Pursuant to Rule 424(b)(2)
Registration No. 333-81321
Prospectus Supplement (To prospectus dated August 31, 1999)
OnHealth Network Company
38,190 Shares
Common Stock
OnHealth Network Company is offering 38,190 shares of common stock pursuant to
this prospectus supplement. All of the shares are being issued to G.D. Searle &
Co.
The common stock trades on the Nasdaq National Market under the symbol "ONHN".
On March 31, 2000, the last sale price of the common stock as reported on the
Nasdaq National Market was $4.1875 per share.
See "Risk Factors" beginning on page 4 of the accompanying prospectus to read
about certain factors that should be considered relating to the 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.
The date of this prospectus supplement is April 3, 2000.
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PROSPECTUS
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6,900,000 Shares
[LOGO OF ONHEALTH]
Common Stock
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By this prospectus, we may from time to time offer shares of common stock. We
will provide specific terms of the offering of our common stock in supplements
to this prospectus. You should read carefully this prospectus and the
accompanying prospectus supplement before you invest.
----------------
See "Risk Factors" beginning on page 4 of this prospectus and those additional
risk factors, if any, contained in the accompanying prospectus supplement, 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.
The date of this prospectus is August 31, 1999
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About This Prospectus
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This prospectus is part of a registration statement that we have filed with
the SEC using a shelf registration process as permitted by Rule 415 under the
Securities Act. Under this shelf registration process, we may, from time to
time, sell up to 6,900,000 shares of common stock in one or more offerings.
This prospectus provides you with a general description of our common stock.
Each time we sell common stock under this registration statement, we will
provide a prospectus supplement that will contain specific information about the
terms of that offering. The prospectus supplement may also add, update or change
information contained in this prospectus. You should read this prospectus and
the applicable prospectus supplement together with the additional information
described under the heading "Where You Can Find More Information" on page 45 of
this prospectus.
The registration statement that contains this prospectus, including the
exhibits to the registration statement, contains additional information about us
and the securities we may offer under this prospectus. You can read that
registration statement at the SEC's web site or at the SEC's offices mentioned
under the heading "Where You Can Find More Information."
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Prospectus Summary
This summary highlights certain information contained elsewhere in this
prospectus. You should read the entire prospectus and the accompanying
prospectus supplement carefully, especially the risks of investing in our common
stock discussed under "Risk Factors" beginning on page 4 of this prospectus and
those additional risk factors, if any, contained in the accompanying prospectus
supplement. 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 July 1999, according to Media
Metrix, onhealth.com had nearly 1,200,000 unique users, an increase of 182% from
March 1999, which ranks the website as one of the most trafficked consumer
health content websites in July 1999. In addition, in June 1999 onhealth.com
attracted 1,563,785 visits, an increase of 61% from our March 1999 visits,
according to Internet Profile Corporation. We have launched 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.
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
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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, and the accompanying prospectus supplement may
include, 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.
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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>
December 31, June 30,
1998 1999
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(Unaudited)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.............................. $ 2,119 $8,854
Working capital (deficiency)........................... (1,158) 6,139
Total assets........................................... 3,894 12,297
Long term debt......................................... -- --
Shareholders' equity (deficit)......................... (301) 7,269
</TABLE>
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Risk Factors
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You should carefully consider the risks and uncertainties described below, as
well as the other information included or incorporated by reference in this
prospectus and the accompanying prospectus supplement, 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 and in the
accompanying prospectus supplement 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.
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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.
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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
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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
Executive Vice President and 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
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retaining highly skilled employees 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
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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
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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.
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. 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.
14
<PAGE>
Use of Proceeds
- --------------------------------------------------------------------------------
We expect to use the net proceeds from sales pursuant to this prospectus to
finance operations while we continue to incur operating losses, to expand our
marketing efforts and for general corporate purposes, including advertising and
brand promotion, 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. 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
--------------
(In thousands)
<S> <C>
Shareholders' equity:
Common stock, $.01 par value: 100,000,000 shares authorized,
16,222,420 shares issued and outstanding...................... $ 162
Additional paid-in capital....................................... 107,765
Accumulated deficit.............................................. (100,658)
Total shareholders' equity and capitalization................ 7,269
</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.
15
<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>
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>
16
<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
17
<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.
18
<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
------ ------ ------
(In thousands)
<S> <C> <C> <C>
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.
