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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
MARCH 15, 2000
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(Date of earliest event reported)
ONHEALTH NETWORK COMPANY
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(Exact name of registrant as specified in its charter)
Commission file number: 0-22212
WASHINGTON 41-1686038
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(State of incorporation or organization) (IRS Employer Identification No.)
808 HOWELL STREET, SUITE 400 SEATTLE, WASHINGTON 98101
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(Address of principal executive offices)
(206) 583-0100
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(Registrant's telephone number, including area code)
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<PAGE>
ITEM 5. OTHER EVENTS
Included in this Current Report on Form 8-K are the Consolidated Financial
Statements and Schedule for OnHealth Network Company and Subsidiaries at
December 31, 1999 and 1998 and for each of the three years in the period ended
December 31, 1999, the related Management's Discussion and Analysis, and
Selected Financial Data. The Consolidated Financial Statements and Schedule are
included as exhibits to this Current Report on Form 8-K.
SELECTED FINANCIAL DATA
The selected financial data presented below has been derived from the financial
statements of the Company.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1999 1998 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 (47,608) (11,019) (11,262) (10,326) (14,875)
Net loss (47,327) (10,939) (10,947) (10,157) (14,234)
Net loss applicable to
common shareholders $ (47,327) $ (11,964) $ (13,965) $ (10,336) $ (14,254)
Net loss per common share:
Basic and diluted $ (2.70) $ (1.12) $ (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
</TABLE>
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
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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.
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.
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,
----------------------------------------
1999 1998 1997
------------- ------------- -------------
(In thousands)
Net revenue $ 3,767 $ 1,522 $ 3,761
Costs and expenses 51,375 12,541 15,023
Loss from operations (47,608) (11,019) (11,262)
Net loss (47,327) (10,939) (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
----------- -------------- -------------
Net revenue $ 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.
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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.
COSTS AND EXPENSES
Total cost and expenses in 1999 increased $38,834,000 or 310%, to $51,375,000
from $12,541,000 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 onhelath.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
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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
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
$579,000 in 1999 and $130,000 in 1998. Stock-based compensation is expected to
increase in 2000, as the remaining amortization related to the two 12-month
employment contracts, which became effective September 9, 1999 and November 29,
1999, will be included in the financial statements.
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.
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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 $47,327,000. 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, will be sufficient to fund our operations through December 31,
2000. Operations generated a negative cash flow during 1997, 1998 and 1999, and
we expect a significant use of cash in 2000 as it markets and expands it Web
site. Any material unforeseen increase in expenses or reductions in projected
revenues will likely require us to seek additional debt or equity financing. If
additional cash is required, we may need to reduce our expenditures or curtail
certain operations. There can be no assurance that additional capital, on a debt
or equity basis, will be found, or if found that it will be on economically
viable terms.
YEAR 2000
We have experienced no disruptions or problems regarding the year 2000
changeover. As part of our year 2000 plan, prior to January 1, 2000, we assessed
its internal systems consisting primarily of desktop and network computers, and
third-party software utilized in our day-to-day operations. Our assessment was
completed as of January 1, 2000 and indicated all systems were operating as
normal. As of the date of the filing of this document, all of our internal
hardware and software continue to operate as normal and to-date, all vendors
utilized by us in our daily operations are operating normally and have not
indicated any year 2000 anomalies. Based upon the successful transition through
the January 1, 2000 rollover period, we do not anticipate any problems to
materialize. Our expenditures for the year 2000 effort were not material and we
do not expect to incur any material costs in 2000 with regards to year 2000.
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FORWARD-LOOKING STATEMENTS
Statements contained herein that are not based on historical fact, including
without limitation statements containing the words "believes," "may," "will,"
"estimate," "continue," "anticipates," "intends," "expects" and words of similar
import, constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, events or developments to be materially different
from any future results, events or developments expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
o the expectation that we will see a growth in revenues and reduction
of net losses as a on-line health network;
o the ability to increase consumer awareness of our Web site;
o the ability to increase our advertising base,
o technology changes and the continued acceptance of the Internet;
o general economic and business conditions;
o competition;
o the ability to attract and retain qualified personnel;
o liability and other claims asserted against us;
o the expectation that we will successfully complete our proposed merger
with Healtheon/WEBMD; and
o other factors referenced in our filings with the Securities and
Exchange Commission.
