<PAGE>
As filed with the Securities and Exchange Commission on July 20, 1999
Registration No. 333-81321
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- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
ONHEALTH NETWORK COMPANY
(Exact name of registrant as specified in its charter)
----------------
<TABLE>
<S> <C> <C>
Washington 7372 41-1686038
(State of incorporation Primary Standard Industrial (I.R.S. Employer
or organization) Classification Code Number Identification No.)
</TABLE>
808 Howell Street, Suite 400
Seattle, Washington 98101
(206) 583-0100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive office)
----------------
ROBERT N. GOODMAN
Chief Executive Officer
808 Howell Street, Suite 400
Seattle, Washington 98101
(206) 583-0100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies of all communications to:
<TABLE>
<S> <C>
C. KENT CARLSON STEVEN R. FINLEY
GARY J. KOCHER Gibson, Dunn & Crutcher LLP
CHRISTOPHER H. CUNNINGHAM 200 Park Avenue
Preston Gates & Ellis LLP New York, New York 10166-0193
701 Fifth Avenue Suite 5000 (212) 351-4000
Seattle, Washington 98104-7078
(206) 623-7580
</TABLE>
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement as the
Underwriters shall determine.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the Securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box:. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
section 8(a) of the Securities Act of 1933 or until the registration statement
shall become effective on such date as the Commission, acting pursuant to said
section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell nor does it seek an offer to +
+buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PRELIMINARY PROSPECTUS
Subject to completion, dated July 20, 1999
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6,000,000 Shares
[LOGO OF ONHEALTH]
Common Stock
- --------------------------------------------------------------------------------
OnHealth Network Company is offering 6,000,000 shares of common stock to be
sold in this offering.
On July 19, 1999, the last reported sale price of the common stock on the
Nasdaq SmallCap Market was $8.50 per share. The common stock is traded under
the Nasdaq symbol "ONHN." We have applied to have the common stock traded on
the Nasdaq National Market upon completion of this offering.
See "Risk Factors" beginning on page 4 to read about certain factors you should
consider before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Public offering price $ $
- ------------------------------------------------------------------
Underwriting discount
- ------------------------------------------------------------------
Proceeds, before offering expenses, to OnHealth
- ------------------------------------------------------------------
</TABLE>
The underwriters may also purchase up to an additional 900,000 shares of common
stock from OnHealth at the offering price, less the underwriting discount,
within 30 days from the date of this prospectus to cover over-allotments.
Delivery of the shares of common stock will be made on or about ,
1999, against payment in immediately available funds.
Warburg Dillon Read LLC
SG Cowen
CIBC World Markets
<PAGE>
Table of Contents
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<TABLE>
<S> <C>
Forward-Looking Statements......................... i
Prospectus Summary................................. 1
Risk Factors....................................... 4
Use Of Proceeds.................................... 16
Capitalization..................................... 16
Selected Financial Data............................ 17
Management's Discussion and Analysis
of Financial Condition and Results of
Operations........................................ 18
Business........................................... 24
Management......................................... 40
Description of Our Securities...................... 41
Principal Shareholders............................. 43
Underwriting....................................... 44
Legal Matters...................................... 45
Experts............................................ 45
Where You Can Find More Information................ 46
Index to Financial Statements...................... F-1
</TABLE>
Forward-Looking Statements
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This prospectus includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. We have based these forward-looking statements largely on
our current expectations and projections about future events and trends
affecting the financial condition of our business. These forward-looking
statements are subject to a number of risks, uncertainties and assumptions
about OnHealth Network Company, including:
. The expectation that we will become the leading online health information
network depends on our ability to continue to:
. produce and obtain high quality editorial content;
. implement effective traffic and brand-building programs; and
. react effectively to competitive conditions within the market,
including the introduction and further development of competitive
websites.
. The expectation that we will see a growth in revenue and positive net
income as a result of our shift in focus to an online health information
network depends on:
. consumer interest;
. the ability to obtain successful revenue sources from advertisers;
and
. other general market and competitive conditions within the Internet
health market.
See "Risk Factors" and "Business" elsewhere in this prospectus.
i
<PAGE>
Inside Front Cover
A picture of the onhealth.com logo and the following text:
Onhealth.com's home page serves as a gateway to consumer health information.....
Onhealth.com provides an integrated way to look at health from daily living to
prevention to dealing with serious illness.
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 "Health Info Tracker" search
capabilities.
Onhealth.com helps consumers actively manage their own health and well-being as
well as their families'.
Also in the Inside Front Cover is a page-view of the onhealth.com website
including descriptions of the following sections:
News & Reports--Original In-Depth Reports cover important consumer issues daily.
Medical Centers--Leading institutions provide deep information on serious
conditions.
My Wellness Manager--An easy-to-use tool for personalizing and managing a
family's health.
References--Extensive original reference databases covering diseases, drugs,
alternative treatments, and much more.
Search and Advanced Search--Allows users to target their searches across the
hundreds of thousands of pages on the site.
Daily Briefing--Original summaries of the most relevant health and medical news.
Interactive Tools--Risk assessment tools, behavior programs, calculators and
more.
Live Shows--Daily expert chat shows, audio webcasts and surgeries.
<PAGE>
Prospectus Summary
This summary highlights certain information contained elsewhere in this
prospectus. You should read the entire prospectus carefully, especially the
risks of investing in our common stock discussed under "Risk Factors." Except
as otherwise noted, all information in this prospectus assumes no exercise of
the underwriters' over-allotment option. References in this prospectus to
"OnHealth," the "Company," "we," "our" and "us" refer to OnHealth Network
Company, a Washington corporation. Our principal executive offices are located
at 808 Howell Street, Suite 400, Seattle, Washington 98101. Our telephone
number is (206) 583-0100.
Our Business
We are a leading independent source of original, informative, timely and
trusted consumer-oriented health and wellness information, products and
services on the Web. Our website, onhealth.com, is a consumer-focused online
health destination dedicated to the management of personal and family health
and well-being. We employ ten full-time staff editors and writers and we use
over 100 health and medical writers and contributors, enabling us to update our
website daily with original health-related features. By providing users with a
broad range of original in-depth reporting, substantive resources and
references, community discussions, direct access to experts, interactive tools
and exclusive search capabilities, onhealth.com combines the strength of
credible journalism with the power of online interactivity.
We launched our website in July 1998. During June 1999, according to Media
Metrix's Quick Edition, onhealth.com had 892,000 unique users, an increase of
119% from March 1999, which ranks the website as the most trafficked consumer
health content website in June 1999. In addition, onhealth.com attracted
1,563,785 visits, an increase of 61% from our March 1999 visits, according to
Internet Profile Corporation. While we have achieved our traffic growth largely
without the benefit of traditional advertising, in the third quarter of 1999 we
plan to launch a coordinated traditional media advertising and public relations
campaign designed to build our brand through the use of television, radio,
outdoor, print and online media. This campaign will coincide with the recently
relaunched onhealth.com website. We also distribute in excess of 60,000 daily
and weekly broadcast e-mails to registered users who have requested our Daily
Briefing, Weekly Newsletter and Health Info Tracker. This private and
personalized e-mail allows our users to stay current on the health-related
subjects most important to themselves and their families. To date, we have
developed distribution partnerships and content sharing relationships resulting
in over 950 websites that drive traffic to our website. We intend to
aggressively expand our content and distribution partnerships with both online
and traditional media partners that can direct additional users to our website.
Because we are not aligned or affiliated with any one individual,
institution or medical organization, we are able to provide an independent
voice and serve as a trusted consumer advocate for health-related issues. We
believe this will allow us to build a loyal and dedicated audience that will
fuel multiple revenue opportunities. While we believe the demographics of our
users are highly attractive to advertisers, we are developing our website to
generate revenue opportunities from multiple sources, including
advertising/sponsorships, e-commerce transactions and content syndication. We
have a shopping area on our website designed to offer our users a wide variety
of health and wellness products including prescription and over-the-counter
drugs, vitamins, herbs, books, magazines, foods, home products and gifts.
Our Market Opportunity
According to Cyber Dialogue, an industry research firm, during 1998,
approximately 22 million adults in the United States searched online for health
and medical information. Cyber Dialogue estimates that approximately 70% of the
persons searching for health and medical information online
1
<PAGE>
believe the Internet empowers them by providing them with information before
and after they go to a doctor's office. Cyber Dialogue also estimates that in
the year 2000, the number of adults in the United States searching for online
health and medical information will grow to approximately 33 million. In
addition, the Internet is enabling advertisers and online merchants to
inexpensively reach vast, yet highly targeted audiences, and to measure in
real-time the effectiveness of their programs.
The quality and breadth of health oriented websites varies widely and to
date no clear brand has emerged as the leading provider of trusted consumer-
oriented health and wellness information on the Internet. Most of these
websites do little more than repurpose and repackage non-proprietary content
without tailoring such content for the consumer and providing context, insight
or analysis. Many offer little disclosure about their affiliations, the sources
of their information and potential conflicts of interest. Additionally, many
health websites are poorly designed, difficult to navigate and do not
understand the needs of women as the principle gatekeepers of the healthcare
dollar. Accordingly, we believe there is a substantial and growing unmet need
for a well-known, trusted, comprehensive health-related website that addresses
consumers' health needs accurately and intelligently while providing a
satisfying consumer experience. Moreover, we believe that such a website will
have the ability to generate significant revenue from a variety of sources,
including advertising and commerce.
Our Strategy
Our goal is to become the premier source of consumer-oriented health and
wellness information and services on the Internet. We intend to achieve this
goal by implementing the following strategies:
. leveraging and enhancing our expansive proprietary health content;
. providing consumers with a compelling Internet health experience;
. establishing onhealth.com as the premier brand for health and wellness
information on the Internet;
. capitalizing on revenue generating opportunities; and
. engaging in selective acquisitions and strategic partnerships.
Our History
Until January 1998, our traditional line of business had been the
development, production and distribution of medical CD-ROM titles. We also
supplied video, animation and graphic assets to a health and medical cable
television channel. In late 1997, our Board of Directors revised our business
strategy and brought in an entirely new management team and other key employees
skilled in the development of Internet websites, and in 1998, we focused on the
development of a consumer-oriented health and wellness website.
This prospectus includes statistical data regarding the Internet industry.
Such data are taken or derived from information published by sources including
Media Metrix, Internet Profile Corporation, Cyber Dialogue Inc. and Jupiter
Communications, LLC, media research firms specializing in market and technology
measurement on the Internet, and International Data Corporation, a provider of
market and strategic information for the technology industry. Although we
believe that such data are generally indicative of the matters reflected
therein, such data are inherently imprecise, and we caution you not to place
undue reliance on such data.
2
<PAGE>
Recent Developments
In July 1999, we expanded our strategic relationship with America Online,
Inc.'s Digital City, Inc. Under the new agreement, we will be a key health
content provider across Digital City's network of more than 60 Digital City
sites, offering general health content to all 60 sites and local health
resources to 20 major Digital City markets initially, including Dallas-Ft.
Worth, Detroit, Los Angeles, Seattle and Washington D.C. Our content will be
available through Digital City on AOL at www.digitalcity.com, on Netscape's
Netcenter, on MCI World Com Internet, and on Compuserve's online service. We
also have entered into a premier content and online marketing agreement with
Yahoo!, Inc. to provide broad access through targeted advertising and
promotional activities throughout the Yahoo! network of web properties. In
addition, we have entered into another agreement with Yahoo! to be a merchant
of Yahoo! Health. Yahoo! visitors will gain direct access to onhealth.com's
online store sections offering alternative health-related merchandise.
Consumers will be able to use OnHealth TimeSavers featuring alternative
medicine topics and products from selected OnHealth merchants. These e-commerce
opportunities will be integrated with Yahoo! Health's health-related research
capabilities, medical advice, physician locator, nutritional cuisine
information and personal health tests.
The Offering
<TABLE>
<S> <C>
Shares offered by OnHealth.. 6,000,000 shares
Shares to be outstanding
after the offering......... 22,222,420 shares
Use of proceeds............. Increased sales and marketing efforts, working
capital and other general corporate purposes,
including possible future strategic alliances and
acquisitions.
Current Nasdaq SmallCap
Market symbol and proposed
Nasdaq National Market
symbol..................... ONHN
</TABLE>
The number of shares to be outstanding after the offering excludes 4,841,619
shares issuable on the exercise of currently outstanding stock options and
224,662 shares issuable on the exercise of currently exercisable warrants. The
number of shares outstanding after the offering is based on shares outstanding
on June 30, 1999. See "Capitalization."
Summary Financial Data
<TABLE>
<CAPTION>
Six Months
Years Ended December 31, Ended June 30,
------------------------------------------------ -----------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- ------- --------
(Unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenue............. $ 7,013 $ 11,970 $ 9,470 $ 3,761 $ 1,522 $ 485 $ 781
Loss from operations.... (32,434) (14,875) (10,326) (11,262) (11,019) (4,478) (11,374)
Net loss................ (31,257) (14,234) (10,157) (10,947) (10,939) (4,142) (11,143)
Net loss applicable to
common shareholders.... $(31,257) $(14,254) $(10,336) $(13,965) $(11,964) $(4,352) $(11,143)
Net loss per common
share:
Basic and diluted...... $ (4.75) $ (1.90) $ (1.36) $ (1.73) $ (1.12) $ (0.43) $ (0.72)
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
------------------
December 31,
1998 Actual As adjusted
------------ ------ -----------
(Unaudited)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents....................... $ 2,119 $8,854 $55,794
Working capital (deficiency).................... (1,158) 6,139 53,079
Total assets.................................... 3,894 12,297 59,237
Long term debt.................................. -- -- --
Shareholders' equity (deficit).................. (301) 7,269 54,209
</TABLE>
The as adjusted information gives effect to the sale of 6,000,000 shares of
common stock to be sold in this offering at an assumed public offering price of
$8.50 per share, and the application of the net proceeds from the sale of the
shares, after deducting the underwriting discount and estimated offering
expenses payable by OnHealth. See "Use of Proceeds."
3
<PAGE>
Risk Factors
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You should carefully consider the risks and uncertainties described below
before making an investment decision. Our business, financial condition and
operating results could be adversely affected by any of the following factors,
in which event the trading price of our common stock could decline, and you
could lose part or all of your investment. The risks and uncertainties
described below are not the only ones that we face. Additional risks and
uncertainties not presently known to us, or that we currently think are
immaterial, may also impair our business operations.
Risks Related to Our Business
We have a history of losses and negative cash flow and anticipate continued
losses.
Since our inception, we have incurred significant losses and negative cash
flow, and as of June 30, 1999, had an accumulated deficit of approximately
$100.7 million. We have not achieved profitability and expect to continue to
incur operating losses for the foreseeable future as we fund operating and
capital expenditures in areas such as expansion of our network, advertising,
brand promotion, content development, sales and marketing, and operating
infrastructure. Our business model assumes that consumers will be attracted to
and use healthcare information and related content available on our Internet-
based consumer healthcare network which will, in turn, allow us the opportunity
to sell advertising designed to reach those consumers. Our business model also
assumes that those consumers will access important healthcare needs through
electronic commerce using our website and that local healthcare organizations
will affiliate with us. This business model is not yet proven, and we cannot
assure you that we will ever achieve or sustain profitability or that our
operating losses will not increase in the future.
Since we recently changed our business focus, we essentially are a new company
and accordingly are subject to those risks associated with a new company.
Even though we were founded in 1990, we have only been active online since
1996 and the onhealth.com website was not actually launched until July 1998. As
a result, our company is essentially a new venture. Therefore, we do not have a
significant operating history upon which you can evaluate us and our prospects,
and you should not rely upon our past performance to predict our future
performance. In transitioning to our new business model, we are substantially
changing our business operations, sales and implementation practices, customer
service and support operations and management focus. We are also facing new
risks and challenges, including a lack of meaningful historical financial data
upon which to plan future budgets, competition from a wider range of sources,
the need to develop strategic relationships and other risks described below. We
cannot guarantee that we will be able to successfully transition to our new
business model.
Our ability to generate profits, if any, will depend on our ability to:
. attract consumers to our website;
. attract advertisers to our website;
. generate e-commerce revenue from our website; and
. control costs.
We anticipate continued significant operating losses at least through 2000,
as our website is improved and marketed and the OnHealth network is enhanced.
We cannot assure you that we will ever attain profitability.
4
<PAGE>
Our business model relies to a large extent on advertising revenue from our
website. We cannot provide any assurance that we will generate significant
advertising revenue.
Our future is highly dependent on increased use of the Internet as an
advertising medium. We expect to derive a substantial amount of our revenue
from advertising and sponsorships. The Internet advertising market is new,
extremely competitive and rapidly evolving, and we cannot yet predict its
effectiveness as compared to traditional media advertising. As a result, demand
and market acceptance for Internet advertising solutions are uncertain. Most of
our current or potential advertising customers have little or no experience
advertising over the Internet and have allocated only a limited portion of
their advertising budgets to Internet advertising. The adoption of Internet
advertising, particularly by those entities that have historically relied upon
traditional media for advertising, requires the acceptance of a new way of
conducting business, exchanging information and advertising products and
services. Such customers may find Internet advertising to be less effective for
promoting their products and services relative to traditional advertising
media. We cannot assure you that the market for Internet advertising will
continue to emerge or become sustainable. If the market for Internet
advertising fails to develop or develops more slowly than we expect, then our
ability to generate advertising revenue would be materially adversely affected.
To date, advertisers have not, by their actions, shown that they believe in the
Internet as a legitimate advertising medium.
Advertising rates quoted by different vendors vary widely, making it
difficult for us to project future levels of advertising revenue. Internet
advertising rates are based in part on third-party estimates of an individual's
use of an Internet website. These estimates of use are called impressions. Such
estimates are often based on sampling techniques or other imprecise measures,
and may materially differ from our own estimates. We do not know if advertisers
will accept our or other parties' measurements of impressions. Since the
Internet advertising industry is in its infancy, universally accepted standards
measuring the effectiveness of a particular Internet advertisement have not
been established or widely embraced. Our advertising revenue could be adversely
affected if we are unable to adapt to new forms of Internet advertising.
Moreover, filter software programs are available that limit or prevent
advertising from being delivered to an Internet user's computer. Widespread
adoption of this software could adversely affect the commercial viability of
Internet advertising and, therefore, our business.
In order to compete for advertising dollars with the growing number of Internet
websites, we must establish, maintain and strengthen our brand.
In order to expand our audience of users and increase our online traffic, we
must establish, maintain and strengthen our brand. For us to be successful in
establishing our brand, we believe healthcare consumers must perceive us as a
trusted source of healthcare information, and advertisers and merchants must
perceive us as an effective marketing and sales channel for their products and
services. As discussed in this prospectus, we are increasing substantially our
marketing budget in our efforts to establish brand recognition and brand
loyalty. Our business could be materially adversely affected if our marketing
efforts are not productive or if we cannot strengthen our brand.
In addition, to remain competitive with other Internet companies, including
the numerous other Internet health-related websites, we must continue to
enhance and improve the responsiveness, functionality and features of our
website and develop other products and services. This will require us to:
. develop or license increasingly complex technology; and
. create an easy to use and functional e-commerce component to our website.
We may not succeed in developing or introducing such features, functions,
products and services in order to attract consumers. Such failure would
adversely affect our business, results of operations and financial condition.
5
<PAGE>
Since our advertising contracts are for short terms and often guarantee a
minimum number of impressions, we cannot be sure that we will continue to
attract Internet advertisers.
The majority of our advertising contracts have been for terms averaging
three months in length, with relatively few longer-term advertising contracts.
We cannot assure you that our current advertisers will continue to purchase
advertisements on our website. In addition, 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.
We depend on third-party relationships, many of which are short-term or
terminable, to generate traffic on our website.
In order to expand our network, we have entered into a number of strategic
relationships which involve the payment of funds for prominent or exclusive
carriage of our healthcare information and services. These transactions are
premised on the assumption that the traffic we obtain from these arrangements
will permit us to earn revenue in excess of the payments made to partners. This
assumption is not yet proven, and if we are unsuccessful in generating
sufficient resources to offset these expenditures, we will likely be unable to
operate our business. We have entered into distribution relationships with
several companies, and we intend to enter into additional relationships in the
future. Most of these distribution relationships are short term in nature and
may not be renewed or may be canceled by our distribution partner. Although we
view our distribution relationships as a key factor in our overall business
strategy, our distribution partners may not view their relationships with us as
significant to their business, and they may later decide to end their
commitment to us or even decide to compete directly with us in the future. We
cannot guarantee that any distribution partner will perform its obligations as
agreed or contemplated or that we would be able to specifically enforce any
distribution agreement. Our arrangements with our distribution partners
generally do not establish minimum performance requirements, but instead rely
on the voluntary efforts of our distribution partners. Therefore, we cannot
guarantee that these relationships will be successful.
Most of our arrangements with third-party Internet websites:
. 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.
In addition, we do not have agreements with many website operators that
provide links to onhealth.com, and those operators with which we do may
terminate such links at any time without notice. As a result, we cannot assure
you that our existing relationships will result in sustained business
relationships or the generation of significant revenue 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
operation and financial condition.
Since our website relies on some content that we do not create, it is possible
that we may not be able to provide such content in the future.
While we produce much of the editorial content found on our website, some of
our content is licensed from third parties. Accordingly, we rely on the
expertise, technical capability, name recognition and willingness to syndicate
content for branding and distribution of others. As health-related content
6
<PAGE>
grows on the web, there will be increasing competition for the best health
information suppliers. This may result in certain content becoming unavailable
or in significantly higher content prices. Such an outcome could make our
website less attractive or useful for a user and could have a material adverse
effect on our business and financial performance.
Our business is changing rapidly, which could cause our quarterly operating
results to vary and our stock price to fluctuate.
Our revenue and operating results may vary significantly from quarter to
quarter due to a number of factors, not all of which are in our control. If we
have a shortfall in revenue in relation to our expenses, or if our expenses
precede increased revenue, then our results of operations would be materially
adversely affected. This would likely affect the market price of our common
stock in a manner which may be unrelated to our long-term operating
performance. Important factors which could cause our results to fluctuate
materially include:
. our ability to attract and retain users;
. our ability to attract and retain advertisers and sponsors;
. our ability to attract and retain customers and maintain customer
satisfaction for our existing and future e-commerce offerings;
. new Internet websites, services or products introduced by us or our
competitors;
. the level of Internet and other online services usage;
. our ability to upgrade and develop our systems and infrastructure and
attract new personnel in a timely and effective manner;
. our ability to successfully integrate operations and technologies from
any acquisitions, joint ventures or other business combinations or
investments; and
. technical difficulties or system downtime affecting the operation of our
website.
In addition, as our market develops, seasonal and cyclical patterns may
emerge. These patterns may affect our revenue. We cannot yet predict to what
extent our operations will prove to be seasonal. Due to the factors noted above
and the other risks discussed in this section, you should not rely on quarter-
to-quarter comparisons of our results of operations as indicators of future
performance. It is possible that in some future periods our operating results
may be below the expectations of public market analysts and investors. In this
event, the price of our common stock may underperform or decrease.
Our success depends in large part on the continuing efforts of two individuals.
In addition, our success depends on our ability to continue to attract, retain
and motivate highly skilled employees.
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. If we lost the services of either Mr. Goodman
or Ms. Farwell, our business would be severely affected. Our ability to execute
our growth plan and be successful also depends on our continuing ability to
attract, retain and motivate other highly skilled employees. As we continue to
grow, we will need to hire additional personnel in all operational areas.
Competition for personnel throughout the Internet industry is intense. We may
be unable to retain our key employees or attract, assimilate or retain other
highly qualified employees in the future. We have from time to time in the past
experienced, and we expect to continue to experience in the future, difficulty
in hiring and retaining highly skilled employees
7
<PAGE>
with appropriate qualifications. If we do not succeed in attracting new
personnel or retaining and motivating our current personnel, our business will
be adversely affected.
To successfully compete in the Internet health field, we must continue to
improve the product we offer and increase the number of people using our
website.
To do so, we will have to significantly increase our operating expenses to:
. develop new distribution channels;
. fund greater levels of research and development;
. add editorial content;
. increase our sales and marketing operations;
. broaden our customer support capabilities; and
. establish brand identity and strategic alliances.
Such planned expansions, however, will require substantial capital. We
cannot guarantee that such capital will be available, or if available, that the
terms on which such capital is available will be acceptable to us. If we raise
additional cash through the issuance of equity or convertible debt securities:
. the percentage ownership of our shareholders will be reduced;
. shareholders may experience additional dilution upon the conversion of
any such debt securities; and
. such securities may have rights, preferences or privileges senior to
those of the holders of common stock.
