agreement. "Telecom Baseline" shall have the meaning given in Section 4.6.1. "Teleprinter Baseline" shall have the meaning given in Section 5.1.6. "Teleprinter Services" means the transmission by SBCL of clinical laboratory test results from an SBCL Lab to a teleprinter covered by this Agreement and the printing of such results by such teleprinter. "Temporary Telecom Baseline" shall have the meaning given in Section 4.6.2. "Temporary Teleprinter Baseline" shall have the meaning given in Section 5.2. "Test Report" means a report generated by an SBCL Lab, setting forth the results of one or more diagnostic or other laboratory tests performed by an SBCL Lab at the request of a Connected Provider. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. "Third Party Claim" means any claim, suit or proceeding (including, without limitation, a binding arbitration or an audit by any taxing authority) that is instituted against an Indemnitee by a Person other than a party hereto and which, if prosecuted successfully, would result in a Loss for which such Indemnitee is entitled to indemnification hereunder. "Threatened Change" shall have the meaning given at Section 7.3. "TopLab" means SBCL's proprietary laboratory systems which facilitate SBCL's internal automated laboratory test processing and reporting, including but not limited to SBCL's Total Order Processing Laboratory system. "Trade Secrets" means information related to a party (1) which derives economic value, actual or potential, from not being generally known to or readily ascertainable by other Persons who can obtain economic value from its disclosure or use, and (2) which is the subject of efforts by said party that are reasonable under the circumstances to maintain its secrecy. "Transferred Phone Line" shall have the meaning given in Section 4.3. "Transition Committee" means the committee described in Section 2.1 of the Agreement. "Transition Period" means the period beginning on the Effective Date and ending on [*]. "Transmission" means the transmittal through the use of Teleprinter Services of Transmittal Information to a Site. "Transmittal Information" means information which SBCL transmits to a Site through use of Teleprinter Services. "Year" means a twelve (12) month period ending on January 31, such that "Year One" shall mean the period from February 1, 1999 to January 31, 2000; "Year Two" shall mean the period from February 1, 2000 to January 31, 2001; "Year Three" shall mean the period from February 1, 2001 to January 31, 2002; "Year Four" shall mean the period from February 1, 2002 to January 31, 2003; and "Year Five" shall mean the period from February 1, 2003 to January 31, 2004. "[*]" has the meaning given in Section 5.13.5. "Year Five [*]" has the meaning given in Section 5.13.6. "Year One Denominator" shall have the meaning given in Section 5.1.7. "Year One [*]" has the meaning given in Section 5.13.2. "Year One [*] Teleprinter Fee" shall have the meaning given in Section 5.1.4. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. "Year One Teleprinter Cost" shall have the meaning given in Section 5.1.8. "Year Three [*]" has the meaning given in Section 5.13.4. "Year Two [*]" has the meaning given in Section 5.13.3. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. EXHIBIT 1.1.1(g) REPORTS 1. REPORTS HEALTHEON WILL PROVIDE TO SBCL 1.1 REPORTS HEALTHEON WILL PROVIDE TO SBCL: Beginning with [*] Agreed Services activity, the billing reports and performance reports listed below shall be provided by Healtheon to SBCL in accordance with the schedules indicated below. Other reports requested by SBCL which are reasonably required for billing, [*] and monitoring of Healtheon performance, and which include only data which is available to Healtheon, will also be provided to SBCL by Healtheon. Notwithstanding the foregoing, to the extent information related to new installations is required for such reports, Healtheon shall institute systems required to collect the necessary information related to such new installations. 