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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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
incorporation or organization) Identification No.)
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
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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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [ ]
Aggregate market value of voting stock held by non-affiliates of the registrant
as of March 9, 1999: $178,383,285
Number of shares outstanding of the registrant's class of common stock as of
March 9, 1999: 15,856,292
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of registrant's definitive Proxy Statement for its 1999 Annual
Meeting of Shareholders are incorporated herein by reference into Part III.
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TABLE OF CONTENTS
PAGE
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Part I
Item 1. Business............................................................3
Item 2. Properties.........................................................20
Item 3. Legal Proceedings..................................................20
Item 4. Submission of Matters to a Vote of Security Holders................21
Part II
Item 5. Market For Registrant's Common Equity and Related
Stockholder Matters...............................................22
Item 6. Selected Financial Data............................................23
Item 7. Managements's Discussion and Analysis of Financial Condition
and Results of Operations.........................................24
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.........28
Item 8. Financial Statements And Supplementary Data........................28
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure..........................................28
Part III
Item 10. Directors and Executive Officers of Registrant.....................29
Item 11. Executive Compensation.............................................29
Item 12. Security Ownership of Certain Beneficial Owners and Management.....29
Item 13. Certain Relationships and Related Transactions.....................29
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....30
Signatures..................................................................33
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PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements based on current expectations,
estimates and projections about the Company's industry, management's beliefs and
certain assumptions made by management. All statements, trends, analyses and
other information contained in this report relative to trends in net sales,
gross margin, anticipated expense levels and liquidity and capital resources, as
well as other statements including, but not limited to, words such as
"anticipate," believe," "plan," "estimate," "expect," "seek," "intend," and
other forward-looking statements are not guarantees of future performance and
are subject to certain risks and uncertainties that are difficult to predict.
Accordingly, actual results may differ materially from those anticipated or
expressed in such statements. Particular attention should be paid to the
cautionary statements involving the Company's limited operating history, the
unpredictability of its future revenues, the unpredictable and evolving nature
of its business model, the intensely competitive nature of the online
environment, risks associated with capacity constraints and the management of
Company growth. Except as required by law, the Company undertakes no obligation
to update any forward-looking statement, whether as a result of new information,
future events or otherwise.
GENERAL
OnHealth Network Company ("OnHealth" or the "Company") intends to become the
leading Internet resource dedicated to the management of family health and
well-being. The Company is an Internet-based provider of high quality health and
medical information and applications to a broad base of consumers. The Company's
Internet site, onhealth.com, produces and distributes original, relevant health
content including in-depth reports, personalized information retrieval,
geographically specific guides to health services and information, editorials
and interactive community environments. By leveraging management's years of
experience in developing businesses, its skill in working with third-party
content providers, and its unique knowledge of consumers of health information,
the Company has created a broad site appealing to health consumers. The key
attributes for success in this venture include building high-value editorial
content, maintaining a friendly and easily accessible site on the Internet,
building trust and credibility, and creating a conducive environment for
community among site users. The Company has entered into, and intends to enter
into additional distribution relationships with businesses which have
significant reach on the Internet, such as search engines, portals, Internet
access providers, community, news information and content and other specialty
sites, media companies, promotional programs and other traditional media to
build the OnHealth brand and drive traffic to the site. Capitalizing on this
broad reach, the Company plans to create multiple revenue streams by leveraging
the branding, customer set, and market awareness created by the onhealth.com
site. OnHealth intends to generate advertising revenue by appealing to
advertisers through its ability to reach targeted demographics and
psychographics. Additional products and services, such as transactional based
e-commerce, subscription and syndication, will be developed to exploit
opportunities as they present themselves in the marketplace.
The Company was founded in August 1990 in the State of Minnesota. The Company
went public in 1993 as IVI Publishing, Inc. Until January 1998, its traditional
line of business had been CD-ROM development, production and distribution. The
best known title, "Mayo Clinic Ultimate Medical Guide", along with other CD-ROM
works, has been distributed through retail and computer OEM channels. The
Company's predecessor was also a supplier of video, animation and graphic assets
to America's Health Network, a health and medical cable TV channel, and
published a book version of its CD-ROM, "Taking Control of Your Health" in
conjunction with Time Life Medical.
The Company's first foray onto the Internet was a Web site, O@sis, which it
developed on a joint venture basis with the Mayo Foundation in July 1996. Due to
philosophical differences regarding the strategic direction of the site, full
ownership of O@sis was later transferred to the Mayo Foundation with the Company
receiving a $2.7 million termination settlement and the return of IVI Publishing
Inc. stock held by Mayo. The Company's current relationship with Mayo consists
of a content contract and certain agreements concerning CD-ROM properties.
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INDUSTRY OVERVIEW
THE INTERNET
The Internet is an increasingly significant global medium for communications,
information and commerce and continues to experience rapid growth in its user
base. International Data Corporation estimates that the number of Internet users
will grow to approximately 320 million by 2002 from approximately 69 million at
the end of 1997. The Company believes that the growth in Internet use is due to
a number of factors including a large and growing installed based of PCs,
improvements in network infrastructure and easier and more cost effective access
to the Internet. Current trends that specifically impact the Company's business
model include the following:
INCREASING ADOPTION OF INTERNET USE BY WOMEN. Women tend to be the
healthcare decision-makers within their households, and therefore the
seekers of health and wellness information. Internet use among women
has increased rapidly in recent years, from 5% in early 1994 to 46% in
1998 and is expected to increase to 51% in 1999, according to
International Data Corporation.
INTERNET USERS VIEW THE WORLD WIDE WEB AS AN IMPORTANT INFORMATION
RESOURCE. Approximately 90% of Internet users use the Internet at least
once a month and more than 70% visit at least one "News and
Information" site. In addition, 17 million U.S. adults searched for
health information in the 12 months ended July 1998 and is estimated to
increase to over 30 million in 2000, according to Cyber Dialogue. This
number of U.S. adults searching for health information equals the
number of searchers of financial information and is just slightly below
the number of news seekers.
ONLINE ADVERTISING HAS EMERGED AS A MORE SIGNIFICANT COMPONENT TO
MARKETERS' MEDIA MIX. Online advertising in the United States is
projected to grow from $1.9 billion in 1998 to $4.4 billion in the year
2000 and $7.7 billion in 2002, according to Jupiter Communications.
E-COMMERCE HAS BECOME A SIGNIFICANT CHANNEL OF DISTRIBUTION FOR
MERCHANDISERS. According to International Data Corporation, worldwide
e-commerce is projected to increase from $12.4 billion, at the end of
1997, to approximately $425 billion in 2002. Average annual spending by
individuals is expected to rise over the same period from $375/person
to $672/person.
HEALTHCARE
According to the Congressional Budget Office, annual healthcare expenditures in
the U.S. have grown from approximately $470 billion in 1982 to more than $1
trillion in 1998, representing more than 14% of the gross national product.
Stimulating this growth is an aging U.S. population which is starting to enter
its prime years for drug and healthcare expenditures. According to the U.S.
Bureau of the Census, the number of individuals over the age of 65 is projected
to increase from approximately 26 million in 1981 to 35 million by 2000, or from
11.5% to 13.0% of the total U.S. population.
Dramatic changes in the U.S. healthcare delivery system are causing more
patients to bear more healthcare costs on an out-of-pocket basis. Concurrently,
more people are attempting to manage their own health rather than relying solely
on medical practitioners. As consumers demand more information, wider choices
and greater involvement in healthcare decision-making, they are seeking health
information in greater numbers and from a wider variety of sources. Moreover,
the "baby-boomer" consumer is characterized as highly educated and technology
literate, increasingly leveraging technology in general and the Internet in
particular to gain greater access to information. The fragmented nature of this
information, whether it be from sources such as written publications,
television, radio or the Internet, as well as the failure of available sources
to properly address the wide variety of information needs and activities of
consumers, provides a large business opportunity for OnHealth.
ONHEALTH'S STRATEGY
The Company believes it is well positioned to capitalize on the market
opportunities created by the rising consumer demand for relevant, timely,
high-quality health and wellness information and the emergence of the World Wide
Web as a medium for both communications and commerce. The Company's strategy for
achieving its goal of becoming the premier network of health-related channels on
the Internet consists of the following:
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CREATE THE LEADING INTERNET RESOURCE DEDICATED TO THE MANAGEMENT
OF FAMILY HEALTH AND WELL-BEING.
-Differentiate the onhealth.com site from other sources of
health and Wellness information by continuing to offer content
that occupies the targeted and practical ground between
"lifestyle" Editorial content and undifferentiated "clinical"
reference material.
-Develop high quality, unique and independent editorial content.
-Provide personalization to enable users to obtain information
on specific diseases or conditions that are of importance to
them, retrieve e-mail, track personal health records for
themselves and their families, obtain local weather and pollen
information and participate in relevant discussion groups,
among other things.
-Provide "intelligent" links to other reliable, relevant online
content.
-Provide regularly updated content to encourage user return
visits.
-Produce a user-friendly, easily accessible and editorially
attractive format. Provide interactive, community and "smart"
search capabilities.
-Offer consumers the ability to purchase health-related
products.
-Provide interactive tools and programs such as risk assessments
and behavior programs to help consumers actively manage their
health and well being.
-The above will drive frequent usage and long user sessions,
thereby establishing an effective platform for advertisers to
reach their targeted demographics.
DRIVE TRAFFIC AND MAXIMIZE THE ONHEALTH.COM BRAND.
-Enter into distribution agreements with Internet search engines
and portals and strategic alliances with other specialty sites.
-Facilitate increased user traffic through an integrated
advertising campaign utilizing multiple channels.
-Utilize "best-of-breed" partners such as TBWA/Chiat Day and
Fleishman-Hillard to facilitate OnHealth's marketing and public
relations efforts.
-Establish pre-eminent market share and build barriers to entry.
FUEL REVENUE GROWTH.
-Develop multiple revenue streams including
advertising/sponsorship, e-commerce/transactions, subscription
and syndication.
-Create a differentiated and productive advertising environment
to include a wide variety and depth of sponsorship areas and a
targeted, creative beyond-banner program.
-Market acceptance of the onhealth.com site will allow the
Company to produce additional content, products and services
for its end-user base.
ONHEALTH.COM
INTRODUCTION
Onhealth.com provides timely and relevant coverage of health news and issues,
substantive resources and references, community discussions, direct access to
experts, interactive tools and exclusive "smart" search capabilities directly to
health consumers. Onhealth.com enables consumers to actively and successfully
manage the health and well-being of themselves and their families. On July 20,
1998, the Company launched its redesigned flagship site, signaling a commitment
to provide the healthcare consumer's best interactive source for health
information and services. By logging onto onhealth.com, consumers will find
aggressive coverage of important health issues and deep database reference
materials in an interactive and personalized format. The site consists of unique
services and features.
ONHEALTH.COM CURRENT SERVICES AND FEATURES
-DAILY BRIEFINGS: Each day, onhealth.com publishes health and
medical news filtered and tailored to what is most practically
relevant to the key demographic. Daily Briefings include: 1)
ORIGINAL SUMMARIES of the most important health-related news
stories, including links to deeper material and 2) DAILY HEALTH
TIPS covering everything from diet and nutrition to stress
reduction and relaxation techniques.
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-IN-DEPTH REPORTS: Each week, onhealth.com publishes new reports
that cover a broad range of health topics in-depth. Examples of
topics include nutrition, stress management, emotional well-being,
managed care and breast cancer. Onhealth.com's In-Depth Reports
provide information beyond the superficial coverage offered by
"lifestyle" health sites but in an insightful and informative
manner which removes the medical jargon found in "clinical" health
sites to provide meaningful coverage of a full range of health
issues. Content for OnHealth's In-Depth Reports is produced by
carefully selected and respected journalists who are assigned by
OnHealth's staff of editors.
-THE ONHEALTH PERSONAL HEALTH TRACKER: Personal Health Tracker is a
free, personal, private service to track, retrieve and save
important health information for onhealth.com users. The exclusive
Personal Health Tracker searches a hand-selected universe of the
Internet's best health and medical resources and sends the user an
e-mail, on either a daily or weekly basis according to user
specifications, when new information is found. The Personal Health
Tracker searches against a user's selection of topics on a daily
basis and can be customized to provide the most relevant
information for a user's specific healthcare needs.
-CITY HEALTH GUIDES: Onhealth.com currently provides localized
information guides for 14 U.S. cities, providing timely, practical
information and resource listings for onhealth.com's users.
Services include local health news, community resources, calendars
of health-related events, classes and support groups and local
pollen, UV and pollution counts.
-ASK OUR EXPERTS: Onhealth.com's exclusive columnists cover core
beats that the site's users have said are most important to them
by answering questions in an in-depth format. Columns like "A
Woman's Body," "Active Aging," "Sex Matters," "Power to the
Patient," "The Holistic Pediatrician" and "Alternative Health" are
written by expert medical and science writers to whom users always
have direct access for comments, questions and suggestions.
-CONDITION CENTERS: Partnering with some of medicine's top research
and clinical institutions, onhealth.com's condition-specific
Condition Centers give consumers hands-on patient guides, expert
answers, community support and the latest medical updates to help
them most successfully manage chronic conditions. For example,
institutions such as the Beth Israel Deaconess Cancer Center, the
International Diabetes Center and the Mount Sinai Cardiovascular
Institute will support those who are managing such difficult
conditions as breast cancer, diabetes and cardiovascular health
problems. Additional Condition Centers for asthma, allergy, and
gastrointestinal disorders will be launched in 1999.
-ONHEALTH LIVE HOSTED BY BROOKE GLADSTONE: Journalist Brooke
Gladstone of National Public Radio hosts onhealth.com's weekly
live Internet-audio interview show featuring leading health and
wellness experts. Users can ask questions during the show and
listen to previous shows through the extensive archive. The
program airs every Tuesday night.
-NEWSLETTER: Onhealth.com users can receive a free e-mail with
alerts to the latest in-depth reports, columns, events and more.
The newsletter is delivered free every Tuesday.
-ILLNESS AND DISEASE DATABASE: Onhealth.com offers a comprehensive
reference tool which enables the site's users access to the most
comprehensive medical conditions database online. Through
Conditions A-Z, users can access information on a full range of
medical conditions.
-USP DRUG DATABASE: Onhealth.com users have access to the most
comprehensive pharmacy database online. Through onhealth.com's
deep pharmacy reference, users can find information on the effects
of a specific drug, its appropriate use and potential side
effects.
-ALTERNATIVE PRACTICES: Onhealth.com provides coverage of several
of the most widely recognized alternative medical therapies
including Acupressure, Hydrotherapy, Naturopathy and Ayurvedic
medicine.
-HERBAL INDEX: Onhealth.com offers the most comprehensive herbal
database on-line. Users have access to general descriptions,
target ailments, preparations and special information on a wide
variety of herbs including Echinacea, Gingko, St. John's Wort and
many others.
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-RECOMMEND A DOCTOR: Onhealth.com has assembled a nationwide
database of good doctors that have been recommended by its
community of users. Over two thousand exceptional doctors are
currently listed, and the database continues to grow.
-DISCUSSION GROUPS: Onhealth.com provides a forum to discuss health
issues and conditions with other consumers. In-depth reports and
Ask Our Experts provide the catalyst for discussion among
consumers within these groups, and information can be integrated
within discussions to provide a meaningful environment.
-MEDICAL ADVISORY BOARD: Onhealth.com has assembled an active
Medical Advisory Board made up of specialists from the Condition
Center partner institutions. The board also includes a large panel
of doctors who review and update the Company's condition reference
material.
-INTERCONNECTED DATABASES AND SITE SEARCH: Since the entire site is
databased, onhealth.com is the most dynamically interrelated
health site on the web. Each page is categorized and cross-indexed
so the most relevant information from across the site is readily
available to the user on any given subject.
CONTENT DEVELOPMENT
The Company's goal for its editorial content is to continue to create
high-value, useful, accessible, and trustworthy editorial elements for its
users. By developing such content, the Company differentiates itself from
"lifestyle" health sites and the medical and scientific jargon of "clinical"
health sites. The editorial staff, working with the health and medical editors,
controls all content on a daily basis. In general, the Company obtains and
produces content for the onhealth.com site in one of three ways: (1)
PROPRIETARY: Created exclusively for OnHealth by Company employees or high
quality contractors who are experienced medical or scientific writers; (2)
SYNDICATED: Licensed for distribution via OnHealth, on an exclusive or
non-exclusive basis following review by the Company's staff editors; and (3)
LINKED: OnHealth may "point" to other content elsewhere on the World Wide Web.
Although linked content is not exclusive to OnHealth, the Company adds value by
finding and pre-qualifying the best health-related content on the Internet.
OnHealth currently has content relationships with the following organizations:
Reuters
AccuWeather
New England Journal of Medicine/Massachusetts Medical Society
International Diabetes Center
Mount Sinai Cardiovascular Institute
Beth Israel Deaconess Cancer Center
Time Life Medical
Additional content to be added to the network in the future may include
high-value content, which may be licensed in the context of user models that go
beyond advertising support. Management believes that through a combination of
these content strategies, the OnHealth brand can create a unique product that
will have more user value and therefore a potential for greater levels of usage
than any health related content now on the World Wide Web.
TARGETED DEMOGRAPHIC
Onhealth.com is targeted to well-educated, technology adopting women aged 25-54
who are proactive in seeking information to actively maintain their health and
well-being and reactive in addressing health and medical issues. OnHealth's
audience is skewed predominantly female, as they are the key healthcare
decision-makers within the household. According to International Data
Corporation, women are expected to represent approximately 51% of on-line users
in 1999, up from 46% in 1998. OnHealth believes that women represent an
attractive demographic for advertisers since women have a disproportionate
control over consumer spending in the United States. Industry experts estimate
that women make 75% of the household's healthcare decisions, control 66% of the
health dollars and spend 80% of a household's discretionary income.
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UNIQUE USERS
According to an article in the October 19, 1998 issue of Business Week, there
are an estimated 15,000 health and wellness web sites today. Even though the
re-launch of onhealth.com was on July 20, 1998, Media Metrix, the leading
provider of measurement services for the Internet and digital technologies, in
their December 1998 US Report, stated that 458,000 unique users visited
onhealth.com, ranking the site third among health sites. This number of unique
visitors represents more than a 60% increase from the October report, ranking
onhealth.com the third most trafficked consumer health and wellness site. The
Company plans to aggressively grow its unique user base. Onhealth.com's
independent and unique content, ownership rights of the content and wide
audience appeal allows the Company to enter into flexible and versatile
strategic relationships to drive traffic. The Company believes that its primary
source for driving traffic will result from distribution and marketing
agreements.
DISTRIBUTION
OnHealth intends to leverage existing and planned distribution agreements in its
execution of a business model that will generate rapid growth in reach and page
views, thereby creating opportunities to generate multiple revenue streams. The
Company has and will continue to enter into distribution agreements with leading
search engine and portal companies, major Internet access providers, community,
news, information and content and other specialty sites, media companies,
promotional programs, other traditional media and corporate/HMOs. Distribution
agreements serve to build the brand and to drive significant traffic to the
onhealth.com Web site. By increasing its brand exposure and traffic through
significant distribution agreements, onhealth.com will seek to be the most
effective means of advertising health-related products on the Internet. Current
distribution relationships include:
SEARCH ENGINES AND PORTALS:
THE GO NETWORK. With over 19.8 million unique visitors per month,
as of January 1999, Go Network is one of the largest sites on the
web. As one of only three Go Network Health Channel Premier
Partners, onhealth.com has a major branded presence - an above the
fold four-color logo button - and Daily Briefing headlines on the
Go.com Health Channel Home page. In addition, OnHealth's content
is featured prominently on the health related sub-channels
throughout the site: "Health News & Information," "Eating Right &
Looking Good," "Fitness" and "Wellness."