Any future acquisitions we make of companies or technologies may result in
disruptions to our business and/or the distraction of our management, due to
difficulties in assimilating acquired personnel and operations.
We may acquire or make investments in complementary businesses,
technologies, services or products if appropriate opportunities arise. From
time to time we engage in discussions and negotiations with companies regarding
our acquiring or investing in such companies' businesses, products, services or
technologies, and we regularly engage in such discussions and negotiations in
the ordinary course of our business. Some of those discussions also contemplate
the other party making an investment in our company. We cannot assure you that
we will be able to identify future suitable acquisition or investment
candidates, or if we do identify suitable candidates, that we will be able to
make such acquisitions or investments on commercially acceptable terms or at
all. If we acquire or invest in another company, we could have difficulty in
assimilating that company's personnel, operations, technology and software. In
addition, the key personnel of the acquired company may decide not to work for
us. If we make other types of acquisitions, we could have difficulty in
integrating the acquired products, services or technologies into our
operations. These difficulties could disrupt our ongoing business, distract our
management and employees, increase our expenses and adversely affect our
results of operations. Furthermore, we may incur indebtedness or issue equity
securities to pay for any future acquisitions. The issuance of equity
securities would be dilutive to our existing shareholders.
Much of our website relies on owned or licensed intellectual property and we
cannot be sure that such rights are protected from the use of others, including
potential competitors.
We regard much of our website and its technology as proprietary and try to
protect it by relying on trademarks, copyrights, trade secret laws and
confidentiality agreements with consultants. In
8
<PAGE>
connection with our license agreements with third parties, we seek to control
access to and distribution of our technology, documentation and other
proprietary information. Even with all of these precautions, it could be
possible for someone else to either copy or otherwise obtain and use our
proprietary information without our authorization or to develop similar
technology independently. Effective trademark, 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 and expensive. We cannot be sure that the
steps we have taken will prevent misappropriation of our proprietary
information. Such misappropriation could have a material adverse effect on our
business. In the future, we may need to go to court to either 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 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 be sure that these third-party technology licenses will
continue to be available on commercially reasonable terms, if at all.
We may have liability for products sold over, or information retrieved from,
our website.
Because any of the materials on our website may be downloaded or viewed, and
such materials could be sent to others, we could be sued for:
. defamation;
. negligence;
. copyright or trademark infringement;
. medical malpractice or personal injury; or
. other theories based on the nature and content of such materials.
We could also be exposed to liability with respect to third-party
information that may be accessible:
. through our website, or
. through content and materials that may be posted by our users on
discussion boards that we offer.
Such claims might include, that by directly or indirectly providing links to
websites operated by third parties, we are liable for copyright or trademark
infringement or other wrongful actions by such third parties through such
websites. It is also possible that, if any third-party information provided on
our website contains errors, third parties could make claims against us for
losses they incur relying on such information. Insurance may not be adequate to
cover any such potential liabilities. Even if such claims do not result in
liability, we could incur significant costs in investigating and defending
against such claims.
In addition, patients who file lawsuits against doctors often name as
defendants all persons or companies with any relationship to the doctors. As a
result, patients may file lawsuits against us based on advice rendered by
physicians through our website. In addition, a court or government agency may
take the position that our delivery of health information, or information
delivered by a third-party website that a consumer accesses through our
website, exposes us to malpractice or other personal injury liability for
wrongful delivery of healthcare services or erroneous health information. We
cannot assure you that the amount of insurance we maintain with insurance
carriers will be sufficient to cover
9
<PAGE>
all of the losses we might incur from these claims and legal actions. In
addition, insurance for some risks is difficult, impossible or too costly to
obtain, and as a result, we may not be able to purchase insurance for some
types of risks.
We are party to litigation with a former officer of the Company.
In June 1999, Jon Fisse, our former Chief Operating Officer, resigned from
OnHealth before we were able to reach agreement on the terms of his employment
agreement. Shortly thereafter, Mr. Fisse filed a lawsuit in the United States
District Court for the Southern District of New York asserting that OnHealth
terminated Mr. Fisse and violated his rights in connection with his separation
from OnHealth. As a result, Mr. Fisse is seeking damages which include
severance compensation, stock option benefits and compensatory and punitive
damages for allegedly defamatory statements contained in our press release
which announced Mr. Fisse's departure. The same day, we filed a declaratory
judgement action in the United States District Court for the Western District
of Washington seeking to declare that Mr. Fisse terminated his employment and
that we owe him no future remuneration or stock option benefits. If Mr. Fisse
were to be successful on all of his claims, our business and financial
condition could be materially and adversely affected. We believe we have valid
defenses against all of Mr. Fisse's claims and intend to defend against such
claims vigorously. See "Business--Legal Proceedings."
We have recently experienced and are currently experiencing rapid growth in our
business. If we are unable to manage this growth our business could be harmed.
We have experienced and are currently experiencing a period of significant
growth. This growth has placed, and the future growth we anticipate in our
operations will continue to place, a significant strain on our resources. As
part of this growth, we will have to implement new operational and financial
systems and procedures and controls, expand, train and manage our employee
base, and maintain close coordination among our technical, accounting, finance,
marketing, sales and editorial staffs. If we are unable to manage our growth
effectively, our business, results of operations and financial condition could
be adversely affected. In addition, all of the members of our senior management
joined us in late 1997, 1998 or early 1999. Thus, we have a very new management
team which has not worked together for very long. We cannot assure you that our
management team will be able to work together effectively or successfully
manage our growth.
It is possible that we may have year 2000 problems. As a result, our computer
systems could fail.
We could be affected by Year 2000 issues related to non-compliant
information technology 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 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 adverse 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.
We believe that the most likely worst case Year 2000 scenario is a failure
beyond our control, such as a prolonged telecommunications or electrical
failure. Such a failure would:
. prevent us from operating our business;
. prevent users from accessing our website; and
. change the behavior of advertising customers or persons accessing our
website.
10
<PAGE>
We believe that the primary business risks, in the event of such failure,
would include:
. lost advertising revenue;
. increased operating costs, loss of customers or persons accessing our
website; and
. other business interruptions of a material nature, as well as claims of
mismanagement, misrepresentation or breach of contract.
Any such problems would have a material adverse effect on our business. We
have not made any contingency plans to address such risks.
Our network could be penetrated. This could result in a disruption in our
website.
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
risk of loss or litigation and potential liability.
If today's economic conditions deteriorate, our future results of operations
would be adversely affected.
Time spent on the Internet by individuals, purchases of new computers and
purchases of membership subscriptions to Internet websites 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 discretionary consumer spending, including economic conditions
affecting disposable consumer income such as employment, wages and salaries,
business conditions, interest rates, availability of credit and taxation. 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.
We have no plans to pay cash dividends, and investors should not buy our common
stock expecting to receive 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.
Our business may face additional risks and uncertainties not presently known to
us which could cause our business to suffer.
In addition to the risks specifically identified in this Risk Factors
section or elsewhere in this prospectus, we may face additional risks and
uncertainties not presently known to us or that we currently deem immaterial
which ultimately impair our business, results of operations and financial
condition.
Risks Related to Our Industry
Consumers and the healthcare industry must accept the Internet as a source of
healthcare content and services for our business model to be successful.
To be successful, we must attract to our network a significant number of
consumers as well as other participants in the healthcare industry. To date,
consumers have generally looked to healthcare professionals as their principal
source for health and wellness information. Our business model assumes that
consumers will use healthcare information available on our network, that
consumers will access
11
<PAGE>
important healthcare needs through electronic commerce using our website, and
that local healthcare organizations will affiliate with us. This business
model is not yet proven, and if we are unable to successfully implement our
business model, our business will be materially adversely affected.
The Internet industry is highly competitive and changing rapidly, and we may
not have the resources to compete adequately.
The number of Internet websites offering users healthcare content, products
and services is vast and increasing at a rapid rate. These companies compete
with us for users, advertisers, e-commerce transactions and other sources of
online revenue. In addition, traditional media and healthcare providers
compete for consumers' attention both through traditional means as well as
through new Internet initiatives. We believe that competition for healthcare
consumers will continue to increase as the Internet develops as a
communication and commercial medium.
There are a number of competitors delivering online health content who will
also seek advertising revenue, and it is likely that more competitors will
emerge in the near future. Such competitors include, among others:
WebMD/Healtheon, Mayo Health O@sis, drkoop.com, Mediconsult, Medscape and
InteliHealth. Many of these competitors have more cash available to spend,
longer operating histories and stronger brand recognition than we do. Some
have internal distribution or other opportunities to support their business
that we neither have nor are able to replicate for a reasonable investment. As
expressed above, we believe that the number of other health care Internet
companies that rely on Internet-based advertising revenue 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.
We believe that the principal competitive factors in attracting advertisers
to our website include:
. the amount of traffic on our website;
. 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.
Our business is dependent on the continuous, reliable and secure operation of
our website and related tools and functions we provide.
All companies that rely on the Internet are dependent upon the continuous,
reliable and secure operation of Internet servers and related hardware and
software. If that service is interrupted, consumers would be inconvenienced
and commercial clients would suffer from a loss in advertising or transaction
delivery. This would result in a revenue loss to us. Even though our computer
and communications hardware are protected through physical and software
safeguards, they are still vulnerable to fire, earthquake, flood, power loss,
telecommunications failures, physical or software break-ins and similar
events. We do not have a complete back-up 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 business. We also depend on third parties
to provide users with web browsers and Internet and online services necessary
for access to our website. 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.
We retain confidential customer information in our database. Therefore, it
is critical that our facilities and infrastructure remain secure and are
perceived by consumers to be secure. Despite the
12
<PAGE>
implementation of security measures, our infrastructure may be vulnerable to
physical break-ins, computer viruses, programming errors or similar disruptive
problems. A material security breach could damage our reputation or result in
liability to us.
Since we operate an Internet-based network, our business is subject to
government regulation relating to the Internet which could impair our
operations.
Because of the increasing use of the Internet as a communication and
commercial medium, the government has adopted and may adopt additional laws and
regulations with respect to the Internet covering such areas as:
. user privacy,
. pricing,
. content,
. taxation,
. copyright protection, and
. the distribution of health care products or advice over the Internet.
Since we operate a healthcare network over the Internet, our business is
subject to government regulation specifically relating to medical devices, the
practice of medicine and pharmacology, healthcare regulation, insurance and
other matters unique to the healthcare area. Laws and regulations have been or
may be adopted with respect to the provision of healthcare-related products and
services online, covering areas such as:
. the regulation of medical devices;
. the practice of medicine and pharmacology and the sale of controlled
products such as pharmaceuticals online;
. the regulation of government and third-party cost reimbursement; and
. the regulation of insurance sales.
FDA Regulation of Medical Devices. Some computer applications and software
are considered medical devices and are subject to regulation by the United
States Food and Drug Administration. We do not believe that our current
applications or services will be regulated by the FDA; however, our
applications and services may become subject to FDA regulation. Additionally,
we may expand our application and service offerings into areas that subject us
to FDA regulation. We have no experience in complying with FDA regulations. We
believe that complying with FDA regulations would be time consuming, burdensome
and expensive and could delay or prevent our introduction of new applications
or services.
Regulation of the Practice of Medicine and Pharmacology. The practice of
medicine and pharmacology requires licensing under applicable state law. We
have endeavored to structure our website and affiliate relationships to avoid
violation of state licensing requirements, but a state regulatory authority may
at some point allege that some portion of our business violates these statutes.
Any such allegation could result in a material adverse effect on our business.
Further, any liability based on a determination that we engaged in the practice
of medicine without a license may be excluded from coverage under the terms of
our current general liability insurance policy.
Federal and State Healthcare Regulation. We earn a service fee when users on
our website purchase prescription pharmacy products from certain of our e-
commerce partners. Federal and state anti-kickback laws prohibit granting or
receiving referral fees in connection with sales of pharmacy products that are
reimbursable under federal Medicare and Medicaid programs and other
reimbursement programs. Although there is uncertainty regarding the
applicability of these regulations to our e-commerce revenue strategy, we
believe that the service fees we receive from our e-commerce partners are for
the primary purpose of marketing and do not constitute payments that would
violate federal or state "anti-kickback" laws. However, if our program were
deemed to be inconsistent with
13
<PAGE>
federal or state law, we could face criminal or civil penalties. Further, we
would be required either not to accept any transactions which are subject to
reimbursement under federal or state healthcare programs or to restructure our
compensation to comply with any applicable anti-kickback laws or regulations.
In addition, similar laws in several states apply not only to government
reimbursement but also to reimbursement by private insurers. If our activities
were deemed to violate any of these laws or regulations, it could cause a
material adverse affect on our business, results of operations and financial
condition.
Internet capacity constraints may impair the ability of consumers to access our
website, which could hinder our ability to generate advertising revenue.
Our success will depend upon the ability of the communications industry to
provide Internet access and carry Internet traffic. The Internet may not prove
to be a viable commercial medium because of:
. inadequate development of the necessary infrastructure such as a reliable
network backbone;
. timely development of complementary products such as high speed modems;
. delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity; or
. increased government regulation.
If the Internet continues to experience significant growth in the number of
users and the level of use, then the Internet infrastructure may not be able to
continue to support the demands placed on it.
Risks Related to the Offering
There may be substantial sales of our common stock after the offering.
Sales of substantial amounts of our common stock in the public market
following this offering, or the perception that such sales will occur, could
have a material adverse effect on the market price of the common stock. We, our
directors, executive officers and certain key employees beneficially owning an
aggregate of 858,646 shares of common stock, have agreed not to offer, sell or
contract to sell or otherwise dispose of any common stock for a period of 180
days after the date of this prospectus without the prior written consent of
Warburg Dillon Read LLC, subject to certain exceptions. In its sole discretion,
and at anytime without notice, Warburg Dillon Read LLC may release all or any
portion of the shares subject to such lock-ups.
In connection with entering into acquisitions and strategic relationships,
we have issued and may continue to issue common stock and options and warrants
to purchase significant amounts of our common stock. The issuance of
significant amounts of common stock, options or warrants in the future,
particularly options and warrants with exercise prices below the fair market
value of the common stock at the time of issuance, could have a material
adverse effect on our business, financial condition or operating results or on
the market price for the common stock.
Our three largest shareholders have significant influence on any matter before
our shareholders.
According to filings made with the SEC, our three largest shareholders have
beneficial ownership of 8,391,750 shares, or 51.7%, of our outstanding common
stock (37.8% on a pro forma basis for the completion of this offering, assuming
such shareholders do not purchase shares in this offering). As a result, these
shareholders, if they act as a group, will be able to exert significant
influence on all matters requiring shareholder approval, including the election
of directors and approval of significant corporate transactions. Such control
may have the effect of accelerating, delaying or preventing a change in
control. For more information, see "Principal Shareholders."
14
<PAGE>
Investors will be relying on our management's judgment regarding the use of
proceeds from this offering.
Our management will have broad discretion with respect to the use of the net
proceeds from this offering, and investors will be relying on the judgment of
our management regarding the application of these proceeds. Presently,
anticipated uses include the funding of operating losses and for general
corporate purposes, including expansion of our network, advertising, brand
promotion, content development and working capital. We may also use a portion
of the proceeds for strategic alliances and acquisitions and to repay debt. We
have not yet determined the amount of net proceeds to be used specifically for
each of the foregoing purposes. Please see "Use of Proceeds."
Our need for additional financing is uncertain as is our ability to raise
further financing if required.
We currently anticipate that our available cash resources combined with the
net proceeds from this offering will be sufficient to meet our anticipated
working capital and capital expenditure requirements for at least 12 months
after the date of this prospectus. During this time period, we may need to
raise additional funds, however, to respond to business contingencies which may
include the need to:
. fund more rapid expansion;
. fund additional marketing expenditures;
. develop new or enhance existing editorial content, features or services;
. enhance our operating infrastructure;
. respond to competitive pressures; or
. acquire complementary businesses or necessary technologies.
If additional funds are raised through the issuance of equity or convertible
debt securities, the percentage ownership of our shareholders will be reduced,
and these newly-issued securities may have rights, preferences or privileges
senior to those of existing shareholders, including those acquiring shares in
this offering. We cannot assure you that additional financing will be available
on terms favorable to us, or at all. If adequate funds are not available or are
not available on acceptable terms, our ability to fund our operations, take
advantage of unanticipated opportunities, develop or enhance editorial content,
features or services, or otherwise respond to competitive pressures would be
significantly limited.
Market prices of emerging Internet companies have been highly volatile, and the
market for our stock may exhibit volatility as well.
The stock market has experienced significant price and trading volume
fluctuations, and the market prices of technology companies, particularly
Internet-related companies, have been extremely volatile. Exceptional share
price and trading volume changes have accompanied recent public offerings by
Internet companies in the first days and weeks after the securities were
released for public trading. Investors may not be able to resell their shares
at or above the initial public offering price. Please see "Underwriting." In
the past, following periods of volatility in the market price of a public
company's securities, securities class action litigation has often been
instituted against that company. Such litigation could result in substantial
costs and a diversion of management's attention and resources.
Certain provisions of our governing documents and Washington law may have anti-
takeover effects.
Certain provisions of our Amended and Restated Articles of Incorporation and
By-laws and Washington law could make it more difficult for a third party to
acquire us, even if a change in control would be beneficial to our
shareholders. For more information, see "Description of Our Securities."
15
<PAGE>
Use of Proceeds
- --------------------------------------------------------------------------------
We estimate that the net proceeds to us from the sale of the 6,000,000
shares of common stock in this offering will be approximately $46.9 million
($54.1 million if the underwriters' over-allotment is exercised in full),
assuming a public offering price of $8.50 per share and after deducting
estimated underwriting discounts and commissions and offering expenses payable
by us.
We expect to use the net proceeds of this offering to finance operations
while we continue to incur operating losses, to expand our marketing efforts
and for general corporate purposes, including approximately $25.0 million for
advertising and brand promotion, approximately $15.0 million for distribution
and marketing relationships and the remainder for content development and
licensing and working capital. We may also use a portion of the proceeds for
the acquisition of, or investment in, companies, technologies or assets that
complement our business.
Pending these uses, we intend to invest the net proceeds from this offering
in short term, investment grade, interest bearing instruments.
Capitalization
- --------------------------------------------------------------------------------
The following table shows the unaudited capitalization of OnHealth Network
Company as of June 30, 1999 on an actual basis, and as adjusted to reflect the
estimated net proceeds of the offering to be received by us as described in
"Use of Proceeds." You should read this table in connection with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of this prospectus.
<TABLE>
<CAPTION>
June 30, 1999
----------------------
Actual As Adjusted
--------- -----------
(In thousands)
<S> <C> <C>
Shareholders' equity:
Common stock, $.01 par value: 100,000,000 shares
authorized actual, 16,222,420 shares issued and
outstanding actual, and 22,222,420 shares issued and
outstanding as adjusted(1)............................ $ 162 $ 222
Additional paid-in capital............................... 107,765 154,645
Accumulated deficit...................................... (100,658) (100,658)
--------- --------
Total shareholders' equity and capitalization........ $ 7,269 $ 54,209
========= ========
</TABLE>
- --------
(1) Excludes 4,841,619 shares of common stock that were subject to outstanding
options and 224,662 shares that were subject to outstanding warrants with a
weighted average exercise price of $8.21 per share in each case as of June
30, 1999.
16
<PAGE>
Selected Financial Data
- --------------------------------------------------------------------------------
The Statements of Operations Data for the years ended December 31, 1996,
1997 and 1998 and the Balance Sheet Data as of December 31, 1997 and 1998 are
derived from our audited financial statements, which are included elsewhere in
this prospectus. The Statements of Operations Data for the years ended December
31, 1994 and 1995 and the Balance Sheet Data as of December 31, 1994, 1995 and
1996 are derived from our audited financial statements that are not included in
this prospectus. The Statements of Operations Data for the six months ended
June 30, 1998 and 1999 and Balance Sheet Data as of June 30, 1999 are derived
from our unaudited financial statements included elsewhere in the prospectus
and which, in the opinion of management, reflect all adjustments necessary for
a fair presentation of that data. All such adjustments are of a normal
recurring nature. This selected financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Financial Statements of OnHealth and the related notes
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
------------------------------------------------ --------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- ---------- --------
(Unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Net revenue............. $ 7,013 $ 11,970 $ 9,470 $ 3,761 $ 1,522 $ 485 $ 781
Cost of revenue......... 2,402 6,231 5,076 2,541 767 741 99
-------- -------- -------- -------- -------- ------- --------
Gross margin............ 4,611 5,739 4,394 1,220 755 (256) 682
Operating expenses:
Product development,
editorial and design.. 19,503 7,494 5,651 4,243 3,744 1,558 3,048
Sales and marketing.... 9,694 7,473 2,705 1,347 5,626 1,431 7,011
General and
administrative........ 5,585 5,647 6,364 6,892 2,404 1,233 1,997
Investment in
affiliate............. 2,263 -- -- -- -- -- --
-------- -------- -------- -------- -------- ------- --------
Total operating
expenses............... 37,045 20,614 14,720 12,482 11,774 4,222 12,056
-------- -------- -------- -------- -------- ------- --------
Loss from operations.... (32,434) (14,875) (10,326) (11,262) (11,019) (4,478) (11,374)
Interest income
(expense).............. 1,177 641 169 (158) 84 54 229
Other income (expense).. -- -- -- 473 (4) 282 2
-------- -------- -------- -------- -------- ------- --------
Total interest and other
income (expense)....... 1,177 641 169 315 80 336 231
-------- -------- -------- -------- -------- ------- --------
Net loss................ $(31,257) $(14,234) $(10,157) $(10,947) $(10,939) $(4,142) $(11,143)
======== ======== ======== ======== ======== ======= ========
Net loss applicable to
common shareholders.... $(31,257) $(14,254) $(10,336) $(13,965) $(11,964) $(4,352) $(11,143)
======== ======== ======== ======== ======== ======= ========
Net loss per common
share
Basic and diluted...... $ (4.75) $ (1.90) $ (1.36) $ (1.73) $ (1.12) $ (0.43) $ (0.72)
======== ======== ======== ======== ======== ======= ========
Weighted average number
of common shares
outstanding........... 6,583 7,484 7,580 8,056 10,680 10,131 15,544
======== ======== ======== ======== ======== ======= ========
<CAPTION>
December 31,
------------------------------------------------
June 30,
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- ----------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 20,653 $ 7,759 $ 3,462 $ 2,488 $ 2,119 $ 8,854
Working capital
(deficiency)........... 20,735 8,607 3,230 (1,252) (1,158) 6,139
Total assets............ 32,101 18,352 13,411 4,577 3,894 12,297
Long term debt.......... -- -- 3,500 -- -- --
Shareholders' equity
(deficit).............. 26,968 12,880 2,900 18 (301) 7,269
</TABLE>
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<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
Overview
We are a leading independent source of original, informative, timely and
trusted consumer-oriented health and wellness information, products and
services on the Web. Our website, onhealth.com, is a consumer-driven online
health destination dedicated to the management of family health and well-being.
By providing users with original in-depth reporting, substantive resources and
references, community discussions, direct access to experts, interactive tools
and exclusive "smart" search capabilities, onhealth.com combines the strength
of credible journalism with the power of online interactivity.
Until January 1998, our traditional line of business had been CD-ROM
development, production and distribution. We were also a supplier of video,
animation and graphic assets to a health and medical cable television channel.
In late 1997, our Board of Directors revised our business strategy and brought
in an entirely new management team and other key employees skilled in the
development of Internet websites. In 1998, we focused on developing an
Internet-delivered, consumer-oriented health and wellness website. Accordingly,
our revenue model as compared to prior years, has changed to concentrate on
online revenue sources as opposed to CD-ROM based product sales and licensing.
In July 1998, we relaunched the onhealth.com website and focused on
generating advertising revenue. We have a wide variety of advertisers on our
website including healthcare and other non-healthcare advertisers. In March
1999, we launched a shopping area on our site designed to offer our consumers
the ability to purchase a wide variety of health and wellness products and
related products. To date, we have e-commerce relationships with drugstore.com,
VitaminShoppe, Amazon.com, SelfCare, American Greetings, ProFlowers, Whole
Foods Market, greenmarketplace.com and enews.com, and expect to continue to add
additional categories and partners.
