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Filed Pursuant to Rule 424(b)(3)
File No. 333-69989
PROSPECTUS
2,439,732 Shares
OnHealth Network Company
Common Stock, $.01 par value per share
On October 30, 1998, we sold Common Stock and Warrants and on December 14,
1998 we sold more Common Stock to certain shareholders. We are filing this
prospectus on behalf of the selling shareholders and they are offering all the
shares of Common Stock offered in this Prospectus so that they may offer and
sell shares in the public market and otherwise. The selling shareholders and the
number of shares of our common stock the selling shareholders may sell under
this prospectus are listed on page 15 of this prospectus.
The selling shareholders may offer their shares through public or private
transactions, on or off the Nasdaq SmallCap Market, at prevailing market prices,
or at privately negotiated prices.
Our common stock is listed on the Nasdaq SmallCap Market under the ticker
symbol "ONHN". On December 29, 1998, the closing price of one share of OnHealth
common stock on the Nasdaq SmallCap Market was $4.375. We will receive none of
the proceeds from the sale of the Shares.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SHARES OR PASSED UPON
THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is January 14, 1999
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SHARES ONLY
IF YOU CAN AFFORD A COMPLETE LOSS. SEE "RISK FACTORS" BEGINNING ON PAGE 4.
THIS PROSPECTUS IS PART OF A REGISTRATION STATEMENT THAT WE HAVE FILED WITH THE
SEC. THE REGISTRATION STATEMENT CONTAINS EXHIBITS AND OTHER INFORMATION NOT
INCLUDED IN THE PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO GIVE INFORMATION OR
TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING DESCRIBED HEREIN.
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy the documents we file at the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. Our SEC filings are also available to the public
from the SEC's web site at http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information in
documents we file with them, which means that we can disclose important
information to you by referring you to those documents. The information
incorporated by reference is considered to be part of this prospectus, and
information that we file later with the SEC will automatically update and
supersede this information. We incorporate by reference the documents listed
below and any future filings we will make with the SEC under Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934:
1. Annual Report of IVI Publishing, Inc.* on Form 10-K for the fiscal
year ended December 31, 1997;
2. Quarterly Report of IVI Publishing, Inc.* on Form 10-Q for the quarter
ended March 31, 1998;
3. Proxy Statement of IVI Publishing, Inc.* for the annual meeting of
shareholders held June 16, 1998;
4. Quarterly report on Form 10-Q for the quarter ended June 30, 1998; and
5. Quarterly report on Form 10-Q for the quarter ended September 30,
1998.
* We changed our name from IVI Publishing, Inc. to OnHealth Network Company on
June 16, 1998.
You may request a copy of these filings or a copy of any or all of the
documents referred to above which have been or may be incorporated in this
Prospectus by reference, at no cost, by writing us at the following address:
Corporate Secretary
808 Howell Street, Suite 400
Seattle, Washington 98101
(206) 583-0100
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THE COMPANY
It is our intent to become the premier source of health-related information
on the world wide web. In the past, under the name IVI Publishing, Inc., we
published in CD-ROM and other formats health related information for some of
America's best-known health-care facilities in partnership with some of
America's most prestigious media firms. Historically, our attention and
resources have been directed to the cable television, CD-ROM and online
interactive media markets.
With the rapid rise of the internet as a source of information for
consumers, we have focused our company's efforts at creating a web site for
consumers of health information that is easy to use, provides custom features
for users and encourages frequent usage. Our flagship web site, located at
www.onhealth.com, opened in July 1997 and was re-released in July of 1998.
We hope to distinguish ourselves by "cutting through the clutter" of the
internet becoming the source for health-related information by locating and
packaging up-to-date and reliable information. By doing so, we will attain a
large number of consumers visiting our web site, which is essential to obtaining
advertising revenues.
We were originally incorporated in August 1990 in the State of Minnesota
under the name Interactive Television, Inc. We changed our name to Interactive
Ventures, Inc. in March 1991, IVI Publishing, Inc. in August 1993, and in
connection with our move to Washington and re-incorporation there, OnHealth
Network Company in June of 1998. Our principal executive offices are located at:
808 Howell Street, Suite 400
Seattle, Washington 98101
(206) 583-0100
RECENT DEVELOPMENT
On December 14, 1998, we completed the private placement of $2.0 million of
our common stock to one of the selling shareholders described in this
prospectus. The terms of this private placement were substantially identical to
those of our October 30, 1998 private placement and are further described in
this prospectus under "Description of Our Securities" and "Selling
Shareholders."
