-----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, GezT4e2CqKtmF9HgLWyQbDqE09uqVs6y138sYA36O5oucTZ+LXv4SQlpuXRL1PFm MOB6+NuU5xEyfqBDtFxOQw== /in/edgar/work/20000814/0000910391-00-000028/0000910391-00-000028.txt : 20000921 0000910391-00-000028.hdr.sgml : 20000921 ACCESSION NUMBER: 0000910391-00-000028 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ONHEALTH NETWORK CO CENTRAL INDEX KEY: 0000910391 STANDARD INDUSTRIAL CLASSIFICATION: [7372 ] IRS NUMBER: 411686038 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22212 FILM NUMBER: 695959 BUSINESS ADDRESS: STREET 1: 808 HOWELL STREET STREET 2: STE 400 CITY: SEATTLE STATE: WA ZIP: 98101 BUSINESS PHONE: 2065830100 MAIL ADDRESS: STREET 1: 808 HOWELL ST STREET 2: STE 400 CITY: SEATTLE STATE: WA ZIP: 98101 FORMER COMPANY: FORMER CONFORMED NAME: IVI PUBLISHING INC DATE OF NAME CHANGE: 19930809 10-Q 1 0001.txt QUARTERLY REPORT ON FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________TO__________. COMMISSION FILE NUMBER 0-22212 ONHEALTH NETWORK COMPANY (Exact name of registrant as specified in its charter) WASHINGTON 41-1686038 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 808 HOWELL STREET, SUITE 400 SEATTLE, WASHINGTON 98101 ( Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (206) 583-0100 ------------------------------------------------------ Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Number of shares outstanding of the registrant's common stock as of July 31, 2000: 24,697,701 ================================================================================ TABLE OF CONTENTS PAGE ---- PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements.............................................3 Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999.........................................3 Consolidated Statements of Operations for the Three Month and Six Months Ended June 30, 2000 and 1999.......4 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2000 and 1999.......................5 Notes to Consolidated Financial Statements .....................6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................11 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings................................................15 ITEM 6. Exhibits and Reports on Form 8-K.................................16 2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
ONHEALTH NETWORK COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) June 30, December 31, 2000 1999 ---------------- --------------- (Unaudited) (Restated) ASSETS: Current assets: Cash and cash equivalents $ 4,883 $ 10,142 Restricted cash 500 500 Accounts receivable, net of allowances of $520 (2000) and $413 (1999) 3,859 1,870 Inventories 22 15 Prepaid advertising 2,690 6,848 Deferred financing costs 14,210 - Other current assets 332 401 ---------------- --------------- Total current assets 26,496 19,776 Furniture and equipment, net 2,712 2,137 Intangibles and goodwill, net 9,253 10,754 Other non-current assets 63 53 ---------------- --------------- Total assets $ 38,524 $ 32,720 ================ =============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable $ 20,000 $ 2,000 Current maturities of capital lease obligations 10 13 Accounts payable 9,507 6,515 Deferred revenue 1,215 859 Other accrued expenses 2,868 2,383 ---------------- --------------- Total current liabilities 33,600 11,770 Non-current liabilities 48 55 Commitments and contingencies Shareholders' equity: Preferred stock, $0.01 par value; authorized, 1,000; issued and outstanding, none - - Common stock, $0.01 par value; authorized, 100,000; issued and outstanding, 24,698 (2000) and 23,812 (1999) 247 238 Additional paid-in-capital 197,471 171,641 Accumulated deficit (188,307) (139,533) Deferred compensation (4,535) (11,451) ---------------- --------------- Total shareholders' equity 4,876 20,895 ---------------- --------------- Total liabilities and shareholders' equity $ 38,524 $ 32,720 ================ ===============
The accompanying notes are an integral part of the financial statements 3 ONHEALTH NETWORK COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ------------------------------- --------------------------------- 2000 1999 2000 1999 ------------- -------------- -------------- --------------- (Restated) (Restated) Net revenue $ 3,683 $ 581 $ 6,347 $ 781 Costs and expenses: Product development, editorial and design 3,422 1,931 6,094 3,147 Sales and marketing 13,842 4,645 26,028 7,011 General and administrative 3,417 1,098 6,209 1,972 Amortization of intangibles and goodwill 749 - 1,500 - Stock-based compensation 3,259 1,034 6,369 1,818 ------------- -------------- -------------- --------------- Total costs and expenses 24,689 8,708 46,200 13,948 ------------- -------------- -------------- --------------- Loss from operations (21,006) (8,127) (39,853) (13,167) Interest income 132 121 280 229 Interest expense (6,049) - (9,203) - Other income - 2 - 2 ------------- -------------- -------------- --------------- Total interest and other income, net (5,917) 123 (8,923) 231 ------------- -------------- -------------- --------------- Net loss $ (26,923) $ (8,004) $ (48,776) $ (12,936) ============= ============== ============== =============== Net loss per common share- Basic and diluted $ (1.11) $ (0.50) $ (2.05) $ (0.83) ============= ============== ============== =============== Weighted average number of common shares Outstanding 24,291 16,150 23,841 15,544 ============= ============== ============== ===============
The accompanying notes are an integral part of the financial statements 4 ONHEALTH NETWORK COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Six Months Ended June 30, ------------------------------------ 2000 1999 ---------------- --------------- (Restated) Cash flows from operating activities: Net loss $ (48,776) $ (12,936) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization 403 147 Provision for doubtful accounts and returns 123 29 Amortization of prepaid advertising and promotional agreements 2,322 646 Amortization of intangibles and goodwill 1,501 - Amortization of deferred compensation 6,369 1,818 Non-cash interest expense 8,610 - Other 10 10 Changes in assets and liabilities: Increase in accounts receivable (2,111) (8) Increase in inventories (7) - (Increase) decrease in other current assets 1,700 (95) (Increase) decrease in other non-current assets (17) 78 Increase in accounts payable 2,992 2,209 Increase (decrease) in other accrued expenses 1,919 (1,381) ---------------- --------------- Net cash used in operating activities (24,962) (9,483) Cash flows from investing activities: Capital expenditures (978) (532) ---------------- --------------- Net cash used in investing activities (978) (532) Cash flows from financing activities: Net proceeds from issuance of common stock: Private placements - 14,092 Exercise of options 301 1,072 Exercise of warrants 388 1,586 Proceeds from short-term loan 20,000 - Payment of financing related costs (1) - Payments on capital lease obligation (7) - ---------------- --------------- Net cash provided by financing activities 20,681 16,750 ---------------- --------------- Net increase (decrease) in cash and cash equivalents (5,259) 6,735 Cash and cash equivalents at beginning of year 10,142 2,119 ---------------- --------------- Cash and cash equivalents at end of period $ 4,883 $ 8,854 ================ ===============
The accompanying notes are an integral part of the financial statements 5 ONHEALTH NETWORK COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (UNAUDITED) NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business OnHealth Network Company, formerly known as IVI Publishing, Inc., (the "Company"), is engaged in electronic publishing of health and medical information in interactive multimedia formats through its web site onhealth.com, providing and supporting a broad range of personal health information, referral and nurse counseling services to customers throughout the United States. Principles of Consolidation The consolidated financial statements include the financial statement of OnHealth and its wholly-owned subsidiaries, Health Decision International, LLC ("HDI") and BabyData.com, Inc. ("BabyData"). All material intercompany balances and transactions have been eliminated. Intangible Assets Intangible assets consist of goodwill, which represents costs in excess of the fair value of the net assets acquired, and identifiable intangibles, which include web development costs, customer base, database content, internally developed software, and assembled work force. Intangible assets are amortized on a straight-line basis over their estimated useful lives of three to five years. Reclassifications Certain 1999 amounts have been reclassified to conform to current year financial statement presentation. Deferred Financing Costs Deferred financing costs represent the fair value of the common stock warrant issued in connection with a financing arrangement. These costs are being amortized over the term of the financing arrangement. Impact of Recently Issued or Adopted Accounting Standards In March 2000, the FASB issued Interpretation No. 44 (FIN No. 44), "Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB Opinion No. 25." FIN No. 44 will be effective July 1, 2000. This interpretation provides guidance for applying APB Opinion No. 25 "Accounting for Stock Issued to Employees." Management has not determined the impact that adoption of FIN No. 44 will have on the Company's financial position or results of operations. In March 2000, the Emerging Issues Task Force (EITF) of the FASB reached a consensus on Issue No. 00-2, "Accounting for Web Site Development Costs" which provides guidance on when to capitalize versus expense costs incurred to develop a web site. The consensus is effective for web site development costs in quarters beginning after June 30, 2000. Management has not yet determined the impact that adoption of Issue No. 00-2 will have on the Company's financial position or results of operations. NOTE 2. BASIS OF PRESENTATION The accompanying unaudited financial statements of OnHealth Network Company have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation 6 have been included. Operating results for the six months