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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 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
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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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [X ]
Aggregate market value of voting stock held by non-affiliates of the registrant
as of March 22, 2000: $135,025,374
Number of shares outstanding of the registrant's class of common stock as of
March 22, 2000: 24,004,511
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TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. Business...................................................... 3
ITEM 2. Properties....................................................18
ITEM 3. Legal Proceedings.............................................18
ITEM 4. Submission Of Matters To A Vote Of Security Holders...........19
PART II
ITEM 5. Market For Registrant's Common Equity And Related
Stockholder Matters...........................................20
ITEM 6. Selected Financial Data.......................................21
ITEM 7. Management's Discussion And Analysis Of Financial
Condition And Results Of Operations...........................21
ITEM 7A. Quantitative And Qualitative Disclosures About
Market Risk...................................................26
ITEM 8. Financial Statements And Supplementary Data...................26
ITEM 9. Changes In And Disagreements With Accountants On
Accounting And Financial Disclosure...........................26
PART III
ITEM 10. Directors And Executive Officers of Registrant................27
ITEM 11. Executive Compensation........................................28
ITEM 12. Security Ownership Of Certain Beneficial Owners
And Management................................................32
ITEM 13. Certain Relationships And Related Transactions................33
PART IV
ITEM 14. Exhibits, Financial Statement Schedules And Reports
On Form 8-K...................................................34
SIGNATURES.............................................................37
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PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements based on current expectations,
estimates and projections about the Company's industry, management's beliefs and
certain assumptions made by management. All statements, trends, analyses and
other information contained in this report relative to trends in net sales,
gross margin, anticipated expense levels and liquidity and capital resources, as
well as other statements including, but not limited to, words such as
"anticipate," believe," "plan," "estimate," "expect," "seek," "intend," and
other forward-looking statements are not guarantees of future performance and
are subject to certain risks and uncertainties that are difficult to predict.
Accordingly, actual results may differ materially from those anticipated or
expressed in such statements. Particular attention should be paid to the
cautionary statements involving the Company's limited operating history, the
unpredictability of its future revenues, the unpredictable and evolving nature
of its business model, the intensely competitive nature of the online
environment, risks associated with capacity constraints and the management of
Company growth. Except as required by law, the Company undertakes no obligation
to update any forward-looking statement, whether as a result of new information,
future events or otherwise.
GENERAL
OnHealth Network Company ("OnHealth" or the "Company") is a leading independent
source of original, informative, timely and trusted consumer-oriented health and
wellness information, products and services on the Web. Our website,
onhealth.com, is a consumer-focused online health destination dedicated to the
management of personal and family health and well-being. Our staff of full-time
editors and writers as well as a constituency of external health and medical
writers and contributors, enable us to update our website daily with original
health-related features. By providing users with a broad range of original
in-depth reporting, substantive resources and references, community discussions,
direct access to experts, interactive tools and exclusive Personal Health Info
Tracker search capabilities, onhealth.com combines the strength of credible
journalism with the power of online interactivity.
The Company was founded in August 1990 in the State of Minnesota. The Company
went public in 1993 as IVI Publishing, Inc. Until January 1998, its traditional
line of business had been CD-ROM development, production and distribution. The
best known title, "Mayo Clinic Ultimate Medical Guide", along with other CD-ROM
works, has been distributed through retail and computer OEM channels. The
Company's predecessor was also a supplier of video, animation and graphic assets
to America's Health Network, a health and medical cable TV channel, and
published a book version of its CD-ROM, "Taking Control of Your Health" in
conjunction with Time Life Medical.
The Company's first foray onto the Internet was a Web site, O@sis, which it
developed on a joint venture basis with the Mayo Foundation in July 1996. Due to
philosophical differences regarding the strategic direction of the site, full
ownership of O@sis was later transferred to the Mayo Foundation with the Company
receiving a $2.7 million termination settlement and the return of IVI Publishing
Inc. stock held by Mayo in 1997. The Company's current relationship with Mayo
consists of a content contract and certain agreements concerning CD-ROM
properties.
We launched our website in July 1998. Internet Profile Corporation (IPRO)
reported that OnHealth's page views grew 1007% to 21,694,000 in December 1999
from 1,959,000 in December 1998. According to IPRO, in December 1999,
onhealth.com attracted 5,166,000 visitors, an increase of 712% from our December
1998 visits, which ranks onhealth.com as the most trafficked consumer health
content website in December 1999. We have launched a coordinated traditional
media advertising and public relations campaign designed to build our brand
through the use of television, radio, outdoor, print and online media. We also
distribute in excess of 100,000 daily and weekly broadcast e-mails to registered
users who have requested our Daily Briefing, Weekly Newsletter and Health Info
Tracker. This private and personalized e-mail allows our users to stay current
on the health-related subjects most important to themselves and their families.
To date, we have developed distribution partnerships and content sharing
relationships resulting in over 600 websites that drive traffic to our website.
We intend to aggressively expand our content and distribution partnerships with
both online and traditional media partners that can direct additional users to
our website.
We provide an independent voice and serve as a trusted consumer advocate for
health-related issues. We believe this will allow us to build a loyal and
dedicated audience that will fuel multiple revenue opportunities. While we
believe the demographics of our users are highly attractive to advertisers, we
are developing our website to generate revenue opportunities from multiple
sources, including advertising/sponsorships, e-commerce transactions, premium
services and content syndication. We have a shopping area on our website
designed to offer our users a wide variety of health and wellness products
including prescription and over-the-counter drugs, vitamins, herbs, books,
magazines, foods, home products and gifts.
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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.
On November 30, 1999, the Company acquired Health Decisions International, LLC.
Health Decisions, which was a privately held company prior to the acquisition,
develops, provides and supports a broad range of personal health information,
referral and nurse counseling services. The five key target audiences for such
services in the healthcare market are consumers, payers, employers, providers
and pharmaceutical companies. Health Decisions provides a wide range of demand
management tools that include symptom assessment, triage, provider selection and
referral, individualized self-care, and preventative counseling for its clients'
members.
On February 15, 2000, Healtheon/WebMD agreed to acquire OnHealth Network
Company. Under the terms of the agreement, shareholders of OnHealth stock are to
receive .189435 shares of Healtheon/WebMD Common Stock for each share of
OnHealth stock. Closing of the transaction, which will be accounted for as a
purchase transaction, is expected in the second quarter of this year, subject to
regulatory approval, including the effectiveness of a joint registration/proxy
statement on Form S-4 to be filed with the SEC, and certain other customary
conditions. Following the closing, OnHealth will become a wholly-owned
subsidiary of Healtheon/WEBMD and the common stock of OnHealth will cease to be
publicly traded.
INDUSTRY OVERVIEW
We believe that the aging of the U.S. population, the rise of restrictive
managed care programs and the emergence of the Internet have combined to create
substantial demand for resources and communities that enable consumers to better
understand and control the decisions that affect their personal health.
The Internet is emerging as an important alternative to traditional media
enabling millions of consumers to seek information, communicate and conduct
commerce. According to Cyber Dialogue, an industry research firm, the online
population in the United States is expected to grow 11% annually from 1999 to
2005, from 65 million users to 122 million users. The Internet is empowering
consumers by providing immediate, low cost access to highly topical, interactive
content and communities. In addition, the Internet is enabling advertisers and
online merchants to inexpensively reach vast, yet highly targeted audiences, and
to measure in real-time the effectiveness of their programs. We believe that
healthcare industry constituents will benefit from the Internet's unique
attributes as an open, low-cost, flexible technology for the exchange of
information and for commerce.
The healthcare industry is the single largest segment of the U.S. economy,
representing approximately $1.2 trillion in spending or 14% of the U.S. gross
domestic product. Over the past decade, the healthcare industry has changed
radically as employers seeking to reduce their healthcare costs have turned from
indemnity insurance to managed health plans. Approximately 180 million people,
or 90% of the insured U.S. population, are now subject to some form of managed
care. We believe that consumers increasingly question the motivations of their
caregivers and are more inclined to take an active role in the decisions that
affect their health and wellness as well as that of their families.
Consumers are seeking more information in order to actively manage their
personal health and wellness. However, traditional sources of healthcare
information, such as print publications, are often voluminous,
reference-oriented and outdated while other media, including television and
radio, lack the analysis and insight consumers demand. As a result, many
consumers are turning to the Internet to obtain health information. According to
CyberDialogue, during 1999, approximately 32 million adults in the United States
searched online for health and medical information. Cyber Dialogue estimates
that approximately 70% of the persons searching for health and medical
information online believe the Internet empowers them by providing them with
information before and after they go to a doctor's office. Cyber Dialogue also
estimates that in the year 2005, the number of adults in the United States
searching for online health and medical information will grow to approximately
86 million.
Industry research has indicated that women tend to be the health care
decision-makers within their households and therefore are the primary seekers of
health and wellness information. Internet use among women has increased rapidly
in recent years (from 5% of all users in early 1994 to an estimated 51% by the
end of 1999). These trends are of particular importance to advertisers since
women are estimated to have disproportionate control or influence over consumer
spending in the United States. Spending on advertising targeted to women is
generally considered to represent the largest single category of advertising in
the United States. According to industry experts, women control 66% of family
healthcare expenditures, make 75% of all healthcare decisions and control or
influence over 80% of all purchase decisions. In addition, industry research
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indicates that women spend less time than men surfing the Internet and tend to
spend more time visiting destinations that meet their needs.
There are currently over 15,000 websites providing health information. The
quality and breadth of these websites varies widely and to date no clear brand
has emerged as the leading provider of trusted consumer-oriented health and
wellness information on the Internet. Most of these websites do little more than
repurpose and repackage non-proprietary content without tailoring such content
for the consumer and providing context, insight or analysis. Many offer little
disclosure about their affiliations, the sources of their information and
potential conflicts of interest. Additionally, many health websites are poorly
designed, difficult to navigate and do not understand the needs of women as the
principle gatekeepers of the healthcare dollar. Accordingly, we believe there is
a substantial and growing unmet need for a well-known, trusted, comprehensive
health-related website that addresses consumers' health needs accurately and
intelligently while providing a satisfying consumer experience. Moreover, we
believe that such a website will have the ability to generate significant
revenue from a variety of sources, including advertising and commerce.
ONHEALTH'S STRATEGY
Our goal is to become the premier source of consumer-oriented health and
wellness information and services on the Internet. We intend to achieve this
goal by implementing the following strategies:
Leverage and Enhance Our Expansive Proprietary Health Content. We believe that
the breadth, depth and quality of the proprietary health content we provide,
together with the fact that our content is tailored for the consumer,
substantially differentiates onhealth.com from other health information websites
and represents a competitive advantage. We will aggressively add reference
material, condition center partners, applications, tools and personalization
functionality. In addition, we have partnered exclusively in certain disease
areas with best-of-breed content partners including the Cleveland Clinic, Beth
Israel Deaconess Cancer Center, the Mount Sinai Cardiovascular Institute, the
Scripps Clinic and the International Diabetes Center. Our content, which is
archived and searchable, ranges from clinical medicine to alternative medicine
and from reference material to journalistic exploration of relevant health
topics. We provide multiple perspectives on health topics. We intend to continue
to differentiate OnHealth by expanding and enhancing our proprietary consumer
health content.
Expand the services that are offered to our Consumers. We will continue to look
for opportunities to satisfy the personalized information and program needs of
our consumer. With the acquisition of Health Decisions we have added a team that
is experienced at offering high-touch personal customer support. We will
continue to offer a host of specialized consumer services that will be easily
integrated into the current OnHealth offering. These programs are tailored to
take into consideration combinations of health issues and practical living
situations faced by real people. The services ultimately create a more skilled
and knowledgeable consumer capable of better self care. Among the services is a
triage system utilizing a 24-hour, seven days a week, telephone-based nurse
counseling service that individually assists users with evaluating symptoms and
helps develop options for immediate and long-term personal care programs; a
decision support system to help consumers better evaluate potential treatment
options (e.g. surgery, therapy or medication); lifestyle and personal care
management services to support the self-management of everything from a chronic
condition to developing strategies for attaining a healthier lifestyle. Also
included in Health Decision services are self-care books, audio libraries of
pre-recorded medical topics, additional analytical and risk assessment tools,
and pharmaceutical support services to increase patient compliance and improve
customer satisfaction and retention.
Provide Consumers with a Compelling Health Experience. We are highly focused on
providing consumers who visit our website with a compelling experience that not
only addresses their initial needs, but also gives them multiple reasons to
spend more time at and return more often to our website. Accordingly, our
website is designed for easy navigation and is intended to be both informative
and engaging. Our experienced creative team understands the multi-dimensional
nature of publishing on the Internet. The team is adept at mixing information,
images, interactive tools, personalization and rich media.
Establish Onhealth.com as the Premier Brand for Health and Wellness Information
on the Internet. We intend to establish onhealth.com as the premier health brand
that consumers associate with trustworthiness and view as their one-stop,
complete resource for health and wellness information on the Internet. To this
end, we have launched a coordinated advertising and public relations campaign
using television, radio, outdoor, print and online media. We plan to also
continue to expand our distribution agreements with search engines, portals and
Internet service providers. Currently, over 600 websites drive traffic to
onhealth.com, including Ask Jeeves, About.com, Microsoft's Hot Mail Web Courier,
Yahoo and AOL's Digital City's Network. Our management team is experienced at
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building consumer brands for Internet and traditional media companies including
MSNBC, The Discovery Channel, ABCNEWS.com, Starwave/ESPN Internet Ventures and
Conde Nast Publications.
Capitalize on Revenue Generating Opportunities. We intend to leverage the growth
in our consumer base by exploiting opportunities to develop multiple revenue
streams including advertising/sponsorship, e-commerce /transaction, syndication
of content and subscription to premium services. In the first quarter of 1999,
we launched a health products shopping area on our website and we plan to
continue to expand our relationships with leading web e-tailers to offer
consumers a full range of health and wellness related products and services.
Unlike many of our competitors, we have an opportunity to leverage our
proprietary content and interactive tools through syndication to provide an
additional revenue stream. We also believe that health consumers are interested
in premium subscription offerings such as personalized smoking cessation and
dietary programs, personalized health and condition reports and direct access to
leading medical experts. By pursuing diversified revenue opportunities, we seek
to reduce our dependence on and exposure to any single revenue stream.
Engage in Selective Acquisitions and Strategic Partnerships. We believe that
there will be significant consolidation in the online health category. We have a
focused business development effort, and are seeking acquisition and strategic
partnership opportunities. We are continually evaluating strategic relationships
with various distribution and media outlets that can serve to drive traffic to
our website and/or increase opportunities to generate e-commerce /transaction
revenue. We intend to pursue acquisitions that have the potential to augment our
current operations in six primary categories: content, applications, products,
revenue, traffic and intellectual capital/people.
THE ONHEALTH WEBSITE
Onhealth.com provides timely and relevant coverage of health news and issues,
substantive resources and references, community discussions, direct access to
experts, interactive tools and exclusive Health Info Tracker search capabilities
to enable consumers to actively manage the health and well-being of themselves
and their families. On our website, consumers will find complete coverage of
important health issues and broad database reference materials in an
interactive, visually pleasing and personalized format.
On March 22, 2000, OnHealth debuted a redesigned site. The redesign replaces the
old channels (News and Reports, Medical Centers, Ask Our Experts, etc.) with
seven new topic-specific channels. The new format mirrors consumers' evolving
e-health interests and needs while providing a cleaner platform for easy access
to the site's broad spectrum of newly expanded healthcare information, services
and solutions.
Each OnHealth Channel is a creatively-programmed symphony of content, tools, and
services and offers daily news, polls, in-depth reports and deep reference
material, resident expert columnists, interactive tools, personalized classes,
live events, community boards, and "inline commerce". Aimed at presenting the
best and most current information and solutions to users, highlights of
OnHealth's new channels include:
o Diseases & Conditions--Offering the latest, medically reviewed
details on diseases and conditions, this channel provides
needed resources on illnesses that most concern OnHealth
users. Web-exclusive reports from the publishers of the New
England Journal of Medicine, disease-specific message boards
with regular weekly appearances by Diseases & Conditions
columnist Dr. Robert Jandl, and extensive archives leave no
question unanswered. Unique reference tools such as the
"Symptom Checker," which helps users evaluate their symptoms,
"Medicine Checker," which alerts users to dangerous drug
interactions and clinical trial listings aid users in
evaluating and treating sickness.
o Women--Catering to over 70% of OnHealth's audience, the
Women's Channel focuses on the physical, mental, emotional,
and spiritual health of its largest audience segment.
Gynecological concerns as well as conditions such as
depression and eating disorders that disproportionately affect
women anchor the section. The section's resident gynecologist
expert is Dr. Yvonne S. Thornton, associate clinical professor
of obstetrics and gynecology at Columbia University College of
Physicians and Surgeons and author of "Woman to Woman: A
Leading Gynecologist Tells You All You Need to Know About Your
Body and Your Health." Important services such as "Find a
Mammography Clinic" are located in the Women's Channel as
well.
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o Family--The Family Channel features daily family health news,
polls, in-depth reports, and a twice-weekly relationship
advice column from the mother-son team of Dan Savage and Judy
Sobiesk. Complementing its main index page, the Family Channel
is subdivided into three sub-channels: Men, Children, and
60-Plus.
o Baby--The Baby Channel is divided into three sub-channels:
Fertility, Pregnancy and Newborn Health. Like other OnHealth
channels, the Baby Channel will feature in-depth news,
features, reference material and polls. In addition, the
Channel provides Pregnancy and Fertility and Newborn message
boards with regular weekly appearances by fertility/pregnancy
expert Dr. Amos Grunebaum, as well as pregnancy and ovulation
calendars. Highlights in the sub-channels include a special
"Nine Months" feature series, a newborn basics section and
"Find a Fertility Clinic."
o Food and Fitness--Catering to the busy lifestyle of its users,
OnHealth's Food and Fitness Channel includes a host of unique
services. "The Diet and Fitness Journal" and "A Healthier You"
segment with a personal trainer and dietician are designed to
help users develop good health habits. Breast self-exam
instructions and a Healthy Holidays Calculator are just some
of the channel's reference tools that aim to improve users'
well being. Liz Applegate, Ph.D., a nationally recognized
nutrition expert is the resident columnist. Coming soon:
"Recipe for Health," OnHealth's new weekly column by Jane
Kirby, registered dietician and owner of the Vermont Cooking
School (April 14); and "Cooking with OnHealth," a series of
10-minute videos on nutritious and delicious meals (July).
o Lifestyle--OnHealth's Lifestyle Channel is about "balance of
life" issues, from managing stress to maintaining
relationships. Special appearances from expert columnists on
"Sex Matters" with certified sex therapist Louanne Cole
Weston, Ph.D. and "OnHealth University," tailored classes with
OnHealth's Life Coach Cheryl Richardson, enrich users'
attitudes and daily viewpoints.
o Alternative Health--The Alternative Channel seeks to find,
analyze, and disseminate the best available information about
the uses and misuses of each popular alternative therapy.
