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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(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, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________
COMMISSION FILE NUMBER: 000-22212
OnHealth Network Company
__________________
(Exact Name of Registrant as
specified in its charter)
WASHINGTON 41-1686038
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
808 HOWELL STREET, SUITE 400
SEATTLE, WASHINGTON 98101
(Address of principal executive offices)
(Zip Code)
206-583-0100
(Registrant's telephone number, including area code)
IVI PUBLISHING, INC.
7500 FLYING CLOUD DRIVE, #500
EDEN PRAIRIE, MINNESOTA 55344
(Former Name and Address)
INDICATE BY 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
APPLICABLE ONLY TO CORPORATE ISSUERS:
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
CLASS OUTSTANDING AS OF AUGUST 10, 1998
- ------ ---------------------------------
COMMON STOCK 10,810,631 SHARES
PAR VALUE $.01 PER SHARE
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PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OnHealth Network Company
BALANCE SHEETS
UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
Jun. 30, 1998 Dec. 31, 1997
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,953 $ 2,488
Accounts receivable, net of allowances
for returns and doubtful accounts of
$257 in 1998 and $1,011 in 1997 109 337
Inventories - 150
Other current assets 109 332
-------- --------
Total current assets 3,171 3,307
Furniture and equipment:
Computers and software 1,035 2,856
Office equipment 744 1,403
-------- --------
1,779 4,259
Accumulated depreciation (719) (2,989)
-------- --------
1,060 1,270
TOTAL ASSETS $ 4,231 $ 4,577
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,403 $ 1,919
Other accrued expenses 1,776 2,640
-------- --------
Total current liabilities 3,179 4,559
Convertible preferred stock 4,554
Shareholders' equity:
Common stock, $.01 par value:
Issued and outstanding shares
10,166 and 10,106 at 1998
and 1997, respectively 102 101
Additional paid-in capital 79,114 78,493
Accumulated deficit (82,718) (78,576)
-------- --------
Total shareholders' equity (deficit) (3,502) 18
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,231 $ 4,577
======== ========
</TABLE>
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OnHealth Network Company
STATEMENTS OF OPERATIONS
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Jun. 30 Jun. 30
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenue $ 155 $ 524 $ 485 $ 2,243
Cost of revenue 334 266 1,022 1,036
--------------- --------------- --------------- ---------------
Gross margin (179) 258 (537) 1,207
Operating expenses:
Product development 830 1,090 1,558 2,401
Sales and marketing 995 249 1,431 643
General and administrative 490 2,840 1,233 3,606
--------------- --------------- --------------- ---------------
Total operating expenses 2,315 4,179 4,222 6,650
Loss from operations (2,494) (3,921) (4,759) (5,443)
Other income 563 563
Interest (expense) income 42 (57) 54 (116)
--------------- --------------- --------------- ---------------
Net loss (1,889) (3,978) (4,142) (5,559)
Preferred stock dividends (56) (30) (56) (60)
Preferred stock accretion (154) (13) (154) (26)
--------------- --------------- --------------- ---------------
Net loss applicable to
common shareholders ($2,099) ($4,021) ($4,352) ($5,645)
=============== =============== =============== ===============
Net loss per common share --
basic and diluted ($0.21) ($0.52) ($0.43) ($0.74)
=============== =============== =============== ===============
Weighted average number of
common shares outstanding 10,146 7,663 10,131 7,661
=============== =============== =============== ===============
</TABLE>
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<TABLE>
<CAPTION>
OnHealth Network Company
STATEMENTS OF CASH FLOWS
UNAUDITED
(IN THOUSANDS)
Six Months Ended
Jun. 30
1998 1997
------- -------
Operating activities:
<S> <C> <C>
Net loss ($4,142) ($5,559)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 429 659
Changes in assets and liabilities:
Decrease in accounts receivable 228 3,399
Decrease in inventories 150 13
Decrease in other current assets 223 97
Decrease in other long-term assets 1,094
Decrease in accounts payable and accrued
liabilities (1,380) (2,491)
------- -------
Net cash used in operating activities (4,492) (2,788)
Investing activities:
Net furniture and equipment additions (219) (31)
------- -------
Net cash used in investing activities (219) (31)
Financing activities:
Proceeds from convertible preferred stock 5,000
Proceeds from exercised stock options 176 74
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Net cash provided by financing activities 5,176 74
Net increase (decrease) in cash and cash equivalents 465 (2,745)
Cash and cash equivalents at beginning of period 2,488 3,462
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Cash and cash equivalents at end of period $ 2,953 $ 717
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</TABLE>
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OnHealth Network Company
Notes to the Financial Statements (Unaudited)
June 30, 1998
BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Preparing financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue, and expenses. Examples include provisions for returns and
bad debts and the length of furniture and equipment lives. Actual results may
differ from these estimates. Interim results are not necessarily indicative of
results for a full year. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1997.
