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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________TO__________.
COMMISSION FILE NUMBER 0-22212
ONHEALTH NETWORK COMPANY
(Exact name of registrant as specified in its charter)
WASHINGTON 41-1686038
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
808 HOWELL STREET, SUITE 400
SEATTLE, WASHINGTON 98101
( Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 583-0100
------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Number of shares outstanding of the registrant's common stock as of
April 30, 2000: 24,697,701
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<PAGE>
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements..............................................3
Consolidated Balance Sheets as of March 31, 2000
and December 31, 1999.........................................3
Consolidated Statements of Operations for the Three
Months Ended March 31, 2000 and 1999..........................4
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2000 and 1999..........................5
Notes to Consolidated Financial Statements .......................6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................11
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings................................................15
ITEM 6. Exhibits and Reports on Form 8-K.................................16
2
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ONHEALTH NETWORK COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------------- ---------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 12,664 $ 10,142
Restricted cash 500 500
Accounts receivable, net of allowances
of $448 (2000) and $413 (1999) 2,574 1,870
Inventories - 15
Prepaid advertising 6,009 6,848
Deferred financing costs 19,831 -
Other current assets
428 401
---------------- ---------------
Total current assets 42,006 19,776
Furniture and equipment, net
2,489 2,137
Intangibles and goodwill, net 10,005 10,754
Other non-current assets 58 53
================ ===============
Total assets $ 54,558 $ 32,720
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 15,000 $ 2,000
Current maturities of capital lease
obligations 10 13
Accounts payable 8,375 6,515
Deferred revenue 1,122 859
Other accrued expenses 1,473 2,383
---------------- ---------------
Total current liabilities 25,980 11,770
Non-current liabilities 52 55
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.01 par value;
authorized, 1,000; issued and
outstanding, none - -
Common stock, $0.01 par value;
authorized, 100,000; issued
and outstanding, 24,693 (2000)
and 23,812 (1999) 247 238
Additional paid-in-capital 195,354 162,662
Accumulated deficit (158,727) (136,842)
Deferred compensation (8,348) (5,163)
---------------- ---------------
Total shareholders' equity 28,526 20,895
---------------- ---------------
Total liabilities and shareholders' equity $ 54,558 $ 32,720
================ ===============
</TABLE>
The accompanying notes are an integral part of the financial statements
3
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ONHEALTH NETWORK COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
2000 1999
-------------- ---------------
<S> <C> <C>
Net revenue $ 2,664 $ 200
Costs and expenses:
Product development, editorial and design 2,673 1,215
Sales and marketing 12,186 2,366
General and administrative 2,793 874
Amortization of intangibles and goodwill 749 -
Stock-based compensation 3,143 12
-------------- ---------------
Total costs and expenses 21,544 4,467
-------------- ---------------
Loss from operations (18,880) (4,267)
Interest income 151 107
Interest expense (3,158) -
-------------- ---------------
Total interest expense, net (3,007) 107
-------------- ---------------
Net loss $ (21,887) $ (4,160)
============== ===============
Net loss per common share-
Basic and diluted $ (0.94) $ (0.28)
============== ===============
Weighted average number of common shares
Outstanding 23,390 14,930
============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements
4
<PAGE>
ONHEALTH NETWORK COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------------
2000 1999
---------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (21,887) $ (4,160)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 191 69
Provision for (recoveries of) doubtful
accounts and returns 36 19
Common stock issued for services - 164
Amortization of prepaid advertising and
promotional agreements 878 -
Amortization of intangibles and goodwill 749 -
Amortization of deferred compensation 3,143 12
Non-cash interest expense 2,989 -
Other - 5
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (739) 259
Decrease in inventories 15 -
Increase in other current assets (269) (73)
(Increase) decrease in other non-current assets (5) 81
Increase in accounts payable 1,860 458
Increase (decrease) in other accrued expenses 432 (900)
---------------- ---------------
Net cash used in operating activities (12,607) (4,066)
Cash flows from investing activities:
Capital expenditures (543) (64)
---------------- ---------------
Net cash used in investing activities (543) (64)
Cash flows from financing activities:
Net proceeds from issuance of common stock:
Private placements - 14,278
Exercise of options 288 860
Exercise of warrants 388 624
Proceeds from short-term loan 15,000 -
Payment of financing related costs (1) -
Payments on capital lease obligation (3) -
---------------- ---------------
Net cash provided by financing activities 15,672 15,762
---------------- ---------------
Net increase in cash and cash equivalents 2,522 11,632
Cash and cash equivalents at beginning of year 10,142 2,119
================ ===============
Cash and cash equivalents at end of period $ 12,664 $ 13,751
================ ===============
</TABLE>
The accompanying notes are an integral part of the financial statements
5
<PAGE>
ONHEALTH NETWORK COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Description of Business
OnHealth Network Company, formerly known as IVI Publishing, Inc., (the
"Company"), is engaged in electronic publishing of health and medical
information in interactive multimedia formats through its web site onhealth.com,
providing and supporting a broad range of personal health information, referral
and nurse counseling services to customers throughout the United States.