PLANET DIRECT. As a featured Health Content Partner for Planet
Direct - a comprehensive, personalized directory of online
services - Planet Direct features access to OnHealth's Daily
Briefing, Daily Health Tips, Conditions A-Z database, pharmacy
resources, In-Depth Reports, Condition Centers, Herbal Index and
links to OnHealth Resource areas. Planet Direct carries many of
OnHealth's Ask our Experts, such as "Sex Matters", "Power to the
Patient", "Alternative Health" and "A Woman's Body". In addition,
OnHealth's logo appears on Planet Direct's homepage with a direct
link to the Company's web site. Planet Direct is co-branded by
more than 450 Internet Service Providers nationwide and affinity
groups like RE/MAX, the U.S. Chess Federation, and Discover Card.
Planet Direct, a wholly owned subsidiary of CMGI, is a personal
Web service that tailors members' online experience to their
interests and local community. By integrating brand name editorial
content with enhanced links to popular sites and services, Planet
Direct provides mainstream consumers with essential, everyday
information such as news, weather, and financial data in a logical
and intuitive manner, ensuring easy access to personal interests
in a community atmosphere.
NBC'S SNAP! As a featured content provider for the Snap! Health
channel, OnHealth provides access to Daily Briefing, In-Depth
Reports and partner content pages for over 180 conditions that are
prominently promoted throughout the health channel. Snap! is a
free Internet directory, search and navigation service that offers
the most powerful way to organize and find anything on the
Internet. The service is logically arranged to give users the
quickest route to the best of what they are looking for on the
Web, providing efficient, high-quality search results and
directory listings and the most often-used content. At the heart
of the Snap! portal service is a directory of Web sites, built by
a team of editors and reviewers to ensure its quality, freshness
and usefulness. Users may either search the directory by using key
words, or browse through the directory's topics, including: Arts &
Humanities, Business & Money, Computing & Internet, Entertainment,
Education, Health, Kids & Family, Living, Local, News & Media,
Oddities, People & Society, Science & Technology, Shopping, Sports
and Travel.
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MICROSOFT'S WEBTV: Under the terms of an agreement with WebTV,
Inc., a subsidiary of Microsoft Corporation, onhealth.com is the
primary supplier the health and wellness content for the Explore
Reference and Health category receiving prominent placement and
promotion on the WebTV homepage. Onhealth.com provides WebTV
Network service subscribers with many unique features, including
access to Daily Briefing, In-Depth Reports, Ask Our Experts,
Condition Centers and Resource areas.
YAHOO! CHAT: OnHealth works with Yahoo! Chat to produce weekly
audience driven, interactive discussions with the country's most
prominent health and wellness experts. Focusing on the most
probing and crucial health issues of the day, the chats take place
Wednesdays at 6 p.m. Eastern (3 p.m. Pacific). The chat
programming is being promoted on both onhealth.com and the front
page of Yahoo! Chat and run of site on Yahoo.
INTERNET SERVICE PROVIDERS AND OTHER:
MINDSPRING. As a Health Content Partner for MindSpring, Onhealth's
four-color logo is prominently featured with direct links to
onhealth.com. Onhealth supplies health and wellness information,
including In-Depth Reports and Ask Our Experts, within the Health
area. MindSpring is a leading Internet service provider focused on
delivering outstanding service and support to its customers.
MindSpring's dial-up subscribers can browse the World Wide Web,
send electronic mail, participate in informative online chats and
access over 20,000 newsgroups. MindSpring offers local Internet
service in more than 360 locations throughout the United States.
MindSpring is also a leading provider of Web Hosting services and
domain registrations.
iSYNDICATE: iSyndicate, the Web's leading content syndication
service, will feature access to OnHealth's Daily Briefing, Ask Our
Experts, and In-Depth Reports as part of its free Express Service,
now serving over 18,432 sites. As of the end of February, there
were 121 sites carrying OnHealth's headlines. With a few easy
steps, iSyndicate Express allows affiliate sites to integrate
selected headlines on their pages, which link to the content
provider's site for the full-text article. Headline links are
dynamically served and automatically updated, allowing affiliate
sites to feature fresh, professional content, and allowing content
providers to reach desirable new audiences, build their brand, and
drive traffic to their site. Onhealth.com joins some of the Web's
leading content providers as part of iSyndicate's Express service,
such as CNET, ZDNet, Reuters and TheStreet.com.
MOTOROLA: Motorola's i Kno! network features OnHealth's Daily
Briefing. Pager customers can also choose to have the Daily
Briefing sent directly to their pagers. Motorola's technology
offers paging companies a broad range of information preformatted
and ready for inclusion in service bundles that the carrier then
offers to its customers. In addition too onhealth.com's health
news, i Kno! offers standard news features such as local weather
and traffic, sports, movie reviews, national and international
news, and financial information.
COMMUNITY:
GEOCITIES. OnHealth is the exclusive content provider of health
information on GeoCities. OnHealth provides health news and
information to GeoCities, which is featured in the "Health"
Avenue. Onhealth.com's headlines are also featured throughout the
Health sub-avenue and subsequent topic pages, where users can
seamlessly link to onhealth.com to access the complete stories.
NEWS, INFORMATION AND CONTENT SITES:
AOL'S DIGITAL CITY NEW YORK: OnHealth provides the first local
health-related content area on AOL's Digital City New York. The
"Health Guide" provides consumers with OnHealth's branded network
of interactive health and wellness information as well as local
news, community resources and listings of health events, classes
and support groups. OnHealth offers to Digital City New York's
users reliable health information and tools that empower them to
make better decisions about themselves their family's healthcare.
OnHealth's Recommend a Doctor Database provides a listing of New
York doctors ranked "good", "great" or "amazing" by their
patients; the Conditions A-Z database and Ask Our Experts,
including "A Woman's Body," "Sex Matters," and "Holistic
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Pediatrician." Digital City, Inc. is the nation's largest and the
Internet Online's most popular local city resource and community
guide. Digital City reaches more than 3 million people every
month, provides an array of interactive products in 50 cities, an
delivers locally relevant news, community resources, entertainment
and commerce in a dynamic and easy-to-use format. Available on
America Online at Keyword: Digital City, on CompuServe's Local
Channel, on Netscape's NetCenter and on the Web at
www.digitalcity.com, Digital City combines useful local
information, expert reviews, and the personal contributions of the
people who use the service to help residents get the most from
their communities. Based in Vienna, VA, Digital City, an AOL
Studios business, is owned primarily by America Online and Tribune
Company.
THIRDAGE: As a primary health content provider, ThirdAge features
OnHealth's Daily Health Tip, In-Depth Reports, Conditions A-Z, and
Personal Health Tracker within the Health Channel. ThirdAge Media
is the leading media company for aging boomers--ThirdAgers--the
fastest growing segment of the population in the United States and
worldwide. Third Age Media embraces a fully integrated approach to
communication through a branded Web site, ThirdAge.com; news
syndicate and electronic distribution channel, Third Age News; and
a market research arm, Third Age Research.
ADVANCE INTERNET: Onhealth.com provides health and wellness
content for Advance Internet's network of sites (www.advance.net),
including New Jersey Online, Alabama Live, Oregon Live, Michigan
Live and more. Advance Internet's users can access onhealth.com's,
Daily Health Tips, OnHealth Live, In-Depth Reports, Ask Our
Experts, and Daily Briefing, from their local sites. Advance
Internet is a subsidiary of Advance Publications Inc., owner of
newspapers in 22 cities as well as Conde Nast magazines; CondeNet;
Parade; and React. Advance Internet Inc. is currently responsible
for the development and management of non local Web sites that are
created in alliance with newspapers owned and operated by Advance
Publications Inc.
COMCAST ONLINE COMMUNICATIONS. As a Content Provider for Comcast
Online Communications, OnHealth's four-color logo is prominently
featured with direct links to the OnHealth site. Onhealth.com's
content, including Daily Briefing, Daily Health Tips, In-Depth
Reports, Ask Our Experts, and OnHealth Live, are prominently
featured in the Health Channel that serves 22 markets of the
InYourTown.com sites and for the Comcast@Home service. Comcast's
popular InYourTown.com sites can take users directly to OnHealth's
localized City Health Guides. Comcast Online Communications,
through its partnership with @Home Network, offers residential
customers the fastest, easiest, and most entertaining way to
access the Internet from home in six markets. InYourTown provides
unique and local Internet content for Comcast@Home subscribers, as
well as all Internet users in 23 Comcast Cable markets.
SAN FRANCISCO CHRONICLE AND NBC AFFILIATE KRON
THE TAMPA TRIBUNE AND NBC AFFILIATE WFLA
These strategic relationships will enable OnHealth to build brand awareness,
drive end-user traffic to the Web site, generate interest with potential and
prospective distribution partners, and create visibility for its content.
OnHealth's strategy is to continue to enter into distribution relationships to
build the OnHealth brand and drive traffic to onhealth.com.
MARKETING & PROMOTION
The Company's media plan is designed to build brand awareness and drive traffic
to the Company's onhealth.com web site. The Company has hired TBWA/Chiat/Day as
its advertising agency of record, Fleishman-Hillard as its public relations
agency and Thinking Media as its interactive agency. The Company's integrated
marketing campaign is expected to begin in the second quarter of 1999 and will
extend over several quarters. The campaign will consist of advertising online as
well as advertising via television, radio, magazines, newspapers and tactical
outdoor ad placements. The Company's strategy includes effectively communicating
that onhealth.com is an indispensable resource for helping consumers manage
their family's health.
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ADVERTISING REVENUE
OnHealth believes its demographic audience and its ability to target specific
users of its site will be attractive to pharmaceutical and other advertisers.
OnHealth believes it is able to create a differentiated and productive
advertising environment by providing the following:
-Targeted programs to reach the most desirable consumers
-A wide variety and depth of sponsorship areas
-Long-term exclusive relationships for highly prized condition-specific
content
-Creative, beyond-banner programs that appeal to more aggressive
advertisers
-Personalization and key word targets that provide flexible cross-site
delivery
Initially, The Company intends to continue to target pharmaceutical advertisers,
and as the Company achieves critical mass, the demographics of the target user
should appeal to a broader range of advertisers such as consumer goods companies
and others. OnHealth utilizes an internal advertising sales department.
Since launching the site, onhealth.com has developed advertising relationships
with the following companies:
Johnson & Johnson
Astra Pharmaceuticals
Merck & Co.
Schering-Plough
Proctor & Gamble
Roche Laboratories
Enzymatic Therapy
Glaxo Wellcome
SmithKline Beecham
Eli Lilly
Citibank
Kellogg's
American Lung Association
Ortho Biotech
Behealthynow.com
Pfizer
Biogen
Women.com
Talkway.com
Greentree Nutrition
Cancer Treatment Centers of America
General Motors
Jamieson Vitamins
1-800 Doctors
Lifewise Insurance
Hoescht
Selfcare
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E-COMMERCE
The Company believes that for OnHealth to be the single best on-line destination
for consumers to manage their health and well-being that it must offer product
purchasing to its consumers. Of the 17 million adults in the U.S. searching
on-line for health and medical information, approximately 50% of these adults
made off-line purchases after seeking information on the Internet, according to
Cyber Dialogue. OnHealth plans to launch a shopping page in the first quarter of
1999. OnHealth plans to partner with various e-commerce sites to offer a wide
variety of prescription and over-the-counter ("OTC") drugs, vitamins/minerals,
herbs, supplements, medical/health-related supplies, everyday health and
wellness essentials, beauty products, books, insurance, financial services and
other appropriate products and services. OnHealth's model is to generate revenue
by focusing on any or all of three areas: 1) fees for guaranteed impressions, 2)
slotting fees and 3) revenue sharing.
OnHealth has recently partnered with drugstore.com as its exclusive on-line
drugstore. The agreement consists of several major components to be rolled out
in a multi-phased approach. The first phase consists of drugstore.com
advertisements placed throughout the onhealth.com site. The second phase
consists of establishing links from onhealth.com to drugstore.com through the
network allowing OnHealth's users to purchase products sold by drugstore.com.
For example, a user searching for information on arthritis will be offered the
latest news, in-depth reports, discussion groups, and links to related OTC
products. The links connecting consumers to drugstore.com's inventory will be
clearly identified as advertisements, giving users immediate access to products
related to their area of interest. To ensure a smooth transition for users going
from onhealth.com to drugstore.com, the OnHealth logo and return button will be
prominently featured on the entry and exit pages on drugstore.com that are
accessed by OnHealth users.
TECHNOLOGY AND SYSTEMS
The Company's Web site is made available with the latest Internet hardware and
software technologies.
Exodus IT-class co-location facilities provide the Company with a secure, high
availability and high bandwidth space for its servers. This includes redundant
OC-3 and OC-12 backbone connections to the Internet, uninterruptible power
supplies with diesel generator backup, all housed in a copper-lined,
earthquake-proof building. Direct connections via "T-1" and DSL lines allow the
main office to connect seamlessly and reliably to the servers and the Internet.
A farm of Intergraph IS-8000 and IS80 mission-critical servers are housed behind
a redundant F5 Big/IP switcher for complete software and hardware fault
tolerance and load leveling. These servers run Microsoft Windows NT Enterprise
Server with Internet Information Server 4.0, Active Server Pages with a
proprietary page caching system and publishing tools for Web page hosting and
production management. The resulting performance in preliminary tests shows
dominance over other competitive sites. All advertisement hosting and reporting
is handled through NetGravity Ad Server, a powerful ad management and
forecasting toolset.
The Web site's Personal Health Tracker and Search features utilize Microsoft
SiteServer tools and technologies. This provides the customized Web crawling,
user profile management, nightly process runs and e-mail support that the
Personal Health Tracker requires.
Microsoft SQL Server databases are heavily used for all content, process
management and tracking needs. Offsite backups occur regularly throughout the
day to protect against a total system failure.
The Company believes the site has been built from the ground up as an extremely
stable, scaleable, and high performance solution for OnHealth's current and
future needs. See "FACTORS THAT MAY AFFECT FUTURE RESULT--Risks Related To
System Operation."
COMPETITION
The editorial environment in interactive media is new, highly competitive and
rapidly evolving. Since the Internet's commercialization in the mid-1990's, the
number of Web sites on the Internet competing for consumers' attention and
spending has proliferated with no substantial barriers to entry, and the Company
expects that competition will continue to intensify. The Company competes,
directly and indirectly, for users, distributors, advertisers and content
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providers. The Company believes that the principal competitive factors in
attracting and retaining users is the depth, breadth and timeliness of content,
the ability to offer compelling and relevant content and brand recognition.
Other important factors in attracting and retaining users include ease of use,
service quality and cost.
ONLINE COMPETITORS
There is significant interest in health-related content among online consumers.
Demographic factors and the growth of online audiences suggest that the
popularity of this content will continue to increase. Similarly, major health
advertisers are showing increased levels of interest in the Internet. The key
operators of health-related sites on the Internet today include:
DIVISIONS OR AFFILIATES OF PRINT PUBLISHERS; including Healthy Ideas
(Rodale Press), PHYS (Conde Nast), Thrive (owned by Oxygen Media),
MediConsult, Dr. Koop and HealthScout (a service of RX Remedy, Inc., a
market research firm.)
VENTURES OF ONLINE SERVICE FIRMS; including Better Health (iVillage)
and Thrive (owned by Oxygen Media), Medscape and WebMD.
PUBLIC SECTOR AND INSTITUTIONAL SITES; including the National Institute
of Health, Mayo Clinic, InteliHealth and university sites. While these
sites compete for viewer time and attention, they do not typically
compete for advertising or transactional revenues.
PORTALS/SEARCH ENGINES; principally the proprietary health-related
content presented to subscribers to America Online, MSN.com, Yahoo!,
Excite, etc.
INTERNET SITES OTHER THAN HEALTH-RELATED SITES; including general
interest sites, such as news sites and search engines, which often host
some health-related content in the context of other editorial
materials.
OTHERS
In addition, the online sites compete to some extent with other media, including
print and television.
The Company believes the principal competitive factors which differentiate
OnHealth from competing brands and sites include the onhealth.com brand name,
the independence and uniqueness of content, the users' perception of content
interactivity, content reliability and trustworthiness, design and usability
factors, comprehensiveness and level of promotion.
This level of competition may result in an environment in which content or
promotional expenses to the Company increase. It may also result in a higher
level of competition for key promotional vehicles. The known and prospective
competitors to the Company are often significantly larger and better financed
than the Company and will likely be better able to afford a more intense
competitive environment than the Company. See "FACTORS THAT MAY AFFECT FUTURE
RESULTS--Competition."
INTELLECTUAL PROPERTY
The Company regards its copyrights, service marks, trademarks, trade secrets,
proprietary technology and similar intellectual property as critical to its
success, and relies on trademark, copyright, trade secret and patent protection
to protect its proprietary rights. While the Company tries to assure that the
quality of its brand is maintained through such actions, there can be no
assurance that steps taken by the Company to protect its proprietary rights will
be adequate or that third parties will not infringe on the Company's
intellectual property. In addition, there can be no assurance that third parties
will not assert infringement claims against the Company which, even if not
meritorious, could result in the expenditure of substantial resources and
management effort.
EMPLOYEES
As of December 31, 1998, the Company employed 34 people on a full-time basis. Of
the total, 18 were in product development, 10 in sales and marketing and six (6)
in general and administrative. When conditions demand it, the Company also uses
part-time employees. None of the Company's employees are represented by a labor
union and the Company considers its relationship with its employees to be good.
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The Company believes that some measure of its future success is dependent upon
attracting and retaining qualified employees, and competition for hiring such
employees is intense.
FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to other information in this Annual Report on Form 10-K, the
following factors should be considered in evaluating the condition and prospects
of the Company. These factors may have a significant impact on the Company's
future operating results.
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.
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
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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
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
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financial condition. In addition, we plan to increase significantly our
operating expenses to develop new distribution channels, fund greater
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
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. See "BUSINESS--Competition."
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
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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
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.
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.
18
<PAGE>
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,
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.
19
<PAGE>
OTHER
PRODUCT DEVELOPMENT/RESEARCH AND DEVELOPMENT
In 1998, 1997, and 1996, product development expenses were $3,744,000,
$4,243,000 and $5,651,000, respectively. In addition in 1997 and 1996, product
development expenses paid for by third parties were $682,000 and $1,204,000,
respectively.
PROTECTION OF PROPRIETARY RIGHTS
We regard the software we own as proprietary and rely upon a combination of
copyrights, trade secret laws, employee and third-party non-disclosure
agreements and other methods to protect our intellectual property. We believe
that copyright protection for our intellectual property is less significant to
our success than factors such as the knowledge, ability and experience of our
personnel, and the quality of our new product development and distribution
efforts.
BACKLOG
We had no significant backlog at fiscal year end of 1998, 1997, or 1996.
MAJOR CUSTOMERS
Three customers represent 40%, 16% and 13% of net revenue for the year ended
December 31, 1998; one customer represents 12% of net revenue for the year ended
December 31, 1997; and three customers represent 15%, 21%, and 11% of net
revenue in 1996. The revenue recorded from the customer which represents 40% of
the net revenue in 1998 was the result of a $603,000 payment received from
Churchill Livingstone related to minimum sales requirements form a terminated
CD-ROM distribution agreement. In 1997, we recognized revenue of $493,000
from our content agreement with America Health Network ("AHN"). Net sales to
an OEM manufacturer in 1996 totaled $1,394,000. Also in 1996, we recognized
$1,000,000 of revenue from our online content agreement with AT&T, which was
terminated in that year. At December 31, 1998, two customers comprised 36% and
20% of outstanding accounts receivable. Two customers represented 77% and 27%
of accounts receivable at December 31, 1997.
ITEM 2. PROPERTIES
Effective the first quarter of 1998, the Company's principal executive and
administrative offices are located in Seattle, Washington. In January 1998, the
Company subleased approximately 1,500 square feet of office space in Seattle,
Washington on a month-to-month basis. Subsequently, the Company leased
approximately 7,000 square feet of space located at 808 Howell Street, Suite
400, Seattle, Washington 98101. The lease expires July 1, 2003.