19
<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
20
<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 July 31, 1999, we had positive working capital of $1,976,000 compared with
negative working capital of $1.2 million at December 31, 1998. At July 31, 1999,
we had cash and cash equivalents of $1.4 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 activities was $10.0 million, which was primarily due to the net
loss of $10.9 million. During the six
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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 from sales pursuant to this prospectus, will be sufficient to
fund our operations through December 31, 1999. 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.
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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 Info 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 July 1999, according to Media
Metrix, onhealth.com attracted nearly 1,200,000 unique users, an increase of
182% from our March 1999 unique users, which ranks onhealth.com as one of the
most trafficked consumer health content websites in July 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. We have launched 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. 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
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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:
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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.
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 launched 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
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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
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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
. Alternative Health contributes to the growing archive of expert-
. Listening to the Body answered questions searchable from anywhere on
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
. International Diabetes of reference material, discussion groups,
Center updates on patient care, and doctor-answered
questions that target major diseases which affect
significant patient populations.
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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 Our website is a research-rich resource that
. Illness and Disease contains hundreds of thousands of pages of
Database content. We have created an extensive amount
. Alternative Practices of original reference content specifically for
Guide consumers. This material is written by medical
. Herbal Database writers, then reviewed and approved by
. Emergency Care Guide doctors. Our reference material is readily re-
. Stop Smoking Center licensable by and desirable to distribution
. "Doctor Says" Video partners. Selected examples of our proprietary
Reference to Common content include:
Ailments
. Allergy Index The Illness and Disease Database contains
. Healthy Eating Reference encyclopedic entries for conditions. We intend
Guide 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
. Health Info Tracker We believe that personalization is fundamental
. Favorite discussions to creating a functional, daily relationship
. Local resources with consumers by managing a family's health.
. Favorite websites My Wellness Manager is designed to encourage
. Newsletter and Daily return visits by providing an easy to use tool
Briefing sign-up for managing a family's health.
. Access points to personal
tools My Wellness Manager provides a single place to
. Smoking Cessation program store and update all the personalizable
. Personal Health Assessment functions within the website, from the Health
Profile Info Tracker to saving direct links to 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
. Health Polls The Smoking Cessation Program is a self-
. Clip and Send directed interactive program that creates a
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.
Our search capability provides direct access
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
. Books and Magazines -- We believe that e-commerce for health requires
Amazon.com and enews.com depth of information and support to aid the
. Holidays and Gifts -- product-purchasing decision. Our health
ProFlowers and products shopping area creates categories with
American Greetings recommendations and has established a unique
. Foods -- Whole Foods Market feature called "TimeSavers" which provides a
. Healthy Home -- way for consumers to "Read About" a product or
greenmarketplace.com associated condition, "Talk About" the issues
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 July 1999, according to
Media Metrix, onhealth.com attracted nearly 1,200,000 unique users, an increase
of 182% from our March 1999 unique users, which ranks onhealth.com as one of the
most trafficked consumer health websites in July 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. We have launched 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. 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.
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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>
32
<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.
- --------------------------------------------------------------------------------------
LifeMinders Internet Service We are the exclusive third party content
Provider/Other provider for the LifeMinders.com Health &
Nutrition category. Lifeminders delivers highly
personal and relevant content, recommendations
and tips to its Health & Nutrition members twice
per month via email.
- --------------------------------------------------------------------------------------
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>
33
<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 Advance and Content Briefings from ten local sites.
Publications,
Inc.)
- --------------------------------------------------------------------------------------
Ask Jeeves News, We receive homepage promotion and integrated
Information and content tiles and links in the Ask Jeeves'
Content 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.
- --------------------------------------------------------------------------------------
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. We have launched 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 a preliminary 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.
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
34
<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 50 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.
35
<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 timesaving
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.
36
<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."
37
<PAGE>
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. Beginning
September 1, 1999 we have leased 8,250 square feet of office space located at
536 Broadway, New York, New York. This lease expires October 31, 2004.
38
<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
Executive Vice President and General
Rebecca J. Farwell.................. 38 Manager
Mary G. Bruno....................... 47 Senior Vice President of Publishing
Ronald M. Stevens................... 35 Chief Financial Officer
Steven R. Cloherty.................. 31 Vice President of Technology
Michael A. Brochu................... 46 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
Executive Vice President and 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.