ended June 30, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. The accompanying unaudited financial statements should be read in conjunction with the financial statements and the notes thereto included in the OnHealth Network Company report to the Securities and Exchange Commission on Form 10-K, as amended, for the year ended December 31, 1999. NOTE 3. RESTATEMENT OF QUARTERLY RESULTS The Company has restated its consolidated balance sheet as of December 31, 1999 and the related consolidated statements of operations and cash flows for each of the four quarters ended December 31, 1999 due to the recording of additional stack-based compensation charges (see Note 12). As a result, the December 31, 1999 consolidated balance sheet includes adjustments to increase additional paid-in-capital by $9.0 million, to increase the accumulated deficit by $2.7 million and to increase deferred compensation by $6.3 million. The impact on the Company's results of operations as originally reported for the three and six month periods ended June 30, 1999 is as follows: Loss Per Common Net Loss Share ----------------- ----------------- (In thousands) THREE MONTHS ENDED JUNE 30, 1999 As reported $ (6,983) $ (0.43) As restated $ (8,004) $ (0.50) SIX MONTHS ENDED JUNE 30, 1999 As reported $ (11,143) $ (0.72) As restated $ (12,936) $ (0.83) NOTE 4. RESTRICTED CASH On August 19, 1999, the Company pledged $500,000 of cash for an irrevocable standby letter of credit related to the lease of new office space that is classified as restricted cash on the balance sheet. The letter of credit will expire on August 20, 2001 and will only be drawn on in the event the Company fails to comply with the terms and conditions as set forth in the lease agreement. NOTE 5. LOSS PER COMMON SHARE Basic earnings per share ("EPS") excludes any dilutive effects of common stock equivalents - options, warrants and convertible securities - and is computed by dividing the net loss by the weighted-average number of common shares outstanding during the period. Diluted EPS is computed by dividing net loss by the weighted-average number common shares and common stock equivalents outstanding. Excluded from the computation of the weighted-average number of common shares outstanding at June 30, 2000 are 332,446 shares, which are forfeitable subject to the continued employment of certain key employees. The effects of common stock equivalents are excluded from the computation for the periods presented as their effects are anti-dilutive. 7 The components of basic and diluted loss per common share are as follows:
Three Months Ended Six Months Ended (In thousands, except per share data) June 30, June 30, -------------------------------- -------------------------------- 2000 1999 2000 1999 ------------- -------------- ------------- -------------- (Restated) (Restated) Net loss (numerator) $ (26,923) $ (8,004) $ (48,776) $ (12,936) ============= ============== ============= ============== Weighted average common shares outstanding (denominator) 24,291 16,150 23,841 15,544 ============= ============== ============= ============== Loss per share: Basic and diluted $ (1.11) $ (0.50) $ (2.05) $ (0.83) ============= ============== ============= ==============
NOTE 6. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS
June 30, December 31, (In thousands) 2000 1999 ----------------- ----------------- Furniture and equipment: Computer hardware $ 3,001 $ 2,205 Software 497 349 Equipment 123 120 Furniture & fixtures 380 356 Leasehold improvements 235 71 Construction in progress - 157 ----------------- ----------------- 4,236 3,258 Less accumulated depreciation (1,524) (1,121) ----------------- ----------------- Total $ 2,712 $ 2,137 ================= ================= Intangibles and Goodwill: Web development costs $ 43 $ 43 Customer base 2,400 2,400 Database content 3,900 3,900 Internally developed software 1,300 1,300 Assembled work force 130 130 Goodwill 3,485 3,486 ----------------- ----------------- 11,258 11,259 Less accumulated amortization (2,005) (505) ----------------- ----------------- Total $ 9,253 $ 10,754 ================= ================= Other accrued expenses: Litigation loss $ - $ 195 Legal fees 90 225 Royalties 386 425 Accrued wages and benefits 837 410 Accrued severance 450 - Interest payable 592 676 Other 513 452 ----------------- ----------------- Total $ 2,868 $ 2,383 ================= =================
8 NOTE 7. MERGER WITH HEALTHEON/WEBMD On February 15, 2000, the Company agreed to merge with Healtheon/WEBMD Corporation ("Healtheon/WEBMD"). As a result of the merger, each share of the Company's common stock shall be converted into and exchanged for the right to receive .189435 shares of Healtheon/WEBMD common stock. The merger is subject to certain conditions and approval of the Company's shareholders. As a result of this merger, Healtheon/WebMD's Registration Statement on Form S-4, relating to the acquisition of OnHealth, has been declared effective by the Securities and Exchange Commission. The Registration Statement contains the proxy statement/prospectus for the transaction. OnHealth plans to hold its annual meeting of shareholders on September 12, 2000 to vote on the proposed transaction. The Company expects this transaction to be completed shortly after OnHealth's shareholder meeting. In connection with the merger agreement, Healtheon/WEBMD has agreed to lend the Company up to $30 million for working capital needs. The Company borrowed $15 million on February 24, 2000 and may make additional loans beginning on May 1, 2000. The Company borrowed an additional $5 million in June 2000. The loans bear interest at prime rate plus 2% and are due on February 15, 2001. Simultaneous with the execution of the Healtheon/WEBMD loan agreement, the Company granted Healtheon/WEBMD a warrant to purchase 5,800,000 shares of the Company's common stock with an exercise price of $10.75 per share. The warrant is fully vested and exercisable immediately and expires on February 15, 2003. On February 15, 2001, the Company has the right to call a portion of the warrant in excess of 3,000,000 shares, or 2,800,000 shares. The fair value of the warrant, approximately $22.6 million, has been valued at the date of issuance using a Black-Scholes option pricing model and will be amortized as interest expense over the one-year loan period. For the three and six month periods ended June 30, 2000, $5.6 million and $8.4 million, respectively, of the deferred financing costs have been amortized and included in interest expense. In addition, the Company granted Healtheon/WEBMD a warrant to purchase 500,000 shares of the Company's common stock with an exercise price of $0.01 per share. The warrant is exercisable in the event the merger agreement is terminated and any principal and interest arising under the loans from Healtheon/WEBMD remain outstanding 90 days after the termination date. The warrant will vest as to 250,000 shares after 90 days, 125,000 shares after 180 days and 125,000 after 270 days. NOTE 8. NOTE PAYABLE In connection with the acquisition of HDI, the Company assumed a $2,000,000 note payable to G.D. Searle & Company ("Searle"), which was secured by all tangible and intangible property of HDI. Interest on the note was stated at 30% per annum. All principal and interest were due on December 18, 2000, with a call option by Searle on June 30, 2000. A result of the acquisition, the Company and Searle entered into a release and Note Cancellation Agreement, whereby the Company intended to repay the principal and interest due by issuing Searle registered shares of the Company's common stock. On March 31, 2000, the note, including approximately $882,000 in accrued interest, was paid by issuing 688,190 registered shares of the Company's common stock to Searle. NOTE 9. STOCK OPTIONS AND WARRANTS On February 15, 2000, shareholders owning in excess of 40% of the outstanding common stock of OnHealth entered into voting agreements providing a proxy to Healtheon/WEBMD in support of the merger agreement with Healtheon/WEBMD (see Note 7). This triggered the acceleration provisions within outstanding employee stock option agreements. As a result, all unvested options, with the exception of the options granted to certain key employees of the Company who waived acceleration until closing or termination of the merger agreement, became immediately exercisable. The number of options that vested on February 15, 2000 as a result of this situation was approximately 2.1 million. The number of options granted to certain key employees that were unvested on February 15, 2000 and will vest upon closing or termination of the merger agreement is approximately 3.4 million. NOTE 10. SEGMENT INFORMATION We have identified our reportable segments based on how our operations are managed and how results are viewed by management. The Company reports operations in two business segments: OnHealth and HDI. Accounting policies of the two segments are the same as those described in Note 1. Description of Business and Summary of Significant Accounting Policies. There were no intersegment sales during the periods presented. The following table contains certain segment information for the three and six month periods ended June 30, 2000 and 1999. 9
Three Months Ended June Six Months Ended 30, June 30, ------------------------------ -------------------------------- 2000 1999 2000 1999 ------------- ------------ ------------- -------------- Net revenue: OnHealth $ 3,179 $ 581 $ 5,189 $ 781 HDI 504 - 1,158 - ------------- ------------ ------------- -------------- Consolidated net revenue $ 3,683 $ 581 $ 6,347 $ 781 ============= ============ ============= ============== Amortization of intangibles and goodwill: OnHealth $ 749 $ - $ 1,500 $ - HDI - - - - ------------- ------------ ------------- -------------- Consolidated amortization of intangibles and goodwill $ 749 $ - $ 1,500 $ - ============= ============ ============= ============== Stock-based compensation: OnHealth $ 3,259 $ 1,034 $ 6,369 $ 1,818 HDI - - - - ------------- ------------ ------------- -------------- Consolidated stock-based compensation $ 3,259 $ 1,034 $ 6,369 $ 1,818 ============= ============ ============= ============== Interest expense, net: OnHealth $ (6,049) $ - $ (9,202) $ - HDI - - (1) - ------------- ------------ ------------- -------------- Consolidated interest expense, net $ (6,049) $ - $ (9,203) $ - ============= ============ ============= ============== Net loss: OnHealth $ (26,169) $ 8,004 $ (47,389) $ (12,936) HDI (754) - (1,387) - ------------- ------------ ------------- ------------- Consolidated net loss $ (26,923) $ 8,004 $ (48,776) $ (12,936) ============= ============ ============= ==============