Principles of Consolidation
The consolidated financial statements include the financial statement of
OnHealth and its wholly-owned subsidiaries, Health Decision International, LLC
("HDI") and BabyData.com, Inc. ("BabyData"). All material intercompany balances
and transactions have been eliminated.
Intangible Assets
Intangible assets consist of goodwill, which represents costs in excess of the
fair value of the net assets acquired, and identifiable intangibles, which
include web development costs, customer base, database content, internally
developed software, and assembled work force. Intangible assets are amortized on
a straight-line basis over their estimated useful lives of three to five years.
Reclassifications
Certain 1999 amounts have been reclassified to conform to current year financial
statement presentation.
Deferred Financing Costs
Deferred financing costs represent the fair value of the common stock warrant
issued in connection with a financing arrangement. These costs are being
amortized over the term of the financing arrangement.
Impact of Recently Issued or Adopted Accounting Standards
In March 2000, the FASB issued Interpretation No. 44 (FIN No. 44), "Accounting
for Certain Transactions Involving Stock Compensation, an interpretation of APB
Opinion No. 25." FIN No. 44 will be effective July 1, 2000. This interpretation
provides guidance for applying APB Opinion No. 25 "Accounting for Stock Issued
to Employees." Management has not determined the impact that adoption of FIN No.
44 will have on the Company's financial position or results of operations.
In March 2000, the Emerging Issues Task Force (EITF) of the FASB reached a
consensus on Issue No. 00-2, "Accounting for Web Site Development Costs" which
provides guidance on when to capitalize versus expense costs incurred to develop
a web site. The consensus is effective for web site development costs in
quarters beginning after June 30, 2000. Management has not yet determined the
impact that adoption of Issue No. 00-2 will have on the Company's financial
position or results of operations.
NOTE 2. BASIS OF PRESENTATION
The accompanying unaudited financial statements of OnHealth Network Company have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, subject to potential
adjustments as discussed in Note 11, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
6
<PAGE>
included. Operating results for the three months ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000. The accompanying unaudited financial statements should be
read in conjunction with the financial statements and the notes thereto included
in the OnHealth Network Company report to the Securities and Exchange Commission
on Form 10-K for the year ended December 31, 1999. The Company anticipates
amending its 1999 10-K (see Note 11).
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.
NOTE 4. LOSS PER COMMON SHARE
Basic earnings per share ("EPS") excludes any dilutive effects of common stock
equivalents - options, warrants and convertible securities - and is computed by
dividing the net loss by the weighted-average number of common shares
outstanding during the period. Diluted EPS is computed by dividing net loss by
the weighted-average number common shares and common stock equivalents
outstanding. Excluded from the computation of the weighted-average number of
common shares outstanding at March 31, 2000 are 447,554 shares, which are
forfeitable subject to the continued employment of certain key employees.
The effects of common stock equivalents are excluded from the computation for
the periods presented as their effects are anti-dilutive.
