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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 JUNE 30, 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 July 31, 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 June 30, 2000
and December 31, 1999.........................................3
Consolidated Statements of Operations for the
Three Month and Six Months Ended June 30, 2000 and 1999.......4
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 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
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ONHEALTH NETWORK COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
June 30, December 31,
2000 1999
---------------- ---------------
(Unaudited) (Restated)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 4,883 $ 10,142
Restricted cash 500 500
Accounts receivable, net of allowances of $520 (2000)
and $413 (1999) 3,859 1,870
Inventories 22 15
Prepaid advertising 2,690 6,848
Deferred financing costs 14,210 -
Other current assets 332 401
---------------- ---------------
Total current assets 26,496 19,776
Furniture and equipment, net
2,712 2,137
Intangibles and goodwill, net 9,253 10,754
Other non-current assets 63 53
---------------- ---------------
Total assets $ 38,524 $ 32,720
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 20,000 $ 2,000
Current maturities of capital lease obligations 10 13
Accounts payable 9,507 6,515
Deferred revenue 1,215 859
Other accrued expenses 2,868 2,383
---------------- ---------------
Total current liabilities 33,600 11,770
Non-current liabilities 48 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, 24,698 (2000) and 23,812 (1999) 247 238
Additional paid-in-capital 197,471 171,641
Accumulated deficit (188,307) (139,533)
Deferred compensation (4,535) (11,451)
---------------- ---------------
Total shareholders' equity 4,876 20,895
---------------- ---------------
Total liabilities and shareholders' equity $ 38,524 $ 32,720
================ ===============
</TABLE>
The accompanying notes are an integral part of the financial statements
3
<PAGE>
ONHEALTH NETWORK COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- ---------------------------------
2000 1999 2000 1999
------------- -------------- -------------- ---------------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Net revenue $ 3,683 $ 581 $ 6,347 $ 781
Costs and expenses:
Product development, editorial and design 3,422 1,931 6,094 3,147
Sales and marketing 13,842 4,645 26,028 7,011
General and administrative 3,417 1,098 6,209 1,972
Amortization of intangibles and goodwill 749 - 1,500 -
Stock-based compensation 3,259 1,034 6,369 1,818
------------- -------------- -------------- ---------------
Total costs and expenses 24,689 8,708 46,200 13,948
------------- -------------- -------------- ---------------
Loss from operations (21,006) (8,127) (39,853) (13,167)
Interest income 132 121 280 229
Interest expense (6,049) - (9,203) -
Other income - 2 - 2
------------- -------------- -------------- ---------------
Total interest and other income, net (5,917) 123 (8,923) 231
------------- -------------- -------------- ---------------
Net loss $ (26,923) $ (8,004) $ (48,776) $ (12,936)
============= ============== ============== ===============
Net loss per common share-
Basic and diluted $ (1.11) $ (0.50) $ (2.05) $ (0.83)
============= ============== ============== ===============
Weighted average number of common shares
Outstanding 24,291 16,150 23,841 15,544
============= ============== ============== ===============
</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>
Six Months Ended June 30,
------------------------------------
2000 1999
---------------- ---------------
(Restated)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (48,776) $ (12,936)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation and amortization 403 147
Provision for doubtful accounts and returns 123 29
Amortization of prepaid advertising and
promotional agreements 2,322 646
Amortization of intangibles and goodwill 1,501 -
Amortization of deferred compensation 6,369 1,818
Non-cash interest expense 8,610 -
Other 10 10
Changes in assets and liabilities:
Increase in accounts receivable (2,111) (8)
Increase in inventories (7) -
(Increase) decrease in other current assets 1,700 (95)
(Increase) decrease in other non-current assets (17) 78
Increase in accounts payable 2,992 2,209
Increase (decrease) in other accrued expenses 1,919 (1,381)
---------------- ---------------
Net cash used in operating activities (24,962) (9,483)
Cash flows from investing activities:
Capital expenditures (978) (532)
---------------- ---------------
Net cash used in investing activities (978) (532)
Cash flows from financing activities:
Net proceeds from issuance of common stock:
Private placements - 14,092
Exercise of options 301 1,072
Exercise of warrants 388 1,586
Proceeds from short-term loan 20,000 -
Payment of financing related costs (1) -
Payments on capital lease obligation (7) -
---------------- ---------------
Net cash provided by financing activities 20,681 16,750
---------------- ---------------
Net increase (decrease) in cash and cash equivalents (5,259) 6,735
Cash and cash equivalents at beginning of year 10,142 2,119
---------------- ---------------
Cash and cash equivalents at end of period $ 4,883 $ 8,854
================ ===============
</TABLE>
The accompanying notes are an integral part of the financial statements
5
<PAGE>
ONHEALTH NETWORK COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
6
<PAGE>
have been included. Operating results for the six months ended June 30, 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, as amended, for the year ended December 31, 1999.