Results of Operations
Six Months Ended June 30, 1998 and 1999
Net revenue
Net revenue for the six month periods ended June 30, 1998 and 1999 was as
follows:
<TABLE>
<CAPTION>
Six Months
Ended June 30,
--------------
1998 1999
---- ----
(In thousands)
<S> <C> <C>
Online..................................................... $146 $563
E-commerce................................................. -- 150
Contract development and other............................. 410 49
Product sales and licensing................................ (71) 19
---- ----
Net revenue.............................................. $485 $781
==== ====
</TABLE>
Net revenue for the six month period ended June 30, 1999 increased by
$296,000, or 61%, to $781,000, from $485,000 in the same period in 1998. The
increase in revenue is primarily due to increased online revenue generated by
our onhealth.com web site, which was redesigned and relaunched in July 1998,
partially offset by a reduction in contract development and other revenue. An
increase in user traffic and the number of site sponsorship and advertising
clients over the same six month period in the prior year accounted for the
increase in online revenue. E-commerce revenue is the result of new contracts
entered into during 1999. The decrease in contract development revenue and
other generally reflects our shift toward online efforts. We do not anticipate
receiving any significant
18
<PAGE>
revenue from contract development and other or product sales and licensing in
the future. E-commerce revenue includes fees for guaranteed impressions,
exclusivity fees and revenue sharing. The negative product sales and licensing
revenues in 1998 are a result of CD ROM product returns.
Gross margin
Gross margin as a percentage of net revenue for the six month period ended
June 30, 1999 was 87% compared to a negative gross margin of 53% for the same
period in the previous year. The improvement in gross margin for the first six
months of 1999 was primarily due to the high margins of online revenue in
relation to the gross margins achieved in the first six months of 1998 for CD-
ROM revenue. The negative gross margin in 1998 was the result of CD-ROM royalty
expenses, CD-ROM inventory write-offs and royalty expenses related to cable
television licensing revenue. In 1999, cost of revenue consists primarily of
third-party royalties relating to content sales, costs of advertising and
sponsorship revenues, and costs of e-commerce.
Operating expenses
Total operating expenses for the six month period ended June 30, 1999
increased $7.8 million or 186%, to $12.1 million from $4.2 million. The
increase was primarily due to increased sales and marketing efforts related to
the Company's onhealth.com web site and increased product development,
editorial and design expenses.
Product development, editorial and design. The increase in product
development, editorial and design expenses for the six month period ended June
30, 1999 of $1.5 million, or 96%, from the same period in 1998 was primarily
due to an increase in the use of outside contractors and headcount. Product
development, editorial and design expenses consist primarily of compensation,
consulting fees, third-party content acquisition costs and web site maintenance
and enhancement costs related to the Company's onhealth.com web site.
Sales and marketing. The increase in sales and marketing expenses for the
six month period ended June 30, 1999 of $5.6 million, or 390%, from the same
period in 1998 was primarily the result of increased advertising expenses
related to the Company's onhealth.com web site and increased headcount.
Marketing expenses include costs related to the launch of a broad-based
consumer targeted advertising campaign expected to commence in the third
quarter of 1999.
General and administrative. The increase in general and administrative
expenses for the six month period ended June 30, 1999 of $764,000 or 62%, from
the same period in 1998 was primarily due to an increase in legal fees and
settlements, travel and headcount. Legal fees and settlements include $273,000
for settlement and legal costs related to the final settlement of the T. Randal
Productions lawsuit, which is in addition to the $677,000 which had been
accrued at December 31, 1998.
Interest Income
The increase in interest income for the six month period ended June 30, 1999
of $175,000, or 324%, from the same period in 1998 is due to the interest
earned on cash received from the private placement completed during the first
quarter of 1999.
Other income, net
Other income, net for the six month period ended June 30, 1998 includes a
$562,000 gain related to the collection of a previously reserved receivable,
$1,000 of other income and a $281,000 expense related to cable television
licensing royalties.
19
<PAGE>
Years Ended December 31, 1996, 1997 and 1998
Net revenue
Net revenue for the years ended December 31, 1996, 1997 and 1998 was as
follows:
<TABLE>
<CAPTION>
Year Ended December
31,
--------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
(In thousands)
Product sales and licensing.......................... $5,152 $1,990 $ 754
Online............................................... 1,000 58 388
Contract development and other....................... 1,346 1,220 380
Cable television licensing........................... 1,972 493 --
------ ------ ------
Net revenue........................................ $9,470 $3,761 $1,522
====== ====== ======
</TABLE>
Net revenue for 1996, 1997 and 1998 of $9.4 million, $3.7 million and $1.5
million, respectively, represents 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 $1.2 million, 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 revenue. 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 $3.1 million, or 61%, a substantial reduction in cable
television licensing revenue of $1.5 million, or 75%, and a decrease in online
revenue from $1.0 million to $58,000.
Product sales and licensing revenue
Product sales and licensing revenue has declined steadily over the past few
years. The decrease generally reflects market conditions for CD-ROM products,
our cancellation of a CD-ROM distribution agreement, and the lack of new CD-ROM
product releases as we shifted our focus toward online efforts. In 1995, we
entered into a five year distribution agreement which allowed for the
promotion, marketing and distribution of certain of our CD-ROM products. The
agreement also provided for minimum levels of sales through the year 2000. In
December 1998, we received a $603,000 payment related to minimum sales
requirements from the termination of the CD-ROM distribution agreement. We do
not anticipate receiving any product sales or licensing revenue from CD-ROM
products in the future as we have discontinued this line of business.
Online revenue
From 1997 to 1998, online revenue increased from $58,000 to $388,000, an
increase of $330,000, or 569%. This increase reflects increased advertising
revenue and website sponsorship from our website which we re-designed and re-
launched in July 1998. The 1997 online revenue of $58,000 included website
sponsorships, advertising and premium services revenue related to onhealth.com
and the former O@sis website. In September 1997, we entered into an agreement
with Mayo Foundation which included the full transfer to Mayo of our ownership
interest in the O@sis website. The $1,000,000 of online revenue in 1996 relates
to nonrefundable advances paid to us under an exclusive agreement signed with
AT&T in October 1995 and the discontinuance by AT&T of the AT&T Health website
in August 1996.
Contract development revenue and other
From 1997 to 1998, contract development revenue and other decreased
$840,000, or 69%. The decrease generally reflected our shift toward online
efforts. From 1996 to 1997, contract development revenue and other decreased
slightly, representing management's efforts to control costs and focus on more
profitable contracts.
20
<PAGE>
Cable television licensing revenue
Cable television licensing revenue reflects revenue from our content and
royalty agreement with America's Health Network ("AHN"). Under the agreement,
we began licensing multimedia content to AHN in May 1995 and were 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, we recorded a receivable for the difference between the
revenue recognized and the cash received during the early years of the
contract. The $1.5 million decrease in revenue from 1996 to 1997 was a result
of us not receiving payments due to AHN's financial difficulties. In June 1997,
as a result of not receiving our quarterly payment, we fully reserved the
outstanding AHN receivable.
Gross margin
Gross margin as a percentage of net revenue 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 revenue 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.
Operating expenses
In 1998, product development, editorial and design costs were principally
related to our website. In 1997, development costs included primarily
onhealth.com development costs and CD-ROM development costs. From 1997 to 1998,
product development expenses decreased from $4.2 million to $3.7 million, a
decrease of $499,000, or 12%. The decrease reflects the lack of new 1998 CD-ROM
product releases, and a shift towards online publishing.
Product development, editorial and design expenses. Product development
expenses were $4.2 million for 1997, a decrease of $1.4 million, or 25%, from
1996, due to our release of fewer CD-ROM products and our shift to online
publishing.
Sales and Marketing. Sales and marketing expenses in 1998 were $5.6 million
as compared to $1.3 million in 1997, an increase of $4.3 million, or 318%. The
increase primarily relates to increased marketing activities for our website.
In July 1998, we began a marketing campaign to promote the launch of the
website which included online and radio advertising. In addition, we incurred
distribution costs related to agreements signed in July 1998 with GeoCities and
Go Network.
Sales and marketing expenses were $1.3 million in 1997, compared to $2.7
million in 1996. The decrease of 50% was a result of the release of fewer CD-
ROM titles in 1997, decreases in expenditures to promote our products and a
smaller expense structure created by the downsizing of operations in late 1996.
General and Administrative. General and administrative expenses were $2.4
million in 1998, compared to $6.9 million in 1997, a decrease of $4.5 million,
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 our relocation
to smaller facilities. The 1997 costs also included certain special charges
including costs to relocate the Company from Minneapolis to Seattle.
General and administrative expenses were $6.9 million in 1997 compared to
$6.4 million in 1996. The increase of 8% was due to extensive litigation and
special charges in 1997. We recorded $808,000
21
<PAGE>
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, we
recorded charges of $1.6 million for the relocation of our headquarters from
Minneapolis to Seattle. These charges included $610,000 in severance to
officers and employees and $962,000 for asset dispositions and lease
termination costs. Also in 1997, we wrote-off $1.7 million in other assets
related to an agreement with Time Life, Inc. Excluding the litigation and
special charges, our 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.
Net 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 $3.5
million 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 $3.5 million in convertible
subordinated debentures that were outstanding for two months in 1996 versus ten
months in 1997.
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 $2.7 million cash payment that
we received in connection with the transfer of ownership of the O@sis website
to Mayo. This was partially offset by other expense of $2.2 million in
connection with our conversion of convertible subordinated debentures to common
stock in October 1997. These debentures were originally issued in November
1996. 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.
Limitation on Use of Net Operating Loss and Other Tax Credit Carryforwards
At December 31, 1998, we had available net operating loss carryforwards of
approximately $81.9 million 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, which provides limitations on the availability of net operating losses to
offset current taxable income if significant ownership changes have occurred
for federal tax purposes. We incurred "ownership changes," pursuant to
regulations currently in effect under Internal Revenue Code Section 382, as a
result of sales of our preferred stock in 1992 and 1993 and may have incurred
ownership changes since that time.
Liquidity and Capital Resources
At June 30, 1999, we had positive working capital of $6.1 million compared
with negative working capital of $1.2 million at December 31, 1998. At June 30,
1999, we had cash and cash equivalents of $8.9 million. During the first six
months of 1999, total cash used by operating activities was $9.5 million, which
was principally due to our net loss for the period partially off-set by an
increase in current liabilities. During the year ended December 31, 1998, total
cash used by operating
22
<PAGE>
activities was $10.0 million, which was primarily due to the net loss of $10.9
million. During the six months of 1999, investing activities used net cash of
$532,000 for purchases of computer equipment. During the year ended December
31, 1998, investing activities used net cash of $472,000 for purchases of
computer equipment. During the first six months of 1999, financing activities
provided cash of $16.8 million: $14.1 million, net of financing costs, from the
private placement of common stock in January 1999, $1.6 million, from the
exercise of warrants, and $1.1 million from the exercise of stock options.
During the year ended December 31, 1998, financing activities provided cash of
$10.1 million: $5.7 million from the private placement of common stock, $5.0
million from the issuance of convertible redeemable preferred stock and $1.1
million from the exercise of stock options.
We believe that our cash and cash equivalents, together with the proceeds we
expect to receive in this offering, will be sufficient to fund our operations
for at least the next 12 months. Operations generated a negative cash flow
during 1996, 1997 and 1998, and we expect a significant use of cash in 1999 and
2000 as we market and expand our website. Any material unforeseen increase in
expenses or reductions in projected revenue will likely require us to seek
additional debt or equity financing. If additional cash is required we may need
to reduce our expenditures or curtail certain operations. We cannot be sure
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 refers to the potential for system and processing
failures of date-related data resulting from 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 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 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, we have not incurred any significant costs related to the
assessment of, and preliminary efforts in connection with, our Year 2000
project and the development of a remediation plan. We do not currently expect
that the Year 2000 issue will materially adversely affect our financial
condition or results of operations. We cannot guarantee that our systems or the
systems of other companies on which our systems rely will be timely converted
or that other companies will convert their systems at all or in a manner
compatible with our systems. If there is a delay in converting these systems or
if the conversions are not compatible, it could have a material adverse effect
on our business, financial condition and results of operations.
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 website, or change the behavior of
advertising customers or persons accessing our website. We believe that the
primary business risks, in the event of such failure, would include, but not be
limited to, lost advertising revenue, increased operating costs, loss of
customers or persons accessing our website, 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.
23
<PAGE>
Business
- --------------------------------------------------------------------------------
Business Overview
We are a leading independent source of original, informative, timely and
trusted consumer-oriented health and wellness information, products and
services on the Web. Our website, onhealth.com, is a consumer-focused online
health destination dedicated to the management of personal and family health
and well-being. We employ ten full-time staff editors and writers and we use
over 100 health and medical writers and contributors, enabling us to update our
website daily with original health-related features. By providing users with a
broad range of original in-depth reporting, substantive resources and
references, community discussions, direct access to experts, interactive tools
and exclusive Personal Health Tracker search capabilities, onhealth.com
combines the strength of credible journalism with the power of online
interactivity.
We launched our website in July 1998. During June 1999, according to Media
Metrix's Quick Edition, onhealth.com attracted 892,000 unique users, an
increase of 119% from our March 1999 unique users, which ranks onhealth.com as
the most trafficked consumer health content website in June 1999. According to
Internet Profile Corporation, in June 1999, onhealth.com attracted 1,563,785
visits, an increase of 61% from our March 1999 visits. While we have achieved
our traffic growth largely without the benefit of traditional advertising, in
the third quarter of 1999 we plan to launch a coordinated traditional media
advertising and public relations campaign designed to build our brand through
the use of television, radio, outdoor, print and online media. This campaign
will coincide with the recently relaunched onhealth.com website. We also
distribute in excess of 60,000 daily and weekly broadcast e-mails to registered
users who have requested our Daily Briefing, Weekly Newsletter and Health Info
Tracker. This private and personalized e-mail allows our users to stay current
on the health-related subjects most important to themselves and their families.
To date, we have developed distribution partnerships and content sharing
relationships resulting in over 950 websites that drive traffic to our website.
We intend to aggressively expand our content and distribution partnerships with
both online and traditional media partners that can direct additional users to
our website.
Because we are not aligned or affiliated with any one individual,
institution or medical organization, we are able to provide an independent
voice and serve as a trusted consumer advocate for health-related issues. We
believe this will allow us to build a loyal and dedicated audience that will
fuel multiple revenue opportunities. While we believe the demographics of our
users are highly attractive to advertisers, we are developing our website to
generate revenue opportunities from multiple sources, including
advertising/sponsorships, e-commerce transactions and content syndication. We
have a shopping area on our website designed to offer our users a wide variety
of health and wellness products including prescription and over-the-counter
drugs, vitamins, herbs, books, magazines, foods, home products and gifts.
Industry
We believe that the aging of the U.S. population, the rise of restrictive
managed care programs and the emergence of the Internet have combined to create
substantial demand for resources and communities that enable consumers to
better understand and control the decisions that affect their personal health.
The Internet is emerging as an important alternative to traditional media
enabling millions of consumers to seek information, communicate and conduct
commerce. According to International Data Corporation, the number of Internet
users worldwide will grow from approximately 100 million in 1998 to 320 million
by 2002. The Internet is empowering consumers by providing immediate, low cost
access to highly topical, interactive content and communities. In addition, the
Internet is enabling advertisers and online merchants to inexpensively reach
vast, yet highly targeted audiences, and to measure in real-time the
effectiveness of their programs. We believe that healthcare industry
24
<PAGE>
constituents will benefit from the Internet's unique attributes as an open,
low-cost, flexible technology for the exchange of information and for commerce.
The healthcare industry is the single largest segment of the U.S. economy,
representing approximately $1.2 trillion in spending or 14% of the U.S. gross
domestic product. Over the past decade, the healthcare industry has changed
radically as employers seeking to reduce their healthcare costs have turned
from indemnity insurance to managed health plans. Approximately 180 million
people, or 90% of the insured U.S. population, are now subject to some form of
managed care. We believe that consumers increasingly question the motivations
of their caregivers and are more inclined to take an active role in the
decisions that affect their health and wellness as well as that of their
families.
Consumers are seeking more information in order to actively manage their
personal health and wellness. However, traditional sources of healthcare
information such as print publications, are often voluminous, reference-
oriented and outdated while other media, including television and radio, lack
the analysis and insight consumers demand. As a result, many consumers are
turning to the Internet to obtain health information. According to Cyber
Dialogue, an industry research firm, during 1998, approximately 22 million
adults in the United States searched online for health and medical information.
Cyber Dialogue estimates that approximately 70% of the persons searching for
health and medical information online believe the Internet empowers them by
providing them with information before and after they go to a doctor's office.
Cyber Dialogue also estimates that in the year 2000, the number of adults in
the United States searching for online health and medical information will grow
to approximately 33 million, and they will spend approximately $150 billion for
all types of health-related products and services.
Industry research has indicated that women tend to be the health care
decision-makers within their households and therefore are the primary seekers
of health and wellness information. Internet use among women has increased
rapidly in recent years (from 5% of all users in early 1994 to an estimated 51%
by the end of 1999). These trends are of particular importance to advertisers
since women are estimated to have disproportionate control or influence over
consumer spending in the United States. Spending on advertising targeted to
women is generally considered to represent the largest single category of
advertising in the United States. According to industry experts, women control
66% of family healthcare expenditures, make 75% of all healthcare decisions and
control or influence over 80% of all purchase decisions. In addition, industry
research indicates that women spend less time than men surfing the Internet and
tend to spend more time visiting destinations that meet their needs.
There are currently over 15,000 websites providing health information. The
quality and breadth of these websites varies widely and to date no clear brand
has emerged as the leading provider of trusted consumer-oriented health and
wellness information on the Internet. Most of these websites do little more
than repurpose and repackage non-proprietary content without tailoring such
content for the consumer and providing context, insight or analysis. Many offer
little disclosure about their affiliations, the sources of their information
and potential conflicts of interest. Additionally, many health websites are
poorly designed, difficult to navigate and do not understand the needs of women
as the principle gatekeepers of the healthcare dollar. Accordingly, we believe
there is a substantial and growing unmet need for a well-known, trusted,
comprehensive health-related website that addresses consumers' health needs
accurately and intelligently while providing a satisfying consumer experience.
Moreover, we believe that such a website will have the ability to generate
significant revenue from a variety of sources, including advertising and
commerce.
Our Strategy
Our goal is to become the premier source of consumer-oriented health and
wellness information and services on the Internet. We intend to achieve this
goal by implementing the following strategies:
25
<PAGE>
Leverage and Enhance Our Expansive Proprietary Health Content. We believe
that the breadth, depth and quality of the proprietary health content we
provide, together with the fact that our content is tailored for the consumer,
substantially differentiates onhealth.com from other health information
websites and represents a competitive advantage. During the remainder of 1999,
we will aggressively add reference material, condition center partners,
applications, tools and personalization functionality. In addition, we have
partnered exclusively in certain disease areas with best-of-breed content
partners including the Cleveland Clinic, Beth Israel Deaconess Cancer Center,
the Mount Sinai Cardiovascular Institute, the Scripps Clinic and the
International Diabetes Center. Our content, which is archived and searchable,
ranges from clinical medicine to alternative medicine and from reference
material to journalistic exploration of relevant health topics. We are not
affiliated with any single health system, payor or individual, and we are free
to provide multiple perspectives on health topics. We intend to continue to
differentiate OnHealth by expanding and enhancing our proprietary consumer
health content.
Provide Consumers with a Compelling Health Experience. We are highly focused
on providing consumers who visit our website with a compelling experience that
not only addresses their initial needs, but also gives them multiple reasons to
spend more time at and return more often to our website. Accordingly, our
website is designed for easy navigation and is intended to be both informative
and engaging. Our experienced creative team understands the multi-dimensional
nature of publishing on the Internet. The team is adept at mixing information,
images, interactive tools, personalization and rich media. Our expansion plans
for 1999 include a variety of new environments and experiences for consumers.
Establish Onhealth.com as the Premier Brand for Health and Wellness
Information on the Internet. We intend to establish onhealth.com as the premier
health brand that consumers associate with trustworthiness and view as their
one-stop, complete resource for health and wellness information on the
Internet. To this end, we have developed and intend to launch in July 1999, a
coordinated advertising and public relations campaign using television, radio,
outdoor, print and online media. We plan to also continue to expand our
distribution agreements with search engines, portals and Internet service
providers. Currently, over 950 websites drive traffic to onhealth.com,
including Snap.com, Yahoo and AOL's Digital City's Network. Our management team
is experienced at building consumer brands for Internet and traditional media
companies including MSNBC, The Discovery Channel, ABCNEWS.com, Starwave/ESPN
Internet Ventures and Conde Nast Publications. We believe that employing
traditional media branding techniques will be critical to establishing a
leading brand.
Capitalize on Revenue Generating Opportunities. We intend to leverage the
growth in our consumer base by exploiting opportunities to develop multiple
revenue streams including advertising/sponsorship, e-commerce/transaction,
syndication of content and subscription to premium services. In the first
quarter of 1999, we launched a health products shopping area on our website and
we plan to continue to expand our relationships with leading web e-tailers to
offer consumers a full range of health and wellness related products and
services. Unlike many of our competitors, we have an opportunity to leverage
our proprietary content and interactive tools through syndication to provide an
additional revenue stream. We also believe that health consumers are interested
in premium subscription offerings such as personalized smoking cessation and
dietary programs, personalized health and condition reports and direct access
to leading medical experts. By pursuing diversified revenue opportunities, we
seek to reduce our dependence on and exposure to any single revenue stream.
Engage in Selective Acquisitions and Strategic Partnerships. We believe that
there will be significant consolidation in the online health category. We have
a focused business development effort, and are seeking acquisition and
strategic partnership opportunities. We are continually evaluating strategic
relationships with various distribution and media outlets that can serve to
drive traffic to our website and/or increase opportunities to generate e-
commerce/transaction revenue. We intend to pursue
26
<PAGE>
acquisitions that have the potential to augment our current operations in six
primary categories: content, applications, products, revenue, traffic and
intellectual capital/people.
The OnHealth Website
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 Health Info Tracker search
capabilities to enable consumers to actively manage the health and well-being
of themselves and their families. On our website, consumers will find complete
coverage of important health issues and broad database reference materials in
an interactive, visually pleasing and personalized format. The site consists of
the following services and features, many of which are unique to OnHealth.
CHANNELS DESCRIPTION
- --------------------------------------------------------------------------------
News and Reports
. The Daily Briefing The Daily Briefing is original journalism,
. In-Depth Reports updated twice daily. The Daily Briefing
provides summaries of relevant health and
medical news to provide consumers with
practical healthcare information.
We publish seven to ten In-Depth Reports each
week covering topics from child immunization
to balanced living to the latest advancements
in medical technology.
Each day's reports are archived along with the
hundreds of thousands of other pages of our
material, which has created an extensive and
varied database of healthcare content.
- --------------------------------------------------------------------------------
Ask Our Experts
. Women's Health Our experts answer user questions each weekday
. Children's Health on these core topics of interest. These
. Fitness and Nutrition doctors, PhDs and respected authors also
. Active Aging appear regularly in chat shows and within
. Sexual Health discussion areas on our website.
. Managed Care
. Balanced Living This material is exclusive to our website and
contributes to the growing archive of expert-
. Alternative Health answered questions searchable from anywhere on
. Listening to the Body the website.
- --------------------------------------------------------------------------------
Medical Centers
. Cleveland Clinic -- Each medical center condition area is a co-
Gastrointestinal Disorders branded mini-site created exclusively with
. Scripps Clinic -- OnHealth in conjunction with leading medical
Allergy institutions from around the country. Each
Asthma institutional partner is a leading expert in
. Mount Sinai -- the particular condition area and each devotes
Cardiovascular Diseases significant internal resources for patient
. Beth Israel Deaconess outreach and education.
Cancer Center --
Breast Cancer Each center is filled with hundreds of pages
of reference material, discussion groups,
updates on patient care, and doctor-answered
questions that target major diseases which
affect significant patient populations.
. International Diabetes Center
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CHANNELS DESCRIPTION
- --------------------------------------------------------------------------------
Live Events
. OnHealth Live! OnHealth Live! is a weekly audio webcast
broadcast Tuesday evenings with host Brooke
Gladstone of National Public Radio. The show
features experts who answer questions from the
audience about important health and wellness
topics from depression to humor and its effect
on healing. Audio archive and text transcripts
from each show are added each week to
OnHealth's searchable database.
. Daily Expert Chat Shows In our Daily Expert Chat Shows, experts discuss
relevant health issues. For example, on
Thursdays, OnHealth presents "Health in the
News" that features experts who make the
latest medical studies understandable for
consumers.
. Live Surgeries
We webcast live surgeries from the Stanford
Medical Center at least once a month. Host
surgeons narrate the surgeries and field
questions from the audience. Combined with
original educational material and surgeon-
answered questions, this feature creates a
valuable reference tool for patients,
potential patients and their families.