Effective October 1998, the Company subleased approximately 525 square feet of
office space located at 420 Lexington Avenue, Suite 300, New York, New York
10170. The lease expires in September 1999.
During 1997, the Company's principal executive and administrative offices
consisted of approximately 40,000 square feet in an office building in Eden
Prairie, Minnesota, a suburb of Minneapolis. The lease also covered
approximately 2,000 square feet of storage space. The Company terminated the
Eden Prairie lease effective March 31, 1998. Prior to leasing the New York
facility, the Company's sales personnel were located in an office building in
Edina, Minnesota, a suburb of Minneapolis. The lease was for approximately 1,000
square feet and expired in September 1998. The Company also leases space in the
following locations: (1) 4,124 square feet in an office building in Carlsbad,
California ending in March 1999; and (2) 790 square feet in an office building
in Carlsbad, California ending in May 1998. The Company did not renew the 790
square feet lease, and does not currently intend to renew the 4,124 square feet
lease. The Company has a subtenant in the 4,124 square feet space through March
1999.
ITEM 3. LEGAL PROCEEDINGS
In February 1996, an action in the District Court of Hennepin County (Minnesota)
was brought by T. Randal Productions et al. against the Company and one current
and two former employees. The plaintiffs made various allegations, including
misappropriation of corporate opportunities and trade secrets by the Company and
its employees and sought award of monetary damages, exemplary damages and
royalties substantially in excess of $10.0 million. In November 1997, a jury
20
<PAGE>
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
21
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock, initially offered to the public on October 6, 1993
under the symbol "IVIP". Since June 17, 1998, the Common Stock has been quoted
on the NASDAQ SmallCap Market system under the symbol "ONHN."
The following table sets forth the high and low bid quotations for the Company's
Common Stock as reported by NASDAQ for the last two fiscal years. Such
quotations reflect inter-dealer prices, without retail mark-up, mark down or
commission and may not necessarily represent actual transactions.
HIGH LOW
-------------- --------------
1998
----------------------
Fourth Quarter $ 6 5/8 $ 2 3/16
Third Quarter 11 3/8 3 5/8
Second Quarter 8 5/8 4 7/8
First Quarter 6 2 5/8
1997
----------------------
Fourth Quarter $ 4 1/4 $ 2
Third Quarter 4 5/16 2
Second Quarter 3 7/8 2 1/16
First Quarter 4 1/2 2 7/8
At March 9, 1999, based on information received from the Company's transfer
agent on the Company's common stock, there were approximately 160 record holders
of the Company's Common Stock, excluding shareholders whose stock is held either
in nominee name and/or street name brokerage accounts.
The Company has never declared or paid any cash dividends on its Common Stock
and does not intend to pay dividends on its Common Stock in the near future. To
date, the Company has incurred losses and presently expects to retain its future
anticipated earnings to finance development of and expansion of its business.
The payment by the Company of dividends, if any, on its Common Stock in the
future is subject to the discretion of the Board of Directors and will depend on
the Company's earnings, financial condition, capital requirements and other
relevant factors.
RECENT SALES OF UNREGISTERED SECURITIES
On April 10, 1998, the Company sold to certain investors a total of 5,000 shares
of the company's Series B Convertible Preferred Stock. In addition, the Company
issued to the same investors warrants to purchase a total of 66,778 shares of
the Company's common stock. As an issuance to sophisticated investors not
involving any public offering, the sale of the series B Convertible Preferred
Stock and the issuance of the warrants was exempt under Section 4(2) of the
Securities Act and Regulation D thereunder.
On October 30, 1998, the Company closed a transaction involving the issuance of
1,000,898 shares of common stock. On December 14, 1998, the Company closed a
transaction involving the issuance of 542,419 shares of common stock. The
December 14, 1998 transaction resulted from the exercise of an put option by the
Company issued to it 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 the Company to issue additional shares of common stock (depending on
the future performance of the Company's common stock (the "Reset Provisions")).
Such Reset Provisions only relate to those shares purchased by the two investors
on October 30, 1998 and December 14, 1998. As of March 12, 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 the Company's outstanding Common stock. As
an issuance to sophisticated investors not involving any public offering, the
sale of the shares of Common Stock subject to such Reset Provisions was exempt
under Section 4(2) of the Securities Act and Regulation D thereunder.
During January 1999, the Company completed a $14,278,000 private placement,
which resulted in the issuance of 2,596,000 shares of the Company's common stock
at $5.50 per share. As an issuance to sophisticated investors not involving any
22
<PAGE>
public offering, the sale of the shares of common stock was exempt under Section
4(2) of the Securities Act and Regulation D thereunder.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below has been derived from the
financial statements of the Company. For additional information, see the
Financial Statements and Notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Year Ended December 31,
(In thousands, except per share data)
------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Net revenue $ 1,522 $ 3,761 $ 9,470 $ 11,970 $ 7,013
Loss from operations (11,019) (11,262) (10,326) (14,875) (32,434)
Net loss (10,939) (10,947) (10,157) (14,234) (31,257)
Net loss applicable to
common shareholders $ (11,964) $ (13,965) $ (10,336) $ (14,254) $ (31,257)
Net loss per common share:
Basic and diluted $ (1.12) $ (1.73) $ (1.36) $ (1.90) $ (4.75)
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments $ 2,119 $ 2,488 $ 3,462 $ 7,759 $ 20,653
Working capital (deficiency) (1,158) (1,252) 3,230 8,607 20,735
Total assets 3,894 4,577 13,411 18,352 32,101
Convertible subordinated
debentures - - 3,500 - -
Total liabilities 4,195 4,559 8,606 3,627 5,133
Convertible redeemable
preferred stock - - 1,905 1,845 -
Shareholders' equity (deficit) (301) 18 2,900 12,880 26,968
</TABLE>
23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
OnHealth Network Company ("OnHealth" or the "Company") intends to become the
leading Internet resource dedicated to the management of family health and
well-being. The Company is an Internet-based provider of high quality health and
medical information and applications to a broad base of consumers. The Company's
Internet site, onhealth.com, produces and distributes original, relevant health
content including in-depth reports, personalized information retrieval,
geographically specific guides to healthcare services and information,
editorials and interactive community environments.
Until January 1998, its traditional line of business had been CD-ROM
development, production and distribution. The Company was also a supplier of
video, animation and graphic assets to a health and medical cable TV channel.
Under this strategy, the Company was never able to attain profitability, and, at
December 31, 1997, had an accumulated deficit of $78,576,000. In 1997, the
Company's Board of Directors revised its business strategy and brought in an
entirely new management team and other key employees skilled in the development
of internet websites. In 1998 the Company was focused on the development of an
Internet-delivered, consumer-oriented network of health and wellness sites.
OnHealth intends to generate advertising revenue by appealing to advertisers
through its ability to reach targeted demographics and psychographics.
Additional products and services, such as transactional based e-commerce,
subscription and syndication, will be developed to exploit opportunities as they
present themselves in the marketplace.
RESULTS OF OPERATIONS
The following table sets forth selected income statement data for OnHealth
Network Company and such data as a percentage of net revenues for the year ended
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Year Ended December 31,
(Dollars in thousands)
--------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
<S> <C> <C> <C> <C> <C> <C>
Net revenue $ 1,522 100% $ 3,761 100% $ 9,470 100%
Gross margin 755 50% 1,220 32% 4,394 46%
Operating expenses 11,774 774% 12,482 332% 14,720 155%
Loss from operations (11,019) (724%) (11,262) (299%) (10,326) (109%)
Net loss $ (10,939) (719%) $ (10,947) (291%) $ (10,157) (107%)
</TABLE>
REVENUE
Revenue for the year ended December 31, 1998, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
(In thousands)
--------------------------------------------------
1998 1997 1996
-------------- -------------- ----------------
<S> <C> <C> <C>
Product sales and licensing revenue $ 754 $ 1,990 $ 5,152
Online revenue 388 58 1,000
Contract development revenue and other 380 1,220 1,346
Cable television licensing revenue - 493 1,972
============== ============== ================
Net revenues $ 1,522 $ 3,761 $ 9,470
============== ============== ================
</TABLE>
24
<PAGE>
Net revenue for 1998, 1997 and 1996 of $1,522,000, $3,761,000 and $9,470,000,
respectively, represent a decrease of 60% from 1997 to 1998 and 60% from 1996 to
1997. The 1997 to 1998 decrease is due to a substantial reduction in product
sales and licensing revenue of $1,236,000, or 62%, a reduction in contract
development revenue and other of $840,000, or 69%, and a reduction in cable
television licensing revenue of $493,000, or 100%. These decreases were
partially offset by a $330,000, or 569%, increase in online revenues. The 1998
product sales and licensing revenue includes a $603,000 payment related to
minimum sales requirements from a terminated CD ROM distribution agreement. The
decrease from 1996 to 1997 is due to a substantial reduction in product sales
and licensing revenue of $3,162,000, or 61%, a substantial reduction in cable
television licensing revenue of $1,479,000, or 75%, and a decrease in online
revenue from $1,000,000 to $58,000.
PRODUCT SALES AND LICENSING REVENUE
Product sales and licensing revenue have declined steadily over the past few
years. The decrease generally reflects market conditions for CD ROM products,
the Company's cancellation of a CD ROM distribution agreement, and the lack of
new CD ROM product releases as the Company shifted its focus toward online
efforts. In 1995, the Company entered into a five year distribution agreement
which allowed for the promotion, marketing and distribution of certain of the
Company's CD-ROM products. The agreement also provided for minimum levels of
sales through the year 2000. In December 1998, the Company received a $603,000
payment related to minimum sales requirements from the termination of the CD ROM
distribution agreement. The Company does not anticipate receiving any
significant product sales and licensing revenue from CD ROM products in the
future.
ONLINE REVENUES
From 1997 to 1998, online revenues increased from $58,000 to $388,000, an
increase of $330,000, or 569%. The increase in 1998 reflects increased site
sponsorship and advertising revenue from the Company's onhealth.com web site
which was redesigned and re-launched in July 1998. The 1997 online revenues of
$58,000 included site sponsorships, advertising and premium services revenue
related to onhealth.com and the former O@SIS web site. In September 1997, the
Company entered into an agreement with Mayo Foundation which included the full
transfer to Mayo of the Company's ownership interest in the O@SIS web site. The
online revenues in 1996 relate to nonrefundable advances payable to the Company
under the exclusive agreement signed with AT&T in October 1995 and the
discontinuance by AT&T of the AT&T Health site in August 1996.
CONTRACT DEVELOPMENT REVENUE AND OTHER
From 1997 to 1998, contract development revenues and other decreased $840,000,
or 69%. The decrease generally reflected the Company's shift toward the online
efforts. From 1996 to 1997, contract development revenues and other decreased
slightly, representing management's efforts to control costs and focus on more
profitable contracts.
CABLE TELEVISION LICENSING REVENUE
Cable television licensing revenue reflects revenue from the content and royalty
agreement with America's Health Network (AHN). Under the agreement, the Company
is licensing multimedia content to AHN starting in May 1995 and is to receive
minimum licensing royalties over the life of the agreement. The revenue was
being recognized evenly over the expected life of the agreement. Due to the
gradual increase in actual payments versus the straight-line revenue recognition
policy, a receivable was recorded for the difference between the revenue
recognized and the cash received during the early years of the contract. The
$1,479,000 decrease in revenue from 1996 to 1997 was a result of AHN's financial
difficulties. In June 1997, as a result of the Company not receiving its
quarterly payment, the outstanding AHN receivable was fully reserved.
GROSS MARGIN
Gross margin as a percentage of net revenues was 50% in 1998 compared to 32% in
1997. The improvement in gross margin in 1998 was primarily due to the high
margins on online revenue and the product sales distribution agreement
termination revenue.
Gross margin as a percentage of net revenues was 32% in 1997 compared to 46% in
1996. The decrease in gross margin in 1997 was partially due to continued lower
gross profits realized on CD-ROM retail sales, but was primarily due to
decreases in higher margin cable television licensing and online revenue.
25
<PAGE>
OPERATING EXPENSES
PRODUCT DEVELOPMENT
In 1998, product development expenses included primarily development, editorial,
design and production costs related to the Company's onhealth.com web site. In
1997, development costs include primarily onhealth.com development costs and CD
ROM development costs. From 1997 to 1998, product development expenses decreased
from $4,243,000 to $3,744,000, a decrease of $499,000, or 12%. The decrease
reflects no new 1998 CD ROM product releases, and a shift towards an Internet
focused business.
Product development expenses were $4,243,000 for 1997, a decrease of $1,408,000
or 25% from 1996, due to the Company's release of fewer CD ROM products and its
shift to online publishing.
SALES AND MARKETING
Sales and marketing expenses in 1998 were $5,626,000 as compared to $1,347,000
in 1997, an increase of $4,279,000, or 318%. The increase primarily relates to
increased marketing activities for the Company's onhealth.com web site. In July
1998, the Company began a marketing campaign to promote the launch of the
onhealth.com web site which included online and radio advertising. In addition,
the Company incurred distribution costs related to agreements signed in July
1998 with GeoCities and Go Network.
Sales and marketing expenses were $1,347,000 in 1997, compared to $2,705,000 in
1996. The decrease of 50% was a result of the release of fewer CD ROM titles in
1997, decreases in expenditures to promote the Company's products and a smaller
expense structure created by the downsizing of operations in late 1996.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $2,404,000 in 1998, compared to
$6,892,000 in 1997, a decrease of $4,488,000, or 65%. General and administrative
expenses consist primarily of compensation to administrative and executive
personnel, fees for professional services, facility costs and bad debt expenses.
The large decrease in 1998 relative to 1997 reflects substantially reduced legal
costs, reduced bad debt costs, and general cost cutting measures including
reduced rent costs from the Company's relocation to smaller facilities. The 1997
costs also included certain special charges including costs to relocate the
Company from Minneapolis, Minnesota to Seattle, Washington.
General and administrative expenses were $6,892,000 in 1997 compared to
$6,364,000 in 1996. The increase of 8% was due to extensive litigation and
special charges in 1997. The Company recorded $808,000 in expenses related to a
settlement of litigation with Viridis, Inc. and received an adverse jury award
of $480,000, plus interest from a dispute with T. Randal Productions, et al. in
1997. In the fourth quarter of 1997, the Company recorded charges of $1,572,000
for the relocation of the Company's headquarters from Minneapolis, Minnesota to
Seattle, Washington. These charges included $610,000 in severance to officers
and employees and $962,000 for asset dispositions and lease termination costs.
Also in 1997, the Company wrote-off $1,741,000 in other assets related to an
agreement with Time Life, Inc. Excluding the litigation and special charges, the
Company's reduction in general and administrative expenses was the result of the
downsizing of the facilities and personnel and management's efforts to
streamline operating costs.
OTHER INCOME (EXPENSE)
Other expense was $4,000 in 1998, compared to other income of $473,000 in 1997.
The 1998 other expense of $4,000 included a $285,000 loss related to fixed asset
disposals, a $562,000 gain related to the collection of a previously reserved
accounts receivable, and a $281,000 revenue sharing payment related to the
collection of the receivable.
The 1997 other income of $473,000 included a $2,700,000 cash payment that the
Company received in connection with the transfer of ownership of the Company's
O@sis Web site to Mayo. This was partially offset by other expense of $2,229,000
in connection with the Company's conversion of Convertible Subordinated
Debentures. The expense represents the excess of the fair market value of Common
Stock issued over the fair value of the Common Stock issuable pursuant to the
original conversion terms of the debentures.
26
<PAGE>
INTEREST INCOME (EXPENSE)
Net interest income was $84,000 in 1998 compared to net interest expense of
$158,000 in 1997. The net interest income in 1998 relative to net interest
expense in 1997 reflects the lack of debt in 1998 relative to 1997. The 1997 net
interest expense includes interest expense of $264,000 related to $3,500,000 in
convertible subordinated debentures, which were outstanding for ten months in
1997. These debentures were converted to common stock in October 1997.
Net interest expense was $158,000 in 1997 compared to net interest income of
$169,000 in 1996. The net interest expense in 1997 versus net interest income in
1996 reflects lower interest income earned from cash and cash equivalents
balances in 1997 relative to 1996 and higher interest expenses in 1997 related
to 1996. The interest expense relates to the Company's $3,500,000 in convertible
subordinated debentures which were outstanding for two months in 1996 versus ten
months in 1997. These debentures were issued in November 1996 and were converted
to common stock in October 1997.
LIMITATION ON USE OF NET OPERATING LOSS AND OTHER TAX CREDIT CARRYFORWARDS
At December 31, 1998, the Company had available net operating loss carryforwards
of approximately $81,910,000 and available research and development credits of
approximately $339,000 for federal income tax purposes. The net operating loss
carryforwards and the credits expire at various times through 2013. These
carryforwards are subject to the limitations of Internal Revenue Code Section
382. This section provides limitations on the availability of net operating
losses to offset current taxable income if significant ownership changes have
occurred for federal tax purposes. The Company incurred "ownership changes,"
pursuant to regulations currently in effect under Internal Revenue Code Section
382, as a result of sales of the Company's Preferred Stock in 1992 and 1993 and
may have incurred ownership changes since that time.
INFLATION
Management believes that inflation has not had a material impact on the
Company's results of operations.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had cash and cash equivalents of $2,119,000.
Total cash used by operating activities during 1998 was $9,962,000, which was
primarily due to a net loss of $10,939,000. Investing activities used net cash
of $472,000 primarily for purchases of computer equipment. Financing activities
provided cash of $10,065,000 primarily from two private placements of common
stock of $5,690,000; a $5,000,000 Convertible Redeemable Preferred Stock
financing; and $1,068,000 from stock option exercises.
Subsequent to the year ended December 31, 1998, the Company received net
proceeds of $14,278,000 from a private placement of 2,596,000 shares of common
stock.
The Company believes that its cash and cash equivalents, including the
$14,278,000 received in the January 1999 private placement, will be sufficient
to fund its operations through December 31, 1999. Operations generated a
negative cash flow during 1996, 1997 and 1998, and the Company expects a
significant use of cash in 1999 as it markets and expands the onhealth.com web
site. Any material unforeseen increase in expenses or reductions in projected
revenues will likely require the Company to seek additional debt or equity
financing. If additional cash is required, the Company may need to reduce its
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
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.
27
<PAGE>
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 to exceed $100,000, although
there can be no assurance to such effect, and any such cost will be funded
through operating cash flows. To date the Company has incurred no significant
costs related to the assessment of, and preliminary efforts in connection with,
its Year 2000 project and the development of a remediation plan. Management does
not currently expect the Company's financial condition or results of operations
will be materially adversely affected by the Year 2000 issue. There can be no
guarantee that the systems of other companies on which the Company's systems
rely will be timely converted, or that a failure to convert by another company,
or a conversion that is incompatible with the Company's systems, would not have
a material adverse effect on the Company.
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.
FORWARD-LOOKING STATEMENTS
Certain statements made in this Form 10-K, which 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 THE COMPANY 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 THE COMPANY WILL SEE A GROWTH IN REVENUES AND POSITIVE
NET INCOME AS A RESULT OF ITS SHIFT IN FOCUS TO ITS 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.
FOR ADDITIONAL INFORMATION REGARDING FORWARD-LOOKING STATEMENTS, PLEASE
REFER TO THE FIRST PARAGRAPH IN "ITEM 1. BUSINESS" AND "FACTORS THAT MAY
AFFECT FUTURE RESULTS."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes that the market risk arising from holdings of its
financial instruments is not material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial information required by Item 8 is included elsewhere in
this Report (see Part IV, Item 14).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
28
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information required by this Item is incorporated by reference to
the Company's definitive proxy statement to be filed within 120 days after the
end of the Company's fiscal year ended December 31, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the Company's definitive proxy statement to be filed within 120 days after the
end of the Company's fiscal year ended December 31, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the Company's definitive proxy statement to be filed within 120 days after the
end of the Company's fiscal year ended December 31, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the Company's definitive proxy statement to be filed within 120 days after the
end of the Company's fiscal year ended December 31, 1998.
29
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) FINANCIAL STATEMENTS
PAGE
-----
Report of Ernst & Young LLP, Independent Auditors............ F-1
Balance Sheet as of December 31, 1998 and 1997............... F-2
Statement of Operations for the years ended
December 31, 1998, 1997 and 1996.......................... F-3
Statement of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996.......................... F-4
Statement of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.......................... F-5
Notes to Financial Statements................................ F-6
(2) FINANCIAL STATEMENT SCHEDULES
PAGE
----
Valuation and Qualifying Accounts S-1
All other schedules are omitted because they are not applicable,
or not required because the required information is included in
the Financial Statements or notes thereto.