Unique reference tools such as the "Herbal Index," a new and
comprehensive guide to herbs, and "Symptom-to-Herb Checker"
which recommends herbal remedies, take the confusion and
mystery out of alternative medicine.
Content
Onhealth.com draws its information from an array of medical and healthcare
resources. Although we are committed to delivering high quality original
content, in order to continue to provide our users with the richest health
information solution, we also partner with a number of organizations and
entities to supply content to the website.
Original Journalism and Live Produced Events
We have assembled a staff of eleven medical and health editors, journalists and
producers. Our senior editors have, on average, 12 years of medical and health
editorial and reporting experience from such outlets as Consumer Reports, San
Jose Mercury News, ABCNEWS.com, Mosby Medical Publishing and the Associated
Press. In addition, we also rely on external writers and contributors who
provide content to the website. Our editorial staff has assembled a panel of
doctors who review and update our medical reference material.
Medical Center Content Exclusive to OnHealth
We have established exclusive partnerships with leading medical institutions for
extensive, condition-specific reference information and support for particular
activities such as live surgeries. We believe the collection of these
institutions creates a powerful and unique network with considerable opportunity
for additional activities and content. Partnering with many institutions
underscores OnHealth's commitment to providing multiples sources and
perspectives from credible parties.
We have chosen to partner with the following institutions for their expertise in
research, clinical work and patient education:
o Cleveland Clinic
o Beth Israel Deaconess Cancer Center
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o Mount Sinai Cardiovascular Institute
o Scripps Clinic
o International Diabetes Center
Third-Party Journalism and Licensed News Feeds and Features
We receive exclusive online monthly reports from HealthNews, published by
Massachusetts Medical Society, publishers of the New England Journal of
Medicine. In addition, we supplement our exclusive content with licensed news
and features from Reuters and other wire services.
OnHealth.com Traffic
We launched our website in July 1998. Internet Profile Corporation (IPRO)
reported that OnHealth's page views grew 1007% to 21,694,000 in December 1999
from 1,959,000 in December 1998. According to IPRO, in December 1999,
onhealth.com attracted 5,166,000 visitors, an increase of 712% from our December
1998 visits, which ranks onhealth.com as the most trafficked consumer health
content website in December 1999. We have launched a coordinated traditional
media advertising and public relations campaign designed to build the OnHealth
brand through the use of television, radio, outdoor, print and other media. We
also distribute in excess of 100,000 daily and weekly broadcast e-mails to
registered users who have requested our Daily Briefing, Weekly Newsletter and
Home Delivery newsletter. This private and personalized e-mail allows our users
to stay current on the health-related subjects most important to themselves and
their families.
Distribution
To date, we have developed distribution partnerships and content sharing
relationships resulting in more than 600 websites that drive traffic to our
website. We intend to aggressively expand our content and distribution
partnerships with both online and traditional media partners that can direct
additional users to our website, thereby creating opportunities to generate
multiple revenue streams. We have and will continue to enter into distribution
agreements with leading search engine and portal companies; major Internet
access providers; community, news, information and other specialty websites;
media companies; promotional programs; other traditional media; and
corporate/HMOs. By increasing our brand exposure and traffic through significant
distribution agreements, we believe we will increase our attractiveness to
advertisers as an effective means of advertising both health-related and
non-health-related products. All of such relationships provide for a direct link
to our website either by clicking on our logo or by clicking on a headline or
article that then links back to our website. Headline links and articles are
dynamically served and automatically updated, allowing affiliate websites to
feature fresh, professional content while allowing us to reach desirable new
audiences, build our brand, and drive traffic to our website. A sample of our
current distribution relationships include AOL's Digital City's Network,
MyWay.com, Snap.com, Yahoo!, Microsoft's HotMail Webcourier, iSyndicate,
MindSpring, Motorola's iKno!, Online Benefits, Real Networks, About.com, Advance
Internet, Inc. (affiliate of Advance Publications, Inc.), Ask Jeeves, Better
Homes and Gardens, Comcast Online Communications; Comcast@home; inyourtown.com
and weather.com.
Branding
Our objective is to create the premier consumer health and wellness brand on the
Internet. While there has been a proliferation of health-related websites on the
Internet, we believe that no single participant has developed a preeminent,
recognizable brand with online consumers. We have launched a coordinated
traditional media advertising and public relations campaign designed to build
the OnHealth brand through the use of television, radio, outdoor, print and
online media.
Our management team has a proven track record of developing content and building
leading consumer brands at Internet and traditional media companies such as
MSNBC, The Discovery Channel, ABCNEWS.com, Starwave/ESPN Internet Ventures and
Conde Nast Publications. We believe that the strength of our management team is
a key factor that differentiates us from many of the other Internet health
companies.
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Revenue Model
We intend to leverage the growth in our consumer base by exploiting
opportunities to develop multiple revenue streams including
advertising/sponsorship, e-commerce/transaction and syndication of content and
interactive tools. In the first quarter of 1999, we launched a health products
shopping area at our website and we plan to continue to expand our relationships
with leading web e-tailers to offer consumers a full range of health-related
products and services. Unlike many of our competitors, we have an opportunity to
leverage our proprietary content and interactive tools through syndication to
provide an additional revenue stream. We also believe that health consumers are
interested in premium subscription offerings such as personalized smoking
cessation and dietary programs, personalized health and condition reports and
direct access to leading medical experts. By pursuing diversified revenue
opportunities, we seek to reduce our dependence on and exposure to any single
revenue stream.
Advertising/Sponsorship Sales
Advertising on the Internet is rapidly becoming a viable commercial medium.
According to Jupiter Communications, online advertising dollars for the health
space is forecast to grow from $100 million in 1999 to a still-modest $700
million by 2004. We believe the demographics of our audience and our ability to
target specific users of our website are attractive to healthcare advertisers
and non-healthcare advertisers. We believe we have been able to create a
differentiated and productive advertising environment by providing the
following:
o targeted programs to reach the most desirable consumers;
o a wide variety and depth of sponsorship areas;
o long-term exclusive relationships for highly prized condition-specific
content;
o creative, beyond-banner programs that appeal to more aggressive
advertisers; and
o personalization and key word targets that provide flexible cross-site
delivery.
Our consumer-oriented content provides attractive audiences for both healthcare
and non-healthcare advertisers. In addition to covering a broad range of
wellness editorial (fitness, nutrition, stress reduction, pregnancy, childbirth,
sexual health, health for seniors, alternative medicine, herbs and vitamins), we
are developing a number of pre-packaged health-related sponsorship packages for
non-endemic advertisers in areas that could include healthy eating, healthy
travel, healthy pet, fiscally fit, auto safety, Y2K baby, fitness file and
holiday packages.
A partial list of healthcare advertisers we have attracted includes: Johnson &
Johnson, AstraZeneca Pharmaceuticals, SmithKline Beecham, Pfizer,
Schering-Plough, Glaxo Wellcome, Eli Lilly, Merck, Butler Dental, Biogen,
Hoechst Marion Roussel, Amgen, Drugstore.com, Nutrisystem and SelfCare. A
partial list of the non-healthcare advertisers we have attracted includes: IBM,
Kellogg's, Ford, Talkway, Call Connect.com, GM Buypower, GM Goodwrench, Pontiac,
Buick LeSabre, Procter & Gamble, AIG, American Express, Ameritrade, JC Penney,
Infantime,Women.com, Lifewise Family Financial Services, ESPN, Disney and
Microsoft.
E-commerce
Transactions. Our model for e-commerce is to generate revenue by focusing on
three areas: fees for guaranteed impressions, exclusivity fees and revenue
sharing. We believe our shopping channel has many advantages for the consumer,
including:
o Information from our articles, databases, experts and community, all
from one location, so that consumers can learn to manage their health
and use that information to make better-informed purchases of products
and services.
o OnHealth TimeSavers enable consumers to read about, discuss and
purchase various products. Every day, consumers can get information on
timely subjects, share ideas with others and buy the products they
need to help maintain their good health.
o Carefully selected online retailers who offer the best combination of
products and services, customer service, reliable and secure online
transaction capability and competitive prices.
We have partnered with drugstore.com as our exclusive online drugstore. Our
partnership with VitaminShoppe as our exclusive vitamins and herbs merchant will
terminate on March 30, 2000 and our relationship with SelfCare as our exclusive
merchant in the Holistic Woman section will terminate at the same time.
Recently, we have added Nutrisystem as our exclusive partner within the weight
management area. Sports Authority, our exclusive partner within the fitness
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section will lose exclusivity at the end of March 2000. In addition to these
partner relationships, we have established various affiliate relationships.
Under the terms of the agreements governing affiliate relationships, we share in
the revenue from purchases made by consumers directed to the partner website
from our website. Affiliate merchants include Amazon.com, American Greeting
Cards Online, ProFlowers, Whole Foods Market, greenmarketplace.com and enews.com
to name a few.
In the near term, we anticipate that there will be approximately fourteen to
sixteen total categories in our shopping channel, all representing healthy
living extensions. Examples of additional categories to be added could include
cooking supplies, healthy pets and music. We also plan to add an assortment of
gift baskets pertaining to health and life events, such as sending a child to
college or having a baby.
Longer-term shopping channel plans include offering e-commerce products and
services that have an interconnection to our audience and subject matter,
through strategic relationships with various e-commerce websites and e-commerce
providers. Products are expected to include medical/health-related supplies,
everyday health and wellness essentials, baby products, beauty products, home
and garden, music, videos and financial services. We plan to continue to deepen
the level and types of services we offer based on consumer needs and requests,
including special commerce events, customized discounts on health products and
more time- saving buying opportunities focused on wellness and health
management.
Recently, we introduced Nurse Connect, OnHealth's first premium service. This is
the first installment of OnHealth's integration of Health Decisions
International (HDI), which was acquired by OnHealth in November 1999. This is a
call-in service that enables consumers to consult with a registered nurse on
health issues. The service is scheduled to be web-enabled by the end of second
quarter. We intend to introduce additional premium services in the second
quarter of 2000. Possible examples of paid subscription services include smoking
cessation, weight loss, stress management and pre-natal care programs.
Syndication Opportunities
We believe that our original content and interactive tools can be leveraged into
a broader revenue platform. Syndication of content and interactive tools is an
important additional revenue opportunity that is a natural extension of our
strategy and branding program. Since we own a significant amount of our content
and interactive tools, we can offer a range of syndication programs, from
providing licensees with the ability to host our content and interactive tools
themselves, to building custom co-branded environments for them. We believe that
syndication opportunities exist domestically and internationally, online and
offline, with hospitals, pharmacy benefit management companies, corporations,
health maintenance organizations and associations, and international general
interest and consumer and professional health portals among others.
Technology and Systems
The OnHealth website uses hardware technologies from, among others, Compaq,
Intergraph, F5 and Cisco. The site uses software from Microsoft, Netgravity,
Buzz, and eShare. Exodus IT-class colocation facilities provide a secure, highly
available, high bandwidth environment for our production, staging, and testing
servers. Exodus provides redundant OC-3 and OC-12 backbone connections to the
Internet and uninterruptible power supplies with diesel generator backup, housed
in a copper-lined, earthquake-resistant building located in south Seattle.
Direct connections to the hosting facility via redundant T1 lines allow our main
office to reliably connect to the production environment and the Internet.
All mission-critical database servers are designed to be redundant and employ
warm-backup technology to minimize downtime and maximize data integrity.
Multiple web servers and advertising servers are utilized to provide
high-availability. Traffic is balanced between all available servers through
load balancing hardware. System health is monitored by realtime server
monitoring hardware and software.
We believe that the onhealth.com online services environment has been designed
to be a stable and scaleable solution sufficient for our foreseeable needs.
Competition
The editorial environment in interactive media is new, highly competitive and
rapidly evolving. Since the Internet's commercialization in the mid 1990s, the
number of websites on the Internet competing for consumers' attention and
spending has proliferated with no substantial barriers to entry, and we expect
that competition will continue to intensify.
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Our website competes directly for advertisers, users, e-commerce customers and
merchants, distribution and syndication partners and other affiliates with
numerous Internet and non-Internet businesses, including:
o health-related online services or websites targeted at consumers, such
as accenthealth.com, ahn.com, americasdoctor.com, betterhealth.com,
drkoop.com, drweil.com, healthcentral.com, healthgate.com,
intelihealth.com, mayohealth.org, mediconsult.com, thriveonline.com
and webmd.com;
o online and Internet portal companies, such as America Online, Inc.,
Lycos Corporation, Microsoft Network, Excite, Inc., Infoseek
Corporation, and Yahoo! Inc.;
o electronic merchants and conventional retailers that provide
healthcare goods and services competitive to those available from
links on our website;
o hospitals, HMOs, managed care organizations, insurance companies and
other healthcare providers and payors which offer healthcare
information through the Internet; and
o other consumer affinity groups, such as the American Association of
Retired Persons, SeniorNet and ThirdAge Media, Inc. which offer
healthcare-related content to specific demographic groups.
We believe that the principal competitive factors in attracting and retaining
users is the depth, breadth and timeliness of content, the ability to offer
compelling and relevant content and brand recognition. Other important factors
in attracting and retaining users include ease of use, service quality and cost.
In addition, we also compete with traditional media, including print and
television for users and advertising dollars. Our known and prospective
competitors are often significantly larger and better financed than us and maybe
better able to afford a more intense competitive environment than OnHealth. The
Internet is highly competitive and changing rapidly, and we may not have the
resources to compete adequately.
Intellectual Property
We regard our copyrights, service marks, trademarks, trade secrets, proprietary
technology and similar intellectual property as critical to our success, and we
rely on trademarks, copyrights, and trade secrets to protect our proprietary
rights. While we try to assure that the quality of the OnHealth brand is
maintained through such actions, there can be no assurance that steps we have
taken and continue to take to protect our proprietary rights will be adequate or
that third parties will not infringe on our intellectual property. In addition,
there can be no assurance that third parties will not assert infringement claims
against us which, even if not meritorious, could result in the expenditure of
substantial resources and management effort. Much of our website relies on owned
or licensed intellectual property and we cannot be sure that such rights are
protected from the use of others, including potential competitors.
Employees
As of December 31, 1999, we employed 101 people on a full-time basis and 24
people on a part-time basis. When conditions demand it, we also use contract
workers in addition to our part-time employees. None of our employees are
represented by a labor union and we consider our relationship with our employees
to be good. We believe that some measure of our future success is dependent upon
attracting and retaining qualified employees, and competition for hiring such
employees is intense.
FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to other information in this Annual Report on Form 10-K, the
following factors should be considered in evaluating the condition and prospects
of the Company. These factors may have a significant impact on the Company's
future operating results.
Reliance on External Financing. We completed two private placements of common
stock during the year. The first was completed in January 1999 for $14.3 million
and the second in November 1999 for $14.7 million. In addition, we raised $20.7
million in a secondary public offering in September 1999. In February 2000, we
agreed to merge with Healtheon/WEBMD. In connection with the merger agreement,
Healtheon/WEBMD has agreed to lend the Company up to $30 million for working
capital needs. We believe our cash and cash equivalents, including the $30
million lending commitment by Healtheon/WEBMD, will be sufficient to fund our
operations through December 31, 2000. We expect a significant use of cash in
2000, as a result of the expansion plans for the OnHealth network and our
marketing and distribution relationships. We are exploring and will continue to
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explore external financing to ensure continued 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. If additional funds are
raised through the issuance of equity or convertible debt securities, the
percentage ownership of our shareholders will be reduced, shareholders may
experience additional dilution and such securities may have rights, preferences
or privileges senior to those of the holders of common stock.
Limited Operating History and Accumulated Deficit; Continuing Operating Losses.
Since our inception, we have incurred significant losses and negative cash flow,
and as of December 31, 1999, had an accumulated deficit of approximately $136.8
million. We have not achieved profitability and expect to continue to incur
operating losses for the foreseeable future as we fund operating and capital
expenditures in areas such as expansion of our network, advertising, brand
promotion, content development, sales and marketing, and operating
infrastructure. Our business model assumes that consumers will be attracted to
and use healthcare information and related content available on our
Internet-based consumer healthcare network that will, in turn, allow us the
opportunity to sell advertising designed to reach those consumers. Our business
model also assumes that those consumers will access important healthcare needs
through electronic commerce using our website and that local healthcare
organizations will affiliate with us. This business model is not yet proven, and
we cannot assure you that we will ever achieve or sustain profitability or that
our operating losses will not increase in the future.
Pending Merger with Healtheon/WebMD. The merger agreement with Healtheon/WebMD
provides that during the period from signing until closing we are able to
operate our business, with certain exceptions, in the ordinary course of
business. If the proposed merger is terminated, however, for whatever reason,
our business would be disrupted. During the interim period between signing and
closing, for example, our advertisers may not want to renew their agreements
with us and instead wait until after the closing to deal with Healtheon/WebMD.
As a result, if the merger were to be abandoned for whatever reason, it could
adversely affect our business, results of operations and financial condition. In
addition, if the proposed merger is terminated, we would be required to pay back
any amounts loaned to us by Healtheon/WebMD, in connection with the merger
agreement, on or by February 15, 2001.
Acceptance by Consumers and The Healthcare Industry. To be successful, we must
attract to our network a significant number of consumers as well as other
participants in the healthcare industry. To date, consumers have generally
looked to healthcare professionals as their principal source for health and
wellness information. Our business model assumes that consumers will use
healthcare information available on our network, that consumers will access
important healthcare needs through electronic commerce using our website, and
that local healthcare organizations will affiliate with us. This business model
is not yet proven, and if we are unable to successfully implement our business
model, our business will be materially adversely affected.
Reliance on Advertising Revenues in an Immature Advertising Market. Our future
is highly dependent on increased use of the Internet as an advertising medium.
