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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 SEPTEMBER 30, 1999
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
incorporation or organization) Identification No.)
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
October 31, 1999: 20,312,506
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<PAGE>
TABLE OF CONTENTS
PAGE
PART I. fINANCIAL INFORMATION ----
ITEM 1. Financial Statements..............................................3
Balance Sheets as of September 30, 1999 and December 31, 1998....3
Statements of Operations for the Three and Nine Months Ended
September 30, 1999 and 1998......................................4
Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998....................................5
Notes to Financial Statements ...................................6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................9
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.................................................12
ITEM 6. Exhibits and Reports on Form 8-K..................................12
2
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ONHEALTH NETWORK COMPANY
BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
----------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,973 $ 2,119
Restricted cash 500 -
Accounts receivable, net of allowances of
$311 (1999) and $256 (1998) 846 509
Prepaid advertising 8,234 197
Other current assets 209 212
----------------- ----------------
Total current assets 14,762 3,037
Furniture and equipment, net 1,181 735
Goodwill, net 3,440 -
Intangibles, net 42 -
Other non-current assets 46 122
----------------- ----------------
Total assets $ 19,471 $ 3,894
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 3,643 $ 1,526
Other accrued expenses 1,485 2,669
---------------- ----------------
Total current liabilities 5,128 4,195
Other non-current liabilities 36 -
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, 20,313 (1999)
and 12,800 (1998) 203 128
Additional paid-in-capital 133,668 89,159
Accumulated deficit (118,122) (89,515)
Deferred compensation (1,442) (73)
----------------- ----------------
Total shareholders' equity (deficit) 14,307 (301)
----------------- ----------------
Total liabilities and shareholders' equity (deficit) $ 19,471 $ 3,894
================= ================
</TABLE>
The accompanying notes are an integral part of the financial statements
3
<PAGE>
ONHEALTH NETWORK COMPANY
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ---------------------------------
1999 1998 1999 1998
------------- ------------ -------------- ---------------
<S> <C> <C> <C> <C>
Net revenue $ 1,005 $ 248 $ 1,787 $ 733
Cost of revenue 88 549 187 1,290
------------- ------------ -------------- ---------------
Gross margin 917 (301) 1,600 (557)
Operating expenses:
Product development, editorial and design 1,976 547 5,023 2,105
Sales and marketing 15,491 1,265 22,503 2,696
General and administrative 798 420 2,795 1,653
Acquisition related costs, including amortization
of goodwill and purchased intangibles 73 - 73 -
Stock-based compensation 92 - 92 -
------------- ------------ -------------- ---------------
Total operating expenses 18,430 2,232 30,486 6,454
------------- ------------ -------------- ---------------
Loss from operations (17,513) (2,533) (28,886) (7,011)
Interest income, net 49 30 277 84
Other income, net - - 2 282
------------- ------------ -------------- ---------------
Total interest and other income, net 49 30 279 366
------------- ------------ -------------- ---------------
Net loss (17,464) (2,503) (28,607) (6,645)
Preferred stock dividends - (36) - (92)
Preferred stock accretion - (374) - (528)
------------- ------------ -------------- ---------------
Net loss applicable to common shareholders $ (17,464) $ (2,913) $ (28,607) $ (7,265)
============= ============ ============== ===============
Net loss per common share-
Basic and diluted $ (1.00) $ (0.27) $ (1.77) $ (0.70)
============= ============ ============== ===============
Weighted average number of common shares
outstanding 17,388 10,698 16,165 10,323
============= ============ ============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements
4
<PAGE>
ONHEALTH NETWORK COMPANY
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------------
1999 1998
---------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (28,607) $ (6,645)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 230 663
Provision for (recoveries of) doubtful
accounts and returns 53 (809)
Compensation associated with stock option
grants 37 -
Amortization of prepaid advertising and
promotional agreements 1,106 -
Amortization of acquisition related costs,
including amortization of goodwill and
intangibles 73 -
Amortization of deferred compensation 92 -
Other 17 -
Changes in assets and liabilities:
Increase in restricted cash (500) -
Decrease (increase) in accounts receivable (391) 835
Decrease in inventories - 150
Increase in other current assets (7,253) (1)
Decrease in other non-current assets 76 -
Increase (decrease) in accounts payable 2,117 (12)
Decrease in other accrued expenses (1,155) (1,290)
---------------- ---------------
Net cash used in operating activities (34,105) (7,109)