(3) EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS WITH EACH MANAGEMENT CONTRACT OR COMPENSATORY PLAN
OR ARRANGEMENT REQUIRED TO BE FILED IDENTIFIED.
See paragraph (c) below.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed by the registrant during
the quarter ended December 31, 1998.
(c) EXHIBIT LISTING.
Certain exhibits have been previously filed with the
Commission and are incorporated herein by reference.
ONHEALTH NETWORK COMPANY
EXHIBIT INDEX
FISCAL YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ------------- -------
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation of the Company,
incorporated herein by reference to Exhibit No. 3.1 to the Company's
Registration Statement on Form S-3, No. 333-69989. 3.2 Bylaws of the
Company, incorporated herein by reference to Exhibit No. 3.2 to the
Company's Registration Statement on Form S-3, No. 333-69989.
30
<PAGE>
4.1 Form of Stock Certificate, incorporated herein by reference to Exhibit
No. 4.1 to the Company's Registration Statement on Form S-1, No.
33-67064
4.2 Statement of Registration Rights - Preferred Stock, incorporated
herein by reference to Exhibit No. 4.2 to the Company's Registration
Statement on Form S-1, No. 33-67064
4.3 Warrant Agreement, dated as of July 17, 1992, between the Company and
Medical Innovation Fund, incorporated herein by reference to Exhibit
No. 4.3 to the Company's Registration Statement on Form S-1, No.
33-67064
4.4 Warrant Agreement, dated as of November 30, 1992, between the Company
and Ronald Eibensteiner, incorporated herein by reference to Exhibit
No. 4.4 to the Company's Registration Statement on Form S-1, No.
33-67064
4.5 Warrant Agreement, dated as of December 20, 1992, between the Company
and Wayne Mills, incorporated herein by reference to Exhibit No. 4.5
to the Company's Registration Statement on Form S-1, No. 33-67064.
4.7 Registration Rights Agreement, dated January 29, 1999, among the
Company and certain investors named therein 51
10.1 License Agreement, dated April 24, 1991, among the Company, William
Morrow Company and Mayo Foundation for Medical Education and Research,
as amended, incorporated herein by reference to Exhibit No. 10.1 to
the 1993 S-1
10.2 Electronic Publishing License, Development and Marketing Agreement,
dated April 28, 1993, between the Company and Mayo Foundation for
Medical Education and Research, incorporated herein by reference to
Exhibit No. 10.4 to the 1993 S-1
10.3 401(k) Savings and Investment Plan, incorporated herein by reference
to Exhibit No. 10.9 to Amendment No. 1 to the 1993 S-1
10.4 1997 Stock Option Plan, as amended, 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 on May 6, 1998
with the Securities and Exchange Commission file No. 0000-22212
10.5 IVI Publishing, Inc. Director Stock Option Plan, as amended,
incorporated herein by reference to Exhibit No. 10.12 to the Company's
Registration Statement on Form S-1, No. 33-76496
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.,
incorporated herein by reference to Exhibit No. 10.19 to the 1994 S-1
10.7 Lease Agreement, dated March 30, 1994, between the Company and
Ryan/Wilson Limited Partnership, incorporated herein by reference to
Exhibit No. 10.25 to the 1994 S-1
10.8 License, Development and Marketing Agreement, dated September 28,
1994, between the Company and Time Life, Inc., incorporated by
reference to Exhibit No. 10.25 to the Company's Form 10-K for the year
ended December 31, 1994*
10.9 1994 License, Development and Marketing Agreement, dated September 27,
1994, between the Company and Mayo Foundation for Medical Education
and Research, incorporated by reference to Exhibit No. 10.26 to the
Company's Form 10-K for the year ended December 31, 1994*
10.10 License Agreement, dated November 10, 1994, between the Company and
Massachusetts Medical Society, incorporated by reference to Exhibit
No. 10.27 to the Company's Form 10-K for the year ended December 31,
1994*
10.11 Sublicense Agreement, dated December 31, 1994, between the Company
and Georg von Holtzbrinck GmbH & Co., incorporated by reference to
Exhibit No. 10.28 to the Company's Form 10-K for the year ended
December 31, 1994*
10.12 Agreement between America's Health Network, Inc. and the Company,
dated May 25, 1995, incorporated by reference to Exhibit 10.14 to the
Company's Form 10-K for the year ended December 31, 1995*
10.13 Amendment No. 2 to License Agreement among William Morrow Company,
Mayo Foundation for Medical Education and Research and the Company,
dated December 29, 1995, incorporated by reference to Exhibit 10.18 to
the Company's Form 10-K for the year ended December 31, 1995*
31
<PAGE>
10.14 Financial Advisor and Consulting Agreement with Frazier & Company LP,
dated July 14, 1994, as amended by a letter agreement, dated June 28,
1995, incorporated by reference to Exhibit 10.19 to the Company's Form
10-K for the year ended December 31, 1995**
10.15 First Amendment dated June, 27, 1994 and Second Amendment dated
October 10, 1995 to Lease Agreement between the Company and
Ryan/Wilson Limited Partnership, incorporated by reference to Exhibit
10.20 to the Company's Form 10-K for the year ended December 31, 1995
10.16 Agreement dated April 1995 among Ryan/Wilson Limited Partnership,
Wilson Learning Corporation the Company regarding a certain lease,
incorporated by reference to Exhibit 10.21 to the Company's Form 10-K
for the year ended December 31, 1995
10.17 Distribution on Consignment Agreement, dated February 29, 1996
between the Company and Davidson & Associates, Inc. , incorporated by
reference to Exhibit 10.22 to the Company's Form 10-K for the year
ended December 31, 1995*
10.22 Sublease Agreement, dated September 17, 1996, between the Company and
Reality Interactive, Inc. for the fourth floor portion of the Main
Lease between the Company and Ryan/Wilson Limited Partnership, Wilson
Learning Corporation, incorporated herein by reference to Exhibit
10.27 to the Company's Form 10-K for the year ended December 31, 1996
10.24 Settlement Agreement and Mutual Release dated September 12, 1997
between the Company and Mayo Foundation for Medical Education and
Research, incorporated herein by reference to Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended September 30, 1997
10.25 Sublicense Agreement dated September 12, 1997 between the Company and
Mayo Foundation for Medical Education and Research, incorporated
herein by reference to Exhibit 10.2 to the Company's Form 10-Q for the
quarter ended September 30, 1997
10.26 Separation Agreement and Release of Claims dated January 26, 1998
between the Company and Joy A. Solomon**
10.27 Letter Agreement dated November 9, 1997 between the Company and
Robert Goodman, incorporated by reference to the Company's Form 10-K
for the year ended December 31, 1997**
10.28 Subscription Agreement, dated January 29, 1999, among the Company and
certain investors named therein 65
23.1 Consent of Ernst & Young LLP, Independent Auditors 80
27 Financial Data Schedule (electronic version only) 81
- -------------
<FN>
** Management Agreement or Compensatory Plan or Arrangement
</FN>
</TABLE>
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 31st day of March, 1999.
ONHEALTH NETWORK COMPANY
By: /s/ ROBERT N. GOODMAN
---------------------------------------
Robert N. Goodman
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant, in
the capacities and dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
----------------- ------- -------
<S> <C> <C>
/S/ ROBERT N. GOODMAN President, Chief Executive Officer and March 31, 1999
- ----------------------- Director (Principal Executive Officer)
Robert N. Goodman
/S/ MICHAEL D. CONWAY Chief Financial Officer, Controller, March 31, 1999
- ----------------------- Secretary and Principal Financial Officer
Michael D. Conway
/S/ MICHAEL A. BROCHU Chairman of the Board March 31, 1999
- -----------------------
Michael A. Brochu
/S/ ANN KIRSHNER Director March 31, 1999
- -----------------------
Ann Kirshner
/S/ RAM SHRIRAM Director March 31, 1999
- -----------------------
Ram Shriram
/S/ RICK THOMPSON Director March 31, 1999
- ----------------------
Rick Thompson
</TABLE>
33
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Shareholders
OnHealth Network Company
We have audited the accompanying balance sheets of OnHealth Network Company
as of December 31, 1998 and 1997 and the related statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of OnHealth Network Company at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
Seattle, Washington
March 15, 1999
F-1
34
<PAGE>
ONHEALTH NETWORK COMPANY
BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1997
--------------- --------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 2,119 $ 2,488
Accounts receivable, net of allowances of $256 (1998) and
$1,011 (1997) 509 337
Inventories - 150
Other current assets 409 332
--------------- --------------
Total current assets 3,037 3,307
Furniture and equipment:
Computers and software 1,218 2,856
Office equipment 291 1,403
--------------- --------------
1,509 4,259
Accumulated depreciation (774) (2,989)
--------------- --------------
Furniture and equipment, net 735 1,270
Other non-current assets 122 -
=============== ==============
Total assets $ 3,894 $ 4,577
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,526 $ 1,919
Other accrued expenses 2,669 2,640
--------------- --------------
Total current liabilities 4,195 4,559
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, 29,000; issued
and outstanding, 12,800 (1998) and 10,106 (1997) 132 101
Additional paid-in-capital 89,082 78,493
Accumulated deficit (89,515) (78,576)
--------------- --------------
Total shareholders' equity (deficit) (301) 18
--------------- --------------
Total liabilities and shareholders' equity $ 3,894 $ 4,577
=============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-2
35
<PAGE>
ONHEALTH NETWORK COMPANY
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Net revenue $ 1,522 $ 3,761 $ 9,470
Cost of revenue 767 2,541 5,076
--------------- --------------- ---------------
Gross margin 755 1,220 4,394
Operating expenses:
Product development 3,744 4,243 5,651
Sales and marketing 5,626 1,347 2,705
General and administrative 2,404 6,892 6,364
--------------- --------------- ---------------
Total operating expenses 11,774 12,482 14,720
--------------- --------------- ---------------
Loss from operations (11,019) (11,262) (10,326)
Interest income (expense) 84 (158) 169
Other income (expense) (4) 473 -
--------------- --------------- ---------------
Total interest and other income and expense 80 315 169
--------------- --------------- ---------------
Net loss (10,939) (10,947) (10,157)
Preferred stock dividends (103) (100) (119)
Preferred stock accretion (702) (43) (60)
Preferred stock deemed dividend (220) (2,875) -
=============== =============== ===============
Net loss applicable to common shareholders $ (11,964) $ (13,965) $ (10,336)
=============== =============== ===============
Net loss per common share-
Basic and diluted $ (1.12) $ (1.73) $ (1.36)
=============== =============== ===============
Weighted average number of common shares
outstanding 10,680 8,056 7,580
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-3
36
<PAGE>
ONHEALTH NETWORK COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-In Accumulated Shareholders'
Shares Par Value Capital Deficit Equity
------------- -------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 7,524 $ 75 $ 70,277 $ (57,472) $ 12,880
Issuance of common stock:
Exercise of options 88 1 355 - 356
Dividends on convertible
redeemable preferred stock
($0.06 per share) - - (119) - (119)
Preferred stock accretion - - (60) (60)
Net loss - - - (10,157) (10,157)
------------- -------------- -------------- --------------- ---------------
Balance at December 31, 1996 7,612 76 70,453 (67,629) 2,900
Issuance of common stock:
Exercise of options 59 1 97 - 98
Lawsuit settlement 175 2 431 - 433
Return of common stock per
Mayo agreement (490) (5) 5 - -
Preferred stock conversion to
common 1,000 10 1,938 - 1,948
Dividends on convertible
Redeemable preferred stock
($0.06 per share) - - (100) - (100)
Preferred stock accretion - - (43) - (43)
Convertible subordinated debenture
conversion to common 1,750 17 5,712 - 5,729
Net loss - - - (10,947) (10,947)
------------- -------------- -------------- --------------- ---------------
Balance at December 31, 1997 10,106 101 78,493 (78,576) 18
Issuance of common stock:
Private placements 1,543 15 5,675 - 5,690
Exercise of options 371 4 1,064 - 1,068
Services 47 4 361 365
Discount on sale of convertible
redeemable preferred stock - - 702 - 702
Preferred stock conversion to
Common stock 733 8 3,622 - 3,630
Cash dividends on convertible
redeemable preferred stock
($0.05 per share) - - (3) - (3)
Non-cash dividends -
preferred stock - - (100) - (100)
Accretion of discount on
preferred stock - - (702) - (702)
Preferred stock deemed dividend - - (220) - (220)
Issuance of stock options and
warrants for services - - 190 - 190
Net loss - - - (10,939) (10,939)
============= ============== ============== =============== ===============
Balance at December 31, 1998 12,800 $ 132 $ 89,082 $ (89,515) $ (301)
============= ============== ============== =============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-4
37
<PAGE>
ONHEALTH NETWORK COMPANY
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------
1998 1997 1996
-------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (10,939) $ (10,947) $ (10,157)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation and amortization 722 1,252 1,409
Interest expense associated with debenture
conversion - 2,229 -
(Gain) loss on disposition of furniture
and equipment 285 711 (3)
Provision for (recoveries of) doubtful
accounts and returns (755) 2,336 1,675
Amortization of warrants issued for services 8 - -
Compensation from stock grants 130 - -
Common stock issued as litigation
settlement - 433 -
Common stock issued for services 365 - -
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 583 1,461 (2,601)
Decrease in inventories 150 5 666
(Increase) decrease in other current assets (25) 253 (139)
(Increase) decrease in other non-current
assets (122) 1,885 (585)
Increase (decrease) in accounts payable (393) (1,287) 843
Increase in other accrued expenses 29 760 636
-------------- --------------- ---------------
Net cash used in operating activities (9,962) (909) (8,256)
Cash flows from investing activities:
Proceeds from disposition of furniture and
fixtures 217 61 510
Capital expenditures (689) (104) (288)
-------------- --------------- ---------------
Net cash provided by (used in) investing activities (472) (43) 222
Cash flows from financing activities:
Proceeds from issuance of convertible
redeemable preferred stock 5,000 - -
Proceeds from issuance of convertible
subordinated debentures - - 3,500
Proceeds from issuance of common stock:
Private placements 5,690 - -
Exercise of options 1,068 98 356
Redemption of preferred stock (1,690) - -
Preferred stock dividends paid (3) (120) (119)
-------------- --------------- ---------------
Net cash provided by (used in) financing activities 10,065 (22) 3,737
-------------- --------------- ---------------
Net decrease in cash and cash equivalents (369) (974) (4,297)
Cash and cash equivalents at beginning of year 2,488 3,462 7,759
============== =============== ===============
Cash and cash equivalents at end of year $ 2,119 $ 2,488 $ 3,462
============== =============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements
F-5
38
<PAGE>
ONHEALTH NETWORK COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
OnHealth Network Company, formerly known as IVI Publishing, Inc., (the
"Company"), is engaged in a single business consisting of electronic publishing
of health and medical information in interactive multimedia formats.
USE OF ESTIMATES
The financial statements have been prepared in conformity with generally
accepted accounting principles, which require management to make estimates and
assumptions that affect the amounts and disclosures reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments of the Company consist of cash and cash equivalents,
accounts receivable, other current assets, accounts payable and other accrued
expenses. The Company's other financial instruments generally approximate their
fair values at December 31, 1998 and 1997 based on the short-term nature of
these instruments.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents. At December 31,
1998 and 1997, cash and cash equivalents consisted principally of United States
Government obligations for which the carrying amount approximates fair value.
INVENTORIES
All inventories are stated at the lower of cost (first-in, first-out method) or
market and consist of packaging supplies and finished goods.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost and are depreciated using the
straight-line method over the shorter of the estimated useful lives of the
respective assets, generally five to seven years.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company is potentially subject to a concentration of credit risk from its
trade accounts, which are not collateralized. The Company performs periodic
credit reviews of its customers and maintains reserves for potential losses for
uncollectible accounts. Such losses have historically been within management's
expectations.
Three customers represent 40%, 16% and 13% of net revenue for the year ended
December 31, 1998; one customer represents 12% of net revenue for the year ended
December 31, 1997; and three customers represent 15%, 21%, and 11% of net
revenue in 1996. The revenue recorded from the customer which represents 40% of
the net revenue in 1998 was the result of a $603,000 payment received from the
customer related to minimum sales requirements form a terminated CD-ROM
distribution agreement. At December 31, 1998, two customers comprised 36% and
20% of outstanding accounts receivable. Two customers represented 77% and 27% of
accounts receivable at December 31, 1997.
F-6
39
<PAGE>
REVENUE RECOGNITION
The Company's revenue consists of fees for online services, product sales and
licensing revenue, contract development revenue, and fees relating to the
licensing of its content for use on cable television.
Online revenue is generated through the sale of advertising and sponsorship of
the Company's onhealth.com web site. Advertising and sponsorship revenue is
earned based upon the number of impressions delivered.
Product sales and licensing revenue consists of retail distribution sales,
direct mail sales, and product sales and royalties on licenses to original
equipment manufacturers (OEM's). The revenue is recognized upon shipment of the
product or in accordance with the licensing agreements. An allowance for return
is recorded at the time revenue is recognized.
Contract development revenue is generated through the use of the Company's
personnel and facilities for the creation of custom multimedia products. The
contract revenue is recognized on a percentage-of-completion basis or at a
specific hourly rate, depending on the terms of the contract.
Revenue relating to the licensing of the Company's health and medical content
for use on cable television channels is recognized when payments are received.
The Company recognized revenue under its cable television agreement with
America's Health Network ("AHN") during 1997 and 1996. (See Note 12).
Revenues for each of the three years ended December 31, 1998, 1997 and 1996 are
as follows (in thousands):
1998 1997 1996
----------- ------------ -----------
Online $ 388 $ 58 $ 1,000
Contract development and other 380 1,220 1,346
Product sales and licensing 754 1,990 5,152
Cable television - 493 1,972
----------- ------------ -----------
Net revenues $ 1,522 $ 3,761 $ 9,470
=========== ============ ===========
PRODUCT DEVELOPMENT COSTS
Product development costs consist principally of payroll and related expenses
for development, editorial, systems and telecommunications operations personnel
and consultants, systems and telecommunications infrastructure and costs of
acquired content. To date, all product development costs have been expensed as
incurred.
ADVERTISING COSTS
Advertising costs are expensed as they are incurred. Advertising costs in
1998, 1997, and 1996 were $3,409,000, $190,000 and $556,000, respectively.
INCOME TAXES
Income taxes are provided based on earnings reported for financial statement
purposes. Deferred income taxes are provided for temporary differences between
financial reporting and income tax basis of assets and liabilities under the
liability method.
F-7
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<PAGE>
STOCK BASED COMPENSATION
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," the Company is required to disclose
the effects on the net loss and per share data as if the Company had elected to
use the fair value approach to account for all its employee stock-based
compensation plans. The Company follows the disclosure-only provisions SFAS No.
123 but applies Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees" (APB 25) and related interpretations in accounting for its
employee stock options. Under APB 25, when the exercise price of employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recorded.
LOSS PER COMMON SHARE
Basic earnings per share ("EPS") excludes any dilutive effects of common stock
equivalents - options, warrants and convertible securities - and is computed by
dividing income available to common shareholders by the weighted-average number
of common shares outstanding during the period. Diluted EPS is computed by
dividing income available to common shareholders by the weighted-average number
of common stock equivalent shares outstanding.
The effects of common stock equivalents are excluded from the computation for
all periods presented as their effects are anti-dilutive.
RECLASSIFICATIONS
Certain reclassifications have been made for consistent financial statement
presentation.
IMPACT OF RECENTLY ISSUED OR ADOPTED ACCOUNTING STANDARDS
SFAS No. 130, "Reporting Comprehensive Income," was issued in June 1997. This
Statement, adopted by the Company on January 1, 1998, establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. This statement does not affect the results of
operations or financial position of the Company. As of December 31, 1998, 1997
and 1996, the company had no items that would have been classified as other
comprehensive income.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," was issued in June 1997 and redefined how operating segments are
determined. SFAS No. 131 requires disclosure of certain financial and
descriptive information about a company's operating segments. This statement was
adopted by the Company on January 1, 1998. Provisions of this statement require
annual disclosure in the year of adoption and interim reporting for periods
thereafter. This statement does not affect the results of operations or
financial position of the Company. The company operates in one principal
business segment across domestic markets.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
was issued in June 1998 and establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The statement is effective for all
fiscal years beginning after June 15, 1999. The impact of the adoption of the
provisions of this statement on the results of operations or the financial
position of the Company has not yet been determined.