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RISK FACTORS
Investment in the shares of common stock offered in this Prospectus (the
"Shares") involves a high degree of risk. You should consider the following
discussion of risks as well as other information in this prospectus before
purchasing any Shares.
Except for historical information, the information contained in this
prospectus and in our SEC reports are "forward looking" statements about our
expected future business and performance. Our actual operating results and
financial performance may prove to be very different from what we might have
predicted as of the date of this prospectus. The risks described below address
some of the factors that may affect our future operating results and financial
performance:
. Reliance On External Financing. Based on our current cash and cash
equivalents, we expect to have sufficient resources to meet our ongoing
financial obligations and operate at least through March 31, 1999. Our
operations generated a negative cash flow during 1997 and during the first
nine months of 1998. The degree to which we are a net user of cash may
increase during the last quarter of 1998 and calendar 1999, as a result of
the expansion plans for the OnHealth network and our distribution
relationships and as a consequence of focusing on a new business model. We
are exploring and will continue to explore external financing to ensure
continued operations beyond March 31, 1999. There can be no assurance that
additional capital, on a debt or equity basis, will be found, or if found
that it will be on economically viable terms. If additional funds are
raised through the issuance of equity or convertible debt securities, the
percentage ownership of our shareholders will be reduced, shareholders may
experience additional dilution and such securities may have rights,
preferences or privileges senior to those of the holders of common stock.
. Limited Operating History and Accumulated Deficit; Continuing Operating
Losses. We were incorporated in 1990 and have been operating continuously
since 1991. However, we have only been active online since 1996 and the
OnHealth network web site was established in July 1997. Because of this
limited history on the internet, there is little information investors can
use to analyze our financial results relating to our internet web site.
Since 1990, we have generated an accumulated deficit of approximately $85
million (through September 30, 1998) and have incurred significant losses
in each of the last five years. Our ability to generate profits depends
upon our ability to attract consumers to our web site and how we leverage
those visits. This means we need to create significant revenue streams from
our web site, earn substantial gross margins on those revenue streams and
control our costs of operation. We anticipate continued significant
operating losses at least through the first half of 1999, as the OnHealth
web site is improved and the OnHealth network is enhanced. We can not
assure you that we will ever attain profitability.
. Shift to Advertising Revenues May Not Replace Revenues from Sales of CD-
ROMs. Since we began operations in 1990 and until early 1998, most of our
revenues were
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based on development, sales and support of CD-ROM titles. In January 1998,
the new management team changed our core business focus to internet web
site hosting of health care related content and the dissemination of health
and wellness information from our web site. The principal form of revenue
from this business model is advertising. Revenues from CD-ROMs have
declined significantly since 1995; however, advertising revenues may never
be sufficient to offset such declines in revenue. There is little
information available to assess the potential profitability or viability of
our business. In other words, we essentially face the same risks and
uncertainties of any new venture, and there can be no assurance that we
will be any more successful in this venture than in our previous business
activities.
. Reliance on Advertising Revenues. We anticipate that a substantial portion
of our revenues will come from the sale of advertisements on our web pages.
Our strategy is to continue to develop advertising and other methods of
generating revenues. We are in the early stages of licensing our products
and technology and in implementing our advertising program. To generate
significant advertising revenues, several things need to happen:
1. Advertisers must accept the internet as an attractive place to
advertise;
2. We need to attract a large number of consumers to our web site;
3. Those consumers need to have demographic characteristics
attractive to advertisers.
. Immature Advertising Market. There is fluid and intense competition in the
sale of advertising on the internet. Advertising rates quoted by different
vendors vary widely, which makes it difficult to project future levels of
advertising revenues. Further, significant and consistent use of the
internet by many advertisers depends upon confirmation that the internet is
an effective advertising medium. To date, advertisers have not by their
actions become convinced of that.
The internet as an advertising medium has not been available for a
sufficient period of time to gauge its effectiveness as compared with
traditional advertising media. No standards have been widely accepted for
the measurement of the effectiveness of internet-based advertising.
Internet advertising rates are based in part on third-party estimates of
users of an internet site (referred to as "impressions"). Such estimates
are often based on sampling techniques or other imprecise measures, and may
materially differ from our estimates. We do not know if advertisers will
accept our or other parties' measurements of impressions.
