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As filed with the Securities and Exchange Commission on April 5, 1999
Registration No. 333-_____
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
-----------------------
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ONHEALTH NETWORK COMPANY
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(Exact name of registrant as specified in its charter)
WASHINGTON 7372 41-1686038
(State of incorporation Primary Standard (IRS Employer
or organization) Industrial Identification No.)
Classification Code
Number
808 HOWELL STREET, SUITE 400
SEATTLE, WASHINGTON 98101
(206) 583-0100
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(Address, including zip code, and telephone number including area code, of
registrant's principal executive office)
ROBERT N. GOODMAN, CHIEF EXECUTIVE OFFICER
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808 HOWELL STREET, SUITE 400
SEATTLE, WASHINGTON 98101
(206) 583-0100
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(Name, address, including zip code, and telephone number, including area
code, of agent for service)
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Copies of all communications to:
C. Kent Carlson
Christopher H. Cunningham
Preston Gates & Ellis LLP
701 Fifth Avenue Suite 5000
Seattle, Washington 98104-7078
(206) 623-7580
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AT SUCH TIME OR
TIMES AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT AS THE SELLING
SHAREHOLDERS SHALL DETERMINE.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the Securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act, check the following box: |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
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CALCULATION OF REGISTRATION FEE
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM OFFERING PROPOSED MAXIMUM AMOUNT OF
SECURITIES REGISTERED REGISTERED PRICE PER SHARE(1) AGGREGATE OFFERING PRICE REGISTRATION FEE
- ----------------------------- ------------------ ------------------------- ------------------------ ----------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value 152,561 shares $14.00 $2,135,854.00 $593.77
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<FN>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c).
</FN>
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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Subject to Completion dated April 5, 1999
PROSPECTUS
152,561 Shares
OnHealth Network Company
Common Stock, $.01 par value per share
We are offering hereby, on behalf of the selling shareholders listed
below and on page 15 of this prospectus, a total of 152,561 shares of common
stock that we are obligated to issue on their exercise of warrants. These
warrants were issued at various times between 1992 and 1995 by IVI Publishing,
Inc., our predecessor in interest. Each warrant allows the individuals or
entities to purchase one share of our common stock at the exercise price set
forth below.
The following table sets forth the name of the person to whom we issued
the warrants, the exercise price per share of their respective warrant, and the
number of shares of common stock the warrants are exercisable into:
WARRANTHOLDER EXERCISE PRICE NUMBER OF WARRANTS
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Medical Innovation Fund (MIF) $4.625 83,784
Ron Eibensteiner $4.625 11,217
Ron Eibensteiner $4.625 15,810
Wayne Mills $5.75 1,750
Wayne Mills $3.25 15,000
Stern & Company $10.00 25,000
The selling shareholders may offer the shares they receive on the
exercise of their warrants through public or private transactions, on or off the
Nasdaq SmallCap Market, at prevailing market prices, or at privately negotiated
prices.
Our common stock is listed on the Nasdaq SmallCap Market under the
ticker symbol "ONHN". On March 31, 1999, the closing price of one share of
OnHealth common stock on the Nasdaq SmallCap Market was $13.625. We will receive
none of the proceeds from the sale of the Shares, but will receive approximately
$821,300 if all of the above listed warrants are exercised.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SHARES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is April __, 1999
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SHARES ONLY
IF YOU CAN AFFORD A COMPLETE LOSS. SEE "RISK FACTORS" BEGINNING ON PAGE 5.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE
SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
THIS PROSPECTUS IS PART OF A REGISTRATION STATEMENT THAT WE HAVE FILED WITH THE
SEC. THE REGISTRATION STATEMENT CONTAINS EXHIBITS AND OTHER INFORMATION NOT
INCLUDED IN THE PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO GIVE INFORMATION OR
TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING DESCRIBED HEREIN.
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TABLE OF CONTENTS
THE COMPANY...................................................................4
RECENT DEVELOPMENTS...........................................................4
RISK FACTORS..................................................................5
USE OF PROCEEDS..............................................................14
DESCRIPTION OF OUR SECURITIES................................................14
SELLING SHAREHOLDERS.........................................................15
PLAN OF DISTRIBUTION.........................................................16
LEGAL MATTERS................................................................16
EXPERTS......................................................................16
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy the documents we file at
the SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. Our SEC filings are also available to the public
from the SEC's web site at http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information in
documents we file with them, which means that we can disclose important
information to you by referring you to those documents. The information
incorporated by reference is considered to be part of this prospectus, and
information that we file later with the SEC will automatically update and
supersede this information. We incorporate by reference the documents listed
below and any future filings we will make with the SEC under Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934:
1. Annual Report of OnHealth Network Company on Form 10-K for the
fiscal year ended December 31, 1998;
2. Proxy Statement of IVI Publishing, Inc.* for the annual meeting of
shareholders held June 16, 1998.
* We changed our name from IVI Publishing, Inc. to OnHealth Network Company on
June 16, 1998.
You may request a copy of these filings or a copy of any or all of the
documents referred to above which have been or may be incorporated in this
Prospectus by reference, at no cost, by writing us at the following address:
Corporate Secretary
808 Howell Street, Suite 400
Seattle, Washington 98101
(206) 583-0100
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THE COMPANY
It is our intent to become the premier source of health-related
information on the world wide web. In the past, under the name IVI Publishing,
Inc., we published in CD-ROM and other formats health related information for
some of America's best-known health-care facilities in partnership with some of
America's most prestigious media firms. Historically, our attention and
resources have been directed to the cable television, CD-ROM and online
interactive media markets.