PRODUCT DEVELOPMENT COSTS
Product development costs consist principally of compensation to Company
employees, interactive design costs paid to outside consultants, travel and
supplies. All costs are expensed as incurred.
Costs related to research, design and development of products are charged to
product development expenses as incurred. Under Statement of Financial
Accounting Standards No. 86 (SFAS No. 86), software development costs are
capitalized beginning when a product's technological feasibility has been
established and ending when a product is available for general release to
customers. The Company has not capitalized any software development costs since
such costs meeting the requirements of SFAS No. 86 have not been significant.
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares of
common stock outstanding. Common equivalent shares from stock options,
convertible preferred stock and warrants are excluded from the computation, as
their effect is anti-dilutive.
In February 1997, the Financial Accounting Standards Board issued Statement
No.128, "Earnings Per Share." This statement establishes standards for computing
and presenting basic and diluted earnings per share (EPS) for financial
statements issued for periods ending after December 15, 1997. The adoption of
this statement will not have a material effect on the Company's reported EPS.
REVENUE RECOGNITION
The Company's revenues consist of product sales and licensing revenue, contract
development revenue, fees relating to the licensing of its content for use on
cable television, and advertising fees for online services.
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Product sales and licensing revenues are made up of retail distribution sales,
direct mail sales, and product sales and royalties on licenses to original
equipment manufacturers. These revenues are recognized upon shipment of the
product or when the Company's obligations under the licensing agreements are
complete. Allowances for returns are recorded at the time revenue is recognized.
Contract development revenue is generated through the use of the Company's
personnel and facilities for the creation of custom multimedia products. This
revenue is recognized by contract on a percentage-of-completion basis or at a
specific hourly rate, depending on the terms of the contract.
Revenues are generated through the licensing of the Company's health and medical
content for use on cable television channels. Through March 31, 1997, the
Company recognized revenue under its cable agreement ratably over the life of
the contract. Thereafter, revenue is recognized on a cash basis.
Revenues are generated through the sale of sponsorships and advertising on the
Company's web site. These revenues are recognized as they are earned.
PREFERRED SHARES
On April 10, 1998, the Company received gross proceeds of $5 million from a
private placement of 5,000 shares of non-voting Series B 5% Convertible
Redeemable Preferred Stock (the "Preferred Shares") and 66,778 five-year
warrants with an exercise price of $11.23125 per share. The Preferred Shares are
convertible into shares of Common Stock at a price which depends on the market
price and varies with respect to when the conversion occurs. In July 1998, the
Company issued 389,003 shares of common stock in conversion of 2,715 shares of
the Preferred Shares. In July 1998, the Company issued 46 Preferred Shares in
payment of dividends on the Preferred Shares. The two purchasers of such
Preferred Shares were both accredited investors.
For this transaction, the Company claimed exemption from registration under
Section 4(2) of the Securities Act of 1933 and Regulation D promulgated
thereunder because, to the Company's knowledge, the purchases were made for the
purchaser's own investment purposes and not for further distribution or resale.
In addition, the Company satisfied the other applicable requirements of
Regulation D in connection with each such offering and sale.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Since its inception, the Company's strategy has been to develop online and cable
television platforms, as well as maintain its staple platform, CD-ROMs, in order
to enhance an integrated approach to publishing electronic health and medical
information. In 1997, the Company was distributing its health and medical
information to end users via all three platforms. Under this strategy, the
Company was never able to attain profitability, and, at December 31, 1997, had
an accumulated deficit of $78,576,000. In 1997, the Company's Board of Directors
revised its
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business strategy and brought in an entirely new management team and other key
employees skilled in the development of internet websites. The Company's current
strategy is to focus its resources on the development of an internet-delivered,
consumer-oriented network of health and wellness sites.