We expect to derive a substantial amount of our revenue from advertising and
sponsorships. The Internet advertising market is new, extremely competitive and
rapidly evolving, and we cannot yet predict its effectiveness as compared to
traditional media advertising. As a result, demand and market acceptance for
Internet advertising solutions are uncertain. Most of our current or potential
advertising customers have little or no experience advertising over the Internet
and have allocated only a limited portion of their advertising budgets to
Internet advertising. The adoption of Internet advertising, particularly by
those entities that have historically relied upon traditional media for
advertising, requires the acceptance of a new way of conducting business,
exchanging information and advertising products and services. Such customers may
find Internet advertising to be less effective for promoting their products and
services relative to traditional advertising media. We cannot assure you that
the market for Internet advertising will continue to emerge or become
sustainable. If the market for Internet advertising fails to develop or develops
more slowly than we expect, then our ability to generate advertising revenue
would be materially adversely affected. To date, advertisers have not, by their
actions, shown that they believe in the Internet as a legitimate advertising
medium.
Advertising rates quoted by different vendors vary widely, making it difficult
for us to project future levels of advertising revenue. Internet advertising
rates are based in part on third-party estimates of an individual's use of an
Internet website. These estimates of use are referred to as "impressions". Such
estimates are often based on sampling techniques or other imprecise measures,
and may materially differ from our own estimates. We do not know if advertisers
will accept ours or other parties' measurements of impressions. Since the
Internet advertising industry is in its infancy, universally accepted standards
measuring the effectiveness of a particular Internet advertisement have not been
established or widely embraced. Our advertising revenue could be adversely
affected if we are unable to adapt to new forms of Internet advertising.
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Moreover, filter software programs are available that limit or prevent
advertising from being delivered to an Internet user's computer. Widespread
adoption or increased use of such software by users or the adoption of such
software by certain internet access providers could have a material adverse
effect upon the viability of advertising on the internet and on our business,
results of operations and financial condition.
Need to Upgrade our Website and Add to Existing Distribution Relationships to
Remain Competitive. In order to remain competitive with other Internet
companies, including the numerous other Internet health-related websites, we
must continue to enhance and improve the responsiveness, functionality and
features of our website and develop other products and services. In addition, we
plan to enter into relationships with additional distributors who will enable us
to drive more traffic to our website. Such undertakings are expensive and we
cannot assure you that we will be successful at upgrading our website or
increasing the strength of our distribution relationships.
Short Term Nature of Advertising Contracts; Guarantee of Minimum Impression
Levels. The majority of our advertising contracts have been for terms averaging
three months in length, with relatively few longer-term advertising contracts.
We cannot assure you that our current advertisers will continue to purchase
advertisements on our website. In addition, our advertising contracts typically
guarantee the advertiser a minimum number of impressions. To the extent that
minimum impression levels are not achieved for any reason, we may be required to
make good or provide additional impressions after the contract term. Providing
additional impressions may adversely affect the availability of advertising
inventory. This may, in turn, adversely affect our business, results of
operations and financial condition.
Need to Enhance and Develop Onhealth.com to Remain Competitive. To successfully
compete in the Internet health field, we must continue to improve the product we
offer and increase the number of people using our website. To do so, we will
have to significantly increase our operating expenses to:
o develop new distribution channels;
o fund greater levels of research and development;
o add editorial content;
o increase our sales and marketing operations;
o broaden our customer support capabilities; and
o establish brand identity and strategic alliances.
Such planned expansions, however, will require substantial capital. We cannot
guarantee that such capital will be available, or if available, that the terms
on which such capital is available will be acceptable to us. If we raise
additional cash through the issuance of equity or convertible debt securities:
o the percentage ownership of our shareholders will be reduced;
o shareholders may experience additional dilution upon the conversion of
any such debt securities; and
o such securities may have rights, preferences or privileges senior to
those of the holders of common stock.
Failure to Achieve Brand Identity. In order to expand our audience of users and
increase our online traffic, we must establish, maintain and strengthen our
brand. For us to be successful in establishing our brand, we believe healthcare
consumers must perceive us as a trusted source of healthcare information, and
advertisers and merchants must perceive us as an effective marketing and sales
channel for their products and services. Our business could be materially
adversely affected if our marketing efforts are not productive or if we cannot
strengthen our brand.
In addition, to remain competitive with other Internet companies, including the
numerous other Internet health-related websites, we must continue to enhance and
improve the responsiveness, functionality and features of our website and
develop other products and services. This will require us to:
o develop or license increasingly complex technology; and
o create an easy to use and functional e-commerce component to our
website.
We may not succeed in developing or introducing such features, functions,
products and services in order to attract consumers. Such failure would
adversely affect our business, results of operations and financial condition.
Unpredictability of Future Revenue Streams; Potential Fluctuations in Quarterly
Results. Our revenue and operating results may vary significantly from quarter
to quarter due to a number of factors, not all of which are in our control. If
we have a shortfall in revenue in relation to our expenses, or if our expenses
precede increased revenue, then our results of operations would be materially
adversely affected. This would likely affect the market price of our common
stock in a manner that may be unrelated to our long-term operating performance.
Important factors which could cause our results to fluctuate materially include:
o our ability to attract and retain users;
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o our ability to attract and retain advertisers and sponsors;
o our ability to attract and retain customers and maintain customer
satisfaction for our existing and future product offerings;
o new Internet websites, services or products introduced by us or our
competitors;
o the level of Internet and other online services usage;
o our ability to upgrade and develop our systems and infrastructure
and attract new personnel in a timely and effective manner;
o our ability to successfully integrate operations and technologies from
any acquisitions, joint ventures or other business combinations or
investments; and
o technical difficulties or system downtime affecting the operation of
our website.
In addition, as our market develops, seasonal and cyclical patterns may emerge.
These patterns may affect our revenue. We cannot yet predict to what extent our
operations will prove to be seasonal. Due to the factors noted above and the
other risks discussed in this section, you should not rely on quarter-to-quarter
comparisons of our results of operations as indicators of future performance. It
is possible that in some future periods our operating results may be below the
expectations of public market analysts and investors. In this event, the price
of our common stock may underperform or decrease.
Dependence on Third-Party Relationships. In order to expand our network, we have
entered into a number of strategic relationships that involve the payment of
funds for prominent or exclusive carriage of our healthcare information and
services. These transactions are premised on the assumption that the traffic we
obtain from these arrangements will permit us to earn revenue in excess of the
payments made to partners. This assumption is not yet proven, and if we are
unsuccessful in generating sufficient resources to offset these expenditures, we
will likely be unable to operate our business. We have entered into distribution
relationships with several companies, and we intend to enter into additional
relationships in the future. Most of these distribution relationships are short
term in nature and may not be renewed or may be canceled by our distribution
partner. Although we view our distribution relationships as a key factor in our
overall business strategy, our distribution partners may not view their
relationships with us as significant to their business, and they may later
decide to end their commitment to us or even decide to compete directly with us
in the future. We cannot guarantee that any distribution partner will perform
its obligations as agreed or contemplated or that we would be able to
specifically enforce any distribution agreement. Our arrangements with our
distribution partners generally do not establish minimum performance
requirements, but instead rely on the voluntary efforts of our distribution
partners. Therefore, we cannot guarantee that these relationships will be
successful.
Most of our arrangements with third-party Internet websites:
o do not require future minimum commitments to use our services;
o are not exclusive; and
o are short-term or may be terminated at the convenience of the other
party.
In addition, we do not have agreements with many website operators that provide
links to onhealth.com, and those operators with which we do may terminate such
links at any time without notice. As a result, we cannot assure you that our
existing relationships will result in sustained business relationships or the
generation of significant revenue for us. Failure of one or more of our
strategic relationships to achieve or maintain market acceptance or commercial
success or the termination of one or more successful strategic relationships
could have a material adverse effect on our business, results of operation and
financial condition.
Competition. The number of Internet websites offering users healthcare content,
products and services is vast and increasing at a rapid rate. These companies
compete with us for users, advertisers, e-commerce transactions and other
sources of online revenue. In addition, traditional media and healthcare
providers compete for consumers' attention both through traditional means as
well as through new Internet initiatives. We believe that competition for
healthcare consumers will continue to increase as the Internet develops as a
communication and commercial medium.
There are a number of competitors delivering online health content who will also
seek advertising revenue, and it is likely that more competitors will emerge in
the near future. Such competitors include, among others: WebMD/Healtheon,
drkoop.com, Mediconsult, Medscape and InteliHealth. Many of these competitors
have more cash available to spend, longer operating histories and stronger brand
recognition than we do. Some have internal distribution or other opportunities
to support their business that we neither have nor are able to replicate for a
reasonable investment. As expressed above, we believe that the number of other
health care Internet companies that rely on Internet-based advertising revenue
will increase substantially in the future. Accordingly, we will likely face
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increased competition, resulting in increased pricing pressures on our
advertising rates, which could have a material adverse effect on our business.
We believe that the principal competitive factors in attracting advertisers to
our website include:
o the amount of traffic on our website;
o brand recognition;
o customer service;
o the demographics of our user base;
o our ability to offer targeted audiences; and
o the overall cost effectiveness of the advertising medium we offer.
Dependence on Key Personnel. Our ability to execute our growth plan and be
successful depends on our continuing ability to attract, retain and motivate
highly skilled employees. As we continue to grow, we will need to hire
additional personnel in all operational areas. Competition for personnel
throughout the Internet industry is intense. We may be unable to retain our key
employees or attract, assimilate or retain other highly qualified employees in
the future. We have from time to time in the past experienced, and we expect to
continue to experience in the future, difficulty in hiring and retaining highly
skilled employees with appropriate qualifications. If we do not succeed in
attracting new personnel or retaining and motivating our current personnel, our
business will be adversely affected.
Reliance on Intellectual Property and Proprietary Rights. We regard much of our
website and its technology as proprietary and try to protect it by relying on
trademarks, copyrights and trade secret laws. In connection with our license
agreements with third parties, we seek to control access to and distribution of
our technology, documentation and other proprietary information. Even with all
of these precautions, it could be possible for someone else to either copy or
otherwise obtain and use our proprietary information without our authorization
or to develop similar technology independently. Effective trademark, copyright
and trade secret protection may not be available in every country in which our
services are made available through the Internet, and policing unauthorized use
of our proprietary information is difficult and expensive. We cannot be sure
that the steps we have taken will prevent misappropriation of our proprietary
information. Such misappropriation could have a material adverse effect on our
business. In the future, we may need to go to court to either enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. Such litigation might
result in substantial costs and diversion of resources and management attention.
We currently license from third parties certain technologies incorporated into
onhealth.com. As we continue to introduce new services that incorporate new
technologies, we may be required to license additional technology from others.
We cannot be sure that these third-party technology licenses will continue to be
available on commercially reasonable terms, if at all.
Liability for Information Retrieved from or Transmitted over the Internet;
Liability for Products Sold over the Internet. Because any of the materials on
our website may be downloaded or viewed, and such materials could be sent to
others, we could be sued for:
o defamation;
o negligence;
o copyright or trademark infringement;
o medical malpractice or personal injury; or
o other theories based on the nature and content of such materials.
We could also be exposed to liability with respect to third-party information
that may be accessible:
o through our website, or
o through content and materials that may be posted by our users on
discussion boards that we offer.
Such claims might include, that by directly or indirectly providing links to
websites operated by third parties, we are liable for copyright or trademark
infringement or other wrongful actions by such third parties through such
websites. It is also possible that, if any third-party information provided on
our website contains errors, third parties could make claims against us for
losses they incur relying on such information. Insurance may not be adequate to
cover any such potential liabilities. Even if such claims do not result in
liability, we could incur significant costs in investigating and defending
against such claims.
In addition, patients who file lawsuits against doctors often name as defendants
all persons or companies with any relationship to the doctors. As a result,
patients may file lawsuits against us based on advice rendered by physicians
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through our website. In addition, a court or government agency may take the
position that our delivery of health information, or information delivered by a
third-party website that a consumer accesses through our website, exposes us to
malpractice or other personal injury liability for wrongful delivery of
healthcare services or erroneous health information. We cannot assure you that
the amount of insurance we maintain with insurance carriers will be sufficient
to cover all of the losses we might incur from these claims and legal actions.
In addition, insurance for some risks is difficult, impossible or too costly to
obtain, and as a result, we may not be able to purchase insurance for some types
of risks.
Risks Related To System Operation. All companies that rely on the Internet are
dependent upon the continuous, reliable and secure operation of Internet servers
and related hardware and software. If that service is interrupted, consumers
would be inconvenienced and commercial clients would suffer from a loss in
advertising or transaction delivery. This would result in a revenue loss to us.
Even though our computer and communications hardware are protected through
physical and software safeguards, they are still vulnerable to fire, earthquake,
flood, power loss, telecommunications failures, physical or software break-ins
and similar events. We do not have a complete back-up for all of our computer
and telecommunications facilities and do not carry business interruption
insurance to protect us in the event of a catastrophe. Such an event could lead
to significant negative impacts on our business. We also depend on third parties
to provide users with web browsers and Internet and online services necessary
for access to our website. In the past, users have occasionally experienced
difficulties with Internet and online services due to system failures, including
failures unrelated to our systems. Any sustained disruption in Internet access
provided by third parties could have a material adverse effect on our business.
We retain confidential customer information in our database. Therefore, it is
critical that our facilities and infrastructure remain secure and are perceived
by consumers to be secure. Despite the implementation of security measures, our
infrastructure may be vulnerable to physical break-ins, computer viruses,
programming errors or similar disruptive problems. A material security breach
could damage our reputation or result in liability to us.
Management of Potential Growth. We have experienced and are currently
experiencing a period of significant growth. This growth has placed, and the
future growth we anticipate in our operations will continue to place, a
significant strain on our resources. As part of this growth, we will have to
implement new operational and financial systems and procedures and controls,
expand, train and manage our employee base, and maintain close coordination
among our technical, accounting, finance, marketing, sales and editorial staffs.
If we are unable to manage our growth effectively, our business, results of
operations and financial condition could be adversely affected. In addition, all
of the members of our senior management joined us in late 1997, 1998 or 1999.
Thus, we have a very new management team that has not worked together for very
long. We cannot assure you that our management team will be able to work
together effectively or successfully manage our growth.
Reliance On External Content. While we produce much of the editorial content
found on our website, some of our content is licensed from third parties.
Accordingly, we rely on the expertise, technical capability, name recognition
and willingness to syndicate content for branding and distribution of others. As
health-related content grows on the web, there will be increasing competition
for the best health information suppliers. This may result in certain content
becoming unavailable or in significantly higher content prices. Such an outcome
could make our website less attractive or useful for a user and could have a
material adverse effect on our business and financial performance.
Governmental Regulation and Legal Issues. Because of the increasing use of the
Internet as a communication and commercial medium, the government has adopted
and may adopt additional laws and regulations with respect to the Internet
covering such areas as:
o user privacy,
o pricing,
o content,
o taxation,
o copyright protection, and
o the distribution of health care products or advice over the Internet.
Since we operate a healthcare network over the Internet, our business is subject
to government regulation specifically relating to medical devices, the practice
of medicine and pharmacology, healthcare regulation, insurance and other matters
unique to the healthcare area. Laws and regulations have been or may be adopted
with respect to the provision of healthcare-related products and services
online, covering areas such as:
o the regulation of medical devices;
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o the practice of medicine and pharmacology and the sale of controlled
products such as pharmaceuticals online;
o the regulation of government and third-party cost reimbursement; and
o the regulation of insurance sales.
FDA Regulation of Medical Devices. Some computer applications and software are
considered medical devices and are subject to regulation by the United States
Food and Drug Administration. We do not believe that our current applications or
services will be regulated by the FDA; however, our applications and services
may become subject to FDA regulation. Additionally, we may expand our
application and service offerings into areas that subject us to FDA regulation.
We have no experience in complying with FDA regulations. We believe that
complying with FDA regulations would be time consuming, burdensome and expensive
and could delay or prevent our introduction of new applications or services.
Regulation of the Practice of Medicine and Pharmacology. The practice of
medicine and pharmacology requires licensing under applicable state law. We have
endeavored to structure our website and affiliate relationships to avoid
violation of state licensing requirements, but a state regulatory authority may
at some point allege that some portion of our business violates these statutes.
Any such allegation could result in a material adverse effect on our business.
Further, any liability based on a determination that we engaged in the practice
of medicine without a license may be excluded from coverage under the terms of
our current general liability insurance policy.
Federal and State Healthcare Regulation. We earn a service fee when users on our
website purchase prescription pharmacy products from certain of our e-commerce
partners. Federal and state anti-kickback laws prohibit granting or receiving
referral fees in connection with sales of pharmacy products that are
reimbursable under federal Medicare and Medicaid programs and other
reimbursement programs. Although there is uncertainty regarding the
applicability of these regulations to our e-commerce revenue strategy, we
believe that the service fees we receive from our e-commerce partners are for
the primary purpose of marketing and do not constitute payments that would
violate federal or state "anti-kickback" laws. However, if our program were
deemed to be inconsistent with federal or state law, we could face criminal or
civil penalties. Further, we would be required either not to accept any
transactions that are subject to reimbursement under federal or state
healthcare programs or to restructure our compensation to comply with any
applicable anti-kickback laws or regulations. In addition, similar laws in
several states apply not only to government reimbursement but also to
reimbursement by private insurers. If our activities were deemed to violate any
of these laws or regulations, it could cause a material adverse affect on our
business, results of operations and financial condition.
Internet Capacity Constraints. Our success will depend upon the ability of the
communications industry to provide Internet access and carry Internet traffic.
The Internet may not prove to be a viable commercial medium because of:
o inadequate development of the necessary infrastructure such as a
reliable network backbone
o timely development of complementary products such as high speed modems;
o delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity
o increased government regulation
If the Internet continues to experience significant growth in the number of
users and the level of use, then the Internet infrastructure may not be able to
continue to support the demands placed on it, which may impair the ability of
consumers to access our website and could hinder our ability to generate
advertising revenue.
Security Risks. Experienced programmers or hackers could attempt to penetrate
our network security. Because a hacker who is able to penetrate our network
security could misappropriate proprietary information or cause interruptions in
our products and services, we may be required to expend capital and resources to
protect against or to alleviate problems caused by such parties. In addition, we
may not have a timely remedy against a hacker who is able to penetrate our
network security. Such purposeful security breaches could have a material
adverse effect on our business, results of operations and financial condition.
In addition, the inadvertent transmission of computer viruses could expose us to
a risk of loss or litigation and potential liability.
Stock Price Volatility. The stock market has experienced significant price and
trading volume fluctuations, and the market prices of technology companies,
particularly Internet-related companies, have been extremely volatile.