1.1.1 Billing Reports (a) Monthly summary reports as of the end of each month by the twentieth (20) day of the following month for each of the [*] by category ([*]), provided that SBCL provides such categories in the transferred database or at time of install: (i) Total Active Teleprinters (ii) Total SBCL Sites [*] (iii) Total New Active Teleprinters (iv) New SBCL Sites [*] (v) SBCL Sites [*] Teleprinters (vi) SBCL Phone Lines Transferred to Healtheon (vii) TELEPRINTERS de-installed (deactivated) by Reason Code (viii) ACTIVE TELEPRINTERS [*] (ix) [*] (b) SBCL will provide to Healtheon an initial database of teleprinter Sites, which includes the information described below that is currently available to SBCL in electronic form. Thereafter, Healtheon will maintain, on a current basis, this data [*] for [*] teleprinter Sites and [*] in an [*] data base of Sites and [*]. Healtheon shall extract information from this data base monthly for SBCL's use, which extract shall be in a mutually agreed electronic format and shall include, by way of example and not limitation, the following information: status of each Site (active, inactive, [*] teleprinter [*]), date SBCL request for teleprinter installation received by Healtheon, date teleprinter installed/activated, date teleprinter de-installed or SBCL service discontinued, [*] [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 1.1.2 Performance Reports (a) All reports necessary to verify and measure the Performance Standards, including, but not limited to the following: (i) Monthly help desk reports, which shall include the number of calls received, [*], type of problem (detail problem coded) and [*] resolve; and the total number of problems [*] in accordance with the Performance Standards. If the collection of any information required for such help desk reports reasonably requires the use of an automated problem tracking computer system, such information will not be provided until [*] (ii) Customer Support Standards reports showing actual performance statistics against the Performance Standrds as described in Exhibit 1.2 for current month and rolling prior 12 months. 1.2 REPORTS SBCL WILL PROVIDE TO HEALTHEON 1.2.1 SBCL will provide reasonable access to information required by Healtheon to perform its obligations under Section 1.1.1 of this EXHIBIT. 1.2.2 Monthly telecommunications reports [*] that are made available to SBCL by the various telecommunications suppliers, including, as available: [*], [*] , carrier name, carrier phone number, carrier contact, carrier club bill number, and any [*] information [*] telecommunications lines. 1.2.3 When requested by Healtheon and when reasonably necessary to [*] in accordance with [*] SBCL will provide Healtheon with a report of [*]. 1.2.4 Monthly report of [*] all SBCL result reports transmitted to Sites via Agreed Services. [*] [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. EXHIBIT 1.1.1(h) TO SERVICES AGREEMENT [*] ACCEPTED AND AGREED: - --------------------------------- ("Client") - --------------------------------- Address ("Client Location") By: ------------------------------ Title: --------------------------- Date: ---------------------------- HEALTHEON CORPORATION By: ----------------------------- Date: ---------------------------- [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. EXHIBIT 1.2 PERFORMANCE STANDARDS Healtheon shall provide Agreed Services at a level that, with respect to each Category below, is equal to or greater than the level of service provided by SBCL with respect to [*] Performance Standards"). Immediately following the Closing Date, Healtheon and SBCL will [*] determine the [*] Performance Standards for [*] and [*] by identifying and defining performance criteria and associated metrics that, with reasonable accuracy, describe the levels of performance [*]. Healtheon and SBCL will use the [*] Performance Standards so determined and [*] and set mutually agreeable performance criteria and metrics for the Performance Standards applicable to Healtheon under this Agreement [*] The Performance Standards applicable to Healtheon will include and measure [*] those categories of performance and/or service that are [*] attributable to Healtheon's responsibilities under this Agreement. Healtheon will not be deemed to have failed to achieve the Performance Standards to the extent such failure is caused solely by circumstances beyond its control, such as [*]. If the Parties fail to agree to and implement Performance Standards [*], notwithstanding anything in this Agreement to the contrary, either party may immediately elect to submit the matter to Dispute Resolution in accordance with the provisions in Section 16. HARDWARE AND TRANSMISSION PERFORMANCE STANDARDS HARDWARE AVAILABILITY The Hardware will, in the ordinary course, be available [*]. For each month, Healtheon shall maintain a [*] as determined by [*]Availability means Hardware systems and modems are operational, functioning properly and available for receiving/accepting report transmissions. SUCCESSFULLY DELIVERED TRANSMISSIONS For each month, Healtheon shall maintain