As of June 30, ------------------------------ Total assets: 2000 1999 ------------- ------------ OnHealth $ 37,539 $ 12,297 HDI 985 - ------------- ------------ Consolidated total assets $ 38,524 $ 12,297 ============= ============ NOTE 11. SUPPLEMENTAL CASH FLOW INFORMATION
Six Months Ended June 30, ----------------------------------- 2000 1999 -------------- --------------- (In thousands) Cash paid during the periods for: Income taxes $ 1 $ - Non-cash investing and financing transactions: Common stock issued for debt 2,882 - Fair value of common stock warrant 22,612 - Common stock issued as litigation settlement 196 - Common stock issued for services 8 1,921 Deferred compensation related to stock options (547) 11,223
NOTE 12. SEC INVESTIGATION AND COMPANY'S SPECIAL INVESTIGATION In October 1999, the Division of Enforcement, Pacific Regional Office of the Securities and Exchange Commission ("SEC"), notified the Company that it was initiating an investigation of the Company's policies and procedures concerning the granting of stock options. The Company has provided information to the SEC. In addition, the Company's Board of Directors hired independent legal counsel to conduct its own special investigation. On February 16, 2000 the Company received 10 a report from independent legal counsel indicating that there were certain instances where stock options were granted to new employees with exercise prices that were below fair market value as of the measurement date for determining stock based compensation under Accounting Principles Board ("APB") Opinion No. 25. As a result, the Company recorded $1.8 million of deferred stock-based compensation in 1999 and was recognizing amortization of the deferred compensation over the vesting period of the underlying options as a stock-based compensation charge. The SEC has been given a copy of the report of the special investigation and has taken deposition of various members of management and Company employees. Based upon additional inquiries by the SEC, the independent legal counsel investigation continued with a review of stock option grants to existing employees. On April 8, 2000, the Company received a preliminary report from independent counsel indicating that there were instances where stock options were granted in 1999 to existing employees and directors with exercise prices that were below fair market value as of the measurement date for determining stock based compensation under APB Opinion No. 25. The Company subsequently hired another independent legal counsel to review all stock option grants (both new hire and existing employees) for 1999 and 1998 to determine whether there were additional stock-based compensation charges to be recorded. On May 31, 2000 the Company received a final report from the new independent legal counsel. As a result, the Company has recorded $7.9 million of additional deferred stock-based compensation for 1999 and $1.1 million of additional deferred stock-based compensation for 1998. These additional deferred stock-based compensation amounts will be amortized to expense over the vesting periods of the underlying options as stock-based compensation charges. The Company has restated their 1998 and 1999 financial statements in their amended Form 10-K for 1999. The SEC has been given a copy of the report of new independent legal counsel. The SEC investigation is still in process and has not been finalized. The Company intends to cooperate with this investigation. However, until the SEC investigation is completed, the Company could, among other things, be required to record additional stock-based compensation charges and could be required to pay a fine. The Company is unable to assess the likely outcome of this matter. As a result, there can be no assurance that this investigation will not have a material adverse affect on the Company's financial position or results of operations. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net Revenue Net revenue for the three and six month periods ended June 30, 2000 and 1999 was as follows:
(In thousands) Three Months Ended June 30, Six Months Ended June 30, ---------------------------------- ------------------------------------ 2000 1999 2000 1999 --------------- ---------------- ---------------- ----------------- Online $ 3,175 $ 567 $ 5,157 $ 713 Services and communication 435 - 937 - Product sales and licensing 68 - 220 19 Contract development and other 5 14 33 49 =============== ================ ================ ================= Net revenue $ 3,683 $ 581 $ 6,347 $ 781 =============== ================ ================ =================
Online revenue Online revenue is generated through the sale of advertising and sponsorship on our onhealth.com Web site. The increase in online revenue for the three and six months ended June 30, 2000 of $2,608,000, or 460%, and $4,444, or 623%, respectively, from the same period in 1999 was the result of an increase in user traffic on our onhealth.com Web site, the number of site sponsorship and advertising clients and the size of the advertising contracts from the prior year. Services and communication revenue Services and communication revenue, a line of revenue for Health Decisions International ("HDI"), which was acquired by us on November 29, 1999, includes, among others, nurse counseling and personal care management services. Services and communication revenue is expected to increase in 2000 as the operations of HDI will be included in our consolidated financial statements for a full year. 11 Product sales and licensing revenue In the first quarter of 2000, product sales and licensing revenue consists primarily of health information software licensing and brochure sales, newsletters and book sales generated by HDI. In 1999 it consisted primarily of OnHealth's CD-ROM related retail distribution sales, direct mail sales, product sales and royalties on licenses to original equipment manufacturers (OEM's) and end users. Product sales and licensing revenue increased in the three and six month periods ended June 30, 2000 by $68,000 and $201,000, or 1,058%, respectively, from the same periods in 1999 primarily due to brochure sales, newsletters, software licensing and book sales generated by HDI. Product sales and licensing revenue related to brochures and newsletters is expected to increase over 1999 as the operations of HDI will be included in our consolidated financial statements for a full year. CD-ROM related product sales and licensing revenue have declined steadily over the past few years. The decrease generally reflects market conditions for CD-ROM products, our cancellation of a CD-ROM distribution agreement, and the lack of new CD-ROM product releases as we shifted our focus toward online efforts. We do not anticipate receiving any significant product sales and licensing revenue from CD-ROM products in the future. Contract development revenue and other Contract development revenue is generated through the use of our personnel and facilities for the creation of custom multimedia products. In the three and six month periods ended June 30, 2000, contract development and other revenue decreased $9,000, or 64%, and $16,000, or 33%, respectively, from the same periods in 1999. The decrease generally reflects our shift toward the online efforts and is expected to continue to decrease. COSTS AND EXPENSES Total costs and expenses for the three month and six month periods ended June 30, 2000 increased $15,981,000, or 184%, to $24,689,000 and $32,252,000, or 231%, to $46,200,000, respectively, from the same periods in 1999. The increase was primarily due to increased sales and marketing efforts related to our onhealth.com Web site, the increase in stock-based compensation expense, increase in personnel and use of contractors to develop, market and sell our products and services and the addition of HDI's results of operations for the first half of 2000. Product Development, Editorial & Design Product development, editorial and design expenses consist primarily of compensation and related costs for our development, editorial, design systems staff, consulting fees, third-party content acquisition costs and Web site maintenance and enhancement costs related to our onhelath.com Web site. The increase in product development, editorial and design expenses increased in the three and six month periods ended June 30, 2000 of $1,491,000, or 77%, to $3,422,000 and $2,947,000, or 94%, to $6,094,000 respectively, from the same periods in 1999 was primarily due to the increase in the use of consultants and staff required to enhance and maintain the onhealth.com Web site. Product development, editorial & design expenses are expected to increase in 2000 as we continue to build our infrastructure and increase product offerings. Sales and Marketing Sales and marketing expenses consist primarily of salaries and sales commissions, advertising costs, travel and public relations. Sales and marketing expenses increased in the three and six month periods ended June 30, 2000 by $9,197,000, or 198%, to $13,842,000 and $19,017,000, or 271%, to $26,028,000, respectively, from the same three and six month periods in 1999. The increase was primarily the result of increased advertising expenses as well as increased headcount. In addition, the operating expenses of HDI are included in the first quarter of 2000. The broad-based consumer targeted advertising campaign, which includes online, television, radio and outdoor advertising, commenced early in the third quarter of 1999. General and Administrative General and administrative expenses consist primarily of salaries and related costs for general corporate functions, including finance, accounting and legal expenses, investor relations and fees for other professional services. General and