NOTE 3. RESTATEMENT OF QUARTERLY RESULTS
The Company has restated its consolidated balance sheet as of December 31, 1999
and the related consolidated statements of operations and cash flows for each of
the four quarters ended December 31, 1999 due to the recording of additional
stack-based compensation charges (see Note 12). As a result, the December 31,
1999 consolidated balance sheet includes adjustments to increase additional
paid-in-capital by $9.0 million, to increase the accumulated deficit by $2.7
million and to increase deferred compensation by $6.3 million.
The impact on the Company's results of operations as originally reported for the
three and six month periods ended June 30, 1999 is as follows:
Loss Per Common
Net Loss Share
----------------- -----------------
(In thousands)
THREE MONTHS ENDED
JUNE 30, 1999
As reported $ (6,983) $ (0.43)
As restated $ (8,004) $ (0.50)
SIX MONTHS ENDED
JUNE 30, 1999
As reported $ (11,143) $ (0.72)
As restated $ (12,936) $ (0.83)
NOTE 4. RESTRICTED CASH
On August 19, 1999, the Company pledged $500,000 of cash for an irrevocable
standby letter of credit related to the lease of new office space that is
classified as restricted cash on the balance sheet. The letter of credit will
expire on August 20, 2001 and will only be drawn on in the event the Company
fails to comply with the terms and conditions as set forth in the lease
agreement.
NOTE 5. LOSS PER COMMON SHARE
Basic earnings per share ("EPS") excludes any dilutive effects of common stock
equivalents - options, warrants and convertible securities - and is computed by
dividing the net loss 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 June 30, 2000 are 332,446 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.
7
<PAGE>
The components of basic and diluted loss per common share are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(In thousands, except per share data) June 30, June 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
------------- -------------- ------------- --------------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Net loss (numerator) $ (26,923) $ (8,004) $ (48,776) $ (12,936)
============= ============== ============= ==============
Weighted average common shares
outstanding (denominator) 24,291 16,150 23,841 15,544
============= ============== ============= ==============
Loss per share:
Basic and diluted $ (1.11) $ (0.50) $ (2.05) $ (0.83)
============= ============== ============= ==============
</TABLE>
NOTE 6. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS
<TABLE>
<CAPTION>
June 30, December 31,
(In thousands) 2000 1999
----------------- -----------------
<S> <C> <C>
Furniture and equipment:
Computer hardware $ 3,001 $ 2,205
Software 497 349
Equipment 123 120
Furniture & fixtures 380 356
Leasehold improvements 235 71
Construction in progress - 157
----------------- -----------------
4,236 3,258
Less accumulated depreciation (1,524) (1,121)
----------------- -----------------
Total $ 2,712 $ 2,137
================= =================
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 3,485 3,486
----------------- -----------------
11,258 11,259
Less accumulated amortization (2,005) (505)
----------------- -----------------
Total $ 9,253 $ 10,754
================= =================
Other accrued expenses:
Litigation loss $ - $ 195
Legal fees 90 225
Royalties 386 425
Accrued wages and benefits 837 410
Accrued severance 450 -
Interest payable 592 676
Other 513 452
----------------- -----------------
Total $ 2,868 $ 2,383
================= =================
</TABLE>
8
<PAGE>
NOTE 7. 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. As a result of
this merger, Healtheon/WebMD's Registration Statement on Form S-4, relating to
the acquisition of OnHealth, has been declared effective by the Securities and
Exchange Commission. The Registration Statement contains the proxy
statement/prospectus for the transaction. OnHealth plans to hold its annual
meeting of shareholders on September 12, 2000 to vote on the proposed
transaction. The Company expects this transaction to be completed shortly after
OnHealth's shareholder meeting.