Results of Operations
The following table sets forth selected income statement data for OnHealth
Network Company and such data as a percentage of net revenues for the three
months ended June 30, 1998 and 1997 (dollar amounts in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C> <C> <C>
Net revenues $ 155 100% $ 524 100%
Gross margin (179) (115%) 258 49%
Operating expenses 2,315 1,494% 4,179 798%
Operating loss (2,494) (1,609%) (3,921) (748%)
Net loss (2,099) (1,354%) (4,021) (767%)
</TABLE>
The following table sets forth selected income statement data for OnHealth
Network Company and such data as a percentage of net revenues for the six months
ended June 30, 1998 and 1997 (dollar amounts in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C> <C> <C>
Net revenues $ 485 100% $ 2,243 100%
Gross margin (537) (111%) 1,207 54%
Operating expenses 4,222 871% 6,650 296%
Operating loss (4,759) (981%) (5,443) (243%)
Net loss (4,352) (897%) (5,645) (252%)
</TABLE>
Revenues
Revenues for the three months ended June 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Product sales and licensing revenue $(115) $ 320
Contract development revenue and other 213 204
Cable television licensing revenue - -
Online revenue 57 -
----- -----
Net revenues $ 155 $ 524
</TABLE>
Revenues for the six months ended June 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
----- ------
<S> <C> <C>
Product sales and licensing revenue $ (71) $1,208
</TABLE>
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<TABLE>
<S> <C> <C>
Contract development revenue and other 410 542
Cable television licensing revenue - 493
Online revenue 146 -
----- ------
Net revenues $ 485 $2,243
</TABLE>
Sales for the three and six months ended June 30, 1998 decreased 70% and 78%,
respectively, compared to the same periods in the previous year. Affecting both
periods were reduced product sales and licensing revenue which were partially
offset by Online revenues. Also affecting the six-month period is a decrease in
cable royalty revenues. Product sales and licensing revenue decreases reflect
market conditions for CD ROM products, the lack of new CD ROM product releases,
and the Company's cancellation of a CD ROM distribution agreement. The negative
product sales and licensing revenue in the three month and six month periods
ended June 30, 1998 relates to CD ROM product returns from the canceled
distribution agreement. Cable television licensing revenue decreases reflect a
cash basis revenue recognition policy related to a cable television contract
with America's Health Network (AHN). The 1998 Online revenues were generated
from the Company's OnHealth.com web site through site sponsorships and
advertising. The Company redesigned and relaunched the OnHealth.com web site in
July 1998.
Gross margin
Gross margin as a percentage of net revenues for the three and six months ended
June 30, 1998 was (115%) and (111%), respectively, compared to 49% and 54%,
respectively, for comparable periods in 1997. The negative gross margin
percentages in 1998 are the result of CD ROM royalty expenses, CD ROM inventory
write-offs, and royalty expenses related to cable television licensing revenue.
Operating expenses
Product Development
Product development expenses for the three and six months ended June 30, 1998,
decreased $260,000 and $843,000, respectively, relative to the same periods in
the previous year. The decrease relates to a shift away from the CD-ROM product
development business and a shift towards an internet focused business. Current
period expenses relate to developing and producing a redesigned OnHealth.com web
site.
Sales and Marketing
Sales and marketing expenses for the three and six months ended June 30, 1998
increased $746,000 and $788,000, respectively, compared to the same periods in
the previous year. Current period expenditures relate primarily to preparing to
market the Company's redesigned web site OnHealth.com.
General and Administrative
General and administrative expenses in the second quarter 1998 decreased to
$490,000 as compared to $2,840,000 for the second quarter of 1997. For the six
months ended June 30, 1998,
<PAGE>
general and administrative expenses decreased to $1,233,000 from $3,606,000 for
the comparable period in 1997. The second quarter 1997 general and
administrative expenses included approximately $2,000,000 from a bad debt
reserve related to AHN which was partially offset by a reduction of $1,000,000
in related liability charges. The 1997 general and administrative expenses also
included a $1,066,000 partial write-off of an asset that represented the
capitalization of costs paid to Time Life, Inc. for the development of The
Medical Advisor. The lower second quarter 1998 general and administrative
expenses also reflect general cost cutting measures including reduced rent costs
from the Company's relocation to a smaller facility.