In March 1998, the Accounting Standards Executive Committee issued Statement of
Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 requires all costs related to
the development of internal use software other than those incurred during the
application development stage to be expensed as incurred. Costs incurred during
the application development stage are required to be capitalized and amortized
over the estimated useful life of the software. SOP 98-1 is effective for the
Company's fiscal year ending December 31, 1999. Adoption is not expected to have
a material effect on the Company's financial statements as the Company's
policies are substantially in compliance with SOP 98-1.
F-8
41
<PAGE>
NOTE 2. LIQUIDITY
The Company has experienced recurring losses from operations and has generated
an accumulated deficit from inception to December 31, 1998 of approximately
$89,515,000. At December 31, 1998, the Company has a working capital deficiency
of $1,158,000 and total shareholders' deficit of $301,000. In January 1999, the
Company completed a $14.3 million issuance of the Company's common stock (see
"Note 19. Subsequent Events"). The Company believes that its cash and cash
equivalents, including the $14.3 million received in the January 1999 private
placement, will be sufficient to fund its operations through December 31, 1999.
Operations generated a negative cash flow during 1996, 1997 and 1998 and the
Company expects a significant use of cash in 1999 as it markets and expands the
onhealth.com web site. Any material unforeseen increase in expenses or
reductions in projected revenue will likely require the Company to seek
additional debt or equity financing. If additional cash is required, the Company
may need to reduce its 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.
NOTE 3. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS
December 31,
--------------------------------
1998 1997
--------------- ---------------
(In thousands)
Furniture and equipment:
Computer hardware $ 1,032 $ 2,160
Software 186 455
Furniture & fixtures 220 1,403
Equipment - 241
Leasehold improvements 71 -
--------------- ---------------
1,509 4,259
Less accumulated depreciation (774) (2,989)
=============== ===============
Total $ 735 $ 1,270
=============== ===============
Other accrued expenses:
Litigation loss $ 677 $ 961
Advertising 609 -
Severance 90 610
Royalties 338 501
Rent obligation 53 252
Accrued wages and benefits 175 4
Payroll taxes 358 2
Other 369 310
--------------- ---------------
Total $ 2,669 $ 2,640
=============== ===============
NOTE 4. COMMON STOCK
On October 30, 1998, the Company completed a $3,690,000 private placement
involving the issuance of 1,000,898 shares of common stock at $3.69 per share.
On December 14, 1998, the Company completed a $2,000,000 private placement
involving the issuance of 542,419 shares of common stock at $3.69 per share. The
shares of common stock issued on October 30, 1998 and December 14, 1998 were
issued to two accredited investors. The terms of these issuances potentially
obligated the Company to issue additional shares of common stock (depending on
the future performance of the Company's common stock (the "Reset Provisions")).
Such Reset Provisions only relate to those shares purchased by the two investors
on October 30, 1998 and December 14, 1998. As of March 12, 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 the Company's outstanding Common stock.
F-9
42
<PAGE>
NOTE 5. CONVERTIBLE SUBORDINATED DEBENTURES
In November 1996, the Company issued $3,500,000 of 9% Convertible Subordinated
Debentures ($3,325,000 net of debt issue costs). These debentures were converted
into Common Stock on October 28, 1997 at a rate of $2.00 per share, resulting in
the issuance of 1,750,000 shares of Common Stock. The original conversion price
was $3.25 per share. The excess of the fair value of the Common Stock issued
over the fair value of the shares issuable pursuant to the original conversion
terms was $2,229,000 and was recorded as an other expense at the date of
conversion.
NOTE 6. CONVERTIBLE REDEEMABLE PREFERRED STOCK
In April 1998, the Company issued 5,000 shares of the Company's 5% Series B
Convertible Redeemable Preferred Stock (the "Series B Preferred Stock") for
$5,000,000. The Series B Preferred Stock was convertible at various increasing
discount rates to the market value of the common stock. This discount aggregated
$702,000 and was recorded as preferred stock accretion over the various periods
of conversion. During 1998, 3,630 shares of the Series B Preferred Stock were
converted into 732,605 shares of the Company's common stock and 1,470 of such
preferred shares were redeemed. The excess of the redemption price over the
carrying value of the preferred shares redeemed was $220,000 and was recorded as
a preferred stock deemed dividend. The preferred stock accretion and deemed
dividend increased the net loss applicable to common shareholders in the
calculation of the 1998 net loss per share as shown in the statements of
operations.
In 1995, the Company issued 2,000 shares of 6% Series A Convertible Redeemable
Preferred Stock (the "6% Series A Preferred Stock")for $2,000,000 ($1,845,000
net of brokerage expenses) to Davidson & Associates, Inc., ("Davidson") a
distributor of multimedia educational and entertainment software. The 6% Series
A Preferred Stock was converted into 1,000,000 shares of the Company's common
stock on October 30, 1997, at a rate of $2.00 per share. The original conversion
price was $11.21 per share. The excess of the fair value of the Common Stock
issued over the fair value of the shares issuable pursuant to the original
conversion terms was $2,875,000 and was recorded as a deemed preferred dividend
at the date of conversion. This deemed dividend increased the net loss
applicable to common shareholders in the calculation of the 1997 net loss per
share as shown in the statements of operations.
NOTE 7. STOCK OPTIONS AND WARRANTS
In December 1997, the Company's Board of Directors adopted the 1997 Stock Option
Plan ("1997 Plan") for its employees, directors and consultants. The Plan, which
is administered by the Board of Directors, permits the Company to grant stock
options for the purchase of Common Stock. The purpose of the 1997 Plan is to
promote the success of the Company by facilitating the employment and retention
of competent personnel and by furnishing incentive to directors, officers and
employees of the Company and consultants and advisors to the Company, upon whose
efforts the success of the Company will depend to a large degree. Incentive
stock options ("ISOs") and non-qualified stock options may be granted pursuant
to the 1997 Plan.
The Company also has a 1991 Stock Option Plan (the "1991 Plan") for its
employees. The 1991 Plan, which is administered by the Board of Directors,
permits the Company to grant stock options for the purchase of Common Stock. The
1991 Plan provides for the granting of ISOs and non-qualified stock options. In
the case of ISO's, the exercise price must be at least equal to the fair market
value per share of the Common Stock on the date of grant. In the case of
non-qualified stock options, the exercise price must be at least 85% of the fair
market value per share on the date of grant. Options generally expire nine to
ten years from the date of grant.
In addition, the Company has a Director Stock Option Plan pursuant to which
current non-employee directors are eligible to receive options to purchase
shares of the Company's common stock at the market price on the date of grant.
F-10
43
<PAGE>
The number of shares of the Company's common stock that have been reserved for
issuance for such plans total 2,378,000.
Activity in the 1991 Plan, 1997 Plan and Director Stock Option Plan is as
follows:
<TABLE>
<CAPTION>
Remaining
Number of Weighted-
Shares Number Average Price
Reserved of Shares Per Share
------------ ----------- -------------
------------ ----------- -------------
<S> <C> <C> <C>
TOTAL OUTSTANDING AT DECEMBER 31, 1995 489,000 907,000 $ 11.53
Options Reserved 200,000 -
Options Granted (582,000) 582,000 4.98
Options Exercised - (88,000 4.06
Options Canceled 461,000 (461,000 13.24
------------ -----------
TOTAL OUTSTANDING AT DECEMBER 31, 1996 568,000 940,000 7.10
Options Reserved 1,750,000 -
Options Granted (684,000) 684,000 2.85
Options Exercised - (59,000) 1.64
Options Canceled 474,000 (474,000) 9.86
------------ -----------
TOTAL OUTSTANDING AT DECEMBER 31, 1997 2,108,000 1,091,000 3.53
Options Granted (889,000) 889,000 5.05
Options Exercised - (371,000) 2.88
Options Canceled 393,000 (393,000) 3.84
------------ -----------
TOTAL OUTSTANDING AT DECEMBER 31, 1998 1,162,000 1,216,000 $ 4.74
============ ===========
</TABLE>
At December 31, 1998, 1997 and 1996, options to purchase 237,000, 325,000, and
602,000 shares were exercisable, respectively.
The following table summarizes information about the stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- -----------------------------
Weighted- Weighted
Average Weighted Average
Range of Number Remaining Average Number Exercise
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Price
- ----------------- -------------- ------------------ --------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
$2.31 - 2.50 150,000 9 years $2.31 50,000 $2.31
2.51 - 3.00 75,000 8 years 2.82 46,000 2.85
3.01 - 3.50 190,000 8 years 3.32 71,000 3.36
3.51 - 4.00 205,000 10 years 3.75 - -
4.01 - 5.50 77,000 10 years 4.36 - -
5.51 - 6.00 30,000 4 years 5.75 30,000 5.75
6.01 - 6.50 429,000 9 years 6.25 - -
6.51 - 26.00 60,000 7 years 10.29 40,000 11.75
--------------- --------------- --------------- -------------- ------------
$2.31 - 26.00 1,216,000 9 years $3.25 237,000 $4.76
</TABLE>
From time to time, the Company's Board of Directors may grant stock options
outside of the existing stock option plans. In 1997, the Board of Directors
adopted the 1997-1998 New Hire Stock Option Plan. This plan provides for the
granting of 1,213,500 non-qualified stock options to newly hired employees in
late 1997 through early 1998. In 1997, the Company granted options to purchase
522,500 shares at prices ranging from $2.31 to $2.50 per share. These options
expire in 2007. In 1998, the Company granted options to purchase 996,000 shares
at prices ranging from $2.75 to $7.88 per share. These options expire in 2008.
F-11
44
<PAGE>
The options granted under this plan had a weighted average price per share of
$3.33. Of the options granted in 1997 and 1998, 40,000 and 265,000 stock
options, respectively, were canceled in 1998 and none were exercised.
The pro forma information regarding net loss and net loss per share required by
SFAS NO. 123 has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options has been estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1998, 1997 and 1996:
1998 1997 1996
------------- ----------- ------------
Risk-free interest rate 5.00% 5.50% 6.21%
Dividend yield 0% 0% 0%
Volatility factor .817 .760 .726
Weighted-average expected life 5 years 5 years 5 years
The weighted-average fair value of options granted during 1998, 1997 and 1996
was $2.97, $1.74, and $2.99, respectively. The Black-Scholes option valuation
model was developed for use in estimating the fair value of traded options that
have no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions including
the expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- ------------- ------------
(In thousands, except per share data)
<S> <C> <C> <C>
Net loss applicable to common shareholders - as reported $ (11,964) $ (13,965) $ (10,336)
Net loss applicable to common shareholders - pro forma (12,970) (14,294) (10,562)
Basic and diluted net loss per share - as reported $(1.12) $(1.73) $(1.36)
Basic and diluted net loss per common share pro forma $(1.21) $(1.77) $(1.39)
</TABLE>
The pro forma effect on the net loss for 1998, 1997, and 1996 is not
representative of the pro forma effect on the net loss in future years because
it does not take into consideration pro forma compensation expense related to
grants made prior to 1995.
As of December 31, 1998 and 1997 the Company had warrants outstanding to
purchase 678,577 and 547,260 shares of Common Stock at prices ranging from $3.25
per share to $30.94 per share. Warrants outstanding at December 31, 1998 expire
from 1999 through 2003. The warrants were generally issued to underwriters and
investment bankers for services performed in connection with several of the
Company's financing transactions.
Common stock reserved for future issuance at December 31, 1998 is as follows:
1991, 1997 and Director Stock Option Plans 2,378,000
1997 - 1998 New Hire Plan 1,213,500
Warrants 678,577
=============
4,270,077
=============
F-12
45
<PAGE>
NOTE 8. LOSS PER COMMON SHARE
The components of basic and diluted loss per common share are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- --------------- -------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Net loss applicable to common shareholders
(numerator) $ (11,964) $ (13,965) $ (10,366)
============== =============== =============
Weighted average common shares outstanding
(denominator) 10,680 8,056 7,580
============== =============== =============
Loss per share:
Basic and diluted $ (1.12) $ (1.73) $ (1.36)
============== =============== =============
</TABLE>
NOTE 9. COMMITMENTS AND CONTINGENCIES
The Company leases office space under agreements accounted for as operating
leases. The agreements expire at various times through 2003. Gross rent expense,
including charges for monthly operating costs, was $522,000, $881,000 and
$1,433,000 for 1998, 1997 and 1996, respectively. The Company has subleased
certain facilities to various tenants under non-cancelable operating leases
expiring in 1999. The Company also has several marketing agreements that require
minimum payments to be made. Scheduled minimum lease commitments and annual
marketing payments are as follows:
Marketing
Lease Payments
-------------------- -----------------
(In thousands)
1999 $ 176 $ 1,885
2000 134 100
2001 142 50
2002 151 -
2003 52 -
-------------------- ------------------
655 2,035
Less sublease rental
income (162) -
-------------------- ------------------
Total $ 493 $ 2,035
==================== ==================
F-13
46
<PAGE>
NOTE 10. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
(In thousands) Year Ended December 31, 1998
-------------------------------------------------
1998 1997 1996
------------- -------------- --------------
<S> <C> <C> <C>
Cash paid during the years for:
Interest $ - $ 298 $ -
Income taxes 7 5 10
Non-cash investing and financing transactions:
Conversion of preferred stock to common stock 3,630 1,948 -
Conversion of convertible subordinated debentures - 5,729 -
Preferred stock/warrant discount 702 - -
Preferred stock/warrant discount accretion (702) (43) (60)
Preferred stock dividends 100 - -
Stock options and warrants issued for services 190 - -
Preferred stock deemed dividend - 2,875 -
Common stock issued as litigation settlement - 433 -
</TABLE>
NOTE 11. INCOME TAXES
At December 31, 1997, the Company has net operating loss carryforwards of
$81,910,000 for income tax purposes and unused research and development credits
of $339,000 that expire at various times through 2013. These carryforwards are
subject to the limitations of Internal Revenue Code Section 382. This section
provides limitations on the availability of net operating losses to offset
current taxable income if significant ownership changes have occurred for
federal tax purposes. For financial reporting purposes, a valuation allowance
has been recognized to completely reserve for the deferred tax assets related to
those carryforwards. The reserve has been established because of the uncertainty
of future taxable income, which is necessary to realize the benefits of the net
operating loss carryforwards.
Components of the Company's deferred tax assets and liabilities are as follows:
December 31,
----------------------------------------
1998 1997
------------------- ------------------
------------------- ------------------
DEFERRED TAX ASSETS:
Accrued expenses and allowances $ 1,223,000 $ 2,788,000
Research and development credits 339,000 326,000
Net operating loss carryforwards 28,669,000 25,880,000
------------------- ------------------
30,231,000 28,994,000
DEFERRED TAX LIABILITIES:
Depreciation 15,000 16,000
------------------- ------------------
15,000 16,000
------------------- ------------------
------------------- ------------------
Net deferred tax assets
before valuation allowance 30,216,000 28,978,000
Less valuation allowance (30,216,000) (28,978,000)
=================== ==================
NET DEFERRED TAX ASSETS $ - $ -
=================== ==================
NOTE 12. INVESTMENT IN AMERICA'S HEALTH NETWORK
In March 1994, the Company acquired an equity position in America's Health
Network ("AHN"), a health information cable television network that combines
live programming with medical consumer product sales. The network launched on
March 25, 1996.
In the first quarter of 1994, the Company expensed its entire investment of
$2,000,000 along with the related investment banking fees of approximately
$263,000. This approach to the investment was made on the basis that the
F-14
47
<PAGE>
invested amounts are not assured of recoverability through future revenue
streams. As of December 31, 1998 and 1997, the Company's underlying equity in
its investment in AHN was approximately $100,000 and $500,000 based on
approximately 1% and 4% of AHN's net assets, respectively. However, because the
Company expensed its investment, its equity in AHN's net assets is not
recognized on the balance sheet.
In May 1995, the Company entered into a content and royalty agreement with AHN.
Under the agreement the Company licensed its multimedia content to AHN starting
in May 1995 and was to receive minimum licensing royalties over the life of the
agreement. This revenue was being recognized evenly over the expected life of
the contract. Due to the gradual increase in actual payments versus the
straight-line revenue recognition policy, a receivable was recorded for the
difference between the revenue recognized and the cash received during the early
years of the contract. In June 1997, as a result of the Company not receiving
its quarterly payment, the outstanding AHN receivable was fully reserved. Due to
the uncertainty of future payments, the Company began recognizing revenue on a
cash basis. In December 1997 and in early 1998, AHN made payments which were
applied against the receivable. At December 31, 1998, the Company has a fully
reserved receivable of $153,000 and AHN had failed to make three scheduled
payments totaling $1,688,000. The Company recorded $0, $493,000 and $1,972,000
in license royalty revenue in 1998, 1997 and 1996, respectively.
NOTE 13. AGREEMENT WITH AT&T
In October 1995, the Company entered into a four year agreement with AT&T
whereby the Company agreed to provide content for AT&T's HealthSite, a division
of AT&T's Personal Online Service ("POS"), in exchange for guaranteed revenues.
In August 1996, AT&T discontinued the HealthSite, and subsequently discontinued
POS. The Company received the 1996 guaranteed revenue payment of $1,000,000 from
AT&T.
NOTE 14. BENEFIT PLAN
The Company has a defined contribution salary deferral plan covering
substantially all employees under Section 401(k) of the Internal Revenue Code.
The Plan allows eligible employees to make contributions up to the maximum
amount provided under the Code. The Company may also make a discretionary
contribution to the Plan. No such contributions have been made by the Company.
NOTE 15. MAYO AGREEMENT
In September 1997, the Company entered into an agreement with Mayo Foundation
("Mayo") which included a full transfer of ownership of the Company's O@sis web
site to Mayo and a new arrangement for revenues and cost sharing concerning
O@sis. Under the terms of the agreement, the Company received a $2,700,000 cash
payment, an additional $300,000 cash payment for hosting the web site for a
transition period, and the return of 490,000 shares of the Company's common
stock. Through the year 2001, the Company will receive a royalty from Mayo on
certain revenues generated by the Mayo Health O@sis site and certain other
non-O@sis Internet projects. In addition, Mayo was released from the Company's
"right of first offer" on Mayo health products produced for electronic media,
and Mayo assumed operating expenses incurred for the web site retroactive to
January 1, 1997 which were recorded as a reduction to product development
expenses. The Company recorded the $2,700,000 payment as other income and
recorded the $300,000 payment as contract development revenue during the third
and fourth quarters, respectively, of 1997.
NOTE 16. RELATED PARTY TRANSACTIONS
During 1998, 1997 and 1996, the Company subleased approximately 20,000 square
feet of its Eden Prairie office space to Reality Interactive, Inc. Reality
Interactive, Inc. and the Company share a common Board member. The lease was
terminated in 1998.
During 1996, two officers of the Company participated in the Company's debt
offering. The total amount of debt issued by the Company to these individuals
was $120,000. Additionally, three directors of the Company participated in the
debt offering, either individually or through affiliated organizations. The
total amount of debt issued by the Company to these individuals and
organizations was $550,000. On October 28, 1997, this debt was converted into
common stock at a rate of $2.00 per share (see "Note 5. Convertible Subordinated
Debentures").
F-16
48
<PAGE>
NOTE 17. LEGAL PROCEEDINGS
In February 1996, an action in the District Court of Hennepin County (Minnesota)
was brought by T. Randal Productions et al. against the Company and one current
and two former employees. The plaintiffs made various allegations, including
misappropriation of corporate opportunities and trade secrets by the Company and
its employees and sought award of monetary damages, exemplary damages and
royalties substantially in excess of $10.0 million. In November 1997, a jury
found that there was no joint venture between T. Randal and the company and/or
any of its employees but awarded T. Randal $480,000 plus interest for damages
sustained to its business. Plaintiffs moved for a new trial, amended findings
and for judgment notwithstanding the verdict. The jury verdict was upheld by the
trial court. The plaintiffs appealed this decision to the Minnesota Court of
Appeals. In March 1999, the Minnesota Court of Appeals affirmed the decision of
the trial court. 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. As of
December 31, 1998, the Company has accrued $480,000 plus estimated court costs.