a "[*] A Successfully Delivered Transmission shall mean a call made to a unit of Hardware from any SBCL source for the purpose of processing Teleprinter Services as to which Hardware successfully: (i) [*] successfully prints any TEST RESULTS transmitted by SBCL systems in accordance with applicable specifications. Factors such as [*] shall be taken into account in determining the performance standard for Successfully Delivered Transmissions. Notwithstanding anything herein contained to the contrary, Healtheon will make commercially reasonable efforts to maintain at least the same successful connectivity rate for [*] results transmissions whether the transmissions are made [*]. [[*]] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. CUSTOMER SUPPORT STANDARDS HEALTHEON HELP DESK The Healtheon Help Desk for all Teleprinter Services will be staffed [*]. Healtheon will be responsible for all calls related to Agreed Services to address any aspect of the Agreed Services except for calls from Connected Providers RELATING TO [*] which will [*]. Healtheon will attempt to resolve any issues related thereto, including but not limited to supplies requests, "how to" questions, hardware malfunctions, and [*] difficulties. Issues of any severity level can be reported to the Help Desk during these times via any one of the following methods: [*] [*] [*] The Healtheon help desk will resolve [*] all calls at the time the client calls, to the extent that the call is resolvable over the phone. By [*] from the Closing Date, SBCL and Healtheon will have developed and mutually agreed to processes for Help Desk [*] HELP DESK RESPONSE TIMES Healtheon will provide Help Desk support for Agreed Services such that, [*], levels of [*] calls and [*] shall be no greater than the levels set forth: [*] [*] [*] AFTER HOURS SUPPORT There shall be after hours support, which is typically limited to issues that are defined as [*] as further defined below. These include, but are not limited to, issues that involve [*]after hours transmission is deemed necessary by the Connected Provider. Non-critical issues such as [*] are handled during normal Help Desk hours. Service is initiated by calling the main Help Desk [*] and leaving a detailed voice message. Voice mail left after hours or on holidays will result in an automatic [*] and immediately initiate investigatory and corrective actions as appropriate in accordance with the [*]. CALL TRACKING Beginning [*] for Teleprinter Services, all calls made to the Healtheon Help Desk will be logged into [*], and will include at a minimum the following information: [*] [*] [*] [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] PROACTIVE SERVICE MONITORING Healtheon will use the [*] to determine proactively which Connected Providers are having difficulty receiving their reports. This proactive monitoring will be performed [*] the Healtheon Help Desk. Healtheon will call Site(s) with problems [*] and perform troubleshooting techniques to resolve the problem(s). All such problems will be logged and a service call initiated [*]. [*] Healtheon personnel will need access to certain [*] functions to meet Performance Standards including, but not limited to, Proactive Service Monitoring. The following is a representative list of the [*] functions [*] to support teleprinters. [*] use of these [*] functions, as appropriate (excluding [*]), will be reviewed and the parties will mutually agree to which functions are necessary to allow Healtheon to meet the Performance Standards, and such functions shall be [*] by [*]. Should such [*] not be agreed and [*] the parties will proceed to dispute resolution in accordance with Section 16.2. [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. [*] [*] [*] PROBLEM RESOLUTION Working with [*], the Healtheon Help Desk will assess each situation and immediately take appropriate actions to resolve the problem on the phone such as to verify that [*] are not the cause of the problem. After the original assessment has been made and [*] , Healtheon will take such action as required to resolve the problem, for example, but not by way of limitation: (i) [*] Help Desk calls will be logged and appropriate actions will be taken based upon [*] each call. It is the responsibility of the analyst handling the call to [*] in accordance with the [*]. The definition of [*] and the [*] DEFINITION: One or more Connected Providers is not properly receiving results reports through the Hardware. REQUIRED ACTION: [*] of [*] issues will be resolved within [*] of the [*]Healtheon will immediately