Exceptional share price and trading volume changes have accompanied recent
public offerings by Internet companies in the first days and weeks after the
securities were released for public trading. Investors may not be able to resell
their shares at or above the initial public offering price. In the past,
following periods of volatility in the market price of a public company's
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securities, securities class action litigation has often been instituted against
that company. Such litigation could result in substantial costs and a diversion
of management's attention and resources.
Impact of General Economic Conditions. Time spent on the Internet by
individuals, purchases of new computers and purchases of membership
subscriptions to Internet websites are typically discretionary for consumers and
may be particularly affected by adverse trends in the general economy. The
success of our operations depends to a significant extent upon discretionary
consumer spending, including economic conditions affecting disposable consumer
income such as employment, wages and salaries, business conditions, interest
rates, availability of credit and taxation. In addition, our business strategy
relies on advertising by, and agreements with, other Internet companies. Any
significant deterioration in general economic conditions that adversely affected
these companies could also have a material adverse effect on our business.
Dividends. We intend to retain all of our earnings, if any, for use in the
business and do not anticipate paying any cash dividends in the foreseeable
future.
OTHER
Product Development, Editorial and Design
In 1999, 1998, and 1997, product development expenses were $7,660,000,
$4,511,000, and $6,784,000, respectively. In addition, in 1997, product
development, editorial and design expenses paid for by third parties was
$682,000.
Protection of Proprietary Rights
We regard the software we own as proprietary and rely upon a combination of
copyrights, trade secret laws, employee and third-party non-disclosure
agreements and other methods to protect our intellectual property. We believe
that copyright protection for our intellectual property is less significant to
our success than factors such as the knowledge, ability and experience of our
personnel, and the quality of our new product development and distribution
efforts.
Backlog
We had no significant backlog at fiscal year end of 1999, 1998, or 1997.
Major Customers
No customer represented more than 10% of net revenue for the year ended December
31, 1999. Three customers represent 40%, 16% and 13% of net revenue for the year
ended December 31, 1998; one customer represents 12% of net revenue for the year
ended December 31, 1997. The revenue recorded from the customer that represents
40% of the net revenue in 1998 was the result of a $603,000 payment received
from the customer related to minimum sales requirements from a terminated CD-ROM
distribution agreement.
ITEM 2. PROPERTIES
We lease approximately 7,000 square feet of space where our principal executive
and administrative offices are located at 808 Howell Street, Suite 400, Seattle,
Washington 98101. The lease expires June 30, 2003. We also maintain
approximately 1,500 square feet of office space in Seattle that is subleased on
a month-to-month basis. In September 1999 we leased 8,250 square feet of office
space located at 536 Broadway, New York, New York. This lease expires October
31, 2004.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we have been involved in legal proceedings in the normal
course of our operations. Other than as described below, we are not currently a
party to any pending or, to our knowledge, threatened legal proceedings in which
an adverse decision could have a material impact on our results of operations or
financial position.
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
18
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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
because they were determined to be granted below fair market value on the
measurement date. 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 replacement ISO grant under the Company's 1997 Stock Option Plan. To
the extent any 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
replacement options will 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock was initially offered to the public on October 6,
1993 under the symbol "IVIP". Starting June 17, 1998, the Common Stock was
quoted under the symbol "ONHN"on the Nasdaq SmallCap Market system. Since
September 1, 1999 the Common Stock has been quoted on the Nasdaq National Market
System.
The following table sets forth the high and low bid quotations for the Company's
Common Stock as reported by Nasdaq for the last two fiscal years. Such
quotations reflect inter-dealer prices, without retail mark-up, mark down or
commission and may not necessarily represent actual transactions.
HIGH LOW
--------- ---------
1999
------------------------
Fourth Quarter $ 14 $ 5 3/4
Third Quarter 12 5/8 5 23/32
Second Quarter 22 3/4 8 1/4
First Quarter 21 7/8 4 5/8
1998
------------------------
Fourth Quarter $ 6 5/8 $ 2 3/16
Third Quarter 11 3/8 3 5/8
Second Quarter 8 5/8 4 7/8
First Quarter 6 2 5/8
At March 21, 2000, based on information received from the Company's transfer
agent on the Company's common stock, there were approximately 199 record holders
of the Company's Common Stock, excluding shareholders whose stock is held either
in nominee name and/or street name brokerage accounts.
The Company has never declared or paid any cash dividends on its Common Stock
and does not intend to pay dividends on its Common Stock in the near future. To
date, the Company has incurred losses and presently expects to retain its future
anticipated earnings to finance development of and expansion of its business.
The payment by the Company of dividends, if any, on its Common Stock in the
future is subject to the discretion of the Board of Directors and will depend on
the Company's earnings, financial condition, capital requirements and other
relevant factors.
RECENT SALES OF UNREGISTERED SECURITIES
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. As an issuance to sophisticated investors not involving any
public offering, the sale of the shares of common stock was exempt under Section
4(2) of the Securities Act and Regulation D thereunder.
In February and March 1999, the Company issued, in the aggregate, 191,758 shares
of unregistered restricted common stock in exchange for certain advertising
arrangements. The issuance of the shares of common stock was exempt under
Section 4(2) of the Securities Act.
In October 1999, the Company issued 162,602 shares of unregistered restricted
common stock in exchange for a one year advertising agreement. The agreement
also requires the Company to pay approximately $350,000 per month as an
exclusivity fee and a placement fee of impressions to be delivered. The issuance
of the shares of common stock was exempt under Section 4(2) of the Securities
Act.
In December 1999, the Company issued 292,683 shares of unregistered restricted
common stock in exchange for the delivery of a guaranteed number of impressions
and click throughs on another internet portal over a one year period. The
issuance of the shares of common stock was exempt under Section 4(2) of the
Securities Act.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below has been derived from the financial
statements of the Company. For additional information, see the Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1999(1)(2) 1998(1) 1997 1996 1995
------- ------- ------ ------ ------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Net revenue $ 3,767 $ 1,522 $ 3,761 $ 9,470 $ 11,970
Loss from operations (50,053) (11,265) (11,262) (10,326) (14,875)
Net loss (49,772) (11,185) (10,947) (10,157) (14,234)
Net loss applicable to
common shareholders $ (49,772) $ (12,210) $ (13,965) $ (10,336) $ (14,254)
Net loss per common share:
Basic and diluted $ (2.84) $ (1.14) $ (1.73) $ (1.36) $ (1.90)
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments $ 10,142 $ 2,119 $ 2,488 $ 3,462 $ 7,759
Working capital (deficiency) 8,019 (1,158) (1,252) 3,230 8,607
Total assets 32,720 3,894 4,577 13,411 18,352
Convertible subordinated
debentures - - - 3,500 -
Total liabilities 11,825 4,195 4,559 8,606 3,627
Convertible redeemable
preferred stock - - - 1,905 1,845
Shareholders' equity (deficit) 20,895 (301) 18 2,900 12,880
<FN>
(1) The 1999 and 1998 loss from operations, net loss and net loss per share
have been restated to record additional amortization of stock-based
compensation. See Notes 2 and 23 of Notes to Consolidated Financial
Statements.
(2) Includes financial data of BabyData, which was acquired on September 9,
1999, and HDI, which was acquired on November 29, 1999. Results of
operations for BabyData and HDI are included beginning with their
respective dates of acquisition.
</FN>
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We intend to become the leading internet resource dedicated to the management of
family health and well-being. We are an Internet-based provider of high quality
health and medical information and applications to a broad base of consumers.
Our Internet site, onhealth.com, produces and distributes original, relevant
health content including in-depth reports, personalized information retrieval,
geographically specific guides to healthcare services and information,
editorials and interactive community environments.
Until January 1998, our traditional line of business had been CD-ROM
development, production and distribution. We were also a supplier of video,
animation and graphic assets to a health and medical cable TV channel. Under
this strategy, we were never able to attain profitability, and, at December 31,
1997, had an accumulated deficit of $78,576,000. In 1997, our Board of Directors
revised its business strategy and brought in an entirely new management team and
other key employees skilled in the development of internet Web sites. In 1998 we
were focused on the development of an internet-delivered, consumer-oriented
network of health and wellness sites. We intend to generate advertising revenue
by appealing to advertisers through our ability to reach targeted demographics
and psychographics. Additional products and services, such as transactional
based e-commerce, subscription and syndication, will be developed to exploit
opportunities as they present themselves in the marketplace.
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In July 1998, we relaunched the onhealth.com Web site and focused on generating
advertising revenue. We have a wide variety of advertisers on our Web site
including healthcare and other non-healthcare advertisers. In March 1999, we
launched a shopping area on our site designed to offer our consumers the ability
to purchase a wide variety of health and wellness products and related products.
To date, we have e-commerce relationships with, among others, drugstore.com,
VitaminShoppe, Amazon.com, SelfCare, Nutrisystem.com, American Greetings,
ProFlowers, WholeFoods Market, greenmarketplace.com and enews.com and expect to
continue to add additional categories and partners.
During the third and fourth quarters of 1999, we acquired BabyData.com, a
premier Web site for pregnant couples and those trying to conceive, and Health
Decisions International, LLC ("HDI"), which develops, provides and supports a
broad range of personal health information, referral and nurse counseling
services to customers throughout the United States. We have accounted for these
acquisitions under the purchase method of accounting. The results of operations
for BabyData.com and HDI have been included since the dates of acquisition.
On February 15, 2000, Healtheon/WebMD agreed to acquire OnHealth Network
Company. Under the terms of the agreement, shareholders of OnHealth stock are to
receive .189435 shares of Healtheon/WebMD Common Stock for each share of
OnHealth stock. Closing of the transaction, which will be accounted for as a
purchase transaction, is expected in the second quarter of this year, subject to
regulatory approval, including the effectiveness of a joint registration/proxy
statement on Form S-4 to be filed with the SEC, and certain other customary
conditions. Following the closing, OnHealth will become a wholly-owned
subsidiary of Healtheon/WEBMD and the common stock of OnHealth will cease to be
publicly traded.
RESTATEMENT OF PRIOR PERIOD RESULTS
The Company has restated its consolidated balance sheets as of December 31, 1999
and 1998 and the related consolidated statements of operations, shareholders'
equity and cash flows for the years ended December 31, 1999 and 1998 due to the
recording of additional stock-based compensation charges (see Note 23 of Notes
to Consolidated Financial Statements). As a result, the consolidated balance
sheets include adjustments to increase additional paid-in-capital by $9.0
million and $1.1 million at December 31, 1999 and 1998, respectively, to
increase the accumulated deficit by $2.7 million and $246,000 at December 31,
1999 and 1998, respectively, and to increase deferred compensation by $6.3
million and $896,000 at December 31, 1999 and 1998, respectively. The
consolidated statements of operations include an adjustment to increase the
stock-based compensation amortization by $2.4 million and $246,000 for the years
ended December 31, 1999 and 1998, respectively.
RESULTS OF OPERATIONS
The following table sets forth selected income statement data for the years
ended December 31, 1999, 1998 and 1997:
Year Ended December 31,
------------------------------------------
(In thousands) 1999 1998 1997
------------- ------------- -------------
(Restated) (Restated)
Net revenue $ 3,767 $ 1,522 $ 3,761
Costs and expenses 53,520 12,787 15,023
Loss from operations (50,053) (11,265) (11,262)
Net loss (49,772) (11,185) (10,947)
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NET REVENUE
Net revenue for the years ended December 31, 1999, 1998 and 1997 was as follows:
Year Ended December 31,
--------------------------------------------------
1999 1998 1997
-------------- -------------- ----------------
(In thousands)
Online $ 3,385 $ 388 $ 58
Services and communication 277 - -
Contract development and other 69 380 1,220
Product sales and licensing 36 754 1,990
Cable television licensing - - 493
-------------- -------------- ----------------
$ 3,767 $ 1,522 $ 3,761
============== ============== ================
Online revenue
Online revenue is generated through the sale of advertising and sponsorship of
our onhealth.com Web site. The increase in online revenue of $2,997,000, or
772%, from 1998 to 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. Online revenue
increased $330,000, or 569%, from 1997 to 1998. The increase in 1998 as compared
with 1997 reflects increased site sponsorship and advertising revenue from our
onhealth.com Web site, which was redesigned and re-launched in July 1998. The
1997 online revenues of $58,000 included site sponsorships, advertising and
premium services revenue related to onhealth.com and the former O@SIS web site.
Online revenue is expected to increase due principally to an increase in the
number of advertising clients.
Services and communication revenue
Services and communication revenue, a line of revenue for 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.
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. Contract development
and other revenue decreased $311,000, or 82% from 1998 to 1999 and $840,000, or
69%, from 1997 to 1998. The decreases generally reflected our shift toward the
online efforts.
Product sales and licensing revenue
Product sales and licensing revenue consists of 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 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. In 1995, we entered into a five year distribution
agreement which allowed for the promotion, marketing and distribution of certain
of our CD-ROM products. The agreement also provided for minimum levels of sales
through the year 2000. In December 1998, we received a $603,000 payment related
to minimum sales requirements from the termination of the CD-ROM distribution
agreement. We do not anticipate receiving any significant product sales and
licensing revenue from CD-ROM products in the future.
Cable television licensing revenue
Cable television licensing revenue reflects revenue from the content and royalty
agreement with America's Health Network (AHN). Under the agreement, we are
licensing multimedia content to AHN starting in May 1995 and are to receive
minimum licensing royalties over the life of the agreement. The revenue was
being recognized evenly over the expected life of the agreement. In June 1997,
as a result of our not receiving our quarterly payment, we stopped recognizing
revenue under the AHN agreement.
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<PAGE>
COSTS AND EXPENSES
Total cost and expenses in 1999 increased $41,033,000 or 321%, to $53,820,000
from $12,787,000 in 1998. The increase was primarily due to increased sales and
marketing efforts related to our onhelath.com Web site and increased product
development, editorial and design expenses.
Product Development, Editorial & Design
In 1999 and 1998 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 onhealth.com Web site.
In 1997, product development, editorial and design expenses also included CD-ROM
development costs. The increase in product development, editorial and design
expenses of $3,149,000, or 70%, from $4,511,000 in 1998 to $7,660,000 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. The decrease in product
development, editorial and design expenses of $2,273,000, or 34%, from
$6,784,000 in 1997 to $4,511,000 in 1998 reflects the shift from CD-ROM products
towards an internet focused business. 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 $31,415,000, or 558%, from $5,626,000 in 1998 to $37,041,000
in 1999. The increase was primarily the result of increased advertising expenses
related to the roll out of our redesigned onhealth.com Web site during July 1999
as well as increased headcount. The broad-based consumer targeted advertising
campaign, which includes online, television, radio and outdoor advertising,
commenced early in the third quarter of 1999. We intend to continue our
advertising campaign in 2000 and, as a result, we expect sales and marketing
expenses to increase over 1999 amounts.
Sales and marketing expenses increased $4,279,000, or 318%, from $1,347,000 in
1998 to $5,626,000 in 1997. The increase primarily relates to increased
marketing activities for our onhealth.com web site. In July 1998, we began a
marketing campaign to promote the launch of the onhealth.com web site, which
included online and radio advertising.
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 $2,495,000, or 110%, from $2,274,000 in
1998 to $4,769,000 in 1999. The increase was due to increased employee costs as
a result of increased headcount, legal fees and settlements, travel and bad debt
expense. Year-to-date legal fees and settlements include $468,000 for settlement
and legal costs related to two lawsuits. 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.
General and administrative expenses were $2,274,000 in 1998, compared to
$6,892,000 in 1997, a decrease of $4,618,000, or 67%. The large decrease in 1998
relative to 1997 reflects substantially reduced legal costs, reduced bad debt
costs, and general cost cutting measures including reduced rent costs from our
relocation to smaller facilities. The 1997 costs also included certain special
charges including costs to relocate the Company from Minneapolis, Minnesota to
Seattle, Washington.
Amortization of Intangibles and Goodwill
Amortization of intangibles and goodwill totaled $504,000 in 1999 and is related
to the amortization of goodwill and identifiable intangibles recorded in
connection with the 1999 business acquisitions. There was no such amortization
in 1998 and 1997. 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 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, and the compensation expense related to stock
option grants. The 1999 stock-based compensation includes amortization of the
compensation arrangements in connection with the acquisitions of BabyData.com in
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<PAGE>
the third quarter of 1999 and HDI in the fourth quarter of 1999, aggregating
$822,000. The stock-based compensation amounts related to options granted with
an exercise price less than the fair value of the underlying common stock is
$3.0 million in 1999 and $376,000 in 1998. Stock-based compensation is expected
to increase in 2000, as the remaining amortization related to the stock option
grants and the two 12-month employment contracts, which became effective
September 9, 1999 and November 29, 1999, will be recognized in the 2000
statement of operations.
Interest Income (Expense), Net
Interest income (expense), net was $279,000, $84,000 and $(158,000) in 1999,
1998 and 1997, respectively. The 1999 net interest income (expense) includes
interest income of $387,000, and interest expense, the majority of which is
related to the Searle note payable of $108,000. The increase in 1999 was due to
the interest earned on the cash balances as a result of financings completed
during the first and third quarters of 1999. The increase in net interest income
(expense), net from 1997 to reflects the lack of debt in 1998 relative to 1997.
The 1997 net interest income (expense), net includes interest expense of
$264,000 related to $3,500,000 in convertible subordinated debentures, which
were outstanding for ten months in 1997. These debentures were converted to
common stock in October 1997.
Other Income (Expense), Net
Other income (expense), net was $2,000, $(4,000) and $473,000 in 1999, 1998 and
1997, respectively. The 1998 other expense of $4,000 included a $285,000 loss
related to fixed asset disposals, a $562,000 gain related to the collection of a
previously reserved accounts receivable, and a $281,000 revenue sharing payment
related to the collection of the receivable.
The 1997 other income (expense), net of $473,000 included a $2,700,000 cash
payment that we received in connection with the transfer of ownership of our
O@sis Web site to Mayo. This was partially offset by other expense of $2,229,000
in connection with our conversion of Convertible Subordinated Debentures. The
expense represents the excess of the fair market value of Common Stock issued
over the fair value of the Common Stock issuable pursuant to the original
conversion terms of the debentures.
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.
LIMITATION ON USE OF NET OPERATING LOSS AND OTHER TAX CREDIT CARRYFORWARDS
At December 31, 1999, we had available net operating loss carryforwards of
approximately $130,323,000 and available research and development credits of
approximately $442,000 for federal income tax purposes. The net operating loss
carryforwards and the credits expire at various times through 2019. These
carryforwards are subject to the limitations of Internal Revenue Code Section
382. This section provides limitations on the availability of net operating
losses to offset current taxable income if significant ownership changes have
occurred for federal tax purposes.