NOTE 18. RELOCATION OF OPERATIONS
During early 1998, the Company relocated its primary operating facilities from
Minneapolis, Minnesota to Seattle, Washington. As a result, certain of the
Company's Minnesota leasehold improvements and computer and software equipment
having a carrying value of $721,000 were not transferable or were not utilized
in the Company's Seattle operations. In 1997, the Company had estimated and
recorded the related relocation expense of $721,000 as a General and
Administrative expense. In addition, in 1997 the Company recorded $252,000 and
$610,000 in general and administrative expenses related to lease termination
costs and severance for former officers and employees, respectively.
NOTE 19. SUBSEQUENT EVENTS
During January 1999, the Company completed a $14,278,000 private placement,
which resulted in the issuance of 2,596,000 shares of the Company's common stock
at $5.50 per share.
F-16
49
<PAGE>
ONHEALTH NETWORK COMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Additions
Charged to
(Recoveries
Balance at Credited to) Balance
Beginning Costs and at End
of Period Expenses Deductions of Period
--------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1998:
Allowance for doubtful accounts
receivable, promotional
allowances and sales returns $ 1,011 $ (755) (3) $ - (1) $ 256
Allowance for obsolete inventory 451 50 - (2) 501
=============== =============== ============= =============
$ 1,462 $ (705) - $ 757
=============== =============== ============= =============
Year Ended December 31, 1997:
Allowance for doubtful accounts
receivable, promotional
allowances and sales returns $ 277 $ 2,336 $ (1,602) (1) $ 1,011
Allowance for obsolete inventory 485 200 (234) (2) 451
--------------- --------------- ------------- -------------
$ 762 $ 2,536 $ (1,836) $ 1,462
=============== =============== ============= =============
Year Ended December 31, 1996:
Allowance for doubtful accounts
receivable, promotional
allowances and sales returns $ 753 $ 1,675 $ (2,151) (1) $ 277
Allowance for obsolete inventory 682 365 (562) (2) 485
=============== =============== ============= =============
$ 1,435 $ 2,040 $ (2,713) $ 762
=============== =============== ============= =============
- ------------------
<FN>
1) Deductions represent accounts receivable determined to be uncollectable and
therefore charged against the allowance account; accounts receivable
determined to be uncollectable due to return of product(s); and accounts
credited due to promotional and administrative allowance arrangements with
distributors.
2) Write-offs of inventory.
3) The $755 net credit to costs and expenses is primarily due to the 1998
recovery of an account previously written off.
</FN>
</TABLE>
S-1
50
<PAGE>
EXHIBIT 4.7
ANNEX I
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of January 29,
1999 (this "AGREEMENT"), is made by and between OnHealth Network Company, a
Washington corporation (the "COMPANY"), and the Investors set forth on the
signature page hereto (the "INVESTORS").
WITNESSETH:
WHEREAS, in connection with the Subscription Agreement, dated
as of January 29, 1999, between the Investors and the Company (the "SUBSCRIPTION
AGREEMENT"), the Company has agreed, upon the terms and subject to the
conditions of the Subscription Agreement, to issue and sell to the Investors
shares of Common Stock, $.01 par value (the "SHARES");
WHEREAS, to induce the Investors to execute and deliver the
Subscription Agreement, the Company has agreed to provide certain registration
rights under the Securities Act of 1933, as amended, and the rules and
regulations thereunder, or any similar successor statute (collectively, the
"SECURITIES ACT"), and applicable state securities laws with respect to the
Registrable Securities (as defined below) issuable to or for the account of the
Investors pursuant to the Subscription Agreement;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Investor hereby agree as follows:
1. DEFINITIONS.
(a) As used in this Agreement, the following terms shall have
the following meanings:
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Investor" or "Investors" means the Investor and the other
purchasers of Shares pursuant to the Subscription Agreement.
"Nasdaq" means the Nasdaq SmallCap Market.
"register," "registered," and "registration" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the Securities Act and pursuant to Rule 415 under
the Securities Act or any successor rule providing for offering securities on a
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continuous basis ("Rule 415"), and the declaration or ordering of effectiveness
of such Registration Statement by the United States Securities and Exchange
Commission (the "SEC").
"Registrable Securities" means the Shares.
"Registration Period" means the period from the Closing Date
to the earlier of (i) the date which is two years after the date of this
Agreement, (ii) the date on which each Investor may sell all of its Registrable
Securities without registration under the Securities Act pursuant to Rule 144,
without restriction on the manner of sale or the volume of securities which may
be sold in any period and without the requirement for the giving of any notice
to, or the making of any filing with, the SEC and (iii) the date on which the
Investors no longer beneficially own any Registrable Securities.
"Registration Statement" means a registration statement of the
Company under the Securities Act, including any amendment thereto.
"Rule 144" means Rule 144 promulgated under the Securities Act
or any other similar rule or regulation of the SEC that may at any time permit a
holder of any securities to sell securities of the Company to the public without
registration under the Securities Act.
"SEC Effective Date" means the date the Registration Statement
is first declared effective by the SEC.
"SEC Filing Date" means the date the Registration Statement is
first filed with the SEC pursuant to Section 2(a).
(b) Capitalized terms defined in the introductory paragraph or
the recitals to this Agreement shall have the respective meanings therein
provided. Capitalized terms used herein and not otherwise defined herein shall
have the respective meanings set forth in the Subscription Agreement.
2. REGISTRATION.
(A) MANDATORY REGISTRATION. The Company shall prepare, and on
or prior to March 1, 1999, file with the SEC a Registration Statement on Form
S-3, or, if Form S-3 is not available, Form S-1 or S-2, which, on the date of
filing with the SEC, covers the resale by the Investor the Shares sold pursuant
to the Subscription Agreement.
(B) CERTAIN OFFERINGS. If any offering pursuant to a
Registration Statement pursuant to Section 2(a) hereof involves an underwritten
offering, Investors who hold a majority in interest of the Registrable
Securities subject to such underwritten offering shall have the right to select
one legal counsel and an investment banker or bankers and manager or managers to
administer the offering, which investment banker or bankers or manager or
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managers shall be reasonably satisfactory to the Company. The Investors who hold
the Registrable Securities to be included in such underwriting shall pay all
underwriting discounts and commissions and other fees and expenses of such
investment banker or bankers and manager or managers so selected in accordance
with this Section 2(b) (other than fees and expenses relating to registration of
Registrable Securities under federal or state securities laws, which are payable
by the Company pursuant to Section 5 hereof) with respect to their Registrable
Securities and the fees and expenses of such legal counsel so selected by the
Investors.
(C) OTHER REGISTRATIONS. The Company will not file another
registration statement with the SEC covering shares of Common Stock prior to the
SEC Effective Date, other than registration statements on Form S-4 or S-8.
3. OBLIGATIONS OF THE COMPANY. In connection with the
registration of the Registrable Securities, the Company shall:
(a) prepare promptly, and file with the SEC not later than
March 1, 1999, a Registration Statement with respect to the number of Shares
sold pursuant to the Subscription Agreement(s) and thereafter to use its
commercially reasonable best efforts to cause such Registration Statement
relating to Registrable Securities to become effective prior to March 30, 1999,
and keep the Registration Statement effective pursuant to Rule 415 at all times
during the Registration Period; and the Company represents and warrants to, and
covenants and agrees with, the Investors that the Registration Statement
(including any amendments or supplements thereto and prospectuses contained
therein), at the time it is first filed with the SEC, at the time it is ordered
effective by the SEC and at all times during which it is required to be
effective hereunder (and each such amendment and supplement at the time it is
filed with the SEC and at all times during which it is available for use in
connection with the offer and sale of the Registrable Securities) shall not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein, or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading;
(b) prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement as may be
necessary to keep the Registration Statement effective at all times during the
Registration Period, and, during the Registration Period, comply with the
provisions of the Securities Act with respect to the disposition of all
Registrable Securities of the Company covered by the Registration Statement
until such time as all of such Registrable Securities have been disposed of in
accordance with the intended methods of disposition by the seller or sellers
thereof as set forth in the Registration Statement;
(c) furnish to each Investor whose Registrable Securities are
included in the Registration Statement and its legal counsel, (1) promptly after
the same is prepared and publicly distributed, filed with the SEC or received by
the Company, one copy of the Registration Statement and any amendment thereto,
each preliminary prospectus and prospectus and each amendment or supplement
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thereto, each letter written by or on behalf of the Company to the SEC or the
staff of the SEC and each item of correspondence from the SEC or the staff of
the SEC relating to such Registration Statement (other than any portion of any
thereof which contains information for which the Company has sought confidential
treatment) and (2) such number of copies of a prospectus, including a
preliminary prospectus, and all amendments and supplements thereto and such
other documents, as such Investor may reasonably request in order to facilitate
the disposition of the Registrable Securities owned by such Investor;
(d) use commercially reasonable best efforts to (i) register
and qualify the Registrable Securities covered by the Registration Statement
under such securities or blue sky laws of such jurisdictions as the Investors
who hold a majority in interest of the Registrable Securities being offered
reasonably request, (ii) prepare and file in those jurisdictions such amendments
(including post-effective amendments) and supplements to such registrations and
qualifications as may be necessary to maintain the effectiveness thereof at all
times until the end of the Registration Period, (iii) take such other actions as
may be necessary to maintain such registrations and qualifications in effect at
all times during the Registration Period and (iv) take all other actions
reasonably necessary or advisable to qualify the Registrable Securities for sale
in such jurisdictions; PROVIDED, HOWEVER, that the Company shall not be required
in connection therewith or as a condition thereto (I) to qualify to do business
in any jurisdiction where it would not otherwise be required to qualify but for
this Section 3(d), (II) to subject itself to general taxation in any such
jurisdiction, (III) to file a general consent to service of process in any such
jurisdiction, (IV) to provide any undertakings that cause more than nominal
expense or burden to the Company or (V) to make any change in its Articles of
Incorporation or by-laws, which in each case the Board of Directors of the
Company determines to be contrary to the best interests of the Company and its
shareholders;
(e) in the event that the Registrable Securities are being
offered in an underwritten offering, enter into and perform its obligations
under an underwriting agreement, in usual and customary form, including, without
limitation, customary indemnification and contribution obligations, with the
underwriters of such offering;
(f) as promptly as practicable after becoming aware of such
event or circumstance, notify each Investor of any event or circumstance of
which the Company has knowledge, as a result of which the prospectus included in
the Registration Statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, and use its best efforts promptly to
prepare a supplement or amendment to the Registration Statement to correct such
untrue statement or omission, file such supplement or amendment with the SEC at
such time as shall permit the Investors to sell Registrable Securities pursuant
to the Registration Statement as promptly as practical, and deliver a number of
copies of such supplement or amendment to each Investor as such Investor may
reasonably request;
(g) as promptly as practicable after becoming aware of such
event, notify each Investor who holds Registrable Securities being sold (or, in
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the event of an underwritten offering, the managing underwriters) of the
issuance by the SEC of any stop order or other suspension of effectiveness of
the Registration Statement at the earliest possible time;
(h) permit a single firm of counsel designated as selling
shareholders' counsel by the Investors who hold a majority in interest of the
Registrable Securities being sold to review and comment on the Registration
Statement and all amendments and supplements thereto a reasonable period of time
prior to their filing with the SEC;
(i) make generally available to its security holders as soon
as practical, but not later than ninety (90) days after the close of the period
covered thereby, an earnings statement (in form complying with the provisions of
Rule 158 under the Securities Act) covering a twelve-month period beginning not
later than the first day of the Company's fiscal quarter next following the
effective date of the Registration Statement;
(j) at the request of the Investors who hold a majority in
interest of the Registrable Securities being sold, furnish on the date that
Registrable Securities are delivered to an underwriter, if any, for sale in
connection with the Registration Statement (i) a letter, dated such date, from
the Company's independent certified public accountants in form and substance as
is customarily given by independent certified public accountants to underwriters
in an underwritten public offering, addressed to the underwriters; and (ii) an
opinion, dated such date, from counsel representing the Company for purposes of
such Registration Statement, in form and substance as is customarily given in an
underwritten public offering, addressed to the underwriters and the Investors;
(k) use its best efforts (i) to cause all the Registrable
Securities covered by the Registration Statement to be listed on the Nasdaq or
such other principal securities market on which securities of the same class or
series issued by the Company are then listed or traded or (ii) if securities of
the same class or series as the Registrable Securities are not then listed on
Nasdaq or any such other securities market, to cause all of the Registrable
Securities covered by the Registration Statement to be listed on the New York
Stock Exchange, the American Stock Exchange or the Nasdaq National Market;
(l) provide a transfer agent and registrar, which may be a
single entity, for the Registrable Securities not later than the effective date
of the Registration Statement;
(m) during the period the Company is required to maintain
effectiveness of the Registration Statement pursuant to Section 3(a), the
Company shall not bid for or purchase any Common Stock or any right to purchase
Common Stock or attempt to induce any person to purchase any such security or
right if such bid, purchase or attempt would in any way limit the right of the
Investors to sell Registrable Securities by reason of the limitations set forth
in Regulation M under the Exchange Act; and
(n) take all other reasonable actions necessary to expedite
and facilitate disposition by the Investors of the Registrable Securities
pursuant to the Registration Statement.
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4. OBLIGATIONS OF THE INVESTORS. In connection with the
registration of the Registrable Securities, the Investors shall have the
following obligations:
(a) It shall be a condition precedent to the obligations of
the Company to complete the registration pursuant to this Agreement with respect
to the Registrable Securities of a particular Investor that such Investor shall
furnish to the Company such information regarding itself, the Registrable
Securities held by it and the intended method of disposition of the Registrable
Securities held by it as shall be reasonably required to effect the registration
of such Registrable Securities and shall execute such documents in connection
with such registration as the Company may reasonably request. At least four (4)
days prior to the first anticipated filing date of the Registration Statement,
the Company shall notify each Investor of the information the Company requires
from each such Investor (the "REQUESTED INFORMATION") if any of such Investor's
Registrable Securities are eligible for inclusion in the Registration Statement.
If at least one (1) business day prior to the filing date the Company has not
received the Requested Information from an Investor (a "NON-RESPONSIVE
INVESTOR"), then the Company may file the Registration Statement without
including Registrable Securities of such Non-Responsive Investor but shall not
be relieved of its obligation to file a Registration Statement with the SEC
relating to the Registrable Securities of such Non-Responsive Investor promptly
after such Non-Responsive Investor provides the Requested Information;
(b) Each Investor by such Investor's acceptance of the
Registrable Securities agrees to cooperate with the Company as reasonably
requested by the Company in connection with the preparation and filing of the
Registration Statement hereunder, unless such Investor has notified the Company
in writing of such Investor's election to exclude all of such Investor's
Registrable Securities from the Registration Statement;
(c) In the event Investors holding a majority in interest of
the Registrable Securities being registered determine to engage the services of
an underwriter, each Investor agrees to enter into and perform such Investor's
obligations under an underwriting agreement, in usual and customary form,
including, without limitation, customary indemnification and contribution
obligations, with the managing underwriter of such offering and take such other
actions as are reasonably required in order to expedite or facilitate the
disposition of the Registrable Securities, unless such Investor has notified the
Company in writing of such Investor's election to exclude all of such Investor's
Registrable Securities from the Registration Statement;
(d) Each Investor agrees that, upon receipt of any notice from
the Company of the happening of any event of the kind described in Section 3(f)
or 3(g), such Investor will immediately discontinue disposition of Registrable
Securities pursuant to the Registration Statement covering such Registrable
Securities until such Investor's receipt of the copies of the supplemented or
amended prospectus contemplated by Section 3(f) or 3(g) and, if so directed by
the Company, such Investor shall deliver to the Company (at the expense of the
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Company) or destroy (and deliver to the Company a certificate of destruction)
all copies in such Investor's possession of the prospectus covering such
Registrable Securities current at the time of receipt of such notice; and
(e) No Investor may participate in any underwritten
registration hereunder unless such Investor (i) agrees to sell such Investor's
Registrable Securities on the basis provided in any underwriting arrangements
approved by the Investors entitled hereunder to approve such arrangements, (ii)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents reasonably required under the terms
of such underwriting arrangements and (iii) agrees to pay its pro rata share of
all underwriting discounts and commissions and other fees and expenses of
investment bankers and any manager or managers of such underwriting and legal
expenses of the underwriters applicable with respect to its Registrable
Securities, in each case to the extent not payable by the Company pursuant to
the terms of this Agreement.
5. EFFECTIVENESS OF REGISTRATION STATEMENT; PENALTIES. Company
shall use its commercially reasonable best efforts to have the Registration
Statement declared effective prior to March 30, 1999. In the event the
Registration Statement has not been declared effective on or prior to April 29,
1999, the Company shall pay Investor in cash 1% of the initial investment in the
Shares (measured by multiplying $5.50 by the number of Shares purchased by
Investor pursuant to the Subscription Agreement), for each month after April 29,
1999 that the Registration Statement has not been declared effective.
6. EXPENSES OF REGISTRATION. All reasonable expenses, other
than underwriting discounts and commissions and other fees and expenses of
investment bankers and other than brokerage commissions, incurred in connection
with registrations, filings or qualifications pursuant to Section 3, including,
without limitation, all registration, listing and qualifications fees, printers
and accounting fees and the fees and disbursements of counsel for the Company,
shall be borne by the Company, PROVIDED, HOWEVER, that the Investors shall bear
the fees and out-of-pocket expenses of the one legal counsel selected by the
Investors pursuant to Section 2(b) hereof. None of the foregoing shall be
construed to require the Investors to bear the fees or expenses of counsel to
the underwriters.
7. INDEMNIFICATION. In the event any Registrable Securities
are included in a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless each Investor who holds such Registrable Securities, the
directors, if any, of such Investor, the officers, if any, of such Investor,
each person, if any, who controls any Investor within the meaning of the
Securities Act or the Exchange Act, any underwriter (as defined in the
Securities Act) for the Investors, the directors, if any, of such underwriter
and the officers, if any, of such underwriter, and each person, if any, who
controls any such underwriter within the meaning of the Securities Act or the
Exchange Act (each, an "INDEMNIFIED PERSON"), against any losses, claims,
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damages, liabilities or expenses (joint or several) incurred (collectively,
"CLAIMS") to which any of them may become subject under the Securities Act, the
Exchange Act or otherwise, insofar as such Claims (or actions or proceedings,
whether commenced or threatened, in respect thereof) arise out of or are based
upon any of the following statements, omissions or violations in the
Registration Statement, or any post-effective amendment thereof, or any
prospectus included therein: (i) any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or any
post-effective amendment thereof or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus if used
prior to the effective date of such Registration Statement, or contained in the
final prospectus (as amended or supplemented, if the Company files any amendment
thereof or supplement thereto with the SEC) or the omission or alleged omission
to state therein any material fact necessary to make the statements made
therein, in light of the circumstances under which the statements therein were
made, not misleading or (iii) any violation or alleged violation by the Company
of the Securities Act, the Exchange Act, any state securities law or any rule or
regulation under the Securities Act, the Exchange Act or any state securities
law (the matters in the foregoing clauses (i) through (iii) being, collectively,
"VIOLATIONS"). Subject to the restrictions set forth in Section 7(d) with
respect to the number of legal counsel, the Company shall reimburse the
Investors and each such underwriter or controlling person, promptly as such
expenses are incurred and are due and payable, for any legal fees or other
reasonable expenses incurred by them in connection with investigating or
defending any such Claim. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 7(a): (I) shall
not apply to a Claim arising out of or based upon a Violation which occurs in
reliance upon and in conformity with information furnished in writing to the
Company by any Indemnified Person or underwriter for such Indemnified Person
expressly for use in connection with the preparation of the Registration
Statement, the prospectus or any such amendment thereof or supplement thereto,
if such prospectus was timely made available by the Company pursuant to Section
3(c) hereof; (II) with respect to any preliminary prospectus shall not inure to
the benefit of any such person from whom the person asserting any such Claim
purchased the Registrable Securities that are the subject thereof (or to the
benefit of any person controlling such person) if the untrue statement or
omission of material fact contained in the preliminary prospectus was corrected
in the prospectus, as then amended or supplemented, if such prospectus was
timely made available by the Company pursuant to Section 3(c) hereof; and (III)
shall not apply to amounts paid in settlement of any Claim if such settlement is
effected without the prior written consent of the Company, which consent shall
not be unreasonably withheld. Such indemnity shall remain in full force and
effect regardless of any investigation made by or on behalf of the Indemnified
Person and shall survive the transfer of the Registrable Securities by the
Investors pursuant to Section 9.