The components of basic and diluted loss per common share are as follows:
Three Months Ended
March 31, 2000
-------------------------------
2000 1999
--------------- ---------------
(In thousands, except per share data)
Net loss (numerator) $ (21,887) $ (4,160)
=============== ===============
Weighted average common shares
outstanding denominator) 23,390 14,930
=============== ===============
Loss per share:
Basic and diluted $ (0.94) $ (0.28)
=============== ===============
NOTE 5. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS
<TABLE>
<CAPTION>
March 31, December 31,
(In thousands) 2000 1999
(Unaudited) ----------------- -----------------
<S> <C> <C>
Furniture and equipment:
Computer hardware $ 2,510 $ 2,205
Software 490 349
Equipment 6 6
Furniture & fixtures 480 470
Leasehold improvements 78 71
Construction in progress 237 157
----------------- -----------------
3,801 3,258
Less accumulated depreciation (1,312) (1,121)
----------------- -----------------
Total $ 2,489 $ 2,137
================= =================
7
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Intangibles and Goodwill:
Web development costs $ 43 $ 43
Customer base 2,400 2,400
Database content 3,900 3,900
Internally developed software 1,300 1,300
Assembled work force 130 130
Goodwill 3,486 3,486
----------------- -----------------
11,259 11,259
Less accumulated amortization (1,254) (505)
----------------- -----------------
Total $ 10,005 $ 10,754
================= =================
Other accrued expenses:
Litigation loss $ - $ 195
Legal fees 225 225
Royalties 220 425
Accrued wages and benefits 428 410
Interest payable 171 676
Other 429 452
----------------- -----------------
Total $ 1,473 $ 2,383
================= =================
</TABLE>
NOTE 6. 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 share. The warrant
is fully vested and exercisable immediately and expires on February 15, 2003. On
February 15, 2001, the Company has the right to call a portion of the warrant in
excess of 3,000,000 shares, or 2,800,000 shares. The fair value of the warrant,
approximately $22.6 million, has been valued at the date of issuance using a
Black-Scholes option pricing model and will be amortized as interest expense
over the one-year loan period. During the quarter ended March 31, 2000, $2.8
million of the deferred financing costs have been amortized and included in
interest expense. In addition, the Company granted Healtheon/WEBMD a warrant to
purchase 500,000 shares of the Company's common stock with an exercise price of
$0.01 per share. The warrant is exercisable in the event the merger agreement is
terminated and any principal and interest arising under the loans from
Healtheon/WEBMD remain outstanding 90 days after the termination date. The
warrant will vest as to 250,000 shares after 90 days, 125,000 shares after 180
days and 125,000 after 270 days.
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 it is determined by the Board of Directors of
Healtheon/WEBMD that, as a result of developments in the SEC investigation of
the Company`s stock option grants (see Note 11) there will be a material delay
in the effectiveness of the Registration Statement, then Healtheon/WEBMD may
terminate this merger agreement. The Company will have 20 days, after notice by
Healtheon/WEBMD of it's intent to terminate, to resolve the Material Delay to
Healtheon/WEBMD's reasonable satisfaction. The Company has not been notified of
an intent to terminate by Healtheon/WEBMD.
8
<PAGE>
NOTE 7. 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 was
secured by all tangible and intangible property of HDI. Interest on the note was
stated at 30% per annum. All principal and interest were due on December 18,
2000, with a call option by Searle on June 30, 2000. A result of the
acquisition, the Company and Searle entered into a release and Note Cancellation
Agreement, whereby the Company intended to repay the principal and interest due
by issuing Searle registered shares of the Company's common stock. If the
Company was unable to provide Searle with registered shares on or before June
30, 2000, then Searle had the option to call the note and all principal and
interest would be due in cash. On March 31, 2000, the note, including
approximately $882,000 in accrued interest, was paid by issuing 688,190
registered shares of the Company's common stock to Searle.
NOTE 8. STOCK OPTIONS AND WARRANTS
On February 15, 2000, shareholders owning in excess of 40% of the outstanding
common stock of OnHealth entered into voting agreements providing a proxy to
Healtheon/WEBMD in support of the merger agreement with Healtheon/WEBMD (see
Note 6). 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 9. SEGMENT INFORMATION
We have identified our reportable segments based on how our operations are
managed and how results are viewed by management. The Company reports operations
in two business segments: OnHealth and HDI. Accounting policies of the two
segments are the same as those described in Note 1. Description of Business and
Summary of Significant Accounting Policies. There were no intersegment sales
during the periods presented. The following table contains certain segment
information for the three month periods ended March 31, 2000 and 1999.