INFLATION
Management believes that inflation has not had a material impact on our results
of operations.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, we had cash and cash equivalents of $10,142,000. Total
cash used by operating activities during 1999 was $43,398,000, which was
primarily due to a net loss of $49,772,000. Investing activities used net cash
of $1,187,000 primarily for purchases of computer equipment and leasehold
improvements due to the growth in personnel. Financing activities provided cash
of $52,608,000 through the private placement of common stock in the first
quarter and public offerings in second and third quarters, aggregating
$49,676,000, net of offering costs; proceeds from the exercise of stock options
$1,347,000; and the exercise of warrants, $1,585,000.
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. We believe our
cash and cash equivalents, including the $30 million lending commitment by
Healtheon/WEBMD, coupled with our ability to reduce discretionary expenditures
as necessary, will be sufficient to fund our operations through December 31,
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<PAGE>
2000. Operations generated a negative cash flow during 1997, 1998 and 1999, and
we expect a significant use of cash in 2000 as we markets and expands our 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes that the market risk arising from holdings of its
financial instruments is not material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial information required by Item 8 is included elsewhere in
this Report (see Part IV, Item 14).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
26
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Set forth are the executive officers and directors of the Company as of March
24, 2000.
Name Age Title
---------------------- ------- -------------------------------------------------
Robert N. Goodman 47 Chief Executive Officer, President and Director
Rebecca J. Farwell 38 Executive Vice President, General Manager
Ronald M. Stevens 36 Chief Financial Officer
Michael A. Brochu 46 Chairman of the Board
Ann Kirschner 49 Director
Ram Shriram 43 Director
Rick Thompson 40 Director
Executive officers of the Company are elected at the discretion of the Board of
Directors with no fixed term. There are no family relationships between or among
any of the executive officers or directors of the Company.
Robert N. Goodman joined the Company in November 1997 as President and Chief
Executive Officer and a member of the Company's Board of Directors. From April
1997 to November 1997, he was the director of business development for MSNBC
Interactive News, LLC. From December 1995 to April 1997, Mr. Goodman was an
independent consultant working for Microsoft Corporation. From November 1993 to
October 1995, he was Assistant General Counsel for The 3DO Company.
Rebecca J. Farwell joined the Company in February 1998 and currently serves as
Executive Vice President and General Manager. Prior to that, she was the
editorial director for Discovery Channel Online (DCOL) and Discovery Publishing.
She began her career at The Discovery Channel in 1987 as the managing editor of
The Discovery Channel Magazine.
Ronald M. Stevens joined OnHealth in August 1999 as Chief Financial Officer.
From May 1996 to August 1999, he served as General Manager and Senior Vice
President of Sierra-On-Line, Inc., a leader in entertainment software. From May
1994 to May 1996, he served as Corporate and Divisional Controller of
Sierra-On-Line.
Michael A. Brochu has been a Director of the Company since April 1997 and has
also served as Chairman of the Board of Directors of the Company since October
1997. Mr. Brochu has served as President and Chief Executive Officer of Primus,
Inc., an electronic customer relationship management ("eCRM") company, since
November 1997. From October 1995 to October 1997, he served as President and
Chief Operating Officer of Sierra On-Line, Inc., a leader in entertainment
software, and as its Chief Financial Officer and Executive Vice President from
July 1994 to October 1995. From 1987 to July 1994, Mr. Brochu served in the
positions of Senior Vice President, Chief Financial Officer and Chief Operating
Officer of Burlington Environmental, Inc., a division of Burlington Resources,
Inc.
Ann Kirschner has been a Director of the Company since February 1998. Ms.
Kirschner is currently the executive director of Columbia Media Enterprises.
From December 1994 to December 1998, she served as Vice President of NFL
Interactive for NFL Enterprises, Inc. Ms. Kirschner was responsible for the
launch of the NFL's official Web site, the official Super Bowl Web site and Team
NFL. Prior to December 1994, she served as President of Comma Communications for
more than two years.
Ram Shriram has been a Director of the Company since February 1998. Mr. Shriram
is currently the Managing Partner of Sherpalo LLC, an early stage venture fund.
From September 1998 to September 1999, Mr. Shriram served as Vice-President of
Business Development at Amazon.com, an Internet retailer. From May 1998 to
September 1998, he served as President and Chief Operating Officer of Junglee
Corporation, a company that enables Web users to locate, compare and transact
goods and services on the Internet. Junglee was acquired by Amazon.com in
September 1998. From February 1994 to February 1998, he served as Vice President
of Netscape Communications Corporation and from October 1990 to November 1994,
Mr. Shriram was Netscape's Director, Channel Sales of Network Computing Devices.
Rick Thompson has been a Director of the Company since February 1998. Mr.
Thompson has served as Vice President and General Manager of Microsoft
Corporation's Hardware Division since October 1987. Mr. Thompson manages the
division's product lines and oversees development.
27
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth all cash compensation paid or to be paid by the
Company, as well as certain other compensation paid or accrued, during each of
the Company's last three fiscal years to each person who served as Chief
Executive Officer during fiscal 1999 and the only other executive officer who
earned more than $100,000 in salary and bonuses in 1999.
<TABLE>
<CAPTION>
Long Term Compensation
-------------------------------------
Awards Payouts
-------------------------- ---------
Restricted
Stock
Annual Compensation Awards All Other
Name and Principal Fiscal ---------------------------------- Awards LTIP Compensation
Position Year Salary ($) Bonus ($) Other ($) ($) Options ($) ($)
------------------------- ------ ---------- ------ ---------- ---------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert N. Goodman 1999 180,000 110,000 - - 650,000 - -
President and Chief 1998 180,000 110,000 - - 300,000 - -
Executive Officer (2) 1997 18,548 35,000 - - 450,000 - -
Rebecca Farwell 1999 130,000 50,000 - 310,000 - -
General Manager (1) 1998 123,559 - - - 115,000 - 50,000
--------------
<FN>
(1) Ms. Farwell joined the Company on February 2, 1998. All Other
Compensation consists of relocation paid to Ms. Farwell during 1998.
(2) Mr. Goodman joined the Company on November 24, 1997 at an annual salary
of $180,000.
</FN>
</TABLE>
OPTION GRANTS DURING 1999 FISCAL YEAR
The following table provides information regarding stock options granted during
fiscal 1999 to the named executive officers in the Summary Compensation Table.
The Company has not granted any stock appreciation rights.
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of Stock
Total Options Price Appreciation for Option
Number of Shares Granted to Exercise or TERM(2)
Underlying Employees Base Price Expiration ------------------------------
NAME Options Granted In Fiscal Year Per Share(1) Date 5% 10%
------------------- --------------- --------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Robert N. Goodman 500,000 (3) 14.60% $ 4.75 01/03/09 $ 1,493,625 $ 3,785,138
150,000 (4) 4.38 11.0625 07/01/09 1,043,572 2,644,616
Rebecca Farwell 65,000 (5) 1.90% $ 4.75 01/03/09 $ 194,171 $ 492,068
25,000 (6) 0.73 8.9375 06/14/09 140,519 356,102
220,000 (7) 6.42 11.0625 07/01/09 1,530,572 3,878,771
------------------
<FN>
(1) The exercise price is equal to the fair market value of the Common
Stock on the date of each grant.
(2) The potential realizable value portion of the foregoing table
illustrates value that might be realized upon exercise of the options
immediately prior to the expiration of their term, assuming the
specified compounded rates of appreciation on the Company's Common
Stock over the term of the options. These numbers do not take into
account provisions of certain options providing for termination of the
option following termination of employment, nontransferability or
vesting over periods of up to five years.
(3) The option was granted on January 4, 1999 and became exercisable to the
extent of 100,000 on January 4, 2000 and will become exercisable to the
extent of 100,000 shares on January 4 of each year beginning January 4,
2001 through January 4, 2004.
28
<PAGE>
(4) The option was granted on July 2, 1999 and will become exercisable
to the extent of 30,000 shares on July 2 of each year beginning July 2,
2000 through July 2, 2004.
(5) The option was granted on January 4, 1999 and became exercisable to the
extent of 16,250 shares on January 4, 2000, 1,354 shares on each of
February 4, 2000 and March 4, 2000 and will become exercisable to the
extent of 1,354 shares on the 4th day of each month from April 4, 2000
through January 4, 2003.
(6) The option was granted on June 15, 1999 and will become exercisable
to the extent of 6,250 shares on June 15, 2000 and to the extent of 520
shares on the 15th day of each month from July 15, 2000 through June
15, 2003.
(7) The option was granted on July 2, 1999 and will become exercisable to
the extent of 55,000 shares on July 2 of each year beginning July 2,
2000 and to the extent of 4,583 shares on the 2nd day of each month
from August 2, 2000 through August 2, 2003.
</FN>
</TABLE>
OPTION EXERCISES DURING 1999 FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table provides information as to options exercised by the named
executive officers in the Summary Compensation Table during 1999 and the number
and value of all outstanding options at December 31, 1999. The Company has no
outstanding stock appreciation rights.
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
Shares December 31, 1999 December 31, 1999
Acquired Value Exercisable/ Exercisable/
Name On Exercise Realized Unexercisable Unexercisable(1)
-------------------- ----------------- ------------ -------------------------- ---------------------
<S> <C> <C> <C> <C>
Robert N. Goodman - - 1,823,089 exercisable $ 1,823,089
3,655,736 unexercisable $ 3,974,411
Rebecca Farwell - - 287,276 exercisable $ 287,276
151,686 unexercisable $ 619,076
------------
<FN>
(1) Value is calculated on the basis of the difference between the option
exercise price and $8.938, the closing sale price for the Company's
Common Stock at December 31, 1999 as quoted on the Nasdaq National
Market, multiplied by the number of shares underlying the option.
</FN>
</TABLE>
COMPENSATION OF DIRECTORS
DIRECTORS' FEES. The Company's directors receive no fees for attendance at
meetings of the Board of Directors, but they are reimbursed for out-of-pocket
expenses relating to attendance at the meetings; however, Mr. Brochu is paid an
annual fee of $30,000 for his services as Chairman of the Board, as well as
out-of-pocket expenses.
STOCK OPTION GRANTS TO NON-EMPLOYEE DIRECTORS. The Company's 1997 Stock Option
Plan provides for the automatic option grant of stock options to each director
who is not an employee of the Company (a "Non-Employee Director"). Each
Non-Employee Director who is elected for the first time as a director is
automatically granted a nonqualified option to purchase 25,000 shares of the
Common Stock at an option price per share equal to 100% of the fair market value
of the Common Stock on the date of the Non-Employee Director's initial election,
which option is exercisable, to the extent of 6,250 shares immediately and on
each of the first three anniversaries of the date of grant. All options granted
pursuant to these provisions shall expire on the earlier of (i) one year after
the optionee ceases to be a director and (ii) ten (10) years after the date of
grant.
29
<PAGE>
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
In August 1999, the Company entered into an employment agreement with Ronald
Stevens. Pursuant to the agreement, Mr. Stevens shall be employed as the Chief
Financial Officer, receive an annual base salary of $125,000 and shall be
entitled to be considered for an annual cash bonus of up to 50,000. If his
employment is terminated for reasons other than (i) due to Mr. Stevens' death or
permanent disability; (ii) by OnHealth for Just Cause; or (iii) by Stevens
without Good Reason he will be entitled to severance benefits. Severance
benefits will include continuance of his base salary and continued stock option
vesting benefits for a period of 12 months.
In February 2000, the Company finalized its employment agreement with Robert
Goodman. Pursuant to the agreement, Mr. Goodman shall be employed as the
President and Chief Executive Officer, receive an annual base salary of $180,000
and shall be entitled to be considered for an annual cash bonus of up to 50% of
his annual base salary. If his employment is terminated for reasons other than
(i) due to Mr. Goodman's death or permanent disability; (ii) by OnHealth for
Just Cause; or (iii) by Goodman without Good Reason he will be entitled to
severance benefits. Severance benefits will include continuance of his base
salary and continued stock option vesting benefits for a period of 24 months.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee (the "Committee") of the Board of Directors,
consisting of Messrs. Shriram, Goodman and Brochu has furnished the following
report on executive compensation.
The Company's executive compensation program is administered by the Committee.
The Committee, which is composed of two independent directors and an employee,
establishes and administers the Company's executive compensation policies and
plans and administers the Company's stock option and other equity-related
employee compensation plans. The Committee considers internal and external
information in determining officers' compensation.
Compensation Philosophy
The Company's compensation policies for executive officers are based on the
belief that the interests of executives should be closely aligned with those of
the Company's shareholders. The Compensation policies are designed to achieve
the following objectives:
Offer compensation opportunities that attract highly qualified executives,
reward outstanding initiative and achievement, and retain the leadership and
skills necessary to build long-term shareholder value.
Maintain a portion of executives' total compensation at risk, tied to both the
annual and long-term financial performance of the Company and the creation of
shareholder value.
Further the Company's short and long-term strategic goals and values by aligning
compensation with business objectives and individual performance.
Compensation Program
The Company's executive compensation program has three major integrated
components, base salary, incentive awards, and long term incentives.
Base Salary. Base salary levels for executive officers are determined annually
by reviewing the competitive pay practices of Internet companies of similar size
and market capitalization, the skills, performance level, and contribution to
the business of individual executives, and the needs of the Company. Overall,
the Company believes that base salaries for its executive officers are at
competitive salary levels for similar positions in these Internet companies.
Incentive Awards. The Company's executive officers may be eligible to receive
annual cash bonus awards designed to motivate executives to attain short-term
and long-term corporate and individual management goals. The Committee
establishes the annual incentive opportunity for each executive officer in
relation to his or her base salary.
Long-Term Incentives. The Committee believes that stock options are an excellent
vehicle for compensating its officers and employees. The Company provides
long-term incentives through its 1997 Stock Option Plan, 1991 Stock Option Plan
and New Hire Stock Option Plans, the purpose of which is to create a direct link
30
<PAGE>
between executive compensation and increases in shareholder value. Stock options
are granted at fair market value and vest in installments generally over three
to five years. When determining option awards for an executive officer, the
Committee considers the executive's current contribution to Company performance,
the anticipated contribution to meeting the Company's long term strategic
performance goals, and industry practices and norms. Long-term incentives
granted in prior years and existing levels of stock ownership are also taken
into consideration. Because the receipt of value by an executive officer under a
stock option is dependent upon an increase in the price of the Company's Common
Stock, this portion of the executive's compensation is directly aligned with an
increase in shareholder value.
Chief Executive Officer Compensation
Mr. Goodman's base salary, annual incentive award and long-term incentive
compensation are determined by the Committee based upon the same factors as
those employed by the Committee for executive officers generally. Mr. Goodman's
current annual base salary is $225,000 with a potential bonus of up to 50
percent. His salary is subject to annual review and increase by the Board of
Directors of the Company. During fiscal 1999, Mr. Goodman was granted options to
purchase 500,000 and 150,000 shares of Common Stock at an exercise price of
$4.75 and $11.06 per share respectively. As Mr. Goodman is a member of the
Compensation Committee, he excused himself from all discussions, deliberations
and determinations relating to the compensation of the Chief Executive Officer.
Section 162(m) Limitation
Section 162(m) of the Internal Revenue Code limits the tax deduction to $1
million for compensation paid to certain executives of public companies.
Historically, the combined salary and bonus of each executive officer has been
well below the $1 million limit. The Committee's present intention is to comply
with Section 162(m) unless the Committee feels that required changes would not
be in the best interest of the Company or its shareholders.
COMPENSATION COMMITTEE
MICHAEL BROCHU
RAM SHRIRAM
ROBERT GOODMAN
COMMON STOCK PRICE PERFORMANCE CHART
The following graph compares the yearly percentage change in the cumulative
total shareholder return for the Company, the Nasdaq U.S. Companies Index and
the Nasdaq Computer and Data Processing Services Stock Index for the period from
December 31, 1994 to December 31, 1999. The Nasdaq Computer and Data processing
Services Stock Index is prepared by Nasdaq and includes all companies in the
Standard Industry Code 737 (computer programming, data processing and other
computer-related services), which are included in the Nasdaq U.S. Companies
Index. A list of the companies included in the Nasdaq Computer and Data
Processing Services Stock Index is available from the Company upon request. The
graph assumes that $100 was invested on December 31, 1994.
31
<PAGE>
[CHART OMITTED]
<TABLE>
<CAPTION>
YEAR END
1994 1995 1996 1997 1998 1999
-------------- ----------- --------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
IVI Publishing, Inc./ OnHealth Network Company* $100.00 $114.13 $ 27.71 $ 22.28 $ 43.48 $ 77.72
Nasdaq Index (U.S.) $100.00 $141.33 $173.89 $213.07 $300.25 $542.43
Nasdaq Comp & Data Proc. Index $100.00 $152.28 $187.95 $230.90 $412.23 $871.27
<FN>
*Prior to June 16, 1998, the Company's name was IVI Publishing, Inc.
</FN>
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of the Company's Common
Stock beneficially owned by (i) each director and nominee for election to the
Board of Directors of the Company; (ii) each of the named executive officers;
(iii) all directors and executive officers as a group; and (iv) to the best of
the Company's knowledge, all beneficial owners of more than 5% of the
outstanding shares of the Company's Common Stock as of March 22, 2000. Unless
otherwise indicated, the shareholders listed in the table have sole voting and
investment power with respect to the shares indicated.
Effective February 15, 2000, certain shareholders of the Company holding in
excess of 40% of the outstanding common stock of the Company entered into
agreements with Healtheon/WebMD granting Healtheon/WebMD a proxy to vote the
shares of Company's common stock held by such shareholders (the "Voting
Agreements"). The execution of the Voting Agreements triggered accelerated
vesting of outstanding stock options granted under the Company's Stock Option
Plans. As a result all unvested stock options became fully vested. Twenty
members of Senior Management agreed to waive the vesting until the later of the
closing of the transaction, or the termination of the Merger Agreement.
32
<PAGE>
Common Shares
Name (And Address of 5% Beneficially Percent of
Holder) or Identity of Group(1) Owned(2) Class(2)
------------------------------------------ ------------------ ----------
Robert N. Goodman 430,625 (3) 1.76%
Rebecca Farwell 85,104 (4) *
Michael A. Brochu 280,000 (5) 1.15%
Ann Kirschner 80,000 (6) *
Ram Shriram 80,000 (7) *
Rick Thompson 80,000 (8) *
Van Wagoner Capital Management, Inc. 10,327,600 (9) 43.02%
All Directors and Executive
Officers as a Group (6 persons) 1,035,729 (10) 4.14%
---------------------------
* Less than 1% of the outstanding shares of Common Stock.