(b) In connection with any Registration Statement in which an
Investor is participating, each such Investor agrees to indemnify and hold
harmless, to the same extent and in the same manner set forth in Section 7(a),
the Company, each of its directors, each of its officers who signs the
Registration Statement, each person, if any, who controls the Company within the
meaning of the Securities Act or the Exchange Act, any underwriter and any other
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shareholder selling securities pursuant to the Registration Statement or any of
its directors or officers or any person who controls such shareholder or
underwriter within the meaning of the Securities Act or the Exchange Act
(collectively and together with an Indemnified Person, an "INDEMNIFIED PARTY"),
against any Claim to which any of them may become subject, under the Securities
Act, the Exchange Act or otherwise, insofar as such Claim arises out of or is
based upon any Violation, in each case to the extent (and only to the extent)
that such Violation occurs in reliance upon and in conformity with written
information furnished to the Company by such Investor expressly for use in
connection with such Registration Statement; and such Investor will reimburse
any legal or other expenses reasonably incurred by any Indemnified Party in
connection with investigating or defending any such Claim; PROVIDED, HOWEVER,
that the indemnity agreement contained in this Section 7(b) shall not apply to
amounts paid in settlement of any Claim if such settlement is effected without
the prior written consent of such Investor, which consent shall not be
unreasonably withheld; PROVIDED, FURTHER, HOWEVER, that the Investor shall be
liable under this Section 7(b) for only that amount of a Claim as does not
exceed the amount by which the net proceeds to such Investor from the sale of
Registrable Securities pursuant to such Registration Statement exceeds the cost
of such Registrable Securities to such Investor. Such indemnity shall remain in
full force and effect regardless of any investigation made by or on behalf of
such Indemnified Party and shall survive the transfer of the Registrable
Securities by the Investors pursuant to Section 9. Notwithstanding anything to
the contrary contained herein, the indemnification agreement contained in this
Section 7(b) with respect to any preliminary prospectus shall not inure to the
benefit of any Indemnified Party if the untrue statement or omission of material
fact contained in the preliminary prospectus was corrected on a timely basis in
the prospectus, as then amended or supplemented.
(c) The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in any distribution, to the same extent as provided
above, with respect to information so furnished in writing by such persons
expressly for inclusion in the Registration Statement.
(d) Promptly after receipt by an Indemnified Person or
Indemnified Party under this Section 7 of notice of the commencement of any
action (including any governmental action), such Indemnified Person or
Indemnified Party shall, if a Claim in respect thereof is to be made against any
indemnifying party under this Section 7, deliver to the indemnifying party a
written notice of the commencement thereof and the indemnifying party shall have
the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel selected by the indemnifying party
but reasonably acceptable to the Indemnified Person or the Indemnified Party, as
the case may be; PROVIDED, HOWEVER, that an Indemnified Person or Indemnified
Party shall have the right to retain its own counsel with the fees and expenses
to be paid by the indemnifying party, if, in the reasonable opinion of counsel
retained by the indemnifying party, the representation by such counsel of the
Indemnified Person or Indemnified Party and the indemnifying party would be
inappropriate due to actual or potential differing interests between such
Indemnified Person or Indemnified Party and any other party represented by such
counsel in such proceeding. In such event, the Company shall pay for only one
separate legal counsel for the Investors; such legal counsel shall be selected
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by the Investors holding a majority in interest of the Registrable Securities
included in the Registration Statement to which the Claim relates. The failure
to deliver written notice to the indemnifying party within a reasonable time of
the commencement of any such action shall not relieve such indemnifying party of
any liability to the Indemnified Person or Indemnified Party under this Section
7, except to the extent that the indemnifying party is prejudiced in its ability
to defend such action. The indemnification required by this Section 6 shall be
made by periodic payments of the amount thereof during the course of the
investigation or defense, as such expense, loss, damage or liability is incurred
and is due and payable.
8. CONTRIBUTION. To the extent any indemnification by an
indemnifying party is prohibited or limited by law, the indemnifying party
agrees to make the maximum contribution with respect to any amounts for which it
would otherwise be liable under Section 6 to the fullest extent permitted by
law; PROVIDED, HOWEVER, that (a) no contribution shall be made under
circumstances where the maker would not have been liable for indemnification
under the fault standards set forth in Section 7, (b) no seller of Registrable
Securities guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any seller
of Registrable Securities who was not guilty of such fraudulent
misrepresentation and (c) contribution by any seller of Registrable Securities
shall be limited in amount to the amount by which the net amount of proceeds
received by such seller from the sale of such Registrable Securities exceeds the
purchase price paid by such seller for such Registrable Securities.
9. REPORTS UNDER EXCHANGE ACT. With a view to making available
to the Investors the benefits of Rule 144, the Company agrees to:
(a) make and keep public information available, as those terms
are understood and defined in Rule 144;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(c) furnish to each Investor so long as such Investor owns
Registrable Securities, promptly upon request, (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144 and the
Exchange Act, (ii) a copy of the most recent annual or quarterly report of the
Company and such other reports and documents so filed by the Company and (iii)
such other information as may be reasonably requested to permit the Investors to
sell such securities pursuant to Rule 144 without registration.
10. AMENDMENT OF REGISTRATION RIGHTS. Any provision of this
Agreement may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and Investors who
hold a majority in interest of the Registrable Securities. Any amendment or
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waiver effected in accordance with this Section 10 shall be binding upon each
Investor and the Company.
11. MISCELLANEOUS.
(a) A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
(b) Notices required or permitted to be given hereunder shall
be in writing and shall be deemed to be sufficiently given when personally
delivered (by hand, by courier, by telephone line facsimile transmission or
other means) (i) if to the Company, at 808 Howell Street, Suite 400, Seattle,
Washington, 98101, Attention: Chief Financial Officer, telephone line facsimile
transmission number (206) 652-9075, with a copy to C. Kent Carlson, Esq.,
Preston Gates & Ellis LLP, 701 Fifth Avenue, Seattle, Washington 98104
(telephone line facsimile number (206) 623-7022), and (ii) if to the Investor,
to such address set forth on the signature page of this Agreement.
(c) Failure of any party to exercise any right or remedy under
this Agreement or otherwise, or delay by a party in exercising such right or
remedy, shall not operate as a waiver thereof.
(d) This Agreement shall be enforced, governed by and
construed in accordance with the laws of the State of Washington applicable to
agreements made and to be performed entirely within such State. In the event
that any provision of this Agreement is invalid or unenforceable under any
applicable statute or rule of law, then such provision shall be deemed
inoperative to the extent that it may conflict therewith and shall be deemed
modified to conform with such statute or rule of law. Any provision hereof which
may prove invalid or unenforceable under any law shall not affect the validity
or enforceability of any other provision hereof.
(e) This Agreement constitutes the entire agreement among the
parties hereto with respect to the subject matter hereof. There are no
restrictions, promises, warranties or undertakings, other than those set forth
or referred to herein. This Agreement supersedes all prior agreements and
understandings among the parties hereto with respect to the subject matter
hereof.
(f) Subject to the requirements of Section 9 hereof, this
Agreement shall inure to the benefit of and be binding upon the successors and
assigns of each of the parties hereto.
(g) All pronouns and any variations thereof refer to the
masculine, feminine or neuter, singular or plural, as the context may require.
(h) The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
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(i) The Company acknowledges that any failure by the Company
to perform its obligations under this Agreement, including, without limitation,
the Company's obligations under Section 3(n), or any delay in such performance
could result in damages to the Investors and the Company agrees that, in
addition to any other liability the Company may have by reason of any such
failure or delay, the Company shall be liable for all direct and consequential
damages caused by any such failure or delay.
(j) This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same agreement. This Agreement, once executed by a party,
may be delivered to the other party hereto by telephone line facsimile
transmission of a copy of this Agreement bearing the signature of the party so
delivering this Agreement.
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IN WITNESS WHEREOF, the parties have caused this Agreement to
be duly executed by their respective officers thereunto duly authorized as of
day and year first above written.
ONHEALTH NETWORK COMPANY
By:/s/MICHAEL D. CONWAY
------------------------
Name: Michael D. Conway
Title: Vice President
INVESTOR
----------------------------
By _________________________
Its __________________________
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List of Purchasers:
Name Robert S. Colman as Trustee UDT dated 3/13/85
Number of Shares 100,000
Name UMBTRU
Number of Shares 2,000,000
Name Larry Arnold
Number of Shares 46,000
Name Wayne W. Mills
Number of Shares 50,000
Name David R. Wilmerding
Number of Shares 200,000
Name Jon C. Baker
Number of Shares 200,000
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EXHIBIT 10.28
SUBSCRIPTION AGREEMENT
THIS SUBSCRIPTION AGREEMENT, dated as of January 29, 1999
(this "AGREEMENT"), by and between OnHealth Network Company, a Washington
corporation (the "COMPANY"), with headquarters located at 808 Howell Street,
Suite 400, Seattle, Washington 98101, and the purchaser set forth on the
Signature Page to this Agreement (the "BUYER").
WITNESSETH
WHEREAS, the Buyer wishes to purchase, upon the terms and
subject to the conditions of this Agreement, shares of the Company's Common
Stock par value $.01 per share (the "SHARES"); and
WHEREAS, the Company and the Buyer are executing and
delivering this Agreement in reliance upon the exemption from securities
registration afforded by Rule 506 of Regulation D as promulgated by the SEC
under the 1933 Act;
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. AGREEMENT TO SUBSCRIBE; PURCHASE PRICE.
(a) SUBSCRIPTION The Buyer hereby agrees to purchase from the
Company that number of Shares set forth on the Signature Page of this Agreement.
The purchase price per Share shall be $5.50 (the "PER SHARE PURCHASE PRICE").
(b) FORM OF PAYMENT. At the Closing (as defined in Section 5)
(1) the Buyer shall pay the Company, by wire transfer of immediately available
funds to such account as specified by the Company to the Buyer that amount equal
to the number of Shares purchased by the Buyer multiplied by the Per Share
Purchase Price, and (2) Company shall agree to deliver certificates representing
the Shares within three days of the Closing.
2. BUYER REPRESENTATIONS, WARRANTIES, ETC.
The Buyer represents and warrants to, and covenants and agrees
with, the Company as follows:
(a) PURCHASE FOR INVESTMENT. The Buyer is purchasing the
Shares for its own account for investment only and not with a view towards the
public sale or distribution thereof.
(b) ACCREDITED INVESTOR. The Buyer is an "ACCREDITED INVESTOR"
as that term is defined in Rule 501 of the General Rules and Regulations under
the 1933 Act by reason of Rule 501(a)(3);
(c) REOFFERS AND RESALES. All subsequent offers and sales of
the Shares by the Buyer shall be made pursuant to registration of the Shares
being offered and sold under the 1933 Act or pursuant to an exemption from
registration;
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(d) COMPANY RELIANCE. The Buyer understands that the Shares
are being offered and sold in reliance on specific exemptions from the
registration requirements of United States federal and state securities laws and
that the Company is relying upon the truth and accuracy of, and the Buyer's
compliance with, the representations, warranties, agreements, acknowledgments
and understandings of the Buyer set forth herein in order to determine the
availability of such exemptions and the eligibility of the Buyer to acquire the
Shares;
(e) INFORMATION PROVIDED. The Buyer and its advisors, if any,
have been furnished with all materials relating to the business, finances and
operations of the Company and materials relating to the offer and sale of the
Shares which have been requested by the Buyer; the Buyer and its advisors, if
any, have been afforded the opportunity to ask questions of the Company and have
received satisfactory answers to any such inquiries; without limiting the
generality of the foregoing, the Buyer has had the opportunity to obtain and to
review the Company's: (1) annual report on Form 10-K for the year ended December
31, 1997 (the "1997 10-K"), (2) Quarterly Reports on Form 10-Q for the fiscal
quarters ended March 31, 1998, June 30, 1998, and September 30, 1998, (3)
definitive proxy statement for its 1998 Annual Meeting of Shareholders (to the
extent incorporated by reference in the 1997 10-K), and (4) the Company's form
S-3 Registration Statement filed December 30, 1998 (SEC 1933 Act Number
333-69989), in each case as filed with the SEC (the "SEC REPORTS"); and the
Buyer understands that its investment in the Securities involves a high degree
of risk;
(f) ABSENCE OF APPROVALS. The Buyer understands that no United
States federal or state agency or any other government or governmental agency
has passed on or made any recommendation or endorsement of the Securities; and
(g) SUBSCRIPTION AGREEMENT The Buyer has all requisite power
and authority, corporate or otherwise, to execute, deliver and perform its
obligations under this Agreement and the other agreements executed or to be
executed by the Buyer in connection herewith and to consummate the transactions
contemplated hereby and thereby. This Agreement has been duly and validly
authorized, executed and delivered on behalf of the Buyer and is a valid and
binding agreement of the Buyer enforceable in accordance with its terms, subject
as to enforceability to general principles of equity and to bankruptcy,
insolvency, moratorium and other similar laws affecting the enforcement of
creditors' rights generally.
3. COMPANY REPRESENTATIONS, WARRANTIES, ETC.
Except as set forth in a document of even date hereof (the
"COMPANY DISCLOSURE SCHEDULE"), the Company represents and warrants to, and
covenants and agrees with, the Buyer that:
(a) ORGANIZATION AND AUTHORITY The Company is a corporation
duly organized and validly existing under the laws of its jurisdiction of
incorporation, and has all requisite corporate power and authority to (i) own,
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lease and operate its properties and to carry on its business as described in
the SEC Reports and as now being conducted, and (ii) to execute, deliver and
perform its obligations under this Agreement and a Registration Rights Agreement
to be delivered at the Closing (the "REGISTRATION RIGHTS AGREEMENT"), and to
consummate the transactions contemplated hereby and thereby.
(b) CAPITALIZATION The authorized capital stock of the Company
consists of (i) 29,000,000 shares of Common Stock of which 12,981,652 shares of
Common Stock were outstanding on January 25, 1999, all of which are fully paid
and nonassessable; and (ii) 1,000,000 shares of Preferred Stock, $.01 par value,
of which 5,800 shares are designated as Series B Preferred Stock, of which no
shares are outstanding; and as of the Closing there will be no material increase
from January 25, 1999 in the number of shares of Common Stock outstanding. As of
January 25, 1999, the Company had outstanding options, warrants and similar
rights entitling the holders to purchase 3,595,628 shares of Common Stock. Other
than as set forth in the preceding sentence, the Company does not have
outstanding any material amount of securities (or obligations to issue any such
securities) convertible into, exchangeable for or otherwise entitling the
holders thereof to acquire shares of Common Stock, except as disclosed in the
SEC Reports. The Company has duly reserved from its authorized and unissued
shares of Common Stock the full number of shares required for (y) all options,
warrants, convertible securities and other rights to acquire shares of Common
Stock which are outstanding and (z) all shares of Common Stock and options and
other rights to acquire shares of Common Stock which may be issued or granted
under the stock option and similar plans which have been adopted by the Company.
(c) AUTHORIZATION. The Shares have been duly authorized. There
are no preemptive or similar rights of any shareholder of the Company or any
other Person to acquire any of the Shares. The Company and the Shares meet the
criteria for continued listing and trading on the Nasdaq SmallCap Market
("NASDAQ SmallCap"); the Company has not been notified since January 1, 1999 by
the Nasdaq SmallCap of any failure or potential failure to meet the criteria for
continued listing and trading on the Nasdaq SmallCap and no suspension of
trading in the Common Stock is in effect. Subject to compliance, if required,
with Rule 4310(c)(25)(H) of the Nasdaq SmallCap, the Company knows of no reason
that the Shares will not be eligible for listing on the Nasdaq SmallCap. For
purposes of this Agreement, "PERSON" means an individual, partnership,
corporation, limited liability company, trust, incorporated organization,
unincorporated association or joint stock company.
(d) SUBSCRIPTION AGREEMENT; REGISTRATION RIGHTS AGREEMENT.
This Agreement, and the Registration Rights Agreement have been duly and validly
authorized by the Company, this Agreement has been duly executed and delivered
by the Company and this Agreement is, and the Registration Rights Agreement,
when executed and delivered by the Company, will be, valid and binding
obligations of the Company enforceable in accordance with their respective
terms, subject as to enforceability to general principles of equity and to
bankruptcy, insolvency, moratorium and other similar laws affecting the
enforcement of creditors' rights generally.
(e) NON-CONTRAVENTION. The execution and delivery by the
Company of this Agreement and the other documents contemplated by this Agreement
and the consummation by the Company of the issuance of the Shares as
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contemplated by this Agreement, and the other transactions contemplated by this
Agreement and the Registration Rights Agreement do not and will not, with or
without the giving of notice or the lapse of time, or both (i) result in any
violation of any terms of the Articles of Incorporation or by-laws of the
Company, (ii) conflict with or result in a breach by the Company of any of the
terms or provisions of, or constitute a default under, or result in the
modification, amendment, termination or cancellation of, result in the
acceleration of any obligation of the Company under, or result in the creation
or imposition of any lien, security interest, charge or encumbrance upon any of
the properties or assets of the Company pursuant to, any indenture, mortgage,
deed of trust or other agreement or instrument to which the Company is a party
or by which the Company or any of its respective properties or assets is bound
or affected, (iii) violate or contravene any applicable law, rule or regulation
or any applicable decree, judgment or order of any court, United States federal
or state regulatory body, administrative agency or other governmental body
having jurisdiction over the Company or any of its respective properties or
assets or (iv) have any material adverse effect on any permit, certification,
registration, approval, consent, license or franchise necessary for the Company
to own or lease and operate any of their respective properties or to conduct any
of their respective businesses or the ability of the Company to make use
thereof.
(f) APPROVALS. No authorization, approval or consent of, or
filing with, any court, governmental body, regulatory agency, self-regulatory
organization, or stock exchange or market or the shareholders of the Company is
required to be obtained or made by the Company for (1) the execution, delivery
and performance by the Company of this Agreement and the Registration Rights
Agreement, and (2) the issuance and sale of the Shares as contemplated by this
Agreement other than (w) the listing of the Shares on the Nasdaq SmallCap, (x)
registration of the resale of the Shares under the 1933 Act as contemplated by
the Registration Rights Agreement, and (y) filing of one or more Forms D with
respect to the Shares as required under Regulation D of the Securities Act of
1933 and related filings under applicable state securities laws.
(g) INFORMATION PROVIDED. The information provided by or on
behalf of the Company to the Buyer in connection with the transactions
contemplated by this Agreement, including, without limitation, the information
referred to in Section 2(e) of this Agreement, does not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they are made, not misleading, it being understood that, for purposes of
this Section 3(g), any statement contained in such information shall be deemed
to be modified or superseded for purposes of this Section 3(g) to the extent
that a statement in any document included in such information which was prepared
or filed with the SEC on a later date modifies or replaces such statement,
whether or not such later prepared or filed statement so states. The Company has
not filed any reports with the SEC under the 1934 Act since December 31, 1998.
(h) ABSENCE OF CERTAIN CHANGES. Except as disclosed in the SEC
Reports, since December 31, 1997, there has been no material adverse change and
no material adverse development in the business, properties, operations,
condition (financial or other), results of operations or prospects of the
Company. Except as and to the extent disclosed, reflected or reserved against in
the financial statements of the Company and the notes thereto included in the
SEC Reports, the Company has no material (individually or in the aggregate)
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liabilities, debts or obligations whether accrued, absolute, contingent or
otherwise, and whether due or to become due. Since December 31, 1997, the
Company has not incurred any liabilities, debts or obligations of any nature
whatsoever which are individually or in the aggregate material to the Company,
other than those incurred in the ordinary course of their respective businesses
or disclosed in the SEC Reports.