Three Months Ended
March 31,
----------------------------
2000 1999
------------ ------------
(In thousands)
Net revenue:
OnHealth $ 2,010 $ 200
HDI 654 -
------------ ------------
Consolidated net revenue $ 2,664 $ 200
============ ============
Amortization of intangibles and goodwill:
OnHealth $ 749 $ -
HDI - -
------------ ------------
Consolidated amortization of intangibles
and goodwill $ 749 $ -
============ ============
Stock-based compensation:
OnHealth $ 3,143 $ 12
HDI - -
------------ ------------
Consolidated stock-based compensation $ 3,143 $ 12
============ ============
Interest expense, net:
OnHealth $ (3,004) $ 107
HDI (3) -
------------ ------------
Consolidated interest expense, net $ (3,007) $ 107
============ ============
9
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Net loss:
OnHealth $ (21,253) $ (4,160)
HDI (634) -
------------ ------------
Consolidated net loss $ (21,887) $ (4,160)
============ ============
Total assets:
OnHealth $ 53,271 $ 32,720
HDI 1,287 -
------------ ------------
Consolidated total assets $ 54,558 $ 32,720
============ ============
NOTE 10. SUPPLEMENTAL CASH FLOW INFORMATION
Three Months Ended
March 31,
------------------------
2000 1999
---------- ----------
(In thousands)
Cash paid during the periods for:
Interest expense $ 1 $ -
Income taxes - -
Non-cash investing and financing transactions:
Common stock issued for debt 2,882 -
Fair value of common stock warrant 22,612 -
Common stock issued as litigation settlement 196 -
Common stock issued for services 8 1,969
Deferred compensation related to stock options 6,328 -
NOTE 11. SEC INVESTIGATION AND COMPANY'S SPECIAL INVESTIGATION
In October 1999, the Division of Enforcement, Pacific Regional Office of the
Securities and Exchange Commission ("SEC"), notified the Company that it was
initiating an investigation of the Company's policies and procedures concerning
the granting of stock options. The Company has provided information to the SEC.
In addition, The Company's Board of Directors hired independent legal counsel to
conduct its own special investigation. 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 market
value on the date of grant. Based on the preliminary findings of this
investigation, the Company recorded $1.8 million of deferred stock-based
compensation in 1999. As a result of the ongoing investigation, the Company
recorded an additional $8.8 million of deferred stock-based compensation in
2000, related primarily to grants to existing employees with exercise prices
below the fair market value as of the date of grant. The Company 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 is continuing to work with independent legal counsel to conclude the
special investigation. The Company anticipates restating it's 1999 10-K to
reflect the additional non-cash expense associated with remeasuring the value of
certain stock option grants. Until this process is complete there can be no
certainty as to whether the financial statements for 1999 will need further
adjustment or whether other periods will be impacted, including the results of
first quarter 2000. Upon completion of this work, the Company will file amended
Form 10-Ks and Form 10-Qs as necessary.
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 12. LEGAL PROCEEDINGS
In June 1999, Jon Fisse, the Company's newly named Chief Operating Officer, left
the Company before the Company and Mr. Fisse were able to agree on the terms of
his employment agreement and both parties commenced litigation. A settlement of
this litigation was reached during January 2000, which resulted 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 in 1999.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Revenue
Net revenue for the three month period ended March 31, 2000 and 1999 was as
follows:
Three Months Ended March 31,
-----------------------------------
2000 1999
---------------- ----------------
(In thousands)
Online $ 1,982 $ 146
Services and communication 502 -
Product sales and licensing 152 19
Contract development and other 28 35
---------------- ----------------
Net revenue $ 2,664 $ 200
================ ================
Online revenue
Online revenue is generated through the sale of advertising and sponsorship on
our onhealth.com Web site. The increase in online revenue of $1,836,000, or
1,257%, from the three month period ended March 31, 1999 to the same period in
2000 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 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 Health Decisions
International ("HDI"), which was acquired by us on November 29, 1999, includes,
among others, nurse counseling and personal care management services. Services
and communication revenue is expected to increase in 2000 as the operations of
HDI will be included in our consolidated financial statements for a full year.