(1) The addresses of the more than 5% holder is: Van Wagoner Group (Van
Wagoner Capital Management, Inc. and Van Wagoner Funds, Inc.) - 345
California Street, Suite 2450, San Francisco. CA 94104.
(2) Under the rules of the Securities and Exchange Commission, shares not
actually outstanding are nevertheless deemed to be beneficially owned
by a person if such person has the right to acquire the shares within
60 days. Pursuant to such SEC rules, shares deemed beneficially owned
by virtue of a person's right to acquire them are also treated as
outstanding when calculating the percent of class owned by such person
and when determining the percentage owned by a group.
(3) Includes 430,625 shares that may be purchased by Mr. Goodman upon
exercise of currently exercisable options.
(4) Includes 85,104 shares that may be purchased by Ms. Farwell upon
exercise of currently exercisable options.
(5) Includes 280,000 shares that may be purchased by Mr. Brochu upon
exercise of currently exercisable options.
(6) Includes 80,000 shares that may be purchased by Ms. Kirschner upon
exercise of currently exercisable options.
(7) Includes 80,000 shares that may be purchased by Mr. Shriram upon
exercise of currently exercisable options.
(8) Includes 80,000 shares that may be purchased by Mr. Thompson upon
exercise of currently exercisable options.
(9) Of the shares, 9,823,650 shares are owned by Van Wagoner Funds, Inc.
("Van Wagoner Funds"), and 503,950 shares are owned by clients of Van
Wagoner Capital Management, Inc. ("Van Wagoner Capital"). Van Wagoner
Funds has the sole power to vote 9,823,650 shares. Van Wagoner Capital
has no power to vote on 503,950 shares and has sole investment power
for all of the shares, including the shares held by Van Wagoner Funds.
The Company has relied on information contained in a Schedule 13G
Amendment filed with the Securities and Exchange Commission on February
24, 2000 by Van Wagoner Funds and Van Wagoner Capital as a group.
(10) Includes 1,035,729 shares that may be purchased upon exercise of
currently exercisable options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
33
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
PAGE
----
Report of Ernst & Young LLP, Independent Auditors............ F-1
Balance Sheet as of December 31, 1999 and 1998............... F-2
Consolidated Statements of Operations for the years
ended December 31, 1999, 1998 and 1997..................... F-3
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1999, 1998 and 1997....... F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 1999, 1998 and 1997..................... F-5
Notes to Financial Statements................................ F-6
(2) Financial Statement Schedules
PAGE
----
Valuation and Qualifying Accounts............................ S-1
All other schedules are omitted because they are not applicable,
or not required because the required information is included in
the Financial Statements or notes thereto.
(3) Exhibits and Reports on Form 8-K
(a) Exhibits With Each Management Contract or Compensatory
Plan or Arrangement Required to be Filed Identified.
See paragraph (c) below.
(b) Reports on Form 8-K.
The following reports on Form 8-K were filed by the
registrant during the quarter ended December 31, 1999: on
October 26, 1999 to report their third quarter 1999
results, on November 23, 1999 to amend the September 15,
1999 filing, which announced the third quarter 1999
BabyData acquisition, to include the related financial
statements and pro forma information, and on December 14,
1999 to announce the third quarter 1999 acquisition of
HDI, including certain related financial statements.
(c) Exhibit Listing.
Certain exhibits have been previously filed with the
Commission and are incorporated herein by reference.
34
<PAGE>
ONHEALTH NETWORK COMPANY
EXHIBIT INDEX
FISCAL YEAR ENDED DECEMBER 31, 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. (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)
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)
23.1 Consent of Ernst & Young LLP, Independent Auditors
27.1 Financial Data Schedule (electronic version only)
35
<PAGE>
27.2 Restated Financial Data Schedule for nine month period ended September 30, 1999
(electronic version only)
27.3 Restated Financial Data Schedule for six month period ended June 30, 1999
(electronic version only)
27.4 Restated Financial Data Schedule for three month period ended March 31, 1999
(electronic version only)
27.5 Restated Financial Data Schedule for year ended December 31, 1998
(electronic version only)
27.6 Restated Financial Data Schedule for nine month period ended September 30, 1998
(electronic version only)
27.7 Restated Financial Data Schedule for six month period ended June 30, 1998
(electronic version only)
27.8 Restated Financial Data Schedule for three month period ended March 31, 1998
(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 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
</FN>
</TABLE>
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 20th day of June, 2000.
ONHEALTH NETWORK COMPANY
By: /S/ RONALD M. STEVENS
-------------------------------------
Ronald M. Stevens
President and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant on
June 20, 2000, in the capacities indicated.
SIGNATURE TITLE
------------------------ ----------------------------------------
/S/ RONALD M. STEVENS Chief Operating Officer (Principal
--------------------- Executive and Accounting Officer)
Ronald M. Stevens
/S/ MICHAEL A. BROCHU Chairman of the Board
---------------------
Michael A. Brochu
/S/ ANN KIRSHNER Director
---------------------
Ann Kirshner
/S/ RAM SHRIRAM Director
---------------------
Ram Shriram
/S/ RICK THOMPSON Director
---------------------
Rick Thompson
37
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Shareholders
OnHealth Network Company
We have audited the accompanying consolidated balance sheets of OnHealth
Network Company as of December 31, 1999 and 1998 and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of OnHealth
Network Company at December 31, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects the
information set forth therein.
As discussed more fully in Notes 2 and 23, the Company has restated the
1999 and 1998 financial statements to correct for errors in determining the
measurement dates for purposes of measuring and recording stock-based
compensation under Accounting Principles Board Opinion No. 25.
/s/ ERNST & YOUNG LLP
Seattle, Washington
February 18, 2000, except for Notes 2 and 23,
as to which the date is May 31, 2000
F-1
<PAGE>
ONHEALTH NETWORK COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
---------------------------------
1999 1998
--------------- --------------
(Restated) (Restated)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 10,142 $ 2,119
Restricted cash 500 -
Accounts receivable, net of allowances of $413 (1999) and
$256 (1998) 1,870 509
Inventories 15 -
Prepaid advertising 6,848 197
Other current assets 401 212
--------------- --------------
Total current assets 19,776 3,037
Furniture and equipment, net 2,137 735
Intangibles and goodwill, net 10,754 -
Other non-current assets 53 122
--------------- --------------
Total assets $ 32,720 $ 3,894
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 2,000 $ -
Accounts payable 6,515 1,526
Deferred revenue 859 95
Other accrued expenses 2,383 2,574
--------------- --------------
Total current liabilities 11,757 4,195
Non-current liabilities 68 -
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, 23,812 (1999) and 12,800 (1998) 238 128
Additional paid-in-capital 171,641 90,301
Accumulated deficit (139,533) (89,761)
Deferred compensation (11,451) (969)
--------------- --------------
Total shareholders' equity (deficit) 20,895 (301)
--------------- --------------
Total liabilities and shareholders' equity $ 32,720 $ 3,894
=============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-2
<PAGE>
ONHEALTH NETWORK COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
(Restated) (Restated)
<S> <C> <C> <C>
Net revenue $ 3,767 $ 1,522 $ 3,761
Costs and expenses:
Product development, editorial & design 7,660 4,511 6,784
Sales and marketing 37,041 5,626 1,347
General and administrative 4,769 2,274 6,892
Amortization of intangibles and goodwill 504 - -
Stock-based compensation 3,846 376 -
--------------- --------------- ---------------
Total costs and expenses 53,820 12,787 15,023
--------------- --------------- ---------------
Loss from operations (50,053) (11,265) (11,262)
Interest income (expense), net 279 84 (158)
Other income (expense), net 2 (4) 473
--------------- --------------- ---------------
Total interest and other income (expense) 281 80 315
--------------- --------------- ---------------
Net loss (49,772) (11,185) (10,947)
Preferred stock dividends - (103) (100)
Preferred stock accretion - (702) (43)
Preferred stock deemed dividend - (220) (2,875)
--------------- --------------- ---------------
Net loss applicable to common shareholders $ (49,772) $ (12,210) $ (13,965)
=============== =============== ===============
Net loss per common share-
Basic and diluted $ (2.84) $ (1.14) $ (1.73)
=============== =============== ===============
Weighted average number of common shares
outstanding 17,529 10,680 8,056
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-3
<PAGE>
ONHEALTH NETWORK COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except per share data)
<TABLE>
<CAPTION>
Common Stock
----------------------- Additional Total
Par Paid-In Accumulated Deferred Shareholders'
Shares Value Capital Deficit Compensation Equity
---------- --------- ----------- ------------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 7,612 $ 76 $ 70,453 $ (67,629) $ - $ 2,900
Issuance of common stock:
Exercise of options 59 1 97 - - 98
Lawsuit settlement 175 2 431 - - 433
Return of common stock per Mayo
agreement (490) (5) 5 - - -
Preferred stock conversion to
common 1,000 10 1,938 - - 1,948
Dividends on convertible
redeemable preferred stock
($0.05 per share) - - (100) - - (100)
Preferred stock accretion - - (43) - - (43)
Convertible subordinated debenture
conversion to common 1,750 17 5,712 - - 5,729
Net loss - - - (10,947) - (10,947)
---------- --------- ----------- ------------- ---------------- ------------
Balance at December 31, 1997 10,106 101 78,493 (78,576) - 18
Issuance of common stock:
Private placements 1,543 15 5,675 - - 5,690
Exercise of options 371 4 1,064 - - 1,068
Services 47 - 365 - - 365
Discount on sale of convertible
redeemable preferred stock - - 702 - - 702
Preferred stock conversion to
common stock 733 8 3,622 - - 3,630
Cash dividends on convertible
redeemable preferred stock
($0.06 per share) - - (3) - - (3)
Non-cash dividends -
preferred stock - - (100) - - (100)
Accretion of discount on
preferred stock - - (702) - - (702)
Preferred stock deemed
dividend - - (220) - - (220)
Issuance of stock options and
warrants for services - - 60 - - 60
Deferred compensation (restated) - - 1,345 - (1,345) -
Amortization of deferred
compensation (restated) - - - - 376 376
Net loss (restated) - - - (11,185) - (11,185)
---------- --------- ----------- ------------- ---------------- ------------
Balance at December 31, 1998
(restated) 12,800 128 90,301 (89,761) (969) (301)
Issuance of common stock:
Public offerings 5,500 55 35,529 - 35,584
Private placements 2,596 26 14,066 - 14,092
Exercise of options 345 4 1,343 - 1,347
Exercise of warrants 356 3 1,582 - 1,585
Services 647 6 6,119 - 6,125
Business acquisitions 1,568 16 12,995 - (4,622) 8,389
Deferred compensation (restated) - - 9,706 - (9,706) -
Amortization of deferred
compensation (restated) - - - - 3,846 3,846
Net loss (restated) - - - (49,772) - (49,772)
---------- --------- ----------- ------------- ---------------- ------------
Balance at December 31, 1999
(restated) 23,812 $ 238 $ 171,641 $ (139,533) $ (11,451) $ 20,895
========== ========= =========== ============= ================ ============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-4
<PAGE>
ONHEALTH NETWORK COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------
1999 1998 1997
--------------- -------------- --------------
(Restated) (Restated)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (49,772) $ (11,185) $ (10,947)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation and amortization 851 722 1,252
Interest expense associated with debenture
conversion - - 2,229
Loss on disposition of furniture and equipment - 285 711
Provision for (recoveries of) doubtful
accounts and returns 117 (755) 2,336
Amortization of prepaid advertising and other
services, paid by stock issuances 1,676 8 -
Amortization of deferred compensation 3,846 376 -
Common stock issued as litigation settlement - - 433
Common stock issued for services - 365 -
Changes in assets and liabilities:
(Increase) in restricted cash (500) - -
(Increase) decrease in accounts receivable (934) 583 1,461
Decrease in inventories 2 150 5
(Increase) decrease in other current assets (2,311) (25) 253
(Increase) decrease in other non-current assets 69 (122) 1,885
Increase (decrease) in accounts payable 4,765 (393) (1,287)
Increase (decrease) in other accrued expenses (1,207) 29 760
--------------- -------------- --------------
Net cash used in operating activities (43,398) (9,962) (909)
Cash flows from investing activities:
Proceeds from disposition of furniture and fixtures - 217 61
Capital expenditures (1,028) (689) (104)
Business acquisitions, net of cash acquired (159) - -
--------------- -------------- --------------
Net cash used in investing activities (1,187) (472) (43)
Cash flows from financing activities:
Proceeds from issuance of convertible redeemable
preferred stock - 5,000 -
Proceeds from issuance of common stock:
Public offerings 35,584 - -
Private placements 14,092 5,690 -
Exercise of options 1,347 1,068 98
Exercise of warrants 1,585 - -
Redemption of preferred stock - (1,690) -
Preferred stock dividends paid - (3) (120)
--------------- -------------- --------------
Net cash provided by (used in) financing activities 52,608 10,065 (22)
--------------- -------------- --------------
Net decrease in cash and cash equivalents 8,023 (369) (974)
Cash and cash equivalents at beginning of year 2,119 2,488 3,462
--------------- -------------- --------------
Cash and cash equivalents at end of year $ 10,142 $ 2,119 $ 2,488
=============== ============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-5
<PAGE>
ONHEALTH NETWORK COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of the 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,
and providing and supporting a broad range of personal health information,
referral and nurse counseling services to customers throughout the United
States.
Business Combinations
For business combinations which have been accounted for under the purchase
method of accounting, the Company includes the results of operations of the
acquired business from the date of acquisition. Net assets of the companies
acquired are recorded at their fair value at the date of acquisition. The excess
of the purchase price over the fair value of net assets acquired is included in
intangibles and goodwill in the accompanying consolidated balance sheets.
Principles of Consolidation
The consolidated financial statements include the financial statements of
OnHealth and its wholly-owned subsidiaries, Health Decisions International, LLC
("HDI") and BabyData.com, Inc. ("BabyData"). All material intercompany balances
and transactions have been eliminated.
Use of Estimates
The financial statements have been prepared in conformity with generally
accepted accounting principles, which require management to make estimates and
assumptions that affect the amounts and disclosures reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Intangibles and Goodwill
Intangibles and goodwill represent the excess of the purchase price over the
fair value of assets acquired. Intangibles and goodwill are being amortized on a
straight-line basis over lives ranging from three to five years.
Long-Lived Assets
In accordance with Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standard ("SFAS") No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, the carrying
value of intangible assets and other long-lived assets is reviewed on a regular
basis for the existence of facts or circumstances, both internally and
externally, that may suggest impairment. To date, no such impairment has been
indicated. Should there be an impairment in the future, the Company will measure
the amount of the impairment based on undiscounted expected future cash flows
form the impaired assets. The cash flow estimates that will be used will contain
management's best estimated, using appropriate and customary assumptions and
projections at the time.
Fair Value of Financial Instruments
Financial instruments of the Company consist of cash and cash equivalents,
accounts receivable, other current assets, accounts payable and other accrued
expenses. The Company's other financial instruments generally approximate their
fair values at December 31, 1999 and 1998 based on the short-term nature of
these instruments.
F-6
<PAGE>
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents. At December 31,
1999 and 1998, cash and cash equivalents consisted principally of United States
Government obligations for which the carrying amount approximates fair value.
Inventories
All inventories are stated at the lower of cost (first-in, first-out method) or
market and consist of books for resale and communication materials.
Furniture and Equipment
Furniture and equipment are stated at cost and are depreciated using the
straight-line method over the shorter of the estimated useful lives of the
respective assets, generally three to five years.
Concentration of Credit Risk and Significant Customers
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of its holdings of cash and cash equivalents and
trade accounts receivable. Banking and investing with credit-worthy financial
institutions mitigates risks associated with cash and cash equivalents.
The Company's trade accounts are not collateralized. The Company performs
periodic credit reviews of its customers and maintains reserves for potential
losses for uncollectible accounts. Such losses have historically been within
management's expectations.
No customer represented more than 10% of net revenue for the year ended December
31, 1999. Three customers represent 40%, 16% and 13% of net revenue for the year
ended December 31, 1998; one customer represents 12% of net revenue for the year
ended December 31, 1997. The revenue recorded from the customer which represents
40% of the net revenue in 1998 was the result of a $603,000 payment received
from the customer related to minimum sales requirements from a terminated CD-ROM
distribution agreement.
Revenue Recognition
The Company's revenue consists of fees for online services, product sales and
licensing revenue, contract development revenue, services and communication
revenue and fees relating to the licensing of its content for use on cable
television.
Online revenue is generated through the sale of advertising and sponsorship of
the Company's onhealth.com web site. Advertising and sponsorship revenue is
earned based upon the number of impressions delivered.
Product sales and licensing revenue consists of retail distribution sales,
direct mail sales, product sales and royalties on licenses to original equipment
manufacturers (OEM's) and end users. The revenue is recognized upon shipment of
the product or in accordance with the licensing agreements. An allowance for
return is 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. The
contract revenue is recognized on a percentage-of-completion basis or at a
specific hourly rate, depending on the terms of the contract.
Services and communication revenue is generated through use of HDI's nurse and
customer service staff members. Services and communication revenue is recognized
in the period in which services are performed.
Revenue relating to the licensing of the Company's health and medical content
for use on cable television channels is recognized when payments are received.
The Company recognized revenue under its cable television agreement with
America's Health Network ("AHN") during 1997. (See Note 17).
F-7
<PAGE>
Net revenue for each of the three years ended December 31, 1999, 1998 and 1997
is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ------------------ ----------------
<S> <C> <C> <C>
Online $ 3,385 $ 388 $ 58
Services and communication 277 - -
Contract development and other 69 380 1,220
Product sales and licensing 36 754 1,990
Cable television licensing - - 493
================= ================== ================
Net revenue $ 3,767 $ 1,522 $ 3,761
================= ================== ================
</TABLE>
Product Development, Editorial and Design Costs
Product development, editorial and design costs consist principally of payroll
and related expenses for development, editorial, systems and telecommunications
operations personnel and consultants, systems and telecommunications
infrastructure and costs of acquired content.
Advertising Costs
Advertising costs are expensed as they are incurred. Advertising costs in 1999,
1998, and 1997 were $33,882,000, $3,409,000, and $190,000, respectively.