administrative expenses increased in the three and six months ended June 30, 2000 by $2,319,000, or 211%, to $3,417,000 and $4,237,000, or $215%, to $6,209,000 from the same periods in 1999. The increase primarily resulted from the inclusion of HDI's operating results in the first half of 2000, which results were not included in the 1999 numbers. The increase was also due to increased personnel costs, as a result of severance obligations to former employees and increased headcount, legal fees, and accounting fees. We expect general and administrative expenses to increase in 2000 as the operations of HDI will be included in our consolidated financial statements for a full year. 12 Amortization of Intangibles and Goodwill Amortization of intangibles and goodwill totaled $749,000 and $1,500,000 in the three and six months ended June 30, 2000, respectively, and is related to the amortization of goodwill and identifiable intangibles recorded in connection with the 1999 business acquisitions of BabyData and HDI. There was no such amortization in the first half of 1999. Amortization of intangibles and goodwill are expected to increase in 2000, as a full year of amortization will be included in the financial statements. Stock-based Compensation Stock-based compensation is principally comprised of compensation expense related to stock option grants and the portion of acquisition related consideration which is contingent on the continued tenure of key employees, which must be recorded as compensation expense under generally accepted accounting principles. Stock-based compensation recorded in the three and six month periods ended June 30, 2000 include stock-based compensation amounts related to options granted with an exercise price less than the fair value of the underlying common stock of $2,182,000 and $4,404,000, respectively, and $1,034,000 and $1,818,000 for the three and six month periods ended June 30, 1999, respectively. Stock-based compensation recorded in the three and six month periods ended June 30, 2000 also includes amortization of the compensation arrangements in connection with the acquisitions of BabyData.com in the third quarter of 1999 and HDI in the fourth quarter of 1999, aggregating $1,077,000 and $1,965,000, respectively. There were no stock-based compensation charges related to compensation arrangements during the three and six month periods ended June 30, 1999. Stock-based compensation expense is expected to increase in 2000, as the remaining amortization related to the two 12-month employment contracts, which became effective September 9, 1999 and November 29, 1999, and the remaining amortization related to stock option grants will be recognized in the 2000 statement of operations. Interest Income Interest income was $132,000 and $280,000 in three and six month periods ended June 30, 2000. The increase for the 2000 period was due to higher average cash balances resulting from the proceeds of a $15,000,000 loan from Healtheon in February 2000 and an additional $5,000,000 received from the loan during June 2000. Interest Expense Interest expense was $6,049,000 and $9,203,000 in the three and six month periods ended June 30, 2000, respectively. The three month period includes non-cash interest of $5,622,000 related to the Healtheon warrant and interest of $427,000 related to the Healtheon note payable. The six month period includes non-cash interest of $8,402,000 related to the Healtheon warrant, non-cash interest of $208,000 related to the Searle note payable and interest of $593,000 related to the Healtheon note payable. Income Taxes We have not recorded a current or deferred provision for income taxes for the periods presented due to the history of losses incurred. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2000, we had cash and cash equivalents of $4,883,000. Total cash used by operating activities during the first half of 2000 was $24,962,000, which was primarily due to a net loss of $48,776,000. Investing activities used net cash of $978,000 primarily for purchases of computer equipment due to the growth in personnel as well as upgrades. Financing activities provided cash of $20,681,000 primarily through the proceeds from the Healtheon note payable, $20,000,000; proceeds from the exercise of warrants, $388,000; and proceeds from the exercise of stock options $301,000. In February 2000, we agreed to merge with Healtheon/WEBMD Corporation ("Healtheon/WEBMD"). In connection with the merger agreement, Healtheon/WEBMD has agreed to lend us up to $30 million for working capital needs. The amounts borrowed under this line of credit are due on February 15, 2001. As of June 30, 2000, the Company has drawn $20 million against this line of credit and received an additional $5 million against the line in July 2000. We believe our cash and 13 cash equivalents, including the lending commitment by Healtheon/WEBMD, coupled with our ability to reduce discretionary expenditures, if necessary, will be sufficient to fund our operations through the anticipated closing date of the merger with Healtheon/WEBMD. Operations generated a negative cash flow during 1999 and we expect a significant use of cash in 2000 as it markets and expands it Web site. Any material unforeseen increase in expenses or reductions in projected revenues will likely require us to seek additional debt or equity financing. If additional cash is required, we may need to reduce our expenditures or curtail certain operations. There can be no assurance that additional capital, on a debt or equity basis, will be found, or if found that it will be on economically viable terms. YEAR 2000 We have experienced no disruptions or problems regarding the year 2000 changeover. As part of our year 2000 plan, prior to January 1, 2000, we assessed its internal systems consisting primarily of desktop and network computers, and third-party software utilized in our day-to-day operations. Our assessment was completed as of January 1, 2000 and indicated all systems were operating as normal. As of the date of the filing of this document, all of our internal hardware and software continue to operate as normal and to-date, all vendors utilized by us in our daily operations are operating normally and have not indicated any year 2000 anomalies. Based upon the successful transition through the January 1, 2000 rollover period, we do not anticipate any problems to materialize. Our expenditures for the year 2000 effort were not material and we do not expect to incur any material costs in 2000 with regards to year 2000. FORWARD-LOOKING STATEMENTS Statements contained herein that are not based on historical fact, including without limitation statements containing the words "believes," "may," "will," "estimate," "continue," "anticipates," "intends," "expects" and words of similar import, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, events or developments to be materially different from any future results, events or developments expressed or implied by such forward-looking statements. Such factors include, among others, the following: o the ability to complete the acquisition by Healtheon/WebMD o the expectation that the Company will see a growth in revenues and positive net income as a on-line health network; o the ability to increase consumer awareness of the Company's Web site; o the ability to increase our advertising base, o technology changes and the continued acceptance of the Internet; o general economic and business conditions; o competition; o the ability to attract and retain qualified personnel; o liability and other claims asserted against the Company; and o other factors referenced in the Company's 1999 Form 10-K/A and other filings with the Securities and Exchange Commission. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future results, events or developments. Additional information on other risk factors which could affect the Company's financial results are included in the Company's Annual Report for the fiscal year ended December 31, 1999 on Form 10-K, as amended, and other Company reports and statements on file with the Securities and Exchange Commission. 14 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In October 1999, the Division of Enforcement, Pacific Regional Office of the Securities and Exchange Commission ("SEC"), notified the Company that it was initiating an investigation of the Company's policies and procedures concerning the granting of stock options. The Company has provided information to the SEC. In addition, the Company's Board of Directors hired independent legal counsel to conduct its own special investigation. On February 16, 2000 the Company received a report from independent legal counsel indicating that there were certain instances where stock options were granted to new employees with exercise prices that were below fair market value as of the measurement date for determining stock based compensation under Accounting Principles Board ("APB") Opinion No. 25. As a result, the Company recorded $1.8 million of deferred stock-based compensation in 1999 and was recognizing amortization of the deferred compensation over the vesting period of the underlying options as a stock-based compensation charge. The SEC has been given a copy of the report of the special investigation and has taken deposition of various members of management and Company employees. Based upon additional inquiries by the SEC, the independent legal counsel investigation continued with a review of stock option grants to existing employees. On April 8, 2000, the Company received a preliminary report from independent counsel indicating that there were instances where stock options were granted in 1999 to existing employees and directors with exercise prices that were below fair market value as of the measurement date for determining stock based compensation under APB Opinion No. 25. The Company subsequently hired another independent legal counsel to review all stock option grants (both new hire and existing employees) for 1999 and 1998 to determine whether there were additional stock-based compensation charges to be recorded. On May 31, 2000 the Company received a final report from the new independent legal counsel. As a result, the Company has recorded $7.9 million