With the rapid rise of the internet as a source of information for
consumers, we have focused our company's efforts at creating a web site for
consumers of health information that is easy to use, provides custom features
for users and encourages frequent usage. Our flagship web site, located at
www.onhealth.com, opened in July 1997 and was re-released in July of 1998.
We hope to distinguish ourselves by "cutting through the clutter" of
the internet becoming the source for health-related information by locating and
packaging up-to-date and reliable information. By doing so, we will attain a
large number of consumers visiting our web site, which is essential to obtaining
advertising revenues.
We were originally incorporated in August 1990 in the State of
Minnesota under the name Interactive Television, Inc. We changed our name to
Interactive Ventures, Inc. in March 1991, IVI Publishing, Inc. in August 1993,
and in connection with our move to Washington and re-incorporation there,
OnHealth Network Company in June of 1998. Our principal executive offices are
located at:
808 Howell Street, Suite 400
Seattle, Washington 98101
(206) 583-0100
RECENT DEVELOPMENTS
On October 30, 1998, we closed a transaction involving the issuance of
1,000,898 shares of common stock. On December 14, 1998, we closed a transaction
involving the issuance of 542,419 shares of common stock. The December 14, 1998
transaction resulted from our exercise of a previously issued put option in the
October 30, 1998 transaction. The shares of common stock issued on October 30,
1998 and December 14, 1998 were issued to two different accredited investors.
The terms of these issuances potentially obligated us to issue additional shares
of common stock (depending on the future performance of the common stock). Such
reset provisions only relate to those shares purchased by the two investors on
October 30, 1998 and December 14, 1998. As of March 31, 1999, all of the shares
of common stock subject to the Reset Provisions have been sold and no such Reset
Provisions apply to any of our outstanding common stock.
On January 29, 1999, we completed the private placement of 2,596,000
shares of Common Stock to certain investors at a negotiated price of $5.50 per
share.
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RISK FACTORS
Investment in the shares of common stock offered in this prospectus (the
"Shares") involves a high degree of risk. You should consider the following
discussion of risks as well as other information in this prospectus before
purchasing any Shares.
RELIANCE ON EXTERNAL FINANCING. We completed a $14.3 million private
placement of common stock in January 1999. Based on the private placement
and our cash and cash equivalents at December 31, 1998, we expect to have
sufficient resources to meet our ongoing financial obligations and operate
at least through December 31, 1999. Our operations generated a negative
cash flow during 1998. The degree to which we are a net user of cash may
increase during the calendar 1999, as a result of the expansion plans for
the OnHealth network and our marketing and distribution relationships and
as a consequence of focusing on a new business model. We are exploring and
will continue to explore external financing to ensure continued operations
beyond December 31, 1999. There can be no assurance that additional
capital, on a debt or equity basis, will be found, or if found that it will
be on economically viable terms. If additional funds are raised through the
issuance of equity or convertible debt securities, the percentage ownership
of our shareholders will be reduced, shareholders may experience additional
dilution and such securities may have rights, preferences or privileges
senior to those of the holders of common stock.
LIMITED OPERATING HISTORY AND ACCUMULATED DEFICIT; CONTINUING OPERATING
LOSSES. We were incorporated in 1990 and have been operating continuously
since 1991. However, we have only been active online since 1996 and the
OnHealth network web site was established in July 1997 and relaunched in
July 1998. Because of this limited history on the internet, there is little
information investors can use to analyze our financial results relating to
our internet web site. Since 1990, we have generated an accumulated deficit
of approximately $90 million (through December 31, 1998). Our ability to
generate profits depends upon our ability to attract consumers to our web
site and how we leverage those visits. This means we need to create
significant revenue streams from our web site, earn substantial gross
margins on those revenue streams and control our costs of operation. We
anticipate continued significant operating losses at least through 1999, as
the OnHealth web site is improved and marketed and the OnHealth network is
enhanced. There can be no assurance that profitability will ever be
attained.
SHIFT TO ADVERTISING REVENUES MAY NOT REPLACE REVENUES FROM SALES OF
CD-ROMS. Since we began operations in 1990 and until early 1998, most of
our revenues were based on development, sales and support of CD-ROM titles.
In January 1998, the new management team changed our core business focus to
internet web site hosting of health care related content and the
dissemination of health and wellness information from our web site. The
principal form of revenue from this business model is advertising. Revenues
from CD-ROMs have declined significantly since 1995; however, advertising
revenues may never be sufficient to offset such declines in revenue. There
is little information available to assess the potential profitability or
viability of our business. In other words, we essentially face the same
risks and uncertainties of any new venture, and there can be no assurance
that we will be any more successful in this venture than in our previous
business activities.
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RELIANCE ON ADVERTISING REVENUES. We anticipate that a substantial portion
of our revenues will come from the sale of advertisements on our web pages.
Our strategy is to continue to develop advertising and other methods of
generating revenues. We are in the early stages of licensing our products
and technology and in implementing our advertising program. To generate
significant advertising revenues, several things need to happen:
1. Advertisers must accept the internet as an attractive place
to advertise;
2. We need to attract a large number of consumers to our web
site; and
3. Those consumers need to have demographic characteristics
attractive to advertisers.
