-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RYbqZ6Svw9ItrFUHO4mlXYUayRH02afl6pzZxvitq/rkTBasZxgGKUA/pViegJZU UoemecJuwAQRQavfcelIVA== /in/edgar/work/20000621/0000910391-00-000022/0000910391-00-000022.txt : 20000920 0000910391-00-000022.hdr.sgml : 20000920 ACCESSION NUMBER: 0000910391-00-000022 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000621 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ONHEALTH NETWORK CO CENTRAL INDEX KEY: 0000910391 STANDARD INDUSTRIAL CLASSIFICATION: [7372 ] IRS NUMBER: 411686038 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-22212 FILM NUMBER: 658090 BUSINESS ADDRESS: STREET 1: 808 HOWELL STREET STREET 2: STE 400 CITY: SEATTLE STATE: WA ZIP: 98101 BUSINESS PHONE: 2065830100 MAIL ADDRESS: STREET 1: 808 HOWELL ST STREET 2: STE 400 CITY: SEATTLE STATE: WA ZIP: 98101 FORMER COMPANY: FORMER CONFORMED NAME: IVI PUBLISHING INC DATE OF NAME CHANGE: 19930809 10-Q/A 1 0001.txt AMENDED QUARTERLY REPORT ON FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A (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 ================================================================================ TABLE OF CONTENTS PAGE ---- 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....................................12 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings................................................16 ITEM 6. Exhibits and Reports on Form 8-K.................................17 2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ONHEALTH NETWORK COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) (Unaudited)
March 31, December 31, 2000 1999 ---------------- --------------- (Restated) (Restated) 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 197,907 171,641 Accumulated deficit (161,385) (139,533) Deferred compensation (8,243) (11,451) ---------------- --------------- Total shareholders' equity 28,526 20,895 ---------------- --------------- Total liabilities and shareholders' equity $ 54,558 $ 32,720 ================ ===============
The accompanying notes are an integral part of the financial statements 3 ONHEALTH NETWORK COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)
Three Months Ended March 31, --------------------------------- 2000 1999 -------------- --------------- (Restated) (Restated) 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 3,110 784 -------------- --------------- Total costs and expenses 21,511 5,239 -------------- --------------- Loss from operations (18,847) (5,039) Interest income 151 107 Interest expense (3,158) - -------------- --------------- Total interest expense, net (3,007) 107 -------------- --------------- Net loss $ (21,854) $ (4,932) ============== =============== Net loss per common share- Basic and diluted $ (0.93) $ (0.33) ============== =============== Weighted average number of common shares Outstanding 23,390 14,930 ============== ===============
The accompanying notes are an integral part of the financial statements 4 ONHEALTH NETWORK COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Three Months Ended March 31, -------------------------------------- 2000 1999 ---------------- --------------- (Restated) (Restated) Cash flows from operating activities: Net loss $ (21,854) $ (4,932) 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 3,110 784 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 ================ ===============
The accompanying notes are an integral part of the financial statements 5 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 all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation 6 have been 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 amended its 1999 10-K (see Note 12). Note 3. Restatement of Quarterly Results The Company has restated its consolidated balance sheets as of March 31, 2000 and December 31, 1999 and the related consolidated statements of operations and cash flows for the quarters ended March 31, 2000 and March 31, 1999 due to the recording of additional stock-based compensation charges (see Note 12). As a result, the consolidated balance sheets include adjustments to increase additional paid-in-capital by $2.6 million and $9.0 million at March 31, 2000 and December 31, 1999, to increase the accumulated deficit by $2.7 million at March 31, 2000 and December 31, 1999 and to decrease deferred compensation by $105,000 at March 31, 2000 and to increase deferred compensation by $6.3 million at December 31, 1999. The consolidated statements of operations include an adjustment to decrease the stock-based compensation amortization by $33,000 for the quarter ended March 31, 2000 and to increase the stock-based compensation amortization by $772,000 for the quarter ended March 31, 1999. The impact on the Company's results of operations as originally reported for the three months ended March 31, 2000 and 1999 is as follows: Loss Per Net Loss Common Share ----------------- ---------------- 2000 As reported $ (21,887) $ (0.94) As restated $ (21,854) $ (0.93) 1999 As reported $ (4,160) $ (0.28) As restated $ (4,932) $ (0.33) NOTE 4. RESTRICTED CASH On August 19, 1999, the Company pledged $500,000 of cash for an irrevocable standby letter of credit related to the lease of new office space that is classified as restricted cash on the balance sheet. The letter of credit will expire on August 20, 2000 and will only be drawn on in the event the Company fails to comply with the terms and conditions as set forth in the lease agreement. NOTE 5. LOSS PER COMMON SHARE Basic earnings per share ("EPS") excludes any dilutive effects of common stock equivalents - options, warrants and convertible securities - and is computed by dividing the net loss 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) $ (21,854) $ (4,932) =============== =============== Weighted average common shares outstanding denominator) 23,390 14,930 =============== =============== Loss per share: Basic and diluted $ (0.93) $ (0.33) =============== =============== 7 NOTE 6. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS
March 31, December 31, (In thousands) 2000 1999 (Unaudited) ----------------- ----------------- 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 ================= ================= 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 ================= =================
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 8 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. NOTE 8. 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 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 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 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 month periods ended March 31, 2000 and 1999. 9 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 $ 3,110 $ 784 HDI - - ------------ ------------ Consolidated stock-based compensation $ 3,110 $ 784 ============ ============ Interest expense, net: OnHealth $ (3,004) $ 107 HDI (3) - ------------ ------------ Consolidated interest expense, net $ (3,007) $ 107 ============ ============ Net loss: OnHealth $ (21,220) $ (4,932) HDI (634) - ------------ ------------ Consolidated net loss $ (21,854) $ (4,932) ============ ============ 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 (98) 9,644 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. On February 16, 2000 the Company received a report from independent legal counsel indicating that there were certain 10 instances where stock options were granted to new employees with exercise prices that were below fair market value as of the measurement date for determining stock based compensation under Accounting Principles Board ("APB") Opinion No. 25. As a result, the Company recorded $1.8 million of deferred stock-based compensation in 1999 and was recognizing amortization of the deferred compensation over the vesting period of the underlying options as a stock-based compensation charge. The SEC has been given a copy of the report of the special investigation and has taken deposition of various members of management and Company employees. Based upon additional inquiries by the SEC, the independent legal counsel investigation continued with a review of stock option grants to existing employees. On April 8, 2000, the Company received a preliminary report from independent counsel indicating that there were instances where stock options were granted in 1999 to existing employees and directors with exercise prices that were below fair market value as of the measurement date for determining stock based compensation under APB Opinion No. 25. The Company subsequently hired another independent legal counsel to review all stock option grants (both new hire and existing employees) for 1999 and 1998 to determine whether there were additional stock-based compensation charges to be recorded. On May 31, 2000 the Company received a final report from the new independent legal counsel. As a result, the Company has recorded $7.9 million of additional deferred stock-based compensation for 1999 and $1.1 million of additional deferred stock-based compensation for 1998. These additional deferred stock-based compensation amounts will be amortized to expense over the vesting periods of the underlying options as stock-based compensation charges. The Company has restated their 1998 and 1999 financial statements in their amended Form 10-K for 1999. The SEC has been given a copy of the report of new independent legal counsel. There is a possibility that options to purchase approximately 2.3 million shares were issued outside of the scope of the Company's existing stock option plans because they were determined to be granted below fair market value on the measurement date. Accordingly, option holders who were granted ISOs will be given the opportunity to elect to either retain their original grant (which will be treated as a non-qualified options for federal income tax purposes) or to receive a replacement ISO grant under the Company's 1997 Stock Option Plan. To the extent any options are determined to have been granted outside the scope of the 1997 Stock Option Plan, the corresponding number of shares subject to such options would be available for future grants by the Company under such Plan. All replacement options will re-issued with the same vesting, exercise price and quantity. The SEC investigation is still in process and has not been finalized. The Company intends to cooperate with this investigation. However, until the SEC investigation is completed, the Company could, among other things, be required to record additional stock-based compensation charges and could be required to pay a fine. The Company is unable to assess the likely outcome of this matter. As a result, there can be no assurance that this investigation will not have a material adverse affect on the Company's financial position or results of operations. NOTE 13. 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. 11 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. 12 COSTS AND EXPENSES Total costs and expenses for the three month period ended March 31, 2000 increased $16,272,000 or 311%, to $21,511,000 from $5,239,000 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 $2,223,000 in the first quarter of 2000 and $784,000 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. 13 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 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 $21,854,000. 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, coupled with our ability to reduce discretionary expenditures, if necessary, 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. 