- --------------------------------------------------------------------------------
Health and Medical References
Proprietary Content
. Illness and Disease Our website is a research-rich resource that
Database contains hundreds of thousands of pages of
. Alternative Practices Guide content. We have created an extensive amount
. Herbal Database of original reference content specifically for
. Emergency Care Guide consumers. This material is written by medical
. Stop Smoking Center writers, then reviewed and approved by
. "Doctor Says" Video doctors. Our reference material is readily re-
Reference to Common licensable by and desirable to distribution
Ailments partners. Selected examples of our proprietary
. Allergy Index content include:
. Healthy Eating Reference
Guide The Illness and Disease Database contains
encyclopedic entries for conditions. We intend
to continue to expand the number of conditions
in this database.
Our website provides information on
alternative healthcare management through the
Herbal Database, which contains encyclopedic
entries and illustrations, as well as the
Alternative Practices guide, which is designed
to help consumers understand various practices
from naturopathy to homeopathy to acupuncture
and more.
The Healthy Eating Reference Guide provides
features on nutrition and eating well,
interactive food pyramids based on healthy
diets around the world, and a database of
healthy recipes. Also included are guides to
reading nutritional labels, tips for shopping
and discussion groups.
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CHANNELS DESCRIPTION
- --------------------------------------------------------------------------------
Health and Medical References
. OnHealth Reviewed Websites The OnHealth Reviewed Websites area contains a
review of over 250 websites. This creates a
source for finding trustworthy websites on the
Internet on important health and medical
conditions. Websites are reviewed for up to
date content, credibility and affiliation.
Repackaged Public Information
. Reading Room Materials As part of our ongoing effort to provide
sources of credible health information, the
Reading Room areas are consumer-friendly re-
packaged selections from government health and
medical sources such as the National
Institutes of Health and the Centers for
Disease Control. These materials are derived
from dense and hard-to-find material, but
through extensive editorial selecting and
repackaging become useful consumer guides.
Additionally, these materials extend the depth
of content available through our reference
channel.
Licensed Third Party Content
. USP Drug Database We supplement our proprietary content with
. Vitamins and Minerals third party licensed reference material and
. Medical Dictionary links to other health sites. These
. Medline arrangements provide our users with one-stop
health research capabilities.
- --------------------------------------------------------------------------------
My Wellness Manager
We believe that personalization is fundamental
. Health Info Tracker to creating a functional, daily relationship
. Favorite discussions with consumers by managing a family's health.
. Local resources My Wellness Manager is designed to encourage
. Favorite websites return visits by providing an easy to use tool
. Newsletter and Daily for managing a family's health.
Briefing sign-up
. Access points to personal My Wellness Manager provides a single place to
tools store and update all the personalizable
. Smoking Cessation program functions within the website, from the
. Personal Health Assessment Health Info Tracker to saving direct links to
Profile favorite discussion groups to user
personalized programs. My Wellness Manager
gives consumers a way to save time and effort
in a secure and personal environment.
We intend to expand the functionality and
integrate My Wellness Manager into off-line
relationships, for doctor visits, provider
issues, holding and owning personal records
information, alerting and supporting events
like pediatric visits or prescription
expirations.
- --------------------------------------------------------------------------------
Interactive Tools
. Health Info Tracker The Health Info Tracker is a free, private
searching service to track, retrieve and save
important health news. Users choose up to 30
categories of health conditions or areas, and
each day the Tracker searches a condition-
specific database fed by daily newswire
stories and OnHealth's new content. When the
Tracker's "smart search" capabilities find new
information available on the user's choices,
it creates a results page with links to the
news articles and sends an email alert
notifying the user that there is new news.
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CHANNELS DESCRIPTION
- --------------------------------------------------------------------------------
Interactive Tools
. Personal Health Assessment A multi-question Personal Health Assessment
. Smoking Cessation Program assessment tool that gives users a relative
. Broadcast Newsletters risk rating and delivers tailored information
. Calculators and services based on the assessment.
. Quizzes
The Smoking Cessation Program is a self-
. Health Polls directed interactive program that creates a
. Clip and Send step-by-step approach: reinforcement,
information and reminders for quitting
smoking.
Broadcast Newsletters provide our users with a
weekly e-mail newsletter alerting them to the
latest In-Depth Reports, expert columns,
events and more. In addition, the Daily
Briefing is sent out through e-mail and
includes links for additional information
directly from e-mail.
Calculators, quizzes and polls give our users
a personal way to interact with important
health information. These quick and easy-to-
use interactive tools are entertaining and
encourage repeat usage.
Users can clip and send any page on the
website directly to someone with a personal
note from the sender.
- --------------------------------------------------------------------------------
Interactive Communities
. Women's Health Our ability to integrate appropriate daily
. Men's Health journalism and events into the community
. Healthy Living and Wellness discussions and support chats makes our
. Pregnancy communities a more valuable and effective
. Parenthood resource for our users. Communities are
. Diseases and Conditions important to health consumers who want to find
. Sexuality others with similar conditions to share their
. Alternative Medicine information and support. We have over 50
. Health Care Issues community discussions that are maintained by
. Pet Health dedicated managers.
- --------------------------------------------------------------------------------
Site Search, Refined Search
and Interconnected Databases Our search capability provides direct access
to every part of the website from every page.
Refined Search capability allows users to
customize, target and sort their searches
against sections or subsets of the website.
Dynamically related linking on every page of
the website is possible because the entire
website is databased, and every piece of
content is categorized and cross-indexed.
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CHANNELS DESCRIPTION
- --------------------------------------------------------------------------------
Local Health
. Local Health Directory The Local Health Directory provides national
. Clinical Trials localized directories for a variety of health
. Recommend-a-Doctor and medical information according to United
. American Medical States zip codes. This material is provided
Association's through a license with InfoSpace and
Doctor Finder integrated into our website.
Our Clinical Trials feature provides a
national listing of clinical trials by disease
and by region.
The Recommend-a-Doctor feature provides a
national database of more than 3,000
physicians created through our community of
users of personally recommended doctors.
The American Medical Association's Doctor
Finder tool provides links directly into the
American Medical Association database of
credentialed physicians in the United States.
- --------------------------------------------------------------------------------
Shopping
. Pharmacy -- Drugstore.com We have chosen reputable e-commerce partners
. Vitamins and Herbs -- to provide the choice of products and level of
VitaminShoppe service appropriate for health consumers.
. Holistic Woman -- SelfCare We believe that e-commerce for health requires
. Books and Magazines -- depth of information and support to aid the
Amazon.com and enews.com product-purchasing decision. Our health
. Holidays and Gifts -- products shopping area creates categories with
ProFlowers and recommendations and has established a unique
American Greetings feature called "TimeSavers" which provides a
. Foods -- Whole Foods Market way for consumers to "Read About" a product or
. Healthy Home -- associated condition, "Talk About" the issues
greenmarketplace.com with others in our community areas, or "Buy
It" directly from our e-commerce partner.
Content
Onhealth.com draws its information from an array of medical and healthcare
resources. Although we are committed to delivering high quality original
content, in order to continue to provide our users with the richest health
information solution, we also partner with a number of organizations and
entities to supply content to the website.
Original Journalism and Live Produced Events
We have assembled a staff of ten medical and health editors, journalists and
producers. Our senior editors have, on average, 12 years of medical and health
editorial and reporting experience from such outlets as Consumer Reports, San
Jose Mercury News, ABCNEWS.com, Mosby Medical Publishing and the Associated
Press. In addition, we rely on more than 100 writers and contributors who
provide content to the website. Our editorial staff has assembled a panel of
doctors who review and update our medical reference material.
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Medical Center Content Exclusive to OnHealth
We have established exclusive partnerships with leading medical institutions
for extensive, condition-specific reference information and support for
particular activities such as live surgeries. We believe the collection of
these institutions creates a powerful and unique network with considerable
opportunity for additional activities and content. Partnering with many
institutions underscores OnHealth's commitment to providing multiples sources
and perspectives from credible parties.
We have chosen to partner with the following institutions for their
expertise in research, clinical work and patient education:
. Cleveland Clinic
. Beth Israel Deaconess Cancer Center
. Mount Sinai Cardiovascular Institute
. Scripps Clinic
. International Diabetes Center
Third-Party Journalism and Licensed News Feeds and Features
We receive exclusive online monthly reports from HealthNews, published by
Massachusetts Medical Society, publishers of the New England Journal of
Medicine. In addition, we supplement our exclusive content with licensed news
and features from Reuters, NY Times Syndicate, Scripps and WellMed, among
others.
Onhealth.com Traffic
We launched our website in July 1998, and during June 1999, according to
Media Metrix's Quick Edition, onhealth.com attracted 892,000 unique users, an
increase of 119% from our March 1999 unique users, which ranks onhealth.com as
the most trafficked consumer health website in June 1999. According to Internet
Profile Corporation, in June 1999, onhealth.com attracted 1,563,785 visits, an
increase of 61% from our March 1999 visits. While we have achieved our traffic
growth without the benefit of traditional advertising, in the third quarter of
1999 we plan to launch a coordinated traditional media advertising and public
relations campaign designed to build the OnHealth brand through the use of
television, radio, outdoor, print and other media. This campaign will coincide
with the recently relaunched onhealth.com website. We also distribute in excess
of 60,000 daily and weekly broadcast e-mails to registered users who have
requested our Daily Briefing, Weekly Newsletter and Personal Health Tracker.
This private and personalized e-mail allows our users to stay current on the
health-related subjects most important to themselves and their families.
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Distribution
To date, we have developed distribution partnerships and content sharing
relationships resulting in more than 950 websites that drive traffic to our
website. We intend to aggressively expand our content and distribution
partnerships with both online and traditional media partners that can direct
additional users to our website, thereby creating opportunities to generate
multiple revenue streams. We have and will continue to enter into distribution
agreements with leading search engine and portal companies; major Internet
access providers; community, news, information and other specialty websites;
media companies; promotional programs; other traditional media; and
corporate/HMOs. By increasing our brand exposure and traffic through
significant distribution agreements, we believe we will increase our
attractiveness to advertisers as an effective means of advertising both health-
related and non-health-related products. All of such relationships provide for
a direct link to our website either by clicking on our logo or by clicking on a
headline or article that then links back to our website. Headline links and
articles are dynamically served and automatically updated, allowing affiliate
websites to feature fresh, professional content while allowing us to reach
desirable new audiences, build our brand, and drive traffic to our website. A
sample of our current distribution relationships include:
Key Distribution Partner
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company/Site Type of Website Nature of Distribution
- --------------------------------------------------------------------------------------
<C> <C> <S>
AOL's Digital Internet Portal We are a key health content provider across
City's Network Digital City's network of over 60 Digital City
sites, offering general health content to all
sites and local health resources to 20 new major
Digital City markets. Digital City users can
access onhealth.com's Daily Briefings, Ask Our
Experts, In-Depth Reports, Conditions A-Z and
other resources covering men's health, sports
medicine, mental health, care giving, addiction,
eye care, dental care and cosmetic surgery. Each
local city guide will provide daily weather,
pollen, air and UV indexes, community resources,
support groups, and health events.
- --------------------------------------------------------------------------------------
Planet Direct Internet Portal Planet Direct features our Daily Briefing
headlines, Daily Health Tips, Conditions A-Z
database, pharmacy resources, In-Depth Reports,
Condition Centers, Herbal Index and Ask Our
Experts. In addition, our logo appears on Planet
Direct's health homepage with a direct link to
onhealth.com.
- --------------------------------------------------------------------------------------
Snap.com Internet Portal Snap.com features our Daily Briefing and In-
Depth Report headlines within Snap.com's Health
News and Diseases and Conditions section. We
also supply co-branded partner content pages for
more than 200 conditions that are prominently
positioned in Diseases and Conditions, Men's
Health, Women's Health, Children's Health,
Sexual Health and Mental Health areas of Snap
Health.
</TABLE>
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<PAGE>
Key Distribution Partner
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company/Site Type of Website Nature of Distribution
- --------------------------------------------------------------------------------------
<C> <C> <S>
Yahoo! Internet Portal We have entered into a premier content and
online marketing agreement with Yahoo designed
to provide consumers with access to our health
content and tools. Under the agreement,
onhealth.com has an integrated presence on
Yahoo! Health, as well as targeted advertising
and promotional activities throughout the Yahoo!
network of Web properties, including Yahoo
Weather, My Yahoo, Yahoo Sports, Entertainment,
Recreation, Yahooligans for Kids and Travel,
among others, as part of Yahoo!'s Fusion
Marketing Online program. Yahoo!'s users will
have access to a variety of onhealth.com's
content and tools as part of the program which
is specifically designed to reach women aged 25-
54 through demographic and editorial targeting.
Under another agreement, we are the exclusive
merchant in Yahoo! Health with an integrated
commerce presence in the "alternative medicine"
category. Yahoo! visitors will have access to
our online store sections offering alternative
health-related merchandise: Vitamins and Herbs,
Holistic Woman, Foods and Healthy Home. These e-
commerce opportunities will be integrated with
Yahoo! Health's research capabilities, medical
advice, physician locator, and personal health
tests.
- --------------------------------------------------------------------------------------
WebTV Internet Portal We are the primary supplier of health and
wellness content for the Explore Reference and
Health category, receiving prominent placement
and promotion on the WebTV Explore home page. We
provide WebTV with access to Daily Briefings,
In-Depth Reports, Ask Our Experts, Condition
Centers and Resource areas.
- --------------------------------------------------------------------------------------
Ameritech Internet Service Ameritech Yellow Page users have access to our
Provider/Other Daily Briefings, Ask Our Experts, In-Depth
Reports, Conditions A-Z, Health Info Tracker,
Pharmacy and Condition Centers.
- --------------------------------------------------------------------------------------
iSyndicate Internet Service iSyndicate features headlines for Daily
Provider/Other Briefings, Ask Our Experts and In-Depth Reports.
iSyndicate Express allows affiliate websites to
integrate selected headlines on their pages,
which link to onhealth.com for the full-text
article.
- --------------------------------------------------------------------------------------
iToaster Internet Service We are the exclusive Health Partner for the
Provider/Other debut of the iToaster. Our icon will be on the
desktop of the first 10,000 units shipped by
iToaster this summer. Users will be able to
click through to onhealth.com from the
prominently placed icon on the desktop.
- --------------------------------------------------------------------------------------
MindSpring Internet Service Our logo is prominently featured adjacent to
Provider/Other direct links to our In-Depth Reports and Ask Our
Experts headlines.
</TABLE>
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<PAGE>
Key Distribution Partner
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Company/Site Type of Website Nature of Distribution
- --------------------------------------------------------------------------------------
<C> <C> <S>
Motorola's Internet Service Motorola's iKno! Network features our Daily
iKno! Provider/Other Briefings sent directly to customers' pagers.
- --------------------------------------------------------------------------------------
Advance Internet, News, Advance Internet's users can access Daily Health
Inc. (affiliate Information Tips, OnHealth Live, Ask Our Experts and Daily
of and Content Briefings from ten local sites.
Advance
Publications,
Inc.)
- --------------------------------------------------------------------------------------
Ask Jeeves News, We will receive homepage promotion and
Information and integrated content tiles and links in the Ask
Content Jeeves' Health Channel that correspond to the
compelling health question sponsored by
OnHealth.
- --------------------------------------------------------------------------------------
Better Homes News, The Better Homes and Gardens website features
and Gardens Information Daily Briefings and Conditions A-Z in its health
and Content channel.
- --------------------------------------------------------------------------------------
Comcast Online News, Our logo is prominently featured with direct
Communications; Information links to our website. Daily Briefings, In-Depth
Comcast@home; and Content Reports, Ask Our Experts, Conditions Centers,
and Resources and Health Info Tracker are
inyourtown.com prominently featured in the Health Channel.
- --------------------------------------------------------------------------------------
The Tampa Tribune News, We provide Tampa Bay Online users access to
and NBC affiliate Information Daily Briefings, In-Depth Reports, Ask Our
WFLA and Content Experts, Resources and Condition Centers.
- --------------------------------------------------------------------------------------
ThirdAge News, We are a primary health content provider to
Information ThirdAge, offering In-Depth Reports, Condition
and Content Centers and Health Info Tracker within its
Health Channel.
- --------------------------------------------------------------------------------------
weather.com News, We are the exclusive third party provider of
Information allergy-related information to weather.com,
and Content whose users have access to OnHealth's In-Depth
Reports, Ask Our Experts, Conditions A-Z and
Allergy Condition Center.
</TABLE>
Branding
Our objective is to create the premier consumer health and wellness brand on
the Internet. While there has been a proliferation of health-related websites
on the Internet, we believe that no single participant has developed a
preeminent, recognizable brand with online consumers. In the third quarter of
1999, we plan to launch a coordinated traditional media advertising and public
relations campaign designed to build the OnHealth brand through the use of
television, radio, outdoor, print and online media. We have set an integrated
budget of $25 million to be spent over the next year and we have retained
TBWA/CHIAT/DAY and Fleishman-Hillard to assist us in this undertaking. The
full-scale media and public relations activities will coincide with the
recently relaunched onhealth.com website.
Our management team has a proven track record of developing content and
building leading consumer brands at Internet and traditional media companies
such as MSNBC, The Discovery Channel, ABCNEWS.com, Starwave/ESPN Internet
Ventures and Conde Nast Publications. We believe that the strength of our
management team is a key factor that differentiates us from many of the other
Internet health companies. While many online providers of health information
have established branding strategies based on high profile alliances with
Internet search engines, portals and service
35
<PAGE>
providers, we believe that a traditional media advertising strategy is an
essential component to establishing any consumer brand and especially an
Internet brand. Due to management's background, we are able to immediately
apply a traditional media branding philosophy to the Internet based service we
provide.
The public relations activities coordinated through Fleishman-Hillard will
complement the advertising program and will likely include intensive media
relations support for the July relaunch of the website. This support will take
the form of an aggressive media outreach to the consumer and business press
with the goal of generating awareness of the website re-launch and brand
campaign.
Revenue Model
We intend to leverage the growth in our consumer base by exploiting
opportunities to develop multiple revenue streams including
advertising/sponsorship, e-commerce/transaction and syndication of content and
interactive tools. In the first quarter of 1999, we launched a health products
shopping area at our website and we plan to continue to expand our
relationships with leading web e-tailers to offer consumers a full range of
health-related products and services. Unlike many of our competitors, we have
an opportunity to leverage our proprietary content and interactive tools
through syndication to provide an additional revenue stream. We also believe
that health consumers are interested in premium subscription offerings such as
personalized smoking cessation and dietary programs, personalized health and
condition reports and direct access to leading medical experts. By pursuing
diversified revenue opportunities, we seek to reduce our dependence on and
exposure to any single revenue stream.
Advertising/Sponsorship Sales
Advertising on the Internet is rapidly becoming a viable commercial medium.
According to Jupiter Communications, advertising revenue on the Internet is
forecast to grow from $1.9 billion in 1998 to $4.4 billion in 2000 and $7.7
billion in 2002. We believe the demographics of our audience and our ability to
target specific users of our website are attractive to healthcare advertisers
and non-healthcare advertisers. We believe we have been 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; and
. personalization and key word targets that provide flexible cross-site
delivery.
We currently have over 40 different advertisers, five of which have signed
year-long commitment packages each ranging in total revenue to us from $150,000
to $400,000. A partial list of healthcare advertisers we have attracted
includes: Johnson & Johnson, AstraZeneca Pharmaceuticals, SmithKline Beecham,
Pfizer, Schering-Plough, Glaxo Wellcome, Eli Lilly, Merck, Hoffman LaRoche,
Butler Dental, Biogen, Hoechst Marion Roussel and SelfCare.
Our consumer-oriented content also provides attractive audiences for non-
healthcare advertisers. In addition to covering a broad range of wellness
editorial (fitness, nutrition, stress reduction, pregnancy, childbirth, sexual
health, health for seniors, alternative medicine, herbs and vitamins), we are
developing a number of pre-packaged health-related sponsorship packages for
non-endemic advertisers in areas that could include healthy eating, healthy
travel, healthy pet, fiscally fit, auto safety, Y2K baby, fitness file and
holiday packages.
A partial list of the non-healthcare advertisers we have attracted includes:
IBM, Citibank, Dr. Scholl's, Kellogg's, Ford, Talkway, Call Connect.com, GM
Buypower, GM Goodwrench, Pontiac, Buick LeSabre, Procter & Gamble, Infantime,
Women.com, Lifewise Family Financial Services, ESPN, Disney and Microsoft.
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<PAGE>
E-commerce
Transactions. Our model for e-commerce is to generate revenue by focusing on
three areas: fees for guaranteed impressions, exclusivity fees and revenue
sharing. We believe our shopping channel has many advantages for the consumer,
including:
. Information from our articles, databases, experts and community, all from
one location, so that consumers can learn to manage their health and use
that information to make better-informed purchases of products and
services.
. OnHealth TimeSavers enable consumers to read about, discuss and purchase
various products. Every day, consumers can get information on timely
subjects, share ideas with others and buy the products they need to help
maintain their good health.
. Carefully selected online retailers who offer the best combination of
products and services, customer service, reliable and secure online
transaction capability and competitive prices.
We recently partnered with drugstore.com as our exclusive online drugstore,
VitaminShoppe as our exclusive vitamins and herbs merchant, and SelfCare as our
exclusive merchant in the Holistic Woman section. In addition to these partner
relationships, we have established various affiliate relationships. Under the
terms of the agreements governing affiliate relationships, we share in the
revenue from purchases made by consumers directed to the partner website from
our website. Affiliate merchants include Amazon.com, American Greeting Cards
Online, ProFlowers, Whole Foods Market, greenmarketplace.com and enews.com.
In the near term, we anticipate that there will be approximately eight to
ten total categories in our shopping channel, all representing healthy living
extensions. Examples of additional categories to be added could include cooking
supplies, travel, healthy pets, insurance and music. We also plan to add an
assortment of gift baskets pertaining to health and life events, such as
sending a child to college or having a baby.
Longer-term shopping channel plans include offering e-commerce products and
services that have an interconnection to our audience and subject matter,
through a combination of partnering with various e-commerce websites, as well
as developing or acquiring our own e-commerce offerings. Products are expected
to include medical/health-related supplies, everyday health and wellness
essentials, baby products, beauty products, home and garden, toys, music,
videos and financial services. We plan to continue to deepen the level and
types of services we offer based on consumer needs and requests, including
special commerce events, customized discounts on health products and more time-
saving buying opportunities focused on wellness and health management.
We intend to introduce premium services in the fourth quarter of 1999.
Possible examples of paid subscription services include: Ask a Doctor, where
users can submit questions to a doctor for a fee; and smoking cessation, weight
loss, stress management and pre-natal care programs.
Syndication Opportunities
We believe that our original content and interactive tools can be leveraged
into a broader revenue platform. Syndication of content and interactive tools
is a significant add-on revenue opportunity that arises naturally from our
strategy and branding program. Since we own a significant amount of our content
and interactive tools, we have the ability to syndicate content, interactive
tools and subsets of the website to other websites, offline media and/or
private label websites. We believe that syndication opportunities exist with
hospitals, pharmacy benefit management companies, corporations, health
maintenance organizations and associations, among others.
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<PAGE>
Technology and Systems
Our website uses Internet hardware and software technologies from, among
others, Compaq, Intergraph, F5 and Cisco, and software from Microsoft,
Netgravity and eShare. Exodus IT-class co-location facilities provide a secure,
high availability and high bandwidth environment for our production servers and
testing servers. Exodus provides redundant OC-3 and OC-12 backbone connections
to the Internet, uninterruptible power supplies with diesel generator backup,
housed in a copper-lined, earthquake-resistant building located in south
Seattle. Direct connections to the hosting facility via T1 and DSL lines allow
our main office to reliably connect to the production environment and the
Internet.
All mission-critical database servers are designed to be redundant and
employ warm-backup technology to minimize downtime and maximize data integrity.
Multiple web servers and advertising servers are utilized to provide high-
availability. Traffic is balanced between all available servers through load
balancing, server monitoring hardware.
We believe that onhealth.com has been designed to be a stable and scaleable
solution sufficient for our foreseeable needs. See "Risk Factors -- Our
business is dependent on the continuous, reliable and secure operation of our
website and related tools and functions we provide."
Competition
The editorial environment in interactive media is new, highly competitive
and rapidly evolving. Since the Internet's commercialization in the mid 1990s,
the number of websites on the Internet competing for consumers' attention and
spending has proliferated with no substantial barriers to entry, and we expect
that competition will continue to intensify.