(i) ABSENCE OF CERTAIN PROCEEDINGS. Except as described in the
SEC Reports, there is no action pending or, to the knowledge of the Company,
threatened against the Company, in any such case likely to have a material
adverse effect on the business, properties, condition (financial or other),
results of operations or prospects of the Company or the transactions
contemplated by this Agreement or any of the documents contemplated hereby or
which would adversely affect the validity or enforceability of, or the authority
or ability of the Company to perform its obligations under, this Agreement or
any of such other documents; neither the Company nor any director or officer
thereof is or has been the subject of any action involving (i) a claim of
violation of or liability under federal or state securities laws or (ii) a claim
of breach of fiduciary duty. The Company does not have pending before the SEC
any request for confidential treatment of information and to the best of the
Company's knowledge no such request will be made by the Company prior to the
time the Registration Statement relating to the Shares which is contemplated by
the Registration Rights Agreement is first ordered effective by the SEC; and
there has not been, and the Company has not been notified of any pending or
contemplated any investigation by the SEC involving the Company or any current
or former director or officer of the Company.
(j) SEC FILINGS. The Company has timely filed all required
forms, reports and other documents required to be filed with the SEC under the
1934 Act. All of such forms, reports and other documents complied, when filed,
in all material respects, with all applicable requirements of the 1933 Act and
the 1934 Act.
4. CERTAIN COVENANTS AND ACKNOWLEDGEMENTS.
(a) TRANSFER RESTRICTIONS. The Company and the Buyer
acknowledge and agree that (1) the Shares have not been and are not being
registered for resale under the 1933 Act (other than as provided in the
Registration Rights Agreement), and the Securities may not be transferred unless
(A) subsequently registered for resale thereunder or (B) the Buyer shall have
delivered to the Company an opinion of counsel, reasonably satisfactory in form,
scope and substance to the Company, to the effect that the Shares to be sold or
transferred may be sold or transferred pursuant to an exemption from such
registration and (2) any resale of the Shares made in reliance on Rule 144
promulgated under the 1933 Act may be made only in accordance with the terms of
Rule 144 and further, if Rule 144 is not applicable, any such resale of Shares
under circumstances in which the seller, or the person through whom the sale is
made, may be deemed to be an underwriter, as that term is used in the 1933 Act,
may require compliance with some other exemption under the 1933 Act or the rules
and regulations of the SEC thereunder.
(c) RESTRICTIVE LEGEND.
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The Buyer further acknowledges and agrees that until such time
as the Shares have been registered for resale under the 1933 Act as contemplated
by the Registration Rights Agreement and such registration statement has been
declared effective by the Securities and Exchange Commission, the certificates
for the Shares may bear a restrictive legend in substantially the following form
(and a stop-transfer order may be placed against transfer of the certificates
for the Shares):
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended. The securities have been
acquired for investment and may not be resold, transferred or assigned
in the absence of an effective registration statement for the
securities under the Securities Act of 1933, as amended, or an opinion
of counsel reasonably acceptable to the Company that registration is
not required under said Act.
(c) REGISTRATION RIGHTS AGREEMENT. On or before the Closing
Date, the parties hereto agree to enter into the Registration Rights Agreement
in the form attached hereto as ANNEX I.
(d) FORM D. The Company agrees to file a Form D with respect
to the Shares as required under Regulation D and to provide a copy thereof to
the Buyer promptly after such filing. The Buyer agrees to cooperate with the
Company in connection with such filing and, upon request of the Company, to
provide all information relating to the Buyer reasonably required for such
filing.
(e) AUTHORIZATION FOR TRADING; REPORTING STATUS. Within ten
business days after the Closing, the Company shall file a notification for
listing of additional shares with the Nasdaq SmallCap relating to the Shares and
provide evidence of such filing to the Buyer. So long as the Buyer beneficially
owns any of the Shares, the Company shall file all reports required to be filed
with the SEC pursuant to Section 13 or 15(d) of the 1934 Act and the Company
shall not voluntarily terminate its status as an issuer required to file reports
under the 1934 Act even if the 1934 Act or the rules and regulations thereunder
would permit such termination.
(f) BLUE SKY LAWS. The Company shall take such action as and
to the extent it shall be necessary or required to qualify, or to obtain an
exemption for, the Shares pursuant to this Agreement under such of the
securities or "blue sky" laws of jurisdictions as shall be applicable to the
sale of the Shares pursuant to this Agreement. The Company shall furnish copies
of all filings, applications, orders and grants or confirmations of exemptions
relating to such securities or "blue sky" laws.
(g) CERTAIN EXPENSES Whether or not any closing occurs, the
Company shall pay or reimburse the Buyer for all reasonable expenses (including,
without limitation, legal fees and expenses of counsel to the Buyer) incurred by
the Buyer, not in excess of $3,000, in connection with this Agreement and the
transactions contemplated hereby.
(h) CERTAIN TRADING RESTRICTIONS. The Buyer agrees that on the
Closing Date it will have no short position in the Common Stock. So long as the
Company is in compliance in all material respects with its obligations to the
Buyer under this Agreement and the Registration Rights Agreement, the Buyer
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agrees that (1) from the Closing Date until the SEC Effective Date (as defined
in the Registration Rights Agreement), it will not sell or contract to sell any
shares of Common Stock or engage in any short sales or other hedging
transactions relating to the Common Stock, (2) during the period from the SEC
Effective Date to the date on which the Buyer no longer owns any Common Shares,
the Buyer shall not engage in short sales or other hedging transactions relating
to the Common Stock.
(i) BEST EFFORTS. Each of the parties shall use its
commercially reasonably best efforts timely to satisfy each of the conditions to
the other party's obligations to sell and purchase the Shares set forth in
Section 6 or 7, as the case may be, of this Agreement on or before the Closing
Date.
5. CLOSING.
Subject to the satisfaction or waiver of the conditions set
forth in Sections 6 and 7, the Closing shall take place shall be 12:00 noon,
Seattle, Washington time (the "CLOSING"), on or before the date which is three
Business Days after the date of this Agreement, or such other mutually agreed to
time. The closing of such sale of the Shares shall occur on the Closing Date at
the offices of Preston Gates & Ellis LLP, 701 Fifth Avenue, Suite 5000, Seattle,
Washington 98104.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL AND ISSUE.
The Buyer understands that the Company's obligation to sell
the Shares to the Buyer pursuant to this Agreement at the Closing is conditioned
upon the satisfaction of the following conditions precedent on or before the
Closing (any or all of which may be waived by the Company in its sole
discretion):
(a) Delivery by the Buyer to the Company of good funds as
payment in full of an amount equal to the Per Share Purchase Price for each of
the Shares;
(b) The accuracy on the Closing Date of the representations
and warranties of the Buyer contained in this Agreement as if made on the
Closing Date and the performance by the Buyer on or before the Closing Date of
all covenants and agreements of the Buyer required to be performed on or before
the Closing Date; and
(c) On the Closing Date, no legal action, suit or proceeding
shall be pending or threatened which seeks to restrain or prohibit the
transactions contemplated by this Agreement.
7. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligation to
purchase the Shares from the Company pursuant to this Agreement at the Closing
is conditioned upon the satisfaction of the following conditions precedent on or
before the Closing (any or all of which may be waived by the Buyer in its sole
discretion):
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(a) Delivery by the Company of the certificates for the Shares
for the account of the Buyer in accordance with this Agreement (such delivery,
the parties agree, may be up to three days after the Closing);
(b) The accuracy on the Closing Date of the representations
and warranties of the Company contained in this Agreement as if made on the
Closing Date and the performance by the Company on or before the Closing Date of
all covenants and agreements of the Company required to be performed on or
before the Closing Date and receipt by the Buyer of a certificate, dated the
Closing Date, of the Chief Executive Officer or the Chief Financial Officer of
the Company confirming such matters and such other matters as the Buyer may
reasonably request;
(c) The receipt by the Buyer of a certificate, dated the
Closing Date, of the Secretary of the Company certifying (1) the Articles of
Incorporation and By-Laws of the Company as in effect on the Closing Date, (2)
all resolutions of the Board of Directors (and committees thereof) of the
Company relating to this Agreement and the transactions contemplated hereby and
(3) such other matters as reasonably requested by the Buyer;
(e) The parties shall have executed a Registration Rights
Agreement in the form attached hereto as ANNEX I;
(f) The Company and the Company's transfer agent shall have
executed an Order to Issue and Register substantially in the form attached
hereto as Annex II.
(g) Receipt by the Buyer on the Closing Date of an opinion of
Preston Gates & Ellis LLP, counsel for the Company, dated the Closing Date, in
form, scope and substance reasonably satisfactory to the Buyer;
(h) The Buyer shall have received a Certificate of the
Company's transfer agent dated as of the Closing substantially in the form
attached hereto as Annex III; and
(i) On the Closing Date, no legal action, suit or proceeding
shall be pending or threatened which seeks to restrain or prohibit the
transactions contemplated by this Agreement.
8. MISCELLANEOUS.
(a) GOVERNING LAW. This Agreement shall be governed by
and interpreted in accordance with the laws of the State of Washington.
(b) COUNTERPARTS. This Agreement may be executed in
counterparts and by the parties hereto on separate counterparts, all of which
together shall constitute one and the same instrument. A facsimile transmission
of this Agreement bearing a signature on behalf of a party hereto shall be legal
and binding on such party. Although this Agreement is dated as of the date first
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set forth above, the actual date of execution and delivery of this Agreement by
each party is the date set forth below such party's signature on the signature
page hereof. Any reference in this Agreement or in any of the documents executed
and delivered by the parties hereto in connection herewith to (1) the date of
execution and delivery of this Agreement by the Buyer shall be deemed a
reference to the date set forth below the Buyer's signature on the signature
page hereof, (2) the date of execution and delivery of this Agreement by the
Company shall be deemed a reference to the date set forth below the Company's
signature on the signature page hereof and (3) the date of execution and
delivery of this Agreement or the date of execution and delivery of this
Agreement by the Buyer and the Company shall be deemed a reference to the later
of the dates set forth below the signatures of the parties on the signature page
hereof.
(c) HEADINGS, ETC. The headings, captions and footers of this
Agreement are for convenience of reference and shall not form part of, or affect
the interpretation of, this Agreement.
(d) SEVERABILITY. If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement or the validity or enforceability of this Agreement
in any other jurisdiction.
(e) AMENDMENTS. No amendment, modification, waiver, discharge
or termination of any provision of this Agreement nor consent to any departure
by the Buyer or the Company therefrom shall in any event be effective unless the
same shall be in writing and signed by the party to be charged with enforcement,
and then shall be effective only in the specific instance and for the purpose
for which given. No course of dealing between the parties hereto shall operate
as an amendment of this Agreement.
(f) WAIVERS. Failure of any party to exercise any right or
remedy under this Agreement or otherwise, or delay by a party in exercising such
right or remedy, or any course of dealings between the parties, shall not
operate as a waiver thereof or an amendment hereof, nor shall any single or
partial exercise of any such right or power, or any abandonment or
discontinuance of steps to enforce such a right or power, preclude any other or
further exercise thereof or exercise of any other right or power.
(g) NOTICES. Any notices required or permitted to be given
under the terms of this Agreement shall be delivered personally (which shall
include telephone line facsimile transmission with answer back confirmation) or
by courier and shall be effective upon receipt, if delivered personally or by
courier, in the case of the Company addressed to the Company at its address
shown in the introductory paragraph of this Agreement, Attention: Chief
Financial Officer (telephone line facsimile transmission number (206) 652-9075),
or, in the case of the Buyer, at its address or telephone line facsimile
transmission number shown on the signature page of this Agreement, with a copy
to Matthew Swartz; Brobeck Phleger & Harrison LLP, One Market, San Francisco,
California, 94105 (telephone line facsimile transmission number (415) 442-1010)
or such other address or telephone line facsimile transmission number as a party
shall have provided by notice to the other party in accordance with this
provision.
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(h) ASSIGNMENT. No party to this Agreement may assign, by
operation of law or otherwise, all or any portion of its rights, obligations, or
liabilities under this Agreement without the prior written consent of the
Company.
(i) SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The respective
representations, warranties, covenants and agreements of the Buyer and the
Company contained in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement shall survive the delivery of payment
for the Shares and shall remain in full force and effect regardless of any
investigation made by or on behalf of them or any Person controlling or advising
any of them.
(j) ENTIRE AGREEMENT. This Agreement and the Registration
Rights Agreement set forth the entire agreement between the parties hereto with
respect to the subject matter hereof and supersede all prior agreements and
understandings, whether written or oral, with respect thereto.
(k) TERMINATION. The Buyer shall have the right to terminate
this Agreement by giving notice to the Company at any time at or prior to the
Closing Date if:
(1) the Company shall have failed, refused, or been unable at
or prior to the date of such termination of this Agreement to perform
any of its obligations hereunder;
(2) any other condition of the Buyer's obligations
hereunder is not fulfilled; or
(3) the closing of the sale of the Shares shall not have
occurred on or before February 5, 1999, other than solely by reason of
a breach of this Agreement by the Buyer.
Any such termination shall be effective upon the giving of notice thereof by the
Buyer. Upon such termination, the Buyer shall have no further obligation to the
Company hereunder and the Company shall remain liable for any breach of this
Agreement or the other documents contemplated hereby which occurred on or prior
to the date of such termination.
(l) FURTHER ASSURANCES. Each party to this Agreement will
perform any and all acts and execute any and all documents as may be necessary
and proper under the circumstances in order to accomplish the intents and
purposes of this Agreement and to carry out its provisions.
(m) PUBLIC STATEMENTS, PRESS RELEASES, ETC. The Company and
the Buyer shall have the right to approve before issuance any press releases or
any other public statements with respect to the transactions contemplated
hereby; PROVIDED, HOWEVER, that the Company shall be entitled, without the prior
approval of the Buyer, to make any press release or other public disclosure with
respect to such transactions as is required by applicable law and regulations
(although the Buyer shall be consulted by the Company in connection with any
such press release or other public disclosure prior to its release).
(n) CONSTRUCTION. The language used in this Agreement will be
deemed to be the language chosen by the parties to express their mutual intent,
and no rules of strict construction will be
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applied against any party.
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SUBSCRIPTION AGREEMENT--SIGNATURE PAGE
IN WITNESS WHEREOF, this Agreement has been duly executed by the Buyer
and the Company by their respective officers or other representatives thereunto
duly authorized on the respective dates set forth below.
BUYERS
Name Robert S. Colman as Trustee UDT dated 3/13/85
Number of Shares 100,000
Name UMBTRU
Number of Shares 2,000,000
Name Larry Arnold
Number of Shares 46,000
Name Wayne W. Mills
Number of Shares 50,000
Name David R. Wilmerding
Number of Shares 200,000
Name Jon C. Baker
Number of Shares 200,000
ONHEALTH NETWORK COMPANY
By: \s\ Michael D. Conway
------------------------
Name: Michael D. Conway
Title: Vice President
Date: January 29, 1999
12
76
<PAGE>
ANNEX II
OnHealth Network Company
808 Howell Street, Suite 400
Seattle, WA 98101
January 29, 1999
American Stock Transfer and Trust Company
RE: ORDER TO ISSUE AND REGISTER
Ladies and Gentlemen:
The Board of Directors of OnHealth Network Company, a Washington
corporation (the "Company"), has authorized the issuance and sale of 2,596,000
shares of the Company's Common Stock (the "Common Stock"), pursuant to the
Subscription Agreement, dated January 29, 1999 (the "Subscription Agreement")
between the Company and UMBTRU, Robert S. Colman as Trustee UDT dated 3/13/85,
Wayne W. Mills, Larry Arnold, David R. Wilmerding, and Jon C. Baker (the
"Purchasers"). The Company is selling 2,596,000 shares of its Common Stock to
the Purchasers. You are, therefore, hereby authorized and requested, as Transfer
Agent and Registrar of the Company's Common Stock: (i) to issue and register for
original issuance 2,596,000 shares of the Company's Common Stock in the names
and amounts set forth on the attached Exhibit A, and (ii) to cause certificates
representing such shares of Common Stock to the Purchasers to be delivered to
the Purchasers at the addresses set forth on the attached Exhibit A
Attached please find a copy of the opinion of Preston Gates & Ellis LLP
regarding the due authorization of the Common Stock issuable pursuant to the
Subscription Agreement.
Very truly yours,
ON HEALTH NETWORK COMPANY
--------------------------
Michael D. Conway
Vice President
ACCEPTED AND AGREED:
American Stock Transfer and Trust Company
By
-------------------------------------
Print Name:
---------------------------
13
77
<PAGE>
EXHIBIT A
LIST OF PURCHASERS
Name Robert S. Colman as Trustee UDT dated 3/13/85
Number of Shares 100,000
Send Shares to #1 Below
Name UMBTRU
Number of Shares 2,000,000
Send Shares to #1 Below
Name Larry Arnold
Number of Shares 46,000
Send Shares to #1 Below
Name Wayne W. Mills
Number of Shares 50,000
Send Shares to #1 Below
Name David R. Wilmerding
Number of Shares 200,000
Send Shares to #2 Below
Name Jon C. Baker
Number of Shares 200,000
Send Shares to #2 Below
#1
Brobeck, Phleger & Harrison LLP
One Market, Spear Street Tower
San Francisco, CA 94105
Attention: Matthew B. Swartz
Telephone: (415) 442-0900
#2
Charles Shchwab & Co
Institutional Service Group
1958 Summit Park Place
Suite 500
Orlando, Florida 32810-5938
Attention: Shandra Whitley
14
78
<PAGE>
ANNEX III
OnHealth Network Company
CERTIFICATE OF TRANSFER AGENT AND REGISTRAR
American Stock Transfer and Trust Company (the "Agent") does hereby
certify that:
1. The Agent is duly appointed and authorized to act as Transfer Agent
and Registrar for the Common Stock, par value $0.01 per share (the "Common
Stock"), of OnHealth Network Company, a Washington corporation (the "Company").
2. The Agent, as Transfer Agent and Registrar, pursuant to written
instructions from the Company, has duly issued, countersigned and registered
certificates evidencing an aggregate of 2,596,000 shares of Common Stock of the
Company as an original issue by the Company, in the names and denominations
previously requested by ______________________________,
______________________________, ______________________________, and
______________________________ (the "Purchasers") as set forth on the
Subscription Agreement, dated as of
January 29, 1999, by and between the Company and the Representative.
3. Such certificates were signed by duly authorized officers of the
Company by their facsimile signatures and countersigned and registered on behalf
of the Agent, as Transfer Agent and Registrar, by a representative of the Agent,
who, at the time of affixing his or her signature, was and still is duly
authorized to countersign and register said certificates.
4. The Agent is duly and validly registered as a "Transfer Agent" in
accordance with Section 17A(c) of the Securities Exchange Act of 1934, as
amended.
5. There are a total of __________ shares of Common Stock of the
Company issued and outstanding as of this date, after giving effect to the
action described in paragraph 2 above.
IN WITNESS WHEREOF, the Agent has caused this Certificate to be
executed by a duly authorized officer on its behalf on January 29, 1999.
American Stock Transfer & Trust Company
By: ________________________________
Name:
Title:
15
79
<PAGE>
EXHIBIT 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-3 No. 333-69989) of OnHealth Network Company and Registration Statements (Form
S-8 No. 33-76498, Form S-8 No. 333-70147, Form S-8 No. 333-70149) pertaining to
the 1991 Stock Option Plan and Director Stock Option Plan, 1997 Stock Option
Plan, and 1997-1998 New Hire Option Plan of OnHealth Network Company of our
report dated March 15, 1999, with respect to the financial statements and
schedule of OnHealth Network Company included in the Annual Report (Form 10-K)
for the year ended December 31, 1998.
ERNST & YOUNG LLP
Seattle, Washington
March 29, 1999
80
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ONHEALTH NETWORK COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,119
<SECURITIES> 0
<RECEIVABLES> 765
<ALLOWANCES> 256
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<CURRENT-ASSETS> 3,037
<PP&E> 1,509
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0
0
<COMMON> 132
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