IMMATURE ADVERTISING MARKET. There is fluid and intense competition in the
sale of advertising on the internet. Advertising rates quoted by different
vendors vary widely, which makes it difficult to project future levels of
advertising revenues. Further, significant and consistent use of the
internet by many advertisers depends upon confirmation that the internet is
an effective advertising medium. To date, advertisers have not by their
actions become convinced of that.
The internet as an advertising medium has not been available for a
sufficient period of time to gauge its effectiveness as compared
with traditional advertising media. No standards have been widely
accepted for the measurement of the effectiveness of
internet-based advertising. Internet advertising rates are based
in part on third-party estimates of users of an internet site
(referred to as "impressions"). Such estimates are often based on
sampling techniques or other imprecise measures, and may
materially differ from our estimates. We do not know if
advertisers will accept our or other parties' measurements of
impressions.
Filter software programs that limit or remove advertising from an
internet user's desktop are available to consumers. Widespread
adoption or increased use of such software by users or the
adoption of such software by certain internet access providers
could have a material adverse effect upon the viability of
advertising on the internet and on our business, results of
operations and financial condition.
SHORT TERM NATURE OF ADVERTISING CONTRACTS; GUARANTEE OF MINIMUM IMPRESSION
LEVELS. Substantially all of our advertising contracts have been for terms
averaging one to three months in length, with relatively few longer-term
advertising contracts. Many of our advertising customers have limited
experience with internet advertising, and may not believe internet
advertising to be effective compared to traditional advertising media. We
cannot assure you that our current advertisers will continue to purchase
advertisements on our web site.
Our advertising contracts typically guarantee the advertiser a
minimum number of impressions. To the extent that minimum
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impression levels are not achieved for any reason, we may be
required to "make good" or provide additional impressions after
the contract term. Providing additional impressions may adversely
affect the availability of advertising inventory. This may, in
turn, adversely affect our business, results of operations and
financial condition.
NEED TO ENHANCE AND DEVELOP ONHEALTH.COM TO REMAIN COMPETITIVE. To remain
competitive, we must continue to enhance and improve the responsiveness,
functionality and features of onhealth.com and develop other products and
services. Enhancements of or improvements to our web site may contain
undetected programming errors that require significant design
modifications, resulting in a loss of consumer confidence and user support
and a decrease in the value of our brand name recognition. We plan to
develop and introduce new features, functions, products and services, such
as increased capabilities for user personalization and interactivity. This
will require the development or licensing of increasingly complex
technologies. We may not succeed in developing or introducing features,
functions, products and services that will attract consumers. Such failure
would likely have a material adverse effect on our business, results of
operations and financial condition.
FAILURE TO ACHIEVE BRAND IDENTITY. We believe that establishing and
maintaining brand identity is a critical aspect of our efforts to attract
and expand our user base, internet traffic and advertising relationships.
We believe that brand recognition will become increasingly important
because of the minimal barriers to entry for competing web sites. We intend
to increase our brand awareness through advertising campaigns in
publications, radio, online media and other marketing and promotional
efforts. If we cannot build a brand recognition that consumers (and
eventually advertisers) seek out, we will likely be unable to generate
revenues.
Developing brand recognition is a complex process. It depends, in
part, on our success in providing a high quality experience. The
value of our brand could be diluted by a variety of events,
including poor consumer or advertiser reaction to our web site and
services offered on the web site.
UNPREDICTABILITY OF FUTURE REVENUE STREAMS; POTENTIAL FLUCTUATIONS IN
QUARTERLY RESULTS. Because our online operating history is very limited and
the economics of the internet are still evolving, it is difficult to
forecast future revenues with a high degree of accuracy. The advertising
and retail industries typically experience their best quarter in the fourth
quarter of each year, and to the extent that we rely upon advertising
revenues, our revenues could similarly fluctuate. Due to the health-related
nature of editorial content, however, we believe that our revenues may not
be as seasonal as the remainder of the advertising and retail industries.
Since our expense levels are based upon anticipated advertising and
licensing revenue, we may not be able to adjust spending in a timely manner
to compensate for any unexpected revenue shortfall. Accordingly, any
significant shortfall in relation to our expectations would have an
immediate adverse impact on our business, results of operations and
financial condition. In addition, we plan to increase significantly our
operating expenses to develop new distribution channels, fund greater
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levels of research and development, increase our sales and marketing
operations, broaden our customer support capabilities and establish brand
identity and strategic alliances.
DEPENDENCE ON THIRD-PARTY RELATIONSHIPS. We are and will continue to be
significantly dependent on a number of third-party relationships to
increase traffic on onhealth.com and thereby generate advertising revenues
and maintain the current level of service and variety of content for our
users. We are generally dependent on other web site operators that provide
links to onhealth.com.
Most of our arrangements with third-party internet sites and other
third-party service providers do not require future minimum
commitments to use our services, are not exclusive and are
short-term or may be terminated at the convenience of the other
party. Moreover, we do not have agreements with the majority of
other web site operators that provide links to onhealth.com, and
such web site operators may terminate such links at any time
without notice. There can be no assurance that third parties
regard our relationship with them as important to their own
respective businesses and operations, that they will not reassess
their commitment to us at any time in the future or that they will
not develop their own competitive services or products.