Income Taxes
Income taxes are provided based on earnings reported for financial statement
purposes. Deferred income taxes are provided for temporary differences between
financial reporting and income tax basis of assets and liabilities under the
liability method.
Stock Based Compensation
As allowed under SFAS No. 123, Accounting for Stock-Based Compensation, the
Company follows the disclosure-only provisions of SFAS No. 123 but applies
Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to
Employees ("APB No. 25") and related interpretations in accounting for its
employee stock options. Under APB No. 25, when the exercise price of employee
stock options is less than the fair market value of the underlying stock on the
date of grant, compensation expense is recorded based upon the intrinsic value
of the stock option. The Company recognizes compensation expense for options
granted to non-employees in accordance with the provisions of SFAS No. 123 and
the Emerging Issues Task Force consensus Issue 96-18, Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services, which require using a Black-Sholes
option pricing model and remeasuring such stock options to the current fair
market value until the performance date has been reached.
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 income available to common shareholders by the weighted-average number
of common shares outstanding during the period. Diluted EPS is computed by
dividing income available to common shareholders by the weighted-average number
of common shares and common stock equivalents outstanding. Excluded from the
computation of the weighted-average number of common shares outstanding at
December 31, 1999 are 549,784 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
all periods presented as their effects are anti-dilutive.
Reclassifications
Certain reclassifications have been made for consistent financial statement
presentation.
F-8
<PAGE>
Impact of Recently Issued or Adopted Accounting Standards
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was
issued in June 1998 and establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. If certain conditions are met, a
derivative may be specifically designated as a hedge. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and the resulting designation. SFAS No. 133, as amended by SFAS 137, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The adoption of this statement is not expected to have a material impact on the
Company's consolidated financial statements since the Company does not currently
hold any derivative instruments.
In March 1998, the Accounting Standards Executive Committee issued Statement of
Position 98-1 ("SOP 98-1"), Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. SOP 98-1 requires all costs related to
the development of internal use software other than those incurred during the
application development stage to be expensed as incurred. Costs incurred during
the application development stage are required to be capitalized and amortized
over the estimated useful life of the software. The Company adopted SOP 98-1 on
January 1, 1999 and there was no significant impact on the Company's financial
position or operating results.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101 ("SAB 101") Revenue Recognition in Financial
Statements, which provides guidance on the recognition, presentation and
disclosures of revenue in financial statements. The Company adopted SAB101 and
there was no significant impact on the Company's financial position or operating
results.
NOTE 2. RESTATEMENT OF PRIOR PERIOD RESULTS
The Company has restated its consolidated balance sheets as of December 31, 1999
and 1998 and the related consolidated statements of operations, shareholders'
equity and cash flows for the years ended December 31, 1999 and 1998 due to the
recording of additional stock-based compensation charges (see Note 23). As a
result, the consolidated balance sheets include adjustments to increase
additional paid-in-capital by $9.0 million and $1.1 million at December 31, 1999
and 1998, respectively, to increase the accumulated deficit by $2.7 million and
$246,000 at December 31, 1999 and 1998, respectively, and to increase deferred
compensation by $6.3 million and $896,000 at December 31, 1999 and 1998,
respectively. The consolidated statements of operations include an adjustment to
increase the stock-based compensation amortization by $2.4 million and $246,000
for the years ended December 31, 1999 and 1998, respectively.
The impact on the Company's results of operations as originally reported for
1999 and 1998 is as follows:
Net Loss
Applicable to Loss Per
Common Common
Shareholders Share
----------------- ----------------
1999
As reported $ (47,327) $ (2.70)
As restated $ (49,772) $ (2.84)
1998
As reported $ (11,964) $ (1.12)
As restated $ (12,210) $ (1.14)
NOTE 3. LIQUIDITY
The Company has experienced recurring losses from operations and has generated
an accumulated deficit from inception to December 31, 1999 of $139,533,000.
During the year ended December 31, 1999, the Company used $43,398,000 of cash in
operations. At December 31, 1999, the Company has working capital of $8,019,000
and cash and cash equivalents of $10,142,000. In February 2000, the Company
agreed to merge with Healtheon/WEBMD Corporation ("Healtheon/WEBMD"). In
F-9
<PAGE>
connection with the merger agreement, Healtheon/WEBMD has agreed to lend the
Company up to $30 million for working capital needs. Amounts borrowed under this
line of credit are due February 15, 2001 (see Note 24). The Company believes its
cash and cash equivalents, including the $30 million lending commitment by
Healtheon/WEBMD, coupled with the ability to reduce discretionary expenditures,
if necessary, will be sufficient to fund its operations through December 31,
2000. Operations generated a negative cash flow during 1997, 1998 and 1999 and
the Company expects 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 revenue will likely require the Company to seek additional debt or
equity financing. If additional cash is required, the Company may need to reduce
its expenditure or curtail certain operations. There can be no assurance that
additional capital, on debt or equity basis, will be found or if found that it
will be on economically viable terms.
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. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS
<TABLE>
<CAPTION>
December 31,
------------------------------------
1999 1998
--------------- ----------------
(In thousands)
<S> <C> <C>
Furniture and equipment:
Computer hardware $ 2,205 $ 1,032
Software 349 186
Furniture & fixtures 470 220
Equipment 6 -
Leasehold improvements 71 71
Construction in progress 157 -
--------------- ---------------
3,258 1,509
Less accumulated depreciation (1,121) (774)
--------------- ---------------
Total $ 2,137 $ 735
=============== ===============
Intangibles & goodwill:
Web development costs $ 43 $ -
Customer base 2,400 -
Database content 3,900 -
Internally developed software 1,300 -
Assembled work force 130 -
Goodwill 3,486 -
--------------- ---------------
11,259 -
Less accumulated amortization (505) -
--------------- ---------------
Total $ 10,754 $ -
=============== ===============
Other accrued expenses:
Litigation loss $ 195 $ 677
Legal fees 225 -
Advertising - 609
Royalties 425 338
Accrued wages and benefits 410 175
Interest payable 676 -
Payroll taxes 90 358
Other 362 417
--------------- ---------------
Total $ 2,383 $ 2,574
=============== ===============
</TABLE>
F-10
<PAGE>
NOTE 6. COMMON STOCK
During January 1999, the Company completed a private placement with six
investors which resulted in the issuance of 2,596,000 unregistered shares of the
Company's common stock at $5.50 per share. One of the investors was an existing
significant shareholder. The Company granted registration rights covering the
shares issued with this agreement. This transaction reflected a discount of
approximately 45% to the market price of the common stock at the time of the
offering. The price was negotiated with the investors using the 35-day trailing
average of the common stock prior to the private placement date. Proceeds, net
of offering costs, totaled approximately $14.1 million.
On June 15, 1999 the shareholders approved an increase in the number of
authorized shares of the Company's common stock to 100,000,000 from 29,000,000.
During September 1999, the Company completed a public offering of 3.4 million
shares, which included 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.
During November 1999, the Company completed a public offering of 2.1 million
shares of the Company's common stock, at $7.00 per share. Proceeds, net of
offering costs, totaled $14.7 million.
In February and March 1999, the Company issued, in the aggregate, 191,758 shares
of unregistered restricted common stock in exchange for certain advertising
arrangements.
In October 1999, the Company issued 162,602 shares of unregistered restricted
common stock in exchange for a one year advertising agreement. The agreement
also requires the Company to pay approximately $350,000 per month as an
exclusivity fee and a placement fee of impressions to be delivered.
In December 1999, the Company issued 292,683 shares of unregistered restricted
common stock in exchange for the delivery of a guaranteed number of impressions
and click throughs on another internet portal over a one year period.
NOTE 7. CONVERTIBLE SUBORDINATED DEBENTURES
In November 1996, the Company issued $3,500,000 of 9% Convertible Subordinated
Debentures ($3,325,000 net of debt issue costs). These debentures were converted
into common stock on October 28, 1997 at a rate of $2.00 per share, resulting in
the issuance of 1,750,000 shares of common stock. The original conversion price
was $3.25 per share. The excess of the fair value of the common stock issued
over the fair value of the shares issuable pursuant to the original conversion
terms was $2,229,000 and was recorded as an other expense at the date of
conversion.
NOTE 8. CONVERTIBLE REDEEMABLE PREFERRED STOCK
In April 1998, the Company issued 5,000 shares of the Company's 5% Series B
Convertible Redeemable Preferred Stock (the "Series B Preferred Stock") for
$5,000,000. The Series B Preferred Stock was convertible at various increasing
discount rates to the market value of the common stock. This discount aggregated
$702,000 and was recorded as preferred stock accretion over the various periods
of conversion. During 1998, 3,630 shares of the Series B Preferred Stock were
converted into 732,605 shares of the Company's common stock and 1,470 of such
preferred shares were redeemed. The excess of the redemption price over the
carrying value of the preferred shares redeemed was $220,000 and was recorded as
a preferred stock deemed dividend. The preferred stock accretion and deemed
dividend increased the net loss applicable to common shareholders in the
calculation of the 1998 net loss per share as shown in the statements of
operations.
In 1995, the Company issued 2,000 shares of 6% Series A Convertible Redeemable
Preferred Stock (the "6% Series A Preferred Stock") for $2,000,000 ($1,845,000
net of brokerage expenses) to Davidson & Associates, Inc., ("Davidson") a
distributor of multimedia educational and entertainment software. The 6% Series
A Preferred Stock was converted into 1,000,000 shares of the Company's common
stock on October 30, 1997, at a rate of $2.00 per share. The original conversion
price was $11.21 per share. The excess of the fair value of the Common Stock
issued over the fair value of the shares issuable pursuant to the original
conversion terms was $2,875,000 and was recorded as a deemed preferred dividend
at the date of conversion. This deemed dividend increased the net loss
applicable to common shareholders in the calculation of the 1997 net loss per
share as shown in the statements of operations.
F-11
<PAGE>
NOTE 9. STOCK OPTIONS AND WARRANTS
In December 1997, the Company's Board of Directors adopted the 1997 Stock Option
Plan ("1997 Plan") for its employees, directors and consultants. During 1999,
the 1997 Plan was amended and restated. The Plan, which is administered by the
Board of Directors, permits the Company to grant stock options for the purchase
of Common Stock. Incentive stock options ("ISOs") and non-qualified stock
options may be granted pursuant to the 1997 Amended and Restated Plan.
The Company also has a 1991 Stock Option Plan (the "1991 Plan") for its
employees. The 1991 Plan, which is administered by the Board of Directors,
permits the Company to grant stock options for the purchase of Common Stock. The
1991 Plan provides for the granting of ISOs and non-qualified stock options. In
the case of ISO's, the exercise price must be at least equal to the fair market
value per share of the Common Stock on the date of grant. In the case of
non-qualified stock options, the exercise price must be at least 85% of the fair
market value per share on the date of grant. Options generally expire nine to
ten years from the date of grant.
In addition, the Company has a Director Stock Option Plan pursuant to which
current non-employee directors are eligible to receive options to purchase
shares of the Company's common stock at the market price on the date of grant.
Activity in the plans mentioned above is as follows:
<TABLE>
<CAPTION>
Shares Weighted-
Available For Average Price
Future Grants Options Per Share
---------------- ------------------ ----------------
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1997 568,000 940,000 $ 7.10
Options Reserved 1,750,000 - -
Options Granted (684,000) 684,000 2.85
Options Exercised - (59,000) 1.64
Options Canceled 474,000 (474,000) 9.86
---------------- ------------------
BALANCE AT DECEMBER 31, 1997 2,108,000 1,091,000 3.53
Options Granted (656,000) 656,000 5.50
Options Exercised - (371,000) 2.88
Options Canceled 392,000 (392,000) 3.82
---------------- ------------------
BALANCE AT DECEMBER 31, 1998 1,844,000 984,000 4.97
Increase in shares reserved 3,000,000 -
Options Granted (2,867,000) 2,867,000 7.32
Options Exercised - (185,000) 4.27
Options Canceled 160,000 (160,000) 7.48
================ ==================
BALANCE AT DECEMBER 31, 1999 2,137,000 3,506,000 6.81
================ ==================
</TABLE>
At December 31, 1999, 1998 and 1997, options to purchase 463,000, 237,000 and
325,000, shares were exercisable, respectively.
F-12
<PAGE>
The following table summarizes information about the stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ---------------------------------
Weighted-Average
Range of Exercise Number Remaining Weighted-Average Number Weighted-Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------------- ------------------ ------------------ ------------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 2.31 - 2.50 150,000 8 years $ 2.31 150,000 $ 2.31
2.51 - 3.00 25,000 7 years 2.75 19,000 2.75
3.01 - 3.50 98,000 8 years 3.33 50,000 3.32
3.51 - 4.00 20,000 9 years 3.56 6,000 3.56
4.01 - 4.50 27,000 9 years 4.22 9,000 4.22
4.51 - 5.00 1,101,000 9 years 4.75 - -
6.01 - 6.50 390,000 8 years 6.25 93,000 6.25
6.51 - 7.00 213,000 10 years 6.92 - -
7.01 - 7.50 81,000 9 years 7.19 7,000 7.38
7.51 - 8.00 314,000 10 years 7.75 - -
8.51 - 9.00 522,000 10 years 8.94 125,000 8.94
9.01 - 9.50 26,000 10 years 9.12 - -
9.51 - 10.00 46,000 10 years 9.84 4,000 10.00
10.01 - 11.00 63,000 10 years 10.48 - -
11.01 - 11.50 420,000 10 years 11.08 - -
12.00 10,000 10 years 12.00 - -
------------------ ----------------
$ 2.31 - 12.00 3,506,000 9 years 6.81 463,000 5.21
================== ================
</TABLE>
From time to time, the Company's Board of Directors may grant stock options
outside of the existing stock option plans. In 1997, the Board of Directors
adopted the 1997-1998 New Hire Stock Option Plan. This plan provides for the
granting of 1,241,000 non-qualified stock options to newly hired employees in
late 1997 through early 1998. In 1999, the Board of Directors adopted the
1998-1999 New Hire Stock Option Plan. This plan provides for the granting of
1,500,000 non-qualified stock options to newly hired employees in late 1998
through early 2000. Options generally expire nine to ten years from the date of
grant.
F-13
<PAGE>
Activity in the New Hire Stock Option Plans is as follows:
<TABLE>
<CAPTION>
Shares Weighted-
Available For Average Price
Future Grants Options Per Share
---------------- ------------------ -------------------
<S> <C> <C> <C>
Balance at JANUARY 1, 1997 - - $ -
Options reserved 1,241,000 - -
Options granted (523,000) 523,000 2.47
Options exercised - - -
Options canceled - - -
---------------- ------------------
BALANCE AT DECEMBER 31, 1997 718,000 523,000 2.47
Increase in options reserved 1,500,000 -
Options granted (1,246,000) 1,246,000 3.61
Options exercised - - -
Options canceled 305,000 (305,000) 2.59
---------------- ------------------
BALANCE AT DECEMBER 31, 1998 1,277,000 1,464,000 3.42
Increase in shares reserved - -
Options granted (808,000) 808,000 10.82
Options exercised - (160,000) 3.46
Options canceled 434,000 (434,000) 8.06
---------------- ------------------
BALANCE AT DECEMBER 31, 1999 903,000 1,678,000 5.78
================ ==================
</TABLE>
The following table summarizes information about the New Hire Stock Option
Plans' options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------- -------------------------------
Range of Weighted-Average
Exercise Number Remaining Weighted-Average Number Weighted-Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------------------ ------------- ------------------ ------------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 2.31 - 2.50 450,000 8 years $ 2.50 288,000 2.50
2.51 - 3.00 174,000 8 years 2.89 113,000 2.85
3.01 - 3.50 45,000 9 years 3.22 13,000 3.22
3.51 - 4.00 279,000 8 years 3.73 94,000 3.72
4.01 - 4.50 27,000 8 years 4.45 4,000 4.22
4.51 - 5.00 182,000 9 years 4.74 9,000 4.63
5.51 - 6.50 59,000 8 years 6.04 20,000 6.10
6.51 - 7.00 20,000 8 years 6.69 9,000 6.68
7.01 - 9.00 39,000 9 years 8.37 2,000 7.87
9.51 - 10.00 60,000 9 years 9.69 - -
11.01 - 11.50 104,000 9 years 11.38 - -
11.51 - 12.00 22,000 9 years 11.94 - -
12.01 - 12.51 45,000 9 years 12.13 - -
13.01 - 13.51 43,000 9 years 13.18 - -
13.51 - 14.00 25,000 9 years 13.63 - -
14.50 - 15.00 80,000 9 years 14.62 - -
15.01 - 15.50 6,000 9 years 15.38 - -
18.50 - 19.56 18,000 9 years 18.97 - -
------------------ ----------------
$ 2.31 - 12.00 1,678,000 9 years 5.78 552,000 3.06
================== ================
</TABLE>
The pro forma information regarding net loss and net loss per share required by
SFAS No. 123 has been determined as if the Company had accounted for its
employee stock options under the fair value method of that statement. The fair
value for these options has been estimated at the date of grant using a
F-14
<PAGE>
Black-Scholes option pricing model, assuming no expected dividends and the
following weighted-average assumptions for 1999, 1998 and 1997:
1999 1998 1997
--------- --------- -------
Risk-free interest rate 6.00% 5.00% 5.50%
Volatility factor 1.113 .817 .760
Weighted-average expected life 5 years 5 years 5 years
The weighted-average fair value of options granted at fair market value during
1999, 1998 and 1997 was $8.32, $3.01 and $1.74, respectively. The
weighted-average fair value of options granted at less than fair market value
during 1999 and 1998 was $10.16 and $5.17, respectively. The weighted-average
fair value of options granted at greater than fair market value during 1998 was
$1.77. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- -------------
(In thousands, except per share data)
<S> <C> <C> <C>
Net loss applicable to common shareholders - as reported $ (49,772) $ (12,210) $ (13,965)
Net loss applicable to common shareholders - pro forma (55,319) (13,351) (14,294)
Basic and diluted net loss per share - as reported $ (2.84) $ (1.14) $ (1.73)
Basic and diluted net loss per common share pro forma $ (3.16) $ (1.25) $ (1.77)
</TABLE>
The pro forma effect on the net loss for 1999, 1998, and 1997 is not
representative of the pro forma effect on the net loss in future years because
it does not take into consideration pro forma compensation expense related to
grants made prior to 1995.
As of December 31, 1999 the Company had warrants outstanding to purchase 224,662
shares of common stock at prices ranging from $3.25 per share to $14.06 per
share. Warrants outstanding at December 31, 1999 expire from 2000 through 2004.