Cash flows from investing activities:
Proceeds from disposal of furniture and
equipment - 188
Capital expenditures (676) (488)
Acquisition of business (60) -
---------------- ---------------
Net cash used in investing activities (736) (300)
Cash flows from financing activities:
Proceeds from issuance of convertible preferred
stock - 5,000
Net proceeds from issuance of common stock:
Private placements 14,278 -
Public offerings 22,737 -
Exercise of options 1,126 941
Exercise of warrants 1,586 -
Payment of financing related costs (2,032) -
---------------- ---------------
Net cash provided by financing activities 37,695 5,941
---------------- ---------------
Net increase in cash and cash equivalents 2,854 (1,468)
Cash and cash equivalents at beginning of year 2,119 2,488
================ ===============
Cash and cash equivalents at end of year $ 4,973 $ 1,020
================ ===============
</TABLE>
The accompanying notes are an integral part of the financial statements
5
<PAGE>
ONHEALTH NETWORK COMPANY
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE 1. DESCRIPTION OF BUSINESS
OnHealth Network Company, formerly known as IVI Publishing, Inc., (the
"Company"), is an Internet-based provider of high quality health and medical
information and applications to a broad base of consumers. Through the Company's
Internet Web site, onhealth.com, the Company produces and distributes original,
relevant health content including in-depth reports, personalized information
retrieval, specific guides to healthcare services and information, editorials
and interactive community environments.
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
have been included. Operating results for the nine months ended September 30,
1999 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999. 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,
1998.
NOTE 3. RECLASSIFICATIONS
Certain reclassifications have been made for consistent financial statement
presentation.
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, 2000 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 available to common shareholders by the weighted-average
number of common shares outstanding during the period. Diluted EPS is computed
by dividing net income available to common shareholders by the weighted-average
number of shares of common stock and common stock equivalent shares outstanding.
Basic and diluted EPS excludes 204,460 outstanding restricted common shares.
The effects of common stock equivalents are excluded from the computation for
the periods presented as their effects are anti-dilutive.
The components of basic and diluted loss per common share are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, 1999
--------------------------------- --------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net loss applicable to common shareholders
(numerator) $ (17,464) $ (2,913) $ (28,607) $ (7,265)
============== ============== ============== ==============
Weighted average common shares outstanding
(denominator) 17,388 10,698 16,165 10,323
============== ============== ============== ==============
Loss per share:
Basic and diluted $ (1.00) $ (0.27) $ (1.77) $ (0.70)
============== ============== ============== ==============
</TABLE>
6
<PAGE>
NOTE 6. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands) 1999 1998
----------------- -----------------
(Unaudited)
<S> <C> <C>
Furniture and equipment:
Computer hardware $ 1,696 $ 1,032
Software 187 186
Equipment 6 -
Furniture & fixtures 225 220
Leasehold improvements 71 71
----------------- -----------------
2,185 1,509
Less accumulated depreciation (1,004) (774)
================= =================
Total $ 1,181 $ 735
================= =================
Other accrued expenses:
Litigation loss $ - $ 677
Advertising - 609
Royalties 230 338
Payroll taxes - 358
Other 1,255 687
----------------- -----------------
Total $ 1,485 $ 2,669
================= =================
</TABLE>
NOTE 7. EQUITY TRANSACTIONS
During January 1999, the Company completed a $14,278,000 private placement,
which resulted in the issuance of 2,596,000 shares of the Company's common stock
at $5.50 per share. Proceeds, net of offering costs, totaled approximately $14.1
million.
During September 1999, the company completed a public offering of 3.4 million
shares, which includes the underwriter's over allotment of 300,000 shares, of
the Company's common stock, at $6.6875 per share. Proceeds, net of offering
costs, totaled approximately $20.9 million.
NOTE 8. ACQUISITION OF BABYDATA.COM INC.
On September 9, 1999, the Company acquired all of the outstanding shares of
common stock of BabyData.com Inc., a premier Web site for pregnant couples and
those trying to conceive.
The aggregate consideration for the acquisition was approximately $5.1 million,
which consisted of 681,534 shares of OnHealth common stock, with a market value
of approximately $5.0 million and approximately $60,000 of acquisition costs. Of
the 681,534 shares issued in connection with the purchase, 204,460 shares are
restricted pursuant to the employment agreement entered into by OnHealth and one
key employee of BabyData. The acquisition of BabyData has been accounted for
using the purchase method of accounting.