of additional deferred stock-based compensation for 1999 and $1.1 million of additional deferred stock-based compensation for 1998. These additional deferred stock-based compensation amounts will be amortized to expense over the vesting periods of the underlying options as stock-based compensation charges. The Company has restated their 1998 and 1999 financial statements in their amended Form 10-K for 1999. The SEC has been given a copy of the report of new independent legal counsel. There is a possibility that options to purchase approximately 2.3 million shares were issued outside of the scope of the Company's existing stock option plans. Accordingly, option holders who were granted ISOs will be given the opportunity to elect to either retain their original grant (which will be treated as a non qualified options for federal income tax purposes)or to receive a new ISO grant under the Company's 1997 Stock Option Plan. To the extent any of these options are determined to have been granted outside the scope of the 1997 Stock Option Plan, the corresponding number of shares subject to such options would be available for future grants by the Company under such Plan. All options will be re-issued with the same vesting, exercise price and quantity. The SEC investigation is still in process and has not been finalized. The Company intends to cooperate with this investigation. However, until the SEC investigation is completed, the Company could, among other things, be required to record additional stock-based compensation charges and could be required to pay a fine. The Company is unable to assess the likely outcome of this matter. As a result, there can be no assurance that this investigation will not have a material adverse affect on the Company's financial position or results of operations. 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit Listing. Certain exhibits have been previously filed with the Commission and are incorporated herein by reference. ONHEALTH NETWORK COMPANY EXHIBIT INDEX JUNE 30, 2000
EXHIBIT NUMBER DESCRIPTION REF. - ------------ --------------------------------------------------------------------------------------------- ---- 2.1 Agreement and Plan of Reorganization among OnHealth Network Company, BabyData.com Inc., BB Acquisition, Inc. and the stockholders of BabyData.com Inc. dated as of September 9, 1999. (L) 2.2 Agreement and Plan of Reorganization among OnHealth Network Company, Demand Management,`` Inc., DMISub, Inc., Health Decisions, Inc., HDISub, Inc., Health Decisions International, LLC and Donald M. Vickery, the sole shareholder of HDI and DMI dated as of November 19, 1999. (M) 2.3 Agreement and Plan of Merger dated February 15, 2000 by and among Healtheon/WebMD Corporation, Tech Acquisition Corporation and OnHealth Network Company. (N) 3.1 Amended and Restated Articles of Incorporation of the Company. (K) 3.2 Bylaws of the Company. (A) 4.1 Form of Stock Certificate. (B) 9.1 Voting Agreement dated February 15, 2000 executed by Healtheon/WebMD Corporation, Tech Acquisition Corporation and OnHealth Network Company and Jon C. Baker, Van Wagoner Funds, Inc., David R. Wilmerding, Michael A. Brochu, Rebecca Farwell, Robert N. Goodman, Ann Kirschner, Ram Shriram, Ronald Stevens and Rick Thompson. (N) 10.1 License Agreement, dated April 24, 1991, among the Company, William Morrow Company and Mayo Foundation for Medical Education and Research, as amended. (B) 10.2 Electronic Publishing License, Development and Marketing Agreement, dated April 28, 1993, between the Company and Mayo Foundation for Medical Education and Research. (B) 10.3 401(k) Savings and Investment Plan. (B) 10.4 1997 Stock Option Plan, as amended. (C) 10.5 IVI Publishing, Inc. Director Stock Option Plan, as amended. (D) 10.6 License Agreement, dated February 9, 1994, between the Company and Time Life, Inc. and First Amendment to Titles Development Agreement, dated as of February 9, 1994 between the Company and Time Life, Inc. (D) 10.8 License, Development and Marketing Agreement, dated September 28, 1994, between the Company and Time Life, Inc.* (E) 10.9 1994 License, Development and Marketing Agreement, dated September 27, 1994, between the Company and Mayo Foundation for Medical Education and Research.* (E) 10.10 Agreement between America's Health Network, Inc. and the Company, dated May 25, 1995.* (F) 10.11 Amendment No. 2 to License Agreement among William Morrow Company, Mayo Foundation for Medical Education and Research and the Company, dated December 29, 1995.* (F) 10.12 Financial Advisor and Consulting Agreement with Frazier & Company LP, dated July 14, 1994, as amended by a letter agreement, dated June 28, 1995.** (G) 10.13 Settlement Agreement and Mutual Release dated September 12, 1997 between the Company and Mayo Foundation for Medical Education and Research. (H) 10.14 Sublicense Agreement dated September 12, 1997 between the Company and Mayo Foundation for Medical Education and Research. (H) 10.15 Letter Agreement dated November 9, 1997 between the Company and Robert Goodman.** (I) 10.16 Subscription Agreement, dated January 29, 1999, among the Company and certain investors named therein. (J) 16 10.17 Employment Agreement, dated August 16, 1999, between the Company and Ronald Stevens.** (O) 10.18 Employment Agreement, dated February 15, 2000, between the Company and Robert Goodman.** (O) 10.19 Consulting and Separation Agreement dated June 14,2000 between the Company and Robert Goodman.* ** 10.20 Agreement and Release dated June 13, 2000 between the Company and Rebecca Farwell.** 27 Financial Data Schedule (electronic version only) - ----------------------------------- (A) Incorporated herein by reference to the Company's Registration Statement on Form S-3, No. 333-69989, filed with the Securities and Exchange Commission on December 31, 1998. (B) Incorporated herein by reference to the Company's Registration Statement on Form S-1, No. 33-67064, (file number 0-22212) filed with the Securities and Exchange Commission in 1993. (C) Incorporated herein by reference to the Company's Preliminary Proxy Statement for the Annual Meeting of Shareholders held June 16, 1998 on Form PRE 14A, filed with the Securities and Exchange Commission on May 6, 1998. (D) Incorporated herein by reference to the Company's Registration Statement on Form S-1, No. 33-76496, filed with the Securities and Exchange Commission in 1994. (E) Incorporated by reference to the Company's Form 10-K for the year ended December 31, 1994, filed with the Securities and Exchange Commission. (F) Incorporated by reference to Exhibit 10.14 to the Company's Form 10-K/A for the year ended December 31, 1995 filed with the Securities and Exchange Commission on October 4, 1996. (G) Incorporated by reference to Exhibit 10.19 to the Company's Form 10-K for the year ended December 31, 1995 filed with the Securities and Exchange Commission. (H) Incorporated herein by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended September 30, 1997 filed with the Securities and Exchange Commission on November 12, 1997. (I) Incorporated herein by reference to the Company's Form 10-K for the year ended December 31, 1997, filed with the Securities and Exchange Commission on April 15, 1998. (J) Incorporated by reference to the Company's Form 10-K for the year ended December 31, 1998, filed with the Securities and Exchange Commission on March 31, 1999. (K) Incorporated herein by reference to the Company's Registration Statement on Form S-3, No. 333-81321, filed with the Securities and Exchange Commission on June 22, 1999. (L) Incorporated herein by reference to the Company's Report on Form 8-K, filed with the Securities and Exchange Commission on September 15, 1999. (M) Incorporated herein by reference to the Company's Report on Form 8-K, filed with the Securities and Exchange Commission on December 14, 1999. (N) Incorporated herein by reference to the Company's Report on Form 8-K, filed with the Securities and Exchange Commission on February 22, 2000. (O) Incorporated herein by reference to the Company's Report on Form 10-K, filed with the Securities and Exchange Commission on March 28, 2000. * Portions of the Exhibit have been omitted pursuant to the Company's request for confidential treatment pursuant to Rule 24b-2 promulgated under the Securities Act of 1933, as amended. ** Management Agreement or Compensatory Plan or Arrangement
(b) Reports on Form 8-K. The following reports on Form 8-K were filed by the registrant during the quarter ended June 30, 2000: In a report filed on Form 8-K, dated June 27, 2000, the Company filed its press release that announced management changes. 17 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in Seattle, Washington, on the 12th day of August, 2000. ONHEALTH NETWORK COMPANY By: /S/ RON STEVENS ------------------------------ Ron Stevens President and Chief Accounting Officer 18 EX-10 2 0002.txt EX-10.19 CONSULTING AND SEPARATION AGREEMENT EXHIBIT 10.19 Note: Portions of this exhibit indicated by "[*]" are subject to a confidential treatment request, and have been omitted from this exhibit. Complete, unredacted copies of this exhibit have been filed with the Securities and Exchange Commission as part of this Company's confidential treatment request. CONSULTING AND SEPARATION AGREEMENT This Consulting And Separation Agreement ("Agreement") is entered into as of June 14, 2000 between OnHealth Network Company ("OnHealth") and Robert Goodman ("Goodman"). RECITALS A. OnHealth has employed Goodman as President and Chief Executive Officer under an Employment Agreement dated February 15, 2000 ("Employment Agreement"), a true and correct copy of which is attached as Exhibit 1. Goodman also has served as a Director of OnHealth. B. Subject to the terms and conditions of this Agreement, Goodman has offered to relinquish his duties as President and Chief Executive Officer and Director, and to serve as a consultant of OnHealth, and OnHealth has agreed. C. This Agreement is intended to memorialize the change in the relationship between OnHealth and Goodman, and to resolve all claims that Goodman could assert that arise out of the Employment Agreement or otherwise arise out of his employment with or separation from OnHealth. AGREEMENTS NOW, THEREFORE, in consideration of the mutual covenants of this Agreement, the parties agree as follows: 1. EFFECT OF RECITALS. The recitals to this Agreement are incorporated by reference in this Agreement. 