Product sales and licensing revenue
In the first quarter of 2000, product sales and licensing revenue consists
primarily of health information software licensing and brochure sales,
newsletters and book sales generated by HDI. In 1999 it consisted primarily of
OnHealth's CD-ROM related retail distribution sales, direct mail sales, product
sales and royalties on licenses to original equipment manufacturers (OEM's) and
end users. Product sales and licensing revenue increased in the first quarter of
2000 from the same period in 1999 by $132,000 or 695%, primarily due to brochure
sales, newsletters and book sales generated by HDI. Product sales and licensing
revenue related to brochures and newsletters is expected to increase over 1999
as the operations of HDI will be included in our consolidated financial
statements for a full year. CD-ROM related product sales and licensing revenue
have declined steadily over the past few years. The decrease generally reflects
market conditions for CD-ROM products, our cancellation of a CD-ROM distribution
agreement, and the lack of new CD-ROM product releases as we shifted our focus
toward online efforts. We do not anticipate receiving any significant product
sales and licensing revenue from CD-ROM products in the future.
Contract development revenue and other
Contract development revenue is generated through the use of our personnel and
facilities for the creation of custom multimedia products. In the three month
period ended March 31, 2000, contract development and other revenue decreased
$7,000, or 20% from the three month period ended March 31, 1999. The decrease
generally reflects our shift toward the online efforts and is expected to
decrease.
11
<PAGE>
COSTS AND EXPENSES
Total costs and expenses for the three month period ended March 31, 2000
increased $17,077,000 or 382%, to $21,544,000 from $4,467,000 during the same
period in 1999. The increase was primarily due to increased sales and marketing
efforts related to our onhealth.com Web site, the increase in stock-based
compensation expense, increase in personnel and use of contractors to develop,
market and sell its products and services and the addition of HDI's results of
operations for the first quarter of 2000.
Product Development, Editorial & Design
Product development, editorial and design expenses consist primarily of
compensation and related costs for our development, editorial, design systems
staff, consulting fees, third-party content acquisition costs and Web site
maintenance and enhancement costs related to our onhelath.com Web site. The
increase in product development, editorial and design expenses in the first
quarter of 2000 of $1,458,000, or 120%, to $2,673,000 from $1,215,000 in the
first quarter of 1999 was primarily due to the increase in the use of
consultants and staff required to enhance and maintain the onhealth.com Web
site. Product development, editorial & design expenses are expected to increase
in 2000 as we continue to build our infrastructure and increase product
offerings.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries and sales
commissions, advertising costs, travel and public relations. Sales and marketing
expenses increased in the first quarter of 2000 by $9,820,000, or 415%, to
$12,186,000 from $2,366,000 in the first quarter of 1999. The increase was
primarily the result of increased advertising expenses as well as increased
headcount. In addition, the operating expenses of HDI are included in the first
quarter of 2000. The broad-based consumer targeted advertising campaign, which
includes online, television, radio and outdoor advertising, commenced early in
the third quarter of 1999. We intend to continue our advertising campaign in
2000 and, as a result, we expect sales and marketing expenses to increase over
1999 amounts.
General and Administrative
General and administrative expenses consist primarily of salaries and related
costs for general corporate functions, including finance, accounting and legal
expenses, investor relations and fees for other professional services. General
and administrative expenses increased in the first quarter of 2000 from the same
period in the 1999 by $1,919,000, or 220%, to $2,793,000 from $874,000. HDI's
operating results have been included in the first quarter of 2000, which
contributed to a significant portion of the increase. The increase was also due
to increased personnel costs, as a result of increased headcount, legal fees,
and accounting fees. We expect general and administrative expenses to increase
in 2000 as the operations of HDI will be included in our consolidated financial
statements for a full year.
Amortization of Intangibles and Goodwill
Amortization of intangibles and goodwill totaled $749,000 in the first quarter
of 2000 and is related to the amortization of goodwill and identifiable
intangibles recorded in connection with the 1999 business acquisitions of
BabyData and HDI. There was no such amortization in the first quarter of 1999.
Amortization of intangibles and goodwill are expected to increase in 2000, as a
full year of amortization will be included in the financial statements.