The intangible component of the consideration for this transaction, which
includes goodwill and purchased intangibles, will be amortized on a
straight-line basis over three years. The deferred compensation component will
be amortized on a straight-line basis over one year.
The following table reflects unaudited consolidated pro forma results of
operations of OnHealth and BabyData on the basis that the acquisition had taken
place at the beginning of each period presented. Such pro forma amounts are not
necessarily indicative of what the actual consolidated results of operations
might have been if the acquisitions had been effective at the beginning of the
respective periods. The pro forma information does not include any one-time
charges for transaction-related costs relating to the acquisition of BabyData.
Nine Months Ended September 30,
-------------------------------------
1999 1998
----------------- ----------------
Revenue $ 1,787 $ 733
Net loss applicable to common
shareholders $ (30,468) $ (9,286)
================= ================
Basic and diluted net loss
per share $ (1.83) $ (0.86)
================= ================
7
<PAGE>
NOTE 9. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------
1999 1998
-------------- ---------------
(In thousands)
<S> <C> <C>
Cash paid during the periods for:
Income taxes $ 3 $ 7
Non-cash investing and financing transactions:
Common stock issued for advertising and
promotional agreements 1,896 -
Conversion of preferred stock to common - 2,715
Preferred stock/warrant discount - 702
Preferred stock/warrant discount accretion - (528)
Preferred stock dividend - 92
Stock options and warrants issued for services - 60
Common stock issued for company acquired 4,993 -
</TABLE>
NOTE 10. LEGAL PROCEEDINGS
In June 1999, Jon Fisse, the Company's newly named Chief Operating Officer, left
the Company before the Company and Mr. Fisse were able to agree on the terms of
his employment agreement. In June 1999, the Company filed a declaratory
judgement action in the United States District Court for the Western District of
Washington seeking to declare that Mr. Fisse terminated his employment and that
the Company owes him no future remuneration or stock option benefits. On the
same day, Mr. Fisse filed a lawsuit in the United States District Court for the
Southern District of New York, asserting that the Company violated his rights in
connection with his separation from the Company, seeking damages which, among
other things, include severance compensation and stock option benefits. The
action filed in Washington has been transferred to New York. Answers have been
filed in both cases and the parties are in the discovery stage of litigation.
The Company believes it has valid defenses against Mr. Fisse's claims.
Nevertheless, the outcome of the lawsuit may have a material adverse affect on
the Company's financial position and results of operations.
NOTE 11. COMMITMENTS AND CONTINGENCIES
In July 1999, the Company entered into a lease for new office space located in
Manhattan, New York. The new office space consists of 8,250 square feet costing
approximately $22,000 per month through November 30, 2004.
NOTE 12. SUBSEQUENT EVENTS
In October 1999, the Company entered into an agreement with About.com, a leading
network of niche vertical sites, whereby beginning in the fourth quarter of
1999, OnHealth will become the exclusive third party provider of health news and
information complementing About.com's existing Health and Fitness Channel. Under
the financial terms of the agreement, OnHealth will pay both guaranteed payments
and other fees, including 162,602 shares of common stock.
8
<PAGE>
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 nine month periods ended September 30, 1999 and
1998 was as follows:
<TABLE>
<CAPTION>
(In thousands) Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------- ------------------------------------
1999 1998 1999 1998
---------------- ------------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Online $ 865 $ 121 $ 1,428 $ 267
E-commerce 130 - 281 -
Contract development and other 10 55 59 465
Product sales and licensing - 72 19 1
================ ================== ================ ================
Net revenue $ 1,005 $ 248 $ 1,787 $ 733
================ ================== ================ ================
</TABLE>
Net revenue for the three month period ended September 30, 1999 increased by
$757,000, or 305%, to $1,005,000, from $248,000 for the same period in 1998. Net
revenue for the nine month period ended September 30, 1999 increased by
$1,054,000, or 144%, to $1,787,000, from $733,000 for the same period in 1998.
The increase in revenue is primarily due to increased online and e-commerce
revenue generated by our onhealth.com Web site, which was redesigned and
relaunched in July 1998, partially offset by a reduction in contract development
and other and product sales and licensing revenue. An increase in user traffic
and the number of site sponsorship and advertising clients over the same three
and nine month periods in the prior year accounted for the increase in online
and e-commerce revenue. E-commerce revenue is the result of new contracts
entered into during 1999. The decrease in contract development revenue and other
and product sales and licensing revenue generally reflects the Company's shift
toward online efforts. The Company does not anticipate receiving any significant
revenue from contract development and other or product sales and licensing in
the future.