Given these uncertainties, readers are cautioned not to place undue reliance on
such forward-looking statements. We disclaim any obligation to update any such
factors or to publicly announce the result of any revisions to any of the
forward-looking statements contained herein to reflect future results, events or
developments.
Additional information on other risk factors which could affect our financial
results are included in our Annual Report for the fiscal year ended December 31,
1998 on Form 10-K, as amended, and other Company reports and statements on file
with the Securities and Exchange Commission.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits
The following exhibits are filed herewith:
99.1 Consolidated Financial Statements for OnHealth Network
Company and Subsidiaries at December 31, 1999 and 1998
and for each of the three years in the period ended
December 31, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
OnHealth Network Company
Date: March 15, 2000 By: \S\ RON STEVENS
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Ron Stevens
Chief Financial Officer
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Index to Financial Statements and Schedule
<TABLE>
<CAPTION>
Page
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<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................... 1
Consolidated Balance Sheets................................................ 2
Consolidated Statements of Operations...................................... 3
Consolidated Statements of Shareholders' Equity............................ 4
Consolidated Statements of Cash Flows...................................... 5
Notes to Consolidated Financial Statements................................. 6
Report of Ernst & Young LLP, Independent Auditors, On Financial
Statement Schedule....................................................... 22
Financial Statement Schedule II............................................ 23
</TABLE>
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EXHIBIT 99.1
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. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
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.
/s/ ERNST & YOUNG LLP
Seattle, Washington
February 18, 2000
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ONHEALTH NETWORK COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
---------------------------------
1999 1998
--------------- --------------
<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 162,662 89,159
Accumulated deficit (136,842) (89,515)
Deferred compensation (5,163) (73)
--------------- --------------
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
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ONHEALTH NETWORK COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
<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 1,401 130 -
--------------- --------------- ---------------
Total costs and expenses 51,375 12,541 15,023
--------------- --------------- ---------------
Loss from operations (47,608) (11,019) (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 (47,327) (10,939) (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 $ (47,327) $ (11,964) $ (13,965)
=============== =============== ===============
Net loss per common share-
Basic and diluted $ (2.70) $ (1.12) $ (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
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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 - - 203 - (203) -
Amortization of deferred compensation - - - - 130 130
Net loss - - - (10,939) - (10,939)
---------- --------- ----------- ------------- ---------------- ------------
Balance at December 31, 1998 12,800 128 89,159 (89,515) (73) (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 - - 1,869 - (1,869) -
Amortization of deferred compensation - - - - 1,401 1,401
Net loss - - - (47,327) - (47,327)
---------- --------- ----------- ------------- ---------------- ------------
23,812 $ 238 $ 162,662 $ 136,842) $ (5,163) $ 20,895
========== ========= =========== ============= ================ ============
</TABLE>
The accompanying notes are an integral part of the financial statements
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ONHEALTH NETWORK COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------
1999 1998 1997
--------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (47,327) $ (10,939) $ (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 1,401 130 -
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
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 Finanical 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.
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 16).
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 equals the market price of the underlying stock on the date of
grant, no compensation expense is recorded. 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.
8
<PAGE>
RECLASSIFICATIONS
Certain reclassifications have been made for consistent financial statement
presentation.
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. LIQUIDITY
The Company has experienced recurring losses from operations and has generated
an accumulated deficit from inception to December 31, 1999 of $136,842,000.
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
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 23). The Company believes its
cash and cash equivalents, including the $30 million lending commitment by
Healtheon/WEBMD, 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 3. 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.
9
<PAGE>
NOTE 4. 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>
NOTE 5. 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 sas 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.
10
<PAGE>
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 6. 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 7. 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.