There can be no assurance that we will be able to maintain
relationships with third parties that supply us with software or
products that are crucial to our success, or that such software or
products will be able to sustain any third-party claims or rights
against their use. Also, we cannot assure you that the software,
services or products of those companies that provide access or
links to our services or products will achieve market acceptance
or commercial success. Accordingly, we cannot assure you that our
existing relationships will result in sustained business
partnerships, successful service or product offerings or the
generation of significant revenues for us. Failure of one or more
of our strategic relationships to achieve or maintain market
acceptance or commercial success or the termination of one or more
successful strategic relationships could have a material adverse
effect on our business, results of operations and financial
condition.
COMPETITION. There are a number of competitors currently delivering online
health content, and it is likely that more competitors will emerge in the
near future. Many of today's competitors are better financed, have longer
operating histories and better brand recognition than we do, and some have
internal distribution or cross-promotional opportunities to support their
online ventures that we do not have and can not replicate for a reasonable
investment. It is possible that existing or emerging competitors may be
able to secure critical editorial content or distribution relationships on
an exclusive basis, or may raise a provider's expectation about the value
of such assets. For these reasons, increased competition may result in
diminished profit margins, market share or brand value. The intense
competition in the consumer software business continues to accelerate as an
increasing number of companies, many of which have financial, managerial,
technical and intellectual property resources greater than ours, offer
products that compete directly with one or more of our products or
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services. We believe that the principal competitive factors in attracting
advertisers include the amount of traffic on our web site, brand
recognition, customer service, the demographics of our user base, our
ability to offer targeted audiences and the overall cost effectiveness of
the advertising medium we offer. We believe that the number of internet
companies relying on internet-based advertising revenue, as well as the
number of advertisers and the number of users, will increase substantially
in the future. Accordingly, we will likely face increased competition,
resulting in increased pricing pressures on our advertising rates, which
could have a material adverse effect on our business, results of operation
and financial condition.
DEPENDENCE ON KEY PERSONNEL. Our development and operation is substantially
dependent on the services of our President and Chief Executive Officer,
Robert N. Goodman and on our General Manager, Rebecca Farwell. The loss of
either Mr. Goodman's or Ms. Farwell's services could materially and
adversely affect our business prospects. We are also dependent on the
continued service of certain other key management as well as our software
engineering personnel, the loss of whose services could significantly delay
the achievement of our planned development objectives. We have not
purchased key man life insurance on any of our personnel. Achievement of
our business objectives will require substantial additional expertise in
the areas of technology, finance, and marketing. We actively seek
additional qualified personnel. Competition for qualified personnel is
intense, and the loss of key personnel, or the inability to attract and
retain the additional highly skilled personnel required for the expansion
of our activities, could have a material adverse effect on our business,
results of operations and financial condition.
RELIANCE ON INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS. We regard
substantial elements of our web site and underlying technology as
proprietary and attempt to protect them by relying on trademark, service
mark, copyright and trade secret laws and restrictions on disclosure and
transferring title and other methods. We also have entered into
confidentiality agreements with our consultants and in connection with our
license agreements with third parties and generally seek to control access
to and distribution of our technology, documentation and other proprietary
information. Despite these precautions, it may be possible for a third
party to copy or otherwise obtain and use our proprietary information
without authorization or to develop similar technology independently.
Effective trademark, service mark, copyright and trade secret protection
may not be available in every country in which our services are made
available through the internet, and policing unauthorized use of our
proprietary information is difficult.
Legal standards relating to the validity, enforceability and scope
of protection of certain proprietary rights in internet-related
businesses are uncertain and still evolving, and no assurance can
be given as to the future viability or value of any of our
proprietary rights. There can be no assurance that the steps taken
will prevent misappropriation or infringement of our proprietary
information, which could have a material adverse effect on our
business, results of operations and financial condition.
Litigation may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets or to
determine the validity and scope of the proprietary rights of
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others. Such litigation might result in substantial costs and
diversion of resources and management attention. We cannot assure
you that our business activities will not infringe upon the
proprietary rights of others, or that other parties will not
assert infringement claims against us, including claims that by
directly or indirectly providing hyperlink text links to web sites
operated by third parties. Moreover, from time to time, we may be
subject to claims of our alleged infringement of the trademarks,
service marks and other intellectual property rights of third
parties. Such claims and any resultant litigation, should it
occur, might subject us to significant liability for damages,
might result in invalidation of our proprietary rights and, even
if not meritorious, could result in substantial costs and
diversion of resources and management attention and could have a
material adverse effect on our business, results of operations and
financial condition.
We currently license from third parties certain technologies
incorporated into onhealth.com. As we continue to introduce new
services that incorporate new technologies, we may be required to
license additional technology from others. We cannot assure you
that these third-party technology licenses will continue to be
available on commercially reasonable terms, if at all.
Additionally, we cannot assure you that the third parties from
which we currently license our technology will be able to defend
their proprietary rights successfully against claims of
infringement. As a result, any inability to obtain these
technology licenses could result in delays or reductions in the
introduction of new services or could adversely affect the
performance of our existing services until equivalent technology
can be identified, licensed and integrated.