Our website competes directly for advertisers, users, e-commerce customers
and merchants, distribution and syndication partners and other affiliates with
numerous Internet and non-Internet businesses, including:
. health-related online services or websites targeted at consumers, such as
accenthealth.com, ahn.com, americasdoctor.com, betterhealth.com,
drkoop.com, drweil.com, healthcentral.com, healthgate.com,
intelihealth.com, mayohealth.org, mediconsult.com, thriveonline.com and
webmd.com;
. online and Internet portal companies, such as America Online, Inc., Lycos
Corporation, Microsoft Network, Excite, Inc., Infoseek Corporation, and
Yahoo! Inc.;
. electronic merchants and conventional retailers that provide healthcare
goods and services competitive to those available from links on our
website;
. hospitals, HMOs, managed care organizations, insurance companies and
other healthcare providers and payors which offer healthcare information
through the Internet; and
. other consumer affinity groups, such as the American Association of
Retired Persons, SeniorNet and ThirdAge Media, Inc. which offer
healthcare-related content to specific demographic groups.
We believe 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. In addition, we also compete with traditional media, including print
and television for users and advertising dollars. Our known and prospective
competitors are often significantly larger and better financed than us and may
be better able to afford a more intense competitive environment than OnHealth.
See "Risk Factors -- The Internet is highly competitive and changing rapidly,
and we may not have the resources to compete adequately."
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Intellectual Property
We regard our copyrights, service marks, trademarks, trade secrets,
proprietary technology and similar intellectual property as critical to our
success, and we rely on trademarks, copyrights, and trade secrets to protect
our proprietary rights. While we try to assure that the quality of the OnHealth
brand is maintained through such actions, there can be no assurance that steps
we have taken and continue to take to protect our proprietary rights will be
adequate or that third parties will not infringe on our intellectual property.
In addition, there can be no assurance that third parties will not assert
infringement claims against us which, even if not meritorious, could result in
the expenditure of substantial resources and management effort. See "Risk
Factors -- Much of our website relies on owned or licensed intellectual
property and we cannot be sure that such rights are protected from the use of
others, including potential competitors."
Employees
As of June 30, 1999, we employed 61 people on a full-time basis. When
conditions demand it, we also use part-time employees. None of our employees
are represented by a labor union and we consider our relationship with our
employees to be good. We believe that some measure of our future success is
dependent upon attracting and retaining qualified employees, and competition
for hiring such employees is intense.
Legal Proceedings
From time to time, we have been involved in legal proceedings in the normal
course of our operations. Other than as described below, we are not currently a
party to any pending or, to our knowledge, threatened legal proceedings in
which an adverse decision could have a material impact on our results of
operations or financial position. In June 1999, Jon Fisse, our newly named
Chief Operating Officer resigned from the Company before the Company and Mr.
Fisse were able to agree on the terms of his employment agreement. We have
filed a declaratory judgement action in the United States District Court for
the Western District of Washington seeking to declare that Mr. Fisse terminated
his employment and that we owe him no future remuneration or stock option
benefits. On the same day Mr. Fisse filed a lawsuit in the United States
District Court for the Southern District of New York, asserting that OnHealth
terminated Mr. Fisse and violated his rights in connection with his separation
from OnHealth. As a result, Mr. Fisse is seeking damages which include
severance compensation, stock option benefits and compensatory and punitive
damages for allegedly defamatory statements contained in our press release
which announced Mr. Fisse's departure. We believe we have valid defenses
against Mr. Fisse's claims and intend to defend against such claims vigorously.
Facilities
We lease approximately 7,000 square feet of space where our principal
executive and administrative offices are located at 808 Howell Street, Suite
400, Seattle, Washington 98101. The lease expires June 30, 2003. We also
maintain approximately 1,500 square feet of office space in Seattle that is
subleased on a month-to-month basis. In October 1998, we subleased
approximately 525 square feet of office space located at 420 Lexington Avenue,
Suite 300, New York, New York 10170. This sublease expires in September 1999.
39
<PAGE>
Management
- --------------------------------------------------------------------------------
Set forth are the directors, executive officers and key personnel of
OnHealth.
<TABLE>
<CAPTION>
Name Age Title
---- --- -----
<C> <C> <S>
Robert N. Goodman................... 47 Chief Executive Officer, President
and Director
Rebecca J. Farwell.................. 38 General Manager
Mary G. Bruno....................... 47 Senior Vice President of Publishing
Michael D. Conway................... 31 Vice President of Finance
Steven R. Cloherty.................. 31 Director of Technology
Michael A. Brochu................... 45 Chairman of the Board
Ann Kirschner....................... 48 Director
Ram Shriram......................... 42 Director
Rick Thompson....................... 39 Director
</TABLE>
Our executive officers are elected at the discretion of the Board of
Directors with no fixed term. There are no family relationships between or
among any of our executive officers or directors.
Robert N. Goodman joined OnHealth in December 1997 as President and Chief
Executive Officer and a member of our Board of Directors. From April 1997 to
December 1997, he was the director of business development for MSNBC
Interactive News, LLC. From December 1995 to April 1997, Mr. Goodman was an
independent consultant working for Microsoft Corporation. From November 1993 to
October 1995, he was Assistant General Counsel for The 3DO Company.
Rebecca J. Farwell joined OnHealth in February 1998 and currently serves as
General Manager. Prior to that, she was the editorial director for Discovery
Channel Online and Discovery Publishing. She began her career at The Discovery
Channel in 1987 as the managing editor of The Discovery Channel Magazine.
Mary G. Bruno joined OnHealth in July 1999 as Senior Vice President of
Publishing. From April 1998 to July 1999, Ms. Bruno served as Executive
Producer of ABCNEWS.com and as Managing Editor of ABCNEWS.com from October 1996
to April 1998. From January 1995 to October 1996, she served as News Editor for
Mr. Showbiz, an online entertainment magazine.
Michael D. Conway joined OnHealth in January 1998 as Controller and Vice
President of Finance. From November 1997 to December 1997, he worked as an
independent consultant for PhotoDisc, Inc., a developer of high-resolution
photographs on CD-ROM, and Sierra On-Line, Inc., a leader in entertainment
software. From May 1996 to October 1997, Mr. Conway served as the Accounting
Manager at Sierra On-Line, Inc. From August 1994 to May 1996, Mr. Conway served
as a Senior Accountant at Deloitte & Touche LLP. From October 1992 to August
1994, he held various positions at KPMG Peat Marwick, including Senior
Accountant.
Steven R. Cloherty Director of Technology, joined OnHealth in March 1998.
Before joining OnHealth, he worked as program manager for The Microsoft Network
Premier Services from March 1997 to March 1998. From August 1995 to March 1997,
he served as an Independent Contractor to Microsoft. From August 1994 to August
1995, he worked as a database developer for Pacific Interactive, an interactive
CD-ROM Developer. While at The Microsoft Network, Cloherty successfully
launched The MINT, American Movie Classics and Getworking Web sites, while
directing the development of MSN's Channel 5.
Michael A. Brochu has been a Director of the Company since April 1997 and
has also served as Chairman of the Board of Directors of the Company since
October 1997. Mr. Brochu has served as President and Chief Executive Officer of
Primus, Inc., a leader in entertainment software, since November 1997. From
October 1995 to October 1997, he served as President and Chief Operating
Officer of Sierra On-Line, Inc., a computer game software developer, and as its
Chief Financial Officer
40
<PAGE>
and Executive Vice President from July 1994 to October 1995. From 1987 to July
1994, Mr. Brochu served in the positions of Senior Vice President, Chief
Financial Officer and Chief Operating Officer of Burlington Environmental,
Inc., a division of Burlington Resources, Inc.
Ann Kirschner has been a Director of the Company since February 1998. Ms.
Kirschner is currently the executive director of Columbia Media Enterprises.
From December 1994 to December 1998, she served as Vice President of NFL
Interactive for NFL Enterprises, Inc. Ms. Kirschner was responsible for the
launch of the NFL's official website, the official Super Bowl website and Team
NFL. Prior to December 1994, she served as President of Comma Communications
for more than two years.
Ram Shriram has been a Director of the Company since February 1998. Mr.
Shriram is Vice-President of Business Development at Amazon.com. Prior to its
acquisition by Amazon.com, Mr. Shriram served as President and Chief Operating
Officer of Junglee Corporation, a company that enables Web users to locate,
compare and transact goods and services on the Internet. Previously,
Mr. Shriram served as Vice President of Netscape Communications Corporation
from February 1994 to February 1998. Mr. Shriram was Netscape's Director,
Channel Sales of Network Computing Devices, from October 1990 to November 1994.
Rick Thompson has been a Director of the Company since February 1998. Mr.
Thompson has served as Vice President and General Manager of Microsoft
Corporation's Hardware Division since October 1987. Mr. Thompson manages the
division's product lines and oversees development.
Description of Our Securities
- --------------------------------------------------------------------------------
Common Stock
Our Articles of Incorporation authorize us to issue 100,000,000 shares of
common stock and 1,000,000 shares of preferred stock. As of June 30, 1999,
there were 16,222,420 shares of common stock outstanding and no shares of
preferred stock outstanding. Each holder of a share of common stock gets one
vote per share on all matters submitted to a vote of shareholders but may not
cumulate votes for the election of directors. Holders of common stock also are
entitled to receive dividends as may be declared by the Board of Directors out
of funds legally available. In the event of our dissolution, liquidation or
winding up, holders of common stock are entitled to share in all assets which
remain after the satisfaction of any claims of creditors or of the holder of
any securities senior to the common stock. Holders of common stock have no
preemptive, subscription, redemption or conversion rights. All the outstanding
shares of common stock are fully paid and nonassessable.
Warrants
As of June 30, 1999, we had outstanding warrants to purchase 224,662 shares
of common stock with various parties with varying exercise prices and
termination dates. Certain of these warrant holders have piggy-back
registration rights.
Provisions Affecting Acquisitions and Business Combinations
The Washington Business Corporations Act contains certain provisions that
may have the effect of delaying or discouraging another person or company from
a hostile takeover of us. Chapter 23B.19 of the Washington Business
Corporations Act prohibits a target corporation, with certain exceptions, from
engaging in certain significant business transactions (such as a merger or sale
of assets) with a person or group of persons which beneficially acquires 10% or
more of the corporation's voting securities (an "Acquiring Entity") for a
period of five years after such acquisition, unless the transaction is approved
by a majority of the members of the target corporation's board of directors
prior to the date of the transaction. An Acquiring Entity is further prohibited
from engaging in significant business transactions with the target corporation
unless the per share consideration paid to holders of outstanding shares of
common stock and other classes of stock of the target corporation meet certain
minimum criteria. These provisions may have the effect of delaying, deterring
or preventing a change in control of the Company.
41
<PAGE>
Director and Officer Indemnification
The Washington Business Corporations Act provides that a Washington
corporation may include provisions in its articles of incorporation relieving
each of its directors of monetary liability arising out of his or her conduct
as a director for breach of his or her fiduciary duty, except liability for:
(i) acts or omissions of a director finally adjudged to be intentional
misconduct or a knowing violation of law, (ii) conduct in violation of Section
23B.08.310 of the Washington Business Act (which section relates to unlawful
distributions), or (iii) any transaction with respect to which it is finally
adjudged that a director personally received benefit in money, property or
services to which the director was not legally entitled. Our Articles of
Incorporation include such provisions. Our Articles of Incorporation and Bylaws
provide that we are obligated, to the fullest extent permitted by law, to
indemnify and advance expenses to each of our currently acting and former
directors and officers, and may so indemnify and advance expenses to each of
our current and former employees and agents. We believe that the foregoing
provisions are necessary to attract and retain qualified persons as directors
and officers.
42
<PAGE>
Principal Shareholders
- --------------------------------------------------------------------------------
The following table sets forth the number of shares of our common stock
beneficially owned by (i) each director; (ii) each of our named executive
officers; (iii) all directors and executive officers as a group; and (iv) to
the best of our knowledge, all beneficial owners of more than 5% of the
outstanding shares of our common stock as of June 30, 1999. Unless otherwise
indicated, the shareholders listed in the table have sole voting and investment
power with respect to the shares indicated.
<TABLE>
<CAPTION>
Common Shares
Beneficially Percent of
Name(1) Owned(2) Class(2)
- ------- ------------- ----------
<S> <C> <C>
Robert N. Goodman.................................... 365,625(3) 2.2%
Rebecca J. Farwell................................... 41,875(4) *
Michael A. Brochu.................................... 233,750(5) 1.4%
Ann Kirschner........................................ 46,250(6) *
Ram Shriram.......................................... 46,250(7) *
Rick R. Thompson..................................... 46,250(8) *
Van Wagoner Capital Management, Inc.................. 6,320,300(9) 39.0%
Nevis Capital Management, Inc........................ 1,294,000(10) 8.0%
All Directors and Executive
Officers as a Group (6 persons)..................... 780,000(11) 4.6%
</TABLE>
- -----------------
* Less than 1% of the outstanding shares of common stock.
(1) The addresses of the more than 5% holders are: Van Wagoner Group (Van
Wagoner Capital Management, Inc. and Van Wagoner Funds, Inc.) 207 East
Buffalo Street, Suite 400, Milwaukee, WI, 53202; Nevis Capital Management,
Inc. -- 1119 St. Paul Street, Baltimore, MD 21202.
(2) Based on 16,222,420 shares of outstanding stock as of June 30, 1999. Under
the rules of the SEC, shares not actually outstanding are nevertheless
deemed to be beneficially owned by a person if such person has the right to
acquire the shares within 60 days. Pursuant to such SEC rules, shares
deemed beneficially owned by virtue of a person's right to acquire them are
also treated as outstanding when calculating the percent of class owned by
such person and when determining the percentage owned by a group.
(3) Includes 365,625 shares which may be purchased by Mr. Goodman upon exercise
of currently exercisable options.
(4) Includes 41,875 shares which may be purchased by Ms. Farwell upon exercise
of currently exercisable options.
(5) Includes 233,750 shares which may be purchased by Mr. Brochu upon exercise
of currently exercisable options.
(6) Includes 46,250 shares which may be purchased by Ms. Kirschner upon
exercise of currently exercisable options.
(7) Includes 46,250 shares which may be purchased by Mr. Shriram upon exercise
of currently exercisable options.
(8) Includes 46,250 shares which may be purchased by Mr. Thompson upon exercise
of currently exercisable options.
(9) Of the shares, 6,320,300 shares are owned by Van Wagoner Funds, Inc. ("Van
Wagoner Funds") and 413,250 shares are owned by clients of Van Wagoner
Capital Management, Inc. ("Van Wagoner Capital"). Van Wagoner Funds has the
sole power to vote 5,907,050 shares. Van Wagoner Capital has no power to
vote 413,250 shares and has sole investment power over all of the shares,
including the shares held by Van Wagoner Funds. The Company has relied on
information contained in a Schedule 13G/A filed with the SEC on July 12,
1999 by Van Wagoner Funds and Van Wagoner Capital as a group.
(10) Based on information provided to the Company by two members of Nevis
Capital Management, Inc. in April 1999.
(11) Includes 780,000 shares which may be purchased upon exercise of currently
exercisable options.
43
<PAGE>
Underwriting
- --------------------------------------------------------------------------------
OnHealth and the underwriters for the offering named below, for whom Warburg
Dillon Read LLC, SG Cowen Securities Corporation and CIBC World Markets Corp.
are acting as representatives, have entered into an underwriting agreement with
respect to the shares being offered. Subject to certain conditions, each
underwriter has severally agreed to purchase the number of shares indicated in
the following table.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Warburg Dillon Read LLC.....................................
SG Cowen Securities Corporation.............................
CIBC World Markets Corp.....................................
---------
Total...................................................... 6,000,000
=========
</TABLE>
If the underwriters sell more than the total number set forth in the table
above, the underwriters have an option to buy up to an additional 900,000
shares from OnHealth to cover such sales. They may exercise that option for 30
days. If any shares are purchased pursuant to this option, the underwriters
will severally purchase shares in approximately the same proportion as set
forth in the table above.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by OnHealth. Such amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
Paid by OnHealth
-------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share.......................................... $ $
Total............................................. $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the public offering price set forth on the cover of this prospectus. Any shares
sold by the underwriters to securities dealers may be sold at a discount of up
to per share from the public offering price. Any such securities dealers
may resell any shares purchased from the underwriters to certain other brokers
or dealers at a discount of up to per share from the public offering
price. If all the shares are not sold at the offering price, the
representatives may change the offering price and the other selling terms.
OnHealth, its directors, executive officers and certain other employees have
agreed with the underwriters not to dispose of or hedge any of their common
stock or securities convertible into or exchangeable for shares of common stock
during the period from the date of this prospectus continuing through the date
180 days after the date of this prospectus, except with the prior written
consent of Warburg Dillon Read LLC. This agreement does not apply to issuances
or sales by OnHealth pursuant to any existing employee benefit plans or upon
conversion or exchange of any currently outstanding convertible or exchangeable
securities.
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while the offering is in progress.
44
<PAGE>
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares
sold by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
SmallCap Market, in the over-the-counter market or otherwise.
In connection with this offering, certain underwriters and selling group
members (if any) who are qualified market makers on the Nasdaq SmallCap Market
may engage in passive market making transactions in the common stock on the
Nasdaq SmallCap Market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934, during the business day prior to the pricing
of the offering before the commencement of offers or sales of the common stock.
Passive market makers must comply with applicable volume and price limitations
and must be identified as such. In general, a passive market maker must display
its bid at a price not in excess of the highest independent bid of such
security; if all independent bids are lowered below the passive market makers'
bid, however, such bid must then be lowered when certain purchase limits are
exceeded.
OnHealth estimates that the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $1.0 million.
OnHealth has agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
Legal Matters
- --------------------------------------------------------------------------------
For purposes of this offering, Preston Gates & Ellis LLP, Seattle,
Washington, is giving its opinion on the validity of the shares of common stock
offered by this prospectus. Members of Preston Gates & Ellis LLP and attorneys
and staff who have participated in this manner own collectively 2,200 shares of
OnHealth common stock. Certain legal matters will be passed upon for the
underwriters by Gibson, Dunn & Crutcher LLP, New York, New York.
Experts
- --------------------------------------------------------------------------------
The financial statements, including the financial statement schedule
incorporated by reference, of OnHealth Network Company at December 31, 1997 and
1998, and for each of the three years in the period ended December 31, 1998,
appearing in and incorporated by reference in this prospectus and registration
statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon appearing and incorporated by reference
elsewhere herein, and are included in reliance upon such reports given the
authority of such firm as experts in accounting and auditing.
45
<PAGE>
Where You Can Find More Information
- --------------------------------------------------------------------------------
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy the documents we file at the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings are also available
to the public from the SEC's website at http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information in documents
we file with them, which means that we can disclose important information to
you by referring you to those documents. The information incorporated by
reference is considered to be part of this prospectus, and information that we
file later with the SEC will automatically update and supersede this
information. We incorporate by reference the documents listed below and any
future filings we will make with the SEC under Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934:
1. Annual Report of OnHealth Network Company on Form 10-K, as amended,
for the fiscal year ended December 31, 1998;
2. Quarterly Report of OnHealth Network Company on Form 10-Q for the
three months ended March 31, 1999;
3. Quarterly Report of OnHealth Network Company on Form 10-Q for the six
months ended June 30, 1999; and
4. Proxy Statement of OnHealth Network Company for the annual meeting of
shareholders held June 15, 1999.
You may request a copy of these filings or a copy of any or all of the
documents referred to above which have been or may be incorporated in this
prospectus by reference, at no cost, by writing us at the following address:
Corporate Secretary, 808 Howell Street, Suite 400, Seattle, Washington 98101.
Our telephone number is (206) 583-0100.
46
<PAGE>
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Shareholders' Equity......................................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<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, 1997 and 1998 and the related statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements 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, 1997 and 1998, 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.
Ernst & Young LLP
Seattle, Washington
March 15, 1999
F-2
<PAGE>
OnHealth Network Company
Balance Sheets
<TABLE>
<CAPTION>
December 31,
------------------ June 30,
1997 1998 1999
-------- -------- -----------
(Unaudited)
(In thousands)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents..................... $ 2,488 $ 2,119 $ 8,854
Accounts receivable, net of allowances of
$1,011 (1997), $256 (1998) and $286 (1999)... 337 509 488
Inventories................................... 150 -- --
Other current assets.......................... 332 409 1,791
-------- -------- --------
Total current assets......................... 3,307 3,037 11,133
Furniture and equipment:
Computers and software........................ 2,856 1,218 1,750
Office equipment.............................. 1,403 291 291
-------- -------- --------
4,259 1,509 2,041
Accumulated depreciation...................... (2,989) (774) (921)
-------- -------- --------
Furniture and equipment, net................. 1,270 735 1,120
Other non-current assets....................... -- 122 44
-------- -------- --------
Total assets................................. $ 4,577 $ 3,894 $ 12,297
======== ======== ========
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Accounts payable.............................. $ 1,919 $ 1,526 3,735
Other accrued expenses........................ 2,640 2,669 1,259
-------- -------- --------
Total current liabilities.................... 4,559 4,195 4,994
Other noncurrent liabilities................... -- -- 34
Commitments and contingencies
Shareholders' equity (deficit):
Preferred stock, $.01 par value: authorized,
1,000; issued and outstanding, none.......... -- -- --
Common stock, $0.01 par value; authorized,
100,000; issued and outstanding, 10,106
(1997) 12,800 (1998) and 16,222 (1999)....... 101 128 162
Additional paid-in-capital.................... 78,493 89,086 107,765
Accumulated deficit........................... (78,576) (89,515) (100,658)
-------- -------- --------
Total shareholders' equity (deficit)......... 18 (301) 7,269
-------- -------- --------
Total liabilities and shareholders' equity
(deficit)................................... $ 4,577 $ 3,894 $ 12,297
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-3
<PAGE>
OnHealth Network Company
Statements of Operations
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
---------------------------- --------------------
1996 1997 1998 1998 1999
-------- -------- -------- ------- -----------
(Unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net revenue................ $ 9,470 $ 3,761 $ 1,522 $ 485 $ 781
Cost of revenue............ 5,076 2,541 767 741 99
-------- -------- -------- ------- --------
Gross margin............... 4,394 1,220 755 (256) 682
Operating expenses:
Product development,
editorial and design..... 5,651 4,243 3,744 1,558 3,048
Sales and marketing....... 2,705 1,347 5,626 1,431 7,011
General and
administrative........... 6,364 6,892 2,404 1,233 1,997
-------- -------- -------- ------- --------
Total operating
expenses................ 14,720 12,482 11,774 4,222 12,056
-------- -------- -------- ------- --------
Loss from operations....... (10,326) (11,262) (11,019) (4,478) (11,374)
Interest income (expense).. 169 (158) 84 54 229
Other income (expense)..... -- 473 (4) 282 2
-------- -------- -------- ------- --------
Total interest and other
income (expense).......... 169 315 80 336 231
-------- -------- -------- ------- --------
Net loss................... (10,157) (10,947) (10,939) (4,142) (11,143)
Preferred stock dividends.. (119) (100) (103) (56) --
Preferred stock accretion.. (60) (43) (702) (154) --
Preferred stock deemed
dividend.................. -- (2,875) (220) -- --
-------- -------- -------- ------- --------
Net loss applicable to
common shareholders....... $(10,336) $(13,965) $(11,964) $(4,352) $(11,143)
======== ======== ======== ======= ========
Net loss per common share--
Basic and diluted......... $ (1.36) $ (1.73) $ (1.12) $ (0.43) $ (0.72)
======== ======== ======== ======= ========
Weighted average number of
common shares
outstanding............... 7,580 8,056 10,680 10,131 15,544
======== ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-4
<PAGE>
ONHEALTH NETWORK COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------- PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES PAR VALUE CAPITAL DEFICIT EQUITY (DEFICIT)
------ --------- ---------- ----------- ----------------
(IN THOUSANDS)
<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 ($0.05 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
Preferred stock
conversion to common
stock................. 733 8 3,622 -- 3,630
Services................ 47 -- 365 -- 365
Discount on sale of
convertible redeemable
preferred stock........ -- -- 702 -- 702
Cash dividends on
convertible redeemable
preferred stock ($0.06
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................... 12,800 128 89,086 (89,515) (301)
------ ---- -------- --------- --------
Net proceeds from the
issuance of common
stock:
Private placements*.... 2,596 26 14,065 -- 14,091
Exercise of options*... 278 3 1,070 -- 1,073
Exercise of warrants*.. 356 3 1,582 -- 1,585
Services*.............. 192 2 1,938 -- 1,940
Amortization of deferred
compensation*.......... -- -- 24 -- 24
Net loss*............... -- -- -- (11,143) (11,143)
------ ---- -------- --------- --------
Balance at June 30,
1999*.................. 16,222 $162 $107,765 $(100,658) $ 7,269
====== ==== ======== ========= ========
</TABLE>
- -----------------
* Unaudited
The accompanying notes are an integral part of the financial statements
F-5
<PAGE>
ONHEALTH NETWORK COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- -----------------
1996 1997 1998 1998 1999
-------- -------- -------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss..................... $(10,157) $(10,947) $(10,939) $(4,142) $(11,143)
Adjustments to reconcile net
loss to cash used in
operating activities:
Depreciation and
amortization................ 1,409 1,252 722 429 147
Interest expense associated
with debenture conversion... -- 2,229 -- -- --
(Gain) loss on disposition
of furniture and
equipment................... (3) 711 285 -- --
Provision for (recoveries
of) doubtful accounts and
returns..................... 1,675 2,336 (755) (753) 29
Other........................ -- -- 8 -- 11
Compensation associated with
from stock option grants.... -- -- 130 -- 24
Common stock issued as
litigation settlement....... -- 433 -- -- --
Amortization of prepaid
advertising and promotional
agreements.................. -- -- 365 -- 646
Changes in assets and
liabilities:
(Increase) decrease in
accounts receivable........ (2,601) 1,461 583 981 (8)
Decrease in inventories..... 666 5 150 150 --
(Increase) decrease in
other current assets....... (139) 253 (25) 223 (95)
(Increase) decrease in
other non-current assets... (585) 1,885 (122) -- 78
Increase (decrease) in
accounts payable........... 843 (1,287) (393) (516) 2,209
Increase (decrease) in
other accrued expenses..... 636 760 29 (864) (1,381)
-------- -------- -------- ------- --------
Net cash used in operating
activities................ (8,256) (909) (9,962) (4,492) (9,483)
Cash flows from investing
activities:
Proceeds from disposition of
furniture and fixtures...... 510 61 217 -- --
Capital expenditures......... (288) (104) (689) (219) (532)
-------- -------- -------- ------- --------
Net cash provided by (used in)
investing activities......... 222 (43) (472) (219) (532)
Cash flows from financing
activities:
Proceeds from issuance of
convertible redeemable
preferred stock............. -- -- 5,000 5,000 --
Proceeds from issuance of
convertible subordinated
debentures.................. 3,500 -- -- -- --
Proceeds from issuance of
common stock:
Private placements........... -- -- 5,690 -- 14,092
Exercise of options.......... 356 98 1,068 176 1,072
Exercise of warrants......... -- -- -- -- 1,586
Redemption of preferred
stock....................... -- -- (1,690) -- --
Preferred stock dividends
paid........................ (119) (120) (3) -- --
-------- -------- -------- ------- --------
Net cash provided by (used
in) financing activities.. 3,737 (22) 10,065 5,176 16,750
-------- -------- -------- ------- --------
Net increase (decrease) in
cash and cash equivalents.... (4,297) (974) (369) 465 6,735
Cash and cash equivalents at
beginning of year............ 7,759 3,462 2,488 2,488 2,119
-------- -------- -------- ------- --------
Cash and cash equivalents at
end of year.................. $ 3,462 $ 2,488 $ 2,119 $ 2,953 $ 8,854
======== ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-6
<PAGE>
OnHealth Network Company
Notes to Financial Statements
(Information as of and for the six months ended June 30, 1999 is unaudited)
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.