Stock-based Compensation
Stock-based compensation is principally comprised of 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. Stock-based compensation recorded in the first quarter of 2000
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 $887,000. The stock-based compensation amounts
related to options granted with an exercise price less than the fair value of
the underlying common stock is $2,256,000 in the first quarter of 2000 and
$13,000 in first quarter of 1999. Stock-based compensation expense is expected
to increase in 2000, as the remaining amortization related to the two 12-month
employment contracts, which became effective September 9, 1999 and November 29,
1999, and the remaining amortization related to stock option grants will be
included in the financial statements.
As announced, the Company has initiated a special investigation into its
practice of granting employee stock options and the accounting treatment
thereof. The Company anticipates restating its 1999 10-K to reflect the
additional non-cash expense associated with remeasuring the value of certain
stock option grants. Until this process is complete, there can be no certainty
as to whether the financial statements for 1999 will need further adjustment or
whether other periods will be impacted, including the results of first quarter
2000. Upon completion of this work, the Company will file amended Form 10-Ks and
Form 10-Qs as necessary.
12
<PAGE>
Interest Income
Interest income was $151,000 in the first quarter of 2000 and $107,000 in the
first quarter of 1999. The increase for the 2000 period was due to higher
average cash balances resulting from the proceeds of a $15 million loan from
Healtheon in February 2000.
Interest Expense
Interest expense was $3,158,000 million in the first quarter of 2000, which
included non-cash interest of $2,780,000 related to the Healtheon warrant,
non-cash interest of $208,000 related to the Searle note payable and interest of
$163,000 related to the Healtheon note payable.
Income Taxes
We have not recorded a current or deferred provision for income taxes for the
periods presented due to the history of losses incurred.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, we had cash and cash equivalents of $12,644,000. Total cash
used by operating activities during the first quarter of 2000 was $12,607,000,
which was primarily due to a net loss of $19,794,000. Investing activities used
net cash of $543,000 primarily for purchases of computer equipment due to the
growth in personnel as well as upgrades. Financing activities provided cash of
$15,672,000 through the proceeds from the Healtheon note payable; proceeds from
the exercise of warrants, $388,000; and the exercise of stock options $288,000.
In February 2000, we agreed to merge with Healtheon/WEBMD Corporation
("Healtheon/WEBMD"). In connection with the merger agreement, Healtheon/WEBMD
has agreed to lend us up to $30 million for working capital needs. The amounts
borrowed under this line of credit are due on February 15, 2001. As of March 31,
2000, the Company has drawn $15 million against this line of credit. 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 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.
13
<PAGE>
FORWARD-LOOKING STATEMENTS
Statements contained herein that are not based on historical fact, including
without limitation statements containing the words "believes," "may," "will,"
"estimate," "continue," "anticipates," "intends," "expects" and words of similar
import, constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, events or developments to be materially different
from any future results, events or developments expressed or implied by such
forward-looking statements.
Such factors include, among others, the following:
o the expectation that the Company will see a growth in revenues and
positive net income as a on-line health network;
o the ability to increase consumer awareness of the Company's Web site;
o the ability to increase our advertising base,
o technology changes and the continued acceptance of the Internet;
o general economic and business conditions;
o competition;
o the ability to attract and retain qualified personnel;
o liability and other claims asserted against the Company; and
o and other factors referenced in the Company's filings with the
Securities and Exchange Commission.
Given these uncertainties, readers are cautioned not to place undue reliance on
such forward-looking statements. The Company disclaims any obligation to update
any such factors or to publicly announce the result of any revisions to any of
the forward-looking statements contained herein to reflect future results,
events or developments.
Additional information on other risk factors which could affect the Company's
financial results are included in the Company's Annual Report for the fiscal
year ended December 31, 1999 on Form 10-K and other Company reports and
statements on file with the Securities and Exchange Commission.
14
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 1999, Jon Fisse, the Company's newly named Chief Operating Officer, left
the Company before the Company and Mr. Fisse were able to agree on the terms of
his employment agreement and both parties commenced litigation. A settlement of
this litigation was reached during January 2000, which resulted in the issuance
of 22,500 shares of the Company's common stock.