Filter software programs that limit or remove advertising from an internet
user's desktop are available to consumers. Widespread adoption or increased
use of such software by users or the adoption of such software by certain
internet access providers could have a material adverse effect upon the
viability of advertising on the internet and on our business, results of
operations and financial condition.
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. Short Term Nature of Advertising Contracts; Guarantee of Minimum Impression
Levels. Substantially all of our advertising contracts have been for terms
averaging one to three months in length, with relatively few longer-term
advertising contracts. Many of our advertising customers have limited
experience with internet advertising, and may not believe internet
advertising to be effective compared to traditional advertising media. We
cannot assure you that our current advertisers will continue to purchase
advertisements on our web site.
Our advertising contracts typically guarantee the advertiser a minimum
number of impressions. To the extent that minimum impression levels are not
achieved for any reason, we may be required to "make good" or provide
additional impressions after the contract term. Providing additional
impressions may adversely affect the availability of advertising inventory
adversely affecting on our business, results of operations and financial
condition.
. Need to Enhance and Develop OnHealth.com to Remain Competitive. To remain
competitive, we must continue to enhance and improve the responsiveness,
functionality and features of onhealth.com and develop other products and
services. Enhancements of or improvements to our web site may contain
undetected programming errors that require significant design
modifications, resulting in a loss of consumer confidence and user support
and a decrease in the value of our brand name recognition. We plan to
develop and introduce new features, functions, products and services, such
as increased capabilities for user personalization and interactivity. This
will require the development or licensing of increasingly complex
technologies. We may not succeed in developing or introducing features,
functions, products and services that will attract consumers. Such failure
would likely have a material adverse effect on our business, results of
operations and financial condition.
. Failure to Achieve Brand Identity. We believe that establishing and
maintaining brand identity is a critical aspect of our efforts to attract
and expand our user base, internet traffic and advertising relationships.
We believe that brand recognition will become increasingly important
because there are minimal barriers to entry with competing web sites. We
intend to increase our brand awareness through advertising campaigns in
publications, radio, online media and other marketing and promotional
efforts. If we cannot build a brand recognition that consumers (and
eventually advertisers) seek out, we will likely be unable to generate
revenues.
Developing brand recognition is a complex process. It depends, in part, on
our success in providing a high quality experience. The value of our brand
could be diluted by a variety of events, including poor consumer or
advertiser reaction to our web site and services offered on the web site.
. Unpredictability of Future Revenue Streams; Potential Fluctuations in
Quarterly Results. Since our online operating history is very limited and
the economics of the internet are still evolving, it is difficult to
forecast future revenues with a high degree of accuracy. The advertising
and retail industries typically experience their best
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quarter in the fourth quarter of each year, and to the extent that we rely
upon advertising revenues, our revenues could similarly fluctuate. Due to
the health related nature of editorial content, however, we believe that
our revenues may not be as seasonal as the remainder of the advertising and
retail industries. Since our expense levels are based upon anticipated
advertising and licensing revenue, we may not be able to adjust spending in
a timely manner to compensate for any unexpected revenue shortfall.
Accordingly, any significant shortfall in relation to our expectations
would have an immediate adverse impact on our business, results of
operations and financial condition. In addition, we plan to significantly
increase our operating expenses to develop new distribution channels, fund
greater levels of research and development, increase our sales and
marketing operations, broaden our customer support capabilities and
establish brand identity and strategic alliances.
. Dependence on Third-Party Relationships. We are and will continue to be
significantly dependent on a number of third-party relationships to
increase traffic on onhealth.com and thereby generate advertising revenues
and maintain the current level of service and variety of content for our
users. We are generally dependent on other web site operators that provide
links to onhealth.com.
Most of our arrangements with third-party internet sites and other third-
party service providers do not require future minimum commitments to use
our services, are not exclusive and are short-term or may be terminated at
the convenience of the other party. Moreover, we do not have agreements
with the majority of other web site operators that provide links to
onhealth.com, and such web site operators may terminate such links at any
time without notice. There can be no assurance that third parties regard
our relationship with them as important to their own respective businesses
and operations, that they will not reassess their commitment to us at any
time in the future or that they will not develop their own competitive
services or products.