LIABILITY FOR INFORMATION RETRIEVED FROM OR TRANSMITTED OVER THE INTERNET;
LIABILITY FOR PRODUCTS SOLD OVER THE INTERNET. Because materials may be
downloaded by the online or internet services that we operate or the
internet access providers with which we have relationships and may be
subsequently distributed to others, there is a potential that claims will
be made against us for defamation, negligence, copyright or trademark
infringement or other theories based on the nature and content of such
materials. In addition, the increased attention focused upon liability
issues and legislative proposals could materially impact the overall growth
of internet use. We could also be exposed to liability with respect to
third-party information that may be accessible through our web site, or
through content and materials that may be posted by our users on discussion
boards that we offer. Such claims might include, among others, that, by
directly or indirectly providing hyperlink text links to web sites operated
by third parties, we are liable for copyright or trademark infringement or
other wrongful actions by such third parties through such web sites. It is
also possible that, if any third-party content information provided on our
web site contains errors, third parties could make claims against us for
losses incurred in reliance on such information.
Even to the extent such claims do not result in liability, we
could incur significant costs in investigating and defending
against such claims. The imposition of potential liability for
information carried on or disseminated through our systems could
require us to implement measures to reduce our exposure to such
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liability, which may require the expenditure of substantial
resources and limit the attractiveness of our services to users.
Our general liability insurance may not cover all potential claims
to which we are exposed or may not be adequate to indemnify for
all liability that may be imposed. Any imposition of liability
that is not covered by insurance or is in excess of insurance
coverage could have a material adverse effect on our business,
results of operations and financial condition.
RISKS RELATED TO SYSTEM OPERATION. All companies that rely on the internet
are dependent upon the continuous, reliable and secure operation of
internet servers and related hardware and software. To the extent that
service is interrupted, consumers will be inconvenienced and commercial
clients will suffer from a loss in advertising or transaction delivery.
These shortfalls would directly result in a revenue loss. Our computer and
communications hardware are protected through physical and software
safeguards. However, they are still vulnerable to fire, earthquake, flood,
power loss, telecommunications failures, physical or software break-ins and
similar events. We do not have full redundancy for all of our computer and
telecommunications facilities and do not carry business interruption
insurance to protect us in the event of a catastrophe. Such an event could
lead to significant negative impacts on our operating results and financial
condition. We are also dependent upon third parties to provide potential
users with web browsers and internet and online services necessary for
access to our web site. In the past, users have occasionally experienced
difficulties with internet and online services due to system failures,
including failures unrelated to our systems. Any sustained disruption in
internet access provided by third parties could have a material adverse
effect on our business, results of operations and financial condition.
IMPACT OF THE YEAR 2000. The Year 2000 issue is the potential for system
and processing failures of date-related data and the result of
computer-controlled systems using two digits rather than four to define the
applicable year. For example, computer programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar
normal business activities.
We could be affected by Year 2000 issues related to non-compliant
information technology ("IT") systems or non-IT systems that we
operate or that are operated by third parties. We have
substantially completed assessment of our internal and external
(third-party) IT systems and non-IT systems. At this point in our
assessment, we are not currently aware of any Year 2000 problems
relating to systems we operate or that are operated by third
parties that would have a material effect on our business, results
of operations or financial condition, without taking into account
our efforts to avoid such problems. Based on our assessment to
date, we do not anticipate that costs associated with remediating
our non-compliant IT systems or non-IT systems will be material,
although there can be no assurance to such effect.
11
<PAGE> 14
To the extent that our assessment is finalized without identifying
any additional material non-compliant IT systems we operate or
that are operated by third parties, the most reasonably likely
worst case Year 2000 scenario is a systemic failure beyond our
control, such as a prolonged telecommunications or electrical
failure. Such a failure could prevent us from operating our
business, prevent users from accessing our web site, or change the
behavior of advertising customers or persons accessing our web
site. We believe that the primary business risks, in the event of
such failure, would include, but not be limited to, lost
advertising revenues, increased operating costs, loss of customers
or persons accessing our web site, or other business interruptions
of a material nature, as well as claims of mismanagement,
misrepresentation, or breach of contract, any of which could have
a material adverse effect on our business, results of operations
and financial condition. We have not made any contingency plans to
address such risks.
MANAGEMENT OF POTENTIAL GROWTH. To accommodate the demand of additional
editorial content and distribution channels for the OnHealth network, the
employee base could grow significantly from the December 31, 1998 level of
34 employees. The expansion of our workforce could place a significant
strain on our management, financial resources and infrastructure. We cannot
assure you that we will be able to attract and retain employees with the
appropriate skill sets, or that we will be able to manage growth
effectively. If we are unable to manage growth in the coming years, there
could be an adverse affect on our operations.
RISK ASSOCIATED WITH CERTAIN LITIGATION. In February 1996, an action in the
District Court of Hennepin County (Minnesota) was brought by T. Randal
Productions et al. against the Company and one current and two former
employees. The plaintiffs made various allegations, including
misappropriation of corporate opportunities and trade secrets by the
Company and its employees and sought award of monetary damages, exemplary
damages and royalties substantially in excess of $10.0 million. In November
1997, a jury found that there was no joint venture between T. Randal and
the company and/or any of its employees but awarded T. Randal $480,000 plus
interest for damages sustained to its business. Plaintiffs moved for a new
trial, amended findings and for judgment notwithstanding the verdict. The
jury verdict was upheld by the trial court. The plaintiffs appealed this
decision to the Minnesota Court of Appeals. In March 1999, the Minnesota
Court of Appeals affirmed the decision of the trial court. The Company
believes the plaintiffs will petition for a rehearing which Company counsel
believes will not be successful. The plaintiffs also have an action pending
against certain affiliates of the Company on the same grounds on which the
action against the Company was based. The Company has indemnified these
affiliates against any damages arising out of these claims. Counsel has
advised the Company that the jury verdict in the action against the Company
should be controlling in this action against the affiliates.