Ronald M. Stevens joined OnHealth in August 1999 as Chief Financial Officer.
From May 1996 to August 1999, he served as General Manager and Senior Vice
President of Sierra-On-Line, Inc. a leader in entertainment software. From May
1994 to May 1996, he served as Corporate and Divisional Controller of Sierra-
On-Line.
Steven R. Cloherty joined OnHealth in March 1998 and currently serves as Vice
President of Technology. 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
39
<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.
40
<PAGE>
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.
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.
41
<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.
42
<PAGE>
Plan of Distribution
- --------------------------------------------------------------------------------
We may offer and sell the shares covered by this prospectus from time to
time. We may sell the shares of common stock in one or more transactions in the
over-the-counter market, on the Nasdaq SmallCap Market or the Nasdaq National
Market or other exchange on which the shares may be listed, including through
block trades or ordinary broker's transactions, or in privately negotiated
transactions, through the writing of options on the shares or a combination of
such methods of sale, at fixed prices that may be changed, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. Alternatively, we may offer the shares to or
through underwriters, brokers or dealers who may act solely as agents, or who
may acquire shares as principals. Such underwriters may include Warburg Dillon
Read LLC, SG Cowen Securities Corporation and CIBC World Markets Corp., among
others. We may pay usual and customary or specifically negotiated brokerage fees
or commissions in connection with such sales. In connection with such sales, we
and any participating brokers or dealers may be deemed "underwriters" as such
term is defined in the Securities Act and the commissions paid or discounts
allowed to any of such underwriters, brokers, dealers or agents, in addition to
any profits received on resale of the shares if any such underwriters, brokers,
dealers or agents should purchase any shares as a principal, may be deemed to be
underwriting discounts or commissions under the Securities Act.
If we use an underwriter or underwriters in the sale of common stock, we will
execute an underwriting agreement with the underwriter or underwriters at the
time we reach an agreement for sale. We will set forth in the prospectus
supplement the names of the specific managing underwriter or underwriters, as
well as any other underwriters, and the terms of the transactions, including
compensation of the underwriters and dealers. Underwriters and others
participating in any offering of common stock may engage in transactions that
stabilize, maintain or otherwise affect the price of the common stock. We will
describe any of these activities in the prospectus supplement.
If a dealer is used in the sale of common stock, we or an underwriter will
sell common stock to the dealer, as principal. The dealer may then resell the
securities to the public at varying prices to be determined by the dealer at the
time of resale. The prospectus supplement will set forth the name of the dealer
and the terms of the transactions.
We may indemnify any underwriter or broker-dealer that participates in
transactions involving the sale of the shares against liabilities resulting
therefrom. Among these liabilities for which indemnification may be provided are
those arising under the Securities Act. The prospectus supplement will describe
the terms and conditions of indemnification or contribution.
We may be subject to the anti-manipulation rules of Regulation M under the
Exchange Act which apply to sales of shares in the market and to other
activities we may wish to conduct.
In order to comply with the securities laws of certain states, if applicable,
the shares may only be sold in such jurisdictions through registered or licensed
brokers or dealers. In addition, in certain states the shares may not be sold
unless they have been registered or qualified for sale in the applicable state
or an exemption from the registration or qualification requirement is available
and is complied with.
In connection with distributions of the shares or otherwise, we may enter
into hedging transactions with broker-dealers or other financial institutions.
In connection with a hedging transaction, broker-dealers or other financial
institutions may engage in short sales of the shares in the course of hedging
the positions they assume with us. We may also sell the shares short and deliver
the shares offered hereby to close out such short positions. We may also enter
into option or other transactions with broker-dealers or other financial
institutions which require the delivery to such broker-dealer or other financial
institution of shares offered hereby, which shares such broker-dealer or other
financial institution may resell pursuant to this prospectus, as supplemented or
amended to reflect such
43
<PAGE>
transaction. We may also loan or pledge shares to a broker-dealer or other
financial institution, and, upon a default, such broker-dealer or other
financial institution may effect sales of the pledged shares pursuant to this
prospectus, as supplemented or amended to reflect such transaction. In addition,
any shares that qualify for sale pursuant to Rule 144 may, at the option of the
holder thereof, be sold under Rule 144 rather than pursuant to this prospectus.