There can be no assurance that we will be able to maintain relationships
with third parties that supply us with software or products that are
crucial to our success, or that such software or products will be able to
sustain any third-party claims or rights against their use. Also, we cannot
assure you that the software, services or products of those companies that
provide access or links to our services or products will achieve market
acceptance or commercial success. Accordingly, we cannot assure you that
our existing relationships will result in sustained business partnerships,
successful service or product offerings or the generation of significant
revenues for us. Failure of one or more of our strategic relationships to
achieve or maintain market acceptance or commercial success or the
termination of one or more successful strategic relationships could have a
material adverse effect on our business, results of operations and
financial condition.
. Competition. There are a number of competitors currently delivering online
health content, and it is likely that more competitors will emerge in the
near future. Many of
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today's competitors are better financed, have longer operating histories
and better brand recognition than ours, and some have internal distribution
or cross-promotional opportunities to support their online ventures that we
do not have and can not replicate for a reasonable investment. It is
possible that existing or emerging competitors may be able to secure
critical editorial content or distribution relationships on an exclusive
basis, or may raise a provider's expectation about the value of such
assets. For these reasons, increased competition may result in diminished
profit margins, market share or brand value. We expect that competition
will increase online in the future due to more entrants introducing
competitive products and industry consolidation, which could result in
better-financed competitors. The intense competition in the consumer
software business continues to accelerate as an increasing number of
companies, many of which have financial, managerial, technical and
intellectual property resources greater than ours, offer products that
compete directly with one or more of our products or services. We believe
that the principal competitive factors in attracting advertisers include
the amount of traffic on our web site, brand recognition, customer service,
the demographics of our user base, our ability to offer targeted audiences
and the overall cost effectiveness of the advertising medium we offer. We
believe that the number of internet companies relying on internet-based
advertising revenue, as well as the number of advertisers and the number of
users, will increase substantially in the future. Accordingly, we will
likely face increased competition, resulting in increased pricing pressures
on our advertising rates, which could have a material adverse effect on our
business, results of operation and financial condition.
. Dependence on Key Personnel. Our development and operation is
substantially dependent on the services of our President and Chief
Executive Officer, Robert N. Goodman and on our Editor-in-Chief, Rebecca
Farwell. The loss of either Mr. Goodman's or Ms. Farwell's services could
materially and adversely affect our business prospects. We are also
dependent on the continued service of certain other key management as well
as our software engineering personnel, the loss of whose services could
significantly delay the achievement of our planned development objectives.
We have not purchased key man life insurance on any of our personnel.
Achievement of our business objectives will require substantial additional
expertise in the areas of technology, finance, and marketing. We actively
seek additional qualified personnel. Competition for qualified personnel is
intense, and the loss of key personnel, or the inability to attract and
retain the additional highly skilled personnel required for the expansion
of our activities, could have a material adverse effect on our business,
results of operations and financial condition.
. Reliance on Intellectual Property and Proprietary Rights. We regard
substantial elements of our web site and underlying technology as
proprietary and attempt to protect them by relying on trademark, service
mark, copyright and trade secret laws and restrictions on disclosure and
transferring title and other methods. We also have entered into
confidentiality agreements with our consultants and in connection with our
license agreements with third parties and generally seek to control access
to and distribution of our technology, documentation and other proprietary
information.
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Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use our proprietary information without authorization
or to develop similar technology independently. Effective trademark,
service mark, copyright and trade secret protection may not be available in
every country in which our services are made available through the
internet, and policing unauthorized use of our proprietary information is
difficult.
Legal standards relating to the validity, enforceability and scope of
protection of certain proprietary rights in internet-related businesses are
uncertain and still evolving, and no assurance can be given as to the
future viability or value of any of our proprietary rights. There can be no
assurance that the steps taken will prevent misappropriation or
infringement of our proprietary information, which could have a material
adverse effect on our business, results of operations and financial
condition.
Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity
and scope of the proprietary rights of others. Such litigation might result
in substantial costs and diversion of resources and management attention.
We cannot assure you that our business activities will not infringe upon
the proprietary rights of others, or that other parties will not assert
infringement claims against us, including claims that by directly or
indirectly providing hyperlink text links to web sites operated by third
parties. Moreover, from time to time, we may be subject to claims of our
alleged infringement of the trademarks, service marks and other
intellectual property rights of third parties. Such claims and any
resultant litigation, should it occur, might subject us to significant
liability for damages, might result in invalidation of our proprietary
rights and, even if not meritorious, could result in substantial costs and
diversion of resources and management attention and could have a material
adverse effect on our business, results of operations and financial
condition.