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 Company borrowed an additional $5 million in June 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. For the three and six month periods ended June
30, 2000, $5.6 million and $8.4 million, respectively, 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.
NOTE 8. NOTE PAYABLE
In connection with the acquisition of HDI, 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. 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 9. 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 7). 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 10. 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 and six month periods ended June 30, 2000 and 1999.
9
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<TABLE>
<CAPTION>
Three Months Ended June Six Months Ended
30, June 30,
------------------------------ --------------------------------
2000 1999 2000 1999
------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
Net revenue:
OnHealth $ 3,179 $ 581 $ 5,189 $ 781
HDI 504 - 1,158 -
------------- ------------ ------------- --------------
Consolidated net revenue $ 3,683 $ 581 $ 6,347 $ 781
============= ============ ============= ==============
Amortization of intangibles and goodwill:
OnHealth $ 749 $ - $ 1,500 $ -
HDI - - - -
------------- ------------ ------------- --------------
Consolidated amortization of intangibles and
goodwill $ 749 $ - $ 1,500 $ -
============= ============ ============= ==============
Stock-based compensation:
OnHealth $ 3,259 $ 1,034 $ 6,369 $ 1,818
HDI - - - -
------------- ------------ ------------- --------------
Consolidated stock-based compensation $ 3,259 $ 1,034 $ 6,369 $ 1,818
============= ============ ============= ==============
Interest expense, net:
OnHealth $ (6,049) $ - $ (9,202) $ -
HDI - - (1) -
------------- ------------ ------------- --------------
Consolidated interest expense, net $ (6,049) $ - $ (9,203) $ -
============= ============ ============= ==============
Net loss:
OnHealth $ (26,169) $ 8,004 $ (47,389) $ (12,936)
HDI (754) - (1,387) -
------------- ------------ ------------- -------------
Consolidated net loss $ (26,923) $ 8,004 $ (48,776) $ (12,936)
============= ============ ============= ==============
</TABLE>
As of June 30,
------------------------------
Total assets: 2000 1999
------------- ------------
OnHealth $ 37,539 $ 12,297
HDI 985 -
------------- ------------
Consolidated total assets $ 38,524 $ 12,297
============= ============
NOTE 11. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------------
2000 1999
-------------- ---------------
(In thousands)
<S> <C> <C>
Cash paid during the periods for:
Income taxes $ 1 $ -
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 1,921
Deferred compensation related to stock options (547) 11,223
</TABLE>
NOTE 12. 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. On February 16, 2000 the Company received
10
<PAGE>
a report from independent legal counsel indicating that there were certain
instances where stock options were granted to new employees with exercise prices
that were below fair market value as of the measurement date for determining
stock based compensation under Accounting Principles Board ("APB") Opinion No.
25. As a result, the Company recorded $1.8 million of deferred stock-based
compensation in 1999 and was recognizing amortization of the deferred
compensation over the vesting period of the underlying options as a stock-based
compensation charge. The SEC has been given a copy of the report of the special
investigation and has taken deposition of various members of management and
Company employees.
Based upon additional inquiries by the SEC, the independent legal counsel
investigation continued with a review of stock option grants to existing
employees. On April 8, 2000, the Company received a preliminary report from
independent counsel indicating that there were instances where stock options
were granted in 1999 to existing employees and directors with exercise prices
that were below fair market value as of the measurement date for determining
stock based compensation under APB Opinion No. 25. The Company subsequently
hired another independent legal counsel to review all stock option grants (both
new hire and existing employees) for 1999 and 1998 to determine whether there
were additional stock-based compensation charges to be recorded. On May 31, 2000
the Company received a final report from the new independent legal counsel. As a
result, the Company has recorded $7.9 million of additional deferred stock-based
compensation for 1999 and $1.1 million of additional deferred stock-based
compensation for 1998. These additional deferred stock-based compensation
amounts will be amortized to expense over the vesting periods of the underlying
options as stock-based compensation charges. The Company has restated their 1998
and 1999 financial statements in their amended Form 10-K for 1999. The SEC has
been given a copy of the report of new independent legal counsel.
The SEC investigation is still in process and has not been finalized. The
Company intends to cooperate with this investigation. However, until the SEC
investigation is completed, the Company could, among other things, be required
to record additional stock-based compensation charges and could be required to
pay a fine. The Company is unable to assess the likely outcome of this matter.