GROSS MARGIN
Gross margin as a percentage of net revenue for the three and nine month periods
ended September 30, 1999 was 91% and 90%, respectively, compared to negative
gross margins of 121% and 76% for the same periods in the previous year. The
improvement in gross margin during 1999 is primarily due to the high margins of
online revenue in relation to the gross margins achieved in the first and second
quarters of 1998 for CD-ROM revenue. The negative gross margins in 1998 are the
result of including certain editorial and design costs, related to the July 1998
onhealth.com site relaunch, in cost of revenue in the third quarter 1998, as
well as CD-ROM royalty expenses, CD-ROM inventory write-offs and royalty
expenses related to cable television licensing revenue. The editorial and design
costs included in cost of revenue in the third quarter of 1998 were reclassified
from operating expenses. In 1999, cost of revenue consists primarily of costs
related to advertising and sponsorship and e-commerce revenue as well as
third-party royalties relating to content sales.
OPERATING EXPENSES
Total operating expenses for the three month period ended September 30, 1999
increased $16,198,000, or 726%, to $18,430,000 from $2,232,000 for the same
period in 1998. Total operating expenses for the nine month period ended
September 30, 1999 increased $24,032,000, or 372%, to $30,486,000 from
$6,454,000 for the same period in 1998. The increase was primarily due to
increased sales and marketing efforts related to the Company's onhealth.com Web
site and increased product development, editorial and design expenses.
PRODUCT DEVELOPMENT, EDITORIAL AND DESIGN. The increase in product development,
editorial and design expenses during the three and nine month periods ended
September 30, 1999 of $1,429,000, or 261%, and $2,918,000 or 139%, respectively,
from the same periods in 1998 was primarily due to an increase in the use of
development and editorial outside contractors and increased headcount. Product
development, editorial and design expenses consist primarily of compensation and
related costs for our development, editorial, design and systems staff,
consulting fees, third-party content acquisition costs and Web site maintenance
and enhancement costs related to the Company's onhealth.com Web site.
SALES AND MARKETING. The increase in sales and marketing expenses for the three
and nine month periods ended September 30, 1999 of $14,226,000, or 1,125%, and
$19,807,000, or 735%, respectively, from the same periods in 1998 was primarily
the result of increased advertising expenses related to the Company's
onhealth.com Web site as well as increased headcount. The broad-based consumer
targeted advertising campaign commenced early in the third quarter of 1999. The
Company intends to continue its advertising campaign throughout 1999 and, as a
result, the Company expects the advertising expenses in the fourth quarter of
1999 to increase significantly over the fourth quarter of 1998.
9
<PAGE>
GENERAL AND ADMINISTRATIVE. The increase in general and administrative expenses
for the three and nine month periods ended September 30, 1999 of $378,000, or
90%, and $1,142,000, or 69%, respectively, from the same periods in 1998 was
primarily due to an increase in headcount, legal fees and settlements, travel
and bad debt expense. Year-to-date legal fees and settlements include $273,000
for settlement and legal costs related to the final settlement of the T. Randal
Productions lawsuit, which is in addition to the $677,000 which had been accrued
at December 31, 1998.
ACQUISITION RELATED COSTS, INCLUDING AMORTIZATION OF GOODWILL AND PURCHASED
INTANGIBLES. These costs consist of amortization of goodwill and other purchased
intangibles and certain acquisition related charges related to the Company's
third quarter acquisition of BabyData.com Inc. The Company expects these costs
to increase in the fourth quarter of 1999 because the Company will record a full
quarter of amortization expense. It is possible that the Company will continue
to expand its business through acquisitions, which would cause acquisition
related costs to increase in future quarters.
STOCK-BASED COMPENSATION. Stock-based compensation is principally comprised of
the portion of acquisition related consideration which is contingent on the
continued tenure of a key employee, which must be recorded as compensation
expense under generally accepted accounting principles. The stock-based
compensation is related to the Company's third quarter acquisition of
BabyData.com Inc. The Company expects the stock-based compensation expense to
increase in the fourth quarter of 1999 because the Company will amortize a full
quarter of deferred compensation.
INTEREST INCOME
The increase in interest income for the three and nine month periods ended
September 30, 1999 of $19,000, or 63%, and $193,000, or 230%, respectively, from
the same periods in 1998 is due to the interest earned on cash received from the
financings completed during the first and third quarters, of 1999.