We currently license from third parties certain technologies incorporated
into onhealth.com. As we continue to introduce new services that
incorporate new technologies, we may be required to license additional
technology from others. We cannot assure you that these third-party
technology licenses will continue to be available on commercially
reasonable terms, if at all. Additionally, we cannot assure you that the
third parties from which we currently license our technology will be able
to defend their proprietary rights successfully against claims of
infringement. As a result, any inability to obtain these technology
licenses could result in delays or reductions in the introduction of new
services or could adversely affect the performance of our existing services
until equivalent technology can be identified, licensed and integrated.
. Liability for Information Retrieved from or Transmitted over the Internet;
Liability for Products Sold over the Internet. Because materials may be
downloaded by the online or internet services that we operate or the
internet access providers with which we have relationships and may be
subsequently distributed to others, there is a potential that claims will
be made against us for defamation, negligence, copyright or
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trademark infringement or other theories based on the nature and content of
such materials. In addition, the increased attention focused upon liability
issues and legislative proposals could materially impact the overall growth
of internet use. We could also be exposed to liability with respect to
third-party information that may be accessible through our web site, or
through content and materials that may be posted by our users on discussion
boards that we offer. Such claims might include, among others, that, by
directly or indirectly providing hyperlink text links to web sites operated
by third parties, we are liable for copyright or trademark infringement or
other wrongful actions by such third parties through such web sites. It is
also possible that, if any third-party content information provided on our
web site contains errors, third parties could make claims against us for
losses incurred in reliance on such information.
Even to the extent such claims do not result in liability, we could incur
significant costs in investigating and defending against such claims. The
imposition of potential liability for information carried on or
disseminated through our systems could require us to implement measures to
reduce our exposure to such liability, which may require the expenditure of
substantial resources and limit the attractiveness of our services to
users.
Our general liability insurance may not cover all potential claims to which
we are exposed or may not be adequate to indemnify for all liability that
may be imposed. Any imposition of liability that is not covered by
insurance or is in excess of insurance coverage could have a material
adverse effect on our business, results of operations and financial
condition.
. Risks Related To System Operation. All companies that rely on the internet
are dependent upon the continuous, reliable and secure operation of
internet servers and related hardware and software. To the extent that
service is interrupted, consumers will be inconvenienced and commercial
clients will suffer from a loss in advertising or transaction delivery.
These shortfalls would directly result in a revenue loss. Our computer and
communications hardware are protected through physical and software
safeguards. However, they are still vulnerable to fire, earthquake, flood,
power loss, telecommunications failures, physical or software break-ins and
similar events. We do not have full redundancy for all of our computer and
telecommunications facilities and do not carry business interruption
insurance to protect us in the event of a catastrophe. Such an event could
lead to significant negative impacts on our operating results and financial
condition. We are also dependent upon third parties to provide potential
users with web browsers and internet and online services necessary for
access to our web site. In the past, users have occasionally experienced
difficulties with internet and online services due to system failures,
including failures unrelated to our systems. Any sustained disruption in
internet access provided by third parties could have a material adverse
effect on our business, results of operations and financial condition.
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. Impact of the Year 2000. The Year 2000 issue is the potential for system
and processing failures of date-related data and the result of computer-
controlled systems using two digits rather than four to define the
applicable year. For example, computer programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar
normal business activities.
We could be affected by Year 2000 issues related to non-compliant
information technology ("IT") systems or non-IT systems that either we
operate or are operated by third parties. We have substantially completed
assessment of our internal and external (third-party) IT systems and non-IT
systems. At this point in our assessment, we are not currently aware of any
Year 2000 problems relating to systems we operate or that are operated by
third parties that would have a material effect on our business, results of
operations or financial condition, without taking into account our efforts
to avoid such problems. Based on our assessment to date, we do not
anticipate that costs associated with remediating our non-compliant IT
systems or non-IT systems will be material, although there can be no
assurance to such effect.
To the extent that our assessment is finalized without identifying any
additional material non-compliant IT systems we operate or that are
operated by third parties, the most reasonably likely worst case Year 2000
scenario is a systemic failure beyond our control, such as a prolonged
telecommunications or electrical failure. Such a failure could prevent us
from operating our business, prevent users from accessing our web site, or
change the behavior of advertising customers or persons accessing our web
site. We believe that the primary business risks, in the event of such
failure, would include, but not be limited to, lost advertising revenues,
increased operating costs, loss of customers or persons accessing our web
site, or other business interruptions of a material nature, as well as
claims of mismanagement, misrepresentation, or breach of contract, any of
which could have a material adverse effect on our business, results of
operations and financial condition. We have not made any contingency plans
to address such risks.