The warrants were generally issued to underwriters and investment bankers for
services performed in connection with several of the Company's financing
transactions.
Common stock reserved for future issuance at December 31, 1999 is as follows:
1991, 1997 and Director Stock Option Plans 5,643,000
1997 - 1998, 1998 - 1999 New Hire Stock Option Plans 2,581,000
Warrants 224,662
-----------
8,448,662
===========
NOTE 10. DEFERRED COMPENSATION
The Company recorded aggregate deferred compensation of $14.3 million and $1.3
million in 1999 and 1998, respectively. Of the amounts recorded in 1999 and
1998, $9.7 million and $1.2 million, respectively, represent the difference
between the grant price and the fair value of the Company's common stock for
shares subject to options granted in 1999 and 1998. Options granted below fair
market value and the associated weighted-average exercise price per share were
1,827,500 and $6.14 and 463,250 and $3.67 during the years ended December 31,
1999 and December 31, 1998, respectively. The amortization of deferred
compensation is charged to operations over the vesting period of the options,
which is typically three to five years. The amount of deferred compensation
recorded in 1999 includes $4.6 million related two acquisitions which included
common shares forfeitable subject to continued employment of certain key
employees. The amortization of these deferred compensation amounts are charged
to operations over the twelve month employment agreement period. Total
amortization recognized in 1999 and 1998 was $3.8 million and $376,000,
respectively.
F-15
<PAGE>
NOTE 11. MERGERS AND ACQUISITIONS
On September 9, 1999, the Company acquired all of the outstanding shares of
common stock of BabyData.com, Inc. ("BabyData"), a premier Web site for pregnant
couples and those trying to conceive. The purchase price for BabyData was
approximately $3.4 million and was comprised of 477,074 shares of the Company's
common stock, par value $.01 per share, including approximately $93,000 of
acquisition costs. An additional 204,460 shares of the Company's common stock,
valued at $1.4 million, were issued and 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.
Since BabyData had no significant assets or liabilities, substantially all of
the purchase price was allocated to intangibles and goodwill. Intangibles and
goodwill will be amortized on a straight-line basis over three years. The
deferred compensation component will be recognized as stock-based compensation,
on a straight-line basis, over a one year period.
On November 29, 1999, the Company acquired Health Decisions International, LLC
("HDI"), which develops, provides and supports a broad range of personal health
information, referral and nurse counseling services to customers throughout the
United States. The purchase price for the HDI acquisition was approximately $4.9
million and was comprised of 451,709 shares of the Company's common stock,
including approximately $691,000 of acquisition costs. An additional 345,324
shares of the Company's common stock, valued at $3.2 million, were issued and
are restricted pursuant to the employment agreement entered into by OnHealth and
one key employee of HDI. In connection with the acquisition, an additional,
207,194 shares are contingently issuable based upon the occurrence of certain
future events.
The aggregate purchase price was allocated, based on estimated fair values on
the acquisition date, as follows (in thousands):
Cash $ 24
Accounts receivable 546
Other current assets 87
Equipment 721
Intangibles:
Customer base 2,400
Database content 3,900
Internally developed software 1,300
Assembled work force 130
Goodwill 156
Liabilities assumed ( 4,366)
-----------
Total purchase price $ 4,898
===========
The intangibles and goodwill will be amortized on a straight-line basis over
periods ranging from three to five years. The deferred compensation component
will be recognized as stock-based compensation, on a straight-line basis, over a
one year period.
The following table reflects unaudited consolidated pro forma results of
operations of OnHealth, BabyData and HDI on the basis that the acquisitions 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.
F-16
<PAGE>
Year Ended December 31,
-----------------------------------
1999 1998
----------------- ---------------
(In thousands, except per share data)
Revenue $ 7,186 $ 6,000
================= ===============
Net loss applicable to common
shareholders $ (53,132) $ (22,456)
================= ===============
Basic and diluted net loss
per share $ (2.75) $ (1.87)
================= ===============
NOTE 12. LOSS PER COMMON SHARE
The components of basic and diluted loss per common share are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- --------------- -------------
(In thousands, except per share data)
<S> <C> <C> <C>
Net loss applicable to common shareholders
(numerator) $ (49,772) $ (12,210) $ (13,965)
============== ============== =============
Weighted average common shares outstanding
(denominator) 17,529 10,680 8,056
============== =============== =============
Loss per share:
Basic and diluted $ (2.84) $ (1.14) $ (1.73)
============== =============== =============
</TABLE>
NOTE 13. COMMITMENTS
The Company leases office space under non-cancelable operating lease agreements.
The agreements expire at various times through 2004. Gross rent expense,
including charges for monthly operating costs, was $422,000, $522,000 and
$881,000 for 1999, 1998 and 1997 respectively. The Company also has several
marketing agreements that require minimum payments to be made. Scheduled minimum
lease commitments and annual marketing payments are as follows:
Marketing
Leases Payments
-------------------- ------------------
(In thousands)
2000 $ 829 $ 9,966
2001 849 57
2002 882 -
2003 832 -
2004 391 -
-------------------- ------------------
Total $ 3,783 $ 10,023
==================== ==================
NOTE 14. NOTE PAYABLE
In connection with the acquisition of HDI described in Note 11, the Company
assumed a $2,000,000 note payable to G.D. Searle & Company ("Searle"), which is
secured by all tangible and intangible property of HDI. Interest on the note is
stated at 30% per annum. All principal and interest are due on December 18,
2000, with a call option by Searle on June 30, 2000. As a result of the
acquisition, the Company and Searle entered into a release and Note Cancellation
Agreement, whereby the Company intends to repay the principal and interest due
by issuing Searle registered shares of the Company's common stock. If the
Company is unable to provide Searle with registered shares on or before June 30,
2000, then Searle has the option to call the note and all principal and interest
will be due in cash.
F-17
<PAGE>
NOTE 15. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
(In thousands) Year Ended December 31, 1999
-------------------------------------------------
1999 1998 1997
------------- -------------- --------------
<S> <C> <C> <C>
Cash paid during the years for:
Interest $ - $ - $ 298
Income taxes 4 7 5
Non-cash investing and financing transactions:
Common stock issued in connection with business
acquisitions 8,389 - -
Stock options and warrants issued for services 6,125 60 -
Common stock issued for deferred compensation 4,622 - -
Deferred compensation related to stock options 9,706 1,345 -
Conversion of preferred stock to common stock - 3,630 1,948
Conversion of convertible subordinated debentures - - 5,729
Fair market value of preferred stock warrant - 702 -
Preferred stock accretion - (702) (43)
Preferred stock dividends - 100 -
Preferred stock deemed dividend - - 2,875
Common stock issued as litigation settlement - - 433
</TABLE>
NOTE 16. INCOME TAXES
At December 31, 1999, the Company has net operating loss carryforwards of
$130,323,000 for income tax purposes and unused research and development credits
of $442,000 that expire at various times through 2019. These carryforwards are
subject to the limitations of Internal Revenue Code Section 382. This section
provides limitations on the availability of net operating losses to offset
current taxable income if significant ownership changes have occurred for
federal tax purposes. For financial reporting purposes, a valuation allowance
has been recognized to completely reserve for the deferred tax assets related to
those carryforwards. The reserve has been established because of the uncertainty
of future taxable income, which is necessary to realize the benefits of the net
operating loss carryforwards. The valuation reserve increased $14.7 million and
$1.2 million during 1999 and 1998, respectively.
Components of the Company's deferred tax assets and liabilities are as follows:
December 31,
-----------------------------------------
1999 1998
------------------- -------------------
DEFERRED TAX ASSETS:
Accrued expenses and allowances $ 2,712,000 $ 1,223,000
Research and development credits 442,000 339,000
Net operating loss carryforwards 45,613,000 28,669,000
------------------- -------------------
48,767,000 30,231,000
DEFERRED TAX LIABILITIES:
Depreciation 48,000 (15,000)
Acquisition of intangibles (3,004,000) -
------------------- -------------------
(2,956,000) (15,000)
------------------- -------------------
Net deferred tax assets
before valuation allowance 45,811,000 30,216,000
Less valuation allowance (45,811,000) (30,216,000)
------------------- -------------------
NET DEFERRED TAX ASSETS $ - $ -
=================== ===================
NOTE 17. AMERICA'S HEALTH NETWORK AGREEMENT
In May 1995, the Company entered into a content and royalty agreement with
America's Health Network ("AHN"), a health information cable television network
that combines live programming with medical consumer product sales. Under the
agreement the Company licensed its multimedia content to AHN starting in May
1995 and was to receive minimum licensing royalties over the life of the
F-18
<PAGE>
agreement. This revenue was being recognized evenly over the expected life of
the contract. In June 1997, as a result of the Company not receiving its
quarterly payment, the outstanding AHN receivable was fully reserved. Due to the
uncertainty of future payments, in 1997 the Company began recognizing revenue on
a cash basis. The Company recorded $493,000 in license royalty revenue in 1997.
In December 1997 and in early 1998, AHN made payments, which were applied
against the receivable. At December 31, 1999, the Company has a fully reserved
receivable of $153,000 and AHN has failed to make three scheduled payments
totaling $1,688,000.
NOTE 18. BENEFIT PLAN
The Company has a defined contribution salary deferral plan covering
substantially all employees under Section 401(k) of the Internal Revenue Code.
The Plan allows eligible employees to make contributions up to the maximum
amount provided under the Code. The Company may also make a discretionary
contribution to the Plan. No such contributions have been made by the Company.
NOTE 19. MAYO AGREEMENT
In September 1997, the Company entered into an agreement with Mayo Foundation
("Mayo") which included a full transfer of ownership of the Company's O@sis web
site to Mayo and a new arrangement for revenues and cost sharing concerning
O@sis. Under the terms of the agreement, the Company received a $2,700,000 cash
payment, an additional $300,000 cash payment for hosting the web site for a
transition period, and the return of 490,000 shares of the Company's common
stock. Through the year 2001, the Company will receive a royalty from Mayo on
certain revenues generated by the Mayo Health O@sis site and certain other
non-O@sis Internet projects. In addition, Mayo was released from the Company's
"right of first offer" on Mayo health products produced for electronic media,
and Mayo assumed operating expenses incurred for the web site retroactive to
January 1, 1997 which were recorded as a reduction to product development
expenses. The Company recorded the $2,700,000 payment as other income and
recorded the $300,000 payment as contract development revenue during the third
and fourth quarters, respectively, of 1997.
NOTE 20. RELATED PARTY TRANSACTIONS
During 1998, 1997 and 1996, the Company subleased approximately 20,000 square
feet of its Eden Prairie office space to Reality Interactive, Inc. Reality
Interactive, Inc. and the Company share a common Board member. The lease was
terminated in 1998.
During 1996, two officers of the Company participated in the Company's debt
offering. The total amount of debt issued by the Company to these individuals
was $120,000. Additionally, three directors of the Company participated in the
debt offering, either individually or through affiliated organizations. The
total amount of debt issued by the Company to these individuals and
organizations was $550,000. On October 28, 1997, this debt was converted into
common stock at a rate of $2.00 per share (see Note 6).
NOTE 21. RELOCATION
During early 1998, the Company relocated its primary operating facilities from
Minneapolis, Minnesota to Seattle, Washington. As a result, certain of the
Company's Minnesota leasehold improvements and computer and software equipment
having a carrying value of $721,000 were not transferable or were not utilized
in the Company's Seattle operations. In 1997, the Company had estimated and
recorded the related relocation expense of $721,000 as a General and
Administrative expense. In addition, in 1997 the Company recorded $252,000 and
$610,000 in general and administrative expenses related to lease termination
costs and severance for former officers and employees, respectively.
NOTE 22. LEGAL PROCEEDINGS
In February 1996, an action in the District Court of Hennepin County (Minnesota)
was brought by T. Randal Productions et al. against the Company and one current
and two former employees. The plaintiffs made various allegations, including
misappropriation of corporate opportunities and trade secrets by the Company and
its employees and sought award of monetary damages, exemplary damages and
royalties substantially in excess of $10.0 million. In November 1997, a jury
found that there was no joint venture between T. Randal and the company and/or
any of its employees but awarded T. Randal $480,000 plus interest for damages
sustained to its business. Plaintiffs moved for a new trial, amended findings
and for judgment notwithstanding the verdict. The jury verdict was upheld by the
trial court. The plaintiffs appealed this decision to the Minnesota Court of
F-19
<PAGE>
Appeals. In March 1999, the Minnesota Court of Appeals affirmed the decision of
the trial court. On June 1, 1999, the Company made a payment of $950,000 to T.
Randal Productions in full satisfaction of a judgment against the Company. As of
December 31, 1998, the Company had accrued $677,000. The remaining $273,000 was
recorded in the quarter ended June 30, 1999.
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 was transferred to New York. A settlement was reached
during January 2000, which will result in the issuance of 22,500 shares of the
Company's common stock, for which an accrual in the amount of $195,000 was
recorded at December 31, 1999.
NOTE 23. SEC INVESTIGATION AND THE 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
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
because they were determined to be granted below fair market value on the
measurement date. 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 replacement ISO grant under the Company's 1997 Stock Option Plan. To
the extent any 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
replacement options will 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.
F-20
<PAGE>
NOTE 24. SUBSEQUENT EVENTS
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. The merger is
expected to be completed in either the second or third quarter of 2000.
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 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 shares. The warrant
is fully vested and exercisable immediately and expires on February 15, 2003. 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.
As a result of this merger, Healtheon/WEBMD expects to file a Proxy Statement
and Prospectus with the SEC as promptly as reasonably possible. The shareholders
of the Company will consider adoption and approval of this merger agreement
within 30 days after declaration of the effectiveness of the Healtheon/WEBMD
Registration Statement. If the SEC investigation of the Company`s stock option
grants (see Note 23) will cause a material delay in the effectiveness of the
Registration Statement, then Healtheon/WEBMD may terminate this merger
agreement.
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. 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 25. QUARTERLY FINANICAL INFORMATION (UNAUDITED)
Financial results by quarter for 1999 and 1998 are as follows. These quarterly
results have been restated to include amortization of stock-based compensation
charges as discussed in Notes 2 and 23.
F-21
<PAGE>
<TABLE>
<CAPTION>
(In thousands, except per share data)
Three Months Three Months Three Months Three Months
Ended Ended Ended Ended
March 31, June 30, September 30, December 31,
--------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
1999
Net Revenue $ 200 $ 581 $ 1,005 $ 1,981
=============== ============== ================ ================
Loss from operations:
As reported $ (4,267) $ (7,106) $ (17,513) $ (18,722)
Adjustment (772) (1,021) (598) (54)
--------------- -------------- ---------------- ----------------
Restated $ (5,039) $ (8,127) $ (18,111) $ (18,776)
=============== ============== ================ ================
Net loss:
As reported $ (4,160) $ (6,983) $ (17,464) $ (18,720)
Adjustment (772) (1,021) (598) (54)
--------------- -------------- ---------------- ----------------
Restated $ (4,932) $ (8,004) $ (18,062) $ (18,774)
=============== ============== ================ ================
Net loss per share:
As reported $ (0.28) $ (0.43) $ (1.00) $ (0.87)
Adjustment (0.05) (0.07) (0.04) -
--------------- -------------- ---------------- ----------------
Restated $ (0.33) $ (0.50) $ (1.04) $ (0.87)
=============== ============== ================ ================
1998
Net Revenue $ 330 $ 155 $ 248 $ 789
=============== ============== ================ ================
Loss from operations:
As reported $ (1,984) $ (2,494) $ (2,533) $ (4,008)
Adjustment (14) (37) (66) (129)
--------------- -------------- ---------------- ----------------
Restated $ (1,998) $ (2,531) $ (2,599) $ (4,137)
=============== ============== ================ ================
Net loss:
As reported $ (2,253) $ (1,889) $ (2,503) $ (4,294)
Adjustment (14) (37) (66) (129)
--------------- -------------- ---------------- ----------------
Restated $ (2,267) $ (1,926) $ (2,569) $ (4,423)
=============== ============== ================ ================
Net loss applicable to common
shareholders:
As reported $ (2,253) $ (2,099) $ (2,913) $ (4,699)
Adjustment (14) (37) (66) (129)
--------------- -------------- ---------------- ----------------
Restated $ (2,267) $ (2,136) $ (2,979) $ (4,828)
=============== ============== ================ ================
Net loss per share:
As reported $ (0.22) $ (0.21) $ (0.27) $ (0.40)
Adjustment - - (0.01) (0.01)
--------------- -------------- ---------------- ----------------
Restated $ (0.22) $ (0.21) $ (0.28) $ (0.41)
=============== ============== ================ ================
</TABLE>
F-22
<PAGE>
ONHEALTH NETWORK COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Additions
Charged to
(Recoveries
Balance at Credited Balance
Beginning to) Costs at End of
of Period and Expenses Other Deductions Period
------------- ------------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1999:
Allowance for doubtful accounts
receivable, promotional
allowances and sales returns $ 256 $ 117 $ 40 (4) $ - $ 413
Allowance for obsolete inventory 501 - - (501) (2) -
============= ============= ========== ============= ===========
$ 757 $ 117 $ 40 $ (501) $ 413
============= ============= ========== ============= ===========
Year Ended December 31, 1998:
Allowance for doubtful accounts
receivable, promotional
allowances and sales returns $ 1,011 $ (755) (3) $ - $ - (1) $ 256
Allowance for obsolete inventory 451 50 - - (2) 501
------------- ------------- ---------- ------------- -----------
$ 1,462 $ (705) $ - $ - $ 757
============= ============= ========== ============= ===========
Year Ended December 31, 1997:
Allowance for doubtful accounts
receivable, promotional
allowances and sales returns $ 277 $ 2,336 $ - $ (1,602) (1) $ 1,011
Allowance for obsolete inventory 485 200 - (234) (2) 451
------------- ------------- ---------- ------------- -----------
$ 762 $ 2,536 $ - $ (1,836) $ 1,462
============= ============= ========== ============= ===========
--------------
<FN>
1) Deductions represent accounts receivable determined to be uncollectable and
therefore charged against the allowance account; accounts receivable
determined to be uncollectable due to return of product(s); and accounts
credited due to promotional and administrative allowance arrangements with
distributors.
2) Write-offs of inventory.
3) The $75 net credit to costs and expenses is primarily due to the 1998
recovery of an account previously written off.
4) Allowance for doubtful accounts of HDI, which was acquired on 11/29/99.
</FN>
</TABLE>
S-1
<PAGE>