RELIANCE ON EXTERNAL CONTENT. We intend to produce only a portion of the
editorial content that will be found on the OnHealth network. We will be
reliant on third-party firms that have the expertise, technical capability,
name recognition, and willingness to syndicate product content for branding
and distribution by others. As health-related content grows on the web,
12
<PAGE> 15
there may be increasing competition for the best product suppliers, which
may result in a competitor acquiring a key supplier on an exclusive basis,
or in significantly higher content prices. Such an outcome could make the
OnHealth network less attractive or useful for an end user, or could reduce
our profitability. Either event would have a materially adverse impact our
results.
GOVERNMENTAL REGULATION AND LEGAL ISSUES. We are not governed by any laws
of any government entity, other than general business and taxation
regulations and the general regulations that surround online enterprises.
However, with the growing popularity of online usage, various new
regulations are possible which may affect privacy, intellectual property
rights, marketing, pricing, content, or other issues. The adoption of
additional laws in this field may reduce consumer demand for online
services, or adversely impact our cost of doing business. Either outcome
could have a material adverse affect on our financial results.
SECURITY RISKS. Experienced programmers or "hackers" could attempt to
penetrate our network security. Because a hacker who is able to penetrate
our network security could misappropriate proprietary information or cause
interruptions in our products and services, we may be required to expend
capital and resources to protect against or to alleviate problems caused by
such parties. In addition, we may not have a timely remedy against a hacker
who is able to penetrate our network security. Such purposeful security
breaches could have a material adverse effect on our business, results of
operations and financial condition. In addition, the inadvertent
transmission of computer viruses could expose us to a material risk of loss
or litigation and possible liability.
IMPACT OF GENERAL ECONOMIC CONDITIONS. Time spent on the internet by
individuals, purchases of new computers and purchases of membership
subscriptions to internet sites are typically discretionary for consumers
and may be particularly affected by adverse trends in the general economy.
The success of our operations depends to a significant extent upon a number
of factors relating to discretionary consumer spending, including economic
conditions (and perceptions of such conditions by consumers) affecting
disposable consumer income such as employment, wages and salaries, business
conditions, interest rates, availability of credit and taxation, for the
economy as a whole and in regional and local markets where we operate.
There can be no assurance that consumer spending will not be adversely
affected by general economic conditions, which could negatively impact our
results of operations or financial condition. Any significant deterioration
in general economic conditions or increases in interest rates may inhibit
consumers' use of credit and cause a material adverse effect on our
revenues and profitability. In addition, our business strategy relies on
advertising by and agreements with other internet companies. Any
significant deterioration in general economic conditions that adversely
affected these companies could also have a material adverse effect on our
business, results of operations and financial condition.
DIVIDENDS. We intend to retain all of our earnings, if any, for use in the
business and do not anticipate paying any cash dividends in the foreseeable
future. Pursuant to our Articles of Incorporation and Bylaws, the payment
of dividends is subject to the discretion of our Board of Directors and any
terms and conditions imposed by law.
13
<PAGE> 16
NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements made in this prospectus, that are summarized here, are
forward-looking statements that involve risk and uncertainties, and actual
results may be materially different. Factors that could cause actual results to
differ include, but are not limited to those identified:
The expectation that we will become the leading on-line health information
network depends on our ability to continue to: (i) obtain high quality
editorial content, (ii) implement effective traffic building programs, as
well as other general market conditions and (iii) competitive conditions
within the market, (including, but not limited to, the introduction and
further development of competitive web sites).
The expectation that we will see a growth in revenues and positive net
income as a result of our shift in focus to the on-line health network
depends on customer interest, the ability to obtain successful revenue
sources from advertisers, as well as other general market and competitive
conditions within the on-line health network market.
USE OF PROCEEDS
In connection with the exercise of the warrants from the Selling
Shareholders (as defined on page 14), we will receive, on exercise of all of the
warrants described herein, $821,313.38. We plan to use the proceeds from these
warrant exercises for general corporate purposes. All net proceeds from the sale
of the Shares which are covered by this Prospectus will go to the Selling
Shareholders who offer and sell their shares. We will not receive any proceeds
from sales of Shares by the Selling Shareholders.
DESCRIPTION OF OUR SECURITIES
COMMON STOCK
Our articles of incorporation authorize 29,000,000 shares of common
stock and 1,000,000 shares of preferred stock. As of March 9, 1999, there were
approximately 15,856,292 shares of common stock outstanding. Each holder of a
share of common stock gets one vote per share on all matters submitted to a vote
of shareholders but may not cumulate votes for the election of directors.
Holders of common stock also are entitled to receive ratably such dividends as
may be declared by the Board of Directors out of funds legally available
therefor. In the event of our dissolution, liquidation or winding up, holders of
common stock are entitled to share ratably in all assets. Holders of common
stock have no preemptive, subscription, redemption or conversion rights. All the
outstanding shares of common stock are fully paid and nonassessable.