. Management of Potential Growth. To accommodate the demand of additional
editorial content and distribution channels for the OnHealth network, the
employee base could grow significantly from the December 29, 1998 level of
35 employees. The expansion of our workforce could place a significant
strain on our management, financial resources and infrastructure. We cannot
assure you that we will be able to attract and retain employees with the
appropriate skill sets, or that we will be able to manage growth
effectively. If we are unable to manage growth in the coming years, there
could be an adverse affect on our operations.
. Risk Associated with Certain Litigation. In February 1996, an action in
the District Court of Hennepin County (Minnesota) was brought by T. Randal
Productions et al. against the company and one current and two former
employees. The plaintiffs made
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various allegations, including the existence of a joint venture and
misappropriation of corporate opportunities by the company and its
employees, and sought award of monetary damages of $14,000,000 to
$16,000,000. 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 for damages sustained to its business. The jury verdict
was upheld by the trial court on plaintiffs' motion for a new trial,
amended findings and for judgment notwithstanding the verdict, and is
currently on appeal to the Minnesota Court of Appeals. The plaintiffs also
have an action pending against certain of our affiliates on the same
grounds on which the action against us was based. We have indemnified these
affiliates against any damages arising out of these claims. While we are
unable to predict the ultimate outcome of this legal action, an outcome
whereby T. Randal was completely successful on its claim would have a
material adverse effect on us and could cause us to discontinue operations.
. Reliance On External Content. We intend to produce only a portion of the
editorial content that will be found on the OnHealth network. We will be
reliant on third-party firms that have the expertise, technical capability,
name recognition, and willingness to syndicate product content for branding
and distribution by others. As health-related content grows on the web,
there may be increasing competition for the best product suppliers, which
may result in a competitor acquiring a key supplier on an exclusive basis,
or in significantly higher content prices. Such an outcome could make the
OnHealth network less attractive or useful for an end user, or could reduce
our profitability. Either event would have a materially adverse impact our
results.
. Governmental Regulation and Legal Issues. We are not governed by any laws
of any government entity, other than general business and taxation
regulations and the general regulations that surround online enterprises.
However, with the growing popularity of online usage, various new
regulations are possible which may affect privacy, intellectual property
rights, marketing, pricing, content, or other issues. The adoption of
additional laws in this field may reduce consumer demand for online
services, or adversely impact our cost of doing business. Either outcome
could have a material adverse affect on our financial results.
. Security Risks. Experienced programmers or "hackers" could attempt to
penetrate our network security. Because a hacker who is able to penetrate
our network security could misappropriate proprietary information or cause
interruptions in our products and services, we may be required to expend
capital and resources to protect against or to alleviate problems caused by
such parties. In addition, we may not have a timely remedy against a hacker
who is able to penetrate our network security. Such purposeful security
breaches could have a material adverse effect on our business, results of
operations and financial condition. In addition, the inadvertent
transmission of computer viruses could expose us to a material risk of loss
or litigation and possible liability.
. Impact of General Economic Conditions. Time spent on the internet by
individuals, purchases of new computers and purchases of membership
subscriptions to internet
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sites are typically discretionary for consumers and may be particularly
affected by adverse trends in the general economy. The success of our
operations depends to a significant extent upon a number of factors
relating to discretionary consumer spending, including economic conditions
(and perceptions of such conditions by consumers) affecting disposable
consumer income such as employment, wages and salaries, business
conditions, interest rates, availability of credit and taxation, for the
economy as a whole and in regional and local markets where we operate.
There can be no assurance that consumer spending will not be adversely
affected by general economic conditions, which could negatively impact our
results of operations or financial condition. Any significant deterioration
in general economic conditions or increases in interest rates may inhibit
consumers' use of credit and cause a material adverse effect on our
revenues and profitability. In addition, our business strategy relies on
advertising by and agreements with other internet companies. Any
significant deterioration in general economic conditions that adversely
affected these companies could also have a material adverse effect on our
business, results of operations and financial condition.
. Absence of Dividends. We have not paid cash dividends since our inception.
We intend to retain all of our earnings, if any, for use in the business
and do not anticipate paying any cash dividends in the foreseeable future.