Interim Financial Information
The unaudited interim financial information as of June 30, 1999 and for the
six months ended June 30, 1998 and 1999 includes all adjustments (consisting
only of normal recurring adjustments), which, in the opinion of management, are
necessary for a fair presentation of the interim information. Operating results
for the six months ended June 30, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999.
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 for all periods presented 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. For all periods
presented, 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.
F-7
<PAGE>
ONHEALTH NETWORK COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Three customers represent 15%, 21%, and 11% of net revenue in 1996; one
customer represents 12% of net revenue for the year ended December 31, 1997;
and three customers represent 40%, 16% and 13% of net revenue for the year
ended December 31, 1998. 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 from a
terminated CD-ROM distribution agreement. Two customers represented 77% and 27%
of accounts receivable at December 31, 1997. At December 31, 1998, two
customers comprised 36% and 20% of outstanding accounts receivable.
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 website. 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 1996 and 1997. (See Note 12).
Revenue for 1996, 1997 and 1998 and for the six months ended June 30, 1998
and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE
30,
------------
1996 1997 1998 1998 1999
------ ------ ------ ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Online.................................... $1,000 $ 58 $ 388 $ 146 $ 563
E-commerce................................ -- -- -- -- 150
Contract development and other............ 1,346 1,220 380 410 49
Product sales and licensing............... 5,152 1,990 754 (71) 19
Cable television licensing................ 1,972 493 -- -- --
------ ------ ------ ----- -----
Net revenue............................. $9,470 $3,761 $1,522 $485 $781
====== ====== ====== ===== =====
</TABLE>
Product Development, Editorial and Design Costs
Product development, editorial and design costs consist principally of
payroll and related expenses for development, editorial, systems and
telecommunications operations personnel and consultants, systems and
F-8
<PAGE>
OnHealth Network Company
Notes to Financial Statements (Continued)
telecommunications infrastructure and costs of acquired content. To date, all
product development, editorial and design costs have been expensed as incurred.
Advertising Costs
Advertising costs are expensed as they are incurred. Advertising costs in
1996, 1997, and 1998 were $556,000, $190,000 and $3,409,000, 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.
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 of 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 net income available to common shareholders by the
weighted-average number of shares of common stock and common stock equivalents
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. For the years ended
December 31, 1996, 1997 and 1998, 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
F-9
<PAGE>
OnHealth Network Company
Notes to Financial Statements (Continued)
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, 2000. 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.
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 had 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. The Company believes that its cash and cash
equivalents, including the $14.3 million received in 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 its
website. 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.
F-10
<PAGE>
OnHealth Network Company
Notes to Financial Statements (Continued)
Note 3. Composition of Certain Balance Sheet Accounts
<TABLE>
<CAPTION>
December 31,
--------------- June 30,
1997 1998 1999
------- ------ -----------
(Unaudited)
(In thousands)
<S> <C> <C> <C>
Other current assets:
Prepaid advertising.......................... $ -- $ 197 $1,309
Other........................................ 332 212 482
------- ------ ------
Total....................................... $ 332 $ 409 $1,791
======= ====== ======
Furniture and equipment:
Computer hardware............................ $ 2,160 $1,032 $1,563
Software..................................... 455 186 187
Furniture & fixtures......................... 1,403 220 220
Equipment.................................... 241 -- --
Leasehold improvements....................... -- 71 71
------- ------ ------
4,259 1,509 2,041
Less accumulated depreciation................ (2,989) (774) (921)
------- ------ ------
Total....................................... $ 1,270 $ 735 $1,120
======= ====== ======
Other accrued expenses:
Litigation loss.............................. $ 961 $ 677 $ --
Advertising.................................. -- 609 --
Severance.................................... 610 90 --
Royalties.................................... 501 338 176
Payroll taxes................................ 2 358 2
Other........................................ 566 597 1,081
------- ------ ------
Total....................................... $ 2,640 $2,669 $1,259
======= ====== ======
</TABLE>
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.
In January 1999, the Company completed a $14.3 million private placement
which resulted in the issuance of 2,596,000 shares of the Company's common
stock at $5.50 per share.
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
F-11
<PAGE>
OnHealth Network Company
Notes to Financial Statements (Continued)
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 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.
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.
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
1997 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 Stock Option 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 ISOs, 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-12
<PAGE>
OnHealth Network Company
Notes to Financial Statements (Continued)
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
Shares Number of Weighted-Average
Reserved Shares Price Per Share
--------- --------- ----------------
<S> <C> <C> <C>
Total Outstanding at De-
cember 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 De-
cember 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 De-
cember 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 De-
cember 31, 1998........ 1,612,000 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-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
EercisexPrices Outstanding Contractual Life Exercise Price Exercisable Exercise 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
F-13
<PAGE>
OnHealth Network Company
Notes to Financial Statements (Continued)
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. 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 SFAS No. 123. 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 1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate................................. 6.21% 5.50% 5.00%
Dividend yield.......................................... 0% 0% 0%
Volatility factor....................................... .726 .760 .817
Weighted-average expected life.......................... 5 years 5 years 5 years
</TABLE>
The weighted-average fair value of options granted during 1996, 1997 and
1998 was $2.99, $1.74, and $2.97, 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>
1996 1997 1998
---------- ---------- ----------
(In thousands, except per share
data)
<S> <C> <C> <C>
Net loss applicable to common
shareholders--as reported................ $ (10,336) $ (13,965) $ (11,964)
Net loss applicable to common
shareholders--pro forma.................. $(10,562) $(14,294) $(12,970)
Basic and diluted net loss per share--as
reported................................. $ (1.36) $ (1.73) $ (1.12)
Basic and diluted net loss per common
share pro forma.......................... $ (1.39) $ (1.77) $ (1.21)
</TABLE>
The pro forma effect on the net loss for 1996, 1997, and 1998 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, 1997 and 1998 the Company had warrants outstanding to
purchase 547,260 and 678,577 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:
<TABLE>
<S> <C>
1991, 1997 and Director Stock Option Plans....................... 2,378,000
1997 - 1998 New Hire Plan........................................ 1,213,500
Warrants......................................................... 678,577
---------
4,270,077
=========
</TABLE>
F-14
<PAGE>
ONHEALTH NETWORK COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. LOSS PER COMMON SHARE
The components of basic and diluted loss per common share are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- -----------------
1996 1997 1998 1998 1999
-------- -------- -------- ------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net loss applicable to common
shareholders (numerator).... $(10,366) $(13,965) $(11,964) $(4,352) $(11,143)
======== ======== ======== ======= ========
Weighted average common
shares outstanding
(denominator)............... 7,580 8,056 10,680 10,131 15,544
======== ======== ======== ======= ========
Loss per share:
Basic and diluted........... $ (1.36) $ (1.73) $ (1.12) $ (0.43) $ (0.72)
======== ======== ======== ======= ========
</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 $1,433,000,
$881,000 and $522,000 for 1996, 1997 and 1998, 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:
<TABLE>
<CAPTION>
LEASE MARKETING
PAYMENTS PAYMENTS
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
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
===== ======
</TABLE>
F-15
<PAGE>
ONHEALTH NETWORK COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE
DECEMBER 31, 1998 30,
-------------------- ------------
1996 1997 1998 1998 1999
---- ------ ------ ---- ------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash paid during the periods for:
Interest................................... $ -- $ 298 $ -- $ -- $ --
Income taxes............................... 10 5 7 7 3
Non-cash investing and financing
transactions:
Conversion of preferred stock to common
stock..................................... -- 1,948 3,630 -- --
Conversion of convertible subordinated
debentures................................ -- 5,729 -- -- --
Preferred stock/warrant discount........... -- -- 702 600 --
Preferred stock/warrant discount
accretion................................. (60) (43) (702) (154) --
Preferred stock dividends.................. -- -- 100 -- --
Stock options and warrants issued for
services.................................. -- -- 190 60 --
Preferred stock deemed dividend............ -- 2,875 -- -- --
Common stock issued as litigation
settlement................................ -- 433 -- -- --
Common stock issued for advertising and
promotional agreements services........... -- -- -- -- 1,939
</TABLE>
NOTE 11. INCOME TAXES
At December 31, 1998, 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:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Accrued expenses and allowances............... $ 2,788,000 $ 1,223,000
Research and development credits.............. 326,000 339,000
Net operating loss carryforwards.............. 25,880,000 28,669,000
------------ ------------
28,994,000 30,231,000
Deferred tax liabilities:
Depreciation.................................. 16,000 15,000
------------ ------------
16,000 15,000
------------ ------------
Net deferred tax assets before valuation
allowance..................................... 28,978,000 30,216,000
Less valuation allowance....................... (28,978,000) (30,216,000)
------------ ------------
Net deferred tax assets........................ $ -- $ --
============ ============
</TABLE>
F-16
<PAGE>
OnHealth Network Company
Notes to Financial Statements (Continued)
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
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 website 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 website 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
F-17
<PAGE>
OnHealth Network Company
Notes to Financial Statements (Continued)
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 website 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 1996, 1997 and 1998, 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").
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 (unaudited)
On June 1, 1999, the Company made a payment of $950,000 to T. Randal
Productions in full satisfaction of a judgment against the Company.
F-18
<PAGE>
OnHealth Network Company
Notes to Financial Statements (Continued)
In June 1999, Jon Fisse, the Company's newly named Chief Operating Officer,
resigned from the Company before the Company and Mr. Fisse were able to agree
on the terms of his employment agreement. The Company has filed a declaratory
judgement action in the United States District Court for the Western District
of Washington seeking to declare that Mr. Fisse terminated his employment and
that it owes him no future remuneration or stock option benefits. On the same
day Mr. Fisse filed a lawsuit in the United States District Court for the
Southern District of New York, asserting that the Company terminated Mr. Fisse
and violated his rights in connection with his separation from the Company. As
a result, Mr. Fisse is seeking damages which include severance compensation,
stock option benefits and compensatory and punitive damages for allegedly
defamatory statements contained in a press release announcing Mr. Fisse's
departure. The Company believes it has valid defenses against Mr. Fisse's
claims and intends to defend against such claims vigorously. However, the
outcome of this lawsuit may have a material adverse effect on the Company's
financial position and results of operations.
On June 15, 1999, the shareholders approved an increase in the number of
authorized shares of the Company's common stock to 100,000,000 from 29,000,000.
F-19
<PAGE>
Inside Back Cover--Logos of Onhealth.com's distribution partners are featured,
together with the following text:
"onhealth.com has a wide range of distribution partners. More than 950
sites currently drive traffic to onhealth.com."
<PAGE>
- --------------------------------------------------------------------------------
- ----------------
PROSPECTUS
- ----------------
6,000,000 Shares
[LOGO OF ONHEALTH]
Common Stock
Warburg Dillon Read LLC
SG Cowen
CIBC World Markets
, 1999
- --------------------------------------------------------------------------------
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy shares of OnHealth common stock only in jurisdictions where offers and
sales are permitted. The information contained in this prospectus is accurate
only as of the date of this prospectus, regardless of the time of delivery of
this prospectus or of any sale of the OnHealth common stock.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The expenses relating to the registration of the Shares will be borne by the
registrant. Such expenses are estimated to be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee........... $ 16,664
NASD filing fee............................................... $ 6,494
Nasdaq National Market listing fee............................ $ 95,000
Accountants' fees............................................. $ 150,000
Printing expenses............................................. $ 180,000
Blue Sky fees and expenses.................................... $ 5,000
Legal fees.................................................... $ 500,000
Miscellaneous................................................. $ 46,842
----------
Total....................................................... $1,000,000
==========
</TABLE>
Item 15. Indemnification of Directors and Officers.
Article XII of the Articles of Incorporation of the Company authorizes the
Company to indemnify any present or former director or officer to the fullest
extent not prohibited by the Washington Business Corporation Act, public policy
or other applicable law. Chapter 23B.8.510 and .570 of the Washington Business
Corporation Act authorizes a corporation to indemnify its directors, officers,
employees, or agents in terms sufficiently broad to permit such indemnification
under certain circumstances for liabilities (including provisions permitting
advances for expenses incurred) arising under the 1933 Act.
In addition, the Company maintains directors' and officers' liability
insurance under which its directors and officers are insured against loss (as
defined in the policy) as a result of claims brought against them for their
wrongful acts in such capacities.
Item 16. Exhibits and Financial Statement Schedules.
(a)
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1 Underwriting Agreement
3.1 Articles of Incorporation of the Company*
3.2 Bylaws of the Company**
5 Opinion of Preston Gates & Ellis LLP regarding legality
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Preston Gates & Ellis LLP (contained in Exhibit 5)
24 Power of Attorney***
</TABLE>
- -----------------
* Incorporated by reference to the Form S-3 of the Registrant filed June 20,
1999 (333-81321)
** Incorporated by reference to the Form S-3 of the Registrant filed December
31, 1998 (333-69989).
*** Previously filed
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors and executive officers of the Registrant pursuant
to provisions described in Item 15 or
II-1
<PAGE>
otherwise, the Registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director or executive officer of
the Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director or executive officer in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement to include
any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change
to such information in the registration statement.
(2) That, for purposes of determining any liability under the
Securities Act, each filing of the Registrant's annual report pursuant to
Section 13(a) or 15(d) of the Exchange Act (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Exchange Act) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To deliver or cause to be delivered with the prospectus, to each
person to whom the prospectus is sent or given, the latest annual report to
security holders that is incorporated by reference in the prospectus and
furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule
14c-3 under the Exchange Act; and where interim financial information
required to be presented by Article 3 of Regulation S-X are not set forth
in the prospectus, to deliver or caused to be delivered to each person to
whom the prospectus is sent or given, the latest quarterly report that is
specifically incorporated by reference in the prospectus to provide such
interim financial information.
(4) That, for the purposes of determining liability under the
Securities Act, each post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(5) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(6) That, for purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(7) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Seattle, State of Washington, on the 19th day
of July, 1999.
Onhealth Network Company
/s/ Robert N. Goodman
By: _________________________________
Robert N. Goodman
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment to Registration Statement on Form S-3 has been signed by the
following persons in the capacities indicated on July 19, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Robert N. Goodman President, Chief Executive Officer, Director
______________________________________ (Principal Executive Officer)
Robert N. Goodman
/s/ Michael D. Conway Controller, Vice President, Chief Financial
______________________________________ Officer (Principal Financial and Accounting
Michael D. Conway Officer)
* Chairman of the Board of Directors
______________________________________
Michael A. Brochu
* Director
______________________________________
Ann Kirschner
* Director
______________________________________
Ram Shriram
* Director
______________________________________
Rick Thompson
</TABLE>
- --------
*Pursuant to power of Attorney dated June 21, 1999
<TABLE>
<S> <C>
/s/ Robert N. Goodman
______________________________________
Attorney-in-Fact
</TABLE>
II-3
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1 Underwriting Agreement
3.1 Articles of Incorporation of the Company*
3.2 Bylaws of the Company**
5 Opinion of Preston Gates & Ellis LLP regarding legality
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Preston Gates & Ellis LLP (contained in Exhibit 5)
24 Power of Attorney***
</TABLE>
- -----------------
* Incorporated by reference to the Form S-3 of the Registrant filed June 20,
1999 (333-81321)
** Incorporated by reference to the Form S-3 of the Registrant filed December
31, 1998 (333-69989).
*** Previously filed
<PAGE>
EXHIBIT 1
FORM OF
UNDERWRITING AGREEMENT
August __, 1999
Warburg Dillon Read LLC
SG Cowen Securities Corporation
CIBC World Markets Corp.
as Managing Underwriters
c/o Warburg Dillon Read LLC
299 Park Avenue
New York, New York 10171-0026
Ladies and Gentlemen:
OnHealth Network Company, a Washington corporation (the "Company"),
proposes to issue and sell to the underwriters named in Schedule A annexed
hereto (the "Underwriters") an aggregate of 6,000,000 shares (the "Firm Shares")
of Common Stock, $0.01 par value (the "Common Stock"), of the Company. In
addition, solely for the purpose of covering over-allotments, the Company
proposes to grant to the Underwriters the option to purchase from the Company up
to an additional 900,000 shares (the "Additional Shares") of Common Stock. The
Firm Shares and the Additional Shares are hereinafter collectively sometimes
referred to as the "Shares." The Shares are described in the Prospectus which is
referred to below.
The Company has filed, in accordance with the provisions of the Securities
Act of 1933, as amended, and the rules and regulations thereunder (collectively
called the "Act"), with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-3 (File No. 333-81321),
including a prospectus, relating to the Shares, which incorporates by reference
documents which the Company has filed or will file in accordance with the
provisions of the Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder (collectively called the "Exchange Act"). The Company has
furnished to you, for use by the Underwriters and by dealers, copies of one or
more preliminary prospectuses and the documents incorporated by reference
therein (each thereof, including the documents incorporated therein by
reference, being herein called a "Preliminary Prospectus") relating to the
Shares. Except where the context otherwise requires, the registration statement,
as amended when it becomes effective, including all documents filed as a part
thereof or incorporated by reference therein, and including any information
contained in a prospectus subsequently filed with the Commission pursuant to
Rule 424(b) under the Act and deemed to be part of the registration statement at
the time of effectiveness pursuant to Rule 430(A) under the Act and also
including any registration
<PAGE>
statement filed pursuant to Rule 462(b) under the Act, is herein called the
Registration Statement, and the prospectus, including all documents incorporated
therein by reference, in the form filed by the Company with the Commission
pursuant to Rule 424(b) under the Act on or before the second business day after
the date hereof (or such earlier time as may be required under the Act) or, if
no such filing is required, the form of final prospectus included in the
Registration Statement at the time it became effective, is herein called the
Prospectus.
The Company and the Underwriters agree as follows:
1. Sale and Purchase. Upon the basis of the warranties and
representations and subject to the terms and conditions herein set forth, the
Company agrees to sell to the respective Underwriters and each of the
Underwriters, severally and not jointly, agrees to purchase from the Company the
respective number of Firm Shares (subject to such adjustment as you may
determine to avoid fractional shares) which bears the same proportion to the
number of Firm Shares to be sold by the Company as the number of Firm Shares set
forth opposite the name of such Underwriter in Schedule A annexed hereto bears
to the total number of Firm Shares to be sold by the Company, in each case at a
purchase price of $_____ per Share. The Company is advised by you that the
Underwriters intend (i) to make a public offering of their respective portions
of the Firm Shares as soon after the effective date of the Registration
Statement as in your judgment is advisable and (ii) initially to offer the Firm
Shares upon the terms set forth in the Prospectus. You may from time to time
increase or decrease the public offering price after the initial public offering
to such extent as you may determine.
In addition, the Company hereby grants to the several Underwriters the
option to purchase, and upon the basis of the warranties and representations and
subject to the terms and conditions herein set forth, the Underwriters shall
have the right to purchase, severally and not jointly, from the Company, ratably
in accordance with the number of Firm Shares to be purchased by each of them
(subject to such adjustment as you shall determine to avoid fractional shares),
all or a portion of the Additional Shares as may be necessary to cover over-
allotments made in connection with the offering of the Firm Shares, at the same
purchase price per share to be paid by the Underwriters to the Company for the
Firm Shares. This option may be exercised by you on behalf of the several
Underwriters at any time (but not more than once) on or before the thirtieth day
following the date hereof, by written notice to the Company. Such notice shall
set forth the aggregate number of Additional Shares as to which the option is
being exercised, and the date and time when the Additional Shares are to be
delivered (such date and time being herein referred to as the additional time of
purchase); provided, however, that the additional time of purchase shall not be
earlier than the time of purchase (as defined below) nor earlier than the second
business day/1/ after the date on which the option shall have been exercised nor
later than
_________________________
/1/ As used herein "business day" shall mean a day on which the New York Stock
Exchange is open for trading.
2
<PAGE>
the tenth business day after the date on which the option shall have been
exercised. The number of Additional Shares to be sold to each Underwriter shall
be the number which bears the same proportion to the aggregate number of
Additional Shares being purchased as the number of Firm Shares set forth
opposite the name of such Underwriter on Schedule A hereto bears to the total
number of Firm Shares (subject, in each case, to such adjustment as you may
determine to eliminate fractional shares).
2. Payment and Delivery. Payment of the purchase price for the Firm
Shares shall be made to the Company by Federal Funds wire transfer, against
delivery of the certificates for the Firm Shares to you through the facilities
of the Depository Trust Company ("DTC") for the respective accounts of the
Underwriters. Such payment and delivery shall be made at 10:00 A.M., New York
City time, on July __, 1999 (unless another time shall be agreed to by you and
the Company or unless postponed in accordance with the provisions of Section 8
hereof). The time at which such payment and delivery are actually made is
hereinafter sometimes called the time of purchase. Certificates for the Firm
Shares shall be delivered to you in definitive form in such names and in such
denominations as you shall specify no later than the second business day
preceding the time of purchase. For the purpose of expediting the checking of
the certificates for the Firm Shares by you, the Company agrees to make such
certificates available to you for such purpose at least one full business day
preceding the time of purchase.
Payment of the purchase price for the Additional Shares shall be made at
the additional time of purchase in the same manner and at the same office as the
payment for the Firm Shares. Certificates for the Additional Shares shall be
delivered to you in definitive form in such names and in such denominations as
you shall specify no later than the second business day preceding the additional
time of purchase. For the purpose of expediting the checking of the certificates
for the Additional Shares by you, the Company agrees to make such certificates
available to you for such purpose at least one full business day preceding the
additional time of purchase. The date on which payment for and delivery of the
Additional Shares is made is referred to herein as the "Option Closing Date."