NOTE 8. 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
11
<PAGE>
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.
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.
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>
14
<PAGE>
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
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 $6.78, $2.99 and $1.74, respectively. The
weighted-average fair value of options granted at less than fair market value
during 1999 and 1998 was $10.66 and $2.65, respectively. The weighted-average
fair value of options granted at greater than fair market value during 1998 was
$1.95. 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 $ (47,327) $ (11,964) $ (13,965)
Net loss applicable to common shareholders - pro forma (52,075) (12,970) (14,294)
Basic and diluted net loss per share - as reported $ (2.70) $ (1.12) $ (1.73)
Basic and diluted net loss per common share pro forma $ (2.97) $ (1.21) $ (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 9. DEFERRED COMPENSATION
The Company recorded aggregate deferred compensation of $6.5 million and
$203,000 in 1999 and 1998, respectively. The amount recorded in 1998, as well as
$1.9 million of the amount recorded in 1999, represent the difference between
the grant price and the fair value of the Company's common stock for shares
15
<PAGE>
subject to options granted in 1999 and 1998. Options granted below fair market
value and the associated weighted-average exercise price per share were 395,000
and $5.99 and 70,000 and $3.35 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 $1.4 million and $130,000, respectively.
NOTE 10. 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, substantailly 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.
16
<PAGE>
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.
Year Ended December 31,
-----------------------------------
1999 1998
----------------- ---------------
(In thousands, except per share data)
Revenue $ 7,186 $ 6,000
================= ===============
Net loss applicable to common
shareholders $ (50,687) $ (22,210)
================= ===============
Basic and diluted net loss
per share $ (2.63) $ (1.85)
================= ===============
NOTE 11. 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) $ (47,327) $ (11,964) $ (13,965)
============== =============== =============
Weighted average common shares outstanding
(denominator) 17,529 10,680 8,056
============== =============== =============
Loss per share:
Basic and diluted $ (2.70) $ (1.12) $ (1.73)
============== =============== =============
</TABLE>
NOTE 12. 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
==================== ==================
17
<PAGE>
NOTE 13. NOTE PAYABLE
In connection with the acquisition of HDI described in Note 9, 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.
NOTE 14. 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 1,869 203 -
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 15. 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.
18
<PAGE>
Components of the Company's deferred tax assets and liabilities are as follows:
December 31,
-----------------------------------------
1999 1998
------------------- -------------------
DEFERRED TAX ASSETS:
Accrued expenses and allowances $ 1,856,000 $ 1,223,000
Research and development credits 442,000 339,000
Net operating loss carryforwards 45,613,000 28,669,000
------------------- -------------------
47,911,000 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 44,955,000 30,216,000
Less valuation allowance (44,955,000) (30,216,000)
------------------- -------------------
NET DEFERRED TAX ASSETS $ - $ -
=================== ===================
NOTE 16. 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
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 17. 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 18. 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
19
<PAGE>
NOTE 19. 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 20. 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 21. 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
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 been 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 22. SEC INVESTIGATION
In September 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. As a result of the Company's own special
investigation, the Company became aware of certain instances where stock
options were granted to new employees with exercise prices that were below fair
20
<PAGE>
market value on the date of grant. As a result, the Company recorded $1.8
million of deferred stock-based compensation and will be 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.
The Company and the independent legal counsel believe that all stock-based
compensation charges for 1999 stock option grants have been recorded.
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.
NOTE 23. SUBSEQUENT EVENTS
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 22) will cause a material delay in the effectiveness of the
Registration Statement, then Healtheon/WEBMD may terminate this merger
agreement.
21
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
On Financial Statement Schedule
We have audited the accompanying consolidated financial statements of
OnHealth Network Company as of December 31, 1999 and 1998 and for each of the
three years in the period ended December 31, 1999 and have issued our report
thereon dated February 18, 2000 (included elsewhere in this Current Report). Our
audits also included the accompanying financial statement schedule. This
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Seattle, Washington
February 18, 2000
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>
23