In October 1999, the Company received a subpoena duces tecum by the Division of
Enforcement, Pacific Regional Office of the Securities and Exchange Commission
("SEC") requesting certain documents from the Company pursuant to a formal order
of private investigation in connection with possible federal securities law
violations. As stated by the SEC in the letter accompanying the subpoena, "[t]he
investigation and the subpoena do not mean that we have concluded that you or
anyone else has broken the law. Also, the investigation does not mean that we
have a negative opinion of any person, entity or security". The Company intends
to cooperate fully with the SEC, and has been providing information to the SEC.
Because the SEC investigation is still in process and has not been finalized,
the Company is unable to establish the likelihood or impact of an unfavorable
outcome. 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. However, the Company does not currently believe that an unfavorable
outcome would have a material adverse impact on the Company's financial
condition.
In addition, the Company's Board of Directors hired independent legal counsel to
conduct its own special investigation. As a result of the special investigation,
the Company became aware of certain instances where stock options were granted
to employees with exercise prices that were below fair market value on the date
of grant. The Company recorded deferred stock-based compensation in 1999 and in
2000. The Company 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 is continuing to work with independent legal counsel to conclude the
special investigation. The Company anticipates restating its 1999 10-K to
reflect the additional non-cash expense associated with remeasuring the value of
certain stock options granted. Until this process is complete there can be no
certainty as to whether the financial statements for 1999 will need further
adjustment or whether other periods will be impacted, including the results of
first quarter 2000. Upon completion of this work, the Company will file amended
Form 10-Ks and Form 10-Qs as necessary.
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Listing.
Certain exhibits have been previously filed with the Commission and are
incorporated herein by reference.
ONHEALTH NETWORK COMPANY
EXHIBIT INDEX
MARCH 31, 2000
<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)
16
<PAGE>
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)
27 Financial Data Schedule (electronic version only)
- -----------------------------------
<FN>
(A) Incorporated herein by reference to the Company's Registration
Statement on Form S-3, No. 333-69989, filed with the Securities
and Exchange Commission on December 31, 1998.
(B) Incorporated herein by reference to the Company's Registration
Statement on Form S-1, No. 33-67064, (file number 0-22212) filed
with the Securities and Exchange Commission in 1993.
(C) Incorporated herein by reference to the Company's Preliminary
Proxy Statement for the Annual Meeting of Shareholders held June
16, 1998 on Form PRE 14A, filed with the Securities and Exchange
Commission on May 6, 1998.
(D) Incorporated herein by reference to the Company's Registration
Statement on Form S-1, No. 33-76496, filed with the Securities
and Exchange Commission in 1994.
(E) Incorporated by reference to the Company's Form 10-K for the year
ended December 31, 1994, filed with the Securities and Exchange
Commission.
(F) Incorporated by reference to Exhibit 10.14 to the Company's Form
10-K/A for the year ended December 31, 1995 filed with the
Securities and Exchange Commission on October 4, 1996.
(G) Incorporated by reference to Exhibit 10.19 to the Company's Form
10-K for the year ended December 31, 1995 filed with the
Securities and Exchange Commission.
(H) Incorporated herein by reference to 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>
(b) Reports on Form 8-K.
The following reports on Form 8-K were filed by the registrant
during the quarter ended March 31, 2000:
In a report filed on Form 8-K/A, dated February 14, 2000, the
Company amended its December 14, 1999 Form 8-K filing to
include the financial statements of Health Decisions
International, which it acquired on 11/29/99, as well as the
related pro forma information.
In a report filed on Form 8-K, dated February 18, 2000, the
Company announced the Agreement and Plan of Merger with
Healtheon/WEBMD Corporation.
17
<PAGE>
In a report filed on Form 8-K, dated February 22, 2000, the
Company reported voting agreements entered into with the
Company's stockholders and option holders, in connection with
the Agreement and Plan of Merger with Healtheon/WEBMD
Corporation.
In a report filed on Form 8-K, dated March 15, 2000, the
Company filed its audited financial statements for the year
ended December 31, 1999, as well as the related Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
18
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, in Seattle, Washington, on the 22nd day
of May, 2000.
ONHEALTH NETWORK COMPANY
By: /S/ RON STEVENS
-----------------------------
Ron Stevens
Chief Financial Officer
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