OTHER INCOME
Other income for the nine month period ended September 30, 1998 includes a
$562,000 gain related to the collection of a previously reserved receivable and
$1,000 of other income, net of a $281,000 expense related to cable television
licensing royalties.
INCOME TAXES
The Company has not recorded a current or deferred provision for Federal income
taxes for the periods presented due to the history of losses incurred.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had positive working capital of $9,634,000
compared with negative working capital of $1,158,000 at December 31, 1998. At
September 30, 1999, the Company had cash and cash equivalents of $4,973,000.
During the first nine months of 1999, total cash used by operating activities
was $34,105,000, which was principally due to our net loss for the period
coupled with the increase in prepaid marketing. Investing activities used net
cash of $736,000 for purchases of computer equipment, compared with $300,000,
net of disposals, during the first nine months of 1998 due to the growth in the
number of personnel. Financing activities provided cash of $37,695,000 through
the January private placement and September public offering of the Company's
common stock, net of financing costs, $34,983,000; the exercise of warrants,
$1,586,000; and the exercise of stock options, $1,126,000.
The Company believes that its cash and cash equivalents will be sufficient to
fund its operations through December 31, 1999. The Company expects a significant
use of cash during the balance of 1999 and the year 2000 as it markets and
expands the onhealth.com Web site. Any material unforeseen increase in expenses
or reductions in projected revenues will likely require the Company to seek
additional debt or equity financing. If additional funding is not available to
the Company on economically reasonable terms the Company may need to reduce its
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 reasonable terms.
YEAR 2000
The Year 2000 issue is the potential for system and processing failures of
date-related data and the result of computer-controlled systems using two digits
rather than four to define the applicable year. For example, computer programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
We could be affected by Year 2000 issues related to non-compliant information
technology ("IT") systems or non-IT systems that we operate or that are operated
by third parties. We have substantially completed assessment of our internal and
external (third-party) IT systems and non-IT systems. At this point in our
assessment, we are not currently aware of any Year 2000 problems relating to
systems we operate or that are operated by third parties that would have a
material effect on our business, results of operations or financial condition,
without taking into account our efforts to avoid such problems. Based on our
10
<PAGE>
assessment to date, we do not anticipate that costs associated with remediating
our non-compliant IT systems or non-IT systems to exceed $100,000, although
there can be no assurance to such effect, and any such cost will be funded
through operating cash flows. To date the Company has incurred no significant
costs related to the assessment of, and preliminary efforts in connection with,
its Year 2000 project and the development of a remediation plan. Management does
not currently expect the Company's financial condition or results of operations
will be materially adversely affected by the Year 2000 issue. There can be no
guarantee that the systems of other companies on which the Company's systems
rely will be timely converted, or that a failure to convert by another company,
or a conversion that is incompatible with the Company's systems, would not have
a material adverse effect on the Company.
To the extent that our assessment is finalized without identifying any
additional material non-compliant IT systems we operate or that are operated by
third parties, the most reasonably likely worst case Year 2000 scenario is a
systemic failure beyond our control, such as a prolonged telecommunications or
electrical failure. Such a failure could prevent us from operating our business,
prevent users from accessing our Web site, or change the behavior of advertising
customers or persons accessing our Web site. We believe that the primary
business risks, in the event of such failure, would include, but not be limited
to, lost advertising revenues, increased operating costs, loss of customers or
persons accessing our Web site, or other business interruptions of a material
nature, as well as claims of mismanagement, misrepresentation, or breach of
contract, any of which could have a material adverse effect on our business,
results of operations and financial condition. We have not made any contingency
plans to address such risks.
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 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 and other factors referenced in the Company's 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, 1998 on Form 10-K, as amended, and other Company reports
and statements on file with the Securities and Exchange Commission.
11
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 1999, Jon Fisse, the Company's newly named Chief Operating Officer, left
the Company before the Company and Mr. Fisse were able to agree on the terms of
his employment agreement. In June 1999, the Company filed a declaratory
judgement action in the United States District Court for the Western District of
Washington seeking to declare that Mr. Fisse terminated his employment and that
the Company owes him no future remuneration or stock option benefits. On the
same day, Mr. Fisse filed a lawsuit in the United States District Court for the
Southern District of New York, asserting that the Company violated his rights in
connection with his separation from the Company, seeking damages which, among
other things, include severance compensation and stock option benefits. The
action filed in Washington has been transferred to New York. Answers have been
filed in both cases and the parties are in the discovery stage of litigation.