WARRANTS
We have outstanding warrants to purchase approximately 341,213 shares of
common stock with various parties with varying exercise prices and termination
dates.
14
<PAGE> 17
SELLING SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock by the selling shareholders (the
"Selling Shareholders") and as adjusted to give effect to the sale of the Shares
offered by this Prospectus:
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
AFTER OFFERING
----------------------------
SHARES
BENEFICIALLY
SELLING SHAREHOLDER OWNED PRIOR TO SHARES BEING
OFFERING OFFERED SHARES (3) PERCENT
- ---------------------------- ------------------ ------------------- -------------- -------------
<S> <C> <C> <C> <C>
Medical Innovation Fund (1) - 83,784 2,890(4)(5) *
Wayne W. Mills 288,000 16,750 271,250 1.7
Ronald Eibensteiner (2) - 27,027 - -
Stern & Company - 25,000 - -
<FN>
* Less than one percent
(1) Timothy I. Maudlin is a general partner of Medical Innovation Fund. Mr.
Maudlin served on our board of directors from August 1991 to December
11, 1998.
(2) Ronald Eibensteiner served as a member of our board of directors
from November 1997 until June 29, 1998.
(3) Assumes the sale of all of the Shares being offered hereby.
(4) Includes 1,211 shares owned by Timothy I Maudlin, general partner of
Medical Innovation Fund.
(5) Includes 1,679 shares owned by Bob Nickoloff, general partner of
Medical Innovation Fund.
</FN>
</TABLE>
OTHER THAN AS DESCRIBED ABOVE, NONE OF THE SELLING SHAREHOLDERS OR
THEIR RESPECTIVE OFFICERS AND DIRECTORS HAVE NOT HELD ANY POSITIONS OR OFFICE OR
HAD ANY OTHER MATERIAL RELATIONSHIP WITH THE COMPANY OR ANY OF OUR AFFILIATES
WITHIN THE PAST THREE YEARS.
We have agreed with the Selling Shareholders to file with the
Commission, under the Securities Act, the Registration Statement of which this
Prospectus forms a part, with respect to the resale of the Shares, and have
agreed to prepare and file such amendments and supplements to the Registration
Statement as may be necessary to keep the Registration Statement effective until
the earlier of (i) three years after the last Adjustment Shares may be issued to
the Selling Shareholders, (ii) the date that all of the Selling Shareholders may
sell all of their Shares under Rule 144(k) of the Securities Act, or (iii) such
date that none of the Selling Shareholders own any of the Shares offered hereby.
15
<PAGE> 18
PLAN OF DISTRIBUTION
The Selling Shareholders, or their pledgees, donees, transferees or
others who succeed to their interest, may offer their Shares at various times in
one or more of the following transactions:
-on the Nasdaq SmallCap Market;
-in the over-the-counter market;
-in negotiated transactions other than the Nasdaq SmallCap Market or the
over-the-counter market;
-in connection with short sales;
-by pledge to secure debts and other obligations;
-in connection with the writing of call options, in hedging transactions
and in settlement of other transactions in standardized or
over-the-counter options; or
-in a combination of any of the above transactions.
The Selling Shareholders may sell their Shares at market prices at the
time of sale, at prices related to such prevailing market prices, at negotiated
prices or at fixed prices.
The Selling Shareholders may use broker-dealers to sell their Shares.
If this happens, broker-dealers will either receive discounts or commissions
from the Selling Shareholder, or they will receive commissions from purchasers
for whom they acted as agents.
If the Selling Shareholders give or pledge their Shares to another
person, such person may sell such Shares as a Selling Shareholder under this
Prospectus. Any Shares that qualify for sale under Rule 144 of the Securities
Act may be sold under such rule rather than pursuant to this Prospectus.
LEGAL MATTERS
For purposes of this offering, Preston Gates & Ellis LLP, Seattle,
Washington, is giving its opinion on the validity of the Shares.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements and schedule included in our Annual Report on Form 10-K for the year
ended December 31, 1997, as set forth in their report, which is incorporated in
this prospectus by reference. Our financial statements are incorporated by
reference in reliance on their report, given on their authority as experts in
accounting and auditing.
16
<PAGE> 19
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses relating to the registration of the Shares will be borne
by the registrant. Such expenses are estimated to be as follows:
Registration Fee
Securities and Exchange Commission $ 593.77
Accountants' Fees $1,000.00
Legal Fees $6,500.00
Miscellaneous $ 500.00
---------
Total $8,593.77
Item 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article XII of the Articles of Incorporation of the Company authorizes
the Company to indemnify any present or former director or officer to the
fullest extent not prohibited by the Washington Business Corporation Act, public
policy or other applicable law. Chapter 23B.8.510 and .570 of the Washington
Business Corporation Act authorizes a corporation to indemnify its directors,
officers, employees, or agents in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
provisions permitting advances for expenses incurred) arising under the 1933
Act. The directors and officers of the Company are entitled to indemnification
by the Selling Shareholders against any cause of action, loss, claim, damage, or
liability to the extent it arises out of or is based upon the failure of the
Selling Shareholder (or his donees, legatees, or pledgees) to comply with the
Prospectus delivery requirements under the federal securities laws or any
applicable state securities laws or upon any untrue statement or alleged untrue
statement or omission or alleged omission made in this Registration Statement
and the Prospectus contained herein, as the same shall be amended or
supplemented, made in reliance upon or in conformity with written information
furnished to the Company by such Selling Shareholder.