2. GOODMAN'S RESIGNATION. Goodman hereby resigns, effective June 14, 2000, from his employment with OnHealth and from his positions as President, Chief Executive Officer and Director of OnHealth. OnHealth hereby accepts such resignation. 3. GOODMAN'S CONSULTING. As required by the Employment Agreement, Goodman shall provide consulting services to OnHealth on a reasonable basis during the twenty-four (24) months following his resignation. From the date of this Agreement until the effective date of OnHealth's merger with Healtheon/WebMD Corporation or its subsidiary or affiliate ("the Merger"), Goodman agrees to provide advice and counsel within his areas of expertise for up to ten (10) hours per week as requested by OnHealth. These services may require travel. OnHealth shall reimburse Goodman for all reasonable expenses he incurs in connection with his consulting duties, upon presentation of such reasonable documentation as OnHealth may require; provided that individual expenses in excess of $150 and expenses totaling more than $400 in any month shall require the prior written approval of OnHealth's Chief Operating Officer. 1 4. INDEMNIFICATION RIGHTS. a. Goodman shall have such indemnification rights as provided by Chapter 23B of the Revised Code of Washington (the "RCW") and shall continue to receive as a contract right all the indemnification rights to which he was entitled and has received (i.e., advancement of expenses as a witness pursuant to RCW Section 23B.08.590(2), which "expenses" includes reasonable attorney fees and costs) as an officer or director pursuant to the Articles of Incorporation and Bylaws of OnHealth, regardless of any later changes or amendments thereto. OnHealth agrees to advance Goodman's expenses for reasonable attorney fees and costs in connection with the current SEC investigation and any subsequent SEC action regarding Goodman in his capacity as an officer or director of OnHealth, subject to Goodman's commitment to OnHealth as to such advances pursuant to RCW Section 23B.08.530. In this regard, Goodman hereby affirms that, in his good faith belief, his conduct by or on behalf of OnHealth at all times met the standard of conduct (the "Standard of Conduct") described in RCW Section 23B.08.510. If it is ultimately determined as provided in RCW Section 23B.08.550 that Goodman's conduct did not meet the Standard of Conduct (referred to herein as "Non-Conforming Conduct"), Goodman hereby covenants and agrees pursuant to RCW Section 23B.08.530 to promptly repay to OnHealth any and all payments or advances of expenses paid by OnHealth with respect to such Non-Conforming Conduct. b. Anything in this Agreement notwithstanding, in the event it shall be determined that any payment, award, benefit or distribution relating to or concerning the indemnification in Paragraph 4(a) above (the "Payments"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, or shall be considered taxable income under the Code, or in the event that Goodman must pay any interest or penalties with respect to such taxes, then OnHealth shall pay to Goodman an additional payment (the "Gross Up Payment") in an amount such that after payment by Goodman of all taxes imposed upon the Gross-Up Payment, Goodman retains an amount of the Gross-Up Payment equal to the sum of (x) the taxes, interest or penalties imposed upon the Payments and (y) the product of any deductions (not including deductions attributable to payments under this Agreement) disallowed because of the inclusion of the Gross-Up Payment in Goodman's adjusted gross income and the highest applicable marginal rate of federal income taxation for the calendar year in which the Gross-Up Payment is made. For purposes of determining the Gross-Up Payment, Goodman shall be deemed to (A) pay federal income taxes at the highest marginal rates of federal income taxes at the highest marginal rate of taxation for the calendar year in which the Gross-Up Payment is to be made, (B) pay applicable state and local income taxes at the highest marginal rate of taxation for the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in federal income taxes which could have been obtained from deduction of such state and local taxes, and (C) have otherwise allowable deductions for federal income tax purposes at least equal to those which could be disallowed because of the inclusion of the Gross-Up Payment in Goodman's adjusted gross income. c. Subject to the provisions of Paragraph 4(b), all determinations required to be made under this Paragraph 4 including whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determinations, shall be made by a nationally recognized accounting firm that is selected by OnHealth (the 2 "Accounting Firm") which shall provide detailed supporting calculations both to OnHealth and Goodman within fifteen days of the receipt of notice from Goodman or OnHealth that there has been a Payment, or such earlier time as is requested by OnHealth or Goodman (collectively, the "Determination"). All fees and expenses of the Accounting Firm shall be borne solely by OnHealth. The Gross-Up Payment under this Paragraph with respect to any Payments made to Goodman shall be made no later than thirty days following such Payment. If the Accounting Firm determines that no tax, penalty or interest is payable by Goodman, it shall furnish Goodman with a written opinion to such effect, and to the effect that, if the Internal Revenue Service contests the failure to report the tax, if any, on Goodman's applicable federal income tax return, it is more likely than not that Goodman will prevail against the Internal Revenue Service. d. As a result of the uncertainty in the application of Section 4999 of the Code and the application of the income tax to reimbursement amounts at the time of the Determination, it is possible that Gross-Up Payments which will not have been made by OnHealth that should have been made ("Underpayment"), or Gross-Up Payments are made by OnHealth which should not have been made, including amounts repaid under Paragraph 4(a) of this Agreement ("Overpayment"), consistent with the calculations required to be made hereunder. In the event that Goodman thereafter is required to make payment of any income or excise tax or additional income or excise tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment (together with interest at the rate provided by Section 1274(b)(2)(B) of the Code) shall be promptly paid by OnHealth to or for the benefit of Goodman. In the event the amount of the Gross-Up Payment exceeds the amount necessary to reimburse Goodman for his income or excise tax, the Accounting Firm shall determine the amount of the Overpayment (including reductions in tax attributable to Gross-Up Payments and repayments under Paragraph 4(a) of this Agreement for the year of the repayment by Goodman) that has been made and any such Overpayment (together with interest at the rate provided in Section 1274(b)(2) of the Code) shall be promptly paid by Goodman (to the extent he received a refund if the applicable income or excise tax has been paid to the Internal Revenue Service) or utilized to reduce tax for a subsequent year to or for the benefit of OnHealth. Goodman shall cooperate to the extent his expenses are reimbursed by OnHealth, with any reasonable requests by OnHealth in connection with any content or disputes with the Internal Revenue Service in connection with the income or excise tax. 5. FINANCIAL BENEFITS TO GOODMAN UPON RESIGNATION. a. OnHealth shall provide Goodman's salary and benefits through June 30, 2000. OnHealth shall notify Goodman of his rights to continue his medical and dental coverage at his own expense through COBRA. Goodman shall contact OnHealth's human resources department if he wishes to convert or continue any other employee benefits. b. OnHealth shall pay Goodman a monthly amount equal to $18,750, less applicable deductions, for a period of twenty-four (24) months commencing on July 1, 2000 and ending on June 1, 2002 (the "Severance Period"). Each such payment shall be made on or before the 10th business day of the month. 3 c. If the Merger closes, OnHealth shall pay Goodman a year 2000 bonus in the amount of $112,500 within five (5) business days after the closing of the Merger. If the Merger does not close, Goodman shall not be entitled to a bonus for 2000. d. Goodman hereby is given ownership of his notebook computer and cellular phone, provided that Goodman shall treat OnHealth's confidential or proprietary information contained on the hard drive of the computer or any other medium in accordance with his obligations under Paragraph 6 of his Employment Agreement. In addition, Goodman shall return the notebook computer to OnHealth before June 30, 2000 for a back-up to be completed by OnHealth IT staff. After the back-up, OnHealth shall return the notebook computer to Goodman. e. Within thirty (30) days of receipt of an itemized invoice, OnHealth will pay Goodman's lawyers for up to $10,000 in reasonable attorney fees and costs actually incurred on Goodman's behalf in negotiation and revision of this Agreement. 