3. Representations and Warranties of the Company. The Company represents
and warrants to each of the Underwriters that:
(a) the Company has not received, and has no notice of, any order of
the Commission preventing or suspending the use of any Preliminary Prospectus,
or instituting proceedings for that purpose, and each Preliminary Prospectus, at
the time of filing thereof, conformed in all material respects to the
requirements of the Act, and when the Registration Statement became effective,
the Registration Statement and the Prospectus complied in all material respects
with the provisions of the Act, and the Registration Statement will not contain
an 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 not misleading,
and the Prospectus will not contain an 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 under which they were
made, not misleading; provided, however, that the Company makes no warranty or
representation with respect to any statement contained in the Registration
Statement or the
3
<PAGE>
Prospectus in reliance upon and in conformity with information concerning the
Underwriters and furnished in writing by or on behalf of any Underwriter through
you to the Company expressly for use in the Registration Statement or the
Prospectus; the documents incorporated by reference in the Prospectus, at the
time they were filed with the Commission, complied in all material respects with
the requirements of the Act and the Exchange Act, and do not contain an 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 under which they were made, not misleading, and the Company has
not distributed any offering material in connection with the offering or sale of
the Shares other than the Registration Statement, the Preliminary Prospectus,
the Prospectus or any other materials, if any, permitted by the Act;
(b) the information set forth under the caption "Capitalization" in
the Prospectus is true and correct as of the date therein indicated. All of the
issued and outstanding shares of capital stock including Common Stock of the
Company have been duly and validly authorized and issued and are fully paid and
non-assessable, have been issued in compliance with all federal and state
securities laws and were not issued in violation of any preemptive right, resale
right, right of first refusal or similar right;
(c) the Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Washington, with
full power and authority to own, lease and operate its properties and conduct
its business as described in the Registration Statement;
(d) the Company is duly qualified to do business as a foreign
corporation in good standing in each jurisdiction where the ownership or leasing
of its properties or the conduct of its business requires such qualification,
except where the failure to so qualify would not have a material adverse effect
on the business, properties, financial condition or results of operation of the
Company (a "Material Adverse Effect"). The Company has no subsidiaries, and does
not own, directly or indirectly, any shares of stock or any other equity or
long-term debt securities of any corporation or have any equity interest in any
firm, partnership, joint venture, association or other entity; complete and
correct copies of the articles of incorporation and bylaws of the Company and
all amendments thereto have been delivered or made available to you, and except
as set forth in the exhibits to the Registration Statement no changes therein
will be made subsequent to the date hereof and prior to the Closing Date or, if
later, the Option Closing Date.
(e) the Company is in compliance in all material respects with the
laws, orders, rules, regulations and directives issued or administered by each
jurisdiction in which it conducts its business, except where noncompliance could
singly or in the aggregate result in a Material Adverse Effect;
(f) the Company is not in breach of, or in default under (nor has any
event occurred which with notice, lapse of time, or both would result in any
breach of, or constitute a default under), its articles of incorporation or by-
laws or in the performance or observance of any obligation, agreement, covenant
or condition contained in any indenture, mortgage, deed of trust, bank loan or
credit agreement or other evidence of indebtedness, or any lease, contract or
other
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agreement or instrument to which the Company is a party or by which it or any of
its properties is bound, and the execution, delivery and performance of this
Agreement, the issuance and sale of the Shares and the consummation of the
transactions contemplated hereby will not conflict with, or result in any breach
of or constitute a default under (nor constitute any event which with notice,
lapse of time, or both would result in any breach of, or constitute a default
under), any provisions of the articles of incorporation or by-laws, of the
Company or under any provision of any license, indenture, mortgage, deed of
trust, bank loan or credit agreement or other evidence of indebtedness, or any
lease, contract or other agreement or instrument to which the Company is a party
or by which it or its properties may be bound or affected, or under any federal,
state, local or foreign law, regulation or rule or any decree, judgment or order
applicable to the Company;
(g) this Agreement has been duly authorized, executed and delivered
by the Company and is a legal, valid and binding agreement of the Company
enforceable in accordance with its terms;
(h) the capital stock of the Company, including the Shares, conforms
in all material respects to the description thereof contained in the
Registration Statement and Prospectus and the certificates for the Shares are
in due and proper form and the holders of the Shares will not be subject to
personal liability by reason of being such holders;
(i) the Shares have been duly and validly authorized and, when issued
and delivered against payment therefor as provided herein, will be duly and
validly issued and fully paid and non-assessable;
(j) no approval, authorization, consent or order of or filing with
any national, state or local governmental or regulatory commission, board, body,
authority or agency is required in connection with the issuance and sale of the
Shares or the consummation by the Company of the transaction as contemplated
hereby other than registration of the Shares under the Act and any necessary
qualification under the securities or blue sky laws of the various jurisdictions
in which the Shares are being offered by the Underwriters or under the rules and
regulations of the National Association of Securities Dealers, Inc. (the
"NASD");
(k) no person has the right, contractual or otherwise, to cause the
Company to issue to it, or register pursuant to the Act, any shares of capital
stock of the Company upon the issue and sale of the Shares to the Underwriters
hereunder, nor does any person have preemptive rights, co-sale rights, rights of
first refusal or other rights to purchase any of the Shares other than those
that have been expressly waived in writing prior to the dates hereof;
(l) Ernst & Young LLP, whose report on the financial statements of
the Company is filed with the Commission as part of the Registration Statement
and Prospectus, are independent public accountants as required by the Act;
(m) the Company has all necessary licenses, authorizations, consents
and approvals and has made all necessary filings required under any federal,
state, local or foreign law, regulation or rule, and has obtained all necessary
authorizations, consents and approvals from other persons, in order to conduct
its business; the Company is not in violation of, or in
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default under, any such license, authorization, consent or approval or any
federal, state, local or foreign law, regulation or rule or any decree, order or
judgment applicable to the Company the effect of which could have a Material
Adverse Effect;
(n) all statutes, regulations, legal or governmental proceedings,
contracts, leases or documents of a character required to be described in the
Registration Statement or the Prospectus or to be filed as an exhibit to the
Registration Statement have been so described or filed as required;
(o) there are no actions, suits, claims, investigations or
proceedings pending or, to the knowledge of the Company, threatened to which the
Company or any of its officers is a party or of which any of its properties are
subject at law or in equity, or before or by any federal, state, local or
foreign governmental or regulatory commission, board, body, authority or agency
which could result in a judgment, decree or order having a Material Adverse
Effect or which could prevent the consummation of the transaction contemplated
hereby;
(p) the audited financial statements included in the Registration
Statement and the Prospectus present fairly the financial position of the
Company as of the dates indicated and the results of operations and cash flows
of the Company for the periods specified; such financial statements have been
prepared in conformity with generally accepted accounting principles applied on
a consistent basis during the periods involved;
(q) subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, there has not been (i)
any material adverse change, or any development which, in the Company's
reasonable judgment, is likely to cause a material adverse change, in the
business, properties or assets described or referred to in the Registration
Statement, or the results of operations, condition (financial or otherwise),
business or operations of the Company, (ii) any transaction which is material to
the Company, except transactions in the ordinary course of business, (iii) any
obligation, direct or contingent, which is material to the Company, incurred by
the Company, except obligations incurred in the ordinary course of business,
(iv) any change in the capital stock or outstanding indebtedness of the Company
or (v) any dividend or distribution of any kind declared, paid or made on the
capital stock of the Company. The Company does not have any material contingent
obligation which is not disclosed in the Registration Statement;
(r) the Company has obtained the agreement of each of its directors,
executive officers and certain other employees and certain of its stockholders,
each as set forth on Schedule B hereto, in the form of agreement set forth in
Exhibit A hereto, not to sell, offer to sell, contract to sell, hypothecate,
grant any option to sell or otherwise dispose of, directly or indirectly, any
shares of Common Stock or securities convertible into or exchangeable for Common
Stock or warrants or other rights to purchase Common Stock for a period of ___
days after the date of the Prospectus;
(s) the Company is not and, after giving effect to the offering and
sale of the Shares, will not be an "investment company" or an entity
"controlled" by an "investment
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company," as such terms are defined in the Investment Company Act of 1940, as
amended (the "Investment Company Act");
(t) except as disclosed in the Prospectus, (i) the Company owns or
possesses the requisite licenses, registrations or other evidences of adequate
rights to make, use or sell, as the case may be, any inventions, copyrights,
know-how (including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures), trademarks,
service marks, trade names, technology and know-how currently employed by it to
conduct its business in the manner described in the Prospectus, (ii) the Company
has not received any notice of infringement of or conflict with (and the Company
does not know of any infringement or conflicts with) asserted rights of others
with respect to any of the foregoing which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would have a Material
Adverse Effect, and (iii) the Company has not knowingly infringed upon any
intellectual property right or patent of any third party, or any discovery,
invention, product or process, the result of which could be a Material Adverse
Effect;
(u) as of the date the Registration Statement became effective, the
Common Stock was authorized for listing on the Nasdaq National Market upon
official notice of issuance; and
(v) the Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares.
4. Certain Covenants of the Company. The Company hereby agrees:
(a) to furnish such information as may be required and otherwise to
cooperate in qualifying the Shares for offering and sale under the securities or
blue sky laws of such states as you may designate and to maintain such
qualifications in effect so long as required for the distribution of the Shares;
provided that the Company shall not be required to qualify as a foreign
corporation or to consent to the service of process under the laws of any such
state (except service of process with respect to the offering and sale of the
Shares); and to promptly advise you of the receipt by the Company of any
notification with respect to the suspension of the qualification of the Shares
for sale in any jurisdiction or the initiation or threatening of any proceeding
for such purpose;
(b) to make available to the Underwriters in New York City, as soon
as practicable after the Registration Statement becomes effective, and
thereafter from time to time to furnish to the Underwriters, as many copies of
the Prospectus (or of the Prospectus as amended or supplemented if the Company
shall have made any amendments or supplements thereto after the effective date
of the Registration Statement) as the Underwriters may reasonably request for
the purposes contemplated by the Act; in case any Underwriter is required to
deliver a prospectus within the nine-month period referred to in Section
10(a)(3) of the Act in connection with the sale of the Shares, the Company will
prepare promptly upon request, but at the expense of such Underwriter, such
amendment or amendments to the Registration Statement and such
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<PAGE>
prospectuses as may be necessary to permit compliance with the requirements of
Section 10(a)(3) of the Act;
(c) to advise you promptly and (if requested by you) to confirm such
advice in writing, (i) when the Registration Statement has become effective and
when any post-effective amendment thereto becomes effective and (ii) if Rule
430A under the Act is used, when the Prospectus is filed with the Commission
pursuant to Rule 424(b) under the Act (which the Company agrees to file in a
timely manner under such Rules);
(d) to advise you promptly, confirming such advice in writing, of any
request by the Commission for amendments or supplements to the Registration
Statement or Prospectus or for additional information with respect thereto, or
of notice of institution of proceedings for, or the entry of a stop order
suspending the effectiveness of the Registration Statement and, if the
Commission should enter a stop order suspending the effectiveness of the
Registration Statement, to make every reasonable effort to obtain the lifting or
removal of such order as soon as possible; to advise you promptly of any
proposal to amend or supplement the Registration Statement or Prospectus,
including by filing any documents that would be incorporated therein by
reference, and to file no such amendment or supplement to which you shall object
in writing;
(e) to file promptly all reports and any definitive proxy or
information statement required to be filed by the Company with the Commission in
order to comply with the Exchange Act subsequent to the date of the Prospectus
and for so long as the delivery of a prospectus is required in connection with
the offering or sale of the Shares, and to promptly notify you of such filing;
(f) if necessary or appropriate, to file a registration statement
pursuant to Rule 462(b) under the Act;
(g) to furnish to you and, upon request, to each of the other
Underwriters for a period of five years from the date of this Agreement (i)
copies of any reports or other communications which the Company shall send to
its stockholders or shall from time to time publish or publicly disseminate,
(ii) copies of all annual, quarterly and current reports filed with the
Commission on Forms 10-K, 10-Q and 8-K, or such other similar form as may be
designated by the Commission, (iii) copies of documents or reports filed with
any national securities exchange on which any class of securities of the Company
is listed, and (iv) such other information as you may reasonably request
regarding the Company, in each case as soon as such communications, documents or
information become available;
(h) to advise the Underwriters promptly of the happening of any event
known to the Company within the time during which a Prospectus relating to the
Shares is required to be delivered under the Act which, in the judgment of the
Company, would require the making of any change in the Prospectus then being
used, or in the information incorporated therein by reference, so that the
Prospectus would not include an untrue statement of material fact or omit to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they are made, not misleading, and, during such
time, to prepare and furnish, at the Company's expense, to the Underwriters
promptly such amendments or supplements to such
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<PAGE>
Prospectus as may be necessary to reflect any such change and to furnish you a
copy of such proposed amendment or supplement before filing any such amendment
or supplement with the Commission;
(i) to make generally available to its security holders, and to
deliver to you, an earnings statement of the Company (which will satisfy the
provisions of Section 11(a) of the Act) covering a period of twelve months
beginning after the effective date of the Registration Statement (as defined in
Rule 158(c) of the Act) as soon as is reasonably practicable after the
termination of such twelve-month period;
(j) to furnish to you four signed copies of the Registration
Statement, as initially filed with the Commission, and of all amendments thereto
(including all exhibits thereto and documents incorporated by reference therein)
and sufficient conformed copies of the foregoing (other than exhibits) for
distribution of a copy to each of the other Underwriters;
(k) to furnish to you as early as practicable prior to the time of
purchase and the additional time of purchase, as the case may be, but not later
than two business days prior thereto, a copy of the latest available unaudited
interim consolidated financial statements, if any, of the Company which have
been read by the Company's independent certified public accountants, as stated
in their letter to be furnished pursuant to Section 6(b) hereof;
(l) to apply the net proceeds from the sale of the Shares in the
manner set forth under the caption "Use of Proceeds" in the Prospectus;
(m) not to sell, offer or agree to sell, contract to sell, grant any
option to sell or otherwise dispose of, directly or indirectly, any shares of
Common Stock or securities convertible into or exchangeable or exercisable for
Common Stock or warrants or other rights to purchase Common Stock or any other
securities of the Company that are substantially similar to Common Stock or
permit the registration under the Act of any shares of Common Stock, except for
the registration of the Shares and the sales to the Underwriters pursuant to
this Agreement and except for issuances of Common Stock upon the exercise of
outstanding options and warrants, for a period of ____ days after the date
hereof, without the prior written consent of Warburg Dillon Read LLC; and
(n) to pay all expenses, fees and taxes (other than any transfer
taxes and fees and disbursements of counsel for the Underwriters except as set
forth under Section 5 hereof or (iii) or (iv) below) in connection with (i) the
preparation and filing of the Registration Statement, each Preliminary
Prospectus, the Prospectus, and any amendments or supplements thereto, and the
printing and furnishing of copies of each thereof to the Underwriters and to
dealers (including costs of mailing and shipment), (ii) the issuance, sale and
delivery of the Shares by the Company, (iii) the word processing and/or printing
of this Agreement, any Agreement Among Underwriters, any dealer agreements, any
Statements of Information and the reproduction and/or printing and furnishing of
copies of each thereof to the Underwriters and to dealers (including costs of
mailing and shipment), (iv) the qualification of the Shares for offering and
sale under state laws and the determination of their eligibility for investment
under state law as aforesaid (including the legal fees and filing fees and other
disbursements of counsel to the Underwriters)
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<PAGE>
and the printing and furnishing of copies of any blue sky surveys or legal
investment surveys to the Underwriters and to dealers, (v) any listing of the
Shares on any securities exchange or qualification of the Shares for quotation
on the Nasdaq National Market or the Nasdaq SmallCap Market and any registration
thereof under the Exchange Act, (vi) the filing for review of the public
offering of the Shares by the NASD and (vii) the performance of the Company's
other obligations hereunder.
5. Reimbursement of Underwriters' Expenses. If the Shares are not
delivered for any reason other than the termination of this Agreement pursuant
to the second paragraph of Section 7 hereof or the default by one or more of the
Underwriters in its or their respective obligations hereunder, the Company
shall, in addition to paying the amounts described in Section 4(n) hereof,
reimburse the Underwriters for all of their out-of-pocket expenses, including
the fees and disbursements of their counsel.
6. Conditions of Underwriters' Obligations. The several obligations of
the Underwriters hereunder are subject to the accuracy of the representations
and warranties on the part of the Company on the date hereof and at the time of
purchase (and the several obligations of the Underwriters at the additional time
of purchase are subject to the accuracy of the representations and warranties on
the part of the Company on the date hereof and at the time of purchase (unless
previously waived) and at the additional time of purchase, as the case may be),
the performance by the Company of its obligations hereunder and to the following
additional conditions precedent:
(a) The Company shall furnish to you at the time of purchase and at
the additional time of purchase, as the case may be, an opinion of Preston Gates
& Ellis LLP, addressed to the Underwriters, and dated the time of purchase or
the additional time of purchase, as the case may be, with reproduced copies for
each of the other Underwriters and in form satisfactory to Gibson, Dunn &
Crutcher LLP, counsel for the Underwriters, stating that:
(i) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Washington, with full corporate power and authority to own, lease and
operate its properties and conduct its business as described in the
Registration Statement and the Prospectus, to execute and deliver this
Agreement and to issue, sell and deliver the Shares as herein contemplated;
(ii) the Company is duly qualified or licensed by each
jurisdiction in which it conducts its business and in which the failure,
individually or in the aggregate, to be so licensed or qualified could have
a Material Adverse Effect, and the Company is duly qualified, and is in
good standing, in each jurisdiction in which it owns or leases real
property or maintains an office and in which such qualification is
necessary;
(iii) this Agreement has been duly authorized, executed and
delivered by the Company;
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(iv) the Shares have been duly authorized and, when issued and
delivered to and paid for by the Underwriters, will be duly and validly and
issued and will be fully paid and non-assessable;
(v) as of the date set forth in the Registration Statement
and the Prospectus, the Company has an authorized capitalization as set
forth in the Registration Statement and the Prospectus; the outstanding
shares of capital stock of the Company have been duly and validly
authorized and issued, and are fully paid, nonassessable and free of
statutory and contractual preemptive rights; the Shares when issued will be
free of statutory and contractual preemptive rights, resale rights, rights
of first refusal and similar rights; the certificates for the Shares are in
due and proper form and the holders of the Shares will not be subject to
personal liability by reason of being such holders;
(vi) the Company does not own or control, directly or
indirectly, any corporation, association or other entity that is a
"significant subsidiary" (as defined in the Rules and Regulations);
(vii) the capital stock of the Company, including the Shares,
conforms to the description thereof contained in the Registration Statement
and Prospectus;
(viii) the Registration Statement and the Prospectus (except as
to the financial statements and schedules and other financial and
statistical data contained or incorporated by reference therein, as to
which such counsel need express no opinion) comply as to form in all
material respects with the requirements of the Act;
(ix) the Registration Statement has become effective under the
Act and, to the best of such counsel's knowledge, no stop order proceedings
with respect thereto are pending or threatened under the Act and any
required filing of the Prospectus and any supplement thereto pursuant to
Rule 424 under the Act has been made in the manner and within the time
period required by such Rule 424;
(x) no approval, authorization, consent or order of or filing
with any national, state or local governmental or regulatory commission,
board, body, authority or agency is required in connection with the
issuance and sale of the Shares and consummation by the Company of the
transaction as contemplated hereby other than registration of the Shares
under the Act (except such counsel need express no opinion as to any
necessary qualification under the state securities or blue sky laws of the
various jurisdictions in which the Shares are being offered by the
Underwriters);
(xi) the execution, delivery and performance of this Agreement
by the Company and the consummation by the Company of the transactions
contemplated hereby do not and will not conflict with, or result in any
breach of, or constitute a default under (nor constitute any event which
with notice, lapse of time, or both, would result in any breach of or
constitute a default under), any provisions of the charter or by-laws of
the Company or under any provision of any license, indenture, mortgage,
deed of trust, bank loan, credit agreement or other evidence of
indebtedness, or any lease, contract or
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other agreement or instrument to which the Company is a party or it or its
properties may be bound or affected, or under any federal, state, local or
foreign law, regulation or rule or any decree, judgment or order applicable
to the Company;
(xii) to the best of such counsel's knowledge, the Company is
not in violation of its charter or by-laws or is in breach of, or in
default under (nor has any event occurred which with notice, lapse of time,
or both would result in any breach of, or constitute a default under), any
license, indenture, mortgage, deed of trust, bank loan or any other
agreement or instrument to which the Company is a party or by which it or
any of its properties may be bound or affected or under any federal, state,
local or foreign law, regulation or rule or any decree, judgment or order
applicable to the Company;
(xiii) to the best of such counsel's knowledge, there are no
contracts, licenses, agreements, leases or documents of a character which
are required to be filed as exhibits to the Registration Statement or to be
summarized or described in the Prospectus which have not been so filed,
summarized or described;
(xiv) to the best of such counsel's knowledge, there are no
actions, suits, claims, investigations or proceedings pending, threatened
or contemplated to which the Company or any of its properties are subject
at law or in equity or before or by any federal, state, local or foreign
governmental or regulatory commission, board, body, authority or agency
which are required to be described in the Prospectus but are not so
described;
(xv) the documents incorporated by reference in the
Registration Statement and Prospectus, when they were filed (or, if an
amendment with respect to any such document was filed when such amendment
was filed) with the Commission, complied as to form in all material
respects with the Exchange Act (except as to the financial statements and
schedules and other financial and statistical data contained or
incorporated by reference therein as to which such counsel need express no
opinion); and
(xvi) the Company will not, upon consummation of the
transactions contemplated by this Agreement, be an "investment company," or
a "promoter" or "principal underwriter" for, a "registered investment
company," as such terms are defined in the Investment Company Act of 1940,
as amended.
In addition, such counsel shall state that such counsel have participated in
conferences with officers and other representatives of the Company,
representatives of the independent public accountants of the Company and
representatives of the Underwriters at which the contents of the Registration
Statement and Prospectus were discussed and, although such counsel is not
passing upon and does not assume responsibility for the accuracy, completeness
or fairness of the statements contained in the Registration Statement or
Prospectus (except as and to the extent stated in subparagraphs (v) and (vii)
above), on the basis of the foregoing nothing has come to the attention of such
counsel that causes them to believe that the Registration Statement or any
amendment thereto at the time such Registration Statement or amendment became
effective contained an untrue statement of a material fact or omitted to state a
material fact required to be
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stated therein or necessary to make the statements therein not misleading, or
that the Prospectus or any supplement thereto at the date of such Prospectus or
such supplement, and at all times up to and including the time of purchase or
additional time of purchase, as the case may be, contained an untrue statement
of a material fact or omitted 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 (it being understood
that such counsel need express no opinion with respect to the financial
statements and schedules and other financial and statistical data included in
the Registration Statement or Prospectus).
(b) You shall have received from Ernst & Young LLP, letters dated,
respectively, the date of this Agreement and the time of purchase and additional
time of purchase, as the case may be, and addressed to the Underwriters (with
reproduced copies for each of the Underwriters) in the forms heretofore approved
by Warburg Dillon Read LLC.
(c) You shall have received at the time of purchase and at the
additional time of purchase, as the case may be, the favorable opinion of
Gibson, Dunn & Crutcher LLP, counsel for the Underwriters, dated the time of
purchase or the additional time of purchase, as the case may be, as to the
matters referred to in subparagraphs (iii), (iv), (vii) (with respect to the
Shares only), (viii) and (ix) of paragraph (a) of this Section 6.
In addition, such counsel shall state that such counsel have participated in
conferences with officers and other representatives of the Company, counsel for
the Company, representatives of the independent public accountants of the
Company and representatives of the Underwriters at which the contents of the
Registration Statement and Prospectus and related matters were discussed and,
although such counsel is not passing upon and does not assume any responsibility
for the accuracy, completeness or fairness of the statements contained in the
Registration Statement and Prospectus (except as to matters referred to with
respect to the Shares under subparagraph (vii) of paragraph (a) of this Section
6), on the basis of the foregoing (relying as to materiality to a large extent
upon the opinions of officers and other representatives of the Company), no
facts have come to the attention of such counsel which lead them to believe that
the Registration Statement or any amendment thereto at the time such
Registration Statement or amendment became effective contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading or
that the Prospectus as of its date or any supplement thereto as of its date
contained an untrue statement of a material fact or omitted 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 (it
being understood that such counsel need express no comment with respect to the
financial statements and schedules and other financial and statistical data
included in the Registration Statement or Prospectus).
(d) No amendment or supplement to the Registration Statement or
Prospectus, including documents deemed to be incorporated by reference therein,
shall be filed prior to the time the Registration Statement becomes effective to
which you object in writing.