notify the appropriate [*] whenever a [*] problem is logged and again when it is fully resolved. Healtheon will notify SBCL immediately of any [*] problem that is not resolved within [*] and provide an estimate and plan of when the problem will be resolved. A [*] Problem is resolved when [*] [*] DEFINITION: One or more Connected Providers is not receiving results reports through the Hardware or is experiencing [*], and either of the following is true: (i) the Help Desk, after [*] determines that to resolve the problem [*] REQUIRED ACTION: [*] of [*] problems will be resolved within [*] of the time it was first received by Healtheon. Healtheon will notify SBCL immediately of any [*] problem that is not resolved within [*] and provide an estimate and plan of when the problem will be resolved. When requested by the Connected Provider, Healtheon will use its reasonable efforts to resolve [*] problems within [*]. A [*] Problem is resolved when the [*] MAINTENANCE AND ADMINISTRATION OF TELEPHONE LINES AS SET FORTH IN SECTION 4.5 OF THE AGREEMENT, THE transfer of Phone Lines to Healtheon pursuant to Section 4.3 shall be [*] [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. NEW TELEPRINTER INSTALLATION/ACTIVATION In accordance with the agreed upon procedures for installing/activating A NEW TELEPRINTER FOR A SITE that SBCL requests or approves for Teleprinter Services, Healtheon will: If new phone line required, order phone line installation and new service on behalf of [*] on average within [*] of receipt by Healtheon of a properly approved and completed NEW TELEPRINTER INSTALL notification from SBCL and will diligently follow up with the phone company until such phone is activated and working properly; Provide Hardware, Hardware installation, Hardware testing [*]coordination of setup of [*] with SBCL, and training as required under this Agreement, to properly prepare and set up the new Connected Provider to use Teleprinter Services within [*] after receipt by Healtheon of [*] NEW TELEPRINTER notification from SBCL and [*] exists or has occurred; and In accordance with Section 6.1 of this Agreement, Healtheon will accommodate STAT Installations either [*] or [*]. Healtheon shall not be responsible for delays in meeting the time commitments in this New TELEPRINTER Installation/Activation section: (i) TO the extent the delay is caused by the [*] in which case SBCL and Healtheon will mutually develop and agree to an appropriate plan and schedule; or (iii) [*]installations require [*] or over [*] (in which case the [*] installation will be completed within [*] after receipt of the appropriate notice). DE-INSTALLATION/DE-ACTIVATION When requested by SBCL [*], Healtheon will (i) de-activate a Connected Provider from SBCL [*] after receipt of SBCL's [*] notification for de-activation, and (ii) de-install Hardware from any Connected Provider within [*] after receipt of SBCL's de-installation request. If appropriate, Healtheon may [*] in that Site in accordance with this Agreement with the approval of the [*]. RETRAINING Healtheon will provide ongoing training support in a manner and at such frequency [*]Teleprinter Services[*] CONSUMABLE SUPPLIES Healtheon will provide, [*] supplies required by all Connected Sites for use in Teleprinter Services as specified in this Agreement. Healtheon will deliver or arrange for delivery of these supplies as required for uninterrupted use of Teleprinter Services. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Routine supply orders will have [*] (TAT), i.e. [*]Healtheon will provide [*] TAT for delivery of supplies. SBCL will cooperate with Healtheon in its efforts to manage timely distribution of supplies, by for example, [*] MEASUREMENTS AND PROBLEM TRACKING Measurement [*] to resolve problems will begin when the problem is received by the Healtheon Help Desk at which time it will be recorded [*]. Measurement will end when the call is resolved satisfactorily and closed by the Healtheon Help Desk representative. In the case of calls that [*] for questions or issues not covered by the Healtheon Help Desk, the Healtheon analyst will, except in those cases where the problem determination or resolution is clearly the responsibility [*] because of the nature of the call, [*]. So long as [*] provides the information needed to resolve such a call, Healtheon will also document that call and close it out with a detailed explanation of the final resolution. Where it is not possible for the Healtheon Analyst to remain [*] it is the responsibility of the [*] to notify the Healtheon Help Desk if