Pursuant to our Articles of Incorporation and Bylaws, the payment of
dividends is subject to the discretion of our Board of Directors and any
terms and conditions imposed by law.
NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements made in this Prospectus, that are summarized here, are
forward-looking statements that involve risk and uncertainties, and actual
results may be materially different. Factors that could cause actual results to
differ include, but are not limited to those identified:
. The expectation that we will become the leading on-line health information
network depends on our ability to obtain high quality editorial content,
our ability to implement effective traffic building programs and
distribution relationships, as well as other general market conditions and
competitive conditions within this market, including the introduction and
further development of competitive web sites.
. The expectation that we will see a growth in revenues and positive net
income as a result of our shift in focus to our on-line health network
depends on customer interest, the ability to obtain successful revenue
sources from advertisers, as well as other general market and competitive
conditions within the on-line health network market.
. The expectation that we will be able to meet our ongoing financial
obligations and operate through, at least March 31, 1999 depends on our
ability to meet our goals, acceptance of our products, the ability to raise
sufficient capital and our ability to control our costs of operations.
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<PAGE>
USE OF PROCEEDS
All net proceeds from the sale of the Shares which are covered by this
Prospectus will go to the Selling Shareholders (as defined on page 15) who offer
and sell their shares. We will not receive any proceeds from sales of Shares by
the Selling Shareholders.
DESCRIPTION OF OUR SECURITIES
COMMON STOCK
Our articles of incorporation authorize 29,000,000 shares of common stock
and 1,000,000 shares of preferred stock. As of December 16, 1998, there were
approximately 12,752,572 shares of common stock outstanding held of record by
approximately 3,175 shareholders. Each holder of a share of common stock gets
one vote per share on all matters submitted to a vote of shareholders but may
not cumulate votes for the election of directors. Holders of common stock also
are entitled to receive ratably such dividends as may be declared by the Board
of Directors out of funds legally available therefor. In the event of our
dissolution, liquidation or winding up, holders of common stock are entitled to
share ratably in all assets. Holders of common stock have no preemptive,
subscription, redemption or conversion rights. All the outstanding shares of
common stock are, and all shares of common stock to be outstanding upon
completion of this offering will be, fully paid and nonassessable.
The Shares issued to the Selling Shareholders were issued pursuant to a
subscription agreement. Pursuant to the subscription agreement, the Shares are
held by an escrow agent and may be released at the discretion of the Selling
Shareholders beginning on the effective date of the Registration Statement of
which this Prospectus is a part. The subscription agreement provides that we
could be required to issue additional Shares ("Adjustment Shares") to the
Selling Shareholders if the "Adjustment Price" of our common stock (which is
defined as the lesser of $6.50 and the average of the closing bid prices for the
immediately preceding fifteen trading days) on the earlier of the date (the
"Reset Date") of the launch of our proposed e-commerce web site, March 14, 1999,
is less than a floor price of $4.24. If the Adjustment Price is lower, then we
will issue to each Selling Shareholder additional Shares, if any, equal to (i)
the product of (x) the quotient obtained by dividing $4.24 by the Adjustment
Price and (y) the number of Shares initially held in escrow on behalf of each
Selling Shareholder on such date (and not previously withdrawn), less (ii) such
number of Shares initially held in escrow on behalf of each Selling Shareholder
on such date. Additional Shares will be required to be issued on Reset Dates
every three months thereafter until the earlier of November 10, 2001 or the date
when all Shares are released from escrow, based on a similar formula if the
Adjustment Price at the end of any such three month period is lower than 1.0125
times the preceding Adjustment Price. To the extent that the number of Shares
issuable under the foregoing formulas on any such Reset Date is negative, those
Shares will be returned by the escrow agent to us and be cancelled. The
Adjustment Price is subject to reduction under certain conditions primarily
involving our failure to keep the Registration Statement of which this
Prospectus forms a part available for use for resales of the Shares. We may be
required to repurchase the Shares initially issued, the Adjustment Shares and
the shares issued upon exercise of the Warrants under certain conditions,
including our default of our obligations under the subscription agreement, the
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<PAGE>
continued unavailability of the Registration Statement, and the absence of
reported prices for the Common Stock on the Nasdaq National Market or the Nasdaq
SmallCap Market; provided, however that we may elect to issue additional Shares
in lieu of repurchasing such shares if the circumstances triggering the
repurchase obligation is not solely within our control.