The Company believes it has valid defenses against Mr. Fisse's claims.
Nevertheless, the outcome of the lawsuit may have a material adverse affect on
the Company's financial position and results of operations.
In October 1999, the Company received a subpoena duces tecum by the Division of
Enforcement, Pacific Regional Office of the Securities and Exchange Commission
("SEC") requesting certain documents from the Company pursuant to a formal order
of private investigation in connection with possible federal securities law
violations. The Company intends to cooperate fully with the request. As stated
by the SEC in the letter accompanying the subpoena, "[t]he investigation and the
subpoena do not mean that we have concluded that you or anyone else has broken
the law. Also, the investigation does not mean that we have a negative opinion
of any person, entity or security". Because the proceedings are in their
preliminary stages, the Company is unable to establish the likelihood or impact
of an unfavorable outcome. However, the Company does not currently believe that
an unfavorable outcome would have a material adverse impact on the Company's
financial condition, results of operations or historical financial statements.
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
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Exhibit
NUMBER DESCRIPTION REF.
-------- -------------------------------------------------------------------------------------------- ----
<S> <C> <C>
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. (M)
3.1 Amended and Restated Articles of Incorporation of the Company. (L)
3.2 Bylaws of the Company. (A)
4.1 Form of Stock Certificate. (B)
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)
10.7 Lease Agreement, dated March 30, 1994, between the Company and Ryan/Wilson Limited
Partnership. (D)
10.8 License, Development and Marketing Agreement, dated September 28, 1994, between the Company
and Time Life, Inc.* (E)
12
<PAGE>
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 License Agreement, dated November 10, 1994, between the Company and Massachusetts Medical
Society.* (E)
10.11 Sublicense Agreement, dated December 31, 1994, between the Company and Georg von
Holtzbrinck GmbH & Co.* (E)
10.12 Agreement between America's Health Network, Inc. and the Company, dated May 25, 1995.* (F)
10.13 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)
10.14 Financial Advisor and Consulting Agreement with Frazier &
Company LP, dated July 14, 1994, as amended by a letter
agreement, dated June 28, 1995.** (G)
10.15 First Amendment dated June, 27, 1994 and Second Amendment dated October 10, 1995 to Lease
Agreement between the Company and Ryan/Wilson Limited Partnership. (G)
10.16 Agreement dated April 1995 among Ryan/Wilson Limited Partnership, Wilson Learning
Corporation the Company regarding a certain lease. (G)
10.17 Distribution on Consignment Agreement, dated February 29, 1996 between the Company and
Davidson & Associates, Inc.* (F)
10.22 Sublease Agreement, dated September 17, 1996, between the Company and Reality Interactive,
Inc. for the fourth floor portion of the Main Lease between the Company and Ryan/Wilson
Limited Partnership, Wilson Learning Corporation. (H)
10.24 Settlement Agreement and Mutual Release dated September 12, 1997 between the Company and
Mayo Foundation for Medical Education and Research. (I)
10.25 Sublicense Agreement dated September 12, 1997 between the Company and Mayo Foundation for
Medical Education and Research. (I)
10.26 Letter Agreement dated November 9, 1997 between the Company and Robert
Goodman.** (J) 10.28 Subscription Agreement, dated January 29, 1999, among
the Company and certain investors named therein (K)
27 Financial Data Schedule (electronic version only)
- -------------
<FN>
(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 the Company's Form 10-K for
the year ended December 31, 1996, filed with the Securities and
Exchange Commission on March 28, 1997.
(I) 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.
(J) 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.
(K) 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.
13
<PAGE>
(L) 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.
(M) Incorporated herein by reference to the Company's Report on Form
8-K, filed with the Securities and Exchange Commission on
September 15, 1999.
* 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
</FN>
</TABLE>
(b) Reports on Form 8-K.
In a report filed on Form 8-K, dated September 15, 1999, the
Company announced the acquisition of BabyData.com.
14
<PAGE>
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 11th day
of November, 1999.
ONHEALTH NETWORK COMPANY
By: /S/ RON STEVENS
------------------------------
Ron Stevens
Chief Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ONHEALTH
NETWORK COMPANY'S FORM 10-Q FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
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0
0
<COMMON> 203
<OTHER-SE> 14,104
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<SALES> 1,787
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