14 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, as amended, and other Company reports and statements on file with the Securities and Exchange Commission. 15 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 Division of Enforcement, Pacific Regional Office of the Securities and Exchange Commission ("SEC"), notified the Company that it was initiating an investigation of the Company's policies and procedures concerning the granting of stock options. The Company has provided information to the SEC. In addition, the Company's Board of Directors hired independent legal counsel to conduct its own special investigation. On February 16, 2000 the Company received a report from independent legal counsel indicating that there were certain instances where stock options were granted to new employees with exercise prices that were below fair market value as of the measurement date for determining stock based compensation under Accounting Principles Board ("APB") Opinion No. 25. As a result, the Company recorded $1.8 million of deferred stock-based compensation in 1999 and was recognizing amortization of the deferred compensation over the vesting period of the underlying options as a stock-based compensation charge. The SEC has been given a copy of the report of the special investigation and has taken deposition of various members of management and Company employees. Based upon additional inquiries by the SEC, the independent legal counsel investigation continued with a review of stock option grants to existing employees. On April 8, 2000, the Company received a preliminary report from independent counsel indicating that there were instances where stock options were granted in 1999 to existing employees and directors with exercise prices that were below fair market value as of the measurement date for determining stock based compensation under APB Opinion No. 25. The Company subsequently hired another independent legal counsel to review all stock option grants (both new hire and existing employees) for 1999 and 1998 to determine whether there were additional stock-based compensation charges to be recorded. On May 31, 2000 the Company received a final report from the new independent legal counsel. As a result, the Company has recorded $7.9 million of additional deferred stock-based compensation for 1999 and $1.1 million of additional deferred stock-based compensation for 1998. These additional deferred stock-based compensation amounts will be amortized to expense over the vesting periods of the underlying options as stock-based compensation charges. The Company has restated their 1998 and 1999 financial statements in their amended Form 10-K for 1999. The SEC has been given a copy of the report of new independent legal counsel. There is a possibility that options to purchase approximately 2.3 million shares were issued outside of the scope of the Company's existing stock option plans because they were determined to be granted below fair market value on the measurement date. Accordingly, option holders who were granted ISOs will be given the opportunity to elect to either retain their original grant (which will be treated as a non qualified options for federal income tax purposes)or to receive a replacement ISO grant under the Company's 1997 Stock Option Plan. To the extent any options are determined to have been granted outside the scope of the 1997 Stock Option Plan, the corresponding number of shares subject to such options would be available for future grants by the Company under such Plan. All replacement options will re-issued with the same vesting, exercise price and quantity. The SEC investigation is still in process and has not been finalized. The Company intends to cooperate with this investigation. However, until the SEC investigation is completed, the Company could, among other things, be required to record additional stock-based compensation charges and could be required to pay a fine. The Company is unable to assess the likely outcome of this matter. As a result, there can be no assurance that this investigation will not have a material adverse affect on the Company's financial position or results of operations. In April 2000, the Company received a request from TBWA Chiat/Day (the "Agency") for certain additional compensation pursuant to the terms of an Advertising Agency Agreement between the Agency and the Company dated March 10, 2000 (the "Agency Agreement"). In May and June of 2000, the Company received letters from attorneys representing the Agency threatening legal action if the matter is not resolved. The Company does not believe that resolution of this matter will have a material adverse effect on the Company's financial condition or results of operations. 16 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
Exhibit NUMBER DESCRIPTION REF. -------- ---------------------------------------------------------------------------------------- ---- 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) 17 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) - ----------------------------------- (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
(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. 18 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. 19 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 20th day of June, 2000. ONHEALTH NETWORK COMPANY By: /S/ RON STEVENS ----------------------------- Ron Stevens Chief Financial Officer 20 EX-27 2 0002.txt FDS --
5 (Replace this text with the legend) 1,000 U.S. Dollars 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 1 12,664 0 3,022 448 0 42,006 3,801 1,312 54,558 25,980 0 0 0 247 28,279 28,526 2,664 2,664 0 0 21,511 36 3,158 (21,854) 0 (21,854) 0 0 0 (21,854) (0.93) (0.93)
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