In addition, the Company maintains directors' and officers' liability
insurance under which its directors and officers are insured against loss (as
defined in the policy) as a result of claims brought against them for their
wrongful acts in such capacities.
Item 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)
EXHIBIT
NO. DESCRIPTION PAGE
-------- --------------------------------------------------- ---------
3.1 Articles of Incorporation of the Company*
3.2 Bylaws of the Company*
4.1 Form of Subscription Agreement relating to the
purchase of the Common Stock**
4.2 Form of Registration Rights Agreement***
5 Opinion of Preston Gates & Ellis LLP regarding 22
legality
23.1 Consent of Ernst & Young LLP, Independent Auditors 23
23.2 Consent of Preston Gates & Ellis LLP****
* Incorporated by reference to the Form S-3 of the Registrant filed
December 31, 1998 (333-69989).
** Incorporated by reference to Exhibit 10.28 to the Form 10-K of the
Registrant for the year ended December 31, 1998.
*** Incorporated by reference to Exhibit 4.7 to the Form 10-K of the
Registrant for the year ended December 31, 1998.
**** Contained within Exhibit 5
1
<PAGE> 20
Item 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors and executive officers of the Registrant
pursuant to provisions described in Item 15 or otherwise, the Registrant has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director or executive officer of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director or
executive officer in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement to include any
material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement.
(2) That, for purposes of determining any liability under the
Securities Act, each filing of the Registrant's annual report pursuant to
Section 13(a) or 15(d) of the Exchange Act (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to Section 15(d) of the
Exchange Act) that is incorporated by reference in the registration statement
shall be deemed to be a new registration statement relating to the securities
offered therein and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To deliver or cause to be delivered with the Prospectus, to each
person to whom the Prospectus is sent or given, the latest annual report to
security holders that is incorporated by reference in the Prospectus and
furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3
under the Exchange Act; and where interim financial information required to be
presented by Article 3 of Regulation S-X are not set forth in the Prospectus, to
deliver or caused to be delivered to each person to whom the Prospectus is sent
or given, the latest quarterly report that is specifically incorporated by
reference in the Prospectus to provide such interim financial information.
(4) That, for the purposes of determining liability under the
Securities Act, each post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(5) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(6) That, for purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(7) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
2
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Seattle, State of Washington, on the 2nd day of
April, 1999.
ONHEALTH NETWORK COMPANY
By: \s\ ROBERT N. GOODMAN
-----------------------------------
Robert N. Goodman
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement on Form S-3 has been signed by the following persons
in the capacities indicated on the dates set forth below.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------------ ----------------------------------- ---------------
<S> <C> <C>
\s\ ROBERT N. GOODMAN President, Chief Executive Officer, March 31, 1999
- ----------------------------------- Director (Principal Executive
Robert N. Goodman Officer)
\s\ MICHAEL D. CONWAY Controller, Vice President and March 31, 1999
- ----------------------------------- Secretary (Principal Financial and
Michael D. Conway Accounting Officer
\s\ MICHAEL A. BROCHU Chairman of the Board of Directors March 31, 1999
- -----------------------------------
Michael A. Brochu
\s\ ANN KIRSCHNER Director March 31, 1999
- -----------------------------------
Ann Kirschner
\s\ Director March __, 1999
- -----------------------------------
Ram Shriram
\s\RICK THOMPSON Director March 31, 1999
- -----------------------------------
Rick Thompson
</TABLE>
3
<PAGE> 22
EXHIBIT 5
{LETTERHEAD OF PRESTON GATES & ELLIS LLP}
April 1, 1999
OnHealth Network Company
808 Howell Street, Suite 400
Seattle, Washington 98101
Re: OnHealth Network Company
Form S-3 Registration Statement
Dear Sir or Madam:
We have acted as counsel for OnHealth Network Company, a Washington
corporation (the "Company"), in connection with certain transactions involving
the issuance of shares of the Company's Common Stock (the "Shares"), upon the
exercise of certain warrants.
In connection with the preparation and filing of a registration
statement on Form S-3 (the "Registration Statement"), under the Securities Act
of 1933, we have reviewed the Company's articles of incorporation and bylaws and
have made such other investigations as we deemed necessary in order to express
the opinions set forth below. Based on the foregoing, it is our opinion that the
Shares, when issued on the valid and proper exercise of the warrants, will be
duly and validly issued, fully paid and nonassessable.
We hereby consent to all references to us in the Registration Statement
and all amendments thereto. We further consent to the use of this opinion as an
exhibit to the Registration Statement. We express no opinion as to any matters
not expressly set forth herein.
PRESTON GATES & ELLIS LLP
By: \S\ C. KENT CARLSON
<PAGE> 23
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "experts" in the
Registration Statement (Form S-3) and related prospectus of OnHealth Network
Company for the registration of 152,561 shares of its common stock and to the
incorporation by reference therein of our report dated March 15, 1999 with
respect to the financial statements and schedule of OnHealth Network Company
included in its Annual Report (Form 10-K) for the year ended December 31, 1998,
filed with the Securities and Exchange Commission.
\s\ ERNST & YOUNG LLP
Seattle, Washington
April 1, 1999