As a result, there can be no assurance that this investigation will not have a
material adverse affect on the Company's financial position or results of
operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Revenue
Net revenue for the three and six month periods ended June 30, 2000 and 1999 was
as follows:
<TABLE>
<CAPTION>
(In thousands) Three Months Ended June 30, Six Months Ended June 30,
---------------------------------- ------------------------------------
2000 1999 2000 1999
--------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Online $ 3,175 $ 567 $ 5,157 $ 713
Services and communication 435 - 937 -
Product sales and licensing 68 - 220 19
Contract development and other 5 14 33 49
=============== ================ ================ =================
Net revenue $ 3,683 $ 581 $ 6,347 $ 781
=============== ================ ================ =================
</TABLE>
Online revenue
Online revenue is generated through the sale of advertising and sponsorship on
our onhealth.com Web site. The increase in online revenue for the three and six
months ended June 30, 2000 of $2,608,000, or 460%, and $4,444, or 623%,
respectively, from the same period in 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.
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.
11
<PAGE>
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 three and six
month periods ended June 30, 2000 by $68,000 and $201,000, or 1,058%,
respectively, from the same periods in 1999 primarily due to brochure sales,
newsletters, software licensing 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 and six
month periods ended June 30, 2000, contract development and other revenue
decreased $9,000, or 64%, and $16,000, or 33%, respectively, from the same
periods in 1999. The decrease generally reflects our shift toward the online
efforts and is expected to continue to decrease.
COSTS AND EXPENSES
Total costs and expenses for the three month and six month periods ended June
30, 2000 increased $15,981,000, or 184%, to $24,689,000 and $32,252,000, or
231%, to $46,200,000, respectively, from the same periods 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 our
products and services and the addition of HDI's results of operations for the
first half 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 increased in the
three and six month periods ended June 30, 2000 of $1,491,000, or 77%, to
$3,422,000 and $2,947,000, or 94%, to $6,094,000 respectively, from the same
periods 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. 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 three and six month periods ended June 30, 2000 by
$9,197,000, or 198%, to $13,842,000 and $19,017,000, or 271%, to $26,028,000,
respectively, from the same three and six month periods in 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.
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 three and six months ended June 30,
2000 by $2,319,000, or 211%, to $3,417,000 and $4,237,000, or $215%, to
$6,209,000 from the same periods in 1999. The increase primarily resulted from
the inclusion of HDI's operating results in the first half of 2000, which
results were not included in the 1999 numbers. The increase was also due to
increased personnel costs, as a result of severance obligations to former
employees and 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.
12
<PAGE>
Amortization of Intangibles and Goodwill
Amortization of intangibles and goodwill totaled $749,000 and $1,500,000 in the
three and six months ended June 30, 2000, respectively, 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 half 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 compensation expense
related to stock option grants and 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. Stock-based compensation recorded in the three and six
month periods ended June 30, 2000 include stock-based compensation amounts
related to options granted with an exercise price less than the fair value of
the underlying common stock of $2,182,000 and $4,404,000, respectively, and
$1,034,000 and $1,818,000 for the three and six month periods ended June 30,
1999, respectively. Stock-based compensation recorded in the three and six month
periods ended June 30, 2000 also 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 $1,077,000
and $1,965,000, respectively. There were no stock-based compensation charges
related to compensation arrangements during the three and six month periods
ended June 30, 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 recognized in
the 2000 statement of operations.
Interest Income
Interest income was $132,000 and $280,000 in three and six month periods ended
June 30, 2000. The increase for the 2000 period was due to higher average cash
balances resulting from the proceeds of a $15,000,000 loan from Healtheon in
February 2000 and an additional $5,000,000 received from the loan during June
2000.
Interest Expense
Interest expense was $6,049,000 and $9,203,000 in the three and six month
periods ended June 30, 2000, respectively. The three month period includes
non-cash interest of $5,622,000 related to the Healtheon warrant and interest of
$427,000 related to the Healtheon note payable. The six month period includes
non-cash interest of $8,402,000 related to the Healtheon warrant, non-cash
interest of $208,000 related to the Searle note payable and interest of $593,000
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 June 30, 2000, we had cash and cash equivalents of $4,883,000. Total cash
used by operating activities during the first half of 2000 was $24,962,000,
which was primarily due to a net loss of $48,776,000. Investing activities used
net cash of $978,000 primarily for purchases of computer equipment due to the
growth in personnel as well as upgrades. Financing activities provided cash of
$20,681,000 primarily through the proceeds from the Healtheon note payable,
$20,000,000; proceeds from the exercise of warrants, $388,000; and proceeds from
the exercise of stock options $301,000.