6. STOCK OPTIONS. a. Contemporaneous with the execution of this Agreement, Goodman and OnHealth are entering into a stock option agreement (the "Option Agreement") which is intended to replace Goodman's stock option grant awarded by OnHealth in January 1999 (the "January 1999 Award"), which January 1999 Award is terminated and canceled upon execution and delivery of the Option Agreement. Goodman acknowledges that the January 1999 Award is so cancelled and represents that he has no claim for any option or other right to purchase or acquire equity securities of OnHealth based on the January 1999 Award other than those contained in the Option Agreement. b. Goodman also received option grants in December 1997, June 1998, and July 1999 (the "Prior Awards"). The parties also wish to clarify an ambiguity in Paragraph 5(b)(ii) of the Employment Agreement regarding options, and hereby agree that Goodman shall have the right to exercise each of the Prior Awards and the Option Agreement award throughout the Severance Period and that such awards are fully vested. c. Anything in this Agreement notwithstanding, if it shall be determined that the accelerated vesting of the options referred to in this Paragraph 6 (the "Option Vesting") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, then OnHealth shall pay to Goodman an additional payment (the "Option Gross Up Payment") in an amount such that after payment by Goodman of all taxes imposed upon the Option Gross-Up Payment, Goodman retains an amount of the Option Gross-Up Payment equal to the excise taxes, interest or penalties imposed upon the accelerated vesting of the Option Vesting. For purposes of determining the Option Gross-Up Payment, Goodman shall be deemed to (A) pay federal income taxes at the highest marginal rates of federal income taxes at the highest marginal rate of taxation for the calendar year in which the Option Gross-Up Payment is to be made, (B) pay applicable state and local income taxes at the highest marginal rate of taxation for the calendar year in which the Option Gross-Up Payment is to be made, net of the 4 maximum reduction in federal income taxes which could have been obtained from deduction of such state and local taxes, and (C) have otherwise allowable deductions for federal income tax purposes at least equal to those which could be disallowed because of the inclusion of the Option Gross-Up Payment in Goodman's adjusted gross income. d. Subject to the provisions of Paragraph 6(c), all determinations required to be made under this Paragraph 6 including whether and when an Option Gross-Up Payment is required, the amount of such Option Gross-Up Payment and the assumptions to be utilized in arriving at such determinations, shall be made by a nationally recognized accounting firm that is selected by OnHealth (the "Accounting Firm") which shall provide detailed supporting calculations both to OnHealth and Goodman within fifteen days of the receipt of notice from Goodman or OnHealth that there has been a Payment, or such earlier time as is requested by OnHealth or Goodman (collectively, the "Determination"). All fees and expenses of the Accounting Firm shall be borne solely by OnHealth. The Option Gross-Up Payment under this Paragraph 6 with respect to any Payments made to Goodman shall be made no later than thirty days following such Payment. If the Accounting Firm determines that no tax, penalty or interest is payable by Goodman, it shall furnish Goodman with a written opinion to such effect, and to the effect that, if the Internal Revenue Service contests the failure to report the tax, if any, on Goodman's applicable federal income tax return, it is more likely than not that Goodman will prevail against the Internal Revenue Service. e. As a result of the uncertainty in the application of Section 4999 of the Code, it is possible that Gross-Up Payments which will not have been made by OnHealth that should have been made ("Underpayment"), or Option Gross-Up Payments are made by OnHealth which should not have been made ("Overpayment"), consistent with the calculations required to be made hereunder. In the event that Goodman thereafter is required to make payment of any income or excise tax or additional income or excise tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment (together with interest at the rate provided by Section 1274(b)(2)(B) of the Code) shall be promptly paid by OnHealth to or for the benefit of Goodman. In the event the amount of the Option Gross-Up Payment exceeds the amount necessary to reimburse Goodman for his income or excise tax, the Accounting Firm shall determine the amount of the Overpayment (including reductions in tax attributable to Option Gross-Up Payments for the year of the repayment by Goodman) that has been made and any such Overpayment (together with interest at the rate provided in Section 1274(b)(2) of the Code) shall be promptly paid by Goodman (to the extent he received a refund if the applicable income or excise tax has been paid to the Internal Revenue Service) or utilized to reduce tax for a subsequent year to or for the benefit of OnHealth. Goodman shall cooperate to the extent his expenses are reimbursed by OnHealth, with any reasonable requests by OnHealth in connection with any content or disputes with the Internal Revenue Service in connection with the income or excise tax. 7. EFFECT OF TERMINATION. a. Goodman's resignation shall not affect or diminish any of OnHealth's rights to enforce any of the covenants in Paragraphs 6 through 9 of 5 his Employment Agreement (collectively, "the Covenants"). Goodman hereby reaffirms his obligations to conform his conduct in accordance with the Covenants and the rights of OnHealth and its successors and assigns to enforce the Covenants under Paragraph 10(a) of the Employment Agreement. b. OnHealth's obligations under Paragraphs 5(b) and 5(d) shall immediately cease if Goodman breaches any of the Covenants, and Goodman shall repay to OnHealth all amounts previously paid to Goodman during the period of such breach. The parties intend the amounts withheld and the amounts repaid as a reasonable forecast of only some of the damages that would result from Goodman's breach of any of the Covenants and not as a penalty. Goodman's repayment obligation in this Paragraph 7(b) shall not preclude OnHealth's exercise of any other right or remedy available to it at law or in equity. 8. RELEASES AND OTHER OBLIGATIONS. a. Goodman represents that he has no pending complaints, charges or lawsuits relating to OnHealth. b. On behalf of himself, his marital community, if any, and his heirs, executors, administrators, successors and assigns, Goodman hereby forever and completely GIVES UP, WAIVES, DISCHARGES, and RELEASES OnHealth, its affiliated companies (including Healtheon/WebMD Corporation), and OnHealth's and its affiliated and predecessor companies' officers, directors, employees, successors, assigns, representatives and agents (collectively, "Released Parties") from any claim, liability, cause of action, damage or charge he has or may have against any of them which is related to or arises out of anything occurring before execution of this Agreement. This includes, but is not limited to, anything RELATED TO EMPLOYMENT OR SEPARATION FROM EMPLOYMENT. Goodman also promises that he will never file or press or join in any claim, charge, complaint or lawsuit based on any such thing. However, this release shall not prevent Goodman from (i) filing a lawsuit for the sole purpose of enforcing rights under this Agreement; (ii) bringing before any administrative agency matters for which such agencies have jurisdiction; (iii) filing a lawsuit based upon events, acts or omissions occurring after the execution of this Agreement. Moreover, nothing in this release shall be construed as a waiver of any rights Goodman may have to vested benefits under OnHealth's 401(k) Plan. c. Goodman acknowledges that this Agreement completely and forever releases, discharges and extinguishes ANY AND ALL claims, liability, causes of action, charges and damages he has or may have or could assert against any of the OnHealth Parties, even those which he does not know about or suspect or anticipate that he may have, and even those which he may not discover until after signing this Agreement. d. OnHealth represents that it has no pending complaints, charges or lawsuits against Goodman. e. OnHealth hereby forever and completely GIVES UP, WAIVES, DISCHARGES, and RELEASES Goodman and his marital community, if any, from any 6 claim, liability, cause of action, damage or charge it has or may have against any of them which is related to or arises out of anything actually known to the Board of Directors before execution of this Agreement. OnHealth also promises that it will never file or press or join in any claim, complaint or lawsuit based on any such thing. However, this release shall not prevent OnHealth from (i) filing a lawsuit for the sole purpose of enforcing rights under this Agreement; (ii) bringing before any administrative agency matters for which such agencies have jurisdiction; (iii) filing a lawsuit based upon events, acts or omissions occurring after the execution of this Agreement. 9. CONFIDENTIALITY. a. The parties agree that the terms and conditions of this Agreement shall remain confidential between them and shall not be disclosed to any other person. This provision shall not preclude Goodman from disclosing the terms of this Agreement to his attorney and accountant, the Internal Revenue Service and immediate family. Likewise, this provision shall not preclude OnHealth from disclosing the terms of this Agreement on a need to know basis to its top managerial employees and Board of Directors, and to outside attorneys, accountants and regulatory agencies. The persons (except for government agencies) to whom disclosure is permitted by this Paragraph shall be subject to the same restrictions in this Paragraph 9 as OnHealth and Goodman. b. [*] c. [*] d. Nothing in this Agreement shall preclude Goodman, OnHealth, and OnHealth officers and directors from testifying truthfully in a legal proceeding, or otherwise disclosing truthful information as required by law or NASDAQ requirements. 10. REMEDIES. The parties acknowledges that any violation of Paragraph 9 of this Agreement could cause irreparable injury, and that the non-breaching party shall be entitled to extraordinary relief in court for any such violation or threatened violation, including but not limited to temporary restraining orders, preliminary injunctions and permanent injunctions, without the necessity of posting bond or security. Moreover in addition to any other remedies 7 available to it for violation of Paragraph 9, OnHealth shall be entitled to recover from Goodman any amounts paid under Paragraph 5(b). Nothing in this Agreement shall limit any right of OnHealth or its successors and assigns to enforce rights under the Employment Agreement. 11. NON-ADMISSION. No provision or statement in this Agreement shall be construed as an admission that either party committed an illegal act or otherwise acted improperly. 