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(e) The Registration Statement shall become effective, or if Rule
430A under the Act is used, the Prospectus shall have been filed with the
Commission pursuant to Rule 424(b) under the Act, at or before 5:00 P.M., New
York City time, on the date of this Agreement, unless a later time (but not
later than 5:00 P.M., New York City time, on the second full business day after
the date of this Agreement) shall be agreed to by the Company and you in writing
or by telephone, confirmed in writing; provided, however, that the Company and
you and any group of Underwriters, including you, who have agreed hereunder to
purchase in the aggregate at least 50% of the Firm Shares may from time to time
agree on a later date.
(f) Prior to the time of purchase or the additional time of purchase,
as the case may be, (i) no stop order with respect to the effectiveness of the
Registration Statement shall have been issued under the Act or proceedings
initiated under Section 8(d) or 8(e) of the Act; (ii) the Registration Statement
and all amendments thereto, or modifications thereof, if any, shall not contain
an 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 not misleading;
and (iii) the Prospectus and all amendments or supplements thereto, or
modifications thereof, if any, shall not contain an 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 the light of the circumstances
under which they are made, not misleading.
(g) Between the time of execution of this Agreement and the time of
purchase or the additional time of purchase, as the case may be, (i) no material
and unfavorable change, financial or otherwise (other than as referred to in the
Registration Statement and Prospectus), in the business, condition or prospects
of the Company shall occur or become known and (ii) no transaction which is
material and unfavorable to the Company shall have been entered into by the
Company or any of its Subsidiaries.
(h) The Company will, at the time of purchase or additional time of
purchase, as the case may be, deliver to you a certificate of two of its
executive officers to the effect that the representations and warranties of the
Company as set forth in this Agreement are true and correct as of each such
date, that the Company shall perform such of its obligations under this
Agreement as are to be performed at or before the time of purchase and at or
before the additional time of purchase, as the case may be, and the conditions
set forth in paragraphs (f) and (g) of this Section 6 have been met.
(i) You shall have received signed letters, dated the date of this
Agreement and in the form of Exhibit A hereto, from each of the Company's
directors, executive officers and certain other employees and certain of its
stockholders, each as set forth on Schedule B hereto, to the effect that such
persons shall not sell, offer or agree to sell, contract to sell, grant any
option to sell or otherwise dispose of, directly or indirectly, any shares of
Common Stock of the Company or securities convertible into or exchangeable or
exercisable for Common Stock or warrants or other rights to purchase Common
Stock for a period of ___ days after the date of the Prospectus without Warburg
Dillon Read LLC's prior written consent.
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<PAGE>
(j) The Company shall have furnished to you such other documents and
certificates as to the accuracy and completeness of any statement in the
Registration Statement and the Prospectus as of the time of purchase and the
additional time of purchase, as the case may be, as you may reasonably request.
(k) The Shares shall have been approved for listing for quotation on
the Nasdaq National Market, subject only to notice of issuance at or prior to
the time of purchase, or the additional time of purchase, as the case may be.
7. Effective Date of Agreement; Termination. This Agreement shall become
effective (i) if Rule 430A under the Act is not used, when you shall have
received notification of the effectiveness of the Registration Statement, or
(ii) if Rule 430A under the Act is used, when the parties hereto have executed
and delivered this Agreement.
The obligations of the several Underwriters hereunder shall be subject to
termination in the absolute discretion of you or any group of Underwriters
(which may include you) which has agreed to purchase in the aggregate at least
50% of the Firm Shares, if, since the time of execution of this Agreement or the
respective dates as of which information is given in the Registration Statement
and Prospectus, there has been any material adverse and unfavorable change,
financial or otherwise (other than as referred to in the Registration Statement
and Prospectus), in the operations, business, condition or prospects of the
Company, which would, in your judgment or in the judgment of such group of
Underwriters, make it impracticable to market the Shares, or, if, at any time
prior to the time of purchase or, with respect to the purchase of any Additional
Shares, the additional time of purchase, as the case may be, trading in
securities on the New York Stock Exchange, the American Stock Exchange or the
Nasdaq National Market shall have been suspended or limitations or minimum
prices shall have been established on the New York Stock Exchange, the American
Stock Exchange or the Nasdaq National Market or if a banking moratorium shall
have been declared either by the United States or New York State authorities, or
if the United States shall have declared war in accordance with its
constitutional processes or there shall have occurred any material outbreak or
escalation of hostilities or other national or international calamity or crisis
of such magnitude in its effect on the financial markets of the United States
as, in your judgment or in the judgment of such group of Underwriters, to make
it impracticable to market the Shares.
If you or any group of Underwriters elects to terminate this Agreement as
provided in this Section 7, the Company and each other Underwriter shall be
notified promptly by letter or telegram.
If the sale to the Underwriters of the Shares, as contemplated by this
Agreement, is not carried out by the Underwriters for any reason permitted under
this Agreement or if such sale is not carried out because the Company shall be
unable to comply with any of the terms of this Agreement, the Company shall not
be under any obligation or liability under this Agreement (except to the extent
provided in Sections 4(n), 5 and 9 hereof), and the Underwriters shall be under
no obligation or liability to the Company under this Agreement (except to the
extent provided in Section 9 hereof) or to one another hereunder.
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<PAGE>
8. Increase in Underwriters' Commitments. Subject to Sections 6 and 7, if
any Underwriter shall default in its obligation to take up and pay for the Firm
Shares to be purchased by it hereunder (otherwise than for reasons sufficient to
justify the termination of this Agreement under the provisions of Section 7
hereof) and if the number of Firm Shares which all Underwriters so defaulting
shall have agreed but failed to take up and pay for does not exceed 10% of the
total number of Firm Shares, the non-defaulting Underwriters shall take up and
pay for (in addition to the number of Firm Shares they are obligated to purchase
pursuant to Section 1 hereof) the number of Firm Shares agreed to be purchased
by all such defaulting Underwriters, as hereinafter provided. Such Shares shall
be taken up and paid for by such non-defaulting Underwriter or Underwriters in
such amount or amounts as you may designate with the consent of each Underwriter
so designated or, in the event no such designation is made, such Shares shall be
taken up and paid for by all non-defaulting Underwriters pro rata in proportion
to the aggregate number of Firm Shares set opposite the names of such non-
defaulting Underwriters in Schedule A.
Without relieving any defaulting Underwriter from its obligations
hereunder, the Company agrees with the non-defaulting Underwriters that it will
not sell any Firm Shares hereunder unless all of the Firm Shares are purchased
by the Underwriters (or by substituted Underwriters selected by you with the
approval of the Company or selected by the Company with your approval).
If a new Underwriter or Underwriters are substituted by the Underwriters or
by the Company for a defaulting Underwriter or Underwriters in accordance with
the foregoing provision, the Company or you shall have the right to postpone the
time of purchase for a period not exceeding five business days in order that any
necessary changes in the Registration Statement and Prospectus and other
documents may be effected.
The term Underwriter as used in this agreement shall refer to and include
any Underwriter substituted under this Section 8 with like effect as if such
substituted Underwriter had originally been named in Schedule A.
If the aggregate number of Shares which the defaulting Underwriter or
Underwriters agreed to purchase exceeds 10% of the total number of Shares which
all Underwriters agreed to purchase hereunder, and if neither the non-defaulting
Underwriters nor the Company shall make arrangements within the five business
day period stated above for the purchase of all the Shares which the defaulting
Underwriter or Underwriters agreed to purchase hereunder, this Agreement shall
be terminated without further act or deed and without any liability on the part
of the Company to any non-defaulting Underwriter and without any liability on
the part of any non-defaulting Underwriter to the Company. Nothing in this
paragraph, and no action taken hereunder, shall relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
9. Indemnity and Contribution.
(a) The Company agrees to indemnify, defend and hold harmless each
Underwriter, its partners, directors and officers, and any person who controls
any Underwriter
16
<PAGE>
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act,
and the successors and assigns of all of the foregoing persons from and against
any loss, damage, expense, liability or claim (including the reasonable cost of
investigation) which, jointly or severally, any such Underwriter or any such
person may incur under the Act, the Exchange Act, the common law or otherwise,
insofar as such loss, damage, expense, liability or claim arises out of or is
based upon any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement (or in the Registration Statement as
amended by any post-effective amendment thereof by the Company) or in a
Prospectus (the term Prospectus for the purpose of this Section 9 being deemed
to include any Preliminary Prospectus, the Prospectus and the Prospectus as
amended or supplemented by the Company), or arises out of or is based upon any
omission or alleged omission to state a material fact required to be stated in
either such Registration Statement or Prospectus or necessary to make the
statements made therein not misleading, except insofar as any such loss, damage,
expense, liability or claim arises out of or is based upon any untrue statement
or alleged untrue statement of a material fact contained in and in conformity
with information furnished in writing by or on behalf of any Underwriter through
you to the Company expressly for use with reference to such Underwriter in such
Registration Statement or such Prospectus or arises out of or is based upon any
omission or alleged omission to state a material fact in connection with such
information required to be stated in either such Registration Statement or
Prospectus or necessary to make such information not misleading.
If any action, suit or proceeding (together, a "Proceeding") is
brought against an Underwriter or any such person in respect of which indemnity
may be sought against the Company pursuant to the foregoing paragraph, such
Underwriter or such person shall promptly notify the Company in writing of the
institution of such Proceeding and the Company shall assume the defense of such
Proceeding, including the employment of counsel reasonably satisfactory to such
indemnified party and payment of all fees and expenses; provided, however, that
the omission to so notify the Company shall not relieve the Company from any
liability which the Company may have to any Underwriter or any such person or
otherwise. Such Underwriter or such controlling person shall have the right to
employ its or their own counsel in any such case, but the fees and expenses of
such counsel shall be at the expense of such Underwriter or of such person
unless the employment of such counsel shall have been authorized in writing by
the Company in connection with the defense of such Proceeding or the Company
shall not have, within a reasonable period of time in light of the
circumstances, employed counsel to have charge of the defense of such Proceeding
or such indemnified party or parties shall have reasonably concluded that there
may be defenses available to it or them which are different from, additional to
or in conflict with those available to the Company (in which case the Company
shall not have the right to direct the defense of such Proceeding on behalf of
the indemnified party or parties), in any of which events such fees and expenses
shall be borne by the Company and paid as incurred (it being understood,
however, that the Company shall not be liable for the expenses of more than one
separate counsel (in addition to any local counsel) in any one Proceeding or
series of related Proceedings in the same jurisdiction representing the
indemnified parties who are parties to such Proceeding). The Company shall not
be liable for any settlement of any such Proceeding effected without its written
consent but if settled with the written consent of the Company, the Company
agrees to indemnify and hold harmless any Underwriter and any such person from
and against any loss or liability by reason of such
17
<PAGE>
settlement. Notwithstanding the foregoing sentence, if at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel as contemplated by the second
sentence of this paragraph, then the indemnifying party agrees that it shall be
liable for any settlement of any Proceeding effected without its written consent
if (i) such settlement is entered into more than 60 business days after receipt
by such indemnifying party of the aforesaid request, (ii) such indemnifying
party shall not have reimbursed the indemnified party in accordance with such
request prior to the date of such settlement and (iii) such indemnified party
shall have given the indemnifying party at least 30 days' prior notice of its
intention to settle. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending or
threatened Proceeding in respect of which any indemnified party is or could have
been a party and indemnity could have been sought hereunder by such indemnified
party, unless such settlement includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter of
such Proceeding and does not include an admission of fault, culpability or a
failure to act, by or on behalf of such indemnified party.
(b) Each Underwriter severally agrees to indemnify, defend and hold
harmless the Company, its directors and officers and any person who controls the
Company within the meaning of Section 15 of the Act, or Section 20 of the
Exchange Act from and against any loss, damage, expense, liability or claim
(including the reasonable cost of investigation) which, jointly or severally,
the Company or any such person may incur under the Act, the Exchange Act, or
common law or otherwise, insofar as such loss, damage, expense, liability or
claim arises out of or is based upon any untrue statement or alleged untrue
statement of a material fact contained in and in conformity with information
furnished in writing by or on behalf of such Underwriter through you to the
Company expressly for use with reference to such Underwriter in the Registration
Statement (or in the Registration Statement as amended by or on behalf of any
post-effective amendment thereof by the Company) or in a Prospectus, or arises
out of or is based upon any omission or alleged omission to state a material
fact in connection with such information required to be stated in such
Registration Statement or Prospectus or necessary to make such information not
misleading.
If any Proceeding is brought against the Company or any such person in
respect of which indemnity may be sought against any Underwriter pursuant to the
foregoing paragraph, the Company or such person shall promptly notify such
Underwriter in writing of the institution of such Proceeding and such
Underwriter shall assume the defense of such Proceeding, including the
employment of counsel reasonably satisfactory to such indemnified party and
payment of all fees and expenses, provided, however, that the omission to so
notify such Underwriter shall not relieve such Underwriter from any liability
which such Underwriter may have to the Company or any such person or otherwise.
The Company or such person shall have the right to employ its own counsel in any
such case, but the fees and expenses of such counsel shall be at the expense of
the Company or such person unless the employment of such counsel shall have been
authorized in writing by such Underwriter in connection with the defense of such
Proceeding or such Underwriter shall not have, within a reasonable period of
time in light of the circumstances, employed counsel to have charge of the
defense of such Proceeding or such indemnified party or parties shall have
reasonably concluded that there may be defenses available to it or them which
18
<PAGE>
are different from or additional to or in conflict with those available to such
Underwriter (in which case such Underwriter shall not have the right to direct
the defense of such Proceeding on behalf of the indemnified party or parties,
but such Underwriter may employ counsel and participate in the defense thereof
but the fees and expenses of such counsel shall be at the expense of such
Underwriter), in any of which events such fees and expenses shall be borne by
such Underwriter and paid as incurred (it being understood, however, that such
Underwriter shall not be liable for the expenses of more than one separate
counsel (in addition to any local counsel) in any one Proceeding or series of
related Proceedings in the same jurisdiction representing the indemnified
parties who are parties to such Proceeding). No Underwriter shall be liable for
any settlement of any such Proceeding effected without the written consent of
such Underwriter but if settled with the written consent of such Underwriter,
such Underwriter agrees to indemnify and hold harmless the Company and any such
person from and against any loss or liability by reason of such settlement.
Notwithstanding the foregoing sentence, if at any time an indemnified party
shall have requested an indemnifying party to reimburse the indemnified party
for fees and expenses of counsel as contemplated by the second sentence of this
paragraph, then the indemnifying party agrees that it shall be liable for any
settlement of any Proceeding effected without its written consent if (i) such
settlement is entered into more than 60 business days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party shall
not have reimbursed the indemnified party in accordance with such request prior
to the date of such settlement and (iii) such indemnified party shall have given
the indemnifying party at least 30 days' prior notice of its intention to
settle. No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened Proceeding
in respect of which any indemnified party is or could have been a party and
indemnity could have been sought hereunder by such indemnified party, unless
such settlement includes an unconditional release of such indemnified party from
all liability on claims that are the subject matter of such Proceeding.
(c) If the indemnification provided for in this Section 9 is
unavailable to an indemnified party under subsections (a) and (b) of this
Section 9 in respect of any losses, damage, expenses, liabilities or claims
referred to therein, then each applicable indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, damages, expenses,
liabilities or claims (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the Underwriters
on the other hand from the offering of the Shares or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company on the one
hand and of the Underwriters on the other in connection with the statements or
omissions which resulted in such losses, damages, expenses, liabilities or
claims, as well as any other relevant equitable considerations. The relative
benefits received by the Company, on the one hand, and the Underwriters on the
other, shall be deemed to be in the same respective proportion as the total
proceeds from the offering (net of underwriting discounts and commissions but
before deducting expenses) received by the Company and the total underwriting
discounts and commissions received by the Underwriters bear to the aggregate
public offering price of the Shares. The relative fault of the Company on the
one hand and of the Underwriters on the other shall be determined by reference
to, among other things, whether the
19
<PAGE>
untrue statement or alleged untrue statement of a material fact or omission or
alleged omission relates to information supplied by the Company or by the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The amount
paid or payable by a party as a result of the losses, damages, expenses,
liabilities and claims referred to in this subsection shall be deemed to include
any legal or other fees or expenses reasonably incurred by such party in
connection with investigating, preparing to defend or defending any claim or
Proceeding.
(d) The Company and the Underwriters agree that it would not be just
and equitable if contribution pursuant to this Section 9 were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in subsection (c) above. Notwithstanding
the provisions of this Section 9, no Underwriter shall be required to contribute
any amount in excess of the amount by which the total price at which the Shares
underwritten by such Underwriter and distributed to the public were offered to
the public exceeds the amount of any damage which such Underwriter has otherwise
been required to pay by reason of such untrue statement or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to this
Section 9 are several in proportion to its underwriting commitments and not
joint.
(e) The indemnity and contribution agreements contained in this
Section 9 and the covenants, warranties and representations of the Company
contained in this Agreement shall remain in full force and effect regardless of
any investigation made by or on behalf of any Underwriter, its directors and
officers or any person (including each partner, officer or director of such
person) who controls any Underwriter within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act, or by or on behalf of the Company, its
directors or officers or any person who controls the Company within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act, and shall survive
any termination of this Agreement or the issuance and delivery of the Shares.
The Company and each Underwriter agree promptly to notify each other of the
commencement of any Proceeding against it and, in the case of the Company,
against any of the Company's officers or directors in connection with the
issuance and sale of the Shares, or in connection with the Registration
Statement or Prospectus.
10. Notices. Except as otherwise herein provided, all statements,
requests, notices and agreements shall be in writing or by telegram and, if to
the Underwriters, shall be sufficient in all respects if delivered or sent to
Warburg Dillon Read LLC, 299 Park Avenue, New York, New York 10171-0026,
Attention: Syndicate Department, if to the Company, shall be sufficient in all
respects if delivered or sent to the Company at the offices of the Company at
808 Howell Street, Suite 400, Seattle, Washington 98101, Attention: President.
11. Governing Law; Construction. This Agreement and any claim,
counterclaim or dispute of any kind or nature whatsoever arising out of or in
any way relating to this Agreement ("Claim"), directly or indirectly, shall be
governed by, and construed in accordance with, the
20
<PAGE>
laws of the State of New York. The Section headings in this Agreement have been
inserted as a matter of convenience of reference and are not a part of this
Agreement.
12. Submission to Jurisdiction. Except as set forth below, no Claim may
be commenced, prosecuted or continued in any court other than the courts of the
State of New York located in the City and County of New York or in the United
States District Court for the Southern District of New York, which courts shall
have jurisdiction over the adjudication of such matters, and the Company
consents to the jurisdiction of such courts and personal service with respect
thereto. The Company hereby consents to personal jurisdiction, service and venue
in any court in which any Claim arising out of or in any way relating to this
Agreement is brought by any third party against Warburg Dillon Read LLC or any
indemnified party. Each of Warburg Dillon Read LLC and the Company (on its
behalf and, to the extent permitted by applicable law, on behalf of its
stockholders and affiliates) waives all right to trial by jury in any action,
proceeding or counterclaim (whether based upon contract, tort or otherwise) in
any way arising out of or relating to this Agreement. The Company agrees that a
final judgment in any such action, proceeding or counterclaim brought in any
such court shall be conclusive and binding upon the Company and may be enforced
in any other courts in the jurisdiction of which the Company is or may be
subject, by suit upon such judgment.
13. Parties at Interest. The Agreement herein set forth has been and is
made solely for the benefit of the Underwriters and the Company and, to the
extent provided in Section 9 hereof, the controlling persons, directors and
officers referred to in such Section, and their respective successors, assigns,
heirs, personal representatives and executors and administrators. No other
person, partnership, association or corporation (including a purchaser, as such
purchaser, from any of the Underwriters) shall acquire or have any right under
or by virtue of this Agreement.
14. Counterparts. This Agreement may be signed by the parties in one or
more counterparts which together shall constitute one and the same agreement
among the parties.
15. Successors and Assigns. This Agreement shall be binding upon the
Underwriters and the Company and their successors and assigns and any successor
or assign of any substantial portion of the Company's and any of the
Underwriters' respective businesses and/or assets.
21
<PAGE>
If the foregoing correctly sets forth the understanding between the Company
and the Underwriters, please so indicate in the space provided below for the
purpose, whereupon this letter and your acceptance shall constitute a binding
agreement between the Company and the Underwriters, severally.
Very truly yours,
ONHEALTH NETWORK COMPANY
By:
---------------------------------------
Robert N. Goodman
President and Chief Executive Officer
Accepted and agreed to as of the date first above written, on behalf of
themselves and the other several Underwriters named in Schedule A
WARBURG DILLON READ LLC
SG COWEN SECURITIES CORPORATION
CIBC WORLD MARKETS CORP.
By: WARBURG DILLON READ LLC
By:
----------------------------
Name:
Title:
22
<PAGE>
SCHEDULE A
Number of Firm
Underwriter Shares Purchased
- ----------- ----------------
Warburg Dillon Read LLC....................
SG Cowen Securities Corporation............
CIBC World Markets Corp....................
-----
Total................................... =====
<PAGE>
SCHEDULE B
PERSONS TO EXECUTE LOCK-UP AGREEMENTS
Directors
- ---------
Michael A. Brochu
Robert N. Goodman
Ann Kirschner
Ram Shriram
Rick Thompson
Executive Officers (other than Robert N. Goodman)
- -------------------------------------------------
Michael D. Conway
Other Employees
- ---------------
Rebecca J. Farwell
<PAGE>
EXHIBIT A
FORM OF LOCK-UP AGREEMENT
July __, 1999
Warburg Dillon Read LLC
SG Cowen Securities Corporation
CIBC World Markets Corp.
as Managing Underwriters
c/o Warburg Dillon Read LLC
299 Park Avenue
New York, New York 10171-0026
Ladies and Gentlemen:
The undersigned understands that Warburg Dillon Read LLC ("Warburg"), SG
Cowen Securities Corporation and CIBC World Markets Corp. propose to enter into
an Underwriting Agreement (the "Underwriting Agreement") with OnHealth Network
Company, a Washington corporation (the "Company"), providing for the public
offering (the "Public Offering") by the several underwriters named in the
Underwriting Agreement (the "Underwriters"), of 6,000,000 shares (the "Shares")
of the Common Stock, $0.01 par value, of the Company (the "Common Stock").
To induce the Underwriters that may participate in the Public Offering to
continue their efforts in connection with the Public Offering, the undersigned
hereby agrees that, without the prior written consent of Warburg on behalf of
the Underwriters, it will not, during the period commencing on the date hereof
and ending 180 days after the date of the final prospectus relating to the
Public Offering, sell, offer to sell, contract to sell, hypothecate, grant any
option to sell or otherwise dispose of, directly or indirectly, any shares of
Common Stock or securities convertible into or exchangeable for Common Stock or
warrants or other rights to purchase Common Stock.
Whether or not the Public Offering actually occurs depends on a number of
factors, including market conditions. Any Public Offering will only be made
pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation between the Company and the Underwriters.
Very truly yours,
_________________________
Name:
_________________________
_________________________
(Address)
A-1
<PAGE>
Exhibit 5
[LETTERHEAD OF PRESTON GATES & ELLIS LLP]
July 19, 1999
OnHealth Network Company
808 Howell Street, Suite 400
Seattle, Washington 98101
Re: OnHealth Network Company
Form S-3 Registration Statement ( Reg. No. 333-81321)
Dear Sir or Madam:
We have acted as counsel for OnHealth Network Company, a Washington
corporation (the "Company"), in connection with the filing under the Securities
Act of 1933, as amended, of the above-referenced Registration Statement (the
"Registration Statement") relating to the registration of shares of common
stock, par value $0.01 per share (the "Shares"), of the Company.
In connection with the preparation and filing of the Registration
Statement, we have reviewed the Company's Articles of Incorporation and Bylaws
and have made such other investigations as we deemed necessary in order to
express the opinions set forth below. Based on the foregoing, it is our opinion
that the Shares will be fully paid and non-assessable under the Washington
Business Corporation Act when certificates representing the Shares shall have
been duly executed, countersigned and registered and duly delivered to the
purchasers thereof against payment of the agreed consideration therefor.
We hereby consent to all references to us in the Registration Statement and
all amendments thereto. We further consent to the use of this opinion as an
exhibit to the Registration Statement. We express no opinion as to any matters
not expressly set forth herein.
PRESTON GATES & ELLIS LLP
By: /s/ Gary J. Kocher
<PAGE>
Exhibit 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 15, 1999 in Amendment No. 1 to the
Registration Statement (Form S-3) and related Prospectus of OnHealth Network
Company for the registration of 6,000,000 shares of its common stock.
We also consent to the incorporation by reference therein of our report
dated March 15, 1999, with respect to the financial statements and schedule of
OnHealth Network Company included in its Annual Report (Form 10-K), as
amended, for the year ended December 31, 1998, filed with the Securities and
Exchange Commission.
/s/ Ernst & Young LLP
Seattle, Washington
July 19, 1999