We will make copies of this prospectus, with any supplements or amendments,
available to purchasers at or prior to the time of any sale of the shares
offered by this prospectus and the applicable prospectus supplement.
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 matter own collectively 2,200 shares of
OnHealth common stock.
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.
44
<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.
45
<PAGE>
Index to Financial Statements
Page
----
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
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
December 31,
------------------ June 30,
1997 1998 1999
-------- -------- -----------
(Unaudited)
(In thousands)
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
======== ======== ========
The accompanying notes are an integral part of the financial statements
F-3
<PAGE>
OnHealth Network Company
Statements of Operations
Six Months Ended
Year Ended December 31, June 30,
---------------------------- --------------------
1996 1997 1998 1998 1999
-------- -------- -------- ------- -----------
(Unaudited)
(In thousands, except per share data)
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
======== ======== ======== ======= ========
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
Six Months Ended
Year Ended December 31, June 30,
---------------------------- -----------------
1996 1997 1998 1998 1999
-------- -------- -------- ------- --------
(In thousands)
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
======== ======== ======== ======= ========
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):
Six Months
Ended June
30,
------------
1996 1997 1998 1998 1999
------ ------ ------ ----- -----
(Unaudited)
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
====== ====== ====== ===== =====
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
telecommunications infrastructure and costs of acquired content. To date, all
product development, editorial and design costs have been expensed as incurred.
F-8
<PAGE>
OnHealth Network Company
Notes to Financial Statements (Continued)
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
December 31,
--------------- June 30,
1997 1998 1999
------- ------ -----------
(Unaudited)
(In thousands)
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
======= ====== ======
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:
Remaining
Number of
Shares Number of Weighted-Average
Reserved Shares Price Per Share
--------- --------- ----------------
Total Outstanding at
December 31, 1995...... 489,000 907,000 $11.53
Options Reserved........ 200,000 --
Options Granted......... (582,000) 582,000 4.98
Options Exercised....... -- (88,000) 4.06
Options Canceled........ 461,000 (461,000) 13.24
--------- ---------
Total Outstanding at
December 31, 1996...... 568,000 940,000 7.10
Options Reserved........ 1,750,000 -- --
Options Granted......... (684,000) 684,000 2.85
Options Exercised....... -- (59,000) 1.64
Options Canceled........ 474,000 (474,000) 9.86
--------- ---------
Total Outstanding at
December 31, 1997...... 2,108,000 1,091,000 3.53
Options Granted......... (889,000) 889,000 5.05
Options Exercised....... -- (371,000) 2.88
Options Canceled........ 393,000 (393,000) 3.84
--------- ---------
Total Outstanding at
December 31, 1998...... 1,612,000 1,216,000 $ 4.74
========= =========
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:
1996 1997 1998
------- ------- -------
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
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:
1996 1997 1998
---------- ---------- ----------
(In thousands, except per share
data)
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)
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:
1991, 1997 and Director Stock Option Plans....................... 2,378,000
1997 - 1998 New Hire Plan........................................ 1,213,500
Warrants......................................................... 678,577
---------
4,270,077
=========
F-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:
Six Months Ended
Year Ended December 31, June 30,
---------------------------- -----------------
1996 1997 1998 1998 1999
-------- -------- -------- ------- --------
(unaudited)
(In thousands, except per share amounts)
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)
======== ======== ======== ======= ========
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:
Lease Marketing
Payments Payments
-------- ---------
(In thousands)
1999.................................................... $ 176 $1,885
2000.................................................... 134 100
2001.................................................... 142 50
2002.................................................... 151 --
2003.................................................... 52 --
----- ------
655 2,035
Less sublease rental income............................. (162) --
----- ------
Total................................................... $ 493 $2,035
===== ======
F-15
<PAGE>
OnHealth Network Company
Notes to Financial Statements (Continued)
Note 10. Supplemental Cash Flow Information
Six Months
Year Ended Ended
December 31, 1998 June 30,
-------------------- ------------
1996 1997 1998 1998 1999
---- ------ ------ ---- ------
(Unaudited)
(In thousands)
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
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:
December 31,
--------------------------
1997 1998
------------ ------------
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........................ $ -- $ --
============ ============
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 SUPPLEMENT
- ----------------------------
38,190 Shares
[LOGO OF ONHEALTH]
Common Stock
April 3, 2000
- --------------------------------------------------------------------------------
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.