12. SEVERABILITY. This Agreement, the Employment Agreement and the Option Agreement contain the entire agreement between the parties on their subject matters, and supersede all prior and contemporaneous discussions and understandings. Goodman shall continue to be bound by his duties under Paragraphs 6, 7, 8, 9, and 10(a) of his Employment Agreement. The provisions of this Agreement are severable, and if any part of the Agreement is found to be unenforceable, the remainder of the Agreement shall remain fully valid and enforceable. 13. ASSIGNMENT. OnHealth may assign rights and duties under this Agreement, but Goodman may not. This Agreement shall bind Goodman's heirs and personal representatives, and bind and inure to the benefit of OnHealth and any entity that acquires all or substantially all of the stock of OnHealth. 14. CONTROLLING LAW/FORUM. Washington law shall govern this Agreement. For any claim or cause of action arising under this Agreement, OnHealth and Goodman consent to the non-exclusive jurisdiction of any state or federal court within Seattle, Washington. The parties retain the right to object to venue in Seattle, including on the basis of forum non conveniens. 15. MISCELLANEOUS. No waiver, modification or termination of any term of this Agreement shall be effective unless in writing and signed by all parties. If any provision as written is deemed unlawful, overbroad or otherwise unenforceable, the parties submit to the construction which will give OnHealth the maximum protection which is reasonable and permissible under the circumstances, or if this is not possible, it shall be deemed severed. OnHealth's failure, delay or forbearance to insist on strict performance of any provision of this Agreement, or to exercise any right or remedy, shall not be construed as a waiver. OnHealth's waiver of any right or remedy in one or more instances shall not excuse Goodman's later strict performance. As the parties have cooperated in the drafting and negotiation of this Agreement, this Agreement shall not be construed against either party as the drafter. This Agreement may be executed in counterparts. GOODMAN HAS REVIEWED THIS AGREEMENT WITH HIS ATTORNEY. GOODMAN HAS ENTERED INTO THIS AGREEMENT KNOWINGLY AND VOLUNTARILY AND BASED UPON HIS OWN JUDGMENT AND DECISION. 8 ROBERT GOODMAN ONHEALTH NETWORK COMPANY \S\ROBERT GOODMAN By \S\ RON STEVENS - ------------------------ -------------------------- Its President \s\ MICHAEL BROCHU 9 EX-10 3 0003.txt EX-10.20 AGREEMENT AND RELEASE EXHIBIT 10.20 AGREEMENT AND RELEASE This Agreement and Release ("Agreement") is dated as of June 13, 2000 between OnHealth Network Company ("OnHealth") and Rebecca J. Farwell ("Farwell"). RECITALS OnHealth has employed Farwell as General Manager. Farwell has announced her intention to resign from OnHealth to assume a management position with a competitor of OnHealth. This Agreement is intended to provide Farwell with specified benefits in exchange for her release of claims and agreement to compete with OnHealth in a fair and appropriate manner. AGREEMENTS NOW, THEREFORE, in consideration of Farwell's receipt of benefits under this Agreement and the other mutual covenants in this Agreement, the parties agree as follows: 1. FARWELL'S RESIGNATION. Farwell's employment with OnHealth shall end on June 13, 2000. On June 13, 2000, Farwell will receive payment for all salary and accrued but unused vacation time. Farwell's medical, dental, vision and life insurance will end on June 30, 2000, while her short-term and long-term disability coverage will end on June 13, 2000. 2. FARWELL'S BENEFITS. Farwell shall receive the following benefits: a. BONUS. On June 13, 2000, Farwell will receive a bonus of $50,000. b. INSURED BENEFITS. If Farwell elects to continue her health insurance coverage through COBRA, OnHealth will pay the premiums until the sooner of (i) Farwell's coverage through another employer, and (ii) May 30, 2001. Farwell recognizes that Paragraph 2 provides benefits beyond which she otherwise was not entitled. 3. TRANSITION OF FARWELL'S DUTIES. Before her resignation, Farwell shall assist OnHealth in transitioning her duties to other OnHealth personnel. For the two (2) weeks after her resignation, Farwell shall be available on reasonable notice to answer questions and further assist in transitioning her duties. Such duties will require no more than seven (7) hours per week. 4. CONFIDENTIALITY. a. "Confidential Information" means all not publicly disclosed information, and all documents and other tangible things which record it, relating to or used in OnHealth's business, whether or not a "trade secret", 1 which is not generally known to OnHealth's competitors and was disclosed to or developed by Farwell as a result of employment with OnHealth. Confidential Information includes the following especially sensitive, not publicly disclosed information: (i) OnHealth's marketing plans and strategies; (ii) OnHealth's finances; (iii) OnHealth's software and business records. b. Farwell represents that as of June 13, 2000 she has surrendered to OnHealth, without retaining copies, all tangible things that are or contain Confidential Information. Farwell also has returned all files, correspondence, memoranda, computer software and printouts, work papers, files, client lists, and other tangible things that OnHealth gave to Farwell, or that Farwell created in whole or part within the scope of her employment, even if they do not contain Confidential Information. 5. RESTRICTIVE COVENANTS. Beginning on June 13, 2000, Farwell shall not (i) for a period of six (6) months hire or otherwise engage any person employed by OnHealth to perform services for Farwell or her employer; (ii) for a period of twelve (12) months solicit any person employed by OnHealth to perform services for Farwell or her employer or any other person or entity; (iii) for a period of twelve (12) months persuade or attempt to persuade Cleveland Clinic to alter or discontinue its relationship with OnHealth. 6. RELEASE. a. Farwell represents that she has no pending complaints, charges or lawsuits relating to employment with OnHealth. b. On behalf of her marital community, if any, Farwell hereby forever and completely GIVES UP, WAIVES, DISCHARGES, and RELEASES OnHealth, any affiliated companies (including Healtheon/WebMD), and OnHealth's and its affiliated companies' officers, directors, employees, successors, assigns, representatives and agents (collectively, "OnHealth Parties") from any claim, liability, cause of action, damage or charge Farwell has or may have had against any of them which is related to or arises out of anything occurring before Farwell signs this Agreement. This includes, but is not limited to, anything RELATED TO FARWELL'S EMPLOYMENT OR SEPARATION FROM EMPLOYMENT. Farwell also promises that she will never file or press or join in any claim, charge, complaint or lawsuit based on any such thing. However, this release shall not be construed to prevent Farwell from (i) filing a lawsuit for the sole purpose of enforcing her rights under this Agreement; (ii) bringing before any administrative agency matters for which such agencies have jurisdiction; (iii) filing a lawsuit based upon events, acts or omissions occurring after the execution of this Agreement. 7. CONFIDENTIALITY. Farwell shall not disclose the existence or terms of this Agreement to any person except her attorney, accountant and immediate family. In addition, neither Farwell nor her future employer shall announce or publicly disclose or imply that Farwell will be leaving OnHealth or joining any other employer until the sooner of (i) June 16, 2000; and (ii) OnHealth's public disclosure of Farwell's resignation. Farwell will have the right to approve OnHealth's press release about her resignation, such approval to be provided within twelve (12) hours of being supplied to her, and such approval not to be unreasonably withheld. 2 8. REMEDIES. Farwell acknowledges that OnHealth would be greatly injured by, and would have no adequate remedy at law for, Farwell's breach of Paragraph 3, 4, 5, 6 or 7. Farwell therefore consents that if such breach occurs or is threatened, OnHealth may, in addition to all other remedies, enjoin Farwell (together with all persons acting in concert with her) from such breach or threatened breach. In any lawsuit arising out of or relating to this Agreement, the prevailing party shall recover reasonable her or its costs and reasonable attorneys' fees. 9. ASSIGNMENT. OnHealth may assign rights and duties under this Agreement, but Farwell may not. This Agreement shall bind Farwell's heirs and personal representatives, and inure to the benefit of OnHealth and its successors and/or assigns. 10. CONTROLLING LAW/FORUM. Washington law shall govern this Agreement. Subject to Paragraph 10, for any claim or cause of action arising under this Agreement, OnHealth and Farwell consent to the exclusive jurisdiction of any state or federal court within Seattle, Washington, and waive any objection based on jurisdiction or venue, including FORUM NON CONVENIENS. 11. MISCELLANEOUS. This Agreement is the entire agreement between the parties on its subject matters, and supersedes all prior and contemporaneous discussions and understandings. No waiver, modification or termination of any term of this Agreement shall be effective unless in writing and signed by all parties. The provisions of this Agreement are severable, and if any part of the Agreement is found to be unenforceable, the remainder of the Agreement shall remain fully valid and enforceable. 12. ACKNOWLEDGEMENT. Farwell acknowledges that she has reviewed this Agreement with an attorney. Farwell signs this Agreement of her own free will and based upon her own judgment and decision. REBECCA J. FARWELL ONHEALTH NETWORK COMPANY \s\ REBECCA J. FARWELL By \S\ RON STEVENS - ------------------------------ ----------------------------- Its COO 3 EX-27 4 0004.txt FDS --
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ONHEALTH NETWORK COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S. DOLLAR 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 1 5,383 0 4,379 520 22 26,496 11,258 2,005 38,524 33,600 0 0 0 247 4,629 38,524 6,347 6,347 0 0 46,200 111 9,203 (48,776) 0 (48,776) 0 0 0 (48,776) (2.05) (2.05)
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