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 June 30,
2000, the Company has drawn $20 million against this line of credit and received
an additional $5 million against the line in July 2000. We believe our cash and
13
<PAGE>
cash equivalents, including the lending commitment by Healtheon/WEBMD, coupled
with our ability to reduce discretionary expenditures, if necessary, will be
sufficient to fund our operations through the anticipated closing date of the
merger with Healtheon/WEBMD. 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.
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 ability to complete the acquisition by Healtheon/WebMD
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 other factors referenced in the Company's 1999 Form 10-K/A and other
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, as amended, 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 October 1999, the Division of Enforcement, Pacific Regional Office of the
Securities and Exchange Commission ("SEC"), notified the Company that it was
initiating an investigation of the Company's policies and procedures concerning
the granting of stock options. The Company has provided information to the SEC.
In addition, the Company's Board of Directors hired independent legal counsel to
conduct its own special investigation. On February 16, 2000 the Company received
a report from independent legal counsel indicating that there were certain
instances where stock options were granted to new employees with exercise prices
that were below fair market value as of the measurement date for determining
stock based compensation under Accounting Principles Board ("APB") Opinion No.
25. As a result, the Company recorded $1.8 million of deferred stock-based
compensation in 1999 and was recognizing amortization of the deferred
compensation over the vesting period of the underlying options as a stock-based
compensation charge. The SEC has been given a copy of the report of the special
investigation and has taken deposition of various members of management and
Company employees.
Based upon additional inquiries by the SEC, the independent legal counsel
investigation continued with a review of stock option grants to existing
employees. On April 8, 2000, the Company received a preliminary report from
independent counsel indicating that there were instances where stock options
were granted in 1999 to existing employees and directors with exercise prices
that were below fair market value as of the measurement date for determining
stock based compensation under APB Opinion No. 25. The Company subsequently
hired another independent legal counsel to review all stock option grants (both
new hire and existing employees) for 1999 and 1998 to determine whether there
were additional stock-based compensation charges to be recorded. On May 31, 2000
the Company received a final report from the new independent legal counsel. As a
result, the Company has recorded $7.9 million of additional deferred stock-based
compensation for 1999 and $1.1 million of additional deferred stock-based
compensation for 1998. These additional deferred stock-based compensation
amounts will be amortized to expense over the vesting periods of the underlying
options as stock-based compensation charges. The Company has restated their 1998
and 1999 financial statements in their amended Form 10-K for 1999. The SEC has
been given a copy of the report of new independent legal counsel.
There is a possibility that options to purchase approximately 2.3 million shares
were issued outside of the scope of the Company's existing stock option plans.
Accordingly, option holders who were granted ISOs will be given the opportunity
to elect to either retain their original grant (which will be treated as a non
qualified options for federal income tax purposes)or to receive a new ISO grant
under the Company's 1997 Stock Option Plan. To the extent any of these options
are determined to have been granted outside the scope of the 1997 Stock Option
Plan, the corresponding number of shares subject to such options would be
available for future grants by the Company under such Plan. All options will be
re-issued with the same vesting, exercise price and quantity.
The SEC investigation is still in process and has not been finalized. The
Company intends to cooperate with this investigation. However, until the SEC
investigation is completed, the Company could, among other things, be required
to record additional stock-based compensation charges and could be required to
pay a fine. The Company is unable to assess the likely outcome of this matter.
As a result, there can be no assurance that this investigation will not have a
material adverse affect on the Company's financial position or results of
operations.
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
JUNE 30, 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)
10.19 Consulting and Separation Agreement dated June 14,2000 between the Company and Robert
Goodman.* **
10.20 Agreement and Release dated June 13, 2000 between the Company and Rebecca Farwell.**
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 June 30, 2000:
In a report filed on Form 8-K, dated June 27, 2000, the
Company filed its press release that announced management
changes.
17
<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 12th day
of August, 2000.
ONHEALTH NETWORK COMPANY
By: /S/ RON STEVENS
------------------------------
Ron Stevens
President and Chief Accounting Officer
18