Other Income
In the second quarter 1998, other income includes $563,000 related to the
reversal of a previously established bad debt reserve. This bad debt reserve was
initially established in the second quarter of 1997 as part of general and
administrative expenses. During the second quarter 1998, the reserve became
unnecessary. To isolate the uniqueness of the reserve reversal, management has
classified it outside of operating activities as other income.
Interest Income (Expense)
The quarter ended June 30, 1998 has net interest income of $42,000 compared to
net interest expense of $57,000 for the quarter ended June 30, 1997. The six
months ended June 30, 1998 has net interest income of $54,000 compared to net
interest expense of $116,000 for the same period in 1997. The 1998 net interest
income includes interest income generated from cash equivalents. The 1997 net
interest expense included interest income from cash equivalents which were more
than offset by interest expense related to $3,500,000 in convertible
subordinated debentures. The debentures were converted into common stock during
the fourth quarter of 1997.
Financial Condition, Liquidity and Capital Resources
At June 30, 1998, the Company had cash and cash equivalents of $2,953,000. Total
cash used by operating activities during the six months ended June 30, 1998 was
$4,492,000 and is primarily due to a net loss of $4,142,000. Investing
activities used net cash of $219,000 primarily for purchases of computer
equipment. Financing activities provided cash of $5,176,000 from $176,000 in
stock option exercises and a $5,000,000 Convertible Redeemable Preferred Stock
financing. To properly market its redesigned OnHealth.com web site, the Company
expects a significant use of cash, and anticipates it will require additional
funding in the fourth quarter to be able to fund its business. There can be no
assurance that financing will be available in amounts or on terms acceptable to
the Company, if at all.
Forward Looking Statements
The statement made in this Form 10-Q relating to the Company's ability to meet
its ongoing financial obligations and operations depends on (i) the ability of
the Company to meet its expected operating revenues, which are variable with
respect to consumer demand and advertising revenues, (ii) the success of its
ongoing development efforts and market acceptance
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of the OnHealth web site, (iii) the success and effectiveness of the Company's
new management team; and (iv) other general market conditions and competitive
conditions within this market, including the introduction and further
development of competitive web sites.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
- ------- -----------------------------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ------- -------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
On June 16, 1998, at the Company's Annual Meeting of Shareholders, the
Shareholders approved the following proposals by the margins indicated:
1. Reincorporation from Minnesota to Washington and the change of the
name of the Company from IVI Publishing, Inc. to OnHealth Network Company.
<TABLE>
<S> <C>
FOR: 5,467,711
AGAINST: 13,203
ABSTAIN: 10,385
</TABLE>
2. Approval of the Company's 1997 Stock Option Plan. The purpose of the
1997 Stock Option Plan's is to promote the success of the Company by
facilitating the employment and retention of competent personnel and
by furnishing incentive to directors, officers and employees of the
Company and consultants and advisors to the Company, upon whose
efforts the success of the Company will depend to a large degree.
Incentive stock options and nonqualified stock options may be granted
pursuant to the 1997 Stock Option Plan.
<TABLE>
<S> <C>
FOR: 5,030,254
AGAINST: 381,735
ABSTAIN: 77,304
</TABLE>
In addition, at such Annual Meeting, all of the directors nominated were
elected by the Shareholders:
MICHAEL BROCHU CHAIRMAN OF THE BOARD
ROBERT GOODMAN PRESIDENT, CHIEF EXECUTIVE OFFICER & DIRECTOR
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ALAN FRAZIER - DIRECTOR
TIM MAUDLIN DIRECTOR
ANN KIRSCHNER - DIRECTOR
RAM SHRIRAM DIRECTOR
RICK THOMPSON - DIRECTOR
RON EIBENSTEINER DIRECTOR
ITEM 5. OTHER INFORMATION
- ------- -----------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
(a) The following exhibits are included herein:
(27) Financial Data Schedule (included only in electronic version).
(b) No reports on Form 8-K were filed by the Company during the quarter ended
June 30, 1998.
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SIGNATURES
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.
OnHealth Network Company
By /s/ Michael D. Conway
Michael D. Conway
Chief Financial Officer
Date: August 13, 1998
<TABLE> <S> <C>
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,953
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4,554
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