WARRANTS
Including the Warrants issued to one of the Selling Shareholders described
below, we have outstanding warrants to purchase 678,477 shares of common stock
with various parties with varying exercise prices.
The Warrants. On October 30, 1998, in connection with the issuance of
1,000,898 of the Shares, we issued to one of the Selling Shareholders warrants
to purchase a total of 124,756 shares of common stock at an exercise price of
$4.809375 per share. The Warrants expire October 30, 2003.
In addition, we have two warrants for the aggregate amount of 66,778 shares
with two investors each with a exercise price of $11.23125. Such warrants expire
April 10, 2003. Also, we have 20,000 warrants with Vance Corp. (our landlord)
with an exercise price of $3.32. Finally, we have issued a warrant to Frazier
Investments for 224,349 shares of common stock exercisable at a price of $6.61
per share expiring June 3, 2000.
SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock by the selling shareholders (the "Selling
Shareholders") and as adjusted to give effect to the sale of the Shares offered
by this Prospectus:
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
AFTER OFFERING (3)
SHARES BENEFICIALLY --------------------
SELLING SHAREHOLDER OWNED PRIOR TO OFFERING SHARES BEING OFFERED (2) SHARES PERCENT
------------------- ----------------------- ------------------------ --------- --------
<S> <C> <C> <C> <C>
Advantage Fund II Ltd. 1,125,654(1) 1,626,103 -0- -0-
----------- ---------
Koch Industries, Inc. 542,419 813,629 -0- -0-
----------- ---------
</TABLE>
(1) Includes 124,756 Shares issuable upon exercise of warrants.
(2) The number of shares of common stock shown as beneficially owned and
offered by the Selling Shareholder represents the number of shares which we
initially agreed to register, including additional Shares which may be
issued to the Selling Shareholders in the future pursuant to the
subscription agreement.
(3) Assumes the sale of all of the Shares being offered hereby.
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<PAGE>
THE SELLING SHAREHOLDERS AND THEIR RESPECTIVE OFFICERS AND DIRECTORS HAVE
NOT HELD ANY POSITIONS OR OFFICE OR HAD ANY OTHER MATERIAL RELATIONSHIP WITH THE
COMPANY OR ANY OF OUR AFFILIATES WITHIN THE PAST THREE YEARS.
We have agreed with the Selling Shareholders to file with the Commission,
under the Securities Act, the Registration Statement of which this Prospectus
forms a part, with respect to the resale of the Shares, and have agreed to
prepare and file such amendments and supplements to the Registration Statement
as may be necessary to keep the Registration Statement effective until the
earlier of (i) three years after the last Adjustment Shares may be issued to the
Selling Shareholders, (ii) the date that all of the Selling Shareholders may
sell all of their Shares under Rule 144(k) of the Securities Act, or (iii) such
date that none of the Selling Shareholders own any of the Shares offered hereby.
PLAN OF DISTRIBUTION
The Selling Shareholders, or their pledgees, donees, transferees or others
who succeed to their interest, may offer their Shares at various times in one or
more of the following transactions:
. on the Nasdaq SmallCap Market;
. in the over-the-counter market;
. in negotiated transactions other than the Nasdaq SmallCap Market or the
over-the-counter market;
. in connection with short sales;
. by pledge to secure debts and other obligations;
. in connection with the writing of call options, in hedging transactions and
in settlement of other transactions in standardized or over-the-counter
options; or
. in a combination of any of the above transactions.
The Selling Shareholders may sell their Shares at market prices at the time
of sale, at prices related to such prevailing market prices, at negotiated
prices or at fixed prices.
The Selling Shareholders may use broker-dealers to sell their Shares. If
this happens, broker-dealers will either receive discounts or commissions from
the Selling Shareholder, or they will receive commissions from purchasers for
whom they acted as agents.
If the Selling Shareholders give or pledge their Shares to another person,
such person may sell such Shares as a Selling Shareholder under this Prospectus.
Any Shares that qualify for sale under Rule 144 of the Securities Act may be
sold under such rule rather than pursuant to this Prospectus.
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LEGAL MATTERS
For purposes of this offering, Preston Gates & Ellis LLP, Seattle,
Washington, is giving its opinion on the validity of the Shares.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements and schedule included in our Annual Report on Form 10-K for the year
ended December 31, 1997, as set forth in their report, which is incorporated in
this prospectus by reference. Our financial statements are incorporated by
reference in reliance on their report, given on their authority as experts in
accounting and auditing.
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