the outcome is to be documented in the help desk system. The service level call statistics will be at least as comprehensive as anticipated by Healtheon or in place for [*]. Other measurements that will be made available on a monthly basis will come from [*]. The variety of reports available based upon the [*] and [*] will include but not limited to: Number of calls [*] Calls [*] [*] [*] [*] [*] The [*] calls closed within the time frame objectives will be measured by [*]by priority level, [*] calls closed within the time frame objectives [*]. The Healtheon Help Desk will use best efforts to accommodate any requests by SBCL for additional information as long as the collection of the information does not add significant time and effort in logging the call. The Healtheon Help Desk statistics will be reported to SBCL on a monthly basis. CLIENT SATISFACTION SURVEYS Within [*], Healtheon will conduct [*]client satisfaction survey [*] For [*] during the term of the Services Agreement, Healtheon will [*] satisfaction with Healtheon's Agreed Services. The format and content of the [*] surveys shall be determined by mutual agreement of Healtheon and SBCL. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. As measured by the results of the [*] satisfaction surveys and additional surveys and measurements as may be mutually agreed to by the parties from time to time, client satisfaction must at all times [*] levels established by [*]. Client satisfaction surveys shall include [*] those matters or concerns that related to Agreed Services or are within the [*] In the event that satisfaction levels [*] will do the following: Healtheon will undertake commercially reasonable steps to address any satisfaction concerns expressed in the surveys. Healtheon shall present an improvement plan within 20 business days to SBCL for SBCL's review and approval, which shall not be unreasonably withheld. Healtheon will conduct an additional survey in four months, or as agreed, after the most recent survey to demonstrate the improved levels of client satisfaction, as may be proposed in Healtheon's improvement plan(s). SBCL agrees to cooperate with Healtheon and assist Healtheon in identifying client concerns to assure that such concerns are [*]Healtheon's delivery of Agreed Services under this Agreement and not [*] [*] STANDARDS [*] Teleprinter Services will not include any [*] Healtheon. Rather, [*] will [*] the Hardware through [*] provided by [*] or Healtheon. In accordance with [*] of the Services Agreement, should Healtheon [*] and SBCL [*], such services will meet the performance standards mutually agreed to by the parties at such time, but such standards shall be no less than [*]. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. EXHIBIT 2.1 TRANSITION COMMITTEE MEMBERS - -------------------------------------------------------------------------------- SBCL Representatives Healtheon Representatives - -------------------------------------------------------------------------------- [*] [*] - -------------------------------------------------------------------------------- [*] [*] - -------------------------------------------------------------------------------- [*] [*] - -------------------------------------------------------------------------------- [*] [*] - -------------------------------------------------------------------------------- [*] [*] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Others as agreed with SBCL Others as agreed with Healtheon - --------------------------------------------------------------------------------
Chairpersons of the Transition Committee shall be: [*] [*] Criteria for all members of the Transition Committee: Each member shall be [*] and shall have available [*]. [*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. EXHIBIT 2.3
NAME CENTER LAB TYPE PERCENT ------ -------- ----- ------ ------- [*]
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. EXHIBIT 5.13.8 TO BE PROVIDED EXHIBIT 11.2
- -------------------------------------------------------------------------------- LABORATORY PHONE ZIP CODE AUTO DIAL GROUP - ------------- ------- -------- ----------------- [*] TOTAL - --------------------------------------------------------------------------------
[*] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. EX-27.1 5 EX-27.1
5 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 4,526 866 6,393 130 0 12,276 18,799 7,523 50,271 18,331 0 0 0 5 30,221 50,271 0 33,231 0 31,894 36,714 66 361 (35,860) 0 (35,860) 0 0 0 (35,860) (.74) (.74)
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